Barry Sternlicht's nontraded real estate investment trust, facing redemption calls from its shareholders in a tough commercial property investment market, has shaken up its executive management team starting at the top.
Starwood Real Estate Income Trust this week replaced John McCarthy, who had served as CEO since the REIT launched in November 2017, with Sean Harris, according to a filing with the U.S. Securities & Exchange Commission. Harris, who has served as president of Starwood REIT since January 2021, will continue in that capacity as well and has been added to its board of directors.
Harris took the board position that had been filled by Christopher Graham. Starwood said Graham also no longer will serve as the REIT’s chief investment officer but will retain the title of head of acquisitions for the Americas.
As for now-former CEO McCarthy, he will continue to serve on the board as vice chairman, Starwood REIT said in the Tuesday filing. Sternlicht is chairman of the Miami Beach, Florida-based company.
No reasons for the changes were given in the SEC filing, but the moves come as private REITs including Starwood's and Blackstone Real Estate Income Trust contend with high numbers of requests to redeem their shares in the weakening commercial property market.
Starwood REIT reported that March share repurchase requests totaled $450 million, or 3.3% of its net asset value. Starwood, like other nontraded REITs, caps monthly redemptions at 2% of NAV. Starwood reported that it has not met 100% of redemption requests since November 2022.
Starwood's Shrinking Portfolio
Moreover, the higher cost of capital caused by higher interest rates have noticeably slows the commercial property investment market. Like other nontraded REITs, Starwood REIT has been absent from the acquisition markets since last August. The value of Starwood REIT’s investments in commercial property shrunk to $19.6 billion last month. In August, its investments totaled $26.2 billion.
Starwood REIT representatives did not immediately respond to a request for additional information.
In the REIT’s first quarter update to investors, Sternlicht talked for several minutes about weakness in the current market tied to banking turmoil, higher interest rates, low returns on investments and reduced property sales transactions. Sternlicht added that he was “not trying to scare real estate investors” with his comments. Instead, he said he wanted to set the scenario for what he sees happening by year-end.
“I think the shape of the economy is becoming more evident,” Sternlicht said. “You're seeing a dramatic change in the yield curve, and a bit of a tug of war now between what the Fed is saying and what the markets think is going to happen.”
Sternlicht said he expects to see lower interest rates in place by year end and the inflation rate to drop to about 2% by the fall.
“So, what could happen of course for us, and should happen for other players in the space, is that as rates come down, we are going to lose some of the gains we have for those of us who have hedged long term our interest rate exposure, but it's going to support dramatically the valuations of our assets,” Sternlicht said. “So, we were very careful now as we whittle through the assets and find the right things to sell to meet redemptions as they come in.”
Sternlicht added that he was optimistic that the portfolio teams would perform well when the markets turn around.
Starwood REIT posted a negative return in the first quarter of 1.9%. For the three years prior to that, it delivered an annualized return of 12.4%. It owns 715 properties across the United States and Europe. About 83% of those properties are in rental housing and industrial, two of the best performing asset classes.