A $10bn property 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 fire sale of assets in what it believes are poor markets.
The fund, known as Sreit, on Thursday told investors it would restrict their liquidity rights by more than 80 per cent, limiting redemptions to 0.33 per cent of its net assets a month from as much as 2 per cent — the amount it has allowed them to redeem since its inception in 2018.
Sreit’s portfolio spans apartment blocks in Arizona, logistics centres in Norway and a large loan it provided to Blackstone for the acquisition of Australian hotel and casino group Crown Resorts.
Facing high redemption requests and dwindling liquidity, Sreit said it would increasingly gate investors because it believes the Federal Reserve will soon cut interest rates, providing for “sunnier skies” in which it would favour selling property.
Starwood’s troubles are a byproduct of the Fed’s two-year campaign to stifle inflation. The central bank’s rapid increase of interest rates from historic lows has hit property valuations, which rose during an era of cheap money. Investors are now looking to put their money in better-performing assets, driving the redemption surge.
The restriction comes amid increasing scrutiny into Sreit’s financial position in the face of heavy redemption requests from its investors. Earlier this month, the Financial Times detailed how Sreit had drawn down more than $1.3bn of its $1.55bn credit facility beginning in 2023 as it used much of its available liquidity to pay redemptions, leaving it short on cash.
That raised the risk it would run out of cash without fire-selling property or borrowing more money. Sreit last reported $752mn in liquidity as of April 30, versus a quarterly pace of redemptions of about $500mn. But the fund was set to exhaust nearly $200mn of that cash on May 1 to continue paying redemptions, according to securities filings published on May 13.
“Sreit maintains a sound balance sheet and continues to be well positioned to navigate through the current environment,” Sternlicht said in an emailed statement to the FT.
The new limits will keep quarterly redemptions to about $100mn, preserving scarce cash. Since the beginning of 2023, investors have redeemed nearly $3bn from Sreit. In the first quarter, investors asked for $1.3bn in cash back, but received only about 38 per cent on a pro-rata basis.
In a letter to shareholders on Thursday, Sreit said it had decided to almost fully restrict investors’ liquidity rights because it believed property markets will soon recover.
Sreit said in the letter: “[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.”
Sreit said in the first quarter its properties generated a 7 per cent increase in rents, which it called the “best in our competitive set”. But it also disclosed it sold $2.8bn in property assets to meet redemptions at values slightly below where it carried the properties on its books.
Starwood said: “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.”
Starwood’s high leverage of 57 per cent of its gross assets means that to raise $500mn to pay off redeeming investors, it would have to sell more than $1bn in property assets.
Investors and regulators have been closely scrutinising redemption data from funds invested in private markets, given the underlying assets can be hard to value. That has raised concerns over whether a fund manager could generate the full sum when selling assets.
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