The Exchanges

Q How do you describe and map out the single family rental market and opportunity set?

A The way we started it, um, was we recognized that a couple things. We were in the midst of ten million foreclosures. Every one of those people is going to be a renter in some way, shape, or form. So we had a massive increase in supply. We had a huge volume of houses that were stuck in sort of the American foreclosure system, and usually when they came out of that, they were really degraded in quality, so needed a lot of work. So they weren't really eligible for homeowners because there was so much work. Most homeowners don't walk around with both a down payment and 30,000 dollars to rehabilitate the asset. So we had this massive inefficiency in the system that could be turned around. We originally mapped it out that we would buy distressed houses like I described, but the process was so full of fat tails, meaning, you know, so many houses that your estimate of 30,000 of repairs was 70 when you really got possession of it. And we also realized that the industry of servicing the houses was so nascent, because the small local players weren't really ever going to be able to use the technology platforms we needed, the efficiency of delivery to people, To drive margins that we ended up having to map the industry out by only buying owner-occupied houses, so houses that homeowners are choosing to sell, and therefore, we're buying high-quality assets, not distressed assets, and by drivi…

AI assessment note: “we ended up having to map the industry out by only buying owner-occupied houses”

Q Once you own these homes, you mentioned there's an alpha component in servicing. What have you been able to build that's different and better from the servicing capabilities outside of Pretium?

A Well, there's a couple of tiers to look at. There's the original small mom and pop home servicers in the communities. When I owned houses and those folks serviced my house, you had NOI margins of like 30%. When we put an asset management layer and create a federation of them and force tech on them, we were able to get to 45%. Once we built our internal structure where we did a hundred percent of the operations, we were able to drive margins to 65% and even higher in some portfolios. So what's the difference that we do first versus that tiering? The first thing is what we did was actually save time. So it's not pricing. It's time. By owning the workflow, we crushed that down to a fraction of what it used to be. The house cash flow is more, and the house is available for renters sooner. Reducing the cost of turnover by both the quality of maintenance while residents are in the asset, and by doing it yourself with your own workers ends up saving money. And creates time savings too. So I'd say the peer group of the largest folks, we have similar efficiencies, particularly I'm talking about invitation homes, for example, American homes for rent. The next tier down just doesn't have the scale for owning your own workforce, owning the strategic purchasing, being able to rent houses because of your advertising budget in a more efficient way. So what we've done is capture the mindshare …

AI assessment note: “Once we built our internal structure where we did a hundred percent of the operations”

Q There aren't that many people that canvassed so many different banks over their career on the sell side. What did you find different about all the cultures of the different places and how that impacted what you were doing?

A Culture is a lot of things. The leadership of the organization by driving a type of culture creates scalability around their vision of what an investment bank or a firm should be. So it becomes a very important thing, because if everybody thinks in the terms of, is this the right thing for our place to do, then you get this repeatable thought process that can be corrupted individually by department heads sometimes. But generally speaking, that's what all of them try to do, whether it's Goldman Sachs or Bear Stearns. Arguably considered to be the two polar opposites of Wall Street. That being said, I found most of them to be more similar than different. When you're in the same ecosystem, The kid with blonde hair looks really different than the kid with brown hair, but they're still probably the same kids who are five years old, but somehow you find differences. We're biased to look at our differences rather than our similarities. The other thing I'd say, you know, Bear Stearns was really characterized, and I use these two because of their perceived differences. Goldman Sachs for many, many years was not perceived as a trading firm. It was only pretty much after the financial crisis, purely woke up and realized what a trading firm it was. And Bear Stearns wasn't a trading firm, despite the image of it. It was a sales firm. So each of these nuances were meaningful. Going back to C…

AI assessment note: “I found most of them to be more similar than different.”

Q If you put on your Lloyd Blankfein hat and you're talking to someone you're thinking of bringing in, What's the roadmap for what Pretium looks like 10 years from now?

A So our aspirations are to be a two hundred billion or two hundred fifty billion dollar alt manager, hopefully faster than 10 years. What we want to do in doing that is to create more new categories. I think some of the categories that will morph private credit's going to change a lot over time, and we're going to have a default cycle in private credit, which will have a impact on distressed investing, They'll have a new round of expertise required. We focus a lot on intellectual property as a category, whether it's patent portfolios, whether it's financing people successfully defending their patents. We continue to look at how would we add real estate debt in the right way. I think, as I said earlier, real estate's never had this much dispersion. So as one of my clients said to me the other day, we're like a lot of people, we're only in three categories of new dollars in real estates. We're in sheds, beds, and meds. Sheds being, like, industrial and logistics, beds being residentials, and meds being medical office, but what that just says to you how to favor, like, offices, which we all know, but it's going to be a massive restructuring of that space. I suspect it'll spill into others, and so the debt part of that market is going to be great. So historically, people have mostly done performing real estate debt. I think you're going to see a massive growth in that. So what we wa…

AI assessment note: “our aspirations are to be a two hundred billion or two hundred fifty billion dollar”

Q Don, I want to ask you a couple of closing questions, and we'll let you go. What's your favorite hobby or activity outside of work and family?

A Is there a better word than dilettante? Because it has such negative connotations, but let me tell you what I mean by that, because it sounds very, like, aspirational and royalty, and what I really mean by that is a person who's interested in a lot of things and an expert in none. I collect some wines, but not so great. I have an art collection. I'm not that great. I play golf. Badly. I ride a bike. I used to be good. I'm not as good, but I love riding my bike. That's my favorite thing to find time to do, because I find the relaxation After mile 25 to mile 50, to be some of the best moments outside of work and children. So that may be my, my thing, but building this business has been pretty encompassing during that, but yeah, um, I have a lot of interest, and I'm really not very good at any of them.

AI assessment note: “I love riding my bike. That's my favorite thing to find time to do”

Q Why don't you take me back to how someone got to Wall Street back when you did?

A It was a great time to get to Wall Street. I was actually in 1979. I was in college. I was looking for the opportunity to start a career that was different than working on Route 17 in New Jersey at the uniform store. That's where I previously worked. Selling police uniforms and security guard uniforms. And I spoke to family members. We had one family member who had good success being in finance. He married into our Norwegian immigrant family. He connected me with some folks at an old company back then called DLJ, and some folks at a company called First Boston. One fellow was very kind to give me a summer job In fixed income research, which at that time I thought that meant analyzing the social security system because my grandmother had a fixed income. That's about all I knew about it. Despite having a major in economics, well, it didn't make any sense to me what fixed income research was. And I got the job most likely because the fellow who hired me saw my resume and he had grew up in Queens and Jackson Heights and went to Manhattan college. And eventually got an engineering degree and a business degree from Columbia. But because his dad was an elevator repairman in Queens, he said, holy, if I could get to tell my dad that I hired a Yale kid whose father was an elevator repairman, he goes, my dad would be proud of me hiring you. So I'm going to give you a job because my dad wo…

AI assessment note: “He connected me with some folks at an old company back then called DLJ”

Q You spotted single-family homes. How did you think about building that within Goldman compared to what you ended up doing at Pretium?

A I think I was concerned. Remember, we had just gone through a whole lot of Senate investigations at Goldman Sachs, where I had the uncomfortable pleasure, if that's the right way to say it, or Of having my emails read on TV by a senator to our CEO. I would not call that one of the better moments of my life. Certainly when your mom calls and said, I just heard your name on TV spoken by XYZ Senator. Is that really your email? You're like, yeah, this isn't turning out the way I expected. I became aware because we had a loan servicer That we were selling homes at a discount to replacement costs, because that was the obligation of the loan servicer. It was dealing with defaults. It had to, an obligation to the securitization to liquidate defaulted homes, and the process was so systemic, the homes were selling below replacement costs. One of the great rules of real estate is if anything sells below replacement costs, particularly within a community where there's demographic growth, you're supposed to buy it. And so, um, I first identified the opportunity, talked to some of the colleagues around Goldman Sachs. There wasn't a whole lot of interest because the challenge we were going through, understandably, but I got compliance's approval to start a process by myself. My daughters were all in college, so as a result, I had plenty of free time, and so I went to all of the high-intensity…

AI assessment note: “There wasn't a whole lot of interest because the challenge we were going through”

Q What goes into that model that you're looking at when you're looking to buy?

A We tend to look for 30 minute commute times, low crime rates, all data you can buy. Good school scores. Not great schools, not because we're picking for people, but the Americans like good schools, but very few of them really want to spend the extra money for great schools. We want a front and backyard, so it's a classic American home you dream about if you grew up like I did, and I think our house was less than a thousand square feet with three boys and one bathroom, so that was not what we're buying. We're instead looking for a three bedroom, two bath house, front and backyard, an eat-in kitchen, two car garage, where the predominance of the members in the community are owners. So for many folks, that's the lifetime dream to live in an asset like that. And for renters, it's really a huge advantage because historically, most folks lived in renter-based communities where all the houses were renters, and those were usually lower quality assets with lower quality schools. That's changed a lot with both our programming as well as others, and so in looking for those houses, that's one of the ways that folks are able to break out of generational poverty by living in ownership communities. But we look for assets like that because we're looking for those aspirational tenants who want to take care of the asset, want to stay there for a long time because they like to live in that commun…

AI assessment note: “We tend to look for 30 minute commute times, low crime rates, all data you can buy.”

Q Which two people have had the biggest impact on your professional life?

A First, that fellow whose father was an elevator repairman has to go at the top of the list because I probably wouldn't have got a job and been invited back because when I left at the end of the summer, there was no plan to hire me back beside being a summer intern. My real first full-time job wasn't a junior credit analyst. My real first full-time job, I was a secretarial assistant. That Mike got me on the payrolls. His name is Mike Hyland. He is a terrific guy. He got me on the payroll at First Boston as the assistant to the secretary named Louise, and I actually whited out things on spreadsheets and typed them in because we didn't have Excel back then, and then would take him to the photocopier, and that was my first full-time job on Wall Street. Then there's a bunch of other people, not the least of which is my father, I'd say, And the reason why I'd bring him up is not because he was a mentor on Wall Street, but that what I said, my advantage was a willingness to work hard, and as colleagues have said, boil the ocean to find an idea. So I'm famous for getting on a plane with three or four canvas bags of research and finishing the trip to California or the Middle East with down to one canvas bag, and then rereading it all on the way back and making notes and Figuring out what to do. And that, I think, is the product of my father, who, um, worked extraordinarily hard. His cha…

AI assessment note: “His name is Mike Hyland... not the least of which is my father”

Q You mentioned the importance of scale in these businesses, and I'm wondering if we could maybe pick something like credit derivatives, where you were there early on, and it was a one-off transaction type of business that later achieved scale across the industry. How do you think about how you take an opportunity that might be discrete and turn it into something that has scale?

A Credit derivatives is sort of the ultimate 21st century example, right? Here, you're well said that we started out in a business that had a series of bespoke contracts that were each negotiated one-off. Clearly, there was tremendous demand. That was the first thing. When you think about scaling, the effort of scaling has to have the expectation that the ability to create efficiency will be rewarded with volume. It was clear to us how valuable credit credit could be in scale. And so to be very successful and creating volume in that space was the output of us looking at it and realizing there could be more liquidity than there was with securities. That was the 64,000 dollar question you'd answer. And so once you realize that you can have more liquidity than securities because securities by their nature We're predominantly held in places like insurance companies or locked up vehicles. As a result, a small percent of the universe could trade, but when you traded these derivative contract notionals, you could have much more volume than actually existed. It made sense to drive scalability, which meant drive conformity. And zero in only on the difference between what people want. What people wanted is they didn't really care that much whether the coupon was quarterly, monthly, or every six months. They didn't really care who was processing them. What they were focused on was getting t…

AI assessment note: “It made sense to drive scalability, which meant drive conformity.”

Q As you build this business over time, you touched earlier on adjacencies in opportunities. How have you thought about taking Predium from the scale you have in single family rentals to other businesses?

A Well, I think that the most obvious things that we're gonna be focused on is, as we continue to drive the efficiency of asset servicing, we should bring that to multifamily in the same communities that our single family homes are in. So we're actively seeking out platforms to purchase in those communities or create one. In addition to that, we're focused on our home builder colleagues, some of the smaller ones, say home builder, 15 through 50. They're the ones who are most challenged by what's happened with the regional banking system. While we don't necessarily think about that impact on the home building industry, it is quite significant for all the smaller and mid-sized home builders. And so we have platforms that have been lending to construction. We're increasing our staff and increasing our capital to be in a position to take on these regional home builders as a part of our Ecosystem. And we can be a great support to them. Because we can both buy the houses, help them buy the land, and finance them. And so as a result, we expect to be good partners. So it's another adjacent thing. One of the fastest growing categories is active adult, as most people know. But basically they are as a similar, quite similar communities just with older folks in it. By the way, 55 and older isn't that old anymore. Kind of a strange concept, but, you know, age has changed tremendously. It's a …

AI assessment note: “we should bring that to multifamily in the same communities that our single family”

Q As you're looking at these types of deals, What are the aspects of the culture that you've built at Predium that you look for to make sure there's a match?

A One of the things I'd observed that a lot of the folks out there are great investors who actually don't want to run the business of investing. So in some ways, that's the first good fit for us. It's not like that's what I want to do, but we've done a pretty decent job of it. When I look at the culture within those people, it's being in a position that That they're really on a mission to create value for the investors, I think is critically important. I think it's also important that while a lot of people like to be absolute return people, most of the investors that I've come in contact really find that abhorrent. Just like, how do I allocate that into my broader portfolio that the mandate is do whatever the hell you want. So I also like people who are Aware of what their clients' needs are, not just focused on driving returns, but that their enterprise fits into the box that the clients want, so in a way that we add value that's an ease of access for the clients. Culturally, they have to be collaborative, but they also have to want to use the infrastructure To inform their investments. One of the most valuable things that we have is a ton of information about how the economy is performing in a lot of different ways. And so smart people will make use of that tool. I think that what we want is critical thinking. It's a big factor that I look for in someone. Do they like to try to…

AI assessment note: “Culturally, they have to be collaborative, but they also have to want to use”

Q How do you think about your buyer build decision on one of these adjacent businesses that you want to go into?

A When I think about growing businesses for Pretium, you have to start top down again. You have to make sure that you're looking at a business that solves a problem for an investor. Can you differentiate the product? Is it a needed product? Is it something that creates an attractive enough return for the risk you're taking? Then you look at it and you say, can I create that In a reasonable way by acquiring a platform or a team. Speed usually does make a difference in these things. Pretty quickly, if it's a relatively new category or a relatively new adjacency, there's either competitors in the space already that have mind share, and so you need to be in a position that you can bring some differentiation. I think that acquiring people right at this moment is far more attractive than Than it is doing it organically. 24 months ago, it was all about organics. Now it's about acquisitions. At this moment, valuations for a lot of alt asset managers have gone down. But a year ago, they were very high and pretty attractive. So there was a lineup of guys all thinking about going public. And all of us who manage these things are humans. So we have a normal array of emotions. What happens is to all of us with an emotional set that's not like Spock on Star Trek is the fact that we're all disappointed that we work so hard, that our peak success was a year ago. And now we have to go back at it …

AI assessment note: “acquiring people right at this moment is far more attractive than Than it is doing it organically.”

Q How did you put all the pieces together from that initial concept of the demographics lining up with the trends and the opportunity set that got created out of the financial crisis into a business?

A It happens over time. It doesn't happen on day one. I wish I could hit E all of the above on the first day that I had the idea, but it didn't happen that way. It happened over time. When I think about that in a way that's more like a case study is when you see such a severe dislocation, there's multiple opportunities embedded in those dislocations. The first part of the dislocation is buying the asset anywhere near It's bottom. Could still be going down, it could still be going up. It doesn't have to be near the bottom, particularly for a big idea like that. So that's not the important thing, but getting in, getting focused, realizing the opportunity for the investor, that's all critical. The next phase of it, for us at least, is making sure that we're investing the time and understanding the long-term trend around that. So in high yield in the nineties, it was A process of constant recovery that created asset management firms that grazed capital for the purpose of soaking up all these cheap securities that will eventually evolve into a more robust private equity business and credit business over time. For us in this space, it was recognizing that our entry point was about the physical asset, but it wasn't about the demand. And as we moved along and operated the assets more efficiently, our funnel could get larger and larger at its top because we saw more amounts of demand of m…

AI assessment note: “The first part of the dislocation is buying the asset anywhere near It's bottom.”

Q And today, how many homes are you able to buy in an average day?

A Well, it varies a lot. So I think one of the important things to be aware of now is that for both investors and the market generally, where value is, changes tremendously. So for many, many years, homeowners would sell assets at very attractive cap rates to institutional investors, because homes overall were depressed in price. Because we came out of that period where they traded an amazing discount. So I used to say it's really not that important to buy the house at the courthouse steps and get that extra 10 or 15% discount because all homes are cheap relative to demographics. All homes. Now we're in a position because of locked in mortgage rates that all owned homes are rich compared to homes sold by open door, offer pad, entities that Right now, the cost of financing is so high, they're periodically forced to sell houses at attractive prices to investors. And home builders are in a position where at any given point in time, so in February, when mortgages came down, they would sell to retail. When mortgage rates go up, they'll sell more to us. And so we think one of the critical parts of success right now is being able to source assets From all three, and potentially even four, meaning build them yourself, venues. And so, today, the bulk of our houses are bought in portfolios. A year ago, or 18 months ago, they were bought from owner occupants. And now in portfolios, as an ex…

AI assessment note: “we'll probably buy 15 to 20,000 houses this year. But almost entirely in portfolio form.”

Q When you're talking to people about the strategy, what are the common critiques you run into?

A I think some people are still recovering from the, this isn't scalable concept, so there's still like a cohort of people, despite that it's been done, and it's like that it's still in front of them, still aren't aware that it can be done, and arguably that you can generate margins very similar to multifamily as an industry. We can provide more value to those folks because people have a predisposition to stay in an asset that's built around a school system longer. So as I think as an industry, two forces will be at work. We will continue to try to improve the experience of the consumer in the house by driving more efficiency and offering more services. So two or three of the things that all of the industry is focused on, including us, is efficiency of power delivering, Another regulatory nightmare, because if you put solar panels on a 100,000 houses, guess what? I'm a utility. I don't want to be a utility. I just want to drive efficiency and delivery. So we have to sort that out. The other thing is there's a lot of ways that we touch the consumer and the structure of the market's inefficient. Like, why are we making people pay monthly instead of when they get their paycheck every two weeks? I think we're going to see things like that. So as a result, I think we'll, Find that this business will end up being more important to consumers, drive higher returns, and more efficiency fo…

AI assessment note: “The other parts of critiques are that we're taking housing stock away from prospective owners.”