Secondary Marketplaces Offer New Liquidity Options As Nontraded REITs Limit Redemptions
In the first week since LODAS Markets listed Blackstone Real Estate Income Trust shares, the secondary marketplace saw more interest than it has in the full month since it listed the nontraded REIT’s largest competitor.
While Blackstone, the world’s largest owner of commercial real estate, is one of several firms to limit investor withdrawals for its nontraded REIT in recent months, BREIT’s listing on a secondary marketplace is offering investors a new way to liquidate. And outsiders say it is a good thing.
“It is something that is another outlet,” said Kevin Gannon, CEO of Robert A. Stanger & Co., a real estate investment banking and financial advisory that tracks nontraded REITs. “More liquidity is better than less liquidity, right? So I think that's good. We’ll just see how the prices level off.”
King said LODAS, which launched as Realto in 2021 and stands for liquidity on demand as a service, functions much like a traditional stock exchange. Interested buyers, usually institutional investors, indicate the volume of shares they want to purchase and the price they are willing to pay.
LODAS has roughly 700 users, the majority of which are sellers, King said. But volume is where buyers level the playing field.
“The buyers represent a much larger swath of appetite,” he said. “So one buyer may represent $100M worth of interest; one seller might represent $100K worth of interest, right? The buyers are typically institutional in size. The sellers are typically — not always, but are typically — retail.”
He said some buyers are willing to pay a price equal to the net asset value or even above. In addition to optimism that the NAV may be below a nontraded REIT’s true value, King said some buyers aren’t seeking deep discounts because they want to establish a secondary market.
“In order to get people to look at the secondary market, they know that they needed to be able to be at the inside to drive investors there,” he said.
But secondary-market transactions tend to come at a discount, said Chad Gardner, vice president of marketing and head of trading at Central Trade & Transfer, another secondary marketplace for nontraded REITs. That can make sellers wary.
“They've learned over the years that the options for liquidity outside of redemptions end up being at sometimes a large discount to what the redemption could be,” he said.
LODAS isn’t just for the benefit of sellers looking for liquidity or buyers who might be able to transact at a discount. The benefits extend to fund sponsors, King and Gannon said.
“Anything that takes pressure off of the redemption queue is good for the nontraded REITs,” Gannon said. “Anything that lessens their need to create liquidity resources is good for them.”
King said LODAS has had talks with BREIT and SREIT about a partnership, but none has materialized yet. He said partnerships LODAS has with some of the other 45 entities traded on the platform aren’t financial agreements, but sponsors will point investors in the redemption queue to LODAS.
“In some cases, when people can't get their money back, they resort to finding a lawyer, and then legal issues now arise,” King said. “And so [the sponsors] know that it's better to point somebody to a way that they can get liquidity than to prevent them from being able to find liquidity.”
Blackstone told Bisnow in a statement that LODAS trading BREIT on its marketplace “has no impact on BREIT.”
While LODAS is structured so that it earns 2.9% from the seller in a transaction, Central Trade & Transfer, which has been around since 2011, operates “a lot like an eBay-style auction,” Gardner said. Sellers list a block of shares, and potential buyers bid against one another. The seller pays CTT a $250 minimum commission or 5% of the transaction, with percentages reducing for transactions over $100K.
Gardner said that while it has had buyer interest, it is early in the gated redemption game, and CTT hasn’t received requests to sell BREIT or SREIT yet.
“As that interest to sell or redeem shares picks up, I'm sure we will start getting inquiries,” Gardner said.
“I do eventually think the sellers will come," he said. "I think it's only a matter of time.”
Gannon said LODAS, CTT and the handful of other companies in the secondary nontraded securities market might not be the only outlets sellers have when they decide it is time to liquidate.
“Right now the nontraded REIT space, the NAV REIT space is about $100B, so that's a lot of equity floating around,” Gannon said. “And if you can only get some portion of that covered per annum, $20B per annum — maybe more than $20B want to exit, right? So yeah, I think there's going to be an opportunity for a market to develop here.”
UPDATE, MARCH 23, 1:18 P.M. ET: This story has been updated with a comment from Blackstone.