Intrinsic value of Ares Commercial Real Estate - ACRE

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$13.98

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$13.98

 
Intrinsic value

$25.11

 
Up/down potential

+80%

 
Rating

str. buy

 
Value-price divergence* premium content

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Our model is not good at valuating stocks of financial companies, such as ACRE.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ACRE stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -4.65
  14.30
  13.37
  12.53
  11.78
  11.10
  10.49
  9.94
  9.45
  9.00
  8.60
  8.24
  7.92
  7.63
  7.36
  7.13
  6.91
  6.72
  6.55
  6.40
  6.26
  6.13
  6.02
  5.92
  5.82
  5.74
  5.67
  5.60
  5.54
  5.49
  5.44
Revenue, $m
  82
  94
  106
  120
  134
  148
  164
  180
  197
  215
  234
  253
  273
  294
  315
  338
  361
  386
  411
  437
  465
  493
  523
  554
  586
  619
  655
  691
  730
  770
  811
Variable operating expenses, $m
 
  55
  62
  70
  78
  87
  96
  106
  115
  126
  137
  148
  160
  172
  185
  198
  211
  226
  240
  256
  272
  288
  306
  324
  343
  362
  383
  404
  427
  450
  475
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  51
  55
  62
  70
  78
  87
  96
  106
  115
  126
  137
  148
  160
  172
  185
  198
  211
  226
  240
  256
  272
  288
  306
  324
  343
  362
  383
  404
  427
  450
  475
Operating income, $m
  31
  39
  44
  50
  55
  62
  68
  75
  82
  89
  97
  105
  113
  122
  131
  140
  150
  160
  171
  181
  193
  205
  217
  230
  243
  257
  272
  287
  303
  319
  337
EBITDA, $m
  31
  39
  44
  50
  55
  62
  68
  75
  82
  89
  97
  105
  113
  122
  131
  140
  150
  160
  171
  181
  193
  205
  217
  230
  243
  257
  272
  287
  303
  319
  337
Interest expense (income), $m
  30
  33
  37
  42
  48
  53
  60
  66
  72
  79
  87
  94
  102
  110
  119
  127
  137
  146
  156
  166
  177
  188
  200
  212
  224
  237
  251
  265
  280
  296
  312
Earnings before tax, $m
  31
  6
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
Tax expense, $m
  1
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
Net income, $m
  40
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  47
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,374
  1,512
  1,714
  1,929
  2,156
  2,395
  2,646
  2,910
  3,184
  3,471
  3,770
  4,080
  4,404
  4,739
  5,088
  5,451
  5,828
  6,220
  6,627
  7,051
  7,492
  7,952
  8,430
  8,929
  9,449
  9,992
  10,558
  11,149
  11,767
  12,413
  13,088
Adjusted assets (=assets-cash), $m
  1,327
  1,512
  1,714
  1,929
  2,156
  2,395
  2,646
  2,910
  3,184
  3,471
  3,770
  4,080
  4,404
  4,739
  5,088
  5,451
  5,828
  6,220
  6,627
  7,051
  7,492
  7,952
  8,430
  8,929
  9,449
  9,992
  10,558
  11,149
  11,767
  12,413
  13,088
Revenue / Adjusted assets
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
  0.062
Average production assets, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Working capital, $m
  0
  -54
  -61
  -69
  -77
  -85
  -94
  -103
  -113
  -123
  -134
  -145
  -156
  -168
  -181
  -194
  -207
  -221
  -235
  -251
  -266
  -282
  -299
  -317
  -336
  -355
  -375
  -396
  -418
  -441
  -465
Total debt, $m
  931
  1,064
  1,210
  1,365
  1,528
  1,700
  1,881
  2,071
  2,269
  2,475
  2,690
  2,914
  3,147
  3,388
  3,640
  3,901
  4,172
  4,454
  4,748
  5,053
  5,371
  5,701
  6,046
  6,405
  6,779
  7,170
  7,578
  8,003
  8,448
  8,913
  9,399
Total liabilities, $m
  955
  1,088
  1,234
  1,389
  1,552
  1,724
  1,905
  2,095
  2,293
  2,499
  2,714
  2,938
  3,171
  3,412
  3,664
  3,925
  4,196
  4,478
  4,772
  5,077
  5,395
  5,725
  6,070
  6,429
  6,803
  7,194
  7,602
  8,027
  8,472
  8,937
  9,423
Total equity, $m
  419
  423
  480
  540
  604
  671
  741
  815
  892
  972
  1,056
  1,143
  1,233
  1,327
  1,425
  1,526
  1,632
  1,742
  1,856
  1,974
  2,098
  2,226
  2,360
  2,500
  2,646
  2,798
  2,956
  3,122
  3,295
  3,476
  3,665
Total liabilities and equity, $m
  1,374
  1,511
  1,714
  1,929
  2,156
  2,395
  2,646
  2,910
  3,185
  3,471
  3,770
  4,081
  4,404
  4,739
  5,089
  5,451
  5,828
  6,220
  6,628
  7,051
  7,493
  7,951
  8,430
  8,929
  9,449
  9,992
  10,558
  11,149
  11,767
  12,413
  13,088
Debt-to-equity ratio
  2.222
  2.510
  2.520
  2.530
  2.530
  2.540
  2.540
  2.540
  2.540
  2.550
  2.550
  2.550
  2.550
  2.550
  2.550
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
  2.560
Adjusted equity ratio
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280
  0.280

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  40
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18
Depreciation, amort., depletion, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  52
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18
Change in working capital, $m
  43
  -7
  -7
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
Cash from operations, $m
  9
  11
  12
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  21
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  38
  40
  42
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
New CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from investing activities, $m
  -43
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Free cash flow, $m
  -34
  11
  12
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  21
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  38
  40
  42
Issuance/(repayment) of debt, $m
  150
  133
  146
  155
  164
  172
  181
  189
  198
  206
  215
  224
  233
  242
  251
  261
  271
  282
  293
  305
  318
  331
  345
  359
  374
  391
  408
  426
  445
  465
  486
Issuance/(repurchase) of shares, $m
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  102
  133
  146
  155
  164
  172
  181
  189
  198
  206
  215
  224
  233
  242
  251
  261
  271
  282
  293
  305
  318
  331
  345
  359
  374
  391
  408
  426
  445
  465
  486
Total cash flow (excl. dividends), $m
  67
  145
  158
  168
  177
  187
  196
  205
  215
  224
  233
  243
  252
  262
  273
  283
  295
  306
  319
  331
  345
  359
  374
  390
  407
  424
  443
  463
  483
  505
  528
Retained Cash Flow (-), $m
  -10
  -51
  -57
  -60
  -64
  -67
  -70
  -74
  -77
  -80
  -84
  -87
  -90
  -94
  -98
  -102
  -106
  -110
  -114
  -119
  -124
  -129
  -134
  -140
  -146
  -152
  -159
  -166
  -173
  -181
  -189
Prev. year cash balance distribution, $m
 
  47
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  140
  101
  107
  114
  120
  126
  132
  138
  144
  150
  156
  162
  168
  175
  182
  189
  197
  204
  213
  221
  231
  240
  250
  261
  272
  284
  297
  310
  324
  339
Discount rate, %
 
  11.50
  12.08
  12.68
  13.31
  13.98
  14.68
  15.41
  16.18
  16.99
  17.84
  18.73
  19.67
  20.65
  21.68
  22.77
  23.91
  25.10
  26.36
  27.68
  29.06
  30.51
  32.04
  33.64
  35.32
  37.09
  38.94
  40.89
  42.93
  45.08
  47.34
PV of cash for distribution, $m
 
  126
  80
  75
  69
  62
  55
  48
  41
  35
  29
  24
  19
  15
  11
  8
  6
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Ares Commercial Real Estate Corporation, a specialty finance company, originates, manages, and services a portfolio of commercial real estate (CRE) debt-related investments. The company operates in two segments, Principal Lending and Mortgage Banking. Its target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investments. The company also originates long-term senior loans collateralized by multifamily and senior-living properties. Ares Commercial Real Estate Corporation has elected and qualified to be taxed as a real estate investment trust for the United States federal income tax purposes under the Internal Revenue Code of 1986. As a result, it would not be subject to corporate income tax on that portion of its net income that is distributed to shareholders. Ares Commercial Real Estate Management LLC operates as the manager of the company. Ares Commercial Real Estate Corporation was founded in 2011 and is headquartered in New York, New York.

FINANCIAL RATIOS  of  Ares Commercial Real Estate (ACRE)

Valuation Ratios
P/E Ratio 10
Price to Sales 4.9
Price to Book 1
Price to Tangible Book
Price to Cash Flow 44.2
Price to Free Cash Flow 44.2
Growth Rates
Sales Growth Rate -4.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -100%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 222.2%
Total Debt to Equity 222.2%
Interest Coverage 2
Management Effectiveness
Return On Assets 5%
Ret/ On Assets - 3 Yr. Avg. 4%
Return On Total Capital 3%
Ret/ On T. Cap. - 3 Yr. Avg. 2.3%
Return On Equity 9.7%
Return On Equity - 3 Yr. Avg. 8%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 47.6%
Gross Margin - 3 Yr. Avg. 48.3%
EBITDA Margin 74.4%
EBITDA Margin - 3 Yr. Avg. 72.1%
Operating Margin 37.8%
Oper. Margin - 3 Yr. Avg. 37.4%
Pre-Tax Margin 37.8%
Pre-Tax Margin - 3 Yr. Avg. 37.4%
Net Profit Margin 48.8%
Net Profit Margin - 3 Yr. Avg. 40.7%
Effective Tax Rate 3.2%
Eff/ Tax Rate - 3 Yr. Avg. 1.1%
Payout Ratio 72.5%

ACRE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ACRE stock intrinsic value calculation we used $82 million for the last fiscal year's total revenue generated by Ares Commercial Real Estate. The default revenue input number comes from 2016 income statement of Ares Commercial Real Estate. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ACRE stock valuation model: a) initial revenue growth rate of 14.3% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 11.5%, whose default value for ACRE is calculated based on our internal credit rating of Ares Commercial Real Estate, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Ares Commercial Real Estate.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ACRE stock the variable cost ratio is equal to 58.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ACRE stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Ares Commercial Real Estate.

Corporate tax rate of 27% is the nominal tax rate for Ares Commercial Real Estate. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ACRE stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ACRE are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Ares Commercial Real Estate operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ACRE is equal to -57.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $419 million for Ares Commercial Real Estate - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 28.568 million for Ares Commercial Real Estate is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Ares Commercial Real Estate at the current share price and the inputted number of shares is $0.4 billion.


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COMPANY NEWS

▶ Ares Commercial Real Estate posts 4Q profit   [06:48AM  Associated Press]
Stock chart of ACRE Financial statements of ACRE
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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