Good day and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the company's third quarter 2017 earnings results. As a reminder, this conference is being recorded on November 1, 2017. I will now turn the call over to Veronica Mendiola from Investor Relations. Please go ahead..

Thank you and good morning. Thank you all for joining us on today's conference call. I am joined today by our Chairman, Rob Rosen; our newly appointed CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; and Carl Drake and John Stilmar from Investor Relations.

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

Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties.

Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment.

These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors including those listed in its SEC filings.

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

Good morning to everyone and thanks for joining us. I'm pleased to announce that our Board of Directors has promoted Jamie Henderson to Chief Executive Officer and elected him as a Director.

Since joining ACRE earlier this year as our President and Chief Investment Officer, Jamie has demonstrated tremendous leadership and a thoughtful vision for our business. Jamie has brought a fresh perspective to our strategy and growth initiatives.

We believe that he will be instrumental in expanding our originations and streamlining certain processes which we expect will further diversify our portfolio and make our business more efficient.

This promotion reflects the confidence that the Board has in Jamie's leadership and our view that he is the right executive to create consistent growth and significant future value creation for ACRE shareholders.

As part of the organizational changes, John Jardine will remain in a key origination position and has been named Vice Chairman and Head of National Accounts for Real Estate Debt within the Ares Real Estate Group.

In this capacity, John will be able to focus all of his time directly on new loan originations, and he will specifically look to further develop and expand our relationships with national accounts, sponsors and intermediaries.

Although, I am stepping down from my position as interim co-CEO, I will remain Chairman of ACRE's Board and I will continue to help set the strategic direction of the company. As you will hear from Jamie and our CFO, Tae-Sik Yoon, today, we are very confident in the future direction of our company.

Our business is performing well, we have a strong balance sheet and we are well positioned for future earnings growth. With that, I will turn it over to Jamie to discuss this quarter's results..

Thank you, Rob. I appreciate those comments and I look forward to working with you, John and the entire team to lead the company and execute on the growth opportunities that lie ahead. Now, let me start with some high level comments on our third quarter results.

We generated strong third quarter earnings as we benefited from new investment activity and significant income from fees that we strategically build into our loans.

As Tae-Sik will discuss, we continue to possess significant dry powder, which means that we haven't yet fully realized our earnings potential through the investment of our available capital.

We remain focused on deploying this capital in an accretive manner that will generate additional recurring earnings, and we continuously look for new ways to lower our cost of capital or source accretive new capital.

Turning to the market, real estate fundamentals remain positive amid solid GDP growth, employment gains, steady rent growth and significant equity capital supporting asset values. New supply is generally in check and leverage to providers remain disciplined.

The market remains competitive, particularly on pricing, but we are focused on picking our spots where we can leverage our national origination capabilities, sponsor relationships, flexibility and the broader Ares platform to source and underwrite the best risk-adjusted deals.

As our third quarter indicates, we remain highly selective, closing three new loan commitments totaling $85 million, including two loans secured by multifamily properties and one student housing loan.

Including these loans, our total loan production year-to-date is $540 million, with the vast majority in senior floating-rate loans across a variety of underlying asset types. While our originations for the third quarter were lower than anticipated, we expect a significant pickup in activity later in the fourth quarter.

Based upon a large number of loans in the most advanced stages within our pipeline, we believe we could close out the year with 2017 originations exceeding last year's. But, as is typical in the lending business, the timing of loan closings can slip or not close for any number of reasons.

As real estate investment managers, our role is to continuously look for inefficiencies and search for the best relative value in the market.

While we expect senior value add loans to continue to be our core area of focus, Ares is making significant new investment in building best-in-class teams and in the people in the infrastructure to further broaden our product capabilities and geographic market coverage. Let me walk you through some of the recent changes that we're working on.

First, we have hired several new senior professionals in various capacities that will invest in a broader array of market segments. For example, Ares' Structured Products Group has added two new senior portfolio managers to pursue B-piece opportunities.

In addition, we have recently made two new senior hires to further enhance our existing value add in construction lending capabilities. In each case, we believe that these will present new investment opportunities with higher potential risk-adjusted returns that could be appropriate for ACRE's investment portfolio.

Secondly, we are refining and adding to our origination staffing to meaningfully increase the number of individuals specifically focused on originations and to expand market coverage geographically in under penetrated segments.

As a result of these enhancements, we are already seeing progress with a larger and broader pipeline including a more diverse group of investment opportunities ranging the spectrum of risk adjusted returns.

Regarding the remainder of 2017, significant repayment activity at the end of the third quarter temporarily reduced our earning assets, reducing our run rate earnings at the beginning of the fourth quarter.

However, we are confident that our full year earnings from operations will meet or modestly exceed our dividends on a full year basis, which would mark the third year in a row where earnings from operations have covered our dividends.

Furthermore, given the depth of our investment pipeline and the expected pickup in anticipated origination activity later in the fourth quarter, we expect our quarterly run rate earning levels to improve as we head into 2018. Finally, our Board declared a fourth quarter dividend of $0.27 per share, consistent with our third quarter dividend.

Now let me turn the call over to Tae-Sik to discuss our financial results in more detail..

Great. Thank you, Jamie. This morning we reported net income of $11.1 million or $0.39 per common share for the third quarter of 2017. For the nine months ended September 30, 2017, we generated net income of $24.2 million or $0.85 per common share, and this compares to dividends paid through the third quarter of 2017 of $0.81 per common share.

Our strong earnings in the third quarter were primarily driven by an increase in our net investment activities where our average unpaid principal balance of loans held for investment during the third quarter was $1.61 billion versus $1.42 billion for the second quarter of 2017, which represents an increase of approximately $190 million.

In addition, in the third quarter we recognized the benefits of fees and other revenue items that we purposely build into our loans to maximize returns and mitigate the impact of prepayments as well as repayments at maturity.

For example, on one loan that was repaid in the third quarter, we received more than $1.2 million in exit fees that were not previously recognized due to contingencies that were only met when the loan paid off.

Another example is that we had three loans pay off in the third quarter prior to their respective maturity dates that in the aggregate resulted in us accelerating the recognition of more than $900,000 in remaining deferred fees. Combined, these examples resulted in more than $2.1 million in earnings or approximately $0.07 per common share.

While these types of fees and other revenue items don't occur on a regular quarter-to-quarter basis and are less predictable, particularly with respect to timing, as an investor and manager we do our best to maximize overall returns on our loans, even if the recognition of such revenues are not smooth and do not occur on a regular recurring basis.

Therefore, as we have said in the past, we encourage our shareholders to look at our results on an annual basis, not quarter-by-quarter, since the timing of when we close new loans, the timing when we get paid back on existing loans and the timing of when we recognize fees and other revenue items may not be as predictable in shorter time frames.

Overall, our investment portfolio has continued to perform well, with stable yields and no impairment charges since inception.

However, as a transitional real estate lender, we do expect delinquencies or defaults to occur from time to time, and accordingly, we diligently underwrite our loans, structure our loans and asset manage our loans with these risks in mind.

As outlined in our 10-Q filing this morning, we had two senior loans to affiliates of the same sponsor where an event of default occurred in mid-September. The first loan involves a payment default of $37 million plus release premiums, and the second loan involves a similar payment default of $12.1 million plus release premiums.

Both senior loans are backed by a cross-collateralized pool of primarily self-storage properties as well as in the aggregate three commercial properties.

More specifically, the first senior loan has a total unpaid principal balance of $159.2 million and is backed by 36 self-storage properties located in seven states as well as two commercial properties located in major metropolitan markets.

The second senior loan has a total unpaid principal balance of $82.3 million and is backed by 12 self-storage assets as well as a single commercial property.

The payment default for both senior loans is primarily due to the respective borrowers not meeting the scheduled repayment dates for the three commercial properties of mid-September 2017, again totaling $37 million plus release premiums for the first senior loan and $12.1 million plus release premiums for the second senior loan.

Both senior loans overall have a maturity date of October in 2018. We have evaluated both senior loans for impairment and have concluded that no charge or reserve is necessary as of the end of the third quarter.

Our conclusion is primarily based on our estimates of value of the collateral properties, applicable reserves, cash flows being generated by the properties and applicable partial repayment guarantees, among others.

We believe that the manner in which we structured these loans to protect our interests including, for example, cross-collateralization of properties, cash flow traps, reserves and partial personal repayment guarantees highlights our rigorous underwriting and structuring processes.

In addition, both senior loans remain current on payment of regular interest as of September 30, 2017, and neither senior loan has been placed on nonaccrual status. Now let me turn back to our aggregate portfolio statistics.

We remain well positioned to benefit from rising short term interest rates, as our portfolio continues to be invested predominantly in senior floating rate loans. As of September 30, 2017, 98% of our portfolio as measured by unpaid principal balance was comprised of floating rate loans, all indexed to one month U.S. LIBOR.

And as an important part of our match funding strategy, 100% of our liabilities are also floating rate, again indexed to one month U.S. LIBOR. As both our assets and liabilities are floating rate, we remain positively positioned for an increase in our earnings in a rising short term interest rate environment.

For example, using our third quarter 2017 portfolio and results on a pro forma basis, we estimate that a hypothetical 100-basis-point increase in one month U.S. LIBOR would have resulted in approximately $0.14 in additional earnings per common share on an annualized basis.

We continue to look for ways to reduce our funding costs and to better manage our balance sheet to support future earnings growth. For example, during the third quarter we amended our MetLife facility to modestly decrease the interest rate to LIBOR plus 2.3% and to extend the initial maturity date.

And since the end of the third quarter, we also amended our existing $125 million facility with Bank of America, decreasing the rate from LIBOR plus 225 to LIBOR plus 200. In addition, we continue to focus on match-funding our assets and liabilities.

As of September 30, 2017 with a weighted average remaining term of three years on our funding facilities including extensions, this matches or exceeds the approximate two year average remaining life of our aggregate loans held for investment.

At quarter end, our balance sheet was moderately leveraged at 2.7 times debt-to-equity, below our target of approximately 3 times debt-to-equity.

As of October 31, 2017, we had $180 million net of reserves in either cash or in undrawn capacity expected to be available under our funding facilities to fund new loans in our pipeline, to fund outstanding commitments under our existing loans and for other general corporate and working capital purposes.

Our buying power from this available liquidity is approximately $630 million of senior loans, assuming a hypothetical 2.5 time debt-to-equity leverage ratio under our funding facilities. Turning to repayment activity, as Jamie outlined, we saw an increase in repayments totaling $182 million in the third quarter of 2017.

And so far in the fourth quarter, we have received approximately $76 million of repayments.

Overall, these repayments totaling nearly $260 million will temporarily depress earnings for the fourth quarter, particularly when combined with the timing of our fourth quarter new loan production, which we expect to occur primarily in the last 45 days of the year.

That said, based on our current pipeline, we believe that we will end the year in a strong position, holding a level of income-generating investments that will allow us to improve our earnings in 2018. With that, I will now turn the call back over to Jamie for some closing remarks..

Thank you, Tae-Sik. In closing, we remain confident in all aspects of our business and our ability to generate higher earnings as we deploy our available capital accretively.

In an effort to generate attractive risk adjusted returns, we are making meaningful new investments in people and infrastructure to broaden the scope of our product offerings and to enhance our origination capabilities.

As we navigate the investment landscape, we will maintain our rigorous and institutionalized diligence process and remain highly selective, with a continued focus on high-quality properties and strong credit quality. Thank you, everyone, for your time, support and interest in ACRE.

With that, operator, could we please open the line for questions?.

Certainly, Mr. Henderson. [Operator Instructions] Your first question this morning will be from Steve Delaney of JMP Securities. Please go ahead..

Thanks, good morning everyone and congratulations on the quarter and also the changes in the C-suite. I think the comments on diversification and better alignment or utilization of the Ares platform -- they strike me as definitely as fresh and something that we haven't heard a lot about coming from ACRE over the last couple of years.

Jamie, you mentioned a couple of products but I’m -- and new individuals joining Ares.

I wondered if you could just step back and maybe expand the scope, say over the last six months of how many people have come onto the platform, maybe a little bit about their specific skill sets and kind of flush [ph] out the additional asset types that we might see coming on your balance sheet in the next couple of quarters. Thank you..

Yes, I'd be happy to. Thank you very much, Steve. So I'll take that in two parts, and part one is how do we utilize the power of the Ares platform to make good investments and in particular to source deals that other folks may not see. First and foremost, Ares has a very significant credit business and also a very significant value add equity business.

We see deal flow all the time coming from other parts of the firm, and that's just inbound traffic based on relationships that the rest of the firm has. And our equity side of the house has great networks, great relationships and a tremendous value-add and opportunistic track record. So they see deals and routinely send them our way.

For example, if they're making a run at a deal that they don't win and it looks like an opportunity for us to place some debt, they can immediately toggle that deal into an inbound for us to look at.

With regards to the number of people that we've added and their skill sets, we've recently added a very senior portfolio manager in the Structured Products Group whose career is focused on CMBS B-piece investment..

Jamie, is that the gentleman that came over from Annaly Capital that was announced in early September?.

No, but it is in conjunction with that. So Precilla Torres, who you may recall was previously our Head of Capital Markets. So the gentleman you are referring to is Sumit. He came over from Annaly, replaced Precilla as Head of Capital Markets in the Ares Debt Group, and Precilla moved over to the Structured Products Group.

In addition to Precilla, we hired Julie Mannack, who's been in the industry for a long time. So now we have 2 very senior portfolio managers in the Structured Products Group that are focused on CMBS and, in particular, B-pieces..

Got it..

In addition to those folks, we've started to add origination capabilities, both geographically and skill set-wise. So we've added two new individuals. Both have significant construction lending backgrounds. One is focused primarily on asset management and one is focused on originations.

We have several open reqs in various parts of the country where our historic production hasn't been up to kind of what I would say is full volume. So stand by for more origination adds..

Excellent. That's very helpful. And so at 9/30, you've always discussed the fact that you had the flexibility to do subordinate loans, preferred equity in addition to senior, some of which is a function of just holding a B-note in terms of the structuring -- financing process.

But is this something that the 96% of senior floating-rate loans at September 30, if we look out to next year, should we expect that to decline materially, or will it be a more gradual process as far as the diversification of the portfolio? Thanks..

So that's a great question. I think that's a daily relative value exercise, Steve. I wouldn't take a stand right now and say that a year from now, our portfolio will be 30% X, Y or Z. I think what we're saying is Ares is making significant investment in new people and new capabilities.

And as we see accretive relative value amongst those asset classes, we will add those to the portfolio, but only to the extent that they're accretive vis-a-vis our traditional core business, which is value add lending..

Got it. Well thank you Jamie for the comments. They are helpful..

Great. Thank you, Steve..

The next questions will come from Jessica Levi-Ribner of FBR. Please go ahead..

Hi, thanks for taking my question. A follow-up on Steve's question about the construction loans.

Can you talk a little bit about what kind of yields you're seeing in the construction space and maybe size that opportunity for us?.

Sure, I'd be happy to. So we see construction lending as one of the more dislocated parts of the capital markets. That's really a function of two things. The first, as many of you know, the Basel III accords have put a heavy capital charge on construction loans, and the banks have really scaled back.

And in essence there's a gap in the capital stack because the banks, in many cases, aren't getting to historical proceeds levels. So let's say pre-Basel III, banks might be getting up to 70% or 75% of the stack. Now we see banks routinely stopping at 50% or 55% of the stack.

That leaves a really attractive tranche available to groups like Ares, where we could put a mezz piece or piece of pref that sits between, say, 55 or 60 up to 75 or 80. We're seeing really strong sponsors, really attractive deals and a nice, thick part of the capital stack available to us.

And that, depending on the asset class those returns could be anywhere from, say, 10% to 15%..

And Ms.

Levi-Ribner, do you have a follow-up question?.

I do. Sorry about that; I think I cut out.

So in terms of the 10% to 15% returns and then just turning quickly to your capital on hand, how long -- how many quarters does that kind of hold you over? And then as you look at originations today are there any, both on the first mortgage or mezz or even construction lending, is there anything that you're relatively more cautious on versus last quarter?.

Jessica, this is Tae-Sik. Maybe I'll handle the first part of your question about capital availability and how many quarters does that provide us runway to. So as we mentioned, as of month end October, we had significant liquidity, $190 million in total.

So again holding in reserve some amount, we have total buying power, if you want to call it on a levered basis of about $630 million. That is obviously a significant runway that we have. In addition, we will always have repayments coming due and prepayments that come earlier than the maturity date. That is part of our normal recurring business.

So right now we feel like, based upon our pipeline and based upon our liquidity and based upon our forecast of repayment, we feel very good that we're in a very good balance actually looking forward in terms of our investment activity and our liquidity.

Sometimes those are -- those are sometimes two things that are very difficult to balance, but right now we feel very good, in fact, about meeting our production goals as well as having liquidity as well as having some capital returned to us in terms of repayments.

So not to give you a specific quarter, but again we have $630 million of buying power right now, and we think we have good liquidity to last us for the foreseeable future in terms of funding our pipeline..

And Jessica, I'll take the other -- I think I heard two other questions nested in there. What are we cautious about? I think we're fairly conservative in the way we view the business.

With regard to specific asset classes where we add an extra layer of caution, and I think hospitality in certain markets, you know the prices are fairly high, so that makes you pay attention. And obviously, retail. There's a huge amount of turbulence in the retail space.

So we're cautious, but we're also looking very carefully because we see a large chunk of the lending community just throwing the baby out with the bathwater, and we are looking at retail deals on a very selective, case-by-case basis.

And I think the second part of your question was inside our pipeline, are there other types of deals that we're looking at? I will say yes. We've been bidding on -- we've historically reviewed many types of investments including the strategies that I just articulated.

And we bid on a -- throughout the course since I've been here, bid on a number of very attractive construction loans. And I think if -- we'll continue to do so..

Okay. Thank you. That’s it from me..

Thank you, Jessica..

The next question will come from Rick Shane of JPMorgan. Please go ahead..

Hey, guys. Thanks for taking my questions. I have a couple specific things. I'd like to talk about the loans that are in default. I'm curious whether or not those loans, those three specific properties can be refinanced outside of the cross-collateralization.

And given how strong the market is for refinance activity, perhaps why that hasn't happened and what's going on with those properties?.

Sure. Rick, this is Tae-Sik. Thanks for your question. So our loan does provide for releases of those three commercial assets. As we mentioned, there are two in the first senior loan and on in the second senior loan.

And our loan documents do provide for a release of those individual properties, as we mentioned, along with some release premiums, so they are eligible to be released from our cross-collateralized pool for either a refinancing or for a sales scenario.

I can't really comment on why that hasn't been done, as you can imagine, but our loan documents definitely provide for individual releases of those three commercial assets..

How are those 3 properties doing versus plan?.

Again, I think it's a good question. I think it's important to recognize that what we built into this loan is that it is a cross-collateralized pool of loans, and so we get the benefits of one type of asset outperforming some others maybe underperforming.

We've built in cash traps, we've built in repayment guarantees, so we really evaluate the loan holistically because that is how we structured the loan, that is how we have managed the loans and that is how we have built in the protections, as we talked about, for the loans.

As we mentioned, based on our analysis, we don't see an impairment charge that needs to be recognized as of the third quarter. And beyond that, again, I think it's just time, just given the circumstance that we don't feel it's appropriate to go into further details on anything specific..

Okay, got it. And also I'd like to talk a little bit about some of the hires and the evolution into the B-piece strategy. Buying B-pieces is a different business and I am curious. Look, you guys individually underwrite every loan that you make. When you buy B-pieces, you own a pool of different loans.

I am curious what the underwriting practices are going to be there. It's a business that we're familiar with from the past, and there have been different strategies in terms of how to underwrite that.

What level of due diligence are you going to do at a property level?.

So just for clarity, Ares is entering that business. That will be housed inside our Structured Credit Group. However, that will make those product types available to ACRE if we so elect. Now, I can assure you that everything we do is done with a very high degree of rigor with regards to credit, analytics and underwriting and surveillance.

So part of the reason we haven't done this to-date, even though we've looked at a bunch of transactions and we could have if we had so elected. We didn't have the people or the process in place at that moment in time. And now that with these new hires and some infrastructure, we feel that the firm is ready or almost ready to do it.

And if those deals meet Ares Real Estate Group's criterion for underwriting and credit quality, then we may elect to invest in them..

Got it, okay. And when we think about the two big expense items besides interest expense are management fees, which this should not impact, but there is a separate G&A item. I'm curious if we should expect any increase in G&A associated with this additional staffing at the Ares level and the due diligence associated potentially with the B-pieces.

How will that work going forward?.

Sure. That's a good question, Rick, and I'm glad you raised it. So you're absolutely right on the first part, which is we get a management fee based upon our shareholder equity.

So any incremental compensation expense, any change to that compensation expense, is really the responsibility of the management company, not of ACRE, so you won't see any change in management fees, nor will you see compensation expense come through to ACRE. As far as G&A, again, I don't expect any material change to our G&A expense.

I think you're probably referring to significant dollars that a B-piece buyer expends upfront underwriting the collateral. We certainly, as Jamie mentioned, would expect to do a full underwriting of the collateral in underwriting a B-piece investment. But again, I don't expect that to be a material impact to our historical G&A numbers..

So is the way to think of it, then, is that will occur at the investment company level and then some of those costs will be passed back on sort of a cost basis to the mortgage rate?.

That's right. And again, for deals that get done, transaction expenses that would not be covered by the borrower, for example, would be included in the cost basis of the loan itself. And so you really wouldn't even see that coming through G&A. I think you'll see that as part of the overall yield of the loan itself..

Got it. Okay. That’s helpful. Thank you, guys..

Sure. Thanks for your questions, Rick..

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

Thanks very much. I just wanted to see if you could comment on the lower originations in the quarter and whether you lost a lot of deals due to increased competition in the market..

Sure, thank you, Jade. So Q3 was slow. It was certainly off the pace that we had hoped, but I think on a full-year basis, we're feeling really good. The pipeline is very strong, with a significant number of deals in the very late stages of being signed up and closed. So I would call it a little blip. Summertime's tough.

Sometimes deals slide for a whole bunch of reasons. It is competitive, but I would come back to the fact that on a full-year run rate basis, we feel really good and feel very good about the status of our pipeline right now..

But I guess, did your win rate decline relative to past history?.

I don't think so. I would say that there was some reasonably aggressive pricing that occurred in Q3 and there were a number of deals where we elected not to pursue. I feel that that trend has really stabilized and we're starting -- I think the market has settled out and settled out in a fashion that we feel comfortable with..

And in terms of competition in some other sectors, the leveraged loan space, for example, we have seen some concessions from lenders on covenants and deal structure, as well as leverage.

Is any of that taking place, or did any of that take place in the third quarter?.

So here's the good news. The bad news is that there was pricing pressure in the industry. The good news is for the most part, the capital markets have been very disciplined.

The lenders as a group have been very disciplined, and we're not seeing much, if any, of the kind of degradation in terms and structures or abuse of leverage that we saw kind of pre-downturn..

Okay.

Just wanted to ask some follow-ups on the loans in default, I guess if nothing happens between now and when you -- and year end, will you book interest income on these loans in the fourth quarter? I know they're currently on non-accrual status, but will you book interest income if the status doesn't change and they're still in default by year end?.

So Jade, I think, again, it's a hypothetical question. And again, I think assuming that, as you say, nothing changes, then I would expect for our recognition not to change as well. I think that's your question. Obviously, if the circumstance changes, we will have to evaluate that question.

But yes, if nothing changes, then I don't expect our revenue recognition to be any different..

Okay. It would seem odd to me to recognize revenues on loans that are currently in default.

Just can you give any color on your recent dialogue with the borrower and give a status update? Not a financial update, but a status update as of October 31, since a month has passed since -- or I guess over a month -- you said the loans were due mid-September?.

Yes, the loans were due mid-September, but again, the information that we have about the operations of the property really are as of September 30th, and we made our assessment and determination as of September 30.

Right now it's November 1st, so a month has gone by and we do not have any material updates to the performance of the properties at this point..

But you've been in dialogue with the borrower?.

We have been in dialogue with the borrower, yes..

And can you say whether the borrower has cured the default by making the required maturity repayments?.

No. As we mentioned, again, this is a continuing situation. And again, I want to make sure we distinguish here that the payment default that we're talking about is the fact that the borrower did not pay the principal and release premiums that were due in mid-September.

However, the interest on the loan was current as of -- or is current as of September 30, 2017. So again, I just want to make sure, in light of your first question, that you understand that distinction..

Got it..

Yes. So again, interest is fully current as of September 30, 2017. What's not current was the principal and release payments that were due mid-September..

Okay.

And so can you give any color on the borrower's rationale for making interest payments but not the required principal and release payments? Is the borrower looking for some kind of concessions or a modification to the loan? Or is there any other color you can give? And the reason I ask these questions is because these two loans are your largest loans and it's to the same borrower..

Yes. No, I understand your question. Again, I just want to emphasize that the payment default here, the principal payment default here, is that $37 million plus release premium on the first loan, $12.1 million plus release premium on the second loan. Again, these are cross-collateralized pools and these have partial repayment guarantees.

We've built in other protection mechanisms. We've done our full assessment -- our impairment analysis. But unfortunately, again, at this time I think, just given the circumstance, that we just don't feel it's appropriate to go into further details about the dialogue or the specifics of the situation..

And are there any implications from a liability perspective in terms of the credit facilities that are financing this cross-collateralized pool?.

Sure. So, we have been working with our lenders. They have been terrific. We have had long-term relationships with the lenders, and we continue to keep them up to date, we continue to work with them. But again, I don't think it's appropriate to go into any further details at this time..

But as a result of this was there any mark-to-market payments that you had to make?.

Again, Jade, I think, just given the circumstance, it's probably inappropriate for me to get into the details. I think if you look at our financial statements, our balances quarter-to-quarter, I think you'll get some sense of what those balances are. But again, I don't want to get into any specifics..

Okay.

And just lastly, are there any other loans that you view as near-term credit risks that we should be aware of?.

No. Jay, this is Jamie. We go through rigorous and continuous evaluation of our loans and the portfolio is in great shape. And I just want to reemphasize with regards to these two loans, they are paying interest, property operations are sufficient to pay interest and to continue paying interest, and we've rigorously analyzed these.

And due to a variety of factors and structures, we've come to the strong conclusion that no impairment is necessary..

Okay.

And just lastly with respect to the level of prepayments in the third quarter, was any of that a function of the robust liquidity in the debt capital markets, or were those repayments in line with your expectation? And should we expect a similar elevated level in the fourth quarter?.

Again, just to put it into broader context, I think we've always said that our prepayments for 2017 won't be materially lower than what we experienced in 2016, and we're definitely tracking towards that again. The first half of the year, we had very minimal repayments.

The $182 million that we had in the third quarter was probably the largest quarter of the year by a pretty wide margin. And of the loans that repaid in the third quarter, as I mentioned, I highlighted as an example, three loans that did pay prior to their maturities, which resulted in approximately $900,000 recognition of deferred fees.

So that gives you an idea of some amount of prepayment activity that occurred prior to the stated maturity dates..

And what was the balance of those three loans, roughly?.

Sure. One second. The balance of those three loans in total was about $39 million, $31 million and $56 million..

Okay. And just looking at your 10-Q, I think there's scheduled maturities of about $112 million in the fourth quarter.

Would you anticipate at least one or two loans not scheduled to repay having early repayment?.

Again, as I mentioned, we've already had $76 million of repayments in the fourth quarter, and as we've always talked about in terms of repayments, these are very episodic. We have very individual loan-by-loan analysis. So our business is, as a transitional senior lender, that we will have shorter-term maturities.

And early repayments, frankly, are a sign of early success of the business plans that our sponsors and borrowers undergo. So again, while they do have a temporary depression of earnings, we think it's a very healthy sign that our loans are repaying and prepaying in some cases..

Jade, just one slight observation to build upon that is LIBOR has increased significantly over the course of the last year and it's likely, in our opinion, to continue to increase.

So even though spreads have come in, LIBOR has gone out, so kind of the total coupon on these deals isn't sufficient to induce a borrower, in most cases, to go through the brain damage of a refi kind of halfway through the business plan execution..

That's a helpful comment.

The $76 million -- was any of that unscheduled?.

So far, no..

Okay. Great. Thanks so much for the questions..

Great. Thank you, Jade..

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

Thanks.

Most of my questions have been answered, but just asking the prepayment question in a slightly different way, if we were to look at the first nine months of the year, is that kind of representative of prepayment activity that you would expect kind of over the course of a year, or do you think that's kind of elevated relative to what you would expect over the next 12 months?.

Sure. Ken [ph], I think again, as I mentioned, quarter-to-quarter it's very episodic. It's going to be lumpy, it's going to be very loan-by-loan.

I think, frankly, maybe the more general viewpoint is if you look at our portfolio of, call it $1.6 billion to $1.7 billion of loans and there's an average life of two to 2.5 years, I think you'd get a sense of what we would expect to have mature in any sort of average year or any given average quarter.

And I think that's probably your best indication of, again, longer term, what we expect in terms of repayments, either at maturity or prepayments prior to maturity. To try to estimate this quarter-by-quarter or even some other period is generally pretty challenging -- not for us.

Again, we're very actively involved in looking at our portfolio, communicating with our borrowers, seeing where they are in our business plans and therefore estimating when we expect prepayments.

But on a quarter-to-quarter basis, again as an individual loan-by-loan analysis, it's not a statistical analysis where we would have 2,000 loans and statistically, you have a pretty good sense of when loans prepay or repay. Here we have 36 loans as of 9/30 and we evaluate those loans on an individual basis..

So if I could build upon that, we're not really seeing any unusual trends or a spike in activity. It just -- I would say it's business in the ordinary course of being a floating-rate lender..

Okay. Make sense. Thank you..

Thanks, Doug..

The next question will come from Ken Bruce of Bank of America-Merrill Lynch. Please go ahead..

Thank you and good morning gentlemen. I had a couple of questions. I think we've kind of discussed prepays and originations and default enough. But I'd like to -- I find the shift in strategy or potential shift in strategy interesting.

I guess, as you've been kind of advertising for years, kind of self-origination of transitional, value-add transitional loans in the commercial real estate space and, obviously, moving into B-pieces as a tangent is related, but obviously takes on a little bit of a slightly different exposure.

So I guess I'm interested in why you are feeling the need to pursue that. And then maybe if Rob's still on the line, why now is the right time to do that, and Jamie, congratulations on your promotion..

Thanks much, Bruce. So I'll take the first part of it, is it's really kind of central tenets of the way Ares invests is we have to be good at it, and we have to have the people and the process and the infrastructure to be good at it.

So I wouldn't suggest that we hadn't done it in the past for any particular reason and right now is this moment in time where the relative value is materially different than it was previously. I will say now we're equipped to do it, where previously we weren't equipped to do it. So it doesn't mean we're going to do it.

It means we now have the people and the process and the infrastructure in place to make this type of investment. And we will evaluate them as we previously have. We've evaluated a bunch of these deals in depth, and we've used our field originators to really kick the tires on the assets in the pool.

But we didn't feel like we were ready, from a people or process or an infrastructure standpoint, so we didn't do it. Going forward, Ares has made the investment to be in a position to make this type of investment with conviction..

Yes, this is Rob. From my point of view, organizations evolve based on capabilities. And I think what you, I hope, will feel comfortable with along with all of our shareholders is that ACRE remains a credit-first shop.

Ares is a credit organization and we won't haphazardly go into business verticals where we don't have a real capability of evaluating, underwriting and pricing an asset appropriately.

And I think that Jamie's arrival along with the addition of several people has given us a clear opportunity to expand the center part of the bell curve to include asset classes that we should be looking at, we should opportunistically take advantage of and we should add them to the ACRE balance sheet where returns, risk and underwriting suggest that it's in the best interests of our shareholders.

But it's all about the evolution of an organization and the evolution of its leadership giving the Board comfort that this is the right thing to do..

Okay. Well, that really was my only questions. Thank you very much you comments this morning. And we’ll talk you soon. Thank you..

Thank you..

Thank you, Ken..

Ladies and gentlemen, the conference has concluded. The question-and-answer session has concluded. I would like to turn the conference back over to Jamie Henderson for his closing remarks..

We have no further comments regarding our next quarter, and thank you all for your time today and your continued support of ACRE. And we look forward to our next call in a few months..

Thank you. Ladies and gentlemen, this concludes the conference call for today. If you missed any part of today's call, an archived replay of this conference will be available approximately one hour after the end of this call through November 14, 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 10112894. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of our website. The conference has now concluded. Thank you for attending today's presentation. At this time you may disconnect your lines..