Looking for a way to diversify your portfolio into commercial real estate? Non-traded real estate investment trusts (REITs) Blackstone REIT (BREIT) and Starwood REIT (SREIT) are two great options. Each vehicle offers solid current income through monthly distributions (5% to 6% annualized) with the prospect of value appreciation over time. We analyze the key components of each investment vehicle and present a view on which is most attractive for investors.
Non-traded REITs 1.0 vs. 2.0
Non-traded REITs sometimes get a bad rap, mainly because version 1.0 was generally a high-fee and low-return product for investors. That said, the industry took big steps forward in 2017 when Blackstone entered the market with version 2.0. Blackstone disrupted the market by offering a product with much lower fees and a much higher-quality sponsor.
Starwood followed Blackstone's lead in 2019, introducing their own non-traded REIT product. Others have followed suit, but BREIT and SREIT remain the two largest, highest-profile options for investors.
BREIT vs. SREIT: Portfolio composition
Portfolio composition is the biggest point of difference between BREIT and SREIT, as most other relevant metrics are very similar. Blackstone (BREIT) has a pedigreed real estate private equity group known for making high-conviction, thematic bets on the future of real estate. They have smartly deployed a significant amount of capital into the industrial real estate sector, including within the BREIT vehicle. Post-COVID, the e-commerce tailwind for industrial real estate has strengthened, given the increased reliance on buying things online.
Industrial real estate has already seen an uptick in both rent growth and property price appreciation since the pandemic began in early 2020. In addition to industrial real estate, BREIT has focused on multifamily housing (including student housing and manufactured housing) and to a lesser extent, hospitality.
In contrast, Starwood (SREIT) has mainly targeted multifamily and office, with a smaller allocation to industrial and hospitality. The office market has been significantly disrupted by COVID, given the mass pivot to work-from-home arrangements by most companies.
Though work-from-home prevalence is likely to decline in a post-vaccine economy, some element of remote work is likely here to stay (i.e., more than pre-pandemic levels). This is a negative for office space, and while the degree of demand falloff over the long term is difficult to handicap, it's a headwind for the sector.
In summary, BREIT has more industrial exposure, while SREIT has more office exposure. Long-term secular trends favor industrial over office. Both BREIT and SREIT have high exposure to multifamily and limited exposure to hospitality.
Additionally, BREIT has moderate exposure to Las Vegas casinos through its net lease bucket. Specifically, BREIT owns the real estate of the Bellagio, MGM Grand, and Mandalay Bay, receiving a fixed rent payment from MGM Resorts. Despite its operating challenges, MGM Resorts has a strong liquidity position as of the third quarter of 2020, with a significant amount of cash on its balance sheet, partially achieved by reducing its dividend. In addition, MGM Resorts has been current on rent payments throughout the pandemic.
Below is a chart detailing the sector exposure for BREIT and SREIT as of the third quarter of 2020