Ares Commercial Real Estate Corporation's (ACRE) CEO Jamie Henderson on Q1 2018 Results - Earnings Call Transcript

Ares Commercial Real Estate Corporation (NYSE:ACRE) Q1 2018 Earnings Conference Call May 1, 2018 11:00 AM ET

Executives

Veronica Mendiola - IR

Jamie Henderson - CEO

Tae-Sik Yoon - CFO

Analysts

Steve Delaney - JMP Securities

Doug Harter - Credit Suisse

Jade Rahmani - KBW

Rick Shane - JP Morgan

Ken Bruce - Bank of America Merrill Lynch

Ben Zucker - BTIG

Operator

Good morning and welcome to Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's First Quarter 2018 earnings results. As a reminder, this conference is being recorded on May 1, 2018.

I will now turn the call over to Veronica Mendiola from Investor Relations. Please go ahead.

Veronica Mendiola

Thank you. Good morning and thank you for joining us on today's conference call. I am joined today by our CEO, Jamie Henderson; our CFO, Tae-Sik Yoon; and Carl Drake from 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 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.

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 the like titled measures used by other companies.

I will now turn the call over to Jamie Henderson.

Jamie Henderson

Thank you, Veronica. Good morning and thanks for joining the call today. Let me start by providing some high level comments on our strong first quarter earnings results and then address how we are navigating the current market environment. We're off to a great start to 2018, generating our highest ever first quarter GAAP and core earnings of $0.33 per share, both up by approximately 40% from last year's first quarter results. As expected, our strong origination activity in fundings at the end of 2017 allowed us to achieve our goal of deploying a significant amount of our capital by year end, which resulted in a higher earnings run rate to start the year.

The reasons for the significant year-over-year increase in our earnings were three-fold. First, we benefited from an increase in our investment portfolio. Second, we lowered our funding costs, and third, we benefited from increases in LIBOR on our primarily senior floating rate loan strategy. We expect these earnings drivers to continue to support more stable earnings throughout 2018 compared to previous years.

I'd also like to address several topics in the market that are on everyone's mind, increasing competition, rising interest rates and overall credit quality and how we are addressing them in our portfolio and investment strategy. First, there is strong competition for quality loans, particularly in top markets. But it is uneven across various markets and property types. Since marketing and pricing conditions vary by property segment, lenders need to be highly selective with a strong understanding of industry dynamics and local markets. Given the size and repayment characteristics of our portfolio, we don't have to buy the market.

Rather, we can pick the spots where we can leverage our direct origination advantages, repeat sponsor relationships and flexible structures to source attractive risk adjusted return investments. At ACRE, the Ares Real Estate Group's market insights and local market knowledge are critical in driving our relative value analysis and due diligence in the various segment opportunities and markets.

Our focus is to have extensive market coverage across a broad range of financing products in order to select the best relative value from the available opportunities in the market. This is consistent with our strategy of augmenting our origination staff, filling in gaps in our market and sponsor coverage and expanding into new products that allow us to generate strong risk adjusted returns. Ares has a great reputation as a reliable and flexible midmarket lender. All of these are strong advantages that allow us to compete favorably for new investments.

Secondly, by focusing our strategy primarily on floating rate loans, we have benefited from rising interest rates. We've been successful in increasing overall portfolio yields and maintaining our net interest margin over the last quarter and the last 12 months. For example, our weighted average unleveraged effective yield increased from 6.4% at the end of the first quarter a year ago to 6.6% at the end of the first quarter of 2018. Tae-Sik will provide additional details on this topic during his financial review.

Finally, despite the aforementioned competition, credit quality trends continue to be favorable. Our current portfolio is 100% performing and we're pleased with the quality of the new loans and underlying collateral that we have closed year to date through April 30, 2018. We remain highly selective having closed approximately 5% of the transactions that we've reviewed over the last 12 months. As we've discussed in the past, we have an excellent track record, backing value add sponsor business plans.

For the $2.1 billion of loans that we've exited since inception, our borrowers have increased the property cash flows by approximately 19%, which highlights the value creation by partnering with high quality sponsors with achievable business plans. With that market context, let me give you a progress update on our origination activity.

Year-to-date, we originated five new loan commitments for 167 million with 94 million closing during the first quarter, which is closely matched to our available capital. Our estimated gross leverage turns on these loans are attractive and are in the low double digit range. In addition, our year-to-date originations through April are above our historical average. Given our more fully invested status, we are deliberately matching our new origination activity closely with our expected repayment velocity.

Our forward pipeline reflects our focus on finding the best relative value across property types and products. We're seeing a growing number of diverse opportunities, especially in construction, an area that we believe is currently under capitalized and offers attractive risk adjusted returns. As we've done in the past, we'll adapt our portfolio composition and investment focus to find the best relative value in the context of changing market conditions.

For example, our portfolio has evolved from approximately 85% senior floating rate loans at the end of the first quarter 2016 to 99% floating rate loans currently, reflecting our views on relative value in a rising interest rate environment. Our commitment to generate strong risk adjusted returns that translate into attractive dividends for our shareholders is further supported by efforts to officially manage our cost and utilization of our capital and maintain an asset sensitive balance sheet position to benefit from rising interest rates.

Tae-Sik will now discuss our first quarter results and financial activities in further detail.

Tae-Sik Yoon

Thank you, Jamie and good morning everyone. This morning, we reported GAAP net income of 9.3 million or $0.33 per common share and core earnings of 9.6 million or $0.33 per common share for the first quarter of 2018. As Jamie mentioned, our strong first quarter results were primarily driven by a combination of three factors. First, of our approximately $0.10 per share increase in GAAP earnings year-over-year, approximately $0.03 per share was due to an increase of approximately $300 million in our average earning assets held during the quarter versus last year.

Second, another $0.03 was from lower funding costs, including the recent modification of our $110 million term loan. And finally, another about $0.03 per share was due to increases in one month LIBOR, which increased approximately 90 basis points year-over-year among other factors. These same earnings drivers are expected to benefit us throughout 2018 and contribute to greater earnings stability.

As a reminder, during the fourth quarter of 2017, we reduced the pricing on our $155 million secured term loan and elected at that time to repay 45 million to reduce the outstanding balance to 110 million. As a result, going forward, we expect our annual interest expense will be reduced by approximately $0.11 per share per year or approximately $0.03 per quarter.

Given the increase in our net investment activities at year end 2017, our average outstanding principal balance during the first quarter of 2018 was 1.7 billion, an increase of approximately 300 million from the first quarter of 2017. Again, this higher level of loans held for investment contributed to our increased earnings for this first quarter.

Turning now to our balance sheet, our leverage remained consistent with last quarter's level with a debt to equity ratio of 3.1 times. This is consistent with our target, given our asset mix was 96% of our loan portfolio in floating rate senior loans. We continue to focus on match funding our assets and liabilities. As of March 31, 2018, we had a weighted average remaining term of 2.9 years on our funding facilities, including extensions, which matches or exceeds the approximate two year average remaining life of our aggregate loans held for investment.

We continue to be well positioned to benefit from rising short term interest rates, as both our assets and liabilities are floating rate and offer a level of inflation protection to our shareholders. As of March 31, 2018, 99% of our portfolio, as measured by unpaid principal balance, was comprised of floating rate loans, all indexed to one month US LIBOR. As an important part of our match funding strategy, 100% of our debt liabilities are also floating rate, again also indexed to one month US LIBOR.

As I discussed earlier, the increase of approximately 90 basis points in one month LIBOR over the past 12 months ended March 31, 2018 resulted in an increase in earnings of approximately $0.03 per share for this first quarter versus a comparable period in 2017. Using our first quarter 2018 portfolio and corresponding liabilities, we estimate that a hypothetical 100 basis points increase in one month US LIBOR would have resulted in approximately $0.13 in additional earnings per common share on an annualized basis or about $0.03 per share per quarter.

Turning to repayment activity, we saw 146 million in repayments during the first quarter of 2018 and 172 million year to date through April. Based on our current pipeline and analysis of our borrowers' business plans, we believe that total repayments for 2018 will be in line with prior year levels at 600 million to 700 million. We recognize that it is important for our earnings for us to continue to invest our available capital. Therefore, as Jamie discussed, we are further refining our ability to more quickly redeploy capital as it is repaid. We expect that our higher level of interest earning loans held for investment combined with reduced borrowing costs and benefits of rising LIBOR will contribute to more stable and higher earnings throughout 2018 than in past years.

Finally, I want to mention that our board declared a second quarter dividend of $0.28 per share payable on July 17, 2018 to stockholders of record as of June 29, 2018.

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

Jamie Henderson

Thanks, Tae-Sik. In closing, we are pleased with our strong first quarter results and the steps we have implemented to provide greater earnings stability. We believe that our origination initiatives, the efforts to continue to use our capital more efficiently and the positioning of our balance sheet to benefit from potential further increases in LIBOR could help us to enhance our earnings versus last year. We're excited for the future growth potential we expect in the years to come for ACRE and as always, we appreciate your support for our company.

With that, I would now like to ask the operator to please open the line for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from Steve Delaney with JMP Securities.

Steve Delaney

Thank you and congratulations on the strong start to the year. Jamie, maybe, if I could address the first question to you. The wording - I found the wording in the press release interesting. I mean, and the phrase that caught my eye was position to match repayments. That certainly is progress, because there have been periods of inconsistency in the past that have created this rollercoaster for earnings. So love that as a starting point, but it doesn't appear to suggest if that is in fact the goal that there's much room for portfolio net growth in the near term and I would appreciate if you could comment on that and whether I'm being too cautious in my take.

Jamie Henderson

Sure. That's a great question, Steve. I think we've done a great job, both in the fourth quarter of getting nearly fully invested and also year-to-date of matching new originations to the repayments. In terms of growth, it's - our objective is to be as fully invested as we prudently can be at any given time and I think we're starting to see the positive impacts of that approach on our earnings.

Steve Delaney

Tae-Sik, in some earnings calls previously, you've given us some idea of your capacity based on liquidity, the current balance sheet. Is your 3 to 1 debt to equity as of March 31, do you view that as peak or do you see - could the current balance sheet support a slightly larger portfolio.

Tae-Sik Yoon

Sure. Good morning, Steve and thanks for the question. We do have some remaining capacity on our balance sheet, but I think the fact that we have been doing a much better job being fully deployed obviously means that we will have less available capital to invest in the future other than of course the repayments that we do expect. I think it's also important to mention that in addition to our efforts to be more fully deployed at all times, we're also again focused on lowering our funding cost.

We're also very focused on making sure that we have a portfolio that will continue to be well positioned to benefit from rising rates and I think you'll see the benefits of all those come through. So as I mentioned in my remarks, that $0.10 overall increase from first quarter '17 to the first quarter '18, $0.03 of that as I mentioned came from higher portfolio level investments, but again another $0.03 came from the fact that we are well positioned to benefit from rising LIBOR and another $0.03 came from lower funding costs. So again while having a larger asset base interest earning investments is important, I think there are other ways for us to continue to maximize earnings.

Steve Delaney

And my final question, you have reworked your two Texas loans. I understand you've given us a good disclosure there. Just looking at your table in the Q on page 11 and trying to highlight lumpy maturities, those combined, that's about 200 million that would hit in early in the fourth quarter. Just curious if you could give us a general update on that relationship and comment as to whether you think those loans will in fact be off your books at the end of this year?

Jamie Henderson

Sure. Great question, Steve. So obviously, we have been working very hard on working with the borrower on that loan. And as we mentioned at year end, 2017, that loan was put back in full performing status. And since that time, they made one final payment in January that was already reflected or discussed on our last earnings call. Good news is, the loan continues to perform. It is very much in line with our expectations and business plan. Right now, it is open for repayment between now and October. October is the due date as we mentioned.

We work very carefully with all of our borrowers to best understand exactly where they are in terms of refinancing and/or selling the assets as part of repaying our loan. These two loans being no exception, you obviously noted that these two loans are very large. So together, they're just under 200 million. I think 199 is the more precise balance. So we are being very, very cautious and careful to make sure that we stay on top of this loan so that we know when the repayment will happen, so that we minimize again the drag of earnings of having on invested capital.

Operator

The next question comes from Doug Harter with Credit Suisse.

Doug Harter

Thanks. Tae-Sik, when you were walking through the earning differences, did you mention anything about repayment or acceleration of repayment income this quarter compared to last and just curious kind of how that stood this quarter.

Tae-Sik Yoon

Sure. Great question, Doug. I didn't mention anything specifically, but as you noted, we did have some repayments this quarter. As we mentioned, we had about 146 million of repayments, three loans that paid off and in some of those cases, we did receive some, if you want to call it, incremental fees related to those repayments. Again, we're always reluctant to call these so called nonrecurring, because they do occur. They are less periodic or regular, but they are purposeful and built into our loan documents, but we did receive some fees, I would say, it's a plus or minus a penny for this quarter in terms of those type of fees, but we did get some repayments and some accelerated fees in connection with those repayments.

Doug Harter

Great. And then just talking about your cost of funds, obviously, a nice improvement here this quarter, but are there any other kind of lines that are up for renewal where you think you can drive further improvement there?

Tae-Sik Yoon

Sure. And while the restructuring of the term loan that we did at year end 2017 was probably the single largest reduction event, we're constantly working with our lenders, with new lenders, with our existing lenders to try to drive down that cost of capital. I think what we find is, when we see asset spreads change that our liability spreads do change, but there's a bit of a lag effect, a couple of quarters, if you want to call it that in terms of lag effect, to make sure that again the asset yield changes are more of a permanent change before our liabilities will change, but we do work with all of our lenders on a very regular basis to modify those rates and we don't necessarily have to wait for one of our lines that come up for renewal.

It's a ongoing dialog we have with them. And in addition to that, again, we are looking for other financing forms that we can benefit from. So again, our business is really based on a net interest margin and so we're constantly evaluating the right hand side of the balance sheet to make sure that we get the lowest cost of funding possible. I know in our past, we have very much benefited from being part of Ares Management and being part of Ares Management gives us much bigger buying power than a standalone company, both in the private markets as well as in the securitization markets, we have benefited from them in the past and I think we'll continue to benefit that going forward.

Operator

The next question comes from Jade Rahmani with KBW.

Jade Rahmani

Just thinking about the book value and the stock price, is that about 83% of book value, what's the plan to close that gap?

Jamie Henderson

So I think that we're doing a great job of demonstrating the earnings power of the company. We need a little help from the audience to help that message get distributed a little more broadly into the investment community. We've built, what we consider to be a great portfolio. It's an attractive floating rate, it's 99% floating rate predominately senior. It's benefiting in real time from increases in LIBOR. And we consider it undervalued. Our stock is - we consider undervalued. So, we're trying to prove it one quarter at a time and one year at a time and feel like we're getting great traction. So need some help and get the word out.

Jade Rahmani

Is there the potential for some kind of strategic transaction to unlock that value, whether it be bulk selling part of the portfolio or potentially privatizing the company? I mean I assume you would think that 17% discount to net asset value is attractive?

Jamie Henderson

I would say - I would answer the question like this. We really like our core business. We think we're demonstrating excellence in our core business. We think the model is viable and sustainable. We're always on the lookout and one of the great benefits of being inside Ares is we do see a lot of strategic opportunities, but we think that pursuing our core business is the best course of action and we're hopeful that investors will see this discount and find it attractive.

Jade Rahmani

Is the current ROE of 9% a stabilized level or do you think there's potential for further upside to that based on the existing capital base? And a related question would be, with about 40% of the portfolio in multifamily, why not take up your leverage targets, which would allow for more significant earnings and dividend growth and perhaps that would help narrow the gap to book value.

Tae-Sik Yoon

Sure. Jade, this is Tae-Sik. In terms of our ROE, when you annualize the quarter's results, this first quarter's results, I think you see it's right around 9%. We do think that is a sustainable level. Again, as we've mentioned in the past, I think our ask is to be really evaluated on a more of an annual basis than quarter-to-quarter just because given the smaller size of our company, about $300,000 in net income is about 1 penny in earnings per share. So, there can be some quarter-to-quarter fluctuation, but we do feel that the 9% ROE target is something that we have achieved, can achieve going forward.

Our goal is, as we mentioned, to remain more fully invested at all times, to keep benefiting from rising rates, to keep focusing on lowering our cost of funding and of course it's to maintain a high credit portfolio. And I think if we do those four steps and we demonstrate to the market over time that we can generate consistent and growing earnings and dividends, that we hope to be rewarded with a higher share price.

In terms of your question about leverage, I think when you look at our overall leverage, it's 3.1 debt to equity. When you look at the competition, you'll see some differences to your point. So we did our securitization FL3 a little more than a year ago and in that portfolio, which was comprised of a lot of multifamily, that portfolio itself, that securitization itself did receive advanced rate at 4 to 1, again to your point where if you have a basket of primarily multifamily and those are the type of assets we feel more comfortable putting on leverage of 4 to 1 versus 3 to 1, we have done so.

But for the overall portfolio, I think we've mentioned that it will be plus or minus 3.1. Again, there will be periods where it's over that. There will be periods where it's under that. We feel comfortable, given the risk profile and credit profile of our portfolio that that's about the right level. We'll continue to monitor the market, we'll continue to look for available capital, we'll continue to look to reduce our cost of capital, but for now, we think that's an appropriate level of debt to equity overall.

Jade Rahmani

And lastly, how do you think about the tradeoff between senior floater source mortgages versus other products, structured products that could potentially produce a higher levered return like mezzanine and preferreds.

Jamie Henderson

So we're still seeing a really attractive relative value in our core line of business, which are floating rate senior loans. We do see a lot of deal flow in those other sectors. We evaluate every single deal one at a time. We compare relative value internally on a daily basis and when we see relative value, we pursue it.

Operator

The next question comes from Rick Shane of JP Morgan.

Rick Shane

Look, one of the hallmarks of Ares as a manager historically has been being an industry leader on the financing side, on the right side of the balance sheet. We've seen a couple of your peers at this point approach the markets with CLOs that appear to be very efficient forms of financing Are there going to be new structures that you're looking at going forward and the flipside of that is, are these structures just increasing the supply of capital in the market and effectively exacerbating the spiral in spreads that we've seen?

Tae-Sik Yoon

Sure. Good morning, Rick. Thanks for your question. This is Tae-Sik. So thanks for your comment about Ares having been an industry leader on financing on the right hand side of the balance sheet. I think that is an area that we take a lot of pride in. That is an area that we actively manage just as importantly as the asset's left hand side of the balance sheet. And I think again as we mentioned, I think one of the great advantages of being part of Ares management is we get to benefit from all of that branding and experience and franchise value of that experience and knowledge and relationship base.

So, as you know, we have actually done three CLOs or remix structures within ACRE and I think we were one of the early leaders of utilizing that structure or even three, four years ago to have fully roundtrip, fully repaid, fully done. We obviously have this third one in place, which again I think was a leader in terms of doing one of the first so-called manage structures where for a two year period, rather than having loans repaid to senior bonds, we get to redeploy those proceeds back into new replacement loans. So I think we have been very much a leader in that securitization space, taking advantage of it as a financing, as a means of financing at lower cost and with no recourse and with great match funding.

That is a strategy that we'll continue to explore going forward. In fact, on that side, we have continued to add to our team internally. We recently added a new Head of our Capital Markets who has a tremendous amount of experience in that and as part of the asset side, we built and are continuing to build out full securitization team to make investments in that side. So our capabilities on the liability side of our balance sheet continues to grow. I think you'll see us continue to expand our leadership role in that space and we'll continue to look at CLO structures, you will continue to see us push down the cost of financing. You'll see us continue to expand warehouse banking relationships. This is a day to day continuous effort on our side.

And to address your question about, does securitization effectively result in higher quantities of capital and therefore result in lower asset yields. Sure, I think it's all part of capital flows and mix. So if you find yourself with lower cost of capital, then it's likely that you'll price your assets commensurate with a lower cost of capital. So, I think there is some correlation and some cause and effect there, hard to measure the exact impact, but I would venture to guess that there is some correlation there.

Operator

The next question comes from Ken Bruce with Bank of America Merrill Lynch.

Ken Bruce

I would like to pick up on really kind of a line of questioning that Jade was going down. I guess, Ares, ACRE has been built on basically this thought of proprietary deal flow being able to drive better kind of returning portfolio to add value to shareholders over time and it's been - I think it's been as a viability standpoint, it's been constrained by capital. The stock has set a level that it doesn't really allow you to grow. So you're kind of stuck in terms of your ability to kind of do much of it and just kind of reinvest runoff and I understand that the, getting the story out, getting that valuation up would, if you could do that sufficiently enough would kind of help solve the puzzle.

You guys are doing a great job in terms of improving the cost of funding and financial engineering, better earnings. So nothing to be taken away from that, but it just feels like there is a tension kind of set up that frankly does not really get broken because the market knows that you're going to need capital. They're unlikely going to want to put a premium on a business that's going to have to issue equity. So I am kind of just really struck in terms of what is the strategic alternative if you're not able to get the market to realize sufficient value or you're just going to be a subscale business that unfortunately is not really able to do much in terms of getting out of this particular paradigm.

Jamie Henderson

So Ken, thank you. That's a great question. I guess we can take that in a couple of parts. I think the biggest thing from my observation, the biggest variables that have impacted our valuation against book have been inconsistent earnings and ROEs that are a little lower than the peer set. I think those are within our control. I think we're demonstrating excellent progress in remedying those and I would put this platform squarely against any competitor in the marketplace in terms of its ability to perform operationally.

And I think at some point, the market is going to conduct a relative value exercise and we're pretty confident that we can get there. So, is it a structural advantage to be small? No. So, we're acutely aware of that and we are working on that. And the counterpoint to that is there's also points in the market where it's a structural disadvantage to be huge. We kind of like where we sit in the market right now. It allows us to be very nimble and allows us to pick deals very deliberately and we think the company is moving in a very positive direction. We think the market's going to figure it out.

Ken Bruce

Okay. And I guess what's the - maybe I'll just have to direct this towards Jamie. I think you're on the board. I mean, what's the board's tolerance for this situation, if you look at it in many degrees, Ares should frankly just roll this thing up, privatize it, scale it up and kind of bring it back to the market after it's been basically scaled up? What's the willingness of the board to kind of entertain the existing situation?

Jamie Henderson

I think the board is tremendously supportive of the activities that we've undertaken. I think they see - it's early, but I think, they see strong results. We had a tremendous fourth quarter. We just generated really strong Q1 results and I think they see the difference in terms of the team's capability to get the company fully invested and generate strong ROEs that are right in there with peer set. As you know, we just brought on Bill Benjamin, who's the new chairman of the board. He's in the catbird seat with regard to all of Ares real estate as the global head real estate. So that's a great step. That's a great sign. I think the board is supportive, patient and I think they believe in the business model.

Tae-Sik Yoon

I am sorry, maybe just to add to Jamie's response, I mean, when you look at the company, again, we're trading at an above 9% dividend yield, 100% of our loans are performing. We're 96% senior. We're 99% on purpose floating rate to take advantage of rising rates. And as we mentioned, I think one of the tools we have obviously is to keep the investment portfolio more fully invested, something that admittedly we have not done the best job in the past, but in addition to that, lower funding costs are on our liabilities as well as further rises in LIBOR, those are all tools available to us to further increase our earnings and when Jamie and I wake up every morning, I think our goal is to focus on driving consistent growing earnings and dividend and we believe that we can do that over time, the market will recognize that and hopefully reward us with a higher share price. Actually the business plan that we're very much focused on and as Jamie mentioned, I think the board is strongly behind us on those efforts.

Ken Bruce

Yes. And then look, I think the strategy is a good one and I'm just wondering how patient everyone's willing to be if the market doesn't kind of work a little bit more, can grow with the plan you've got set up. That's all.

Operator

[Operator Instructions] The next question comes from Ben Zucker with BTIG.

Ben Zucker

I was going to ask about any new products you guys were looking at, but I think Jade touched on that and if I heard you guys right, you're still thinking that the transitional bridge loan space is the best relative value opportunities. So maybe I'll just jump right into what your impressions are on borrower sentiment in the market right now. We've obviously seen rates move meaningfully higher year to date, but at the same time, the Fed is very clearly telegraphing additional rate hikes to come. And I'm just wondering is this causing any sort of a pull forward or acceleration of business plans, type of event that might keep demand firm for the near to medium turn, or is there a definite slowdown taking place.

Jamie Henderson

That's a great question, Ben. Look, the market is a little choppy. I think, people that own commercial real estate are eyes wide open to the activities of the Fed. They're looking at a ten-year treasury. That's risen quite a lot and has the potential to rise more, the cap rates spreads, treasuries come in significantly. And they're certainly sensitive to their cost of financing. So I think a couple of things have happened. We haven't seen any real aggressive pull forward in terms of people paying us off. In fact, the un-levered returns of our portfolio have gone up quite a lot. So, the bars aren't getting any meaningful relief in kind of - on the coupon side. I think what we've observed is the velocity of sales transactions really slowed down over the course of last year.

There is a fairly material bid spread that has formed in the marketplace. So transaction, trades have slowed a little bit, saw a little uptick recently in that, but the good news for our business is there's still a very significant amount of loans that are maturing over the course of next several years. I think it's in excess of $1 trillion. If you add up all of the capacity of all of the mortgage REITs, it's not a lot of money on a relative basis to the amount of deals that need to get paid off. In addition to that, there is record dry powder on the equity side of the house in terms of value add and opportunistic equity funds. So it's a, I think, the prospects are still good.

Ben Zucker

I guess if that's one of the benefits of maybe being slightly capital constraint right now is you don't have this abundance of capital that you need to put to work in any kind of time with action. That might be a nice way to move into a question on competition. Obviously, as you just mentioned, there's a lot of money chasing these floating rate bridge loans right now and spread tightening has been a very consistent theme for the last year. And I understand each loan is unique, so I don't want to look at spreads on a couple of your subsequent originations to try and extrapolate a trend. But that said, it does look like they might be at or nearing a bottom. So I wanted to ask, do you think that there is still room for some additional spread compression or are we nearing a trough and of course with one month LIBOR up about 35 basis points year-to-date, the all in returns are holding up nicely right now, but I just wanted to focus on the spread side of things.

Jamie Henderson

So, it's hard to say from where we sit, what's going to happen with spreads. I mean, let's say over the course of the last 12 months, we saw notable spread compression between 50 and 75 basis points. I think we've done a great job of originating a mix of investments that are still generating attractive yields. I think our NIM has held up nicely over the last 12 months. It's essentially flat. So with regard to what's going to happen with credit spreads, I think if you looked at a graph of where credit spreads are, global credit spreads across all asset classes, have been on a fairly sustained decline for many, many, many years. Will that last forever? I would suggest not. I think we will be very well positioned to take advantage of it, if it widens.

Ben Zucker

That's helpful. And then lastly, this is a little cleanup maybe for Tae-Sik, the largest loan in your portfolio that Steve Delaney referenced, the 116.4 million mortgage secured by the diversified portfolio. I know you said that that's open for repayment now and that also had like a portion, like 42.5 million that was already doing repaid. So I'm just wondering are there any more staggered maturities within that loan or is that entire remaining balance now contractually due in October, those subject to prepayment now.

Tae-Sik Yoon

Sure. Thanks, Ben. So there are no more staggered maturities. It's one final maturity for the remainder of the portfolio. So again, all of the so-called commercial assets in that portfolio, that $116.7 million loan have been repaid, last one being in January, so a few months ago. So all of the remaining assets are self-storage assets in that $116.7 million portfolio and there is no staggered state of maturity.

In the $82.3 million portfolio, again, similarly, there is no staggered maturity, but as we mentioned, there is the one remaining commercial asset in that portfolio. That's why we still refer to that one as various instead of self-storage. That one asset is - has a unpaid principal balance at one commercial asset, just over 12 million. So of the 82.3, just over 12 million is related to that commercial asset. The maturity for that entirety of the loan is October 2018.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jamie Henderson for any closing remarks.

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.

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 May 15th 2018 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 10119045. An archived replay will be also available on a webcast link located on the home page of the Investor Relations section of our website. You may now disconnect.