Starwood Capital limits withdrawals in its troubled $10 billion real estate fund

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The $10 billion real estate fund managed by Barry Sternlicht’s Starwood Capital is severely limiting investors’ ability to exit their investments as it preserves liquidity and avoids selling off assets in places they believe are poor markets.

The fund, known as Sreit, on Thursday told investors it would limit their liquidity rights by more than 80%, limiting redemptions to 0.33% of net assets per month from a maximum maximum 2% – the amount the fund has allowed them. to acquisitions since its founding in 2018.

Sreit’s portfolio includes apartment complexes in Arizona, logistics centers in Norway and the large loan Sreit provided to Blackstone to acquire Australian hotel and casino group Crown Resorts.

Faced with high redemption demands and dwindling liquidity, Sreit said it will increasingly “shut out” investors as it believes the Federal Reserve will soon cut interest rates, creating conditions for “sunny skies” that they will prioritize selling assets.

Starwood’s troubles are a byproduct of the Fed’s two-year campaign to tame inflation. The central bank’s rapid rise in interest rates from historic lows has hit asset values ​​that had risen during the era of cheap money. Investors are now looking to put money into better-performing assets, fueling a surge in buybacks.

The restriction comes amid growing scrutiny of Sreit’s finances amid major buyback requests from investors. Earlier this month, the Financial Times detail How Sreit drew down more than $1.3 billion of its $1.55 billion credit facility starting in 2023 as it used much of its available liquidity to pay off debts buyout, leaving them short of cash.

That increases the risk of running out of cash without selling assets or borrowing more money. Sreit last reported liquidity of $752 million as of April 30, compared with a quarterly redemption rate of about $500 million. But the fund is expected to exhaust nearly $200 million of that cash on May 1 to continue making redemption payments, according to a securities filing published on May 13.

The new limits will keep quarterly repayments at about $100 million, keeping cash tight. Since the beginning of 2023, investors have bought back nearly $3 billion from Sreit. In the first quarter, investors asked for $1.3 billion in cash back but only received about 38% pro rata.

In a letter to shareholders on Thursday, Sreit said it had decided to limit investors’ liquidity rights almost completely because it believes real estate market will recover soon. The fund did not respond to a request for additional comment.

Sreit said in the letter: “[As] As fiduciaries to our shareholders, we cannot recommend being an active seller of real estate assets today given what we believe is a near-bottom market with limited transaction volumes and we believe the real estate market will improve.

Sreit said that in the first quarter, its properties generated a 7% increase in rents, which it called “the best in our competitive group.” But it also revealed that it sold $2.8 billion of real estate assets to meet redemptions at a value slightly less than its book value of the assets.

Starwood said: “In total, we sold approximately $2.8 billion of real estate, including approximately $1.8 billion in multifamily, industrial and real estate loans at a profit 335 million dollars. . . These purchases and sales occur within 2% [fund’s] The total value of assets.”

Starwood’s high leverage ratio of 57% of total assets means that to raise $500 million to pay buyout investors, it would have to sell more than $1 billion in real estate assets.

Investors and regulators have been scrutinizing redemption data from funds investing in private markets, as the underlying assets can be difficult to value. That raises concerns about whether the fund manager can generate the full amount when selling assets.