Zeller, Reschke, and Brennan Say What?
Yesterday we brought out the real estate icons performing wizardry behind the curtain at Bisnow’s The Capital Stack – What’s Next? Their billions in collective capital would make the Great and Powerful Oz himself weak in the knees.
325 of our closest friends joined us at the Swissotel, where our Icons panel was filled with real estate greats that have grown their companies from nothing in true, self-made form. (Maybe their secret was ruby scaffolds.)
Pircher, Nichols & Meeks partner Gene Leone moderated, and like the rest of the panel, shared the story of his first job. He cut grass at Garden City Golf Club in New York and remembers one valuable lesson. A coworker told Gene, “We’ll still be here when you go back to school in 10 weeks. Work hard and realize that when you get out of school, you don’t want to cut grass for a living.” That drive to achieve more continues to fuel each panelist, and Gene grilled them on salient capital stack takeaways from their decades in the biz.
Walton Street Capital managing principal Jeff Quicksilver entered the working world as a lifeguard, so he knows risk, and has used that since Walton Street’s creation in ’94. His firm is seeing the best risk-adjusted returns in US real estate, he says, though it's raised close to $1B from Mexican pension funds now that it can invest in private REITs. Walton Street couldn’t scoop up enough broken assets post-downturn, but these days it’s gaining interest in cash-flowing assets with shorter hold times and interest rate exposure (like the Thompson Chicago and Hotel Lincoln). But trees don’t grow to the sky, Jeff says, so Walton Street is selling many of its stabilized investments to take advantage of the aggressive capital markets and distribute capital back to its investors. (Armed with this information, we're selling all our trees.)
It’s no surprise that The Prime Group chairman and CEO Mike Reschke is hooked on conversions, given his job in kitchen and bath sales/design at age 14. His firm’s $400M conversion of a 100-year-old historic building into the JW Marriott was fraught with $35M of overruns, but Mike’s using that $35M education (plus a more conservative budget and new contractors) on his next hotel conversion at 11 S LaSalle (soon-to-be Residence Inn by Marriott). He’s also eyeing high-yield acquisitions in energy markets, like Prime’s recent buy of a limited-service hotel portfolio in the Eagle Ford Basin in South Texas (20% cap rate, 70% non-recourse, 10-year money at 4.5% interest).
Given Blue Vista’s unique value proposition as a real estate private equity shop delivering capital to middle-market deals under $50M, we imagine chairman Robert Byron was an incredibly creative grocery bagger back at Jewel in Skokie. The firm started in ’02 with a $30M fund, stretching that into $1.1B of real estate across 31 deals by staying in the top 10% of the equity stack, he says. Sometimes, LPs will even call Blue Vista up and say they’re looking to do a deal with a local partner short on co-investment capital, and they'll enter as the last piece of the puzzle. Big players like Blackstone can’t compete in this niche, Robert says, since writing a $6M check won’t move the needle for them.
Zeller Realty Group (ZRG) chairman and founder Paul Zeller’s first job was in a factory, and he says it was great motivation to continue his education. He brought China to Chicago with ZRG and Cindat Capital Management’s 311 S Wacker investment, an incredibly murky process. Where real estate used to operate somewhere between fear and greed, now it’s lust (for yield) and trust, Paul says. Building trust with foreign capital is tough since you’re carrying different scars, underwrite risk differently, and have different deal vocabularies. If ZRG could have found similarly cheap capital at home, it would have, Paul said candidly, but the capital markets are all waves, and today’s seem to be biggest in Asia.
Partners Group global VP of asset management Poonam Mathis' first job was an internship with Newsweek, perhaps the beginning of her international expertise. She agrees with Paul that conversations between sponsors and global capital rarely lead to everyone agreeing on an optimal business plan, but they create a comfort level. (Then the marriage occurs, and you see what really happens.) Building a sponsor’s trust also gives foreign capital more insight into what’s happening on the ground, making it feel like more of a partnership, she says. Poonam has noticed the effects of increasing construction costs on Partners’ 200 N Michigan development with John Buck, but says a silver lining has been the firm’s heightened interest in logistics, industrial, and port cities.
Brennan Investment Group managing principal Mike Brennan (co-founder of First Industrial and executive director of UW’s Graaskamp Center for Real Estate) began working as “managing director” of carwash attendants at age 11, he says, for a whopping $1/hour. Brennan buys industrial around the country, differentiating itself with its eight principals' storied histories in the asset class and “all in” approach. There’s no sugar daddy sitting in the corner office, he says. It’s “eat what you kill,” with each partner investing and signing guarantees on each deal. With 40% of the firm’s portfolio being recapitalized or sold and the debt markets frothy, it’s clearly a great time to be a value-add buyer (despite those pesky high prices), he says. Check back for more event coverage tomorrow.