About this episode
How are investors “becoming the bank” through investments like mortgage REITs? Chief Market Strategist Troy Gayeski shares the key takeaways from his latest strategy note on why current conditions favor these debt-focused CRE investments and how to pick one.
Troy joins Content Strategist Harrison Beck to examine the regulatory trends shaping CRE lending, how higher interest rates can amplify potential opportunities and what investors may want to seek out when evaluating these investments.
“If you can be the bank and potentially earn an attractive return well above cash without taking uncomfortable levels of risk, what a wonderful outcome.” –Troy Gayeski
Transcript excerpt
Troy Gayeski: If you can be the bank, most importantly, earn an attractive return well above cash without taking uncomfortable levels of risk, while at the same time playing some small part of helping economic expansion and mitigating the risk of economic contraction, what a wonderful outcome.
Harrison Beck: This is The Takeaway with Troy Gayeski, a podcast from FS Investments. We sit down with Chief Market Strategist Troy Gayeski to get the latest on what’s happening in the economy and what investors may want to do about it. I’m Harrison Beck, FS Investments Content Strategist. I’ll take Troy through today’s top questions so that you can get The Takeaway.
Harrison Beck: Welcome Troy.
Troy Gayeski: Hey, Harrison, how are you?
Harrison Beck: I’m doing good.
Speaking about these larger trends in the market. You have a new strategy note, it appears on forbes.com. It’s all about the opportunity set in a particular corner of commercial real estate, mortgage REITs.
And the headline here is that there are both regulatory and macro trends that are favorable to investing in commercial real estate debt and mortgage REITs in particular. And so today we’re going to talk about what these favorable conditions are, where they came from and what they mean for how investors might pick an opportunity.
But first let’s be specific about the strategy we’re discussing here. There are lots of different ways of investing in CRE and lots of different kinds of REITs. Can you just define what a REIT is and what’s unique about the kinds of debt-focused instruments we’re talking about today?
Troy Gayeski: Yeah. So when you think about REIT, which stands for Real Estate Investment Trusts, the vast majority of client capital that has ever been deployed in real estate is in the equity part of the capital structure. Think about owning a home. You own the equity, the bank is the senior lender. It’s you and them. Maybe they’ve sold that loan off to Fannie, Freddie or Ginny. Then you think about commercial real estate, focused rates, vast majority of capital, over 95% has been invested in the equity part of capital structure. And, just like corporate equity, you have a lot of upside when things go well, but a lot of downside when things go less than well.
