CEO on Leadership: Michael Pelt, President and COO, MDH Partners
By: Ron Derven, contributing editor, Development
Michael Pelt is president and chief operating officer of MDH Partners in Atlanta. He oversees the company’s day-to-day operations, including compliance with joint ventures, lender requirements and property management. He is the former chief information officer and president of the office division of M.D. Hodges, a past president of the Georgia Chapter of NAIOP and a former instructor for the CCIM Institute. He is a licensed real estate broker in Georgia, holds a Bachelor of Business Administration degree from the
University of Georgia and a Master of Science degree in real estate from Georgia State University.
Development: As COO, what are your core areas of focus?
Pelt: Our company’s current focus is on buying and accumulating vacant industrial buildings, leasing them up and packaging them for sale in portfolios. Our goal is to achieve opportunistic returns, which we generally define as an internal rate of return of 20 percent or greater and a doubling of the equity that is put into the transaction. Since starting the business in 2005, we have hit those return requirements on all of our transactions. I have two partners in the company, Jeff Small Jr., chairman and CEO, and Phillip Hight. We have intentionally stayed a small company, so we each wear a lot of hats and outsource all support services.
Although we handle all real estate activities (from property acquisition through lease-up and sale), the activity most important to our success is property acquisition. We have all heard the truism that you make your money when you buy real estate; you just get paid when you sell it. Because of that, we tend to be quite careful and never compromise our underwriting on an acquisition, even if a particular asset begins to get a lot of competition. We operate our business in programmatic joint ventures with institutional equity partners; we make decisions that are in the best interest of our partners and trust that success for our firm will follow. We have had the great fortune to partner with outstanding companies like Blackstone Group and, most recently, Wells Fargo Real Estate Capital. Our JV partner relationships are very strong today because we strive to be the best local operating partner for their real estate and to gain their unconditional trust in us as fiduciaries of their money.
Development: What qualities do you look for when you hire senior staff and outsource activities?
Pelt: Versatility and integrity. On the versatility side, in that long (three- to five-year) period when we are acquiring properties, leasing them up and selling them, there are a handful of fun, “sexy” aspects of the job, such as sourcing acquisitions or executing large leases — but there are many more activities that are more mundane but just as important. We need people willing and able to work on everything, not just to fill one role.
Regarding integrity, our business relies on institutional capital; therefore, everyone in the company must put the interests of the equity partners ahead of company and personal interests if we are to be effective stewards of the equity partners’ money. We look at everything through the eyes of the equity partner, not just what kind of commission or fee a transaction may generate for us.
Development: Looking out three to five years, what do you see on the horizon that will impact the industry? What are you doing today to prepare for those impacts?
Pelt: Real estate is much more reliant on institutional capital than in the past. Institutions have much more stringent contractual requirements, more extensive reporting and oversight than, say, local equity investors. Institutions also have increased internal sophistication (both staff and technology) compared to years past. Local real estate operating partners historically have resisted or avoided this type of oversight where possible. Since we have always worked with this type of equity partner, it is not a transition for us.
Development: How has the industry changed during your career?
Pelt: In many ways, the industry has not changed; in other ways, it has changed dramatically. The fundamentals of real estate are much the same as they were: it is still a very local business, it is a supply-and-demand driven business with a lot of “blocking and tackling” activities that have remained unchanged. But it also has changed dramatically. For example, when I got into the business in Atlanta in the early 1980s, the major office and industrial real estate companies were family businesses run by strong individuals like Frank Carter, M.D. Hodges, Harvey Mathis and Mack Taylor, to name a few. Today, these companies either no longer exist or, if they do exist, they are run by more traditional corporate structures and decisions are made by boards, committees and departments rather than by an individual. Also, when I got into the business a large portion of real estate returns came from tax loss write offs or shelters. It was typical to pass some of these paper losses along to the executives of the local operating partner as part of their compensation. At that time, many transactions were driven by tax shelters and not by real estate fundamentals. That all ended with the Tax Reform Act of 1986. Today, returns are almost exclusively from cash flow and reversion/sale, which I think provides a healthy alignment of interests between the local operating partner and the institutional investor.
Development: What is the most valuable lesson you’ve learned over the course of your real estate career
Pelt: I have learned two valuable lessons. First, our industry is capital intensive; therefore, we need other people’s money (OPM). The most fundamental principle you must live by if you want long-term success is to always treat your investor’s money like it is more important than your own. Second, my undergraduate degree was in risk management. While I can’t remember much from the insurance courses, I apply the “rules of risk management” to every decision I make: 1) Don’t risk a lot for a little, 2) don’t risk more than you can afford to lose and 3) consider the odds. These rules apply to financial and nonfinancial decisions. Sometimes deals can get quite complicated and external pressures begin to drive deals in one direction or the other, so it is comforting for a simple-minded person like me to fall back on these simple-minded rules.