(Source – YouTube)
Starwood Capital’s $10 billion property fund, managed by Barry Sternlicht and known as Sreit, has announced significant restrictions on investors’ ability to exit their investments. This move is aimed at preserving liquidity and avoiding a rapid sale of assets in a challenging market environment. Credit will now limit redemptions to 0.33% of its net assets per month, down from the previous allowance of up to 2% since its inception in 2018.
Sreit’s diverse portfolio includes apartment complexes in Arizona, logistics centers in Norway, and a substantial loan to Blackstone for the acquisition of Crown Resorts, an Australian hotel and casino group. Facing substantial redemption requests and limited liquidity, Streit has decided to gate investors more stringently. Starwood Capital’s fund believes that the Federal Reserve’s anticipated interest rate cuts will create a more favorable market for property sales in the near future.
The restrictions come amid increasing scrutiny of Sreit’s financial health, as the fund has drawn down more than $1.3 billion of its $1.55 billion credit facility since the beginning of 2023. This drawdown was necessary to meet redemption demands, depleting much of its available liquidity and raising concerns about potential cash shortages. As of April 30, Sreit reported $752 million in liquidity, with nearly $200 million set to be used for redemptions on May 1.
Navigating Financial Strain and Investor Expectations
Barry Sternlicht emphasized in an emailed statement that Sreit maintains a robust balance sheet and is well-positioned to navigate the current economic environment. The new liquidity restrictions will limit quarterly redemptions to approximately $100 million, conserving the fund’s scarce cash reserves. Since early 2023, investors have withdrawn nearly $3 billion from Sreit, with $1.3 billion requested in the first quarter alone. However, only about 38% of these requests were fulfilled on a pro-rata basis.
In a letter to shareholders, Sreit explained the decision to restrict liquidity rights, citing a belief in an imminent recovery of property markets. The letter 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.”
During the first quarter, Sreit’s properties generated a 7% increase in rents, which the fund touted as the best performance within its competitive set. Despite this, Sreit had to sell $2.8 billion in property assets at values slightly below their book valuations to meet redemption requests. This included $1.8 billion of multifamily, industrial, and real estate loans, generating a $335 million profit but reflecting the challenges in maintaining asset values under pressure.
Liquidity Restrictions Amid Market Challenges
The high leverage of Starwood Capital’s portfolio, with 57% of its gross assets tied to debt, means that raising $500 million for redemptions would necessitate selling over $1 billion in property assets. This leverage intensifies the difficulty of maintaining liquidity while satisfying investor exits.
Investors and regulators continue to scrutinize redemption data from funds with private market investments, due to the difficulty in accurately valuing underlying assets. This scrutiny raises concerns about a fund manager’s ability to generate sufficient funds from asset sales to meet redemption demands, particularly in a depressed market. Sreit’s strategy highlights the delicate balance between maintaining liquidity, managing investor expectations, and navigating a volatile real estate market.
