Madison International’s Ron Dickerman on His Firm’s Holdings & COVID-19

Ronald Dickerman, the founder and president of global real estate private equity investment firm Madison International Realty — one of New York City’s largest retail landlords — has created a direct secondaries business, where it acquires ownership stakes from existing joint venture investors who are looking to sell, assuming their position over the remaining life of the investment. 

He has called his firm’s strategy “counter-cyclical.”

In 2017, Madison made a splash when it bought a 51 percent ownership interest in a 12-asset, 2.1-million-square-foot retail portfolio valued at $1 billion from Forest City Realty Trust. The assets are mostly in NYC but also northern New Jersey. 

And in January, just beating the outbreak, Madison closed on its $1.2 billion flagship Fund VII — which drew from a variety of foreign capital providers — that is geared to target “late-cycle” opportunities across the globe. 

Some of Madison’s global holdings include Sony Center in Berlin as well as a number of properties in London, including Paternoster Square near St. Paul’s Cathedral and a stake in Covent Garden in the west end, at the end of Piccadilly Circus. 

Dickerman chatted with Commercial Observer last week to discuss the state of his holdings and how investors like himself are triaging as well as staying ahead of issues caused by COVID-19. 

Commercial Observer: Tell us a bit about Madison’s platform and how you’ve been weathering the storm caused by the outbreak.

Ronald Dickerman: We focus on a very unique and in my opinion an underexposed niche of the commercial real estate business. Real estate is the ultimate local business, but over the last several decades it has become a global asset class, with money flowing everywhere. Real estate is illiquid and cyclical as an asset class, just as brought about by the current crisis and what we’re all living through right now. So given that fact, it’s not a surprise that investors that own illiquid positions in some of these real estate assets I described often look to sell down or sell out of their ownership stake before the natural liquidation cycle of the building itself. Madison has created a unique business that we call “direct secondaries,” and effectively, what we do is buy those ownership stakes from existing investors looking to sell them and then we assume their ownership position over the remaining holding period of the investment. We do it in three geographies: the U.S., U.K. and Europe. We do it across four asset classes: office, multifamily, industrial and retail. We’ve created these ventures with some of the most prominent sponsors around the world, and in our opinion, we own some of the highest quality real estate assets that exist in private equity. So, think of it as a backdoor entry point and a win-win solution, which bodes well in the current crisis and the current state of the commercial real estate business.

So, you’re quite busy at the moment, then?

We’ve been extremely busy. And the irony is we’re coming off one of the best years in our history. In 2019, we invested almost $1 billion in equity in the assets and the markets I mentioned. Now, with COVID-19, we’re playing aggressive defense on our existing investment portfolio, which is very large. We’re focused on rent collections, life and safety issues, and liquidity and making sure these ventures are going to stand the test of time. We’re also focused on go-forward capital deployment. We did happen to raise and have a final closing on our flagship Fund VII in January 2020, so just as a coincidence, the timing was quite good. We are reaching out to counterparties and sponsors to see if there are ways we can assist them with their liquidity needs. 

Can you tell us a bit about the health and outlook of the Forest City retail portfolio?

It’s a really unique situation. What I’ve been saying all along — and still it has the virtue of being true — is it allows us to really buck the retail narrative, that those are transit and entertainment style assets. We own the Madame Tussaud’s wax museum complex in Times Square; we own Atlantic Center and Atlantic Terminal directly across from Barclays Center. Atlantic Terminal is obviously at the intersection of the LIRR and the New York City subway system, and we have 2 million people a year coming through Barclays. So, this is a very different retail story. The properties are very highly occupied, leased long term and the rents in place are still, in this market, well below market value. So, the fact is, it’s a little bit like playing a jigsaw puzzle on a “good news” basis. We are looking to recapture space where we can and we’re looking to shift the retail tenancy into the new world. When you look at our tenants, they’re really from the 1980s and 1990s, and we want more food and beverage and more experiential and we are in the process of doing that. We’re also going to make them look different and more attractive to the current users. It’s a long-term opportunity for us. We bought the portfolio with very long term pension fund money, and we expect to own them for 10 to 15 years. This is not high street; I’m not talking about Prada, Gucci and Polo [Ralph Lauren]. 

Of your existing portfolio, where are you seeing the most pressure as it relates to rent collections and other issues that have developed due to the outbreak?

There’s no question that it’s led by retail. We have a credibly-sized retail portfolio; we are the second largest retail landlord in the five boroughs of New York. We own Atlantic Center, Atlantic Terminal and Queens Place in Brooklyn and Queens, [respectively]. Those properties are closed by state mandate, so there is a fair amount of empathy for what I’ll call “nonessential” tenants whose stores are closed, in terms of rent payments. We are empathetic and looking to work with our tenants to make sure they have viable businesses. We also understand there are lease agreements and there’s credit that backs those leases, so we will work with our tenants on a reasonable basis, looking to get them any assistance that might be available. I would say to a lesser degree we’re seeing some dislocation in multifamily and industrial and less dislocation in office, because most of our office buildings are backed by credit-worthy tenants. 

How are you gauging the health of those office credit-worthy tenants to have a better sense of when they might start feeling more pressure to not pay? What’s the dialogue been like? 

We’ve had a tactical tilt focused more on multifamily and industrial over the last [few] years or so. We’ve certainly bought office buildings, but what we’ve bought have been specialty buildings, creative offices and things that were differentiated. We’ve shied away from the B-quality, commodity office. We do feel like we’ve seen the writing on the wall. And there’s a very active discussion going on now about what’s the new normal, and how much of these existing issues we’re all dealing with — in terms of working from home and social distancing — are going to carry forward into the new world. We’re a part of that discussion and we think there will be residual effects. 

There are major landlords, like Jeff Blau at Related, who are out in the press making strong statements about rent collections. What are your feelings about stronger tenants within your portfolio who might be apprehensive about paying rent, and how critical is this phenomenon at this stage, being that some landlords have been so outspoken about it?

I think the answer is a mixture of the human elements of this crisis coming first, the health and safety of people and their families. That has to echo through. Frankly, you could argue about what percent of the population — what age demographic —is being most impacted by [the virus], but we are all sheltering in place to do our part. I would say that that thesis translates into your question about those who can pay rent and those who have [stable or strong] balance sheets, versus those who don’t. I don’t think every tenant is created equal. On the one hand, I don’t think the answer is slamming your hands on the table and saying “every tenant must pay rent. Period,” or on the other hand, I think it would be wrong for a landlord who is a fiduciary to their investors to wave their hand say, “Oh, no, no, we’re happy to waive rents for anybody who asks.” So, I think the real answer lies in the middle. I do get frustrated with essential tenants who are open and have credit who choose to not pay rent. That strikes me as just an abuse of the general goodwill that we’re all trying to utilize as human beings. But, on the other hand, if you’re a smaller-sized tenant and you’re closed by mandate and you have no customers and you don’t have credit and you don’t have a balance sheet, it’s very hard to expect that tenant to pay rent. What I would expect is landlords and tenants to form partnerships to work together to utilize state and federal programs to find liquidity. There’s another issue here too, which is: there’s going to be a massive unwinding required of these issues over the next several months and possibly years. Keep in mind that the courts, right now, are closed, and my sense is the courts aren’t going to want to hear every landlord and tenant matter. So, the fact of the matter is, there needs to be a “best efforts” undertaking between landlords and tenants to work this out in a way that’s practical for all parties involved. 

Do you have any tenants that exhibit those strong balance sheets and aren’t willing to pay and how are you finding solutions to that?

We have all different types of tenants, so the answer is yes. We have tenants who are going above and beyond; we have tenants who have surprised us by paying the rent, where we didn’t expect that they likely would; we have other tenants who have surprised us on the other side, along the lines of your question, where they have credit and strong balance sheets and they’ve chosen not to pay their rent. We’re reaching out to all of the above and trying to work with them on a reasonable and human basis. 

Going back to Fund VII, although it closed pre-coronavirus, you captured a wide pool of investors from across the globe. What’s been the sentiment from them, now, about deploying that capital, where it’s going to go and how, and how’s that dialogue changed, if at all? 

I would say they identified the nuances and the attributes of our strategy as a reason to have invested with us. Many of the investors had been with us through many fund cycles and several of them are new. They want us to be patient and thoughtful, to assess risk and return and be good fiduciaries of their capital and to make the investment decisions they hired us to make. I think it would be foolhardy to rush out and to deploy all the capital at once. On the other hand, this is a cycle, it’s an aberration, this is a global pandemic and we will get through this and markets are going to recover. At the end of the day, this opportunity will be finite. There’s another big question about the residual effect on the economy, and I think everyone is hunkering down for what is going to be a very very difficult second quarter. Corporate earnings are going to drag on the stock market; the stock market seems like it’s raring and roaring to go. It was down around 30 percent and now I think the S&P is down 14 percent, so it’s basically halved back it’s losses and yet, we still have a pretty awful second quarter ahead of us. I think you still have to be cautious. And the other thing is that the crisis is only four to six weeks old. We saw it coming in China and through Europe, but we, unfortunately, were slow to react in the U.S. but we’re now in full mobilization mode. We still have some difficult times ahead of us.

As a landlord with such a large footprint, what more do you need in the form of local, state and federal governments’ responses? What more can be done? 

I think a lot of the government programs are focused on employees and on labor costs and there hasn’t really been a specific focus on real estate. In my opinion, if there was something more to be done, it would be around assistance with rent payments. Maybe that’s not politically correct to be helping the landlords, especially in the current environment. But we’re a part of the food chain and we’re a part of the commercial debt markets. Tom Barrack at Colony has been extremely bearish on the impact on the commercial debt markets, because what happens to CMBS, CLOs and securitizations when landlords can’t pay their debt service because tenants aren’t paying their rent? So, we’re a critical part of the food chain, so to answer your question, I don’t think there’s been enough attention paid to supporting the commercial real estate market.