Feeder Fund for S2 Capital’s REIT Predicts Loss

A Southlake, Texas-based private equity firm that brought investors to the real estate investment trust created by Scott Everett’s S2 Capital isn’t expecting to get anything out of the multifamily REIT.

Trinity Investors, which helped S2 form the REIT in 2024, warned, “Equity investors should expect a full loss of capital,” The Promote reported. Per Trinity, S2 is shifting focus to “maximizing value for mezzanine investors,” the outlet said.

Everett called the update “old news” in an email: “We notified LPs of this in November,” he said.

He highlighted the multifamily fundamentals that have churned out investors in the Class B and C space, including a 32 percent drop in rents from October 2022 and a 26 percent increase in expenses “not including the increase in interest rates.”

“We have continued to mark down our down legacy vehicles given these fundamentals to be transparent and are working with our lenders on solutions to maximize recovery,” he said.

The investor update comes a few months after S2 Capital issued a capital call, asking for $70 million in preferred equity. Without the funds, the firm said it would have to sell off properties at an estimated 5.5 percent cap rate, meaning investors would lose between 60 percent and 75 percent of their equity, The Promote wrote in January.

S2 ended up raising $30 million, which will provide a “short runway to complete an orderly wind down of the REIT,” according to Trinity Investors. The REIT owns over 9,000 units in North Texas, Houston and Phoenix.

In creating the REIT, Everett bought time to stave off the waves of distress that toppled many of his multifamily syndicator peers. Some industry voices lauded the move at the time as innovative, which shielded the portfolio from floating-rate debt, such as LinkedIn account CRE Analyst, who wrote, “If this is what happened, S2 just showed other syndicators how to survive until ’25.”

S2 survived until ‘25, but interest rates remained elevated much longer than industry experts predicted, allowing distress to creep into the firm’s multifamily portfolio.

The same month that S2 raised $343 million for its second value-add fund, the firm lost a property to foreclosure. It allegedly defaulted on a $36 million mortgage from CBRE for the 290-unit Preslee Apartments, at 2504 Ivy Brook Court in Arlington.