Beyond REITs: Other Ways to Invest in the Real Estate Market
Ares Capital Corporation
Externally managed by Ares Capital Management (ARCC), Ares offers $10 million to $50 million senior and senior subordinated debt, and mezzanine debt, which sometimes includes an equity component, to middle market companies. The stock price generated a return of 9.53% YTD (year-to-date).
In the current tight spread environment, ARCC’s scale, sizable balance sheet, ample liquidity position, and industry relationships enable the BDC to continue to make competitive, high quality investments. The company stands to benefit in a rising rate environment since the portfolio is predominantly floating rate.
American Capital (ACAS) offers senior debt, mezzanine debt, and equity to fund growth, acquisitions, and securitizations. The company invests from $5 million to $800 million per company and is internally managed. The stock price generated a return of -5.23% YTD.
Substantial cash flows both from operating sources and repayments of existing investments will support a combination of new investments, debt repayment, and share repurchases along with the proposed spinoff transactions that will be the catalyst to unlock value for investors.
Externally managed by private equity firm Apollo Management, Apollo Investment (AINV) offers $20 million to $150 million mezzanine and senior secured loans. Apollo may also take equity positions, and may invest in public companies. The stock price generated a return of 6.64% YTD. The company’s relatively high exposure to energy investments increases its near-term risk. The company’s investment prospects have improved as the company has pursued less liquid senior secured credit from more liquid subordinated credit. This portfolio strategy has helped to dampen yield compression in a low-rate environment.
BlackRock Capital Investment
Externally managed by BlackRock Kelso Capital Advisors, BlackRock Capital Investment (BKCC) provides debt and equity in the $10 million to $50 million range in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component. The stock price generated a return of 20.61% YTD. The company assumes substantial portfolio risk by investing in private non-investment-grade companies. While the company seeks to mitigate this risk through diversification and investment selection, it remains subject to earnings volatility and capital losses.
Main Street Capital
Externally managed, Main Street Capital (MAIN) provides $2 million to $15 million of long-term debt and equity capital to lower middle market companies with revenues in the $10 million to $100 million range. The stock price generated a return of 12.7% YTD.
With a low cost operating structure and differentiated strategy within the lower middle market, Main Street is considered one of the strongest companies in the BDC sector. Its ability to grow NAV (net asset value) primarily through equity appreciation and raise additional equity capital at a premium to NAV is a key differentiating factor compared to many peers.
Liquid real estate ETFs
Some of the liquid real estate ETFs are CBL & Associates Properties (CBL), the iShares US Real Estate ETF (IYR), Toll Brothers (TOL), Retail Opportunity Investments (ROIC), and Forest City Enterprises (FCE.A).
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