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A $10 billion real estate fund managed by Barry Sternlicht’s Starwood Capital is strictly limiting its investors’ ability to exit their investments as it preserves liquidity and avoids a massive asset sale in what the company believes are bad markets.
The fund, known as Sreit, told investors on Thursday it would limit their liquidity rights by more than 80 percent, limiting redemptions to 0.33 percent of its net assets per month, from as much as 2 percent – the amount has allowed them. to be repaid since its inception in 2018.
Sreit’s portfolio includes apartment complexes in Arizona, logistics centers in Norway and a large loan it made to Blackstone to acquire Australian hotel and casino group Crown Resorts.
Faced with high redemption requests and dwindling liquidity, Sreit said it would attract more and more investors as it believes the Federal Reserve will soon cut interest rates, creating “sunnier skies” in which it would favor selling of real estate.
Starwood’s problems are a byproduct of the Fed’s two-year campaign to suppress inflation. The rapid hike in interest rates by the central bank from historic lows has impacted real estate valuations, which have risen in an era of cheap money. Investors are now trying to put their money into better-performing assets, fueling the redemption wave.
The restriction comes amid increasing scrutiny of Sreit’s financial position in light of heavy redemption demands from its investors. Earlier this month, the Financial Times detailed how Sreit had drawn down more than $1.3 billion from its $1.55 billion credit facility from 2023 as it used much of its available liquidity to pay repayments, leaving a cash shortage arose.
That raised the risk of running out of cash without selling real estate or borrowing more money. Sreit last reported $752 million in liquidity on April 30, versus a quarterly repayment pace of about $500 million. But according to securities filings posted May 13, the fund would have to deplete nearly $200 million of that money by May 1 to continue making principal payments.
“Sreit maintains a healthy balance sheet and remains well positioned to navigate the current environment,” Sternlicht said in an emailed statement to the FT.
The new limits will limit quarterly repayments to about $100 million, preserving scarce cash. Since the beginning of 2023, investors have redeemed almost $3 billion from Sreit. In the first quarter, investors requested $1.3 billion in cash back, but received only about 38 percent on a pro-rata basis.
In a letter to shareholders on Thursday, Sreit said it had decided to almost completely restrict investors’ liquidity rights as it believed real estate markets will recover quickly.
Sreit said in the letter: “[As] As a fiduciary to our shareholders, we cannot recommend being an aggressive seller of real estate assets today, given what we believe is a near-bottom market with limited transaction volumes, and our belief that real estate markets will improve.”
Sreit said its properties generated a 7 percent rental increase in the first quarter, which it called “the best in our competitive range.” But it also disclosed that it was selling $2.8 billion worth of real estate to meet repayments at values slightly lower than where it had the properties on its books.
Starwood said: “In total, we sold approximately $2.8 billion in real estate, including approximately $1.8 billion in multifamily, industrial and real estate loans for a profit of $335 million. . . These sales took place within 2 percent of the [fund’s] gross asset values.”
Starwood’s high leverage of 57 percent of its gross assets means that to raise $500 million to repay redeeming investors, it would have to sell more than $1 billion in real estate assets.
Investors and regulators have been closely watching the redemption data of funds invested in private markets as the underlying assets can be difficult to value. That has raised concerns about whether a fund manager could generate the full amount from asset sales.