ACRE News Ares Commercial Real Estate Corporation Reports Fourth Quarter and Record Full-Year 2015 Results

Ares Commercial Real Estate Corporation Reports Fourth Quarter and Record Full-Year 2015 Results

News

Ares Commercial Real Estate Corporation Reports Fourth Quarter and Record Full-Year 2015 Results

Mar

1

2016

Fourth quarter net income of $8.9 million or $0.31 per diluted common share

 

 Record full-year 2015 net income of $34.3 million or $1.20 per diluted common share

 

 - Subsequent to end of fourth quarter -

 

 Increased first quarter 2016 dividend to $0.26 per common share

 

Expands stock repurchase program to $30 million

 

 

DECEMBER 31, 2015 FINANCIAL RESULTS

 

New York, NY — March 1, 2016 - Ares Commercial Real Estate Corporation (the "Company," "ACRE," "we," or "our") (NYSE:ACRE), a specialty finance company primarily engaged in principal lending and mortgage banking of commercial real estate loans, reported net income of $8.9 million or $0.31 per diluted common share and record net income of $34.3 million or $1.20 per diluted common share, respectively, for the fourth quarter and full-year of 2015. In addition, the Company announced that its board of directors declared a first quarter 2016 dividend of $0.26 per common share payable on April 15, 2016 to common stockholders of record on March 31, 2016.

 

"We are very pleased with our fourth quarter results, which concluded a strong year of execution where we exceeded our 2015 earnings goals and generated approximately 40% growth in year-over-year earnings per share," commented Robert Rosen, Interim Co-Chief Executive Officer and Chairman of ACRE. "During 2015, we efficiently deployed our available capital, expanded the production and profitability of our mortgage banking platform, maintained our strong credit discipline and further diversified our sources of financing. In addition, our investment portfolio continues to perform exceptionally well. Our strong execution against our goals and objectives positions ACRE to capitalize on the current market opportunity in 2016 and beyond. As a result, the Board of Directors has increased the quarterly dividend to $0.26 per common share. We currently expect our 2016 earnings per share to exceed our new level of dividends on an annual basis."

 

"Given current market volatility, borrowers are increasingly demanding the surety of execution and flexible capital that we provide," said John Jardine, Co-Chief Executive Officer and President of ACRE. "We believe this enhances our value proposition and provides us with the opportunity to take advantage of the higher returning investment opportunities currently available in the market. However, consistent with our disciplined approach to credit, we plan to be measured in our deployment of available capital."

 

"Having renewed or closed new funding facilities throughout 2015, we are well positioned with diverse sources of liquidity, moderate leverage and significant available capital for investment," said Tae-Sik Yoon Chief Financial Officer of ACRE. "Given the strength of our balance sheet and our available sources of liquidity, we expect to make purchases of our stock at current levels under our expanded stock repurchase program."

 

THREE MONTHS ENDED DECEMBER 31, 2015 FINANCIAL HIGHLIGHTS

Financial Results and Activities:

  • For the three months ended December 31, 2015, net income was $8.9 million or $0.31 per diluted common share, comprised of $6.9 million in net income for the Principal Lending segment and $2.0 million in net income for the Mortgage Banking segment.
  • For the Principal Lending segment, new originations were $63.0 million in commitments and $59.1 million in outstanding principal and an additional $16.3 million of fundings on existing commitments for the three months ended December 31, 2015. Loan repayments totaled $135.5 million in outstanding principal for the three months ended December 31, 2015.
  • For the Mortgage Banking segment, originations totaled $195.9 million in commitments for the three months ended December 31, 2015.

 

Capital Activities:

  • In October 2015, the Company amended the $140.0 million revolving master repurchase facility with UBS Real Estate Securities Inc. to, among other things, extend the initial maturity date to October 21, 2018 and amend the price differential (or interest rate).
  • In December 2015, the Company entered into a $155.0 million Credit and Guaranty Agreement (the ‘‘Secured Term Loan") with Highbridge Principal Strategies, LLC, as administrative agent, and DBD Credit Funding LLC, as collateral agent. The Company made an initial draw of $75.0 million at closing with the remaining $80.0 million that may be drawn within nine months of closing. The Secured Term Loan has a maturity date of December 9, 2018.
  • In December 2015, the Company amended and restated the $225.0 million Amended and Restated Master Repurchase and Securities Contract with Wells Fargo Bank, National Association ("Wells Fargo Facility") to, among other things, extend the maturity date to December 14, 2016 and amend the interest rate. In addition, the Company continues to have two 12-month extensions at the Company’s option provided that certain conditions are met and applicable extension fees are paid, which, if exercised, would extend the final maturity of the Wells Fargo Facility to December 14, 2018.
  • On December 15, 2015, the entire aggregate principal amount outstanding of the Company’s unsecured 7.00% Convertible Senior Notes (the "2015 Convertible Notes") matured and were repaid in accordance with the terms of the Indenture governing the 2015 Convertible Notes.

 

FULL-YEAR 2015 FINANCIAL HIGHLIGHTS

Financial Results and Activities:

  • For full-year 2015, net income was $34.3 million or $1.20 per diluted common share, comprised of $27.3 million in net income for the Principal Lending segment and $7.0 million in net income for the Mortgage Banking segment.
  • For the Principal Lending segment, new originations were $165.7 million in commitments and $159.3 million in outstanding principal and an additional $70.5 million of fundings on existing commitments, excluding non-controlling interests held by third parties, for full-year 2015. Loan repayments totaled $410.6 million in outstanding principal for full-year 2015.
  • For the Mortgage Banking segment, originations totaled $838.4 million in commitments for full-year 2015.

 

PRINCIPAL LENDING SEGMENT AS OF DECEMBER 31, 2015

 

At December 31, 2015, within its Principal Lending segment, the Company had originated or co-originated 38 loans held for investment (excluding 24 loans totaling $762.7 million in outstanding principal that were repaid or sold since inception) totaling approximately $1.3 billion in commitments and $1.1 billion in outstanding principal, excluding non-controlling interests held by third parties.

 

Portfolio Interest Rate, Yield and Remaining Life Summary ($ in millions):

 

   

As of December 31, 2015

 
   

Carrying 
Amount (1)

 

Outstanding 
Principal (1)

 

Weighted 
Average 
Interest Rate

 

Weighted Average
 Unleveraged 
Effective Yield (2)

 

Weighted 
Average
 Remaining 
Life (Years)

 

Senior mortgage loans

 

$961.4

 

$965.6

 

4.4%

 

5.1%

 

1.4

 

Subordinated debt and preferred equity investments

 

166.4

 

168.2

 

10.6%

 

11.2%

 

5.1

 

Total loans held for investment portfolio (excluding non-controlling interests held by third parties)

 

$1,127.8

 

$1,133.8

 

5.3%

 

6.0%

 

1.9

 

  

(1)The difference between the Carrying Amount and the Outstanding Principal face amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. The table above excludes non-controlling interests held by third parties. A reconciliation of the Carrying Amount of loans held for investment portfolio, excluding non-controlling interests, to the Carrying Amount of loans held for investment as included within the Company’s consolidated balance sheets, is presented below.

 

(2)Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premium or discount) and assumes no dispositions, early prepayments or defaults. The Total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of December 31, 2015 as weighted by the Outstanding Principal balance of each loan.

 

 

As of December 31, 2015, 93% of the Principal Lending segment’s loans held for investment portfolio consisted of floating rate loans and 85% consisted of senior mortgage loans (as measured by outstanding principal), excluding non-controlling interests held by third parties.

 

A reconciliation of ACRE’s loans held for investment portfolio, excluding non-controlling interests held by third parties, to ACRE’s loans held for investment as shown within its consolidated balance sheets is as follows ($ in millions):

 

   

As of December 31, 2015

 
   

Carrying 
Amount

 

Outstanding
 Principal

 

Total loans held for investment portfolio (excluding non-controlling interests held by third parties)

 

$1,127.8

 

$1,133.8

 

Non-controlling interest investment held by third parties

 

46.6

 

46.6

 

Loans held for investment

 

$1,174.4

 

$1,180.4

 

 

Portfolio Diversification Summary as of December 31, 2015 (excluding non-controlling interests held by third parties) ($ in millions):

 

PROPERTY TYPE

   

Outstanding
 Principal

 

% of Portfolio

 

Multifamily

 

$362.0

 

32%

 

Office

 

293.9

 

26%

 

Mixed-use

 

110.8

 

10%

 

Retail

 

106.3

 

9%

 

Industrial

 

99.0

 

9%

 

Various

 

48.5

 

4%

 

Healthcare

 

41.6

 

4%

 

Hotel

 

71.7

 

6%

 

Total

 

$1,133.8

 

100%

 

 

GEOGRAPHIC MIX

   

Outstanding 
Principal

 

% of Portfolio

 

Midwest

 

$290.1

 

26%

 

Southeast

 

197.8

 

18%

 

Mid-Atlantic/Northeast

 

231.3

 

20%

 

Southwest

 

241.6

 

21%

 

West

 

124.5

 

11%

 

Diversified

 

48.5

 

4%

 

Total

 

$1,133.8

 

100%

 

 

 

MORTGAGE BANKING SEGMENT (ACRE CAPITAL) AS OF DECEMBER 31, 2015

 

For the three months ended December 31, 2015, ACRE Capital originated $195.9 million in total commitments comprised of $63.6 million in Fannie Mae Delegated Underwriting and Servicing ("Fannie Mae") loans, $41.8 million in Federal Housing Administration ("HUD") loans and $90.5 million in Federal Home Loan Mortgage Corporation ("Freddie Mac") loans.

 

As of December 31, 2015, ACRE Capital’s multifamily servicing portfolio consisted of 973 loans with an unpaid principal balance of $4.9 billion. The carrying value of ACRE Capital’s MSRs was $61.8 million at December 31, 2015.

 

RECENT DEVELOPMENTS, INVESTMENT CAPACITY AND LIQUIDITY

 

On January 20, 2016, the Company originated a $56.0 million first mortgage loan on a hotel portfolio located in California. At closing, the outstanding principal balance was approximately $56.0 million. The loan has an interest rate of LIBOR + 4.75% (plus origination and exit fees) subject to a 0.25% LIBOR floor and an initial term of three years.

 

On February 26, 2016, the Company amended its $50.0 million Bridge Loan Warehousing Credit and Security Agreement with Bank of America, N.A. to expand the eligible assets to include loans secured by general and affordable multifamily properties.

 

On February 26, 2016, the Company amended its $50.0 million secured revolving funding facility with City National Bank (the "March 2014 CNB Facility") to extend the maturity date to March 11, 2017. In addition, the Company continues to have one 12-month extension at its option provided that certain conditions are met and applicable extension fees are paid, which, if exercised, would extend the final maturity of the March 2014 CNB Facility to March 10, 2018.

 

As of February 26, 2016, the Company had approximately $170 million in capital, either in cash or in approved but undrawn capacity under the Company’s borrowing facilities. After holding in reserve $10 million in liquidity requirements, the Company expects to have approximately $160 million in capital available to fund new loans, fund outstanding commitments on existing loans, repurchase its common shares and for other working capital and general corporate purposes. Assuming that the Company uses all such amount as capital to make new senior loans and the Company is able to leverage such amount under its financing facilities at a debt-to-equity ratio of 2.5:1, the Company would have the capacity to fund approximately $560 million of additional senior loans.

 

As of February 26, 2016, the total unfunded commitments for the Company’s existing loans held for investment were approximately $90 million. In addition, borrowings under the Company’s secured funding agreements were approximately $564 million, borrowings under the Company’s secured term loan was approximately $75 million, debt issued in the form of commercial mortgage-backed securities was approximately $28 million and debt issued in the form of collateralized loan obligations was approximately $193 million.

 

On February 28, 2016, the Company’s board of directors increased the size of the existing $20.0 million stock repurchase program to $30.0 million and extended the stock repurchase program through March 31, 2017.

 

On March 1, 2016, the Company declared a cash dividend of $0.26 per common share for the first quarter of 2016. The first quarter 2016 dividend is payable on April 15, 2016 to common stockholders of record as of March 31, 2016.

 

2016 ANNUAL STOCKHOLDERS MEETING

 

The Board of Directors set April 15, 2016 as the record date for the Company’s 2016 Annual Meeting of Stockholders. The 2016 Annual Meeting of Stockholders will be held on June 27, 2016, at 11:00 a.m., Eastern Daylight Time, at the offices of Proskauer Rose LLP, Eleven Times Square, New York, New York 10036.

 

FOURTH QUARTER 2015 DIVIDEND

 

On November 5, 2015, the Company declared a cash dividend of $0.25 per common share for the fourth quarter of 2015. The fourth quarter 2015 dividend was paid on January 19, 2016 to common stockholders of record as of December 31, 2015.

 

CONFERENCE CALL AND WEBCAST INFORMATION

 

On Tuesday, March 1, 2016, the Company invites all interested persons to attend its webcast/conference call at 12:00 p.m. (Eastern Time) to discuss its fourth quarter and full-year 2015 financial results.

 

All interested parties are invited to participate via telephone or the live webcast, which will be hosted on a webcast link located on the Home page of the Investor Resources section of the Company’s website at http://www.arescre.com. Please visit the website to test your connection before the webcast. Domestic callers can access the conference call by dialing (888)-317-6003. International callers can access the conference call by dialing +1(412)-317-6061. All callers will need to enter the Participant Elite Entry Number 5357745 followed by the # sign and reference "Ares Commercial Real Estate Corporation" once connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. For interested parties, an archived replay of the call will be available through March 14, 2016 at 5:00 p.m. (Eastern Time) to domestic callers by dialing (877)-344-7529 and to international callers by dialing +1(412)-317-0088. For all replays, please reference conference number 10078265. An archived replay will also be available through March 14, 2016 on a webcast link located on the Home page of the Investor Resources section of the Company’s website.

 

ABOUT ARES COMMERCIAL REAL ESTATE CORPORATION

 

Ares Commercial Real Estate Corporation is a specialty finance company primarily engaged in principal lending and mortgage banking of commercial real estate investments. Through Ares Commercial Real Estate Corporation’s national direct origination platform, it provides a broad offering of flexible financing solutions for commercial real estate owners and operators. Through ACRE Capital LLC, Ares Commercial Real Estate Corporation’s mortgage banking subsidiary, it originates and services multifamily residential mortgage loans, senior housing and healthcare facility loans by utilizing programs overseen by governmental agencies and government-sponsored entities. Ares Commercial Real Estate Corporation elected and qualified to be taxed as a real estate investment trust and is externally managed by a subsidiary of Ares Management, L.P. (NYSE:ARES), a publicly traded, leading global alternative asset manager with approximately $94.0 billion of assets under management as of December 31, 2015. For more information, please visit www.arescre.com. The contents of such website are not, and should not be deemed to be, incorporated by reference herein.

 

FORWARD-LOOKING STATEMENTS

 

Statements included herein or on the webcast / conference call may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended, which relate to future events or Ares Commercial Real Estate Corporation’s future performance or financial condition. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including the returns on current and future investments, rates of repayments and prepayments on the Company’s mortgage loans, availability of investment opportunities, the Company’s ability to originate additional investments and completion of pending investments, the availability of capital, the impact of repurchasing equity capital, the availability and cost of financing, market trends and conditions in the Company’s industry and the general economy, the level of lending and borrowing spreads, commercial real estate loan volumes, the continuing operation of government agencies, government-sponsored enterprise activity and the risks described from time to time in the Company’s filings with the Securities and Exchange Commission. Any forward-looking statement, including any contained herein, speaks only as of the time of this press release and Ares Commercial Real Estate Corporation undertakes no duty to update any forward-looking statements made herein or on the webcast/conference call. Projections and forward-looking statements are based on management’s good faith and reasonable assumptions, including the assumptions described herein.

 

CONTACTS

 

Ares Commercial Real Estate Corporation

Carl Drake or John Stilmar

(888)-818-5298

iracre@aresmgmt.com

 

 

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

   

As of December 31,

 
   

2015

 

2014

 

ASSETS

         

Cash and cash equivalents ($8 and $47 related to consolidated VIEs, respectively)

 

$

8,995

 

$

16,551

 

Restricted cash

 

30,380

 

66,121

 

Loans held for investment ($483,572 and $848,224 related to consolidated VIEs, respectively)

 

1,174,391

 

1,462,584

 

Loans held for sale, at fair value

 

30,612

 

203,006

 

Mortgage servicing rights, at fair value

 

61,800

 

58,889

 

Other assets ($2,695 and $3,438 of interest receivable related to consolidated VIEs, respectively; $35,607 and $18,352 of other receivables related to consolidated VIEs, respectively)

 

72,804

 

55,004

 

Total assets

 

$

1,378,982

 

$

1,862,155

 

LIABILITIES AND EQUITY

         

LIABILITIES

         

Secured funding agreements

 

$

522,775

 

$

552,799

 

Warehouse lines of credit

 

24,806

 

193,165

 

Secured term loan

 

69,762

 

 

Convertible notes

 

 

67,414

 

Commercial mortgage-backed securitization debt (consolidated VIE)

 

61,815

 

217,495

 

Collateralized loan obligation securitization debt (consolidated VIE)

 

192,528

 

305,734

 

Allowance for loss sharing

 

8,969

 

12,349

 

Due to affiliate

 

2,658

 

2,735

 

Dividends payable

 

7,152

 

7,147

 

Other liabilities ($299 and $498 of interest payable related to consolidated VIEs, respectively)

 

32,029

 

22,431

 

Total liabilities

 

922,494

 

1,381,269

 

Commitments and contingencies

         

EQUITY

         

Common stock, par value $0.01 per share, 450,000,000 shares authorized at December 31, 2015 and 2014, 28,609,650 and 28,586,915 shares issued and outstanding at December 31, 2015 and 2014, respectively

 

284

 

284

 

Additional paid-in capital

 

421,179

 

420,344

 

Accumulated deficit

 

(11,992

)

(17,674

)

Total stockholders’ equity

 

409,471

 

402,954

 

Non-controlling interests in consolidated VIEs

 

47,017

 

77,932

 

Total equity

 

456,488

 

480,886

 

Total liabilities and equity

 

$

1,378,982

 

$

1,862,155

 

 

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

   

For the three months ended
December 31, 2015

 

For the year ended
December 31, 2015

 

Net interest margin:

         

Interest income from loans held for investment

 

$

21,206

 

$

86,337

 

Interest expense

 

(8,756

)

(36,342

)

Net interest margin

 

12,450

 

49,995

 

Mortgage banking revenue:

         

Servicing fees, net

 

4,113

 

16,051

 

Gains from mortgage banking activities

 

6,220

 

27,067

 

Provision for loss sharing

 

(16

)

1,093

 

Change in fair value of mortgage servicing rights

 

(1,843

)

(8,798

)

Mortgage banking revenue

 

8,474

 

35,413

 

Total revenue

 

20,924

 

85,408

 

Expenses:

         

Management fees to affiliate

 

1,501

 

5,948

 

Professional fees

 

799

 

3,091

 

Compensation and benefits

 

4,456

 

20,448

 

General and administrative expenses

 

1,618

 

6,795

 

General and administrative expenses reimbursed to affiliate

 

919

 

3,878

 

Total expenses

 

9,293

 

40,160

 

Income from operations before income taxes

 

11,631

 

45,248

 

Income tax expense

 

579

 

1,928

 

Net income attributable to ACRE

 

11,052

 

43,320

 

Less: Net income attributable to non-controlling interests

 

(2,175

)

(9,035

)

Net income attributable to common stockholders

 

$

8,877

 

$

34,285

 

Net income per common share:

         

Basic earnings per common share

 

$

0.31

 

$

1.20

 

Diluted earnings per common share

 

$

0.31

 

$

1.20

 

Weighted average number of common shares outstanding:

         

Basic weighted average shares of common stock outstanding

 

28,525,361

 

28,501,897

 

Diluted weighted average shares of common stock outstanding

 

28,609,650

 

28,597,568

 

 

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

BALANCE SHEET SEGMENT INFORMATION

AS OF DECEMBER 31, 2015 and 2014

(in thousands)

2015:

 

Principal
Lending

 

Mortgage
Banking

 

Total

 

Cash and cash equivalents

 

$

5,066

 

$

3,929

 

$

8,995

 

Restricted cash

 

13,083

 

17,297

 

30,380

 

Loans held for investment

 

1,174,391

 

 

1,174,391

 

Loans held for sale, at fair value

 

 

30,612

 

30,612

 

Mortgage servicing rights, at fair value

 

 

61,800

 

61,800

 

Other assets

 

53,191

 

19,613

 

72,804

 

Total Assets

 

$

1,245,731

 

$

133,251

 

$

1,378,982

 

2014:

 

Principal
Lending

 

Mortgage
Banking

 

Total

 

Cash and cash equivalents

 

$

15,045

 

$

1,506

 

$

16,551

 

Restricted cash

 

49,679

 

16,442

 

66,121

 

Loans held for investment

 

1,462,584

 

 

1,462,584

 

Loans held for sale, at fair value

 

 

203,006

 

203,006

 

Mortgage servicing rights, at fair value

 

 

58,889

 

58,889

 

Other assets

 

39,959

 

15,045

 

55,004

 

Total Assets

 

$

1,567,267

 

$

294,888

 

$

1,862,155

 

 

 

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

THREE MONTHS ENDED DECEMBER 31, 2015

SEGMENT STATEMENT OF OPERATIONS

(in thousands)

   

Principal 
Lending

 

Mortgage 
Banking

 

Total

 

Net interest margin:

             

Interest income from loans held for investment

 

$

21,206

 

$

 

$

21,206

 

Interest expense

 

(8,756

)

(2)

(8,756

)

Net interest margin

 

12,450

(1)

 

12,450

 
               

Mortgage banking revenue:

             

Servicing fees, net

 

 

4,113

(2)

4,113

 

Gains from mortgage banking activities

 

 

6,220

 

6,220

 

Provision for loss sharing

 

 

(16

)

(16

)

Change in fair value of mortgage servicing rights

 

 

(1,843

)

(1,843

)

Mortgage banking revenue

 

 

8,474

 

8,474

 

Total revenue

 

12,450

 

8,474

 

20,924

 
               

Expenses:

             

Management fees to affiliate

 

1,357

 

144

 

1,501

 

Professional fees

 

483

 

316

 

799

 

Compensation and benefits

 

 

4,456

 

4,456

 

General and administrative expenses

 

686

 

932

 

1,618

 

General and administrative expenses reimbursed to affiliate

 

835

 

84

 

919

 

Total expenses

 

3,361

 

5,932

 

9,293

 

Income from operations before income taxes

 

9,089

 

2,542

 

11,631

 

Income tax expense

 

4

 

575

 

579

 

Net income attributable to ACRE

 

9,085

 

1,967

 

11,052

 

Less: Net income attributable to non-controlling interests

 

(2,175

)

 

(2,175

)

Net income attributable to common stockholders

 

$

6,910

 

$

1,967

 

$

8,877

 

(1)Revenues from two of the Company’s borrowers in the Principal Lending segment represented approximately 30.5% of the Company’s consolidated revenues for the three months ended December 31, 2015.

(2)Interest expense does not include interest expense related to the intercompany notes between the two business segments presented, Mortgage Banking (conducted through ACRE Capital Holdings LLC) as borrower and Principal Lending (conducted through the Company) as lender. Additionally, servicing fees, net does not include servicing fee revenue related to the primary servicing of ACRE’s loan portfolio by ACRE Capital. The intercompany interest expense and servicing fee revenue are eliminated from the consolidated financial statements of the Company. If intercompany interest expense and servicing fee revenue were included in the consolidated financial statements, interest expense, servicing fees, net and net income for the three months ended December 31, 2015 would have been $1.1 million, $4.2 million and $0.9 million, respectively, for Mortgage Banking.

ARES COMMERCIAL REAL ESTATE CORPORATION AND SUBSIDIARIES

FULL-YEAR 2015

SEGMENT STATEMENT OF OPERATIONS

(in thousands)

   

Principal 
Lending

 

Mortgage 
Banking

 

Total

 

Net interest margin:

             

Interest income from loans held for investment

 

$

86,337

 

$

 

$

86,337

 

Interest expense

 

(36,342

)

(2)

(36,342

)

Net interest margin

 

49,995

(1)

 

49,995

 
               

Mortgage banking revenue:

             

Servicing fees, net

 

 

16,051

(2)

16,051

 

Gains from mortgage banking activities

 

 

27,067

 

27,067

 

Provision for loss sharing

 

 

1,093

 

1,093

 

Change in fair value of mortgage servicing rights

 

 

(8,798

)

(8,798

)

Mortgage banking revenue

 

 

35,413

 

35,413

 

Total revenue

 

49,995

 

35,413

 

85,408

 
               

Expenses:

             

Management fees to affiliate

 

5,397

 

551

 

5,948

 

Professional fees

 

2,018

 

1,073

 

3,091

 

Compensation and benefits

 

 

20,448

 

20,448

 

General and administrative expenses

 

2,830

 

3,965

 

6,795

 

General and administrative expenses reimbursed to affiliate

 

3,426

 

452

 

3,878

 

Total expenses

 

13,671

 

26,489

 

40,160

 

Income from operations before income taxes

 

36,324

 

8,924

 

45,248

 

Income tax expense (benefit)

 

(11

)

1,939

 

1,928

 

Net income attributable to ACRE

 

36,335

 

6,985

 

43,320

 

Less: Net income attributable to non-controlling interests

 

(9,035

)

 

(9,035

)

Net income attributable to common stockholders

 

$

27,300

 

$

6,985

 

$

34,285

 

(1)Revenues from two of the Company’s borrowers in the Principal Lending segment represented approximately 29.1% of the Company’s consolidated revenues for the year ended December 31, 2015.

(2)Interest expense does not include interest expense related to the intercompany notes between the two business segments presented, Mortgage Banking (conducted through ACRE Capital Holdings LLC) as borrower and Principal Lending (conducted through the Company) as lender. Additionally, servicing fees, net does not include servicing fee revenue related to the primary servicing of ACRE’s loan portfolio by ACRE Capital. The intercompany interest expense and servicing fee revenue are eliminated from the consolidated financial statements of the Company. If intercompany interest expense and servicing fee revenue were included in the consolidated financial statements, interest expense, servicing fees, net and net income for the year ended December 31, 2015 would have been $4.3 million, $16.5 million and $3.1 million, respectively, for Mortgage Banking.