Amid a dimmer outlook for the commercial real estate sector, since the mid-point of last year, Blackstone, Starwood, KKR and others have seen rising redemption requests for their real estate funds and trusts, and some have taken the step of gating further redemptions. For example, Blackstone has blocked investor withdrawals from its real estate income trust BREIT starting last November, when such requests surpassed 5% of the net asset value of the fund. Of the $4.5 billion in redemption requests in March, BREIT approved $666 million. Starwood and KKR have adapted similar measures as redemption requests they received exceeded the amount they would be able to grant under the operating rules of their trusts.
These conditions, along investors’ greater need for liquidity in a volatile environment, have resulted in increased interest in the real estate secondaries marketplace, which set a record last year. With recent failures in the regional bank sector and ever louder headlines about trouble brewing for the U.S. commercial real estate industry, many investors are getting increasingly nervous about their holdings and looking for opportunities to cash out.
WMRE recently spoke to Brian King, CEO of LODAS Markets, about this emerging marketplace and the amount of demand for real estate secondaries in today’s environment. LODAS, which stands for Liquidity On Demand as a Service, is an automated online marketplace that matches buyers and sellers of alternative and real estate investments, including stakes in non-traded REITs, business development companies (BDCs) and private placements. It launched under the name Realto in November 2021. Here's what King told us about the type of activity he's seeing on the platform. Along with auction site Central Trade & Transfer, LODAS is one of the only secondary markets for these assets.
This Q&A has been edited for length, style and clarity.
WMRE: How much trading in real estate secondaries are you seeing right now?
Brian King: Because it’s an illiquid market, it ebbs and flows. Some days you can have a tremendous amount of activity and some days just a handful of transactions. [April 17th] was our biggest day. We had well over a million shares transacted and for us that was a great day. We don’t talk about our transaction volumes publicly at this point. The biggest thing we like to communicate is from a buy side perspective that it’s the most critically important part. We have about $2 billion that’s been committed from a buy-side perspective to our marketplace, which is fantastic from a seller perspective that they know in many cases if they have a liquidity need there’s typically always going to be someone at the other side of that trade. Of course, we can’t guarantee that. With most of the products on our platform, we have three, four and, in some cases five, different bids from investors looking to buy.
WMRE: How does trading compare to the period before some non-traded REITs started gating redemptions?
Brian King: I would definitely say it has increased dramatically over the last several weeks and months. This year has been dramatically better than last year. With the fact that a lot of the very famous NAV REITs have had to cap redemptions, [that] has created some notoriety around the space, which has caused people to talk about us and that’s been really helpful. Even if someone doesn’t own a BREIT share, they are (learning) there’s a secondary market. That’s why sponsors have started reaching out to us directly to try to work with their customers. That’s the biggest win we could have to have sellers introduced to us by the sponsor.
WMRE: Has the amount of trading gone up and by how much?
Brian King: I would say over the last three months it's been an order of magnitude—multiple times—[higher] so far this year versus last year. We have new funds on our marketplace this year that weren’t on last year. We listed Blackstone a few weeks ago. I’m sure you know the story of how many shares went unredeemed. This past month they had $4.5 billion in shares put up for redemption, but only filled 15% of that. Some $665 million was filled so that leaves a lot of opportunity, and we have seen a decent amount of those transactions come to us. I wouldn’t say the majority of that multi-billion [amount] has come to us by any means. We have also seen a lot of shares with Sila as our most transacted symbol now. Shareholders have been in there for a long time, and it’s performed fairly well. But I think a lot of people are concerned about the future of the commercial real estate market, given current market conditions. There are a lot of people looking to see if they have ways to be able to take some of those chips off the table.
WMRE: Are you seeing a difference in the amount of demand/trading around non-traded REITs that have not gated redemptions versus those that have?
Brian King: Across the board we’ve seen an increase in demand from all products. I wouldn't say we’ve seen a substantial amount more from those who did [gate redemptions] versus those who haven’t. I will add something that is nuanced. Many of the legacy REITs that we trade on our marketplace were sold primarily through the independent broker-dealer channel, so they’re typically smaller. They could still be pretty big, but they’re not sold through the wire houses. The Starwoods, Blackstones and other products like that are primarily sold through the wire houses, and we haven’t seen quite as much transactional volumes through those channels as what we have through independent broker dealers or RIA channels.
WMRE: How is the pricing trending on a comparative basis?
Brian King: Compared to a point in time, we have largely seen prices in REITs trending down, but the NAVs have been trending down as well. Every new quarter that an NAV was published, the vast majority of REITs repriced down. In most cases, the buyers on the marketplace are typically buying at a discount to NAV because there’s a liquidity discount since there’s some risk built in to being a buyer. In many cases, it can be anywhere from 10% to 20% discount of what they’re putting their bids on. If a sponsor reprices their NAV downward, you can assume buyers are also going to reprice downward as well. Not all REITs have gone down. Surprisingly, Blackstone NAV has continued to go up. But based on what we’re hearing from a lot of different major bulge bracket firms—some of the biggest banks in the world—I have had conversations with some of their chief investment officers over the last couple of weeks, I think a lot of them are very concerned about the commercial real estate space, especially as it pertains to anything that has to do with office space. That’s pretty concerning for a lot of people. I think where you see more transactional volume happening tends to be something people are trying to exit, something that has a lot of office real estate exposure.
WMRE: What are you seeing in terms of activity surrounding private placements and BDCs?
Brian King: We see a pretty consistent amount of activity in BDCs, and I think there’s a lot of concern around debt generally. You can now get fairly high yields in other assets that don’t have the same level of potential risk. I think that’s what has made a lot of investors or financial advisors that are rebalancing books of business for their clients want to rebalance some of these assets out of their portfolios. Institutions have a longer term time horizon. They can buy at a discount and ride out storms. We don’t have a tremendous amount of private placement transactions yet, but that's the next phase of our business.
WMRE: What kind of investors are using the platform?
Brian King: From a buying perspective they are institutional in nature. There are insurance companies, hedge funds, real estate funds, family offices and RIAs. Sellers are mostly, but not exclusively, retail in nature. These products, because of the structure, were sold to give retail investors an exposure to alternative asset classes. The way we get to those sellers happens in a couple of different ways. We have direct opportunities to work with individual investors, and we also work with financial advisors, broker/dealers and RIAs that have clients that have this. They can help clients set up accounts and introduce clients to us.
WMRE: How are you cultivating your customer base?
Brian King: A lot of my background comes from working with institutional investors, and I have found that I’m typically only one or two phone calls away from knowing an institutional party that might have an interest in this. When we first started, we had one insurance company that was a buyer, and then it branched out and we wound up finding many others. There are some big institutions that created a whole separate fund just so they can invest in these investments. They didn’t have it before we existed, but they say ‘here’s an opportunity for us to participate in a new market that we haven’t before.’ That was exciting to be able to have those types of relationships happen.
WMRE: What about sellers?
Brian King: From a seller perspective, we do rely on some messaging from different people who have talked about us. That helps get a lot of people interested in us. We also have sales’ teams that have relationships with a lot of the financial advisors to help them understand what’s available and how it works. The biggest success we have is that the actual funds themselves—the REITs that are approaching us—are working with us to help their shareholders looking for an exit, have an exit. A lot of funds that are on our marketplace today, there isn’t an avenue of liquidity outside of a secondary market like us. If you’re at BREIT, there is a liquidity valve that’s provided by the sponsor, but they’ve hit caps. There are a lot of the funds that are legacy REITs where there is no liquidity by the sponsor. Many of those are reaching out to us and saying ‘We would love to help our investors have an exit, along with the idea that we can replace them with institutional investors that perhaps have a longer time horizon.’
