Key Takeaways
- • Apollo Global Management is investing $1.02 billion in a new joint venture with Starwood Real Estate Income Trust (SREIT), the non-traded REIT managed by Starwood Capital Group led by Barry Sternlicht.
- • The joint venture will hold roughly 120 U.S. affordable housing assets from SREIT's portfolio, with Apollo holding a 41.5 percent ownership stake.
- • Proceeds will pay down part of SREIT's credit facility, following SREIT's earlier halt of share redemptions this year, which left investors unable to withdraw.
- • Apollo receives a share of cash generated by the apartment properties, but SREIT holds a call option exercisable 5 to 10 years after closing, capping Apollo's internal rate of return at 7%.
- • The deal underscores liquidity pressure at a trust that still holds $22.5 billion in assets and illustrates the redemption risk inherent in non-traded private real estate vehicles.
Summary
Apollo Global Management and Starwood Real Estate Income Trust announced on Tuesday, August 4, that Apollo will invest $1.02 billion in a new joint venture with SREIT, the commercial real estate fund commonly known as SREIT. The venture will hold around 120 U.S. affordable housing assets drawn from SREIT's portfolio, and Apollo will own 41.5 percent of it. Proceeds will be used to pay down part of SREIT's credit facility, the borrowing line the trust draws on when it needs cash.
The transaction is best understood against SREIT's liquidity position. As a non-traded REIT, SREIT's shares do not trade on an exchange, so investors seeking to exit must request redemptions from the trust. Earlier this year SREIT halted those redemptions, leaving investors unable to withdraw their money, and the trust had already tightened its redemption limits more than two years earlier. The article characterizes the trust as a large fund that found itself short on cash rather than a small fund in distress, and it describes the Apollo deal as part of that remedy. SREIT still holds $22.5 billion in assets.
Apollo's return comes through a share of the cash flow generated by the apartment properties, providing a steady stream of rental income. SREIT retains a call option allowing it to repurchase Apollo's stake 5 to 10 years after closing. If SREIT exercises that option, the buyback price is structured so that Apollo's internal rate of return cannot exceed 7 percent, limiting Apollo's upside in that scenario.
The article frames the transaction as a broader lesson for investors in private real estate: a fund that needs liquidity can bring in an outside investor who takes a share of future rent, while existing investors must wait. The key consideration for holders of private real estate funds, the article concludes, is not only what a fund owns but how quickly investors can get their capital back if needed.
The transaction is best understood against SREIT's liquidity position. As a non-traded REIT, SREIT's shares do not trade on an exchange, so investors seeking to exit must request redemptions from the trust. Earlier this year SREIT halted those redemptions, leaving investors unable to withdraw their money, and the trust had already tightened its redemption limits more than two years earlier. The article characterizes the trust as a large fund that found itself short on cash rather than a small fund in distress, and it describes the Apollo deal as part of that remedy. SREIT still holds $22.5 billion in assets.
Apollo's return comes through a share of the cash flow generated by the apartment properties, providing a steady stream of rental income. SREIT retains a call option allowing it to repurchase Apollo's stake 5 to 10 years after closing. If SREIT exercises that option, the buyback price is structured so that Apollo's internal rate of return cannot exceed 7 percent, limiting Apollo's upside in that scenario.
The article frames the transaction as a broader lesson for investors in private real estate: a fund that needs liquidity can bring in an outside investor who takes a share of future rent, while existing investors must wait. The key consideration for holders of private real estate funds, the article concludes, is not only what a fund owns but how quickly investors can get their capital back if needed.
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