00:00I do want to start off with rates because I was looking at J.P. Morgan Asset Management's
00:03most recent sort of mid-year outlook and I think you guys were basically pricing in less than 50
00:08basis points of rate hikes this year. We got half of that a couple days ago with the expectations
00:14we're going to get maybe another 25 basis points. Is this materially change in any way your outlook
00:19for the rest of the year and into next year? We remain bullish on commercial real estate. It's
00:24interesting though. I mean higher rates mean a higher cost of capital and that's obviously a
00:29short-term headwind for the industry. That being said, just look at the economy. So if you look at
00:33the Fed data, GDP is expected to grow by 2.3%. Unemployment still just over 4%. If you look at
00:39the Chase spending data over the last 12 months, the consumers actually spent 5% more. So for us,
00:45we're not underwriting rates going down to drive returns for our investors, but we have to be
00:49really selective on the types of opportunities that we focus on. Well, give me a sense of the
00:53type of opportunities that you're focusing on and whether those opportunities shift just a bit.
01:00And again, this isn't just about 25 basis points. This is about the belief that we're going to be
01:05higher for longer and maybe materially higher. We totally agree. I think higher for longer is
01:09probably where we'll be. There's two things that we're very focused on right now. One is income,
01:14and we do that through our net lease strategy. We can talk a little bit about that. And we also
01:18have
01:18focused on debt. So we're getting the best returns that we've seen in our debt portfolio since we
01:24came out of the great financial crisis. And net lease has been an amazing opportunity for us. $1.1
01:29billion fund closed last week, really focused on long-term growing cash flows, double-digit returns
01:36paid monthly with an overall yield or IRR in the mid-teens. Well, can I just ask you though on
01:41that?
01:41So, I mean, $1.1 billion, congratulations. But then you wound down that more diversified fund that
01:46was $1.4 billion. I mean, what's changed over the last couple of years where you felt like a net
01:51lease structure was the right way to go? The investing landscaping continues to evolve. Yeah.
01:56And as rates go up, investors demand more options from real estate. Real estate's really going back
02:01to the fundamentals, meaning cash flow and diversification. The net lease strategy allows
02:05investors to have a lot of cash flow. So 10% current cash flow through that real estate vehicle.
02:10Any red flags within real estate that concern you right now?
02:15We're always watching the real estate markets incredibly closely. I think one thing that
02:19we've seen that we talk to investors a lot about is the repricing of real estate. So as you know,
02:24rates went from zero to over 5% and that caused real estate values to drop by over 20. So
02:30we really
02:31think now's a great time to buy value. And the biggest concern for us is having investors' dollar
02:35cost average throughout this cycle. And you just had in Washington, they were passing a bill in July to
02:40make housing affordability more for other peoples. And then of course, we have the midterm elections
02:44coming up. How do you position around certain policy uncertainties when it comes to that with
02:49this administration? So we always think about housing. And I think we've spoken on this show
02:54before. We're 5 million housing units short of what we need in this country for the housing demand.
02:59And what would need to happen to fix that?
03:01More supply. The other issue now is with rates at 7%, we believe we should be creating more housing,
03:06which is why we own over 6,000 single family for rent housing units. These are not units that we
03:11take out of communities, but units that we build to create more stock.
03:15I mean, what type of units are you moving into? Properties are you moving into? Because it seemed
03:19like you were moving into more smaller properties relative to the larger properties. Is that a fair
03:24characterization?
03:24So while we may move into smaller properties in terms of transaction size, we love townhouses. We
03:30like single family for rent. The average first-time home buyer is now over 40 years old, and that's
03:36going to continue to creep up. So most people want more space and a great school district and a place
03:41to live.
03:41But give me a sense, though, with the transaction size being smaller, is that a reflection of,
03:46I guess, going to a slightly different market or seeing more opportunities in a different market
03:50that may sort of be better for income generation?
03:5380% of the overall market, transaction size is less than $100 million. So for us, being able to
03:59dollar cost average throughout every market and use our scale and our size to get great
04:04transactions for our investors is a place that we've really focused. You typically don't see a
04:09large manager focusing on smaller deals, but we have loved dollar cost averaging through the
04:13volatility in this market.
04:14Which regions within the U.S. have the most capital right now?
04:18You've seen a lot of capital go into the Sun Belt, which has created a lot of building.
04:22And we talked about a lot of units in the market the last time I was here. The exciting part
04:27now is
04:27we aren't seeing much building, given the increase in rates. What does that mean? That means that
04:32there's going to be less supply, more demand, and increased rent growth.
04:36But then also, what about the job aspect of it, if you don't have construction happening to build
04:40those homes, too, from a job aspect?
04:43We still like the migration trends going into the Sun Belt. We've really focused our portfolio
04:48on middle-income families, making roughly $110,000 per year. It's great. The average rental unit for us is around
04:55$2,500. There's a big job population that can fill that, and it's been great to be able to support
05:01the community in that way.
05:02I do want to go back, though, too, because when you talk about the dollar cost averaging in and the
05:06net lease kind of deals and the structure of all that here,
05:09I mean, if you're taking a single-tenant long-term deal here, is that actually a real estate bet, or
05:18is that just—I mean, that to me just sounds like a corporate bond.
05:21Credit meets real estate.
05:23Okay.
05:23So you get the tax advantages of real estate.
05:26Yeah.
05:26Is that what clients are looking for right now, more so?
05:29Clients want income, and they want tax advantage.
05:32Yeah.
05:32And so we're able to provide both. So we underwrite the underlying credit of the tenant, and we also underwrite
05:39the real estate.
05:39Okay. I do want to ask you a little bit about office. I know we've talked in the past about
05:43how the office market is back, at least in certain cities, definitely.
05:47But then I was going through some of the data, and it's like, you know, it's like 60%, 70%
05:51of some of the deals that we've seen this year are kind of concentrated in some of those—basically kind of
05:55the trophy properties, if you will.
05:57And I do wonder if that is sort of masking an office market that maybe isn't as healthy as it
06:02should be.
06:03I know, you know, the A-class is supposed to be it, but what about everybody else?
06:07We completely agree. It's haves and have-nots.
06:09If you look at the bottom third of office, it's got 70% of the vacancy, and there's literally no
06:16ability to get into the best office properties on Park Avenue.
06:20Midtown's been a great example of that, our headquarters, but it's the most in demand, and we still think the
06:25trade is go for quality in office, and it's office really meets hospitality versus older office.
06:30Well, I'm curious, though, for those other properties, the ones with the 70% vacancies and stuff, what's the solution
06:36for those from the owner's perspective?
06:38Is that just basically a teardown and start from scratch, or, I mean, how do you resolve that?
06:43Can you renovate out of that problem?
06:45We are beginning to see more renovations and more conversions into residential, but I do think some creative adaptive reuse
06:52is what's going to be required for office that is older office stock that cannot be relet.
06:57And finally, demographics when it comes to students or senior living, what are you seeing there?
07:02So I think the first baby boomers will be 80 this year, and we focused a lot on senior housing.
07:09How do we think about this demographic trend?
07:11We're seeing it in the Sun Belt, which has been very exciting for us, and we also are investing in
07:15student housing.
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