Many people think that doing good and doing well are mutually exclusive and that profits and purpose don’t play nicely in the sandbox. But this Walker Webcast guest disagrees.
Bobby Turner sat down with Willy to talk about the importance of pursuing social good, including his 25-plus years in the social impact investment space and how he built and grew Turner Impact Capital into one of the nation’s largest social impact investment firms.
The conversation starts with sports, “a great platform for becoming a successful businessman.” Bobby talks about his athletic career in tennis and lacrosse and the “3 Q’s” necessary for success: the iQ (intellectual quotient), the eQ (emotional quotient), and aQ (adaptable quotient).
He also talks about growing up in Baltimore, where he gained both diverse perspectives and access to the American Dream. “I did not grow up wealthy by any means,” he says, “but I did grow up believing that with hard work, a decent education, access to healthcare, and a bit of luck, I could become successful later in life.”
But for too many people, this dream has become eclipsed by food insecurity, healthcare insecurity, and living paycheck to paycheck, he says. “There are millions of Americans today whose educational, healthcare and financial outcomes are predetermined by the environment they are born into.” The end result: a lack of hope.
Bobby shares more with Willy about his own personal experiences. He graduated from the Wharton School of the University of Pennsylvania “with a black belt in how to create wealth” and assumed that the creation of wealth would bring a corresponding sense of happiness. “Which of course it didn’t,” he says. “As a young man, I found myself in an environment which measures success by just making money.”
By his mid-30s, he realized that doing good and doing well didn’t have to be exclusive and that “to truly address systemic changes, you had to harness market forces.”
In 1998, Bobby and basketball star Magic Johnson founded the Canyon-Johnson Urban Funds, which deploys capital in the three areas of education, housing, and healthcare. In 2014, Bobby founded Turner Impact Capital, “a builder of schools and a buyer of multi-family assets.”
“It is not sustainable to have 50% of renter households rent-burdened and 1 million families spending upwards of 60% of their income on rent at the expense of other essential necessities,” Bobby declares. “Capitalism needs a major evolution and corporate leaders willing to follow up on their promises.”
Over the past seven years, Turner Impact Capital has raised about $5 billion for infrastructure that addresses community needs, serving over 120,000 healthcare patients and getting 62,000 students into their charter school system so far. In addition, the company just sold a portfolio of 24,000 apartment units, Bobby reveals.
But these investments in social change did not come at the expense of profit, he explains. He talks about passive and active impact investing and about value investing, “which requires one to scour the marketplace for opportunities that are overlooked, misperceived, and difficult to underwrite.”
How do such actions translate into making money? Recruiting people who want to do good and rewarding them for giving back to their communities is a self-fulfilling prophecy, Bobby says. “If you can create a sense of community, people will feel compelled to stick around and do their part for the greater good.”
“We need to educate as many people as possible that doing good, doing well is a great business model and a business model you feel really good about participating in,” Bobby concludes.
02:46 Reigniting the American dream
07:00 Privilege and the Canyon Johnson Urban Fund
14:48 Operating in underserved communities
18:18 Balancing purpose and profit
24:38 ESG and active investing
31:36 Competition and housing
38:07 Consistency in doing good
40:33 Protecting America’s investments
Willy Walker: Bobby, let's start here. High school lacrosse player, Baltimore, Maryland. You're now a 5.0 tennis player. Should you have actually started playing tennis earlier or was lacrosse the right move for you?
Bobby Turner: Let's start off with a very mediocre high school lacrosse player. And at this point in my life, a very mediocre tennis player.
Willy Walker: That's not true. That's just not true. That's total bullsh*t.
Bobby Turner: Everything's relative. When I play Willy, I'm an excellent tennis player. When I play Andre Agassi, I think.
Willy Walker: See it's all relative to the competitive set. There are few of us in the room who can say, “When I play Andre Agassi,” which he does on a very consistent basis.
Bobby Turner: Yeah, you know, I think that sports in general are a great platform for being a successful businessman. I’m much more successful as a businessman than ever was as an athlete. But I've always felt the need that to be successful in any pursuit of success, you had to have three Qs. You had to have the IQ, the intellectual quotient. You had to have the EQ, which is the emotional quotient. But you also needed to have the AQ, which is the adaptability quotient. And what you learn from sports is that sh*t happens very quickly and by surrounding yourself. I actually like lacrosse better than I like tennis because tennis is a very lonely sport, a very individual sport. Lacrosse was a team sport. But mostly my lacrosse experience was sitting on a bench when I played at college.
Willy Walker: So, you're still a big fan of Baltimore and without upsetting any of my friends in the room who actually are in Baltimore, own assets in Baltimore, I've asked you whether you would move from L.A. back to Baltimore, and you said I'd move back in a heartbeat. What is it about Baltimore that's still in your heart?
Bobby Turner: It's comfort food to me. You know, I grew up in an environment of I wouldn't say great privilege, but great perspective and great diversity. And when I go home, just like you come here, it's like a high school reunion where, I mean, when we think about where we are in our lives at this point, I mean, imagine when you graduated high school and you thought that you would wake up in the year 2022, and imagine where we are today. I mean, it's unbelievable to me what has happened in the last five years, in the last ten years. But it's no surprise either. When we think about the last three years, we've experienced a global pandemic. We've experienced an economic crisis; we've experienced the civil rights movement. We've experienced a real threat on our democracy. Any one of those, individually or separately, would have been formidable to our existence and all four of these happened at the same time. But I think that what most people don't recognize is, even before these crises – as a country, we've sort of lost our ideas and the belief in the American dream. Even before COVID, there were 43 million families living on food stamps in this country. Before these crises, 78% of Americans were living paycheck to paycheck. Before this crisis, only one in three high school students in public schools in this country were proficient at grade level. Before this crisis, 50% of renter households were rent burdened, spending upwards of 30% of income on rent, and nearly 12 million or one out of four renter households were spending upwards of 50% to 60% of their income on rent at the expense of food security, health security, retirement security. In health care, where we're number one in the world in what we spend $4.6 trillion a year, 20% of our GDP. And by the way, that's the entire GDP of Germany. Our health care outcomes are terrible and it's just not sustainable. So, I think that we all have to step back and recognize that we can lay all the blame on COVID or the crisis. But we have to lay the blame on ourselves for having a lack of courage to recognize that what we suffer from as a country is not the narrative that we're focused on today, which is wealth, the disparity of wealth. I think the disparity of wealth is a bad thing as extreme as it is today, but that's not the core problem. We have poor people historically have not dislike rich people. They've wanted to become rich people. I did not grow up wealthy. I did, however, believe that with hard work, with a decent education, with decent health care and a little bit of luck that I could become successful. But the reality is that there are hundreds of millions of Americans today in this country whose educational, healthcare, and financial outcomes are predetermined by where they are born, by the color of their skin, by their nationality, by their gender, and they have been foreclosed out of the American dream. And while historically we have looked to the government or philanthropy to provide a basic social safety net, to provide a clear path to, or a level and fair playing field for prosperity, I think we can all agree that our reliance upon the government and philanthropy have actually handicapped our outcomes, particularly in the areas of education, housing, and health care. What I truly believe is that the biggest challenge we face as a society is not the disparity of wealth, but rather the disparity of hope.
Willy Walker: So, did you craft that speech? Was it when you were doing Canyon Johnson? When you were at Canyon Capital Realty Advisors, you were a capitalist, you were trying to make as much money as you could make returns. And then at some point, what you just talked about, you said this is too important an issue for me to continue doing what I'm doing. Was it the work you did on Canyon Johnson that opened your eyes to it or was it before that?
Bobby Turner: I think it was probably before that. I mean, I'm evolving.
Willy Walker: As we all are.
Bobby Turner: I actually look around the world and some people are devolving, which is disappointing at best.
Willy Walker: He did say “around the world,” not “around the room,” I just want to be very clear there. He wasn't making comments about anyone in the room. (Audience laughs)
Bobby Turner: You know, when I was in high school, my father was in the footwear industry. And for a number of summers when I was in high school, he sent me down to work in his factories on the island of Puerto Rico in a small town called Aguadilla. I remember the first year going down, and he put me on an assembly line on a glue machine, basically cementing the bottom part of the shoe to the top part of the shoe. I spent about eight weeks there sniffing rubber cement. Imagine how successful I would have been had I not gotten high sniffing glue every day in glue in a shoe factory. But the environment was disheartening. It was truly a subhuman environment. There was no air conditioning, no ventilation, hot glue, hot machines on and on either side of me, there were two gentlemen that I met. One was Juan and one was Carlos. And I got to meet them and have lunch with them every day. At the end of the summer, I went home to Baltimore and my father asked me, “What did you learn this summer?” I said, “I've learned how to make shoes,” and he said “You didn't learn anything. You're going back next summer.” And I was a little bewildered. But I went back the next summer and to my surprise, had the same machine waiting for me. There was Juan and Carlos on either side, and I said to Juan and Carlos, “What are you guys doing here?” And I remember Carlos looking at me, asking me, “What do you mean, what are we doing here? What are our options? Where would you think we would be?” And I remember at the end of the summer, I went back, my father asked me, “What did you learn this summer?” And I said, “I learned how lucky I am that I have a choice.” I think that's something that a lot of people forget, particularly in our industry and people of wealth, people of success, that we're not entitled to our success. I mean, the reality is if you're very smart, Willy Walker, you are very, very smart. You're very, very hardworking. I'm smart. I'm hardworking. Most of us in this room are smart and hardworking. But there are millions of people in the world today that are as smart as we are. There are billions of people who work harder than we do. So, what did we do that enabled us to be this fortunate? And you have to conclude that luck has played a role. I'm a big believer that if you recognize how large a role luck has played, there is a burning responsibility to pay that good luck forward. So, as you said, I went to the Wharton School, graduated in ‘84 with a black belt in how to create wealth. And I assumed, unfortunately, that with that creation of wealth would come a corresponding sense of happiness, which it didn't do. After I went to Wharton, I went to work for a firm called Drexel Burnham Lambert in New York. And after Drexel failed in 1990, I eventually went on to become one of three partners in a firm called Canyon Capital Advisors. Canyon Partners, where I found myself as a young man in an environment where the sole metric of success was just making money. I was surrounded by people who candidly, it was a zero-sum game: for me to win, you had to lose. And that just wasn't enough for me. And I think in order to get a sense of balance in my life, I began to spend more time with philanthropy where I struggled as well. I struggled with the reality that the vast majority of organizations that I was funding were really just putting Band-Aids on issues. We were treating issues. We were reactive to issues. We weren't proactive. And in many instances, the organizations we were funding were not sustainable. They weren't scalable. In fact, they came back each year asking for more money, and they weren't being held accountable for creating durable, sustainable change. I concluded that in many instances we were just funding legacies of dependency. So back when I was in my mid-thirties, I evolved into a banker, an investor who recognized doing good and doing well, didn't need to be exclusive. But the fact is, our reliance upon the government to treat issues, handicapped our outcomes. And if you wanted to really cure and address systemic changes, you had to harness market forces that were durable, scalable, sustainable, and profitable. So that was my evolution. I started the business in 1998 in a partnership with Magic Johnson. We formed our first Canyon Johnson Urban Fund. He and I were at basketball game, a Lakers game, sitting on the floor, seating over the din of the crowd. Magic looked down upon me (because anatomically he always had to,) and he asked me what I was working on. And I said, “Well, I'm thinking about forming an urban fund.” And of course, his name was Irvin. And he thought, I said, ‘Irvin Fund.’ And I said, I can't believe he got that grin that he gets so brilliantly because I cannot believe someone wants to do Irvin Fund. I said, “Well, don't believe it. No one does. I want to do an urban fund. And here is why.” And within a day had me in his office. And by the way, this is what it's like sitting on one of Magic’s seats, my feet did not hit the ground.
He convinced me that he needed to be my partner because he said to me, “Bobby, two words would clearly define investments in urban communities – communities of neglect, communities of color, communities of immigrants. The two words were arrogance and distrust. Arrogance is you, Bobby. Arrogance is capital. Because you are well-educated, because you have capital, you assume you know how to solve the problems of social injustice. And the other word is distrust. And distrust comes from the communities that actually suffer the injustices of social discrimination, who assume you're just there to make money. And me, Magic Johnson, I can bridge that gap for you. I can be that ambassador of Great Will.” So, we agreed on pretty much everything except for how long it would take to raise the first fund. We're going to raise $300 million. I bet Magic it would take six months. The fundamentals, even today, the fundamentals are amazing. I look around, I see Daryl Carter out there who's one of the great pioneers in social impact investing. I mean, the fundamentals of investing in underserved communities are phenomenal. The huge existing mismatch between supply and demand, the growth in these markets, the misperception of these markets and the lack of capital, create an incredible opportunity. Create great wealth. I said, “Magic, it'll take us six months.” Magic looked at me and said, “Are you kidding me? It's going to take us two years to raise this fund. Not because of the misperception of the opportunity, but because of the bigotry, the arrogance and the prejudice that exists in social capital.” So, we'll do a little audience participation. Who thinks I was right with six months? I have a lot of friends here today. Yeah. Who thinks Magic was right with two years? Well, the fact is, we were both right. It took us two years and six months to raise the first fund. And it wasn't actually that funny. It was really humbling and humiliating, just how deeply seated the prejudice was and candidly still exists today. But we raised our first fund, it took us two and a half years. We raised $300 million our first fund. Fifteen investments, we did about a 14% return, net of all fees. It took us two and a half months to raise our second fund of $600 million, and our third fund of $1,000,000,000 took us about two and a half weeks. From there, we evolved. We expanded our initiatives because what we recognize is that hope is a three-legged stool, and we had to go into education, housing, and health care.
Willy Walker: Before you jump to that, let me just ask you one thing: On that first fund, what was it from either investment or operating standpoint that was dramatically different in investing in those neighborhoods than previous investments you made in, if you will, Canyon’s core fund, Canyon’s opportunistic fund, etc..
Bobby Turner: The underlying fundamentals from a vocational standpoint were exactly the same. I mean, finance is a vocational skill. The underwriting of the additional, the alternative risks, the consequential risk of investing in underserved communities. The lesson learned there was going back to the difference in arrogance and distrust.
Willy Walker: Is that from an operating standpoint, or from an assumption’s standpoint?
Bobby Turner: Less of assumptions, because assumptions are just something we create. From an operating expense and operating in underserved communities, it required a unique perspective. It required a diverse perspective to understand communities themselves, to understand how the underserved communities wanted the same opportunities as non-underserved communities. How are we going to deal with issues like drugs, gangs, and crime? How are we going to deal with public outrage? How are we going to deal with community outreach? And I think that drove me to recognize that diversity is critical, and diversity is something that I think is bantered about a little too liberally today. Everyone's talking about DEI and personally, I believe that diversity for the sake of diversity is negligence. I think to have diversity, just to say you're diverse, is not living up to a fiduciary responsibility to investors, work to an investment or even to a community. Diversity to us is not just gender. It's not just ethnicity, but it's also a knowledge base. It's understanding how a single mother thinks when she's going to rent an apartment. Does that single mother want what I thought would be the subzero refrigerator or the self-flushing toilet? Or does that single mother want a great school or a healthy, safe environment or access to affordable health care? So, it's just perspective. So, diversity at our firm doesn't just stop at, again, race or gender. It goes into you know; we have a school fund with Andre Agassi where we taught 124 charter schools over the last seven years in some of the worst performing schools in the country. It is run by a former public-school superintendent. We have a health care fund that builds outcome based, value-based health care, preventative health care and again, HPSA community, Healthcare, Performance Shortage Areas. We built 36 clinics, but that is run by Dr. Len Fromer, who's a former primary care physician who helped advise the Center for Medicare and Medicaid Services on how to retool infrastructure for outcome and value-based health care. And of course, on our housing fund, which you've been incredibly helpful supporting us with, you know, that is run by Gee Kim, who grew up in low-income housing. So, it’s a perspective that you don’t gain in a college or in a university. It’s called the EQ of wisdom or the experience of life that is also an important sense of diversity whenever you make an investment decision.
Willy Walker: So, to put some numbers around that, I believe that in your health care system, you’ve served 120,000 patients/clients. You’ve got 62,000 students in your charter school system, and you own 24,000 apartment units. I think I’m about right on those numbers.
Bobby Turner: The only thing you’re missing is we had 20,000 units. We were very fortunate. Gee Kim was very prolific in his thought, and we sold our housing portfolio about July of this year.
Willy Walker: And so, when you started to build the concept of Turner Impact, you said, you know, it came out of Canyon Johnson in saying it’s really housing, schools, community, and health care. When you went to your partners at Canyon before you left, you said, “I have done Canyon Johnson to do inner city retail. Now I want to broaden out and do another kind of impact fund.” What was their reaction to you when you said rather than generating 17% to 19% returns, we're going to generate 15% to 17% returns?
Bobby Turner: They actually encouraged me to do it, just somewhere else. It wasn't so funny at the time. I can look back now and say that was funny. But the reality is, like most investors, they assume and assumed that doing good and doing well need to be segregated, that profits and purpose don't play nicely in the sandbox, that if you're going to superimpose a social agenda helping the world and at the same time make money – that will come at a sacrifice in yield. But the reality is, I can refute that with 30 years of experience that will tell you and show you that, if done correctly, investing in social change does not come at a sacrifice in yield. In fact, if it's done right, it actually generates better risk adjusted returns than more traditional investment strategies in real estate because it's not based on speculation.
Willy Walker: But you showed that in Canyon Johnson, and yet then when you jumped out to create Turner Impact, you went out hat in hand. You met with the largest institutional investors in the world. The two years and six months that it took you and Magic to raise Canyon Johnson looks like a pretty quick timeline in comparison to what it took you to raise Turner Impact.
Bobby Turner: Well, we've raised about $1.7 billion over the last seven years, which has empowered us, enabled us to do four times that with leverage, you know, five or $6 billion of community changing infrastructure.
Willy Walker: Does it start with the school; does it start with the clinic? Does it start with housing?
Bobby Turner: It's a great question. It starts with the community and what the community needs. I will tell you that hope is a three-legged stool. We will not see a clear path to prosperity. There will not be a fair and a level playing field unless all three legs are addressed. There's an interdependency between education, housing and health care so all three have got to be addressed at the same time, and therefore, all three of our funds are focused on the same communities. It might be in East L.A., it might be in West Baltimore, it might be in North Philadelphia, where we are not just building schools, but we're focused on building schools that are then enriching our housing projects that are then supported by preventative health care clinics within close proximity to the projects that we built and the schools that we built as well.
Willy Walker: So you've historically been a builder of schools and a buyer of multifamily assets – given today's pricing in the multifamily world (and you said you've just sold most of your portfolio), but as you sit there and say, I want to continue to expand building schools, are you thinking about building multifamily around it or are you still focused on a buy strategy?
Bobby Turner: So, we will continue to buy and preserve housing. The cap rates are such that we haven't found that interesting because at the end of the day, a social impact investor has two responsibilities. The first responsibility is to be a fiduciary to our investors and deliver strong market rate returns. The second is to draw strong deliverable opportunities for underserved communities. I cannot buy in any universe an existing workforce housing project today at a 3% cap rate and figure out how I'm going to generate private equity like returns for our investors. It's very, very difficult.
Willy Walker: Do you think that three caps adjust?
Bobby Turner: The answer is it actually adjusts; a lot of things are going to have to adjust. Let's first address the issue that it's not sustainable to have 50% of renter households rent burdened. It's not sustainable in this country to have 14 million families spending upwards of 60% of their income on rent at the expense of food security, health security, and retirement security. And if it's not sustainable, that means our way of life is not sustainable. Because we've learned through history, we don't learn from history. But there is an aristocracy that is thriving in this country. There is a population, a growing population lives on the other side of the moat. And as long as that population believes that their children will have an equal or a better lifestyle, they stay complacent on that side of the moat. When families begin to recognize that their children will have a worse quality of life and that their quality of life is not sustainable, they are going to figure out how to cross that moat. It will either be a political revolution, or it will be a physical revolution. And I looked at elections a couple of years ago and I looked at someone like Bernie Sanders or Elizabeth Warren, who I have mad respect for, but they're socialists. And candidly I'm not ready to give in on capitalism. I don't want this to be the United Socialistic States of America. Notwithstanding, capitalism needs to evolve.
The challenge we have is there are very few corporate leaders who have the courage to follow up on their words. The Business Council about two years ago, led by Jamie Dimon from JPMorgan, they went out with great bravado. That said, we at the Business Council, this great think tank, we believe that we need to amend or evolve the definition of what the purpose of a corporation is for. It can't just be for shareholder value. It has got to be for stakeholder value, for community value, for employee value, for the environmental value. With great fanfare, I would bet if you audited the 15 or 20 members of the Business Council when they went back to their businesses, they've done very, very little in their business practices to make a difference, a collective and conscientious difference, to make sure that they are employing socially and environmentally responsible practices. A lot of people are talking about. A couple years ago...
Willy Walker: But you and I have debated this one because I say to you that Jamie Dimon gave corporate leaders across the country an avenue to be able to focus on these issues more. And you continuously discount that and say that's B.S. And the other piece to it is what BlackRock has done as it relates to changing the way that public investments are being made into those corporations and the fact that ESG has become such a big issue. Right now, we're at a point where you're getting this big boomerang effect, where they're actually people coming back and saying ESG is all hocus pocus, and we don't need ESG.
Bobby Turner: So somehow we've politicized hope. Somehow we politicized a fair and level playing field. So, let's start with BlackRock. Kudos to Larry for going out there and saying business needs to be a force for good. The problem is that there's two forms of impact investing. There's passive and there's active. But Larry is promoting passive impact investing. What that means is I'm going to look at my stock portfolio and I'm going to use social impact as a risk filter, and I'm going to use it to curate a portfolio of companies in my portfolio that are not bad. So, we're going to divest of companies that are in the tobacco industry. We'll divest of big pharma; we'll divest of fossil fuel. But the reality is, none of that stimulates or drives social change whatsoever. It has to be direct social impact investing. It has to be private equity. It has to be real estate. I also challenge Larry, when you take a look at his team themselves, his trillions of dollars of assets under management. What percent of those funds are managed by people of color or women? It is very politically correct, or it has been, to say I'm a social impact investor. It's great to be in the asset gathering. But the reality is there's a lot of charlatans out there that have almost a Cirque du Soleil sense of moral flexibility. Holding people accountable is what we need to do at this point in the cycle of our world. So that is a concern right now.
When I look at Ron DeSantis from Florida or Greg Abbott, there was a ribbon cutting last week in Dallas, Fort Worth for a brand new Rocketship Academy, a K through 7 public charter school in a predominantly Hispanic community. And Gregory Abbott, you know, Andre Agassi is my partner in the school and Governor Abbott's PR group said, well, Andre Agassi is coming, oh, Bobby Turner's coming, but Andre Agassi is coming. And “Gregory Abbott would like to be on the podium talking about this great new school.” But Gregory Abbott is out there saying that, you know, the state of Texas, we will not take our retirement funds and invest in any organization that is prioritizing ESG. So, I just wanted to make sure that Governor Abbott knew that I would also be on that podium congratulating him on his amazing investment or that he would support this amazing investment which was made by a socially impactful ESG fund. So that message was delivered and to my surprise, not, he didn't show up, he didn't come. So again, I think a lot of it is just ignorance and that's different than stupidity. Because you can't fix stupidity, but you can educate ignorance. And I just think right now that there's an ignorance out there that people don't recognize. Again, if done correctly, doing good and doing well needn't be exclusive. Again, if done correctly, you drive better risk adjusted returns. Because, I mean, there's four ways to create wealth, right? You know them. Number one is to inherit, which most people fail at. Number two is marriage, which most people fail at. Number three is what most people in this room do. You speculate, you buy something, and you hope people will patronize your retail center. You build a hotel. You hope people are going to support your hotel. You build a restaurant. You hope people are going to come each year, offering whatever it might be. You're speculating. People speculate every day on interest rates. You're going to buy at a 2% cap rate. I mean, where is the upside there. Yes, we're going to increase rents by 7% per annum. Really? In what universe in this country today do you think there is elasticity within a system where people can afford a 7% increase in rent? Again, 78% of US families are living paycheck to paycheck. One out of four families are spending more than 60% of income on rent. You're going to jack up rent. You can't. The reality is, there is no room there. That's just pure speculation. Investing in social change is not focused on speculation.
Willy Walker: What is your fourth one of how you create wealth?
Bobby Turner: Value investing. So again, it's not as glamorous and that's the way I was trained at Wharton and the way I was trained at Drexel – value investing is not nearly as glamorous as the first three. You know, again, inheriting, marrying, or speculating, but it is consistently a way not to lose money. Value investing requires one to scour the universe, scour the marketplace looking for opportunities that are overlooked, misperceived, difficult to underwrite. And that's impact investing.
Because when you're investing in public education, I'm not trying to create demand for public school seats. One out of three public school students are proficient at grade level. That means two out of three are not. So, you don't think there's a lot of parents out there looking for a great school seat? When you think about public education, you think about housing. There's not a dearth of demand. The demand is large, it's growing and it's unmet. And the traditional investor has been the government and or philanthropy. The other aspect of impact investing is that it's misperceived by institutional capital because it does require unique knowledge of communities and issues to be able to identify, quantify, and mitigate the risk.
Great examples. What happened during the pandemic. Who owned hotels? How did you do?
Who owned retail? How do you do?
Who owned office buildings? How did you do?
Well, who owns a fund that's in the education business? 100% of our rents collected.
Who's in the business of outcome-based health care? 100% of rents collected. Who's in the business of naturally affordable, naturally occurring workforce housing? We collected rents 400 basis points, 4% larger than the National Multifamily Index. And that is because the underlying demand is not impacted by global pandemics, geopolitical issues, and economic crises. The demand is large, growing, and unmet. And the reality is, we need more people to focus on these markets, but we need them to be more thoughtful and creative as to how they identify, quantify, and mitigate the risks.
Willy Walker: So how do you lead to get there, Bobby? Because I listened to you say all that. It’s very impressive. You’ve clearly changed both your career, your focus, your investments, to meet what you believe to be incredibly important issues. But there are lots of us and I'll talk about myself who feel like we're making a little bit of a difference on these issues. We're trying to do the most we can. And there's a sense in your comments of, “Well, that's either not enough or it's kind of just window dressing on the real issue.” Speaking for myself, I'm not going to give up doing what we're trying to do with Walker & Dunlop to drive even further into these issues, because I think we're doing a great job on it. You've got a billion aid of capital. You're getting two to three times leverage off of that. You're making a difference. But how do you get others to join you in making that difference without making them feel like they're just doing window dressing?
Bobby Turner: Well, so number one is, if I'm doing this. I am fundamentally an introvert who works very hard to be an extrovert. I hate public speaking, but I need to because someone asked me, you know, am I afraid of competition? Because what happens if I share my secret sauce and expose people to the amazing opportunities that exist in investing in historically Black communities that's going to create competition? I'm not afraid of competition. In fact, I'm afraid that there's not competition, Willy. Our first housing fund was 22 properties, about 8,000 units. We were able to change the opportunity set for 14,000 residents by enriching their communities with after school, school services, health services. I mean, our business model is very simple. If you want to buy a property, preserve affordability, but drive profits. How do you do it if you don't want to increase rents? You gotta do it by reducing expenses. What's the biggest expense of owning and operating workforce housing? It's not real estate taxes, it's not insurance, it's not capital improvements, it's turnover. Because let's be serious, no one works two jobs a day, comes home to a shoddy apartment in a shoddy neighborhood, spends 40% to 50% of their income on rent and says, “God, I love living here.” There's no pride in rentership, and that leads to tremendous transiency in workforce housing. In fact, on average, naturally occurring property experiences 100% vacancy every 24 months, which means your lease duration is every two years, two years.
Our theory was, it's a very simple model that if you could change the sense of community, you could create a pride in rentership, people would stay longer. And if they stay longer, you drive down economic loss, which is turnover, vacancy, bad debt. If people have pride in rentership to treat their properties better, which reduces your capital improvements, and you'll make money without increasing rents. And the reality is, over the last seven years, with the help of our school funds and our health care funds, we subsidized housing for educators, for health care workers, and for law enforcement agents. And in return for subsidized housing, these essential service residents provide essential services to our community. 140,000 program participant hours, which in turn drove a sense of satisfaction. In fact, how do you then measure impact? Well, number one is we drove our tenant satisfaction from below 30% to greater than 95%. I feel really good about that.
Now, addressing my need to be a socially impactful investor is only as good as me making money. So how does that then translate into math and money? Well, by driving tenant satisfaction to 95%, people stayed longer. In fact, our average lease duration increased by over a year and a half, which meant that our economic loss dropped by about 37%. The number of incidences at our properties dropped by over 50%. The amount of capital improvements in terms of expenses dropped as well, which led to an increase NOI of about 12% without ever increasing rents and bringing it home to make it super sweet, is we sold the portfolio in July. The portfolio generated a 25% net IRR to investors, a 2.5 times equity, multiple net of all fees. That's doing good by doing well. That's impact investing at its best.
Willy Walker: Do you think you could have gotten there without having the vision or the mission from a community standpoint? In other words, like I've heard you talk about some of the if you will, I don't want to call them tricks, but some of the things that you've done from an operating standpoint, like getting police officers to park their cruiser outside. So, there's a sense of security. You're giving that police officer subsidized housing and you say the only thing I require is that cruisers parked in that parking space every night. So, there's this sense there. Do you think that I guess the issue with that is everyone in this room could take that back and say, let's try and get a police officer at every asset we have to park their cruiser outside and we're going to get this great sense of security. It's not that easy. I think one of the questions I'm asking you here is all of the various component parts come together to get those returns because there is a mission behind it to create this sense of community. Is that not correct?
Bobby Turner: Absolutely. And as a result, when we started our first Turner Impact Fund, we hired third party property management, basically relegating that actual on property, on site, to someone who didn't work for me very quickly, we recognized that we had to bring in our own in-house property management. We had to have people of the community, in the community, of the issues, from the issues on the ground. We don't just recruit a law enforcement agent to park a squad car out front. We recruit him so that every spring when we subsidize Girl Scout troop, when they go from door to door selling Girl Scout cookies, that law enforcement officer is tagging along, not the tagalong cookie, but the tag along with that young, beautiful woman who is hopefully going to be a serial or a cookie entrepreneur. And, you know, when the door swings open and a neighbor looks down and sees little Lisa Gonzalez selling her cookies, and next to her is Officer Smith. And Lisa Gonzalez says, “I'm your neighbor. I live in apartment 5C, in building two, would you mind buying cookies from me?” Then you've got Officer Smith who's got his revolver in his hands. It's like saying, if you don't buy cookies, I'm going to bring my gun out. But that creates a sense of community. And we interview, deeply interview, and rigorously vet those essential service providers. We don't just want a police officer to be there. But again, let's be serious. No one becomes a police officer unless they really want to make a difference in people's lives. No one goes to allied health care services unless they want to make a difference in people's lives, and no one goes into public education to get rich. So, by recruiting these people and rewarding them for giving back to their communities, it's a self-fulfilling prophecy of building that sort of double bottom or triple bottom line of doing good, doing well.
Willy Walker: So, you've gained leverage, you've had a huge impact. I already gave the numbers of almost 30,000 health service care receivers, 60,000 kids in your schools, 24,000 residents in the portfolio you used to own. How do you gain additional scale from here? Because as I think about it, in the model that you've created, in the returns that you've just outlined, you should be managing $20 billion. You should be managing $40 billion today, not only $1.8 billion. And I say only very much in quotes, because it's amazing what you've done, but how do you gain leverage from here? How do you really tackle these issues that you so clearly define and outline beyond talking to groups like this.
Bobby Turner: Number one is, we needed to prove out the thesis. So, we wanted to start small. We wanted to prove to investors that you could do well and do good consistently. And we have across all three of our verticals are all profitable, both financially and they're all incredibly impactful socially. My biggest challenge I have in life is I hate raising money. It's the worst part of my job and I'm the only one who does it. So, I am going to scale. I just have to find the right strategic partner in the next year or two that has distribution because we can deploy the capital. I just can't call upon another consultant or I cannot call upon another head of real estate at a public pension fund and try to convince them that doing good and doing well aren't mutually exclusive because they're not compensated for taking risks. So now we have a great track record. Now we need to find the right permanent capital source of distribution. But more importantly, I think that, again, I go back to am I afraid of competition? I'm not afraid of competition. We need to educate as many people as possible. That doing good and doing well is, first of all, a great business model. It's a great legacy. But, boy, it really feels awfully good. I mean, I look around the room and I'm smiling, and I keep going back to Daryl here because, you know, we've been in the battlefields together for 25 years and all of a sudden it seems to be Depeche Mode, not the band that I listen to, you know, growing up. But it's very fashionable now to say you're a social impact investor, but it's really full of a bunch of liars and charlatans out there who are proclaiming to be truly responsible to the betterment of society, and they're not. I worry about that because they will make mistakes. They will not understand how to identify, quantify, and mitigate the risks. There will be arrogance, there will be mistakes. It will set the movement back a long way. But I am optimistic because, again, I think these challenges are so daunting. But it's the daunting challenges that will create the generational investment opportunity to create great wealth and make great change both financially and socially.
Willy Walker: Talking about investors, didn't you once tell me that you went over and met with a Chinese pension fund that said you gave them the opportunity to invest in the United States education system and they said they'd take the entire thing. And you said, I don't think that really be a good thing.
Bobby Turner: So, I'm with Andre Agassi. And you have to understand, I mean, Andre's an incredible human being. He's an eighth-grade dropout. And, you know, about six weeks into Andre and I “dating” to get to know each other because he was a philanthropist, and I was a capitalist, and he was very involved in public charter schools. Andre called me on a Sunday morning and said, “Bobby, I need help with math for my son Jaden.” And I said, “Well, that's going to be easy for me.” I said, “I've got a deal for you because I need help with my forehand.” He goes, “I've seen your forehand, I don't need that much help with math.” (Laughs) “So what's the problem?” He goes, “I cannot explain to Jaden for his math test on Monday – in what universe a -3 x -3 can generate +9? Pete Sampras kicks my ass three times. He kicks my ass another three times, there's nothing good about this.” He goes, “How and why? Explain to me.” So, I said to him, “Well, Andre. I don't know.” So, I rolled over to my wife in bed and I said, “Help.” And she goes, “Explain to Andre that if you do a bad thing to a bad person, that's a good thing.” -3 x -3 can generate +9. He goes, “I heard that, but what's that got to do with it? Why does -3 x -3=9?” I think you know something I don't know. “It's just one of those math tenets that you have to memorize.” He goes, “Maybe you can live your life that way, but I can't.” So, I got totally schooled by an eighth-grade dropout.
Six months later, we're in front of CIC, China Investment Corp.. We were introduced then by Mike Milken, and we pitched them. We do this virtuoso presentation on why the world should be investing in public education. We're raising a $250 million fund. At the end of the presentation, the gentleman from CIC leans into the table and says, “Mr. Agassi, Mr. Turner, I love this fund. We will take the entire fund.” And I'm like, “That's one of those great moments in life. I'm done”, you know, drop the mic. And then, of course, I look over and Andre is leaning in and I'm like, oh, f*ck. Andre goes, “Wait, wait, wait – why? Why does the government of China want to invest in a private equity real estate fund focused on public education in America?” To which the gentleman from China looked at Andre and said, “Mr. Agassi, this may come as a surprise to you, but your country is indebted to our country to the tune of nearly $2 trillion. And none of us here today at this meeting will be alive to see that debt repaid. Therefore, we, the government of China, have got to rely upon the next generation of Americans to grow the economy out of the debt you owe us, and you are failing miserably. So, this is a hedge for us. We need to invest in public education because we need to protect our investment in America.”
We did not take that money. The reason we didn’t is that we sort of realized that it is incumbent upon us to solve our own problems. If we're going to rely upon the government of China to educate our children or to pay for the education of our children, our way of life is not sustainable. And again, I go back to capitalism is broken, but it's not fatal. And we need to all think about little ways, as you talked about. How can we all, on a day-to-day job say, “How can we without costing us profits – how can we think a little more differently, a little more progressively? Intelligently on how we can incorporate socially and environmentally responsible practices into our business?” Because at the end of the day, businesses that employ these practices, it's just good business. And I think it's good business because I think you look around and the values of today's consumers, their form of activism today is shopping. They're supporting brands that they believe share their values and they are rejecting brands they don't. And I think that will be the ultimate driver of corporations changing their ways.
Willy Walker: Bobby, thanks for coming. Great to have you here.
Bobby Turner: Thanks for having me.