Mini Tender Offer Highlights Real Estate Alt’s Liquidity Challenges

Following last year’s massive fundraising, real estate alternative investment vehicles such as non-trading REITs and business development companies (BDCs) are set to record record inflows in 2022. But one downside to these structures is that investors always have few options for raising money if they want an early exit, leading to smaller public offerings that some critics deem predatory. We encourage purchases.

The real estate alternative sector raised $69.3 billion year-to-date through July, according to Robert A. Stanger & Co. This is a 95% increase compared to the same period in 2021. – BDC traded at $17.1 billion, Interval Funds at $15.5 billion and DST at $6.0 billion. While capital is being poured into these vehicles, being present ahead of planned liquidity events such as sales or IPOs can be expensive for shareholders.

“I think almost everyone in the industry would agree that we need liquidity options for investors. Co-Founder of Equity Trapped Direct Lenders to Commercial Real Estate Investors.

Many opportunistic investment groups have taken advantage of the illiquidity within the real estate alternative sector to make unsolicited small tender offers (less than 5% of a company’s equity), often at bargain basement prices. You are trying to buy a stock at a price. Examples of mini tender offers over the past year include:

  • In June, CMG Partners and its affiliates entered into a pending investment to purchase up to 500,000 shares of American Healthcare REIT Inc., a non-trading real estate investment trust formerly known as Griffin-American Healthcare REIT IV Inc. Launched a mini tender offer of consent. $5.35 was reportedly 42% cheaper than his NAV at the time.
  • Comrit made an unsolicited mini-tender offer to investors in KBS REIT III in November at $7.19 per share.
  • In March, Mackenzie Capital Management LP made a mini tender offer to purchase up to 1.25 million shares of CIM Real Estate Finance Trust common stock at a price of $3.15 per share.

Such offers are a thorny issue on the part of sponsors and have faced backlash from other industry participants who hope to offer investors in need of liquidity a more legitimate secondary market option. I’m here. Realto Capital’s Brian King describes companies such as MacKenzie Capital as taking a “vulture-like” approach to taking advantage of unsuspecting retail investors. B) offer low low prices and C) offer a very short window to “act now,” like a late-night infomercial. Another point of contention is that a third-party bidding firm is bypassing Financial Her Advisors to directly access shareholders who may not be sophisticated real estate investors.

“We believe the model in general, and more specifically the discounts that Mackenzie tends to offer while leveraging third-party tender offer models, are predatory.” liquidity solution. From time to time, we have shareholders who crave liquidity for a variety of reasons, such as divorces, deaths, or other unforeseen events. In many cases, even if they feel the offer doesn’t represent a fair price, they’re excited to accept the offer that’s available because they don’t have other options to access quick liquidity, Cox said. point out.

Mackenzie Capital could not be reached for comment.

Even the SEC admits that small tender offers are often aimed at “catching investors off guard,” and offers a list of tips for shareholders.

Growth will also spur liquidity demand

Historically, shareholders seeking liquidity have been limited to options that include:

  • Buyback of own shares to REIT or BDC
  • List shares on an exchange or auction site
  • Acceptance of Tender Offers by Third Parties

However, groups such as Cox Capital and QuickLiquidity are working to educate stakeholders about liquidity alternatives. Sean Stephan, partner at Cox Capital Partners, said: But there are larger ecosystems being built to facilitate liquidity in highly illiquid markets, he added.

For example, Cox Capital does not make unsolicited offers. The firm works with clients, including financial advisors with business books, to underwrite shares in fundamentals including holdings, distribution and purchase programs, and pathways to liquidity. Cox Capital underwrites approximately 35% of assets at a discount of only 1-2% to more illiquid and distressed assets. “Ultimately, what we want to do is get rid of these third-party tender offer firms that are actually abusing and offering an unfair value,” says Stephan.

QuickLiquidity also aims to provide an alternative source of liquidity to private real estate investors in vehicles such as LLCs, LPs and DSTs. When the company was first founded in 2015, its model focused on acquiring a small number of investors at a discounted price. But there is usually a big gap in pricing, Miller notes, and there was a big gap between what QuickLiquidity paid and what shareholders were willing to accept.

Six years ago, the company changed its model, offering loans backed by minority interests in real estate partnerships. The company presents buyout offers to investors who reach out for liquidity, but the bulk of its business is focused on providing loans against equity in partnerships. “This gives investors access to liquidity without having to sell at a discount,” he said.

The secondary market continues to evolve

Private realtors struggle to tap the secondary market. Over the years, many secondary markets have been launched and failed. An example of a secondary he marketplace that has been around for several years is Central Trade & Transfer. Most recently, Realto launched a secondary market platform. In addition to the secondary market, shareholders can reach out to private secondary market buyers such as Sell My REIT.

“Since crowdfunding has become a big deal, there seems to be more focus on liquidity options and secondary markets. There is also

Demand for liquidity need not come from dire circumstances such as death or divorce. Some shareholders may not only want to adjust their positions to rebalance their portfolio, but they may also be making changes due to having a new financial his advisor. “By offering higher prices, we see more people come to the table for more differentiated reasons,” he says Cox.

It’s also important to note that these are not liquidity solutions offered in markets that are no longer growing. On the contrary, there has been a significant increase in fundraising in the sector, adds Stephan. Big names such as Blackstone and Starwood are attracting more capital, and JP Morgan recently completed an application for plans to launch a $5 billion non-trading REIT. “We see some of these more mainstream institutions entering the space because of the opportunity set that exists, and we have to build it back and forth. It means we need to offer liquidity options to investors to make it more affordable,” says Stefan. .

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