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Aspen’s St. Regis Will Become US’s First Public Single-Asset REIT

Stephane De Baets’ Elevated Returns, a New York-based asset management outfit, may be riding an express chairlift into the history books.

The firm, which acquired the St. Regis resort in Aspen, Colo., in 2010, won approval from the Securities and Exchange Commission late last month to spin off the property under the ownership of a newly formed real estate investment trust (REIT) called Aspen REIT. When it does—and after its New York Stock Exchange initial public offering later this month that aims to hawk 1.675 million shares at $20 each—the trust will become what De Baets said will be the first single-asset REIT to trade on an American exchange.

Elevated Returns plans to retain 51 percent of the shares, bringing equity investment in the property to $68.4 million. Those stakes combine in the capital stack with a $119.4 million mortgage to bring the St. Regis’ total valuation to $187.8 million.

The structure pioneers a novel configuration of real estate ownership, allowing anyone with a brokerage account to buy a piece of an individual commercial asset for no more than the price of a dinner entrée.

“It’s a democratization of the investment model,” De Baets said. “We’re enabling the man on the street to, point to point, invest into a particular asset and to enjoy 100 percent of the economic interest.”

The concept is not unheard of. In the mid-1980s, in an arcane, convoluted transaction that allowed the Rockefeller clan to skirt a tax liability for liquefying its real estate holdings, the family created a single-asset REIT assigned to collect interest on mortgages on Rockefeller Center in Midtown Manhattan.

And in 2013, an upstart called ETRE Financial was poised to zip several different commercial properties, in Boston, Washington, D.C., and Philadelphia, into discrete single-asset trusts available to shareholders to trade on the Nasdaq exchange.

Both of those endeavors careened toward the gutter. By the end of 1995, Rockefeller Center Properties was deeply distressed, suffocating under the layers of debt it had taken on to protect shareholders and buying back bonds that were set to convert into equity in the future.

And ETRE Financial fizzled before launch, postponing a series of IPOs in the wake of what analysts speculated was lackluster investor interest.

Michael Rotchford, who co-leads the capital markets group at Savills Studley, mused that concern in particular would be an obstacle for any single-asset trust to confront.

“Single-asset REITs for certain assets are a great idea, but I think that liquidity is going to be of great concern to individual investors,” Rotchford said.

When asked about concerns over the vibrancy of the proposed REIT’s secondary market, De Baets was upbeat, explaining that Aspen will employ a market-maker, Citadel Securities, to promote liquid trading in the stock.

“The market-maker is very incentivized to keep the market liquid,” he said. “If the first [single-asset REIT] is successful, there’ll be 20 of these.”

The hotel, at 315 East Dean Street in the ritzy Rocky Mountains town, is nothing to shake a stick at. Two blocks from the lift lines for the Aspen Mountain ski resort (also known by its former moniker, Ajax), the St. Regis boasts five restaurants—including one that serves dishes from chefs Eric Ripert and Mario Batali—a full-service spa and even butlers available to meet guests on the tarmac at Aspen-Pitkin County Airport to carry their luggage.

De Baets may also have an ace up his sleeve in the form of deep relationships with Asian investors. In addition to his role at Elevated Returns, the Belgium native also serves as a managing director for OptAsia, a specialty investment bank with offices in Bangkok. In that capacity, De Baets lived in Thailand for 20 years and said he believes that an emerging investor class in China and throughout the eastern part of the continent is hungry for recognizable American properties in which to park their cash.

When considering mainstream U.S. REIT opportunities, “most of my investors in Asia say, ‘I don’t know, this REIT has 500 different assets,’ “ De Baets said, “ ‘It’s complicated for me to understand if it’s a good deal.’ “

With Aspen REIT, “you only have one set of numbers,” he added. “The underlying value of the asset is easy to understand.”

The pitch to foreign retail investors will be bolstered by the tax advantages that real estate investment trusts enjoy abroad.

“For foreign pension plans that are now recognized [by the U.S. government], they would be exempt from taxes on the dividends,” explained Kenneth Weissenberg, a partner at New York accounting firm EisnerAmper. “And a nonexempt holder can sell his stock in the REIT and not be subject to” the Foreign Investment in Real Property Tax Act, a law that charges income tax to foreigners who make money in American real estate.

Incentives for foreign REIT investors were further strengthened by 2015’s PATH Act, which lowered the rate of dividend withholding for foreign REIT investors to 21 percent from 30 percent.

But how well Aspen REIT will serve owners as an investment vehicle remains unknown. Trophy resort hotels have always been difficult to find investment comparisons for, analysts say, because their fortunes are so closely tied to local conditions. But single-asset REITs lack any precedent at all, leaving De Baets to play a guessing game for what the financing market will bear.

“We don’t know that the general public will be happy with the yield,” the asset manager said. “We’ve priced this offering with an entry yield that is so attractive that we know the asset will be in demand. Where will it settle once it’s trading? No one knows.”

Still, Elevated Returns thinks that the ski town’s prestige and the strength of the St. Regis brand will boost the REIT’s market with investors content to dampen their expectations for return.

“I would say that the difference between the sexy asset and the non-sexy asset would be the yield compression,” De Baets said.

The paperwork that Aspen REIT has filed with the SEC in advance of its initial offering of shares grants an intriguing glimpse into the finances of a luxury hotel adjacent to a destination ski area.

Occupancy is sharply seasonal. During the ski season—roughly from late December through the first few weeks of April—demand soars, and guests rent 80 to 95 percent of the St. Regis’ 179 rooms. The picture is similar over the summer, from June through August, when travelers mob the town for hiking and rafting, as well as a yearly two-month classical music festival.

Revenue follows a similarly lumpy pattern. In December 2016—the most recent ski season for which data are available—the average price for a night at the St. Regis peaked at $1,665. But in the October offseason two months earlier, rooms could be had for less than a quarter of that price.

Still, the St. Regis was able to charge consistently higher rates than its competitors throughout Colorado, its SEC filings show. In 2016, the hotel raked in just shy of $29 million in room revenues, or about 45 percent of the REIT’s planned IPO valuation.
On the whole, revenue from the hotel has grown 14 percent since 2015, supporting the REIT’s pledge to pay out a 5.8 percent annual dividend.

Given REITs’ surging popularity—May 2017 data from the National Association of Real Estate Investment Trusts showed that daily trading in the sector was up roughly 150 percent over the preceding decade—analysts say the time is ripe for new innovations in the vehicles.

“You have growing popularity of the real estate space as the primary alternative investment,” said David Blatt, the chief executive of New York-based CapStack partners. “Additionally, people are looking to diversity away from public equities and bonds to have noncorrelated assets. That, in turn, has really brought a lot of people off the sidelines.

“I think [the single-asset REIT concept] is sector agnostic, but I do think that you’re going to acclimate people far better utilizing something that has a brand,” Blatt said. “Coming to market saying you’ve got a fantastically well-located warehouse complex—I’m sorry, but I fell asleep after you said ‘warehouse.’ ”

On the other hand, with a market cap, at $68.4 million, only about a 10th as large as its self-identified competitors, Aspen REIT might appear to have an uphill battle winning investor attention amidst the clamor.

On that front, the hotel’s branding could be crucial to its success.

In exchange for using the St. Regis moniker and outsourcing its day-to-day operations to the brand, Elevated Returns pays Marriott, which owns St. Regis, an annual fee based on a percentage of the Aspen hotel’s operating revenue—$500,000 at a minimum.

The Bethesda, Md.-based lodging company did not respond to a request for comment.

“[St. Regis’] sales network is very strong and sophisticated,” De Baets said, citing the company’s “no-blackout, highly rewarding loyalty program. That’s something that has been very powerful for properties like ours.”

Source: commercial

CapStack’s David Blatt Talks Rising Markets and Patient Capital

CapStack Partners just closed on a three-property, 475-unit multifamily portfolio in Nashville, Tenn. The alternatives-focused investment bank partnered with multifamily operator MACC Venture Partners to complete the acquisition—the first transaction under a recent investment mandate to acquire value-add and opportunistic multifamily assets across the Southeastern U.S. CapStack has been busy growing and diversifying its business to meet the needs of an evolving roster of clients. Last March, it launched an agency loan origination platform, and in July, it added an investment advisory arm to its financial services capabilities. David Blatt, the company’s CEO, sat with Commercial Observer at the end of 2017 to tell us what’s new at CapStack.

Commercial Observer: How has business been?

David Blatt: We’ve been busy growing our platform in terms of different offerings and capabilities. We’ve always had a focus on the advisory side and investment banking side—working on deal-level executions with a lot of developer-operators, and we’ve now broadened that focus to include what I’d define as securities-based work—so, private placements, fund formation and REIT formation work. We also became an investment adviser where we function as an investment manager and pursue acquisition opportunities. We rolled out a multifamily investment strategy, and we’re partnering up with the sponsors that we’ve historically advised.

Which opportunities are you primarily pursuing within your multifamily strategy?

We’ve been focused on the Southeast and looking at value-add opportunities, particularly in markets like Nashville, Atlanta and the Carolinas.

Why do you like the Southeast?

We’re a big proponent of finding rising market opportunities, and I like the macro drivers of Southeast markets. You’re looking at in-migration, and the type of people coming in tend to be younger, educated people. There are educational institutions there. There’s a growing food and beverage component, which—probably because I’m a New Yorker— I recognize the value in. And, there’s the technology component. All of those factors are contributing into those markets. You have to buy right and have a longer-term horizon for whatever it is you’re investing into.

Nashville seems to be an especially hot market right now.

There’s definitely a lot of attention there. I think in the beginning everyone was really excited about it and now people are cautioning that it’s being overbuilt. But for us, we’re looking more at Class-B [properties], which isn’t really factoring into the overbuilding debate. And even in that debate, everyone acknowledges that it’s a function of time for the absorption of that inventory and less that it’s a market that’s going to soften.

Have you been traveling for work?

Yes, I’m traveling a lot to meet with various investor groups.

How have investors’ preferences evolved?

The concept of investing in what’s known as alternatives—private investments as opposed to trading on the stock or bond market—has become the focus of a lot of individual investors and financial advisers, and real estate makes up the bulk of that. Individual investors have always invested in real estate, but it’s been on a one-off basis in terms of private deals, whereas now you’re seeing their attention focused on increased exposure to deals where institutions are making great returns and owning great assets. So that’s who comprises our investor profile and why we became an investment adviser.

Are you speaking with many foreign investors?

We’ve been approached by some high-net-worth foreign investors. Some of them are a little more organized into family office structures. Direct investment deals are really the driver—so, cutting out some middle steps without necessarily having a pre-existing relationship with the deal sponsor—those deals have been the focus of many groups and individuals, more so than getting involved in a REIT.

Is there increased foreign investor appetite for markets outside of New York?

Those investors aren’t going to react as well to secondary or tertiary markets, but when you bring up a market like Atlanta or Nashville and present the investment thesis behind it, then investors are responsive to that. I think a lot of groups are also getting priced out of New York City—it’s an ongoing complaint.

 Is New York City overheated?

I think what’s challenging is the volume of capital sources and the diversity of capital sources; that’s what’s making it really difficult. I’ve had local investors complain about getting outbid on deals where the cap rate makes no sense, not thinking that the buyer isn’t really thinking about the deal on a cap-rate basis. That makes it really challenging because you have a group that’s willing to pay more because their agenda is far different. But, there’s no way to solve in the near term for the amount of capital that’s in the marketplace. The only way you can start to make sense of a deal is through two main inputs: money and time. So, if you were originally looking at a deal with three-year or five-year horizon, now you have to start thinking about it as 10 years or longer. You’re starting to see institutions like Blackstone have open-ended or ultra-long duration funds because in the end everyone believes in the asset class, so the question is how much time do you need for that deal to start making sense. If  you’re not going to get that near-term yield, you have to have—at the very least —patient capital.

On the capital-sourcing side of your business, are you still primarily working with alternative lenders?

Yes, we are. There are more firms that have been created, in addition to strategies within groups that have historically focused on some other part of real estate investing—equity or what have you—that have formed these debt funds. A second component of our business that we’re currently growing is that we’re syndicating deals for a lot of these lenders.

How has that been going?

We have a larger population of lenders that need to lever in order to get their returns. So for us it’s been a great way to transact and interact with these groups instead of just asking, “Hey, will you look at this deal to finance?” It also helps us to understand the capital makeup. The category of alternative lenders is a catchall, but every one of these groups comes to the table with a different capital makeup that’s driven by their investors.

 How do you find the nonbank lending environment right now?

The perception of the nonbank lender used to be one of “This profile is going to stick around long enough to bridge a gap until regulation changes to make it easier for banks to get out there again or there’s a pullback in the market. Then these groups will go away.” Looking back on 2017, you now have a profile of a lender that is going to be sticking around and financing executions for borrowers and developers in the space.

Do you think we’re in a healthy market?

I do. There’s definitely a sense of caution that has permeated the market from the buy side and from the finance side, but I don’t see that as a bad thing at all—I think it’s a really healthy thing. It slows the pace of transactions down, but people are being thoughtful about their execution and analyzing deals differently. I’m not seeing lenders make aggressive loans, and I think the alternative lenders have been very thoughtful about the financing they’re providing, and considering, “What happens if I end up owning this property?”

I think regulated banks don’t like to contemplate that possibility into their analysis because it inherently implies that they’ve made a mistake as a lender—because the primary execution is “I’m going to lend this money, you will pay me my rate and then repay me my money.” But coming out of the last recession, a lot of the groups on the alternative lender side are much wiser about the prospect of owning assets.

 Are we nearing the end of this real estate cycle, do you think?

Nothing signals to me that there is an end to the cycle in the immediate term, simply because when you look at the macro-fundamentals of everything that is going on it’s all healthy. There’s no overheating with respect to anything—whether it’s financing or development. There are certain pockets to keep an eye on. Obviously, retail has had some issues, but to me, that really started 20 years ago when e-commerce came on the scene.

 What could cause a disruption in the market?

I think something severe in the scope of world politics, if it impacts the capital markets in a big way. It would have to be so severe an event that people hoard money again and don’t want to deploy it. The biggest issue is that there’s so much capital, so where does it all go? And where would people pivot if they were to to pivot away from real estate in the near term?

There are so many things driving real estate forward right now. People are willing to accept lower returns, and some of it is a function of how cheap capital has been for so long, and some of it just because they need to park their money somewhere. This is a massive ship, and it would have to be something really big to make it turn in the other direction.

Source: commercial

CapStack Acquires Three-Building Nashville Multifamily Portfolio for $36M

Specialty investment bank CapStack Partners acquired a three-building, multifamily portfolio in Nashville, Tenn. for $35.5 million from Memphis, Tenn.-based Lennox Companies, CapStack announced last week.

The portfolio acquisition includes three, two-story, garden-style apartment complexes: The Vistas apartments, a 205-unit, 159,000-square-foot property located at 5319 Nolensville Pike in Nashville; Fawnwood Apartments, a 158-unit, 139,000-square-foot complex at 321 Walton Lane in Madison, a suburb of metro-Nashville; Archwood Meadows, a 112-unit, 116,000-square-foot complex, located at 110 Archwood Place in Madison.

CapStack plans to engage a multi-million dollar renovation and repositioning program for the three complexes to “unlock embedded value and cash flow opportunities,” according to a release from CapStack.

“This acquisition directly aligns with our investment parameters,” CapStack Chief Executive Officer David Blatt said in prepared remarks. “Each property is exceptionally well-located, has a stable operating history and offers a significant value-add opportunity. We intend to reposition the portfolio into high-quality workforce housing to capitalize on the strong demand for this type of product in Nashville.”

This portfolio acquisition comes as an early part to the firm’s push to invest in value-add and opportunistic multifamily assets across the Southeast. Last July, CapStack expanded its operations with the inclusion of a investment advisory platform—just a few months after the creation of its agency lending division that March. One month later, the firm received a mandate to acquire multifamily assets, sourcing opportunities in-house and through local and regional landlords and developers.

“We are pleased to be able to offer this strategy as part of our investment advisory platform and so soon after its launch,” Blatt said. “Our intention has always been to manage our clients’ investments throughout their respective life cycles, and today we are more than capable of doing just that.”

CapStack completed the Nashville buy with operating partner North Carolina-based MACC Venture Partners, which has been tapped to manage the three complexes. In keeping with the firm’s pledge to utilize local operators and developers, Blatt told Commercial Observer his firm is looking “to bring in partners like MACC that have on-the-ground operational expertise in the markets that we target.”

Blatt added in prepared remarks: “When I launched CapStack, the broader vision was always to build an institution that blends highly informed capital markets advisory with investment management solutions for clients seeking alternative investments like real estate.”

Neither officials at Lennox Companies nor its asset management arm, Lennox Living, could immediately be reached.

Source: commercial

In 2018, More Money, One Problem: More Money

It seems that for the past few Januarys, the capital markets had a doomsday prediction for the year ahead. Not long ago, risk retention signaled the death of the conduit loan market. More recently, the wall of maturity was set to topple the commercial real estate industry. In the end, the market’s appetite for CMBS bonds and real estate investments—along with the capital to back it—overcame the apocalyptic forecasts. I could say, “I told you so,” but you’re reading this because you care less about the past and more about what’s in store for 2018. Here’s what you need to know.

First and foremost, there are no market specific doomsday predictions on the horizon. The fact is the debt and equity markets are as robust as ever. As it relates to debt, CMBS issuances have climbed last year from $68 billion in 2016 to $77 billion. Turns out, bond buyers like risk retention and when an originator puts their money where their mouth is. Further, more debt funds have raised capital for loan originations and broadened their menu of lending programs. Most notably, regulated banks are set to see the legislative reigns loosen on their CRE loan originations, specifically, those associated with HVCRE, or High Volatility Commercial Real Estate, loans.

HVCRE loans require regulated banks to keep 150 percent risk weight—an increase from the previous 100 percent requirement. In dollar terms, for a $100 million loan, a bank needs to keep $12 million in capital reserves for a HVCRE loan versus $8 million for a 100 percent risk-weight loan. To be exempt from HVCRE designation, the current regulation mandates that borrowers of acquisition and development loans must contribute at least 15 percent cash into a project’s total cost. So, if a developer acquires a site say 10, 20, or 30 years ago and it appreciates in value to a point that the land contribution would more than suffice as all or some of a developer’s equity contribution into a project, it still doesn’t satisfy the HVCRE regulation for the developer’s 15 percent cash contribution relative to total project cost.

But back to the debt market impact. While I’m not predicting that the correction, amendment or repeal of this rule will significantly increase construction loan origination volume in the short run—banks have long memories and the last recession acutely resonates—it does make banks’ decisions to originate such loans a function of credit again, more so than the regulation associated with last decade’s financial crisis. It also means that there is inherently more debt capital available.

As it relates to equity capital, billions in real estate funds have been raised for all types of assets, regions, hold terms and investment strategies that have still yet to be deployed. Additionally, the alternative investment vehicles that specifically target individual investors directly and through the registered investment adviser and broker-dealer channels continue to grow and proliferate.

Now that we understand capital up and down the stack abounds, we need to also consider that economic indicators such as job and wage growth continue to signal near-term growth and stability, even as the Fed has, and will, continue raising rates into 2018. Think of that as the government taking the training wheels off because we’re cycling of our own volition and not showing signs of wobbliness. Add to this the gift of tax reform that the CRE industry received in 2017. Surprisingly, no one strongly predicted that a real estate-oriented president like Donald Trump would preserve and likely enhance the tax benefits of owning investment real estate. With that uncertainty gone, we can expect to see more capital pouring into the asset class from institutions, and individuals seeking to increase their portfolio allocations to public REITs, alternative investment vehicles and direct investment in real estate.

The comforting aspect of all this capital flow is the general caution and consideration debt and equity investors have been applying without overreaching to secure deals. I hear the common complaint about finding a deal that makes sense, and there is indeed a large and growing disparity between deals being reviewed and deals actually getting done than in the past. The groan is primarily one of intense and growing competition because of the higher volume of available capital and lower volume of available deals. However, when a deal does make sense for a lender or investor, they pounce quickly and with purpose. That is a sign of a healthy and responsible market, not a reckless or overheated one. So for 2018, all signals point to a steady market with no sensational dire predictions to kick off this year, or at least not any with the force to turn the capital spigot off in the near term. This leaves the only remaining problem, where and how all this capital gets allocated.

David Blatt is the chief executive officer of CapStack Partners. Connect with him on LinkedIn or on Twitter @capstackceo.


Source: commercial

The Rise of the Individual Investor Class

Historically, individuals—more colloquially referred to as “friends and family” or the “country club” investor—have always been the on-ramp investor profile for many property developers-operators. These investors were generally relegated to the smaller investments presented to them by people they knew in the real estate business, or real estate investment trusts available in the public markets. All the while, larger deals and fund vehicles remained the purview of the larger institutions. As the real estate investment class has grown in prominence over the last few years, so too has the prominence and power of the individual investor.

From Crowd to Class

Over the last few years, the advent of crowdfunding allowed individuals to access smaller debt and equity investments that didn’t necessarily involve a sponsor with whom that investor had a pre-existing relationship. Conversely, it allowed sponsors to raise the necessary capital from unaccredited investors and in very small increments. This was an early indication that a critical mass of individuals could take down a big-ticket asset such as real estate. Notably, many of the first movers in the crowdfunding space, such as Realty Mogul, Fundrise and Patch of Land, have parlayed their database of investors into raising homegrown fund vehicles that they manage today.

From Families to Offices

Over the same period, wealthy individuals and families have begun to organize into single and multifamily offices. Rather than make investments in a haphazard and reactive manner, they now leverage and allocate their wealth into real estate investments much more strategically, programmatically and proactively. They have brought on institutional-caliber staff and investment advisers to do so. As an investment manager, we have witnessed this evolution up close, as this profile has charged us with investment mandates defined by strategy rather than by deal (“Find me multifamily value-add investments” vs. “What do you think of this multifamily deal I was just sent?”). They can compete with institutional private equity funds to make such real estate investments. Sponsors have begun to take note.

From Institutions to Individuals

Blackstone recently announced that 15 to 20 percent of its assets under management have been raised from individual investors. This comes from a directed push that it began roughly five years ago, where the firm has been creating products and vehicles that could be sold through the broker dealer and registered investment adviser channels. They have cultivated an army of sales and marketing people to do so. Other large institutions like BlackRock, Starwood Capital Group and Brookfield have been similarly creating products and staffing up to do the same—either organically or via acquisition of advisers that manage individual investor capital.

But it is not only the larger marquee name institutions that are doing so. As an investment bank and adviser, we are regularly presented with asset- and strategy-specific real estate fund or REIT offerings that are geared towards individual investors. We are also doing more fund formation and private placement work with emerging real estate developer-operators seeking to organize their platform beyond the “one-off” syndication model by which they built their business. While the larger institutions require scale, the diversity of the individual investors makes room for small and midsize vehicles with niche strategies that don’t necessarily need to fit into the standardized five-year hold typically presented.

As capital has flooded the real estate market, it has become increasingly difficult for real estate funds to invest into real estate deals using the traditional three- to seven-year closed-end fund structure. Many sponsors also recall how quickly the larger institutions turned off the capital spigot in the last market downturn. While at the same time, individual investors and their financial advisers are seeking to recalibrate a portion of their investment portfolios away from public equities and bonds into alternatives, particularly real estate.

The individual investor class tends to be “stickier” with a long-term and, in certain instances, evergreen investment horizon. This provides for a level of patience and stability into a fixed asset like real estate. It is reminiscent of Warren Buffet’s comment, “Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.”

David Blatt is the chief executive officer of CapStack Partners. Connect with him on LinkedIn or on Twitter @capstackceo.


Source: commercial