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  • Writer's pictureAndre Watson

Starwood, Other REITs Join Blackstone in Limiting Investor Withdrawals As Economic Concern Spreads

Requests To Cash Out Climb Amid High Inflation, Economic Uncertainty

Starwood Real Estate Income Trust’s most recent purchase included the Grand at Westside in Kissimmee, Florida. (CoStar)

Investor calls to cash out shares are quickly spreading across U.S. nontraded real estate investment trusts, with more REITs taking steps to suspend or limit redemptions as economic concerns grow.

At least three more REITs have disclosed moves to limit the cash dispersals through the buyback of shares since news broke late last week that Blackstone Real Estate Income Trust took such a step. And the efforts by REITS to hold onto cash also appear to be reducing property purchase volumes.

Among the latest to limit share repurchases is Starwood Real Estate Income Trust with a net asset value of about $26.2 billion. Starwood REIT is one of the largest owners of multifamily properties in the United States, with extensive holdings in Europe. The REIT reported to investors that it fulfilled 63% of investor redemption requests in November after the repurchase requests exceeded a 2% limit, reaching 3.2% of its net asset value, according to a report in Barron’s.

Starwood REIT declined to comment to CoStar News. Other REITs disclosing requests to have shares redeemed include GTJ REIT, and Hartman vREIT XXI, Securities and Exchange Commission filings show.

Hartman vREIT XXI reported suspending its share redemption program “in order to combat the impact of rising interest costs, inflation, recession uncertainty on free cash flow.” The REIT added that it would continue to consider the liquidity available to stockholders going forward, while GTJ reported redeeming $1 million in shares but received requests exceeding its limit of $2 million per year. As a result, GJT was unable to purchase all shares that investors presented for redemption.

The ability to redeem shares on a monthly basis is one reason investors are attracted to so-called NAV REITs such as those managed by Blackstone and Starwood, Kevin Gannon, chairman and CEO of investment banking firm Robert A. Stanger & Co., told CoStar News in an email.

“Investors in NAV REITs are more sophisticated than the earlier investors in lifecycle REITs and they allocate from one class of investments to another as market conditions dictate,” Gannon said. “In addition, NAV REITs have greater levels of liquidity compared to lifecycle REITs, offering 2% per month, 5% per quarter. That level of liquidity is good for those investors wanting to allocate to other assets or investments yet protects remaining investors from having to liquidate suddenly.”

Redemptions Follow Performance

The decision by more investors to cash out some nontraded REIT shares shows they are behaving rationally, Christopher Lucas, managing director and lead REIT analyst for Capital One Securities, told CoStar News in an email.

“When investors get their various investment statements and look at the performance of every liquid investment what they will see is poor performance with a high degree of correlation,” Lucas said. “Except for the nontraded investment — which, as a result of the poor stock and bond performance, has now become a much larger piece of their overall portfolio. It makes sense for investors to rebalance — which comes at the expense of having to redeem shares in their illiquid investment.”

Blackstone and Starwood have attracted huge sums of money this year, with Blackstone raising $15.8 billion in the first nine months through issuance of common stock, up slightly from $15.2 billion in the same time a year ago, according to its latest quarterly report. However, the pace of fundraising started slowing in the third quarter. It had declined from an average of about $6 billion per quarter in the first half of 2022 to $3 billion in the third quarter.

Starwood had raised $4.2 billion in the first nine months compared to $3.6 billion for the same time last year. Its fundraising pace also slacked off in the third quarter from an average of about $1.55 billion per quarter in the first half to $1 billion in the third quarter.

Both REITs have reported that repurchase requests have surged this year. Blackstone reported repurchasing $6.4 billion of shares through the first nine months of this year, compared to just $843 million in same time last year. About $3.5 billion of this year’s total came in the third quarter.

Starwood reported repurchasing $567.6 million in the first nine months of this year, compared to $39 million in the same time last year. About $403 million of that came in the third quarter.

Starwood and Blackstone’s November redemption numbers showed requests coming even at a faster clip that the third quarter, prompting the limit on redemptions going forward.

Even without accounting for new fundraising through share sales going forward, and now caps on how much they will redeem, Gannon noted that the REITs should have several quarters of cushion before they would need to liquidate assets.

However, given increased calls for redemption from investors, Blackstone REIT is showing a willingness to sell properties. Last week, the REIT said it is selling its 49.9% interest in the MGM Grand Las Vegas and Mandalay Bay Resort and Casino real estate to its partner Vici Properties for $5.5 billion.

Both Blackstone REIT and Starwood REIT have noticeably slowed property purchases since July from the first half of the year and from the second half of last year. The two REITs have completed just $3.1 billion in purchases since July 1, according to CoStar data. That compares to $17 billion in the first half of the year and $17.6 billion in the second half of last year.

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