Q4 2019 Earnings Call

Thank you.

Chad good morning. And thank you for joining us on today's conference call. I am joined today by our new CEO Brian Donohoe David Roth our president and chasing you on our CFO in addition to home release and the 10K that we filed with the SEC. We have posted on earnings presentation under the investor resources section of our website at www.cbre.com before I 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 believe expects intends will should May and similar Expressions. These forward-looking statements are based on Management's 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. Yep.

materially from those of

Press 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 of measures of operating performance and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with the generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies and now I will turn the call over to Brian Donna.

Thanks, Veronica and good morning everyone. I'm happy to be speaking with you today and I look forward to getting to know more of you in the weeks and months ahead.

I want to start with a few highlights of 2019 and then walk through our strategic priorities for 2020.

As you saw on our earnings release this morning, we ended a successful 2019 on a high note with a strong fourth-quarter gaap. Net income was $0.33 per share for the quarter and a dollar $28 for the full year with respect to court or earnings. We generated $0.37 per share for the fourth quarter and a dollar forty one per share for the full year.

Benefited from strong investment activity throughout the year at attractive spreads throughout 2019. We originated $777 million dollars of commitments a 28% increase year-over-year.

We've increased our average loan size from 33 million in 2018 to $43 in 2019. And we expect this trend to continue.

By increasing our average loan size. We expect to be able to continue to generate our Target r o s and more efficiently deploy our capital.

Regarding the dividend. We paid out a dollar 32 per share up $0.16 from 2018. And this marks the fourth consecutive year. We have fully covered a dividend from quarterback.

As we look forward we see us commercial real estate fundamentals remaining favorable due in large parts of the continued strength of the overall economy as well as measured supply and demand Dynamics. We continue to see a tight labor market and a healthy consumer while we are exercising appropriate caution due to the duration of the economic cycle as well as the possibility of certain event driven risks off as a result of this. Our portfolio is purposefully constructed to be Diversified across asset classes and regions with Investments and Seventeen States.

We recognize that competition for Quality loans remain strong, but we continue to find attractive situational relative value in many markets and property segments are National platform now includes offices in Los Angeles, San Francisco Chicago Atlanta Denver and New York providing us with a growing number of opportunities and allowing us to remain highly selective additionally as the area's real estate platform has continued to scale. We've become a more attractive partner to our Target borrowers and brokers who appreciate that we can provide a broader array of Capital Solutions.

As the number of opportunities we review continues to grow or remaining very disciplined with a strong focus on credit quality and Loan structure.

Since the first of the year we've executed 238 million in commitments a record four acre in the first quarter with time still left on the calendar.

We're pleased to have a strong and building pipeline of investment opportunities Behind These commitments and we're seeing robust activity in each of our Target markets.

Based on this activity along with our strong forward-looking investment pipeline. We elected to raise $73 in common Equity during the month of January at an accretive basis of 108% of book about this transaction increased our book value by fifteen cents per share from $14.70 per share to $14.92.

The performance of the existing portfolio remains found with no impairments the current composition of our portfolio reflects our continued emphasis on quality a hundred percent of the assets are investments. We originated in 2019. We're structured as senior mortgage loans and the total senior loan composition of our portfolio is 96%

In terms of our strategic initiatives for 2020. I just want to highlight a few items first. We're going to continue to leverage the resources of the area's management platform and our partners on the real Equity team to create more opportunities for origination these same synergies also allow us to efficiently evaluate each perspective credit.

We're going to maintain a rigorous diligence and underwriting process with specific attention paid to loan structure in real estate quality.

We're going to continue to have a disciplined approach to Capital efficiency in an effort to maintain high levels of invested capital and maximize profitability.

We are focused on optimizing our borrowing costs and overall expense load and lastly we expect these initiatives will give us the opportunity to further scale our business a creatively.

With Adam going to hand over the call to taste to discuss our fourth-quarter and full-year results in more detail. Great. Thank you, Brian and good morning. Everyone earlier today. We reported gaap. Net income of 9.7 million or 33 cents per share and core earnings of 10.7 million or $0.37 per share for the fourth quarter of 2019 for full-year 2019 gaap. Net income was $37 million or a dollar $28 per share in core earnings were 40.6 million or $1.41 per share.

in the fourth quarter

We close 6 new loans, totaling $250 million in commitments consistent with our current portfolio all 6 new loans our senior positions that aren't floating rates of interest income wage across sectors and regions.

Total funding for the fourth quarter were $260 million which includes initial findings of $205 million on the six new loans and $55 million on the prior existing loan for the year. We close 18 new loans in 2019, totaling $777 million commitments and made fundings totaling $680 million.

Since your end we have closed for New loans, totaling $238 billion commitment. So far in the first quarter of 2020 of these loans 132,000 loan that was originated in the areas where house in the fourth quarter of 2019 was purchased by acre in the first quarter. We continue to view that Ares Warehouse as a significant competitive Advantage for us that provides acre with an attractive source of liquidity and allows us to better match a timing of new loan originations and Loan repayments.

As of December 31st our loan portfolio included fifty loans without scanning loan commitments of one point nine billion in an outstanding principal balance of 1.7 billion up approximately 10% from the end of 2018.

And the fourth quarter of 2019 our portfolio continue to benefit from library floors contributing more than two cents per share to our quarterly earnings.

At the end of two thousand nineteen, ninety 3% of our loan portfolio consisted of floating rate loans with built-in live or floors that averaged about 1.76% off.

And in addition to percent of our loans are fixed rate.

This means that overall 95% of our loans have some level of protection against declining Library based on Libor of 1.76% at year end 2019 month 61% of our loans have Library floors that are either in the money or are fixed rate.

In contrast at year end 2019, although 100% of our liabilities were floating rate to match fund our assets only about 5% of our outstanding debt when a subject to Libor floors.

With respect to loan repayment activity in the fourth quarter. We had a hundred fifteen million of loans repay bringing total payments for 2019 to 482 million month. This was below our expectations as a maturity dates in certain loans were pushed out each with their specific reasons.

With lower-than-expected repayments in 2019. We do expect a higher than average repayment volume in the first half of 2020. Although we have not received any repayments so far in the first quarter month.

Turning to the liability side of our balance sheet debt-to-equity ratio was 3.1 times at 2019 very much in line with our Target given that ninety 6% of our loans are packages since your end. We close a new hundred fifty million repurchase ability with Morgan Stanley which provides us an attractive financing source to further expand our product offering month and this brings our total debt capacity to over two billion.

Now, let me touch upon an upcoming an important new accounting standard Cecil or current expected credit losses in our 10-K file earlier today. We disclose an estimated range of current expected credit losses or Cecil reserve a 4.8 million to 6.7 million which represents approximately twenty-five to thirty five basis points of our total loan Commission.

We will continue to finalize our seasonal analysis and will provide a more specific Reserve number as well as further context and background in our subsequent filings and calls.

Lastly before returning the call back over to Brian. I want to mention that our board declared a first quarter dividend thirty-three cents per share payable on April 15th, 2022 Stockholm a record as of March 31st, 2020. And so with that I will now turn the call back over to Brian.

Thanks basic. Let me conclude by saying that since joining acre in December of last year have been incredibly impressed by our team the strength of the platform at Ares and I'm excited for where we're headed in the future bought a 2019 was a very good year for acre one in which we demonstrated our ability to generate consistently strong profits and solid investment activity going forward. We believe we have a significant opportunity to expand our market share and scale this business in a highly creative manner for our shareholders.

with that I'd like to

Ask the operator to open the line for questions. Thank you.

Thank you.

At this time. If you'd like to ask a question, please press * then 1 on your touchtone phone. If you'd like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question comes from Doug harder with credit Swiss, please. Go ahead. Thanks Brian. Hey, I guess now that you've been there in your seat a couple a couple of months. Um, you know, can I guess can you just talk about what kind of what you know kind of drove you to to kind of take this role and you know, kind of what month, you know kind of how you think you can Leverage The the area's platform, you know better to kind of continue to achieve the results that you're looking for.

Sure, in terms of the first part of your question What attracted me to areas? I think the overall platform really speaks for itself the breadth of of product offering the team members that that do the work day to day is is as impressive as you can find I think specifically to the real estate space having the synergies that exist between off the debt and Equity business position is very well both to to find unique opportunities and to execute on them judiciously, I think in terms of the growth path and and David Moss and I speak about this, you know on a daily basis. We think there's some low-hanging fruit in terms of the joint execution of the business plan between debt and equity and I think that will specifically benefit off the acre platform.

I guess on that. I mean are you would you look to add Equity to the acre business or anything that kind of has longer duration than the current the correct folio or is that you know other ways to kind of Leverage The the equity business? Yeah, I think it's more um the mindset and and the approach to the business. I think from an underwriting perspective or focus a great deal on on the basis of the assets that we are financing. There's no intent to get into the equity business. I think our our colleagues there do a great job and and Thursday, we're going to maintain a disciplined approach to the debt business itself. We do think that there may be some opportunity in the future to find longer-duration assets that should be attractive both from an r o e perspective and otherwise, um, so really I would think about it as specifically day-to-day underwriting help specific example.

You know, we're we're working on a trip.

Transaction now that is two doors down from an asset that uh, our Equity Fund has underwritten and provided a bid on so that's the type of synergy that I'm that I'm referencing.

Great. Thank you, Brian.

The next question will come from Steve Delaney with JMP Securities, please go ahead good morning. And thank you for taking the question. We noticed it in the four Q originates change that you had to Industrial loans, totaling 80 million and that for for loans and in industrial for all the 2919. So you're now up to 7% Could you just comment on those opportunities? It looks like one was Florida one was California and also it everybody's talked about industrial over the last several years, but they say yeah, we'd love it. If we can't find any maybe comment on what Ares did differently in 2019 to find some attractive industrial loans. Thanks.

Sure. Good morning Steve. This is Kasich. I'll tell you so, you know, clearly clearly industrial is a sector that that we do book is quite heavily on and it's Brian mentioned. It is certain age something on the equity side of the business that we have a great deal of expertise both in the US and in Europe and it is a sector that we have focused on I think it has taken us a little bit longer on the debt side to get more exposure because of what we discussed before there's a bit of a, you know, a binary nature to the business. It's either, you know, fully stabilized very institutional long-term debt long-term lease application or it's one where you know, it's highly highly transitional right at the very beginning stages or ground up development. And so there are I would say a little bit more of a limited opportunity set off, you know, nonetheless. This is a sector that our overall real estate team is very focused on and I think one of the benefits that we're seeing within the debt side is we're starting to see greater deal flow dead.

I think what you saw in 2019 in particular fourth quarter, you know is a reflection of that.

It's helpful. And on the dividend policy. Should we think about that it it you guys have ramped up your earnings nicely contributing, you know part of that we attribute to maybe the areas Warehouse, um, but going forward now that you're sort of at the level and the stock is responded. Are you thinking about your dividend is more of an annual decision, or will it still be more ad hoc as you as you go through the year?

Sure, great question, you know, I think it is a longer-term decision. You know, we do evaluate a quarter-to-quarter. However, as we've talked about we do think of our you know, annual earnings Target annual production are you know our annual objectives, you know on a longer-term basis than quarter-to-quarter but having said that, you know, the dividend is reviewed by the board and is and it certainly reviewed by the management team as well, you know on a quarter-to-quarter basis, I think historically we have faith in the first quarter, you know Look to You Know look to our dividend and made sure that we were very comfortable with it. I think our track record more or less speaks for itself, you know, we've had four consecutive years where we have either earned or out earned our dividend in terms of core earnings and that is certainly something we intend to continue. And so I don't think anyone should read to month.

Great, okay.

into whether we did or did not raise the dividend this quarter it will continue to be evaluated on a I would

They are rolling 12-month basis, not on a calendar 12 calendar year 12 month basis, but we do take a you know, a longer-term approach to setting the dividend. Obviously, we want to make sure our systems are growing and stable and consistent and that we continue to fully learn or meet our dividend. It no that's helpful. Especially your comment about rolling rolling 12-month Outlook page. Thank you very much for the comments. Absolutely. Thank you Steve. The next question is from Jade. Rahmani. Thanks very much of one point six years on the portfolio. Is that on a fully extended basis and can the company redeployed Capital at similar return levels about a year and half from now and Thursday is lungs pet fully repaid.

Sure, good morning. This is Kasich. You know, I think our remaining weighted average life has remained very consistent over the last couple of years. It's always been for the senior portfolio in particular, you know anywhere from 1 and 1/2 to 2 years. So we were originated alone. If you want to call it. The typical loan is a three-year loan with some extensions that are built in page and typically those extensions have certain tests that need to be met. So when we talk about the weighted average life, we're talking to the initial maturity not the extended maturity really for that reason, but you know, this is nothing new for us. This is very purposeful and the type of loans that we're pursuing as we mention. We really like the shorter term loans because it allows us to Thursday instead of you know, position our portfolio for a little bit more of a near-term outlook on you know on the macroeconomy. So for example, you see today we have virtually no retail exposure dead.

if we had a legacy portfolio that was five years or seven years older you probably

See a lot more retail than what you see today. So I think that's a, you know, great real-time example of how a short-term floating-rate portfolio allows us to continue to tailor our portfolio for more current month conditions. But to answer your question. No, I think we feel very comfortable that will continue to originate, you know will continue to out originated are repayments and we are very cognizant of when repay ma'am coming up we put in place to Ares Warehouse line to help better manage the timing and repayments and new organizations. So we feel very comfortable that we will be able to manage the repayments are coming up and be able to manage our returns in our oh he's okay. And do you feel that leopard returns are currently consistent with the last couple of quarters?

You think so. Yeah. Yeah. I think that that they have been I think obviously as we recognize in our the beginning of the call, we we recognize where the market is and and the pressures that do exist. We've been able to find pockets of of assets that that hit r r o s at at similar risk profiles to that which we've we've targeted previously and we're also offer benefits from more efficient capital on our liability side of the balance balance sheet.

Okay. Thanks.

Very much the in the repayments you mentioned that maturity dates were pushed out each with specific reasons. First of all in the schedule that you showed in the third quarter supplemental weren't any 2019 maturity dates that I assume that's the fully extended maturity dates, but can you give color on what pushed out each maturity extension a loan modification and I think in addition the 10K disclose that in November acre did modify and $11 loan on a residential property in California wage and increase the interest rate. So if you could comment on that as well

Sure, absolutely. So when you look at the business of acre, you know, we're obviously focused on lending against quality assets that are generally undergoing a sort of business transition where you know, the owner borrower developer manager is repositioning the asset so that they can enhance cash flow. They can enhance occupancy. They can grow rent until we really like about our business plan is that you know over the course of exiting that business plan actually enhance cash flow and and also enhance value so that we get delivered from our perspective, you know over the execution of that business plan noting all that, you know, business plans do take some times, uh, different schedules and originally plan. So I'm playing sometimes get executed faster sometimes business plans get executed longer and generally when we find ourselves in a situation where we are being asked to modify or extend alone again. Yep.

Think of that as very ordinary.

Course of business, you know again as a transitional lender, this is what it's about. Right? It's about underwriting business plan executions and in some cases and again relatively limited but in some cases, I do expect as part of our ordinary course of business to modify an extend loans, you know specifically with respect to the you know, one loan that you pointed out where you know, we did modify them alone. You know, I think that's a great example of one where you know, not only are we modifying the loan and extending alone, but you know, those are situations where you know, we can for example, ask for fees we can ask for higher rates of Interest. So these modifications don't come for free if you want to call that and in addition and again, I won't speak specifically to any particular loan just given the sensitivity and and and any specific ones itself, you know, we do we do also seek to get in some cases additional collateral dead.

additional deposits and

There's no escrows additional protection mechanisms. I think, you know, we're very conscious of you know, buttressing and further about you're saying our security position in these types of situations where their jobs are either extensions or modifications and that California alone. It's characterized as residential. Is it multi-family or is it something else?

No, I think this is the one loan that you know, we've spoken up before is not multi-family. It is a single family residential development. It's our only exposure to that sector, but I think we talked wage this before.

It's for sale housing.

Correct. Okay. So what's going on with the project?

Again again, I you know what we generally don't do is talk specifically about any individual project, you know on a public call like this, but as I said, you know projects did take longer, you know, we don't think there is an impact on collateral value. We don't certainly think there's an impairment as I mentioned, you know, we think this is ordinary course of business to extend modify certain loans in this situation in particular we were able to get some better economics and in particular we were able to get additional collateral to again further buttress our club ocean.

Okay.

Also wanted to ask about you did mention potential other asset classes that would include longer-duration. What are your thoughts about the Freddie Mac K series program and it's buying be pieces within that program could be attractive.

Yeah, that's specifically hasn't been a focus of ours recently. I think what I'd say is the the yields around a lot of those types of Securities have been compressed down and we find that our skill set in our yields that that we are targeting are are better matched up to bespoke originations on on Direct real estate rather than in a public format. We we obviously given the the breath of the platform and the different asset classes that we either invest in or tangentially cover or aware of it. And we've we pay attention to what I owe on both in the the k-series type product and cmbs generally. Um right now we don't find it all that compelling.

Okay. Do you know are there questions in the queue after me? Otherwise, I'll get back in the queue.

Yes, there are a couple of other persons on the call. Yes. Okay. Thanks. Thank you to the next question is from Steven laws with Raymond James, please go ahead real good morning up a little on Jade's line of questioning but you know taste like you mentioned your prepared remarks that no prepayments. No repayments month-to-date from the table's will supplement. It looks like I think five loans for February, you know maturity of this month another like a condo residential loan meslow next month you talk about discussions with those borrowers, you expect those prepayments to occur between now and quarter-end have they extended or kind of how should we think about the repayments coming here in the next month or two as we as we build our model out?

Sure.

No, absolutely. I think you're right. I think there are two loans with a February 2020 maturity day and then you know three other loans with a March twenty twenty-five or day again, I think each situation is, you know, pretty different and unique, you know, there isn't you know any sort of commonality if you want to call that with these maturities, you know, I would certainly say that our expectation today is that you know, most will pay off, you know in accordance with the expected maturities that you see here. I would also tell you that, you know, we are working on some further extensions of some of the loans as well. And again, I think in connection with those further extensions, you know, I think I gave you this again as pretty much ordinary course of business, but I think in connection with these further extensions, you know, we will be seeking, you know, better economics and better structured to protect us during this month.

Good.

But I do think you know, we'll see some repayments and we'll see some extensions combination of the two.

And can you maybe talk a little bit about that just to pick on two random loans your two largest multifamily loans loan one matures this month. It's Adelle + 475 1/2 hour late, you know few months ago and I'll + 285, you know, when you do an extension on one of these loans, you keep the same terms so they get better as it negotiated somewhere between the existing rate and Thursday and market-rate kind of can you can you give us any color on how that conversation goes and and what adjustments to the to the the interest income results from that?

Yeah, I don't think there's a general rule obviously. Wish there was I think each of them is negotiated based on you know, the outstanding principal balance of the loan relative to what we feel the collateral value is obviously we feel that we're well secured in each of the situations and we do approach each of these situations opportunistically right off as tasted mentioned. We from a credit standpoint want to effectuate a deleveraging of our of our position one way or the other either through a pay down or through additional collateral and then Thursday, we are opportunistic with respect economics as well. So we're going to capitalize on on that with respect to fees obviously from an IR perspective of pay down has a similar effect wage and in certain instances, we will increase the the rate, um in most instances. This is a a short-term extension, but we've yep

across the board we feel

We're well secured and improving our position materially through through the changes and through the extension.

Great and to follow up in an earlier question. I remember it was Doug or Steve Delaney would ask but from a capital standpoint, you know, you just did a secondary offering you you you've got an ATM which uh, you know, I don't think you've been very active with please correct me if I'm wrong and and then you've got a financing facility that sits at the parent that Center disposable if you need to to front fun loans ahead of putting in I'm in your portfolio. So, you know, how much can you leverage the area's platform? What what type of origination volume would you like to see or how should we think about, you know, growing portfolio over the course of the year as far as your access to additional Capital, you know, as well as redeploying the the repayments that come in.

I'll touch on it briefly and then I'll let a stick to expand upon it but I think real estate credit is a natural extension of everything else that goes on within the areas business lines. Um and given David Ross arrival last year and the team members that that we have in place we feel we're well positioned to month span the origination capacity in house and there's various lovers we can pull to do that the pipeline obviously what we've we have a record first quarter based on commitment to date and we we have a as we indicated in our prepared remarks a strong pipeline behind those commitments and we feel we have as much transparency into the offensive side of our business as long we've had um in quite some time. I think with respect to repayments. We we manage them as best we can but certain parts of that are outside of our control. Um, we are dead.

As we said opportunistically working with borrowers to extend certain credits.

And reposition those assets in our favor with respect to the rest of the year. I think we're going to continue to focus on expanding our origination footprint as we wage is not remarks as well. I think increasing our average loan size will be very beneficial to us as we scale the platform we can we can do more with less in that regard. It's like, I don't know if if I add anything further their sure maybe just add just a couple of things, you know, so we did 777 727 million in 2019 Steve Nash. You said, you know, we raise more Capital we have 8 p.m. We have the area's Warehouse line, you know, we have more financing kept capacity as well. So I think you know we've set ourselves up very well. We think for you know, a growing a creative business and we're hoping to take advantage of that. So in addition to those those incremental liquidity mechanisms, you know, yep.

As Prime mentioned in his remarks, you know, we continue to expand our team we continue to add offices, you know, we continue to further leverage the area's platform for David and everyone else on the on the team. So I think you know, we are absolutely position ourselves for you know, growing origination volume, but at the same time, you know, fully maintain a credit discipline and that's why in response to the prior question of you know, do we expect repayments to be an issue going forward? I think we've been able to imagine the past. I think it'll be increasing volume of of repayments going forward just given are higher are higher loan count today, but you know in addition to all that with increased loan size. May I do feel very comfortable that will be able to continue that how to originate our deployment are repayments and that we will continue to be able to you know, make sure that we remain as fully invested a pig.

Thursday

appreciate the color. Thanks basic and

Brian of Veronica appreciate it. Thank you Stephen.

The next question is from Rick Shane with JPMorgan.

Hey guys. Thanks for taking my questions this afternoon or this morning. First of all, we really do appreciate the granularity particularly on the floors. It's very helpful. So thank you for that case a good one, sir technical question for you. When we look at the areas line and Loans on that line. Does that count as an unfunded commitment for the re and does it actually have a Cecil Reserve?

Morning, thanks for your question. So, you know when when a loan is placed under the area's Warehouse line, there is nothing recorded on a club books. So it's not recorded as a commitment. It's not there's no Cecil Reserve because acre has the option but not the obligation to you know, purchase the log on from the area's vehicle. So because of that there is no reflection on the acre balance sheet of any loans that are on the on the area's Warehouse line until a name was you know acre actually makes that purchase and once acre does make that purchase it'll certainly be reflected both in terms of outstanding balance, uh caring valve that commitment as well as Cecil Reserve, but only when it's brought on two acres balance sheet

Got it. Okay, that that's helpful. And then Brian I wanted to talk a little bit your final comments were about the opportunity to scale this business and for historical reasons acre has elapsed access to the capital markets lack the ability to scale and it is in fact substantially smaller than several of its appears which month or I guess incubated longer before going public when you look at the opportunity in the fact that acre has returned to the capital markets what took the opportunity to enhance our own in terms of basis points. And how much larger do you think? You need to be in order to realize that?

It's a good question. And I guess I'd say I think there's not necessarily a true Benchmark that we have to attain in order to increase our efficiency of capital. Um, we do I think based on the raise in January and the positioning of the platform through the origination pipeline. We feel pretty comfortable that we're already benefiting from the scale both from the the the Aries name and I think it becomes reflected in in our borrowing costs which which we've managed down, um appropriately over the last quarter and a half before there's not a Target size for the platform. I think the disciplined approach that the firm has taken to capital-raising in the past reflected in the the patience of trade-off of booked for such a long period of time before going to the market. I think we're going to continue to employ that same discipline. Um, but the more transparency we have we used to be our origination wage.

Atlanta more comfortable will be um access.

in various parts of the capital structure

got it and and Kasich. Oh, oh, I'll put that same question to you. When we look at the p&l is the opportunity for scale in the GNA expanse and the professional teams is that were cuz again, obviously one of the challenges for externally managed Vehicles is historically there is less expense Leverage. Is that where we would see it and how would you expect those expenses to grow in relation to portfolio growth?

Sure Rick, it's a great question. And I think you know we've discussed this a bit before you know, and and and really I think a terrific part of our business model is that off our G&A expenses are largely fixed in terms of the dollar amount. So our audit Clause, you know, our listing fees or Dino Insurance some of those are the bigger line items. So with the recent $73 Equity offering which, you know, increase our Capital Base by about 17% or so. We certainly wouldn't expect a 17% increase in those types of fixed expenses, I would tell you that we expect virtually no change in, you know, the fixed expenses that I just mentioned so that really that net are we on this incremental 73 million is going to be higher than the fact that we were earning on, you know, the capital days prior to that. So I think that is going to be one of the big benefits of scale. So even if you know the the spreads our loans don't change if wage

nothing else changes other than having

A bigger Equity Capital base. We will you know, we will realize the benefits of spreading fixed expenses over wider Capital base and grow r r o e and or earnings from there the same part where I think we will benefit again without changing the spread without changing the you know, the gross revenues is that we believe we will get better financing costs, you know with a larger portfolio with a larger Capital base. I think one of the reasons you could easily see this is we can do for example larger more Diversified clo financings. We will get better range better structures. And I think that'll again help r r o e even if the spreads our loans don't change.

Got it. Okay. Thank you very much guys.

Absolutely. Thank you Rick. Once again is reminder. If you'd like to ask a question, please press * then 1 the next question is a follow-up from Giovanni with please go ahead. Thanks very much. I wonder if I'm wondering if m&a is still a priority for the company or if the emphasis has shifted more toward organic growth.

So I think you know again one of the big advantages of being part of the Aries family is we continue to see we think just about all opportunities for m&a whether it's whether it's something brought to us or whether we see the inside track and approach potential partners and targets and so m&a will continue to be you know, a very viable and and very attractive opportunity for us to grow but just like, you know, as we mentioned in terms of raising Equity or going to business we're only going to do it for the right reasons wage is not simply to get bigger but really to have a enhanced synergistic growing r o e business and so that may be a very high bar for us to hit in terms of May but you know Acquisitions and mergers, you know is certainly something that we continue to evaluate we continue to look at and again being part of Ares family. We have great access to

Okay.

Just a couple of quick other ones in terms of the REO portfolio the hotel in Westchester the income streams been somewhat volatile. It doesn't seem to follow a seasonal pattern. I was wondering if you give some color if you could give some color on the earnings contribution. We should expect to retake the fourth quarter and analyze it to retake the last three quarters and realized that off anything you could say on that.

Sure. So one thing to keep in mind is that you know, we took over ownership sort of mid first quarter 2019. So even 2019 itself doesn't reflect a month for 12 months basis. And certainly the first quarter of 2019 is a partial quarter. The second thing to mention is background is that you know hotels, you know where this one is located in Worcester County, you know is a seasonal business. So third-quarter in particular is a very slow quarter relative to second and fourth quarters, which tend to be the you know, the busier Quarters off because it's not a tourist Hotel. This is more of a business class Hotel. So there's going to be less business travel in the months of July and August in particular. And therefore you did see our wage earnings for the third quarter. It would be the lowest of the Year again, excluding first quarter because that was a partial quarter. So there is some seasonality. So it's hard to you know, annualize any particular quarter dead.

Having said all that, you know, we're very pleased with the performance.

Of you know this hotel what we saw in 2019 is that you know, we exceeded budget even exceeded budget by about 5% So we had shown nice bath year-over-year growth, you know, we continue to outperform budget we did finish our capex program on the you know on some of the common areas in the in the hotel and I think we saw some increase in a meeting traffic towards your end because of that and we'll continue to active manage actively-managed this asset. We are not long-term holders as well. I mentioned we're not in the office business, but I think this is a great demonstration of our capability to manage a situation like this where there was virtually no interruption between the time. We were A lender versus an owner because we worked very very closely with and part of an integrated real estate team, you know, we're able to take situations like this mitigate any losses and Ed.

And there's this hotel and you know, when the right time comes to sell this house that you know, we will do so in a very orderly manner and and hopefully be out of it is the third quarter a decent proxy for the first quarter or is is one Q lighter than than three Q.

You know again.

I would tell you the second and fourth quarters tend to be the stronger quarters and third and fourth quarters tend to be the lighter quarters not trying to give you an exact comparison of you know, first versus third. It's almost month by month, but it is it is a seasonal business.

Okay, and just lastly on financial leverage, you know, it was 3.1 times at year-end and following the the recent Equity raise. We belong somewhere in the 2.7 times range should be modeling getting back to that three times range. And what's the long-term assumption for leverage?

So I think you know, I think we've talked about plus and minus three so long as we maintain a you know, a strong ratio of senior loans is about our our intended target and where we that's where we come out. You know, we do vary our financing quite a bit loan by loan portfolio by portfolio. So for example, you know the clo transaction that we did a couple of years ago given the attract the attractiveness of that type of financing being non-recourse being matched funded and and the overall terms of that structure, you know, we did choose to go higher and leveraging that one was a little bit more than 4:00 to 1 and in some situations we go significantly Less Than 3 to 1 so it is a you know loan Bailon determination, but really our overall business name r o e model is predicated predicated upon maintaining a lot of three to one ratio. So, you know being at 3 and one in Iran, you know, we thought was a very good level for us.

Okay. Thanks very much for taking the questions right. Thank you.

This concludes our question answer session. I would like to turn the conference back over for closing remarks to Brian Donohoe.

Thank you. I want to thank everybody for their time today, and 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 call for today. If you missed any part of today's call an archived replay of this conference call will be available available approximately one hour after the end of this call through March 5th, 2022 domestic Colors by dialing 177-344-7529 and to International callers by dialing +1-412-357-0088 for all replays. Please reference conference number 101-3768. An archived replay will also be available on a webcast link located on the homepage of the investor resources section of our website. Thank you for joining. Today's presentation. You may now disconnect. Take care.

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