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Edited Transcript of ACRE earnings conference call or presentation 3-Aug-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Ares Commercial Real Estate Corp Earnings Call

Chicago Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Ares Commercial Real Estate Corp earnings conference call or presentation Thursday, August 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Alan Henderson

Ares Commercial Real Estate Corporation - President & CIO

* John B. Jardine

Ares Commercial Real Estate Corporation - Co-CEO, Director and Partner of Ares Real Estate Group

* Robert L. Rosen

Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO

* Tae-Sik Yoon

Ares Commercial Real Estate Corporation - CFO and Treasurer

* Veronica Mendiola

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Conference Call Participants

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* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Jessica Sara Levi-Ribner

FBR Capital Markets & Co., Research Division - Research Analyst

* Sam Choe

* Steve Delaney

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Presentation

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Operator [1]

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Good morning and welcome to Ares Commercial Real Estate Corporation's conference call to discuss the company's second quarter 2017 earnings results. As a reminder, this conference is being recorded on August 3, 2017.

I will now turn the call over to Veronica Mendiola from Investor Relations.

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Veronica Mendiola, [2]

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Thank you. Good afternoon and thank you for joining us on today's conference call. I'm joined today by Rob Rosen, our Chairman and Interim Co-CEO; John Jardine, our co-CEO; Jamie Henderson, our President and Chief Investment Officer; Tae-Sik Yoon, our CFO and Carl Drake and John Stilmar from Investor Relations. In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

Before we begin, I want to remind everyone that 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 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 statement, 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'll now turn the call over to Rob Rosen.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [3]

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Thank you, Veronica. Good morning to everyone and thanks for joining us. Let me begin by providing some comments on our most recent earnings results and then discuss our earnings trajectory for the second half of the year.

For the second quarter, we generated earnings of $ 0.24 per share, which was in line with our expectations, but not fully reflective of our potential, as we continue to have meaningful excess capital that is yet to be deployed. In addition, the significant majority of our new loan production closed very late in the quarter and therefore did not contribute materially to our second quarter earnings.

During the second quarter, we continued to leverage our national direct origination platform, strong relationships with our customers and the broader Ares platform to source new loans on cash-flowing properties across the U.S. Given current market conditions, we continue to remain highly selective in order to find compelling relative value and inefficiencies in today's market.

As John and Jamie will discuss in further detail, we found many attractive opportunities, originating $ 321 million during the second quarter and closing an additional $ 58 million subsequent to quarter end. Our investment portfolio continues to exhibit stable yields, strong credit quality and no impairment or losses. During the quarter, we increased our borrowing capacity to $ 1.9 billion to support future portfolio growth. Furthermore, our portfolio remains well positioned to further benefit from rising interest rates.

Looking forward, we remain focused on growing our earnings by deploying our available capital in an accretive manner and seeking opportunities to drive down our cost of capital. As we benefit from a higher level of earning assets and greater capital efficiency, we continue to expect to cover our current dividend level from earnings from operations on a full year basis in 2017.

With respect to our dividends, our board declared a third quarter dividend of $ 0.27 per share, consistent with our second quarter dividend and an increase of a $ 0.01 compared to the third quarter a year ago.

I will now turn the call over to our President and Chief Investment Officer, Jamie Henderson, who will discuss current market conditions and our investment activity. Jamie?

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [4]

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Thank you, Rob and good morning everyone. Let me begin with some comments on the market, our positioning and our strategy. John will then provide more specific details regarding our investment activity during the second quarter and our future pipeline.

In general, underlying real estate market fundamentals remain favorable. Employment and rents are growing steadily and occupancy rates across most asset classes and geographies remain stable, while the supply of new real estate continues to be moderate. Market transaction volumes have declined slightly, but overall activity remains at a healthy level. We continue to find that demand for transitional lenders like us is strong, as borrowers value our flexibility, speed and excellent reputation, supporting the execution in the business plan.

Our national footprint and deep relationships with sponsors gives us a wide view of the market, permitting us to remain highly selective and to structure financings with compelling returns. Over the past 12 months, we've closed approximately 5% of the transactions that we reviewed.

Since joining in April, I've been very impressed by the institutionalized and integrated process that our team uses to leverage the broader Ares platforms and to identify relative value across the market. Over the past several years, you've seen us further diversify our portfolio by uncovering opportunities and inefficiencies in certain market segments. We've made select new investments in self-storage, student housing and hospitality to complement our core strategy of lending to multi-family and office properties.

As part of our underwriting process, we partner with our highly successful real state equity teams to provide valuable insights regarding the quality of our borrowers' business plans and a more granular view of the opportunities in the market. We believe that this holistic view and integrated process has allowed ACRE to generate compelling credit performance over the past 5 years.

Our current pipeline is comprised of mostly senior commercial mortgage loans, secured by value-add assets across our favorite property types, which is consistent with our current portfolio of holdings. We're also seeing compelling subordinate investments, where we have the opportunity to structure controlling positions that we would expect to generate attractive risk-adjusted returns.

Given the size and composition of our pipeline, we remain confident in our ability to deploy our excess capital and grow our originations year-over-year. As we search for relative value across the market, we will continue to explore opportunities to further broaden and diversify our portfolio into new segments, particularly where we can leverage the broader Ares platforms, real estate and credit expertise.

With that I will turn it over to John who continues to lead our value-add originations to provide more color on our recent investment activity.

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John B. Jardine, Ares Commercial Real Estate Corporation - Co-CEO, Director and Partner of Ares Real Estate Group [5]

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Thank you, Jamie. Like many credit asset classes in today's market, the senior value-add market is competitive, but we are finding attractively valued opportunities as we leverage our competitive advantages. As stated earlier, we had a robust quarter of new investment activity and our repayments were limited.

During the second quarter, we closed [6 new] senior floating rate commitments totaling $ 321 million, with $ 281 million of initial fundings and $ 6 million of fundings on existing commitments. A significant majority of these fundings closed towards the end of the quarter. We also had only $ 17 million of repayments, allowing us to increase our investment portfolio by a net $ 271 million for the quarter.

We finance value-add business plans for our sponsors in a variety of underlying asset types, including 4 office properties, 1 multi-family and 1 student housing property, all with strong supply and demand dynamics. Additionally, all 6 loans in the second quarter were with new sponsors, reflecting our reputation and deep contacts with local sponsors and intermediaries. In each case, we were able to tailor a flexible financing solution to support the sponsors business plan and generate a compelling risk-adjusted return opportunity for our portfolio.

For example, the largest loan we originated this quarter was $ 110 million senior loan to support a successful and well-respected local sponsor's investment in a portfolio of office properties in Dallas, Texas. The properties in the portfolio are located in a very liquid market, in a high traffic area with strong demand. And importantly, they're a minimal competing office properties of its class in the surrounding area. In order to close such loans, we leverage our competitive advantages, including our relationships with quality local sponsors, our reputation in the market and our ability to move quickly and remain flexible. By supporting sponsors' business plans, we increase their ability to generate cash flows, which increases the value of the property and consequently deleverages our position. This results in improved and more attractive risk profiles for our loans. Across more than $ 1.5 billion of repayment since our inception, our borrowers have increased property cash flows on average by approximately 15%, which underscores the value created by selecting strong sponsors, well-positioned properties and attractive business plans.

Now let me turn the call over to Tae-Sik to discuss our future -- our financial results in more detail.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [6]

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Great, thank you, John and good morning everyone. In our earnings release this morning we reported net income of $ 6.7 million or $ 0.24 per common share for the second quarter of 2017. As Rob stated earlier, our second quarter earnings were very much in line with our internal expectations and are not yet indicative of our full earnings potential until we utilize a significant majority of our available capital.

For the second quarter of 2017, the average unpaid principal balance of our loan portfolio was $ 1.42 billion and our second quarter borrowings averaged $ 1.05 billion, including our secured funding agreements, term loan and our third securitization.

Based upon the new originations John discussed earlier, our portfolio increased by more than $ 500 million compared to the second quarter of 2016. As we have indicated previously, we remain well positioned to benefit from rising short-term interest rates as our portfolio continues to be invested predominantly in senior floating rate loans. In fact, as of June 30, 2017, 97% of our portfolio as measured by unpaid principal balance, was comprised of floating rate loans, all indexed to U.S. LIBOR, and as an important part of our match funding strategy, 100% of our debt liabilities are also floating rate, again indexed to U.S. LIBOR. As both our assets and liabilities are floating rate, we remain positively positioned for an increase in earnings in a rising short-term interest rate environment. For example, using our second quarter 2017 portfolio and results on a pro forma basis, we estimate that a hypothetical 100 basis point increase in 1 month U.S. LIBOR would result in approximately $ 0.12 in additional earnings per common share on an annualized basis.

In support of our loan portfolio, we have been able to obtain over $ 500 million of new financing capacity this year. This includes our third securitized financing that we closed in the first quarter of this year, which priced at an initial average weighted coupon of LIBOR plus 1.85%, which currently represents our lowest cost of capital for financing our senior loans. As part of the transaction, we were able to include a reinvestment period, which gives us the ability to replace repaid loans for a period of 2 years, rather than repaying the third-party held senior notes with principal payments from the repaid loans.

Looking forward, we have strong incremental earnings opportunity from efficiently deploying our excess capital. Currently, we have approximately $ 111 million, including reserves either in available cash or in undrawn capacity, expected to be available under our financing facilities to fund new loans in our pipeline, fund outstanding commitments under our existing loans or for other general corporate and working capital purposes. Excluding the impact from any repayments, our dry powder from this available liquidity is approximately $ 350 million of senior loans, assuming a hypothetical 2.5x:1 debt-to- equity leverage ratio under our financing facilities.

Turning to repayment activity. We experienced very light repayment volume of $ 17 million during the second quarter. However, some of the repayments we expected during the second quarter has shifted to the third quarter. While we continue to expect that overall 2017 repayments will be below 2016 levels, the third quarter is likely to experience higher repayment activity given the shift in timing.

We remain confident in our ability to deploy our capital in an accretive manner in order to meet our goal of exceeding our 2016 production levels. With an attractive pipeline of investment opportunities, together with our ability to repay a portion or all of our $ 155 million secured term loan, without premium or penalty gives us a number of options to efficiently manage our existing and future capital. Given this optionality, we expect to drive earnings growth during the back half of the year, such that our current dividend level will be covered by earnings from operations on a full year basis. So with that I will now turn the call back over to Rob.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [7]

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Thank you, Tae-Sik. In closing, our business is performing well and we are positioned to improve our earnings. As we continue to leverage the strength of our direct origination platform to find the most attractive relative value for our shareholders, rest assured that we remain a credit-first shop and that we are absolutely committed to maintaining our rigorous investment process and strong credit quality. As I've said in the past and as we have demonstrated as a public company over the last 5 years, we will not compromise on our underwriting standards or chase credit to generate volume. Thank you everyone for your time, support and interest in ACRE. With that operator, could we please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Steve Delaney of JMP Securities.

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Steve Delaney, [2]

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The CLO market, we are hearing, or we're seeing it in CMBS, but certainly in floating rates CLOs, and you have your 1 issue FL 3 outstanding. Could you comment whether you have the possibility of calling and reissuing that? Obviously, I know there would be some expenses to write off, but would just be curious if there is any opportunity to improve your cost of funds by reissuing that.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [3]

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This is Tae-Sik. Thanks for your question. One of the advantages we have from our recent securitization, again this just closed a few months ago, back in the first quarter of this year, is that we were able to privately negotiate, privately place this with a single institutional investor. So I think we have tremendous flexibility to talk to the single investor and make whatever modifications we think are necessary. I don't think our expectation is that we would call and try to reissue. We think we price it very attractively, as I mentioned, with initial weighted average coupon of LIBOR plus 1. 85%. But having said that, I think, again, because this is a single investor who owns all of the investment-grade certificates and we obviously held on to all of the subordinate certificates, so-called the equity piece of securitization, I think we have the ability to negotiate any modifications that we think are necessary and that may be helpful for us. So as we've mentioned before, we're always actively looking to reduce our cost of capital, we're always looking to more efficiently have a stellar right-hand side of the balance sheet and I think what you suggested in terms of looking at all of our financing, including our most recent securitization is certainly part of the business plan and what we focus on here every day.

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Steve Delaney, [4]

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I had forgotten Tae-Sik how recent that was, so apologies that we had seen some people calling. I mean, I didn't realize yours was earlier this year, just my bad memory. Just looking at the strong pipeline, we're hearing about -- and back to my theme of attractive securitization, when you look at your pipeline in the lower repayments, do you think you might have the opportunity to do another CLO financing by the end of this year, maybe in the fourth quarter? Would you have enough loans?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [5]

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Great question. As you know, what we don't do is we don't originate, we don't price, we don't underwrite any of our loans with the belief or with the business plan to do a securitization. However, in our company's history, we have now done 3 securitizations. So I think we opportunistically take advantage of the securitization market. Prior to doing 1 recently, the securitization market was frankly not that receptive to doing a securitization, so you didn't see us doing 1 for example in 2016. But obviously market conditions have changed, particularly early this year, where we felt it was very advantageous for us to do it. We certainly free up our credit facilities, we significantly lower our cost of funding. This is non-recourse, it's very, very well match funded and in this case, in particular, we were able to add in this 2-year revolving period, which gives us tremendous flexibility in the expected life and the flexibility of this facility. So pardon me for the long answer, but the answer is absolutely we'll continue to look at a fourth securitization as certainly an option. As you've seen, our portfolio growth has been very significant, we've added more than $ 500 million of net loans to our book since last year or since June of last year. So we're continuing to grow the senior loan portfolio and as we get to a critical mass, we will certainly look at the opportunity to do additional securitizations going forward.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [6]

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Hey Steve, it's Rob. One other point, and I've mentioned this before. But our board and we examine securitizations as an alternative financing vehicle. And you all are sophisticated observers of the market. In addition to sort of the cost of the securitization, we really also have to debate and measure our ability to give up repayments and cash flow that's generated from repayment of loans, which in a traditional securitization, obviously go to repay the senior tranches and we sort of hang out there until we can collapse the securitization. This substitution feature that we were able to negotiate on our last securitization sort of ameliorates that cash flow problem. But I always want you to understand that as we examine the alternative, we also have to examine the value of getting repayments back on to our balance sheet and funding new production and not just sort of wait until the end of a securitization for us to get our capital back.

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Steve Delaney, [7]

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Understand; appreciate that Rob. And I have 1 final closing one, it will be short, more of a strategic observation I guess. Despite the strong quality of your loan portfolio, and I should note we are starting to see some cracks within the industry and I think I certainly have confidence and I think most investors understand that quality is your first objective within building your loan portfolio. When I look at your price-to-book value, which appears to be somewhat below 90% versus others in the group, I come to the -- I keep coming back to the conclusion that the only thing -- the challenge that ACRE has is being sub-scale and that comes through somewhat in just trading liquidity of your stock, but it also comes through in this ability to kind of be lumpy in your quarterly earnings and not consistently cover your dividend. I'm just curious, if greater scale is something that you, Rob and the board are focused on, and if you see that as a path to a better valuation for the stock.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [8]

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You're absolutely right, Steve. Scale is our friend. Having production that is more even over the course of the year and not being as back-end weighted as we have historically been is another primary objective of the management team and finding ways to drive down our cost of capital, so that our accretive earnings can drive this gap between our market price and book value, which quite frankly, I don't understand, but I'm biased. So we've got to do all of those things, but scale is absolutely our friend, but scale will only be achieved by underwriting properly and putting on our books high quality assets. We are not going to chase scale by reducing our standards and people have to understand that there is a culture here that goes across platforms at Ares and that culture is to protect our shareholders' capital, invest it wisely, generate accretive and growing returns and over the long run, build a business that has longstanding value.

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Operator [9]

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And our next question today comes from Jessica Levi-Ribner from FBR.

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Jessica Sara Levi-Ribner, FBR Capital Markets & Co., Research Division - Research Analyst [10]

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Can you speak a little bit about maybe why the repayments were so low this quarter and are just flowing into the third quarter? Is it the timing issue or...

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [11]

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Thanks again for your question. This is Tae-Sik. As we mentioned, we had a very light repayment of [$ 17 million] this quarter. And we are tracking very consistently to what we have said in our prior earnings call early this year that we expect 2017 repayments overall to be materially lower than the repayment that we had in 2016. The result of which is primarily due to the fact that in 2016 we had a very strong production year, particularly in the second half of 2016. So we have a lot of recent vintage or more recently originated loans on our books heading into 2017. So naturally we expect that less repayments in '17 than we had in '16. I think in terms of second quarter in particular, as we've always said previously, again because this is a very (inaudible) business, it's loan-by-loan, it's borrower-by-borrower, it's project-by-project, our borrowers are going to have differences in timing than what may have been originally planned. In fact the $ 17 million isn't significantly less than we expected, but it was less than we expected, but -- and as we mentioned, we do expect that to actually happen in the third quarter. So good news for us is that the repayments have been pushed back approximately 1 quarter, which gives us an additional 90 days on average to earn more interest on the loans. It is clearly not due to any performance issue of the underlying assets. Again our borrowers are very much executing all of their business plans, but the timing of refinancing, the timing of sales, which are generally the way we get repaid on our loans, have been pushed back for various reasons, certainly non-related to credit reasons. So we feel very fortunate frankly to be able to have these additional loans on our books for an additional quarter.

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Jessica Sara Levi-Ribner, FBR Capital Markets & Co., Research Division - Research Analyst [12]

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Okay. And then can you kind of talk to me a little bit about the spreads that you're seeing in the market today and maybe a little bit about the competition? I know you made some opening -- or John made some opening remarks about the competition, but as a rent spread compression, are you seeing more market participants and maybe talk a little bit about your pipeline for the next quarter.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [13]

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Jessica this is Jamie Henderson. So there has been spread compression that's occurred during the first half of the year. It varies widely. I would say, on average it's plus or minus 50 basis points, but that's situation specific and asset specific. I think the team has done a great job of finding really good deals and has maintained great credit discipline, while simultaneously getting paid. So it's a little choppy. There's been deals that I think were under-bidden deals that were over-bid and we try to stay away from the deals that are over-bid, in order to get paid for risk. Simultaneously, we've done a great job of managing the right hand side of the balance sheet, which has helped to minimize the impact of spread compression. And to address your second question about new entrants, there have been, I would say, conversion of private capital to public capital, but the net increase in capital availability hasn't been significant. So it's really mostly the same old faces, just different forms of ownership. And your last question regarded the pipeline. And...

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John B. Jardine, Ares Commercial Real Estate Corporation - Co-CEO, Director and Partner of Ares Real Estate Group [14]

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So last quarter we talked about our pipeline and we talked about $ 200 million that we were looking at in our pipeline. I can say to you that today our overall pipeline is similar in size. And again, you must understand that it does fluctuate daily. But we believe really the originations in the second half of the year will exceed the first half of the year. And let me just emphasize that we originated $ 455 million in the first half of the year. So we expect, strongly expect, to do better than that in the second half of the year.

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Operator [15]

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And our next question comes from Jade Rahmani of KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [16]

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I was wondering if you could comment on the magnitude of spread compression that you've seen over the last quarter and year-to-date.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [17]

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So there has been spread compression, but it tends to be asset-by-asset, deal-by-deal, it's plus or minus 50 basis points. And I'll reiterate that I think the team has done an excellent job of still finding high credit quality deals, where we're getting paid well for risk and also the management of the balance sheet has helped us maintain our margins.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [18]

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Can you give some color on incremental yield spreads and overall ROEs that you're seeing and also why do you think there has been the magnitude of spread compression we've seen?

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [19]

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I'll address the second question first. I think it's -- the spread compression has been largely a function of rapidly increasing LIBOR. LIBOR has come up in excess of 100 basis points over the last 18 months. Some of that has been absorbed by spread. If you look at, generally speaking, gross unlevered returns, they are fairly stable. The coupons that the borrowers are paying are fairly stable.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [20]

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Is that because their business plans don't have the capacity to absorb higher rates or it's thirst for yield in the market and some new capital on the sidelines?

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [21]

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I think in aggregate if you looked across the whole industry, there has been a very modest expansion in cap rates, somewhere on the order of 25 basis points, which has been a slight function of the increased coupons. But generally speaking the business plans and we see this on the equity side of the business, are still generating very attractive levered returns.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [22]

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When you talk about broadening the product suite and I apologize if you have already said this, but exactly what are you referring to? Is it more subordinate capital structures, structured products, preferred equity, is it construction loans, is it additional property types, what are you thinking about?

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James Alan Henderson, Ares Commercial Real Estate Corporation - President & CIO [23]

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So ACRE has a great opportunity by virtue of its position within Ares. Our credit capabilities, real estate capabilities and private equity capabilities all add a great perspective to our lending business and give us a variety of deal flows. When you combine that with our direct origination capabilities and regional office system, we see a lot of good relative value opportunities. As we sit here today, we continue to see great relative value in our senior (inaudible) mortgage product, which makes up the bulk of our assets. We use the strength of the platform to further test and review broader product types and assets. Really not ready to go into detail today, but I will say we'll continue to do things that are consistent with our strength and our strong credit focus and our objective is to provide the best risk-adjusted returns to our shareholders.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [24]

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Wanted to ask about the 2 large loans in the portfolio that are labeled diversified and I think there's disclosure around the asset types which are self-storage, but also includes retail and office. And I think last quarter there was a disclosure that the maturities on the non self-storage components were earlier than the October 2018 maturity and I did see that 1 of the loans experienced a modest paydown of $ 17 million. So can you give an update on these 2 loans and I guess what prompted that disclosure last quarter, if there's any credit issues in these -- in either of these loans?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [25]

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Thanks for your question. I think the way you described it is exactly correct. We did experience a $ 17 million paydown on the smaller of the 2 loans that you referenced. And the reason that we put in the disclosure is exactly again the reason you're asking, which is there's been a lot of focus and questions from shareholders and analysts about repayment activity. There is obviously a great focus on net deployment as opposed to just gross deployment. So we thought it would be helpful disclosure to provide a little bit more insight that these are both cross-collateralized pooled loans that have a lot of assets, but do have maturity dates with respect to the office and retail assets that are before the final maturity of the older loans themselves. We thought it would be helpful disclosure because of that focus on repayment activity of our firm. So in terms of your question about what the performance of the overall loan is, it continues to perform very well. Obviously, our overall portfolio as a whole, including these 2 loans continues to perform very well. In our 5-year history, we did not have any impairment losses. That continues to be true today. As we mentioned, we continue to have very strong credit performance. So now the disclosure was not related in anyway to credit performance. And the reason for the disclosure again was to provide better insight on repayment activity, so that you could really keep track. And the $ 17 million of repayment activity that we talked about in the second quarter having incurred, has exactly happened in this -- in the 2 loans that you described.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [26]

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And are these two loans to the same borrower?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [27]

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Yes, they are.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [28]

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Okay. Just lastly I wanted to see if you could comment on the pipeline. I think last quarter you indicated the amount of loans on the term sheet. So just directionally want to see if you could give any thoughts there.

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John B. Jardine, Ares Commercial Real Estate Corporation - Co-CEO, Director and Partner of Ares Real Estate Group [29]

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So last quarter we spoke about a pipeline of about $ 200 million and our overall pipeline today is similar in size, but they fluctuate daily, but it's very, very similar in size. So I will say to you that we believe the originations in the second half of the year will exceed the first half of the year, and let me please remind you that we originated $ 455 million in the first half. So we expect to do better than that in the second half of the year.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [30]

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And maybe just one other comment in reference to Jade your question before you leave. You mentioned sort yield compression going on in the market. Again, 1 thing we want to emphasize is that the portfolio that we have as of June 30, we think is really outperforming current market. As you saw in our disclosures, the weighted unlevered effective yield is 6%, which we think is very strong. Again, this relates back to a question that Steve DeLaney asked earlier about discount to book value. When you're really taking account that our loan portfolio is generating on the senior side of 6%, we think that the discount to really the underlying value of the loans may be even greater than the discount to book value itself. So again, just want to emphasize that our loan portfolio continues to generate on the senior side 6% on on unlevered effective basis.

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Operator [31]

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(Operator Instructions) Today's next question comes from Sam Choe, Credit Suisse.

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Sam Choe, [32]

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Most of my questions have been answered, but with regards to the excess capital, do you have some sort of expectation as to when you plan to deploy all that capital, or is it just like invest-as-you-deem-fit kind of approach, because I just want to kind of get an update as to how you're thinking about the pacing of additional loan investments.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO and Treasurer [33]

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I think we're very conscious of the capital we have. Obviously, if we don't put the capital to work, we have under-invested capital, it does impact our earnings and we're certainly very motivated and very focused on fully deploying that capital. There is no specific timeline, if you want to call it that we're placing on ourselves. We do believe that we will be, so-called, fully deployed, other than reserves and other than other capital we need to keep around. But we will be fully deployed really by year end and that's consistent with what you heard from Jamie and John in terms of what we believe our full year production levels to be, as well as what we believe our full year earnings to be, again with having earnings from operations fully cover our dividend. So all of that is really premised upon our belief that we will have more or less full deployment or full utilization of the capital by year end.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [34]

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I'd like to just add one thing. If you take a look at our production and deployment of capital and you go back so last year and our sale of ACRE cap and the generation of that roughly $ 93 million of equity, you sort of take a look at what we said we were going to do and what we've done. We've got -- I'm going to use approximations here -- approximately $ 500 million more of assets on our books than we did last year. We continue to maintain great credit quality during that deployment period. We hope that you've got message from John and Jamie that we've got terrific production momentum going into the second half of the year. We've had managerial enhancement at the highest levels of ACRE, that's going to wind up being great for our shareholders over the near and long term. We've got terrific cost of capital opportunities, to reduce cost of capital on the right hand side of the balance sheet. Don't want anybody to forget about that. We've got a business where we're a credit-first shop and as always, our business is responsive to our borrowers. The timing of closings, the timing of repayments are not always in our hands as much as we'd like to influence it. But as you sort of take a look at where we are today and the remainder of this year and the momentum going into 2018, it's -- from my point of view, it's pretty darn good. So don't forget about where we've come from, what we've done and delivering on what we promised to our shareholders.

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Operator [35]

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Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Rob Rosen for any closing remarks.

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Robert L. Rosen, Ares Commercial Real Estate Corporation - Chairman and Interim Co-CEO [36]

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Okay. I guess I've said everything that I had to say in the answer to that last question. So we are grateful for your interest in ACRE , we're grateful as always for your support and we look forward to our next call in a few months. So thank you very much.

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Operator [37]

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And thank you, sir. And 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 1 hour after the end of this call through August 16, 2017 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 10109927. An archived replay will also be available on our webcast link located at the home page of the Investor Resources section of our website. This concludes our conference call. Have a great day.