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What's in the Offing for Ares Commercial (ACRE) Q2 Earnings?

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Ares Commercial Real Estate Corporation (ACRE - Free Report) is scheduled to report second-quarter 2020 results on Aug 6, before the opening bell. The company’s quarterly interest income is expected to have marginally improved year over year, while earnings per share (EPS) are expected to have declined.

In the last reported quarter, this mortgage real estate investment trust (mREIT), which originates and invests in commercial real estate assets, posted core earnings of 32 cents per share, missing the Zacks Consensus Estimate of 33 cents.

Over the trailing four quarters, the company missed the Zacks Consensus Estimate in three occasions and surpassed in the other. It delivered a surprise of 4.37%, on average, during this period. The graph below depicts this surprise history:

Let’s see how things have shaped up prior to this announcement.

Factors at Play

Rebounding from the steep sell-off in March, which resulted in mREITs witnessing a drastic decline in share prices and book values, the mortgage and commercial lending market stabilized during the second quarter. This was supported by the Federal Reserve’s continuous purchase of Agency mortgage-backed securities, a decline in benchmark interest rates to near zero and an improvement in the housing data.

Moreover, with the decrease in floating rates (like LIBOR), repo rates and short-term rates during the second quarter, Ares Commercial is expected to have witnessed lower interest expenses in the second quarter.

As of Mar 31, 2020, 62% of the company’s loan portfolio was collateralized by multifamily, office and industrial properties. These property sectors are relatively less impacted by the pandemic. This is expected to have driven Ares Commercial’s portfolio performance in the second quarter. In fact, the company received all loan debt service payments for the April 2020 payment date. Additionally, it received May and June debt service payments for nearly 96% of its portfolio (based on outstanding principal balance).

However, as of the first-quarter end, 98% of the company’s loans (based on outstanding principal balance) were floating rate loans. The decline in LIBOR rates during the second quarter is expected to impact the company’s net interest income due to lower interest earned on such floating rate loans for the said period.

Its loan portfolio also includes six senior loans on hotel properties. This constituted 14% of Ares Commercial’s outstanding principal balance as of Mar 31, 2020. Notably, the coronavirus pandemic and the resultant social distancing protocols continued to wreak havoc in the U.S hotel industry by reducing travel demand during the second quarter. Severe reductions in occupancy, average daily rate (ADR) and revenue per available room (RevPAR), characterized the April-June period, making it the worst quarter recorded by the U.S. hotel industry.

Hence, recovery of hotels has been unlikely in the second quarter, impacting property owners’ ability to make payments to their lenders. This casts a pall of gloom over debt service for the company’s senior loans on hotel properties and it is expected to have witnessed higher non-accruals related to such loans.

The company also owns a hotel property and recognizes revenues from hotel operations under revenues from real estate owned. The pandemic is anticipated to have significantly impacted occupancy rates and revenues at the hotel property in the second quarter.

Moreover, as the outlook for GDP, employment rates and commercial real estate values remains unappealing, the company is anticipated to have increased its CECL reserves in the June-end quarter. Such an increase in loss provisions is anticipated to have impacted the company’s GAAP earnings and book value per common share in the second quarter.

Amid these, the Zacks Consensus Estimate for second-quarter interest income of $30 million indicates a marginal improvement of 0.03% from the year-ago reported figure.

Lastly, prior to the second-quarter earnings release, there is a lack of any solid catalyst for becoming overly optimistic about the company’s business activities and prospects. The Zacks Consensus Estimate for second-quarter EPS has been unrevised at 24 cents over the past month. It also represents a year-over-year decline of 36.8%.

Here is what our quantitative model predicts:

Ares Commercial does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Ares Commercial is -16.67%.

Zacks Rank: Ares Commercial currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthcare Trust of America, Inc. (HTA - Free Report) , set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

Public Storage (PSA - Free Report) , slated to release results on Aug 5, has an Earnings ESP of +0.41% and a Zacks Rank of 3 at present.

National Storage Affiliates Trust (NSA - Free Report) , scheduled to announce earnings figures on Aug 6, has an Earnings ESP of +0.44% and a Zacks Rank of 3 currently.

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