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Ares Commercial Real Estate Corp (ACRE) Q1 2019 Earnings Call Transcript

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Ares Commercial Real Estate Corp  (NYSE: ACRE)
Q1 2019 Earnings Call
May. 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's First Quarter 2019 Earnings Results. As a reminder, this conference is being recorded on May 1, 2019.

I will now turn the call over to Veronica Mendiola Mayer from Investor Relations. Please go ahead.

Veronica Mayer -- Vice President, Public Investor Relations and Communications

Thank you. Good morning and thank you for joining us on today's conference call. I'm joined today by our CEO Jamie Henderson, our CFO Tae-Sik Yoon and David Ross, Ares Management, Head of Real Estate Private Equity who will be available for the question-and-answer session. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contained 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, intent, will, should, may and similar expressions.

These are 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 condition or results and involve 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.

During this conference call we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies.

The company's newly formatted first quarter 2019 earnings presentation can be found in the Investor Resources section of our website of www.arescre. com. Ares Commercial Real Estate Corporation earnings release and 10-Q are also available on the company's website.

I will now turn the call over to Jamie Henderson.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Good morning. And thanks, Veronica. We were off to a strong start this year generating GAAP in core EPS of $0. 30 and $0. 32 respectively. Our strong earnings origination's and investment pipeline reflect the progress that we have made to generate and higher and more predictable earnings. We have multiple levers to pull to further improve our earnings throughout the year. These include the benefits from higher average deployment of capital and further cost savings on our liabilities and operating expenses.

One of the highlights for the quarter was a strong uptick in year-over-year origination activity, which is the result of the efforts that we have undertaken to expand our origination capabilities and to extend our national footprint.

In the first quarter, we originated five senior floating rate loans for $275 million in commitments, which includes $234 million in ACRE and $41 million in the Ares warehouse. This is almost three times the volume of loan commitments originated in the first quarter of 2018.

The loan in the Ares warehouse is designated for ACRE we expect will be transferred to ACRE's balance sheet in the second quarter. All of these loans are first mortgages, secured by high-quality commercial properties in growing markets and backed by strong sponsors. Importantly, this investment activity coupled with a strong pipeline has set the foundation for a higher run rate of earnings in the second quarter and for the remainder of the year.

Secondly, we closed our latest private securitization lowering the cost of funds by 15 basis points. This is a great example of how we continue to reduce our all-in spread on our liabilities. This is an important earnings driver and we are optimistic that we can further reduce the cost of our liabilities in 2019.

Finally, we reduced our comparable G&A expenses on a year-over-year basis. These cost-cutting measures are firmly in place and we expect the earnings benefit to come through in coming quarters.

Turning to the market and current investment activity. U.S. real estate fundamentals remain favorable. We continue to see strong relative value in the middle market lending to high-quality sponsors on attractive properties. Given the size and repayment characteristics of our portfolio, we can be very nimble and selective with no requirement to buy the market. Rather, we can pick the spots where we can leverage our direct origination advantages, repeat sponsor relationships and flexible capital.

Since quarter end we have closed two additional loans secured by office properties in Texas and North Carolina totaling $59 million in new commitments. We are seeing attractive relative value with growth leveraged returns on all loans close to date in the low to mid-double-digits in the aggregate.

We remain focused on expanding our origination team and geographic footprint and closely integrating our equity and debt teams to broaden the number of opportunities that we source. By doing so, we are able to remain highly selective, while also achieving our goal to be more fully deployed continuously.

The size of our total pipeline has more than tripled versus this point a year ago. We are already seeing a significant increase in production in certain regions where we have added new originators and we expect this trend to continue as our platform continues to scale. By increasing the number of opportunities that we see, we can remain highly selective closing less than 5% of the transactions that we reviewed year-to-date.

Finally, our Board declared a second quarter dividend of $0.33 per share. On an annualized basis this represents an attractive 8.7% annualized dividend yield based on yesterday's closing price of $15.20 per share. As we've said in our last earnings call, we have fully covered our dividend from core earnings for the past three years and expect to cover our annual dividend again this year.

I will now turn the call over to Tae-Sik to discuss our first quarter results in further detail.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Great. Thank you, Jamie. And good morning, everybody. Earlier today we reported GAAP net income of $8.5 million or $0.30 per common share and core earnings of $9.1 million or $0.32 per common share for the first quarter of 2019. And while we are pleased with our results, I think it is worth noting that our earnings for this first quarter did not meaningfully benefit from acceleration of origination and exit fees normally associated with early repayment of loans.

We have mentioned in the past that on average we received approximately $0.02 per common share per quarter in such fees. But for this first quarter such accelerated fees were less than half a penny per share. In addition, while we have strong originators of $234 million in new commitments and funded, $121 million in unpaid principal balance in the first quarter, we were a bit under deployed due to significant repayments that we had in year-end 2018.

As Jamie said however, we had a strong finish to the first quarter and continue to build our loan book with a strong pipeline to lean into, which means that we feel very positive about the remainder of 2019. We also believe that our earnings will benefit from more typical levels of accelerated fees, as well as reductions in our borrowing costs and G&A expenses.

As of March 31, 2019 our portfolio continues to remain primarily floating-rate with 98% of our loans as measured by unpaid principal balance index to one month LIBOR. This has allowed us to benefit nearly step by step with the increase in short-term rates over the past few quarters.

At the same time however, should rates reverse direction and start to decline, we have embedded LIBOR floors into 92% of our loans to provide us with some meaningful levels of protection.

Credit quality also remained strong with no impairment to losses since the inception of our company more than seven years ago. As of March 31, 2019 the portfolio included 45 loans with an outstanding principal balance of $1.6 billion.

Now let me provide some background on the property we converted to real estate owned on March 8, 2019. The property is a full-service Marriott branded and managed hotel located in Tarrytown New York known as the Westchester Marriott. For those of you who are not familiar with Tarrytown it is an affluent suburb of New York City and located within Westchester County.

The hotel itself is as full-service property with 444 rooms and offers 26 000 square feet of flexible meeting space. Over the past four years approximately $12 million has been invested in the hotel, including room and common area renovations.

Since acquiring the property about a month ago, our in-house asset management team has initiated a strategic plan to continue to improve operations, increased group sales and complete renovation of the ballrooms.

As we have mentioned in the past at Ares we have significant hospitality expertise, having owned interest in more than 60 hotels comprising over 39,000 rooms. And our team has worked with many of the major brands and management companies, including Marriott, Hilton, Hyatt among others.

At the time we took ownership of the hotel, we recognized the property as a real estate owned at an initial fair value of $38.6 million, including working capital. This represents about $80,000 per key. This fair value is approximately equal to the carrying value of our prior senior loan and as a result we did not recognize any gain or loss upon taking ownership of the hotel. In addition to aggressively managing the property to further improve cash flows, we are seeking to finance the hotel.

Today we have received multiple term sheets from third-party lenders. Upon successfully refinancing the property and based upon trailing 12 months of cash flows generated by the hotel, we expect our returns on our equity will be at or higher than what we are earning on our prior senior loan on the hotel.

We are comfortable with our business case for owning this property and we're very encouraged by the hotel's improving net income and other key metrics over the past 12 months, as well as at hotels positive outlook going forward.

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

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Tae-Sik In closing, we are off to a very good start and our enhanced origination activities have laid a strong foundation for improved earnings throughout the year. We continue to have multiple levers to further improve earnings, including our goal of staying fully deployed, which will be aided by the use of the Ares warehouse, along with potential further reductions in our cost of capital and G&A expenses.

We feel very good about our portfolio and the momentum that we have with our growing market presence and productive team. As always, we appreciate your support for our company.

With that, I would now like to ask the operator to please open the line for questions and answers. Thank you.++

Questions and Answers:

Operator

(Operator Instructions) The first question is from Steven Delaney of JMP Securities. Please go ahead.

Steve Delaney -- JMP Securities -- Analyst

Good morning. And thank you for taking my questions. I noted on page three of your deck that of the four loans closed in the first quarter that the funded amount only represented 52% of the total commitment. Could you comment on the nature of those loans. Because it would suggest to me that there may be a construction loan in there or may be a couple loans that are just heavy transitional or heavy rebuilds? Thanks. Okay.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. Good morning, Steve. And thanks for your question. So the one loan in particular and if you look at page nine of the same deck. And it's really loan number 25 under office loans. This is one of the loans that we closed and literally closed right at the end of the month, right at the end of the quarter. You can see that the commitment is $84 million and the outstanding principal is zero. It is a transitional asset, but it is not a construction loan. So we didn't fund anything at closing, but you know, we will rapidly do so. But at closing there was nothing funded day one. So that's the majority of the difference between a commitment amount and the funded amount.

Steve Delaney -- JMP Securities -- Analyst

Got it. I apologize for not checking out page nine in the deck, but that and that makes a lot of sense Tae-Sik . And I also notice on that same page that you did a student housing project and that you have-it's not a great percent, but 10% of the portfolio.

Earlier today we heard another commercial real estate lender report that they had taken-had to take a loss provision on a student housing property that was on a loan service for Fannie Mae. Just curious when you look at that sector are there specific parts of the country locations or types of schools that you prefer? I understand this particular property was located, the loan that went bad in a state that we would consider subpar from just an economic and demographic standard. Just curious about the student housing focus?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Hey, Steve. It's Jamie Henderson. Good morning.

Steve Delaney -- JMP Securities -- Analyst

Hi, Jamie.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

So we're really picky. It is less then 10% of our portfolio and the attributes that we look for in student housing obviously proximity of the campus, growing enrollment you need to be alert to whether or not the university is adding inventory that can compete against you, new supply. These are high-quality properties in really good locations at name-brand universities. And the students really seek a level of amenities that was inconceivable when we were in college. So we're...

Steve Delaney -- JMP Securities -- Analyst

Got you. I understand.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

...with our portfolio and also with our ability to underwrite this type asset.

Steve Delaney -- JMP Securities -- Analyst

Got it. Thank you, Jamie And Tae-Sik the last thing for me. Thank you for the explanation on the low prepays and sort of the reason to step down to $0.32 from an average of $0.37 in the prior two quarters makes me feel a little bit better about my $0.35 that was up on the board.

Having said that, in the light repays in the first quarter, can give us some idea of what you would expect over the balance of 2019 to repay as a percentage of the $1.6 billion portfolio with March 31?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. Great question, Steve. So, you know, I think in the past we've had repayments as low as $400 million, repayments as high as $700 million, again I'm rounding here a little bit. And it's a bit again as we've always said episodic because when you have a portfolio of 45 loans, it is a loan-by-loan analysis. This is not a statistical analysis, unlike residential mortgages where it is quivering (ph) between interest rates and other macroeconomic factors and you can sort of predict CPRs and other types of repayment rates. So it is very episodic.

I would say after having higher than average repayment in 2018, we do expect to have what I would say is lower than average prepayment in 2019. We think you know, a chunk of that will come in the second quarter, may be early part of the third quarter. That is sort of our you know, our best estimate. So I think for the year I think we're in the lower end of that range that I've mentioned between $400 million and $700 million.

Steve Delaney -- JMP Securities -- Analyst

Got it. That's helpful. Thank you both for your comments.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Absolutely. Thank you, Steve.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Steve.

Operator

The next question is from Doug Harter of Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. I guess, could you comment on where you are versus fully deployed today, just kind of, I guess kind of what to put that in context of kind of on the last call of saying you expected to be fully deployed to kind of within 30 days of that call?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. Good morning, Doug. This is Tae-Sik. So you know, again, I think with a relatively granular portfolio, we put in p lace the Ares warehouse facility to help us manage through different liquidity needs that we have. And so as we mentioned, the primary purposes of the Ares warehouse line is to put in so-called storage loans that we can pull down at ACRE when capital becomes available and its going to be a very, very effective tool for us.

You know, you see that we did put in one loan $40.5 million loan into the Ares warehouse lines, so you can take from that, that during the quarter, during the third quarter we had a time in which the cash flow that we had or cash available that we had at ACRE wasn't sufficient to fund this $40.5 million loan.

So there will be different, i would say it moments in time where we're more fully invested, there will still to be moment in time where we're less fully invested and what we're really driving toward is to be more consistently fully invested at all times.

I would tell you that we're not quite there yet but, we're making tremendous progress toward that goal. And I think even before we put in the Ares warehouse line, you know, a few months ago, you can see our 2018 performance a lot of that improvement in performance in 2018 was the fact that we are keeping our capital more fully deployed.

We think with this Ares warehouse line we'll continue to build upon that success even more so, but I would tell you that in the first quarter as I mentioned in my remarks, we were under deployed overall for the quarter versus where we want to get to, but it's significant progress that we've made versus 12 months ago versus prior years. And I think we'll keep driving toward that goal.

So as I mentioned, maybe just to directly answer your question, yes, so there was a period in time in the first quarter where we didn't have the liquidity to fund this $40.5 million loan, so we put it on the Ares warehouse line, with some prepayments coming up we do expect cash to be made available, as well as financing some assets that we mentioned that we have, cash will be available to pull that $40.5 million loan into the ACRE balance sheet. And then I think going forward from there, again we'll push toward having a much more fully deployed balance sheet at ACRE and putting the excess deal flow into Ares warehouse line.

Doug Harter -- Credit Suisse -- Analyst

Got it. And then Tae-Sik on your comment theory that kind of once you get leverage on this-on the owned hotel you know, that the returns should be comparable to exceed. Can you just talk about you know, is there volatility? Should we expect more volatility seasonality to-you know, to that return kind of over-you know, kind of over the holding period that you would expect to hold it?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. Great question. So clearly as a lender you know, we are-we are somewhat protected you know, with the volatility of cash flows from different types of properties in a particularly in hotel properties which do rent you know, day by day and do not have the benefit of long-term leases here. But you know when you look at the Westchester Marriott you know, obviously this is the hotels we've mentioned has always been current on its-on its principal and interest payments on the loan itself.

So it has never been late on interest payments, it always had positive cash flow even when it took a bit of a downturn right after the renovations we talked about, it was still able to meet its interest payments and you know and funded the required CapEx reserves within the hotel itself.

So there has been volatility some of it planned because of the room renovations or common area renovations, some of it is not pre-planned in terms of market disruptions, but you know, this is a hotel that's been around since 1981 as we mentioned. It's always been branded and managed as a Marriott and that has brought some stability to the hotel.

So while there clearly is going to be volatility in any hotel assets and really any real estate asset overall, we think we have a decent amount of cushion. We will get attractive financing on those assets. As I mentioned statement that we will you know, either get to or even exceed the returns that we've earned as a lender against this property is based upon you know, the trailing 12 months income, the last full amount of income in 2018, particular that can change of course.

But again, you know, we think we're on a good path toward continue to increase the cash flow of this asset. We've certainly experienced that over the past 24 months and you know, the plans that we have for this hotel we think will contribute to even a little bit of further growth in the operating income of the hotel.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

And Doug, it's Jamie. I'll just build upon that, just a little bit. So as Tae-Sik mentioned, you know, really good trajectory for cash flows. And I think it's really important to kind of put this in the context of our portfolio. once we lever the asset, our exposure here is pretty small. So even if there is a little bit of vol it's-we don't consider it meaningful.

Doug Harter -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

The next question is from Jade Rahmani of KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Thanks very much. The financials that you showed for the hotel. Is that from March 8 through the end of the month. So we don't have a full quarter of numbers?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Correct. Correct. So that really represents that stub period for the third quarter starting March 8 through the end of the quarter.

Jade Rahmani -- KBW -- Analyst

So I think that the yield based on your prior presentation was about 7. 25%. So multiplying that by your basis $38.6 million should imply about $2.8 million of NOI from the property. Is that what we should think about?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Well, I think you know, again it's hard to extrapolate any, you know any short periods because there is seasonality week-by-week, month-by-month and certainly season-by-season. So you know, I would say 2018 the net income for the property was significant above that number, it was really no-it was really right around $4 million of net income before FF&E reserve, again, that's 2018. But again there is seasonality involved quarter-to-quarter.

Jade Rahmani -- KBW -- Analyst

Okay. And in terms of the renovation plan, I mean, I believe that Normandy had put in significant renovations over the past four years. I've actually been to the hotel because my wife works for a company nearby and they have their annual holiday party there. But what kind of renovations are you planning to do and how much do you expect to spend on a per room basis or you know in other areas?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. So, you know, again when we made this loan back in the summer of 2015. This was really a loan to help renovate the asset. So, while it was made by the prior owner, you know it was all-much of that was done during our period of. being a lender on this property. So and you know, what we've said in the past obviously is that, the timing that we think it's taken for the hotel to benefit from those renovations is taking longer than what we all expected.

I think going forward you know, the type of renovations that we're planning on doing primarily relates to the ballroom areas. So if you-If you're familiar with the property and it's 26,000 square feet, very flexible, there's a you know, a number of rooms that make up to 26,000 square feet. But it's really that ballroom in terms of. carpet, walls, ceiling treatment that we'll be spending some significant dollars on.

And again, this is all in a CapEx reserve that we've already built up. We being us and the prior owner have been building up. So the majority of the cash, in fact I think, almost all of the cash necessary for that ballroom innovation is already in a FF&E reserve account.

Jade Rahmani -- KBW -- Analyst

Okay. I was going to say what's the estimated holding period?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

So I think the only estimated holding period that we have at this point to really say is, you know, we don't expect to put this on a market in next 12 months. We think the hotel is continuing to grow and continue to benefit from the work that's been done and will be done going forward.

And so we think you know, its in our best interest to complete that work, continue to grow RevPAR, as well as NOI and then look to sell the property. Obviously, we're not a long, long term holder of this asset, but given that the performance is going well and is continuing to improve, we think we're best off not immediately signed this asset, but continuing to complete the business plan, complete the renovation plan and sell with higher NOI in place.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

So Jade, and I'll build on that just a little bit. It's Jamie Henderson. So we look at this asset in the context of Ares has extensive multi-decade experience as an owner-operator and investor in hotels as Tae-Sik mentioned. So we feel very qualified to analyze the property, the operations. Cash flows are ramping. We think there Is meat on the bone in terms of revenue and expenses.

So we think we're really well positioned to do what Ares does really well, which is improve real estate and improve cash flows. But I also think its a great opportunity for me to introduce David Roth who is the Head of our U.S. Equity Business. David's an industry veteran. He's been on the equity side of the business for more than 30 years and was recently a Senior Managing Director at Blackstone, where I think he did in excess of $20 billion worth of real estate equity transaction. So I'd like to give David a minute to just articulate his thoughts on the asset and his perspectives on the way we can ramp cash flow.

David Roth -- Head of U.S. Real Estate Private Equity

Yes. Thanks, Jamie. I think my mic was off, so I'm not sure you heard me there. Thank you Jamie and thanks Jade and nice to meet you. Thanks for the question. As as Jamie mentioned, the Ares team, including myself have very deep experience developing and owning Marriott branded hotels, along with other hospitality brands in both the value added capacity and an opportunistic capacity. We've got very deep domain expertise in this area. Having owned over 60 hotels and we have investments that are very close to this hotel. So we know the market fairly well.

I think it's really important to note that in recent past we've been one of the largest developers of Marriott products, so we have a very, very close and good relationship with Marriott. So as I think about the asset, I always think about you know, things like what is your basis, what are the things you can do to improve cash flow et cetera. This deal we really think the basis is at a good level at 87,000 a key, we like that basis. The team has reviewed the asset and we feel confident in our collective ability to improve profitability and the overall value of the asset over time. And basically that's through opportunity increased cash flow and the ways that have been talked about.

So you know, this is just to say that the ACRE team and we on the equity side plan to partner on this asset through the life of this assets and should we get the best execution on the strategic plan and ultimately on the future sale.

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Okay great. Thanks for all that color. This is actually Ryan swapping in for Jade. Thanks, guys. And just one last quick one. You mentioned the LIBOR floor is on the portfolio. I was wondering if you can give us what the average floor was across loans that have one?

David Roth -- Head of U.S. Real Estate Private Equity

Sure. It's 1.48% and if you need to have more details we do have a little bit of a write up in our 10-Q on that information, but it's 1. 48%. And as we mentioned 92% of our loans do have LIBOR floors. And so what-and the reason it's at 1.48% is, if you look at our more current loans we will generally try to set LIBOR floors at whatever the current LIBOR is today. And so when we talk about 1.48% obviously we've had a you know, last 12 to 24 months we've had rising LIBOR. So some have been set at lower LIBOR floors, but that's when LIBOR was lower. But overall right now as of March 31, 2019 it's 1.48%.

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Got it. Thanks.+

David Roth -- Head of U.S. Real Estate Private Equity

Yeah.

Operator

(Operator Instructions) The next question is from Rick Shane of JPMorgan. Please go ahead.

Richard Shane -- JP Morgan Chase & Co -- Analyst

Hey, guys. Thanks for taking my questions this morning and again, look a lot of questions have been asked about the property. But I'd just like to understand sort of the game theory here both from the Ares perspective and from the sponsor perspective of where you wound up. This loan was on repayment default back in June, it was cured in September and now you've taken title.

I'm curious why the sponsor would choose to let that happen given the investment they've made at this point and why from a relationship perspective you guys would seek that outcome and frankly even from a game theory perspective have to deal with all the questions you're getting from us this morning, if the property can be resolved in relatively short order.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. Rick, thanks so much for the question and again, excellent question in terms of the reason why the borrower would pursue the course of action that it did. As we mentioned, you know, this was done in a negotiated transaction, so there was no foreclosure. So this was a, I don't know, if you want to call it a mutually agreed to transaction with the borrower itself.

So again, you know, it's hard for us to put ourselves exactly in the mindset of the borrower. I can tell you that I think based on our experience with them, this was an asset that was owned by multiple a group of borrowers and not just one manager or one investor, but multiple investors. I think those multiple investors may have had different interests in what they wanted to do with this hotel. They also had different priorities of cash flow associated with this-with this hotel. And the fact that they owned this hotel or were-had interest in this hotel for a relatively long time, you know, . in vehicles that were also in existence for a very long time.

So without getting into two particulars. Now, as we've mentioned we did give them a six month extension from June to December and then when December came we all sort of met and you know we felt that it was in the best interests of everybody for us to take over, put in what we would say is the renewed interest and effort that we are going to be making in the hotel. And so you know, we felt we were in the best position to continue to complete the business plan for this hotel, complete the renovation of this hotel, continue to grow the cash flow and we felt we would be in a better position to do that than the former borrower.

But it is you know, as you implied, it is an unusual situation because the loan as we mentioned has always been current and in the majority of those kind situations as you would know, a lender would typically extend a loan, the borrowers would typically extend the loan and they would continue to work things out, particularly when you know the relationship is friendly and particularly when the property continues to show growth and the property most importantly continues to meet debt service.

So you know, we really appreciate the question, because you know, I understand from-you know, from your perspective it may be a bit of a head scratchier, but at the end the day you know, we did feel that we could have pursued the option of extending a loan further and not having to show this property as REO, but we still feel you know, the best decision for us was to take ownership and full control of this asset. go Jamie I apologize.

+.Look. Thanks so for much for your question and the again excellent question in terms of the reason why the bar would pursue the course of action that it did. As we mentioned this was done in negotiated transactions was so there is no foreclosure. So this was a what to do would call it a mutually agreed to transaction with the borrower itself. So again talk about for itself exactly in the mindset of the borrower I can tell you that I think based on our experience with them this was an asset that was owned by multiple group of borrowers and that was just one manager or one investor but multiple investors.

I think those multiple investments may have had different interests in what they wanted to do with this hotel they also had different priorities and the cash flow associated with this hotel. And the fact that they've owned this hotel or were had interest in this hotel for a relatively long time. In vehicles that were also the existence very long time. So without getting into two particulars as we've mentioned we did give them a 6-month extension from June to December.

And then when December came w e all sort of net and we felt that it was in the best interest of everybody for us to take over put in what we would say a renewed interest and effort that we were going to be making in the hotel. And so we felt we were in the best judgment to continue to complete the business plan for this hotel complete the renovation of this hotel continuing over the cash flow and we felt we would be in a better position to do that than the former borrower.

But it is as you implied it is an unusual situation because the loan as we mentioned has always been current and in the majority of those type situations and you would now a lender would typically extend the loan to borrowers would typically extend the loan and they would continue to work things out particularly when the relationship is friendly and particularly when the property continues to show growth and the property most importantly continues to meet service.

So we really appreciate the question because I understand from your perspective it may be a bit of a head scratchier but at the end of the day we did feel that we kind of pursue the option of extending loan further and not having to show this property has already own. But we still feel the best decision for us was to take ownership and full control of this asset.

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Go ahead Jamie I apologize.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

I'm sorry, I didn't meat to cut you off. Yes. So when you find yourself in this situation as a lender, you know, you're really analyzing a variety of assets you can take with an asset and you know, we're here to maximize shareholder value and we're going to execute on the path and the plan that maximize shareholder value. And in this case it was a very amicable transaction, which makes it a little easier, but I'll come back to the fact that you know, we like the asset. We like the location. We really like our basis. It's cash flowing double digits to our-what we think will be our levered position and we think there's meat on the bone.

And the last little bit is just to reiterate, you know, Ares has great in-house domain expertise, in particularly in Marriott branded full service hotels. So I would kind of leave you with that thought, that you know we analyzed every path that we could take with the asset and we think this one is the best.

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Got it. No it's interesting, I know, I don't think I'm in a position to assume it's a good or a bad outcome, but to Tae-Sik's point, it's a unusual outcome in the context of what we're all used to looking at and so that's why it's worth exploring sort of the background here. appreciate it guys. Thank you.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

And we've seen this and you know most of folks here have been in the industry for you know, 20 to 30 years. You you can't see a lot of idiosyncratic behavior at the end of a fund's life. I mean, there are moments in time particularly if there are more than one fund in an investment that they may be at odds with regard to you know, advancing fresh capital and sometimes it's just easier for them to give back the keys. So it's not always what we would perceive as purely rational economic behavior, there are a bunch of externalities that drive it.

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Yeah, it's funny that comment, it totally makes sense, but at the same time it seems like a somewhat irrational decision and definitely makes you scratch your head a little bit.

Operator

There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Jamie Henderson for closing remarks.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thank you. I want to thank everyone for their time today. We look forward to speaking with you again in a few months on our next earnings call.

Operator

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 May 15, 2019 to domestic callers by dialing 1877-344-7529 and to international callers by dialing 1412-317-0088. For all replays please reference conference number 10129708. An archived replay will also be available on our webcast link located on the homepage of the Investor Resources section of our website. Thank you for attending today's presentation. You may now disconnect.

Duration: 38 minutes

Call participants:

Veronica Mayer -- Vice President, Public Investor Relations and Communications

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Steve Delaney -- JMP Securities -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Jade Rahmani -- KBW -- Analyst

David Roth -- Head of U.S. Real Estate Private Equity

Ryan Tomasello -- Keefe Bruyette & Woods -- Analyst

Richard Shane -- JP Morgan Chase & Co -- Analyst

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