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Based in Chicago, Illinois, Ares Commercial Real Estate (proposed ACRE) scheduled a $150 million IPO with a market capitalization of $180 million at a price range mid-point of $19.50 for Thursday, April 26, 2012. [S-1]

ACRE is one of eight IPOs are scheduled for the week of April 23th. (Full IPO calendar here).

Manager, Joint Managers: Wells Fargo; Citigroup; BofA Merrill; J.P. Morgan.

SUMMARY
This is a start-up REIT that acquired four mortgages from December, 2011 through March 2012. It's not hard to acquire those kind of mortgages to put into a REIT, especially with assistance from IPO underwriters.

Red flags:

  • $47 million of the IPO proceeds are allocated to repay loans advanced by the lead underwriters, Wells Fargo and Citibank.
  • $6.3 million of the IPO proceeds are going back to the sponsor, to cash them out 100%.
  • The sponsor is an alternative investment manager that manages $46 billion dollars, owns ACRE's investment manager and is setting up ACRE to be its own private cash cow.
  • The incentive fee (see below) is confusing and apparently provides a 20% profit payback over a hurdle rate of 8%, which is a little steep relative to other REITs in ACRE's asset class, some of which don't charge as much.

CONCLUSION
Avoid this self-serving IPO designed as a cash cow for the parent/sponsor as well as the underwriters. See these charts: AQ parent and AQ organizational structure. IPOdesktop doesn't like convoluted organizational structures.

BUSINESS
Founded in December, 2011, ACRE is on originating, investing in and managing middle-market commercial real estate loans ("CRE"). ACRE's target market is real estate loans ranging in size from $15 million to $100 million.

SPONSOR/PARENT
Ares Management, a global alternative asset manager and SEC registered investment adviser with $46 billion of total committed capital under management as of December 31, 2011.

INITIAL PORTFOLIO
From when ACRE started in December, 2011 through March 31, 2012, ACRE originated or co-originated four loans secured by CRE middle market properties.

The aggregate originated commitment under these loans was $121.0 million, $98.9 million of which ACRE has funded or expects to fund and $22.0 million of which was fully funded by Citibank, N.A., an affiliate of Citigroup Global Markets Inc. (one of the underwriters of this offering).

As of March 31, 2012, ACRE had funded $78.2 million of its $98.9 million of commitments.

DISTRIBUTION POLICY
ACRE generally intends over time to pay quarterly distributions in an amount equal to its taxable income

INCENTIVE FEE
S-1 page 13

Read below, directly quotes from ACRE's S-1 filing, obviously written by lawyers, perhaps with the intent to confuse potential investors.

Our Manager will be entitled to an incentive fee with respect to each fiscal quarter (or part thereof that the management agreement is in effect) in arrears in cash.

The incentive fee will be an amount, not less than zero, equal to the difference between:
(NYSE:A) the product of (i) 20% and (ii) the difference between our Core Earnings (as defined below) for the previous 12-month period, and (NYSE:B) the product of

(1) the weighted average of the issue price per share of our common stock of all of our public offerings multiplied by the weighted average number of all shares of common stock outstanding (including any restricted stock units, any restricted shares of our common stock and other shares of our common stock underlying awards granted under our 2012 Equity Incentive Plan as further described below) in the previous 12-month period, and

(2) 8%;

and the sum of any incentive fees earned by our Manager with respect to the first three fiscal quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any fiscal quarter unless cumulative Core Earnings for the 12 most recently completed fiscal quarters is greater than zero.

"Core Earnings" is a non-GAAP measure and is defined as GAAP net income (loss) excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that we foreclose on any properties underlying our target investments), any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of our independent directors.

USE OF PROCEEDS
ACRE expects to net $147 million from its IPO. $47 million is allocated to repay debt owing under a Wells Fargo Facility and the Citibank Facility, both of whom are lead underwriters for the IPO.

$6.3 million is allocated to redeem Series A Preferred Stock and the balance is for general working capital. This means ACRE is cashing out 100% of the initial capital put in the facilitate the IPO.

Disclaimer: This ACRE IPO report is based on a reading and analysis of ACRE's S-1 filing and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Ares Commercial Real Estate