Critical Review: Ares Commercial Real Estate (NYSE:ACRE) and MFA Financial (NYSE:MFA)

MFA Financial (NYSE:MFA) and Ares Commercial Real Estate (NYSE:ACRE) are both small-cap finance companies, but which is the superior investment? We will contrast the two businesses based on the strength of their analyst recommendations, dividends, institutional ownership, profitability, risk, valuation and earnings.

Valuation and Earnings

This table compares MFA Financial and Ares Commercial Real Estate”s gross revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
MFA Financial	$745.06 million	0.90	$176.78 million	$1.00	6.66
Ares Commercial Real Estate	$54.83 million	3.41	-$900,000.00	($0.08)	-42.12

MFA Financial has higher revenue and earnings than Ares Commercial Real Estate. Ares Commercial Real Estate is trading at a lower price-to-earnings ratio than MFA Financial, indicating that it is currently the more affordable of the two stocks.

Institutional & Insider Ownership

65.3% of MFA Financial shares are held by institutional investors. Comparatively, 41.3% of Ares Commercial Real Estate shares are held by institutional investors. 1.0% of MFA Financial shares are held by company insiders. Comparatively, 2.3% of Ares Commercial Real Estate shares are held by company insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a company will outperform the market over the long term.

Analyst Ratings

This is a breakdown of recent recommendations and price targets for MFA Financial and Ares Commercial Real Estate, as provided by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
MFA Financial	1	2	4	0	2.43
Ares Commercial Real Estate	2	4	1	0	1.86

MFA Financial presently has a consensus price target of $9.79, indicating a potential upside of 47.02%. Ares Commercial Real Estate has a consensus price target of $5.00, indicating a potential upside of 48.37%. Given Ares Commercial Real Estate’s higher probable upside, analysts plainly believe Ares Commercial Real Estate is more favorable than MFA Financial.

Dividends

MFA Financial pays an annual dividend of $1.44 per share and has a dividend yield of 21.6%. Ares Commercial Real Estate pays an annual dividend of $0.60 per share and has a dividend yield of 17.8%. MFA Financial pays out 144.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Ares Commercial Real Estate pays out -750.0% of its earnings in the form of a dividend. MFA Financial has raised its dividend for 1 consecutive years. MFA Financial is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Profitability

This table compares MFA Financial and Ares Commercial Real Estate’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
MFA Financial	19.38%	7.58%	1.05%
Ares Commercial Real Estate	-8.04%	4.08%	1.23%

Risk & Volatility

MFA Financial has a beta of 1.45, meaning that its share price is 45% more volatile than the S&P 500. Comparatively, Ares Commercial Real Estate has a beta of 1.19, meaning that its share price is 19% more volatile than the S&P 500.

Summary

MFA Financial beats Ares Commercial Real Estate on 12 of the 17 factors compared between the two stocks.

About MFA Financial

MFA Financial, Inc., together with its subsidiaries, operates as a real estate investment trust in the United States. It invests in residential mortgage securities, including non-agency mortgage-backed securities, agency MBS, and credit risk transfer securities; residential whole loans, including purchased performing loans, purchased credit deteriorated, and non-performing loans; and mortgage servicing rights related assets. The company was incorporated in 1997 and is based in New York, New York.

About Ares Commercial Real Estate

Ares Commercial Real Estate Corporation, a specialty finance company, originates and invests in commercial real estate (CRE) loans and related investments in the United States. It provides a range of financing solutions for the owners, operators, and sponsors of CRE properties. The company originates senior mortgage loans, subordinate debt and preferred equity products, mezzanine loans, and other CRE investments, including commercial mortgage-backed securities. It 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. Ares Commercial Real Estate Corporation was incorporated in 2011 and is based in New York, New York.