Starwood Capital Hemorrhages Cash at Investors Expense
Published On: June 12, 2024

Last month, Starwood Capital Group announced a significant change in their buy back policy of the company’s $10 billion fund, Starwood Real Estate Income Trust (SREIT). On Thursday, May 23rd, Starwood’s owner, Barry Sternlicht, and CEO, Sean Harris, stated that the company would only buy back 1% of the value of the fund’s assets each year, a sharp drop from the previous 5%. This drastic change is the result of the rapidly depleting liquid assets at the fund’s disposal and the growing number of redemption requests from investors.

Real Estate Investment Trusts (REITs) give individuals the opportunity to invest in large, income producing real estate, such as office buildings, apartment complexes, hotels, and warehouses. They can be very lucrative investments for those looking to diversify their portfolio, without having to buy, operate, and maintain commercial real estate. As with any investment, they come with their fair share of risks, such as lack of liquidity and share value transparency, and they are certainly not immune to changes in the real estate market. Often, they are publicly traded entities.

That is where SREIT and Blackstone’s BREIT differ from others, as they are both privately held, also known as nontraded real-estate investment trusts. Both private REITs launched in 2017 and became increasingly popular when interest rates were low due to their 5% dividend payout. However, interest rates did not remain low and a force of nature flipped the financial market on its head. A global pandemic forced most people to not only stay home but also work from home, leading to a sharp decline in commercial occupancy. Apartments were left empty as renters could not afford to live there, and restrictions imposed on hotels and restaurants limited revenue.

REIT Investors were not seeing the returns they were used to, as the properties were not as profitable as they were pre-pandemic. In 2022, the Federal Reserve added to the headache when they announced the raising of interest rates. As the pandemic came to a close and the world began to look like it did prior to 2020, the commercial real estate sector is struggling to achieve the same gains they have previously enjoyed.

Starwood’s SREIT Faces Liquidity Crisis Amid Surge in Redemption Requests

Starwood’s SREIT is no exception and the fund’s liquid assets pales in comparison to the number of investors looking to cash out. According to a recent Wall Street Journal article on the matter, the fund totaled $752 million at the end of April 2024, a stark contrast to the $1.1 billion reported the year prior. What’s more alarming is the fact the fund was reportedly $2.2 billion at the end of 2022, twice the amount reported less than 6 months later. It’s clear Starwood has a serious problem and it’s no surprise the company chose to make the decision to decrease the buy back percentage from 5 to 1. They don’t have enough money to keep the fund afloat and fulfill the long list of redemption requests at their feet.

Their attempts to protect the fund come, once again, at the cost of the investor. They’re focused entirely on ensuring the fund and the company survives, not to pay the money their investors are rightly entitled to. It is an unfortunate but not uncommon occurrence with this investment type. The REIT structure was first enacted by Congress in 1960 for the purpose of creating a new source of capital for the real estate market. It took less than 15 years for overzealous investing to lead to the first REIT failure in the mid-1970’s. In 1998, Criimi Mae, a non-investment grade commercial mortgage REIT declared bankruptcy after they failed to raise additional capital at a time of turmoil in the market. Just ten years later, REITs played a significant role in the 2008 Financial Crisis.

Despite the potential benefits of REIT’s, the risks have proven to be exceptionally high, and to the detriment of the investor. When the market is more volatile, companies like Starwood and Blackstone will wash their hands of any responsibility and prioritize their own self-interest. That is why Starwood changed the SREIT funds buy back policy and why many of their investors will not see the money they are entitled to. The fund hemorrhaged money due to Starwood’s inability to plan for potential changes in the market, despite decades of data suggesting that drastic shifts can occur at any time. Now, they are trying to salvage a sinking ship, while the average investor is left in the water.

Investments of any kind come with a certain amount of risk. If you invested in Starwood’s SREIT between 2017 and 2022 at the recommendation of your financial advisor and have been unable get your money back, you may have a claim to pursue through FINRA arbitration. Call Stoltmann Law Offices at 312-332-4200 for a free, no obligation, initial consultation with an experienced securities attorney. We are a contingency based law firm, which means we don’t get paid until you do.

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