Starwood REIT Sells 41.5% of Affordable Housing Portfolio to Apollo for $1.02 Billion

Starwood Real Estate Income Trust, a nontraded real estate investment trust known as SREIT, has formed a joint venture with Apollo Global Management under which Apollo affiliates invested $1.02 billion for a 41.5% stake in a portfolio of about 120 of SREIT’s affordable housing properties.

The joint venture, structured as a Delaware limited liability company, closed Aug. 3. SREIT holds the remaining 58.5% equity interest and retains full asset management responsibility and operational control of the portfolio. SREIT will consolidate the joint venture on its books and classify Apollo’s stake as a redeemable noncontrolling interest, with no gain or loss recognized on formation.

SREIT said proceeds will go toward repaying a significant portion of its credit facility, calling the transaction “a critical step” in its plan to improve liquidity and enhance stockholder returns.

The transaction follows through on comments Starwood Capital Group chairman and chief executive officer Barry Sternlicht made in April, when SREIT suspended most stockholder redemptions and cut its Class I annualized distribution rate to 4.7% from 6.3%. At the time, Sternlicht said the firm was continuing to “actively explore strategic capital raises” to support liquidity, as AltsWire previously reported.

Under the joint venture agreement, SREIT guarantees Apollo an annual minimum yield on its investment that increases over time, with SREIT responsible for the payment. SREIT holds a call option to redeem Apollo’s interest; if exercised between the fifth and 10th anniversary of closing, the call price is calculated to ensure Apollo a capped internal rate of return of 7%.

A newly added risk factor in SREIT’s prospectus describes the consequences if the company does not exercise that option promptly. But if SREIT declines to exercise the option at or shortly after the fifth anniversary, it faces escalating obligations – including minimum yield payments, make-whole contributions and other contingent payments that grow each year Apollo remains invested. According to the filing, if SREIT cannot meet those payment obligations, Apollo may become entitled to governance rights over the joint venture’s portfolio, potentially limiting SREIT’s ability to manage, refinance or sell the underlying assets on its preferred timing or terms.

Goldman Sachs & Co. LLC acted as exclusive structuring agent and financial adviser to SREIT. Citibank, Barclays Bank, Wells Fargo Bank, Morgan Stanley Bank, Deutsche Bank, JPMorgan Chase Bank, Bank of America, and Natixis served as advisers and arrangers. Paul, Weiss, Rifkind, Wharton & Garrison acted as legal counsel and Centerview Partners as financial adviser to Apollo.

Starwood Real Estate Income Trust launched in December 2017 and invests in stabilized real estate across the United States and Europe.

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