The Exchanges

Q So you're not that old. How'd you get started?

A Well, I met a fellow who I shared a beach house with in West Hampton, and he said he'd back me when he found out. I was 31. 30, actually. I And then my old boss, who felt bad about firing me, gave me two million dollars, and then the Ziff brothers, and also the Burden family, which are the Vanderbilts, they put up ten million each, and that was our fund, twenty-one million dollars. The thing is, you can't buy a lot for twenty-one million dollars in real estate, so, but assets were so cheap, we bought, our first deal was the Windmill Springs Apartments in Colorado Springs. We bought 513 apartments for three million dollars. It was 15,000 dollar apartment. That's from the government. The government formed this resolution trust corporation, which had all the assets of the savings and loans that had gone under to sell. So we would go to auctions in fields with pickup trucks and there'd be music playing between portfolios of assets they were selling. I went to these auctions and I, there was a multi-family in Ocala and it came with a llama farm. And a whole bunch of other stuff. So we buy buckets of stuff they were selling and we would show up with our twenty one million dollars. I went back to the families and said, we've already spent your 21. We need some more money. So they said, how much you need is at least 50. So they topped us off to fifty million dollars and then we were ab…

AI assessment note: “Well, I met a fellow who I shared a beach house with”

Q How'd you have the inflection in the hotel business? I know you went from buying a bunch of hotels to buying Westin bigger and bigger assets.

A So we had been buying hotels, and a couple of things happened. There was a company we bought, Davidson, was managing a bunch of their assets. That was a public company called Hotel Investors Trust. The symbol was HOT, H-O-T. And it was basically a bankrupt REIT. It had about 20 hotels. It had about two hundred million dollars of debt. I think it had an eight million dollar market cap. But it also had this thing called a paired share structure, where the management Company was allowed to manage the assets of the REIT, which technically in all other hotel REITs, because REITs can only own passive income streams, is outside of the entity. This was in the entity. So the shareholders would own both the management company and the asset, and there'd be no conflict of interest between the two, because you own both of them. So we thought this was cool. So we bought the debt of that company. The two hundred million we started buying was held by four different entities. We started buying it. We approached them and said, your debt isn't worth par. One by one, they all agreed, and we were able to buy the debt, and then I decided to take all, a whole bunch of the real estate hotel assets that we bought and go public with them, so I, I contributed some hotels in Dallas, some notes on other stuff. And the debt we bought, and we basically took over that entity. We own seventy-something percent …

AI assessment note: “we basically took over that entity. We own seventy-something percent of it”

Q Why don't we start back at the beginning of your career? How about how you first got into real estate?

A I went to Brown university and coming out of Brown, I wanted to get a job on wall street, but I had no background in wall street. And so I became an arbitrage trader. First I got a job with Booz Allen. Then I left that and became an arbitrage trader. And then I worked for credit Swiss and I kind of liked the markets. I got into business school and I wasn't sure I was going to go cause I was making decent money and I was broke. Um, but I got online to buy my first lotto ticket. And I think it's the only lottery ticket I ever bought. And I said, what would I do if I won lottery? And I said, I go finish my education. So I only applied to two schools, Harvard and Stanford. I got into Harvard and got waitlisted at Stanford, and I decided to go. And then when I got out, I tried to get a job with Wall Street again, and I got offered a job in Goldman Sachs's real estate group. I'm kind of a frustrated artist. I took art classes in high school. I went to Solar Mine Guild for Artists. I painted. Real estate seemed like, okay, it was also the last great imperfect market. Things happen in the real estate market that don't happen in the securities market. People do deals because they have a tax situation, or they don't want people to see what they screwed up, so they call you. And stuff happens even today that's almost inexplicable. People selling things perhaps off market because they don'…

AI assessment note: “got offered a job in Goldman Sachs's real estate group”

Q How do you think about selling at that point in time?

A One of the rules of real estate is when prices get to replacement costs, you should sell, because when the prices get that high, new construction begins, and so they were, in that case, we thought these assets, which were old, had risen so much in value, so what happened was the reed industry was born back then, and the reed industry was born not because people wanted to the good graces of these very rich real estate guys, it's because they were all on recourse debt, and interest rates plummeted, And all of a sudden the dividend yield of an unleveraged real estate portfolio was higher than interest rates. So Sam Zell took public his apartments and got off mountains and mountains of recourse debt. And so the Simons took went public with their holdings and everybody used the public markets to de-leverage and get off those recourse guarantees they had. And so the reed industry was born and then it sort of took off from there. It had been around, but it had never been legitimate and never been large enough to matter. Then all of a sudden it became the exit strategy for every real estate guy on earth, because again, the dividends were lower than the cost of debt.

AI assessment note: “when prices get to replacement costs, you should sell, because when the prices get that high”

Q So I want to ask you a couple of closing questions before I do that. You're typically traveling all over the world, visiting properties. What was COVID like for you?

A I actually enjoyed COVID. I had both of my sons with me in Miami and I never get to work with my kids. So that was kind of fun. And we did a couple of deals in the middle of the chaos. We did a rescue package on TPG's mortgagry, TRTX, and he said, how could you do this? My son, who's just entered Harvard Business School, and I was explaining to him that at these values, where our attachment points were for the loans we were getting, we couldn't really lose money unless the United States ceased to exist. So we went out great, and the stock rebounded. We made a ton of money. I got to see a real live contrarian deal in the middle of the heat. We bailed out this company. So that was kind of fun, and I decided that the only place that was real distress in real estate during COVID was the public markets, which overreacted, and everyone thought the world was ending privately. It couldn't happen. So stocks went so cheap, we raised a seven hundred million dollar fund from our clients that would still answer the phone. It's up 83%, so it's good. And we just, in five names, we've really focused on five names, and it's funny, a couple of them we've made Three of them we've made takeover offers on, which turned out to be like, I was sort of injured. They got so cheap, and now we just want to take them out. But we try to be agile. And COVID was also great because I'm good in crises. It focus…

AI assessment note: “I actually enjoyed COVID. I had both of my sons with me in Miami”

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A Well, we have investors from China. We've avoided going to China as investors, except in one area, in hotels. We have a joint venture with a Chinese account. Fundamentally, if you're like me, and you're sort of a Graham Dodd value investor in assets, in real estate in particular, it's difficult when you can't see supply, and you can't see demand. The data doesn't really exist, and somewhere up in the Politburo, they're deciding that They're gonna build a new town, and they're not telling you about it, and they're gonna move two million people to that town, and I'm not sure where they're coming from. They're doing the hundred-year plan and the fifty-year plan, and our investors have five-year cycles, and I don't think they really give a hoot if your IRR is a 13 or a three. So the state's gonna win, and therefore I kind of worry about adverse selection, us getting the worst deals, the locals getting the better deals. And ultimately, you know, it's evolved into now it's possible there'll be other issues for American investors in property. So we have not invested in China for a while. One of our clients, of course, it was formed to invest outside of China. So, but even there, they've now asked us if we would do things with them in China. And we're looking in categories, but one of the lessons I've learned over the last couple of years, 30 years, is we don't put enough political ris…

AI assessment note: “We've avoided going to China as investors, except in one area, in hotels.”

Q So what are the other two green lights?

A Well, industrial is green, and I would say data centers are light green. Demand is robust, but rents aren't really moving because there's so much supply being added. Offices are, they're red, yellow, and green. They're in all three categories. Europe is more returned to the office. I think before the Delta variant, they were sort of Depends where you were. London was zero, but Berlin was 65, 70. Some of the other markets were higher. All of these places have the Delta variant put a crink in the whole recovery or the slant of the recovery. And then the red going to yellow, going to green is hotels. And even in that market, if you had a resort hotel during the pandemic and it was open, you did really well. We had to have a record year during the pandemic at the one hotel in Miami that we built and 20% higher cash flow this year than last year. So it's been incredible. On the other hand, if you have a big group housing in Manhattan, you're lucky if you can had for a while, if you were open, which you weren't, then you were opened and you had six percent occupancy. Without the businesses here and no foreign tourists, there was no reason to own a hotel in New York. Actually, it's been shocking to me that the New York recovery has been as good as it has in hotels just because domestic travelers have money and they're traveling. So you had a reasonably decent summer in New York withou…

AI assessment note: “industrial is green, and I would say data centers are light green.”

Q So you started in apartments, you moved to hotels. I know eventually you built a lending business. I'm curious, how do you think about this kind of flexible opportunistic investing in real estate?

A Our job is to allocate capital to the best returns for the least risk. I do that across all the asset classes in real estate. I always say bet the jockey, not the horse, right? It's like, Our job is to jump from asset class to asset class, from apartments, hotels to land, single family homes, student housing. We, you know, ski resort, mammoth mountain. We own golf courses, anything we can call real estate. We throw in, we even bought airports because we wanted the hangers at the airports. So we look for the best returns. And then you add the fact that we can do it all over the world. We've been all over the world, whether it's Thailand or Japan or Europe. We said the wine drinking countries, but also the Nordics now and Oslo and Copenhagen. Sweden. So we've invested pretty much all over the world, and we also, at times, we've gotten out of the equity and just done debt, and so in the old days, we'd done a mezzanine fund that we took public. That created a company called Starwood Financial, which then changed its name to I-Star Financial to avoid confusion with Starwood Hotels and Starwood Capital, the private company. So I-Star's still around. We spun out the current CEO who left, Jay Sugarman. He's now the CEO. He's been there for Ever. And then actually I redid that in 2009 when there was no debt available. I went back to Wall Street and said, we want to be a lender. We want …

AI assessment note: “Our job is to allocate capital to the best returns for the least risk.”

Q What's the biggest mistake you've made and what have you learned from it?

A On paper, the worst deal you did is the best deal you did. Like, for me, it was when I bought this company, Ransworth, I was the head guy to make the decision in England for my old employer, and a very wealthy guy who was on the Forbes for a hundred made a catastrophic mistake. And we were following the Reichmans at the time, the richest people in the world into the British property markets, and they got it wrong. And we thought because they were doing it, we should do it. And there was some things that were wrong from the start. I didn't object to them like negative leverage. There was massive negative leverage in that trade. So I think also probably the hardest thing for me in running a public company and private company has been dealing with people. And somebody once told me that keeping bad apples, you're not helping those people. You're hurting your organization. And they're setting a bad example, and the fact that they survive in your company is pulling down the performance of your whole company. But I always get caught in the personal side of that. You know, they have two kids, they've been here 17 years, they're trying hard, they just don't have a talent set, you don't know how to tell them that, you kind of push them, keep pushing them into more and more irrelevant corners, but you should let them go. It's funny because I had a reputation of being difficult because I w…

AI assessment note: “it was when I bought this company, Ransworth”

Q So if you're looking across the world, across asset classes and think about risk reward and assets that are relatively illiquid, how are you assessing when to get in and when to get out?

A Everything has its time. It's like wine. Well, our funds have ten-year lives, so we have to be cognizant of that. We have two one-year extensions if we want it. Things that we think Have a lot of upside. We'll probably keep things that we've gotten most of the upside because we finished a renovation, at least the building we might sell. Generically today, just being relevant today and stay away from history, I mean, today you have one market on fire, one in its associated markets, which is the residential markets, multi-family rentals. We, I think we have a 110,000 apartments, something like that, one of the largest owners in the country, of which 40,000, I think, are affordable housing. So that's a business that has no Technological risk, really. Nobody can sleep in their computer. It's one part of real estate that isn't going to be affected by most anything. So we made that call a couple of years ago as COVID spread that it would put office into at best a yellow category. Hotels were dark red or red because I'd leave dark red for retail, which imploded. And because of that, like everything else, I learned early on that the flow of capital can overwhelm fundamentals. So because those other asset classes, which traditionally would probably be taking 60, 70% of all the money set of The side for real estate were shut. Apartments in industrial would zoom, and the pressure would kn…

AI assessment note: “Things that we think Have a lot of upside. We'll probably keep”

Q So I want to go through a tour of some of the assets today, particularly post COVID. Before that, I'm really curious about signaling effects. So you've had so much success and I would suspect that the market thinks when you go to sell something that you think, you know, most of the juice is that, how does that play out in terms of transacting on the backend?

A I think it's the same thing with PE shops selling to one another. It's interesting. We've had running debates about, for example, our multifamily assets. My team's feeling is not to Renovate all the units to let the next guy have the opportunity, and they think it's reflected in the purchase price. Like, they'll buy down the cap rate, the yield, because they have this upside of renovating the rest of the assets. We kind of prove to them that it works, doing 20% of the units, and leave 80% of it for them. I can't say I'm on board with that. I would like to do more than we do, but we have this constant debate, and I've won in a couple cases, so we'll see if I'm right as we go to sell these assets, because there's also a group of buyers, like your home, Who wanted everything perfect. They just want to yield and they don't want to spend any money or do any work. So there's both. So I think the market, and it's true from lying from Blackstone or other firms. Again, we can't predict cap rates. I mean, you can, you can have a view, but that's rarely in our investment memos. So if I thought cap rates were compressing, I might think Starwood picked a bad time to sell. Or I'm selling for the wrong reasons, the end of a fun life or something like that. I don't think it's so bad that people think, like, they can't make money if they buy from us. They may have, like, a tenant, we're selling…

AI assessment note: “I don't think it's so bad that people think, like, they can't make money”

Q What opportunities are you seeing that you think other people aren't yet?

A I can't tell you that on a broadcast. That would be awful. I'll tell you what, what I think is interesting. I still think Brazil is more interesting than a lot of times clients and capital races to places. When we went to India, our clients were, you need to be in India. And they went to Brazil and we were very careful. We did just two things of scale. And one of them is now the second biggest logistics platform. It's a public company. We've gotten walloped on the currency, but made a lot of money in local So I think Brazil is actually a lot of capital left. I actually believe Brazil will be interesting for real estate players, and it's a big country, a couple hundred million people, an emerging middle class. You got to watch the governments about to turn over again, so the governments are super important. It's more like, what am I worried about that other people aren't worried about, as opposed to, like, where do I see the opportunities? You know, I think the political issues in the country and around the world are going to have a bigger effect on investing than they probably have in the last 20 years. I think the change of government in Germany probably is overlooked, is important, and Merkel's been the longest lasting European leader. I think that you have to watch that. You have to be careful. The Democrats now, because they have all power, they'll probably lose conventiona…

AI assessment note: “I can't tell you that on a broadcast. That would be awful.”