Episode Transcript:  

Jeannette Friedrich: [00:00:00] There is a lot of opportunity that is starting to sprout up in the markets, and there are a lot of people that are really excited on capturing those. We're gonna speak with a guest who's aligned with that view and more on today's episode. Let's get REady2Scale.

Hey guys. My name is Jeannette Friedrich. I'm the director of Investor Relations here at Blue Lake Capital. Joining me today is Aaron Greeno. Aaron is the founder and managing partner at Arselle Investments. Previously he was the managing director and co-head of US Real Estate's investments at Morgan Stanley, as well as a partner of and head of West Coast at Dune Real Estate.

He has a Bachelor's in Psychology and Business Administration from the University of Miami. As well as his JD and NBA from UCLA, and he is joining us from just up the road from [00:01:00] me in Los Angeles, California. So Aaron, welcome to the show.

Aaron Greeno: Thank you for having me.

Jeannette Friedrich: Yeah. So we dug up a little fun fact about you too.

Apparently you used to play college football as part of the national championship, winning a team from the University of Miami. Nice.

Aaron Greeno: I did. Yeah. I was it was, it feels like a very long time ago now.

Jeannette Friedrich: All right. So Aaron, you just recently set up our cell investments, and I'm curious to know why of all times did you decide to do that now?

Aaron Greeno: Glutton for punishment, maybe? No. I appreciate the question. My partner and I both spent our careers really on the private equity side between Morgan Stanley and Dune for me, for almost 20 years. And really through that time, spent a lot of time working with operating partners, investing, institutional capital.

And I think the market has evolved quite a bit and through that time had a chance to really, help people build their businesses and help them think about, the right way to, to pursue different strategies. I think in this, evolution of the market now, [00:02:00] the execution of real estate has become more and more important.

I think, over the last 20 years and, rates declining, it was a little bit never easy but had wind at your back and a lot of it was capital markets driven. We really felt like this part of the cycle was gonna be much more a lot of opportunity, to go acquire good assets, but you gotta work the heck out of 'em and really execute.

And you need to have, I think, really alignment with your capital and your business plan in a way that, you know, in a way that it can work more efficiently and seamlessly. And so we thought, coming out of the, call it allocator side and moving more to the operator side of the equation, layering on the dynamics we're seeing in the industry, which are really.

Twofold. One, a lot of succession and leadership transition with folks that started their business in the early nineties and are now, ready to take a little bit of a step back, but often have these operating chassis that are, pretty good and have a good team that are ready to run a little bit faster maybe.

And then a bunch of younger folks who, because of what's happened in the market, may not have the balance sheet or the institutional experience to be able to really be out on their own in the scale that they want to. And we felt like we had a [00:03:00] role to play to. Really inject ourselves into a handful of these platforms where we can play a bit of a role, both in investment thesis development, adding some institutionality to process and back office and, thesis development and bring some of our capital relationships to the equation and in a more efficient way where you're not paying two levels of private equity promote, but you're getting effectively the same service.

And we were able to leverage really, 30 years of relationships with people that, we've been in the foxhole with, that are, known, trusted operators with real talent and add our skill sets to theirs. And hopefully one plus one equals more than two. And and hopefully have some fun doing it.

So we felt like it was a good time in the cycle to be, getting in and starting a new business. And and we're excited to have the opportunity.

Jeannette Friedrich: Yeah, it makes perfect sense to me. I actually would say it's a genius maneuver given your network and your experience. It's very 360, the different hats that you've been able to wear throughout your career and now this.

So I think it it's a very strong complimentary role to the other things that you've already accomplished. Yeah, I think it's a very smart move for sure. [00:04:00] Now, you touched on where we are in the markets. Oh my. Let's talk about that. The Fed is signaling, that there's slower easing path maybe than what they had been predicting.

And finally, the 10 year yields are starting to trend a little bit lower. So I'm curious to know how does this shift in rate, expectation change your approach to deploying capital right now? And what should investors really understand about. Essentially timing and discipline in what we would consider maybe to be a pre easing environment.

Aaron Greeno: Yeah, no it's a really good question and I think, obviously as a levered asset class and a lot of what we do is moderate leverage. 60, 65% and heavily impacted obviously by interest rates and I think. Where you saw a lot of people get hung, borrowing it at zero, but on a floating rate that with a one year cap and now we're seeing a lot of deal flow from that.

Candidly as it's come back is to really be mindful of the downside risk and, not fully underwrite where you think the upside could go. And I think, the approach we [00:05:00] take is really. Cap rates are gonna be somewhat related to the longer end of the curve. Your short term, if you're borrowing, floating rate, your short term interest payments and cashflow will be related to the shorter end of the curve.

So I think we do take into account what the Fed is signaling and I think most people at this point believe 25 to 50 basis points for the balance of the year. And I think more trending to that 50. And as you get into the three point a half and maybe down to 3% SOFR, it feels like that's where it bottoms.

And then depending on the economy, may drift back up. Inflation fears I think are still very real and there's a lot of data and, now a freezing of data with government shutdown and volatility and policy and around tariffs. That I think just makes it. Pretty hard to pinpoint.

I was at a presentation from one of the the top economists for University of California that he is usually a very opinionated guy and he said, I don't know, here's three cases and the 10 year will be somewhere between, two and four and a half percent, three years from now.

And they're like, thank you. I'll invest on the back of that. So I think what we've tried to do is say, it feels like. You're finding some steadiness in rates. We are buying things I think [00:06:00] now at a really attractive entry point where, it's a massive discount to replacement cost almost in many instances.

Being able to exit at below the prior owner's basis, buying things with cash flow and generating some of your return from actual cash yield. And, that's somewhat defensive and whether you're hedging. By, putting a little bit of a further out interest rate cap on it or you're borrowing fixed rate financing obviously through the agencies and multifamily, which is somewhat easy to do.

Hedging your risk so that you're not exposed to spikes in interest rates, but can benefit from some cap rate compression on the end if it comes and your deal working if it doesn't and even if there's a little expansion, still making a return that you'd be happy with. And it's obviously hard to underwrite that way.

It's a competitive environment and I think you are getting people that are starting to underwrite more compression on the backend and. With that they're able to pay more for, the numbers on paper. But we've tried to maintain a discipline that, if you need treasuries to go to two and a half percent to make your numbers work, it's probably not the right asset.

And I think there's, there's enough in the system that we haven't, we haven't had to stretch like that to find interesting deals. I [00:07:00] do think certain asset classes are more exposed than others and, we. And we can get more into it, but we, we invest across a handful of different asset classes and certain things like multifamily, which heavily repriced after being down to the, three cap range versus, grocery anchored retail where it's just been a six cap forever.

There's more exposure to movement in those interest rates, the closer they are tied to it. So we take it all into account and I wish I had a crystal ball for it, but we try to, we try to be defensive, in our approach.

Jeannette Friedrich: Absolutely. And actually, let me pull that thread a little bit further.

Where, as far as the fact that you're actually targeting different types of assets, where are you identifying the greatest opportunity right now versus which assets do you feel are still a little bit, beyond the risk profile you wanna take on?

Aaron Greeno: Sure. And so just a little bit on our strategy, which is, really we're investing through platforms as I mentioned earlier.

We started this, a year ago, whenever we were in, in thesis development saying. Okay, this is broadly what we want to do, which asset classes do we like? And then, which geographies do we like and who within [00:08:00] those are the best people that we want to align ourselves with.

And, at the time, obviously multifamily and industrial were the bells of the ball. And then getting, just decimated and resets of rates, right? And grocery anchored. And retail generally has been in this 10 year funk since the first Amazon Fresh opened where nobody would touch it.

And e-commerce is gonna take everything over. And so where you had massive injections of supply and residential and industrial and, rents and values that grew, 30, 40%. And really aggressive borrowing at high LTVs on the retail side, you didn't have any of that. You had 200 million plus square feet get demolished.

And, smart investors that just held on and very little new talent entering, the kind of competitive landscape there. And so we like the risk profile there. We like the, the return profile and the, the amount of cashflow you're able to generate still finances really well and yields have stayed wide enough where you still get a good cash on cash return, but there's very little distress.

A lot of 'em are long-term ownership. And so the catalyst. To be able to unlock these things, maybe isn't there as much. So we like [00:09:00] that asset class. We think it'll be a large portion of what we do. And we've got a great partner that we're working with on a big portfolio now, but, residential and industrial, we've done a lot of and we think have reset to a point where they're also very interesting in certain markets.

And we're trying to be, very sub-market specific in how we approach it. And looking at residential for instance, right? You can pick up a page for a given market and say, oh, there's. X amount of units, 50,000 units that were built in Phoenix, whatever the number is.

But if you don't drill down into the submarkets where those units are delivering and then look at the job growth that's coming along with it and do a more granular underwriting, then you're beholden to just whatever, CoStar or the research house you're looking at is telling you. And so we've tried to take an approach where, we're really looking market by market at trying to be deeper, more boots on the ground, and where do we think the supply dynamics are gonna recover more quickly?

And what's the catalyst for that? And trying to overlay that with some type of, I don't think there's really distress in the market right now. I think there's stress and there's a slowly picking up, amount of seller and kind of, lender willingness to force the issue on some transactions now.

But [00:10:00] it is still hard to find, hard to find the good stuff. And I think on the industrial side, we felt like and this is a little true in residential too, California and Southern California in particular has really been. In the crosshairs, both, in terms of local politics, regulation and also just some of the fundamental demographic issues.

And you layer on that, what's happened in entertainment and it's a tough picture, right? COVID Recovery and Office here has been lower, and the asset values are beaten up. And as we look across the landscape, as much as there are some really attractive growth, growth elements in the Sunbelt.

The scarcity of supply and the relative yield you're able to get here for infill assets that are really defensive from new supply is pretty interesting. So we've actually incrementally leaned in a little bit more here and in somewhat of a contrarian way, still spending some time in the Sunbelt, still spending some time in, Seattle for instance.

But each one is its own reason for being and looked at a little differently. So that's, it's probably a longer answer than you wanted, but a little bit how we look at the world.

Jeannette Friedrich: No, it's actually very interesting, especially when we're looking at it from the perspective of different types of [00:11:00] assets and the ways that they can create opportunities, but also some different challenges.

One of the things that I am curious to ask you is when it comes to an operator, regardless of what type of asset class we're talking about, what type of capabilities matter. To you and what's been a again, almost a flat rent environment to a certain extent that gives you confidence that they can actually drive NOI growth?

Aaron Greeno: Yeah, no great question. And look, I start with number one is just, integrity and work ethic, right? And a lot of these folks we've again, been doing business with through cycles. So we've seen them when things are hot and we've seen them, when, when the chips are down and you gotta really.

Roll your sleeves up and, manage costs and work with your lender, and there's everybody's pointing fingers, right? And so I think just knowing that there's somebody who views the world the same way and has a very high level of integrity and is gonna approach something with a true sense of ownership is, maybe it's a corny way to say it, but that's really number one.

And the, the biggest the biggest non-negotiable I think for us. And then as you go down from there, we've got folks who [00:12:00] are. Everything from developers who can, also manage and execute value, add business plans to people who are really great at acquiring things and, find their way into off market deals.

And I would say there's a bunch of versions of operating platforms that can be successful as long as they know what they are and we know how they fit with what we can do. And, you can supplement some of those things. And part of what. Part of what we're doing is identifying, Hey, you're great at these things.

You go do those things. We're pretty good at these things. Let us, take lead on these things. But I think folks who, really know at a granular level, the markets they're operating in, where, if you're developing it's they, they know all the. Ins and outs of the codes and the city, the city staff and, they've had war stories and scars to prove it around the corner and have owned that asset before.

And they know the, the small leasing broker who's gonna get you the end to the owner who nobody talks to, right? Those are all super valuable things. And then I think just a, an ability to manage costs in a way that doesn't sacrifice quality. And I think. It's pretty easy to say, I got three bids and let me go execute this CapEx [00:13:00] project.

It's much harder to really, know who the right sub is, who can do it in a smart way, source the right materials, figure out, if I do this in all Epay, would it's gonna cost me X, but there's this other material that, I did that's 40% cheaper that you know, will actually give you the same aesthetic.

So I think those things are all hugely valuable and on the commercial side, just the relationship with the leasing community and some of that is. Reputationally doing what you say you're gonna do, time and time again where, a lot of these tenants, if they're signing a 10 year deal they really care who their landlord is.

And, the leasing brokers talk and they know. Who's a good landlord and who's not, right? And so people who actually respond to the tenants and, can execute, on, on what their tenants need, whether that's capital or from a property management standpoint, just being responsive, right?

It's you go walk on a property and is there garbage on the ground? Is there not? It's little things like that where you can just tell if there's care and pride of ownership that, I think ultimately really matters.

Jeannette Friedrich: Yeah, absolutely. I think a lot of people really do not appreciate or understand the tremendous value and [00:14:00] impact that network can make in this industry.

It is for sure, often overlooked and undervalued, I think, by outsiders that are, not aware of the magnitude of what a difference it can make if you have so and in your pocket, or if you don't, if you can get ear or if you can't. Yeah, absolutely. Very true. It's an exciting time in the market because it felt so sleepy for like the last couple of years, right?

Raising capital was very difficult. There was a lot of folks sitting on the sideline not wanting to really deploy funds. We're finally really starting to see, I would say an awakening. And even so much so as like a stirring at the Giants, right? We've seen Blackstone and Brookfield, they're getting into logistics.

We see large family offices are co-investing again. So I'm curious to know how is that trend playing out where you are? Are you seeing allocators finally really starting to come back into the game? And what do you think that means as a broader indicator? For even, everyday regular investors that are trying to watch and [00:15:00] read the signs of the market.

Aaron Greeno: Yeah, no good question. And obviously side of the world I lived on for a long time and so I think I, we have unique relationships there 'cause those were, our competitors but also friends for, for a long time. And I, I would say it's still very uneven and very selective.

And so I think a couple things are happening. One. You are starting to see some liquidity coming into the system in terms of, new investment commitments and you've seen a few folks who have been able to raise new funds, but it's been fairly concentrated. I think you've still got this dynamic at play where, because.

It's been such a log jam. Nobody's gotten a distribution from a real estate investment in four years. And any fund that was, planning to be liquidated by now is like going for extensions and trying to hold on. And every LP is sitting there saying I can't give you money for your next fund, so you gimme back my money from the last fund.

And until that really happens, people are just holding on and trying to, hope values recover. And I think the unevenness at interest rates has contributed to that. The core investors who really are driving the lower cost of capital stuff, and we [00:16:00] had a large opportunity fund at Morgan Stanley.

We also had a, what's now I think a $45 billion core, open-ended core fund. And so we got to look at, both sides of the spectrum and those funds, which really drive a lot of the value for the trophy assets. They're quarterly redemption. So they had outgoing cues for the last several years and investors saying, I gotta get money from somewhere.

It's supposed to be marked to market. I think there's still some argument of, are they marked deeply enough? I think some maybe aren't. And you can look across the Odyssey Index and make your own judgments there. Excuse me. But the reality is, while they have outgoing cues, it's really hard for them to make new investments.

And it's hard for them to sell assets if they're not marked appropriately because then it, calls into question where the rest of the portfolio is. Until that clears out and it's starting to, I think if you listen to folks who track that really closely and talk to some of the portfolio managers, that's gonna be a quarter or two away from really clearing the queue.

And I think there is new investment appetite. It sounds like from the LP community to come in at reset values at, at that time. Yeah. That'll really start driving the lower cost of capital end of the spectrum to now it's really been a lot of [00:17:00] value add opportunistic capital that wants to go buy core assets, but they want an 18 to 20% return and the sellers of those assets, typically will claw and figure out a way to hold on rather than selling to that buyer.

And we've certainly seen a gap in the market where. And then I think the larger funds also have liquidity, right? So they've been able to do bigger platform plays and I think the Blackstones of the world where they can go do a, multi-billion dollar execution. I think that's a very different, different level of liquidity and companies that need that type of check, there's not a lot of places they can go right?

Where, in the middle market, I think there, there are folks who need to make a certain return, but their aperture's like that big of what they can do. And there's everybody rushing into data centers. And for everything else it's the Goldilocks of it, can't be too tall, can't be too short, can't be, and I think that's been an interesting dynamic where you have sellers that, I think something like 80% of the things that we underwrote and even chase ended up not trading at all.

It wasn't just, we may have been the only person at the table, but ultimately couldn't reach a deal. And I think part of that's just because of the cost of capital of LPs as well, where some of these [00:18:00] deals maybe should have traded for a core plus return. But, our partner may have been more of a value adder, opportunistic partner where, we can only pay what we can pay based on the structure.

I, I think as the core capital comes back in, as there's a little bit more compression in the bid ass spread. You'll start to see some of that loosen up. And then I think the families and the private investors have really benefited from, from that where they can take a little bit longer term view and go indirectly.

And we've certainly seen that on individual deals and some of what we've done, has been a little bit more private capital targeted to date. And our thesis has a little bit been. That, that middle market between, upper end of where private investors can do it and lower end of where, large private equity wants to jump in, is really inefficient right now.

And if you can tie that up and capitalize it, I think there's some additional margin. It doesn't feel like capital's gonna come flooding in such a way that. Pricing just automatically resets to some crazy level. I think it will, hopefully match transaction volume increasing a little bit.

'Cause we've been at a little bit of a lull, in that regard. And I think it'll be healthy for the market as it starts to come in a measured way. And, if. We'll [00:19:00] see I think office has been an interesting case study. It went from, everybody was doing it to, it's a dirty word and I'm never gonna do it again.

To wow, that's awful cheap and a couple families made great buys. Let me go start to get in. And all of a sudden it's, it, you're seeing people invest there again. And yeah, I think that's just the cycle of these things. So it's really just about picking your spots and hopefully not being exposed where you need liquidity at a time when, when it's scarce.

But I do think it, it feels like it's picking up and post Labor Day, to me, it felt like. Both the private investors and a lot of the institutions said, okay, we have. Things are bouncing all over the place. We have a view of what the world is and if we can buy things at a really good basis that, feel somewhat defensive and have a cashflow component, probably willing to start to underwrite that and we'll see, we'll see what it looks like.

Jeannette Friedrich: Yeah, absolutely. Could not agree more. All right very insightful and I appreciate you giving us some additional perspectives. I tend to talk about multifamily only because that's what, our bread and butter as painful as it is right now. But it's also exciting as there is definitely some opportunity, starting to come on the market.

[00:20:00] But it's very interesting to hear. How you are seeing it from your platform and what you're working on. Now, before I let you go, I do wanna ask you what I call the lightning round questions, which are five questions that I ask all of the guests on the show. So are you ready? Sure. All right, great. So first of all, when you are, not spontaneously deciding to start your own business in the middle of a very challenging economy what do you actually do for fun?

Aaron Greeno: Good question. I have two little kids, so I try to spend as much time with them, as possible. And I I was playing basketball a decent amount, but had had my once every 25 year blown out knees. So I'm probably on the sidelines for that for a while. But thank, thankfully I've got plenty to keep me busy around here with the new business.

Jeannette Friedrich: Good. Now, what is something interesting about you that most people don't know? And I already ruined the football one, so sorry about that.

Aaron Greeno: Part of it, from, from the origin of our company, maybe it's not a funny story, but my mom's actually a, an immigrant from Haiti and and my partner Kevs family came over from Armenia.

And the name of our company ourselves is the name of the tallest [00:21:00] peak in Haiti and the tallest peak in Armenia merged together as one name. And we wanted to give a little bit of a nod to our heritage. Fun, fun fact about the company,

Jeannette Friedrich: yeah, that's super cool. I love it.

That's great. All right, now what about as far as a book or a podcast? So someone's trying to just either improve their overall understanding of capital markets or really, different investment strategies, is there anything that you recommend that you found helpful?

Aaron Greeno: No, that, look, that's that's an interesting question. There's a lot of kind of, media consumption out there. I think I think the Marx podcast at Oaktree just for, really topical stuff that comes up every now and then, every couple months when he publishes one are, are very interesting to look at, there's some more wonky capital market stuff like buzz McCoy I think wrote a book called The Dynamics of Real Estate Capital Markets that we all had to read when I started at Morgan Stanley, 20 years ago.

But I enjoyed Sam Zell's book. I think there is just different perspectives on it. And what you're looking for. And I think you guys obviously have some great content and and there's some really good real estate podcasts I think out there and market podcasts out there.

And then the Economist generally I [00:22:00] think has some really great just, put your earphones on and listen to it for an hour and you get everything that happened in the world.

Jeannette Friedrich: For sure. For sure. And thank you. I appreciate the compliment. I will also say. There's a lot of crazy stuff out there too, so that's true too, with caution.

Yeah, for sure. That is

Aaron Greeno: true too.

Jeannette Friedrich: Yeah, for sure. One of the things that we talk about also is that, yes, we all wanna make money, we wanna have some great returns, but we also are doing it for the point of not the money, but being able to really build and live extraordinary lives. So what's your advice to someone who's focused on doing that?

Aaron Greeno: For sure. I think, look, we really started this with the view of, we wanna do business with people we like, we want to have fun doing it. We want to do it the way we want to do it. And I would say, the money and all that is a little bit hard to chase. And certainly early on, I think focus on experiences, focus on, building your network and doing what you're supposed to do and showing up with integrity and being, being reliable and just, working your butt off and learning as much as you can.

And I think especially in markets like [00:23:00] this. Then I started my career in oh seven, so very early on we hit, hit the GFC. Everybody's oh, I wanna do acquisitions, or I wanna be at an opportunity fund. And everybody's very concerned with the title of what they're doing and.

The exact context of what their first staffing is. And I think the reality of it is find a place where you're gonna be in the flow, where you're gonna learn a lot, where you're doing, doing things that are hard. And it might be really painful to go live restructurings for two years.

'cause nobody really likes, that dynamic and maybe it's not the most fun thing in the world, but. You learn an awful lot. And I think those skills and relationships build on each other. And so I've tried to approach my career that way. I know my partner Kev has as well, where it's just what opportunities in front of me and where can I go learn and grow, and I'll figure the rest out later.

And so that's that's where we're at.

Jeannette Friedrich: Absolutely. I have to say it's been the last few years especially have been very educational for me personally yeah. Absolutely. Of course. And then last but not least, Erin, if folks wanna get in touch with you, how can they find you?

Aaron Greeno: Sure. I'm on LinkedIn.

Our website is our sell investments.com. And you can find us [00:24:00] there and we we look forward to hearing from you.

Jeannette Friedrich: Alright, perfect. Aaron, thank you. Very helpful. And for those of you that invested your time with us today, thank you. We appreciate it. Make sure to leave us some comments, let me know what else you'd like to dig into.

And in the meantime, be bold, be extraordinary. And just keep moving forward. REady2Scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target class B value add multifamily properties across the sun.

Our CEO Ellie Pearlman invest a substantial amount of capital into every deal. This means our interests are aligned with yours. If you're an accredited investor looking to expand your portfolio and diversify sponsors, be sure to visit us@bluelake-capital.com. Blue Lake capital, be bold, be extraordinary, and [00:25:00] keep moving forward.