(Bloomberg)—Billionaire Tom Barrack has a lot in common with his longtime friend Donald Trump. He’s a real estate mogul who’s had massive successes and high-profile busts. He projects a wealthy image and rewards loyalists. And in January, he embarked on a new act that has been slow to gain momentum.
Barrack’s property empire has consolidated into Colony NorthStar Inc., a real estate investment trust born near the start of the year from a merger of three companies: his own Colony Capital Inc., NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. The new entity is making bets on health-care properties and warehouses, deals that are decidedly less flashy than Barrack’s more famous transactions, such as investing in Nevada casinos and Michael Jackson’s Neverland Ranch.
So far, Colony NorthStar has struggled to appeal to investors. Shares are little changed since the merger’s completion, trailing some rival firms in a year where optimism over the Trump administration’s agenda is helping to fuel a stock rally.
“We’re in a transition,” said Chief Executive Officer Richard Saltzman, who’s worked at Barrack companies for 14 years. “Burden of proof is on us, for sure, but I think people are leaning in. We’ve got a lot more work to do, but we’re quite optimistic about what we are doing and how it’s going to look six months to a year from now.”
Colony NorthStar is now the main investment vehicle for the 70-year-old Barrack, the company’s chairman, marking the latest turn in a more than three-decade career in real estate and private equity. At the same time, he’s becoming more known outside financial circles for his role as a Trump champion, from appearing on television to defend his policies to organizing the inauguration. And while he doesn’t hold an official role in the administration, Barrack says he offers informal advice to the president.
“The best thing I can do is be a friend and be able to tell him when he’s off base without him firing me,” Barrack said in an interview.
Distressed Bets
Barrack built his career from bets on seemingly out-of-favor assets. The son of a Lebanese grocery store owner, he worked as a lawyer in the Middle East and had a stint in the Interior Department of President Ronald Reagan’s administration before joining the investment firm of Texas billionaire Robert Bass in the 1980s. There, he capitalized on the savings and loan crisis by buying distressed assets from failed thrifts, working with the likes of David Bonderman, who went on to co-found TPG Capital. Barrack also helped engineer the sale of New York’s Plaza Hotel to a prominent real estate investor: Donald Trump.
“I learned from him a lot of things about instincts and how he evaluates people,” Barrack said. “We were both contrarians, but he was better, brighter and more aggressive in building his own brand. I had great people around me and the wind at my back a little.”
With money from Bass, Barrack founded Colony Capital in 1991 and built a private equity giant by investing in soured loans and real estate, including celebrity-centric deals such as buying Neverland Ranch and saving photographer Annie Leibovitz from bankruptcy. The company persevered after some missteps in the mid-2000s -- including backing the $8.5 billion purchase of Station Casinos, which ended up going bankrupt, and getting crushed on Xanadu, the trouble-plagued $2 billion retail and entertainment complex in New Jersey’s Meadowlands, during the financial crisis -- and Barrack now has a personal fortune that’s estimated at $1.3 billion, according to the Bloomberg Billionaires Index.
His collection of residences includes a ranch, polo facility and winery near Santa Ynez, California, and a condo in Manhattan’s Trump Parc East. In Los Angeles’s Bel Air neighborhood, he’s developing a mansion that will be at least 53,000 square feet (4,900 square meters) that a Colony spokesman said it is being built for a friend, whom he declined to identify.
Inner Circle
People close to Colony say Barrack surrounds himself with a tight circle of lieutenants and values loyalty. Senior leaders, who typically number 10 to 15 at a time, stay for an average of 12 years, and many have worked with him since Colony Capital’s inception, according to the company.
He sometimes hires people he knows or as a favor to others. Such employees are known as friends of Tom, or “FOTs,” by Colony workers, according to people close to the firm. Some FOTs lack the necessary business experience or acumen, and often end up having ambiguous roles, said the people, who asked not to be named discussing internal matters. Still, employees are rarely fired, they said.
“I err on the side of loyalty over top performance for sure,” Barrack said. “I’ve hired people from a reservoir of unusual places versus going to Wall Street and saying, ‘I’m going to go steal someone from Goldman Sachs.’”
That’s led to unorthodox hires such as Tommy Davis, a former spokesman and head of external relations for the Church of Scientology. Davis joined Colony in 2012 as a part of the rental-home business before eventually becoming Barrack’s chief of staff, coordinating media-related requests and bookings.
Barrack is the godfather of Davis’s brother, Davis said in a telephone interview. He is no longer employed by the firm but works for Barrack personally as an independent contractor.
Going Public
Barrack took Colony Capital public in 2015, merging it into Colony Financial, a publicly traded REIT, giving the company access to $9 billion in assets and making it less dependent on outside money.
“I was giving back to all the people who had been loyal to me all that time and giving them a currency, a balance sheet, a company and a future,” Barrack said. “And it’s given me space to think about other things.”
The marriage of Colony and the NorthStar companies -- one of which focused on commercial-property investments and debt, with the other managing the REIT’s assets -- accelerated growth for Colony Capital, which had been slower to raise money from institutional investors after its financial-crisis losses. By 2010, Colony’s flagship private equity fund had lost 60 percent of its value.
NorthStar had the ability to pool money from individual investors through entities like nontraded REITs, which are sold to mom-and-pop investors and aren’t traded on stock exchanges. Colony had already been exploring buying or building such vehicles itself. By merging with Colony, NorthStar had a way to quiet vocal shareholders, who had argued that top managers were collecting millions of dollars in compensation even as the stock was underperforming.
The new company has about $56 billion in assets, compared with about $25 billion for Colony before the merger. Barrack personally owns or controls an almost 5 percent stake, according to public filings.
‘Somewhat Unprecedented’
Property REITs traditionally focus on owning real estate and distribute most of their profits to shareholders in the form of dividends. Colony NorthStar has a more complicated setup in that it also has an asset-management business embedded in the company.
The company has already sold some investments that are no longer central to its strategy of putting money into real estate related to health care, hotels, warehouses or investment-management services.
“What they’ve done is somewhat unprecedented,” said Mitch Germain, a real estate analyst with JMP Securities LLC in New York. “The Colony management team has done a fairly swift job of beginning the process of simplifying what the company is and exiting what they consider to be noncore.”
The stock has likely underperformed because it’s not a traditional REIT that investors can easily compare with others, Germain said. In May, the company reported funds from operations that trailed analysts’ average estimate.
It also has fallen short of fundraising goals. Colony NorthStar closed its latest Global Credit Fund with commitments of $1.2 billion, 20 percent of which was funded by the company itself. Colony had set a pre-merger target of $2.5 billion.
Barrack chalks that up to a shift in the investing landscape, as the traditional model of private equity firms and hedge funds that charge high fees to manage money has become “an antique.”
“Pension funds, family offices and sovereign wealth funds are run by sophisticated investors who aren’t as interested in putting money into a gigantic fund,” he said. “They’d rather pay for each transaction and see the deal. They want to be more involved.”
Warehouses, Nontraded REIT
Colony NorthStar is pushing deeper into investing in industrial properties, according to Saltzman. There’s also a plan in place to tap retail investors by raising $2 billion for a New York-related nontraded REIT, and $4 billion for other funds.
In the meantime, Barrack has made headlines related to Colony’s past deals, including being entangled in a dispute with an Italian prosecutor who has accused him of being involved in a tax scheme related to Colony’s sale of luxury Sardinian properties. Barrack has denied the prosecutor’s allegations.
He’s also selling his stake in house-rental company Colony Starwood Homes, one of the firm’s largest investments over the past several years and an industry he helped pioneer. Another business, lender Colony American Finance LLC, was sold to Fortress Investment Group LLC.
Barrack has become less visible at Colony NorthStar, with Saltzman as the public face of the firm, as it takes shape and finds its place among other REITs. He’s become more visible when it comes to defending Trump. He continues to weigh in, as a friend, but contends the president knows what he’s doing.
“I have given my thoughts on a variety of topics,” Barrack said. “And he has thanked me for my opinion and then said, ‘But if I listened to you I would never be president. I’d still be on ‘The Apprentice.””
To contact the reporter on this story: Heather Perlberg in Washington at [email protected] To contact the editors responsible for this story: Daniel Taub at [email protected] Kara Wetzel
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