Latest / The Promote Podcast / JPM's Roosevelt Run & Cortland's PE Courtship
Transcript
- Hiten Samtani (00:00) So dude, I know you're fast becoming a cricket fan. Have you ever heard of the term reverse swing? Reverse swing is kind of one of these dark arts. It was pioneered by the Pakistanis and it's flum expatsment of all stripes for decades. And I kind of thought of it again because of what the Pakistanis are doing at the Roosevelt Hotel in New York City. Will Krasne (00:02) Yeah. I don't know. very unpredictable and sort of all over the place. So yeah, sounds right. Hiten Samtani (00:28) Welcome back to the Promote Podcast, your insider guide to the money and mania of the CRE markets. Lieutenant Will here as always. There's so much to discuss, quite a lot. JP Morgan's making a play for the Roosevelt Hotel. A deal would mean the mighty bank controls over 7 million square feet of prime midtown space. Will Krasne (00:49) almost enough to fit all of Jamie Dimon's ego. Hiten Samtani (00:53) But with the Pakistani government on the other side, it's not going to be that straightforward. Starwood is in &A mode. It's buying Brookfield's triple net machine. And multi-family giant Bell Partners in Cortland are getting their summer bods ready for suitor. Will Krasne (01:06) decided to dig on these. Hiten Samtani (01:10) A shout out to our sponsor Vesto, which gives CRE players a single, clear point of access for all their bank accounts. You'll hear more on them in a bit. Since we always get accused of favoring New York, we definitely are partial, but we always start with New York. Let's go all the way south to kick this off. Let's go to Greensboro, North Carolina. I love it. What's going on there? Will Krasne (01:24) I why wouldn't you? So Bell Partners is putting themselves through a process, not just selling the assets, their portfolio, or their management company, they're selling the platform, the opcode is. Hiten Samtani (01:48) Yeah, it's a little bit unclear on what exactly they're doing. All we know for certain is that they've hired an external firm to explore options, bringing in a capital partner, an outright sale or like a sale of an arm of the business. It's not clear exactly. Will Krasne (02:01) what they're ⁓ Hiten Samtani (02:16) predicted, yeah, there's not that much upside yet. Will Krasne (02:19) Predictable and there is value to that. So if you look at your starwood taking milestone private like they people ascribe value like real value to those platforms Yeah, or for Bell, I mean, I think there's also value just to their dev machine So someone can buy into their pipeline and look to capitalize it over time So I guess a little bit unclear as to what's going on. But if they were just selling their existing portfolio, they'd probably hire pick any one of the typical Hiten Samtani (02:47) Yeah, want to see BRE or etc. It seems like they're hiring an iBank. Again, we don't have that name yet. On the other hand though, and I don't think you know this well yet, Kortland, which is a lot bigger, Atlanta based giant, they are also going through process right now and they have hired Evercore to help them figure out exactly what's what. Will Krasne (02:50) Yeah, sounds like they're hiring corporate bankers. Breaking news happening right now breaking news for Wow, so that is... Yeah, you guys can't see me, but I'm a little startled. don't know what's set. Hiten Samtani (03:17) That's a little bit of news, So, Cortland's a very big deal. This is about 70, 75,000 units that they own. So they're, you know, I think a top 10 landlord in the country. Steve DeFrancis has built quite a machine. And I think the idea here from sources that the promote spoken to is there's so much money flowing into the space, so much private equity money, retail money, et cetera. What are we worth? Can we get a bigger war chest? With Courtland, I think the idea is to basically retain control unless it's some sort of stupid money offer and just kind of expansion fuel. That's the play that I've been told this is. Will Krasne (03:57) Interesting. that, mean, Steve has, Steve, I'm not like on a first name basis with him. Steven DeFrancis has built, he's a G, he's built an incredible machine. I mean, I think there's, can listen to him on, think on the Walker webcast from like a couple of years ago during COVID. And he's talking about how like they vertically integrated their sourcing of like marble for all of their unit renovations. Cause they do so many of those per year and they have standardized all that. And you know, they're very focused on like being top owners in their markets. and made a ton of for people and for themselves. ⁓ Hiten Samtani (04:29) Yeah, they're a cash cow. think they're also pretty quiet giants, think partially because of where they're headquartered. They kind of fly under the radar. There have been two big news events related to them. One is they're one of the central landlords in that whole real page lawsuit, the crackdown on those big landlords. And I think they were the first ones to settle and figure something out with the DOJ. So that's one. The other one is a little more smaller, but more fun for us. They've stepped into a floating and they did rescue prep in Buckhead. Will Krasne (05:00) That's in their backyard. They're very creative. They can operate stuff, which is sort of how you're going to really do deals at scale right now is figuring out creative ways to get into the capital stack and take over versus just sort of waiting and paying the highest number to, you know, a broker process. That's just sort of what's going to happen right now. I think it's really interesting. think Courtland in particular, because that business is, you know, fees coming in, like they have a fund series, they're vertically integrated. ⁓ I don't blame him for doing this because they are playing offense right now. They have made it through a couple of cycles and incredibly highly thought of, as a ⁓ very well run company. There's such a low supply of good things to buy at scale that like if Cortland comes out, it's the same story in the multifamily market right now. I can't tell you the number of institutions I talked to that say like, yeah, we're looking at like six and a half cap buys and like, crime bug head like sure you are a whatever like good stuff trades low five high four ⁓ even a little tighter tax adjusted. Hiten Samtani (06:05) You're not wrong. From the numbers I've been hearing recently, that's right. Will Krasne (06:10) It's exactly right and Cortland is the same thing. Yeah, it's a tough M &A market Yeah, you know people are uncertain about a lot of things But if you have a great company and there's no other great companies that are gonna take people's attention I guess we're talking about Bell So there's two good companies, but Coraline sort of I think a little bit of a different beast. Yeah Hiten Samtani (06:28) But it's also, don't you think it's also like they see the crop of players out there who really, really want to spend money and scale up in these fields. So look at Blackstone Air Communities, KKR Quartera, right? Apollo just bought Bridge Investment Group. So these are like multi-billion dollar deals. Will Krasne (06:43) Artemis getting bought by bearings. We've talked about a lot of these I mean Why wouldn't six street buy them just saying like they did that big deal for LNM. Like why wouldn't they do this? Hiten Samtani (06:52) the way that I'm understanding the Cortland thing, if it is growth capital, et cetera, it would be similar to what they did with LNM, what Sixth Street did with LNM, which is like take a minority stake and now Ron Mollis can kind of run right. Will Krasne (07:05) Well, I mean, you still had Steve DeFrancis from Riot, think, here. Hiten Samtani (07:08) Yeah, but so there, as I understand it, doing it from a position of strength, there are others who are putting themselves through a process maybe from a weaker position where they're kind of, we've talked a little bit about how the middle is death. If you're a small sharpshooter, great. If you're Blackstone, gobble everyone up, great. But the ones that are in the middle, and I would imagine Bell Partners falls into that category, it's like you struggle to do the biggest best deals and. and rates haven't gone your way. It can be very challenging and from the outside you may not know it. Will Krasne (07:40) Totally, and you may have payroll and GNA that's been expanding at a rate higher than you've been making money on the top line, and that can really eat away you really quick. And if you go through a couple of cycles without promotes, then it's really tough to pay your people. And if they walk out the door, you're in trouble. I mean, it's smart on Cortland's part too, because off the top of my head, I can't tell you how big their fund series have been, but they have real big institutional investors. But if you're able to put a bunch of cash on the balance sheet right now, like, That seems like a pretty good idea. And if Steve DeFrancis can crystallize a number and the management team crystallizes a number, mean, good for them. Hiten Samtani (08:14) The way that, you know, Star employees are encouraged to go out there in the market every so often and see what they're worth. Will Krasne (08:20) I mean, our hobby horse, Prof. G, have us on. You know, every three years when you're a professor, you gotta go get an offer from another firm. And Cortland is doing really well, and as well as anyone in this space, I guess, can. And like you said, you get the nail in head. They're coming from a position of strength. And the best time to raise is when you don't need the money, and the best time to sell is when you don't have to. Hiten Samtani (08:42) It's true. And markets can really smell desperation when it comes down to it. I want to talk quickly about just some other strategies that people are using now to kind of expand the pool of capital available for investment. I read a piece in Perry, think a couple of days ago, where Greystar, they just launched a private wealth team to expand the net outside of institutional capital. Super interesting. Will Krasne (09:05) This has been the Holy Grail. People have been talking about this in private equity for 10 years. I remember sitting in a teach-in at the Carlisle Group in 2013 or 2014, whatever it was. Hiten Samtani (09:15) Was this before or after Rubinstein almost ran you over? Will Krasne (09:18) I remember. I wasn't there that long, so... But he's in there saying that we have to figure out how to get distribution into wealth channels because the same reason why every single bro on the internet wants to go buy an HVAC company from a boomer, it's the same reason why Greystar wants to go to every Edward Jones advisor and get the dentist with $2 million in the bank to put $75k into their fund. Hiten Samtani (09:43) You know what this reminds me a little bit of? That was the genius of Nick Schorsch, American Realty Capital. Will Krasne (09:48) Yeah, I mean, it's the same thing with any of these non-traded reads. If you have the distribution into the retail channel, like it's very sticky. It's there. And there's so much money there too. Like you have to go out and sort of like these sales cycles for institutions are so long. Hiten Samtani (10:05) Can you say more about that? What do mean by that? Will Krasne (10:07) Like you can't just call up, you know, Texas teachers and be like, Hey, we have, you have a great meeting and you're like, cool. Like what's the wiring instructions? Like that doesn't happen. Hiten Samtani (10:16) You're saying it's like a multi-year courtship before the first check's written. Will Krasne (10:19) Yeah, it takes forever and you're also directly competing against everybody else and there's a lot of stuff that you sort of can't control and if you get tapped into the right distribution channel for retail, it's just, the money can just come and think of it this way, this is how all of these syndicators raised all the money. Hiten Samtani (10:38) I swear I was going to go there and then I said, this too low? Sunbelt syndicators tapped into these private wealth channels, right? Whether through feeder funds or whatever they did, Indian doctors, et cetera, they were able to get wealthy people to give them money and they were able to go and make a very nice business out of this until it last. Will Krasne (10:41) No, it's the same thing. Absolutely. And the other thing too, I think, which is important to note is that the tax law has just changed and a hundred percent bonus depreciation is back, I think permanently. Tax savings for real estate are now so stark. If you are a retired person, if you have lots of passive income, not active income, actual passive income, that can be offset by real estate depreciation. So now, Hiten Samtani (11:19) financial passive income, not. Will Krasne (11:28) the returns have to be so much higher in public markets or even fixed income to get to the same after-tax place. And so I think there's gonna be more alts are gonna go to retail investors because if you're like, I don't know it drives me crazy is when someone's like, well, I can get a bond at 4.8%. Why would I ever buy real estate at five? Well, first of all, two things. One, I've never seen anyone like renovate a bond and get the yields to go up. The second is you're getting annihilated on taxes unless you buy a muni bond. everyone's going to figure this out and want to own real estate for no other reason than to offset other passive income, particularly for folks without a W-Dip. Hiten Samtani (12:09) So we saw this gray star story. Who are the people who suddenly going to be people that real estate cares about? Will Krasne (12:14) If you are the head of alternative investing at a big RIA, you're going be really popular. You might not pay for a meal for the next decade. 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So New York real estate has forever been the world's investment playground and not just private money, state money from all over the world has found its way into our towers, right? The government of Iran owns 655th Avenue. That's been a big controversy. So many different governments have their money piled in here. And one in particular we're talking about today is the Pakistani government. The state owned airline of Pakistan, PIA, owns the Roosevelt Hotel. And this is like... This is one of the strangest assets in New York at the moment. Giant hotel, like it's a thousand rooms now, but I think it was way more than that at some point. Will Krasne (13:52) who even knows exactly how many rooms there are. If you do an asset walk there, actually, that'd be really interesting. Whoever, JP Morgan, if you buy this and you need help on diligence, I just would like to add a curiosity, so I'm available. Hiten Samtani (14:03) Why are we talking about the Roosevelt Shuttered Hotel? It was controversially turned into a shelter for migrants by NYC and that deal is basically coming to an end, which is why this hotel is now one of the most coveted assets in all of New York. Will Krasne (14:17) I think there's one person who might covet it more than anybody else. Hiten Samtani (14:21) Jamie Dimon, patron saint of New York office landlords. So the promote learned last week that among the advanced proposals to buy the Roosevelt is JP Morgan. Let's just try to paint the picture here. Now, JP Morgan, they already control over 5 million square feet in what a couple blocks well, right? Will Krasne (14:39) It's right around 270 Park, the giant Norman Foster tomb that they're building for Jamie. Hiten Samtani (14:48) Yes, they did a teardown of 270 and they're building a 2.5 million square foot tower there. They bought 250 Will Krasne (14:55) Let me just stop for one second. Everyone go Google Norman Foster New Yorker profile. It's so good and it talks at length about this building. And one of the lines in there that has stuck with me is there's a lot of bronze being used in there in this building. someone very high up at JP Morgan, the author heard say, how good is Norman Foster? It's like, well, if you can sell bronze to Jamie Dimon. Hiten Samtani (15:21) Yeah, so I think, ⁓ you know how we talk about a lot of real estate development giants sort of being in the mold of their founder. When it comes to the banks like JP Morgan and Jamie Dimon are so synonymous with each other. Like I could probably name the CEOs of the other big banks, but not really, right? But Jamie Dimon and JP Morgan, it's like the chief capitalist of America is the way I think about Jamie. Will Krasne (15:44) non-Treasury Secretary, Treasury Secretary. Hiten Samtani (15:47) And when he came out and said that working from home is for numbnuts, basically he went on this hall of fame tirade about how it was killing creativity and killing collaboration, whatever. lot of you were on the fucking zoom and you were doing the following, okay? Will Krasne (16:03) sending texts to each other over an asshole the other person is. Hiten Samtani (16:06) New York office landlords, mean, you could hear the excitement and the gratitude for Jamie. Will Krasne (16:11) I mean, he knows how to play to his audience because a lot of those guys he's lent money to. Hiten Samtani (16:14) Absolutely So he mandated a return to office for his employees five days a week. This is a few months ago. And you can see kind of all the all the plays are making in Midtown. So 270 Park, two and a half million square feet. They bought 250 Park right next door. And after the rezoning is kind of all done, you're looking at almost a million square feet there. They own the Bear Stearns headquarters, obviously, at 383 Madison. Will Krasne (16:42) Namely they when they bought it during the Great Recession they're like you bought it for less than the value of the building Hiten Samtani (16:50) Yeah, it's true. then, they have 383 Madison and then they have 390 Madison, which is their private wealth arm. So if you put those all together and you add all the bonuses and density, blah, blah, blah, you end up with about 5 million square feet already. So it's already one of the most impressive corporate campuses that I can think of in New York history, really. And now the Roosevelt, no one's going to run this shit as a hotel. It's fucking disaster. But if you can tear it down and redevelop, et cetera, You're looking at anywhere between 1.3 to 1.5, 1.6 million square feet, which means that Jamie Dimon would have 7 million square feet in Midtown Manhattan. Will Krasne (17:27) Think of the people in there five days a week. That's so many. Hiten Samtani (17:30) we should talk about why this is a little messy or more than a little messy. The seller. It's primarily the seller. It's the government of Pakistan. If you follow Pakistani politics at all, ⁓ it's a full contact sport. It's wild. Will Krasne (17:45) I'm gonna have to let you go on this because I'm not exactly up to date on the latest from Islamabad. ⁓ Hiten Samtani (17:49) So they've had many different governments, many different types of governments, dictatorship that turned into a democracy, then kind of a puppet democracy. It's crazy. And they've had like half a dozen new governments in the last, call it a handful of years. So each time there's been, and my God, where do we even begin? There's been at least two prime ministers that have been assassinated. Will Krasne (18:13) about when the PIA got into the building after a lease with a purchase option from the Milsteins. Hiten Samtani (18:19) Yeah, so they come in in the late 70s. They basically had a deal with the Milstein family, the New York dynasty, and they come in, but they had an option to buy, and their partner on this deal was one of the Saudi princes. They exercised their option in 2000 to buy it, not without a pretty spicy court battle with the Milsteins. Will Krasne (18:38) being a full context for lawsuits with the Milsteins is up there. Hiten Samtani (18:42) Yeah, so every time the government of Pakistan has looked to sell this asset, this is one of their most prominent external trophies. And it's also, I guess it has a lot of symbolic value as well, right? Like the heart of Manhattan, you own something like this. Every time they've tried to do this, there's been some government kerfuffle that has replaced prime ministers, replaced ministers, and then replaced the head of the state airline as well, which means the asset's been in and out of the market for, I don't know, almost three decades. Will Krasne (19:10) I think that's right. I think they put it up for sale. I think it also depends quite a bit on the profitability of Pakistani airlines. So I think in what, in 07, the airline lost like $100 billion in the first nine months of the year. And like, hey, we should sell this hotel that we have. I think they tried earlier than that in like 2003, I think like for NATO and related. I think the current president expressed interest in buying it. Hiten Samtani (19:35) mean, pretty much everyone who's anyone in New York real estate has looked at this thing at some point. Will Krasne (19:40) And this is a hotel where you could lose 200 million dollars like in a minute. Like we're trying to renovate this thing. Hiten Samtani (19:47) Can you imagine the carpeting? Like I'm just trying to picture the carpeting of this hotel. It's like the shining is what I'm thinking of right now. Will Krasne (19:53) and play with us. Yeah, God, and I was just, mean, just think of it this way. Like someone was talking about, I think it might've been Antonio from Mad Project on Twitter about budgets for construction. And someone's like, how much could paint cost? Like $50,000. It was like $2 million in the project. Like what does it cost to just, you feel like, hey, I just want to repaint the Roosevelt. I want to repaint 1200 rooms. mean, it's so much. Hiten Samtani (20:16) Yeah, so you have that, you have the union component, so Hotel Trades Council, Local6 has some kind of clause in here where the end user would have to pay a pretty nice chunk of change to operate this as another kind of property. There's a lot of complex moving parts here and ⁓ any buyer would have to figure those out. mean, obviously JP Morgan has the kind of money that can make all these problems go away. Will Krasne (20:40) got the money, got the governmental affairs, they got the lawyers, they can make all of these things go away. Hiten Samtani (20:46) got the juice. so Peter Agarti of JLL is leading a process. But as I understand it, it's not just Mr. Peter Agarti. It's like JLL's capital markets team. There's a consulting team. There's like just like the Pakistani government. There's like multiple arms of JLL that are trying to figure this thing out. Can you imagine the diet coke budget? Will Krasne (21:02) Can you imagine the liens? Imagine the title search? The reams of paper. But yeah, it makes sense for them. mean, look, Jamie wants to consolidate here. mean, 7 million square feet is a ton of square feet, but just how many employees does JP Morgan have in New York right now? I don't even know. I'll just Google it right now. They have about 40,000 employees in New York. So even if they hot desk everyone at 150 square feet per worker, they got more than enough for everybody. By the way, also, do you know who the lender that they most recently refinanced the Roosevelt with? Hiten Samtani (21:44) The Pakistanis? Yeah. I think it was JP Morgan. Yep. So the proposal that's in play at the moment, I believe ⁓ is a ground lease. And we talked extensively about ground leases when it came to 625 Madison and Ashkenazi and S.L. Green. Why would ⁓ PIA prefer a ground lease here? Like, what's the reason? Will Krasne (21:47) for you. Ding ding ding. Product taxes. I'm sure they've owned this forever. sure. they, I was looking again, just flipping through right before we got on this and I think it lost like $37 million in 2020. Zero idea what the org chart looks like on this. But my guess is if they want to around lease, it's probably for a tax reason. So basically the same thing that happened at 660 Fifth Avenue with Brookfield where they took out the Kushner's by basically prepaying, 100 years of ground rent. So it's not a sale because there would have been enormous tax consequences for it. That would be my guess. Hiten Samtani (22:38) That sounds about right. Will Krasne (22:40) But I also don't know, like, I don't know where the airline is chartered and what the tax on it's- Hiten Samtani (22:45) There are so many ifs in this deal, right? It's PIA, the government could change tomorrow, Imran Khan could come out of prison, take over, and then suddenly this thing is off again, who knows? But if this does consummate in a deal, we're looking at, think, the most impressive campus in current New York City. Like we have Google on the West side, right? With St. John's Terminal, Chelsea Market, et cetera. This is even more substantial than that. Will Krasne (23:09) Yeah. And it's right in the heart of everything. And it's on Park Ave. mean, you own seven million square feet of park in Madison. I mean, it's kind of jaw dropping. And think of it this way. I mean, how big is one Vanderbilt? It's what? Two and a half million? All right. So this is basically, you know, two and a third one Vanderbilt is just for JP Morgan. Hiten Samtani (23:23) close to three million One bandy I think I want to close this one out by imagining what like 20, 25 years from now, what could that look like? Like what is a perfectly executed Jamie Diamond Kingdom in Midtown look like? Let's paint a picture. Will Krasne (23:43) lot of bronze. He's built the biggest, baddest bank, widely considered the most well-run, and he wants to control his own destiny. He wants his people in five days a week, and this is going to be the legacy. You know, when you step off the train and you look up Park Avenue and you just see the JP Morgan glittering campus, I mean, that's, you know, the value of that is ineffable. Hiten Samtani (24:07) When you step off the PIA flight from Islamabad, you see the JPMorgan campus. That's what you meant to say. Okay, so we're going to close out with this giant triple net lease machine deal, right? Starwood is buying fundamental income properties from Brookfield for 2 billion and change. Why is it interesting outside of another example of AUM Goblin? Will Krasne (24:33) So Starwood Property Trust is sort of a really interesting company. It was formed, think, pretty much as a dark pool post-GFC. Blind pool, sorry, not a dark pool. A dark pool, I think, is what you trade blocks of stock in, if I remember from Flashboys. That's correct. The blind pool basically said, us, we're going to do smart stuff. They're sort of, I think, best known for their mortgage business. So they're lenders on a lot of different things, which we've talked about on the promote. They also... have a pretty big equity business too. So they own a large portfolio of affordable housing. The fund series for Starwood Capital Group, know, and not just them, it's, it's, it's writ large. There's not a ton of promote ⁓ probably in the vintages like during COVID or the ones that have been raised recently. And then now fundraising is difficult for almost everybody. So where does the profitability come from? Where does, where do the fees come from? And I think growing STWD has sort of been a big focus point for Barry over the past handful of years. And this is a way to do it. it is, know, STWD pays, pays an enormous dividend. It's gotta be like 9%, something like that, but it mostly covers it. If not all the way covers it. And it can sort of like adjust its profitability up and down because they have like, they could sell off some of their multifamily if they needed to and sort of manufacture it that way. So. buying this makes sense from that perspective because NetLease has yield. Hiten Samtani (26:04) We should talk about what they're getting here. They're getting about 12 million square feet. So you're 450 plus properties. Will Krasne (26:12) 467 properties, 12 million square feet, 44 states, 56 industries, 93 tenants, 100 % leased. And what's, I think, stood out to me the most is that there's a 17 year weighted average lease term with 2.2 % average annual rent escalation. It's like kind of low growth. Income. Also, what was interesting is that in the statement, Jeff Demotica, who's the president of Starboard Property Trust, with, what did he say? So this is again in the official IR statement from Starboard Property Trust. We anticipate this investment to be accretive to distributable earnings. Phenomenal. After. Giving effect to projected refinancing of existing debt and projected acquisition volume. Hiten Samtani (26:50) Uh-huh. This is a classic unquotable quote. This would be like a promote no-brainer. But what is it? Will Krasne (27:02) It means it's not gonna be a basically like so basically they're saying we're gonna refi their entire debt stack to Give them a cheaper cost of capital and then we're gonna buy a bunch of stuff at high yields and that'll make this a creative That's the short version. But again like It's it's not gonna be you know, a huge cash flow guys are right away. They admit it as such but Hiten Samtani (27:05) you Let the stock do on this announcement. Will Krasne (27:33) I am pretty sure it went down. In the whole math of these public reads, and again, friend of the pod, Hunter, can talk about this more eloquently than I can, but you basically have, you know, here's what our assets are worth, and then here's what the stock market values us at. And if you're buying things that are more expensive than what the market is valuing you at, that's bad. Hiten Samtani (27:56) Should we talk just for a second about like triple net lease properties and what, you know, what the, what the juice is there? just in case we have some casuals on the call. Will Krasne (28:04) Totally. triple nets basically are the operating costs for a property. So, if you buy something and it's a triple net property and you're the landlord, let's forget about like complicated lease scenarios. But basically you just get a check every month. The tenant pays the taxes, they pay the insurance, they paid a landscape, they pay for snow removal, they pay all that stuff and you just sort of get a check. They call it mailbox money. That sort of thing. Like if you owned a ground lease McDonald's, just you were going to get a check every month and it was great. Life was grand. However, the problem with these things are twofold. The first is your return is pretty locked in. They have general escalations in the lease, but if inflation is higher than your escalations and some of them are tied to CPI, which gives some protection, you're losing money on the real basis. Every single year, the second is. If you're now, also have to be a credit analyst because yeah, it sounds great to have a 15 year lease, but if it's leased to like grandma Bessie's special liver and bratwurst company, and you know, it has no other locations and no earnings and no nothing, that credit's pretty bad. So how valuable is this lease? And some things that would look really credit worthy could not be. mean, think about all the restaurant chains that have been private equity owned. Think of all the right aides that people bought thinking. Hiten Samtani (29:33) city etc right like yeah things can happen. Will Krasne (29:35) Yeah, things can happen. So, yes, it's great to have predictable income, but if the credit's terrible, like, kind of doesn't matter. ⁓ Hiten Samtani (29:43) Bring this home for us with the Starwood Brookfield deal. Will Krasne (29:45) they're having this thing that's not very management intensive. There's only 28 people at fundamental income, which is for a platform that just got bought for $2.2 billion. Hiten Samtani (29:53) Fucking hell man, well done to them. Will Krasne (29:55) Yeah, that's it's very lean because again, it's it's like we joked a couple weeks ago where if you work for the Goldman family in the 90s was the best job in real estate because you just had to worry about getting paper cuts from all the checks you were open Hiten Samtani (30:05) But man, what's the valuation per employee here? That's gotta be pretty damn impressive. Will Krasne (30:09) But the point being they can't renovate this they can't increase the cash flows outside of the 2.2 percent contractual ⁓ Rent increases the way it's gonna work is like if they can go buy stuff at higher yields but the reason I talked about the credit earlier is that The high yield stuff like that's sort of what creates The problem over time because eventually the higher yield or the higher cap rate assets There's a reason for it. And so we've seen this over and over again in reitland where You keep trying to raise the dividend So you keep buying higher cap rate stuff to cover it and you buy worse quality, either worse quality real estate, worse credit real estate, and then at some point it just sort of implodes on itself. So it can be a very dangerous game to play. Hiten Samtani (30:51) I think you're being a little too pessimistic because if you think of what Barry Sterling said about this deal, here's what he said. The acquisition of fundamental marks the next evolution, but not the last for our platforms. So he's probably got some more tricks up his sleeve. Will Krasne (31:04) No, they're going to go buy a bunch of stuff. They're going to refinance it that no one's better playing capital markets than these guys. So they're going to do a good job. But all I'm saying is that this isn't a magic bullet. Like no one has solved investing here. Like there's there's still risks. Hiten Samtani (31:19) That's it for the Promote Podcast this week. A shout out again to our sponsor for this episode, Vesto. See how its service gives CRE players a single, clear point of access for all their bank accounts by going to Vesto.com. That's V-E-S-T-O.com. We'll be back next week as always with more CRE insider goodness. Will Krasne (31:37) Reminder, hit us up at partnerships at thepromote.com if you want to reach our audience of C-suite executives, frustrated acquisitions guys, VPs at brokerages. Hiten Samtani (31:47) at brokerages that's like the most table stakes audience you can get. Will Krasne (31:51) But that is how many people listen to this podcast. Think of all. Hiten Samtani (31:54) That is true. That is true. Will Krasne (31:57) and please like, share, subscribe to the podcast so that more people can find it. Hiten Samtani (32:02) Will is like watching these charts like a fiend. I have, you know, I've started meditating and I try to stay away from this shit right now, but yes, we both really care. And listen guys, we should also say thank you so much for being such an obsessed audience. It is a pleasure to pod for you guys every week and Will, thanks for being such a maniacally fun co-host dude. Will Krasne (32:20) Thank you for asking me to do this, it's really been a treat. Hiten Samtani (32:24) Ciao!