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

Rick Shane - JPMorgan Steve DeLaney - JMP Securities Jessica Levi-Ribner - FBR Jade Rahmani - KBW Doug Harter - Credit Suisse Charles Nabhan - Wells Fargo.

Good afternoon, good morning and welcome to Ares Commercial Real Estate Corporation's conference call to discuss the company's third quarter 2016 earnings results. As a reminder, this conference call is being recorded, on November 3, 2016. I would now like to turn the conference call over to Mr. John Stilmar from Investor Relations..

Thank you, Jamie. Good afternoon and thank you everyone for joining us on today's conference call. I'm joined today by Rob Rosen, our Chairman and Interim CEO; John Jardine, our President and Co-CEO; and Tae-Sik Yoon, our CFO.

In addition to our press release and the 10-Q that we filed with the SEC, we have also posted an earnings presentation under the Investor Resources section of our website at www.arescre.com.

During this conference call, we will discuss net income from operations, excluding the gain and expenses from the sale of ACRE Capital, which is a non-GAAP financial measure as defined by the SEC Regulation G.

A reconciliation of net income from operations to net income attributable to common stockholders, the most directly comparable GAAP financial measure, can be found in the earnings press release, which is available on the Investor Resources section of our website.

We believe that net income from operation is a useful information to our investors regarding the financial performance, because it demonstrates our operating performance, excluding one-time items related to the sale of ACRE Capital.

Before we begin, I'd also like to remind everyone that comments made during the course of this conference call and webcast, as well as 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 words such as anticipates, believes, expects, intends, will, should, may and similar such expressions. These forward-looking statements are based on management's current expectation of 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 the SEC filings.

Ares Commercial Real Estate 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'll now turn the call over to Rob Rosen..

Thank you, John. Good morning, good afternoon to everyone. I'm pleased to report that we generated $18.4 million or $0.65 per share of net income in the third quarter.

Excluding the gain and related transaction expenses from the sale of our mortgage banking business, ACRE Capital, we are $9 million or $0.31 per share from operations in the third quarter. Our strong earnings were supported by a record amount of new balance sheet loan commitments originated, which totaled more than $600 million.

During the end of the third quarter we also completed our previously announced sale of ACRE Capital to Barings Real Estate Advisers for approximately $93 million. Reflecting the value that we created during our ownership we realized a gain of $10.2 million or $0.36 per share.

Of note, we also incurred $700,000 or $0.03 per share of after-tax expenses from the sale of ACRE Capital as well as an additional $300,000 of incentive fee related management expense, due to the increase to core earnings from the transaction.

It should also be noted that we executed this transaction on time and using the internal resources of Ares rather than incurring the expenses of a financial advisor in the deal, in order to maximize the value to ACRE's shareholders.

Looking forward we expect the capital that we've recaptured from this transaction will allow us to further grow our principal lending portfolio, which we expect to result in higher earnings and a more predictable and stable company.

Once we fully reinvest our approximately $93 million in proceeds from this sale, we expect to generate $0.30 to $0.33 per share of annual earnings per share on this capital. This compares to the prior 12 months of annual earnings we generated from ACRE Capital of $0.24 per share.

Therefore we expect to generate approximately $0.06 to $0.09 per share of incremental recurring annual earnings from this transaction.

As Tae-Sik will discuss in more detail, given the current earnings of our lending business and following the full redeployment of our capital we received from the sale of ACRE Capital, we expect to improve our return on equity and be in a position where our earnings comfortably exceed the current dividend level on a consistent quarter-to-quarter basis with less volatility than we have experienced with our prior mortgage banking business.

These recent actions are indicative of our strong execution over the past 12 months for our company.

During this period, we have increased our loans held for investment by $200 million from $1.27 billion to $1.47 billion with the help of more than $850 million in new gross commitments, increased our quarterly dividend to $0.26 per share starting with the first quarter of this year and increased our book value per share from $14.25 to $14.68 as our earnings have outpaced our dividends.

During this time, we have also taken important steps to position the company for future success. Through the successful sale of ACRE Capital at a sizable gain, we repositioned our available capital to further grow our core principal lending portfolio and our earnings, which we expect will result in a more stable and predictable company.

We also have been effective in raising accretive capital from creative sources, including our $155 million delayed-draw term loan that allowed us to minimize short-term earnings disruptions, while we invested the capital accretively.

We will continue to leverage the strengths of being affiliated with our manager, Ares Management in pursuing additional creative and accretive forms of financing and capital to further grow our portfolio and earnings.

Now, let me turn the call over to John Jardine to discuss our record third quarter investment activity, our market outlook and a deeper dive into our strength of our credit portfolio..

Thank you, Rob and good afternoon everyone. The market opportunity for flexible capital providers like us continues to be attractive and as noted on last quarter's call, we are witnessing a notable resurgence in transaction opportunities with generally favorable pricing and structures.

Our markets are aided by strong underlying commercial real estate fundamentals, including stable to improving occupancy levels and solid rent growth. Competitive conditions in the lending market are generally favorable as banks and capital market participants continue to face either regulatory or market structure headwinds.

With these favorable conditions, lending spreads and credit terms continue to be relatively unchanged at attractive levels. These generally favorable market conditions are partly reflected in our third quarter originations. Consistent with our portfolio, the majority of our commitments in the quarter were to multi-family and office properties.

But we also originated two separate senior loans totaling $258 million collateralized mostly by self-storage properties across multi-state region. This diversity underscores our capability to originate loans and find value across a variety of property types in markets.

We are attracted to the fact that self-storage has historically had the lowest default rates across all major property types per Wells Fargo CMBS research. Our direct relationship with the sponsor along with our ability to provide a thoughtful structure and timely execution allowed us to source these attractively priced and structured loans.

During the third quarter, the weighted average unleveraged effective yield of our senior loan originations was 5.7%, in excess of the 4.9% percent unlevered effective yield on the $250 million of senior loan repayments received and above the 5.1% yield on our aggregate portfolio of senior loans as of the end of Q2, 2016.

We believe there are inherent credit benefits of lending to value enhancement business plans. Since our inception we have committed approximately $2.9 billion of these types of loans without a delinquency, loss or impairment.

Across the $1.2 billion of loan commitments that have repaid since our inception, our borrowers were able to grow cash flow at the property level by more than 15% during our commitment period.

This is an important factor as the increased cash flow which typically results in increased value, which in turn deleverages and de-risks our position, further supporting our credit performance. Looking forward we see a continued active transactional market and favorable competitive conditions.

As we told you earlier this year we targeted $700 million to $900 million in annual production for 2016. We are pleased to already be at the middle of that range with $795 million committed thus far and on a trajectory to exceed the high-end of our annual production range this year.

Now, let me turn the call over to Tae-Sik to discuss our financial position and results in greater detail..

Great. Thank you, John. In our earnings release this morning, we reported third quarter net income of $18.4 million or $0.65 per common share and adjusted net income from operations, excluding the gain and the expenses relating to the sale of ACRE Capital of $9 million or $0.31 per common share.

As Rob mentioned, these strong results were in part, driven by strong quarter-over-quarter capital deployment from record loan originations. We continue to enjoy a strong portfolio of credit performance.

Our $1.47 billion in portfolio of loans held for investments continues to perform well with no defaults, delinquencies, impairments or losses, since inception of our company back in 2011.

As John indicated, our track record of strong credit performance is driven by the combination of our direct origination and structuring capabilities as well as the risk mitigation characteristics associated with our strategy of financing business plans that create incremental real estate value.

For the third quarter of 2016, our average unpaid principal balance of our investment portfolio was $1.21 billion or excluding non-controlling interest $1.164 billion. Our average third quarter borrowings, which included our secured funding agreements, term loan and securitization were $851 million.

Our portfolio continues to be focused on floating rate senior loans, which positions us well in a rising rate environment. As of the end of the third quarter, 88% of the portfolio as measured by unpaid principal balance was comprised of senior loans and 93% of the portfolio was comprised of floating-rate loans.

All of our loans are backed by properties in the United States, primarily in major markets. As we have said previously, we have no exposure to the properties located in Europe, Canada or any other foreign locations.

Furthermore, we continued to expand our financing sources, as we closed approximately $270 million of additional senior loan funding capacity in the third quarter. And just as importantly, we continue to match fund our assets and liabilities.

As of September 30, 2016 with 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.

At the end of the third quarter our balance sheet was moderately leveraged at 2.6 times debt to equity, providing us continued capacity to grow our balance sheet up to our comfort range of about 3 times debt to equity. Looking forward we expect the deployment of our available capital to drive meaningful earnings growth.

Now, let me walk you through how we look at future earnings potential of our business. Starting with our principal lending business, if you look at the last four quarters, our principal lending business alone generated approximately $0.87 per common share.

Assuming we invest our $93 million of capital from the sale of our mortgage banking business, we have said that we expect this capital will generate approximately $0.30 to $0.33 per share of additional annual earnings.

As you can see adding these two components on a historical basis, you get earnings that comfortably exceed our recently announced annualized dividend run rate.

And beyond deploying the $93 million proceeds, we believe that we can further enhance earnings through additional reductions in our cost to capital, reinvesting loans that repay at higher yields and seeking further reductions in our operating costs.

So, all taken together we believe that we have a bright future with additional sources of capital that will lead to a larger more diversified portfolio of loans held for investment and result in a more scaled and stable earning company.

Before I turn the call back over to Rob for some closing remarks, I want to remind investors that this morning we announced that we declared a $0.26 per share dividend for the fourth quarter, consistent with last quarter's dividend and payable on January 17, 2017 to shareholders of record on December 30, 2016.

And with that, I will turn the call back over to Rob..

Thank you, Tae-Sik. In closing, we are pleased with our execution against our goals, which we believe have laid a strong foundation for future shareholder value creation and earnings growth.

Over the past 12 months, we have originated more than $850 million in a diverse set of attractive commercial real estate investments, maintained excellent credit quality, continue to access attractive sources of new capital, covered our distribution with earnings from operations and increased book value per share.

In addition, through the sale of ACRE Capital and redeployment of proceeds, we believe we are well positioned to deliver meaningful earnings growth from more recurring sources and an improved overall return on equity.

In our view our stock offers great value, currently selling at a discount to book value, yields well over 8% and has a dividend that has been more than covered by earnings, which benefit from rising interest rates.

Looking forward our organization is coalesced around a common set of goals, high quality originations at attractive yields, continued prudent and diversified portfolio construction, efficiently deploying our available capital and expanding our sources of capital with the help of our external manager.

As a result, we believe we have significant ability to expand our portfolio and earnings into 2017, while continuing to be highly disciplined and prudent in our credit decisions and portfolio management. We thank our investors and employees for their continued support and hard work.

With that, I would now like to ask the operator to please open up the line for questions and answers. Thank you very much..

[Operator Instructions] And our first question today comes from Rick Shane from JPMorgan..

Thanks guys for taking my question this morning. Look, I think you guys are making great progress in terms of the initiatives that you've laid out.

I also think that you're in a little bit of a tough spot, which is just from a pure finance perspective given the discount to book, it makes sense to buy back stock, but from a operations and scaling perspective that deleverages -- that takes economies of scale out of the business and ultimately I think you need to achieve those in order to be able to generate an ROE that investors are really looking for.

We're looking at an ROE for you guys over the next 12 months, let's call it, in the 8% range based on our published numbers, with scale because I think ultimately you're going to have to have investors understand the scalability of this business.

Where do you think the ROE can go on a long-term basis with additional scale?.

Good afternoon, Rick and thanks very much for your question. I do think your question is a very insightful one, that the lack of scale is definitely a disadvantage that we have today.

We've talked about it in terms of providing greater growth opportunities, lowering our cost of capital, providing greater liquidity and certainly in terms of scaling expenses across the board. I think one example that we've given historically is that if you look at our expenses other than management fees, most of our expenses are very fixed.

So, hypothetically if we were to double our common capital base, we would not expect to see a significant increase in those expenses, expenses such as audit fees, SEC filing fees, D&O insurance costs, those type of expenses.

So, right there you could expect anywhere from call it 75 basis points even upwards of a 100 basis points increase in ROE -- in net ROE just from running essentially the same business, but having double the amount of common capital and being able to scale your expenses.

In addition to that, if you were able to further lower your cost of capital, which is certainly something we are further pursuing day by day and I think we've done very effectively over the past several years, but again with greater scale we think we can push that cost of capital down even further. And again that would be very enhancing to ROE.

So, without giving a specific number -- clearly if you're modeling us at an 8% ROE without the benefits of scale, we could clearly see as again I mentioned 75 basis points to 100 basis points simply from scaling expenses over a larger capital base and then further enhancements due to aspects such as decreasing our cost of capital.

And again that -- none of that takes into account what John Jardine was talking about on this call today, which is focusing again on higher yielding investments themselves, our ability to redeploy the capital that we're getting from loan payoffs into in fact higher yielding loans going forward.

So, I think there are a lot of things we can do without scale, but there are even more things we can do once we reach scale..

This is Rob. Let me add just two things. First, the question about appropriately buying back shares below book value is a logical and important question.

With what we've done to the company in terms of stability and progress over the last 18 months, our reputation with our customers and our borrowers and it seems like you'll hear from me, I'm sure, several times during this call, really, playing above our weight in terms of the types of deals that we are originating, in terms of great quality, diversification, broad portfolios of cross-collateralized assets.

Our opportunity to increase earnings and scale is really remarkable and what we've got to continue to do is deliver, improve and hopefully that will sort of bridge this gap that we have between the value that's reflected in our book value and where we are trading.

But we're making such enormous progress in the market with our customers that -- the capital redeployed there really has tremendous incremental value..

Look, I think you framed the issues very well and actually I really appreciate it was -- and I know I usually often ask somewhat of an open-ended question. I really appreciate the effort to answer that as specifically as possible in terms of both the impact of scale and the impact of lower funding cost. I think it helps really frame the issue.

So thank you guys..

Our next question comes from Steve DeLaney from JMP Securities..

Thanks. I appreciate it. Just a couple of minor kind of housekeeping things on the balance sheet, if I may.

First, Tae-Sik, I noticed that the City National facility was not renewed, just curious if your decision there, was that just a matter of cost versus other alternatives?.

Sure. Good afternoon, Steve. Thanks very much for your question. Yes, we have two City National Bank facilities. We have the original, what we call the CNB 1 facility, just internal nomenclature, that was the original $50 million facility. And then we have the second facility, which we call obviously CNB 2 facility, which was a $75 million facility.

So, we continue to have just for clarification, the $50 million facility and we have had the second facility of CNB 2, $75 million facility, that did expire on September 30, and we did fully repay the proceeds or outstanding balance under that loan. It was really an internal decision of again continuing to expand our diverse source of the financing.

It was also a decision that, as far as our capacity with CNB, we felt keeping the $50 million facility, but for now allowing the $75 million capacity to expire was best in terms of our liquidity decision. As you can tell, we have significant capital to deploy right now with more than $400 million of capacity.

So for now, we felt that was the best decision and we will continue to explore lots of different avenues in terms of continuing to finance our book here..

Okay.

And the CNB 1, is that the facility that if I recall correctly, Ares guaranteed that facility on behalf of ACRE?.

It's really the opposite, the $50 million is a standalone facility that is guaranteed by ACRE itself and it was the $75 million facility that was supported by Ares..

Okay, got it. Thank you. And then you won CLO on your balance sheet, it is really paid down and de-levered. I guess we are about $57 million now, from about $192 million at the end of last year. If you look at that transaction, do you have any capability since it has de-levered and return is -- levered return is obviously lower.

Is there anything you can do to call -- collapse that and put that capital, that collateral on one of your bank facilities or even do a fresh CLO.

How are you looking at that?.

Sure. Absolutely. In fact, that is something we did with our first CMBS securitization that in fact began as a slightly larger securitization. We did a $500 million securitization in our FL1 transaction as we call it.

And once it got paid-off in terms of the certificates held by third parties, we were able to collapse that and delever the $100 million of loans that we retained as part of that securitization.

Our plan is to do something very similar and in fact, the good news is that even as of just a couple of days ago, that FL2 securitization’s actually been further repaid down to about $21 million. So, we are very, very close to, in fact, having the ability to so-called collapse that second securitization.

Both securitizations, as you know were very successful, they performed exactly as we expected. Certainly, the credit performance of the underlying loans were very strong. The repayments were on schedule of what we originally expected and so it performed very, very much in line and continues to do so.

And in fact, I know one of the benefits of our first securitization is that, within a year of issuing the certificates the third party certificates were actually upgraded, which is an unusual event to occur within that 12 month window.

So, I think we have hopefully built a great reputation within the securitization market, not only by ACRE, but really through all of the securitization experience that Ares Management as a firm has developed.

And so I think -- we expect to continue to benefit and hopefully take the opportunity when the window is open for us to do securitizations in the future..

Yes, this is Rob. Let me add two points. The first is, I think success with your financing partners breeds support and continued success. So, our success in our securitizations in our opinion creates an environment where there would be terrific receptivity when and if another securitization for ACRE were the right corporate financing decision.

And even something like the repayment in full of the CNB facility that was guaranteed by Ares Management to CNB is sort of a small indication of growth, stability and -- I'm highly confident that were we to come back to CNB with a request for an examination of a new financing that this experience of performance and repayments on time, on schedule is something that will hold us in good stead.

So these are small steps, but you can rest assured that we hope to capitalize on them..

Appreciate that. Rob. My last question has to do with the dividend, kind of ties back to Rick Shane's comment as well. So you have made even before the simplification and the stabilization, if you will, of the earnings stream. Over the last several quarters you guys have consistently covered your $0.26 dividend.

So, I think the Street is getting very comfortable with that, but I would point out that you are yielding 8.2% and the peer group yields 8.7% and even larger names like Starwood and Blackstone are actually trading to a higher yield today, currently in the market.

So I guess my question is with the improvement in the quality of earnings going forward and the obvious coverage that you have currently and Tae-Sik stepping us through the trailing 12 and putting in the $0.33, I mean you have very strong coverage.

So I guess my question is what does the Board need to see to be comfortable increasing the dividend at some point over the next few quarters?.

It's a great question. Let me give you part of the answer and then Tae-Sik I'm sure will give you the right answer. The first thing is that I was always trained that companies that trade at lower yields to their peers are obviously of a significantly higher quality and have prospects for growth. So, maybe that's one of the things embedded here.

I think, you're absolutely right. We've done so much in terms of stabilizing the company, monetizing the value that was embedded in ACRE Capital and having that now reflect itself in our book value and our Board understands the consistency of the earnings stream.

And from my perch, I can assure you that the examination of the dividend in 2017 is a high priority and will be consistently at the top of the agenda of our Board meetings..

And just to add to Rob's thought, I think that's exactly right. We certainly upon selling ACRE Capital take a very fresh look at our dividend, given what we believe will be greater consistent earnings, which obviously ties into our ability and desire to pay dividends.

I would say, historically, just to give you a little bit more perspective and share with you our thoughts is, it partly goes back to the question that Rick asked a few minutes ago, which is how do you think about the scale, how do you think about share buyback, how do you think about capital? And clearly one of the analytics or one of the considerations you take into factor when considering dividend, is the retention of earnings and our ability to keep earnings and redeploy it at very attractive yields.

So all of that has been factored into the past, all that will be continued to be factored in the future, but as Rob said I think, the Board is obviously going to take a very fresh look at our dividends going forward particularly given the sale of ACRE Capital and particularly the deployment that we have had success in getting new investments in..

Yes, I also feel a little obligation to sort of, if we examine history, if we go back to when we increased our dividend to $0.26 was at the beginning of the year, our first quarter, particularly in our mortgage banking business was somewhat challenged. And there was, in fact, a little bit of skepticism about why we did it.

And so, upon reflection, we saw the stability of our business, we had confidence in what was happening in our principal lending business, we were not at that time on the path of selling the mortgage banking business, that happened later in the year.

But I think it's all about sort of being confident in your business model, your approach, your quality. And I think we enter 2017 with a higher degree of confidence in who we are, what we do and our ability to deliver growth to our shareholders than we ever have before..

Our next question comes from Jessica Levi-Ribner from FBR..

Hey guys, thanks so much for taking my questions. You've talked extensively on the call about the capacity to fund about $425 million of new loans using 2.5 times leverage, maybe a little bit more if you do 3, but you did substantially more than that this quarter.

How do we think about the pace going forward given your capital position now? And also does the liquidity that you provide us in the slide deck, does that include possible loan repayments and how could that factor into the equation?.

Sure, good afternoon Jessica. Why don't I start and then ask John Jardine to really address the question. But let me just start on the front end. The liquidity that we published in our earnings release this morning is really just a snapshot of what our liquidity position was as of yesterday.

So it will be $122 million in available capital when leveraged 2.5 to 1, we want to sort of throw up that $425 million as a -- a demonstrated number of what we could do. But what it doesn't include is, it doesn't include future repayments that we expect, so that we can again redeploy that capital generally into higher yielding loans.

It doesn't reflect new financing sources that we continue to push and look for. Certainly we're not at this point because we're trading at below book value looking at any equity linked sources of capital, but we continue to look for non-equity linked sources of capital that will give us additional investment capacity at accretive levels.

So, I just wanted to again clarify for your question that the $425 million of capacity and the $122 million available capital is only a snapshot as of yesterday.

And John, do you want to sort of expand?.

So Jessica, we promised our stakeholders that we would originate between $700 million to $900 million in new accretive loans. And we are, at this juncture in the -- 30 days into the fourth quarter, we're at the midpoint of that range.

So, the expectation is that the trajectory will be quite good going forward and we look into the marketplace and we find -- we're finding opportunities in many, many parts of the United States, which are very interesting. We look for inefficiencies in almost every market that we cover.

And we are very excited about the opportunities going forward in deploying this capital in an accretive, measured and thoughtful manner..

So this is Rob again, one slight, sort of strategic point that I'd like to make to a very good question and that is that, repayments are significant and they are significant in the industry. Repayments for us reflect our customers and the sponsors that we support, really living up and doing their business plans and then effectively taking us out.

What the repayments do for us right now is really quite positive. They give us more capital to support new activities. And from a financial point of view, the new loans that we're putting on are at accretive yields to the repayments.

So, we get more firepower, we support our customers, our originators have increasing capital and the new loans that we're putting on are at accretive yields. That's a good picture..

Our next question comes from Jade Rahmani from KBW..

Thanks for taking my questions. I wanted to ask about originations again, that $700 million to $900 million range and you've already done this year, I think commitments $806 million, in terms of fundings, $784 million. So 4Q would be a moderation from this quarter.

Is there anything -- do you think that you could exceed the $700 million to $900 million range you've put out there?.

So, as I said just a moment ago, I think the trajectory is upward. So my expectation is because of what I see in the marketplace that we will be at the upper end of the range and perhaps exceed it..

Okay. On repayments, is there anything that's either occurred so far this quarter or anything further you'd care to say 3Q is obviously outsized, 2Q’s maybe what we would consider a bit more normalized ,but still elevated relative to the portfolio.

So is there any kind of range noting that the duration on your senior loans is quite short, definitely a shorter maturity profile than your peers at around less than two years?.

Sure. Jade, thanks for your question. This is Tae-Sik. So I think in our so called ordinary course of business, it is part of our business plan as a light transitional lender to have repayments.

As you said our average loan has really been two to three years, so you can expect in the ordinary course of business that that's sort of the expected life of loans. So far this year we've had just under -- through the third quarter we had just under $500 million of loan repayments, I think that's been very consistent with our business plans.

We don't think fourth quarter or any particular quarter is going to be unusual, but again because we are still a relatively bespoke lender, you will see quarter-to-quarter variability. But again as we've talked about in some of our discussions, we are very actively managing every one of our loans.

We have a very good sense of when each loan is about to prepay or likely to prepay as our sponsors reach -- successfully reach their business plans. This is something we are very focused on and very communicative about in terms of our asset management responsibilities.

So, as we believe that a loan could come up for repayment in the next several months or next several quarters, that certainly goes on a list of our liquidity, there's no certainty that those loans will repay, but again when you have the experience and the close communications we have with our borrowers, we have a very good sense of when and if loans are going to repay.

So, we are filling our pipeline in advance of that. It's very rare if ever that we get surprised by a repayment. So that again we're able to very effectively manage repayments as part of our overall originations program..

Just to put a final point on the earnings question, you disclosed earnings from continuing operations in the quarter of $0.22.

Can you talk to the timing of third quarter loan closings and repayments and perhaps quantify what continuing operations earnings would have been had those been in place for a full quarter? For example, assuming the loans were on the books for about a month or so, I'm getting around $0.28 of sort of full in-place earnings.

That's before any incremental 4Q originations. Do you think that's reasonable? And that would be before the accretion of the ACRE Capital redeployment..

Sure. So, Jade, I can't really comment upon the specific numbers. I think some of the information that hopefully we have provided will help you maybe get a better understanding of kind of where we are at the end of the quarter versus mid quarter or during the quarter, so.

For example, we ended the quarter with about $1.47 billion of loans held for investments. I think we mentioned on our remarks that the average unpaid principal balance of our investment portfolio during the quarter was $1.2 billion -- $1.21 billion and in fact $1.164 billion when you excluded non-controlling interest.

So given the strong investment activity we had during the quarter, you can see kind of the timing of when that happened. Again, we also had, as we mentioned about $250 million of repayments in the quarter itself, but the average, as I said is $1.21 billion versus what we show as our carrying value of $1.47 billion at the end of the third quarter.

Is that helpful?.

That's helpful.

Just -- is target leverage 2.5 times or greater? And when do you expect to be fully deployed?.

Sure. So I think, we mentioned sort of in generic form that we're comfortable with leverage of approximately 3 to1 debt-to-equity. Now having said that, I think as we've always mentioned in the past, we don't think about all debt the same.

So, for example, when we have done our securitizations in the past, we were very comfortable actually going to 4 to 1 debt-to-equity within the securitizations themselves for a number of reasons.

One is, by definition, they were match funded from both an interest perspective as well as a maturity perspective, meaning that the maturity of the certificates that we issued in the securitizations weren't due until the underlying loan is paid off. Secondly, they were non-recourse to ACRE itself.

So, we had retained, as you know the subordinate positions in both securitizations, but they were not recourse to ACRE itself. And third, the type of assets that we put into securitizations were very strong cash flowing, primarily -- I shouldn't say primarily, but a large component of it was multi-family.

So, if you have a situation like that, I would tell you that we're very comfortable as demonstrated by the success of both securitizations, that 4 to 1 leverage something we'd be comfortable with. If you had really an opposite type of debt, however you want to call it, which we don't have, we would feel less comfortable with even 3 to 1.

So, 4 to 1, we sort of give as a more of a general measure of the type of facilities we have today, kind of a benchmark of how we look at it. But to be more specific, we look at liability on a facility-by-facility, collateral-by-collateral basis, cost-by-cost basis.

So, if you tell me, hey, I could get 3.5 to 1, but my average cost of borrowing will have to go up by 50 basis points, that would change our thinking. So, there's a lot of factors that go into it. But I think what we've said in general is that we're comfortable with what we have today with about 3 to 1 debt-to-equity.

We ended the third quarter with 2.6 debt-to-equity, so as you can tell we do have some capacity, we have a decent amount of capacity even within that comfort range that we talked about..

Okay.

And just finally, are there any corporate expenses allocated to ACRE Capital that would be pushed back to the parent post the sale, aside from the modest management fee allocation?.

So, most of the expenses incurred by ACRE Capital were identified under the separate segment reporting and now discontinued reporting as of second quarter and third quarter.

I think once you see sort of the financial statements, the income statement without ACRE Capital, I think it will be very clear that we no longer have compensation expenses, we no longer have significant G&A expenses that were purely allocated and specific to ACRE Capital itself.

And again, we, for segment reporting purposes, allocate some of the G&A reimbursement fee as well as management fee between principal lending and mortgage banking that obviously will no longer happen with respect to mortgage banking. But the vast majority of expenses for ACRE Capital will go away because it was pure to ACRE Capital itself..

Our next question comes from Doug Harter from Credit Suisse..

Thanks. Mine have all been asked and answered at this point. Thank you..

[Operator Instructions] Our next question comes from Charles Nabhan from Wells Fargo..

Hi guys, most of my questions have been asked as well, but just a couple of quick modeling questions. A clarification on Jade's with regard to expenses. If we look at the expense base outside of management fees from continuing operations, it's roughly -- it's about $700,000 in legal and professional fees and about $1.5 million in G&A.

Is it fair to think about that as a run rate going forward or is there more room for cost optimization there?.

Charles, thanks for that question. Absolutely, there is, we believe, significant room for optimization. Plus I think we should point out that particularly in times of these kinds of transitions, we try to categorize appropriately, expenses that are related to the sale of ACRE Capital, but I'll just give you one example.

As you noticed, when we sold ACRE Capital, not only did we file all of the SEC requirements in terms of announcing the sale, but we also re-casted our prior earnings without ACRE Capital and showing it as discontinued operations. We also did our S3 filing this quarter to again refresh our shelf registration statement.

So, there are significant amount of one-time items that go into, for example, that professional fee -- that professional fee in particular, if you compare it to prior quarter, prior periods was up couple hundred thousand dollars because of these one-time expenses.

So, I would not say, use our third quarter professional fees for example, as any sort of run rate indication. What I would do is, go back a little bit more historically and look at it from in terms of an average perspective. I think that would give you a better indication of what we would expect on a quarter-to-quarter basis on a normalized level..

Okay, great.

And were there any prepayment penalties on the repayments this quarter?.

There were no prepayment penalties. So, in other words, what we do with our loans is, let's just talk, maybe generically, about your typical loan. If we structure our loan as a three year loan with one or two year extensions, what we get from our borrowers is we get an upfront fee.

We often also get an exit fee and we also ask for a period of lockout, right, where the borrower does not have the ability to repay our loans. So, this quarter we did not have any loans that asked us to waive the lockout period and pay any form of penalty.

But I would mention that, again, as ordinary course of business, we certainly do have loans that prepay before the full three year term, so after the lockout, but before the full maturity. And in those situations what we have is, we have remaining fees that haven't been recognized, the upfront fee or the backend fee that hasn't been recognized.

And once the loan does pay off, whatever fee balance that hasn't been recognized to date will be accelerated and recognized in the quarter that it repays.

Again, we don't consider this a one-time event or an unusual event because it's really a regular recurring part of our business and it is something that we used to, again, get paid upfront on a three year loan.

And if a borrower chooses to repay us early, that certainly within their prerogative and often that happens because they have accelerated their business plan and successfully met their business plan, but we believe we have earned that fee and we will recognize that accelerated fee in the quarter that it pays off..

So, most -- in LIBOR lending, you don't have your traditional prepayment fees as you see in the longer duration paper -- fixed coupon paper, so maybe that helps to clarify the answer to your question..

It does. Thank you very much. I appreciate the color..

This is Rob. Before we end the call, there was one thing that did not come up in this call and upon reflection I sort of feel obliged to point out.

When we, a couple of quarters ago announced that we were entering into a transaction to sell ACRE Capital, one of the areas of great concern and appropriate concern was how long was it going to take to deploy the capital that came as a result of that sale.

And in fact, would there be a drag on earnings until that capital was deployed? And I don't want to go around patting ourselves on the back, but we promised to you as analysts and we promised our shareholders that we would work very hard to make sure that, that capital -- that we would work to deploy into the sales.

So that when the sale in fact concluded that we would not have a material drag on earnings and we would benefit from the originations that were funded by the capital that was freed up. And it has not come up as a question, but it's very important to point out that, that was something that we did promise we would do and we did it.

So, I just wanted to make that point. We are grateful for your taking the time to be on the call with us. Operator, are there any other questions? End of Q&A.

Sir, at this time I am showing no additional questions..

Thank you. We thank everybody for joining us on this call and we look forward to talking to you after the fourth quarter. Bye, Bye..

Ladies and gentlemen, this does conclude our conference call for today.

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