Ares Commercial Real Estate Corporation (ACRE) Q2 2021 Earnings Call Transcript

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Ares Commercial Real Estate Corporation (ACRE 0.14%)
Q2 2021 Earnings Call
Jul 30, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. And welcome to the Ares Commercial Real Estate Corporation's Conference Call to discuss the Company's Second Quarter 2021 Financial Results. As a reminder this conference call is being recorded on July 30, 2021.

I will now like to turn the call over to John Stilmar from Investor Relations.

John Stilmar -- Investor Relations

Good afternoon. And thank you for joining us on today's conference call. I am joined today by our CEO, Bryan Donohoe; Tae-Sik Yoon, our CFO; and Carl Drake, our Head of Public Company Investor Relations. 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 I begin, I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such 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 these expressed in these forward-looking statements, and as a result, a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this call, we will refer to certain non-GAAP financial measures we use as a matter of presentation for operating performance, and these measures should not only be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like titled measures used by other companies.

Now I would like to turn the call over to Ares Commercial Real Estate's CEO, Bryan Donohoe, who will walk through our second quarter earnings results. Bryan?

Bryan Donohoe -- Chief Executive Officer

Thanks, John and good afternoon everybody. This morning, we announced another strong quarter with distributable earnings of $0.37 per share up 16% year-over-year. We are pleased with our performance, which is primarily being driven by our portfolio of strong and diverse credits, increased investment activity, reduced funding costs and the continuing benefits we received from our LIBOR floors. Our company continues to benefit from Ares scaled real estate platform alongside of growing economy and a more active real estate market with improving fundamentals.

Overall, as individual property transaction activity has increased over the quarter, we are now at levels commensurate with the second quarter of 2019. The improving economy is also driving broad-based rent growth, which is improving across all major property sectors with particular strength in multi-family, one of our favorite and targeted sectors. Against this backdrop of improving fundamentals, we are seeing an attractive, competitive landscape highlighted by post-pandemic market inefficiencies on the origination side, while stronger players like us are able to benefit from more attractive funding.

This has resulted in a more fragmented marketplace that enables scale platforms such as those affiliated with Ares to find attractive investment opportunities and grow market share. The capabilities and reach of the broad Ares platform are driving, sourcing advantages throughout our space and even more specifically in high conviction property types, such as industrial and multi-family, as well as in favorite segments, such as self storage, student housing and select office opportunities. The increased size and diversity of our investment pipeline enables us to remain highly selective closing less than 5% of the loans we evaluate, while maintaining a strong deployment pace.

The result of this is that we are seeing loan opportunities with all-in spreads that are approximately in line with pre-pandemic levels, but with attachment points and credit terms, that tend to be more attractive than pre-pandemic structures. The strength of our platform and the market opportunities, have enabled us to accelerate our new investment commitments. In fact, the second quarter commitments of $311 million represented the third consecutive period in which we grew new commitments and origination volumes.

This higher loan activity is also driven by incumbent borrow relationships as approximately 64% of our commitments to this quarter came from repeat borrowers. However, we were also pleased to find strong receptivity for new high-quality sponsors, given the breadth of our product offerings. As an example, during the second quarter, we closed a $38 million multi-family loan with a new sponsor that is one of the largest multi-family owner operators in the southeast with more than 30,000 units under management. This origination momentum is continuing into the third quarter with approximately $254 million of new commitments closed thus far in July.

In order to support our expanded investment pipeline and greater investment activity, we issued 6.5 million common shares to raise just over $100 million of common equity at a 10% premium to book value near the end of the second quarter. The benefits of scale from our two equity raises this year will enable us to further gain market share during an attractive time to invest as the overall economy continues to recover. As far as the capital we raised in June, we are working hard to invest the majority of the net proceeds in the third quarter, but do expect that the additional shares that we have issued to have a temporary, modest impact to our earnings per share in the third quarter.

However, given our expected pace of capital deployment, we do not expect that our fourth quarter earnings will be impacted. Most importantly, as we have said consistently from the beginning of this year in connection with the announcement of our supplemental $0.02 per share quarter dividend, we continue to expect full coverage of both our regular and supplemental dividends from our distributable earnings for the full year 2021. Turning to the portfolio, our book remains 98% invested in senior loans. And approximately two thirds of our loans are collateralized by multi-family office, industrial and self-storage properties.

We continue to be underweight hotels and retail exposures. And against the backdrop of an improving economy and further bolstered by the strength of our asset management capabilities, we continue to see strengthening of the credit of our portfolio as reflected in our weighted average internal loan risk rating, which improved for a third consecutive quarter to 2.8 as of Q2 2021 versus 2.9 in the first quarter and 3.0 at year end 2020. Additionally, loans on non-accruals declined from three to one, reflecting the healthy recovery of underlying property performance. While the COVID-19 pandemic and all the uncertainty and challenges it brought are not over, we have optimism for the remainder of 2021 and beyond.

With that, I will now turn the call over to Tae-Sik to provide more details on our second quarter results and financial position.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Thank you, Bryan, and good afternoon, everyone. Earlier today, we reported GAAP net income of $17.6 million or $0.43 per common share and distributable earnings of $15.1 million or $0.37 per common share. Our earnings continue to benefit from our LIBOR floors with a 1.36% weighted average one month LIBOR floor on our loan portfolio at the end of the second quarter of 2021. Our second quarter GAAP earnings also benefited from a $3.9 million reduction in our CECL reserve.

18% decline in our CECL reserve was primarily driven by an improved macroeconomic forecast and as further evidence of the improvement of our loan portfolio risk ratings. And in addition to strong earnings, we continue to grow our book value per share. For the second quarter supported by continued improvement in the credit performance of our portfolio and the accretive 6.5 million share common equity offering that we just executed before quarter-end, our book value per share increased by $0.22 to $14.45 per share.

This marks our fourth consecutive quarter of improving book value per share. Now, let me talk about the other side of our balance sheet and specifically the strength of our capitalization and liquidity funding mix. Our debt-to-equity ratio was 2.1 times as of the end of the second quarter, excluding CECL reserve. Additionally, our earnings and balance sheet continued to benefit from highly efficient match-funded and non-recourse sources of CLO financing that now comprise 69% of total outstanding borrowings, up from 34% in the second quarter of 2020.

Our non-recourse debt-to-equity ratio now stands below one time. And going forward, we believe that we have additional avenues to further optimize our leverage capacity and further lower our cost of capital. As Bryan mentioned, we have increased our common equity capital base by more than 45% since the second quarter of last year. These two equity offerings totaling more than 200 million in common equity have enabled us to begin leveraging some of the benefits for scale.

For example, this greater scale has allowed us to invest in larger, more high quality loans to build even a more diversified portfolio. And on the liability side, there's greater scale, has allowed us to execute on more efficient forms of financing such as being able to complete our second CLO financing. Before I turn the call back over to Bryan, I did want to briefly discuss two loans that are beyond their contractual maturities.

While we continue to work with the respective borrowers, rather than simply agreeing to extend the maturity of these loans, we have decided to keep these loans in the current status to put ourselves in the best position to negotiate successful resolutions and outcomes. Please note that we believe that we are protected through sufficient collateral values and have not taken any impairment or put these two loans on non-accrual status as of the second quarter of 2021.

And with that, let me turn the call back over to Bryan for some closing remarks.

Bryan Donohoe -- Chief Executive Officer

Great. Thanks Tae-Sik. In summary, we're continuing to execute against our strategic and financial goals for the company. During the second quarter, we delivered strong earnings and healthy and improving credit quality in our portfolio. We are well-capitalized to invest our capital into the attractive market opportunities we see in front of us. We believe we remain on track to continue to deliver strong profitability for our shareholders and to meet our financial goals for the year. We greatly appreciate the support of our investors and for your time today.

With that, I'll turn it over to the operator to open the line for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from Steve Delaney with JMP Securities. Please go ahead.

Steve DeLaney -- JMP Securities LLC -- Analyst

Thanks. Hello everyone. Really just my one main question that I have listening to your comments and the deck, repays look like they were fairly light in the second quarter at $125 million or about 7% of the funded portfolio. Do you have some insight or view to what might -- how that level of repay might play out over the second half of this year? Thanks.

Bryan Donohoe -- Chief Executive Officer

Yeah. Thanks. Good question. I think one of the factors is the active asset management that our team works through in the portfolio. And we're in constant dialogue with our borrowers to understand and try to get as much transparency as we can about future repayments and we'll work to kind of keep what we can and keep what makes sense in the portfolio and extend the life cycle of loans, or I think that active asset management that is certainly a big part of our platform, benefits us to some degree there.

The way we're managing it though, probably most importantly, is that we're going to operate as if the expectation is that as our loan portfolio matures, that we will see some accelerated repayments. So we're going to manage the book as if it's coming. But thus far it has been probably more muted than we would have expected and we'll continue to manage it as actively as we can, but really tough to put a specific point on it, but it's certainly a focus of ours.

Steve DeLaney -- JMP Securities LLC -- Analyst

And obviously, you're trying to ramp up lending and take advantage of current opportunities to have that pipeline, in case that you do get a spike, right, or you can maintain and hopefully slightly grow your portfolio, especially with the new common equity. Would you -- let me put it this way and understand you don't want to give a specific, a lot of this is unknown, right, in terms of borrower behavior over the next five months of the year. But I think I heard you say that the recent rate or at least that 7% in a quarter, it sounded like you do view that is maybe a little surprisingly on the light side, if I heard you correctly.

Bryan Donohoe -- Chief Executive Officer

To a degree, I mean, look, I think each of the assets that we've invested in, if you think about bottoms up underwriting approach, each asset, underwritten specifically and each asset is going to have a different life cycle. But if we -- portfolio wide in normal course, right, we're thinking about these loans being kind of two and a half to three years of weighted average life. And some of the repayments as we're all aware of were muted last year. So we're managing the book as if we're going to see more of that repayment and to your point, we've really focused on making sure that we are a net positive from a deployment perspective. And beyond that, just active dialogue with these borrowers to understand and have as much transparency as possible but on a macro level, we just -- we think about it in terms of weighted average life and being around that 30 to 36 month period.

Steve DeLaney -- JMP Securities LLC -- Analyst

Thanks for the comments, Bryan. I'm going to leave the rest of the topics to the guys coming up behind me. Thanks.

Bryan Donohoe -- Chief Executive Officer

Appreciate it.

Operator

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

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

Hey guys, thanks for taking my questions this morning. Look, there's been a steady ramp in originations, and if we look back, you are on pace to potentially have your strongest year ever, especially, we sort of think about what July look like in terms of fundings in volume. I am curious when we think about the binding constraints on the model going forward, and we think about capital and we think about repayments. I'm curious how much scalability you think you have on the origination side? I think it's pretty clear that you can source of $1 billion of funding a year. Do you think you can go meaningfully above that? And again, I'm not asking for guidance, I'm asking just from a capability perspective, if the balance sheet supports it.

Bryan Donohoe -- Chief Executive Officer

Yeah, great question. Look, I think that we tried to touch on in our earlier discussion was really the breadth of the platform, right. We built out an origination team to match the scale that we feel we have capacity for in this business. And I think some of our capital raises that that Tae-Sik touched on what it allows us to do is improve upon the quality of our borrowers, right, just scale does the larger loan sizes will ultimately come with more institutional sponsorship groups.

But the scale that we can now attach to in terms of originations is such that it's larger loan sizes. So it's not just the number of deals that is going to increase. It's the size of the loans. And I think the quality of the sponsor and properties kind of comes in and come in with that. So I think we've built a team -- to summarize, we've built a team to certainly attack the opportunity set that we see in the space, but it's not just simply adding to the quantity of deals. It's adding to the size of the deals that allows us to do that.

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

Got it. Okay. That's very helpful. And look, I understand there's been a long-term investment in the origination platform, and I think right now that the opportunity is really sort of catching up with that. Thank you, guys.

Bryan Donohoe -- Chief Executive Officer

Thank you.

Operator

Our next question will come from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you very much. What are your thoughts around the sustainability of the supplemental dividend as you think about future runoff on the portfolio, incremental investment yields, cost of financings, other capital avenues the company may explore.

Bryan Donohoe -- Chief Executive Officer

Yeah, great question Jade. Why don't I -- I'll let Tae-Sik take it at the outset here and I'll add some color.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Great. Yeah, no, it's a great question, Jade. Earlier this year, when we instituted the supplemental dividend of $0.02, we obviously said that we expect that to set dividend to be in place for the full year of 2021. And that toward the end of the year, we would reevaluate kind of what to do with that $0.02 supplemental dividend, obviously, so far we've announced three quarters of that dividend consistent with our initial indications. And again, we're certainly on pace for the fourth quarter to do the same, obviously we haven't declared that yet. But I think we're on pace to do that.

I think as you referred to the LIBOR floors, with a limited amount of repayment that we've had so far for the six -- for the first six months of this year, we've been able to continue to maintain very strong benefit from LIBOR floors. So you can see that even as of the end of second quarter, the weighted average LIBOR floor was 1.36% versus call it 10 basis points spot one-month LIBOR today. So we're well within the money of our LIBOR floors. There has been some runoff obviously since the beginning of the year, but continue to generate very strong positive incremental income from the LIBOR floors itself.

The other thing we're doing obviously is we know this is a finite life asset, and therefore we are positioned a portfolio and we have a number of levers that we think we can exercise and take advantage of to make sure that when these LIBOR floors are of much smaller benefit than they are today that we will have sufficient earnings to continue to pay out a very attractive dividends. Obviously, one of them who we talked about in the context of further scale is even more efficient forms of financing, right. So with greater scale, we believe we can take advantage of more efficient forms of financing that provides higher proceeds, but most importantly, lower cost of debt. We think our deployment levels will continue to grow, so that we will have more and more of our available capital put to work. We will always obviously push for spreads on our assets try to push down at the same time, our cost of funding.

And then finally, with greater scale, I mean, obviously we've grown our capital base, as we mentioned by 45%. And with greater scale, we believe that that we will also enjoy some G&A savings, right, as a percentage of our equity base. Today, we find ourselves at 2.1 debt to equity. So the -- if you want to call it the organic earnings that we're able to generate is sort of under optimized right now, because of that under leveraged position today. But we do plan on adding incremental leverage to our balance sheet to get much, much closer, if not right at the target of 3.0 debt to equity.

So I think those are all the levers that we believe will -- we have available to us. We're obviously very, very busy implementing all of those strategies. And so as the LIBOR floors runoff, we will implement those strategies to maintain our earnings as much as possible. And at that time, I think we'll make the decision of what to do with the supplemental dividend longer-term. But for now, again, we are comfortable saying that for 2021, we will maintain our supplemental dividend and that toward year end, we'll be in a much better position to talk about what to do with it on a go-forward basis.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Bryan, did you have any additional comments?

Bryan Donohoe -- Chief Executive Officer

No, Jade. I think Tae-Sik covered it well. I think you talked about the different avenues that we would explore. And I think the primary one Tae-Sik finished with which is just our leverage capacity, which is there's a lot of different forms of leverage available to us. And I think we can continue to press on that efficiency. And I think we'll see the benefit from that moving forward.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. Couple of questions on credit, the decline in non-accrual loans to $31.3 million from $66.8 million, I apologize I didn't get a chance to go through all the footnotes, but could you just discuss what took place there?

Bryan Donohoe -- Chief Executive Officer

Yeah Tae-Sik, you want to cover that?

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. So Jade, I mean, obviously we had three loans on non-accrual status. And just this last quarter, we took two off non-accrual. One is a student housing project, the other one is a hotel. The student housing project itself was sold and a new party came in, put in additional equity. We were fortunate enough to be able to work with this new buyer to keep the property in our portfolio. There was basically $6 million net equity injected into the property. And we think the new owner, the new operator sponsor here. It was a great business plan to sort of reinvigorate this property. But certainly with having the same collateral, but $6 million less than proceeds -- we felt that was appropriate, certainly because it's a new loan as well to no longer have that property on non-accrual status.

And the amount of repayment that we had on our original loan was sufficient to certainly more than cover our carrying value of the loan. So we took no loss, in fact, showed a small gain versus our carrying value versus what we received in terms of the principal repayment. The second property that we took off non-accrual status is a portfolio of hotel loans. Again, as you know, we were very scrutinizing of our hotel portfolio during the pandemic. This portfolio of hotels, particularly in the last three months has shown sort of very robust increase in occupancy, in ADR, and in RevPAR.

Frankly, it's probably come back to beyond pre-pandemic levels. And now that it has shown sustained recovery of its performance, again, we thought that was appropriate to take it off of non-accrual status. So as you mentioned, that leaves us with one property collateralized by -- one loan collateralized by a hotel that remains on non-accrual status, again, we're hopeful that this property will continue to show some improvement. We don't think that improvement has been enough and hasn't been sustained enough to make the transition, but certainly trending in the right direction as well.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

And on the modification side, I think usually you guys disclose number of modifications or the aggregate amount of principal that it relates to and I can see that in the 10-Q, I'm assuming perhaps there were no modifications, but one or two double-check that.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Yeah Jade, I think that's right. Again, nothing really worth noting, obviously the two loans that we mentioned that are past the maturity, we have not modified and we have allowed them to be in their status quo, but yes, nothing material.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

And just the two loans in maturity default, what do you think the timing of resolution is for those? And it seems you did not take an impairment or book a reserve anything of that nature. So you feel there's adequate coverage on the asset side.

Bryan Donohoe -- Chief Executive Officer

Yeah, part of the -- sorry, go ahead, Tae-Sik. I'll jump in after.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Okay, sorry about it. Yeah, no, I'm just going to just mention on the impairment side, yeah, no, Jade, I think that's the most important point here, right is we do believe there is sufficient collateral to protect us from an impairment. Obviously, that's the reason we don't believe that an impairment in either case is warranted. As you know, we've had situations in the past where we've had default and we felt it was in our best interest to put the loans in default. So that we will have proper positioning with the borrower to negotiate the best resolution, but Bryan, why don't you go ahead? I just wanted to make a comment certainly on the impairment question.

Bryan Donohoe -- Chief Executive Officer

Yeah. And I'll just add specific to your question Jade on the timing. Like, we've -- I mentioned the active asset management earlier, we've got the capacity and the expertise to kind of work through loan issues in a lot of different formats, right? There's a lot of arrows in the quiver, so to speak from acceleration through just kind of calling the default. And in this case, we think that the best resolution and most timely is through just allowing us as Tae-Sik said, allowing these loans to sit in the status they are. But I think that the default interest in some other economic factors will accelerate the resolution of these transactions in the near-term.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you for taking your questions.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Hey, Jade. Just one thing before you leave. I just want to mention, in terms of modification, the answer is no, we didn't make any modification in terms of what a borrower would typically request. Just to be complete, I just wanted to mention that we did make so-called one modification of a loan on a multi-family loan, because we wanted to a potential maturity was coming up and we wanted to keep that loan on our books. So we did, I guess, if you want to call it, technically modify it, but it wasn't due to the loan not performing. In fact, it's the opposite. This is a loan we want to keep. And so we were able to do that and keep this loan on our books.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks and good to know that. Appreciate it.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Thank you. Thank you, Jade.

Operator

Our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws -- Raymond James & Associates, Inc. -- Analyst

Hi. Good morning. Good discussion so far and wanted to touch on the REO asset, revenue came in, a good bit above what I was looking for. Can you talk about the trajectory there with that asset and how do we think about seasonality with the asset versus more of a straight line recovery from COVID on the hotel.

Bryan Donohoe -- Chief Executive Officer

Yeah, good question. I think the performance of the asset somewhat speaks for itself. And I appreciate you picking up on that. And I think thematically, it's based on a lot of what we've touched on in prior quarters reduction in kind of an unnatural reduction in supply in the market, and a lot of work to harvest as much demand as we could in that geography. It's tough to say, how see -- my gut is that seasonality, which impacts most hotels will be a little bit tougher to predict this year, just as people come out of COVID and make their plans and kind of -- I don't necessarily think you'll be as tethered to the traditional calendars as we've been historically.

Typically, in the market the first quarter, first couple months of the year is kind of a little bit slower. But demand has been positively trending for the asset. And then just to add to that, I'd say that just because we talk about it in most quarters, in terms of where we see the alternate resolution based on the recovery you see in the numbers. I think we will continue to monitor and explore the ultimate resolution of the asset over the next few quarters as well.

Stephen Laws -- Raymond James & Associates, Inc. -- Analyst

Great. And when I think about the operating expenses there, I mean, can we take the sequential change and think about that as the variable expenses associated with that amount of incremental revenue? Are there other factors either plus or minus that number that we should consider?

Bryan Donohoe -- Chief Executive Officer

I think it's been pretty constructive in general in terms of the way we've worked with the manager there to kind of operate in a -- as we've described a kind of a mid service model. And I think to the extent that we're seeing increased revenues, clearly some operational expenses will come parcel with that. But I think we'll continue to be constructive in terms of limiting expenses and making sure that we're focused on margins as well as revenues.

Stephen Laws -- Raymond James & Associates, Inc. -- Analyst

Great. And then I wanted to follow up on Steve's question earlier, just as far as managing portfolio growth and repayments coming in. And I went back and looked a couple of years ago unfunded commitments were in the mid teens. You guys have those in the high single digits now under 10. I know you've got the pipeline -- you've got the Ares facility, is that enough to manage the upcoming repayments as those start to come in 6 or 12 months? Or do you think you'll take back that up the unfunded commitments side, back up into the mid or high teens?

Bryan Donohoe -- Chief Executive Officer

Good question. Tae-Sik do you want to touch on that a little bit.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Sure. No, I think, obviously we have a number of things that we can do on the balance sheet to help manage repayments and making sure that we're as fully deployed and interest earning as possible. I mean, you certainly mentioned one, which is the Ares warehouse line. Ares warehouse line as you know is about $200 million plus of capacity that we would have to do senior loans there. It is something that has been very, very valuable to us particularly during the pandemic to help manage the liquidity and needs of ACRE.

And I think going forward, I think it will be extremely helpful for us to, again, put loans on the Ares warehouse line. So that, again, real-time we have the ability to bring it back on to the balance sheet as loans pay off on the ACRE side itself. In addition, we have, as we mentioned, significant debt capacity right now. We are significantly under-levered from our target of 3-0. So I think the best strategy to manage repayments frankly is to make sure that we are as fully invested as fast as we can make good loans and find ourselves in a position where we will be fully invested.

We'll have loans in the Ares warehouse and we will be in a good position at that point then to handle the upcoming repayment. And again, one of the strategies that we just covered in one example that we'll continue to push on is we'll work very hard to keep the loans that we want on our books. And if that means generating more attractive terms for the borrower. We certainly will do that to make sure that we're at least at market. But there are certainly a number of strategies that we can do to help mitigate what we would anticipate to be the growing repayments in the upcoming quarters.

Stephen Laws -- Raymond James & Associates, Inc. -- Analyst

Great. Appreciate the color on that Tae-Sik. Thanks for the commentary today.

Bryan Donohoe -- Chief Executive Officer

Absolutely Stephen, thank you.

Operator

Our next question will come from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse Securities (USA) LLC -- Analyst

Thanks. Could you talk about the spreads that you're -- that you got on kind of 2Q loans and 3Q to-date and how that compares to the existing portfolio?

Bryan Donohoe -- Chief Executive Officer

Yeah, good question. I think, notwithstanding the scale deployments, there's -- we mentioned the inefficiencies in the market in general. There's been compression around multi-family and industrial, but kind of in keeping with that financing costs are similarly compressed and really in a pretty good state of equilibrium, I would say. So if we took it as a whole, you're seeing relative value in the real estate that generally, but really with spreads that are in line with pre-pandemic levels, but a little bit of disparity in terms of asset class allocation at this point.

Doug Harter -- Credit Suisse Securities (USA) LLC -- Analyst

Got it. And Bryan, you mentioned that, one of the benefits of scale is kind of being able to move up in size and in quality of the underlying sponsors and borrowers, I guess, how did that translate? Do you give up some spread to move -- to make that move up or just how would you compare relative value there?

Bryan Donohoe -- Chief Executive Officer

Yes, I think, I'd be remiss to say that higher quality sponsors don't garner some lower coupons. I think that if we think about the underlying mission, right, which is to create a stable platform -- stable portfolio to deliver yields to our investor base. I think the higher quality sponsors and performance and quality of asset that comes with that is a net benefit. And again, as Tae-Sik touches on each quarter, we don't -- we certainly focused on the spreads themselves of the loans we make. But the real focus is on the margin between our borrowing costs and the loans we make. And so what the higher quality loans, the more scaled positions allows us to have more pricing power as it relates to our lender counterparties. So net-net, despite potentially coupons that come down and keeping with the quality of the sponsors, I think we're in a better place overall.

Doug Harter -- Credit Suisse Securities (USA) LLC -- Analyst

Great. Thank you, Bryan.

Operator

Our next question will come from Tim Hayes with BTIG. Please go ahead.

Timothy Hayes -- BTIG -- Analyst

Hey, good afternoon, guys. Thanks for taking my questions. First one, obviously tonight's growth this quarter, but interest income was pretty flat sequentially. So just curious if there was a timing mismatch between originations being a closed in the back end of the quarter versus repayments on the front end, or if maybe there were just some older vintages that paid off. So you got less prepayment income, just trying to reconcile that.

Bryan Donohoe -- Chief Executive Officer

Yeah, Tim, I think, timing sort of any quarter, certainly makes a big difference, right? And I think you're right. I think some of the loans that we closed in the second quarter really were much more back-ended for the second quarter. So you didn't see as much income being generated for the quarter. The second thing that worked is that because we are less deployed in terms of our leverage, as I mentioned, 2.1, we continue to accrue the amortization of fees associated with much of our interest expenses, and that is not being spread over a bigger borrowed amount. And so you'll see a little bit of a tick up in our borrowing costs as well.

So I think those are probably two major reasons for not seeing that lift. If you want to call it that with the higher originated balance. But I think you'll see that start to even out in the third quarter. As we mentioned in the third quarter, so far we've kind of had the opposite situation, which is great, right, which is that we've closed $200-plus-million of loans in the first month of the quarter, unlike second quarter where again, most of the loans were a little bit more back ended.

Timothy Hayes -- BTIG -- Analyst

Right, makes sense. And then, excuse me, on the capital stack, it's small, but I know you have the term loan that $60 million of term loan coming due, I forget exactly when, but sometime in the next few months, I believe. And just curious how you feel about addressing that if you're considering up-sizing it and refinancing at a lower cost, given other execution in the market, or if there are other forms of debt capital you're considering to add to the cap stack that can help kind of satisfy that maturity?

Bryan Donohoe -- Chief Executive Officer

Sure. No, great question. So the $60 million term loan comes due in December of this year, so a couple of months away. Basically as you know the history here is that it began as $110 million term loan and we did pay down $50 million of it earlier this year, so leaving a balance of $60 million. Today's capital markets, there are numerous options for us to pursue. As I mentioned, basically getting our company closer or if not to the full target leverage over the next few months is a big priority of ours right from 2.1 to closer to 3.0.

And as part of that, leveraging off of the balance sheet, I think paying down the $60 million term loan debt and recapitalizing the company with different forms of leverage is certainly something that we are well underway, analyzing and executing on. Whether we'll replace it with another term loan, whether we'll refinance with our existing lender, whether we'll pursue other forms of debt capital, such as convertible notes on secure, there is quite a few debt available -- debt capital available that is out there.

And so, we feel we're in a very good spot to do it. Final answer of course is that, $60 million is a relatively small amount of debt as a ball of maturity. So not too concerned about the amount itself, but it is going to be basically a refinance as part of an overall sort of recapitalization plan of our debt as we continue to increase our debt-to-equity from 2.1 up to 3.0.

Timothy Hayes -- BTIG -- Analyst

Yeah, makes sense. Okay. And then to my last question kind of on the -- nearly 50% of your originations were in the industrial space this quarter. I know that the mortgage REIT space, the commercial lenders have typically had a hard time finding a lot of loans that kind of fit their strategy in that sector. So I'm curious if you could just touch on your pipeline where that's -- I guess where that's coming from, if it really has to do with the Ares platform and your expertise on the equity side in that space providing some resources to you guys?

And then, along those same lines, are there opportunities as you target larger loans? Is there opportunities for you to do significantly larger loans that can be kind of syndicated across different areas, vehicles and hope you get some exposure to higher quality sponsors, higher quality assets without having a giant capital commitment.

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Yeah, good question, Tim, I'll answer your second question first, which is to say yeah, there is the opportunity to utilize different parts of the broader platform to capitalize assets and benefit in the ways that you're noting. So I think that is a significant progression of where we sit as a team today. And I think our investors in ACRE will benefit from that moving forward. With respect to the industrial asset in question, a couple of things come to mind. First and foremost, I think where your direction -- your question is headed is, is that the pricing for fully stabilized industrial is a little bit more core in nature than which would -- than that, which would likely fit into the mortgage rate model.

I think what we benefit from with respect to the asset and the question is really two things. First and foremost, it is a high conviction asset class for us historically at areas in the debt and equity space. And we do think that the addition of Black Creek to the broader platform also brings some particular insights that allows us to participate in the asset class at different parts of the asset's life cycle, right? So earlier and prior to stabilization, we can have higher conviction in the space based on the expertise and the amount of investment history we have in the sector. And then secondly, the nature of this acquisition specifically was with a repeat sponsor. And the timeline for closing was such that it really allowed us to take advantage of certain attributes of the closing process and find an asset in the sector that matched up with the ROE targets that we have more broadly

Timothy Hayes -- BTIG -- Analyst

Understood. Well, I appreciate the comments as always guys. Thank you.

Bryan Donohoe -- Chief Executive Officer

Thank you Tim.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Bryan Donohoe for any closing remarks.

Bryan Donohoe -- Chief Executive Officer

Yeah, thank you, and thanks everybody for the time today. We continue to appreciate all the support of ACRE and look forward to speaking to you again in a few months. Stay well. Thank you.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call an archived replay of this conference call will be available approximately one hour after the end of this call through August 13, 2021 to domestic callers by dialing 1877-344-7529 and to international callers by dialing 1412-317-0088. For all replays, please reference the conference number 10156566. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. You may now disconnect.

Duration: 52 minutes

Call participants:

John Stilmar -- Investor Relations

Bryan Donohoe -- Chief Executive Officer

Tae-Sik Yoon -- Chief Financial Officer and Treasurer

Steve DeLaney -- JMP Securities LLC -- Analyst

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

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Stephen Laws -- Raymond James & Associates, Inc. -- Analyst

Doug Harter -- Credit Suisse Securities (USA) LLC -- Analyst

Timothy Hayes -- BTIG -- Analyst

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