Adam Gower: Larry. Always such an enormous pleasure to see you.
Larry Feldman: Likewise.
Adam Gower: Thank you. This is the Deal Time podcast so a little bit different. So, why don't you kick off. Please introduce yourself. Name, company name and position, and then we'll talk about the company.
Larry Feldman: Sure. My name is Larry Feldman and the company's name is Feldman Equities. I am the CEO and we are an office building owner and developer.
Adam Gower: Tell me the story of your company. What's the background to Feldman?
Larry Feldman: Sure. Sure. The company goes all the way back to the 1920s, to my grandfather. My grandfather and my father were both general contractors and built heavy construction-type projects, all around the country. Things like airports and exciting projects like, sewage treatment plants. They built missile facilities for the US government, for the military, and then morphed. In the 1970's and 60's, they morphed to become a developer where they built things only for their own account as opposed to fee construction for third parties. And then, I joined the company in the 80s and became the CEO in the 90s. We specialized, in that period of time, and all the way through today's date, in office buildings primarily, although I have done some retail. My main focus throughout most of my career, and my dad before me, is office buildings. And now, Mack, as you know, Adam, is 4th generation.
Adam Gower: Yeah, it's absolutely wonderful. I love that. Now you also, you ran a REIT didn't you? There was a REIT story in the 90's.
Larry Feldman: I did. Yeah. In around 1997, we took the company public. We renamed the company, at that time, Tower Realty Trust. We were traded on the New York Stock Exchange under the symbol TOW and I was the Chairman and CEO. We were public for about 2.5 - 3 years and then we merged into what is now - there was an interim company in the middle of it. Most of our buildings that we owned and/or developed in Manhattan and Florida, were acquired by what is today, SL Green. And then, following that merger, it was sort of like a neutron bomb. The building survived, but the people didn't, something like that. But we reincarnated as a privately held company and bought back from the public company a series of buildings that included Florida properties and then, sort of, reincarnated as a primarily Florida-based company - that was around the year 2000 and, ever since then, we have been buying aggressively throughout Florida. We've had an emphasis in Tampa. Our sister company has bought a lot in Orlando where we owned, when we were public, and then owned as well as private. And also we've owned and managed in southern Florida as well.
Adam Gower: And what is your investment philosophy? What do you look for?
Larry Feldman: Sure. Well, going back to those old general contracting days. We look for properties that are in "A" locations. We want to buy the absolute best location we can buy, and we want to buy buildings that have decent bones so that when we get done renovating them, our total dollars in, to the cost of renovating, winds up at a level where we could still make money post renovation. So, we bring in, all of that old background of heavy construction, that goes all the way back to my family's beginning. We're not afraid to spend as much as 20 million dollars on a building to completely renovate it, end-to-end. We don't just come in with a paint brush, a little lobby refresh. We will, in many cases, redo every surface of the building that you can see visibly. And we'll put in things like, brand new fitness centers, business centers and conference centers for tenants, chill zones where you hang out with laptops on soft seating, with a cappuccino machine 24/7 and play zones for millennials. All these types of amenities are geared to driving occupancy. So, we'll buy a building that physically needs improvement, in an "A" location. We'll come in with a massive renovation, which will include these kinds of amenities that I just talked about, fitness centers, conference centers. We put in new restaurants with healthy choices and those sorts of things. And, all of that is designed to drive up occupancy. So a typical building we'll buy is only maybe 80% leased/70% leased and we're going to use our renovation to drive up occupancy and drive up cash flow, which eventually leads to a much higher valuation so that, 3-5 years after we work our magic, we can exit either through a refinancing or a sale and realize the fruits of our labor.
Adam Gower: And you have a name, don't you, for those renovations? You've got to share that.
Larry Feldman: Yes, our lobbies - we refer to - when we do a lobby, we completely gut the lobby, typically to where, a casual observer walking into our lobbies, post renovation will swear, that this is a brand new building. We refer to that medical procedure as a "lobby-ectomy". With respect to the whole building, and usually we'll renovate the whole building, that medical procedure is a radical "office-ectomy".
Adam Gower: I love those terms. So here we are, you know, we are emerging from a, once in 100-year pandemic.
Larry Feldman: Right.
Adam Gower: An earth shattering event.
Larry Feldman: Right.
Adam Gower: What - talk to me about the future of office buildings as an asset class but also as an investment opportunity.
Larry Feldman: Right. Well, as you know, Adam, back in March of last year, the stock market was falling about 2,000 points a day and there was a belief that we were basically looking at the end of the office building - that the office building would go the way of the buggy whip or the dinosaur. And that tenants would not pay rent and it was basically, Larry Feldman cuddled up in the fetal position, in March of 2020. Then, as time progressed, we actually collected rent. In fact, all through 2020 and into 2021, after an initial pause, we are now back up to pre-pandemic rent collection, which is about 95 - 97%, which by the way, is the same number that all of the public REITs that on Class A buildings - they are all reporting similar rent collection. And then, a funny thing happened, and I think I told you about this. My head of leasing sits right here. You can't see it on the screen, but she's right here. She's the best leasing lady in Tampa, maybe in the state of Florida. And she came in and say, Larry, you know, I've got a to lease. And I say, what, a new lease? She's says yeah, and he just signed it and I was like, in shock because I was reading such horrible negativity that I couldn't believe we actually signed a new lease. And then that would happen maybe, once every few weeks, and then it turned out to be once a week and then twice a week. And then, that happened all through 2020 and it's accelerating now in the first quarter of 2021. We've added up our same store sales that ignores any buildings we acquired. We acquired a building in 2020, so you take that out. Our same store sales is actually up for new leasing year-over-year. So, go figure.
Adam Gower: That's interesting.
Larry Feldman: We do think it's mainly the "Florida effect". But, it's also our renovations which have really outdone our competitors. Our intense marketing program, which is unique in the industry. We pay our real estate brokers a higher commission. We pay them faster. We do a lot of things that are focused on driving up occupancy. And like the old newscaster Tim Russert - I don't know if you remember that name. He's a great old newscaster and every election he would say, "Florida, Florida, Florida". That's really a lot of our win, is at our back, with being in the state of Florida.
Adam Gower: And you're seeing, also - oh sorry about that. You're also seeing this idea that people are working from home, but you're also seeing more space per person as well. Talk to me about that a little bit.
Larry Feldman: Yeah. I call it WTF / WFH. WFH - Work From Home is going to shortly - and many, many CEOs are saying WFO - Work From Office. That is really becoming more and more, the mantra. It's so funny that - a survey was done by KPMG, leading accounting firm, right? In the heat of COVID, roughly, I'm going to say, July or August of last year, survey said 70% of CEOs intended to cut back on their office space footprint, post-COVID. The exact same survey - the exact same company, KPMG, came out with their report just now. And guess what it says, 17% of those CEOs expect to cut back on footprint. So, what is this all about? So, here is a little bit of flavor. People are saying now, oh the new vogue is going to be "the hybrid". Have you heard about that - the hybrid, yet?
Adam Gower: No. What is that?
Larry Feldman: The hybrid is - we're going to let people work from home 2 days a week. And so, we're going to have some sense of company culture and cohesiveness. We're going to have people in the office 3-days a week and we're going to do what we call, "hot desking". There'll be nobody that will have their own office. You'll plug and play as you come in. You won't know what office you get assigned until somebody at the front desk says, "go to desk number 39 at the end of the corridor".
Adam Gower: Right.
Larry Feldman: And so, that may wind up cutting office footprints down by 30-40% but, on the other hand, when - if you think about what happened since 2008 - 2019 was exactly the worst thing that could have happened to the industry which was, every year office-using companies, service companies, put more and more people into less and less space. So much so that it became a petri dish for COVID. So, now they realize they've got to spread people out further. So, where 2 days a week might be as much as a 30-40% percent head-count reduction of space need. You have counteracting that. A 30-40% spacing of desks. So those two things may just, kind of, wash each other out. And then, you have companies that are just saying, you know, we want everybody back in the office, period. And, the number one company that has announced that is Amazon. And, I'm going to almost quote them verbatim, "we are an office-centric company". We want everybody back in the office, in person, so that they can work together and collaborate and create and best serve our customers. That was just issued worldwide as a statement by Amazon. Today, Jamie Dimon says, he's canceling all Zoom calls. He's had it with Zoom and Zoom stock has started to tank, which is a wonderful thing. I apologize to any of your viewers that might work for Zoom. But, you know, we've been taking a verbal abuse from friends and family well - all year long. Well, who needs an office if you have Zoom? Well, you know and I know, if you spend enough time on Zoom, you feel like Tom Hanks in that movie, Castaway, where he starts screaming at his volleyball, "Wilson!". You know, It's just, the whole idea of working from home, is very isolating. In my personal case, my closest friends wouldn't come to see us. We sequestered at home for a few months. I think you and I were on a Peloton bike. That was like....
Adam Gower: That's right.
Larry Feldman: That was my socialization in that period. We had a little tiny video screen on the Peloton screen.
Adam Gower: It was crazy, wasn't it?
Larry Feldman: Yeah, and I felt like, I was, kind of, slightly, losing my mind a little bit. By the way, I'm very healthy and sane, normally. But I just felt like Tom Hanks in that movie, Castaway. And it's so interesting. You know, the reason I mention that movie is it's interesting. He had all the food and shelter that he needed. Remember in the movie? But he was still losing it. Even though he was surviving, he was not surviving. He was not surviving. So, human interaction, face-to-face, in-person, to me is almost like a basic survival.
Adam Gower: Alright. So, let's wrap up this sponsor profile. I'm interested in knowing you. You're not a fix and flipper. You don't do deals every week. You're very deliberate, when you find deals. Talk to me about the opportunities that you see and how you look for them and what kind of frequency, do you think. Because, I know that when they do come for you, they come and they go quickly for investors. So, what do you look for and why does it take so long to find a good deal?
Larry Feldman: Our key metric is - can we buy the bricks, on a price-per-square- foot, that lead us to a calculation whereby, post renovation, acquisition price, plus all of the cost to renovate, we are still way below the cost of building a brand new building. We get very excited about that. If we're buying a class A building where we can bring it up to an A+, by renovating it. If it's in a great location, we get very excited about those economics, particularly in markets like Florida, where we have enormous growth, where there will be new construction, which is typically $400-$450 per square foot, as compared to our total renovation costs of somewhere around $250 per square foot. We love that discount and makes no sense for us to build right now, even though we're happy to build from the ground-up and have built office buildings from the ground-up. We don't see the logic of doing that. And we get very excited about buying bricks much cheaper than they cost to build. So, that goes all the way back to my dad and my grandfather and that old general contracting day, background my own background, as a developer, where I have built from the ground-up and I know what it costs to build. So, those are, kind of, the key simple metrics that we look at. And then, we want to make sure that the market has demand drivers. So, we look for first, a state like Florida and then we look for specific markets within the state where there is tremendous in-migration of companies and residents and also youth. Even though, I'm an older guy at this point, I still believe in youth and the energy that that creates. So, we look for places where maybe traditionally there was an older resident base, but now there's a large influx of new vibrant tech companies which are augmenting the traditional insurance, banking and other finance-related companies and the law. Those are the traditional office users that I grew up with. But now, I get really excited with the Googles and the Apples and those type of companies.
Adam Gower: Larry, let me ask you one final question, and then I'll ask you to sign off. Last question. What's been the hardest lesson you've learned in real estate that informs how you work today?
Larry Feldman: I have lived through several recessions. One of the recessions was, I opened a 40-storey tower in midtown Manhattan and I felt like I was in a 747 in a nose dive. I could see the label of a golf ball, on the golf course. It was pretty, pretty scary times. And, I remember, you know, the survival mechanisms I used, which were intense marketing - that's something that got us through those recessions. But I'm always afraid of the next recession. I never - a lot of developers are always saying things like, well, we can speculate. Let's just not take that tenet. We'll wait to get a higher rent. Just tell them, no. I'm not going to lease at that rent. We're always undercutting our competitors and filling up space faster and keeping our rents up for the renewal period of the lease. So, we're always thinking about the next recession and it goes back to those old survival days where I remember when demand was weaker. So, when demand is good, we take it. And when demand is weak, we take more market share. And those are the things that, you know, aside from that and my prostate, by keeping me up at night...it's what I think about.
Adam Gower: This is a family show Larry.
Adam Gower: Alright. One last question. So, you will remember the days of radio, when you had to tune in to listen to a show.
Larry Feldman: Right.
Adam Gower: Just thinking in those terms. This is a podcast. So you start it when you want to, you listen to the whole thing. But if somebody were to tune in and only hear your last sentence or two, an investor. What would you want them to take away from this podcast?
Larry Feldman: In one or two sentences?
Adam Gower: You can spend as much time as you like. I'll put another reel on the recorder.
Larry Feldman: Well, I think. You are in it. If you invest with us, you're dealing with a company that has survived multiple recessions. The philosophy I just talked about is, the sort of, a rent and repent is an old refrain of my dad's, which was, we don't try to get the last stretch up to the last rent dollar. Our whole methodology is, fill our buildings, keep them well occupied, driving up cash flow by driving up occupancy. Using our creative renovations to do that and incredible amounts of marketing. We out-market our whole competition and I think that's what's gotten us through multiple recessions and probably will get us through the next one. So, I think that's what's unique about our company. The fact that we are also innovators and we like to use the slogan - we're re-inventors of the office buildings. We're one of the first developers to put in a fitness center in an office building, back like, 30 years ago. Now we're doing these fitness centers that, you wouldn't believe. They look like something you'd pay $100 a month to be a member of, with the most beautiful machines in the world, full shower facilities, big gyms, which we give for free to our tenants. All of that is designed to attract new tenants and retain existing and drive up net operating income.
Adam Gower: Larry Feldman, Feldman Equities, just an enormous pleasure to see you again. Thanks so much for being on the podcast today.
Larry Feldman: Thank you very much Adam.
