The Real Market With Chris Rising – Ep. 34 Pat Jackson

Chris Rising: 00:00:02 Welcome to The Real Market with Chris Rising, the only podcast that brings the Real estate conference panel to your headphones. You’ll hear from super stars from every realm of commercial Real estate. The biggest brokers, the most well-known architects, the largest investors and the most visionary developers. You’ll learn what they do, how they do it and what drives their success. We’ll discuss the latest trends across regional markets, capital flows both national and global and we’ll explore technologies role in shaping all of it. We’ll take a clear eyed look at where we’ve been, where we are now and what’s to come. Real conversations. Real experts. Real insights. This is The Real Market. Welcome to The Real Market with Chris Rising. I’m really pleased to have Pat Jackson with me today. Pat is the CEO of Sabal Capital Group. Welcome to the show. I’m really excited to have you.

Pat Jackson: 00:01:00 Thanks Chris. I’m so happy we got together.

Chris Rising: 00:01:03 Well, I’m real excited to talk about with you about all the things that are going on in the debt world and also on the equity side of things, because I think we’re on a really interesting time and given all the noise out there politically and people going near the end of the year, I think we … I have, in my podcasts, kind of stopped and said, “Where are we and what are doing.” So, I think this conversation is going to be very interesting, but I think you should probably tell our audience a little bit about what you do and Sabal’s role in real estate is today?

Pat Jackson: 00:01:36 Okay. Sure. So, Sabal is a company that I started about 12 years ago. It’s always focused on the commercial Real estate sector and primarily around debt. We started the company back in the very beginning of the great recession I guess you would call it, in early 2009, and it was, initially, set up to buy commercial real estate debt coming out of banks either because the debt was impaired and they needed to get it off their balance sheet, or the banks were in trouble for some other reason and they needed to actually move the debt off the balance sheets.

Pat Jackson: 00:02:23 From 2009 until about 2014 bought about 5000 loans from banks from the tip of Florida to the tip of Washington, so nation-wide approach. Basically any type of commercial Real estate asset you can imagine. And We also focused on helping banks analyze their balance sheets and try to figure out whether they had adequate capital. That would either facilitate an M&A transaction or a recap and we did that for the FDIC as well. We valued about 200 different banks over the financial crisis for the FDIC, of which they eventually closed about 80 of those banks and used our data to assess what they thought the loss would actually be and used that to market the failing bank to a local acquiring bank to keep their deposits safe.

Pat Jackson: 00:03:30 Getting started we were in quotes “Real estate experts”, but we had expertise in the banking sector as well, so it was a really unique position in the market place. Top of the house we always tell people we’re commercial Real estate investors, whether it’s buying debt and converting it to properties that we own. We ended up owning about 3,000 of those assets around the country and managing them and selling them eventually. Started lending in 2013 in the commercial Real estate space again, only commercial. Today we’ve originated about five billion dollars worth of loans across all the different kind of asset classes, [inaudible 00:04:17] asset classes you find in the commercial Real estate sector. [crosstalk 00:04:21] we also have a-

Chris Rising: 00:04:20 Let’s stop for a second here, Pat. I was just going to stop you there for one second because you got a lot in there and I want to break it down a little. So you come out of the great recession and starts Sabal. Did you have your own capital? I think a lot of people are always curious how people start a business, especially at time of great crisis. How did you get it started?

Pat Jackson: 00:04:43 I self-funded the company to start out and over the course of time brought in partners. Again, I’ll call them friends and families, but more sophisticated than kind of a guy you meet at your church or something. I have an investment banker in New York that I knew, one is an insurance company executive. They came in on their own personal capacity as an investor with me. Once we started the ball rolling, I think we went from basically an idea at the coffee shop to probably 60 employees in the first six months. We started getting business going around the advisory work with the FDIC and other banks. That actually created some income stream. I think by the time a year rolled around, I didn’t have to put anymore money in the business. Now that’s not saying I’m taking any money out, but I wasn’t having to feed the machine anymore. We peaked out at 240 employees as far as growing our business in that regard.

Pat Jackson: 00:05:47 Buying Real estate assets we used different investment vehicles for that. It’s traditional GP-LP structure where we knew the manager of a fund and we would buy assets into that. As the management company, would run those assets on behalf of the investment pool that we had put together. But we are continually… We are in that business today, we are a registered investment advisor for Intact [inaudible 00:06:20] pension funds and endowments and family options today in our business as well. But we’re not buying $6 billion worth of commercial Real estate on my checkbook for sure. It was in conjunction with money managers and pension fund and what not to be able to facilitate doing that.

Chris Rising: 00:06:40 Did you compete at all with the Oaktrees of the world. The people who did the really big pips and all that? Pat Jackson: 00:06:45 As a matter of fact, Oaktree was one of my largest investors. So we partnered with Oaktree early on.They saw us as a company that had operational excellence in new commercial Real estate obviously had a good understanding in the banking sector. Oaktree’s pitch to us was, “We’re not operators, we were looking for guys like you to be able to help us deploy money.” So we worked with a lot of the funds of Oaktree. And I think about 22 different funds of Oaktree. They are there obviously a well respected group in the distress key partner for me, getting the business going. And we were prominently featured in some of their annual events where we talked about the distress and how we are addressing distress and we were a key partner during that phase with them. So lots of history with that company.

Chris Rising: 00:07:46 So when you’re looking back now, and say 10 plus years later, when you were first putting together the team and you saw this opportunity. What were you looking for in your team members? Because you were the founder and you were the one writing the checks and there was a ton of distress going on and bad things happening both in the political world and in the financial world and in the Real estate world. What were you thinking about? Was it reactive or very proactive about the team that you were putting together?

Pat Jackson: 00:08:19 Yeah, that’s a terrific question. And I saw a lot of companies do it differently for the way we did at night, obviously, I’m biased that ours was the right way. It’s like fill the drains, you build it and they will come. I felt very strongly that early on for me to attract capital. First of all, I needed to have something that’s not just a PowerPoint and an idea you needed actually have infrastructure, you need to be able to demonstrate you knew how to operate especially… You need to be able to show that you have were able to operate with good controls and compliance. So a lot of the earlier headcount or less Real estate focused people, but rather process, accounting, are key getting things like that modeling people, analytical people that will be able to put things in place.

Pat Jackson: 00:09:17 And it was only after we kind of got that up and running, which is let’s say, from February to probably July where you really had a platform that you can say, “Look, we could officially go out and look at a portfolio of loans of maybe 200 lines and analyze them in a very robust consistent way.” Because part of the way I wanted to do this was not only can you take the data and parse through it and come up with a credible bid that made sense that you’re also going to give a return to your investors. But it’s like the dog that caught the car, what do you catch it? So what happens when you buy the asset are you going to be prepared to actually do something with it? And how actually kept that data and had that data prepared to be able to make us smarter.

Pat Jackson: 00:10:09 Today, we actually took what we wanted to do it and went in and own the assets, what are you going to do with it? And we saw in the early stages, a lot of companies that were bidding on portfolios that had nothing behind them, and they may have had a capital source but the reality is, if they had one, it’s like, “Oh my gosh, I’ve the one now I’ve got to put everything together.” And the problem about that is that, it’s harder to raise money when you don’t have really anything that you can point to people come in and audit. Number two is it makes your initial from there to actually start working out assets really elongated and you do want to be quick about this. And number three, just in terms of Working with the FDIC, because we did buy five different portfolios from the FDIC. They need to know that you have a robust compliance and a robust operation in place to be able to either be qualified to bid. And so the guys that didn’t have that really never were able to scale.

Pat Jackson: 00:11:18 And so that was a big upfront investment early on to do that. But I think it was the right way of doing it. Because that compliance regime we put in place even then continues to exist today. And we’re auditing company and we’ve got all kinds of audits that go on in that company. And they come through and our compliance is very robust and we get great audits and it just keeps you ahead of the curve, it’s our tagline staying ahead of the curve.

Chris Rising: 00:11:48 So let me ask you then-

Pat Jackson: 00:11:48 So, we didn’t want to always be ahead of the curve as far as we’re open to the market is going and not have to be in a situation where, “Oh my gosh, I just found out that I’m behind and I’ve got to spend lot of attention, try to deal with internal things rather than really being able to take advantage of market movement when it happens when we see it.” Chris Rising: 00:12:09 I do appreciate kind of the Wayne Gretzky quote of trying to go where the puck is going to be. But- Pat Jackson: 00:12:13 Yeah, exactly. Where the puck is going, yeah I use that a lot.

Chris Rising: 00:12:15 Let me ask you this, though, because I think a whole lot of our audience, really, we’re in school, and maybe even High school or Grade school. When you and I were living this period of time and I don’t know if everybody who’s in their 20s or even early 30s understands that period of time where you were looking for comps that nobody could apply because they were from such a different era, even though the era was six months before and all. How did you deal with the idea that you didn’t want to catch a falling knife because these prices were dropping so quickly, and where did you get confidence that, “Okay, if we’re going to make a bid, we can live by this bid, even if it drops 5% or 10%?” Because we saw things and I know you did too. We saw drop 95% in value in two months and the and Real estates too-

Pat Jackson: 00:13:05 Absolutely I don’t mind sharing the first portfolio we bought was at 38 cents on the dollar.

Chris Rising: 00:13:08 Wow.

Pat Jackson: 00:13:09 How do you know if that was the right number? It turns out that was very much the right number. But was to say that number is not 35 or 30 or 25 to your point.

Chris Rising: 00:13:23 Would you have weekly meetings because you’d had enough experience I want to get into your experience in a moment. But you get this team together, and they’re all very accomplished at doing certain skill sets. But that doesn’t mean that that people have judgment, and they have experienced. How did you coach people through not being able to apply comps to value because they weren’t valid, or just the panic, how did you deal with the panic that a lot of people were feeling about, they had to be right? You’re investing your money. So how did you deal with that from coaching elbow and also the perspective of don’t let the… What is it saying? Like all the time which is, “Don’t let perfection be the enemy of the good.”

Pat Jackson: 00:14:07 Yeah. Well, that’s a little bit of a long answer to tell, I’ll try to be as extensive as I can. It’s almost when I went back when I was first looking for the first, because I met another capital. And I remember vividly July of 2009 I was in New York in meeting with various firms like Oaktree. And part of it was going through and first [inaudible 00:14:42]. Here’s our business, here’s how we’re going to manage this. This is how we’re going to value it. Here’s how we’re going to use comp levels and its various different ways of doing whether you’re buying it’s like price per pound, you look at a square foot and look at replacement costs. You start making decisions around that. You look at demographics of the market and try to say, “How do you think that it’s going to look from a percentage of replacement costs and start getting comfortable about that?” And then try to make some assessments about How long do you think that the market will simply returns will normalize market and that’s a total guess by the way.

Pat Jackson: 00:15:19 But I’ll give you an example with one of the first portfolios we bought was a Phoenix based portfolio. And we hired a consultant that was specifically focused around the Phoenix markets. And we went back and we hired a helicopter flew around and looked at the assets, because a lot of it was land decisions. And one of the things that we wanted to look at is, what is the diversity of this market relative to new businesses coming in? And is it concentrated around particular industry? Which it wasn’t, and one of the things was the driving force was water. How much water does it have to be able to sustain population growth. And turns out that was the report was that it was amazing how well that was done.

Pat Jackson: 00:16:09 But we just didn’t wing it in the regard of how do you think you’re going to do it? We tried to get into the specific market as much as we could, which included looking at a lot of assets, I think we looked at, our very first portfolio that we look at, we did 700 different site visits. Can you imagine on a nationwide basis, going out and deploying doing 700 site visits that we would make in a day. By the way, that portfolio had 3500 assets, and it was only a subset that you try to pick as much as you possibly can. Representations of asset classes in a particular geographic area that you think you can make as best possible judgment about what you think that value could be.

Pat Jackson: 00:16:56 And then you do a lot of statistics because again, then it becomes very much a statistical exercise about how you apply those cohorts is what we call them, across all the other remaining assets to be able to try to come up with what will be this smartest bid based on the return. And frankly, it was easier earlier. Because you’re guessing about price per pound, how do you think you ultimately going to be able to get back to return? It got harder, frankly, to win in 13, and 14, because people were bidding dating based on things that we thought were way less analytical and more emotional. And so that’s I guess the time exactly to get out.

Chris Rising: 00:17:46 I do have this image of you talking to your team about these 700 site visits that you’re writing the checks for. “Okay, we’re doing southwest and you’re staying at the motel six.” At what point-

Pat Jackson: 00:17:58 It was that. It really was that.

Chris Rising: 00:17:59 At what point? Was that it was really about a year where you said, “Okay, I feel like this isn’t a startup anymore and it’s got legs.” we have a lot of people on the on this podcast who even though their companies are thriving, still sleep with one eye open because it’s still uncertain. When did you start to feel the confidence in your business plan and your team and how do you look at that today?

Pat Jackson: 00:18:24 I would say July 2010. And that’s about a year and a half later. I think I wrote my last, like, “Okay, I got this more money in”, around April 2010. And by July, we had enough assets under management and things really started to grow. We had a lot, obviously most of our expense was either travel or headcount. But by that point, you’d had enough of a track record and you’ve had success building up your servicing business, but that you really do start saying, “Okay, it’s…” You see that, “Okay, this is at least for this cycle is going to be able to make it.” Because by that point people were starting to see us as one of the leading participants in the distress cycle.

Pat Jackson: 00:19:18 And that just continued to compound itself every time you won another deal, just picked up in the press and people’s like, “Wow, you guys are on fire.” Well, we’re not totally on fire but one of the things that we did well, is we maintained one discipline as far as bidding. And number two is we use analytics and I think our stat was like, we won 44% of what we did, which is unheard off. And what we would do is, we would take loan tapes that were coming out for people say, “Hey, I want to bid on this deal.” We would apply data either way that we had created ourselves or data that we were able to actually find elsewhere. And in bracket where we thought that trade would need to occur to make it make sense for us. And I’ll give you an example, we would get a portfolio from a bank and “Hey, we need to sell this and we will run our analytics.” And come back say, “Hey, look, we think it’s going to be a 50 per cent tray, plus or minus two and a half up or down.”

Pat Jackson: 00:20:24 And if that works for you will really invest time and it, will buy the assets and we’ll go through and will analyze, operating statements and rent rolls, we’ll do the normal kind of deep dive in it. But if the bank responds, “Oh my gosh, I can’t sell it for 55 cents I’ve got it only reserved to sell for 75 use, don’t bother.” Because they don’t have the ability, whether they want to or not whether the price is really 55 or not. They don’t have the financial capital structure to basically clear those assets at a price that made sense. And if you didn’t apply that kind of discipline and that kind of analytical upfront.

Pat Jackson: 00:21:06 You spent your time, you spent a lot of money and a lot of wasted time going after deals that were never going to get done because the market price to clear that asset and the ability for the bank, because that’s really where the assets are coming from, to clear that because just their capital reserves were too far apart. And so we turned down many, many, many deals right up front and saying “We’re not reaching far apart calls when you get more reality.” And they would, a lot of times they will go through a process.

Pat Jackson: 00:21:43 And investors would be working with them and get through and they would come back and they would either do it 55 like we did, and the bank would say no, so everybody wasted a lot of time or the bank had to get real, or the better, overpaid and then they probably got really hurt. But that’s kind of the way things kind of evolved. So by that time things were better back to your point. And then obviously 11, 12, 13 or we’re buying a lot of distressed debt. And then we started branching off our business because we get you back your Gretzky idea, we started seeing the fact though, “Hey, it’s time to start thinking about the market is recovered come back a lot. Now it’s time to start thinking about lending in changing our strategy.” We still have a few lingering assets from our distressed days so we still aren’t working out. But-

Chris Rising: 00:22:41 Let me break down a little, you’ve used the word analytics a lot. It’s something that we take very seriously at my firm. But as those of us who are a little bit more mature and I grew up with Apple II, and as my parents would say, I really grew up playing Pong is much more than an Apple II. But I’ve always been very interested in technology and we use analytics here. Can you describe, you start a new company, you’ve got to make an investment in people, obviously make an investment in technology. What was it that you saw and how did you set up your databases to begin with? But what was it that made you value analytics and the use of technology to execute on analytics? Well where did that come from in you’re thinking in your career?

Pat Jackson: 00:23:33 Okay, so before I started this company, I worked for a bank, but ran the commercial business started running that. But the career up till then was really more in the manufacturing business. It was very high tech business, but it was end of the day, you’re building product and that’s very much of a process, driven business that you try to think about how you building a widget and using that old term, moving from process A, to process B to processing C and you got to think about it in a much compartmentalized way, about how you would actually put something together and then all the different pieces of data that go into that kind of thing to think about it. And I just knew that the opportunity was so vast, that if you didn’t take a data driven approach, you will get overwhelmed in a minute. And I’ll give you a perfect example of a comment one of the persons early in my company.

Pat Jackson: 00:24:47 And I were talking and I was talking about, “Look guys, if we do this right, we can buy $10 billion dollars worth of assets.” And the guy snickered, “But what are you snickering about?” “I just don’t see possible blah, blah, blah and ideas that were working out $20 million of assets at the time.” I was like, “You’re never going to ever get in this company.” Because you have to think in the scale of the opportunity. And if you want to be a guy sitting in your gym shorts, working out $20 million of assets at the time, you’re just going to be eaten alive here. And by the way, when you think that way, the idea of having a deal with the data and think about it in a much broader scale, you can get there because you’re dealing off of you a spiral notebooks and a number two pencil, that’s fine, that’s fine. And then there’s a place for you. But it’s just not here because, we’re thinking in so differently about how this opportunity is in our marketplace and how we’re going to go about it.

Pat Jackson: 00:25:52 And we’ve got to think about it in the concepts that are big enough to be able to be meaningful to make decisions and it goes all the way back to one of your earlier questions about how do you get comfortable with a bit well, the more data you can actually feed into your comp set, especially this data that you’ve kind of derived your own views of valuations and more importantly is what you thought you can actually get after doing certain things, what you buy low sell high kind of thing. If you can start getting that data from your own data sources, how are people going out and taking the tires and seeing assets and whatnot. Then you get more and more confident about how you did and that is a scale business.

Pat Jackson: 00:26:47 And if you don’t think about it that way, you’re just, right at the get-go. So we always thought about the essence of, I guess it starts with me and we’re saying this is opportunity of a lifetime and again for your listeners may be younger and definitely don’t remember this but the Resolution Trust era back in the 90s was when the banking crisis of the 90s occurred. It was a career divine moment for many people, it was the opportunity of a lifetime, obviously, some people lost their shirts, but those who are in position to take advantage of it did very well.

Chris Rising: 00:27:30 Yes.

Pat Jackson: 00:27:31 And when the crisis is occurring, I saw that and I think that in part, being close to the FDIC and being able to have really intimate discussions with them about what they’re saying was it was eye opening to me about how big this crisis could be. And you had to be prepared to deal with it on a big scale. And the only way to do that is just set up your system, which is again, back to the Gretzky idea is that build it so that you can actually respond to it. And that’s what we did and yeah. Chris Rising: 00:28:08 And that’s it, it’s a hard thing for a lot of entrepreneurs to really think like that because we are writing checks and you’re fearful that it won’t work. But if you don’t start with that architecture, you can never really grow. So I really applaud you for that. Let’s go back a little bit-

Pat Jackson: 00:28:24 I remember one of my investors, one of my personal investors back in April 2010. We were putting in more money and like I said, that was kind of the last time we had to do it, but I remember him asking me, “Hey Pat, do you really think this is going to work?” And I said, “I really do. I think this is going to be something really special. It’s already feels like it. I think this is our last time we’re going to put money in.” And I remember he was like “Okay.” And it was me that was the extent of the conversation, but it was kind of, “Okay, this is another Gut check moment. What do you think?” Yeah, “I think it’s…” and then we and then the rest is history.

Chris Rising: 00:29:01 Well, let’s go back a little and talk a little bit about how you got interested in commercial real estate? Where did you grow up? Where’d you go to school? Talk a little bit about your background.

Pat Jackson: 00:29:15 So I grew up in South Carolina, I grew up on a farm. My father was a commercial Real estate business. He’s invested in different multifamily properties and stuff. So I grew up in that business and I was meeting with a client yesterday and he was sharing his history and I’ll share my history as well. My exposure to commercial Real estate was not very glamorous, it was back in the days where I literally would not go into a room collect rent, and the apartment buildings and on Wednesdays I actually helped collect garbage at the various units and just that that kind of thing. But it was something that I saw was a real opportunity that serve a niche in the marketplace especially where work force housing which we can talk about multifamily for working people.

Pat Jackson: 00:30:04 And again, it’s an opportunity creating a nice opportunity for wealth building. And so I was always exposed to it and grew up in it. I did DDA, I went to the University of South Carolina, I got my degree, got my MBA. Went with it to Europe for a while working for international setting, and then eventually ended up in California working for a Swiss company. And none of that was commercial Real estate to heaven. But an opportunity came along, I was running a company and an opportunity came along to go work for a bank. And they were looking to bring in young people who knew how to run businesses, not just your traditional banker. And what came from that was I wanted to start a commercial Real estate business for that bank.

Pat Jackson: 00:30:59 And that’s really what I did. And the unique thing about this was, I was co-owner in that subsidiary. And my deal with the board was I’ll be the first loss. In the event we make a loan that goes bad, I will eat the first 10% of the loss, which was extremely unique. And so certainly entrepreneurial and but not surprisingly, you ever had a loss. And as a result, it kind of taught a valuable lesson that if you look at what got us in to the financial crisis, is that when you have people who are actually revenue driven, but not credit driven, not having skin in the game and making good quality decisions. Don’t be surprised when the consequences are not what you expected or the results are not what you expected. So that’s how I got back into business I’d say because I that started in me.

Chris Rising: 00:31:59 Wow I just happened to a few weeks ago be with your Gamecocks former coach and my former coach Steve Spurrier so-

Pat Jackson: 00:32:07 Wow. In the heydays.

Chris Rising: 00:32:09 Yeah, I had a good time with him but I didn’t know that you’d gone to South Carolina. The saying is that the Cock ain’t playing until the top roof is swaying there at price. But I had the-

Pat Jackson: 00:32:18 The Cock’s had a game last week but lost to Tennessee so I was not very happy. My company name is actually the Latin name for the South Carolina Palmetto palm tree which is the state tree. So, while I’ve lived in California for 20 plus years now those who hear my accent probably can tell them I’m a southern and I go back there as much as I can. I love it back there and but it’s part of the California and the reality is California is the Real estate Mecca. And when I was starting the company, I obviously had a choice to do it wherever I wanted to. But part of the reason why I chose to put the company here in Irvine was, when you grow a business, we talked about data analytics and all this other stuff. Pat Jackson: 00:33:18 In reality, it’s about talent and the ability to actually bring in great talent, especially when you’re scaling quickly, you want to be able to have a pool of talent that you can tap and grow with, you will not miss your opportunity and in our county represented a way for us to just grab great Real estate people, that were very experienced that were often at work, that we could plug in our business and instantly a lot smarter around real estate than a company that was two years old. And because we had guys were hiring that had 30 years of experience commercial real estate and couple that with data analytics and process and in maybe a big vision, you really can do some special and that’s what we were able to do. So that’s why Southern California was a natural for us to be able to do this.

Chris Rising: 00:34:20 That makes a lot of sense to me. So let me ask you this, So here we are in 2019, you watch your business evolved from buying distressed debt into making loans? The question I often get and so therefore I like to pose it to people on the podcast is, we’re not so much what anymore? And I always hate that question. But where do you think we are here as we were ending 2019? We’ve had continuous job growth, though it’s slowed a little bit, but it’s still all positive. As you’re looking out on your business strategy, can you articulate a little bit about where you think you’re headed and what you think the headwinds are going to be?

Pat Jackson: 00:35:02 Well, when you say commercial Real estate and kind of the market and whatnot is incredibly segmented, you have to really dig into the different pieces that make up the overall industry. And we have Freddie and Fannie licenses that we originate commercial Real estate, multifamily commercial Real estate loans that are primarily small balance which is squarely in the workforce housing space, and that represents a big chunk of our business. And we look at that regardless of economy. That is a historically underserved and now is acutely underserved, critically underserved market or just where people can live and the single family housing market hasn’t flexed to be able to provide enough supply to have the natural migration up from winning to owning. And then you couple that with just the lending standards are so hard now for first time home buyer.

Pat Jackson: 00:36:24 You supply and then for when you do have supply, it’s hard to get a loan. So it actually depends on rates, it’s just hard to get a loan. And so people are staying in rental property a lot longer than they historically have. A nice supply demand, you got a macro basis has a very big impact on what we see as the durability of that particular sector of the market. That really transcends whether we go into a slowdown or not. And if you go back and look even during the depths of you know 2009, 10. This sector did really, really well, maybe just had very little defaults because you lose your house, you got to rent.

Pat Jackson: 00:37:11 Because there’s not a supply for what I’ll call affordable, not subsidized, but affordable workforce housing, coming on, even were close to the need is just supply constrained market and we like this dynamics, independent of economy. So we’re so committed to this that in our investment management business, we are a buyer of the DPS except the first loss securities over securitize these assets. We were one of the largest buyers of that asset segment for Freddie Mac. And we thought, literally billions in that space. And because we think that the big fundamentals are just so compelling is that hard to imagine, even in a dramatic adjustment, that you would find yourself in a situation where you have defaults starting to kick in.

Pat Jackson: 00:38:12 Independent of LTV, the reality is cash flow is king. And the reality is, if a property is even if the LTV gets adjusted, if you’re still performing, and it’s still plenty of cash flow coming at the bar, typically, which is our bar, typically is going to continue making their payments and keep it current and then ride out the cycle. So, that’s one thing and we do also participate in the core commercial Real estate, whether it’s your office or even the service hotels and self storage and that kind of core Real estate space as well we live in that we do own the DTC for those assets as well. What we’re not doing is and frankly, we don’t see this really, in this cycle. We don’t see what we call a pro forma underwriting where you’re basically saying, “Look, okay, you’re not performing today but on a 10 year loan in five years, your rent growth will get you there and therefore, we’re going to go ahead and make your one.” We just don’t see that and we certainly don’t do it.

Pat Jackson: 00:39:19 We’re we’re underwriting to and place current cash flows. And in LTV where we have a real aligned equity with the water and then because we are keeping these securities on our balance sheet, I feel like I got a highly motivated Counterparty as the Bard make sure they’re going to perform. So, these are not highly structured deals, that often is what causes a lot of problems and downturns row. We think that in the same space we are doing that we’re somewhat insulated now. Famous last words.

Chris Rising: 00:40:08 Is there an area in the country- Pat Jackson: 00:40:08 I don’t know where we are in the cycle just be I’ve heard him using the World Series last night using data Base Ball analysis. We’re probably at about the 15th inning. But who know? It’s the United States market continues to bump along with lots of economies around the country are negative interest rates, slowing down and whatnot and it doesn’t feel like in the near term and now say certainly in the next year that we’re in for any kind of a radical change. Now, the big question is going to be what happens to the election? I don’t know if that’s going to result in a slow down or speed up or whatever. I think what I hope that doesn’t happen is we have a fundamental change of the rules and I’m going to give you a good example of change of the rule that just occurred that you never can, you never know what’s going to happen until it happens.

Pat Jackson: 00:41:07 But these rent control laws are really crazy Ivan’s that people didn’t expect and we do a lot of business in New York and one of our big clients is a specialist of going out and buying older apartment buildings in the five boroughs and renovating them and then they’re all rent control, moving them up in the rent control band so that they can get a return on their investment. And all of a sudden for assets they had recently bought where they have, a value-add strategy, all of a sudden rent control laws come along and say you can’t raise your rent.

Pat Jackson: 00:41:50 So, as we were dealing with this yesterday with this particular investor, that all of a sudden as they walk, “I’m not going to spend the money.” All of a sudden it doesn’t make any sense for me to go forward with my Cap-X plan, because I’m not going to be able to get the [inaudible 00:42:12] that I was expecting to justify the investor. So he had not anticipated when he made that investments, $700 million deal. He had not anticipated that the rent laws were going to change when he made that investment. So that’s an unanticipated, it affects his local economy in a big way.

Chris Rising: 00:42:39 Yes, it does.

Pat Jackson: 00:42:40 And how he’s investing.So-

Chris Rising: 00:42:41 Yeah, my friends who went through the same thing. Feel like there was a real retreat-

Pat Jackson: 00:42:46 [crosstalk 00:42:46] South California Organ for [inaudible 00:42:48].

Chris Rising: 00:42:48 There’s a feeling there was a real retreat of the deal, especially in New York, where it was pretty well established that there’d be a 10 year in place and then you could raise the market and they changed rules. Like California, what was passed here, I don’t see it as draconian. But I think what it’s a canary in the coal mine is that, that the cost of living has gotten so out of control that if we can’t fix it in market based ways, we’re going to have politicians who try to fix it in ways that appeal to the crowd, and that’s never a good thing.

Pat Jackson: 00:43:21 Yeah. Shortlist because… I’ll use this example in New York. Now, that property that would have been nicely updated for the tenants, of course,[inaudible 00:43:38] but, he’s not doing that. So now you only have properties that are not going to be updated. So it’s going to be, they’re going to be focused on cost control. And I think that starts to make a bad living situation for the tenants and the owner. And then nobody’s going to make investments as far as buying and building new property when they don’t feel like they can get a good return on it. So this, was it 1482 here in California? There’s been a lot of conversations about that and at least the California laws was more thoughtful about it building an inflation attack in it and so in reality is you can increase, you can take CPI plus and increase.

Pat Jackson: 00:44:28 So it was more golf all the way, In New York they didn’t do that like holy cow. If your expenses is over 3% you can only raise your rates 2% guess what? You have an eroding asset in terms of value and that’s just not right. But I think long term, they’re going to have to deal with the fact that this might feel good it feels to the masses for a moment in time, but it doesn’t address supply issue. I think that off limit, we have to deal with supply to meet [crosstalk 00:45:03].

Chris Rising: 00:45:03 I could agree with you more and I think density is a huge issue that and I get it. People who grew up in a California where you had the American Dream you had the single family home and I get people saying, “No, I don’t want that to change.” But I think we’ve got Millennials, we’ve got Gen Z who just they want to be able to afford something that they can live in a dynamic neighborhood in a dynamic place. So we’re having a cultural shift going on. But right now the baby boomers are winning in terms of nimbyism, so we’re not getting more supply.

Pat Jackson: 00:45:32 That’s true.

Chris Rising: 00:45:34 And then we’re having this push back through from the legislature saying, “Well, we’ll try to control rent.” So I think there’s going to be something there. I don’t know if it’s going to be Black Swan myself, but there are some things going on that I’d love for you to address. I’ve spoken at several conferences lately and the issue of Fannie and Freddie making loans has come up. Can you talk a little bit about that about what’s happening in the market and why It seems like this spigot’s getting turned off a little bit?

Pat Jackson: 00:46:03 Well, the spigot got turned off and I got turned back on. So number one I can speak at length about this. We are a Freddie and Fannie seller servicers as they term it. And the way Freddie, now were talking about commercial. Freddie and Fannie are huge in the residential space and they have a much smaller business in the multifamily space, the commercial side, and that’s the world we live in. And they have a regulator that basically sets their lending cap how much they can lend per year and is typically looked at as how much of the market do they want be the GSB to government sponsored entity, the Freddie and Fannie, to be able to actually capture that. Otherwise we go to private Cap and let’s call it July this year the regulators started really digging into, “Okay, what is going to be your number? What’s going to be your scorecard for 2020? How much are you going to be allowed to land in 2020? So there was a whole lot of uncertainty about that. And it affected a bit what they could do in the second half of 2019 because a lot of that spills over in 2020.

Pat Jackson: 00:47:30 So they know they dramatically changed their rates, increase their rates, to slow down their pipeline. And it had a big impact on the marketplace and things really slowed down. And the agencies combined and then all the family represent. I think it’s like 40% of the market, the dead market. So it’s a massive impact when all of a sudden they’re like, “We’re out, hold on.” It becomes a big tremor in a sector and in for basically July and August and September no one knew what the number is going to be. And the regulator Calabria’s just released the score-card and gave them 100 billion dollar target per each Freddie and Fannie for the multifamily business for the five quarters that means an $80 billion bogey that they can hit each. So 160 total in 2020, which was much better than anyone thought it was going to be. Give you an example, Freddie was going to do about 80 billion this year. That means they can continue to operate at the current high level. Fannie, I think it’s going to be about 67 billion. So that means in 2020 they actually can go up and take some market share.

Pat Jackson: 00:49:00 So, that means the agencies are still in there in the marketplace as a debt provider, and typically they’re very competitive. So that’s good thing. So, when we talk about how to go about what do you seek to the marketplace? At least in terms of the agencies participating in the market and not artificially slowing things down, it looks like for at least through 2020, they’re going to be still very active in the marketplace, which is a good thing. Chris Rising: 00:49:34 Do you think they are going to get privatized and with Mnuchin as secretary of treasury you think that’s coming?

Pat Jackson: 00:49:47 Yeah, that’s true. But the question is when? It’s too easy look at government programs, they are monastery inefficient, but when you look at TARP, the TARP program. Again, back to the financial crisis that Congress put money in to try to get the things saved. Part of it was like they bailed out Freddie and Fannie they took the GSE government sponsored entities as with an implicit guarantee and made it an absolute guarantee and that they took over Freddie and Fannie it is owned by the treasury today. It is a government owned entity, but it operates like a private entity, and that to capitalize, to recapitalize them to keep them solvent. Again, primarily driven by the multifamily, but nonetheless, they put in about $180 billion into the agencies to recapitalize them. And part of the deal they came in from the treasury is all your profits above a certain amount will go back to the treasury, and since that occurred, that Freddie and Fannie has contributed about 300 billion back to the treasury. So it’s been a huge amount is returned far more than the government put back in.

Chris Rising: 00:51:03 Wow.

Pat Jackson: 00:51:04 But so for them to be able to be put back into the private hands out of the government, which I think everyone wants to see happen. They have to figure out how do you feel the capital hold that the government, still holding kind of an IOU 480 billion? So what the regulator has allowed him to do is to start retaining capital. So I think that the target for each is 25, 22 billion, something like that. So Freddie and Fannie, both will start keeping a portion of their dividends which they’ve historically just given back to the government to be able to start building up a capital base. That’s starting to position them. This is not going to happen us, It’s not going to happen in 2020. If you just look at the earnings of the two agencies over the past few years, which is arguably been great years they’re not generating enough to be able to make up the hole that’s necessary. But let’s say Freddie would need, I think their target is 25 billion. If they had 25 billion, they would still probably need 50 to 60 billion just to spin out.

Pat Jackson: 00:52:15 And so, how they’re going to make up that hole, so it’s going to take some time to figure it out. And there’s lots of politics going into this. Because, when you look and say, “Why are the agencies even there, what’s so important about them?” What they ensure is liquidity in the marketplace for working Americans. It is an absolute unique structure that we have in the United States that promotes home ownership and it promotes affordable housing. It was a models that took place in the 1930s. And it’s absolutely makes us unique, it promotes stability in the workforce and stability in the communities.

Pat Jackson: 00:53:00 It’s been a great model for the world and didn’t really exist anywhere else. And so there is a huge social benefit to our citizens by having the agencies in place. So there’s definitely a place for it. It’s just a question is, is it government owned, is it closet government owned? Is it guaranteed by the government does directly or indirectly? And there’s 1000 opinions about it, you can appreciate just looking at Congress, there’s going to be one faction that says, “We will, high level of control about how the agencies work.” There’s going to be another group just trying say, “Spin it out with the private market deal with it.” But, that’s going to be the big struggle that’s going to occur is what is it going to ultimately look like besides side from the money? What is it going to look like? Because the importance of the agencies playing in our overall housing market.

Chris Rising: 00:54:03 Yeah, I think this is just a wonderful run through of the importance of Freddie and Fannie. Let me ask you this is what kind of tie all this in a knot as you sit where were you sit today, you’ve gone through several cycles. We talked a little bit about the RTC and obviously the Great Recession.

Pat Jackson: 00:54:23 I went around that.

Chris Rising: 00:54:25 But not the depression, the recession.

Pat Jackson: 00:54:28 I love their [inaudible 00:54:32]. There were lots of wealthy guys that came out of that cycle.

Chris Rising: 00:54:34 That’s true. But as you look at where we are today, and beyond just your business. What are some lessons that you think are important to impart to people about being a business person and being in commercial Real estate. But just some of the basic lessons. My goal is to try to make sure everybody’s coming across very humanized out of this I mean, because you do wake up with fears and concerns. What are some lessons you can impart?

Pat Jackson: 00:55:04 I’ll give you one right out of the gates so that you think about… You hear about the criteria going at what makes good credit. It’s capital, it’s different things, but character, and doing what you say you’re going to do and actually, operating your business almost like your mother’s watching it. And I think it comes down to, it’s a character issue more than anything else. They were really looking at it almost like an inward mindset versus and outward mindset. You want to make sure that, when you’re operating, you’re operating in a way that people upstream and downstream are not going to be damaged just because you’re doing something that’s good for your pocket. And sometimes it’s hard to do that because you going to use trust thing but character in banking, looking back at what do people do, what they say they’re going to do? Do they think beyond just their own personal well being is a little old fashioned maybe.

Pat Jackson: I think it’s really important. And I’m an Eagle Scout, so I kind of live by that. And you when I interview people, I’ll have my Eagle Scout framed in my office, and I’ll point you and say, “You know, just don’t embarrass me.” And [crosstalk 00:57:41] what are you talking about? And I’ll say, “Look, Scott is trustworthy, start there.” And if you can do that, we’re going to get along just fine. And you’re ready finding your career to don’t cut corners try to cut to take the long view. That’s a little that’s a little preachy but I do believe it.

Chris Rising: No. But I think it’s important. Yeah, I think it’s important, I’d say some of the most impressive people in Real estate I’ve met were Eagle Scouts, and I’ve been honored to be involved in as I say often I when I did Cub Scouts, but as far as I could go on, and all of a sudden I got in the way, the football field got in the way of me going to Cub Scouts. So I stayed at the football field.

Pat Jackson: Yeah of course, you grow up, right? It’s not that it’s that hard. It’s just like life gets in the way. Yeah. And it’s like, you don’t get it by the time you’re 15 chances are you’re not going to make it.

Chris Rising: That’s right.

Pat Jackson: You discover other things.

Chris Rising: Well, this has been a terrific conversation. I do want to ask one last question, which is, when you look back at your career, what was the biggest challenge that you felt that you’re really proud of yourself that you overcame? And I to be in anything, could be at any age. But what hit you in the face, and you said, “Oh my god, I don’t know if I’m going to get over this.” But you got over it and you’re proud of it?

Pat Jackson: Well, I mean, I was part of a bank failure. And I remember the senior executive in the bank at the time, and I remember being around the other bank executives was going down and there were a lot of people freaking out, “Oh my God.” And I will never thinking I didn’t have one shred of concern that this was the end of something I just looked at it as the next great opportunity and I don’t know why I had that just absolutely, just never seem to strike me as that this is a crisis. And I think just keep cool when… Because, that was a failure by the way.

Pat Jackson: So failures don’t mean you’re in a train wreck, frankly, sometimes it’s the greatest opportunity of your career that just got it for you but you got to be reactive to it. And I use examples a while ago say when I was dreaming this up at the coffee shop, and I wasn’t getting kind of for as I was dreaming this up when it first came up. I was literally doing this kind of on my own, thinking about the business and whatnot< And I go to coffee shop in the morning and hang out and there was just turns out to be about 40 Real estate guys sitting around drinking coffee, and I remember thinking, a lot of these guys are ringing the hands about the trashy that’s going on in the marketplace, but where they should be thinking about is how am I going to take advantage of it. And so keep moving forward. And because you may have what is perceived as something bad, it might be the greatest opportunity of your life, of your career and so, and I’ll give you one of the other point. Pat Jackson: This is kind of advice that I had early in my career. I had a senior executive I reported to and it’s a British fellow, and he used to tell me, “You know Pat just get more than 50% of your decisions and you’ll have a degrade in career.” And the way he said that to me, I said, “Holy cow, it just doesn’t seem like enough.” But what he was really saying is, “Don’t be afraid to take a chance and make a decision. You just don’t do it. But the worst thing is this to still have not make decisions and not move forward and not get ahead of the game.” And I see that every day, with people in the industry. So you can just make a decision. It’s not going be that bad. Chris Rising: Well, on that note, and we’ll wrap it up I think part of making the decision to is feeling confident that you made the decision to move on now doesn’t mean you can’t learn if they were bad decisions, but boy, my biggest frustration and partners and people that we do business with are people who want to re-live the decision that was made six months ago. You made it, good or bad and we move on. So I really like what you said because I think People… We’re going to have something bad happen, I have no doubt, you I’m sure have no doubt that the economy is going to take a twist or return. It could be because of a war, it could be because of a political change in laws, or it could be just the trees don’t grow to the sky. And I think the there is a ton of opportunity. Chris Rising: And not that I don’t want to wish ill on us and all that. But I think the problem that you have when the trees are growing so quickly and so high, is that people start to forget that they’re going to be opportunities when they stop growing. And so I think you’re talking about going through that bank failure and saying, “Take a deep breath, be very clear eyed, come up with a plan and have conviction around it.s a great lesson for everyone to learn.” So, well, Pat, I really appreciate it- Pat Jackson: You see I had that perspective when its worked out by the way. Chris Rising: And Pat you know what? I have every confidence in telling the audience that it probably didn’t work out exactly how you thought there were probably twists and turns. And there were probably days you woke up and said I don’t know how I’m going to this done. But you kept putting one foot in front of the other. And you put good people around, you put a system in place. And the older I get, I think the system is more important almost in the goal. Sometimes, the goal put you in a direction if you don’t have the system will never get there. And so these have been great lessons, and I really appreciate you taking the time and doing this for me. I really enjoyed it. I think we probably could have gone for a couple more hours, but we’ll maybe leave that for a year or two and see where we are in the economy. Pat Jackson: Exactly. We’ll find out how we were predictive of what happened or not. Chris Rising: Terrific. All right, Pat, thank you so much. Pat Jackson: Cheers. My pleasure. Bye.