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A veteran real estate professional, William Newman is chairman of the board and chief executive officer of New Plan Excel Realty Trust, New York City, a New York Stock Exchange-listed real estate investment trust and one of the nation’s largest REITs. He is a former two-term chairman of NAREIT, the industry organization that represents the nation’s real estate investment trusts. In 1996, he was honored by that organization for his pioneering REIT industry leaders hip. In 1998, he received the Real Estate Entrepreneur of the Year Award in the annual industry awards program spons ored by Ernst & Young.
Named one of the most distinguished alumni of Baruch College of The City University of New York, Mr. Newman has taken a leading role in forming and funding the Steven L. Newman Real Estate Institute, which boasts a distinguished board of real estate industry leaders, and in encouraging the establishment of the College’s and New York City’s first undergraduate program in real estate. Both the institute and the Bachelor of Science in Real Estate and Metropolitan Development program are housed within Baruch’s School of Public Affairs. Mr. Newman chairs the advisory board of the institute, which he and his wife, Anita, endowed in 1995 in honor of their son.
William Newman was born in New York City and educated in city schools. He majored in accounting at The College of the City of New York (CCNY) -- "Downtown City" -- later renamed as Baruch College. Upon graduation, he became a certified public accountant and a partner in his father’s accounting and real estate syndication firm, a predecessor company of New Plan Realty Trust.
Under William Newman’s direction, New Plan Management Co. became a public company in 1962, and he was named its first president. Mr. Newman was also appointed chairman in 1971. In 1972, the company became New Plan Realty Trust, a real estate investment trust, with Mr. Newman serving as president and chairman. In 1992, New Plan became the nation’s first publicly traded billion dollar REIT. In 1998, Mr. Newman oversaw the merger of New Plan with Excel Realty Trust, creating a real estate company with assets of $2.9 billion.
Mr. Newman is a member of the Chief Executives Organization and the Metropolitan Presidents Organization, "graduate" groups of the Young Presidents Organization, of which he was a member. On four separate occasions in recent years, he has been awarded the Wall Street Transcript’s gold, silver, and bronze medals as one of the best chief executives in the real estate industry. During the administration of President George Bush, he served as a member of the President’s Real Estate Advisory Committee.
The following is a talk given by William Newman at Baruch’s School of Public Affairs on October 6, 1999, to students in a capstone class in the undergraduate real estate and metropolitan development program.
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The best way I can give you some of my ideas on real estate is to describe my career from the time I entered what was then CCNY’s School of Business . I had been preceded there by my father and my mother. My father graduated in the Class of 1926. My mother had me instead. My late brother also graduated from Baruch. The president of our company graduated from Baruch. So we have a long history of affiliation with the school.
Briefly, my parents were immigrants who got a free education here. I went to school at Evander Childs High School in the Bronx and later commuted down here to school by the 3rd Avenue El to 23rd Street, which was the school’s only building at the time. I was originally in the class of 1946. However, in 1942 a small event called World War II came along, and I joined the Navy, having taken the test right here in what is now Mason Hall. I was only 17 at the time, so I figured it was a good way to get out of classes for a day.
Lo and behold, I got notice that I should come down for an interview. Which I did. I don’t know if you still have ROTC nowadays? Well, we had Reserve Officer’s Training Corps at the time. I was a sergeant. It helped me get into the Naval Officer’s Training Program, and I think that was one of the important milestones of my life. By that time I was a junior; in those days you could get into college at 15 years old, and that’s how old I was when I started at Baruch.
In the Navy I got used to running a department as an officer. I got used to dealing with older people. I was still a kid, barely 19 by then. I got used to working in this particular office, which was called the Area Petroleum Office. We did all of the accounting and requisitioning for the entire Pacific Ocean petroleum needs. We were working with billions of dollars. It was excellent training.
I would say that before I went into the Navy I was a rather indifferent student. It was wartime. Most of my friends and I, our minds weren’t on academics . I was copy editor of the Ticker. We spent a lot of time perfecting our pool games, going bowling, and playing hearts in the Ticker’s office.
When I got out of the Navy, though, I buckled down. My grades went up, and I worked part-time for my father, who by this time had a small CPA firm with about 10 people. While I was away in the Navy, he had started buying real estate with some of his clients. Syndication was a particular New York phenomenon. It was not a national movement of any sort . Every body did it their own way, and it bore little resemblance to what’s going on today in syndication.
We worked mainly with our own clients or their relatives. Being very unsophisticated, we didn’t realize that the syndicator shouldn’t put his own money into the deal. So we invested as a family. It has stood us in very good stead. Anything you bought in those days turned out to be good and profitable. We had no promoter’s "edge," other than the fact that we got paid for management and leasing, and we got paid for doing the accounting for these various syndicates.
Lesson number one: I think the best way to get into real estate is through management -- management and leasing. Everything after that -- the financing, the buying, the selling -- really rests on the knowledge you gain by understanding the bricks and the mortar, understanding how to lease space . Those are the basics of the industry, and I think you would be well served to go that route.
The syndicates we had, as I mentioned, were fairly small compared to what goes on today. One of the other lessons we learned was, don’t go into a deal with partners. The best deal we almost bought was killed by somebody who was not as knowledgeable as we were and wasn't willing to commit, or delayed the deal long enough so that we lost it. At that point I made a vow to myself that we would never go into a deal that we didn’t control.
So here I am. I’m back, graduated finally in 1947. Originally I was in the Class of '46, but I got alot of credit for my Navy service. Professor [Emanuel] Saxe -- a very eminent member of the accounting faculty here -- evaluated the returning veterans' credits. I had gone to Williams briefly in the Navy. And when he asked, "What is this 'ECO 12?'" or whatever it was, I answered very quickly, "Statistics." As a result I got credit for statistics, and never had to take what was then considered the toughest required course. So if I’m weak in statistics nowadays, you’ll understand that.
At any rate, I got out, graduated in 1947. From 1947 to 1962, I was largely with my father in syndication. And one of the things that I learned was that accounting was a wonderful background, but it’s not necessarily the be-all and end-all in business. It has stood me in very good stead all these years, but the real estate business has been a lot better and a lot more profitable for the same amount of effort. Maybe it was because my father’s clients were mostly furriers on 27th and 28th Streets, and you had to fight for your fee at the end of the year, while as managers of a building, we were in control of our own destiny.
I used to say that if I weren’t being paid for what I did, I would pay for the job. I was sort of half serious. I eventually wound up in the Young Presidents Organization -- I don’t know if you’ve heard of YPO, but it’s something you ought to find out about eventually. They ran a motivational seminar. Learning about yourself and what makes you tick is an extremely important thing in life. It turned out the YPO tested you -- and this was scientific -- on your need for power, your need for affiliation, and your need for achievement.
I reviewed the graph that they prepared for me, and I said, "Gee, it looks like I’m a power-hungry maniac. I’m in the top five percentile of the need for power, and as far as achievement, I’m also way up there, and as far as affiliation (being one of the boys), I’m below the average line." And a Harvard professor there said, "Bill, no, you’re not anything other than an entrepreneur and a typical YPO-er." But what it told me was that these were important things in my life. I discovered that many friends of mine who had not gone through this exercise and had sold their companies and made millions of dollars were the most unhappy people I knew, because it really wasn’t dollars they were interested in: They had to run their company and not be part of another company. It’s a very important lesson, and I’m sure there are plenty of psychological tests around that can be used.
When I entered it, the New York real estate syndication field was very freewheeling. There was no regulation; no government filings were necessary. You prepared a document -- it could have been a single sheet of estimates or it could have been a little booklet -- but nobody checked it, and you went out and raised money on that basis.
This went on for awhile until one of our larger syndicators at the time got into trouble. He misrepresented some of the facts in a deal, and the Attorney General stepped in. We used to have a Syndicators Association and I was part of it, vice president in fact, and so was he. He told us the story about how his people marketed his real estate deals to individual investors. He had a whole floor, a "bucket shop" of people calling. He said, "I went up there one day, and I was listening to these guys selling the deal, and I didn’t recognize it. It wasn’t the deal that I put together. So I said, "What did you do, Lou?" He said, "I got out of there! I didn’t want to disturb them."
At any rate, once that happened, I saw a regulated future, whereas before we had not had any filings to do. There were no expenses involved. I wasn’t sure I wanted to stay in the industry, and that’s when we looked at going public. And in 1962 we had what is today called a "roll up." We got all of our syndicates together -- it sounds a little bit more grandiose than it actually was -- but we had about 13 properties that we had syndicated, mostly, as I said, with my own accounting clients. We sent out an offer to exchange their interest in these properties for the stock of a new company called New Plan Realty Corp. of Delaware.
Up until that point, we were one of the last syndicators around. There had been a big syndication move, but after the Attorney General got into the game, and after economics killed some of the others, we were sort of a dinosaur, one of the last floating around. So we went public in 1962; we’ve been public now for 37 years.
The way we went public determined our next 10 years of existence. We had no underwriter. We sold a little bit of stock, but mostly it was an exchange offer. We had a total capitalization of $6 million, of which $300,000 was equity and $5.8 million was debentures.
It was a peanut at the time: a dozen or 13 properties. And we stayed quasi-public for eight or nine years. There was virtually no trading . We were over-the-counter, and a few companies traded our stock, but you pretty much had to do it by appointment rather than in the free market. But all during that time we perfected our own skills, and eventually we attracted the attention of a Wall Street firm then called Burnham & Co., which eventually became Drexel Burnham. And today it’s back to Burnham again. They bought into the company.
This was the next major lesson I learned in life and in business. They came in, and agreed to pay $10 a share, but they were going to pay it over four years. After the first two years, when they had about five dollars paid, the stock was selling for four. They still owed five dollars per share, so there was a good deal of unhappiness on their part, and they tried to rescind the deal. We turned them down.
Every one of these things could be a little case study on its own, but one of the things I learned was about this business of Wall Street involved in real estate. I was walking on clouds when they came into the company. They bought 15 percent of the company in letter stock, which means that it was restricted. I was patting myself on the back for this great affiliation, and after about a year or so they came to me and said, "Bill, we’d like you to do something." "What’s that?" I asked. " Well, we have this other company that we bought into, and we’d like to combine the two." I said, " Oh, what do they do?" "They buy old property on the West Side." "Okay, who’s going to do what?" I asked. "Well, we’d like you to step aside and let them run things." That was like a bucket of cold water thrown over me. Here we were, we thought, on top of the world. But we learned that people on Wall Street rarely have the same goals that you do. Their interests are some times the same as yours, but most of the time they’re not. They want to get out within three years. They want to triple their money. And that’s it.
So I was really flattened by this request of theirs, until I remembered that my family owned two-thirds of the company. So I respectfully declined to go into their program. Those other guys they were going to merge us with have had a meteoric disappearance from sight; never heard from them again. In fact, Drexel Burnham had a meteoric disappearance.
At any rate, during the period from 1962 and even after Drexel came in, we were quasi-public, as I mentioned before. The stock wasn’t going anywhere. We couldn’t raise capital of any sort. Money cost us more than you could invest it for.
In 1972 we actually tried to go private. We made an offer to our share holders. The stock was selling at about four or four and a half. We made an offer buy all our syndicate participants’ stock for a $10 debenture. The stock was paying $0.30 a share per annum at the time, and the debenture would have paid them eight and a half percent, $0.85. Most of the share holders were my father’s clients, well educated, and they asked what my family was doing. And I said, "We’re staying with the company. We’re not doing anything." And the typical answer was, "Well, you must know something we don’t. We’ll stay with the company, too." So we still have to this day some of my father’s old clients, shareholders who are in their nineties, or if we don’t have them we have their children or grandchildren. And it’s been a family-run business since 1926 in a way. Still is.
After failing to go private, we looked around and decided that we’d become truly public. The only way to get really public was to become a real estate investment trust (REIT). Everybody else who had originally been syndicators was out of business. The companies had met amorphosed into other lines. And here was this little industry that was formed by an act of Congress in 1960 and had gone nowhere. It had maybe a billion dollars in gross assets all together, because it was considered very restrictive. At that time you couldn’t operate your own property; you had to use an outside managing agent. You couldn’t buy and sell. You couldn’t have any income from non-real estate sources.
Most people were very leery of the format. However, we felt that we could operate under that format, and so we reorganized from a Delaware public corporation to a Massachusetts business trust. (Massachusetts was where the REIT format had originated, and the state had more REIT law on its books than any other state.) At that time we had four classes of stock. We had corporations in about 15 or 20 states that all had to be merged, with various taxation problems. If we had known how difficult it was going to be, I don’t think we ever would have started. But not knowing the difficulties is sometimes a very good thing in life, because then you set your sights and you go for it. And we did.
At the time my family owned too much of the stock for us to qualify as a REIT. We owned 47 percent of the company, and that was a no-no as far as the REIT regulations. We had to either raise the bridge or lower the river. We either had to sell off, which we didn’t want to do, or get the capitalization higher and thereby reduce our percentile ownership. So we had to have an underwriting, and that’s where Burnham eventually came back into the picture. They were our first underwriters.
It was like getting into a cab years ago and offering the driver an extra tip to get down to the dock in time to get onto the Titanic. Which is what we did. We broke our backs to become a REIT in 1972, and the industry sank underneath us in 1973. That’s a whole story in itself, and I can go into that briefly.
The REIT industry had, for those days, a huge amount of money poured into it over a very brief period. It had gone from a few billion to $20 billion in two years. Most of the REITs in those days were formed by institution. You can picture a brand new company, with new personnel, no portfolio, new typewriters and filing cabinets, new secretaries, everything brand new. The people running it, say for the Chase Manhattan Bank, were usually people who had reached their top level of promotion -- good old Charlie, we can’t promote him any higher, let him run the REIT. This was what happened throughout the industry, and as a result, the lending institutions formed these REITs and they became a profit center for that particular institution. There was no incentive for REIT personnel, because they couldn’t give Charlie an incentive without giving their own people the same incentive back at the main office.
In those days, the format was to sell a $10 stock and pay a dollar dividend to create a 10 percent yield. After expenses, that means you had to invest at 12 percent in order to be able to pay out. And everybody was cookie-cutting these deals. The only place in the real estate field that would produce that kind of yield were construction and development loans, probably one of the riskiest parts of real estate investment . Any thing that isn’t existing, where you can’t tell what you’re going to hit when you get into the ground, is a problem.
The other problems that existed were that all of these REITs -- and bear in mind, 95 percent of the industry had no operational knowledge of real estate to speak of -- were lenders. As a result, when we had what was probably one of the worst real estate recessions starting in 1973, combined with runaway inflation where interest rates went over 20 percent, this was a formula for disaster. Like all good formulas, it worked perfectly. Out of $20 billion, the industry lost over $12 billion in equity and borrowed capital. It was set back for about five years.
However, we at New Plan were different from most of the others in that we were a REIT equity: we owned our own property. We had been public for 10 years. When we went public we had an experienced management team. We had a portfolio we’d been working with for all these years. As a result, we survived very handily. Almost the entire industry cut out all dividends, if they didn’t fail altogether. We never missed, delayed, or reduced our dividend. In fact, in 1979, we were the first company that had the temerity to come back to the public market to raise money. There was a front page article in Barron’s on "this sturdy little REIT" that was back and raising new capital. It was just unheard of.
We were pioneers in that respect. By this time we had more or less evolved a strategic plan, which we didn’t have as syndicators. As syndicators, if somebody sent in a good deal, whether it was a taxpayer in Queens or an industrial in Chicago, if we could make money on it, we would try to syndicate it.
Now we are more focused. We have shopping center properties in 31 states. We directly own 38 million square feet, and another seven million through joint ventures that we’re involved in. In that end of real estate, you’re in the retail business; you’re partners with the retailer. Why? Because every one of our leases has a percentage rental clause. Based on sales. Even if the retailer is selling at a loss, you still get a percentage. He’s the guy who’s keeping the store open until 10 o’clock while you’re playing golf. And he’s working for you. So anything that you can do to help the retailer in the way of maintaining the premises—advertising and whatnot—is a very important factor in your business.
Now while we’re talking about my company’s portfolio, we had one apartment house when we were syndicators. We now have 55 projects with 13,000 units, but that’s a sideline with us. There’s a question about whether we will keep them.
I want to talk a little about the REIT because that’s our business. A REIT is best described as a closed-end mutual fund that only can deal or largely must deal in real estate. Basically, 75 percent of your assets have to be in real estate or real estate–related investments, and, similarly, your income has to pass this test. The final requirement is that you have to distribute 95 percent of your taxable income.
Advantages and drawbacks: It’s hard to build up capital when you’re paying out 95 percent. Most REITs pay out 100 percent. You have a little bit of a spread, a cushion between taxable income and cash flow or, as they call it, funds from operations. We only pay out about 70 percent of our funds from operations, so we have a cushion of about 30 percent. But my feeling about REITs is that they are the greatest thing to come along in real estate since the expulsion from Eden.
My feeling is that anything that is really good for the individual investor has got to be a good thing. For the individual investor the REITs solved almost all of the drawbacks to real estate investing. What are the drawbacks? The first and obvious one is liquidity. There is very little liquidity in owning a property. It’s difficult to buy. It’s difficult to sell. One of the reasons it’s difficult to sell is because everybody puts a price on it that’s 10 percent higher than the highest price he ever heard for a similar property. But if you want to sell a share of General Motors, you don’t set your price, the market sets it. Liquidity is solved by the REIT because you wind up with a share in the company. If you don’t like it, you pick up the phone and get rid of it.
The next thing that it solves is the amount of money necessary to get involved in real estate. You can have a kid who gets a bar mitzvah gift and buys a share, or you can have the largest pension fund in the western world, which is a Dutch one, own five million shares in New Plan -- they have invested over 100 million dollars in our company. And this is the same format for both the kid and the pension fund. Anything that can accommodate such disparate investors has to have some thing good going for it.
There is the advantage of professional management in all of its aspects. When we say management, you really have to be a pro when you’re buying, when you’re running, and definitely when you’re selling real estate. And this is provided by a properly run REIT.
The last drawback to individual investment in real estate is the lack of diversification that exists when you own one property. You buy a building and they change the road pattern or the demographics change. There are many reasons that one individual property is vulnerable. And this is solved by a REIT to varying degrees, depending on the company. If you like a certain area of the country, there are REITs in that area. You can invest in certain types of REITs. There are office building REITs, shopping center REITs, enclosed mall REITs, golf course REITs. There is even a prison REIT. I’m not joking; they lease prisons to various states. So REITs come in all sizes and shapes.
The other advantage that REITs have is a visible track record. They’re public. You can go back 10 years and see what they’ve been doing and how well they’ve done in different periods. You have a regulated industry. You can’t have a REIT that goes into electronics; unfortunately there are some variations of that. But in general, you have to stick to your knitting if you want to be a REIT. This is enforced by the SEC and the Treasury Department, who check up as to whether or not you’re living up to REIT requirements.
You have what to me is one of the best advantages, and that is constant scrutiny of your company. Now this is great for the share holder, but not so hot for us. Besides the SEC, you’ve got the New York Stock Exchange. You’ve got the media that follow REITs. If you’re of a certain size, you’ve got analysts from virtually every single investment banking firm analyzing you. You have your outside auditors and directors, unlike many of the big public syndicates of a number of years ago, most of which went broke: then people would not know how their investment was doing until they got a notice that it was worthless after a 10-year period. With REITs, you, can pick up the paper and see how you stand every single day. Real-time pricing. I’ve often said that with all the scrutiny, I don’t mind being examined under a microscope or being looked at with a telescope, but when they start using the proctoscope, I start to object. And that’s the way you feel sometimes.
At any rate, with all of these regulations and whatnot, the REIT, I think, is a very fine format for the investing public. It hasn’t hurt us. We’ve gone from being the smallest REIT to, at one time, being the largest in the country. We were the first ones to hit over a billion dollars in market capitalization. Since then, the industry has more or less exploded, and now there may be 20 odd companies with over a billion in capitalization. The securities have become acceptable for institutional investors. It used to be pretty much the province of the retail investor, the individual. But today the market is being driven to a large extent by the institutions: the pension funds, the money managers. Occasionally, they try to call the shots as well, but we haven’t had too much trouble in that department.
For a while, New Plan was the one REIT that shone like the beacon in a dark sea. When everybody was cutting their dividends, we showed that we could increase our dividends. We started increasing our dividend in 1979. We’ve increased it every single quarter now for the last 20 years. Every single dividend is larger than the one before, which is a tremendous advertisement for the industry. It shows you can do it. We did most of it without any debt. We showed the world that you can operate without leverage.
Until about seven or eight years ago, none of our properties had any mortgages on them. We were able to raise equity capital at a cost well below the yields available. So we showed the world that under the right circumstances, this is something that could be done. As a result, sooner or later, the industry exploded around us, and now it’s a couple of hundred billion dollars in size. Every single investment bank has their own analyst.
Right now the industry is in the doldrums. It is not favored by the investing public. The yields available on REIT stocks are tremendous. Today our dividend alone is roughly 10 percent. It’s hard if not impossible to buy real estate with that yield. We all sit around and gripe about it in the industry, but the main reason, in my opinion, is that we are very unglamorous compared to the Internet stocks. I have friends who are always saying about the stocks they’re investing in, "Wow, it went up five points yesterday." We wouldn’t go up five points in two years.
The same thing goes for the money managers. You’ve got a young guy who’s running a billion dollar fund, and if he can hit a home run somewhere on an electronic stock, he’s not going to go into a stick-in-the-mud real estate stock. Even though we’re a basic. And we’ve had people say that they’re starting to cash in on the Internet stocks and get back into basic values. We’ve just got to be patient at our end.
New Plan as a REIT has been a very good vehicle. As a public company, our dividend has gone from 19 cents a share per annum to about $1.64 over our life time. We’ve grown exponentially. And we’ve been very happy. The REIT format keeps you out of trouble. As I say, you can’t go into electronics and still be a REIT.
| QUESTIONS AND ANSWERS | ||
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Question:
It’s obvious that you have many talents. But I would like to know which talent of yours has contributed most to your success?Answer:
I don’t know if I agree with your basic premise. Being an accountant, I think, was one of the main things that helped me to understand business. And I was fortunate enough to have a father who was probably one of the best businessmen I’ve ever met. He may not have been the best accountant, but he was a wonderful teacher. When I got out of the Navy, my desk was in his office, and I tagged along with him wherever he went and learned about life and business that way. He was the kind of accountant that people trusted. I remember somebody brought their fiancé e to meet him just to see whether he approved. You know, the way some people look at doctors today, that’s how they looked at him. I’ll tell you what else: having the kind of personality that has to be in charge is important, I think. I don’t say it’s a plus as far as a character trait, but it drives you. And then the rest is common sense—a big dose of that.Question:
don’t mean to sound pessimistic, but are you prepared for a downturn in the market or a big increase in interest rates?Answer:
Yes. It’s a very good point. We feel that the portfolio we put together is not recession-or depression-proof, but it’s depression-resistant. We invest mostly in community shopping centers: strip centers, not enclosed malls. The main anchors of these are the supermarkets or the K-Marts. These stores are the last to feel any recession. People have to eat. There was a time, probably before your time, when there was a gasoline shortage. People couldn’t get gas, and as a result didn’t drive the five miles to the mall but shopped right in their neighborhoods. We noticed during this tough time that our supermarket sales went up, because people were not eating out as much in a bad economic climate; they were buying groceries and eating at home. So our portfolio consists mostly of retailers selling necessities. Also, we’re unleveraged. We have no mortgages. What happened? They can’t take the property away.I’ve always felt that safety was my primary concern in investing. Not how much you’ re going to make, but how much you’ve got to lose. And very often, all the time in fact, we take a worst -case scenario when we’re buying a property. What happens if so-and-so goes broke, and we can’t re-rent it? What is our yield then, and is it unacceptable? And so "safety first" has always been my byword and ought to be yours if you ever get into that end of the business.
Question:
How does New Plan differentiate itself from other REITs?Answer:
In a number of ways. First, we have a longer track record than anybody else -- we’ve been around since 1926. If you think about it, that’s maybe a quarter of the life of this country. And we’ve always done well. We’ve got, for our industry, a very good balance sheet: only about 30 percent of our total capitalization is debt. We have diverse properties, as I said. We have 350 properties. Not any one of them, if it fell off the face of the earth, would make us vulnerable, or even cause us to reduce our dividend. That’s one good thing about being big. Another good thing is you can get good people to work for you. You can pay more money and not feel it. When we started out, if we made one lease it could shoot our funds from operations up by 10 cents a share. Nowadays, we have to get a million dollars in increases to do that.But in general, we’ve also learned, through one of my friends who was my teacher in this, you keep the banks protected. You never renege on any kind of bank deal, and you never surprise them. More important: they don’t care if you tell them, "Hey, we’ve run into an iceberg here, we’re going to have problems" as long as they know about it. It’s a very important lesson. Banks are wonderful partners. All they want is their money with interest. They don’t want a piece of the deal. For many years, we were about the only viable REIT that could go to the public market. We kept Merrill Lynch’s corporate finance department in real estate alive single-handedly. They were down to two people. We supported them. So track record is a meaningful thing.
Question:
You described REITs as unglamorous compared to the Internet. For a lay person, I have no idea about investing. I’d like to put my money in stocks, and I’m looking at the Internet stocks, and they’re paying big bucks.Answer:
I don’t think they’re paying big bucks. I don’t think they’re paying anything. None of them that I know is making a nickel, but the public has pushed their price up. They go down just as quickly. I hope I’m not being forward in anyway by telling you, I’d stay the hell out of it. Buy a money market fund before any of that. Unless this is really risk capital and you don’t mind taking a shot at it, if you would have gone down to Atlantic City and bet the same money. If you’re looking for income -- again, maybe it’s special pleading -- but the REITs are in a very good position now for people to invest. And get a guaranteed -- at least guaranteed in my mind -- nine percent yield. You know, it’s better than utilities. And if you want to go into the market that’s basic. You should have part of whatever money you invest in something like that.Question:
You said earlier there was a problem with commercial leases if they were rent-controlled, and you try to stay out of New York because it’s very hard to do business. Is there a reason to continue to stay out of New York if the rent-control laws change, and, just in general, how do you choose which properties are acceptable to you?Answer:
Well, we got out of the habit of investing in New York. My family owns a piece of New York property that was never part of our public company. But what I’d like -- you know, it’s sort of wishful, wistful thinking -- is to have the Newman Institute create bridges between the public and the private sector, because the word "landlord" is still a dirty word to a large part of the New York City population. And it shouldn’t be. You could see the kind of invective and venom when they were talking about changing the rent-control laws. I have no personal or business interest in that, but I hate to see it. It’s not being handled on a logical basis, and I think it’s counterproductive. But that’s my personal opinion.What I’ve often said is, I really am not happy about being a captive industry in New York City, because it is so highly politicized. Why is it that the New York Stock Exchange is constantly threatening to move to New Jersey? They have to fight to be able to handle whatever taxes are being levied on them.
There’s nothing more captive than real estate, and it just hasn’t worked out. We have gotten out of residential. We’ve gotten out of office buildings. We used to be in the office building business at one time. There are no 500,000-foot shopping centers in New York City. So it has been a combination of both things. What we do like to invest in is largely in the suburbs or in small towns. It’s just that New York is your home. You grew up in New York. It’s the best.
I love New York, possibly in are as other than real estate. You know, you’ve got one whole segment, the residential segment, which is rent-controlled. There was a time a number of years ago, long after commercial rent control came off, when things got a little tight on the office end. And sure enough, in the City Council, there were proposals to reinstate commercial rent control. When we buy residential property -- we buy it throughout the country -- we usually avoid any place where the renters outnumber homeowners because there is the possibility of rent control being put in. But outside of New York, it rarely if ever happens.
Question:
How do you feel about the hybrid REITs where they purchased mortgages?Answer:
How do I feel about it? Well, I’m always prejudiced in my own favor. I like REITs that are more or less focused. And hybrids by nature are not. For instance, we have some mortgages in our portfolio, but they are the result of having sold the property and taking back a purchase-money mortgage. The mortgage REITs were largely discredited during the seventies, and I’m not a big fan. I like equity. I like people who know what they’re investing in, know how to run it, know how to manage it. But after all these years, I’m entitled to certain prejudices.Question:
Why do you specialize in retail properties?Answer:
Just by accident I guess. We invested in one retail property -- I’m trying to remember which one was the first -- and it worked out so well, we sat down and analyzed it. Did we bring anything to that particular deal? Sure we did. We understand what makes a retailer tick. We know what he needs. We know who he wants to have as a neighbor. One led to another. You establish an infrastructure of management specialists and leasing specialists who are familiar with the retail end of real estate. We saw that we were not particularly enamored of every aspect, like enclosed malls. It was our good fortune to not be a ble to buy any enclosed malls in the early days. These were the darlings of the pension funds. And the prices that they commanded were ridiculous. They sold for 6 or 7 percent yields. And we couldn’t afford it. Our money cost us much more. So we never got into enclosed malls. In time the world changed.American retailing has gone through dramatic changes in the last few years. And I’m not even talking about the Internet, where the returns aren’t in yet. But what happened was that the entire trend has moved toward what is known as "value retailing." That’s a fancy word for discounting.
What has gone on? You’ve got the K-Marts and the Walmarts. Then you have what is known as the "category killers" in our business -- Barnes and Noble, for example. All of a sudden, you know, you don’t have the little musty bookstore on the corner, you have a 35,000-square-foot monument where you can have your coffee and get every book that’s ever been written, and with the computers they can do whatever they want. Others in that group are Toys "R" Us, Circuit City, Pet Smart. These category killers put everybody else out of business. Nobody today pays full price for a book.
Finally, you have what I consider the cutting edge of that trend: the factory outlet center. I like them, because we’ve got six of them. We’ve got about two million square feet of them, and they’re great. But every dollar spent in one of these establishments is a dollar and a half that isn’t being spent in Macy’s or in the conventional department store. And I think it spells a major change in conventional retailing. So, as far as I’m concerned, enclosed malls a resort of dinosaurs; they’re still roaming around, but I don’t know how much life they’ve got left. They’re fighting back in other ways. We like community centers that sell largely necessities.
Question:
What are the company’s goals? You aspired to $100 million (in purchases) for the year, and it looks like you might fall short. As we enter the fourth quarter, are you likely to be more aggressive?Answer:
No. Absolutely not. As I mentioned, I’m in the middle of a search for a new CEO, and one of the things I remember from some of the YPO seminars that I attended for awhile was "management by objective." Our business doesn’t lend itself to arbitrary goal-setting. You have to be completely aware of all the aspects that surround you -- the pricing of what you want to buy, availability of capital. Right now, the price of our stock is so low that we can’t intelligently sell it. Stock prices are below liquidation value in most of the industry. As a result, if you want to buy some thing, where do you get the money? You’ve either got to sell some of our existing property, which we’re doing, or you’ve got to borrow. And in our case borrowing jeopardizes our credit rating. I didn’t mention this before, but our company has the highest credit rating in the industry, which is A from Standard and Poor’s, and A2 from Moody’s.Getting back to your question, we pull in our horns. You know, we may have said we’d like $100 million, because we did $350 million the year before, but so what? Nobody’s going to take away your chair and your desk because you didn’t achieve what was sort of a pious goal. That’s about all it is. This is a business where you have to be opportunistic, using the word in a good sense. You have to be aware of timing. There are some times when you’ve just got to pull in your horns and hunker down for a year or two, and that’s it. Otherwise you do stupid things.
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