Executive Interview: Timothy J. Lebold

Timothy J. Lebold
Principal
Lebold Saha Asset Management LLC

Timothy J. Lebold graduated from San Diego State University with a Bachelor of Science degree in Business Administration with an emphasis in Finance. Upon graduation Mr. Lebold joined Prudential Securities (now Prudential Equity Group) where he was an Equity Associate. Working closely with the research department and sales traders, Mr. Lebold advised major institutions such as T. Rowe Price and Morgan Stanley. Following two years with Prudential Securities, Mr. Lebold joined a small, growing technology company in suburban Philadelphia. As the Director of Business Development, Mr. Lebold traveled the globe developing relationships and creating offerings for global technology innovators such as Qualcomm, Nokia and Symbian. While at NSTL, Mr. Lebold was responsible for new business development, managing a large service team and developing new offerings to service the ever-changing wireless industry.

After NSTL, Mr. Lebold left to pursue entrepreneurial endeavors and manage a growing investment portfolio. At that time, Mr. Lebold was managing his own, relatively large, equity and real estate portfolio. The portfolio has since grown into a variety of investment vehicles that have been investing in equities, fixed income securities, high yield bonds, real estate and privately owned businesses.

Q: How has your strategy changed as a result of the credit crisis? Have you expanded/narrowed your acquisition criteria? If so, to what, and why?

A: Our strategy has not changed one iota during the credit crisis. As value investors who focus on cash flow, our strategy never changes, we simply have to dial-back or rev-up expectations depending on the credit environment that we are in. We actually love the credit crisis (poor economy) as it has provided many more buying opportunities, whether distressed or otherwise. I believe Warren Buffett said it best a few years back: “We feel like mosquitoes in a nudist camp, there are juicy targets everywhere.”

Our only fear at this point is that the economy will turn around before we have the opportunity to execute on all of the transactions in our pipeline. Unfortunately, buying real estate is not like buying a stocks, there is just as much work after the transaction closes (to bring the asset to complete stabilization), as there is during the due diligence process.

Q: What is your favorite part of your job? Least favorite?

A: My favorite part of the job is two-fold:
1) Every day is different
2) Working with my business partner, Shamit.

The best part about my job, though at times the worst thing, is that every day is different. It forces you to never be in a rut. One day we are modeling different acquisition candidates, the next day we are writing our quarterly or annual letter, etc. But of course this variety requires constant re-prioritization of tasks. On the rough days, I sometimes think about how nice it would be teaching SCUBA diving in the Caribbean.

The other best part of the job is working with Shamit. We share the same investment philosophies, work ethic and interests (for the most part), however, at times we approach solutions differently and have varying views on investments and strategies. We challenge each other and therefore make each other better. Well, he makes me better. I hope I make him better. The jury is still out.

Q: Are you implementing any green technology into your assets? Do you think it is a good strategy economically? Why/why not?

A: We have begun looking into “green” technology, however we have yet to see a model that is truly commercial viable from an investment perspective. In general, we believe that the price of the technology (like with all emerging technologies) will come down, making the investment case viable. At this point, we believe there is not a first mover advantage from a consumer/investor standpoint. With that being said there are a few incremental revenue opportunities in the “green” space that do not require capital expenditures. We have begun looking into these for our larger properties.

Q: Real estate is cyclical. In terms of the specific asset classes you look to acquire, where in the cycle do you think we are right now? How long do you think it will take before we are at par again?

A: In talking about the real estate cycle, I believe one must discuss the general state of the economy. And one of my favorite sayings is: “If you ask 10 economists about the economy, you will likely get 13 answers.”

The real estate market had a large period of careless activity from roughly 2005 until early 2008. Simply, banks that should not have been loaning money were loaning to people who should have been borrowing allowing individuals and investors to buy houses or commercial properties that they simply could not afford or sustain. However, everyone was making money, so let’s put the lipstick on the pig and worry about it later. Was the tech bubble of 2001 really that long ago; has no one remembered it?

Sitting here in April of 2010 we are all well aware of the results. The good news is that we are positioned with a great deal of cash to sift through the rubble and make opportunistic investments, which we have been doing. Of course, we are not the only shark in the tank, and this glut of easy prey will not last forever. The economy will rebound; real estate prices will head north; and employment will eventually pick up.

We believe a full rebound will not happen in 2010. We should have another 12 months of tailwinds, allowing us to buy properties at significant discounts. The reason we expect tepid economic growth is unemployment. Yes, I said it, and some of you probably disagree. However, employment is at levels not seen in ages. This coupled with low productivity, means that the slack capacity will not be filled with new hires, but with raising productivity. Therefore, unemployment will not move all that dramatically; the consumer will continue to suffer; household net worth will not grow, so on and so forth. Our thesis is overly simplified, but we believe there are enough facts to bring us to this conclusion.

The lack of economic growth will also force banks to maintain their relatively tight lending practices, which in turn will keep potential homebuyers on the sideline. In addition, banks’ balance sheets will be mucked up thanks to the brilliant idea of “extend and pretend.” This is good for residential landlords, as the demand for rentals should increase in certain segments.

The general economic overcapacity that we have seen in the market/economy is correcting. However, this correction is a long process, with many moving parts from taxes to a company’s R&D spend. Remember, we just experienced the worst downturn this country has seen since the 1930’s. Once the overcapacity shrinks properly, the economy will rebound and prosperity will recommence. Subsequently, enthusiasm will ensue, another bubble will begin to form (read: overcapacity, again), and we will be back in a profitless market. Nothing quite fails like success. Shamit and I believe this is a good bit away, however, don’t be surprised if we are talking about some sort of bubble in the next few years.

Despite our forecast, and not to sound contrarian or pessimistic, we really like a rather weak economy for the sake of real estate investing. A struggling economy generally means that supply will stay relatively high, while demand remains low. However, rents on the residential side in the Philadelphia area have remained strong, which presents a great buying opportunity. Just as I always say after the holidays, we don’t want the sale to end.

Q: Both you and Shamit have Wall Street backgrounds (equity markets), yet you decided to start a real estate fund. Why?

A: Shamit and I both spent a good deal of time on Wall Street (Shamit more than me), and I believe that we both could argue that we could not have entered the industry at a better time to see how everything works, and in fact, just how broken the system is. In the nine years since we both started working at Prudential Securities, we have witnessed two bubbles (and subsequent bursts), an almost daily creation of new financial products and ultimately, everything that we learned in school has been thrown out the window.

The point that is most important is that finance and investing has changed. Balancing risk and reward is now more important than ever, which leads to the need for clear diversification in an investment portfolio, especially at the early stages of ones investment lifetime. This is very different from what is taught in typical finance classes around the world, where the lesson is take on more risk (high beta equities) and less diversification when you are young because your investment period is long and the peak will end up outweighing the troughs.

Most people do not realize that real estate (income producing properties) are one of the few, if not only, asset class that will decrease risk of a diversified portfolio, while increasing the overall return. And to be clear, we are referring to actually owning (or having a direct investment) in the asset, not necessarily finding exposure through REIT or other similar securities.

So with that in mind, we wanted to create a product that would provide an investor who wants real estate exposure in a passive fashion with an actively managed product. Given our backgrounds, our love for finance and our personal experience investing in real estate, it has been a very natural transition.

In short, invest in what you believe in. We believe in real estate and believe more people should have exposure.

Q; If you weren’t in real estate, what would you be doing with your life?

A: One plan I would like to execute is that of a business incubator to which investment/assistance is provided not based upon what I believe the investment will yield, but based upon how fun the business would be or how cool the product is. There are plenty of cool things that do not get developed because the business/service/product does not make business sense. So, I guess I should say that I would like to run a charity for entrepreneurs or creative people.

Additionally, if I have started this “business,” there is a rather high probability that I am semi-retired, or generally speaking have created enough wealth that there is not much “need” to work, and therefore I would travel a lot. I believe it would be fascinating to circumnavigate the world three times; once by land, once by sea and once by air. Further it would very fun to be the captain of each crusade, meaning drive the car/truck, captain the ship and pilot the plane.

Q: What keeps you up at night?

A: Nothing other than my cat, Kennai. Shamit and I have developed a business plan with vast attention to detail and have created an organization that allows us to do what we do best; invest, while folks like property managers (Icon Realty Group) execute on the property level. We have complete confidence in the team and are continually pleased with the performance of our assets.

However, on those random evenings when the cat does indeed wake me up, I tend to think about how we are going to find our next acquisition. Acquisitions are the oxygen of our strategy and we have a constant need to redeploy capital, albeit patiently and prudently.

Q: What do your weekend activities include?

A: On the weekends chances are that you will find me outside playing some sort or sport or riding my motorcycle. We have had a nice couple of months in the Philadelphia area, so it has been perfect for football, basketball, etc. I am really looking forward to the water getting warmer in NJ so I can go SCUBA diving.