S2 Capital targets $1bn for multifamily private REIT

S2 Capital is seeking to raise up to $1 billion for its newly launched non-traded real estate investment trust focusing on the multifamily sector, PERE has learned.

S2 declined to comment, but PERE understands the firm is targeting $100 million in the initial closing for the open-end vehicle and aims to reach $1 billion in commitments over the next five years. The Dallas-based multifamily specialist launched S2C Real Estate Income Trust in February, according to a filing with the US Securities and Exchange Commission.

S2, which was founded in 2012, is seeding the unlisted REIT with approximately 10,000 apartment units totaling $1.6 billion in assets under management. The properties, which are concentrated in the Sun Belt states of Texas, Arizona, Florida, Georgia and the Carolinas, were originally acquired through 26 joint ventures that the firm formed with primarily high-net-worth investors from 2016-21. The assets, which were built from the 1980s through 2020 and have been partially or fully renovated, are currently 93 percent leased.

All of the individual investors in the 26 JVs have rolled up into the private REIT. Meanwhile, S2 will seek to raise new equity from wealth management groups, registered investment advisers, broker-dealers and family offices. The capital raised through the REIT will be used to acquire new assets, typically those built in the 2010s to 2020s.

With the private REIT, S2 will pursue an open-end, core-plus strategy focused on acquiring stabilized assets directly from developers and will target a net 12 percent IRR. By contrast, with its closed-end value-add and opportunistic funds, the firm sources its deals from private owners and lenders and is targeting 16 percent or higher returns.

S2 will also be refinancing the existing debt on the individual assets in the REIT’s seed portfolio with a $1 billion credit facility with Fannie Mae. PERE understands that such a credit facility is typically only available to borrowers seeking to finance a minimum of $500 million in multifamily assets with a single loan. The facility, for which the firm had an initial closing of $250 million this week, will lower S2’s cost of debt by 300 basis points.

Having previously raised capital on a deal-by-deal basis during its first decade in business, S2 then raised its first multifamily fund S2 Multifamily Value-Add Fund in September 2022, closing on $400 million against a $250 million target. The vehicle was one of the largest first-time, US-focused private real estate funds raised that year, according to PERE data. The firm is currently in the market with S2 Real Estate Fund II, which has a $600 million target, PERE data shows.

S2C Real Estate Income Trust will be the largest multifamily-focused private REIT by number of operating units. The second-largest non-traded REIT focused on the sector, Cottonwood Communities Advisors’ Cottonwood Communities, had 7,761 operating units as of December 31, according to the vehicle’s most recent prospectus.

Although many of private real estate’s largest managers have focused on raising diversified non-traded REITs – such as Blackstone’s Blackstone Real Estate Income Trust and Starwood Capital Group’s Starwood Real Estate Income Trust – the number of sector-specific private REITs has been on the rise.

Aside from S2C Real Estate Income Trust, these specialist vehicles include BGO’s industrial-focused IREIT, Ares Management’s Ares Industrial Real Estate Income Trust and Bridge Investment Group’s Bridge Investment Group Industrial Real Estate Income Trust, which was launched last month, as PERE previously reported.

Non-traded REIT fundraising, however, is down significantly year-over-year, mirroring a similar slowdown in institutional real estate fundraising. NAV REITs – which account for most of the new capital raised by non-traded REITs – recorded negative net fundraising of approximately $6.2 billion in 2023, reflecting fundraising, dividend reinvestment and redemptions, according to data from New Jersey-based investment bank Robert A Stanger. This is compared to nearly $23.2 billion of net positive fundraising in 2022, the firm’s data showed.