Ares Commercial Real Estate Corp (ACRE) 2012 Q4 法說會逐字稿

Good morning. Welcome to Ares Commercial Real Estate Corporation's earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Monday, April 1, 2013.

Comments made during the course of this conference call and Webcast, and the accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. The Company's actual results could differ materially from those expressed in the forward-looking statements for any reason, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the Company may discuss core earnings, which is a non-GAAP financial measure, as defined by SEC Regulation G. Core earnings is used to compute incentive fees to the Company's manager, and the Company believes it is an appropriate supplemental disclosure for a mortgage REIT. For these purposes, the Company defines core earnings as GAAP net income loss, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization, any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP, and certain other non-cash charges, as determined by and approved by a majority of the independent directors of the Company. A reconciliation of core earnings to net income loss attributable to common shareholders, the most directly-comparable GAAP financial measure, can be found in the Company's earnings release issued earlier this morning, and posted on the Company's website at AresCRE.com. I will now turn the call over to Mr. Michael Arougheti, Ares Commercial Real Estate Corporation's Chairman.

Thank you, operator. Good morning, everyone, and thanks for joining us for our fourth-quarter and year-end 2012 earnings call. I'm joined on the call today by John Bartling, our CEO; Bruce Cohen, our President; Tae-Sik Yoon, our CFO; and Carl Drake, who heads our Investor Relations activities. Before we discuss our results, I thought it would be helpful to put recent market trends into context, and give you our perspective on how these trends impact ACRE. As many of you know, aggressive central bank policies and a global thirst for yield for investors have created abundant liquidity in many markets, and increased investor confidence, as volatility has declined. While this liquid environment has naturally tightened credit spreads for lenders, it has been very supportive of credit performance and asset values, and the outlook for defaults remains moderate. In addition, corporate issuers are benefiting from strong access to the debt and equity capital markets at attractive levels.

From a macroeconomic standpoint, growth remains slow, yet is at a sufficient level to drive fundamental improvement. Recent gains in employment, housing and income levels have provided a sounder foundation for our economy, and for the commercial real estate market. Property values and cash flows have increased, supply continues to be restrained, and vacancy rates are moderate. Stronger liquidity in the commercial real estate market has facilitated a more active financing environment, including a rebounding CMBS market. Based upon the stronger fundamentals, we are seeing increased equity capital flowing into our core markets, creating additional opportunities for us.

When we consider the spread tightening against the improving fundamentals, we continue to believe the commercial real estate market provides compelling opportunities to generate attractive risk-adjusted returns, relative to other classes and the current low level of interest rates. While competition for certain assets has increased, we believe that this is offset by the enhanced opportunities to provide value-added capital in a more active transaction environment. 2012 was a strong year for transaction volume in the commercial real estate market, particularly during the fourth quarter, when the anticipation of changing tax rates incentivized owners to transact by year-end. So far into 2013, property transaction volumes in our market have slowed seasonally, and credit spreads have tightened somewhat relative to the fourth quarter, primarily due to less new volume. However, we believe this slowdown is attributable to seasonality, and the powerful pull-forward effect from anticipated tax changes, and not reflective of a broader slowdown in market activity. In fact, we've seen total deal activity sourced by our origination platform rebuild over the last several months, and we expect that market activity will rebound, and possibly exceed the overall transactional volume of the past year. While 2012 was a good year for commercial real estate fundamentals, we believe the outlook for 2013 and beyond continues to be promising.

As John will walk you through in a minute, we accomplished a great deal in our first year as a public Company. That said, as ACRE's largest shareholder, we remained focused on ramping our earnings and dividends, and becoming a larger company. We're excited about the organic growth opportunity in our business, and we continue to review ways to scale our business, by extending our reach and product breadth. We have a terrific team in place, a high-quality core portfolio, and a solid foundation from which to grow opportunistically. And with that, I'd now like to turn the call over to John.

Thanks, Mike. Let me start by highlighting our accomplishments for the fourth quarter and last year, during which, we completed our IPO in May. As you can see from our earnings release, we finished the year strong by closing seven new loan commitments, totaling $187.2 million in the fourth quarter alone, six of which were collateralized by multi-family properties. We ended the year with a diversified investment portfolio of 15 loans in 12 different markets, totaling $405.7 million in commitments, and $356.7 million in outstanding principal. The portfolio carries an attractive unleveraged effective yield of 7.4%, including a 6.8% on senior loans, with a weighted average loan to value at origination of 75.6%, and 11.4% on subordinate loans, with a weighted average loan to value at origination of 69%. We expect that our unleveraged returns will be enhanced as we apply appropriate leverage to our senior first mortgages, and we believe that we are generating attractive returns for the conservative risk positions we hold. In addition, we are very pleased with the portfolio's performance, as all investments are tracking on plan at year end.

We experienced considerable investment momentum over the final two quarters of 2012, as we originated over $300 million in new investment commitments out of approximately $11 billion in sourced opportunities, over that same time frame. This transaction momentum reflected a few key factors. First, our reputation for providing flexible capital and certainty of execution resonated with clients focused on acquisitions with critical time requirements. Secondly, we continue to benefit from repeat business with incumbent relationships. And finally, improving fundamentals, steady to rising property values, and the aforementioned concern over potential tax change, facilitated transaction activity, particularly during the fourth quarter.

Near the very end of the fourth quarter, we carefully explored all of our options for raising new capital, after we had invested substantially all of the available capital that we had raised in our IPO. We determined that the most effective way to protect book value per share, and to enhance earnings for shareholders, was to issue unsecured convertible notes, with an initial conversion price above our book value per share. Tae-Sik will provide more detail on this issuance later in the call, but I want to point out that beyond being shareholder-friendly, it will have a short-term drag on earnings, until the capital's fully invested, not too dissimilar from raising common equity. Once the proceeds are fully invested, however, we expect the capital to be accretive to earnings. Since no management fee will be paid on this convertible debt, unless converted into equity, growth in our interest income from new investments should lead to improved profitability, as most of our expenses are largely fixed in nature.

It should also be noted that although overall demand for the convertible notes exceeded the amount we offered, certain of our directors, officers and affiliates directly invested in over 12% of the capital raise, reflecting our continued confidence in our investment strategies. While convertible notes issuance did add a little drag to our earnings, we are pleased that the Company swung to a $0.12 per share profit in the fourth quarter, or $0.14 per share in core earnings, a substantial improvement from prior quarters. This change in profitability particularly demonstrates the accretive impact of ramping our portfolio into attractively-yielding investments. We still need to leverage our expense base further by investing our remaining available capital in the second quarter, to achieve even higher levels of profitability.

Now let me discuss what we have accomplished since the beginning of 2013. In our press releases this morning, we highlighted that we had led the closings on transactions totaling $179.6 million in commitments during the first quarter. Of this total, a new $47 million loan commitment replaced an existing one of the same amount. Net new fundings on the commitments totaled $51.1 million, which will ultimately be funded using a little more than 50% of the capital that became available from our convertible notes issued.

Let me take a minute to walk you through these transactions. On March 20th, we closed a loan assumption and modification on an existing $47 million loan commitment, collateralized by a Miami office property, to facilitate the acquisition of the property by a new sponsor group. We were pleased that we were awarded the acquisition financing in conjunction with the sale of the property to two new sponsors, one of which is a pre-existing client of ours. Importantly, both our flexibility and our incumbent relationship with one of the acquiring sponsors played important roles in maintaining this strongly-performing asset, and at the same interest rate, despite an improvement in our loan to value using current market pricing. Our loan to value at origination of 76% on the old loan declined to 67%, based on the purchase price, validating the quality of our original underwriting on this property.

On March 28, we led the closing of a co-originated $107 million loan commitment through our relationship with a prominent owner and operator in Atlanta. The owner-operator, along with its JV partner, required acquisition financing for three Class A multi-family properties totaling 1,026 units in three attractive sub-markets of Atlanta. These assets were part of a large divestiture underway by a major property owner. Our ability to convey certainty of closing for the sponsors and the seller was instrumental in their winning bid for the properties, and it played a role in our ability to secure this highly-attractive financing opportunity. As part of the transaction, we elected to structure the overall investment as an A-B note, whereby we funded a $26.7 million B note, while a $68.1 million A note was funded by a large money center commercial bank. Total occupancy on these three properties averaged over 96%, and the blended weighted average loan-to-value at origination was approximately 80%. The initial all-in interest rate on our B note is approximately 12%, but will fluctuate, depending on changes in LIBOR and fundings to the borrower.

On March 29, we closed a $25.5 million first mortgage financing collateralized by two Class A office buildings in the Overland Park sub-market of Kansas City. We funded $24.4 million on the loan at closing, and the proceeds were used to refinance existing indebtedness. The loan has an initial loan-to-value of 65% and carries an unleveraged effective yield of 6.1%. This loan was also provided to a repeat customer, showing the power of incumbent relationships as we grow.

Through the consummation of all three transactions made during the first quarter, you can see firsthand the importance of our incumbent relationships. We were able to protect our current investment and interest rate on the Miami property investment, despite the change in ownership. Secondly, our direct relationship with the Atlanta owner-operator and the seller helped us secure the acquisition financing for the sponsor group. In the case of the Kansas City loan, the sponsor group provided us the opportunity to review its portfolio, and encouraged us to provide value by refinancing existing indebtedness. This early look at the portfolio was invaluable in our process to win this investment opportunity.

On a pro forma basis as of March 29, we had a portfolio of $458.6 million in commitments, and $407.7 million in outstanding principal of loans held for investment, across 17 loans. Since we closed these two new transactions at the very end of the first quarter, we will see an immaterial earnings impact from these investments for the first quarter. As Mike discussed, we have begun to review a number of intriguing new growth opportunities in both the primary and secondary markets that could help us scale our business. We are seeing increased transaction flow and asset classes such as industrial and retail, among other property types. In addition, our capital markets teams continued to review secondary whole loans and portfolio of loans for attractive investment opportunities, where we can leverage our knowledge and industry expertise.

As a result of the rebounding market, and the expanding breadth of our platform, the total amount of the investments we are reviewing has increased since the amounts we reported on our last call in November. To give you an idea of the components of our current pipeline, as of March 29 we had $126 million of potential loans, with respect to which we have issued non-binding term sheets. $316 million of potential loans with soft quotes, or where indicative terms have been provided, and another approximately $1.2 billion of potential loans that we are evaluating at various stages. The breakdown by property type was approximately 55% in office, 20% in multi-family, 12% industrial, 7% retail, and 6% other. Of course, we can't assure you that we will close any of these loans, and we may co-originate a portion of these loans. In addition, we note that we typically close a relative small portion of the loans we review, particularly when such loans are in the earliest stages of evaluation.

With that I will turn the call over to Tae-Sik to review our fourth quarter results, and additional financial commentary. Tae-Sik?

Thank you, John, and good morning. I will now discuss the financial results of our Company for the fourth quarter, as well as for the full year 2012. On our website this morning, AresCRE.com, we posted our fourth-quarter and full-year 2012 earnings announcement, as well as a copy of our 2012 10-K that was filed this morning. During the fourth quarter of 2012, our loans held for investment generated approximately $4.9 million of gross interest income. Our associated interest expense was $1.3 million, resulting in a net interest margin of approximately $3.6 million for the fourth quarter. For the full year, our loans generated approximately $9.3 million of gross interest income, compared to about $2.3 million of interest expense, for a net interest margin of $7 million. Other expenses for the fourth quarter totaled approximately $2.5 million, including base management fees, third-party professional fees, and other general and administrative expenses.

As we mentioned on our prior earnings call, to make certain that we have the resources and the staff to successfully execute our business plan as a national direct lending platform, we have built out our infrastructure in size, to manage a much larger asset base than the one we currently have. However, once we reach greater scale in terms of our loans held for investment, as well as our capital base and revenue, we expect to see better absorption of our operating expenses. For the year, our expenses totaled approximately $6.1 million. For the fourth quarter of 2012, our net income attributable to common stockholders was $1.1 million or $0.12 per basic and diluted common share. Our core earnings for the fourth quarter were $1.3 million, or $0.14 per basic and diluted common share, after adding back $136,000 of non-cash stock-based compensation, and $97,000 unrealized non-cash loss, due to the mark-to-market loss on the derivative liability that was created on our balance sheet, related to the conversion features of our convertible notes.

For the full-year 2012, our net income was $186,000 or $0.03 per basic and diluted common share, and our core earnings were $621,000 or $0.09 per share, after adding back $338,000 of non-cash compensation, and again, the $97,000 unrealized non-cash loss on the derivative. We have provided a reconciliation of core earnings to net income in the back of the earnings release and Form 8-K filing that we provided this morning. As John covered earlier, we ended the fourth quarter of 2012 with $405.7 million in commitments, and $356.7 million in outstanding principal amount of loans, with a weighted average remaining life for all loans of 2.8 years. Details of the loans held for investment are outlined in our earnings release for the fourth quarter, as well as our 10-K.

The assets backing our loans are geographically diversified, with approximately 40% of the properties located in the Southeast, 35% in the Northeast, 13% in the West, 8% in the Midwest, and 4% in the Mid-Atlantic region. All are segmented by the outstanding principal amount of the loans. In addition, as far as interest rate risk, all of our loans other than a $14.3 million mezzanine loan are floating rate. Similarly, all of our liabilities under our three funding facilities are also floating rate. As a result, we believe we are well match-funded in terms of interest rate risk on our assets and liabilities.

As of December 31, 2012, we had outstanding unfunded commitments on loans totalling approximately $49 million. As John noted, all of the investments in the portfolio were paid in accordance with our terms, and we had no loan impairments as of December 31, 2012. At the end of 2012, we had $387.9 million in total assets, including approximately $23.4 million in unrestricted cash. Our stockholders equity was approximately $165.4 million, or $17.85 per diluted common share at December 31, 2012.

Now, let me discuss our recent capital raise, and how it impacts our available capital and earnings. On December 19, 2012, we issued $69 million of unsecured convertible notes due December 2015. The notes carry a coupon of 7%, with an initial conversion price of $18.65 per share, which represents a 15% premium to the trading price of our common stock upon pricing, and about a 4.5% premium to our year-end book value per share. As John stated, we determined that convertible notes are the most cost effective and leverageable form of capital available to us at the time in order to move us toward our profitability goals. We used the net proceeds of approximately $66 million from the convertible notes to initially repay outstanding borrowings, until we use such funds available for new senior loans. While the issuance of the convertible notes creates some amount of drag to our near-term earnings, we expect that as we fully redeploy the capital that became available, the transaction will become accretive to our earnings. The two investments that closed at the end of March will certainly minimize this initial earnings drag, and as we continue to invest this capital, we expect the transaction will be additive to our earnings.

As of the close of business of March 29, 2013, and once a formal financing commitment is in place to finance the $25.5 million commitment that closed last week, we will have approximately $48 million of remaining capital, either in cash or in an approved but undrawn capacity under our senior funding facilities. After holding $20 million in reserve, we will have approximately $28 million in capital to fund new investments, additional commitments, and for other working capital purposes. Assuming that we can achieve a debt to equity ratio on this capital of 1 to 1, to 2 to 1, the Company will have capacity to fund approximately $55 million to $85 million of additional senior loans and existing commitments. Finally, subsequent to the end of the fourth quarter, we funded our dividend of $0.25 per common share on January 10, 2013, for shareholders of record as of December 31, 2012. As you may have seen in our press release on March 20th, we declared our first quarter dividend of $0.25 per common share, consistent with the fourth quarter's level, to be paid on April 18 to shareholders of record on April 8, 2013. With that, I will now turn the call over back to John.

Thanks, Tae-Sik. In summary, we are proud of our achievements in our first partial year as a public Company, and we're excited about our future prospects. During 2012, we accessed the equity markets as the only commercial mortgage IPO, and we demonstrated access to the convertible notes market later in the year. Since our IPO, we have originated a strong portfolio by leveraging our team and infrastructure in place, and we have closed over $350 million in new investments through the end of the first quarter of 2013, and from a market perspective, we believe we have established ourselves as a credible and flexible one-stop provider of transitional and acquisition capital in the mid-sized commercial real estate lending sector for investments in the $30 million to $75 million range. Our fourth-quarter momentum was very strong, and was our most active quarter to date of new investments. While our first-quarter net fundings were lower compared to the fourth quarter, due to seasonality and other market factors, we were able to put over 50% of the capital that became available to us, as a result of our issuance of convertible notes, to work in attractive, new investments at the tail end of the first quarter. This seasonality appears to be behind us, as evidenced by the pick-up in the investment we have just recently originated over the last several months, and the size of our current investment pipeline, reflecting the strengthening market and our platform breadth.

Finally, as Mike stated earlier, we continue to believe the market dynamics ahead of us are compelling, and have reinforced our strategy. If last year proved one thing to us, it is that we offer a unique value proposition to the market. We not only originate product directly, but we also offer a high service component, characterized by flexibility of structure and responsiveness to our clients' needs. Our service and flexibility are particularly well-suited for sponsors seeking to unlock value through transitional capital. We expect the need for our capital will improve, as the equity capital flows move into the core markets, where our value proposition can be of most value.

We believe that our earnings results do not yet reflect our potential, due to our sub-scale size, and we recognize that there may be challenges along the way, given the lumpiness we may face between capital raising and asset deployment. However, as witnessed with the convertible notes offering, we continue to be thoughtful in how we raise our capital to scale our business. In addition to improving expense absorption, we believe that increased scale will enable us to lower our cost of funds, provide additional asset and liability diversification, and increase trading liquidity for our shareholders. We also continue to review various financing alternatives, including the securitization and portfolio financing markets. Most importantly, we want to build a Best-in-Class business to match the market opportunities we foresee, and deliver an attractive and lower-risk earnings and dividend stream to our shareholders.

On behalf of the entire team, Mike, Tae-Sik, Bruce, Carl and our dedicated team of investment professionals here at Ares, we want to thank our investors for their continued support. That concludes our prepared remarks. Operator, please open up the lines for the question-and-answer session.

(Operator Instructions)

And our first question will come from Steve DeLaney of JMP Securities. Please go ahead.

My first question has to do with how you're viewing the developments in the CLO market. And I guess, specifically, in addition to the fact that CLO financing, or CMBS, however you actually structure it, in addition to being non-recourse and permanent match-funded, do you believe that over the course of 2013, there might be some potential for interest cost savings through a structured financing, as compared to your use of your three bank facilities? Thanks.

Hi, Steve. Thank you very much. It's John.

Yes, John, good morning.

Absolutely, we think that the CLO market is forming. It's becoming attractive, and we do believe that we'll be able to access it in 2013, and lower our overall cost of funding. Managing the right-hand side of our balance sheet is as important to us as our investment activity on the left-hand side of the balance sheet. So we see that as an opportunity to improve our net interest margin, and we're going to be actively watching that market form, and you should expect us to be pressing in on it.

And along those same lines, John, thank you, do you also from time to time -- I know when you do a lot of your new co-originations, you're working with an A note and a B note structure. So when you think about CLOs and taking those first lien positions and essentially selling an A note through a securitization, is there also opportunity to work with individual banks on a particular -- like a regional bank, on a particular loan that might be in their market? And is that also an opportunity, so you're not really tapping the capital markets, but you're really using your network of commercial bank relationships and basically selling an A note instead of issuing a CLO?

You said it very well. Thank you. The good news about Ares, or being here at Ares, is that we do have dedicated resources, not only in real estate but across the whole platform, that we leverage off on with our bank relationships, whether they're the big money center banks, or the regional banks, or even local or community banks. We are actively talking to those finance center, we're working with them on co-origination. We're also working with them on potential opportunities to monetize assets, where we think that there's an opportunity to do that. And we do look to continue to press in on those relationships. So whether it is the securitized market or it's the bank market, we are active in it. We have two dedicated resources, the loan and real estate and the capital markets team that really are doing nothing more than just actively talking to the bank market, and the securitization market.

Steve, it's Mike Arougheti. Just by way of example, as we talked about in the prepared remarks, if you look at the investments that we made at the end of the quarter, the B notes that we structured, carry a 12% yield on it. I think there was another benefit that may not be obvious to folks, but we've talked about before, is when you start the origination of the investment as a whole loan and structure an A-B, we have the ability to fatten the B note, if you will, so the attachment point for our B note tends to be much higher up the capital structure than you would see, if the origination were coming from a bank. We're not having to give up the yield. In particular, when you're in spread tightening environments like the one that we've been in generally over the last 12 to 18 months, it's quite remarkable that through that direct origination and structuring gain, you can keep your yield and your risk position intact by effectively arbitraging the liquidity in the bank space.

It should also be added that when we control -- this is the benefit of direct origination. When you control the origination, you control the dialogue with the borrower. We are in a position then, where we in turn go to the bank market and work them on the A note, so that we are getting the best pricing, and that is active on every single deal.

Thanks. Appreciate all the comments, and good luck in 2013.

Thank you, Steve.

Our next question will come from Jade Rahmani of KBW. Please go ahead.

I wanted to ask, given your investment capacity pipeline, and your comment that 2013 originations could be similar or greater than 2012, can you discuss how you expect to fund future growth, and how you think about increasing leverage versus future capital issuances?

Thanks, Jade. Great. Clearly, as we seek to build scale, we will likely need to raise capital. Scale matters here. We have been very up-front that we believe scale is important to our business and we have the infrastructure in place to be a much larger Company. Beyond the obvious aspects of it, it does absorb our fixed operating expenses, it increases trading liquidity, helps lower our funding costs, and improves access to capital. It also increases our value proposition to our clients with larger hold sizes, with further diversification to our investors, and improves our ROE.

We do have available capital that is from our convert, as Tae-Sik mentioned earlier, around $55 million, $85 million in senior loan capacity. In the near term, there are several more options in front of us to garner some more balance sheet efficiencies. We are exploring non-recourse financing structures and the securitization in the portfolio financing markets, and we'll continue to explore other forms of capital. I think the most important thing to note is, as we look at where our price per share was at the end of last year, we decided not to go into the equity issuance market, because we didn't like where the price was, to book. It is a metric. But as we look at other metrics in our business, including the benefit to EPS, we're going to continue to evaluate what is the best execution in the form for us to access the capital markets.

Okay. And just a clarification, as of March 29, can you give the available capacity on the three bank facilities?

Sure. We have significant capacity under the bank facilities. In total, capacity under the three bank facilities are in excess of $300 million. The actual drawn amounts under the three facilities as of March 29 is actually just under $200 million, $199 million. So we still have significant capacity. I think one of the things that we mentioned early on is our goal to take off some of the capital that we have financed under those three funding facilities, put it into a different type of financing vehicle, whether that be a CLO-type vehicle or some other form of permanent capital financing, so that we would expect to free up additional capacity under our three lines.

Okay. And in the investment capacity section of the press release, you refer to leverage of between 1 to 2 times with respect to that one loan origination. I believe at the time of the IPO, you were targeting 2 to 2.5 times leverage, and I wanted to see if anything had changed, with respect to your total leverage expectations or targets.

No, it's a good clarification, Jade. No, the expectation is that we still are targeting the 2, 2.5. The reason we had indicated the 1 to 2 range is, if you look at our leverage as of year-end, you'll see that we were sub-scaled in terms of our leverage. We were actually under 1.5 in terms of debt to equity. Even with the new loans that we booked this quarter, we will still be under 2, and so we wanted to indicate a range that was consistent with where we are today. But our stabilized goal is to still hit the 2 to 2.5 range in terms of debt to equity. I think when we talk about some of the financing options we just talked about, CLO, other permanent financing, I think those other types of vehicles will allow us to achieve the more optimal leverage that we just discussed.

Okay. Thanks for that. And just a final quick one. Regarding the convert, should we use the 9.4% effective interest rate that you disclosed in your 10-K for modeling purposes?

Yes. I think it's important to note that obviously that has three components to it. One is the actual 7% coupon, and then you have the additional amortization of the expenses related to the convertible note offering itself. And then we have the amortization of the warrant component, the $1.8 million derivative component. So it's really all three of those combined, that get you to that level. Obviously, the expense component, we've already paid for that up front. The warrant component is a -- the derivative component is a non-cash component, so I think it's important to note 9.4 is an all-in cost of capital for GAAP purposes, for interest rate calculation purposes, that is higher than what's going to be the actual interest expense that we pay out-of-pocket each quarter.

Our next question will come from Amrita Ganguly of JPMorgan. Please go ahead.

This is, Amrita, and I actually work with Rick Shane at JPMorgan. I have two quick questions, but first I think you just touched on, we were trying to get to that $313,000 of other interest expense, and -- again, I apologize, this is a bit repetitive. I see that about $100,000 is the increase in the derivative mark from the 1.7, when you issued to the 1.8 at December 31. And then is that other $200,000, is that just the two odd weeks that you had issued the convert times the 9.4%? And would that be -- I understand the market is going to move around every quarter. That's not something that we can predict. Is it fair to say that $200,000 is kind of the appropriate run rate expense going forward?

I think that's correct. If you look at the $313,000, and there should be a breakout in the 10-K, but you'll see that $97,000 of that, as you mentioned, is due to the non-cash mark-to-market on the derivative components of the convertible note offering itself. The remaining $216,000 does relate to that 9.4% cost of capital, which again includes the various components that we just talked about. The actual coupon, the amortization of the expenses, as well as the amortization of the derivative component itself. I think it's important to dissect all three of those and sort of recognize which are actually cash components, which are non-cash components.

Sure. Okay. And then the next question is another quick modeling question, as well. On the professional fees, it looks like -- I understand obviously you had a lot of transactions during the fourth quarter, so it makes sense. But the expenses were noticeably higher than the third quarter. So going forward, is that the roughly $500,000, is that -- should we think about that as kind of just the fixed cost per quarter, or is it relative to the number of originations, or the volume of originations? How should we think about that going forward?

Sure. I think it's hard right now with the fact that we went public back in May of last year to give, I would say, a very normalized run rate on the professional fees. As you mentioned, it will fluctuate depending on the activities for the quarter. It will depend upon some of the things that we're looking at, some of the other issues that come up. So there's going to be some variability in the professional expense. As you mentioned, in the third quarter, that amount was lower than what we booked for the fourth quarter, different than what we booked in the second quarter. While we do have some estimates for that, I think right now it's hard to give too much predictability in professional fees. I would say that what we've experienced in the last couple of quarters, it's a pretty good indication overall, to give a pinpoint number at this point would be a little difficult.

It would be premature. Excellent. Thanks so much.

And we have no additional questions at this time. I would like to hand the call back to Mr. Bartling for his final remarks.

Thank you very much everybody, for joining us today on the call. I think what you're hopefully seeing is us grow our business the way we had hoped to grow it. We're very excited about the fourth quarter, and what we're doing. Ares remains one of the largest shareholders, and as such, we've had a great track record of always doing what is right to build this business, and we're working hard to do it. So everybody have a good day, and we'll talk soon. Thank you.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference will be available approximately one hour after the end of this call, through April 15, 2013, to domestic callers, by calling 877-344-7529, and to international callers, by dialing +1-412-317-0088. For all replays, please reference conference number 10025354. An archived replay will also be available on a webcast link located on the home page of the investor resources section of our website. You may now disconnect your lines.