A Discussion with Bluerock About Interval Funds and Total Income + Real Estate Fund
October 31, 2017 | James Sprow | Blue Vault
In a wide-ranging interview with Josh Hoffman, Managing Director, at Bluerock Real Estate, Blue Vault discussed the history of interval funds, the unique qualities of interval funds that have made them an increasingly important alternative investment class, and the history of Total Income + Real Estate Fund, an interval fund managed by Bluerock.
There are currently over 55 interval funds registered with the SEC, with portfolios valued at over $17 billion in a variety of asset classes, ranging from credit to hedge funds to real estate. The capital raise by interval funds is increasing, potentially eclipsing the capital being raised by nontraded REITs, which have seen their equity sales falling from a high of $19.9 billion in 2013 to just $4.6 billion in 2016. Interval funds have been a relative bright spot in the alternative investments universe, offering increased liquidity and transparency, features that make them more attractive in a changing regulatory environment.
Both nontraded REITs and interval funds with a commercial real estate focus offer investors the opportunity to invest in an asset class with low correlations to returns on common stocks and bonds, and distribution rates that make them attractive in a low-rate environment. We asked Hoffman what can make interval funds such as Total Income + Real Estate Fund more attractive than a nontraded REIT and he had some ready answers.
First, interval funds are not “blind pools,” meaning investors in interval funds can see the fund’s portfolios prior to investing. While nontraded REITs may take a narrow approach to building portfolios of commercial real estate assets in one sector such as office, multifamily, industrial or hospitality, interval funds can diversify broadly by purchasing shares in existing portfolios managed by many different institutional managers across the spectrum of CRE types.
By putting their investors’ funds to work with existing portfolio managers in portfolios that are already built, the dividends paid by interval funds can be covered immediately by the yields on the shares purchased by the fund. Nontraded REITs, on the other hand, must report net asset values early in their life cycle that, in some cases, are well-below their offering prices, and often fund distributions from offering proceeds until their real estate portfolios can generate sufficient funds from operations to fully cover payouts. Until a nontraded REIT offering can reach a “critical mass,” offering expenses and administrative costs can make it challenging to achieve full coverage of distributions.
Interval funds offer transparency in total returns not available with nontraded REITs, which due to their relative illiquidity and life cycles, do not report shareholder returns until a full-cycle liquidity event such as a listing or merger occurs. Interval funds can regularly report income, unrealized gains and realized gains on their portfolios because a percentage of their assets may be traded, making it simple to “mark to market” on a daily basis. For their substantial investments in “Private Equity Real Estate Securities” or “Private ERES,” an interval fund can use the NAVs reported by the Private ERES each quarter, adjusting each NAV for changes in benchmarks that the valuation committee of the interval fund deems representative of the Private ERES market. Interval funds with daily NAVs can give investors complete transparency regarding the value of their shares since the funds offer redemptions on a regular basis at reported NAVs.
Interval funds make quarterly repurchase offers to their shareholders, offering to repurchase no less than 5% of their outstanding shares as of repurchase pricing dates. For example, Bluerock’s Total Income + Real Estate Fund repurchased 2.05% of its then-outstanding shares on May 10, 2017, at the NAVs for each of the Fund’s four share classes on the “Repurchase Pricing Date,” which was May 10.
While the Fund is a “closed-end fund” by definition, its shares do not trade in a secondary market via a stock exchange. Instead, liquidity is offered via the quarterly repurchase offers. The fund is therefore subject to continuous inflows of investor funds, but only periodic outflows, which can be limited to 5% of its total NAV quarterly.
The Total Income + Real Estate Fund had 98.8% of its portfolio value invested in Private Equity Real Estate Securities as of March 31, 2017. These companies are managed by 20 or so institutional managers, such as Morgan Stanley, J.P. Morgan and Blackstone. The remaining portions of the portfolio were invested in nontraded REITs and publicly traded REITs.
An interval fund can offer individual investors access to institutional real estate assets managed by some of the largest investment management companies in the world. The co-investors in these institutional portfolios must qualify with at least $200 million in assets, so the interval fund structure gives individual investors access to these managers and their portfolios that would not otherwise be possible. And, individuals investing in interval funds do not have to meet the same qualifying net worth or income tests as investors in nontraded REITs.
Blue Vault asked Hoffman about some key metrics that can be applied to interval fund performance. Of course, foremost among those metrics is the total annualized rate of return to investors. With daily NAVs reported for the fund, and quarterly or monthly cash distributions, these rates of return can be easily calculated and reported. Next, he mentioned the Sharpe Ratio, a comparison of the rate of return on investments to the variation in returns measured by the standard deviation of returns. Again, with daily NAVs per share reported, both the rate of return and the variation in daily returns can be calculated.
With regard to distribution coverage, unlike nontraded REITs that report MFFO (modified funds from operations) which Blue Vault compares to cash distributions to calculate coverage, the interval funds that report daily NAVs provide a method to measure distribution coverage. Whenever distributions are paid, the daily NAV will decline by the amount of the distribution, other things equal. Whenever the NAV declines less than the amount of the distribution, it is clear that total return is more than sufficient to cover the distributions. Since January 2013, the NAV of TIPRX, the Class A shares of Bluerock’s Total Income + Real Estate Fund, has increased from $21.14 to $29.33 as of October 25, 2017, a 39% increase, indicating that distributions have been covered by investment income and appreciation in the fund’s portfolio.
On October 24, Bluerock’s Total Income + Real Estate Fund (“TI+”) celebrated its five-year milestone. According to a press release, since inception TI+ “has delivered a total annualized return of 8.21% with low volatility and low correlation to broader markets, and has paid 19 consecutive distributions, most recently at an annualized rate of 5.25%.”
Ramin Kamfar, CEO of Bluerock, stated, “”We are strong believers in the value of institutional private equity real estate within a traditional investment portfolio of stocks, bonds, and treasury bills because these investments introduce a non-correlated asset that has, historically, reduced volatility while enhancing total return.”
Kamfar, Bluerock’s founder, started his career as an investment banker at Lehman Brothers, then left to focus on private equity investing, building a startup into a chain of bagel shops known as Einstein Noah Restaurant Group. Bluerock has evolved with the commercial real estate investment market, starting with TICs (tenancy in common investments in real estate), Reg. D offering, DSTs, nontraded REITs, public REITs and now interval funds. Each of these investment types have been ways in which individual investors can participate in commercial real estate investments, giving access to an asset class that has low correlations with stocks and bonds and offers attractive rates of return.
TI+ is widely available through the independent broker-dealer network, registered investment advisors, and on numerous platforms including TD Ameritrade, Schwab, and Fidelity. The minimum investment in the fund is $2,500 ($1,000 for retirement plans) for Class A and Class C shares. Investors can visit the fund’s website for details at www.bluerockfunds.com.
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