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The $10 billion equity fund managed by Barry Sternlicht’s Starwood Capital tightly limits its investors’ ability to exit their investments as it preserves liquidity and avoids selling off assets in what it sees as bad markets.
The fund, known as Sreit, told investors on Thursday that it would limit its liquidity rights by more than 80 percent and limit redemptions to 0.33 percent of its net assets per month from up to 2 percent — the amount it had allowed them to do. redeem since its inception in 2018.
Sreit’s portfolio includes apartment buildings in Arizona, logistics centers in Norway and a large loan it provided to Blackstone for the acquisition of Australian hotel and casino group Crown Resorts.
Faced with high redemption demands and dwindling liquidity, Sreit said he would increasingly hedge against investors as he believes the Federal Reserve will soon cut interest rates, providing a “sunnier sky” in which to favor property sales.
Starwood’s troubles are a byproduct of the Fed’s two-year campaign to suppress inflation. The central bank’s rapid rise in interest rates from historic lows has hit property valuations, which have soared in the era of cheap money. Investors are now looking to put their money into better performing assets, leading to an increase in buybacks.
The restrictions come at a time when Sreit’s financial position is under increasing scrutiny in the face of heavy buyout requests from its investors. Earlier this month, the Financial Times detailed how Sreit used up more than $1.3 billion of its $1.55 billion credit facility at the start of 2023 as it used much of its available liquidity to pay buybacks, leaving it short on cash .
This increased the risk that it would run out of cash without selling assets or borrowing more money. Sreit last reported $752 million in liquidity as of April 30, against a quarterly redemption pace of about $500 million. But the fund was expected to use up nearly $200 million of that cash on May 1 to continue paying out buybacks, according to securities filings released May 13.
“Sreit maintains a healthy balance sheet and continues to be well positioned to navigate the current environment,” Sternlicht said in an emailed statement to the FT.
The new limits will keep quarterly buybacks at around $100 million, preserving scarce cash. Since the beginning of 2023, investors have bought almost $3 billion from Sreit. In the first quarter, investors demanded $1.3 billion in cash back, but received only about 38 percent on a pro rata basis.
In a letter to shareholders on Thursday, Sreit said it had decided to almost completely limit investors’ liquidity rights because it believed property markets would recover soon.
Sreit stated in the letter: “[As] as a fiduciary to our shareholders, we cannot recommend being an aggressive seller of real estate assets today given what we believe is a market near the bottom with limited transaction volumes and our belief that the real estate markets 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 set”. But it also revealed that it sold $2.8 billion in assets to meet buybacks at values slightly lower than where it carried the properties on its books.
Starwood said, “In total, we sold approximately $2.8 billion in real estate including approximately $1.8 billion in multifamily, industrial and real estate loans for proceeds of $335 million. . . These sales were within 2 percent [fund’s] gross asset values.”
Starwood’s high leverage of 57 percent of its gross assets means it would have to sell more than $1 billion in assets to raise $500 million to pay paying investors.
Investors and regulators have scrutinized redemption data from funds invested in private markets because the underlying assets can be difficult to value. This raised concerns about whether the fund manager could generate the full amount when the assets were sold.