UPDATED, 4:40 p.m., Oct. 5: The Lightstone Group is no stranger to public, non-traded real estate investment trusts geared toward particular markets, having sponsored and launched four separate such funds in the past decade.
But the company’s latest – Lightstone Real Estate Income Trust or LREIT, which kicked off earlier this year – is its first focused specifically on the New York City market, and Lightstone hopes to raise $300 million through the platform for real estate-related investments throughout the city.
“The focus will be Lightstone projects in New York City, [but] it will also be investing with other qualified opportunities as well,” Lightstone president and COO Mitchell Hochberg told The Real Deal.
In 2005, the firm launched its first REIT, Lightstone Value Plus REIT, which invested in residential, hospitality and retail properties. It then launched Lightstone Value Plus REIT II in 2009 and Lightstone Value Plus REIT III in 2014, both focused on select-service hotels.
With LREIT, Hochberg said his company sees “an opportunity for the REIT investor to invest in development, particularly in New York City, in a position that can get them a strong return without being [exposed to] the highest level of risk.”
Unlike the previous funds, LREIT will be primarily investing in preferred equity, which the firm believes will reduce risk and deliver more predictable returns for investors. The fund began raising money earlier this year by selling shares through investment advisers – a process that is “going extremely well,” Hochberg said, though he didn’t offer specific figures.
But public, non-traded investment platforms like LREIT aren’t for all types of assets, Hochberg said, citing as an example Lightstone’s acquisition of around 12,000 building lots in Southern Florida, Arizona and Southern California in the post-recession years.
“We bought it thinking it was very opportunistic,” Hochberg said, adding that the assets “had no cash flow” and that it was “difficult to determine what the horizon would be” for them. Such assets, he said, “we wouldn’t even consider putting a REIT into, because we thought it was too high risk. We did that on our own balance sheet.”
While many real estate firms have used the REIT model in a similar fashion to Lightstone – establishing separate, smaller trusts devoted to particular asset classes – Hochberg said his company wasn’t considering the possibility of a wholesale REIT conversion. Forest City Enterprises — the parent company of New York-based Forest City Ratner — is one major company taking that course of action, with the firm expected to complete its REIT conversion at the start of next year.
“I think the biggest advantage to anybody going public is access to capital, typically at costs that would be less than capital available privately,” he said. But there are also “the regulatory issues of being a public company,” Hochberg noted, and the establishment of funds like LREIT enable Lightstone to “access those strategies” of the REIT model without having to compromise its private status.
“For us right now, with interest rates low, the spread between the cost of capital that we could get as a private company – either at an entity level or on a project basis – wouldn’t justify dealing with the issues of being a public company,” he said.
A previous version of this article quoted Mitchell Hochberg specifying shareholder returns expected by LREIT. Lightstone has since retracted those expectations.