Starwood said to raise $2.8B for two funds

Greenwich-based Starwood Capital Group LLC, the investment firm founded by Barry Sternlicht, finished raising capital for two funds totaling about $2.8 billion that will invest in real estate.

The Starwood Global Opportunity Fund VIII, which will target distressed debt and property, took in more than $1.8 billion, according to a person familiar with the effort. The Hospitality Fund II, which will invest in hotels, attracted nearly $1 billion, said the person, who declined to be identified because the deal is private.

Starwood previously had raised about $10 billion of equity for 11 funds and other investments, according to documents from JPMorgan Chase & Co., which helped the firm find investors. Starwood is leading a plan to bring Extended Stay Hotels Inc. out of bankruptcy and purchased loans in October from failed Chicago-based lender Corus Bankshares Inc. as the real estate market reels from a 40 percent drop in commercial property values from its 2007 peak.

"Raising new capital in this environment speaks to the team at Starwood and the deals they've been able to get done," said Dan Fasulo, managing director of New York research firm Real Capital Analytics Inc. "Barry and his team are one of the few that have been able to put money to work in the past few months."

Starwood Global Opportunity Fund VII, which closed in 2005 with commitments of $1.48 billion, was up 3 percent as of January, according to the person. Starwood Capital Hospitality Fund I, which closed in 2005 with commitments of $900 million, was up 10 percent, the person said.

Starwood plans to invest much of the new opportunity fund's capital in the United States, targeting distressed borrowers, lenders and banks taken over by the Federal Deposit Insurance Corp.

"Everyone knows of somebody who's in trouble with something in real estate today," Sternlicht, 49, said on a Feb. 11 call with potential investors, a recording of which was obtained by Bloomberg News. "It's a great opportunity for us."

Starwood led a group in October that won part of a $4.5 billion portfolio of real estate assets that belonged to Corus before regulators took over the Chicago-based lender in September.

Starwood and its partners outbid their nearest competitor for the portfolio by more than $100 million, or 20 percent, people familiar with the sale said at the time. Sternlicht said on the call that Starwood is "spending a lot of time with the FDIC."

Most regional banks in the United States are "effectively bankrupt," said Sternlicht, providing an opportunity as $1.2 trillion of real-estate debt matures over the next four years.

Starwood Capital also may acquire distressed properties by taking positions in the debt, said Sternlicht, including the Carlyle Hotel on Manhattan's Upper East Side. The firm bought mezzanine loans backed by the hotel for 50 cents on the dollar at about January 2009, he said.

"We're just hoping they trigger a covenant," Sternlicht said of the loan, which matures next March, adding that his firm could wind up owning the hotel for $400,000 per guest room, or about 30 percent of replacement cost. "We take over management; that would be a windfall."

Fortune.com reported Friday that Sternlicht is making a similar play with 100 W. Putnam Ave., the former UST building in Greenwich that was turned into a hedge-fund hotel by Antares Investment Partners, only to have its two biggest lessees shut down their funds and cease operations.

The Carlyle, owned by Maritz Wolff & Co., has seen cash flow drop since Starwood Capital bought the note, Sternlicht said.

"Starwood purchased a syndicated piece of a loan backed by the Carlyle," Philip Maritz, president of Maritz Wolff, said. "All debt backed the Carlyle has never been in default and is not forecast to go into default. In fact, since all covenants have been met the loan was recently extended."

Riviera Deal

Sternlicht is also trying to take over ailing Las Vegas casino-owner Riviera Holdings Corp. four years after a bid he backed was shot down by shareholders.

Starwood Capital, along with "some friends," bought control of Riviera's first mortgage for about 50 cents on the dollar and is leading creditors negotiating a prepackaged bankruptcy, Sternlicht said. Riviera, which owns a Colorado casino in addition to the 55-year-old Las Vegas resort, defaulted on a $245 million loan in February 2009.

"We are now working to take the company through a pre- pack," Sternlicht said. "It's going very well. We lead the creditors' committee there."

`Mortally Wounded'

Starwood Capital could own Riviera's 26-acre resort for "about $5,000 a room, which is less than the cost of the furniture," Sternlicht said on the call, without saying how much Riviera debt it held. "I'm thinking of it as a long-term parking lot. We're just going to hold it and have very little invested in the deal."

Starwood Capital is also working on a restructuring with "a multi-billionaire who has a large real estate portfolio," Sternlicht said on the call. He didn't name the person.

"Those are exciting opportunities when you have few competitors," he said. "Most of our competitors are mortally wounded, especially the Street."

Sternlicht founded Starwood Hotels & Resorts Worldwide Inc. in 1995 and was that company's chairman and chief executive officer for almost a decade. Brands include the W, Sheraton and Westin.

He raised $810 million through an initial public offering of Starwood Property Trust Inc., a REIT. Shares have since dropped 3.5 percent.