18. SEGMENTS

The Company’s reportable segments reflect the significant components of the Company’s operations that are evaluated separately by the Company’s chief operating decision maker, the Company’s Chief Executive Officer, and have discrete financial information available. The Company organizes its segments based primarily upon the nature of the underlying products and services. The Company’s Chief Executive Officer and management review certain financial information, including segmented internal profit and loss statements, which are presented below on that basis. The amounts in the reportable segments included in the tables below are in conformity with GAAP and the Company’s significant accounting policies as described in Note 2.

The Company operates in two reportable business segments:

· principal lending—includes all business activities of ACRE, excluding the ACRE Capital business, which generally represents investments in real estate related loans and securities that are held for investment.

· mortgage banking—includes all business activities of the acquired ACRE Capital business.

The Company is primarily focused on two business segments involving CRE loans. First, in its principal lending business, the Company originates, invests in, manages and services middle-market CRE loans and other CRE-related investments for its own account. These loans are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial and other commercial real estate properties, or by ownership interests therein. Second, in its mortgage banking business, conducted through a recently acquired subsidiary, ACRE Capital, the Company originates, sells and retains servicing of primarily multifamily and other senior living-related CRE loans. These loans are generally held for sale.

Allocated costs between the segments include management fees and general and administrative expenses payable to the Company’s Manager, both of which represent shared costs. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. As the Company integrates ACRE Capital into its existing business, the Company expects future allocations to include costs relating to services performed by one segment on behalf of other segments.

The table below presents the Company’s total assets as of March 31, 2014 by business segment ($ in thousands):

	Principal		Mortgage
	Lending		Banking		Total
Cash and cash equivalents	$	22,874	$	7,528	$	30,402
Restricted cash	8,334		14,717		23,051
Loans held for investment	1,110,357		-		1,110,357
Loans held for sale, at fair value	-		1,045		1,045
Mortgage servicing rights, at fair value	-		60,132		60,132
Other assets	17,961		14,913		32,874
Total Assets	$	1,159,526	$	98,335	$	1,257,861

The table below presents the Company’s total assets as of December 31, 2013 by business segment ($ in thousands):

	Principal		Mortgage
	Lending		Banking		Total
Cash and cash equivalents	$	14,444	$	5,656	$	20,100
Restricted cash	3,036		13,918		16,954
Loans held for investment	958,495		-		958,495
Loans held for sale, at fair value	84,769		4,464		89,233
Mortgage servicing rights, at fair value	-		59,640		59,640
Other assets	16,632		15,861		32,493
Total Assets	$	1,077,376	$	99,539	$	1,176,915

The table below presents the Company’s consolidated net income for the three months ended March 31, 2014 by business segment ($ in thousands):

	Principal Lending			Mortgage Banking			Total
Net interest margin:
Interest income from loans held for investment	$	15,152		$	-		$	15,152
Interest expense	(5,072)			-			(5,072)
Net interest margin	10,080		(1)	-			10,080

Mortgage banking revenue:
Servicing fees, net	-			5,263			5,263
Gains from mortgage banking activities	-			1,386			1,386
Provision for loss sharing	-			(119)			(119)
Change in fair value of mortgage servicing rights	-			(1,847)			(1,847)
Mortgage banking revenue	-			4,683			4,683

Gain on sale of loans	680			-			680
Total revenue	10,760			4,683			15,443

Expenses:
Other interest expense	1,553			132		(2)	1,685
Management fees to affiliate	1,374			118			1,492
Professional fees	707			218			925
Compensation and benefits	-			4,021			4,021
Acquisition and investment pursuit costs	20			-			20
General and administrative expenses	715			1,504			2,219
General and administrative expenses reimbursed to affiliate	819			181			1,000
Total expenses	5,188			6,174			11,362
Income from operations before income taxes	5,572			(1,491)			4,081
Income tax expense (benefit)	241			(915)			(674)
Net income (loss)	$	5,331		$	(576)		$	4,755

(1) Revenues from one of the Company’s customers in the principal lending segment represented approximately $2.9 million of the Company’s consolidated revenues for the three months ended March 31, 2014.

(2) Other interest expense does not include interest expense related to the intercompany note 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, as described in Note 12. As such interest expense is related to an intercompany note, it is eliminated in the consolidated financial statements of the Company. If interest expense related to the intercompany note were included, other interest expense and net income would have been $1.0 million and $(1.5) million, respectively, for mortgage banking.