Transcript
Dean Wehrli:
Okay. Welcome to New Home Insights, the John Burns Real Estate Consulting Podcast about the US housing market. I’m your host Dean Wehrli. Today, we’re going to take a look at kind of the big picture. We’re going to talk with one of the biggest real estate investors, really the biggest investors in the world about how he looks at deals in this ever changing market landscape. We’re also going to learn from his past a little bit to help us adapt to our future. All of this means that we are joined today by Jason Keller. He’s a managing director at Oaktree Capital Management. It’s a company with a global footprint and a wide sweep of assets, but also some major stakes in the home building world. Jason, why don’t you say hi to the listeners and then tell us briefly about Oaktree and what you do there?
Jason Keller:
Well, thank you, Dean. It’s great to be here with you today. Yeah, I’m Jason Keller. I am a managing director and the head of residential investments at Oaktree. I am a little bit embarrassed to be called the largest and one of the largest investors in the world.
Dean Wehrli:
Don’t be modest.
Jason Keller:
My firm Oaktree is nationally recognized. I work under the umbrella of our real estate investment platform, which has been a part of Oaktree since its inception 25 years ago. But under that umbrella, we’ve been investing actively in the residential space now for really the last 13 years that I’ve been at Oaktree.
Jason Keller:
And as I’m sure most of your listeners know Oaktree is really alternative asset manager in the broadest sense, 20 plus different investment strategies really centered around a distressed debt focus, but now very broad in its breadth and the reach of its investment scope. And as I noted before, I work for the real estate group and have been running our residential investment practice for the last 13 years.
Dean Wehrli:
Right. You guys have your hands in a lot of pies, but we’re going to focus on residential, but later on, we’re definitely going to talk about some other asset classes as well. So let’s start with kind of take us through a couple of major pivot points before we get to the current pivot point. So we’ll skip right over the 1990s when you were, I guess, driving around in your Volkswagen Vanogan again with skis on the top.
Jason Keller:
Yes, exactly.
Dean Wehrli:
We’ll skip right over that and go straight to the early 2000s and the.com bust. You were really just starting to get your feet wet in this sector, but that had a huge impact, had a big impact on the economy, but maybe not as big an impact on the housing sector. How did things change for you in that early dot com bust era, or did you even need to really change your strategy or look for alternative strategies from that?
Jason Keller:
Well, during the .com bust, I was actually really more focused on commercial assets. My recollection of that in 2000 was that we had bought a hotel in downtown San Francisco early in 2000. And I remember kind of going there as we’d gone through the due diligence and you couldn’t get a reservation at a restaurant, the streets were packed and I was struck just a year and a half later, how you could fire a cannonball through the streets and seemingly not hit anybody.
Jason Keller:
So that was really my first exposure to a really sharp but focused downturn. And at DLJ, the interesting thing was, is that as an asset focused investor, we had a limited number of options in terms of the palette of things that we could do. We went in, we took a look at the time when asset prices finally started to come down. We started buying up some office buildings in San Francisco, more hospitality, that type of thing at DLJ. But really it was asset-based investing and so there was a limited amount of types of investments that we could do. And one of the reasons why I went over to Oaktree was that we could do more, that the palette was extraordinarily broad in the types of investments that we could make.
Dean Wehrli:
And is that kind of a critical thing to keep in mind during any kind of a crisis situation that it might lead to different investments or different approaches and you have to be sort of nimble?
Jason Keller:
Yes, absolutely. I mean, when we think about residential, we tend to think of just land development and home building, right? But residential is huge. It’s the largest asset class in the country, right? So I mean not to diverge, but when we take a look at what we’ve done at Oaktree over the last 13 years, I mean, we have entitled land, we’ve developed land, we’ve loaned money on land, and we have our own land banking company.
Jason Keller:
But we also build homes through joint ventures around the company, but we also build them through the three home building companies that we own. If the mortgage on those homes goes delinquent like they did during the GFC, we created a platform that went out and bought $5 billion of nonperforming loans. And then we bought our own servicing company to oversee the restructuring.
Jason Keller:
Then keeping this going, when we saw the homes going on the auction block, we moved into Fix & Flip lending. And we built up one of the largest Fix & Flip lenders in the country, which we sold to Goldman Sachs a couple of years ago.
Jason Keller:
So there’s a lot that can be done if you have a platform and enough capital and the trust of your investors to sort of step outside of just the land development and the home building box.
Dean Wehrli:
So you have to be omnivorous and you can’t be afraid to go into whatever looks like it might be a good opportunity.
Jason Keller:
Well, yes, absolutely. I mean, the point is that the world of residential investing is enormous and you have to be able to do more. I mean, it’s almost like, you’ve probably heard the military lament that they’re always prepared to fight the last war, which is leaving them vulnerable to change, right? Well, likewise, I think everybody’s always sort of prepared to fight the last recession, and for us, the GFC was a housing focused recession, but today we might, obviously the opportunities are always going to be different with every individual sort of market shock, whether it is market specific or whether it’s national or global in nature.
Dean Wehrli:
Yeah. I mean, that’s true in a lot of disciplines. In some, in history, it’s called kind of a lessons learned bias where you are, you’re learning whatever the lesson was in the last whatever event, that’s what you apply to the next one, even though they might be radically different.
Jason Keller:
Very true.
Dean Wehrli:
I think some folks might be surprised, though, to hear about the Fix & Flip, that back in the 2000s you guys were doing Fix & Flip and you’d think such a large entity, but again, you’re omnivorous and you look at any opportunity.
Jason Keller:
We did take a look at it and said, “How do we want to play in the individual home renovation play?” And we decided that we didn’t want to actually put equity into the little Fix & Flip guys. It was too granular and it was going to be too hard to track and there’s too much opportunity for graft. But as a lender, we felt like we could control that and we sort of rode that home renovation wave upwards.
Jason Keller:
And when we were saying, “Okay, we want to move into infill home-building,” we made the decision and we went out and bought. We’re building them up right now.
Dean Wehrli:
So, okay. So, let’s fast forward a little bit to the, I guess the big one, or at least the last big one until this big one, which is the Great Recession. Maybe just take us through how you got through the worst of it early on, and then maybe, and then how you pivoted after you had a chance to assess, or maybe I’m wrong, maybe you were assessing and reassessing and taking advantage right away. What was going on then? And you were by this time at Oaktree.
Jason Keller:
Yes, that’s right. So I moved over to Oaktree in 2007. Interestingly enough, Oaktree had made the decision, prior to my joining, I could brag about the decision because I had nothing to do with it. They made a decision in 2005 to liquidate all of their assets. So they actually, in 2007 Oaktree hadn’t made a purchase for two years when I bought, sorry, when I joined the firm. I had bought nothing. So by the time I came in, they really had a clean slate and left us in a unique position of being able to take a look at the broader environment and say, “Where do we see opportunity?”
Jason Keller:
And whereas my colleagues, of course, were seeing lots of opportunity all over the place in everything from hospitality to commercial, to multifamily, to office, et cetera, et cetera, I took a look at the slowly disintegrating housing industry and raised my hand and said, “I’d like to build a platform around this.”
Jason Keller:
And it was this idea at the time in 2007 through 2009 and 10, that as the markets were collapsing in residential, that housing can’t go anywhere. We need it. It’s the largest asset class. And even in 2009, when you felt like there wasn’t going to be another new home built in the whole country for 20 years, taking a look at it from a couple of steps back, it became clear that this could be a once in a generation opportunity to put a lot of money to work in an industry that kind of just sort of had to come back at some point.
Dean Wehrli:
Even though all you heard at the time was vacant homes and replacement costs, you’re right. It seemed like there wasn’t going to be any more profitable building for forever, but you saw that as an opportunity.
Jason Keller:
Yes. Yes. And that was when we went in and we started buying up. We started up buying early on. It was everything from CFD bonds. We actually had a platform where we were buying effectively property tax-like debt, CFD bonds in California. That sort of kicked things off. And then we moved into land development where we were buying up bankrupt pieces of dirt from banks and repurposing those. That was fantastic.
Jason Keller:
And then we moved from there into more asset heavy acquisitions, like distressed land development and some distressed home building joint ventures. So we were kind of led baby steps starting off in individual land deals up through the big corporate home building acquisitions.
Dean Wehrli:
This might sound like a weird question, but how do you, I mean, you’re clearly very forward looking for your opportunities. How do you, and you mentioned again, you don’t want to sort of rely on the last time, rely on the last event. So how do you, do you force yourself to be forward looking and how do you prevent yourself from being bound by that last lesson? I mean, it’s not easy. It’s human nature to base decisions on the last lesson of the past.
Jason Keller:
It really is. I mean, and I don’t really, we sort of fast forward here, we talk a little bit about COVID, but I mean, once again, when we moved into this last recession or sorry, into the COVID led recession here, everybody was thinking about what happened during the GFC, right? But if you take a look at the underlying fundamentals, the supply demand fundamentals, you say to yourself it doesn’t really look like it could be, at least in the short term, there’s going to be a GFC-like recession in the housing industry.
Jason Keller:
I think you just have to be a little bit data focused and I’ll give you a little plug here. I mean, I’m obviously a huge fan of John Burns Real Estate and I love those 250 page decks that you guys put together full of data. Because I think that if you remain data focused and try to divorce yourself from the emotion of the moment and the passions of what’s going on around you, that you can find those opportunities that people are missing. And so when the home builders stock started collapsing in March, we took a look at that and said that that looks like an interesting opportunity to go out and buy some non-control positions in home builders.
Dean Wehrli:
Yeah.
Jason Keller:
So you’re right. I think it is difficult to separate yourself emotionally from everything else that’s going on.
Dean Wehrli:
That is the hard part, isn’t it? That’s the right word emotionally, because, so let the data and let the numbers speak for themselves and rise above the, let’s be honest, often irrationality of the stock market.
Jason Keller:
Yeah. Well, I mean, it’s interesting, speaking of COVID. I mean, housing sits firmly at the base of Maslow’s hierarchy of needs, right? I mean, it’s not like a steak dinner can be substituted with a peanut butter sandwich, but housing, housing is, you can delay household formation. People can double up for some time in households, but it can’t be denied at the end of the day.
Dean Wehrli:
That makes sense. I mean, there’s a couple things above it, but this is a family podcast, so we can’t talk about at least one of those, but yeah, you’re right. Housing is core. Housing is as fundamental as it really gets. That’s key anytime in this industry, any crisis. So let’s flip to before. We will get to COVID and the current situation here in just a moment, but let’s flip to kind of how you look at how you assess your investments more generally. First, let’s stick with the residential space and let’s talk about sort of market to market, I guess, and then we’ll get to some of the specific deals and how you assess specific deals.
Dean Wehrli:
But first, how do you assess different markets or even different housing product against other markets and other products? Does that make sense at all?
Jason Keller:
So, I would say that I’m a huge fan of demographic studies and watching the broader movement of people and generations. I actually do love Burn’s book on generational changes and demographic changes in how people raise their children and where we see people moving.
Dean Wehrli:
You mean Big Shifts Ahead?
Jason Keller:
That would be the one. I wasn’t going to plug-
Dean Wehrli:
I am.
Jason Keller:
I actually liked it. I think that it’s very apropos to what we’re talking about here. There’s another book called The Accidental Superpower by Peter Zeihan that talks about demographics in depth, as well, which I also find sort of interesting when I’m thinking about the future.
Jason Keller:
But back to your specific question, I really do watch where jobs and people are moving. And then we take a look at that and compare it to the property type that we’re thinking about creating. So I am actually a big believer in infill housing. I will say that I am a little concerned right now about the big cities and for a couple of reasons. The demographic changes of the millennials moving out to the suburbs to raise their kids could be exacerbated, of course, by what’s happening with COVID right now. But I really look to demographics.
Jason Keller:
And so if I’m out in the Bay Area and we’re taking a look at a piece of dirt, is it close enough in to take advantage of the job trends there? Or is it further out? And if it’s further out, should we be taking a look at senior housing, for example, where people sell their homes in the infill areas and move out to the suburbs. But I really do believe that demographics and job trends are probably the first thing that we look at when we’re looking at markets.
Jason Keller:
And I think that’s also worth noting when we’re talking about where we want to invest, it’s recognizing where I can be competitive as well. Because we’ve been involved in these large scale home builders in the past, I understand very, very well the competitive advantages that they bring to bear and for us to try to backstop a small private home builder and send them up competing head-to-head against Toll or D.R. Horton, I recognize that that’s probably not going to play out for us.
Jason Keller:
However, if I can find a place where my capital can compete in a specialized niche, well, that’s really interesting to me. And so the infill opportunities are one thing, maybe it’s a specialized builder of a product type that the public’s haven’t been concentrating on, or it is a platform, which rather than competing against the home builders, we are partnering with them to provide a capital source.
Dean Wehrli:
Okay, Jason, so how do you, let’s switch over to something, how you assess specific deals, whether they be land deals or joint ventures or land bank and whatever. Is it the same? Is it still demographics, demographics, demographics, and jobs, jobs, jobs, or are there different inputs for you?
Jason Keller:
Well, we’re always looking for the kind of the hook, the reason why our capital is going to be competitive or the reason why something would make sense. I want to find the point of distress in a particular environment. I want to find the rationale why this partner is going to be competitive. And so there really has to be some kind of story behind it, an opportunity to buy it a little bit less expensive, a place where our expertise or our relationships on the lending side can perhaps give us an edge on financing, on financial engineering.
Dean Wehrli:
Okay, I’m asking this for every smaller developer or builder out there, but do you ever just kind of go with your gut, even if maybe the numbers don’t say go?
Jason Keller:
That’s a great question. The answer here is at Oaktree, no. Actually we never go with our gut. It would be kind of fun to be able to say that, “Yeah, we just took a flyer on this one,” but even investments that seem like a no brainer, we will actually, really we’ll put together a 20 or 30 page deck digging down into it and saying, “Okay, if this looks too good, what’s wrong? Well, there must be something wrong. What are we missing here?” That kind of tends to be how we look at those no-brainer investments. We thought, “Oh, we must be stupid. And we’re missing something that everybody else is.” And so we really convince ourselves that no, we’re not the stupid people at the table. We think that this actually makes sense.
Dean Wehrli:
Are you looking for reasons to say no to a deal or reasons to say yes?
Jason Keller:
I really like that question because you get to the heart of the conundrum that is being an investor. And which is that at the end of the day, I am paid to put money out. That’s what Oaktree does. That’s what investors expect us to do. But my career over the long term is dependent on making the right decisions. It’s always so much easier to actually say no.
Jason Keller:
But you have to keep the bigger picture in mind that this is our job is to say yes. And so it’s that tension between the short term need to put money out against the long term need to protect your career, your reputation, and most importantly, that of your firm and your investors. You’ve got to protect the investor’s interests first and foremost, even though they are obviously the ones that are giving you the money and telling you, “We expect you to put this to work.” So there is a tension there. It’s a healthy tension. And it’s one that I think keeps us all very focused on not just saying no because no is easy, but being very judicious when we do say yes.
Dean Wehrli:
Let’s assess briefly, at least, let’s look at nonresidential space. And how do you assess non-residential opportunities versus residential opportunities? Or are they just completely apples and oranges?
Jason Keller:
Well, they are apples and oranges, but like any good fruit salad you’re going to want to have all of it in the final product, right?
Dean Wehrli:
And you’ll even have that broad palate within sectors, so like hotels, you might have some boutique, but you might have some major tourist plays, too, something like that.
Jason Keller:
Absolutely. We always laughed actually during, call it 2009 to 13, we were buying these absolutely gorgeous resorts and key hotels, beautiful five-star hotels that looked great on the cover of a magazine. But by 2015, 2016, we were buying, let’s just say, a lot less attractive looking investments and you’ve sold out all of those really spectacular looking. But now paying a four cap for a five-star hotel makes no sense.
Dean Wehrli:
Okay. Okay. So now our listeners are with bated breath to get to the current, the COVID pandemic. So let’s turn more to the present here. How has the COVID pandemic changed your outlook, your method, for instance, even at the biggest picture, is it, are you looking at assets differently, like industrial warehousing up, maybe retail down something like that?
Jason Keller:
I mean, broadly speaking, so taking a step back, yes. We’ve absolutely been playing by a mix of defense and offense. We shuttered our hotels early on. We went back and assessed every single one of our office tenants to make sure where we felt we might have exposure and might have to go to lenders. We’re very happy to see that, by this point, we had limited exposure… We have almost no exposure to office buildings with WeWork in them. And I think we have zero WeWork tenants, so that was positive for us.
Jason Keller:
But when we kind of dive down into the residential space, that’s where I actually thought that we were going to find really interesting opportunities, but it wasn’t going to be in the assets. It was such a quick shock that everybody just sort of sat on their assets. And we really haven’t seen land change hands at distress values because COVID happened so quickly, right? But where the bomb went off this time, which was completely different from the other recessions, was it went off in the mortgage industry, right?
Jason Keller:
I mean, think of these poor mortgage REITs. These guys come in, they buy a few performing bonds. They buy a few performing Fix & Flip loans, have a long lunch, and then the government comes in and drops a bomb in the middle of this industry saying nobody needs to pay their mortgage anymore. And it was the right decision to make for the benefit of the homeowners, but the ramifications of that decision have profound impacts on the mortgage industry. And what was different about this than prior industry shocks was that we realized the fragility of the mortgage origination and acquisition and aggregation industry, because things seized up immediately.
Dean Wehrli:
Do you see the mortgage, I mean, there’s kind of different takes on how that’s going to play out. What is it something like eight and a half percent of mortgages are in forbearance, but even something like 22% of those folks actually paid their May mortgage. Do you see that being, the take for most folks seems like, “Oh, that’s going to play out relatively well. It won’t lead to a ton of distress.” Do you see that happening?
Jason Keller:
Actually, I mean, if we go back three months, I think that is, by the way, stepping back. I think that your take right now is correct. That with the benefit of three months of sort of seasoning to see how this all played out, that people are saying, “Ah, the government stepped in. They provided liquidity. The GSE’s all put basically gates around and guidelines out on how they were going to deal with forbearances.” And so what you see now is the mortgage industry is healthy. They’re the most profitable that they’ve been in a decade. They’re out there minting money right now, printing mortgages of 3%.
Jason Keller:
But if you go back, Dean, three months ago, even as the Treasury rates were collapsing, mortgage rates were going the opposite direction and mortgage origination was actually tightening up. Because nobody knew how they were going to handle the, how are you going to handle forbearances? What where the GSEs is going to do if somebody didn’t make a payment? Where are you going to make that loan originator buy that loan back? Well, where is he going to get the money to buy the loan back? But the whole industry seized up for the moment.
Jason Keller:
We didn’t believe that there was going to be a major impact on home values. I mean, normally of course housing is related to unemployment and housing and housing pricing is related to income growth and both of those unemployment and housing income growth were headed negative. But this really, to us looked like a short term disconnect, particularly as it related to how fast things had gone south in the home builders and the mortgage industry.
Jason Keller:
This particular recession right now, the opportunity looks like it’s going to be in the mortgage origination and aggregation space.
Dean Wehrli:
Do you look forward in how you assess the residential market now post-COVID for instance? You mentioned it a little bit ago that in the residential space, maybe we are a little more suburban, maybe we’re home officing more, maybe buyers will be a little less urban-oriented. Is that impacting your decisions now?
Jason Keller:
Yes, it is actually. I’ve got to be honest in that I’m a little nervous about American cities right now. We already had a little bit of an exodus going back to the demographics discussion of the millennials moving out of the cities to the suburbs now that they’ve formed households and sort of are at that child raising stage. So we already had that bit of a demographic exodus, and I had been hoping that they would be backfilled by retirees that were kind of moving into the cities to take advantage of urban living and the ease of living. But I am concerned right now about whether or not those retirees will be willing to move into the cities in an environment where they might not feel as safe. And so I actually am a little bit concerned about that.
Jason Keller:
Oaktree, in general, had been more focused on what we called the growth markets, high growth markets in more suburban type environments Phoenix, Las Vegas, as opposed to L.A. or New York City. And so we had already sort of been shifting for the most part out of those markets, broadly speaking. I am a little concerned that the COVID situation might be exacerbating that demographic shift. I’m kind of curious, I mean, because Dean, I know you guys do a lot of work on this. I’m curious if you have an opinion on that as well?
Dean Wehrli:
We do see demand shifting a little bit to lower densities, to more suburban, too, and product changing, too, in kind. But the saving grace though, for a lot of the really urban core areas will be supply. The Bay Area is a good example where yeah, we do see some of that demand moving to more outlying areas, but supply is just so constrained and has been forever. And there’s a lot of other major metro areas like those, too. I think depending on supply levels, and maybe it’s more in the for sale sector than it is in apartments, that could save them from this diminished demand.
Jason Keller:
I couldn’t have said it better myself. I agree a hundred percent with them.
Dean Wehrli:
Let’s end with kind of your crystal ball because I like to do this, put you on the spot, which is my favorite thing. So what, if anything, do you think you will do differently on a more or less permanent basis or at least the mid-term at least due to COVID?
Jason Keller:
Well, I think we need to be really careful right now about unemployment and where that’s going. I know you’re looking for more of a permanent answer here, but I don’t know. I don’t tend to make permanent shifts based on kind of one-time events. I made the point that I feel like this housing shock, the initial housing shock was overwrought given the short term disconnect between unemployment and housing. Over the long term however, I’m worried about sort of the urban versus suburban trends and I’m worried about unemployment and I am worried about a sort of loss of manufacturing jobs as it relates to new tech oriented jobs and whether or not we have the education infrastructure in place to really bring people up to take advantage of those new types of employment.
Jason Keller:
So I’m focused on unemployment going forward. I’m focused on demographics going forward. I don’t think, I’m not certain that COVID is going to have a real lasting impact. I might regret actually saying that, but you know, when we took a look at post 9/11, we all thought, “Well, we better move away from urban high-rise or a high-rise office.” And it didn’t end up being a real sea change in people’s decisions to live in urban areas or live high-rise.
Jason Keller:
And I guess maybe I’ve got my blinders on a little bit here, Dean, in thinking that COVID might not be as impactful five years from now. I kind of hope it isn’t. Maybe that’s my hopes, maybe not my intellect, but the time will tell whether or not I’m right on that.
Dean Wehrli:
Honestly, I personally think you are. I think when you’re caught up in the moment of something, especially a momentous event like this, you do tend to think it’s natural to think of these things as long lasting, but this is such an exogenous event that happened to us, or we sort of did to ourselves as opposed to like the Great Recession that it could very well have minimal, if any long term impact.
Jason Keller:
Like I said, time will tell. Maybe we’ll look back on this and we’ll both say, “Oh, I wish we hadn’t said that.”
Dean Wehrli:
I know. And then we’ll just delete it off the upload. Well, Jason, I really appreciate it. This has been fantastic. Thank you so much for joining us.
Jason Keller:
It was my pleasure and look forward to seeing you in person again, sometime, hopefully very soon.
Dean Wehrli:
Yes, me too. All right. Thanks everyone for listening. That’s it for now. So until next time, I’m Dean Wehrli, and this has been the New Home Insights Podcast. So long.
