Andrew Farkas Sold Off Most of His Businesses at Just the Right Time. What’s Next?

When he was a young Turk less than a decade out of Harvard, Farkas (whose father Robin was the former CEO of Alexander’s department store) started Insignia Financial Group, which would go on to buy the legendary Edward S. Gordon real estate company. At its peak, Insignia/ESG owned, controlled or managed some 275,000 apartments and 200 million square feet of commercial space.

In 2003, Insignia/ESG was sold to CBRE, and Farkas dived into his second chapter on the very same day the deal closed. He started Island Capital Group, which in addition to his work in the United Arab Emirates began buying up some serious New York real estate. (More on that in a minute.)

After the Global Financial Crisis, Farkas started C-III, the collection of businesses that has largely been monetized over the last 12 to 18 months, and which was the third iteration of Farkas’ career — or, chapter three. And, given that the market for real estate drastically changed since then, cashing out when he did might have been a stroke of true genius.

And now? What about chapter four?

In addition to buying up garden apartments and grocery-anchored retail around the country, the two most dramatic deals that Farkas has embarked on in the last year and a half have been his purchase of the 678-key Lexington Hotel in Midtown from DiamondRock Hospitality for $185.6 million in July of 2021, followed by his purchase last April of the Sheraton Times Square with MCR for $373 million.

Andrew Farkas sat with us in February on a couple of Zoom calls, and this is what he had to say.

This interview has been condensed and edited.

Commercial Observer: Why hotels and why now?

Andrew Farka’s:  First of all, I had a certain belief with regards to New York City’s recovery. I thought a five-star recovery was going to take much longer than a four-star recovery. 

The [Lexington and the Sheraton] were two hotels that were closed at the time. The aggregate room count was almost 2,500. I thought they were very well located for business travelers. The Lexington also was in a corridor where so many hotel rooms had been closed permanently that it sort of created additional demand by virtue of lack of supply. And the price for which we were able to buy these assets was around $200,000 a key. That’s very cheap. The prior owners had paid north of two and a half times those numbers. 

The Lexington was the only Marriott Hotel in that area of town, and it was a very, very solid four-star asset. We figured that if our theory was right about the recovery, we’d see some strong numbers out of it again. So, we bought the asset. We had a sort of big capex program scheduled to go into the asset. We opened it and, in truth, the amount of money we had to spend on the asset was so much less than we had originally planned. We basically bought new sheets and things like that. But [today] the hotel is 95 percent occupied. And the average daily rate was around $300. So, it’s just —  it’s killing it.

How did you finance these properties? Was money easy?

Well, the equity obviously came from Island Capital and its affiliates. The debt financing for the Sheraton was provided by the seller. And Lexington had a third-party lender.

Has it been tough to get money now? [Both properties were acquired before the rate hikes.]

The answer is yes. You can still get it. But you get less, and it’s much more expensive.

Has there been a lot of overseas money?

There always is.

Your timing on selling off C-III Asset Management was pretty much perfect. Take us through your thinking, and why you decided to sell off the portfolio when you did.

The markets at the time were very hot. We had just come out of COVID, and rates were still low. No one had seen the indicators of inflation, or at least the government hadn’t spoken about them. Cap rates were low, et cetera, et cetera. The numbers were very, very attractive for the seller. Today, it’s a buyer’s market. And we’ve been fortunate. All I can say is that we tend to buy during times of distress, and sell when things are strong. And we just did the same thing. It just appeared like we were at the top of the mark. 

I think it was 2006 we bought 230 Park Avenue — the Helmsley Building — we bought that building for $700 million, and that’s when CMBS was at its peak. So we put up $100 million of equity. The first quarter of 2008 — so let’s call it 18 months after buying it — we sold that building for $1.15 billion, and then the second quarter of 2008 came, and the world ceased to spin on its axis. How did that happen? It just happened.

But I think a lot of people knew in 2008 that things were going badly.

The first quarter people didn’t really know. But, yeah, again, good fortune. You know Ed Gordon?

I didn’t know him personally, but I know him by reputation.

He was a mentor to me and he’s one of the greatest guys I ever knew. The man was a genius. And he had all these sayings. I sort of live my life by many of his sayings now, but the one that applies here is he said, “You know, Andrew, the harder I work, the luckier I get.”

He also said, “Be careful the toes you step on today, because they may be attached to the ass you have to kiss tomorrow.”

Our timing over the years has been fortunate. Again, I think it would be presumptuous for us to claim any greater vision; that was fortunate. We pay attention. We know what distress looks like.

Tell me about the yachting business. This is one that I saw on your bio, and I know nothing about it.

That business was a 20-year struggle. I started that business in, like, 2001 or so. And the idea was very simple. The yacht builders were building bigger and bigger and bigger boats. They were launching them faster and faster and faster. People were buying them. But there are no facilities that have been built to accommodate vessels like this.

So, nature abhors a vacuum. I figured if we could create these purpose-built megayacht facilities around the world — as ambitious as that sounds — we would be able to create an industry that had not existed before, which is sort of what we do. And, lo and behold, that happened. It was called Island Global Yachting. 

And, over a period of 20 years, that company basically aggregated a portfolio of 26 marinas in 23 countries. Now that sounds great, but I will tell you that that company died a thousand deaths. But, with me, nothing, nothing will ever fail until you pry it from my cold dead fingers. And then last year we sold it for about $600 million, which is a great number considering there were points along the way when it was worth zero. But it’s a very interesting business. And the original thesis turned out to be accurate.

Andrew, how did you get into the real estate business?

My children will often say to me, “Dad, doesn’t matter if you’re sick, if you’re busy … you always go to work. Why?” And the answer is: “No choice.” The lack of alternatives makes life easy.

When I graduated from college, the only thing I wanted in life was to go to Harvard Business School. I was rejected from the Harvard Business School and, given that my family business had failed, I had to have a job to support myself. I ended up at a firm that doesn’t exist anymore called Thomson McKinnon in the real estate tax shelter department, and I became fascinated. That was the beginning of it.

Originally, I didn’t chase it. It chased me. You asked me why today I’m still so fascinated, and it is because real estate enjoys the most complex capital structure compared with almost any other asset in the world.

As long as we’re reminiscing, what would you say was your biggest regret in terms of any of the business things that you’ve done?

[Pause.] I want to answer you accurately. At one point, we were the largest owner and operator of affordable housing in the United States. For whatever reason, the secretary of Housing and Urban Development at that point in time [Andrew Cuomo] decided that he wanted to make a name for himself and came after us for no good reason. While nothing bad happened, it was torturous for two years. That was a terrible experience.

Tell me about Dubai. What did you guys do in Dubai?

We should go out for dinner one night, have a bottle of wine, and I’ll tell you the story, because it’s a great story. But I ended up going before Dubai was Dubai. Palm Island was not complete. It wasn’t anything close to what it is today. And the No. 1 thing we did there was we re-created the Fannie Mae-Freddie Mac analog for the United Arab Emirates because they were building condos and villas and this and that, trying to create an economy based in no small part on vacation homes and things like that. You can’t sell condos and villas unless you can provide financing. 

As you know, in this country we have Fannie Mae and Freddie Mac, and when a bank accumulates enough mortgages they can sell them to others and package them up [in a securitization], sell them off, put capital back, and start lending again. They did not have that in the UAE and we created that for them. We called it the N-SEC, as in Emirates National Securitization Corporation. We literally had to create a market for them to sell mortgage bonds — which, by the way, was made additionally tricky for the fact that they want it to be Sharia-compliant. I assure you that I am the only member of my congregation familiar with Sharia law.

What’s next? Are you looking at any other hotels in New York as well? Are you gonna be the new hotel guy of New York?

I can’t talk about some of that stuff specifically, but how’s this: If anybody has any good ideas for us, please bring them. We have capital to invest. So, Insignia was chapter one, everything we did in Dubai and the major investments we made in New York with our partners between 2003 and 2008 was chapter two. C-III was chapter three. And, stay tuned, because there will be a chapter four. I’m focused on a whole bunch of things right now, but let’s see what emerges.

Is there anything that’s worrying you in general about global markets, or the real estate scene or anything?

The streetlight turning red before I cross worries me! Everything worries me!

The way I think about it is, if you can solve for the lowest common denominator, then everything else should be OK. But, sure, event risk has never been greater. People are even talking about us defaulting on the national debt. Wow. It’s just wow out there.

Do you have, like, a default plan? I’m curious whether anybody’s actually thinking seriously about what happens, because it does seem kind of scary.

How’s this: I have people smarter than me thinking about it.

I want their number.

If they come up with anything good, I’ll let you know.