REPORT FROM THE U.S.—Analysts and hotel owners believe The Blackstone Group’s recently announced nontraded real estate investment trust could signal a shift in that company’s typical investment strategy and the overall transactions market.
Regulatory filings in early August revealed Blackstone officials are looking to raise $5 billion for the new REIT—named Blackstone Real Estate Income Trust—which will invest in several real estate classes, including hotels.
Since that point, the REIT has been the subject of much news coverage and speculation, with many wondering what Blackstone will do with it, what it means for the larger industry and why Blackstone chose not to list the company.
Sources said the typical pattern of nontraded REITs is a departure from Blackstone’s regular modus operandi.
Robert W. Baird & Company VP Michael Bellisario said Blackstone has focused on buying properties in multiple sectors, fixing them up and then selling them for a profit, like the company did with its quick purchase and sale of Strategic Hotels & Resorts. This practice has been so institutionalized that the company even adopted a slogan of “Buy it, Fix it, Sell it.”
With this nontraded REIT, however, it’s likely Blackstone would be more interested in cash flow and income than profits from a sale, Bellisario said.
The nature of the REIT model and its rules on length of property ownership means a change in the buy it, fix it, sell it approach, said Raymond Martz, EVP and CFO at Pebblebrook Hotel Trust. Private equity’s design encourages quick turnarounds and asset flips, which capture higher fees, but REITs can’t do that. Nontraded REITs pay high dividend yield to attract retail investors, he said.
“When you pay high dividend yield, you have a lot of fees associated with it and you can be focused on properties generating a lot of income,” he said. “More likely than not, you’re focusing on asset classes in higher cap rates. You invest in markets with yield to pay the dividend.”
This is why many nontraded REITs aren’t geared toward development and value-add, Martz said. They have to buy assets with high cap rates, which means higher dividend yields and pushing to secondary markets sometimes because that’s where higher cap rates can be found.
“Assets for this REIT may be more stabilized properties and generating income,” he said. “It’s more of a buy-and-hold approach.”
Effect on the market
Bellisario said hotels should expect to see about 20% to 25% of the $5-billion fund, and he believes it’s going to take time to for the hotel industry see how Blackstone’s strategy plays out.
Income and yield are a bit bigger of a focus on the nontraded side, he said, so that could skew the aim toward select-service properties with higher yielding or secondary and tertiary markets.
Bellisario said there is a void in the nontraded REIT sector, and REITs are generally not in acquisition mode. Private equity has been more cautious. All of this could lead to acquisition opportunities for Blackstone.
Roughly $1 billion wouldn’t be enough to start taking over hotel REITs, he said, so Blackstone could target single assets or small groups of properties.
“It doesn’t make Chesapeake (Lodging Trust) or Apple (Hospitality REIT) or Hersha (Hospitality Trust) acquisition targets,” Bellisario said.
Ryan Meliker, managing director and senior REIT analyst at Canaccord Genuity, disagreed. While it’s harder to forecast the impact of Blackstone’s nontraded REIT for hotel owners at this point, he said there’s potential for growth. The new REIT will shake up the nontraded sector, he said, and even $500 million a year dedicated to hotels will be meaningful.
“If they get big enough, they could potentially buy publicly traded companies,” Meliker said. “They will be a capital source competing for acquisitions.”
This all depends on how much Blackstone raises and how fast it does it, he said. If Blackstone raises $100 million in a month or a quarter, the REIT will put that capital to work quickly.
The new REIT means competition for owners looking to buy, said Neil Shah, president and COO of Hersha Hospitality Trust, and while nontraded REIT vehicles often start out small, they can grow fast. Blackstone’s interest in acquisitions could have an effect on pricing in the marketplace.
Blackstone has been acquiring select-service hotels on the private equity side for the past five years or so, he said, so Blackstone officials have experience in that space, understand capital requirements as hotels age and are versed in other issues like supply growth.
Generally, there have been fewer pools of capital focused on select-service purchases, Shah said. A disruption of debt markets in 2015 slowed the flow of private equity capital, as well.
“It’s a great piece of news to know there’s another permanent vehicle, but long-term nontraded REITs are focused on select-service hotels,” he said. “That gives developers around the country the conviction to develop hotels attractive to that platform.”
A troubled sector
While still public companies, the shares of nontraded REITs are not listed on a national securities exchange as they are with exchange-traded REITs. Financial advisers sell the shares directly to clients, and the secondary market is limited, so clients tend to hold on for nearly a decade.
Bellisario said the nontraded REIT sector has lost some momentum recently because of missteps and mistakes.
“That’s been a bit of a black eye for the industry and a bull’s-eye on their backs from investors with scrutiny,” he said.
Nontraded REITs must also deal with new federal law requiring financial advisers to act in the best interest of their clients, Meliker said. Prior to the regulation, advisers could sell nontraded REIT securities and charge a large fee from their clients, which wasn’t necessarily disclosed to clients upfront.
Meliker noted nontraded REITs have additional stability from not being listed. The trusts can be more attractive to clients because they avoid the up-and-down movement of publicly traded REITs. But advisors have a more difficult time selling nontraded REIT stock after disclosing fees to clients.
“So now, if you buy a share of a nontraded REIT from a financial adviser, if it shows you paid $10, you got $8.80,” he said.
Meliker said Blackstone’s move into the space shows the company is willing to put in effort to rehab the tattered image of nontraded REITs, which took a hit when groups like AR Capital decided to flee the space over worries about regulation.