In an unusual move, global alternative investment manager Ares Management plans to shut down the public offering of common shares in its two nonlisted real estate investment trusts and shift to private sales.
The timing of the announcement comes when fundraising by nonlisted REITs is at a low point as more capital has flowed to other higher yielding real estate and alternative investments. It also comes amid stricter securities regulations.
In separate Securities and Exchange Commission filings with similar language, Ares Real Estate Income Trust and Ares Industrial Real Estate Income Trust disclosed plans to close the public offering of primary shares on July 2.
While no reasoning was given for the decisions, both REITs said the moves did not reflect adverse developments at the firms or an unfavorable view of real estate fundamentals.
The REITs both decided to commence perpetual private offerings of common stock, the filings said. At the same time, they plan to continue to be public reporting companies, which means they will make public filings with the SEC, including quarterly and annual reports and monthly disclosures of net asset values.
Ares officials declined to comment to CoStar News.
“Overall, I would say it is smart move by Ares. I expect many others to follow,” Kevin Gannon, chairman and CEO of investment banking firm Robert A. Stanger & Co., told CoStar News in an email.
There are a couple of fundamental challenges to publicly registered REIT programs, Gannon said.
“First, they must clear a challenging and ever-changing regulatory gauntlet of blue sky or state securities regulations and the SEC that are costly and oftentimes frustrating,” Gannon said. “Second, those blue-sky regulations limit investments by individuals to 10% of net worth, oftentimes counting all other alternative investments.”
More money has been flowing to those other alternative investments, including private placement offerings as well as business development companies, tax-advantaged offerings and infrastructure funds, according to Stanger data.
Other asset managers such as KKR, Apollo Global Management, Goldman Sachs, Morgan Stanley, Starwood Capital Group and Invesco have been among the players filing for private placement offerings in REITs, business development companies or operating company formats, according to Stanger data.
For 2024, Stanger estimates that the retail alternative investment landscape will total $100 billion of equity raises, up from $75 billion in 2023. Nonlisted REITs are expected to get only $5 billion of the 2024 total.
Los Angeles-based Ares plays in several other alternative investment arenas that are raising more money than its nonlisted REITs are from public share offerings.
One example is the tax-advantaged Delaware Statutory Trust. In a DST, investors pool their money to own fractional interests in the trust, which holds title to an investment property or a small portfolio of properties. This structure allows investors to access the benefits of owning real estate without the management responsibilities associated with direct ownership.
Additionally, DSTs can offer tax advantages, such as deferring capital gains taxes through a so-called 1031 exchange, named after the corresponding section of the U.S. tax code that allows investors to sell one property and reinvest the proceeds into another similar property.
Ares REIT and Ares Industrial combined in 2023 to post DST share sales totaling $762.4 million, according to their SEC filings. The sales of common stock in 2023 combined came in at a smaller amount, at $403.9 million.
The gap has been widening this year. Combined first-quarter DST sales hit $215.7 million — ahead of the pace set last year, according to filings. Combined first-quarter stock sales were $58.9 million, trailing last year’s pace.
The REITs did not break out how much of their common stock sales were done through public versus private sales.
“In my experience, this is pretty unusual to close the public offerings to focus solely on private offerings in the nontraded REIT space,” Luke Schmidt, a senior financial analyst with Blue Vault Partners, an alternative investment management consultant, told CoStar News in an email. “I believe there are a handful of nontraded REITs that are raising capital through both channels simultaneously, but this move is pretty uncommon.”
Ares also has a nonlisted business development company that has had a quickening pace of success in raising public capital, Schmidt noted. Over the past three quarters, it has raised $382.7 million in the third quarter, $490.9 million in the fourth quarter and $595.9 million this past quarter.
“This success could also be in play here, where they are wanting to shift their public offering focus to this space since it is hot right now and raising quite a bit of capital,” Schmidt said.