References to the terms "we," "our," or "us" refer toAres Industrial Real Estate Income Trust Inc. and its consolidated subsidiaries. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes certain statements that may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements relate to, without limitation, our ability to raise capital and effectively and timely deploy the net proceeds from our public offerings, the expected use of net proceeds from our public offerings, our reliance on the Advisor and the Sponsor, our understanding of our competition and our ability to compete effectively, our financing needs, our expected leverage, the effects of our current strategies, rent and occupancy growth, general conditions in the geographic area where we will operate, our future debt and financial position, our future capital expenditures, future distributions and acquisitions (including the amount and nature thereof), other developments and trends of the real estate industry, investment strategies and the expansion and growth of our operations. Forward-looking statements are generally identifiable by the use of the words "may," "will," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "project," or the negative of these words or other comparable terminology. These statements are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions, and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, present and future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
? Our ability to raise capital and effectively deploy the net proceeds raised in
our public offerings in accordance with our investment strategy and objectives;
? The failure of properties to work as expected;
? Risks associated with acquisitions, disposals and development of properties;
? Our inability to successfully integrate acquired properties and operations;
The failure of successful integration
? operations and corporate culture of Ares, and to retain
personnel following the acquisition by Ares of
investment advice and distribution activity in
? Unforeseen delays or increased costs associated with any development project;
? The availability of cash flow from operating activities for distributions and
capital expenditure;
Defaults or non-renewal of leases by customers, renewals of leases at prices below
? expected rent, or failure to rent properties at all or on favorable rents and
terms;
Difficulties in general economic conditions and in real estate, debt and
? securities markets in particular, including those related to COVID-19
pandemic;
? Changes in laws or regulations, including changes to laws governing the
taxation of real estate investment trusts (“REITs”);
? Our inability to obtain, renew or extend necessary financing or access debt
or stock markets;
? Conflicts of interest arising from our relationship with the Sponsor, the
Advisor and their affiliates;
? The risks associated with using debt to finance our business activities, including
refinancing and interest rate risks;
? Increase in interest rates, operating costs or capital higher than expected
expenditures; ? Changes to GAAP; and
? Our ability to continue to qualify as REITs.
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Any of the assumptions underlying forward-looking statements could prove to be inaccurate. Our stockholders are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report on Form 10-Q will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances, or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, including, without limitation, the risks described under "Risk Factors," the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
PREVIEW
General
Ares Industrial Real Estate Income Trust Inc. is aMaryland corporation formed onAugust 12, 2014 to make investments in income-producing real estate assets consisting primarily of high-quality distribution warehouses and other industrial properties that are leased to creditworthy corporate customers. We currently operate as a REIT forU.S. federal income tax purposes, and elected to be treated as a REIT beginning with our taxable year endedDecember 31, 2017 . We utilize anUmbrella Partnership Real Estate Investment Trust ("UPREIT") organizational structure to hold all or substantially all of our assets through theOperating Partnership . We intend to conduct a continuous offering that will not have a predetermined duration, subject to continued compliance with the rules and regulations of theSEC and applicable state laws. In order to execute this strategy in compliance with federal securities laws, we intend to file new registration statements to replace existing registration statements, such that there will not be any lag from one offering to the next. OnAugust 4, 2021 , theSEC declared our registration statement on Form S-11 with respect to our third public offering of up to$5.0 billion of shares of our common stock effective, and the third public offering commenced the same day. Our second public offering of up to$2.0 billion of shares of common stock was terminated immediately upon the effectiveness of the registration statement for the third public offering. Under the third public offering, we are offering up to$3.75 billion of shares of our common stock in the primary offering and up to$1.25 billion of shares of our common stock pursuant to our distribution reinvestment plan, in any combination of Class T shares, Class D shares and Class I shares. We may reallocate amounts between the primary offering and distribution reinvestment plan. Pursuant to our public offerings, we offered and continue to offer shares of our common stock at the "transaction price," plus applicable selling commissions and dealer manager fees. The "transaction price" generally is equal to the net asset value ("NAV") per share of our common stock most recently disclosed. Our NAV per share is calculated as of the last calendar day of each month for each of our outstanding classes of common stock, and is available generally within 15 calendar days after the end of the applicable month. Shares issued pursuant to our distribution reinvestment plan are offered at the transaction price, as indicated above, in effect on the distribution date. We may update a previously disclosed transaction price in cases where we believe there has been a material change (positive or negative) to our NAV per share relative to the most recently disclosed monthly NAV per share. See "Net Asset Value" below for further detail. Additionally, we have a program to raise capital through private placement offerings by selling DST Interests. These private placement offerings are exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act. We anticipate that these interests may serve as replacement properties for investors seeking to complete like-kind exchange transactions under Section 1031 of the Code. We expect that the DST Program will give us the opportunity to expand and diversify our capital raise strategies by offering what we believe to be an attractive and unique investment product for investors that may be seeking replacement properties to complete like-kind exchange transactions. We also make loans ("DST Program Loans") to finance no more than 50% of the purchase price of the DST Interests to certain purchasers of the interests in theDelaware statutory trusts. During the three months endedMarch 31, 2022 , we sold$157.1 million of gross interests related to the DST Program,$12.7 million of which were financed by DST Program Loans. See "Note 6 to the Condensed Consolidated Financial Statements" for additional detail regarding the DST Program. During the three months endedMarch 31, 2022 , we raised gross proceeds of approximately$252.8 million from the sale of 20.0 million shares of our common stock, including shares issued pursuant to our distribution reinvestment plan. See "Note 8 to the Condensed Consolidated Financial Statements" for information concerning our public offerings. 23
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As ofMarch 31, 2022 , we directly owned and managed a real estate portfolio that included 202 industrial buildings totaling approximately 39.3 million square feet located in 29 markets throughout theU.S. , with 354 customers, and was 97.3% occupied (99.0% leased) with a weighted-average remaining lease term (based on square feet) of approximately 4.4 years. The occupied rate reflects the square footage with a paying customer in place. The leased rate includes the occupied square footage and additional square footage with leases in place that have not yet commenced. As ofMarch 31, 2022 our real estate portfolio included:
194 industrial buildings totaling approximately 38.1 million square feet
? included our operating portfolio, which includes stabilized properties, and
was 98.3% occupied (99.6% leased) with a weighted average remaining lease term
(based on square feet) approximately 4.4 years; and
8 industrial buildings totaling approximately 1.2 million square feet including
our value-added portfolio, which includes properties acquired with the intention
? to be repositioned or redeveloped, or recently completed buildings that have not yet
reached stabilization. It is generally considered that a building is stabilized on the
earlier than the first anniversary of the completion of the structural work of a building or
building reaching 90% occupancy.
Concurrently with the BTC II Partnership Transaction (as described in "Note 4 to the Condensed Consolidated Financial Statements") onFebruary 15, 2022 , we and our joint venture partners formed theBTC II B Partnership , through which we co-own five properties that were part of the original BTC II Portfolio and were not part of the BTC II Partnership Transaction. As ofMarch 31, 2022 , we owned and managed five buildings that were either under construction or in the pre-construction phase totaling approximately 1.8 million square feet, through our 8.0% minority ownership interest in theBTC II B Partnership . Unless otherwise noted, these buildings are excluded from the presentation of our portfolio data herein. We have used, and intend to continue to use, the net proceeds from our offerings primarily to make investments in real estate assets. We may use the net proceeds from our offerings to make other real estate-related investments and debt investments and to pay distributions. The number and type of properties we may acquire and debt and other investments we may make will depend upon real estate market conditions, the amount of proceeds we raise in our offerings, and other circumstances existing at the time we make our investments.
Our primary investment objectives include the following:
? preserve and protect the capital contributions of our shareholders;
? provide current income to our shareholders in the form of
distributions; and
? achieve capital appreciation in our net asset value through active investment management and
asset Management.
There is no assurance that we will attain our investment objectives. Our charter
places numerous limitations on us with respect to the manner in which we may
invest our funds. In most cases these limitations cannot be changed unless our
charter is amended, which may require the approval of our stockholders.
We may acquire assets free and clear of mortgage or other indebtedness by paying
the entire purchase price in cash or equity securities, or a combination
thereof, and we may selectively encumber all or only certain assets with debt.
The proceeds from our borrowings may be used to fund investments, make capital
expenditures, pay distributions, and for general corporate purposes.
We expect to manage our corporate financing strategy under the current mortgage
lending and corporate financing environment by considering various lending
sources, which may include long-term fixed-rate mortgage loans, floating-rate
mortgage notes, unsecured or secured lines of credit or term loans, private
placement or public bond issuances, and the assumption of existing loans in
connection with certain property acquisitions, or any combination of the
foregoing.
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Net Asset Value
Our board of directors, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. With the approval of our board of directors, including a majority of our independent directors, we have engagedAltus Group U.S. Inc. , a third-party valuation firm, to serve as our independent valuation advisor ("Altus Group " or the "Independent Valuation Advisor") with respect to providing monthly real property appraisals, reviewing annual third-party real property appraisals, reviewing the internal valuations of debt-related assets and liabilities performed by our Advisor, helping us administer the valuation and review process for the real properties in our portfolio, and assisting in the development and review of our valuation procedures. As part of this process, our Advisor reviews the estimates of the values of our real property portfolio, real estate-related assets, and other assets and liabilities within our portfolio for consistency with our valuation guidelines and the overall reasonableness of the valuation conclusions, and informs our board of directors of its conclusions. Although third-party appraisal firms, the Independent Valuation Advisor, or other pricing sources may consider any comments received from us or our Advisor or other valuation sources for their individual valuations, the final estimated fair values of our real properties are determined by the Independent Valuation Advisor and the final estimates of fair values of our real estate-related assets, our other assets, and our liabilities are determined by the applicable pricing source (which may, in certain instances be our Advisor or an affiliate of Ares), subject to the oversight of our board of directors. With respect to the valuation of our real properties, the Independent Valuation Advisor provides our board of directors with periodic valuation reports and is available to meet with our board of directors to review valuation information, as well as our valuation guidelines and the operation and results of the valuation and review process generally. Excluding real properties that are bought or sold during a given calendar year, unconsolidated real properties held through joint ventures or partnerships are valued by a third-party appraiser at least once per calendar year. For valuations during interim periods, either the Advisor will determine the estimated fair value of the real properties owned by unconsolidated affiliates or we will utilize interim valuations determined pursuant to valuation policies and procedures for such joint ventures or partnerships. All parties engaged by us in connection with our valuation procedures, including the Independent Valuation Advisor,ALPS Fund Services Inc. ("ALPS"), and our Advisor, are subject to the oversight of our board of directors. Our board of directors has the right to engage additional valuation firms and pricing sources to review the valuation process or valuations, if deemed appropriate. At least once each calendar year our board of directors, including a majority of our independent directors, reviews the appropriateness of our valuation procedures with input from the Independent Valuation Advisor. From time to time our board of directors, including a majority of our independent directors, may adopt changes to the valuation procedures if it: (1) determines that such changes are likely to result in a more accurate reflection of NAV or a more efficient or less costly procedure for the determination of NAV without having a material adverse effect on the accuracy of such determination; or (2) otherwise reasonably believes a change is appropriate for the determination of NAV. We will publicly announce material changes to our valuation procedures. See Exhibit 99.2 of this Quarterly Report on Form 10-Q for a more detailed description of our valuation procedures, including important disclosure regarding real property valuations provided by the Independent Valuation Advisor. Our valuation procedures, which address specifically each category of our assets and liabilities and are applied separately from the preparation of our financial statements in accordance with GAAP, involve adjustments from historical cost. There are certain factors which cause NAV to be different from total equity or stockholders' equity on a GAAP basis. Most significantly, the valuation of our real assets, which is the largest component of our NAV calculation, is provided to us by the Independent Valuation Advisor. For GAAP purposes, these assets are generally recorded at depreciated or amortized cost. Another example that will cause our NAV to differ from our GAAP total equity or stockholders' equity is the straight-lining of rent, which results in a receivable for GAAP purposes that is not included in the determination of our NAV. The fair values of our assets and certain liabilities are determined using widely accepted methodologies and, as appropriate, the GAAP principles within the FASB Accounting Standards Codification under Topic 820, Fair Value Measurements and Disclosures and are used by ALPS in calculating our NAV per share. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. We did not develop our valuation procedures with the intention of complying with fair value concepts under GAAP and, therefore, there could be differences between our fair values and the fair values derived from the principal market or most advantageous market concepts of establishing fair value under GAAP. The aggregate real property valuation of$6.86 billion compares to a GAAP basis of real properties (net of intangible lease liabilities and before accumulated amortization and depreciation) of$5.36 billion , representing a difference of approximately$1.5 billion , or 28.1%. As used below, "Fund Interests" means our outstanding shares of common stock, along with OP Units, which may be or were held directly or indirectly by the Advisor, the Former Sponsor, members or affiliates of the Former Sponsor, and third parties, and "Aggregate Fund NAV" means the NAV of all the Fund Interests. 25 Table of Contents
The following table shows the components of the fund’s overall net asset value as of
As of
(in thousands) March 31, 2022 December 31, 2021
Investments in industrial properties $ 6,860,200 $ 5,677,050
Investment in unconsolidated joint venture partnership 20,441 147,952
DST Program Loans 81,338 68,772
Cash and cash equivalents 277,374 216,848
Other assets 58,220 36,317
Line of credit, term loans and mortgage notes (2,352,726) (2,261,140)
Financing obligations associated with our DST Program (681,045) (499,964)
Other liabilities (105,351) (73,467)
Accrued performance participation allocation (83,300) (81,185)
Accrued fixed component of advisory fee (4,955) (3,864)
Aggregate Fund NAV $ 4,070,196 $ 3,227,319
Total Fund Interests outstanding 280,832 258,170
The following table shows the net asset value per interest of the fund as of
(in thousands, except per Fund Interest data) Total Class T Shares Class D Shares Class I Shares OP Units Monthly NAV$ 4,070,196 $ 3,115,681 $ 220,639 $ 668,181 $ 65,695 Fund Interests outstanding 280,832 214,973
15,223 46,103 4,533 NAV Per Fund Interest$ 14.49 $ 14.49 $ 14.49 $ 14.49$ 14.49
The increase in net asset value per interest of the fund for the month ended
Under GAAP, we record liabilities for ongoing distribution fees that (i) we currently owe the Dealer Manager under the terms of the dealer manager agreement and (ii) we estimate we may pay to the Dealer Manager in future periods for shares of our common stock. As ofMarch 31, 2022 , we estimated approximately$88.7 million of ongoing distribution fees were potentially payable to the Dealer Manager. We do not deduct the liability for estimated future distribution fees in our calculation of NAV since we intend for our NAV to reflect our estimated value on the date that we determine our NAV. Accordingly, our estimated NAV at any given time does not include consideration of any estimated future distribution fees that may become payable after such date. We include no discounts to our NAV for the illiquid nature of our shares, including the limitations on our stockholders' ability to redeem shares under our share redemption program and our ability to suspend our share redemption program at any time. Our NAV generally does not reflect the potential impact of exit costs (e.g. selling costs and commissions related to the sale of a property) that would likely be incurred if our assets and liabilities were liquidated or sold today. While we may use market pricing concepts to value individual components of our NAV, our per share NAV is not derived from the market pricing information of open-end real estate funds listed on stock exchanges. Our NAV is not a representation, warranty or guarantee that: (i) we would fully realize our NAV upon a sale of our assets; (ii) shares of our common stock would trade at our per share NAV on a national securities exchange; and (iii) a stockholder would be able to realize the per share NAV if such stockholder attempted to sell his or her shares to a third party. The valuations of our real properties as ofMarch 31, 2022 , excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties, were provided by the Independent Valuation Advisor in accordance with our valuation procedures. Certain key assumptions that were used by the Independent Valuation Advisor in the discounted cash flow analysis are set forth in the following table: Weighted-Average Basis Exit capitalization rate 4.7 % Discount rate / internal rate of return 5.7 % Average holding period (years) 10.3 26 Table of Contents A change in the exit capitalization and discount rates used would impact the calculation of the value of our real property. For example, assuming all other factors remain constant, the changes listed below would result in the following effects on the value of our real properties, excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties: Increase (Decrease) to the Input Hypothetical Change NAV of Real Properties
Exit capitalization rate (weighted-average) 0.25% decrease 4.0 %
0.25% increase (3.6) %
Discount rate (weighted-average) 0.25% decrease
2.2 %
0.25% increase (2.1) %
FromNovember 1, 2017 throughJanuary 31, 2020 , we valued our debt-related investments and real estate-related liabilities generally in accordance with fair value standards under GAAP. Beginning with our valuation forFebruary 29, 2020 , our property-level mortgages and corporate-level credit facilities that are intended to be held to maturity (which for fixed rate debt not subject to interest rate hedges may be the date near maturity at which time the debt will be eligible for prepayment at par for purposes herein), including those subject to interest rate hedges, were valued at par (i.e. at their respective outstanding balances). In addition, because we utilize interest rate hedges to stabilize interest payments (i.e. to fix all-in interest rates through interest rate swaps or to limit interest rate exposure through interest rate caps) on individual loans, each loan and associated interest rate hedge is treated as one financial instrument which is valued at par if intended to be held to maturity. This policy of valuing at par applies regardless of whether any given interest rate hedge is considered as an asset or liability for GAAP purposes. Notwithstanding, if we acquire an investment and assume associated in-place debt from the seller that is above or below market, then consistent with how we recognize assumed debt for GAAP purposes when acquiring an asset with pre-existing debt in place, the liabilities used in the determination of our NAV will include the market value of such debt based on market value as of the closing date. The associated premium or discount on such debt as of closing that is reflected in our liabilities will then be amortized through loan maturity. Per our valuation policy, the corresponding investment is valued on an unlevered basis for purposes of determining NAV. Accordingly, all else equal, we would not recognize an immediate gain or loss to our NAV upon acquisition of an investment whereby we assume associated pre-existing debt that is above or below market. As ofMarch 31, 2022 , we classified all of our debt as intended to be held to maturity, and our liabilities included mark-to-market adjustments for pre-existing debt that we assumed upon acquisition. We currently estimate the fair value of our debt (inclusive of associated interest rate hedges) that was intended to be held to maturity as ofMarch 31, 2022 was$80.8 million lower than the carrying value used for purposes of calculating our NAV (as described above) for such debt in aggregate; meaning that if we used the fair value of our debt rather than the carrying value used for purposes of calculating our NAV (and treated the associated hedge as part of the same financial instrument), our NAV would have been higher by approximately$80.8 million , or$0.29 per share, not taking into account all of the other items that impact our monthly NAV,
as ofMarch 31, 2022 . 27 Table of Contents
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