Real Estate Investment Trusts

Nontraded REITs: Facing Hurdles Amid Higher Interest Rates and Market Challenges

Nontraded REITs (Real Estate Investment Trusts) are encountering significant obstacles in today’s economic climate. Factors such as rising interest rates, headlines about half-empty office buildings, and investors pulling their money from these products have created a challenging environment. 

This blog explores the current state of nontraded REITs, with a specific focus on the recent developments surrounding the Starwood Real Estate Income Trust Inc. (Starwood REIT).

Starwood REIT’s Move to Limit Shareholder Redemptions

On May 24, 2024, Starwood Real Estate Income Trust Inc., a nontraded REIT with $9.8 billion in assets, announced it was limiting shareholder redemptions. This decision aims to stabilize the fund as it waits for the commercial real estate market to rebound and interest rates to decrease. 

The Wall Street Journal reported earlier in the week about the dire straits the Starwood REIT is facing. The fund is working to preserve its available cash and credit by limiting investor redemptions.

In the first quarter of this year, Starwood REIT was hit with $1.3 billion in withdrawal requests but could satisfy less than $500 million of them. According to the report, the fund’s liquidity, consisting of cash, marketable securities, and a bank line of credit, was drying up. By limiting client redemptions, Starwood REIT intends to stabilize the company and protect its existing stockholders.

Changes in Repurchase Plans

According to a filing with the Securities and Exchange Commission, Starwood REIT has cut the amount of shares it buys back from clients in its repurchase plan beginning this month. The monthly buyback rate was reduced from 2% of stockholder NAV to 0.33%. Starting in July, the quarterly redemption will decrease from 5% of stockholder NAV to 1%. Starwood REIT stated in the filing that it intends this move to be temporary and is waiving 20% of its monthly base management fees to alleviate some of the impact on investors.

Industry Challenges and Comparisons

Nontraded REITs, unlike their publicly traded counterparts, are not registered on any public exchanges and do not trade. This has historically provided a stable investment option for investors, but the industry is currently facing a series of negative factors. These include sharply rising interest rates, concerns about half-empty office buildings, and increasing investor withdrawals.

The ability to buy back significant amounts of shares from clients was a key selling point for financial advisors when promoting this generation of nontraded REITs. The Blackstone Real Estate Income Trust Inc. (Blackstone REIT), launched in 2016, was the first of these REITs, followed by Starwood REIT two years later. The previous generation of nontraded REITs, often managed by smaller investor groups, were criticized for overpromising and under-delivering regarding pricing, liquidity, and performance.

Unlike Starwood REIT, Blackstone’s REIT has not lowered its monthly or quarterly redemption amounts, highlighting the different strategies employed by these major players in the nontraded REIT market.

Strategic Decisions and Market Impact

The decline in publicly traded REITs and the rise in interest rates have left many commercial real estate investors wondering what moves nontraded REITs like Starwood REIT would make to shore up their companies. In a letter to shareholders, Barry Sternlicht, CEO of Starwood Capital Group, and Sean Harris, CEO of Starwood REIT, explained the decision to amend Starwood REIT’s share repurchase plan.

“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 Starwood REIT’s existing stockholders,” the letter stated. This decision aims to prevent unnecessary dilution and preserve the value of Starwood REIT’s assets.

Kevin T. Gannon, Chairman and CEO of Robert A. Stanger & Co. Inc., commented on Starwood REIT’s move: Starwood REIT “…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.”

Questions About Nontraded REITs?

The challenges faced by nontraded REITs like Starwood REIT underscore the importance of strategic decision-making in maintaining stability and protecting investor value. While the current environment presents significant hurdles, temporary measures such as limiting redemptions can provide the necessary time to navigate these challenges.

For investors seeking expert legal advice on navigating the recent complexities of nontraded REITs, Reif Law Group is here to help. Contact us today with any questions or concerns you may have about your REIT investments.