Wealthy investors who want access to high-quality real estate but are looking for a long-term, income-producing investment—not a riskier private-equity style play—are turning to non-traded REITs.
A relatively new entrant to this sector—although definitely not new to commercial real estate—is Brookfield Real Estate Investment Trust, a public fund that doesn’t trade on an exchange, but offers investors the ability to redeem shares monthly.
The fund is backed by the company that has developed such properties as Manhattan West on New York City’s Ninth Avenue and the mixed-use properties known as Brookfield Place that can be found in lower Manhattan, Toronto, and in Perth and Sydney, Australia, in addition to properties it owns and operates.
“We started out as owners, operators, and developers of these assets and then became an asset manager,” says Zachary Vaughan, CEO of Brookfield REIT. “It gives us a different angle. Our philosophy has always been that we want to own assets we can run ourselves.”
Brookfield REIT, launched in January, is also managed with alternative investing expertise from Oaktree Capital Management. Brookfield Asset Management bought 61% of Oaktree in September 2019, later creating Brookfield Oaktree Wealth Solutions as a vehicle for distributing products through private wealth channels. The REIT was the first of these.
In particular, Oaktree offers expertise in real estate debt, which has allowed Brookfield REIT to buy floating-rate credits as a buffer to inflation. Because the interest rates paid by creditors on this debt floats in tandem with Treasuries, “as rates go up, our cash flows move up as well,” Vaughan says, “It’s a great hedge against inflation versus owning commercial property, which is a flat income stream with no rent growth.”
Examples of these credit investments include “a piece of debt” secured by the Boca Raton Resort and Club in Boca Raton, Fla., owned by Michael Dell’s MSD Partners, and parts of mortgages on “select service hotel portfolios around the US,” says Vaughan, who also oversees Brookfield open-ended real estate activities across the globe.
Through June 30, the fund’s institutional class shares posted a total return of 13.5% with an annualized distribution rate of 5.18%, according to the firm’s website.
penta recently spoke with Vaughan about the attributes of non-traded REITs, and Brookfield’s approach to the sector.
A Public Vehicle for High-End Property
Wealthy individuals and families typically invest in top-end commercial real estate by buying property directly or co-investing with a group of investors.
Owning public REITs is another option for real estate exposure, but the performance of these vehicles correlates with more publicly traded stocks, Vaughan says. Consider that the MSCI US REIT index fell 20.32% through June 30 this year compared with a 20.58% drop in the S&P 500 index.
Non-traded REITs have existed historically, but Vaughan says they often offered limited ability for investors to regularly redeem shares and they didn’t provide transparency to investors concerning the properties they owned and their value.
The landscape for these funds has changed within the past five or six years. Today, non-traded REITs tend to provide a “substantial income,” Vaughan says. They also give investors the chance to own high-quality real estate in a vehicle that is “almost almost identical if not better in terms of governance and transparency than you would get as a large institution who is looking for long-term real estate.”
Until recently, these products were mostly available to large institutional investors, such as pension funds, insurers, endowments, and large family offices. Today they are also available to a wide range of individuals, but Vaughan argues with a fee structure, governance, and alignment of interests that is “better than what we have in private institutional funds.”
At Brookfield, that’s because the REIT is overseen by an independent board, in addition to federal and state regulators.
Investors get access to Brookfield REIT through several private wealth managers with minimum investment requirements in the range of $10,000 or more, but that can vary depending on the share class and the dealer.
Boosting the Inflation Buffer
Recently Brookfield REIT, which has a little more than US$2 billion in gross assets, has been boosting its allocation to real estate credit to counter inflation. Vaughan says the fund can be responsive to economic challenges because of its relatively small size compared with funds that are US$20 billion or more.
Real estate credit comprises about 6% of the fund’s gross assets today, which Vaughan says is likely to grow quickly to 15% and beyond.
Because the average remaining term on these loans is less than three years, the fund can pivot and reinvest the loan proceeds in real estate equity should market conditions turn around.
Favoring Apartments Over Warehouses
Today is still a good time to invest in real estate, but selectively, Vaughan says. “This isn’t a time you can buy any real asset and hope that the yields keep going down, and that multiples paying on income go up.”
Because of its history as a real estate developer and operator, the fund can build its portfolio property-by-property, giving it better insight into how each asset is likely to perform. That’s in contrast to funds that will buy a portfolio of assets, which are often sold at a premium today, according to Vaughan. “I can curate my own portfolio,” he says.
The fund’s real estate investments currently are largely in properties that provide a stable source of income. Mostly that means multi-family apartments (often luxury properties) and high-end commercial real estate, such as Dreamworks Animation Studios in Glendale, Calif. and Principal Place, a 664,000 square-foot office building in East London housing Amazon‘s
largest European corporate office in a long-term lease.
The fund also taps Brookfield’s single-family rental company for access to single-family homes in 20 fast-growing cities in the US, including Nashville, Tennessee; Indianapolis; Greenville and Charleston, South Carolina; and Cincinnati, according to a recent property report.
The type of assets Vaughan is avoiding in this market are those that don’t have “pricing power,” such as many warehouses with long-term leases. Values for these properties will suffer given the amount of warehouse distribution space that’s been built and the 545 million square feet that was still under construction in the first quarter this year, according to data from commercial real estate firm CBRE,
In addition to more than ample supply and slowing demand, warehouse tenants typically have “flat income streams,” and sign longer leases that allow for minimal annual increases. That makes for a challenging investment when rates are rising, Vaughan says. “The math hasn’t made sense to us,” he says. “There’s a lot being built and the prices people are paying don’t add up to us.”
Credit: www.marketwatch.com /