Starwood private REIT gating will lead others to ‘consider it’

Starwood CEO Barry Sternlicht said the redemption limits for the firm's SREIT are temporary. But similar limits could be also imposed on other private REITs.

Starwood Capital’s move to limit redemptions out of its cash-squeezed private REIT has so far made it an outlier, but other managers of such investment vehicles could consider taking similar action, PERE has heard.

“We think that others will consider it now that one of them has gated,” said Kevin Gannon, the chief executive of New Jersey-based investment bank Robert A Stanger. “[Redemptions have] eaten up their liquidity, by definition, and they’re going to hit a point where they’re going to say, ‘let’s lower the redemption level because we can, we’re entitled to do that and we’ll take the hit on fundraising’ – fundraising is fairly insignificant anyway.”

Starwood chief executive Barry Sternlicht last week wrote to stockholders in Starwood Real Estate Income Trust saying the firm would begin limiting share repurchases in May to 0.33 percent of net asset value per month, down from 2 percent. From July 1, the firm will limit share repurchases to 1 percent of NAV per quarter.

In making this change, SREIT now stands apart from other non-listed REITs, the managers of which are yet to instigate redemption limits beyond their original investor agreements.

Among other managers, KKR is not making any changes to the redemption limits at its private REIT, according to a representative at the firm. Meanwhile, there are no changes in the works for the sector’s biggest private REIT, Blackstone Real Estate Investment Trust, either. “It is business as usual at BREIT,” a Blackstone spokesperson said. “Its semiliquid structure is working as designed and we have no plans to amend our share repurchase program.” Brookfield’s REIT is also not limiting redemptions, according to a source familiar with the matter.

Similarly, no such limits are materializing at smaller private REITs. A source familiar told PERE there were no such plans to make changes at manager Sculptor’s smaller Sculptor Diversified Real Estate Income Trust, which launched last year, for example.

Starwood-founder Sternlicht said the change at the $9.9 billion REIT, the second largest of its kind behind BREIT, is temporary. It is likely to be in place for six to 12 months “in anticipation of a lower interest rate environment and improved real estate capital market,” he said in the letter. During the period of amended share repurchase, he added, the adviser would waive the 20 percent management fee.

“By not selling a meaningful number of real estate assets into this market and temporarily amending the share repurchase plan, we believe we are making the best decision to protect and maximize value for SREIT’s existing stockholders,” he wrote, noting that 80 percent of the stockholders – about 45,000 investors – have never redeemed.

In an statement, Sternlicht said SREIT maintains a sound balance sheet and is well positioned for the current environment. “We have built an exceptional portfolio of high-quality real estate – as evidenced by our same-store NOI growth in the first quarter which is best in our competitive set and more than twice that of the average non-traded REIT peer.”

Nonetheless, the gating move comes at a challenging time in terms of performance and for capital raising for non-traded REITs.

The Stanger NAV Total Return Index was down by -1.1 percent for the one-year period ending on March 31. By comparison, NAV REITs returned 8.5 percent and 8.3 percent, respectively, over three- and five-year periods. In its calculations, the report calculates total returns by a change in the REIT’s NAV and its net distributions per share. By comparison, New York-based data provider MSCI’s MSCI US REIT Index was up 1.74 percent during the year end on March 31 and down by -1.07 percent for the three years ending on March 31.

On the capital raising side, last year NAV REITs fundraising total hit -$6.2 billion, a steep drop from nearly $23.2 billion in 2022, per Robert A Stanger data. Overall, non-traded REITs reported $2.2 billion of fundraising year-to-date. The low fundraising is being outstripped by cash outs, too. Gannon told PERE last week that Blackstone, for example, raised $493 million for BREIT for the first quarter but redeemed $2.9 billion.

And while Starwood’s move to reduce redemptions will hurt its fundraising, Gannon said, the decision to wave management fees was a good compromise and made logical sense. “Whenever you gate redemptions, you’re going to have a difficult time raising money because no one’s going to want to put money into a deal where they know they’re going to be locked up. So we think that’s going to be a big negative for them to raise money going forward, but what you really want is for them to perform. You want the real estate to appreciate in value.”

Stanger estimates that unmet SREIT redemption requests reached $326 million at the end of April, or 3.5 percent of aggregate stockholder NAV. SREIT reported its liquidity sleeve was at $752 million as of the end of April, or just 8 percent of stockholder NAV. “To curtail redemptions, at this time, given that the liquidity has been bled out, we think it’s a smart thing to do,” Gannon said.