Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg P M L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. There's
Speaker 1: been a lot of concern about the three trillion dollar
Speaker 1: one trillion dollar junk bond market in the US for
Speaker 1: a number of years. This year, however, it has been
Speaker 1: out performing. Our next guest joins us to talk about that,
Speaker 1: John McClean, portfolio manager at Diamond Hill. John, I want
Speaker 1: to start with that because there's been a lot of
Speaker 1: concern about riskier assets this year, certainly volatility picking up,
Speaker 1: and yet the high old market has been significantly outperforming
Speaker 1: higher rated debt. What do you make of that? Well,
Speaker 1: I think it's uh, the credit spread that you have
Speaker 1: in in high yield is uh still reasonably attractive for
Speaker 1: the default rate expectations going forward. Uh, So you have
Speaker 1: UM you know with this case, you also have less
Speaker 1: interest rate sensitivity UM with with high yield, and so
Speaker 1: I think if people are worried about the markets, I'd
Speaker 1: first be a little bit more worried about equities as
Speaker 1: as opposed to high yield. When we talk about high yield,
Speaker 1: should we get specific and talk about some of the
Speaker 1: energy areas like oil, natural gas? I mean, because weren't
Speaker 1: they really the big focus of high you lending? Uh? Yeah,
Speaker 1: I mean that was definitely the story in sixteen. Um,
Speaker 1: I think the market has sharpened its pencil and understands
Speaker 1: where good assets are and where weaker assets are. And uh,
Speaker 1: from our viewpoint, you want to be concentrated in the
Speaker 1: Permian basin. And uh, you know, at this point, companies
Speaker 1: have right size their balance sheets. Uh. You know, I
Speaker 1: think we've seen all the distress kind of moved through.
Speaker 1: And uh, with the commodity environment where it is, particularly
Speaker 1: in oil, uh you know, around sixty bocks. Uh, that's
Speaker 1: pretty constructive for for a lot of the high yield
Speaker 1: issuers right now, all right, I want to talk a
Speaker 1: little bit about some of the sinkholes that we're seeing.
Speaker 1: For example, Community Health. Uh, yesterday it was rumored that
Speaker 1: it is going to hire advisors to restructure its debt
Speaker 1: and its bonds sunk. This sort of feeds on an
Speaker 1: ongoing slump in healthcare related junk bonds. Is this scenario
Speaker 1: where you see opportunity or that you want to avoid
Speaker 1: like a plague? Yeah, I'd probably see the latter. Uh.
Speaker 1: We are certainly underweight healthcare in general, and UH community
Speaker 1: specifically has a very tough path on a go forward basis.
Speaker 1: We don't really like the assets and we think that
Speaker 1: it has an untenable debt load. So I do believe
Speaker 1: a restructuring could occur U and could occur it seemingly
Speaker 1: faster than and the market has anticipated. Another name that
Speaker 1: caught my eye Valiant. This is a company with twenty
Speaker 1: seven billion dollars of debt. It just sold more bonds
Speaker 1: and there were plenty of buyers. Evidently were you among them?
Speaker 1: And do you view this as a sign that the
Speaker 1: pendulum has swung back to issuers in the high bond market. Well,
Speaker 1: we were not. And the coupon that they had to
Speaker 1: pay at nine and a quarter was pretty expensive relative
Speaker 1: to the market, yielding a little north of six percent.
Speaker 1: So uh, you know, they're in a position right now
Speaker 1: again with a with a very weakend. Uh, they have
Speaker 1: to continue to kick the can down the road and
Speaker 1: their interest costs continue to move higher. I don't think
Speaker 1: a deal is traded particularly well. Um, So you know,
Speaker 1: I think that one is certainly a wait and see story.
Speaker 1: Tell me about Sprint and they're going back to the
Speaker 1: market for more money and they using spectrum as collateral.
Speaker 1: You're kind of laughing a little bit here. Why we
Speaker 1: kind of put that in the too hard pile. It's
Speaker 1: it's very hard to you know, set a set a
Speaker 1: true valuation around what that spectrum is worth. So if
Speaker 1: we can't analyze and understand it, we're not going to
Speaker 1: commit capital to it. What about the e t F
Speaker 1: involvement in the high old bond market, there has been
Speaker 1: a sort of bifurcation between bonds that are included in
Speaker 1: the high yield bond e t f s and those
Speaker 1: that have not. How much do you sort of play
Speaker 1: that space and try to focus on bonds that are
Speaker 1: either in the e t F s or out of them. Yeah,
Speaker 1: I mean the e t f s are favorite trading
Speaker 1: counterparty Lisa UM. What does that mean? You have a
Speaker 1: technical buyer or seller, and they're typically buyers into strengthen
Speaker 1: sellers into weakness. UM. So for us, that is certainly
Speaker 1: an opportunity that we can exploit in the market, um
Speaker 1: by providing them the liquidity that they provide to their customers.
Speaker 1: So I think the E t f s and high
Speaker 1: yield are kind of a victim of their own success. Uh.
Speaker 1: They've been sold as liquidity, not as alpha. And uh,
Speaker 1: you know, I would say that if you look at
Speaker 1: their performance over any reasonable period of time, their bottom
Speaker 1: quartile performers. And uh. You know, with equity markets, you
Speaker 1: have cheap beta, and if you look at the expense
Speaker 1: ratios on the on these relative to true active management,
Speaker 1: you're not really getting a big break there. Tell me
Speaker 1: about private equity companies in their role in buying up
Speaker 1: how yield debt? What have you seen right now? Ah,
Speaker 1: there continues to be a swath of capital in in
Speaker 1: private equity, So uh, you know, I would continue to
Speaker 1: think that we will see more on the LBO front. Um.
Speaker 1: It's just how much leverage you can put on companies.
Speaker 1: So I'm wondering you said initially you expect the default
Speaker 1: rate to remain low, John, what are you looking at
Speaker 1: in particular to signal that the tide is turning? Because
Speaker 1: this is sort of the key question that everybody turns
Speaker 1: to when they talk about strength and risk your assets.
Speaker 1: I mean, we're looking at underlying economic data and growth
Speaker 1: seems to be here. Unemployment rates continue to be very low.
Speaker 1: You know, it is a strong labor force right now.
Speaker 1: So uh, you know, again, we we remained pretty constructive
Speaker 1: on the fundamentals of the US economy and with high yield,
Speaker 1: roughly of revenues are generated domestically. Netflix interested in buying
Speaker 1: Netflix debt? They've certainly got a lot of it at
Speaker 1: a certain price, absolutely a price. Uh you know, I
Speaker 1: would say with Netflix, Um, you know, we would look
Speaker 1: to where they were issuing that several years ago. Um,
Speaker 1: you know, if you could get a high fives uh
Speaker 1: six percent kind of coupon on a name, I think
Speaker 1: that would be very attractive. Now, what will we see that?
Speaker 1: I don't believe so. Um, but you look at the
Speaker 1: content library itself covers the debt there, so it's a
Speaker 1: company you can believe in the equity market capitalization. That's
Speaker 1: a that's a huge margin of safety for US. Which
Speaker 1: companies in this sort of triple B sphere, the lowest
Speaker 1: rated investment grade tier are you watching for a potential downgrade? Uh? Yeah,
Speaker 1: that's a difficult one right now. It's not a particular
Speaker 1: area of the market that that we're really focused on. Um,
Speaker 1: you know, I think we'll we'll continue to see uh
Speaker 1: you know some fallen angels like a Teva um you know,
Speaker 1: where you have large scale M and A that doesn't
Speaker 1: work out. But there's nobody particularly on my radar right now,
Speaker 1: toys r Us tell me about any Were you involved
Speaker 1: with any of that? No, that was the train wreck
Speaker 1: we saw coming a mile away. What what what gave
Speaker 1: you that? I mean a lot of people obviously didn't
Speaker 1: see that train. They thought it was light at the
Speaker 1: end of the tunnel. When's the last time you've been
Speaker 1: to a Toys r Us? Basically, Like it was basically
Speaker 1: something as basic as that you run it. You talk
Speaker 1: amongst yourselves at the at the firm, say, we don't
Speaker 1: even do this ourselves. Yeah, that's certainly a part of it.
Speaker 1: And uh, you know they are, they were saddled with
Speaker 1: too much debt and uh you know, their competitors were
Speaker 1: taking market share for a long period of time. So
Speaker 1: it was something that uh, you know, we felt like
Speaker 1: we could see well in advance. I want to thank
Speaker 1: you very much for being with us. John McClean is
Speaker 1: portfolio manager for Diamond Hill Investment Group, helping to manage
Speaker 1: more than twenty two billion dollars based in Columbus, Ohio.
Speaker 1: Although Mr McClean hills from the great state of Kentucky,
Speaker 1: factory work and the industrialization of the world. It has
Speaker 1: attracted political pundits, but it also has now attracted a
Speaker 1: analysis by Joshua Freeman. He is a distinguished Professor of
Speaker 1: history at Queen's College and the Graduate Center of the
Speaker 1: City University of New York of Cuney, and his book
Speaker 1: is entitled Behemoth, a History of the Factory and the
Speaker 1: Making of the Modern World. And he joins us here
Speaker 1: in our eleven three oh studios. Professor Freeman, thank you
Speaker 1: very much for being here. First, tell us why did
Speaker 1: you decide to write this book? Well, you know, I
Speaker 1: was what caught my attention was in two thousand and
Speaker 1: ten when there was a sudden bursts of attention to
Speaker 1: Fox con because there was some suicides of its workers
Speaker 1: jumping off the roofs. And this this got, you know, attention,
Speaker 1: and what que my make maker of iPhone products, maker
Speaker 1: of iPhone you know, and biggest and not just iPhone,
Speaker 1: but Samsung and many, many different things. And what caught
Speaker 1: my eye was the size of the factory. It had
Speaker 1: two hundred and fifty thou workers and as in a story,
Speaker 1: and this was mind blowing. This company I had barely
Speaker 1: ever heard of. And I started thinking, you know, are
Speaker 1: their precedence for this kind of outsized establishment? And you know,
Speaker 1: I thought, well, yeah, they kind of are, and that
Speaker 1: in each era for three hundred years now they have
Speaker 1: been kind of cunning edge establishments that have been the
Speaker 1: templates for the future and have captured public attention, you know,
Speaker 1: because they've become carriers for debates about, you know, what
Speaker 1: our future should look like, you know, what system should
Speaker 1: we have. So that's what it got me into this book.
Speaker 1: I thought, let me do some case studies that start
Speaker 1: with the earliest English factories and in with Fox coun
Speaker 1: One of the brilliant things about the way you framed
Speaker 1: this was looking at factories as disruptors, not sort of
Speaker 1: moments of nostalgia that people want to get back to.
Speaker 1: Can you give us a sense of kind of how
Speaker 1: you did that, what you were thinking, Well, you know,
Speaker 1: I think in the States right now, we look at
Speaker 1: decline and abandonment so much. But you know, I want
Speaker 1: to tell the story when these things were sources of wonderment,
Speaker 1: when these were new things under the sun, that they
Speaker 1: represented these great breakthroughs in human ingenuity and capacity and
Speaker 1: also frankly, human misery at the same time. You know,
Speaker 1: they're all linked together. Um. And what I found over
Speaker 1: and over again was the observers saw them this way
Speaker 1: almost immediately, whether it was in in eighteenth century England,
Speaker 1: or the people that flooded into tour the Ford Factory
Speaker 1: in the nineteenth nineteen twenties, UM, or the photographers who
Speaker 1: celebrateed Soviet factories, that there's a great sense that this
Speaker 1: was some vision of what the new society was going
Speaker 1: to be like. Maybe described for listeners what it would
Speaker 1: be like if you were to enter a factory that,
Speaker 1: let's say, operated in the United States, a textile mill,
Speaker 1: for example, around the turn of the previous century. Well,
Speaker 1: you know, if you were going into a textile mill
Speaker 1: in the early days of textile manufacturing, uh, probably you
Speaker 1: were coming from the country or rural life. And first
Speaker 1: of all, you've probably rarely ever seen so many people
Speaker 1: in one place or such a large building. You know,
Speaker 1: even just going in a five story building was a
Speaker 1: new thing. Then it was loud. You know, there's all
Speaker 1: this machinery, weaving machinery you know has has you know,
Speaker 1: throws back and forth the shell sixty times a second.
Speaker 1: You couldn't hear anything. It's stunk because you know, they
Speaker 1: were this before oil. They were using whale oil and
Speaker 1: animal grease. UM. And there were all these workers, and
Speaker 1: yet it was all being coordinated. It was all in
Speaker 1: one with them, the whole thing, the people in the
Speaker 1: machinery was one enterprise. UM. In the best of the factors,
Speaker 1: you might see pretty nice looking young women mostly you know,
Speaker 1: we came from New England farms. Uh. In the worst
Speaker 1: of the factories, you'd see child labor looking pretty darning,
Speaker 1: miserable and starved. So, Josh, let's connect this to now,
Speaker 1: because we hear a lot about bringing manufacturing back to
Speaker 1: the US, keeping uh some of these assembly line and
Speaker 1: production jobs in America. And I'm wondering, what moment in
Speaker 1: time are politicians talking about this looking at what which
Speaker 1: which era of manufacturing do they want to bring back?
Speaker 1: And what's that tell us about our moment right now? Uh?
Speaker 1: In humanity? Well, I think the nostalgia, if you want
Speaker 1: to call that, uh, the the the make America great again.
Speaker 1: I think people are thinking really about the fifties and
Speaker 1: the sixties. Uh. And this was an era when you
Speaker 1: had the height of American manufacturing industry and unionization, which
Speaker 1: meant that the the tremendous uh productivity lead to profits
Speaker 1: that were widely shared. So it's sustained a way of
Speaker 1: life of upward mobility for people who came out of
Speaker 1: high school, got a job in the local plant, did
Speaker 1: better than their parents, and knew the kids were going
Speaker 1: to do better than them. And I think that's the
Speaker 1: moment people look back to. You know, I'm not so
Speaker 1: sure of bringing a fox con plant as they operate
Speaker 1: in modern China is going to sustain that way of life.
Speaker 1: You know, Wisconsin just uh said it would spend three
Speaker 1: billion dollars to do that. It will be interesting to
Speaker 1: see what actually happens. You were not only uh analyzing
Speaker 1: historical precedent, but as Lisa brought up, current factories, factories
Speaker 1: in China, just give us a sense of the scale. Uh.
Speaker 1: And and there again, if we can draw us a
Speaker 1: picture their mind box, they're absolutely mindboggling you know fox
Speaker 1: KNT City, which was their big ascendion center, which is
Speaker 1: still operating, although there are many other plants. Uh. It
Speaker 1: takes an hour to walk across the complex. Um there
Speaker 1: are you know, something like two hundred three hundred thousand
Speaker 1: people there. Uh, seventy or eighty thousand of them live
Speaker 1: in dormitories. These are young Chinese people, mostly coming from
Speaker 1: the rural areas. Um. There's the factories themselves, which combine
Speaker 1: both very sophisticated production techniques and just very old fashioned
Speaker 1: assembly with people doing very fine putting together of small
Speaker 1: things to go into your phone or the mother boarder
Speaker 1: of your laptop. But it's surrounded by whole world. You know,
Speaker 1: there's everything from soccer fields to cyber cafes to wedding
Speaker 1: dress shops. You know. Uh. I think for a lot
Speaker 1: of young Chinese people this who are leaving behind, you know,
Speaker 1: less developed rural areas, this is an interlude that that
Speaker 1: that's difficult. The work itself is tough and boring, but
Speaker 1: also it was a glimpse into a more urban, cosmopolitan
Speaker 1: world before they go back to where they came from,
Speaker 1: which is what happens with most of these workers. What
Speaker 1: about pay well, it depends on what you measure it by.
Speaker 1: By U s stands, of course, it's very low. But
Speaker 1: pay in Southern china's gone up. There's been actually a
Speaker 1: big wave of strikes, which doesn't get much publicity in
Speaker 1: this country. That's pushed up wages and in fact, UH
Speaker 1: some companies, like there's a company that makes UH shoes
Speaker 1: for of Anka Trump's line, have begun building factors in
Speaker 1: Africa because pay rates in Southern China are now going
Speaker 1: up pretty quickly. So um, you know, UH, it's a
Speaker 1: very fluid situation and the cycle that we saw in
Speaker 1: the United States and elsewhere of you know, you build
Speaker 1: a new factory, it's innovative, but but at some point
Speaker 1: it gets eclipsed by by the newer version of it,
Speaker 1: and labor course another course go up, and then it closes.
Speaker 1: That cycle seems to be happening ever faster. It's it's
Speaker 1: just a fascinating issue. Thank you so much for joining us,
Speaker 1: really truly pleasure. Josh Freeman Distinguished Professor of History and
Speaker 1: author of Behemoth, History of the Factory and the Making
Speaker 1: of the Modern World. He is at Queen's College and
Speaker 1: the Graduate Center of the City University of New York,
Speaker 1: And it raises this question of, you know, can you
Speaker 1: ever focus on just recreating that one moment where it
Speaker 1: all works together and wages are rising and the jobs
Speaker 1: are still innovative going forward. The United Kingdom's Prime Minister,
Speaker 1: Theresa May expelling twenty three Russian diplomats to talk about
Speaker 1: this and other possible points of contention between the European Union,
Speaker 1: the UK, the United States and Russia. We want to
Speaker 1: bring in Toby Harshall, Bloomberg U national Security Editor. Tobe
Speaker 1: how much of a big deal is this? Um, It's
Speaker 1: both a big deal and not a big deal. UM.
Speaker 1: It's going to depend on exactly who the diplomats are.
Speaker 1: I think Theresa May is in front of Parliament right now.
Speaker 1: It may or may not come up. She's going to
Speaker 1: give a statement later in the day sort of with
Speaker 1: more details. I mean, this is this is all part
Speaker 1: of the game that they play. Um. We suspended, you know,
Speaker 1: under the Obama administration, we suspended Russian diplomats and we
Speaker 1: took over their their lovely shore house in Maryland. UM.
Speaker 1: And I don't think anyone truly it's more of a
Speaker 1: statement than it is actually messing up their their their embassy. Okay,
Speaker 1: so there was this nerve agent attack of a former
Speaker 1: Russian citizen. He was killed in the UK. Interest, Yes,
Speaker 1: hanging on, but they're hanging on. But they're both hanging on. Okay,
Speaker 1: great died overnight. But okay, um, Okay. How important is
Speaker 1: it that President Trump respond to this in support of
Speaker 1: the United Kingdom? Um? It's only important because it's President Trump. Um,
Speaker 1: because of you know, his statements during the campaign that
Speaker 1: led a lot of people to think he was going
Speaker 1: to be squishy on Russia. Um. He actually hasn't been. Um.
Speaker 1: They've been pretty tough on on Putin. Um since they have,
Speaker 1: since they've taken office, they upped sanctions, they've they're rhetoric
Speaker 1: has been pretty good. Um. But yeah, it would be
Speaker 1: nice to see him just add moral support. Toby, is
Speaker 1: this more about the optics and the headlines? Because I
Speaker 1: can't imagine, as horrible as it is, that this is
Speaker 1: a security threat to let's say, either the United Kingdom
Speaker 1: or to the United States. And I'm wondering whether this
Speaker 1: is in a sense of diversion of attention away from
Speaker 1: issues having to do with challenging air power in the
Speaker 1: Baltic sale of military hardware to Turkey and perhaps even
Speaker 1: undermining NATO. That's always a possibility. I'm gonna I'm gonna
Speaker 1: be the skunk at the garden party for a moment,
Speaker 1: for we don't actually have proof that Rushes behind this. UM.
Speaker 1: We strongly suspect for good reason that they were, so
Speaker 1: I don't want to get into their motivations behind it. UM.
Speaker 1: I don't think that anyone would would think this is
Speaker 1: gonna going to keep the attention off of their other
Speaker 1: nefarious doings for very long. In fact, I think it'll
Speaker 1: only add to the image of of of the Russians
Speaker 1: as as you know, being a huge problem. Okay, so
Speaker 1: let's say, okay, it hasn't been proven. Both individuals who
Speaker 1: are attacked with a nerve agent are are still hanging on,
Speaker 1: although they are critically ill. Uh. At the same time,
Speaker 1: Rex Tillerson came out in strong support the now former
Speaker 1: Secretary of State for the U S came out in
Speaker 1: strong support of Theresa May and the United Kingdom in
Speaker 1: their efforts to go after this. Whereas yesterday we heard
Speaker 1: President Trump waffle on the issue, saying, you know, well,
Speaker 1: we'll see what happens whether it's Russia or whoever else.
Speaker 1: I mean, this seems symbolically important. Are we reading too
Speaker 1: much into that? Um? I think in the US we
Speaker 1: maybe are. I mean, for the Brits to react like
Speaker 1: this is very much called for. I mean, this is
Speaker 1: an attack on their on their sovereign territory. Um. It's
Speaker 1: also you know, if Russians were behind it. Remember that
Speaker 1: some he was part of a prisoner swap. So this
Speaker 1: is breaking all the rules of the Cold War. Um.
Speaker 1: Once you're part of a prisoner swap, you're supposed to
Speaker 1: be clear. I mean, we're not going to go after
Speaker 1: the people that he was traded for and try and
Speaker 1: kill them. Um. It it's therefore, it's different than the
Speaker 1: previous poisoning case, UM, where the person was a defect,
Speaker 1: not a defector anymore, but had fled the Soviet Union
Speaker 1: and was living, you know, in quasi hiding. UM. It's
Speaker 1: no better to attack people with with nerve agents, UM,
Speaker 1: no matter their status. UM. But this is it's really strange, Toby.
Speaker 1: Let's just shift to the US and our own defense
Speaker 1: budget right now. What's the most important issue that should
Speaker 1: be before people's attention when it comes to spending over
Speaker 1: seven hundred and what sixty billion a year. I hate
Speaker 1: to say it, but it's actually UM pension and healthcare
Speaker 1: reform for for veterans. I don't think we can do
Speaker 1: much about that. For UM the current retirees. I mean,
Speaker 1: we made a promise to them. They put their lives
Speaker 1: on the line. UM. But I think we have to
Speaker 1: be much much tougher on UM. The people in the
Speaker 1: service and particularly new recruits and with disaffect things like
Speaker 1: the Veterans Administration. Yeah, that's a separate budget technically, UM,
Speaker 1: but I think there are a lot of savings to
Speaker 1: be done there. UM. The disability UM program in the
Speaker 1: v A is an absolute disaster. In fact, when they
Speaker 1: had the huge scandal about the waiting times a few
Speaker 1: years ago, UM, almost all of those people were not
Speaker 1: waiting to be admitted to a hospital. They were UM
Speaker 1: looking to have their disability claims reviewed and a larger
Speaker 1: monthly checks. So it wasn't it wasn't as horrible as
Speaker 1: it seemed. It was bad that there was this huge backlog,
Speaker 1: But the real problem is UM the people get you know,
Speaker 1: they're great, they were in the military, they're they're strong
Speaker 1: and capable people, and they get sort of sucked into
Speaker 1: this this this disability trap um, where there's not a
Speaker 1: good system to get them back in the workforce and
Speaker 1: it's sort of a subsistence living. Toby harsh thank you
Speaker 1: so much for being with us. As always, we love
Speaker 1: having you on. Toby Harshot Bloomberview, National Security editor, talking
Speaker 1: about the move the Teresa May announced today expelling twenty
Speaker 1: three Russian diplomats. Where are we in the real estate market?
Speaker 1: Cycle here to answer that question so that you can
Speaker 1: rest easy, as Scott Lawler, founder and chief executive officer
Speaker 1: of Waypoint Residential based in Connecticut, but here in our
Speaker 1: eleven three oh studios today in New York, Scott, I
Speaker 1: want to start with that question. But before we get
Speaker 1: into the answer, has the market in the US ever
Speaker 1: been more bifurcated between cities that have seen an explosion
Speaker 1: of growth and price increases and the sort of smaller
Speaker 1: and mid tier communities that kind of had been left
Speaker 1: behind until recently. Um, well, it's hard to say where
Speaker 1: whether it's ever been more bifurcated, but it certainly is
Speaker 1: now right and so what we're experiencing is, um, there's
Speaker 1: a tremendous influx of capital into major coastal markets, institutional capital,
Speaker 1: foreign capital and so on. And one of the reasons
Speaker 1: we try and um playing a little bit different playing
Speaker 1: field is because of that. So it's the case that
Speaker 1: capital has now flowed further out, and we used to
Speaker 1: be a little bit ahead of the packer. So we
Speaker 1: hoped and felt um playing in secondary tertiary markets even
Speaker 1: as recently as three or four years ago. We talk
Speaker 1: secondary tertiary, we're talking perhaps Baltimore, uh, Pittsburgh, New York.
Speaker 1: As view of the world is different, but you know,
Speaker 1: markets as small as half a million million people and
Speaker 1: so on. UM, there's a point in time when we
Speaker 1: felt we were you know, we didn't have as many
Speaker 1: friends pursuing deals in those markets. And what's going on
Speaker 1: is because of what we talked about a minute ago,
Speaker 1: and the tremendous influx of capital into the major coastal
Speaker 1: markets driving down yells, um capitals spread out in search
Speaker 1: of yield. So the markets are absolutely bifurcated, but we're
Speaker 1: seeing a dynamic where the smaller markets are becoming more
Speaker 1: competitive as well. Tell us about the time, I think
Speaker 1: it was recently that you broke ground on a new
Speaker 1: development in Georgia. This is a senior living facility and
Speaker 1: it combines a couple of different things. It's what they
Speaker 1: call memory care community. And maybe just use that as
Speaker 1: an example of the kinds of new things that you're
Speaker 1: doing and the demand that you see demographically for this
Speaker 1: kind of real estate. Yeah, so senior housing, Uh, it's
Speaker 1: a sector we're very excited about. Um. We've got into
Speaker 1: it about a year ago. That was our first investment,
Speaker 1: and it's it's a good thirty to forty minutes outside Atlanta, okay,
Speaker 1: um a little bit more than a hundred units noon
Speaker 1: and Georgia. That's right. And relative to what I was
Speaker 1: talking about a minute ago, you know, Atlanta, depending how
Speaker 1: you look at some would consider a major market, tremendous
Speaker 1: capital inflow and so on. So we have to be
Speaker 1: thoughtful about where we play from a geographic perspective as
Speaker 1: it relates to the product type. So this is a
Speaker 1: mix of independent living, assisted living in memory care, which
Speaker 1: is typically how we like to do it, UM and
Speaker 1: and show it's ground up development and and the idea
Speaker 1: here is really um like everyone, I should say like everyone,
Speaker 1: but senior has become much more competitive in a response
Speaker 1: to sort of you know, the demographic tidal wave that's coming,
Speaker 1: and we understand that, and for actually many of our
Speaker 1: friends do too, and so this space has become more competitive,
Speaker 1: and so we bring to bear the same philosophy and
Speaker 1: trying to be thoughtful about how we play geographically, so
Speaker 1: we get the benefit of that demographic tidal wave, but
Speaker 1: not necessarily compete with all our best friends when we're
Speaker 1: pursuing opportunities. And this was a joint venture with Watercrest
Speaker 1: Senior Living, right, that's okay. Use that as an example
Speaker 1: to sort of explain how you survived the two tho
Speaker 1: eight downturn to then be able to do something like
Speaker 1: this because you were at Broadway Partners and boy, you
Speaker 1: probably have the scars to prove it. Yes, I was, UM,
Speaker 1: and I do and so UM, look what we're doing
Speaker 1: now is a very different business plan. UM for a
Speaker 1: couple of reasons, UM were big believers in the apartment sector.
Speaker 1: There are all sorts of things driving the sector and
Speaker 1: I'm sure you've had other folks talked about it and
Speaker 1: all that kind of stuff. And this sector has performed
Speaker 1: very well in this UM cycle, and importantly performed on
Speaker 1: a comparative basis during that crash, okay, um better than
Speaker 1: other commercial property types. It's basically a less volatile, lower
Speaker 1: beta sector. So whereas office buildings, UM, shopping centers, hotels
Speaker 1: experienced certain fluctuations and rents and values and so on,
Speaker 1: the market blows up, apartments experiences cycle, but at too
Speaker 1: much lesser degree. Coming out of what you refer to
Speaker 1: that that sounded pretty cool to me. So, Um, part
Speaker 1: of what we're doing is to take advantage of tremendous
Speaker 1: macro drivers that are behind the apartment sector. And part
Speaker 1: of it is, you know, as you point out, Um,
Speaker 1: we're coming out of that cycle. The way we did
Speaker 1: something with a little bit less volatility felt pretty good.
Speaker 1: So what we did is, you know, we went through
Speaker 1: the cycle of Broadway. We had a lot of difficulty, Um,
Speaker 1: kind of experienced a little bit of everything and contending
Speaker 1: with lenders and investors and so on. But we came
Speaker 1: out of it, I think a lot better than a
Speaker 1: lot of people thought we were gonna And when it
Speaker 1: was time to start investing again, we said, you know,
Speaker 1: it's been a few years since we've done a deal.
Speaker 1: Let's take a look around, decide what we think makes
Speaker 1: the most sense. I had assumed all along I would
Speaker 1: just get back in the office business. But when we
Speaker 1: looked around, we decided there was a lot to like
Speaker 1: about the apartment business, and we started by dipping our
Speaker 1: toe in the water. We did a couple of deals
Speaker 1: with some part to check it out. Decided we were
Speaker 1: big fans, and decided to kind of go full speed
Speaker 1: real quick. Given the scars that you have, what are
Speaker 1: you looking for to indicate that another downturn in the
Speaker 1: housing market is UH is coming. Well, let me respond
Speaker 1: to the question a little differently. As far as another
Speaker 1: downturn coming, here's how we structure our business. Okay, And
Speaker 1: that's what I spend the most time thinking about. It's
Speaker 1: not trying to forecast when the downturn is coming, but
Speaker 1: making sure we're positioned to contend with it. So we
Speaker 1: do extreme downside sensitivity analysis. Okay, we look at the numbers. Basically,
Speaker 1: we look at every acquisition as if two thousand and
Speaker 1: it was happening the next day. And more than that,
Speaker 1: we we show those numbers to our investors. And I
Speaker 1: get asked that question all the time. I call it
Speaker 1: the ending question, Scott, what inning or in fact, I
Speaker 1: think you opened the segment that way, and my answer
Speaker 1: is always I don't know, but he let me tell
Speaker 1: you what's going to happen when, And I say, if
Speaker 1: this acquisition experiences two thousand and two tho nine, here
Speaker 1: is arithmetic, and the way you get there is with
Speaker 1: very conservative use of leverage and playing in a relatively
Speaker 1: low beta sector like I described. And when you bring
Speaker 1: those two things together, you're able to very confidently say
Speaker 1: there's going to be a cycle. Here's the information, right.
Speaker 1: I don't know when, why, and how bad, but I
Speaker 1: know we're okay when it happens. And being a good
Speaker 1: steward of capital, I think is much more about being
Speaker 1: able to answer the question that way than saying we're
Speaker 1: in the seventh or eighth or ninth or whatever the
Speaker 1: case may be. Much appreciate it. Comeback spend more time
Speaker 1: with us. Scott Lawler as the founder and the chief
Speaker 1: executive of Waypoint Residential, giving us his views on the
Speaker 1: real estate industry. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm pim Fox I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo wits one Before the podcast,
Speaker 1: you can always catch us worldwide on Bloomberg Radio