S2 Capital Winds Down First Fund

S2 Capital is dissolving its first multifamily fund with no capital returns – the same news recently relayed to investors in the firm’s real estate investment trust.

A July 1 letter from founder Scott Everett that was shared with The Real Deal said the $400 million valued-add fund’s limited partners and preferred equity investors will receive “no return of capital.” S2 closed its first fund in September 2022 after launching earlier that year with a goal of $250 million. It closed its second multifamily fund last summer, raising $373 million.

Everett blamed the “exceptionally challenging environment” for the fund’s troubles, citing the rising cost of debt, cap rate growth and record supply. The fund’s 20-property portfolio saw an average 16 percent increase in expenses and 50 percent increase in the cost of interest while rents dropped an average of 24 percent across the portfolio, Everett detailed in the letter.

S2 Capital, which was founded by Everett in 2012 when he was 23, quickly became one of the country’s largest multifamily landlords, amassing over 40,000 units across the Sun Belt by 2021 using floating-rate debt. When interest rates surged, the firm looked for creative ways to restructure its portfolio, such as the creation of a fund to convert investors’ equity in 26 assets into REIT shares.

The conversion made the investments open-ended and allowed S2 to secure lower-rate debt for troubled properties, since the assets were pooled and therefore mixed with better-performing properties.

The firm is getting creative once again in an effort to salvage some of the properties in its first fund. Everett, in the letter, outlined a plan to purchase its debt on the fund’s viable assets and then sell the properties into a new investment vehicle after restructuring the debt.

The company is also seeking to raise $100 million for this new investment vehicle for the good assets. The bad assets will go into foreclosure or be sold at a discount.

S2’s REIT met the same fate as fund one. Created in 2024 to buy time until interest rates dropped, the REIT pooled 9,000 units, allowing S2 to secure lower debt rates for the portfolio that included struggling properties. Existing investors received shares valued at 93 cents on the dollar to reflect the portfolio’s equity markdown. But, “survive ‘til ‘25” hasn’t panned out as expected; over halfway through 2026, rates are still elevated, with no sign of relief.

Less than two years later, S2 hit up REIT investors for a $70 million cash infusion, without which, the firm will 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 reported earlier this year.

S2 ended up raising about half of that, enough to provide a “short runway to complete an orderly wind down of the REIT,” according to feeder fund Trinity Investors. The Southlake, Texas-based private equity firm, which has partnered with S2 since its founding in 2012, told investors to expect “a full loss of capital” from the REIT, The Promote reported in May.

Since then, distress has cascaded for S2 Capital. At this month’s foreclosure auctions, the firm risks losing control of five North Texas properties, representing $311 million in troubled loans from Computershare Trust, Benefit Street Partners, Citibank and U.S. bank Trust.