Webcast transcript
Willy Walker: Chris Lee is responsible for KKR’s real estate business in the Americas, overseeing both equity and credit investing platforms in the region. He serves as portfolio manager for KKR Property Partners Americas and is currently Vice Chairman of the New York Stock Exchange-listed REIT, KKR Real Estate Finance Trust Inc. (NYSE: KREF). Chris sits on KKR's Real Estate Equity and Credit Investment Committees and Real Estate Equity and Credit Portfolio Management Committees in the Americas, KKR's ESG Committee, KKR's Global Inclusion and Diversity Council, co-chairs KKR's Americas Inclusion and Diversity Council and chairs KKR's Real Estate Valuation Committee.
Prior to joining KKR, he spent three years at Apollo Global Management on their global real estate team and earlier in his career worked at Goldman Sachs in the merchant banking division's Real Estate Principal Investment Area (REPIA). He earned his MBA from Harvard Business School and his bachelor’s degree in Economics from Emory University. Chris is a former trustee of St. Mark's School of Texas in Dallas, Texas. He currently serves as a member of the Board of Directors of Sponsors for Educational Opportunity (SEO) in New York, the PREA Foundation in Hartford, Connecticut, as a trustee of Collegiate School in New York, and as a member of the Dean's Advisory Council for Emory College of Arts and Sciences in Atlanta, Georgia.
So, Chris, before we dive in and back up a little bit to your education and what made you the person you are today, of those people listening, they go back and they say, well, I just listened to the Walker Webcast and Chris Lee said this… What’s the “this” that they ought to remember out of this webcast?
Chris Lee: Well, first of all, Willy thanks a lot for having me. And Susan, thanks for all your help getting this prepared. I would say that the “this” is my parents instilled a really strong work ethic in my brother and me. And I think that that's the one thing that's been kind of consistent through my life, is if you work hard, like my dad would always say, “If you work hard, you can get lucky.” I think that any young person should think about that as they embark on their career and whatever it is you want to do in life.
Willy Walker: And from a market standpoint, you and I talked a little bit yesterday about your general outlook and we're going to dive into this deeply. But is it a relatively defensive and kind of wait and see posture or is it now the time to get active in and to be in the markets?
Chris Lee: Yeah, I mean, I think what you said in your opening remarks Willy is somewhat consistent with our view in the markets. We're much more constructive in terms of putting capital to work to start the year. The last six months of last year, especially where we were at the end of the year, there's tremendous amount of uncertainty. I think some of the scenarios that we're looking at from an economic perspective are a lot more range bound. So, we're out looking at acquiring properties. We're actually getting much more serious about, you know, bids in the market. And then we're very active on the securities and lending side as well. So, we're active in the markets. We're putting capital to work, and we feel like it's a pretty attractive risk reward environment that we're sitting in right now.
Willy Walker: It feels like most of the market is sort of waiting for an event, if you will. I think a lot of people have kind of pinned up, “Once the Fed stops raising, I can get active again.” I would also say the general sentiment I got in Las Vegas last week from a lot of investors was “I just don't want to be the first one to dive into the pool,” which quite honestly I think is kind of interesting because not criticizing anyone who was listening in, but everyone bought at the peak and is okay to kind of put those buy at the peaks to the side and not feel like they as an individual or as a firm kind of didn't look that great in doing that. But no one wants to be the one who goes and buys now when everyone else isn't buying and says, “Oh, they bought too high.” And so, it seems like everyone is trying to perfectly price the bottom, even though they were happy to pay at the top. Are you waiting for a seminal event or is this sort of just it builds as the overall market evolves?
Chris Lee: Yeah, I mean, there definitely is comfort in numbers, but our view is that we're not waiting for any group of investors to come back to the market. A lot of what we're seeing right now is, like you said, it was about rate volatility. People didn't know where they were going to five, six or 7% on short rates and where the ten year might end up. It comes back to the scenarios are more range bound. Now, we don't know whether we're going to high fours or low fives, but I think six, seven, that's probably off the table. And you look at where we were summer of last year, we had inflation prints of 9%. Now we're into six. It's clear coming down with the Fed is doing its work and so we're active and then it comes down to pacing. And so, it depends on the pools of capital you have. But in our view if we're pacing appropriately, then we're not trying to call the bottom. But we think that the risk reward in the market is, like I said, very attractive. We're looking at yields there at much higher levels than they've been looking at replacement costs. We're looking at development pipelines coming down. So, we're looking at a bunch of different factors that give us more of a green light than a red light in a market like this.
Willy Walker: So, given that KKR manages over $500 billion of capital, Chris, and the breadth of the platform, many people on this call are, if you will, very focused just on the commercial real estate space and very focused on commercial real estate in the United States. The breadth of the platform that you sit in gives you a very distinct view on global capital flows and whether capital is flying to what asset class, what geography, etc.. Does your view as it relates to commercial real estate and in the Americas, go across, if you will, KKR writ large? Or is your viewpoint as it relates to we think we're a little bit more range bound now, things are looking like we can get into it, and we want to be very consistent here and not just kind of like jump in at one moment and pull out of the next. Is that similar to KKR writ large or is that really more of a specific U.S. commercial real estate view?
Chris Lee: Yeah, I mean, when you think about commercial real estate values, we think they're kind of three broad things that drive valuation. You've got fundamentals. Then you have capital flows and then you have the macro. And all of those are really things that we're observing outside of our real estate business.
So, let's start with fundamentals. Well, who makes real estate decisions? Landlords don't. We could sit around and talk to each other all day. We own real estate. The people that make real estate decisions are consumers and corporates. And then you think about what drives some of the big moves in real estate. It's these consumer preference changes and then demographic shifts, and then it's a rate sensitive asset class. And we're always trying to figure out what's happening in the macro, what's happening GDP, and of course the last 12 months it's been dominated by what's happening with rates. And then I think your point on capital flows is really important. And so, we've seen some pretty constructive activity to start the year. I mean, we have a huge corporate credit business. The high yield market has come in off 70 basis points to start the year. There's not a lot of supply. You're starting to see real signs around primary issuance. And so, when you think about what can move money out of real estate, it's because you can go get a lot of yield somewhere else. And if that kind of alternative becomes less yield because spreads start coming in, then you can see the capital markets on the real estate side get more constructive. So, what we're seeing in high yield makes us feel better about what we're seeing in the CMBS spreads. And by the way, CMBS spreads have come in. So, we're always looking at these big kinds of tectonic plates that are moving around capital markets and in the macro, which then informs our decisions on how we want to think about risk in the real estate markets and even specifically around different asset classes and geographies.
Willy Walker: So, you have been a very large buyer of both CMBS as well as B pieces on CMBS How do you feel about that market right now, given your comment on high yield?
Chris Lee: I mean, the CMBS spreads to start the year have come in a lot. I mean, the first conduit deal of the year was very well oversubscribed. There was a SASB deal by one of our large brethren in the market that went very well last week and is still kind of out in the market. And so, we're seeing these signs that are saying people are coming back in the market, people are taking risks. And by the way, there are a lot of institutions that have to put cash to work because they have liabilities. They have other things that are driving that desire to go buy assets. And in a world like this, where there's not a lot of new primary issuance or supply, then that drives spread compression. So, we think that the CMBS market is starting to heal. And that's across conduit and the SASB market. We're seeing even a floating rate CLOs. I mean, we're seeing all of that come in to start the year.
Willy Walker: Given where the markets are right now, you've got a huge equity business and you've got a huge credit business. Are you, if you will, overweight on the equity side right now, given where valuations have moved, are you overweight on the credit side, given the liquidity we're seeing in the debt markets and the need for your capital?
Chris Lee: I mean, listen, that's one of the nice things about our business. We built a business where all of the risk prices at one investment committee. So, we're making a loan or buying securities or we're going to buy an individual property or a portfolio – all of that risk rolls up to one investment committee. So, we are seeing relative pricing across the first mortgage loan all the way through looking at the equity at the bottom of the capital structure. It definitely still is a lenders market. And so, lending is a scarcity of capital given the banks have pulled back since the end of last year, starting to hear some signals that they're coming back. But right now, we definitely think it's a lenders’ market. So, the relative value in credit, whether it be securities or direct lending, is still quite attractive. Like I said at the beginning, we are starting to see on our equity side, we're starting to see assets that are pricing at levels that we are starting to get excited about, whether it's discounted today's replacement cost or whether it's the yields, whether it's the risk profile of the assets that we can buy given some of the REITs and core players in the market, there are a lot of things that we're seeing that are that are attractive on equity. But I'd say the real value is probably skews a little bit towards credit right now today.
Willy Walker: AREF reported, I believe, last night or first thing this morning, earnings and had a write off of I believe it was a loan on an office building. What's your take as it relates to credit generally speaking, on commercial real estate, but more specifically, let's use that as a launching pad to go into office for a moment.
Chris Lee: Yeah. I mean, listen, I would say real estate credit more broadly, this cycle is all about interest rates. Rates were, you know, super low coming out of COVID. We had a tremendous amount of monetary and fiscal stimulus that went into the market in that type of environment. Real estate did very well, but we didn't have overbuilding and we didn't really have oversupply and we really didn't have overleverage. So, when you look at even in a more normalized rate environment that we're in or even a more restrictive rate environment, a lot of asset classes are still performing well on the fundamental side, primarily housing assets and industrial. And so, we're not really seeing credit issues in those types of deals.
And then for our lending business, we're generally lending to top sponsors. We're lending in the most liquid markets, you know, moderate LTVs – office I think is a totally different asset class right now in terms of the fundamentals are more challenged there. And I think some of this is secular, right? We did a massive work from home experiment starting in March of 2020 that every firm across every industry did starting that weekend, we all went home, and a lot of places are trying to figure out how to get more efficient? How do we compete with a very tight talent market? I mean, unemployment for college educated workers is 2%. I think it was 1.8% in fall of last year. So, there's basically no ability to access talent.
So, some types of fields are trading on, oh, you can work hybrid, you can work three days a week. So, everyone is looking at their real estate footprints as well as their head count and trying to figure out how to optimize that in an environment where companies are much more focused on margins and more traditional metrics versus just growth. And so, I think office will continue to be challenged. And then there's, of course, the sustainability overlay and, you know, capital markets overlay that comes into play there. So. I think there'll be clear winners and losers. But I think office is, you almost have to take that as a separate sub asset class within the broader real estate market because it's going through a secular chain, just like retail did over the last 15 years.
Willy Walker: KKR is back in the office, you learned investment banking business being in the bullpen at Goldman Sachs. And you know how much you learned having someone sitting across the way and showing you a model or talking about something or hearing a partner or managing director, make a comment about how you interfaced with a client or what have you. What's your take as it relates to back to office versus remote? And do you think that there is a paradigm that allows for both to work together, or do you think that it's got to be one or the other?
Chris Lee: So I think your point on how young people are, I mean, I did sit in a bullpen at Goldman Sachs and there are few things about that experience: I worked a lot, I learned a lot, and I made some unbelievable friends that are friends of mine still to this day that I started at Goldman Sachs, I guess now over 22 years ago now. And so, you can't really do that in a hybrid environment. And then let's talk about what we were doing at KKR. We've been back in the office since the summer of ‘21. We moved from a different space into our headquarters here at Hudson Yards, which is where I am today. We are in an office culture. We just function much better in the office. People can collaborate better. We're an idea business, we're a relationship business. How do you come up with ideas if people aren't together. How do you build relationships internally? The types I was talking about where you can really pick up the phone and get access to information across any asset class, any market in the world. You have to build those relationships by being face to face. And so, we believe that we get the best out of our culture, we deliver best for our investors if we're in the office.
And so, there are, I think, a lot of functions out there, though. We're not, I think, indicative of every single office user in the market. There are a lot of places where the job is to come in sit in a cube, do a job and then you go home and there are hundreds of millions of square feet of office. It's filled up with people doing more things like that. And I think that's where there's a big debate on how much office space people need for that. But at KKR, we're in the office. I like being here every day. When I'm home. If I'm sick or something, I'm bored and there's no one around. My kids are at school. My wife is staring at me like, what are you doing here? So, I like to be at the office.
Willy Walker: Does it concern you at all, Chris, that I know you took additional space at Hudson Yards and the space that you picked up was space that Meta had originally leased from Related Companies, and you picked it up from them. Does this sort of reversal as far as tech companies were the big acquirers of space in 2022. You saw the leasing volumes in ‘22, and it was you know, Meta was taking this space in Austin. And Google is taking space there, and they're all now both shedding space as well as shedding employees. Is this from your view, is this a kind of a tectonic plate that shifted as it relates to office uses of the technology firms? Or is it just a timing issue as it relates to them having to scale down and giving back some space as they're trying to right size their operations?
Chris Lee: Yeah, it's a good point. I mean, we're the beneficiary of that. We need more space. It's going to be great when we can, when we can occupy that. But I think it's more indicative of what you're saying, which is a broader theme in the market. You had basically big tech, but you also had emerging tech that were the marginal users, not just in Silicon Valley, they were the marginal lessees in a lot of markets. And they were taking big blocks of space. They were leasing way ahead of their growth projections. And when you think about companies whose cost of capital for several years is really zero, they added a lot of headcount and then they added a lot of real estate. And you think about what the two biggest costs for a company, now all of a sudden you're focused on margin. Well, it's people in real estate. And so, we're just going through a rationalization period with some of these companies. But I think that it is going to have a really significant impact on some of these office markets where you have these companies pulling back at a time when every company is rationalizing their office space.
So, you have some of these markets that are quite dislocated when you add in the sublease space availability rates in the high teens into the twenties. And then you have a market like a DC, for example, and you have, the federal government for different reasons, not really bringing people back to the office. But it goes back to this competition for talent. I mean, you know, a commute is actually, can be attacked. So, you have different markets that are dealing with different things. But I think across the board, everyone is looking at their space. But I think, in a lot of the big markets, tech was a big marginal lessee of space in those markets.
Willy Walker: Your private equity side of the business owns hundreds of businesses, maybe even thousands of businesses. And I'm assuming that, as you sit around the water cooler and talk to people, they sort of say, we're working on cost savings of outsourcing technology to India, for instance. We're working on cost savings of this and that and that. There's always kind of a theme of the day, is one of those themes on the private equity side, the office footprint of the portfolio companies that you have, and that being kind of a long-term potential cost savings or is there any conviction on the private equity side as it relates to that?
Chris Lee: Yeah, It's interesting you asked this question. It's kind of interesting the way our firm works. We got ahead of this, you know, really before the pandemic, we weren't really investing a lot in office. We have some office exposure. Yes, that time we're investing in our second U.S. fund. But we primarily focused on the Sunbelt. But if you look at what we started doing after COVID, we have done just a handful of office deals. And when you look at our opportunistic, our core plus strategy, you can count them on a couple of fingers. And so a lot of what we were seeing was through our private equity look through, we actually surveyed a bunch of our companies during the pandemic, and I think we surveyed 50 or 60 of our U.S. companies on a bunch of different real estate related topics, how they were thinking about talent nodes, how they were thinking about office space for those that matter to their logistics footprints, how they're about retail, etc.. Probably 30, 40 questions. And our macro team and our capstone team really led this effort. But when you look at what came back, it was very clear within a few months after the pandemic that people had office space high on the list. And so, you're getting that from the C-suite of dozens of companies that we control. And then it's getting reinforced by a bunch of our colleagues and partners who sit on the boards of these companies. And so, we really took a shift in if you look at our exposure to the US office, our global portfolio, I think it's less than 5%. And so, we really started shying away from this, several years ago. But a lot of that was what we're seeing through, effectively the boardrooms of the companies that we control.
Willy Walker: And I think, Chris, similarly, you have made a big play since 2018 in logistics, You've bought over $7 billion of logistics assets in the industrial sector since 2018. What are you seeing? And I think it's about 45 million square feet. What are you seeing in the logistics/industrial space that you still like at this point?
Chris Lee: Yeah. I mean, the fundamentals are still very strong. And when you think about what was really driving it coming out of the GFC, it was just how goods were reaching consumers. It was the onset of e-commerce. But what we've seen over the last several years is now shifted to onshoring, supply chain resiliency. Supply chains moving from just in time to just in case. And so, a lot of the logistics build out is not just this e-commerce migration. It's several other factors and themes that are driving that need for space. And so, it's also shifting where goods are even showing up in the country. I mean, a lot of goods would come in from Asia. They go to the port of Long Beach, and they get distributed across the country. Well, now you're seeing a lot of those goods show up in Savannah, Jacksonville and other ports on the East Coast going through the Panama Canal. So that even changes where logistics are needed. So that also goes back to a lot of those insights, which were things that our team and our colleagues were working on with our macro team and people in private equity. But we still feel good about the fundamental story there and we're still seeing very strong leasing demand. And the nice thing is, like you said, we have quite a large platform, so we're leasing every day and you know, over a dozen markets were buying, were selling. And so, we have a very good feel for what's going on in the ground in those markets, but still quite positive.
Willy Walker: Is there anything from an industrial viewpoint geographically, Chris, that you see evolving here? So, I mean, when you talk about, for instance, multi, there are a bunch of people who are saying we want to stay away from sort of high political risk environments because of either rent control or something else. So, I'm going to stay out of California and potentially New York or what have you. But at the same time, from a logistics standpoint, those are still New York, not so much, but obviously California and some of Texas, Louisiana have big ports that are very important for logistics as it relates to distribution networks. Is the geographic overlay that you have to keep in mind wildly different as you think about various asset classes that you're investing in?
Chris Lee: Yes, we are always thinking about the quality of the cities, because if you think about what creates real estate demand, it's population growth and then business activity. And so, what makes a city attractive to businesses and people? Well, you need great physical infrastructure and great educational infrastructure, which means universities in and around these cities. And then you need to think about this. We need cultural infrastructure. And so, you think about what makes a city attractive to young people? You want to be able to go do things. And so like, why has Austin thrived over the years where you've got great cultural things for people to do. You can't just go build those, can't create sports teams and create South by Southwest and film festivals and music scenes. Those are things that are part of cities that make them attractive for young people, then businesses are going to go there to have their talents. That's why people have gone to Dallas and Atlanta in some of these places because they're attractive. And then you've got the cost of living and other things that come into play. But people want to live in cities that are dynamic.
So, we are always looking at which geographies are going to get an outsized share of GDP growth. Because if GDP is growing at two and a half percent real, that is wildly distributed across different MSAs. And so, there are some MSAs that are shrinking, as we know, and then there are some MSAs that are growing very rapidly. And so, we're always looking at that, re-underwriting that, we're underwriting what makes those cities attractive. And I think your point is also right, you're looking at the political environment and whether you can continue to attract great companies and great highly educated young people.
Willy Walker: There are two things that come to mind on that. The first one is KKR has vast resources. You've got internal economists. You can buy any research you need to and you're getting it across not only commercial real estate, but on a much, much wider sort of macro view across industries because you're investing in all industries, etc. Where's your research come from in the sense of how much of it is proprietary, where you using your own data feeds or your own analysis versus buying a CoStar report or real capital analytics report that most people who are listening in on this would go and if you will, buy off the shelf research, are you taking basically public data and scrubbing it like most people do? Or are you doing a lot of proprietary research that you think gives KKR a unique insight into markets?
Chris Lee: I mean, listen, we're big users of CoStar, Real Capital Analytics. And I think a lot of that data, though, is backwards looking. It's what has happened. It's what has traded. It's what's in the newspaper. So, we need all of that data. And so, like I said, we consume that. But we're always looking for what we think is going to happen over the next three years, five years, ten years? And so, it's coming up with what are the themes that are going to be the GDP plus drivers of the economy. And it comes back to corporate strategy drives that, demographics and then consumer behavior. We're trying to understand those three things because that ultimately drives how consumers want to access goods. Where do they want to live? How do they want to live? Do they want to work in offices? do they want to work hybrid? Where do companies want to hire people? Do they want them in the office or not? Those are the decisions. Do they care about sustainability? Those are the types of questions we're always asking because those will inform us of where the world is going. And that's what we're trying to do best or where the world is not going, and then we can avoid sectors that we think are getting de-prioritized from an economic perspective. So that's what we're spending a lot of our time doing, and that's why it's very important for us to be integrated with our colleagues in private equity, corporate credit macro, that's how we invest.
Willy Walker: It's really interesting that you say, Chris, the kind of what corporations are doing. Because it feels like as much as the Fed is trying to slow things down and everyone's kind of focused on what's the Fed policy doing and how is that changing the world we're in, that many corporations are starting to take a different view about what ‘23 will look like and almost looking beyond any type of recession that might be out there that it feels to some degree, particularly in the last week since the jobs report came out, that it was almost like, okay, Fed raised by 25, jobs report came out much healthier than anyone expected maybe we can kind of push through this from a corporate growth standpoint, even if the Fed's trying to slow things down.
Am I misinterpreting the data or is that sort of the general sentiment you're feeling around with your private equity colleagues who are sort of investing in businesses and thinking about not just what ‘23 looks like, but ‘24 and ‘25?
Chris Lee: Yeah, I mean, listen, a lot of our company’s big input is labor, and we've got a great industrial practice here, consumer practice. And you look at what fourth quarter real GDP grew two and a half percent. I think nominal was in the six range. But what's population growth in the country, it's sub 1%. And then take out immigration. What's the organic population growth in the country? And so labor markets are extremely tight and we're seeing that in the jobs reports. I mean, it also just shows how offside that the Fed was the first week we had rates at zero, we were putting fiscal stimulus and now rates have gone from zero to almost five. And the job market hasn't blinked. And so, we think that's structural until we figure out how to grow our labor force, you're going to continue to have quite tight labor markets. Some of this might lag a little bit. There are some layoffs and I think we're a little bit focused on corporate earnings and seeing how companies deal with margin compression, where they've had a lot of margin expansion over the last several quarters. So, it is something we're focused on. But I think just coming back to these labor markets, they're extremely tight and that's it. The kind of unskilled or lightly skilled labor. You know, you're still hearing a lot of construction markets are still tight even though they've started to level off. But when you look at unemployment on the college educated side, I'll tell you, the stats, it comes out every month when you look at by educational attainment is sub 2%. That number, you can't change that unless we're growing our population or people are coming into the country.
Willy Walker: And all those people need to live somewhere. So, you're overweighted both in your lending business as well as your multifamily property business.. What's your feel about multifamily and if you can have any general themes? You mean to that point about college educated being under a 2% unemployment rate that would say major urban center A-class or B-class multi? Do you still like that, given where valuations have gone or are you zigging more towards those unskilled semi-skilled laborers who might be in a secondary or tertiary market that need workforce housing?
Chris Lee: So, we play across the spectrum. I would say we're focused on basically top 15 cities, like we might buy workforce housing and class A housing in the same city. But we're not really in what I call secondary and tertiary markets. We do believe that these urban centers will continue to grow and that that can mean a city like I'm from Dallas, it's growing in many different pockets. But it comes back to you've got these places with big airports. You've got hundreds of thousands of college students in universities. Within a few hours flight. Those cities will continue to, in our view, outperform.
Now, we like class A housing. We're a big owner of class A housing, but demand has to stay in check with supply. And so, in some of these markets, the thing that we are focused on is supply pipelines, they are delivering and it's mostly a certain type of product. It's targeting this higher educated tenant base. So, if you grow demand at 3%, but you build supply at five, rents can go down. Supply and demand have to be in check. So, we are focused on the supply pipelines that in some markets seem a little bit elevated around a specific product type. But longer term, we like housing, we like multifamily, we like student housing in a lot of markets, and we have long term holds as well as more opportunistic plays that we've made across all of the housing sectors.
Willy Walker: A lot of your big private equity competitors got into the Single-family Rental, Built for Rent space, and now have public vehicles that came out of their investments from the private equity firm. What's your take on SFR/BFR right now as it relates to an alternative to either single family or to multi?
Chris Lee: Yeah we think about it as it's part of the rental housing market and you know; we own single family homes across many of the markets that we like longer term on the traditional multifamily side. So, we don't think about it much, much differently now. You need to have a great platform because you're operating in scale. It's very different to operating hundreds of homes in a jurisdiction versus a 300-unit garden style multifamily house. So, a lot of the technology and the infrastructure that we built out through our operating platform is very important. But we think that is just part of the broader housing market we are in there as an institutional investor just like, you know, the other forms of housing that we mentioned.
Willy Walker: If you are heading out, Chris, to raising funds today, and I'm assuming there are a lot of strategies that you all are constantly out talking about. But one of the issues that came up a lot when I was at NMHC last week, as well as talking to a number of clients, should return expectations come down that as cap rates have adjusted, are we in sort of a structural shift, are investor sort of return requirements permanently shifting and should you bring down your yields or should you hold with where it was? And we're kind of at an anomaly right now. What's the KKR view on you're going out to raise some new multibillion dollar fund, have you shifted your yield expectations or are you holding of a print today that would be the same as it was in 2019?
Chris Lee: Yeah. I mean, I'd say the short to medium term, our return expectations are higher. And when you think about what's the component of a return, there's a risk-free rate. Risk free rates are significantly higher than they have been since the financial crisis. So, we're talking about now, 13, 14 years and then risk premiums are elevated on top of that. And so, a lot of that is due to uncertainty, cost of financing. And so, the unlevered returns that we are underwriting right now are kind of at the highest levels that we've seen in a number of years. And a lot of that is we're buying it at wider cap rates. And then with growth, even assuming not a lot of cap rate compression on the back end, we're assuming unlevered returns that are much higher. And that's why at the beginning I was like, we're starting to get much more excited about this investing climate because in our Opportunistic Fund series, we're seeing some very attractive deal profiles right now. But to answer your question, simply unlevered return expectations for us are higher, and we think we're seeing that across the market. And that's what's pushed cap rates up for a lot of different asset classes.
Willy Walker: It's a really interesting comment coming from someone who, understands the global capital markets as well as you do and as well as KKR does, because I do think that there are a number of people who are not as broad, not as wide as your platform is, who sit there and go, well, there's no way that yields can stay where they are, given the pricing pressures that we've seen. And we need to kind of adjust our returns because it's a very different market today than it was just a year ago. And so, it's reassuring to me to hear you come out and say that, and particularly given what you're seeing on the unlevered yields that you're getting on both existing investments as well as prospective investments that you all are underwriting.
Chris Lee: Yeah, I mean, real estate in most institutional portfolios, it competes. It has to compete with equities and fixed income and other asset classes that yield infrastructure. And so, if cap rates don't move in real estate, then a chief investment officer of an insurance company or a pension fund is just going to shift that allocation to high yield. And so, we're looking at what was happening last year as cap rates were moving out. A lot of that was being driven by you could go get high single digits buying, you know, first lien bonds for a while. So that capital has to flow where the attractive real value is. It can't stay in the real estate unless real estate adjusts and then vice versa. If we end up in a world where risk premiums come down and credit spreads come in and base rates come back in over some period of time, then you know, all asset classes, all risk assets can benefit from that from a multiple expansion perspective. So, it's just having that view that there's a lot of capital it can move quickly, and it doesn't have to be in real estate, it can be in something else if someone could get a better return.
Willy Walker: Talking about the diversity of, if you will, capital flows from one asset class to the other. KKR real estate platform is global, and while you're responsible for the U.S., you have a lot of input on what you all are doing in other places. You've got a Europe fund, you've got an Asia fund, you've got a Japan fund. As it relates to where global capital is looking for a home as it relates to commercial real estate, is the U.S. at the top of the pecking order right now, or is there a real play in Europe for various reasons that Europe's the place to be, Asia’s the place to be, or more specifically, your Japanese fund?
Chris Lee: Yeah, I think it really depends on where the investor is domiciled, because with some of these interest rate moves, you've had some big currency swings in the market. So, it really depends on what's the investor's home currency and what are they really translating those returns back into. But we're seeing demand across the board for our products. Clearly, the second half of last year when there was that much uncertainty in the market, when there's that much when you think about denominator effects or other asset classes going down in price, that definitely puts a lot of big institutional investors on pause or at least makes it take them longer to make new commitments to funds. But I think ultimately real estate is now an established asset class. And we think about the US, it's an established market, rules of law, etc.. So, we believe that there will continue to be a lot of demand for our asset class here and also around the world. I think what will really be interesting is how people make the decisions on manager selection and who they want to entrust with that capital. And so, it goes back to what is your investment process, what is your differentiation, how do you make decisions? What information do you have access to? We think a lot of investors are really digging into that and really holding a lot of us and our competitors' feet to the fire on what is your secret sauce, why you and not someone else.
Willy Walker: I'm an investor with full disclosure in KKR Asia Fund or the private equity side, not on the real estate side. I'm just curious as it relates to your view on China. And I guess two kinds of the specific questions there, Peter Linneman, when he was on two weeks ago, Chris, he mentioned the fact that a big driver of hotel occupancy in the United States pre-pandemic was Chinese tourism. And I heard him say that and thought about the fact that if you were to go and invest in a hotel today that had been occupied by a lot of Chinese nationals who came to the United States and then it went down, if you have a bet on China opening back up and getting back to the tourism that we typically would expect from China, that wouldn't be a bad place to be right now because probably that asset value is way down and that once they open up China, then everyone starts traveling back to the States and they'll go to those same hotels that had, for whatever reason, from a booking agent standpoint, from a service standpoint, from a location, because there's something that Chinese tourists like to go see, that that might not be a bad bet right now. Are you all making any bets as it relates to kind of the macro political view on either the lockdown in China being released or tensions between China and Taiwan that says we don't have visibility into that, we're just going to stay away until we see that type of a geopolitical potential friction point ease.
Chris Lee: Yeah. So, listen, we've got a lot of expertise around China, given that we're investors there in our private equity business as well as our real estate business. I'm not the expert on China, but I think the one thing that you said that we are focused on as it relates to us investing is the reopening of China. I mean, you're talking about the second largest economy in the world that's kind of had rolling lockdowns for, we're almost three years into this. And so that I think will have major implications, positive implications if they get back to a level of normalcy. I think part of it, like you said, when you have a billion and a half people, a lot of people moving into the middle class, when those people start getting out and spending money and traveling and that creates a lot of economic activity that has probably been somewhat restrained. And then also when you talk about your supply chains and there's some relief fund on some of the supply chain issues that we've had here in the U.S., that is also something that, you know, it's been a little bit of a headwind to our economy. So, I do think that is a positive once they get back to kind of full scale. But some of the more nuanced questions around the geopolitical environment, we have better experts on that than me.
Willy Walker: Yeah, but I think it's honestly a very interesting one as it relates. They're going to open at some point if you bet properly on that and you buy something that is very impacted by that opening up, you could make a great play right now. And the question is where and when and if you got any kind of conviction on that, it really could end up being a fantastic investment.
Chris Lee: Yeah, we agree. And we've got like I said, a great team in Asia on the real estate side as well as the private equity side. And my guess is we're all over that. And like I said, in the U.S., it's much more around just getting back to a fully functioning economy, which in the U.S., China's is a part of that given how much of an impact they have on supply chains in many of our industries here, including real estate.
Willy Walker: I want to shift for a moment here, Chris. You're on the board of SEO (Sponsors for Educational Opportunity) and it is chaired by Henry Kravis, founder of KKR, one of the founders. And at SEO, one of the things that was noteworthy to me was that they create an ecosystem of excellence and SEO got you your first internship on Wall Street. But kind of a little bit of a broader question, not specifically the SEO. They talk about an ecosystem of excellence. You have been in a lot of ecosystems of excellence. You started out at St. Mark's School in Texas, clearly an ecosystem of excellence. You went on to Emory University, clearly an ecosystem of excellence. You went to Harvard Business School. Another one. You went on to Goldman Sachs, another one. Then to Apollo and then to KKR. Every one of those is an ecosystem of excellence. If you had to sit there and think about which one and you're at KKR, so you're somewhat biased to it. So, let's just say KKR is the best ecosystem of excellence there possibly…
Chris Lee: Best of the best.
Willy Walker: The best of the best. But for a moment, Chris, just as you think about those ecosystems of excellence and what provided you with either the learning or the relationships to get to where you are today, which one of those ecosystems provided you with both the training and the relationships that got you to where you are? And they're all cumulative. And St. Mark's is distinct from Goldman Sachs. But if you could?
Chris Lee: Well, I think when you put it like that, you need to get a start at some point. And so, I can't be here talking to you if I didn't get the option to go to St. Mark's, if I didn't get an internship in 1998 in the mortgage department at Chase Security, like you said, they're all cumulative. And so, when you think about what the premise of SEO, it's a very simple premise that talent is evenly distributed. Opportunity has historically not been. And so, what we are doing at SEO in all the different programs is matching talent with opportunity. And there's just been a gap there. And if you think about why that's important for our country, if we want to maximize our productivity as a country. So, if we have excellent people that never actually get an opportunity because they just never match up with it, that's just a lost opportunity. And so that's why that's really the name of the organization, Sponsors for Educational Opportunity. But it's about having the opportunity to go to Wall Street. I didn't know anything about Wall Street. My parents are both in health care. But I worked hard, and I found out that SEO existed, and I got an internship. And that actually led to the next 25 years of my career. But without that internship, we're not having this conversation.
Willy Walker: You and I have spent plenty of time talking about women and minorities in commercial real estate and the fact that both of those groups are underrepresented. You've taken a significant leadership role both inside of KKR as well as in the industry, as it relates to trying to create opportunities, trying to recruit more women and minorities into the commercial real estate industry. Talk for a moment about what you've specifically done. And I think almost more importantly, Chris, where you've seen success.
Chris Lee: Yeah. I mean, I think what's interesting about the real estate industry it historically was very much driven by families. And so, there were a lot of families that owned properties. And then over time, some of those businesses became more institutionalized. But you think about a lot of those families where there weren't minorities that owned a lot of real estate. And so, it was an industry that was primarily father to son, and so there weren't women really in the industry as well. And so, then you think about, well, what was the talent funnel into our industry? It probably was 30% were people that actually knew that the industry existed and was available to them from an opportunity perspective. So, over the last several years, what we've been trying to do at SEO or at the PREA Foundation or even what we're doing specifically here at KKR, is really to open up the awareness about real estate and alternatives. This is an industry and it's a huge industry. It's a multi trillion dollar, you know, employees, millions and millions of people. But people just didn't think about it as a career. And so, a lot of what we're doing with SEO or Girls Who Invest is just making people aware of it. Because it's literally not rocket science. It's a very exciting career. And I think if we can broaden that funnel of people that know it exists and then bring people into the industry through internships and getting people exposed to it like I was, I wasn't exposed through a family business. I was exposed through an internship at an investment bank. Then we're going to have more people that come in, in the entry level and then have opportunities to grow. And then I think what all of our firms need to do, and this includes us, this includes Walker & Dunlop and others who are supportive of broadening this funnel is once people get to your organizations, what are we doing to make sure people feel comfortable, feel supported, feel like they have a career path within that organization. And those are things that when you talk about early years at Goldman Sachs, I felt that there. And so, I met people who I felt cared about me as a professional. And then that allowed me to get opportunities to grow, work on deals, and that led to a career at that point. But I think that's the continuum and it's every step of the way. We all need to be doing our part because I think ultimately we'll have a better industry. I think we'll get more ideas in our industry; we'll get more diverse viewpoints at the table. And I think it's something that I feel like it's happening, but it's our industry that is a little bit late to the game there.
Willy Walker: Yeah, I'd echo that. I guess the question I'd have is I mean, you talk about big corporations like Chase, where you had your first internship. What Jamie has done as far as a senior management team at JPMorgan Chase is unbelievable as it relates to the diversity that he's put at the very, very senior ranks. And Goldman Sachs similarly has a very diverse senior management team. I think one of the things that I consistently hear is that at the senior levels of many of the firms, whether they are property owners or whether they're services firms, that there aren't many mentors who look like the aspiring woman or look like the aspiring minority to have that type of a mentorship. If that's kind of what cracks the code, it's going to take us a very long time to move all that up there. So, is there any shortcut to that? Because of that mentor/mentee relationship, women and minorities coming into the industry and say, I can look at Chris Lee, is super important to them, understanding a career path for them, getting the advice, the counsel, and the support, which we all need. I don't care how smart you are, we all need that support. We're all going to make mistakes. And I think in many instances, unless you've got someone who puts you under their arm and says it's going to be okay tomorrow, many of us take a divergent path. And so, without being able to wave a magic wand and say, let's have our industry at the top ranks look like Goldman Sachs or JP Morgan Chase, what can we do?
Chris Lee: Well, I think that we have to believe that the people that mentor you or sponsor you – I think those are two very different things – don't have to look like you. Why can't I be a mentor to a young woman? Why can't you? You know, the people that have mentored me over my career, a lot of them have been white males. And I think we have to break down that yes, representation matters. You want to be able to see someone that looks like you, that's doing some of the same things, but ultimately how you get up that curve path, you need someone in your management chain to really believe in you and sponsor you. That's how my career has developed and that's how I've been able to grow my career here. That was how I was able to grow my career at Goldman. But it wasn't necessarily someone that looked like me, but it was someone that I found some common interest with. And I worked hard. At the end of the day, people want people that can help them create value. And so, I think that that's where we have to really move the conversation. We all have to be comfortable mentoring people that might not look exactly like us. By the way, that's just one part of any of our identities. There are all sorts of other things to build common ground around. But I think that that's going to be important if we want people to be able to advance their careers in organizations.
Willy Walker: I think that's such an important point. And I would say when we were focused on how we could do training and growth of women at Walker & Dunlop, one of the programs that we looked at and really thought had huge merit to it is a program they have at PNC Bank called Men as Allies. And so rather than just having a women's group and a women's initiative that is all female based, it's really using men to be exactly as you just said, the mentors and the and the proponents of growth of women inside their both specific groups, as well as more broadly across the entire company. And we went and studied that program and implemented it W&D, and it's been wildly valuable to us as having men as allies and not just sort of saying women's growth and career pathing has to be the responsibility of female executives and female managers.
Chris Lee: Exactly. I think we have to evolve the conversation more in that direction because there's no reason why someone can't mentor, because at the end of the day, it's not just the mentorship, it's the sponsorship. And that's more important than putting people in positions where they can have visible opportunities to create commercial impact. That's what everyone wants an opportunity to do at Walker & Dunlop. That's what everyone wants to do at KKR, have opportunities to create tangible commercial impact, and I don't think that has anything to do with someone's race or gender.
Willy Walker: We are out of time, Chris. I am super, super appreciative of you taking the time. I had all sorts of other things to talk about with you, and you and I will have the opportunity over dinner to finish up on my questions list about a number of different things that influence your leadership style. But I'm super appreciative of you spending this hour with me and giving all of us your insights on both how KKR real estate has become, what it is, and your views on the overall market today. And so just a big, big thank you for all you do and for spending time with me.
Chris Lee: I appreciate it. As always, it's a lot of fun and it's my first webcast with you. So, it's a real pleasure and we enjoy the business that we do with you and Walker & Dunlop, so thanks for the opportunity and go Chiefs.
Willy Walker: Yeah, we never even got to that. So, anyone understands the connection to that, the family that owns the Chiefs are all St. Mark's graduates. And so, Chris is actually very good friends with the family. And we were talking about the fact that they might win the championship this weekend. So, there you go.
Chris Lee: A lot of St. Mark's people are Chiefs fans, so I'm one of them. So go Chiefs.
Willy Walker: It's great. Have a great Superbowl weekend. Thanks Chris, very much and everyone who joined us, and we'll see you again next week. See you, my friend.
