Good morning, and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the company's First Quarter 2019 Earnings Results. As a reminder, this conference is being recorded on May 1, 2019. I will now turn the call over to Veronica Mendiola Mayer from Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us on today's conference call. I am joined today by; our CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; and David Roth, Ares Management Head of U.S. Real Estate Private Equity who will be available for the question-and-answer session. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intent, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any of such forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to like titled measures used by other company. The company's newly format first quarter 2019 earnings presentation can be found in the Investor Resources section of our website at www.arescre.com. Ares Commercial Real Estate Corporation's earnings release and 10-Q are also available on the company's website. I will now turn the call over to Jamie Henderson.

Good morning, and thanks Veronica. We are off to a strong start this year generating GAAP and core EPS of $0.30 and $0.32, respectively. Our strong earnings originations and investment pipeline reflect the progress that we have made to generate higher and more predictable earnings and we have multiple levers to pull to further improve our earnings throughout the year. These include the benefits from higher average deployment of capital and further cost settings on our liabilities and operating expenses. One of the highlights for the quarter was the strong uptick in year-over-year origination activity which is the result of the efforts that we have undertaken to expand our origination capabilities and to extend our national footprint. In the first quarter, we originated five senior floating rate loans for $275 million in commitments, which includes $234 million in ACRE and $41 million in the Ares Warehouse. This is almost 3 times the volume of loan commitments originated in the first quarter of 2018. The loan in the Ares Warehouse is designated for ACRE and we expect will be transferred to ACRE's balance sheet in the second quarter. All of these loans are first mortgages secured by high-quality commercial properties in growing markets and backed by strong sponsors. Importantly, this investment activity coupled with a strong pipeline has set the foundation for a higher run rate of earnings in the second quarter and for the remainder of the year. Secondly, we closed our latest private securitization lowering the cost of funds by 15 basis points. This is a great example of how we continue to reduce our all-in spread on our liabilities. This is an important earnings driver and we are optimistic that we can further reduce the cost of our liabilities in 2019. Finally, we reduced our comparable G&A expenses…

Great. Thank you, Jamie, and good morning, everybody. Earlier today, we reported GAAP net income of $8.5 million or $0.30 per common share and core earnings of $9.1 million or $0.32 per common share for the first quarter of 2019. And while we are pleased with our results, I think it is worth noting that our earnings for this first quarter did not meaningfully benefit from acceleration of origination and exit fees, normally associated with early repayment of loans. We have mentioned in the past, that on average, we receive approximately $0.02 per common share per quarter in such fees. But for this first quarter such accelerated fees were less than $0.005 per share. In addition, while we have strong originations of $234 million in new commitments and funded $121 million in unpaid principal balance in the first quarter, we were a bit under deployed due to significant repayments that we had at year-end 2018. As Jamie said however, we had a strong finish to the first quarter, and continue to build our loan book with a strong pipeline to lean into, which means that we feel very positive about the remainder of 2019. We also believe that our earnings will benefit from more typical levels of accelerated fees, as well as reductions in our borrowing cost and G&A expenses. As of March 31 2019, our portfolio continues to remain primarily floating rate, with 98% of our loans as measured by unpaid principal balance, indexed, to one month LIBOR. This has allowed us to benefit nearly step for step with the increasing short-term rates over the past few quarters. At the same time however, should rate reverse direction and start to decline we have embedded LIBOR floors into 92% of our loans to provide us with some meaningful levels of…

Thanks, Tae-Sik. In closing, we are off to a very good start and our enhanced origination activities have laid a strong foundation for improved earnings throughout the year. We continue to have multiple levers to further improve earnings including our goal of staying more fully deployed, which will be aided by the use of the Ares Warehouse along with potential further reductions in our cost of capital and G&A expenses. We feel very good about our portfolio and the momentum that we have with our growing market presence and productive team. As always we appreciate your support for our company. With that, I would now like to ask the operator to please open the line for questions-and -answers. Thank you.

[Operator Instructions] The first question is from Steve Delaney of JMP Securities. Please go ahead.

Good morning and thank you for taking my questions. I noted on page 3 of your deck that of the four loans closed in the first quarter that the funded amount only represented 52% of the total commitment. Could you comment on the nature of those loans? Because it would suggest to me there may be a construction loan in there or maybe a couple loans that are just heavy transitional or heavy rebuilds. Thanks.

Sure. Good morning, Steve and thanks for your question. So the one loan in particular and if you look at Page 9 of the same deck and it's really loan number 25 under office loans. This is a -- one of the loans that we closed and literally closed right at the end of the month -- right at the end of the quarter, you can see that the commitment is $84 million and the outstanding principal is zero. It is a transitional asset, but it is not a construction loan. So we didn't fund anything at closing, but we will rapidly do so. But at closing there was nothing funded Day 1. So that's the majority of the difference between the commitment amount and the funded amount.

Got it. Apologize for not checking out page nine in the deck, but that makes a lot of sense Tae-Sik. And I also notice on that same page that you did a student housing project and that you have -- it's not a great percent but 10% of the portfolio. Earlier today, we heard another commercial real estate lender report that they had taken -- had to take a loss provision on a student housing property that was on a loan service for Fannie Mae. Just curious, when you look at that sector, are there specific parts of the country locations or types of schools that you prefer? I understand this particular property was located -- the loan that went bad in a state that we would consider subpar from just an economic and demographic standard. Just curious about the student housing focus?

Hey, Steve it's Jamie Henderson. Good morning.

Hi, Jamie.

So we're really picky. It is less than 10% of our portfolio. And the attributes that we look for in student housing obviously: proximity of the campus, growing enrollment, you need to be alert to whether or not the university is adding inventory that can compete against you new supply. These are high-quality properties and really good locations at name-brand universities and the students really seek a level of amenities that was inconceivable when we were in college.

Understand.

So we're really confident with our portfolio, and also with our ability to underwrite this type of asset.

Got it. Thank you, Jamie. And Tae-Sik, the last thing for me, thank you for the explanation on the low prepays and sort of the reason to step down to $0.32 from an average of $0.37 in the prior two quarters. It makes me feel a little bit better about my $0.35 that was up on the board. Having said that, the light repays in the first quarter, could give us some idea of what you would expect over the balance of 2019 to repay as a percentage of the $1.6 billion portfolio at March 31?

Sure. Great question, Steve. So, I think in the past, we've had repayments as low as $400 million repayments as high as $700 million. Again, I'm rounding here a little bit. And it's a bit again as we've always said episodic, because when you have a portfolio of 45 loans, it is a loan-by-loan analysis. This is not a statistical analysis, unlike residential mortgages where there's a clear link between interest rates and other macroeconomic factors, and you can sort of predict CPRs and other types of repayment rates. So it is very episodic. I would say, after having higher than average repayment in 2018, we do expect to have what I would say is lower than average repayment in 2019. We think a chunk of that will come in the second quarter maybe early part of third quarter, and that is sort of our best estimate. But I think for the year, I think we're in the lower end of that range that I've mentioned between $400 million and $700 million.

Got it. That’s helpful. Thank you both for your comments.

Absolutely. Thank you, Steve.

Thanks, Steve.

The next question is from Doug Harter of Credit Suisse. Please go ahead.

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

Sure. Good morning, Doug. This is Tae-Sik. So again, I think with a relatively granular portfolio, we put in place the Ares Warehouse facility to help us manage through different liquidity needs that we have. And so as we mentioned, the primary purposes of the Ares Warehouse line is to put in, so called storage loans that we can pull down at ACRE when capital becomes available, and it's going to be a very, very effective tool for us. You see that we did put in one loan a $40.5 million in the Ares Warehouse line. So you can take from that that during the quarter, during the third quarter, we had a time in which the cash flow that we had or cash available that we had at ACRE wasn't sufficient to fund this $40.5 million loan. So there will be different, I would say call it, moments in time where we're more fully invested. There will still to be moments in time where we're less fully invested. And what we're really driving towards is to be more consistently fully invested at all times. I would tell you that we're not quite there yet but, we're making tremendous progress towards that goal. And I think even before we put in the Ares Warehouse line a few months ago, you can see our 2018 performance a lot of that improvement in performance in 2018 was the fact that we are keeping our capital more fully deployed. We think with this Ares Warehouse line we'll continue to build upon that success even more so. But I would tell you that in the first quarter, as I mentioned in my remarks, we were under deployed overall for the quarter versus where we want to get to. But it's a significant progress that we've made versus 12 months ago versus prior years, and I think we'll keep driving towards that goal. So as I mentioned maybe just a direct answer to your question, yeah, there was a period in time in the first quarter where we didn't have a liquidity to fund this $40.5 million loan, so we put it under Ares Warehouse line. With some repayments coming up we do expect cash to be made available as well as financing some assets that we mentioned that we have. Cash flow will be available to pull that $40.5 million loan into the ACRE balance sheet. And then I think going forward from there, again we'll push towards having a much more fully deployed balance sheet at ACRE and putting the excess deal flow into the Ares Warehouse line.

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

Sure. Great question. So, clearly as a lender, we are somewhat protected with the volatility of cash flows from different types of properties, particularly a hotel property which do rents day-by-day and do not have the benefit of long-term leases here. But when you look at the Westchester Marriott, obviously, this is a hotel as we've mentioned has always been current on its principal and interest payments on the loan itself. So, it has never been late on interest payments, it always had positive cash flow even when it took a bit of downturn right after the renovations we talked about, it was still able to meet its interest payments and funded the required CapEx reserves within the hotel itself. So, there has been volatility. Some of it planned because of the room renovations common area renovations. Some of it is not preplanned in terms of market disruptions, but this is the hotel that's been around since 1981 as we mentioned. It's always been branded and managed as a Marriott and that has brought some stability to the hotel. So, while there clearly is going to be volatility in any hotel asset and really any real estate asset overall, we think we have a decent amount of cushion. We will get attractive financing on this asset. As I mentioned the statement that we will either get to or even exceed the return that we've earned as a lender against this property is based upon the trailing 12 months of income -- the last 12 months of income in 2018 in particular. That can change of course. But again we think we are on a good path towards continuing to increase the cash flow of this asset. We've certainly experienced that over the past 24 months. And the plans that we have for this hotel we think will contribute to even a little bit of further growth in the operating income of the hotel.

And Doug it's Jamie. I'll just go to pound that just a little bit. So, as Tae-Sik mentioned really good trajectory for cash flows and I think it's really important to kind of put this into context of our portfolio. Once we lever the asset our exposure here is pretty small. So, even if there is a little bit of lull, it's -- we don't consider it meaningful.

Okay. Thank you.

The next question is from Jade Rahmani of KBW. Please go ahead.

Thanks very much. The financial that you showed for the hotel is that from March 8th through the end of the month? So, we don't have a full quarter of numbers?

Correct, correct. So, that really represents that sub-period for the third quarter starting March 8th through the end of the quarter.

So, I think that the yield based on your prior presentation was about 7.25%. So, multiplying that by your basis $38.6 million, should imply about $2.8 million of NOI from the property. Is that what we should think about?

Well, I think -- again it's hard to extrapolate any short periods because there is seasonality week-by-week, month-by-month, and certainly season-by-season. So, I would say 2018, the net income for the property was significantly above that number. It was really right around $4 million of net income before FF&E reserve, again that's 2018. But again there is seasonality involved quarter-to-quarter.

Okay. And in terms of the renovation plan, I mean I believe that Normandy had put in significant renovations over the past four years. I've actually been to the hotel because my wife works for a company nearby and they had the annual holiday party there. But what kind of renovations are you planning to do? And how much do you expect to spend on a per room basis or in other areas?

Sure. So, again, when we made this loan back in the summer of 2015, this was really a loan to help renovate the asset. So, while it was made by the prior owner, it was all -- much of that was done during our period of being a lender in this property. So -- and what we've said in the past obviously is that, the timing that we think it's taken for the hotel to benefit from those renovations has taken longer than what we all had expected. I think going forward, the type of renovations that we're planning on doing primarily relates to the ballroom areas. So if you're familiar with the property and that's 2600 square feet, very flexible, there's a number of rooms that make up to 26000 square feet, but it's really that ballroom in terms of carpet, walls ceiling treatment that we'll be spending some significant dollars on. And again this is all in a CapEx reserve that we have already built up. We being us and prior owner have been building up. So the majority of the cash -- in fact I think almost all of the cash necessary for that ballroom renovation is already in a FF&E reserve account.

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

So, I think the only estimate holding period that we have at this point to really say is we don't expect to put this on the market in the next 12 months. We think the hotel is continuing to grow and continuing to benefit from the work that's been done and will be done going forward. And so we think, it's in our best interest to complete that work continue to grow RevPAR as well as NOI and then look to sell the property. Obviously, we're not a long long-term holder of this asset. But given that the performance is going well and is continuing to improve, we think we're best off not immediately sign this asset, but continue to complete the business plan, complete the renovation plan and sell with higher NOI in place.

So Jade and I'll build on that just a little bit. It's Jamie Henderson. So we look at this asset in the context of Ares has extensive multi-decade experience as an owner/operator and an investor in hotels as Tae-Sik mentioned. So we feel very qualified to analyze the property, the operations. Cash flows are ramping. We think there's meat on the bone in terms of revenue and expenses. So we think, we're really well positioned to do what Ares does really well, which is improve real estate and improve cash flows. But I also think this is a great opportunity for me to introduce David Roth, who is the Head of our U.S. Equity Business. David's an industry veteran. He's been on the equity side of the business for more than 30 years and was recently a Senior Managing Director at Blackstone where I think he did in excess of $20 billion worth of real estate equity transaction. So I'd like to give David a minute to just articulate his thoughts on the asset and his perspectives on the way we can ramp cash flow.

Yes. Thanks Jamie. I think my mic was off, so I'm not sure you heard me there. Thank you, Jamie. And thanks Jade and nice to meet you. Thanks for the question. As Jamie mentioned, the Ares team including myself have very deep experience developing and owning Marriott-branded hotels along with other hospitality brands in both the value-added capacity and an opportunistic capacity. We've got very deep domain expertise in this area having owned over 60 hotels and we have investments that are very close to this hotel. So we know the market fairly well. I think it's really important to note that in recent past, we've been one of the largest developers of Marriott products. So we have a very, very close and good relationship with Marriott. So as I think about the asset, I always think about things like what is your basis, what are the things you can do to improve cash flow et cetera. This deal we really think the basis is at a good level at $87000 a key. We like that basis. The team has reviewed the asset and we feel confident in our collective ability to improve profitability and the overall value of the asset over time. And basically that's through an opportunity to increase cash flow in the ways that have been talked about. So this is just to say that the ACRE team and we on the equity side, plan to partner on this asset, through the life of this asset to ensure we get the best execution on the strategic plan and ultimately on the future sale.

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

Sure. It's 1.48%. And if you need to have more details, we do have a little bit right up in our 10-Q on that information, but it's 1.48%. And as we mentioned 92% of our loans do have LIBOR floors. And so what – and the reason it's at 1.48% is if you look at our more current loans we will generally try to set LIBOR floors at whatever the current LIBOR is today. And so when we talk about 1.48% obviously we've had a – last 12 months to 24 months we've had rising LIBOR. So some have been set at lower LIBOR floors, but that's when LIBOR was lower. But overall right now as of March 31 2019 it's 1.48%.

Got it. Thanks.

[Operator Instructions] The next question is from Rick Shane of JPMorgan.

Hey, guys. Thanks for taking my question this morning. And again, look a lot of questions have been asked about the property. But just like to understand sort of the game theory here, both from the Ares perspective and from the sponsor perspective of where you wound up. This loan was on repayment to fall back in June. It was cured in September and now you've taken title. I'm curious, why the sponsor would choose to let that happen given the investment they've made at this point and why from a relationship perspective you guys would seek that outcome and frankly from a game theory perspective have to deal with all the questions you're getting from us this morning if the property can be resolved in relatively short order?

Sure. Rick thanks very much for your question. And again, excellent question in terms of the reason why the bar would pursue the course of action that it did. As we mentioned, this was done in a negotiated transactions so there was no foreclosure. So this was a, if you want to call it a mutually agreed to transaction with the borrower itself. So, again it's hard for us to put ourselves exactly in the mindset of the borrower. But I can tell you that, I think based on our experience with them this was an asset that was owned by multiple group of borrowers and not just one manager or one investor, but multiple investors. I think those multiple investors may have had different interests in what they wanted to do with this hotel. They also had different priorities of cash flow associated with this hotel and the fact that they've owned this hotel or were – had interest in this hotel for a relatively long time in vehicles that we're also in existence for a very long time. So without getting into two particulars, as we've mentioned we did give them a six-month extension from June to December. And then when December came, we all sort of net and we felt that it was in the best interest of everybody for us to take over put in what we would say, as the renewed interest and effort that we are going to be making in the hotel. And so we felt we were in the best position to continue to complete the business plan for this hotel complete the renovations on the hotel continue to grow the cash flow. And we felt, we would be in a better position to do that than the former borrower. But it is as you – as you implied it's an unusual situation, because the loan as we mentioned has always been current. And in the majority of those kinds of situations as you would know a lender would typically extend the loan the borrowers would typically extend the loan and they would continue to work things out particularly when the relationship is friendly and particularly when the property continues to show growth and the property most importantly continues to meet that service. So we really appreciate the question, because I understand from your perspective, it maybe a bit of a head scratcher. But at the end of the day, we did feel that we could have pursued the option of extending the loan further and not having to show this property as REO. But we still feel the best decision for us was to take ownership and full control of this asset.

I appreciate that. Some of – well go ahead Jamie. I apologize.

I'm sorry. I didn't mean to cut you off. Yeah. So when you find yourself in this situation as a lender, you're really analyzing a variety of paths that you can take with an asset. And we're here to maximize shareholder value. And we're going to execute on the path and the plan that maximizes shareholder value. And, in this case, it was a very amicable transaction which makes it a little easier. But I'll come back to the fact that, we like the asset, we like the location we really like our basis. Its cash flowing double-digits to our -- what we think will be our levered position. And we think there's meat on the bone. And the last sort of bit is, just to reiterate, Ares has great in-house domain expertise in -- particularly in Marriott-branded full-service hotels. So, I would kind of leave you with that thought, that we analyzed every path that we could take with the asset and we think this one is the best.

Got it, no it's interesting. I don't think I'm in the position to assume it's a good or a bad outcome. But to Tae-Sik's point it's an unusual outcome in the context of what we're all used to looking in. So that's why it's worth exploring sort of the back entrée. I appreciate it guys. Thank you.

Yeah. And we've seen this. And most of the folks here have been in the industry for 20 to 30 years. You can see a lot of idiosyncratic behavior at the end of a fund's life. I mean there are moments in time particularly if there is more than one fund in an investment, that they may be at odds with regard to advancing fresh capital. And sometimes it's as easier for them to give back the keys. So, it's not always what we would perceive as purely rational economic behavior. There are a bunch of externalities that drive it.

Yeah. It's funny that comment. It totally makes sense, but at the same time it seems like a somewhat irrational decision. And definitely makes you scratch your head a little bit.

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jamie Henderson for closing remarks.

Thank you. I want to thank everyone for their time today. We look forward to speaking with you again, in a few months on our next earnings call.

Ladies and gentlemen, this concludes our conference for today. If you 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 May, 15, 2019, to domestic callers by dialing 1877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10129708. An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. Thank you for attending today's presentation. You may now disconnect.