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Edited Transcript of ACRE earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Ares Commercial Real Estate Corp Earnings Call

Chicago May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Ares Commercial Real Estate Corp earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Roth

Ares Management Corporation - Partner & Head of U.S. Real Estate Private Equity - Ares Real Estate Group

* James Alan Henderson

Ares Commercial Real Estate Corporation - President, 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

* Ryan John Tomasello

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

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

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Thank you. Good morning, and thank you for joining us on today's conference call. I am joined today by our CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; and David Roth, Ares Management Head of U.S. 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 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, intent, 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 of 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 at www.arescre.com. Ares Commercial Real Estate Corporation's earnings release and 10-Q are also available on the company's website.

I will now turn the call over to Jamie Henderson.

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

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Good morning, and thanks, Veronica.

We are off to a strong start this year, generating GAAP and core EPS of $0.30 and $0.32, respectively. Our strong earnings, originations and investment pipeline reflect the progress that we have made to generate higher and more predictable earnings, and 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 the 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 5 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 3x the volume of loan commitments originated in the first quarter of 2018. The loan in the Ares Warehouse is designated for ACRE and, 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 2 additional loans secured by office properties in Texas and North Carolina totaling $59 million in new commitments. We are seeing attractive relative value with gross levered returns on all loans close to date in the low to mid-double-digit 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 review 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 have said on our last earnings call, we have fully covered our dividend from core earnings for the past 3 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.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [4]

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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 receive approximately $0.02 per common share per quarter in such fees. But for this first quarter, such accelerated fees were less than $0.005 per share. In addition, while we have strong originations 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 at 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 cost 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 indexed to 1 month LIBOR. This has allowed us to benefit nearly step for step with the increasing 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 remains strong with no impairments or losses since the inception of our company more than 7 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 a full-service property with 444 rooms and offers 26,000 square feet of flexible meeting space. Over the past 4 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, increase group sales and complete renovations 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 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. To date, we have received multiple term sheets from third-party lenders. Upon successfully financing the property and based upon trailing 12 months of cash flows generated by the hotel, we expect that 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 the hotel's positive outlook going forward.

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

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James Alan Henderson, Ares Commercial Real Estate Corporation - President, CEO, CIO & Director [5]

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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 more 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Steve Delaney of 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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I noted on Page 3 of your deck that of the 4 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 there may be a construction loan in there or maybe a couple loans that are just heavy transitional or heavy rebuilds.

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

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Sure, Steve, and thanks for your question. So the one loan in particular, and if you look at Page 9 of the same deck, and it's really loan number 25 under office loans. This is a -- 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 0. It is a transitional asset, but it is not a construction loan. So we didn't fund anything at closing, but we will rapidly do so. But at closing, there was nothing funded Day 1. So that's the majority of the difference between the commitment amount and the funded amount.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [4]

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Got it. Apologize for not checking out Page 9 in the deck, but 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.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President, CEO, CIO & Director [5]

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Steve, it's Jamie Henderson. So we're really picky. It is less than 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 and 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 really [confident] with our portfolio and also with our ability to underwrite this type of asset.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [6]

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Got it, Jamie. And Tae-Sik, the last thing for me, thank you for the explanation on the low prepays and sort of the reason of the step-down to $0.32 from an average of $0.37 in the prior 2 quarters. It makes me feel a little bit better about my $0.35 that was up on the board. Having said that, the light -- repays in the first quarter, can you 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 at March 31?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [7]

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Sure, great question, Steve. So 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 there's a clear link 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 a higher-than-average repayment in 2018, we do expect to have, what I would say is, lower-than-average repayment in 2019. We think a chunk of that will come in the second quarter, maybe early part of third quarter, and that is sort of our best estimate. But 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.

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Operator [8]

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The next question is from Doug Harter of Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [9]

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I guess could you comment on where you are versus fully deployed today? Just kind of, I guess, kind of want to put that in context of kind of on the last call of saying you expect it to be fully deployed to kind of within 30 days of that call.

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

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Sure. Doug, this is Tae-Sik. So again, I think with a relatively granular portfolio, we put in place 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 it's going to be a very, very effective tool for us.

You see that we did put in one loan, a $40.5 million into the Ares Warehouse line. 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, call it, moments in time where we're more fully invested. There will still to be moments in time where we're less fully invested. And what we're really driving towards 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 towards that goal. And I think even before we put in the Ares Warehouse line 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 a significant progress that we've made versus 12 months ago versus prior years, and I think we'll keep driving towards that goal.

So as I mentioned, maybe just a direct answer to your question, yes, 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 under Ares Warehouse line. With some repayments 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 towards having a much more fully deployed balance sheet at ACRE and putting the excess deal flow into the Ares Warehouse line.

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

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

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [12]

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Sure. Great question. So clearly as a lender, we are somewhat protected with the volatility of cash flows from different types of properties, particularly a hotel property, which do rents day by day and do not have the benefit of long-term leases here.

But when you look at the Westchester Marriott, obviously, this is a hotel, as we've mentioned, has always been current 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 downturn right after the renovations we talked about. It was still able to meet its interest payments and funded the required CapEx reserves within the hotel itself. So there has been volatility. Some of it planned because of the room renovations, common area renovations. Some of it is not preplanned in terms of market disruptions. But 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 asset, and really any real estate asset overall, we think we have a decent amount of cushion. We will get attractive financing on this asset.

As I mentioned, the statement that we will either get to or even exceed the return that we've earned as a lender against this property is based upon the trailing 12 months of income, the last 12 months of income in 2018 in particular. That can change, of course. But again, we think we are on a good path towards continuing to increase the cash flow of this asset. We've certainly experienced that over the past 24 months. And 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.

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

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And Doug, it's Jamie. I'll just build upon that just a little bit. So as Tae-Sik mentioned, really good trajectory for cash flows, and I think it's really important to kind of put this into 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 lull, it's -- we don't consider it meaningful.

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Operator [14]

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The next question is from Jade Rahmani of KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [15]

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The financial 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?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [16]

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Correct, correct. So that really represents that subperiod for the third quarter starting March 8 through the end of the quarter.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [17]

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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?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [18]

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Well, I think -- again, it's hard to extrapolate any short periods because there is seasonality week by week, month by month and certainly season by season. So I would say, 2018, the net income for the property was significantly above that number. 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.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [19]

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Okay. And in terms of the renovation plan, I mean I believe that Normandy had put in significant renovations over the past 4 years. I've actually been to the hotel because my wife works for a company nearby, and they had the 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 in other areas?

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [20]

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Sure. So 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, it was all -- much of that was done during our period of being a lender in this property. So -- and 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 has taken longer than what we all had expected.

I think going forward, the type of renovations that we're planning on doing primarily relates to the ballroom areas. So if you're familiar with the property, and that's 26,00 square feet, very flexible, there's a number of rooms that make up the 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 have 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 renovation is already in a FF&E reserve account.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [21]

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

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [22]

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So I think the only estimated holding period that we have at this point to really say is we don't expect to put this on the market in the next 12 months. We think the hotel is continuing to grow and continuing to benefit from the work that's been done and will be done going forward. And so we think it's 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 assign this asset but continue to complete the business plan, complete the renovation plan and sell with higher NOI in place.

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

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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 an 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's meat on the bone in terms of revenue and expenses. So we think we're really well positioned to do what Ares does very well, which is improve real estate and improve cash flows.

But I also think this is 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.

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David Roth, Ares Management Corporation - Partner & Head of U.S. Real Estate Private Equity - Ares Real Estate Group [24]

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Yes. Thanks, Jamie. And -- 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 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 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 an opportunity to increase cash flow in the ways that have been talked about. So 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 asset to ensure we get the best execution on the strategic plan and ultimately on the future sale.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [25]

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

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

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Sure. It's 1.48%. And if you need to have more details, we do have a little bit 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 -- 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, '19, it's 1.48%.

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Operator [27]

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

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [28]

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And again, look, a lot of questions have been asked about the property. But 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 to fall 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, 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.

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Tae-Sik Yoon, Ares Commercial Real Estate Corporation - CFO & Treasurer [29]

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Sure. Rick, thanks very much for your 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, this was done in a negotiated transaction, so there was no foreclosure. So this was a, if you want to call it, a mutually agreed-to transaction with the borrower itself.

So again, it's hard for us to put ourselves exactly in the mindset of the borrower. But 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 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 in existence for a very long time.

So without getting into particulars -- as we've mentioned, we did give them a 6-month extension from June to December. And then when December came, we all sort of met, and we felt that it was in the best interest of everybody for us to take over, put in what we would say as the renewed interest and effort that we are going to be making in the hotel. And so we felt we were in the best position to continue to complete the business plan for this hotel, complete the renovations on the 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, as you implied, it's an unusual situation because the loan, as we mentioned, has always been current. And in the majority of those kinds of situations, as you would know, a lender would typically extend the loan, the 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 debt service.

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

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [30]

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I appreciate that. Some of -- well, go ahead, Jamie. I apologize.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President, CEO, CIO & Director [31]

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I'm sorry. I didn't mean to cut you off. Yes, so when you find yourself in this situation as a lender, you're really analyzing a variety of paths that you can take with an asset. And we're here to maximize shareholder value, and we're going to execute on the path and the plan that maximizes 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 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 sort of bit is just to reiterate, 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 we analyzed every path that we could take with the asset, and we think this one is the best.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [32]

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Got it. No, it's interesting. I don't think I'm in the 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 in, so that's why it's worth exploring sort of the back entrée. Appreciate it, guys.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President, CEO, CIO & Director [33]

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And we've seen this, and most of the folks here have been in the industry for 20 to 30 years. You can 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 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.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [34]

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Yes. 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.

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Operator [35]

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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.

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James Alan Henderson, Ares Commercial Real Estate Corporation - President, CEO, CIO & Director [36]

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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.

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Operator [37]

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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 May 15, 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 10129708. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.

Thank you for attending today's presentation. You may now disconnect.