Brookfield is following the lead of other institutions by diversifying its fundraising efforts to acquire commercial properties. Higher interest rates have restricted traditional capital attraction methods, prompting the firm to target investors seeking tax benefits on their gains.
The Toronto-based conglomerate’s Brookfield Real Estate Income Trust has announced the initiation of a program aimed at raising up to $1 billion through private placements of Delaware Statutory Trusts (DSTs) that hold one or more properties, as detailed in a recent filing with the Securities and Exchange Commission (SEC).
DSTs provide significant tax advantages, allowing investors to defer capital gains taxes through a 1031 exchange, named after the relevant section of the U.S. tax code that enables property sellers to reinvest proceeds into similar properties without immediate tax consequences.
This strategy represents a notable shift for Brookfield REIT, which has traditionally relied on stock sales for capital. Recent SEC filings indicate a contraction in the pool of investors interested in equities this year. In a DST structure, investors pool funds to own fractional interests in the trust, which holds title to one or more properties. This arrangement allows investors to enjoy the benefits of real estate ownership without the responsibilities of direct management.
Nontraded real estate investment trusts (REITs) like Brookfield’s have increasingly turned to DST programs to enhance fundraising as capital inflow has dwindled during a period of elevated borrowing rates maintained by the Federal Reserve—the highest in over 15 years. Although the Fed recently reduced rates by half a percentage point, analysts anticipate a gradual impact on commercial property markets.
Data from investment banking firm Robert A. Stanger & Co. indicates that public nontraded REITs reported approximately $4.2 billion in fundraising through August 2024. This figure is significantly lower than the $10.2 billion raised in 2023 and down from $33.2 billion in 2022.
Popularity of Alternative Investments
Kevin T. Gannon, chairman and CEO of Stanger, predicts that fundraising among nontraded REITs will remain subdued for the rest of the year, as other alternative investments gain traction. The decline in demand for nontraded REITs can be attributed to their lack of open market trading for common stock, making it more challenging for investors to liquidate their holdings. Additionally, nontraded REITs have restrictions on the number of shares they can buy back each quarter.
The high-interest-rate environment of the past two years has contributed to declining commercial property values, further disincentivizing investors from purchasing nontraded REIT stock.
Gannon views Brookfield’s launch of a DST program as a prudent move. He notes that it offers “another alternative for raising capital that ultimately provides investors with better diversity and better opportunities to liquidate their holdings.” Gannon emphasizes that DSTs serve as an effective estate planning tool for investors holding appreciated real estate assets.
Fundraising through DSTs has remained stable over the past two years and is on track for a robust performance in 2024. CoStar data indicates that sponsors completed $3.8 billion in DST offerings in 2023, nearly matching that total with $3.7 billion completed by September of this year.
Market Activity and Trends
Currently, there are 172 active DST fund offerings from 70 different firms in the market, having raised $2.3 billion while seeking an additional $6.1 billion, according to CoStar data. In a notable trend, Ares Management announced in May that it would cease public offerings of common shares in its two nonlisted REITs, opting instead for private offerings, which have proven more effective for fundraising.
Starwood Real Estate Income Trust, a nontraded REIT from Starwood Capital Group, launched a 1031 DST exchange program last year to counteract its lagging fundraising efforts.
As of August 2024, Brookfield REIT was the ninth largest nontraded REIT, based on the net asset value of its property holdings, which totaled $1.8 billion. However, it has not ranked among the top 10 nontraded REITs for fundraising this year. Brookfield REIT reported only $55.6 million raised through stock sales by the end of August, in stark contrast to Blackstone Real Estate Income Trust, which raised over $1 billion and holds the largest net asset value among nontraded REITs at $105 billion.
Brookfield REIT’s DST program is designed to expand and diversify its capital-raising strategies. Dana Petitto, chief operating officer and portfolio manager for Brookfield REIT, expressed confidence in the current real estate investment environment, stating, “We believe we are currently in the most attractive real estate investment environment in the past decade, driven by interest rates having peaked and now on the decline, which has led to increased transaction and capital markets activity.”
Addressing the Need for Capital
Petitto noted that many investors have remained on the sidelines during the past couple of years, resulting in a heightened need for liquidity. She explained, “Undercapitalized owners who need to sell assets to repay maturing debt or finance capital projects find there are few buyers and many competing assets for sale. This allows investors with access to capital—like Brookfield—to select the very best assets without needing to compete on price with other buyers.”
The net proceeds from Brookfield’s DST program will be utilized to enhance investment liquidity, repay debt, and reduce borrowings. Petitto indicated that while the program will initially focus on the multifamily sector, Brookfield possesses the investment sourcing and operational capabilities to expand into other sectors in the future.
As of August 2024, Brookfield REIT’s portfolio consisted of 68% rental housing, 24% net-leased properties, 5% logistics distribution centers, and 3% office spaces, according to its SEC filings. The REIT’s largest apartment holding by acquisition price is the 490-unit Briggs & Union Apartments in Mount Laurel, New Jersey, acquired for $158 million in April 2022, according to CoStar data.
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