Latest / The Promote Podcast / Where Alpha Goes to Die & the CoreWeave Canary

Transcript

Where Alpha Goes to Die & the CoreWeave Canary · The Promote Podcast

• Hiten Samtani (00:05) Commercial real estate is supposed to be overrun by dumb guys, which, to be fair. But how come every time the smart money muscles its way in, it gets humbled? Will Krasne (00:14) Because we dragged the smart money down to our level and beat them with experience. Hiten Samtani (00:31) This is the Promote Podcast, your insider guide to the money and mania of the CRE markets. I'm Hiten Samtani. Will Krasne (00:36) And I'm Will Krasne. Hiten Samtani (00:41) Big shout out to our sponsors for their support and overall good cheer. Pensford the only interest rate advisory focused exclusively on CRE. Will Krasne (00:48) Bravo Capital, a leading HUD and Bridge Lender. BTR is HUD eligible, and Bravo is all over that. Big men of the moment right now. Hiten Samtani (00:57) Absolutely. You'll also hear during this episode from our friends at Gibson Dunn, top attorneys of the firm, take us inside the cap stack in a series of conversations. This week we dive into why the smartest guys in the room keep belly flopping when it comes to CRE. Two Sigma's recent retreat is part of a long line of edgy hedgies who've been humbled at the brick and mortar altar. We then head to the scene of a fast-moving car crash in the world's hottest asset class. Yields on CoreWeave junk bonds have surged to an alarm ringing 15% this week. And institutional players from across the CRE universe are watching closely. Will Krasne (01:30) Before we get into all that, let's get started with the punch list, our signature rundown of the newsiest news in CRE. This week's punch list is powered by H Equities. If you're a mid-market GP stuck before the end zone, Elliot Horowitz's team is your go-to on both sides of the cap stack to get you in for six. Hiten Samtani (01:51) They can kick it a bridge loan of up to fifty million, or they can come in as a co-GP with that elusive last twenty percent slug of equity. Find them at hities.com. That's hequities.com. Also, I truly enjoyed Elliot's mad as hell about cap rates rant, channeling Howard Beale. Very promotes. Well done. It's Will Krasne (02:09) didn't see this and Hiten Samtani (02:10) a fun time. Will Krasne (02:11) we're all mad about cap rates right now. They should be lower. Alright, we gotta go out to a story we've talked about before, one Beverly Hills. Hiten Samtani (02:18) This is turning into a bit of an obsession of ours just because this capital stack, as we said before, is confounding. It was recently revealed that they've been going to their buyers and tapping them for more than just buying units. Will Krasne (02:29) It's a new source of financing where your buyer is actually lending you the money to build the thing. So Hiten Samtani (02:35) So founder bonds they're calling it. Will Krasne (02:38) and the promised return is not that great. It's five percent. Hiten Samtani (02:44) Under the current yield on treasuries a couple of weeks. Will Krasne (02:46) Cheaper than the tenure right now. These bonds are gonna be junior to the just under three billion dollar JPM led senior and a billion five of Mes from VC. Vici. VG. VC. Vici. Hiten Samtani (02:58) B T. Uh-huh. Will Krasne (03:00) Those loans, of course, come with certain performance guarantees that they have to hit on the condo sales. So if the project falls short, the bondholders are left not only without the penthouse if it doesn't get built, but also without the money that they lent at below the risk free rate. Hiten Samtani (03:18) most amazing thing here is that they have actually successfully raised a tremendous amount of money from this vehicle already. They've done about a billion plus of condo sales, and all the buyers so far have agreed to kick in for this founder bonds program. So they've raised about 350 million and hope to raise another 1.3 billion. Will Krasne (03:36) Are they bringing out like the blank coffee little tip jar at the end and basically saying Hiten Samtani (03:43) it's just gonna ask Will Krasne (03:43) quick question right there? in Florida, you are allowed to use buyer deposits towards your development project costs. You talked to David Hochfelder and he said that it was almost like having an option on the land. You can't do that in California. However, give it to the Kane International, part of the Guggenheim Boley, Mark Walter complex. Hiten Samtani (04:05) Private credit mafia. huh. Will Krasne (04:07) find a novel way to do this because this is essentially just using a buyer deposit as a way to finance construction. It's an ultra cheap cost of capital. I'm not even mad, I'm impressed. Hiten Samtani (04:18) Why would the buyer go for something like this? It doesn't sound like the most attractive proposition. Will Krasne (04:23) It's honestly a little bit like when you join Riviera and they say, All right, here's your, you know, two million dollar initiation fee and you can get part of it back if you resign the club down the road. Hiten Samtani (04:34) Okay, next one. More AUM Gobbling. QT Will Krasne (04:37) Yeah. Hiten Samtani (04:39) is buying Stockbridge for three seventy five million up front, and I think there's another one seventy five or so in the form of other comp down the road. Will Krasne (04:47) The structure here was pretty interesting because EQT is getting 100% of the manco. And then the GP entities didn't totally understand the read here where they're they're getting like 35% of existing promote, maybe, or it wasn't clearly defined in any of the write-ups that I saw. I'd be interested to dig into that. But the Stockbridge team is actually going to like pretty senior levels at EQT. I think one guy is going to be head of US, another person is going on the management committee on the finance side. So it's not as if they're just buying them and then everybody's leaving at the top end, which is what happens in some cases. And the other thing that was interesting is they're making the stock bridge shareholders buy EQT stock with their cash. Okay. Which is, again, I thought pretty interesting and a way to lock people in. You don't normally see that because if you're stockbridge, you're thinking you want to cash out. Hiten Samtani (05:33) EGT is a private equity giant out of Sweden and they've actually built out EQT real estate under a guy called Henry Steinberg in just the last five or six years they've become a behemoth, absolutely giant player in industrial and other assets. This is part of the broader AUM gobbling, which is we need to keep building out our assets and fee streams, otherwise we're not relevant. We can't compete. Next one. Will Krasne (05:57) Our favorite Spanish tax sensitive investors back. Hiten Samtani (06:02) Amancio Ortega is buying one North Whacker in Chicago for five hundred and fifty million dollars. I believe this is the city's largest office trade in God knows when, a decade at least. Will Krasne (06:12) Yeah, I think since Aeon Center, there might have been a higher valuation on a piece of something that sold last year, but we don't count that. Ortega bought it from a pretty smart guy in his own right. Hiten Samtani (06:22) Donald Brent. Will Krasne (06:23) Irvine Company had owned this building. They had a 350-odd million CMBS loan. And Ortega he buys most things cash. So this is rare. Yes. I wonder how rigorous the CMBS. I always wonder that just in general. I've assumed quite a lot of loans and It's always pretty difficult. What do you say to Ortega? Like, can we see your REO? Do you have proof of funds? Do you have the net worth and liquidity needed for this loan? Hiten Samtani (06:52) Look, all I know is I'm good for my eighty billion. Will Krasne (06:58) The Esquire Theater Building, the Hotel on Magmile, and where Tiffany is located on Michigan Avenue. Given that he paid almost a billion dollars for Paris office, he bought what did he buy? He bought something else. Hiten Samtani (07:11) He's been buying up half of Miami basically. Will Krasne (07:14) He's had a very good year this quarter. Hiten Samtani (07:18) Okay, next one. Our guy Scott Everett. He's still standing. He is figuring out how to survive, figuring out how to stay in the game, which is what a lot of the big boys have done. He announced a refi and modification of about $1.2 billion of loans across 8,000 plus units. He also said that he has put to bed a PG lawsuit that was brought by Capital One, and he has raised at least some amount of money for the continuation vehicle that he needed to keep himself going. This is Will Krasne (07:48) Big deal. He had 12 foreclosure sales. Those are canceled. He modified this, and I don't think he got a ton of term. I think it was another two years, but we're starting to see the story around supply and rents that we sort of thought was going to happen maybe two years ago. When Bruno Caboclo got drafted by the Raptors, someone said that he was two years away from being two years away. So we actually might now be in the two years away part of this. That could be enough time. Hiten Samtani (08:19) There's not much room to breathe here though, right? Like the new fund I think has ninety-five percent LTV debt. Will Krasne (08:24) He modified just under a billion of loans and he got just about a quarter billion in new financing and the appraised values on these things are not much more than that. I will say though, over the weekend I've been reading some stock pitches for whatever reason. The most levered companies are the ones where the equity can really spring back. Hiten Samtani (08:41) baby, we're gonna talk about that in a couple of seconds. Also, by the way, Everett's Piers, though he'd probably dispute that characterization, Rise forty eight has also figured out a refi via Namura. They're getting six hundred million dollars. This is again a two year window, so it's gonna be quite tight for them as well. Will Krasne (08:58) This is a lot of closing costs. Hiten Samtani (09:00) Yes. Will Krasne (09:03) Six percent of the loan and closing costs. What what is going on? Hiten Samtani (09:07) And it's twenty million dollars cash in here. Will Krasne (09:11) man. Those aren't included in the closing costs, are they? Hiten Samtani (09:15) Rise 48 famously used to tout that we have never lost a dollar of LB capital. And over the summer they started massaging that messaging a little bit and they said, even the largest institutions have taken losses in the cycle. This comes back to what we're talking about. These hustlers are learning lessons from the very best. Will Krasne (09:33) Okay. I don't want to kick anyone for losing money. One of the things that ruined boxing versus MMA is that everyone had to have a perfect record and so they would avoid the big fights. If you've never lost a dollar of capital, like you're probably not taking enough risk. You're probably leaving in the long run return on the table. That said, it was ludicrous to say that you've never lost a dollar of investor capital because if it's not realized doesn't mean it's not lost. I keep thinking back to some story about Lenny Dijkstra before he went to prison and he said he had sixty five winning stock picks in a row or something because he just never sold the ones that went down. Hiten Samtani (10:15) But no matter what else it is, and it's gonna be a tough fight ahead, they've bought time. That's something. Will Krasne (10:20) It's not something, it's everything. Right now you're dead or alive and they're alive. Hiten Samtani (10:25) That's it for the punch list. When we come back, it's time to talk smart money with quotes. JP Conklin, welcome back to the promote. Tell me about the conversations you've been having post-Rate Hike. I would imagine there's been a deluge of inquiry, concern, existential doubt since then. speaker-3 (10:48) The most pressing question is how many more hikes will there be? A lot of the discussion is around, I can probably live with two or three. Anything above that starts becoming pretty painful. And so a lot of the discussion that we're having with customers is how likely is it that we'll see more than 75 basis points of total tightening? And I've been punting on things like selling or refinancing or even hedging decisions because I kept expecting rates to come back down. And now I don't know what to do. Hiten Samtani (11:17) Pensford, you've been a hand on the shoulder for these investors for about twenty years now. What are some of the evergreen reflections you can apply? Because a lot of these people, this is their first dance, this is their first brush with this kind of pressure. speaker-3 (11:29) First thing I tell them is the lender requirement shouldn't be their hedging strategy, that they should decide what is best for them and their business independent of what the lender is requiring. From there, let's have a discussion around what are your disposition plans and what is your risk tolerance. If something might cause you to not be able to sleep at night, let's try to eliminate that risk. Hiten Samtani (11:49) JP Conklin, thank you so much for being with the promote. Two Sigma Investments has cut senior staff at its real estate unit and it stopped fundraising and it's no longer making new investments out of that business. This is just two years after it opened its doors to outside cash. The reason we wanted to talk about this, these are the captains of the universe who've been flooding into CRE and supposed to have smart differentiated strategies, and it doesn't always work out that way. Not to punch on Two Sigma too hard, but it's just a really interesting indication of where the market is at and where you can get burned. No matter how smart you are. Will Krasne (12:29) A hundred percent. Two Sigma manages eighty-five billion dollars. They probably make in revenue what they were trying to raise here in a month or or something. This was a sort of relatively small part of their business. Unfortunately. Hiten Samtani (12:42) Just a footnote in history. Yeah. Will Krasne (12:46) I will say they hired real dudes to do this. The first guy we gotta talk about, you have the description of him down pat. Hiten Samtani (12:54) Jay Tomlson Hill, Tom Hill, the legendary Blackstone deal maker, he was immortalized in Barbarians at the Gate of Wesley, sporting an oiled back Gordon Gecko haircut atop five feet ten inches of icy Protestant reserve. He was brought in here to run this. Will Krasne (13:12) And he left like after two years. That's always the biggest red flag. He's like, Fuck this, I'm a billionaire. What do I need this for? Hiten Samtani (13:19) I don't need the adjective. Will Krasne (13:21) They hired Rich Gomel, he's an OG. I mean, he was back in the day CO of Group de Louvre in Paris, which was owned by Starwood Capital Group. And then after that, Rich was part of Junius, which was the direct sort of JP Morgan real estate business, and then ran Arc. Hiten Samtani (13:36) We works real estate investment platform. Will Krasne (13:39) Yeah, real guy, real pedigree trying to raise, you know, two billion and they got some purchase, but not as much as they thought. We've Hiten Samtani (13:45) seen this quite a bit, right? Where storied firms go out to the market hoping to raise gobs of money and fall short to the point where they can't execute what they necessarily wanted to execute. Talon starts to leave. So Gomel's gone, two of the three remaining partners are leaving, other people on the real estate leadership team. Will Krasne (14:02) $2 billion for a first-time fund is a big number. Town Lane, which is led by one of the foremost Blackstone real estate executives of last 20 years, raised less than that. So someone with a direct pedigree in this space who's done it a million times at the biggest and highest level raised less than that. They talk quite a big game. So there's an interview in 2021 from five foot 10 inches of Protestant Reserve saying that. Real estate is rich in data, but nobody uses it to figure out what to buy or where to buy it. Ugh. It can also help avoid having, quote, your talented investment professionals bark up the wrong tree, go down dead end alleyways, and waste their time on non-deals. Hiten Samtani (14:45) Oof, so what Hill is saying is that data can serve as a source of alpha in C R E investing. And I don't know if he's been proven right in that regard. Will Krasne (14:54) I will say this. I don't know much about two Sigma's business. I'm just a, you know, simple real estate guy. I can pretty much guarantee you they have better data on population growth, spending, consumer tracks, preferences. However, that data is really most useful when there is a liquid transaction market. And I'm not saying in real estate, like, is there liquidity? We'll Blackstone buy you out. What I'm saying is can you press a button and execute your trade in currencies in Bonds and stocks, what have you, that's the case. Now, not always in the size you want, obviously, if you're trading a thinly traded public equity or whatever, but the data only really works in a market where you can transact efficiently. Stat arb or whatever works in the stock market or in currencies because you can get instant liquidity. If you get some data about population growth or whatever, like you gotta go buy the fucking buildings. If Jethro doesn't want to sell it to you, like tough shit. If your data tells you, hey, Nashville multifamily. Yeah. That's going to be hot. That's one piece of the puzzle. You have to one find the deals and execute the transactions on the ground, which is a whole different skill set. Even buying widely marketed deals, a lot of folks kind of crap on and say, Well, gosh, you just paid the highest number. That's hard. Widely marketed deals are competitive. And if you're buying those things, you are one of the big firms that has to put out money. And it is hard to win those. There's a lot of strategy that goes into them. It's not as if you can just show up and say, I'll pay the most. Like that's not always how it works. Yeah. Beyond that, there's deal-specific factors. You can be in the right market, but what if you buy a deal that has a cracked foundation that you didn't diligence properly and your deal's wiped? What happens if you're in a flood zone and you're not properly insured? There's a million things that can happen operationally that are sort of beyond the realm of data science. In fact, having too much data probably is a bad thing. Hiten Samtani (16:48) thing. Well what you're saying is information arbitrage is only effective if matched with immediacy and speed and real estate is just not built for that. The seller has to be a willing seller. You've got to have the infrastructure on the ground, whole set of factors that distinguish it from some of these other industries that two Sigma has probably crushed it in. Will Krasne (17:08) Here's an example. How long does Gary Barnett take to do land assemblage? Hiten Samtani (17:12) Seven years and counting. Yeah. Will Krasne (17:14) It takes forever. And you can't just press a button and buy a stuff Hiten Samtani (17:20) Ring, ring, you can never do it. Will Krasne (17:21) then. Even if you were gonna pay over market value, just walk down an avenue in New York, in Manhattan, and look at a skyscraper that's built into with a little house, like a four-story walk-up, like underneath it, because they didn't want to sell. That happens all the time. Hiten Samtani (17:37) Canta levering and all that stuff, yeah. Will Krasne (17:39) Yeah. So the data's really helpful. You have to have certain things for a real estate investment to be successful. But it doesn't guarantee you that what do you Hiten Samtani (17:48) Think happened to make them finally pull the plug? Do you think it's just a couple of quarters of mah returns? This is essentially shuttering the real estate division. Will Krasne (17:57) First is if you are two sigma and you make so much money on your core business and you have something else which isn't making money, do you th might think, Why are we doing this? It's a distraction. Hiten Samtani (18:07) It's a distraction. Yeah. And it's an expensive distraction. Will Krasne (18:10) Very senior people that you hire are not inexpensive. If you can't raise as much money as you think, I'm sure the division as a whole wasn't profitable. Also, it's just a very difficult time in real estate. You were gonna have to work four years without carry, without promote, all of these things. And if you are just a nascent startup inside of essentially one of sort of the four or five perpetual money machines that have been created on Wall Street, then I understand it. We're not even speculating. This is just stating a fact. Two Sigma has had a sort of very public tumult between its two founders, David Siegel and John Overdack. Hiten Samtani (18:48) Every blow has played out in the financial press. It's been ugly. One of the founders had a divorce that also added to the drama. It's been bad. And we've seen quite a bit of talent bleeding out just more broadly at that firm over the past couple of years. Will Krasne (19:03) This isn't the only really, really, really smart money machine that has really that has pulled back from real estate. Hiten Samtani (19:11) For the summer, we we talked about King Street. So King Street Capital Management, which had become one of the big players in credit in real estate. They were in the middle of a deal in South Florida. They just said, we're pencils down. So they had a mez piece in this in this property, in this deal, and they just didn't fund it. So these guys had to scramble for alternative funding. So King Street ended up restructuring so that real estate just became a part of the larger machine. So it was relegated into nothingness. They had their own unit before with their own mandate and it was just gobbled up into the mothership, which meant by definition it was less important. Yeah. Will Krasne (19:45) And then Baupost which is one of the most eminent hedge funds or investment firms. Klarman? Yeah, Klarman. They'd done a lot of real estate. So they'd done equity, they'd done a lot of real estate debt, both purchasing distressed debt and originating debt. They cut a huge chunk of their investing staff a year and a half or two years ago. But a lot of the folks who were cut were in real estate. And I think they effectively eliminated the real estate equity business. And so they're only doing distressed real estate credit now. Who's left? Hiten Samtani (20:12) As one of our listeners put it, if the companies that say finance instead of finance are getting out of the game, who's coming in? Will Krasne (20:21) Going be taxable folks. There was a great paper that went around a couple of months ago. The apartment trade is over, back to multifamily investing. I think that's sort of writ large what's going to happen in real estate. Real estate is not in general a high octane, super high return churn and burn business. We had that for five or six years, or the better part of a decade. Yeah, Hiten Samtani (20:41) And it was a good time. Will Krasne (20:43) God, what a time. But that's not what the business is. It is Supposed to be non-correlated equities, gives you more than half of your total return in cash flow and allows you to use leverage to magnify the returns. And it's also one of the biggest beneficiaries of the tax code of any asset class. That's really what we're going back to. So the money that's coming in right now, we talked about DST fundraising. We're talking about the pricing on gas stations. These are incredibly tax sensitive assets within real estate, which itself is very tax sensitive and and benefits taxable investors. The next phase, it's gonna be family offices, it's gonna be our Yeah. Hiten Samtani (21:20) Men with deep pockets. Will Krasne (21:22) You're watching Namdar buy every mid block office building for cash. Hiten Samtani (21:27) The Ophers are coming in and doing so many things, Amancio Ortega, the Safras, it makes sense. As I got deeper and deeper into this beat, I'm like, I haven't fully appreciated how important or how central the tax question is to everything. I feel like I still haven't. That's really the the core of everything. That's Will Krasne (21:45) Totally right because multifamily is not meant to be a 20 IRR. It's just not. Yeah. What you can do though is find a 10, 11, 12% deal where you think you can hit that all day long or not a lot has to go right. And then with the tax torque, get up to really closer to a mid teens IRR. That is more what multifamily is meant to do in an era where who's made a lot of money recently? Who's realizing a lot of taxable gains? This is the same reason you're seeing Vinod Kozla. By the Seahawks. It's the same reason Josh Kushner is buying the Lakers. If you have printed a huge amount of gains on the AI trade or in equities or any other asset class that's exploded over the last handful of years, the place it's gonna go is tax-advantaged assets that can offset those gains. And those places are sports teams and for the less well healed commercial real estate. Hiten Samtani (22:39) If it's the shifting class of investors that is defining the next wave of the market, what do their partners need to think about? If you're used to dealing with a two sigma or a bow post or a King Street and now you're dealing with the Nidan Ofer or a Safra or whatnot, like how does the equation change for all the the parties involved? Will Krasne (22:59) From my perspective, and I think probably from yours, it's a good thing because we're bringing characters back. The rich guys who can swing it around a little bit, who aren't buttoned up and are willing to take risks or do crazy stuff. Those are Hiten Samtani (23:10) We love those guys. Will Krasne (23:11) the best. So I think one, just from an entertainment standpoint, it's going to be hopefully be better. I'm very excited for that. But I also think it means different types of things are going to be bought. The Ophers, I don't know them, but I'm just speaking broadly. Maybe they have a thematic view on Manhattan or something. Yes. But it's a lot different than a macro view that's been disseminated from the top of a skyscraper on Park Avenue that filters all the way down and means that everyone buys iOS. It's a lot different. You're gonna see folks trying to buy the best in class real estate that's got a troubled cap stack or or try to pick things off moving very quickly because the advantages those guys have is if you are liquid and you can close You can chip on price. And now's really a time to do it. And I think people are starting to turn over a little bit. Cash is like the guy at Anthropic who tried to convince the Pope that they'd invented God. It's the alpha, the omega, it's everything. Hiten Samtani (24:22) Okay, let's go inside the cap stack with Gibson Dotton. Kahlil Yearwood of Gibson Dunn. Thank you so much for being with the promote. Good morning. speaker-4 (24:31) Morning. Hiten Samtani (24:32) You've been tasked with implementing AI across the real estate practice, which is going to be a fun journey to be on. speaker-4 (24:38) Myself and my partner Krystyna Blakeslee, the way we talk about it is we want to both raise the floor and raise the ceiling. Hiten Samtani (24:47) Do any C R E specific examples come to mind? speaker-4 (24:49) One of her clients does a lot of work in the mezzanine loan space. And so what we did is we took a pile of about 20 mortgage mezzanine intercreditors that she had negotiated for this client and we went through them with AI and we identified what are the issues that get negotiated the most. And we went through every issues list that she had ever done for that client. We identified where they landed on points. And we came up with a playbook of 204 issues and where this one client had ended up on each of the points. So we were able to identify what is quote unquote market, right? You hear all the time about market, right? What's the market on this issue? We identified what was market for this client, what is the best they have ever gotten, and what's something they have never agreed to. We then built a custom interface. With just a click of a button, it pops up and it shows this is the best you've gotten. This is what is market and here's what you've never agreed to. Super powerful for doing our first draft markup, particularly powerful for live negotiations. Hiten Samtani (26:04) Kahlil Yearwood of Gibson Dunn, thank you so much for being with the promote. Aaron Crowitz from Bravo Capital, welcome back to the promote. What do you speaker-2 (26:13) Hi Hiten, good to be here. Hiten Samtani (26:15) think about SNFs as a category? Broadly, 101. speaker-2 (26:19) They're more similar to hotels than they are to multifamily. Both for an owner and for a lender, what should be top of mind is you're in a life safety category. If a hotel changes hands in a bankruptcy and all the lights go off and people might not get room service on time, that might be slightly unfortunate. In skilled nursing, you're entrusted with the lives of the elderly who are reliant on specialized equipment. If there's any bump in the road, you really have to make sure these people are prioritized and that it's more than an asset. Hiten Samtani (26:57) Distress in a capital stack can actually translate quite directly into distress in a person's life. And that's a pretty big responsibility as both an operator and I'd imagine as a lender. speaker-2 (27:07) A hundred percent. That's why reputational risk is so important in general, but especially in the healthcare space where you want to be aligned with people who have been trusted fiduciaries for decades. Hiten Samtani (27:21) Aaron Crowitz from Bravo Capital, thanks for being with the promote. So we keep not wanting to talk about data centers, but the debt markets keep t keep telling us, well, sorry guys, you gotta talk about data centers. The cost of protecting Core Weaves debt against default for five years has risen as much as 75 basis points. And that's the highest intraday level on record. Swap's pricing at more than a 60% chance of default within the next five years. Ouch. Will Krasne (27:54) Let's caveat this. I'm not the credit derivatives expert. Hiten Samtani (27:57) Nor am I. W we know that the the junk bones are in the fifteen percent range, which is typically considered like scary default range. Will Krasne (28:06) Yeah. And the the credit default swaps, which were made famous by Michael Lewis and Greg Zuckerman and Hiten Samtani (28:12) And billionaire investor Jeff Green. Will Krasne (28:14) and billionaire investor Jeff Creed in the great financial crisis where people would buy pr insurance credit default swaps against mortgage bonds. And then when those defaulted, they were paid out. This doesn't mean Coral Weave is gonna default. It's one argument I've heard about this, because this has been a big topic. in real estate and just really the economy the last week is if you have an NVIDIA, if Core Weave is sort of crucial to their business Hiten Samtani (28:43) They will do what they need to do to keep it propped up. Will Krasne (28:46) Because it's so de minimis. Now, again, that has its own unintended consequences because as we've talked about, there's a lot of circularity here. And if that circularity gets more pronounced and more visible, then that spooks people as well. These instruments shouldn't really move this quickly. So Oracle's own bonds, the credit default swaps against them have moved quite a bit and insurance has gotten more expensive. It's not just the levels of these things, it's sort of like when we talked about rates, it's the velocity of the moves that's scary. Hiten Samtani (29:15) Let's maybe start with just defining what Core Weave is. So it is one of the classic companies known as NeoClouds. They run up huge clusters of NVIDIA chips and then they rent them out and they rent out computing power to these hyperscalers, right? The AI labs and the big tech groups and whatnot. So they are an intermediary between the chip manufacturers and the startups and the companies that are going to be using those. They're a we work of the data center industry, essentially. Will Krasne (29:42) A little bit different because I would the credit for Core Weave is slightly better than than we work because they essentially have take or pay contracts from Microsoft, Amazon, Google, or Alphabet. So the credit is a little bit better, but essentially that is the business model. There's a lot of risk there being a middleman because if all of a sudden the price of the chips goes down, like that is catastrophic to the business. Now that hasn't happened yet. And frankly, also a good deep dive is. One of the great trades of the last however many years is Magnetar. I think made like a $50 million loan to Coreweave that I think at one point was like two-thirds of their firm's AUM. And they're like a big fun. Hiten Samtani (30:25) They did quite well. By the way, they popped up in a cap stack recently that I was looking at. really? I forget which one, but they're they were in there somewhere. Will Krasne (30:32) On the equity side, too, what does this mean for the stock price, right? It's a make or miss league in some cases. And they were down like 15% in a day last week. Their 9% bond yield slid to 80 cents on the dollar, which brings that's, as we said, at the top the yield to 15%. That doesn't mean Corv is paying 15. They are not. They're contractually paying nine. It's just buyers of those bonds are requiring a yield to maturity of 15% to acquire them. As you learn, First day of economics, bond prices and bond yields. As our good friend Maverick said, they are inverted. Hiten Samtani (31:13) Just to capture the atmosphere around the company, I think our guy Bill Zocks said it best. He's a portfolio manager at Franklin Templeton. He said debt investors are freaked out about CoreWeave cost of equity and equity investors are freaked out about its cost of debt. So both sides are Will Krasne (31:30) I don't I I've never heard of Bill Zox, but I I'm I feel great calling him our guy after that quote because that's fantastic. Hiten Samtani (31:38) So Corweave also raised two point three billion dollars in a very novel financing that was co led by Blackstone and Digital Bridge. And when we had Mark Gansy on from Digital Bridge, he was breaking that transaction down with us. If you remember, this is the the chips are essentially held hostage box. Will Krasne (31:55) Metaphorical walk. Hiten Samtani (31:57) Yeah, exactly. So you get pledging Will Krasne (31:59) The revenue as a pledge, you're Hiten Samtani (32:00) the revenues. Will Krasne (32:01) and then that's the belt. And the suspenders is you get a lean on the GPU. Hiten Samtani (32:05) There are a lot of the players that we think about, the fortunes are tied up here. The saving grace is that demand just keeps going like that. Like demand for this kind of compute for these chips is just inexorable, right? It doesn't seem to let up at all. The issue here has always been the supply. Will we be able to build enough to deal with it? Will Krasne (32:24) And then the ultimate price of the chips and the GPUs, because if those collapse, then the whole business model is screwed. Because this is all sort of predicated on number going up. I will say Core Weaves founders have sold, I think, three billion a stock, which I know again, they should be taking chips off the table. Don't regard them that obviously, but they've sold two billion this year, I think. One of the founders was in the FT. Hiten Samtani (32:47) Quite an interview there, I think. Will Krasne (32:49) Yeah. I mean, th that guy, you know, said some stuff. He said their goal is to really get investment grade ratings on more of their debt. And then ultimately the company itself, what did they want to get? How much money were they trying to raise? Hiten Samtani (33:05) Unlimited, they said. That's all the money in the world that sits in the insurance tranche. Will Krasne (33:10) just all the money in the world. That's all. Hiten Samtani (33:13) Insurance, just to zoom out a little bit, has become one of the biggest talking points in the real estate credit markets as well. We've seen groups like Apollo figure out how to tap into things like Athene to then generate or originate a ton of activity in real estate credit. Will Krasne (33:28) Beyond that too, a lot of this has gone into to data center. We're seeing fallout in the equity markets because the IPO window might be shut. Beyond OpenAI pushing into next year, Anthropic, there's questions around if they will get out. But really, just in the last couple of weeks alone, AirTrunk, a big REIT in Australia, was planning to go public on the Singapore stock and change. They pulled that. Hiten Samtani (33:50) They shelved it. Yep. Yeah. Will Krasne (33:52) Firmus Group postponed a big IPO as well. Firmus Hiten Samtani (33:55) Firma scritt. Will Krasne (33:56) Grid, because they didn't get enough. Demand and then Brookfield had C Square, which went out, got out, good for them, but priced hundreds of millions less than their initial goal. The thing that drives all this with just semiconductor companies. So the iShare semiconductor ETF fell nine sessions in a row through Friday and has lost about fifteen percent in the last thirteen days. Hiten Samtani (34:18) This all comes back to real estate because if Core Weaves having their insurance price like default is perhaps in the air, right? And the debt gets more and more expensive. All the construction that has been the story of our market for the last three plus years, what happens to all of that? Oracle invoking force majeure in the Blue Owl project, right? All these little question marks keep popping up on the horizon. Will Krasne (34:41) What they say, the market climbs a wall of worry. You hit the nail on the head when you say it. Do you think people are gonna be using more or less of these things exactly in a couple of years? It's gonna be more. The question is everything around it and how we get there. Hiten Samtani (34:55) There was an amazing little nugget I I read a few years ago where the the valuation of Stripe was two X larger than the implied valuation of the entire fintech market a decade ago. That's how quickly these things can move. Just one company was more valuable than the entire TAM that was expected for this category back then. Will Krasne (35:17) talk about the tech bubble in 2000, but that stuff was right. All of that capacity that got put in the ground, all that fiber, all that connectivity, that's what led to this. AI is built off of the infrastructure from that bust. So if the same thing happens, I mean, ultimately all of it's gonna get used and we'll be in a more productive place down the line. And it doesn't mean there's not gonna be a huge amount of intermittent pain. Hiten Samtani (35:44) That's what I was gonna get at, right? There's still gonna be bodies. Will Krasne (35:46) Yeah, like the rules of gravity still apply. We haven't seen business models necessarily like this. Core weaves debt, a lot of it is unsecured, a lot of it is project or if it's secured, it's project level. They've done a fantastic job of levering through their capital stack. Yes. Because not all debts created equal. A personal guarantee on something with no cash flow is a lot different than an unsecured loan, is a lot different than a loan secured only by one asset. So you gotta read your indentures. Hiten Samtani (36:22) That's it for the pod this week. The alphas of the hedge fund world are finding very little alpha in the CRE business and are marching out with their tails between their legs. And Core Weaves teetering in the bond markets is a warning shot for all the CRE allocators and investors who've tied their fortunes to the near clouds. Will Krasne (36:38) Shout out to all of our sponsors. Thank you guys so much. You are tremendous and handsome and kind. Hiten Samtani (36:45) Quite handsome. Will Krasne (36:46) Shout out to Pensford the only interest rate advisory focused exclusively on CRE. Find them at Pensford.com Bravo Capital, a leading HUD and Bridge Lender. If you're in the BTR game, you need to be talking to them because that is a big source of financing that can juice your returns. You can find them at BravoCapital.com. HEquities, if you're looking for the last 20% of your capital raise or you need some bridge debt. As Coral Weave might. Find them at h equities dot com and of course Gibson Dunn. Hiten Samtani (37:14) Thank you, Gibbs of Dunn. All right, November 5th, we're doing our live podcast in New York. We've got one of our guests nailed down. Should we tell him who it is? Will Krasne (37:22) Let's do it next week. Hiten Samtani (37:23) Alright, so I'll see you next week then, man. Thank you. Will Krasne (37:25) Thank you. Hiten Samtani (37:26) Ciao.