Starwood latest nontraded REIT with concerns

Making a widely anticipated move to limit shareholder redemptions, the Starwood Real Estate Income Trust Inc., with $9.8 billion in assets, yesterday announced it was cutting back the amount of shares it would buy back from its retail customers each month as it waits for the market for commercial real estate to rebound and interest rates to drop.

On Monday, the Wall Street Journal reported the dire straits that the Starwood REIT, known as SREIT, was facing. SREIT was trying to preserve its available cash and credit by limiting investor redemptions, according to the report. In the first quarter, the fund was hit with $1.3 billion in withdrawal requests but satisfied less than $500 million of them.

Essentially, the fund’s liquidity, consisting of cash, marketable securities and a bank line of credit, was drying up, according to the report. By limiting client redemptions of shares customers bought from financial advisors and may want to sell back to the REIT, SREIT intends to stabilize the company.

According to a filing with the Securities and Exchange Commission, SREIT has cut the amount of shares it is buying back from clients in its repurchase plan beginning this month, to 0.33% of stockholder NAV from 2%.

Beginning July, the quarterly redemption will decrease to 1% of stockholder NAV from 5%. SREIT stated in the filing that it intends the move to be temporary and is waving 20% of its monthly base management fees.

Non-traded REITs are public companies but aren’t registered on any public exchanges and don’t trade. As InvestmentNews reported in November, sales of non-traded REITs tanked last year, with the industry raising just $9 billion through September after successive years in which it took in more than $30 billion in new capital.   

The industry is facing a series of negatives: sharply rising interest rates, headlines about half-empty office buildings, and investors pulling their money from products, including SREIT.

The larger capacity to buy back significant amounts customer shares from clients was a key selling point for financial advisors when selling this generation of nontraded REITs, with the Blackstone Real Estate Income Trust Inc. the first such REIT to launch in 2016. SREIT followed two years later.

The previous generation of nontraded REITs were often managed by much smaller investor groups and did not have the scale of Blackstone and Starwood. Those were commonly criticized for overpromising and under delivering in terms of pricing, liquidity and performance. Unlike Starwood, Blackstone’s REIT has not lowered its monthly or quarterly redemption amounts.

The close to one-third decline in publicly traded REITs and the rise in interest rates has left many commercial real estate investors wondering what moves nontraded REITs like SREIT would make to shore up such companies.

“Therefore, after very careful consideration and thoughtful debate, we, along with SREIT’s Board of Directors, have made the decision to amend SREIT’s share repurchase plan, which we expect to be temporary,” the company said in a letter to shareholders signed by Barry Sternlicht, CEO of Starwood Capital Group, and Sean Harris, CEO of SREIT.

“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,” according to the letter. “Eighty percent of our stockholders – approximately 45,000 investors – since inception remain fully invested and have never redeemed.”

“This is how we would have done it ourselves,” stated Kevin T. Gannon, Chairman and CEO of Robert A. Stanger & Co. Inc. “SREIT was facing a decision to either dispose of assets at fire sale prices just to meet redemptions or deny investors liquidity to prevent unnecessary dilution. They instead did the right thing: lowering capacity to buy time to generate liquidity that is not dilutive.”

“The reduction in the management fee lets investors know that management feels their pain, and it lights a fire under SREIT to get back to normal share repurchase program capacity expeditiously,” Gannon added.