Reviewing 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 investment? We will compare the two businesses based on the strength of their dividends, risk, analyst recommendations, profitability, institutional ownership, valuation and earnings.

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	-44.10%	11.92%	1.32%
Ares Commercial Real Estate	-13.02%	-5.15%	-1.80%

Risk & Volatility

Two Harbors Investments has a beta of 1.19, meaning that its share price is 19% more volatile than the S&P 500. Comparatively, Ares Commercial Real Estate has a beta of 1.26, meaning that its share 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 10.1%. Ares Commercial Real Estate pays an annual dividend of $0.60 per share and has a dividend yield of 12.3%. Two Harbors Investments pays out -54.4% of its earnings in the form of a dividend. Ares Commercial Real Estate pays out -400.0% 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 raised its dividend for 1 consecutive years. Ares Commercial Real Estate is clearly the better dividend stock, given its higher yield and lower payout ratio.

Institutional & Insider Ownership

64.2% of Two Harbors Investments shares are owned by institutional investors. Comparatively, 41.3% of Ares Commercial Real Estate shares are owned by institutional investors. 0.7% of Two Harbors Investments shares are owned by insiders. Comparatively, 1.8% of Ares Commercial Real Estate shares are owned by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a company is poised for long-term growth.

Valuation and Earnings

This table compares Two Harbors Investments and Ares Commercial Real Estate”s gross revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Two Harbors Investments	$450.15 million	3.11	$298.17 million	($2.50)	-5.37
Ares Commercial Real Estate	$69.65 million	3.86	-$34.99 million	($0.15)	-32.53

Two Harbors Investments has higher revenue and earnings than Ares Commercial Real Estate. 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.

Analyst Ratings

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

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Two Harbors Investments	1	7	1	0	2.00
Ares Commercial Real Estate	1	3	1	1	2.33

Two Harbors Investments presently has a consensus target price of $11.96, indicating a potential downside of 10.96%. Ares Commercial Real Estate has a consensus target price of $5.33, indicating a potential upside of 9.29%. Given Ares Commercial Real Estate’s stronger consensus rating and higher possible upside, analysts clearly believe Ares Commercial Real Estate is more favorable than Two Harbors Investments.

Summary

Ares Commercial Real Estate beats Two Harbors Investments on 10 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.