The $10 billion fund from Starwood Capital Group has been trying to preserve its available cash and credit by limiting investor redemptions. In the first quarter, the fund was hit with $1.3 billion in withdrawal requests but satisfied less than $500 million of them, according to regulatory filings.
Even with these limitations, the fund’s liquidity, consisting of cash, marketable securities and a bank line of credit, has been drying up. It totaled $752 million at the end of April, down from $1.1 billion at the end of last year. It was $2.2 billion at the end of 2022, according to filings.
“They don’t have a lot of liquidity left,” said Kevin Gannon, chief executive of Robert A. Stanger, an investment bank that specializes in real estate funds.
These developments have left the Starwood Real Estate Income Trust (Sreit) with three options—none of them appealing. It could take on more debt. It could sell properties into a tough market. Or it could halt completely or limit further redemptions, a move that would greatly impair the fund’s ability to raise new money. Unless it takes one of these three steps, Sreit looks poised to run out of cash and credit before year-end if the current pace of redemptions continues.
Other real estate funds are handling the pressure from the long queue of redemptions in varying degrees. The largest of the funds, Blackstone Real Estate Income Trust (Breit), has $7.5 billion in liquidity and earlier this year was able to fulfill all redemption requests. But withdrawals continue to exceed new fundraising.
Sreit was one of the most prominent real estate funds launched between 2017 and 2022, second in size only to Breit. These funds, known as nontraded real-estate investment trusts, invest in commercial property similar to publicly traded REITs. In all, these vehicles raised about $95 billion, mostly from individual investors, according to Stanger.
The funds also were very popular when interest rates were low because they paid dividends in the 5 percent range. Sold through financial advisers, they also gave small investors the opportunity to participate in what was then a hot commercial property market.
But investors started to bolt as interest rates jumped and commercial real estate (CRE) values fell. In late 2022, Sreit and others began limiting redemptions to as much as 2 percent of their net asset values a month and up to 5 percent a quarter.
New fundraising also has dropped sharply as some analysts have criticized the structure of the funds and financial advisers have raised warnings. Sreit’s new fundraising has dwindled to about $15 million/month, down from more than $600 million a month in the first half of 2022.
Sreit’s ability to make redemptions will help determine whether the funds will be a long-term feature of the real estate market or fade away. Some analysts believe that the funds are proving themselves through a tough commercial property market. Others say the funds are showing major problems.
Because it can’t raise enough new funds to make up for even its limited redemptions, Starwood has been considering a number of difficult options, say people familiar with the firm’s thinking.
The fund could borrow more, but that would be costly at today’s high interest rates. Sreit’s current debt is already equal to 57 percent of its assets, which is more than many comparable real estate funds. Sreit’s target leverage is 50 percent to 65 percent.
The fund could sell assets. Sreit owns hundreds of properties throughout the country, mostly warehouses and rental apartment buildings in the Sunbelt. But the value of most CRE has been hammered by high interest rates, which drive up costs in the high-leverage business. Rental apartments have also been hurt by overbuilding in many markets.
Most rental-apartment owners who bought in the years just before the interest-rate spike “would prefer not to sell in this market,” said Matthew Werner, managing director with asset manager Chilton Capital Management.
Finally, Sreit could halt or limit further investor redemptions.
A redemption halt “would be fatal,” Stanger’s Gannon said. “You wouldn’t be able to raise another dime.
Sreit was launched in 2018 by Starwood Capital, a private-equity firm headed by Barry Sternlicht, the storied real estate investor and founder of the Starwood Hotels chain. Sreit raised more than $13.5 billion in equity, which it used to buy more than $25 billion in real-estate assets.
The fund attempted to sell properties last year as the redemption queues began to lengthen. Sreit sold a portfolio of single-family rental homes to Dallas-based Invitation Homes for $650 million, including debt.
But more recently, the fund has slowed sales because of depressed prices. Like other owners, Sreit is hoping prices will rebound later this year, especially if the Federal Reserve begins to cut interest rates.
Instead, Sreit has relied on its line of credit. But that won’t last much longer at the rate the fund is drawing it down. The line has $275 million of capacity, down from its original size of $1.55 billion.
Excerpt Peter Grant, wsj.com
