Walking away from the opportunity to take over his father’s successful architecture practice in favor of a position in the real estate group of a large Wall Street investment bank was a pivotal decision for Spirit Realty Capital, Inc. (NYSE: SRC) President and CEO Jackson Hsieh, who believes that in order to truly succeed you must have passion for whatever career path you choose.
Training as an architect at the undergraduate and graduate level did give Hsieh a grounding in three-dimensional problem solving, but after completing his studies he knew that ultimately it was not what he wanted to pursue. The opportunity to work for a real estate developer during graduate school, which involved leasing up a vacant office building as well as pre-development work, set the wheels in motion.
“I loved designing buildings and I still have that passion today, but what I learned working in the business of architecture is that I really wanted to be on the ownership side or on the developer side of that asset. I wanted to be the one that determined the course of the design and the leasing, and how things were financed, versus just being in one part of that building’s puzzle,” Hsieh says.
Despite receiving job offers from real estate development firms, Hsieh decided to work for the real estate group at Salomon Brothers, Inc. in 1987. “My investment banking career actually was really quite a surprise to me. I didn’t plan on doing that and it also surprised me by the amount of years that I stayed in the business.” After 30 years on Wall Street, in various roles, Hsieh made another transition—this time to the c-suite.
Hsieh recently spoke with REIT magazine about the changes underway at Spirit Realty, how net lease has evolved over the last decade, and why golf has untapped potential, among other issues.
What were your initial thoughts about heading to Wall Street rather than accepting an offer in a real estate development firm?
I remember speaking to a couple of alumni from the architecture program who had switched over into the real estate business. I also spoke with Camille Douglas, who was at Olympia & York at the time. She told me that it was going to be very uncomfortable, but that I would learn a tremendous amount about finance that would help me when, ultimately, I got into a real estate company. So, I ended up taking that job and the funny thing was I had so much fun in that business. I spent almost 30 years in that career.
Another big career change was leaving Wall Street for Spirit Realty in 2016. What attracted you to this position?
When Spirit went public in 2012, I was one of the senior bankers working on the IPO. After the company completed its IPO, I was hired by another company as their M&A banker to try to sell the business. That company was Cole Credit Property Trust II, a public non-listed REIT with about $3.7 billion in assets. The long and the short of it was that I was able to get the former CEO of Spirit to enter into a $7.4 billion stock-for-stock merger agreement roughly three months after the IPO.
After that I was involved in most of the major capital market transactions for Spirit. The board knew me and obviously the management team knew me, so joining the company was a very easy fit when the timing was right. My prior years of working in investment banking and getting all that experience was actually precisely what Spirit needed when I joined.
During my banking career, I had experience building global real estate teams at UBS and at Morgan Stanley. I was also completing high profile merger and restructuring assignments. Getting all kinds of different experience, watching people make good decisions, watching decisions that were not so good, was just a great laboratory for me to learn from.
Was there anything you weren’t exactly prepared for?
One of the things I hadn’t had experience in before Spirit was buying commercial real estate. It really took me constantly asking a lot of questions, asking the right questions, and then developing confidence and finally demonstrating a successful investment track record for our shareholders and board. That took time, but I believe I’ve developed that since I’ve been here.
What were some of the initial tasks you faced when joining Spirit Realty?
Those first several months were a really important time for me. I was able to identify numerous areas for improvement in processes and to utilize more technology to help us make better-informed investment decisions.
During that time, we started to make significant process and senior personnel changes for the company. We changed our head of acquisitions, head of research, head of credit, head of asset management, and CFO. It was quite a substantial change.
Today we are a very efficient, very informed team with the ability to make decisive decisions based on changing market conditions. Executing all these spinoffs and personnel moves all at the same time was something that really brought about the current leadership team that we have today. I’m quite blessed to have this leadership team that I work with around me.
How important was the spin-off of SMTA REIT in 2018 in terms of where Spirit sits today?
The successful $2.9 billion leveraged spinoff and sale of SMTA and the $1.1 billion sale of other non-core real estate assets was actually crucial and probably one of the most important things that I and my team have done for shareholders.
By September 2019 the company was a little bit smaller. We were at $421 million in rents versus $600 million prior to the spin-off, but those rents were primarily from larger or more financially robust tenants. At that time, approximately 48% of our rental income came from publicly listed companies. We had very little secured debt and our debt to EBITDA was four times versus six-and-a-half times previously.
Can you talk about how Spirit’s portfolio has evolved during your tenure?
Since I joined, we’ve acquired $4.8 billion of real estate assets using our proprietary ranking process and technology tools. Of that $4.8 billion of assets, 55% were designated as retail assets. 32% were industrial, and 12% fell in the ‘other’ category. There’s been significant change, essentially it’s been a wholesale transformation of our business.
The share of large revenue, public tenants in our portfolio increased from 36.7% of rent in 2017 to 53.4% today. We’ve got better credit, better wherewithal, and more sophisticated operators. The top three tenants today are Lifetime Fitness, followed by Invited, formerly ClubCorp (an owner and operator of private golf and country clubs), and then BJ’s Wholesale Club. It’s a very stable, diversified portfolio.
What changes have you seen in the net lease sector over the last decade?
Ten years ago, net lease property acquisitions, particularly in the retail area, were largely dominated by public non-listed REIT platforms. CMBS debt was really only possible for net lease assets that had over 10 years remaining on their lease. It was really a more challenging financing environment for net lease assets.
Fast forward to today and liquidity in the public and private institutional and exchange buyers has increased dramatically for the net lease asset class. Today you’ve got sale-lease back financing structures that are available as a source of capital for operators in very heavy real estate-intensive businesses such as freestanding retail, light manufacturing, distribution, flex office, casinos, water parks, and golf.
It’s really a much more functional type of market between real estate owners today in the net lease space and what I call best-in-class operators. That’s why I believe that, even in changing economic environments, the performance of this asset class is going to be better than people expect.
Earlier this year, Spirit Realty unveiled its inaugural ESG report. What are some of the key achievements for the company in this area?
Last year, we started to make some meaningful strides on our ESG practices. We hired HXE Partners to help us create a long-term ESG roadmap, began adding green lease language to new deals, we created an ESG steering committee with board oversight, we adopted SASB and TCFD disclosure, and created other numerous internal and external social initiatives throughout our organization.
