FBR Upgrades Ares Commercial's 'Show Me Story'

In a report issued Monday, FBR & Co. analysts Daniel Altscher and Cole Allen upgraded their rating on shares of Ares Commercial Real Estate Corp ACRE from Market Perform to Outperform, while raising their price target from $12.50 to $13.00 after meeting with the company’s management.

Prior to the recently held investor meetings with management, the firm believed the small-cap company had “lot to prove in terms of fundamental performance” before it could become positive on the stock. While the current situation may not be perfect, the analysts consider enough progress has been made, especially in ACRE capital, to warrant their Outperform rating.

According to the research note, the specialists at FBR are “aware of some of the pushback around the stock (e.g., ~$340 million market cap, smaller-than-peer balance sheet, little access to equity capital, negative sentiment remnants from nearly two years ago that just cannot be washed away, etc.),” but still believe investors with a focus on small-caps “owe it to themselves to look at this value stock trading at ~80% of book value that is in an active transformation.”

Why does turning around ACRE Capital matter?

Why is ACRE Capital so important to the analysts, if it only accounts for about 20 percent of the company’s overall business, one might ask. Well, since its acquisition was announced in May 2013, the unit has not contributed to earnings and has delivered inconsistent performance. However, this trend seems to have reverted in the past couple of quarters and should continue in the right track, the experts think, and, at the very least, the unit could represent a sellable asset.

Other Factors

A few other key elements supporting FBR’s upgrade include “favorable asset sensitivity to higher short-term interest rates, a floor under the stock with a buyback authorization now put in place, and inexpensive valuation on a book value per share basis.”

Shares of Ares are up about 1.4 percent on Monday trading.