Jeremy Ford, Senior Vice President of Metropolitan Real Estate Equity Management, recently had a roundtable discussion with Nigel Hatfield (Clifford Chance), Chris Papachristophorou (RREEF Real Estate) and Dominic Field (Hodes Weill & Associates). The conversation focused on real estate investment in Europe and the multiple perspectives on the private equity fund model.

Jeremy Ford (second from left)

Click here to download the full PERE article.

Margaret McKnight
Managing Director

Introduction

Commercial real estate is an asset class that includes a wide range of strategies and approaches, all of which can be segmented into a few simple categories. The most important segmentation is core versus non- core, or properties with stable income versus unstabilized ones. Some investors consider four loosely defined classifications: core, core plus, value-added, and opportunistic.

Our “core” category includes both core and core plus strategies, and our “non-core” category includes both value- added and those opportunistic strategies that are real estate based rather than corporate. The distinction between value- added and opportunistic essentially refers to how unstable the income is, but there is not a consensus on where on the continuum the definition changes. Most things considered to be value-added have some income component, whereas opportunistic assets can have none (i.e., empty buildings or new developments).

This paper offers some perspectives on core and non-core investing, and includes a brief discussion of cycles and how they can affect both types of investing.

Continue reading (PDF)

David Sherman is the president of Metropolitan Real Estate Equity Management, a Real Estate Circle Leader and member of the MBA Real Estate Program Advisory Board. David was the chairman of the 2010 Real Estate Symposium Steering Committee.

Interview conducted by Jason Chiang ‘12

Please tell me about Metropolitan’s business model.
We started in 2002 with the idea that we could help investors source, underwrite, and invest in best-in-class real estate managers around the world.  Our job is to determine from a top-down approach which investment strategies we like, find diligence experts in those particular areas, and share those ideas and strategies with a wide range of investors who otherwise wouldn’t have access to similar opportunities.

We only invest in non-core strategies, and look for managers with operating or financial expertise to take broken assets and fix them through a workout or repositioning to ultimately create a core asset.  Essentially, we are looking to partner with top quartile managers who can create the real estate equivalent of alpha.
We don’t take generic positions on markets, either.  We focus on specific markets that we believe are going to outperform the overall real estate market.  Across all geographies, we are looking to partner with highly specialized managers who have a successful operating history and know the local markets intimately.  For example, if we determine that West Coast multifamily fundamentals look attractive, we will interview several apartment managers with long track records and have specific knowledge of the area before selecting one. 

On average, how many funds and managers do you look at?
In 2010, we looked at 463 different funds, met with 172 managers and ultimately made 15 investments across four different continents. 

What benefits do real estate fund of funds provide to investors?
Without question, a fund of funds provides diversification.  By committing capital to a fund of funds, an investor can get exposure to 13-17 underlying managers and several hundreds of properties across many countries. 

But more than diversification, a fund of funds acts as a form of risk management, especially as you invest further and further from home.  If you were a US investor investing in New York or Chicago, you could probably do enough research and due diligence to avoid those few local managers who can and will do stupid things.  But if you wanted to invest in Stockholm, Sao Paulo, or Beijing, it becomes much harder if you don’t have the resources to diligence markets and managers from your desk.  You need the local networking and contacts in order to know who will be a good manager and partner. 

Where are you focused geographically? 
We have two programs offered each year: a US focus and a non-US focus.  With our US fund, we can invest anywhere in the country.  The non-US fund will invest about 50% in Europe, about 40% in Asia and the balance in Latin America.  In Europe, we primarily look to Western and Northern Europe, and in Asia we are heavily weighted towards developed markets where we can look to a history of rental rates and property values to see where values should be today.  In China, for example, cities are being created overnight and it is much more difficult to say with confidence what a piece of property will be worth.  So, we focus instead on Japan, Hong Kong and Singapore.  We’ve looked at India for years and haven’t invested there yet.

What current investment opportunities are you seeing in the market?
We’ve seen two themes develop.  The first is that on a global basis, market fundamentals have bottomed.  It’s very hard to find a market that’s still in complete freefall.  In fact, there’s been selective recovery in a few markets due to demand drivers, such as with London office, US multifamily, coastal industrial, and office in Silicon Valley.  However, it’s still going to be a long, slow recovery. 

The second theme is that distress is everywhere.  Everything we currently invest in has some kind of distress angle.  For example, in Tokyo we are looking for managers with the ability to service and manage large pools of non-performing loan portfolios.  In California, we have partnered with a retail leasing specialist who acquires releases and repositions foreclosed malls.  These malls are acquired for below replacement cost, and we make equity-like returns by taking advantage of opportune timing. 

Since 2008, investors have increasingly started separate accounts with GPs instead of going into blind pool funds, with many suggesting that the blind pool model is on its way out.  Do you agree with this sentiment?
No, not at all!  Of course, there’s been a lot of press around fund managers with poorly conceived strategies who invested and went bankrupt.  But what I believe is that the market’s ability to differentiate between the smart managers and the not-so-smart managers was not where it needed to be in 2007. 

Many investors, including us, have spent the last three years thinking about what caused busted funds to be unsuccessful.  On the one hand, you have good managers who were still patient and smart at the top of market and had sound strategies around buying underperforming assets and truly adding value.  However, they’re underwater today because of poor timing.  On the other hand, you saw fund managers buying a lot of assets that didn’t actually belong in the blind pool fund model.  You also saw other managers who didn’t have capital markets discipline and won’t be raising money again.  Again, these were poor managers that the market didn’t identify, but there’s really nothing wrong with the model itself. 

What was the biggest take away from your Columbia Business School experience?
I don’t remember – it was about 100 years ago!  Maybe having bagels in Uris Hall?

In all seriousness, CBS gave me a solid finance education.  I was math major in my undergrad, but I knew nothing about finance, economics or money in general.  CBS allowed me to go from an operations scheduler at Mobil Oil into the finance business.  It gave me exposure to a lot of New York-based firms, and I got to meet, speak with, and get to know a lot of members of the business community here.  It was an extremely helpful experience. 

You’ve recently joined the MBA RE Program Advisory Board.  What is your opinion of the Real Estate current program at Columbia? 
While there wasn’t a real estate program when I was a student, I taught at Columbia Business School from 2000-2006. I know that the program today is so much deeper and better than it was when I was teaching here.  Lynne Sagalyn and Chris Mayer have really done an amazing job raising the level of the program. 

Columbia students in the Real Estate Program have a huge amount to offer employers.  The value of a focused real estate program is that it really gives a student the time and energy to study real estate and figure out what they like.  One of my biggest issues in hiring people out of school is that you’re always afraid they will change their mind.  The real estate focus gives students a credible position, it gives them the ability to hone their interview skills, and it allows them to say with confidence what skills they can bring to employers and how they can execute on Day one.  It’s huge.

Do you have any advice for current MBA students about to re-enter the job market?
MBAs have tons of experience and examples of when they led projects or have done amazing things, but they don’t always share those examples in interviews.  They should be trying harder to sell themselves and make a compelling case as to why they should be hired.  It’s really no different than trying to sell a property or close a deal; generic answers don’t work. 

Do you have any intention to return to the classroom as an Adjunct Professor?
I would absolutely return if possible, probably when I retire and have time again.  I had a wonderful experience teaching those first seven years and working with Lynne and Chris to create new course materials, come up with new cases, and think about new ways to explain real estate fundamentals to students.  Unfortunately, my current business has gotten too big for me to teach currently, but I would encourage all alumni who have some kind of real estate specialty to come back and teach. 

Fund of funds platform hires senior Grosvenor man in Asia to help it expand its operations in the region.

Jonathan Brasse

Metropolitan Real Estate Equity Managers has appointed John So to expand its presence in Asia, PERE has learned.

So joins the New York-based real estate fund of funds management business, which has approximately $2 billion of assets under management, in August.

Founded in 2002 by managing directors David Sherman, Robert Burke and David Nasaw, Metropolitan has since gone on to raise 12 fund of funds with various strategies for the US and globally, its most recent efforts to close coming in 2008.

The firm is currently in the market raising Metropolitan Real Estate Partners VII, for which it has already closed on $33 million, according to PERE’s Capital Watch. Its investors include institutions and high net worth individuals.

So will be made managing director for Asia and is expected to lead the firm’s offering in the region.

He joined Grosvenor in 2000 from Jardine Fleming Securities and has been a director of the Grosvenor Asia board with a stint as a Director of the Grosvenor Fund Management board from 2003 to 2007.

At Grosvenor, So was responsible for investments and fund management in Hong Kong, Japan and Singapore, with a more recent focus on Greater China investment.

David M. Sherman
President

David M. Sherman is a Co-founder, the President of the Manager and a member of the Investment Committee. Mr. Sherman has more than 24 years of real estate finance and analytical experience. In 2000, Mr. Sherman founded D. Sherman & Company, Inc., an advisory firm focused on strategic issues and transactions in the real estate securities industry.

Previously, Mr. Sherman was the Managing Director of Salomon Smith Barney’s REIT research team, which covered over 60 stocks and supported the firm’s 15 billion of REIT offering activity. The team received recognition from Institutional Investor Magazine in 1998 and 1999. Mr. Sherman also held other positions in real estate finance, investment banking, and strategic planning at Smith Barney, The Harlan Company, First Boston, and Paine Webber, including acting as the Chief Financial Officer of Paine Webber Properties, a family of real estate funds with over $500 million in property investments.

In addition, Mr. Sherman was an Adjunct Professor of Real Estate Finance at Columbia University Graduate School of Business Administration for seven years. Over the years, Mr. Sherman has published numerous articles in periodicals including American Banker, Pension Real Estate Association quarterly, Shopping Center Business, and National Real Estate Investor.

Currently, Mr. Sherman serves as an independent director on the board of Brookfield Homes Corporation. Mr. Sherman received his B.A. in Mathematical Economics from Brown University and his M.B.A. in Finance from Columbia University Graduate School of Business Administration.

T. Robert Burke
Managing Director

T. Robert Burke is a Co-founder and Managing Director of the Manager and a member of the Investment Committee. Mr. Burke has co-founded two successful real estate organizations (AMB Property Corporation (NYSE: AMB) and Institutional Housing Partners, a leading homebuilding finance company) and has over 30 years of real estate experience.

Prior to founding AMB, he was a senior real estate partner with the law firm of Morrison & Foerster and, for two years, served as that firm’s Managing Partner of Operations. In addition, he is a Trustee of Stanford University and has served on the investment committees of the Stanford Management Company, the Hewlett Foundation and the UCSF Foundation.

He is also the former Chairman of the Board of Directors of the Pension Real Estate Association, and a former member of the Board of Governors of the National Association of Real Estate Investment Trusts. Mr. Burke graduated from Stanford University and holds a J.D. degree from Stanford Law School.

David G. Nasaw
Managing Director

David G. Nasaw is a co-founder, Managing Director, and a senior member of the investments team. Mr. Nasaw has more than 35 years of real estate investment experience, including more than 25 years representing high net worth owners of real estate properties. This experience includes the creation of asset allocation and investment strategies, the implementation of investment strategies for real estate allocations, property and portfolio valuations, property disposition and acquisition strategies, as well as market studies and development analysis.

Mr. Nasaw was the President and founder of Metropolitan Real Estate Advisors, Inc., now RMA, an asset advisory firm engaged in the deployment of real estate investment capital for several high net worth families. RMA manages approximately $1 billion of equity and mezzanine investments in more than $4 billion in properties, including apartments, single family homes, industrial, office, senior housing, self-storage, and retail. He is now a senior advisor to RMA.

Mr. Nasaw has also served as a consultant to corporate clients on various property leasing and development projects. Mr. Nasaw was a principal purchase negotiator on behalf of the former owners of the Oakland Athletics baseball franchise and the leader of the consulting group to a major media conglomerate for evaluations of potential sports franchise acquisitions including the Los Angeles Dodgers, the Chicago Blackhawks, the Chicago White Sox, and the Chicago Bulls. Mr. Nasaw also serves on the board of directors of Sutter Health, the fifth largest U.S. non-profit community-based health care provider.

Mr. Nasaw received a B.S. and an M.B.A. from Northwestern University.

Felipe Dorregaray
Managing Director

Felipe Dorregaray is a Managing Director, the Chief Financial Officer and the Chief Compliance Officer of the Manager. He is responsible for finance and administration and supports all aspects of fund management activities including investments, client service and regulatory compliance.

Mr. Dorregaray joined D. Sherman & Company, Inc. as a Vice President in 2001. Prior to that, Mr. Dorregaray served as the Latin American Equities strategist at ABN AMRO. Mr. Dorregaray’s research experience began in 1996 when he joined Salomon Smith Barney’s REIT research group.

Mr. Dorregaray received a B.S. in Physics and Mathematics from the University of Miami and an M.B.A. from American University.

Margaret Gipe McKnight
Managing Director

Margaret Gipe McKnight is a Managing Director and a member of the Investment Committee. Ms. McKnight is responsible for identifying, evaluating, and analyzing Underlying Fund managers and investment opportunities. Ms. McKnight will also seek and review opportunities to purchase interests in Underlying Funds on the secondary market.

Prior to joining the Manager, Ms. McKnight spent six years with Cambridge Associates where she led their real assets specialist consulting practice. She advised clients on all aspects of building real assets portfolios, from setting policy to selecting and monitoring managers.

Prior to joining Cambridge Associates, Ms. McKnight spent eleven years with J.P. Morgan where she was a Vice President, Real Estate Equity Investments, and served on the investment team of the Argo Partnerships. Prior to that role, she was part of the investment banking group at J.P. Morgan; her advisory assignments included an extensive review and restructuring of an $8 billion national portfolio and the sale of a subsidiary of The Equitable (at that time the nation’s largest real estate investment management company).

Ms. McKnight graduated with high honors from Swarthmore College and received an M.B.A. from New York University.

Andrew Jacobs
Managing Director

Andrew Jacobs is a Managing Director and a member of the Investment Committee. Mr. Jacobs is responsible for identifying, evaluating and analyzing Underlying Fund managers and investment opportunities. Mr. Jacobs will also seek and review opportunities to purchase interests in Underlying Funds on the secondary market.

Prior to joining Metropolitan, Mr. Jacobs was with Angelo, Gordon & Co. for ten years where he undertook senior level acquisition and asset management responsibilities for a diversified portfolio consisting of 50 properties located throughout the U.S. with a total capitalization of $1.7 billion. While at Angelo Gordon, Mr. Jacobs focused on the “opportunistic” and “core plus” strategies.

Prior to Angelo Gordon, Mr. Jacobs was a project manager for Hines at their corporate headquarters in Houston. There, Mr. Jacobs oversaw the development of a 473 room Westin hotel and the disposition of a large portfolio of industrial properties.

Before Hines, Mr. Jacobs worked for Campbell Soup, selling surplus industrial properties and selecting retail locations for Campbell’s subsidiary, Godiva Chocolatier.

Mr. Jacobs is active in several architecture preservation organizations in New York and has been a member of ULI since 1994. He is also an Adjunct Professor of Real Estate Finance at Columbia Business School. Mr. Jacobs holds an M.B.A. in Real Estate Finance from Columbia Business School and a B.A. in the History of Art from the University of Pennsylvania.