“This isn’t FTX”: Sternlicht waves off REIT withdrawal panic

Barry Sternlicht said limits on withdrawals from non-traded REITs like the ones run by his Starwood Capital Group and the Blackstone Group aren’t cause for a major freak-out.

“We’re not a hedge fund. We can’t liquidate our properties overnight at attractive prices,” he explained. “We have to manage liquidity.”

Sternlicht was speaking with Newmark president Jimmy Kuhn at New York University Schack Insitute’s capital markets conference at the Pierre Hotel Tuesday as the biggest non-traded REITs move to curb a surge of withdrawals.

Starwood and Blackstone in the last week both put up the gates, limiting the amount investors can withdraw from their REITs in a month as they were hit with a surge of redemption requests.

In the case of Blackstone, Asian investors began pulling their money out over the summer as property markets in their own countries took a hit. Surging redemptions have the potential to cause liquidity issues, and the caps have raised concerns that these investment vehicles — which have outperformed publicly traded real estate companies — may be facing deeper challenges that are not apparent on the surface.

Sternlicht, however, said the non-traded REIT values are designed to be closer to steadier real estate values as opposed to the volatile public markets. The implications of the withdrawal caps, he said, shouldn’t be confused with a major crisis.

“It isn’t a run on the bank,” he said. “This isn’t FTX.”

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Asian investor selloff led to Blackstone raising the gates

Speaking with Kuhn, Sternlicht identified some major warning signs he sees in the market. Negative leverage — when borrowing costs are higher than the cap rate on a property — are a warning sign that’s now “flashing dark orange, maybe even red,” he said.

Starwood owns LNR Partners, the country’s largest CMBS special servicer, and Sternlicht said he’s seeing an increase in distress that will make for buying opportunities.

“Half of me is upset for everything I own… and half of me is happy, because there’s going to be amazing opportunities to deploy capital today,” he said.

When comparing the current economy to past downturns, the Starwood chief executive recalled a deal he did during the Great Recession where his company bought a $6 billion pool of loans from Corus Bank on apartment construction projects at 30 cents on the dollar.

There was only one other bidder on the loans: Stephen Ross’ Related Group, which Sternlicht said criticized him “very openly in front of 5,000 people at a conference in Arizona” for overpaying.

Sternlicht said he tripled his money on the deal in two years.

“We definitely had the last laugh about that,” he said. “I think Steve owes me a dinner.”