Blackstone jumps into nontraded REIT market

Firm wants to raise $5 billion in first venture, possibly through wirehouses

Aug 10, 2016 @ 12:35 pm

By Bruce Kelly

Wall Street alternative investment giant The Blackstone Group, with $356 billion in assets, is diving into the beleaguered nontraded real estate investment trust marketplace, registering its first nontraded REIT with the Securities and Exchange Commission on Wednesday.

The Blackstone Real Estate Income Trust Inc., which will invest primarily in stabilized income-oriented commercial real estate, looks to raise $5 billion from investors, with $1 billion of that in shares of its distribution reinvestment plan, according to its registration filing with the SEC. The REIT's special limited partner, an affiliate of Blackstone, will receive a fee of 12.5% of the REIT's total return after meeting a 5% hurdle.

Priced at the industry standard $10 per share, the REIT's upfront selling commissions on its T shares are 3%; investors will also pay dealer manager fees of 50 basis points and an annual stockholder servicing fee of 85 basis points, which runs a maximum of seven years, according to the SEC filing.

Over the seven-year period, investors who buy $10,000 of the REIT's T shares will pay $906 in commissions and fees, according to the filing. Those who buy S shares will pay slightly higher upfront commissions, but the same total amount over the seven-year period. The REIT's annual dividend, or distribution, will be decided after it begins investing, according to the filing.

InvestmentNews reported in February that The Blackstone Group was seriously considering launching a nontraded REIT. But look for Blackstone to shun the traditional marketplace of independent broker-dealers and turn to wirehouses such as Merrill Lynch and Morgan Stanley, with whom they already have business relationships, to sell the new REIT, according to one industry executive who asked not to be named.

Blackstone will likely “distribute this REIT through the wirehouses,” said the executive who said he did not have direct knowledge of the REIT's distribution strategy. “It looks like the REIT is primarily geared to that market.”

When asked about the REIT's distribution plans, Blackstone spokeswoman Paula Chirhart declined to comment.

Capped at close to 9%, the cost structure of the new Blackstone REIT is clearly different than the traditional, full-commission nontraded REIT sold mainly product that independent broker-dealer such as LPL Financial and Ameriprise Financial Services Inc. Such REITs typically carry loads of 12%, including a 7% to brokers at the time of sale. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.

Investment bank Robert A. Stanger & Co. Inc. estimates $5 billion to $6 billion in nontraded REIT sales this year, or close to half of last year's sales of close to $10 billion.

Sales of such REITs have suffered dramatically this year because of two key factors, according to industry executives.

First, a new rule by the Financial Industry Regulatory Authority Inc., known as 15-02, has made REIT prices more transparent to investors and thus more difficult for brokers to sell. And the coming fiduciary standard for brokers working with client retirement accounts — formally introduced in April by the Department of Labor — is also a key factor in depressing sales.

(See: Nontraded REIT sales fall off a cliff as industry struggles to adapt )

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