Starwood's $10 Billion Real Estate Fund is Using the Credit Line as Investors Withdraw Money - Latest Global News

Starwood’s $10 Billion Real Estate Fund is Using the Credit Line as Investors Withdraw Money

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A $10 billion U.S. real estate fund is running low on liquidity as investors demand their money back, marking a reckoning for a sector reeling from rising debt costs and fears about property valuations.

Starwood Real Estate Investment Trust (Sreit), one of the largest unlisted real estate funds, has drawn down more than $1.3 billion of its $1.55 billion unsecured credit facility since early 2023 following numerous redemption requests.

The fund, managed by Barry Sternlicht’s Starwood Capital, started 2023 without drawing on the credit line. However, the company only has about $225 million remaining, according to the latest filings this week.

At the current pace of repayments, Sreit would run out of loans and cash in the second half of this year unless she takes out more loans or sells more real estate assets.

Both the Starwood fund and a larger Blackstone Group rival raised and invested tens of billions of dollars in commercial real estate just before U.S. interest rates began rising in 2022, generating significant fees for their private equity owners and financial advisers who the funds sell to wealthy customers.

Unlike listed real estate funds, where investors are free to sell shares on the open market, private Reits are able to control withdrawals and avoid fire sales of assets.

Still, despite growing concerns about real estate valuations, investors have managed to withdraw billions annually from the Starwood and Blackstone funds.

Last year, investors withdrew $2.6 billion from Sreit and $12.4 billion from Breit, Blackstone’s real estate investment trust. While redemptions at Breit have slowed significantly in recent months, allowing the company to fully service monthly payout requests for the first time since the end of 2022, redemptions at Sreit remain at record highs.

Blackstone has convinced some investors that it can weather the commercial real estate storm, in part because it has less exposure than Starwood to sectors like U.S. housing and more exposure to hot areas like data centers.

In the first quarter of 2024, Miami-based Starwood granted a decreasing portion of redemption requests. Investors demanded $1.3 billion of their money back, but received only $501 million pro rata because quarterly withdrawals were capped at 5 percent of net assets. In March, only about a quarter of these requests were granted.

The Reit’s total liquidity was $752 million as of April 30, comprised of $446 million in cash on hand, $225 million in available borrowings under its credit facility and, according to a securities filing on April 30 about $45 million in debt securities available for sale combined Wednesday. However, a separate filing on Monday revealed that Sreit had to make nearly $200 million in additional redemptions on May 1, quickly depleting that cash balance.

“Liquidity is not something people think about on the way up, but it can suddenly become a problem,” said Phil Bak, CEO of Armada Investors, which invests in listed real estate funds. “When it comes to private Reits, liquidity concerns have been addressed and they will come first again.”

Starwood declined to comment.

A person familiar with the fund said it would have more liquidity later this month after asset sales that would be completed soon. Starwood could sell other assets to raise money, this person said. The fund has also announced a plan to divest $1 billion in real estate through special tax-efficient deals with high-net-worth individuals.

The situation also highlights the debt and valuation metrics at Sreit, which invests in residential real estate as well as industrial warehouses and self-storage facilities. The portfolio includes apartment blocks in Arizona and logistics centers in Norway. This also includes a loan to Blackstone for the takeover of the Australian hotel and casino group Crown Resorts.

U.S. apartment rents could come under pressure this year as a record supply of new homes hit the market in 2024, according to Yardi Matrix, a real estate data provider. Such forecasts have weighed on valuations of public Reits investing in multifamily properties across the U.S., with shares of Mid-America Apartments and Camden Property Trust down by more than a third from their peaks in late 2021.

Starwood’s reported net asset value is down more than 16 percent from its September 2022 peak of nearly $10 billion. Private funds have largely refused to reduce their net asset value as much as exchange-traded funds have lost value.

Starwood’s heavy debt load of $15 billion also compares unfavorably with borrowings from public Reits, giving the company a leverage ratio of 57 percent of its gross assets, about twice that of public peers. Restrictions on how much more leverage the company could take on complicate its task of managing withdrawals: to keep the leverage ratio stable, the company would have to sell about $1.1 billion in real estate to raise $500 million after paying off the debt Generate US dollars for withdrawals.

The group sold $2.2 billion worth of properties in 2023. Should it make further property sales at lower valuations than anticipated, a downward revaluation of its assets would also worsen its debt metrics.

Even after last year’s real estate sales, Sreit’s interest expense rose 12% year-over-year to a record $154 million in the first quarter of 2024, driven by additional borrowings under its credit facilities, on which the company charged interest pays more than 7.5%.

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