Bill Lenehan: Investing in Commercial Real Estate

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money.
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**SPEAKER_2** (1:42)
Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (2:14)
My guest today is Bill Lenehan. Bill is the CEO of Four Corners Property Trust, a listed REIT and one of the leading owners of restaurant real estate in the US. Their portfolio is made up of 982 properties across 47 states.
Real estate is something that most of us own, whether as an investment or as a home. And Bill's insight into the asset class at this particular moment in time is fascinating to hear. Please enjoy my conversation with Bill Lenehan.
So Bill, this is going to be a really neat opportunity to talk with someone that I've probably learned the most from about the asset class of real estate at large. It's not my background, not my area of expertise, but I think it's interesting to everyone because we're surrounded by it all the time. We all buy houses, or many people do. We work in offices, we visit malls, we do all these things. An interesting orienting place to begin is actually with something topical, even though I think a lot of what we'll talk about today is a bit more timeless. Just because the nature of the environment that we're talking in, which is November, what day is it today, like the 18th, 2022, rates are the obvious place, I think, to begin, because everyone's familiarity with the situation of rates have grown up a lot, mortgage rates have grown up a lot. So the housing market hasn't really crashed so much as it's sort of frozen. Nobody's moving, no one wants to go from a 2% to an 8% mortgage.
It would seem as though this dramatic rate change is very bad for real estate, and it's always more nuanced than that. So given that that's what's going on in the world, let's start there. Give us your more nuanced take on what is actually happening as rates go up in terms of how it affects real estate.

**Bill Lenehan** (3:48)
Patrick O'Shaughnessy Thank you for having me. I'm excited to do this. So rates have increased substantially, cost of debt has increased substantially. You mentioned mortgages, but for example, the company I run, which is a mid-investment grade company, we borrowed money last December at 3%. Today, it would be just shy of 7%.
And the availability of that capital is much reduced to begin with.
Rates have gone up. I think inflation has gone up. And the Fed's actions to try to combat inflation are beginning to be effective. What do I mean by that? Well, there's the mathematical part of, with higher base rates, borrowing costs are higher. Your ability to pay for an asset is hindered to make the same rate of return. The expectation of returns over a risk-free rate have gone up substantially. What I would say is, if you use the mental model of the Federal Reserve sitting on my Zoom calls, would they be happy? Would they be high-fiving each other? Or would they be saying, these guys still don't get it, we need to raise rates more?