Transcript

Aaron:

So today I’m joined by Stuart Zook.

I really want to thank you for being on the Dealmakers’ Edge today.

Stuart is a principal of Monument Capital Management and Monument Real Estate Services. Monument Capital Management is an A-Rod Corp company, and is one of the country’s premier, fully integrated real estate investment firms. Stuart has worked with institutional and private owners [by] managing portfolios that have exceeded $2 billion in value and total more than 40,000 units over the course of his career.

Stuart, I’m really happy you’re here and excited for you to tell your story today for our listeners.

Stuart:

Thanks very much for inviting me.

Aaron:

So I guess we can jump right into it. We usually try to start with a personal background, where you grew up, where you got started in the business…

Stuart:

Sure. So I grew up in the northern suburbs of Chicago. I had an interesting start in this business. It is the only thing I have worked in for over 40 years. During college, my sister was in something called “work study” in high school. I don’t know what they call that nowadays. And she worked for this little company that was a real estate investment company that was probably, I don’t know, six blocks from my house where I grew up.

She said, “look, they’re looking for people during the summer.” And I said, “Great, I need a job. I’m tired of painting houses in the summer. I’d like to actually work in an office.” I had an accounting and finance degree, but I also had marketing and advertising. So you could see I’m a little bit on both sides of my brain sort of work at the same time. I went in and interviewed and they hired me in like 5 seconds because I was cheap labor to be able to work on SEC reporting; 10-Ks,10-Qs, those kinds of things. The name of the company was the Balcor Company. That company was founded by Jerry Reinsdorf, who owns the Chicago Bulls and the Chicago White Sox. I was the 32nd person in that company to be hired. My first office was a card table in Jerry’s office.

That was probably the best education. You could throw college out and take those two summers and winters and just sit there and be a sponge.

So, Chicago was a hotbed for real estate at that time, especially [for] syndicators. You had Balcor, which became a huge company. You had JMB Realty, which became a huge company, and of course you had Sam Zell’s equity group, who I eventually worked for later on in life. But you’d be on airplanes and you’d be having drinks and everybody knew each other and people switched places back and forth. I started out in accounting, which is a great place to learn, a great place to start. They told me I wasn’t very good at it. (laughs) No, that isn’t really what they said, but they said, “You’re a little bit too creative for this particular part of the company.” And I ended up in basically due diligence and investment analysis, and [I] flew all over the country looking at deals.

My goal always was to be a generalist and learn as much as I could about every aspect of the business. So, I wanted to learn about property management. [At] Balcor, you really couldn’t do that because we didn’t own anything locally. So I would have had to pick up a move and I really didn’t want to. So I went to work for a local company and learned some property management stuff, but actually physically managed properties. Again, everybody sort of kept moving–at a company called VMS Realty [Partners], which in New York became fairly large. Again, I was like the 70th person to go to work there. So I tended to show up at places that were blowing up and we’re getting bigger. We were closing one deal a week when I was at VMS; worked there on mostly analysis, but also some property management and investment side and then had my first experience at getting to work with the Sam Zell organization.

So I worked at the predecessor of Equity Office, which was called First Office, and oversaw about 12 office buildings throughout the United States prior to REITS and any other public money coming into that industry. Then, [I] ended up working on the Zell Merrill Lynch Fund, which was the first sort of public real estate pension funds getting back involved in real estate. I was basically the check and balance on the acquisition guys on what we were buying. I wasn’t always their favorite person but, you know, you learned.

And then I did a bunch of different things. [I] ended up back at EQR, both on the operations side and the asset management and investment side. And [I] really was there a very long time; almost ten years. That was where I had my portfolio—started out in the Midwest and then eventually had the work on the asset investment side in the Southeast. So that’s where I had about 40,000 units.

You could learn a lot. (laughs) However, my opinion of REITS are [that] they’re a publicly-traded vehicle that just happens to invest in real estate. So, you’re not really doing real estate. You’re really the stock market. Quarterly reports are important, stock markets are important, and how I ended up with working with Alex Rodriguez, which is where I am now. I met him through a couple of different people and actually used their construction company to do some of the rehabs at EQR, [and] got to meet them. [I] saw that they had a portfolio of about 5,000 units—which is a lot—that they had accumulated in two years. And the portfolio had issues; let’s put it that way. And I said, “Boy, I’m going to go from this job isn’t all that difficult” to “this job is going to become difficult.” And that’s where I’ve been since 2008. Good time to move, right? (laughs)

Aaron:

That’s very unique. I didn’t know that about sitting in Jerry Reinsdorf’s office on a folding card table. I’m sure you were whispering in his ear during the Bulls era. Your advice helped put together Jordan, Pippen, and everything else by some of your strategic counsel, right?

Stuart:

So I got to work on the [Chicago] White Sox acquisition. I didn’t get to work on the [Chicago] Bulls acquisition. That happened while I was there. I actually met my wife there. She actually was my auditor. That was fun.

Aaron:

Anything to clear an audit, right Stuart?

Stuart:

Yeah, right. Yeah, yeah, yeah. And even after getting through my creative accounting, she still was willing to go out with me. But she…she actually stayed during that whole time. I would tell you that—look, things were very interesting then; [in] 1979, you had 21% interest rates. When I say that to people, they go, “How did any deal work?” I don’t know. (laughs) I don’t know. And there was a period there for like two weeks where we laid off 50 people. The company, I think, was seriously considering “could this work?” Because they were basically doing public and private syndications.

When I left, there were over 300 people working there. So, I mean, the company had grown. I can tell you that Balcor had an amazing idea, and its idea is something that some other people are using now. They developed a relationship with Alex Spanos, who is one of the largest apartment builders in the United States; not just apartments, but he also built those low-rise like tech office buildings. But Alex, they’re also the owners of the San Diego Chargers at this point. Alex has passed, but his funding is there. And what Balcor would do in order to get deal flow—which for me was one of the coolest things I had realized and didn’t really understand—was they were buying properties that were under construction with earn-outs. So they were tying up deals before they even hit the market. So you had a pipeline of deals that were going directly from the Spanos Corporation, which is a company, family company based in Stockton, California that is building all over, and we were … we were basically giving them their take-out before the construction was completed. One thing to remember on these earn-out deals: if they didn’t hit their numbers, we didn’t pay as much. Right? So it was based on whether or not they hit their numbers, but it gave them the ability to keep getting bigger and bigger and bigger as well.

Aaron:

Did you join before or after Lehman in 2008? What was the timing of when you started, where I guess you met, you met Alex and everybody else before 2008, but I guess you started and it was like the worst financial crisis in our lifetime at that time. Must have been a fun time to start.

Stuart:

May 2008. Yeah. College is great, and I actually went back and got an MBA when I was 60 years old. So, I mean, I do want to keep learning, but the concept of what “CMBS” even was. Nobody really understood it. Nobody got it. They were just getting loans. They had no idea how they were being structured. So I joined in May [2008]. As you can imagine—and I know you’ve been doing this awhile—2006…anything you bought in 2006 and 2007, you probably overpaid for and you probably overleveraged. I mean, that was just, the market was bubbling and people were being able to put in CMBS debt plus another B piece plus a C piece. I mean, it was kind of crazy and they were packaging deals. Everything was fine until the economy went south. The worst part for me was finding anybody who had any ability or knowledge of negotiating or discussing your loans with special servicing. Nobody even had heard I think of special servicing at that point. And trying to talk to these people who are representing bond people…so it was a very, it was a very odd time. I also, four months later, got hit with Hurricane Ike which caused close to $12 million of damage to my Houston portfolio. So, it was an interesting first six months (laughs) to say the least.

Aaron:

Well, hopefully you weren’t second guessing yourself. And obviously since then, you’ve done [an] enormous amount of great deals and great market discovery and so on. So maybe walk us through those early years: 2008 to 2010. I guess everybody just sort of muddled through if you were in real estate, but I imagine you just got back to what you were good at: finding markets, finding deals, creating value. And maybe you could talk us through some of those early years at the company.

Stuart:

Sure. So, some of it also was learning how to be a workout specialist, which I was not (laughs), and being able to have discussions with lenders. Seriously, you couldn’t even find an attorney that had a lot of experience in those days saying, “Well, I’ve read the loan documents and I still don’t know who you should be contacting.” You know? And then you would contact somebody and they would say, “Well, I would have to take this to the committee.” What committee? What is it? What are you talking about? (laughs) So, you know, you have these bondholders and shareholders. And frankly, what I learned in those days was that you only have the power that’s given to you at that point. You can’t really take it. And if you’re a special servicer, you can only do what’s in your agreement. There’s also a huge conflict of interest because they continue to earn fees as a special servicer. So working out a loan with you isn’t always to their advantage. Sometimes it is. And I know there have been lots of lawsuits from bondholders and shareholders or whatever on those CMBS loans saying “Nobody cared about us. All, you guys wanted to do was milk this for another five… three years and keep taking a fee.”

I found that there were some that were better than others. I also found that if you were straightforward and honest with people, especially on the lending side, you accomplished a lot more. And I got actually to have a personal relationship with a couple of the guys who we, you know, who I discussed loans with. I mean, they’re non-recourse loans. You could walk away and turn in the keys and be done if you wanted to. But that wasn’t what I wanted. If you’re reasonable with them, and you understand that their job sort of sucks, right—because they have one hand tied behind their back—that they’ll go to bat for you. And they did. And I got several write downs, and I also got a bunch of things that had not been securitized and realized that every bank, if you remember, in 2008 [and] 2009 was freaking out on their loan portfolios. So I was able to get really large discounts on that. They said, “just let’s get out. I want out.” You know? “I want out and just get out of the loan. Tell me what you think you can get out.”

So I found bridge lenders. I had worked with bridge lenders before who had helped me get out of those kinds of things. And then I put money back into the deals. We recapitalized because they weren’t bad properties per se. They were just properties that were overleveraged. Some of them were in great locations. You know, you were never going to make it work. There was one property—and I’ll just give you a quick example: the occupancy would have had to be 108% for me to break even. It wasn’t going to happen, right? And when you show that to a lender, they go, “Oh, ok. So why do I want this back?” They don’t. They don’t. And I said, “I want to be honest with you, I can fix this and I can maximize the income.” And the best comment I got back from the servicing people was, “we visited your property. We shopped the market. You’re doing everything you can. We have no problem with the way you’re operating—trying to drive value here. You’re putting money back into the deal. You just have too much debt.” And, right, when somebody says that to you, you’re like, “Okay, well…”

So we were able to build our properties back up. We have new debt in place. I ended up refinancing a bunch of things and I didn’t sleep a heck of a lot for a couple of years. But when we came out of it, I said, “Wow, if we can do this, we can do anything.” We’ve been playing defense for two years, maybe two and a half. It’s time to start playing offense. The market is in a good place for us to be able to buy at significantly better pricing than we probably would have seen in the last ten years. We should start doing that and that’s when we started to start.

Aaron:

And one of the things you’ve done. We’ve talked about this a fair amount is you’ll sometimes skate to where the puck is going. You’ll sort of discover these markets and get in there a little bit before everyone is there. You try to find the 2- to 3- to 4-year window. Tell me how you fell into that for a strategic view, and how that’s worked to your advantage to sort of figure out markets before they the competition realizes that they are markets.

Stuart:

So my advice to people is you should spend a lot of time reading. There’s so much information. But most people are lazy and they don’t want to do it, so they don’t spend the time. The other thing is, is you got to get on an airplane. I had brokers who I became fairly good friends with who said, “I will pick you up at the airport. I need you to get on the plane. I have a deal that I know you’re going to love.” And you got to say yes, okay? You may not do it, but I will tell you, five out of five times I did that, I bought the deal and actually looked at it after 5 minutes and I said, “if the numbers work, I would buy this.” And they were in markets I wasn’t 100% aware of, such as Savannah, Georgia [and] Augusta, Georgia. I was in Raleigh before anybody was in Raleigh, you know? I’d never even known where Raleigh was.

We also focused a lot on the migration. There was a huge influx of immigration and migration by the Hispanic population in the United States. Charlotte’s [Hispanic] population grew. Raleigh’s Hispanic population grew. We saw a huge Hispanic population growing in Georgia. And we spent time because, by our definition, we are a “workforce housing” company. I probably should have put a trademark on that term because I started using it way before everybody else did. But we look for people who are renting by necessity, not by choice. And the Hispanic population, we found from our, from our investigation was extremely hardworking, will do whatever they have to in order to pay rent. There’s never a delinquency problem. Never, ever, ever. Once in a while, you do need your staffs to be bilingual. You do need to understand their culture. So I learned it. Look, I’m in South Florida. If I can’t learn the Hispanic culture down here, I shouldn’t be able to learn it anywhere. But we learned it and we found pockets. We found pockets in Raleigh. We found pockets in Charlotte. But the other thing I did was I really studied who are the governors? What’s their philosophy on bringing jobs into the States? Are they, are they like presenting companies with tax credits? So I asked people a question in one of my investor meetings, and I gave them five cities to pick where the largest BMW factory in the world is, and not one of my investors at my investor meeting—and there were probably 60 people there—could give me the answer. Well, I figured it out. It was in Spartanburg, South Carolina, which now they’re bragging on their commercials [that] they’re building all their SUVs there. That is bigger than any factory they have in Germany. It is humongous. Well, nobody knew about Spartanburg, and nobody knew about Greenville.

So, I started to look and I started, and I started to buy there. There are jobs. There are sustainable jobs. Those people are hardworking. They’re making good money. People didn’t know about that. Since then, people from New York have figured it out. You can actually fly there. So the end of Greenville. So they figured it out and you know, the market kind of got out of control. But so, that’s what you have to do. You kind of look at which governors, where are they pushing? You know, you see that Tennessee is very automotive-oriented. They’re really pushing to do that. Atlanta: I did not understand this whole motion picture thing. And then I spent some time and talked to a state representative and they said, “you’re basically operating tax free. If you’re in the movie business, why wouldn’t you do movies, produce movies and TV in Atlanta?” So, I learned about that. Those are the underlying factors for what builds my business, which supports my business.

Aaron:

That seems like more of a business strategic advantage; educating yourself, taking the time to educate yourself, leaning into where the jobs are going and the growth is going. What about just overall edge, mental edge? You’ve had, you’ve dealt with a lot of pressurized situation over the years. You have a massive portfolio, have a lot of investor, investors, partners, colleagues. What are you doing day to day to just sort of stay the course and deal with the ups and downs with managing a very large portfolio, and all the issues that come with it?

Stuart:

I turn 66 next month. About two years ago, I said the day-to-day operations are something that if I don’t start letting other people get more involved, we’re not going to have that planning, that succession-type planning in the company. So we made a decision to bring in a president of the company and let me focus on the investment side. Where I love, what I love to do, what I’m very good at. And to reduce some of the stress and pressure of the 140 some [odd], 150 employees we have, which are in 12 different states. You can’t be watching everything they’re doing. It’s not easy. And it takes a good team. And we built a good team.

On the investment side: so number one, my edge is you’ve got to be a sponge. You absorb everything you can. Now when you meet people, you absorb, you have…but the other thing is you have to really listen and you have to listen to your people tell you what they’re finding. I send other people to look at deals. I do see every deal we buy before we buy it. But I like to send other people out first. Give me your impression, and then when I go out, I can tell if they really are looking at the same things I am, but at least that’s one thing. So you want to listen to your people internally.

You also want to listen to your investors or your external people that are telling you what’s going on. And what I heard was one of two things. One, the market scared them so much that they’re just going to keep their money in cash. They don’t understand. They’re having trouble putting their arms around. And then I have the more forward-thinking people, which was what I was hoping to hear. And I didn’t force them to say this, which was I’m done with the market. I’m going into alternative assets. I can’t take this anymore. You’ve never lost 30 percent for me in 90 days. You’ve never done that. Well, the bottom line is, I’ve never lost anything. But the truth is, they’re not wrong. So you have two reactions, right? But you need to listen. I wasn’t going to put myself out there and create distress without listening to what the people really want. And, you know, you’ve got to really think about what’s your goal here. Is your goal to be the biggest? Never was, never was. Our goal was we don’t ever want to lose money on a deal. We never want to have that. We have avoided—knock on wood—we’ve avoided having any capital calls ever…additional capital calls ever. And those are things that I know maybe are not sustainable forever. But for right now, in my world, they’re sustainable. And I continue to focus on that.

But I want to know what they want, because what I want maybe doesn’t matter. You know? The other thing I’ve done is I got into the podcast world to listen to different people talk and listen to books, and to re-listen to books that I’ve heard a long time ago and try to spend some time talking to research and economist people that I know. And, boy, did that change your perspective. And that brings you down to where you become more confident. When you’re more confident, you’re less stressful. That’s kind of how it goes.

Aaron:

Well said. I think everybody can learn a lot from everything you just covered. Anything else we didn’t talk about that you think are important for listeners to hear? Sometimes I’ll ask, you know, if somebody managed to squeeze in for coffee on your calendar. Maybe they are a couple of years out of school, they’re starting to build a portfolio, maybe they’re at a big institution or trying to get to an institution, but they really want to build a portfolio long term for themselves or their investors. What type of advice would you give them today in this new world we find ourselves in? Obviously, the principles are the same, but things are always changing to either break in or start to be developing further in their career. What kind of best practices—other than sharing your story, which has been fabulous—anything [that] you think is important for those people to keep in mind as they progress?

Stuart:

Things haven’t changed all that much. Here’s the things I did, and number one, I focused on being a generalist more than being specific at the beginning. So you want to know as much about the different aspects of an investment; not just, “oh, I want to be a finance expert.” Okay, that’s great. Do you understand how to read a financial statement correctly? Do you understand how to operate a property which then gives you the ability to understand what a loan should look like or what you think you can accomplish? Do you understand the economies of the economy? What’s going on with jobs?

I wasn’t making a lot of money. I won’t date myself too much about how much I was making during my first summers at Balcor and my winter vacations at Balcor. And then I eventually went to work there. I was offered three jobs… and did not (misspoke)… choose the job that paid the most amount of money. In those days it wasn’t a lot of money anyway. Yes, my goal was to get out of my parents’ house as soon as possible, I wouldn’t disagree with that. But I also said, “where am I going to learn the most?” You know? And even though I was making not a lot of money, I always went to lunch when they asked me. And I didn’t always have the money to go to lunch. (laughs) But I went to lunch and I listened at lunch. And a lot of times they were talking business at lunch. A lot of times we were speaking with other people at lunch. And another couple of things I did was I spent some time, you know, I offered to take people to lunch. I offered to meet with them. I offered to do whatever. You know? I go after work once in a while and have drinks with people. Did I really want to be there doing that? No. And I was by far the youngest person there. I was 22 when I started at Balcor. There wasn’t anybody under 25 years old and I had zero experience. So I sucked up everything I could. I asked a lot of questions. I also tried to network with people outside of my area of expertise so I would go spend time just hanging out with the property management guys just to learn. You know? What’s going on here? Why is this happening? You know? And I spent time with the legal people even just talking it through. And one of the people actually eventually became the executive vice president of the Chicago White Sox and the Chicago Bulls.

And it’s kind of funny.  I talked to my wife about this all the time and I said my time with Howard Peyser, who was a really cool guy. I don’t know how to do that again, you know? And then later on, when I first went to work in a Zell organization, I had much more access to him actually, which at EQR you had no access really. But when I was on the office building side and the Zell-Merrill Lynch side, where he’s out there sweating, trying to raise money, and I sat with him and I listened to what he had to say. And he can be a very interesting guy (laughs) and he can be pretty tough on you. And, you know, and these are things that don’t cost a lot of money. But most people [say] “I got to go workout.” Yeah, but if you would have taken that workout and spent maybe 45 minutes sitting with this person and yeah. You have one beer. Okay, maybe you don’t love to do that, but, you know, you learn something. And for me, that’s…that’s a big deal. And I try to tell people that all the time.

The other thing, last thing, is when you’re in the apartment business and for those people who want to do that, understand that you’re really part capitalist, part sociologist. Right? These are people’s homes, and this is a community, especially if you start to get to two and three and four or 500-unit properties. Right? And following 9/11, where I was in the air when it happened, flying to Detroit from Minneapolis and couldn’t figure out why I was a half hour early until I landed and I got the last rental car that I could get at National. I drove to my properties which were in Ann Arbor, and I couldn’t believe what I was seeing. People were coming into the clubhouse. They didn’t know what to do. Their lives had been affected in ways that they didn’t know. Crying. Whatever. When we sat with my regional manager and she goes, “here’s what I think…. And I go run out to Sam’s Club, whatever.” We bought water, we bought snacks, we bought all sorts of stuff. We went and rented big screen TVs–in those days they were really big–and put them in the clubhouse. And we had people come together and they had support. They had a support system. At that point, I realized that we’re not just here to collect rent and fix a toilet once in a while, but for a lot of these people, we’re pretty much what they interact with on a regular basis. And I’ve tried to really make sure my people understand that’s what business we’re in. We are also in the business of making money. Excuse me, I don’t want to leave that out. But you can do both.

Aaron:

Well said, Stuart. I think somebody listening to this will take away a lot of different lessons. And your experience has been invaluable. And I surely want to have a follow-up call with you to see how things are going. But in the meantime, I want to thank you for being on today. It was wonderful and look forward to speaking again soon and again. Really appreciate you being on.

Stuart:

No problem. I still owe you lunch or coffee or something. So when you’re coming down here and you can’t take the winter, give me a buzz and we’ll…we’ll catch up.

Aaron:

Definitely. All right. To be continued. And thanks again for being on.

Stuart:

Take care.