Analyzing Ares Commercial Real Estate (NYSE:ACRE) & Two Harbors Investments (NYSE:TWO)

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

Insider & Institutional Ownership

64.2% of Two Harbors Investments shares are held by institutional investors. Comparatively, 41.3% of Ares Commercial Real Estate shares are held by institutional investors. 0.7% of Two Harbors Investments shares are held by company insiders. Comparatively, 1.8% of Ares Commercial Real Estate shares are held by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company will outperform the market over the long term.

Volatility and Risk

Two Harbors Investments has a beta of 1.19, indicating that its stock price is 19% more volatile than the S&P 500. Comparatively, Ares Commercial Real Estate has a beta of 1.26, indicating that its stock price is 26% more volatile than the S&P 500.

Dividends

Two Harbors Investments pays an annual dividend of $1.36 per share and has a dividend yield of 12.0%. Ares Commercial Real Estate pays an annual dividend of $0.60 per share and has a dividend yield of 11.6%. Two Harbors Investments pays out -27.8% of its earnings in the form of a dividend. Ares Commercial Real Estate pays out -3,000.0% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Two Harbors Investments has increased its dividend for 1 consecutive years. Two Harbors Investments is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Profitability

This table compares Two Harbors Investments and Ares Commercial Real Estate’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Two Harbors Investments	-109.90%	12.00%	1.29%
Ares Commercial Real Estate	-1.64%	-1.99%	-0.70%

Analyst Recommendations

This is a breakdown of current ratings for Two Harbors Investments and Ares Commercial Real Estate, as reported by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Two Harbors Investments	2	7	0	0	1.78
Ares Commercial Real Estate	2	3	1	0	1.83

Two Harbors Investments presently has a consensus target price of $12.88, indicating a potential upside of 13.26%. Ares Commercial Real Estate has a consensus target price of $5.33, indicating a potential upside of 2.86%. Given Two Harbors Investments’ higher probable upside, equities analysts plainly believe Two Harbors Investments is more favorable than Ares Commercial Real Estate.

Earnings and Valuation

This table compares Two Harbors Investments 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
Two Harbors Investments	$412.00 million	2.87	-$454.30 million	($4.89)	-2.32
Ares Commercial Real Estate	$54.83 million	5.24	-$34.99 million	($0.02)	-259.25

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

Summary

Ares Commercial Real Estate beats Two Harbors Investments on 9 of the 17 factors compared between the two stocks.

About Two Harbors Investments

Two Harbors Investment Corp. invests in, finances, and manages mortgage servicing rights (MSRs), agency residential mortgage-backed securities (RMBS), and other financial assets through RoundPoint in the United States. The company target assets include agency RMBS collateralized by fixed rate mortgage loans, adjustable rate mortgage loans, hybrid mortgage loans, or derivatives; and other assets, such as financial and mortgage-related assets, including non-agency securities and non-hedging transactions. It qualifies as a REIT for federal income tax purposes. As a REIT, the company must distribute at least 90% of annual taxable income to its stockholders. Two Harbors Investment Corp. was incorporated in 2009 and is headquartered in St. Louis Park, Minnesota.

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.