Speaker 0:
with me in the studio, we have Ben bian, managing director and co portfolio manager of the European Real Estate Opportunities Platform. Ben, thanks for being here. Great to

Speaker 1:
be here. Thank you for having me.

Speaker 0:
Now, broadly speaking. And for those who haven't heard the term, how do you define opportunistic real estate as an asset class?

Speaker 1:
Well, I think, uh, part of the answer is in the name, um opportunistic, Uh, means employing a strategy that is

Speaker 1:
to remain nimble so you can move into or out of situations as opportunities arise rather than restricting your investment parameters to the extent that you can't throttle back, um, when assets, you know, become too pricey or pivot into new opportunities. Uh, when you see, uh, a missed pricing in the

Speaker 0:
markets Are there particular industries that you can think of that really suit this kind of strategy?

Speaker 1:
Um, yeah. I mean, I like, I think real estate, as as an asset class, um, is is one that, um, goes through cycles. And so, um, when you think about,

Speaker 1:
uh, uh, real estate over a hold, you know, you can have a high quality class a property that over time um, systems become, uh, dated or or degraded. Um, tenants, um, have lease expires. Things like that. And the properties need, um, need an extensive amount, amount of work. And so, you know, oftentimes a business plan and opportunistic investing would involve taking on an asset. Um, that, um maybe the owner has under invested or mismanaged the property.

Speaker 1:
Um, and we would, you know, take a property like that on and invest in deferred maintenance. Uh, add a building, amenities. Um um, uh, create more efficient, um, operating expenses in order to, you know, improve cash flows over the asset. Or maybe even, um, you know, as as use, uh, requirements change, um, in an industry, you might see, you know, let's say office is no longer the highest and best use for a property.

Speaker 1:
Um, and maybe it's best suited as a hotel, but that requires a lot of capital. And so, um, as an optimistic investor to be able to look at a property like that, um, and, uh, you know, have the capital, the resources, um, and the know how to take it on, um, get vacant possession, uh, value, which, you know, oftentimes is maybe the key to unlocking, uh, the value in A in a property, um, and then investing,

Speaker 1:
um, and working together with a group of of advisors and designers architects in order to, you know, reimagine that that property, um, is a new

Speaker 0:
use, and you've touched on a few points there, but looking at a traditional bar and hold strategy and then an opportunistic real estate strategies, what are some of those key differences? And I know you've touched on a few points there.

Speaker 1:
Um, yeah. I mean, you know, what's what's funny is so not only, um are we trying to fix properties and sell them into into, uh, into more liquid,

Speaker 1:
uh, investment markets. Oftentimes, we're actually buying properties from, um, investors that have traditionally, um, taken a more passive approach to to, uh, to their ownership where they would buy, you know, a high quality asset, Um, and kind of put it aside, you know, for the long term, which generally works. Um, but as I said, over time, tho, those assets require capital. And so, um, we would then, um, take on those assets and, um,

Speaker 1:
invest in the properties and and ultimately, uh, sell them back into, uh, the public markets, and we kind of view ourselves as a, um

Speaker 1:
it's a bit of a repair man for the industry. So, you know, we're not constrained by dividend yield requirements. We're not constrained by, uh, certain accounting limitations that allows us to do some of the work that, um, that a core or institutional owner may not be, uh may not have the resources or the capacity to take

Speaker 0:
on and staying with the investors. Where are they looking today? Is it in public markets? Is it more in private markets? Where are they looking?

Speaker 1:
Um well, I think you know what we're what we're seeing in the markets today is that, uh, with the rising rates. Um, there's a lot of, uh, building up of of stress in the markets. And so, you know, as I think as we look across the investment landscape, you know, the opportunity definitely is in as in opportunistic or or private markets. Um,

Speaker 1:
the challenge is transaction volumes are way down. And so, you know, if you, um, uh, compare transaction volumes right now versus a year ago, I think the numbers across Europe are down about 90%. And that's because if you don't have to sell a property today, um, you're not gonna do it. You're not gonna test those waters. So most of what we're seeing is in the public markets, most of the activity, most of the re pricing. So there is, uh, there is a near term opportunity in public markets, but underneath that is a growing,

Speaker 1:
um, amount of of stress building up in the system. And so, you know, we see the opportunity not not as buying properties, but as, uh, working with banks and borrowers to try to recapitalize or or or or, you know, or um,

Speaker 1:
working with banks and borrowers to try to reposition or recapitalize some of those assets that that are trying to kind of make it, um, through this this period of volatility

Speaker 0:
and relatively compared to other real estate strategies, it's relatively short term. How does E. S G come into play? How do you build that into your process?

Speaker 1:
Um, that's a great question. And a very relevant one.

Speaker 1:
Uh, you know, actually, I would say e s G is really fundamental to our business plan. It it It is the centrepiece of of our underwriting in almost every in every case. And, you know, in my position, I'm often forced to navigate, uh, some of the nuances between the US markets and and Europe and in the US, Um,

Speaker 1:
you know, E s G is still a bit of a merging idea. Uh, it's really being driven by the LP community, and even amongst, uh, the LP s, it's not There's not a consensus view. Um, and and I think some of the recent anti e s g movement that that's taken hold in the US is a case in point, where in Europe, E S G is really, uh uh, you know, the situation couldn't be much. Couldn't be.

Speaker 1:
Where in Europe, um, the situation is completely different. Uh, not only is there consensus amongst the LP s, but you have regulators in Brussels and locally, um, rapidly, uh, enacting new policies that we're all racing to meet. Um, you have, uh, lenders and investors that are changing and creating E S G investment parameters. The that that is, um, the style of of of assets. They they'll finance or buy.

Speaker 1:
And you have tenants and their employees, um, increasingly demanding more of of landlords, Which means, um, if you, uh if you do it right, the payback is pretty big because it means you're gonna be able to not only, uh, finance your properties more efficiently. Uh, um, lease your properties, um, at the highest rents, But you're also gonna be able to sell those into the most, uh, liquid markets

Speaker 0:
interesting and looking at opportunities. When you source these new opportunities and you look across the board

Speaker 0:
looking across the space, how do you identify different opportunities? And are there any guard rails in particular that stop you from investing in certain ones?

Speaker 1:
Um, well, I think as a starting point, we look across the industry for for opportunities. So, um, you know, we're not just, uh, a single asset, class focused investor. Um, you know, being opportunistic, we're, you know, looking for, um, interesting, uh, opportunities. And whether it's office or or residential, um, single family, uh, rental, um, to, uh, uh, senior living or student housing. Um,

Speaker 1:
but anything we do, you know, first and foremost has to pass, uh, the typical K y c and AM l hurdles, um, that we're all faced with. And frankly, that's becoming, you know, AAA work stream in and of itself. I think it takes us, you know, 2 to 3 months to set up a bank account. Um, for one of our new investment vehicles. Um,

Speaker 1:
but, you know, mostly I think the biggest hurdles that that we that we face when we're looking at any deal happens to be our partner. And so we found that the single most important factor to the success or failure of of an investment, um, happens to be, um what, you know, the quality of our of

Speaker 1:
operating partner. Most deals we do will will involve an operating partner that will invest 5 to 10% of the equity alongside of us. Um, and they'll take responsibility for executing the business plan with with us, You know, with the firm retaining, um, oversight and and and controls, um,

Speaker 1:
and, you know, so we spend an inordinate amount of time, uh, diligence in our partners, their, uh their expertise, the depth of their bench. Um, the the, um the technology that they employ and their experience to ensure that you know, the partners that we choose are capable of executing the plans that we take on.

Speaker 0:
And, uh, now everyone must be different. But

Speaker 0:
clearly, there's a level of risk here with a lot of these opportunities. How do you manage risk within your portfolio?

Speaker 1:
Um, it's a good question. Um, so, you know, one is through our operating partners. So So we we spend a lot of time with operating partners, as I mentioned,

Speaker 1:
um, who help us? They're really at the front front line of executing our plans. Um, but when I think about, um, risk, there's the asset level risk, Um, which we then have a separate asset management team that works very closely with them to stay on top of, um, any early warning signs at the property level. But, you know, for for me when I the biggest factor around risk in our business is leverage. And, um,

Speaker 1:
you know, leverage and the dangers of leverage, um can be very destructive for an asset class that is otherwise, um, very robust and and and, you know, real estate is, is is able to weather the ups and downs of most, uh, market storms pretty well unless you're abusing

Speaker 1:
leverage. And so one of the keys for us is is is being very prudent when it comes to to leverage. So we aren't stuck in a situation where timing delays, which tend to be the biggest um, the biggest, uh, factor on any business plan we're executing is some sort of element of, of, of timing delays. Um,

Speaker 1:
usually aren't a big deal unless you've abuse leverage. Um, and and, you know, it reminds me when when I when I look at, um, some top managers who, coming out of the G f C really oversaw the the complete implosion of of of some of their, um, investment funds. And they made statements, you know, along the lines of we didn't see that coming. And I just remember marvelling at that at the time.

Speaker 1:
Um, because I've always felt our job is, you know, not just to make money in bull markets, but to protect capital in down markets as well. And you know, to me, that seems to be the true differentiator in the in the industry is you know, those that employ a more all weather approach to investing, and those that, um, seem to make one way bets that

Speaker 1:
tend to go right. Most of the time, but blow up spectacularly every 10 years or so.

Speaker 0:
And so by looking out and looking at the broader sector as a whole, what's your outlook for 2023 beyond?

Speaker 1:
Well, I I think there's problems ahead. And so, you know, as I said, with the rise in rates, it's put a lot of pressure on balance sheets both in the public markets and, uh, private borrowers. And so, while as we stand here today, transaction volumes are down significantly. I think you're gonna start to see,

Speaker 1:
you know, some of that shake loose over the course of 2023. But in the short run, uh, most of what we're doing is is, you know, working with existing borrowers to recapitalize structures, um, to buy time. But I see private valuations continuing to decline. As as, uh, the industry grapples with a rising rate environment.

Speaker 0:
That's all we have time for, Ben. But thank you very much for coming by.

Speaker 1:
It was a pleasure to be here. Thank you, Rory.