Real Estate Credit Over Yield at Invesco – Charlie Rose (EP.519)

Charlie Rose is the Global Head of Real Estate Credit at Invesco, where he oversees an $85 billion global platform. Before joining Invesco, Charlie worked in real estate as an academic researcher, jack-of-all-trades through the financial crisis, and investor up and down the capital stack for eight years at Canyon Partners. Our conversation covers Invesco's "credit over yield" approach, property-first underwriting, collaborative work inside the firm, and relationship-based focus. We discuss sourcing through repeat borrowers, risk management, portfolio construction, contrarian calls, including avoiding data centers and AI exposure, and "sheds and beds" theme of industrial and multifamily loans. We close with lessons from the 2022–23 real estate correction, managing troubled loans, and how Invesco is using AI to improve investment decisions. See full disclaimer here https://www.capitalallocators.com/podcast/real-estate-credit-over-yield-at-invesco/. Register for TomorrowX using the Capital Allocators discount here https://tomorrowxsummit.com/partner-offer?token=WIVivSy7_so7XoVZGb2gLweZei3QtL8LZ_TdrCg-ocE. Learn More Follow Ted on X https://twitter.com/tseides?lang=en at @tseides or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant https://thepodcastconsultant.com/

• 0:00Speaker 00

  I'll share with you a controversial position that we've taken. We are not lending on data centers. It is a tempting sector to lend to in this environment. The supply of opportunity is immense. The yields are interesting on the face of it. We're seeing valuations of these tech firms explode in this environment. However, we believe that there's fundamental binary risk in data center investments. In the hyper scaled situations, you oftentimes have a single tenant. They may be investment grade today.

• 0:43Speaker 00

  It's unclear to us how reusable that space may be, or what the functional obsolescence considerations may be five, 10, 20 years from now for that real estate. And there's no alternative use. A lot of different segments of the investable universe have some meaningful exposure to AI. If we can remove that exposure from our portfolio, that will help maintain that low correlation profile of our asset class.

• 1:22Speaker 01

  I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Charlie Rose, the Global Head of Real Estate Credit at Invesco, where he oversees an $85 billion global platform. Before joining Invesco, Charlie worked in real estate as an academic researcher, jack of all trades through the financial crisis, and investor up and down the capital stack for eight years at Canyon Partners.

• 1:52Speaker 01

  Our conversation covers Invesco's credit over yield approach, property-first underwriting, collaborative work inside the firm, and relationship-based focus. We discuss sourcing through repeat borrowers, risk management, portfolio construction, contrarian calls, including avoiding data centers and AI exposure, and sheds and beds theme of industrial and multifamily loans. We close with lessons from the 2022-23 real estate correction, managing troubled loans, and how Invesco is using AI to improve investment decisions. Before we get going, I'm excited to tell you about an amazing conference and offer a discount to attend.

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• 4:25Speaker 01

  Charlie, great to see you.

• 4:27Speaker 00

  Ted, great to see you again.

• 4:28Speaker 01

  I'd love you to take me back to where your initial interest in real estate started.

• 4:34Speaker 00

  I grew up in a small town about 45 minutes east of Seattle, Fall City, Washington, where it rains 30% more than in the city of Seattle. Simple life, great, hardworking community. I saw a few examples of people in our community who made it out, had done well for themselves. The pivotal moment for me was when my family had an opportunity to live in Switzerland in sixth grade. It completely opened my eyes to the world and the built environment, set me on a different trajectory. I was an English major in undergrad. I had no internships in commercial real estate in college.

• 5:20Speaker 00

  I had this vague idea that real estate would be an interesting career path. I had no idea what that meant. I applied to pretty much anything that I could see that had the words "real estate" in it. Eventually, I landed a job working for Ken Rosen, the Chair of the Fisher Center of Real Estate at UC Berkeley, as a research analyst. He needed someone who was a good writer. I spent three years working for Ken, learning about what fundamentally drives demand and supply in the real estate markets. That has been the basis for my career.

• 6:01Speaker 00

  During that time, our clients were investment banks, commercial banks, private equity funds, home builders. I saw what our clients were experiencing, the decisions that they were making. I went back to business school, then got on the buy side.

• 6:19Speaker 01

  What was your trajectory from the interest in real estate to landing where you have on the credit side?

• 6:27Speaker 00

  One of the things that gives me a lot of pleasure in my role is having the opportunity to speak with young people who are just exploring careers in real estate or are early in their careers. I always share the same advice. One, of course, work hard. Find that opportunity where you can put in long hours, get maximal exposure early in your career. The other piece of advice is be open-minded. Be ready to leap at opportunity when it presents itself, even if it's not exactly what you expected that opportunity to be.

• 7:12Speaker 00

  When I graduated from business school, I thought that I was going to be a real estate developer. Many people who enter the commercial real estate business come with that expectation early on. Who doesn't want to drive down the street and point out the window of the car and tell your kids, "I built that tower"? That was an alluring idea. The opportunities that were presented to me were different. I graduated business school in 2008, not a dissimilar environment from when I graduated undergrad in '03. I was undergrad in the Bay Area during the tech wreck.

• 7:52Speaker 00

  Oh, wait, we were glad to have any job in real estate at the time. I worked for a real estate holding company. I was working on workouts, negotiating with lenders. I thought I was going to be doing acquisitions when I took the job. There were no acquisitions around. At one point, my boss said, "We're shutting down one of our regional offices. Could you sell the office furniture?" I would do whatever was necessary to keep that job. From there, I took a job at Canyon Partners. Canyon had raised a $1.1 billion fund and was staffing up to take advantage of distress. We were investing up and down the capital stack.

• 8:36Speaker 00

  We were buying debt, recapping deals, senior loans, pref equity, eventually moving back into common equity. That was a great experience because it created optionality in my career later on. I had equity experience, debt experience, distressed experience. I didn't expect that I would end up being a lender at that time. I thought eventually I would be a developer. Fast forward eight years, I got a call from some of my now colleagues at Invesco Real Estate. We had clubbed on the acquisition

• 9:17Speaker 00

  of the largest subperforming loan sale that Bank of America made coming out of the global financial crisis. They wanted to scale a credit business. They were looking for the right person to do that. I seized on the opportunity because the Invesco platform is characterized by information sharing, collaboration, and great client relationships. I believe that we could build something special here at Invesco.

• 9:48Speaker 01

  As you made that decision to go over to Invesco from Canyon, other than the high level feel-good nature of the buzzwords you might use to describe the platform, how did the platform impact how you thought about building this business?

• 10:04Speaker 00

  Invesco has a distinct culture. It's hard to describe culture in a conversation like this. You need to be in the trenches with people to experience that culture. In our business, we can all think about organizations where there's a lot of competition between investment professionals, a lot of pressure that comes out of that. Invesco has, at the core of the culture, a collaboration approach. Our CEO of Private Markets calls that IQ compounding. He has been a tremendous leader in evidencing to our people

• 10:49Speaker 00

  that we do better when we work together. That was what I bought into as we started this credit business, that I would be surrounded by an amazing team of people that had my back and were supporting me in everything that I was doing. That's fundamental to what we've built here. When we talk about our Invesco Edge as lenders in the market, we talk about how we're a relationship-based lender. Our credit approach, which we call credit over yield investing.

• 11:29Speaker 00

  The third key aspect to our Invesco Edge is our property-first approach to lending. We only lend on the type of real estate that we own on the equity side of the business. We ensure that we do that by having a process whereby our loan originators are out in the market, talking to our repeat borrowers. About three quarters of our borrowers are repeat borrowers. They're identifying opportunities that fit the box on paper. They're immediately bringing in their colleagues,

• 12:07Speaker 00

  whose job is to buy real estate in the given market and property-type combination. By the time we get to investment committee, we've had a true collaborative approach between our originator, our credit underwriters, our acquisitions team, and our equity asset management team, who's providing a lot of insight from what they're seeing in our existing owned portfolio. At investment committee, all of those people speak up and are expected to evidence that they've been engaged in the process and they're supportive of the transaction. Today, we're one of the foremost active debt fund lenders in the US.

• 12:51Speaker 00

  If the equity side of the house is pursuing an acquisition of a property, they're the runner-up on that transaction. And one of our competitors is awarded the transaction. Then we, on the credit side, jump right in behind them. We'll quote the debt, typically have a head start on our competition. In other instances, where we are working with our relationship borrowers, and our relationship borrowers are generally our peers, 90-plus percent of our borrowers are institutional groups. If you think of a big private equity manager with a real estate business, they're most likely one of our borrowers.

• 13:34Speaker 00

  So when they bring us a de novo transaction, we're working side by side with the equity colleagues to get their insights, because they are boots on the ground day-to-day in these markets. They can help us better underwrite the risk of those opportunities that we're seeing.

• 13:54Speaker 01

  If you work backwards, that second point, credit over yield, what do you mean by that?

• 13:59Speaker 00

  When we are investing, we identify outperformance as hitting the target returns that we have established, then outperforming on credit quality. We define outperformance as having better quality sponsors, higher-quality real estate, lower advance rates or loan-to-value ratios, higher cash coverage, and better covenant packages. When we are sitting in our Monday morning pipeline call, talking about the opportunities in front of us and the competitive dynamic, our default is always to say, we're going to lean in on pricing

• 14:44Speaker 00

  rather than leaning in on leverage or structure. If I have my choice, I'm going to try to win business by being more efficiently priced than my peer, rather than winning business by offering a couple million dollars extra proceeds.

• 15:07Speaker 01

  As you look at that set of criteria, it lends itself to higher-quality assets. You would also think, by nature of that underwriting, lower yields may be lower returns than peers. How do you think of positioning yourself as a strategy if most of what you're trying to underwrite is safer than what other people are?

• 15:28Speaker 00

  As a credit investor, the number one most important part of my job is preserving principal or protecting invested capital. Downside protection is more important than optimizing yield. They're both important. If we can't get that downside protection piece, then the yield piece becomes irrelevant. That's our starting point. We have a risk-based approach to underwriting opportunity. We're looking at a whole swath of potential risks,

• 16:08Speaker 00

  whether that's physical property risk, climate risk, insurance risk, market risk, counterparty risk. We then believe, if we can assemble a portfolio of high-quality credits, we will minimize default risk, minimize risk of loss. We can prudently use our broad balance sheet relationships from our 2.4 trillion AUM overall platform to optimize the type of leverage that we get against our loans and deliver the types of returns that our investors expect.

• 16:50Speaker 01

  What are the levers that you use to drive returns, knowing you're trying to avoid the left tail?

• 16:57Speaker 00

  One of the most important things that we can do to ensure that we are, A, maintaining our credit over yield posture, and B, not getting ground to the very last basis point from a pricing perspective, is focus on those relationships. Our relationships today are roughly 100 borrowers in good standing. Over 70% of the loans that we will originate this year will be loans that we characterize as off-market or preferentially sourced loans with those borrowers. If we can find opportunities where we've developed these constructive relationships,

• 17:41Speaker 00

  we can avoid the heavily bid auction processes. We believe that we can set up true win-win transactions with our borrowers, where we're achieving a fair yield for our investors. They're getting certainty of execution, flexibility, fair pricing, and a relationship which is going to give them positive leverage in multiple ways over many years.

• 18:12Speaker 01

  When one of those 100 investors brings you a new opportunity, what are the things you're looking at to avoid that you see that could be a risk or could cause a loss relative to another property?

• 18:26Speaker 00

  There are a lot. We've spent a lot of time thinking about, is there any potential binary risk in this credit? We're generally looking to lend on properties that have an attractive cash flow profile, a diversified tenant base, or diversified demand for that property. We're looking to lend in markets that have evidenced healthy liquidity throughout market cycles historically, and where we think that fundamental liquidity profile will hold up going forward. I'll share with you a controversial position that we've taken.

• 19:07Speaker 00

  We are not lending on data centers. It is a tempting sector to lend to in this environment. The supply of opportunity is immense. The yields are interesting on the face of it. We're seeing valuations of these tech firms explode in this environment. However, we believe that there's fundamental binary risk in data center investments. In the hyper scaled situations, you oftentimes have a single tenant. They may be investment grade today. It's unclear to us how reusable that space may

• 19:50Speaker 00

  be, or what the functional obsolescence considerations may be five, 10, 20 years from now for that real estate. And there's no alternative use. That goes completely in the face of our approach, consistent with the credit over yield mandate of avoiding binary risk. The other piece of it is, we don't think many of our investors want us to be investing in data centers. Real estate credit is characterized by a low correlation to most other asset classes, low correlation to any public market, fixed income, or equity asset classes.

• 20:33Speaker 00

  Interestingly, a sub point two correlation to private equity, private credit, real estate equity. Real estate credit has been a good diversifier in both a broad portfolio, also in an alts portfolio historically. A lot of different segments of the investable universe have some meaningful exposure to AI. If we can remove that exposure from our portfolio, that will help maintain that low correlation profile of our asset class.

• 21:09Speaker 01

  What are some of the opportunities where you are leaning in?

• 21:12Speaker 00

  We will have our most productive year from a deployment perspective this year. Year to date, we have either closed or committed to well over $5 billion of loans, which will exceed our prior record for deployment. That is coming predominantly from two underlying themes. One is a theme that has been present in the market for a number of years. Banks are less active as a percentage of the overall real estate debt market than they have been historically. Real estate credit is the fourth largest fixed income

• 21:55Speaker 00

  asset class in the US. It's a $6 trillion asset class. That's not to say that the banks are not active in real estate credit. They are. Historically, the banks were 51% of the market prior to COVID. Today, they're roughly a third of the market. That's left this gap that debt funds and alternative lenders such as ourselves have been filling. The second underlying theme, which is coming into play this year, and we expect to be sustained over the next couple of years, is an elevated maturity environment. I don't necessarily talk about a wall of maturities. We are expecting $3 trillion of real estate

• 22:40Speaker 00

  debt maturities over the next five years. And this year is five years after the prior peak of loan originations in 2021. So you're seeing a lot of loans come due. That is driving a material increase in refinance activity. More of the loans that we are originating today are refinance loans than we've seen historically. We're active along the coast. We're active in the Sun Belt, active in Europe. The vast majority of our volume is industrial, multifamily, and variations on those two themes, beds and sheds.

• 23:19Speaker 01

  What is it about those two that attract your attention?

• 23:23Speaker 00

  Industrial and multifamily are the most liquid property types in the US. In Europe, logistics is one of the most liquid property types. The multifamily market is less mature in Europe. We like the liquidity profile. That is helpful for us in underwriting multiple sources of repayment. It also means that our relationship borrowers are pretty active in those two spaces specifically. When we talk about logistics, we're generally talking about multi-tenant logistics. Oftentimes, we're financing portfolios that are geographically

• 24:03Speaker 00

  diversified. You end up getting similar characteristics between logistics and multifamily in as much as you have a granular underlying set of tenants, which provides some diversification. If a certain industry is experiencing headwinds, that won't mean that we'll see wholesale weakness in our underlying tenant profile.

• 24:29Speaker 01

  Curious to ask you about office. Post-COVID, there was this question of where do office occupancies settle in in major cities? What have you seen in the office market over the last bunch of years?

• 24:40Speaker 00

  We spend so much time talking about office, and it's a relatively small part of the institutional universe today. It was a larger part historically. Office looms large in our conscience. These are the tall buildings, the shiny towers in our CBDs. A lot of us have spent a lot of our careers working in these buildings. What we saw coming out of COVID, the straw that broke the camel's back was the rate hiking cycle, was an unprecedented amount of value destruction in an unprecedentedly short period of time for any single property

• 25:20Speaker 00

  type. What we saw in office was far faster and more acute than what we saw in the regional mall sector earlier in our careers. It has been painful for many in the industry. Today, there's more clarity around what office is in demand, what office is not in demand, more clarity around values. Office buildings are selling in this environment. We can peg values with better certainty. For much of the last five years, we wouldn't touch office. The first reason for that was, if there's one thing I hate as a lender more than anything else, it's uncertainty. It was difficult to underwrite demand, rents, and ultimately

• 26:05Speaker 00

  values in an environment where most players were on the sidelines. Today, office is more underwritable, at least for the good stuff. There are some unique challenges to office that make it a tougher asset class for us to underwrite. One is, it is a very capital intensive asset class. You think about how much it costs to build out a new office suite. Then the fact that you have to continually do so as Lisa's role introduces a high capex burden, which is challenging in optimizing returns. Secondly, you tend to have more GDP

• 26:48Speaker 00

  correlation. In many instances, some binary exposure to tenancy. We have made one office loan this year. Granted, we're going to make well more than 50 loans this year. That is the first step for us post-recovery. The office loan that we made was in the San Francisco CBD.

• 27:10Speaker 01

  Would love to hear more about your underwriting process with your team. When a potential loan crosses your desk, what do you guys do?

• 27:19Speaker 00

  The first step is an email followed by a phone call from someone with whom we have an existing relationship. They're going to send us some basic information, loan amount, property type, location, key credit metrics, the leverage ratio that they're seeking, and the cash flow profile of the asset. With that basic information, we can weed out the vast majority of loans and say, hey, this is not a fit for us for one reason or another. It's too big, it's too small, maybe it's going to go fixed rate, most of our loans are floating rate. For those loans that do fit our box, we have a team that is responsible for underwriting

• 28:03Speaker 00

  the investment. The team is led by a senior originator. Our originators have had prior careers either at banks, insurance companies, or other debt funds before joining Invesco. They're supported by associates and analysts who are responsible for running all of the numbers. They're actively bringing in experts from other parts of our business to opine on the underwriting. We underwrite the underlying collateral as if we were buying the real estate. Our associates and analysts use the exact same cash flow model that their peers on

• 28:46Speaker 00

  the equity side of our business do. We then determine what we think the loan to value ratio is. That may not be the same as what the appraiser says it is. We like to have our own view formed. We'll spend a lot of time in the market. We walk both the assets we're lending on as well as the market. Typically, we have boots on the ground across our organization in most of these markets. We have a two-step investment committee process. Our first investment committee is before we issue a term sheet to our borrower. We believe that it's critically important that, once we issue a term sheet, we can

• 29:29Speaker 00

  offer a very high certainty of execution for our borrowers. It would be an extremely unusual situation where if we issue a term sheet, we're unable to close on the transaction. If we sign the term sheet, then we go back to investment committee after we have received a whole series of third-party reports. We send out specialists who are MAI appraisers to do a formal appraisal. We have physical property inspections. Organizations that have construction specialists on their team, they're going out, making sure that the roof, plumbing, and the electrical is all in good shape.

• 30:14Speaker 00

  If it's a seismically active zone, we'll have a seismic expert come in and identify how much risk there is of physical damage in a seismic event. Similarly, in a wind zone, a hurricane-prone environment, we do flood studies, we do environmental studies. Once all that's done, all of those reports are reported back to investment committee. In most instances, there aren't any major surprises. If there is a major surprise from a third party, we're addressing that with our borrower. Maybe we're adjusting our proceeds, maybe we're adding some structure. Or there've been a few instances where we found something with the underlying real estate where we've gone back to our borrower.

• 30:57Speaker 00

  They've changed their decision on the investment. They've sought to have a price reduction or even dropped the acquisition opportunity.

• 31:07Speaker 01

  I'm curious about the pattern recognition of the financial work compared to the on-the-ground work, whether it's your team kicking the tires or experts you're sending out. The signals that you get on the ground and how you integrate that into a financial modeling and supply and demand framework?

• 31:29Speaker 00

  We are looking for information that is unique and not publicly available. There are a lot of information asymmetries in the private markets, generally speaking, and in private real estate. There are instances where we're leveraging that boots-on-the-ground expertise to give us helpful forward indicators. Let me give you an example. A couple of years ago, we were underwriting an office building in the Bay Area. Initially, our originators said, this is a slam dunk. We own an office building in the same office park.

• 32:11Speaker 00

  The office building that we own has good occupancy. It looks like these guys are buying it at a basis not dissimilar to our basis, full steam ahead. When our asset manager got involved in the underwriting, they said, you guys might want to slow down a little bit here because we have not had a single tenant tour our building that we own in this office park for the last 12 months. What we're observing is that all of the tenants in the market are wanting to be on the other side of the submarket, close to the Caltrain station. There's little demand in this particular pocket.

• 32:52Speaker 00

  That led us to take a much more conservative approach on rents, absorption, and occupancy for this building, which ultimately made us not competitive, despite the fact that all of the publicly available market data, which is backwards-looking, was supportive of the transaction.

• 33:11Speaker 01

  With all of the internal relationships in Invesco, I'd love to hear more about who is adjacent to you that's helping foster in this information when you're looking to underwrite a loan?

• 33:24Speaker 00

  We're fortunate to have a lot of internal experts. This starts at the macro level. My view as a real estate lender is that my job is to be building and managing a portfolio which should perform throughout all stages of the economic and credit cycle. I believe my investors are investing with me for that downside protection and an attractive income profile on a through-cycle basis. They're not getting total return, they're not getting upside when values are ripping.

• 34:04Speaker 00

  On the flip side, they should have a much more stable experience in a down cycle. One of the things that we are thinking about is how do we structure our loans and our balance sheet such that we can deliver an attractive yield for our investors in all stages of the rate cycle? We talk about being rate agnostic. That being said, Invesco has a huge fixed income capability. We have major equity capabilities, we have currency capabilities. We are regularly talking to our rate strategists to understand their perspective of where

• 34:48Speaker 00

  they think rates are going so that we can make sure that we are sensitizing investments in an appropriate way. Maybe modulating risk, taking more of a risk on or a risk off posture depending on that viewpoint. Similarly, we have macro economists who are thinking about major macro trends. That can inform where we are thinking about leaning in from a geographic perspective or an industry concentration perspective. When it comes to the real estate, we're a global business. Many of our borrowers borrow from us in both the United States and in Europe.

• 35:30Speaker 00

  We are talking to our colleagues on both sides of the Atlantic. I sit on the European Credit Investment Committee. My colleague who runs our European credit business sits on the US committee. We're trying to bring in a variety of expertise across the platform. Within the equity business, we have folks who have specialized on some specific product types. We have a team that is specialized on single-family for rent. We have a team that specialized in medical office, a manufactured housing team, a self-storage team. As we see opportunities in those property types, we're pulling them in to help us assess

• 36:15Speaker 00

  the risk, make sure we're looking at the right metrics in those markets. Importantly, understanding the physical characteristics of buildings. I think back to an example of an industrial property in Phoenix that we were underwriting for multi-repeat borrower of ours. On paper, it looked like a slam dunk. We owned two industrial buildings in the same submarket. Overall, market stats were pretty healthy in that submarket. When we brought in our asset manager, who's been asset-managing industrial in Phoenix for 25 years and sits in our local office here in Southern California, she said immediately, I wouldn't do that deal.

• 36:57Speaker 00

  That is the last-in, first-out building in the market. The reasons are, one, it doesn't have as good of truck parking as the other buildings in the market. That's always going to be a consideration for tenants in this market. Two, the specific micro-location, real estate being a block-by-block, building-by-building business, means that trucks need to make three left turns coming off the interstate to get to that building. If tenants can go into a building where they only need to make one left turn or right turns, they're going to save a minute 90 seconds every time. That adds up over the years in diesel fuel costs. They're going to go to those buildings first.

• 37:39Speaker 01

  When you go through this loan by loan, you make decisions to underwrite certain things that come onto your plate. How do you think about constructing a portfolio of loans?

• 37:50Speaker 00

  It is one of the more important things that we need to think about as I think back on lessons learned from the last correction, which by the way, the correction in commercial real estate between 22 and 23 was one of the three most severe corrections in commercial real estate in modern history since World War II. I have honed in on that experience on making sure we continue to have strong discipline around minimizing concentration risk within our portfolio. From a credit perspective, I am much more sensitive to that concentration risk than maybe I would be in an equity portfolio, certainly a higher yielding equity portfolio,

• 38:34Speaker 00

  where I may make some concentrated bets. Being focused on preservation of capital and minimizing downside risk, I want to make sure that if there's a black swan event at a single asset, that that doesn't have a significant negative impact on the overall portfolio. Diversification comes across multiple metrics. It's geographic diversification. It's underlying tenant industry diversification. Making sure we don't have too much exposure with any given sponsor and any given fund, property types, currency in our global funds. From there, portfolio construction is less sensitive

• 39:18Speaker 00

  than you would see in some total return strategies. The most important thing is making sure that we're not taking binary downside risks. We're going to look at making sure that we have exposure to those property types that are generally aligned with the convictions that we have from a top down for real estate equity.

• 39:41Speaker 01

  As you're monitoring portfolio, inevitably, real estate's cyclical. You will go through a tough market. You mentioned that 22, 23, one of the toughest that you've seen. When things start going wrong, how do you think about triaging where the problems are first? Understanding what you need to do as the manager of those loans?

• 40:04Speaker 00

  We have a couple of fundamental principles. One is we are a relationship lender. We're in this business for win-win transactions. If we have a loan where the underlying collateral is experiencing some challenges, we are generally going to take the position of working with our borrowers, giving them more time so long as they are evidencing that they are committed to the asset, that they are committing resources, attention to the execution of the business plan, also committing capital to the deal. If they are, we're going to lean in generally on giving them more time. If they're not, we're going to move swiftly

• 40:49Speaker 00

  because we don't want to see waste at the property. We have the ability typically to exercise remedies, take control of a property in 60 to 90 days in most jurisdictions. We can do that with some degree of certainty. In many instances, that credible threat is sufficient in getting some borrowers' attention. In the COVID time period, we had six hotel loans. We quickly got with all of our hotel borrowers. In five out of six instances, they either said, it's tough times. We're going to keep going. We're going to check capital. We believe in this asset.

• 41:33Speaker 00

  Please be patient with us. Or could you give us some modest accommodations? Maybe accrue interest so we don't have to be coming out of pocket for three months of this period. We had one borrower who took a much firmer position and said, Imbesco, we want you to fully accrue interest for a year. By the way, occupancy has gone from 85% to two occupied rooms. We still have taxes, insurance, utilities and labor to pay. We want you to come out of pocket to pay those operating costs. And our answer was, that's fine. If that's your position, we'll do that. Our investors need to benefit from the upside

• 42:16Speaker 00

  if we're increasing our exposure at this difficult time. We commenced a foreclosure process. A week before the foreclosure, we got a liquor license. So those two people in the hotel could have some beverages. Our borrower realized we were serious and they paid us off in full in July of 2020. I have to think we were one of the only hotel lenders to be paid off in full in 2020.

• 42:39Speaker 01

  How do you work through a relationship in a situation like that? Where maybe they were anomalous relative to the other ones? How do you reassess that at a tough time?

• 42:51Speaker 00

  It's the classic adage of in trying times, you see partners' true colors. That specific example was a borrower who we'd done seven loans with. I like the people there. I still consider them to be friends, but we saw how they approached things with their lenders. That's not what we expect from our borrowers. So we're not going to make another loan to them and we haven't. There are a couple of borrowers out there who had tough situations. They did the right thing all along. You could take the posture of, hey, if you've lent to someone and the underlying business plan was a failure,

• 43:35Speaker 00

  maybe you shouldn't lend to them again. We have the entirely opposite view. We're going to lean in for those borrowers who leaned in for us.

• 43:45Speaker 01

  In an asset class that you're participating in, there is so much data. In this exploding world of AI, curious how you've used AI to enhance the information that you have?

• 43:58Speaker 00

  We are an AI-first organization. We are moving swiftly. We are investing heavily in AI applications and uses. This is a top-down mandate for the firm. Our objectives are to use AI to optimize investment outcomes to improve our investor experience. You'll notice that efficiencies and saving costs aren't one of the top two objectives. Maybe that will be something that we can benefit from in the future. We are using AI constantly. There is a healthy tension within our organization

• 44:42Speaker 00

  of leaders pushing hard for innovation and increased adoption, while compliance and legal are putting up healthy guardrails around that. Our clients' data must be preserved. We certainly can't have AI agents making investment decisions or presenting faulty information that is used for investment decisions. There are many, many different applications that we're using on a daily basis. We're using AI to create lease abstracts, to take 100-page leases, summarize them down to the key points that our underwriters need.

• 45:26Speaker 00

  We're using AI to do some modeling tasks. We are using AI as a basic research assistant tool for us. We are automating much of our investor reporting with AI agents. It's early days for us in our implementation of AI.

• 45:49Speaker 01

  As you look at your opportunity sets that comes across your desk, what are some of the things that you are finding interesting that you think the market may not?

• 45:58Speaker 00

  We have taken a constructive position on Europe. That has been a differentiator relative to some of our peer sets. We see that we can at times generate some excess yield for like-kind risk in Europe, given greater information asymmetry in that market. You also see us lagging into adjacent property types to our two major themes. We've been a longstanding player in industrial outdoor storage and self-storage. Those are areas where we have significant exposure and we're continuing to gain exposure.

• 46:42Speaker 00

  In the sheds portion of the beds and sheds, I would include iOS and self-storage as sheds category. On the bed side, we are active in conventional multifamily. We also have been active in 55-plus age-restricted communities. Student housing recently has been a major theme of ours. You have to be careful in student housing because these individual markets are relatively small. They can be exposed to excess supply. But if you pick the right locations, they can be fortress assets. We think about how are we able to create different access pathways to opportunity?

• 47:26Speaker 00

  One area where we've invested a lot of time and built a healthy architecture is in creating standby portfolio facilities for our borrowers who are pursuing aggregation strategies. We'll set up a 250, 300, $500 million facility with specific parameters that's on standby. It gives our borrowers certainty of execution from a credit underwriting perspective as they're pursuing new opportunities, efficient financing process when they onboard new opportunities and gives us access to some transactions that we wouldn't otherwise have access to.

• 48:09Speaker 01

  How do you set the bounds to make sure that when the time comes for that investor to access the loan, that you're comfortable with it?

• 48:17Speaker 00

  A lot of good communication, making sure that everyone has a clear and unified vision for the purpose of the facility. We have full discretion over any loan that gets added to the facility. You want it to be a win-win transaction. It's not in anyone's interest for us to spend a bunch of time setting up a facility and then not approve loans. Making sure that there is alignment on what fits and doesn't fit early on is critical.

• 48:46Speaker 01

  How are you thinking about the influx of interest from private wealth?

• 48:54Speaker 00

  Invesco is most known as a traditional asset manager. We're one of the four largest managers of ETFs globally. We have a successful actively managed mutual fund franchise. We have a huge exposure to retail investors and deep relationships in those distribution channels. One of our strategic initiatives is to take our best ideas on the private market side and bring those to the wealth channel. We've done that in real estate equity. We've done that in private credit. We have done that in real estate credit as well. We did

• 49:35Speaker 00

  see earlier in the cycle, a pretty significant growth of wealth capital on the real estate equity side. There have been a number of entrants on the credit side in recent years. But if you look at the amount of wealth capital raised into real estate credit vehicles, it is a drop in the bucket relative to the overall market size and is not coming close to filling the gap that is then left by the banks. You can also look at broader debt fund fundraising. There certainly is activity in that space, both from the wealth

• 50:17Speaker 00

  channel and the institutional channel. For every new entrant in the debt fund space, we're seeing another group that took some real hits along the way during this last correction, who's now out of the market.

• 50:32Speaker 01

  What excites you as you look out over the next couple of years?

• 50:35Speaker 00

  There was a moment in time during the pandemic where I was stuck in my basement working. I live in Los Angeles. Half my neighbors were in the entertainment industry. And as far as I could tell, they were having fun, relaxing and not working for those first several months. We were working harder than we'd ever worked before. It felt like I was rolling out of bed, going straight to my home office, cranking until lights out. That was a tough time. In some ways, I stumbled into my current role. I had a moment during the pandemic where I looked myself in the mirror and said, is this what I meant to

• 51:18Speaker 00

  do? Sling real estate loans for large commercial owners of real estate. That helped me form some clarity around what it is that we do. At the end of the day, we are managing money for retirees, future retirees, both the wealth side, DC defined contribution, also defined benefit. We're managing money for insurance companies and that is enabling insurance companies to pay out on claims for life insurance when there's a tragedy in a family or some other major need. We are providing for these ultimate beneficiaries.

• 51:58Speaker 00

  It's helpful for us to keep that in mind. On a day to day basis, I view my role as providing for my family. I have young kids. Also provide opportunities for our team to provide opportunity for their families. If my colleagues want to put their kids through private school, making sure that they can do that. If they want to plan an early retirement, plan for a family, whatever it is, it gives me a lot of pleasure to see us creating those opportunities for our people. Over the next several years, we're going to continue to grow this business fairly substantially. Our pace of growth is quick, but governed

• 52:42Speaker 00

  by our fundamental principle that performance comes first, growth can only come to the extent that we can maintain our performance position in the marketplace for our clients. Over time, we're going to provide for a whole lot more families here at Invesco Real Estate, and that's exciting.

• 53:01Speaker 01

  Charlie, I want to make sure I get a chance to ask you a couple of closing questions. What's the most rewarding thing you do outside of work?

• 53:08Speaker 00

  The most rewarding thing that I am doing outside of work is as a father. I have four young kids. I recently joined the board of my eldest daughter's school, which is an amazing school focused on teaching children with language-based learning differences from grades two through 12. These are kids who the traditional public schools and independent private schools in our region have failed, have been unable to teach these kids how to read and learn and develop a love of learning. Our school is able to cater to

• 53:51Speaker 00

  these students and teach them in the way they need to be taught. That's incredibly rewarding.

• 53:57Speaker 01

  What are you unusually good at that most people don't know about?

• 54:01Speaker 00

  I'm a pretty good skier. Most people don't get to see me doing that. I grew up in a small town. While it did rain an awful lot, the mountains were only about 35 minutes away. It snowed quite a lot in the mountains. Back then, Lyft tickets were $12 a day. My mom would pack us brown bag lunches. It was a accessible, middle-class support back then and a huge part of my childhood. At Stanford, I joined the ski team, which is nothing to write home about, but meant that I spent a huge amount of time skiing throughout my

• 54:43Speaker 00

  early life and into my twenties. It's something that I got a lot of joy out of and enjoying teaching my kids these days.

• 54:52Speaker 01

  What's your biggest pet peeve?

• 54:54Speaker 00

  My biggest pet peeve is people not getting to the point. I want to hear what you're saying. I want to understand your recommendation and I want you to tell me what you're saying before you go into all of the detail. We're busy around here. I value your opinion. I want you to get it out efficiently.

• 55:18Speaker 01

  What have you changed your mind about the last few years?

• 55:22Speaker 00

  This has been a significant time of growth for me as an investor. Until December of 2022, I had never experienced a realized loss on any investment that I made. In some ways, experiencing that first loss was a liberating experience that has now allowed me to have a much more humble view of myself as an investor, has allowed me to go back and look at not only the investments that went sideways, also the investments that

• 56:05Speaker 00

  went well, where we were lucky, and be honest with myself about why those investments were either successful or not, and realize that the investments that were successful sometimes have lessons for me to learn from.

• 56:24Speaker 01

  Which two people have had the biggest impact on your professional life?

• 56:28Speaker 00

  Without a doubt, number one is my father, John McBride Rose. My dad started his career in public service. When I was a baby, he found himself unemployed. He had to plead for a job with a public finance shop in Seattle. He ended up making an incredible career, financing primarily public schools through bond issuances throughout the Pacific Northwest. He ended up as CEO of that organization. My father taught me how critical honesty

• 57:07Speaker 00

  and ethics are above all else. He taught me how important it is to care for the people that you work with and your clients. He did so in a humble, lead by example way, without being explicit in the way that he taught his lessons. Today, I am inspired by our CEO at Invesco, Andrew Schlossberg. He has set a clear strategic direction for our firm, which is principles-based, and I'm excited to see where he takes this firm over the next decade.

• 57:49Speaker 01

  All right, Charlie, last one related to that. If the next five years are a chapter in your life, what's that chapter about?

• 57:56Speaker 00

  My husband and I have talked a lot about how this is a specific chapter in our lives right now. We moved last year to live close to the school for children with learning differences that my daughter attends. We moved to a great neighborhood with great neighbors, which is not a neighborhood that I would have chosen to live in, were it not for my daughter's educational needs. This is that chapter in our lives where we are parents, we are going all in. There will be a time in my life when I can live in exactly the neighborhood that I want to live in.

• 58:41Speaker 01

  Charlie, thanks so much for sharing another great chapter in the Invesco story in real estate.

• 58:47Speaker 00

  Ted, it was a pleasure. I hope we can do it again.

• 58:50Speaker 01

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• 59:15Speaker 02

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.