Starwood Capital's Sreit Fund Limits Redemptions to Preserve Liquidity Amid Market Challenges

Key Takeaway

• Starwood Capital's $10 billion Sreit fund limits redemptions to 0.33% per month, down from 2%, to preserve liquidity amid poor market conditions.
• Sreit has sold $2.8 billion in property assets at values slightly below book value and reported a 7% rent increase in Q1.
• High leverage (57%) and rising interest rates are pressuring commercial property markets, complicating the outlook for real estate investments.

Starwood Limits Redemptions

Starwood Capital's $10 billion property fund, known as Starwood Real Estate Income Trust (Sreit), has announced significant restrictions on investor redemptions. The fund will now limit redemptions to 0.33% of assets per month, a drastic reduction from the previous allowance of 2% monthly or 5% quarterly. This move is aimed at preserving liquidity and avoiding a fire sale of assets in what the fund believes are currently poor market conditions.

In a letter to shareholders, Sreit stated, "[As] a fiduciary to our stockholders, we cannot recommend being an aggressive seller of real estate assets today given what we believe to be a near-bottom market with limited transaction volumes, and our belief that the real estate markets will improve." The fund's portfolio includes diverse assets such as apartment blocks in Arizona, logistics centers in Norway, and a significant loan to Blackstone for the acquisition of Crown Resorts in Australia.

The decision to restrict redemptions comes amid increasing scrutiny of Sreit's financial position. Earlier this month, it was reported that Sreit had drawn down more than $1.3 billion of its $1.55 billion credit facility to pay redemptions, leaving it with $752 million in liquidity as of April 30. The new limits are expected to keep quarterly redemptions to about $100 million, preserving scarce cash. Since the beginning of 2023, investors have redeemed nearly $3 billion from Sreit.

Financial Performance and Asset Sales

Despite the liquidity challenges, Sreit reported a 7% increase in rents for its properties in the first quarter, which it described as the "best in our competitive set." However, the fund also disclosed that it had sold $2.8 billion in property assets to meet redemption requests, at values slightly below their book values. Starwood stated, "In total, we have sold approximately $2.8 billion of real estate including approximately $1.8 billion of multifamily, industrial, and real estate loans at a $335 million profit. These sales occurred within 2% of the [fund’s] gross asset values."

Starwood's high leverage, at 57% of its gross assets, means that to raise $500 million to pay off redeeming investors, it would need to sell more than $1 billion in property assets. This high leverage ratio has raised concerns among investors and regulators, who are closely scrutinizing redemption data from funds invested in private markets due to the difficulty in valuing underlying assets.

Broader Market Context

The move by Starwood comes as higher-for-longer interest rates are causing cracks in the commercial property market. Sreit and competitors like Blackstone Real Estate Income Trust have faced rising pressure since the second half of 2022, when investors began requesting more money back, leading to the enforcement of previously disclosed limits. In October 2022, Sreit's redemption requests exceeded the 2% threshold, but all requests were fulfilled. However, the trust left some requests unmet a month later.

Redemption pressure eased at the end of last year when it appeared the Federal Reserve was preparing to cut interest rates. Shareholders requested just $314 million in December 2023, down from a peak of $715 million in January of that year. However, with the economy performing strongly, policymakers have warned that rate cuts might not happen as soon as previously forecast, complicating the outlook for real estate.

"This was a very hard decision to make, but having managed through six major downturns over our 30-year history, we believe we are making the best decision for all shareholders," Barry Sternlicht, Starwood's CEO, said in an emailed statement. "We anticipate the real estate markets are bottoming and will continue to improve from here, so further leveraging the vehicle or selling our portfolio’s assets to meet monthly redemptions would negatively impact all investors."

Management Quotes

• Sreit (Starwood Capital):

  "[As] a fiduciary to our stockholders, we cannot recommend being an aggressive seller of real estate assets today given what we believe to be a near-bottom market with limited transaction volumes, and our belief that the real estate markets will improve."

• Starwood:

  "In total, we have sold approximately $2.8bn of real estate including approximately $1.8bn of multifamily, industrial, and real estate loans at a $335mn profit . . . These sales occurred within 2 per cent of the [fund’s] gross asset values."