Ares Commercial Real Estate Corp (ACRE) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Ares Commercial Real Estate Corporation's conference call to discuss the Company's fourth-quarter 2015 and full-year earnings results. As a reminder, this conference is being recorded on March 1, 2016. I would now turn the call over to John Stilmar from Investor Relations.

Thank you, Amy. Good afternoon. We appreciate you all for joining us today for ACRE's Q4 and full-year 2015 earning call. I'm joined today by: Rob Rosen, our Chairman and Interim Co-CEO; John Jardine, our President and Co-CEO; Tae-Sik Yoon, our CFO; and Carl Drake, Ares' Head of Public Investor Relations.

Before I begin I want to remind everyone that comments made during the course of this conference call and webcast and accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, conditions 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 Rob Rosen, our Chairman and interim Co-CEO.

Thank you, John. Good afternoon to everybody. Our fourth-quarter earnings of $8.9 million or $0.31 per share concluded a strong year of execution against our goals and objectives.

For 2015, we generated record earnings of $34.3 million, or $1.20 per share, a 40% year-over-year increase and a 1.2 times coverage of our cash dividend. We also materially outperformed the initial earnings guidance we set at the beginning of 2015 of $1.02 to $1.14 per share. As we reflect on 2015, we would like to review our progress measured against the four goals we established at the beginning of last year:

First, we sought to enhance our return on equity in our principal lending business by being highly selective on new originations, and by optimizing our available capital. During 2015, we focused on high quality and accretive investments across a diverse set of property types, to enhance our earnings and further diversify our principal lending portfolio. We also took steps to improve profitability by opportunistically selling lower earning investments, which allowed us to redeploy this capital into higher earning assets. Collectively, these actions enabled us to generate $27.3 million in net earnings, representing a 21% year-over-year improvement in principal lending earnings, compared to 2014.

Secondly we sought to improve the profitability of ACRE Capital through greater scale and our repositioning efforts that occurred in 2014. In 2015, our GSE and FHA originations collectively increased 69% to $838 million, which enabled us to drive a 28% increase in revenues for mortgage banking. Our revenue growth, along with the reduction of $2.4 million in G&A expenses in our back office drove an additional $5 million in net income. ACRE Capital's 2015 earnings represented a 600 basis point improvement in return on equity compared to 2014.

Third, we sought to further enhance our sources of liquidity and lower our cost of financing. In 2015, we added $205 million of new borrowing capacity, and lowered the financing costs on approximately $300 million of our borrowing capacity. With our diverse sources of liquidity, moderate leverage, significant available capital, and match-funded balance sheet, we are well-positioned to capitalize on the improving investment environment, that John Jardine will touch on.

Finally, our fourth goal was to find cost efficiencies across our business in 2015. During 2015, we were able to reduce our consolidated G&A, including professional fees, by $3.1 million or 24%, compared to 2014. There continues to be meaningful operating leverage in our cost structure from incremental growth.

As we enter 2016, we are highly confident in our business and excited about the improving opportunities. This confidence is reflected in our Board's decision to increase our first-quarter 2016 dividend to $0.26 per share, compared to the prior-quarter's dividend of $0.25 per share. This decision was made after completing an examination of our available capital and assessment of our 2016 earnings, an in-depth review, and a perspective analysis of the credit quality in our investment portfolio.

For more on the market opportunities and our portfolio position, I will now turn the call over to John Jardine.

Thank you, Rob, and good afternoon, everyone. Let me start with an update on recent market dynamics. As we discussed on our last call, we started to see increased market volatility in the broad credit markets, along with some minor spread widening in our markets during the fourth quarter of last year.

Given the changing market environment we made a conscience deliberate decision not to step on the gas in late 2015 with production, as we expected terms and pricing to continue to improve, and that is exactly what has occurred. If you look at CMBS BBB-minus spreads as a proxy, they widen from 400 basis points in September to 500 basis points in mid-November 2015, but have since widened to 800 basis points in February of 2016.

As you may recall, we closed our $150 million delayed draw secured term loan in late 2015, in order to have available capital for growth in new market opportunities. With this capital, our leverage is at the low end of our targeted range, at a moderate 2.1 times debt-to-equity, leaving the opportunity to increase our return on equity as we deploy our available capacity throughout the year into the improving investment environment.

The good news is that we are now seeing an improving investment environment as traditional lenders to commercial real estate are tightening their underwriting standards or cannot provide attractive dependable sources of financing for real estate. Therefore, borrowers often shift from the traditional fixed-rate financing strategies to lenders that can provide certainty of closing, with often lower all-in costs and shorter term floating rate options. This shift in demand is improving our deal flow, and allowing us to be even more selective about properties and sponsors.

Given the elevated market volatility and the shift in demand we are seeing pricing and terms improve by approximately 50 to 75 basis points compared to the beginning of the fourth quarter. We expect these market dynamics to continue into 2016. Currently, CMBS issuance is running at less than half of last year's pace. Furthermore, increased regulations such as the implementation of the risk retention later this year and the FRTB rules that increase the capital standards for holding CMBS securities will only serve to advantage lenders like ACRE, that can provide certainty of capital to borrowers.

As a result, we are witnessing demand shifting from conduits in capital markets' based providers to balance sheet lenders like us. We are also seeing other market participants, such as commercial banks and insurance companies tighten their lending standards as well. This was highlighted in the Fed's January 2016 Senior Loan Officer Opinion Survey.

Furthermore, respondents expect bank lending standards to continue to tighten over the course of 2016. Interestingly, in the same survey, respondents witnessed continued strength of demand for commercial real estate loans. This clearly points to the growing opportunities set for us as we seek to capitalize on our advantages of stable and flexible source of capital to real estate borrowers.

Recent market volatility is also presenting new opportunities for our mortgage banking segment. We believe the importance of being able to offer stable sources of financing has increased and is further differentiating our GSE and FHA-sponsored lending capabilities from other capital providers. We are particularly excited about the long-term strategic position of our AFHA platform in the face of tightening credit conditions, especially in construction lending. As banks have reduced their appetite to provide construction lending, FHA products on qualified projects have become increasingly attractive for borrowers.

Given the strength provided by FHA and GSE guarantees, ACRE Capital remains very well-positioned in this market to provide certainty of capital for borrowers, and differentiates our mortgage bank from other capital markets' oriented platforms that are currently pricing loans approximately 100 basis points above ACRE Capital GSE offerings. Given our disciplined underwriting of primarily senior directly originated loans on stable or value-enhanced properties, we are in an enviable position of being able to play offense, play offense in today's market environment.

Our portfolio continues to perform well with no delinquencies, losses or impairments since our inception in 2011. Our focus is providing flexible capital to high-quality sponsors that often pursue value-enhancing business strategies. This value-enhancing or cash flow improvement strategy provides incremental downside protection, and is a key, a key part of our strategy and confidence in our portfolio.

This enhanced protection is an important differentiator as we lend against cash flowing properties, not land or development loans, and provide flexible capital to enhance cash flow and subsequently the value of these properties. In doing so, we believe we create compelling risk-adjusted returns.

Our portfolio is primarily tied to properties in liquid markets, with a weighted average population per MSA well over 7 million people. In addition, we gain great comfort in our portfolio since we seek to lend against major property types with a distinct focus on office and multi-family, two of the strongest performing property sectors since 2004 according to Moody's.

Our loans have strong debt-service coverages with current cash flow. We also have minimal energy exposure, with only $77 million of our principal lending portfolio in energy related markets, which is comprised of really four loans collateralized by multi-family properties in Houston. All loans are continuing to perform well, and we continue to expect to be repaid in full.

I would now like to turn the call over to Tae-Sik to walk you through our financial results and 2016 earnings outlook.

Great thank you, John. On today's call, I would like to provide a brief recap of key financial elements from our fourth-quarter and full-year 2015 results, discuss our strong financial position at year end, and then walk you through our 2016 outlook.

Fourth-quarter earnings were $8.9 million or $0.31 per diluted common share, which is comprised of $6.9 million from principal lending and $2 million from our mortgage banking business. These quarterly results contributed to a strong year in 2015 with $34.3 million in net income, or a record $1.20 in earnings per share. This represents a 40% year-over-year increase in earnings, and a strong 120% coverage of our dividend.

Our balance sheet at year-end 2015 was also strong, leaving us well-positioned heading into 2016. Our portfolio has been well-constructed, consisting primarily of short-term floating-rates senior loans. As of December 31, 2015, the weighted average remaining life of our loan portfolio held for investment was just under two years, and 85% of the portfolio was comprised of senior loans, collateralized by properties located in diverse geographic markets.

And as John mentioned, since our inception in 2011, we have not had any delinquencies, defaults or impairments. This disciplined approach to creating a highly attractive loan portfolio also applies to managing our liquidity and financing sources. Our balance sheet was moderately leveraged at year end at a debt-to-equity ratio of 2.1, and as of February 26, 2016, we had $160 million of available cash or in approved but undrawn capacity under our financing facilities that we can use to fund new loans, to fund outstanding commitments under our existing loans, to buy back our stock, and for other general corporate and working capital purposes.

To illustrate the dry powder of our available liquidity, assuming we use all of this $160 million for new loans, we would have capacity to originate approximately $560 million of senior loans, assuming a 2.5 debt-to-equity leverage ratio. As we have done since our IPO, we continue to be disciplined about match funding our assets and liabilities.

Our financing agreements have a weighted average remaining term of more than 2.5 years, assuming we exercise available renewal options, which significantly exceeds the less than two year weighted average remaining life of our loans held for investment. We have structured our financing sources with the goal of providing balance-sheet stability, through challenging market conditions.

From an earnings standpoint, based on current market conditions and a number of assumptions, we believe that our full-year 2016 earnings will exceed the annualized level of our increased first-quarter 2016 dividend. However, as we have stated many times previously, we operate our business and internally measure our performance on an annual basis. As it has occurred in prior years, we expect there will be quarter-to-quarter fluctuations in our earnings.

In fact, due primarily to two reasons: first, the typical seasonality of a slow start to a New Year in originations, and second, the significant liquidity that we enjoy in the amount of $160 million, we anticipate that our earnings for the first quarter of 2016 will be well short of our $0.26 dividend; however, we anticipate this gap to be short lived, and applied only to the first quarter. As we head into the remainder of the year, we expect to take advantage of stronger seasonal periods for new loan originations as already evidenced by our growing pipeline, combined with significantly higher yields that are available in the marketplace that we can take advantage of now, given our significant liquidity.

Overall, despite a slow start, we believe that our earnings for 2016 will exceed our increased annualized dividend rate. Our Board's decision to increase the quarterly dividend underscores this confidence in our earnings.

You may have noticed in our earnings release this morning that with the support of our Board, we extended for another year an increase by $10 million our share-repurchase authorization to $30 million. We also expect to implement a 10b5-1 plan to provide us with greater flexibility in executing share buybacks. All of these efforts are a direct result and reflection of management's belief that our common shares are currently significantly undervalued, particularly given the strength of our loan portfolio and the significant increase in value that we believe we have created in our mortgage banking business since acquiring it in the fall of 2013.

And finally, before I turn the call back over to Rob, I want to remind investors that our increased first-quarter dividend of $0.26 per share is payable on April 15, 2016 to shareholders of record on March 31, 2016.

So with that, I will now turn the call back over to Rob for some closing remarks.

Thank you, Tae-Sik. As we look forward into 2016 and beyond, we want to remind investors that we are committed to three primary goals and principles.

First, we are a credit-first organization and culture. We are committed to rigorous credit discipline, and we will be highly selective in originating quality investments with appropriate risk-adjusted returns. We believe our disciplined approach, experienced team, and investment platform based on direct origination and servicing provides us with competitive advantages. We feel fortunate to head into more volatile markets with a solid performing portfolio as a foundation, so we can dedicate resources to capitalizing on the market opportunities.

Second, we're committed to building shareholder value and growth, which we believe is reflected in our positive outlook for 2016, and our Board's recent decision to increase the dividend. Furthermore, as market volatility increased in late 2015 and into 2016, we believe there would be an expanded-opportunity set to invest our capital.

We were deliberate in maintaining capital levels to position our business to go on offense with capital to deploy, in an increasingly attractive opportunity set. We believe our discipline has presented us with attractive opportunities to build shareholder value through the repurchase of our stock, and to invest capital at wider spreads. Admittedly, we sacrificed some earnings in the first quarter, however, we believe we have better positioned our business for greater long-term value creation.

Third, we're committed to collaboration and the realization of the many benefits we gain from our Ares external manager, which had $94 billion of assets under management at year end. As part of a large global organization like Ares, our access to external capital sources is materially enhanced through Ares' broad and deep relationships. We will also continue to leverage the many other benefits of our relationship with Ares such as deal flow, market knowledge, credit insights, and diligence expertise that we believe enhance our overall performance and profitability for shareholders.

I want to thank our employees for their hard work and dedication, and our investors for their support. We would now be happy to take your questions.

(Operator Instructions)

Our first question is from Dan Altscher at FBR.

I saw the increase in the buyback authorization up to $30 million. I guess it was already $20 million. I was just going to confirm that I guess there wasn't any stock repurchased initially on that program yet to date, and I guess, what's giving you the impetus now to increase the authorization, and maybe how committed are you to go out there buy, and actually do the buyback?

Thanks. This is Rob. Let me take a crack at the question. First, you're right. There were no share buybacks under the initial authorization.

As you recall, in the latter part of 2015, we were in the face of very volatile credit markets, putting together our new term loan B which was a source of capital to repay our maturing convert, and also give us firepower entering 2016. We're glad that we put that loan in place, and we think that it probably would be difficult to recreate at this point in time.

As we enter 2016, the capital markets and the volatility of the markets were really quite extraordinary. So in discussions with our Board, and particularly in the face of pulling back on our deployment of capital in our lending areas, we determined to put in place a 10b5-1 plan and expect to be in the markets on a regular basis, and actively be buying our shares in 2016.

Okay, thanks Rob. That's a helpful response. John, I think your comments were, since the beginning of the fourth quarter, you seem to be maybe loan pricing out maybe 50 to 75 basis points or so, and maybe the terms are improving. I guess one, if you can talk about what terms you're seeing that have improved, whether it's proceeds or covenants or LTVs, then what terms have been improved, and how have borrowers responded a 50 to 75 basis point increase. Are they pushing back or willing to accept it because it's better than what they can do in CMBS?

They are willing to accept it, because it's better what they can do in CMBS. But you know, you're seeing some in the insurance company world, you're seeing lower LTVs that are required, you're seeing stricter covenants, so the ability of borrowers to obtain very flexible capital from the insurance sector is not as evident as it has been in the past, and certainly in the CMBS world, it has been very, very, very choppy, so it just poses an environment for us that is quite attractive.

Okay and then one for Tae-Sik, or two for Tae-Sik I guess. Appreciate the color around first quarter being probably below the dividend. I think you're worth well below the dividend. Can you maybe frame the magnitude of what maybe you might be expecting, and on the other side of the equation, for full-year 2015 you clearly cover the dividend at a $1, and would clearly cover it again even if it was $1.04. So is there any way to gauge how much do you think you might cover it again in 2016 by the new amounts?

Sure thanks, Dan. So with respect to first-quarter dividend, I think I made a comment that the first quarter is going to be negatively impacted by two primary reasons. One is the typical seasonality, particularly in mortgage-banking business, where you basically start each quarter with zero and you have to earn your originations in that quarter, and obviously the first quarter is a very weak quarter seasonally. We saw the same thing last year, where certainly the first quarter was also the weakest quarter for ACRE Capital business so we expect that same pattern to repeat itself in 2016.

What is different about 2016 versus 2015 is really the principal lending business. So if you look back at where we ended 2014, our balance sheet was relatively fully invested. I believe we had about $50 million to $55 million of available liquidity, so we were very well invested going into the first quarter of 2015, and therefore, even though we had a weaker seasonally typical quarter for the ACRE Capital business, we had a very strong quarter for the principal lending business.

I think really that's what's different about first-quarter 2016, is that we ended the year in 2015 with approximately $160 million available to invest versus the $50 million to $55 million in 2014 and therefore, I think what you're going to see is a weaker first quarter for the principal lending business versus what we were able to achieve a year ago, and that's why I think you saw our comments of first quarter being well short of the dividend.

And then in terms of the rest of the year, I think we decided at this point to provide just a range of where we think we're going to come out. I think we will exceed our dividend rate, but just given the volatility in the markets today, just given the pace of investments as well as significant repayments of loans, and the timing of all this when it happens, I felt we all felt that the best range to give to the market today was simply to say that we believe we will exceed our dividend rate, without being more specific on that range.

Okay, thanks. That's a helpful commentary.

All right. Thank you Dan.

The next question is from Steve DeLaney at JMP Securities.

Congratulations, everyone, on a strong close to 2015. Obviously, a big story last year was the growth in ACRE Capital, as Rob mentioned, or John, up I think 70% year over year. Just wondering with that momentum that you've built, have you set any specific goals for 2016, originations relative to 2015? And the second part of the question, are you still actively engaged in recruiting efforts, in order to expand that platform? Thank you.

It's a great question. It's John Jardine.

Hi, John.

We have in the fourth quarter hired three new originators, and as you know, Fannie and Freddie's limits are going to be up $1 billion.

Right.

We also think that there's just going to be a better handle on their cap management, and we also think it's going to be just more consistent. So from that standpoint, we see the GSE should be, I think, even a better environment in 2016 than we saw in 2015. Again, as I mentioned, we have hired new originators, and we believe that our origination volume will increase over 2015 and 2016, so I think the environment is quite good. We're going to focus on some more of a affordable side of the business where the GSEs find, want us to really look for attractive opportunities. So quite bullish on the ACRE Cap pipeline as well.

Great and you touched on it of -- please go ahead, Rob I'm sorry.

This is Rob. Let me just add one more point please.

Yes, sir.

And it was the success of the fourth quarter and we'll have the carryover into 2016, because the fourth quarter had several instances where we proved the value of our balance sheet supplementing bridge capability for our GSE lending capability, and having proven and improved that model, I think that you know, hopefully, you'll see more of that as we go through 2016, and I think that, that will have the potential to contribute to ACRE Cap's performance.

Great, thanks for adding that, Rob. John, back to the -- you mentioned in your comments about the GSE capacity affordable. I was just curious, my follow-up question was going to be this concept of an addition to the quantity of your origination force, but also the level of specialization. Because in addition to the $1 billion increase on the cap we've also had a lot of, I think the term is either exempted or excluded loans from the cap, such as senior and small balanced manufactured housing, and as you mentioned affordable. So are you specifically looking for individuals that maybe have some of that niche type of client base or expertise, that would get you into the buckets that are not subject to the cap going forward?

We have and we did. So the answer is yes.

Great. Thanks, and it's a small thing. You give us a great break-out by the Freddie, Fannie and HUD, and the mix is obviously very important, the profitability, so we would appreciate continuing to have that. Maybe over time, some of the other buckets as to how they kind of slot into the caps, just a thought that it might be helpful looking forward as well.

And I just have one final thing. Your most recent loan in the first quarter was a $56 million hotel loan. Now over the years, we've noticed your focus on multi-family and office, and I think hotel was relatively small, only 6%. So I'm just curious if there were any specific attributes with respect to this California hotel portfolio that made it attractive to you, since it's a little bit of a departure from your previous focus. Thank you.

Good question. The hotel sponsorship is quite strong. The supply of new product is extremely limited. It's just a well-run facility, so from that standpoint, we are extremely careful in our underwriting of hotel properties, and this is a fine example of our care in underwriting that particular type of asset. So again, limitation on new product, strong sponsorship are two key elements.

Great. Thank you all for comments, and best of luck for another strong year in 2016. Thank you.

Thanks Steve.

The next question is from Jade Rahmani at KBW.

I guess, although the stock is up today, I have a strategic question which is, ACRE continues to trade at a meaningful discount to book value, and I would assume what you think is the underlying value of the business. I think you've done a good job managing the business within existing constraints, and also, have been prudent with the use of capital. But an alternative course of action could have easily been, and something that could have the potential to create a stronger Company, some involvement, increased involvement from the manager.

So I would like to ask whether the management, manager has considered buying in the Company, which would be at a discount to fair value, and then proceed to invest in it in a meaningful amount of capital to allow ACRE to grow its size and scale, generate much stronger ROEs, and then later figure out what to do with the business. So has management or the Board contemplated such action or another alternative would be potentially selling ACRE Capital or combining ACRE with another company.

So, this is Rob. Those are all compelling alternatives, and I think, consistent with what we've said, is that we are active in the examination of all sorts of M&A and exogenous opportunities. There are lots of things happening in the space. There are lots of opportunities, and we've got an external manager that is both strong, stable, and creative in their willingness to examine appropriate opportunities.

M&A and alternatives take a while. You spend a lot of time hunting down something, and then, lo and behold at the end of the day, things don't happen. But we're happy to invest the time and effort in a growing number of opportunities that are in the marketplace.

I think that the alternatives that exist within the Company, including ACRE Cap, are all part of the panoply of alternatives that we should and do examine, but our objective is to bridge our gap between our book value, which we have a great deal of confidence in. We believe that our shares are materially undervalued. We believe that we've got a great management team and discipline, that over time will bridge that gap through internal growth, and also a creative and opportunistic team that's willing to look at external opportunities.

Great. Well, I appreciate those comments. On ACRE Capital, what can you say about the originations outlook, and I noticed -- or I didn't see anything on what you've rate-locked so far this quarter, so should we expect any originations for the first quarter, and also can you give some color on what drove the lower comp and benefits in that business?

This is Tae-Sik. Why don't I talk about the compensation first, and then John can address the rest of your question about the originations outlook for ACRE Cap. In terms of compensation for ACRE Capital, it's really driven by -- the variability is really driven by two aspects. One is the commissions that our originators earn based upon the loans that they produce. That's one. And then there's a discretionary bonus component to it.

And so when you compare prior results to this year results, or you compare this year's results versus this quarter's results versus prior-quarter's results you'll see variability based upon those two factors. In other words, lower origination volume in the fourth quarter versus third quarter, meant that you had both a lower commission rate, commission amount, as well as lower discretionary bonus because the bonus pool for the organization is also tied to both the revenue and the profitability of the business quarter to quarter. So we will accrue different amounts quarter to quarter even at a discretionary bonus amount, based upon the actual performance during that time period. And that's why you'll see a meaningful lower amount quarter to quarter. John, do you want to address the question?

Yes let me talk to you a little bit about the first quarter with ACRE Cap. We had a few loans that were scheduled to close in the first quarter that we actually moved into the fourth quarter of 2015. So when we look forward, as to what the pipeline looks like for ACRE Cap, I'm extremely excited about the prospects for the balance of the year. We have, as I mentioned, some new originators.

We have fine tuned our processes. We've enabled ourselves to fine tune our ability to use our bridge facilities to assist, and again, the FHA pipeline looks quite good as well. So I mentioned in my remarks, there's a lot of potential construction loan financing that's coming out of there, so I couldn't be more thrilled with the pipeline, as I'm looking at it for the balance of the year.

And the first quarter in particular? You have been providing the amount of loans that have been rate-locked.

Yes, we have. The first quarter, I think we've told you it's going to be weaker, but it's basically the seasonality issues that we experienced last year. So I'm not sure how else to answer your question except that way.

Okay just two quick ones. What's generally the average warehouse balance to carry, because I noticed the period-end balance is typically way below what I model, and yet the interest expense, the implied interest expense seems to come in line. So what's a good proxy if you did about $200 million in the quarter of the average warehouse capacity. Is it about 65% or 75% of that?

Yes Jade, it's going to vary quite a bit, and I'll give you the reason. It's because the warehouse facilities for the mortgage banking business is generally -- that loan is generally held call it 5 to 15 days, so we will literally close on a loan, we will finance that loan closing using the warehouse, but we have already pre-sold that loan, and so it's really a matter of that loan being outstanding for 5 to 15 days. So what you're seeing is you're seeing a lot of variability in quarter-ending balances, because just the timing of when loans close versus when loans are sold will drive the quarter-ending balance.

So even in a typical quarter where if you'll see $200 million to $250 million of production, you could see a quarter-ending warehouse balance as low as $25 million, as high as $150 million. It will all depend upon what loans we happen to have closed close to quarter end, but simply have not sold yet, right at quarter end. So you'll see a lot of variability. I think the interest expense that you see is probably a better indicator of the volume of business we did for the quarter, but again, even that is going to be varied quite a bit depending on whether we held the loan for 5 days,15 days, 30 days.

Okay, and just what's the advance rate on the warehouse facility?

I believe it's LIBOR plus 160, don't quote me exactly, but it's right around LIBOR plus 160.

But in terms of the leverage that you're able to get, is it up to 80%?

For the mortgage banking business it's nearly 100%. We oftentimes don't take advantage of it, but because the -- again, I just want to differentiate this versus the principal lending business, when we originate a mortgage banking loan in ACRE Capital, that loan has already been sold to an investor. So we're simply warehousing that loan for 5 to 15 days, as I mentioned, before it's actually physically sold to the investor.

But because it's sold, the price is already fixed. We are not taking spread risk. We are not taking credit risk. We are not taking market risk. We are taking some amount of counter-party risk but in our history, we have never had a default of the counter-party. But because it's pre-sold, and we have a great history, we're able to generally get, call it, 99% of that loan as an advance rate.

Great. Thanks very much for taking my questions.

Absolutely, thanks Jade.

The next question is from Charles Nabhan at Wells Fargo.

Looking at the maturities schedule, it looks like there's about $250 million to $300 million in loans coming back this year. I know that's subject to change, but if we think about the pipeline as it stands today in the demand environment, could we anticipate that full-year principal lending originations will exceed the volume of maturities during the year?

Yes. That would be correct.

We think by a very comfortable amount. I think one of the actual advantages of having maturities coming up in 2016 is really twofold. One is, it will continue to prove out our credit thesis.

In our Company's history, we've already had $800 million of loans come due, all of which obviously successfully paid off at or prior to maturity. And the second advantage that we believe, particularly right now, is that many of the loans we think we will be able to redeploy the capital at even higher interest rates, just given the spread widening that we've seen in the past couple of quarters here.

Without any material change in risk profile.

Yes, this is Rob. One other observation about that is, I appreciate your pointing towards the repayments, because if you take a look at the average life of our loan portfolio, it's approximately 2 years, 1.9 years. And it really underscores the certainty of repayment that we believe exists in our portfolio.

And quite frankly, the illogic of the discount of the value of the Company, and the value of the portfolio, given both the stringent credit approach that we have, as well as this relatively short duration left in an expanding margin environment. So we sit down, we look at all of those things and for us, it paints quite a pretty picture.

Okay and as a follow-up, I know that mezz lending has been more of an opportunistic secondary strategy for ACRE historically, but given your comments on a tightening and standards among insurance companies, could you potentially see more opportunity in that space as volatility persists?

This is John Jardine. Yes, most definitely. In the mezz and preferred-equity space, we'll see more opportunities this year than we've seen in the past.

Anecdotally, interestingly, just to hammer home, again, we've looked at some mezzanine opportunities when we looked at them in November and December of last year. And then we elected to step back, because we didn't like the environment and now we're seeing the same opportunity, I'm not sure what we're going to do about it, come back to us at 250 to 300 basis points wider than we saw in December of last year. So not only are you going to see more of it, you're going to see it at wider spreads.

Okay, and I appreciate the commentary on the improvement in lending terms, but I was wondering if you could touch on your -- given your conversations with your lenders, can you give us a sense for where spreads are on the borrowing side? And I'm assuming you're able to pass on any increases to your borrowers, but can you just give us a sense for what you're hearing from your conversations with your lenders?

This is John Jardine. I will have Tae-Sik help with this answer, but we spend a considerable amount of time with our lenders to gauge their level of comfort with the credit quality of our loans, and also to investigate and examine internally how they're looking at the loan-on-loan business, and we're comfortable at this point that things are pretty much the status quo at this juncture, and we're going to be able to take advantage of widening spreads with efficient leverage, and I think that's what we're going to see for the time being. Now the second part of your question relates to, what happens if those rates begin to move, and they could, but we haven't seen any sign of it. Would we be able to pass those on to the borrowers? Most definitely we would, and Tae-Sik, go ahead if you'd like to?

Sure. Charles, we have not witnessed our lenders coming to us, asking to reprice our liabilities. What we have heard is that each of the banks, most of the banks have really tightened who they're doing business with, and I think new entrants into the markets or new facilities will be certainly more challenged than the existing facilities. And I think this is largely a great reflection of the strong support and branding we have with Ares Management, due to the fact that we have a global relationship with Wells Fargo, with Citi, with UBS, with all of our existing lenders, Citi National Bank, MetLife, Bank of America.

Because we have this global Ares relationship, I think we at ACRE significantly benefit from that, and I think that is part of the reason we're able to enjoy our existing relationships with the banks. And as I mentioned, they have not come to us asking to increase spreads, but we also think the big advantage is that this will in essence limit the competition out there in terms of other lenders trying to get new facilities.

Great, thank you for the color.

Absolutely, thanks Charles.

The next question is from Rick Shane at JPMorgan.

You have talked during the call several times about the improvement in pricing, that you've seen, given volatility in the markets. One of the things that we've heard Ares across the continuum talk about over the years is that you can't price for bad credit, and you can't price for bad terms. You haven't spoken very much about what's going on, in terms of underlying credit or structure in the new environment. I'm assuming that there's an opportunity as you move through 2016 to continue to high-grade that aspect of originations, as well. Can you talk about what you're seeing in the market right now?

Well what we're seeing in the markets are similar opportunities that we see and have seen in 2015 at wider spreads, quite honestly, without a significant increase at all in the risk profile and credit matrix of those particular loans, so we're seeing a lot more borrowers, stronger sponsorship sponsors, that are going more into the floating-rate markets, and it's actually benefiting us significantly. The dislocation in the CMBS market is assisting us in many respects. So I don't know if that answers your question, but I think that's what we're seeing.

It does to some extent. I guess what I would ask is that if, and again, there are many aspects of any loan that you make, price being one of them, and it sounds like so far the initial reaction of the market is repricing assets. My question is, do you think as you move through the year, if this dislocation persists, that you'll have more negotiating power on the other terms of the loan?

So first of all I want to make the point again that the fundamentals in the real estate market are strong, and as we go forward, do we believe that we are going to see these opportunities continue into 2016? Absolutely yes.

So this is Rob. Let me give a little bit of color just sitting in my chair at the Company. I'll reiterate. What ACRE is, is part of the larger credit culture that really drives Ares.

And our job has to build a great process-driven, credit-driven Company, where the lending that we do is against well underwritten cash flow, and we attempt as hard as possible, and our history shows that so far, we've done it, where the cash flow that we underwrite, the sponsors with whom we do business, the LTVs that we deploy, do everything we possibly can to not have credit be the source of big mistakes that eat into the value that we're attempting to create. So process, credit, lending against cash flow, and as a good friend of mine once said to me, don't miss it on big mistakes. So that really is how we run our business.

That's fair enough. I would describe, I think we try to run our business the same way.

Then we're in great Company.

Flattery. I don't know how to respond to that one, but I'll gloss over it. But I guess what I would say is this. Obviously the credit track record speaks for itself, and what you're describing to me, I think sounds more like a technical -- that you view what's going on right now more is a technical dislocation than a fundamental dislocation. And that has potentially different outcomes, and maybe a different time horizon.

Yes, I think we agree with you. I mean John, certainly John Jardine will comment as well, but you know what we've been reacting to is really a very strange credit market and volatility in credit markets since the latter part of 2015, going into this year. From our point of view, the real estate fundamentals that we are seeing and the real estate fundamentals that our terrific team are underwriting, remain quite strong.

If you look at some of the regulatory issues, headwinds that the CMBS market is facing with risk retention, and the fundamental review of the trading book, the FRTB, it's been very challenging for that market. By way of example if you just look at senior investment grade, and what the banks have to charge for a CMBS loans they have on their books, it's the same charge on an investment grade RMBS sub-prime loan, how about that?

And the same is true below investment grade. It's the same charge as an RMBS subprime, so when you look at these headwinds, and you look at that, it's basically fundamentally regulatory. And that's what's causing this, so a lot of it, for sure. It's not real estate fundamentals that's causing this at all.

So not to put too fine a point on this, but what I'm hearing is a technical dislocation is something where you tap the gas, and a fundamental dislocation is something where you tap the brake, and you're looking at a tap-the-gas situation?

Yes, I think that's right.

Great okay, thanks. That actually helps heading into 2016, thank you.

The next question is from Ken Bruce of Bank of America.

I'm going to pick up where Rick left off. I guess in the context of tapping the gas, is I want to make sure I'm understanding and interpreting your earlier comments properly, but it feels like the overall pricing has improved. You think you may get some better terms and structure at the end of the day. Is it now that you're actually beginning to put capital to work, or are you still thinking that there's maybe some reason for being on the sidelines?

No I think now is the time to begin putting capital to work. And let me be clear here. In the first part of the quarter, the fog was so dense I pulled the car over, and set it on the side of the road, all right?

Now, the fog's cleared, in my view, we're seeing pricing, we're looking at opportunities that I believe are quite strong, and I want you to be clear. If the fog resumes, or it comes back, we are going to slow the car down again. So just to be clear, we're seeing the opportunities. We're putting our foot on the gas, and we're looking forward to a strong second, third and fourth quarter.

Okay and maybe so we can understand what, how you gauge the fog rolling in or out, and here in San Francisco, we can appreciate that. Is it spreads, as I think you pointed out BBBs widening or tightening. Is that reflective of basically where market anxiety and volatility and all ultimately are materialized, or is there anything that can be -- that we can use to maybe understand what is driving the go, no go, please?

Well I think that for the first part of the quarter, there was such volatility and opaqueness in the market that you could not appropriately price risk. It just does not, was not there. And I believe now that we have some time, we've seen some CMBS deals go out. We've seen some insurance company loans. We've also seen some of our competitor's pricing. We are at the point now where we've got a framework where I can appreciably price risk, and that's exactly what I could not do in the first 30 days of 2016.

Okay, great. Well I think that actually is quite helpful. When anxiety is ultimately running the highest, I guess there's no price discovery, there's no visibility in the market and that's what's going to give you some sense as to whether you want to invest or not, and right now that's I guess has improved enough over the last few weeks to basically want to move forward. And absent the first quarter, it sounds like you're looking pretty constructive at the remainder of the year.

That would be correct. Thank you.

Thank you.

Our next question is from Douglas Harter of Credit Suisse.

Thanks, my questions have been asked and answered.

This concludes our --

Well we are grateful for the time that you've spent with us, and we look forward to talking with you at the end of our next quarter. Thanks a lot.

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 call will be available approximately one hour after the end of this call through March 14, 2016 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 10078265. An archived replay will also be available on a webcast link located on the homepage at the Investor Resources section of our website. Thank you. You may now disconnect.