Ares US Real Estate Opportunity Fund III
Ground Lease Aggregation Strategy, Various - In-Closing
Creation of a national platform to originate and aggregate a diversified ground lease portfolio
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Anticipated Investment
Date:
Location:
Gross Capitalization:(¹)
Anticipated Equity
Committed:(3)
Investment Theme:
Equity
(60-100% LTV)
Junior Tranches
(45-60% LTV)
AAA Tranche
(0-45% LTV)
Illustrative
CMBS Structure
Key Metrics
Q3 2020
Various
$800 million
$100 million*
Market dislocation and mispriced
risk
Equity
(60-100% LTV)
Leasehold
Mortgage
(35-60% LTV)
Ground Lease
(0-35% LTV)
Illustrative Ground
Lease Structure
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Investment Rationale & Key Drivers of Return
Generate Stable Cash Flows through Structuring and Aggregating Ground Leases
Opportunity to originate ground leases on commercial and residential properties
across the US and aggregate a portfolio of diversified fee positions
The positions will seek to generate steady cash on cash returns and realize
opportunistic returns through moderate yield compression
Additionally, the fixed rent escalations and/or CPI adjustments on ground leases
create an inflation hedge
Seek to capture the Mispricing of Ground Lease Yields Relative to Other Senior
Positions
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Ground leases are the safest portion of capital stack at 30-40% LTC, making them
more defensive than AAA tranche of CMBS debt while pricing at higher yields**
At current cap rates, Ares views fee positions as offering attractive risk-adjusted
returns given their priority in the capital stack and contractual rental increases
Ares expects that over time institutional investor demand will drive yield
compression:
Asset class is becoming more institutionally accepted and sought after
Potential for portfolio premium through creation of diversified portfolios
Seek to create Premiere Platform with Experienced Partner and Limited
Competition
Increased demand for ground lease structures has recently emerged and is
growing amongst existing owners seeking refinancings or for new acquisitions
We observed limited institutional participation in the US market exists today
Ares has entered into exclusivity with a strong sponsor who brings a deep track
record and is positioned to create a US platform in the sector
We believe AREOF III will further benefit from the launch of this platform through
its ownership interest
Investment Status
The term sheet has been executed and JV documentation is underway
The sponsor has begun to hire key individuals that will lead the platform
Potential to result in a co-investment opportunity for third-party investors
Expected net of co-investment. There can be no assurance that any co-invest opportunities will be made available to prospective investors. Decisions regarding whether and to which investors to offer co-invest opportunities to
are made in the sole discretion of the general partner and may be based on a number of factors. Investing in this fund does not entitle you to allocations of co-invest opportunities. Please refer to the notes on page 36 and
endnotes on 74. **JP Morgan CMBS Weekly Datasheet, Q2 2020. As of June 30, 2020 unless otherwise noted.
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