Intelligent Deals Amidst “Massive Illiquidity” … Possible or Not?
Panelists Discuss Market Changes; Staying Ahead of the Cycle
The second panel of the 25th annual Cornell Real Estate Conference featured four of today’s most prolific deal makers discussing recent changes in the market and extracting profit from every phase of the real estate cycle.
Panelists were Wes Edens, chairman and CEO of Fortress Investment Group, LLC; Jon Gray, senior managing director of the Blackstone Group; Stephen Quazzo, co-founder and CEO of Transwestern Investment Company, LLC; and Barry Sternlicht, chairman and CEO of Starwood Capital Group.
The panel topic itself was proof of the cyclical nature of real estate: When the conference was being planned in the spring, around the time of Blackstone’s buyout of Sam Zell’s Equity Office REIT, the market had never seemed frothier. It seemed appropriate, then, to title the session, “Intelligent Deals Amidst Massive Liquidity…Possible or Not?” Then came the credit crunch of August. Accordingly, the panel was renamed on the fly, replacing “liquidity” with its antonym, “illiquidity.”
The first to comment on the seizing of the credit markets and the resulting repricing, Mr. Gray characterized it as “positive,” adding that in his perspective, the cool down in the real estate market prevented a potential bigger real estate crash that would have resulted had value continued to spiral upward without commensurate yields.
Mr. Quazzo echoed Mr. Gray’s sentiment, and stressed the importance of taking a variety of positions in the capital stack in order to keep making deals: “In the last 60 days, the high yield and mezzanine debt markets have provided a significant amount of profitability. In particular, the current market conditions have provided favorable conditions for the origination of one-off mezzanine loans to borrowers.”
The conversation then turned to decision making vis-à-vis acquisition and disposition. Regarding relative returns versus absolute returns, Mr. Sternlicht wryly commented: “You can’t pay bills on IRR,” adding, “The models are almost always wrong. Time frame? You never the time frames correct in modeling. Investment memos are always wrong. Get in, get out and take advantage of the time frame and everything around you as circumstances change.”
The panel then concluded with musings on the costs and benefits of being a public company. Mr. Gray acknowledged that being a public company is “painful” due to the intense scrutiny surrounding each transaction, but that ultimately the infusion of IPO capital creates growth opportunities. Regarding the pressure of meeting and managing investor expectations, Mr. Eden summarized: “In the public markets, the path to happiness is to do what you said you were going to do.”