Interview 004_Thomas W. Pulley
Dec 25, 2011
byInvestment in Japan
Company: Fortress Real Estate (Asia)
Thomas W. Pulley is a Co-Chief Investment Officer of funds in the Credit Funds group at Fortress Investment Group LLC, and is also a member of the firm’s Management Committee. Mr. Pulley joined Fortress in October 2007 from Credit Suisse where he was head of the private equity division in Japan. In 2000, Mr. Pulley moved to Japan to build and manage the Asian Investment program of DLJ Real Estate Capital Partners (RECP), a real estate private equity fund organized by Credit Suisse. Mr. Pulley was one of four designated key men for DLJ Real Estate Capital Partners III and a member of its Investment Committee. Prior to its initial public offering, Mr. Pulley was a director of E House, a leading real estate services company with offices in 20 Chinese cities. Mr. Pulley has over twenty years of experience of real estate investment expertise, having started his career at Bankers Trust. Mr. Pulley received a B.A. from University of California at Berkeley and an M.B.A from the Wharton School of Business of the University of Pennsylvania.?
Please describe your investment philosophy, the background on why you have decided to focus on the Japanese real estate market through debt, or in other words, Japanese debt opportunity backed by hard assets.
First, I have been investing in Japan for over 10 years and think that Japan (Tokyo especially) has one of the best real estate markets in the world for investors given the relatively low vacancy rates and natural barriers to supply. Given the distressed part of the cycle since the Lehman shock, we have found that debt offers the best method to acquire assets and benefit economically from the cash flow and residual value associated with the properties. When purchasing debt, one of the most important tasks is to develop a conservative estimate of cash flow and value. Tokyo generally offers this ability given the real estate characteristics of low vacancy, relatively low supply, and clear creditor-debtor laws. In purchasing debt or assets directly, our investment philosophy revolves around cash flow. This is especially true given that the economy is tepid. We focus on the ability to earn profits even if the property does not appreciate or we have to wait to sell the underlying asset. We also believe that given the lack of attractively yielding investment products in Japan, that institutional investors will continue to increase their investments in cash flow yielding properties. Fortress Japan Opportunity Fund’s (“FJOF” or a “Fund”) investment philosophy is to draw upon Fortress’s worldwide expertise in debt investments, real estate valuation, credit analysis, complex structured finance, asset management, and public equity markets to execute Fortress’s Japan strategy. Fortress strongly believes that Japan is in the phase of the cycle which is characterized by low prices for real estate-related investments due to finance companies becoming forced sellers, as well as many banks and investment banks transitioning from buyers to sellers in order to clean up their balance sheets. Furthermore, it is expected that \2.9 trillion of Japanese CMBS and structured finance products are scheduled to mature over the next several years, whereby many of these obligations under such CMBS will either go into default or require modification. Thus, with such factors serving as a backdrop, Fortress expects that pricing in many cases will reflect substantial discounts to in-place rents and collateral values which will lead to compelling opportunities in investments in real estate loans and real estate related assets.
Please let us know where you find investment opportunities today. What is attractive for you?
We continue to find attractive opportunities purchasing real debt collateralized by real estate and related opportunities. Moody’s refers to 2.6 trillion of CMBS loans maturing in the next three years, where only 26% will likely be refinanced. We have purchased loans from these structures and believe this will be an increasing opportunity as the special servicers have largely delayed realizing the loan upon a loan default, but the maturity of the CMBS bonds are approaching and there is increasing pressure for a realization. This is the mostly wider quoted number for distressed real estate debt in Japan given the public information available. However, Fortress believes the CMBS inventory is only approximately half of the distressed debt given the additional loans on foreign and domestic banks’ balance sheets as well as in other funds and finance structures. We have also seen that certain real estate intensive companies or projects need capital and believe this provides another opportunity set. We have also developed our reputation as a reliable partner in the Japanese business community and have found great partners, banks, and institutions to work with.
Please explain why you have decided to be a portfolio manager.
I continue to enjoy the challenge of investing capital in real estate and debt. I started my career during the U.S. Savings and Loan crisis where we were evaluating real estate during the depths of the real estate doldrums. The main challenge is to figure out what the proper value is and executing on a business plan. I also enjoy trying to earn a good return for the various investors including pension funds and other institutions.
What is your belief as a portfolio manager? What do you try to achieve and what you would never do?
As a portfolio manager, I continue to focus on opportunistic deals through debt and real estate. As an opportunistic portfolio manager, I need to be open-minded and cannot immediately turn a deal down as there could be hidden gems that we can recover with some creativity and effort. I believe Fortress is one of the best firms at finding those gems in what looks like a difficult situation. Fortress has done this here in Japan with many of the loan pools purchased over the past couple of years; and has also done this continuously in the U.S. and Europe. However, I doubt we would ever make an investment like an option or a bet where we could lose our investment, but make a lot of money. This is why we have continued to use conservative leverage, focus on our base case returns and trying to create a few upside options where we could do better.
Please recommend your favorite books on investments, and the reasons you favor them.
Two books that I recently read stand out: Snowball, the biography of Warren Buffet, and The Big Short by Michael Lewis. Both books deal with recent market history and the lessons learned from these experiences greatly reinforced my investment philosophy. What is interesting about these books is that they describe two fundamentally different investment approaches. Warren Buffet’s approach is to focus on fundamental value, cash flow and barriers to entry as providing the basis for his investments. To great success, Warren Buffet applied this investment approach across multiple market cycles including the go-go ‘60s, the stagflation of the ‘70s, to the takeover era of the ‘80s to the Internet and then housing bubbles of the last twenty years. The Big Short, on the other hand, describes a period of extreme market volatility where excessive leverage and complex structures fueled a global bubble in asset prices, which then collapsed. Investors during this period were momentum investors, where capital flows drove violent changes in value. Those investors who bought on the way up lost a lot of money and those who sold short on the way down generated huge returns. With our fund, we are focused on sustainable cash flow and low leverage as providing the rational for our investments. If we successfully apply the lesson learned from Warren Buffet, we will not need to time the market, but rather have a portfolio of diversified investments secured by hard assets which provides great staying power independent of short term market moves.
Please recommend any media source (newspaper, journals and website) you check on a regular basis.
Nikkei Real Estate Market Report
Various research reports / websites including (CB Richard Ellis, Sanko Estate, Miki Shoji, Jones Lang LaSalle, Japan Real Estate Institute, etc.)
That’s all the questions we have. Thank you very much for your cooperation.
Managing Director, Investment and Research
This article originally appeared on March 1, 2011. Any views presented in this article are as of such date and are subject to change.
This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.