Hilton Smith, Jr., President & CEO of East Bay Company

LowcountryBizSC:
Where were you born and raised?

Hilton Smith:
I was born and raised in Washington, DC and then went to high school in Hagerstown, Maryland, a small community one hour west of DC.  My wife and I attended Georgetown University and both ended up working at the World Bank in our degree areas, international finance.  I thought that I would spend my entire career in finance, but in the late 1970’s, my father-in-law, William Murray, talked me into to coming to Charleston to help out with East Bay Co., LTD, a real estate company that he had founded in the late 1950’s.

LowcountryBizSC:
Talk a little about your father-in-law, William Murray. What did you learn from him?

Hilton Smith:
My father-in-law was born and raised in Charleston, SC.  He went to the University of South Carolina before entering the Navy and fighting in World War II.  Thanks to the G.I. Bill, he was able to attend Harvard University where he earned a law degree.  A tax lawyer by specialty, he worked on Wall Street as the managing partner of a large law firm before branching out into real estate development. 

Bill Murray loved Charleston and perhaps the one thing that I learned most from him was the importance of giving back to the local community.  More than just a family member and eventual business partner, my father-in-law and I were good friends.
 
My father-in-law came from an era when many believed that the best place to invest money and to develop wealth was long-term, capital real estate.  Take your income, spend as little of it as you can, and invest the remainder in real estate.  Buy low, sell high, cover your expenses while you are holding.  His vision was really quite simple.

 

LowcountryBizSC:
You have been in Charleston since the late 1970’s?

Hilton Smith:
No, we stayed in Charleston for about a year and half.  Moving here from DC was a bit of a culture shock. Back then, Charleston was more provincial, a very small town in everything from the delivery of the news to the social opportunities, etc.  We decided to move back to DC. I went to work for a small management consulting business, and at the same time, also started to become more seriously involved in commercial real estate investments in and around Hagerstown.

LowcountryBizSC:
When did you move back to Charleston?

Hilton Smith:
Back in Hagerstown, I started working on the redevelopment of a downtown, historic building into office space.  When I looked around for partners, my father-in-law stepped up to the plate and helped finance the deal.  After that, he and I probably worked on over 50 real estate deals over the years, with him mostly providing the capital and me being the worker bee.  Eventually, I started to have a little of my own money for investing, so it gave me the leeway to branch out on my own. 

Over the years, I continued to be a board member of East Bay Company, so we never really lost our connection to Charleston and this region. In 1998, my father-in-law again approached my wife and me about moving to Charleston and taking a more direct role in the day-to-day operations of East Bay Company.  Skip ahead 20 years, and now my wife was excited about the prospect of moving here. The transformation in Charleston between the 1970’s and the 1990’s represented a truly remarkable and dramatic turnaround for this community.  I joined the company as President and CEO, with my father-in-law continuing as the Chairman of the Board. My father-in-law passed on in 2007.  

LowcountryBizSC:
What is your core business?

Hilton Smith:
We build or buy apartment buildings, office buildings, hotels and shopping centers.  We are not involved in any industrial development. We also do some residential subdivisions where we buy land, develop it and build houses. 

LowcountryBizSC:
Do you manage your properties yourself?

Hilton Smith:
We manage all of our properties ourselves. 

Though we do have an in-house sales force, we work with independent brokerage firms to help us sell our properties.  Each house that we sell is listed through the brokerage community.  We also lease our commercial space with brokerage support.  They are the best sales people you can get.  We have generated a good reputation with the brokerage firms. 

LowcountryBizSC:
How have you been affected by the down economy?

Hilton Smith:
The economic downturn has affected all real estate based companies.  Our real estate strategy over the years has been mostly buy and hold long-term. Many of the properties that we are involved with have been in our portfolio for a long time and fortunately, we did not buy properties at the height of this most recent market.  This has meant that we have not been as impacted as some other real estate companies. 

It’s a very challenging period for people in real estate right now because of the liquidity problem.  Banks are inundated with regulators and are spending most of their time working out loans that have gone bad.  In particular, commercial loans that were made five years ago are maturing and therefore need to be renewed – but the underlying asset upon which these loans were made may now be worth less.  Companies may be forced to put more equity into the deal at a time when equity is hard to come by. 

LowcountryBizSC:
What is the biggest challenge that you have had to face in the real estate business?

Hilton Smith:
The real estate crash in the late 1980’s was a challenging period for me.  At that time period, the government created the RTC (Resolution Trust Corporation), a government owned asset-management company set up to help liquidate troubled real-estate assets owned by the Savings and Loans. Being in the real estate business, you borrow money regularly. With the falling real estate prices, cash got tight. What I learned in that situation is that when you have a problem the best thing to do is to face up to it.  Communicating with my companies’ creditors with integrity was an incredibly vital part of our survival through that time period.  I was able to restructure most of our debt in the late 1980s and come out of that recession in a much stronger position. Opportunities are often in front of you, even in a down economy.

LowcountryBizSC:
Where are the bulk of your real estate holdings today?

Hilton Smith:
East Bay Company is one of our larger companies, but we have over 40 different companies with real estate interests in six states, mostly concentrated in South Carolina, Maryland, and New York.

In Charleston, most of the commercial property that we own is on the peninsula.  We are in a great location in one of the hottest areas for restaurants and bars in Charleston.  We offer our tenants access to the parking garage that we own (a critical aspect of peninsula development).  Generally, our strategy has been to convert buildings into first floor retail, 2nd and 3rd floor office, possibly third floor residential. All said and done, East Bay Company owns about 120,000 square feet of office and commercial space on the peninsula.

We also have some office buildings in West Ashley, residential in West Ashley and Summerville, and several residential developments on James Island.

LowcountryBizSC:
What advice would you give to people starting out in real estate?

Hilton Smith:
First, if you want to get into the market today, you can’t do it with a bank’s money; it has to be with private equity or your own money. 

It’s also important to have strong relationships with good lawyers and bankers who want you to succeed. 

If you have capital, this is a good time to start in the industry because you can benefit from other people’s bad decisions.  If something is on the market today, it’s probably because the owner is forced to sell.  We feel that it is cheaper to buy what is standing because assets are selling for less than they cost to build.  Banks, institutions and individuals are in a position where they have to sell their real estate assets for a fraction of their value.  Banks are selling distressed assets for between 30 to 50 cents on the dollar.  We have been buying.

There are a lot of great opportunities out there, but you have to remember that location is critical and you have to stay diversified. Make sure that you have enough liquidity so the when times get tough, you can get through.  The most important thing in business is to be flexible, but in order to be flexible, you need to be liquid. 

LowcountryBizSC:
How many employees do you have?

Hilton Smith:
You need to have great talent to build a business. East Bay Company and our other companies have been blessed with amazing employees, many of whom have been with us for over 20 years.  We have an office in New York, one in Hagerstown and also this office here in Charleston employing 25 office staff. 

LowcountryBizSC:
As this is a good time to buy, would you expand your portfolio geographically?

Hilton Smith:
Expanding geographically can be a difficult strategy to implement in any business. We are constantly being presented with opportunities all over the country, but it is difficult to imagine expanding out beyond the current six states in which we operate.  As their career grows, if my sons show an interest in other markets, we might consider it.  That will be their choice. 

LowcountryBizSC:
Has the process of buying real estate changed?  Is it more analytical?

Hilton Smith:
You still get a gut feeling for real estate, but you don’t buy until you thoroughly analyze the deal and run your financial models.  I have always run the money of the businesses that I have been involved with. That is my background and training.  But my son, Hilton, has more financial skills than I will ever have.  Though I retain veto power on any deal, I have now placed more of the financial analysis on my son’s shoulders.   

LowcountryBizSC:
What is your leadership style?

Hilton Smith:
You want to inspire the people around you to do their best.  I love to get people’s input on investment decisions by surrounding myself with a table of talented people who will speak their minds.  I love to try to listen to what everyone has to say, to summarize, and help come up with a course of action.  As an entrepreneur, in the end, you make your own decisions. 

I am co-executor, trustee of my father-in-law’s estate.  This is a great honor that was given me by my father-in-law and has allowed for incredible leadership opportunities. 

Besides running the business, since I have moved back to Charleston I have been given numerous opportunities that have allowed me to practice leadership on a much broader level.  I am the Chairman of the South Carolina Aquarium and also very involved with the College of Charleston Foundation, MUSC, Hollings Cancer Center, the EastWest Institute and I am on the Palmetto Project Board.  Being on these Boards is different than leading a group of employees who are either family, or like family members to me.  On many of these boards, I am privileged to be sitting across the table with world class leaders such as Nobel Laureate and former Prime Minister of Finland, Martti Ahtisaari, for example. I learn by just observing how these people interact with others.

LowcountryBizSC:
What is your favorite leadership experience?

Hilton Smith:
My favorite leadership experience is running these companies and mentoring my sons in the business.  My sons are a key part of our success at East Bay Company and all of our companies.  Hilton III is here with us in Charleston and my son Christopher, who attended law school here in Charleston, runs the Maryland operation.  There is nothing better for me, nothing that I am more proud of than the opportunity to come to work each day with my sons. I see great leadership skills in my sons and a great future for all of our companies.

I am an avid deep sea diver and my entire family is into diving. Diving has been the focus of our greatest family vacations ever and has opened all of our eyes to the severe problems that our oceans and waterways are facing with regards to pollution and overfishing. I feel diving has given me leadership opportunities to help raise awareness of these issues.

I have been on the Board of the Aquarium for 8 years and for the past two years as its Chairman.  It was extremely humbling to take over the reins of leadership from the previous Chairman, the late Jerry Zucker. Jerry was a brilliant man and a good friend. The Aquarium had been built based on a feasibility plan of a million visitors a year.  When that number actually turned out to be 500,000 customers a year, the Aquarium started to run into some serious financial issues.  

Jerry helped develop a strategy to retire debt that the current Board has continued to implement.  We received tremendous support from this community (and also from some outside of the community) – philanthropic giants who believed in the great mission of the Aquarium.  This month, we will pay off that debt. 

LowcountryBizSC:
Have you ever done any diving around Charleston?

Hilton Smith:
The only diving that I have done in Charleston is with Jonathan Zucker, Jerry’s son. Jonathan is on the Aquarium Board with me and he invited me to go diving in the tank at the Aquarium.  We have over 7,000 animals in the tank!  It was one of the most amazing and unique diving experiences of my life.

LowcountryBizSC:
What books are you reading?

Hilton Smith:
I am inundated with so much business-related paperwork that by the end of the day, I just don’t have extra time to read a 500 page book.  Phone calls and emails are also a major time consumer. I read my financials, my periodicals, and my dive magazines. It’s a sign of the times maybe, but that’s all I have time for right now. 

Life without Lawyers is one book that I would recommend to anybody starting out in business, particularly in real estate.  There are so many reasons you need a lawyer in real estate – I must speak to a dozen lawyers a day! Lawyers are critical to your success, but this book is a great reminder to people about the importance of balancing good counsel with independent thought.  You have to make your own informed decisions.