Barry Sternlicht / Getty
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/By Clive Minchom /
As the fragile economic recovery takes hold in the United States, major property companies there continue to reshuffle their portfolios: to match assets against liquidity, opportunities against risks, and for some it is an opportune time to take advantage of the liquidity needs of others.
Barry Sternlicht’s Starwood Capital Group, a leading global private hedge fund focused on real estate, is a master of this approach and he has been, counter-cyclically, buying up other people’s problems at a discount for two decades.
Liberty Center in Pittsburgh
It was announced on August 2nd that Starwood Capital has completed the purchase of Liberty Center, a prominent mixed-use office and hotel building located in downtown Pittsburgh’s “Golden Triangle”, through its Starwood Distressed Opportunity Fund IX. The property was acquired from a partnership that included Forest City Enterprises, Inc. and Jos. L. Muscarelle, Inc., for a gross purchase price of $135 million.
The 27-story prime office tower contains over half a million square feet of rentable space, and is the headquarters building for Federated Investors Inc. The office portion of the property is attached to a 600 room Westin Hotel, one of the best full-service hotels in the city. The hotel is itself connected via an enclosed pedestrian bridge to the nearby David L. Lawrence Convention Center, designed by Rafael Vinoly.
In addition to the office building and hotel, Liberty Center includes a 25, 000 square foot retail shopping arcade and underground parking for nearly 500 cars. With the purchase now under its belt Starwood plans to improve the tenant and guest experience through substantial, much-needed, and likely quite expensive, renovations to the lobbies, hotel rooms, restaurants and other common areas.
Pittsburgh’s “Golden Triangle”
The Starwood Perspective On the Purchase
This is what Starwood had to say about its new purchase:
“We are excited to be acquiring this well-performing mixed use asset, which is situated in a market that has increasingly attractive fundamentals, ” said Jeff Shuster, Vice President at Starwood Capital. “The Pittsburgh economy is experiencing a Renaissance with broad based growth in multiple sectors, including energy, healthcare, technology, education and financial services. This economic expansion has helped raise the downtown Class A office occupancy rate to be among the best in the nation.”
“We are pleased to be adding to our hotel portfolio the Westin Pittsburgh, one of the premier hotels in Pittsburgh’s city center, ” said Suril Shah, Senior Vice President at Starwood Capital. “We expect the convention center to provide a sustainable source of room demand and when combined with the city’s projected job and population growth, should offer meaningful upside to the investment on behalf of our partners.”
The selling partnership was led by Forest City Enterprises, a New York Stock Exchange listed national real estate company based in Cleveland, founded by the Ratner family in the nineteen twenties. Reflecting its own priorities, perhaps, the Forest City press release for the same transaction focuses first on how they divvied up the cash: i.e. the gross selling price was $135 million, and the transaction generated net cash proceeds, for Forest City’s own share of the property of approximately $30 million. Prior to the transaction the property was owned, in a 50/50 partnership, by Forest City and Joseph Muscarelle of Maywood, New Jersey.
The View From the Seller’s Perspective
In its press release Forest City then reiterates its own current strategic goals leading up to this transaction:
“This transaction continues our strategic effort to exit non-core products and markets, and to use proceeds from dispositions to improve our balance sheet, and invest in our mature portfolio and entitled development opportunities, ” said David J. LaRue, Forest City President and Chief Executive officer. “In addition, the Westin Convention Center was the last remaining hotel in our portfolio, so the sale also marks Forest City’s exit from that business. Our focus going forward continues to be apartment, retail, office and multi-use projects in our core markets.”
That is a very clear statement of goals. Forest City then points out in its release that since the beginning of its fiscal 2013 it has completed seven dispositions, including both fully consolidated and unconsolidated (equity-accounted) assets, generating net cash proceeds of approximately US$124 million. That, together with another 12 dispositions with total net cash proceeds of approximately US$129 million in the previous 2012 fiscal year.
Wow, US$253 million that is a lot of dough, and it cannot have been easy in such down markets but certainly great credit due for the accomplishment, even for a US$10 billion company. Also given that the Liberty Center was jointly owned with a private party, whose own objectives may have been even more focused on liquidity, its sale manages to keep them both happy.
About Forest City
Forest City Enterprises, Inc. is an New York Stock Exchange listed national real estate company with US$10.6 billion in total assets. The company is principally engaged in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. It was founded in 1920 after the Ratowczer (later Anglicized to Ratner) family emigrated to the United States from Poland. The family’s lumber business – built by their four children, Charles, Max, Leonard and Fannye Ratner – prospered and expanded greatly. Eventually the company left the retail and lumber businesses to focus on the ownership, management and development of real estate.
Forest City’s real estate operations continued to grow as the Company went public in 1960, eventually listing on the big board of the NYSE. The 1960, 70s and 80s saw the company’s development footprint expand nationally – from the Midwest to California and New York as it became known for complex urban developments. In the past twenty years, Forest City undertook and completed some of its most well-known projects, including The New York Times Building in Manhattan, University Park at MIT near Boston, and Victoria Gardens in California.
In 2011, David LaRue succeeded Charles Ratner as CEO, becoming the first Chief Executive in Forest City’s history who is not related to the founding family. Charles Ratner remains the Chairman of the Board of Forest City, after having previously served for many years as its CEO.
About Starwood Capital
Starwood Capital Group (Starwood) is a private investment firm based in Greenwich Connecticut, focused on global real estate, energy, infrastructure and securities trading. It was founded by Barry Sternlicht, 53, its Chairman and CEO. He is also chairman of Starwood Property Trust, the largest commercial mortgage REIT in the United States traded on the NYSE.
Today the firm manages approximately US$12 billion of investor capital on behalf of its high net worth and institutional partners. Starwood employs approximately 225 associates at its headquarters in Greenwich, Connecticut, and other offices in Atlanta, San Francisco, Washington DC, London, Mumbai, Sao Paolo, Paris and Luxembourg.
From 1995 through early 2005, Sternlicht was also Chairman and CEO of Starwood Hotels & Resorts Worldwide, Inc., a company he founded in 1995. Starwood Hotels employed over 120, 000 people and is one of the leading hotel and leisure companies in the world with more than 895 properties in 100 countries. Sternlicht also created W Hotels, perhaps the world’s most successful “boutique” brand, and built St. Regis Hotels into a stand-alone hotel brand as well. In 2005, Starwood acquired Groupe du Louvre which owns crystal maker Baccarat.
About Barry Sternlicht
Sternlicht was born in New York City in 1960 and grew up in Connecticut, the son of a Holocaust survivor from Poland. He received his BA, magna cum laude, with honors from Brown University, and later earned an MBA with distinction from Harvard Business School.
After graduation, he first went to work for JMB Realty, a real estate investment company in Chicago, where he learned the real estate business. In 1989, after the real estate market collapsed, he was laid off and went into business on his own.
Sternlicht’s first foray into distressed real estate occurred when he was able to raise $20 million from the wealthy Ziff and Burden families of New York in order to, first, buy-up loans at a huge discount from the Resolution Trust, created by the federal government to pick up the pieces from the then savings-and-loan crisis. Then, in 1991 he launched Starwood Capital Group to also buy-up multi-family apartment buildings which were being auctioned off by the government en masse as it exited the aftermath of the savings and loan crisis. In 1993 he sold these on to Chicago real estate magnate Sam Zell in exchange for more than 20 percent of Zell’s Equity Residential Properties Trust. When Zell then took the company public later that year, Starwood got a 100% return which launched his business dramatically. Sternlicht later began to purchase hotel sites, focusing on combining his passions of architecture and real estate finance.
His business philosophies are clear and eminently quotable:
“Pay attention to the big themes, because that’s what will help you earn ten times your money, ” Forbes Magazine recently quotes him as saying, going on to warn, “if you focus too much on the micro, then you can be obliterated by the macro and vice versa.” Forbes link is here
Another key to success he says is to remember that “you don’t know anything ever” and that “you have to be willing to change your mind.” “As the facts change, ” he says, “change your thesis. Don’t be a stubborn mule, or you’ll get killed.” Another important tactic has been to study outliers, rather than eliminate them, as the statistically minded frequently recommend: “You can learn everything that there is to know about the industry or the player from the company that is performing better or worse.”
This last item is perhaps his most important piece of advice. Huge banks went bust in the recent crisis of 2007-2008 precisely because they ignored what their risk management advisors soothingly had told them were “outlying” adverse possibilities – i.e. highly unlikely events which could be ignored; events which then of course materialized and destroyed their business models.
Barry Sternlicht has clearly learned from adversity and profited from it. JMB, where he had his first job, was a highly leveraged buy-out company that this writer was, for a time, on the other side of what became a major transaction with when a major Canadian publicly listed real estate company, Cadillac Fairview Corporation, was ultimately sold to them.
As an already highly leveraged company the deal with JMB added even more layers of leverage. So, when the roll over of rents in the next ensuing downturn led to a collapse in corporate revenues amidst a collapse of the then prevailing hugely inflationary economic expectations, those debts could not be supported and JMB went down with it as well. Clearly Sternlicht learned the most important lesson of his life then – buying cheap to profit later from other people’s misfortunes is much more fun than creating a big mess yourself at the top of the market.
In 2010, Sternlicht was named Executive of the Year and Investor of the Year by Commercial Property Executive. In 2005, Sternlicht was named America’s Best Lodging CEO by Institutional Investor magazine.
Sternlicht is a member of the Interior Design Magazine Hall of Fame. He received the Preston Robert Tisch Distinguished Industry Leadership Award from New York University, the CEO Diversity Award by Diversity Best Practices/Business Women’s Network, the Lifetime Achievement Award from the Association of Travel Marketing Executives, the Hospitality Heritage Award from the American Hotel and Lodging Association, and the Marketer of the Year Award from Brandweek. Sternlicht’s humanitarian efforts have led to prestigious national honors such as JDRF’s Man of the Year, JDRF’s Living and Giving Award and JDRF’s Chairman’s Award.