0:00

Hello, I'm Ted Seides and this is Capital

0:02

Allocators.

0:05

This

0:11

show is an open exploration of the people

0:13

and process behind capital allocation.

0:16

Through conversations with leaders in the money

0:18

game, we learn how these holders

0:20

of the keys to the kingdom allocate

0:23

their time and their capital. You

0:25

can join our mailing list and access

0:27

premium content at CapitalAllocators.com.

0:32

All opinions expressed by Ted and podcast

0:34

guests are solely their own opinions and do not reflect

0:36

the opinion of Capital Allocators or their firms.

0:39

This podcast is for informational purposes only

0:41

and should not be relied upon as a basis for investment

0:43

decisions. Clients of Capital Allocators or

0:46

podcast guests may maintain positions

0:48

and securities discussed on this podcast.

0:52

My

0:52

guest on today's sponsored insight

0:54

is Don Mullen, the founder and

0:56

CEO of Predium Partners, a $51

0:59

billion specialized investment firm he

1:01

started in 2012 to focus on the US housing,

1:05

residential and corporate credit markets.

1:08

In a little over a decade, Predium has rapidly

1:11

grown to become one of the largest owners

1:13

of single family rentals in the country. Prior

1:16

to founding Predium, Don spent 30 years

1:18

on Wall Street, including long stints

1:20

at First Boston, Bear Stearns and Goldman Sachs

1:23

and shorter ones at Salomon Brothers and Drexel

1:25

Burnham Limber. Our conversation

1:28

covers Don's history on Wall Street, identification

1:31

of the opportunity in single family rentals

1:33

and path to founding Predium to capitalize.

1:36

We discussed the single family rental market, sourcing

1:39

and servicing properties, scaling through

1:41

technology, critiques of single

1:43

family rental investments, growing

1:46

into adjacencies and aspirations

1:48

for Predium in the decade to come.

1:51

Before

1:51

we get going, we're hosting our fourth

1:54

cohort of Capital Allocators University

1:56

in New York City on September

1:58

14th.

1:59

Capital Allocators University, or

2:02

CAU, is a chance to connect

2:04

and learn with peers. We'll

2:07

bring together a few dozen allocators,

2:09

each with around five to 15 years

2:11

of experience, to share frameworks

2:13

on interviewing money managers, investment

2:16

decision-making, leadership and management,

2:18

and investing. And we'll engage with

2:20

four fantastic chief investment officers.

2:23

Jenny Heller from Brandywine, Kim Liu

2:25

from Columbia, Anna Marshall from the

2:27

Hewlett Foundation, and Brian O'Neill,

2:29

recently retired from the Robert Wood Johnson

2:32

Foundation. You'll get a chance to meet

2:34

some great people and learn a lot in

2:36

an information-filled day. Hop

2:39

on our website at capitalallocators.com slash

2:42

university to apply.

2:45

Please enjoy my conversation with

2:47

Don Mullin.

2:49

Don, great to see you. Nice

2:51

to see you, thanks for coming by. Why

2:54

don't you take me back to how

2:57

someone got to Wall Street back

2:59

when you did? It was a

3:02

great time to get to Wall Street. That was actually 1979.

3:07

I was in college. I

3:09

was looking for the

3:11

opportunity to start

3:14

a career that was different than working

3:17

on Route 17 in New Jersey at the uniform

3:19

store. That's where I previously worked, selling

3:22

police uniforms and security guard

3:24

uniforms. And I spoke

3:27

to family members. We

3:29

had one family member who had good

3:31

success being in finance. He married

3:34

into our Norwegian immigrant

3:36

family. He connected me with

3:38

some folks at an old company back

3:41

then called DLJ, and

3:43

some folks at a company called First Boston.

3:46

One fellow was very kind to give me a summer

3:49

job in fixed income

3:51

research, which at that time I thought that meant

3:54

analyzing the social security system because

3:56

my grandmother had a fixed income. That's

3:58

about all I knew about it.

3:59

Despite having a major in economics,

4:02

well, it didn't make any sense to me what fixed income

4:04

research was. And I got

4:06

the job most likely because

4:09

the fellow who hired me saw

4:11

my resume and he had grew

4:13

up in Queens in Jackson Heights and

4:15

went to Manhattan College

4:17

and eventually got an engineering

4:19

degree and a business degree from

4:21

Columbia.

4:22

But because his dad was an elevator repairman in Queens,

4:26

he said, holy, if I could get to

4:28

tell my dad that I hired a Yale kid whose

4:31

father was an elevator repairman, he goes,

4:34

my dad would be proud of me hiring you. So

4:36

I'm going to give you a job because my dad would be

4:38

proud of you.

4:40

So take me on a tour of your Wall

4:42

Street experience.

4:44

So I get that summer job in 1979,

4:46

which was a great time to start on Wall

4:48

Street, similar to what

4:51

Warren Buffett says, you know, we

4:53

can't ignore the benefits we get from

4:55

being born in an era. He points that

4:57

out about himself, how poorly he would have

4:59

fared in the medieval

5:01

times or something like that. I completely

5:04

acknowledge that. Entering Wall

5:06

Street in 1979 at the beginning

5:08

of peak interest rates, as

5:10

they start to come down, you see an explosion

5:13

of demand

5:14

for experienced people as the industry

5:16

grows. I'm a huge beneficiary

5:19

of that. So 1979, 1980, I'm a summer person on

5:21

Wall Street. 1981, I'm

5:26

a summer person, but then I take off in September because

5:28

I don't have enough money to be the European

5:30

travel that so many people do when they graduate.

5:33

So I did my European travel from September

5:36

through January, which was a little less fun,

5:38

but still

5:39

I got to do it. Obviously paid for it myself,

5:41

was able to get myself back into Wall

5:44

Street. So first Boston as

5:46

a credit analyst, eventually

5:49

I work in high yield sales. Very

5:51

lucky time. 85, 86 is

5:54

the beginning of that industry being created.

5:56

I get to be a capital markets guy there because

5:58

I get bored as a...

5:59

salesperson and the team at First

6:02

Boss is incredibly supportive. And

6:04

I become very curious about all the adjacencies

6:07

of sales. So I end up

6:09

doing capital markets.

6:10

Then I go to Drexel,

6:12

where that was sort of the intellectual

6:14

capital of knowledge

6:16

about not just leverage finance,

6:18

but really company valuation in some ways. The

6:21

world really hadn't focused on cash flow

6:23

enough then. And there's always a balance between

6:25

growth and cash flow, and they were the experts

6:28

in cash flow valuation.

6:30

Obviously, the firm disappears, and

6:32

I go then to Salomon Brothers,

6:35

meet some great people,

6:37

but a little frustrated with the direct team

6:39

that I'm working for, because they're less

6:41

familiar with leverage finance is really about. They're

6:44

more classic investment bankers and classic

6:47

salespeople, but good folks. And

6:49

Bear Stearns comes over the transom, which is one

6:51

of the scrappiest places in its entire

6:54

history, fearless in

6:56

its willingness to hire people

6:58

who want to work hard versus people who

7:00

were born to it. And they give

7:02

me the greatest job opportunity, arguably,

7:05

that has ever been given. At 32

7:07

years old now, I'm given the opportunity to run

7:09

a department.

7:11

And in the 10 years that I was

7:13

there, I went from running

7:15

their high-yield trading desk to

7:18

all of credit emerging markets, investment-grade

7:20

trading, a big chunk of investment

7:22

banking, leverage finance, the industry

7:25

groups within it. I don't run M&A. Alan

7:27

Schwartz chooses to run that. And I

7:29

run all the capital markets departments, including equities

7:31

and the like, and help start the asset

7:34

management division and the PE division

7:36

and basically have responsibility

7:38

for international generally. So

7:40

it was a fantastic

7:41

opportunity that only would take place

7:44

at a place like Bear Stearns during that cycle,

7:46

being the kind of person who likes to take

7:49

on things that you think aren't succeeding

7:52

enough. So you feel like you have the opportunity to

7:54

grow as a person and the fun of

7:56

solving the riddle of why doesn't

7:59

this thing. optimize? How do you

8:01

make it optimize? And a

8:03

lot of people in the business that I've seen

8:05

that kind of divide into two categories. People

8:08

who do like being entrepreneur, like

8:10

as I just described, as well as some people who

8:13

are more like focused on being in

8:15

the thing that's already successful.

8:17

And that's their way of

8:19

managing their personal career risks.

8:22

I thought the better career path for

8:24

me was being in the thing that

8:26

wasn't successful, that was harder

8:29

to do, that someone else hadn't solved that problem.

8:32

And by solving that problem improves

8:34

your probability of adding value to the

8:36

firm and your success. As

8:38

Bear Stearns gets bigger, they want

8:40

me to run investment banking full

8:42

time, which was

8:45

not my idea of the career

8:47

path that I wanted. And so as

8:49

a result, I let it be known to

8:51

a handful of people that I was willing

8:53

to leave. I was interviewed first by

8:56

Goldman Sachs because they had a big

8:58

challenge with their credit trading businesses.

9:00

And they'd already hired some of the people

9:02

who worked for me away. So they had inside

9:05

knowledge of me, that person they'd hired away

9:07

from me was David Solomon. And

9:09

so David Solomon was recruiting me.

9:12

I then spent, must admit 56

9:14

people or something crazy. A person

9:16

who's pretty well known from Goldman Sachs reaches

9:19

out to me and says, listen, after 56

9:21

interviews, if we come to the conclusion,

9:23

you just don't fit here.

9:25

You're culturally a bad fit. We

9:27

think you're talented, but

9:29

not going to happen. A year later,

9:32

David called back again and said,

9:35

we want to talk to you again. I said, I'm not doing it. I

9:37

spent months jerking around on

9:40

this thing. He said, you're going to meet one person,

9:43

one interview only. And I said, I

9:45

had breakfast with Lloyd Blankfein, who

9:49

is particularly insightful about talent.

9:52

I think that's one of his great skills. In

9:54

this circumstance, it wasn't about me. It was about

9:56

his willingness to look at someone

9:58

and make a decision, which I thought He was self-aware

10:01

of his talent selection skills. And

10:04

we sat down for two hours, and at

10:06

the end of two hours, he told me my next 10 years

10:08

of career at Goldman Sachs and

10:11

convinced me, which is no

10:13

small task. If you remember, I said at Bear Stearns,

10:15

I ran almost everything but mortgages

10:18

and government bonds that I was going

10:20

to go to Goldman Sachs and only run the high-yield

10:22

trading desk. I said, Lloyd,

10:24

I last did that more than

10:26

a decade ago. He said, no, this is going

10:29

to work out great. And he described a career

10:31

arc that had me at the end

10:33

of the process being either a division head

10:35

or being on the management committee. I

10:38

left to go to Goldman Sachs, and that's

10:40

sort of my sell-side career.

10:43

There aren't that many people that canvassed

10:47

so many different banks over

10:49

their career on the sell side. What

10:51

did you find different

10:53

about all the cultures of the different places

10:56

and how that impacted what you were doing? Culture

10:58

is a lot of things. The leadership

11:01

of the organization, by driving

11:03

a type of culture, creates

11:05

scalability around their vision

11:07

of what an investment bank or firm should be.

11:10

So it becomes a very important

11:12

thing, because if everybody thinks in

11:14

the terms of, is this the right thing for our place

11:17

to do, then you get this repeatable

11:19

thought process. That can

11:21

be corrupted individually by department

11:24

heads sometimes, but generally speaking,

11:26

that's what all of them try to do, whether it's

11:28

Goldman Sachs or Bear Stearns, arguably

11:31

considered to be the two polar opposites

11:34

of Wall Street.

11:35

That being said, I found most of them to

11:37

be more similar than different.

11:40

When you're in the same ecosystem,

11:43

the kid with blond hair looks really different than

11:45

the kid with brown hair, but they're

11:47

still probably the same kids who are five years old, but somehow

11:49

you find differences.

11:51

We're biased to look at our differences

11:53

rather than our similarities. The other

11:55

thing I'd say, Bear Stearns was really

11:57

characterized, and I use these two because of their... perceived

12:00

differences.

12:02

Goldman Sachs for many, many years was not perceived

12:04

as a trading firm. It was only pretty

12:06

much after the financial crisis, purely

12:08

woke up and realized what a trading firm it was. And

12:11

Bear Stearns wasn't a trading firm,

12:13

despite the image of it. It was a sales

12:15

firm. So

12:18

each of these nuances were meaningful.

12:21

Going back to Credit Suisse vs. Boston, it

12:23

was really investment banker driven

12:26

firm that traded

12:28

to support investment banking. But it wasn't

12:30

viewed as the powerhouse source of P&L

12:33

back in the 80s. And most places that wasn't.

12:36

Drexel, the trading desk, effectively

12:38

ran everything everywhere all

12:40

the time. Because the trading desk

12:42

and the capital markets function were integrated, one

12:45

of their problems. And then at Salomon

12:48

Brothers, it was almost trading

12:50

to the extreme. Not in a

12:53

way that was oppositional to clients, but

12:56

their scale

12:58

of risk taking relative

13:01

to

13:02

the size of the market at the time.

13:04

When I ran Goldman Sachs' leveraged finance

13:06

trading desk businesses, we weren't

13:09

as big in some things as Salomon Brothers

13:11

had been 15 years earlier.

13:13

The scale of risk taking was extraordinary.

13:16

And so

13:18

in the end,

13:19

they share more in common than

13:21

they have differences.

13:23

But their differences could be

13:25

meaningful. And I'd say that the most important

13:27

attribute in each one, unlike

13:31

big manufacturing businesses, the CEO's

13:34

personality and the way he deals with

13:36

the people in the organization is

13:39

one of the most important attributes

13:42

for culture, risk taking,

13:44

client treatment, and overall

13:47

success of any business I've ever

13:49

seen.

13:50

You mentioned the importance of scale

13:53

in these businesses. And I was wondering if

13:55

we could maybe pick something like credit derivatives,

13:57

where you were there early on and it was a

13:59

one-on-one. transaction type of business

14:01

that later achieved scale across

14:04

the industry. How do you think

14:06

about how you take an

14:09

opportunity that might be discrete

14:11

and turn it into something that has scale?

14:14

Credit derivatives is sort of the

14:17

ultimate 21st century example, right? Here

14:20

you're well said that we started out in a business

14:22

that had a series of bespoke contracts

14:25

that were each negotiated one

14:28

off. Clearly there was tremendous

14:30

demand. That was the first thing when you think about scaling.

14:33

The effort of scaling has to have

14:36

the expectation that the

14:39

ability to create efficiency will be rewarded

14:41

with volume.

14:42

It was

14:44

clear to us how valuable

14:46

credit creatives could be in scale.

14:49

And so to be very successful

14:52

and creating volume in that space was

14:54

the output of us looking

14:56

at it and realizing there could be more liquidity

14:59

than there was with securities. That

15:01

was the $64,000

15:03

question you'd answer. And so once

15:06

you realize that you can have more liquidity than

15:08

securities because securities by their nature were

15:10

predominantly held in places like insurance

15:13

companies or locked up vehicles

15:15

as a result, a small

15:17

percent of the universe could trade. But when you traded

15:19

these derivative contract notionals

15:22

you could have much more volume than

15:25

actually existed. It made sense

15:27

to drive scalability, which

15:29

meant drive conformity and

15:31

zero in only on the difference

15:34

between what people want. What people

15:36

wanted is they didn't really care that

15:38

much whether the coupon was quarterly, monthly,

15:40

or every six months. They didn't really care

15:43

who was processing them. What they

15:45

were focused on was getting the names

15:47

they wanted, what the liquidity they wanted.

15:49

That was somewhat representative of the

15:51

risk in the trade. And so when you

15:54

could create a vehicle like that you

15:56

satisfied a need of the marketplace to

15:59

be in a position. where it could

16:02

more dynamically trade its risk. And

16:05

so if you find an ability where

16:07

there's large demand, create

16:09

an efficient product to solve that demand, and

16:11

scalability to some degree

16:14

is the output.

16:16

As you're navigating your career on the sell

16:18

side, you mentioned your gravitation

16:21

to businesses where other people hadn't succeeded.

16:24

Curious how you thought about trends and

16:27

how you would identify opportunities.

16:30

I didn't always look for places where

16:32

everyone failed. There

16:34

would be things that Goldman Sachs was not doing

16:37

well, but other people were doing well. I had a model

16:39

to study. At Bear Stearns, we had a lot of things

16:41

we didn't do as well as we would have liked. Leverage

16:44

finance was a good example. I had the opportunity to have

16:46

almost complete control of that ecosystem,

16:48

and I could learn from my experiences at Drexel,

16:51

I could study Merrill Lynch at the time, was very successful,

16:54

and then figure out what could we do without

16:57

the resources that a Merrill Lynch had to

16:59

accomplish our goal. We were at number 12 in the league

17:01

tables. We got to two or three, I think, after

17:03

a period of time. And so

17:06

when you look at opportunities to create

17:08

success where either your organization doesn't

17:11

or other people don't, you're right, I

17:13

first focus on trends and

17:15

have an insight into, similar

17:17

to what I said on credit derivatives, that if you

17:19

see demand,

17:21

if you create the right product,

17:24

the capturing the value in those longer

17:26

term trends is the most effective

17:29

way to be successful in that space. Now,

17:31

some of that is you benefit from pattern recognition

17:34

if you're 40 years on Wall Street.

17:37

We've seen a lot of these things over

17:39

and over, and that doesn't mean you're gonna be

17:41

right. I had a higher expectation for

17:43

credit defaults after COVID

17:45

hit, didn't properly gauge the amount

17:48

of stimulus versus its impact

17:50

on credits. But usually what would

17:52

happen is, and Single Family Homes is the great

17:55

case study for me personally, they

17:57

said it became very clear that the...

18:00

sell-off in houses from 2009, let's call it through

18:02

2012-13, was going to have a lot of analogies

18:06

to credit sell-off in 1991. In 1991,

18:11

we had decided that high

18:13

yield bonds or junk bonds, as they were then

18:16

more commonly referred to, were radioactive.

18:19

They were a disease that needed to be expelled

18:22

from the US economy. And we forced

18:24

insurance companies out of their positions by raising

18:26

cap charges. They were in SNLs

18:29

that otherwise had problems, and they were forced to sell-off.

18:33

And as a result, that created a systemic

18:35

sell-off event, even if the

18:37

companies on the other side hadn't

18:39

changed in their credit quality. So you had this

18:41

imbalance between buyers

18:44

and sellers that created an extraordinary entry

18:46

point for someone building a credit

18:48

investing business. And that's one

18:51

of the things that I became aware of in trends,

18:53

which is that building machines

18:55

that can farm or capitalize

18:58

on dislocations and trends

19:01

are some of the ways some of our most

19:04

successful alt managers built

19:06

their business. And then once they built the culture,

19:09

the infrastructure, the branding,

19:12

the ability to communicate with the broader

19:14

group of allocators, they successfully

19:17

were able to cause a perpetuating

19:19

business that grew in size.

19:21

You spotted single-family

19:23

homes. How did you think about

19:26

building that within Goldman

19:28

compared to what you ended up doing at Predy? I

19:31

think I was concerned. Remember, we had

19:33

just gone through a whole

19:34

lot of Senate investigations

19:36

at Goldman Sachs, where I had

19:39

the uncomfortable pleasure, if that's

19:41

the right way to say it, of having my

19:43

emails read on TV by

19:46

a senator to our CEO. I

19:49

would not call that one of the better moments of my

19:51

life, certainly when your mom calls and

19:54

said, I just heard your name on TV

19:56

spoken by XYZ senators. Is that really

19:59

your email?

19:59

You're like,

20:01

yeah, this isn't turning out

20:03

the way I expected. I became

20:05

aware because we had a loan servicer that

20:08

we were selling homes at a discount to replacement

20:10

costs because that was the obligation

20:13

of the loan servicer. It was dealing

20:15

with defaults. It had an obligation

20:18

to the securitization to

20:20

liquidate defaulted homes. And

20:24

the process was so systemic, the

20:26

homes were selling below replacement costs. One

20:29

of the great rules of real estate is if anything

20:31

sells below replacement costs, particularly within

20:33

a community where there's demographic growth,

20:35

you're supposed to buy it. And so I

20:39

first identified the opportunity,

20:41

talked to some of the colleagues around Goldman

20:43

Sachs. There wasn't a whole

20:45

lot of interest because the challenge we were going through,

20:48

understandably, but I got compliance's

20:50

approval to start a process by

20:52

myself. My daughters were all

20:54

in college. So as a result, I had plenty of

20:56

free time. And so I went

20:59

to all of the

21:01

high intensity locations like Tampa,

21:04

Las Vegas, Riverside County, California,

21:07

Phoenix, Scottsdale, started walking

21:09

communities with high default intensity, making

21:12

observations about those, and then

21:14

eventually invested $25 million on my

21:17

money and bought houses, put

21:19

a small asset management layer on top of it

21:21

for people to manage local property managers. And

21:25

while our margins in the phase one

21:27

of that were not what I had hoped for it, I

21:30

hope we look a lot more like multifamily

21:32

margins. I could see the

21:35

opportunity for improvement because

21:37

the inefficiencies and the

21:40

servicing, the assets were so extraordinarily

21:42

high.

21:43

And I came back to the executive office

21:45

of Goldman Sachs and said, I think this is going to be a very

21:48

big business because

21:51

almost all the houses in the United States that are

21:53

rented are more fragmented

21:56

than car services in the country, which

21:58

if you think of what Uber did is

22:01

they put a logistics layer on top

22:03

of the black car industry and

22:05

made it more accessible for other people to

22:07

get into that space and so therefore drove down

22:10

the marginal cost and

22:12

made marginal access easier. So

22:15

this could be uber-esque, it'll never

22:17

get the premium that uber gets, but

22:20

it's uber-esque and its ability to

22:22

be scaled up if

22:25

you focus on the right attributes.

22:28

So what happened was the firm actually wanted

22:30

to try to do it. I was

22:33

the one pushing back at that point

22:34

telling the executive office and saying, Lord

22:37

you were just down in Congress

22:39

seven months ago.

22:40

It didn't take more than a pico-second for them

22:43

to say, you're right, we can't do this.

22:45

They didn't necessarily want me to leave, but they were very happy

22:48

about the way we worked

22:50

together to make sure it was a good process.

22:52

So they were very supportive of helping

22:55

me get the business off the ground.

22:56

How do you describe and map out the

22:58

single-family rental market

23:01

and opportunity set?

23:03

The way we started it was

23:06

we recognized that a couple

23:08

of things. We were in the midst of 10 million foreclosures.

23:11

Every one of those people is going to be a renter in

23:14

some way, shape, or form. So we had a massive

23:16

increase in supply. We had

23:18

a huge volume of houses that were

23:20

stuck in sort of the American

23:23

foreclosure system

23:25

and usually when they came out of that, they

23:27

were really degraded in quality, so needed

23:30

a lot of work.

23:31

So they weren't really eligible for

23:33

homeowners because there was so much work. Most homeowners

23:35

don't walk around with both a down payment

23:38

and $30,000 to rehabilitate the asset. So

23:40

we had this massive inefficiency

23:43

in the system that could be turned

23:46

around. We originally mapped it

23:48

out that we would buy distressed houses like I described,

23:51

but the process was so full

23:53

of fat tails, meaning

23:56

so many houses that your estimate of 30,000 of repairs

23:59

was

23:59

70 when you really get possession of

24:02

it. And we also realized

24:04

that the industry of servicing the houses

24:06

was so nascent because the

24:08

small local players weren't really

24:11

ever going to be able to use the technology platforms

24:13

we needed, the efficiency of

24:15

delivery to people to drive margins

24:18

that we ended up having to map

24:20

the industry out by only buying

24:22

owner occupied houses. So houses

24:25

that homeowners are choosing to sell and

24:28

therefore we're buying high quality assets

24:30

not distressed assets. And

24:33

by driving homogeneity in the earliest

24:35

phases, similar to credit default swaps,

24:37

driving it down to the simplest concept

24:40

of a house. So a 2000 square

24:43

foot, three bedroom, two bath, two car garage,

24:46

front and backyard, predominantly in a homeowners

24:48

association built in the 21st century. The

24:51

needs of this modest repairs, we focused

24:54

on clustering. You could drive

24:56

efficiency of delivery of servicing.

24:59

So we mapped it out. That was the tactical

25:01

mapping, call it that. The

25:03

strategic mapping was to

25:05

focus on high demographic growth

25:08

communities that were probably under built.

25:11

That was predominantly in the Southeast and Southwest

25:14

where you still had a positive demographic

25:16

movement of Americans into those communities

25:19

and that you could buy that type of

25:21

house I described in scale because

25:24

there was so much development done in the last 20 years. So

25:27

when you look at older communities like the

25:29

greater New York area, even the greater LA

25:31

area, you have so many generations

25:34

of house type built over the last 70

25:36

years that you couldn't get any uniformity

25:39

of house type. And so as

25:41

a result, it really made it much harsher to surface. So

25:43

that's how we mapped it out there. The

25:46

next layer up is to think of the big, big, big

25:48

picture in simple terms. Are

25:51

there enough houses for the people? Do we have too many or

25:53

too little? And whether you look at

25:55

Stanford, Harvard, Fannie

25:57

Mae, almost any.

27:59

locations. The first part of

28:02

this location is buying

28:04

the asset

28:06

anywhere near

28:08

its bottom. It could still be going down, it could

28:10

still be going up, it doesn't have to be near the bottom, particularly

28:12

for a big idea like that. So that's

28:14

not the important thing, but getting in, getting focused,

28:17

realizing the opportunity for the investor,

28:20

that's all critical. The next phase

28:22

of it, for us at least, is making

28:25

sure that we're investing the time and understanding

28:28

the long-term trend around

28:30

that. So in high yield in the

28:32

90s, it was a process of constant

28:35

recovery that created asset

28:37

management firms that grazed capital

28:39

for the purpose of soaking up all these

28:41

cheap securities that will eventually

28:44

evolve into a more robust private

28:46

equity business and credit business

28:48

over time. For us in this space,

28:51

it was recognizing that our entry

28:53

point

28:54

was about the physical asset,

28:56

but it wasn't about the demand. And as

28:59

we moved along and operate the assets

29:02

more efficiently, our funnel

29:05

could get larger and larger at its top

29:08

because we saw more amounts

29:10

of demand of many different types.

29:13

And so as a result, what we concluded

29:15

is that this was early on, again,

29:17

five or six years into it, that it wasn't

29:20

a trade, which is why

29:22

in 2019, other people had been selling out,

29:24

taking the companies public, putting them into

29:27

REITs. And we had a line

29:29

of people around the block telling me to go public.

29:31

And again,

29:33

our best years of performance, obviously, were during

29:35

COVID. We didn't expect that,

29:37

but we expected the best years of performance to be

29:40

when people acknowledged the fact there's

29:42

a housing shortage. And when people were

29:44

going public, the market had not yet been

29:47

attuned to the big idea. It wasn't buying

29:49

cheap assets. It's owning assets

29:51

that are in heavy demand. And

29:53

so our engine, I think we had

29:55

two points where we had

29:58

insight that many share it. So

30:01

that was when we built the business. Many people thought, hey,

30:03

these are cheap assets. Let's just buy them. Colony,

30:05

capital, American home, Saran. John

30:08

Gray is arguably the best real estate investor

30:10

of my lifetime. And I say arguably

30:12

because somebody may disagree with me, but I could have a hard

30:14

time finding someone who disagree with that statement,

30:16

I think generally. One of the best real estate investors,

30:19

maybe of all time. So lots of people have that

30:21

deal. But by 17, 18, 19, we were kind of lonely

30:23

saying, this is

30:25

not a trade.

30:27

This is an industry

30:30

that's here to stay, that'll be here for a

30:32

long time. Because Americans have always

30:34

rented houses. There's always going to

30:36

be someone who wants to live in a good community

30:39

that it can't afford to purchase that

30:41

house. And there's a cohort

30:43

of Americans are increasingly choosing to

30:46

rent over home because

30:48

they have other priorities in their

30:50

life.

30:51

That's why we stayed with

30:53

both private as an investment manager and

30:55

as our assets. And we

30:58

think that opportunity is only increasing,

31:01

not decreasing at this moment. Because

31:03

if you looked at what happened, we have 70%

31:06

of Americans have mortgages less than 4%. They're not

31:09

selling their house anytime soon. I think when

31:11

you go to five, the number is 95%. If the

31:14

Fed raises rates, as some

31:16

people are suggesting, one or two

31:18

more times, mortgages will be seven.

31:21

At this point, we're crushing more supply

31:24

than

31:25

we are actually crushing demand. So the Fed's

31:28

in a really awkward spot. But the

31:30

reality of it is we saw that the mismatch

31:32

of housing, the ability to scale,

31:35

the need for rental stock delivered in a better

31:37

way. And I say a better way because we

31:40

do service faster than entrepreneurs

31:42

do, understandably, because they don't have full-time staff.

31:45

And we have hundreds of people doing service. And

31:48

so we believe that we have both created

31:51

a solution for a need, as

31:53

well as made the product better.

31:55

Where do the opportunities come from?

31:58

I guess you could buck it into two or three.

31:59

things, right? So there's the

32:02

how do you acquire all those houses? Then

32:05

how do you service all those houses?

32:07

Or at least two of the biggest categories.

32:10

So when we acquire houses our first 59,000 houses

32:13

we bought one at a time

32:14

That's usually one of the things that makes

32:17

people's eyes a little bit like glaze

32:19

over like how the hell did you do that? So

32:21

did you do that? So

32:24

we built the technology that analyzes

32:27

houses for sale in all the

32:29

markets we operate in

32:31

and so we're able to acquire

32:33

houses one at a time by

32:35

sort of driving a proprietary

32:37

search engine that didn't take you

32:39

know Foreast or physicists locked

32:42

in a black room from months the

32:44

ability of off-the-shelf technology to create

32:47

a lot of the things I'm going to describe is one

32:49

of the Reasons this industry exists

32:52

the technology wasn't ready

32:54

and cheap enough to build it off

32:56

the shelf using things like

32:59

Salesforce and basic modifications

33:02

of search to have done this in

33:05

2000 it really was the technology and

33:07

the entry point occurred at the same

33:10

time what goes into that

33:12

Model that you're looking at when you're

33:14

looking to buy

33:15

We tend to look for 30 minute

33:18

commute times low crime rates all

33:21

data you can buy Good school scores

33:23

not great schools not because we're picking

33:26

for people but the Americans like good

33:28

schools But very

33:30

few of them really want to spend the extra money for

33:32

great schools We want a front and backyard

33:35

So it's a classic American home you

33:37

dream about if you grow up like I did and

33:39

I think our house was less than 1000 square feet

33:42

with three boys in one bathroom, so I was not

33:44

what we're buying We're instead looking for

33:46

a three-bedroom two-bath house front

33:49

backyard and eat in kitchen Two-car

33:52

garage where the predominance

33:54

of the members in the community are

33:56

owners so for many folks,

33:59

that's the lifetime dream

34:01

to live in an asset like that. And for

34:03

renters, it's really a huge

34:05

advantage because historically, most

34:07

folks lived in renter-based communities

34:10

where all the houses were renters, and

34:12

those were usually lower quality assets

34:15

with lower quality schools.

34:17

That's changed a lot with both our programming

34:20

as well as others. And so in looking

34:22

for those houses, it's one of the ways that folks

34:25

are able to break out of generational poverty

34:27

by living in ownership communities. But

34:30

we

34:30

look for assets like

34:32

that because we're looking for

34:34

those aspirational tenants who

34:37

want to take care of the asset, want to stay there for

34:39

a long time because they like to live in that

34:41

community. When you're doing your

34:43

diligence, when you first went out and

34:45

bought the $25 million, you mentioned going

34:47

to these communities, presumably looking at the homes.

34:50

When you're buying 59,000, I'm curious what you

34:52

miss in

34:54

that process when you're bringing it to scale.

34:58

When we started in the beginning, as I said earlier, we

35:01

bought houses like a lot of people at the foreclosure

35:03

sales, and the tail risk was

35:05

very high. Then we start to

35:07

look at portfolios that were for sale of houses

35:09

from Fannie Mae and Bank of America,

35:13

lots of tail risk embedded. So the things

35:15

that we focused on there, just to

35:17

give you examples of risk factors,

35:20

we used to joke a lot, but a lot of the houses

35:22

that were in foreclosure like that, they

35:25

used to call them grow houses because

35:27

the squatters would break in and the

35:29

power was still turned on and they would grow

35:32

weed illegally in these houses. And

35:34

that was more common in Southern

35:36

California and Arizona

35:38

than it was in other parts of the country

35:41

we saw. And so we

35:43

just didn't want to go through all that drama.

35:46

So that's why we eliminated the

35:48

risk of that through own occupied housing.

35:51

Even within that, it was an

35:53

iterative process to improve our

35:55

inspection skills. So

35:58

one of the great things in the... US system

36:00

today is the 30 day inspection

36:03

period. All Americans have. And

36:05

so we were able to reduce our tailrest further

36:07

by inspecting roofs

36:10

and foundations. One of the

36:12

big events that took place, there was a Chinese

36:14

sheetrock problem in Florida.

36:18

So we quickly put that into our

36:20

inspection report because that was, you had

36:22

to rebuild the house because those houses,

36:24

the timber was fine, but the sheetrock was horrible

36:27

and damaging and unhealthy. And so

36:29

we tried an iterative approach to reduce

36:32

fat tails.

36:33

What kind of team did you have in place to

36:36

do these inspections? We believe the

36:39

acquisition of assets, which I talked about is critical

36:41

in all the things we do.

36:42

Also servicing the assets

36:45

in a way that drives return is important. A lot of

36:47

people think servicing is beta. We think it's

36:49

a source of alpha. And then financing

36:52

the assets wisely is equally important.

36:54

Building the enterprise for us was

36:57

again, an iterative process because there

36:59

was anybody around doing this. And

37:01

when we started it, pretty much

37:03

no one in multifamily thought it was a business.

37:06

So we had a huge struggle, both getting everyone

37:09

down the value chain. So

37:11

we had to create our own

37:14

group of handymen and otherwise inspectors

37:17

from other fields and train them with our

37:20

tools that we created. We

37:22

eventually moved from the old

37:24

school clipboard with

37:27

check boxes and no numerical scores

37:29

that were fed in that quickly

37:32

to custom programmed iPads

37:35

that fed the data into Salesforce.

37:37

And so call it 18 months into

37:39

this, we use the Salesforce platform

37:42

to manage workflow for all these inspectors,

37:45

as well as create documents that

37:47

they could use in their iPads remotely

37:50

that would feed the information to

37:52

the acquisition coordinator and then

37:54

power the closing process.

37:57

So it was both streamlined and

37:59

not

37:59

require emails.

38:03

So when the house is agreed upon

38:05

to be purchased, it alerts and

38:08

schedules the inspector to go, it alerts

38:11

the closing department, it alerts the

38:13

finance department, and they're given

38:15

timeframes to execute their tasks. So

38:17

that was a big win for us.

38:19

And today,

38:21

how many homes are you able to

38:23

buy in an average day?

38:25

Well, it varies a lot. So I think one of the important

38:28

things to be aware

38:31

of now is that for both investors

38:33

and the market generally, where

38:36

value is changes

38:38

tremendously. So for many, many years, homeowners

38:42

would sell assets at very

38:44

attractive cap rates to institutional investors

38:47

because homes overall

38:50

were depressed in price because

38:52

we came out of that period where they traded an amazing

38:55

discount. So I used to say it's really

38:57

not that important to buy the house at the

38:59

courthouse steps and get that extra 10

39:01

or 15% discount because all homes

39:04

are cheap relative to demographics, all

39:06

homes. Now we're in a position because of

39:09

locked-in mortgage rates that all owned

39:11

homes are rich compared

39:14

to homes sold by open door,

39:16

offer pad entities that

39:19

right now the cost of financing is so

39:21

high they're periodically forced

39:23

to sell houses at attractive prices to

39:26

investors. And home builders are

39:28

in a position where at any given

39:30

point in time, so in February,

39:33

when mortgages came down, they

39:35

would sell to retail. When mortgage rates go

39:37

up, they'll sell more to us. And so

39:40

we think one of the critical parts of success

39:42

right now was being able to source assets

39:45

from all three and

39:48

potentially even four, meaning build them yourself

39:51

venues. And so

39:53

today the bulk of our houses are bought in portfolios.

39:56

A year ago or 18 months ago, they were bought

39:59

from owner occupants. And now

40:01

in portfolios, as an example, we'll

40:03

probably buy 15 to 20,000 houses this year,

40:08

but almost entirely in portfolio

40:10

form.

40:11

Once you own these homes, you mentioned there's

40:13

an alpha component in servicing. What

40:16

have you been able to build that's different and better

40:19

from the servicing capabilities outside of

40:21

Pretty? Well, there's a couple of tiers to look at.

40:23

There's the original small

40:26

mom and pop home servicers

40:29

in the communities. When I own houses and

40:31

those folks service my house, you

40:33

had NOI margins of like 30%. When

40:37

we put an asset management layer and create

40:39

a federation of them and force tech on

40:42

them, we were able to get to 45%.

40:44

Once we built our internal

40:47

structure where we did 100% of the operations,

40:49

we were able to

40:51

drive margins to 65%

40:54

and even higher in some portfolios. So

40:56

what's the difference that we do first versus

40:59

that tiering? The first thing is

41:01

what we did was actually save

41:04

time.

41:05

So it's not pricing, it's time.

41:08

By owning the workflow, we

41:10

crushed that down to a fraction

41:12

of what it used to be. The house cash flows

41:14

more and the house is available for

41:16

renters sooner. Owning

41:18

the cost of turnover by both the quality

41:21

of maintenance while residents are

41:23

in the asset and by doing

41:26

it yourself with your own workers

41:29

ends up saving money

41:30

and creates time savings too. So

41:33

I'd say the

41:34

peer group of the largest folks,

41:37

we have similar efficiencies,

41:40

particularly I'm talking about invitation homes, for example,

41:42

American Home Soren. The

41:45

next tier down just doesn't have the scale

41:47

for owning your own workforce, owning

41:50

the strategic purchasing, being

41:53

able to rent houses because

41:55

of your advertising budget in a more efficient

41:57

way. So what we've done is... capture

42:00

the mindshare of the prospective residents,

42:03

deliver the assets more quickly, and

42:06

deliver them more cost-effectively. Each

42:08

stage of it is tweaking things

42:10

now at this point. There's a massive,

42:13

easy answer. I'm

42:15

curious how you think about the

42:17

exit strategy in

42:20

this market that you're in.

42:22

Sure, I think there's a multitude

42:25

of exit strategies for any

42:27

portfolio, but let

42:30

me frame it broadly first and then work my way

42:32

down. Framing it broadly is I think this

42:34

will always be an asset class that

42:37

people invest in, like multifamily. It's never

42:39

going away, right? It's just gonna

42:41

have good years and not good

42:43

years and houses or apartment

42:46

buildings that are out of favor. So

42:49

the demographics of Detroit don't justify

42:51

a lot of the old buildings, but

42:54

new buildings still might attract people. This like new

42:56

office does, right? Office has the greatest

42:59

dispersion today ever in office

43:01

history. And single-family homes will eventually

43:04

become like a regular real estate

43:06

asset class. So we will

43:08

be able to sell portfolios. We saw that pre-interest

43:11

rate increase. We would sell portfolios

43:14

to REITs that either

43:16

use our management or somebody else's management.

43:19

So I think exiting portfolios

43:22

will be like every other asset class,

43:24

where you can sell them in pools to other

43:26

institutions who like that asset class

43:28

at that time, whether they want a value

43:31

added strategy or a new build strategy

43:33

or just a stable cashflow. That

43:36

will take place.

43:37

When you're talking to people about the strategy,

43:40

what are the common critiques you run into?

43:43

I think some people are still recovering

43:45

from the this isn't scalable

43:48

concept. So there's still like

43:50

a cohort of people despite that it's been

43:52

done and site that it's still in front of them, still

43:56

aren't aware that

43:58

it can be done in arguably.

43:59

that you can generate margins very similar

44:02

to multifamily as an industry.

44:04

We can provide more value

44:08

to those folks because people have

44:10

a predisposition to stay in an asset that's

44:12

built around a school system longer.

44:15

So as I think as an industry, true

44:17

forces will be at work. We will

44:19

continue to try to improve the experience

44:21

of the consumer in the house by driving

44:24

more efficiency and offering more services. So

44:26

two or three of the things that all of the industry is

44:28

focused on, including us, is

44:32

efficiency of power delivery,

44:34

another regulatory nightmare. Because

44:37

if you put solar panels on a hundred thousand houses,

44:39

guess what? I'm a utility. I

44:42

don't want to be a utility. I just want to drive

44:44

efficiency and delivery. So we have to sort that

44:47

out. The other thing is there's a

44:49

lot of ways that we touch the consumer

44:53

and the structure of the market's inefficient.

44:56

Like why are we making people pay monthly instead of when they

44:58

get their paycheck every two weeks? I think we're going to see

45:00

things like that. So as a result, I think

45:02

we'll find that this business will end up

45:04

being more important to consumers,

45:07

drive higher returns and more efficiency

45:09

for the consumer. The other parts of critiques

45:12

are that we're taking housing stock away

45:15

from prospective owners.

45:16

When people focus on that, they

45:18

don't focus on as well, at

45:20

least equally,

45:22

should be the fact that we're putting

45:24

people in communities that historically

45:26

they wouldn't have had the opportunity to live in. So

45:30

if you're a 620 FICO score with $60,000 worth of

45:35

debt, making it $150,000 or $160,000 a year, you weren't living

45:37

in this community. And so people are

45:44

raising their children in better school districts

45:46

and better houses with

45:48

more aspirational community members because

45:50

they live in an ownership community. So

45:53

I think it's a little unfair both to the

45:55

industry and our residents, not just us, our residents,

45:58

that people are trying to... eliminate

46:00

the opportunity for them to live in those

46:02

communities. The other thing that I think

46:05

that is underway is because

46:07

of our capital, not just ours, but the

46:09

industry, we're putting billions

46:12

every year into building new houses that

46:14

during a cycle like this wouldn't take place.

46:17

Homeowners would back away.

46:19

The imbalance would continue to a

46:21

greater extreme.

46:23

So when

46:24

sales dropped down in January because mortgages

46:27

are too high, we're like, okay, we'll

46:29

take a billion dollars houses. So

46:31

the home builders have come to look at us as the

46:33

safety net, the lender of less

46:35

resorts, so to speak. So I think the critique is unfair

46:38

that

46:38

I think we will increasingly

46:41

serve a great balancing

46:43

function, both for residents

46:46

and construction

46:48

in a way that makes the market less prone to volatility

46:52

and gives people more aspirational assets to live

46:54

in.

46:54

It's such a large scale consumer

46:57

facing business. I'm curious how

46:59

you manage the inevitable PR,

47:01

whether it's one of those critiques or something goes wrong

47:03

in a house.

47:04

You have to err on the side

47:07

of helping the resident any way reasonably

47:09

possible. And so

47:11

our

47:12

desire to use our scale when

47:14

helpful

47:15

for folks is one of the advantages

47:18

we bring as an entity. For us,

47:20

the

47:21

incremental thousands of dollars

47:24

to do that

47:25

is the right thing to do. But mom

47:27

and pop who have three houses that they're renting

47:29

can't perform that intervention. Not

47:31

because they're not well-intended, but most

47:34

of them, that's their business and they're

47:36

running very tight, similar to what happened during

47:38

COVID. So during COVID

47:40

mom

47:41

and pop entrepreneurs who are renting

47:43

assets suffered the most

47:46

because folks could go into rental moratoriums.

47:49

And in fact, they couldn't evict people understandably,

47:53

but they had to pay their mortgages

47:54

on those assets

47:55

because we have the scale that we did

47:58

and so many good residents making. payments,

48:01

we were able to go out and hire 25 people

48:03

just to specialize in helping the

48:06

people who couldn't make payments and help

48:08

them apply for federal support. So

48:11

I think the arguments against

48:13

scale are actually

48:16

misguided. Scale makes a big

48:18

difference in helping support both the

48:20

residents and connectivity to the community,

48:23

which is a big part of our program

48:25

for the next two years.

48:26

As you build this business over time, you touched

48:28

earlier on adjacencies and

48:31

opportunities. How have you thought

48:33

about taking Predium from

48:36

the scale you have in single family

48:38

rentals to other businesses? Well,

48:40

I think that the most obvious things

48:42

that we're going to be focused on is as

48:45

we continue to drive the efficiency

48:48

of asset servicing,

48:49

we should bring that to

48:52

multifamily in the same communities

48:54

that our single family homes rent. So we're

48:56

actively seeking out platforms to purchase

48:59

in those communities or create one. In addition

49:01

to that, we're focused on our

49:03

home builder

49:04

colleagues, some of the smaller

49:06

ones say home builder 15 through 50. They're

49:10

the ones who are most challenged by what's

49:12

happened with the regional banking

49:14

system. While we

49:16

don't necessarily think about that impact

49:19

on the home building industry, it is quite

49:21

significant for all the

49:23

smaller and mid-size home builders. And

49:26

so we have platforms that have been lending

49:28

to construction. We're increasing our staff

49:31

and increasing our capital to be

49:33

in a position to take on these regional

49:36

home builders as a part of our ecosystem.

49:39

And we can be a great support to them because

49:43

we can both buy the houses, help

49:45

them buy the land and finance them.

49:48

And so as a result, we'd expect to be good partners.

49:50

So it's another communities

50:00

just with older folks in it.

50:02

By the way, 55 and older isn't that old anymore.

50:05

Kind of a strange concept, but you know,

50:08

age has changed tremendously. It's a huge

50:11

factor in the housing shortage.

50:14

If you go and look, yes, the millennial

50:17

generation is the greatest generation scale

50:19

since the baby boomers, but

50:21

the baby boomers don't think they're

50:24

old yet.

50:25

And so as a result, they're still living in homes,

50:28

single family homes, much longer than

50:30

any generation. If you went back to 1992 and you

50:33

looked at the data, you turned 60 years

50:35

old and you moved out of a single family home. And

50:38

it was like a rock dropping out of the sky,

50:40

how fast the curve goes down.

50:42

And you looked at that same curve

50:44

in 2019, pre-COVID,

50:47

which is going to make this even more

50:49

extreme, people don't move

50:51

out of their house till they're 74. So

50:53

you took 14 years of inventory

50:56

that used to come off the market, cut

50:59

down on the number of homes you're building,

51:01

so below trend for almost a

51:03

decade and increased the number

51:05

of prospective buyers or renters.

51:08

That's why this is so extreme. But

51:10

active adult is where a lot of these folks will end up

51:12

moving. Actually, I think that it

51:14

almost be redefined as active adult

51:16

is over 65, not 55 in many

51:19

cases. My parents are 85 and 86 and they live

51:21

in an active adult

51:23

community. But with all that being said, we

51:25

think that's a great opportunity set too, because

51:28

it's an area that benefits from scale. There's

51:31

a large amount of ownership. There's not a lot of opportunity

51:33

for rentership in that community. So if you

51:35

think about the things that are adjacencies that we think

51:38

we can use our toolkit for and improve

51:40

the environment for the residents, active

51:43

adult housing choice, furniture,

51:45

building communities, and

51:47

using our financing arm to

51:49

help build more homes at this point. How do

51:52

you think about your

51:53

buyer build decision on

51:55

one of these adjacent businesses that you want to go

51:57

into?

51:58

When I think about... growing businesses

52:01

for Perdian.

52:03

You have to start top down again. You have to make sure that

52:05

you're looking at a business that solves a problem

52:07

for an investor.

52:08

Can you differentiate the product?

52:11

Is it a needed product? Is it something

52:13

that

52:14

creates an attractive enough return for

52:16

the risk you're taking? Then you look

52:18

at it and you say, can I

52:20

create that

52:22

in a reasonable way by

52:24

acquiring a platform or a team?

52:27

Speed usually does make a difference in these things.

52:29

Pretty quickly, if it's a relatively

52:32

new category or a relatively

52:34

new adjacency, there's either competitors

52:36

in the space already that

52:38

have mindshare. And so you need to be in a position

52:40

that you can bring some differentiation.

52:43

I think that acquiring

52:45

people right at this moment

52:48

is far more attractive

52:50

than it is doing it organically.

52:53

24 months ago, it was all about organics. Now

52:56

it's about acquisitions.

52:58

At this moment,

53:00

valuations for a lot of Alt asset

53:02

managers have gone down, but a year

53:04

ago, they were very high

53:06

and pretty attractive. So there was a lineup

53:08

of guys all thinking about going public.

53:10

And all of us who manage these things are humans. So

53:13

we have a normal array of emotions. What

53:16

happens is to all of us with an emotional

53:18

set that's not like Spock

53:20

on Star Trek is the fact that

53:22

we're all disappointed, that

53:25

we work so hard, that our peak

53:28

success was a year ago.

53:31

And now we have to go back

53:34

at it again, back into the salt mine

53:36

and rebuild a new thing, a new adjacency,

53:39

get it larger, higher, so

53:42

that we can have that efficiency for

53:44

our client. The landscape is scattered

53:47

with guys with 10 to $30 billion. I'm

53:50

in the older vintage of these guys, but

53:52

there's a whole lot of them between 50 and 65.

53:56

And they've all thought

53:59

they had reached. their goal of being

54:01

able to take it public or realize value and

54:03

now they can.

54:04

I think you're gonna see what Angelo Gordon

54:06

did with TPG is the beginning

54:09

of a massive wave of this. There's

54:11

a lot of mergers that are gonna take place and

54:14

so when the market wants to do that, when

54:17

people aren't holding out for the last dollar

54:20

but rather saying I want to make sure

54:22

that I'm merging with a person I can

54:24

work with because I have to work again but

54:27

I want to make it easier by being bigger that

54:30

it's better to be acquiring platforms if

54:32

the culture fits going back to one of your

54:34

first questions the culture has

54:36

to fit the people have to like

54:38

working together so I have to make sure that

54:41

says strategic advantage for the clients

54:43

that you did this that it doesn't look like

54:46

over here is a private equity firm and we bought a long

54:48

short equity fund yeah that's nothing to do with each

54:50

other so there's just a strategic initiative

54:53

beyond the leadership get along when

54:55

you can get all those things I think you're gonna see a lot

54:58

more of this because a lot of people out there

55:00

for trying to figure out what they do next

55:02

as you're looking at these types of deals

55:05

what are the aspects of the culture that you've

55:07

built at Predium that you look for to make sure

55:10

there's a match

55:11

one of the things I'd observed that a

55:13

lot of the folks out there are great investors

55:16

who actually don't want to run the business

55:18

of investing so in some ways

55:20

that's the first good fit for us it's

55:22

not like that's what I want to do but we've done

55:24

a pretty decent job of it when I look at

55:26

the culture within those people it's

55:29

being in a position that they're

55:32

really on a mission to create value

55:34

for the investors I think is

55:36

critically important I think it's also

55:38

important that while a lot of people

55:40

like to be absolute return people

55:43

most of the investors that I've come in contact really

55:46

find that abhorrent just like how

55:49

do I allocate that into my broader

55:52

portfolio that the mandate is do whatever

55:54

the hell you want so I also

55:56

like people who are aware of what

55:58

their clients needs are

55:59

not just focused on driving returns,

56:03

but

56:04

that their enterprise fits into the box that

56:06

the clients want. So

56:08

in a way that we add value that's an

56:10

ease of access for the clients.

56:12

Culturally, they have to be collaborative,

56:16

but they also have to want to

56:18

use the infrastructure to inform

56:21

their investments. One of the most valuable

56:23

things that we have is a ton

56:25

of information about how the economy is performing

56:28

in a lot of different ways. And so

56:30

smart people will make use of that tool. I

56:33

think that what we want is critical

56:36

thinking. It's a big factor that I look

56:38

for in someone. Do they like

56:40

to try to solve complicated

56:42

problems in

56:45

a way that creates value

56:47

for the investment?

56:48

And I think that's a differentiator for us. So we don't

56:51

want someone who is

56:53

very beta oriented, but looks for complexity

56:57

and thinks they can add value through complexity

56:59

by applying the right resources

57:01

and not looking for hobbyists.

57:03

So when we talk about non-performing loans,

57:06

we often say there's professionals

57:09

and tourists. We want to be professionals

57:11

only with the deep knowledge, with

57:13

a specialization that adds the

57:16

most value because of our knowledge. And the

57:18

client can choose if they want to be in that asset class

57:20

or not. Our job isn't to roam the world

57:23

and buy the cheapest stock off to Shanghai.

57:26

That's not what we're going to do.

57:27

If you put on your Lloyd Blank fine hat

57:30

and you're talking to someone you're thinking of bringing in, what's

57:33

the roadmap for what Predium looks

57:35

like 10 years from now?

57:37

So our aspirations are to be a $200 billion

57:40

or $250 billion alt manager,

57:43

hopefully faster than 10 years. What

57:45

we want to do in doing that is to create

57:48

more new categories. I think

57:50

some of the categories that will morph

57:53

private credit is going to change a lot over time. We're

57:55

going to have a default cycle in private credit, which

57:58

will have an impact on distress. investing,

58:01

they'll have a new round of expertise required.

58:04

We focus a lot on intellectual property as

58:06

a category, whether it's patent portfolios,

58:09

whether it's financing people

58:11

successfully defending their patents. We

58:14

continue to look at how would we add

58:16

real estate debt in the right way. I think, as

58:19

I said earlier, real estate's never had this much dispersion.

58:22

So as one of my clients said to me the other day, we're

58:25

like a lot of people, we're only in three categories

58:27

of new dollars in real estate. We're in sheds,

58:29

beds,

58:29

and meds. Sheds

58:32

being like industrial and logistics, beds

58:35

being residentials, and meds

58:37

being pinnacle office. But what that

58:39

just says to you how to favor offices,

58:42

which we all know, but it's going to be a massive restructuring

58:44

of that space. I suspect it'll

58:46

spill into others. And so the debt part of that

58:49

market is going to be great. So historically,

58:51

people have mostly done performing real estate debt.

58:53

I think you're going to see a massive growth in that. So

58:56

what we want to do is be in a position that over

58:58

the course of the next five

59:01

to 10 years, we've added areas

59:04

that had growth opportunities that add

59:06

value

59:06

to clients and in doing so

59:09

create an enterprise that will long

59:12

exist past my time on

59:14

this earth.

59:15

Don, I want to ask you a couple of closing questions

59:17

and we'll let you go. What's your favorite hobby or

59:19

activity outside of work and family?

59:22

Is there a better word than dilettante? Because

59:25

it has such negative connotations. But let me tell you

59:28

what I mean by that because it sounds very

59:30

like

59:31

aspirational and royalty. And what I really

59:33

mean by that is a person who's interested

59:35

in a lot of things and an expert in none. I

59:38

collect some wines, but not so great. I

59:40

have an art collection. I'm not that great. I

59:42

play golf badly. I ride

59:44

a bike. I used to be good. I'm not as good, but

59:46

I love riding my bike. That's my favorite thing

59:48

to find time to do because

59:50

I find the relaxation after

59:54

mile 25 to mile 50 to be some of

59:57

the best moments outside of work and

59:59

children. So that may be my thing,

1:00:01

but building this business has been pretty

1:00:04

encompassing during that. But

1:00:07

yeah, I have a lot of interest and I'm really not very good

1:00:09

at any of them. What

1:00:10

did you dream about doing when you were

1:00:12

a kid?

1:00:13

I dreamed of being

1:00:15

a detective because

1:00:18

unlike other kids in the neighborhood who had

1:00:20

a lemonade stand, I opened

1:00:23

a private detective stand to

1:00:25

look for cats and lost toys and

1:00:28

things like that. And the book was, was

1:00:30

it Encyclopedia Brown was a little book

1:00:32

about that as a kid? So I used to avidly

1:00:35

read them. So certainly at one point I

1:00:37

thought I would be a private detective. And

1:00:40

later I read a lot of Lou Archer type

1:00:42

novels as a kid. So I loved that

1:00:44

whole era. After that, though,

1:00:46

when I grew up, I had a better set of aspirations.

1:00:49

Let's say, you

1:00:50

know, I liked the guy who had the office

1:00:52

down the block who was the insurance salesman

1:00:55

because he didn't have to wear a uniform. My dad wore

1:00:57

a green uniform and he didn't go

1:00:59

at any of my sporting events. Not

1:01:02

because he didn't love them because he was embarrassed

1:01:04

to be there in his uniform.

1:01:05

And so I wanted to live

1:01:07

a life that was, didn't

1:01:10

have one bathroom

1:01:12

for five people that probably didn't

1:01:14

require me to wear a uniform. I was excited

1:01:16

to wear a suit, to be quite frank, I'd

1:01:18

never had one. And

1:01:20

got me out of a lovely little town called River Edge, New

1:01:22

Jersey. And I just wanted to get

1:01:24

out of there.

1:01:25

What's your biggest investment pet peeve?

1:01:28

Two things. One is, despite

1:01:31

people's best efforts, there's still a

1:01:33

lot of consensus following.

1:01:36

And that's only been amplified over the years

1:01:38

by technology driven investors

1:01:41

and traders who focus on trend trading.

1:01:43

And so

1:01:45

the system really does

1:01:47

still not reward people to be outside

1:01:51

the system.

1:01:52

And that was great for me. It took a long

1:01:54

time. This was like we were out in the desert

1:01:56

wandering around for seven, eight years before

1:01:59

people figured out the that it really was a business. The

1:02:01

infrastructure of it is a little bit reminiscent

1:02:04

of the Apple IBM computer

1:02:07

debate of the 90s, where it's like you

1:02:09

were never incented to buy an Apple product

1:02:11

if you were a corporate purchasing person, because

1:02:14

you got no penalty for buying IBM

1:02:17

and you had a lot of risk if you bought Apple. And

1:02:20

there's a lot of that in the investing world

1:02:23

where you don't really

1:02:25

get a penalty for buying Blackstone in most places.

1:02:28

And God bless them, they do a good job. No

1:02:30

one should take that as a critique of them, but

1:02:32

critique of the mindset

1:02:35

of many, not all people in this space.

1:02:38

I think that people write things off

1:02:41

too fast

1:02:42

because they often don't have the time

1:02:45

or the willingness to explore an idea. And

1:02:48

that creates opportunity though,

1:02:50

but it makes the opportunity harder to execute

1:02:53

on.

1:02:54

What investment mistake did you make that

1:02:56

you'll never make again?

1:02:58

Timing is a great example here. So

1:03:01

personally, I was short

1:03:04

and they last tech boom in

1:03:06

the early 21st century. And I got squeezed

1:03:09

out of my shorts

1:03:11

and lost a huge percent

1:03:14

of my net worth. That 60 days

1:03:16

later, I would have tripled my net worth.

1:03:18

So timing,

1:03:20

which is a classic complaint everyone has.

1:03:23

And that's the case even in SFR,

1:03:25

where everybody thought we were late, just four or five people

1:03:27

were in, but the reality is we were early.

1:03:31

Which two people have had the biggest

1:03:33

impact on your professional life?

1:03:36

First, that fellow whose

1:03:39

father was an elevator repairman has to

1:03:41

go at the top of the list because I probably

1:03:43

wouldn't have got a job and been invited

1:03:45

back. Because when I left at the end of

1:03:47

the summer, there was no plan

1:03:50

to hire me back beside being a summer intern.

1:03:52

My real first full-time job

1:03:55

wasn't a junior credit analyst. My

1:03:58

real first full-time job.

1:03:59

I was a secretarial assistant

1:04:02

that Mike got me on the payroll.

1:04:04

His name is Mike Highland. He is

1:04:07

a terrific guy. He got me on the

1:04:09

payroll at First Boston as the assistant

1:04:11

to the secretary named Louise. And

1:04:14

I actually whited it out, things

1:04:16

on spreadsheets and typed

1:04:18

them in because we didn't have Excel back then. And

1:04:21

then we'd take him to the photocopier and that was

1:04:23

my first full-time job on Wall Street. And

1:04:25

then there's a bunch of other people, not the

1:04:27

least of which is my father,

1:04:30

I'd say. And the reason why I'd bring him

1:04:32

up is not because he was a mentor

1:04:34

on Wall Street, but that what I said, my advantage

1:04:37

was a willingness to work hard.

1:04:40

And as

1:04:41

colleagues have said, boil

1:04:42

the ocean to find an idea. So

1:04:44

I'm famous for getting on a plane

1:04:46

with three or four canvas bags of research

1:04:49

and finishing the trip to California or

1:04:51

the Middle East with down to one

1:04:54

canvas bag. And then rereading

1:04:56

it all on the way back and making notes and

1:04:58

figuring out what to do. And that I think

1:05:00

is the product of my father who

1:05:03

worked extraordinarily hard. His

1:05:06

challenges in life put the chip on my

1:05:08

soldier. We had to borrow

1:05:11

money from uncles and cousins

1:05:13

and stuff like that to buy a house. And

1:05:16

so feeling like the poor

1:05:18

relatives was one of the important motivators.

1:05:21

Through that, I've learned from just

1:05:24

a ton of great people like Lloyd,

1:05:26

I mentioned, Gary Cohn, Tom

1:05:29

Harris, Mike Milken, John

1:05:31

Goodfriend, Ace Greenberg, Jimmy

1:05:34

Kane, even though a lot of people like to take Jimmy's

1:05:36

name in vain. I learned a lot

1:05:38

from him. So I had the benefit of almost

1:05:41

being a Zellig for

1:05:44

those old movies of Wall Street because I

1:05:47

worked at all these fantastic places with

1:05:49

all these brilliant people. And they

1:05:51

all taught me something.

1:05:52

What was the best advice you ever received?

1:05:56

So there was a fellow who worked at Bear Stearns named

1:05:58

Richie Metric.

1:05:59

A brilliant man. And

1:06:02

they had given me a new business unit to

1:06:04

manage. And I went

1:06:07

through it and started analyzing the people

1:06:09

and laying people off and hiring people.

1:06:12

And Richie said to me, why are you firing all these people?

1:06:14

Because, well, I kind of figured out if

1:06:17

I could do their job better than they

1:06:19

could, I probably should replace them.

1:06:21

And he goes, no, stupid. That's

1:06:23

why you're in charge.

1:06:27

So it gave me a whole different perspective

1:06:30

on human resources.

1:06:32

So while it might sound like a story about

1:06:35

me, it's about me being stupid. And

1:06:37

so I had to change my views. That

1:06:39

was one of the best pieces of advice

1:06:41

I ever had for someone. All right, Don, last

1:06:43

one. What life lesson have you learned that

1:06:45

you wish you knew a lot earlier in life?

1:06:48

I think I'm very blessed. So everything

1:06:50

that's happened, I wouldn't ever do, no

1:06:53

matter how bad it was or how good it was. I

1:06:55

wouldn't go back and change anything.

1:06:58

Everyone around me has

1:07:02

just been a great experience. Great

1:07:04

friends, great family, very happy with everyone. If

1:07:07

I had the opportunity to learn

1:07:09

something sooner,

1:07:12

when I was in my 30s and running a lot of stuff,

1:07:15

I had a

1:07:17

great sense of anxiety.

1:07:19

Because my responsibility vastly exceeded

1:07:21

my experience.

1:07:23

And during that period of time, I would

1:07:25

say that I could have been more

1:07:27

magnanimous to the people around me.

1:07:30

And as I grew older, I became keenly

1:07:32

aware of the fact that you don't meet anyone

1:07:35

once. You meet them almost

1:07:37

as many times as the Earth goes around the sun.

1:07:40

And so as a result, I wish I was a more magnanimous

1:07:43

younger person, who nonetheless is

1:07:46

driving people hard and working hard. And I've

1:07:48

found that to be an

1:07:50

interesting and amusing thing. As I'm in this

1:07:52

seat today and traveling

1:07:54

the world, I find people who used to work

1:07:56

for me from Abu Dhabi to Korea.

1:08:00

And I guess I wasn't as bad as I perceived

1:08:02

myself to be,

1:08:03

because so many of them have been nice

1:08:06

and helpful and collaborative, but

1:08:09

more than a few have said to me,

1:08:12

I stood outside your office and was absolutely

1:08:14

scared shitless to go in.

1:08:16

And that person is the global head

1:08:19

of real estate allocation at a very large

1:08:21

sovereign wealth fund. Don,

1:08:24

thanks so much for sharing your experience,

1:08:26

insights, and this incredible story of single-family

1:08:29

rentals. Thank you so much for the time, I appreciate

1:08:31

it. Thanks

1:08:33

for listening to this Sponsored

1:08:35

Insight. Sponsored episodes

1:08:37

are paid opportunities for another 12

1:08:39

to 18 managers a year to

1:08:42

appear on the podcast. If

1:08:44

you're interested in telling your story in

1:08:46

front of the largest audience of investors

1:08:48

in the industry, please email us

1:08:51

at teamatcapitalallocators.com

1:08:54

to apply for one of the slots.

1:08:59

Thank you.