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Video: The New World of Non-Traded REITs

The latest video from ADISA’s Focus on Alternatives, an educational series that covers key topics in alternative investing.

The DI Wire’s publisher, Damon Elder, sat down with Kevin Gannon, chairman and chief executive officer of Robert A. Stanger and Co., to discuss non-traded real estate investment trusts in the latest video from ADISA’s Focus on Alternatives, an educational series that covers key topics in alternative investing.

Gannon explains what has spurred the transformation and resurgence of non-traded REITs in recent years, as top institutional players continue to enter the space and break fundraising records while providing more frequent share valuations and transparent fee structures, enhanced liquidity, and often outperforming their publicly traded counterparts.

Video Transcript

Damon Elder   00:07

Hello and welcome to another edition of Focus on Alternatives, sponsored by ADISA. I’m Damon Elder the publisher of The DI Wire.com and today we’re joined by Kevin Gannon chairman and CEO of Robert A. Stanger and Company. Today we’re to talk about non-traded REITs which as I’m sure most of you know Kevin is the authority on, so this is the perfect topic for him and so why don’t we dive right in Kevin. Specifically, we’re not going to talk about so much the past of non-traded REITs but the transformation that we’ve seen over the last few years. So of course, non-traded rates were started in the early 90’s when they slowly grew in popularity ultimately in the mid, I think what 2013 2014 or so especially once Arc could come on board Nicholas Swartz Arc, we saw equity raise get up to about 15 billion I think a record around 2013 or so. Then of course we saw FINRA’s 1502, and the Arc implosion and equity raised plummeted to about 4 or 4 ½ billion per year for the next three years. And then just a few years later now it’s going to be according to Robert A Stanger Company you’re projecting their equity raise of about 35 billion this year for non-traded REITs how did this traumatic transformation happen?

Kevin Gannon   01:12

Well, I think fundamentally what happened was there’s a big transformation of the product style right. We now have non-traded REITs that are very transparent in terms of their disclosure right we know what the NAV is every month. We didn’t know that before Damon, we went for years without knowing what NAV was now we know NAV every month. We have a good dividend level a good dividend yield and we have great sponsorship we have sponsorship by the likes of Blackstone, Starwood, Nuveen, KKR, and others don’t mean to leave anybody out but they’re some great sponsors have entered this space.

And on top of all of that we’ve got a product that delivers a liquidity element right, we can we can get up to 20% of the equity out of these things every year by the way they’re structured. That confidence in the liquidity has been a big game changer. And then the last pieces what should be the first piece which is performance, performance has been excellent right. We’ve seen the performance of the non-traded’s, we and another trade organization sponsor a monitor and that monitor tracks the performance of these deals and that they’re outperforming the traded REITs which I think drives the traded REITs a little crazy. But it’s been much more stable, so you’ve got performance, liquidity, good sponsorship, and transparency the makings of a great industry really.

Damon Elder   02:39

So, you mentioned you know Blackstone and some other really large institutional players who’ve come into the space. Blackstone of course is singularly the the behemoth in the room 800-pound gorilla raising somewhere around 2/3 I think of the equity in the space but others are growing like you mentioned all these other institutional players Starwoods really having some real success in the last few years. What are the institutions doing differently how have they transformed the space fundamentally?

Kevin Gannon   03:04

Well I think they’re bringing a great and broad perspective on real estate right, when we talk with John Gray when you first came out with Blackstone and we said OK So what are we going to buy you know what are you going to do with this different. And he said well I’m going to focus my high conviction assets are going to be those things we think are going to really grow the next five years. And so, we they focused on apartments and logistics slash industrial and and some of that lease versus the old style was more office some healthcare and and retail right. So he stayed away from those asset classes which were I think quite smart and and everyone else followed suit and it’s turned out to be a great play, so I think that research and knowledge about real estate that broader perspective on real estate asset classes big game changer I think. In the old days as you know we focus on generally singular asset classes which is how the public REITs are are structured. In this Business Today it’s more mostly diversified there are exceptions Aries and black Creek have an industrial program which is really well and…

Damon Elder   04:18

Got to be in an asset classes last several years industrial and multifamily has been a great place to be right?

Kevin Gannon   04:22

A great place to be, the performance has been great because of the morphing out of retail right morphing out of retail and the work from home thing which is bitten to guys who had a lot of office. So, we think that’s going to turn around as these cycles go we think there’ll be some recovery but at the end of the day they picked the right asset classes and they also picked things like self storage right and a few others that have have done quite well. We like it and everything in a little bit of moderation but multifamily and industrial was clearly a game changing focus for the space.

Damon Elder   05:00

Um so rightly or wrongly fairly or unfairly for years non trader rates were criticized for having unduly high or a fee structures for investors. How have the institutions how are modern non traded REITs approaching fee structures have have they moderated in real terms or you know is it just again you’re you’re attracting a different class of investor different class a sponsor?

Kevin Gannon   05:24

Yeah, I think a couple things to answer that. One is the front end loads different right it’s structured differently it’s lower generally speaking and it’s paid differently, you either sell I shares about half the space raises money, and I shares so…

Damon Elder   05:38

And those are for institutional type investments with really no load.

Kevin Gannon   05:42

No load at all, it’s usually dropped into a wrap account and they collect their fees from financial advisory perspective out of the wrap account. And then there’s other classes that have a 2 to 3% load which is added on top of the purchase price. As you know in in our space, we constantly dragged the 10% load with us and that dragged on your performance. Now it’s added to the top and comes off as a Commission and kind of forgotten about ultimately in terms of the security. And the rest of the load if any is a servicing fee that’s paid out until they hit a threshold of like 8 or 8 ½%, and again it’s more accepted It’s paid out overtime and it’s not the 10% load up front that usually startled everybody. With that change it changed the perception of the space. Now we don’t get the punches in the nose, I took the punches in the nose for the space…

Damon Elder   06:31


Kevin Gannon   06:32

… for a lot of years and we explained how it was different but now with the performance measured the way we measure it it’s really a big change a big change. The rest of the fees they charge Damon, are won’t be they don’t charge anymore is is the dealer manager fee to the sponsors managing broker dealer that comes out of the sponsors pocket. That used to be a point and a half that covered that cost they don’t get that anymore. It takes a big boy to play in this space because that cost is pretty substantial. Secondly the fees they take are usually 12 ½ basis points on NAV plus 12 ½ percent of total return subordinated to a 5 but a full catch up inside the five. So they can be tasty, but you must hurdle the five and you need appreciation to make that happen. So again, I think that it’s more aligned I think that that fee structure is more aligned with the investors than it was in the past.

Damon Elder   07:30

And like you said performance pretty much Trump’s anything and you know

Kevin Gannon   07:33

I think so…

Damon Elder   07:34

You’re seen some good performance, but generally speaking I know you don’t have maybe the numbers right in front of you, but generally speaking over the last several years what have the NAV REITs been returning to the investors?

Kevin Gannon   07:43

Yeah, up till this past year it was about 7% to 8% was typically an annual total return dividend and appreciation. This past year it’s been 15 to 20, because they’ve they recovered from that. We had a little dip in the first quarter last year with COVID like ever and they these guys stepped up and they took their hits, and everybody said well let’s see how that plays out. And most of them by end of the year had recovered and done well the other thing more amazing I think, and the real bellwether of this space was them meeting redemptions. When the redemptions kicked in Q1 last year, those everybody said well what are they going to do and some of them hurdled their 2% monthly cap and they stepped up and met the redemptions and I think that eased at the tension and…

Damon Elder   08:29

Well, really didn’t see any closure to the redemption programs. I mean like you said they really pretty much stepped up and fulfilled them.

Kevin Gannon   08:34

Correct but even when they hurdled, they’re 2% cap, they didn’t gate anybody. They met the redemptions and you know what they put everybody’s mind at ease. And I think that was really probably the best thing they could have done even though it cost them some of their capital it was a smart thing to do it was that smart was brilliant, because everyone was calling me what are they gonna do what they gonna do and I said well we’ll see. But they they stepped up and met it and I think that that calmed everybody down and it’s it’s done well as a result.

Damon Elder   09:03

Why are the institutions chasing the retail dollars, I mean it’s a much less efficient way of raising capital for them. Certainly, far less efficient than they’re typically used to in raising equity. Why… why did they why is there such interest from all these big institutional players and coming into the retail space now?

Kevin Gannon   09:19

Well, I think there’s a swing of how capital gets raised institutionally, institution typically drive a harder bargain on fees. The fee you see in their offering document isn’t the fee they pay. They have a thing called side letters every every every investor gets a side letter, and the fees get get chewed up a little bit, and so that’s a challenge. And usually, they’re finite life right these are perpetual life vehicles right which is a big attraction. And it feels like a stickier source of capital people put their money in they’re making the conscious decision to invest perpetually probably got a 10-year horizon probably. So that feels pretty strong and and something that they they are looking for and the fees aren’t bad. You know 125 basis points plus 12 ½% total return last year Blackstone I don’t want to be picking on Blackstone, but they paid almost three almost $400 million dollars in total fees out of one deal. So that got me got my phone ringing off the hook everybody’s calling me thinking that well we can’t be Blackstone, but a small piece of Blackstone would be…

Damon Elder   10:21

Getting a lot more wiggle room.

Kevin Gannon   10:22

Yeah, so I think I think it’s interesting and plus I think they like the IQ of the product now, the IQ of the product is a big deal right. We for years we were always looked at as a kind of a secondary type of investment, now it’s a primary Major League investment now. And I think that it’s something that everyone thinks is a a good alternative to the traded REIT space. We’d never say that traded REITs are are not good investments they are good investments, this is a good complementary investment and…

Damon Elder   11:01

But fundamentally different, even though very similar, right?

Kevin Gannon   11:03

Yeah, the traded REITs call us now, the traded REITs call… they want the lowdown on how is this working, explain this to me. Can we do one of these right, they’re asking that question and monster you know $50 $100 billion dollar traded REITs are asking about coming into this space. I don’t think many of them will come if any but there’s not that much interest where it’s it’s exciting because because the capital formation is so great, I mean as you said 35 billion this year in non-traded REITs the other alternatives we track is another $35 billion $70 billion coming in…

Damon Elder   11:37

Real money…

Kevin Gannon   11:38

…to our space is is pretty sizable, and as you point out you know our peak year previously was 2014 and it was like 19 billion it was about $19 billion dollars and a big year a big year and that was without the wires.

Damon Elder   11:53

That was a record year, yeah.

Kevin Gannon   11:54

That was without the wires.

Damon Elder   11:56

Well so you bring up something else I wanted to talk about. So that seems to be another fundamental shift that we’ve seen once the institutions and even prior, I mean we saw really LaSalle came in many years ago and it slowly built up their non-traded REIT and and they started to bring in a lot of wire money. Blackstone obviously was raising I think most of their equity through the wire houses. Is that what are we seeing equity flow rise wise. I mean traditionally non-traded REITs raise their retail capital through registered reps broker dealers etcetera RIAs to certain extent but now it seems like we’re really starting to see a flood of equity coming in from the warehouses is that true what kind of percentages are we seeing you know what from your insight?

Kevin Gannon   12:34

Our estimate is about 80% of the money’s coming through the wires, and about 30% of that is coming from overseas. So, they they’re able to source the capital from overseas now, and so it’s it’s a it’s a an international product now. Where you wouldn’t have thought of that like like that this product like that previously so having that kind of source of capital is it’s intoxicating, I think to some of them. And it’s it’s a great opportunity to get out there and build your AUM up. Like like we said Aries has come in Blackstone, KKR, Starwood it’s a it’s a good list of sponsors that It’s an upgrade it’s an upgrade to the sponsorship of our space. Not nothing wrong with the old line sponsors the inlands and the Griffins they’re all great companies but these are some institutional sponsors you know so.

Damon Elder   13:24

Are you starting to see because of the wires of growing more familiar with the non-traded alternative space that maybe we’re going to start to see more inclusion among the wire houses and some of the other types of alts that are out there?

Kevin Gannon   13:36

Sure, you already see it Damon, you see it you see it with the DSTs, you know the DST the wires have caught fire with the decrease…

Damon Elder   13:43

I think Black Creek has a wire.

Kevin Gannon   13:45

Black Creek and and there’s a couple others, and the the folks at Canter have one they’re not in the wire but they they have a product that’s linked up with their non-traded REIT. And the idea is let’s capture the capital on a 1031 exchange and then roll it into a permanent perpetual life vehicle, and that guy’s gonna probably stay until that that family member dies because he can’t 1031 out of that anymore.

Damon Elder   14:11


Kevin Gannon   14:12

…and but it’s a diversified rather than being a single asset he’s in a diversified pool and so I think you’re going to see a lot more of that coming down the Pike here in our space.

Damon Elder   14:22

There’s really been a complete sea change, and really dramatically short period of time what’s coming what’s ahead I mean you mentioned you’ve seen you’ve fielded some phone calls from publicly traded REITs who may or may not enter the space but what else are you seeing what are your predictions for the next several years in the space?

Kevin Gannon   14:37

I think you’re going to see a lot of other asset classes come this way. You you already have the Stepstone deal, which is a private equity deal right. And so, you and I can for a 50 grand, or 100 grand can buy an interest in a private equity deal where ordinarily we’d have to put up half million dollars to do that right. So. we’re going to have exposure to that, we think that’s big and that’s coming down the Pike here. They’ve already gotten effective deal and they see others lining up to do that. You’re going to see more BDC’s right you just saw Apollo file right and Apollo is a big player..

Damon Elder   15:11

Another big name entering the space.

Kevin Gannon   15:12

Another big name come to our space. They tried to come in a few years back they tried to buy arc.

Damon Elder   15:17


Kevin Gannon   15:18

Tried to buy Arc.

Damon Elder   15:19

A few things happened there.

Kevin Gannon   15:20

Right…at the right time, and at the end of the day we’re going to see more players like that. Bring a broader array of good legitimate institutional quality product to retail investors. That’s and we owe it all to the guys who who started this a momentum the WP Carey’s the Leo Well’s the Inlands the CNL’s of the world those guys were The Pioneers right.

Damon Elder   15:42

Who would have thought 30 years ago what we’d be seeing today.

Kevin Gannon   15:44

Right exactly right exactly right, so I think it’s been it’s been a good run and I think it’s just we’re just in I think we’re in the early innings if somebody asked me anywhere, I’d say maybe the second

Damon Elder   15:54

Oh wow.

Kevin Gannon   15:55

Maybe the second inning I think it’s got a long way to run it’s because it’s a great product.

Damon Elder   15:59

It’s a whole new world. It’s going to be to see what happens in the next few years. Alright Kevin, thank you for joining us today. And thank you for watching. For more information regarding the entire world of alternative investments please visit www.adisa.org

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