Welcome to Ares Commercial Real Estate Corporation’s Fourth Quarter and Year Ended December 31, 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday February 21, 2019. I will now turn the call over to Veronica Mayer from Investor Relations..

Thank you, Allison. Good morning and thank you for joining us on today's conference call. I’m joined today by our CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; Carl Drake and other members of Investor Relations.

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.

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

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

Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures.

We use these as measures of operating performance and these measures should not be considered in isolation from, or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to like titled measures used by other companies.

I will now turn the call over to Jamie Henderson, who will begin with our fourth quarter and full year 2018 highlights..

Thank you, Veronica. Good morning everyone. And thanks for joining our call today. I would like to start the call today by recapping some 2018 highlights for our business, including a review of the initiatives that we put in place to enhance our profitability.

I will then discuss our 2019 outlook and address the latest increase to our quarterly dividend. As you can see from our earnings release this morning, we closed 2018 on a very high note, with $0.35 and $0.38 of GAAP and core earnings per share respectively.

This capped off a great year for ACRE with GAAP earnings of $1.35 per share and record core earnings of $1.43 per share up 27% from 2017. Additionally, our return on equity from core earnings increased to approximately 9.7% for 2018 from 7.7% for 2017.

Our strong quarterly, and annual earnings are the result of very deliberate steps that we took over the course of the year to achieve a higher and more sustainable level of earnings, including improving our deal sourcing and operational capabilities, continuing our rigorous credit processes with a portfolio comprised almost entirely of senior loans and further reducing the borrowing spreads and our liabilities.

I’m going to spend a little time discussing each of these efforts. Early in 2018, we set out to enhance origination capabilities in order to broaden our investment scope. We also focused on further aligning ACRE with a broader Ares management platform and our U.S. real estate private equity business in particular.

As a result of these enhancements, the number of opportunities that we evaluated more than doubled with over 1000 potential transactions reviewed in 2018. The growth in our pipeline of opportunities enabled us to remain highly selective closing less than 5% of the transactions we reviewed.

By expanding our origination capabilities and broadening our investment scope, we’re able to improve the average amount of capital deployed throughout the year, which helped drive higher profits. For example, we held about 12% more in average earning assets during 2018 as compared to 2017.

As you may recall, we also announced that Ares management recently close a $200 million real estate debt warehousing vehicle that will hold Ares originated real estate loans.

Going forward, we believe that this warehouse provides us with the ability to better match the timing of our repayments with new loan originations and will further enhance our ability to remain more fully invested.

We also focused on positioning our portfolio to benefit from market conditions, with approximately 99% of our portfolio and floating rate loans at the beginning of the year. We benefited throughout the year as our weighted average on levered effective yield increased from 6.3% at the end of 2017 to 7.1% at the end of 2018.

Finally, we continue to reduce the borrowing spread on our liabilities. During 2018, we renewed or extended over 900 million of revolving facilities with similar or improved financing terms.

In 2019, we continue to enhance the efficiency of our financing sources by expanding the size of our existing securitization to $445.6 million and reducing the initial borrowings spread.

Turning to recent investment activity, despite the capital market volatility that began in Q4, commercial real estate fundamentals remain stable in our view with continued strength and rental growth, occupancy rates and transaction volumes amongst other factors.

In the fourth quarter, we originated 182 million of new commitments in six senior loans and one subordinate loan across multi-family office and residential condo sectors. These loans were also geographically diversified across six different markets. For all of 2018, we originated 609 million in new commitments across 18 loans in 24 different markets.

Year-to-date, we have closed over 130 million of new commitments and we have a strong and building pipeline of investment opportunities that we expect will enable us to be nearly fully invested within the next 30 days.

As we look forward, we believe that ACRE is well-positioned with a stable, primarily senior oriented portfolio and we see levers in place for driving additional earnings upside potential for ACRE.

We remain laser focused on further optimizing the returns from our capital base by increasing the average amount of capital deployed in loans throughout the year. In particular, we believe that the availability of the Ares warehouse is a significant competitive advantage to allow us to be more fully deployed and drive higher earnings.

Given our confidence in the stability of our earnings, and the further upside potential generated from the strategic initiatives that we have discussed, we have declared a first quarter 2019 dividend of $0.33 per share.

Since the beginning of 2018, we’ve now declared for dividend increases totaling $0.06 per share for our fourth quarter 2017 dividend. We have also fully covered our dividends from core earnings by more than 120%. I will now turn the call over to Tae-Sik to discuss our fourth quarter and full year results in further detail..

Thank you, Jamie and good morning everybody. This morning we've reported GAAP net income of $10 million or $0.35 per share and core earnings of $10.9 million or $0.38 per share for the fourth quarter of 2018. For full year 2018, we reported GAAP earnings of $38.6 million or $1.35 per share and core earnings of $40.8 million or $1.43 per share.

During the fourth quarter, we continue to benefit from a higher amount of our capital put to work in investments, from rising short term interest rates and from further reduced borrowing spreads.

We also received additional interest income that was specifically built in, in connection with the repayment of certain loans that I will cover a little bit more detail.

On the dividend front, in 2018, we paid an annual dividend of $1.16 per share and as you just heard, declared a $0.33 dividend for the first quarter of 2019, which represents an attractive 9.4% annualized dividend yield based on yesterday's closing price of $14 03 per share.

This is also the third consecutive year that we have fully covered our dividend from core earnings. As expected, we experienced a greater than average level repayments during 2018 totaling $747 million. This included the repayment of two loans totaling approximately $199 million at the end of November comprised mostly of self-storage properties.

As part of the repayment process, we've purposely built in and received additional interest income during the quarter, amounting to approximately $0.04 per common share in the fourth quarter of 2018. During 2018, we continue to improve our borrowing spreads on our debt facilities.

We renewed or extended over 900 million of bank facilities all with similar or improved terms. At the same time, we continue to match fund our assets and liabilities, where our liabilities have longer maturities than our assets.

For example, as of December 31st 2018, we had a weighted average remaining term of four years on our funding facilities, including extensions. This exceeds the approximate two year average remaining life of our aggregate loans held for investment.

A few weeks ago in early January, we announced that we upsized, refinanced and extended the investment period of our existing $272.9 million privately placed securitization. Together with the investment grade notes issued in March 2017, the securitization now totals 445.6 million in senior notes held by third parties.

This transaction further strengthens our balance sheet and supports a higher level of earnings by reducing our overall borrowings spread and providing a more efficient match funded non-recourse source of financing.

By using the capabilities of Ares management to structure and execute the transaction internally, we are able to significantly save on costs with no placement or structuring fees. Our relationship with a single, high quality investor allowed us to privately place this transaction, reducing market risk, and achieving better terms.

We are also able to extend the reinvestment period by an additional two years, giving us the ability to replace, repaid loans in the pool rather than using proceeds to repay the loans upon maturity.

We also improved our borrowing spread as newly issued notes now have a blended, initial weighted average coupon of LIBOR plus 1.7% representing a 15 basis point decrease in the cost of funds, which we expect to add more than$0.02 per share of earnings per year.

Overall, our investment portfolio continues to perform well as demonstrated by no losses or impairments, stable occupancy rates and debt yields.

We continue to believe that our direct origination platform and the broader Ares resources along with our deep asset matching capabilities, provide many operational and informational advantages in our investment process.

For example, for the 2.7 billion [ph] loans that we have exited since inception, our borrowers have increased the property cash flows by approximately 18% which highlights the value creation of partnering with quality sponsors with achievable business plans.

Before turning the call back over to Jamie, I wanted to bring your attention to one loan we have discussed in the past, a $38.6 million senior loan collateralized by a nationally branded full service hotel in the New York area. At year-end, the loan was a maturity default as noted in our 2018 10-K.

The hotel property however, continues to demonstrate year-over-year stable to growing performance in terms of occupancy, daily rate, and net operating income from 2017 to 2018.

Most importantly, the hotel property continues to generate sufficient cash flows to fully cover regular interest payments and all regular interest payments on this loan are current as of this time. In addition, a cash trap has been in place so that no excess cash is being distributed to the borrowers.

As we mentioned previously, the hotel was recently renovated and is managed and branded by a well-known national hotel company. Our in-house asset managed team has spent many hours extensively reviewing this property in the market in which it operates. We also engage an appraiser to provide us an updated third party valuation.

Based on all the information we have and the analysis we perform, we have not put this 38.6 million senior loan a non-accrual status and have not taken an impairment on this loan as of year-end 2018. We continue to have discussions with the borrower regarding our options under the loan documents.

And so with that, I will now turn the call back over to Jamie for some closing remarks..

Thanks, Tae-Sik. In closing, I want to thank the team for all of their hard work this year. 2018 was a very good year for ACRE, one in which we generated record core earnings and attractive returns on equity, resulting in four dividend increases since the beginning of 2018.

Given the steps that we have implemented to remain more fully invested, and to continue our rigorous credit selection and portfolio management process across a diverse portfolio of assets, we believe, that we are very well positioned for another good year in 2019.

Going forward, we believe that we have achieved a higher, and more sustainable level of earnings and our objective is to continue to earn and pay a stable and growing dividend as we execute on our plan to achieve greater scale and to reward our shareholders. With that, I would like to ask the operator to open the line for questions. Thank you..

Thank you. [Operator Instructions] Our first question will come from Steve Delaney of JMP Securities. Please go ahead..

Good morning everyone and congratulations on a strong finish to the year. I guess, I'd like to start thinking about repayments. Obviously the portfolio has grown to about 1.5 billion in outstanding.

If we were to think about trying to project out in 2019 on a percentage basis, based on I guess the year end portfolio or the average for 2019, could you give us a sense of what the range of expected prepayments or repayments might be and more near-term as far as far as the first quarter or if you're expecting or seeing anything there that could give us a little insight into what we might expect? Thank you..

Sure. Good morning, Steve. This is Tae-Sik. Thanks very much for your question. So in terms of repayments, I think, in 2018, we did higher -- a higher than what we would call our three to four year average. I think the last three to four years we have average right around $600 million to $650 million.

Last year as we mentioned, we had $747 million, but again, just want to note that it was partly impacted by the fact that we had the two large loans, it's only $199 million the self-storage loans that was paid off in November. So those are obviously lumpy components of the overall portfolio.

And I think in 2019, I think we're expecting probably right around average to above average, so call it $600 million to $700 million. I don't think we're expecting, what we did experience in 2018.

Obviously, this will depend upon execution of the borrowers' business plans, it will depend upon overall market conditions but our forward-looking estimates and repayments is shorter than that, slightly higher than three to four year historical average in the $600 million to $700 million level for 2019.

First quarter, I don't think we expect anything unusual. Good news again is that there isn't a huge lumpy loan that -- now that we've had in the past. So I think you'll see it's smooth out a little bit quarter-to-quarter, but obviously we keep a very close forecast on this..

Okay, very helpful. And Jamie, there were two mezz loans made in the quarter. Not that you don't make those but a little departure from the obvious focus on senior loans and they were on condo properties in New York and Florida.

Could you just comment if there was anything unique about those properties or the borrower relationships that made them attractive to the team? Thank you..

Good morning, Steve. This is Jamie Henderson. So good question. And I think, it comes back to the approach we used to any around investments. I think -- I think I had mentioned previously, huge focus on -- on the power, the building and the basis.

These are what we consider really, really strong investment opportunities and really good locations at a basis that we feel really comfortable with and we feel, we're getting compensated really well for the risk..

Got it. Thanks, Jamie. And again congratulations on the ability to take the dividend up and we look forward to 2019..

Thank you, Steve..

Thank you, Steve..

Our next question will come from Stephen Laws of Raymond James. Please go ahead..

Thank you. Good morning. And Tae-Sik following up on Steve's questions on prepayments. Looking at the portfolio breakout in the K, it looks like scheduled -- scheduled maturity is somewhere between $300 million and $325 million.

So as your prepayment, do you expect some unscheduled maturities, how closely are you guys able to watch these loans to get timing for early repayment.

You maybe shed a little light on reconciling that the scheduled maturities in 2019 versus the prepayment expectations?.

Sure, great question, and thanks for dialing in Steve. So historically, our loans have been in the typical sense of a three-year loan with some potential extensions beyond that. The average life of a loan has really been just over two years. So you can tell that most of our loans have actually repaid prior to their stated maturity.

I think, what drives it is really the success of borrowers' business plans. Naturally what we monitor the most closely, we are a light transitional lender and I think, when we see properties progressing toward the success of their business plans.

I think, that is probably to us the best indication that -- that the bar will then either refinance or more typically sell their assets in which both cases results in an early repayment. So we certainly take new account the stated contractual maturity [ph] part of our expected maturity schedule.

But we really do look at the loans one off -- one by one, to make sure that we have a good sense internally of -- and of course, we're always constantly dialoguing with our borrowers to sort of better understand. So it's really a very customized loan-by-loan analysis that we did come up with our analysis of when loans are expected to be repaid..

Great. Appreciate the color on that. And I guess, Tae-Sik on the financing costs, you guys obviously done a very good job of reducing the financing costs and some of your warehouse facilities.

Can you talk to on the securitization? But can you talk to where you see that going, how much more room is there, you think that you can push down those expenses, your borrowing cost or maybe kind of where you see that trending over the course of this year?.

Excellent question. And I think, what we've said in the past is that we've done, I think, we've done a very good job in terms of continuing to match fund our assets and liabilities. And that's true in terms of maturities, that's in terms of interest rate risk and over time, we believe it's also been true in terms of borrowing spreads.

And so there is a bit of a timing difference. So when we see asset spreads on our loans either rise or decline, we don't get an immediate reaction on our warehouse facilities and our borrowing facilities. But we do see that there's probably call it as six to nine month lag.

And then we do see our ability to price down our borrowing costs, maybe not for the exact same levels both up or down, but directionally there is some correlation with a bit of a lag effect. So right now, I would tell you that, we are catching up in terms of borrowing cost to what we experienced in terms of asset spreads declining in 2018.

And I think, what we would say in terms of further changes in our borrowing costs will be somewhat dictated by what we see going forward the spreads on our loans and assets. So if we see further decline or changes in our asset spread, then I think, we'll see similarly a commensurate change in our borrowing costs..

Great, that's helpful. And Jamie well, regarding the Ares facility and I guess, the current portfolio leverage, looks like leverage at year end was down a little bit, just given the repayments in Q4. So not surprising over the year, you guys have operated 3 to 3.25 turns of leverage.

Should we expect the portfolio leverage to get back to that level before you start utilizing the aggregation facility or are the facility at the parent of Ares or have you already started using that facility to fund some investments that you take down later? Can you maybe guide us through where you think, you'll operate leverage with the company before you really start using that $200 million facility?.

Sure, that's a great question, Steve. It's a little bit of both.

Honestly the objective is to maintain a steady pace of originations and to kind of remove the variability caused by timing and so sometimes even if you -- even if you know, you have the leverage coming from one of the facility providers sometimes, the timing isn't exactly perfect with regards to new origination.

So I think the goal is to not only optimize leverage, which is an ongoing daily activity, but also optimize the amount or percent invested. And that's really where the warehouse comes into play. It allows you to effectively slightly over originate in anticipation of capacity coming free.

The percent invested is one of the largest drivers of profitability..

Great, that's helpful. And certainly eliminating that cash drag, certainly flow through and drive higher ROEs. So looking forward to seeing you guys utilize that. I appreciate the color. Thanks, Jamie and Tae-Sik for taking my questions..

Thank you, Steve..

Thank you, Steve..

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

With respect to the dividend, do you expect core earnings after the incentive fee to cover the dividend for 2019?.

So Jade, I think, in the past, when we talk about core earnings covering our dividends, even when you subtract out the incentive fee, we have done so. And so we do really look at our dividend as our ability to cover from a cash basis.

And so we have been very careful in terms of making sure that we have the cash available -- the net cash available to cover our dividend..

Thanks. I do acknowledge that cash flow from operations has been about 111% of dividend. So you're covering the dividend from a cash basis. Just a friendly suggestion, I think that you might want to introduce a core earnings metric after the incentive fees like some of the peers are doing, including PXMT and KREF.

Secondly, wanted to ask if you could provide any color on the outside is interest income that you said contributed $0.04 was that fee related due to the restructured self-storage loans that repaid.

What was the source of that outsized income?.

Sure. So as a lender of transitional assets, we carefully document our loans. So that obviously number one, we have all the protections, we believe we are needed.

And secondly, in the event that there are modifications made to the loan whether there are loan modifications or there are extensions or there are covenant issues we do generate, we do build in fees both upfront, as well as upon modifications to make sure that we get paid for taking those types of incremental changes and potentially incremental risks.

So $0.04 that I referred to is what we would say, what is sort of beyond the regular interest payment that we have built in. So the $0.04 is -- that's what we call it sort of additional interest is going to be beyond the normal regular interest that is due on a loan.

And so we were able to generate, as we mentioned, an amount that basically equates to about $0.04 per common share in the fourth quarter..

In terms of the self-storage loans, can you give any additional color on how you use stripped structure as protective mechanism to protect your principal. And can you comment on how prevalent those same structural attributes are with respect to the rest of the portfolio..

Good morning, Jade. It's Jamie Henderson. So if you roll-back the tapes, a little bit some of our previous calls where we spoke in detail about that, those loans. I think you've found that we reiterated over and over again that, the way we originate the deals and document the deals and structure the deals has a whole series of protectionism.

In this case, we had really good structure. Those structures are very common in most, if not all of our loans and they're designed to protect us in the event that deal goes off track. So I think, this was a great outcome. I think, it was a testament to the way we do the -- the way we originate loans and structural loans and it worked..

In terms of the broader market, have you seen any impact from the December volatility in terms, of how loans are pricing or deal flow, anything that's changed based on what took place in December..

Not, really, I think, there is a little blip. I think, the folks that are heavily dependent on public CLO's probably experienced a little bit of anxiety during that time period. It really -- that wall really didn't translate rapidly into the private market spreads, so not much. It's a strange time of the year for the industry as well.

Kind of December, you're basically digesting loans you'd already signed up and then coming into January, the whole industry. That's a positive. Just -- just a little bit to go to a series of conferences, so we didn't see much..

And just lastly on the M&A front. The topics come up in the past.

Are you seeing anything of interests, maybe in the private -- that platform side or potentially some smallish mortgage rates?.

So, as we mentioned previously, Ares has exceptional reach into that world and we think, we see most everything, that's in the marketplace. We were always looking, but we're cautious and diligent and we're not going to transact just for the sake of transacting, we're going to transact in a way that would be beneficial to our shareholders..

Thanks very much..

Thank you, Jade..

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

Thank you, and good morning. Congrats on a very good quarter. I'd like to ask a question that really going to build-off of one that Jade, just asked relating to the fourth quarter volatility. I understand, it didn't impact pricing or anything in the quarter.

But, as we kind of look forward and begin to kind to anticipate any further spread widening in liquid credit markets. How long would you expect that to take to kind of work into the private market if it does at all? And I know, there's a lot of kind of, discourse back and forth to kind of what may happen from a macro perspective.

But are you seeing any kind of change in tenure from the conversations you're having with borrowers as to how their business plans are looking?.

Hey, Ken. It's Jamie. And that's -- that's a really good question. It's really hard to predict how involved, like works its way into any given market and it really comes down to the -- the source of the wall and how long it persists. So look, we would love some mild volatility. We think our portfolio is super well positioned in tariff.

And we would love to be in a position to take advantage of it, if it comes. How long it takes and how long it lasts, that's really hard question to answer.

I think it, I think, the most important thing is being, having a really durable portfolio, where you feel you -- that allows you to be forward facing when those moments in time come and to take advantage of it..

And maybe just flipping that around, I mean, is there other ways for you to protect yourself or lock-in effectively the financing rates or spreads that you're, that you're able to get.

Today, obviously, you've kind of talked about just the improvement over the course of the years has been very helpful for driving the economics in your business and is there any way to in a sense, lock that in?.

Ken, this is Tae-Sik. I think, that's an excellent thought in terms of how do we take advantage of sort of current financing markets. I think, we've done that to some extent by expanding our latest FL3 securitization, we took advantage of that opportunity and not only increased the size of that, by about $170 million.

But also obviously extended the reinvestment term and lowered our borrowing spread and lock that in. And that obviously is a very strong non-recourse match funded termed out type of financing. I think, we'll look to more strategies like that.

I won't be more specific than that, but I think, we are definitely looking to take advantage of the financing markets and lock-in today's cost capital, to lock-in today's financing terms and really looking to further sort of even better match fund our assets and liabilities than we have in the past..

And I think, it's a real -- that execution, is a real testament to the power of the Ares platform that we are able to get that done privately at scale during a time of a lot of market volatility..

Right. And maybe just lastly, and I guess maybe also kind of plays into the first question. From the -- from the, what we had heard from the fourth quarter volatility is that it forced to -- can lead to borrowers, more or less sitting on their hands.

I don't know, if you experienced that yourselves and if so, you mentioned that first quarter is always a little slower, but are you seeing, maybe some of that consternation that had been in the market begin to reverse?.

So I think the immediate reaction turn times of volatility is bit as spread opens up between buyers and sellers. And I think that's certainly happened on the equity side of the house.

With regards to financing, I mean, we certainly observed a little bit of commodity in terms of sponsors and how they're coming to market and their choice of the form of financing. But it really -- it didn't last long. And I think, the impact was pretty small in a marketplace. So we think, that just based on our pipeline, volumes feel pretty good..

Perfect. Well, thank you for your comments on the call. And again congratulations on the good quarter..

Thank you. Ken..

Thank you. Ken..

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

Thanks. Just following up on Steven's question earlier. Can you just say whether, talk about whether you started using utilizing the Ares facility.

And I guess kind of where or how we should think about kind of when those benefits will start to recruit to ACRE?.

Sure. Good morning, Doug. Thanks for your question. I think you heard from part of our prepared remarks, particularly from Jamie that we do expect to be nearly fully deployed toward the end of this quarter.

And when we're fully deployed, that's when we'll start obviously utilize the Ares warehouse line to make sure that we build up that inventory of loans that will be available for them as to drop on, as existing loans payoff. So right now, there are no ACRE designated loans under the warehouse line, under the Ares warehouse line.

But our expectation and our intent is to start to utilize it in the near future..

Great. Thank you, Tae-Sik.

And then can you just talk about kind of, how you see the outlook for spreads kind of as we go through 2019 or at more specifically asset yields, if the Fed is in fact done and kind of how you see those trending?.

So our sense is that spreads have feel like they have stabilized. It's a pretty big scattered plot of information that we base that sentiment on.

Once again, it's really hard to say, what's going to happen in the future with spreads and particularly as it relates to Central Bank activity, it feels pretty good right now, the market feels reasonably stable. Once again, we like a little bit of volatility and we think, it makes market better and healthier..

[Operator Instructions]. Our next question will come from Ben Zucker of BTIG. Please go ahead..

Good morning, or afternoon, and thanks for taking my questions.

Jamie, did I hear you right that you expect to be at full deployment in the next 30 days or so?.

That's correct. I mean, the timing, it's often very challenging to time exactly when deals are going to close but we were pretty close based on what we think is in the pipeline to being fully invested. And at that point of time, I'm sorry, go ahead..

No. No, go ahead, please, Jamie..

That's when we think, that the areas of warehouse becomes a real strategic differentiator for ACRE..

Absolutely. So, understanding that the timing can push and pull a little bit, but on the term full deployment, when I look back at your balance sheet and see where it's been before, we've seen it hold a portfolio of about $1.75 billion in loans in 2018.

And that was even before you increased your CLO financing which I'm assuming comes at a higher advance rates. So is it safe to assume that when you're using terms like full deployment is that, is that $1.75 billion portfolio or are we speaking the same language right now or am I getting a little ahead of myself..

Ben, this is Tae-Sik. I think in terms of looking at the portfolio, it will depend on a couple of things, right. One is the senior versus mezzanine mix, because if it's a 100% senior, you'll see a higher, higher overall volume of loans outstanding principal balance of loans, if it's more subordinate loans, you will see something lower.

The second primary consideration is the type of senior loan that we are financing and the type of financing we have. As you mentioned, if we have more CLO type financing. I think, as a team we're more comfortable increasing the leverage beyond that 3, 3.25 target that -- that we've mentioned in the past.

If it's the more typical warehouse lines, then we'll stick to our 3, 3.25 in a quarter range itself. Plus then you also have to look at the underlying asset.

So while we sort of have a general leverage policy debt equity policy, it really is much more customized on a loan-by-loan basis, so that if we have a strong cash flowing asset, particularly, multifamily for example, we may feel more comfortable levering that type alone higher versus something that has maybe a more transitional business plan itself.

So there's a lot of factors and so when Jamie talks out being fully deployed. I think, there is a multitude of factors taken in account.

I think for us, we really look at it as how much more equity capital do we have available to invest rather than do we have $6 billion of loans or $7.5 billion loans, which really based upon the equity capital that we have to deploy..

Okay, that's all helpful Tae-Sik. And then really, this is just my last one, and it's a higher level. In prior years maybe a little while ago when you raise the dividend. You mentioned that you might not covered in the first quarter of the year but there are quarterly swings and on a full year basis, you expected coverage to be there.

And you didn't say anything to that effect, this time around.

But I'm wondering, is there a chance that -- that dynamic might be at play just kind of looking at where the portfolio ended the year, your subsequent funding and then maybe some back-end weighted on closings coming or is the under earn in 1Q 2019 a possibility or you don't think so?.

Right. Now that's a great observation Ben. And I think, as we've said in the past, we do believe that we should be looked at and we frankly do look at our business on an annual basis. So the dividends are quarterly obviously, but we do set our dividends based upon what we see our ability to earn in cash, the annual type of number.

So we didn't say specifically, this time, I'm glad you pointed that out. But I do think, it is important to reiterate that we do look at our business and we do look at dividends and we do look at our ability to generate the cash to pay the dividend, really on an annual basis..

That's helpful. And I think everyone on this call would agree that annual, I assume the way to look on these businesses. So, that's it from me guys. Congrats on the dividend raise. And we'll talk soon..

Thank you, Ben..

Thank you, Ben..

Our next question is a follow-up from Jade Rahmani of KBW. Please go ahead..

Thank you. I was wondering if you can give any more color on the hotel loan that's in maturity default. Can you give a sense of what the submarket is, that it's in, I think, previously you said that it was in -- it was a suburb of New York. So wondering if that's Westchester or is that's Brooklyn, Queens.

Then you mentioned the major full service nationally flagged, the operator is managing the building. Can you give any color on that? And I think that the renovations were done several years ago because the loan was originated in the second quarter of 2015.

So I guess, why has it taken so long for the property to hit stabilization?.

Sure, Jade this is -- this is Tae-Sik. In terms of more specifically identifying the hotel. Again, I think, for a lot of reasons, we are not specific about the exact location or the exact property itself.

I think, what you reiterated in terms of being here in the New York metro areas correct, what you said about being both branded and managed by a very well known nationally branded management company is correct as well. In terms of why it's taken longer to fulfill this business plan.

Again, as a transition lender, we do find often that our business plan our borrowers do execute their business plans faster than what they anticipate and what we anticipate. And therefore we have historically seen that many of our loans are paid off earlier than the stated maturity.

There are going to be occasions and this is certainly one of them where the execution of that business plan and the fulfillment of that business plan does take longer than either we or the borrower expect it.

As I mentioned, we are seeing positive growth in this property so results between 2017 versus 2018, we saw some positive trends in terms of occupancy, in terms of daily rate, in terms of overall net operating income. So it's on a positive trend.

Obviously, it's not at a level where we would have expected it when we underwrote the loan three years ago in 2015, as you mentioned. There are many reasons for that. There's nothing anything specific other than the hotels are just being renovated.

I think, more time does is needed for this hotel to sort of fully realize the benefits of that, plus we do think that the sub-market itself has shown overall improvement and there's been some lift from that as well..

And from your vantage point at this stage, do you anticipate staying in the deal? Do you anticipate for closing on the asset, or more likely would you believe that another bridge lender would refinance the loan?.

So again, just given the nature of this call and nature of the discussion, we really can't get into the details of what our plans are. As we mentioned, I think we do build in a lot of protections into loan documents to make sure that we are well protected.

So for example, I mentioned that the hotel is operating very well, it's producing cash flow, so regular interest is fully current, we're trapping all cash. So we're building up even a little bit of further reserves. So we do have the mechanisms built in to protect us during the interim and for the eventual outcome.

Just, again, given the nature of this call, we really can't speak specifically about exactly the remedies that we're currently pursuing.

But just to suffice to say, that we feel that we have very good documents and that most importantly, that we have very, very strong capabilities in-house at Ares, no matter what direction this hotel takes to manage this both as a loan or as an asset itself..

Thanks very much..

Perfect. Thanks so much, Jade..

Thanks, Jade..

Ladies and gentlemen, this will conclude the question-and-answer session. At this time, I'd like to turn the conference back over to Jamie Henderson..

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

Ladies and gentlemen, this concludes our conference for today. If you missed any part of today's call, an archived replay of this conference call will be available through March, 7, 2019, by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10127187.

An archived replay will also be available on the webcast link located on the homepage of the Investor Relation section of our website. The conference has now concluded. Thank you for joining us. You may disconnect your lines..