Good afternoon, and welcome to Ares Commercial Real Estate Corporation's conference call to discuss the company's first quarter 2016 earnings results. As a reminder, this conference is being recorded May 5, 2016. I will now turn the conference call over to Mr. John Stilmar from Investor Relations. Mr. Stilmar, the floors is yours, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on today's conference call. I am joined today by Rob Rosen, our Chairman and Interim Co-CEO; John Jardine, our President and Co-CEO; Tae-Sik Yoon, our CFO; and Carl Drake, Ares Head of Public Investor Relations. In addition to our press release and the 10-Q that we filed with the SEC this morning, 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 as well as 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 such expressions. These forward-looking statements are based on management's current expectation of markets condition and management's judgment. These statements are not guarantees of future performance, conditions or results, and involve a number of risks as well as 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 such forward-looking statements. Please also note that past performance or market information is not the guarantee of future results. With that being completed, I will now turn the call over to Rob Rosen.

Thank you, John. I would like to start with a few highlights from our first quarter, and put them in context with recent market conditions and our pace of capital deployment. As you may recall from our last conference call in early March, we described our decision to preserve our capital during the volatile market conditions in the first quarter. At that time, we were seeing increasing lending spreads and we decided to invest our capital in more favorable higher spread loans with a goal of improving our forward earnings. We also highlighted that our first quarter earnings would be temporarily impacted by this capital deployment decision, along with seasonal headwinds and slower transaction activity in our mortgage banking business. As a consequence, our first quarter earnings were $0.18 per share, in line with our internal expectations. Now that the market has stabilized at higher spread levels, we are beginning to deploy our excess capital in principal loans in order to drive higher earnings. We also expect to capitalize on our building mortgage banking pipeline to improve our earnings going forward. Accordingly, we continue to expect that we will generate full year earnings in excess of our annualized dividend, as Tae-Sik will discuss in more detail. Let me take a minute to provide some additional insight into our two operating segments. In our principal lending business, we believe we continue to benefit from the long-term supply/demand imbalance for value-added real estate financing. We have broad market coverage with our established national direct origination footprint that we believe is well-positioned to ramp up loan production for the remainder of the year. Given the closing of our $155 million delayed draw term loan financing in late 2015 coupled with additional capital from prepayments, we are in the enviable position of having significant…

Thank you, Rob, and good afternoon, everyone. Let me start with an update on recent market dynamics. As Rob highlighted, we made a conscious decision to reserve our capital at the beginning of the year, as spreads continued to widen. In our market, senior loans spreads have now stabilized at approximately 50 basis points to 75 basis points wider than the levels witnessed in the fall of 2015. In the liquid credit markets, we are seeing some modest tightening from recent peak pricing in February. Considering for a moment CMBS, triple V minus spreads as proxy, spreads tightened about 175 basis points from February's wide levels of 800 basis points and have remained stable around these levels. The recent tightening of spreads and general stability in the financing market has positively impacted transaction activity across our market. Current market conditions are more stable and activity levels are beginning to increase once again. Turning to our principal loan activity for the first quarter. We closed loan fundings of $109 million, including fundings of existing commitments. These loans are to very strong sponsors, tied to properties in the office hospitality sectors in diverse and liquid markets. Furthermore, our principal loan pipeline is building at attractive spread opportunities. Our pipeline is primarily comprised of loans to sponsors, who are increasingly valuing our flexible capital and our execution capability in a market, where certainty of closing is critical. Looking forward, based on current market conditions, we are targeting loan fundings for the full year in the range of $700 million to $900 million. We believe our focus on directly originating and structuring our own loans results in more favorable terms and pricing, than if we purchased our loans from intermediaries. However, in times of disruption and volatility, we are able to leverage the strengths…

Thank you, John. On today's call, I would like to provide a brief recap of our first quarter 2016 results, discuss our strong liquidity and financial position, and then walk you through our outlook for the remainder of the year. As Rob stated, first quarter 2016 earnings were $5.1 million or $0.18 per common share, comprised of $5.5 million in net income from our principal lending segment and a net loss of $334,000 from our mortgage banking business. While these levels of earnings do not meet our long-term return objectives, these quarterly results were in line with our internal expectations. Our lower principal lending results reflect the fact that we have a substantial amount of available capital that did not currently earn spread income. And for mortgage banking, new loan production during the first quarter suffered from expected seasonality and volatile capital market conditions. Going forward, however, we continue to expect that increasing loan originations across both our principal lending and mortgage banking businesses should drive improved earnings for the remainder of the year, resulting in full year 2016 earnings to be in excess of our current annualized quarterly dividend level. Our balance sheet remains strong and well-positioned to capitalize in today's environment. During the first quarter we funded $109 million in new and existing loans. Our portfolio continues to be constructed primarily of short-term floating rate senior loans. As of March 31, 2016, 85% of our loan portfolio was comprised of senior loans, collateralized by properties located in diverse geographic market with the weighted average remaining life of under 1.5 years. Since the inception of our company in 2011, we have not had any delinquencies, defaults or impairments. Furthermore, our portfolio remains focused on office and multifamily, two of the strongest performing property sectors since 2004 according to Moody's.…

Thank you, Tae-Sik. The closing of our delayed draw term loan in December and the conservative construction of our balance sheet provides us with significant capital to invest. Given our building pipeline of investment opportunities, we look forward to prudently investing this capital, which we expect will increase our earnings as we capitalize on today's favorable market environment. We appreciate our investors support and the hard work and dedication of our employees. As a management team, we are committed to building long-term shareholder value for our investors. Operator, please open the line for questions.

[Operator Instructions] The first question we have comes from Steve DeLaney of JMP Securities.

We certainly expected to see the sequential dip in earnings, I have to say, larger than we had modeled, but in the comments that you've made today about we're at the level of recovery going forward this year. But Tae-Sik, I was just wondering, we've heard that the discipline around lending and the slow seasonality on multifamily, totally understandable. I'm just a bit curious to know if there was anything on the expense side of the income statement that may have been classified as one-time or non-recurring that we should also know about that could have contributed to the dip?

I think in terms of our normal operating expenses, there is some so called seasonality to some of our G&A expenses. So for example, in the first quarter you probably saw a slight tick up in our G&A, and that has to be with, for example, some additional audit cost and legal cost associated with our annual audit process. So while we do try to amortize those type of cost over the four quarters, there is some seasonality built into those kind of expenses. Nothing heavily material, but you obviously did see some slight increases in our G&A expenses first quarter versus fourth quarter.

And for clarity, John's goal of $700 million to $900 million, I interpreted that we're just talking about the principal lending segments there. Am I correct?

That would be correct.

And of course, sorry, these are unconnected questions, but I just had three or four things to kind of bring up. The convertible notes, you were able to clean up and you actually did it with your own resources in cash rather than some kind of refinancing. The first quarter was obviously not conducive at any part of the debt market and I'm sure senior corporate notes were not spared in that. But I'm curious whether you are continuing to monitor the senior note market, and if you feel that at some point that may become another source of investable capital for you that you're able to put some corporate debt on the books?

Yes. And I think it's a great point, Steve. We are always, as you can imagine, constantly monitoring the debt markets and we're always looking to optimize our capital structure. We obviously have a few disciplines that we're very, very focused on in maintaining. One of which is what we mentioned is match funding our assets and liabilities. Our goal, obviously, is to continue to do that. Our goal is to continue to lower and drive down our cost of debt capital. And so we will continue to monitor the market. We will continue to monitor the senior debt market. We will continue monitor the term loan market. We will continue to monitor the CMBS market. And obviously, we'll continue to work with all of our warehouse line vendors to make sure that, again, we continue to match fund our assets and liabilities, both respected term and input rate, as well as drive down the pricing of our debt capital.

Yes. I would add one more point to that, Steve. I think that you should also know that we benefit greatly from learning a great deal from our colleagues in other parts of Ares who are very active in the financing market, so that availability, pricing, knowledge of structuring. We learn a lot from a management company. We learn a tremendous amount from our brethren at Ares Capital Corp and all of that benefits us significantly as we plan for alternatives beyond warehouse facilities.

As I go through the day and I think about Acre, I rarely connect the dots back to ARCT. You make a very good point there. My final comment is of relation to Acre Capital. And I just want to share that, I think from the investment community perspective, there is a lot of enthusiasm about the optionality that that part of your business adds, because at least from the outside it looks to be very scalable and less capital intensive than the principal lending segment. And I'm just curious as you think about allocating capital and keeping dry powder, are you seeing any M&A opportunities with respect to the Acre Capital platform, whether that's on originations, whether it might be a default servicing sales from PUD. Just curious, if there is anything to do with Acre Capital from a strategic perspective? That's my last question.

I think you will understand that we're constrained in our ability to comment about any specific M&A opportunities at either Acre Capital or in the principal lending business or for Acre as a whole. I think as we've said for several quarters, we're continuously engaged in examining opportunities that could allow us to grow organically and exogenously. We believe that over the past couple of years, we've really built a great pipe, as we call it, at Acre Cap. And we're hopeful that we'll find ways to cause the Acre Cap value to be reflected in the valuation of Acre.

And next we have Joel Houck of Wells Fargo.

The target of $700 million to $900 million for the full year in your principal lending business equates to about $600 million to $800 million left over the next three quarters, given your Q1 funding levels. You mentioned on Slide 7 that you have $450 million assuming full leverage or at least 2.5x. Is there other resources or something we're missing because of the stock at trading where it's at, presumably the equity capital markets are closing. I'm just wondering, how to adjudicate the gap between your origination plan and the amount of fully levered capital available to you at this time?

That's a great question, Joel, and we should have more clear about the difference. Really the difference is based upon repayments of loans that we have on our current balance sheet. One of the things we mentioned is that our senior portfolio has an average remaining life of under 1.5 years. The overall portfolio has an average life of about two years. So as you can imagine over the next eight months or so we do expect a significant amount of repayments and prepayments of our loans. And we believe we will be in advantageous position to redeploy that capital. And in most cases, we believe we will be able to redeploy that capital at higher spreads and earn more income through that. So the gap between the $450 million and the, $700 million, $900 million numbers is really made up of again, recycling capital that we expect to come from repayments of existing loans.

And I know you guys bought back some stock and you have the 10-5b-1 plan, but in the case of Acre, and I think shareholders always, and analysts always lobby for more buybacks, but in your case it seems like deploying the capital and leveraging the balance sheet and then taking advantage of your pipeline were probably more advantageous. I'm just wondering, if you see it the same way or if you still think that you need to do some share buybacks, given the disconnect from book value?

It's a great question. And I think that we're really very sensitive to maintaining our position in the markets having capital to meet the needs of our growing sponsor based origination network. At the same time, there is the mathematical analysis of accretion opportunity that comes when our stock is inappropriately priced and discounted to a point at which we really can't ignore the opportunity that it presents for creating shareholder returns. So it is, as you've rightly pointed out, a delicate balance of deploying capital in our business at these wider spreads. But at the same time, recognizing that there are moments when you should want us to take advantage of inappropriately priced common stock, if it adds considerably to the returns for our shareholders.

So there isn't a lot of math involved, I guess, from your perspective. It's not something that is completely off the table, given the pipeline. If I could switch a different direction, one of your peers yesterday alluded to some process improvements that were implemented by HUD. Obviously, you guys are a HUD lender. I'm wondering if you could provide some color on those process improvements and how that could impact the mortgage banking business going forward.

Any process improvement that we get from HUD is a wonderful event. And we've heard about them, we haven't seen them. But it would certainly accelerate the velocity in terms of transaction volume and the lead time it takes to close these loans. So I would say only that we would benefit greatly by efficiencies in the HUD process.

Are those improvements designed to maybe alleviate some of the jamming up of the system, for lack of a better term, during times of market volatility like we saw in Q1 or is this something different that they're talking about?

Well, they had consolidated some of their offices in an attempt to become more efficient. And again, we are talking about the government, so we're hoping that that works. But it really is consolidating some of their offices and centralizing their processes in a manner, which we hope will become more efficient.

I actually had one last one. How does the opportunity to purchase smaller, perhaps, private platforms or even portfolios of assets, how does that stack up relative to your pipeline, deploying capital, and mortgage banking, as well as stock buybacks?

I think it's a clearly -- they are opportunities that we examine. And I think what you should assume is, is that every opportunity competes for a dollar of capital based on the returns that it will deliver, return on assets, return on equity, accretion to our earnings. And at the same time, we need to always be conscious of satisfying the growing demands of our sponsor base and ensuring that we're there to serve them with a flexible capital that they require. So as John pointed out, will we buy loans, will we buy portfolios? Positively, as long as we can subject them to our underwriting standards, price them appropriately and make sure that they're more than competitive with the returns that we can generate through our self origination. So we examine those opportunities, we will continue to. And it is all about reunderwriting, maintaining credit quality and making sure that they are accretive to our earnings.

And next we have Jessica Levi-Ribner of FBR Capital Markets.

Couple of my questions have been asked and answered. But would you be able to elaborate on the secondary transactions that you're seeing in the market and what kind of discount or spread discount that you would anticipate closing those loans at or what makes them attractive?

That's a good question. Each one is different. So it's very hard to categorize without distinguishing each asset separately. So are the discounts on these significant? I'm not sure what that is about. Sometimes the element of that financing that they're able to provide us, which also has a material effect. But the thing that's important for you to recognize is that we weigh very carefully the acquisition of this type of loan based upon what we can self originate. And then from time-to-time we see opportunities and we seize those opportunities. But once again, as Rob said, we put them through the same rigorous credit processes in determining whether in fact they are appropriate for Acre.

At the risk of saying something, which perhaps everybody on the call knows, when we talk about secondary transactions, please remember we are not talking about participating in anybody else's loan in a minority position. We are talking about purchasing an entire loan, re-underwriting and controlling that loan, and controlling the engagement with the borrower, so no minority participations, no passive participations, rather control of the entirety of a loan that we might buy as a secondary transaction.

And just to further elaborate, also we're buying the whole entire loan. And we service that ourselves through our primary servicer, which is rated, as you know, S&P above average. So we're controlling this from the point of time when we're actually underwriting and to closing and servicing until it matures.

And then on the mortgage banking side, the new lenders or the new team members that you've brought on, what kind of production do you foresee for each of them, or do you think about it per head, or is it more just that it'd be overall contribution to the overall platform?

The three new originators, we needed to expand our footprint in the northeast, which is primarily what this did, and it added team members to an existing team. and as it turns out and this may change during the year, but we're seeing pipeline from these new originators and from even our existing originators in sort of the higher, more profitable GSE and HUD-type business.

Next we have Jade Rahmani of KBW.

Just firstly, can you talk about whether you're seeing banks curtail lending? And do you think this, in conjunction with the moderation in CMBS volumes, has the potential to lead to a liquidity crunch?

I think there's sufficient capital out there, particularly in the subordinate side of the market. Do I think that there is a credit crunch because of the dislocation in CMBS market? I think that what we're seeing is a lot of the borrowers that are traditional CMBS type borrowers are moving more towards the short-term floating rate type of instruments for flexibility and structuring and the like. And I think there is sufficient cap. But I don't see a credit crunch of any sort at this point. I think there is enough capital out there.

And have you seen a pullback from banks? Things like the mid-cap banks, in particular, you have been talking about it this earnings season?

No. We've seen a pullback from the banks in terms of their credit matrix, their advance rates, and what they're willing to lend on a LTV basis, and some of the charges that they are ascribing to inventory on their principal book has increased as well. So yes, we have seen them pullback.

Regarding the sequential downtick in loan repayments, was any of that attributable to 1Q volatility? We've heard some other companies' say that prepayments did slow, partly reflecting volatility in the quarter?

And I'll have Tae-Sik chime in on this as well. We've actually seen our borrowers, on the value-added lending side, they've done a very good job in executing their business plan. And for the most part, we seem to be pretty much on forecasts for our prepayments. We've seen maybe a couple of instances, where there has been some delays, but nothing of significance.

I think that's right, John. I think as we've always mentioned, our repayments and prepayments are somewhat sort of anecdotal, meaning we have a very discrete portfolio. We evaluate each and every loan for prepayment possibility. We are in constant communications with each of our borrowers. So I think we have a very good handle on what is going on with the assets, what's going on to business plan. We obviously overlay that with what's going in the overall capital markets. So I think what you mentioned is true in a very general sense, meaning that it is a little harder for borrowers to refi or potentially sell their assets, particularly in the first quarter. Did we, in our specific portfolio, see a material change in those business plans? Not really. But I do think -- I agree with you that overall that difficulty or the time it takes for a borrower to refi or sell an asset is taking a little longer than it would have.

Given the aggressive ramp in fundings that you guys plan, and some in real estate do feel that this is potentially later innings in the commercial real estate cycle. What are you putting in place to make sure you are not being overly aggressive in your underwriting? Have you changed anything? Are you underwriting loans to standards you previously did or are you looking to do slightly lower LTVs, potentially or write loans on assets with more in-place cash flows?

We happen to think the fundamentals are solid, first of all. Second of all, we pay very particular attention to the sponsorship and their ability to execute the business plan, and that's vital to our lending thesis. And you could only do that really with boots on the ground, direct origination as integral to our whole business model. So what I would say to you is, yes, you'd need good sponsorship. We find very good opportunities throughout the country. We have a national footprint that enables us to have coverage throughout the United States. So we see some markets that we'd be very careful of and we see others that we'd like to be very aggressive of, but it's on a case-by-case basis, but most importantly, Jade, is the sponsorship is important in these particular times, and their ability to execute and their financial capabilities as well.

I would add one thing that I hope will give you and all of our shareholders comfort. The DNA of this organization, and by this organization, I mean Acre and Ares as a whole, is a credit-based conservative DNA culture. So if there is one thing we are not going to compromise on, it's credit standards. We're not going to reach for returns and we're not going to put at risk our balance sheet by reaching, and with diminished credit quality, and take on larger levels of loan risk, it's simply not who we are. And we'd rather miss on a deal than do a deal that is a reach in terms of credit quality. And I hope you understand just how engrained that is in all of the credit areas of Ares.

Lastly, can you just touch on your Houston exposure, and perhaps, comment on how both the office loans' in the portfolio, as well as the multi-family, are performing?

Once again, Jade, we do not have any delinquencies. We do not have any missed payments. In particular, in Houston, our multi-family portfolio in Houston is, we have gone through rigorous testing there to make sure that we're happy with where we are, the snapshot that we have today, and then we've actually gone out and pro formaed what we think things will look like 18 to 24 months down the road. And we have great comfort and communicated that to our Board, great comfort in our multi-family assets in Houston. We do not have any office in Houston. And again, we have not seen any degradation of value in our office portfolio throughout the United States as well.

And, Jade maybe just to put it in context of size, again, as John mentioned, our Houston exposure on the principal lending side is limited to existing multi-family. It's really four loans. One of the four loans is actually part of a cross-collateralized portfolio. So we've even gone to the extreme of, even if that one loan in the cross-collateralized portfolio were not to perform, the other loans in that portfolio would more than cover the overall principal balance of that loan. And I think the other important thing to understand about, again, our exposure to Houston, if you call that, is the principal balance is in the $70-ish million. So again, not a big, big part of our overall $1.2 billion principal loan balance.

The Texas office property, can you say, which market that's in?

I assume its Houston, but I was obviously wrong.

It's in Dallas. And it's not affected by the oil and gas situation at all.

Next, we've Douglas Harter of Credit Suisse.

With the relatively short remaining duration on your principal lending portfolio, can you talk about what type of end-of-life payments there might be on those and how that might impact, both cash flow and earnings?

Sure. I think our strategy is to make loans on short-term floating rate assets. Most of our loans do have some extensions that allow the borrower generally upon meeting certain conditions to extend those loans. So when we talk about the average life being about just under 1.5 years, again, that's the base year term. Some of our loans do extend. But in terms of prepayments, obviously, our job, as I mentioned, is to constantly monitor this portfolio. We service all of these loans. So as you can imagine, we're in constant contact with the borrowers. So when a borrower decides to prepay a loan, it does not come as a surprise to us. I think we have good lead time in understanding how their assets are performing. We have good lead time in terms of understanding where they are in a refinancing or sale process. So we are actively forecasting and making sure that we are ready to redeploy the cash or the capital that we would receive upon repayment of those loans. And as we mentioned, the overall target that we have for production this year does look at the capital that we expect to receive from repayments, and therefore our ability to redeploy that capital in new loans once they do repay.

And then on the mortgage banking side, can you just remind us kind of what type of lead time it generally takes until a loan is locked? So basically how much visibility do you have into kind of the next couple of months of locks from here on out?

Generally, it varies, but Fannie and Freddie would be -- the GSEs would be probably 45 to 60 days and HUDs can be as long as six months to nine months. And we've seen a lot of the HUD loans six months ago and nine months ago, so we know kind of when they're about ready to hit.

Well, at this time, we're showing no further questions. I will like to hand the conference back over to the management team. End of Q&A

Thank you, operator. Thank you all for joining us on this call. And we look forward to talking to you again at the end of our next quarter. Thank you.