ACRE

We rate Ares Commercial Real Estate Corp (ACRE) as a Reduce with a composite score of 41.0/100 at a current price of $5.01. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in value (49th percentile) and momentum (38th percentile), which together account for the majority of the composite score. Offsetting weakness in investment (22th percentile) and stability (24th percentile) tempers our overall conviction. We assign a No Moat rating (11/100), Very High uncertainty, and Poor capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress; the path to profitability. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Ares Commercial Real Estate Corp holds a top-quartile position (#0 of 50) within the Finance, Insurance, And Real Estate sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 41.0/100 places it at rank #3415 in our full 7,333-stock universe. At $248M in market capitalization, Ares Commercial Real Estate Corp is a small-cap player in the Finance, Insurance, And Real Estate space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue contraction of -16% combined with momentum at the 38th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 0% (-76.5pp vs sector) narrow to operating margins of -6% (-23.5pp vs sector) and net margins of -6.9%, yielding a gross-to-net conversion rate of N/A%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $5.01, Ares Commercial Real Estate Corp is trading near fair value based on current fundamentals. Our value factor score of 49/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at EV/EBITDA of 9.4x (at a premium), P/B of 0.6x, P/S of 4.8x. We evaluate these multiples in the context of both absolute levels and sector-relative positioning to form our valuation view.

We assign a Very High uncertainty rating to Ares Commercial Real Estate Corp. The stock exhibits multiple compounding risk factors: significant leverage (186% debt-to-equity), current negative profitability (net margin -6.9%), below-average price stability (24th percentile). The extreme uncertainty around future cash flows makes precise valuation difficult, and the range of outcomes is exceptionally wide. Only investors with high risk tolerance and extended time horizons should consider this name.

Specific risk factors that inform our assessment include: significant leverage (186% debt-to-equity); current negative profitability (net margin -6.9%); below-average price stability (24th percentile); weak quality scores (31th percentile). Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 24th percentile and quality factor at the 31th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: a 15.52% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate Ares Commercial Real Estate Corp's capital allocation as Poor. Key concerns include low returns on equity (-0.6%), elevated leverage (186% D/E), negative profitability, weak asset returns (ROA -0.2%). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — Ares Commercial Real Estate Corp significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, Ares Commercial Real Estate Corp receives a Reduce rating with a composite score of 41.0/100 (rank #3415 of 7,333). Our quantitative framework assigns a No Moat (11/100, trend: stable), Very High uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 33/100.

Our analysis does not support a constructive view on Ares Commercial Real Estate Corp at this time. The combination of limited competitive advantages, very high uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.