With Announced Offering and Ramping Up of Broker-Dealer Network, Starwood Takes Page from Blackstone’s Strategy for Tapping Retail Investors
Just when it appeared the non-traded REIT sector was crumbling amid sharply declining sales volume, two of the world’s largest CRE investors have recently jumped into the space. Both appear to be targeting a source of capital previously overlooked by the big money firms: pooling individual “retail investors” buying securities on their own account rather than on behalf of large institutions.
Starwood Capital Group Holdings, L.P. became the latest major player to test the waters, announcing last week that it was launching a non-traded property REIT. Starwood said it hopes to raise up to $5 billion through an initial public offering for the REIT and plans to use the money to acquire stabilized commercial property and debt in the U.S and globally.
The newly formed Miami Beach-based Starwood Capital affiliate, Starwood Real Estate Income Trust, Inc., filed a registration statement with the U.S. Securities and Exchange Commission to offer up to $4 billion in common shares and up to $1 billion in shares under its distribution reinvestment plan.
Starwood REIT’s objective is to provide “an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to CRE with less volatility than publicly traded real estate companies,” according to the filing. The new affiliate, externally managed by advisor Starwood REIT Advisors, L.L.C, also an affiliate of Starwood Capital, is seeking REIT status in the so-called blind-pool offering, the company said in its S-11 registration filing.
Also on Oct. 17, Starwood Capital announced a major expansion of its broker-dealer affiliate, hiring veteran executive Trisha Miller and a much of her W. P. Carey, Inc. team. W.P. Carey, one of the pioneering companies in the non-listed REIT sector, announced its exit from the non-traded space last summer to refocus on its core net-lease business.
“Our broker-dealer’s expanded focus to include individual investors represents an important step in Starwood’s growth,” said Barry Sternlicht, chairman and CEO of Starwood Capital. “We have been carefully evaluating how to reach individual investors for some time and believe now is the opportune time to diversify our offerings to this growing source of capital.”
Following Blackstone’s Lead
The Starwood IPO comes on the heels of the formation of Blackstone Group’s first non-traded REIT, Blackstone Real Estate Income Trust, which has a goal of raising more than $1.4 billion this year.
“Our objective is to bring Starwood Capital’s leading real estate investment platform with an institutional fee structure to the non-listed real estate investment trust (REIT) industry,” the filing said.
Non-traded REITs reached the bottom of their cycle last year, hitting a 12-year low for sales in 2016 amid increased regulatory scrutiny and efforts by companies to reduce their fee structure and increase transparency into their operations.
“The pullback created a funding gap and now, quality capital is flying into that gap because there’s still a fundamental need for retail investors to place capital and achieve returns,” said Jim Berry, leader of Deloitte’s U.S. real estate and construction sector practice and co-author of the firm’s newly issued 2018 Real Estate & Construction Outlook.
“The quality of capital is at one of the highest levels ever in our industry, and that drives efficiency in the marketplace and high levels of expectation for investors,” Berry said. “We’ve also seen an increase in shareholder activism in the publicly traded space, and one of the reasons for that is that real estate is attracting a greater number of individual investors.”
Starwood REIT will consider investments in all types of commercial property, including multifamily, office, hotel, industrial and retail, medical office, student housing, senior living, data centers, manufactured housing and storage properties, as well as first-mortgage, subordinated mortgage and mezzanine debt.
The REIT’s investment and property acquisition strategy seeks to capitalize on the scale, reputation and long-standing relationships of Starwood Capital, one of the world’s largest real estate companies, the company said. Starwood Capital also operates Starwood Property Trust (NYSE: STWD), a commercial mortgage REIT.
Help Coming for Yield-Seeking Retail Investors
Blackstone Chairman and CEO Stephen Schwarzman elaborated on the private-equity giant’s alternatives and retail investment strategy during the company’s recent third-quarter earnings call.
“We continue to expand and diversify our fundraising channels, including into retail [investing],” Schwarzman said, adding that Blackstone alternative funds are seeing increased demand from wirehouses, private banks, independent broker-dealers, registered investment advisers and family offices.
“In these channels, investors by and large have been under-allocated to alternatives within their portfolios, some dramatically,” Schwarzman added. “We are helping them access institutional-quality products, in many cases for the first time.”
With the current oversubscription in Blackstone funds, growth will come from developing alternative products in real estate and other sectors, and expanding and deepening penetration into broker-dealer networks and other channels, said Joan Solotar, Blackstone’s head of private-wealth solutions.
“A lot of individuals want yields, and we were able to leverage the real estate investing group [and] identify assets that were more yield-oriented … and put it in a structure that was accessible to them,” Solotar said.