Apollo Global Management/) and Starwood Real Estate Income Trust announced a big deal on Tuesday, August 4.
Apollo is putting $1.02 billion into a new joint venture with Starwood Real Estate Income Trust, the commercial real estate fund commonly called SREIT. A joint venture is simply a business that two parties own together.
The venture will hold around 120 US affordable housing assets from SREIT's portfolio.
Apollo's ownership stake in the venture will be 41.5 percent.
The money from the deal will go toward paying down part of SREIT's credit facility. That is the borrowing line it draws on when it needs cash.
This is a deal between two big names in finance, but it is also a sign that SREIT needed the money.
SREIT is a real estate investment trust, or REIT. That means it owns property and pays out most of its rental income to investors.
It is also a non-traded REIT, so its shares do not trade on a stock exchange like a normal company's do.
That leaves investors without a simple way to sell. If they want out, they have to ask the trust to buy back their shares, a process known as a redemption.
Earlier this year, SREIT halted those redemptions. Investors who wanted their money out couldn't get it.
The trust had already tightened its redemption limits more than two years ago, so the halt didn't come out of nowhere.
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In a non-traded REIT, redemption requests are often the main way shareholders can get their money back. When a trust stops honoring those requests, it creates a line of investors waiting to exit.
Starwood Capital Group, the firm led by Barry Sternlicht, manages SREIT.
The trust still holds $22.5 billion in assets.
That makes this less like a small fund struggling and more like a giant that found itself short on cash.
The Apollo deal is part of that fix.
Apollo is not doing this for free.
Under the joint venture, SREIT will hand over a share of the cash those apartment properties generate, which gives Apollo a steady stream of rental income.
SREIT also keeps a call option. That is simply the right to buy back Apollo's stake at certain times.
SREIT can exercise that option 5 to 10 years after the deal closes.
If it does, the buyback price works out so Apollo's yearly return, a measure known as internal rate of return, can't go above 7%.
So Apollo can make money on this deal, but how much it can make is limited if the buyback happens.
SREIT gets breathing room now and a chance to buy back Apollo's stake later.
This deal is a useful window into the private real estate market.
When a fund like SREIT needs cash, it can bring in an outside investor who gets a cut of the future rent.
For your portfolio, the big picture is simple: your cash can stay locked up longer than you expect. Even a fund with $22.5 billion in assets can freeze withdrawals and leave investors waiting.
You might not own a stake in SREIT. But the same pressure that pushed this deal forward can show up in any investment that makes it hard to sell quickly.
The new partner gets a share of the rent, and the original investors have to wait.
So the next time you look at a private real estate fund, the question is not just how much it owns.
It's how fast you can get your money back if you need it.
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