Sternlicht on retail’s woes: Tenants have done “incredibly shitty job” running stores

Starwood Property Trust’s $172M Q4 net income was up from previous quarter

TRD NATIONAL /
Feb.February 25, 2020 05:00 PM
Chairman of Starwood Capital Group Barry Sternlicht (Credit: iStock)
An illustration of Chairman of Starwood Capital Group Barry Sternlicht (Credit: iStock)

Troubles in the retail world aren’t going away anytime soon — and retailers have themselves to blame.

That’s according to Starwood Property Trust CEO Barry Sternlicht, who spoke at Tuesday’s fourth-quarter earnings call.

During the call, Sternlicht recounted a visit to a new clothing store on Lincoln Road in Miami. Sternlicht said he walked around the store and couldn’t find a basic item — shorts — in a medium size.

He said retailers then send customers online because “Wall Street wants to hear about their online sales. So it’s kind of a big mess.”

Sternlicht added: “Rents are lower, tenants have all the leverage. And I would say the tenants themselves have done an incredibly shitty job running their stores.”

Capital is needed to fix retail assets, he said. Though Sternlicht predicted retail’s woes would eventually stabilize, he added that landlords have to work to replace bankrupt tenants — even though there are fewer options out there.

The issues plaguing retail — from the growth of e-commerce to changing consumer preferences — have led to store closures and tenant bankruptcies.

Starwood, the real estate investment trust that is an affiliate of Miami Beach-based Starwood Capital, has also felt the impact.

In the fourth quarter, Starwood reported net income of $171.9 million, buoyed by the sale of the firm’s portfolio in Ireland for $119.7 million, and up from $140.4 million in the third quarter. Sternlicht said the sale of those overseas assets helped to offset the nearly $72 million in losses the company saw on its mall side.

For the year, Starwood reported net income of $509.7 million. That’s up from $385.8 million in 2018.

He also sought to head off any concerns about the American Dream Mall in East Rutherford, New Jersey. Starwood also holds debt on that massive property, which partially opened in the fall after over a decade of delays. Sternlicht said for that property, its debt was not underwritten as a retail loan, but as a theme park, given the mall’s experiential features, including a ski slope and roller coaster. And the Mall of America in Minnesota is collateral against that debt, further protecting Starwood’s interests, he said.

“There’s no chance that we’ll ever see a problem in that loan,” Sternlicht assured analysts on the call.

A “good outcome” for Lord & Taylor building?

Sternlicht noted another iconic property Starwood provided debt on: WeWork’s Lord & Taylor building on Fifth Avenue.

Starwood has a piece of the property’s senior and mezzanine loans. During the call, Sternlicht addressed the news that Amazon was in talks to buy the 10-story building from WeWork, which closed on the property in 2019.

The Real Deal first reported on Amazon mulling the acquisition last week, pegging the price at around $1 billion.

“We have call protection in that loan, obviously. If they [WeWork] stay…we would be really happy,” Sternlicht said. “But I think you’re going to see a good outcome there and it’s not an exposure for the company at all.”

Amazon, a year out from its decision to nix its plans to build another campus in Long Island City, already leases spaces around New York but also had reportedly been in talks to lease space at the iconic former department store last summer.

Sternlicht added that Starwood was not bullish on New York City’s office market, which he said could see expenses rise faster than rents.

The city’s office market — along with those in other major cities across the world — also has greater exposure to so-called FAANG companies, or Facebook, Amazon, Apple, Netflix and Google. Those companies, plus a few others, Sternlicht noted, are also fueling the general growth of the stock market.

“These [companies] are driving these commercial property markets, and if they get in trouble in the stock market, they will get in trouble in the real estate markets,” he said. “The markets have never been more intertwined.”

And perhaps the biggest threat to FAANG companies?

“The thing that will stop these companies is regulation,” Sternlicht said. “And that’s the hardest thing to underwrite.”

Write to Mary Diduch at [email protected]


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