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Blackstone's New Non-Traded REIT Begins Selling Shares

$5 Billion Offering Set to Shake Up Non-Traded REIT Fundraising Amid Calls for Lower Fees
September 7, 2016
Blackstone Real Estate has officially gone to market with shares for its newly launched and first-ever non-traded REIT -- Blackstone Real Estate Income Trust Inc.

The PE giant is looking to raise up to $5 billion for the REIT and a minimum of $150 million with plans to invest the proceeds in stabilized, income-oriented commercial real estate properties and securities.

According to its offering papers, Blackstone REIT has not yet entered into any arrangements to acquire any properties or real estate-related securities.

As CoStar News previously reported, Blackstone is hoping to upend the high-fee structure normally associated with non-traded REITs by capping fees at less than 7%. It also will offer potential investors four different classes of shares, each with variations on its fee structure and different distributions.

In addition, Blackstone REIT’s offering sets a return ‘hurdle amount,’ which is a minimum internal rate of return of 5% that has to be achieved before the advisor is entitled to any performance allocation.

Such a structure is more typical in the institutional world in which Blackstone Group operates but is new to the non-exchange traded REIT industry.

Blackstone's surprising entry into the much-maligned non-traded REIT sector comes amid calls on non-traded REIT sponsors to lower the upfront commissions on non-traded REITs and other direct participation programs.

In April 2016, industry watchdog the Financial Industry Regulatory Authority (FINRA) issued new rules governing direct participation program statement valuations (Regulatory Notice 15-02.) The new FINRA rule was designed to make such sales charges more transparent to investors.

But according to Michael Pagano, executive vice president of compliance, legal and risk assessment for Houston-based 1st Global, many non-traded REIT sponsors sought to circumvent the new disclosure rules by creating so-called Class T shares, which allocate sales charges over time to make them appear smaller instead of triggering them when the purchase is made.

“While a very small number of industry participants are taking baby steps to lower investor costs, the majority of the industry - non-traded REIT sponsors and some independent broker-dealers - just want to maintain status quo and are hopeful that everything will return to normal,” Pagano said in a recent statement. “This is not a realistic view of the future.”

Pagano said his company, a research and consulting firm that partners with CPA, tax and estate planning firms to promote effective wealth management strategies, commended recent moves by Hines and Inland to lower costs and said he believes these efforts are a big step toward bringing retail investing more in line with the institutional world.

“It’s time for the industry to stop talking about lowering costs and actually lower them,” Pagano said.

While it expects to have a competitive advantage from its lower fee structure, Blackstone is also banking on its strong brand and investment expertise to overcome stigma attached to the non-traded REIT sector.

“We believe our most powerful competitive strength is our affiliation with Blackstone, which is one of the largest buyers, sellers and managers of commercial real estate in the world,” the REIT stated in its filing.

Blackstone Real Estate has been investing since 1991, and has total assets under management of $103 billion representing over $200 billion of debt and equity real estate assets globally.

Blackstone has been has been one of the largest, if not the largest investor, in U.S. real estate for over 25 years. Blackstone Real Estate’s U.S. holdings currently include:

  • 67 million square feet of office buildings,

  • 62 million square feet of retail properties,

  • 48,000 multifamily units and 48,000 single-family homes, and

  • 282,000 hotel rooms.

    "This portfolio provides valuable real-time, proprietary market data that we expect will enable us to identify and act on market conditions and trends more rapidly than our competitors,” the REIT stated.

    See related CoStar News coverage of the non-traded REIT sector:

    Blackstone Group, Others Seek to Revive Non-Traded REIT Industry

    New Financial Disclosure Rules Pose Latest Hurdle for Beleaguered Non-Traded REIT Industry

    Consolidation in the Works for Handful of Non-Traded REITs

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