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Edited Transcript of ACRE earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 Ares Commercial Real Estate Corp Earnings Call

Chicago Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Ares Commercial Real Estate Corp earnings conference call or presentation Friday, July 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Roth

Ares Commercial Real Estate Corporation - President

* James Alan Henderson

Ares Commercial Real Estate Corporation - CEO, CIO & Director

* Tae-Sik Yoon

Ares Commercial Real Estate Corporation - CFO & Treasurer

* Veronica Mendiola Mayer

Ares Commercial Real Estate Corporation - VP of Public IR & Communications

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Conference Call Participants

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* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jade Joseph Rahmani

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

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Ares Commercial Real Estate Corporation's conference call to discuss the company's second quarter 2019 earnings results. (Operator Instructions) As a reminder, this conference is being recorded on July 26, 2019.

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

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Veronica Mendiola Mayer, Ares Commercial Real Estate Corporation - VP of Public IR & Communications [2]

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Good morning, and thank you for joining us on today's conference call. I am joined by today by our CEO, Jamie Henderson; David Roth, our new President; Tae-Sik Yoon, our CFO; and Carl Drake; and other members from our Investor Relations team. 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, condition or results, and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. 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 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.

And with that, I will now turn the call over to Jamie Henderson.

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [3]

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Thank you, Veronica. This morning, we reported strong results for the quarter as we continued to execute on our annual business plan and many of the financial objectives that we laid out earlier this year.

We generated core earnings per share of $0.38, up 9% from the second quarter of 2018. Our new loan commitments for the second quarter totaled $99 million and total loan fundings were $129 million. This brings our year-to-date commitments and fundings to 33 -- $333 million and $250 million, respectively, in line with our levels for the first half 2018.

From a return perspective, we are seeing higher expected return profiles in closed loans for the first half of 2019 compared to the first half of 2018. To date, all originated loans this year have anticipated gross levered returns in the low- double-digits.

Turning to the market. We continue to believe that U.S. real estate fundamentals remain healthy. Supply generally remains in check in most of our targeted markets and property demand is consistent. Transaction activity has recently picked up for us, but we are remaining highly selective. As an example, we closed less than 5% of the transactions that we reviewed during the first half of 2019.

Our focus on broadening the number of opportunities that we source is putting us in a good position to redeploy our capital into attractive investments for our shareholders. As a result of our efforts to grow and broaden our pipeline, the amount of transactions that we are currently reviewing and have quoted or are in more advanced stages has doubled versus the same period in 2018.

As we have said in the past, we will not compromise on credit quality, and we are focused on originating loans within our targeted return range. We are further expanding our geographic footprint to markets that have strong growth dynamics and that we believe are less sufficiently covered by the competition. In the second quarter, we added a new origination professional in Northern California, which will increase our West Coast coverage.

As you may have seen from our press release this morning, we have named David Roth as our new President. Many of you heard from David on last quarter's conference call as he discussed our U.S. real estate equity platform's experience in the hospitality sector and how it supports ACRE's investment activities. David runs our U.S. Real Estate Private Equity business and is a member of our Global Real Estate Investment Committee. David and I have been closely working together since he joined earlier this year. And his impact has already been significant. I look forward to working more closely with David in his new role going forward.

I will now turn the call over to David for a brief introduction.

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David Roth, Ares Commercial Real Estate Corporation - President [4]

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Thanks, Jamie, and good morning, everyone. I'm very pleased to join ACRE as President and take on a more formal role with the company. I look forward to working with Jamie, Tae-Sik and the team to help grow the business. I'll be happy to answer any questions. And I look forward to meeting all of you in person in the future.

And now I'm going to pass the call over to Tae-Sik to walk you through our second quarter financial results.

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

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Great. Thank you, David, and good morning, everybody. Earlier today, we reported GAAP net income of $9.8 million or $0.34 per common share and core earnings of $11 million or $0.38 per common share for the second quarter of 2019.

Our strong second quarter results benefited from certain events, including above-average accelerated fees related to repayments, which was in contrast to the lower-than-average accelerated fees that we experienced in the first quarter of 2019. In addition, for this second quarter, we benefited from strong performance at the Westchester Marriott hotel.

As Jamie mentioned, we closed on $99 million of new commitments across 3 senior floating rate loans during the second quarter. This included the transfer of a $41 million loan on an industrial property that was originated in the Ares Warehouse in the first quarter and then subsequently transferred to ACRE in the second quarter. Total fundings for the second quarter were $129 million, which includes initial fundings of $59 million and $70 million of fundings on prior existing commitments.

As of June 30, the loan portfolio included 45 loans with an outstanding principal balance of $1.5 billion. Credit quality continues to remain favorable with no impairments and the portfolio-weighted average unlevered effective yield remains at 7.2%. At quarter end, 92% of our floating rate loans have embedded LIBOR floors, which provide us with meaningful levels of protection, should rates decrease. The weighted average LIBOR floor for the 92% of loans with such floors is 1.6%.

Now turning to our balance sheet. Our leverage remained consistent with a debt-to-equity ratio of 2.9x. This is in line with our target, given our asset mix with 96% of our loan portfolio in senior loans. During the quarter, we continued our efforts to further improve our financing facilities.

A few weeks ago, we announced that we amended the terms of our $50 million secured revolving credit funding facility with City National Bank, or CNB, which is an attractive source of flexible financing for us. We added an accordion feature, for example, that provides an additional $25 million of capital for limited periods on an if-and-as-needed basis, lowered the cost by 35 basis points and further added an extension option to extend the maturity for 2 additional years through 2 additional 12-month extensions.

In June, we also obtained a $28.3 million nonrecourse first mortgage loan on the Marriott Westchester hotel. This effectively reduces our equity in the investment to just over $10 million. In our view, the $28.3 million loan proceeds represent 73% of our $38.6 million carrying value, further substantiating our views on the fair value of property. Based on trailing 12 months of cash flows generated by this hotel, we expect that the return on our equity will be in the mid-teens or well above the return we were earning on our prior senior loan on the hotel on a levered basis. Going forward, this $28.3 million loan may be increased to up to $30 million, subject to certain conditions.

Finally, on repayments. In the second quarter, we have $190 million of loans that repaid, bringing repayments for the first half of the year to just under $250 million. We currently expect a pickup in repayment activity in the second half of this year with aggregate repayments for 2019 to be -- to likely be at the higher end of our original of $400 million to $700 million range we previously provided.

We believe that we remain on track to fully cover our full year dividends for 2019 through core earnings. As a result, our Board declared a third quarter dividend of $0.33 per share. On an annualized basis, this represents an attractive 8.8% annualized dividend yield based on yesterday's closing price of $14.94 per share.

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

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [6]

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Thank you, Tae-Sik. In closing, we are very pleased with our strong second quarter results and where we stand going into the second half of the year. We've been very selective in transacting on investments. With attractive risk-adjusted returns, our pipeline is a strong and Marriott Westchester is performing well. Looking ahead, we continue to seek opportunities to grow our earnings through capital deployment and by reducing the cost of our liabilities and operating expenses.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today will come from Steve Delaney with JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [2]

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And congratulations on the nice quarter. Boy, you guys give such thorough info in terms of repayments, et cetera, that it's hard to have too many questions, but I'm going to take a shot at it. Jamie, you mentioned the pipeline is building and it's above -- I think I heard you say it was double where it was last year. And when combine that with Tae-Sik's comments about something in the $600 million to $700 million range of annual repayments.

I'm looking back to the portfolio 1 year ago in June of 2018 and it was $1.75 billion, if my model is correct. And now we've slipped below $1.5 billion. I guess the question is the pipeline that you see and the momentum, can we get back to something like a $1.7 billion, $1.8 billion portfolio, given the repayments here over the next 6 months? How long is that going to take to reach your prior peak level? So I'll stop there and see where we go.

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

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Sure. Steve, this is Tae-Sik. Maybe I'll start off and then Jamie can more specifically address. I just want to start off with the one comment that obviously any balance that we give at the end of the quarter really reflects that one pinpoint in time. And clearly, we have periods where we'll end the quarter higher and we have periods where we end the quarter lower. I would tell you that in terms of the repayments that we had just in the second quarter this year, much of that happened right at the end of the quarter.

So even though it got ended with a little bit of a lower balance, the earning power that we had during the quarter was higher than the $1.5 billion that you see reflected. So it will vary. I'll let Jamie sort of cover what the future pipeline looks like. But I think the important number to focus on during any quarter is really the average that existed. And that's in our supplemental earnings that you'll see. But again with that, why don't I turn to Jamie for some additional color?

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

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Thanks, Tae-Sik. So the pipeline feels great. Typically, at this point in the summer, it can get a little quiet. But we've got 6 or 7 executed term sheets and a really strong volume right behind that. So we feel really good about where we see it going into the second half of the year. If you look historically, our strongest quarter has always been Q4. And I think the way we're positioned this year heading into the second half is really, really good. I'll also say that our selectivity is higher than it's ever been. And the returns on the deals that we closed through the end of the second quarter are actually higher than last year.

So despite a lot of chatter about spread compression, we're still seeing really, really good deals. As I mentioned, we have expanded our geographic footprint. And getting these originators in place on the ground in the markets, where some of the competition just doesn't have a true ground game has allowed us to be more selective, put in good, high-quality credits at really attractive spreads. So feel really well positioned for the rest of the year.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [5]

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And that return profile seems to be a little at odds about what we're seeing. We are hearing that some of the spread compression we saw with the last 12 to 8 months, especially with rates coming down, has subsided somewhat. But you're describing not just level returns but higher returns. And is it that you're being -- really filtering down, instead of it being a real volume game, you're filtering it down to where the risk-adjusted return on the loan is where your selectivity really comes in? Is that why we're seeing this kind of countertrend to the group, I guess, is what I'm saying?

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [6]

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Well, I would look at it in two parts. We've always had a very high degree of selectivity, so it's always been less than 5%. And it still is less than 5%. But we've more than doubled the top of the funnel. So rather than electing to just kind to buy the market, so to speak, we're just picking our spots carefully and really pressing for that kind of incremental risk-adjusted return.

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Operator [7]

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The next question comes from Doug Harter of Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [8]

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Just wanted to get your updated thoughts on the holding of your REO loan. As you said, you kind of validated the fair market value with your loan. The performance was good. Kind of just the thoughts around kind of monetizing that and kind of moving on and redeploying back into the loans versus continuing to hold it. And you are generating a strong return but could be more volatile. Just kind of how you think about those dynamics.

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [9]

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So Doug, it's Jamie. So I'd start by saying that we really like the asset. It's a good asset. And it's definitely outperforming budget and kind of our initial projections. We've stepped down our exposure in the asset quite significantly through the financing that Tae-Sik mentioned and generating really attractive cash and cash returns. So feel very good about where we sit at the moment.

Hospitality assets are interesting. There's an operating company component to them. There's a good time to sell them and there's obviously bad times to sell them. We think that there's some work to be done at the asset level that can enhance the returns to optimize the sale. So we're going through some of that work as we speak. And we think that, that can drive incremental NOI and facilitate a better sale. And Tae-Sik, do you have any thoughts on the asset that you want to share?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [10]

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Sure. No. absolutely. I think that's very accurate. I mean Doug, I think one thing to make very clear is this is not intended as a long-term investment. However, we believe we have the skills and the experience and the people here at Ares to really add the value that we think we can add to this hotel. We do think this is, as we said, more than a year hold that we'll want to make sure that we fully stabilize it properly, we fully maximize the operations. As Jamie said, we are doing some of the common area renovations right now. We want to make sure that we see the cash flow benefits from the prior renovations as well as the new renovations that we're completing today.

And so really given Ares' experience and what we see for the future of this hotel, while we're not a long-term holder of this investment, we do want to maximize the value here. I think we've taken all the right steps so far, including the financing, but more importantly on the operations of the hotel. And we feel very good about its prospects. But you're right. There is seasonality, there is more volatility in only an asset like this than a loan. So we're not in the business of owning hotels. We're not in the business of operating hotels. So we will convert this to cash and then redeploy it into loans. But we don't feel compelled to do it immediately. We think we can maximize value here.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [11]

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And then away from this asset, but obviously Ares has the expertise to kind of own real estate. In the past, you've talked about kind of wanting to add duration to the portfolio. Just I guess what are your current thoughts on potentially adding some owned real estate to the portfolio as a long-term kind of core holding?

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [12]

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That's a good question, Doug. And the good news is we see the flow in all the asset classes. So definitely see it in the pure real estate equity side, see it in the security side, also see it in our core business. We think that the relative returns in the levered first mortgage model are still really compelling and offer great relative value. There will be a moment in time where we think adding duration is appropriate. And we're always engaged in that kind of hourly, daily, weekly relative value exercise.

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Operator [13]

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The next question comes from Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [14]

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With the stock, I believe, modestly above book value, I think that there is at least some potential for common equity issuance. How do you think about that, given the magnitude of repayments that you're experiencing, running in excess of originations? And secondly, are there any portfolio acquisitions in the market that could be attractive that you've seen?

For example, I cover two companies, one is Colony. And yesterday, they announced a strategic shift focusing on digital, so they could potentially be a seller of a lot of assets. And also another company, iStar, has pivoted to solely focus on ground lease. They have a high-yielding billion-dollar portfolio. So just wondering if there's any potential for growing the company through acquisitions.

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [15]

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Thanks, Jade. So I guess I'll take that in a couple parts. With regards to common equity issuance, we've stated previously that it's a two-part test. Number one, it has to be nondilutive. So we're clearly passing that test. Number two, we said that we need kind of clear near-term opportunity to reinvest that capital at attractive returns. That, because of volumes of repayments, we haven't met that test just yet. There will be a moment in time where we think we'll meet that test. And at that point, we would evaluate issuing equity.

As it pertains to portfolios in the marketplace, I think Ares is blessed by the fact that we see pretty much every transaction out there, many of the ones that you cite and also many that aren't public. So we get a good look at everything. And it comes down to pricing and credit quality. So that's always -- the intention is to find a really attractive book with high credit quality that's reasonably priced. So when and if we see that, we'll trade.

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

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And what about distressed assets? I think that I've noticed an increase in capital raising and capital formation around anticipation of either idiosyncratic assets that it requires some kind of workout capability. Could that be interesting to you at this point in the cycle?

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

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Sure. So I think to play in that space, you need to be good at a couple things. Number one, you need to be a good structured credit shop, so you can understand what you're buying. Number two, you need to be able to own, operate and fix real estate. So we clearly qualify on both fronts. Part of the reason David is on the team, and we're happy to have him, is to enhance the integration of our 2 platforms and to be ready when and if those opportunities present themselves.

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

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Okay. That's interesting to hear. Just on the outlook for originations and also repayments. It's been some time since you exceeded about $200 million in annual originations. Do you see -- I mean in quarterly originations. Do you see the potential for that in the next 2 quarters? And on the repayment side, can you clarify? I thought the range -- Tae-Sik's comment was that you'd be at the higher end of $400 million to $700 million. But I believe Steve said $600 million to $700 million. So I just want to clarify that.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [19]

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Sure, Jade. Why don't I take that repayment question first? So I think what we said is the higher end of that $400 million to $700 million range. And I guess I interpreted Steve's comment as that higher range being the $600 million to $700 million of that $400 million to $700 million original range. And so I think that's right. I guess I would sort of say the range, I think, we have is more in the $550 million to $700 million range. So we were just trying to kind of narrow that range to provide you guys with a better viewpoint. Again as we've always said, the caveat here is that we have 45 loans. They're all very bespoke situations. There's really no statistical way to predict repayments, unlike a large single-family home loan portfolio.

This doesn't really react specifically to interest rate movements or spread movements even. I think it's really based upon when our sponsors complete their business plans, stabilize the assets and therefore are ready to either refinance or sell the assets. That's really what drives repayment activity. Having said that, we obviously carefully monitor all of our loans, speak with the borrowers on a very frequent occasion. So we have a pretty good sense. But again, we have a relatively wide range because they are lumpy, they are very bespoke. So I would tell you that right now, we would tell you the best range we have on the upper half of that $400 million to $700 million, meaning $550 million to $700 million.

One clarification I do want to make is I think you had mentioned at the outset of your question to Jamie that repayments exceeded originations. And again, I would always caution people not to look at our statistics on a quarter-by-quarter but really look at it annually or at least look at it year-to-date. So for example, year-to-date, our originations and our repayments were almost the same, right around $250 million in terms of fundings as well as prepayments for the year. If you look at the balance sheet, it looks like our loan is a little bit less than the year-end activity.

And I would tell you the adjustment you have to make is we didn't own the Westchester Marriott at the year-end. That was a $38.6 million loan. So if you adjust for that, you can see that our total balance is almost identical year-end through June 30. And so maybe going back to Steve's original question about why our loan balance also seems lower is because with the REO, we took $38.6 million of loans and it's now in a real estate owned asset and therefore will have naturally $30.6 million less in loan balance. So that's a small adjustment but I think an important adjustment to make.

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

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And just on the potential for originations to exceed $400 million in the back half?

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

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Yes. So as I mentioned, we have 6 deals with term sheets executed. That's a principal balance of close to $200 million. And behind that, we have good visibility into also a significant number of loans. So as I mentioned, feel really good about the second half. Timing in this business moves around a lot. So this is just a bit of a guess as to when this closes, be it Q3 or Q4. But full year, feel very good about where we're sitting.

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Operator [22]

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Our next question comes from Rick Shane with JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [23]

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Tae-Sik, you had mentioned that the weighted average LIBOR floor is 1.62%. Curious what the distribution is. Because as LIBOR moves down, obviously that's the average. But I'm curious when we should start seeing a little bit of more income pick up. And I am curious, given sort of what has happened over the last couple of years in terms of margin compression, if some of that was loss of floor income and whether or not this will actually enhance spread as we see rates drop.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [24]

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Sure. And thanks for your question. So that's right. So we had mentioned that more than 90% of our loans have LIBOR floors and that the average floor for those loans with the floor is 1.6%, just above 1.6%. Just more specifically, I'll just give you some example. So we set our LIBOR floors generally at market. So the loans that were done a year ago obviously have lower LIBOR floors. Loans that were done the last 3 to 6 months have higher LIBOR floors.

So for example, 20% of our loans have floors that kick in right around 2.25%. So with LIBOR today at 2.4%, we have 20% of our loans that are pretty close to the current market. We have another set of loans that kick in at about 2%. So we get about just under 29% of our loans kick in at around 2%. As you can see, we're well-distributed and well-protected from [ethers] in LIBOR floor. Obviously, the further it falls, more percent of our loans kick in. But just to address your question about more near-term impact, so 20% at 2.25%, just under 29%, 28.7% to be more exact kick in at 2% LIBOR. And then in terms of your second...

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [25]

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Go ahead.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [26]

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Sorry, go ahead, Rick.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [27]

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No, I said I didn't mean to cut you off. You were going to answer the second part of my question. I apologize.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [28]

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Yes. And then on margin expansion, or I guess impact of borrowing margins when LIBOR changes, certainly the reasonable estimate is what we saw as LIBOR ticked up is that our spreads compressed a bit. Because again if you are a borrower, you certainly are focused on spread. But what you really focus on is your all-in cost of financing, right? So again, if the LIBOR goes up, you can afford to pay a little less spread. What we're expecting and I think what we're seeing just a little bit of is as LIBOR comes down or at least the indications are that it may likely come down, I do think we'll have to -- I think we'll get a little bit more pricing power. Jamie might want to speak more specifically about it. But that is certainly something we intend to see or expect to see.

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [29]

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Yes. Coupons tend to be a little bit sticky and thus the spreads tend to widen a little bit when the index moves.

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Operator [30]

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(Operator Instructions) The next question comes from Stephen Laws with Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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A couple of follow-up questions, please. Tae-Sik, I think you've done a great job covering the prepayments in the second half of this year. But really want to get your thoughts on 2020. As I look through your portfolio of loans, I think I only see 3 and they're fairly small that mature in the first half of 2020. But then you do have -- so basically, the 2020 schedule of repayments are very much back-end loaded to the second half of the year.

First off, can you confirm if that's accurate as I think about how to look at my quarterly results through 2020? But time that incident, the new Ares facility, I know you brought one loan down, can you talk about whether or not that's an objective and how valuable that can be? If you can get Ares facility, say, filled up by June, that way, it's in place to pull those assets down in the second half when the repayments pick up next year.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [32]

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Sure. And again, thanks for your question. I think your question is a very insightful one. So certainly, when we look at our repayment schedule, we begin with the state of maturity on our loan. And we certainly start from there. And then we really look at each asset and say, "What's the likelihood that it repays before the maturity? What's the likelihood that it may extend it for whatever reason?" And we start to make significant adjustments. So I think if you looked at our internal work and said, "What is the expected maturity schedule?" It will look quite different than the stated maturity schedule because I would say it's a minority of our investments that actually pay off on stated maturity.

As you know, we have a very limited number of loans that extend, typically for good reasons, but a very small number that extend beyond. But the vast majority pay before the stated maturity. So I think if you look at 2020, at this point, our view is that, that trend, that general pattern, will remain consistent. That even though stated maturity may be more back-ended, my anticipation is that you'll see maturities that's probably more spread out throughout the year. Again having said, it's very loan-by-loan type of analysis. So I would always start as you did with the stated maturity. But we always make significant adjustments to our expected maturity based upon what we're seeing in the business plans of each asset.

I think the second point you made, which is the Ares Warehouse, you're spot-on. That is absolutely the reason that we put this Ares facility in place is to help us through periods of higher [returns]. And so we want to build up a storage of loans in the warehouse facility so that when we get a repayment, it doesn't take 30 days, 60 days, 90 days to redeploy that capital, but it's something that we can immediately drawdown from the Ares Warehouse facility. Obviously, the team is working very hard, incredibly hard to not only put loans on the balance sheet today but to put extra loans, if you want to call it, in the warehouse facility so that going forward -- and particularly 2020 going forward -- that we will be able to deal with loan repayments much more efficiently than we have in the past.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [33]

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That's great. Appreciate the color on that, Tae-Sik. And on the hotels, I know you touched on it. You mentioned seasonality in your answer to Doug's question. Can you maybe give us a little color around the seasonality of the revenue we should be modeling for that? You did say you'd likely own it for more than a year, so we'll go through a full year with it. So maybe two questions. One is the seasonality we should see on revenue side of that. The second is on the expense base. How much of that is fixed versus variable types of the revenue?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [34]

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Sure. No, excellent question. And Westchester Marriott is -- experiences somewhat typical business -- suburban business-style behavior, meaning that in the summer months when there's less business travel and more tourism, it's going to get less business. There's going to be less group business. There's going to be less conferences. There's going to be less meetings. And that's generally true. In the third quarter, that's a little less true. But on a typical basis, first and third quarters tend to be the slowest but particularly third quarter. So seasonally, second quarter and fourth quarter are generally the strongest for these type of hotels. And I think what we have budgeted -- because we haven't owned this hotel for the full year cycle, but certainly as a lender, what we have seen and what we have budgeted for this hotel is that third quarter will definitely be the slowest of the quarters. Second quarter was a very strong quarter. But third quarter, we do expect it to be on a quarter-to-quarter basis the weakest of the 4 quarters.

Yes. I was going to get to your second question about fixed versus variable cost. Full-service hotels do have a substantial portion of their expenses as fixed cost. This hotel is a 444-room hotel, so does have full staff. It does have full food and beverage. It does have full catering. So there is substantial fixed cost at this hotel. There are obviously some variable costs in terms of room cost. But being a full-service hotel, unlike some more limited-service hotels, there is a higher percentage of expenses that are fixed. So seasonally, what you'll see is that the operating margin for the hotel will be more impacted because of the higher percentage of fixed cost.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [35]

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I guess to try and tie all that together, with the 3Q being the seasonally lowest revenue, do you expect it to be profitable for just the third quarter alone? I know you look at it more on an annual basis. But when we're looking at our model for this coming quarter, do you expect a positive margin there for the third quarter?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [36]

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So Stephen, we have not provided specific guidance for the hotel. I think all we have said is if you look at this historically, we expect 2019 to be in line with historical. That was our budget. I think it's performing, I would say, slightly ahead of that at this point. And so I think if you were to kind of look at how much revenue this hotel has generated, how much NOI this hotel has generated so far in the year and kind of take that into consideration for the rest of the year, you might be able to get some sense. But I think directionally, I think you're correct. It will be substantially lower, the budget is substantially lower in the third quarter than the second quarter for sure. But I prefer not to, at this point, give exact specifics on whether it will be positive, whether it will be negative or that specific amount.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [37]

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Fair enough. Well, I'll make sure to ask again in 3 months, so you can talk about the strongest quarter in Q4 and then talk about how positive it is for the contribution then. So I'll let you get both sides of that next quarter.

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Operator [38]

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Our next question is a follow-up from Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [39]

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I was wondering if you could quantify the benefit from prepayment income that you generated in the quarter?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [40]

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Sure, very happy to do so. So again, I just want to put this in the proper context. And so what we've said in the past is that on your typical, if there is such a thing, your average quarter, we experience about $0.02 impact -- $0.02 per share impact from acceleration of deferred origination fees. First quarter, we mentioned we had minimal accelerated fees in the first quarter. The second quarter was just about $0.03 per share. And so as you can tell, first quarter, we were under average, second quarter, we were above average. And again, that's why again want to emphasize that rather than looking at this quarter-to-quarter, we think about this as a longer-term annual trend of about $0.08 per year, if you want to call that.

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Operator [41]

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Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jamie Henderson for any closing remarks.

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James Alan Henderson, Ares Commercial Real Estate Corporation - CEO, CIO & Director [42]

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Thank you very much. I want to thank everyone for their time today on a Friday in July. We look forward to speaking with you again in a few months, and we hope you have a wonderful summer. Thank you.

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Operator [43]

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And thank you, sir. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference will be available approximately 1 hour after the end of this call through August 9, 2019, 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 10131890. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you for joining today's presentation. You may now disconnect.