Blackstone Group’s nontraded REIT cut numerous property deals in 2019, including one that put it in control of a venture that owned the Bellagio hotel and casino in Las Vegas. PHOTO: DAVID BECKER/REUTERS
A once-discredited type of real-estate fund aimed at small investors has come roaring back, under new management.
These funds, which go by the name of nontraded real-estate investment trusts, buy office towers, hotels, shopping centers and other commercial property. They tout annual dividends of more than 5% and typically require investors to put in at least $2,500.
Individual investors are flocking to
these funds in search of higher returns
and more stable sources of income at
a time when bonds offer minuscule
yields. “The product is super-attractive
when rates are low,” said Barry
Sternlicht, chief executive of Starwood
Capital Group.
Investment firms raised $10 billion for
these funds in the first 11 months of
2019, according to investment bank
Robert A. Stanger & Co., compared with $8.8 billion for 2018 and 2017 combined.
The surge of new money marks a stunning turnaround for these funds, which have been around for 20 years but suffered a more than 50% decline in fundraising a few years ago after industry scandals and criticism. Regulators faulted them for excessive fees and poor disclosure. Fundraising plummeted and investors turned to publicly traded REITs, which make similar property investments and trade more easily.
Now, big-name investment firms like Blackstone Group Inc. and Starwood are driving the comeback. They are offering variations of products that were previously sponsored primarily by little-known firms, some of which have gone out of business.
Starwood, which launched its nontraded REIT in late 2018, was raising more than $100 million a month toward the end of last year. In some months last year, Blackstone raised over $1 billion.
The recent entrants have rolled out new nontraded REITs with lower costs and better disclosure.
Blackstone Real Estate Income Trust Inc. helped revitalize the business in part by convincing banking giants like UBS Group AG and Bank of America Corp.’s Merrill Lynch brokerage to sell it, offering the product greater visibility.
Proponents say they offer more direct exposure to the property market than public REITs, which can be subject to stock market volatility that can whipsaw these real-estate companies’ shares even when property markets are doing well.
Many analysts believe a traditional stock and bond portfolio will likely produce annual returns between 2% to 5% over the next three to seven years, noted Steve DeAngelis, head of distribution for Philadelphia-based FS Investments, which launched a nontraded REIT two years ago.
“That’s tough when investors need to meet their retirement needs and education needs and health care needs,” he said.
Nontraded REITs have plenty of critics, who say that investors get the cheapest commercial real-estate exposure with public REITs, which cost the same brokerage fee to buy or sell as any other listed stock.
Trading liquidity is also much better with a listed company. Investors who need to cash out of mall giant Simon Property Group or New York office landlord SL Green Realty know they can do so with a simple call to their broker.
It can be trickier with a nontraded REIT. While
most of the new ones will buy back stakes from
investors needing their money, they will start
limiting redemptions if they get too many
requests at once.
Detractors also say some of these REITs pay
dividends partly from the capital they are
raising from investors. That increases the risk
of a dividend cut if the REITs can’t generate
enough cash from property investments.
This dividend pledge is “a marketing gimmick
in my mind,” said Matthew Werner, a portfolio
manager of Chilton Capital Management LLC,
which invests in public REITs.
Yet even critics say the new structure is an
improvement on the old. Nontraded REITs
in the first half of the last decade charged
upfront fees as high as 13%. Many of today’s
REITs charge upfront fees of less than 5%, but
also take a piece of the profits if they exceed a certain amount.
The old crop of nontraded REITs also were structured as closed-end funds that promised to liquidate and return money to investors after a number of years. Some were slow to report the true value of the funds, leaving investors in the dark about the value of their shares until the funds liquidated.
In 2014, the collapse of the real-estate empire run by Nicholas Schorsch, then the largest promoter of nontraded REITs, hurt the industry’s reputation. In July, Mr. Schorsch and others agreed to pay more than $60 million to settle charges from the Securities and Exchange Commission for allegedly wrongfully obtaining millions of dollars in connection with two separate REIT mergers.
He didn’t admit or deny any wrongdoing. “Mr. Schorsch is very pleased to have resolved this matter,” his attorney told The Wall Street Journal at the time.
The new crop of REITs go through regular appraisals and frequently report to investors whether their property portfolios have increased or declined in value.
Terra Capital Partners, which is planning to raise money for its nontraded REIT, this year volunteered to register as a public reporting company, requiring public quarterly filings, to provide investors with “consistent disclosure,” said Vik Uppal, the chief executive.
And Lowe’s is taking steps to improve pricing and promotional tools in order to recoup lost margins in the new year. Moreover, lower interest rates, stability in the housing sector and advertising efficiencies from the continued shift to digital marketing should give the stock
a boost.
All three stocks are rated buy at UBS, with Hasbro upgraded on Nov. 25. Amazon has a $2,100 price target, Hasbro has a $117 price target and Lowe’s price target is $140.
Home improvement retailer Lowe’s is also a “top global idea” at RBC Capital Markets, where it’s rated outperform with a $134 price target.
“While we have long believed that part of Lowe’s relative underperformance versus Home Depot relates to their respective store bases, as Lowe’s stores tend to be located further out from major metro areas, we have also underestimated how difficult Lowe’s had made it for Pros customers to do business with the company, and improvements on this front should enable it to gain incremental market share,” analyst Scot Ciccarelli wrote in a note.
Young consumers are increasingly concerned about climate change which makes environmental sustainability a top issue for the retail sector.
“We believe brands that promote sustainability will gain wallet share of younger consumers and become more relevant,” wrote Cowen analysts in their “Future of Retail” report. “In our view, there is a strong momentum toward eliminating waste among retailers.”
Cyber Monday mobile transactions in 2019 totaled $3.1 billion, according to Adobe Analytics data. Total Cyber Monday online sales were $9.4 billion, a record.
“The smartphone continues to radically alter the end-to-end customer experience as customers increasingly rely on smartphones to research, transact and engage with brands,” Cowen analysts say.
The rise of smartphone shopping is due to social media platforms and the influencers, brand ambassadors, and communities that have popped up on them. Cowen data shows that more than 63% of millennials ages 18 to 34 spend at least four hours per day on their mobile phones.
“We also believe that the channel has major implications for both in-store traffic and conversion as consumers use devices to inform purchases before or during shopping trips, including the use of smart labels, virtual reality and augmented reality,” Cowen said.
Even as shoppers use mobile devices and other e-commerce platforms to make a purchase, customers are increasingly opting to make the last-mile trek for their
items themselves.
“We expect more shoppers to adopt and appreciate curbside pickup, which we view as an ideal manifestation of combining physical and digital retail,” Cowen said.
Cowen data shows that 21% of the U.S. population has tried curbside pickup or buy-online-pickup-in-store for their groceries.
Walmart Inc. (WMT) and Target Corp. (TGT) are the leaders in curbside pickup, Cowen says. Both are able to leverage their large store fleets to offer the service.
“Given that the same-day options rely on our store assets, team and inventory they are much more profitable than traditional e-commerce fulfillment,” said Target’s Chief Executive Brian Cornell on the third-quarter earnings call.
E-commerce on various devices and convenient fulfillment methods are also erasing the shopping calendar.
“Black Friday will change dramatically in 2020,” said Graham Cooke, chief executive of Qubit, a personalization software provider. “There’s no need to wake up at the crack of dawn just to fight over sale items when shoppers can find great deals from their couch.”
Moody’s analysts think global trade policy disputes, will continue to be a risk factor in 2020, as well as a weight on consumer confidence. President Trump’s U.S. - China trade war has disrupted global manufacturing and retailing supply lines and the import tariffs have raised some prices.
“Although we do not expect a recession in 2020, recession risks are high amid a backdrop of trade policy uncertainty, [and] an unpredictable political and geopolitical environment,” Moody’s says.
“Increased trade friction could trigger spikes of volatility in financial markets and further disrupt trade flows. Many companies have so far been able to lessen the effect of tariffs through a combination of cost reductions, buildup of pre-tariff inventory and price increases within the industry supply chain. But these offsets may not last if these
tensions persist.”
Moody’s forecasts slight operating income growth to a 3% or 4% increase in 2020 for the retails sector, though analysts don’t expect “much improvement” in operating margins as retailers use promotions to increase market share.
Dollar stores like Dollar General Inc. (DG), off-price retailers like TJX Cos. (TJX), and supermarkets like Kroger Co. (KR) are expected to outperform. Department stores like Macy’s Inc. (M) and J.C. Penney Co. Inc. (JCP), and drug stores like Walgreens Boots Alliance Inc. (WBA) are forecast to underperform.
The Amplify Online Retail ETF (IBUY) is up 30% for the past year, the SPDR S&P Retail ETF (XRT) has gained 13.4% for the period, and the Dow Jones Industrial Average (.DJI), and S&P 500 index (.SPX) are up 24.2% and 30.3% respectively.
Secondhand retailers are also in a position to benefit from concern about sustainability. Cowen thinks RealReal Inc. (REAL) and ThredUp, which forecasts that the secondhand market will be valued at $51 billion by 2023, have an advantage.
Nearly half of the total sustainable merchandise is for women, 25% for children, and 24% for men, according to the StyleSage Sustainability Report.
MarketWatch
2020 may be a good year for homebuyers
Online lifts holiday shopping sales
Seema Shah of Creditntell.com says the holiday shopping season got a lift from
e-commerce sales, but overall results could have been more robust.
© 2020 Bloomberg L.P.
Sustainability will continue to be top of mind for young consumers
Retail gets increasingly mobile
Recession fears and international trade disputes will continue to impact the
retail sector
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