For most dealmakers, a $425 million loss on a single transaction could easily spell the end of a career. In 1989, Barry S. Sternlicht, a brash 29-year-old partner at Chicago's JMB Realty Corp., engineered a huge leveraged buyout of Randsworth Trust PLC, a British property company. Two years later, when the British real estate market fell apart, Randsworth Trust collapsed, wiping out equity holders.
When he set out on his own that year, though, he so impressed investors with his ambitious plans to invest in the depressed property market that the likes of the Ziff publishing family and New York's Burden family invested $60 million. That was just the beginning. He has since raised $3.3 billion, which has allowed him to build a $5 billion portfolio of hotels, offices, and land. He has also emerged as among the nation's savviest real estate dealmakers, rewarding his investors with returns averaging more than 50% per year since 1991. "He is very smart, an awesome player," says Chicago real estate investor Samuel Zell.
TWO STARS. Sternlicht's investors will no doubt like him even more in coming weeks. Goldman, Sachs & Co., which owns 50% of Westin Hotel & Resorts, is offering to sell the entire chain for more than $1 billion. His Starwood Capital owns the other half of Westin and would stand to more than double the $273.5 million he paid for its stake in 1995. But in an unusual twist, another Sternlicht vehicle, Starwood Lodging Trust, a real estate investment trust that Sternlicht created in 1995, is the leading bidder for Westin. If Starwood Lodging, which is already worth $2.6 billion, buys the entire property, it would become one of the biggest and best-positioned hotel companies in the U.S. "What has made us dangerous in the market is that we have real estate background but we also understand Wall Street," says Sternlicht. With Westin, Starwood Lodging would control the fourth-largest chain, a 196-hotel portfolio, with 68,971 rooms and a strong brand name in a rapidly consolidating industry.
The son of the president of a small manufacturing company from Stamford, Conn., Sternlicht has always known he wanted to do big deals. Just months after joining JMB from Harvard business school, he was a key player in the Chicago company's $404 million acquisition in 1987 of real estate developer Arvida Corp. from Walt Disney Co. Sternlicht knew the assets, having analyzed Disney's real estate holdings as part of a Harvard project. "Barry was just two months out of school, and he was opening doors for us at Disney," says JMB President Neil G. Bluhm.
After leaving JMB to go it alone, Sternlicht showed his knack for finding value in the collapsing real estate market. He picked up $52 million worth of multifamily apartments at dirt-cheap prices at Resolution Trust Corp. auctions. He then sold his portfolio for a 20% stake in Zell's Equity Residential Property Trust that was worth $180 million when the company went public in 1993. At the same time, Sternlicht was among the first to start buying into the depressed hotel market. He focused on urban areas where building costs were steep and existing hotel properties selling at a fraction of replacement cost.
NO TAXES. Sternlicht's key deal in the hotel field was his 1995 acquisition of Hotel Investors Trust, a troubled REIT that, due to a legal wrinkle, was able to simultaneously buy and manage hotels, unlike other hotel REITS that must lease assets to a management company. But it still escapes corporate income taxes that burden conventional hotel companies.
The REIT, renamed Starwood Lodging, is located in Phoenix. But Sternlicht strikes his deals from a simple sublet office above the main commercial street in Greenwich, Conn. This spring, he has spent $537 million to acquire 15 hotels and 9 management contracts from Chicago to New Orleans. And he's trying to develop a partnership with Ian M.I. Schrager, who owns a hip hotel chain.
Despite his furious dealmaking, Sternlicht has few skeptics. Yet when he begins going head-to-head with the likes of Hilton, Sheraton, and Marriott, the going may get harder. Says JMB's Bluhm: "He is running fast and furious. But he may not know when to slow down." His future success may depend on whether he keeps remembering the humbling wipeout in his past.