Ares Commercial Real Estate Corp (ACRE) 2014 Q1 法說會逐字稿

Good morning and welcome to the Ares Commercial Real Estate Corporation's conference call to discuss the company's first quarter 2014 earnings result.

During today's presentation, all callers will be placed in listen-only mode. Following management's prepared remarks. the conference will be opened up for questions. As a reminder this conference is being recorded on May 7, 2014.

I would now like to turn the conference are call over to Carl Drake, Director and Head of Public Investor Relations of Ares Management LLC.

Thank you, Operator, and welcome everyone to our earnings call this morning. I am joined today by John Bartling, Chairman; Todd Schuster, President and CEO; Tae-Sik Yoon, Chief Financial Officer; and John Stilmar from Investor Relations.

On this morning's call we will reference our first quarter earnings slide presentation that can be accessed by going to our website at www.arescre.com and by clicking on the Q1 2014 earnings presentation link on the home page of the Investor Resources section of the website.

As a reminder, comments made during the course of this conference call and webcast and the accompanying documents may contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We don't undertake to update our forward-looking statements unless required by law.

The Company's actual results could differ materially from those expressed in the forward-looking statements for any reasons 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.

I would any turn the call over to Todd Schuster.

Thanks, Carl, and good morning, everyone. I am really excited to report that we are on track to benefit from our recent capital and growth initiatives in both principal lending and in our mortgage banking and servicing platform. The quarterly growth in principal lending earnings from $2.9 million in the fourth quarter of 2013 to $5.3 million in the first quarter of 2014 demonstrates the earnings leverage we've gained from investing our available capital into attractive new investments.

The origination momentum in our principal lending business is continuing as showed on slide 3 of our earnings presentation. During the first quarter, our new commitments increased 10% compared to the same period last year and this growth marked the fourth consecutive quarter of year-over-year growth in new commitments.

In addition, Q1 was the first full quarter of investment activity under John Jardine's leadership, and as you may recall John took over responsibilities for our origination teams late in the fourth quarter of last year.

We are very pleased with the new direction and the expansion of our origination capability and we fully expect our new investment momentum to carry into the second quarter. Also on this slide, you can see that our broad origination platform continues to find opportunities to produce generally stable ROAs.

Staying on slide 3 as of May 6, 2014 we expect to have about $58 million in available capital, either in cash or undrawn capacity under our funding facilities and assuming we obtain financing for two recently originated senior loans.

Assuming that we used (inaudible) to make new investments and are able to achieve a debt to equity ratio of 2.5 to 1, we should have the capacity to fund approximately $200 million of additional senior loan investments.

As we seek to further scale our balance sheet within principal lending, I want to know that we believe we have access to alternative sources of leverageable capital that we believe would enable us to grow and be accretive to our earnings.

Over the last three quarters, we have demonstrated our ability to access different forms of capital allowing us to continue to optimize our balance sheet. We have no current intention of pursuing a dilutive equity issuance at these levels. It's worth reiterating that Ares Management is committed to the success of this Company and in that see strong support were Ares through its deal flow relationships and resources.

Our cultured ACRE is centered on direct origination rooted in a philosophy of principal investing that leverages the broad credit capabilities and informational advantages that we believe exist across the organization. As we highlight or slide 4, the shared focus at ACRE and across Ares Management had led us to create an attractive geographically diverse portfolio of more than $1.1 billion with 91% in senior secured loans and 95% of the loans tied to floating rates.

We have continued to scale our platform both in terms of resources and new sectors and geographies. We've been working with the Ares in Europe for past several months identifying investment opportunities there.

Ares Management is already a tenured and successful real estate equity investor in that part of the world with a 15-year track record of successful investing in Europe. Furthermore, Ares Management is one of the largest non-bank lenders to middle-market companies across Europe through it's direct lending platform based in the UK with three additional offices throughout Europe.

As a result, we believe expanding into real estate lending in Europe is a natural extension of our capabilities and by leveraging the scale and credit advantages that we believe are already embedded in these successful direct origination platforms.

Equally important to us is the strategic expansion into senior housing and healthcare. Similar to its deep investment experience in Europe, Ares Management possesses extension of healthcare investment experience across the platform. More specifically, Ares Management is and active investor in and lender to the healthcare industry through private equity and corporate lending activities.

Furthermore, given our strategic investment in ACRE Cap, we have the ability to provide borrowers with both flexible bridge loans as well as long-term fixed rate government backed loans secured by multi-family and healthcare properties.

In order to leverage this broad-based capability, we recently hired a senior originator to build out our footprint in the healthcare real estate lending space. We expect to source new investments in both healthcare lending and the European markets later this year.

Supporting our growth is our ability to source attractive debt capital. On slide 5, we highlight that as our assets have grown. We have worked with our banking partners, advisors and the rating agencies to attract diverse sources of efficient financing. To this end in April, we accessed a highly attractive $195 million credit facility from UVS followed by a recent doubling of our funding facility capacity with Citibank to $250 million. Tae-Sik will discuss this in more detail later in the call, but I think this slide underscores our progress in expanding and diversifying our sources of financing. And as we seek to grow our balance sheet, we intend to continue our emphasis on match funding our assets and liabilities. We believe our balance sheet is well-positioned for a potential rise in interest rates, which we believe in turn enhances ROEs.

Shifting focus to ACRE Capital, our mortgage bank and services business, please turn to slide 6. We believe that ACRE cap runs ACRE's product offerings and access to proprietary deal flow and expands ACRE ability to drive out performance in an increasingly competitive investment market.

Given this opportunity, ACRE Cap has made strong progress in repositioning its origination capabilities with the hiring of 10 new originator since our acquisition of the business in the third quarter of 2013. We are currently making progress on our strategic objectives including focusing on larger loan sizes as well as a growing pipeline of potential rate-locked loans for the second quarter.

In addition to the upgraded staffing and originations, we are actively working to improve and scale the services capabilities to meet the anticipated opportunities in that space. As ACRE Cap enhances the operating scale of the mortgage banking and servicing business, we also expect to experience better long-term cross-selling opportunities and credit performance.

As noted last quarter, we expect the economic benefits of these changes to be Moriah parents in the second half of the year. While ACRE Cap generated a slight loss this quarter as the Company was rebuilding its origination capabilities, our success in hiring and the status of the pipeline gives us confidence that we will see enhanced earnings from ACRE Capital in the back half of this year.

In summary, we expect that our principal lending business will continue to improve its profitability as we continue to make new investments into and increasingly efficient capital structure. More over, we are excited about the expansion of our platform into several new and attractive segments where we can leverage the expertise of the Ares platform.

Regarding ACRE Cap, we are pleased with the building second quarter pipeline that we believe will put ACRE Cap materially ahead of first quarter production levels and on track with our expectations.

I will now turn the call over to Tae-Sik to discuss further advancement on our financing and more details surrounding our first quarter earnings.

Great. Thank you, Todd and good morning, everybody. Today I am going to be discussing the financial results of the Company for the first quarter of 2014 and as Todd mentioned discuss some of our recent accomplishments including most particularly the significant expansion of our borrowing capacity.

So let me start off with our financial results this morning. As Todd stated earlier, our consolidated net income for the first quarter of 2014 was $4.8 million or $0.17 per common share. That as you saw in our earnings release this morning, represent a 45% quarter-over-quarter increase versus our results in the fourth quarter of 2013. This strong growth in net income is primarily attributable to the accretive impact of closing more than $500 million in loan commitments in the fourth quarter of 2013 and the first quarter of 2014 in our principal lending business.

The $4.8 million in that income was composed of a $5.3 million gain in our principal lending business which itself is up more than 80% quarter-over-quarter from the fourth quarter of 2013 and a loss as Todd mentioned of about $576,000 in our mortgage banking segment versus a gain of $361,000 in the fourth quarter of 2013.

For the principal lending segment, we originated from a seven senior loans during the quarter totaling $193 million in commitments of which $179 million was funded at closing. These amounts included six new loans totaling $146 million commitments as well as a refinancing of an existing $47 million loan.

So at quarter end at March 31, 2014 we had 39 loans totaling more than $1.2 billion in commitments and $1.1 billion of outstanding principal. And of course all of the loans that we held continue to perform in accordance with their terms and we are recognizing no impairments at March 31, 2014.

Since ending the first quarter, we have closed an additional three senior loans so far into the second quarter totaling $77 million commitments of which $73 million have been funded so far. So this raises our principal lending portfolio now to 42 loans totaling nearly $1.2 billion in outstanding principal.

And as you heard earlier from Todd subject to obtaining financing commitments in accordance with the terms of our existing funding facilities, we expect to have capacity to fund approximately $200 million of additional senior loans going forward.

Now shifting to our mortgage banking business, ACRE Capital rate-locked approximately $28 million of Fannie Mae DUS and FHA HUD commitments in the first quarter. We continue to expect that our origination activity and therefore our fee income in the creation of new mortgage servicing rights will continue to ramp-up throughout the remainder of 2014. We have added production teams and they are focused on closing new larger loans under GSE and FHA HUD programs.

Turning to our balance sheet, we continue to believe that we are well-positioned to benefit in a rising interest rate environment. As of March 31, 2014, approximately 95% of our principal lending portfolio is comprised of floating rate loans based on LIBOR. So if LIBOR rises, we expect that you are unleveraged effective yield will commensurately rise.

In addition, we have carefully crafted our liabilities to match fund our assets. Each of our funding facilities, including our lines with Wells Fargo, UBS, Citibank, Cap One, along with our menu City National Bank Revolving Facility and the commercial mortgage-backed securitization that we issued last fall, again are all floating rate based on LIBOR. Only our $69 million convertible note issued back in December of 2012 is fixed rate.

So overall that means approximately 95% of our liabilities are floating rate which by design matches our approximately 95% floating rate asset base.

Since we are well match-funded in terms of interest rate, similar to the impact that an increase in LIBOR would have on our unleveraged effective yield, we expect that and increase in LIBOR would also result in an increase in our leveraged ROE.

In addition to carefully match-funding [integrate] exposure, we have also continued to expand our borrowing capacity to fund a significant growth in our loan originations. Since the start of this year, we have added $370 million in new capacity.

First in March, we closed on a new $50 million revolving facility with City National Bank. Second, just a few weeks ago, we closed on $195 million funding facility with UBS. And just yesterday, we successfully doubled the commitment under our existing Citibank facility which increased from $125 million to $250 million.

So with these two new facilities and an increase in the existing Citibank facility, our total debt capacity is nearly $1.3 billion including the $395 million commercial mortgage-backed securitization we closed in November.

Finally, with respect to dividends, our Board declared a second quarter dividend of $0.25 per common share, which is consistent with our quarterly dividend levels two 2013.

Now, before turning the call back every our to Todd I wanted to note that our earnings release for this first quarter of 2014 did not include reference to core earnings and alternative measure that we included in the past.

As you know, ACRE originally adopted the definition of core earnings more than two years ago prior to our IPO our when our business was focused solely on principal lending.

However, following the acquisition of ACRE Capital in the second half of 2013, management believes that core earnings will back a less meaningful measure of ACRE's consolidated financial performance going forward. Accordingly, we have decided to discontinue the practice of reporting core earnings.

And with that I will now turn the call back over to Todd for some closing remarks.

Thanks, Tae-Sik. Before we conclude, I wanted to update everyone on and exciting development involving the parent company of ACRE Investment Advisor.

Last week, Ares Management L.P. priced its initial public offering on the New York Stock Exchange. Following its IPO, Ares Management employees retained ownership of more than 70% of the Company. We believe that this transaction is positive for the future of ACRE as the continued growth of Ares Management will enhance Ares Management's abilities to a attract and remain professional talent and strengthen the Ares platform and provide ACRE with a broader array of information app services.

At ACRE, we continue to grow our core Principal Lending business. We have a leading commercial real estate direct lending platform in our sector which enable is us to see a broad view of the market opportunity and to select strong risk adjusted returns. We are excited to further expand our platform into several new geographies and markets by leveraging Ares deep expertise.

We see tremendous opportunity over the longer-term to scale this business in the US and Europe as we take advantage of the changing bank regulatory environment and the compelling long-term opportunity to finance [spuds] or business plans around transitional assets.

We are also very optimistic about our mortgage banking and servicing business as we are seeing origination momentum resulting from our repositioning efforts, which we believe will result in enhanced earnings in the back half of this year.

Taken together, we see great potential for these two complementary businesses to drive shareholder value. In the near-term , our objective is here to earn and/or exceed our currently quarterly dividend. We believe we remain on track to accomplish this objective in the second half of the year.

I would like to thank our shareholders for their support and our employees for their hard work and dedication.

And with that, operator, would you please open up the lines.

(Operator Instructions). Steve DeLaney. JMP Securities

Thank you. Good morning, everyone. Todd, as you look ahead to the second quarter, you've already closed three lines for about $75 million. As you see the near-term pipeline, are you comfortable giving us any indication as to whether the second quarter volume is likely to exceed the six loans and $146 million excluding the refi that you booked in 1Q?

Steve, what I can tell you is that we are seeing a lot of activity in the market right now, a lot of inquiry into us as it relates to financings across a broad array of asset types. The momentum is clearly building and we are very encouraged by what we're seeing right now.

Okay. I'll take that as a positive outlook. Thank you. And looking forward I know Europe is going to take a while to come together, but when you see the market does the loan products over there and the opportunities should we expect that the bulk of the debt you originated over there over in Europe UK or in the main land would be senior floating rate type of structures as opposed to more mezz like opportunities? Just -- if you could comment more from a loan product rather than just geography what might we see there.

Yes. I would expect that we would continue our sort of protocol and methodology that we have employed here in the US so that we would continue with direct origination, we would continue with the senior loan focus and we would continue with the floating rate focus.

Okay. Very good. And I noticed in the first quarter five of the six loans were multi-family. You've talked in the past about the synergy between your principal lending business and ACRE Cap. As you look at those relationships in the nature of those loans in terms of the transitional aspects, would you expect that some of those loans will end up being refinanced by ACRE Cap in the next two to three years?

Well, a couple of things. First I mean we are seeing -- we continue to see a lot of inquiry around multi-family. I firmly believe that part of that has to do with the fact that we've matched up ACRE Cap with the balance sheet and we're seeing a lot of that synergy playing out right now. There's a lot of sort of cross dialogue, cross inquiry, cross-selling so I think that, you know, multi-family continues to be an important part of what we're going to be doing over the next -- for the foreseeable future, but we also see great opportunities in other assets classes. We're seeing -- we continue to see office as an interesting opportunity and we're also exploring others as well. Did I get to your question?

Yes. I think so. I appreciate the comments. Thanks, Todd.

Yes.

Dan Altscher, FBR.

Thanks and I appreciate you taking my question this morning. You know I was wondering on the financing side how does the outlook right now look for another potential CLO or securitization or I guess in the securitization obviously when you did the one in earlier in the year the loan book was right around $700 million but [health] from investments kind of trending around that area right again. What's the appetite or outlook for doing that sort of financing structure?

So it's a great question, thanks. Look, I think we're always, always, always evaluating the opportunities on the right side of the balance sheet. So we will continue to look at the CMBS market and the CLO market to evaluate whether that's the best execution for us. We're obviously very aware of what's going on in those markets. We constantly monitor them. We're constantly evaluating them. We have done one transaction last year. We are fully up to speed on what we can and can't do there and while I can't necessarily comment on what our plans are, you can be sure that we're watching it carefully and as we achieve a critical mass in our portfolio and if that's -- if it's an opportunity to do something, we will take a hard look at it.

Okay. You know, and then maybe just broadly also about the spread environment, you know, just looking at the quarterly trends it looks like the spread or the overall asset yield is continuing to drop a little bit. Can you talk a little bit about the competitive position in -- or the competitive nature of the business right now? It certainly feels like competition is heating up across the senior part of the mortgage market. Are you guys seeing that too or is there maybe some selective nature in what you're underwriting in terms of looking from perhaps lower assets yield and reflective of the actual assets that you're looking to underwrite?

So, you know, the way we compete is we compete with through our direct origination system, we compete with flexible capital, we compete by being creative around structuring with sponsors. We create -- excuse me -- we compete because we're reliable source of capital that closes when we say we're going to close.

So for all of the reasons I think if you look at the chart in the book -- in the deck that we -- that we attached, if you will, I think you would see that our ROAs are actually kind of holding up right now and in addition we are seeing -- and you mentioned the CMBS market before, we are seeing a significant amount of -- or I'd say a meaningful amount of spread compression on the securities side. So our ability to execute on the right side is increasingly getting better and, again, our ROAs are holding up right now and it's mostly tied to the way we approach the business and the value add that we create for our clients.

Okay. And if I could maybe sneak in one numbers question for Tae-Sik. You know, in ACRE Capital, the comp line moved up a little bit this quarter again. You know I don't remember if there was maybe some noise in the fourth but just to see if there's any noise in this quarter once again or if this is maybe a little bit more representative of the run rate now that you've maybe completed a majority of the hirings.

Sure. Good morning, Dan. I appreciate the question. Yes. In terms of ACRE Capital, we have obviously added some new personnel as we talked about in our prepared remarks and substantial parts of the increase that you saw from the compensation expense last quarter to this quarter is $3.7 million to a little bit over $4 million has to do with increased staffing as well as some one-time costs associated with recruiting, signing bonuses, those kind of things.

So I wouldn't quite take the $4 million as some sort of run-rate, but you are correct in assuming that the increase was due to staffing levels that have been increasing as we continue to build up the team for ACRE Capital.

And let me just add those staffing levels are all around productivity so we're -- we've been hiring as I mentioned before some really high-quality loan producers for ACRE Cap and that in part is what you're seeing in that line item.

Alright. Thanks, guys. Appreciate the time.

Sure. Absolutely, Dan. Thank you.

[Charles Mayhem], Wells Fargo Securities.

Good morning and thank you for taking my question. Within the principal lending business, you had mentioned that you would be looking at larger dollar loans as among your initiatives. Now, in the past -- in the first quarter, let's say the average loan size is probably in the $20 million to $30 million range and excluding the $200 million originations in the fourth quarter that $20 million, $30 million average stood.

Now, going forward how should we think about what loan sizes do you intend to target and in terms of time frame how should we think about a potential migration towards larger dollar loans?

That's a great question and I think what you're noticing in the last quarter is that we moved a little bit into some secondary markets but following our top, you know, high-quality sponsors into some of secondary markets where we see some opportunity and value and when we do that, that's likely to bring down the average loan sizes a little bit as we stay in primary markets and finance sponsors in those markets. Those will tend to be higher average loan sizes. But ultimately, we're going to move where the opportunities are and where we see the value is.

Okay. And a quick numbers question. Do you have the LTV on maybe the originations this quarter versus the existing book?

We -- LTVs -- I don't think is information that we typically provide.

Okay. And I guess one more quick follow-up with I guess my own question. When you think about the fundamentals of primary versus secondary markets, could you perhaps give us some color on what you're seeing in terms of rent, in terms of fundamentals in else terms of provides recovery in those markets and where you're (multiple speakers) opportunity.

Yes. Well first of all you would expect that the increases in values have lagged what's done on in sort of the primary, especially the coastal markets. There is a general improvement of the fundamentals across the secondary markets obviously different markets have different technical and fundamental aspects to them but as a general matter we're trying to find those secondary markets and asset classes in those secondary markets again where the value is and we are trying to follow -- as opposed to sort of leading ourselves into the secondary markets we're trying to follow our upon source, our good sponsors, into those markets so that we're make making sure that while we're in secondary market we're with the best folks in those markets.

Great. Appreciate the color, guys. Thank you very much for your time.

Thank you.

[Michael Rothenburg], [Mohab Partners].

Hi, guys. Thanks for taking my question. In your prepared remarks, you talked about a no interest in raising equity at this time and a desire to earn your dividend. I presume the first point, you know, because your stock is trading around 85% of book value and can you get a little bit more -- yes, I want to say also that we're very concerned because as shareholders here we see a disconnect between management fees (inaudible) areas based on asset size and potential dilution of and equity offering.

So I ask if you can get a little bit more granular on how you expect to earn your dividend? And you talked about, you know, upside of the back half of this year. If you can maybe quantify certain things we're missing in the last quarterly report.

Sure. Good morning, Michael. Thanks for your question. Yes. In terms of earning our dividend, you know I think it's important to note that one of the things we mentioned on our call this morning, our remarks this morning, is that the principal lending business alone as you can see in our segment reporting generated about $5.3 million of net income, which is obviously a significant increase from our prior quarter's income and that really compares to dividends on our current $0.25 of about $7.1 million. So that's about $1.8 million difference so we're getting close and the momentum is certainly building for principal lending as we discussed to get to a higher number.

In addition, as we mentioned while there's a number factors that could ultimately impact the outcome of our earnings. You know, our goal continues to be that the dividend will be earned from our principle lending alone. And probably most importantly as Todd said, when we really take the two businesses together, so principal lending and mortgage banking, as you can tell mortgage banking so far is not a business that has generated returns that we believe it will generate but once we put the changes that we are putting in place now into place we believe that when we take the two businesses together that we will meet and even exceed the dividend over time and particularly starting in the second half of this year.

And can you maybe get a little more specific on the mortgage banking side where the upside is versus the first quarter? Is it expensive?

Sure.

Or is this a -- yes?

Yes. No. It's not so much expensive. I mean obviously as we mentioned there will hopefully be some rationalization of expenses once we get through our restructuring so as any Company once you are going through a restructuring phase, you will incur some one-time expenses and we're starting to see some of those start to come through in this quarter as well as the upcoming quarters.

But really the upside -- the question you asked -- the upside comes from significantly greater production levels. This quarter in particular we generated $28 million of new loan production for the mortgage banking business. Obviously that is significantly below the historical numbers that the Company has produced even prior to us acquiring it and our goal is to significantly increase that number, and that's really the upside.

The upside is we have put in the new originators we talked about, we are undergoing the restructuring changes we talked about and we expect all of that to result in significantly greater production levels going forward, again, starting particularly in the second half of this year and that's really the upside to the mortgage banking business.

Todd, I don't know if you want to have to (multiple speakers) --

No, I think that's -- Tae-Sik I think that's all right. I would just add that we're actually starting to see the pipeline build for the second quarter as well so we're seeing second quarter momentum in that business and we expect that to continue and accelerate into the third and fourth quarter.

Okay. And on the origination side can you maybe quantify if you had your current book in place for a full quarter? Would the earnings be meaningfully higher or -- because some of these loans obviously didn't enjoy the benefit of offering them.

Yes. I mean clearly if we were to originate higher loan levels the earns for the mortgage banking business would be higher. You know, as you can tell we booked -- even with $28 million of loans closing the -- break look in the first quarter of 2014 you can see a mortgage banking revenue was approximately $4.7 million. So as we continue to book more loans and greater volumes we would expect revenues to significantly increase.

As we talked about in some of our prior quarter calls we do have some fixed expenses and some variable expenses, the single largest variable expense being really commissions so there would be some commensurate increases in expenses along with revenues, but we would fully expect that as we increase originations that our net income for the mortgage banking business would increase.

Okay. Got it. I was actually -- I was trying to get to the other side of the business if maybe we're not seeing the benefit of the full quarter and the principal lending because some of the loans came late in the quarter.

Yes. That as well. So timing in the principal lending business does matter quite a bit. In fact, one of the things we mentioned in the fourth quarter results is even though we had very significant originations in the fourth quarter, the fourth quarter -- the vast majority of those loans really were closed in the last 15 days of the quarter so those loans $359 million of originations and commitments in the fourth quarter did not have much impact in the fourth quarter and what you really see in the first quarter is significant increases more than 80% increase in net income as I mentioned in the prepared remarks was largely due to originations of new loans, but particularly the originations done in the fourth loan have the most significant impact really in the first quarter, not in the fourth quarter.

Right. Okay. Got it. It might make sense if you have another quarter like the fourth where the originations come very late to talk about a run-rate earnings from that side of the business, if you have a dynamic like you did again in the fourth quarter. Okay. That's all my questions. Thank you.

Thank you.

Jade Rahmani, KBW.

Thanks for taking the question. Can you just describe the gain on sale of loans line $680,000 what drove that and also the income tax benefit? Actually was -- yes. I think you had a net income tax benefit, which I assume was driven by the mortgage banking loss. So just those two items.

Sure. Good morning, Jade. Thanks for your questions. Yes. In terms the $680,000 gain and that is as you will see in the segment reporting attributable to the principal lending segment, there is more disclosure in the 10-Q about this loan particularly but this relates to the sale of what we call the gray stone senior loan sale. This was a loan that we originated back in the fourth quarter and as you'll notice in the balance sheet at year-end we actually had a loan that we classified as available-for-sale. That loan was successfully sold [put so] into our business plan in the first quarter and when we sold the loan we were -- we recognized a part of the origination fee and the exit fee that were not sold to the purchasers of the senior notes and so the 680 represents basically the gain on recognizing the fees that were not sold as part of the two senior notes that we sold.

And then you also see that because we held that loan [grace] on senior loan available-for-sale, we held it within a taxable resubsidiary because there was our intent our plan to sell that loan so we held that loan in a taxable resubsidiary. That tax resubsidiary obviously is a taxable entity and that's why under principal lending in connection with the $680,000 gain, you also see a $241,000 tax expense associated with that gain.

And then go into your second question in terms of the tax benefits, right. We ended up with a net tax benefit on a consolidated basis of $674,000 and that has to do with, again, the tax benefit that we would expect from the loss, the pre-tax loss, that we incurred for the mortgage banking business at ACRE Capital.

Okay. And so just regards thanks, guys $5.3 million run-rate for the principal or the $5.3 million that the principal lending business actually backed out the $680,000 unless your -- unless there are other similar gains you expect to generate?

Well, yes. I mean there as lot of ways to obviously look at the numbers. You know, if you look sort of through our history, there have been a lot of what are generally classified as one-time items. Obviously, when you start to have a number of one-time items they may be different one-time items. I think you should take into consideration that aspect of it, but that's right. We would not expect gain on sale of loans itself to be a run-rate item as you have described it.

Okay. I mean just regarding the dividend what's the rationale behind maintaining the dividend and essentially paying part of it out of book value at this point?

Well, I think the rationale is our goal is to maintain a consistent dividend level and as we mentioned in both our prepared remarks and in response to some of our questions, it is our goal and it is our belief that we will starting in the second half of this year that we will start to earn our dividend. So we believe the best course of action is to held the dividend steady at this point and, again, execute on our business plan.

Okay. I think in the past you've talked about a leverage target of 2 to 2.5 times. There's other players that are considering higher levels of leverage and given competition as well as the healthiest state of real estate lending from when you originally provided that target are you considering increasing that target or actually what drives your comfort with leverage at this point?

Sure. Good question, Jade. You know I think as the market evolves, as our capital structure evolves, as we continue to scale our business and as we continue to really focus on senior loans, so one of the things you will notice is that at March 31, 2014 95% of our loan portfolio in our principal lending business as measured by outstanding principal is comprised of senior loans. As you can also tell that our portfolio has continued to perform very well and we have recognized since we went public we recognize no impairments, no defaults.

So we have to take into consideration all of those factors when considering what is the appropriate level of leverage. I think we've also successfully demonstrated our ability to tap alternative sources of debt capital. Clearly, we did the commercial mortgage backed securitization back in November of last year. At that point, as we mentioned on our call that effectively resulted in about an 80% advance level or the equivalent of call it 4 to 1 debt to equity. But, again, because that facility, that securitization itself was non-recourse and obviously by terms match funded both in terms of interest rate risk and term, we felt very continuously comfortable that that was the right strategy to employ.

So I think when we're looking at leverage levels we certainly take into consideration our overall debt equity ratios, our overall LTV ratios but again we want to be very specific and take into consideration what type of borrowing facility we're talking about, continuing to match-fund the interest rate exposure, continuing to match fund the term, continue to look for alternative sources, the diversification -- if you want to call it of our financial is sources so all of those factors and more are taken into consideration when coming up with what is the so-called right level of debt to equity, right level of loan-to-values.

The other thing I will just mention before I think Todd want to probably add a comment as well is that a different parts of our Company's cycle, you know, I think you'll see different levels of leverage.

So for example I think if we are preparing to do a securitization or preparing to do some offering, you know, I think it would be advantageous for our Company to take on a bit more incremental leverage so that we have the assets and we have the capacity to do the right size offering and/or securitization. So, again, depending upon the stage of where we are in the capital cycle, I think you'll see different levels of leverage. Todd, did you want to add anything?

No. I think that actually pretty much covered it. I just want to reiterate that we think the quality of our portfolio both from a credit perspective, from a match funding, you know the fact that portfolio is match-funded on asset liability basis, the fact that most of the mortgages, almost 95% of senior mortgages. All of that gives us -- those things collectively give us comfort around issues as they relate to leverage.

Great. Thanks for taking the questions.

Absolutely. Thanks, Jade.

We have no more questions. I would like to turn the conference over to Todd Schuster for closing remarks.

Thank you, Operator, and thank you everyone for your time and questions today. If you have any follow-up, please reach out to our IR department and thanks again for your support and we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call an archive replay of this conference call will be available approximately one hour after the end of this call through May 20, 2014 to domestic callers by dialing 877-344-7529 and to international callers by dialing area code 412-317-0088. For all replay, please reference conference number 10044227. An archive replay will be also available on a webcast link located op the home page of the investor resources section of our website. Thank you.