Latest / Icons of DC Area Real Estate / Tom Burton- Innovative Private Equity Investor (#101)

Transcript

Tom Burton- Innovative Private Equity Investor (#101) · Icons of DC Area Real Estate

• 0:09
  Speaker A: Hi, I'm John Co and welcome to Icons of DC Area Real Estate, a one on one interview show highlighting the backgrounds and career trajectory of leading luminaries in the Washington, DC area real estate market. The purpose of the show is to highlight their backgrounds and their experiences and some interesting stories about their current business as well as their past, and to cite some things that you might take away both from educational standpoint as well as lessons learned in the industry and some amusing and sometimes interesting background stories. So I'm hoping that you will enjoy the show. Before I introduce my guest, I'd like to share that both this podcast and the community I started in 2021, called the Iconic Journey in CRE, is now part of a new nonprofit organization with that same name. The new company will offer opportunities for sponsorship to grow the community both in membership and in programs. It also allows you as listeners to show your appreciation for this podcast, which has delivered episodes twice monthly since August 2019 with a charitable contribution. Transitioning the community and podcast into the nonprofit organization is underway. The community, which is open to commercial real estate professionals between the ages of 25 and 40 years old, is currently up to 65 members and growing. If you would like to learn more about either joining the community or contributing to the podcast, please reach out directly to me at John at Coenterprises coenterprises.com separately, my private company, Co enterprises, now will focus only on advisory work for early stage real estate firms and career counseling. If you have interest in learning more about its services, please review my website@coenterprises.com. Thank you for listening.
• 2:24
  Speaker B: Thank you for joining me for another.
• 2:25
  Speaker A: Episode of Icons of DC Area Real Estate. I'm so pleased to introduce our guest for today's show, who is Tom Burton? Tom is the co head of the ABR real estate investment firm. ABR is a private equity firm derived from Alex Brown Realty, where it's changed its name recently. Tom is also the chief investment officer of the firm. In this episode, Tom talks about his extensive career. He recounts his upbringing in South Jersey, his work in the family gas station business, and his Boy Scout experiences. He details his accounting studies at the University of Maryland, his time at Ernst and Young, and his MBA at Wharton, which led him to the real estate industry. Tom discusses the challenges of entering the industry during a recession in the late 80s, early ninety s, and his roles at USF and G and then Alex Brown Realty, where he contributed to the transition from single asset syndications to the institutional fund business that they've developed. Today, he shares his approach to asset management, acquisitions, and building partnerships, emphasizing character assessment and strategic investment. Tom also talks about current market trends, the firm's fund model, and the importance of structured asset management. He reflects on the company's long term goals, community engagement, ESG efforts, and the qualities sought in his employees that he's hired. Finally, Tom offers personal insights on finding joy in one's career, the significance of support of a supportive partner, and the value of curiosity and continuous learning, which Tom demonstrates in his involvement with Johns Hopkins University. So without further ado, please enjoy this wide ranging conversation with Tom Burton.
• 4:36
  Speaker B: So, Tom Burton, welcome to icons of DCA Real Estate. Thank you for joining me today.
• 4:41
  Speaker C: Well, thanks for being with me today as well. And thanks for organizing these podcasts. The series is terrific and I know just a really great resource for young people learning about our industry and trying to understand their way around it. So what a terrific thing you've got going here. John, thank you so much.
• 5:02
  Speaker B: Yep. Could you describe your role at Alex Brown Realty or AvR now it's called and your focus day to day?
• 5:09
  Speaker C: Sure. So I have a couple roles here. Along with Ed Norberg, I serve as co senior managing director. So we're both senior managing directors. We run the firm together. I'm also the chief investment officer. And then Ed and I both spent a fair amount of time in fundraising.
• 5:28
  Speaker B: Okay, let's kind of go back, take the way back machine, and look at your origins. So tell me about your origins and youth and your parents were and what you learned from them.
• 5:39
  Speaker C: Sure. Well, I grew up in south Jersey near Atlantic City, and my mother was a stay at home mom, and my father was a small businessman. My father ran a gas station, owned a gas station on the Atlantic City Expressway, which is between Philadelphia and Atlantic City. So 55 Miles toll Road opened in around 1965. And you run up and down the turnpike, you see these gas stations with a big service plaza. So he owned that as a dealer, basically a franchise with Golf Oil corporation. So golf had a 20 year lease with the Atlantic City Expressway Authority, and my father had a 20 year lease with golf. So he took that when he was, I believe, about 46 years old. He had worked at other service plazas on the Pennsylvania turnpike for golf. And long came this opportunity for him. And actually it was really a great way for myself. I have two brothers. We all worked in the business with our father. It was a 24/7 enterprise, so we had a shift of people, three eight hour shifts. And from a very, very young age, I worked for my father. I probably six, seven eight years old, I'd go to work with him on a summer day or maybe on a weekend, and I'd do things like fill the map racks. Right? Remember when there was free maps? You were gas station. Oh, yeah. And there was a time when cars used a lot of oil, so I would go out and fill the racks with oil and help clean windshields and so forth. At the age of twelve in New Jersey, you could get your worker's permit. So I was able to start working, put on my golf uniform and pump gas. And so every summer, really, until I got out of college, that was my summer job, and I would come home on holidays from college. And if I wanted some extra money, my dad was always looking for somebody to kind of fill in. It was a really interesting business because when he took the lease in 1968, the business was very seasonal. So the Jersey shorts extremely popular in the summer and not as popular in the winter. So we made money from June, July and August, and we lost money in the other nine months, but we made enough money in the summer to sort of carry us over this seasonal, seasonal speech, driving traffic. Right. But in 1976, the saving New Jersey passed legislation that allowed for casinos in Atlantic City. And suddenly we made money every month, I'll bet, and lots of businesses around the south Jersey area. My father in law had an insurance and real estate business. Suddenly there were many more people needing insurance and lots of homes trading and so forth. So it was actually a very big economic impact to the region and certainly a big impact to us. But it was really a great experience working with my father. He was an excellent manager and just had a good nose for business and a great mathematical mind. He could add a column of numbers in his head, he could divide numbers, he could multiply all in his head. I often wondered whether he'd actually be really good in our industry. How we sit around and we talk about, well, what would it be at a six cap or six and a half cap? Well, you'd have to take a number and divide it by zero six or zero 65. He kind of stuff in his head. It's really very interesting.
• 9:12
  Speaker B: Is that why you got your propensity of numbers, you think?
• 9:15
  Speaker C: I wonder about that. I think it's that and the other part of working with my dad and his business, we did some mechanical things. This is a gas station that you came through, you got gas and you left. Unless, of course, you had a flat tire or you had a broken fan belt, of course, Teddy knows, or a hose. So we would fix that and get you on the road. So my older brother, he gravitated towards that part of the business. And to this day, in his whole career is very sort of the physical world. He's a really good mechanic, and he can fix anything. And his whole career has been oriented not in cars so much, but just the physical world. The other thing we did, of course, is we counted all the cash, we counted all the change, and we kept books. And my father taught me that, and I just really liked it, and I kind of gravitated towards it. And I'm sure by the time I got to Maryland and started thinking about a major, I know that that was one of the influences. It's just interesting working with my dad, and basically he taught me how to do the books. Well, the other thing I always observed about my parents, both of them, they never complained about anything. It's just really interesting to me. And I don't know if it was their upbringing, but they worked very hard and they just never complained. And I think that's something I think I've tried to instill in my own children and try to live that sort of pattern myself. It's just very interesting to me. I've reflected on it many times. Undoubtedly, there were hardships, and just like in any other family, there are struggles. And my father ran a business, and it was a 24/7 business, and I never heard him complain, and my mother either. It's just so interesting to me.
• 11:03
  Speaker B: Well, you're probably ingrained with the ethic of hard work just looking at your parents and what they had to go to do to run a 24/7 gas station operation.
• 11:15
  Speaker C: I would think my brothers and I all worked. We just always had a job. Always had a job sometimes, too. All through high school and college. I didn't work for my father so much in the school year, but I worked for another gas station around town. I worked for a florist around town in college park. When you were in school in college Park? I actually worked for the University of Maryland.
• 11:40
  Speaker B: Oh, you did?
• 11:41
  Speaker C: Resident light department. All of us have always had a job. We just all have always worked and sometimes more than one job.
• 11:51
  Speaker B: That's good. So any other experiences growing up other than before you got to college park and University of Maryland?
• 11:59
  Speaker C: I think during that time frame, in addition to the influence of working with my father, I know a lot of your guests had great experiences playing sports. That was not my world. I didn't play a lot of sports growing up, but I was involved in Boy Scouts, and what a great experience that was for me, at the time, we had a very active troop. Almost every weekend we did something. We went hiking the appalachian trail. We did all kinds of really terrific activities. And my brothers, two brothers and I were all Eagle scouts. And to become an Eagle Scout, you have to work. It's a lot of work, and it takes a plan. Right. There's this sort of planning element, too. You have to get 22 merit badges, and you have to do a lot of other things. And of those 22 merit badges, 14 are elective. You have to get, I should say, 14 are required and seven are elective. And so almost everybody that spends any time in Boy Scout gets first aid and camping and cooking merit badge. But by the time you start to work your way towards Eagle Scout, you have to pick some other things. So we got fingerprinting merit badge, an oceanography merit badge. And I always look back on that, and I think, what a great opportunity to go learn something that you would never have had any real reason to learn anything about fingerprinting when you're 13 years old. Right. But I went down to the police station, and I had to ask them a lot of questions, because there's a part of every merit badge where you have to do something, and then you have to learn and write up something and go down and get fingerprinted. It was just great. You also, of course, learn a lot about leadership over time, and we had just wonderful experiences. But I think about it a lot, this whole notion of learning leadership and planning. Every trip you go on, a hiking trip or canoeing trip, we would go to Canada for two weeks in the wilderness. Canoeing. Well, you've got to think about what you're going to take and what are you going to cook every single meal. And there's this sort of planning element to it that is really valuable to learn at an early age. The more stuff you carry, the heavier your bag is.
• 14:19
  Speaker B: So are you a checklist lover?
• 14:22
  Speaker C: I'm a big checklist. You should say that. I'm a checklist guy. Yes. I have a checklist that tells me to make a checklist.
• 14:34
  Speaker B: Yeah. What you just said about, you got.
• 14:38
  Speaker C: To think it all through.
• 14:39
  Speaker B: Yeah. My son is a, you know, as a pilot, you have to have a checklist.
• 14:46
  Speaker C: Right, right. It's the same. Interesting.
• 14:50
  Speaker B: Yeah. So, University of Maryland. Why there? And from New Jersey. I mean, you could have gone to, you know, Penn.
• 15:01
  Speaker C: Yeah. It's an interesting question. I didn't look at many schools in New Jersey. I have a. I have a sister who, an older sister who was living here in Baltimore at the time. And so Maryland was on my mind. I had been here from time to time. I had never been to a University of Maryland, and I had this idea I wanted to be an architect. So again, you're a junior in high school. You're starting to think about colleges and majors. I didn't know anyone that was an architect. We didn't do anything around real estate in my family, but I just liked buildings, and I just thought it would be interesting. I did take, in high school, I took two years of drafting, which is really more for mechanical drawing. That would really be better for an engineering major than architecture, because in architecture, you don't get to use a t square as much as you do in mechanical drawing. But in any event, those were my ideas. And the University of Maryland accepted me into their pre architecture program. So I thought, all right, well, off we go. We're to the University of Maryland. Turns out pre architecture is the major they put you in if they think you're probably never going to qualify to be in the architecture. I did. You know, your fall of your freshman year, you take this architecture survey class, which I did enjoy, but you had to do a lot of free hand drawing, and that was not in my skill set. So by the end of that semester, I began to look at other majors, and I just ended up picking accounting again, I think probably because the time I spent working with my dad, I didn't know anything about accounting except the bookkeeping experience I had with my father. But I moved into an accounting major.
• 16:47
  Speaker B: And then went on to get your did.
• 16:51
  Speaker C: I did. And at Maryland, it was at the time, you only needed four years to become a CPA. Today you need five. You probably know, right. You need that fifth year. But one of the things that was great for me at the University of Maryland is thinking back on experiences that were really influential and impactful. I joined a fraternity, so I have two guys that I met during orientation. Before you go to college, right, that summer you're in orientation, and we're standing in line. And we're both from the same area of South Jersey, went to rival life schools. None of us have housing. And so we decided we're going to come back in a couple of weeks. We're going to look for housing. We're going to find a place to live, the three of us. And at the time, the University of Maryland didn't have enough dormitory space for out of state students. So if you're in state, you almost certainly got into a dorm. But if you're out of state, you were beyond, below the list. So we go to the off campus housing office, and they have a list of places that you might look into apartments and so forth. As it turns out, on the list are fraternities who would board you. You could be a boarder at a fraternity house. So we went to a couple of fraternity houses and ended up at the Sigma chi house, and they had a room that was a triple. So we signed a lease, swore we would never join a fraternity, the three of us, and within two or three weeks, we were completely sold. And honestly, it was really one of the greatest experiences of my life. We definitely had a lot of fun, but this was a really well organized and well led fraternity. We did a lot of great things. I'd say, on the charitable side, we ran the whole house. When I say we ran the whole house. We employed two cooks, we paid their wages. We did it all. My junior year, I was elected treasurer, and I did all that. I created books, financial statements every month, and I kept books and paid bills. Sure. I mean, it was a very pretty serious job. And in my senior year, I was elected president. And the fraternity, many fraternities have this had a really wonderful leadership training program that they would run you through every summer. And I participated in three summers. And then, actually, as an alumni, I was on the faculty of the Sigma.
• 19:14
  Speaker B: I think is the largest fraternity in the country, if I'm not mistaken, as.
• 19:18
  Speaker C: Far as number of chapters. But really a great experience.
• 19:22
  Speaker B: I was a SiU.
• 19:23
  Speaker C: Okay. But it was a really. Life is a bit serendipitous, right? We were just looking for a place to live, and we end up walking into this particular building and rang a room. And by the way, I never lived anywhere else for eight semesters, all eight semesters in that chapter house. That's great. Very good experience.
• 19:43
  Speaker B: Lifelong friends, I assume.
• 19:44
  Speaker C: And I have a bunch of lifelong friends, actually great friends in the industry, really, that I've worked with some friends who should. Might be a candidate for your podcast.
• 19:54
  Speaker B: That's cool. Yeah, that's great. So no sports, but you were active in the fraternity there, then.
• 20:01
  Speaker C: I was, yeah. By the way, this was a little ironic, because this was the fraternity that was the most active athletically, so a big interfranity rivalry, and every sport we competed in, and I'm not sure I participated, maybe ping pong just wasn't my thing.
• 20:24
  Speaker B: You were doing the books and you were running the fraternity as president the senior year. Right. So that's important.
• 20:30
  Speaker C: Yeah.
• 20:31
  Speaker B: So then you went into the accounting profession, right?
• 20:34
  Speaker C: I did. I ended up moving to Philadelphia and I worked at Ernst Winnie, which is now Ernst Young, and I worked there for four years. I spent two of the years as a staff accountant in the audit practice, which was a great experience. Of course, at that time, you had to sit for your CPA, so everybody studied, didn't pass the CPA, or else you'd have to go find another job. But we all did that.
• 21:01
  Speaker B: What did you like about accounting?
• 21:04
  Speaker C: It's interesting. I think what I liked the most about it was going from client to client, and they were all pretty different. So you might have a client. We had a client that made dumpsters. I mean, it's really interesting. And I had a client that was a non for profit, and I had a client that was a health insurance company. The 76 ers were a client. I was on the audit of the 76 ers. It was fantastic. Really a fun experience at that time. I learned this goes back a few years, but a professional basketball team barely made money during the regular season. But if you get into playoffs, then you start to make money. So get into playoffs. But that's how they got profit.
• 21:48
  Speaker B: How much was television revenue as part of their.
• 21:52
  Speaker C: I don't remember. It's a good question. I think it was a large portion of it at that time. It was owned by a guy by name of Harold Capso and the team. And he had founded Nutrisystem.
• 22:03
  Speaker B: Oh, yeah.
• 22:04
  Speaker C: And Nutrisystem was a client.
• 22:06
  Speaker B: Oh, there you was.
• 22:07
  Speaker C: Really. I really did enjoy you just show up again. I'm the junior staff account auditor, if you will, and you had to basically learn a whole new industry. Learn how did you work down on.
• 22:20
  Speaker B: Market street in Philadelphia then?
• 22:22
  Speaker C: Yeah, I was right at market in broad, at 29 downtown Center Square on Market street. One of my other clients was strawberries and clothier, no longer around as a department store, but I did enjoy. I'd made some friends with some guys around my second year who were in the consulting practice. So at the time, all these firms sort of had three practices, tax audit and consulting. And consulting sounded really exciting to me. So I got myself into the consulting practice. Most of what they did was healthcare consulting, because I really didn't know anything about. But one of the other things really great about these firms is they just send you to a training program that they run and build up your skill set for. So if you like learning, it's really a fantastic career. So I moved into consulting, but what would happen is the last two years I was there, busy season would roll along and they would be understaffed on the audit team. And I'd get a phone call. Tom, we'd like you to come out and work on this audit. And honestly, it was great. It worked out just fine. I had a chance to do both. The last year I was there, the entire firm had begun a small practice to serve small businesses. And they asked me to be a resource to the partner that was responsible for building out that practice for them. So he hadn't really staffed it out. But one of the things that this practice was going to do is prepare financial statements, forecast financial statements for a small business. Let's just say we had a client. He was by name of Frank Torecki. He was working at Wanamakers, but he wanted to start his own department. He really wanted to start his own clothing store, men's clothing store. And I get sent over to his office, and I'm there to help him prepare the forecast, the projections for what would this look like? Income statement, balance sheet, and a cash flow statement. So I sat and got all the assumptions from them and went back. And the lotus spreadsheet, if anyone remembers.
• 24:44
  Speaker B: What Lotus it is, of course, Lotus one, two, three.
• 24:47
  Speaker C: What a fantastic experience.
• 24:49
  Speaker B: And now you do it for real.
• 24:50
  Speaker C: Estate, and now I do it for real. Right? Little did I know. Yeah. I always say everybody has to have a first job. And I really believe, my heart of hearts, that public accounting is a first job. Unless you find your way into something else that you know for sure you want to do, it's a fantastic first job.
• 25:12
  Speaker B: Well, it's interesting accounting. I've been studying it. It's looking backwards today. True finance is looking forwards. And to me, that was more exciting.
• 25:22
  Speaker C: Yeah, I like that analogy when you.
• 25:25
  Speaker B: Think about it, because really what you're doing is reporting. You're really putting everything together that's history. To really report what's there in finance, you're saying, okay, I know what was there, but we don't know what's going to be happened in the future. So what do we need to do here, right? How do we project? What are the assumptions we need to use for that? And that's what you were doing on the consulting side with that clothing client, right? You were doing a forecasting thing.
• 25:55
  Speaker C: It was really a great experience. I'm a very young person working with a very senior guy, 23, 24 years old, working with a guy. That's about, first of all, at the moment he ran, he was the president of Wanamakers, and he had this idea to lead wanna makers and start this new business.
• 26:19
  Speaker B: But he was not a finance guy, so he needed your help.
• 26:23
  Speaker C: Right. It was fun. I really enjoyed it, and I learned a ton.
• 26:27
  Speaker B: That's cool. So then you decided to go back, get your MBA at Wharton.
• 26:34
  Speaker C: So why did you do, did you know? I had some colleagues that I watched, some older colleagues do know, spent three, four, five years in public accounting. And one day you'd hear that this one or that one had left to go back to business school. And someone went to law school, too. It was interesting. And I still had this idea about the built environment. I didn't pursue a degree in architecture, but I still had an interest in the built environment and wondered whether I could make a career of it. The building I officed in was next to Liberty Place, where Bill Rouse built. Jim Rouse's nephew built two large office towers on Market street. And I sort of watched that get built. And I had this idea that I should be a developer. I'd like to be a developer. I didn't know anything about development, and I didn't know a lot about real estate, but I understood that if I went back to school and I could then major in that area and maybe pivot into that career. So that's what really put kind of Wharton in my head or an MBA in my head. And I applied to schools and got into Wharton. And I was living in Philly at the time and recently married, and seemed like the easiest thing to do is just go down the street to Wharton instead of into the Ernst and Winnie offices on a Monday Morning. And that's what I did.
• 28:03
  Speaker B: So you went full time?
• 28:04
  Speaker C: Oh, yeah, I went full time, yeah. Sold my car to pay the first year's tuition.
• 28:09
  Speaker B: Yeah. Did they give you a scholarship?
• 28:14
  Speaker C: I got a handful of scholarships from a variety of different places. That helped. I don't know if I got anything from the Warren school. I may have, but one of the things I did to help pay my tuition was I was a Ta in cost accounting.
• 28:32
  Speaker B: There you go.
• 28:33
  Speaker C: So that actually was a very good for undergraduates. For undergraduates, right. And I had won cost accounting class at the University of Maryland, so I had to reteach myself cost accounting in order to teach it to very, very bright young men and women at real. The first semester was the biggest challenge. After that, I kept my notes, but I had also, while I was thinking about applying to schools, I had my CPA. I'd come out of the University of Maryland with good grades, but not impressive grades. I thought, well, what else could I do to make myself look like a better candidate. And so I sat and passed something called a certificate in management accounting, which is just like the CPA, which is another credential thing. It's multiple tests. But it was a really good body of work for me. It's more about things like cost benefit analysis break even. It's more management accounting than GAAP accounting.
• 29:38
  Speaker B: So if you're doing an m, a type of analysis with a merger. Yeah, that kind of thing.
• 29:45
  Speaker C: And it had a whole section on economics and on data science and so forth. It was really interesting. It was a fantastic piece of information, the body of work to learn, some of which you knew, but you just had to sort of reteach yourself a. So when I went to teach cost accounting at Wharton as a TA, I think it was helpful to have done that CMA work, but I did that. And then actually my old fraternity had a grant program for alumni members who were going to graduate school. You basically served as a scholarship chairman to the local chapter. And although again, the students at Penn were very, very bright, I'm not sure they really needed a scholarship chairman. But I was their scholarship chairman and that helped pave my way through school as well.
• 30:37
  Speaker B: So you decided to focus on real estate there.
• 30:40
  Speaker C: I did, yeah. I was a real estate major. It's fall of 1988 and it seemed like a wonderful.
• 30:49
  Speaker B: So did Dr. Peter Lunarman have any influence on you at all?
• 30:52
  Speaker C: Yeah, actually, it's funny you should ask. I got to know Peter very well. He's a good friend. And I'm sure many of your guests, if they have any interaction with Peter, they have a lot of story to go along with it.
• 31:06
  Speaker B: One of my guests, Willie Walker, introduced him about every quarter for his podcast.
• 31:11
  Speaker C: Yeah. So they just did that in New York recently. Right. So in probably October of my first year, so my first semester. Speaking of paying your way through school, there's a bulletin board that says this is long before the Internet, right? There's a bulletin board that was advertising for a strategic planning consultant. And I didn't know a lot about strategic planning, but in theory, I had been a consultant at Ernst Winnie. So I pulled it off the bulletin board and went up to meet somebody. I didn't know who it was. I'd never met the person before, but it's Peter. So at that time, Peter had just taken over the real estate department at the Wharton school and there was a real estate center, but he was really charged with making it something relevant. And he wanted to create a strategic plan to launch this or relaunch this real estate center. And he was looking for some students to help. And so a young lady and know classmate, she showed up at the same time I did that Tuesday afternoon. And Peter said, okay, you both do it. Okay. So the assignment was for us was to go survey other universities and the academic centers that they had and what were they doing, and how did they raise money and what was their programming, and how did they staff it? Long before the Internet. So Peter had a list of some ideas. So I literally just got on the phone and started calling these different universities. And I'd finally get a hold of the director, and I just interviewed them. And then I'd write up my notes for Peter.
• 32:56
  Speaker B: That's Wisconsin on that list.
• 32:58
  Speaker C: Yeah.
• 33:00
  Speaker B: When I was in graduate school, they were the real estate program.
• 33:05
  Speaker C: Right. And we finished that assignment, and then up here had a couple of other assignments that he would just ask me to consult. And he paid beside on what he paid, but I basically worked for him as this sort of part time consultant. I remember once he was asked by, I believe it was Cushman and Wakefield to speak at their annual conference where they take all the highest producing people. And they asked him to speak on the industry and compare us to other brokerage firms. So Peter said, okay, here's what I want you to do. So I had to go out and basically gather the data on all these different brokerage firms and feed it back to Peter. And then he organized it into a presentation. So then, of course, when I had a chance to get in any of his classes, I did. He and a woman, a professor by the name of Anita Summers, taught a real estate and public policy course, which is really fantastic. And if you know anything about Anita, she is Larry Summers'mother, Larry Summers, the secretary, treasury, and also the president of Harvard University. Right.
• 34:16
  Speaker B: And I think my son was a classmate of his twin daughters.
• 34:20
  Speaker C: Oh, is that right? Yes. Okay. I think at that time, he was the president, or had recently been the president of the World bank. And she had a lot of stories about her son, which was just sort of fun to hear. She's just a fantastic teacher and instructor and really thinker around public policy. So I took that class and very much enjoyed it. And then Peter also had a real estate entrepreneurship class that I took. I think that was my fourth semester. The other Peter let him in. Story is in the fall of 819 89, Peter calls me up to his office and he says, hey, a guy by name of Peter Bedford from California just bought all of Henry Kaiser's real estate holdings in Hawaii. And he's very active in Uli. And he's going to sponsor a Uli advisory panel to go study what he just bought. And he wants a professor from Wharton and a student from Wharton to go on this advisory panel to Hawaii to Hawai. And I think you should be the student. I said, well, that's very interesting. I said, that's very interesting. Can I get back to you? He said, absolutely. Because I'm thinking to know, recently married, my wife and I are living a very frugal lifestyle. We're certainly not going to Hawai. How do I tell my wife I'm going to Hawaii? So at the time, I worked for a guy part time who, he had been married three times, and I thought he knew a lot about being married. So I asked him what I should do and he said, look, you go back to Professor Lineman and you say, I'd love to go. Can I take my wife? He's going to say no. And you're going to go back and tell your wife this whole story and that you did ask, could you bring your wife? I'm like, brilliant. It's a brilliant idea. No wonder you've been married three times. So I go back to Professor Lenoman and I ask him, and he says, sure, you can take your wife. And by the way, I went on this advisory panel trip and I was the only one there with a wife. I could assure you that. But that was a really great experience because the rest of the panel was all real estate professionals. Doug Mitchell, who had Peachtree center, south of Atlanta, Roger Galatis had the Woodlands. He was the president of the Woodlands. Gotti Kaufman.
• 37:03
  Speaker B: I know Gotti.
• 37:04
  Speaker C: Okay, so he was on the panel with us.
• 37:06
  Speaker B: Gotti's great.
• 37:07
  Speaker C: And he was terrific. So what I observed is that these people all shared all their experiences and their ideas in the most collaborative way. It was just so interesting to watch them. I not sure that I had much to contribute. I may have done a spreadsheet for them, but it was so terrific to see them collaborating. And when I got into our industry, I realized that's a really common part of our industry, that we all just collaborate and we collaborate on things that we're not even working on together. So I could call you about something in Washington, DC and you would just tell me what you think.
• 37:52
  Speaker B: Let me back up just for a moment, because I've been on a technical advisory council for Uli. They call it a tap in Washington. Was this a council where Kaiser or the buyer hired Uli as an advisor to make sure that they were absorbing this portfolio properly. I mean, was this an engagement that you, Ali, was given?
• 38:16
  Speaker C: As I understand it, this advisory panel was financed by Peter Bedford, Bedford Properties. And the charge was, I've just bought this really large portfolio of real estate in Hawaii, most of it in Honolulu, most of it around Hawai Kai, if you know where that is. What should I do? What do you recommend I do with all this real estate? And we came back with a recommendation. We recommended that he build luxury homes. We recommended that he establish himself as a leader in the community, that he hire somebody local to run all of this who has relationships with the community. You might know that in Hawaii, it's really common for real estate to be owned by one or more trusts. And then if you and I own the home there, it's almost certain that we would own our home subject to a ground lease trust. So the real estate that he owned, sure enough, most of it was subject to a leasehold, and they recommended that he cement his relationship with the ground.
• 39:36
  Speaker B: Was Alawan, a shopping center right next to the. I've been only been to Honolulu once, but short story, I met my son there coming in on an aircraft carrier, and then he and I rode out together on the carrier, coming back on what's called a tiger cruise for the Navy, because my son was in the Navy. That was probably one of the top three or four bucket list items of my life, was to do that for six days.
• 40:07
  Speaker C: Wow, you were there six days on.
• 40:09
  Speaker B: An aircraft carrier across the Pacific Ocean? Yeah. And I'd never been in the service before, so this was a very special experience. Anyway.
• 40:20
  Speaker C: Thank you for sharing that.
• 40:22
  Speaker B: Yeah, that was a special time. That's my big memory of Hawaii. So then you finished up with Wharton, and what were your thought process then?
• 40:33
  Speaker C: Well, think about it. I'm graduating in May of 1990. There's an enormous real estate recession working its way around the country, call it. Right. It sort of didn't happen in every market at the same time.
• 40:52
  Speaker B: Did you see it in Philadelphia? I mean, was it hitting hard pretty there when you were in school?
• 40:57
  Speaker C: You know how the way we could tell was my friends and I, who were all real estate majors in the fall of our first year, when all the employers are coming through, hiring either permanent or summer interns, they through big, lavish events with all kinds of food and everything, and give a long presentation and then interview a lot of people. That was the fall of 88. In the fall of 89, there was virtually none of that on the real estate side. It was very, very different. And many of my friends who were real estate majors ended up pivoting into other careers. By the way, they did great, but I kind of hung in there, and I ended up. Today you would do an Internet search to find employers in a market, but at that time, you went to the book of lists. You get the Baltimore Business Journal or the Chicago Business Journal, and you go to their book of lists, and you scroll your fingers down, you try to find the name of something that looks like a real estate. There was some real estate companies interviewing, but not that many. And I ended up because my sister lived here in Baltimore. Baltimore was sort of on my mind. It's not that far from Philly. And I ended up connecting with a woman who ran one of two real estate portfolios at an insurance company, USF G, based here, based here in Baltimore. And I remember interviewing with her in early March, and she said, I do need to hire somebody, but I need somebody to start right away. So now it's the spring of my last year, and I told her, I said, well, I don't have classes on Fridays, and I can be here every Friday. My sister lives literally around the block. I can stay with her. And my spring break is coming up. I can give you a whole week. So that's how I spent my spring, and my spring break was coming here every Friday working for her. And then I spent my spring break. Others went skiing. But I came here to Baltimore and worked for. The woman's name was Marilyn McGinn. She's really just a really talented, smart woman who had been given responsibility for, I would call it like, the non conventional part of the insurance company's portfolio. So by non conventional, I mean the insurance company had made investments in golf courses and land development, and we actually owned some driving ranges. So things that were not conventional because they also had a portfolio of very conventional insurance investments, loans, mostly. Loans to apartment developers, office, retail, more traditional. She has a nontraditional portfolio, so I was able to start with her.
• 44:00
  Speaker B: So was it workouts from the get go?
• 44:02
  Speaker C: No, it wasn't. So, honestly, I sometimes reflect that maybe this was the last financial services company to get the memo that there was a real estate recession because they were still making commitments, really. They had a joint venture with Glen Eagles out of Scotland to build Glen Eagles in the United States, build Glen Eagles resorts. They hired the guy who was running the green bar. They put him on a team, and they were going to build Glen Eagles resorts. They bought the old Lake Placid resort in Lake Placid. Again, this is months before I got there, not years before I got there. When I started that spring, they were not in workout mode. I never quite understood why, but by July, she was let go and they merged the two portfolios and it then was treated as a workout portfolio. The team that was running the more traditional portfolio took on the whole portfolio. As I said, I worked on Fridays and during my spring break, and on a Saturday, I graduated Saturday. In May, I graduated from Wharton, and on Monday I came here and went to work, actually in this building on the 7th floor, really, where we sit here? Absolutely. 100 life street. She was on the 7th floor. That's where I worked. And then they merged our two groups. The group that inherited our portfolio was very receptive to having me work for them. I suppose they didn't have to be, but they were. That's right.
• 45:55
  Speaker B: This building was the USF and G building.
• 45:57
  Speaker C: It was the US f and G building, right?
• 45:59
  Speaker B: That's right.
• 46:00
  Speaker C: So that's July of 1990. By November of 1990, the CEO who ran the business, he gets replaced by a guy by name of Norm Blake. So Norm came from Heller and they recruited him to stabilize the insurance company and hopefully rebuild it into something again. But it was a very difficult time for the insurance company and really a great experience for me to be involved in workouts. As you know, it actually is a fantastic way to learn our industry.
• 46:36
  Speaker B: It is.
• 46:39
  Speaker C: Young men and women call me sometimes and ask about career opportunities. And more recently, I told them, I said, look, we very well may be heading into a period where there's a lot of workouts that need. We know there's going to be an office period, right. But there very well may be in some other asset classes. So be on the lookout for special servicers or banks that are standing up workout departments. Maryland National bank created basically like a bad. Right. And right over that building near us. And that's a fantastic experience. It's a really great way to learn the business. You learn valuation, learn negotiation. You have to read a lot of documents, which, as it turns out, is really important to our profession.
• 47:30
  Speaker B: Well, you also have to figure out how to unline deals that were structured certain ways that no longer make any sense.
• 47:38
  Speaker C: Right.
• 47:39
  Speaker B: And then figuring out this pro forma doesn't work. So how do we make one that does? And what do we have to do to adjust it to make it pencil. And you just have to rewrite the business plan of the property every time.
• 47:53
  Speaker C: It's a challenge, but it's the one upside for a young person's career. When we enter into a down market. The one upside is that a lot of workout firms are probably going to be hiring, and it's good experience, in my opinion.
• 48:12
  Speaker B: So you were with USF and G for a couple of years, and then what?
• 48:17
  Speaker C: Well, when I was looking for a job coming out of Wharton, I sent letters to lots of organizations in Baltimore and all around the country. But one of them ended up with a guy by the name of John Pru, who was running Alex Brown Realty at the time. And he was very nice. He responded to me, actually called me today. I got your resume. I'm not hiring, but I saw your resume. I thought I'd give you a call and told me a little bit about the business. So when I moved here, I looked him up and went to lunch with him. And then the summer of 92, I kind of reengaged with them. And he had just had an asset manager leave. She was working at the firm, and I left to move to Tennessee with her husband. And he said, so I'm going to be hiring another asset manager. And I thought, well, I'm working for an insurance company that's trying to preserve capital, and this is a group, a private company that's going to deploy capital. John and some partners had taken the firm private from the old Alex Brown and son's investment bank. So started by an old investment bank, and then the year before, they had taken it private and with a plan to take advantage of the distress in the market and raise capital and acquire assets and build a portfolio. So it just looked like a very different opportunity for me.
• 49:45
  Speaker B: So talk about the cultural change, and then after that, tell me about the history of Alex Brown Realty and how it all was formed originally before the taking private and all the evolution of it since then, if you can.
• 49:58
  Speaker C: Well, the cultural change, I think, was in some ways it's related to large versus small, and in some ways related to the circumstances of one company and where they are in their kind of financial condition versus another. So USF and G at the time was trying to restabilize themselves. I remember having lunch with Norm Blake. So Norm Blake was really a great leader, interesting guy. He would have lunch. You could have lunch with him on the 17th floor of this building. There's a cafeteria, and you could sign up to have lunch with them. Not only had like once a month, he would just have lunch with whoever signed up. So you could sit at a table like you and I are sitting right here and sit with the CEO of a large public insurance company. And I think he had been there about a year. And I remember asking him, I said, I'm sure you did a lot of research on the company before you accepted the job. What was your biggest surprise? He said, I did a ton of research. He was a financial manager. He worked at GE Capital, worked at Heller. Brilliant guy. He said, I did a lot of research, went through all the financial statements, poured over him. I had no idea how close to bankruptcy we were. And he stabilized the company, brought some capital in, discouraged themselves of some nonprofitable lines, and began to restabilize the company. But all of that was sort of rolling through every department, including the real estate department. It was just a lot of turmoil and you sort of sensed it a little bit, I think people, there was a little bit of sense of anxiety and uncertainty kind of month after month, day after day. Whereas when I went to Alex Brown Realty, they had just bought themselves from the investment bank. They had raised some capital to deploy around a couple of strategies. One was parking lots. They had actually raised through two public limited partnership offerings. They were acquiring parking lots all around the country. They had clients that they were raising capital through the old Alex Brown and Son's networks. They were still very close, and all the investment managers or brokers at the firm thought very well of them. So it was just different. The sense of competence and looking forward and just working together in a collaboration and teamwork.
• 52:28
  Speaker B: Why did they start a real estate group in the first place? I guess is what I'm trying to figure out also.
• 52:33
  Speaker C: Well, remember, Alex Brown and Sons was founded in 1800, and I know and run as an investment bank by the descendants of Alexander Brown until mid 70s. So in 1972, it's 172 year old investment bank, still run by the descendants of Alexander Brown. And by the way, and like all those investment banks, a private limited partnership. So there's partners of the firm that effectively own the company. And they created a real estate practice really to make investments for the partners and the better clients of the firm. And it started out as mostly just like a syndication shop. People would bring us deals and we would invest in apartments or the partners.
• 53:23
  Speaker B: Just all put in a bunch of.
• 53:24
  Speaker C: Dough and invest basically partners and their clients.
• 53:26
  Speaker B: Yeah, right.
• 53:30
  Speaker C: When I say we, this is the first 20 years before I got there. But they would execute a real estate investment strategy. Interestingly, it is in many ways consistent with what we do today.
• 53:45
  Speaker B: Interesting.
• 53:45
  Speaker C: I'll describe what we do and think through the things that are very different, the things that are absolutely the same. So the things that are absolutely the same are it's value add and we invest with real estate operators, and it's diversified. Things that are different is we're not as diversified as we used to be, but it's diversified across different property sectors and it's middle market sized. And things that are a little different would include today the transactions are a little bit bigger than they were when I came to the firm in 92, we would still write one, two $3 million equity checks. Today it's closer to 10 million on average, let's say, because it is middle market, but it's lower middle market. And it was an opportunity for them to provide a product to their clients that was different than the things that they were otherwise doing. The gentleman that ran the business at the time, like late 80s, early 90s, saw the changes in the marketplace, the distress that was coming. And I think the firm by then, the firm had become the firm, meaning Alex Brown and Sons was a public company by then, and they had become very, very active and one of the most prolific IPO shops. So they took Microsoft public, they took Sun Microsystems, Outback Steakhouse. They took a lot of brand names public, weren't they?
• 55:20
  Speaker B: At one point they merged with Bankers Trust.
• 55:22
  Speaker C: So that's 1997, that was later, that's 97. They are really sold to Bankers Trust.
• 55:30
  Speaker B: I see. And wasn't some other big institution involved with them, too? Deutsche.
• 55:37
  Speaker C: Well, then in 99, Deutsche bank. Bankers trust gets sold to Deutsche bank.
• 55:42
  Speaker B: Okay.
• 55:42
  Speaker C: Yeah. And of course, you probably know in 98, USF and G gets sold to St. Paul. So by then they had very much restabilized. The insurance company had stabilized the real estate portfolio under the leadership of. I don't if know you've ever met Charlie Wurhane. No, just a fantastic, really a really smart investor, a great leader, and a really good manager of people. So he was part of the real estate team. And when Norm Blake came in, he kind of reshuffled the team and had Charlie serve as leader of it, and he did a fantastic job. My friends that stayed have perfectly good careers with the firm. Now, when they sold the firm, the sold insurance company to keep, I don't think any of them, they sort of moved everybody into other, they all went off to other careers. Right? Sure. But he really did an excellent job sort of restabilizing and then building the portfolio. They began to deploy capital again at the insurance company.
• 56:51
  Speaker B: So when you joined Alex Brown, it was 1992, tough market. So what were you looking at doing at that time?
• 56:59
  Speaker C: Well, we were still managing our existing assets, of course, and some of them were in somewhat a stress condition, but most of what we had was multifamily parking. We owned a portfolio of nursing homes. We didn't own a lot of office. We didn't own a lot of retail, which were those just like today office in particular back then, for different reasons, but that was really struggling. So it wasn't a workout portfolio. As distressed as I think others might have been, one of the things the firm never did is you recall there's a time when a lot of investment was made for tax purposes. You buy something, you leverage it way up, and you generate extremely large syndicates. Right. Extremely large tax losses to your clients, who can then use those to offset their ordinary income. Well, by the time the 1986 tax law passes, you really can't do that. And the firm never did that. They never had tax driven investment strategies, always much more fundamental than tax driven. And that turns out to have been really fortuitous because the assets at the time, we are in a recession, so maybe income is down a little bit, but it wasn't a blatantly distressed portfolio. At the same time, we were able to raise capital to buy new assets and we were buying multifamily. We did buy. We bought some banknotes and so forth. But yeah, the day I came there, they were. I think the week I came there, we closed on an apartment project in Atlanta near the airport.
• 58:47
  Speaker B: So you probably saw some good deals then, when the markets were sure, we.
• 58:52
  Speaker C: Did see some good deals. In hindsight, those were very good years to be deploying capital. And I was on the asset management side, so I wasn't responsible for sourcing. But we did. We were deploying capital through the parking portfolio as well, still, and actually had really great outcomes.
• 59:13
  Speaker B: So you went on to become the head of asset management here at the firm.
• 59:17
  Speaker C: I did. When I came to Alex Brown Realty, they built a very good team of investment professionals and good asset management protocols. But maybe because of my accounting background, I kind of brought a sense of, or just the way I do things was very organized, very methodical. And there was a woman that worked there. Her name was Pat, and she always laughed. She's like, you came here and first thing you did was you created a filing system. They didn't really have one if you were an asset manager. You just had a drawer full of everything. And I like to be organized.
• 1:00:01
  Speaker B: You're a checklist guy.
• 1:00:02
  Speaker C: I'm a checklist guy. So I came up with a filing system, and I numbered the different sections of the file, and it was all Paper then. Right now it's all digital. But it is still a filing system for the asset managers. But yeah, I created this. If you were to be transferred a file like you're now responsible for the apartment project in Atlanta, you got a.
• 1:00:27
  Speaker B: Box full of paper.
• 1:00:28
  Speaker C: Right. I wanted the box to be organized. Sure. So that was one of the things. I mean, it sounds like the smallest of things, but it was just an example of things that I did and I really like to do. Right.
• 1:00:41
  Speaker B: Well, due diligence. It helps to have things. I want to analyze the financials, I want to answer insurance. All these different things, you got to know where they.
• 1:00:55
  Speaker C: Yes. So slowly all the boxes got put in these files. It all worked out. The other thing that I did, and I really brought this from USF and G. At USF and G, we adopted a business plan process. So when Norm Blake came in, he very quickly wanted to get his hands around what are my cash flows over the next four to eight to twelve quarters? I need to know what my cash flows are. And so the only way to really do that with your real estate portfolio is you got to build out some projections. And rather than have every asset manager just build their own for whatever they want, we came up with a template. What would it look? So we built this template for almost like a deck of reports that comprise the business plan. And I brought that idea over to Alex Brown Realty. I said we ought to do something the same. And every year we'll review these business plans, we'll put them in front of the management team and have them review what we're projecting.
• 1:02:14
  Speaker B: That begs a question. So before you came and did that, and I assume, did they have a fund at that time or was every asset a standalone type deal? And so how did they report to their partners and to investors?
• 1:02:31
  Speaker C: It was more backwards reporting. They certainly could tell you what happened last quarter.
• 1:02:37
  Speaker B: Right.
• 1:02:39
  Speaker C: And each asset manager had something of a forecast for what might happen in the future, but it wasn't standardized.
• 1:02:48
  Speaker B: So when you made investments, how would you value a property when you're looking to buy something?
• 1:02:54
  Speaker C: We did have a standardized approach to underwriting. Okay. But the asset manager wasn't necessarily responsible for maintaining that. They could, they might have.
• 1:03:04
  Speaker B: You didn't have a budget for the property?
• 1:03:06
  Speaker C: Of course we had a budget for the property. Yeah, we had an underwriting that included a budget. And every year we would get new budgets from our property managers, our partners, and we would review those. But that's the next twelve months. That's not the next five years.
• 1:03:24
  Speaker B: Yeah, I got it. Okay, so you took more of a strategic approach to it than a tactical approach. You were trying to say, okay, let's look beyond that. When are we going to sell this asset? What are we going to think about doing, refinancing or all these different things?
• 1:03:41
  Speaker C: And how do we approve the budget? Right. So an asset manager could approve the budget they get from the property manager. But maybe the thing to do is for the asset manager to take that budget, certainly provide their initial comments to the property manager, but roll that up into an updated forecast of our ownership plan, and then take that and their other assets and present them to the management team for their review and understanding and approval. We slowly migrated into that. Initially, I was the only one that did business plans and then eventually the other asset managers.
• 1:04:22
  Speaker B: So you basically turned this company into an institutional investor. In essence, when you came here, I.
• 1:04:28
  Speaker C: Probably didn't know I was doing that. I was just trying to be really organized.
• 1:04:31
  Speaker B: That's what you did.
• 1:04:36
  Speaker C: I will say it was very much embraced by the management team. It wasn't like I was pushing up a rock, up a hill. It was very embraced. It all made sense to them. If I had an idea that maybe was a little far reaching, and they helped balance out overreaching ideas on how to be organized. And it worked out, I think, really well. And it allowed us. By 2005, we had begun to organize our clients into funds instead of single asset syndications. And the first funds in the mid to late 80, at mid to late 90s were very, very small, like 20 million or 40 million. In 2005, we launched what we hoped would be an institutional fund. So we went out to raise $250,000,000. We raised 255,000,000. The capital was dominated by institutional investors. And to your point, we had to present an institutional looking platform, protocols and the way we do things, the best way to think is like repeatable processes. We do the same thing over and over again.
• 1:05:45
  Speaker B: Reporting had to be somewhat standardized, right, for your investors.
• 1:05:49
  Speaker C: So we did upgrade our reporting over time, get back to single asset syndications. In the 90s, early 90s, as an asset manager, you would write the report to the investor, the quarterly report, but their protocol at the time was just a letter. And I introduced the idea of a letter with some boxes that were financial statements, right? So narrative plus financial reporting. And then by the time we launched our funds, we created an investor reporting team and an investor relations team, and they took over reporting and have done a fantastic job, actually.
• 1:06:35
  Speaker B: Well, that's interesting. So that's about the time we met, around 2004 or five, something like that. You were on the radar screen for people then to bring deals, potential partners to. At that time. I don't know when you started actively marketing it, but obviously you had relationships you were building at that time. Just out of curiosity, what was your aum at that point? Do you know offhand or not?
• 1:07:08
  Speaker C: That's a good question. I would tell you that the number of assets that we had, we probably had probably 70 assets. Some were small, some were larger. The parking assets were actually pretty small.
• 1:07:26
  Speaker B: Right.
• 1:07:26
  Speaker C: They might be two or three $4 million.
• 1:07:29
  Speaker B: Just garages or what?
• 1:07:31
  Speaker C: We own 28 lots and garages all around the country. In that portfolio, we have probably 70 very diversified, including categories that we don't invest in anymore, like commercial land or residential land, or we want some of the nine hole golf course in Manassas.
• 1:07:51
  Speaker B: Really?
• 1:07:52
  Speaker C: I don't recommend.
• 1:07:54
  Speaker B: No. So then you evolved into the acquisitions area. Talk about how that transition occurred and why. What happened there.
• 1:08:04
  Speaker C: Well, I've been running the asset management team. As a player coach. I had my own portfolio of assets, but I was responsible for managing the team. By the way, it's a small team. It's three or four people. And then John Crew had asked me to work on acquisitions, and initially, he would just refer people to me because I didn't know anybody that would want to use our capital unless they were already a partner. But people would find their way to us, and John would ask me to work on something and underwrite it. And I ended up, my earliest acquisitions that I was responsible for were in mostly Florida or California. We had never really done any investing in California. And I went out there in 1989, and like a lot of things, it was somebody we knew in California who said, you should come out and meet these folks if you're looking for interesting opportunities to deploy capital around. I think in that case, actually, it was a guy at Alex Browning sons in San Francisco. So we were still very close to the old investment bank. But I went out to California, I remember, and I went to San Francisco, and then I went to Orange county throughout four or five, six months back and forth, and ended up doing a lot of business in California over the years. We ended up building a good sized portfolio out there. We have one partner, in fact, that we first transacted with in 1998. We bought a subplex industrial with them, and we still own an asset with them. We've been working with them ever since 25 years. Yeah, it's been a great experience. Like a lot of our partners, when I met them, I would say they were pretty small. It was all friends and family. We think of them today as an emerging operator, right. And then we bought a lot of assets with them, had fantastic outcomes, and about three or four years ago, they wanted to build a portfolio, really reset what they were doing, and ended up with a $250,000,000 commitment from Almanac, which I'm delighted for them. I miss working with them as much as I used to, although we're great friends, but they've really evolved, and that's not uncommon for some of the partners that we've worked with over the years that they've sort of started friends and family, and we help them transition to more institutional like capital and grow their businesses. And sometimes they outgrow us, sometimes we're still with them, right? Sometimes a little bit of both.
• 1:10:47
  Speaker B: Well, because of the size of your investments and you're a middle market investor, you're probably breaking the cherry of a lot of developer operators with regard to institutional relationships, I'm guessing.
• 1:11:01
  Speaker C: I think that's very true. I think we have been a resource to those size managers or operators who again just get exhausted by trying to raise money from friends and family or kind of outrun the amount of capital that they have. At some point, maybe their network can support one transaction a year of five or 6 million of equity, but not three.
• 1:11:30
  Speaker B: It's interesting, our industry doesn't have a quote unquote venture capital source really per se, but your firm and I've been involved with a lot of firms. Your firm seems as close to that as any other firm that I know on the equity side, as far as equity investment, because you'll look at a company that they've done a few deals, but all friends and family, and it's a different environment. As you well know, you structure a deal differently than a friends and family deal structure is going to be on the equity side. You may be able to, as a friends and family sponsor, be able to charge all the fees you want and they don't know any different. You sit down with Alex, with AVR.
• 1:12:21
  Speaker C: I don't think you're going to get.
• 1:12:22
  Speaker B: That fee on this deal. Right. So talk about how that transition occurs and how you educate people coming out of the friends and family environment into what you do.
• 1:12:33
  Speaker C: Well, we've done that a lot. I've certainly done it my whole career. Working with what I'll refer to as emerging operators. Right. And sharing with them how this works. How would it be working with an institutional operator and getting them to appreciate that their current compensation is almost certainly going to be less than what they could get out of their friends and family. The trade off is, and it's for them to make the decision whether the trade off is worth it. But the trade off is they get an investor who is in the market almost always is very anxious to see other opportunities from them. And we rarely get credit for this when we meet somebody. You have to be in business with us for a while, but eventually, I think our operating partners appreciate us as a strategic partner, not just financial partner. So, as you know, we're investing in value added deals, which means we're going to buy something and execute a business plan that has a lot of points of problems along the way. And not everything is going to work out according to the business plan. It never does. So there's going to be tons of decision points that we're going to have to all weigh in on. And we've been through a lot of those decisions and we have a lot of experience. We have a very talented team here, and we can make a lot of great contributions around those decisions. When we go to sell it, sell the asset, we have a lot of experience selling assets. Since I've been here, we sold 200 things. We have a lot of experience in doing this. And we have a legal team that is very hands on, very helpful negotiating contracts and loan documents. So we get a lot of credit for that. But never, when you're meeting somebody across the table for the first time, they're just not going. Unless maybe they've talked to some of our existing partners, they're probably not going to appreciate that you can't talk them into it. You explain that a little bit, but mostly what they're interested in is your capital, and then you share with them how you could help them grow their business and what we've done for others. But yeah, I and others in the firm have had the conversation with folks around their compensation a lot.
• 1:14:57
  Speaker B: Well, consistency is important, and that's one of the things. And as almost every sponsor that's getting into the sponsorship business and becoming an operator, the hardest thing for them to do, and several of my guests said it when they started up, is raising capital and going to partners to believe me, I'm going to get this done. It's really a tough sell. Sometimes it's out of their goodness, of their heart, because they believe in their children or their friend, but it's a little harder. So you have to screen that because you're looking at, oh, well, they've done it with friends and family. They've had a couple of deals they've done well with. But you're kind of, whereas somebody like prudential or some of the big investors say, well, you need a big track record. We have to see that you've turned assets and done a lot of things before we're going to sit down and do a joint venture with you.
• 1:15:56
  Speaker C: Well, it's a good point. When John Pru asked me to begin working in acquisitions, he told me early on, he said, look, you're going to be great at underwriting and modeling and diligence, but the part you also have to become great at is assessing character. Because we're partners with these people, we're going to have legal documents that say they have to do this and we have to do that, and we get the right to do that no matter what they think. But none of that's going to matter. You need to assess people, to size people up and figure out, are they of good character? Are they going to be a fiduciary for our capital the way we are a fiduciary for our clients capital? Are they going to be reasonable or are they ill tempered? Are they going to be fair when you go to work with them, are they going to be responsive? Just communicate with you, and you have to figure that out. It's really important. And one of the things all of us at the firms benefited from was the leadership here behaved that way. John and the people that ran the firm and Alex Brown's sons was this way. Very fair, very strong fiduciary responsibilities. Client first was everything. Very good at communication, very responsive. So something goes up, you just tell them, you just work it out.
• 1:17:33
  Speaker B: Transparent.
• 1:17:34
  Speaker C: A lot of transparency. It had been modeled for us, so when we go to look for it, we have a sense of what it looks like. And I'd like to think that those who interacted with us saw it as well, which is why we have a lot of repeat business.
• 1:17:53
  Speaker B: But like all of us do, there are blind spots occasionally. So I'm guessing that once or twice you made a mistake.
• 1:18:02
  Speaker C: Yes, I have made mistakes. I've made mistakes on that assessment.
• 1:18:09
  Speaker B: So is it a gut feeling? Are there assessments? You ask people to take some kind of an exam, or you ask them certain questions to kind of get a sense of their character. How do you do that evaluation? Out of curiosity.
• 1:18:24
  Speaker C: It'd be great if there was a test would be given. I hadn't thought about that. Right now, the best way is to spend time with them, spend time with them, get to know them. It's very common for us to meet somebody, underwrite a deal with them and not transact, not because we don't like the deal or we don't like them, but we're just still getting to know them a bit. And I do tell new partners this a lot. I said, I want you to know, and the partner that I mentioned that I met in 1998, that we transacted with for 25 years, we didn't do their first deal. I can remember, I went out, I underwrote it, I looked at it, and we didn't do it. We did the next deal. So spending time with them is very, very important in an environment where we can interact by Zoom a lot. I have to remind the acquisition officers and others that don't let that be a crutch, like get out and meet people, go out and hang out with them, go to a baseball game with them, just spend time with them. And I think that's the best way. We almost always have folks come here just this week. Yesterday, no, yesterday, we had a group here presenting an opportunity to us. The whole team came down and they met us, and they get the chance to meet our team as well. We're very confident that our successes are more correlated to the people we've been in business with than the things we've acquired. In fact, years ago, around the time of the great financial crisis, there was a student at the Wharton school getting his MBA. And it must have been 2009 when nobody could get a summer internship. So we hired him. I didn't really have a need for him, but he was a very bright guy. And I said, look, here's what I want you to do. Go through the entire portfolio, and at that time, maybe 140 transactions, I can't remember well the whole portfolio that we had bought and sold by that time. And I said, I want you to tease out what were our better results. Is it geography? Is it property type? Is it short hold, long hold? Development? We do a little bit of development, acquisition. So he goes through this whole exercise, and one of the things he did is he looked at repeat partner. And the only thing that came out of this, because we looked across the whole portfolio, there was no strong correlation between property type, geography, investment style. But if you sorted by repeat partner, it was a bit binary. Either we had a very good outcome or we didn't. There was no middle road. Just sort of reminded you that who you're in partners with is really important. It was more correlated to partner than to property type or geography or other or other characteristics. So your question about getting to know people it's really important, and we're not going to do it over Zoom. You got to hang out with them, get to know them.
• 1:21:54
  Speaker B: I mean, because you're in the opportunistic real estate investment business, it seems to me that if you were walking a site, whatever investment you're going to make with them, and just ask questions, I mean, this is what I would do. I would just walk the site and say, oh, your business plan says.
• 1:22:16
  Speaker C: How.
• 1:22:16
  Speaker B: Are you going to do that? And then listen to their answers very carefully, how they thought it through, and not only what they're going to do immediately, but what are the repercussions of what that decision is going to make going on in the future, and what does that do long term, to the value of the property in your mind, and then assess from that. And those responses are, to me, very critical in deciding whether to go forward with somebody on their plan or with just their character about, did they really think this through or not? I don't know.
• 1:22:52
  Speaker C: No, I think you're right on. When somebody sends us an investment opportunity, the acquisition officer almost always ends up reviewing it and sending a long list of questions. You've seen me, I've probably done it to you, right? There's a long list of questions. Of course, how that person responds to those questions, whether they sound rational, sincere, like a full answer, or whether they know what they're doing right, is really important. The other thing that's telling is you start to negotiate a term sheet with somebody. Now, I do respect that people are entitled to self interest. So if you want to negotiate hard for your self interest, I respect that. But how you go about that and how you make your case is, I think, really important. And then there are just things that we just think are not fair. And we're very accustomed to explaining to somebody why we think they're not fair and just see how they react. And there have certainly been transactions where myself or an acquisition officer would just say, I still don't see being in business with them. We're investing in the middle market. Typical total deal size is 35 million or less. If you look at any given year, 80 85% of all transactions in the United States are 35 million or less. Right. We're in the largest part of the market. So if something doesn't feel great or isn't just worth, like, we'll just move on to something else. We'll just pivot. This is one of the great advantages of our strategy, is just go do something else. We will find another opportunity. We're not desperate to get this done. We don't have to be. We'll just move on to something else.
• 1:24:50
  Speaker B: Your investors know that, too? I assume so. When you're doing an investment pitch for raising capital, we're somewhat discerning, and they want to know that. And we may not get all your money out right away, but we will eventually. But we want to make sure because of the market we're in, what we do requires a discernment, that it's not a slam dunk, it's not a core investment, which you can look at. Oh, yeah, well, I get this. This takes a little more time. There's a business plan that takes a little bit more thought to make an investment. Right.
• 1:25:33
  Speaker C: And having a wide choice of opportunities, in our experience, in my opinion, is one of the greatest ways to be a good investor. Just a lot to select from. Right. And you just select the ones that seem like the most obvious to give you the outcomes you're looking for. Wave off the others. But imagine we could only buy red buildings on a certain. I mean, then you're sort of stuck buying a bunch of red buildings on a certain street. It's not as much opportunity.
• 1:26:07
  Speaker B: Well, two of the classic investors in the United States, Charlie Munger and Warren Buffett, have a saying about investing, and they just know I just wait for my fat pitch and I'm not going to swing on anything else, so I'm just going to wait.
• 1:26:24
  Speaker C: Yeah.
• 1:26:26
  Speaker B: If I see an opportunity, I'm going to take it. But that opportunity has to be just right there in front of me. That's their approach. You might be a little more, not quite as discerning as that, but it's interesting. You want to avoid mistakes as much as possible.
• 1:26:44
  Speaker C: We're out looking for the pitch. Think of it that way. We're out trying to find people to pitch us and be discerning.
• 1:26:54
  Speaker B: Yeah. In addition to looking at, well, let's say assuming you look at diverse property types, you come into a capital stack in a variety of ways. Right. You're just not always the same way on every deal. So you might come in at a co GP, an LP position, you might come in as maybe a preferred equity situation.
• 1:27:16
  Speaker C: We do. So early on I mentioned there are some things that we do today that are very consistent with. Certainly when I came here in 92 and even before that, and there are things that have evolved. So when I came here in 92, really all we did was joint venture equity as an LP. Yes. Thank you. That was basically what we did. And in a wide variety of property sectors. Today we're in really just three property sectors. In fact, we think of it as two verticals, shelter and logistics. So shelter meaning hospitality or rental housing, and logistics meaning anything that's industrial. And we have different approaches to that, meaning not just LP equity, but as you mentioned, we will do preferred equity. We actually have a programmatic joint venture with a group to deploy small balance preferred equity. And the investments have been virtually all industrial or rental housing. So small balance meaning an equity check of two to five or $6 million. And then more recently, we launched a GP investment program that will allow us to invest as a co investor with the GP. So if a GP has a $50 million equity requirement, and they've got to come up with 10% of that, say 5 million, we can help them with 50, 60, 70% of the GP position.
• 1:28:50
  Speaker B: But it's all equity. There's no debt. You don't make debt.
• 1:28:53
  Speaker C: So so far we have not deployed anything as debt. We haven't set up a debt.
• 1:28:58
  Speaker B: We don't do MEZ spend.
• 1:29:01
  Speaker C: In lieu of preferred equity. Preferred equity and MEZ are kind of cousins. We could do Maz, but more often it's been structured as preferred equity.
• 1:29:13
  Speaker B: Okay, similar to the time when you began your career. We're now in a market of great uncertainty, with interest rates up significantly over the past two years, and the office space demand market still reeling from repercussions of the pandemic. With appropriate investment strategy, however, the market may actually provide opportunities. How do you see ABR taking advantage of this market? If you do?
• 1:29:39
  Speaker C: Well, I don't think we'll participate on the office side. Right. We have not bought an office asset since 2016. We do own some medical office, which we think is fundamentally different investment or different business. But what we found through most of my career here is that we were never big enough to invest in a CBD, and we couldn't buy a hundred million dollar office building. We were always basically buying suburban office buildings, which, as you know, are a commodity. And they've become even more of a commodity so long before the pandemic and work at home and Zoom meetings upended the demand for office, we had just waived it off today in our portfolio in two office buildings, and that's it. On the other hand, I do think there will be. And we're already seeing opportunities in other asset classes, particularly the ones that we're focused on. Logistics, rental housing. And our niche in hospitality is pretty narrow. So it's select service, extended, say limited service hotels, almost always flagged by Marriott or Hilton, by the way, those are middle market size, maybe lower middle hotels. But I do think we're going to see opportunities there. We already are. We're seeing at the moment it's anecdotal, though. I don't know how big of a trend this is or will become. But anecdotally, we're seeing assets that somebody bought for 100 a couple of years ago and now trades at 85 or 90. And some of these assets are going to have to trade because they won't be able to refinance the loan. So they have a loan, maybe they have a fixed rate loan, but it's not into perpetuity. Or maybe they bought a hedge or bought a cap or entered into a swap, but it's not into perpetuity. When they have to refinance the loan or deal with the expiring hedge, they're either going to have to bring some new capital or they're going to have to sell the asset. So we're already beginning to see that. Again, I call it anecdotally, the other thing that's happened is while the transaction volume is way, way down, the things that are trading are not getting much attention. And sellers know that were they to sell, they almost certainly have to acknowledge through pricing, acknowledge that the next buyer is not going to be able to borrow 75% of the total cost and finance it at three and a half percent or even 4%. So those owners that are prepared to acknowledge that have to let their assets be sold at a lower price point. And most of our competition over the years in this sort of middle market or lower middle market, most of it is private investors. We really don't compete with the largest well capitalized operators. So those smaller entrepreneurial investors have relied on, as you know, very high leverage and they can't get them anymore. They need more equity. And we have capital to deploy. And so we're expecting to see a lot of opportunities that are priced appropriately, that give us a chance to deploy our capital. I just think there'll be less. So back to we're in a part of the market where there are the most transactions, and now that part of the market has even fewer bidders because they can't get the leverage right. They're used to 70, 75% leverage.
• 1:33:40
  Speaker B: Your negotiating position is stronger, too, right now because there's less equity out there.
• 1:33:45
  Speaker C: To do these kinds of things.
• 1:33:47
  Speaker B: Right?
• 1:33:47
  Speaker C: Right. So we're just going to wait around for our pitch. There it, and not passively, we are actively in the market connecting with all of our friends and colleagues in the marketplace who are bringing us opportunities all the time.
• 1:34:08
  Speaker B: So, Tom, tell me a little bit about, you use a fund model to make investments. Has that been the methodology from the beginning, or did you brutally have, or initially have corporate capital to invest and then shift it to third party fundraising? Have you considered other ways of raising capital, like starting an operating company and or going public?
• 1:34:28
  Speaker C: So it's always been client capital. Right now the firm co invests in every transaction. When it was single asset syndications, we would invest in every transaction and we'd co invest in the funds, but it's always been a business based on client capital. When I came here in the early 90s, as I mentioned, virtually everything we did was a single asset syndication. We did have these public limited partnerships that were buying parking and nursing homes, but otherwise, which kind of hints of a fund. You raise capital, it's dedicated for one strategy, and you deploy it into a portfolio. But more recently, it's been virtually all fund oriented. So we raise funds, we raise capital from investors that range from large institutional pension plans to high net worth individuals and endowments and foundations and insurance companies. And we aggregate all of their capital and deploy that across, usually a three year period into a portfolio of assets. We have not really given any consideration to being a fully integrated operating company. We really like this strategy of being able to pivot around to where we think the best opportunities are. And while we're not a fully vertically integrated operating company, our asset managers are very hands on. So they have experience in property management sometimes because that's where they came from. But we have had examples, particularly during the great financial crisis, where we had operating partners who just couldn't stay in business. They just couldn't sustain themselves. So now our asset manager becomes the sole person responsible for a property and responsible for finding a property manager and deciding about every single lease and so forth. It doesn't happen very often.
• 1:36:34
  Speaker B: Do you have to unwind that partnership then, at that point?
• 1:36:37
  Speaker C: No, you don't really unwind it. You just run it without the participation of your partner, and it didn't happen again. I think at the time of the great financial crisis, we might have had 80 assets, and maybe that happened in three. It doesn't happen very often. They're still friends. One of them commented on the same LinkedIn page announcement that you did, John. Okay, so they just couldn't support themselves during a very distressful time. But my point is that our asset managers, while they're not day to day, roll up your sleeve sort of operators, they actually have that skill set and can think that way on behalf of us and our clients.
• 1:37:21
  Speaker B: So how many funds have you raised and at what scale?
• 1:37:25
  Speaker C: So we're actually investing today for the 9th fund.
• 1:37:31
  Speaker B: Really?
• 1:37:31
  Speaker C: Again, the first funds were tiny. The first funds were actually raised as a co investment vehicle for a bunch of other investors. So we might raise $20 million, and then that 20 million would be invested across, say, five or six assets that in each deal there was both fund and a handful of individual investors. So think of it as almost like a co investment vehicle. And we grew that over the years. In 2001, we launched what we referred to as the Chesapeake series. So we call that fund one, and today we're investing for fund six. But there were three funds before that. So while I'm investing today for fund six, we actually have nine funds that we've operated over all these years.
• 1:38:16
  Speaker B: And are these closed end funds?
• 1:38:17
  Speaker C: They've always been closed end funds. Right.
• 1:38:20
  Speaker B: Okay, so what life typically did you structure them to be, or ideally like five? 7810.
• 1:38:28
  Speaker C: Well, the earlier funds, it's an interesting question, because the earlier funds were dominated by high net worth individuals who were much more inclined to a longer term investment and not as IRR driven. When we started to raise capital from institutional investors, as you know, they are much more internal, rate of return driven. And so the earliest funds, why would they be?
• 1:38:55
  Speaker B: Just tell me why.
• 1:38:58
  Speaker C: I think that they have so many investment choices, and while what that means is that they probably get their capital back sooner, but they have the ability to reinvest it as quickly as they possibly can. And so I think they tend to be more internally rated, say, IRR driven, than the typical high net worth.
• 1:39:24
  Speaker B: Well, my experience tells me that they're looking at bonds, stocks, other investments quite more frequently and saying, okay, what bucket do we need to put? How do we allocate all these different investment choices?
• 1:39:40
  Speaker C: Right. My point is they have other things they could invest it in. So to get the capital back in a reasonable period of time becomes really important to them. The funds we're raising today are two to 300 billion in size. Again, if we were to raise a billion dollars, you might ask, how do you invest in the middle market, Tom? How do you deploy 10 million, an equity check at a billion dollars, be 100 transactions? Right. We know for sure we could scale it beyond 300 million, but a billion would be a challenge, in our opinion.
• 1:40:18
  Speaker B: What's the largest single equity check the firm's ever written? It's out of curiosity.
• 1:40:24
  Speaker C: We had one equity check for 23 million, but it was two assets. So in a single asset, the largest single asset invest check is probably 15 or 18 million. It's always been in that kind of eight to twelve range. As you know, John, if I came to you and said, hey, John, we deploy equity checks of 20 million or above, you would have a lot of ideas for that. But if I told you we'd like to write equity checks of like five to ten, I'm going to guess you have fewer ideas for five to ten. Back to we just a little, well, a bit less competition. Right.
• 1:41:04
  Speaker B: What's interesting, and this is what I think is intriguing, is your co GP program, which you're now offering, allows you to make a $10 million equity investment and 100 million dollar deal, potentially, of course.
• 1:41:19
  Speaker C: Right. And that's one of the reasons that we implemented the GP investment program is over all of the firm's life and my career, for sure, we've had operating partners who would come to us and they're trying to raise 50, 70, 80 million of equity for a transaction that we think is fantastic. We know them really well, we think they're fantastic, and yet we can't participate. I have no way of participating. But we also know that they're going to have to come up with probably about 10% of that total equity. So let's just say $80 million of vector, they need to come up with $8 million. So maybe we could be helpful there. Maybe we would give them 50, 60, 70% of that $8 million check. And if you look at the pipeline today for the GP investment program, that's basically what it looks like, is those kinds of transactions. The other thing that we found is we would have partners who would bring us a strategy that, while the deal by deal was not that large, if you add up all of the transactions that they hope to do within this strategy, which we might think is a fantastic strategy, they're going to quickly outstrip their own personal resources to be 10% co investor in every deal. So again, as a co GP, we could be a resource to them.
• 1:42:55
  Speaker B: So to some extent, you're setting up in that regard an equity line of credit, in essence, for a strategy to some extent, or a programmatic.
• 1:43:07
  Speaker C: We would be a programmatic joint venture partner on the co GP side. Absolutely. That's exactly how we think. And we've written term sheets that look just like that.
• 1:43:17
  Speaker B: Yeah. So they have a certain period of time to get this allocated. Otherwise if they don't get in that time, you're not going to get there. So we're going to kind of wolf all back. Is that what you.
• 1:43:30
  Speaker C: And that happens. We have done in our value add funds when we're the lp, we've created programmatic joint ventures around strategies that we think are wonderful with partners that we've known for a long time. And it turns out that by the time we get started, it becomes hard to find opportunities for that particular strategy. The market becomes too competitive and we kind of mutually agree that we probably should just drop this strategy and we'll deploy the capital somewhere else. But it's all very amicable and sure. Again, we have a portfolio of operating partners who we're very close to and we consider them friends and they're very understanding and we're understanding of their circumstances as well.
• 1:44:25
  Speaker B: I didn't ask this earlier. I'm going to flip back. I wanted to bring up that one. We met and the first relationship, of course, I introduced you to.
• 1:44:35
  Speaker C: Right.
• 1:44:36
  Speaker B: The strategy there was buying opportunistic industrial properties in Mississippi, and there were very few institutional investors willing a to invest even in the state of Mississippi, much less the size of the deals that we were looking at, because I think the largest deal was about eight or $10 million.
• 1:44:57
  Speaker C: That's true. That's right.
• 1:44:59
  Speaker B: Total size of the deal.
• 1:45:00
  Speaker C: Right.
• 1:45:01
  Speaker B: So it was a little unusual talk about would you consider that kind of an investment today or have you moved beyond that kind of thought process today, tertiary market investing like that?
• 1:45:17
  Speaker C: I don't think we have an aversion necessarily, tertiary markets. The key is that you can be confident that when you finish executing the business plan, there will be a buyer for that property. Is there a pool of buyers, a market for that asset and that asset type? So you may recall. So our strategy with Murray, his name was Murray Weichel. Great guy. Our strategy with Murray was to acquire industrial assets around the state of Mississippi. This was right after Katrina, if you recall, and Murray, who was from Michigan, had been active in Mississippi because a lot of his tenants, which were mostly auto manufacturing and related companies, had moved to Mississippi where it was cheaper and a very welcoming environment to run a manufacturing business. So he had incredible connections to the state of Mississippi and virtually every market and was able to, if you recall, was able to get us effectively a list of virtually every industrial building in the state of Mississippi that might have been available for sale because CBRE and JLL didn't have this list. He was working with the economic development departments. That's right. And we went around and toured a lot of the state. You could buy things. So as a value add investor, you're looking for attractive, yielding things, or things that when you add value, will be yielding well above where it might trade. And it's not unusual, in fact, it's super common that you're looking for great value relative to replacement costs. And at that time, you could buy these industrial buildings, some of them tenanted, some of them not, and just an incredible value relative to the price. So our strategy was, let's go build a portfolio. We'll be diversified by market, and then fill in with tenants and take it back to the market for a sale. As it turns out, we only bought two things, one in Jackson and one in Natchez. And by the time we closed on both, we had tenants. If you recall, the one in Natchez, we sold very quickly, probably a year and a day, and had a very good outcome. And the Jackson building we kept for many, actually many years, had perfectly good cash flow, changed tenants from time to time, and eventually sold it.
• 1:47:50
  Speaker B: Yeah, well, those types of assets, too. A user could be your best buyer sometimes instead of an investor, depending on.
• 1:47:57
  Speaker C: The situation, I think Nissan ended up, they may have bought the Jackson building. I know they were the last tenant.
• 1:48:04
  Speaker B: I mean, in my experience with industrial, the user, if you find a user buyer, there's no investor that's going to ever pay as much as a user does for an going to. They own it forever. They'll use it as a company. So when I was in that industry, we look for that as often as possible. So talk a little bit about your company structure. You co lead the firm with Ed Norberg you mentioned, right. How does Ed's and your roles complement each other? Talk about your other senior team members, Lee Collins, David Wolf, and Dan Blake. Behind them. You have quite a team of investment asset management and fundraising professionals, it appears. Talk a little bit about your company.
• 1:48:48
  Speaker C: We do. We have about 30 people in the company. We have three acquisition officers, three asset managers, and we have some people that support the acquisition team. We have a team of accountants, and we have a fundraising team, an investor relations team. Ed and I run the company, as I mentioned. And Ed actually joined the company around 2018. So I knew Ed. We had shared an operating partner. In fact, we've twice now shared an operating partner. And at that time, the gentleman who ran the firm, John Pru, was beginning to think about retirement. And I thought it'd be great were I to take on his responsibilities. I was chief investment officer, and I thought it'd be great to have somebody kind of partner with, to help me with fundraising. John and another colleague really did all the fundraising at that time. She is also retired. And so Ed and I started to talk. Ed was very close to two of our board members that he had known for many years, so it actually worked out really well. So Ed bought some shares in the company, joined our board, and then came on full time to run the business with me. I'd say day to day. Ed spends the bulk of his time on new business development and fundraising, and I spend most of my time on sort of running the portfolio, chief investment officer, and working with the asset side. We both do a bit of the other person's role as well. Ed is very active in all of our new investment opportunities and how we're managing the portfolio, and I'm very active in fundraising, but it's actually turned out to be just a terrific kind of balance of sharing, working responsibilities and working together.
• 1:50:42
  Speaker B: Are you structured as an LLC?
• 1:50:44
  Speaker C: We are an LLC. So one of the things that Ed helped us do for almost 50 years, we were a C Corp. So one of Ed's earliest ideas was, let's transition to an LLC. And it was an enormous undertaking. Why? Well, you have to have the company valued. You have to structure in a way that's sort of tax smart to avoid the tax implications that you might incur if you didn't think it all through. So it was a fair amount of work.
• 1:51:18
  Speaker B: Well, I guess the question is, in my mind, the biggest change for that. And again, you're an accountant, so I'll defer to you on the structural side. But it seems to me that an LLC, it's more like a partnership where things flow through direct, as opposed to a corporate entity, which you have this structure of reporting from a corporation standpoint with an LLC is more of a flow through entity.
• 1:51:45
  Speaker C: That's right.
• 1:51:45
  Speaker B: Is that the right way to look at it? And whereas senior management then have rights, the share allocations, it's a direct pass, instead of going through the corporate entity itself and distributed that way, and then having the dividends, as opposed to having a direct ownership structure pass through.
• 1:52:06
  Speaker C: That's right. And it's substantially more tax efficient.
• 1:52:11
  Speaker B: Right.
• 1:52:13
  Speaker C: To your point, the members of the team that end up owning an interest in the firm own it more directly.
• 1:52:22
  Speaker B: And you don't have double taxation too.
• 1:52:26
  Speaker C: It's a very smart way to run our kind of business.
• 1:52:30
  Speaker B: You could have done a sub s corporation too, right?
• 1:52:34
  Speaker C: I think we probably could have done that as well. This turned out to be more efficient, and then we do have a team besides Ed and I, we have Lee Collins, who you mentioned, and Dan Blake and David Wolf. So Lee runs our asset management team and also is what we refer to as a disposition officer. So years ago, probably 2010 or eleven, we were coming out of the great financial crisis. We had a lot of assets that we did not sell, of course, in 2008, nine and ten, but it was becoming time to sell them. And we had these terrific, well understood protocols for how we acquired assets. What do we do? What's our process? We have a preliminary review. We have a final approval. We have a due diligence checklist. We were very, very organized on the disposition side, which, as you know, is the second, perhaps the second most important moment in the life of an investment. We were a bit more casual. We had great outcomes, but we didn't have a script for how do we do it. And we had an acquisition officer who had been here for a very long time. He was an asset manager before that and knew everybody in the market. And we thought maybe his name was Craig. So maybe we have Craig Drambauer be a disposition officer. We crafted a job description. Craig and I crafted a script for how do we do it? What's our policy, our protocol for how do we sell an asset? We write a memo to the investment committee. I recommend we sell. This is why I recommend it. Here's a wholesale analysis. And if they approve it, they effectively approve a minimum acceptable price. So we're not going to just sell it, because we may go to market and find it. Everything's worth 100, only gets bids at 70. We may or may not want to trade at 70. So we got very organized and Craig went on to sell a lot of assets for us. Coming out of the great financial crisis, when values were beginning to recover. When Craig retired, we asked Lee, who by then was already the head of asset management, to take on this role as disposition officers. One of probably go through, like seven smartest things we ever did that's on the list of seven was create a position called the disposition officer, accompanied by these protocols. And Lee is excellent.
• 1:55:02
  Speaker B: So, looking portfolio wide, what's your typical hold?
• 1:55:07
  Speaker C: The typical hold today is about four to six years. In fact, if I were to build a bar chart for you showing over the years, by vintage early 90s, mid 90s, early thousands, you'll see that that hold period has come down over the years. I think the last time I did this, the average hold period for things that we had sold was four and a half to five years. So it's definitely come down back to a question about IRR. As soon as an asset has stabilized, you're probably not going to get a lot of additional IRR from holding it longer unless there's an event in the future that's going to create substantially more NoI or you're in a season where it's just silly to try to sell assets. So, yes, it's come down over the years, which has allowed us produce just fantastic outcomes for our clients and for the funds. And then David Wolf is our general counsel. So David joined us from a large law firm called Vincent and Elkins. He was living Dallas and had come to us at the time. We had a general counsel who had gotten ill and had to leave the company, so we hired David. And the former general counsel really was just a terrific real estate lawyer. And David is a terrific real estate lawyer. In fact, he may be the best real estate lawyer I've ever met. But just like a lot of things, you bring somebody new, they have all these new ideas, and he had a lot of fantastic new ideas, just how to be more organized in the way we transact the way we structure our agreements, things that we might put in there to kind of protect us around that time, or soon after he joined us, which is probably about 2004, by the way, everyone's worked here for like, a long time. I think the average tenure is 17 or 18 years for at least 30 people. But we became a registered investment advisor. So do you ever have any clients that have done that? You got to create a whole portfolio of policies and the ways you manage yourself, and you need a chief compliance officer? David is our chief compliance officer. So in addition to being a fantastic real estate lawyer, he's now become a very well informed and excellent chief compliance officer for us.
• 1:57:41
  Speaker B: Yeah, well, institutional investment requires a lot of things today that it didn't say ten years ago with ESG and all these different requirements. Now there's more questions asked by investors than ever before, I assume. Right.
• 1:57:59
  Speaker C: Well, there, you know, the SEC continues to implement new rules, so just last year, there's the new marketing rule. What's the new marketing rule mean? Well, everything that you push out to the public, that kind of sort of looks like marketing, and most things do, has to meet certain standards. For example, I might have given you a list in a pitchbook. I might have listed all of our assets that we've sold in the last 20 years and the internal rate of return for each of those assets. Well, now I'm obligated to give you not just the gross, but the net. Well, the net is a function of what that fund that owns that investment achieved as a net IRR. And we've got to figure out a way to develop a net for every asset based on the outcomes of each of those investments. And, of course, the fees and expenses for running the portfolio. We have a methodology. I'm very pleased with the methodology. David and I and some others worked up the methodologies. There was guidance from the SEC on how to do this. We just followed that guidance. But just an example of some extra work.
• 1:59:16
  Speaker B: You wonder why you need in house counsel. There's a lot of reasons why you need it, right?
• 1:59:22
  Speaker C: I find having in house counsel one of the greatest advantages is, and I just had this conversation with an operating partner recently who's thinking about bringing in house counsel. I told him, I said, one of the greatest things is your young acquisition officers and asset managers, if they're willing, they can learn. They can go down to the general counsel or attorney's office, like down the hall and sit in their office and talk to them and not worry about a meter running while they learn about the difference between malfeasance and I'll never.
• 2:00:02
  Speaker B: Forget my first day in real estate investing with prudential insurance. I was handed five leases, and they said, okay, read these. And if there's terminology you don't understand, there's a guy down the hall that you go see and sit down with. And that's.
• 2:00:20
  Speaker C: I did.
• 2:00:21
  Speaker B: And he became the best man in my wedding.
• 2:00:24
  Speaker C: Oh, terrific.
• 2:00:27
  Speaker B: So Jack was just great. And he's probably one of the most prolific writers in real estate law in the country, or he was.
• 2:00:34
  Speaker C: Oh, wow.
• 2:00:34
  Speaker B: He's retired now, but anyway.
• 2:00:36
  Speaker C: Well, I tell David from time to time, like, don't forget, part of your job description is teaching.
• 2:00:44
  Speaker B: That's right.
• 2:00:45
  Speaker C: You need to teach people. And I tell new acquisition folks here, do not just let David. And he has a colleague, Maurice Tucker, who is associate counsel. She's also a fantastic real estate attorney. Do not let them pass on the loan document with waiting for your comments. They have to read this, and they do. But you could hire somebody new, and they might not think that way. Well, I'll just let the lawyers read it. So, for a lot of your younger listeners, I really can't emphasize enough how important it is and really how valuable it is to just teach yourself to read. You got to learn how to read contract, because it's all over our industry.
• 2:01:29
  Speaker B: It's what we do every day. If you're investing, you're looking at legal documents every single day.
• 2:01:36
  Speaker C: Right. You can't just rely on the attorneys to tell you what they think. And eventually you're going to be asked to write like a term sheet or something. You need to be able to write the way you need to mimic their writing in plain language. It's a really important skill. And I learned all that from Terry hall before David joined us and from David. And they both were extremely patient teaching me.
• 2:02:05
  Speaker B: Yeah. So talk about the composition of your fund investments. Where are you more willing to take risk, and where are you very conservative at staying the course?
• 2:02:16
  Speaker C: Well, we tend to be pretty conservative investors, and I would say over the years, the number one place that we were conservative is in exit valuations. And in particular, since we come out of the great financial crisis and interest rates have declined and cap rates have declined, we have been very reluctant to use the exit cap rate that was projected or the exit cap rate that somebody achieved last month. And in fact, we have a look back testing that we do, where once we sell something, we look back, what did we originally underwrite as an exit cap? What did we just get as an exit cap? And last year, what did we value this asset at? What do we value the equity at? What do we value at it now? And we have a long track record of being conservative. I'm sure that we missed out on opportunities over the years, although I do think now, as you know, cap rates have moved up, so we might now be right. We've been wrong on the good side for a long time. And I think cap rates have moved to kind of where we thought they would be, not that we predicted they would move here. We just didn't understand how they could stay that low for so long, and we were just too cautious or nervous, call it what you will, to keep that assumption in our underwriting. So that's the main place where we tend to be very cautious. I say where we're more likely to be, I don't use the word aggressive, but we will bet on operating partners. We have operating partners that we've been in business for a very long time. We've had excellent outcomes with them. And if you see us approving an investment that seems to have an underwriting that is just a little more aggressive, it's probably because we've just had great experience with them and we trust them. We've seen them again. We've had partners that we've invested with for decades, many of which we came through the great financial crisis with. So if things get bad, we see how they perform. So we are more apt to reach, if you will, with an operating partner that we've had an excellent experience with, that we trust, than somebody new? Somebody new many times. Honestly, we've never transacted with them. I don't think this is a place where we want to stretch.
• 2:05:06
  Speaker B: So, as you said earlier, your funds are closed end. Is it your intention to keep AVR going indefinitely? As a rolling fund manager, do you have other goals for the company?
• 2:05:17
  Speaker C: Well, it's a great business, so yes, we would be delighted to stick with this model. What we would like to do and what we are doing, as you can tell, just with the GP investment program, we are adding some opportunities or some offerings that we think are complementary to what we do. They're not that different today. We actually have a separate managed account assignment for one investor who that has taken the form of co investment, but they're asking us to find investments just for them under a specific strategy, which we're perfectly suited to do that. So what Ed and I and the rest of the management team intend to do is like every other business. What are your competitive advantages? Competitive advantages? We have a super broad network of resourcing. We have been in the market for a very long time. We're cycle tested, we have an excellent track record, and we have a skill set in this middle market or lower middle market. I'm not saying it's unmatched, but it's very good and we've done it for a long time. So we'd like to leverage those competitive advantages and be a resource to other investors. And we sort of sit in the middle. We're a resource to investors and we're a resource to the users of that capital. I think we kind of build a platform that's tailor made to do that. So, yeah, that's our plan. We're excited about it.
• 2:06:58
  Speaker B: And you can innovate within that plan.
• 2:07:01
  Speaker C: Exactly. And we have experience with different property sectors. So over the years, we decided office was just not a good investment. It's not for us. We didn't go out of business. We just pivoted to other sectors. We were reconcentrated in other sectors.
• 2:07:22
  Speaker B: Your website cites responsibilities of core value. Talk about your philosophy behind the company initiatives and giving back and ESG and how they affect your company's investment.
• 2:07:34
  Speaker C: You know, long before there were the letters ESG, we were running a business with a bunch of people who were very committed to the community, individually as well as corporate. So we have for, I think since I come here, we've had community service things that we've just done as a team that we enjoy doing. We help the Salvation army every year here in Baltimore, they have a gift giving program. Gifts come in, and then they sort them for families who have. I have these three kids, and these are what they're looking for as a gift. So it's like a logistics thing. So we've helped them with that for many years, and we love doing it. There's a day we do it. We have a great time helping the Salvation army doing that. My colleagues have always been active in the community doing things, and then more recently, I'd say in the last ten years, we've adopted some programs that kind of leverage the areas that we're interested in and where we think we could be helpful. So, for example, we have a program we call the Chesapeake Scholars program, where we mentor sort of students that are kind of an underrepresented part of our profession. So you and I go to a real estate conference. Look around the rhythm. It's mostly men. Women are making some inroads, but it's mostly men, and they're mostly white. So there's an enormous population of students and others, young people, who are just underrepresented in our industry. And we think we can get them exposure to our industry by just mentoring them, just having them be a part of what we do. So we invite them to participate in all of our acquisition meetings, all of our investment committee meetings. Now, today, it's easier, right? Because you might have a student at Emory, and she can just participate by Zoom, hold the meeting with the team's meeting, or Zoom, and then we invite them. When we have a service day, we have them join us if they want to, but we keep kind of integrate them to what we're doing. If we go on a field trip, we'll invite them. They usually go on Tuesday at 02:00 but maybe it's Friday and maybe it's in DC. And the students at american university, they just join us. It's been great. It's been a ton of fun. We end up with usually two to four students a school year, and that's been great. The other thing that we're doing is we have a program for veterans at Wharton who are getting their MBA, who work with us in the spring as an intern. So they work usually Fridays because that's their day off of school. This actually got started. A friend whose son was getting his MBA at Wharton, he had spent, gone to Harvard, and then he was in the marines for, I think, six years. And he knew a lot about risk, managing risk, like personal risk, but he didn't know anything about risk capital. He had never put an excel spreadsheet together to forecast projections and really didn't understand. He had no exposure to capital markets and investment decision making. So we needed somebody that spring and he joined us as an intern. He worked exclusively with one of our acquisition officers. So this sort of side by side, which worked out really well. So Phil, Ben Benudo was effectively his mentor that spring. And he joined us for all of our investment committee meetings and all of our acquisition meetings by Zoom. And at the end of the term he said, and he know this was mean, we did it because we needed some help. And I just happened to know, but he said, this was mean, I had no exposure to any of this. And now I completely understand. Now, of course, he's at Morgan Stanley doing great. And so I thought, why don't we just replicate it? We're replicating in the spring. You get a first year. You don't want to grab them in the fall because they're just bombarded with new things. So we grab them in the spring. And so we have the intern who's at board getting their MBA work with us in the spring. We tag them to an acquisition officer. And that's been a terrific experience. And then the last thing that we're doing, actually, a bit takes me back to Peter Linneman. You probably know Peter has a charity that he and his wife Kathy support called Sam Alimu Charity. So these are students in Kenya that he basically sponsors and helps them all the way through college. So similarly, I have an old friend who spent his career in international relief services and ends up. He married a woman from Malawi and she has started a charity. So they're both sort of retired from their professional careers. They live in Malawi, in Africa. And her charity helps. They have a school, they have a food program where they basically process honey and sell it around the country as a way to earn money to support the charity. And they have a health clinic. So we have basically adopted, it's called Malato. We've adopted them and what we're doing is helping them because I talked to my friend, I told him we wanted to see if we could work with them. He said, what? I need more. Anything else? I need someone to help me with financial forecasting and financial management. I said, well, I think I have 30 people that can help you. So we're helping them do the things that I did at Ernst and Winnie for Frank Tereki, right. Build out financial projections, create financial models, really teach them how to do it. That's our goal. That's great. So those are things, I think, even without ESG, we would just do this. This is just kind of our DNA. The e part of ESG is interesting. We are like others. We're making sure and kind of always have that buildings we acquire are being renovated in a way that takes into consideration reducing energy. But what's interesting about our strategy is if you think about we buy buildings, we put capital into it, we bring them back to life and give them a longer, useful life. That would be in lieu of, let's just say it's a 200 unit apartment project that would be in lieu of just building 200 new units. And we wondered whether what we did had resulted in lower carbon emissions over the light of the building than building anew. And if you google that question, you'll find there's some writing around it, and it appears to be true. But we've actually partnered with Johns Hopkins to do a research study around our portfolio, our assets, what we do. Like do the math around whether we're to, as you know, we have a director of research that we put out research materials from time to time. And so he's working with Johns Hopkins on that. So I hope to have an opportunity to share that with you soon.
• 2:15:18
  Speaker B: Understanding the measurement of that and how that's measured and how specifically you can look at the comparison of what the use the carbon emissions from new construction and new activities, visa vis keeping the existing and retaining and all that. It would be an interesting thing to understand.
• 2:15:38
  Speaker C: I think the math is going to be the new building have lower carbon emissions year to year than the old building. But the cost to build the carbon emission associated with the building, transporting the materials there, rebuilding the site, all that activity offsets the savings that you might have otherwise expected. So I hope to be able to have a document or a research paper that documents that for you soon. But from our perspective, this is what we've always done, and we'll see what John Hopkins thinks about it.
• 2:16:19
  Speaker B: That's great. When you hire, what do you look for in prospective?
• 2:16:24
  Speaker C: You know, we're looking for a couple things. One is someone who's willing to work hard. So we talked before about a work ethic and what you grew up with, right? Just have a strong work ethic, just be willing to work hard. We want to make sure that they are a team player. So no one here is a superstar. Everybody works in a team environment, and that's really important. That's a kind of legacy from the Alex Brown and sons days. And then the second really important legacy from the Alex Brown and Sunscale is this notion of fiduciary. Are you going to conduct yourself as a fiduciary for our clients and our clients capital? It's really, really important. It's like a core thing for us. And then the last thing is just for people that are curious, they just have a sense of curiosity. And we just think that's so important that when you see something, you get a financial statement that comes in that compares this quarter to last quarter or this quarter to the budget and there are variances. Aren't you curious why? Curious about why. Just be curious. Just have a sense of curiosity. I think it's so valuable. We think it's so valuable.
• 2:17:37
  Speaker B: I think the core competency of anybody to live is a core competency.
• 2:17:44
  Speaker A: That's great.
• 2:17:45
  Speaker B: So what are your life priorities among family, work and giving back top well.
• 2:17:51
  Speaker C: I'm sure like a lot of your listeners, the priorities are to balance them, to balance those priorities right and to find a way that you can give back and have a stable, happy family that you enjoy being with and then do things at work that are productive. The key for me has been probably two, I'd say three things. One is I have found myself in a career that I just absolutely love. I really love what we do. I really love my colleagues and working with them, it's just enriching. And I've never come to work kind of dreading opening the door, ever. The second is at a very early age, I found a life partner. My wife Christine, who just is very supportive, had the same sort of shared goals as I did, was delighted and happy to raise our family and take care of. She ran the house while I went to work and I traveled a lot. And we just never had any conversation around whether there was a difficulty with that or not. And when I'm not here and we're together, we hang out together and we don't let work kind of overwhelm. What she's curious what's going on at work. She knows everybody, right? We were both very young when I came here, but that has been really a blessing. And then I'd say the third thing, I do a lot outside of the office community things. I'm on a couple of boards, and I do like working around different charities. The key for me has always been I only do stuff that's fun. I really do like all the things I'm involved in, I really enjoy, and I don't join boards and just sit around and I'm not even very good at that. But if I join something and give me a project, I'm fantastic at that. So I just do things that I like. And so far it's worked out really well.
• 2:20:01
  Speaker B: So what advice would you give your 25 year old self today? Tom?
• 2:20:06
  Speaker C: Well, at 25, I was getting ready to go to Wharton, and the first thing I would do is if you get into Wharton, take Jeremy Siegel's class, because he teaches or taught macroeconomics. I was a business school student at Maryland, and I could wave out of macroeconomics. Turned out to be a mistake because he's the most prominent teacher in the school at that time and remains one of the most prominent economists. He was just on squawkbox yesterday in the world. So, yeah. Tom, take Jeremy Siegel's class. I didn't know that. The other thing I think I would do is figure out a way to work overseas for a period of time. Really? Yeah. I just think in hindsight, I didn't really try hard to do that. I know I would have loved it. My wife would have happily gone with me. I should have done that. I think you'd get my friends and colleagues that I've met that have had that experience. Maybe it's two to five years. It's really valuable.
• 2:21:04
  Speaker B: Did you tell your children today?
• 2:21:06
  Speaker C: Yeah, I have told them.
• 2:21:08
  Speaker B: Yeah. My son worked in London for three years and he enjoyed it a lot. In fact, he regretted having to come home. But that's another story. If you could post a statement on a billboard on a major freeway for millions to see, what would it say?
• 2:21:27
  Speaker C: Well, I've listened to many of your podcasts, and the folks you interview have great responses to this question, so I'm just going to share mine. I'm going to add it, and that is just be curious. I just can't emphasize how important that is and how valuable it is and how much you'll enjoy learning new things. Just be curious.
• 2:21:49
  Speaker B: Tom, thank you very much for your insightful and thoughtful commentary today, and I really appreciate it.
• 2:21:56
  Speaker C: Well, thank you, John. Thanks for your programming here and everything you're doing. It's just terrific. Thank you so much.