John Stilmar - IR Rob Rosen - Interim CEO John Jardine - Co-CEO Tae-Sik Yoon - CFO Carl Drake - IR.

Rick Shane - J. P. Morgan Jade Rahmani - KBW Charles Nabhan - Wells Fargo Doug Harter - Credit Suisse.

Good afternoon and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2016 Earnings Results. As a reminder, this conference is being recorded on August 4, 2016. I would now like to turn the conference over to Mr. John Stilmar from Investor Relations. Mr. Stilmar, the floor is yours, sir..

Thank you. Good afternoon, everyone, and thank you for joining us on today's conference call. I am joined today by Rob Rosen, our Chairman and Interim CEO; John Jardine, our President and Co-CEO; Tae-Sik Yoon, our CFO; and Carl Drake, the Head of our Public Company Investor Relations.

In addition to our press release and a 10-Q that we filed with the SEC, we have posted an earnings presentation under the investor resources portion of our Web site 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 such 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. Please also note that past performance or market information is not a guarantee of future results. I would like to now turn the call over to Rob Rosen..

Thank you, John. On this call, I would like to start with a few quick comments on our second quarter earnings and then discuss our pending sale of our mortgage banking platform and how it positions our Company for improved profitability and greater earnings stability.

John Jardine will then walk through an update on the market and our estimated principal loan volumes for the year. Tae-Sik will conclude with a review of our second quarter financial results and liquidity position.

As we discussed on our last call in May, we expected that our earnings would rebound strongly for the remainder of the year after a slow start in the first quarter.

I am pleased to report that our second quarter net earnings did increase materially as we generated $8.7 million or $0.31 per common share compared to $5.1 million or $0.18 per common share for the first quarter. The sequential quarterly increase in earnings was principally driven by expanding origination volumes.

As John will discuss, we are seeing a notable pickup in recent transaction activity which bodes well for future capital deployment.

Turning to the pending sale of our mortgage platform, we announced an agreement in June to sell our mortgage banking platform ACRE Capital to Cornerstone Real Estate Advisors for $93 million, subject to several closing adjustments.

By way of background, we acquired the business nearly three years ago for approximately $61 million and contributed some additional capital towards the expansion of the origination and operational infrastructure of the platform.

While we believe the purchase price is attractive and reflects the value we created, our decision to sell the business was based on our view of the changing competitive landscape for governmentally-sponsored commercial real estate debt.

In our view, large GSE originators and intermediaries are both expanding market share, creating challenges for less-scaled GSE platforms.

Having closely examined the ingredients and incremental investment necessary to make ACRE Capital a meaningful participant in the market, we concluded that monetizing our profit and reallocating the capital was financially and strategically more compelling, particularly given the attractive economics of our core lending business.

As such, we expect the redeployment of this capital to lead to higher and more stable earnings for the overall Company.

Once we fully deploy the proceeds from the sale, we expect to be able to generate $0.30 to $0.33 per share on the capital, which compares to the $0.26 per share we earned over the last four quarters at ACRE Capital which were our peak earnings.

In summary, with the sale of ACRE Capital, we believe that we will have a more streamlined Company, returning to our roots and one focused on directly originating, retaining and actively managing loans to owners of commercial real estate.

We continue to see a highly attractive market for value-added lending to sponsors of commercial real estate and positioning the business this way allows us to leverage our core competitive strengths as originators and credit-first managers.

In addition, it allows us to take further advantage of the informational and resource advantages of the Ares management platform. We believe this will result in strong and more stable long-term earnings for our shareholders.

Regarding the potential timing of this transaction, we continue to believe it will close late in the third quarter or early in the fourth quarter of this year. Conversations with the GSEs regarding approvals remain positive and are progressing in a timely manner and are in accordance with our expectations.

With respect to the rest of 2016, our goal is to generate earnings from operations that will fully cover our most recently announced annualized dividend, excluding the expected net gain on the sale of ACRE Capital.

Achieving this objective will, of course, depend on the timing of capital deployment, as well as the timing associated with the sale of ACRE Capital and other factors. Tae-Sik will discuss this in more detail, but we remain confident in our outlook.

We also remain committed to looking for additional ways to further scale and create shareholder value both organically and inorganically as appropriate using all resources at our disposal. Now, let me turn the call over to John Jardine to discuss recent investment activity and the market in greater detail..

Thank you, Rob, and good afternoon, everyone. The market opportunity for flexible capital providers like us continues to be attractive and we have witnessed a notable resurgence in transaction activity in the last few months. Earlier in the year, borrowers remained on the side lines due to market volatility.

However, recent stability and continued strong underlying commercial real estate fundamentals, including stable to improving occupancy levels and solid rent growth, is creating a better environment for sponsors to transact.

Importantly, competitive conditions in the lending market remain stable as banks and capital market participants continue to face either regulatory or market structure headwinds. As such, borrowers are valuing our ability to provide flexible and dependable capital.

With these favorable market conditions, lending spreads and credit terms remain stable and are attractive. We are seeing senior loans with unlevered effective yields of more than 5% and subordinated investment yields are generally in the low double-digits to low teen returns.

Now, shifting towards our investment activity, during the second quarter, we closed $91 million in two senior loans, floating rate commitment collateralized by either office or mixed use properties.

Since the end of the second quarter, we've experienced meaningful acceleration in capital deployment by closing $158 million of new senior loan commitments. Additionally, we have approximately $150 million in potential loan commitments where we have executed term sheets and expect to close within the month.

These loans are principally concentrated in the multi-family and office sectors. As a reflection of robust market conditions, our pipeline is ever expanding and the transaction outlook for the remainder of the year appears very favorable. We expect the third quarter and second half of the year to be significant for new loan originations.

And as Tae-Sik will walk through in more detail, we are well positioned with capital to be able to invest into this active market. Based on this outlook, coupled with our assessment of our available capital, including repayments and the pending sale of ACRE Capital, we expect to be nearly fully invested by the end of the first quarter of 2017.

I would now like to turn the call over to Tae-Sik Yoon to walk you through our financial results and outlook..

Thank you, John. As you read in our earnings release this morning, we reported second quarter net income of $8.7 million or $0.31 per diluted common share.

The strong quarter-over-quarter growth in our net income is primarily attributable to greater origination volume and loan closings in the second quarter versus what we experienced at the start of the year, where volatile capital market conditions resulted in a significant reduction in transaction volume.

As for our current levels of transaction activity, as you just heard from John, we are pleased to report that originations are strong and we that have gotten off to a great start for the third quarter with $158 million in new loan commitments already closed for our balance sheet through the end of July.

In addition, we have already rate-locked 94 million in new loans for ACRE Capital, our mortgage banking business, thus far in the third quarter. For those of you that had a chance to review our second-quarter financial results, you will note that we no longer present the results of ACRE Capital as a separate business segment.

Instead, starting the second quarter, due to the pending sale, we treat ACRE Capital as a discontinued operation under accounting standards qualification 205-20.

Nonetheless, in Note 16 of the financial statements presented in our second-quarter 2016 10-Q filing, you will see a detailed income statement and balance sheet for ACRE Capital as a discontinued operation.

Please also note that upon the closing of the transaction, all ACRE Capital employees, as well as associated compensation expenses, operating expenses and future loan loss liabilities, will be retained at ACRE Capital and will no longer be held at or consolidated by ACRE.

For our 1.1 billion loans held for investment, credit performance continues to be strong with no defaults, delinquencies or impairments since the inception of our Company in 2011. One of the questions we often receive from our shareholders relates to our exposure to markets adversely impacted by the energy industry, particularly Houston, Texas.

As we have mentioned in prior calls, as our loan book is purposefully diversified across different geographies and industries, our exposure to Houston was limited to four loans backed by well-performing existing apartments.

And, in fact, as expected, due to the improvements that our borrowers have achieved in their respective business plans, three of our four loans in that market, totaling 67 million in unpaid principal balance, were repaid in full during the second quarter.

The one remaining loan in Houston, which again is backed by an apartment building, has an unpaid principal balance of approximately 10 million and is part of cross-collateralized pool of loans that are all performing well. And as we stated before, we have no exposure to the Dakotas or west Texas.

We believe that our success in Houston, Texas is a strong testament to our credit underwriting processes. Our portfolio continues to be focused on floating-rate senior loans. As of the end of the second quarter, 85% of the portfolio as measured by unpaid principal balance, was comprised of senior loans.

And 91% of the portfolio was comprised of floating-rate loans and 100% of our loans are backed by properties in the U.S., primarily in major markets. As we have said previously, we have no exposure to properties located in Europe, the UK or any other foreign locations.

Furthermore, our portfolio remains focused on office and multi-family, two of the strongest performing property sectors since 2004, according to Moody's. At the end of the second quarter, our balance sheet was moderately leveraged at 2 times debt to equity, providing us significant headroom versus our comfort range of up to 3 times debt to equity.

As of August 2, 2016, we had 129 million of available cash or an approved but undrawn capacity under our financing facilities to fund new loans in our pipeline, to fund outstanding commitments under our existing loans, for other general corporate and working capital purposes.

This 129 million excludes the anticipated proceeds from the pending sale of ACRE Capital, excludes anticipated proceeds from repayments of existing loans and excludes the anticipated expirations of the 75 million funding facility from Citi National Bank.

To illustrate the dry powder of our available liquidity as of August 2, 2016 we could fund approximately $450 million of senior loans, assuming a 2.5:1 debt-to-equity leverage ratio. The significant amount of capital we have to invest is driven by our expanding sources of attractive financing.

Since the beginning of the year, we have renewed or extended approximately $325 million in capacity under our existing funding facilities.

And in addition, since the beginning of the year, we have added approximately $245 million in new financing capacity, including a new $125 million facility with US Bank and expanding our existing Wells Fargo facility by $100 million from $225 million to $325 million.

Our continued ability to extend and expand our access to credit facilities, often combined with the lower cost of borrowing, is a strong testament of the value we believe comes from our affiliation with Ares Management. Along with expanding our financing capacity, just as importantly, we continue to match fund our assets and liabilities.

As of June 30, 2016, we had a weighted average remaining term of 2.8 years on our funding facilities, assuming we exercise available renewal options. This matches or exceeds the approximate two year average remaining life of our aggregate loans held for investment.

In addition, due to the floating-rate nature of our loans and liabilities, we remain positively positioned for an earnings benefit should short-term interest rates rise.

As for the remainder of 2016, it is our goal to fully cover our most recent annualized dividend with earnings from operations, which will include the results of mortgage banking as a discontinued operation until sold, but will exclude our expected net gain, transaction expenses and other related activities in connection with the pending sale of ACRE Capital.

This morning we announced that we declared a $0.26 per share dividend for the third quarter, consistent with last quarter's level and payable on October 17, 2016 to shareholders of record on September 30, 2016.

Finally, as we transition our business towards a more focused lending platform, we will continue to evaluate new financial reporting disclosures and metrics to provide greater insights on our loans held for investment for the benefit of our shareholders.

To start, we will begin to provide quarterly average balance information of our loans held for investment and our various borrowing facilities. For the second quarter, our average unpaid principal balance of our investment portfolio was $1.183 billion or $1.137 billion, excluding non-controlling interest.

Our average second quarter borrowings, which included our secured funding agreements, term loan and securitizations, were $836 million.

In closing, we are excited about the momentum we have built and the strong transaction activity that we are seeing in the markets today, which we believe will lead to higher originations volume and a pickup in our earnings.

We also look forward to closing the pending sale of our mortgage banking business and focusing the proceeds in additional loans held for investments, which once fully deployed, we believe will be accretive to our earnings. So with that, I would now like to ask the operator to please open up the line for questions and answers. Thank you..

Thank you sir. We will now begin the question-and-answer session [Operator Instructions]. The first question, we have, comes from Rick Shane of JPMorgan. Please go ahead..

Thanks, guys, and good morning. I'd love to understand a little bit about the transition away from ACRE Mortgage. I think the investors are really appreciative of the guidance you provided through the end of this year and the outlook into 2017. I'd like to discuss two things.

One is in the interim period before the sale is completed, is it possible that you will run modestly above your leveraged targets in order to get ahead of the necessary deployment of capital? And then second, what is the leverage assumption underlying the $0.30 to $0.33 run rate at, I guess, full deployment starting Q2, 2017?.

Sure, Rick, thanks very much for your question. So on the first part of the question, what we are anticipating is that we will continue to leverage our portfolio. Between now and the closing of the ACRE Capital transaction, we will have the use of several credit facilities. And I think you will see us continuing to deploy additional leverage.

I don't expect it to go above the 3.0. I think you will see it increase from certainly the levels today of 2.0, but I would venture to guess that the best estimate is somewhere between 2.5 to 3. We would not expect to go over 3 even during this interim period.

And then the second question in terms of once we do redeploy the capital and we expect to earn, as we said, $0.30 to $0.33 on the redeployment of the proceeds from ACRE Capital, that really assumes, again, somewhere between 2.5 to 3 times leverage, using that 93 million in proceeds..

Got it. And then in terms of the outlook in terms of that $0.30 to $0.33, that implies roughly an 8.5% to 9% ROE.

Just curious if you think that makes sense in the current environment and given the operating scale of your business? And should we see that as an ROE that is ultimately correlated to LIBOR? And what is that correlation, is it a 100 basis point move and LIBOR correlates to a 50 or 75 basis point improvement in ROE?.

Sure. In terms of your LIBOR question, that $0.30 to $0.33, basically, is premised upon LIBOR staying at current levels today. So thank you for pointing out that. In fact, if LIBOR were to go up, that $0.30 to $0.33 would commensurately go up, lock step, with increases in LIBOR. But our $0.30, $0.33 assumes a stable LIBOR where it is today.

In terms of, again, your other question, I think in terms of, again, where we see the earnings potential, again, the $0.30 to $0.33 assumes that capital is fully deployed. And once we get to that level, we will achieve the $0.30 to $0.33 in earnings. And the ROE you mentioned, I think that is correct.

But again, I just want to emphasize that is a net number. So we will earn more than the range that you described. But it is after the applicable operating expenses and management fees that it would net down to the numbers that you described..

Next one is Jade Rahmani of KBW..

Thanks very much. We're seeing REITs and others talk about deceleration in rent growth and some players talking about the cycle potentially having peaked. Banks also, in certain sectors, seem to be pulling back, particularly construction, but also in multi-family. And regulators are increasingly scrutinizing Siri.

Your tone describes a robust environment.

So how would you explain the apparent disconnect? And also, can you comment on what safeguards you have in place to ensure that you're not putting out too much capital at potentially the wrong time in the cycle?.

Good question. This is John Jardine. Thank you. We apply a very rigorous credit discipline to every investment that we make. We also find that there are inefficiencies in markets, in some of the liquid markets, where we believe others do not.

We have a direct origination platform where we have offices throughout the country and we are able to mine those opportunities. So, we find that the banks and some of the insurance companies have pulled back.

We think that they pulled back in some of the more, I would say, vibrant markets in the coasts where there is supply issues that we are watching very, very carefully. So I would say to you that due to our rigorous credit underwriting capabilities, we're able to find good opportunities and we believe that the market is strong in many respects.

But you have to be mindful and careful of certain markets where there may be some oversupply..

This is Rob Rosen and I would add one thing to John's thorough answer. We are a sponsor based organization and the model that we use is, knowing our sponsors well, and then underwriting the real estate, underwriting the cash flow and underwriting the credit appropriately. So, we don't go at the edges, we don't stretch for deals.

And with added capital going into our principal lending activity, our ability to be even more responsive to our growing roster of repeat sponsors is in fact a competitive advantage and really is quite similar to the methodology that our brethren used over the last decade in building our strong Ares Capital business.

So, I hope that helps distinguish something that could be viewed as being commodity like in nature to being something that rests on the strength of the sponsor, good underwriting and being thoroughly cash flow lenders..

And let me further add -- thank you, Rob. Let me further add that we're seeing repayments which really validates the underwriting that we've actually participated in with our sponsors. And we've seen rent growth and we've seen value being added.

And it's validated by the fact that they are now taking and repaying our positions, our value-added positions and going longer term. So we're seeing rent growth in a lot of our portfolio and we're comfortable with what we're seeing going forward right now..

In terms of the earnings guide posts that you put out there pro forma for the sale of ACRE Capital, can you comment on over what time frame you might expect to get to that run rate?.

Sure. Tae-Sik, please..

Sure. Thanks, Jade. I think as John mentioned, we are, obviously, working very hard already, even though the transaction hasn't closed. We are already working on a pipeline to invest the proceeds from ACRE Capital's sale.

The nice thing about this process is that we obviously had significant lead time knowing that we are working on the transaction and putting the transaction on a contract in late June. So we've been obviously working already to put the proceeds to work as soon as we receive them.

But overall, I think the comment that John made is that we expect to be fully deployed or substantially fully deployed towards the end of the first quarter of 2017.

And that includes not just the proceeds from the sale of ACRE Capital, but the existing availability that we have today, as well as some anticipated repayments that we expect on our existing loan pool..

And lastly, can you comment on the aggregate size of the pipeline that you evaluate, I don't know, maybe on a monthly basis or something, and what the conversion rate could be?.

So to give some clarity, we look at our pipeline daily. And the conversion rate I really can't speak to.

But the robustness of the pipeline is significant enough and vibrant enough that we believe that the information that we provided you is well within our reach in order for us to be able to effectuate the measured and strong deployment of this capital into good opportunities over the next few quarters..

Next, we have Charles Nabhan of Wells Fargo..

Hi, good morning. As a follow-up to Jade's question, given the cautious tone in the market, could you speak to any changes in behavior you've seen from your sponsors in terms of investment or fund flows into commercial real estate? And in addition to that, you obviously upped the capacity of your lending facilities during the quarter.

Have you seen any change in funding costs during the quarter as well? And could you also speak to any changes in tone from your lenders as well?.

This is John Jardine. Let me answer your last question first. With respect to our warehouse lines and our lenders, we have not seen any material changes to date. In terms of your second question, I believe, regarding the cautious nature in which others are looking at these markets. We are very cautious and careful.

We have the ability to utilize the robust Ares credit capabilities to assess opportunities and we find that is a very, very, very strong part of what we do. Hopefully that helps to answer your question. If you want more refinement to it, I'd be happy to continue..

Charles, maybe I'll add to what John said in terms of our warehouse lines. As we mentioned, this year in particular, we have been very successful in not just renewing, extending our facilities, but also putting in expansions or new facilities. We just put in a facility with US Bank. We just extended and expanded our facility with Wells Fargo.

We're very thankful to both those institutions as well as all of our lenders and business partners for doing so. What I want to be careful is we're not making a generic statement that these type of facilities and this type of access to capital is available to all market participants.

I think we feel very fortunate and I think we are very well prepared, being part of Ares Management, to have access to this kind of capital. I know the relationships that we have across all of the banks that we have here at Ares Management is very helpful for us in obtaining those kinds of facilities and the type of rates that we're able to achieve.

But overall, as John said, we're not finding a negative tone of our warehouse lenders. I think like everybody else they see what's going on in the market, they are, as they have always done, they do a thorough due diligence of the assets of the credit, of the sponsors.

But we are pleased that they continue to work very carefully with us, we are very pleased that we continue to have great access to capital. And we're very pleased that we're able to continue to actually renew and expand our warehouse facilities..

As a follow-up, in terms of the opportunity set going forward, I would think that your pipeline mostly resembles the existing portfolio, senior mortgages with spreads in the 400 to 500 basis point range.

Can you speak to your appetite for mezz lending and any opportunity you might be seeing in terms of loan purchases in the market?.

This is John Jardine. Thank you for the question. We look at every opportunity that would appear in the market. Predominantly we are directly, organically originating mortgages. We find that is the most effective way.

Although, we -- from time to time, can find opportunities where we can acquire attractive loans from sellers in the marketplace, so I hope that answers your question..

Yes, that's helpful. And I guess conversely, liquidity is not a concern by any means at this point in the near term. But in the past you've obviously sold some lower yielding loans.

Is that an avenue that you're willing to explore as well, going forward?.

So, again, John Jardine speaking. We look at every opportunity within our portfolio and outside of our portfolio. We've sold a loan or two in the past that were -- we felt strategically it was in our best interest. Is there a definitive plan to sell loans? Not necessarily.

But we just look at opportunities as they exist, both on the sell side and the buy side, and we carefully, carefully examine how they might affect us and provide an accretive result..

Next, we have Doug Harter of Credit Suisse..

Thanks. Tae-Sik, you mentioned that you've been expanding the credit facilities.

Could you talk about what the exact capacity is and whether you need to expand the credit facilities further to be able to fully deploy all the capital that you guys have and will have from the sale of ACRE Capital?.

Sure, Doug, thanks for your question. Obviously, with the pending sale of ACRE Capital, we are looking to expand and we have expanded the credit facility so that we have about 1.3 billion of capacity today.

And we believe that when you measure that versus the little more than 400 million of shareholder equity we have, that is pretty good capacity, when we talk about the range of 2.5 to 3 times debt to equity. Will we continue to seek additional sources of debt capital? Absolutely.

Will we continue to work with our existing lenders and new potential lenders to lower our cost of funding? Absolutely. But I think we feel we're in a very good position today with the facilities we have in place right now to meet the production goals that we have..

And is there anything that you guys are looking at, new structures or anything else on the capital structure that you guys would be looking at that could potentially be beneficial?.

Sure, great question. And again, similar to what we described as our continued pursuit of additional sources of debt capital, we will continue to do that on the equity side as well.

I think we have mentioned several times that if we're trading below book value, that we will not seek to raise common or common-linked equity securities where it would be dilutive to our book value.

But having said that, we will continue to look for opportunity to raise both equity and debt capital, nothing specific to mention at this point, other than the fact that we continue to evaluate all of those possibilities..

That will conclude today's Q&A session. I would now like to turn the call back over to the management team for any closing remarks.

Gentlemen?.

Thank you, operator. We at ACRE are grateful for your support. As shareholders, we look forward to the remainder of 2016 and look forward to our next earnings call with you. And, again, thank you very much..

And we thank you, sir, and to the rest of the management team for your time also today. Ladies and gentlemen, this concludes our conference call for today.

If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of this call through August 17, 2016, to domestic callers by dialing 1-877-344-7529 and to international callers by dialing area code 412-317-0088. Again, those numbers are 1-877-344-7529 or area code 412-317-0088.

For all replays, please reference conference number 10088268. Again that is conference number 10088268. An archived replay will also be available on the webcast link located on the home page of the investor resources section of our Web site. Again, we thank you all for attending today's presentation. At this time you may disconnect your lines.

Thank you, take care and have a great day..