CRE Bank Exposure & Starwood's Redemption Song

Starwood’s Redemption Song

Investors worried about the property market want out of Starwood’s private REIT, but Starwood is running out of funds to hand back to them.

The $10B SREIT has just $225M of cash to draw on its credit line, according to new filings, after massive redemption requests saw it tap into $1.3B of a $1.55B credit facility since the beginning of last year. Last year, investors withdrew $2.6B from SREIT. Its multifamily concentration, once a big talking point, has turned into a fear factor 😨 for investors.

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Starwood (cont.)

The new data show the race-against-time pressure SREIT is under. In Q1 of this year, investors asked Starwood for $1.3B of their money back, but Starwood only returned $500M, given a cap on withdrawals set at 5 % of net asset value (which is down 16% from ‘22 highs).

“Liquidity isn’t something that people think about on the way up but it can become a concern suddenly,” Phil Bak, whose Armada ETFs invests in listed REITs, told the FT. “When it comes to private REITs, liquidity concerns have been dismissed and they will become paramount again.”

Now, Starwood could certainly sell assets to raise cash and boost its liquidity – per the FT, a couple of deals are already in the works. But speed is the thing here – SREIT was due to meet nearly $200M in redemptions on May 1. And any fire sales would lead to a painful reappraisal of its NAV, which would make it all worse. I reached out to Hunter over at Lewis Enterprises (the ten31 posse gets 40% off on his annual sub here) for his take 👇️ 

The highlight here is the Faustian bargain of setting the NAV. One way to turn outflows to inflows would be to lower the NAV (aka accept reality). The lower share price would presumably attract buyers that would level the supply-demand imbalance for the fund. BUT the gating structure which limits the redemptions to percentage of NAV would go UP, meaning more dispositions as a % of total fund value would be needed to clear the queue. BREIT [Blackstone’s pvt REIT] kind of stabilized by allocating more to more liquid instruments (CMBS etc) so that redemptions could be more easily met. They also took a miniscule NAV haircut but I don't think that really mattered much. The leverage profile of SREIT also makes lowering NAV tricky without potentially tripping debt covenants on the credit line it’s using to meet redemptions.”

Look, I get that SREIT stuff is technical and eye-glazey. But it’s important context to have when Sternlicht goes on his doomsday rants. 

Rebel With a Cause

Finance prof Rebel Cole (great name) has dropped the latest iteration of his much buzzed-about analysis of bank exposure to CRE. Using publicly available Call report data from the FFIEC, Cole crunches the exposure to mortgages and construction loans, as well as unused commitments to fund such loans. Some nuggets: Flagstar ($113B in assets) has $9.3B in total equity, but a whopping $51B of CRE exposure (553%). Condo construction darling Bank OZK has $5.3B in equity, but $33B in CRE exposure (621%). And OZK has no plans to slow down, with CEO George Gleason saying in a new interview that “we're getting a much larger share of the pie right now, but it's just a smaller pie.” 🥧 

Regulators use the exposure ratio to get a sense of bank health; anything over 300% raises eyebrows. Per Cole, 67 of the country’s large banks (defined as >$10B of assets) exceed that threshold. Predictably, some bankers wish Cole would just go away – his analysis has provoked ire in the past 🌶️ 

What’s Debt Between Yeshiva Buddies?

A little cholent 🍲 via the wind-down entity for Yoel Goldman’s All Year Holdings: it alleges that when Goldman was in charge of the once high-flying development firm, it issued a $3.3M loan in ‘18 to his yeshiva buddy Yoel Silberstein. The loan matured a year later, accruing 16% interest, per TRD - but Silberstein didn’t make good on it.

Instead, in late ‘20, Goldman signed a hand-written agreement (in Hebrew) forgiving the debt 👏 , stating that he had owed Silberstein money for a couple of syndication deals and for brokering peace between him and Toby Moskovits and Michael Lichtenstein of Heritage Equities. For Silberstein’s time and troubles, per Goldman, they were all square 🤝 

However, Goldman had no right to make such a side deal, restructuring officers allege, and the agreement was never disclosed to All Year’s long-suffering Israeli bond investors (catch up here). As things stand today, the restructuring entity for the bankrupt firm has sold off most of the its major holdings – valued at $1B+ at All Year’s pomp.

(Bonus: To better understand the world of Brooklyn’s Hasidim RE power players, start w/ this epic.)

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The Full Monty

An ugly fight for control is playing out at hotel magnate Monty Bennett’s Ashford Hospitality Trust: Bennett and another board member failed to receive the necessary votes for reelection and were forced to resign. However, they were almost immediately reinstated by the board, which cited a “proxy campaign” by activist investor Blackwells Capital. Meanwhile, Blackwell’s CIO Jason Aintabi described the reinstatement as a “shameless maneuver” and vowed that the board would face accountability.

Ashford recently delisted its stock and sold off several holdings to reduce its debt load. For more on the Bennett-Blackwells proxy battle, go here.

Loan, Own, then Build

In January, Madison Realty Capital took control of a mammoth L.A. county portfolio via deeds-in-lieu signed by distressed megalandlord Neil Shekhter (NMS, WS), who was buried under $1.1B of unpaid debt (great tick-tock of the messy tale here and my summary here). In a tepid market, lenders are often at a loss (no pun intended) about what do with such huge portfolios in various stages of undress, but lender-developers like Madison have more options. On one of the sites, Madison is now planning a 24-story, 264-unit rental tower that at 260 feet would be the city’s tallest, per SMDP.

601 Colorado was once one of the Builder’s Remedy (lil’ explainer video here) projects, but was pulled from that process under a settlement (upzoning, expedited permits) between the city and Shekhter last year.

Madison (Zegen, Shatz, Tantleff), minority owned by tech whisperer Divesh Makan’s Iconiq Capital, is one of the busiest debt players in the game, w/ $3B of financing deals in ‘23 (recent stuff here and here and here).

Quickies

• 📽️ The Roofstock-Mynd merger and the state of SFR startups

•  NRAI, which admitted to a Ponzi scheme in ‘22, is planning 429 rentals in Ft. Lauderdale – you wouldn’t know it from the article 😍 

• Sternlicht, Joe Sitt, Len Blavatnik & other RE bigwigs pushed NYC mayor to send police to break up protests at Columbia

• Another Related coup in West Palm Beach: JPMorgan joins GS, Point72 at 360 Rosemary (more on Ross’s SoFla ambitions here)

• This was a given… Nvidia drops $374M to own its SV digs 

• PIMCO-owned Columbia Property Trust steps into the sunlight

• Mezz lender Monarch takes piece of AECOM/Combined’s $500M hotel-condo project in WeHo

• Receivership sale for 4.5M (!) sf Houston office complex (formerly owned by CPP/Silverpeak/Nuveen, who defaulted on $465M CMBS in ‘22) - more on the soaree state of Canadian office investors here 

Unquotable Quotes