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Non-traded REITs Tinker with Liquidity Features to Address Redemption Requests

Industry analysts view KKR's and Starwood's recent moves to respond to redemption requests on their non-traded REITs as positive for shareholders.

Two non-traded REIT sponsors' recent moves to anticipate rising redemption requests for their non-traded REITs might spook some investors. Still, industry analysts said the two 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 investment banking firm Robert A. Stanger & Company. The process might result in new liquidity structures. At the same time, it underlines that “limited liquidity means just that,” Gannon wrote in an email. “Make sure you have other sources of liquidity.”

Like other semi-liquid vehicles, non-traded REITs have caps on redemptions. A common non-traded REIT structure caps redemptions at 20% annually, 5% percent quarterly and up to 2% monthly. However, elevated requests for long periods of time can put non-traded REITs in a position of having to sell assets in order to create liquidity to meet redemption requests. In a commercial real estate transaction market that is still largely dormant and with values well off cyclical peaks, non-traded managers could find themselves having to either sell their best assets or offload lower-quality properties at distressed prices. That can create a vicious cycle in which a non-traded 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 letter to shareholders dated May 23, executives with Starwood REIT (SREIT), a non-traded REIT sponsored by Starwood Capital Group, noted that while redemption requests have declined from their peak a year and a half ago, requests continue to exceed the company’s share repurchase plan’s monthly and quarterly limits. The REIT’s management and board of directors said they feel now is not the most advantageous time to sell off assets to meet these obligations, so they have limited share repurchases to 0.33% of NAV per month and 1.0% of NAV per quarter. Using NAV from April 20, 2024, these limits total approximately $33 million in available monthly liquidity and $100 million in quarterly liquidity. SREIT expects to keep the lower redemption caps in place for six to 12 months, at which time it hopes lower interest rates and a better real estate environment will make selling assets more attractive. In conjunction with the lower redemption threshold, Starwood will waive 20% of its management fee during this limited capacity period.

“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 SREIT’s existing stockholders,” SREIT’s letter stated.

The company declined further comment.

Year-to-date, SREIT has delivered a return of 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 loss of 0.21% on its Class I shares.

Taking a An Alternate Route

Meanwhile, asset manager KKR announced on June 4 that if its KKR Real Estate Select Trust Inc.’s (KREST) NAV per share falls below $27 June 1, 2027, the company’s management will cancel up to 7.7 million shares it owns to keep NAV at $27, with the value of the canceled shares accruing to shareholders. The shares are currently valued at approximately $200 million. KKR will also provide the REIT 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 experienced a loss of 2.03%, while the REIT delivered a total return of 4.58% over a three-year period.

“The KREST Shareholder Priority Plan and additional investment reflects our strong conviction in KREST and our belief that this is a good time to be investing 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 the near-term volatility and remain invested for the upside of a potential real estate recovery.”

It is estimated that the Shareholder Priority Plan would help protect KREST’s shareholders from potential value declines 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 issues from snowballing, which likely puts their REIT shareholders in a more advantageous position than those of REITS that have suspended their redemption programs.

“The rejected redemption request numbers will be very large with the next announcement, but by putting up their own capital, they’re trying to ease some of the worries and get back to normal operations,” Schmidt wrote in an email.

“With Starwood and KKR, it appears to me that they’re 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 off some of their assets to fund these redemptions, likely at a discount, which would hurt the REIT’s long-term interests and the returns of their more loyal shareholders.”

In a note on KKR’s announcement, Gannon called it a “smart and bold move to offer enhanced downside protection for returns” and noted that it might help the REIT’s future fundraising effort.

David J. Inauen, head of research at Stanger, added that KKR is sending a message that it would rather not cash out of current investments and wants to continue to put capital to work, which will likely benefit KREST’s shareholders.

On Monday, Stanger also upgraded SREIT’s rating to “market perform,” emphasizing its strong operating fundamentals and growth profile.

SREIT’s decision to reduce redemption capacity does carry near-term risk, Inauen wrote in that note. However, in Stanger’s view, it still makes sense to include SREIT in a REIT investment portfolio.

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