Episode 31: A Glimpse At Understanding The Market And Outworking Your Competition

 

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00:00 [Intro] Welcome to the multi-family millionaire podcast. The show that interviews multi-millionaire real estate investors and top producers in the real estate industry. If you’re looking to create passive income and achieve financial freedom so that you can do what you want whenever you want, you’re in the right place. Our goal is to simplify and make real estate investing easy for you. For more information, you can find us at www.JLM.real estate.

00:29 
Jason Lee: All right, everyone. Welcome back to the podcast. Thank you for joining us today. Today, I’m sitting here with Stephen Bittel, Stephen, how you doing today?

 

00:38 

Stephen Bittel: Great. How are you?

 

00:40 

Jason Lee: I’m doing fantastic. Thanks for coming on. I’m excited to interview you. You got a great story. To kind of start off the show, can you tell us a little bit about who you are and what you’re doing today in real estate?

 

00:55 

Stephen Bittel: Yes, I was born in Miami in our public hospital in 1956, 65 years ago. In a 1 through 12 graduate of the Miami gate county public school system, which I’m still very engaged in and close to our superintendent who was soon to depart to run the school district out in LA. 

 

I went to Boden college in Brunswick Maine, spent a year in Europe with a Watson fellowship and then came back and attended the university of Miami school of law on a partial scholarship. I started Terranova in the fall of my second year of law school out of my house, have been exceedingly fortunate at a number of great years. Eventually moved into an office between my second, third year of law school and graduated with seven employees and three properties that we were, that we had syndicated under management.

 

We had a great run until about 86 and the real estate industry blew up with the combined effects of the tax reform act of 86 and the financial institution reform recovery emergency act. Our properties and our holdings got clobbered and we roared into building what became the largest third-party management leasing business in the Southeast United States. It was great. We took our profits and slowly reinvested. One of those projects we still have and, you know, over time we built the third-party management leasing business. As we continue to reinvest the original deals, the equity came from friends and family. Next, we moved on to high-net-worth individuals. Next, we moved on to big institutions and now we are out of the third-party management leasing business, and mostly invest for our own account.

 

02:52 

Jason Lee: Very cool. What kind of drew you to commercial real estate specifically when you were in school?

 

02:59 

Stephen Bittel: So, growing up in Miami, my mom was a schoolteacher, my dad an attorney, you know, I was the grandson and great grandson of immigrants and, you know, most of my parents’ friends were other professionals. And when they would sit around the dinner table at the house, they would talk glowingly about their real estate investments and never about their careers. My thought was that if real estate was so good, I used to ask, why don’t you do it full time? And they said, well, we needed the money from our careers to invest. So, you know, I think I caught the bug there. When I spent a year in Europe with my Watson fellowship, I met with lots of private banks and I liked their model that they did everything for the investor, finding the investment, operating the investment, and eventually monetizing it. 

 

So, you know, we kind of took part of that model, applied it to an asset class of commercial real estate. You know, the goal was we were going to work everyone as a company, which I think we did for many, many years and, you know, we’ve had some good results.

 

04:05 

Jason Lee: Very cool. So, can you talk to us a little more about what Terranova does like what kind of asset classes you invest in your company culture and what you’re focusing on today?

 

04:17 

Stephen Bittel: It’s a great question. What we do has transitioned a lot over the years. You know, when we were growing the company, we were the largest operator of anchor open air shopping centers in Florida. As communities got built out, and another generation hit the marketplace. We became, we thought the growth was going to slow down in that sector that had been very, very good to us and we transitioned into more high street retail. 

 

So today we operated an investment portfolio around a billion dollars. About half of it is in commercial real estate. The other half of it is in several operating companies, a dental insurance company, another one in the gas station, car wash and convenience store business. 

 

So today we invest on our own account. We have a lot of private equity investments as well. A big one in a biotech company in Israel called Exit that does gene editing on chickens. You know, we’ve got some producing agricultural land in the state of Washington, bridge building business, a brain fitness software, I mean a wide variety of things of assets. 

 

Our real estate today is substantially focused on high street retail. We’re the largest operate, owner operator on Lincoln Road on Miami beach, where we have 7 buildings, and we have 15 buildings in coral Gables on the other high street in Miami dad county called miracle mile. We still have some anchored retail. We’re kind of exploring, dipping our toe back into that business. It’s an out of favor asset today, which we like buying out of favor assets. And we spent the last part of last year, we sold our headquarters building, which was a big liquidity event. And we refinanced most of our portfolio at long term, low interest rates. So, we wanted to be poised to jump back into the market on a lower basis if there was an asset repricing, which if the stock market of the last week is any indication, maybe it’s happening sooner than we’d imagine.

 

06:30 

Jason Lee: Wow, that’s a big portfolio. And you said most of it is in retail. Tell us about kind of what you went through when COVID first hit in March of 2020.

 

06:42 

Stephen Bittel: Terror. I went through terror. You know, I was at speaking in Colorado, and I heard someone at the next table say that 11 people in the town I was in gotten tested that day. The next morning, I read the online news and it said nine of them were positive. And I turned to my wife and said, we’re going home tomorrow morning. She of course went skiing. I connected with our, with the leadership team in the office and said, we’re going to shut down by this weekend. We need to slash the operating expenses at every property. So, I flew home that Thursday spent Friday on the phone with our bank saying if they don’t, if our tenants don’t pay, we might not be paying either good news is our tenants did pay and we didn’t need any help. 

I didn’t go to the office for the next two and a half months, our office because of the operations services we provide, our properties was deemed an essential service by our governor. A very different approach than in California. I’m not sure which was right, what was supposed to be a two-week shutdown, I didn’t go, again I didn’t go to office for two and a half months. Our president who has Parkinson’s, she came in twice a week at 6:00 AM to sign checks, but she was gone before anyone arrived. And I spent the next two and a half months fighting with our tenants to pay rent. 

 

Most of our tenants, we gave them 50% base rent abatement while they a deferral, not an abatement. They paid us back in November, December. We did that on almost all of them. The ones we ended up litigating it with were all national chain stores. But by September, October, all the deals were done, and everyone was paying. We were by a year end, maybe a handful of exceptions, a hundred percent collected. Steinmart went bankrupt on us. We lost one out our gallery and coral Gables. But other than that, the only losses were tenants that older businesses that had leases that were expiring, went out of business. 

 

But in April and May, you know, I was worried that I was going to be part of it. Cause I didn’t know [08:56 inaudible]. They did. It turned out better than we expected. In south Florida because of the nature of our portfolio, we have a lot of restaurants. Most of the restaurant had 2021 sales exceeding 2019. Cause they took advantage of outdoor seating. They learned how to create delivery and take out businesses. So, I think most of them are stronger today than they were before the pandemic hit. Obviously, Omicron has got everyone nervous again and now we’re back to only eating outdoors.

 

09:33 

Jason Lee: Yeah. It’s a very interesting answer because I’m seeing a lot of my clients or a lot of activity in the San Diego market where people are kind of getting out of office and retail and trying to get into multi-family. In Florida, are you seeing that the retail market is still pretty strong, and values are still higher than what they were, you know, pre COVID.

 

09:58 

Stephen Bittel: It depends on the deal. Clearly institutional investors today are really heavily overweighted in industrial and multifamily. Those are two parts of the real estate economy that perform well during COVID, especially industrial. Multifamily, you know, that was middle class and above did well working class multifamily did not do as well. Certain markets we own multifamily in Austin, Texas, and there were eviction moratoriums as there were in New York city and those markets that was harder. 

 

Supermarket anchored, retail were the supermarkets a major piece of the whole property, probably pricing today better or higher than it was in 2019. And that’s substantially because interest rates are lower, and you can buy and have yield. You can’t keep your money in the bank and have yield. It’s hard to have much yield with bonds, publicly traded equities are riskier. So, it’s a piece of the investment pie that you can get current yield and have a hope for appreciation. So maybe you can do better than 7% inflation. That’s harder to do in most other asset classes right now. 

 

Obviously, regional mall retail, power center retail, those are trading lower than they were in 19. So, I think it very much depends on the class. High streets, which are heavily dependent nationally on office occupancy and both probably are trading at lower prices than they were pre pandemic. So, I think, you know, to lump all of retail in one category is probably a mistake. And I think you have to slice it up into the different pieces.

 

11:47 

Jason Lee: I agree. No, I completely agree.

 

11:50 

Stephen Bittel: Parts of retail that are offering basic goods and services to, you know, neighborhoods is really performing quite well today. And again, that also varies based on where you are in the country, based on, you know, are you a red or blue state? What the laws are of that state in terms of opening and closing, as well as what the weather’s like.

 

12:12 

Jason Lee: Yeah, I agree. Kind of switching gears a little bit. You’ve been through a lot of cycles you’ve been in real estate for a long time. Could you tell us more about kind of, what part do you think I get this question all time, where do you think we are in the cycle? Where do you see the market going in the next five to 10 years? Things are crazy. Everything’s hot, but what’s going to happen in the next, you know, foreseeable future in your opinion.

 

12:39 

Stephen Bittel: Look, I’ve said for almost two years that I thought that all of our assets were highly inflated, and you know, I think that low interest rates and historically low tax rates on a federal level, just put so much fuel in the economic engine that, you know, that it’s going fast and hard. Layering into that expansive federal monetary policy. And I think we’ve gotten the economy that we expect or should have expected. Having said that, you know, commercial real estate tends to trade at a pretty consistent spread over the 10-year TDO as that has run up a little bit, maybe 50 basis points in the last few months, one would expect a similar adjustment in real estate valuations, cause debt’s costing more. 

 

I mean the transactions that we financed in the high twos and low threes, you know, probably are 50 basis points wider today. And that just means there’s less yield. So where are we in the cycle? We sold assets. We refinance assets, because we wanted to position ourselves to enter what we thought was a likely asset revaluation with a high level of liquidity. So, we could go back in at a lower basis. We figured if it happened, we were poised to pounce. If it didn’t happen, we would have a big cash position. So, we have a big cash position. We have bought some things in the last six weeks coming out of one exchange, there were some different economics associated with the like kinded exchange and conventional, but we thought those were, they were good assets that, you know, we thought would stand the test of time. 

 

I think we’re late in the cycle. I mean, you know, typically cycles in this country are seven to nine years. I think most people would say that our recovery began in the third quarter of oh nine. So that means we’re well past the ninth inning or the fourth quarter, but you know, expansive monetary policy and low interest rate has kept this party going. Clearly the last week in the stock market and today have been somewhat devastating and maybe that repricing is commencing right now as we speak.

 

I mean today I knew the stock market was, the [15:02 inaudible] was down over a thousand points. That’s recovered a little bit since then, but I haven’t checked, like let me check right now. So, look, capitalist economies have always been prone to business cycles, but the market, which was down, wow, it was down over a thousand points at noon is up 99 points now. So that’s a huge recovery intraday.

 

15:28 

Jason Lee: Wow. Yeah. And on top of that, where do you see interest rates going in the next, you know, one to two years.

 

15:34 

Stephen Bittel: Look, if the utterances of the fed are to be believed, then they’re supposed to be apolitical and they’re not completely apolitical, but I do believe them, you know, they have clearly made flight fighting inflation a big part of their agenda over the next year. So, you know, they said that interest rates are going to go up, you know, does it go up a full point? Does it go up a point and a half? I don’t think a lot higher than that. It has some devastating impacts on servicing the federal debt. That’s a big issue and the same thing on state municipal debt. 

 

So, I think we will have a series of very small interest rate increases. And if rates go up a point and a half, we still are over the course of my career at historically low rates. You know, when I was a child in the business just over 40 years ago, I always used to say we bought and sold and financed everything on a tenth, because we were real estate guys, and we weren’t that smart. It made the math easy for us. 

 

Well today, you know, a quality assets trade sub five. So long term holders, it makes us look really smart.

 

16:45 

Jason Lee: Yeah. So, kind of going backwards a little bit here, in the beginning of the podcast you were saying that you manage and own over a billion dollars’ worth of real estate. For someone who’s listening to this show, who’s just getting started. You know, can you give some advice on how you got there and kind of what was your journey to get to this point in your life and your real estate career?

 

17:07 

Stephen Bittel: I always say that I was born genetically gifted. I had a super smart dad, incredibly social mother. I was not as smart as my father or as social of my mother, but I outworked everyone. You know, I still, you know, I sent my first email today at just before 5:00 AM. The guy I sent it to at work said, were you having a bad night? And I said, no, I was having a good morning. So, you know, first of all, clearly there’s a generation today that likes to talk about balance in their lifestyle. I always joke that balance is not a lifestyle balance is something that happens in a bank account. 

 

If you have no balance in your life and you work all the time and that’s who I was. And that was the culture of our company that we all worked all the time and we all talked to each other at nights and on weekends and early in the morning, because we were so focused on achieving great things. 

 

That was one. Two, probably the most, the capital we’re required to start today is higher than it used to be. I always tell people to try to hit your wagon to the smartest, most honest, hardworking entrepreneur you can find and learn, then make yourself invaluable and hope they will share. We at 4:58 PM on December 31st, by most people who are already chilling their champagne for New Year’s Eve, we were all in the office closing the final refinancing of the year, which we cashed out $25 million above the payoff of a prior deal. This was a, it was a 40 million financing for a deal we bought in 2001 for $4 million. So, it was a score deal and you know, two of our prior executive each got seven figure wires for their participation in those deals.

 

Cause philosophically we believed that if I was the only one achieving the rewards of our efforts, that I would have a very small business. Our president is with us 24 years. The guy Scott that runs our non-real estate related assets and family holdings, he’s here 18 years, you know, we’ve built a team that likes each other, that likes to work each other and trusts each other. And you know, we were doing our first of several large deals with the big New York institution and their head of real estate asked Mindy, our president, how do you manage Stephen? And Mindy said, oh, you don’t manage Stephen. You just kind of listen. And he usually gets it right. And hopefully we make good investments. So, and she said an in time he will figure out why he’s doing what he’s doing to be able to explain it.

 

But I can’t always explain it. You know, I still, we manage our balance sheet very viciously, always retiring our most expensive debt first. And then we try to take advantage of what we think our good long-term plays. You know, we never buy a deal that we don’t intend to own forever. Now we don’t own them all forever, but we have tended to own our assets much longer than most of our peers and revisit the capital markets by taking out debt, which is [20:25 inaudible] repetitively. 

 

So, I think the right, my right advice is pick the right person, get to the office before them, if you still go to the office, which we do stay later and be available every time they call and say, do you want to go look at a deal on Saturday and Sunday? Which I haven’t done since this Saturday.

 

20:48  

Jason Lee: Oh man. Stephen, that is fantastic. 

 

20:51 

Stephen Bittel: Everyone always asks me when I’m going to, people ask me when I’m going to retire. And I always say, I promise within a few years of my passing.

 

21:00

Jason Lee: Yeah. You know, it’s cool to see. I mean I’m a younger guy, but I’m very similar to you. I always work late. I’m trying to build my company right now. You know, my commercial real estate brokerage. I opened up a couple months ago, but I’ve been in the business for five years and I have a small portfolio myself by about 50 units in San Diego. But it’s just good talking to people like you that, you know, are way ahead of me just like light years ahead of me, like, you know, 30 years beyond. It’s just cool hearing your story and kind of seeing what it takes to get there because I feel like in real estate people always look for the easy way out, but the only way out is to outwork your competition. And that’s what, you know, I’ve learned the hard way.

 

21:47 

Stephen Bittel: But when we did tenant rep, we knew the sales of every tenant and every shopping center and every property we put someone in, we, you know, we could tell a cohesive, persuasive story about why it was the right place. We could have that conversation with both the tenants and the landlords. Knowing, look, it was hard gathering the information back then. There was no [22:08 inaudible]. You know, we maintained a database on every property in every county and had a full research department before any of the big shops did, but you know, we were a private company and we put our balance sheet to work for us to give us better information. 

 

And for our leasing people, you know, we got the listings, our inhouse legal team negotiated leases. All we wanted them to do was go find the tenants, tee up a letter of intent, flip it back to management and go sign another lease. You know, look, it was a unique model in a unique time. And we were in a growing economy, and we really took advantage of, and instead, and we took our profit and reinvested, I lived in the same house for 33 years. My daughter lives in that house today and my son who works here, lives next door to her and my other son lives behind her, and we live a half a block away.

 

23:00 

Jason Lee: That’s amazing.

 

23:01 

Stephen Bittel: So, I see my four grandchildren almost every day.

 

23:06 

Jason Lee: That’s fantastic. Do you only, I guess the better question is what markets are you investing in right now? What submarkets in the US?

 

23:15 

Stephen Bittel: So, we funded, you know, we are a limited partner in the deal We funded in an office high rise in Seattle Last week. You know, we owe multi-family in Austin, Texas, our gas station, car wash, convenience store portfolio is in Florida and Georgia. Our retail is substantially in Florida. I mean, we’ve looked hard in Southern California and Chicago. Those offers we made didn’t happen for one reason or another, were we happy when the pandemic hit, I don’t know how we would’ve run those from so far away. You know, we really like Austin, Texas. We really like south Florida. We think both are benefiting from positive in migration and, you know, positive population growth, corrects all of the real estate mistakes. 

 

You know, we are in all these assets at, you know, historically low cost compared to new construction. So, we feel like that’s a competitive advantage. And because of our size, we think our financing costs are lower. You know, we have a substantially under levered portfolio today, which it makes traveling through downturns in the economy all the more comfortable. It’s painful to watch others, but you know, we think that economic corrections are most [24:34 inaudible].

 

24:36 

Jason Lee: I agree. Where are you seeing the opportunities right now? In real estate, you know, if any there’s a lot of people who are struggling to find, you know, deals those pencils. 

 

24:48 

Stephen Bittel: Look, the first step is admitting that it’s hard to find things, you know, when you have a fund, we don’t have a fund. We just have our own assets, funds have to put out many times, because they can’t go to their [25:01 inaudible] and just say, we’re out. So, we’ve said we’re on a number of [25:07 inaudible] over the last 20 years. Look, the retail we bought, we bought four high street deals in 21, we think those are out of favor assets and, you know, we want to buy out of favor assets, and we want put our balance sheet to work on our low cost of debt capital together and hopefully ride this cycle out better. 

 

Well, we think, built a core strategy also can be an effective approach. But the conventional business of going out and buying a center and working it hard, we don’t think that works today. Especially, you know, the credit quality and future of tenants is a much dicier scenario today than it historically was. 

 

So, I think we’re more situationally focused than we are in any particular asset was.

 

26:03 

Jason Lee: Got it. That makes sense. Kind of wrapping up the show here Stephen, it’s been a great interview so far. To any, you know, one who’s listening, who’s looking to get into real estate right now in 2022, What is one piece of advice you would give them?

 

26:24 

Stephen Bittel: I think you want to specialize in an asset class and know more about it than anyone else you’re dealing with. I mean, I begin every day with about an hour of doing nothing more than reading current financial information. So, you know, everyone teases me at work that I am the company clipping service says by the time everyone wakes up, there usually have lots of articles waiting for them to read. But I think understanding how to operate assets, you know, I started managing and leasing, really made me understand the owning and operating part of it so much better. 

 

And you know, I think from doing it just over 40 years, I can show up at an asset and have a feeling and you know, that feeling comes from a lifetime of doing it, that I don’t think I had in the beginning.

 

So, I think I try to come in, you know, the same way I did in college. I want to be better prepared than everyone else. I want to know the information better, unless with a really good memory. And you know, funny, I was driving up Saturday to look at up projects for sale in west Palm beach and, you know, Mindy, our president was with me and I, you know, every time we went by, I said, we used to own this. We used to manage that. You know, I knew who the lender was, who the original tenant that got replaced, know that kind of history sometimes plagues me, because I remember what I could have bought it for. And sometimes it helps me understand where the asset is today. But I think that out preparing and out working everyone is a sure-fire path to success.

 

27:59 

Jason Lee: That’s great advice, Stephen. Well last but not least, where can people learn more value and how can someone maybe get in contact with you?

 

28:09 

Stephen Bittel: Well, my email address is stephen@terranovacorp.com or Stephen with a PH. So, I’m easy, I’m really good by the way, by email, I’m terrible by telephone and you know, our website www.Terranovacorp.com is a buyout and I welcome anyone to reach out.

 

28:31 

Jason Lee: Great. Well, Stephen, thank you so much for your time today. I know you’re a busy man. I’ll let you go. But it was great having the chance to interview you. Thanks for your time.

 

28:39 

Stephen Bittel: Great, Jason, thank you and have a wonderful day.

 

28:44 

Thank you for joining us on the multifamily millionaire podcast. The show that interviews, multimillionaire real estate investors and top producers in the real estate industry. We’re here to help you create passive income and achieve financial freedom so that you can do what you want whenever you want. We’ll catch you next time on the multifamily millionaire.

 

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