The Exchanges

Q What'd you do with the property from owning it directly to eventually selling it and getting out of the direct real estate business?

A When the market improved, we went to sell the deal in the late nineties. So essentially we marketed the asset for sale. And at the time the Russia crisis hit in 1998, despite being under contract, the deal fell through and Harry Macklow at the time was the buyer. And we had come up with a plan to not only sell the building, but sell the dream of redeveloping the retail. At the property and let the next guy take that to wherever they wanted to go. And Harry saw the vision. To be honest, he was the only one that saw the vision. But when he couldn't close because he couldn't get financing, we approached Harry and asked him for some advice on how we could do it ourselves. And myself and one of my colleagues went to David and the president of Yale, and we said, we have a plan to redevelop this asset. We have to get it rezoned in New York City next to Trump Tower. And we did. We ripped off the front of the building and expanded it, and Yale probably made a hundred million dollars on the redevelopment. It was a great experience for me. I got to learn all aspects of the real estate business. Helps me do my job today, which is, you know, understanding what our partners are going through and how they do what they do.

AI assessment note: “we have a plan to redevelop this asset... We ripped off the front”

Q What was one of those partnerships that worked really well for you?

A Well, one of the early ones was a group called Douglas Emmett, and they're a public company now, very successful. This was back in the early to mid-nineties, and they were pursuing massive distress in Los Angeles. One example that always resonates with me, when we were underwriting some of their early deals and trying to understand how they look for opportunity, things were so bad in California back then that we underwrote no residual To the assets in at least one deal. It was not even a land residual. We assume that these assets just went away at the end of the lease term because things were so bad. It's almost impossible to get your head around it today. But back then that was not a completely far-fetched outcome that was going to happen. And we would underwrite deals. Is this a reasonable risk-adjusted return, assuming the world comes to an end? And then if it doesn't, we'll do great. I think they had nine funds. They all did very well, and then they went public, and they did a great job for themselves and for Yale.

AI assessment note: “Well, one of the early ones was a group called Douglas Emmett”

Q Why don't you take me back after the thirty-something years of working at Yale, how you got in the office in the first place?

A I was at NYU Business School, and I wanted to get into the real estate business. It was 1990, very rough time in the real estate business. There was a job posting to work at the Yale Endowment, which was something that most people didn't know much about. Endowment management didn't exist. I interviewed for the job, and it took a few months to get through the process, and I picked up and moved to New Haven and was working for some guy named David Swenson that nobody had ever heard of before. The office was not that much bigger than this conference room I'm sitting in now. I was working for Ellen Schumann and Donna Dean, and we started to figure out how to invest Yale's money in real estate. Back in the day, Yale was a direct real estate owner of assets. When I joined, I was put in charge of managing all those assets, and David and Ellen and Donna were pursuing this New model called private equity real estate, and I got the real estate training on the direct asset set, but also got exposure on the ground floor in the private equity real estate business.

AI assessment note: “There was a job posting to work at the Yale Endowment”

Q What was the decision process to sell all of the direct real estate and moved into this private equity model?

A David Swenson was a first principles investor, and he looked at the real estate business in the eighties and said, this doesn't make any sense. And he thought that the fee-based nature of the business, there was no alignment of interest. There was lots of separate accounts. It just wasn't the right model for how he was looking at it with a blank sheet of paper. He looked over at the private equity venture capital business and said, that's a business that is structured in the right way, and we should model Our real estate business off of that, and that's what we did. So essentially, right when I joined Yale, Ellen and Donna, and to some extent myself, wrote a strategy paper on how we would transform the portfolio from a directly held to more of a partnership model. And it's funny, because we went to all these very impressive Yale professors and asked them, how do we create a portfolio? How do we Find the efficient frontier, all these economists like Ibbotson and Stephen Ross and people like that, and they just said, find good people. It was the opposite of the ivory tower mindset. Just go find good people doing really interesting things and set up the right structure, and it'll take care of itself. That's what we did. We obviously were learning as we were going, and one of the exciting things was David was learning as he was going, so he was shoulder to shoulder to us, and we co…

AI assessment note: “wrote a strategy paper on how we would transform the portfolio from a directly held”

Q How many different meetings do you think you had with a manager?

A I'd say we'd have two initial meetings trying to understand how they think, how they do what they do, what's the culture of the team, and the level of drive, and all those intangible things to figure out whether this is somebody that Yale wants to be partners with for a long period of time. And then we'd probably go out on the field and spend a solid 24 hours with the person, probably have dinner, tour assets, maybe two days of asset tours, depending on how close together the assets were. One thing that's nice about real estate is you got to spend a lot of time in the field, kicking the tires, seeing assets, meeting the people. Real estate people like to talk a lot, so there's a lot of sharing, and you really get to know somebody when you're spending six, 8:10 hours in a car driving around looking at assets, and it tells you not just about their investment acumen, but also who they are as people. And then we'd come back, and we'd probably spend a lot of time Then doing the work at our desk and doing a lot of interaction with the manager. Sometimes that was just over the phone. Obviously today it'd be more zoom related. You would learn a lot from all the different aspects of that. There are different things to learn at different times. We'd have a pretty good sense after we toured assets, whether these people have the general bones of what we're looking for in terms of a partner…

AI assessment note: “I'd say we'd have two initial meetings trying to understand how they think”

Q How'd you go about finding the opportunities you were looking for?

A Some of it was relationships. Some of it was we wanted to gain exposure to certain property types, so we might do deeper dives in certain areas. So after nine 11, we thought it would probably be a good time to think about hotels, and we did broad survey of the hotel business to find people that we thought might fit what we're looking for. Sometimes you'd go down Paths, and there was nobody that fit the bill. Sometimes there weren't a lot of players in certain property types, or maybe there just weren't enough that made the grade. Whatever reason, we didn't get in early enough to make it happen. So there's a lot of luck that also goes along with it to find the right person at the right time. The one thing I always did, I took every call. My pride at the end of the day was I returned every phone call, usually before I went home that night. I always felt I really like this business, so I like talking to a lot of people, but I just felt like you never knew where the next great deal was going to come from, and a lot of the people that we backed early weren't the greatest marketers of themselves. The business wasn't as sophisticated in terms of presentations. You had to look through some of the noise to find the kernel could potentially create a great investment company there. Because there wasn't placement agents and all this stuff, but we spent a lot of time just meeting with a lot…

AI assessment note: “Some of it was relationships. Some of it was we wanted to gain exposure”

Q So in a situation like hotels coming out of nine 11, how do you turn over rocks and trying to understand who the best hotel operators are that you might be able to put into the type of structure that you like investing in?

A It comes from a lot of different sources, and we actually did a big deal with the Kempton Hotel Group. As an example, we had met with Bill Kempton years before and just never were able to make a deal, and then when things got a lot cheaper, Bill had actually passed away, but the company was still around, and we spent some time reintroducing ourselves and understanding what the plan is, what they want to do. But it's a lot of rabbit holes, a lot of just meeting a lot of people. The good news is at Yale, the door is open, so you can meet with anybody. They take your call. That was the amazing thing. I could be 25 years old, not knowing a thing about real estate, and you called the CEO of a company, and you said you worked at the Yale Endowment, and the door almost instantaneously opened up. At the time, I didn't fully appreciate how nice that was, but it was a great Calling card that we had that we could use and we did and we should have used it. That was great.

AI assessment note: “It comes from a lot of different sources, and we actually did a big deal”

Q As the industry learned more and caught up over the decades you worked at Yale, how did you try to stay ahead?

A I think each person figures out their own way. My way was to get as close to the managers as possible and to really understand what they're doing and be valuable. So I would not only have some input into what they were doing, but also understand what they're doing and why. I say to the younger people in the office, when we back at an early stage manager, there's a window where you need to be the person that they call when they have an issue. And that window doesn't stay open forever. And you need to take advantage of that window so that when they're 20 years later, you're still the person that they call. And if you miss that window, they'll find somebody else to do that. And I prided myself on having, I think, people in the office would say maybe the best relationships with the managers in the office. I think that's a two-edged sword at times, but I understood the managers really well. I was Close with them. I understood what they were doing. I understand their portfolios really well. Could speak coherently about what they were doing on each deal.

AI assessment note: “My way was to get as close to the managers as possible”

Q where there's an opportunity set you'd like to pursue, you're trying to find the right partner. How do you decide if you're not finding the partner, whether you just get exposure to it? Think of it as like a beta to that space while you're waiting. Compared to just saying, no, unless you lie in the opportunity with the people, you're just not going to deploy the capital at all.

A Historically, we took a pass on the sector. If we couldn't find the right group, we just did not pursue the sector. And industrial was a good example where even once the sector became much more interesting and institutional, it took us a while to find the right person. And we missed some opportunity there. I think one thing that's really interesting that's changed in the real estate business that you were getting the beta regardless of the property type. So focusing on alpha was all that mattered. Unfortunately post GFC that's completely flipped on its head. So now you have office is in the tank today and industrial has been super hot for the last 10 years. So all of a sudden you've had sectors just go completely in opposite directions. And getting the beta would have been really good for those property types, even if you didn't get a lot of alpha. Coming from where we came from, that wasn't the mindset that we had coming out of the GFC, that that was necessarily the way we should play it, because that's not what had happened over the past 30 years. And that was a change that was harder to see prospectively.

AI assessment note: “Historically, we took a pass on the sector. If we couldn't find the right group”

Q As you invested alongside of organizations that you may have first put early capital in, and then they expanded and grew over time. What are some of those aspects of building the business the right way that you saw that you found yourself giving certain kind of advice repeatedly to some of the managers?

A I say this to a lot of our managers. You're managing three or four different things at once. You're managing a portfolio of assets. You're managing a fund. You're managing an investment management business, and you're managing a team. And you have to manage all of these things in a way that works for all the different constituents. And it's really hard, and it's really complicated. The guy who got to the top of a lot of these real estate firms is a deal guy. And he's not a organizational guy, and he's not an investment management guy in the same way that maybe in other asset classes. So helping them think through these types of issues that they should be thinking about, or even just raising them so they start thinking about creating an organization that can handle all these different constituencies that need to be addressed.

AI assessment note: “You're managing a portfolio of assets. You're managing a fund. You're managing an investment management business”

Q If you were in your last couple of years looking at opportunities, how did you decide where to spend your time on different opportunity sets?

A When we decided where we wanted to play, I think it was a combination of looking at our portfolio, seeing where maybe there were some holes in it, what we're seeing out in the market, where maybe there's some interesting stuff going on, usually because it was some distress where we thought maybe we should be taking a harder look at this and finding, A, we'd have a bigger seat at the table during a distress period, and B, hopefully, with all these new managers, it's great to get in when things are cheap and have them get their Firm off to a good first start. It was still a people-based focus, but we definitely looked at different sectors and tried to figure out where we could find the next interesting opportunity, and I'd say we were a little slow on some of these nichier sectors where these non-traditional real estate sectors like student housing and self-storage Part of that was the people in the business by definition almost didn't have a lot of experience, and there wasn't a lot of institutional players, and we were trying to find people that were just as good as the other people. In the rest of the portfolio, which made it challenging early on to find the best and the brightest when they're early. And that's where I think having these relative multi-strategy shops is very helpful because they actually help educate us to understand, oh, there's these other sectors over here.…

AI assessment note: “it was a combination of looking at our portfolio, seeing where maybe there were some holes”

Q What tips did you give the junior people as they were getting up that curve in how to get more efficient at the process?

A The hardest thing the young people had was getting to know. A lot of the young people were 22, 24 years old. There's some fifty-year-old real estate guy on the phone who's very good and very persuasive, and I would tell the young people, you need to figure out your way to get to know quicker, because that's your job, without offending somebody who's probably old enough to be your father or mother. And I would encourage them, and I would walk through examples of how they can do it, and because managers were very sophisticated about pushing back and responding, and they had to learn how to think on their feet. The original ones, you would obviously do it in front of them, and you'd show them your way, but everyone needed to develop their own style of how they were going to interact with people, and one thing I worry about in today's world, there's less of that. It's more over email and less the human face-to-face contact, which I think is critical in the real estate business.

AI assessment note: “I would tell the young people, you need to figure out your way to get to no quicker”

Q When you have a relationship in the one hand that lasts for 30 years and in others don't last for as long, what happens that tends to lose your attention and interest?

A It could be a lot of different things. It could be the manager decides to do something different. Like in the example of Kempton, they sold their management company and they were no longer an operating company, and that changed how they did things. Hard to say. At the time, they thought this was a good thing. It didn't fit exactly what Yale's model was. Others decided to do other things. They wanted to broaden their product offering and things like that. Obviously, track record is a huge piece of this, and the better they did, that's a big wind at their back, and the worse they did, more questions were asked. One thing that David was really good about, and this taught me a lot, was looking around corners and looking at the people, and you know, everyone's gonna have a slump or an issue, and how do they respond? What's the opportunity going forward as a result of the mistake? Was it a mistake by the firm? Was it the market? So we dug in a lot on underperformers to understand whether we want to buy more when it's cheap, like a value investor, or do you want to exit because it wasn't a great place to be? There was one manager that got off to a really rough start in the Bay Area, and their investment period was up, and they were only about half invested, and Dave stepped up to the plate and said, let's extend this investment period, and they've just hit the ball out of the park. Th…

AI assessment note: “It could be the manager decides to do something different.”

Q What are some of the other ways that you think made the investment office at Yale so special?

A It always comes down to the people and the collegiality. We felt like we were doing some groundbreaking stuff early on, and really being a part of something that was really special. It was a close-knit group. We were working really hard I think everyone really enjoyed what we were doing. It was a passion. We thought we were doing some really interesting things, and we were at the early stage of an industry that was developing. I'm not sure we knew it at the time, but we were doing some interesting stuff. Also, David was very focused on the mission of the organization and Yale specifically, whether it was basketball games or financial aid or working with students, and that was fantastic. But at the end of the day, we worked at the investments office, and we were working 12 hours a day on investments, and I think one thing that gets a little lost is we're in the investment business, and we're spending all of our time thinking about investments, and I think having the passion for investing is critical to do well in it, and it's nice that you're not making a rich guy richer, you're making Yale richer, and they're doing really good things with it. But my day to day job was all about investing, and the mission was important in the background, but it wasn't the primary reason of why I really enjoyed the job.

AI assessment note: “It always comes down to the people and the collegiality.”

Q How do you balance that in what's thought of at least over time as a cyclical sector?

A It's challenging. You're relying a lot on the manager to make the investment decision of how much they want to buy and how much they want to sell. We relied on that heavily with our alignment of interest. Could we have been a little bit more tactical at times? Maybe. It's hard to judge But the model was to trust the managers and be informed about what they're doing and make judgments about what they were doing, but if they had demonstrated ability to navigate cycles, that gave us a lot of confidence. That wasn't always easy, because as the cycle became longer, different managers behaved differently. Some took a lot of chips off the table and sat on their hands. Others went longer the market. We tried to rely on our managers and also our own judgment to calibrate risk in what they're doing. And really, the more expensive things got, the more we would try to understand the What they were doing and how much risk they were taking, and that's when it became challenging. Some things were foreseeable and other things were coming out of left field.

AI assessment note: “the model was to trust the managers and be informed about what they're doing”

Q Did you find over time that a person or small group of people that start the organization that are focused on deals can evolve to being able to build all those roles?

A It's all over the map, and I think that's the interesting part about the real estate business. Each one is different. Each one has their strengths and their weaknesses and their blind spots, and they're all trying to figure this out in some different parts of the cycle of where they need to be, and to me, that's what's really interesting about the business. There were some that the managers were more on autopilot because they were at a phase of their company's evolution where they didn't need a lot of oversight, and others were Where they were early stage, or maybe they were reinventing themselves, where they needed more advice, and that was a nice thing to work on, where you had a range of groups. The goal was always to get them closer to autopilot, and you'd start out with a young, thirty-two-year-old that's creating a firm, and over time, they hopefully get to a place where they need less oversight. Maybe one of the mistakes I made early in my career is just because less oversight Is needed. There's still need oversight. Yale still needs to be on top of things. When a manager's shooting the lights out, you still need to make sure that they stay on the straight and narrow.

AI assessment note: “It's all over the map, and I think that's the interesting part”