HOW BARRY STERNLICHT BECAME THE KING OF HOTELS
(FORTUNE Magazine) – It was less than 24 hours before ITT's shareholder meeting, and Barry Sternlicht was stressed out. The meeting would decide the fate of the hotel and casino giant and end one of the nastiest takeover battles of the '90s. Sternlicht, chairman and CEO of Starwood Lodging, had a $10.2 billion white-knight offer on the table, and he'd spent a frantic four weeks putting it together. With associates running in and out of his Greenwich, Conn., office and phone calls streaming in nonstop, Sternlicht talked to FORTUNE as he juggled the last-minute things that are the stuff of bidding wars. "I woke up today and looked in the mirror and thought, 'This is the worst I've ever looked,' " he said. He combed through lists of large ITT shareholders whose voting preferences still needed to be canvassed (Fidelity, ITT's largest institutional shareholder, and Soros Fund Management were already in Starwood's camp). He crammed for a conference call to fight a scathing two-page ad the opposing bidder for ITT, Hilton Hotels Corp., had unleashed that day. He exploded on a telephone call with a Bear Stearns investment banker when numbers needed for the conference call were late. "They were supposed to be here at 8 A.M.--it's now after noon. What the hell's going on?" Sternlicht screamed into the phone.
By the afternoon of the next day, the stress seemed worth it. Preliminary tallies of ITT shareholder votes gave Starwood Lodging a decisive victory over Hilton, meaning that Starwood, a hotel company based in Phoenix, will swallow a company seven (yes, seven) times its size in revenue to become the largest lodging and gaming company in the world, with a total market capitalization of about $17 billion (assuming, of course, no one else emerges with a better bid). And Sternlicht, who nobody had heard of a few months before, will assume the helm of a 77-year-old company with $10 billion in assets. All of which has left some real estate veterans wondering, Who does this guy think he is, anyway?
You might be interested to know, because Sternlicht emerges from this deal as the new king of the hotel business. To put it another way, he's a visionary in a stark new era of real estate finance as well as a quirky fanatic whose ideas about the aesthetics of hotel design just might rattle the whole industry.
Sternlicht graduated from Harvard Business School in 1986 and joined a leading '80s real estate firm, JMB Realty, where he proved himself a gutsy and deft dealmaker. He bought Starwood, then called Hotel Investors Trust, in January 1995 with money he had made from private real estate deals. He foresaw value in its rare paired-share structure, in which a REIT--real estate investment trust--and a standard operating company trade as one stock. (Paired shares essentially let REITs both own and manage real estate assets, thus allowing for greater operating control.) At Starwood, his track record of deals--46 so far--has meant incredible growth for a company that had been on the verge of bankruptcy three years ago.
Since then, the value of Starwood's stock has risen from $12 a share to a recent $56, and revenue has grown from practically nothing to almost $900 million. Sternlicht's acquisitions have placed Starwood in a strategic position in the real estate market, since most of the company's properties have been upscale, full-service hotels in urban areas where new building costs are prohibitively steep. "Starwood stands alone because they're downtown, high-end, and right now there's no evidence of competitive capacity there. This is one of the best areas in real estate right now," says Ken Heebner, a fund manager at CGM Funds who owns 335,000 shares of Starwood. The acquisitions have also been done cheaply--an average of 30% lower than what it would cost to build.
Of course, Sternlicht couldn't have been so deal-happy without the luck of the bull market behind him. Investors' voracious appetite for REITs over the past three years has allowed Starwood to finance deals by issuing new shares of its highflying stock. "If Barry had tried to create Starwood in an environment where he had to borrow the money to buy every hotel asset rather than continually print new equity, he would not have been able to do it," says Henry Silverman, CEO of hotel franchiser HFS.
If Sternlicht has anything to say about it, REITs like Starwood will continue gobbling up more and more of the country's real estate. Functioning as public market structures that parcel out 95% of their profits to shareholders in the form of dividends rather than paying corporate income taxes, REITs have grown from a $9 billion market in 1990 to a $131 billion market today, and are moving real estate from private ownership and debt-oriented financing to Wall Street. And to the extent that the ITT shareholder vote was a referendum on REITs, these structures are also replacing traditional corporate ownership of real estate. "Any company in the U.S. that has significant real estate should own it through a REIT structure. It's just stupid to own it through a [standard] corporation," says Sternlicht. That's precisely what he told ITT COO Robert Bowman when pitching the merger to him. It's also what he told Hilton's Stephen Bollenbach when he proposed an acquisition in early 1996. Bollenbach, of course, didn't buy it.
One thing that could derail Starwood's growth would be if Congress stripped Starwood of its unique paired-share structure, or cracked down on REITs in general. Hilton's Bollenbach, for one, has promised to continue lobbying Congress to change the tax status of paired-share REITs, which he considers highly unfair. Sternlicht says he's not worried, but just in case, he's hired Bob Dole to head a "public policy advisory committee" and has added former Senate majority leader George Mitchell to Starwood's board.
Sternlicht's passion for doing deals is matched, oddly enough, by the thrill he gets thinking about how hotels are designed. Ask him about bedspreads--or end tables, wall coverings, and modular lamps, for that matter--and his eyes light up. "It's where my heart is in this whole enterprise," enthuses Sternlicht, who paints watercolors and describes himself as a "frustrated artist." Sternlicht has been personally involved in creating models for stylish hotel rooms that Starwood plans to roll out in 20,000 of its 32,000 rooms (not counting hotels from the company's pending $1.6 billion Westin Hotels & Resorts acquisition or ITT's Sheratons). The business strategy behind the concept is that hotel customers will pay a premium for style, and superior design will distinguish Starwood's product in a marketplace crowded with generically ugly hotel rooms. "You wouldn't ever confuse this with a Marriott," says Sternlicht, proudly showing FORTUNE a photo of Starwood's sleek, neutral-toned room design. "You walk into the Days Inn and you're not going to pay $200 a night, but when I show you this picture you can't tell me what the room rate should be." If the strategy works, Sternlicht thinks it will be Starwood's suit of armor against the inevitable real estate down cycles.
Sternlicht also has plans for even hipper hotel rooms and a new brand of Starwood hotels that he won't name yet, calling it just "our funky brand." These include New York's Doral Inn, currently undergoing a $75 million makeover by celebrity restaurateur Drew Nieporent, the owners of the Paramount Hotel's Whiskey Bar, and the designer of Planet Hollywood.
Maybe there will even be a few Sternlicht watercolors on those "funky" walls.