➤ The real estate investment trust model will afford investors in the new federal Opportunity Zone program an easier exit than a limited partnership as the regulations are currently set up.
➤ Skybridge-EJF Opportunity Zone Real Estate Investment Trust Inc. is offering Opportunity Zone investors a level of diversification that would otherwise be difficult to achieve.
➤ There is room for multiple REITs to thrive around the program, which was created with the 2017 tax reform package and is intended to spur investment in economically depressed regions in the U.S.
Source: SkyBridge-EJF Opportunity Zone REIT
Brett Messing is president of SkyBridge-EJF Opportunity Zone REIT, a new entity pioneering the use of the REIT model in the program. The company launched in December 2018 and is now funding its first investments.
S&P Global Market Intelligence caught up with Messing to discuss the new REIT's plans and potential investments, as well as the rationale for implementing the REIT structure. What follows is an edited transcript of that conversation.
S&P Global Market Intelligence: Would you talk a little about how the new REIT came into being?
Brett Messing: After the details of the Opportunity Zone program came out in late 2017, Skybridge Capital began working with EJF Capital LLC on the structure. EJF Capital, a hedge fund, focuses on regulatory and policy change and the investment opportunities that flow from them. The Opportunity Zone program is enormous and is immensely complex, and they have a number of Washington, D.C., relationships.
Most of our investors are taxable investors — we don't work with big endowments or offshore money — for whom this represents a historic tax incentive. We just felt there was a lot of overlap with our existing business.
What are the particular benefits of using a REIT framework for Opportunity Zone investments?
The Opportunity Zone regulations are still being ironed out, but as they stand, you have to hold an investment in a qualified Opportunity Zone fund for 10 years to reap the full tax benefits, and the exit mechanics for a REIT structure are, at least at this juncture, much easier than they are in the case of a limited partnership. Additionally, the REIT structure is something with which investors are already familiar. So there is a marketing element. Pattern recognition has value.
Additionally, investors like yield. As a REIT, we have to pay out 90% of our taxable income to investors as dividends. Once we build the projects and lease them and the cash starts flowing, there will be a 5% dividend, and growing thereafter.
The REIT structure is also more conducive to diversification, which could be viewed as one of the big ideas governing the Opportunity Zone program. The government is effectively incentivizing diversification by opening a window for large amounts of capital tied up in big stock positions to flow into new investments. And along those lines, we're offering a highly diversified REIT, both in terms of geography and property type.
Would you spell out how the REIT structure allows for an easier exit?
In a few years, after we have normalized the portfolio, we intend to go public via an initial public offering. At that point, each investor will be allowed to manage their own exit. The REIT affords its shareholders that level of flexibility.
Do you have a sense for the level of competition you may face from other prospective Opportunity Zone-focused REITs?
We are admittedly early to this. I've been to many events to speak about this and have only encountered one other group that is looking to do a REIT. We have spent a lot of time and money developing the structure and researching the issues. But I do think others will replicate what we are doing. We are already receiving a lot of positive feedback about the structure.
I actually want this space to grow and provide many opportunities, so I don't really view other bodies that come in right now as competitors primarily. Obviously we want our share of the market, but it seems to be a rising-tide scenario.
Are you targeting a specific kind of investor or group of investors with the REIT?
I would say holders of large, concentrated single-stock positions, generally. And that was the group that the people pushing the Opportunity Zone legislation had in mind. How do we get all this wealth tied up in stocks reinvested in communities? Philanthropy only gets you so far.
Secondarily, I would say any equity investor with a lumpy portfolio — where a portion of the holdings have outperformed massively — after a yearslong bull market, who might be looking to reduce their risk.
A final category would be anyone who recently experienced a liquidity event. A lot of the first investors in the Opportunity Zone program have been people who sold a business, or made some significant sale and realized a gain in the last few months.
The company in its investor materials has highlighted multifamily, industrial and hospitality for potential investment. Would you briefly walk me through your thesis behind that mix?
Our primary thesis is diversification. There is also some secular logic to it. Household formation has been growing faster than housing, generally, so the nation is under-housed. We're perhaps most interested in industrial, which has benefited from e-commerce's growing share of the retail marketplace. One of our first projects is a warehouse facility near the Port of Savannah in Georgia. And despite the rise of Airbnb and other similar services, hotel demand is on the rise in many markets around the country.
Is there anything that unifies the areas you have targeted so far? Are you staying out of core markets, generally?
Our investments are 10-year holds. We are looking at zones that have the population, job and infrastructure growth — zones with the wind at their backs. That excludes a significant number of them. We have seen probably $6 or $7 billion of deals inside the zones as of mid-December, and only maybe $300 million or $400 million of those deals are investible, in our view. The real challenge is identifying the good opportunities.