Transcript

Aaron:

Today, I want to welcome our very esteemed guest. It’s an old friend of mine, Daniel Klein. He’s the president of Klein Enterprises, a fourth-generation developer, owner and operator of commercial real estate through the mid-Atlantic region. In his role as president, Daniel is responsible for the company’s overall performance managing debt and equity leasing, asset management, development, acquisitions, with the primary focus on sustaining the company’s existing portfolio while handling that long-term growth. And Daniel, you’re doing a great job and you’re coming off of a large closing and you’re also very young. So we’re really excited that you’re on the podcast today. Thank you for being here.

Daniel:

Thank you very much for having me.

Aaron:

What we like to do to start, is we really just like to dig into people’s personal background.  I know you started in the family business, but the company morphed into a lot more than that. Maybe you could just give me sort of broad-brush strokes, a few minutes for our listeners, where you grew up, where you went to school, how you got started in the business, that type of thing?

Daniel:

Sure, absolutely. So I’m born in Baltimore, Maryland, and grew up here. And eventually after Baltimore, I did a year of boarding school; a school called Mercersburg Academy in Pennsylvania, and then went to college in Boston at Boston University. My background in Baltimore was sort of a little bit unconventional. Even though we’re in a family business, my father passed away when I was very young – when I was four, and my mother had a lot of mental health issues, and so I ended up moving in with my grandparents after my freshman year in high school. And that sort of ties in with the real estate story in a way, because my grandfather that I moved in with is the one who really had started what was sort of the genesis behind Klein Enterprises, and I ended up sort of getting the education at the kitchen table with him while I was in high school and working for the company over the summers back then. I worked as a maintenance man, really a maintenance boy at that time when I was 14 or 15 one summer and I worked in the office one or two summers. I think the second summer actually I got fired by my family. But that’s a separate story….And then it sort of gave me sort of the platform to be interested in real estate.

And while I was in college in Boston, I actually worked as a residential real estate broker and thought I’d end up moving to New York and working in investment banking or doing something in that direction. But my grandfather, who really was my father who had raised me, was 86 when I finished in Boston and asked if I would move back to Baltimore and work with our family business, which was a solid business, but pretty small in scale at that point in time. And he was somebody I couldn’t really say no to. And so I moved back to Baltimore in 2004 and thought I would give it a shot for a year or two. And here I am today, 18 years later, running Klein Enterprises, and I’m very proud of what we’ve been able to grow and achieve here.

Aaron:

For sure. And I think on your [web]site you have a quote from your grandfather: “Always remember that talent gets you nowhere if you don’t apply yourself and put in the hard work to produce something.” And what a quote that is that you’re a testament to. I’m sure you think about that all the time.

Daniel:

Absolutely. He was a big believer that there are a lot of people in this world who have the skills and the abilities to go places, but they don’t actually apply them. And I was fortunate that he taught me about a lot of people that he saw himself who maybe had the talent but didn’t have the will to achieve what they wanted to achieve in life.

Aaron:

That’s a great quote and great story. And you really bring that to bear every day. We really want to get behind that, too; that perseverance. And you’re coming off of a large deal. I know [you have been] working really hard on for a while and we’ll get to that as well. But I guess from there, just delving into the business, how are those early years for you? Sort of just you learn from the bottom up literally, but maybe you could talk about some of those earlier years doing acquisitions coming up. Really young, that type of thing.

Daniel:

Sure. Well, you know, after working as a residential broker in college in Boston, I actually took a pay cut to move back to Baltimore and work with my family. I remember when I moved back in 2004, we had seven or eight employees in our office, and I spent the first two years sort of rotating around and learning all aspects of the business. And we were a modest company that had ownership and probably 15 shopping centers in the Baltimore metropolitan area at that point in time. I don’t think there was a better time to come back and get that exposure because for the first three or four years that I was working with my family, we were unsuccessful in probably 8 to 12 bidding opportunities in acquisitions of shopping centers. We were having trouble finding development sites because everything was sort of at the height of the market and the economics just weren’t making sense in a lot of transactions. Rather than being a big company where if I was on an acquisitions team, I’d put the bid in and we wouldn’t win it and I wouldn’t learn anything. My grandfather would actually sit down with me after we put a bid in and let’s say we’d offer $10 million or something and it would sell for $13 or $14 million….

He’d run through the economics with me on the interest only loans that people were underwriting, the 25% rent growth that people were underwriting, and just how it didn’t seem sustainable and it didn’t seem right. And I think it positioned us in a really healthy way where once the downturn finally hit in 2008 and 2009, that we were in very healthy position financially and we didn’t have any bad deals that were weighing us down. And it sort of gave us an opportunity to look ahead with a fresh start as to how we wanted to grow a company coming out of the downturn.

Aaron:

I know a lot of people struggled then, and you’re lucky that you were positively positioned at that time. One thing that we talked about a while ago—and at this point it may have been years. You know some people may be listening to this that are in a family business and family businesses have different family dynamics. They’re businesses, but they’re different in many ways than obviously institutions and other more corporate structures, if you will. I know you were really active from a very young age years and years ago, going back and positioning a family business to be more institutional in nature, not institutional in the stuffy sense. But with different governance and structures and pieces of the puzzle in place, you can really put together the scale. And I think a lot of family companies, they just say, “well, my dad had these assets, my grandfather had these assets. I’ll continue to have the assets, maybe buy a few more.” But you really thought much bigger. And that, I think, catapulted your growth. And this is a conversation, I think going back years. Maybe you can describe to listeners how you went through that thinking process about how to really grow the infrastructure and the corporate governance as you scale.

Daniel:

Absolutely. I think it took some time in terms of those first two years where I really felt like not a lot was happening, and I felt like we were just being stewards of the assets that we had, but not trying to actually grow the company for everybody’s benefit. And, you know, other than my grandfather, my late uncle and my grandfather passed away back in 2010, but my late uncle, Michael Klein, was a partner in the business as well. And he sort of espoused this philosophy that my grandfather’s generation lived to work, and my uncle’s generation just worked to live. And I felt like it didn’t necessarily need to be either one. But by hearing a second or a third generation take that approach that they’re just working to live as opposed to putting in more effort and take advantage of the opportunities that they’re given, it would always anger me. It’ll always make me upset when I would hear him say it publicly, because I would look at what we had and say, “This is an amazing platform and most people start with nothing.” And so the base that we have is something that we should be grateful for and we should take advantage of the opportunities that we’re given. And it ties in with a lot with some of my family history beyond my father passing away young. I have a sister who passed away when I was 15. And so looking at the opportunities that they missed really has driven me to sort of look at the opportunities that I’m in a position to take advantage of. And I also see a lot of other family businesses that would just sort of maintain what they would have and it never seemed to end well. Families grow, generations shift. And it’s always seemed to me that if you’re not attempting to grow what you have in a healthy and responsible way, you probably won’t end up with much when you’re all said and done. And I’ve always been motivated by the statistics that people give that by the time you get to the third generation, only 2-3% of family businesses still exist. And who knows what the quality of those businesses are. And so hearing that also, I’ve been a big believer that there’s nothing wrong to start out as a family business and to evolve into something that’s more stable and more secure and healthier that can serve a broader base of people for many years to come.

Aaron:

Well said, and I think that’s a struggle. People get emotionally attached to the family bonds. It’s hard to think on a macro level. There’s obviously complex relationships on the deep, deep level there to …evolve. But evolve you certainly have. And I know it was almost about a year or so ago. You had a $2 million investment in Almanac Realty. Tell me about how that came to be. To the extent you can share, and I know it was years and years of positioning yourself in more of that corporate structure like we talked about, versus “we’re a small-knit family business.”

Daniel:

I think the origin story there actually goes back to adversity in our family business and issues that I was experiencing sort of as a next generation leader in our family business. I became president here at Klein Enterprises in late 2009/2010 when I was 28 or 29 years old. And I was equal partners with my late uncle, and we grew the business from maybe $150 million of gross asset value then to up to about $1.2 billion today. And you go through a lot of growing pains as an organization, as a company, when you are doing a lot of new transactions with new structures. And a lot of it came to a head with my uncle in the summer of 2016 where, you know, I don’t talk about it that frequently, but I have shared with others that we were having so much conflict amongst the two of us that I was prepared to leave Klein Enterprises and go start another company. He was mostly retired. We discussed a formal sort of transition of him out of our operating company for a number of years, and he was creating a lot of issues with our growing team and our personnel with Monday morning quarterbacking and just allowing ego to get in the way of doing what was best for the company at the time. It came to a head, and we sort of had to sit down about it. And if he wasn’t prepared to have a formal succession plan or a transition plan for operating company, I was going to go. And he recognized that he needed to walk away from the operating company, not ownership of his real estate, but the operating company, so that I could hire the best people possible to build out the highest quality team that we could have to grow. And that transition and that transaction where I bought him out at the end of 2016, beginning of 2017, really laid the platform to allow us to bring in a lot of really unbelievable people to help build out our team.

I was able to hire our general counsel, Neil Schechter, or Chief Investment Officer Sean Garland, our Chief Financial Officer Aaron Levinoff, and build the infrastructure to allow us to continue to grow. And that allowed us to go into a process where we did a portfolio-wide roll up, which started at the beginning of 2018 and we formed a holding company that would have ownership across all of the assets in our portfolio. And we invited a lot of our [] partners and non-family investors to come along with us. And we started out with an entity January 1st, 2018 that had about close to $150 million of net equity value. And that infrastructure that we built with our holding company allowed us to really take that institutional step to evolve our company and evolve our organization, and [it] allowed us to get a corporate credit facility and allowed us to have a clearer vision about who we wanted to be in the future, not just who we were in the past.

And we continued to grow that holding company and to grow our asset base and grow equity base. And that sort of helped open the door for an institutional partner to come in and invest in our holding company. So that way we continue to grow our platform over the next 5 to 10 years.

Aaron:

I’ve always been impressed by how you’ve taken the family business and institutionalized it. I find that there’s either [] institutions or family businesses and there’s so much stress in between. You’ve put in a lot of work, I know, and you simplified that for listeners, but I know there was a lot of heartache and a lot of effort from your team and you personally—and congratulations on that.  And bringing it to present day, fresh off the press, you just acquired nine shopping centers across: Maryland, Virginia, Pennsylvania, over $130 million transaction. I know you worked really hard with that on your team. It was… Cedar Realty Trust was the seller. So maybe you could talk about that too a little bit.

Daniel:

Sure. There’s some irony behind this transaction because our roots are in grocery anchored shopping centers and effectively from 2012 to through 2021, I put forth so much effort to diversify our portfolio to get away from being 100% retail. And we developed about 2,500 Class A apartments during that period of time. And really our team did a great job of executing on the diversification. And so to come back in full circle and acquire 800,000 square feet of retail all at once in a single closing from a seller that—in the process of selling themselves were dissolving—was a symbolic transaction that as we’re growing with our core roots, while also still focusing on these other asset classes.

That’s a deal that was really originated by DRA [Advisors] and KPR [Centers]. I’m sure a lot of people have heard about it. They went under agreement to buy 33 centers from Cedar [Realty Partners] for north of $800 million, and they spun off a number of closings and a number of the assets and we ended up acquiring nine of the assets in the mid-Atlantic region on the same day that DRA and KPR acquired the rest of the assets that they didn’t burn out. And that’s the type of transaction that needed north of $50 Million of equity from our side. And it’s the type of transaction that we’re comfortable that we can perform on, given that we have a really excellent private equity partner and when we have a good transaction that makes sense economically and fits in our wheel-house we can perform on, and that’s a testament to our team here. Also, I mentioned we had eight people when I moved back here. We have 25 people in our corporate office today and we have a deep bench of analysts. We have deep bench and property management, and we have a deal team that’s really strong that can work together to execute on complicated transactions.

Aaron:

Well said and well executed. And again, if it wasn’t for all the infrastructure you worked very hard to build and that partner you brought on, this deal may not have happened. So it’s important for listeners to appreciate that you can’t just walk in and acquire that deal. It’s many, many years of infrastructure and development of the team, etc.

Daniel:

Closing a transaction like that and buying 100,000 square feet of retail all at once. You actually sort of just laid it out for me. But our philosophy here for the past five or ten years has been to build up our infrastructure so that way we have the necessary team on hand where we can execute on the opportunities that we know will be coming to us in the future. And I think this one is a great example where we closed our private equity partnership last year and they committed $200 million to Klein Enterprises. We didn’t know where the deals were going to come from. We had a nice pipeline of transactions, but not to satisfy $200 million of commitments. But we sort of espoused internally that once we have the capital commitment, we need to have the personnel and the team ready because you never know where these opportunities are going to come from. And the Cedar Portfolio—or the portion of it that we took down—is a great example where our existing long-term relationships reached out to us, knowing that we had the capital behind us and knowing that we had the team capable of executing the transaction like that. And we negotiated an off-market transaction that we closed less than 90 days after it was introduced to us. And without the right team and without preparing the thinking ahead to what types of opportunities we would see, we would have never been able to do that.

Five years ago, if we would have received this call, we would just said “You know what, that’s too big for us. We’ll pass.” When we get these calls now, everyone is excited and ready to embrace these opportunities to see what we’re able to take advantage of and what we’re able to achieve as a company.

Aaron:

I think you hit it right: “relationships.” You have those relationships in place, you bring it together with your team, mix in some capital and a little bit of luck; you’re on your way. So you’ve really put in all the major ingredients. It’s incredible to see. One of the things we’ve talked about in the past is you’re now in a position to also invest in some operating companies yourself, companies that sort of their mission or what they’re doing day-to-day on a deal flow perspective is accretive to your broader ambition. I don’t know if you can describe any specific deals—and you can keep it generic—but how does that work for you as a strategy? I know sometimes whether it’s a family office or institution, they’re looking for growing businesses to invest in on their own. In addition to growing their core portfolio.

Daniel:

You know, tied in with our growth, one of the things we learned when we originated KE Holdco, which is our holding company—and we had a few subsequent roll ups along the way—is that as we add existing partners who in their own family situations were looking for ways to diversify just being concentrated in a few assets that they saw the value in rolling their equity interests up into our holding company, we realized that as an external strategy, to look at other families or other companies that may not have their own succession plans in place or transition plans in place, that we could be a good alternative for them to roll their operating companies up or their real estate portfolios or portions of their portfolios into our holding company. Candidly, we’ve been so busy focusing on our development pipeline and our acquisition transactions, and those deals take more time; we haven’t actually executed on the M&A side with any other real estate firms yet; not because the opportunities aren’t there, but the psychology involved in families making that leap is just more of a cultivation process as opposed to the Cedar Deal, for example. We got the call three months ago and then we’re closed today.

And so we’ve also had to figure out where we want to expend our energy as we’re looking at opportunities because we see so much and we have that problem already because we have a diversified portfolio. Out of our $1.2 billion of assets, about 40% of that gross value is in retail, about 45% is in class-A multifamily, and the other 15% is in that bucket of what we call “everything else,” but really consists of flex, industrial, office, and self-storage. And so filtering out our opportunities across all of the asset classes that we’re already operating in takes enough energy and effort that we haven’t been able to focus as much on the M&A side as we’d like to. But we do think there are a lot of great opportunities out there.

Aaron:

One of the things you touched on earlier in the beginning of the conversation was mental health. And I think mental health goes a long way as far as if you can get your head on straight, you could actually be available for your team to execute at a very high level and to make it all flow. It’s very stressful taking down $130 million transaction, even if it comes from a relationship and with all the equity aligned and all the chaos that involves, but also just being a steward for all the capital, all the property management, everything you’re doing and all that you went through in your childhood. How do you manage the day-to-day stress? What type of mental tapes do you play in your head to sort of carry on day-to-day? I’d love to hear about that.

Daniel:

Sure. I’m definitely somebody that learns from experience and having been directly involved in experiences and walking away and saying, “How did it impact me? How did I respond? What did I do to make myself a better person coming out of it?” I absolutely take time for myself, even if I get back on and I sit at my computer and I work from 10:00 at night to midnight when everyone’s sleeping in my house, I carve out the family time in between. I coach my kids’ sports teams. I still actively play on a 40 and up lacrosse team. I play on an ice hockey team. I play tennis. I’m very focused on physical fitness as a way to have an escape from the grind of the wear and tear that your body can take mentally dealing with work environments. And I’m also a very stable person emotionally because I’ve seen so many people who were unstable around me that I always expect the unexpected. And so the little things that can add up during the day don’t really bother me. But I definitely have people here in my office who wear their emotions on their sleeves and serve that role on my behalf. So everyone sort of has to play their role. And we have people here who definitely do deal with a lot of those burdens. And I figured out eventually at this point in my life, in my career—I’m 41 now—where my strengths are and what sort of brings me up versus what brings me down. And I think it’s very important for people to sort of step back and recognize that, and also sort of be open with the people that are working with about where you are at any point in time in terms of how you’re feeling about a situation and not to keep it all bottled up. And I think that transparency and clarity really help out everybody at the end of the day.

Aaron:

Yeah, there’s so much to unpack on that topic that I always like to try to hit it.

Daniel:

I can go as long as you want. People in my office actually get annoyed sometimes because I don’t ever get angry, mostly because I realize how precious every moment we have is. And if I were to spend it being angry, it’s not going to help anyone else. At the end of the day, you know, I feel like I’ve developed a Ph.D. in psychology at this point in time. Real estate is an industry that everybody knows has very low barriers to entry, and the counterparties in every transaction are completely different. You can sort of use the Forrest Gump box of chocolates analogy. We could be working with a mega institution on a transaction at 10 a.m. that has 12 people from their deal team working on the deal that you need to keep in the loop on something. And at 1:00 in the afternoon, we could be dealing with a guy who literally dropped out of high school and started his company in a pickup truck that he still drives around and is his only partner in the company. And it’s really important to step back on any transaction or really any interaction in life and to process who’s on the other side of the table from you and who you’re dealing with and what their motivations are and what they’re trying to achieve. Because every situation is different.

And even with the same company, if you’re dealing with a company three months apart, their situations might be different. And it’s really important to step back and sort of take measure or take stock as to who you’re dealing with and what you’re dealing with, to have some empathy and to understand who’s on the other side and realize that sometimes the transaction is going to be easy and sometimes it’s going to be difficult. And you can have both of those experiences within two days with the same person that’s on the other side of the table.

Aaron:

Anything I haven’t asked you that you wish I would have asked you that you can really articulate some of your thoughts about whether it’s dealmaking, goal setting, day-to-day grind, managing?

Daniel:

I think for any real estate company that’s growing, I think the issues that we deal with today as an organization—as a company from a strategic perspective and an HR perspective and a personnel perspective—really relates to sort of where we are operating, where our portfolio is, and how we’re growing. We … our holdings today are in five states along the East Coast of the United States, and we were only in Maryland ten plus years ago. There’s more travel. There’s a fragmented workforce. We have to manage our time obligations as we’re looking at opportunities in different states. We have to vet out what we’re actually looking at. And so that also ties into sort of how we how quickly we say no to something. I’m not someone who’s very good at saying no, period. It’s one of my weaknesses, which is also why we have some great people here who know how to say no on my behalf because everyone says I’m too nice. And so looking at opportunities and figuring out very quickly, does it fit within our criteria or not? Do we say yes or no when an opportunity comes in?

We’ve had to get much better at because we would spend too much time a few years ago looking at deals that were too small, not accretive to our mission, and also it ties into sort of thinking about where I was ten years ago and where our company was ten years ago versus today. I look back ten years ago and my plan at that point in time was just to work extremely hard and grind it out and grow our company steadily and consistently. You know, not really looking to the future as to what the future would hold. And my personal philosophy at that point in time was as long as we continue to do good deals and expand our asset base, everything will fall into place. And I feel like now it sort of has fallen into place. But now that we have 25 people working here and we have a private equity partner and we have north of $1 billion of assets, we actually have to have [a] very clearly laid out strategic plan for our company and for our partners and for everyone that we’re dealing with to understand what we’re trying to get to and what we’re trying to achieve. And so now when we look at transactions, we ask ourselves the question “Is this consistent with the strategy and the plan that we’ve laid out?” And if it’s not, that’s how we’re able to say no.  

Aaron:

Well said, Daniel, I really appreciate you being on. I just think your story is terrific. You overcame a lot of adversity in your personal life. For a young guy, you’ve built a lot. Your future is very, very bright. [You] took down this exciting deal. I’m sure there will be many more to read about in the papers over the next year or two. And I really want to thank you again for being on with our listeners. I’m sure a lot of people can learn a lot from your story. And I guess we’ll wrap it here. But again, thanks again, Daniel. You’ve been an amazing guest.

Daniel:

Well, I greatly appreciate it. And a sidebar to being a guest on this podcast is I’m finally moving up close to you. We’re relocating to Bergen County [New Jersey] in about a month. I’m in my last ten days here as a full-time resident in Baltimore with my family. So my wife and four kids and I are all moving up to Bergen County. So now all of my friends in New York mostly are aware, some of them may hear it on here first and look forward to seeing everybody up there.

Aaron:

Amazing. And we’ll roll out the red carpet for you for sure. Daniel, thanks again for being on and I can’t wait to hear more updates over time.

Daniel:

Thank you very much.

Aaron:

Thank you for joining the Dealmakers Edge. Don’t forget to follow us on your favorite podcast platform. Give us a five-star rating so more people can follow the conversation.