Cobie Packard:

I think patience is key. I think patience generally pays off. You could always look at those flash-in-the-pan ideas that ultimately do win, but in the long run, I think taking a patient and methodical approach to building your career and also to investing, I think, does ultimately pay dividends.

Nancy Lashine:

Hello and thanks for tuning into Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners.

Park Madison is a capital solutions and advisory firm serving the global institutional real estate business. We sit at the intersection of real estate managers and their capital partners. In bringing these two groups together, we speak to a broad range of thought leaders about recent trends in real estate investing, capital markets, operations and technology. And on this show, we try to bring some of those insights and conversations directly to you.

My guest on this episode is Cobie Packard, Partner and Head of Real Estate at MSD Capital. Cobie and I recorded this in June 2021, which was actually a very hopeful time during the pandemic. Vaccines were out, COVID cases were down, and the US economy was flush with stimulus dollars. There were many reasons to feel optimistic. Cobie and I discuss MSD's manager selection process, investing in real estate through the lens of a family office, and how to build meaningful relationships within the institutional real estate community.

We begin our conversation with my prodding Cobie about how he got into the real estate business and how his studies as an ethics major at Yale helped shape his perspective on the world.

Cobie's our first guest working for an advisor backed by a family office, an individual, and you've been there, Cobie, about three years, enough time to get your feet wet and then have the boat rocked by COVID, so we look forward to hearing about how you see the world. Welcome to the show.

Cobie Packard:

Thanks, Nancy. Glad to be here.

Nancy Lashine:

So we met, Cobie, gosh, back in 1998, a few years before 9/11. We were working at Lehman Brothers in the World Financial Center and you were an analyst, if I remember correctly. This is what I remember. You majored in philosophy at Yale, is that right?

Cobie Packard:

I was in an interdisciplinary program called Ethics, Politics and Economics, which feels sort of quaint when you think about that in today's world. But yeah, I was an analyst. I had maybe one or two gray hairs, and those listening can't quite see me, but it's mostly full gray now, and probably about 10 pounds thinner.

Nancy Lashine:

Well, all of that stuff is, it's changeable. But it's funny because the way you've approached real estate, it's always just seemed appropriate to me that ethics and a thought process was part of your training.

Cobie Packard:

Well, I think real estate-

Nancy Lashine:

I'm excited to hear about it and how you're thinking about things.

Cobie Packard:

Yeah, I do think real estate is one of those fascinating industries where you can't just look through a single lens at anything you do. And I think that my studies at Yale were designed to look at problems in the country and society generally from couple different points of view. How do politics impact it, how do economics impact it, and then what's the philosophical and ethical overlay?

And I think that applies to real estate. I mean, you can't look at real estate through a single lens. When you look at property investing, you have to do the bottoms-up, you have to do the top-down, you have to think about the regulatory overlay, you have to think about people and what their desires are and where things are going. And I think it's hard to do all that. I certainly didn't know how to do that 23 years ago, but I think it's really important in being successful in the business.

Nancy Lashine:

Yeah, and I would imagine it has a different impact when you're working for MSD than working for an investment bank or a private equity shop. So I'll be curious to hear about how you're thinking about investment strategy today and maybe how that's evolved in your different positions.

Let's just, for our audience though, start at the beginning or closer to the beginning. Where'd you grow up? I know the answer to that, but tell everybody where you grew up and how you got interested in real estate to begin with.

Cobie Packard:

Well, I grew up on Long Island in a little town called Sea Cliff, and my parents were small business owners. I actually got interested in real estate just by following my parents around. We were in the process of buying a new house and doing home renovations probably most of my childhood. Some were done successfully, some were done unsuccessfully by my parents, but watched the process of buying, renovating, and improving real estate as a kid.

Actually, when I was 13, my parents were trying to buy a property on the main street in our downtown, but it required a zoning change. So I literally did a parking study for my parents' presentation at the local zoning board in Sea Cliff where I prepared the analysis, looked at all the... How many parking spots per commercial building on the downtown street? And made the case for why we should get a zoning variance.

We didn't get it, which I think was also a lesson in small-town politics, but I think my parents still have the poster board that I created on a dot matrix printer for the presentation to the village.

So that was really my first foray into local zoning, and I think I learned a lot of lessons even back then, but it was always an interest. And when I was in college, I actually concentrated in urban development. I was always very curious about cities. And when I was thinking about what to do after college, my original thought was, "I'd love to be a developer and build things." And once I got my head around that, talked to many people and everybody said, "Get a finance foundation."

So I ended up going to Lehman Brothers as an analyst in the Real Estate Investment Banking Group with an objective of staying for a very short amount of time and learning the fundamentals of real estate finance and going to be a developer or something like that. But ultimately, got hooked. I had the opportunity to start and build a real estate private equity business, which was Lehman's first, and that was right around the time you and I met.

Nancy Lashine:

So we met and then two, three years later, 9/11 happened. Of course, Lehman went through... Literally had to relocate to a hotel in Midtown. That was the launch of the private equity business that you were involved in. And you stuck around not for two or three years, but I believe for 10 years at Lehman.

Cobie Packard:

That's right.

Nancy Lashine:

Many of the people listening probably are too young to remember what happened at Lehman. But what'd you take away from that period at Lehman? I'm assuming you worked through the workout of not just the global trauma or the American trauma that we lived through, but then of course the fall of Lehman. So how did that influence your thinking?

Cobie Packard:

Well, we could talk about this for several hours, so I'll try to keep it short.

I mean, fundamentally, I'd say first, the formative years after college working 80 to 100 hours a week create pretty interesting bonds with people. So my analyst class, the folks that I started Lehman with, I think continue to be lifelong friends and there's a bond there that is pretty deep, and particularly... And then if you fast-forward and think about Lehman filing bankruptcy in 2008 and all of my colleagues, and we had probably 300 people plus in our real estate business at Lehman at the time, between investment banking, real estate private equity, and lending, all of those folks found other jobs and most have been incredibly successful in their careers elsewhere. They call it, "The Lehman Diaspora," and I think it's true. The folks who worked there have remained very influential and successful in the real estate business. And it's fun to have all those friendships around the sector.

But I think 9/11 and living through that and all the way through the bankruptcy of Lehman, both impact one's ability to manage adversity, uncertainty and build grit. It was actually quite remarkable. Six days after 9/11, we were back up and running with computers, printers, fax machines in the Sheraton Manhattan and the Sheraton New York hotel in Midtown Manhattan. On the trading side, making trades, on the banking, on the private equity side, looking at investments and opportunities. It was pretty amazing in the face of such a tragedy.

There was just a tremendous amount of resilience that I think we all had going through that. And perhaps that was what led to a little bit of the hubris around what happened with the bankruptcy about the belief that we couldn't fail, but we ultimately did. But going through that, coming out of it, and looking forward and having complete uncertainty as to both the macro but also the micro from a job security perspective, it was pretty impactful.

But what I think it does is for me, it helped me understand, think about just the fact that there is uncertainty in the world. You have to be prepared for truly cataclysmic outcomes, do the best you can to risk-mitigate from a personal perspective, but also from a professional perspective. And I think going through that in some respects increases one's tolerance for risk because you understand how bad things can get and how they ultimately do recover, but also, it makes one think about how to mitigate risk in investments that you make to make sure that they can withstand bad things that happen in the world.

Nancy Lashine:

Wow. Well, we'll certainly touch on that more when we talk about what happened in the last 18 months, but it's just so interesting to hear you talk about it that way. I'm reminded when Ray Mikulich said to me... I called Barry Sternlicht. He said, "You must have some empty hotels," and six days later, you were up and running in a hotel uptown. That's pretty incredible. And that is the power of entrepreneurship and relationships and just making things happen. Resilience is a great term for it.

All right. Past Lehman, you founded a company, then you found yourself at Apollo where you were for seven years. Tell us a little bit more about what the business looked like at Apollo.

Cobie Packard:

So in between Lehman and Apollo, I actually partnered with some former colleagues. This is end of 2008, a couple months after the bankruptcy, early 2009, with an objective of trying to build our own real estate private equity firm.

And just one last comment on how you react to the adversity and the event of something like the bankruptcy of Leman Brothers. I mean, I looked at the world and said, "Gosh, I didn't control this outcome." Both the federal government did, but then this leadership at Leman did. I spent the first decade of my career truly just trusting the guys I work for and feeling like they could do no wrong and they had it under control. Even though when I looked at the financials of Lehman Brothers, I couldn't understand a darn thing, but you just assume that the guys leading the operation know what's right and what's wrong, how to risk-mitigate and how to do the right thing. And I think I lost a lot of that faith afterwards.

And so my response was, "I'm going to go into business for myself with a couple of colleagues so I understand exactly what I have and what I don't have." And we tried to raise a fund in 2008, 2009, and as you know, Nancy, that was not an easy time to be raising capital. So we tried it, we gave it a shot, and then ultimately, as we were about a year into the effort, we'd lined up some capital but not enough to make it truly viable, and we were approached by Apollo who was looking to start a real estate private equity business after spinning out the previous one in what became AREA Property Partners.

So the group of us that had started our independent shop all joined Apollo in 2010, and it was sort of a fun time in many respects. I mean, Apollo is a very strong investment culture with a distressed bias, happy to invest when things are not clear. We were building a team and that was fun. And after a short period of time, I stepped into a leadership position overseeing our US real estate private equity business there.

And it was a great time to be investing. We bought some distressed hotels, we bought distressed debt, we started a single-family rental housing business. As the market started to stabilize, we continued to invest in hotels. As the lodging recovery was happening, we built an office portfolio. We invested in cold storage. So we built a pretty interesting, diversified portfolio across asset classes. We did a fund one in 2011, and we did a fund two in 2015. And it was great. It was fun to build a business. It was fun to build a team around that business and be in an environment with a great investing culture and have effectively some pretty good macro tailwinds.

Nancy Lashine:

You were really early into some of the hot sectors like SFR, single-family rental, cold storage. That was well before I've heard about it in the market. How has that real estate performed, do you know?

Cobie Packard:

So I would say being early isn't always perfect, and I would say in single-family rental housing, we were very early. By way of example, we started investing in Las Vegas single-family houses before Blackstone got there. But our approach was deliberate, it was conservative, it was focused on buying attractive yield. And we knew this stuff was cheap. We knew financing wasn't available yet. We knew that if we bought assets at 50% of replacement costs, replacement costs would ultimately increase, but we'd make money on the reversion.

But because it was early and because we were doing it at such a granular level, we were not set up to grow it as big as others were. Blackstone came in the market with a completely different perspective, others came into the market, the folks you know who got really big in the space like Starwood, like Colony, et cetera, and they just blew us out of the water. They started paying more than we did, and they started really moving the market.

So we were early, but because we started so early and we were getting such attractive buys, it felt like the market was running away from us. So instead of just competing and buying more at higher prices, we pulled back a little bit. So we ultimately, because we were early, because we had the benefit of the stuff we did in the early part of the cycle and we were set up to be really more opportunistic as opposed to driven by the pure macro bet, we didn't scale as much as we could have, and that was probably a mistake. But we identified the trend, we identified the opportunity, we figured out how to deploy capital in a smart downside-protected way, but ultimately, others scaled quicker and we pulled back instead of effectively meeting them at the market.

And I'd say that was right and wrong. It was wrong in that the part of the play that we didn't fully exploit was the capital markets, particularly the securitization markets, but we got the fundamental real estate piece 100% right, but I think my only regret is we could have gone bigger. And I think it's a lesson.

The lesson is we had tremendous conviction in the sector, tremendous conviction in the recovery. It was not obvious at the time that this was a great way to play it, but it was ultimately a good strategy and we made good money. I think the asset appreciation was tremendous, but because we were so early and the capital markets had not been as efficient on the debt side, it wasn't a super great IRR, but it was a great fundamental increase in asset value, if that makes sense. But it-

Nancy Lashine:

It makes complete sense, Cobie. And I guess I would just say to you, I would just take credit, if I were you. Take credit for having the right idea early before anybody else because you did. And yeah, other people scaled it, but you were there first and those assets, they performed well.

Cobie Packard:

Well, thank you. And I forget whether this is a marketing podcast or a, "Let's have a real discussion about real life" podcast. And having known you for as long as I've known you, I can't help but take the spin out and just tell you the real story.

But I do think it was smart. I do think it was early, and I do think it was contrarian at the time. And at the end of the day, I think it was the very, very beginnings of what is now a truly institutional asset class. I mean, at the time, as most folks listening probably know, there was not a capital market institutionally. There was not a capital market on the debt side. So it was a bet that all these things would show up and people scaled these assets, and you just looked at the size of the market opportunity and how big this sector was, it's measured in trillions, not billions, and it was just very clear that it made a lot of sense to aggregate these assets.

And I think the challenge was how do you do it in a way that's efficient and scalable? And we took a fundamental real estate approach to it, others took a technology-first approach to it, but I think we were right in that getting big for big sake wasn't necessarily a winning strategy. And we focused on a few markets that we have conviction in. We focused on Southern California, we focused on Northern California, we focused on Las Vegas, we focused on Chicago, we focused on Atlanta, and did fundamental real estate underwriting in those markets, got comfortable with the supply and demand, and ultimately really exploited those markets through local operations on the ground in those places. And we were very clearly not trying to just be the bulk buyer. We've literally bought 1,500, 2,000 houses one by one.

And so I think it was ultimately a smart strategy. I think it's been fascinating to see how that market evolved over the last decade-plus.

Nancy Lashine:

Yeah, well, now people call it SFR 2.0, which is the special-built communities which are built as single-family rental communities. So they're all in one place, there's one management company that cuts everybody's lawn, everybody has the same appliances, so it's that much easier to manage.

I don't think I've ever told anybody this, but about 10 years before you did what you did at Apollo, I was asked to join the board of a company called Red Brick. Do you remember a guy named Blake Eagle? He ran the real estate at Frank Russell and he was on the board and he asked me to join, and it was a single-family rental business. So it was very early on. Obviously, they had the idea, it was before the GFC, so it was before anyone ever lost money in housing. And that was the thesis was this goes up forever, why shouldn't institutional investors own this? But they didn't have the technology and they didn't have the execution.

And so it's just listening to you is a really good tutorial in you need the idea, you need the technology, you need the execution, you need the right people. And then market cycles and loss has a role in it, but none of this is simple and none of this is... People talk about things, but execution is so very complicated.

Cobie Packard:

Yeah. But what I would say, my final comment on SFR is it would never have worked, and maybe this was the case with the company that you were involved with, it never would have worked prior to the iPhone because being able to be on the... Both in terms of going out on the streets, identifying assets, figuring out what the neighborhood's property values were, and it started as basic as guys buying would go and look on Trulia and see where the trades were on the street, and then translating that acquisition boots-on-the-ground strategy to operation boots-on-the-ground strategy, it all required technology. And if it were a decade earlier, it would've never worked.

Nancy Lashine:

So true. And probably we'll say a lot of things like that 10 years from now. The question is, what will they be?

Cobie Packard:

That's exactly right.

Nancy Lashine:

So you've said so many things that have made me think about your transition to MSD, and particularly talking about understanding risk, how to take it, how to protect yourself, knowing how bad things can get. My knowledge of MSD before you joined, and I guess it was Barry Sholem who spearheaded the real estate initially there, was this fantastic hospitality business. So there were just these great hospitality assets in Los Angeles and in Hawaii.

And you joined, and I think you've continued on that particular framework, but why don't we step back a little bit and talk... And obviously when we think about hospitality in the last 18 months, it's been a different kind challenge, but let's talk a little bit first about what your strategy has been since you've joined MSD and maybe describe that for us.

Cobie Packard:

Yeah, so let me maybe describe what's different about us because I think fundamentally for me, I mean, having invested opportunistically in real estate my entire career or almost my entire career, first at Lehman Brothers and then at Apollo, I was always a provider of high-cost capital. And in many respects, the capital I was investing was not particularly differentiated, perhaps differentiated by maybe we were an ounce smarter than other people or maybe an ounce quicker than other people, but in many respects, doing a lot of the same things as other investors with opportunistic capital.

And what is so different about MSD and the capital that we represent is it's got many of those same opportunistic, entrepreneurial characteristics as capital that I had in my prior lives and that of competitors, yet we have patience and duration. And so combining the ability to do complicated, opportunistic investments with the ability to think really long-term about the real estate is, in my mind when I joined, I thought just a tremendously differentiated competitive advantage.

Because I think what do you always look for when you're in the investing business? You're looking for an advantage, you're looking for an edge. And it was very clear to me from the moment I first started thinking about MSD that we had a tremendous advantage in the market and the ability to deploy that capital into real estate assets that need time, that need patience, but have complexity that an opportunistic investor's best situated to take advantage of. That was, to me, a pretty winning combination.

And so as we look at the world and we look at where we want to invest capital, we focus on those things where first and foremost, our capital provides us niche. And so if there is a first filter, that's the first filter. And it also, back to bringing all the disciplines to bear in real estate, right? You think about the bottoms-up approach, the top-down approach, thinking long-term really requires a different mindset around the macros. I mean, it matters some whether rents grow at 3% or 4.5% when you're holding something for two to three years. It matters some, but it's not a game-changer. But when you compound that 3 versus 4 or 2 versus 4 over 10 years, it's a game-changer. And so really getting the macros right, thinking about where people are moving, where the puck is going, I mean, it matters so much more when you're a long-term holder. So we spend a lot of our time thinking about that.

Now, that's not to say that we don't trade assets. We do. When a trade is worth more in the market than we think it's worth more intrinsically, we're happy to sell, but the mindset really informs our approach to asset selection and where we focus. So we start with having a competitive advantage because of our capital, and then we layer on a macro view around demographic trends. Perhaps not surprisingly, we've spent a lot of our time of late in places like Texas and Florida and because we believe in the job growth, we believe in the population growth, we like the business-friendly climate there, and that's been a big part of our strategy because we're long-term holders.

And then the other thing we really spend a lot of time thinking about is innovation and how innovation and disruptive forces are impacting real estate and trying to get in the way of those. There are a lot of pretty obviously identified disruptive forces that have impacted real estate over the last decade. The e-commerce is probably the most obvious, I'd say. We've not deployed capital in that strategy at MSD because I think it's pretty well-identified, but we're always looking around the corner and trying to find the next disruptive force that is going to drive change in real estate. And we've spent a lot of time thinking about where the world is going and our long-term capital needs to be thinking that way because we're in a, as everybody knows, a very fast-changing world, and we have to be thinking around the corner to be successful investing with a long-term mindset.

Nancy Lashine:

So when I talk to most institutional managers, they will say the most important decision they make is basis, what price they buy at. Given that you're thinking longer term, that you're thinking about compounding, is price important?

Cobie Packard:

Yeah, price is always important, and I think the biggest risk of being a long-term, some people use the term forever holder, but I think let's just call it long-term holder of real estate is you could rationalize overpaying for a lot of things, right? You could say, "If I'm amortizing an overpay, if I'm overpaying by $10 and I'm amortizing that $10 over 30 years, that's like $0.33 a year." No big deal, right?

So I do think basis matters, but I actually think basis always matters, it creates your downside protection, it makes you feel good about your options, but ultimately, I think what matters equally is the quality of a location, the quality and the barriers to entry. So I think we spend a lot of time thinking about supply constraints and it's not necessarily can more stuff be built in this market, but it is can something that's competitive with what we have or are building take this asset's place in the market?

So we spend a lot of time thinking about truly best-in-class locations, and when you're thinking about those best-in-class locations in a market, that actually provides you the downside protection that basis provides in a short-term hold strategy. So it means we're lot pickier in terms of where we focus, but we think that that pickiness on top of hoping to buy at a good basis with good cashflow potential provides pretty healthy downside protection.

So I'd say in an opportunistic world, basis matters almost exclusively because when you know that you need to sell something within a fund life of three to five years, you have to get that right or you can get completely blown up. I think the quality of the real estate, the quality of the location, and the inherent barriers to location matter a whole lot more when you take a long-term hold.

Nancy Lashine:

So pick that apart for me. And I'm thinking of two pieces of real estate. Maybe you can compare in your mind how you would look at them on behalf of MSD. One is Hualalai on the Big Island of Hawaii where you guys have the most incredible, natural location and a fantastic asset you've recently renovated and put a lot of new capital into. And the other is, call it, Park Avenue and 48th Street in Midtown Manhattan where JP Morgan liked the site so much that they were willing to take down their building and build a brand-new office building.

When you think about quality of location and the ability to have something that's more competitive, how do you think about a dense urban market like that versus something that's Big Island in Hawaii, which is a beautiful, natural location?

Cobie Packard:

A complicated question, but I think a great one, and this wasn't on the script, so I'm going to have to think very quickly.

Nancy Lashine:

You knew, Cobie, nothing would be on the script.

Cobie Packard:

Yeah, exactly. Well, listen, I think 48th and Park is a, in many respects, a barriers location, except when you've got an upzoning of the entire Midtown East District and you've got Hudson Yards being created, what is that forever location is going to be redefined. So maybe let's go down that thread for a minute.

The definition of what is a impenetrable real estate location can change, for sure. We've debated is SoHo always going to be main and main for retail in New York City? Probably. But if you look down the road 20 years, maybe not. Probably. The Meatpacking District ultimately supplants SoHo for whatever reasons, its proximity to the Hudson River Park, just as an example. Does Hudson Yards supplant traditional Park Avenue as the prime commercial node in New York City? Maybe. I mean, Grand Central is not moving, right? So I think you could argue that Park Avenue is a location of that quality.

Hualalai, a hotel on a big island, but a small island in the middle of the Pacific Ocean has different characteristics in that it is so difficult to get entitlements and build something and it is so incredibly expensive to build a resort there. It is not actually replaceable from an economic perspective.

And so you think about those characteristics and they're fundamentally different, but there's another factor of play in a luxury resort that's not at play on Park Avenue, which is elasticity of demand. And I think we look at elasticity of demand in many respects across the things we do. Is this asset of a quality where you can continue to push the rate because the quality of the asset's so good, the quality of location's so good, and because the alternatives are so few and the willingness of the customer to pay is so great that you can continue to drive price?

And I'd say that's certainly true in Hawaii. It's true when you have a... I'll give an example of a plan we've got to build a boutique office building in a AAA location in Dallas as part of a mixed-use development we're doing there where I think the characteristics of that office are such that everybody will want to be there and will pay.

And so I think looking at elasticity of demand is another important factor as we think about real estate locations. I'm not sure a 300,000-foot corporate user is going to think about elasticity of demand in the same way and is going to want to pay a good price for 300,000 feet of office, so your ability to just crush it based on just pushing rental rates is further limited.

Nancy Lashine:

I hear you and I'm glad you mentioned that you think there is a role for a boutique office building somewhere. Completely understood.

Just before we leave the broader question, when you analyze an opportunity, how are you thinking about returns? Do you have to defend the real estate returns relative to private equity and venture with your colleagues within the MSD overall allocation? Are you thinking some deals are more core and very safe and some deals are more opportunistic and you would price them accordingly? How do those metrics work in your decision process?

Cobie Packard:

Well, so I would say for sure we do. We very much think about relative value. We invest in real estate credit, we invest in real estate private equity, we invest in corporate credit, we invest in private equity, we invest in the public markets, we invest in growth equities. So if you look at across all of the things we do as a firm, we've got a singular investment process and we very much think about risk return. And we of course also think about portfolio diversification and real estate's value in a portfolio, but we do very much think about relative value across asset classes.

And I've always believed that that's a really important discipline because I think the opposite where you're sort of myopically looking at real estate and saying, "This feels like the best thing that's out there, so I'm going to go do it," I think ignores what's happening in the broader capital markets. I think it's a critical discipline to successfully investing in real estate.

What it ultimately results in is there's points in time when you say, "Real estate is just expensive and I'm happy not investing." And given the nature of how we are set up, we don't have to deploy capital. And at some point, we're better off deploying capital in our existing portfolio, at other points, we're better off making new investments, and sometimes we're better off doing nothing. It's just working the assets we have. And I think one of the other benefits of a long-term portfolio is you have that choice. So from our perspective, it's a core part of our discipline to look at where else we can generate the returns for our investors and very much think that way.

In terms of up and down the risk curve, we start with typically a five to 10-year underwriting and we say, "Okay, what does this deal look like over the execution of its business plan?" And that business plan may be, it's usually not three years, but it's somewhere between five and 10 years. And then we separately evaluate our portfolio investments over time and say, "Do we like the go-forward risk-adjusted returns?"

And so inherently as part of that, if we've got a heavy-lift business plan, if we're developing something, if we're redeveloping something, a lot of the juice comes in the earlier years, but because we have approached these investments with a long-term mindset and we think, at least at the outset, we believed we like the macros in the long-term, we ultimately conclude when we do that reunderwriting, when we do that hold-sell analysis and say, "Five years down the road, do we want to keep holding this thing or not?" we'll often sacrifice some total return because we like the position, it's an asset we know, but we do look at it on an ongoing basis relative to alternatives.

So the result of that is we end up with a balanced portfolio where we've got a lot of risk in early stages of business plans and then we've got less risk perhaps in assets that are now cash-flowing and generating interesting rates of return. So if you look at parts of our portfolio and certainly some of the hotels that we've owned for a long time or the multifamily that we've owned for a long time, if you looked at it objectively, you would say it falls more in the core category. But if we like the macros, we like the supply-demand dynamics, we're happy to hold that.

So balanced, we end up with a portfolio that's got some opportunistic characteristics, some value-add characteristics, and ultimately some core characteristics. And for us, as taxable investors, we do think about the tax impacts of selling and paying capital gains, capture of depreciation, and then the after-tax reinvestment of dollars. And as we all know, real estate is one of the most tax-advantaged investment asset classes. So to ignore that is to ignore one of the biggest advantages real estate has for investors. So we do think about that as we think about ought we sell and reinvest versus just holding and refinancing, so that definitely comes into our thinking.

Nancy Lashine:

Right, that certainly makes sense. When you look at your portfolio today in terms of property types, what's the allocation look like today for people who are listening, who don't know MSD as well?

Cobie Packard:

I'd say we've got a concentration in hotel assets by virtue of, frankly, the appreciation of value over time. We've got hotels on both coasts, Florida, California, Hawaii. We've got multiple development projects in Dallas and Austin, Texas, markets that we like a lot. And those are urban, in many cases mixed-use projects with retail components, residential components, commercial office.

We have a very substantial multifamily portfolio, mostly more workforce housing, stick-built product in good, high-growth locations. And we've got some self-storage in the portfolio. We've got... I'd say we are light on stents, standalone retail and office, which is fortunate. But otherwise, broadly speaking, a pretty diversified portfolio across asset classes with a concentration, I'd say, more on hospitality and development where we spent a lot of our time recently.

Nancy Lashine:

Are you investing with operating partners or are you doing some of this directly? How are you structurally going about it?

Cobie Packard:

We've got a 18-person team in real estate that has a lot of capabilities to invest directly and asset manage directly. And we've got a large hotel asset management team. We actually directly property manage one of our investments on the hotel side. We've got development capabilities on our team, we've got multifamily operational capabilities on our team, so we've got a lot of in-house capabilities and we continue to expand those as our portfolio grows. But we also do leverage local partners and development capabilities because there's a tremendous amount of value in bringing local and specialized partners to bear on investments.

But we fundamentally take a very active approach to what we do. We maintain control, we drive business plans, and when it makes sense, we have partners alongside of us and that's allowed us to scale our portfolio well beyond what our team could do otherwise. But I'd say more and more as we think about our investments and long-term holds, we expect to build out more internal capabilities because I think it's a really valuable discipline to be able to control the outcomes 100% on the assets, particularly if you take a 10 to 20 on those investments.

Nancy Lashine:

Do you ever invest in other people's funds?

Cobie Packard:

We don't. We think about control as being a key element of our strategy. We get paid to be an active investor and it's philosophically our mindset. I mean, I would say there are probably small strategic investments that we might consider making over time, but fundamentally, we're active control investors in what we do in real estate.

Nancy Lashine:

So you have a huge portfolio, both development and hospitality. Can you give us some color of how you navigated through COVID and where you are now?

Cobie Packard:

It was a painful year, particularly for our hospitality portfolio, and it required, I'd say, a tremendous amount of conviction about the quality of the real estate we own and where we would be on the other side of COVID. And I think it was incredible. I mean, we literally went, in the course of a couple of weeks, in March 2020, thinking of this as a short-term aberration to shutting down hotels that had been expected collectively to generate a couple hundred million dollars of EBITDA in 2020, and figuring out what we needed to do just to not keep the lights on, but make sure that the assets were protected. And so going from that expectation of positive EBITDA to the expectation of meaningful losses in income to cover taxes and insurance and making sure that the senior staff continued to get paid, it was pretty incredible.

In short, we created a task force, reallocated everybody on the team to focusing on the hotels, even those who hadn't been focused on the hotels before, understanding liquidity, understanding the risks, understanding what our lenders would need from us, what the hotel managers would be looking for. And it was sort of an all-hands-on-deck approach to figuring out COVID protocols, how to shut these hotels down, whether we could shut them down entirely without triggering defaults under our loan. How are we going to deal with our lenders?

So the first four or five, six weeks were pretty intense, seven days a week working with our properties, figuring out where we were going, what to do, and this is just on the hotel side. Meanwhile, we had a whole bunch of other things going on in the portfolio, collections on our multifamily assets were reduced pretty dramatically so we were watching those carefully, and by and large, our multifamily portfolio actually held up pretty well. We had development projects underway, so we went one by one and said, "Gosh, do we think we should keep funding pre-development costs? There's this thing, where are we going to be on the other side of this?"

So it was, I guess I'd say, having flashbacks to '08 and thinking about liquidity positions and lenders and all these things, and it was like you just wake up, make a list of all the things you got to figure out, and just figure out who's going to go execute each of them, and ultimately talking to everybody you possibly can in the market about what others are doing and what others are seeing and how others are reacting. So it was a busy six weeks, but then we got to some level of understanding of where we were going, but it was a pretty intense time.

I think ultimately, what we found though, just so after we got through the triage of closing the hotels, what we found is we believe we had a great portfolio of assets and we went from defense to offense and said, "Okay, we've got an opportunity here. What can we do while we're closed?" And we had renovation plans for a few of our properties, substantial. And in both cases, they involved shutting down the assets. So we said, "Let's shift to offense." And then shifting to offense, we decided to accelerate our renovation plans, take advantage of the downturn or lack of demand, and ultimately come out the other side with renovated properties that can perform.

Now, we didn't quite fully anticipate just how strong the bounce back would be in the leisure hospitality market, but it's been, knock wood, so far, pretty incredible, well known in the market just how strong the leisure demand is today. Booking paces are off the charts and better than what they were before COVID as we look out to the second half of 2021 and into '22. I think it goes to the long-term approach, which is choose your assets carefully, have conviction in their long-term ability to be successful, and then being opportunistic around capital investment, on top of covering operating shortfalls. We ended up putting a lot of money into these assets over the last year, and I think that will have proved to be a good decision because we'll come out stronger with a better product and hopefully attract a lot of demand.

Nancy Lashine:

Well, certainly a competitive advantage that MSD has over a lot of other owners that you could put a lot of money in, do those renovations, and have them done now.

Cobie Packard:

Yeah. It goes back to my experience going the GFC and looking at the other side of it. When you're in a fund business, liquidity is inherently constrained, right? You only have as much money as investors have committed to you. And I'm sure you've heard dozens of examples of LPs who called up their fund managers and said, "You better not call my capital" in 2008, 2009.

So when you have those liquidity constraints, it can really impact your ability to be nimble. We're fortunate to have an investor base that allows us to be more flexible and nimble and opportunistic. We're thankful for that. And I think when you can do that, it allows you to do good things and take advantage of liquidity constraints broadly and take advantage of dislocations.

Nancy Lashine:

I'm reminded as I hear where you've been, which is even more traumatic and I appreciate it, and where you are today, being in the fundraising business, it was impossible to raise the fund in 2009, but if you guys had held on to '10, patience is everything. You would've been fine. Not to say that there's anything to look back on, but it is really a good lesson in just patience and figuring out how to look at the horizon and beyond.

Cobie Packard:

It is true, and unfortunately though, I mean, it was sort of easier in many respects. I don't know if it was the benefit of experience, but it was easier in many respects to see the other side of COVID, I think. You can imagine what it looked like. I would say in 2008, even into 2009, it was harder to see what the other side was going to look like when you had fundamental institutions that have been around, in the case of Lehman Brothers, since 1850, just implode. Bear Stearns, implode. Fannie, Freddie, AIG. It was not clear at the time, and I think there were many investors with more experience than certainly I had as a young person in 2008 who saw the other side more clearly. But it's hard to see the other side.

I think that's probably a lesson for everybody, which is you get out of the present, think about where things are going, and I think those who both invest in the public markets and the private markets, but probably more so the public markets over the last 12 months, who have the ability to look to the other side, I think have been rewarded for doing so. But when you're in the middle of a crisis, it's definitely hard to think about where you're going to be on the other side of it, particularly if you're triage.

Nancy Lashine:

Especially when you're living in the epicenter of it, right? I mean, you couldn't have been any closer to it than you were really. And look, I lived through the tech bubble, the S&L crisis, but GFC was just different.

And one of the things I've heard from many folks is that one of the issues with the next generation coming in is that there's just been a lack of training to figure out how to take risks and therefore a fear of taking risks, which is not going to bode well for people in terms of being innovative and doing hard things. So living through something like this, to the extent that it does teach you how to take risks, recover, be resilient, to use your phrase, certainly will be critical in finding great investors over the next generation.

So Cobie, if you were going to give advice from where you sit today, to someone starting the real estate business, to yourself 20 years ago, if you will, what kind of advice would you offer young professionals?

Cobie Packard:

Well, I guess I'd say a couple things. First, build a network and spend your time building that network. I think in the real estate business in particular, you can't go on a Bloomberg screen and figure out what's going on. True for all private markets. But I think building the network, developing, really focusing on finding friends and focus in the industry that you can connect with and build relationships with, I didn't do that as well as I could have on the outside, but I got lucky because all my friends worked at Lehman Brothers, and then snap my fingers, they all worked elsewhere.

So that network's so critical. It's so critical to information-gathering. And when I think about navigating through COVID, half my day was spent talking to people that I've known for a long time about what they're seeing and what their experiences have been. And I think that was invaluable in knowing how to navigate what we navigated. So I think that's one.

I think the other is to be patient, and I say that because that's what I've always done in terms of my approach to my professional development. And I think it's really hard today when folks graduate from college and they see their friends going to work for a tech company and that company is worth a billion dollars in about 20 minutes, and they see that and then they look at a long, plodding career in real estate and how long it takes to get to the wealth creation event, but I think patience is key. I think patience generally pays off. You could always look at those flash-in-the-pan ideas that ultimately do win, but in the long run, I think taking a patient and methodical approach to building your career, and also to investing, I think does ultimately pay dividends.

But I think also combining patience with a sense of urgency is also healthy, and I find it as I think about the younger folks I work with, I think they have the combination of those two things, which I think leads to a good balance.

Nancy Lashine:

Well, that's such great advice, Cobie. Be patient, make friends, and some of the other things that you said earlier today, be resilient, learn how to take risks, but protect yourself, being early isn't always perfect. A lot of great messages. So really, we thank you for taking the time. I know you're incredibly busy. You've got a fantastic portfolio you're managing and team. I appreciate you taking the time to talk to us today. Thanks.

Cobie Packard:

Nancy, great to do it, and always fun to chat with you. Thanks so much.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital.

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