Demystifying Commercial Mortgage-Backed Securities

Richard K. Green: Welcome to our discussion of all things, commercial mortgage backed securities. It's my pleasure tonight to welcome Roy March, the CEO of Eastdil Securities, which is one of the most important issuers of CMBS in the country. Roy, and you still have had a great relationship with USC for many years. How many people do hire from USC most years?

Roy March: Oh, it's the bigger question would be how few people do we hire elsewhere?

- Okay, all right. And so, it's just always delightful to have Roy participate with us, and we'll talk about some of Roy's interests other than CMBS. He's been very interested in, and instrumental to trying to solve the homelessness problem here in Los Angeles. And I hope toward the end, we can say a few things about that, Roy.

- Yeah.

- But let's just open it up, if you could tell us a little bit about your background and how you got to where you are today.

- Well, it's inauspicious for sure. I was a failed chemical engineer student and ended up getting involved in the economics program at UC Davis, where I went to school. Actually, it was where Mike VK went to school, and Jeff Weber, and we sorta joked about the fact there was no real real estate program up there per se, but we actually learned everything you needed to know about how to put people together as a result of the animal husbandry program that UC Davis ran. But in the economics, I came from a frayed blue collar background. And so, there was no white collar professional ambitions that I had. I just didn't know what you do with an economics degree candidly. And so, my soon to be father-in-law suggested that maybe I get an MBA. And as I looked at the opportunities for me to be admitted into a good MBA program, I lacked the grades, and I wasn't a particularly good test-taker. I know this your heresy for an educator like yourself.

- No, no, no, no, no. It's not about me, no.

- But at the end of the day, what all I could think of that would fill kind of the third aspect of the admissions process was to get as much experience as I possibly could. So literally, between I went to work for a company called Kidder, Peabody for a summer, as in essence, an unpaid intern, to get coffee and sandwiches for the managing director in San Francisco. And at the same time, I got my real estate license at what, at the time was, and it still is a program, where you don't have to get a special license to become a commercial real estate broker. You could also be a residential broker with the same program if you passed it. And I ultimately got my real estate license that summer. And when I went back to school, it was clear that they... There was an opportunity to become the financial business manager for the Associated Students. And I had all this experience now in corporate finance and real estate, and they were doing a bond offering for the Rec Hall at UC Davis that year. And so, I got hired as the business manager to try and help them through that process at 19 years old, and literally, had no knowledge whatsoever other than having passed a real estate licensing program. And then, as I came out of school life, there was an opportunity to interview for an unpaid internship at Blyth, Eastman Dillon, which was the parent company of Eastdil. And they were trying to fill this hole. And I went down, and as I went into the Work Learn Center to get a little background on the opportunity, out falls an Eastdil Realty brochure, and it had a young, attractive people and awesome buildings. And I thought, "Well, what about that?" But they didn't have an intern program until I snuck behind the receptionist after my first interview and showed up for an interview, an unscheduled interview at Eastdil. And the guy appreciated my ambition, and so, I started as an unpaid intern on April 3rd, 1978, and never went back to business school. And so, that was the beginning. I started in San Francisco in 1978. And I just literally started my 42nd year here at Eastdil.

- So that's a great, it has a very Steven Spielberg ring to it.

- Yeah.

- In that he was taking the Universal... He would go on the Universal City's tour, and that was back before it was a theme park.

- Yeah, yeah.

- It was just tram. And he would just kind of sneak off the tram and showed up in a studio and a soundstage, and kinda hang out, and asked to do stuff.

- Yeah.

- And apparently the story of how he got started. So that's really interesting. Tell us a little bit about what Eastdil does, and then what we'll start getting into sort of more of the nuts and bolts of CMBS market.

- Sure, so along the short of it is Eastdil is a real estate investment bank. Ben Lambert, who's the founder and current Chairman of Eastdil started in 1967 at what was then Eastman Dillon, that's the name, Eastdil, prior to its merger with Blyth, Eastman Dillon, and Blyth, Eastman Dillon's merger into Paine Webber, which is now Credit Suisse. So all those consolidations that occurred in between, but it was born out of a, in essence, a real estate investment banking culture that was different than the traditional mortgage banking and investment sales culture that existed. In that it was in essence, a salary plus a bonus-based system that in essence, promoted collaboration, and cooperation, and teamwork, in kind of an old-fashioned partnership form that was meant to bring all the knowledge and resources, relationships together to serve a client at the end of the day. And our goal is to, in essence, be a trusted advisor that brings creative and actionable ideas that are valuable to people, and then to be able to execute on those. And we do between 225 and $250 billion a year in transactions globally, primarily in Europe and in the US, across all product types; debt, equity, private placements, securitizations, and the like, as well as the more traditional sales, joint ventures that get done domestically, offshore, and try to traffic in things that are the most relevant that allow us and afford us the ability to be able to access the C-suites in sovereign wealth funds, pension funds, insurance companies, and help them develop strategies, and then candidly go out and find those opportunities for them to do in scale. And to do so in a manner that we become literally, and hopefully just a part, a trusted partner in their thinking, but only representing the groups that are seeking capital for those things.

- So could you take a minute and walk us through the process of creating a CMBS? And then I'm gonna ask you some questions, comparing that to a more traditional mortgage.

- Yeah, well, and let me back up a little bit, because I think historically, and Mike VK, who is the savant around this? So we're the twins. He's the savant and I'm the village idiot. So he was there actually at the very birth of these things. And he sat on the X with Milken at Drexel as they were developing in essence, the securitization market. And if you look back into the early '90s, and prior to that, loans were traditionally, placed and done with banks and insurance companies. We're the two primary providers of that. There were some pension funds who've got into the fixed income slash mortgage business on hold-on basis. But everything was kinda priced the same way. There was no kinda risk-adjusted return for relative position in the capital stack and seniority or junior to one another. It was all just one whole loan. So if you were borrowing 30%, 40%, 50%, or more of a value, loan to value, it didn't really matter. It was all priced the same way, because it all went in as a whole loan. And so in early '90s, just after the bad recession, it was in many ways led by the commercial real estate industry. And it was one of those events that occurred as a result of A, devaluation of the dollar against the yen. And so, there was a lot of capital coming in from Japan, and a lot of it was in the real estate business in particular because those Japanese construction companies to qualify for big infrastructure opportunities in Japan had to rank within a certain range of the top 10 in order to qualify for it. And so, they could invest in construction projects around the world in a minority basis to get credit for that. And ultimately, they over-invested in new product without there being the demand for it. At the same time, the savings and loan industry went through deregulation. And as a result, they got heavily involved in the financing markets. And then, there was this little thing that began to evolve in terms of the theory of how people should invest in real estate to get the proper returns across the pension fund portfolio. It's called Modern Portfolio Theory at the time, and it was thought that by the consultants and in their wisdom, that if you had up in the range of 10% of your investments in commercial real estate equities, that it would give you the right balance to give you the right result relative to your overall portfolio, to deliver the returns that you were looking for for your beneficiaries. All that came together all at once. And as a result, there was a flood of capital that came into the marketplace. And with that, there was the meltdown in the savings and loan industry. Thousands and thousands of banks and financial institutions were put into receivership. There was the development of what became the RTC, which was a holding company in essence, by the government to consolidate the banks themselves and separate the real estate assets from the other financial assets, and then to kind of redistribute them, liquidate them, hopefully, and create more recovery, if you will, into the government systems themselves. I go through that because at the time, because real estate had such a cloud over it, the traditional real estate investors, weren't there in essence to provide liquidity to the market. And what happened was that Wall Street and led in large part by Drexel, got into the business of trying to create a security that ultimately, would qualify for underwriting and pricing that would appeal to non-traditional real estate investors. And so, that was literally kind of the advent, if you will, of modern securitization, was to try and in essence, create these tranches that could be hopefully rated, and ultimately, taking those rated tranches, and selling them to non-traditional real estate investors as securities themselves. And thus, that crisis created securitization, particularly, in the commercial real estate markets as we know them today.

- So just because as it happens, you're going to go on the week before we talk about tranching in class, could you just take two minutes to talk about what you mean when you use that term?

- Yeah, what it is in essence, creating relative risk segments of the underlying financial instruments, and in this case, a securitized mortgage, let's call it, just for basic terms. And to, in essence, try to develop a risk profile for each one of those segments, and to then rate them so that they can be sold into the market. It allows people to in essence price rated segments of a financial instrument. And so, it's literally trying to get the most secure to the least secure and figure out exactly where those pressure points are in a traditional way or in a regimented way, so that people knew that if they're buying a AAA bond, in essence, they knew what AAA meant, because it was the same as a AAA bond in another, in a corporate sense.

- So and just to clarify is so there's priority on cash flows.

- Correct.

- So that the A tranch gets the first cash flows and then B after that, and C.

- Priority in cash flows, and collateral, correct.

- Right, right, and so how do you, when you do this slicing, how do you determine where those cut points are where you move from an A to a B?

- Yeah, well, it is literally trying understand what the coverage is for that position and comparing it to other, again, rated instruments in terms of that same sort of rating system, if you will, and whether or not it has a debt yield, in each one of those positions that would provide sufficient coverage and collateral for that. And so, it's literally dissecting each one of them. And in the beginning, it used to be maybe two or three different tranches, and ultimately, we were back in the GFC when things collapsed. We were selling mezzanine loans and the securities that had tranches that were up to sort of J, K, L. So it was no longer just A, B, C. They'd been tranched in that manner. And there was actually as part of that failure in the residential side of it, they would take a very, very low-rated segment of the collateral, and if they had enough diversity, they would get a higher rating for those. So you could have the worst part of the rating in an individual asset and collect enough of them to get a diversity rating that might take it to the most secure piece of the asset that you were selling. And so, that ultimately provided for, a rather dangerous characterization of security.

- Right, no, so it's on the assumption there was sort of if default would be an independent event across these securities. And of course, that was very incorrect. They were highly correlated.

- Correct.

- If one went bad, then a bunch of the others would too. So you really weren't getting the diversification.

- Correct.

- [Richard] People thought that they were getting with that platform.

- Correct, correct.

- So this leads me to another question. So one of the things in RMBS space, it's I'm sure you know that the private label market basically has not returned. I mean, it has, but just a little bit.

- Yup.

- And the story that I hear is the problem is not the lower rated tranches. People actually are eager to buy them because they get yield. It's that they don't trust that the best rated tranch is actually as safe as people say. And so, nobody wants to buy that. And that's why sort of Ginnie, Fannie, and Freddie have complete command of the mortgage market because people say, "Yeah, we may not trust "them either, but at least "the government is behind that." If we go to commercial space, do you see that kind of dynamic where people are actually hungrier for the lower rated stuff nowadays than the higher rated stuff?

- Well, not necessarily. And again, when as we, as we came out of the GFC, it exposed a lot of the fallacy in the rating system. And there were holes, I guess, in the protocol and then in the discipline, if you will, of the rating systems themselves. And it created a lack of competence, if you will, in ratings, in particular. In fact, many of the rating agencies themselves were under a severe amount of criticism as a result of maybe, not being as disciplined and as vigilant around that as they might have otherwise been. But generally speaking, what happens in a time of crisis is it's risk off. And so, they try to go to the most secure portion of that particular place. And it's interesting because in this environment, as we've seen some of the dislocation occur, that is exactly where it went first. And then as the Fed started pouring money in, and it got too cheap for that relative risk that people were moving toward up the risk scale, if you will, and now, providing in essence, lower cost of capital than we had in the securitization market than you can get out of the private placement market in a more traditional real estate piece of that. Now, there are things that come along with securitization that ultimately, people have avoided. Part of it is faceless, having trustees, and servicers, and people like that, as opposed to being able to directly deal with a counterparty, whether it's an insurance company or a pension fund, who ultimately, you can have a discussion with, if you've got a change in your leasing profile, or you've got a change in the capital program, or you've got some sort of event that occurs that might cause for, that might be cause for an adjustment to that loan. When you're dealing with a servicer, they're limited to kinda the rules of the road, technically, and as a result, you may or may not be able to get to the right pragmatic answer because the rules of the road have been set up to protect the investor, in that case, and taking control of that versus the operator who borrowed the money, ultimately, getting control of it. So I think that, to get back to your primary question, which is are people more likely to get into the risk side of it or not. It all really depends on kinda what are the nominal returns. And the biggest, and just if I'm digressing, pull me back in.

- No, no, no, this is perfect.

- When you have $17 trillion of sovereign debt that is at zero or negative, and you have a global requirement for the beneficiaries, whether they be insurance beneficiaries, or whether they be the citizens of a country, you have... And the world has been set up to, in essence, deliver a 6 to 7% return for those services and those benefits. In an environment where you've got all this capital in essence, at zero or negative, how do you get to those returns? And you look at it on a relative basis. And one of the things that we've seen in this environment is this is no longer just going through the real estate group or the general investment group. This has gone up to CEO and CIO of these companies to be making, what I'll call relative risk bets with their capital to try and deliver the best returns that they possibly can. And as a result of that, the world needs to have, it doesn't need to, but in order to get to those returns, which have, if they don't get there, have major, major impacts on their society, not just their economic outcome, but their society. And as a result, they're probably gonna get in the higher risk part of the curve. Particularly, on a relative value basis when equity seemed pretty, pretty flashy. And the fixed income market is at all time highs.

- Right.

- And from a value perspective in the all-time lows.

- There's only so negative rates can go. And so yeah, the opportunity for capital gains and fixed income now is pretty much zero, right?

- Yup, and as a result, that if you look at, and this is more of a valuation question, if you look at the core real estate return, unlevered at a 6%, over a 10-year period, it's not risk-less, but when you look at the 10-year bellwether, US treasury, the spread between that and a 6% return is the most stark it's ever been.

- Yup.

- And so, people are looking at it and saying, "Well, if I can underwrite the sustainability "of that income stream, that's a very good "relative return for the risks I'm taking." And so, they'll start off at the most senior level, and they'll start to go down the gradient of where they're willing to take risks and step in for the relative return. But for the most part, the CMBS market is alive and well, and back. More so than the banks, and more so than a lot of the rest of the market itself with the exception of the private placement, life insurance business.

- So a couple of follow-ups here, and I'm trying to decide what order to do this in, but I think I'll do this. So your views on interest rates in general, and my colleague, Larry Harris, talks about this fundamental problem facing the world right now, which is we're just getting old.

- [Roy] Yeah.

- And what that means is we know we're not gonna be making money, and so, we're saving like crazy right now. And we just have a ton of us in this position. I put myself, I'm 61, right.

- Yeah, yup.

- So I'm thinking about how much money am I gonna have when I retire? That's at the top of my mind.

- Yup.

- Maybe I won't retire, but that's a whole other thing.

- Yeah.

- And you look at Japan, you look at Germany, you look at France, you look at Singapore, you look at Korea, you look at us in the... We're actually younger than the other places, but we're getting old pretty quickly.

- Yep.

- And so, we argues in light of the fact that we have a world where future consumption is more important to us than current consumption, it's inevitable that you're gonna have these very low interest rates for a very long period of time.

- [Roy] Yup.

- I'm curious about what your view on that is. And second, in light of that, I mean, this is the fundamental that undermines that ability to get that 6, 7% return that you need in order to meet your pension obligations, social security obligations, healthcare obligations, and so on.

- Yep, so I think we're in the camp of lower for longer, and whether it's lower forever, it's hard to sustain any of this without some level of growth. And your instinct is productivity is higher than it really shows up in the numbers, right. Just to do with technological advances and all the rest, but we're less productive than we were per capita in many places around the world. But I think our view is that it's going to be lower for longer, that in that respect, therefore it's probably gonna put pressure on to get money out at rates that ultimately can provide the right kind of return for the relative risk that they're looking for. And that's the implication for that is that the world is flat financially, for sure. And so real estate, as a result of the advent of securitization in the CMBS market, on the debt side, we're competing for dollars, we're competing against oil, we're competing against currencies, we're competing against other financial instruments. And at the moment, we are continuing at this point in time to provide a higher return than the bond market and the corporate markets do. And the question is inevitably, that is that risk any different or is it maybe even better than some of the corporate risks that's been underwritten at lower rates? So our view is that there's gonna be more compression in CMBS market and the debt market in general. Just as a result of the tidal wave, or tsunami, or however you wanna put it of capital that's out searching for yield, and it's gonna go to again on a relative risk basis. So we're very focused on the underlying collateral, as you know, which is what's something really worth. And that's something, you gotta understand the V, in order to understand the risk and the return that goes with the L, in that loan-to-value equation. And so, understanding the credit, and we think credit is in large part mispriced, continues to be mispriced because people tend to use what one might call a ham-handed approach or a gross approach to value in a more traditional way. And so, I think that in as we go forward, I think it's gonna, the credit analysis is gonna have to be much, much more disciplined and much more acute in order to make sure that that credit is being priced correctly. And that gets all the way back to the CMBS story, which is, are they being underwritten appropriately for the most secure piece versus all the way through the last dollar, if you will, of lending?

- So your point about valuation intrigues me. And so, I wanna come to the issue of cap rates. When you talk about your 6, 7% return on unlevered for real estate, I mean, it's two components, right? It's the cap rate is about four, and you're expecting growth of 2 to 3% a year.

- Yep.

- Again, in light of the demographic changes in the world, in light of what we're... I mean, we're already seeing it in retail.

- Yep.

- In light of the fact that people may be using less office space, I don't buy the idea that people are gonna work at home forever 'cause I need to be in the office.

- Right.

- But they might work at home more often than they did before.

- Right.

- Which could have an impact on demand for office. In light of the fact that you have all of people getting older, which means that they can't afford rents, if they're renters in the housing market, the way they used to, what's gonna happen to that G part of that return? So current versus growth?

- Right.

- [Richard] Are you guys thinking about that?

- Yeah and well, I think that, again, it's not one size fits all. And so, as we were going into this COVID, and look, I've been through the '80s, the '90s, the early 2000s, I hope, I hope you have a segment in your class about the "LTCM: When Genius Failed", because it's a brilliant analysis, I think, of people being smart by half, but forgetting that-

- Yep.

- Multi-derivative.

- We do a class on the big, on the both the book and the movie, "The Big Short".

- Okay.

- And we break it down.

- Yeah, the LTCM thing, "When Genius Failed", it's just a great example of some award-winning scholars who forgot to calculate a second derivative impact as well.

- And the amazing thing is I, well, I will say Martin shows no remorse, or apologies, or anything for any of that, which is I find quite extraordinary. He's still lecturing people on how to invest, which is kind of amazing with that.

- Yeah, yeah, so I think that as we were going into this, there were some things that were decelerating for sure. One thing that was decelerating was retail in its traditional format, particularly, in the mall space. It was already on the decline as a result of the ascent of e-commerce and digital commerce in general. And so candidly, what we did was we shifted our resources into logistics and industrial. And we think, we've gotten ahead of, somewhat ahead of the game. And then, and part of it... And one of the great things that came out of that was, "Oh, well, we just need to convert retail into logistics." Well, that only worked if logistics were as valuable as the retail space that was creatively being destroyed at that point in time. But those things that's been accelerated, as it relates to retail. What was going to be a three to five-year deceleration or acceleration of decline is gone into like a five-month acceleration in decline aided by these lockdowns and all the rest. So try and get your handle around the V. In retail right now, it's extraordinarily difficult. And it's more by divining than it is by facts at this point. The same is true in a lot of the hospitality market with the travel bans and everything else, there's a more, it's more difficult. And so, people are going back to 2019 and trying to project what they expect demand could be. But there's very, very, very little in the way of data points. The instinct is drive to resorts, the big box on one end coming back sooner, maybe limited service coming back sooner. On the flip side, you've got these big box convention and group facilities in major cities that look like those are gonna be more challenging to come back. So that's kind of what I'll call the stress de-stress rescue relief kind of capital, where people who take risks, substantial risks are gonna play in. And then, you've got the other end of the spectrum, which is data centers, driven by this digital evolution, revolution, because it's almost like a revolution every 15 minutes. Life science, which was on the gain prior to this whole COVID thing, which is... And what people didn't realize is how technology was converging with science and that with quantum computing, the ability to deliver everything from vaccines to cures to treatments could be accelerated through modeling without having to go through extensive human testing that oftentimes fail. And so, that technology revolution along with science being combined, that pushed things in a very, very fast manner. A lot of these office buildings that are technologically advanced and who have as occupants, credit tenants, that are in what we'll call the next generation or this generation and beyond industries, those things are accelerating. And then, you've got the multi-family space that is a... It's shifting a bit in terms of its locales, But you've got what I'll call a build-to-rent program, which is a purpose-built housing, single-family-housing type of program, as people are less likely to buy than rent in the future, but want more space in their own place and less density. And then the credit space itself is also on the ascent. And part of it is because the ability to be able to in essence, do a credit underwriting and lock-in sustainable rent that is collected, is going to be super important. In that space, there's a huge drive into. But the challenge is you've got everything in between, which is that redevelopment, that value-added space, where you've got to rely on tenant demand and-

- Well, and there are political problems now with value-add as well.

- Correct, correct.

- Than resurrection. I mean, in New York City, you basically can't do it.

- You can't do it.

- Anymore.

- And so, there's this whole segment in between that was, that is gonna have a time-out here for at least a period. That is the big question mark. So I think that there's this shift into highly opportunistic retail and hospitality investing, and then core-to-the-bone investing on the other end. And people are going in different directions and in the middle, will get resolved or solved as the opportunities on either end evaporate over time. And that's probably a 2021, 2022 type of opportunity.

- So let me ask one more CMBS question, and then I want to turn to an issue I know you care a lot about which is homelessness. But I wanna come back to the issue of governance and what trustees can and cannot do. Did we learn anything from the GFC? Is the governance inside the CMBS better now than it was then? Is there a little more flexibility or are we faced with the same set of problems? Just that sort of things like resolving conflicts of interest within the trust.

- Yeah.

- That we faced seven, eight years ago?

- Yeah, so there was the ability for a servicer, in essence, to buy out of these trusts for their own accounts. And there was a huge conflict of interest that was associated with it that no longer exists. There also was-

- And how you would define that? 'Cause I use very short... If you'd just explain that in a little more detail, please.

- Basically, the servicer of, in essence, the security that they were, and that they had signed up to and bought the rights to, had the ability to buy the securities underlying that if in default, if they had gone into default. And they had, and I don't wanna say unfair, but they had an advantage of knowledge and access, if you will, that others didn't have. And so, the question became were they financially motivated for their own benefit as opposed to benefit of the trust itself? And were they making decisions that were in the best interests of the beneficiaries of that trust or in the best interest of themselves? And so, they no longer can have that advantage as part of the trusts themselves now.

- So what about... Is there some flexibility built in? So you have, for example, a covenant that's violated in a loan that you're like you get cover drops for a couple of months because you're having collection issues, but then you fix it and you're back. Okay, I mean, how is that resolved now? Does it go into technical default or is there an ability to have some forbearance under circumstances like that?

- Yeah, there's more flexibility, more judgment around those kinds of things. And again, the motivations of the servicer and the special servicer, and the like, of all been put under, been put to the test in the sense that there's no, I mean, it used to, that there was no resolution oftentimes because they were getting paid fees to manage it in its special servicing, if you will. So there was no resolution and the borrower wasn't benefiting from it. And the security holder wasn't benefiting from it. The only people who are benefiting from it were the people in between, who were supposed to be servicing this in good faith. And so, bottom line is there is more flexibility around it, around those kinds of things. It's changed the dynamic a bit because the borrowers who never, ever wanted that faceless capital are now looking at not only the availability of it and the pricing of it, but the new, new flexibility in it as being something, where there's an opportunity to, in essence, have a discussion as opposed to it going to the letter of the trust itself.

- So I, and that was gonna be my last, but I just want one more. So on, I'm coming back to your V again on stuff that has to be refinanced in the next year. How is that being treated? Do people need to bring more equity to the table because they're so unsure about valuations? Or how is that working right now?

- Yeah, so again, what we did find is if you compare the last cycle that ended up with the GFC to today, there's probably... The borrowing rate would suggest that it's anywhere from 10 points to upwards to 14 points. Less leverage has been taken on in the system by borrowers if this go around. So it's been a more conservative outlook relative to borrowing. Now, it's beginning to creep up. And by the way, the money was there at a cost, but people were not as focused on increasing the leverage as they were making sure they had the right balance of cost to leverage. So there was less leverage in the system per se. And having said that, today, even as we sit here today, you can still borrow, up to 75% LTV. Not 85 or 92%, the same way as you could, but you can still borrow at the higher leverage rates, but people aren't taking that leverage on and more equity is going into projects.

- So let's finish up by talking about an issue that I know you care very deeply about, which is homelessness. If you could just take a minute to tell us why you decided to put time and resources into that issue and what your outlook, if any, is. Are things getting better? Are things getting, if you look around.

- Yeah.

- So they were getting better. What do you see is the outlook for this very serious problem?

- Unfortunately, it continues to be grim. And it's grim and let's step back, about sounding too pithy about it. My basic view is how could we as a civilization think that we've made any progress when we have so many people who are on the margin? And just one person on the margin is a challenge, but look at the numbers. And for Southern California in particular, which is where my focus has been primarily, and you look at the fact that we've got the biggest homeless population in the United States, and everybody thinks it's a result of the weather. And it's not, 75% of the homeless population is actually Southern California natives, if you will. And if you break down what the causes of homelessness are, they're kind of 1/3, 1/3, 1/3 in terms of addiction, mental health, and some of those crossover, and housing. That people just can't afford to live anymore. And a lot of that is regulated, not regulated, but people think they're doing good by limiting the amount of housing that can actually be developed in a fair market sense, puts tremendous pressure on the rest of the market. And those folks that think that they're on the margin are actually inside the margin when you look at what can and can't be done in terms of fair market rental. But at the end of the day, the biggest challenge continues to be the political challenge. And that is it's with ULI and with the help of a lot of people within the homeless community itself, there have been solutions that have been put in place, put before our politicians and the governments to solve whether it's BRIDGE Housing or ultimate housing. And ultimately, those things are adopted with great fanfare about what the intent is of a mayor of a city until you get to whose district is it going. And as you know, the ULI study came back, and there was this whole push to be able to put in BRIDGE Housing in equally in every district. And you know-

- 222 units in each district is my recollection.

- Yep and-

- And more often, it's less.

- And the bottom line is, is I think there were four of them that actually happened because nobody wanted to have them in their district, even though it was being equally distributed, no one wanted them to happen. And so, until you can fix that, I think that it continues to be grim in terms of the prospect. I've given up because we've got a lot of people who do care about what we're doing in this space. It's just a question of whether or not we, people have the political will to actually make the change.

- Well, it's like... So I'm feeling a little optimistic for the first time because of Project Roomkey. And the great thing about that is this is a great time to be acquiring hotel rooms 'cause they're cheap.

- Yep.

- At the moment. And the zoning is not an issue, they're there.

- Yup.

- So it's impossible to block it.

- Yep.

- And so, I'm a little bit hopeful, Roy, that this will actually make a difference. And I know that the county has proposals into 14 hotels. I think 10 of them are gonna be done. That'll be like a thousand rooms there.

- Awesome.

- So at least there's something. Now, it's a tiny dent, but at least it's the first dent I've seen in a long time.

- Yeah, that's a thousand more. And each one counts to somebody. And I'd love to hear more about it, candidly, because those are the kinds of battles, if you will, that ultimately become winning more.

- So Roy March, thank you very much-

- Thank you.

- For spending 3/4 of an hour with us, telling us a little bit about your story, and giving us your views on the CMBS market, and a few words on homelessness. It was just a great expenditure of time. Thank you again for your generosity.

- Thank you, thanks for the opportunity, and thanks for the carrying the flag on this homeless situation in particular, because it does impact as I tell people who don't think that they've got a homeless problem. It impacts everybody, not only at the societal level, but there's real real estate value implications.

- Oh, and public health.

- Public health and real estate values. My whole push has been in the shadow of one of the most opulent, wealthy cities of the world is the greatest homeless population in America. And it's a tragedy, but it also has an impact on, not only on society, but on value and human values.

- Thank you again.

- [Roy] Thank you.