E355: From Deal-by-Deal to a $6.5B Platform: Building a Real Estate Investment Empire

0:00So it's 2008. It was a global financial crisis. Most people were panicking. You went on this run of buying properties. You bought 9 ,000 units. How did you do that? Well, it's easy to make up a story looking in the rearview mirror, but obviously liquidity disappeared. People, I always say, had two black eyes and a broken nose. And fear really dominated the overall market. And we kind of did the opposite, not recklessly, but because we had great partners that had always kind of supported us over the years and just found this opportunity to go take advantage of others' misfortunes. I hate to really say it that way, but people were in trouble.

0:37We were able to step in, and we weren't buying distressed necessarily assets. We were really buying distressed capital stacks. And again, liquidity, panic, everybody was uncomfortable. And so you had these four sellers. HUD was, you know, liquidating pools of brand new assets. Everything was for sale and there was no bid. Maybe go a little bit upstream of that. You had already built a reputation which allowed you to go out and purchase these 9 ,000 units. Tell me about the importance of building those relationships ahead of time. I call it integrity. A lot of folks may call it something different, but we had really created people's trust.

1:15And this went back to 2003 with an old partner of mine when, you know, I met folks from my local gym, doctors, attorneys, lawyers. They were giving us capital to go buy our first few deals. And we had started to prove a track record. We had created this momentum. And then when 08 hit, we had had great returns, great transparency. We had built our reporting, you know, standards. So folks were actually really comfortable with us. So it wasn't a matter of would they do it. If we were getting behind it and the one question they'd always ask is, how much money are you and your parents putting in? My dad was a school principal, so, you know, it didn't have a ton, but they were all in with us.

1:51And that's really what built the foundation for us to go take advantage in that, you know, 2008, say 2009 to 12, buying those 9 ,000 units. Obviously, you're not impervious to fear, just like the rest of the market. What set you guys apart and what operating principles let you play offense when everyone was playing defense? So first thing was we didn't have any problems. And we were primarily in the secondary and tertiary markets, Albuquerque, New Mexico, Fort Collins, Colorado. My background had been real estate lending. So I always tell folks I'm a recovering lender. We did it. We would underwrite conservatively.

2:27We focused on basis. And this was a time where we're buying things for$40 ,000,$60 ,000 a unit that had been built for$100 ,000 plus a unit. And we were focused opportunistically on markets that had job diversity, durability. We weren't going to, you know, kind of a town that was a one trick pony. If that one employer in that town left, we were kind of left high and dry. So that's really what gave us the conviction. But you, David, you said something. It was operating. And so at that time, when you're operating in these secondary and tertiary markets and we were doing our own property management, we would buy our own flat roof coating machines and we were doing our own parking lots.

3:06And so that hands-on management at the time really gave us the benefit to go in and kind of even on top of the great basis, eke out more operationally when people and even residents were uncertain of the economic future. That's ironic because today with the amount of, you know, states that we operate, we actually don't have property management today, but that operating side during those times when we were kind of going into one area and people were really mobile to move with us, meaning our employees on the property management side, that made a huge difference. There's these different terms that people use in the institutional world.

3:44And my least favorite term is allocating. It's extremely passive. Then you could have investing. And then I think the best term is actually owning. What assets do you want to own? In this case, you were literally owning and literally operating those assets. So you knew it on a much more granular scale than say an investor or an allocator. I never say an allocator because I love that you brought that up because allocators mean that good market or bad market, you have to put money to work. And at Forum, we've always taken a little different approach that we want to have a flexible mandate. And I'm a believer there is an opportunity throughout every market cycle, just like what we've seen over the last few years, not a ton on the acquisition side, development really slow, but a ton of opportunity on the real estate, debt and credit sides.

4:25It reminds me of financier Bernard Baruch, 20th century financier that had this quote, the most difficult time to invest is now. One of the themes I've seen over the last three years of this podcast is every single time, everybody says we're in a very uncertain time. It's a very difficult time to invest. It has not changed over three years. Markets have gone down and up. When markets are up, then you worry about things being overpriced. When markets are down, you worry about the next recession and things going further down. There is no perfect market. No, there really isn't. But again, another learning lesson, going back to the allocator, if you're diversified in what you do as a company, there always should be an opportunity.

5:01I use the example, David, as a single family home builder. In the GFC in 2008, we had a few investors that were single family home builders with us, and they filed bankruptcy. And so I never wanted to be just a quote unquote, single family home builder. That's why we built the different strategies and solutions we have all in multifamily, right? Up and down the capital stack. So those were lessons learned, if you will, along the way that you want to have that diversity and not be forced to just invest or allocate capital. Expert calls have always been one of the most powerful ways to build conviction.

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7:19I think it's very emblematic of difficult times. You didn't even go out and buy 9 ,000 units that were selling for the lowest price. Because there was so much supply and so little demand, you were able to cherry pick otherwise great units. And I think that's lost on a lot of people during crises is because there's so much panic in the market, you're able to make these quote unquote obvious trades. For me, during the COVID, I was able to invest into Robinhood alongside Sequoia. And it was like this once in a lifetime opportunity where Sequoia was coming and saying, hey, do you want to invest with me?

7:49It's a very rare thing. And of course, a lot of family offices didn't want to back me at that point, because they said, well, it's COVID, you know, let us know when there's a better market. Of course, these opportunities really come once in a generation. But I think there's this mistaken belief that you have to make some heroic action and some very contrarian or very difficult to price asset, where in reality, when things are really difficult, just having a steady mind allows you to make the obvious investment. why did we lean in the GFC? Why are we leaning in now? And I would say it's conviction.

8:19And again, it's the Warren Buffett, be fearful when others are greedy and greedy when others are fearful. Go with your gut. And whenever I went against my gut, it was the wrong thing. Looking back, it's easy to make up a story. But having that conviction when others are scared, and you know, human nature, like even in the markets today, the broader markets, not just real estate, when you see the choppiness, when you see oil up, when you see the Iran war, what do people would typically do? Nothing. They sit still. That's the time to look under the cracks and say, hey, where is the opportunity? And that's what Forum is really good at doing is, you know, evolving, always asking questions.

8:55You know, where is the opportunity? What are we missing? And that's what kind of has set us apart and allowed us to find these outsized returns and not be quote unquote, the market like a big, huge fund that's an allocator. It's the beta, right? Like public reach today are beta. They're so big, it's like an aircraft carrier to turn them around. They got to do billions of dollars in investments. And when you have the ability to be nimble and opportunistic investors, that's where you create alpha if you have that conviction. I call that below the headline trade. I had the CIO of Texas Tech University, and he was actually investing into office spaces today.

9:32And if you ask anyone, that's the craziest trade. But he was able, because the headline was so bad, because so many people were ignoring the asset class. He went below there and similarly to you, went to secondary cities and went to where there's a lot of job certification. He was able to get these amazing trades because most people could not get past the headline. So there's these almost obvious below the headline trades in every single market that on a risk adjusted basis make a lot of sense, but nobody wants to do that because they're afraid of the headline. So we started the podcast talking about how you got started, how you scaled during the global financial crisis.

10:04Fast forward 20 years or so today you're at six and a half billion dollars and a couple years ago you decided to go from this deal by deal contract to a fund contract why did you do that i go back to the oh wait if you guys remember wachovia and washington mutual uh two banks that are no longer around we learned something from every downturn and one of the things we learned there was money was free and it was really cheap and so the deal by deal model worked number one for us and it built our foundation but it really limited scale and efficiency. So every raise we did was a transaction. Every deal required a new capital stack.

10:40And what I realized after the OE downturn was lenders, instead of doing 80 plus percent loans, now today, like on construction, are doing 55 or 60. And then you couple that on the lending side with inflation, the costs going up. And I just realized on top of those platform is probably the best word for it. Our platform was a deal by deal. And to go raise and send out an offering memorandum on a one-off basis to raise what used to be$10 million, then$20 million was now$30 or$40 million. It just wasn't scalable. I couldn't really see this company being more than just the next deal versus where we are today where we're an investment manager and platform.

11:19It's taken the better part of a decade to turn this whole ship around where we have built the foundation to go as high as we want. Otherwise, we would have been like a tree with limbs and no roots. It would have been all about the next deal versus what is the strategy or what are the solutions we're going after. So it was a hard transition, but in front of me at the time, it was very obvious that I didn't really have a business. I just had a collection of a bunch of deals. What needed to change going from deal by deal to a fund? What it allowed us to do, and the hardest thing I've done in my career is combine a real estate firm with an investment manager.

11:55So it was that shift of building an investment management platform that means you need compliance and you need tax and you need legal and fund operations. So it was really taking the time to attract deeper and more sophisticated talent. And candidly, we outgrew a lot of the talent over this evolution over the next 20 years or this last 20 years. Get to where we are today in the foundation and on the platforms that we are. One of the things we talked about last time that we chatted is the right product for the right market. In other words, the right financial product for the right investor base.

12:32How did you go about building this out? And what have you learned through this process? What I learned was don't ever tell the market what you want to do. They'll tell you very quickly what they want you to do. What's an example of that? When we first launched what is now our interval fund, we did it as a closed end. We raised$50 million, had an idea seven years ago in real estate credit space, and did it as a closed-end fund. I said, okay, once we get a track record, we converted it into a 40-act tender fund. Well, a tender fund, when you're going after RAAs, registered investment advisors, have sub-docs.

13:08Most advisors don't want to fill out sub-docs. So we made that misstep, and I said, look, what we need to do is go out to the RAA market. What's the right solution from them? So we put together eight different folks, had a half a day kind of off-site with them. And they said, look, we would love this product if it were in an interval fund with a ticker. So hence, a couple of missteps. Even though our performance, again, was great, it just took us that time to realize we should have done not – the middle step is where I went wrong with tender fund. What I should have done is gone from closed-end fund into interval fund, point-and-click, ticker symbol now.

13:44It's on Schwab, Fidelity, LPL, and the likes. So the lesson learned from that as we did other vehicles is we brought advisors together saying, hey, here's a, you know, equity vehicle that we're looking at doing. What's the right wrapper, if you will, or what's the right structure rather than us trying and thinking that we know what the market wants. And the lesson there isn't on the vehicle. It's on the process to determine what the vehicle is. And it's engaging essentially your customers, which are the investors and your unique customers to figure out exactly what they need. That's right. And I think the key lesson is capital isn't homogenous.

14:17Product design really matters. You famously did a project for Google, aka Alphabet. Tell me about that. And what were your lessons there? Yeah, so kind of fell into that. We had the first opportunity I mentioned at the beginning that we built in Boulder, Colorado, right next door, we did an assemblage. And we thought it'd be more multifamily, maybe some mixed use. As we had our plans going, Google came knocking and said, look, we want to do an expansion. A couple of things. the lesson wasn't just about doing a development. It was about creating credibility, that we had the team, that these large counterparties wanted alignment with us.

14:51They wanted predictability. They wanted communication. And it really elevated the standards that we had to operate at. You know, they're operating at the highest level. We had to as well. And once you learn how to operate at that high level, you really can't go backwards. So yes, it was a development. Yes, it was a very successful development. They eventually ended up buying it from us. But putting together the right team and creating that credibility was probably a defining moment for our company. You're a college football player. You were on many great teams. And you today have to manage teams.

15:26Talk to me about this evolution of deal by deal, buying 9 ,000 units, building a fund. How did you upscale your team? When you find something that just fits right, you end up wearing it more than anything else. And for me lately, that's been my rag and bone Miramar jeans. What really stood out to me is that they look like traditional denim, but honestly feel more like sweatpants. They've got that clean, structured look, but with a level of comfort that makes them easy to wear all day. I've been wearing them pretty consistently, whether I'm recording, traveling, or just out there during the day, and they become one of those go-to pieces I don't really have to think about.

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16:32Again, that's 20 % off at www.rag-bone.com with code INVEST. When you find something that just fits right, you end up wearing it more than anything else. And for me lately, that's been my rag and bone Miramar jeans. What really stood out to me is that they look like traditional denim, but honestly feel more like sweatpants. They've got that clean structured look, but with a level of comfort that makes them easy to wear all day. I've been wearing them pretty consistently, whether I'm recording, traveling, or just out there during the day. And they become one of those go-to pieces I don't really have to think about.

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19:14And I feel like I'm a great leader and a great doer. I'm an awful manager. Really, David, like there was never one aha moment. And I have a saying that leaders ask questions. And it sounds very trivial. deal. But it's always asking, like the old saying, like skate where the puck's going. It's always asking, well, what's next? Are we doing this right? Because the worst answer you could, an employee could ever give me if I asked, well, why are we doing this? They say, well, this is what we've always done. That's why we do it. It's like, no, there might be a better way to do this. And so always looking and seeing where the market is going.

19:44And so it wasn't a revolution. It was just an evolution. You just have to evolve into the market that we're going after from the investor store side, which is financial advisors, registered investment advisors, which can lead. They're just really an extension of our old friends and family that have advisors. That's how we kind of evolve leadership management and doing I think leadership and doing in some ways actually competes with itself. And I'll explain that. We talked about Alphabet, they famously had this 20 % of your time would be tinkering and focused on these skunk work projects, these projects that weren't expected to really go anywhere.

20:19But once every decade that you know, they would have like a new Gmail or something come out of that. One way to think about it is you have a certain amount of time every week. And if you are at capacity with doing, if at the end of the week, you're always exhausted, and you're always just getting by enough to do the tasks at hand, that time and that effort competes with leadership or thinking about the business. There's this whole paradigm about working in the business versus working on the business. The problem of working on the business is that you can't do it until you've worked in the business.

20:47So adding that capacity in your business and giving yourself the quote unquote time to think when you do your tasks and you have that extra capacity of time, that's when you come up with new ideas. Nobody stops to think, well, why did I have time to think about business? Why did I think about this upreap or these intervals? It's because you have that extra time. Some of my biggest breakthroughs are always when I'm being not doing. And that's when I get that white space just to think. And I think social media, the likes, just as you said, so much doing. When we started Forum, I said we were two guys in a truck.

21:18And we were doing everything. I was investor relations. I was HR, not very good at it. Probably would have fired myself, but I was our CIO. And as you evolve and grow, hopefully you're able to teach and backfill the folks behind you. And you fast forward today, we wouldn't have folks that, you know, came from S &P 500, apartment REIT, or Fidelity, or some of these household names. if I was still two guys in a truck. We had to continue to scale and build that infrastructure. And as I said earlier, and I never apologize for this, I have tons of empathy for people, but sometimes a company outgrows people.

21:57Maybe even me. I would say to my executive team, if I'm not the best leader, put me in my spot. We're very radically transparent with each other. And one of the things that my executive committee told me after our last offsite a month and a half ago, So we need you to be out focusing more on investments and more white space time. Your ideas, your creativity. Don't get me wrong. I go down rabbit holes a lot and hit a dead end and quickly and I say, okay. And so I try not to distract people in our company with my ideas. I have a place in which to, I call it our product development committee, in which to air or share those new ideas.

22:34I think a lot about how to get better ideas, how do companies get better at implementing new ideas. And I think you have to embrace the fact that companies that build on great ideas have a very low hit rate on new ideas. In other words, new ideas or being very entrepreneurial, being very creative, in essence, is a pursuit that can't have a high hit rate versus maybe managing and scaling incrementally. You could be predictive. You could kind of manage two quarters. But big ideas by themselves have a low hit rate. But that doesn't mean they can't 10x the business. can't create orders of magnitude of positive benefits in business.