Starwood To Wind Down European Lending Vehicle

Decision Came After Larger Shareholders Indicated They Wanted Money Back

Starwood Capital is winding down its listed European lending vehicle after larger shareholders indicated they would pull out.

The private equity firm based in the United States said the investment style has grown less popular despite Starwood European Real Estate Finance being a success.

The decision to wind down the vehicle came after shareholders passed a resolution at an extraordinary shareholder meeting in January to amend the group’s investment policy to pursue a strategy of the return of capital over time to shareholders, Starwood said in a stock exchange announcement.

Under the group’s discount control mechanism in the first quarter of this year, Starwood would have been required to offer shareholders an opportunity to redeem up to 75% of their holding because the discount to net asset value was more than 5% during the second half of last year. The stock was trading at 91.7p a share on Friday morning, a 13.5% discount to net asset value of 105.2p a share.

Having discussed redemptions with larger shareholders, Starwood concluded that the vehicle would shrink in size to an extent that it would “no longer being of viable size to provide shareholders with significant liquidity and scale".

Starwood said the vehicle had been a success since it listed on the stock exchange in December 2012. The vehicle invested ￡1.6 billion of capital in loans secured against real estate and, even through VOID, did not make a single loss. It produced net asset value total returns of 6.2% and paid a total ￡206 million in quarterly dividends to shareholders.

As of the end of last year, Starwood European Real Estate Finance had 20 investments with a net asset value of ￡416.1 million. The average remaining loan term is 1.7 years.

Earlier this month, Starwood Capital Group’s chairman and chief executive, Barry Sternlicht, saidthis is one of the best times in years to make commercial real estate loans, but that his firm cannot take full advantage of the opportunity.

Starwood Property Trust, a Greenwich, Connecticut-based real estate investment trust and the self-described largest commercial mortgage real estate investment trust in the United States, could be taking advantage of a situation where “banks are on the sidelines" by aggressively originating commercial real estate loans now, Sternlicht said during a conference call. 

Credit spreads mean newly made loans would be highly profitable, too. “We feel we could deploy capital extremely well and at incredible spreads in this market,” Sternlicht said. “We think we can make extraordinary loans today.”

Instead, Starwood is going do "virtually nothing" for now to protect the REIT’s liquidity. Sternlicht blamed the Federal Reserve for for creating "incredibly tight conditions” by raising interest rates. 

The Bank of England hiked interest rates by 0.25 basis points to 4.25% this week. The European Central Bank raised interest rates by 50 basis points to 3% last week. 

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