Transcript: Sean Dobson, Amherst Holdings

The transcript from this week’s, MiB: Sean Dobson, Amherst Holdings, is below.

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This is Masters in business with Barry Ritholtz on Bloomberg Radio.

Barry Ritholtz: This week on the podcast, I have an extra special guest. Sean Dobson has really had a fascinating career as a real estate investor, starting pretty much at the bottom and working his way up to becoming a investor in a variety of mortgage backed securities, individual homes, commercial real estate, really all aspects of the finding, buying and investing in, in real estate. And on top of that, he’s pretty much a quantitative geek. So he’s looking at this not simply from the typical real estate investment perspective, but from a deep quantitative, analytical basis. If you’re interested in, in any aspect of commercial, residential, mortgage backed real estate, then you should absolutely listen to this. It’s fascinating and there are few people in the industry who not only have been successful as investors, but also very clearly saw and warned about the great financial crisis coming, because it was all there in the data. If you were looking in the right place and continues to build and expand, the Amherst grew into a real estate powerhouse. I found this conversation to be absolutely fascinating, and I think you will also, with no further ado, my discussion with Amherst Group, Sean Dobson.

Sean Dobson: Thank you very much. It’s great to be here.

Barry Ritholtz: So, so let’s talk a little bit about your career in real estate, but before we get to that, I just gotta ask on your LinkedIn under education, it says, didn’t graduate, none working for a living. What does that mean?

Sean Dobson:  Well, I think I answered questions of, of when did you graduate? And so I said, I didn’t graduate, and then that was your, what degrees did you achieve? And I said, none. Right? And then it, and then I think the question was, you know, what were you doing or what were your interest in? So I was working for a living, but I, but I didn’t go to college.

Barry Ritholtz: Did not go to college. Right. So that leads to the next question. What got you interested in real estate?

Sean Dobson: It was, it was happenstance. I, I took a temporary job at a brokerage firm in Houston, Texas, the summer after high school between high school and college, really as the office runner, you know, running around, picking up people’s dry cleaning, grabbing lunch, opening the mail, that sort of thing. And I took the job really because a friend of ours, a friend of the family’s had worked there and just said what an interesting sort of industry it was. This is the back when mortgages were sort of a backwater of the fixed income market. So they were traded a little bit like muni bonds. They’re not really well understood, not well followed. Most

Barry Ritholtz: 1990s or before? [1987]. Wow. 1987.

Sean Dobson: So after that it was, I later was given some opportunities to join the research team and then took over the research team and then took over the, eventually took over the trading platform. And then by 1994, a group of us had started, started our own business. And that’s, that’s the predecessor to Amherst, which we bought in 2000 and had been running it since then.

Barry Ritholtz: So, when you say you were running the trading desk, you’re running primarily mortgage-backed securities?  Anything else? Swaps, derivatives, anything along those lines?

Sean Dobson: So back then it was really just mortgage-backed securities and structured products that were derivatives of mortgage-backed securities. We sort of carved out a name for ourselves in, in, in quant analytics around mortgage risk. And that’s still a big core competency of Amherst is understanding the risks of mortgages are kind of boring, but they’re also very complicated. The, the borrower has so many options around when to refinance, how to repay, if the repay. It takes quite a lot of, of research, quite a lot of modeling, quite a lot of data to actually keep up with the mortgage market. It’s really 40 million individual contracts, 40, 50 million individual contracts and a million different securities. So it takes quite a, it’s, we’ve built an interesting system to allow you to sort of monitor all that and price it in real time.

Barry Ritholtz: So if you are running a desk in the 2000s and you’re looking at mortgage-backed and you’re looking at securitized product, one would think, especially from Texas as opposed to being in the thick of, of Wall Street, you might have seen some signs that, that perhaps the wheels are coming off the bus. Tell us about your experience in the 2000s. What did you see coming? Yeah,

Sean Dobson: So, so from the late eighties until the really, the late nineties, we were focused primarily on prepayment-related risk in agency mortgage-backed securities. By the time you get to the early 2000s, Freddie Mac, Fannie Mae and me were losing market share. A lot of
mortgages were coming straight from originators and going and being packaged into what later became the private-label securities market. So as part of our just growth, we attacked that market. And up until that moment in time, we didn’t spend a lot of time on credit risk in mortgages. We didn’t really have to model credit risk because that was, that risk was taken by the agencies. But in these private labels, you had the, the market was taking the credit risk. So we took the exact same modeling approach, which is loan level detail, borrower behavior, stochastic processes, options based modeling.

And we said, let’s just take a little detour here and make sure we understand the credit risk of these things before we sort of travel, start making markets and banking and, and, and really making these a core part of our business. At that time, this market was about a third of all mortgages were the ones where the credit risk was going into the capital markets. So that little detour was in 2003. And, and
we found a couple things we modeled pre, we modeled defaults the same way we modeled prepayments, which is a, an option for the consumer to not pay.

Barry Ritholtz: Most people rarely hear it described that way.

Sean Dobson: It’s, it’s, it’s a unique approach, right? And, and it was u unique at the time. And so we, we thought there were conditions under which the option probably should be exercised. You know, if you, if your upside down, if you have a $200,000 home and a hundred thousand dollars mortgage, and there’s, and the consequence for not paying is ding on your credit report, you’re
probably not supposed to pay is, is the position we took. So through that lens, we said, okay, let’s price these securities. And we found a bunch of interesting things for, for example, we found that the follow on rating surveillance for mortgage-backed securities doesn’t follow the same ratings methodology that the initial rating does. So over time, the risk composition of the pool would, would change dramatically. So think about 2003 home prices had gone up a lot from 2000. So mortgage position in 2000 were way more valuable in 2003 than they were when they originated because they weigh less credit risk. Not the same, the same thing couldn’t be true as, as you went forward in time,

Barry Ritholtz: Each subsequent vintage became riskier and riskier became riskier and riskier as prices went up because rates are gone lower and lower.

Sean Dobson: And that’s the way we thought about it. The way we think about it, when you make someone a loan, this is, this is sort of the, the credit OAS world. So when, think about when you make someone a loan on a building, whether it’s this building or, or a home, you are implicitly the
United States. You’re implicitly giving them the, the option to send you the keys, right? So

Barry Ritholtz: Jingle mail is what we used, used to call it

Sean Dobson:J mail. Exactly. And so we, we thought, we said, okay, we’ve been pricing complicated options our whole career, so let’s just price the option to default as if it is a financial option. When you do that, and then you looked at the types of loans that are being originated, and this is where Amherst’s story is a little different than some of the, the stories you’ve seen around the
financial crisis. What we figured out was that the premium that you were being paid as this option seller was way below the fair market price of the premium, meaning that the, the default risk you were taking was way higher than the market had appreciated. So they were underpricing default risk dramatically. Then as we dug in and dug in and dug in, we realized that there were a lot of loans that were really experiments. There were financial experiments where the borrower hadn’t been through due diligence. The LTV was very high. The underlying risk of the home market was very high.

Barry Ritholtz: By the way, these were the no doc or ninja loans. No income, no job, no assets were exactly ninja,

Sean Dobson: No pulse seems reasonable.

Barry Ritholtz: Exactly

Sean Dobson:  So you look back at these things you like, how could it happen? But we are, we’re loan level people, right? So we don’t see the mortgage backed securities market as a market. We see it as, like I said, about 50 million assets and we’re modeling up the value of every home in the country, every, every week, basically. And we’re modeling the value of every mortgage in the country, and we’re modeling up the value of every, every derivative of that mortgage, the structure, products and so forth. So through our lens, it was like, okay, we’ve made these financial experiments, the
underlying real estate has become very volatile. So we could construct trades that had very, very low
premiums to sell this volatility to, to basically join the consumer on their side of the trade, which is in essence buying insurance on, on the bonds that were exposed to these great risk.

So we built, we did that for a lot of the markets. So a lot of the headline names, you see a lot of the stories you see about, about the financial crisis, a significant number of, of those investors we were helping in security selection, modeling, and analytics. So that, that sort of put Amherst on a different
pact because prior to that, our core business model was investment banking, brokerage market making, and underwriting. By the time we got to 2005 and figured out that there was such a large sector that was so mispriced, we started hedge funds, opportunity funds, we took sub mandates from the big global macro hedge funds, and we started to build our model around investing in our research, co-investing our research and earning carried interest in sort of big complicated trades that we thought we had figured out the market. Maybe the market hadn’t priced something properly.

Barry Ritholtz: How, how did that end up working out?

Sean Dobson: It was a wild ride. It was a wild ride because by the time you got, well, so in 2005, we went on a road show trying to tell people what we had learned, and there wasn’t a lot of reception. We, we literally,

Barry Ritholtz: Let me, let me interrupt you and ask you, did, did people laugh at you?

Sean Dobson: They were more polite than that. Okay. But they didn’t invest, right? So, so there, there were very few people that thought because at, at that time, the trailing credit performers for us single family mortgages great. Was impeccable, right?

Barry Ritholtz: I wanna say oh five was where we peaked in price and oh six
is volume, or am I getting that better?

Sean Dobson: ’05 ’06, it started to turn over. And our thesis on a lot of these mortgages and the very, very exposed securities within these structured products wasn’t that home prices needed to go down. It was that the only way that the loan was gonna perform is home prices is if the consumer could refinance out of it quickly. Right. So you really just wanted the music to stop. Right. And or if, I mean, this whole thing was gonna come down if the music stopped. Right? So the mu by the time the music stopped, it was pretty apparent, but we had it, there’s a, there’s a big industry conference called a FS that happens twice a year. And in the 2000 at the 2005 conference, it’s kind of wild. So these big brokerage firms get together and they set up a convention like, like plumbers, and they all give out tchotchkes and they have a, and then they give presentations in their businesses. So we
participated in this, our tchotchke that year was a hard helmet, was a, was an orange hard hat. And it
said, beware of falling home prices. And our whole thesis was, that was what I’m trying to describe,

Barry Ritholtz: That’s some great swag. Do you, do you still have any?

Sean Dobson: I have one in my office now. That’s awesome. I have, I have a, I have a
helmet from Beware of Falling Home prices, and I have one for our new construction division where we build entire neighborhoods. So, and that’s really the, the, to sort of bring it all together with this core competency and analytics. And we’re probably the only, maybe not the only, but, but I don’t know of ano a competitor. We’re we’re the quant shop in real estate, in the quant shop in physical assets. So with that core competency, that’s the reason we’re in the single family rental business. So you followed that all the way through. There were amazing trades to do, amazing opportunities, wild, scary things to do. I got to spend a lot of time in DC consulting on the response to the financial crisis and trying to sort out sort of what was really going on. And what we figured out in 2009, really when we started buying homes is that we made the bet that it, I mean, it wasn’t a very exotic bet, but we made the bet that the subprime mortgage market wasn’t coming back at all.

Barry Ritholtz: So wait, let, let me unpack some of that. Sure. ’cause there’s a lot of really interesting things. When you mentioned DC I’m aware of the fact that you briefed Congress, the Federal Reserve, the White House. Yeah. Who, who, who, who else did you speak to when you were there? What, so what was that experience like?

Sean Dobson: I lived in Washington, DC for five years. My family and I moved to McLean,
Virginia in, in 2008. So we were down the street and we were in a pretty interesting situation because we were the, we were one of the biggest, if not the only investment bank specializing in the core risk that the nation was facing. And we didn’t need any help, right? So we weren’t there looking for changing of a reg cap, you know, of anything. We weren’t looking for a bailout, we weren’t looking for recapitalization or anything. We were just there as a source of information. So we, we met a lot of of interesting people in DC and it was the whole gamut. We were consulted on the recapitalization of Freddie Mac and Fannie Mae. We participated in that with treasury and FHFA and the regulators, the White House. And I would say that Washington was pretty interesting because we had gone and, and spoken to people in 2005, 2006, and to kind of let people know that there was something, these are, this is a trillion dollars worth of misprice risk. Right? Right.

00:13:02 [Speaker Changed] And, and I, I very vividly recall, oh six, even oh seven people were, Hey,
we’re in the middle of a giant boom. Why do you have to come, you know, reign on our permits? Yeah.
It was what, what was your experience? It
00:13:15 [Speaker Changed] It was lonely. I I I tell you the analogy was something like this, is that we
had seen what had happened and by 2006 it was over, right? The, the mortgages were defaulting,
people were taking out mortgages and defaulting in the third payment, the fourth payment,
00:13:28 [Speaker Changed] 90 day warranty on those non-conforming non Fannie Mae mortgages from
those private contractors, like a toaster comes with a longer warranty. It’s
00:13:38 [Speaker Changed] Amazing. Yeah. So, so eventually even that was go, even that they wouldn’t
provide 90 day warranty. Eventually it was take it a cash for keys or cash to carry. So like, for us, it was
weird though, because the analogy I give is that in 2006 it happened, it was over first quarter of 2006,
the market was, was over. The market kept issuing securities. And, and I think the analogy that we, we
think about is that if you’re standing, if you’re sitting in front of a bank and you know, a, a van rolls up
and people with masks run in and they empty out the bank and they leave with all the money and you
see it, and then people keep coming and going from the bank for another year, you’re like, you know,
there’s no money. Keep
00:14:10 [Speaker Changed] Making deposits. There’s
00:14:11 [Speaker Changed] No money in that bank. Right? And so, so we sort of felt pretty stupid for a
while because we did a lot of losing trades in 2006 that were the, you know, that obviously didn’t come
to fruition until the actual people could see the losses. So in mortgages, the borrower can stop paying
maybe a year to two years before the lenders actually book a loss. So there’s this great lag in, in housing
that is affecting the market. It’s affecting today’s CPI numbers that the market doesn’t do a great job of
adjusting the real time for information that they already have. So when the borrower hasn’t paid in 12
months, probably not gonna get back the loan, probably not gonna start paying again. And then you can
model up what happens, like what’s the home home gonna sell it for? What are my expenses to sell it
for how long it’s gonna take? And all of a sudden you have a loan that was worth, you know, a hundred
cents on the dollar and now it’s worth 30 cents on the dollar, and you knew that eight months into the
loan, or eight months, or maybe a year ago or two years ago. But it
00:15:03 [Speaker Changed] Takes that long to write it down. But
00:15:04 [Speaker Changed] It takes that long for the losses to get through to the securities. And so, I
don’t know if it’s sort of just the fact that we’re so myopic into the mi minutiae of each little detail, or if
it’s the fact that the market kind of doesn’t wanna buy a umbrella until it starts raining. Right?
00:15:18 [Speaker Changed] Huh. Really, really very fascinating. So, so coming out of this in oh nine
home prices on average across the country, down over 30%, but really in the worst areas like Las Vegas
and South Florida, and, you know, parts of California, Phoenix parts, Arizona, Phoenix, right? Two,
00:15:37 [Speaker Changed] Two thirds in Phoenix.
00:15:38 [Speaker Changed] Unbelievable. Yeah. So, so you say, I have an idea. Let’s buy all these
distressed real estate and rent ’em out. Yeah,
00:15:44 [Speaker Changed] I had, I had a very good idea. So I have very good partners, very patient
with me. And I said, okay, I, we don’t think the subprime mortgage market is coming back, which was a
non-consensus view at the time. People were buying up mortgage originators and things, waiting for the
machines to sort of get turned back on. We were thinking this is, investors are never gonna buy these
loans again at any price. So what’s gonna happen? What’s gonna happen to the homes? And what’s
gonna happen to the, to the people that were living in these homes? And what a lot of people I think
didn’t follow is that, you know, there was a concept that job losses called mortgage caused mortgage
defaults. But in the Amherst view, a a mortgage default can be rational as, as distasteful as it may sound,
right? And when I give this presentation in Europe or the, or the e the EU or the uk, they look at me like,
you’re crazy. Or in Australia or in Canada, they’re like, what do you mean mortgage is a recourse? And
it’s like, well, not
00:16:28 [Speaker Changed] In the us. Well, actually, some states are recourse and some states are not.
00:16:32 [Speaker Changed] What I can tell people is that one person’s default, you have, you can
handle, but when seven or 8 million people default, we don’t have debtors prisons, right? They’re,
they’re recourse. They mean they’re not recourse. So in this, in this context of, of a mortgage now being
clear to everyone that this default risk is present, it’s real, and it’s hard to price because following the
borrower’s economic profile, there, there are defaults that are related to just life events, but there’s also
defaults related to a macroeconomic event. So we took the position, you know what, investors are not
gonna buy these loans anymore. The homes are here. And the, the job loss wasn’t as big as the
mortgage defaults were, right? So the people still had jobs, they still had revenue, and the homes were
very affordable. Now, because the prices have been reset. So we, we asked ourselves, okay, we’ve seen
this movie before.
00:17:19 Can we at Amherst make a $300,000 home investible to a global financial investor? Which I, we
spent our whole careers turning a 300,000 mortgage investible in the global capital markets. So we said,
okay, this is probably not a long put for us because we’ve been following the mortgage with all this for
30 years now we’re just gonna follow the house the same way. So we took our same analytic and
modeling team and we said, let’s press down one more level so we can actually price the home instead
of the mortgage with precision. And then let’s set up an operating capability that allows us to acquire
the homes, renovate the homes, manage the homes, and then more importantly, scale the homes into
an investible pool. So we created pools of homes just the same way we created pools of mortgages in
1989. So
00:18:06 [Speaker Changed] Are you keeping these homes and leasing ’em out, or are they flips, for lack
00:18:11 [Speaker Changed] A better word? So they’re, so they’re kept and leased out. And so, so
starting in 2009, we, we, there was no flip market. There was no, no one to sell ’em to because the
mortgage market had basically for closed on a large, a large section of the consumer base. So think
about,
00:18:23 [Speaker Changed] And that credit market was frozen pretty much,
00:18:26 [Speaker Changed] And it’s still frozen for most people, right? So really? Yes.
00:18:28 [Speaker Changed] Still
00:18:28 [Speaker Changed] Today, still today. Basically the barrier to entry to getting a mortgage
became irreversibly higher. And we spent a lot of time, so you mentioned my time in DC I went, I got to
go and brief the Federal reserve, which is kind of cool. I got to go into the FOMC room and I got to sit
with, with Yellen, the Bernanki and walk ’em through, kind of in our view how we got here and the best
way out. And I asked them not to shut down the subprime mortgage market because it does serve a
large swath of the American public who has a slightly higher rent to income or debt to income ratio, or
has defaulted on a credit card in the past or something. But they can pay, they’ve had a problem in the
past, they’ve cured it. Well, those people now are pretty much blocked outta the mortgage market.
00:19:10 So I was unsuccessful in talking people in, and still to this day, unsuccessful into talking to
people to get back into lending to lower credit quality consumers. Because you can do it, you can risk
based pricing. So we took the, we took the view like, hey, that market’s not coming back. People are not
gonna listen to us. They’re not gonna say there are some good subprime loans and some bad subprime
loans. They’re just gonna, they’re just going to draw a line and say, you, you have to have a credit score
above a certain level. You have to have income above a certain level. You have to have a debt load
below a certain level, or the price for you is zero. You just, the answer is no. You’re
00:19:42 [Speaker Changed] Out of the market.
00:19:42 [Speaker Changed] Used to, you would say you would pay 1% more or 2% more right now. He
said no, huh. So that, so that’s how we, so then we said, okay, well how’s this gonna work? And we had
seen this movie before, aggregating mortgages, strapping services on them, getting them rated, getting
them available to the global capital markets. So we also saw the conflicts and the frictions of the
mortgage market when it went under duress. The, the problems with getting service to the consumers.
The problem with getting service to investors, the litigation, a lot of people don’t know it, but we were,
we represented a large swath of the US investor base and their litigation for buying these busted
securities. So we said, you know what? Let’s just build under one platform. Everything you need to
originate, manage, service, aggregate, and then long-term service these homes on behalf of the
residents and the investors. So that’s the, that’s the single family rental platform we built. Huh,
00:20:35 [Speaker Changed] Absolutely. Fascinating. So let’s talk a little bit about who the clients are for
Amherst. I’m assuming it’s primarily institutional and not retail. Te tell us who your clients are and, and
what, what they wanna invest in. Sure.
00:20:49 [Speaker Changed] O over the years we’ve migrated really to what I would say is the largest
customer base in the world, the largest in single investors. So we, we do business with most of the
sovereign wealth funds, most of the big US national insurers, global insurers, the largest pension funds.
And we, we try to position ourselves as an extension of their capabilities. And since we’re smaller, more
nimble, we can kind of get in there and do some of the gritty things, the smaller things. Imagine setting
up a platform with, you know, in 32 markets that has to buy each individual home and execute a CapEx
plan on a 30, $40,000 CapEx plan on a home. So these large investors need someone like us to kind of
make things investible in scale. And so that’s, that’s where we’ve been. So it’s all institutional investors.
It’s, it’s the, call it 500 largest investors in the world. Is that
00:21:39 [Speaker Changed] Patient cap do, do they have the bandwidth to, Hey, we’re, we’re in this for
decades at
00:21:44 [Speaker Changed] Time? Yeah, it’s super patient, it’s super sophisticated. They’re asset
allocation model driven folks. The bulk of our investors are investing on behalf of consumers, on behalf
of taxpayers. So we we’re partners with the state of Texas, the actual state of Texas, not one of the
pension funds, but the state itself. So we have a lot of the, you know, sovereign wealth fund types that
are investing on behalf of taxpayers. So it’s very long dated capital. They’re, they’re lower risk tolerance,
I would say very high standards on quality of service and quality of, of infrastructure and decision
making. So we’re very proud that we’re, you know, a partner to, to that type of capital.
00:22:21 [Speaker Changed] So, so let’s talk a little bit about the residential side before we look at the
commercial side. You mentioned you are in 32 markets, buying single family homes. How many homes
have you guys purchased?
00:22:32 [Speaker Changed] So the platform service is about 50,000 units now. So we’ve, we purchased,
and most of the homes were purchased one at a time, independent due diligence, independent
construction management to get the home back up to current market standards. And we manage each
home, you know, independently.
00:22:45 [Speaker Changed] So that implies that some of the helms you’re, you’re buying are kind of
project homes erect or, or otherwise neglected doesn’t even have to be a wolf elected destruction, just
time and tide,
00:22:57 [Speaker Changed] Just what we like to say is it’s, it’s deferred CapEx. So you’ll find that owners
that have owned the home for 10, 15, 20 years become pretty comfortable, right. With a smudge paint
or a stained floor or old countertops or appliances that may make noises at ni at night or that, or that,
you know, that bathroom set, that leaks and whatever. And so people just get comfortable in their
homes and they, they tend not to reinvest in real time on keeping that home up to current market
standards. So we buy those homes that haven’t really been touched in 15 or 20 years. They’ve still got
the original builder interior. We make sure that, of course, that the bones of the house are good, the
foundation and the walls and so forth. But then we pretty much trip ’em down to, I wouldn’t say down
to the studs, but down to the sheet rock and put a brand new interior in ’em. We oftentimes, people
don’t buy a roof. They’ll, they’ll let the roof go longer than, than maybe they should just
00:23:45 [Speaker Changed] Staple a new one on top. Exactly. Or a third one or, so we bought a
00:23:48 [Speaker Changed] Lot of roofs, we buy a lot of HVACs, we take out a lot of compressors that
are still running on those old toxic gases. So we basically bring the home up to a current modern
standard. And there’s a, there’s a profit in that. The, the home you get paid to go and improve a piece
real estate.
00:24:01 [Speaker Changed] And then how do you figure out what to lease these for? And do you ever
sell any of these homes?
00:24:06 [Speaker Changed] We do sell, we do. The platform is pretty nimble. So if, if, for example, we
were talking before the show, we were talking about how some markets, it really benefited from the
post covid migration and it’s changed their, their customer base dramatically. So think about Naples,
Florida, and Clearwater and those types of places. So in those places, home prices, since pre covid are
up maybe 40, 50% and rents are up 20, 25%. So they really don’t really make much sense your answer
anymore as a, as a rental investment. So we’re cleaning those homes back up and selling ’em back to the
consumers. So that’s an active part of portfolio trimming and opt and optimization. And it’s cool to have
the capability to, to sort of execute in both markets.
00:24:45 [Speaker Changed] So it’s funny you mentioned Naples and Clearwater, a few of the areas
adjacent to those really got shellacked by that last hurricane that came through last year. Yeah. What do
you do when you have a natural disaster? Is that, does that create any interest or is it just, just too much
mayhem? No, it’s,
00:25:02 [Speaker Changed] It’s, well, we’ve been hit by hurricanes several times, floods several times,
tornadoes several times, given that the homes are in 30 markets. The good news is no one event has a
big impact on the portfolio. The bad news is all events you get to experience, right?
00:25:16 [Speaker Changed] You’re diversified, which means you’re embracing every natural
00:25:19 [Speaker Changed] Disaster, right? So in Houston, America, and one year we got hit in Houston
and in Florida at the same time, two different hurricanes. So what’s interesting is that now we have a
natural disaster team and response unit and a playbook, which is a little bit unfortunate that you have to
have that, but we use it every couple of years now. We tend not to invest when those markets are
busted. We, we do see a lot of demand for our rentals because when, you know, a few percent of the
housing stock gets taken offline for a storm, sure it creates pressure on demand. But now our job is just
to go in there and get the homes fixed as fast as we can and get ’em back into service. So
00:25:52 [Speaker Changed] 50,000 homes, I’m gonna assume you’re a self insurer on all those homes.
00:25:56 [Speaker Changed] We do. So Amherst is completely vertically integrated. We own our own
insurance platform, huh. So we are the, we are, you know, we basically access our coverage through the
reinsurance markets at our scale. It’s hard to go get insurance through the normal channels. And so we
set up our own insurance brokerage and risk retention platform. And now we, we insure through the
reinsurance markets.
00:26:16 [Speaker Changed] Huh. Really very, very intriguing. So let’s, let’s talk a little bit about some
data and technology you use. Sure. You guys created your own platform. Tell us a little bit about what it
was like developing that and what makes it specific and unique to Yeah, Amherst,
00:26:31 [Speaker Changed] It’s interesting because, you know, today we talk about AI and, and, you
know, high speed computing and what, what I look at what we do as being comically, you know, simple
compared to what we talk, what we’re talking about today with generative ai. But when we started this
in the late eighties, so that was the job I was promoted into, which was, hey, let’s figure out how to
differentiate pricing from one mortgage pool to the next. They’ve got different interest rates, they’ve
got different LTVs, they’ve got different credit scores, they must have different values. So I was part of a
small, or the, you know, our team was part of a small group of people tackling this problem in the late
eighties, early nineties. And what we do today is just now growth of that original project. So it’s a
quantitative analytics approach. It’s highly data driven, but we need to know the price history for assets,
the correlation to the, to what drives price.
00:27:16 And then we have a big consumer behavior modeling infrastructure because we have, what’s
nice is that over the, over the 30 years of our history, and then we purchased data that was probably 25
years old at the time, we can, we can measure how consumers behave to changes in their economic
environment. And that consumer behavior will affect home prices and will affect performance on credit.
It’s that the, so that’s the core competency and it’s just leveraged into, if it’s a loan, if it’s a security
backed by a loan, if it’s the actual estate itself. So from a data perspective, think about it this way. So
obviously the s and p 500 is 500 names and they report four times a year, and God loved the analysts
that have to figure out how to price these things with so little information. We have a hundred million
items that we’re following.
00:27:58 There’s a hundred million piece of real estate in the country. We’ve gathered up all the
information you would need to do an appraisal. And we keep that information current in real time. And
we’ve automated the, the appraisal process for valuation, both intrinsic value, meaning like, where
would we pay it, where would we buy it, and where is the fair market price that asset from that level,
from price and from consumer behavior now. So now we’re, we’re watching the payments on every
mortgage in the country. So you can see who paid, did Maryland do better than Texas last month, and
more importantly, versus the model who outperformed, who underperformed because there’s a
schedule and there’s an expectation for not everyone to pay every month.
00:28:34 [Speaker Changed] So when you’re, you’re trying to put a value on a home, you’re not just
sending a third party appraiser out to do a drive by and go, yeah, it’s about 2 75. You’re actually
crunching a lot of numbers. And this is proprietary data.
00:28:47 [Speaker Changed] We’re a, we’re running a 10 year Monte Carlo, that’s probably 20,000,
10,000 paths of outcomes on that asset. That includes all of its changes in its property taxes, it’s, it’s
depreciable life for the improvements of the assets. And then of course it’s revenue stream from rental
demand.
00:29:02 [Speaker Changed] So, so it’s interesting that you started this after the financial crisis, given
your technological expertise and your unique way to, to value these things. I’m curious how much of this
is a legacy of your experiences during the great financial crisis? How did that couple of years affect how
you look at risk and pricing of, of real estate properties?
00:29:26 [Speaker Changed] Yeah, it’s, it’s, it’s on the, it’s, it’s infecting I would say. So the problem, the
problem for me, I’ll speak for myself personally in the financial crisis is that once you find something like
that, because literally we were saying to people, you know, these loans aren’t gonna pay off, right? In
2005, 2006, and they were like, Sean, you know, in the worst default rate it’s been geographically
focused, right? Whether it was the farm belt crisis or the California crisis. So what, what are you talking
about? National home prices going down. And oh, by the way, the defaults in those micro markets were
10 or 15% and the losses were 5%. So if, if you had 5% losses on a, on a market and the market was only
5% of a pool, the losses are gonna be nearly zero, right? And we’re like, yeah, except for none of that’s
gonna happen this time.
00:30:10 And they were like, sure, Sean, pat you on the head and send you down the road. So, so one of
the problems is once you see something like that, you kind of look for them everywhere. So we spent
our time, a lot of time looking for, looking for Sasquatch. And so the other thing is, is that, and I think it’s
our core risk management culture, is that we think that till risk is way more probable than everyone else
does. So we manage the business for extreme shocks to prices for home prices moving 25, 30% than a
year for interest rates moving dramatically in a short period of time. And we found, you know, that
00:30:40 [Speaker Changed] Check, check, check, it happens all these tail risks,
00:30:43 [Speaker Changed] Well it’s like the a hundred year floods,
00:30:44 [Speaker Changed] But every 10 years or so,
00:30:45 [Speaker Changed] Yeah, I’ve been doing this for 30 years and I’ve had how many a hundred
year floods more than more than 0.3. You,
00:30:51 [Speaker Changed] You know, the fascinating thing is I have a vivid recollection of a paper, a
white paper coming out by professors Reinhart and Rogo. I never remember it. It was five financial
crises. So it was Helsinki, it was Sweden, it was Japan, it was Mexico, maybe US in the Great Depression
was the fifth one. I don’t remember exactly what it was by the way, that paper eventually becomes,
yeah, this time is different. 800 years of financial folly, right? But the average of the real estate drop in
any modern financial, we’re not talking about tulips, right? Like the last century was over 30% in real
estate. Right? And once you, once I saw that paper, I remember saying, Hey, this isn’t a theoretical
possibility. This has happened.
00:31:37 [Speaker Changed] Yeah. The,
00:31:38 [Speaker Changed] In recent decades, right?
00:31:39 [Speaker Changed] The, so people think of home prices as being sort of four, 5% price movers
per annum, right? And that’s the case most of the time. But the problem is we don’t get to live most of
the time. We get to live all the time. And so, so sometimes that 5% move can be 35% or 40%. So think
about that 80% LTV mortgage, that doesn’t seem like a risky loan. The bar will put up 20%, the lender
put up 80%, but there’s a one and something chance that the home price goes back to, goes to 65, and if
the home goes to 65, the loan is no longer gonna pay off. So that was the, that was the sort of the thing
that we built that people hadn’t thought through is how do you stochastically forecast a range of
outcomes for the asset price? Then how does it affect the repayment risk on the loan?
00:32:20 [Speaker Changed] So, so you have to have boots on the ground with 50,000 homes. Yeah.
How big a staff do you have? Is it regional? How, how do you manage since, since you’re now the
landlord for these homes, how do you manage the regular maintenance? The the one-off? Yeah. You
know, things break or refrigerator stops, the toilets backed up, up. How, how do you manage that?
Yeah,
00:32:40 [Speaker Changed] It’s, it’s complicated. So we have a, a both of an on balance sheet group of
repairmen. So we’re an investment management platform that also has trucks with plumbers cruising
around the country and fixing air conditioners. We also have a, a, a great vendor network and we have a
lot of technology that the team, as you mentioned is, is about 1500 people that are just in that single
family rental platform. This is one of the things Amherst does. But that 1500 person team is augmented
by about 2000 vendors of companies. And we’re able to handle the properties because we have a team
in the field. So we literally have a, a repair and maintenance team that’s assigned to a group of homes.
So that person has their, their 300 homes or something, and then they’re part of a local team that’s
managing about 1500 units. So it’s not that different from how you would manage a multi-family, an
apartment complex.
00:33:32 It’s just that the rooms are further apart, the units are further apart, and it causes our drive
times to be higher. But one of the things that we went into this, that was one of the big questions is
could you provide good service and could you manage it? And we don’t get it right all the time, but if
you think about the fact that how easy it is to get someone out to a home, and that’s part of our filtering
criteria of how we buy a home. But think about the fact that for for 10 bucks you can have Domino’s
bring you a pizza and somehow outta that 10 bucks, they get the delivery person from their store to
your home with a hot pizza. And they were able to pay for the Super Bowl ad out in embedded in that
$10 cost, like the transportation cost to get people to and from these homes. It just isn’t a barrier. It’s
really timing and technology to really, to route
00:34:12 [Speaker Changed] ’em. So let’s talk a little bit about technology over the past, I don’t know,
two decades, real time monitoring of things like fire flood, carbon monoxide break-ins, whatever. Yep.
They’ve become very inexpensive, very ubiquitous. Everybody can have, have it on a phone. Is that
anything that you’ve explored in terms of we
00:34:34 [Speaker Changed] Spend a lot of time on it. There’s big privacy concerns. Yeah. So we have
families, we have 50,000 families living in their homes and they’re their homes, and we’re proud to be
part of that process. So we, you know, a lot of that stuff gets a little creepy to us. And so we haven’t
done, well, there’s
00:34:46 [Speaker Changed] A difference between a puppy cam where you’re seeing what’s going on in
the bedroom, and I know in my basement I have a, a, a flood alarm,
00:34:54 [Speaker Changed] Like a high water alarm, that sort of thing, right? So that we’re still on their
network, we’re still, so that technology for us to go at it stronger, we would like for those devices to
communicate back to us directly. Not
00:35:07 [Speaker Changed] Like a wire, like a cell independent.
00:35:09 [Speaker Changed] So we are looking at, there’s locks now you can buy that have little cell
phone transmitters in them, right? So we may, we may look at things like that, but at this point we have
so many people on the field. We’re touching the houses 6, 8, 9 times a year. We have good relationships
with our, with our residents. A lot of that stuff is a little bit of pizazz. And we see, you know, there are
people charging residents, you know, $50 a month for electronic door lock or something. We don’t think
that that’s sustainable consumer,
00:35:32 [Speaker Changed] It’s a $50 product. How do you charge $50 a month for that?
00:35:35 [Speaker Changed] No, I don’t, I don’t, I don’t get it. So we, well, we’ll it’s coming along. If I can
get direct cell phone connections to a high water alarm, I would take it. But really what we have is a
person go out there and look and touch the property eight times a year. And that’s how, that’s how we
do it. A lot of this is not so complicated, but we have, you know, through Covid was fascinating because
that field team, and we have a big construction management team. So these guys, those 50,000 homes
have all been renovated so that those teams during covid, man, they stood up and they went out and
they made us so proud. They provided service to the residents. They finished construction jobs, they got
homes back in service so people could move out of wherever they were and get into a home. So it’s
been fascinating to watch this business run through a crazy covid cycle and then a crazy post covid cycle
and now an interest rate cycle. The, the team has had to be pretty nimble, huh?
00:36:20 [Speaker Changed] Really quite, quite intriguing. Let, let’s talk a little bit about, about your
space. What are you doing these days in mortgage-backed securities? Does that market exist remotely
like it did in the two thousands? Well,
00:36:32 [Speaker Changed] It’s great that you ask about it. So my, the bulk of my career was spent in
the mortgage backed securities and structured products markets. The single family rental business kept
us very busy while the Fed was monetizing so many mortgages, right? So, as you know, they own about
a third of all mortgages that were ever issued. The relative value for, for non-government investors was
so bad that we wound down a lot of our capabilities in that space. We actually sold our investment bank
to Bonko Santander as part of just the frustration with how much intervention had sort of driven down
value in that space. Well now that’s completely reversed and there’s a real vacuum today, a real
vacuum. As the Fed stopped buying mortgages and they bought a third of, of the whole market when
they stopped buying them, I think the belief was that the market would get back to its regular scheduled
programming and the traditional investors would show up to buy them and they didn’t because a lot of
those traditional investors don’t exist anymore. You,
00:37:26 [Speaker Changed] You lose a whole generation, there’s no succession. Yeah. Beyond that, this,
this
00:37:30 [Speaker Changed] Is the largest debt capital market in the world. It’s the largest most liquid,
and there’s, it’s lost its sponsor. So the sponsor went from being the big investment banks, the, the
government agencies, the big bank balance sheets, a lot of the insurance company balance sheets, and
the money managers, the fed displaced all of them. Then they, then they changed regulations to where
the investment banks can’t really step in. The agencies are no longer allowed to run balance sheets. The
REITs are not really well positioned to, to step up in the size as we just saw in the fourth quarter. So
there’s a real lack of sponsorship for the assets, and they’ve become incredibly attractively priced. So
we’ve, we’re, so we’ve been gin back up those strategies. We still, we’ve always run strategy that space,
but they’ve been very sort of boring strategies, index tracking, index outperformance, that kind of thing.
But now there’s opportunity to really go in and build proper hedge fund strategies, proper total return
strategies. The relative value is sort of startlingly attractive now.
00:38:22 [Speaker Changed] So I always hated the term financial repression, but what you’re describing
really is the Fed engaging in financial repression on that corner of the market. Well, what
00:38:33 [Speaker Changed] I, what I would say is that they were investing for a non-monetary focus
motivation, right? They didn’t care what their return on the mortgages were. They
00:38:39 [Speaker Changed] Price insensitive, they
00:38:41 [Speaker Changed] Right, they cared what the lower mortgage rate did to the economy. So as,
as, as a person that’s just investing for an economic return, you can’t compete with that, right? Right. So
their motivations were totally different and they, and they basically drove down the relative value to
where on a, on a hedge adjusted basis, if you looked at a mortgage and you sort of get it back to where
it’s got the same risk as a treasury, it was yielding almost half a percent less than a treasury. They
normally yield half a percent more, and now they yield 1% more. So in fixed income terms, that’s a lot.
So they’re, so now we’re really focused on mortgage. We’re way more active than we have been in the
past, and we’re excited about the opportunities there. And, and we have a commercial mortgage
lending strategy as well.
00:39:19 [Speaker Changed] Huh? That, that’s kind of interesting. So, so let’s talk a little bit about what’s
going on in the commercial space. We were talking earlier about 60 Minutes, did a piece recently on the
New York real estate market is never coming back. And all these big office towers are, you know, empty.
I’m old enough to remember the See-through Office Towers, right? In Dallas back in the
00:39:42 [Speaker Changed] Eighties. And, and Dulles the whole, right? The Washington Dulles corridor
was full of See-through right.
00:39:45 [Speaker Changed] SeeThrough buildings. So we’re not there. But certainly the typical high rise
has, you know, a vacancy rate of 10, 15, 20%, and the occupancy rate during the day is probably another
10, 15% less than that. What, what’s going on in the office space
00:40:03 [Speaker Changed] Circuit? So, so the, the castle data is pretty fascinating and you can get it on
your Bloomberg terminal, the castle, the castle data, as we talked about before, a a bar by,
00:40:13 [Speaker Changed] By the way, that’s all swipe cards of employees literally going in and out of
those
00:40:17 [Speaker Changed] Building. That’s real time physical occupancy data is pretty, and it’s not
perfect, like no data set is, but it’s pretty startling. The last time I looked at it, most markets are peaking
at 50% physical occupancy. Wow. Remember I said before that in the mortgage market, in the
residential mortgage market, a borrower can stop making payments. And it might be two years before
the investor actually takes a loss. Sometimes five years. Well, I think that same thing’s been happening
in commercial now for the last, you know, since 2021 is that physical occupancy is the leading indicator
to economic occupancy. Economic occupancy is who’s paying the rent. And, and corporate leases are of
incredibly high credit quality, incredible, very few leases ever default. Those leases, however, are going
to come due. And the renewal rates are tragically, tragically low. So if you model out what’s gonna
happen to the commercial space from an economic perspective, you don’t have to be a wizard to figure
out that that monetary or physical fiscal or financial occupancy is gonna track.
00:41:16 Physical occupancy companies aren’t gonna be able to give back one for one as much space as
they’re not using because they’ve got this peak and load problem where everyone likes to come to work
on Wednesdays. So you still need the space, but the quantum of space that people need has been
reduced dramatically. And we’re seeing it in that castle data. So, so it’s a scary thing to do, but if you
forecast that, that the lease payments track the physical usage, meaning that what you’re seeing today,
it’s 15% vacancy because some leases expired and didn’t get renewed. Well, all of those leases that are
being underutilized by half, if those don’t renew or they renew at much smaller spaces, you could create
30, 40% physical or actually financial vacancy in the commercial space. Now it’s dangerous to forecast
that far in the future because behavior can change.
00:42:03 How much space do people need? What do they do out the fact they want their whole team to
get together three days a week? So they do, they just eat the space on the Mondays and Fridays. Some
companies are never coming back, some jobs are never coming back. So the way we look at it, we have
some loans in the office space, we do feel like it’s like bottom fishing time. You know, we’re, we’re,
we’re, we’re taking back real estate now that is $50, $60 a square foot space for big beautiful buildings
that need to be re repopulated. But the, so the way we think about it’s this is that occupancy’s probably
gonna drop by a third, but it won’t be a third for everyone, right? In some places it’s gonna go to zero
and some guys they won’t, they won’t feel it. So asset selection becomes incredibly important. So
there’s
00:42:43 [Speaker Changed] A huge difference between the a class buildings and, and the B and C class.
And I’ve heard people say even within a, there’s a big range. There’s
00:42:52 [Speaker Changed] The super a stuff, you know, the one Vanderbilt thing at 200 bucks, a spec
foot spectacular, right? That you can’t get enough of it, but a block away, some traditional commodity
office space, that’s us, that’s a little drafty, whatever, right? You know, there, people just don’t want it at
any, at any price. So now that super a space is a very, very small fraction of the market. So it’s not, what
happens there probably isn’t gonna be sort of impactful. But we think that, you know, there, there
people have to adjust to a new normal of demand, like demand function for, for commercial real estate
has come down. Now, this is by the way, just another domino in a long series of what the Andreesen
Horowitz guys call software eating the world, right? This is technology eating real estate. And so if you
look at this over a longer period of time, the way we think about it is that technology ate retail and we
all kind of saw it, right? It was Amazon killed the, the shopping mall. Airbnb has eaten up a lot of hotel
demand. So technology matching a home to a, to a a rent or a leaser has eaten up a bunch of the hotel
demand. Now work from home is eating, is eating office. So we can, we kind of have a playbook for how
this goes. And it’s not great.
00:43:58 [Speaker Changed] And all of these are technology enabled. Without tech, you wouldn’t be
able to do this. The, the ironic thing is the, I I love people discovered like screen sharing in 2021, right?
That tech has been around for a dozen plus 15 years. Well,
00:44:13 [Speaker Changed] I know I think about the people that created Skype, they must be sort of
jumping off a bridge somewhere because, you know, you couldn’t give away Skype pre covid. And now,
now I don’t even have calls on my phone, my office phone ever anymore. Everything happens over
teams or over, over Zoom. So the behaviors changed so quickly, but, but I think that, you know, the CEO
from Cisco made a good point that the home has become the enterprise. And what he was saying is that
Cisco is seeing people buying really sophisticated communications equipment for their homes because
now they’re, they’re pushing the, they’re pushing their use case high. So for us it’s, it’s also kind of
fascinating, and this is a little bit about how the, the, the single family rental trade has become so
interesting is as people stop going out to the mall and they shop at home as high speed communications
allows them to stream at home as delivery allows them to eat at home, right there, these real estate
sectors are all seeing their demand dry up, the demand for usage, all of that demand is showing up in
the home.
00:45:10 It’s showing up in that, in that 1800 square foot three bedroom home because, and everyone’s
use case and demand for real estate’s changing because they’re spending so much more time there.
00:45:20 [Speaker Changed] So I kind of feel like a lot of those big technological shifts we’re, we’re post
the peak of that. Like I’m a big online shopper and I’ve kind of come to recognize there’s certain things
that you just can’t buy on online. Yeah. You
00:45:35 [Speaker Changed] Have, I have a tough time with clothes and things. Clo
00:45:37 [Speaker Changed] Clothes is a perfect example, right? A lot of times you order certain things
like it’s hilarious. You think you’re getting a four foot tall, you know, lamp and this into miniature, I guess
the photo is what the photo is. Yeah. There’s just no scale tape mail. Yeah, yeah. Tape measure next to
it, or really,
00:45:54 [Speaker Changed] But let me ask you about this because pre covid, you couldn’t have
convinced me I could buy groceries on an app. Oh,
00:45:59 [Speaker Changed] I was doing that, that, that was easy.
00:46:00 [Speaker Changed] Now, I don’t think I would ever go back to grocery
00:46:02 [Speaker Changed] Store. In fact, Amazon began that when they bought Whole Foods.
00:46:05 [Speaker Changed] So think about what that means. That grocery store, that grocery store
anchored retail. Ordinarily the grocery store space was underwritten at a loss by the real estate
developers,
00:46:13 [Speaker Changed] Right? Because
00:46:14 [Speaker Changed] That was your magnet.
00:46:16 [Speaker Changed] Now it’s your distribution hub
00:46:17 [Speaker Changed] And there’s no people. So what happens to the dry cleaner? What happens
to the ice cream shop? What happens to the t-shirt shop? What happens to the travel agent?
00:46:24 [Speaker Changed] They they have to adapt the same technology. Yeah. And do pickup and
delivery. So
00:46:28 [Speaker Changed] Com So e-commerce is changing, like the footprint for a business, it’s
addressable market. And so I don’t think this is over. I think that that the pricing of it, kinda like we
talked about, the loan starts, the loan defaults, and then two years later someone takes a loss. Today
we’re, we’re CPI prints higher than people expected because owner equivalent rents is higher. That OER
number was calculable four months ago. So the market does, it does, isn’t doing a good job of
forecasting what it already, what pricing and what it, what it already knows in many cases. And I think
that we’re still in the repricing phase of real estate for a new, a new type of demand. So
00:47:04 [Speaker Changed] Some of the solutions to these are wholesale changes to the way we built
out suburbia, which is so car dependent. I if we were creating these more walkable communities, like
back in the Andy Griffith days,
00:47:18 [Speaker Changed] It’s
00:47:18 [Speaker Changed] Fascinating. Suddenly you, it’s fascinating. Have you have retail that’s
survivable because everything isn’t getting your car and drive to target. That’s right. Or or have target
make a delivery.
00:47:28 [Speaker Changed] Exactly. So we spend, you think about how European cities work. That’s
that’s what they’re, that’s how they’re, that’s how they’re designed. So,
00:47:35 [Speaker Changed] So the question is, is that something we can build here? Is there an appetite
for that? Is there financing
00:47:41 [Speaker Changed] For that? So I’m spending a fair amount of time on just that. Is, is can you
respond to this? Should you respond to it? Because as you said, like, you know, maybe this is a flash in
the pan. If all the companies decide that employees have to come to work every day, then, then these
trends in occupancy will change and quantum of demand will change. But I recently was given a book,
and I read it, it’s a companion of essays called A City is Not a Tree. It was written in 1965. And it was
about this, it was about how, how a city should work to optimize the experience for its residents and
think of a city as a product. And so we give the speech to mayors when we’re asked about sort of how
we think about their city from a migration investment perspective. And we try to tell people that a city is
a product. So New York City is a product and the customers can choose a different product. And it’s, it’s
a great product. It’s one of the greatest products in the world. But like all customers and like all
businesses in all product delivery systems, you have to freshen your product to keep your customers
happy. And we see some cities doing that in some cities not doing that. So you have to modify, you can’t
just completely tear down and change.
00:48:42 [Speaker Changed] So, so one of my favorite YouTube channels is this kind of wacky Canadian
expat who moved to Amsterdam and it’s called not Just Bikes. And he talks about livable, walkable cities
and how different countries in Europe do a better job of it. And how there are pockets of it in the US
right? And, and North America. But they’re few and far between. Yeah, it’s really,
00:49:06 [Speaker Changed] I think it’s something we’re spending time on because we’re with our
vertical integration of manufacturing homes, building homes, real estate development, the ability to
monetize a home either as a sell to a consumer or a rent and have into an investor. It gives us the ability
to think big about development. And I haven’t seen anyone pull off yet. So the master plan community
of the United States, other than maybe the Woodlands in Houston, very few of them are actually master
plan for multiple product types where you have office, medical, civil, residential, entertainment, all kind
of thought about together the way you would, the way European cities were developed. But remember
Europe, like you said, you said a very key thing. European, European cities were developed before the
cars became
00:49:46 [Speaker Changed] Right, a thousand years.
00:49:47 [Speaker Changed] A lot of our cities stopped growing as core cities and started growing as
these suburban driven cities because of the car. And so this will be simple, this will be interesting to
think if will you reverse? And this is something that global real estate investors are thinking about on a
full-time basis. There was a paper written about five years ago, I think it was put out by the research
team, Prudential, and it was all about urbanization and all of the investment themes across our investor
base. The biggest investment in the world were very focused on urbanization as a global theme. And you
could see it in Southeast Asia, you could see it all over China. You could see it of course has happened in
the United States where people left the small town to go to the big city. Covid may have reversed one of
the largest global trends in investing in the last a hundred years.
00:50:27 It may have turned, it may have turned us from urbanization to, to de urbanization and the
impact of that. Now, I don’t, we’re not calling that just yet, but it’s probably one of the most important
things that people can focus on. Are we gonna shrink the size of these mega cities that all benefited
from urbanization for the last, you know, sort of 50 years in the US maybe the last 15 years in, in
Southeast Asia. So it’s an interesting time where the, where the, I wish I could tell you how it’s gonna
turn out, but there is a, the ball is bouncing around and we need to understand which way it’s gonna
land.
00:50:58 [Speaker Changed] Te tell us about Main Street renewal. What is that?
00:51:00 [Speaker Changed] So that’s the operating platform for the single fundamental business. That’s
our construction management, our real estate brokerage platform, our leasing platform, the customer
service platform. So that’s the brand name that the consumers see that our part, their operating
partners see for the whole vertically integrated single family rental strategy that’s basically analogous to
the entire ecosystem of the mortgage market wrapped up under one one corporate label. Huh.
00:51:25 [Speaker Changed] And we, we’ve been talking a lot about single family homes to be purchased
and rented a couple of years ago. 60 Minutes did a piece talking about, hey, is private equity pushing out
local buyers? I know you have an opinion on this. Yeah. Tell us a little bit about your experience with 60
Minutes.
00:51:42 [Speaker Changed] Sure, sure. So, so first of all, I love 60 minutes. I don’t know, it’s just ’cause
I’m finally old enough to age into their demographic, but I think it’s one of the best news shows on
television because in that 12 or 15 minute segment, they really can simplify a topic and make it, and
make it understandable to everyone. The topic of of where do we fit in the ecosystem of the single
family housing market is what we’re doing a good thing or a bad thing, obviously, you know, I’ve got a
couple thousand people that wake up every day and go to work. They don’t think they’re doing a bad
thing. So, so I can tell you our perspective of it, I can kind of give you both sides of the argument and
people can decipher themselves. I mean, part of the argument is that, that if, if am, if, if Sean buys the
home or if Amherst buys the home, some family couldn’t buy the home.
00:52:21 And it’s true that, that if we buy the home, no one else could buy the home. I’ll give you that
part. Now in the US we tracked the home ownership rate. Over time, the home ownership rate’s grown
to sort of mid sixties and bobble around it got really, really high when we were giving away mortgages in
2007. And then it came back down. But that number is, has been a six handle for the last 50 years, right?
So 60 something percent of people own their homes. The inverse of that number is the people that
don’t own their homes. So that number has, has been between 30 and call it 30 and, and 25% for a very
long time. So that third of, of of how, of families in the US that rent their home rent for a myriad of
reasons, one of the reasons that they rent is because they can’t get a mortgage.
00:53:04 And part of our bet in 2009 was that the group of people who were gonna be locked outta the
mortgage market is gonna grow substantially, partially because the standards became higher. And
partially because student loans became kind of a predatory financial product. So having a student loan
makes it way diff more difficult to get a mortgage. So in this argument of are we buying a home that a
family is not moving into? I, I put the paradigm in a slightly different way. When that home comes up for
sale, a lot of families show up that wanna live in that home. A group of those families show up and they
can get a mortgage and they can buy the home. A group of those families show up and they can’t get a
mortgage for that second group of families to get to live of that home.
00:53:43 And investors gotta buy the home. And that investor can be, and historically has been very
small investors, people that own one or two homes, maybe they owned a home, lived there, moved
away, kept it, rented it. And now through the tech, through technology and through significant
investment platforms like ours, allow larger investors to go and invest in that home. So when I sit down
with policymakers and they’re sort of, of this mindset that, that I should have stayed away and let the
family buy the home. What I like to do is say, look, can you guys just put together the pictures of these
two families and who’s gonna get to live in that home if, if the only people who can get a mortgage can
live there and who can live there if Sean buys the home? Because demographically they look more like
the people, the people that get served by the home when I buy it, look a lot more like the people the
government should be trying to help. And that usually takes people and they step back and they go, wait
a minute, what do you mean? I’m like, well, so Sean doesn’t live in 50,000 homes. Someone’s living in
there. And the people that live in those homes for the most part are not candidates to get a mortgage in
the 2024 mortgage standards
00:54:45 [Speaker Changed] Market. And, and it’s not because they don’t have a jobs and they aren’t
currently current
00:54:49 [Speaker Changed] On that. They’re paying $2,000 a month in rent. Our average customer only
pays 25% of their income in rent for $2,000. They cover everything. They cover the, the chance that the
AC breaks, they don’t have to pay for that property taxes, insurance, the whole nine yards. So right now,
the cost to rent is probably 30% cheaper than the cost to own. But more importantly, if you’re not given
a chance to get a mortgage, it doesn’t matter what the cost to own is, the cost for you is infinite because
you’re not allowed to, to get a mortgage. So when they, when Dodd-Frank passed and the standards for
mortgage credit became unfairly high, we said, okay, this is what’s gonna, this is what the nation has
decided it wants to do. Now against my advice, when I sat, when I sat at the Federal Reserve, I said, this
doesn’t have to happen this way. We can sort out for you what the good subprime was from the bad
subprime. People were like, we agree you can, but that’s not how policy works. That mortgage market
has been shut down and it’s gonna stay shut down.
00:55:40 [Speaker Changed] So, so what should we do to reopen that mortgage market for people who
are currently employed? Have a half decent credit
00:55:47 [Speaker Changed] Record. Now, now you’re ba we’re gonna need the two hours for the
podcast. I got a whole list of things we need to do. But the give
00:55:52 [Speaker Changed] Give us a short version.
00:55:53 [Speaker Changed] The the primary, the primary thing you have to do is you have to put risk.
You have to make risk-based pricing, legal in the US mortgage system, Dodd-Frank made risk-based
pricing illegal. So, so if someone comes in with a lower credit score, a higher likelihood of default, and
remember the likelihood of default could mean that they go from being 5% likely to 10% likely not 90%
likely. But if someone comes in that that has a likelihood to default above a certain level, the answer is
you can’t make them the mortgage
00:56:21 [Speaker Changed] At any price at any
00:56:23 [Speaker Changed] Price as
00:56:23 [Speaker Changed] Opposed to where it’s, I’ll make up a round number if we’re at 5%, they
could buy, get a mortgage at six and three quarters,
00:56:29 [Speaker Changed] Three charge. We used the, the rate used to be three points higher or two
points higher. So Dodd-Frank basically carved out the maximum premium you can charge to anyone.
And then they created recourse for the borrower. So I give this presentation in the UK and I gave this
presentation to France once and I said, okay, the US passed. They were like, why is the demand for
rental so high? And I said, well, people can’t get mortgages. I said, why? I said, well, Dodd-Frank created
a precedent that said that if I lend you money to buy your home and then you can’t pay me back, you
can sue me. And even in France, the guy would say, no, no, no, you mean the other way around? I lend
you the money you don’t pay. I can sue you. And I’m like, no, no. So there’s, there’s this concept that,
that that was part of the, the ether in the financial crisis that the banks were the approximate cause for
the default. And so the bank should not be allowed to make these loans. There were some bad actors.
That’s
00:57:23 [Speaker Changed] That’s a wild statement because as someone literally wrote a book on this,
banks did a bunch of stuff that wasn’t very smart, but it’s hard to say the banks making loans with
approximate cause. Now there was a handful of banks doing the ninja stuff and, but that was mostly
00:57:40 [Speaker Changed] There was enough bad acts to go around. The banks had culpability, the
securitization industry had culpability.
00:57:44 [Speaker Changed] Well, there’s a lot more.
00:57:45 [Speaker Changed] The serving industries had curb, had culpability
00:57:47 [Speaker Changed] The ratings agencies, the
00:57:49 [Speaker Changed] Rating had culpability. And this is what I spend time in Washington trying to
explain to people. But the consumers had culpability as well. Sure. So the, a lot of people with
fraudulent loans, 6, 7, 8 loans. So we bought a bunch of these loans. Something people don’t know is
that we audited 80,000 loan contracts that we bought and we, there’s a return to sender clause in
mortgage contracts that most people don’t know about. Right. And if the borrower defaulted and the
contract in a certain way, the person that sold you a loan has to buy it back. So in these 80,000 loans,
you kind of had sort of two big populations of, of predatory borrowers. One were the little mini, we call
’em the little mini Donald Trumps. They would have like 25 or 30 or 40 homes, no equity down. They’re
all rented, no management, kind of like Yolo of like if they go up, we’re gonna refinance ’em. If they
don’t, we’re gonna send the keys back in. And these were loans that were made with no equity from the
borrower, 80% first 20% second investor loans. And then, then there were a group of people who really
just wanted a house and they were willing to fib about their financial standards to get there. Right. And
so, and the banks and the mortgage originators, in many cases there’s 80,000 files. You would open up
the file and it would say the person was a dental hygienist and made a hundred thousand dollars a year,
00:58:57 [Speaker Changed] No documentation. And
00:58:58 [Speaker Changed] That loan was loan was approved. No, in the same file would be the
application that got denied that said that they were a dental assistant and they made $50,000 a year. So
they would give us the file that, so they
00:59:09 [Speaker Changed] Would, so so those were the, I heard stories at the time of the mortgage
brokers who were able to guide an applicant through coaching. Coaching, no, don’t write this, don’t
write, here’s what you gotta say. Absolutely. And basically, you know, we’re we’re co-conspirators to
fraud and you know, the
00:59:27 [Speaker Changed] Mortgage broker was making five or 6% of the loan amount. Right. It’s a lot
of incentives. So, so,
00:59:31 [Speaker Changed] So I blame them much more than the person who just did what they were
told. Right? They were wrong at this. Really, the professional is the one got a hold accountable
00:59:38 [Speaker Changed] At this point. I think that we’re hung up on who to blame, not you and me,
but if the market is not on who to blame and the market isn’t paying attention to who got harmed,
right? Because the, in the first degree, the person that got harmed was the person who who got
foreclosed upon and got evicted from their home. That’s a very clear harm to see. The harder harm to
see is the maybe 8 million families that haven’t been able to buy a home since this law went
00:59:59 [Speaker Changed] Tion. And it’s 15 years later.
01:00:00 [Speaker Changed] It’s, and there’s no progress. So the rental market has to grow. Institutional
capital is gonna play a, a part in every home transaction. Institutional capital has to be there to make the
loan if, if they’re not gonna buy the home providing service to the third of American families who rent
for various reasons. Now, about a third of our customers or 20% of our customers move out every year.
So they were never like long-term committed to that location to begin with. The, the credit scores of our
customers suggest and the financial condition of our customers suggest it would be very difficult, if not
impossible for them to get a mortgage on average. So this is the solution for people to move out of the,
the, the other thing people think about is that it’s okay to rent apartments. So that’s socially acceptable,
right? Right. To invest in apartments and rent them.
01:00:44 But apartments are primarily one and two bedroom products. So we’re a three bedroom
product. So as you age out of an apartment or you need more space ’cause you work from home or you
have a family or whatever, and you age into the single family product, which is location driven, local
amenities driven, blah blah blah. Traditionally you would go and get a mortgage and buy. But that cross
section of the customer base that the mortgage market serves has shrunk so much that we set up this
platform. ’cause we knew they were coming, we knew that they’re gonna wanna live in that product and
they’re gonna need to get there with a different financial solution than a mortgage. So we developed an
institutional scale securitized financing vehicle for the pool of homes. We developed the services that
wrap around the pool of home to lower its cost of capital.
01:01:23 So the cost of capital for single family rental today is in the five, five point a half percent range.
Prior to us getting involved, the cost of capital for rental was probably 800, over 900 over because it was
provided by small investors taking very specific location risk. Now we can have a thousand homes. The
all the idiosyncratic risk is pretty much gone. So we feel very proud of what we’re doing and I wish that
the, the conversation about this crowd out, we feel focused more on the specifics of who didn’t get to
buy but who got to live there. And when people see that and they see that, oh wait a minute, you know,
these are 300,000 homes. These are not, you know, these, these are homes that, that bar that resident
would’ve a very difficult time getting into without us. And we were able to provide a really good service
at a very effective price for that customer base.
01:02:10 [Speaker Changed] That, that’s a really interesting answer to a complicated question. And it, it
still leaves open the problem that there are 8 million people that are, might otherwise be owners,
01:02:21 [Speaker Changed] Be
01:02:22 [Speaker Changed] Be be homeowners. But the rule change has pretty
01:02:26 [Speaker Changed] Much locked out. And the way I think about out the way you get my slip
box, but in the worst of the worst mortgage pools that we were short in the, in the sub and the, the
dirtiest of the pools were the, everybody was lying. The borrow were the banker, the securitizer
engaged, everybody was lying. The worst of the worst, about 35% of the loans defaulted, which means
that two thirds of even those dodgy things paid. So those are two thirds of those families got to get on
the economic ladder and own the piece of America because the, the third worked out so poorly we shut
out the two thirds. And that’s kind of the frustration i I had with Washington is like, guys, like I know
there’s the throw the baby out with a bath or whatever, but you’re throwing out, you’re throwing out an
opportunity for people to own a piece of the country and act as owners in their community because you
don’t have a good way to manage the ones that don’t work out. So we should be focused on what to do
when they don’t work out. We shouldn’t prohibit the activity because some of it doesn’t work out
01:03:19 [Speaker Changed] Well. Congress seems to have its act together. I’m sure they’ll work.
01:03:23 [Speaker Changed] I’m sure it’s next on the
01:03:23 [Speaker Changed] Docket. This will, right, this will, this will all be worked out. Alright, so I only
have you for a limited amount of time. Let, let’s jump to our favorite questions. We ask all of our guests
starting with what have you been entertained with these days? Tell us what you’re either watching or
listening to.
01:03:39 [Speaker Changed] Oh, wow. So I’m a very boring person. I spent a lot of my time buried in, in
data and analytics. I think that I really love the whole Yellowstone series. I’m upset that Costner backed
out because I thought the production quality was so good. So I’ve seen all of the, the pre the, you know,
the, the prequels and so forth under, on the entertainment side. I, I think that streaming has set a whole
new bar for, for quality of, of programming.
01:04:01 [Speaker Changed] Yeah. No, that’s, that’s absolutely on my list. Tell us about your early
mentors who might have helped shape your career.
01:04:09 [Speaker Changed] Wow. Well, so I’ve got a big family. I’m one of five kids. My parents were
serial entrepreneurs. I’ve got four big sisters. And so they, they’re all successful in, in various ways. And
so the family has always been the primary motivator. And, and leaders, you have to, in this, in our
business, you know, in finance who you marry really matters. So I’ve been married for 28 years and my
wife was in finance. She ran an investment management business, built it up and sold it. So having,
having support at home and having a real partner in the business is super, super important. Our jobs,
when you’re the founder of a business, you know, the hours are long and the mental exercise is
significant. So, so having the right teammate at home is, is absolutely paramount. I I was, I had a, a high
school economics teacher who later went, went to work for the Federal Home Loan Bank of Dallas
named Sandy Hawkins, who was just fantastic for a high school economics teacher.
01:05:01 She covered everything from Milton Friedman to, to free lunches in a way that made it fun for
high school kids. And I absorbed every second of that I could. And then I had this really unusual situation
because I was at this brokerage firm when I was very young and mortgages were just getting some
science around them. And I was always good at math and, and I had been writing code since I was in the
sixth grade. So I had real support around Wall Street. ’cause at the time there was a small club of, of
firms that were helping solve this problem together. And so I had a, a guy named Frank Gordon who ran
mortgage research at First Boston. That was just a great support to kind of bring me up up the learning
curve.
01:05:41 [Speaker Changed] Huh, interesting. Tell us about some of your favorite books and and what
have you been reading recently?
01:05:47 [Speaker Changed] Well, I mentioned I read a City is Not a Tree. It’s, it’s a little bit boring, but
it’s fascinating because I do think that there’s an opportunity for us to rebuild micro cities. So instead of,
instead of going to the, the exurbs and trying to adjoin a city, I do think there’s something that we’re
working on to just plop in the middle of nowhere and build a, a full standup city, which would be
fascinating. I, my, my daughter and I listen to crime junkies and the on the entertainment side, I think it’s
one of the most popular, other than yours, of course one of the most popular podcasts in the country.
It’s fascinating. It’s, it’s a couple of young women that, that tell the story of, of some sort of unsolved
mystery or solved mystery of, of real time. What do they call it there? It’s, it’s the real crime dramas. I
think it’s been pretty fascinating. And I’ve got, we have two kids, so my wife and I have, have a freshman
at Columbia and a sophomore at Stanford. So we’re spending a lot of time learning about the college
experience
01:06:39 [Speaker Changed] Freshman at Columbia. Oh, so you’re bi you’re back and forth. But
01:06:41 [Speaker Changed] My poor wife is on like the coast to coast tour.
01:06:44 [Speaker Changed] Are you, are you guys in Austin a lot?
01:06:47 [Speaker Changed] Home is in Austin. Home is
01:06:49 [Speaker Changed] In Austin. So you’re halfway. So it worked that way.
01:06:50 [Speaker Changed] Exactly. We’re equally or it’s equal travel to either place.
01:06:54 [Speaker Changed] And so our final two questions. What sort of advice would you give a recent
college grad interested in a career in mortgages real estate, CRE, any, anything along those lines? Yeah.
01:07:07 [Speaker Changed] Oh, so when, whenever we have interns come in or we have young
executives start, I buy ’em a couple things. So I buy them the, the Frank Zi handbook on Mortgage
backed securities, the, the Mortgage Backed Nerds Bible. And we, and I buy them a book, Bernstein’s
book called Against the Gods. And I really think that, and maybe it’s just ’cause I’m such a quant nerd,
but I think that against the gods, it’s a very small book, a a very quick read, but it does a really good job
of teaching people that you can apply quantitative analytics and probably a theory to almost anything
and to everything to your life decisions to everything. And I think it provides a nice paradigm in a world
where today it feels like because of the political environment, people are sort of, it’s black or it’s white,
it’s zero or it’s one and it’s never zero or one.
01:07:51 Right? There’s always some difference in between. So that’s, that’s a book that I think is sort of
required reading at Amherst to really understand the history of risk management, the history of
probability theory, how it first turned into what are the big mispricings have been. So I, it’s not a, it’s not
a super complicated read, but I think it does a really good job of taking people from thinking about the
world as trying to predict a thing instead of saying, wait a minute, there’s a range of things. Can I be
okay with a broad array of outcomes versus just betting on that one thing.
01:08:19 [Speaker Changed] And pretty much everything Peter Bernstein writes is great. It’s
01:08:22 [Speaker Changed] Awesome. The gold, the gold one’s even good too.
01:08:24 [Speaker Changed] And our final question, what do you know about the world of real estate
investing today? You wish you knew 30 so years ago when you were first getting started?
01:08:33 [Speaker Changed] Wow, that’s fascinating. The, the ecosystem of real estate has been hard
for me to follow, coming at it from the fixed income markets. So just understanding the various players,
what they do and how they’re motivated has been something I wish I would’ve just sat down and
mapped out early on because understanding how people are sort of economically rewarded really helps
you predict their behavior. And I was kind of confused by that for a long time, trying to pick the thing
that was the right answer instead of the thing that would’ve benefited the most people. It’s like in the
financial crisis, we were, we were short countrywide in scale, hundreds of millions of dollars and Bank of
America bought them.
01:09:12 [Speaker Changed] And I’m like, but for like next to nothing though, right? Well,
01:09:15 [Speaker Changed] But, but yeah, but it was worth less than nothing.
01:09:18 [Speaker Changed] Right?
01:09:19 [Speaker Changed] And so zero was a good, out was a good outcome for that thing. So at, so at
that point we realized that the consequence of countrywide failing was, was so great that the system
was going to find an alternate outcome. So we, we switched our thesis to that point to understand that
the value of an asset might have more to do with the consequences of that asset failing than the asset’s
actual probability of failing. And that’s something I wish I would’ve figured out before because it was like
that. So,
01:09:42 [Speaker Changed] So you and I could go down this rabbit hole because we were short. CIT we
were short Lehman and we were short a IG and a IG similarly to systemically important. Yeah. Couldn’t
be allowed to, to crash and burn. But what was so fascinating was, okay, how come Lehman Brothers
was left out to fall on its face uniquely Yeah. Amongst the giant financial players. And I have a pet
theory, which I’ve never been able to validate anywhere. People forget, you know, Warren Buffet very
famously made a loan to Goldman Sachs Sure. That at very advantageous prices got a nice piece of
Goldman gr great bit of business for Berkshire Hathaway. What people forget is a few months earlier he
had offered that deal to Dick folds, right. And Dick fo said, what is the soul man trying to do? Steal the
company, tell him to go jump. And once you turn down Warren Buffet, h how can the treasury
Department or the Fed Yeah. Write a, you know, a all right, we’re gonna bail you out of a couple
hundred billion dollars. Yeah, you, you, you had a chance to save yourself, but you waited for us.
01:10:54 [Speaker Changed] It’s super complicated. We were a little bit on the outside looking in on that
deal. We did Price Lehman, we priced Morgan Stanley for a lot of different investors. We bear Stearns,
the magnitude of the losses was hard to get your head around, but it felt like the capital markets had it
about right. So when Bear Stearns was sold, their CDS was trading 35 points up front for the senior
unsecured piece. So it’s meant that the bond portion of their capital structure had about a $65 recovery.
If you mark to market Bear Stearns, that was about right. But the consequence of wiping out the equity,
what, what would had effects that we couldn’t even years later I figured out what the effects were. But
like the, the, you know, it’s kind of like the old Annie Hall. Like there’s what they’re saying and then
there’s what’s in the subtitles, right? Like the macro of who owned the equity, who was gonna get
crammed down, who owned the fixed income, who was gonna end up with control. Like there was a
much bigger, that’s what I’m trying to say about what to learn, is that the first instance of what you see
of something probably is a fraction of the story
01:11:52 [Speaker Changed] For sure. And, and, and if you remember, oh, you have a weekend to figure
this out. Yeah, we, we expect a deal before markets open Monday, these
01:12:00 [Speaker Changed] These trillion dollar balance sheets full of complex liquid assets and you
have a weekend. So, so it was, it’s, I think that’s the thing is like, it’s probably never as obvious as it looks
would be one advice and, and to understand the whole ecosystem, not just one asset’s, you know, sort
of risk profile.
01:12:15 [Speaker Changed] Huh. Well, Sean, thank you for being so generous with your time. This has
been absolutely fascinating. We have been speaking with Sean Dobson. He is the chairman, chief
executive Officer and Chief Investment Officer at Amherst Group managing about $16.8 billion. If you
enjoy this conversation, well be sure and check out any of our previous 500 or so. You can find those at
iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Check out my new podcast at the
Money, 10 minutes of conversation about earning, spending and investing your, your money with, with
an expert. You can find that in the Masters in Business Feed, or wherever you get your favorite podcast.
Sign up for my daily reading [email protected]. Follow me on what’s left of [email protected]. Follow all of
the Bloomberg Family of podcasts at podcast. I would be remiss if I did not thank the correct team that
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is my project manager. Paris Wald is my producer, Sean Russo is my head of research. I’m Barry. You’ve
been listening to Masters in Business on Bloomberg Radio.

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