Transcript

Aaron Strauss: Welcome everybody to “The Dealmaker’s Edge”. Today we’re really excited to be joined by Peter Borzak, who is the CEO and founder of Pine Tree. Pine Tree [is] uniquely positioned in the industry. It’s the sole private commercial real estate company in the US with a national institutional-quality, retail-focused platform, which invests and provides services to shopping center assets across the risk spectrum. Over $3 billion in retail assets under management. They’re really an industry leader in managing, acquiring, developing, and leasing, necessity based open-air shopping centers from coast to coast. An amazing team, Pete, you put together; we’ve talked about that in the past, and we’re just super excited you’re on and can’t wait to learn from your experience. So thanks for being here.

Peter Borzak: Thanks for having me.

Aaron Strauss: Maybe we could start from the beginning? You know, sometimes the pre-real estate beginnings…it sort of shapes the investor mindset early on. Maybe you could talk about some of your early beginnings, where you grew up, early experiences towards college, and shortly thereafter?

Peter Borzak: Yeah, so [I] grew up in suburban Chicago, in Evanston, Illinois—[the] home of Northwestern University, and my mom was on the faculty there when I was growing up. And [the] family had a printing business that my grandfather had started and my dad ran for his career. And [I] wasn’t really sure what I was gonna do as I was growing up and went to college in Washington, DC and at some point, maybe halfway through college, [I] decided I would go into the family printing business. And so [I] spent summers there and some of my vacations and was super close with my dad and my grandfather and would love to have worked with them. But when I got to my senior year in college, I felt like I needed to prove to myself that I could cut it in the world and that I could get a job and hold a job. And so, [I] decided to go a different path and had a conversation with them and said, “who knows if this is permanent”, but I’m going to just see if I can do something not in the family business. And so, was introduced to commercial real estate at that time and was lucky enough to be able to get a job out of college in a training program that my company had. So I was lucky to graduate at a time when the real estate market was pretty, hot and active.

Aaron Strauss: Yeah, that seems to be a big theme. People who graduated school and from ‘08 to ’10….

Peter Borzak: …Didn’t have that experience…

Aaron Strauss: …Exactly. And it looks as if it really was about a decade before you actually launched Pine Tree. [And] so [a] few businesses, a few companies… I’m sure you saw—from different viewpoints—the business broadly, but maybe some or one of those early themes that you decided you want to be an entrepreneur and really launch for yourself. What are some of those key ideas and thoughts that were percolating during those early years?

Peter Borzak: About being an entrepreneur and starting something?

Aaron Strauss: Yeah, exactly. Yeah.

Peter Borzak: So my dad and my grandfather were really ahead of their time in being what I would call “enlightened business owners” and “enlightened managers” around creating culture and the relationships that they had with the people that worked at the company. It was not a huge company. Chicago at that time had a lot of printing companies and was sort of known as a printing town. So they had a plant on the south side of Chicago; about 125 people. But the way that they interacted with the people that worked at the company and when they would walk me around, and I remember even as a little kid, they would walk us around the plant. And they knew everybody’s name. They knew everybody’s story, and they really created a great work environment. And that was at a time when people weren’t really talking about work environments or culture. And I think that experience really inspired me to want to be an entrepreneur; whether I was going to go into that business or do something different. [It] really inspired me to want to go down that entrepreneurial path. And so when I got out of college and started my real estate career, I had in the back of my head that at some point I was going to be interested in starting something or being part of something where I could help try to create that kind of culture that they had created.

Aaron Strauss: Amazing. And we talk about culture all day long here, and I think we’ve had conversations about in the past and famous [Peter] Drucker quote:“Culture eats strategy for breakfast.” Everyone plans a million things, but unless you have people who are rowing together who want to do it, it’s just not going to happen. Right? But that, that’s really amazing. You set out with the vision that’s in the culture. It’s really the only thing you can actually take from a company. You can poach colleagues, you can outbid people on assets, but that’s the way you feel every day. That’s a secret sauce. If I had to guess, I mean, beyond just the acumen but you probably could have been successful in anything if you focus on the culture first.

Peter Borzak: Yeah. I mean, I think, it’s a good thing for just as a society, it’s a good thing for us that this has become a focal point. And especially since the pandemic, I think there’s been a special spotlight placed on that. It’s obviously harder when you’ve got people that are working remote. But yeah, I think that’s one of the things that I enjoy most about my whole professional career is those relationships and trying to build that kind of camaraderie inside the company. And it’s a very collaborative business that we’re in. And so I think it is really a requirement to be able to deliver the kind of product that we want to deliver at Pine Tree; to have that kind of collaboration and that kind of camaraderie and the kind of interaction that the people inside of Pine Tree have with each other.

Aaron Strauss: Amazing. And even despite COVID, I know you did very well and we’re very active throughout that period. But before we get to that, maybe you can just talk about some of those earlier years. A lot of people look at you and say, “Hey, Pine Tree is this huge company, you’re the largest private shopping center owner.” I mean that’s not something that happens in one fell swoop. It happened from the very beginning and you start off with the right frame of mind as the culture. But, maybe you could talk about those earlier years? Somebody listening to this now may think, you know, “maybe I should start my own investment company. I should go be an entrepreneur and start a business.” You know, talk about those early years because people gloss over those after people become very successful.

Peter Borzak: So I don’t think we’re the largest private company, but we try to make our mark. But the early years, I started out as an analyst, as a financial analyst working in an acquisition program. And that’s still a very common career path today for people who get out of college especially are getting out of business school and you want to get into the transaction side of the real estate business, whether it’s on the debt or the equity side. Still a very common career path to be in a financial analyst role. And that role hasn’t really changed that much since I started. We were one of the first users of Argis and Argis is still the prevailing software package for projecting leases and financial results, you know, going forward. And so not a lot of difference from that role. So I worked at a company that doesn’t exist anymore in Chicago for a few years, and then intentionally went to a smaller company where I could see sort of how the whole process worked at larger companies. You tend to get a little bit more segmented in, in one area of the business and one function. And so [I] went to a smaller company to get an idea about how all the pieces fit together, and then had a chance to start a company in 1990, five years before we started Pine Tree. And unfortunately, I was too young and too immature at that time to understand the cycle that we were in and to understand the opportunity, and so [I] didn’t really take advantage of it, but it was still a great experience.

Aaron Strauss: Amazing. Any lessons if you were to do it differently in the beginning? Or, I mean, you started off with the mindset of culture, which is amazing, but I’m sure it’s always the deals that got away and such…but maybe talk about hiring, how you started to build the team initially? How do you frame out that organizational chart?

Peter Borzak: So I met the person who started Pine Tree with me; his name is Barry Herring and we started the company in 1995, and he was a retail expert and also a development expert. My experience had been much more general and much more on the investment side and had more relationships in the capital markets and among equity investors. So we had a really good sort of yin and yang combination of skills and experiences and expertise, and that worked really well. And so we started the company in 1995 and started with a couple of development deals and had a small team, and it was mostly high-impact people who could handle big segments of the business. So, you know, we had a leasing person, we had a person who was…could, it was sort of a jack of all trades who could handle property management and HR and IT, and run the office. So at the beginning, it was a fairly small group and as we grew as a company, we continued to build out the team and to sort of fill in specialties. And then as we grew and started to scale, that tends to get much more specific in the roles and we had less generalists and more people who were sort of what you call like a proverbial sharpshooter.

Aaron Strauss: Yeah. And I guess it happens fast. You blink and the time goes by, the years go by, all of a sudden you turn around, [and] you’ve got a hundred team members in an office and all these shopping centers and you don’t even know how you got there, I’m sure on certain days. But you put in the work, that’s for sure. And you built a magnificent company, team, brand, reputation that obviously you should be super proud of and it’s amazing. Maybe talk about some of those deals that really helped level you up to different stages. Sometimes it’s a portfolio, sometimes it’s taking on a big management assignment, but companies go through these stops and starts and big leaps. Maybe you could talk about some of those leaps because some people listening may have companies that are doing $X million revenue [and] want to take that leap. So it’s exciting to hear about those.

Peter Borzak: So I guess maybe there are a couple things I would mention. Some of the best learning experiences that we had [were] in our early years. We were strictly developing from the ground up. So all of our deals from when we started the company in 1995 for about the first ten years were ground-up developments. And so that was also a very specific niche in the business. It was done during a time when there was a proliferation of big box stores across the United States, and Target and Walmart and Home Depot and what they used to call “category killers” we’re expanding at a rapid pace. It was a good time to be developing, and we sort of rode that wave. But one of the things that was helpful was we had a couple deals, one in particular that was you know, where we had problems that popped up. We developed a shopping center in Wisconsin where our grocer went dark and our lender was, you know, a little bit freaked out about it. We had personal recourse and it was one of the first real sort of pieces of adversity that we had to deal with. But it was a good experience because I think it helped teach us how to keep our minds calm during a very stressful time, approach things on a very systematic basis, [and] figure out one step at a time how to get through the situation. We ended up doing a buyout from the grocer that went dark. We were able to get a large check, pay our loan down, replace that tenant, and ultimately sell that project at a small profit; not a large profit, but enough that we took something that looked like it could have been a disaster, and we turned it into something that was, you know, far less [of a] disaster. I call it maybe a passable outcome, but that was something that was helpful because real estate investment—especially real estate development—is fraught with issues that pop up all the time. And I think learning how to deal with those problems and learning how to stay calm and think rationally and clearly is something that I think is essential for being in this business.

Aaron Strauss: I couldn’t agree more, and it’s a theme we hear every day. Somebody called me this morning very stressed out, and I literally just told them, “It’s just today; one day at a time. You know there’s always going to be an issue. You don’t know what tomorrow will bring.” It sounds like you took a terrible situation. It turned into a home run because any profit on a bad sort of luck there is wonderful.

And talk about the necessity-based shopping center business, obviously retail pre-COVID and then, you know, the early years with e-commerce. We’re so far beyond that in different cycles and different reasons, but clearly necessity-based shopping centers have been the darlings through COVID and beyond, and people, they will shop online. They will always shop online, but you’re definitely still going to the grocery store. Maybe you could talk about how you got into that mindset to focus on necessity-based versus a lot of other sectors of retail obviously have struggled.

Peter Borzak: Yeah, so it’s a great question. At the very beginning, and this goes back to 1995, where almost 28 years ago we knew at the time that the enclosed mall was on a downward trajectory. It’s taken a while for that whole story to play out, and I think we’re seeing an acceleration of that right now with all the trouble in the enclosed mall space. And clearly there are some top performing malls that continue to do extremely well and are extremely relevant. But as we’ve all seen, there are a lot of enclosed malls that are not performing so well, that are being repurposed and, and having to be reimagined. So even at that time, we decided that the necessity-based shopping centers and retail sector was the most interesting for us, and the one that we thought had the most runway when the GFC hit. That was when a lot of the narratives started to get negative about retail. And coming out of the GFC, retail was the last asset class to recover. Multifamily recovered very quickly and then other asset classes sort of followed suit. It was a little bit longer for retail to recover. And then what we saw during the 2010s was this suburban migration driven by several different factors, including the boom in the millennial population graduating from college and entering the workforce. And they, especially then that group, had a particular interest in being in urban cores and in urban centers; and the cities across the country were flourishing and in a lot of cases at the expense of suburban areas. And we also saw the increase in online shopping in e-commerce. And those factors have created something of a rollercoaster ride for open-air retail over the last 12 to 15 years. But the reality of the sector has always been better than the narrative. Our properties throughout that period have continued to perform well. And when you’ve got a strong center in a strong location, and with the right mix of tenants, we have consistently been able to fill vacancies and keep those properties well leased. And so the actual performance throughout that whole period has been very strong. To your point, when we entered COVID, it looked at the beginning like it could be sort of the final nail in the coffin, and there was a lot of talk about, you know, “retail apocalypse” because of health concerns. People were having a lot of products delivered to their homes; open-air retailers were struggling, and we were getting a lot of rent deferral requests and it looked really troubling in the beginning of that period. But by the Summer of 2020, We saw a very different story and we saw people return to the shopping centers in huge numbers. We saw people migrating back to the suburbs in huge numbers for, again, many different reasons. Part of that was people’s interest in having more space generally both to be able to work from home, but also to be able to have more space from a health perspective. And in addition, I think the baby boom, or sorry, the millennial population that we’re starting to get a little bit older. It was now getting into a different phase of their life where they were getting married and having kids. And so moving to the suburbs made sense, especially with cities shut down. and that trend we see continuing to this day. And so the combination of people having needs for a lot of the goods that are being sold from open-air centers; equipping home offices from Home Depot, equipping home gyms from Dick’s. And when the world started to open up again, there were lines around the block at TJ Maxx’s and Rosses and Burlingtons. So we’ve seen huge success in the open-air model among grocery stores and among necessity based retailers. And so I think since the pandemic, the narrative around retail has become much more positive and people have much more conviction right now universally that OpenAir retail and brick and mortar retail is here to stay and is a necessary part of the omnichannel approach to retailing, which is sort of an industry buzzword, meaning good retailers have got to offer customers different options. And one of those options has got to be having a brick-and-mortar presence and a place where the store can express their brand and products and values and where people can either shop for products in the store, [or] return products they’ve bought online. They want to have options to create the relationship that works for them. And so we’ve seen a lot more confidence in the retail sector since 2020.

Aaron Strauss: Yeah, I absolutely…love the way you said it. The narrative certainly is oftentimes more negative than the reality. And we’ve talked in the past about the fact the returns are there. I think one of the issues, and correct me if I’m wrong, because you’re much more an expert than I am, you’re talking to the investors every day, with multifamily and industrial, the run that they’ve been on, and now that the rate’s coming up. People are realizing, well now you need a return. You can’t buy multi at cap rates, you know, where they are and the lending not being there to support the numbers. So it seems like there’s still a spread to make on retail and maybe now the institutional partners you’ve had are even hungrier for more product because they’ve got to get a yield. Are you seeing even more demand because maybe multi[family] is starting to taper off? Industrial seems to be still very hot, but it was always competing with those other asset classes.

Peter Borzak: Yes, we definitely are seeing more interest and more conversations around retail right now than we’ve seen in quite a while especially among institutional investors. And I think to your point, cap rates have been trading wide of interest rates and also wide of industrial and multi-family for a while. They continue to trade wide of those two sectors and even current interest rates. And so I think more and more people are recognizing right now that with the, as I mentioned, change in narrative because the narrative that the reality of the open-air retail space was never as bad as the narrative. But now that the narrative has gotten much more positive, I think a lot more investors either have turned or are turning to retail as an option for generating yield.

Aaron Strauss: Yeah, absolutely. And you’re the perfect company and person to take advantage of that, and you’ve always attracted tremendous interest, so it’s a wonderful time. Speaking of that momentum, what do you think the next few years hold for you if you can, you know, sort of map out you’re always in growth mode, you’ve been from day one, but do you have sort of goals or targets, or…we sort of have to float where the opportunity is. Do you have, you know, are you very bullish in trying to acquire a lot in the relatively near future?

Peter Borzak: We’ve had a really big acquisition year since about the fourth quarter of 2021. We’ve acquired about $450 million in open-air shopping centers across the country. And not [I’m] sure that the next couple months will be quite as active because at this moment there’s a lot of…trepidation around the capital markets and around where the economy is going. But we think that 2023 should be a really interesting year for making investments and potentially taking advantage of some opportunities and see if there’s real distress or not, but I think in open-air retail space, I think it’s going to be less about distress and more about, you know, just finding interesting opportunities to make investments. And there will be some groups that are going to want to sell assets and, you know, we’re hoping that we’ll be able to continue to grow.

Aaron Strauss: Amazing. And I’m sure you will have no doubt. What about the mental aspects? You oversee a lot of people. You’ve got a lot of things on your plate. So how do you manage the head space day-to-day? I think that’s a question people like to ask, people who are managing a lot of responsibility.

Peter Borzak: Well, the first answer would be, having a great team and a great group of people both at the company but especially at the manager level. And we’ve got just an incredible group of people at the company, but managers who are handling the day-to-day functions of the company, the day-to-day reporting and overseeing the team. And during the pandemic, as we know, all companies had all kinds of issues with you know, people who had, family members who were sick, people who were sick themselves, people who had you know, just issues taking care of parents, dealing with kids and school from home; there were just a lot of complications in people’s lives. And so creating an environment where people had the flexibility to be able to deal with their lives and also deal with work was really important. So I think that’s the first most important answer.

But I think the second one, and partly to what you’re asking, is my sort of philosophy over the last few years around my professional life has been that rule number one is keep your mind calm and everything else is a distant second. I think the ability for any of us to just be able to keep thinking in rational ways and not respond to things emotionally or impulsively is a really…is something that I aspire to. It’s something that I strive for. And I think that’s a really important element and different people have different ways of trying to get to that space where you feel that your mind is calm. For me, I like to work out a lot and that’s one of the ways that I release stress. I go to a boxing gym three days a week and that helps me work things out. I also listen to a lot of music and that also helps me try to get myself evened out. But it’s definitely something that I try to focus on.

Aaron Strauss: Well said. Amazing. I know mental health is a topic that everybody needs to discuss all the time, and it’s good [that] it’s getting more awareness these days. It needs to just be something that you talk about at home, but now it’s sort of, percolating work and it ties to the culture you need to bring your whole self. And if your whole self is not all there, then everyone’s going to suffer and really appreciate those insights. Peter, as long as we have you, is there anything else I should have asked you or could have asked you or would’ve asked you that you would’ve loved to answer, that you think would be something good for people to hear or know about—in the broad scope, either real estate or general?

Peter Borzak: No. I think we’ve covered it. I appreciate you having me. I think the only thing would just be that people should look at the reality of retail real estate. I think that they will find that it’s a really healthy sector and the retailers right now are really healthy. One of the things that the pandemic did was clear out some companies that [were] teetering and maybe we’re not meant to survive long term, but that space has been filled and our sector is in really good shape right now and poised for the future.

Aaron Strauss: Perfect. Well, Pete, it’s been an amazing conversation. I really want to thank you again for taking time out of your extraordinarily busy day and all your responsibilities you’re juggling and really looking forward to staying in touch and talking again soon. And again, thank you so much for being on.

Peter Borzak: All right. Thank you Aaron. Appreciate it.

Aaron Strauss: Of course.