10 Things You Need to Know About Paladin
Here at Paladin, we have a long track record as a U.S. SEC Registered Investment Advisor and fiduciary to institutional clients and family offices. These partners have come to know us well over the past three decades. They’re familiar with our company’s history, as well as our culture and what continues to drive us today.
As we expand our investor base and begin working with new family offices and individual investors, it’s equally important to create these bonds. In this article, we provide a behind-the-scenes look at Paladin. We hope this helps to paint the picture for who we are as a company as you consider your investment alternatives.
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Our founders have touched nearly every aspect of the real estate industry.
We would argue that there’s no better education than hands-on experience. Our founding partners have been engaged in the real estate investment industry for 30+ years, well before they formed Paladin in 1995. Their experience touches nearly every aspect of the real estate industry, from real estate investment banking to acquisition and investment, property management, property management, lending, development, asset management and more.
Jim’s big-name banking experience.
Jim Worms, Paladin’s Chairman and CEO, is trained as a lawyer and Certified Public Accountant, but he spent the bulk of his early career as a partner at two global real estate firms, Eastdil Realty and Salomon Brothers. While serving as a Managing Director at Salomon Brothers, Jim co-managed the firm’s worldwide real estate investment banking and principal investment activities. This early institutional exposure continues to influence Paladin’s evaluation of equity risk, disciplined investment execution, and conservative, thoughtful use of leverage even today.
Fred’s stroke of good luck.
While Jim was immersed in the global institutional capital markets in the late 1980s, Fred Gortner, Paladin’s COO and Head of U.S. strategy, was busy getting his hands dirty as a property manager and real estate syndicator in Southern California. After graduating from business school, Fred teamed up with one of his college friends to launch a local property management company. Their first client? That friend’s family, who then owned several Class B and C apartment buildings in Los Angeles.
This stroke of good luck was not lost on Fred. Despite his lack of experience at the time, the family office was impressed by Fred and his partner’s business plan for renovating and repositioning each property. They took a leap of faith when they hired Fred, but it’s a leap that has since paid tremendous dividends. Today, over thirty years later, those same properties are still held by that family office and provide continuing durable income streams and long-term value appreciation.
Paladin has a proven track record, with nearly $7 billion of real estate investments in 8 countries across the Americas.
Anyone who is considering investing in a real estate fund, syndication, or investment partnership will want to conduct thorough due diligence on the sponsor. We welcome those inquiries as we are extremely proud of our track record.
Since our founding in 1995, Paladin has invested in $7 billion worth of real estate investments across a range of property types and strategies. Two thirds of this investment activity has taken place in seven Latin American countries. We were one of the pioneers in developing for-sale, affordable housing on a broad scale across the region, including markets like Costa Rica, Brazil, Chile, Colombia, Mexico, Uruguay and Peru. In places where others saw obstacles navigating a myriad of complex legal, tax and regulatory regimes, we saw opportunity. We realized that the main barrier to entry in these markets was due to lack of experience with the management intensive nature of the business. We dedicated the resources needed to learn how to successfully invest in these markets, built up seasoned teams in four regional offices and, in turn, have successfully developed approximately 40,000 housing units.
Domestically, we’ve focused our efforts on value-add workforce rental housing in high-density, land-constrained markets like Southern California. To date, we’ve made 90 value-added apartment investments across the U.S. totaling over 15,000 units and nearly $800 million of cost. Our Southern California investments have been among our best performing to date.
Managing through multiple real estate cycles has taught us to be conservative.
In the 1980s, we (Jim and Fred) were both working for large financial institutions that made or arranged financing for real estate developers. Oftentimes, we watched in amazement as various lenders made construction loans in excess of the actual development cost of the project. For example, if a borrower needed $100 million to develop an office building that an appraiser said would eventually be worth $125 million upon completion and lease-up, many banks would routinely offer loans of $103 million, and then pay themselves a $3 million origination fee. Many lenders in those days, particularly Savings & Loans, focused on volume (i.e. market share) rather than security and profit. Developers often had little of their own skin in the game, and were happy to take the money, since it was only the S & L’s money at risk.
When the Savings & Loan crisis finally experienced reality in the early 1990s, the markets tumbled. Real estate values plummeted and many of those loans went into default.
Our front row seats during this time taught us important lessons about the dangers of too much leverage and not focusing on downside risk. It led us to be conservative with our own investment capitalization as well as require any development partners to have substantial amounts of their own capital at risk. Equity returns can be benefitted by prudent leverage, but too much debt, or poorly structured debt, can wipe out invested equity quickly during a market downturn. We always make sure our deals pencil out on an unleveraged basis before considering how much and what kind of debt financing to put on a property. If the unleveraged project-level economics are attractive, then the equity returns should be equally attractive using relatively conservative amounts of debt. When it comes to debt financing, we favor fixed rate loans with durations matching our expected holding periods, and we ideally structure these loans such that debt service is substantially covered by current cash flow. We realize that most investments will eventually experience a market cycle and we want our deals to weather those disruptions while preserving invested equity.
We don’t compete with institutional buyers for deals.
Commercial real estate, especially the multifamily sector, has experienced a massive influx of institutional capital over the past few decades. Institutional buyers who have a tremendous amount of capital they need to invest will generally avoid smaller properties, pay more for a property, and be willing to hold a property longer than we would, reducing profit margins and heightening the risk if projects go off plan. These buyers will accept lower proforma returns than we would. This makes it difficult to compete with institutional buyers—so we don’t.
Instead, we focus our efforts on markets and strategies that have high barriers to entry for institutional capital where we can achieve better returns. For example, despite strong demographic demand for workforce housing in Latin America and among the most compelling project-level economics in the world for such investments, there are very few institutional investors pursuing this strategy in the region. This is because the average equity investment is only about $5 million. Scaling up an institutional-quality portfolio in Latin America is quite difficult and a management-intensive undertaking. This dearth of institutional capital creates a competitive advantage for firms like Paladin who have hands-on experience with building smaller asset portfolios such as we create with workforce housing.
This same dynamic creates a similar opportunity for workforce rental housing in Southern California. There is very little developable infill land remaining in greater Los Angeles. The existing rental stock was largely constructed in the decades after World War II and consists mostly of smaller low-density assets, typically 50 units or less. As a result, most large institutional investors view the Southern California apartment market as simply too management intensive, with a large and fragmented pool of smaller properties, often exhibiting substantial deferred maintenance due to their under-capitalized and less sophisticated “mom and pop” owners. This creates an substantial competitive advantage and asymmetrical value proposition for firms like Paladin who are experienced in increasing cash flow and residual value for these fatigued, under-performing properties.
We believe that it is critical for sponsors to have “skin in the game”.
One of the lessons we’ve learned is that, whether we are the developer/operator or providing joint-venture equity along with a third-party operator, it is important for the principals of the sponsor to have “skin in the game”. Sponsors who have a meaningful amount of their own equity invested in their deals are generally more motivated to outperform in good times and stay the course in more difficult or changing economic conditions. A sponsor who has no personal capital at risk – in other words, a “free option” on the upside – could easily lose focus with an investment that has experienced any difficulties.
We (Jim and Fred) saw this in real time in the late 1980s and 1990s. In those decades, the debt markets were freewheeling and capital abundant, such that many sponsors were able to obtain financing for an investment without contributing any of their own equity. This occurred again in the early 2000s in the lead-up to the Global Financial Crisis. When the market ultimately turned some sponsors simply walked away from their investments, leaving lenders with large losses. This why we believe it is essential for sponsors to have their own money on the line, alongside any other investors or lenders. Having “skin in the game” is one of the best ways we ensure an alignment of interests with that of our investors.
We avoid trying to hit home runs and prefer singles and doubles.
In many respects, Paladin’s investment approach is rather boring. We primarily target workforce housing strategies that most institutional investors find too management intensive. The ground-up affordable housing developments we build in Latin America are underpinned by great demand, cycle-resilient demographic tailwinds, high profit margins and low leverage – a very different proposition than the typical for-sale home building development in the U.S. or other developed markets. The smaller Class B and C rental apartments we acquire and renovate in Southern California have similar risk mitigating characteristics: favorable supply-demand fundamentals combined with the cost of existing assets well below the cost of new construction. These assets are generally not pretty and would look out of place on a glossy corporate brochure or website. But, importantly, the downside protection offered by our strategies has proven to be attractive to our investors. Carefully identifying and managing the risk of the investments we acquire, aiming to hit steady singles and doubles with proven strategies, rather than swinging for the fences, is fundamental to our goal of preserving invested equity while making steady returns.
We rely on fundamental market research and know how to read through the headlines.
Paladin has been investing in the United States and Latin America for nearly three decades. Our current focus on workforce housing investments in these markets, particularly Southern California, is the product of extensive experience investing across multiple product types and markets, as well as a research-driven approach towards formulating effective investment strategies.
Still, in recent years there has been no shortage of media headlines about the negative effects that the pandemic, politics, housing shortages, rent control and taxes are having on our target markets. It’s no wonder that some people are often surprised to learn that we remain big believers in California—specifically, Southern California – and Latin America.
Our view on this is simple: the primary aim of media headlines is to sell a subscription to the media product, whether digital or hard copy such as a newspaper. So, it is not surprising how frequently the headlines mask, or miss altogether, the underlying facts and significant market opportunities that exist in these markets. Take rent control for example. To the casual newspaper reader or less sophisticated owner of smaller apartment properties in Southern California, rent control is another complex, confusing and burdensome regulatory nightmare to manage. In reality, rent control helps create the market conditions for exceptional value-added investment, limiting additions to supply, and generating exceptional returns with limited downside risk, provided you have the knowledge and experience to navigate the nuances of varying rent control regulations across different submarkets.
We are a U.S. SEC Registered Investment Advisor (RIA).
Since 1995, we’ve invested in over $6 billion of real estate in eight countries across the Americas. The majority of this capital has come from pension funds, endowments, foundations, other institutional investors and family offices. Although we were not required to become a Registered Investment Advisor (RIA) at the time – a formal designation conferred upon certain investment managers by the U.S. Securities and Exchanges Commission – we felt it was best practice to do so.
As an RIA, we have certain obligations and fiduciary duties to our investors. Among other things, we are required to always put the interests of our clients first, be thorough and transparent in our marketing materials and other communications with current and future investors, follow strict ethical standards and codes of conduct, and maintain accurate books and records that are subject to SEC review. Being an RIA is considered the gold standard among institutional investment managers, and is something that our individual investors benefit from, as well. We treat all our investors the same way, regardless of their size or level of sophistication.
Our corporate values always guide our actions.
All decisions, large and small, are grounded in three corporate values: integrity, perseverance and focus.
- Integrity: At Paladin, we believe in doing the right thing—always. First and foremost, this means doing what’s best for our investors. It also means being honest and fair in our dealings with any joint venture partners, brokers, property managers and other industry stakeholders.
- Expect Change, Plan for It and Persevere: The real estate business is incredibly dynamic. Markets conditions can abruptly change overnight (e.g., the COVID pandemic) and at the deal-level, we get thrown curveballs all the time. Technology seems to have sped up the pace of change today relative to decades past and certain disruptive technologies are permanently upending many sectors of the real estate market. To be successful over the long term, you must know how to recognize and anticipate changing market conditions, and then shift and adjust your investment strategies at the right time. We’ve always loved the challenge of doing this and believe it is our culture of nimbleness and perseverance – a drive to keep moving forward – that allows us to thrive during challenging times.
- Focus: We have learned that we cannot be all things to all investors. We’ve also learned that superior investment performance is often the product of a focused and disciplined investment strategy. That is why Paladin had grown into a boutique investor in workforce housing and other niche strategies across the Americas. We focus our efforts where we have a proven track record of performance – markets with high barriers to entry and where our expertise and experience give us a competitive advantage.
We live and breathe these corporate values every day; they are simply at the core of who we are.
Culture matters. We have a team of superstars—without the superstar egos.
We learned long ago that culture matters within any organization. What we’ve tried to do at Paladin is build a team-oriented culture - made up of superstars - but without the superstar-sized egos. In our experience, unchecked egos can have a negative impact on corporate culture and the motivation and productivity of employees.
Some degree of turnover in management is always to be expected for a firm of our size (25+ employees), especially since we’ve been around for nearly three decades. What we’ve found is the need to strike a balance. We aim to empower our team members with the discretion to succeed on their own, while providing sufficient hands-on managerial guidance and resources to bolster their success and work towards a common cause. This approach gives people room to grow in their careers, while also benefiting from our experience and lessons learned.
We’re proud to say that this approach continues to be working. Our corporate culture has never been stronger and, as a result, the performance of our investments has never been better.
If you’re considering investing in a real estate fund, limited partnership or other syndication, be sure that you conduct thorough due diligence on the sponsor, whether it be Paladin or another firm. The sponsor is responsible for determining strategy, making the right investments and overseeing all day-to-day real estate activities. It is the sponsor with whom you are entrusting your hard-earned capital, so you want to be sure that sponsor will always act as a good steward on your behalf.
Take the time to learn about a sponsor’s history, their track record, and their business strategies going forward. Importantly, you will want to make sure that their values and goals are aligned with your own.
We hope this peak under the hood at Paladin has been insightful. Interested in learning more? Contact us today!