Andrew Jobst: Knowledge, Intelligence & Curiosity — The Secrets Behind a Boutique LP Equity Provider.

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Episode 6 of Offshoot brings long-time friend and acquaintance, Andrew Jobst onto the show.  Andrew is a principal of HG Capital.

Since 1995, HG Capital has specialized in providing joint venture equity for value-add and opportunistic real estate investments throughout the Western US. Uniquely, they typically invest $8MM and less per transaction.  That stance reflects a very deliberate and strategic effort to place equity into a portion of the market with less buying pressure. That notion to “buy where others are not” has proven very successful over the firm’s 25-year history.

Andrew is unquestionably one of the most intelligent and highly educated people I engage with on a recurring basis. He is involved in all aspects of the Fund’s operations including originations, joint venture negotiations, and asset management & disposition.  Since joining the company in 1997, he has structured over 100 investments with completed value of more than $2 billion.  He’s insatiably curious, very thoughtful, and both possesses and seeks knowledge from a very wide array of subjects.  Interestingly, his formal education was not a traditional foundation for a career in real estate as he holds a B.S. in Biology, a B.A. in Economics, and a Master’s Degree in Engineering Economic Systems and Operations Research, all from Stanford University.

Within the episode we touch on a wide array of topics, including:

• The wall of capital that is in the market and the implications for the real estate market.
• The fact that capital is not on the sidelines because of the COIVD-19 pandemic.
• The idea that there is no real estate market, but only a basket of discreet deals that the media likes to call the market.  Deals are all case-by-case.
• The space that HG plays within and why those smaller equity checks, and their smaller platform represent a vibrant strategy.
• COVID-19 as a “grand natural experiment” that has catalyzed and accelerated a wide array of changes.
• Incentives as a central tenet of any partnership and the difference maker in structuring deals for the best outcomes and creating alignment.
• “Greener Grass Syndrome” and the tendency for operators to drift into the space of other competitors who may know more than they do, who are just as sharp, and work just as hard as them.  Why will they be more successful than the incumbents, and what makes them see that grass as so green?
• Asking the developer or investor why do you like this deal, now?

Transcript

Kevin Choquette:

Hello, everyone. Thanks for tuning into my conversation with Andrew Jobst, a partner at HG Capital, a private equity firm based in Menlo Park, California. Since 1995, HG Capital has specialized in providing joint venture equity for value add and opportunistic real estate investments throughout the Western US. Uniquely, they typically invest $8 million and less per transaction. That stance reflects a very deliberate and strategic effort to place equity into a portion of the market with less buying pressure. That notion to buy where others are not has proven very successful over the firm’s 25 year history.

Andrew is unquestionably one of the most intelligent and highly educated guys I engage with on a recurring basis. He’s involved in all aspects of the fund’s operation, including originations, joint venture negotiations, and asset management and disposition. Since joining the company in 1997, he’s structured over 100 investments of a completed value in excess of $2 billion. He’s insatiably curious, very thoughtful and both possesses and seeks knowledge from a wide array of subjects. Interestingly, his formal education was not a traditional foundation for a career in real estate as he holds a BS in Biology, a BA in Economics and a master’s in Engineering, Economic Systems and Operations Research all from Stanford University. Andrew, thank you for taking the time, and welcome to the podcast.

Andrew Jobst:

Thanks, Kevin. Thanks for having me here.

Kevin Choquette:

Yeah, my pleasure. To get us started, could you just tell me a bit about yourself and HG Capital?

Andrew Jobst:

Yeah. So I grew up in Northern California, ended up going to school relatively close to home. Candidly, I never expected to get into real estate, but Stanford has what’s called a coterminal degree program, which allows you to stay for an extra year and get a master’s. My predilection is generally to go into math, and that side of my brain seems to work better than the other side. And so I found myself in the program that you described, which is now called Management Science and Engineering, which is less of a mouthful, and frankly, I needed to earn some money for that fifth year.

So I found an internship at a company that happened to be close to where I lived at the time and ended up as an intern at HG Capital in ’97 as I was finishing my education. That led me into real estate, and I knew nothing of real estate at the time so it was very much a education by fire, effectively. I didn’t think that I would end up in real estate after I started there. Ended up going through the interview process for management consulting and accepted a job offer and cashed the bonus check and thought that I was going to go into that part of the world.

At the time, HG was relatively early and they were looking for somebody else permanently, and while I didn’t have really the experience to start at the level that they thought they wanted, we had effectively a five or six month interview process. And so they knew who I was and I had a sense of who they were and what they stood for. And so ultimately, I made the decision, which was difficult at the time, to essentially tell the consulting firm that I found a different offer and I was going to stay with HG and sent them back the bonus check and apologized. Yeah, it was a difficult thing for somebody at that stage of essentially the start of my career to turn down a job after I had accepted it. But ultimately, here I am 20 plus years later and I think it was the right decision.

Kevin Choquette:

Yeah, absolutely. What about HG? What can you tell the listeners about the firm and what you guys are about?

Andrew Jobst:

So I think probably the best way to describe it is to give just a little bit of the history. So the firm is actually a successor company to my partner Henry’s father’s business that was started in the UK just after World War II in the ’40s. He started a real estate business that ultimately had a couple of hundred employees, I think, at the peak, but they had all aspects of real estate that they focused on. They owned a home building company. They had a construction company. They built for themselves. They built for third parties. In the morning, they might be underwriting an industrial development. In the afternoon, they might be thinking about a residential subdivision. And so they focused geographically, but they were very flexible with respect to the opportunities that they took advantage of.

That served Henry’s father and their business quite well for decades. In the ’70s, the family decided to leave the UK and of all places they picked Northern California. One of the main reasons that they chose Northern California is the area that they were comfortable with in the UK, or that they were most familiar with in the UK, was an area that was heavily influenced by technology. And so Henry’s father packed their bags and moved to another area that had heavy influence from technology in Northern California. For a long time, the family, effectively, was just investing their own capital. And rather than replicate the business they had in the UK, they made a conscious decision to use their knowledge to invest with developers, understanding that real estate is a very local business.

That was a more effective way to deploy their capital. It was to find people that understood their market niches, to understand their markets, and that were experts in their product type. That was a good marriage of the family capital with local developers. And because they had that focus on smaller transactions, because they had the knowledge in both commercial property types as well as residential, it just flowed into that kind of strategy. With the funds, that’s the same strategy we have today. So we still focus on smaller deals. We still are very flexible with respect to product types. So we will invest in residential, we will invest in commercial, and we are not moving back over to the GP side. So we often see folks that they will invest with third parties, but they will also serve as their own GP, and that’s just not a direction that we take.

So the firm essentially morphed over time. We kind of joke that we’re a 50 plus year old startup company, but every deal is essentially a new venture. But how we chose our strategy really stems from those original roots in the UK where you recognize that real estate is not some uniform blob of things to invest in, but every deal has its own unique attributes that you need to understand and find a way to generate the best profit that you can from the deals.

Kevin Choquette:

You and I have known each other for probably 15 plus years at this point. One of the things I enjoy about HG Capital is the fact that you will consider smaller investments. From my vantage point in the industry, that is a scarce commodity, that the bulk of investors that I can reach out to and speak to for JV equity are going to have a pretty hard floor at 10 million, if not 15 or 20, as kind of, “This is as low as we’ll go.” And to do 10 million, it probably needs to be fairly compelling. We could probably drill on just this for quite some time, but aside from perhaps that historical experience base of smaller private deals that the predecessor company was executing on its own account, what is it that has kept you guys in that smaller investment size?

Andrew Jobst:

So there’s a couple of answers to this question. One is that capital markets have arranged themselves in ways where most of the funds end up in very large markets effectively, multi-billion dollar funds. And just from an efficiency standpoint, it’s difficult to deploy that kind of capital doing it five million at a time. So number one, in the bigger transactions, there’s just a lot of people chasing and frankly, there’s fewer opportunities there. So one is just the capital structure is just far more competitive with the bigger deal size. But the second thing, and this is pretty important, is this grew out of internal capital being deployed into real estate. If you just, next time you go on an airplane, which may be a little while, look out of the window and ask yourself how many deals below you are fitting for 10 million of equity and up. The answer is not as many as deals that need less than 10 million of equity.

So from our perspective, because we’re not a volume shop and we’re looking for the best returns possible, it’s just a far more inefficient space. I mean, the challenges are that it takes just as much time to underwrite a $5 million investment than it does to underwrite a $20 million investment. So again, naturally, a lot of the competition gravitates toward those bigger deals because it’s a more efficient way for them to operate. But for us, yeah, we suffer from an efficiency standpoint, but we think we make it up from a return standpoint, and because we’re heavy investors in the vehicles, it’s something that we want to stay in that space.

Kevin Choquette:

Yeah, agreed. When you look at these, I mean, you and I’ve talked about it and I think you may have some stats on it, but let’s go back up to 35,000 feet or whatever our cruising altitude is and look down. I can’t quote them off the top of my head, but it’s a relatively small fraction of the total of commercial real estate assets that are over 50,000 square feet, which is where you’re going to start to get capitalization in total that would support $10 million and above JV equity. Do you have any reference points as far as the data, in terms of how many more targets you might have as a smaller LP investor than those larger shops?

Andrew Jobst:

Gosh, I looked years ago. I took a look at CoStar and I just kind of broke it down broadly by deals that were 20 million and less versus 20 million and more of total asset value. I think the number was something like 95% of the assets-

Kevin Choquette:

Correct.

Andrew Jobst:

… that were listed for sale were 20 million or below. So there’s a huge number of real estate transactions that are smaller, just enormous. I don’t know if we’ll get into it or not, but it’s one of the reasons that we stick to our current structure, which is relying on third party GPs to find the transactions because candidly, when you have that volume of smaller deals that are possible out there, you want to cast a wide net in order to try to pick off the ones that you find most attractive. But, yeah, to answer your question, it’s enormous. It’s enormous. We’ve had people ask us in the past why we haven’t grown bigger. The answer is simple, which is, “Then we’re just going to be competing with everybody else, and we prefer to be in a space where we feel like there’s some inefficiency remaining.”

Kevin Choquette:

Yeah. I mean, I guess to put a point on it, I see the space that HG occupies as really vibrant. I think the buyer’s market that you are standing in is really strong. I mean, you would have seen that over all the years where you contemplated two, three, four, six, $8 million JV equity investment. You may be one of the only bidders, the only bidder, or maybe there’s three other bidders, which would be kind of surprising. That’s a great spot to be. So we’ll get back into the fund stuff, I think, but what’s happening in the business right now? What are you guys seeing? We just came off an election where obviously whatever inning you want to call it in COVID-19, but what do you guys see and what challenges are you seeing? What’s happening in the business today?

Andrew Jobst:

I think the biggest thing that we’re seeing today is just, there’s just a lot of capital out there. There’s a lot of people searching for yield and that has made it fairly challenging, frankly, to find investments simply because capital is freely flowing. While it’s true that sources of organized capital rarely go below that $10 million mark, there are private individuals that will invest. And so developers will oftentimes find a syndicate of investors to make their deals happen. But from a very big picture standpoint, I think a lot of people… There’s a lot of this discussion about working from home, not working from home, what’s going to happen with major cities, San Francisco and New York? Is everybody going to work remotely forever and order all their groceries online forever and never leave their living rooms? I don’t know.

But right now, I guess the best way to put it is I feel like we’re playing on borrowed time a bit. We’ve got government support, and here we are on the 29th of December, and maybe we’re going to get a bit more government support coming out. And so a lot of the problems with respect to employment and whatever business destruction occurred during the pandemic are being papered over for now. So I think there’s a little bit of maybe misplaced comfort, I would say. And so we haven’t seen values correct the way we have in prior downturns and we may not, but we do think that there’s still opportunity if you can be patient and pick your spots. The space that we, in particular, focus on are value added and opportunistic deals, which most people understand what that means, but what it effectively means is it’s not yet a clean and polished asset with cashflow, right? There’s something wrong with it, something where it’s not performing up to where it should, or it’s not yet built.

So we think that if there’s something wrong with an asset, you can ultimately build it and create that value. At the end of the day, where we’re seeing this, I think people have referred to it as a wall of capital, where this wall of capital is having the most impact is on the finished product, effectively, the completed asset and the yields going lower and lower and lower. So where are we today? It’s a very good question. I think when you start saying, “Well, where are we today?” I think oftentimes people confuse where we are today with where they think we’re going. And so both of those intertwine in unpredictable ways. So where I think we are today is a period of complacency with people searching for yield. Where we actually are today? Hell, I don’t know. We’ll find out in a few years.

Kevin Choquette:

Right. Well, there’s been this whole alphabet thing on the recovery and at some level this whole thing is even questionable in terms of its traditional recession dynamics and all of that. But certainly, the stock market I got wrong. I thought we’d retest the bottom. The whole notion of a V-shaped recovery was nonsensical. As it pertains to publicly traded equities, I was 100% wrong. I’ve been wrong on a lot of things as it pertains to pandemic prognostication.

What do you think might be coming? I mean, you referred to this like the wall of capital and a whole bunch of liquidity searching for yield. Do you think that real estate markets might follow a trajectory that’s not too dissimilar to what has happened in the stock market? Which is to say, perhaps capital will be on the sidelines for a short period of time and then as soon as there’s… I don’t know that this one’s going to put in a floor like previous or The Great Recession, I should say, and then we’ll see a big run-up. But what do you think? I mean-

Andrew Jobst:

Yeah. I guess, I don’t think capital is on the sidelines. In the past, in cycles, there were periods of time where there was very few people bidding on assets. Post dot.com in the Bay area, I think it was in 2000 after the dot.com bubble burst, people would say, “There’s so much office. It’s going to take a decade to absorb it all.” Well, it was absorbed in, I don’t know, something like five years. But there was that point in time where everybody was very concerned. And so there were just much fewer bidders, and prices got down to levels where you could take some perceived risk and get a pretty healthy return if it worked. A similar story in the post housing bubble environment. Prices got to a point where your downside was very limited and there was meaningful upside.

Where we are today, you have certain product types, some of which we don’t play in. But take hotels for an example. Hotel debt, there’s just a ton of capital that thinks, “Oh boy, I can now buy some assets cheap. I can buy some distressed debt.” I’ve heard stories of some of this debt trading at still 90 cents on the dollar. These are businesses that today aren’t generating any cashflow or any income, and there’s a real question as to whether they’re going to be anywhere close to where they were before. So I don’t know, but it seems like today, that capital hasn’t left.

I think what’s going to happen is it’s going to be deal by deal and market by market more than ever before. There’ll be broad trends, but I don’t think it’s going to be a situation where you could just say, “Well,” I don’t know, just, “office is in trouble so just buy office,” or, “Hotels are in trouble so their prices are going to go down, so just buy hotels and enjoy that ride up.” I think there are some things that are going to be different post-pandemic than pre-pandemic and consequently affect real estate in ways that is unpredictable. So will all office be down forever? No, of course not. But I think the higher quality office is going to do better than lower quality office. I think, and we’ll probably get into this, but urban versus suburban retail is suffering and there’s going to be needs based retail and experiential retail and then there’s going to be everything else. Then there’s going to be hotel. Hotels focused on business travel I think are going to do worse.

So anyway, I think where we are is that prices haven’t corrected because all this capital’s chasing yield. I think when we look forward five years from now, I think there are definitely going to be winners, there’s going to be assets that recover strongly, and there are going to be losers. There are going to be assets that people thought would recover and they just didn’t. It’s just hard to predict what’s going to happen.

Kevin Choquette:

Well, I agree with you on this notion of it being kind of a case by case assessment in terms of the merits of an investment. But I think there’s something else potentially at play which has actually been a benefit to my business, which is there’s a pretty wide dispersion of opinions and viewpoints on assets and trajectories. I mean, take the example you gave of, sorry, hospitality paper, whether it’s distressed or not, or maybe it’s pre-distressed and there’s some sort of a… I’m looking for the word I can’t find right now, but they’ve postponed the payments, right? Deferment.

Andrew Jobst:

I think, yeah, the colloquialism is that they’ve kicked the can.

Kevin Choquette:

Right, they’ve kicked the can. They’re deferring their collections of the debt payments and maybe it’s on the market in that scenario. I’ve talked to Eric Boyd on this podcast not so long ago, and their view is with the amount of uncertainty on an asset to get back to even break even and the time period under which that needs to happen, those assets, again, case by case… And it will certainly matter on what flag, is it full serve? Is it limited serve? Is it select serve? All of that matters. But their view is plus or minus, it needs to be 65 cents on the dollar, the dollar being, call it, January 2020.

That viewpoint, obviously, is not shared by the people who are paying 90 cents. That’s the one thing that I think may… And I’ll go back to your thing and say, yeah, I also don’t know where we are, and in two years we’ll know exactly where we were. But the one thing that may happen here is that dispersion of opinion over value and whether or not now is a good time to buy will eventually consolidate. Then I think the wall of capital that you’re talking about will well and truly flow because it will be clear that the trend is in, right? And if you still have dollars to get out, perhaps, again-

… will have dollars to get out, perhaps. Again, you still need your investment discretion, and case by case will always be the mandate.

But I do feel right now, there’s people who would say, “I wouldn’t do that, for this price,” so there’s some bid-ask spread. But there are other people on the same asset who are willing to pay.

Perhaps we’ll see a consolidation of opinion, and a consolidation of sentiment, because at the moment, even in just the lending community, we’ve got some lender’s pencils down. We’re not interested to make any new, for example, construction loans in the remainder of 2020, we’re going to wait to see what happens with the CDC, and these eviction moratoriums and things like that.

Where others are absolutely thinking, “Hey, cap rates are going to compress. I’ve got a great exit in the agency debt. Let’s just lean in and make aggressive construction loans.” I don’t know if you’re seeing that, but I definitely see this divergence of opinions across the commercial investment and lending marketplace.

PART 1 OF 4 ENDS [00:24:04]

Andrew Jobst:

I think you’re right. There’s definitely different opinions. I think the interesting thing for me is, one of the things that I’ve learned to be true, over the first part of my career is that the most dangerous, and we’ve probably talked about this before, but the most dangerous phrase in investing is that, “It’s different this time.”

Kevin Choquette:

Right.

Andrew Jobst:

And so …

Kevin Choquette:

Or a paradigm shift.

Andrew Jobst:

Or it’s a paradigm shift, yes.

Kevin Choquette:

Yeah.

Andrew Jobst:

So I think what we’re seeing now is, all the capital providers out there, or not all of them, but enough to keep the market afloat are effectively saying, “It’s not different this time, it’s just the same.”

Office markets will recover. Hotel markets will recover. Retail, to the extent there’s an ability to recover, it will go back to the prior trend line. I think there’s a lot of people who are making that bet that it’s not different this time, that here’s going to be a light at the end of the pandemic tunnel, and we’re going to recover.

I’m sympathetic to that. Again, because I’ve always thought that that was a dangerous phrase to say, that it is going to be different this time. But this was a grand, natural experiment, if you will.

Everybody was forced to shop from home, work from home, if they could, do things differently than they had before, and take advantage of a lot of tools and technology that existed, but hadn’t been widely used. I think probably the opinion that I subscribe to the most is that the pandemic has essentially accelerated technology-driven that existed pre-pandemic, but maybe hadn’t been as broadly spread.

I think, it’s not different this time. But I think, if you step back, and take a different view and say, “Well, what trends were in existence before, and likely accelerated through the pandemic? And how does that affect real estate?” In some cases, it’s going to affect real estate so much, that it is going to be different, in terms of certain assets just not recovering.

That’s the thing that gives us pause is just, again, that attitude of, “Buy things that are out of favor, because it will recover,” it just doesn’t feel as comfortable this time. Our focus is on things that are benefiting from some of the trends that are emerging from the pandemic, but existed before the pandemic.

At some point, maybe we’ll dip our toe in the water of things that were more affected, but I don’t think we’re really going to see how those product types recover, until some time after the vaccine is out, and the case counts are down, and people get back to a normal life. Then I think we’ll start to have a better sense of what the real world is going to look like.

Kevin Choquette:

Well, look, we’ll come back to other things that I think are different now. But since you just mentioned some of the, or alluded to, there are certain sectors, certain investment opportunities, that you guys are finding of interest today. What are those? What markets, what assets, why are you pursuing those?

Andrew Jobst:

I want to differentiate between assets that are highly priced, and where we think there’s opportunity. For us, if I say, “Yeah, I like workforce housing.” Well, it’s very highly priced. Well, of course it is, because I think a lot of people see it as a safe product type.

But when we’re looking at investment opportunities, we’re always looking for some unique aspect to a transaction. It’s really trying to position ourselves to be in markets that are going to be less affected, or in markets that are likely to hold up in a period of disruption.

For us, the three product types that I would say are top of the list for us are industrial, multi-family and storage. It doesn’t mean that we won’t invest in a residential or in a retail deal, excuse me, tomorrow. It doesn’t mean that we won’t find an interesting office investment the day after that.

But from a top-down perspective, those are the product that we see as, I don’t want to say being resistant to a downturn. But those are the product types that I think are going to be stable through a rough patch. That’s what you need to expect at this point, is that there’s going to be a rough patch.

You always have to expect there to be a rough patch. I mean, probably one of the key questions we ask ourselves on any investment is, “Do I want to hold this asset through a downturn?” If it’s a deal that’s a race to the exit, that just doesn’t feel very comfortable right now.

But with industrial and storage and multi-family, you have tailwinds, with respect to e-commerce for industrial, and you have, generally, lack of development when it comes to multifamily, and the desire for folks to live somewhere out of the rain and snow. Multi-family is something where there’s going to be steady demand, it’s just a question of price, and you’ve got multi-tenant, so you have protection against one tenant failing, and then storage, which is a bit more of an operating business.

But similar to multi-family, you have hundreds of tenants at an individual property, so your risk that all of them leave on the same day as close to zero. Those are the three property types that I would say we probably like the most, but we’re very opportunistic. If a deal comes about that is something else, we’re very happy to take a look at it.

Kevin Choquette:

And then, Western US is the focus, if you were to think primary, secondary tertiary markets, whether it’s those three asset classes, or something a bit less down the middle of the plate. How do you look at the different tiers of markets? Where would you guys invest?

Andrew Jobst:

Primary markets oftentimes are just too expensive. The asset prices are too high. If you’re going to go into San Francisco or Manhattan, as an example, in the geography, that’s out of our geography, the cost of things is just way outside of the typical $5 million check that we need.

When you go into tertiary markets, things that are too far out, you have two questions that are sometimes difficult to answer. That is, one is, where is the demand coming from to use the real estate that you own? And the second is, who’s going to buy this when you’re done, and you want to sell it? And there’s just, there’s fewer people that are willing to own assets in what I would call true tertiary markets.

So we tend to focus on secondary markets. We will move into tertiary, if it’s something that is still within striking distance of a major job center. But we tend to focus in probably that first ring, outside of a major job center.

Kevin Choquette:

And then, what about development, and/or entitlement risk? Is that something that HG will consider?

Andrew Jobst:

Yes, to development, entitlement is more difficult. We have done entitlement in the past. The issue with entitlement is, it can be a political process, and quite risky. And it’s a Catch-22. It’s the classic issue of, something that is that difficult tends to come with it, some meaningful value creation.

You can go into an entitlement project in a place like Texas, and there’s really not much value creation there, because the barriers to getting something approved doesn’t really exist. Then there’s getting entitlement in California, which can be quite difficult, even if you’re not doing anything that’s very controversial. But the upside in California is, if you go through that process, there’s typically some meaningful value created, once you get to an approved project.

But to answer your question, the answer is yes to both of those. But I would say, nine times out of 10, that we’ll do, say, nine development deals for every one entitlement deal.

Kevin Choquette:

There you go. Yeah, that’s a good ratio. Going back to this notion of what is different now, and paradigm shifts, and all of that.

I have similar trepidation when, for me, if I’m going up in an elevator and somebody says, “Well, it’s a paradigm shift.” I’m like, “Okay, ring the bell. We’re at the top of the cycle.”

But I feel the monetary policy that is afoot, the ballooning of the Fed balance sheet, I think they’ve added three trillion to their assets, or I guess, liabilities. We’ve put now, I guess, with the latest stimulus, it’ll be four trillion of fiscal response.

Marry that with what you were just calling the wall of capital, that has already, for a long time, been in search of yield, marry that to the fact that the tenures at 0.95 up from, I think, a low of 0.55, or thereabouts? Yields are compressed, severely compressed.

And I wondered what your thinking is, as it pertains to those dynamics, and price and yield and spreads between the risk-free rate and real estate, and the implications. To me, there are some pieces on the board that you could interpret as being fairly bullish, for asset appreciation. But that is not as open-ended question as I would like.

When you look at monetary policy, when you look at the wall of capital, when you look at the mandate, for whether it’s life companies or pension funds to produce reliable yield, where does all the money go now? Now, there’s even more of it out there, and it’s not going to get it in any of the bond markets. So what’s next?

Andrew Jobst:

Boy, if I had an answer that I was confident in, I would probably already have made enough money to be living on a beach. One of the things that has been a challenge for me to really get my head around is, the conventional wisdom is that the Fed drives interest rates.

I’ve heard some fairly compelling arguments from people that flip that on its head, and say, “No, no, the Fed doesn’t drive interest rates, the Fed reacts to a natural demand for capital.” The idea is, if I can try to summarize somebody else’s thoughts succinctly, if the Fed was too loose, then inflation should emerge.

But the fact that it hasn’t yet, of course, notwithstanding, the stock market, and capital appreciation, and other inflated asset values, art and collectibles, and maybe precious metals, the idea that the Fed can dictate demand for capital by lowering or raising rates? I don’t know. I don’t know if that’s true or not.

So, I look at it, and we look at it more in terms of the thing that hasn’t emerged, higher yields, inflation, and could emerge. How does that impact any particular deal that we’re invested in? The answer really is, well, you want to be in product types that perform well in those kinds of environments, and structure yourself conservatively, so it doesn’t whack you. But I don’t-

Kevin Choquette:

When you say higher yields, do you mean higher interest rates?

Andrew Jobst:

Yes, sorry.

Kevin Choquette:

Yeah. Yeah, yeah.

Andrew Jobst:

I don’t know. I mean, I look at it more from a policy perspective, and you say, “Okay, well, we have so much debt, both, corporate balance sheets, and we have huge amounts of debt on the government balance sheet, if you will.” And I don’t see that going away.

I think deficits are going to continue to rise, just based on demographics alone. The demographic story is one that also bleeds through to the demand for yield, as opposed to the demand to take risk on future cash flows. So I don’t know. I don’t know.

I mean, I think that eventually we’re going to, and I’m going to use the royal we, in terms of the US, they’re going to have to monetize their debt. There’s just going to be too much pressure to do so in various ways. And that is going to, ultimately, I think, lead to inflation. I just don’t know when.

Kevin Choquette:

Well, and that’s-

Andrew Jobst:

Or [crosstalk 00:39:35].

Kevin Choquette:

I’m already wondering if we’re seeing inflation. Why is the stock market, the Dow’s at, almost 31,000? Valuations are all time highs, if you look at tables of historic slice and dice percentile. Almost everything’s at the hundredth percentile, in terms of historic valuations. So why is that?

Because we have a high confidence in earnings? Because we believe that everything’s going to come through this totally unscathed? I am questioning whether or not we’re already seeing the impacts of inflation, which is asset inflation, right? Milk, cheese, dairy, petroleum, I don’t know that that’s where it’s going to happen.

This goes to the overused thing of a K-shaped recovery, but I feel there’s already enough capital pressure, that assets are going to go up. And I don’t know that the Fed has a lot to do, in terms of policy response, because of your point, A, they need to monetize the debt, sort of debase the dollar, and B, any real movement in inflation rates, sorry, in interest rates, I think, could actually damage whatever … I don’t know if we’re in a recovery right now or not, because of all of the stimulus.

But I’m wondering, is inflation already here? Are the stock prices up because of expectations of inflation, not necessarily improvements in performance in all time high valuations?

Andrew Jobst:

One of the big issues is just what you noted, which is, higher interest rates, because of how much debt is on corporate balance sheets is going to dramatically impact businesses, and their income levels. And I think we saw that, I forget where it was a couple of years ago, where they started to raise rates, and the markets didn’t like that very much.

There’s going to be this real push and pull of trying to “normalize” things, and normalize rates, but because of how much debt is out there in existence, it’s going to impact any recovery that there might be. So I don’t know.

I think the other thing that we need to be careful about is, prices of everything are set on the margin. You can talk about the stock market going up and up and up and up, but at a certain point in time, the value of a company is dictated by the last 1% of the stock that has traded.

If you just have a little bit of confidence kind of leaving the balloon, you could see values come back to earth on some of these high flying stocks, relatively quickly, especially those that don’t have any, I don’t know, this fancy thing called income? But eventually, it comes back down to earth.

The question is, what happens when prices come back down to earth? Does this capital crawl back into its hole, or does it just try to find yield elsewhere? And I think that’s a difficult question to answer.

I keep coming back to demographics. You have Baby Boom generation getting older, and they’re looking for fixed income, they’re looking for yield. You’ve got pension funds globally that are all looking for yield, and where are they going to find it? They’re not finding it in sovereign debt anymore, and a lot of these countries simply can’t afford to have rates that much higher.

So when are they going to be able to find an alternative source of yield, other than things like real estate, and dividend paying stocks? I don’t know. I’m going to say, I don’t know a lot, because I don’t.

My kids ask me sometimes, they go, “So how was your day?” I said, “I don’t know, ask me in five years. That’s when I’ll know.”

Kevin Choquette:

Right. When that asset comes full cycle, and we’re actually realizing our gains or losses?

Andrew Jobst:

That’s exactly right, yeah.

Kevin Choquette:

Well, so then, take a slight, loop it back around to what we were talking about. Because we’re talking about risk writ large, in the broader equity markets, and perhaps, how’s that going to impact those who are seeking yield in the real estate market?

Bring it back to just your day to day at HG and assessing risk. I’ve had countless conversations with you, where I feel like I’m getting a wonderful education, because of the kinds of questions that you’re asking me, and the kinds of concerns that you have around a specific project, and, “Well, what about this, what about this, what about this?”

How do you, when you’re assessing a potential investment, how do you think about risk? You could probably literally teach a master’s class at Stanford on it, but … I heard you say, you look for some unique attributes that are defensible, something that isn’t in the every day offering, that might be in the marketplace. But beyond that, how do you assess risk/reward, and whether or not a project is worthy of HG’s equity capital?

Andrew Jobst:

When I started at HG, I was the numbers guy, right? So I did a lot of modeling, built a lot of models, did a lot of that work.

You fall into this false sense of security, that the model is driving the decisions, right? Over time you learn that, oh, the models are a nice tool, they can kind of tell you what things might look like. But at the end of the day, it’s the asset, it’s the market, it’s the partner, it’s the plan that all matter.

There are situations where I’ve run a model, and come up with a result that doesn’t … If you just went by the model, you would say, “I don’t want to make that investment.” But in fact, no, it’s an asset that I would want to own personally.

Those are the deals that we might do, that the models say, “Yeah, maybe you don’t, just because it’s a unique asset in a very strong market.” But when you talk about the risks, you say, “Okay, well, then what risks does that deal not have? And what benefits does it have, that make you sort of make that decision?”

Stepping back and thinking about each project, there are really two things that matter, and I’ll expand it to three, but the two things that matter are what you paid, and what you can sell it for when you’re all done, right? That’s all that matters. Our most important decisions are what to buy and when to sell.

The thing that I would say, I’m going to break it into two pieces, is the value. One of the parts of the value, from a piece of real estate’s perspective, is the income that you have. And the second is, what yield is the buyer going to expect when they go to sell it?

You can’t really control the very last bit, but you can try to position yourself, so that you have the best chance possible to have a strong income. And how do you get that point?

Number one is, you try to make sure that you have costs that are defensible, and costs that are understandable, on day one. So if you’re going to do a ground-up development, it’s much more comfortable to have fully bid plans, and a capable sponsor, and a known general contractor, and a healthy contingency.

Then, from an income perspective, you look at a couple of big pictures. One is, who’s your audience? How deep is that market? And why do you think you can have the income at the end of the day that you’re underwriting to?

Those are the really big picture points that you’re trying to understand on any given deal. But then, from a risk perspective, on any transaction, you’re trying to eliminate the small but catastrophic risks …

… trying to eliminate the small but catastrophic risks. I mean, that’s why you do your due diligence, making sure that you’re not built on a landfill and making sure that you have the proper entitlements for what it is that you’re trying to do. The things that you can’t understand, you need to understand. Then from a market perspective, it often comes down, and I’m surprised how infrequently I hear it, I often … I hear people talk all the time about rates and debts and spreads and cap rates and all that stuff. But I much less frequently hear people talk about just the simple supply and demand.

From our standpoint, when we think about what makes a deal attractive, number one, you have to eliminate all those small but catastrophic risks. You have to understand your costs. You have to make sure that, if market rents didn’t move today, that you’re actually developing something to an income that should give you value meaningfully in excess of your cost. But the big thing is you want to be in a market that somehow has some supply constraints and is a product type that is still in demand. I find that, looking back over time, some of the most successful deals that we’ve had, had strong demand and very limited supply.

It’s actually not that complicated. I mean, it’s really hard to find those things because oftentimes, once people have assets that are in high demand and limited supply, they never want to sell them, but it’s difficult to find all of that at work. I’ve seen people who get, I dub it, “Grass is greenerism.” I’ve seen developers, over time, who decide that it’s really hard to find things that fit their metrics in the markets that they know the best, and they start to go to other markets. In some cases, they do it with great success, tremendous success. In some cases, I think they may lose sight of the fact that there are already real estate developers and players who have been in those markets for decades, and have a very good handle on what the risks are inherent in that product type in that market.

The new guy’s not going to have the relationships. They’re not going to get to look at the right deals. They’re not going to really understand the dynamics. So I think that’s where sometimes risk emerges, when people have a feeling that they understand things that they may not have the experience to truly understand, but it all comes back down to that supply and demand. Again, it’s … Sorry to go back to Econ 101, but that’s where I found probably the most success, is when that supply and demand picture is the strongest.

PART 2 OF 4 ENDS [00:48:04]

Kevin Choquette:

That style drift you’re talking about, I think you see that it manifests itself in a lot of different ways and in a lot of different times. In fact, to the earlier comment of riding up the elevator and having somebody say, “Well, it’s a paradigm shift,” when I see developers start to take on a new asset class, because they feel like it’s a better use of their equity dollars and resources, I similarly get nervous, right. See a multi-family developer who might either go to a market in the Southeast, out of California and say, “Hey, look at the yield on cost. Look at how all of this plays out.” I think you’re right, may lose sight of the general supply demand dynamics that would be in place there, because of the lack of barriers to entry, or the lack of difficulty in titling and building new product.

Or perhaps see a multi-family developer who suddenly wants to move over to hospitality, because he believes that he can develop and operate something that produces a 9 or 10 yield on costs, but he’s never run a hotel. He’s never managed a hotel management company. He has no idea about the efficiencies of the different floor plates, the room product, how to put the guts of the operations in the appropriate places to have an efficient machine that is nested inside of the physical plant. I couldn’t agree with you more that the grass is greenerism is a real risk.

Andrew Jobst:

Yeah. I mean, it’s one of the things that I learned really early on, which is I’m not a special flower. There’s a lot of people out there who are really smart and really driven and really hardworking. Whenever you think that you can just move into somebody else’s territory and do really well, it’s very difficult to do that. This is a … it’s a terrible, terrible example, but Michael Jordan is probably the greatest competitor and basketball player of all time. It doesn’t mean he can just go play baseball and be an all-star the next day, right? I mean, he did great. He did great. I mean, he’s an athlete, but he wasn’t as good because look, there were people that specialize in that particular sport and they ended up … They’re just better at it because they’d been doing it for longer. They’ve had a focus on it for longer.

I’ve had this discussion with some of our better partners who have said, “Hey, we really know this market, but what about that market?” I told them, I said, just be careful because recognize that you guys have 20 years of experience in your particular market. There are people that have that level of experience in the market you want to go to. Do you think you’re going to be better off competing there, or perhaps doing fewer deals over the next year than you would like in your current market, and build your relationships further, and look deeper, and hunt more than shooting, if you will. Again, some people have been very successful being in multiple markets.

Kevin Choquette:

Well, let’s bring it back to HG though, right?

Andrew Jobst:

Yeah.

Kevin Choquette:

You and I have had this conversation. I don’t want to talk about any of your investors, or any of your funds, or anything like that. But you have shared with me, in the past, that some of your stronger investors have come to you and said, “Hey, why don’t you make your funds larger? Why don’t you allow me to write you this enormous check so you can deploy this magnitude of capital for me?” I mean, that is the same equivalent of grass is greenerism that’s being offered to you. Hey, stop doing these small deals. Go do some big deals, I’ve got a big check for you. As I understand it, the response I mean-

Andrew Jobst:

Well yeah, the response is that’s fine, but the reason, we’ve had success is because of our niche. If you start telling us that … If you just, all of a sudden say, “Oh, you’re going to need to do bigger deals,” all of a sudden, you’re talking about a whole different set of developers that you need to talk to, just different markets that you’re going to be operating in. It’s just a more competitive landscape. So yeah, every once in a while, it’s tempting, because we’ve had people say, “Oh, you guys have been successful for a while. How come you aren’t bigger?” Well, maybe our success is because we’re not bigger. Some people get it.

It’s also interesting just generally speaking, when you have large institutions that just say, well, we can’t write a check of less than X, you’re forcing the fund sizes bigger by doing that. Therefore, you’re forcing money into these larger and larger vehicles that have to deploy the money into larger and larger assets. So what I would really like to do, and this is all tongue in cheek, of course. But if somebody wants to write me a $50 million check for $20 million asset, I’m more than happy to sell it.

Kevin Choquette:

Perfect.

Andrew Jobst:

But that’s where … I don’t want to say we’re heading there, but it’s interesting that we may be heading there, right, in some cases where the deals are getting bigger, just because they’re getting more expensive.

Kevin Choquette:

Well, the other question is what business are those funds in? You said at the outset that-

Andrew Jobst:

Are you an investor or are you an asset manager?

Kevin Choquette:

That’s right. Right, the history of HG and the current ethos is that it’s private capital. It’s largely HG capital. So yeah, I’m sure that there’s an incentive for you as fund managers to perform, but when a large portion of the capital returns are coming to the principles of a fund management, your incentive and your alignment is completely different than someone who’s out there raising yet another $1 billion or $2 billion fund with a three-year mandate, or even a two year mandate to get those dollars out. I mean, it’s the classic OPM, other people’s money. The downside, for them, as long as they’ve done the CYA and managed career risk by employing all of the right consultants and pointing all to the right studies, it’s diminimous if not zero where when your own capital’s at risk.

In fact, it’s one of … Someone years and years ago, a principal to a debt fund that’s based up north of us. I’ll leave them nameless because I don’t want it to come back to him. But he had said, “There’s a difference between money and my money.” I can’t agree more, right? But you guys are in the business of managing, if you will, my money, not money. I think a lot of the other fund managers are just moving dollars around. It’s not that they’re lacking in expertise, or that they are failing their fiduciary duties, but it’s just a fundamentally different proposition than being a small, closely held, deeply invested fund.

Andrew Jobst:

Yeah. I think that’s right. Every so often, you talk to a guy that went from managing a small fund to a big fund. They, if you get truth serum into them, they’ll say, “Yeah, I really wish we could do smaller deals again. But it just doesn’t work for them because they’re now too big. It’s a difficult balance, frankly, because yeah, look, if I’m managing a billion dollars, that’s a pretty nice fee income, but man, I would hate to have to deploy it. I would especially hate to have to deploy it in a way where I was really happy with every investment that we made.

Kevin Choquette:

Right. Well, but look, part of what you guys have done that I think is a very intelligent response in terms of having smaller investment mandate, smaller vehicles is that you’ve got a small team. I mean, how many people are part of HG now?

Andrew Jobst:

Yeah. I mean, there’s two partners. There’s Henry and I, and then we have a CFO. We have an accounting manager. We have an office staff. But people look at that and say, “It’s small. How do you guys manage it?” The answer is, well, we use good professionals. We don’t skimp on hiring good counsel and good accounting firms. But also, people forget that we have a general partner on every deal, or a manager of that asset, and they’re running the day to day. So yes we’re involved with them, but we’re pretty lean.

This gets into what is the right size of an operation? The challenge is once you get too big, you have to … and we’ve talked about this too. You got to keep feeding the beast, right? You have to make an investment, and you really don’t want to be in a situation where you have to make an investment when it’s the wrong time to make an investment. You want to make an investment when you find the right investment. You don’t want to have to make an investment because the money is just sitting there and you have a career risk if you don’t get it to work. That’s a recipe for disaster.

Kevin Choquette:

Yeah. I would also argue the other side of it, which is the small team that has deep expertise and is actively managing the entire portfolio, the care and feeding that may well extend from that kind of an organizational structure. Versus the very large funds with lots of professionals and MBAs and varying degrees of tenure and expertise. You may or may not get a good result. It’s a function of how well they’re managing that kind of an operation, but it’s a different animal.

Andrew Jobst:

Well, and it’s.

Kevin Choquette:

[crosstalk 01:01:26].

Andrew Jobst:

Sorry to interrupt, but it’s also … it may be a different mandate. Again, I’m not in that space, but if you manage an endowment or a pension fund, of course, you want to get good returns, but you also need to have exposure to certain asset classes based on the diversification goals of your entity. So yeah, everybody’s top quartile. That’s the joke. At least [crosstalk 01:01:54] funds are top quartile.

Kevin Choquette:

Right.

Andrew Jobst:

You want to have good, competent, management. You want to have quality reporting. You want to have transparency. You want to have honesty and all of the things that we all know are important when you’re … have a duty to other people’s capital. But I sometimes, I get the sense that for a lot of these larger entities, they just need to have exposure to those markets and how can they best get exposure with a competent manager? But that’s a different business, right? That’s a different mandate than trying to get the best risk adjusted returns that you can.

Kevin Choquette:

Agreed. On this topic though, of teams, and anyone who’s listened to the podcast for a bit will know this question because I’ve been asking it repeatedly. Misfit is one of the competitors to Fitbit. I think that’s what they were called. I heard one of their founders speak at a MIT presentation, and it was asked of him, “Do you fear competing technologies?” Without missing a beat, he replies, “I don’t fear any technology. I fear excellent teams.” It hit me really quickly and hard that a guy who presumably is at the cutting edge of all things tech doesn’t actually care about the tech, he cares about the team. So how do you think about that either within the context of HG or perhaps even more importantly, the GP who you’re entrusting your millions of dollars with on each of these deals?

Andrew Jobst:

It’s a good question. I guess I would say that I would slightly modify it by saying what I focus on really is incentives. Because when Henry’s father had a home building company, and so they had people that were in house that were brand acquisition guys. So we’re in a cyclical business here. Let’s not kid ourselves. Hasn’t seemed like we’ve had a cycle for a while, but this is a cyclical business. So there are times when what you would really want that land acquisition guy is to sit on his hands. So one of the challenges, I think, of having a big team is that … I hate to go back to sports metaphors, but shooters are going to shoot.

It’s hard to say no to that marginal deal. It’s good enough maybe, but maybe you’re heading into a downturn. But you’ve got the team, and so you’re going to be buying the deal anyway. For us, I think the greatest flexibility that you have is the ability to say no. I know I didn’t answer the question that you wanted. When we think about teams, like I said, incentives are one of the things that matter. If the developer is thinking about things the same way that we are, which is we’re trying to create value for themselves and us as the investor, and they have a team that is not pushing them to make bad deals, that is a pretty important first step. But for us, a lot of our partners, they’re smaller teams. It’s, I don’t know, three folks, four, two. They’re relatively small shops.

They’re entrepreneurs that are out there hustling. I mean, what matters far more, aside from incentives, is their level of experience. Are they doing something that they’ve done before, or are they doing something that is brand new and totally out of the box? Because you can have a really great team doing something that they’ve never done before. That may come with it more risk than the guy who may not have the same credentials, but he’s been fishing in the same pond for 30 years. He knows every street and every corner and owners and developers or brokers. It’s that latter guy that might come up with the more interesting transaction than the more highly pedigreed team.

So I think when you’re building a product, when you’re when you’re building your technology, yeah, the team matters. Because the same levels of expertise can go any number of different directions. But I guess I think about teams a little bit differently than from a real estate perspective, especially at the size that we’re on, where what really matters is expertise and focus and experience in those markets that matter.

Kevin Choquette:

And alignment, right? That’s your point with incentives?

Andrew Jobst:

Incentives, yeah. Why are you doing this deal? Are you doing this deal because you need the fee income, or you’re doing this deal because you really believe that it’s the right thing to do?

Kevin Choquette:

Right, and how much are you investing and what are your fees? Are you getting an acquisition fee? Are you getting a disposition fee? Are you getting a development fee? Are you getting a general contractor’s fee? How does all that stack up against the amount of capital that you’ve got in?

Andrew Jobst:

Yeah. I love when a sponsor comes to me and says, “I have this acquisition fee, but I don’t need the money today. I have it because there’s effort that has gone into this. So I can defer some of the fee. I can structure it differently, but I don’t need the fee to pay my mortgage tomorrow.” Okay. That feels okay. That feels all right. But yeah, the motivations matter. Also, when people say, “Well, wait, what do you want to see in a package?” I’m sure you’ve, given your background, you’ve seen this a lot. What do you want to see in a package? I just want to know why you want … why you liked this deal.

If you work with experienced teams in markets, they will have looked at dozens and dozens and dozens of deals before they find the one that they bring to you. So a pretty important question is, well, why? Why this one? Why do you like this one? The right team can explain that very succinctly. If we see the world the same way that they do, which we frequently do, then that might be a deal we want to do.

Kevin Choquette:

Yeah. Let’s switch over a little. We’ve been doing a lot of the facts and figures, if you will, in and around the real estate space. Moving over to the more personal side, personal performance, things like that. Let’s take on the topic of daily routines. For me, if I can get the day I can get … perhaps I can get it all, right? I find the world to be full of noise and shiny things that can take my attention away from the objective. Sometimes for me, even just keeping the objective in mind, to be very candid, is difficult. So over the years, I’ve come up with a bunch of routines that I try to employ on a daily basis to get me on target. I wonder, for you, what you may do on a daily basis that you attribute to your success. You’ve obviously had a really great run with Henry in the HG platform. Daily routines, rituals, habits, anything on that side that you attribute to your success?

Andrew Jobst:

I don’t think there’s anything in particular. I would say, not losing sight of the details and making sure that you have operating partners that also focus on those details. I think that, from my standpoint, I think, as you mentioned at the outset, we do a little bit of it all. We had a partner who was with us for a long time and he would say, “Look, if we were a restaurant, we would set the table. We would cook the food. We would serve the food. We’d clean the table after, and we would lock up when the night was over.” That’s how it is with us. We do a little bit of it all. So you tend to, over time, have your focus shift to one thing or another, asset management on a particular project that has a challenge or a new transaction that you’re trying to underwrite.

I would say from a ritual standpoint, I don’t really have any rituals. I get up in the morning. I go to work. If there’s a deal that has to get done, you work on that deal that’s in front of you. I think it does change from time to time, depending on where you are in the cycle. As an example, when the pandemic first hit, I would wake up every morning, and the first thing that I would think about is, okay, where do I need to play defense? What projects might have some challenges given the fact that we have this uncertain environment that we’re about to enter?

So a lot of it was just thinking ahead about what kinds of issues can come up, and preparing for those unknowns. We had a project under construction that you know quite well. I kept thinking about, well, what happens if that project is shut down? So talking to the operating partner about will our insurance cover loss if for some reason we’re shut down? How can we properly secure the site? Where can we store building materials? As it turned out, we never had to shut it down. But you tend to find your days thinking about how to mitigate risks that emerged. When the pandemic came, there was, all of a sudden, a whole bunch of potential risks, and so you spent your time mitigating those risks. Then after the defense was done being played, then you start thinking about, okay, where is there opportunity? Where can I move the ball forward in other situations?

… I moved the ball forward in other situations. So again, I don’t think there’s any real rituals, so it didn’t really answer a question probably in a way that that helped.

PART 3 OF 4 ENDS [01:12:04]

Kevin Choquette:

No, no. It’s fine.

Andrew Jobst:

I don’t wake up at 4:00 AM and meditate for 12 minutes and then have a cup of chai tea, or anything like that. I put on my work clothes and go and try and get things done.

Kevin Choquette:

Hey, whatever it takes. We all have our own methodologies here. That notion that I shared with you though, of kind of noise or shiny things, I find the world is full of opportunity. And Tim Ferris, one of his guests had this notion that early in your career you’re stranded on a desert island and you’re putting these notes into plastic bottles and sending them out to sea. Then one bottle comes back and you’re just overjoyed like, “Oh, somebody got the message.” And then later in your career, the bottles are just washing up all the time. And so there’s a whole new skill set that needs to show up.

That can be for you guys deal flow, but it can also … Look, I’ll just say it this way. I see the world full of opportunity. I find that saying no is actually curiously and inversely related to my success, as opposed to saying yes. It’s like, “We should make the movie the no man, as opposed to the yes man.” But I wonder for you, do you have any of those sort of afflictions with opportunities, shiny stuff, whether that’s even … I don’t think you’re much of a social media guy, certainly I’m not. But, how do you navigate what I perceive as a deluge of opportunity information? Is that something that affects you in the professional sense in terms of managing a day?

Andrew Jobst:

Yeah, it can. I also agree with you that saying no is a feature, not a bug. I think Henry is, for anybody whose heard him speak, he has a British accent because he moved from the UK. And some people I think have dubbed him sort of doctor no. I think what I’ve found over time, just like you, is saying no more often is better than saying yes more frequently, and saying no quickly is better. I think the one thing that I’ve learned over time and maybe it’s just experience, but early in your career a deal falls apart, you feel terrible. You kind of do a kind of a mental post-mortem of what happened and how come it didn’t happen. But I think now I just sort of shrugged my shoulders and go, “There’s going to be another deal.” It’s just a question of when it’s going to show up, but there’s always another deal.

I would say with respect to the shiny objects of the day, the internet is a wondrous place and lots of things to read. I wish there was a sort of more curated place to go for information that is interesting to me, other than the internet. I mean, it feels like often times it’s sort of a fire hose of information. And so you do have to consciously turn it off. I talk to one sponsor I think probably more than the internet, it’s kind of emails. And he was saying, “How do you deal with your emails?” He gets hundreds every day. And I go, “Yeah, I get a lot of emails every day.” And I’ve heard people say, “Oh, you know, inbox zero.”

So all these fancy diagrams and workflows in order to get your inbox down to next to nothing. And I think those are good goals. I certainly would like to have fewer emails in my inbox. But I think that for me, you do need to consciously kind of turn that off. I don’t mean necessarily email or the internet, but you have to, for me at least sometimes say, “Look, I’m not going to read the next article that is not applicable to my business.” I’m going to actively go out and seek out things that are interesting for my business. And so instead of using the internet as a fire hose that is coming at you, to use the internet as a tool where you can dig deeper for information.

I just get frustrated when I find something that I think is interesting. And then they say, “Oh great, that’ll be $1,000.” I’m like, “Oh, damn. I want free information.” I don’t want good expensive information. It is a challenge to focus, but I find that if you come back to the job at hand, which is managing the investments, I think the focus comes. What asset is this? Okay, what is it that I can learn? Or what is it that I can look at that might change a decision that I might make in the future about that particular property? And use that as a starting point, as opposed to just sort of turning on the fire hose.

Kevin Choquette:

You just mentioned when a deal falls apart. I don’t know if in your mind’s eye, that was a deal you’re trying to put together and something went sideways, or it’s a deal you’ve invested in and it’s some number of years down the line. But, failures happen. I wonder if you have any favorite failure of yours that might’ve set you up for a positive learning opportunity, if you will, or a later success and maybe, how do you think about failures? I’ve certainly had a few of my own and they tend to be some of the more powerful learning.

Andrew Jobst:

Yeah. There are failures. There’s going to be failures, especially like I said, in a cyclical environment. I guess one of the things that … two things that I’ve learned over time. One is that in an economic downturn, demand can evaporate overnight. And if the supply picture is not very good, meaning there’s too much supply, it just doesn’t matter what the rent is that you’re trying to charge. There’s just nobody who wants your particular space.

So, one failure that I have in mind was an office building that was constructed, it was well located. And then the post housing crash hit and there was literally no demand. It just didn’t matter what rents we were trying to charge, there was just no tenant that had any interest. Then you can also go to the other end of the spectrum, which was an industrial land property in a very tight market. But likewise, despite there being very, very little supply and presumably strong demand, it did not work. I think the answer there was depth of demand.

So, you kind of have both sides. Number one, you could have a market where you think there’s robust demand and that demand evaporates in a downturn. And if there’s too much supply, it’s going to take too long for recovery for you to really survive. Then on the other side, you can have situations where it looks like there’s a dearth of supply, but if the pool of potential users is too shallow, that’s where you can run into problems as well. So I think that’s kind of led me over time to have, I think, a greater respect for supply constrained markets. But also, when you think about the ultimate end user for your property, to really have a good feel for what the depth of the demand is for the user that you’re looking for.

And so it’s kind of the marriage of those two. I’ve taken lumps over time, oftentimes brought on by a downturn. You never really know … What is it? [inaudible 01:20:02] you don’t know who’s swimming naked until the tide goes out. And so it’s been a couple of those experiences that have kind of really solidified that perspective. I think that has helped us this time around. I’m playing a lot less defense, I think, then I have in prior, I say, disruptive times. I think a lot of that is because of this focus on supply constraint markets and markets where there’s deeper demand.

Kevin Choquette:

So since you are on the receiving side regularly of investment pitches, whether that’s through conduits like me on the capital advisory side, or direct from operators or developers. Do you have any thoughts for … Some of these guys are pros, so they speak your language, they know how to approach you. They know how to answer that question, which you just double underscored, which is why this investment? Why do you want to do this now? I think that’s great advice.

Anything that you might want to pass along to that group of … whether they’re the seasoned pros, or the early guys that are trying to approach a group like HG Capital and land with something that resonates to kind of get an earnest engagement from you, and not just get the cell phone swipe to the right and delete the email. Or is it left? I guess it’s swipe left and delete.

Andrew Jobst:

I don’t know. I think I was married before that, so I don’t know which way you swipe. Yeah, it’s a good question. I think again, the key two pieces are why this, why now? But also, for the developer to really understand the risks inherent in their product type, and to be able to speak to why those risks have been mitigated, or don’t really exist. And what I’ve found is that for the partners that really know their craft, they really understand those risks and they have very good answers and they have kind of a deep understanding of what those risks are.

I’ll give you an example. We recently closed on an acquisition with a partner on a piece of industrial land. There does need to be … It has proper zoning and it also has a cleanup that the seller needs to complete from an environmental perspective. Completing the entitlement process and understanding the environmental, were things that he had absolutely nailed. And he had great representation, great professionals. And so, when we looked at that deal, the issue wasn’t the market. I mean, the market is just phenomenal. The issue is making sure that those risks were not meaningful in the grand scheme of things.

And by really having a firm view on them and understanding them and having the right professionals, it gave us confidence that he was thinking about those risks in the appropriate way. So I guess, the one piece of advice that I would give is, pay more attention to mitigating the risks. And yeah, explaining the market helps, but you can’t control the market. The market’s going to do what the market’s going to do. You can try to position yourself the best way possible and you can explain why you’re positioning yourself a certain way. But the big thing is, risk mitigation. That is huge in the grand scheme of things.

So, if you’re a sponsor trying to raise capital, understand why you’re doing this deal, as opposed to any number of the other dozens, and understand how you can mitigate the risks that are inherent in any particular transaction. I can tell you that if you call me and the very first answer is, “We won the bid on this deal.” That’s not a great opening line. Because if we just wanted to go out and buy things at market clearing price, we could just go out and do it. Just go out and bid on assets, why not? So there has to be some reason why, there’s some value that can be created through the GPs actions. There’s always going to be risks inherent in any of those plans, and really understanding how to mitigate those risks is important.

Kevin Choquette:

Yeah. I think that’s great advice. I think the other thing is probably to the extent they can access … Well, actually, I’ll turn this into a question. How do you view relationships in terms of it being a quality that provides better access to you guys? I mean look, you’re talking about managing time. You’re talking about shutting off emails. You’re talking about saying no way more than yes. The implications are that there’s no lack of deal flow. So, how do relationships play into you navigating that ecosystem? I imagine that when you have a flag flying that says, we have equity capital, the phone rings.

Andrew Jobst:

Yeah, it does. And when you stayed in the same space for a long time, the phone rings. We, I think, have a reputation of doing smaller deals, so the phone rings. What I would say is, on my side, what I try to do, and I sometimes fail at it and I recognize that. But, I try to give quick nos. But what I tell people is I say, “Look, don’t take offense with a quick no. There’s a lot of nos before you can get to a yes.” And so what I tell people is, “Call me frequently, tell me what it is that you’re looking at, and I’ll give you an honest opinion of what I think about your overall business plan.”

I think the challenge for a lot of guys is they try to … I think it’s human nature, we try to categorize things. So, people try to put us into a box and that’s why I try to take it back up a step and say, “Look, don’t put us in a box.” Don’t think of us as industrial apartments and storage guys, and that we’ll never touch office. We will. We will, if it’s the right opportunity. So I tell people, “Don’t try to put us into a box. Call us frequently. We’ll try to give you feedback.” We’ll try to tell you what we don’t like about something. And, over time you’ll get a feel for what we like and what we don’t like.

In some cases, we’ll never do a transaction with somebody. And it’s not because we don’t think they’re capable, it’s just because there wasn’t quite that right fit of a deal and an opportunity at the right time. And then there are other situations where we’ll talk to somebody for years and then there’ll finally be something that really hits and does well. And I would say, over time, if we’ve done one deal with you and we get a good feel for how you operate, you’re going to get the benefit of the doubt on the next deal. Because just again, human nature, you have experience and comfort that the sponsor’s going to do what they say. That reduces that kind of sponsorship risk. But yeah, the first deal is always hard. But I would say, communication. Happy to get on the phone and have a conversation.

Kevin Choquette:

Yeah. And I’ll tell you from my experience in terms of the sort of architecture of sell side versus buy-side, I’m obviously sell side coming to you with opportunities and you’re the buy-side investor. The exchanges I’ve had with you over the years and their reasons, this is an interesting thing from the perspective of an advisor. I have come up with a very good sense of an earnest no, that’s based upon some meaningful thought. And the feedback is pointed and should be given some credence, versus a no that’s just frankly bullshit, and it’s an excuse. They either don’t have money, or they don’t have bandwidth, or they’re too lazy to think about something that’s on the Northern shore of Maui. They’ll say it’s outside of their geographic focus.

Look, a lot of them are legitimate nos and they’re worth hearing. But the ones that are thoughtful, which is what you’ve provided. For the person who’s trying to understand the industry, this space, what works and what doesn’t, it’s sharpening the saw, right? It’s pointed feedback that’s insightful. It’s something you can take back to the client and say, “Hey, they have this concern about a risk that we haven’t really addressed. How are we going to address that?” And maybe something else that you can encourage the … I know you talked to both the advisory’s kind of broker side and also the principals, but I think there’s a lot of opportunity for people to take that feedback and just use it.

I’ll say it a different way. We often don’t go to our best capital sources until at least 12 pitches in. Why? Because I want to hear all the reasons that people say no to a deal so that I’ve got the answers when I get to number 13, who’s really my number one investor. So there’s [crosstalk 01:29:42]

Andrew Jobst:

Sorry to interrupt. But you also have a sense over making pitches over how many that you understand what the questions that people have are. I’m surprised sometimes at some of the simple questions that I ask where some of the younger sell side capital seekers don’t have answers to. You know why I’m asking the question, but they don’t. And I start to scratch my head and go, “Why don’t they think this?” And that’s sometimes a worrying factor where I start saying, “Wait, these deals are getting done and people didn’t ask this one basic question.” And that’s sort of a sign of maybe the market getting a little bit out of whack. I also think it’s interesting, there are times in the market where I’ll say no to a deal, and in the back of my head I’m thinking, “That deal’s not going to get financed.” It’s never going to happen.

And it comes back around and around and around, maybe three different sponsors, maybe with a lower and lower price, and eventually it makes sense. And then there are times, and this feels like one of those, the second times where you say no to a deal and in the back of your mind you’re going, “Oh yeah, somebody will do that deal.” You may not think it makes any sense, but somebody will do it. And I kind of feel like that’s where we are today.

But yeah, I think you’re dead on right. Understand the kinds of questions that can come at you and be prepared to answer them. It just shocks me sometimes that some of the simple questions can’t be answered quickly, and then that always is somewhat of a concern.

Kevin Choquette:

Yeah. Well, look, Andrew, we’re on a kind of holiday week, if you will. You’ve been very generous with your time as we move to wrap it up. I wonder, do you want to share the HG website, or any sort of contact information that might allow people to … I mean, Google works pretty well. They could all find you I’m sure. But if there’s anything you want to share, feel free.

Andrew Jobst:

Yeah. I think the easiest way for people to get ahold of me is by email and they can find that email on our website, which is www.hgre.com. So hotel, golf, Roger, echo. It’s not the flashiest website. We’re trying to fit somewhere between, Blackstone and Berkshire Hathaway. But you know, you can get to kind of who our team is, and I think our email’s kind of right under our name. But it gives you a little bit of a sense of who we are and where we came from. But yeah, if people have questions, feel free to reach out. Happy to give you feedback on a deal and answer any other questions you might have.

Kevin Choquette:

Cool. Anything else you want to add? I mean, just give you the floor here, if there’s anything that kind of [crosstalk 01:32:35]

Andrew Jobst:

No, I don’t think so. I ramble at times. But the only thing I guess I would finish on is, a lot of these questions that you’ve asked about capital markets and debt markets, where the real estate markets are going? And I guess the last thing I would kind of leave with people is, there is no quote, unquote broad real estate market. Every deal is different. Every city is different. Every product type is different. And so, really dialing in and understanding, why this street, why this asset, why this product type? It really matters, because like I said, there’s not a national real estate market, even though the media likes to portray it that way. It’s really deal by deal. And so, understanding your market, understanding your product type, understanding your location, is really key to being successful.

Kevin Choquette:

Yeah. That’s fantastic. Well, look to you, thank you for joining the podcast. To all the listeners, thanks for sticking with us. I appreciate the time, Andrew. I always appreciate your thoughts and insight, and look forward to the continued conversations over the years.

Andrew Jobst:

Sounds good, Kevin. I appreciate you having me.

Kevin Choquette:

All right. Take care.

Andrew Jobst:

You too. Bye.