Ares Commercial Real Estate Corp (ACRE) 2014 Q3 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 third quarter 2014 earnings.

(Operator Instructions)

As a reminder, this conference is being recorded on November 10, 2014. 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 words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. These forward-looking statements are based on management's current expeditions of market conditions and management's judgment. These statements are not guarantees of future performance, condition, or results, and involve a number of risks and uncertainties.

The Company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, 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 will now turn the call over to Todd Schuster, ACRE's President and CEO. Please go ahead, sir.

Thank you, Chad, and good warning everyone. I'm joined today by Tae-Sik Yoon, our Chief Financial Officer, and John Stilmar from investor relations.

This morning, we reported third-quarter earnings of $4.1 million or $0.14 per common share, which was comprised of $4.9 million in earnings from our principal lending business, and an $800,000 loss from our mortgage banking unit. Our principal lending business performed in line with our expectations, after considering the impact from loan prepayments, discussed on our last earnings call. However, we experienced a shortfall in production within mortgage banking, that created a setback in earnings.

While our third-quarter mortgage banking results did not meet our expectations, the benefits from the repositioning of the business are becoming more evident in the fourth quarter. As a result, we expect the fourth quarter to demonstrate stronger ACRE capital production and earnings, when combined with the anticipated rebound in earnings from our principal lending business, we expect to cover the dividend in the fourth quarter.

Let me put all of this into context. Our focus is on building a leading, full-service commercial real estate lender, that delivers attractive returns and dividends with prudent investing and capital management. Since our IPO, we have built a strong portfolio of directly-originated loans, totaling over $1.2 billion.

Our direct origination footprint, along with our capability to invest across the capital structure, allows us to originate attractive assets, while optimizing the returns, using a variety of financing sources. We have enhanced our business by extending into new products and diversifying our revenues, including the addition of at GSE-focused mortgage banking platform. In today's competitive market, we believe these attributes are paramount and building a successful and sustainable full-service real estate lending company.

During the third quarter, our principal lending business was very active, originating $235 million of new senior floating rate loan commitments in seven different transactions. All of these commitments were in primary, established commercial real estate markets. Furthermore, consistent with their plan to deliver stable returns through various cycles, 84% of these commitments were collateralized by multi-family and office properties.

We continue to have a balance of growing relationships with new borrowers, while simultaneously leveraging incumbent relationships, as about a third of the new principal loan originations in the third quarter came from repeat customers. Our ability to control our origination process also affords us the ability to be disciplined around portfolio construction. Our portfolio is geographically diverse, and continues to perform very well from a credit perspective.

Furthermore, 95% of our loan portfolio is comprised of floating rate assets, which are match funded with floating rate liabilities. As a result, when short term interest rates rise, we expect a corresponding lift in earnings. As we continue to build a highly attractive principal loan portfolio in the quarter, earnings within principal lending had a modest sequential decline, given the prepayments that we discussed with you on our prior earnings call.

The impact of prepayments was particularly acute, as they occurred earlier in the quarter as compared to our new investments, which closed towards the end of the quarter. Furthermore, most prepayments came from loans that were in our 2013 securitization, which deleveraged our balance sheet as the proceeds went to repay the senior bonds in the structure. These factors drove lower third-quarter earnings for principal lending.

So far in the fourth quarter, we have not had any prepayments. We do anticipate prepayment activity late in the fourth quarter, however, we anticipate that such activity will closely align with the timing of new loan originations. Therefore, the overall impact to earnings should be minimal.

Furthermore, the fourth quarter will benefit from a full quarter of earnings from loans originated late in Q3. As a result, we expect fourth-quarter earnings from our principal lending business to rebound to second-quarter levels.

Shifting to ACRE Capital, the $800,000 loss was driven by production for the quarter that is well below our goal for the business. We have been pushing to stabilize the production levels by the second half of this year, and more specifically, for the fourth quarter. Regardless, third-quarter loan production was disappointing, and in hindsight, we were a quarter behind in our efforts to stabilize production.

However, given the investment in and enhancements to our production and servicing groups, combined with the receipt of the Freddie Mac license in August, we have added meaningful value to ACRE Capital, and we expect that value to be reflected by increased production and earnings starting in the fourth quarter. More specifically, based on the strength and advanced stages of our loan pipeline, along with loans originated to date, we expect ACRE Capital to achieve record levels of production in the fourth quarter, ranging between $200 million to $250 million.

Further aiding this outlook is the completion of ACRE Capital's servicing platform transition. Since acquiring ACRE Capital, we have enhanced the servicing infrastructure and relocated the platform to Plano, Texas, to better accommodate the growth that we expect in the business. As this migration is now complete, we expect ACRE Capital to garner $250,000 to $500,000 of quarterly expense savings, starting in the fourth quarter.

Lastly, we have communicated our goal of covering our dividend from earnings by the end of the year. I am pleased to say that we are on track to execute against this goal, as we estimate that we will earn a range of $0.25 to $0.28 per share for the fourth quarter. This estimate is in part based on achieving between $200 million to $250 million of originations in our mortgage banking business, of which $51 million has already been achieved so far in the quarter.

In addition, other factors, such as the timing and returns on projected originations in principal lending and mortgage banking segments, and the timing and amounts of prepayments in the principal lending segment, could cause a possible variance to this projection. This, of course, would not include any unforeseen extraordinary or one-time items that may impact our results, including significant volatility in interest rates.

Going forward, we do not plan on providing quarterly earnings guidance on a regular basis, as we believe investors should evaluate our business and our dividend-paying capability over longer periods of at least annually. With respect to dividends, our board declared a fourth-quarter dividend of $0.25 per common share, consistent with our historical quarterly dividend levels throughout 2014.

I would like to turn the call over to Tae-Sik Yoon, our Chief Financial Officer, to provide additional detail on our third-quarter results and financial position.

Great. Thank you, Todd, and good morning everybody. Today I will be discussing and reviewing the financial results of the company for the third quarter, and discuss in more detail our continued progress in optimizing our balance sheet, including lowering the cost of debt funding, diversifying our sources of debt capital, and freeing up additional sources of new investable capital.

So let me start off with our financial results first. As Todd stated earlier, our consolidated net income for the third quarter of 2014 was $4.1 million, or $0.14 per common share, consisting of $4.9 million profit in our principal lending business, and an $800,000 loss in our mortgage banking business.

The decline in net income for our principal lending business versus second quarter of 2014 is primarily attributable to approximately $125 million in anticipated prepayments of senior loans that we experienced in the third quarter. Fortunately, we were able to party mitigate the impact of prepayments by originating seven new senior loans, totaling $235 million in commitments during the quarter. Nonetheless, prepayments did have an adverse impact on third-quarter results for principal lending.

At quarter end, we had 43 loans totaling more than $1.4 billion in commitments, and $1.2 billion of outstanding principal, with 95% of the portfolio comprised of floating rate loans. All of our loans continue to perform in accordance with their terms, and we have no delinquencies and no impairments at September 30, 2014.

In our mortgage banking business, which we call ACRE Capital, we rate-locked $51 million of Fannie Mae DUS loans during the third quarter, again, significantly below our objectives, due to the continued stabilization of the business that we acquired about a year ago, in the third quarter of 2013. However, as Todd noted, we have made significant progress and expect that our origination activities, and therefore our net income, will ramp up meaningfully in the fourth quarter of 2014.

As our production team gains more traction and time in the market, we expect production volume to grow meaningfully in the fourth quarter. In addition, as we are substantially complete with our restructuring and consolidation efforts at ACRE Capital, we do not expect to incur $250,000 to $500,000 of expenses in the fourth quarter that we experienced in the prior quarters of this year, as part of the now-complete restructuring efforts.

Now, let me turn to a few comments about our continued success in optimizing our balance sheet. Let's begin with our success in lowering our cost of debt capital. A year ago, at the end of third-quarter 2013, the weighted average cost of our total debt capacity for our secured funding facilities, through which we finance our senior loans, was LIBOR plus 2.43%, excluding the amortization expenses.

In comparison, as a result of further reductions in borrowing spreads and successfully closing two securitizations in the past 12 months, our weighted average cost -- the weighted average cost of our total debt capacity for our secured funding facilities and securitizations, through which we finance our senior loans, including undrawn commitments, is down to LIBOR plus 2.15%, again excluding the amortization expenses. So overall, we are down about 25 to 30 basis points in borrowing costs over the past year.

Second, in addition to lowering the cost of our debt capital, we have significantly expanded our debt capacity and diversified our sources of debt capital. For example, on July 30, as discussed in the last earnings call, we closed a second $75 million revolving credit facility with City National Bank, with support from our manager, Ares Management.

And shortly thereafter, on August 13, we added a new source of financing through a new facility with Metropolitan Life Insurance Company. Having this $180 million facility from a well-regarded insurance company enhances our sources of liquidity and adds to our ability to capitalize on the current market opportunities to owners of commercial real estate.

And most recently on August 15, we announced further improvements in our capital structure, with the pricing of our second securitization transaction, by selling $309 million of investment grade bonds to third parties, while retaining $70 million of non-investment grade securities. The initial coupon is LIBOR plus 145 basis points before expenses, and represents a compelling source of financing for our senior floating rate assets.

At the end of third-quarter 2014, our total debt capacity stands at $1.7 billion, versus just over $500 million at the end of the third-quarter 2013. So more than a 3 times increase. In addition, we have diversified our debt funding sources to include warehouse lines at four different banks, an insurance company, as well as successfully issuing two securitizations.

Finally, one last point about optimizing our balance sheet. We have been able to free up additional leveragable capital that we have utilized to fuel the growth of the company without the need to raise new common equity. In fact, in 2014 alone, we have freed up nearly $150 million of such leveragable capital from various sources, including the two credit facilities totaling $125 million with City National Bank and approximately $20 million of incremental proceeds from the August securitization.

Going forward, we expect to continue to optimize our balance sheet. As we ended the third quarter of 2014, with a debt-to-equity ratio of 2.5 to 1, we believe that we have significant capacity on our balance sheet to continue to originate new loans, and grow our business, without the need to issue new common equity.

Now let me provide a snapshot of our current capital availability. Subject to obtaining financing commitments in accordance with the terms of our existing funding and credit facilities, we expect to have capacity to fund approximately $280 million of additional senior loans going forward, assuming a debt-to-equity ratio of 3 to 1.

And finally before turning it over back to Todd, let me address the question that we often receive about rising interest rates. More specifically, we are asked whether our earnings would be adversely impacted if short-term interest rates go up. Fortunately, and by design, because 95% of our assets in our principal lending business are floating rate, and we have match funded our liabilities with floating rate debt, we are well-positioned to benefit in a rising interest rate environment, so in fact, if LIBOR rises, we expect our net income to rise commensurately.

And so with that, I will now turn the call back over to Todd.

Thanks, Tae-Sik. While our third-quarter results were primarily impacted by lower production within our mortgage banking business, we are already experiencing a meaningful improvement thus far in the fourth quarter. Looking forward, our principal lending business continues to perform well, as we obtain attractive new investment opportunities across the capital structure.

Our mortgage banking business is poised to expand, as our new production professionals gain traction, and as we capitalize on a broader GSE product offering, and some seasonal tailwinds. This improvement gives us confidence that our fourth-quarter earnings are on track to earn our quarterly dividend of $0.25 per share. With a diverse source of revenue streams and optionality for higher interest rates to drive greater principal lending earnings, we believe our Company is well-positioned to deliver attractive earnings and dividends, as we look into 2015 and beyond.

Before we take questions, I wanted to welcome Rob Rosen as our new Chairman of the Board of Directors. Rob has been a Board member of ACRE since the Company's inception. I have had the pleasure of working with Rob as a board member and in my current role, and greatly admire his commitment and contribution towards building ACRE.

Rob has a distinguished professional career, with 35 years of leadership as a senior executive and director in financial services, healthcare services, and real estate companies, as well as private equity funds. Rob is also an operating advisor to the Ares Management private equity group, and is an inaugural member of Ares Capital Corporation's Board of Directors. I look forward to working with Rob more closely in his new role, as we continue to build a leading commercial real estate business at ACRE.

This concludes our prepared remarks. Operator, please open up the lines for Q&A.

(Operator Instructions)

Dan Altscher, FBR.

Thanks and good morning. I appreciate you taking my call today. I had a question about ACRE Capital first, I think the call referenced a couple of times that mortgage banking was a little bit below expectations. Can you maybe help quantify how much maybe it was below what you were thinking, and maybe perhaps more importantly, why it ended up being below those expectations?

Yes. Dan, its Todd. I would say a few things. First of all, I don't think we anticipated a huge quarter in the third quarter out of ACRE Cap.

With that said, we certainly anticipated something greater than $51 million. Probably something more in line with what we did in the second quarter, just the generic reaction to the question. But I can tell you that towards the end of the second quarter, we were beginning to see meaningful pipeline activity as a result of all our repositioning efforts at ACRE Capital, and ultimately, it just took a little bit longer than we had anticipated for the pipeline to materialize.

Given that fourth quarter increased to $200 million to $250 million it's a pretty big number now, you're clearly on your way, it looks like, so far. With some fourth quarter activity, but there's still a lot that needs to be done to reach those numbers. So, how or why are you so confident then, that fourth-quarter can reach those big increases?

I guess I would agree with you that there's a lot to be done, but I just want to add that there's a lot that has been done. And if you kind of look at the pipeline that we have right now, it is in a much more advanced stage in terms of where deals are in their normal lifecycle. So we just feel pretty confident about the number that we put out there, the $200 million to $250 million. Very confident.

Okay and then maybe just other quick one, and then I will drop off. Just parsing the comments together from the call and the press release. Q2 seems like it's going to be more of a normalized -- or I shouldn't say normalized. 4Q should look a little bit more like Q2 in terms of principal lending, and then there should be a good ramp in mortgage banking. So is that the right way to take the $0.25 to $0.28 that fourth-quarter in the lending business is probably a little bit north of $0.20, or around $0.20, and then mortgage banking is the difference?

Sure, Dan. This is Tae-Sik. I think your general comment about fourth-quarter principal lending being somewhat closer or somewhat to second quarter is generally correct.

When we talked last time on our earnings call, I think we advised that third-quarter in particular would have some volatility due to prepayments, and obviously both Todd and I remarked about the impact of the prepayments in the third quarter. Fourth-quarter, we don't expect prepayments to impact the fourth-quarter results as directly as it did third quarter. But I think your general comment about fourth-quarter principal lending results being somewhat akin to second quarter is generally correct.

Okay. Thanks. I'll drop off for others.

Steve Delaney, JMP Securities.

Good morning, everyone, and let me say at the outset that just given the lumpiness, we really appreciate the view ahead to fourth quarter. I think it will serve everyone well. Maybe to start with Tae-Sik.

You have a convert that you put on at the end of 2013, I guess. I think it's 7% coupon. It would seem that, I think it was a three-year deal, so we're really looking at that borrowing, and looking at it as having essentially one year to go. Tae-Sik, I wondered is that issue, is that callable at this point, or when it might it be callable?

Sure. Good morning, Steve. The first convert that we did, the $69 million convert was done in December 2012. And you are absolutely right, there is three years term. And so the due date would be December 2015. Like most converts, we do not have a callable feature to it.

Okay.

Obviously there other strategies that we could follow. For example, we could try to simply purchase the outstanding convertible notes, but we do not have a right to call it per se.

Okay. Got it. Thanks for clarifying that. So any addition, you'd have to let that basically run its course before you could look to replace that funding?

Or as I mentioned, either run its course or look to potentially buy it back early.

Got it. Okay. Shifting over to ACRE Capital and the new Freddie Mac license that you obtained back in August. I was just curious if that is already benefiting your pipeline? Didn't know if any of the producers that you have brought on have a long record with Freddie and you have already seen some benefits of the addition to the broader product set?

There is no question, it's helped. It's helped energize or re-energize the origination system. We will absolutely close -- shouldn't say absolutely, but we will close loans in the fourth quarter in Freddie Mac. You'll start to see that activity pick up in the fourth quarter, and then certainly in the first quarter, as well.

So we will see Freddie Mac activity. It really helps that the originators in the field, when they have multiple products that they can sell. So all in all, the Freddie Mac acquisition has been very valuable for us.

And, Todd, taking that thread a step further, if Freddie has a small balance product, and I believe just in the past year they've added a manufactured housing product like Fannie Mae does as well. So when you look at Freddie, do you look at all those product offerings from Freddie Mac, as well as just the traditional program plus?

Right now we're focused on the traditional program, if you will, but we constantly evaluate some of their other products and are always discussing internally whether or not we want to participate in some of those other products. Of course, it's up to Freddie as well. It's not just a unilateral choice on our part.

But we're constantly looking at the product offerings that Freddie has, and make decisions accordingly. But I will tell you, we are very focused on the main line product right now, we're trying to remain extremely focused, and really get this pipeline moving through the system, and get our closings up.

Got it. Talking about just the repositioning broader at ACRE Capital. I recall in my notes somewhere from last call or from conversations, I believe you said you had 12 producers there? Is that still accurate?

That's about right.

About right? Okay. So I know this is kind of forward thinking, and I'm trying to stay out of guidance. But if you have 12 established producers, and what the normalized annual production is for these types of originators, how can we view, based on what you have in place now, what the annualized capacity of that origination team might be, relative to the numbers that we're putting up now?

Understanding that there's lumpiness, but you could say third quarter, fourth quarter combined, you've got a $50 million number and a $250 million, so let's call it $300 million, double that to $600 million, is that capacity? Or should we think of capacity as being a multiple of what the annualized 3Q, 4Q originations might be?

So it's a great question. I think of it in a couple of different ways, Steve. First of all, if you take our range for fourth-quarter, we're going to do somewhere around $400 million for the year, in a year that we were repositioning the business. So we fully expect to do meaningfully more next year. And we're continuing to build the business.

So if rates and the GSEs and everything cooperate, fourth quarter of 2015 should be better than the fourth quarter of 2014. Just as a general matter. And moreover, I'd quote a statistic, it may not be exactly right, but the way I think about the business is about 65% of the business gets done in the second half of the year, and 65% of that gets done in the fourth quarter.

So there's some seasonality of the business. So if you start to do some math around what we think fourth-quarter 2015 will be better than fourth quarter 2014, and maybe 35% of that business happens in the fourth quarter, you can start to do some math around that, I guess.

Right. Okay. Thanks for the color. It's helpful.

Jade Rahmani, KBW.

Thanks for taking the questions. Just following up on that last point.

Can you elaborate on the outlook post-4Q? For example, to what extent is the pickup in ACRE Capital attributable to seasonal factors, rather than the repositioning? And on the loan side, how do you plan to offset the compression in loan yields, since it looks like you're originating loans at around LIBOR plus 3.75%, or maybe a touch higher, versus your current blended average, excluding origination fees of around 5.2%?

Thanks, Jade.

Look, in the mortgage banking business, it's a building business for us, right? So there is seasonality that I just described. But in addition, the overall business, the level of the overall production should be building as well. So you're seeing -- you'll start-- you're seeing in the fourth quarter and you will see that, hopefully, over 2015 play out.

And as it relates to the question about spread compression on the principal lending business, we have seen spread compression. I don't know, I'm not necessarily predicting a meaningful more spread compression, it could certainly play out that way. We are actually starting to get a sense that some of the regional banks are getting a little more full on their products, and maybe that'll have an impact on the market.

The risk retention rules probably won't have a meaningful impact for a year or so, because that's a two-year implementation. But as a general matter, spreads have come in on the left side, but as Tae-Sik noted in our financings, for example, on the securitization at LIBOR plus 145, they've clearly come in on the right side. So what we're seeing is ROAs are in, and ROEs might be impacted, but not nearly as much as you would suspect by just looking at the ROAs.

Jade, one thing to clarify there, just to make sure we're comparing, I would say apple-to-apple in terms of spreads and yields. I think what you're referring to in terms of suggesting the 375 as our current spread, we obviously listed a couple of recent deals that we have closed, and that ranged from LIBOR plus 375 to LIBOR plus 395.

And yet, none of that includes the amortization of fees, both front-end fees and exit fees. Whereas the 5.2% that you referenced, which is really 5.1% at the end of 9-30 for our senior loans, that includes the fees. So if you look at the weighted average interest rate without the fees, you see it's about 4.6%. So I think that's probably a better comparison of the existing yield of our existing portfolio versus what we are seeing currently in the market.

And again I would just caution that the three deals that we've identified as having closed since quarter-end is three loans. It's not necessarily representative of the example of the type of all of the loans that we will be dealing going forward.

Great. Actually that clarification is very helpful. In terms of your interest expense, the impact of the amortization of deferred financing fees, was, I think about $3 million or so this quarter. Is that a line item that includes anything unusual? And also, to what extent was there an impact from prepayments on any of the product that you've securitized, since I think those are fixed pools?

Sure. No, it's right.

I think when we have loans in either of our securitizations and those loans prepay, what we will do is we will also accelerate the recognition of deferred financing fees related to those two securitizations. So for example, in the third quarter, when you look at our total interest expense, included in that $8 million interest expense for the quarter is a little bit more than $1 million of securitization cost that we accelerated, due to some prepayments of loans that occurred within the first securitization that we did.

In addition, there was approximately $400,000 of other expenses associated with putting in place the second securitization, that we should not have on a going-forward basis. So, that's right. I think of that $8 million in interest expense, you do see a significant portion being a beatable to the acceleration of deferred financing fees, as well as some one-time fees associated with the second securitization that we completed.

Okay. So, is it fair to say that about $1.4 million might be considered -- is $1.4 million of the $8 million might considered elevated?

Well, I would say they are certainly one-time in connection with the securitizations. Obviously, to the extent that we have more prepayments within the securitization of loans in the securitizations, we will continue to amortize or accelerate the recognition of those deferred financing fees. The good news is that we also have deferred revenue of one-time fees that we get, both front-end and back-end fees, that we would also recognize in the interest income.

So for example, just to give you a number for the third quarter, so the amount of interest expense that we recognized on an accelerated basis was the $1 million, again part of the deferred financing costs. To offset that, we had about $735,000 interest income that we recognized as accelerated deferred revenue on the same loans that prepaid in the securitization.

Okay. Can you also discuss your prepayment expectations? I think Todd alluded to some prepayments you expect late in the fourth quarter. But also just on a go-forward basis. I think I've seen reports noting, and it's also probably a function of yield compression, but reports noting a pick-up in refis out of CMBS, since those loans originated a couple of years ago, are now attractive to refinance.

So, Jade, real estate is a somewhat of a tax-driven business, and as a result, you see, oftentimes, a flurry of activity towards the end of the year. So we have not experienced any prepayment activity in the fourth quarter, but we do expect some by the end of the quarter. It's a little tricky to predict, because these notes -- the notes that the borrowers have usually provide for like a 30-day notice or something like that.

So we don't always know exactly when those prepayments are coming in. We try to stay very close to the borrowers in the servicing and asset management of the loans. And sometimes, we get an earlier read in that respect. But as a general matter, there's a 30-day provision, and that's the lead time that we can get as it relates to prepayments.

Thanks. And lastly, I just wanted to ask, since I saw three of the deals you did this quarter were in New York City. If you could provide a view on the New York City market, given how high land prices have risen, and the pipeline of new developments?

New York City continues to attract capital from North America, and Europe and Asia, as well. It is a magnet. It's a capital magnet. We're very -- we like New York a lot, but we like a lot of other cities in the US a lot, as well. But in the case of New York, we think, listen, you could have some occupancies move up and down a little bit within modest ranges, or rents move up and down within modest ranges, but as a general matter, we like the outlook for New York quite a bit.

Thanks very much.

Rick Shane, JPMorgan

Thanks for taking my question. I thought the answer you provided to Steve Delaney was very helpful, and I'd love to explore that just a little bit further. One of the pieces of math that you can do off of that is using the seasonality that you described, and the originations at that you're projecting in the fourth quarter determine a run rate headed into 2015, and I think that's a useful exercise.

Two questions there. One is how much pull-forward, given the weak third-quarter do you see in that fourth quarter number? Is it a little bit inflated because of that?

And a follow-up to that is, as we head into 2015, if we start to see the run rate in the fourth quarter as a base rate plus or minus, what do you think the growth rate potential from there is? Obviously, we're not going to get the doubling or tripling we saw quarter over quarter. Is this a business, given market share opportunities, that's a 10%, 15% platform growth opportunity?

So a couple ways to think about that. The production in the fourth quarter, you would come to the conclusion that it's pulling third-quarter production into it. I think of it a little differently, since we've been repositioning the business. It's more about when the stabilization starts to hit of the business, and that's what we're seeing in the fourth quarter. We thought we would see more of that in third quarter, but it's really beginning to stabilize now in the fourth quarter.

Going forward again, it's hard for me to get granular with you on the production levels and the increases. But I would just again tell you that I believe that fourth-quarter 2015, all things being equal in the market, will be higher than what we are experiencing in 2014. And I think, clearly, the first three quarters we had in 2014 are not reflective of the stabilized business, or what we think this business can do.

Got it. And, again, I think the incremental information you provided today was really helpful in terms of understanding what the potential is in the third and fourth quarter each year. With the idea that you are laying out channel markers, in terms of where you think the business is going to range between, on the low end in the first and second quarter of the year, what type of the -- what percentage of the annual production would you normally anticipate, based on seasonal trends you had seen in the past?

You can see anywhere of 35% to 45% of your business can come in the first half of the year. 40% is maybe a good number. I know I said 65% in the second half, but maybe 40%. Especially, if you have a strong fourth quarter to feed off of going into the early part of the year.

And does that skew into the second quarter at all? Is there a dip in the first? It sounds like that you said there probably isn't.

I'm sorry, repeat the question? I didn't get it.

Because of the substantial volumes in the fourth quarter, would we expect Q1 would be the lowest of the year? It sounds like you just suggested that Q1 and Q2 might be more on parity with one another.

Not always. It doesn't always fall into a rhythm. They are generally in parity. Again, this is a business for us that's building. So we just expect to see more production than what we've obviously seen in our prior, in 2014 in those quarters, substantially more.

So it's going to be hard for you to drive any conclusions until you see, my guess is, a full year of production. But as a general matter, we're going to see -- we should see a lot more production in 2015 than we saw in 2014.

Got it. And, I know there's an enormous number of variables. I appreciate you willing to help us at least understand the parameters in a better way. Thank you.

[Charles Nandhan], Wells Fargo.

Just a broader question on the multifamily market. I was wondering if you comment on some of the newer products at Fannie and Freddie, and the extent to which the could help drive overall market share for the GSEs within the multi-family market, heading into 2015?

I'm going to come at the question a little bit more generically. Look, in the first six months of 2014, the GSEs were down meaningfully, something like 50%. And then came back fairly aggressively, starting in the third quarter.

The GSEs, I think, are committed to maintaining a meaningful market share in the multi-family space. And they might ebb and flow a little bit during the course of the year. I don't think you will see the kind of ebbing that we saw late in 2013 and early in 2014. But you will see some at ebb and flowing around the numbers, but as a general matter, the GSEs are committed to the space.

And we're seeing it in terms of -- the thinking they are doing around their products, how they're executing the leadership that they're providing in their businesses. So we're seeing it in a multitude of ways. But it definitely appears like they are very committed to the space and to market share, meaningful market share.

Okay. And as a follow-up, could you give us a sense for the timing of your third quarter originations relative to the repayment? I believe you may have touched on this, but it would seem, based on our numbers, that the good majority of those originations were back-weighted within the quarter? Is that a fair estimate?

Yes. Think in terms of third quarter, timing did have an impact on the results for our third quarter. So while we did originate more of loans than prepaid in the third quarter, timing was such that much of our prepayments happened earlier in the third quarter, and much of our pipeline in the fourth quarter into third quarter closed towards the second half of the third quarter.

Okay. Appreciate the color. Thank you.

Ken Bruce, Bank of America - Merrill Lynch.

Good morning and thanks for the call. First question really, and I recognize that ACRE Capital in the mortgage banking business can be volatile at any point in time; I appreciate that this is maybe a difficult question to ask on a very narrow basis. But is there anything in the quarter that you could point to, that led to the reduced volume?

Was it things that were in pipeline but fell out because of changes in rates? Was the pipeline just didn't build over the period that you had expected for either competitive pricing reasons? Or what was the real dynamic behind the shortfall, if you could provide any dimension to that?

Thanks for the question. I know you're looking for a very granular answer there, but I'm going to say what I said before, which was we were beginning to see a meaningful pipeline of business. We had done a lot of work and made a lot of investment around repositioning the Company. And I just think that it took a little longer to reach some kind of level of stabilization in the business than we had anticipated. And we think we're through the bulk of that now, and we think the fourth quarter is going to show, is going to confirm that.

Good, well it thoroughly sounds that way from your short-term expectation. As you think about the current 12 producers, is that a number that you want to see how that basically begins to perform on a volume basis? Or would you be thinking about adding to that in this market? How are you thinking about growing the platform overall?

So, we're always looking for very talented folks in the business, especially on the production side. So if there's an originator in the market that we can hire, that we think is additive in a meaningful way to our business, then we would, of course, have dialogue, and try and bring that person on into our shop.

But as a general matter, we are not looking to staff up in a meaningful way. We would probably -- at this point, I argue we're looking to more slowly grow our sales force. Especially when you think about what we did last year, in terms of bringing on a whole new crew of originators.

We are looking to stabilize that group now, get them to work together. Keep them focused. Get the production in the door. Achieve what we want to achieve in 2015, which is substantially more production than we did in 2014. If there is good people to hire along the way, we'll hire them.

Okay. So is it fair to maybe characterize that as, you want to optimize the current from if there's opportunities to be somewhat more opportunistic, with an individual or group, then that's fine. Really you're looking to essentially get this platform optimized?

The existing platform can do substantially more business than it has done. And in addition, I would say it's fair to say that we would consider modestly growing that platform if the right folks come around.

Great. Thank you for your comments this morning.

(Operator Instructions)

Don Destino, Harvest Capital.

I'm pessimistic. I can drill down a little more after -- I thought Ken did a pretty good job of asking my first of two questions. But it's hard for us to understand what happened in mortgage banking in the third quarter. I get repositioning, which is a pretty generic term, but you were down substantially from the second quarter; based on what other public companies did, your market share was down even more so.

And it would be really helpful if there was -- if you lost an employee, or if there was something else other than repositioning, we were disappointed. It would be helpful to then gain confidence that there is a stabilization, and that the fourth quarter is a good run rate, and then we could grow from there.

Again, I thought Ken did a great job of asking the question. I didn't learn anything else. I'm not sure if the way I asked it will bear any more fruit, but if you could try. And then I have one follow-up.

What I can say is, we're confident in the levels we gave you for the fourth quarter of $200 million to $250 million. The pipeline today is in a much more advanced stage then it was at the beginning of the third quarter, in terms of not only loans that have already rate locked, but loans that are in the queue ready to rate lock.

So we just think the pipeline is much more advanced than it was. And third quarter was effectively, I know you don't necessarily like the answer, but it's the product of not having a stabilized business at that time. Now, we're moving much more directionally towards having a business that's stabilized, and we're seeing that in the form of a much more advanced pipeline.

Got it. And then the second question around Tae-Sik's discussion of capital availability. Can you just give us some assurance that -- I heard you on terms of how much of business you can do, and how much you can add to the balance sheet with current capital. Can you just give us some assurance that the price at which you could execute, actually price and equity raise, has to be substantially higher, regardless of how much you grow over the next two or four or six or ten quarters? That those that own it or that are considering buying stock need not worry about another capital raise below book?

Don, sure, this is Tae-Sik.

I think we have said in the past and I'll reiterate here, certainly where our stock is trading at today, we do not have any interest in issuing new common equity at that level, below book value. Book value right now is slightly above $14 and at today's stock level, we certainly don't have an interest in issuing new common equity.

In terms of our capacity, as I mentioned, we have significant capacity as it stands right now. We actually also expect to have incremental capacity over and beyond what we have today, because we do continue to have assets that we can leverage going forward. We ended the third quarter with a debt-to-equity ratio of 2.5 to 1.

So I think you'll agree with us that we have capacity in today's market to further optimize that balance sheet, and that is it really the basis of our plans, to capitalize the growth of our business. To optimize the balance sheet further, so that we can free up additional capital, to grow the balance sheet further. But we do not need to do that at this point, with the need to raise common capital.

Got it. I understand. Hey, look, don't mean to be critical, we own the stock, we think it's a very mis-valued company. And just getting that mortgage banking business going, which is an asset that I don't think you're getting any credit for whatsoever, I think is key. And that's the reason I'm drilling down on making sure I understand what happens. Keep up the good work, and I'll talk to you off-line. Thanks

Thank you. We appreciate the comments and the questions. If it's not coming through, it should. We are optimistic about the fourth quarter for that business.

Got it.

This concludes our question and answer session. Would like to turn the conference back over to Todd Schuster for any closing remarks.

Thanks, Chad. I just want to thank all of you for your participation on today's call and we appreciate your support, and look forward to talking with you all next quarter. Thanks, everybody.

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 November 24, 2014 to domestic callers by dialing 1-877-344-7529 and to international callers by dialing 1-412-317-0088.

For all replays, please reference conference number 10053849. An archived replay will also be available on a webcast link located on the homepage of the investor resources section of our website. Thank you for attending today's call. You may now disconnect.