Barry Sternlicht: The Next Chapter

A couple of days ago the top trending topic on Twitter was “#4wordsbeforedeath” meaning if you had 4 words to say before you died, what would they be? (for those of you who don’t follow us on Twitter, find us @llenrockgroup) Llenrock’s 4 words were “buy low, sell high.” Someone who truly lives by this common phrase is Barry Sternlicht, the “King of Hotels.” Mr. Sternlicht capitalized on the back end of the Savings and Loan Crisis by amassing capital and purchasing properties the government was auctioning off. It is also said that the real estate market is cyclical, and Mr. Sternlicht is counting on this principle as he has, once again, begun to buy up real estate.

The New York Times posted an excellent article that describes Mr. Sternlicht’s partial purchase of Corus Bankshare’s portfolio from the FDIC. For the next few paragraphs I’m going to play devil’s advocate, just to keep this from turning into a gush about how much we here at Llenrock love Barry Sternlicht. Back in December 2009, fellow Llenrock blogger Dave Jacobs did just that in a post that dubs Mr. Sternlicht, “the man.” However, these days there are those who are cautious about his investing plan. This European debt crisis, with rising LIBOR rates could indicate a double dip recession. If that’s the case, is Mr. Sternlicht going to be able to make his $150M payment in October 2011?  On top of this he has to win a whole mess of foreclosure proceedings on the properties in the portfolio.

What helps is that the federal government gave him low interest financing, including $1.4B at 0%.  Why would the government give such a loan to a private equity group, instead of attempting to bail out the original builders? Because they clearly have confidence that he will repay the loan. This is interesting considering that there seems to be a consensus that Mr. Sternlicht overpaid for the properties, and his competitor’s model even included hundreds of millions of dollars to fix “construction defects.” So depending on whose point of view is correct, there is the potential that Mr. Sternlicht overpaid for the portfolio AND he’s going to have to sink more money in them to fix “defects.” And if they are true, they could potentially hinder Mr. Sternlicht’s profit taking.

But let’s get serious now. He’s Barry Sternlicht. Barry. Sternlicht. There’s a reason he paid what he did for Corus’ portfolio (he adamantly claims he would pay even more today). He has vision. He sees the world in a way that no one else possibly can. Give Mr. Sternlicht distressed real estate, and he will turn it into gold. This isn’t his first rodeo, and it probably won’t be his last.

What happened the last time Mr. Sternlicht started to buy up real estate in a distressed economy? Starwood Capital was formed. Starwood Capital then started what is now Starwood Hotels & Resorts Worldwide HOT. Starwood Capital today has an estimated $13B in assets under management. Starwood Hotels is one of the largest hotel companies in the world. And if none of this is enough to convince you that Mr. Sternlicht knows what he’s doing, then look at one of his previous purchases.

During the Savings and Loan Crisis, one of the complexes Mr. Sternlicht bought contained a llama farm. Not only that, but it was a great investment. Not because he offered rides to neighborhood kids, but because the actual llama farmer paid off the loan before Mr. Sternlicht could foreclose on it. Did he plan it that way? I don’t know. Maybe he just has a soft spot for furry pack animals from South America. But that’s how Mr. Sternlicht operates. He buys where he sees opportunity. To his skeptics, I say have a little faith. Let him do what he does best.

To those complaining that the government should help out the condo builders before they help out Mr. Sternlicht and his private equity group, I say play-time is over, it’s time to bring in the big guns. Plus they are going to make money for the FDIC, which badly needs it at this point. Combining his passions for architecture and real estate, I have full confidence in him turning the entire distressed portfolio into gold. And with the low-interest financing, he may not be under as much of a time-crunch as his competitors think. In the end, the reason why he’s going to succeed is exactly as he says when he looks out the window of one of the empty units he recently bought, “Someone is going to want to live here - someday.”