Episode 32: Barry Sternlicht - Chairman and CEO of Starwood Capital Group

26:23I interviewed with Marvin Davis, which most people don't know. And he was a tycoon and he offered me a job and I wanted a contract. And he said, I won't give you a contract. He said, if I could fit the contract to one piece of paper, will you sign it? He goes, I guess so. So I wrote this contract that I could never get screwed on. And it was so small and he wouldn't sign it. I wouldn't work for him. I said, I'm not going to take the risk again and get screwed. So, and then I got this offer from a friend of mine to back me in my own stuff. And again, I didn't really know what I was doing. So I think the sign of intelligence for your viewers is to ask a lot of questions.

27:01People who don't ask questions and are fearful of looking stupid, they will wind up being stupid. And you will make mistakes you shouldn't make. It's okay not to know things. And today you have chats so you can ask it anything you want and be smart. but ask questions. Most people would like that. It shows you're interested and you don't know what you're doing. So it's okay. I mean, at some point, if you ask endless questions and you don't catch on, you probably should try a different profession. But asking questions, and I think, I just recently made this speech internally. I mean, our guys should, and I think some of this probably happens in lots of investment shops where other partners don't want to shoot arrows at someone's deal because it's not nice.

27:45It's not friendly. It's not, you know, you're not supporting me. But in fact, you're supporting the firm by improving the investment process, by trying to shoot bullets at it, to try to, you know, ask every question, get every answer. So you aren't surprised that you succeed because of things you thought you'd succeed with. You could, you thought rents would go up because supply would diminish. And then, you know, when you get lucky when yields on property fall because interest rates change. So a couple more things about lessons learned. I mean, hope's not a business strategy. You have to make your own hope.

28:20And luck is when preparation meets opportunity. I was accused of being lucky when I created Starwood Hotels the first time our Hotel Investors Trust and then became Starwood Hotels. We worked our butts off and we were able to get a stock that traded a huge multiple, which I can then use as an acquisition vehicle to build the largest hotel company in the world over three years part-time while running Starry Capital Group. So, yeah, I mean, Hilton was there, and Hilton, unmarried, ultimately went to Washington to keep us from growing and get rid of our structure. But they weren't in the game, and we were disciplined.

28:57While we worked really hard, we didn't overpay for stuff. We had a little twin company that was born after us called Patriot American Hotels, and they kept outbidding me over and over again. And I was like, and the market loved it for a while. They love the action. Their stock flew, but they were overpaying. And when the geese came home and they couldn't buy anything else and people looked at the financials, they blew it. And the stock company went bankrupt. So you got to have a long-term view and you got to stay disciplined. And it's probably really good advice for the markets today, by the way, because we're in a chapter of investing that they don't teach at any business school in the country.

29:34so it is it is not um fundamentally driven it is not this is not cash flow growth this is uh we're definitely moved into the casino society so we'll see how this works out but it's definitely a different time i watch a lot of podcasts with you and you mentioned that you had a lot of executives that didn't work out that weren't loyal and you spent over 20 years trying to find kind of the right team to surround you what do you know about talent now that you wishing you 20 years ago Well, I think, I mean, you know, we companies, not my company, all companies grow at a pace. And you go from the minor leagues, the major leagues to trying to win the Super Bowl.

30:17And some of your talent can go with you and some of it is capped out. And sometimes, you know, and then as people get older, their priorities change. I mean, investing is a hard business and you have to stay in the game. Otherwise, it's just potluck. and you might just go to Vegas, you know, and have the same odds. So you have to stack the deck in your favor by doing the work. And I think, you know, everyone loves to get lucky, but, you know, I could get hit by lightning. And it happens in investing too, but that's not a way to run your life is throw, you know, hope, stand under a tree and hope you get hit by lightning 50 times.

30:53But you do have to have chips in the table to get lucky. You have to be in the game. so and that means you're going to make a lot of mistakes but you there are the mistakes are all learning opportunities and hopefully you you structure them in such a way that they don't devastate you they don't wipe you out so I think um in hiring people I think you know when you grow really fast sometimes you know you you take an athlete above their capability sometimes you aren't building the depth in an organization you need. Sometimes people's priorities change. They've made enough money or they have a personal issue at home when they decide they want to do something else.

31:34I think building depth to an organization, as it goes, obvious is really important. I think if you've seen my podcast, I think one of the CEOs on the firm told me when I was running Starwood Hotels, he goes, like, if you keep bad actors, you're doing the whole firm a disservice. and you're setting a standard because he'll say, oh, that guy gets away with it or she gets away with it. And so you think you're being nice to that person and you don't want to be a tough guy to fire them. It's really hard to let people go. I'm sure you're too young to have watched all the Seinfeld episodes when George Costanza fires people and you burst into tears and everything and people line up to get fired because they want to see how how emotional he gets.

32:12And then he gets numb from all the firing and he stops crying and everyone's furious at him. I mean, firing people is difficult, especially if you know them and they've been with you a long time. In my business, they've had kids or they got kids in school. But our loyalty at the top has to be to our business and our fiduciary duty or our investors or we're just not going to survive. So it's hard. I think the one thing most people agree on is the no asshole rule. You know, culture is a big deal. And if you see somebody, but it's there's much more nuance than that. People aren't working that hard.

32:47They're making it. I make a big distinction between pilot error and mechanical failure. I kind of like crises. They organize everyone to focus on the stuff that really matters. And people band together. When 9-11 happened and our cash flow at Start Hotels dropped from$1.6 billion to$937 million, we had a crisis on our hands. We got rid of all the superfluous things we were doing and focused on things that really mattered. And everybody was hand and hip. Same thing happened in the pandemic for us. In Star Property Trust, we just made it. We batten the hatches down and got through it. Now Star Property Trust, the nation's largest commercial mortgage rate, which started as a blind pool in 2009 from an idea I had.

33:30We raised$900 million in the New York Stock Exchange. Today it's a$20,$30 billion company,$28 billion company. It's the only mortgage rate that's never cut its dividend, and it's the only one trading above its IPO price. And I think we've paid out a total return over 13 or 14 years, like 11 and 12%, which would be most any hedge fund. And it's listed. And right now it trades like a 9.6 dividend yield. So, you know, and we did. I was pretty careful up front to diversify that company because I know you can't force capital into one sleeve and hope that it will be safe forever. So we continue to diversify that company.

34:07And it's interesting. I keep hearing the analysts don't like us. I said, I don't really care. I'm going to build a resilient company. They can buy the stock or not. I'm OK. Vote with your feet. But right now, it's doing pretty well. So I think people finding talent in my new role that I'll, as I brought in a press, and I'm going to spend more time finding great talent. And great talent in the firm should want great talent beside them. and not view it as a threat, but use it as a learning experience if they're better or that we will do better for our investors, which means they will do better too.

34:48So it's hard. It's hard in all companies. But I think it's like I consider CEO a lot like an NFL football coach. He's got his quarterback. He's got his line. He's got his wide receiver. And there's chemistry that's super important between the receiver and the quarterback. But if this world-class person shows up that's better than their quarterback, it's their job to go get that quarterback, try to bring him in-house, try to figure it out, try not to lose the chemistry, but win the Super Bowl. So you have loyalty. You also have a stodginess that comes into organizations that stay doing the same thing.

35:25When I took over Starwood Hotels, we were the most innovative hotel company in the world. We've won multiple awards for that. and all the ideas that I think many of which I came up with, but I hired people from Disney, from American Airlines, from Pepsi. I thought we had enough hotel people and I wanted to benchmark that company against the best sales culture at Cisco or the best HR department at PepsiCo, not the hotel industry. So I think you have to benchmark yourself against best in class in each vertical in your company and bring in more points of view so you have a quilt that has more colors.

36:02In investment shops, everybody thinks they want to say what they think I want them to say, like what I want to hear. I want to know why I'm wrong. I don't want to know why I'm right. I already have that. I got that down. I want to know. And it's funny because I will be very, and I talk about this a lot. I have a theory, but it's a theory. And it has to stand all the facts all the time as they change. And you have to want to change your mind. And I think when you're running an investment shop, even when you're running a company, it can be any industry, not real estate, you have to know when you should like when sheer force of will will get something done or when you're banging your head, you know, a square peg in a round hole.

36:41It doesn't matter how long you'll spend at that. I think everyone tries to do things where they have competitive advantage. Also, that gives you conviction to win something. You know, it's not like you can't be conservative on 10 variables underwriting a business. If somebody is going to use their knowledge and get aggressive on one and you're going to be, you know, and I don't think you've done anything like I don't think that's good. I don't think you can be the greatest person in the world. But if you are you won't win it, you won't get the deal. So you need to come with some thesis and some background and have conviction, which is true if you're playing golf, tennis, a sport or in the business of sport.

37:21But keep your mind open. Keep your head open to new variables and new data that might change your thesis. And you might go from a hold to a sell or a hold to a buy more. you know so i i tell a funny story that years ago we were having a uh asset management meeting and our portfolio in denver our apartments were yielding like 18 cash on cash and we probably underwrote eight so they were and they looked at me after they told me this and they saw i was kind of like really unhappy and they said why are you unhappy this is so great i said why didn't we buy 30 other properties there we had the information you should have told us that we were crushing are underwriting and we should use that information to run back in the market and have conviction and buy five other things so i think when you can tilt the playing field in your favor with unusual data or work hard work i think you know my success i've worked really hard you know it's not nobody can say that i i travel and read everything i can read and get my eye and i'm constantly looking for new ideas and new opportunities.

38:27And I, I try to be super creative, you know, and, and perseverance is genius in disguise. Like I will, like you, like you kept coming at me and now you have a podcast. So, but you know, I respect that. And I admired that in you. And I think I, and there's a, there's a right way and not a right way to do it. I mean, you don't want to be obnoxious, but you get a lot out of trying hard and, and working hard. You really do. the world pays off for hard work it does and one other thing which somebody said to me when i was young the world um is it's a fair world out there you get 24 hours a day everyone does and how you choose to use them is up to you so and don't be upset like by the way if you want to make forty thousand dollars a year and you know have seven hours a day to play other things it's totally cool.

39:17It's up to you. But don't, you know, you can't, can't expect to have built a lot of wealth for yourself working two hours a day. So like, that's up to you. It's all good. But you know, it's a fair world. So I take that to heart. Yeah, your point about talent really resonated with me. I mean, I've had some experience, even though I'm young, I've had some experience with talent. I had a, I had an executive assistant, I bootstrapped a business, I had an executive assistant at 14 for no reason, which is a little funny tidbit. But you've closed hundreds of billions of dollars worth of deals. And you're known as a really talented dealmaker and negotiator.

39:55What are some like kind of keys to successful negotiation? Well, you asked me about Neil Bloom. And early on in my career, we were walking into a, we were going to buy Universal Studios, Lou Osterman, the legend. And I think it was that trip where Neil looked at me and says, you know, it's time to be proud and time to grovel. because you got to know when you got to do which. And then he said, you know, you also have to learn to walk away. Like, and that's one of the hardest things to do in deals is walk away and be firm on your pricing and don't, you know, don't change your assumptions to justify this higher price you're paying.

40:31Like, that's silly. So, you know, I think about negotiating. Everyone has a different negotiating style. I think it's a hard thing. You want to buy something. Where do you start? Like you don't want to offer more than the guy wants for the asset, right? Or he may be willing. I think another thing you see in our business, you learn is people have investors who require different rates of return. So my investors want a 20. If I'm competing with a guy who wants a 10, he can outbid me. So, you know, he's not stupid. He's not a dummy. He's just got a different source of capital. That makes him quite smart.

41:08And they're comfortable with that asset at a 10. So I think I try to do deals and be reasonable from the start. I don't start with crazy ass or ask for crazy prices, hoping I get 80 cents on the dollar. And everyone's different than this. And I think the same is true in budgeting your company or budgeting your business. It's an art form. Like, do you set a goal? And I fought with a fellow I hired to run Starwood Hotels early on. he would set impossible annual budgets. And I said to him, why are you setting budgets like this? They can't possibly hit them. He goes, I know that, but they'll be within 80%.

41:48That's still better than they would do if I let them budget themselves. I don't adhere to that philosophy. And if you're going to use that philosophy, you better have some mechanism in the year for the year when they see they're missing their numbers to know that you're still in the game for the year. Otherwise, they've lost the incentive to perform because they're not going to make budget and they know it. So I think my goal is to give something that's achievable has to be measurable and uh and people can hopefully make uh you know can can can then hit the targets they need i think i think deal making is really an art form and i think the other key to negotiation which is people talk about all the time is making someone else feel like what you want is their idea i think one thing i also learned from neil in a really interesting negotiation with the walt disney company when we're buying this company from them But his style, he asked for some crazy stuff.

42:40But we were deep in the negotiation. And it was the equivalent of one and one is three. And he's arguing. And I'm there. I'm 28 years old or seven. I'm looking like, are you an idiot? Like, do you really think one and one is three? And the chief counsel of Walt Disney is turning the color of a bell pepper. You know, the president of Walt Disney was Frank Wells. He's screaming at me. I'm sitting there like, this makes no sense. And I walk out with Neil like, Neil, that's one and one isn't three. The one and one is two. He goes, I know that. I'm going to give this point away so I can get everything else.

43:13So, I mean, there's different styles of negotiating. And I think, you know, I've seen a lot of different styles. I think it's most important to know who you're negotiating with. Yeah. And how do you make them win? What do they need? And can you get them successful? I had a guy who was a lawyer work for me. he was a brilliant guy but maybe the worst deal that I've ever seen because every point was of equal importance to him and in reality only these three were important the other 17 didn't matter so focus on the ones that matter to you and recognize the relative importance of these issues in a deal and make sure you get the ones you need to get or you can't do the deal and the rest are kind of negotiating bait and realize that the other person And it's a deal is a relationship.

44:04They're going to get called later in your life as a reference. You don't want people to say you were, you know, an asshole. I think also another thing I picked up from JMB, there's a very famous guy that worked there. He really negotiated the other side to the bone, like to the bone, like he left no meat or skin or anything. It's just the bone. I don't try to do that. You know, I don't I don't whether I get that extra million dollars off the deal. It's not going to make a difference in the deal price. and the deals performance ultimately. So I don't try to, now we find issues like the roof is caving in and we didn't underwrite that.

44:38That's not a price cut, that's due diligence. But if we want to go back and say, hey, I want 5 million off the price for no reason. I mean, that's something I try not to do. And we couldn't be as successful as we've been over three decades if we retraded people on deals all the time. And for a while, our competitors were saying we were doing that, even though we weren't. And I kept saying, well, how do you think I did? I bought 700 hotels. Well, we owned over 120 ,000 market rate apartments. We have the largest number of apartments in the country. Today we have the largest number of affordable units in the United States, 53 ,000 units.

45:13But our market rate book is down to like 50 ,000 units down from 120 ,000. So you don't buy all this stuff if you wind up retrading everyone. That would be a, your reputation would precede you and you wouldn't get any deals. Quite the contrary. We'd come in second and third and a bid and they'd still close with us because they know we'll close. So that's one of the benefits of being in business a long time. I have a couple unrelated questions to investing for you. You're obviously very focused on design. What does great design mean to you? What does it feel like? I'm a you're on a really important subject to me personally, because I think, you know, what matters in real estate in particular is what's happening to the asset.

45:55I look out my window. I probably have 40 analysts and associates sitting at their desks. They're doing performance that are meaningless. It really matters what's going on in the property. What what the financials that come into our offices that we model off are a result of what's happening at the property. So if you put the trash bin in front of the leasing office or the pool furniture is a mess where there's no fresh flowers or the flowers are dead, you're going to have a problem with your occupancy. And it's not you're not computer is not going to fix it. It's what happens to the property. And I, you know, I built my career on design matters.

46:26I created W Hotels out of an idea that you could have a cooler hotel, not the coolest hotel. It was never supposed to be even Ian Schrager's hotels. It was supposed to be, I call it the staff at W Magazine, not Kim Kardashian. Because Kim's not loyal to me. She'll be at every new thing that opens. And I want to build a loyal crowd. So I think design matters. I think today design matters more than anything. I think you're appealing to an affinity group, a group of people. I think the K car, which was Chrysler, they built a car in a single chassis and it was a huge failure. You can't do that. You have to pick a niche and own it and be true to that and then gain authenticity in your niche.

47:10And then if it's a big enough niche and you do it well enough, you can price against that and get some loyalty and some pricing power. And when I started W Hotels and the guys would come back and say, oh, we're$10 ahead of the Marriott and$10 ahead of the Hilton. I'm like, well, we're not competing with Marriott and Hilton. We're a different crowd. People want to stay with W or saying something about themselves. Try 50 bucks. and that would hold. And that's now with one hotels, we see the same thing. We built a hotel in Brooklyn here in New York. You know, the room rates, when we were bottling it out, the guys were telling me, hey, Sheridan and this other hotel, they're doing$280 a night, so maybe we'll do like$320.

47:48I said, it's irrelevant what the neighbors are doing. We're going to build this great building, brand new, with incredible rooftop and a pool overlooking the skyline of Manhattan. Today, we averaged$780. You know, the guys are still$300. So, I mean, I think sometimes this is sort of an art form, but design does matter. What you build, and you see it today in the office markets, the best buildings are full. Buildings that I built a building in Miami during the pandemic in a market that most people thought was pretty full. And we leased the entire building with no leasing broker during the pandemic.

48:22And it was 100 % full. I leased it by myself because I built the best building in South Beach. and I knew people that wanted to be in the building and I built the right product. That market was small tenants and I have 10 family offices in the building. So, you know, I think it's really, really important what you build matters. But don't fall in love. Like, don't be stupid about it. Don't like you see guys. I don't care what everyone I'm building the nicest building. You still have to get the math right. You have to get the cost versus the yield. Right. And a lot of times, if you get lucky, like the one South Beach today, we thought we'd get$600, but we built a really good hotel and it gets$1 ,000 a night and nobody's pissed off.

49:06So, you know, I think design, and to me, it's all senses. It's color, texture, sound, smell, everything. It's everything. You got to work on all the five senses when you're certainly in the hotel business and in the rest of real estate. I think it matters. I really think it matters. We've renovated many of our apartment buildings. I took one building in Aventura and I gutted the units. And if we fixed them up, we doubled the rents. So we're good. Some people are really good. We're good. We're not great. We could be better. Everyone could get better. I want to ask you kind of a question that's different than a lot of the questions I'm asking you.

49:50And then I have two more questions left for you. but I know you're Jewish and I know you're involved in the Jewish community. How did your, I'm half Israeli and I'm also Jewish. How did your perspective on the world change after October 7th? That's quite a pivot. Well, immediately, as you know, I started this social media movement called Facts for Peace to try to convince or teach people who Hamas was and what they called for and that they weren't a partner for peace ever. The world seems to have lost the narrative. I mean, they call for the destruction of Israel. And so I don't know how anyone could ask for a Palestinian state that's led by a government that doesn't recognize Israel's right to exist.

50:35So would I like a two-state solution? Absolutely. Is it probably the only solution that works in a bad situation? Yes. But then you have a government that recognizes Israel's right to exist, and then Israel will recognize the Palestinians' right to exist. if they spent all this money on building resorts, hotels, and creating jobs rather than buying missiles and cutting up water pipes to create missiles to fire at Israel. I thought that for me, that was my call to action. I thought I cared. I had a history. I've been to Israel as a kid. And again, a couple of times as an adult. So I thought I've been successful to help with something like that.

51:15And we've had a billion views of our videos, though it's hard. The world is poised really aggressively against Israel. And I was recently offshore. You watch CNN International and you watch CNN. And CNN International is virially anti-Israel. And CNN is mostly anti-Israel because it fits in with the left narrative now. And nobody seems to be upset about the children and the women dying in Ukraine. They seem to be dying. And they didn't start the war, the Ukrainians. And all that has to happen, they tell people that all these tunnels in Gaza, when the Nazis bombed London, Winston Churchill put the populace of London in the subway tunnels.

52:01Those tunnels could have been used for the women and children of Gaza. And instead, they left them on the surface, put Hamas soldiers in the tunnels. And they wanted them to die so they could get world sentiment. and they don't care about life, but they say that. They're martyrs in a cause. So it's worked beautifully for them. Obviously, it was the ignition of the October 7th massacre was the fact that Israel was going to probably sign a peace treaty with Saudi, which they couldn't have happen. And it's interesting that Arab countries have said that Hamas can't stay, but the Europeans don't seem to have that point of view because the Arab nations know they're not a partner for peace.

52:41Can you just take that off for a sec? And so I think, you know, I don't know. I don't think I'm not a fan of Bibi's government. And I think Israel does a really bad job of talking about all the good stuff they do. But, you know, I do know that this is the explosion of anti-Semitism is something that I never thought I'd see in my life, in this country at least. And a lot of it's born from ignorance, which is why I did the social media program. And we targeted persuadables. I mean, 10 percent of Americans think the Holocaust never happened. So they're not persuadable. I can guarantee you the Holocaust happened.

53:23My father is living proof. And, you know, now you have this revisionist history on Hitler was a good guy and Churchill was a bad guy. So it's scary. How could you say anything else? And, you know, a lot of this stems from a world where family and values and what's right and wrong is kind of getting all mixed up. And it's very distressing. I choose to believe it'll be OK, but super, super rough right now. Yeah. Yeah. I just wanted to hear your perspective on it as a young Jew and a young Israeli in the United States. And I want to end on a little bit more of a upbeat note. this is a very very different question but it's probably the second most challenging question i'll ask you today after the last one but if you could only stay at five hotels for the rest of your life i can't name those i probably haven't been there there's uh some places i've been that were great as um all tudor jones owns a hotel in uh tanzania which is uh outrageous um it's And then I've been to the Sengita Resorts in South Africa.

54:34They were terrific.

54:38You know, I've become a bit of a snob on hotels. They really got the extraordinary to totally impress me. Are there any others that were, like, mind-blowing? It's interesting. I think that the Amman in Tokyo is pretty amazing. has a lobby that probably cost, you know,$6 billion, given all the space they gave to Iraq.

55:04I'm thinking, we have to come back to you on this. It's, you know, let me think.

55:17There's a lot. I mean, I could pick my own hotels, but I won't. We still own the Creon in Paris. it got renovated it's beautiful they did a lovely job um there's a hotel in mallorca um wait on the point now um i've got the name of it roca rocco rocco it's pretty cool it's an old it's an old uh la residencia there's a belmont it's beautiful um but don't put me on the spot because i'm gonna i'm gonna you know i like to tell you all my hotels then i can i can tell you that The Baccarat in New York, which I built. I'll go, that's a really nice urban hotel.

56:01But I have, I don't know. I got a lot of hotels I like. I'll check out the lobby of the Baccarat next time I'm in the city. My final question, I end off with every guest with this question. This has been an incredible interview so far, and I first want to say I really appreciate you coming on. But if you had to give one piece of advice to a 15-year-old today, I'm 15 and turning 16 in four days, what would it be?

56:25I mean, my entrepreneurial finance professor said, find the freight trains in your life and get on them instead of in front of them. So think about what those freight trains are. Today, AI and how changing the world is going to be one of them for sure. But I think don't take shortcuts. like basically be willing to walk the walk and don't don't take a shortcut build a strong foundation for whatever it is you want to do in your life and career i've just read barry diller's book who i've known for 25 years and he talks about working in the mail room and how he went here and he was this guy's assistant that guy's assistant i was basically that that person i i licked i licked envelopes in a mail room you know in the summer years so just do the work like don't Do the shortcuts to understand the building blocks of what it is you're doing.

57:20Learn as much of the variety of roles that it takes to succeed in whatever it is you want to do. But spend the time, especially when you're your age, because it's not about money. It's about acquiring skills. Money will come later. And then again, if you're fortunate enough to get into something you love, then it's not even work. And for me, design does not work. I love it. It's a creative outlet for me. And it gives me peace. I enjoy design. And the fact that I'd marry it with a financial skill so I know what I can spend to get a decent return for my investors, that's the holy grail for what we do.