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What's Ahead for Non-Traded REIT Sector? Rebound Expected in 2018 Driven by Large Institutions, Small Investors Alike

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What’s Ahead for Non-Traded REIT Sector? Rebound Expected in 2018 Driven by Large Institutions, Small Investors Alike


Yield-Hungry Investors Expected to Return to Nonlisted Space Next Year After Fundraising Craters in 2017

Nonlisted REIT Griffin Capital Essential Asset REIT, Inc. traded the 460,000-square-foot DreamWorks headquarters and studio campus in Glendale, CA to a South Korean investor 10 days ago for $290 million.

The amount of funds raised by non-traded REITs is expected to hit a 15-year low for 2017 amid increased federal regulatory scrutiny and pressure on companies to reduce their fee structures and increase transparency into their operations.

At least two large sponsors of nonlisted trusts have exited the space in recent months. W. P. Carey Inc. (NYSE: WPC), a major player which had sponsored non-traded REITs since 1990, decided to exit the business in June. In a similar move to focus on its real estate portfolio, net-lease operator VEREIT, Inc. (NYSE: VER) agreed to sell its Cole Capital nonlisted REIT operator to an affiliate of Los Angeles-based CIM Group, Inc. in a transaction valued at up to $200 million.

Non-traded REIT fundraising will end 2017 at $4.2 billion, a nearly 79% plunge from the $19.6 billion raised during the sector’s 2013 peak, according to sector consulting firm Robert A. Stanger & Co. Nearly half that total, about $2 billion, will be generated by just one player, Blackstone Group’s nascent Blackstone REIT, which began trading this year.

However, Stanger and other analysts see a rebound in the future. The recent arrivals of Blackstone, Starwood Capital Group and other global investment institutions and money managers such as Cantor Fitzgerald, paired with the growing appetite for yield among smaller retail investors and major funds alike, may boost the fortunes of the non-traded REITs in 2018.

Cantor Fitzgerald LP this week announced plans to launch Rodin Income Trust, its second non-traded REIT, with a goal of raising up to $1.25 billion to acquire CRE debt, securities and properties. In October, Starwood Capital Group became the latest major player to test the waters, announcing plans to launch Miami Beach-based Starwood Real Estate Income Trust, Inc., hoping to raise up to $5 billion through an initial public offering for the REIT and use the proceeds to acquire property and debt in the U.S and globally.

Stanger forecasts a more-than 33% increase in fundraising by non-traded REITs next year to approximately $5.6 billion, pointing to the acceptance of the formerly maligned non-traded REIT sector by big institutional players and the broader financial community as investors search all corners of the market for yield opportunities.

Kevin T. Gannon, managing director with Robert A. Stanger & Co., said the turnaround may be part of a strategy by Blackstone, Starwood and other major players to use non-traded REITs as a vehicle for pooling individual retail investors who buy securities on their own account rather than on behalf of large institutions.

The Starwood IPO follows the formation of Blackstone Group’s first non-traded REIT, Blackstone Real Estate Income Trust, which has already exceeded its goal of raising more than $1.4 billion this year.

“Blackstone has been dominating the space with its institutional cachet and long-term relationships with the wire houses, who have been a significant force in non-traded REIT fundraising in the last two years,” Gannon said. “This year, the wire houses have been an important factor through their business with Blackstone, and in prior years, through their fundraising through Jones Lang LaSalle.”

Non-traded REITs have also been active sellers. Griffin Capital Essential Asset REIT, Inc. late last month sold DreamWorks Animation’s headquarters and studio campus, a five-building, 460,000 square foot property in Glendale, CA, for $290 million. The REIT acquired the building in July 2015 for $215 million.

Other important non-traded REIT players this year have been Carter Validus in the data center and health-care asset space, Cole Capital in the net lease sector, and Black Creek and Smartstop in industrial and self-storage properties, respectively, according to Stanger.

Los Angeles-based CIM Group agreed to acquire nonlisted REIT operator Cole Capital from net-lease operator VEREIT, Inc. (NYSE: VER) in a transaction valued at up to $200 million, a price that “seems light” compared with JMP Securities’ estimated $260 million valuation of the platform, according to JMP Securities analyst Mitch Germain in a note to investors.

The non-traded industry has faced considerable challenges associated with the Department of Labor’s new fiduciary rule and increased transparency, which have inhibited fundraising, Germain said, noting that full-year projections for 2017 are well below five-year averages for the industry.

CIM said it plans to grow Cole’s assets under management and expects to gain broader distribution of the non-traded REITs it sponsor through its broker-dealer agreements.

“With this acquisition, CIM acquires expertise and what it believes are best-in-class performing funds in the net/finance-lease space, complementary to CIM Group’s well-established urban product platforms,” CIM said in a statement confirming the acquisition. “In addition, CIM acquires one of the market-leading retail distribution organizations serving Independent broker-dealers and registered investment advisers, complementing CIM’s existing relationships with institutional investors and wirehouse distribution channels.”

JMP Securities’ Germain also underscored the attraction of getting access to these sales channels for reaching individual investors.

“We think the emergence of retail platforms among well-renowned institutions including Blackstone and Starwood Capital should add further credibility to the industry,” Germain said.


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