Intrinsic value of Ares Commercial Real Estate - ACRE

Previous Close

$13.37

  Intrinsic Value

$28.33

stock screener

  Rating & Target

str. buy

+112%

Previous close

$13.37

 
Intrinsic value

$28.33

 
Up/down potential

+112%

 
Rating

str. buy

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
  21.10
  19.49
  18.04
  16.74
  15.56
  14.51
  13.56
  12.70
  11.93
  11.24
  10.61
  10.05
  9.55
  9.09
  8.68
  8.31
  7.98
  7.69
  7.42
  7.17
  6.96
  6.76
  6.59
  6.43
  6.28
  6.16
  6.04
  5.94
  5.84
  5.76
Revenue, $m
  82
  99
  119
  140
  164
  189
  216
  246
  277
  310
  345
  381
  420
  460
  502
  545
  590
  638
  687
  737
  790
  845
  903
  962
  1,024
  1,088
  1,155
  1,225
  1,298
  1,373
  1,453
Variable operating expenses, $m
 
  58
  69
  82
  96
  111
  127
  144
  162
  181
  202
  223
  246
  269
  293
  319
  345
  373
  402
  431
  462
  495
  528
  563
  599
  637
  676
  717
  759
  803
  850
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
  58
  69
  82
  96
  111
  127
  144
  162
  181
  202
  223
  246
  269
  293
  319
  345
  373
  402
  431
  462
  495
  528
  563
  599
  637
  676
  717
  759
  803
  850
Operating income, $m
  31
  41
  49
  58
  68
  78
  90
  102
  115
  129
  143
  158
  174
  191
  208
  226
  245
  265
  285
  306
  328
  351
  375
  399
  425
  452
  479
  508
  539
  570
  603
EBITDA, $m
  31
  41
  49
  58
  68
  78
  90
  102
  115
  129
  143
  158
  174
  191
  208
  226
  245
  265
  285
  306
  328
  351
  375
  399
  425
  452
  479
  508
  539
  570
  603
Interest expense (income), $m
  30
  33
  40
  47
  56
  66
  76
  87
  99
  112
  125
  139
  154
  170
  186
  203
  221
  239
  258
  278
  299
  320
  343
  366
  390
  415
  441
  469
  497
  527
  557
Earnings before tax, $m
  31
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  29
  30
  32
  33
  35
  36
  38
  40
  41
  43
  45
Tax expense, $m
  1
  2
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
Net income, $m
  40
  6
  7
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33

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
  1,602
  1,914
  2,259
  2,637
  3,048
  3,490
  3,963
  4,466
  4,999
  5,561
  6,151
  6,769
  7,415
  8,090
  8,792
  9,523
  10,283
  11,074
  11,895
  12,748
  13,635
  14,557
  15,516
  16,513
  17,551
  18,631
  19,757
  20,930
  22,152
  23,428
Adjusted assets (=assets-cash), $m
  1,327
  1,602
  1,914
  2,259
  2,637
  3,048
  3,490
  3,963
  4,466
  4,999
  5,561
  6,151
  6,769
  7,415
  8,090
  8,792
  9,523
  10,283
  11,074
  11,895
  12,748
  13,635
  14,557
  15,516
  16,513
  17,551
  18,631
  19,757
  20,930
  22,152
  23,428
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
  -57
  -68
  -80
  -94
  -108
  -124
  -141
  -159
  -178
  -198
  -219
  -240
  -263
  -287
  -312
  -338
  -365
  -393
  -423
  -453
  -484
  -517
  -551
  -587
  -624
  -662
  -702
  -744
  -787
  -832
Total debt, $m
  931
  1,129
  1,354
  1,603
  1,875
  2,170
  2,489
  2,829
  3,192
  3,575
  3,980
  4,405
  4,850
  5,315
  5,801
  6,306
  6,833
  7,380
  7,949
  8,540
  9,155
  9,793
  10,457
  11,148
  11,866
  12,613
  13,391
  14,201
  15,045
  15,926
  16,844
Total liabilities, $m
  955
  1,153
  1,378
  1,627
  1,899
  2,194
  2,513
  2,853
  3,216
  3,599
  4,004
  4,429
  4,874
  5,339
  5,825
  6,330
  6,857
  7,404
  7,973
  8,564
  9,179
  9,817
  10,481
  11,172
  11,890
  12,637
  13,415
  14,225
  15,069
  15,950
  16,868
Total equity, $m
  419
  448
  536
  633
  738
  853
  977
  1,110
  1,251
  1,400
  1,557
  1,722
  1,895
  2,076
  2,265
  2,462
  2,666
  2,879
  3,101
  3,331
  3,570
  3,818
  4,076
  4,344
  4,624
  4,914
  5,217
  5,532
  5,860
  6,203
  6,560
Total liabilities and equity, $m
  1,374
  1,601
  1,914
  2,260
  2,637
  3,047
  3,490
  3,963
  4,467
  4,999
  5,561
  6,151
  6,769
  7,415
  8,090
  8,792
  9,523
  10,283
  11,074
  11,895
  12,749
  13,635
  14,557
  15,516
  16,514
  17,551
  18,632
  19,757
  20,929
  22,153
  23,428
Debt-to-equity ratio
  2.222
  2.520
  2.530
  2.530
  2.540
  2.540
  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
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
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
  6
  7
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
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
  6
  7
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
Change in working capital, $m
  43
  -10
  -11
  -12
  -13
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -32
  -33
  -34
  -35
  -37
  -38
  -40
  -42
  -43
  -45
Cash from operations, $m
  9
  16
  18
  20
  22
  24
  26
  28
  29
  31
  33
  35
  37
  38
  40
  42
  44
  46
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  75
  78
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
  16
  18
  20
  22
  24
  26
  28
  29
  31
  33
  35
  37
  38
  40
  42
  44
  46
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  75
  78
Issuance/(repayment) of debt, $m
  150
  198
  225
  249
  272
  296
  318
  341
  362
  384
  404
  425
  445
  465
  485
  506
  526
  547
  569
  591
  614
  639
  664
  690
  718
  747
  778
  810
  844
  880
  918
Issuance/(repurchase) of shares, $m
  -1
  70
  80
  89
  97
  106
  114
  122
  129
  137
  144
  151
  159
  166
  173
  180
  187
  194
  202
  210
  218
  226
  235
  244
  254
  264
  275
  286
  298
  311
  324
Cash from financing (excl. dividends), $m  
  102
  268
  305
  338
  369
  402
  432
  463
  491
  521
  548
  576
  604
  631
  658
  686
  713
  741
  771
  801
  832
  865
  899
  934
  972
  1,011
  1,053
  1,096
  1,142
  1,191
  1,242
Total cash flow (excl. dividends), $m
  67
  285
  323
  358
  392
  425
  458
  490
  521
  552
  582
  611
  640
  669
  698
  727
  757
  787
  818
  850
  884
  918
  955
  993
  1,033
  1,075
  1,119
  1,165
  1,214
  1,266
  1,321
Retained Cash Flow (-), $m
  -10
  -76
  -87
  -97
  -106
  -115
  -124
  -132
  -141
  -149
  -157
  -165
  -173
  -181
  -189
  -197
  -205
  -213
  -221
  -230
  -239
  -248
  -258
  -268
  -279
  -291
  -303
  -315
  -328
  -342
  -357
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
 
  255
  236
  261
  286
  310
  334
  357
  380
  403
  424
  446
  467
  488
  509
  531
  552
  574
  597
  621
  645
  670
  697
  724
  753
  784
  816
  850
  886
  924
  964
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
 
  229
  188
  182
  173
  161
  147
  131
  115
  98
  82
  67
  54
  43
  33
  24
  18
  13
  9
  6
  4
  2
  2
  1
  1
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  82.9
  69.3
  58.6
  50.2
  43.4
  37.8
  33.3
  29.5
  26.4
  23.7
  21.4
  19.4
  17.7
  16.3
  15.0
  13.8
  12.8
  11.9
  11.1
  10.3
  9.6
  9.0
  8.5
  8.0
  7.5
  7.1
  6.7
  6.3
  5.9
  5.6

Ares Commercial Real Estate Corporation is a specialty finance company. The Company is primarily engaged in originating and investing in commercial real estate (CRE) loans and related investments. The Company operates through principal lending segment. Its target investments include senior mortgage loans, subordinated debt, preferred equity, mezzanine loans and other CRE investment opportunities, including commercial mortgage-backed securities. These investments are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, senior-living, self-storage and other commercial real estate properties, or by ownership interests therein. Through the Company's manager, Ares Commercial Real Estate Management LLC, it has investment professionals located across the United States and Europe who directly source loan opportunities for the Company with owners, operators and sponsors of CRE properties.

FINANCIAL RATIOS  of  Ares Commercial Real Estate (ACRE)

Valuation Ratios
P/E Ratio 9.5
Price to Sales 4.6
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow 42.3
Price to Free Cash Flow 42.3
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 21.1% 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 28.583 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 3Q profit   [07:59AM  Associated Press]
▶ Ares Commercial Real Estate posts 2Q profit   [Aug-04-17 02:28AM  Associated Press]
▶ Ares Commercial Real Estates Dividend Curve   [Jul-26-17 12:09PM  Market Realist]
▶ [$$] Two Mortgage REITs Set for Earnings Upside   [Jun-13-17 11:52AM  Barrons.com]
▶ Ares Commercial Real Estate posts 1Q profit   [May-02-17 06:45AM  Associated Press]
▶ Ares Commercial Real Estate posts 4Q profit   [06:48AM  Associated Press]
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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