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Conducted by Shivani Goolab ’21
Ross L. Smotrich ’83 is an adjunct professor at Columbia Business School teaching Real Estate Equity Securities Analysis. He led Barclays’ real estate securities research team as Managing Director and Senior Equity Analyst until June 2020; he is currently focused on advisory work and strategic consulting. With over 35 years of real estate finance and analytical experience, Mr. Smotrich has covered a majority of the S&P 500 real estate stocks, ranked in the Institutional Investor All-America research poll nine times and was twice named in The Wall Street Journal’s All-Star Analysts Survey.
You are one of the leading real estate equity analysts in the market, could you please describe your role?
A sell-side securities analyst typically sits at the intersection of the firm’s two key constituencies - issuer clients and their investment bankers on the one hand and the buy-side, namely institutional investors and the firm’s sales force, on the other. The equity analyst is very much at the center of the capital formation process, analyzing companies’ business models, financial strength and management in order to assess whether the stock is a good or bad investment for institutional and retail investors. That in turn very much drives the company’s cost of capital.
What makes the role so interesting, and at the same time so challenging, is the need to take into account the differing perspectives of those many constituencies, even as you consider multiple analytical levels simultaneously including macro, fundamental, valuation and technical drivers. Equity analysts also benefit from a unique vantage point; they often have extraordinary access to top management and the luxury of an incredibly broad purview. As a sector, real estate is so interesting to analyze because every aspect of the macro economic environment touches the asset class in some way; intellectually the work can take you in an infinite number of directions.
In that vein, I think that to be successful as a real estate equity analyst it is important to look at the industry and at individual companies holistically. Real estate as an asset class is increasingly more complicated, corporate and institutional; the public companies have evolved into fully integrated operating entities not simply a collection of hard assets. So, strategy and tactics are important – and by extension, so too is management. For listed real estate, it is equally important to understand how the broader capital markets work and why investors invest the way they do – in both relative and absolute terms.
Finally, I think it’s important to have some degree of humility. A stock analyst can have outsized influence on investors’ perception of a company, and by extension how that firm’s securities trade. Given the layered nature of the analytical process however, it is very easy to be wrong. It is difficult to make consistently good stock calls and nearly impossible to be right a majority of the time. At the end of the day, my goal is to provide investors incremental insight that helps them make better investment decisions.
What led you to pursue a path in real estate generally, and securities analysis in particular?
I came to Columbia Business School with a background in history and economics, an interest in architecture and urban planning but without any real knowledge of business or for that matter, any specific professional direction. During my first year, I took an EMBA course in Real Estate Finance; that course brought all my interests together (economics and business, architecture and the built environment) and I have worked in real estate finance ever since.
At the time, the most interesting work and the best training was to be found in the commercial banks – real estate was not yet really a focus of the Wall Street firms. A summer internship at Chemical Bank (now JP Morgan Chase) led to a full time offer and I spent the next eleven, almost twelve years at the bank – first as a construction lender, as an investment banker and finally heading a work out / restructuring group during the global real estate recession of the early 1990s.
The move into securities analysis was driven by several considerations. First, the recession era work-out strategy for many firms was to raise capital by going public. There was an interesting confluence of events – private firms were willing to sell a portion of their equity in order to de-lever and stay in business, retail stock investors were looking for investment alternatives and Wall Street stood ready to act as an intermediary. I worked on two large transactions: Simon Property Group and Trammell Crow; we restructured the Bank’s exposure to the two firms which in turn facilitated their IPOs. That experience led to the realization that the real estate industry – talent, assets, debt and equity – was migrating into the public markets. My mid-career switch into sell-side research was a way to leverage my banking and analytical experience and remain relevant in the face of that secular shift. In retrospect, I was fortunate to have been there at the beginning of the modern REIT era.
My first job as a REIT analyst was at Merrill Lynch. Merrill at the time, was at the epicenter of the emerging public real estate industry; the firm had roughly a 50.0% market share in both issuance and trading volume. Bear Stearns approached me four years later with the opportunity to re-build its REIT research practice. My ten years at Bear were excellent, right up until when they weren’t. As a result of the great financial crisis, the firm was sold to JPMorgan, and I moved my team to Lehman Brothers. It seemed like a good idea at the time. Exactly 90 days later, Lehman filed, and Barclays bought the U.S. broker dealer out of bankruptcy. I have led the REIT and real estate securities research team at Barclays from that time until June of this year.
It’s been an incredibly interesting ride. I have seen a few real estate cycles and been fortunate to work with some of the most accomplished professionals in the industry. I think the real estate industry has gone through irrevocable structural change during that period, migrating from an opportunistic, privately owned and deal driven business into a more institutional, better capitalized operating business; by extension real estate is a more investible asset class. When I look back, each step in my career, from lending to investment banking and ultimately securities research, leveraged the prior experience. I was able to stay relevant, even as the industry continued to evolve; that’s my goal going forward.
Given real estate is such a relationship driven industry, how have you been able to cultivate strong relationships over the years?
A key lesson from that first real estate finance course is that the real estate industry is a very small world – don’t burn any bridges – though the professor may have used more colorful language. The second key observation came from one of my mentors who said, if you are going to work for a large financial institution, be sure that your department is one that the firm cares about deeply. In that vein, I have been fortunate to work at various times for firms that had leading edge real estate departments – and by extension attracted really accomplished people, many of who went off to do some very interesting things. Finally, I think it’s incredibly important to treat people decently, and in an honest and reciprocal way. It is very easy, particularly as a securities analyst or as a lender, to confuse a substantive relationship for temporary influence that you may have by virtue of your role or title. I truly appreciate the many friendships that I have developed at each stage of my career – be it at companies that I followed, investors or colleagues at each of my previous firms.
Drawing on your extensive experience, which qualities do you think the strongest management teams in the sector possess?
As an analyst, that is a frequently asked question, and I think it is a critical one. Conceptually, I think of listed real estate companies as infinite life, operating vehicles rather than simply a collection of assets. In that vein, good management can take challenged assets and make shareholders a lot of money while poor management can take great assets and destroy value.
What makes good management is a hard question to answer, but there are a number of manifestations. Does the management team have a cogent strategy given the operating and financial environment, and does the organization have the competitive advantages and tactical ability to execute it? Is the organizational structure consistent with that strategy, does it make sense economically, will the company be able to create incremental value?
Real estate is a cyclical business. In my mind, the best management teams have a prescient view that allows the company to anticipate change, stay ahead of the curve, and in what is essentially a mature industry, continue to take market share. I think that will be even more important given the impact of COVID-19. Increasingly, the ability to conceive and utilize technology effectively and economically will be an important differentiator.
Finally, real estate is a capital-intensive asset class and balance sheet management is incredibly important. The business is cyclical and so too are the capital markets. The best managements are able to adjust their strategy to take those capital markets cycles into account, and vis a versa. Balance sheet management and financial flexibility will become even more critical in the next 12 – 18 months. Management teams will need to be able to pivot their businesses successfully to deal with coming challenges.
Seeing as we are currently in the midst of an unprecedented economic and social crisis, I wanted to take this opportunity to get your perspective on the current volatility in property markets across the world. What effects are you already seeing and would expect to see as a result?
At a macro-level, this is so unlike anything we have previously seen and because every part of the economy touches real estate, the industry is being affected in so many ways. In a nutshell though, I see the current pandemic essentially as accelerating the changes – in consumer preferences, and on how physical real estate is used – that were evident before COVID-19.
Many observers suggest that the outcomes will be binary – everybody will move to the suburbs for example, or we will never work in an office again. I think the reality will be much more nuanced. It will clearly be impacted by the development of a vaccine or therapeutics, but there is no question that consumer preferences will evolve, how we use the built environment will change over time, and by extension so too, the real estate industry. I think that this process will play out in several phases:
With large parts of the economy on “pause” or in a deep recession, there are immediate ramifications for revenue generation; that impacts how one values real estate cash-flows which in turn informs securities valuation. Further, the lack of transaction activity coupled with volatility in relative benchmarks makes the valuation process that much tougher.
In the intermediate term, say the next 12 - 18 months, the key will be to figure out which companies are going to survive, and in what form. That necessitates detailed balance sheet analysis, assessing available liquidity and burn-rate. The market disruption will lead to greater bifurcation, so I am focused on assessing which companies will emerge from the crisis stronger and well-poised to take market share.
Longer term, evaluating the implications for how we will live going forward, how this will affect the built environment and therefore, the effects on real estate as a sector is going to be key.
I think the ways in which we use real estate will evolve more rapidly than before, but as I said earlier the outcome will not be binary. For example, office real estate will still be important in my mind – it drives corporate culture, on-boarding and productivity. But employees may work remotely a couple of days a week which may argue for some type of hoteling or a hub and spoke office setup. And secondary cities, less reliant on public transportation may become a more attractive alternative. Remote working and a migration to lower cost of living cities was happening before COVID-19 – think Austin or Charlotte – it may just accelerate.
You have been teaching the RE Equity Securities Analysis class at Columbia Business School for a few years now, what is your favorite aspect of teaching?
My time in the classroom at CBS has been both a joy and an incredible challenge. Pulling together a seemingly huge amount of real time information and finding ways to distill and communicate it so that it resonates with the class has been a real test. But the level of student engagement is high, which helps materially and the class interaction, something that I truly enjoy, makes it all worthwhile.
My hope for students that take the course is that they gain real perspective on how REITs operate and impact the broader real estate environment, even as they build the requisite analytical skills to work professionally at the most sophisticated levels of real estate finance.
As someone who has lived through, and very successfully navigated the GFC, what advice would you give to current Columbia Business School students on how they can respond and adapt to the current economic crisis?
Stay engaged, learn from the past but look forward, and keep an open mind, I think some very interesting opportunities will arise from the structural and secular changes we spoke about earlier. For me, it wasn’t just the GFC – I have been through a number of cycles. In fact, when I graduated from CBS, the prime rate was 20% and it was nearly impossible to find a real estate job. When I reflect on my own career, the ability to leverage past experience and personal relationships in the next phase, whatever that may be, has been incredibly important; somehow it all makes sense in the end. Be thoughtful, strategic and optimistic.
Shivani Goolab ’21 is an MBA student in the Class of 2021 with a concentration in Real Estate. She serves as Co-VP of Development on the Board of the Columbia Women in Business Society. Prior to Columbia, Shivani worked as a Relationship Manager in the Structured Property Finance division of Investec Bank plc in London, UK, where she was responsible for origination and management of a debt and equity portfolio across several real estate sectors. Shivani is a Chartered Accountant and graduated from the University of Cape Town in 2011 with a post-graduate diploma and B.Bus.Sci. degree in Finance and Accounting.