Sternlicht’s next stop: New York City

Active elsewhere in the country since the bust, Barry Sternlicht's Starwood Capital has recently ramped up its deal-making here

Aug.August 01, 2011 03:48 PM

Joe Farrell
Barry Sternlicht
Barry Sternlicht started his company, Starwood Capital Group, during a downturn — and recently he’s been expanding it, especially here in New York.

Since the beginning of the year, Sternlicht, the firm’s chairman, has been ramping up his Manhattan deal-making.

The brains behind the iconic “W” brand, he’s picked up a slew of Manhattan properties in the last few months, including 1414 Avenue of the Americas, and the former Donnell Library on West 53rd Street, among others.

While Sternlicht has been one of the most active real estate players of the downturn, the focus on New York marks a shift from 2009 and 2010, when he concentrated on distressed properties in other parts of the country. Notable was his company’s 2009 deal to buy a 40 percent stake in Corus Bank’s distressed loan portfolio for $554 million after the lender was shut down by regulators.

Starwood led a group of investors on that deal to buy the portfolio — which was made up mostly of loans on condos in Florida, Washington and New York — at 60 cents on the dollar. However, now the Big Apple has been getting more of Starwood’s attention as the hotel investment market here has caught fire (see “Inn fashion”).

“We have some investors that are very excited about investing in New York,”Sternlicht told The Real Deal during a phone interview last month. New York will always be the pit stop for foreign travel. It’s the only city in the U.S. with a [hotel] occupancy rate that hovers above 80 percent. Over time, the city will be okay.”

That rosy outlook for the New York hospitality sector wasn’t always the case. At the beginning of the downturn, the hotel market plummeted in New York City, with hotel investors defaulting on loans, and hotel operators decreasing room rates. Revenue per room was down across the board.

But those fundamentals started turning around in 2010, and for the last six to nine months, investors have been going after hotels in the city. Among those investors, Sternlicht is in prime position to pounce.

In late January, Starwood Capital paid a modest $72 million to buy 1414 Avenue of the Americas, just one block from Central Park, with plans to convert the former office tower into a boutique hotel property. The previous owners — Murray Hill Properties, headed by Norman Sturner, and private investor David Werner — bought the property for $120.5 million. In 2009, hotelier Ian Schrager, working with Sturner, announced plans to convert the 18-story building into a “six-star”luxury hotel. But the plan stalled, and the owners sold a $65 million loan to RCG Longview in July 2010.

Ivan Hakimian, president of Hakimian Properties and the lone broker on the deal, said Starwood made the most sense as a credible buyer that could close a deal in a prime Manhattan location on time.

“I worked on the deal very quietly [and] brought in a few potential buyers,”Hakimian told The Real Deal. “There were people that were a little bit higher on pricing, but we went with the right buyer who was able to close on the deal in a short period of time.”

A few months later, in March, Starwood stepped in again to buy another stalled New York City project, this time teaming up with Manhattan-based developer Tribeca Associates. The two spent about $400 million and have plans to build a 120-room hotel and 140,000-square-foot condo project at the former Donnell Library at 20 West 53rd Street.

Sternlicht also told The Real Deal that Starwood has become an equity partner with JDS Development and Property Markets Group, the investment company cofounded by Ziel Feldman, in a new $150 million condo project at the former Verizon building at 210 West 18th Street.

“We were looking for a partner that had the financial strength to help get us over the line,”said Michael Stern, managing partner at JDS.

The residential brokerage Core is scheduled to launch sales at the site in the spring of 2012.

John Fox, senior vice president of PKF Consulting, said Starwood has done a good job of strategically positioning itself to take advantage of distressed assets that become available.

“Like their competitors, I think they are opportunistic,”Fox said. “When they see the right deal at the right time, they jump.”

From the beginning

Starwood’s ascent did not happen by accident.

Sternlicht, 50, best known as the wunderkind of the hospitality world, launched Starwood Capital 20 years ago after spending much of his formative years working for a Chicago-based real estate firm called JMB Realty. He got pushed out of JMB following the disastrous $425 million acquisition of London-based Randsworth Trust PLC, in which he was the lead analyst in 1989.

Soon after leaving, Sternlicht and a group of several other young executives, including iStar’s Jay Sugarman, were managing about $60 million in investments for the Ziff and Burden families, the former of publishing fame and the latter representing one wing of the Vanderbilt family. And by 1991, Sternlicht formed Starwood Capital Group.

Starwood quickly began to acquire dozens of residential and hotel properties. In 1994, it bought a firm called Hotel Investors Trust, which it renamed Starwood Lodging. And in 1997, Starwood acquired Westin Hotels and Resorts for $1.7 billion, and ITT Sheraton for a stunning $14.3 billion — a move that was heavily criticized by investors, who said Sternlicht overpaid. Upon the completion of the Westin deal in 1998, the company was renamed Starwood Hotels and Resorts.

Shortly after consolidating the new company, Sternlicht brought in longtime friend and former Harvard Business School classmate Richard Nanula as the new CEO. But the move backfired. According to news accounts at the time, it created internal turmoil at Starwood and ultimately soured their friendship. Some believe Sternlicht was also irked that Nanula, former chief financial officer at Disney, was being portrayed as the company’s top decision maker — a portrait Sternlicht wanted corrected.

But Sternlicht disputes that. “That became a convenient myth for the rest of my career,” he told The Real Deal.

Still, Sternlicht had developed a reputation as a brilliant yet mercurial executive obsessed with every detail of the business. And he certainly didn’t want anyone thinking he was playing second fiddle.

“This is a very smart guy who knows what he wants, and what he thinks is going to work,” said one industry observer who has worked with Sternlicht. “He won’t hesitate to tell you what he thinks.”

The internal battle not only led to Nanula’s departure, but proved to be a sneak preview of Sternlicht’s infighting with other top executives at the company. He later lost a power struggle with the board over his role and the role of former Coca-Cola executive Steven Heyer. Ultimately, Heyer took over as CEO at Starwood Hotels and Sternlicht left in 2005. (Heyer was ousted as CEO in 2007.)

After leaving Starwood Hotels, Sternlicht went back to his roots at Starwood Capital. He quickly began acquiring several luxury brands, including the Hôtel de Crillon in Paris and Baccarat Hotels and Resorts. He also started an eco-friendly joint venture with Avalon Hotels called 1 Hotel & Residences. The partners were planning to develop a hotel near Bryant Park on West 40th Street, but the deal fell through.

However, the market crash forced Sternlicht to put his plans to launch these new hotel brands on hold. He is starting to roll out them out overseas now, but his plans for them in the U.S. are still unclear.

Repositioning time

Still, Starwood did not stall for long — even once the market turned down. Months after the Lehman Brothers collapse, Sternlicht made several key moves to position Starwood Capital for the eventual recovery of the capital markets.

In 2009, Sternlicht issued an initial public offering for a new company called Starwood Property Trust, a real estate finance firm that originates and invests in commercial loans and debt.

Also, starting in 2009, Starwood Capital began to raise more than $4.4 billion in a bid to both position itself as a lender of choice and acquire distressed assets.

By April 2010, the firm said it raised $2.8 billion through two new funds, the Starwood Global Opportunity Fund VIII, which raised more than $1.8 billion, and the Starwood Capital Global Hospitality Fund II, which raised $965 million.

And the company has used that money to make some major acquisitions, including the Corus loan portfolio.

While some say Sternlicht paid way too much for the $554 million portfolio (his group paid about 20 percent more than the next-highest bidder), he defends the deal. He says the group has reduced the total number of distressed assets from 101 to about 60, and has only eight foreclosed loans remaining.

“It’s done better than we thought, prices are higher than we thought, and the velocity faster than we thought,” Sternlicht told The Real Deal. “I’m really thrilled with the investment. It was a great contrarian play.”

Meanwhile, in June 2010, Starwood acquired a 49.9 percent stake in Hersha Hospitality Management, a Philadelphia-based firm that operates more than 70 hotels nationwide. Starwood plans to fuel Hersha’s strategy of acquiring select and full-service hotels in major suburban markets.

Hersha has acquired hotels in New York City as well, buying and managing a number of properties built by the McSam Hotel Group under the Holiday Inn, Hampton Inn and other “select service” brands.

Getting aggressive

Starwood Property Trust has been aggressive in providing financing. It invested $768.8 million worldwide in the second quarter alone.

Also, the company reported a 55 percent jump in first-quarter earnings to $31.4 million, or 43 cents a share, compared with $20.2 million, or 37 cents a share, in the year-ago period.

Among the various loans the property trust has originated is a $30 million mezzanine loan at a hotel on the Upper East Side. Starwood Capital had also previously acquired discounted notes at the famed Carlyle Hotel, which refinanced those loan in April.

“We haven’t seen this level of origination since we started our business,” Sternlicht said in a first-quarter conference call with investors in May. “There’s a lot of volume in the market today, and we expect it to grow, not shrink.”

One of the more aggressive deals completed by Starwood was at the landmark City Club Hotel at 55 West 44th Street, where it made a $36 million loan in late June. The property, owned by investors Stephen Brighenti, Jeffrey Klein and Russell Hernandez, had a loan from Column Financial coming due in June.

After talking to a number of lenders, the owners reached an agreement with Starwood and secured a deal that included $23 million to refinance the existing securitized debt and another $13 million construction loan that will allow the owners to build an additional 66 rooms on top of the existing property. Brokers at Cushman & Wakefield Sonnenblick Goldman handled negotiations for the hotel.

The City Club Hotel, a former gentlemen’s club built in 1904, is considered one of the hidden gems of the New York hotel market, a place where celebrities and other sophisticated travelers stay, because of its relatively low profile. The hotel is located in a prime location between Fifth and Sixth avenues, and is the home to chef Daniel Boulud’s DB Bistro Moderne.

Jared Kelso, senior director at Cushman & Wakefield, said that Starwood Property’s background in the hospitality business allowed them to structure a complex deal in about three weeks, where more traditional lenders would have taken a pass.

“There are a lot of lenders that can claim to understand the New York City market, but there are very few who can claim to understand the intricacies of hotel ownership,” said Kelso, who represented the City Club owners. “They got the story.”

Ben Thypin, senior market analyst at Real Capital Analytics, agreed that Starwood may be uniquely able to structure more complex loan deals in the current hotel market.

“It seems to me they’re concentrating on the type of opportunities a more conventional lender would be less willing to do,” said Thypin, noting that they seem to be willing to lend on riskier deals that others might not take a chance on.

Despite the success of his new venture, Sternlicht remains concerned about the pace of the market and warns of a debt bubble.

“I was seeing deals where the debt was more than what I was willing to pay for the assets,” Sternlicht said.

Starwood is also looking at a new development in Manhattan that has yet to be announced, Sternlicht said.

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