Some of the statements contained in this quarterly report constitute forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions contained therein. The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in "Risk Factors" and elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2013. In addition, some of the statements in this quarterly report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Commercial Real Estate Corporation(except where the context suggests otherwise, together with our consolidated subsidiaries, the "Company," "ACRE," "we," "us," or "our"). The forward-looking statements contained in this quarterly report involve a number of risks and uncertainties, including statements concerning: † our business and investment strategy; † † our projected operating results; † † the timing of cash flows, if any, from our investments; † † the state of the U.S. economy generally or in specific geographic regions; † † defaults by borrowers in paying debt service on outstanding items; †
† actions and initiatives of the
† † our ability to obtain financing arrangements; † † the amount of commercial mortgage loans requiring refinancing; † † financing and advance rates for our target investments; † † our expected leverage; † † general volatility of the securities markets in which we may invest; †
† the impact of a protracted decline in the liquidity of credit markets on our business;
† † the uncertainty surrounding the strength of the U.S. economic recovery; † † the return or impact of current and future investments; †
† allocation of investment opportunities to us by
† changes in interest rates and the market value of our investments;
† † effects of hedging instruments on our target investments; †
† rates of default or decreased recovery rates on our target investments;
† the degree to which our hedging strategies may or may not protect us from interest rate volatility;
† changes in governmental regulations, tax law and rates, and similar matters (including interpretation thereof);
† our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes, or "REIT";
† †† -------------------------------------------------------------------------------- †
† our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the "1940 Act";
† availability of investment opportunities in mortgage-related and real estate-related investments and securities;
† the ability of our Manager to locate suitable investments for us, monitor, service and administer our investments and execute our investment strategy;
† our ability to successfully complete and integrate any acquisitions;
† our ability to integrate
† the successful completion of the
† † availability of qualified personnel; †
† estimates relating to our ability to make distributions to our stockholders in the future;
† † our understanding of our competition; †
† market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; and
† † the future of
U.S. Government-sponsored entities. We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013and elsewhere in this quarterly report on Form 10-Q. We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Overview We are a specialty finance company that operates both as a principal lender and a mortgage banker (with respect to loans collateralized by multifamily and senior-living properties). We are externally managed by our Manager or "ACREM," a wholly owned subsidiary of Ares Management LLC, or "Ares Management," a global alternative asset manager and a SECregistered investment adviser, pursuant to the terms of a management agreement. Our Manager has investment professionals strategically located across the nation who directly source new loan opportunities for us with owners, operators and sponsors of commercial real estate ("CRE") properties. From the commencement of our operations in late 2011, we have been primarily focused on our principal lending business, where we directly originate, manage and service a diversified portfolio of CRE debt-related investments for our own account. We are also engaged in the mortgage banking business through our wholly owned subsidiary, ACRE Capital LLC(" ACRE Capital"), which we believe is complementary to our principal lending business. In this business segment, we primarily originate, sell and service multifamily and other senior-living-related loans under programs offered by Fannie Mae ("Fannie Mae") and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development("HUD"). ACRE Capitalis approved as a Delegated Underwriting and Servicing ("DUS") lender to Fannie Mae, a Multifamily Accelerated Processing ("MAP") and Section 232 LEAN lender for HUD, and a Government National Mortgage Association("Ginnie Mae") issuer. While we earn little interest income from these activities as we generally only hold loans for short periods, we receive origination fees when we close loans and sale premiums when we sell loans. We also retain the rights to service the loans, which are known as mortgage servicing rights or "MSRs" and receive fees for providing such service during the life of the loans which generally last ten years or more.
Because we operate both as a principal lender and a mortgage banker (with respect to loans collateralized by multifamily and senior-living properties), we can offer a wider array of financing solutions to our customers, including (i) short and long-term loans ranging from one to ten (or more) years, (ii) bridge and permanent loans, (iii) floating and fixed rate loans, and (iv) loans
40 -------------------------------------------------------------------------------- collateralized by development, value-add (or transitional) and stabilized properties. We also have the flexibility to provide a combination of solutions to our customers, including instances where our principal lending business provides a short-term, bridge loan to an owner of multifamily properties while our mortgage banking business seeks long-term permanent financing for the same customer. This provides us the opportunity to offer a customer an efficient "one stop" financial product and at the same time to earn revenues at multiple times in the relationship with the customer. First, we earn interest and interest-related income while holding the short term bridge loan. Second, we earn origination fees and sale premiums when we provide permanent financing and sell the loans under HUD/
Ginnie Maeand government sponsored entity ("GSE") programs. And, third, we earn servicing fees from MSRs that we retain on the permanent loans. We were formed and commenced operations in late 2011. We are a Marylandcorporation and completed our initial public offering (the "IPO") in May 2012. We have elected and qualified to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2012. We generally will not be subject to U.S. federal income taxes on our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to the extent that we annually distribute all of our REIT taxable income to stockholders and comply with various other requirements as a REIT. We also operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act. We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the "JOBS Act," and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies." In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. However, we chose to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We could remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 millionas of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billionin non-convertible debt during the preceding three year period. The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, CRE debt and other financial assets in the marketplace. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of investment, conditions in the financial markets, credit worthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Changes in Fair Value of Our Assets. In our principal lending business, we generally hold our target investments as long-term investments. We evaluate our investments for impairment on at least a quarterly basis and impairments will be recognized when it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we will record an allowance to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan's contractual effective rate, or if repayment is expected solely from the collateral, the fair value of the collateral. Loans are collateralized by real estate and as a result, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower, are regularly evaluated. We monitor performance of our investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower's ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral, i.e., leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service as well as the residual loan balance at maturity; (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower's exit plan, among other factors. 41 --------------------------------------------------------------------------------
Although we generally hold our target investments as long-term investments within our principal lending business, we may occasionally classify some of our investments as available-for-sale; provided that such classification would not jeopardize our ability to maintain our qualification as a REIT. Investments classified as available-for-sale will be carried at their fair value, with changes in fair value recorded through accumulated other comprehensive income, a component of stockholders' equity, rather than through earnings. Additionally,
ACRE Capitaloriginates multifamily mortgage loans, which are recorded at fair value. The holding period for these loans held for sale is approximately 30 days. At this time, we do not expect to hold any of our investments for trading purposes.
Changes in Market Interest Rates. With respect to our business operations, increases in interest rates, in general, may over time cause:
† the interest expense associated with our borrowings to increase, subject to any applicable ceilings;
† † the value of our mortgage loans to decline; †
† coupons on our mortgage loans to reset to higher interest rates; and
† to the extent we enter into interest rate swap agreements as part of our hedging strategy where we pay fixed and receive floating interest rates, the value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause:
† the interest expense associated with our borrowings to decrease, subject to any applicable floors;
† the value of our mortgage loan portfolio to increase, for such mortgages with applicable floors;
† coupons on our floating rate mortgage loans to reset to lower interest rates; and
† to the extent we enter into interest rate swap agreements as part of our hedging strategy where we pay fixed and receive floating interest rates, the value of these agreements to decrease. Credit Risk. We are subject to varying degrees of credit risk in connection with our target investments. Our Manager seeks to mitigate this risk by seeking to originate or acquire investments of higher quality at appropriate prices given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results and stockholders' equity. Market Conditions. We believe that our target investments currently present attractive risk-adjusted return profiles, given the underlying property fundamentals and the competitive landscape for the type of capital we provide. Following a dramatic decline in CRE lending in 2008 and 2009, debt capital has become more readily available for select stabilized, high quality assets in certain locations such as gateway cities, but remains muted for many other types of properties, either because of the markets in which they are located or because the property is undergoing some form of value creation transition. More particularly, the available financing products tend to come with limited flexibility, especially with respect to prepayment. Consequently, we anticipate a high demand for the type of customized debt financing we provide from borrowers or sponsors who are looking to refinance indebtedness that is maturing in the next two to five years or are seeking shorter-term debt solutions as they reposition their properties. We also envision that demand for financing will be strong for situations in which a property is being acquired with plans to improve the net operating income through capital improvements, leasing, costs savings or other key initiatives and realize the improved value through a subsequent sale or refinancing. We also see a changing landscape in which many historical debt capital providers respond to banking regulatory reform with less active participation or more rigid products, less tailored to the needs of the borrowing community. While we expect to see or have seen the emergence of new providers, we believe those with deep experience and strong backing will have the opportunity to build market share. Performance of Multifamily and Other Commercial Real Estate Related Markets. Our business is dependent on the general demand for, and value of, commercial real estate and related services, which are sensitive to economic conditions. Demand for multifamily and other commercial real estate generally increases during periods of stronger economic conditions, resulting in increased property values, transaction volumes and loan origination volumes. During periods of weaker economic conditions, 42
multifamily and other commercial real estate may experience higher property vacancies, lower demand and reduced values. These conditions can result in lower property transaction volumes and loan originations, as well as an increased level of servicer advances and losses from
The Level of Losses from Fannie Mae Allowance for Loss Sharing. Loans originated and sold by
ACRE Capitalto Fannie Mae under the Fannie Mae DUS program are subject to the terms and conditions of a Master Loss Sharing Agreement, which was amended and restated during 2012. Under the Master Loss Sharing Agreement, ACRE Capitalis responsible for absorbing certain losses incurred by Fannie Mae with respect to loans originated under the DUS program, as described below in more detail. The losses incurred with respect to individual loans are allocated between ACRE Capitaland Fannie Mae based on the loss level designation ("Loss Level") for the particular loan. Loans are designated as Loss Level I, Loss Level II or Loss Level III. All loans are designated Loss Level I unless Fannie Mae and ACRE Capitalagree upon a different Loss Level for a particular loan at the time of the loan commitment, or if Fannie Mae determines that the loan was not underwritten, processed or serviced according to Fannie Mae guidelines. Losses on Loss Level I loans are shared 33.33% by ACRE Capitaland 66.67% by Fannie Mae. The maximum amount of ACRE Capital'srisk-sharing obligation with respect to any Loss Level I loan is 33.33% of the original principal amount of the loan. Losses incurred in connection with Loss Level II and Loss Level III loans are allocated disproportionately to ACRE Capitaluntil ACRE Capitalhas absorbed the maximum level of its risk-sharing obligation with respect to the particular loan. The maximum loss allocable to ACRE Capitalfor Loss Level II loans is 30% of the original principal amount of the loan, and for Loss Level III loans is 40% of the original principal amount of the loan. The Price of Loans in the Secondary Market. Our profitability is determined in part by the price we are paid for the loans we originate. A component of our origination fees is the premium we recognize on the sale of a loan. Stronger investor demand typically results in larger premiums while weaker demand results in little to no premium. Market for Servicing Commercial Real Estate Loans. Service fee rates for new loans are set at the time we enter into a loan commitment based on origination volumes, competition and prepayment rates. Changes in future service fee rates impact the value of our future MSRs and future servicing revenues, which could impact our profit margins and operating results over time. Restructuring activities During the three months ended March 31, 2014, we began restructuring and relocating certain ACRE Capitalsupport services in order to centralize the platform into one location. For the three months ended March 31, 2014, we recorded $0.2 millionof costs associated with restructuring activities, which consisted primarily of employee termination costs. These costs were recorded in general and administrative expenses within the ACRE Capitaloperating segment. Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended
Results of Operations
The following table sets forth consolidated results of operations for the three months ended
For the three months ended March 31, 2014 2013 Net interest margin: Interest income from loans held for investment $ 15,152 $ 6,711 Interest expense (5,072) (1,385) Net interest margin 10,080 5,326 Mortgage banking revenue: Servicing fees, net 5,263 - Gains from mortgage banking activities 1,386 - Provision for loss sharing (119) - Change in fair value of mortgage servicing rights (1,847) - Mortgage banking revenue 4,683 - Gain on sale of loans 680 - Total revenue 15,443 5,326 Expenses: Other interest expense 1,685 1,552 Management fees to affiliate 1,492 614 Professional fees 925 566 Compensation and benefits 4,021 - Acquisition and investment pursuit costs 20
General and administrative expenses 2,219
General and administrative expenses reimbursed to affiliate 1,000 747 Total expenses 11,362 4,601 Changes in fair value of derivatives -
Income from operations before income taxes 4,081
Income tax expense (benefit) (674) - Net income $ 4,755 $ 327
Comparison of Three Months Ended
Net Interest Margin For the three months ended
March 31, 2014and 2013, we earned approximately $10.1 millionand $5.3 millionin net interest margin, respectively. For the three months ended March 31, 2014and 2013, interest income from loans held for investment of $15.2 millionand $6.7 million, respectively, was generated by weighted average earning assets of $1.1 billionand $358.0 million, respectively, offset by $5.1 millionand $1.4 million, respectively, of interest expense, unused fees and amortization of deferred loan costs. The weighted average borrowings under our secured funding agreements were $702.5 millionand $149.6 millionfor the three months ended March 31, 2014and 2013, respectively. The increase in net interest margin for the three months ended March 31, 2014compared to the three months ended March 31, 2013primarily relates to the increase in the number of loans held for investment from 17 loans to 39 loans as of March 31, 2014. Mortgage Banking Revenue For the three months ended March 31, 2014, we earned approximately $5.3 millionin net servicing fees. Servicing fees include fees earned for all activities related to servicing ACRE Capital'sloans, the fees earned on borrower prepayment penalties and interest earned on borrowers' escrow payments and interim cash balances, along with other ancillary fees. For the three months ended March 31, 2014, we earned approximately $1.4 millionin net gains from mortgage banking activities. Gains from mortgage banking activities includes the initial fair value of MSRs, loan origination fees, gain on the sale of loans, interest income on loans held for sale and changes to the fair value of derivative financial instruments, including loan commitments and forward sale commitments. Since the acquisition of ACRE Capitalclosed on August 30, 2013, we did not earn any servicing fees or have gains from mortgage banking activities for the three months ended March 31, 2013relating to ACRE Capital. 44 --------------------------------------------------------------------------------
For the three months ended
Related Party Expenses Related party expenses for the three months ended
March 31, 2014included $1.5 millionin management fees due to our Manager and $1.0 millionfor our share of allocable general and administrative expenses for which we are required to reimburse our Manager pursuant to the management agreement, dated April 25, 2012, between us and our Manager. Related party expenses for the three months ended March 31, 2013included $0.6 millionin management fees due to our Manager and $0.7 millionfor our share of allocable general and administrative expenses for which we are required to reimburse our Manager. The increase in related party expenses for the three months ended March 31, 2014compared to the three months ended March 31, 2013primarily relates to increased stockholders' equity and an increase in capital markets and acquisition activities. Other Expenses Other interest expense for the three months ended March 31, 2014and 2013 was $1.7 millionand $1.6 million, respectively, related to the 2015 Convertible Notes and warehouse lines of credit. Changes in fair value of derivatives for the three months ended March 31, 2013was $398 thousandrelated to the 2015 Convertible Notes. Professional fees for the three months ended March 31, 2014and 2013 were $0.9 millionand $0.6 million, respectively. Acquisition and investment pursuit costs related to the acquisition of ACRE Capitalfor the three months ended March 31, 2014and 2013 were $0.02 millionand $0.6 million, respectively. General and administrative expenses for the three months ended March 31, 2014and 2013 were $2.2 millionand $0.5 million, respectively. Since the acquisition of ACRE Capitalclosed on August 30, 2013, we did not incur any other expenses for the three months ended March 31, 2013relating to ACRE Capital. Compensation and benefits Compensation and benefits for the three months ended March 31, 2014was $4.0 million. Since the acquisition of ACRE Capitalclosed on August 30, 2013, we did not incur compensation and benefits for the three months ended March 31, 2013relating to ACRE Capital. Cash Flows
The following table sets forth changes in cash and cash equivalents for the three months ended
For the three months ended March 31, 2014 2013 Net income $ 4,755 $ 327 Adjustments to reconcile net income to net cash provided by operating activities: 2,931 899 Net cash provided by operating activities 7,686 1,226 Net cash used in investing activities (66,519)
Net cash provided by financing activities 69,135
Change in cash and cash equivalents $ 10,302 $ (840) Cash and cash equivalents increased by
$10.3 millionand decreased by $0.8 million, respectively, during the three months ended March 31, 2014and 2013. Net cash provided by operating activities totaled $7.7 millionand $1.2 million, respectively, during the three months ended March 31, 2014and 2013. This change in net cash provided by operating activities was primarily related to the increase in net interest margin due to an increase in loans held for investment. For the three months ended March 31, 2014, adjustments to net income related to operating activities primarily included originations of mortgage loans held for sale of $52.8 million, sale of mortgage loans held for sale to third parties of $56.1 million, change in the fair value of MSRs of $1.8 million, and change in other assets of $2.7 million. The adjustments for non-cash charges for the three months ended March 31, 2013, included stock-based compensation of $136 thousand, accretion of deferred loan origination fees and costs of $739 thousand, amortization of deferred financing costs of $227 thousandand $398 thousandof unrealized loss on the derivative (included in changes in fair value of 45 --------------------------------------------------------------------------------
derivatives). Net cash used in investing activities for the three months ended
March 31, 2014and 2013 totaled $66.5 millionand $55.7 million, respectively, and related primarily to the origination of new loans held for investment partially offset by a sale of a mortgage loan held for sale.
Net cash provided by financing activities for the three months ended
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We use significant cash to purchase our target investments, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash generally consist of unused borrowing capacity under our financing sources, the net proceeds of future offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. We expect that our primary sources of financing will be, to the extent available to us, through (a) credit, secured funding and other lending facilities, (b) securitizations, (c) other sources of private financing, including warehouse and repurchase facilities, and (d) offerings of our equity or debt securities. In the future, we may utilize other sources of financing to the extent available to us. See "Recent Developments" for information on our available capital as of
May 6, 2014. Equity Offerings
There were no shares issued in public or private offerings for the three months ended
During the quarter ended
City National Bank Facility
Advances under the CNB Facility accrue interest at a per annum rate equal to the sum of, at our option, either (a)
LIBORfor a one, two, three, six or, if available to all lenders, 12-month interest period plus 3.00% or (b) a base rate (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one month LIBORplus 1.00%) plus 1.25%; provided that in no event will the interest rate be less than 3.00%. Unless at least 75% of the CNB Facility is used on average, unused commitments under the CNB Facility accrues unused line fees at the rate of 0.375% per annum. For the three months ended March 31, 2014, we incurred a non-utilization fee of $8 thousand. The initial maturity date is March 11, 2016subject to one 12 month extension at our option if certain conditions are met. As of March 31, 2014, the outstanding balance on the CNB Facility was $45.0 million. BAML Line of Credit ACRE Capitalmaintained a line of credit with Bank of America, N.A. (the "BAML Line of Credit") of $80.0 millionwith a stated interest rate of Bank of America LIBOR Daily Floating Rateplus 1.60%. The agreement governing the BAML Line of Credit was amended in March 2014to extend the maturity date to May 1, 2014. See "Recent Developments", as well as Note 20 to our consolidated financial statements in this quarterly report on Form 10-Q for a subsequent event related to the BAML Line of Credit.
The sources of financing under our secured funding agreements (the "Funding Agreements") that are used to fund our target investments are described in the following table.
As of March 31, 2014 December 31, 2013 Total Outstanding Maturity Total Outstanding Maturity $ in thousands Commitment Balance Interest Rate Date Commitment Balance Interest Rate Date Secured Funding Facilities: LIBOR + 2.00 to December December Wells Fargo LIBOR + 2.00 to Facility
$ 225,000 $ 128,3802.50% 14,
$ 225,000 $ 166,9342.50% 14, 2014 (1) Earlier of Earlier of LIBOR + 2.25 to July 2, 2018 July 2, Citibank LIBOR + 2.25 to Facility 125,000 103,762 2.75% or (2) 125,000 97,485 2.75% 2018 or (2) LIBOR + 2.00 to Capital One LIBOR + 2.00 to Facility 100,000 64,400 3.50% - (2) 100,000 - 3.50% - (2) March 11, CNB Facility 50,000 45,000 LIBOR + 3.00% 2016 - - - - Total $ 500,000 $ 341,542 $ 450,000 $ 264,419Warehouse Lines of Credit: LIBOR + 1.40% No No ASAP Line of LIBOR + 1.40% to Credit $ 105,000$ - to 1.75% expiration $ 105,000$ - 1.75% expiration May 1, BAML Line of Credit 80,000 - LIBOR + 1.60% May 1, 2014 80,000 - LIBOR + 1.60% 2014 Total $ 185,000$ - $ 185,000$ - (1) The initial maturity date of the Wells Fargo Facility is
(2) The maturity date of each individual loan is the same as the maturity date of the underlying loan that secures such individual loan.
See Note 6 to our consolidated financial statements in this quarterly report on Form 10-Q and "Recent Developments" for further discussion of our secured funding agreements.
Other Credit Facilities, Warehouse Facilities and Repurchase Agreements
In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities, warehouse facilities, repurchase facilities, convertible debt, retail notes, securitized financings and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. Capital Markets In addition to borrowings, we will need to periodically raise additional capital to fund new investments. We have elected and qualified to be taxed as a REIT. Among other things, in order to maintain our status as a REIT, we must annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and, as a result, such distributions will not be available to fund investments. We may also seek to enhance the returns on our senior commercial mortgage loan investments through securitizations, if available. To the extent available, we intend to securitize the senior portion of some of our loans, while retaining the subordinate securities in our investment portfolio. The securitization of this senior portion will be accounted for as either a "sale" and the loans will be removed from our balance sheet or as a "financing" and will be classified as "securitized loans" on our balance sheet, depending upon the structure of the securitization. Leverage Policies We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exemption from registration under the 1940 Act, we intend to continue to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on first or senior mortgages, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 4-to-1 ratio. Our charter and bylaws do not restrict the amount of leverage that we may use. The amount of leverage we will deploy for particular investments in 47
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our target investments will depend upon our Manager's assessment of a variety of factors, which may include, among others, the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy generally or in specific geographic regions and commercial mortgage markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our assets, the collateral underlying our assets, and our outlook for asset spreads relative to the
LIBORcurve. Income Taxes We have elected and qualified for taxation as a REIT. As a result of our REIT qualification and our distribution policy, we do not generally pay U.S. federal corporate level income taxes. Many of the REIT requirements, however, are highly technical and complex. To continue to qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders. If we fail to continue to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax beginning with the year in which we fail to qualify) and may be precluded from being able to elect to be treated as a REIT for our four subsequent taxable years. Even though we currently qualify for taxation as a REIT, we may be subject to certain U.S. federal, state, local and foreign taxes on our income and property and to U.S. federal income and excise taxes on our undistributed REIT taxable income. In connection with the acquisition of ACRE Capital, we contributed the common units of ACRE Capitalto ACRE Capital Holdings LLC(" TRS Holdings"), a wholly owned subsidiary of ours. An entity classification election to be taxed as a corporation and a taxable REIT subsidiary ("TRS) election were made with respect to TRS Holdings. In addition, in December 2013, we formed a new wholly owned subsidiary, ACRC Lender W TRS LLC("ACRC TRS"), for which an entity classification election to be taxed as a corporation and a TRS election were made, in order to issue and hold certain loans intended for sale. A TRS is an entity taxed as a corporation other than a REIT in which a REIT directly or indirectly holds equity, and that has made a joint election with such REIT to be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by us without jeopardizing its qualification as a REIT. A TRS is subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, as a REIT, we also may be subject to a 100% excise tax on certain transactions between us and our TRS that are not conducted on an arm's-length basis. Dividends We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and to the extent that it annually distributes less than 100% of its net taxable income in any taxable year, and that it pay tax at regular corporate rates on that undistributed portion. We intend to make regular quarterly distributions to our stockholders in an amount equal to or greater than our net taxable income, if and to the extent authorized by our board of directors. Before we make any distributions, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our Funding Agreements, other lending facilities, repurchase agreements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Off-Balance Sheet Arrangements
The Company has commitments to fund various stretch senior and transitional senior mortgage loans, as well as subordinated and mezzanine debt investments in its portfolio, extend credit and sell loans. Commitments to extend credit by
ACRE Capitalare generally agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or VIEs, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities. 48 --------------------------------------------------------------------------------
Table of Contents Recent Developments On
April 9, 2014, we and certain of our subsidiaries entered into a $195.0 millionrevolving master repurchase facility (the "UBS Facility") with UBS Real Estate Securities Inc.("UBS"). We will use the UBS Facility to finance commercial mortgage loans, under certain circumstances, commercial real estate mezzanine loans, and other assets meeting defined eligibility criteria which are approved by UBS. The initial maturity date of the UBS Facility is April 7, 2017, subject to annual extensions in UBS's sole discretion. On April 30, 2014, we originated a $23.3 milliontransitional first mortgage loan on an apartment complex located in Georgia. At closing, the outstanding principal balance was approximately $20.8 million. The loan has an interest rate of LIBOR+ 3.85% (plus origination and exit fees) subject to a 0.25% LIBORfloor and a term of three years. On May 1, 2014, we originated a $33.5 millionstretch first mortgage loan on an industrial portfolio located in Ohio. At closing, the outstanding principal balance was approximately $32.7 million. The loan has an interest rate of LIBOR+ 4.20% (plus origination and exit fees) subject to a 0.20% LIBORfloor and a term of four years. On May 1, 2014, ACRE Capitalentered into a Sixth Amended and Restated Mortgage Warehousing Credit and Security Agreement with Bank of America, N.A. and the other lenders thereto, which provides for a committed warehouse line of up to $80.0 millionthat matures on April 15, 2015. On May 5, 2014, we originated a $20.4 milliontransitional first mortgage loan on two industrial buildings located in California. At closing, the outstanding principal balance was approximately $19.6 million. The loan has an interest rate of LIBOR+ 5.25% (plus origination and exit fees) subject to a 0.25% LIBORfloor and a term of three years.
In addition to increasing the size of the facility, the Citibank Facility amendment eliminated the
LIBORfloor (other than with respect to one mortgage loan pledged under the Citibank Facility) as part of the interest rate calculation and changed the final repayment date from being the latest date on which a payment of principal is contractually obligated to be made in respect of each mortgage loan pledged under the Citibank Facility to December 2, 2018.
Citibank Facility amendment and Amended and Restated Substitute Guaranty Agreement also modified certain financial tests and covenants to more effectively utilize the Citibank Facility, including, without limitation, modifying the debt to tangible net worth test to require us to maintain a ratio of (i) recourse debt to tangible net worth of 3.0 to 1 and (ii) total debt to tangible net worth of 4.0 to 1. As of
May 6, 2014, subject to obtaining financing commitments (in accordance with and subject to the terms of the Company's applicable funding facilities) for two loans totaling approximately $40 millionin outstanding principal, the Company expects to have approximately $68 millionin remaining capital, either in cash or in approved but undrawn capacity under the Company's funding facilities. After holding in reserve $10 millionin liquidity requirements, the Company expects to have approximately $58 millionin capital available to fund additional loans, outstanding commitments on the Company's existing loans and for other working capital purposes. Assuming that the Company uses such amount as equity capital to make new investments and is able to achieve a debt-to-equity ratio of 2.5 to 1, the Company has the capacity to fund approximately $200 millionof additional senior loan investments. On May 7, 2014, we declared a cash dividend of $0.25per common share for the second quarter of 2014. The second quarter 2014 dividend is payable on July 16, 2014to common stockholders of record as of June 30, 2014.