The Exchanges

Q In addition to some of the things we talked about, industrial assets, a little bit of infrastructure, defense, what are some of your favorite themes in the portfolio today?

A Another sector we love is senior housing. We've been very active in that. It goes all back to structural drivers. We know the eighty-plus age cohorts growing at nearly five percent a year while the overall population is dead flat. It's not only where all the growth is, it's where all the wealth is, too. There are a lot of them with a lot of money. That translates to a lot of demand and need for senior housing. That's a space we've been focused on because of the demand side, coupled with a dramatic drop-off in supply. Another one is net lease. Net lease is a lease structure in which the tenant pays the rent and all the expenses. It's the type of real estate where you, as the asset owner, have the most predictability of cash flow, the most downside protection between long-term contractual cash flow tied to credit tenants, tantamount to a credit investment, but you also have the hard asset ownership. The benefits of that real estate ownership that give you the inflation hedging, the appreciation potential, the ability to play these long-term mega trends for individual investors, tax efficiency. That's been a very big focus for us as well.

AI assessment note: “Another sector we love is senior housing. We've been very active in that.”

Q You mentioned that when you first started investing, there was already a platform here, Morgan Stanley, we'll say, 26 years ago. How is that real estate part of what you've been involved with for so long, evolved over the years?

A When I started, Morgan Stanley was one of the first amongst the largest real estate private equity businesses. We've seen the space institutionalized pretty dramatically. If I think back to 2000, the real estate private equity business was largely opportunistic closed on funds and U.S. pension fund capital. We've seen over time a diversification of the types of investing. More core, open-ended, or different strategies. We've seen a diversification of the investor base. It's super global today. Our business was a leader in a few regards there. We were one of the first to say, we want to serve our investors more holistically. We were one of the first entrants from the opportunistic space into the core space. Fundamentally, we're in the client service business. We first and foremost focus on what role should real estate play in investors' portfolios? What is most important to them? Ultimately, having strategies that serve their purposes, having core and opportunistic, having a few core plus strategies, being global in what we do has given us much better perspective. It's enabled us to have better judgment across the strategies and attract extraordinary talent as well.

AI assessment note: “We've seen over time a diversification of the types of investing.”

Q I'd love to start walking through how you implement that. You come up with a theme. How do you then take that and look for actionable ideas?

A Across real assets, we manage about eighty billion dollars of investable capital. We have over 300 people, 20 offices, 13 countries. We're thematic and top-down, constantly assessing this. Part of the magic of our business is those local teams who are super embedded in those local markets. It's not just that global perspective that I have the privilege of looking across the world with my senior partners, assessing where the best risk adjusted opportunities are. Those local teams are so embedded in their markets that they are able to better source and better execute those opportunities. We cherry pick. You can be in a hot sector and still get burned if you pick the wrong asset. We are fixated on Only investing where we feel like we're making money on the buy or it's sufficiently well priced. We never set ourselves in a place where we're forced to invest. It's also cherry picking within the strategies. That's particularly important today because you're seeing such divergence. Industrial is a high conviction strategy for us. You need to be selective within industrial. It's not just the markets, but the sub markets. The size, the specs. By way of example, I take the state of California. We've been investing in industrial assets in and around Silicon Valley that are benefiting from the physical AI trends, among other things. Rents are up 40% over the last several years. If you drive…

AI assessment note: “Those local teams are so embedded in their markets that they are able to better source”

Q What was it about investing that drew you in early on?

A What I loved about investing from the beginning was that interdisciplinary approach, understanding how the world works, understanding the drivers of growth or where the risks lie, ultimately having the accountability for outcomes. The intellectual curiosity with the rigor, you're forced to make decisions amidst uncertainty. I spent my Yale years at coffee shops at four in the morning debating things endlessly. In investing, you need to make a call, then you're held accountable. I also loved that it's not just the upfront decision. Should I do this? How will this play out? Then you have an ability to effectuate change once you own it. For the assets we own, it's not just buy and hold, it's buy and change. You can transform these assets. That's one of the things that's less understood about both real estate and infrastructure is how active those assets are. It's not Just that durable cash flow, but it's about affecting change, renovating, or leasing, or shifting, or repositioning assets. Having that active edge was also part of the appeal.

AI assessment note: “What I loved about investing from the beginning was that interdisciplinary approach”

Q As you recently took over non-real estate, real assets, real assets, infrastructure, how's that changed your perspective on these different opportunity sets?

A There used to be a hard line between real estate and infrastructure. Today, it's more of a dotted line. In certain instances, no line at all. I've had so much to learn, and it's been incredible. Fortunately, we have a spectacular team. The investors within our infrastructure business are so good. It's been great to learn more about power assets and their data center platforms. I'd been on Their investment committee for many years, it's quite different to be more directly involved. There's so many underlying similarities. These are both businesses where you are investing in the things that are essential to humans. Those assets and services that human beings will need regardless of cycle, whether that is increasing power needs or a housing shortage. These are both asset classes that are Focused on cash flow, inflation hedging. These are asset classes where new supply is a fundamental question. These are assets that can be transformed on both sides within our infra teams and our real estate teams.

AI assessment note: “There used to be a hard line between real estate and infrastructure.”

Q With the thematic backdrop, how do you think about constructing a portfolio of assets?

A One of the things that we try to do very well is focus on portfolio construction as opposed to some investors out there. It's almost a compilation of deals. We're focused on geographic diversification, sector diversification, but also diversification of the underlying types of risks we're taking because you can have risks that are more correlated than meets the eye. Even though your pie chart says, well, I'm X percent here and Y percent there. So we're focused on thinking about that underlying correlation or driver. Then setting our portfolios up to really have duration. When people in real estate or infrastructure think about duration, a lot of times they go to financing. Having financing can give you a lot of runway. The other thing that can give you a lot of runway is having durable cash flow. Cycles are inevitable, and you want to be able to weather them.

AI assessment note: “We're focused on geographic diversification, sector diversification, but also diversification of the underlying types”

Q As you're talking to your clients, we're in this world where there's been a lot of liquidity bottleneck in private markets broadly. How are people thinking about real estate and infrastructure as part of their portfolios in a constrained liquidity world?

A On the real estate side, we are four plus years into a real estate correction. Trailing performance doesn't look particularly good. Beyond the liquidity constraints, you have recency bias. What we're seeing for the smart investors is two things. One, a recognition that should be a time to go in, not out. Real estate values are still down 20 plus percent, while the broader investable universe is at all time highs. Real estate Well-priced relative to other asset classes. Also a recognition that because we're coming out of this, new supply is way down. One of the major determinants of how this cycle will play out is the supply side. That new construction falling way off, on top of it, construction costs still being so elevated, means we think this cycle, there'll be more room for rents to run and values to grow before that inevitable supply side response kicks in. From a cyclical perspective, You're seeing investors saying, this seems interesting. Beyond the cyclical, there's been renewed focus on what role does real estate play in our portfolios? What are we trying to get out of this? Fundamentally, the role real estate plays, and it's largely true for infrastructure as well, it's that durable cash flow, inflation hedging. Real estate is one of the most effective, Inflation hedges across the broader investable universe. While we believe investors should have multidimensional infl…

AI assessment note: “What we're seeing for the smart investors is two things. One, a recognition”

Q In the U.S. office market, even talk about New York as we're sitting here, how has that settled out post-COVID?

A Fortunately, we're done debating whether people are going to go back to the office. We know they are. Now the question is what type of office they're going back to. It's not just this question of the best and the rest. What we're seeing is the best of the best assets are almost becoming an oasis in the office desert. We look across our office assets. We are seeing all time high rents. That demand for the best of the best office has never been stronger in many markets. In contrast, I think the weaker assets may continue to depreciate. That relates to demand pullback. It also relates to the CapEx intensivity of those assets. You still have to pour a lot of capital in, and if you're never going to get the top-line rents, the ROI on those dollars are pretty challenged.

AI assessment note: “What we're seeing is the best of the best assets are almost becoming an oasis”

Q What are some of the examples of things you've done to significantly improve an asset under your ownership?

A It ranges pretty dramatically. Sometimes it's a super light value add, sometimes it's heavier. One of the pitfalls of real estate investing in particular is people can become very seduced by business plans with a heavy reposition. As much as we are obsessed with creating value in the underlying assets, we are also extraordinary disciplined about investing. Every dollar we invest gets the same level of scrutiny. A lot of times you see investors super focused on the buy, but then can pour capital in with a little bit more ease. Like in physics, what comes up must come down. In real estate, not every dollar that goes in comes out. We are rigorous in terms of that, which means that some of our value-add business plans can be lighter. There are times we are doing a light renovation or figuring out how to slightly reposition an entrance. Small things can have high ROI. We also have the history of doing more substantial value-adds. I happened to be in Boston last week. The Boston seaport Was an investment I led as an associate back in oh six. We bought 23 acres of surface level parking. We had this incredible vision that if you understood Boston and all the dynamics that this could be the hottest spot, which by the way, it is today. Over time, we really engaged in a master planning of that whole area, which was one of the most vibrant mixed use urban sub markets. Arguably in the world…

AI assessment note: “We bought 23 acres of surface level parking... engaged in a master planning”

Q When you had the whole breadth of strategies going into the financial crisis and you wanted to focus, how did you decide what areas to focus in?

A If I look back to the period coming out of the GFC, a lot of money was made on interest rates coming vertically down. You saw cap rate compression, cheap, heavy borrowing. We benefited from some of those tailwinds in our investing. We took the approach that we want to be invested in those sectors and markets that have more durable drivers of demand, more structural tailwinds, because There are two theories of investing. The things you know are going to happen and the things you think are going to happen. The truths and the, I think so. We focus on investing in those spaces where you have structural drivers of demand, regardless of market cycle. Today, we know we're living in a multipolar world where there's a U-turn on globalization. We know we have aging demographics in most global markets, increased power needs. We position our portfolios and our investment strategies to capitalize on those structural, durable drivers. If you think about post GFC, multiple expansion or cheap borrowing drove a lot of return. Today, we live in an environment with rates more elevated, relatively range bound. That means you need to be invested in those spaces where you can see outsized income growth. That orientation in terms of investment philosophy has served us well through this period.

AI assessment note: “invested in those sectors and markets that have more durable drivers of demand”

Q If you look at today, some of the hottest areas in all of the AI infrastructure, real estate, what are the things that you're looking at within your portfolio to see if those trends continue or you have to be careful because maybe there's a change in the CapEx cycle?

A There's the demand side of it that you're referencing, the supply side, and then questions around what residual looks like. When AI comes up with anyone in real estate or infrastructure, it's immediately just data centers. There's no question that that is probably the single biggest beneficiary of the AI trend. There are also a lot of other ways to play AI in real estate and infrastructure that get less attention, and that therefore have Better risk-adjusted return because you have a better basis on entry. Industrial real estate is a huge beneficiary. It's simple things like AI as an accelerant to e-commerce growth. It's advanced manufacturing. How AI is accelerating that, particularly here in this country, as a driver of demand. There are types of real estate. On the infra side, we've been doing a lot with power and fiber production. The things that are ultimately powering these AI focused data centers. In terms of how we're testing it, having a large asset base enables you to feel demand in real time. We're constantly assessing that. We're looking at for these underlying companies, the tenants, whether it's the hyperscalers or others, what decisions they're making, where they're owning the assets themselves, Versus where they're leasing it, perhaps to have a little more optionality. Double clicking under some of those decisions.

AI assessment note: “In terms of how we're testing it, having a large asset base enables you”

Q When you're underwriting a deal, how do you balance the desire for the thematic trend with what you think you can do to improve the asset when you own it?

A For virtually any investment we make, we want to feel like we can make money in a few ways. Being in the right theme is important. You want to be where that structural demand is there, where you're owning the physical infrastructure that underlies human lives. Needs to be structural demand. We also want to believe that we can affect change in the asset. We can have the right theme, we can buy it right, Then we have another bite at the apple because we can improve it. It's different by region in terms of how that value add comes into play. Given the nature of the sellers, we're always looking for ways to improve these assets. If you take infrastructure, for example, we've obviously seen a massive institutionalization and growth of that space over the last 20 years. Because of that, you're not going to make a 15% return on a toll road anymore. You want to stick with the stability that's paramount and so fundamental to infrastructure investing, but to generate returns, you need to be in assets where you have that value add.

AI assessment note: “we want to feel like we can make money in a few ways”

Q Real estate is this interesting blend of numbers and then real world assets and development. How did you find your place in that different blend of activities?

A One of the things I love so much about it is it straddles the two. You have the analytical high finance element to it. It's also tangible. It can be kind of gritty on the ground. That combination makes it endlessly exciting and gives opportunity to arbitrage a bit. Part of the initial appeal was how tangible it is, how You want to avoid being too self-referential in any type of investing. You can understand real estate is just a function of how people use space, where they want to live, how they want to work, how they want to consume goods, whether it's in store or online, how they want a vacation. That constantly brings you back to basic judgments about how we live today and the early signs of how we might be changing that behavior.

AI assessment note: “Part of the initial appeal was how tangible it is”

Q What are some of the things you've learned about hiring, retaining, optimizing the people on your team?

A Culture matters. One of our key competitive advantages is that part of building such a strong culture is the accumulated trust over time. My partners and I, many of us grew up in the foxhole together. Through those experiences, you develop a sense of trust and understanding of people's Risk appetite. There's a greater efficiency of communication. That trust and respect we have for each other allows us to challenge each other. One of the issues you see when culture breaks down is consensus building or group think. Because we've lived through cycles together, we're very comfortable challenging each other. That helps drive optimal outcomes. Culture is a big part of it. We raise people to be great investors, or we endeavor to.

AI assessment note: “Culture matters. One of our key competitive advantages is that part of building”