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Starwood REIT Reduces Capacity on Share Redemptions

Starwood Real Estate Income Trust, Inc. (“SREIT”), the second largest non-traded net asset value real estate income trust with nearly $9.8 billion in aggregate NAV, has lowered the capacity under its share repurchase plan (“SRP”), beginning with May 2024 redemptions.

The monthly redemption limit will decrease to 0.33% of stockholder NAV as of the end of the prior month, and, beginning on July 1, 2024, the quarterly redemption will decrease to 1% of stockholder NAV as of the end of the prior quarter.

The previous capacity limits in place were 2% of stockholder NAV monthly and 5% quarterly. SREIT has stated that it intends the move to be temporary. In connection with the lowered capacity limits, SREIT is waving 20% of its monthly base management fees until the prior capacity levels are reinstated.

“This is how we would have done it ourselves,” stated Kevin T. Gannon, chairman and chief executive officer of Robert A. Stanger & Co. an investment banking firm that specializes in non-traded alts. “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 SRP capacity expeditiously.”

SREIT has been plagued by negative fund flows going back to Q4 2022, when it first began to prorate shareholder redemption requests. In April 2024, SREIT reported that it was only able to satisfy 37% of redemption requests – an increase from the mere 24% SREIT satisfied in March 2024. Stanger estimates that unmet redemption requests totaled $326 million at the end of April, or 3.5% of aggregate Stockholder NAV. The decision to lower its SRP capacity comes after SREIT recently reported that its liquidity sleeve totaled $752 million as of the end of April, or just 8.0% of stockholder NAV.

At one point, SREIT amassed an aggregate NAV that exceeded $14 billion by aggressively pursuing a strategy to acquire growth real estate, with a heavy emphasis on residential properties and by using more aggressive leverage than most of its NAV REIT peers at a time when residential debt financing was much cheaper. However, rising inflation ultimately led to hawkish monetary policy, and higher interest rates began to take their toll on residential property valuations.

According to Stanger, as interest rates began to rise sharply in 2022, investor’s share redemption requests began to pile up, and, in Q4 2022, redemption requests totaled 6.7% of stockholder NAV, exceeding the 5% quarterly capacity limit of the SRP, leading to proration. With fundraising drying up, SREIT turned to asset dispositions to find capital to return to shareholders, divesting $2.2 billion of properties in 2023. As previously reported by The DI Wire, SREIT has borrowed more than $1.3 billion from its $1.55 billion unsecured credit facility since the beginning of 2023 due to high redemption demands. Stanger reports that total indebtedness for the REIT exceeds $15 billion.

Starwood Real Estate Income Trust launched in December 2017 and invests in stabilized real estate across the United States and Europe.

Robert A. Stanger & Co., Inc., founded in 1978, is an investment banking firm specializing in providing investment banking, financial advisory, fairness opinion and asset and securities valuation services to partnerships, real estate investment trusts, and real estate advisory and management companies in support of strategic planning and execution, capital formation and financings, mergers, acquisitions, reorganizations, and consolidations.

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