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11 December 2019

Walton International: A bullish view on US real estate

Edward Fleming, Executive Vice President for Land in the Eastern United States for Walton International, walks Banker Middle East through the state of the United States real estate market, and the opportunities that millennial homebuyers are creating.

Shutterstock/EB Adventure Photography

by William Mullally

How did your journey bring you to Walton International?

I joined Walton in November of 2014. Currently, I’m the Executive Vice President for land in the Eastern United States. My responsibilities run from Washington DC all the way down to the tip of Florida, and any of the assets that we own or might potentially acquire, and any of the partnerships we have with builders and landowners are my and my team’s responsibility.

The Walton Group of Companies currently administers about 35,000 acres in the East Region alone, which is about 40 per cent of the total land assets that Walton co-owns in the United States with our investors. I didn’t take the traditional path to move up into the development, asset management and homebuilding business.

Most guys started out in some fashion in homebuilding and development. I was in the U. S. Army for 25 years, and some folks may say, that doesn’t patch over to a career in the private sector, but most of my time in the military was spent managing complex construction projects, leading large organisations, participating in multi-national exercises, and administering multi-million dollar budgets. 

Aside from the Civil &  Environmental Engineering and construction background that I have, clearly, as you move up in the military, you spend a lot more time building relationships, starting partnerships, and then, as a leader, bringing folks together to bring your vision to fruition. The art of leadership is encouraging folks to see your vision and get to the end through lots of different means.

All the skills I learned in 25 years in the army come to help me here in our asset management business.

What were some of the projects you tackled in that role?

One of the assignments I had was down in New Orleans after Hurricane Katrina. I was responsible for all the reconstruction of all the levees, the flood walls, the pump stations, and anything that was damaged, destroyed, or needed to be rebuilt as a result of Hurricane Katrina.

That was a $14.6 billion programme, and I was fortunate to be down there for three years in a leadership role as the senior army officer responsible for that work. Although I had a great team of dedicated professionals, having billions of dollars of construction projects under my leadership was something that was a humbling, rewarding, and learning experience.

Could you break down some of the projects you are working on with Walton?

There’s a couple of development projects that have really been important not only to me but to the Walton Group of Companies as a whole. One of them is called Westphalia in the greater Washington DC area.

It’s a very complex, 479-acre mixed-use project with mixed ownership and lots of equity and debt partners. It has both residential and retail, and it’s an amazing project that’s allowed me to understand not only the land development business but also the acquisition and disposition of an asset.

Clearly every project and every asset that Walton manages has its own lessons to be learned and its own challenges that come along with it, and it could be anything from coordinating with the local elected and appointed officials regarding zoning, to coordinating with the local community, who may or may not want a particular development project in their neighborhood.

In addition, negotiations with consultants, contractors, and of course the ultimate disposition of the asset to a homebuilder/buyer.  Just most recently, we negotiated a sale of a 1000-acre master-planned project with a large public homebuilder down in Florida, just outside of Tampa, and it has become the example of the way that we will sell a lot of our land assets in the future.

With a template for an agreement now in place with this buyer, we have adjusted that for other states and counties around the country, and we expect to see considerable land dispositions in the future not only with this particular buyer but with other local, regional and national top-tier homebuilders.

What are your views on the real estate market in general in the United States at the moment? Where do you see things heading?

The market is very strong. Of course, it’s hard to generalise across the country, but overall it is very strong. There are a couple reasons why we feel comfortable saying that.

Clearly, low mortgage interest rates,  currently and for the foreseeable future, are something that’s an indicator of a strong market. But perhaps more importantly, we see a big chunk of millennials coming into the market.

They are between the ages of 23 and 38, and they were slow to get into the homebuying market and form households after the housing led recession, but are now the largest cohort in the U.S. population at around 80 million. Slowly they are starting to build households, and we are bullish on the fact that they are coming into the market now; in 2018 alone, millennials accounted for 37 per cent of all homebuyers.

Also, there was a lot of unmet demand from 2008 to 2017, where we were only meeting around 65 per cent of the homes that were needed around the country. If you put those things together, we feel very strongly that there is a lot of room for homes to be built around the country.

How much focus do you put on a potential recession?

We acknowledge it, and we understand it. We know that something will happen to the economy in the near future, but an expansion never dies of old age. There has to be some sort of external action that would cause some sort of downturn.

We don’t expect it to be very long or very deep, and we don’t expect it to be caused by the housing market like it was in 2008. I will also say that we have a strategic advantage. It’s built in our business model that all the assets we own have no debt on them—they’re all equity. When we purchase land, we purchase it on an all cash basis on a co-ownership basis with investors.

As a result, we’re in a pretty good position to be able to withstand any downturn that may come a long, combined with the fact that we’re a private company so we’re not subject to market or shareholder pressure. We have patient capital and we’re not making decisions based on quarterly calls and stock price, and this gives us a strategic advantage as a land asset manager.

Edward Fleming, Executive Vice President for Land in the Eastern United States for Walton International

How much has the real estate market changed since the housing crisis in the late 2000s?

Builders these days are shifting to what we call a land-light strategy. Back in 2008-2010 after the recession, approximately 50 per cent of the homebuilders in the United States went out of business, which doesn’t get a lot of attention and a lot of people don’t probably grasp.

One of the big reasons why was they had so much land on their balance sheet, it may have had some debt on it, and unfortunately, they probably lost it to a bank through foreclosure. As a result, they have gotten very conservative to the point where they don’t want to have a lot of land on their balance sheets.

This is a great opportunity for Walton, who is in the land, asset management and real estate business, because we love having land. For those who don’t want to carry land on their books, we can accommodate them. Because there were so many homebuilders that went out of business, they are very conservative now in the way that they buy land.

Since they don’t want it on their balance sheets, as I mentioned, we are able to feed that market. We have created an opportunity to sell homebuilders land to meet their just-intime inventory requirements, in a similar way that they would buy lumber or other supplies that they would need to build their homes.

If we can sell them 200 acres at a time, instead of them buying 1000 acres from us all at once, they can manage their homebuilding in phases and better utilise their capital for infrastructure to kick start development.

Then, the land is a commodity that is delivered just in time and, because of our equity position, we don’t have an interest payment that we have to make. We can provide that resource to the homebuilder in a pretty good fashion that meets both our needs.

In reference to Walton’s plans for the next few years, are they set in stone or are they beholden to which way the wind blows in the real estate market in the Eastern region?

There are some things that won’t change. We won’t lever our land. There are some development projects that, once we get into construction, we will take out loans for development, but those are very few. Our traditional model is to buy our land with no debt. It is a core principle of Walton’s pre-development model to buy the land with equity, and I don’t see that changing.

However, we have to understand who our buyers are, and we have to provide our buyers a way to buy land from us, as they have changed over the years. In the early 2000s, landowners and developers would buy big chunks of land, and after the recession, they wouldn’t buy raw land, they wanted serviced lots.

They were expecting someone else to bring the servicing in, the streets and the landscaping. There was a period of time when builders only wanted horizontal, finished, serviced land, or serviced lots. Now we’re at a point where it’s a land-constrained environment. A lot of builders want to have their destiny in their own hands regarding horizontal development, but they only want it just in time.

Our strategic position as an asset manager of over 86,000 acres in the United States allows us to accommodate this need.

Where do you see opportunities?

We see opportunities in a couple of different places. One is looking at the geography in different parts of the country. If you look at the assets that we have, we use the phrase the ‘Southern smile’, going from Southern California, through Arizona, across into Texas, and then over into Tampa, Orlando, Jacksonville in Florida and then all the way to DC.

We also have land assets in Denver, Colorado and some in Oklahoma City. We don’t anticipate any changes there. If you look at domestic migration in the United States, folks are moving out of the Northern climates and high-cost states.

States that have higher taxes, whether you’re talking Connecticut, New York, New Jersey or Illinois, people are moving to places with affordable housing, strong employment, lower taxes and a better climate which in most instances are Florida and Texas. When you see those migration patterns over time, it makes us comfortable that those places are going to have good opportunities.

Most of those locations are also more pro-development and have a more simplified entitlement process. Second, we’re looking to leverage the way that homebuilders are buying land. Traditionally, we would go out to research and acquire land on our own, and not necessarily have a specific exit partner in mind.

We knew the strategy, but we didn’t have a particular buyer in mind. Now we’re going to homebuilders and asking them if they like a particular piece of land but don’t want it on their balance sheet, we can buy it, and enter into an agreement now that they are interested in purchasing it sometime in the next two to three years to suit their just in time inventory requirements. That in turn, may provide a bulk sale or income opportunity in the future for our co-investors.

We’re looking at those two models to be able to accommodate what builders are looking for and how they are going to acquire land in the future. We’re in a very good equity position on our land, we have very patient investors, and we appreciate the almost 96,000 investors we have across the world, split half and half between Middle East & Asia, and North America.

We’re very appreciative of our investors, and we are looking to continue to provide innovative real estate opportunities and raise capital in those regions going forward.


Bill Doherty, CEO, Walton Global Investments

What were the conversations that led to achieving Shari’ah compliance?

Bill Doherty: We’d been discussing it for quite a while, so doing business out of our Singapore office for Malaysia and Indonesia, we began discussing it seven to eight years ago, and put it into action between three and four years ago, gaining approval about three years ago. That was for our pre-development land product, which is the cornerstone of the Walton Group of companies.

We are going to be introducing another product to the marketplace in Q1 2020 which we are going to work immediately in an effort to achieve Shari’ah compliance as well, which will be a cash-flowing product, an income-type product, which will be tied to a Fortune 500 homebuilding company in the US.

Could you tell me more about that project?

Bill Doherty: We launched our first fund of this product in the United States in October, which is called the BOLD Fund, the Builder-Optioned Land Development Fund. With this, we work with national publicly-traded builders in the US where they have land assets they are looking to acquire, and instead of them acquiring those assets, we purchase the assets ourselves.

We have an agreement in place where they will take down those assets phase by phase or by lot over a specified period of time. The first fund is tied to a Fortune 500 company who is the number one home builder in terms of volume. They will be our primary partner for this fund and for funds going forward.

RELATED STORIES: Walton International US real estate US real estate




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