WEBVTT - Hilton CFO on Growth and Expansion 0:00:00.600 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.520 --> 0:00:12.880 This is Bloomberg business Week inside from the reporters and 0:00:13.080 --> 0:00:16.640 editors who bring you America's most trusted business magazine, plus 0:00:16.720 --> 0:00:20.840 global business, finance and tech news. The Bloomberg Business Week 0:00:20.880 --> 0:00:25.800 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:27.400 --> 0:00:31.800 Our Bloomberg opinion columnist Andrea Felstede. She put out a 0:00:31.800 --> 0:00:33.960 column today. She said that after three years of rushing 0:00:33.960 --> 0:00:36.200 to book trips in the wake of the pandemic era 0:00:36.320 --> 0:00:41.640 restrictions sharply higher fares, protests against tourism, fatigue from endless 0:00:41.640 --> 0:00:44.600 hour spent in airports, and income squeeze by inflation, tim 0:00:44.920 --> 0:00:46.360 are all taking their toll. 0:00:46.640 --> 0:00:48.680 Okay, So let's check in with Kevin Jacobs about this. 0:00:48.720 --> 0:00:51.960 He's the president and CFO over at Hilton Worldwide. Holding's 0:00:52.000 --> 0:00:54.639 home to twenty three brands, including Hilton Hotels and Resorts, 0:00:55.000 --> 0:00:58.840 Waldorf Astoria, Hampton, DoubleTree, Embassy Suites, and new brands like 0:00:58.920 --> 0:01:02.280 Spark by Hilton and Lift Smart Studios by Hilton. 0:01:02.600 --> 0:01:04.720 Kevin is in New York City. Kevin, great to have 0:01:04.840 --> 0:01:07.240 you here here on Bloomberg Business Week. So, as I mentioned, 0:01:07.280 --> 0:01:10.480 our Bloomberg opinion columnist, writing, she says travel demand is 0:01:10.520 --> 0:01:12.680 far from falling off a cliff, but there are signs 0:01:12.680 --> 0:01:15.480 that our wanderlust is downshifting from never ending to a 0:01:15.520 --> 0:01:18.200 more normal pattern. What are you seeing, you guys see 0:01:18.240 --> 0:01:19.880 a lot firsthand and welcome. 0:01:20.120 --> 0:01:22.320 Yeah, first of all, Carol, Tim, thanks for having me on. 0:01:22.360 --> 0:01:25.200 We're not really seeing that. I mean, I think leisure 0:01:25.360 --> 0:01:28.520 travel has been normalizing off of kind of the boom 0:01:28.560 --> 0:01:31.279 that it had during COVID. But we're still seeing growing 0:01:31.319 --> 0:01:34.399 demand for travel, and in fact, most people expect the 0:01:34.440 --> 0:01:37.560 summer travel season to be quite strong. And you know, 0:01:37.640 --> 0:01:40.720 business travel is coming back and group actually is leading 0:01:40.760 --> 0:01:43.480 the way, which wasn't the case during COVID, But you 0:01:43.520 --> 0:01:45.440 now have a lot of pent up demand for meetings 0:01:45.440 --> 0:01:48.320 and events that is fueling growth in our business as well. 0:01:48.360 --> 0:01:51.520 So we're still seeing trends. You know, certainly same store 0:01:51.520 --> 0:01:52.960 sales growth is not going to be what it was 0:01:53.040 --> 0:01:55.000 last year, but it's still going to be quite strong 0:01:55.440 --> 0:01:56.760 for this year going forward. 0:01:56.920 --> 0:01:59.880 So where are you seeing the best growth, the biggest growth, 0:02:00.080 --> 0:02:02.880 Which portion of the of the hotel properties or which 0:02:02.920 --> 0:02:04.240 brands are seeing the best growth? 0:02:05.040 --> 0:02:07.080 Well, if you think, I mean really all of the 0:02:07.120 --> 0:02:09.160 brands are seeing the best growth. The higher segments are 0:02:09.560 --> 0:02:12.320 growing better than the really lower segments at the moment, 0:02:12.480 --> 0:02:15.320 and our same store sales outlook as two to four 0:02:15.360 --> 0:02:17.079 percent for the year, and we think the US will 0:02:17.120 --> 0:02:18.920 be sort of at the lower end of that range, 0:02:19.320 --> 0:02:21.480 and everywhere else outside of the US will kind of 0:02:21.480 --> 0:02:24.160 be at the higher end of that range. So international 0:02:24.200 --> 0:02:26.800 growth is still a bit stronger than the US but 0:02:26.840 --> 0:02:29.600 still growing, you know, reasonably well, like kind of low 0:02:29.639 --> 0:02:31.200 single digit same store sales growth, but. 0:02:31.200 --> 0:02:33.320 You're seeing sort of the same growth. Whether we're talking 0:02:33.400 --> 0:02:36.120 sort of the budget lower end brands in the portfolio 0:02:36.240 --> 0:02:38.600 versus the high end brands in the portfolio. 0:02:39.200 --> 0:02:41.400 Well, in our portfolio, we don't have a lot of budget. 0:02:41.400 --> 0:02:44.160 We have a premium economy brand that you mentioned called Spark, 0:02:44.240 --> 0:02:47.119 and we're really not as distributed at the really low segments, 0:02:47.120 --> 0:02:49.400 which you know, they've been a little bit weaker, but 0:02:49.480 --> 0:02:51.560 that's a lot of that has to do with more 0:02:51.600 --> 0:02:54.840 difficult comparables to last year because they were quite strong, 0:02:55.120 --> 0:02:57.079 and there's a little bit of an effect of that 0:02:57.200 --> 0:03:00.800 consumer sort of feel slowing down a little bit, but 0:03:00.919 --> 0:03:04.320 mostly across our growth is pretty consistent across the segments 0:03:04.320 --> 0:03:05.280 that we operate, so. 0:03:05.240 --> 0:03:07.200 Any signs of softness, you know, we kicked off this 0:03:07.240 --> 0:03:10.600 hour talking with our international Economics and Policy correspondent Michael McKee. 0:03:10.600 --> 0:03:13.840 There's a lot of economic data, including labor data, of course, 0:03:13.880 --> 0:03:16.560 throughout this week. But last week we saw, you know, 0:03:16.639 --> 0:03:19.480 some points of showing some softness when it comes to 0:03:19.520 --> 0:03:23.480 consumer spending here in the US. Any signs of softness 0:03:23.600 --> 0:03:25.160 or folks trading down at all. 0:03:26.440 --> 0:03:29.240 We're not seeing trade down, and we're not really again, 0:03:29.320 --> 0:03:32.040 other than the really low end of the business, which 0:03:32.080 --> 0:03:34.000 is a little bit lower than where we operate, we're 0:03:34.000 --> 0:03:37.320 really not seeing the consumer pull back. The consumer still 0:03:37.360 --> 0:03:40.440 feels really solid. 0:03:39.760 --> 0:03:40.160 All right. 0:03:40.280 --> 0:03:42.160 We know you guys have a ton of properties, about 0:03:42.200 --> 0:03:44.800 seventy five hundred properties, including time shares. I think that 0:03:44.840 --> 0:03:46.360 was at the end of last year. I think when 0:03:46.360 --> 0:03:48.400 I was checking some of the data points, you own 0:03:48.440 --> 0:03:50.680 a small amount, you manage a bunch. The bulk, though, 0:03:50.720 --> 0:03:54.920 is franchise ease. What's top of mind for your French cheese. 0:03:55.080 --> 0:03:57.080 They're not French cheese. That's like a grilled cheese. SWaCH. 0:03:57.280 --> 0:04:01.680 Franchisee owners, I'm a little hungry, what are their stress points? 0:04:01.760 --> 0:04:04.240 And again, does the growth kind of mirror or the 0:04:04.320 --> 0:04:07.040 upside mirror what you are telling us that you've already 0:04:07.120 --> 0:04:07.920 kind of shared with us. 0:04:08.720 --> 0:04:10.400 Yeah, I mean, like you said, you know, upwards of 0:04:10.440 --> 0:04:13.440 eighty percent of our hotels now, our franchises are you know, 0:04:13.480 --> 0:04:15.760 we manage a bunch of hotels and our ownership segment 0:04:15.800 --> 0:04:17.880 is quite small, but you know, their outlook is quite good. 0:04:17.880 --> 0:04:20.880 Our you know, our construction starts, you know, so new development. 0:04:20.880 --> 0:04:22.640 First of all, we think we're going to open will 0:04:22.680 --> 0:04:25.800 open nearly two hotels per day this year, right, so 0:04:25.880 --> 0:04:28.880 our prospects for growth are quite strong. Most of our 0:04:28.880 --> 0:04:32.479 franchisees are seeing the same thing we're seeing. The prospects 0:04:32.480 --> 0:04:36.279 for development are quite good. Our construction starts, so new 0:04:36.520 --> 0:04:39.240 hotels going under development was up forty five percent in 0:04:39.279 --> 0:04:41.680 the first quarter. We think that will continue to be 0:04:41.760 --> 0:04:43.280 up this year. And we actually we think we'll start 0:04:43.320 --> 0:04:47.080 more rooms under construction this year than we did pre pandemic. 0:04:47.240 --> 0:04:51.080 So I think, you know, look it it's not equal everywhere. 0:04:51.160 --> 0:04:53.680 And you know, our franchises are looking at prospects for 0:04:53.760 --> 0:04:56.760 revenue growth. They're thinking about their cost profile, right because 0:04:57.160 --> 0:04:59.720 with this great inflation that has fueled the revenue and 0:04:59.760 --> 0:05:02.520 our you know, there's cost inflation, so we're working with 0:05:02.600 --> 0:05:05.440 them to think about how to drive incrementals cost savings 0:05:05.480 --> 0:05:08.600 in the hotels. But generally speaking, our owners and franchises 0:05:08.600 --> 0:05:09.600 are quite fullish as well. 0:05:09.600 --> 0:05:11.159 We want to talk a bit more about the cost equation, 0:05:11.200 --> 0:05:12.440 but I want to go back to that, you know, 0:05:12.800 --> 0:05:15.720 two new hotels every day. You guys had come out 0:05:15.760 --> 0:05:20.279 with some news today about expanding your lifestyle portfolio, doubling 0:05:20.279 --> 0:05:22.680 it to seven hundred hotels within the next four years. 0:05:23.000 --> 0:05:26.000 How come how and where? Like, where are you doubling? 0:05:26.040 --> 0:05:28.680 Where are you opening two new hotels every day? 0:05:29.440 --> 0:05:31.479 Well, it's really across the globe and so yeah, we 0:05:31.520 --> 0:05:33.640 put out a press release this morning about our growth 0:05:33.640 --> 0:05:37.360 and lifestyle. We're celebrating our tenth anniversary in the lifestyle space. 0:05:37.520 --> 0:05:41.640 Fifty percent of the luxury the lifestyle segment broadly has 0:05:41.680 --> 0:05:44.599 grown fifty percent over the last five years, and it's 0:05:44.600 --> 0:05:48.080 been double the addition the additional hotel count and lifestyle 0:05:48.080 --> 0:05:50.400 hotels has been double out of the broader industry. So 0:05:50.440 --> 0:05:52.960 these are very popular type brands. We've been in the 0:05:53.000 --> 0:05:56.240 space for a while. We recently acquired the Graduate brand 0:05:56.640 --> 0:05:58.920 and we entered into a joint venture with another group 0:05:58.960 --> 0:06:01.800 to bring the Nomad brand, which is a luxury lifestyle brand, 0:06:01.800 --> 0:06:05.359 into our portfolio. So we now have six great lifestyle brands. 0:06:05.400 --> 0:06:07.440 And yeah, we we think we can go from what 0:06:07.480 --> 0:06:09.640 we have three hundred and fifty lifestyle hotels today, we 0:06:09.680 --> 0:06:12.000 think we'll have seven hundred within the next four years 0:06:12.200 --> 0:06:13.880 and the growth will really be around the world. 0:06:14.240 --> 0:06:16.680 So, Kevin, how do you make sure that the new 0:06:16.760 --> 0:06:19.040 properties that you add, as you mentioned two new hotels 0:06:19.080 --> 0:06:21.039 per day around the world, how do you make sure 0:06:21.080 --> 0:06:25.839 that the franchisees are geographically protected from competing with Hilton 0:06:26.240 --> 0:06:28.159 and other owners of Hilton when they're out there. 0:06:28.279 --> 0:06:30.839 Well, yeah, I mean we're pretty careful. Look where the 0:06:30.839 --> 0:06:33.719 interests are aligned, right, one hundred nearly virtually one hundred 0:06:33.720 --> 0:06:36.279 percent of the capital for our growth comes from other 0:06:36.360 --> 0:06:39.840 from hotel and people investing in hotels, either building new 0:06:39.880 --> 0:06:42.799 hotels or buying hotels and affiliating with them in our brands. 0:06:43.120 --> 0:06:45.760 And we're invested in their success because if they're successful, 0:06:45.800 --> 0:06:47.680 then they will choose us for their next deals and 0:06:47.720 --> 0:06:50.800 that that obviously enhances our growth rate. And so the 0:06:50.800 --> 0:06:52.320 way you do it is you're you know you're just 0:06:52.480 --> 0:06:54.840 very careful. We work with each on each and every 0:06:55.000 --> 0:06:57.960 new hotel deal. We work with our partners to find 0:06:57.960 --> 0:07:01.359 the right locations for the right brands, and we want 0:07:01.440 --> 0:07:04.000 and need each of our hotels to be successful. So 0:07:04.040 --> 0:07:07.000 it's sort of it's pretty self regulating. Interests are aligned, 0:07:07.160 --> 0:07:09.880 and none of us want to put a hotel, you know, 0:07:10.000 --> 0:07:12.120 on top of another hotel where they're going to compete 0:07:12.160 --> 0:07:14.480 too much. And the reality is is we it's up 0:07:14.480 --> 0:07:17.880 to us to keep growing our customer base, having our 0:07:17.920 --> 0:07:20.960 brands be strong and driving that premium performance so that 0:07:21.000 --> 0:07:22.960 our owners make more money when they invest with us. 0:07:23.000 --> 0:07:24.720 And if they make more money when they invest with us, 0:07:24.760 --> 0:07:27.160 then they'll choose us for our next deals for their 0:07:27.200 --> 0:07:30.160 next deals, excuse me, which which enhances our growth rate? 0:07:30.200 --> 0:07:33.280 Hey, Kevin, our Bloomberg intelligence team of analysts noting that 0:07:33.280 --> 0:07:36.720 you guys cleared your debt maturity schedule before twenty twenty five, 0:07:36.760 --> 0:07:39.480 the majority now do in twenty twenty eight and beyond 0:07:39.600 --> 0:07:43.360 cushioning it against sector headwind So it sounds like it 0:07:43.440 --> 0:07:47.400 really gives you, guys, really some you know, freedom to 0:07:47.480 --> 0:07:51.800 move around no matter what might happen in the economic environment. 0:07:51.840 --> 0:07:53.360 At least for a couple of years. 0:07:53.440 --> 0:07:54.000 Is that fair? 0:07:55.200 --> 0:07:58.160 Yeah, I think we remained. We're all we've always been 0:07:58.200 --> 0:08:01.400 focused on financial flexibility. So it's not just the ultimate 0:08:01.520 --> 0:08:03.480 quantum of our debt or the cost of our debt, 0:08:03.480 --> 0:08:05.600 which of course we care about a lot, but we're 0:08:05.600 --> 0:08:08.040 always looking for opportunities to push maturity. We have one 0:08:08.080 --> 0:08:10.880 small maturity in twenty twenty five, and then and then 0:08:10.880 --> 0:08:13.760 we don't have maturities for a while, and that served 0:08:13.800 --> 0:08:15.640 us well in COVID, you know, and COVID when our 0:08:15.680 --> 0:08:18.120 revenues went to new year zero, we didn't need to 0:08:18.120 --> 0:08:20.280 abend our credit facility because we didn't have any near 0:08:20.400 --> 0:08:23.400 term maturities. We didn't breach any covenants, and so we've 0:08:23.440 --> 0:08:26.760 always been really focused on financial flexibilities. One of our 0:08:26.840 --> 0:08:28.360 one of the core tenants of our capitol. 0:08:28.560 --> 0:08:31.040 All right, ten seconds, what's the hottest place? Where's everybody going? 0:08:31.040 --> 0:08:31.560 Real quickly? 0:08:32.640 --> 0:08:33.160 Everywhere? 0:08:33.320 --> 0:08:33.720 Everywhere? 0:08:33.800 --> 0:08:37.560 Oh yeah, everywhere? 0:08:38.320 --> 0:08:42.680 All right, all right, all right, Kevin favorite children, Kevin Jacobs, 0:08:42.679 --> 0:08:46.960 thanks so much, President CFO at Hilton Worldwide Holdings Holdings. 0:08:46.960 --> 0:08:48.720 Excuse me, you're. 0:08:48.600 --> 0:08:52.160 Listening to the Bloomberg Business Week podcast. Catch us live 0:08:52.200 --> 0:08:55.240 weekday afternoons. From two to five pm Eastern Listen on 0:08:55.280 --> 0:08:57.800 Apple car Play and then Brout Auto with a Bloomberg 0:08:57.880 --> 0:09:00.440 Business app, or watch us live on you Tube. 0:09:01.640 --> 0:09:03.360 Just a bit of news in the world of commercial 0:09:03.360 --> 0:09:05.920 real estate in recent days. Common, once the largest co 0:09:06.000 --> 0:09:08.959 living company in North America, files for bankruptcy and it's 0:09:08.960 --> 0:09:11.520 going to liquid date after it was squeezed by overhead 0:09:11.559 --> 0:09:15.719 costs and rising interest rates. Also in other news, Rockefeller 0:09:15.800 --> 0:09:18.160 Center Plaza here in New York. It's what's known as 0:09:18.160 --> 0:09:20.840 a privately owned public space. It's set to get a 0:09:20.840 --> 0:09:22.280 fifty million dollar makeover. 0:09:22.720 --> 0:09:22.960 Carol. 0:09:23.000 --> 0:09:24.439 These are just a couple of the headlines from the 0:09:24.440 --> 0:09:26.480 world of commercial real estate in recent days. 0:09:26.520 --> 0:09:28.719 There's a lot going on. You know, all of our 0:09:28.760 --> 0:09:30.840 listeners and viewers certainly know we like to talk about it. 0:09:30.880 --> 0:09:32.760 Let's get more on the space warrend To Han is 0:09:33.000 --> 0:09:34.839 CEO of a Core Capital. It is one of the 0:09:34.880 --> 0:09:38.439 biggest non bank commercial real estate lenders in the United States. 0:09:38.679 --> 0:09:41.840 The firm has offices in New York, LA, Miami, San Francisco, 0:09:41.880 --> 0:09:44.320 and Dallas. They've got about twenty billion dollars in assets 0:09:44.360 --> 0:09:47.040 under management. We're joining us here in studio in our 0:09:47.080 --> 0:09:48.160 interactive broker studio. 0:09:48.160 --> 0:09:50.160 Welcome, welcome, Thank you very much, nice to be here. 0:09:50.240 --> 0:09:51.800 It's great to have you here. We do like the 0:09:51.800 --> 0:09:52.640 real estate space. 0:09:52.679 --> 0:09:54.600 I hate when we say how's it going, because it's 0:09:54.600 --> 0:09:57.720 obviously there's a lot of verticals to it in different areas. 0:09:57.800 --> 0:10:01.120 But look at the space, tell us how things are going, 0:10:01.120 --> 0:10:02.880 where's their strength, where there's weakness. 0:10:03.480 --> 0:10:05.240 Look, I mean there's a lot of headlines around the 0:10:05.280 --> 0:10:07.720 negativity in commercial real estate today, and a lot of 0:10:07.720 --> 0:10:10.840 that really driven by this rapid increase in interest rates. 0:10:10.920 --> 0:10:13.680 I mean, really when lasted we see interest rates rise 0:10:13.760 --> 0:10:17.079 this rapidly, and commercial real estate is an interst rate 0:10:17.280 --> 0:10:22.040 sensitive investment, so by virtue of that, one would conclude 0:10:22.080 --> 0:10:24.800 that there's going to be some issues. But the part 0:10:24.800 --> 0:10:26.520 that I think a lot of people are glossing over 0:10:26.920 --> 0:10:30.839 is the fact that fundamentals for commercial real estate are 0:10:30.880 --> 0:10:34.200 actually quite solid. And when I talk about fundamentals, just 0:10:34.200 --> 0:10:37.840 think about it in the context of what drives demand 0:10:38.200 --> 0:10:41.160 for a commercial real estate product, whether it's a hotel, 0:10:41.600 --> 0:10:44.640 whether it's an apartment building, whether it's an industrial complex, 0:10:44.720 --> 0:10:46.800 whether it's self storage, and the list. 0:10:46.640 --> 0:10:47.240 Can go on. 0:10:47.760 --> 0:10:51.480 What are those demand generators? And when we look at 0:10:51.520 --> 0:10:52.920 it and This is one of the reasons why I 0:10:52.960 --> 0:10:55.760 think this is in my career, twenty eight yr career, 0:10:56.280 --> 0:10:59.520 the most compelling time to be in commercial real estate, 0:10:59.600 --> 0:11:02.360 whether that coming in through the credit side like Acre does, 0:11:02.760 --> 0:11:08.080 or investing in this new vintage of equity. It's really 0:11:08.679 --> 0:11:11.800 that the fundamentals remain incredibly strong. 0:11:12.120 --> 0:11:13.719 So demand is there for. 0:11:13.679 --> 0:11:18.720 The products, but the fundamentals aren't strong across different sectors 0:11:18.960 --> 0:11:21.240 of commercial real estate. I mean, we talk a lot 0:11:21.240 --> 0:11:24.480 about different classes of office buildings, for example, and what 0:11:24.520 --> 0:11:26.720 we hear over and over again from folks is, okay, well, 0:11:26.960 --> 0:11:29.800 demand is strong when it comes to Class A buildings, 0:11:29.880 --> 0:11:32.440 but at the lower end you're not seeing demand for those. 0:11:32.720 --> 0:11:34.800 I mean, that's true, but let's go up one level. 0:11:34.880 --> 0:11:37.920 So what drives demand the consumer? Okay, So the consumer, 0:11:38.040 --> 0:11:42.120 particularly the higher income owners, continue to spend, and they 0:11:42.120 --> 0:11:43.360 could spend a lot. 0:11:43.520 --> 0:11:44.880 Take hotels as an example. 0:11:45.080 --> 0:11:47.000 If you take a look at the high end sector 0:11:47.080 --> 0:11:50.040 of hotels, the average daily rates is higher than it 0:11:50.080 --> 0:11:52.880 was in twenty nineteen by a big margin, and continues 0:11:52.920 --> 0:11:53.319 to grow. 0:11:53.800 --> 0:11:56.080 We just talked about it with the CFO of Hilton. Yeah. 0:11:56.240 --> 0:11:58.480 Absolutely so, yeah, and they're seeing it. 0:11:58.480 --> 0:12:01.280 They're also seeing expansion in the groups, meaning that the 0:12:01.320 --> 0:12:03.920 shrinking and the commercial risk state office sector is resulting 0:12:03.960 --> 0:12:05.640 in more folks wanting to go off. 0:12:05.440 --> 0:12:07.280 Sites to do group outings. 0:12:07.360 --> 0:12:09.920 So we've seen hospitality perform well, so the help of 0:12:09.920 --> 0:12:13.880 the consumer, right particularly higher end consumer. Secondly, corporate spending 0:12:14.640 --> 0:12:18.880 is rapid, and thirdly is government spending. In the United States, 0:12:19.080 --> 0:12:21.920 we have tremendous amount of stimulus going on through these 0:12:22.000 --> 0:12:24.640 various acts, whether it's the Infrastructure Act, the Chips Act, 0:12:24.679 --> 0:12:27.720 or otherwise driving trillions of dollars back into the economy. 0:12:27.800 --> 0:12:30.680 And all of this does is it drives the demand 0:12:30.679 --> 0:12:33.160 for commercial real estate product one way or another. 0:12:34.240 --> 0:12:36.440 Okay, big picture, I get it right. That sounds like 0:12:36.440 --> 0:12:38.480 a long term perspective. But what's the state of play 0:12:38.480 --> 0:12:41.160 between real estate right now and banks? And I'm curious 0:12:41.160 --> 0:12:44.240 if there's still some leeway to extend and kind of 0:12:44.240 --> 0:12:46.679 wait for lower rates to happen, because you know, as 0:12:46.720 --> 0:12:49.280 you say, real estate very sensitive to higher rates, and 0:12:49.360 --> 0:12:51.679 so for some folks in a low rate environment in 0:12:51.720 --> 0:12:54.600 the real estate spase, no problem higher rates, or if 0:12:54.600 --> 0:12:57.720 they've got to rethink those loans or rework those loans, 0:12:58.000 --> 0:12:59.559 that's a whole different story. And that's when you get 0:12:59.559 --> 0:13:02.559 into either problems defaults in some difficult situations. 0:13:02.640 --> 0:13:04.960 You're absolutely correct, and this is the story and the 0:13:05.000 --> 0:13:07.280 focus now. Clearly, at the beginning of the year, there 0:13:07.320 --> 0:13:09.280 was a lot of optimism as the FED was pivoting 0:13:09.360 --> 0:13:12.720 effectively signaling that they were going to pivot. Resulted in 0:13:12.760 --> 0:13:15.520 a lot more transaction volume and a buildup of investment 0:13:15.600 --> 0:13:17.959 sales and optimism buyers wanting to come in and sell 0:13:18.000 --> 0:13:21.440 ers wanting to transact. With a reversal in that sort 0:13:21.440 --> 0:13:23.760 of behavior, things have slowed down, at least on the 0:13:23.760 --> 0:13:25.120 transaction volume side. 0:13:25.240 --> 0:13:26.840 But coming back to the bank. 0:13:27.000 --> 0:13:29.680 Issue, this is the big issue, and this is the 0:13:29.800 --> 0:13:33.160 secular change in behavior that we see in the capital markets. 0:13:33.520 --> 0:13:37.200 So the regional banks made up seventy five percent of 0:13:37.280 --> 0:13:41.040 all commercial estate learns in the banking sector. It's just 0:13:41.200 --> 0:13:44.480 simply math, is what I tell our investors too. The 0:13:44.520 --> 0:13:47.320 bank's cost of borrowing is significantly higher than what it 0:13:47.400 --> 0:13:49.920 was historically, whether it's through deposits or whether it's through 0:13:49.920 --> 0:13:53.160 borrowing through the FED window or otherwise. And their assets, 0:13:53.160 --> 0:13:54.920 a lot of them are longer term assets at lower 0:13:55.000 --> 0:13:58.199 yield rates, resulting in margin compression for the banks. They 0:13:58.240 --> 0:14:01.080 have other issues to balance sheet, to relate issues. My 0:14:01.200 --> 0:14:02.600 belief is that we're going to see a lot more 0:14:02.679 --> 0:14:06.280 pain in that sector. You're also seeing an increased regulatory 0:14:06.800 --> 0:14:10.240 oversight of the regional banks. So them and the banks 0:14:10.280 --> 0:14:13.680 are overweight commercial real estate loans. So what's happening to 0:14:13.760 --> 0:14:17.080 them is their ability to deploy new capital today is 0:14:17.240 --> 0:14:18.440 highly highly limited. 0:14:18.640 --> 0:14:20.760 Now think about it, get it off their balance sheet. 0:14:20.880 --> 0:14:22.080 Yeah, that's so, there we go. 0:14:22.200 --> 0:14:25.800 So the question that I get asked a lot is, so, 0:14:25.880 --> 0:14:29.040 what is the investment opportunity in commercial real estate credit 0:14:29.120 --> 0:14:29.640 and how do. 0:14:29.600 --> 0:14:30.240 You access it? 0:14:30.680 --> 0:14:33.440 Think about it as four waves that are going to 0:14:33.520 --> 0:14:36.280 crest at a different point in time. There's half a 0:14:36.360 --> 0:14:39.800 trillion dollars of equity raised to invest in commercial real 0:14:39.880 --> 0:14:43.640 estates sitting on the sideline looking to invest. Secondly, you've 0:14:43.640 --> 0:14:45.600 got two and a half trillion dollars of debt coming 0:14:45.680 --> 0:14:47.880 due in the next four and a half years that 0:14:47.960 --> 0:14:51.160 needs to get refinanced. Thirdly, you have the banks to 0:14:51.240 --> 0:14:55.560 your point, sitting on a bloated ballanced sheets of commercial 0:14:55.600 --> 0:14:59.320 real estate. Those loans, with the FED keeping rates where 0:14:59.320 --> 0:15:01.520 they are, and they of capitals staying hi, they're going 0:15:01.560 --> 0:15:03.560 to need to offload some of these assets. 0:15:03.960 --> 0:15:05.200 So that's the third wave. 0:15:05.480 --> 0:15:07.920 And the fourth wave is that not many people are 0:15:07.920 --> 0:15:10.560 talking about. Is with interest rates being as high as 0:15:10.560 --> 0:15:12.600 there are, there's not a lot of free cash flow 0:15:12.680 --> 0:15:16.360 available to invest in the commercial real estate properties. So 0:15:16.480 --> 0:15:19.360 from a debt perspective, the banks are going to pull back. 0:15:19.680 --> 0:15:21.800 The private lenders are going to step into the void 0:15:22.000 --> 0:15:24.400 and provide the capital for the commercial real estate sector. 0:15:24.760 --> 0:15:27.520 But at the end of the day, your investors want 0:15:27.520 --> 0:15:31.480 to return, and in a higher interest rate environment, that 0:15:31.800 --> 0:15:34.360 might require a bit of patience. So I'm wondering about 0:15:34.720 --> 0:15:37.720 the patients that you guys have with real estate owners 0:15:37.760 --> 0:15:40.920 who borrowed perhaps a few years ago. Are you preparing 0:15:40.920 --> 0:15:44.080 for foreclosures as rates go up? Are you working with 0:15:44.160 --> 0:15:45.360 these borrowers? What's going on? 0:15:45.520 --> 0:15:49.080 Yeah, it's a fantastic question. Every lender is doing their 0:15:49.080 --> 0:15:51.640 invest to work with a borrowers. Now, keep in mind, 0:15:51.680 --> 0:15:56.600 this wasn't a situation where borrowers were behaving badly. It's 0:15:56.600 --> 0:15:59.000 not even an oversupply issue for the most part. There's 0:15:59.040 --> 0:16:02.520 some oversupply in this sectors, but that isn't really the driver. 0:16:02.880 --> 0:16:05.480 It was simply that you had good borrows. You made 0:16:05.520 --> 0:16:08.200 a good loan, but when a rate cap expires and 0:16:08.200 --> 0:16:11.920 the interest rate goes from three to eight, they can't afford. 0:16:12.160 --> 0:16:13.320 There's no free cash flows. 0:16:13.360 --> 0:16:14.360 So how patient are you? 0:16:14.640 --> 0:16:17.000 Well, look, we try to be as patient as possible. 0:16:17.000 --> 0:16:20.680 Most of our capital is actually long term capital. Those 0:16:20.680 --> 0:16:22.600 that are those lenders are going to have bigger issues 0:16:22.600 --> 0:16:26.640 are those that have leverage short term leverage obligations on 0:16:26.720 --> 0:16:29.680 warehouse lines and otherwise, and they're going to be less 0:16:29.920 --> 0:16:30.920 patient with borrows. 0:16:30.960 --> 0:16:32.680 So we're what's your long term So give me an 0:16:32.720 --> 0:16:34.360 idea of what long term is. They're taking five years, 0:16:34.400 --> 0:16:35.320 ten you We're like, what is it? 0:16:35.560 --> 0:16:38.640 Oh for our capital, Yeah, it's long term capital. It's 0:16:38.760 --> 0:16:40.880 way more than five years. So we can on some 0:16:40.920 --> 0:16:42.000 assets we're taking back. 0:16:42.080 --> 0:16:42.600 You can write it. 0:16:43.120 --> 0:16:44.800 We'll write it through, you know. And we have a 0:16:44.960 --> 0:16:48.120 very large asset management team. So we're very focused on 0:16:48.160 --> 0:16:50.440 getting out in front of the issues, working with borrows 0:16:50.560 --> 0:16:51.800 and then trying to get to. 0:16:51.720 --> 0:16:52.280 The other side. 0:16:52.320 --> 0:16:54.320 But will there be foreclosures and where will they be? 0:16:54.680 --> 0:16:57.360 There's going to be foreclosures that they're starting already now. 0:16:57.480 --> 0:16:59.880 Clearly we talked about office quickly. That is the eight 0:17:00.040 --> 0:17:02.880 underd pound Gorilla that is a secular change in demand 0:17:03.080 --> 0:17:05.919 driven by COVID. No one was expecting that. But you 0:17:06.000 --> 0:17:08.440 take a mid office building that is a B quality, 0:17:08.720 --> 0:17:09.880 a building that was no good to. 0:17:09.840 --> 0:17:10.800 Go in the first place. 0:17:10.960 --> 0:17:14.040 Yeah, that building is going to be riddled with problems. 0:17:14.119 --> 0:17:16.199 And there are a lot of those buildings in cities 0:17:16.240 --> 0:17:19.359 like New York, Chicago, Los Angeles and other places that 0:17:19.440 --> 0:17:23.880 are clearly having problems already. There's not it's very difficult. 0:17:24.080 --> 0:17:26.840 There's no real simple solution there. There's adaptive reuse. You 0:17:26.840 --> 0:17:31.040 can turn them into apartment buildings. That's tough, exactly, not easy, right, 0:17:31.320 --> 0:17:34.000 and and there's a bit of hope there. But there 0:17:34.000 --> 0:17:35.560 are things that Lenda's are going to take back that 0:17:35.600 --> 0:17:37.880 there's no real reuse. But it's I would say, it's 0:17:37.920 --> 0:17:41.000 really isolated to office. 0:17:41.160 --> 0:17:44.000 Is it just some office where there's going to be foreclosures? 0:17:44.080 --> 0:17:46.560 Is there other parts of the commercial real estate market 0:17:46.600 --> 0:17:49.159 where you where there might be some foreclosures? 0:17:49.200 --> 0:17:49.800 And forgive us, we. 0:17:49.840 --> 0:17:52.560 Said no, no, you're exactly So what's going to drive it? 0:17:52.600 --> 0:17:55.520 So we talked about fundamentals besides office. Right then you 0:17:55.800 --> 0:17:58.760 nailed it to im, talking specifically about the high end 0:17:58.800 --> 0:18:02.720 office buildings doing really well, well and out performing. But 0:18:02.760 --> 0:18:05.359 what are we facing today is an interesting thing. This 0:18:05.560 --> 0:18:09.800 isn't really a structural problem with commercial real estate. In 0:18:09.840 --> 0:18:13.199 other words, it's not necessarily an oversupply issue. It's not 0:18:13.320 --> 0:18:18.000