Broker’s Report, February 10, 2017 A Look Back — Starwood Acquisition 10 Years Later

I was making some final revisions to the new Mammoth Real Estate Blog site and I was reading some of the columns from 10 years ago. I thought it would be interesting to put some of them together and read them in hindsight…..

From 12-21-2006

…..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”.)

From 1-21-2007

…..The most profound transition in 2006 was the sale of the Ski Area. I received a myriad of questions throughout the year about it. Two of my most commented on columns were “A Long Road To Aspen” and “Oil Sheiks, Hong Kong Billionaires and Hedge Funds”. Those columns conjured up both praise and scorn. (Candor is my incurable defect.) Selling the concept that Mammoth can pull a few levers and be on par with Aspen is a joke. Mammoth is 50 years behind in cultural growth and philanthropy.

The “Oil Sheiks” title was a quote from a speech that Barry Sternlicht gave in 2006 referring to those who own all of these assets. The crux is that Dave McCoy and family don’t own the Mountain any more. It REALLY is all about profits and return on investment now. Although it is currently well under our radar, this is going to be an fascinating transition. In my 25 years of doing business here I’ve seen how brutal Mammoth can be on people only interested in profits. And Mammoth is working on a new brand, I hope we don’t get branded the old-fashion way.

My recurring complaint is the resort’s lack of attention to customer service. We’ve had some false start attempts through the years but there is no tangible follow through. Mammoth is 20 years behind in the evolution of resort service. Many of our long established small businesses have it figured out, but as a whole we’re way behind. The powers that be seem more interested in building buildings than providing resort quality service. Great service can overcome many things. Without it we won’t be able to compete at the highest level.

Last year an Intrawest executive (on the service side) admitted to me “there is a serious disconnect at our company from the development side to the operations (service) side”. Maybe Intrawest’s new private equity owner and Starwood Capital can recognize this disconnect. Or will it remain mired in private equity management? I recently read the new bestseller on hospitality “Setting The Table” by Danny Meyer. Meyer is probably New York City’s most successful restaurateur. He makes a profound theory about hospitality, “Hospitality is present when something happens for you. It is absent when something happens to you. Those two simple prepositions–for and to–express it all”. Hmmm…

From 3-2-2007

Mr. Alper is right–the Town Council hasn’t learned from the past and the citizens of Mammoth remain apathetic. (The present local officials still haven’t learned that developers always ask for more than they expect to get.) But something very significant has happened. A December 25, 2006, article in Forbes magazine calls condo hotel units “lousy investments”. The condo hotel business is the “scam” Mr. Sykes refers to. Build a bunch of high-density units (after beating up the local municipality) and quietly imply to the prospective buyers that the rental revenue will be impressive. Then low-ball the budgets (hence the projected fees), build cheap product with some nice lipstick, sell the project out and get out of town as fast as possible. Leave the new owners holding the bag. Then we’re in to the “who cares” phase.

In many markets (including Mammoth) there is already an oversupply with many new projects coming forward. In many markets there is inadequate management and personnel to run the “front desk”. (Ask yourself; why would a professional hospitality company put their best people at a highly seasonal property where they service no debt?) Something else very significant has happened. The greatest bull-run of our lifetimes in real estate is over. Intrawest’s timing was brilliant–for them. Today’s buyer is more patient and discerning. With the hope of escalating appreciation gone, buying at a pre-sale event and waiting three years for your condo isn’t going to make sense any more. And these new buyers might even read the Homeowners Association documents. Another part of the “scam’ is over. The pyramid-like scheme of bringing existing owners in to give them “preferred” priority-purchasing position on the next project is now only a game that fools or the too-rich-to-care will play. Think musical chairs. Think chain letters.

So now the public has learned (and this will only get worse) that this product is a lousy investment and doesn’t really have appeal to the majority of our market–southern Californians. Simply there is already more supply than demand. Throw in marginal guest service levels, increasing HOA fees, no motivation to fill rooms in the (long) off-season, no established air service, no public parking AND then look at land costs, development and construction costs, marketing costs…But who cares?

The February 10 issue of The Economist contains an article on private equity (okay, remember, that’s who owns Mammoth now). The article starts “Take an underperforming company. Add some generous helpings of debt, a few spoonfuls of management incentives and trim all the fat. Leave it to cook for five years and you have a feast of profits. That has been the recipe for private-equity groups during the past 20 years.” Gee, Rusty Gregory told us day-one he thought Starwood would be here 5 to 7 years. Just enough time to encumber half of our town, throw management (Rusty) some incentives, trim all the fat and let it cook, and then reap some profits. Then “who cares about what happens”. Wake up Councilmen, we’re already in the trim-fat-and-cook phase.

Now this might all be my opinion, but a year ago I was having a drink at a local bar with who I consider the pre-eminent land-use attorney in Mammoth. We were talking about the negotiation of the Development Agreement between the Town and Intrawest. This took place several years ago. He didn’t hesitate to say that “The Town has all the cards, they just don’t know it.” Wouldn’t we all like to negotiate against fools like that? I then asked him what the Town left on the table in that negotiation. He had obviously though about it. He said very matter-of-factly, “$100 million.”

Fool me once, shame on you. Fool me twice, shame on me. Isn’t it time Mammoth wakes up to the madness?

From 4-21-2007

….Okay everybody, up from your computers. Stand up. Take a big breath. That’s better. By now you’ve probably received (and long forgotten) an email from some Mammoth real estate entity about a press release issued on April 5 from Mammoth Mountain Ski Area. While the world yawned, young (and some not-so-young) and hungry Mammoth agents made something of it. Perhaps this would kick-start the next buying frenzy?

The press release stated that MMSA and their real estate marketing arm known as Playground, are about to commence an earth shattering series of announcements about the future plans of Mammoth. “After months of comprehensive planning by Starwood and some of the west coast’s leading architects and designers, we are thrilled to now be in position to move forward with Playground to roll out MMSA Development Company’s 2007/08 development program.”

The immediate upcoming releases are destined to be about the new luxury hotel brand in the south village and a new quarter ownership opportunity “nestled alongside Sierra Star’s seventh fairway.” Both have been “much anticipated.” (By whom?–Starwood investors looking for some return on investment? By hungry sales team members looking for commission income?) “Both offerings are completely unique in the market and extremely well positioned.” (Can anybody explain what “well positioned “ means in today’s psycho-babble marketing lingo?)

The “buzz” of the press release was the “unveiling of plans involving more than $1B of new investment in Mammoth Mountain Ski Area”. This leads to Point #1 of Reading Between the Lines. It doesn’t mean Starwood is going to invest $1B into the Ski Area. It means they plan on developing properties (namely condo hotel and fractional units) that they are projecting will generate $1B worth of sales. Maybe a minute fraction of this $1B will actually be tilled into the ground without a direct multiplier of return on investment. Essentially, they are looking for someone (like you) to finance their otherwise un-finance able hotel rooms.

The press release goes on, “Starwood’s ongoing capital investment and its consolidation of real estate and operations marks the beginning of a truly exciting new era for Mammoth…elevated to an entirely new level.” This leads me to Point #2 of Reading Between the Lines. (I dearly apologize for my cynicism.) I think they call it déjà vu (all over again). This sounds just like a press release issued by Intrawest ten years ago. Where are my old Mammoth Times issues or even better the “mail drop” marketing blasted material for Juniper Springs Lodge? (Maybe we now know what “well positioned” means.) Anybody who’s been paying attention knows what this “elevated to a new level” is likely to mean. Charles Ponzi knew.

Point #3 of Reading Between the Lines; hold on to your wallets! The “battle of the fractionals” is about to begin. I’m envisioning timeshare-like pitches while you fill your gas tank in places like Mojave and Big Pine. “Sir, I can tell by the skis on top of your car that you are heading to Mammoth for the weekend. How would you like a free lift ticket? Just sit through a 30-minute presentation…” Or, “Is that a DVD player in your Escalade? we now have a newly updated version of “On the Shoulders of Giants” (except Barry Sternlicht is now one of the Giants) on DVD that you can play on your way up the hill.”

Seriously, all we need are more fractional properties. Fractionals are destined to be the resort equivalence of today’s sub-prime mess. I can hear people now, “but it was so affordable to get in, but now the monthly is killing me and there’s nobody to buy me out”. AND these fractional properties are selling so well right now (NOT!) that they’re going to build a whole bunch more. And each offering will promise a better location, services, amenities and yadda yadda. But don’t worry Mr. Buyer, they’re well positioned!

Point #4 of Reading Between the Lines; We know that last month Peter Dupuis and his company S&P Destination Properties (currently marketing the Tanavista project here in Mammoth) were being chased and courted by Starwood and MMSA. Instead the press release announces Playground will remain the marketing and sales reps. S&P apparently has better things to do in exclusive places like Dubai. Playground are minor leaguers compared to S&P. Maybe Pete will do some consulting.

Point #5 of Reading Between the Line; And this is becoming the most important point of all. Now, more than ever, is the time to be discerning about your resort real estate investments in Mammoth Lakes. Enough said.

And From  9-12-2008

….Since I’ve always fantasized about writing fiction, let’s first discuss what the possible internal influences could be. The two-and-a-half years of new Ski Area ownership appears to be a rudderless boat, almost dead in the water. If we compare the timing of the purchase (the top of the market and most likely overleveraged) to so many other purchases in that time frame, words like default, write-down, short sale, etc. instantly come to mind. Oh, excuse my ignorance, the Ski Area is too big to fail. The really exciting thing coming is the new branding, to be set in motion this fall. If it isn’t perfectly professional, with solid buy-in from the community, then it may just become the New Coke of Mammoth lore. I’ve promised to be open minded and enthused.

The Ski Area just seems to lack leadership of any kind. It appears to be run more like a highly leveraged hedge fund lost in denial. And we know there are plenty of those out there, just open the financial pages. Maybe Woolly could become the new figurehead and make guest appearances in town assuring the citizens that everything is all right. But the point of all this is that something has to change––maybe new ownership, new management, somebody or something, with real resort experience and caring. I hope for something other than a bunch of blast-through private equity/hedge fund/Wall St. profiteers in our future. Excuse my ignorance again. It may take years of pain, but…the sooner the better in my opinion. But would that be a trigger? And meanwhile, real estate values could take such a direct beating due to this floundering that this alone could be the trigger. People (buyers) are definitely out there looking to invest in Mammoth. Most are on the sidelines trying to time the bottom.

Other internal triggers? Most now fall under the category of “lost opportunities.” Kool-Aid clouds the thinking, darn it. (Or maybe we just need enough passage of time for people to forget.) The “new” airport and air service won’t create any pop. If successful and able to continually grow and expand, there is no doubt that it will be good for sales activity and values. But it will be an ongoing process. New splashy developments have lost their trigger value––too much letdown emanating from the Village and Eagle developments, or lack of developments. I say five to ten years to correct that ship, and about that much time to re-absorb the inventory to create any real demand, or at least the demand for developers to justify moving forward.

The condo hotel concept is going to need some serious re-working, the lenders on both ends are scared to death and the concept is flailing in almost all markets. Here in Mammoth, the back-end execution (promises, promises) of these development plans has probably caused more damage then anything else. The projects themselves are okay, but the other “pieces of the pie” were left out. So maybe now we can convince the outside world that we have the Fountain of Youth here somewhere (Dave seemed to have found it). Or maybe we should quietly plant gold instead of trout in our local creeks and bring back panning. The powers-that-be need to create a new gold rush. They don’t seem too interested in fundamentals.

The external influences are much more compelling. Whether they have the potential to create a frenzied trigger is hard to say. I’ve referred to Mammoth as a “safe haven” because I’ve heard that term used by others. It’s more than just affluent people parking money in local real estate. What I’m talking about is the potential for a “black swan” event, or even the general degradation of life in southern California metropolitan areas.

With ancestry in Los Angeles reaching back to the 1800’s, I can’t ignore the area’s history of civil unrest. Things don’t seem to be getting any better and tougher economic times will only make things worse. Problems there could create more demand here, and a small surge in demand can put plenty of pressure on the limited supply of this market. For many, Mammoth could move from being discretionary to necessary.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.