Good afternoon. And welcome to Ares Commercial Real Estate Corporation’s conference call to discuss the company's full year and fourth quarter 2016 earnings results. As a reminder, this conference is being recorded on March 7, 2017. I will now turn the call over to John Stilmar from investor relations..

Good afternoon, everyone, and thank you for joining us on today's conference call. I’m joined today by Rob Rosen, our Chairman and interim co-CEO; John Jardine, our President and co-CEO; Tae-Sik Yoon, our CFO, and Carl Drake, the head of public investor relations for Ares.

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

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

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

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

Before we begin, I want 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 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 number of factors, including those listed under the SEC filings.

Ares Commercial Real Estate Corporation assumes no obligation to update such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. I would now like to turn the call over to Robert Rosen..

Thank you, John. In our view, we finished 2016 with strong fourth-quarter results, which capped off a successful year for our company.

In looking back over the year, we met our goals for prudently investing our capital, generated consistent and strong credit performance, continued to secure attractive lower-cost financing for our portfolio, and delivered an attractive total return of approximately 10% from dividends paid and growth in net asset value.

During the year, we originated a record $875 million of new loan commitments, at the upper end of our $700 million to $900 million goal that we established at the beginning of the year. As you may recall, we began 2016 in a period of significant volatility, causing us to initially preserve our capital.

When spreads widened as a result of the volatility, we were able to capitalize on the opportunity as the year unfolded, with a meaningful ramp-up in originations in the middle and back half of the year.

Our investment activity, along with rising LIBOR, helped drive our senior unleveraged effective yield to increase from 5.1% at year-end 2015 to 5.7% at year-end 2016. Our direct origination strategy continues to allow us to be highly selective as we closed only approximately 5% of the commitments, which we evaluated last year.

Our commitment, as a company, to a credit first mindset is further evidenced in the strong performance of our loan portfolio as we continued our track record with no delinquencies, impairments or defaults since our inception. Additionally, the last of our $77 million of Houston multifamily exposure has fully repaid.

This is further evidence of the strength of our platform and the success we have had lending to strong sponsors, pursuing value-creating business plans.

In support of the growth of our loan portfolio, we continued to access attractive forms of financing during 2016, closing $300 million of new financing capacity and renewing or extending $575 million of financing facilities, all with similar or improved terms.

Given the significant market volatility experienced during 2016, this execution underscores the strength we have with our financing partners, in large part due to our relationship with Ares Management and the strength of our credit history.

Lastly, on September 30, we successfully divested our GSE-oriented mortgage banking business for a significant gain. This resulted in $93 million of proceeds, allowing us to further grow our principal lending portfolio, which we expect will improve recurring cash earnings and our overall profit potential.

As I stated earlier, our successful execution in 2016 resulted in strong financial performance. During the year, we paid $1.04 per share in dividends and increased book value from $14.31 to $14.71 per share. Once again, we more than covered our dividend from operating earnings.

As we progress in 2017, we have recently taken advantage of the depth of our institutional relationships and a more liquid financing market to increase and extend our borrowing capacity.

We accomplished this through extending the maturity date on our $50 million CNB facility to 2018, with options to extend to 2020 and closing a $273 million privately negotiated securitization financing.

As Tae-Sik will further discuss, this securitization not only expands our borrowing capacity to support future portfolio growth at a very attractive cost of financing, it also provides improved flexibility as a result of unique features that we were able to receive.

Armed with a conservatively leveraged balance sheet of just 2.2 times debt to equity, along with significant capital to deploy, we are well-positioned to take our earnings to higher levels.

This morning, we announced that our Board of Directors increased our quarterly dividend from $0.26 per share to $0.27 per share for the first quarter of 2017, payable on April 17, 2017 to shareholders of record on March 31, 2017.

This dividend increase reflects our full-year earnings view as opposed to a quarterly level as we anticipate the timing of our available capital deployment to temporarily cause us to under-earn our quarterly dividend in the first half of the year and over-earn it in the second half of the year. Tae-Sik will provide more details later on in the call.

Now, let me turn the call over to John Jardine to discuss our origination activity and our market outlook.

John?.

Thank you, Rob, and good afternoon, everyone. As Rob stated, we had a very good year on the origination side, which demonstrated the breadth and reach of our national platform. For the year, we originated $875 million of new loan commitments across 13 states, which drove a 16% increase in our investment portfolio.

Consistent with our commitment to less economically sensitive property types, 36% of our commitments in 2016 were to office, 22% each to multifamily and self-storage, 9% to mixed-use properties, with only 6% and 5% to hospitality and retail respectively.

This mix shows our strategy of lending on more stable property types, with a focus on strong performing and cash flowing office and multifamily properties, and a conscious under-weighting of more economically sensitive properties such as hospitality and retail.

Additionally, our strategy causes us to avoid situations where there is no cash flow, such as raw land or business plans that expose our loans to binary risk, such as properties in tertiary markets or where large tenant concentrations creates rollover risk during business plans.

We also continue to enjoy the benefits of having strong sponsor relationships, with about half of our commitments in 2016 to repeat sponsors. Rob already touched on our strong credit performance. But another measure of the strength of our portfolio can be viewed through repayment activity.

During the year, we received $685 million of repayments, reflecting the completion of our borrower's business plans and the subsequent sale of the property or refinancing of our loan with longer-term fixed rate debt.

On the more than $1.4 billion of repayment since our inception, our borrowers have increased the property cash flows on average approximately 15% by successfully executing their business plans. This increase in cash flow supports higher valuations and deleverages our position to improve the risk profile of our loans.

As such, repayments are really a byproduct of the success of our sponsors’ business plan execution. Based upon our analysis of our borrowers’ business plans and ongoing communications with them, we currently expect repayment activity for full-year 2017 to track lower than last year's rate of prepayments.

Looking forward, 2017 has started with strong global liquidity and a general risk-on mentality from the capital markets. This has led to a general rise in asset prices and tighter market conditions.

While our focus on middle-market value-added sponsors is not immune from these market dynamics, we are less exposed as our borrowers seek a customized solution to support their value-enhancing business plan.

Late in the fourth quarter of 2016 and early in the first of 2017, we had several borrowers take more time to close transactions amid the rise in interest rates and market volatility after the US elections. This delay led to a slowdown in the pace of our capital deployment, but our activity has recently picked up with several transactions closing.

Our portfolio continues to be dominated by floating-rate senior loans. As of the end of – 91% of the portfolio as measured by unpaid principal balance – excuse me, for a total of $134 million in the first quarter, mostly in the second half of last month.

More importantly, our pipeline transactions has been building and deepening, which we believe supports our view that our investment pace will accelerate in the second quarter and remain strong in the second half. As a reminder, we originated a total of $685 million over the third and fourth quarters of 2016.

Based on capital availability and origination expectations, we believe full-year 2017 originations will exceed 2016 level and our mix will continue to include a heavy concentration of senior floating rate loans, with selected mezzanine and preferred investments.

Given our modest first-quarter closings to date, we expect the impact of originations will be felt more in the second half of the 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 net income of $8.1 million or $0.28 per common share for the fourth quarter of 2016 and $40.3 million or $1.41 per common share for full year 2016.

Net income from operations for full year 2016, which excludes the net gain relating to the sale of ACRE Capital, our prior mortgage banking business, was $31.2 million or $1.09 per common share.

As Rob mentioned, our strong results for the fourth quarter and for the full year 2016 were driven by improved capital deployment, the benefits of rising short-term interest rates and our successful sale of ACRE Capital on September 30, 2016.

For the fourth quarter, our average unpaid principal balance of our investment loan portfolio was $1.4 billion. Our average fourth-quarter borrowings, which included our secured funding agreements, term loan, and securitizations, were $1 billion. Our portfolio continues to be dominated by floating-rate senior loans.

As of year-end, 91% of the portfolio as measured by unpaid principal balance was comprised of senior loans and 96% of the portfolio was comprised of floating rate loans. All of our loans are backed by properties in the US, primarily in major markets.

As we have said previously, we have no exposure to property located in Europe, the UK, or any other foreign locations. During 2016, we closed $300 million of new bank provided financing capacity and renewed or extended $575 million of bank funding facilities, all with similar or even improved terms.

We also continue to match-fund our assets and liabilities. For example, as of December 31, 2016, we had a weighted average remaining term of 2.9 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 both, our loans and liabilities, we remain positively positioned for an increase in our earnings, assuming short-term interest rates continue to rise.

For example, if you take your balance sheet of assets and liabilities at year-end 2016 and pro forma a 100 basis point rise in 30-day LIBOR rates, we estimate approximately a $0.13 per common share increase in annual net interest income.

Lastly, our December 31 balance sheet was leveraged at 2.2 times debt to equity providing us continued capacity to grow our leverage up to our comfort range of approximately three times debt to equity. As Rob mentioned, in the first quarter of 2017, we further supported our balance sheet by extending our $50 million CNB facility to March 2018.

At the same time, we also received two additional one-year extensions, which if fully exercised would extend the maturity of this $50 million facility to March 2020.

We also continue to execute on attracting efficient low-cost sources of financing, which is illustrated by the $273 million privately placed securitization we just closed last week with a well-known institutional investor.

In addition to freeing up incremental bank capacity to further support future portfolio growth, the securitization provides a highly attractive funding source. This later securitization builds on our track record of strong execution and it continues our trend of receiving improved structural features on each successive deal.

As you recall, in 2013, supported by the institutional brand of Ares Management, our first securitization was well-received by investors and the vehicle performed well over its life, as evidenced by the ratings upgrades of the notes in the deal. This first securitization was fully repaid and retired in mid-2016.

In part due to the success of our first securitization, we closed a second offering in 2014 with a 40 basis point spread improvement compared to our first transaction. This second securitization was also fully repaid and retired in late 2016. Now, with our third securitization, we've been able to further improve upon our prior successes.

First, we negotiated a private placement of all the investment-grade notes to a single high-quality investor, thereby significantly reducing market risk, while also achieving strong market execution as we priced meaningfully inside of a recently issued transaction.

Second, we were able to include a reinvestment period, giving us the ability to replace repaid loans in the pool for a period of two years rather than having proceeds going towards repayment of senior notes.

Although our ability to replace repaid loans are subject to rating agency and lender approval, we feel confident that our replacement loans will meet the necessary criteria.

This reinvestment period provides the opportunity to extend the tenure of our borrowing under attractive sources of financing and is a strong reflection of our relationship with this high quality institutional investor.

Finally, we were also able to achieve favorable call provisions during the life of the securitization financing, which allows us to more efficiently manage our capital. These structural features and the tight execution on pricing are in stark contrast to what we are seeing in comparable broadly marketed transactions.

Overall, this later securitization provides us with a highly efficient, lower spread and non-recourse stable source of financing versus our warehouse lines. At an initial weighted average coupon of LIBOR plus 1.85%, the spread is approximately 30 to 50 basis points lower than our average spread across our bank funding lines.

Furthermore, we secured an 80% advance rate compared to a more typical 75% advance rate for these same assets under our warehouse lines. We were able to use the capabilities of Aries Management to execute this transaction with minimal cost.

With the sale of ACRE Capital and now the execution of this third securitization transaction, we have achieved highly attractive transaction executions with significant cost savings for shareholders as we utilize the internal relationship, structuring and placement resources of Ares.

As Rob touched on earlier, let me discuss our capital position and its impact on our earning trajectory. Given the expected strong repayments at the end of last year, we began 2017 with a lower level run rate earnings than reflected in our fourth quarter's results and have, as of March 31, 2017, approximately $163 million of leverageable capital.

However, as we deployed a significant amount of available capital, we expect our earnings trajectory to ramp meaningfully from under-earning our quarterly dividend in the first half of 2017 to out-earning our quarterly dividend in the second half of 2017, simply due to the timing of booking new loans and the timing of when our existing loans pay off.

Again, it is this timing and velocity of net capital deployment that is shaping the earnings profile of ACRE. It is not credit, it is not lending spreads, and it is not our cost of funding.

In our view, our strong financial position gives us significant opportunity to increase our earnings as we continue to deploy available capital, further refine our cost of funding and operating costs, as well as expand our overall capital base. I will now turn the call back over to Rob some closing remarks..

Thank you, Tae-Sik Yoon. Looking forward, our organization remains anchored around the common set of values and goals. We are a credit-focused institution dedicated to creating a high-quality portfolio where our cash oriented income stream covers our dividends on an annual basis. We have not and will not chase credit to generate volume.

But with our direct origination platform and the advantage of our affiliation with Ares Management, we believe we are very well positioned to generate attractive returns for shareholders. Following the sale of ACRE Capital, we believe that we are capable of reaching a return on equity of approximately 9% over the intermediate term and beyond 2017.

We believe we have taken the right steps to achieve this goal, developed a portfolio with strong expected gross ROEs on our investment, locked in efficient and attractive forms of financing, expanded our capital base and focused on minimizing our expenses with tight cost controls.

By deploying our available capital and remaining highly disciplined and prudent in our credit decisions and portfolio management, we believe this goal is achievable. For 2017, our dividend increase to $0.27 per quarter reflects our confidence in our ability to invest our capital throughout the year and earn the dividend on an annual basis.

We believe our stock offers great value, currently selling at a discount to book value, despite our excellent credit track record, our ability to increase earnings from rising interest rates, a two-year track record of steady and increasing dividends, and a meaningful excess capital position which provides a catalyst for future earnings growth.

We thank our investors and employees for their continued support. With that, I would now like to ask the operator to please open up the line for questions and answers. Thank you very much..

Thank you. [Operator Instructions] Our first question comes from Steve DeLaney of JMP Securities. Please go ahead..

Good afternoon, everyone, and thank you for taking my questions. In the press release, you provided a lot of detail about the four new loans totaling $133 million. We didn't see a reference to any payoffs that may have come in.

So, the first question is, have you received any payoffs? Do you expect any loan payoffs to be coming in before March 31? Thank you..

Good afternoon, Steve. This is Tae-Sik. Thanks very much for you question. Yes, we did receive some payoffs in the first quarter to date and it’s typical in our business. We do expect further repayments in the first quarter. I think as John mentioned, for the year, 2017, we do generally expect less prepayments than the amount that we had in 2016.

Again, that's really based upon sort of a loan by loan analysis that we do. As we sort of mentioned before, with our loan portfolio, we are in very, very frequent communications with our borrowers. We are evaluating where they are along their business plan.

And the good news is, when our borrowers successfully achieve their business plans, they are in a position to either sell the asset or value in excess of what they purchase it for or they’re in a position to refinance on a more prominent basis.

As a value-added lender, particularly as a value-added lender with a focus on floating-rate loans, we do expect and have prepayments. So, really, to answer your question, we have had what we would say is a normal and expected amount of prepayments in the first quarter.

Again, prepayment activity for the year, we expect to be materially less than what we had in 2016. But that is absolutely a normal part of our business..

Well, that's helpful, because it ties in without having anything in the press release about specific payoffs, that very much helps to clarify your indication of weaker first half of 2017 earnings and then stronger second half. So, thank you, that's helpful.

I noticed, it was pretty striking that each of the four loans was multi-family or student housing, which we know is something you have a meaningful percentage. I think it was 26% in those two property types that you're in, but certainly not what I would call dominant.

So, the fact that all four of the disclosed loans are in this property type, is this reflecting a conscious effort on your part to focus here, given where we are in the real estate cycle?.

Well, that's helpful because it ties in without having anything in the press release about specific payoffs. That very much helps to clarify your indication of weaker first half of 2017 earnings and then stronger second half. So, thank you. That's helpful.

I noticed, it was pretty striking that each of the four loans was multi-family or student housing, which we know is something you have a meaningful percentage. I think it was 26% in those two property types that you're in, but certainly not what I would call dominant.

So, the fact that all four of the disclosed loans are in this property type, is this reflecting a conscious effort on your part to focus here, given where we are in the real estate cycle?.

Hi, Steve. John Jardine. We are seeing some opportunities in our pipeline in the multifamily sector, but I would not suggest that it is a conscious decision based upon where we are in the cycle to move to the multifamily or provide a heavier emphasis on multifamily lending.

We do, as you know, have a significant ownership interest in multifamily units in our equity group. We have great comfort in them. And the fundamental statistics that you’ll find in multifamily, we’re finding that rental growth has been fairly stable at 3% and we’re also seeing occupancies improve.

So, though, I would not say that we are pushing towards being more multifamily centric, but we’re seeing opportunities lately that I think reflect the good value..

Thank you, John. And just my final question is on the new securitization, FL3. It would certainly be – with 4 to 1 leverage and the pricing advantage versus bank lines, this would appear to be your – at least initially, the highest ROE sub-segment of the portfolio.

Are you comfortable indicating any range of what your expected ROE is, either initially or over the average life of that securitization?.

Sure. This is Tae-Sik again. I think your insights are very, very much correct.

With 4 to 1 leverage, with financing costs, with initial weighted average coupon, L plus 185, we also mentioned that we were able to execute a very efficient transaction from a cost perspective really relying upon, again, the internal resources here at Ares Management, I think the ROE that we are expecting to achieve on the capital that we have in FL3 would really be significantly and materially in excess of the ROE that we would typically earn under a warehouse type of finance situation or under a unlevered subordinate position.

So, as you know, we have sort of mentioned in the past that if you look at our mezzanine or subordinate positions, we generally are somewhere between 11 and 11.5. On a levered senior loan basis using warehouse lines, we’re sort of in that same range, maybe slightly higher.

And what you'll see on the capital that we have in FL3, you’ll see again, with 4 to 1 leverage again, specifically I think it’s also important to mention again that it’s non-recourse.

So, we certainly feel more comfortable in the context of non-recourse match-funded type of financing, along with the high-quality nature of the 12 loans that have been put into securitization. We’re comparable with that 4 to 1.

But the net effect is, you’re absolutely right, we do expect meaningfully higher ROE on that capital than the typical levered ROE that we get on warehouse levered senior loans or under the unlevered mezzanine financing..

Steve, this is Rob. Maybe I can just open the kimono a little bit to the conversations at the board level about securitization and then point to some of the things we mentioned in our script that are unique to the securitization. The board examined securitizations consistently.

And one of the things that we always debate is the cash flow coming from repayments going to pay down the senior tranches of the securitization, leaving us with the lower rated tranches on our balance sheet, but no cash flow to reinvest.

The importance of this redeployment period in this securitization and its value to us to have a second bite at the apple with cash flow coming in, subject, of course, the loans being approved by the institutional partner and rated.

But assuming that we maintain our credit quality, the extension of duration, the ability to recycle those loans and that cash flow over an additional two year period was very significant in terms of our board coming to the conclusion that this securitization structure is increasingly valuable to ACRE and our ability to build our business..

Got it. Thank you, Rob. Appreciate everyone's comments..

The next question comes from Charles Nabhan of Wells Fargo. Please go ahead..

Hi. Good afternoon. Thank you for taking my question. Just wanted to follow up with Steve's question regarding repayments in a slightly different way. If I was to look at the portfolio detail, it appears that the maturity schedule is weighted towards the back end of the year. And I know that, obviously, changes.

But based on – given your comments around the trajectory of earnings, is your expectation that repayments in the first half of the year will exceed repayments in the second half of the year, despite the maturity schedule?.

Hi, Charles. This is Tae-Sik. Again, thanks again for your question. I think the maturity schedule that you see in our 10-K filing, which identifies on a loan by loan basis the origination date as well as the material terms of the loan, certainly an indicator of when we expect repayments to happen.

As you’ll recall, the majority of our loans actually repay prior to their stated maturity date. We certainly have situations where we have had borrowers repay at maturity day, we certainly had borrowers who have exercised extension options to extend it beyond maturity date.

But, certainly, the majority of loans have paid prior to the stated maturity date. So, as we’ve mentioned in the past, we have a very granular portfolio. We have a very active asset management process. And so, the way we sort of evaluate, the way we do evaluate repayments is to really examine it on a loan by loan basis.

And when we do that, I think we find that the repayments for the year are relatively distributed through the year.

I think just from an analytical standpoint, if you look at our so-called forecast, we do find repayments to be maybe a little bit more front loaded in the first half of the year rather than the second half of the year just because we have better visibility of those loans.

So, it’s more a structural reasoning for that rather than an analytical framework. So, I will give you that little information, but again I think what’s important to note is that, as John mentioned, we do expect less prepayments this year in 2017 than we experienced – in 2017 than we did in 216.

And then secondly, we believe that – and we know that repayments of our loans is just a natural part of being in the floating-rate light transitional senior loan business..

This is Rob again. I would just emphasize a word that we use in the script and we don't use this word lightly. And it was that we expect repayments to be materially lower than they were last year. And just to frame it, last year, Tae-Sik, we had repayments of….

$680 million..

$680 million. And so, while there always be surprises, based on the way we manage our book and our constant contact with our borrowers, our stating that repayments will be materially lower is an important consideration as we plan the second half of the year..

Got it.

And as a quick follow-up, could you give us a little color around what types of loans, what types of collateral fit the reinvestment criteria of the securitization?.

Sure. I think the type of criteria that will fit reinvestment criteria of the securitization is very similar to the type of loans that we have traditionally done here at ACRE.

So, the 12 loans that form the initial pool, I think are very representative of the overall ACRE portfolio, even as a snapshot today, but really even as a microcosm, if you want to call it that, of what we have historically done.

That's why we sit here today letting you know that we feel very comfortable that we will continue to originate loans and book loans that will meet the criteria to replace loans that pay off in the securitization because that criteria is very similar to what we already have in the securitization, what we've always done here at ACRE and what we continue to do in the future..

We’re cash flow lenders. If we were to propose a loan collateralized by raw land or a construction loan and attempted to put those asset classes into the securitization as replacement for the cash flow loans that we put in, I guess we probably would not have a good chance of that being new approved.

But if we stick to our knitting, underwrite properly and really continue to originate loans based on existing cash flow, we're confident that we’re going to be able to get these loans approved for recycling into the securitization..

Got it. Thank you..

Thank you, Charles..

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

Good afternoon. This is actually Ryan on for Jade. Thanks for taking my questions. My first question is on M&A.

Is this something you view as an opportunity? And are you seeing an increased deal flow in the market today? And if so, what types of business lines might you view as attractive for adding to the ACRE platform?.

Yeah, this is Rob. The answer is M&A is an important part of how we spend our time, particularly how I spend my time affecting an M&A transaction is something that we very much want to do.

The M&A transaction has to – if it's simply a synthetic financing, essentially acquiring something to liquidate and then liquidate the acquired company's assets and redeploy them into our CRE portfolio, that's one sort of the transaction.

The second type that makes M&A a bit more difficult is when we have the opportunity of looking at companies that have some overlap with our sweet spot of what we do and how we do it. Then you have to make sure that the origination team is consistent with the approach that we take to originating loans and being a credit first shop.

And then, as is always the case in every transaction at Ares, when we have the opportunity of examining an M&A deal and there are people involved, we have to make sure that there is cultural fit. And so, first, what’s the business that we’re looking at. Is it simply a synthetic financing? If it is, then that is analytically easier for us to do.

If it's taking on capabilities, how do those capabilities match up with what we have. And finally, if it's taking on people, how do those people fit in from a cultural point of view to what drives Ares and all of its businesses.

But let me tell you that we are active and wanting to do an M&A transaction is high on the list of things that we’d like to accomplish in 2017..

Great. Thanks for that good color. And just moving on, we've seen some of your peers issue unsecured debt and the execution seems to suggest strong demand in that space.

Is that something you'd potentially look at?.

This is Rob again. The answer is yes. We look at everything that our competitors do, every board meeting that we had has as a review of – is somebody in the space doing something smarter that we should be learning from and we’re not at all afraid to say that somebody has uncovered something.

And as part of our quarterly board meetings and something that we do here between board meetings is we examine the financing opportunities up and down our balance sheet. So, if there are things being done in the unsecured debt area, you can rest assured we’re examining it.

If there are things and opportunities that are opening up in the preferred stock area, you should assume that we are learning about that and examining that as well. The one thing that we have to reiterate is we will not do equity financing below book. It’s commitment we made a while ago to you and to our shareholders.

So, we will not do below book equity linked financing. Everything moving up the cap stack are things that we look at consistently..

Maybe just to add to what Rob said, in our past, for example, several years ago, we did a $69 million convertible note financing, and that was successfully paid off about a year and three months ago. So, we have certainly had a track record about a year and three months ago. We also did $155 million term loan – privately placed $55 million term loan.

So, as Rob mentioned, not only do we evaluate different types of financing, but we have successfully executed different types of secured and unsecured financing.

Obviously, with this latest securitization that we did, where we achieved pricing of LIBOR plus 185, we thought again that was the most cost-effective, most efficient source of debt capital for us at this time. But what's important to know, as Rob said, we constantly evaluate all of our options.

We constantly evaluate what collateral we have available, what type of capital structure we’re looking for. We’re very mindful of course of our overall debt to equity type of ratios, all of our credit ratios. Rest assured, we will evaluate all of those capital alternatives, both on the debt side as well as on the equity side..

And then just lastly, can you give some color on the types of opportunities that you're seeing today? For example, if you are seeing an increase in refinance opportunities as opposed to acquisition financing and are you seeing more stabilized assets? And finally, if perhaps construction lending is of any interest?.

This is John Jardine. Let me begin at the end. The construction lending business, you're not going to see us really involved in construction lending. We are really – and again, I want to emphasize this, focused on cash flow lending on real assets, and not relying on interest reserves and construction loans for repayment.

So, no, that's not an area that you would expect to find us participating in.

As far as the balance of your question, are there any particular types of collateral that we’re seeing, is that what you were asking specifically?.

I guess more so the mix of refinance opportunities versus stabilized or acquisition loans?.

So, we’re seeing a fairly healthy mix of acquisitions and refinancings with a slight bias on the acquisition side. It was a little bit slow in the early part of the year as buyers and sellers were really sort of trying to discover what the appropriate pricing levels were for some of these assets.

And now, we’re seeing in our pipeline, which is significant, a slight bias to acquisition financing..

Great, thanks for taking my questions..

The next question comes from Jessica Levi-Ribner - FBR & Company. Please go ahead..

Hi, guys. Thanks so much for taking my questions.

A few have been asked and answered already, but just thinking about this year, what kind of yields are you seeing already in the first quarter? What are you expecting versus the yields on the loans rolling off?.

Well, let me begin by saying that we are finding good opportunities and accretive yields in the market today. And as you can imagine, a lot of what has been repaid has some vintage to it. But I think the yield perspective, from what we’re originating now, will be will be accretive.

And it's hard to really depict, unless Tae-Sik you have that number, exactly what those repayments will be. It’s hard to know exactly which loans are going to repay at what time. So….

So, Jessica, maybe to shed some more light on your question and I think it’s a very, very relevant question, so for 2016, obviously, with the benefit of hindsight here, we can tell you that we were a beneficiary of rising spreads, rising interest rates, so that if you look at our senior portfolio, we went from a 5.1% unlevered effective yield at the end of 2015 – and this isn’t just for the newly originated loans, but for the portfolio as a whole, that bumped up about 60 basis points, the 5.7% unlevered effective yield for the senior portfolio.

So, you can see that we had a very meaningful increase not just in the loans that were originated, but in the overall portfolio, that being a combination of loans that paid off versus loans that were originated.

I think going forward into 2017, our business plan does not forecast, our business plan does not rely upon expansion of either interest rates or spreads themselves. I can tell you, at the same time, we're not expecting a meaningful contraction in bond spreads either.

If you look at the maturity of the loans that are coming up, if you look at the loans that we have recently closed and you look at the loans that are in our pipeline, we continue to find an attractive source of opportunities where we can at least maintain the type of spreads that we have in the portfolio and maintain the kind of spreads that we believe will be rolling off.

Generally, what we find is that our borrowers aren’t refinancing our loans because they are able to save 50 basis points on spread. We find that our borrowers are paying off our loans because they have successfully met their business plan.

They have, as we said, on average increased their cash flow by approximately 15% on the loans that are paid off, and therefore, what they're really doing is they’re monetizing the value that they've created by either selling the assets or refinancing it at a longer-term basis with higher proceeds and with lower rates.

What they're generally not doing is they’re not saying, hey, we’re going to do another transitional senior loan at 50 basis points lower than where they’re borrowing at today. Again, it's more about – they’ve successfully met their business plan, they’ve increased the value and they want to monetize that value..

Okay. Fair enough. And that's really it for me. Thank you..

Great. Thanks so much, Jessica..

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

Thanks.

Just to clarify the point you were just making there, Tae-Sik, does the guidance and the expectations for covering the dividend, what are your thoughts around interest rate increases for 2017?.

Sure. So, Dough, I think as I mentioned in our so-called statements about what we expect to earn this year versus our dividend, really assumes a stable LIBOR rate today. However, I think it’s very, very important to mention, as we’ve said, is that should rates go up, should 30-day LIBOR in specific go up, we will be the net beneficiary of that.

So, while that is not built into our dividends, it is a very positive correlation for our company. So, as I mentioned, for example, if we took simply our balance sheet as of year-end 2016 and just did a simple pro forma 100 basis point increase in LIBOR, we would see about a $0.13 per annum increase in earnings per share.

So, it’s a very meaningful number, obviously. We don't count on it, but we would be the net beneficiary of rising interest rates..

And is that pretty ratable for – if you were to look at a 25-basis-point move, would it be roughly $0.03?.

Yeah. I think it’s a very linear move, if you want to call it that. One of the reasons we benefit from that is, if you look at our $155 million term loan, we have a 1% LIBOR floor. So, even though our assets will increase in yield, some of our liabilities, particularly that $155 million term loan, will not because we’re already paying at a 1% floor.

So, it’s not directly linear for that reason, but otherwise it would be relatively linear..

Got it. And then, I believe you said on the securitization, you have a two-year reinvestment period.

Can you just help me understand or help size the benefit of that, and how much you typically would see in repayments in that sort of two-year window on your existing portfolio versus kind of the three-year average life or term of a typical loan?.

Sure. And here, I think what we have found in our first two securitizations and they were materially of similar size, we found that in that first two years of the securitization that a large portion of the senior notes that we sold to third-party holders were being paid down during that two-year period. So not a 100%, but pretty close.

So, for example, our second securitization, that was a 2014 securitization. And by the end of 2016, it was fully retired. So, 100% of the senior notes that we offered again with a little bit – right around the same advance rate, 80%, was fully retired within that two-year period.

So, for us, to have this two-year reinvestment period will significantly increase the expected life of the securitization transaction. So rather than having, call it, an expected two to two-and-a-half-year life, we would expect to add on up to that two additional years..

All right, that's helpful. Thank you..

Thank you for your question, Doug..

I see no further questions. So, I will turn it back to Robert Rosen for closing remarks..

Thank you, operator. Thank you to all of you who joined our call. We’re proud of what we accomplished in 2016, proud of our dividend increase, and look forward to great accomplishments during 2017. Thank you all very much..

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 March 21, 2017 to domestic callers by dialing 1-877-344-7529 and to international callers by dialing 1-412-317-0088.

For all replays, please reference conference number 10098006. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of our website. Thank you very much for attending. You may now disconnect..