Recent moves by two non-traded REIT sponsors to anticipate rising redemption requests for their non-traded REITs may spook some investors. However, industry analysts said both companies are doing the right thing for their shareholders.
after facing increased redemption requests for over a year, the net asset value REIT industry is currently testing the limits of its liquidity feature, a process that will likely take at least another 12 months, noted Kevin T. Gannon, chairman and CEO of the investment banking firm Robert A. Stanger & Company. The process may result in new liquidity structures. At the same time, he points out that “constrained liquidity means just that,” Gannon wrote in an email. “Make sure you have other sources of liquidity.”
Like other semi-liquid vehicles, non-tradable REITs have limitations on redemptions. A typical non-traded REIT structure limits redemptions to 20% per year, 5% per quarter and up to 2% per month. However, claims raised over long periods of time may place non-tradable REITs in a position of having to sell assets in order to generate liquidity to meet redemption requirements. In a commercial real estate transaction market that is still largely dormant and at low values at cyclical peaks, non-trading managers may find themselves selling their best assets or offloading lower-quality properties. with difficult prices. This can create a vicious cycle in which a non-tradable REIT's portfolio deteriorates, leading to more investors wanting to head for the exits.
Two asset managers, Starwood Capital Group and KKR, are adopting different tactics to prevent that scenario.
In a May 23 letter to shareholders, executives at Starwood REIT (SREIT), a non-traded REIT sponsored by Starwood Capital Group, noted that while redemption requests have fallen from their peak a year and a half ago, requests continue to exceed the monthly and quarterly limits of the company's share buyback plan. The REIT's management and board of directors said they believe now is not the best time to sell assets to meet these obligations, so they have limited share repurchases at 0.33% of NAV per month and 1.0% of NAV in quarterly. Using the NAV as of April 20, 2024, these limits amount to approximately $33 million in available monthly liquidity and $100 million in quarterly liquidity. SREIT expects to maintain lower repurchase limits for six to 12 months, during which time it hopes lower interest rates and a better real estate environment will make asset sales more attractive. In connection with the lower redemption threshold, Starwood will waive 20% of its management fee during this period of limited capacity.
“By not selling a significant number of properties in this market and temporarily changing the stock repurchase plan, we believe we are making the best decision to protect and maximize value for SREIT's existing shareholders,” the letter said. SREIT.
The company declined further comment.
Year to date, SREIT has returned 1.67% on its Class I shares, with its monthly NAV at $22.87 per share. In April, the most recent month for which data is available, SREIT posted a 0.21% loss in its Class I shares.
Taking an alternate route
Meanwhile, asset manager KKR announced on June 4 that if the NAV per share of KKR Real Estate Select Trust Inc. (KREST) falls below $27 on June 1, 2027, the company's management will cancel up to 7.7 million shares it owns to keep the NAV at $27, with the value of the canceled shares accruing to shareholders. The stock is currently valued at around $200 million. KKR will also provide the REIT with up to $50 million to meet redemption requests and other needs.
KREST's NAV currently stands at $25.94 per share. Year-to-date, its Class I shares suffered a loss of 2.03%, while the REIT delivered a total return of 4.58% over a three-year period.
“KREST's shareholder priority plan and additional investments reflect our strong conviction in KREST and our belief that this is a good time to invest in the real estate market,” KKR executives said in a statement. “This commitment allows KKR to make an attractive opportunistic investment while enabling all KREST shareholders to look beyond short-term volatility and remain invested for the benefit of a potential real estate recovery.”
It is estimated that the Shareholder Priority Plan would help protect KREST shareholders from a potential decline in value of up to 16%.
According to Luke Schmidt, vice president of research with Blue Vault Partners, KKR and Starwood are trying new tactics to prevent redemption problems from snowballing, which is likely to put their REIT shareholders in a more advantageous position than those of REITS that have suspended their buyback programs.
“The numbers of rejected repurchase requests will be very high at the next announcement, but by deploying their capital, they are trying to ease some of the concerns and get back to normal operations,” Schmidt wrote in an email.
“With Starwood and KKR, it seems to me that they are trying to do right by their shareholders who want to stay in the fund and believe in its future,” he added. “If they kept their policies as before, they would be forced to sell some of their assets to fund these repurchases, likely at a discount, which would hurt the REIT's long-term interests and returns. to their most loyal shareholders.”
In a note on KKR's announcement, Gannon called it a “smart and bold move to provide enhanced protection for returns” and noted that it could help the REIT's future fundraising efforts.
David J. Inauen, head of research at Stanger, added that KKR is sending a message that it would rather not take advantage of current investments and wants to continue to put capital to work, which is likely to benefit KREST shareholders.
On Monday, Stanger also upgraded SREIT's rating to “market perform,” highlighting its strong operating fundamentals and growth profile.
SREIT's decision to reduce repurchase capacity carries short-term risk, Inauen wrote in that note. However, according to Stanger, it still makes sense to include SREITs in a REIT investment portfolio.