J.P. Morgan’s New Nontraded REIT Has a Differentiated Investment Strategy
November 16, 2022 | James Sprow | Blue Vault
Introduction
J. P. Morgan launched their new nontraded REIT program, J. P. Morgan Real Estate Income Trust (JPMREIT), in July 2022, a $5 billion offering with four share classes (D, I, S & T), and like their successful predecessors, Blackstone REIT and Starwood REIT, the product will be a perpetual NAV REIT, with monthly NAVs that determine the transaction prices and redemption prices. This program represents J. P. Morgan’s first foray into the nontraded REIT space. The REIT’s transaction prices will be based upon the previous month’s NAV per share (same for every share class), and redemptions will be allowed up to 2% of outstanding shares per month and 5% per quarter. Those features of the offering make JPMREIT resemble the NAV REIT offerings from Blackstone and Starwood. In this article, we want to identify the major differences between JPMREIT and two of its rivals in the nontraded REIT industry.
JPMREIT’s Unique Approach
First, JPMREIT’s investment approach will take advantage of the J. P. Morgan vertically integrated platform to focus 25% of its investments in development, including redevelopment and refurbishment. Their literature identifies the cost differences between developing properties vs. purchasing existing assets. JPMREIT has the optionality in the portfolio to develop when replacement cost is less than that to purchase in a given market. For example, like their peers, they will target single family rental properties as an attractive asset class. However, they would have the option to develop those properties in growth markets rather than purchasing portfolios of existing homes.
As JPMREIT enters the market, the fund will have the advantage of significant dry powder. As the pricing of commercial real estate comes under pressure and the possibilities of recession loom, the REIT will take advantage of buying opportunities and won’t be burdened with slower-growth assets. Recent articles have pointed to the slowing of capital raise and acquisitions by Blackstone REIT with its huge portfolio of real estate investments (over $138 billion as of September 30, 2022) which means the REIT may not be able to pivot toward new opportunities as quickly as a new NAV REIT entering the space.
The JPMREIT offering also competes with Blackstone’s REIT with lower fees (1% per annum payable monthly on all share classes vs. BREIT’s 1.25%).
The planned allocation of JPMREIT’s investments include a 10% tranche for international investments, including opportunities as they arise in Asian and European markets. By comparison, BREIT has just 3% of its portfolio in international assets, primarily focused in Europe.
JPMREIT identifies its targeted investments in three categories labeled “Consume”, “Live” and “Work.” The assets the REIT will target in each category are as follows:
Consume (notice the focus on “last mile” with assets closest to consumers)
Last mile warehouses
Last mile logistics terminals
Last mile services and recreation
Live
New single family rental construction
Newly built and existing Sunbelt apartments
Diverse housing for all generations
Work
Efficient offices in distributed innovation growth markets
Biotech
Last mile healthcare
The common denominators across each category of potential investments are the “new economy” and the “Smile” region of Sunbelt states with their higher projected population and employment growth. By emphasizing “last mile” assets the REIT is taking advantage of the evolution of the U.S. economy that was accelerated during the pandemic. Assets related to logistics promise to be a continuing growth opportunity. JPMREIT focuses on going “beyond traditional warehouses” to target critical sub-sectors in the supply chain where there are significant supply/demand imbalances. For example, there are opportunities to own land for logistics parking facilities for the hundreds of trucks involved in last mile deliveries. Furthermore, a focus on transload facilities or truck terminals that are used to load trucks outside of ports. JPMorgan manages over a hundred of each of these assets in its broader platform and they continue to face supply/demand imbalances, which is expected to drive growth.
We expect the housing shortage in the U.S. to continue for years to come as the surge in house prices during the pandemic and the rise in mortgage rates challenge both households and builders. These trends make the construction of new single-family rental and multifamily assets a potentially attractive area for the REIT.
The J.P. Morgan Advantages
The JPMREIT investment concepts are guided by J.P. Morgan’s 50 years of experience in managing commercial real estate, navigating seven real estate cycles, and providing liquidity in open-end private structures to investors throughout those cycles. For an example of J.P. Morgan’s expertise, J.P. Morgan Securities LLC dominated the top spot among financial advisers for real estate investment trust M&A in 2021, with eight deals totaling approximately $65.58 billion in transaction value. J.P. Morgan has decades of proprietary operational, financial and performance data from investing in direct real estate to support decision making.
Not to be overlooked is the advantage that Chase offers the REIT in identifying potential acquisitions. Proprietary data from Chase that serves over 66 million U.S. households provides a resource to the REIT team to identify those areas that are experiencing job and income growth, making them attractive for acquisitions and development. The banking side of J.P. Morgan and the available proprietary data is another unique advantage enjoyed by the JPMREIT team.
Conclusion
J. P. Morgan brings tremendous organizational advantages to the nontraded REIT industry and has a unique strategy that differentiates JPMREIT from their two largest peer/competitors. In order to succeed in the nontraded REIT business, investors and financial advisers must see the new offering as an opportunity to invest in the new economy and the areas of the U.S. economy, both geographically and demographically, with the greatest potential for growth. Given the financial strength of J.P. Morgan and the breadth of the Chase banking network, there is every reason to believe that the REIT will raise capital quickly and succeed where Blackstone and Starwood have blazed a trail.
Sources: J.P. Morgan REIT; J. P. Morgan
