Ares Commercial Real Estate Corporation (ACRE) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2018 earnings results. As a reminder, this conference is being recorded on July 26th, 2018. I will now turn the call over to Veronica Mendiola from Investor Relations. Please go ahead.

Thank you, Bryan. Good morning and thank you for joining us on today's conference call. I’m joined today by our CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; and Carl Drake and John Stilmar from Investor Relations. In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered in isolation from, or as 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. I will now turn the call over to Jamie Henderson, who will begin with our second quarter highlights.

Thank you Veronica, good morning everyone and thanks for joining our call today. Let me start with some high level commentary on our second quarter results. We reported another strong quarter as we continue to benefit from recent profitability improvement initiatives and our predominantly match funded floating rate investment portfolio. For the second quarter we generated GAAP in core earnings of $0.33 and $0.35 per share up 39% and 46% respectively from the same period last year. Our earnings benefited from a higher average portfolio balance as we more efficiently redeployed repaid capital into loans with attractive risk adjusted returns. In addition, we continue to enjoy the benefits of our senior floating rate portfolio strategy, as LIBOR increases drove incremental earnings during the quarter. And finally, the reduced cost of our liabilities also contributed to our year-over-year growth and earnings. Given the higher level of earnings that we have obtained we are increasing our quarterly dividend by another penny for the second time this year. our third quarter dividend will be $0.29 per share. Our ability to redeploy capital more efficiently and remain more fully invested underscores the progress we are making to broaden our product mix and leverage our national coverage in market segments that maybe less efficiently covered by the competition. During the second quarter, we originated five new loan commitments for 215 million across a variety of property types. Consistent with our current portfolio the new loans close were primarily senior floating rate loans, supplemented by Select Junior Capital Investments. The largest loan we originated was $68 million senior loan to finance the acquisition of the portfolio of hotels with strong brand affiliation located in attractive markets throughout the specific North West. The loan will support a high quality sponsors business plan to improve common areas and [indiscernible] in order to increase revenues. During our diligence process, we work closely with Ares Real Estate Private Equity team and leverage their knowledge and insights into this hospitality brand and market segment. A real estate equity team has extensive experience in acquiring and repositioning hotels and has owned over 38,000 key since inception. Having started the year since we fully invested, the team has done a nice job of matching new investments to repayments. Throughout the second quarter, our loan commitments totaled 310 million, with approximately 257 million in funding, which is in line with our repayments of approximately 238 million. In addition, our anticipated gross leverage returns on our new loans remain consistent with returns on repaid loans within our targeted levels of low double digits. Commercial real estate fundamentals remain strong with healthy macroeconomic tailwinds. And the market remains very competitive, we are finding attractive new investments through our platform advantages, broad reach and geographic coverage. We are off to a strong start in the third quarter having executed 160 million in term sheets and transactions expected to close in the next few months. I will now turn the call over to Tae-Sik to discuss our second quarter results in further details.

Great, thank you, Jamie, and good morning everyone. Earlier today, we reported GAAP net income of 9.3 million or $0.33 per common share and core earnings of 10.1 million or $0.35 per common share for the second quarter of 2018. Our core earnings increased by $0.11 per common share versus a comparable period for 2017 and this was really driven by three primary factors. First, we held approximately 300 million more in interest-earning assets during the second quarter of 2018 versus the same period last year due to increased loan production. Second, as you know, we significantly reduced the overall cost of our $110 million term loan in late 2017. We are seeing the earnings benefit from the lower cost of this liability come through in the first half of 2018. And finally, as we have spoken about this in the past, our balance sheet is well positioned to take advantage of rising short-term interest rates and as expected we experienced an approximate $0.03 per common share lift to our core earnings in the second quarter of 2018 as one month LIBOR increased approximately 90 basis points year-over-year. As far as repayment activity during the second quarter of 2018, it was relatively light at 92 million. However, as some of these repayments occurred prior to their stated maturities, we did recognize approximately $0.02 per common share in the second quarter of 2018 from accelerating remaining unamortized fees. For the first half of 2018, loan repayments totaled 238 million. Going forward, we do expect heavier repayment activity in the second half of this year with aggregate repayments for 2018, exceeding prior year levels. Our investment portfolio continues to perform well with no impairments or realized losses. However, as we have discussed previously, as a commercial real estate lender primarily focused on working with borrowers under value-added business plans, we do expect to experience loan defaults from time to time. Accordingly, we diligently underwrite and structure our loans with these risks in mind and in addition as part of Aries management we have the in-house experience, staff and capabilities to manage defaulted loans and if necessary take back properties and manage them. As described in our 10-Q filed earlier today, we have one senior loan with the principal balance of 38.6 million collateralized by a nationally branded full-service hotel that is in maturity default. The loan was due in early June 2018 and we continue to work with the borrowers on this loan. We have evaluated the loan for impairment and have concluded that no charge or reserve is necessary as of June 30, 2018. Our conclusion is based on a multitude of factors including collateral value, for which we have recently received an updated appraisal and an assessment of property cash flow. As of the most recent financial reports we have received, the hotel property continues to generate positive cash flow sufficient to pay regular interest due on the loan. Regular interest on the loan is current as of June 30, 2018 and we have not put the loan on nonaccrual status. Finally as Jamie mentioned earlier, our board declared a further midyear increase to our quarterly dividend to $0.29 per common share for the third quarter of 2018. This dividend will be payable on October 16, 2018 to stockholders of record as of September 28 2018. So with that, I will turn the call back over to Jamie for some closing remarks.

Thanks Tae-Sik. In closing we have generated two really strong quarters of earnings thus far in 2018 and these positive earnings drivers should remain in place going forward. While we expect to experience more repayments during the second half of the year, we believe that the steps that we are taking to broaden our investments scope, expand our market coverage and further leverage the capabilities of the broader Aries platform have improved our ability to reinvest our repayments maintain a nearly fully invested status. Looking forward, we feel really good about the operational progress that we have made we feel that we have more operational and investment efficiencies that we can capitalize on gradually over time. We like our market position as a nimble middle-market lender with a well diversified portfolio of nearly all senior floating rate in short duration loans that we believe we will perform well over different economic environments. With that, I would like to now ask the operator to please open the line for questions and answers. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] and our first question today comes from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Hello everyone and congratulations on a strong quarter. I was wondering if you would just comment Jamie on your appetite or your need for growth capital at this point, it strikes me that you guys are in a really good place right now in terms of replacing runoff and staying reasonably invested, but just curious how you see looking out over the next six to 12 months the opportunity in front of you versus your existing capital base. Thanks.

Good morning, Steve. Thanks very much, that's a great question and you know we get that question pretty frequently. Clearly, you know, we aspire to grow, you know we really like our position right now as - with regards to not having an enormous weight of capital to deploy. We think it allows us to pick our spots very nimbly and I think the team has done an excellent job of matching really good new originations of proceeds from repayments. And I think we have always you know reiterated to the market that as we come to the market to raise new capital we will do it in a way that that doesn't dilute our existing shareholders.

You are being clear on that for sure. There are obviously a lot of instruments out there we're seeing active in the market so it seems that you do have some opportunity for incremental financing if you wish to choose it, but I can appreciate you are being disciplined and not putting growth ahead of profitability. Maybe Tae-Sik this is probably best directed to you, like the penny at a time kind of dividend strategy. I think it probably serves you better overtime than one big lump sum pop in the dividend. I wondered if you could comment though, since your earnings have moved significantly higher. How are you running in terms of distributions against your year-to-date projected taxable income you know the two half that this for full year? And if you are under distributed what are your thoughts about how you will meet the distribution requirement going forward? Thanks.

Sure, good morning Steve and thanks for your question. No, you are absolutely right. As a REIT, we obviously do have distribution requirements based upon our taxable income, not based upon our GAAP income. We have also said in the past that our taxable income for the most part is pretty close to our GAAP income as well as our cash flow. So there is not a big disparity. We have obviously so far in the year, have significantly out earned our dividends, both in terms of GAAP income and core earnings income. We haven't fully assessed our taxable income, but it's pretty much in line with again with the GAAP and core measures. So I think, under the REIT loss, we do have some flexibility as to how we treat dividends, we do have some flexibility as to so-called rollover potential some of the taxable income that we might have. But we do obviously very much bear in mind the requirements under the REIT laws to make sure that we are in full compliance with that. Having said all that, I think the dividend that we want to set for the company are very much driven by management and of course Board's approval and their viewpoint on the outlook of our earnings being going forward. So clearly we have experienced very good growth in our earnings and that's what led to the increase in the dividend midyear, which again was a second increase this year, having raised it for the first quarter of 2018. And I think on a go forward basis, we have a number of tools to manage the [REIT[ (Ph) requirements, some of which would be to roll over to gain, some of which would to make special distributions or one-time distributions, some of which would be to obviously increase dividends overall. So there is a number of options we have. We have all that obviously in mind. You are asking very insightful question. But I do think that our dividend policy, our regular dividend policy is very much based upon our assessment of our earnings potential and outlook.

Thanks for the comments.

Absolutely. Thanks you Steve.

Next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi good morning and congratulations on a strong quarter. Tae-Sik I appreciate the comments on the maturity to default, I was going to ask about that so I appreciate you providing color there. To touch on the leverage and the maturity, can you talk about where you are comfortable operating portfolio leverage? Are you looking to maybe increase leverage in the third quarter ahead of the October schedule of repayments or kind f how are you thinking about the chunk of capital that comes back in October you will need to be redeployed?

Great. Stephen good morning, thank you for participating in our call this morning. It’s a very good question. I think in terms of leverage, let me talk generically about leverage and then more specific about your question about would we look to potentially leverage up a little bit more anticipation of the two large loans that are coming due in early October. So in terms of our overall leverage policy, I think we have said in the past that our goal is to be more or less plus or minus three to one debt-to-equity. Maybe you will see that fluctuate as we have more production as we have some repayments also will depend upon the type of loans we do. One of the reasons, I think we are at higher end of that range, right now we ended the quarter second quarter at 3.2 debt-to-equity is because we are again 97% senior and all of the warehouse financing, all of our CLO financing, all of our term on financing is all on balance sheet. So unlike doing a lot of mezzanine or B notes where the embedded debt that may be subordinate to is not on your balance. When you are doing a senior loan all of the debt that’s ahead of your in terms of warehouse facilities, securitization is on balance sheet. So I just want to make that clear that it's not always an apple-to-apple comparison when you look at another balance sheet that may appear less leverage, but that may be because they have more subordinate loans that don't consolidate the underlying leverage. So again 97% senior loan and therefore virtually all of the senior debt ahead of us is on balance sheet. So with that, you know, we are at 3.2 to one, which to us is a comfortable level. I think that is our target level and that is where we find we think we generate the best enhanced level of levered returns without undue risk on our financing facilities. The second thing just to mention is that you know we have been very steadfast in maintaining a match funded balance sheet, meaning that we match fund in terms of both interest rate risk as well as term, so 99% of our assets are floating rate, 100% of our liabilities are floating rate and they are both indexed to U.S. one month LIBOR. So very well match funded, that really gives rise to what we mentioned before about us benefiting from rising LIBOR rate, because we are so well match funded on our assets and liabilities. The second way we obviously match fund is the term of the assets and liabilities. The average weighted term of our assets is under two years, the weighted average life of our liabilities is 2.7 years. So again, we want to make sure that our liabilities don't come due before the maturity of our assets. And then really the third general policy, if you want it call it, with respect to leverage is that we will lever different debt-to-equity depending on the type of assets as well as the type of facilities. So we will use higher leverage when we have done securitization. So our last securitizations FL 3 we were slightly better than four to one debt-to-equity which is higher than what we would normally do at three to one. However, very low cost of financing, nonrecourse match funded and the type of asset that we put in as collateral were very much cash flowing multifamily focused with a good diversity base. So in those kind of situations we would be more comfortable taking leverage up to that four to one level, whereas your typical warehouse line, your typical loan facility I think that three to one level you know is an appropriate level of debt-to-equity. Having said all that, you know in response to your more specific questions about would we lever more in anticipation, the answer is yes, but not fully, we're not going to lever up the balance sheet of four to one in anticipation of the loan coming due and find ourselves in a difficult position if that doesn't happen. But again our goal is to remain as fully invested without taking undue risk, so would we look to lever up a little more than we would otherwise, the answer is yes. So that we can stay ahead of anticipated repayments but we are not going to lever up to anticipate the full repayment in October for example. Apologies for the long answer.

Great I appreciate it. No it's a great color and I appreciate it, it's given the financing capacity that you guys break out in your supplemental it certainly seems like that allows you the flexibility to manage your pipeline and repayments in a way to keep capital fully deployed and close to the target leverage, so that's great. Maybe a broader question. Jamie, can you talk about sourcing and what you are seeing on competition out there. Maybe where you are seeing the best opportunities, I assume it's outside of the top 10 MSAs and clearly looks like multifamily and office you know remain the two biggest exposures for their particular asset classes you like or property types that you like or don't like in the market today.

Sure, thank you Steve and you know wanted to also thank you for your coverage, really happy to Raymond James on board. So I guess I will take that in a couple of parts. You know the market is competitive, that's no secret, I think you are going to hear that across the Board on the competitors' earnings calls. I will say we think you know we built a material competitive advantage into our platform and Ares through the years has invested very heavily in building out a regional office system, we have the origination offices both debt and equity in New York, Chicago, Los Angeles, Dallas and Atlanta and we have a small outpost in Washington DC. We think that that's a really intrinsic advantage. It gives us a much broader coverage of the midmarket space where we transact. I think if you look at our portfolio its somewhat different than a lot of the competitors in terms of where we land and the size of deals that we do. Our average loan balances is between $40 million and $50 million and we somewhat systematically avoided the very large loan space in the gateway cities, not to say that's a bad strategy, it’s just a different strategy. So we feel pretty good about our ability to source deals, maybe get a little better coverage in markets where the competition is less active, strong ground game, I think leads to better credit outcomes for us. With regard to the composition of our portfolio. You can see it's heavily weighted to multi and office. We like both of those asset classes and I think the rest of portfolio is really well diversified into asset classes where we are going to take less exposures and also really well diversified geographically.

Great. Thanks a lot for the color there and again congratulations on a very nice second quarter.

Great. Thank you Stephen.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. Just first on the one maturity default. I was wondering if you could give us any sense of timeline as to resolution on that.

Sure. Good morning Doug, thanks for y our question. So as we mentioned the maturity default just happened. The loan was due in early June, so there hasn’t been a lot of time since the maturity default. We are obviously working very closely with the bar on the situation. In this situation where this is a hotel that underwent a fairly extensive room renovation, some common area renovation and it has not yet restabilized coming out of that renovation. We of course are evaluating all of our options, as we mentioned as a value add transitional senior lender we are very focused on making sure that we have all of our rights in the documents. As we mentioned, we have a very strong management capabilities, customer serving capabilities embedded within the Ares real estate management operations. So we feel we are very well positioned to make sure we exercise all remedies. Obviously one of the options is to modify and give the borrower more time. Another option is to possibly seek to take back the asset, there are a lot of different avenues that we can go down. As far as your question of timeline, I don’t think I can really give you anything more specific. I think, again, as we mentioned, the loan is current. The property is cash flowing. So the regular interest payment on the loan is current and has been current. And we anticipate that it will continue to perform, so that we set that level. But as far as timeline of when we would have ultimate resolution, I think that's a little bit too early to kind of give you any more specifics.

Alright. Thanks Tae-Sik. And then I guess if we could just look out, I guess you talked about a couple of big maturities in October, but just the outlook for maturities and your comfort with the kind of credit quality given that maturity schedule.

Sure, so as I mentioned, we have had 238 million of loan repayments for the first half of this year, which was pretty much average for what we have experienced last couple of years. I think we have seen some further likely repayments come to fruition than we did early this year. I think earlier this year, we had thought that our total repayments for the year would be about average that we have experienced in last couple of years around 600 million to 700 million. I think we now see that repayments in the second half of 2018, we think it's going to be greater. We don't know for sure of course. It’s not based upon somewhat data maturity other than some of the loans that we talked. But we are finding that some of the loans that don't actually come to mature second half of this year have accelerated their business plans. And so that there is an increased likelihood for the payments and that's why we mentioned that right now that we do expect heavier repayment in the second half versus the first half and that the aggregate for 2018 will exceed or likely to exceed prior year’s levels. But I think that's probably you know a good statement with respect to credit, because we believe that the business plan that these assets are experiencing are basically trending you know ahead of time.

And Doug this is Jamie. I will just add to that a little bit. As you know, historically fourth quarters has been very strong originations quarter for us. We don't see that changing this quarter, and we have also you know invested heavily in beefing up the originations, staff and adding in geographies where we were underrepresented. So we're investing upfront in anticipation of getting these repayments.

That's helpful. Thank you.

The next question comes from Rick Shane with JPMorgan. Please go ahead.

Guys, thanks for taking my questions. When we look at slide four the implication of slide four in terms of the floating rate, fixed rate mix is that the yield on the portfolio should have a beta of almost one to LIBOR, and the reality is that over the last 12 months where we have good data the beta to LIBOR has been about half of that. And I think everybody understands the competitive pressures that have driven that. My question is the following, given where you are right now the fact that there is significant reinvestment need and the potential significant reinvestment need in the second half of the year. How do you weigh the idea as you start to approach book value again in terms of multiple of the benefits of scale versus the opportunity to maximize returns by being a little bit smaller in the current environment?

Sure, good morning Rick this is Tae-Sik. Maybe I will take the first part of the question and maybe throw the second part of the question over to Jamie. You know as far as how we're positioned relative to rising LIBOR you know not obviously haven't see the math behind the 50% sort of correlation that you referred to. But you know as I mentioned, when we have experienced a hypothetical 100 basis points rise in LIBOR, we would anticipate about a $0.13 increase in our core earnings, which if you divide that by our book value of 14.70 and change you know is around 90 basis point. So may not be quite a 100%, but I think you know you will see its significantly higher than I think that 50% that you mentioned and in fact you know in the last 12 months quarter-to-quarter, second quarter of 2017, second quarter of 2018 you know there has been about a 90 basis point increase in LIBOR. As we mentioned, for the quarter we experienced about a $0.03 increase in our earnings. Again if you were to annualize that, I think it would be closer to that 90 basis point increase in ROE based upon the increase in LIBOR. And again that's because as you said, virtually all of our assets are floating-rate, all indexed to U.S. one month LIBOR. There are no floors in place and all of our liabilities are also again floating-rate LIBOR all indexed to one month LIBOR.

Got it, so my back in the envelope math is literally looking at the 40 to 50 basis point increase in all in yield on the portfolio versus the 100 basis point increase in LIBOR. I attribute the ROE enhancement to more efficient financing in part because you have less undrawn and also because you have been able to lower your financing cost. It is interesting you are right, it gets you wound up to some extent where the interest rate sensitivity would suggest, but my instinct is that it's more liability driven than asset driven in fact.

Got it. No I think I understand your math and I think the difference between our portfolio unlevered effective yield, as you mentioned the 40 to 50 there, that's partly offset then by a little less spread on the assets right, because that 6.8 all in asset yield as you will see as of 2Q, 2018 that's a combination of LIBOR plus asset spread. So you are right, LIBOR is increased 90 and some of that has been offset by decreases in the asset yield in the borrowings spread.

And Rick just to build upon that. I think that's been delivered on our part. I think we have maintained quite a lot of credit disciplines. We see every single deal that the competition sees for the most part, and we have elected not to really reach for yield. And I'm thrilled that our portfolio is almost entirely floating-rate first mortgages. I think it’s a great place to be at this point in the cycle, particularly in a rising rate environment and we are seeing the accretion every single quarter. With regarding your second question - I’m sorry go ahead.

No, go ahead, that’s what I want to circle to, go ahead please, sorry.

I think if I understood your questions, how do you weigh the benefits of scale versus, having excess capital in a competitive market is that? I just want to make sure I’m answering right question.

That’s exactly, and then realize the irony of me asking that question, because I have been asking about building scale on the balance sheet for so long.

Yes. So once again I’m really happy with where we sit, because we are in a very managed, controlled environment in terms of how much capital we need to deploy. We have invested a lot into people and process to allow us to be more efficient in our deployment. When and if we elect to go to the capital markets and raise capital, it will be done in a way that's non-dilutive and it will be done at a time when we feel we can efficiently and rapidly invest the capital. Once we grow our capital base, as you all know, it's very accretive to earnings because it more efficiently absorbs the fixed overheads.

Got it. Okay, thank you very much.

You are welcome. Thanks Rick.

The next question comes from Jade Rahmani with KBW. Please go ahead.

Hi thanks very much. What are your thoughts around M&A? Are there any interesting potential combination opportunities? And without being specific could you characterize dramatically whether they would expand into additional business lines complementary areas diversification type strategies? Or would it be ore expansion of what you are currently doing?

Yes, thanks Jade. I will start and maybe Tae-Sik can finish. One of the great things of being inside Ares is we see enormous amounts of deal flow. Ares has a big private equity business. We have dedicated strategy team that does nothing but analyze and digest merger and acquisition opportunities. The team is incredibly capable and it's a huge resource for Tae-Sik and I to quickly get to the bottom of deals. I would say we see everything that's coming through intermediaries and we see a heck of a lot of off market flow as well. So I guess I will answer your question by saying, we look at everything. We are very, very active in the review of deals all the time, I mean it’s a big part of what Tae-Sik and I do. That being said, we will only pull the trigger to the extent that we think it's accretive. We see people paying a pretty hefty multiples for platforms. And I will say it like this, we look at everything, we analyze almost everything but we are extremely deliberate in discipline with regard to pulling the trigger.

Thanks. Just on credit trends more broadly, anything you are seeing in the market that gives you pause, starting to see a couple of credit issues in the space, they seem one-off in nature, but in a benign environment I just wanted to see if you have noticed any changes in credit trends.

So I wouldn't say noticing anything material in terms of credit trends. I don't see anything you know structural or secular. Look the U.S. macro picture is really good, I think unemployment claims are at close to a 50 year low that's absolutely remarkable. Healthy consumerism is a massive driver of GDP. GDP growth is excellent. Real GDP growth is probably approaching its best point in the cycle, corporate earnings are really strong with limited exception. So the drivers of healthy commercial real estate are all in place, good wind at our backs. Supply is pretty much in check, you know the cost of coming out of the ground now is pretty high and that you know helps to mitigate new supply. I don't see rampant abuses of leverage, don't really see the equity trying to consume excess leverage and don't see the capital markets providing excess leverage. So generally speaking, I think it's pretty balanced. In this business, there is always going to be onesy-twosies, I mean it's just the nature of you know the statistical probability of having one-off credit incidents in a large portfolio. It happens. The real way to look at in my opinion is does the manager have the in-house capability of not only managing through that situation, but owning and operating and fixing the real estate if they had to.

Just on the hotel maturity default, what submarket is that in and can you say what hotel flag is.

You know our policy is generally to really give the state, so as you will see in our list of loans you see that this property is located in New York, really can't be more specific than that but it is in the state of New York. And as far as flag as I mentioned, it's a very well-known nationally branded flag, one that obviously everybody would be very, very well familiar with, but again our policy is not to give more specific than that.

But you know good vibrant market, good flag.

Is the loan in one of the CMBSs?

No.

Was it securitized now?

No.

Okay. And then just looking at the repayment outlook for the rest of the year, do you anticipate the self storage loan that matures in October to repay?

Sure. So as you can imagine, you know we're in regular communications with the borrower and the borrower has indicated to us that they do plan and anticipate repayment at maturity. It's also noteworthy that the information that we're getting about that self storage asset themselves they continue to perform well, we have in fact seen slight-slight pickups in occupancy you know at the portfolios. So we think that the portfolio is readily re-financeable, again it's good to see continued steady improvements of the properties themselves. Again, to answer your question based upon our communication with the borrower, we do anticipate a repayment at maturity, but you know we will obviously have more further information on that.

Great and are there any other loans that you think are at risk of missing scheduled maturity repayment in the second half of the year?

No, no. There is nothing on our so-called watch list that would indicate. In fact as I mentioned, I think if anything we are seeing an acceleration of repayments, really the opposite direction.

Just back to the hotel, it sounds from your remarks, not sure if I'm misinterpreting, but that there is a slight bias toward potentially taking back the asset this is the first time I have heard you guys emphasizing Ares Special Servicing capabilities ability to own assets and fix real estate. I mean whereas in the self storage case previously I don't think you were focused on that. You were focused on restructuring the loan, is that a correct interpretation.

No, we are in the business of lending money and getting money back at the end of the loan, that’s our primary business. We are not a loan to own shop. But it's important to understand that we are very capable in the event that we needed to own something. If great equity business is at Ares with long track record, very successful track record of value-add equity investing, including hotels. So that's never our goal, but God forbid if that came to pass we are extremely well-equipped to deal with it.

Thanks for taking the questions.

Thank you Jade.

Thank you Jade.

[Operator Instructions] Our next question comes from Ken Bruce with Bank of America Merrill Lynch. Please go ahead.

Hi, thanks good morning. My questions are going to be revisiting some earlier ones, one from Rick and I think one for Steve or a combination of the two. I guess you know as we have looked out over the past year or so, you have seen some margin compression that has occurred and as was pointed out some of that's been offset by better funding. I guess as you are looking into the back half of the year, where you do have some accelerated repayment. What are your thoughts in terms of your ability to continue to maintain the economics in the business generally like they are? And do you see any potential risk for margin compression as you look forward?

Ken its Jamie Henderson. Thank you. That's a great question. So I guess I will take that in two parts. Number one, it's really hard to guess where the capital markets are going to be and where our spreads are going to be in the future. I will say it feels to us like there has been slowing in the rate of compression over the course of last few quarters. And I look at where we are reinvesting proceeds versus where - of those loans that are paying off its pretty close. So that feels really good. I think it's no secret that spreads have to come in. But I think on balance, both the originations team and Tae-Sik’s team managing our liabilities has done a great job of preserving solid NIMs.

And then I guess the other adjunct question is, to the degree that you do see margin compression. I think Tae-Sik had alluded to being willing to take up leverage to offset that, did I interpret that correctly?

Ken, sorry if that was a misunderstanding. No, I think our goal with respect to our leverage is to lower the cost of leverage alright. And I think you have seen a increase in our leverage versus a year ago, because we have simply put out the capital at the three to one target debt-to-equity levels, but the increase in the leverage from a year ago wasn't due to spread compression, but it was due to us targeting a certain level of return using leverage to enhance those overall returns. So it's not due to spread compression, but it's really again I think our overall business plan to really be at three to one. And when we saw us a year ago at 2.5 to one or lower two to one, it was because we were under deployed. And obviously what we always want to do is, invest our equity capital first and then lever up from there. So it wasn't due to lower spreads on our assets. It was greater production that led to the higher three to one debt-to-equity ratios.

So you know we have the capacity, but we have been very disciplined in the application of leverage.

Right. No maybe I didn’t ask the question properly. So, we have seen a lot of capital come into certain sectors that’s obviously led to some level of margin compression you have kind of talked about earlier in the call just how your asset sensitivity has been essentially benefiting you as rates have risen, but as we kind of think through the math, it would look like there is some pressure on the overall economics of the business and one of the ways that you have been able to contend with that is obviously reduce your funding cost, but also use some of the structures to improve overall leverage CLO would be an example of that. So I'm trying understand what your willingness is to continue to do that to generate the similar returns in the business which I think is important as you kind of get through the heavy reinvestment schedule in order to essentially still have that stability dividend and dividend coverage.

And so I would answer like this, I think we are blessed with exceptional capital markets team that is you know able to source very, very good leverage for us and we have also proven that we can use state-of-the-art CLO technology that allows us very attractive reinvestment periods. And when I look at some of the other CLOs coming to market I don't see that same you know structural benefit. So we're fully equipped it is just Tae-Sik and I spent a lot of time determining how to optimize and right now we feel pretty good about where we sit, but we do have additional capacity if we elect to use it.

Great. Okay, well I think that really covers it for me. So thank you very much and congratulations on another good quarter.

Thank you Ken.

Next question comes from Ben Zucker with BTIG. Please go ahead.

Good morning and thanks for taking my questions. All of them were pretty much asked and answered, but from a high level what do you think it might take to bring back some of the positive momentum that we saw in the stock during the first part of the year. I think on the last conference call, you identified execution and earnings consistency as some of the keys to success and Jamie I'm just curious if you think that's still the case today.

Yes, so thank you Ben, that's a great question. And you know we have been very clear about our objective to drive profitability through better execution and not through taking excess risk or applying excess leverage. I think the team has done a great job of delivering on that and we finished Q4 last year effectively fully invested. We have maintained that level of investment at attractive returns through Q1 and Q2, we're generating really solid consistent higher level of earnings and we're you know steadily raising the dividend. Those are great outcomes and those are in line with what we told the market. So in terms of velocity of stock when I look at how some of the comps are trading I see what I think is really attractive value in ACRE.

I definitely hear you on that Jamie, and as quick follow-up are there any thoughts about whether a new investment type might help the story. I think the CMBS, the B pieces in that market can generate unleveraged yields in the mid teens. So that always seems like a good place for a credit focus shop to maybe earn some outsized returns on its capital. What are you guys thoughts on that market and investment type?

So you know we have the luxury of being able to take relative value approach in terms of our primary business which is floating-rate first mortgages, we're still seeing really good relative value there. You can see that the Company's earnings are increasing and we're more or less sticking to our knitting with regard to that line of business, but we also have full capabilities at Ares to add other elements to the portfolio if we see relative value. So we have a team at Ares dedicated solely to B piece investing, you know we have large team dedicated solely to equity investing. So if we saw a relative value or when we see relative value in those sectors and furthermore we have full teams on the ground in Europe that are buying, improving, and cash flowing equity real estate. So it’s a fairly simple matter for us to lend over there, when and if we see relative value. So we are relative value shop, we have a great seed to look at all forms of real estate investment. And when and if we see good relative value outside of our historic primary lines of business, we will transact.

That’s helpful. Thanks for your comments Jamie and congrats on a nice start to the year and the dividend increase guys.

Great. Thanks very much Ben.

At this time this will conclude today's question-and-answer session. I would like to turn the conference back over to Jamie Henderson for any closing remarks.

Great. Thanks so much. I want to thank you all for your time today, really appreciate it, great questions and we look forward to speaking to you again in a few months on our next earnings call.

Ladies and gentlemen, this concludes our conference call for today. If you have missed any part of today's call an archived replay of this conference call will be available approximately one hour after the end of this call through August 9, 2018. To domestic callers by dialing 1877-344-[indiscernible] and to international callers by dialing 1412-317-0088. For our replays please reference conference number 1012-1856. An archived replay will also be available on a webcast link located on the home page of the investors resources section of our website.