Macro

Starwood's $10bn Fund Draws $1.3bn Amid High Redemptions

Starwood taps over $1.3bn credit amid $10bn fund liquidity crisis, facing high redemptions and leverage concerns.

By Barry Stearns

5/16, 00:12 EDT
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Key Takeaway

  • Starwood's $10bn property fund faces liquidity crunch, drawing $1.3bn from its $1.55bn credit line amid high redemption requests.
  • Sreit's leverage ratio at 57% of gross assets, with a debt load of $15bn, complicates meeting withdrawals without asset sales.
  • Despite selling $2.2bn in property in 2023, interest expenses rose 12% to a record $154mn in Q1 2024 due to higher borrowing costs.

Liquidity Crunch Hits Starwood

Starwood Real Estate Investment Trust (Sreit), a $10bn unlisted property fund, is facing a liquidity crisis as it has drawn more than $1.3bn of its $1.55bn unsecured credit facility since the beginning of 2023 due to heavy redemption requests. With only about $225mn of cash left to draw, the fund could run out of credit and cash in the second half of this year without additional borrowing or asset sales. This situation highlights the challenges faced by private real estate investment trusts (Reits) in managing liquidity amid rising debt costs and concerns over real estate valuations.

Redemption Pressures and Asset Sales

Investors withdrew $2.6bn from Sreit last year, and redemptions remain at record highs. In contrast, Blackstone’s property fund, Breit, has seen a slowdown in redemptions, meeting monthly withdrawal requests in full for the first time since late 2022. Starwood granted only a portion of redemption requests in the first quarter of 2024, fulfilling $501mn out of $1.3bn asked on a pro-rata basis due to a cap on quarterly withdrawals. To address liquidity concerns, Starwood has announced plans to dispose of $1bn of property through special tax-efficient deals with wealthy individuals.

Leverage and Valuation Concerns

Starwood’s high debt load of $15bn, with a leverage ratio of 57% of its gross assets, is roughly twice that of public Reits. This high leverage complicates Starwood’s ability to meet withdrawals without affecting its leverage ratio. The fund's declared net asset value is down more than 16% from its September 2022 peak, and further property sales at lower valuations could worsen its debt metrics. Starwood’s interest expense rose 12% from the prior year to a record $154mn in the first quarter of 2024, highlighting the impact of rising debt costs.

Street Views

  • Phil Bak, Armada Investors (Neutral on private Reits):

    "Liquidity isn’t something that people think about on the way up but it can become a concern suddenly... When it comes to private Reits, liquidity concerns have been dismissed and they will become paramount again."