Starwood Capital limits redemptions from troubled $10 billion real estate fund

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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 prevents a fire sale of assets in what it believes are poor markets.

The fund, known as Sreit, told investors on Thursday that it would restrict its liquidity rights by more than 80 percent, limiting redemptions to 0.33 percent of its monthly net assets from a maximum of 2 percent, the amount that has allowed them. to redeem since its inception in 2018.

Sreit’s portfolio includes apartment blocks in Arizona, logistics centers in Norway and a large loan it provided to Blackstone for its acquisition of Australian hotel and casino group Crown Resorts.

Faced with high redemption requests and dwindling liquidity, Sreit said he would increasingly attract investors because he believes the Federal Reserve will soon cut interest rates, providing “sunnier skies” in which it would favor property sales.

Starwood’s problems are a byproduct of the Federal Reserve’s two-year campaign to quell inflation. The central bank’s rapid rise in interest rates from record lows has hit property valuations, which have risen during an era of cheap money. Investors are now looking to put their money into better-performing assets, driving the rise in redemptions.

The restriction comes amid growing scrutiny over Sreit’s financial position amid strong requests for redemption from its investors. Earlier this month, the Financial Times detailed how Sreit had drawn more than $1.3 billion from its $1.55 billion credit facility starting in 2023 as it used much of its available liquidity to pay repayments, leaving it short of cash.

That increased the risk that it would run out of cash without selling properties or borrowing more money. Sreit last reported $752 million in liquidity as of April 30, against a quarterly redemption pace of around $500 million. But the fund was required to exhaust nearly $200 million of that cash by May 1 to continue paying repayments, according to securities filings released May 13.

“Sreit maintains a strong balance sheet and continues to be well positioned to navigate the current environment,” Sternlicht said in a statement emailed to the Financial Times.

The new limits will keep quarterly repayments at around $100 million, preserving scarce cash. Since the beginning of 2023, investors have redeemed almost $3 billion of Sreit. In the first quarter, investors asked for $1.3 billion in cash refunds but received only about 38 percent prorated.

In a letter to shareholders on Thursday, Sreit said he had decided to almost completely restrict investors’ liquidity rights because he believed real estate markets would recover soon.

Sreit said in the letter: “(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 The real estate markets will improve.”

Sreit said that in the first quarter his properties generated a 7 percent increase in rents, which he called “the best in our competitive set.” But he also revealed that he sold $2.8 billion in real estate assets to meet repayments at slightly lower values ​​than the properties on his books.

Starwood said: “In total, we have sold approximately $2.8 billion of real estate, including approximately $1.8 billion of multifamily, industrial and real estate loans, for a profit of $335 million. . . These sales occurred within 2 percent of (the fund’s) gross asset values.

Starwood’s high leverage, at 57 percent of its gross assets, means that to raise $500 million to pay redeeming investors, it would have to sell more than $1 billion in real estate assets.

Investors and regulators have been closely examining redemption data for funds invested in private markets, as the underlying assets can be difficult to value. This has raised concerns about whether a fund manager could generate the entire sum by selling assets.

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