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Ares Commercial Real Estate Corp (NYSE:ACRE)
Q2 2019 Earnings Call
Jul 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2019 Earnings Results. [Operator Instructions] As a reminder, this conference is being recorded on July 26th, 2019.

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

Veronica Mendiola Mayer -- Principal, Public Investor Relations and Communications

Good morning and thank you for joining us on today's conference call. I am joined today by our CEO, Jamie Henderson; David Roth, our new President; Tae-Sik Yoon, our CFO, and Carl Drake and other members from our Investor Relations team.

In addition to our press release and the 10-Q that we filed with the SEC, we have posted an earnings presentation under the Investor Resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainty.

Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. The Company's actual results could differ materially from those expressed in the forward-looking statements, as a result of a number of factors included those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements.

During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and these measures should not be considered in isolation from or as substitute for measures prepared in accordance with Generally Accepted Accounting Principle. These measures may not be comparable to like-titled measures used by other companies.

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

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thank you, Veronica. This morning, we reported strong results for the quarter, as we continue to execute on our annual business plan and many of the financial objectives that we laid out earlier this year. We generated Core earnings per share of $0.38, up 9% from the second quarter of 2018. Our new loan commitments for the second quarter totaled $99 million and total loan fundings were $129 million. This brings our year-to-date commitments in fundings to $33 million -- $333 million and $250 million respectively, in line with our levels for the first half of 2018.

From a return perspective, we are seeing higher expected return profiles in closed loans for the first half of 2019 compared to the first half of 2018. To date, all originated loans this year, have anticipated growth in levered returns[Phonetic] in the low-double digits

Turning to the market. We continue to believe that US real estate fundamentals remain healthy. Supply, generally remains in check in most of our targeted markets and property demand is consistent. Transaction activity has recently picked up for us, but we are remaining highly selective. As an example, we closed less than 5% of the transactions that we reviewed during the first half of 2019. Our focus on broadening the number of opportunities that we source is putting us in a good position to redeploy our capital into attractive investments for our shareholders. As a result of our efforts to grow and broaden our pipeline, the amount of transactions that we are currently reviewing and have quoted or are in more advanced stages has doubled versus the same period in 2018.

As we have said in the past, we will not compromise on credit quality and we are focused on originating loans within our targeted return range. We are further expanding our geographic footprint to markets that have strong growth dynamics and that we believe are less efficiently covered by the competition. In the second quarter, we added a new origination professional in Northern California, which will increase our West Coast coverage.

As you may have seen from our press release this morning, we have named David Roth as our new President. Many of you heard from David on last quarter's conference call, as he discussed our US Real Estate Equity platform's experience in the hospitality sector and how it supports ACRES investment activities. David runs our US Real Estate Private Equity Business and is a member of our Global Real Estate Investment Committee. David and I have been closely working together since he joined earlier this year and his impact has already been significant. I look forward to working more closely with David in his new role going forward. I will now turn the call over to David for a brief introduction.

David Roth -- President of Ares Commercial Real Estate

Thanks, Jamie, and good morning, everyone. I'm very pleased to join ACRE as President and take on a more formal role with the Company. I look forward to working with Jamie, Tae-Sik and the team to help grow the business. I'll be happy to answer any questions and I look forward to meeting all of you in person in the future.

Now I'm going to pass the call over to Tae-Sik, to walk you through our second-quarter financial results.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Great. Thank you, David and good morning, everybody. Earlier today, we reported GAAP net income of $9.8 million or $0.34 per common share and Core earnings of $11 million or $0.38 per common share for the second quarter of 2019. Our strong second-quarter results benefited from certain events, including above-average accelerated fees [Phonetic] related to repayments, which was in contrast to the lower than average accelerated fees that we experienced in the first quarter of 2019.

In addition, for this second quarter, we benefited from strong performance at the Westchester Marriott Hotel. As Jamie mentioned, we closed a $99 million of new commitments across three senior floating rate loans during the second quarter. This included the transfer of a $41 million loan on an industrial property that was originated in the Ares Warehouse in the first quarter and then subsequently transferred to ACRE in the second quarter. Total fundings for the second quarter were a $129 million, which includes initial fundings of $59 million and $70 million of fundings on prior existing commitments.

As of June 30th, the loan portfolio included 45 loans with an outstanding principal balance of $1.5 billion. Credit quality continues to remain favorable, with no impairments and the portfolio weighted average -- unleveraged effective yield remains at 7.2%. At quarter-end, 92% of our floating rate loans have embedded LIBOR floors, which provide us with meaningful levels of protection, should rates decrease. The weighted average LIBOR floor for the 92% of loans with such floors is 1.6%.

Now, turning to our balance sheet, our leverage remained consistent with a debt-to-equity ratio of 2.9 times. This is in line with our target, given our asset mix with 96% of our loan portfolio in senior loans.

During the quarter, we continued our efforts to further improve our financing facilities. A few weeks ago, we announced that we amended the terms of our $50 million secured revolving funding facility with City National Bank or CNB, which is an attractive source of flexible financing for us we added an accordion feature, for example, that provides an additional $25 million of capital for limited periods on an if and as-needed basis. Lowered the costs by 35 basis points and further added an extension option to extend the maturity for 2 additional years through 2 additional 12-month extensions. In June, we also obtained a $28.3 million non-recourse first mortgage loan on the Marriott Westchester Hotel, this effectively reduces our equity in the investment to just over $10 million. In our view, the $28.3 million loan proceeds represent 73% of our $38.6 million carrying value, further substantiating our views on the fair value of the property.

Based on trailing 12-months of cash flows generated by the hotel, we expect that the return on our equity will be in the mid-teens or well above the return we were earning on our prior senior loan in the hotel on unlevered[Phonetic] basis. Going forward, this $28.3 million loan may be increased to up to $30 million subject to certain conditions.

Finally, on repayments. In the second quarter, we had a $190 million of loans that repaid, bringing repayments for the first half of the year to just under $250 million. We currently expect a pickup in repayment activity in the second half of this year with aggregate repayments for 2019 to be -- to likely be at the higher end of our original $400 million to $700 million range that we previously provided.

We believe that we remain on track to fully cover our full-year dividends for 2019 through Core earnings. As a result, our Board declared a third-quarter dividend of $0.33 per share. On an annualized basis, this represents an attractive 8.8% percent annualized dividend yield based on yesterday's closing price of $14.94 per share.

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

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thank you, Tae-Sik. In closing, we are very pleased with our strong second-quarter results and where we stand going into the second half of the year. We've been very selective in transacting on investments with attractive, risk-adjusted returns, our pipeline is strong and Marriott Westchester is performing well. Looking ahead, we continue to seek opportunities to grow our earnings through capital deployment and by reducing the costs of our liabilities and operating expenses. With that, I would like to ask the operator, please open the line for questions and answer.

Questions and Answers:

 

Operator

Thank you [Operator Instructions]. The first question today will come from Steve Delaney with JMP Securities. Please go ahead.

Steven C. DeLaney -- JMP Securities -- Analyst

Good morning, everyone, and congratulations on the nice quarter. Boy, you guys give such thorough info in terms of repayments, etc. that it's -- that it's hard to have too many questions, but I'm going to take a shot at it. Jamie, you mentioned the pipeline is building and it's above. I think I heard you say it was double where it was last year and when combining that with Tae-Sik's comments about something in the $600 million to $700 million range of annual repayments. I'm looking back to the portfolio one year ago, in June of 2018 and it was $1.75 billion, if my model's correct and now we've slipped below 1.5, I guess the question is, this -- the pipeline that you see in the momentum, can we get back to something like a $1.7 billion, $1.8 billion portfolio given the repayments here over the next 6 months? How long is that going to take to reach your prior peak level? So, I'll stop there and see where we go.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure, Steve, this is a Tae-Sik. Maybe, I'll start off and then -- Jamie can more specifically address. I just wanted to start off with the one comment that obviously, you know, any balance that we give at the end of the quarter really reflects that one pin-point in time. And clearly, you know, we have periods where we will end the quarter higher and there were periods where we end the quarter lower. I would tell you that in terms of the repayments that we had just in the second quarter of this year, much of that happened right at the end of the quarter. So, even though it ended with a little bit of a lower balance, you know, the earning power that we had during the quarter was, you know, was higher than the $1.5 billion that you see reflected. So, you know, it will vary.

I'll let Jamie sort of cover what the future pipeline looks like. But, you know, I think the important number to focus on during any quarter is really the average that existed. And that's, you know, that's in our supplemental earnings deck that you'll see. But again, with that, I'm going to [Phonetic] turn to Jamie for some additional color.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Tae-Sik. Good morning, Steve. So, the pipeline feels great. Typically at this point in the summer, it can get a little quiet. But, you know, we've got 6 or 7 executed term sheets and a really strong volume right behind that. So, we feel really good about where we sit going into the second half of the year. If you look historically, our strongest quarter has always been Q4 and I think the way we're positioned this year heading into the second half is -- is really, really good. I'll also say that our selectivity is higher than it's ever been, and the returns on the deals that we've closed through the end of the second quarter are actually higher than last year. So, despite a lot of chatter about spread compression, we're still seeing really, really good deals. As I mentioned, we've expanded our geographic footprint and getting these originators in place, on the ground, in the markets where some of the competition just doesn't have a true ground game, has allowed us to be more selective, put in good -- high-quality credits at really attractive spreads. So, feel really well-positioned for the rest year.

Steven C. DeLaney -- JMP Securities -- Analyst

And that perform -- that return profile seems to be a little at odds about what we're seeing. We are hearing that some of the spread compression we saw over the last 12 months to eight months, especially with rates coming down, has subsided somewhat. But, you're describing, not just level returns but higher returns. And it -- is it that you're being select -- really filtering down instead of it being a real volume game, you're filtering it down to where the risk-adjusted return on the loan -- it's where your selectivity really comes in? Is that why we're seeing this kind of counter-trend to the group, I guess is, what I'm saying.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Well, I would look at in two parts. You know, we've always had a very high degree of selectivity, so it's always been less than 5%. And it still is less than 5%, but we more than doubled the top of the funnel. So rather than, electing to, just kind of, buy the market so to speak, we're just picking our spots carefully and really pressing for that kind of incremental risk-adjusted return.

Steven C. DeLaney -- JMP Securities -- Analyst

Got it. Hey, well, thank you both for your comments. That's all I have.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Great. Thank you, Steve.

Operator

The next question comes from Doug Harter of Credit Suisse. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Just wanted to get your updated thoughts on the holding of your REL[Phonetic] loan. As you said, you kind of validated the fair market value with your loan, the performance was good, kind of just the thoughts around, kind of, monetizing that and, kind of, moving on and redeploying back into loans versus, continuing to hold it. And, you are generating a strong return, but could be more volatile and just kind of how you think about those dynamics?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

So, hey, Doug, it's Jamie. So I'd start by saying that we really like the asset. It's a good asset and it's definitely a outperforming. You know, budget -- in kind of our initial projections. We've stepped down our exposure in the asset quite significantly through the financing that Tae-Sik mentioned and generating really attractive cash-on-cash returns. So, feel very good about where we sit at the moment, hospitality assets are interesting. You know, there's an operating company component to them, there is a good time to sell them and there's, you know, there's obviously bad times to sell them. We think that there is some work to be done at the asset level that can enhance the returns to optimize a sale. So we're going through some of that work as we speak and we think that can drive incremental NOI and facilitate a better sale.

And Tae-Sik, do you have any thoughts on the asset that you want to share?

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure, no absolutely, I think that's very accurate. I mean, Doug, I think one thing to make very clear is, you know, this is not intended as a long term investment. However, we believe we have the skills and the experience and the people here at Ares to really add the value that we think we can add to this hotel. We do think this is, as we said, more-than-a-year-hold that we'll -- want to make sure that we fully stabilize the property, we fully maximize the operations. As Jamie said, we are doing some of the common area renovations right now. We want to make sure that we see the cash flow benefits from the prior renovations as well as the new renovations that we're completing today.

And so really given Ares' experience, and what we see for the future of this hotel, while we're not a long term holder of this investment, we do want to maximize the value here. I think we've taken all the right steps so far, including the financing, but more importantly on the operations of the hotel. And we feel very good about its prospects. But you're right, there is seasonality, there is more volatility in owning an asset like this than a loan. So we're not in the business of owning hotels, we're not in the business of operating hotels, so we will convert this to cash and then redeployed into loans. But we don't feel compelled to do it immediately. We think we can maximize value here.

Douglas Harter -- Credit Suisse -- Analyst

And then, away from this asset. But obviously, Ares has the expertise to kind of own real estate. In the past, you've talked about, kind of, wanting to add duration to the portfolio. Just I guess, what are your current thoughts on potentially adding some owned real estate to the portfolio as a long term kind of core holding?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

That's a good question, Doug and the good news is, we see the flow in all the asset classes. So definitely see it in, you know, in the -- Pure real estate equity side, seeing in the security side. Also seeing our Core business, we think that the relative returns in the levered first mortgage model are still really compelling and offer great relative value. There will be a moment in time where we think adding duration is appropriate. And we're always engaged in that kind of hourly, daily, weekly relative value exercise.

Douglas Harter -- Credit Suisse -- Analyst

Okay. Thank you Jamie.

Operator

The next question comes from Jade Rahmani with KBW. Please go ahead.

Jade J. Rahmani -- KBW, Inc. -- Analyst

Thanks very much. With the stock, I believe modestly above book value, I think that there is at least some potential for common equity issuance. How do you think about that, given the magnitude of repayments that you're experiencing running in excess of originations? And secondly, are there any portfolio acquisitions in the market that could be attractive that you've seen? For example, I cover two companies. One is Colony and yesterday they announced a strategic shift focusing on digital so they could potentially be a seller of a lot of assets. And also another company, iStar has pivoted to solely focus on ground lease, they have a high yielding $1 billion portfolio. So just wondering if there's any potential for growing the company through acquisitions?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Jade. So I guess I'll take that in a couple of parts. With regards to common equity issuance, we've -- we stated previously that it's a two-part test. Number one, it has to be non-dilutive. So, we're clearly passing that test. Number two, we said that we need a kind of, clear near-term opportunity to reinvest that capital at attractive returns, that because of volumes of repayments, we haven't met that test just yet. There will be a moment in time where we think we'll meet that test. And at that point, we would evaluate, you know, issuing equity.

As it pertains to portfolios in the marketplace. I think Ares is blessed by the fact that we see pretty much every transaction out there, many of the ones that you cite and also many that aren't public, so we get a good look at everything. And it comes down to pricing and credit quality. So that's always the -- the intention is to find a really attractive book with high credit quality that's reasonably priced. So when and if we see that we'll.

Jade J. Rahmani -- KBW, Inc. -- Analyst

And what about distressed assets? I think. I've noticed an increase in capital raising -- capital formation around anticipation of other idiosyncratic assets that require some kind of workout capability. Could that be interesting to you at this point in the cycle?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Sure, so I think, to play in that space, you need to be good at a couple of things. Number one, you need to be a good, structured credit shop, so you can understand what you're buying. Number two, you need to be able to, own, operate and fix real estate. So we clearly qualify on both fronts. Part of the reason, David's on the team and we're happy to have him is to enhance the integration of our two platforms and to be ready when and if those opportunities present themselves.

Jade J. Rahmani -- KBW, Inc. -- Analyst

Okay. That's interesting to hear. Just on the outlook for originations and also repayments. It's been some time since you exceeded about $200 million in annual originations. Do you see -- I mean, in quarterly originations, do you see the potential for that in the next two quarters? And on the repayment side, could you clarify? I thought the range Tae-Sik's comment was that you'd be at the higher end of $400 million to $700 million. But I believe Steve said $600 million to $700 million. So, just want to clarify that.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure, Jade, why don't I take that repayment question first? So I think what we said is the higher end of that $400 million to $700 million range and I guess, I interpreted Steve's comment as that higher range being the $600 million to $700 million of that $400 million to $700 million original range. And so I think that's right. I guess, I would sort of say the range I think we have is more in the $550 million to $700 million range. So we are just trying to kind of narrow that range to provide you guys with a better viewpoint. Again, as we've always said, the caveat here is that we have 45 loans. They're all very bespoke situations. There's really no statistical way to predict repayments, unlike a large single-family home loan portfolio, right -- this doesn't really react specifically to interest [Phonetic] rate movements or spread movements even. I think it's really based upon when our sponsors complete their business plans, stabilize the assets and therefore are ready to either refinance or sell the assets. That's really what drives repayment activity.

Having said that, we obviously carefully monitor all of our loans, speak with the borrowers in a very -- frequent occasions. So we have a pretty good sense. But again, we have a relatively wide range because they are lumpy, they are very bespoke. So I would tell you that right now, we would tell you the best range we have is on the upper half of that $400 million to $700 million, meaning $550 million to $700 million.

One clarification I didn't want to make is I think you mentioned at the outset your question to Jamie. You know that repayments exceeded origination and again, I would always caution people not to look at our statistics out of a quarter[Phonetic] but really look at it annually or at least look at it year-to-date. So, for example, year-to-date our originations and our repayments were almost the same. Right around $250 million in terms of fundings as well as repayments for the year. If you look at the balance sheet, it looks like our loan is little bit less than year-end activity. And I would tell you, the adjustment you have to make is we didn't own the Westchester Marriott in the year-end, that was a $38.6 million loan. So if you adjust for that, you can see that our total balance is almost identical, year-end through June 30th. And so maybe going back to Steve's original question about why our loan balance also seems lower is, because with the REL[Phonetic] we took $38.6 million of loans and is now in a real estate owned asset and therefore will have naturally $38.6 million less in loan balance. So that's a small adjustment, but I think an important adjustment to make.

Jade J. Rahmani -- KBW, Inc. -- Analyst

And just on the potential for originations to exceed $400 million in the back half?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Yes. So as I mentioned, we have six deals with term sheets executed. That's a principal balance that's close to $200 million. And behind that, we have good visibility and into also a significant number of loans. So as I mentioned, feel really good about the second half. Timing in this business moves around a lot. So this is just, a bit of a guess as to when this closes, be it Q3 or Q4, but full-year, feel very good about where we're sitting.

Jade J. Rahmani -- KBW, Inc. -- Analyst

Thank you.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Jade.

Operator

Our next question comes from Rick Shane with J.P. Morgan. Please go ahead.

Richard Shane -- J.P. Morgan. -- Analyst

Hey, guys, thanks for taking my questions this morning. Tae-Sik, you had mentioned that the weighted average LIBOR floor is 1.62% -- curious what the distribution is because as LIBOR moves down, obviously that's the average. But I'm curious when we should start to see a little bit of floor income pick up. And I am curious, given sort of what has happened over the last couple years in terms of margin compression, if some of that was loss of floor income and whether or not this will actually enhance spread as we see rates drop.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure. Good morning, Rick, and thanks for the question. So. that's right. So, we had mentioned that, more than 90% of our loans have LIBOR floors and that the average floor for those loans with the floor is 1.6% just above 1.6% just more specifically, I'll just give you some example. So, we set our LIBOR floors generally at-market, so the loans that were done a year ago obviously have a lower LIBOR floors . Loans that were done in the last three months to six months have higher LIBOR floors. So, for example, 20% of our loans have floors that kick in right around, 2.25%[Phonetic] . So with LIBOR today at 2.40%[Phonetic] we have 20% of our loans that are pretty close to the current market. We have another set of loans that kick in at about 2%. So we get about just under 29% of our loans kick in at around 2%. You can see we're well distributed and well protected from beakers[Phonetic] in LIBOR floor obviously the further it falls, more percent of our loans kick in. But just to address your questions about the more near-term impact, so 20% at 2.25% just under 29% -- 28.7% to be more exact, kick in at 2% LIBOR.

And then in terms of your --

Richard Shane -- J.P. Morgan. -- Analyst

[Indecipherable] Oh go ahead Tae-Sik, I didn't mean to --

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

I'm sorry, go ahead Rick.

Richard Shane -- J.P. Morgan. -- Analyst

No, I said I didn't mean to cut you off. You were going to answer the second part of my question. I apologize.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Oh, yes. And then, on margin expansion or I guess, impact of borrowing margins when LIBOR changes, certainly the reasonable estimate is what we saw as LIBOR ticked up is that our spreads compressed a bit because, again, if you're a borrower, you certainly are focused on spread, but what you're really focused on is your all-in cost of financing, right. So again, if LIBOR goes up, you can afford to pay a little less spread. What we're expecting and I think what we're seeing just a little bit of is, as LIBOR comes down, or at least the indications are that it may likely come down. I do think we'll have to -- I think we'll get a little bit more pricing power. Jamie might want to speak more specific about it, but that is certainly something we intend to see or expect to see.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Yes, coupons tend to be a little bit sticky and -- thus the spreads tend to widen a little bit when the index moves.

Richard Shane -- J.P. Morgan. -- Analyst

Great. Thank you, guys.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Thank you, Rick.

Operator

Once again, as a reminder, [Operator Instructions]. The next question comes from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi, good morning. A couple of follow up questions, please. Tae-Sik, I think you've done a great job covering the prepayments in the second half of this year, but really want to get your thoughts on 2020, as I look through your portfolio loans, I think I only see three and they're fairly small that mature in the first half of 2020. But then you do have -- so basically the, 2020 scheduled repayments are very much back-end loaded to the second half of the year. You know, first off, can you confirm that's accurate as I think about how to look at my quarterly results through 2020? But time that into the new Ares facility, I know you brought one loan down. Can you talk about whether or not that's an objective? And how valuable that can be if you can get that Ares facility, say, filled up by June, that way it's in place to pull those assets down in the second half when the repayments pick up next year?

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure. Good morning, Stephen, and again, thanks for your question. I think your question is, is a very insightful one. So certainly, when we look at our repayment schedule, we begin with the state of maturity on our loan and we certainly start from there and then we really look at each asset and say what's the likelihood that it prepays before the maturity? What's the likelihood that it may extend for whatever reason and we start to make significant adjustments. So, I think if you looked at our internal work instead[Phonetic], what is the expected maturity schedule, it'll look quite different than the stated maturity schedule, because, I would say it's a minority of our investments that actually pay off on -- on stated maturity.

As you know, we have a very limited number of loans that extend typically for good reasons, but a very small number that extend beyond. But the vast majority, pay before the stated maturity. So I think if you look at 2020, at this point, our view is that that trend, that general pattern will remain consistent, that even though stated maturity may be more back-ended, my anticipation is that, you'll see maturities that's probably more spread out throughout the year. Again, having said that, it's very loan by loan type analysis. So I would always start as you did with stated maturity, but we always made significant adjustments to our expected maturity based upon what we're seeing in the business plans of each asset.

I think the second point you made, which is, the Ares warehouse, you're spot on. That is absolutely the reason that we put this Ares facility in place is to help us through periods of higher [Indecipherable]. And so we want to build up a storage of loans in the warehouse facility so that when we get a repayment, it doesn't take 30 days, 60 days, 90 days to redeploy that capital. But it's something that we can immediately draw down from the Ares warehouse facility. Obviously, the team is working very hard, incredibly hard, to not only put loans on balance sheet today but to put extra loans, if you want to call it, in the warehouse facility so that going forward, particularly 2020 and going forward, that we will be able to deal with loan repayments, much more efficiently than we have in the past.

Stephen Laws -- Raymond James -- Analyst

That's great. Appreciate the color on that Tae-Sik. And on the hotel, I know you touched on it. You mentioned seasonality in your answer to Doug's question. Can you maybe. give us a little color around the seasonality of the revenue we should be modeling for that. You did say, you'll likely own it for more than a year, so we'll go through a full-year with it. So maybe two questions. One is the seasonality we should see on the revenue side of that. The second is on the expense space. How much of that is fixed versus variable tied to the revenue?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Sure. Excellent question. And you know, Westchester Marriott, experience is somewhat typical business, suburban business style behavior. Meaning that in the summer months, when there's less business travel and more tourism, it's going to get less business. There's going to be less group business. There's going to be conferences, there's going to be less meetings. And that's generally true in the third quarter. That's a little less true but on a typical basis, first and third quarters tend to be the slowest, but particularly, third quarter. So, seasonally, second quarter and fourth quarter are generally the strongest for these type of hotels. And I think what we have budgeted because we haven't owned this hotel for the full-year cycle, but certainly as a lender, what we have seen and what we have budgeted for this hotel is that third quarter, will definitely be the slowest of the quarters. Second-quarter was a very strong quarter. But third quarter, we do expect it to be a -- on a quarter-to-quarter basis, the weakest of the four quarters.

I was going to get to your second question about, fixed versus variable cost. Full-service hotels, do have a substantial portion of their expenses as fixed costs. This hotel is a 444 room hotel. So it does have full staff, it does have full food and beverage, it does have full catering. So there is substantial fixed costs at this hotel. There are obviously some variable costs in terms of room costs. But being a full-service hotel, unlike some more limited-service hotels, there is a higher percentage of expenses that are fixed. So seasonally, what you'll see is that the operating margins of the hotel will be more impacted because of the higher percentages of fixed costs.

Stephen Laws -- Raymond James -- Analyst

I guess to try and tie all that together with the 3Q being the seasonally lowest revenue, do you expect it to be profitable for just the third quarter alone? I know you look at it more on an annual basis, but when we're looking at our model for this coming quarter, you expect a positive margin there for the third quarter?

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Stephen, we have not provided specific guidance for the hotel, I think all we have said is, if you look at this historically, we expect 2019 to be in line with historical. That was our budget. I think it's performing. I would say slightly ahead of that at this point, and so I think if you were to kind of look at how much revenue this hotel has generated, how much NOI this hotel has generated so far in the year, and kind of take that into consideration for the rest of the year, you might be able to get some sense. But I think directionally, I think you're correct. It'll be substantially lower. The budget is substantially lower in the third quarter than the second quarter for sure, but I prefer not to -- at this point give the exact specifics on whether it'll be positive, whether it'll be negative or that specific amount.

Stephen Laws -- Raymond James -- Analyst

Fair enough. I'll make sure to ask again in three months so you can talk about the strongest quarter in Q4[Phonetic] and talk about [Indecipherable] for the contribution then. So I'll let you get both sides of that next quarter. So thanks for taking my questions. Really appreciate it.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Absolutely. Thank you, Stephen

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thanks, Stephen.

Operator

Our next question is follow up from Jade Rahmani with KBW. Please go ahead.

Jade J. Rahmani -- KBW, Inc. -- Analyst

Thanks very much. I was wondering if you could quantify the benefit from prepayment income that you generated in the quarter?

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Sure .No, happy to do so. So, again, I just want to put this in the proper context. And so, what we have said in the past is that on your typical if there is such a thing, your average quarter, we experience about $0.02 impact -- $0.02 per share impact from acceleration of deferred origination fees. First-quarter, we mentioned we had minimal accelerated fees in the first quarter. This second quarter was just about $0.03 per share. And so, as you can tell, first quarter, we were under average. Second quarter, we were above average. And again, that's why again, I want to emphasize that rather than looking at this quarter-to-quarter, we think about this as a longer-term annual trend of about $0.08 per year, if you want to call that.

Jade J. Rahmani -- KBW, Inc. -- Analyst

Thanks very much.

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Thank you, Jade.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jamie Henderson for any closing remarks.

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

Thank you very much. I want to thank everyone for their time today on a Friday in July. We look forward to speaking with you again in a few months. And we hope you have a wonderful summer. Thank you.

Operator

And thank you, sir. 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 will be available approximately one hour after the end of this call through August the 9th, 2019 to domestic callers by dialling 1-877-344-7529 and to international callers by dialing 1-412-317-0088. For our replays, please reference conference number 10[Phonetic]. 131890. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of our website. Thank you for joining today's presentation. You may now disconnect.

Duration: 41 minutes

Call participants:

Veronica Mendiola Mayer -- Principal, Public Investor Relations and Communications

Jamie Henderson -- Director; Chief Executive Officer of Ares Commercial Real Estate; Partner of Ares Real Estate Group

David Roth -- President of Ares Commercial Real Estate

Tae-Sik Yoon -- Partner, Chief Financial Officer and Treasurer of Ares Commercial Real Estate

Steven C. DeLaney -- JMP Securities -- Analyst

Douglas Harter -- Credit Suisse -- Analyst

Jade J. Rahmani -- KBW, Inc. -- Analyst

Richard Shane -- J.P. Morgan. -- Analyst

Stephen Laws -- Raymond James -- Analyst

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