One Of America's Biggest REITs Is Seriously Strapped For Cash

Starwood Capital Group's SREIT, founded in 2018, grew its overall value to an estimated $10 billion by early 2024. However, one of America's biggest REITs is now firmly stuck between a rock and a hard place. This year has been very difficult for SREIT, which suddenly finds itself struggling for cash in a challenging real estate market characterized by higher borrowing costs, fewer asset buyers, and a massive influx of investor redemption requests.

The Wall Street Journal, quoting various regulatory report filings, reported that SREIT received $1.3 billion worth of investor redemption requests in the first quarter of 2024. The same filing shows that SREIT has paid out less than $500 million of those requests. This situation is similar to the one Blackstone REIT faced last year when it limited investor redemptions for several quarters in 2023.

Despite not having paid nearly two-thirds of the first quarter's redemption requests, SREIT is still facing a severe cash crunch. It has three main sources of liquidity: cash, a credit line, and a portfolio of securities they could sell if they choose. As recently as 2022, SREIT's total liquidity was $2.2 billion before shrinking by almost half to $1.1 billion by the end of 2023. The current balance is only $750 million.

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Not only are those numbers trending the wrong way, but they are doing so at the worst possible time. It's not unusual for investors to make redemption requests in a down market, but the current state of the real estate market leaves SREIT with three equally unappealing options for easing its liquidity crisis. The first option is to sell off assets from the portfolio.

Unfortunately, it's very much a buyer's market right now, because there simply aren't a lot of buyers out there. Very few institutional buyers would be interested in buying assets from SREIT at the top of the market prices, especially considering current interest rates. So, any asset sale from SREIT at this point would likely require discounting price(s), which will only further decrease investor confidence in the fund.

 The second option is also unpalatable. SREIT could halt investor redemptions, but most analysts think such a move would devastate its ability to raise funds in the future. After all, how does a REIT limit redemptions and then ask those same investors to provide more investment capital for future acquisitions a few years later?

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SREIT's management also understands that limiting redemptions would only be a temporary fix. That's because as soon as SREIT reauthorized redemptions, it would find an even larger group of them requesting redemptions and heading for the exit doors with their capital. That brings SREIT to their third, and equally distasteful option for raising money: borrowing.

 It's one thing to borrow money to buy an asset and grow it in value. However, borrowing money to pay off redemption requests is the proverbial equivalent of robbing Peter to pay Paul. That's especially true considering that SREIT would likely need to borrow between $500 million and $1 billion to ease its liquidity crisis. However, today's sky-high interest rates are as big an impediment to borrowing for REITs as they are for first-time homebuyers.

The debt service on a loan that size at today's interest rates would be like a stone around SREIT's neck, constantly dragging the fund's performance down with a giant line item that serves no real benefit from a wealth-building perspective. Then there is the troublesome issue that SREIT's current debt-to-asset ratio is already 57%. Not only is that higher than many competing funds, but borrowing more would push the ratio into the danger zone.

Industry analysts and real estate investors alike will be watching SREIT very carefully because the fund's next move could have serious long-term implications for the future of REIT investing. In the past, investors could rely on big funds like SREIT to deliver reliable returns and relatively low risk. If SREIT can't find a way out of its current troubles, investor confidence in REITs could suffer severely. 

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