When investing in real estate, you can’t take people and their motivation out of the equation, Almanac Realty Investors says.
Investors in real estate are known to be very hands on. They like to visit their buildings, walk around in them to touch the walls and see if maintenance is up to date. They like to get a feel for how the building is used and how its occupants interact with it.
In case of a new building project or renovation, you can see these investors stroll around in hard hats, checking on the progress of various aspects of the build and the quality of the work.
But bricks and mortar form only one side of the coin.
The people managing the assets are just as important. They are responsible for keeping a building in good shape and are the first port of call when things go wrong. Their understanding of potential tenants and the local market is instrumental in ensuring full occupancy. And their skill in negotiating rental prices is an important driver of profitability.
To ensure the people managing your property do a good job requires alignment of their interests with your objectives as an investor.
It is for these reasons Almanac Realty Investors, part of global asset manager Neuberger Berman, likes to invest in independent real estate companies, also known as real estate platforms, rather than individual assets. Importantly, this approach puts the investor and real estate operator under the same roof as co-shareholders.
“Having aligned folks who are working within the company, where you can see what they’re doing, is, we think, less risky and more powerful than saying: ‘Well, I own a building and the management team sits outside it, so I don’t have to worry about it,’” Matthew Kaplan, Managing Director and Head of Almanac, says in an interview with [i3] Insights.
“Well, you should worry about it. You should go and see what the alignment of interest is and what’s going on there.”
A common position taken by investors reluctant to adopt the platform model is that the approach can make real estate investing overly complex, since you are not just dealing with a building, but also with the business model of the operating or management company and its staff.
People are touching your buildings anyway. And whether they're outside the platform or they're inside, what they're thinking and what they're doing is very important to your outcome – Matthew Kaplan
But Kaplan says this is always the case.
“People are touching your buildings anyway. And whether they’re outside the platform or they’re inside, what they’re thinking and what they’re doing is very important to your outcome,” he says.
He argues owning a company is in fact simpler in structure than trying to manage real estate assets in separate vehicles and then having to deal with an operating company on top of that.
“What is complicated is when you buy a building, you put it in a single entity, you have separate reporting and separate partnerships. Then you buy another building and you put it in another entity, managed by the same or a different management company, trying to understand who’s working on your building. Besides, their definition of success might be very different from yours,” he says.
Instead, Almanac invests in often family-owned businesses and creates a unified structure that allows them to streamline operating processes. Justin Hakimian, Managing Director with Almanac, says that often when his team looks to recapitalise a new company they start off with a disorganised collection of intertwined processes, the result of years or even decades of unstructured growth.
“Where we see this disorganisation can come through is where each deal has a different tax structure or you have certain expenses running through the operating business that are family related. It can be how they report to you or how they report to third parties, like lenders,” Hakimian says.
“It can be the decision-making process internally. A lot of these groups are managed by one, two or three primary decision-makers, maybe they’re doing things informally. You’ve got to clean all that stuff up.”
The trick is to do it without alienating the management team, but to provide them with the tools that facilitate further growth.
“You don’t want to zap them of their entrepreneurial spirit because that is how they became successful and how they’ve gotten to the point where they can contribute tens of millions of dollars,” Hakimian says.
“But there are also some reporting and governance processes that need to be cleaned up and often the team really appreciates us bringing in a structured process around decision-making.”
People Power
The focus on people has been a key part of the Almanac story since the very beginning. Almanac started its life in 1981 as Rothschild Realty Managers, a partnership between John McGurk and the well-known Rothschild banking family.
The Rothschilds are known for their high standard of care and service to their clients, as well as their long-term focus, something that was uncommon among the typical Wall Street-based real estate investor at the time, Kaplan says.
“I remember going to London and the most senior person in the room would serve coffee to everybody. It was all about service and long-term relationships. It’s not just the minimum fiduciary [duty],” he says.
“What was important to them was: ‘Are we making money in five years’ time?’, which for Wall Street was like an eternity.”
McGurk had a similar approach. Although he was well schooled in the minutiae of real estate investing, he placed much emphasis on choosing the right kind of partners. “It was not just how good they are; it was about who they are, what their reputation was, how they treated each other, it was a whole life approach,” Kaplan says.
McGurk retired as managing partner in 2009, but was still involved as a member of the investment committee and partner until shortly before his passing in 2018. Kaplan says McGurk brought a similar people-focused philosophy to managing his staff and instilled in him that despite the importance of the job, family comes first.
“I was driving hard, this is Wall Street after all, and he would say: ‘What are you doing? Go home. We’re parents first, we’re wives first, we’re husbands first, we’re family first.’ He definitely set the tone that you can do business and you can have it all,” he says.
Almanac’s philosophy of building profitable businesses through strong partnerships can be found in one of Kaplan’s favourite investments: Merritt Properties in Baltimore, Maryland. Merritt is a full-service commercial real estate company, originally founded by Leroy Merritt some 50 years ago.
“I think it has all the elements of what we look for. It’s a family run business with tremendous values that treats their customers incredibly well. They’re all leasing people that know how to build buildings and have a tremendous reputation in the Baltimore marketplace, especially in industrial,” Kaplan says.
“We’ve built together, we’ve developed together, we’ve bought together, we do everything together. Sometimes you get to be Warren Buffett and you get to keep your winners and just let them do what they do.”
What is really happening is that all construction across every industry is just coming to a grinding halt. So, if you look forward a couple of years, you should have pretty favourable supply-demand dynamics and the rent story should actually be pretty good – Justin Hakimian
Hakimian’s favourite investment also relied on the strength of the management team. After having sold a portfolio of caravan parks to a real estate investment trust, recreational vehicle (RV) pioneers Dave Napp and Colleen Edwards were looking for their next business venture and established National RV Communities (NRVC) in Scottsdale, Arizona.
“They wanted to bring the band back together again. On the asset side, we grew from zero to 61 parks. Again, it goes back to alignment of interest and taking the right people to be inside the business and touching the assets,” Hakimian says.
“On top of that, we lived through the GFC and not only did we live through it, we prospered through it. We bought parks that probably were not attainable before the GFC and we grew cash flow every year from inception through to exit.”
Eventually, Almanac sold NRVC to Centerbridge in 2013.
Looking ahead, Hakimian sees plenty of opportunities. Although the firm is a bottom-up investor, looking at over a hundred businesses a year to make two or three investments, rather than taking a macroeconomic view of the market, he does expect to see strong momentum for industrial assets and apartments.
“What is really happening is that all construction across every industry is just coming to a grinding halt. So, if you look forward a couple of years, you should have pretty favourable supply-demand dynamics and the rent story should actually be pretty good,” he says.
Kaplan is even carefully optimistic about retail assets, despite the challenges from e-commerce.
“We think that most of the damage has been done in retail. Supply is falling, demand is rising and the retailers that are left are actually smart. They are integrated into the internet,” he says.
“Retail as an asset class has got probably more upside than people are giving it credit for.”
This article is sponsored by Neuberger Berman. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.