Broadstone Real Estate Access (BDREX) Comprehensive Review
Category: Non-accredited investor funds
Honors: Best core plus funds
What is Broadstone Real Estate Access (BDREX)?
Broadstone Real Estate Access (BDREX) is a unique 3-strategy fund that offers both nonaccredited and accredited investors access to a diversified commercial real estate portfolio.
Each strategy is held in a different "sleeve" of the fund: institutional real estate funds, directly owned real estate and public market real estate equities.
Fees are rock-bottom and lead the industry. Investors can redeem quarterly, and minimums are low at $2500. This is an especially nice perk since some of the funds in the institutional sleeve normally require $1 to $5 million to access. I suspect this combination of features alone will be enough to make some investors want to pull the trigger.
Unlike virtually all other closed-end funds (including BREIT), you don't have to find (nor pay) a broker to access BDREX. Also, there are no minimum income requirements (again unlike BREIT and many other closed-end funds).
On the minus side the fund is relatively new (started in October 2018) and the directly owned real estate sleeve is not yet funded. So currently the fund is overweight in the public markets sleeve at about 50%.
This may also raise some question marks for those investors who are in real estate to escape public market correlation and volatility. Very early in its life, BDREX hadn't funded its private real estate sleeve, and appeared to be highly susceptible to that volatility. In a more recent market downturn it held completely steady, which may indicate that it's now much better insulated (although some public REITs also held steady, so this may not be a true test of the new structure yet). More on these and other things is in the "pros and cons" section below.)
How does Broadstone Real Estate Access (BDREX) work?
As mentioned above, BDREX has a unique three-part strategy:
Institutional real estate funds (40 to 50% target)
Directly owned real estate (20% target)
Public market real estate equities -- public REITS (30 to 40% target).
There are competing funds that do offer a fund sleeve and a public sleeve. And others that have a directly owned sleeve and a public sleeve. But none that I'm aware of that do all three.
The funds in the institutional real estate sleeve typically require $1 to $5 million minimums to invest directly. And BDREX provides access at just $2,500 minimum (for Class W shares). So for some investors, this alone will probably be worth the price of admission.
What's also very nice here is what's missing. Competitors that offer similar institutional access (RREEF Property Trust, Blue Rock Total Income + Real Estate Fund, PREDEX, USQ core real estate fund, etc) charge high sales loads, hefty promotes and/or large management fees. BDREX blows these away with no sales loads, no promote and a low management fee (1.5% for Class W and 1.25% for Class I shares).
The directly owned real estate sleeve can invest in any commercial real-estate is sourced by the same group that is doing Broadstone's commercial net lease and multi-family properties for their other funds. but It's not yet built out because the fund is relatively new and still identifying target properties. When it's implemented, it will not charge a promote or carry, which will make it significantly cheaper than competitors like Blackstone Real Estate Investment Trust (BREIT).
The final sleeve invests in public market real estate equities (i.e. public REITs). Real estate investments are generally not liquid, so the sleeve allows the fund to honor investor redemption requests without having to liquidate the real estate. Like many closed-end funds, BDREX allows investors together to withdraw up to 20% of the entire fund total per year (5% per quarter). So it's good to see that the target for this is 30 to 40% and provides an extra buffer. Some competitors target less than 20%, which may juice their return in the short term, but could cause liquidity problems in a downturn.
To generate extra return in this sleeve, the fund utilizes a company called Heitman. Heitman has $42 billion under management and implements a covered call strategy that is normally only available to institutions. Currently, raw public REITS return about 3 to 4% (in distributions only). And a covered call strategy like this might return 6-7% (in distributions). So, some will like the increased return.
Note that this sleeve is not hedged in any way against public market price drops. So, there will always be more public market correlation in BDREX than a completely private market fund. This isn't unique to BDREX, as most closed-end funds with a public liquidity sleeve have this issue. But it's something that some investors may wish to consider.
An investor who can't stomach any more public exposure, will probably not find BDREX to be a good match. On the other hand, the fund is maturing and filling out more and more of its nonpublic sleeves. And the stock price and does appear to be getting much more resilient to stock market volatility.
As an example, back in December 2018, the stock market went down about 15.7%. While most private market real estate investment stayed fairly steady, BDREX lost 7.7% during the same time ($10.39 to $9.58 or $0.81). I suspect this would be uncomfortable for many real estate investors.
However, more recently (May 13, 2018) the stock market dropped 2% in one day due to trade war escalation. But unlike a few months before, BDREX held completely steady at $10.64. The fund had filled out its institutional funds sleeve a lot more, which presumably dampened the volatility considerably.
On the other hand, one of our sharp readers pointed out that Vanguard's real estate index fund (VGSIX) also did well that day. And this is almost completely public REITs which can be quite volatile in many stock market drops. So arguably this is not a full test, and the jury is out on this issue, until there is a sustained stock market drop that hammers public REITs.
What are Broadstone Real Estate Access (BDREX) Pros and Cons?
Advantages: Unique three-part strategy. Rock-bottom fees and no commissions. Modest minimum of $2500. Modest leverage at 33% portfolio level. Perhaps 20-30% of return may be tax shielded. They accept non-accredited investors (and no income requirements). No broker required.
Disadvantages: Newer fund and direct access sleeve is not yet funded. No downside hedging on liquidity sleeve if there is a severe downturn.
Accolades: Best core plus funds.
As mentioned extensively earlier, BDREX has a unique three-part strategy that no other funds currently has. The fees are rock-bottom and lead the industry (which was also described extensively above).
The minimums are very modest at $2500 and are available to non-accredited investors without an income requirement.
A nice perk is that you don't have to find and pay a broker to access the fund. In comparison, it can be very difficult to access many closed-end funds such as BREIT.
Leverage is modest with a 33% cap across the portfolio and implemented through a line of credit. Additional leverage through the sleeves appears to roughly break down like this:
Private funds: modest leverage.
Public records show that the debt fund has none and others appear to be modest leverage significantly below 40% (often in the 20s).
Direct sleeve: no leverage. No mortgages.
Public sleeve: no leverage is being used by Hietman.
The public REITs themselves may have debt 30 to 50% range.
Additionally, like most REITs, there appears to be potential for some tax shielding (perhaps in the 20s to 30's).
Also, even though the fund is new they are currently covering their dividend with cash flow. This is unusual for a fund this young and a positive sign.
On the other hand, since the fund is new (launched in October 2018), the direct market sleeve is unfunded (as discussed earlier). So the public market sleeve is much higher than the target (currently around 50%). This means that there is higher than targeted exposure to stock market volatility. This however is mitigated by the fact that in a recent 2% stock market drop, BDREX held completely steady (detailed above). It's possible a longer or more sustained drop might have a different result, so those concerned about this may wish to monitor BDREX over the next sustained in downturn.
(Click here for direct access to the prospectus and fund materials. Important: this link is for convenience only and we don't take any compensation for referring investors to any sponsor.)
Is Investing in Broadstone Real Estate Access (BDREX) Legal?
BDREX markets to investors under the Investment Company Act of 1940, and is available to both accredited and unaccredited investors. There is no income test (unlike many other closed end funds).
What does the Broadstone Real Estate Access (BDREX) fund look like?
Here is my step-by-step due-diligence on BDREX. Note that the portfolio will change over time, so what I see now may not be the same in the future.
Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions.
The fund invests in institutional real estate funds, direct real estate and public REITS. Projected returns are about 5% from distributions, perhaps a few points more from price appreciation and paid quarterly. The two distributions so far have met and exceeded the 5% target.
The first step is to check if the asset class and strategy even make sense for my portfolio. (If you don't know how to do this, please see The Conservative Investor's Guide to Due Diligence). Let's say that it does and dive in.
I believe we are late in the cycle and am concerned about a possible upcoming downturn. And above all I don't want a sponsor who has never gone through a downturn learning expensive lessons with my money. In a mainstream asset class like this, I generally require full real estate cycle experience in the exact strategy, with little or no investor money lost. A less conservative investor, or one less concerned about a downturn will not care about this issue.
Looking at the different tiers:
Institutional real estate funds: BDREX reveals it's top 5 holdings here. It's possible these funds may meet my criteria, and they look promising. But there noway to tell for sure.
On one hand several of them appear to be part of the core real estate index (ODCE). These are some of the longest-running, conservatively run funds out there and are likely to have extremely experienced sponsors at the helm. On the other hand, not all part of the ODCE. And BDREX is restricted by SEC regulations from handing out the pitch decks for these funds (which would contain the necessary information). Also Google searches on the funds themselves only shows partial information.
So I can't say with certainty that this meets my requirement and since I err on the side of caution, it's a dealbreaker for me. This is shame, because the SEC regulations which no doubt were intended to protect investors, in this case are making it impossible to get enough visibility into the fund to fully gauge risks.
On the other hand, an investor who interprets the information differently, or is less conservative or simply less concerned about a downturn, may be perfectly fine with this.
Direct real estate sleeve:
BDREX sources its net lease deal flow from the same team that sources the deals for Broadstone Net Lease (BNL) and Broadtree Residential (BTR). BNL is a $3.7 billion fund, that has gone through a full real estate cycle with no significant share losses over the long-term. (BTR is a ~$350 million+ multifamily fund). So this portion of the sleeve meets my criteria and I give it a big green flag.
The sleeve can also invest in multifamily and other types of commercial real-estate. It's not clear to me how much experience the underwriters have and if it's full cycle or not. So since I'm not sure and I err on the side of caution, for me this is a red flag. For someone that is more comfortable with the underwriting or less conservative, then this would be a nonissue.
Public REIT sleeve:
The sleeve doesn't really match up with my criteria which is based on private real estate. So I'm going to skip evaluating it here.
Skin in the game:
Since I'm conservative, I'm concerned that the sponsor promote incentives them to push the risk envelope. So I like to see 5 to 10% co-investment to mitigate this risk. (I'm also okay with less skin the game, if the sponsor is new: as long as it is a lot of money to them).
In this case, the fund does not charge a promote. This is both very nice and very unusual. It also makes skin in the game less important to me than usual. However, it's still useful to protect against unnecessary churn. And the management company seeded the fund with $20 million of it's own cash, which is currently a whopping 46% of the fund (as of last filing in Feb 2019). I consider that to be great plus and a good sign.
Since I'm concerned about a downturn I don't want to see more than 65% LTV leverage. I took a detailed look at the leverage earlier. While it's not possible to get an exact number, it seems to me almost certainly to be below 65% total. If that's the case then I consider this to be a good sign.
I also want to see an investment eliminate interest-rate risk and refinance risk by locking in long-term debt (7 to 10 years) and at a low, fixed rate interest rate.
It's not clear to me what the terms are on the debt. If it is indeed long-term and fixed interest rate than that to me is a great sign. A floating rate that is unhedged would be a dealbreaker for me. Medium-term debt would be a yellow to a red flag and short-term a red flag.Someone who thinks interest-rate are going down, and/or not concerned about refinance risk may not care about these issues.
Fees and promotes:
BDREX really shines here with fees that are significantly below competitors and that lead the industry. (Full details were mentioned earlier)
Note that in the institutional access section, there are additional fees being charged by the underlying funds (on top of those charged by BDREX). And typically these may include a promote and other fees. So a person might argue that the double layers of fees here are high.
I can see that argument, but it's only high if a person has the $1 to $5 million necessary to meet the minimums required to invest directly in these funds. If not, then to me the ability to access these institutional funds at just a $2,500 minimum makes it well worth paying.
The public REIT sleeve:
Since I believe we are late in the cycle, I have been reducing my exposure to all public equities including public REITs. So an investment in BDREX would be a step in the wrong direction for me in this regard.
There are so many other advantages to BDREX that I wish this sleeve was structured a little differently so this wouldn't be so problematic. For example, if they implemented a hedging strategy, it would reduce the volatility in a severe downturn and make this more palatable.
The problem is that this would also reduce the current return. As a conservative investor, I wouldn't mind that. But I also know that I'm not the typical investor. For more typical, aggressive investors the low return would probably be a dealbreaker. So I can understand why they don't do this: I'm probably not the target market. But it doesn't stop me from wishing that they did!
As it is currently, this sleeve is a dealbreaker for me. An investor who is fine with this exposure, or who wants access to the institutional covered call strategy (which they probably can't get anywhere else), will feel this sleeve is great.
If the investment passed all my initial checks, I would have dived in further. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
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About Ian Ippolito
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