Ares Investments' Complex Company Structure
Ares Commercial Real Estate Corporation has filed to sell its shares publicly under the proposed ticker symbol (ACRE). The company is looking to price its shares in the narrow range of $19.00 - $20.00 per share. The company also plans to qualify as a real estate investment trust.
Ares Commercial Real Estate Corporation is a newly organized specialty finance company. It will be managed by Ares Commercial Real Estate Management LLC, which is an affiliate of Ares Management LLC. Ares Management has $41 billion of committed capital under management.
This offering will actually complete a merger with ACRC Holdings LLC, in which Ares Investments will receive shares of common stock. In exchange Ares Commercial Real Estate Corporation will receive a portfolio of recently originated commercial real estate loans.
The Commercial Real Estate Business or CRE
The commercial real estate market is in the early stages of recovery from the severe economic downturn that began in 2007. The steep decline in commercial real estate lending continued throughout 2008 and 2009. The recovery in CRE is expected to be both gradual and uneven due to many factors; some of which are government reform of lending institutions like Fannie Mae and Freddie Mac and slowing GDP growth in both the United States and Europe.
Foreign investment in the United States CRE market has increased over the past couple years and is a key factor in stimulating the U.S. market. The percentage of foreign investment in the U.S. CRE market rose to 12.3% in July 2011, compared to 8.4% in the same period a year prior.
The commercial real estate market recovery has varied across several sectors. Many retailers have put expansion plans on hold due to uncertainty surrounded consumer spending. As a result, both industrial and retail space have seen decreases in rent growth and an increase in vacancies. While apartment and office spaces have had the opposite pattern. Office space has had a low rate of vacancies, allowing landlords to drive rent rates higher. In the single family home sector, high foreclosure rates and stagnant income favor renting apartments over home buying.
The commercial real estate market should experience a slow, gradual, and somewhat muted recovery over the next few years. Ares Commercial Real Estate Corporation will face additional obstacles including a high level of maturing debt that was originally incurred at the height of the market, a monetary policy that may not remain favorable to real estate, and tighter credit standards.
Ares Commercial Real Estate's Main Competitors
It's difficult to nail down Ares' competitors because the company has yet to release a detailed investment strategy. Some real estate investment trusts doing business in the same area are General Growth Properties (GGP) which runs shopping malls and Inland Real Estate (IRC) which owns shopping centers.
Ares Commercial Real Estate's Lack of Financial Reports
Because this is a newly formed entity it does not have any financial information to report in its filings with the SEC. Upon completion of this offering it will acquire all the commercial real estate loans of Ares Investment Holdings Inc. and begin to pay monthly dividends of 90 to 100 percent of its taxable income pursuant to the requirements of a real estate investment trust.
IPOs Similar To Ares Commercial Real Estate
Over the past few years there have been several Commercial REIT IPOs similar to Ares Commercial Real Estate. Whitestone is a small cap commercial REIT which at the time of its offering had a book value of $10.30. Its class B common shares went public in August 2010 at $12.00 per share. The company was attempting to price its shares at $14.00 to $16.00 and had to lower its expectations. It has recently traded around $13.00 and its annual dividend yield is 8.76 percent.
Another commercial or retail REIT that went public in 2010 was Excel Trust Inc. which also priced shares at $12.00 per share, well below the expected range of $15 - $17. Excel recently traded at $11.79 per share and had an annual dividend yield of 5.56 percent.
Most recently Retail Properties of America priced its IPO at $8.00 a share. It received a nice 8% pop on its first day of trading, however the stock priced significantly lower than its expected $10.00 to $12.00 range. It has since traded as high as $9.44 and has yet to make its first dividend payment.
How To Trade Ares Commercial Real Estate
Throughout the recent recession REITs have outperformed other sectors and the broader market. A trend that will probably continue in this low interest rate environment. However, investors of late are not willing to pay a high price for an entry point, so expect ACRE to price at the bottom of the range or below it. While the price should move to the upside in first few days, price movement should flatten out and most of the money to be made will come from dividends. If you're in the market for this type of investment, this stock is one you will have to hold for a while before you see a decent profit.
Market information for Whitestone from SEC filing here. Some information taken from the S-11 on Retail Properties of America click here. The S-11/A filing for Excel Trust, Inc. can be accessed here. Ares Commercial Real Estate Trust's S1 filings can be found here. Some analysis is based on data from Deloitte & Touche LLP's publication here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.