Starwood Sees Payoff in Patience

Corus's Condo Assets Look Primed to Rebound Someday; FDIC Approves Sale

Barry Sternlicht's Starwood Capital Group has a relatively straightforward game plan for the distressed condo assets of Corus Bank that he is set to buy in a closely watched federal auction: wait until the market recovers.

The deal, announced Tuesday evening by the Federal Deposit Insurance Corp., hands Starwood and its investor partners the Corus portfolio of 112 construction loans, more than two-thirds of which are in default or are in foreclosure. Starwood will have to decide how to deal with the troubled projects and their developers as well as those headed for default.

Mr. Sternlicht is under no pressure to move quickly. The FDIC structured the deal to discourage the winning bidder from “flipping” individual commercial real-estate loans and assets to vulture investors or individual borrowers. Instead, the deal gives added incentives for the winning bidder to manage assets and reduce debt.

The FDIC's offer of zero-percent financing means that “you can afford to hold these properties and sell them at the right pace in difficult markets,” Mr. Sternlicht said in an interview.

Starwood and private-equity firm TPG made the winning bid of about $2.77 billion for the Corus assets, which was about 20% higher than competing offers, according to people familiar with the matter. Those assets have a face value of $5 billion, but many of the condo projects funded by Corus face varying degrees of distress.

The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership. As a result, Starwood's upfront equity stake comes to $554 million. The FDIC is also offering up to $1 billion over the next five years for any unfunded commitments, construction overruns, and carrying costs for bank-owned inventory. The investors would have to pay off any of that debt, plus $1.38 billion in debt issued by the FDIC, before they can begin collecting on their investment.

The Starwood-led consortium includes private-equity firms W.L. Ross & Co. and Perry Capital LLC and beat out seven other bids, including those from investors Colony Capital LLC and New York developer Related Cos. Barclays Capital advised the FDIC on the auction.

“This is not about making a quick sale or a quick flip. This is about serving as an appropriate steward for the capital of the FDIC,” said Harrison LeFrak, a principal of the LeFrak Organization, a developer with a small stake in the investor group.

Corus assets include luxury-condo projects in the hardest-hit housing markets in California, South Florida and Las Vegas. Some of those areas are seen as strong growth markets over the long term, and many will have little new construction coming online over the next few years.

“In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory,” Mr. Sternlicht said.

In South Florida, where Corus had some 16 condo loans at the end of June, the Starwood-led consortium could leapfrog other developers that have been sidelined during the credit crunch. “There's a symbolic changing of the guards in terms of who is the most powerful entity in Miami's condo market,” says Peter Zalewski of Condo Vultures LLC.

Starwood, founded by Mr. Sternlicht in 1991, is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities.

Chicago-based Corus was seized by federal regulators last month and another Chicago bank, MB Financial Inc., agreed to assume $6.6 billion in deposits from the bank. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

The fate of Corus's borrowers remains to be determined in the coming months, as Starwood decides which loans it may extend, and where it will pursue foreclosure. Empty or unfinished developments, for example, might be converted to rental buildings until the market recovers.

Write to Nick Timiraos at nick.timiraos@wsj.com

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With its fast moving fashion cycles, the fashion industry is a highly competitive, and global industry that is worth millions. According to Fenton (2008), due to the notion that fashion is associated with affluence, glamour and status, many consumers (in particular women) are “willing to spend their savings on designer fashions”.

There is a growing market for rental luxury goods, as there is an increasing trend among consumers to believe that they are entitled to have the best things in life. However, not many of these consumers have the ability to obtain a lifestyle that is beyond their purchasing power. (Evers 2006) Being a fairly recent concept in the fashion industry, designer item rental is a concept that responds to the needs and wants of modern consumers (mostly women); empowering them with choices within their purchasing power.

“Now, instead of consumers having to trade down expectations to mainstream versions of luxury products, or forgoing essentials to afford one premium brand” (Evers 2006, p8), they can rent the luxury goods they want, whenever they want. An increased awareness on the part of designers, coupled with the fashion industry's fast moving cycles, has also contributed to the rising popularity of designer item rental; as more companies, (e.g. BAG BORROW OR STEAL). (Liu 2007)

Consumers who own or desire luxury goods are fashion-conscious, trendy fashionistas who not only want the associated prestige and status which accompany the brand(s) they carry, but also the perceived aesthetic appearance and feasibility of the item. They have the need to be in sync with the latest fashion trends, and do not want to be the last in line in “owning” the latest designer fashion item.

However, due to limited or restricted spending power, they may not have the means to own such goods. There are also consumers who are unwilling to purchase designer fashion items, only to become passé the next fashion season. Thus, these consumers (ranging from students, working women to housewives) look toward the designer fashion rental market as an answer to their needs and wants – a sense (satisfaction) of exclusivity, status and privilege, as not many can afford such luxury goods; wanting to look good at the same time. (Han 2008)

As the fashion cycles are relatively fast-moving, consumers expect companies providing designer item rental services to be up-to-date with the latest designer fashion, and have a wide selection of items to select from. The cost effectiveness of renting as opposed to purchasing a designer fashion item, the flexibly of changing items (frequently) and the satisfaction of having had many designer fashion items, coupled with the attractive privileges and discounts available, make it even more appealing to these consumers.

Pros:

• Target markets

As anything from designer bags, clothes, accessories and jewelry can be rented, “the luxury rental concept can be applied to virtually every business segment” (Evers 2006, p8). Thus, making it possible to consider the designer fashion rental market as a niche market, since target markets can be segmented according to designer fashion categories, consumer lifestyle expectations and statistics (demographic, psychographic an

• Growing market

The designer fashion rental is a growing market, offering more options to consumers. With the increasing amount of consumers who are looking for more economical ways of 'expanding' their wardrobe, especially if they want to experience the status and exclusiveness that is often associated with designer fashion items despite their limited spending power (Han 2008), or if they are affected by any economic downturn (Barlyn 2008). Investors are also finding companies such as BAG BORROW OR STEAL attractive (Evers 2006); all of which contribute to the industry's growth.

• Competition

As there can be many niches catering to specific target markets, there are fewer competitors: few companies provide similar services, as compared to mainstream fashion.

• Profit

Profit margin is relatively high as niche markets tend to have smaller overheads and generally do not need to achieve high sales volume to generate more profit.

Cons:

• Latent/irregular demand

Depending on the fashion season and popularity of certain designer fashion items (latent/irregular demand), sales could decline if items stocked are unpopular with consumers. Another example would be that during a recession or slow economy growth, consumers might be more concerned about their physiological needs rather than their self-esteem needs (Maslow 1943); consuming less designer fashion goods, resulting in declining sales.

• Capital

Fast-moving fashion cycles might make it harder to predict which items to stock; especially if a company is restricted by capital/cash flow; they would be unable to afford stocking too much inventory. Capital is crucial when it comes to stocking inventory, the more capital available, the more items can be offered. Thus, appealing to consumers by providing them with more choices.

• Changing Values

Reflected in the growth of products and service that consumers believe are consistent with their values. For example, consumers may switch to another company providing the same service for a lower price.

BAG BORROW OR STEAL, SAC DE LUXE and FASHION HIRE are (such) companies that rent designer fashion items to consumers who want the associated affluence, glamour and status, that accompanies designer fashion, but are either lacking in purchasing power or reluctant to purchase an item they think might be passé the next fashion season. In order to retain customer loyalty, these companies aim to provide value to consumers who have plenty of options to choose from by engaging in customer orientated services (value-pricing), through the marketing mix (4Ps – Product, Place, Price and Promotion); delivery channel.

• Product

There is a wide range of designer branded items such as bags, sunglasses, jewels and belts being offered by the above mentioned companies; all of which are guaranteed to be 100% authentic. The guarantee that the goods available are genuine improves the company's reputation, resulting in customer loyalty as consumers not only have the assurance that they are getting value for money goods/service, but also have more options to choose from (with latest and vintage designer fashion items).

Consumers are able to know which items are available for rental easily through the website interface, and delivery is slated within 24 to 48 hours, inclusive of a prepaid envelope to facilitate the items' return at the end of the rental period; adding convenience to consumers. Consumers can be placed on a waiting list (with priority given to members) for a popular item that is currently not available. For example, BAG BORROW OR STEAL's case, enabling consumers to purchase a designer fashion item should it be available for sale, gives consumers the sense that they have more flexibility and an additional option, should they wish to purchase a rental designer fashion item (depending on its availability); with gift vouchers also available.

• Place

Most designer fashion companies operate exclusively on the internet: with each company owning a website containing imagery, in the form of a gallery and categories, and product information being displayed. This enables consumers to easily browse through the selection of products on the website; rent the selected item(s) and make payment for the rental (refer to Appendix 2) at their convenience and comfort. Having a website reaches out to a wider target market as more consumers as are becoming more tech-savvy, with additional information such terms and conditions, waiting lists, fashion trends etc… All of which help consumer with their buying process (comparison). In addition, these companies have physical outlets, giving consumer more options. For example, BAG BORROW OR STEAL has a physical outlet that enables consumers to purchase gently-used designer handbags.

• Price

The pricing scheme offered by the above mentioned designer fashion rental companies is easy to understand as each item is priced individually, varying according to the item's brand value, availability and duration of rental period. Delivery charges are quoted at a net additional price which includes the return delivery for the rented item, and transportation insurance. Additional insurance against excessive wear and tear is available separately, depending on the value of the item. In additional, there is a range of membership fees (options) that consumers can choose depending on their situation (varying from the period of subscription and as a member to the percentage of discounts available); customers are able to enjoy discounts of rentals. Therefore consumers have the flexibility in selecting the option that best suits their needs.

• Promotion

In order to provide more value to consumers, memberships are offered, providing benefits such as discounts of up to 50%, privileges, offers, special prices and incentives. Upon becoming a member, a personal client profile is created, with consumer preferences, which speeds up the rental process and enhances the overall experience. To further personalize the service, the company's newsletter with updates on fashion and promotions are sent to members to keep them updated.

For example, FASHION HIRE offers different membership schemes to suit to consumer preferences and purchasing power, with memberships being available from a period of 3 months to a year. FASHION HIRE also has a referral program where members are rewarded when they patronize a friend as a new customer. Another example would be BAG BORROW OR STEAL, which gives consumers the option should they want to purchase their rented item which is subjected to item availability. BAG BORROW OR STEAL has a rewards program which enables members to accumulate points as they rent items, the more they rent the more points they receive and these points can be accumulated to be used for future rented items. Members are also granted priority when it comes to being able to rent a popular item that is currently not available. Thus, adding to the consumers' perceived value of the item they are renting, as consumers believe they are getting more (value).

To further enhance their popularity, BAG BORROW OR STEAL and SAC DE LUXE have been frequently featured in fashion and women's magazines recently. Free publicity in the form of “appearances” in movies, such as the mention of BAG BORROW OR STEAL in the recent movie “Sex and the City”, also aid in the promotion and popularity of designer fashion rental services.

References:

Barlyn, S 2008, 'The skinny on handbag-rental services', Wall Street Journal – Eastern Edition, Vol. 252, Issue 20, pp. 2.

Evers, R 2006, 'It's nice to share', Brand Strategy, May, pp. 8.

Fenton, S 2008, 'China's rich have insatiable appetite for haute couture', Reuters News, 29 May

Han, J 2008, 'Pocket-pinched opt for rental luxuries', Korea Times, 4 July 2008

Maslow, A H 1943, 'A theory of human motivation', Psychological Review

Tan, C L L 2007, 'Nice dress – is that a rental?', Wall Street Journal – Eastern Edition, Vol. 249, Issue 111, pp. 1-8.

Bag Borrow or Steal, viewed 21 August 2008, http://www.bagborroworsteal.com

Fashion Hire, viewed 21 August 2008, http://www.fashionhire.co.uk

Sac Deluxe, viewed 21 August 2008, http://www.sacdeluxe.fr

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