ExchangeRight REIT Introduces ER Share Class, Targets 10% Rate of Return

ExchangeRight, a sponsor of Delaware statutory trust and non-traded real estate investment trust investment offerings, launched a new share class for its Essential Income REIT. The newly introduced ER shares, exclusively for broker-dealer representatives and their accredited investor clients, targets a 10% internal rate of return net to investors.

ExchangeRight said the shares’ internal rate of return is supported by a current monthly tax-efficient income of 6% annualized and additional growth potential generated by participation in the REIT’s value in addition to ExchangeRight’s incentive fees and sponsor DST fees.

According to the sponsor company, the Class ER shares’ baseline 6% annual return target is anchored by the performance of the Essential Income REIT’s $1.2 billion real estate portfolio, which was diversified across 353 properties, 34 states, and 36 recession-resilient and primarily investment-grade credit tenants as of May 31, 2024. The REIT has fully covered its dividend since its January 2019 inception and has collected 100% of rents regardless of economic volatility.

As the REIT acquires additional net-leased properties, ER share investors participate in ExchangeRight’s performance-based incentive fee at two times their Class ER pro rata ownership in the REIT. Class ER investors may also share a portion of the company’s DST fees earned upon the REIT’s acquisition of ExchangeRight’s net-leased portfolios.

The acquisitions enabled by ER shares’ capital raise are anticipated to enhance the Essential Income REIT’s diversification, adjusted funds from operations, and long-term investment capital from DST investors who complete a tax-deferred 721 exchange into the REIT. Class ER share investors may directly benefit from this potential enhancement of the REIT’s portfolio and value, given their right to participate in a portion of ExchangeRight’s fees and the expected conversion of Class ER shares into Class I shares on a 1:1 basis at a future date.

Earlier this month, the Essential Income REIT entered into a credit facility with Wells Fargo for up to $400 million, listing potential uses to finance permitted acquisitions, expenditures, and investments; pay applicable pre-development and development costs; and support refinancing and working capital needs. The REIT became a public reporting company one year ago.

“Our new ER shares are structured to achieve a special win-win arrangement for the Essential Income REIT’s investors and ExchangeRight,” said Joshua Ungerecht, a managing partner at ExchangeRight. “In exchange for providing longer-term capital to accelerate the REIT’s acquisitions and value enhancement, Class ER investors may directly share in the additional potential profits resulting from these acquisitions. Moreover, ER share investors may benefit from significant tax efficiencies throughout the targeted five-year hold period and additional tax-deferral options upon an eventual ER share conversion.”

Although there is no guarantee that the new ER share class offering will achieve its investment objectives, the sponsor is optimistic.

“We are excited by this unique share structure that is available exclusively to broker-dealer representatives and their clients, as we seek to provide them with tax-advantaged income and upside potential in order to advance the REIT’s long-term aggregation and investment strategy,” added Ungerecht.

ExchangeRight reports that the company and its affiliates’ platform has more than $5.9 billion in assets under management that are diversified across more than 1,200 properties and over 24 million square feet across 47 states, as of May 31, 2024. The company invests in net-leased properties in the “necessity-based” retail and healthcare industries, as well as value-add inline and outparcel retail spaces shadow-anchored by grocery tenants.

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