Upon first glance, it seems hard to believe that Richard Wilpon, Michael Katz, and Tom Osterman run the diversified investment company that also owns the New York Mets. Sure, the three dress the part of successful businessmen, wearing dark, expensive-looking suits for a photo shoot held three hours before game time at Shea Stadium on a sunny July day. But it's not long before the three kids from New York come out in these 50-plus-year-old men.
Osterman starts the ribbing, telling Katz to run the bases for action shots. Katz takes jabs at Osterman's liberal political views. Wilpon stands in the middle, getting tugs and rabbit ears from his long-time business partners. Then Osterman wraps up the session by standing on the top stairs of the Mets dugout posing with an "Eat. Spit. Be Happy." bucket as Mets players Al Leiter, Tom Glavine, John Franco, and others walk by in pre-game warm-ups.
This is how it goes at Sterling Equities, a New York-based company that has 17,500 multifamily units now and has owned about 55,000 since its inception. Despite the fact that these three men helped build a business that's not only a huge player in multifamily, but other sectors of real estate, the media, sports, and now even recycling agricultural waste, it's hard to get them to stop joking around. Maybe that's because they've known each other so long they're practically brothers. In fact, Katz's and Wilpon's brothers, Saul Katz and Fred Wilpon, started the business in 1972. Richard Wilpon joined at the company's inception, Michael Katz joined in 1973, and Osterman joined in 1974. "We've known each other so long that we finish each other's quotes," Osterman says.
But just because Sterling leaders like to joke around doesn't mean they don't take their business seriously. As a matter of fact, the continuity and collegial environment at Sterling helped set the tone for the growth of the company, according to Michael Katz. The group built Sterling with the real estate business, with apartment units and 17 million square feet of commercial and retail space. "The real estate business was what brought us to the baseball business," says Richard Wilpon.
When looking at baseball players, the Mets want to find that elusive five-tool performer–a position player who possesses a powerful bat, can hit for a high average, has speed, owns an accurate, strong throwing arm, and has a good glove. While some would argue that there aren't many five-tool players wearing Mets uniforms at the moment, the company that owns the team has five key tools in multifamily: power business relationships, a high average of successful deals, laser-like accuracy to pinpoint markets, speed to do quick turnarounds, and flexibility to try different market sectors. "They have an unbelievable reputation in the marketplace," says Charles Frischer, a senior vice president with Capri Capital, an Arlington, Va.-based banker for Sterling.
Power Relationships The home run is possibly the most inspiring event in baseball. Nothing can turn around a game quicker than a 400-foot shot off a slugger's bat–that's why baseball scouts are always looking for someone with strength and bat speed to power the ball out of the park. In multifamily deals, Sterling comes to the bargaining table armed with capital from powerful investors, including individuals, families, and institutions.
As Sterling grew in the 1970s and '80s, its investors included a number of wealthy individuals and families that the Wilpon and Katz families knew. In 1991, the company partnered with American Securities LP, which was founded as the investment office of Sears and Roebuck's William Rosenwald (son of Julius Rosenwald, president of Sears), to form Sterling American Property Inc.
That same year, Sterling had started a fund targeting properties in New York–but the real estate climate sent the company scooping up mortgage notes instead. It followed with two more successful funds that bought real estate, and its happy investors took note. "Ninety-five percent of the people who participated in prior funds went into our fourth fund," Katz says.
This is no small feat, according to Frischer. "Their investor base includes some incredibly smart people," the banker says. "If they trust you with their money, it's a big vote of confidence."
Sterling takes this responsibility very seriously. To prove its commitment to each fund, the company contributes about 10 percent of the capital, making Sterling the biggest single investor in each fund. "Other people use their investors to get where they want to go," Frischer says. "We see Sterling act more as a participant with their investors." Sterling agrees. "We know many of our investors personally," explains Michael Katz. "We don't want to sit across the table from them and tell them we lost money."
Batting a Thousand Fortunately, Sterling hasn't had to tell any investors that it lost money on a deal. In that respect, it's batting a thousand. In baseball, success, even for good hitters, comes much less frequently. If you get a hit one-third of the times you're at bat (hitting .333), you'll be a perennial all-star.
Sterling's key to hitting for a high average: a conservative approach. It manifests itself in a number of ways, but it starts with financing. Sterling leverages anywhere from 60 percent to 75 percent of a deal and stays away from adjustable-rate mortgages, preferring to lock properties on fixed-rates instead. "Other players rely more on floating rate financing, which can produce more short-term, but may prove to be much riskier," Frischer says.
Sterling Equities bought Sunshadow in Casselberry, Fla., in March 2001. It used the joint venture system on the 384-unit property, partnering with ConAm, a developer, owner, and manager of multifamily properties in San Diego. In the long run, this gives Sterling what may be its most important asset: time. "Everyone's says it's location, location, location in real estate," Osterman says. "It's really timing, timing, and timing. We don't want to be in a position where we're forced to sell because we got floating debt that we did at 2 or 3 percent."
Yet there's a downside to this strategy. If Sterling played the market right on adjustable-rate loans, it would pay less in debt service costs each month, leaving more money in its coffers. But company leaders say that's a small price to pay for the security of choosing the security of fixed-rate financing. "We will lose some money, but it's OK," Katz says. "We will still make enough to make everyone happy."
Laser-Like Accuracy Late in a tied baseball game, a runner who successfully takes an extra base off a hit can devastate the team in the field. The best way to keep this from happening is to have outfielders with strong, accurate arms, discouraging base runners from becoming aggressive and putting your team at risk.
When Sterling looks for multifamily properties, it also wants to limit risk. It does this by zeroing in on profitable properties the same way an outfielder would throw out a base runner trying to take an extra base. Sterling utilizes a number of resources across the country to find properties. It first relies on its regional offices, located in St. Louis, Houston, and Boca Raton, Fla. Sterling's presence in these local markets also allows it to develop relationships with joint venture partners, other owners, and brokers.
It also possesses the advantages of being involved in different real estate sectors. "If you have office, you will see residential properties and vice versa," Osterman says. "You're going to know that market and understand its demographics and where it's going."
Sterling sorts through 500 properties a year, buying 10 or 15 after putting them through a rigorous evaluation. The most important question that gets asked (and answered): "What if?" as it applies to the area's job market and other factors. "A property is torn apart like you can't imagine," says Lee Harris, president of NAI Cohen/Esrey Real Estate Services Inc. in Kansas City, a longtime manager and joint venture partner with Sterling. "A lot of eyes look at those numbers. Rather than make the numbers fit the deal, they look at the worst-case scenario."
It represents yet another example of Sterling's conservative approach. "The penchant for managing risk can cause you to pass on good deals," Harris admits. "As a result, sometimes we'll beat a deal to death and miss out. But I'd still rather err that way than do a bad deal and pay for it later."
Quick Reflexes The ability to be agile, be versatile, and make quick movements after a ball is hit can earn good fielders a Gold Glove. It can keep runners off the bases and limit the amount of run-scoring opportunities for the other team.
Sterling possesses the agility and versatility of a gold glover, which limits its risk in real estate. While Sterling's conservative strategy requires that its own assets span geographic areas, product types, and asset classes, it does maintain agility in being able to jump in and out of certain markets. This helps it earn returns on par with other opportunity funds, Katz says.
Sterling's agility and versatility certainly came into play over the past few years. The New York-based company has a real estate portfolio is now 75 percent multifamily and 25 percent commercial. But its split was closer to fifty-fifty in the past. The reason the company has pushed into multifamily: Sterling leaders see greater potential in this market because of rising interest rates, rising home prices, and demographics. "Baby boomers will exit single-family [homes] and look for properties where they don't have to work on yards, and echo boomers will look for new households," says Tarak Patolia, vice president of Sterling Equities, Inc., and head of the acquisition department for the Sterling American Property Funds.
As in most things Sterling does, risk is also a factor in staying in residential. "We believe residential is less risky than other opportunities," Wilpon says. "If you have an office building with a couple of major tenants and they go bust, you're receiving no rent and you don't sleep at night. In residential, you spread your risk over 300 tenants."
But the company says it's not wedded to multifamily. "If there's a downturn in one sector, we can always change," Katz says.
Sterling also applies a diversified approach to its multifamily portfolio itself. (See chart, left.) The same is true in regions and product types. The company has between 15 percent and 25 percent of its properties each of the five main regions around the country. There is also a split among asset classes. "We are usually in Class B, but we are comfortable with Cs and As," Osterman says.
Put this together with Sterling's knowledge of management, financing, and construction and you have a team versatile enough to deal with a downturn in any sector. "We're as comfortable in the boiler room as we are in the boardroom," Osterman says. "We know how to operate all of these properties because we have done it in all property types, phases of the business cycle, and product classes."
Speed Game Speed is a tremendous tool to have in baseball. A fast runner can change the complexion of a game with his ability to steal bases.
Speed can also help Sterling change the complexion of a property. The company buys properties with the intention of a fast physical and financial transformation. "We look to turn around these properties as quickly as possible because we are selling in five to seven years," Wilpon says.
For instance, the company is now working with BH Management in Dallas to upgrade the business center, pool, landscape, patio fencing, and interior units in a Florida property. "We're transforming the property from a physical standpoint and lifestyle standpoint," says Harry Bookey, CEO of BH Management. "That's something that we've both agreed is the way to maximize the value on some of these assets."
When Sterling looks at B- and C-class properties, it usually zeros in on those in need of management or physical rehab. "We look for local investors without capital sources," Patolia says. "The market improves, and often times, the owner doesn't have the resources to improve because of a limited partner structure."
Team Spirit While each of the five traits–power, consistency, speed, agility, and accuracy–help a baseball player, he can't truly reach his potential without great teammates. The same is true for Sterling.
Each of the Sterling's properties is a study in teamwork, regardless of whether the company manages the actual property. Sterling works with joint venture partners to meet resident needs, often taking a more in-depth look at operations than many owners would. Even in properties it doesn't manage, Sterling will go through budgets by line item for each property. "If you are a managing agent who doesn't like an active presence on the part of your client, the relationship might not be for you," Harris says. "But it sure works for us."
Harris' best example of this process: the 169-unit Ruskin Apartments in Kansas City, Mo. NAI Cohen/Esrey, which has managed the property for Sterling for years, is used to lengthy budget processes with the New York-based company. "We must produce our justification of the various income and expense items," Harris says. "It's not enough to say that last year we spent $22,000 on mowing the grass. Sterling expects to know how many times each month we expect to mow the property and how much it costs per mowing. It's not enough to say that last year we spent $10,000 replacing appliances. Sterling expects to know exactly what type of appliances we plan to replace, how much each appliance costs, and which units are slated for replacement."
Obviously, property management is not just left to property managers at Sterling Equities. At Sterling-run properties and jointly owned properties, each member of the team takes a role. Acquisition managers, for instance, have a large say in property operations. The acquisition people meet weekly with management to review what's happening at a property, and they meet monthly to review budgets against the original model.
Although it's easy to see how this kind of interaction could cause some friction between people, this doesn't seem to happen at Sterling. The camaraderie between the partners seems to have spread throughout the organization. "If you're not a team player, you're not going to last here," Wilpon says. "Whether it's real estate or baseball, big egos won't last here."
Amazing Asset
Want to get the attention of that banker or institutional investor you're trying to woo? Easy: Buy a professional baseball team. That's what Sterling Equities did when it bought a portion of the Mets in 1980. Two years ago, the company took full ownership. "It opens lots of doors for us," says Michael Katz, senior executive vice president. "People are enthralled with it. They enjoy going to games. There's a lot of entertaining there."
Sterling's bankers also see the advantages. "It's very, very easy to prequalify them as a serious, large player," says Charles Frischer, senior vice president of Capri Capital in Arlington, Va., one of the company's lenders. "People know that if you own a major league baseball team in America, you're a big player." Since taking over the Mets two years ago, Sterling carried many of its real estate business practices to the baseball business. For instance, the company wants Mets customer service agents to take the same care with fans that its apartment leasing agents do with tenants. "If you call for a ticket and you get a nasty person on the phone, it puts a negative spin on the experience before you even get there," says Richard Wilpon, a senior executive vice president with Sterling.
Owning the Mets also offers some more measurable advantages as well, as Sterling combines its baseball and investment business to leverage its purchasing power. One example: travel, where Sterling obtains discounted rates for the team and company members. A baseball scout flying to Chicago to scout the Cubs for a three-game series goes under the same travel plan as someone evaluating a 300-unit apartment property in the Windy City.
Sterling Equities at a Glance
- What: Investor and manager of multifamily and commercial real estate
- Leaders: Michael Katz, senior executive vice president and chief financial officer; Richard Wilpon, senior executive vice president; Tom Osterman, executive vice president
- Headquarters: New York
- Markets: National markets including College Park, Md., Birmingham, Ala., and Kansas City, Mo.
- Portfolio: 17,500 apartments in metropolitan areas across the country, including St. Louis, Denver, and New York
- Founded: 1972
- Employees: Approximately 200