Private Equity’s Big Bet on Logistics Facilities

on iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show weekdays at two pm Eastern only on Bloomberg Radio. Let's set the Business week agenda. We're gonna start with Dave Wilson. He is our stocks editor, of course, also the author and the chart of the day. And in a minute we're gonna hear from Gina Martin Adams, our chief equity strategist. Dave, I want to start with you, help us understand the tone in the market today. Oh,

it's just a broad based advance here. You've got energy stocks at the forefront, given that oil prices are holding up at least after the clients we've seen the last few weeks. I mean, you're seeing some pretty substantial gains to it. A lot of stocks that have been beaten up over the past a few weeks. You think about Norwegian Cruise Lines or American Airlines or MGM Resorts. I mean, there are plenty of stocks like that, and if you look at what's down in the SP there aren't that

many stocks, only thirty three at this point. What's notable, though, is that we're seeing weakness among real estate investment trusts and that looks like a real area of concern for investors. UH specifically when you look at mortgage reads, the ones that invest in mortgage backed securities that you know, lend money for properties. I mean, we're seeing some companies in that area, smaller ones, certainly not SMP five level, that are having trouble keeping up with all their demands for money.

A couple of them, specifically invest Go Mortgage Capital ticker i DR and New York Mortgage Trust ticker n y m T, have actually come out and said we can't meet margin calls at this point, and their shares are taking a beating because of that, and it's resulted in

some week this across real estate at this point. Yeah, and we've certainly seen that play out in the mortgage market, and that is one of the you know, bond markets, the mortgage bond market in particular, that has not seen the bounce back or or at least you know, ease of concerns that we've seen in other aspects of the financial markets. UM, you know. So, yeah, that makes sense that that we're seeing some of an impact. Gina, come on in. I was listening to you this morning, UM,

listening to you on Bloomberg Radio. So where are we can we assume that once we get through this, that you know, everything's going to kind of get back to normal for companies and that we bounce back. What are your projections here? Well, I think that's a that's a tough question. I don't know that we get back to normal precisely, because I think we are in the process

of kind of trying to figure out what normal looks like. UM, as we address the crisis, the crisis, as we address the health concerns, as we address our infrastructure and our capabilities of dealing with this, I think we will continuously kind of reassessed how businesses will fund shin over the course of the next six twelve maybe even longer that six twelve months or maybe even longer. What I will say in terms of the equity market, but I think

is very relevant right now. What you do find almost every period is the equity markets from the bottom before the fundamentals bottom, we bottom on average about two fifty days two hunt five to be precise, before we reach our earnings bottom. We average in most cases about a year before we make our economics economic bottom, we find a bottom in equity prices. So when you ask the questions sort of where do we go from here, the relevant equity market question is what have we already priced in?

And how much more do we really need to price? When we look at what we've priced in, we've already priced for much deeper than average recession experience in the earning satlook. So now it's a question of timing. How long does it last? How deep does it get? Does it last beyond September, because that seems to be about what we price. Does it go to December? Does it go to next March? Those are the questions investors have

to ask themselves at this point. And so, Gina, what about this divergence as it were, between the health crisis and investor for lack of it, a term enthusiasm. I mean, is the market still paying attention to mortality rates and spread in all of those things? I think so, I think the market is definitely paying attention to those. You know, if you look at where we are today, we've had a tremendous bounce back all but all we've done has

gone back to Friday's levels. Um, so we're, you know, back to where we were a couple of days ago. I think that the market is also trying to price in what has been an extraordinary effort on the fun the part of policymakers. You know, yesterday we've just had an absolute bazooka of fed stonelists announced in many ways, and now we're starting to price in a potential for fiscal stimulus, which that's the game changer too. So well, we're absolutely trying to plot the path of virus contagion,

figure out how to slow that pace of increase. At the same time, we are getting the supports necessary to try to stabilize the equity market and certainly try to provide the economy some shelter from the inevitable fallout, right right, And I do wonder about you know, I've heard a lot of conversations about you know, getting money into the hands of people, but you know, right now, they've got to have some security that they're going to be what's

really more on everybody's mind is that they're going to have a job that they certainly come back to her, that companies hold them onto and that's crucial for companies keeping going. Um, Gina, thank you so much. Gina. Martin Adams, chief equity strategist at Bloomberg Intelligence, on the phone from New Jersey. Dave Wilson also with us, our stocks editor at Bloomberg News, on the phone from New Jersey. You're listening to Bloomberg Business Week with Carol Messer and Jason

Kelly on Bloomberg Radio. We have been very fortunate to talk to a number of medical experts, usually this time of our show to get an update on where we are when it comes to the outbreak. We talk a lot throughout the course of the show about the markets.

Let's understand it from the perspective of Dr Penny Wheeler, she is president CEO of a Line of Health, joining us on the phone from Minnesota to give you some size and scope, as we say, at Bloomberg owns and or operates thirteen hospitals more than ninety clinics throughout Minnesota and western Wisconsin. Dr Wheeler, thank you so much for

joining us. Thanks for having me on so help us understand what before we talk nationally, what does this look like for you in your backyard right now in Minnesota and Wisconsin. Yeah, in Minnesota, Wisconsin. I think what we're seeing is uh something other geographies have seen sooner than we have. We are just on the ramp phase up

of seeing a more disease burden in our communities. We're hoping it's a slower ramp because of some of the hygiene and isolation UM protections that have been in but that we're at right now downsizing our elective surgery compacy so we can support care needs needed in our community. I am curious what you think about when we have conversations about kind of reopening up the US economy, Um, how do you feel about that from a healthcare perspective?

Or what are you seeing? Because um, you know, certainly there are hot spots unfortunately on the coasts, certainly in New York City where you know, the New York metro area where Jason and I are coming from, and our team, Um,

but how do you see that? Yeah, Well, first and foremost, we think that our ability to actually have the capacity and the resources and the protective equipment for our staff relies on the social distancing necessary to reduce the burden in the community over time so we can actually have

the resources to care. So priority number one is do we we have the right capacity and resources to care and can we care well for those who are deal So we would say and promote at this time that that social distancing is actually vehicle to help out being able to be there for our community. So we feel

strongly about that at this point. Um. We totally understand that the economic consequences even right now our significant for people, including healthcare organizations, and we have to look at the long term consequences of that as well, um, and to that balancing act. But right now that is so needed for us to make sure that we have the adequate resources to care, prayer our communities and for our herosis

occurring for them. And Dr Wheeler, just briefly, you know, what do you think happens next in terms of the national outbreak. I'm guessing you're talking to your counterparts across the country in terms of the numbers, the predictions, the modeling, what's your best guess or your best information at this point.

I think the challenge has been that that because of our um the scarcity of resources around testing, either getting adequate testing vehicles, for the ingredients to do testing that we haven't had white testing, we need to do very detailed monitoring from an epidemiological standpoint, that's not quite difficult. So that's why I think our modeling is kind of probably the map right now, and we're not really sure. We're getting an update from our states but later today

on what that modeling shows. But it's been very challenging because of the pousity of testing resources available at the frontier. Yeah, no, I know, right exactly, and in terms of getting access to the necessary equipment that is needed. You know, what is you know, it's interesting we are obviously covering the story so closely, but I'm just curious from your perspective, you know, what is it that maybe we are we are not telling in the clearest way that maybe we

need to be. I think that, first of all, I really appreciate the news media and getting out that for us to be able to talk about how this it seem really helps us as healthcare workers do our job

invest in service of the community really important. I think that sometimes things that get lost is like you know, uh, we still don't know what the trajectory of this curve is and many of our community and until we know, we're at a place where its plateaung somewhat to actually release restrictions uh um, done in a perilous way, even though even though totally understand the economics of this have to be balanced of the long economics that the short

term resource needs. So understand that, and I would say that, you know, gosh, in some base I just heard one cleaning products were down to a day of supply. I protected equipment. Many are down stays of supply to testing has been a challenge for for everybody. So those things are real. Well, there's more release that is proposedly on the way. I'd say that at the front here, those

are still real constraints. All right, Well, we really appreciate the time in some great perspective of Dr Penny Wheeler, president CEO of a Line of Health, joining us on the phone from Minnesota. You're listening to Bloomberg Business Week with Carol Masser and Jason Kelly on Bloomberg Radio, Carol, You'll probably remember, uh, last year, more than a year ago, I think John, the president of Blackstone, was talking with us about where they were making big bets and one

of those places was warehouses. And man, is that bet looking like it's going to pay off? John Gray, of course, president of black Stone. Blackstone is one of the subjects of the story that is in the upcoming issue of Bloomberg business Week. It's on the terminal and online today. Noah bou Hire wrote it finance reporter for Bloomberg. He joins us on the phone from Seattle along with Joel Webber, the editor of Bloomberg business Week. He's on the phone

from Brooklyn. Noah got us say, great, great story, and man, these guys are right in the midst of it. Give us the size and scope here. Yeah, so, um, I mean you put your finger on it. They made it. They've been making an enormous set on warehouses. Last year alone, they bought more than um twenty billion dollars worth of industrial properties and that that includes warehouses, logistics facilities. Um. And you know, as as as we all know, uh, you know, I'm the only way you can get stuff

these days safely is to have it delivered. And um, the um just demand for these properties had already been extremely high before before the coronavirus came around. Vacancies were below five in a lot of places. UM, you know, getting those sort of close to city in sale properties that that enable last mile delivery and and and for people to do online ordering. Uh, it was just really hard. So the fundamentals were there, and and now we're seeing in a pretty dramatic way, um uh, just the need

for these properties. So so Noah side and scope, this is what we love right here at Bloomberg. UM talk to us about Blackstone, and I think there's another firm that you mentioned in your story. How much have they bought into or invested in a lot a lot? So the other firm is a is a real estate read called for logists. They're actually the biggest in the US. Between the two of them, they have about a billion square feet, which is more UM than their next ten

largest competitors combined. So you're really um, it's it's an industry that it's rapidly consolidating and has these two enormous players um and uh and and and you know I think the important thing to note here, um is that, uh, the um sort of the scale has been important in in in consolidation in this industry. It's the bigger just getting bigger. So Joel, come on in here, because this echoes back to a story, a series of stories that you and I and a number of people worked on,

uh towards the end of last year. I think it was I don't know, it's all blending together here man um related to private equity put it in some context for us, well, I think it just shows, um, one of the ways that private equity has been able to work into all these different hidden facets of our lives, and like, this is a really present bet to say, look, we know that delivery services above all, are are going to be a thing that only increases in demand, and

that you know proves especially true right right now during the coronavirus. UM. So so I think it's just another example when when you have as much capital as these guys can deploy and you sort of look through um America's sort of supply chain, Um, where can they insert themselves and add value? And that's clearly what's coming to

bear here. UM. No, my question for you is sort of you know, how lucrative is if it's like you know, you think about warehouse and these are just big empty spaces you probably don't even need to heat them in

a lot of different places. What how how lucrative is this? Well, I think a lot of it's gonna come down to the exact property mix and the financing that was deployed um to to get these places that you know, one of the dynamics that that has been at playing in this this part of the real estate world is it's just complete scarcity of properties. The landlords have had a

lot of pricing power over the last stretch. UM. One of the big risks and and and the clouds hanging over this real estate and all other real estate right now is is just what's demand gonna be. Um. There is a lot of industrial wear industrial space across the US that's that's not used by e commerce, that's you know, helping like auto manufacturers for parts. UM, it's used by

the oil and gas industry. There are a lot of sectors of the economy that are really going to get hurt and may not have as much need for this space. So one of the big question marks right now is what the demand picture is going to look like for um, for these properties. Uh, the one thing they do have going for them in a big way is just that e commerce is is a big piece of the pie, and it's a growing piece of the pie, and it's

an in demand piece of the pie. So I am curious, you know, so in terms of you know, Amazon and how they fit into this whole picture, I mean, are they beholden to them at all or they're a competitor when it comes to this space. Um, Amazon leases a lot of space, they're want, They're one of lodges this big tenants. Um. So uh, it's it's uh, They're They're definitely part of the equation here. But you need to

we need to think more broadly than that. I mean, you know grocery stores, you know, Walmart has big hiring plans around this. I mean, these are facilities that help facilitate um delivery of goods to stores and to people's doorsteps. So so when you think about sort of all the other companies that are sort of in this space or partnering to service sort of the warehouse business, like how big an economy does this start to look like? Oh?

I don't I don't know if I have exact debts on that, but um, but you know, there's there's a lot of this UM property out there. Um the uh you know, to to the point I was saying earlier, you know, a lot of this is going to come down to how prescient this stuff looks. It's it's really going to come down to like the prices that investors paid. I mean, I think there's a case to be made that you know, black Stone and and prologists that have

been expanding a lot recently. I mean they they they bought these at a time when these assets were extremely high priced and um, certainly in the short term amid all this uncertainty. It's it's it's hard to see how those valuations are going to hold up. UM. And then the question becomes is this is this an opportunity for the big guys to get even bigger and pick up you know, take up you know, buy more of these warehouses at lower prices. Right, Yeah, what's the what's the

calculus like to buy to buying a place? Is it like procrimular freeway and population density or what like, what's the what's the spreadsheet looks like when they're when they're dreaming about these exquisitions only about thirty seconds here. Now, Yeah, all of those things, all of those things matter, um. But at the end of the day, what they're looking at is what sort of rent increases that they're going to get over time. That's that's the key, um uh

for sure. And so all of this uncertainty about the economy is is throws those calculations uh into disarray. Alright, great stuff, really really nice stories in the upcoming edition of Bloomberg bis Week online and on the terminal. Now, Noah bu Higher wrote it about private eculeist Big Bet on logistics. He joins us from seattlele Webber, Theater of this sweet joining us from Brooklyn. You're listening to Bloomberg Business Week with Carol Masser and Jason Kelly on Bloomberg Radio.

And a story that just crossed the Bloomberg talks about banks here in New York being blindsided. Uh. And it all has to do with um New York virus relief, specifically some an executive order that was signed by New York Governor Andrew Cuomo. Let's get the details from our own Eric Shatsker. He's joining us on the phone from Brooklyn. So, Eric,

what's going on here? Well, Carol, I don't think anybody would accuse Andrew Cuomo of not moving quickly and trying to do as much as possible to provide relief to his constituents here in New York surrounding. The danger is posed by the coronavirus and the economic shutdown it has caused. But sometimes when you move quickly, uh, you end up, you know, running into some unintended consequences. And that's what happened with this executive order that Cuomo signed on Saturday.

The order is intended to provide relief to New York State homeowners into small businesses, many of which are struggling because their incomes and the revenues have vanished, UM. And they know that they are gonna be able to make mortgage payments or loan payments. And so the executive order UM requires directs, if you will, New York State supervised banks to give ninety days of forbearance to anybody who's

running into trouble financial trouble because of the coronavirus. But there's the unintended consequence that I refer to has to do with the scope of the order. The Department of Financials um UH Services, which is the regulatory body for banks here in New York State, also supervises a bunch of foreign banks, and it also has regulatory authority for many contracts that are important and elemental to the way Wall Street functions, and this order appears to apply to

those banks into those contracts as well. So while it gives ninety days of forbearance on mortgage payments, it also gives let's a a hedge fund, you know, that's in the midst of a trade surrounding some commercial mortgage backed securities, the right to say to say it's the right to say to a bank that maybe the counterparty in that trade, sorry, I'm not paying for ninety days, even though the value of that trade may have collapsed, and and by all rights the banks should be able to close out that

trade or demand collateral. It's it's really quite a crazy situation. Well, and it is something and you play this out nicely in your story and you talk to some folks, you sort of play it out logically that, I mean, this is the sort of thing that could have the I mean, the huge unintended consequence of really like locking up at least parts of the system right here. Yes, that's right. So think about it this way. There are potentially hundreds

of billions of dollars of notional value in these trades. Now, the notional value doesn't mean that that we're talking about hundreds of billion dollars of potential losses, but it gives you a sense of the scale. And if these banks are forced to effectively stand off for ninety days, the value of these contracts changes can change dramatically. It can saddle them with losses that they're not able to collect on. It can impair their regulatory capital. It can inhibit their

ability to function as counterparties in the financial system. It may allow other banks that aren't regulated by New York States, such as JP Morgan and City Group and Bank of America, which are federally chartered, to make give them an unfair advantage over these foreign banks such as Barclays or Deutsche Bank. Because of this order, it has far reaching implications. It's probably fair to assume, Jason that the Governor in his

office didn't anticipate that this would happen. But already the first day of business after this order was signed, and that's yesterday. Uh. Some hedge funds and mortgage reads and credit funds had lawyers threatening the banks with litigation if they tried to foreclose. It's incredible. This it feels like Carol, feels like an episode of Billions, you know, I feel like Brian Coppleman and curl like, oh, this could be

a little storyline, alright. One the one caveat here is that the Department of Financial Services has yet to issue it's rule right to the banks. And somehow, particularly because this has now been raised as an issue, as you know, it's one of the most read stories in the Bloomberg in the past couple of hours. Um, they may get a wake up call and realize that they have to

change the language in in in those regulations. All right, So, Eric, only about a minute or so left, got to ask you about a big interview you did yesterday with Tom Barrick, well known financier, friend of President Trump, real estate investor. What was your big takeaway from that because he sort of put a proposal out there. Well, Tom has one of those unique abilities to connect the dots, you know, between what's going on in the financial world and the

political world. And clearly the guy has met some criticism,

but he knows his stuff. And and Tom Berrick is warning the commercial mortgage business, which includes both the origination of loans and the trading of those loans on Wall Street, the financing of those loans on Wall Street, is on the verge of collapse because again the same things people can't pay their debts, can't pay their commercial mortgages, that pank can't pay their home mortgages, and because there's so much leverage in the system, if that seizes up, it

threatens an economic collapse that in his mindred livel out of the Great Depression, which is what we've been seeing play out in the commercial mortgage market today. And what's he proposing, Eric Briefly, Oh, he's proposing a number of things quickly. He wants that bill from Congress that would uh you know, that would give five million dollars of primate a billion excuse me in liquidity for the financial

system someone which could be used for release. He wants to suspend things like market market accounting, low modification accounting, a new rule coming in on credit loss recognition. What he says is if you give the market a ninety day time out, you know, he's he's got a great way, as you know, of simplifying the language around the stuff. Just give people a time out for ninety days and then you can take the accrude interest, tack it out of the back of the loan, and everything's gonna be okay.

But without that ninety day time out, things are going to continue snowballing as they have these past few days with an end. Very few of us can predict, very very familiar with timeouts these days, living at home and working at home with a two year old as you can imagine. All right, Eric Shatsker, thank you very much. Great work is always great reporting both today on this Cuoma law as well as a great interview with Tom Barrett. I'm roam a journal Yeah, but you let me drive.

Oh no, no, no, non please, I'll do the right revalle me. I want to dry ball, just drive baby the questions trying Drive to the Globe. Thanks well, try us Bloomberg Radio. It is time for the Drive to the close back with us as John Augustine, he's chief investment officer at Huntington's private bank. They've got roughly eighteen billion in assets under management, joining us on the phone from Columbus Ohio. John, good to have you back with us. Hope you are doing okay, your family okay in this

crazy time. Yes, shelter in place. But everybody's doing okay. We're calling our customers, were doing virtual meetings and and everybody's doing okay. So what do you go? Ahead? Go ahead, Jason, Well, I think we were probably gonna ask the same question. What are you hearing you know, as you talk to your customers as they call in, what's the tone? What's the tenor if you can generalize, well, the tone is number one? That how am I positioned? We've We've tried

as best we could to be balanced and diversified. That's how we went into this. We've rebalanced one. We were actually going to look to do it again this week, but markets, of course reversed upwards today. But the first and foremost is how is my portfolio structured? Then the second thing we we have to then be proactive to make sure with our clients a couple of things, that they have enough cash for six to twelve month cash needs and if they don't, we need to raise that.

And then secondly, we need to confirm time horizons. Because time horizons and all the holdings around the portfolios. Now we need to do a good job of making sure we're meeting the client's investment intent. So those are those are really most of the college zation. So what Yeah, what's changed in terms of your approach when you look at time horizons at this point on? Well, two things. So, first off, there's a time horizon around stocks in the

stock market volatility. We're learning today that stock can obviously go up up as violently as they can go down. The second thing we are actually coning in on a little bit more is income with these now much lower bond yields, protecting the income that clients may be looking for. And that's a little bit deeper discussion now because rates and yields are probably gonna be lower longer. So there's two different sets, one for growth, one for income. And

so let's talk about some of the growth names. Especially, uh, you know, we've I know you've got some tech that you look at. We were just talking tech with our Dave Wilson, and you know we have seen the NASDAC with a little bit of resilience over the past few days. What's the tech play here? What are some names you like? Well, our team has been coming into some of the names

they couldn't get into before. So quite frankly, the equity teams come into Apple, they've come into a video, Um, the growth team has come in excuse me, the growth team has come into advance advanced Micro. Then we've also come into into it, and a lots of different approaches for areas that were arguably much more expensive than now

we're obviously much more attractive to us. So there's been a lot of our our equity team has been doing a lot of upgrading to areas they couldn't get into now obviously they're much cheaper like what, well, don't know, it's we were talking about. They're coming into the tech names has mentioned they're coming into the advanced micro and video, the Apple, the into it. So there's different sets that

we're scaling into, not jumping into, but scaling into. Well, John, I do wonder if we're going to look back at this time and say, Jason and I've had these conversations before, and I think you know, if you had the guts during the crisis and had the cash that enabled you to do it, there were certainly some names that were you know, at firesale prices um. And I do think when you look at it now too, in terms of how much some some name in particular, not just the

overall market have been beaten up. Um, there has to be opportunities there. And I do wonder if we're going to look back at this time once we get through it, um, and just from a stock market basis, that this was a great buying opportunity. Yeah. The first thing, obviously we have to get through, Carol, was obviously the number of cases exact, the number of cases under control and contained,

and then obviously get to treatment. But the second part of this is then we're going to come into some eye popping economic numbers here over the next couple of weeks. It's going to start Thursday with the weekly unemployment claims as you have been talking about, and how how will the market be able to navigate those? We think the

market has a lot of bad priced into it. It was interesting that it all opened higher in Asia overnight, kept pace up in Europe and we did not sell off into the clothes, which we've often been doing after Europe closes. So there's how much more bad news can there be? Now that the Olympics are postponed for a year, and the number of cases, unfortunately in Europe and the US,

continues to rise. So we're starting to think of it in those terms, the bad news effect, which often makes markets turn when it's least expected, as you know, and so what worries you at this point, John, Well, the case is number one. Getting the cases contained, that's number one. We agree that, you know, we hope on the other side of this, there's a timetable for getting back to work that may be arguably a little bit more difficult in Europe. China seems to already be starting to do it.

It looks like the administration at least is starting a plan here, So getting just the actual logistics of getting back to work once the virus has been contained. So that's first and foremost on our mind. Then the second thing on our mind would be what will we all come back in the economy? Will the consumer come back in the economy in June, July, August is one would suspect, are we still going to hold back? We think those are the three key months for the share June, July,

August and so and just only abouts left. I mean, how much do you worry? I feel like this is going to become a very relevant question. It feels like, over the next few days, how much do you worry about going back to work too soon? No, that's that there's gonna be a balancing act there, right, There's gonna be very much a balancing act there. From from really a global perspective, there's gonna be a balancing act there. And so that's what we don't know. We just are.

Our point is we're hoping there is a plan at least or a thought. We started talking about it with some of our business customers. That you gotta remember on the other side of this is getting back to work, right, So it's going to be debated probably for years, whether it was too soon or whether it was too late. Will it be the perfect you know, low in the market that we always try to to find and never do. It might be, but it's something that's going to be

very important economy. Well, this is certainly something that you know, none of us have had to deal with on a personal and professional basis, and certainly on an investment basis. John Augustine, thank you so much, Chief investment officer at Huntington's private bank, roughly eighteen billion in assets under management on the phone from Columbus, Ohio. So great to check in with him. Jason really appreciate that you're listening to Bloomberg Business Week with Carol Masser and Jason Kelly on

Bloomberg Radio. Thanks for listening to Bloomberg Business Week. You can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show every weekday at two pm Eastern only on Bloomberg Radio