Ares Commercial Real Estate's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.13.13 | About: Ares Commercial (ACRE)

Ares Commercial Real Estate Corporation (NYSE:ACRE)

Q3 2013 Earnings Conference Call

November 13, 2013 11:00 AM ET

Executives

John Bartling, Jr. - Co-Chief Executive Officer

Todd Schuster - Co-Chief Executive Officer

Tae-Sik Yoon - Chief Financial Officer

Analysts

Steve DeLaney - JMP Securities

Jade Rahmani - KBW

Dan Paduano - Neuberger

Charles Nabhan - Wells Fargo

Operator

Welcome to Ares Commercial Real Estate Corporation’s Conference Call to discuss the Company’s Third Quarter Earnings. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday November 13, 2013.

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 the words such as anticipates, believes, expects, intends, will, should, may and similar expressions.

The company’s actual results could differ materially from those expressed in the forward-looking statements for any reason 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 the past performance or market information is not a guarantee of future results. During this conference call, the company may discuss core earnings, which is a non-GAAP financial measure as defined by SEC Regulation G.

Core earnings is used among other things to compute incentive fees to the company’s manager and the company believes it provides useful information to investors regarding financial performance, because it is an alternative method that the company uses to measure financial conditions and results of operations.

Core earnings should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For these purposes the company defines core earnings as GAAP net income/loss excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization, related to targeted investments that are structured as debt to the extent the company forecloses on any properties underlying such debt, any unrealized gains, losses or other non-cash items recorded in net income or loss for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income or loss.

The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges as determined by and approved by a majority of the independent directors of the company.

A reconciliation of core earnings to net income or loss attributable to common shareholders the most directly comparable GAAP financial measure can be found in the company’s earnings release issued earlier this morning and posted on the company’s website at arescre.com.

At this, we would like to invite participants to access the accompanying slide presentation by going to the company’s website at www.arescre.com and clicking on the Q3 2013 earnings presentation link on the homepage of the investor resources section of the website.

I would now turn the call over to Mr. John Bartling, Ares Commercial Real Estate Corporation’s Co-CEO.

John Bartling, Jr.

Thank you, operator. Good morning everyone and welcome to the ACRE Q3 earnings call. On the call with me today is our Chairman, Michael Arougheti; Todd Schuster, our Co-CEO; Tae-Sik Yoon, our CFO; and Carl Drake, Head of Investor Relations.

I’d like to start out by providing a few market observations and then an update on Ares Management’s recent acquisition of Area Property Partners as well as ACRE’s acquisition of Alliant Capital. I will then turn the call over to Todd Schuster, who will discuss current market trends and how they influence our investment activity across the platform, and our positioning of ACRE as a leading specialty finance business. Tae-Sik will then highlight our third quarter’s financial results and recent progress on our balance sheet initiatives. Todd will conclude the call before we take Q&A.

First, from a macro standpoint, low short and long-term interest rates have resulted in a fairly benign real estate credit market. This said policy and politics in Washington DC continue to drive volatility especially around the GSEs. Despite this volatility and because of the benign nature of the credit markets, the current lending environment in the U.S. is in a risk-on mode. With the Fed dovish and inflation low, [thanks to every emerged] [ph] finance stabilize cash flowing commercial real estate while specialty finance companies are chasing transitional asset-based financing.

We continue to be vigilant in our underwriting although we have observed looser terms and more questionable lending practices as the market chases yield. These market forces highlight the importance of having a very strong direct origination investment platform like ACRE’s in order to uncover the most attractive opportunities.

As many of you know, we worked on closing successfully integrating Alliant Capital into ACRE during the third quarter. We also made great progress in optimizing our balance sheet and our cost of capital by completing the restructuring of our bank lines and most recently pricing our inaugural CMBS transaction.

On July 1st, Ares Management completed its acquisition of Area Property Partners, the global real estate investment management firm with a demonstrated 14-year track record in the U.S. and Europe.

This transaction has transformed the Ares Real Estate Group as we now have approximately 140 investment professionals and $8.5 billion of committed capital under management. We believe ACRE is already benefiting in terms of regional expansion, transactional referrals, due diligence expertise, greater market recognition and direct deal sourcing as our investment professionals have become more relevant to the real estate market.

On August 30, we closed our acquisition of Alliant Capital which was renamed ACRE Capital. As a reminder, ACRE Capital is a national multifamily focused commercial real estate services platform that originates for sale Fannie Mae and FHA mortgage loans and retains the mortgage servicing rights or MSRs.

With about $600 million in originations last year, ACRE Capital was – have the national presence with 15 offices located across the country. The addition of ACRE Capital is a strategic and financially important evolution for ACRE since it materially increases our origination scale and broadens ACRE’s product offering. Todd will walk you through our plans in more details but we are very excited about the future impact we believe ACRE Capital will have on this business.

In summary, we have significantly scaled Ares Management Real Estate Group in the third quarter along with ACRE in order to drive meaningful value in 2014 and beyond. Finally, we have made meaningful progress in optimizing our funding and capital structure to drive attractive future returns consistent with our business plans.

And with that, I will now turn the call over to Todd.

Todd Schuster

Thanks John.

During the third quarter, property fundamentals remain strong continuing the trend of gradual improvement against the backdrop of a slowing growing – of a slow growing economy and a choppy bond market.

Property level cash flows are modestly increasing and occupancy rates are holding steady. From a valuation standpoint, property values continue on an upward trend as cap rates held stable or were slightly lower during the third quarter. Rising property values have also unlocked deal activity as most segments other than multifamily have exhibited strengthening transaction volume this year.

One important trend we are beginning to see is that buyers of commercial real estate are shifting their investment focus from core stabilized asset into investments that are more transitional in nature. These value added investors require flexible debt capital to reposition or improve a property and then utilize long-term financing once the property’s cash flow has improved.

We are very encouraged about this trend as it plays into both our legacy bridge loan capability as well as our newly acquired long-term fixed rates funding capability in multifamily. This shift is also beginning to play out in other property types which should favor our primary client base that requires shorter term flexible financing for value added projects.

Let me now turn to our recent investment activity. For the third quarter, ACRE originated $203.1 million in commitments for the principal lending business and rate locked $100.1 million of loans for ACRE Capital totaling $304.2 million in originations.

In the principal lending business, the third quarter’s originations included two senior loans for office properties located in Southern California, a senior loan collateralized by a retail property in Chicago’s attractive Miracle (sic) Magnificent Mile shopping district and a mezzanine loan collateralized by the office and parking portion of the mixed use office and condominium property in downtown Chicago.

Our principal lending portfolio remains diversified by geography with 24 loans in 19 markets across the United States at quarter end. We continue to be highly selective in our originations with a clear focus on less volatile property types such as office and multifamily which accounted for 46% and 42% of our portfolio as of the end of the third quarter.

Subsequent to quarter end, we have originated two new investments in our principal lending business. First, on October 17, we originated a $4.85 million preferred equity investment in a multifamily property in a submarket of Houston. The preferred equity has a rate of return of approximately LIBOR plus 11%. Secondly, on November 6, we originated a $15.3 million mezzanine loan collateralized by interest in a proposed mixed use development located in Long Islands, New York. The loan has a fixed interest rate of 11.5%.

We continue to have a very attractive pipeline and are busy working on several transactions that we hope to close by year-end.

As John mentioned during the third quarter, we completed the acquisition of Alliant Capital which we have renamed ACRE Capital. ACRE Capital provides us the capability to be a full spectrum lender with both short and long-term financing solutions for the large and strategically important multifamily market. ACRE Cap also expands ACRE’s capabilities into new property type such as senior housing and healthcare.

The ability to integrate our relatively shorter term principal lending products with longer duration, fixed rate product is a compelling value proposition to our client represent a differentiated approach to the market. We expect many strategic and financial synergies from our newly enhanced platform including the diversification of revenues from the creation of new long dated servicing revenue streams as well as fee income from the sale of our originated Fannie Mae and FHA mortgages. These diverse sources of revenues and earnings could provide us opportunities to enhance book value and our support expanding the dividend.

Turning to the first month of its operations in September, ACRE Capital rate locked 12 loans totaling $100.1 million. This total was comprised of two FHA/HUD loans totaling $76.2 million and 10 Fannie Mae DUS loans totaling $24.9 million. It’s important to point out that FHA/HUD loans tend to be larger in size and require a longer lead times to complete the FHA/HUD financing as compared to the Fannie Mae DUS loans. As a result, we would expect Fannie – excuse me, FHA/HUD loans to be lumpier than the Fannie originations.

Before I turn the call over to Tae-Sik, I want to touch on the CMBS securitization that we priced last week. We believe the attractive execution from a pricing and proceeds standpoint validated the advantages we can derive from our direct origination and disciplined credit investing.

The improved efficiency of the financing has provided low cost additional capital, which I believe further, enhances the growth capacity of our platform. With this newly unlocked capital, we will continue to focus on generating attractive full cycle, risk adjusted returns by remaining highly selective and consistent in our credit underwriting.

I will now turn the call over to Tae-Sik to discuss our financial results.

Tae-Sik Yoon

Great. Thanks Todd.

Our third quarter net income was $7.6 million or $0.27 per common share. Net income for the quarter included two material non-recurring items. First, you recognize a gain on the acquisition of Alliant Capital of $5.2 million; and second, we incurred transaction expenses of $2.1 million in connection with a closing of the Alliant acquisition itself.

Excluding the impact of these two items net income would have been approximately $4.5 million or $0.16 per common share. With respect to our principal lending business, again, this is where we originate and hold loans for investments; we ended the third quarter with 24 loans totaling $759.8 million in commitments and $697.4 million in outstanding principal. Approximately 85% of our loan portfolio measured by outstanding principal was comprised of senior loans with 15% in outstanding principal invested in subordinated loans.

The weighted average life for the overall portfolio was approximately 2.6 years with a weighted average unleverage yield of 6.4%. Our portfolio continues to perform well. As of September 30, 2013, all the investments in our investment portfolio were paying in accordance with their terms and no reserves or impairments have been taken.

As far as interest rate exposure, our portfolio remains very focused on shorter term floating rate loans. In fact, 22 of the 24 loans we held at quarter-end again representing more than 93% of our outstanding principal, are floating rate loans based on 1 month LIBOR. And to match fund our assets, all of the liabilities under our three funding agreements as well as a securitization that I will discuss shortly are all floating rate based upon one month LIBOR.

Given the match funded capital structure of our investment portfolio, we do not expect material margin compression in a raising rate environment. And in fact, we would expect ROE on our loans to benefit from higher LIBOR rates.

Turning now to our mortgage banking and servicing business, which we conducted through our wholly-owned subsidiary ACRE Capital. We generated approximately $4.4 million in gross revenues during the month of September, our first month of ownership after closing the acquisition at the end of August.

Revenues from mortgage banking activities in the September totaled $3.8 million driven largely by the $101 million in loans that were rate locked in the month of September.

In terms of our balance sheet and financing activities, we made great progress lowering our funding cost and expanding our access to capital. First, as you previously heard from John, we made significant improvements to our three funding agreements. We expanded our borrowing capacity by approximately $140 million to a total of $450 million while at the same time including pricing and modifying certain financial tests and covenant to allow for greater balance sheet efficiency.

And most recently on November 5, we announced further improvements to our funding with a pricing of $494 million CMBS transaction in which we will offer $395 million of investment grade bonds to third parties and retain the remaining $99 million of non-investment grade securities. This transaction is expected to close on November 19, [indiscernible] customer closing conditions and while we do not assure you we will close, we do believe that the securitization will have a number of positive impacts on our business.

First, the initial coupon of LIBOR plus 189 basis points before expenses on the $395 million of certificates being sold is lower than the cost of funds under our funding agreements. We believe this transaction helps validate the value of the marketplaces on our loan portfolio. Second, we achieved an initial 80% advance rate on the $494 million in principal outstanding of loans placed in the securitization. This initial higher incremental leverage will free up significant proceeds that can be reinvested in our business and further grow our loan portfolio and earnings.

In fact, based on our current liquidity and pro forma for the closing of the securitization transaction, ACRE has capacity to fund approximately $500 million of additional senior loan investments and again, assuming a debt-to-equity ratio of approximately 2.5 to 1.

Third, this transaction opens up a new and very attractive market for us to best manage our capital structure. By establishing ACRE has a successful issuer in the asset-backed market, our future capabilities in options are enhanced.

And fourth, the structure of this transaction enhances our diligent approach in managing the risk associated with liabilities on our balance sheet. The securitization is non-recourse and is match funded with respect to both interest rate and term allowing us to lock-in financing for the life of the underlying loans.

So to summarize, the securitization lowers our initial cost of funds, while at the same time providing high advance rates on a non-recourse basis match funded and further sets out a path for other avenues of capital and financing for the company.

Finally, before I turn it back over to Todd, I would like to mention that we – I would like to mention we announced our fourth quarter dividend of $0.25 per share which is payable on January 22, 2014 of the common stockholders of record as of December 31, 2013.

Our goal continues to be earn and grow our quarterly dividend as we optimize our capital structure and invest our capital over time.

And with that I will now turn it back over to Todd.

Todd Schuster

Thanks Tae-Sik.

As you can see, in summary we have been very busy laying the foundation for what we believe will be a very successful business. Having been here now four months our team has executed well across two major strategic objectives.

First, we believe the closing of the ACRE Cap acquisition and the expansion of our managers real estate group as a result of Ares Management’s acquisition of Area Property Partners positions us well for profit growth in 2014.

Second, our continued focus on aggressively managing the right-hand side of the balance sheet as resulted in an improved cost of financing expanded borrowing capacity in a more efficient capital structure to drive future earnings, ROE and growth. Therefore, we believe we have an excellent foundation in place to capitalize on an attractive market opportunity.

Thus far in 2013, it has been a time for platform expansion, the creation of a high quality investment portfolio and the optimization of our capital structure. We recognized these benefits are yet to be fully revealed in earnings, we believe earnings growth will follow our ability to continue in scaling our expense base prudently deploying our capital and optimizing our leverage.

As one of the largest shareholders, we believe the future is bright for ACRE and ACRE Capital. We have meaningful capital available to invest a competitive cost of capital and an enhanced origination platform that we expect to uncover high quality investment opportunities. On behalf of the entire management team and our dedicated group of investment professionals, we want to thank our existing and new shareholders for their support.

Operator would you please open up the line for question-and-answers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

Our first question comes from Steve DeLaney at JMP Securities.

Steve DeLaney - JMP Securities

Good morning, everyone and thank you for taking my questions. The third quarter started off quite strong with principal originations with the three loans in July but then it appeared that maybe there was a little slowing in momentum certainly in the form of closings as we went into the quarter. So I was just wondering Todd, you mentioned several things that are queued up for the fourth quarter, can you give us any sense of a range for what fourth quarter principal originations might look like?

Todd Schuster

Thanks Steve.

Steve DeLaney - JMP Securities

It’s easily the highest quarter seasonally I think, thanks, yes.

Todd Schuster

Yes, thanks. Appreciate the question. We said from back when we did the follow-on offering, I believe that we thought we have our capital invested from that follow on offering by the end of the year. And while I can’t make any kind of prediction in that regard, I can tell you that we are working really hard to have those proceeds committed by year-end and I can also tell you that the pipeline has been building very nicely over the last 90 days or so. And we are hoping to see a very productive and profitable fourth quarter.

Steve DeLaney - JMP Securities

I appreciate that. I mean the information you give us about investable capital is very helpful. And I mean just to pick up on your point of fully investing the June proceeds, you’re guiding to estimated $140 million available and if deployed in senior loans $500 million. So in your mind when you say fully deployed, should we think that target portfolio looks like something I guess we’re $700 million now but aren’t we talking about a portfolio fully deployed somewhere between $1.0 billion and $1.2 billion?

Todd Schuster

It would be hard to argue with the math Steve.

Steve DeLaney - JMP Securities

Okay. I just want to make sure, I mean just that when we talk about full deployment because obviously it has a lot of impact on run rate and dividend and expectations. So I just want to make sure that we connected those two things with the full deployment and the $500 million of capacity.

And then lastly, just one – thank you for that Todd. And then lastly, more of a housekeeping thing. Actually before I get to the housekeeping item, there was – are you seeing, I noticed these fourth quarter loans, the two small loans were more subordinated loans which you – wouldn’t be your primary focus. Are you seeing, I know you said the pipeline is healthy but I worry a little bit banks with their continued low cost of funding maybe getting too aggressive in or getting very aggressive in senior floating rate loans. And I just wondered if the early 4Q closings in some ways reflect increased competition for senior loans?

Todd Schuster

We strive always to be flexible in the way we approach the market. Our preferred mode of operation is to originate first mortgage loans, stretch loans and once in a while opportunities avail themselves to us where we can where a borrower already has their first mortgage lined up and they come to us for the mezz request or something like that. And we don’t let the fact that we preferred to do first mortgage is getting the way of a great opportunity like that. So –

Steve DeLaney - JMP Securities

Yes. I understand.

Todd Schuster

Okay.

Steve DeLaney - JMP Securities

Go ahead John, sorry.

John Bartling Jr.

Sorry, Steve. I love the line of questioning, clearly the banks are stepping in and they are getting their fair share. But they are staying fairly disciplined after advance rates. And there also not – for all the reasons we discussed before they are still, they are not as fast and not as nimble, most people don’t like to do recourse. There is a lot of attractive – of course, the thesis is still in place despite the reemergence. And whether it’s in real estate or other areas that we’re focused in on the non-banking structural opportunities still exist here and that’s not getting in the way what does get in the way is when transactional volume slow down but the 10-year doubles. And then you will see sort of some slowing down which we saw, we did see a little bit of that towards August. But, now that the market has gone back to its normal pace and you’re seeing the tenure just back down. We are seeing sort of what you would expect going into the fourth quarter.

Steve DeLaney - JMP Securities

Okay. Thanks John. And finally, my housekeeping item, looking at the portfolio, I don’t think it was mentioned in the press release, but it appears to us that the Boston senior loan for $35 billion might have repaid in the third quarter, can you confirm that?

Tae-Sik Yoon

Sure, Steve. There was a repayment in the third quarter of the loan in Boston, that’s right.

Steve DeLaney - JMP Securities

Okay. Very good.

Tae-Sik Yoon

We had mentioned in the press release not specifically naming the loans but that two loans have been paid off, one in the second quarter and one in the third quarter, so you’re right, the Boston loan would be paid in the third quarter.

Steve DeLaney - JMP Securities

Okay, thanks. Appreciate the comments gentlemen thanks.

John Bartling, Jr.

Thank you, Steve. One thing I would add to that last point is, there have been some initial concerns about the advance rate against that property and I think that goes not only to show the quality of the portfolio on the underwriting that we have assembled but it also goes to the strength of understanding the core credits behind that asset that it is now paid off and was sold at a much higher basis than we have even under written.

Steve DeLaney - JMP Securities

Good point. Thanks John.

Operator

Our next question comes from Jade Rahmani at KBW.

Jade Rahmani - KBW

Thanks for taking the question. Regarding the securitization which looks like it will have very strong execution and an ROE north of 20%, how quickly do you think you can deploy that capital. I think when you raised capital you said in the past than you are seeing about $1.8 billion of loans per month and historically had been able to get a 3% capture rate. And that you would hope to eventually originate roughly $300 million per quarter. So just wanted to find out the timing for redeployment of that capital?

And then secondly, just the remaining duration on the loans that are being securitized?

Todd Schuster

Do you want to take the second one first Tae-Sik?

Tae-Sik Yoon

Sure. In terms of the loans that were securitized again if you look at our portfolio today overall for the 24 loans, we have an average term of about 2.5 years. And the average duration of the portfolio that’s being contributed to the securitization is a little bit short of that but very consistent with that term.

Todd Schuster

And as for the first question, so the securitization freed up somewhere around $60 million of capital. And we – that capital will be useful to us in the first quarter. We are - not only are we teeing up a really nice pipeline for the fourth quarter but we are starting to see some really good activity for the following quarter as well.

And as for the $2 billion or so per month we continue to see that kind of volume of activity and that doesn’t appear to be slowing down to John’s point they got a little slower over the summer as a result of all the volatility in the bond market. But, since the summer it’s – we have seen that sort of normalize again.

Jade Rahmani - KBW

Okay. And this related to Steve’s question, as outsiders when we look at the company and the pace of origination, to what extent would you say the slowness of late is related to the interest rate environment or just capital certainty with respect to the company itself?

Todd Schuster

I think the -- whatever slowdown has occurred and again that was over the summer and we are not seeing much of a slowdown. At this point we are seeing a lot of activity in the system and as I said before the pipeline is building nicely and pretty significantly.

So but I do attribute or ascribe the slowdown in the summer to the volatile in the bond market. You have the 10-year treasury pop somewhere around 100 basis points that the kind of thing that will freeze borrowers momentarily. Since then of course, 10-year treasury has come back a little bit. The market has settled down and we have seen activity pick up accordingly.

John Bartling Jr.

I think the other thing I just add Jade because it’s a great question is that we continue to be disciplined investors. And some of the activity I think you have seen in the market is opportunities we have seen its more asset based lending than it is cash flow based lending. And when you look at this CMBS transaction, one of the – its exhibit A for the quality of the cash flow underwriting that we do and the quality of the assets, to extent we want to get – to the extent we see that we can get paid for taking little more asset based finance risk which we will do.

We do take advantage of those moments. But, today we are seeing a solid quality portfolio in all measures that we are looking to invest. So it’s a nice pace today.

Jade Rahmani - KBW

Okay. And quick housekeeping item, was there any related to that loan repayment – was there any yield maintenance or early prepayment income?

Tae-Sik Yoon

There was no yield maintenance with prepayment income. However, we did accelerate remaining fees that were otherwise capitalized. So there was some acceleration to fees that were remaining on the balance sheet that helped to contribute the earnings in the third quarter. But, there was no prepayment of fees associated with that payment.

Jade Rahmani - KBW

Are you able to say how much the acceleration was? Just trying – I’m trying to back into what the normalized loan yield would have been in the quarter?

Tae-Sik Yoon

I don’t have the exact number. It was not a huge number. It was not a big number. But, the other I should mention is that because we do have largely floating A pool and most loans they just would be on the chart, you have fees associated with it called front-end fees and back-end fees. That you will see with prepayment of these loans that we will capture those similar type of fee going forward as well.

Jade Rahmani - KBW

Okay. So the – so when I calculate the weighted average yield for this quarter, I think its about 7% based on your in place loan portfolio, I would assume given the statistics of that period and that going forward the weighted average yield would be lower than that?

Tae-Sik Yoon

It’s going to fluctuate obviously, I mean from the timing of when the capital is invested. So I don’t know the exact math behind your 7%, but you do have to take into account the timing of when each loans are originated or paid off when calculating that weighted average ROE for the quarter.

Jade Rahmani - KBW

Great. Thank you very much.

Tae-Sik Yoon

Thank you.

Operator

Our next question comes from Dan Paduano at Neuberger.

Dan Paduano - Neuberger

Hi. Can you hear me?

John Bartling Jr.

Yes.

Dan Paduano - Neuberger

Okay. So talk about $150 million in remaining capital, and $10 million liquidity reserve, is that required by your credit arrangements and as that percentage liquidity reserve changed over the last couple of years as you redone credit arrangements?

Tae-Sik Yoon

Dan, it is. The $10 million requirement is a requirement by one of our three funding facility lenders. The other two did not require a minimum liquidity but one does. We can meet the $10 million requirement in two forms; one is minimum $5 million of unrestricted cash and the other $5 million being made up of either unrestricted cash or availability but undrawn capacity under any of our other lines.

So it’s relatively straightforward us to be able to meet that minimum liquidity requirement. And you are right that is a change earlier this year before we amended a three facility, those facilities required as to meeting $20 million of unrestricted liquidity on our balance sheet, which obviously create a lot of drag in our ability to earn on our capital. So we took great efforts this summer to modify all three of our banking facilities, three of our funding facilities so that we can more efficiently manage our capital more efficiently manage the drag. And we have been very successful in doing that by eliminating $20 million requirement and only having one $10 million requirement against half of which is going to be met through cash, half which going to be met through undrawn capacity.

Dan Paduano - Neuberger

Thank you.

Operator

Our next question comes from Charles Nabhan at Wells Fargo.

Charles Nabhan - Wells Fargo

Good morning. And thank you for taking my question. I wanted to talk about some of the trends in the multifamily lending market specifically if the government shutdown had any impact on originations during the third and into the fourth quarter. And also there has been some chatter that activity with the GSEs has reaccelerated during the fourth quarter and I was hoping to get a little color on that as well?

Todd Schuster

Great question. And we have been talking about for a while now, the power of the combination of Alliant Capital now ACRE Cap. With the balance sheet of ACRE and we sort of envision, even if the GSEs cut back some of their production, its still I think Fannie Mae is around $30 billion last year, Freddie Mac I can’t remember their exact number. There is still a lot of loan production, given the way we were set up, given that we have a balance sheet to match up with our GSE business. We envisioned that our originators in ACRE Cap are going to have access to better quality sponsors, higher average loan sizes got to make them much more efficient, right now the ACRE Cap portfolio is $4 billion with a 1000 loans so that’s $4 million dollars per loan.

Now we can certainly envision seeing average loan sizes double over the next year again as a result of having combining the balance sheet with the GSE business. So the other part of that is, we definitely think it gives us an opportunity because the way we are structured, very neatly structured we think to expand our market share. And we think our expanded market share will more than offset any decline that the GSEs implement over the next 12 to 24 months. So we are actually very optimistic about the business, very excited about it and we see a lot of opportunity.

Charles Nabhan - Wells Fargo

Okay. If I could ask a quick follow-up question more of a housekeeping question. Now you reported about $100 million in originations in one month during the quarter and about $3.8 million associated with those originations. Now, should we think about that 3.8% is a fair margin on originations going forward? And also is that – if we think about that $100 million, is 300 a good run rate on a quarterly basis going forward as well?

Todd Schuster

Let me touch the margin question. And the margins are reasonable sustainable and bond markets are stable. When we get volatility in the bond market it could have an impact of reducing a little bit of your margins. But in a stable bond market, the margin should be relatively stable.

Charles Nabhan - Wells Fargo

Okay.

Tae-Sik Yoon

Just one other clarification of that. Again, the mortgage banking revenue, there are three primary components to that so we talk about margins, just want to clarify that those margins include both sale premiums, origination fees and a creation of more mortgage servicing rights in connection with those loan originations.

Charles Nabhan - Wells Fargo

Okay. And have those – have the MSRs – have the MSRs been created on those rich, where they created as of 9/30? I know that the release mentioned they were just rate locked, and I assume that occurs on sale, would that be correct?

Tae-Sik Yoon

That’s correct.

Charles Nabhan - Wells Fargo

Okay.

Tae-Sik Yoon

So the actual, the technical creation of the mortgage servicing right happens when you actually sell the loan and retain the servicing right.

Charles Nabhan - Wells Fargo

Okay.

Tae-Sik Yoon

But, the income associated with creation of a financial instrument at least in the form of an interim derivative is recognized at rate lock.

Charles Nabhan - Wells Fargo

Okay. I appreciate that color. Thank you.

Todd Schuster

Let me – you had one other question, I just want to touch on which was the run rate. I think I mentioned in my remarks that FHA business in particular can be lumpy. And so we saw some of that lumpiness if you will in the month of September.

Charles Nabhan - Wells Fargo

September?

Todd Schuster

Yes. So those deals come in spurts and the Fannie Mae business tends to be more evenly [sided] over the course of the year. So you shouldn’t necessarily take September and extrapolated that’s what every month look like.

Charles Nabhan - Wells Fargo

Okay. That’s helpful.

Operator

We have no further questions. I would like to turn the conference back to management for closing remarks.

John Bartling Jr.

Thank you, everyone for joining us today for the ACRE Q3 2013 earnings call. We look forward to reporting back to you during the next quarter. And have a nice day.

Operator

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 November 26, 2013 to domestic callers by dialing 877-344-7529, and to international callers by dialing +1-412-317-0088. For all replays, please reference conference number 10034562. 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 for attending. You may now disconnect.

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