1929 For Offices, Not All Who Sonder Are Lost & the Sternlicht Hero's Journey

No Conflict, No Interest

“Out beyond ideas of wrongdoing and rightdoing, there is a field. I’ll meet you there.” - Rumi

Commercial real estate is a tiered business. At the bottom you have the chumps who do the work, hit the job sites, walk the properties, lay the linens. The higher up you go, the more financial engineering comes into play. By the time you’re Barry Sternlicht, that (with a healthy sprinkle of media engineering) is most of the game.

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Sternlicht (cont.)

A Sternlicht family office-sponsored SPAC, Jaws Mustang Acquisition Corp., is moving to acquire a stake in a Starwood Capital (Sternlicht’s company) hotel 🏨 portfolio. Jaws Mustang currently has no assets except for its $23M in cash, but is valued at $300M. I’m not even going to attempt to break down what’s happening here, but fortunately Hunter over at Lewis Enterprises has.

By mostly liquidating a SPAC but not terminating it, Sternlicht has created a valuable public shell into which he can place assets from his sprawling empire.  

 Through a creative share-based transaction I can only vaguely conceptualize, he could move the value of these hotels into Jaws Mustang in such a way that the shares retain value. He’s already succeeded at having $23 million of cash trade like it’s $300 million.

Sternlicht’s sponsor entity has been extending forgivable promissory notes to cover the administrative costs of the SPAC. Aside from these small loans and initial $25,000, the $22.7 million Sternlicht paid for his warrants is his only investment in Jaws Mustang. He has created a high margin of safety for his capital in this structure. If by some miracle of financial engineering he can complete the transaction and get the share price to $11.51, the combination of his common and warrants would turn $22.7 million into over $400 million.

This is “no conflict, no interest” illustrated at a level that would make even Adam Neumann stand up and applaud. Forbes put it nicely: “Barry Sternlicht has found the perfect partner for his latest SPAC deal: himself.”  

“1929 For Offices:” But Where the Sales At?

There are headlines, and there are data, and seldom the twain shall meet. A new MSCI analysis cited by WSJ shows that despite all the challenges rocking the office market (surging vacancy rates, downsizing tenants, defaults), distressed sales are still quite a tiny piece of the pie. Just 3.5% of all U.S. office deals in ‘23 involved a distressed seller, the analysis found, and that share fell to 2.7% in January. In the GFC, we saw a flood 🌊 of distressed office sales- so far this time it’s just a trickle.

A few reasons: Lenders are eager to work things out with sponsors given all the banking hullabaloo (catch up here on how banks and regulators are thinking about workouts); tenants are still paying the rent even though new leases are getting smaller; and given that debt packages now involve more lender groups than they did in the GFC, it’s harder to corral 🐂 all parties to the sale table. Deal-hungry debt investors have also stepped into the mix – seemingly everyone (SL Green, Rechler, Fortress, KKR, Blackstone, Brookfield, randos) is raising or deploying a distressed-office fund, even though (especially if?) many of their own buildings are distressed. Brokers are, of course, touting this as a generational buying opportunity (I cannot think of one period in modern history where they didn’t do this), and some investors are going even further back.

“It’s 1929 for offices,” said Reven Capital’s Chad Carpenter, who’s trying to raise a $1B blind-pool IPO for distressed-office lending.

Quickies

• Hang tight: Economists reckon that the Fed will have to keep rates higher for longer than the markets anticipate, per a new FT-Chicago Booth poll: ≤ 2 cuts this year, with the first between July-Sept.

• The family of billionaire Ken Dart 🎯 has a fat stake in a $426M NYC real estate portfolio (If you want more intel on the families 👨‍👨‍👦‍👦 backing some of the biggest developers/deals out there, I got you here)

• A marriage of unequals: Two prominent New York 🗽 landlord groups, RSA and CHIP, are expected to merge. RSA is bigger and has far deeper pockets than CHIP, which caters to smaller landlords. The merger is subject to state AG approval.

• “Merely a sham company:” A strip mall guy (not that one) was charged over an allegedly phony $77M tender offer of WeWork stock 👏. A rather engineered plot - buying short-dated call options, then announcing an intent to acquire 51% of the company’s minority shares

• Poor LoanCore: Lender took back a GVA-owned San Antonio apartment property for $21M at foreclosure auction. GVA (Stalcup, catch up here) had defaulted on a $56M loan 🤷‍♀️ 

• Home prices in Austin have fallen more than anywhere else in 🇺🇸. That’s after a 60% jump from ‘20-’spring 22. Apartment rents, too, are down (7% this past year), compared to a 20% leap in ‘21.

Not All Who Sonder Are Lost

What is a bad outcome, really? If you raised $600M from VCs, IPO’d via SPAC at a $1.9B valuation, did the podcast circuit as someone redefining hospitality, and bought Pharrell’s house in L.A., are you not a success? What happens after matters not.

Short-term rental firm Sonder delayed its Q4 earnings report and said it would have to restate ‘22 and ‘23 earnings due to accounting snafus related to the manner in which it calculated the “valuation and impairment of operating lease right of use assets and related items.” (It says cash balances and cash flows will not be impacted.) Sonder put a new CFO in place this time last year, and has been working on getting to fighting weight by shedding assets. The company estimates that Q4 revenues will be $164M and that free cash flow – excluding restructuring and lease termination costs — will be -$35M.

Sonder SPAC’d in Jan. ‘22 (sponsors: Alec Gores and Dean Metropoulos) and its market cap today is $41M (down 98%). Many of its proptech brethren have suffered similar fates, and have also been beset by accounting issues – see a selection in the proptech graveyard below.

Unquotable Quotes

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