Exclusive outtakes from industry leaders
LeFrak: We’ve been bunting for years
This is a funny baseball technique to use when most executives spend their time trying their best to hit home runs, but LeFrak Organization‘s chairman, president and CEO says it’s worked for his real estate empire, so there’s no need to stop now. When we asked him at our Reuters Global Real Estate Summit why his company didn’t borrow a ton of money during the real estate boom, he said:
We did not want to be seduced by market conditions. My children like to kid me — Every time you get up to the plate, you bunt, and we’ve been bunting successfully for a hundred years. As a result, I’m not interested in changing the methodology that’s worked so successfully.
LeFrak, grandson of Harry LeFrak, who started the company in 1901, took a similarly cautious approach to resort hotels, which he also talked about at his summit appearance on Monday in New York City:
It’s way out on the risk curve. … It sounds glamorous, but boy, you gotta have a strong stomach for that. It depends on a lot of discretionary spending –- corporations willing to step up and do outings and have meetings in places that may or may not be looked favorably on by their shareholders… The whole notion of saying, “I’m going to take my top producers to Hawaii” may not be, let’s say, that robust.
LeFrak talked about meeting people who’d built big luxury resorts on Caribbean islands like Anguilla, including some places that might not always have up-to-date infrastructure, like an airport that can handle moving lots of people onto and off the island.
When you ask, how do people get here, they shrug their shoulders. There’s opportunity in that space, but it would be a departure from the way I would like to think and how our executives like to think about how we would spend our money.
When we weren’t asking LeFrak about his bunting strategy, we quizzed him on the seemingly never-ending dispute over Peter Cooper Village–Stuyvesant Town, the massive apartment complex that Tishman Speyer Properties and BlackRock bought for $5.4 billion in 2006. The deal collapsed along with the real estate market, and Tishman defaulted on its loan payments in 2009. Much legal wrangling has ensued. LeFrak drew a literary comparison:
You know “War and Peace?” To find out what happens, you have to go through all 1,200 pages. This is like “War and Peace.” It’s going to take some time. You’ve got to sort out the legal differences that exist because of the court cases… then the differences with the tenants because they have a big stake at the table. Whoever buys this thing has to go to Fannie (Mae) and Freddie (Mac). Let’s say you need a mortgage of a billion and a half dollars. Where do you go for such a thing? … In the meantime it’s a party for the lawyers or a party for the service making its fees. It’s interesting what a lightning rod it is for the newspapers. If I pick up the phone, all I have to do is say “Stuyvesant Town,” and I get immediate attention, like the whole world of real estate is based in Peter Cooper Village.
Finally, we ended up discussing why rich hedge fund managers feel like they have to live in New York City when there are plainly cleaner, more tax-friendly places to live. Said LeFrak:
I have a lot of hedge funds as tenants. It’s all actually pretty amusing when they talk to you. They could all be in Miami with no tax and sunshine … and if you really ask them why they’re here, it’s always, “I got a daughter at Spence.” There’s some non-economic reason why they’re here. Maybe they pay for the privilege of being here and they don’t care about it, but there’s nothing that they’re doing that couldn’t be conducted somewhere else.