Latest / Bloomberg Intelligence / What Whole Foods Means for Amazon's Foray Into Food

Transcript

What Whole Foods Means for Amazon's Foray Into Food · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
• 0:11
  Speaker 1: we bring you the most important, noteworthy, and useful interviews
• 0:15
  Speaker 1: for you and your money, whether you're at the grocery
• 0:17
  Speaker 1: store or the trading floor. Find the Bloomberg p m
• 0:20
  Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com.
• 0:31
  Speaker 1: It's shira Ov day of Bloomberg Gadfly columnists joining us
• 0:35
  Speaker 1: in the studio about the Amazon purchase of Whole Foods.
• 0:39
  Speaker 1: Go ahead, give us your take on on this. Well,
• 0:42
  Speaker 1: first of all, I was surprised. Seems to be everybody. Yes,
• 0:45
  Speaker 1: it seems to everybody. I mean, we should say that.
• 0:46
  Speaker 1: Our colleagues at Bloomberg News wrote a story in April
• 0:50
  Speaker 1: that essentially said Amazon looked it talked internally about buying
• 0:54
  Speaker 1: Whole Foods last fall, and they decided not to pursue it.
• 0:57
  Speaker 1: But it shows you that this has been something that's
• 1:00
  Speaker 1: been on Amazon's mind for a while. And the really
• 1:02
  Speaker 1: interesting thing here is that grocery shopping is one of
• 1:06
  Speaker 1: the biggest categories of consumer spending, but it has been
• 1:10
  Speaker 1: very resistant to e commerce. Only about two or three
• 1:13
  Speaker 1: percent of all grocery shopping happens online, and you know,
• 1:17
  Speaker 1: that's the kind of thing that Amazon loves to attack.
• 1:20
  Speaker 1: Here is a humongous market with eight hundred billion dollars
• 1:23
  Speaker 1: in annual spending in the US alone, but it needs
• 1:28
  Speaker 1: a kind of Amazon e commerce touch, and so that's
• 1:31
  Speaker 1: what we're seeing here. What is that touch? To be honest,
• 1:34
  Speaker 1: I do not know I have, because I mean they
• 1:37
  Speaker 1: talks about that, but a lot of people have been
• 1:39
  Speaker 1: trying to give it this touch, this online, including Amazon.
• 1:42
  Speaker 1: It should be said that Amazon has a something called
• 1:45
  Speaker 1: Amazon Fresh, which is an online grocery delivery service that
• 1:48
  Speaker 1: it started rolling out ten years ago now um and
• 1:52
  Speaker 1: starting in its hometown of Seattle, and since expanded to
• 1:55
  Speaker 1: a number of markets. But even by Amazon's own admission,
• 1:58
  Speaker 1: Fresh has not gonne extremely well. And Amazon more recently
• 2:02
  Speaker 1: has tried some other grocery ideas. It just opened some
• 2:07
  Speaker 1: pick up kiosks in Seattle again where you order online
• 2:11
  Speaker 1: and then you drive up to these windows to kind
• 2:13
  Speaker 1: of pick up your groceries. You know, it's opening a
• 2:15
  Speaker 1: convenience store for food and other merchandise also in Seattle.
• 2:19
  Speaker 1: So it's clear that Amazon has been very interested in grocery,
• 2:22
  Speaker 1: but maybe not exactly sure how to do it. And
• 2:25
  Speaker 1: to be honest, I don't know what their plans are
• 2:28
  Speaker 1: for Whole Foods. Do they think the future of shopping
• 2:31
  Speaker 1: is stores, Do they think it's online? Do they think
• 2:33
  Speaker 1: it's a mix of both. This is exactly what I
• 2:35
  Speaker 1: was wondering. I mean, is this going to change the
• 2:37
  Speaker 1: Whole Foods experience dramatically? Are they going to leave it
• 2:39
  Speaker 1: as is and sort of uh, you know, jump off
• 2:42
  Speaker 1: of that. I would bet, and this is sort of
• 2:45
  Speaker 1: a semi educated guess to be fair, I would bet
• 2:49
  Speaker 1: that they would for now leave Whole Foods, you know,
• 2:51
  Speaker 1: as a grocery chain, but they would use it as
• 2:53
  Speaker 1: a kind of a test bed for new ideas. And
• 2:56
  Speaker 1: I don't think that they're spending thirteen point seven billion
• 2:59
  Speaker 1: dollars simply to buy a grocery chain. They're buying it
• 3:03
  Speaker 1: because they want to figure out what the grocery shopping
• 3:08
  Speaker 1: of the future is and then they want to control
• 3:10
  Speaker 1: that and use Whole Foods as a way to kind
• 3:14
  Speaker 1: of get them there. They also access all of this
• 3:19
  Speaker 1: incredible data, correct, I mean, everything that gets scanned, whether
• 3:24
  Speaker 1: it's a stock keeping unit, that's being put on the
• 3:27
  Speaker 1: shelf or something that's being put into a bag as
• 3:29
  Speaker 1: you check out. You may not even have a human cashier. Yeah,
• 3:34
  Speaker 1: that's right. I think the data piece is is huge
• 3:37
  Speaker 1: that they're suddenly going to get all this information not
• 3:40
  Speaker 1: just about shopping behavior, but also about the kind of
• 3:43
  Speaker 1: mechanics of running a grocery chain with distribution and dealing
• 3:48
  Speaker 1: with suppliers and things like that. Again, our our Bloomberg
• 3:52
  Speaker 1: News colleagues wrote this big piece about Amazon's kind of
• 3:54
  Speaker 1: grocery ambitions a while ago, and one of the revelations
• 3:58
  Speaker 1: there was Amazon had a problem with the kind of
• 4:00
  Speaker 1: inventory and distribution in groceries that you know, bananas would
• 4:04
  Speaker 1: go bad and things like that. So it's also getting
• 4:07
  Speaker 1: some expertise on the back end of running food delivery
• 4:10
  Speaker 1: food operations. I mean, it's interesting though that they chose
• 4:13
  Speaker 1: Whole Foods of all places, because Whole Foods hasn't exactly
• 4:17
  Speaker 1: been a seller example of distribution, and they've struggled with
• 4:21
  Speaker 1: overpriced items and this has not been a grocery store
• 4:25
  Speaker 1: chain that has done phenomenally well in the past few years.
• 4:29
  Speaker 1: Is it because the valuation what made more sense for Amazon?
• 4:33
  Speaker 1: Or was it because uh, they saw something else. Well,
• 4:37
  Speaker 1: Whole Foods has some serious advantages. One is it it
• 4:40
  Speaker 1: has a very good brand and that's certainly something that
• 4:44
  Speaker 1: is valuable for Amazon. And also Whole Foods was uniquely
• 4:47
  Speaker 1: vulnerable right that it's been attacked by johnah Partners, an
• 4:51
  Speaker 1: activist investor recently, and so you know, it was in
• 4:55
  Speaker 1: the position where Whole Foods needed a white Knight, and
• 4:58
  Speaker 1: Jeff Bezos, I guess, was more then happy to swoop
• 5:00
  Speaker 1: in and be that white night. The Amazon web services
• 5:05
  Speaker 1: business is always cited as being this growing conglomerate inside
• 5:10
  Speaker 1: of Amazon. Just give you twenty seconds to connect that
• 5:13
  Speaker 1: with this purchase. Um. So, one thing that has been
• 5:17
  Speaker 1: speculated is could Amazon Amazon's grocery ambitions be the next
• 5:23
  Speaker 1: aws that it's if they manage to get the distribution
• 5:27
  Speaker 1: of food right and the in store experience right, can
• 5:30
  Speaker 1: they then sell that as software to other grocery companies.
• 5:34
  Speaker 1: That's fascinating, Shara Ovida, always fabulous speaking with you Bloomberg
• 5:38
  Speaker 1: Gadfly columnists. You put it so nicely, and it really
• 5:41
  Speaker 1: gives us a sense of what could be at stake
• 5:43
  Speaker 1: here and why this is being treated as such an
• 5:46
  Speaker 1: industry disruptor Shara Ovida. Her columns are awesome, go read them.
• 6:02
  Speaker 1: They have a new executive, but it has a very
• 6:04
  Speaker 1: big problem that is coming to the new executive, John
• 6:08
  Speaker 1: Flannery from Jeff Immult who just stepped down. And Katherine Klinsky,
• 6:13
  Speaker 1: a bloom BERGNESE reporter, highlighted this in a recent story
• 6:16
  Speaker 1: looking at how g E has a thirty one billion
• 6:19
  Speaker 1: dollar deficit and its pension, which is the biggest among
• 6:22
  Speaker 1: SMP five companies and this even more shockingly fifty percent
• 6:25
  Speaker 1: greater than any other corporation in the US. Katherine, how
• 6:30
  Speaker 1: did we get to this point? How is ge so
• 6:33
  Speaker 1: desperately underfunded in its pension? Yeah, definitely, John Flannery has
• 6:37
  Speaker 1: this big hole to feel. Um, Like most corporate pensions,
• 6:41
  Speaker 1: the financial christ really wrecked them. That was when they
• 6:43
  Speaker 1: fell underfunded, and it's it's been a hard time trying
• 6:47
  Speaker 1: to recoup those losses over the years. I mean, interest
• 6:49
  Speaker 1: rates have been really poor, and even if you've invested
• 6:52
  Speaker 1: in other assets, you know, it's been a volatile market
• 6:55
  Speaker 1: and it's hard to always kind of recoup those losses. Um.
• 6:58
  Speaker 1: A lot of companies have instead and putting cash to
• 7:01
  Speaker 1: their plans, or they've been offloading them to ensures, they've
• 7:03
  Speaker 1: looked for kind of other solutions to try and shore
• 7:06
  Speaker 1: up these pensions. UM. But with GE, it's just steadily
• 7:10
  Speaker 1: trended down in terms of their shortfall. Now G has
• 7:14
  Speaker 1: a lot of company, doesn't it. I mean it's not
• 7:16
  Speaker 1: as if gees alone in not having a completely funded
• 7:20
  Speaker 1: pension plan. Some of the most recognized and largest companies
• 7:24
  Speaker 1: in the United States General Electric is writing about but
• 7:28
  Speaker 1: General Motors, Boeing, ex On Mobile, A, T and T,
• 7:31
  Speaker 1: Lockheed Martin. Is there no downside legally or financially to
• 7:37
  Speaker 1: underfunding your pension plans? So they just go ahead and
• 7:40
  Speaker 1: don't worry about it. Yeah. So, actually, if you hold
• 7:44
  Speaker 1: an underfunded pension plan, you have to pay more fees
• 7:47
  Speaker 1: to the PPGC, which is kind of the government agency
• 7:49
  Speaker 1: that backstops these UM. So there is an immediate kind
• 7:53
  Speaker 1: of financial cost to these plans. You know, it is
• 7:55
  Speaker 1: important to recognize that these obligations are decades long. So
• 7:59
  Speaker 1: if markets start to ali, yes, that might really help them, UM,
• 8:02
  Speaker 1: as long as they're invested in the asset that actually
• 8:05
  Speaker 1: rallies compared to the bonds that they have been buying.
• 8:08
  Speaker 1: Because they were afraid to buy stocks. Definitely, So they
• 8:11
  Speaker 1: I mean, they they're pretty well diverse. They have equity,
• 8:13
  Speaker 1: they have debt, real estate, private equity. They actually own
• 8:17
  Speaker 1: thirty million dollars or thirty million shares of g in
• 8:20
  Speaker 1: fact um. But it's hard to always bet on that.
• 8:23
  Speaker 1: And a lot of companies now are starting to say,
• 8:26
  Speaker 1: you know, we're not going to wait for markets to
• 8:28
  Speaker 1: kind of help us. A lot of companies are taking
• 8:30
  Speaker 1: these actions. And you have big public pensions that have
• 8:33
  Speaker 1: just come out out right and said, look, are long
• 8:36
  Speaker 1: time assumption that we're gonna get seven and a half
• 8:38
  Speaker 1: returns each year on our assets is going out the window.
• 8:41
  Speaker 1: We're gonna have to lower that to six and a
• 8:43
  Speaker 1: half to six point to five percent, whatever it is,
• 8:46
  Speaker 1: which means more contributions in the part of both employees
• 8:50
  Speaker 1: as well as possibly, uh, you know, the actual organization, right,
• 8:55
  Speaker 1: I mean, but what strikes me about g E is
• 8:58
  Speaker 1: that g E opted not to do what others were doing,
• 9:01
  Speaker 1: not to make contributions, instead to give out forty five
• 9:04
  Speaker 1: billion dollars basically two shareholders with buy backs instead, basically
• 9:10
  Speaker 1: because of this activist pressure. I mean, at some point
• 9:13
  Speaker 1: this is going to come back to bite them, because
• 9:15
  Speaker 1: you have to wonder, are they just investing in risk
• 9:17
  Speaker 1: your assets with the money from the pension in order
• 9:20
  Speaker 1: to make up for the shortfall and crossing their fingers. Yeah,
• 9:23
  Speaker 1: So they have been making some contributions about over the
• 9:26
  Speaker 1: past two years, it's been about two billion dollars to
• 9:28
  Speaker 1: their pension plan. But that's paltry compared to the forty
• 9:31
  Speaker 1: five billion they've been spending on share repurchases. And while
• 9:34
  Speaker 1: it's you know, while the pension plan could receive a
• 9:38
  Speaker 1: great boost from interest rates, while it might be fine
• 9:40
  Speaker 1: in the end, we argue that, you know, it's kind
• 9:42
  Speaker 1: of this this uh, this tension between those short term
• 9:46
  Speaker 1: effects of hey, let's appease these activist shareholders, make sure
• 9:50
  Speaker 1: our investors are happy with this kind of growing hole
• 9:53
  Speaker 1: that they have on their on their balance sheet, and
• 9:56
  Speaker 1: it's hard to recoepe those losses. I was looks going
• 10:00
  Speaker 1: to say, just to add to this idea that you're
• 10:02
  Speaker 1: talking about, what these assets, what they're invested in, the
• 10:06
  Speaker 1: various assets, because when you have interest rates that are
• 10:08
  Speaker 1: as low as you describe, and we're all living through
• 10:12
  Speaker 1: this um, there is no way that you're going to
• 10:15
  Speaker 1: meet your benchmark, your target. Right, You're and that hasn't
• 10:19
  Speaker 1: even been a sort of reality moment for many pension
• 10:23
  Speaker 1: fund managers. Correct, correct, and um so G has lowered.
• 10:27
  Speaker 1: They went from about nine percent in the early two
• 10:29
  Speaker 1: thousand's to now seven point five, but it's still that's
• 10:33
  Speaker 1: kind of a higher assumption for the way markets are doing.
• 10:36
  Speaker 1: We've seen a lot of pension plans um either lower
• 10:39
  Speaker 1: those even further or take steps to kind of better
• 10:42
  Speaker 1: match their assets and their liabilities, kind of taking a
• 10:45
  Speaker 1: traditional insurance view of it. Um and that has also
• 10:49
  Speaker 1: helped at least mitigate the volatility, because sometimes you're just
• 10:52
  Speaker 1: never going to make up those returns, but at least
• 10:55
  Speaker 1: you don't want to. And they have to keep cashing, right,
• 10:57
  Speaker 1: I mean, the Arissa rules say that you have to
• 10:59
  Speaker 1: keep a certain amount of cash on hand in order
• 11:01
  Speaker 1: to pay out current beneficiaries. Yeah, they definitely need UM
• 11:05
  Speaker 1: cash to be able because some of these beneficiaries are
• 11:07
  Speaker 1: already taking payments and but a lot of those obligations
• 11:10
  Speaker 1: are decades long, so they'll still have, you know, a
• 11:12
  Speaker 1: bunch of assets to kind of play with for a
• 11:14
  Speaker 1: little bit. Is she the biggest pension or a company
• 11:18
  Speaker 1: with a pension out there, they do. I mean they
• 11:20
  Speaker 1: have a very sizable pension. So ninety four billion dollars
• 11:24
  Speaker 1: in obligations and about sixty three and assets right now,
• 11:27
  Speaker 1: what are the comparable kinds of what are the other
• 11:30
  Speaker 1: companies with comparable pensions? Yeah, I mean it kind of
• 11:33
  Speaker 1: sizes up with many industrial companies. Those tends to be
• 11:36
  Speaker 1: kind of the larger pensions that we see. It's kind
• 11:38
  Speaker 1: of those legacies of decades of kind of blue collar workers. UM,
• 11:42
  Speaker 1: they're about sixty seven percent funded. That's kind of an
• 11:44
  Speaker 1: important number to recognize, is UM. You know, their their
• 11:48
  Speaker 1: obligations to kind of their assets that they have now.
• 11:51
  Speaker 1: UM generally pension experts say eighty percent is where you
• 11:55
  Speaker 1: tend to want to be UM and higher if you can,
• 11:58
  Speaker 1: but is kind of a one to shoot for. Well,
• 12:01
  Speaker 1: I was gonna say, if you guys also get a chance.
• 12:03
  Speaker 1: Has a great uh piece of corporate research by Bob
• 12:07
  Speaker 1: Coley over at Russell Investments. It's it's about this year's
• 12:13
  Speaker 1: earlier this year, but it talks about the twenty billion
• 12:15
  Speaker 1: dollar club, meaning you know, do you have liabilities that
• 12:18
  Speaker 1: you're unmet by more than twenty billion and UM, well,
• 12:22
  Speaker 1: you know you've got the General Electric as I said,
• 12:24
  Speaker 1: General Motors, but just add to the list a T
• 12:26
  Speaker 1: and T Dow Chemical. Well, we know what's happening there.
• 12:29
  Speaker 1: Johnson and Johnson, thank you very much for bringing this
• 12:32
  Speaker 1: to our attention. Really well done and uh look forward
• 12:35
  Speaker 1: to more. Katherine Chiglinsky, US insurance reporter for a Bloomberg
• 12:51
  Speaker 1: Well Insulin. Insulin is one of those drugs that is
• 12:56
  Speaker 1: life sustaining and it is sold throughout the United States
• 12:59
  Speaker 1: at races that have increased dramatically over the last decade.
• 13:03
  Speaker 1: Here to tell us more about drug pricing is Michael Ray.
• 13:06
  Speaker 1: He is the founder and the chief executive of our
• 13:09
  Speaker 1: ex Savings Solutions and he joins us from Overland Park, Kansas. Michael,
• 13:14
  Speaker 1: thanks for being with us. Can you comment on some
• 13:17
  Speaker 1: moves in the state of Nevada, specifically with the Governor
• 13:21
  Speaker 1: Brian Sandoval signing a law that is now the really
• 13:27
  Speaker 1: the most strict requirement for the revelation of drug prices,
• 13:32
  Speaker 1: which we strangely don't have. Yeah, it's great to be
• 13:36
  Speaker 1: with you, Jim. I think that the legislation really shows
• 13:39
  Speaker 1: the frustration and the desperation people feel. We've seen this
• 13:43
  Speaker 1: public outcry about drug prices and you know, some recent
• 13:47
  Speaker 1: examples really focused on influence. Um. I think it just
• 13:50
  Speaker 1: demonstrates the pain people feel, um, financially, I think that
• 13:54
  Speaker 1: it it's something that's a threat too, you know, just
• 13:57
  Speaker 1: common health health care for the those diabetics, and it's
• 14:01
  Speaker 1: it's a it's a really important topic. I think that
• 14:03
  Speaker 1: the legislation, um, you know, is a is a great
• 14:07
  Speaker 1: first step. I think that there there's much more and
• 14:10
  Speaker 1: it's a much more complex issue that needs to be
• 14:12
  Speaker 1: dealt with. Well, let's just talk certainly, let's let's clarify
• 14:14
  Speaker 1: what this legislation actually said. The law required drug makers
• 14:18
  Speaker 1: to annually disclose the list prices they set, profits they make,
• 14:22
  Speaker 1: and adjustments to any kind of pricing due to inflation
• 14:28
  Speaker 1: or otherwise, basically giving more transparency to how they set prices. Correct. Yeah,
• 14:34
  Speaker 1: that's right, and I think from a macro approach it
• 14:36
  Speaker 1: makes sense. But you know, the what the patient pays
• 14:40
  Speaker 1: that the counter, coupled with what they're other therapetic options are,
• 14:43
  Speaker 1: and what's going to be most impactful. Basically, what I'm
• 14:45
  Speaker 1: saying is the data you know at years N is
• 14:48
  Speaker 1: really going to have a little impact on what consumer
• 14:51
  Speaker 1: experiences when they go to try to buy their influence.
• 14:53
  Speaker 1: Is this law constitutional? Again, I'm sorry, is this law constitutional?
• 14:58
  Speaker 1: Because I can imagine and and and just reading up
• 15:01
  Speaker 1: on it, it it seems like some pharmaceutical companies are saying,
• 15:04
  Speaker 1: you know, this might actually raise some some legal issues
• 15:09
  Speaker 1: about whether whether the state can basically voiced this kind
• 15:13
  Speaker 1: of requirement upon them. Yeah, I mean, I think it's
• 15:16
  Speaker 1: it's uh, you know, it's kind of like bringing one
• 15:19
  Speaker 1: stand back to a flood. Um. There's you know, it's
• 15:22
  Speaker 1: going to have a limited effect because of the complexity
• 15:24
  Speaker 1: of the system. You know, we're not just talking about manufacturers,
• 15:27
  Speaker 1: but we're talking about an entire supply chain that's disrupted
• 15:30
  Speaker 1: or um, you know, may adjust other parameters um. And
• 15:35
  Speaker 1: I think that even if you look at the find
• 15:37
  Speaker 1: the five thousand dollars a day that adds up to
• 15:40
  Speaker 1: two million bucks um, that's really not not that much
• 15:43
  Speaker 1: money in the grand scheme of things, even if they
• 15:45
  Speaker 1: decided not to disclosed its state. But other states have
• 15:48
  Speaker 1: also taken this up correct Vermont, for example, asking drug
• 15:53
  Speaker 1: makers to justify certain price increases of fifteen percent or more. Uh,
• 16:00
  Speaker 1: is there any reason to doubt that other states will
• 16:03
  Speaker 1: look at this and say, gee, we want the same
• 16:05
  Speaker 1: benefits for our UH citizens. Yeah, I think, Um, I
• 16:11
  Speaker 1: think that's certainly possible. And again kind of back to
• 16:14
  Speaker 1: the original point of this is on one drug or
• 16:17
  Speaker 1: one set of drugs, Um, it's certainly important and impactful, um,
• 16:21
  Speaker 1: But there's a much bigger system here. And you know,
• 16:24
  Speaker 1: even if even if every state requires them to disclose
• 16:27
  Speaker 1: the pricing, again, it's after the fact, um, And what
• 16:31
  Speaker 1: is it going to mean ultimately to the individual consumer
• 16:35
  Speaker 1: at the pharmacy counter There there's a lack of information,
• 16:37
  Speaker 1: But from a therapy standpoint and a price standpoint, that's
• 16:40
  Speaker 1: the ultimate problem that needs to be solved, um, so
• 16:43
  Speaker 1: that the market forces can take over. Michael, you started
• 16:47
  Speaker 1: out by saying that this move on the part of
• 16:50
  Speaker 1: Nevada legislators shows this desperation of people to get pharmaceutical
• 16:55
  Speaker 1: costs under control, and how desperate people UH feel throughout
• 16:59
  Speaker 1: the coun treat How much is this an effort to
• 17:02
  Speaker 1: put pressure on Washington to perhaps inject a little bit
• 17:06
  Speaker 1: more of a collective bargating power when deciding or negotiating
• 17:11
  Speaker 1: with pharmaceutical companies from Medicare and medicaid. Well, I think
• 17:16
  Speaker 1: I think that this certainly is uh, that that's part
• 17:19
  Speaker 1: of it. You know, everyone agrees that drug prices need
• 17:21
  Speaker 1: to go down. Everyone agrees that, you know, people should
• 17:24
  Speaker 1: have the right to to an access to this type
• 17:26
  Speaker 1: of care. Uh. The question is what are the dollars
• 17:29
  Speaker 1: and cents and who does it affect and how um
• 17:32
  Speaker 1: in it? Again, it's a very complex. You've got a
• 17:34
  Speaker 1: supply chain that includes not just pharma but wholesalers, TBMs,
• 17:38
  Speaker 1: pharmacies themselves. Um, And so you've got to look at
• 17:42
  Speaker 1: the entire system. UM. But I do think that there's
• 17:45
  Speaker 1: you know, it's a it's a move to put further
• 17:48
  Speaker 1: pressure on whether it's legal. I know is one question,
• 17:51
  Speaker 1: um that I've heard said, it's you know, is this
• 17:53
  Speaker 1: type of is this a precedent that can even be brought? Um?
• 17:56
  Speaker 1: So I'm not sure to lead legally how that would
• 17:59
  Speaker 1: play out. I'm sure there will be challenges to this, Michael,
• 18:03
  Speaker 1: just quickly. I'm also as part of this move in Nevada, UH,
• 18:07
  Speaker 1: nonprofit organizations that are working on behalf of either patients
• 18:12
  Speaker 1: or funding medical research, they're going to have to reveal
• 18:16
  Speaker 1: and disclose the donations that they received from pharmaceutical companies
• 18:21
  Speaker 1: as well as insurance providers and benefit pharmacy benefit companies.
• 18:25
  Speaker 1: Why isn't that something that already happens. That's a great question. Again,
• 18:30
  Speaker 1: back to the complexity. It's a it's a very very
• 18:33
  Speaker 1: deep web of of how money changes hands and who's
• 18:37
  Speaker 1: changing hands from. You know, that's not a piece that
• 18:39
  Speaker 1: I cited, but that's a fantastic example, um of of
• 18:43
  Speaker 1: some of the you know, economic mechanics um and you know,
• 18:47
  Speaker 1: if you're gonna have transparency, you can't have transparency just
• 18:49
  Speaker 1: in one part. You need to have it everywhere. Thank
• 18:53
  Speaker 1: you so much for joining us. Michael Ray, founder and
• 18:56
  Speaker 1: CEO of r X Savings Solutions, which is based in
• 18:59
  Speaker 1: Overland Park, Kansas, Thank you so much for joining us.
• 19:13
  Speaker 1: Recent data shows that the housing market recovery in the
• 19:17
  Speaker 1: US has been incredibly uneven. Big metropolitan areas like New
• 19:21
  Speaker 1: York City, Miami, uh San Francisco have gained disproportionately, while
• 19:27
  Speaker 1: other smaller municipalities have lagged behind. So what does a
• 19:31
  Speaker 1: real estate investor do with this information? Terrell Gates joins
• 19:35
  Speaker 1: US now. He's chief executive officer and founder of Virtues
• 19:38
  Speaker 1: Real Estate Capital, which over sees about three billion dollars
• 19:42
  Speaker 1: in real estate assets from Austin, Texas. Terrell, I'd love
• 19:45
  Speaker 1: to get your take on this. When you see this
• 19:47
  Speaker 1: bifurcated market that appears to be slowing down right now,
• 19:51
  Speaker 1: do you avoid those municipalities that have gained the most,
• 19:55
  Speaker 1: like the New York's of the world and the San
• 19:56
  Speaker 1: Francisco's or do you think that those are the areas
• 19:59
  Speaker 1: that are most resilient if there is another downturn in
• 20:02
  Speaker 1: the near future. Yeah, that's a good question. I mean, certainly,
• 20:06
  Speaker 1: entrance prising are cost to buy today is a major
• 20:10
  Speaker 1: factor and where you're going to invest and where you're
• 20:12
  Speaker 1: not going to invest. But you also have to think
• 20:14
  Speaker 1: about sustainability of that income stream, and you have to
• 20:16
  Speaker 1: think about the growth potential. And so one of the
• 20:19
  Speaker 1: things that's been occurring over the last twenty to thirty
• 20:22
  Speaker 1: years is this great urbanization movement of people coming back
• 20:25
  Speaker 1: into the cities looking for more info locations, and that's
• 20:30
  Speaker 1: driving up those valuations that you're talking about. Let's talk
• 20:33
  Speaker 1: of if we can about some of the areas in
• 20:36
  Speaker 1: which you have expertise. I want to start with student
• 20:40
  Speaker 1: housing and I'm wondering if you could maybe use an example.
• 20:43
  Speaker 1: I know this one at Rutgers University, Rockoff Hall. Uh,
• 20:47
  Speaker 1: maybe you could use that as an example. How did
• 20:48
  Speaker 1: you find that property and what attracts you to the
• 20:52
  Speaker 1: student housing market, what makes it attractive? Well, our overall
• 20:56
  Speaker 1: thesis here at Vertices we don't invest in aditional commercial
• 21:00
  Speaker 1: real estate. We invest in property types that we believe
• 21:04
  Speaker 1: our recession resilient. In other words, property types that can
• 21:06
  Speaker 1: continue to perform even when there is an economic cycle
• 21:10
  Speaker 1: downturn or a cappa market cycle um retreat. And we
• 21:14
  Speaker 1: think student housing is one good example of that because
• 21:18
  Speaker 1: when we go into recessionary period, university enrollments actually increase.
• 21:22
  Speaker 1: Not surprising, right, because what that typically means is unemployment
• 21:26
  Speaker 1: goes up, more people go back to school, and there's
• 21:29
  Speaker 1: a greater need for housing. So the Rutgers University example,
• 21:34
  Speaker 1: that's a property that's walking distance to the main campus
• 21:37
  Speaker 1: of Rutgers University, which is one of the largest universities
• 21:40
  Speaker 1: in the country. There's about sixty five enrollment at all
• 21:43
  Speaker 1: of its campuses. And for that particular property, we did
• 21:46
  Speaker 1: buy that one off market. It is the only private,
• 21:51
  Speaker 1: lead built, purpose built student housing property in that particular market,
• 21:55
  Speaker 1: and so we found it compelling because we felt like
• 21:57
  Speaker 1: we could increase the performance of that secular property, driving
• 22:02
  Speaker 1: revenue from that property and ultimately driving income evaluation. Terrell,
• 22:06
  Speaker 1: if you're going to get into student housing, though, don't
• 22:08
  Speaker 1: you have to consider a little bit more the whole
• 22:10
  Speaker 1: backdrop of student debt and the fact that there is
• 22:13
  Speaker 1: this growing concern that all of these students who are
• 22:17
  Speaker 1: borrowing all this money are going to be able to
• 22:19
  Speaker 1: pay it back. Does it matter to the real estate investors?
• 22:22
  Speaker 1: It absolutely does, And you're hitting on a very important
• 22:25
  Speaker 1: point there, because there is a very different experience and
• 22:30
  Speaker 1: investing at different types of universities. So this backdrop of
• 22:34
  Speaker 1: the student housing bubble, as well as online technology driving
• 22:38
  Speaker 1: more lower cost education, is very much a factor. But
• 22:43
  Speaker 1: what you will see is at the major tier one
• 22:46
  Speaker 1: public flagship universities like a Rutgers or here in Texas
• 22:49
  Speaker 1: where I'm from, into University of Texas at Austin and
• 22:52
  Speaker 1: texasan m university, enrollment and demand for that quality education
• 22:57
  Speaker 1: continue to increase, and so there just isn't enough housing.
• 23:02
  Speaker 1: And what's happened really over the last twenty years, and
• 23:05
  Speaker 1: I would say, over the last ten years at an
• 23:07
  Speaker 1: even greater clip is many of these universities have said,
• 23:11
  Speaker 1: number one, we don't have the capital because we have
• 23:14
  Speaker 1: less state support today than we did in the past
• 23:17
  Speaker 1: to build the housing that we need to meet meet
• 23:20
  Speaker 1: the demand from our kids. And number two, we're not
• 23:23
  Speaker 1: good at it. That's not what our job is. Our
• 23:25
  Speaker 1: core competency as the university is education and research, it's
• 23:28
  Speaker 1: not real estate services. So they've been outsourcing that need
• 23:32
  Speaker 1: at a much greater clip to the private sector, to
• 23:35
  Speaker 1: groups like ours. Speak if you can about senior living properties.
• 23:39
  Speaker 1: I know you've got some Detroit, Orlando as well as Burlington, Vermont,
• 23:44
  Speaker 1: and then maybe just quickly on your medical office and
• 23:46
  Speaker 1: self storage, because each of those sort of tackles uses
• 23:50
  Speaker 1: the same strategy but tackles a different market. That's exactly right,
• 23:53
  Speaker 1: So senior living, same thing. Everybody knows about the graying
• 23:57
  Speaker 1: of of America. UM, we have an even gotten even
• 24:01
  Speaker 1: close to the peak of what we're going to see
• 24:02
  Speaker 1: from the boomer generation, which that actually doesn't peak until
• 24:05
  Speaker 1: about two thousand thirty three. But what we've seen is
• 24:09
  Speaker 1: is um for particularly needs based senior living. In other words,
• 24:14
  Speaker 1: when you gotta go, you gotta go. It's not really
• 24:16
  Speaker 1: a question because the level of care required means somebody
• 24:19
  Speaker 1: can't be living completely independently. So for us, we think
• 24:24
  Speaker 1: senior living is extraordinarily compelling because we think it is
• 24:27
  Speaker 1: a very sustainable income stream. Because the reality is is,
• 24:30
  Speaker 1: even if you lose your job or you have to
• 24:33
  Speaker 1: take a lower cost job, probably the last thing you're
• 24:36
  Speaker 1: gonna do is take your eighty six year old mom
• 24:38
  Speaker 1: out of a senior living community that's providing a high
• 24:41
  Speaker 1: level of care that she really needs and provides her
• 24:43
  Speaker 1: better quality of life than she could get at home.
• 24:46
  Speaker 1: So for us, we think the space is uh compelling
• 24:50
  Speaker 1: from a number of different perspectives, not only the sustainability
• 24:53
  Speaker 1: of that income stream, but also the ability to grow
• 24:56
  Speaker 1: it providing higher quality operations and hospitality. Tarrell, I have
• 25:00
  Speaker 1: to think with all the money that's been going into
• 25:02
  Speaker 1: real estate assets and the amount of cash looking for
• 25:06
  Speaker 1: some kind of bond substitute with higher yields, I have
• 25:09
  Speaker 1: to wonder, have you seen competition to your strategy just
• 25:14
  Speaker 1: balloon and have valuations dramatically? Yeah, So you know this
• 25:18
  Speaker 1: is an interesting point, right, and and a lot of
• 25:21
  Speaker 1: our investors asked the same question right there, saying, well,
• 25:24
  Speaker 1: wait a minute, all these people are getting into your
• 25:26
  Speaker 1: property types, because everybody looks over and they say, these
• 25:29
  Speaker 1: property types, these quote unquote alternative property types, many of
• 25:32
  Speaker 1: which are becoming more mainstream. They have higher yields, higher
• 25:36
  Speaker 1: total returns, historically, their recession resilient I want to get into.
• 25:41
  Speaker 1: But what they don't quite understand about these property types
• 25:44
  Speaker 1: is they are also more operationally intensive, and so what
• 25:47
  Speaker 1: that means is there's more idiosyncratic risk. In other words,
• 25:51
  Speaker 1: running a student housing property or running a senior living
• 25:54
  Speaker 1: property is not like running a multi family property. Similarly,
• 25:57
  Speaker 1: running a medical office building is not like running an
• 25:59
  Speaker 1: off buildings. So you have to have a lot of
• 26:01
  Speaker 1: the main expertise in these particular categories. So what's happened
• 26:05
  Speaker 1: is is a lot of these new investors, whether it's
• 26:08
  Speaker 1: big institutions like star Wood Capital or Carlisle or black Stone,
• 26:12
  Speaker 1: or the sovereign wealth funds like g I C or
• 26:15
  Speaker 1: the large pension funds, as they've come into the space,
• 26:18
  Speaker 1: they're typically buying large portfolios, and usually there are premiums
• 26:23
  Speaker 1: being paid for those large portfolios because they're making a
• 26:27
  Speaker 1: macro bet on the space that it's going to continue
• 26:29
  Speaker 1: to perform well. We, on the other hand, we generally
• 26:32
  Speaker 1: buy one off properties where valuations are usually a little
• 26:36
  Speaker 1: more compelling, that also have upside potential by improving the
• 26:40
  Speaker 1: quality of the real estate or improving the quality of
• 26:42
  Speaker 1: the operations, and then we ultimately end up selling to
• 26:46
  Speaker 1: a lot of these big financial groups or the reads
• 26:49
  Speaker 1: in larger portfolios and hopefully garnering the premium. Thanks very
• 26:52
  Speaker 1: much for sharing all this information with this Terrell Gates,
• 26:55
  Speaker 1: chief executive officer, founder of Vertas Real Estate Capital based
• 26:59
  Speaker 1: in Austin, Texas. Thanks for listening to the Bloomberg P
• 27:06
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 27:09
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 27:13
  Speaker 1: I'm Pim Fox. I'm on Twitter at pim Fox. I'm
• 27:17
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 27:20
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.