BLUEPRINT: Greener pastures

Most real estate investment firms name themselves after imposing landmarks or characteristics of strength, superiority and even predation. While Meadow Partners might seem like a rather modest moniker, the firm is proving its prowess by flourishing in two of the biggest, most competitive markets on the planet: New York and London. 
Partners Jeffrey Kaplan, Andrew McDaniel and Timothy Yantz launched Meadow in 2009, during the depths of the recession, and have kept their focus on the two key cities they know best. They also have built a reputation for coming into troubled situations, often between lenders and property owners, and crafting solutions that make everyone happy—including Meadow’s investors.
“I was with Morgan Stanley in the days of the Resolution Trust Corporation (RTC),” recalls Kaplan, “and I told myself at the time that, if I were ever lucky enough to see that kind of distress in the industry again, I wanted to run my own firm.” That is a big part of the reason Kaplan founded Meadow when he did. “Also, I wanted to get back to focusing on the real estate,” he says. “As my former company grew, I found myself serving more as a manager of people and spending less time acquiring properties, and I really like the real estate side of the business.”
As founder, managing partner and chairman of the investment committee of Meadow, Kaplan is primarily responsible for the daily management, strategic direction and investment policies of the firm. Prior to forming Meadow, he was a managing principal and co-chairman of the investment committee of Westbrook Partners, a global private equity real estate firm with more than $35 billion under management. 
Kaplan joined Westbrook’s New York office when it was first opened in 1994. He served as a managing principal responsible for Westbrook’s acquisitions in the US and Europe until 1999. He then founded and managed Western European Partners, a joint venture with Westbrook Real Estate Fund III. After that, he worked for Cohen & Steers Capital Partners for a year before rejoining Westbrook as a managing principal in 2001 to establish its London office and head its European operations. 
In his love of being close to the deal, Kaplan found two kindred spirits for partners in Meadow. Both McDaniel and Yantz also are Westbrook alumni with experiences that complement those of Kaplan. “We often talked informally about wanting to work together,” says Yantz. “When the chance came to form Meadow Partners, we figured it was now or never. There are always new deals, but you never know how many more opportunities you have to run your own company.”
McDaniel is a partner and member of the investment committee of Meadow and oversees its acquisition and asset management activities in Europe. Before joining the firm, he was a director in the London office of Westbrook. Prior to that, he worked in the acquisitions group of Charlesbank Capital Partners, a real estate and private equity firm that historically has invested on behalf of Harvard University’s endowment fund. 
Yantz, also a partner and member of the investment committee, oversees Meadow’s acquisition and asset management activities in the US. Prior to joining the firm, he was a director in the San Francisco office of Westbrook, having been a prime force in establishing that office and expanding Westbrook’s acquisitions program in the West. Prior to moving to California, he was based in Westbrook’s New York office, where he was involved in acquiring assets in eastern US markets as well as the firm’s acquisition efforts in the UK. Prior to Westbrook, he too worked in the acquisitions group of Charlesbank.
Growing pains 
The experience and enthusiasm that Kaplan, McDaniel and Yantz brought to Meadow sustained them through the tricky initial start-up period. “When we started, we knew what we wanted to do in an overall sense, but we had to decide what we needed to do first,” says Yantz. “How were we going to sustain ourselves? We looked at where we had made money in our previous careers – and where we had not – and decided to focus on our backyards of New York and London.”
Far from cutting themselves off from wider opportunities, Yantz explains that a tight focus on two key cities was essential to establishing the business practice and reputation that Meadow has cultivated. “These are two global markets of great depth and breadth,” he says. “In our experiences, we found that, in those two cities, the highs were higher when the overall market was up and the lows were not so low when the market was down.”
Yantz details how Meadow has retained essentially the same tactical approach to segmentation since the beginning. “We concentrate on office, retail and residential with some hospitality and some industrial, but only when those are not operationally intensive. It is a very narrow strategy, but it enables us to do a lot of different things within those markets and segments.”
Since the founding of Meadow, a tight focus helped harness the energy that the three partners brought to their new venture. Still, for all their experience and familiarity, there was some trepidation being out on their own. “We were nervous, absolutely,” Kaplan recalls. “Looking back on it now, we had forgotten what times really were like when the RTC was functioning. In our memory, it was like things were bad and then it all got better.”
According to Kaplan, what everyone tends to forget is the day-to-day, week-in-and-week-out workload of finding opportunities and putting deals together – not that he and his partners shrink from that. Quite to the contrary, they formed Meadow precisely because they wanted to get back to the granularity of deal making. However, once Meadow was up and running, nothing happened quite as quickly and easily as in their memory.
“We launched in February of 2009, and it was surprising how long it took for deals to trickle out of the banks,” Kaplan says. “It was not until mid-2010 that things started to thaw. Part of the problem was that banks just could not afford to take the hits necessary to sell assets.”
In addition, it was a real challenge “going from just being deal guys to running a whole business,” adds McDaniel. “We had to get everything operational and in compliance in two different markets in two different countries all at the same time.” He notes that, at the time, there were different prevailing conditions in New York and London. Indeed, some of those differences persist today, with London generally behind New York in terms of overall recovery, deal flow and liquidity. 
“If we had started one year earlier in London, ’08 instead of ’09, it would have been a very interesting time,” McDaniel says wryly. “In ’09, there was a complete pause in the London market, and it still is in the process of coming out from that.”
That is not to say there were not complications in New York as well, but what helped get Meadow off the ground was an early investment by Hawkeye Partners’ Scout Fund I. That enabled Meadow to bear down on its strategy of investing in deals in the $15 million to $25 million range. Meadow’s first fund ultimately raised $225 million in equity, invested in 12 projects totaling $750 million and has realized eight of its investments so far.
“We knew the Hawkeye folks and sort of backed into a relationship with them,” says Kaplan. Yantz adds that one of the benefits of the Hawkeye investment was that it “forced us to grow faster. We had to establish our policies and procedures quickly.”
Kaplan corroborates that. “We had a track record and a reputation, but this is very much a what-have-you-done-lately business. We would meet people and they would say, ‘You’re the guys from Westbrook. What have you done together under the Meadow name?’ The Hawkeye investment allowed us to establish our own track record.”
Second verse, same as the first 
For its second fund, launched in July 2012, Meadow had the same investment strategy as its first, with the addition of hotel and industrial assets. After an admittedly difficult start, Meadow Real Estate Fund II saw increased interest towards the end of the fundraising period, bringing in a total of $320 million in equity from US pensions and endowments like the North Carolina Retirement System and the University of Texas Investment Management Company. 
Thus far, Fund II is approximately 65 percent invested. Kaplan says another fund is likely on the horizon for this year with a $400 million to $500 million equity target, and he expects the firm to launch funds of that size approximately every two years going forward.
“In New York, we initially found a lot of distressed properties,” says Yantz [see Knights on Broadway]. “That market has evolved now, and we are into more of a proposition where we add value to undermanaged buildings. Our narrow focus on regions and segments also allows us to be more creative in assembling deals, looking at different structures and combinations of equity, debt and mezzanine. We are broadening our focus somewhat in terms of property types and are looking at a few hotel transactions now.”
In theory, the UK strategy is no different from that of New York, although McDaniel notes that the tactics are different because, in many cases, properties there still can be in some distress [see Taking the high road]. “We don’t have to take a lot of time finding properties because we know these markets,” he says. “That enables us to spend more time working on deals.” 
In both London and New York, McDaniel says Meadow is using what he calls ‘proactive origination’, following developments at properties for months and, in some cases, even years. Yantz adds that “it would be difficult to do that if we were more spread out. Our principles of focus and depth really compound each other. We understand transactions better, and that gives us better risk-adjusted returns.”
Putting an even finer point on the philosophy, McDaniel explains that Meadow often “comes into a situation, especially a distressed situation where owners are fighting with the bank, and we say to those owners: ‘We are property people; we speak your language and we know your challenges.’ Then, we go to the bank and say: ‘We have done many deals in many distressed situations, and we can get you paid.’ Everyone is happy.”
Yantz recalls several such situations in Meadow’s early days in New York. “In 2010 and 2011, we saw a lot of situations where distressed debt was sold and traded and people were lining up to take positions in the capital structure. Most of that is done now in the US, but that is not the case yet in the UK. The early transactions we had in New York ended up being terrific deals, and now we are moving into growth mode.”
London, however, still can be spotty, notes McDaniel. “In London, there still are short sales and distressed debt buys today, like there were in New York in 2011,” he says. “That is not a negative situation, but definitely a tricky one.”
Truffle hunters 
A critical piece of Meadow’s investment strategy – the sweet spot as some people call it – is its focus on deals between $10 million and $30 million. “That is a really nice deal size, and a lot less competitive because it is under the radar screens of the big fund managers,” says Kaplan. “They usually need deals of $50 million and up to move the needle for their investors.”
Yantz notes that not all deals are the one million-square-foot variety. “There are a lot more buildings in the 100,000- to 200,000-square-foot range that can be acquired or at least controlled for an equity check of around $20 million,” he says. “We are getting back to a large inventory of that size property, at least in New York, and we historically have been able to add value in such situations. If you work with a pre-war building with 100,000 square feet and one owner, you have big opportunities to turn over the rent rolls and bring in new businesses, new management, new energy and new ideas.”
Expanding on the idea of ingenuity, Kaplan observes that Meadow “doesn’t really see other groups in most of the deals we do. I know that people like to say they have no competition, but we really are not bumping into many funds on many of our deals. We do every now and then, but it will be a different one each time.”
Kaplan believes that, by sticking to its knitting and following its focus markets closely, Meadow is able to ferret out deals before the investment community becomes broadly aware. Of course, there may be others following the same approach but, like truffle hunters, each has its own patch of familiar forest and they don’t tend to overlap.
“When it is time to make deals, especially if we have been following a property for a while, we rarely see other industry names,” says Kaplan. “Often, the competition will be a local entrepreneur who also knows the neighborhood but who may not be able to get the money.”
Yantz notes that Meadow can afford to be picky, thanks in part to the smaller size of its funds. “We don’t need to close a large amount of investments in a short amount of time,” he adds. “That kind of pressure can lead to strategy drift.”
Still, Meadow has the flexibility to enter into larger transactions if opportunities come along or it can create them. “We work in markets that have some pretty big assets,” Yantz says. “Because our investor base is open to co-investment, we can get things rolling from within our fund and then offer additional opportunities to our LPs.”
That said, Kaplan sees investments remaining fairly steady. “The pace on Fund II is indicative,” he says. “Given an average fund size of $400 million, an average deal size of $20 million and about five deals per year in each of our two focus markets, that means two years to commit each fund. That seems like a good pace.” 
Knights on Broadway 
Meadow provides rescue capital and realizes upside in New York 
In late 2010, Meadow Partners led a leveraged recapitalization of 655 Fifth Avenue and 100 Broadway, a two-property portfolio of troubled commercial assets in Manhattan. That transaction was completed through a joint venture of Meadow Real Estate Fund I, Madison Capital and the Canada Pension Plan Investment Board, an existing investor in Meadow’s first fund.
“The prior owner was overleveraged, but not quite underwater,” Yantz recalls. “Initially, we bought the existing mezzanine positions, then worked with the existing creditors to restructure and delever the deal, ultimately stepping up into the equity as the new owners. With that two-stage approach, we were able to get into two very attractive assets at very favorable terms. Call it de-leveraging or rescue capital, we got a terrific basis.”
The Fifth Avenue address is fully leased to Salvatore Ferragamo, while the Broadway address is a historic, multi-tenant office building of 400,000 square feet. That latter property was about 70 percent leased at acquisition, and Meadow was able to increase occupancy to more than 90 percent. “We got all new tenants,” Yantz adds.
Meadow’s investment recently paid off when it sold 100 Broadway in July and 655 Fifth Avenue in October. “For a total investment of $215 million, we realized a gross sale of $450 million on both addresses,” Yantz says. “That is a terrific return for just under three years, especially for not having to do a great deal of heavy lifting or redevelopment.”
In a similar scenario, Meadow acquired 211 East 43rd Street from “a legacy owner who had decided to maximize cash flow from the property and, as a result, had not been able to maximize capital value,” says Yantz. “This was one building, with about 210,000 square feet and more than 100 tenants. We cleaned up the lobby, put in new elevators, vacated a lot of smaller tenants and instituted a new leasing program. As a result, we improved the rent rate from $30 per square foot when we bought it to current rents in the high $40s and low $50s.”
Taking the high road 
Perseverance and ingenuity pay off for Meadow in London 
Shortly after it closed the deal for 655 Fifth Avenue and 100 Broadway in New York, Meadow Partners completed a £100 million recapitalization of 125 Kensington High Street in London. The firm, through its Meadow Real Estate Fund I, took control of the property with the consent of its existing lenders and prior owner. 
The property is a 140,000-square-foot retail and office building located in a prime submarket of central London. Meadow’s business plan includes improving the property’s retail mix as well as targeted capital improvements.
“We found this property off market, building up trust with the family owner over time,” says McDaniel. “First, we took the existing A note and created an ABC structure, putting our capital into the B position. In doing so, we provided a solution that worked for all of the parties involved and for which they were willing to pay an outsized return, essentially allowing us to take full control of the equity and full control of the asset.”
More recently, Meadow acquired the C piece for less than 50 cents on the dollar. “We were only able to do that because of our understanding of the structure and our relationship with the other parties,” McDaniel adds. “In addition, we set up the paper so that it could not be traded to anyone but us.”
That deal was one year in the making, but it has surprised even the partners at Meadow with is appreciation. “We underwrote the transactions assuming that all the tenants would leave when we started pushing rents, but everyone stayed,” says McDaniel. “There is real alpha in what we are doing in these deals.”