Good day and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Fourth Quarter and Full Year 2017 earnings results. As a reminder, this conference call is being recorded on March 1, 2018. I will now like to turn the conference call over to Veronica Mendiola of Investor Relations. Please go ahead.

Thank you and 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 Carl Drake from Investor Relations. In addition to our press release and the 10-K 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 our 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 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 the like titled measures used by other companies. In addition, comments made during the course of this conference call do not constitute tax advice to, and should not be relied upon by investors, who should consult their own tax advisors regarding the matters discussed herein, and the tax consequences of an investment in ACRE. Please also note that none of past performance, current or potential dividend yields or market information is a guarantee of future results. I will now turn the call over to Jamie Henderson.

Thank you, Veronica. Good morning, and thanks for joining the call today. Before Tae-Sik walks us through our fourth quarter and full year earnings, I thought it'd be helpful to highlight the many accomplishments we made in 2017 that we believe has set a strong foundation for an improved level of earnings and more earning stability throughout 2018. Let me start on the investment front. As we discussed in our last call, we commenced several strategic initiatives to enhance our origination capability, broadened our investment products, align more closely with the broader Ares real estate platform and add new origination professionals in strategic markets. We are really excited about the benefits we expect to obtain in 2018 and beyond, as we fully implement our plan. We began to see some initial benefits of these initiatives during the fourth quarter, with $416 million of new commitments across 11 loans, which led to a record $956 million in new commitments for the full year. Our strong finish to the year also allowed us to achieve our goal of deploying a significant amount of our excess capital by the end of the fourth quarter, resulting in a higher earnings run rate beginning in the first quarter of 2018. Our investment portfolio continues to perform well and we ended the year with 100% of our loans in performing status. As a testament to our structuring and asset management capabilities, in connection with repayments by the borrower, we resolved the defaults on the two previously defaulted loans, which we had discussed last quarter, as Tae-Sik will describe in more detail. And finally, we also used the strong liquidity in the capital markets to reduce our funding costs and to improve the efficiency of our liabilities. Importantly, the benefits of these initiatives were not reflected in our 2017 earnings results. However, as we will describe, we are poised to benefit from these ongoing improvements in 2018 and beyond, in the form of greater quarter-to-quarter earnings stability and enhanced profitability. Now let me turn the call over to Tae-Sik to discuss our financial position and results in greater detail, and then I will come back with more color on our forward outlook.

Great. Thank you, Jamie, and good morning, everybody. Before I get started, I want to let you know that during our earnings call, that in addition to our GAAP results, we will also be discussing our core earnings as a supplemental metric of our company's performance. This is a measure that we have historically reported, but going forward, expect to provide a higher level of focus. This morning, we reported GAAP net income of $6.2 million or $0.22 per common share, which includes a $0.03 per share onetime non-cash charge, relating to the partial repayment of our Secured Term Loan. Our core earnings were $7.2 million or $0.25 per common share for the fourth quarter of 2017, which in addition to other adjustments, adds back the $0.03 per share onetime non-cash charge. For full-year 2017, we generated $30.4 million in GAAP earnings or $1.07 per common share and core earnings of $32.1 million or $0.13 per common share. Please refer to schedule 1 of our earnings release 8-K that we filed this morning for a reconciliation between our GAAP and core earnings. Both our fourth quarter and full year GAAP in core earnings results reflect the meaningful amount of excess, uninvested capital that caused a drag on our full earnings potential. In particular, our fourth quarter GAAP in core earnings reflect significant repayment activity at the end of the third quarter and the back-ended timing of our new originations in the fourth quarter. Despite the impact from the uninvested capital, we fully covered our dividends from core earnings during full year 2017, making this our third year in a row of full core earnings coverage of our dividends. To provide more detail on our fourth quarter activity, our originations included 11 new loan commitments, with 10 of the 11 consisting…

Thank you, Tae-Sik. Before we take your questions, let me briefly touch on current market conditions in investment activity and then I will discuss our financial outlook going forward. From a market point of view, over the past few months, we have seen a significant increase in volatility in the public equity and high yield markets, driven by fears of inflation, future Federal Reserve interest rate hikes and rising long-term interest rates. Although the real estate capital markets are currently very liquid, we are mindful and well-prepared for the potential volatility that could flow through to our markets. For the moment, competition for quality assets remains high, which has led to tighter spreads. On the other hand, real estate fundamentals remain strong and economic activity should pick up as the benefits of the tax reform work their way through to our markets. Transaction activity remains healthy and we continue to see significant demand from lenders with broad and flexible capital. We continue to focus on finding opportunities where we can leverage our direct origination model, sponsor relationships in a broader Ares platform to source and underwrite the best risk-adjusted return investments. For example, throughout 2017, about half of our investments were to repeat sponsors, reflecting the two-way value of our incumbent relationships with proven sponsors. Since year-end, we have made two new commitments for $38.4 million and we have term sheets executed on three more loans, totaling approximately of $150 million that we expect to close in the near-term. This $186 million of potential new loans, represents a material increase in our historic Q1 production and is reflective of our available capital, as well as the progress that we have made in origination capabilities. Our current pipeline is healthy, comprised of mostly senior loans and is well diversified across property…

Thank you. [Operator Instructions] And our first questioner today will be Steve Delaney with JMP Securities. Please go ahead.

Thanks for taking my questions. Jamie, I heard you loud and clear that given that you're now just slightly over 3x leverage, that the origination volume is going to have to be tailored pretty well to match up with repayments. So I guess, two questions there. As you look at your stated maturities, can you give us any sense for what your outlook is for repayment volume? I know some of those can be – or not anticipated when they come in. But some outlook for that and tie that into the $955 million that you originated in 2017. I'm just trying to get a sense for aggregate originations for 2018 if they will top last year? Thank you.

Thanks, Steve. That’s a great question. So we think that repayment activity this year will be higher than last year. It should be somewhere on the order of $600 million to $700 million. One thing we're trying to do, and you can see it in our Q4 originations, where we did 11 loans and for the year, I think it was about 24 loans – a focus on a more granular portfolio tends to smooth out the repayment volumes and allows us to better predict when capital comes back. So the macro-origination number for 2018, we think is less important than focusing on what percent of our available liquidity is fully invested. So that's what we are targeting.

Okay, I hear you loud and clear, because even if you could originate more at this point, you're constrained by your current balance sheet. So – okay. But it sounds like your granularity comment that – should I take that that you're finding slightly smaller loans to be more attractive than bigger lumpier loans that may be harder to replace when they pay off? Is that where you're going?

Yes, I think our average loan size, over the course of the year, was somewhere in the neighborhood of $40 million to $50 million. And that's the mid-market. That tends to be where we transact, some loans were larger, some were smaller. I think those loans tend to attract a slightly lower bid than some of the larger loans. They tend to get slightly better pricing. So I think you'll see us continue to focus on the mid-market.

Okay, great. And my follow-up question, Ben noted that in the 10-K, I believe, that you actually sold a loan in the fourth quarter, about $75 million office property in Texas. Could you offer some comments on that as to the decision for selling that loan?

Sure, Steve, good morning. This is Tae-Sik.

Hi, Tae-Sik.

Good question. So first, when we talk about the total amount of exited loan, that does include the two loans, as you mentioned, that we sold in the fourth quarter. Selling loans is obviously not part of our, what I would call, our normal quarter-to-quarter or year-to-year operating activity and in fact, in the history of ACRE, I think we have sold a total of three loans. So one several years ago and then two in the fourth quarter. There were two loans in the fourth quarter. They were to a related borrower, so technically there were two loans, but it was really an A-note and a B-note to the same borrower and the same asset itself. So quarter-to-quarter, what we do is we evaluate our portfolio and we make some strategic decisions about our liquidity, about our portfolio mix, when and how we can redeploy that capital. We look at our concentrations with the respect of property touch, geographies, borrowers. And so I can't get into the specifics because we don't generally identify the borrower or the specific locations of properties, but this situation, in particular, one was, where we wanted to reduce our overall exposure to that market and to that borrower. And we had a successful sale, as you noted, we didn't recognize a gain or loss. So it was basically sold at carrying value inclusive of transaction cost. So you know, we consider it a very successful investment. And part of our strategy – overall strategy to, again, make sure that we have an optimal portfolio of investments and that includes targeting different types of new originations and on occasion, as I mentioned, this is a pretty isolated event, right. And on occasion, we will look to sell loans to again make sure that we have the optimal portfolio overall.

That’s very helpful. Well, thank you for the comments. I will get back in the queue. Thanks.

And our next questioner today will be from Jade Rahmani with KBW. Please go ahead.

Thanks. Can you give some color on the California condo construction loan? And why the yield is so high?

Sure. So it's not a condo, it's a residence. And as I think I mentioned in Q3, one of the things that we're doing with the origination suite is adapting it to make it more able to identify relative value and execute on it. So we saw tremendous relative value, it's in this deal. It's a first mortgage. It's full recourse and it's got a really attractive rate and a great basis. So we see very good relative value there and from time to time, we'll transact in that fashion.

So that's a large house?

Yes.

Okay. Are you interested in the special servicing B-piece buying space? There's a company called Rialto, which I'm sure you're familiar with, that has been reported to be in the market. Just want to gauge your interest in that kind of a business, if you think it would be appropriate to combine with ACRE? Maybe not that specific, but the type.

Yes. I will say this, one of the great things of being part of Ares is we have exceptional M&A and private equity capabilities and we are very well banked, so we see pretty much all of the M&A flow in the space. That – I have no comments specifically on that particular deal.

But suffice to say, it's something – that business line is something that ACRE could be interested in. I know that you are interested in buying B-pieces?

Yes, so that's a hypothetical, in terms of – that line of business is of interest to us, whether or not we're ready or willing to undertake being in that business, at that scale, is an open question.

What's your comfort level with taking financial leverage significantly higher?

Jade, this is Tae-Sik. I think as we have mentioned in the past, we have been underdeployed, underinvested and therefore, underleveraged. I think we've always talked about a target leverage, plus or minus 3 to 1. And we've mentioned that at times we will be under 3 to 1, at times we will be over 3 to 1. I think we find ourselves in a very good spot, being at year-end at 3.1. I think the other thing that we have to sort of taking into consideration is type of assets that we're financing. Again, one of the reasons we're at 3 to 1 is that we mentioned the vast majority of our portfolio, 96%, is senior floating-rate loans. So unlike a portfolio where you'd have, call it, two-third senior loans and one-third subordinate loans, and therefore, your debt-to-equity measured on the GAAP basis may look lower. Again, our portfolio is 96% senior loans, all of which are financed. And therefore, I think you have to look at GAAP consolidated debt-to-equity ratio in that context. The other is, again, the fact that we are levering senior loans and the fact that we have match funded financing and further that we have a very diversified base of borrowing. So as I mentioned in my prepared remarks, we have nine different types of borrowing, including the securitization, but great relationships with the warehouse banks and the lenders that we have. So we feel very good about where we are from a debt-to-equity perspective. I think you'll start to see the earnings benefit come through because of the leverage that we have in the 3 to 1 range. And your question about, are we comfortable going higher. Again, I think it depends on all the things we just said. As long as we continue to have high-quality assets, diversified sources of borrowing, match funded strategy and we're prudently leveraging each asset individually and not looking at this just holistically as a ratio, then yes, I think we would be comfortable putting on so-called more leverage. But we do have an overall covenant in most of our borrowed facilities of 4 to 1.

In terms of the dividend, is it something that can be revisited through the year? Or is it a one-year decision? The press release said annual – third annual consecutive dividend increase.

Sure. Good question. So I think each quarter is an individual decision and obviously, it's a decision of our Board of Directors and I think we have taken sort of the first quarter or our year-end process to maybe more fully evaluate in accordance with business plans, our dividend. And as I mentioned, this is the third annual increase that we've had. We've had one in 2016, 2017 and now 2018. I don't think, having said all that, I don't think you should read into a fixed pattern where we will only consider it once a year or that we will consider it every year. We did just historically mention that it has been three years in a row, which is factually correct. But our dividend policy really is to evaluate it quarter-by-quarter. As we mentioned, with all of the improvements that we put in place, we expect to produce a more stable earnings going forward, quarter-to-quarter, year-to-year. But with all that, I don't – I do expect us to continuously evaluate our dividends on a quarter-by-quarter basis.

Okay. Thanks for taking the questions.

Absolutely. Thank you.

Thank you, Jade.

[Operator Instructions] And our next questioner today will be Doug Harter with Credit Suisse. Please go ahead.

Hey, guys. This is actually Josh Bolton on for Doug. You mentioned that you've been adding origination personnel since last quarter, giving you a broader geographic reach. Have you seen the impacts of those additions? Or is that something that we would expect over the next coming quarters? Thanks.

Yes. So I think the best measure of that is the throughput that we achieved in Q4, which is admittedly early days with regard to the implementation of our strategic business plan. But getting 11 loans through the system in Q4, and really good loans, I think is a good measure of the kind of early results with regards to adding originators over time. We intend to continue to add originators in strategic markets. So I think the benefits of those future adds, obviously, haven't been seen yet.

Great, makes sense. And then just in terms of diversifying the asset base, given the competition you're seeing in the market, how comfortable are you guys increasing your allocation lower in the capitals stack? Thanks.

So I think, if I understand your question, you're referring to doing more subdebt-type executions?

Yes, like if you seeing increased competition in the senior loans, increasing your allocation of capital to – yes exactly, to like subordinate loans?

Yes, and I'd come back to Q4. Almost all the loans we did last year were senior loans. That's our bread and butter. We are still seeing very good relative value in that space. It is competitive, but we're generating still attractive relative returns there. We will and have done subordinates throughout the life of the company and when, and if, we see relative value in the subordinate space, it will – we'll transact there.

Great. Thanks for the comments, guys.

Thanks very much.

And I see no further questions at this time, so I would like to turn the conference back over to Jamie Henderson for any closing remarks.

Great, thank you very much. We appreciate your time and interest in ACRE. We are very optimistic about our outlook and excited about the enhancements to the company that we're implementing and we look forward to giving you an update on our progress next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. 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 the call and that will run through March 15, 2018, 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 10116419. An archived replay will also be available on the webcast link located at the home page of the Investor Resources section of our website. Thank you and have a good day.