Starwood Real Estate Income Trust Imposes Tighter Redemption Limits

Starwood Real Estate Income Trust (SREIT), a $10 billion fund managed by Barry Sternlicht’s Starwood Capital Group, is implementing stricter limits on investor withdrawals. The fund will now cap monthly redemptions at 0.33% of its net asset value and 1% per quarter, a significant reduction from the previous limits of 2% per month and 5% per quarter.

The new restrictions are expected to last between six months and a year. Starwood Capital Group has emphasized that these measures are necessary to avoid selling assets at discounted prices, which could harm overall shareholder value.

In a letter to shareholders, Barry Sternlicht and SREIT CEO Sean Harris stated, “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.”

To offset the impact of these restrictions, Starwood Capital Group will reduce its management fees for the duration of the new limits.

The decision comes as the commercial property market grapples with the effects of prolonged higher interest rates. SREIT, along with other major real estate income trusts like Blackstone Real Estate Income Trust (BREIT), has faced increasing pressure since the latter half of 2022 when investor redemption requests surged. Last October, SREIT’s redemption requests surpassed the 2% threshold, leading to unmet requests in subsequent months.

The pressure briefly subsided at the end of 2023 as it seemed the Federal Reserve might soon lower interest rates. Redemption requests dropped to $314 million in December 2023, from a peak of $715 million in January of the same year. However, recent economic strength has led policymakers to signal that rate cuts may not be imminent, complicating the outlook for real estate investments.

Sternlicht acknowledged the challenges in an emailed statement: “This was a very hard decision to make, but having managed through six major downturns over our 30-year history, we believe we are making the best decision for all shareholders. We anticipate the real estate markets are bottoming and will continue to improve from here, so further leveraging the vehicle or selling our portfolio’s assets to meet monthly redemptions would negatively impact all investors.”

Despite the optimism, SREIT continues to experience significant outflow pressures. In April, shareholders requested $518 million in redemptions, but the fund only managed to pay out approximately $192 million.

As of the end of April, SREIT reported $752 million in liquidity, which includes $275 million in an undrawn credit line. With the liquidity situation tightening, Starwood executives faced a difficult choice between selling assets, increasing borrowings, or limiting redemptions. They opted for the latter to maintain the fund’s financial stability.

Information for this briefing was found via Bloomberg, The Wall Street Journal, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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