Station Casinos was Colony’s ‘worst investment ever’ for timing

As Colony Capital tries to recoup some of its $1.5 billion investment in bankrupt casino operator, Station Casinos, the firm’s founder has admitted the deal was the “worst investment ever” in terms of timing.

Thomas Barrack told Bloomberg Markets magazine the November 2007 take-private of Las Vegas-based Station was poor, saying: “If you were to pick the hour, the minute that it could have been the worst investment ever, it was.”

Colony and Fertitta Gaming – owned by Station founding family Frank and Lorenzo Fertitta – have launched a $772 million stalking horse bid to take control of the company, after it filed for bankruptcy protection last summer. The reorganisation plan would a newly-formed company owned by Colony, Fertitta and some of Station Casino’s mortgage lenders trying to acquire substantially all of the assets of the casino operator.

According to a Bloomberg report last week, US bankruptcy judge Gregg Zive overruled unsecured creditors, which were seeking to halt a planned 6 August auction for a majority of Station’s 18 casinos. Colony's reorganisation plan has won the backing of roughly 90 percent of creditors.

Colony led a consortium of investors in the $5.4 billion acquisition of Station in 2007, assuming $3.4 billion of debt. The private equity real estate firm invested $1.28 billion from its Colony Investors VII and VIII funds, on top of a $300 million mezzanine investment, for a 75.9 percent stake in the operating company. The Fertitta family invested $902 million in the Station group.

We’re going to fight, scratch and claw our way to every cent of capital that we can get back. We also know from history that the best funds come out of an abyss like this. Colony Capital founder Thomas Barrack

In the Bloomberg Markets interview, Barrack also talked about the firm’s 2008 acquisition of a $23.5 million loan secured against Michael Jackson’s Neverland ranch from Fortress Investment Group. “We’re always trying to find places that people haven’t gone before,” he said. “We’re going to fight, scratch and claw our way to every cent of capital that we can get back. We also know from history that the best funds come out of an abyss like this.”

With reported write downs of roughly 60 percent in the $4 billion Colony Investors VIII fund,  Barrack said in the interview it was “tough emotionally”, to deal with such losses, adding: “In 17 years, the investors have never experienced something like this.”

Barrack also spoke about the firm’s 2006 investment in New Jersey retail and entertainment complex, Meadowlands Xanadu. In 2006, Colony Capital led a $1.5 billion recapitalisation of the project when the original partner, the Mills Corporation, sold its stake following a series of financial difficulties.

The project though has faced a raft of problems, and in January former New Jersey Governor Chris Christie’s team said the project “appears to be a failed business model” and an “abandoned project”, calling on the state – and the new governor – to “engage the owners to open or surrender the property”.

Barrack, who told Bloomberg Market he called the project “Xana-don’t”, said the failure of Lehman Brothers – a lender to the project – “killed us.

“We had a great team together and started leasing,” Barrack said. “Even the downturn was OK. What killed us is, Lehman went broke. We never envisioned our bank going bankrupt.” Developer The Related Companies is currently in talks to partner Colony, and fellow private equity real estate investor Dune Real Estate Partners, on the project.

“The question for private equity is, ‘What do you want to be when you grow up?’” Barrack added in the interview. “Are you making money from investing or managing assets? That’s the dilemma that everybody’s facing.”