Ares Commercial Real Estate (NYSE: ACRE) and Starwood Property Trust (NYSE:STWD) are both finance companies, but which is the better business? We will compare the two businesses based on the strength of their profitability, earnings, risk, valuation, institutional ownership, dividends and analyst recommendations.

Analyst Ratings

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

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Ares Commercial Real Estate 0 2 2 0 2.50
Starwood Property Trust 0 0 2 0 3.00

Ares Commercial Real Estate presently has a consensus target price of $14.17, indicating a potential upside of 16.60%. Starwood Property Trust has a consensus target price of $24.00, indicating a potential upside of 21.52%. Given Starwood Property Trust’s stronger consensus rating and higher possible upside, analysts plainly believe Starwood Property Trust is more favorable than Ares Commercial Real Estate.

Insider & Institutional Ownership

63.1% of Ares Commercial Real Estate shares are owned by institutional investors. Comparatively, 67.7% of Starwood Property Trust shares are owned by institutional investors. 1.8% of Ares Commercial Real Estate shares are owned by insiders. Comparatively, 2.4% of Starwood Property Trust shares are owned by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a stock will outperform the market over the long term.

Valuation and Earnings

This table compares Ares Commercial Real Estate and Starwood Property Trust’s top-line revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Ares Commercial Real Estate $81.96 million 4.24 $40.33 million $1.14 10.66
Starwood Property Trust $784.67 million 6.57 $365.18 million $1.66 11.90

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

Dividends

Ares Commercial Real Estate pays an annual dividend of $1.08 per share and has a dividend yield of 8.9%. Starwood Property Trust pays an annual dividend of $1.92 per share and has a dividend yield of 9.7%. Ares Commercial Real Estate pays out 94.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Starwood Property Trust pays out 115.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Starwood Property Trust has raised its dividend for 2 consecutive years. Starwood Property Trust is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Volatility and Risk

Ares Commercial Real Estate has a beta of 0.62, indicating that its share price is 38% less volatile than the S&P 500. Comparatively, Starwood Property Trust has a beta of 0.22, indicating that its share price is 78% less volatile than the S&P 500.

Profitability

This table compares Ares Commercial Real Estate and Starwood Property Trust’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Ares Commercial Real Estate 33.69% 7.76% 2.16%
Starwood Property Trust 52.28% 11.88% 0.79%

Summary

Starwood Property Trust beats Ares Commercial Real Estate on 13 of the 16 factors compared between the two stocks.

Ares Commercial Real Estate Company Profile

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.

Starwood Property Trust Company Profile

Starwood Property Trust, Inc. is a real estate investment trust. The Company operates through three business segments: Real estate lending (the Lending Segment), which engages primarily in originating, acquiring, financing and managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, commercial mortgage-backed securities (CMBS), residential mortgage-backed securities, and other real estate and real estate-related debt investments; Real estate investing and servicing (the Investing and Servicing Segment), which includes a servicing business in the United States that manages and works out problem assets; an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, and a mortgage loan business, and Real estate property (the Property Segment), which engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties.

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