For many investors, public non-traded REITs are neither fish (private) nor fowl (exchange-traded), but rather an odd duck. They can have the high fees, opaque values and liquidity problems associated with private REITs, while offering to any investor, not just accredited ones, the potential for returns higher than those from listed REITs. To improve the breed, the daily-NAV non-traded REIT was conceived, in which the issuer updates the REIT’s net asset value every day. This solves the opacity problem, but at the cost of higher operating costs – it takes money to generate a new NAV.
In 2016, Blackstone, a leading investment firm with more than $360 billion in assets under management (including $200 billion in global real estate assets), sensed an opportunity in the public non-traded REIT market and seized it, in the form of the Blackstone Real Estate Income Trust. The Blackstone REIT invests primarily in income-oriented commercial real estate in the United States. This monthly-NAV, public non-trading REIT broke escrow on January 4, 2017, selling 27,859,345 common stock shares worth a total of about $279 million in net proceeds from its continuous public offering. The eventual goal is a maximum offering of $5 billion. The Blackstone REIT focuses on commercial rental properties (at least 80 percent) and real estate debt securities and cash (up to 20 percent).
The initial minimum investment is $2,500, and the share price is $10. To invest, you must either have:
- A net worth of at least $250,000, or
- A gross annual income of at least $70,000 and a net worth of at least $70,000
While the suitability standards are high, they are below those for accredited investors. This works because the shares are SEC-registered – they are not private shares, which would require most investors to be accredited or sophisticated.
In the words of a famous politician, the offering was YUGE. Let’s see why.
A Tottering Market
Before the Blackstone REIT, capital raising for public non-traded REITs was faltering, declining by 55 percent year-over-year through November 2016 and down 75 percent from its high in 2013.
One reason for the drop-off was FINRA Rule 15-02, which requires non-listed REITs to provide a timely share value on customer account statements. The previous practice had been to report the original offering price, usually $10/share, every statement. The new rule spurred non-listed REITs to calculate daily and monthly NAVs. REITs can compute NAVs by deducting fees, commissions and expenses from the amount available for investment, or by enlisting third-party appraisals of the REIT’s assets and liabilities according to standard industry practices. The new rules also require disclosure of the portions of dividends that represent return of capital rather than earnings.
Blackstone Dips In
Blackstone convinced Morgan Stanley, Merrill Lynch and UBS to sponsor the shares, beginning in mid-October 2016. The net capital proceeds by the end of year, $279 million, were double that of the second-largest non-traded REIT, Jones Lang LaSalle Income Property Trust, during the same period. In other words, the Blackstone REIT blew the market wide open.
Blackstone’s Secret Sauce
Blackstone’s success rested on several factors, including:
- Reputation: The Blackstone name is revered in private-equity circles, enough so to get three giant Wall Street banks to distribute shares, two of which had never participated in the non-traded REIT market. This allowed Blackstone to target relatively virgin territory: Wealth management advisors and other retail clients of the banks. These institutional and fee-based accounts bought $41 million of the Class I (no-load) shares.
- Lower fees: Blackstone capped fees at 8.75 percent of gross proceeds versus the usual 10 to 12 percent charged by most non-traded REITs. It also offered several share classes, including no-load (Classes D and I), and 3.5 percent upfront sales commission/dealer manager fee (Classes T and S), as well as providing certain reimbursements to the sponsors. Note that all but Class I charge a stockholder servicing fee ranging from 0.25 percent to 0.85 percent. The advisory fee is 1.25 percent of NAV, and the performance participation allocation (PPA) is 12.5 percent of the fund’s annual return, with a 5 percent hurdle rate – if the fund’s return doesn’t surpass the hurdle, then the PPA is waived. Investors who purchase $10,000 of Class T shares will pay commissions equaling $906 over a seven-year period. S-share purchasers will pay the same amount but pay a higher initial fee.
- Monthly NAV structure: Blackstone gambled, apparently correctly, that monthly pricing was sufficiently transparent to attract investors. Blackstone is committed to unlimited monthly redemptions, which eases liquidity concerns, although it doesn’t address NAV slippage. The NAV per share per class is set on the last calendar day of each month, subject to dealer manager fees and selling commissions. The REIT aims for—but doesn’t guarantee—monthly distributions.
Blackstone has been steadily enlarging its portfolio since the initial offering date. For example, NREI Wire reports that the REIT bought a portfolio of industrial assets from High Street Realty in mid-April for $402 million. The 6-million-square-foot portfolio consisted of 38 properties 97 percent leased to more than 90 tenants, located primarily in Atlanta, Chicago, Houston, Harrisburg, Dallas and Orlando. The average cost per square foot was $67.30. Blackstone liked the portfolio because the market rents in those cities have been rising at a 5 percent annual clip, while vacancy rates have fallen one percentage point, to 5.2 percent, over the last two years.
The Blackstone REIT has lately acquired real estate from three other Blackstone affiliates, including $116 million in bonds secured by a mortgage made by Blackstone for Chicago’s Willis Tower. Blackstone plans to renovate and expand the iconic skyscraper. It also purchased an apartment complex in Mesa AZ for $40.7 million and an industrial complex in Stockton CA for $32.5 million.
The advantages of non-listed REITs over private ones, including better price transparency and higher liquidity, are helping Blackstone lead a vanguard of new funds, many with daily NAVs. A few years ago, the non-listed REIT market was dying, but now it’s gaining new momentum as investors increasingly diversify their holdings by turning to alternative investments.