Described by colleagues as a deal junkie, Barry S. Sternlicht took the industry by surprise Oct. 30 when he announced he was stepping down as chief executive officer of Starwood Hotels & Resorts Worldwide Inc., a hotel and leisure company. Mr. Sternlicht will remain board chairman but will now spend most of his time at the helm of Starwood Capital Group Global LLC, Greenwich, Conn.
Mr. Sternlicht is no stranger to real estate investment. He has been chairman and CEO of Starwood Capital since he helped form it in 1991. He led the negotiations for the recapitalization and reorganization of Starwood Hotels, saving its Hotel Investors Trust from defaulting on its debt obligations, and its 1997 purchase of ITT Corp., thwarting Hilton Hotels Corp.'s hostile takeover bid. In 1995, he spearheaded the acquisition and recapitalization of Westin Hotels and Resorts.
But in recent years, he has spent the lion's share of his time running the hotel company, which includes St. Regis, Sheraton, Westin, Four Points and W hotels. Now he will be focusing his efforts on the investment management firm. Days after switching jobs, he spoke with reporter Arleen Jacobius about the changes, his goals for Starwood Capital and the new funds he plans to bring to the market in 2004.
Q What are your plans?
A I'm going back to Starwood Capital. My intention is to flip-flop. I have been spending 80% to 90% at the hotels; I will spend most of the time at Capital and more time with my family. I think we are going to look at what we want to accomplish in the next five years, whether buying core opportunity companies, whether managing separate accounts, which we have not done, or manage targeted segment funds. It's something we'll figure out. I'll be chairman and CEO for now.
Q When do you expect to begin fund raising again?
A That's to be determined. We'll finish investing the sixth fund (Starwood Global Opportunity Fund VI). … It's about half invested and we'll be back in the market for whatever that may take. … We may be back as soon as the first quarter of 2004 with Fund VII. We'll be raising at least $1 billion.
Q Do you feel pressured to reduce fees by institutional investors?
A I've felt pressured for 10 years. Buyout funds have longer investment periods, seven or eight years with eight principals and shops of 15 or 20 people. There's a different approach with 65 people (at Starwood Capital). We need asset management fees and fund fees to execute our business plan. It's a good deal compared to private equity and hedge funds. I privately feel you get what you pay for. It's a tough business. There's a lot of work and a lot of travel. You don't get paid until the deal closes. Hedge funds market every month and get 10% of the profits.
Q Will you be starting a hotel fund?
A I have a non-compete for as long as I'm on the board (of Starwood Hotels & Resorts). I have to figure that out. Until I do, I won't be doing one. It's something where I have a unique expertise, and something the hotel company can't easily do. I would have to present it to the hotel company board first.
Q Will you be starting a new co-investment fund or a target fund?
A We did a co-investment fund. That one's with National Golf (Properties) with Goldman Sachs. …There's a lot of bifurcation of interest. Some (real estate fund executives) just want to do foreign, some domestic. Some feel overweighted in retail and want to do apartments and office. We are essentially opportunistic. We go to locations that are out of favor. We've been very creative. We see something that someone else does not see to create value. Real estate investors think they are just buying a yield.
Q Is real estate hot right now?
A Real estate reminds me of the dot-com years. There's a little of the fool's game. Guys who only finance short don't take risk and return into account. If interest rates don't go up, they'll do well. We have not, as a group, taken interest rate risk. I don't think investors understand interest rate risk. When the bull turns to pigs, the pigs may end up at the top. Many have been saved because they are floating (debt); if they were fixed there would have been carcasses everywhere. It's very competitive. We're losing more deals now than we used to because capital is coming from places you could not imagine. A lot of private guys are in real estate. … Real estate is different today than it was three years ago. Everyone is doing highly leveraged deals. It's crazy not to. There's opportunity in the leverage today. There's a building that sold in Washington, which was financed 85% with less than 5.5% fixed for seven years. You got to take it. If you can finance through an office recession for five years, you will be OK. Real estate is not an asset class where you are looking for quarterly liquidity. Real estate is a long-term asset class. If you do short term, it's silly.
Q What sectors do you favor now?
A Residential is interesting. (Central business district) office is hard to buy. If they are fully leased, they will sell like a bond. I've seen prices paid for buildings that are amazing. They're not looking for capital gain; they are looking for yield. If CBD is virtually empty, the building's cheap and you have to hold and carry it and the IRR, depending on when and if you will ever lease it. It's hard to get aggressive. We like for-sale housing.
We also like senior housing. I think the hotel sector, you have to know what you are doing because you will get hurt if you don't. We're active in Europe, but good deals are hard to come by. We've nibbled but not executed in Mexico. … Yields are good in distressed debt; exit strategies are good. On a one-off basis, we're still looking at retail. There's more development deals.
Q Are replacement costs still a relevant measure of value in real estate?
A Replacement cost is relevant, but it's not the only thing. One of the disciplines that has protected us is the residual value per foot. We often hardwire replacement cost down.
QWhat do you think about what's happening with London's Canary Wharf PLC and the consortiums building to take it over?
A We almost got to be involved in the front end. … Assets for families are always interesting. I regret not getting into it in the front end. I met three or four times with Paul Reichmann (who until Nov. 12 was chairman of the board of Canary Wharf, London's second financial district) and Canary Wharf had a lifecycle longer than the fund but with family investors. They were uncomfortable with control and could not move forward.
I've had five big misses in my career and that would be one of them.
Q Will you be expanding your team?
A We'll be hiring people. ... We'll be spending on asset management and acquisition talent. If we go back into REITs (real estate investment trusts), we would hire from outside to do that. We have a great team. I'm hoping they'll take me back.