Private Equity Consumes Mammoth

Q & A from the Holiday issue of the Mammoth Real Estate Times

Q: I think I am late to the whole information cycle about the sale of Mammoth Mountain (Ski Area) and I can’t seem to find much new information other than a bunch of re-hashed articles. What is your take on all of this now that we are a year or so into this new era?

A: The first thing to know is the name Barry Sternlicht, more so than the name Starwood Capital Group. He is the boss. But don’t expect to find Barry pounding beers at The Mill. A simple Google search will confirm he isn’t likely to spend much time in one place. He certainly has an impressive resume for someone who is not yet 50 years old. We know he has been to Mammoth (or maybe it was his double) and many around here are still a little perplexed as to why he bought the Ski Area and large chunks of local real estate. My guess is it has something to do with the saying “the difference between the men and the boys are the price of their toys.”

After leaving Harvard Business School, Sternlicht was already doing high-level real estate deals in his 20’s. In the mid-90’s he took over a bankrupt REIT (Real Estate Investment Trust) valued at around $30 million and turned it into Starwood Hotels and Resorts. In ten years he pumped the public company’s value to nearly $14 billion. In 1997 BusinessWeek Magazine called Sternlicht “Fast, Smart, Dangerous”. Essentially he is the Bill Gates of luxury hotels.
Maybe more important to those of us here in Mammoth; he is attributed with developing the hotel concepts like The Westin, St. Regis, and “W”. He has obviously proved he is a shrewd real estate man, a company leader, but he has also received the admiration of designers, architects and especially the end-users–the hotel guests. He is credited with inventing/envisioning the Westin “Heavenly Bed.” In 2005 he was inducted into the Interior Design Hall of Fame. If Mammoth will ever have a chance for a quality makeover or upgrade, this is it.

Conjecture is that for Sternlicht, like many fast moving CEO’s, the public company rigors of chasing quarterly earnings and the new regulations (Sarbanes-Oxley/2002) became too stifling. So he left Starwood Hotels in spring of 2005 and moved back to his old private equity firm Starwood Capital Group. It seems like a great move for him–he can focus on developing new ultra-luxury hotel concepts and not be bogged down with administration and government mandated compliance. And there is a ton of money (“oil sheiks and hong kong billionaires”, etc.) chasing after private equity firms, especially ones that have a proven talent at the helm.

That all happened at about the same time Mammoth Mountain came on the market. Since that time Sternlicht has also acquired the Hotel Crillon in Paris and plans to tune it up and take that concept to many prime locations around the world (no plans for Mammoth.) He also acquired one of the largest luxury hotel chains in Europe. And of course they all need renovating and updating. Meanwhile, he has new concepts in the works including the “1” announced back in October. Mammoth is slated to be one of the first locations for a “1”. And then there are more acquisitions–Japan, Thailand, India, Sardinia, etc. Sternlicht is positioning to rival his old company, and probably blow past it. (And is Barry betting on a more favorable exchange rate with the dollar?)

With all of this new momentum everything seems quite rosy here in Mammoth, right? Well, there are some challenges. As a private equity firm, Starwood Capital at some point (sooner than later) has to produce cash flow. Mammoth Mountain appears to have good, established cash flow (and a to-good-to-be-true lease) with even more upside potential, as long as Mother Nature cooperates. So it was probably a good acquisition. The “hotel” part of Mammoth Mountain, Mammoth Hospitality (also known my pet peeve) has tons of upside potential. I’m sure their partners (the owners of the condo hotel units they manage) would appreciate some attention to increased cash flow too. MMSA has hired a new vice president/department head from the outside, so we’ll see. The really good news is that Mr. Sternlicht brings to Mammoth the utmost experience in quality hotel development and operations.

One of the biggest challenges for Starwood (and their cash flow) is the inordinate amount of time it takes to get a hotel built and up-and-operating here in Mammoth. Just look at the Westin under construction in the Village. The project is long sold out and we would love, as a community, to be offering that level of accommodations to guests in our town. But it looks another year out–at least. In watching what Starwood is doing globally, they are acquiring existing hotels and doing major renovations. That opportunity doesn’t exist here in Mammoth. Even though they are focusing on smaller projects (than the Mammoth Westin), they are at least 3 years away from having their first hotel up and operating.
But maybe that is a good thing, maybe they can fine-tune the properties managed by Mammoth Hospitality (Grand Sierra Lodge, Lincoln House, Juniper Resort, etc.) and get to a higher level of training and staffing so the foundations are laid for bigger ventures.

From a real estate standpoint, they also need some absorption of some the re-sale inventory and rebuild sales momentum. Anything built by Starwood is likely to have square foot sales prices in the $1,500 to $2,000 range. That will be a whole new pricing threshold in Mammoth. I for one don’t think the market will support that right now. I don’t care if it is Barry Sternlicht, Donald Trump or Saint Peter. And it is yet to be seen whether they will take the normal pre-sale route. The market has changed. The pure speculators are on the sidelines for now. The savvy consumer is tired of being marketed and sold luxury and delivered mediocrity. Starwood could choose to produce an outstanding finished product while letting some market momentum rebuild–and then sell at very high prices. Again, we’re dealing with a private equity mentality, not a publicly held company.

Another challenge is the fractional and “club” marketplace. Many of the development pro formas rely on a quantity of highly profitable fractional or “resort club” units. So far, most Mammoth consumers are reading “timeshare”–easy to get in, difficult to get out, AND massive fees. The Intrawest Altis project, marketed heavily last winter, has been put on hold. The fractional market is seen as very airport dependent, and that it will take a “seasoned” airport, not just the promise (once again) of flights “next winter.” We’ll see, and even with regular established air service there seems to be only so much capacity in Mammoth for fractional ownership. The end product has to be really, really special.

Another challenge on the condo hotel side is Sternlicht’s commitment to “green” or LEED (Leadership in Energy and Environmental Design) development. While certainly admirable (Sternlicht describes himself as an environmentalist) and supported, getting a development through the regular process here in Mammoth is difficult enough. Getting a development LEED-certified is even more costly and timely. Maybe we’ll have to settle for “LEED-inspired” design (that sounds like an Intrawest phrase–remember the architecture of Juniper Springs Lodge being “evocative of the Ahwahnee Hotel”.)

Besides developing condo hotel properties, Starwood has the challenge of overseeing the development of a new “face” for Mammoth. The Dave McCoy era is over. Lovable Woolly doesn’t exude luxury. The Mountain has recently hired a new “branding” expert to a senior vice president position. I don’t think the brand is going to be black t-shirts. This is going to get interesting. I honestly can’t wait to see the new (potential) concepts. Maybe they’ll even have a contest. I always liked “No Other Mountain Lives Up To Its Name.” And it will be interesting to see if they continue to separate Mammoth the ski area from Mammoth (Lakes) the resort community.
The best news is the proposed return of Mammoth Heli-Ski. Stay tuned for further details in the press. Maybe we really are heading in a great new direction.

Happy New Year!