The Exchanges

Q I want to circle back to a couple of those steps and maybe start with the financial crisis. What were the types of problems that you were dealing with inside of Morgan Stanley on the real estate side?

A There were really two firms who were leaders in terms of real estate private equity, Morgan Stanley and Blackstone. There were investments, hundreds of them across all asset classes, but the common theme It was very high amounts of leverage and cross-collateralization in funds that did not have the liquidity to manage themselves through. In addition, the firm was using its balance sheet to bridge billions of dollars of investments that would effectively be warehoused at the firm and ultimately moved into investment management vehicles. There were also open-end funds in Germany that we had formed. You put illiquid assets like real estate into Liquid open-end daily NAV, daily redemption vehicles. There were real estate hedge funds. It wasn't only the real estate. It was the vehicles and the ventures. The relationships with investors who were very disappointed. The firm that was on the verge of bankruptcy. There were issues that if a given fund received a going concern opinion from the auditors, it could trigger the ISDAs across the entire Morgan Stanley firm and take it down. So there were very complicated issues over a period of time. And the intensity lasted for, you know, nine months or a year.

AI assessment note: “high amounts of leverage and cross-collateralization in funds that did not have the liquidity”

Q What was the history of the organization and where the wealth came from?

A So his dad was a poor kid from East Texas that Served in World War II, married a young woman from Dallas whose parents had died, left her a small grain business, and in 1948 he had the vision to build an industrial business because he learned in the grain business that people needed space. He built a small industrial building in Dallas on Cole Street that we own today on what they call a speculative basis. He didn't have a tenant in hand. He just went out to build the building and thought they would come And they came, and that was very unique. That didn't happen in America back then. If you built an industrial building, you had a tenant in hand. And so from 1948, all through the 19 fifties, and by the 19 sixties, his dad became one of the largest real estate developers in the United States. And by the end of the 19 sixties, he was developing around the world, including in China, he was developing in the 19 seventies. So the company by the 19 seventies was widely regarded As the largest real estate developer, manager, leasing company in the United States.

AI assessment note: “in 1948 he had the vision to build an industrial business”

Q So when you get this call from Harlan, you mentioned those initial conversations. Also, it wasn't about what you had done. It was about who you were. Love to hear what kinds of questions was he asking you?

A Tell me my grandfather's life story. Where did it come from? What was his background like? Who were his parents? How did you grow up as a kid? What did you do when you were a kid? Who are your friends? What do you like to do with your time? What are you interested in? How about my kids and my wife and my family? And it was all about understanding me as a person that we all have our stories that brought us to this point. And that went on for hours. There was no discussion of, oh, I see you went to NYU and you worked at Morgan Stanley. There was none of those discussions. Those came later, and that was very different.

AI assessment note: “Tell me my grandfather's life story. Where did it come from? What was his background”

Q How are you viewing the opportunity set today, right? There are these couple of themes on top that aren't really changing anytime soon.

A There's a very difficult time. This is without a doubt since 2008, 2009. We are here in terms of the amount of challenges as an industry, and it's very different this time around. We don't have complete failure of the banking system, but instead of interest rates dropping to the floor, we have interest rates going through the roof. And in a highly levered asset class like real estate, these cash flows are being hurt. And so we are clearly in a period of duress from a capital markets perspective, but it's a very bifurcated market because the fundamentals underneath things like industrial and multifamily are really terrific, but the fundamentals, something like office are awful. And so the opportunity is very bifurcated based upon cities, based upon asset classes, but in general, the market is seizing up. The bid-ask spread, The amount of uncertainty that's out there. The best opportunities that are being executed today are really in the private credit space. It's providing both senior loans and mezzanine loans to borrowers who can't get their traditional financing done with their banks. And that type of return is clearly a mid-teens, can be a high-teens, unlevered return on reasonable credit risk. There are structured equity solutions. You have managers, developers, operators who are committed To doing things from a growth perspective, but they can't sell buildings in order to g…

AI assessment note: “The best opportunities that are being executed today are really in the private credit space.”

Q When you've had this big gap in the credit side, how do you think about the allocation of capital between equity-related investments and credit-related investments?

A I think at this moment in time, all things being equal, the bus is tilted more towards the credit opportunity and tilted away from the equity opportunity. It doesn't mean there are no opportunities, but like many others since the spring of 2022, we have not been constructive on the equity side. We have not made any major new commitments on the equity side. There's a distress out there, but that distress is largely the office sector. The other sectors from a fundamental supply, demand, occupancy, rental growth, they're doing just fine. Even retail. I mean, forget malls and power centers, but retail's doing fine, because there's been no supply to speak of for 15 years. Multifamily's doing fine, industrial's doing fine, so there's no distress at that level. The bid-ass spread is wide, because the seller says, look, I can hang on to this thing, and yes, I don't like my cost of debt financing, and I gotta refi it, but I'd rather refi it with this Mez loan than sell it to you for a song. So the sellers are able to hang on, and the buyers are like, listen, I'm not gonna pay that price. You'd like to execute more, but the bid-ask spread remains pretty high in the business today.

AI assessment note: “the bus is tilted more towards the credit opportunity and tilted away from the equity”

Q Why don't you take me down the path of how a nice New York boy like yourself ends up in Dallas?

A I am a nice New York boy. I was born, raised, schooled, and worked here for 50 years. At the end of 2014, I met this really interesting guy named Harlan Crowe, and he was looking for someone to lead the company as he was moving towards retirement. We talked, I met him in his office down in Dallas, and he was one of the most interesting people I had met. And I had interviewed over the years for lots of jobs over time. In talking to people, they want to know about my business life and my career, and my discussion with Harlan had nothing to do with that. It was who was I as a person, and who were my grandparents, And my family, and it was the most interesting multi-hour discussion I'd had, and that led to multiple discussions, and after some period of time, I looked at my wife, and my wife looked at me and said, we're going to take this leap, and this isn't Kansas anymore. We're not staying in New York. This is an opportunity in Dallas, but that was seven years ago that I made the move at the age of 50 from New York down to Dallas.

AI assessment note: “I met this really interesting guy named Harlan Crowe, and he was looking for someone”

Q So how does it come about that what starts as effectively a family office, real estate holdings, turns into an organization where they're bringing an outsider from the family in to run it in what could be the third generation?

A Trammell had six children. Some of them had worked in the business at various points in time earlier. But after the SNL crisis, Harlan was the only one working in the business, and Harlan really saved the company. As a relatively young man, that was a terrible time for real estate. The company was hurt, and Harlan did an amazing job of resurrecting the company and bringing it to what it was. And so as Harlan was approaching this chapter in his life and thinking about retirement, there were no other family members to run the business. There are no other family members in the business. I think there's another Lesson that can be learned. And now, today, I know lots of family businesses, most family businesses do have family members continuing to run it. But I think we've also seen that just because you're a family member doesn't mean you're necessarily equipped. And I think you also see organizations where if you have a lot of family members working in it, you may not get other people from the outside who want that opportunity in their careers to join. And so I think Harlan had somewhat of a philosophical point of view that it will be good to have a non-family member running the business. Ultimately, that wasn't about me. It wound up being me, and it also wasn't someone from inside the company, which he could, of course, done that. We have so many talented people, because I think …

AI assessment note: “there were no other family members to run the business”

Q If you could pick out one or two people that you've learned key lessons from, Who and what would those be?

A When I started working in investment banking, one of the first guys I worked for is a guy named Rob Falson. Rob taught me the power of calm, deliberate, analytical persuasion. That's who he was. And from that approach, the power of that to be persuasive to the people around you. And I learned that. I didn't understand that, but I learned that from Rob. Coupled with, he's just a terrific guy. And that was so valuable to me. The second person that had a profound influence from my life is a Terrific guy named Owen Thomas, and if you're in the real estate business, everybody knows OT. Owen ran Morgan Stanley Real Estate when I was there, and I had the privilege of being his ops officer. They take you offline from your deal job, and you go alongside, at that time, Owen, and you do whatever he does and help him out. I got to learn from one of the greatest leaders and managers. What I learned from him is fairness. He's got incredible sense of Fairness and being fair to the people around him, and as a result of that, he's been able to, in his career, attract and retain some of the best and brightest people out there, and the power of an organization when you have just great people working for it. Owen never tried to take credit for things, and everybody felt they were part of his team, and I learned that from him, and I'm grateful to him, and luckily, I still see him quite often. He's …

AI assessment note: “Rob taught me the power of calm, deliberate, analytical persuasion... The second person”

Q As you traveled around in the early years, what did you find that was similar and different from what you expected coming in?

A I had a fair amount of time to get to know the company before I came in and lots of people, so I think my expectations of what I would see were largely in line with what I did see, but the overwhelming feeling that I had then and today is I had always believed when I worked in New York that it really was the capital markets that created the value, that we were really smart. We could deal with complexity. We could structure things, and what I really came to realize, no, no, no, no, no. These are the people who create the value. The people who build the buildings, the people who operate the buildings. Don't get me wrong. You need to be a smart investor, and you need to have the right capital structure and the right alignment, and those are all critical elements. But the real estate, how it's located, how it's leased, how it's designed, the architecture, the planning, that's really where the value is added. That became overwhelming to me at the time, and it's overwhelming to me today. And I see it in the dichotomy Of the way people engage in the business today.

AI assessment note: “my expectations of what I would see were largely in line with what I did see”

Q wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. When you have this multi-decade breadth of experience in real estate, and then you go to manage outside capital, how do you decide what that mandate will be?

A We have a strategic but evolving point of view on the real estate opportunities in the United States, and we love to partner up with people to pursue those opportunities. There are lots of things that are impossible to figure out. Where's the economy going? What's the stock market going to? Where are interest rates are going? But there are some things that are just obvious and we all know it. And so if you look at real estate and you say to yourself, what are the obvious things are going to create growth on a secular basis into the future? They're obvious. It is obvious Americans are moving to the Southeast and Southwest. That is not a cyclical move. That isn't about COVID. That's happening for lots of reasons we all know. Well, one of the surefire ways to make money in real estate, invest where people are moving to. Second thing is, this e-commerce thing. It doesn't take a genius to realize that this train has been coming at you for a long time, and it's going to continue into the future. What's the impact on real estate? More industrial, less retail. So, industrial is an asset class. Sounds like a good place to be. The third point, and you see this, this is a secular trend, and these trends evolve and change over time. We are so underhoused in America, the amount of nimbyism that's stopping the development Of multifamily housing. We have millions of Americans who don't have p…

AI assessment note: “what are the obvious things are going to create growth on a secular basis”

Q So as you come out of that and you move into more of a broader management role across some of these asset classes and not just the deal person in real estate, what was different being in that seat from what you might've thought from your prior experience?

A Well, the first thing that was apparent to me, and it goes back to why I got back into real estate, is the moment I left real estate in terms of my responsibilities and took responsibilities across other asset classes, such as venture capital or credit, I can get the wool pulled over my eyes pretty quickly. I'm not an expert investor in any of these sectors, and while I have general investment acumen, this is not my neighborhood. That was an uncomfortable place for me to be, and at some level, I felt at times like a bureaucrat, because in real estate, those are my chops, and my ability to engage as deep and drill down into the deal, to the fund, to the relationship with investors, to the business, all of that is a landscape that I understand and have intuition around. These were asset classes I had no intuition around, and that was uncomfortable for me. But at the same time, it did build my chops with respect to managing people and working through organizational constructs and conflict amongst people, and the reality of leadership in a different way. And so I grew from being uncomfortable, but it was uncomfortable.

AI assessment note: “the moment I left real estate... I can get the wool pulled over my eyes”

Q I'd love to hear some about where you think competitive advantages lie. I mean, you certainly talked about relationships in local markets, but as you go through the diligence process of a deal, the underwriting, the acquisition, what makes someone better than the next participant in the space?

A Well, look, the first thing is, it's such a big fragmented business. There are a lot of terrific firms out there with very capable people. It is very difficult in the business to be truly differentiated to the extent there are in some areas, so that's the first thing, and we have so many terrific competitors out there, really good. I'd highlight the following thing to you. Ask if the investment team has ever leased a building, managed a building, operated a building. Do they really know the underlying real estate? Have they spent their whole lives just underwriting spreadsheets? Obviously, you need Teams of people who do both. You should have people on your team who've leased the building, who've managed the building, who's operated, who understand the business plan that you get out of an investment committee deck and a spreadsheet, and I think one of the differentiating factors for any firm could be making sure that they have people who really understand the underlying business and have lived it, as well as the financial experts, because real estate is definitively two sides to a coin. It is a marriage of the underlying assets in the capital markets. More so than other industries. Not every other industry, but most other industries. And so I think a differentiating capability is having that built together. I give Blackstone the most credit for this. They really figured out a l…

AI assessment note: “one of the differentiating factors for any firm could be making sure that they have people who really understand the underlying business”

Q So as you came in, you had four different business lines. How did you set out to organize this and view the role that you were stepping into?

A Well, the first thing was do no harm. The culture of the firm is phenomenal top decile. If you knew us and you were in the real estate business, it is an amazing, his dad and Harlan, the culture they have set up, the way they have managed the business, it is a top decile firm from a culture perspective, and I knew that. So the first thing was do not bring your New York, Wall Street, Attitude, and he wouldn't have hired me if he thought I was that kind of guy, but do no harm. Make sure, and going back to my earlier comment, my job wasn't to come in there in 90 days and come with a new business plan. It was to build trust, and so I spent a year just listening, learning, getting to know people, and to understand the organization. When you've been around 70 years, there's lots of history, and you need to uncover lots of rocks to understand that, because if you make decisions early on, You're gonna make a lot of mistakes, and so when I came in there, I knew my job was to keep my ears really wide, keep my mouth really small, and get to know people. We're a real estate company. The people at Crow know how to build things. They know how to operate things, and I had to spend a lot of time around the United States with all of our teams who build things and really understand that side of the business much better than I understood from working out of my New York City office. And that was m…

AI assessment note: “It was to build trust, and so I spent a year just listening, learning”

Q You have this long legacy of the family developing and owning these assets that they've held on to. It turns into a multifamily office. How did you think about the value of externally managing capital instead of just continuing to manage the family's assets?

A We've had this discussion a lot. I think what excites the family It's creating opportunity for people. Otherwise, it's just money. It's great. It's terrific. We can invest in lots of things, and we can get a financial return on it. It's terrific, and people can live their lives, but that doesn't really create opportunity for people, and the engagement with people, they're part of our business family. They're part of our culture. We are one, and watching hundreds of people, I mean, over the years, thousands, but even today, hundreds of people create opportunity for their families. Hundreds of people create multi-generational wealth for their families. That's what the Crow family's interested in, and that's why we're not just managing our own capital, because we're trying to grow to create opportunity for the people that work there.

AI assessment note: “that's why we're not just managing our own capital, because we're trying to grow”