Barry S. Sternlicht says he's a private guy. Even so, he's managed to slip into the limelight from time to time — recently in his pajamas — for the good of his firms.
Mr. Sternlicht is chairman and chief executive officer of Starwood Capital Group LLC, a Greenwich, Conn., real estate investment management firm. Until 2005, he was chairman and CEO of Starwood Hotels & Resorts Worldwide Inc., a hotel and leisure company.
No matter the business, at his core Mr. Sternlicht is all about real estate, structuring more than 200 deals with a property value of about $30 billion. One of the firm's latest real estate funds to close, Starwood Global Opportunity Fund VII, has bought everything from student housing to golf courses — by buying properties or portfolios or the companies that own them.
Even Starwood's 2005 purchase of champagne-maker Groupe Taittinger had a real estate component: Taittinger subsidiary Societe du Louvre is a large European hotel network.
Mr. Sternlicht has come a long way since earning a Harvard University MBA and his first job at real estate investment firm JMB Realty. He originally started Starwood Capital to buy properties auctioned by the government during the savings and loan meltdown. He later sold the portfolio to Sam Zell. Mr. Sternlicht and Starwood got into the hotel business by buying Hotel Investors Trust, a real estate investment trust.
Starwood has a number of funds including energy investment and hedge funds. Although Mr. Sternlicht won't talk about it, Starwood is in the market with Starwood Debt Fund II, Starwood Global Opportunity Fund VIII and Starwood Capital Group Energy Fund.
How have the changes in the credit market affected your investment strategy? It's affected everyone's investment strategy. Deals are done with more equity and prices are down. I started in the RTC (Resolution Trust Corp, created to sell thrift institutions taken over by regulators in 1989) days in 1991. We operated in an environment with scarce debt capital between 1991 and 1994. Today, there's debt, but its loan to value is down; you need a big slug of equity. Transaction value was down 70% in the U.S. this year. It affected the buy side and the sell side differently.
There are guys around that were playing in IRR (internal rate of return) arbitrage. Everyone knew the music would stop. Not only did the music stop but the orchestra left the room. It's a totally different world and it's not going back. But the reality has not quite set in. People think the money will be coming back. Don't count on it.
It's been suggested that real estate is not destined to hit bottom but a series of bottoms. What do you think? There are a lot of loans out there ... where the properties cannot support the loan. They thought they could lease up with higher rents or they have a well-heeled sponsor but they won't be able to refinance at loan maturity. All loans that are 80% to 85% loan-to-value, they are all wounded, all walking dead. A lot of deals are busted and they don't know they are busted. They not only can't borrow 80% loan-to-value but they can't use the same growth rates for rent or existing yields. It's a triple whammy.
In the past three years, there were a lot of loans in the pools done with three-year terms and two one-year extensions. Everyone will extend now because the spreads are no longer market, but they are just buying time We're talking of hundreds of billions in real estate loans. You have to throw in the land loans as they come due, and we have not heard about the bank loans to the private entities. There are quite a bit out there: development or acquisition development loans for the infrastructure. There's a lot and we still have not heard about them. We've heard about the CMBS (commercial mortgage-backed securities), but we have not heard about principal loss in these other areas.
Is it a better time to be on the debt side? I've rolled from asset class to asset class. Prices were too high and we got into mezzanine debt and created the public finance company, iStar Financial Inc. (Starwood contributed more than $1 billion in high-yielding debt from two private investment funds, later merging with TriNet Corporate Realty Trust.)
I pick the jockey, not the horse. It's all about the risk in the return. You click where to set the dial on acceptable risk. An equity problem is in the debt. It's not the core investment you levered 50%; the 70% to 80% leverage is tricky.
When did you get back in to investing in debt? The first whole loans in three to four years we bought in December and January. We're buying another one right now. It's mezzanine. It's not a first loan. Good deals are still hard to find.
What's your economic prognosis? There ... is the dollar. Things are cheap here for foreigners. I do think the world has too much money. My view is yield and property will have value and still this is the good old U.S. of A. We still have a stable government and treasury. If you go to Turkey, they are thinking about buying condominiums in South Beach. They are thinking about buying 20 condos in South Beach because they're so cheap. If you take off the domestic glasses and look at the world, you may say $1,400 a foot in Manhattan is ridiculous, but if it's $2,000 a foot somewhere else, it's cheap. ... It's not all doom and gloom.
Why did you go into the energy business? The deal flow is good. It's a nice little business for us. We find it's synergistic. It's all about supply and demand and replacement costs. We focus on transmission. It's like having a tenant in an office building. These are big deals, more than $1.5 billion. It's impossible to finance right now, like everything, at reasonable borrowing costs.
Have the complex loan vehicles made it difficult to do business? We hired Bill Green from Wachovia. (William C. Green joined Starwood from Wachovia Securities as managing director last December.) He focused on our debt funds. He has a lot of knowledge of who owns the loans and what can be done from the selling institution's viewpoint. I think it's all real estate underwriting.
Was last year a busy year? I never worked harder. We invested $2 billion in equity in 2005, $800 million in 2006 and we did $200 million (in deals) in 2007. It was a brutal year. Prices went from ridiculous to absurd. That's why I started the different businesses. If real estate was going the way it was going, I was getting out.
I was a corporate CEO. I worked risk arbitrage and equity research. I wanted to go into real estate in 1991 because it was the world's last imperfect market. Real estate will be interesting relative to other assets. The economy is going to move along the bottom for 12, maybe 18, months. We will have to get through to the new administration and see if the tax code is the same. It all will have to move across the market.
Have your goals changed since you started in the real estate business? I did not expect to work quite this hard. I wanted to get out of the limelight. I used PR as a weapon to build W (the W hotel chain) ... I did everything we could to generate publicity and that resulted in me being public. I'm glad I'm not doing it now. It's easier to be private. The quarter-to-quarter pressure is just brutal, especially in real estate. Real estate is a long-term asset. It's hard to produce (quarterly) earnings in real estate. I don't have to deal with crazy new regulations. There are some whacko things that (became law). There were deals that died on the vine because of it, great deals.
Contact Arleen Jacobius at [email protected]
