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- [00:09]
A
I was thinking recently that being in shipping is the most romantic source of wealth a CRE investor could have. Something about having made your money on the high seas and then deploying it in luxury property.
- [00:20]
B
I mean, that's how you get Jackie out. But I disagree. To me it's aluminum smelting and bonus points if you do it right in the wreckage of the Soviet Union.
- [00:30]
A
I guess after you've cracked some oligarch skulls. Delinquent real estate borrowers are sheep in comparison. Welcome back to the Promote podcast, your insider guide to the money and mania of the CRE markets. I'm Hitan Samtani.
- [00:51]
B
And I'm Will Krasny.
- [00:55]
A
A shout out to our sponsors, Bravo Capital, the leading Huddenbridge lender and loan boss.
- [01:01]
B
The best in class, CRE debt management software.
- [01:04]
A
This week we dive into the life and times of two quintessential men with deep pockets. Billionaire British bros. David and Simon Rubin have become some of the most aggressive buyers of trophy hotel and retail assets across the country. Many of them in various states of undress and distress.
- [01:18]
B
And maybe friends with Ursula Andres. Looking for shells?
- [01:23]
A
No, I'm just looking. We then look at Apollo's new triple net partnership with Realty Income. It's an alliance that says much about how both Aum Gobblers and Vanilla REITs are saying they've got what the other needs. And finally, Bill Ackman's albatross. And yes, we need to be more specific about which one we're talking about. JCPenney is now the scene of a bruising battle between the pass through trust and a jilted would be buyer tasty docket.
- [01:48]
B
I gotta say, the billionaire British brother scene is pretty electric with the Rubens and the Barclays. Barclays, subject of a great book. You may never see us again. Highly recommend it. But the Rubens I think might have them beat.
- [02:01]
A
Oh, let's put it in the show notes. We really gotta get this book list or book club thing going cause we've got a lot of requests and we've dropped the names of so many Goodreads here.
- [02:11]
B
Yeah, that's on us. We apologize. We'll get to that. But first let's get started with the punch list. Our signature rundown of the newsiest news and cre.
- [02:21]
A
We should probably start with the loss of an industry legend. David Simon of Simon Property Group. He died of cancer at just 64.
- [02:29]
B
Just a sad day. One of the absolute OGs and legends of the modern reit industry. He was the son of Melvin Simon, who Mel and his brother Herb Simon founded what is now Simon Property Group. I think the largest REIT or one of the largest.
- [02:46]
A
They are the largest retail owner in the world. They control over 200 million square feet.
- [02:50]
B
Just one of the most epic stories.
- [02:51]
A
He used to work for Perella, the M and A legend, then went and saved his family business, set him up for an IPO and then went on this incredible M and A tear which created the modern Simon Property Group and
- [03:03]
B
really had tremendous leadership throughout Covid. They bought some of their tenants, kept them alive forever.
- [03:09]
A
21 Brooks Brothers, all the redeveloped a
- [03:11]
B
bunch of areas into residential and mixed use. Did a phenomenal job. So absolute legend. There's a great anecdote in his obit where he was at Indiana University, his alma mater, and he donated a bunch of money to it. And he was on campus 10 or 15 years ago and they saw top 50 graduates or most powerful graduates or something in the history of Indiana University. And he wasn't on it. And he's like, I looked at 40 to 50. He's like, I could have been there. Come on,
- [03:38]
A
keep shopping up there, David. Next one. Fannie and Freddie stocks are in free fall again. This time it seems to be over fears that this whole so called privatization, the ending of conservatorship, is no longer imminent.
- [03:55]
B
The housing policy has kind of gotten put on the back burner a little bit. Given that we're at war.
- [03:59]
A
That hasn't stopped Bill Pulte from putting out more and more unhinged announcements.
- [04:02]
B
I wonder if Stu Miller looks over at him and is like, I'm such a better billionaire housing scion.
- [04:07]
A
I think he looks down at him.
- [04:09]
B
Not over at great point. But yes, Trump administration's been focused on trying to make housing more affordable. And some of the plans included in this sort of privatization side of the gestalt are actually good. Producing friction for community banks to make more home mortgages, make resume mortgages easier to finance. But the reason that the US multifamily market is the envy of the world, the most liquid property market, is because Fannie and Freddie have a guarantee from the federal government and they provide really attractive fixed and floating rate financing at incredible terms. Yes, that's what allows people to do construction, lo, is because you can take it out to Freddie or Fannie.
- [04:48]
A
That's who you have in mind when you're doing all this stuff.
- [04:50]
B
There's literally like bridge to Fanny, bridge to Freddie. I'm doing it right now. And if that guarantee goes away or somehow becomes implicit, what does that eventually mean? Because then if you think about this too hard, it's like one of those things where you look at a dollar bill and you're like, what does this mean? This is all made up. I'm just going to start carrying around guns and carry actual gold. And that's the economy we're going to live in. We're going to hunt and gather. So you don't want to go down that route.
- [05:16]
A
What was their plan? The synthetic backstop they had? What did that look like?
- [05:19]
B
Willie Walker talked about this somewhere. Willy, don't me. It was like the implicit guarantees, like, it's just as good. I'm like, is it? I don't know. And the other thing too is that Fannie and Freddie, they were put into conservatorship and had to get bailed out by the taxpayers. It's been an incredible investment for the taxpayers. Good job, taxpayers. They've distributed tons of profits. They stimulated liquidity in the mortgage and home market. What more could you ask for?
- [05:45]
A
But the stock went through the roof. I want to say, eight or ten months ago when this talk came up of privatization again. I know Bill Ackman made a killing. The momentum has died down. Is that why we're seeing this right
- [05:55]
B
now with multifamily or housing at all? We're so whipsawed by rates moving back and forth, by being impacted by everything else that's going on in the world that I think Freddie and Fannie are no different.
- [06:06]
A
So Fannie and Freddie raised their purchase caps, I think to 88 billion each for this coming year.
- [06:10]
B
Right. In the anticipation that the slower transaction market of the last few years would be a thing of the past, given the economy taking off rate cuts and none of those things are happening. The world has shifted quite a bit. You look at the 10 year and the 5 year since the Fed meeting last week and we were anticipating earlier in the year, what, three cuts or two more cuts in addition to what we've already gotten. And now people are saying that we might hike if Andy and Freddie rely on volume. And we're at a point where you can basically just look at the 10 year and the 5 year and be like, here's where our volume is going to be
- [06:43]
A
next. One, I think we got to ask this question at this point. It's been long enough. Is Brookfield bad at office investing? Yeah, we've talked a lot about their downtown LA portfolio, which they've kind of poo pooed as not really part of their core business, but it was part of their core business. Now they've just deeded and looed. What's the verb?
- [07:03]
B
You have deed and looed.
- [07:04]
A
They've just deed and looed. Another office tower in San Francisco, a market that has seen quite an upswing in recent months.
- [07:12]
B
This one kind of hurts because some of their big rivals, Blackstone, divco West, divco west, they have had enormous wins in San Francisco and obviously Conversant just closed their massive hotel deal and Brookfield's over here, just like handing buildings back.
- [07:28]
A
A partnership has come in here. I hadn't really heard of these guys. One of them is from your neck of the woods, Meridian Group. They bought the debt and they're basically taking this property over.
- [07:37]
B
There's a whole sort of cottage industry of these kind of folks. They've been around since the early 90s buying stuff. Pretty eminent DC guys. This is a big swing for them.
- [07:46]
A
There's bad real estate and then there's bad cap stacks. And I would imagine that this is more of the latter.
- [07:51]
B
In a vacuum, this is a nice asset. It's part of a huge mixed use project. It got a huge construction loan and it's just been vacant. They haven't been able to lease it. They delivered into the worst timing you could have, which was mid to late 22, I think. So they are somewhat a victim of that. They got peak supply chain, they got peak rate hikes, they got peak San Francisco. Bad juju. But what's crazy to me though is that they've only leased 20,000 square feet of this thing. And it's the thumbtack of all places, which is just kind of great because there's a lot of stuff going wrong, like the pipes haven't been turned on, the water and the lights all need to be checked and thumbtack's there. So they can always fix everything in the tower. So their RM should be really, really light.
- [08:34]
A
All right, next one. This comes back to the Iran conflict. One of the things to consider as this conflict drags on is the role of the GCC countries, which are hostile to Iran and have been taking some hits, literally.
- [08:47]
B
What does GCC stand for?
- [08:48]
A
The Gulf Cooperative Council. Is it cooperation or cooperative? It's Saudi, the uae, Qatar, Kuwait, et cetera. It's a bunch of these. Ugh.
- [08:56]
B
The Qatar again, I love it.
- [08:57]
A
The Gulf Arab countries, they are very, very big allocators. Major players in the global investment landscape through a variety of bets. Venture capital, crypto, private credit, real estate. And there was an attack on a Qatari LNG facility last week. The energy Minister said that this is going to wipe out 17% of our export capacity. That's staggering. When you have something like that, you do have to think about if this goes on for a while, what does this mean for the allocator side of the universe? Because all the fund managers from Blackstone to Brookfield to whoever are courting the Middle Eastern investors hard.
- [09:36]
B
And the whole alternative asset management industry, we talked about AOM gobbling. It's basically a shark. It's like there's nothing on the mind of the shark but eat. They have to keep moving forward and so they need more money, but they've run out of pensions, endowments, all of those things. And they need to go elsewhere to get money because again they the carry isn't really 1 the point but 2 valued by wall Street. And so you need consistent earnings. And the way to get that is increase your fee paying assets under management. And they have tapped out. And so they got to go to 401ks, which is why this has been such a big push. They're going to retail, which is why John Gray is doing running videos. And by the way, come see us in Nashville this week talking about the
- [10:18]
A
running videos and so much more. A media strategy for gps.
- [10:21]
B
Yes. So they're going to those places. But the biggest fish are these sovereigns. There are billions of dollars that can be used basically as like a political cudgel. And you can invest behind things you want. You can learn about certain things. We've talked about Ray Dalio setting up a family office.
- [10:37]
A
He's sitting in Abu Dhabi. He's got the Kundura on. He's sitting with Sheikh Tahnoon, who Bloomberg called the world's $1.5 trillion man, which is a great nickname. I wish I have someday.
- [10:46]
B
But that goes away. A lot of these big plans in the us what happens to data center build out? All of that money underpins so much of our economy. Like what was the tweet the other day? The global economy is predicated on San Francisco lying to New York about how good AI is and then it's New York lying to the Middle east about how safe private credit is.
- [11:10]
A
That's it for the punch list. When we come back, we're going to talk the brothers Rubin. I'm here with Aaron Crowitz of Bravo Capital. Aaron, $2 billion in deals, 100% HUD approval rate, five years since launching. How do you keep that streak going?
- [11:30]
C
Comes down to our team. Our underwriters know what HUD wants. We're a pure play Hud lender. Meaning everything we do is HUD and bridge to hud. No taking shots and just hoping when we go, we really go.
- [11:41]
A
You closed a healthcare HUD Express lane deal in four days. Four days?
- [11:45]
C
Four days from our submission to HUD's approval.
- [11:48]
B
And?
- [11:48]
C
And it goes back to knowing the ins and outs of the program so that there is no guesswork.
- [11:52]
A
Sniffs Assisted living. It feels like such an arcane world full of very complicated regulations and such a specific cast of characters that you really need to know, Cole, to make this work.
- [12:02]
C
Exactly. We're steeped in state by state regulations and distinctions. But we're not just about hud. We also have a very strong balance sheet. Bridge affiliate Bravo Property Trust. And we just financed over 170 million out in Miami and 125 million in Dumbo, Brooklyn. If we have conviction, we move fast.
- [12:24]
A
Thanks, Aaron. And where can people find you?
- [12:25]
C
We're@bravocapital.com.
- [12:35]
A
I love doing the Brothers whatever. It sounds so much better than the other way around.
- [12:38]
B
Right?
- [12:39]
A
There's something very fairy tale about it.
- [12:41]
B
Did you ever read the Brothers Karamazov? I did, yeah.
- [12:45]
A
Eh, too long. Okay, we're talking about the brothers Rubin. Incredible tale here. Well, they just bought a luxury shopping center in Palm beach, which is the excuse to talk about them here. But David and Simon Rubin, man, they're real characters. The kind of people that we live for here at the promote. We talk about men with deep pockets.
- [13:04]
B
Oh yeah, we do. One of the deepest.
- [13:07]
A
So they're born in Bombay, which is now Mumbai, to a Baghdadi Jewish family. The father had moved there to work in the booming textile industry during the days of the British.
- [13:16]
B
And these guys just make money from a stone. They've done it all and they've done it everywhere. David, he started working in scrap metals. He worked at a couple of banks and scrap metal. Metal trading is some of the wild west. Go read the world for sale. Guys like Mark Rich, who comes up later, Glencore Vitor, all of these commodity traders, just absolute. You gotta have balls the size of coconuts.
- [13:38]
A
You gotta have balls of aluminum. It's a combination of just bare knuckle business. The kind of things that you would see in many other professions at the highest echelons. But also all of these things are very, very politically connected to pretty psychotic entities.
- [13:55]
B
Sometimes the most dangerous places in the world to deal with the craziest people in the world to get this stuff done.
- [13:59]
A
You know what it reminds me of when we did the Gary Barnett episode about diamond trading this Is way crazier. And Yitzhak Tesla. Yeah, Yitzchak Tesla saying, you know, life is worth less than the ash of this ashtray. Kind of some similar dynamics here.
- [14:12]
B
Oh, except turned up to 11, 100%. You're going to some of the places that these guys have been. And so you had David doing that, and then you had Simon, the operations guy. So he turned around a carpet manufacturer, sold it for a profit, got into real estate. Was doing property deals in London in the 70s. And these guys just had great timing. They saw opportunity, which I thought was the most interesting thing. A lot of people said, okay, yeah, this cash for shares thing in Russia, it could be something. And people made absolute fortunes being politically connected, buying stuff for no money. And these guys, they're not Russian.
- [14:44]
A
They're not Russian and they're Jewish. And those things don't necessarily work very well in Russia.
- [14:48]
B
No, they do not. But they came in and invested something like a billion dollars capital in like four years. And we talked about Mark Rich. Apparently Mark Rich might have been involved in staking them, which is a very Mark Rich thing to do.
- [15:02]
A
Mark Rich, obviously of Glencore fame and then Clinton fame. Correct. Same record.
- [15:07]
B
Yes. And his wife Denise is still hanging out at life with key Denise. I'll see you later this year.
- [15:13]
A
What they did was they brought in raw aluminum, delivered them to Russia and took out finished aluminum in exchange, which they then sold on the open market, presumably at a massive profit.
- [15:23]
B
Good generals think about strategy. Great generals think about logistics. You need to have strategy and logistics and spades here to do this.
- [15:30]
A
They eventually exited Russia by selling their interests to one of the all time characters, Roman Abramovich, the owner of Chelsea fc.
- [15:37]
B
Do you really own Chelsea or do you just keep it for the next generation? Sold it to him for $300 million. And they knew everybody they were involved with, like Derek Poska, all of these major characters who the whole London grad era, that was these guys, they were in the midst. And again, they were not Russian.
- [15:58]
A
Just to add to the oligarch intrigue here, they also bought themselves a Premier League team. They own Newcastle fc, who by the way, we just thrashed in the Champions League.
- [16:11]
B
They take their money out of Russia coming out of this. I think the most important thing is they are liquid. They're liquid as anybody out there. And their money's not tied up in a company, not tied up in property like it is. Ready to go deploy. Yep. They go,
- [16:31]
A
They start doing property. They build up a really significant upscale portfolio in London in the UK they were also early players in the data center frenzy and they cashed out big time. In 2016 they sold a stake in a company called Global Switch to the Chinese for two and a half billion dollars.
- [16:49]
B
Shudder to think what that's worth now. But never went broke taking a profit. They made their first big move into the US the most notable move in the mid-2010s peak foreign capital coming into the US but they did this the smart way actually. They bought the debt for a couple of really tasty hotels in New York.
- [17:07]
A
World famous Plaza Hotel, the Dream Downtown and Grosvenor house. They paid 800 million for the combined debt. So they controlled the cap stack on these three notable properties in Manhattan and they just kind of kept going.
- [17:21]
B
The consistent theme is tippy tippy top. They are buying for a big discount and they are bailing somebody out or not bailing somebody out. Condensates that they're paying like a high price. They are taking people off of the petard. That's the other thing is that during COVID when hospitality and retail where the assets I think hit some of the hardest, that's where these guys pounce.
- [17:41]
A
Yes.
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B
As you said up top, if you're dealing with aluminum smelting in Murmansk, like dealing with Todd Glazier is not a problem. No shots at Todd. The key again is it's high end stuff, complicated and somebody needs somebody with a lot of liquidity. And again, having seen the loan docs here, I would not imagine this is like so for 400 money.
- [18:07]
A
Let's put some numbers on the scale here. I think between 2020 and 2022 they deployed at least 4 billion into US real estate through a combination of debt and equity.
- [18:16]
B
And they do it with very little diligence, which is really attractive for a lot of these assets. There's no committees, there's no we're going to take a while to go syndicate this out. They bought a bunch of the retail portfolio from Vornado at a big haircut, big discount, but I think they closed in 30 days.
- [18:32]
A
They also bought something from SL Green, 609 5th. I believe they bought the retail there. The Sari Ben Ashkenazi had been booted out. The sellers insisted on a simultaneous contract and closing. Which means you sign and you take title right away.
- [18:45]
B
That's what you do in ma transaction. Not like real estate necessarily or in real estate. It's like if you're buying the 4 unit in Gowanus and then they kept going.
- [18:55]
A
Some of the more recent high profile deals they Bought the W South beach off of David Edelstein and A.B. rosen.
- [19:01]
B
They have the loan on the JW Marriott. Turnberry.
- [19:04]
A
They have a condo inventory loan with JP Morgan on your boy Gary Barnett's Central park supertalls.
- [19:10]
B
They might be waiting a while to get paid back there. We'll also afraid of hair. They've got Century Plaza in la, which was just this absolute massive, multi billion dollar project.
- [19:23]
A
Ronnie Reagan used to hang out there back in the day, I think it
- [19:26]
B
was called the Western White House. Michael Rosenfeld's big boondoggle, billionaire debt foreclosed.
- [19:31]
A
Oh my God. He had been trying to make this. So the plan was to take this hotel, revamp it as a hotel, plus two condo towers. Tippy Top Condos, Louisiana is a tough market for condominium living. This was like a $1.8 billion project. He took some pretty high octane financing from the Rubens back and forth for a long time. They finally took control of this property and booted him out. The Rubin brothers are now in their 80s. One of the brothers, his middle son David, is now running point on this project.
- [19:59]
B
So for two brothers who really shunned publicity and in fact sued Fortune for
- [20:04]
A
libel, they did one on the record interview and then promptly sued Fortune for it.
- [20:09]
B
Somehow the real deal got David Rubin
- [20:12]
A
on the record double fisting a Diet Coke and a vape.
- [20:15]
B
This is a fascinating interview and it sheds a lot of light on what it's like being the son of great men. Capital G, capital N is a curse. But I think it's especially so when it's not like the guys made their money in the candy factory. Good day, sir.
- [20:30]
A
Talking about being the son of a buccaneer, the son of a man of action.
- [20:35]
B
David Ruben over here is dealing with this thing that he probably isn't that equipped to handle. These are incredibly complicated. This is like a related job. You need Steve Ross. I don't know if you need David Rubin doing this even though he's moved over there. It's just interesting that they chose this time to come out in public. And maybe part of it is saying, hey, our condos are 36% sold. Maybe we need to do a little bit of marketing.
- [20:58]
A
The good thing here is that they don't have to worry about the lenders.
- [21:02]
B
Yeah, when you own it all equity, it makes life so much easier.
- [21:06]
A
Todd Glazier, best known as Palm Beach Ultra Ultra Ultra luxury spec home developers. He was involved in a project called 1000 Museum. And the Rubins really beat up the developers over there. And I Chatted with Todd. At some point the Rubins came up and he said they knew we were taking an inventory loan. They just want to be assholes. But the best thing in the world is everybody now knows the Rubin brothers that are coming to town to lend money are hard ass sons of bitches. So will you violate any debt covenants recently?
- [21:43]
B
So funny you should ask. I have been in technical default recently. I mean, who among us, right? But not since Q4. And that's not because I paid off the loan. It's because that's when I started using Loan Boss.
- [21:56]
A
I can't believe how old school some of our listeners are. They're still crunching DSCRs in Excel and all that.
- [22:00]
B
Ugh, Total waste of time. Risky business to boot. Lone Boss runs the entire process for me. One click covenant testing. Incredible. Instant cash flow forecasting. Impeccable. And my favorite nerdy delight, the live Forward Curve. So I hate having to go download the forward curve. And then it's always vertical and you got to alt HVT to have it go horizontal. Make sure the index match works like ridiculous.
- [22:25]
A
They've just got it sorted here for you.
- [22:27]
B
Much better. So thank you, Lone Boss listeners.
- [22:30]
A
Check them out@loanboss.com that's loneboss.com and tell them the promote sent you.
- [22:49]
B
You've got the nerdy girl and you've got the hot guy over here being like, I can make her the prom queen. And that in this case is Apollo going to Realty Income and saying, let's team up.
- [23:02]
A
Wait, which one? In this example, which one's the hot guy?
- [23:05]
B
Freddie Prinze Jr. And she's all, that is Apollo. And then what's it, Rachel Lee Cook is Realty Income. And then she takes off her glasses and you're like, oh my God, look at that cash flow. What are you doing?
- [23:16]
A
I'm getting ready to play some Sega. No, you're not. What is happening here? So Apollo is investing about a billion dollars in 500 of Realty Income's single tenant properties, which are triple net leased, which means the tenant is responsible for basically everything. Mailbox money here, right? Or the closest thing to it, pretty much.
- [23:35]
B
The triple nets are taxes, insurance and maintenance. And that's pretty much everything associated with property outside of roof structure, parking lot. Sometimes Those are the type of types of properties that Realty Income owns. And what's attractive about them is that they have very high margins because there's no cost. You're not making a home run. These are more like stay rich than get rich. But these companies, and there's Realty Income, there's nnn, triple net properties.
- [24:03]
A
The one that just sold was fundamental.
- [24:05]
B
Yeah, Fundamental income was kind of that These things have actually, like if you look at stock price over time, with dividends reinvested, the returns are quite good.
- [24:12]
A
And I think that qualifier is really important. Quite good. Minstrels wouldn't sing about these, but they
- [24:17]
B
make money, I think like low to mid teens over like 30 years since IPO, not nothing. So why is Apollo doing this? And first of all, like, why is Realty Income doing this?
- [24:25]
A
The REITs in general are facing the Rodney Dangerfield problem. Right.
- [24:29]
B
I don't get no respect from anyone. Right. Because what the public markets are sort of realizing, we talked about this all the time, that oh yeah, all these things are getting bought because they're trading below nav. And if you're trading below nav, what does Don Draper say? You don't like what's being said? Change the conversation. If people don't like the fact that you own real estate, which is a very capital intensive, low margin business, stop owning real estate.
- [24:49]
A
Stop owning real estate and get into a little bit of a better story, which in this case is fee generating vehicles.
- [24:54]
B
Right. They're still going to asset manage all the Wendy's, but what it means is that they're generating fee related income and it allows them to diversify their earnings. And that multiple applied to that earnings stream is much higher than what you're going to apply to Arby's. With seven years of Walt left in
- [25:10]
A
Topeka, they're taking external capital from Apollo and then this new JV will own these properties. Is that right?
- [25:17]
B
I'm not exactly sure whether it's like a recapitalization technically or like a new purchase, but yeah, essentially that's the case where they are not using their entire balance sheet to go buy these things. They're freeing up their own balance sheet and they're creating a fee stream which wasn't there before. And what's also interesting too is that there's a right to buy back the stake from Apollo for a 6.75 IRR, like a pref kind of return. I guess it's fascinating from Realty Income's perspective, but it's really fascinating from Apollo's perspective because last episode we even talked about how they're like the T shirt cannon shooting people into the stands of debt. There's just not enough debt. They got to go find other things to do. And so what they do is they find the most debt like product in real estate equity which is triple net
- [26:03]
A
consistent boring returns that you can basically project out for 20 years. Years, let's say.
- [26:08]
B
Yeah, because that's what they need. They don't want a lot of like zero coupon heavy value add no cash flow for four years and then the residual value 17 IRR. They want that every quarter, every month.
- [26:19]
A
Yeah. I'm going to read you a quote from Realty Income CEO Sumit Roy, which I think speaks to this. Our size, scale and long standing commitment to providing dependable monthly dividends to investors make this a natural fit with Apollo's insurance capital.
- [26:33]
B
There you go. Says it all. And this is not the first exploration into the space that Realty Income has done. And they have a JV with gic where Singapore Sovereign Wealth Fund which backs
- [26:46]
A
everything, I call them the everything LP.
- [26:48]
B
But only 49%.
- [26:50]
A
Only 49%.
- [26:51]
B
They're focused on built to suit logistics properties with long term net leases. Same type of profile. That dependable cash flow in the financialized world is incredibly valuable because all of this capital underpinning the real estate space and a lot of the global financial system is annuity based where you have certain obligations that you have to hit every year. And so if you can deliver that cash flow profile, it's really, really valuable.
- [27:13]
A
I'm going to read this quote from Apollo's co president Scott Kleinman. The game quote really is built around can you originate enough attractive assets to meet your needs? That's why we've been so focused, some might say maniacally focused on really making sure we're building the right type of origination in the right volume.
- [27:32]
B
That's exactly what this is. And it's origination not just for debt because that's I think where people think about it, it's origination of equity investments too. And so you have to find stuff that meets the profile of the capital that they have. Investing in something else can create higher returns. But that does not matter. We are making widgets in the commercial real estate space and the widget that is really expensive right now is the very consistent cash flow deal. And so people are looking to find those widgets wherever they can. And Realty Income was just sitting on a widget factory.
- [28:14]
A
Silver foxes in henhouses. How do we get into this?
- [28:20]
B
Bill Ackman, back in the day before
- [28:22]
A
he was, before the Twitter screens.
- [28:24]
B
Yeah, he was really big on these SPVs into retail names. He did it with Target and he did it with J.C. penney where he hired Ron Johnson of Apple Store fame, of course, didn't work. Complete debacle.
- [28:37]
A
Apple Store luxury premium Design Forward product. J.C. penney, Value Shopper, best price. That's kind of what matters more than the X factor of design and whatnot.
- [28:50]
B
Pretty much that's beyond my pay grade, but yeah, sounds good. I think that's probably right. But everyone really looked at the real estate value for all these retail names and that includes Saks Fifth Avenue, Hudson's Bay Company, Target. Even with stuff like Kohl's, I think today there's like the, oh, we can unlock the value of the real estate. And there was this continued thesis that that was going to be the case, that this was going to be so valuable. So J.C. penney goes into bankruptcy and they spin up this new trust, the Copper Pass Through.
- [29:22]
A
It's called a pass through trust, set up to liquidate the real estate over time. Exists just for that purpose.
- [29:28]
B
Yeah, to pay off the lender. So they're not reinvesting in the stores or redeveloping anything. And so they have, it's 135,000 square feet on average across 35 states for all these stores and Censiby has all this value and, and so they're leased to the sort of remain co of JCPenney, which is paying some sort of rent. Okay. And they go to package this for sale and they sell it for a billion dollars for 119 stores. Or do they?
- [29:58]
A
They had a deal to sell this to a company called Onyx Partners.
- [30:02]
B
Huh.
- [30:02]
A
I never heard of these guys.
- [30:03]
B
I had neither. Their website, phenomenal. Their headline on the website is Investment Collaboration for Generational Solutions.
- [30:11]
A
It's just one of those spat out combination of words.
- [30:15]
B
No idea what that means. They agree to buy it for just under a billion dollars and they have this net operating lease. You assume that these are financeable because there is some cash flow, but again, the credit is not great. These things probably trade pretty wide, but then the deal doesn't close.
- [30:32]
A
This sounds so basic to say, but there's two components to any real estate purchase, right? You sign the documents to buy it and then you actually close on it. The second part did not happen here.
- [30:41]
B
And there's always a question about why does the seller want to sell? Does the buyer want to buy? Does the buyer have the money? All of these are good questions. And the seller in this case is saying the buyer defaulted, the buyer saying the seller wouldn't let us close.
- [30:54]
A
The buyer's allegations are especially interesting. They're basically saying that J.C. penney or the Pass Through Copper got cold feet or didn't love the buyer and actually went and secret shopped the deal around to other suitors. Even when they had a deal with them, they mentioned, this is one of my favorite terms in real estate that I'm so happy came up again. It says they delivered them a dirty estoppel.
- [31:14]
C
Oh, damn.
- [31:15]
A
Oh, dang.
- [31:15]
B
What? Oh, shit. Shut.
- [31:18]
A
Let's talk about what a dirty estoppel is.
- [31:20]
B
Two Parks Ruinart, one part gin, a couple of bidders. No. So when you buy something and there's a tenant in place, you will have to get, in many cases an estoppel. And so the estoppel is essentially a document that says the tenant says there's no side deals. This is what the lease says. There's no other amendments. The landlord didn't lend you $2 million to pay the rent for the next.
- [31:41]
A
Somewhere buried in the lease, this is kosher certificate, basically, right?
- [31:45]
B
Pretty much. And Onyx is essentially saying that the estoppels they got back were like bullshit. It's a pretty big deal. Because part of their plan ostensibly here was borrow against the cash flows, sell off some of probably the choice assets to get their basis down and bring the yield up and that's how they're going to make their returns.
- [32:06]
A
Basically the John Gray Blackstone EOP strategy. Right.
- [32:10]
B
But to make that work, you need to make sure that the leases say
- [32:12]
A
what the leases say they say like
- [32:13]
B
that they're enforced, the rent's what it is and all those things. And so they're saying that didn't happen. And they're also saying that the seller told them explicitly there are offers way above you guys, we don't care.
- [32:24]
A
Did any of the other buyers come to light?
- [32:26]
B
No, of course not.
- [32:27]
A
No. Okay.
- [32:29]
B
I think essentially what happened is that Onyx didn't have the money. I don't know that for a fact. Just reading between lines, Onyx put up a $5 million deposit, which again, feels kind of low for a billion dollar deal. Yeah. For a transaction this magnitude. This came to light because Copper's annual reports came out. They're trying to use 2 million worth of the deposit as their monthly cash payment to the shareholders. So that's why this came out? Yeah, because at stake here is like that deposit's ours.
- [32:59]
A
Wait, so wait, they can take the money and deploy it as they please?
- [33:01]
B
Well, they're saying you defaulted, you were non refundable, so that's our money now. And Onyx is filing suit against that.
- [33:08]
A
Where do things stand now? These properties are. They Maybe just less valuable than people thought.
- [33:13]
B
I think that's right. These things triple net in general is very susceptible to interest rates because you can't make it go up. And in this case too, you have very like, hard to repurpose real estate. We talked about how like retail saved by mixed use development or adding residential, like at the Ala Moana Mall. Yeah, sure.
- [33:30]
A
Is that the giant, the one that got that monster CMBS recently?
- [33:33]
B
Yeah, in Hawaii, but not where like JCPenney is. The stores are so big, they're so expensive to reposition. You got to punch holes in the wall for windows if you're going to use any other use. So they're like really not that valuable. It's one of those things where on a spreadsheet you can talk yourself into it, but in reality, maybe it's just not worth that much. And so Copper pass through Trust4, or whatever it's called is saying, why don't we just do a read? That's what we should do.
- [33:57]
A
Wait, they're going to create a new vehicle now at this point, sell it
- [34:01]
B
to the public markets. That's how we're going to pay off these.
- [34:03]
A
If it were me, you know who I'd be calling right now?
- [34:05]
B
The Rubens.
- [34:06]
A
Ben Ashkenazi.
- [34:10]
B
The retail real estate's littered with the carcass of many a enterprising investor. And I think it's just claimed potentially two new names in Copper, Passive Trust and Onyx.
- [34:31]
A
That's it for the promote podcast this week. The British invasion might have started with the Beatles, but now it's firmly the domain of the Rubin brothers, with the reits being sold for parts. One has teamed up with Apollo to change the narrative. And JCPenney's carcass is staying in the meat locker for now as the would be buyer and seller go at it in court.
- [34:49]
B
We'll be back next week with more CRE Insider goodness. Thanks again to our sponsors, Bravo Capital
- [34:54]
A
and Loan Boss, you can find them at bravo capital.com and loanboss.com I'm so excited to see you in a couple days. It's been too long.
- [35:01]
B
I know. I've actually gotten taller.
- [35:05]
A
All right, I'll see you on Wednesday.
- [35:08]
B
Yes. And come see us live Thursday. Somewhere in Nashville.
- [35:12]
A
Somewhere in Nashville. All right, dude, thank you.
- [35:14]
B
Thank you.
- [35:15]
A
Ciao.