The Exchanges

Q There are a couple aspects of the strategy that you've intimated at the first, obviously multifamily. Why focus on multifamily real estate?

A If you look at the different real estate asset classes, it's the least controversial one. We can debate work from home with regards to office. We can debate on consumption patterns with retail. Data centers are too big for someone like us to address. Multifamily, there's no debate. People need a place to live. That's the most important thing. Second most important thing is it always has access to the lending market. Because of buyers, we can borrow off of Fannie and Freddie financing, we always have access to borrow from the bond market effectively, whereas the other asset classes have more risk in accessing the debt capital market. This is the easier asset class to own for predictability, for safety, sleep at night, investing money. The other thing I would point out is that multifamily is a asset class that Has historically had low capex. It lends itself well to making distribution, whereas things like office or retail are tenant improvement heavy. Therefore, maybe more episodic in its ability to return capital to investors. What we are trying to create is a synthetic fixed income replacement stream for an investor and a tax advantage one. Multifamily lends itself best of all those asset classes to doing that.

AI assessment note: “Multifamily lends itself best of all those asset classes to doing that.”

Q What do you see as the biggest risks to the strategy not playing out as you expect it will?

A One is higher interest rates. I tend to think that if they were to have higher interest rates, it would likely come with higher inflation, which we benefit from. Population growth. If the United States population growth doesn't grow at the rate it has historically, that could be problematic. And replacement costs. If replacement costs goes down, if there are cheaper ways to build, particularly some of the markets that may have more land than others, that could potentially be a risk. We have never seen that. It's always possible some form of technology allows you to build a lot cheaper. The last one would be high unemployment at an inopportune time. For example, unemployment is meaningfully higher than it has been historically. Those are the large risks that I would see playing on. If you have a higher unemployment, it likely comes with lower interest rates, means the capitalization rates are lower and the value of the income stream is higher. There are all sorts of offsets to each of the risks that I mentioned.

AI assessment note: “One is higher interest rates. I tend to think that if they were to”

Q What's the subtlety if most of the competition uses floating rate debt? You've mentioned you want to use fixed rate debt. How do you come to that decision to use fixed rate debt?

A It goes back to the income replacement side. If you are trying to get the tax benefit from investing in real estate, you get it from having a long-term hold because it allows you to use the depreciation shield. If you buy a piece of multifamily property, you depreciate most of the assets over 27 and a half years. If we're trying to buy that income stream, goes back to the example of a six percent cap rate with five percent broad financing, it starts out as a cash on cash slightly over six year one, and it grows through the hold. Maybe that's eight percent over the hold. If you use floating rate financing, that number may not be as predictable. You're subject to the Fed raising and lowering rates. In the fixed income side, if you hold it for 10 years, you have a more predictable income stream. You're less dependent on rates for your returns. Going back to the example, if you have a ten-year hold and you have an eight percent cash on cash over the ten-year hold with a fixed income debt financing, if the asset doesn't grow in value, you're getting an eight IOR. If the asset grows two to three percent a year, which is more likely, you're probably getting something in the low teen because of that. It lessens your risk to rates. It also lessens your risk to exit cap rates on the back end. If rates go up during the hold, if your cap rate ends up being a hundred basis points wider, it'…

AI assessment note: “In the fixed income side, if you hold it for 10 years, you have a more predictable income stream.”

Q All right, Robert, let's kick it off with you. Take me back. What's your upbringing that led you to get into the investing world in the first place?

A I grew up in Boston. Parents were immigrants from Lebanon. I had the fortune of growing up in the eighties and nineties. I enjoyed reading things like the Wall Street Journal, business books, Wanted to go to a business school for undergraduate. When I saw Wharton in the summer of 1992, I said, this is really where I want to go to school. I applied early. I got in. I was thrilled. And I spent four years there from 93 to 97. Majored in real estate, majored in finance. I was great at math. I loved playing with numbers. I loved reading stories. I invested in the stock market when I was a teenager. That's really what I wanted to do. I had done two summers of investment banking in California. Came to the conclusion that investing was what I felt would give me control of what I could do and where I could live. The best real estate job coming out of Wharton was at Blackstone. So that's where I started in 1997. I worked there for three years. There were very few investment jobs coming out of Wharton that were available. Most of them were banking. Private equity didn't really exist for an undergraduate. Blackstone was a great place for me to learn. I joined the group when it was on Fund Two. The group only had 12 professionals. We had a portion of an office floor on 3:45 Park Avenue. A lot of the people that are there today were very low on the totem pole back then, and it was a great le…

AI assessment note: “I grew up in Boston. Parents were immigrants from Lebanon... I invested in the stock market”

Q How has the business evolved to get you back to thinking about private real estate?

A When I started looking at my own returns and my investments in twenty-twenty, I'd invested in a bunch of real estate general partnerships over the last 1015 years. My best after-tax returns were coming from real estate because of the depreciation shelter and the growth in income. I was getting attractive returns on an after-tax basis was effectively doubled because you're getting a tax to fill on the income. I saw that in twenty-twenty and I said to one of my partners, we should be doing more of this because The returns are much better than liquid returns on an after-tax basis. We came to the conclusion that we really needed to create this ourselves, and we couldn't invest more with other GPs because the other GPs don't have the things that we were looking for, which was, they're not necessarily benefiting from the income shield that you're getting from real estate because you need to own it long-term. You need to use fixed rate financing to do that. They are generally using short-term floating rate financing And they have shorter term hold because they're trying to generate carried interest income to pay themselves. And then lastly, I would say they don't have as much personal capital invested. So the alignments are not there. There are some other intricacies around taxes and bonus depreciation that we did not see that other GPs were necessarily solving for. We came to the con…

AI assessment note: “We came to the conclusion that we needed to reverse engineer the optimal solution”

Q What's that trajectory been over the last 20 years in the hedge fund business?

A The hedge fund business in the early 2000 when I started was a terrific business. It was less mature, less developed, Broadly speaking, the markets were flat in the 2000. And in the hedge fund business in the longshore, you could make 10, 15% a year. There were sectors that went up when other sectors went down. Correlations were low. Competition was low. You didn't have people that were using credit card data and satellite data and analyzing number of words were used in a conference call the way they are today. So the competitive field was a lot easier. The business was less mature. You didn't have the number of multi-strap funds and the crowding that you do today. It was a great area and a golden area as some people have referred to it. Very different today.

AI assessment note: “The hedge fund business in the early 2000 when I started was a terrific business.”

Q When you look across that set of experiences, early private equity, real estate, a little bit of venture shorting, a hedge fund and long only today, what are the common threads you took away that helped you say over the last 20 years at Newbrook, take all those lessons and bring it into your investment style?

A It's always to keep your eyes open for opportunity, to be aware of what's changing in the equation, where we are in a cycle. Some things can be good for one sector, not be good for other sectors, and to be aware of that. When I was at Blackstone, what had happened in technology came to the detriment in the public markets of real estate companies. REITs would be trading at a significant discount to NAV because people were selling public real estate stocks to buy the technology stocks. Conversely, those stocks did better when the technology stocks blew up. These things can work in reverse. When you look back at the last 20 years as an example, cycles can happen in different asset classes at the expense of one another. It's important to keep sight of that. As I look at where we are today, there are assets that are at all-time highs, and there are assets that are at 20 to 30% off of their all-time highs, and that creates opportunities. That's one of the most important things I've learned from that perspective.

AI assessment note: “It's always to keep your eyes open for opportunity, to be aware of what's changing”

Q Once you have the strategy, you've identified a bunch of assets. How did you think about this as a business?

A Going back to the part where I met James in January of 20, 22. Once we had that meeting and we agreed on it, I mentioned to a bunch of my friends the following couple of months, I was thinking of doing this and here's why, and here's what made sense to me. A lot of them said to me, I would do that too. That really makes a lot of sense. That's when it came to me that maybe this is a business. I was really doing this for myself, but ultimately I realized that this was a need that needed to be provided to other people. What I often say to people who work in our industry and financial services is, what do you think you need to retire? And how do you think about retirement? And I use an example. If you think you need ten million dollars to retire at the age of 65, let's fast forward to 65. So you're gonna wake up one day and you're gonna start trading in your pajamas and trying to make a living at 65 from that. I said to them, assume you had five million dollars in real estate paying eight percent. And you're not paying tax on that, and that grows at above inflation, because you're going to get inflation and rents, and with leverage, maybe it's five percent. And then the other five million dollars, you have stocks and bonds and whatever investing you want to do on the side. So you would have 400,000 dollars of tax-deferred income that you're getting, and then you have your other fiv…

AI assessment note: “That's when it came to me that maybe this is a business.”