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[Music]
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all right it's kind of fitting that
00:00:18
we're here at the New York Stock
00:00:19
Exchange I mean right below us trading
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away there is a place the epicenter of
00:00:23
so much that went so wrong a year ago
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and yet also kind of a place where some
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things are starting to look right um you
00:00:32
know 1982 my first trip to New York Wall
00:00:34
Street Journal flies me up for an
00:00:35
interview an editor takes me out for a
00:00:37
walk and he says I'm about to take you
00:00:38
to the biggest gambling pit in the world
00:00:40
and it's ruled by fear and greed and it
00:00:43
was the New York Stock Exchange and
00:00:45
we've seen just how much fear can really
00:00:47
rule down there so are we finally coming
00:00:50
out of it is it finally getting better
00:00:52
well we're going to hear from a guy
00:00:53
Barry Stern who's got somewhere around
00:00:55
$3 billion riding on a big bet so if
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you'll please join me and welcoming
00:01:00
Barry
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sterlet okay so you sit there I sit here
00:01:09
good now um I think it's somewhere
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around three billion and then if you
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leverage that you could get what 20 30
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to one leverage on that in these days uh
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or probably up to 12 billion maybe four
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to one so I'm thinking you're feeling
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like we're okay and the economy is in
00:01:22
good shape but not or not no no no not
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at all um first off you're were I
00:01:28
thought you were saying 3 billion you
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were referring to the chorus acquisition
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we made which was 2.7 billion but you
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must be referring to the opportunity
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funds that we invest which I think if
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we're lucky I mean that funds we've
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invested so far this year about in those
00:01:42
funds about $800 million and they're
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only 25% leverag so you can't get
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leverage like you could before right um
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certainly disciplines you and um and
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it's harder to go broke if you have no
00:01:53
leverage which that's okay um but the
00:01:56
world is not um in great shape you know
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it's uh especially the US I I think um I
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do think that investing real estate is a
00:02:04
long-term game and when I started in '
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91 um we were buying from the RTC today
00:02:10
we're well the chest deal was bought
00:02:12
from the FDIC sort of added a letter but
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it's still a government agency um and uh
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the principles that I was so excited
00:02:21
about in 91 when I started my firm Are
00:02:23
Back In play 20 some odd years later and
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what three key principles would those be
00:02:27
you're buying below replacement cost in
00:02:29
the US which is a big deal good thank
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you the number one thing or you got a
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couple more I got two more uh you have
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positive leverage if you can get
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leverage at all so you're if you if you
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buy even an eight yield and you can
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borrow at six you you can get a 10 cash
00:02:44
on cash or nine and a half1 which is
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compelling relative to the other asset
00:02:48
classes the fixed income um governments
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even corporates even junk bonds and you
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just wait and eventually in a growth
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country like the United States which we
00:02:58
are still growing people forget that
00:03:00
unlike Western Europe unlike Japan we
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have demographic growth here So
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eventually you know if you're certainly
00:03:06
a patient investor growth will bail you
00:03:08
out unless you're investing in Detroit
00:03:11
so if you're in Detroit you're probably
00:03:12
not in great shape but um there are
00:03:14
there even in places like Albany you can
00:03:16
make money so it's a great industry the
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real estate industry because it is the
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last great and perfect Market you're
00:03:21
sitting over the epicenter of the
00:03:23
perfect Market you know the the but real
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estate it's not that hard I mean you
00:03:29
have to keep common sense is really
00:03:30
important which most people seem to lose
00:03:33
in the real estate Cycles um because
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they get access to both equity and debt
00:03:37
Capital but at the end of the day it is
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the most practical application of Common
00:03:41
Sense probably in investing well
00:03:42
especially if you're buying property
00:03:43
instead of just pieces of paper trading
00:03:45
back and forth which you you do a little
00:03:47
both though don't you we do both and
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they both take common sense but I was
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once when I was younger I'm going to
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pretend I'm still young I saw a sign at
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a holiday in that said was one of those
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B Billboards and it said common sense is
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very uncommon and I really believe that
00:04:02
I mean it's um it's amazing how as we
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look at the chorus assets which are 102
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construction projects all over the
00:04:08
country some of the stuff that was built
00:04:10
is inexplicable you know like in the in
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the you know 40 miles from the nearest
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Indian reservation and it's a highrise
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and all you see are tumble weed so you
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kind of Wonder did loan officer ever
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come out to the site um feel the dreams
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those are the problems you know those
00:04:26
are the problems when um the basics of
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real estate are forgotten they build
00:04:30
twostory retail I learned that when I
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was six years old that the second story
00:04:33
of retail only rents on a pro forer for
00:04:36
a banker right and um I'm impressed that
00:04:39
at age six you knew the phrase proor I
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didn't um and well all right so we heard
00:04:44
a couple reasons for why you're
00:04:45
investing now and why it looks good tell
00:04:46
us two or three key things that worry
00:04:48
you about the economy and whether we
00:04:51
we'll have a second dip or whether we
00:04:52
actually will this is not I mean people
00:04:54
look at then you see this is the fastest
00:04:56
second fastest recovery in history since
00:04:58
they you know the second dip in the
00:05:00
second facts of recovery I think
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fundamentally this is a different
00:05:02
economy than it was any other recession
00:05:04
that we've come out of Better or Worse
00:05:06
well different and worse because you're
00:05:09
you're it's being powered by government
00:05:10
spending and not by private Market
00:05:12
spending um and it's uh you know it's I
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I Ed the analogy that day of it's a lake
00:05:17
a thin lake or lake with a thin layer of
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ice on it and some people came out and
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started to dance and other people looked
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at them and said they're not falling
00:05:24
through the ice and they came out and
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it's a race between how fast the ice
00:05:26
will get thick how fast the economy will
00:05:28
strengthen and whether the weight of all
00:05:30
these people now losing all their
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risk um focus that they had the last 12
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months are now just piling on top of the
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lake because everyone's got to be in the
00:05:40
market we really wants to sit it looks
00:05:42
that way yeah I would say we're
00:05:44
forgetting very fast you know and I
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corporate bonds you know corporate bonds
00:05:47
the real estate deals are trading faster
00:05:49
and faster the discipline of reading the
00:05:51
documents what these um documents say in
00:05:55
the fine print is again you're not
00:05:57
having time to do there's a tremendous
00:06:00
Global search for yield and it's driving
00:06:03
prices and yields and supporting the
00:06:05
market probably certainly in real estate
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way ahead of the fundamentals so the low
00:06:08
government rates allow me not to do any
00:06:10
research and just rely on Moody right
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that well I it's not moody I mean you
00:06:16
you have uh in in 1991 two and three the
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re industry was really born when
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borrowers went public because they were
00:06:23
going to go broke right everyone was
00:06:25
recourse Mr tol knows this with with me
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that b are recourse on debt instead of
00:06:30
going David Simon isn't here I was with
00:06:32
him yesterday but his I remember seeing
00:06:34
his father Mel who should rest in peace
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just passed away in the office of my
00:06:38
boss crying tears coming down his cheeks
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because uh c bonds were trading at like
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nine but the guy was government
00:06:46
treasuries but but cap rates were six so
00:06:48
he was worth billions on paper and then
00:06:51
all of a sudden malls were worth 10 and
00:06:53
he had dead at 9: and he was broke and
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how did he get out of being broke he
00:06:58
went public and the market short rates
00:07:00
were so low that a yield of five or 6%
00:07:02
on a mall looked pretty good to the
00:07:04
public and the retail guys stepped in
00:07:06
and and and REE equitized the real
00:07:08
estate industry and that's how that's
00:07:10
the Dirty Little Secret of how the real
00:07:11
estate industry was born um the Reit
00:07:14
industry and it's happening again I mean
00:07:16
we did a blind pool this summer we
00:07:18
raised just cash but everywhere I go now
00:07:21
I hear about 43 different IPOs of
00:07:24
anybody with any asset thinks they can
00:07:26
go public and probably at the moment
00:07:28
with the discipline or lack thereof in
00:07:30
the public markets you can do that and
00:07:32
um you know we could probably take four
00:07:34
companies public right now I I just
00:07:36
don't know if we can handle it so I just
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want to make sure I got that right what
00:07:39
you just said is what do you do when you
00:07:40
go broke you go public I'm never going
00:07:42
to look at an IPO the same way is there
00:07:44
any press here seriously yes yeah
00:07:47
there's select members I'm done
00:07:50
talking good you go public okay so when
00:07:52
you take one of their next uh entities
00:07:55
public I think we're going to have to
00:07:56
look at that good liking that um so and
00:08:00
yet in crisis and in the fear lurks
00:08:02
opportunity if you can get there and if
00:08:04
you know what you're doing and that's
00:08:05
what you're betting on with yourself
00:08:07
yeah I I think there in all the debris
00:08:09
there's always great opportunity and
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anytime the government gets involved in
00:08:12
an industry well no matter what it is
00:08:13
there's things to do you can take
00:08:15
government to the cleaners can't you no
00:08:16
they're actually this time they're much
00:08:17
smarter they're our partner so we're
00:08:19
working for you and cor and chorus if we
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do a good job you make money because you
00:08:23
own 60% of the equity you the American
00:08:25
taxer I'm just hoping they don't go
00:08:26
after your salary once you start reaping
00:08:28
really good profits here well to some of
00:08:29
that uh that government's partner stuff
00:08:31
but why don't we start with a global
00:08:32
view and tell us around the world either
00:08:34
where you're investing or where you
00:08:36
think the hottest spots are where values
00:08:38
fell the most but economic growth is
00:08:40
doing the best I'm thinking of course
00:08:41
China and Southeast Asia but what else
00:08:43
you got so in 2005 we invested sever
00:08:46
like two two and a half billion dollars
00:08:48
and 80% of it was in Europe it wasn't
00:08:50
here uh we did and um and then we opened
00:08:53
offices in Mumbai and we've had an
00:08:55
office in Tokyo forever um and and
00:08:58
London and and and we felt that there
00:09:00
were much better opportunities outside
00:09:02
the US the last from 05 to 07 in fact we
00:09:06
went from 2 billion investing to like
00:09:08
600 million 06 to 200 million 07
00:09:12
globally and we just stopped investing
00:09:13
because prices went crazy and I was
00:09:15
having no fund I thought risk reward
00:09:17
today we just bought our first building
00:09:18
in London we've bought in God knows how
00:09:20
long we got out about two years ago from
00:09:22
our London Holdings and we just stepped
00:09:24
in and bought a building in the city of
00:09:25
London even in ' 05 why 80% Europe why
00:09:28
not 80% Asia
00:09:30
I have we have difficulty investing in
00:09:32
Asia I we've been in and out of Japan
00:09:34
we've actually never lost money I think
00:09:35
we've done like 15 or 20 transactions
00:09:37
there that's kind of shocking yeah it's
00:09:39
shocking to me too um we just called the
00:09:42
fall and C it was the widest and still
00:09:43
is the widest spread between yields on
00:09:46
property and the cost of debt in the
00:09:48
whole world is in Japan having said that
00:09:50
if in a macro if you you nobody would
00:09:52
ever invest in Japan on a macro basis
00:09:55
because the the people are it's really a
00:09:57
dying nation and uh industrial what you
00:10:00
saw I used to joke with the guys in The
00:10:01
Firm that the Japan's blip and how it
00:10:04
headed north last couple years was just
00:10:06
the Japanese conglomerates building
00:10:08
plants in China to put them out of
00:10:10
business so essentially they you know
00:10:13
they were basically as China becomes
00:10:15
more of a manufacturing base it's hard
00:10:17
for Japan to compete with the lower cost
00:10:19
of wage labor so China we've been in and
00:10:22
out of in one deal two deals one we're
00:10:25
not totally out of the other one we got
00:10:26
out of and we made some money but I
00:10:28
don't want to invest in China actually
00:10:30
overheated I don't think we they don't
00:10:32
they don't need our money and um I know
00:10:35
we can get in I just don't know when we
00:10:36
get out and and since they're not
00:10:38
telling us the Rules of Engagement okay
00:10:40
like for example a hotel is in China and
00:10:42
Shanghai are running 35% occupancy and
00:10:44
this mayor decides he wants to build
00:10:46
another hotel they want to build a whole
00:10:48
new city somewhere they don't actually
00:10:49
tell you that when you're investing in
00:10:51
downtown Shanghai that they're going to
00:10:52
move 14 Industries 14 miles away and
00:10:55
build another city so from a supply
00:10:57
demand Dynamic it's
00:10:59
it's not underr all right so Japan China
00:11:02
what do you think of Russia CU that
00:11:04
population is is declining rather than
00:11:05
improving too all years you won't touch
00:11:08
Russia no i' I've never been anywhere
00:11:10
that I wanted to get out of faster in my
00:11:11
life okay Europe you're liking um Europe
00:11:16
we like but Europe's stuck the banks are
00:11:19
stuck the banks aren't selling the paper
00:11:21
that they have the entire British
00:11:23
Banking systems been uh nationalized and
00:11:26
the guys who have all the paper are just
00:11:27
sitting on it RBS
00:11:30
hbos uh Barkley who's not part of the
00:11:32
government Ward but when you're
00:11:34
borrowing at zero you know you can hold
00:11:36
stuff for a long time have they not
00:11:38
written down the value enough of the NBS
00:11:40
stuff to my knowledge they've written
00:11:41
almost nothing down in England the banks
00:11:43
over there where some of the banks here
00:11:45
in the US have taken huge hits right I
00:11:46
mean Goldman rode off 50% I think of a
00:11:48
lot of it Holdings didn't but they got
00:11:49
to borrow $3 billion at zero too so I'd
00:11:52
like to spread a little love around to
00:11:54
us um the uh you know that's I think one
00:11:57
of the things that you miss about the
00:11:58
banks in the US is that um and that's I
00:12:00
think where the public outrage is is
00:12:02
Justified because it isn't if you borrow
00:12:05
if you gave any of us money at zero I'm
00:12:07
sure we could make money we could all
00:12:09
buy treasuries right and make three
00:12:11
points and and make a lot of money and
00:12:13
to pay bonuses out of that pool even I
00:12:15
might be able to do that even you and
00:12:16
I'm terrible at this stuff and and on
00:12:17
the other hand the lending banks are not
00:12:19
lending and anything they say that
00:12:20
they're lending is not true but isn't it
00:12:22
a good thing when Banks don't lend
00:12:24
because doesn't it mean ah they don't
00:12:25
feel good enough to lend and the guy
00:12:27
applying for the money doesn't have a
00:12:28
good enough credit I mean maybe they're
00:12:29
doing the right there nothing to do with
00:12:31
that it's just they have as they said to
00:12:32
me we can earn 20% buying Securities why
00:12:35
would I lend you money and um you know
00:12:37
we have a situation now that's a
00:12:39
multi-billion dollar transactions we're
00:12:40
P we're willing to put in over a billion
00:12:42
of equity into the deal yeah and um the
00:12:45
only banks we have talking to us are
00:12:46
foreign this is a US deal right mhm yeah
00:12:49
it's what was the name of it did you say
00:12:51
I I'm not telling you okay but it's a
00:12:54
good try all right um and yet Europe uh
00:12:57
as much as you worry about the banks
00:12:59
haven't written off the stuff enough
00:13:00
Europe is out growing the US much to my
00:13:02
dismay well Europe Europe um Europe's
00:13:07
got a bigger problem Europe has the a
00:13:09
currency issue now because the Chinese
00:13:10
wand being locked to our currency as we
00:13:14
drop in value against the Euro the WAN
00:13:16
appreciates against the Euro I mean
00:13:18
depreciates also against the Euro so
00:13:20
chin European exports you know German is
00:13:23
the driver of much of the growth of
00:13:24
conel Europe how's it going to compete
00:13:26
where the dollar keeps weakening and the
00:13:28
and the the W keeps getting cheaper and
00:13:31
cheaper so um it's it's something's
00:13:33
going to give there Europe's not really
00:13:36
it never took off and it never crashed
00:13:38
as hard that it's hard we own too many
00:13:40
Assets in Europe it's very hard to lay
00:13:42
people off so you don't see these huge
00:13:44
unemployment but you can't you never see
00:13:46
the booming growth either right so it's
00:13:48
just a safety net it's more of a spider
00:13:50
web it's harder to move it up and down
00:13:52
and the Boom in the 90s Europe created
00:13:54
vastly fewer jobs than the US economy
00:13:56
that we were far more robust this time
00:13:58
around will the lead or will it lag
00:14:00
behind in recovery it's pretty obvious
00:14:02
we're going to lag behind yeah to me I
00:14:04
mean we were not we don't have the
00:14:05
infrastructure or the or the
00:14:07
Congressional and and presidential
00:14:09
leadership to create the jobs we need if
00:14:12
you rate $787 billion stimulus package
00:14:15
and a couple hundred billion it goes to
00:14:16
tax cuts that didn't work under Bush and
00:14:18
we did them again under under Obama I
00:14:20
mean you they should put 150 billion
00:14:22
into Alternative Energy Research because
00:14:25
that would create enormous jobs and have
00:14:27
a dividend of trillions of of defense
00:14:29
spending we wouldn't have to bother with
00:14:31
if we didn't have to rely on but
00:14:32
government can't create jobs though at
00:14:34
all can it it just creates a tax vampire
00:14:36
bat ATT government if they gave a $50
00:14:38
billion Grant to somebody who could cure
00:14:40
the oil our dependence on oil I'm sure
00:14:43
we'd create a lot of entrepreneurs who
00:14:44
could do the Google of oil I mean we we
00:14:47
are our greatest strength is our
00:14:49
optimism and we have no memory as a
00:14:52
nation like Tiger Woods is going to be a
00:14:54
hero in a year is wait is the no memory
00:14:56
thing is the no memory thing a good
00:14:58
thing or a bad thing fears was right
00:15:00
they love it they the Americans love
00:15:01
this we can't remember anything after
00:15:03
after it's off the Post cover we forget
00:15:05
right is that a good thing or a bad
00:15:06
thing I one it help us forget some of
00:15:08
the pain and the Panic of a year ago
00:15:10
it's very positive it's resilient right
00:15:12
yes and yet it's also disturbing no I
00:15:15
would say on the margin you'd like it
00:15:16
this way people who are optimistic about
00:15:19
the future invest in companies and jobs
00:15:21
and growth and the Japanese do not they
00:15:23
think in 5 years they're going to be
00:15:25
worse off than they are today see that's
00:15:26
my t-shirt shirt saying that I want to
00:15:28
start selling is that capitalism is
00:15:30
optimism monetized I mean that's what
00:15:32
capital are you bet because you really
00:15:34
feel like something's going to go well
00:15:35
that's what you're doing right now
00:15:36
that's a good saying yeah isn't that
00:15:38
good I like that remember you heard here
00:15:39
first don't steal it I've already got
00:15:41
the domain name um all right so now why
00:15:43
don't we get more specifically into some
00:15:45
of the stuff you're doing and what it's
00:15:46
like to be in bed with the FED I like it
00:15:49
that rhymes it doesn't matter if it's
00:15:50
accurate I'm a journalist I don't let
00:15:51
the facts get in the way of a good story
00:15:53
um so you've got one two you've got a
00:15:56
roughly a billion dollar fund is
00:15:57
investing in hotels is that right
00:15:59
you got like I counted two or three
00:16:01
major things you got going on you got a
00:16:02
two billion dollar fund that's doing
00:16:04
distressed no you have a billion billion
00:16:06
billion and a half dollar fund doing
00:16:07
Global real estate you have a billion
00:16:08
dollar fund it's investing in in hotels
00:16:12
and um and then we have the billion
00:16:13
dollar Reit uh that trades on the New
00:16:15
York Stock Exchange that we took public
00:16:17
August 10th and that has about because
00:16:19
you're going broke gotcha okay so we got
00:16:21
these three guys and and um which which
00:16:25
ones have government deals going on
00:16:26
government as partner with their
00:16:30
the global opportunity fund uh
00:16:32
participated in the purchase of chorus
00:16:34
Bank the assets of chorus bank and that
00:16:36
was the largest distressed property sale
00:16:38
I think of the year right um and that
00:16:42
bank which was based in Chicago had lent
00:16:44
money all over the country to build
00:16:46
condos office buildings and some multi
00:16:49
Family Properties was it close to half a
00:16:50
billion dollars in loans outstanding 4
00:16:53
4.5 billion in loans four billion in
00:16:55
loans a little de decimal point there uh
00:16:59
wow okay we paid about 2.7 billion for
00:17:02
it so you got 4 something billion you
00:17:03
paid 2.7 how much of that money was from
00:17:05
government that you put up only what so
00:17:08
the government financed the deal at 50%
00:17:10
at 0% interest liking that so it was a
00:17:13
billion 350 of equity of which the
00:17:15
government kept
00:17:16
60% right so they pay us a management
00:17:19
fee and we split with them and you owe
00:17:22
40% we are our group owns 40 this so you
00:17:26
have 40% of any possible upside cuz
00:17:27
you're willing to take on the risk
00:17:29
whereas you put up only what's that
00:17:31
percentage of the total money put in
00:17:32
like 5% 20% okay 20 to to earn 40 that's
00:17:36
pretty good whereas the government put
00:17:38
up 80 and it wants
00:17:40
60 roughly is that well some of it's
00:17:43
debt so you're ripping off the federal
00:17:44
government aren't you yeah it's not
00:17:46
quite
00:17:47
right they actually pay it look it's
00:17:49
actually this is a much better model
00:17:51
than they did in the RTC days because
00:17:54
this way you know they're really renting
00:17:55
these shops and having them work these
00:17:57
deals out for them so and they did a
00:18:00
market clearing price I mean there was a
00:18:02
auction and and um and they were we
00:18:05
tried to get some tweaks in the contract
00:18:07
and they said nope we're not going to do
00:18:08
anything they've been very very tough
00:18:11
honestly the risk in dealing with the
00:18:12
government like in a deal like this is
00:18:14
probably not the FDIC there is political
00:18:16
risk anytime you deal with the
00:18:17
government particularly today and since
00:18:19
we bought a lot of 21 million square
00:18:21
feet of residential projects you know I
00:18:23
don't know thousand tens of thousands of
00:18:25
Condominiums yet to be sold I mean sure
00:18:27
if we were if a guy bought a unit in a
00:18:29
building at 700 foot and we're selling
00:18:30
the unit now because we paid 100 a foot
00:18:32
for it for 200 a foot I sure that guy's
00:18:35
going to send a letter to his
00:18:36
Congressman upset very upset yeah he's
00:18:39
taking me down yeah in fact I was
00:18:40
wondering about you know they I believe
00:18:42
when they started the pee pip make my
00:18:43
funk the pee pip they said no backlash
00:18:46
no bonus capping and yet they've said
00:18:48
that before and then changed the rules
00:18:50
how worried are you about that I I think
00:18:51
you have to be concerned um because I
00:18:53
think the Administration has definitely
00:18:55
done some unprecedented things to the
00:18:57
business community I saw a little chart
00:18:59
which I guess was in Baron somebody sent
00:19:00
me yesterday that the Obama
00:19:02
Administration has the fewest number of
00:19:04
business Executives in places than any
00:19:08
president in the history of the United
00:19:09
States it's like eight and the average
00:19:11
has been like 38 and um so there's not a
00:19:14
lot of experienced business people
00:19:16
running around this Administration and I
00:19:18
think I think for that reason and I'm a
00:19:20
de a Democrat so I should say that I'm
00:19:23
terrified um but I am a Democrat and um
00:19:27
socially at least
00:19:29
um and fiscally I just think the
00:19:31
government has to be careful and and the
00:19:33
more they Tinker with the rules for
00:19:36
populist Notions the the more difficult
00:19:38
the recovery will be right because
00:19:40
businesses will look elsewhere Capital
00:19:42
can move away people can pick up and go
00:19:45
places and um right New Jersey knows
00:19:47
that and there's a lot of attractive
00:19:48
places to invest today and they're not
00:19:50
necessarily the US right uh what do you
00:19:52
think of the P pip I I could swear
00:19:53
originally we thought a hundred billion
00:19:55
would be put up they'd buy a trillion
00:19:56
dollars of Bad Assets Now it's a of its
00:19:59
former self and they don't like these
00:20:00
programs so tal they don't really like
00:20:02
tal they don't want to do single
00:20:03
borrower tal which is the they Obama
00:20:06
administration the the fed you know the
00:20:08
treasury they don't like these programs
00:20:10
the PIP uh I don't think they think they
00:20:12
need it anymore so they they have nine
00:20:14
managers um one of them I guess they
00:20:16
just killed TCW so they have eight
00:20:18
managers um they don't like this program
00:20:21
and they don't think the market really
00:20:22
needs it it seems the markets because of
00:20:24
the search for yield the markets are
00:20:25
have rallied so hard work out themselves
00:20:28
yeah do you think it's it's it's okay do
00:20:30
you think we indeed don't need at the
00:20:32
moment they don't need it yes do you not
00:20:34
see toxic assets we still have probably
00:20:36
a trillion out there that we haven't
00:20:37
fully written down is that not a big
00:20:39
thing that we should be worried about
00:20:41
looming over this entire thing there yes
00:20:43
but the the banking system is bankrupt
00:20:46
in the US the regional banking system is
00:20:48
playing hide the something hide the
00:20:51
weenie I guess but I mean it is the the
00:20:54
banks if they mark their loans to market
00:20:55
right now and had to clear them there
00:20:57
are very few Banks Regional banks that
00:20:59
we be solving then why don't we need
00:21:01
more pip cuz pip doesn't address that
00:21:04
issue pip is really just buying
00:21:06
Securities in the market you know it's
00:21:07
buying residential Securities that exist
00:21:09
and were once AAA and are no longer AAA
00:21:12
you can buy those but they had to be
00:21:13
once triaa right what they're trying to
00:21:15
do is tighten the very bottom of the of
00:21:17
the capital stack I always look at it
00:21:18
from the equity so some people say
00:21:20
that's the top of the stack but I call
00:21:22
it the bottom um and they're just trying
00:21:25
to tighten that then they figured the
00:21:26
rest of the and that's true I mean if
00:21:27
they if the the sing aaa's tighten then
00:21:30
firms like ours with our starbard
00:21:32
Property Trust Reit can layer in more
00:21:34
expensive capital and make the overall
00:21:36
cost of financing palatable to a
00:21:38
borrower so it's a very valid strategy
00:21:41
but at the moment as the last the even
00:21:43
the first tal deal done that developers
00:21:45
Diversified tal that Goldman issued not
00:21:47
a week and a half ago only 20 something
00:21:50
per of the people use tal uh program
00:21:53
people insurance companies everybody's
00:21:55
just looking for yield but is that's a
00:21:56
good sign though that they didn't didn't
00:21:58
use govern that's a big deal the markets
00:22:00
are ree equitized the markets are
00:22:02
working there there's a liquidity bubble
00:22:03
forming this this thought though that we
00:22:05
haven't written off enough of the toxic
00:22:07
assets we have it no question did the
00:22:09
did the fbe accounting board make a
00:22:11
mistake when it eased those marketto
00:22:14
Market rules and put less pressure on
00:22:16
the banks was that I mean should it
00:22:18
stayed hard I don't think that was a
00:22:19
mistake I think the recent announcement
00:22:21
that if the appraise value is below the
00:22:23
value of the loan uh and you don't have
00:22:24
to take a write down that's a horrific
00:22:26
mistake if the appraise value is below
00:22:28
the value you don't have to take they
00:22:29
recently made that rule I didn't know
00:22:30
about that rule yeah the last two weeks
00:22:32
well the numbers just you have to be in
00:22:34
a conversation with the borrower yes
00:22:36
nobody noticed it but it's a very
00:22:37
dangerous precedent because you can't
00:22:39
tell the banks from each other then you
00:22:41
can't tell who's a good bank who's a bad
00:22:42
bank right and it's that's really a bad
00:22:44
idea the reason the reason the mark to
00:22:47
Market had to be suspended and I thought
00:22:49
was was the right move was because the
00:22:50
markets got very thin and the marks were
00:22:53
too difficult and those weren't even
00:22:54
realistic prices give me a break well
00:22:56
like for example we bought Bonds in
00:22:58
Europe up on a company in March at 28
00:23:00
cents and now they're 93 and it's a real
00:23:02
estate company so did you sell them no
00:23:05
we're not selling them we we don't have
00:23:06
nothing else to do with the money so
00:23:07
we're we're yield pigs ourselves so you
00:23:09
know we don't have if we had something
00:23:11
to do with the money we'd sell them
00:23:11
immediately but but that Mark was a
00:23:13
stupid Mark and if You' taken a bank
00:23:15
down with a mark like that that would be
00:23:16
dumb but today if I've got an appraisal
00:23:19
on a property and it's $50 and the loan
00:23:21
is $300 which it is on some of this
00:23:23
stuff I think you should write off a
00:23:24
little bit of that I would think you
00:23:25
should write off a little bit of that
00:23:27
and we were hoping that the banks there'
00:23:28
be a flood of paper now that the banks
00:23:29
have Rec capitalized and the stocks are
00:23:31
up that they would actually take all
00:23:33
that Capital that's stuck in these
00:23:34
assets and redeploy to more productive
00:23:36
uses which is what we did in the 90s
00:23:39
when the last time we did this and it
00:23:40
worked and the bank stocks went up and
00:23:42
yet the banks have chosen not to sell
00:23:44
their paper because they don't want us
00:23:45
to get a 15 yield to maturity and they
00:23:47
said we can do that because we're buying
00:23:48
at zero and they have no need and that's
00:23:51
why in the first quarter I don't know
00:23:52
what the statistics are now the guy who
00:23:54
runs BFA real estate said to me we made
00:23:55
$1 billion of loans and I in real estate
00:23:58
I said said wow that's pretty impressive
00:23:59
I didn't see any of that 11 billion of
00:24:01
it was just rolling the existing loans
00:24:03
that came due and 1 billion of it was to
00:24:06
actually taking out other banks that had
00:24:07
failed participations in deals that they
00:24:10
were already in taking them so there was
00:24:11
no net new credit creation for property
00:24:13
right although at least those ones that
00:24:15
were rolled over are now out of risk and
00:24:16
and don't pose a who knows what whe
00:24:18
they're going to go bad the market the
00:24:21
the credit markets are healing there's
00:24:22
and they I think they may be overhealing
00:24:24
but uh not not in the sense that there's
00:24:26
a lot of real estate loans nobody wants
00:24:28
to lend M to real estate because every
00:24:29
Bank BFA and Wells Fargo which have the
00:24:32
one and two exposures to commercial real
00:24:35
estate I'm not aware that they're major
00:24:37
sellers of loans and I I think they just
00:24:40
they're hoping that values they'll be
00:24:42
melt up yeah we melt up I rec5 billion
00:24:46
in higher profit last quarter because it
00:24:48
wrode up some of the stuff that written
00:24:50
so far down on the other hand a non-bank
00:24:52
GE just wrote down their book I think
00:24:55
yesterday or two days ago and um they
00:24:57
took a 30% markdown and that was the
00:24:59
first time they acknowledged that that
00:25:01
that the 85 billion of property they
00:25:02
have may not let me tell you something G
00:25:05
is selling NBC Universal in CBC so ge's
00:25:07
dead to me let's not even talk about let
00:25:08
me ask you about paper versus property
00:25:10
when you go out and buy pieces of paper
00:25:12
that are distressed debt are you buying
00:25:14
it because you know what I'm hoping the
00:25:16
guy that issued this defaults on it and
00:25:18
I could take over his property and
00:25:20
convert the piece of paper into property
00:25:21
that I got for a dime on the dollar or
00:25:23
are you buying the piece of paper to say
00:25:25
I'd like to flip this baby once it goes
00:25:27
up which is which is more often though
00:25:29
which is actually in the re we do loan
00:25:31
to loan which is the loan we think is a
00:25:33
good value maybe the property's cash
00:25:35
flow will rise the loan to value will
00:25:37
fall and the credit quality the paper
00:25:40
will improve so we'll get a gain on the
00:25:41
on the paper in our opportunity funds we
00:25:44
do loan to own which is buy the loan and
00:25:46
then hope to get the property in
00:25:47
maturity most of the stuff because lior
00:25:49
is zero I mean everything almost
00:25:50
everything is paying we see dozens of
00:25:53
deals where the current yield is like
00:25:54
two and the yield to maturity is like 52
00:25:57
because it's not going to mature to the
00:26:00
par it's not going to get paid off so so
00:26:02
those are really tough deals to buy into
00:26:04
a Reit that's supposed to pay a dividend
00:26:05
because the current yield is so low but
00:26:08
we would do them in the opportunity fund
00:26:09
if we felt that we could get the keys
00:26:12
when you when you do it buy a loan to
00:26:13
own uh almost in essence betting on the
00:26:16
the person's the the company's default
00:26:19
do do you feel guilty at all do you feel
00:26:21
any kind of moral compunction there well
00:26:24
in chorus I have 102 best new friends
00:26:28
the people compies of the loans yeah
00:26:30
everybody who borrowed has called us
00:26:32
multiple times and wants to buy back
00:26:34
their loans so right um I I don't feel
00:26:36
that um no I don't feel guilty okay
00:26:40
neither do I I'm I'm glad that I mean
00:26:42
someone sold it a value and they sold
00:26:43
for that reason and someone bought it
00:26:44
value uh interest rates obviously the
00:26:47
low interest rates around the entire
00:26:49
world the key kindling that uh that you
00:26:52
need here to get this warming fire
00:26:55
started but so so at what point does
00:26:57
that end and at what point when it goes
00:27:00
to this level I I now I can't make money
00:27:02
and I start to pull in my my wings what
00:27:03
what if fed is doing the same mistake
00:27:05
greens man did I me they're waiting too
00:27:07
long to raise they should already raise
00:27:09
I said they should raise by June short
00:27:10
rates were a point nothing would change
00:27:12
except some of the money that's seeking
00:27:14
silly yields or would probably go into
00:27:17
savings the reason people aren't Saving
00:27:19
right now again in the US is who wants
00:27:21
to earn 10 basis points right so one or
00:27:23
2% short rates would actually I think
00:27:26
settle down the market would help help
00:27:28
us from if this doesn't stop you're
00:27:31
going to see such massive inflation in
00:27:33
four years the first that I've seen
00:27:34
since the 70s and um and they're they're
00:27:38
going to make it they're not going to be
00:27:39
able to turn it off it's going to be
00:27:40
like a snowball so can you make money at
00:27:43
2% right now the rates are a quarter of
00:27:45
a point down to zero right can you make
00:27:47
money if it's up to 2% leave money in
00:27:49
cash and I'm talking about households
00:27:51
corporations are sitting on the highest
00:27:52
cash balances they've had in 50 years
00:27:54
because they're terrified but the
00:27:56
consumer doesn't know what to do with
00:27:57
them the money and saving and earning
00:27:59
zero is not appealing to him so he's
00:28:01
taking bets and making bets and mutual
00:28:03
funds and other stuff and they're buying
00:28:04
looking for munis and other stuff and
00:28:06
they're not doing their credit analysis
00:28:07
again and and he we're doing it right
00:28:09
over again and we're doing exactly what
00:28:11
we did wrong five 10 years ago so the
00:28:13
FED just start raising rates when now
00:28:16
right away too long already yeah by the
00:28:18
way it would help the dollar the dollar
00:28:20
can't be in a free fall either so it you
00:28:22
know it would balance the world I I
00:28:24
don't want 4% short rates but I think
00:28:26
the short and the curve must be raised
00:28:28
now if I was telling it now like today
00:28:31
even though it's going to cost you money
00:28:32
you're not going to have as much upside
00:28:33
leverage or you're not going to it's
00:28:34
healthier because the 10 year and the 30
00:28:36
year which is really important for Real
00:28:37
Estate will stay will not rise if
00:28:40
inflation goes nuts the 5ye and the 10
00:28:42
year and and home mortgages which are 47
00:28:45
right now will go to seven if they raise
00:28:47
rates in the economy sort of gently the
00:28:50
one or 2% money is not going to change
00:28:52
the job creation profile you don't have
00:28:54
to worry about it killing the economy
00:28:55
and yet it might okay it would it would
00:28:58
is far more resilient now than in 1991
00:29:00
come back no our economy is not so
00:29:03
resilient our economy um is is got a
00:29:07
trillion dollar steroid rolling through
00:29:09
its system which is the government
00:29:10
spending yeah but it looks so good I
00:29:12
mean it feels good but it's not real the
00:29:14
the patient's still on the operating
00:29:16
table and yeah and uh he's he's about to
00:29:18
get off the table and he's like it's
00:29:19
like giving your blood right they said
00:29:21
don't get up too fast it's like don't
00:29:22
pull it when they end the government's
00:29:25
purchase of a trillion dollars of agency
00:29:27
mortgage vaccin April that program ends
00:29:30
it'll be interesting to see what happens
00:29:32
you know right but I do think right now
00:29:34
it's all it looks all good but it'll be
00:29:36
interesting to see when they pull that
00:29:37
out people don't understand what's going
00:29:39
on in the credit markets in the me
00:29:40
you're just not your M's you're
00:29:42
spreading around you're making bets all
00:29:43
over the place aren't you you're
00:29:44
leveraging up like crazy aren't you
00:29:45
you're you're making money while you can
00:29:47
it's fun again it was not fun the last
00:29:49
couple years and it's fun to invest in
00:29:51
property you know what I've been looking
00:29:52
for a good upbeat note to end it on it's
00:29:53
fun again thank you very much for uh
00:29:56
Barry Str it's going to be a 10-minute
00:29:57
break guys before the next session on
00:29:59
distressed real estate and Mr Stern will
00:30:01
be one of the members of that panel so
00:30:03
stick around uh thank you very much
00:30:04
Barry great job
