By Paul Rosta
If the commercial real estate industry held a decathlon for executives, Barry Sternlicht would be a serious threat to run off with the trophy, and not just because Starwood Capital Group’s chairman & CEO looks as fit as the tennis player he was at Brown University 30 years ago. Since rising to prominence in the 1990s for his role in reshaping the hotel industry, the versatile Sternlicht has brought his skills to a formidable array of business areas: private equity investment, REITs, hospitality marketing and design, investment banking, residential development and renewable energy, to cite a partial list.
Last year was typically busy for the various Starwood affiliates. “We were pretty aggressive last year,” said Sternlicht, perhaps understating the case.
The efforts he led seemed to pack a decade’s worth of activity into 12 months. Among other highlights, the Starwood companies acquired a large minority stake in a hospitality management company, partnered to buy the real estate assets of a failed bank, opened a Starwood office on a fourth continent, paid $157 million for a non-performing portfolio of commercial loans and kicked off development of a high-end resort on Maui. All told, Starwood affiliates raised $3.3 billion last year, including $1.8 billion through Starwood Capital’s eighth opportunity fund. Meanwhile, Sternlicht continued a longtime strategy of keeping his hand in an eclectic array of businesses beyond commercial real estate. Last year, Starwood affiliates invested in renewable energy, single-family residential development and air travel (see “Land, Sea & Sky” on page 22).
This run of activity—all undertaken in the midst of a still-shaky economy— earned Sternlicht recognition from his peers as CPE’s Executive of the Year and Investor of the Year for 2010. The awards acknowledged the most recent accomplishments of an executive whose company manages assets valued at $16 billion and who has influenced the industry on multiple fronts since founding Starwood Capital in 1991.
“I find him more bold and entrepreneurial than most folks in real estate today and most folks in the institutional real estate world today,” observed Neil Shah, president & COO of Hersha Hospitality Trust, who began working closely with Sternlicht last June, when Starwood Capital bought a 49.9 percent stake in Hersha’s management affiliate, Philadelphia-based Hersha Hospitality Management.
That deal was the latest evidence of Sternlicht’s continuing clout in the hotel business, six years after leaving Starwood Hotels & Resorts Worldwide Inc., the company he founded in 1995 and built into a global juggernaut. Starwood Capital’s investment in Hersha followed the first-quarter closing of its second hospitality fund, valued at $965 million. “Because we have funds that buy hotels, we thought it would be terrific to better control our investments with a hotel management company,” he explained.
The investment in Hersha Hospitality Management raises Starwood’s profile in hotel management. Its SH Group affilate manages the Baccarat brand and is developing four properties in the Middle East and four in China. Starwood’s investment in Hersha will help that company expand its management portfolio from about 80 properties today to as many as 200 in the next three to five years, Shah said. That growth will come from third-party management agreements, from hotels owned by Starwood funds and from managing hotels acquired by Hersha Hospitality Trust. In approaching such deals, Sternlicht takes the role of a visionary, who masters details without getting lost in them, Shah observed. “He’s a very demanding executive of his team as well as of his investors and his partners.”
Sternlicht expects all those participants to do their homework, particularly carrying out the financial analysis of any given investment. Being thoroughly conversant with the numbers, however, is only the first step in the decision-making process. “The heavy lifting is when you roll up your sleeves and talk about the execution,” Shah noted.
By value, the biggest publicly disclosed transaction Starwood participated in last year was the $2.8 billion acquisition of assets formerly owned by Corus Bank N.A. Burdened by non-performing loans, primarily in the multi-family sector, the Chicago-based lender was seized by the Federal Deposit Insurance Corp. on Sept. 11, 2009.
Starwood teamed with TPG Capital, Perry Capital and WLR LeFrak, a joint venture of the LeFrak Organization and WL Ross & Co. The buyers scooped up a portfolio that included more than 100 loan and real estate owned assets—condominiums, multi-family properties, office properties and land—all acquired at a significant discount to its estimated $4.5 billion value. Initial concerns about construction defects proved to be unwarranted, as material issues turned up on only one building.
The FDIC retained a 60 percent equity interest in the portfolio and is providing interest-free financing on 50 percent of the purchase price The agency also provided a $1 billion facility for working capital and project completions. By February, the Starwood-led venture had divested about 20 assets; it expects to pay back its entire $1.4 billion in FDIC acquisition debt by the end of the year.
In addition, a Starwood opportunity fund purchased three loan portfolios with a total principal balance of $537 million in 2010. The most recent of those transactions, which closed last December, was a $157 million portfolio of non-performing loans from a Midwestern bank that included 137 loans on properties in North Carolina, Florida, Ohio, Michigan and Indiana.
An early entry in the past two years of hectic activity was the 2009 launch of Starwood Property Trust Inc., a publicly traded investment banking concern that invests in, and originates, commercial real estate debt. The initial public offering raised $950 million—the largest blind-pool offering ever for a company traded on the New York Stock Exchange. By the end of 2010, the REIT had amassed an investment portfolio valued at $1.8 billion, all but $200 million originated or acquired last year. The company also raised $435 million through the sale of 23 million shares of common stock Starwood Property invested in multiple product types. The hospitality sector figured in several deals. During the fourth quarter, for example, the company issued $206 million in financing on a portfolio encompassing 10 full-service hotels representing upwards of 2,800 keys. Starwood Property also paid $178 million for a senior loan secured by the assets of a hotel company; the price represented a discount from the loan’s $205 million value.
Starwood Property Trust also marked Sternlicht’s return to the public markets after his departure from Starwood Hotels in 2005. In its mission, however, Starwood Property more closely resembles iStar Financial, the publicly traded investment banking firm that Sternlicht founded in 1998 and chaired until divesting Starwood’s interest in the company five years later.
Sternlicht is anticipating the rebound in the tourism industry by investing in several high-profile projects. Last November, Starwood and Hyatt Hotels Corp. unveiled plans to team up on the development of Andaz Wailea Resort and Residences, an oceanfront resort on Maui. Scheduled for a late 2012 opening, the $90 million project will incorporate 255 guest rooms, 35 suites and six 3,500-square-foot villas. The project will join five Andaz-branded hotels already in operation, with another five planned.
Meanwhile, Starwood Capital is continuing to expand its global footprint, most recently to Latin America. Last year, the company opened an office in Sao Paulo, adding to a roster of global satellite offices that so far includes London, Luxembourg, Paris, Mumbai and Tokyo. To lead the Sao Paulo-based affiliate, formally known as Starwood Capital do Brasil Ltda., Sternlicht recruited Rodolfo and Vitor Senra, who had previously run an investment firm specializing in office, industrial and residential properties. Joining the Senras is Ryan Hawley, a Sternlicht lieutenant and member of the Starwood acquisitions team.
Taken as a whole, these moves mark a shift from the approach Sternlicht had pursued since 2006. By mid-decade, Sternlicht saw the writing on the wall. “I thought that risks and returns had gotten completely upside down,” he said. “It was not the business I entered into in 1991.” The ultimate example was Blackstone Group’s $38 billion acquisition of the Equity Office Properties Trust portfolio in 2007. Blackstone promptly flipped some of those assets for as much as $1,000 per square foot—above replacement costs at the time. Sternlicht describes the atmosphere as “musical chairs in vivid HD.”
Sternlicht responded by tacking away from the overheated market. The economic slump damaged the balance sheets of some Starwood properties but not their value. Starwood turned its focus to managing its existing assets and raising capital to protect investor liquidity. “We were very upfront with our limited partners, and tried to help them distinguish between good capital calls and throwing their money away,” Sternlicht explained.
A Connecticut native, Sternlicht graduated from Brown University magna cum laude in 1982. He worked as an arbitrage trader on Wall Street before attending Harvard Business School. Before he graduated in 1986, Sternlicht applied for a position with JMB Realty Corp. The firm’s co-founder & president, Neil Bluhm, called him and said, “You’re my No. 1 draft pick.”
Sternlicht fondly recalls his tour of duty at JMB, commenting, “I had a great six years with Neil Bluhm.” He sums up Blum’s principles of success as, “The secret is that there are no secrets. You’ve got to work hard. You make your own luck.” Other lessons about finance and investment came through trial and error. One instructive deal involved the acquisition of an office portfolio in London. “We actually had a good investment; we just wound up with the wrong balance sheet,” he said. As originally planned, the financing structure was to include some $600 million in equity and $300 million in debt. But at the time, U.S.-based pension funds were not ready to invest in London. As a result, the financing consisted of $600 million in debt and $300 million in equity. “Interest rates rose, and we were D.O.A. We lost our equity,” Sternlicht recalled. Nevertheless, the deal taught valuable lessons in underwriting and execution: “You learn so much more from your mistakes than your successes.” After his apprenticeship at JMB, Sternlicht struck out on his own in 1991, launching Starwood Capital Group. A few years later, still well shy of his 40th birthday, he had established himself as one of the commercial real estate industry’s most creative entrepreneurs. In 1992, Starwood raised $52 million through its first two opportunity funds, and followed that up by raising $102 million in a third fund. In 1993, Starwood was a player in Equity Residential Properties’ initial public offering, exchanging the multi-family assets acquired in its first opportunity fund for operating units convertible to stock.
That same year, Starwood Capital also bought its first hotels, kicking off the series of moves that would realign the hospitality industry. In 1994, Starwood got into the REIT business when it acquired a majority interest in Hotel Investors Trust, a nearly bankrupt REIT. Sternlicht restructured the company, buying most of its senior debt and contributing assets that Starwood had acquired through its private equity investments, and renamed it Starwood Lodging Trust. The REIT’s shares were paired and traded as a unit with Starwood Lodging Corp., the operations and management affiliate.
That set the stage for a pair of massive back-to-back leveraged buyouts. The first, the acquisition of Westin Hotels & Resorts Inc., unfolded in two stages. In 1995, a joint venture of Starwood Capital Group and Goldman, Sachs & Co. bought Westin Hotels & Resorts for $537 million. In January 1998, Starwood Lodging acquired Westin Hotels & Resorts for $1.8 billion. With that transaction, Sternlicht rebranded the operating and management company Starwood Hotels & Resorts Worldwide Inc., and likewise renamed the REIT Starwood Hotels & Resorts.
One month later, Starwood Hotels completed an even bigger blockbuster: the purchase of ITT Sheraton Corp. for $14.6 billion. That brought the company’s holdings to more than 650 properties, creating the world’s biggest hotel company. Sternlicht promptly set about finetuning the portfolio. The volatile, capital-intensive nature of the casino hotel business made it a less-than-ideal fit for Starwood Hotels’ core assets, and in April 1999, Starwood sold Caesars World Inc. to Park Place Entertainment Corp. for $3 billion. A month later, Starwood completed its exit from the casino business by selling the Desert Inn in Las Vegas to Sun International Hotels Ltd. for $275 million. Those transactions and others raised $6 billion in proceeds that Starwood used to pay down debt.
The hotel business, meanwhile, had proven to be tailor-made for Sternlicht’s wide-ranging interests in capital markets, operations, marketing and design. Having shaken up the hotel industry’s dynamics through mergers, he contributed a number of other influential innovations. In 1999 he started the popular Starwood Preferred Guest program, credited with being the first “no blackout” program in the industry. Using the century-old St. Regis Hotel in Midtown Manhattan as foundation and namesake, Sternlicht launched a new luxury brand in 1999 that has now expanded to 22 properties.
An accomplished painter, Sternlicht took special satisfaction in applying his eye for design and style to Starwood’s hotel brands. For Sheraton and Westin hotels, he commissioned top designers to create fresh, attractive guest rooms and public spaces. Sternlicht also created the boutique W Hotels brand and infused it with a hip, upscale flair. He noted with pleasure that he is one of only two business executives in Interior Design’s Hall of Fame. As the citation accompanying Sternlicht’s 2005 induction stated: “The founder and chairman emeritus of Starwood Hotels & Resorts Worldwide has a passion for design that’s revolutionized the hospitality industry, earning him the admiration of designers, architects and guests alike.”
Sternlicht won acclaim for his revolutionary contributions on multiple fronts, but the accomplishments exacted a certain price. Reflecting on the Herculean task of merging the Starwood, Westin and Sheraton brands, he said, “If I’d been younger, I probably never would have done it.” One headache was finding the right mix of executives and sorting out redundancies.
Necessary though the process was, it also led to misinterpretations. “When I let people go because they weren’t making it happen, I got pummeled (in the media),” he explained. The grind of running a public company also took its toll. After nearly a decade at the helm, Sternlicht stepped down as CEO in 2004 and moved into the role of executive chairman of the board. The following year, he resigned from that post amid reported tensions with other board members. “It was time for me to go,” he said. “The public view of CEOs had changed.”
Sternlicht takes a fairly upbeat near-term view of the market. “I think 2011 is going to be a pretty good year for property values,” he said. Among other trends, the veteran investor is monitoring the end of the Federal Reserve’s plans to inject liquidity into the market through its quantitative easing policy and a business tax credit that is pushing demand forward from 2012 to 2011, just as the housing credit and “Cash for Clunkers” programs did before them. He is also tracking the rising profile of sovereign wealth funds, noting that those players are primarily chasing core assets in blue-chip markets like Manhattan, Washington, D.C., and San Francisco.
Sternlicht speculates that the 2012 elections will bring about major changes in economic policy. Uncertainty over a possible change complicates the task of formulating strategy. Sternlicht, however, offers a reminder that “you’ve got to anticipate that it’s going to change.” Whatever the next few years bring, it is clear that Sternlicht will be on the move long before grass has a chance to grow under his feet.