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Starwood, Like Blackstone, Limits Investor Redemptions from Big Real Estate Fund

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Starwood Real Estate Income Trust, which owns apartment buildings and other commercial real estate, has moved to limited withdrawals from the fund.

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Another big nontraded real estate fund is limiting investor redemptions.       

Starwood Real Estate Income Trust, a nontraded real estate investment trust, is curbing redemptions after investor withdrawal requests exceeded the REIT’s monthly limit in November.

Known as SREIT, the $14.6 billion REIT is chaired by Barry Sternlicht, the founder and CEO of Starwood Capital, a private investment firm focused on real estate with over $125 billion in assets under management. Starwood Capital manages the REIT. Sternlicht also is CEO of Starwood Property Trust (STWD), a publicly traded real estate lending company.

SREIT is the second-largest nontraded REIT behind Blackstone Real Estate Income Trust, which has about $69 billion of net assets. The Blackstone (ticker: BX) vehicle, known as BREIT, moved to limit redemptions in November after elevated investor withdrawal requests exceeded its 5% quarterly limit.

Like BREIT, SREIT allows for monthly redemptions of 2% of net asset value, or NAV, and 5% of NAV quarterly.

The elevated redemption request shows that many retail investors are moving to the exits on nontraded REITs, which aren’t traded on an exchange, after their performance has vastly exceeded that of publicly traded peers this year. The huge performance gap between the nonpublic and public REITs has created an incentive for investors in the nontraded REITs to cash out.

Rather than trading on the exchanges like the NYSE, these REITs are like mutual funds because investors can buy or sell shares monthly based on their NAV subject to redemption limits.

In a letter to financial advisors that was forwarded to Barron’s, SREIT said it received repurchase requests equal to 3.2% of NAV in November. Based on the 2% monthly limit, it fulfilled 63% of investor redemption requests (0.63 times 3.2 equals 2). Any requests that weren’t filled will have to be made again in December, the letter said.

Nontraded REITS have monthly and quarterly redemption limits to protect them from having to liquidate sizable amounts of real estate or materially boost leverage in response to high redemption requests from investors.  

“These limits are designed to protect existing investors and the long-term health of the vehicle, and ultimately to maximize shareholder value,” SREIT wrote in its letter.

SREIT has a similar asset mix and fee structure to BREIT and has had comparable performance. SREIT, like BREIT, has the bulk of its assets in multifamily apartment complexes, followed by warehouses. These have been two of the strongest-performing sectors in the REIT industry in recent years.

SREIT’s year-to-date return through October was 10.2% on one of its share classes, comparable to the return of about 9% for BREIT.

Leading public apartment REITs like


Equity Residential

(EQR) and


Mid-America Apartment Communities

(


MAA

) are off by about 30% in 2022. SREIT’s annual base fee is 1.25% of net assets and a performance fee of 12.5% subject to a 5% hurdle rate. It has returned about 15% annually in the past three years.

The SREIT and BREIT asset bases are dominated by commercial real estate investments, which are less liquid than publicly traded securities. In its 10-Q, SREIT said it had $2.5 billion of immediate liquidity at the end of September, consisting of $1.7 billion of borrowing power and $800 million of cash.

Like BREIT, SREIT has grown rapidly in the past year as total assets rose to $30 billion in October from about $20 billion at year-end 2021. With around $15 billion of debt outstanding at the end of September, SREIT has a higher leverage ratio than comparable public REITs like Mid-America Apartment Communities,


AvalonBay Communities

(AVB), and


Prologis

(PLD), the biggest warehouse REIT. AvalonBay, for instance, has a similar enterprise value—market value plus net debt—as SREIT but has $8 billion of outstanding debt.

Still, retail investors have liked the performance of the nontraded REITs and ample dividend yields of about 4%. But putting limits on redemptions, or imposing a gate, can rattle investors and potentially prompt more withdrawal requests while making it difficult for the nontraded REIT to sell new shares to investors.

Keefe, Bruyette & Woods analyst Robert Lee wrote earlier this year that alternative managers are eager to attract “locked-up capital” from individual investors. While that is not an issue when times are good, he said, “there is a risk that in times of stress, individual investors may realize they aren’t so happy with the lack of access to their capital.”

While the liquidity limits are clearly disclosed in nontraded REIT literature, they haven’t been an issue until recently. This is how SREIT describes its redemption, or repurchase, plan:

“While you should view your investment as long term with limited liquidity, we have adopted a share repurchase plan, whereby on a monthly basis, stockholders may request that we repurchase all or any portion of their shares. Due to the illiquid nature of investments in real estate, we may not have sufficient liquid resources to fund repurchase requests. In addition, we have established limitations on the amount of funds we may use for repurchases during any calendar month and quarter.”

Write to Andrew Bary at andrew.bary@barrons.com

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