With a "personal vendetta against Chicken Little," WaFd Bank CEO Brent Beardall debunks misconceptions about today’s CRE landscape. This episode highlights the resilience of banking relationships during economic stress, high inflation, and last year's bank upheavals. Beardall’s candid commentary, including his plane crash survival, offers insights on leadership and connectivity. Learn about economic indicators, the Fed's balancing act, and promising regions for real estate investments. Don't miss this episode!
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Welcome everybody from thePeaks of the Mountain West, high
up here on the Wasatch Front.
We are excited to talk realestate, the economy and anything
else that may come about.
I want to thank you all forjoining us today for this week's
(00:48):
episode of Peaks and Portfoliosby PEC Companies.
As we are well into 2024,experts predict that we are on
track to remain in a challengingenvironment for financial
markets.
Continuing high inflation,escalating lending costs,
tightened margins, increasedregulation and cybersecurity
threats all remain relevantfactors in the current risk
(01:09):
landscape.
Additionally, the SiliconValley Bank, Silvergate and
First Republic collapses weredefining moments in 2023.
So these events have all shineda spotlight on banks in the
mainstream media, something thatwe haven't seen much of since
the GFC, and this does bringabout increased scrutiny around
regulators, investors, customersall driven by a bit of fear,
(01:33):
maybe in their investments, andso, with all of these factors in
mind, we wanted to hear fromsomeone in the banking industry
that can shed some additionallight, so we are delighted to
have as our guest today BrentBeardall, CEO for WaFd Bank.
Welcome, Brent.
Brent Beardall (01:49):
Rachel, thanks so much for having me today
Excited to be here.
There's just a little bit wehave to talk about, huh.
Rachel Oh (01:54):
Just a little bit.
Just a little bit.
I can only imagine what it'sbeen like for you lately.
It's so good to have you.
It's been a minute since youand I last met.
You're where In Seattle,correct?
How is my hometown, seattle?
Brent Beardall (02:06):
You know Seattle is doing fantastic.
We get through the dark days ofwinter and now all of a sudden
it's light till eight o'clock atnight and it is beautiful For
my money.
Literally, seattle for the nextthree to four months is the
most beautiful place on earth.
Rachel Oh (02:19):
I 1000% agree.
In fact, I've always saidthere's no other more beautiful
place than planet during thosemonths, though rest of the time
it's a little bit you pay theprice the rest of the time.
Brent Beardall (02:30):
No question about it you definitely do.
Rachel Oh (02:33):
And, um, just on a personal note, how is your
health?
I know you've had you had.
Brent Beardall (02:36):
I don't want to belabor that by any stretch, but
you're physically well, thingsare good yeah, doing, doing
great, yeah, so I what about ayear and a half since the plane
accident Doing great, probably90 plus percent, and just it's a
phenomenal perspective.
Every day I wake up grateful tobe alive and really the biggest
(02:57):
ramification for me is flyingagain.
Right, I mean, I've been onprobably a hundred plane flights
since in that year and a halfand everything's fine until you
hit turbulence and then the PTSDsets in.
But you know, in life we allhave challenges and sometimes
you just have to tackle thosechallenges.
Rachel Oh (03:15):
Yeah, yeah.
No, I appreciate that.
In fact I've been kind offollowing you and I really
appreciate the way you've turnedyou know tragedy into messages
of hope and positivity and allthe things that you're doing and
all the goods.
So kudos to you for that andthe impact that you've made.
So it has definitely been wellreceived and it's not gone
unnoticed.
So I just wanted to kind ofjust thank you for all of that,
(03:36):
because I know it's beenprobably challenging the last
little bit.
Brent Beardall (03:40):
Well, that's very nice of you to say.
I appreciate it.
And you know I've certainlylearned a lot, and you know I've
said this before and I'll sayit again Everybody has a plan
until you get punched in theface and I got punched in the
face pretty good.
But one of my key learnings wasto not be shy about telling
(04:07):
people that you love them, andit's been amazing to me, as you
open up and you becomevulnerable, just how people
express themselves to you andyou deepen relationships and
friendships, and it's reallycool.
And you know we're going to talka lot about commercial real
estate and I know a lot ofpeople in commercial real estate
and I have deep relationshipsand friendships and that matters
because in the banking industry, yeah, you know, we all have
the contracts, the paperwork welook after, but I really want to
make sure that we partner withpeople that are going to be
(04:28):
there through the good and thebad times and, uh, relationships
do matter and you really, youknow, as Warren Buffett famously
said, you never know who'sswimming naked until the tide
rolls out.
It sure feels like the tide'sabout ready to roll out, doesn't
?
Rachel Oh (04:41):
it?
Yeah, it sure does, it reallydoes, which is why we have you,
because we want you to, like youknow, substantiate or dispel
things that we're hearing.
So for those of you who may notbe as familiar, I just want to
give them a little bit ofbackground on you.
Brent Beardall is the vicechairman, president and chief
executive officer of WaFd Bank,a Washington State commercial
(05:11):
bank headquartered in myhometown of Seattle Washington,
and it is the largest bankheadquartered in Washington
State, with about $30 billion inassets.
So congratulations, brent.
I think that's gone upsubstantially since I last
looked at this.
You joined the bank in 2001 asthe vice president and
controller, and since thenyou've been CFO, chief banking
officer and, of course, thenawarded the title.
Brent Beardall (05:22):
Okay, and Rachel , I'm going to cut you off right
there.
Let's get into it.
I mean, I know I'm a lousybanker.
I've been doing it for a longtime.
Hopefully I know something, butwe'll let your listeners decide
after they get into this right.
Rachel Oh (05:32):
Yeah, no, absolutely Absolutely.
So you know, as I started off,we are, you know, we've been
seeing increased scrutiny fromregulators.
Investors and customers, youknow, may be driven by some of
the fears around theirinvestments.
And right now I know thatyou're on a bit of an education
tour, combating what the generalpublic typically hears in the
media about investments, bankingand commercial real estate.
(05:54):
So tell me why this issomething you're so passionate
about.
Brent Beardall (05:57):
Well, first of all, thanks for the opportunity.
I am on a personal vendetta tokill chicken little.
I am so tired of the talkingheads standing up and saying the
sky is falling with commercialreal estate.
They point to one or twooutliers as examples and then
people make and it's just such afoundational mistake they're
(06:18):
making when they extrapolatesomething that's happening, you
know, in St Louis or in SanFrancisco or Los Angeles and say
, oh, okay, then let's look atyour whole portfolio bank.
Or let's look at a company likePEG and say, oh, you're in
commercial real estate.
It must stop the madness.
Commercial real estate is sucha wide and varied marketplace If
(06:39):
you want to understandcommercial real estate,
especially when you want tounderstand commercial real
estate and banks.
Now let me set the recordstraight right, WaFd Bank has
the third highest concentrationin commercial real estate of any
bank in the country.
So to say we're long incommercial real estate would be
an understatement, right?
So I have a vested interest.
But you have to understandreally three things about
(07:01):
commercial real estate.
Number one you need tounderstand the category of it.
The risk factors of an officeversus stabilized multifamily,
versus a car wash versushospitality unbelievably
different risk characteristicsright.
You can't group all thosetogether.
That's number one.
You have to understand thecategory.
Number two you have tounderstand the location.
(07:24):
Everyone knows real estate.
Think about your personal realestate.
Location matters.
How close are you to schools?
How close are you to employment?
How close are you to thingsthat you want to do?
The location matters If you'rein a shady part of St Louis or
San Francisco, if you're down inthe Tenderloin, you're going to
have problems.
If you're there on the WasatchFronts, just outside you name it
(07:44):
Lehigh you're booming, you'redoing phenomenally well.
So you have to understand thecategory of CRE.
You have to understand thelocation and then, very
importantly from a bankingstandpoint, you have to
understand the amount of equitythat your client puts in.
The more skin in the game thatyou have with your borrowers,
(08:05):
the more likely they are to rideout the storm with you.
And we're a bank that's beenaround for 107 years.
Think about that 107 years,think of all of these cycles
that have transpired in 107years.
And when cycles happen, youhave to know who's on your side
and who's just in it to make theshort-term profit that can can
get a jump ship.
And by having an alignment withthe bank and your borrower.
(08:28):
That means they have equity inthe game.
So on average on our commercialreal estate portfolio we have
about 45% equity in the game.
So people that look at ourportfolio and say, oh my
goodness, I am nervous aboutyour portfolio, I'm like stop
the madness.
I literally don't lose sleepover our commercial real estate
portfolio at all.
That's not to say it's notunder stress.
(08:49):
Of course it's under stress.
Look what's happened to the NOIjust because of interest costs.
Right, and the details matter.
Specifics matter.
If you've got multifamily andyou've got rent control, you're
going to have challenges.
But let's get into thosedetails.
Let's get into the specificsand understand the portfolios
and stop just blindly paintingeverything with a wide brush
(09:11):
that, oh my goodness, commercialreal estate's a dumpster fire.
Rachel Oh (09:14):
Okay, so then let's talk about that.
Then You've just mentionedthree things that you look at
and evaluate.
Obviously, when you're lookingat what you guys are going to
underwrite or loan on, know,evaluate.
Obviously, when you're lookingat, you know what you guys are
going to underwrite or loan on.
So, asset classes what?
Where I mean?
Where do you?
Where does WaFd?
Where do you think banks aremost keen right now?
Brent Beardall (09:31):
Well, right now, unfortunately, because of the
regulatory environment, it'sanywhere but commercial real
estate.
Right, and real estateinvestors are seeing that
because everybody thinkscommercial real estate oh my
goodness, it's a scarlet letter.
But stop the madness.
Right.
And it goes back to the greatfinancial crisis.
Because where did all thelosses come from?
They came from quote unquotecommercial real estate.
(09:53):
But specifically, if you lookat the segment, they came from
land acquisition and developmentand spec construction.
That's where the losses camefrom in the Great Recession.
The losses is we're looking atit today.
That's where the losses camefrom in the Great Recession.
The losses as we're looking atit today.
In all sincerity, I see lossesprimarily in one asset category
and that's large office in largemetropolitan markets, and it
(10:15):
really is driven by the physicaloccupancy.
If you have people coming inand using the buildings, offices
are generally going to bepretty good.
If you have vacant offices,that's a problem.
Rachel Oh (10:26):
Yeah, now you know we've talked with a few
different people along the wayin different episodes, including
, you know, Gensler, as StephenPainter talked about.
You know just what they'redoing with.
You know how they view officeto multifamily example.
You know because of all thevacancies and et cetera.
So you've kind of mentioned youknow the category.
So obviously commercial realestate right now is is tough
location matters to you then.
(10:48):
So let's say you are going tolend, then there's something
that you've that the bank hasfound, your team has found, that
they really like.
Are there certain areas of thecountry then that you focus on?
I mean, where?
Where do you guys see the bestopportunities?
Where would you underwrite?
Where would you loan?
You know what kind?
I mean you mentioned maybe notthe tenderloin, but like where?
Brent Beardall (11:06):
Yeah, yeah.
So really we are very fortunate.
We are in the nine Westernstates, right, we're from
Washington all the way down toTexas.
If you think of Texas asWestern, that's where the seats
we go.
But nine Western states and thebeauty is, for the most part,
right, california has some netmigration away from California.
But you look at the eight otherstates, we have net emigration,
(11:27):
and that's where I think youhave to ask yourself location.
Do people want to live there?
It's supply and demand and weall know the barriers to
bringing on more supply.
Supply is really really tough.
The question is, is theredemand?
And you look at our eightWestern states outside of
California, you have more peoplecoming into those states than
(11:47):
ever before.
And then you compound that interms of multifamily, which is a
real positive.
Single-family residentialhousing has never been less
affordable, right?
So people are going to have tolook for somewhere to live.
That's not in single-familyhousing.
So that's multifamily.
And I do actually have somebreaking news to share with you
today, and it just so happensthis afternoon we're going to
(12:08):
file an 8K, so I can tell youthis without getting in trouble
with the SEC.
Rachel Oh (12:11):
Okay, let's not do that.
Brent Beardall (12:13):
So, yeah, let's not do that.
So we just announced that wehave signed a definitive
agreement to sell $3.2 billionof stabilized multifamily loans
to Bank of America, who's theagent for PIMCO.
So ultimately, pimco, thelargest bond fund in the world,
is the ultimate buyer.
We're selling $3.2 billion ofmultifamily loans at $0.92 on
(12:37):
the dollar.
Rachel Oh (12:38):
Wow.
Brent Beardall (12:39):
That is a home run.
The only reason we're selling itat a discount is because of
interest rates.
Rates have moved so fast sothose rates are below market.
But they have looked at theportfolio and they've said holy
cow, there's really no creditrisk in this at all.
If you can pay us for theinterest rates, then we'll do
the deal.
And that's exactly what's goingto happen.
When we announce it today, weexpect it closed by the end of
(13:00):
June.
And if that does happen andit's not done until it's done
Sure, but if it does happen,think about what that does for
commercial real estate, not onlyfor WaFd but for all midsize
banks.
Yeah, because it provesliquidity.
Yeah, as soon as you get awilling buyer and a willing
seller to come together at aprice and 92 cents on the dollar
, that's great.
Take that all day long yeah.
Rachel Oh (13:22):
Yeah, yeah.
No, that's amazing and I youknow.
Congratulations to the team forputting that together and what
an amazing.
You know something that you cando for your borrowers right,
and your folks with deposits inthe bank.
So that's a huge, huge win.
So congratulations.
And thanks for breaking newshere with us.
(13:42):
That's amazing.
Brent Beardall (13:43):
Yeah, no, it is a huge win.
And, most importantly, what itdoes for us it allows us to go
from playing defense to playingoffense.
Rachel Oh (13:51):
Now you can actually go back out.
Brent Beardall (13:53):
We can go back out and we can redeploy those
funds because, I argue today,the loans that you're
underwriting today are going tobe some of the best loans that I
have made in my 30-year bankingcareer, because you're going to
be able to demand strictercovenants, you're going to be
able to demand more capital inand you're going to be able to
get the deposits with thoseloans.
So I'm unbelievably excited.
In fact, one of my biggestworries is how do we not you
(14:16):
know how do we ferret that outover a period of several
quarters, not just have it allgo poof real quick?
Rachel Oh (14:23):
Yeah, yeah.
Well, you'll have to beselective, right, and you can.
Brent Beardall (14:26):
That's exactly right.
We can, that's right.
Rachel Oh (14:29):
So let's talk about that.
The third piece in that youknow when we kicked off and what
you were saying is trying todispel all the you know the
anxiety and whatnot aroundcommercial real estate is equity
.
So you mentioned about 45%.
Equity is sort of what you guysare seeing.
Is that going to continue?
Do you see that trend changingor holding steady?
Brent Beardall (14:48):
No, I think that continues and part of the
reason people are putting somuch equity in the deal is
because debt service is soexpensive.
I know, Right Right.
To be able to hit your debtservice coverage ratios, you've
got to put a lot of equity inthe deal.
So until interest rates startsubsiding a little bit, I do
think people are going tocontinue to put a lot of equity
in the deals, which is great forus as banks and not so great
(15:10):
for investors.
But again, the investors thatare in our sweet spot they say,
okay, how much do we need to putin?
Let's make it work, let's makesure a pencil's for everybody
and putting that much equity iswhat it requires.
And we, again, we we find moredemand than there is supply for
those good loans.
Rachel Oh (15:28):
Yeah, well, I will say, if you can make a deal,
pencil with that much equity,that's a strong I mean that's a
strong profile right there.
Brent Beardall (15:35):
So that is a phenomenal, phenomenal loan, no
question.
Rachel Oh (15:38):
Yeah, okay, okay.
So you guys are going to.
I'll have my team call you, butI'm just going to, okay.
So we've talked about assetclass, we talked about location,
we talked about equity.
Let's just then shift a littlebit to just specifically your as
(16:00):
a banker.
You have a unique perspectiveand probably unique data on what
is really going on right nowwith the consumers, right.
So you know we're seeing theFed is holding.
You know they're not going tobe lowering their rates.
The economy is, you know,unemployment is still low,
inflation is ticking up a bit.
But I'm just curious, like, atthe consumer level, you know,
what are you seeing?
Is there any worry in thefuture?
Are we?
Do you think people are doingwell, like, I'm just curious, if
(16:22):
all the data is, is, you know,proving out?
Brent Beardall (16:24):
Yeah, so I really think we kind of have a
bifurcated consumer segment, ifyou will.
The vast majority of consumersare struggling, and struggling
mightily, I think.
If you look back to about 2020and think about the cumulative
impact of inflation, thecumulative impact in the last
four to five years of inflationis like 25% increase in costs,
(16:49):
right, and we all see it.
When we go to the grocerymarket, when we go to buy gas,
everything is more expensive.
We're all seeing it right nowin insurance.
That is stressing the averageconsumer, right.
I mean, what is the stat?
Like you know, 60% of Americansare living paycheck to paycheck
, right?
It's stunning, right.
So those are the consumers thatare being stretched.
(17:12):
There is no question about it.
Now, on the other hand, you'vegot those that have savings,
that have stock.
They're doing very, very welland it's a great irony of
increasing interest rates thepeople that have deposits, that
are getting paid more for it.
They're doing very well.
They can withstand theinflation.
It's everyone else the netspenders, the net payers of
(17:35):
interest that are beingincredibly stressed, and so I
think that's really kind ofwhere we're at is.
You can look out there and youmight not get a full set of data
by going to the airport,looking at the airport, going to
restaurants and saying, oh mygoodness, look how busy it is.
You're not seeing everybody.
That is literally, you know,pinching their pennies and just
(17:55):
stretching their dollar as faras they can to make ends meet,
which is the vast majority ofAmericans right now.
Rachel Oh (18:01):
Yeah, now that's I would say that's, a very true
statement.
Again, all the data, not thedata, but the you know the
rhetoric we're hearing,especially with unemployment and
just all the creation of jobs.
You think everything is goinggreat, but yeah, I think that
the real underlying story isthat it's not always the case.
What do you think it's going totake?
Brent Beardall (18:17):
And let me follow up on that too the
creation of jobs.
What jobs are being created andat what pay rate?
Right?
So I mean just looking at thenumber of jobs.
That's one indicator, but it'sjust like when I talk to my
teams, it's the quality of jobsand what they pay, right?
Don't just look at a bank andsay loan originations Fantastic,
(18:40):
we can originate all the loanswe want.
At what kind of spread were youable to originate those loans?
Right?
So you've got to ask the nextquestion and in today's day and
age, right, we're a USA Todaysociety.
We just want the headline.
Stop the madness.
You've got to go beyond theheadline.
Stop the madness.
You've got to go beyond theheadline.
You have to understand, becausenot all jobs are created equal.
Rachel Oh (19:00):
Yeah, that's true.
That is true.
We can totally see that.
Okay.
So then, my follow-up to that,then, is what needs to change?
What do you think needs tohappen in order for this to sort
of right?
You know how do we write theship, like what needs to be done
.
Brent Beardall (19:14):
Well, first of all, how much does the ship need
to be righted?
I really don't think we're onthis precipice of terrible
things happening.
I think that the consumers aswe mentioned, there's a lot of
consumers that are really,really stretched, but I don't
think we're on the precipice ofhaving this major decline in
values on commercial real estate.
(19:35):
And one of the things that hasshocked me the most, if somebody
had said to me in 20, whatever2022, hey, we are going to
increase mortgage rates by threeand a half to 4%.
What's going to happen to thevalue of single family housing?
Typically, the rule of thumb, ifyou look back through the
(19:56):
cycles, is every one percentincrease in mortgage rates, you
should have a 10 percent declinein the value of single family
homes.
That simply has not happenedright, and that is why
affordability is in an all-timelow and I don't see it happening
.
I don't see a huge adjustmentcoming in single family housing.
I don't see a huge adjustmentcoming in multifamily.
(20:17):
Right, there certainly could bean office, but where are we
really risky right now?
I see the biggest risks, quitefrankly, is just how
overinflated it seems the equitymarkets are.
You look at some of these PEsbut you ask yourself why is that
?
And that's because there hasbeen so much cheap and easy
(20:37):
money flowing for so long rightand they're chasing for yields.
So, really, what needs to change?
From my mind, we need to see aproper slope to the yield curve
right, and that can happen intwo ways.
We're going to have 21consecutive months of an
inverted yield curve, neverbefore in our lifetimes.
Rachel Oh (20:56):
Rachel, have we seen 21?
Brent Beardall (20:56):
months of an inverted yield curve.
Never before in our lifetimes,Rachel, have we seen 21 months
of an inverted yield curve.
Typically, the inverted yieldcurve says, hey, a recession is
coming.
And we haven't had one wehaven't, and my prediction is
we're not going to have one,because here's what's nuts.
You look at the way ourgovernment is spending money.
We're spending money like adrunken sailor.
(21:18):
We have our government spendingmoney like we're trying to get
out of a recession.
Yeah, If you think about it,it's like somebody driving their
911 down the freeway in youknow six gear, going 110 miles
an hour, slammed on the gas andat the same time slamming on the
brakes.
Rachel Oh (21:34):
Yeah.
Brent Beardall (21:35):
Right, you've got the government spending
money like crazy and, by the way, you go back to jobs.
So many of their jobs arecoming from the government
sector, so you've got all thesejobs coming.
You've got the governmentspending money by the way, not
spending our own money, spendingborrowed money and then you've
got the Fed trying to slowthings down.
So we're driving with two feetright now right, one foot on the
(21:59):
gas, one foot on the brake.
So I don't see a recessionbeing imminent.
But what needs to happen?
We need to get back to a normalslope on the yield curve, and
that either happens from thelong end going up, which is what
I think probably should happenI think the long end is
artificially low or you have gotto get the short end to go down
(22:19):
, which would only happenthrough Fed cuts.
Rachel Oh (22:21):
And we've already heard that they're not going to
so, or at least anywhere in thenear term.
So it looks like then the longend needs to go up.
Tell me so help our listenersunderstand.
What do you mean by that, thenthe long end going up?
Brent Beardall (22:35):
The 10-year right Right.
If we're saying, hey, the shortend is here, around 5%, and
we're going to stay here that ishigher for longer, then why in
the world would the 10-year bebelow that?
It shouldn't be.
The 10-year should be abovethat, right.
So I don't know what the rateon the 10-year should be, but I
think it should be above the Fedfunds rate.
(22:56):
So take it to 5.5%, 6% on the10-year, but then what does that
do to mortgage rates?
That would take mortgage ratesfrom 7% up to 8% or 9%, which
probably needs to happen,because then that would take
some juice out of the housingmarket.
Rachel Oh (23:11):
Yeah, my mother always likes to remind me that
she financed during a doubledigit, so I don't know why you
guys are always, so you know,complaining, because I think I
don't remember when, but whenthey were in a double digit
environment.
Brent Beardall (23:25):
Okay, Rachel, I'm going to be your favorite
podcast host because I'm goingto tell you what you can retort
to your mom about.
Rachel Oh (23:31):
Yeah, tell me.
Brent Beardall (23:33):
That's fantastic .
It was double digits.
How much did you pay for yourhouse?
Rachel Oh (23:36):
I know and let's inflation.
Brent Beardall (23:37):
Adjust that now right, I know.
Oh, you know, I bought my housefor $45,000.
Rachel Oh (23:42):
I know I think it was $30,000.
Brent Beardall (23:43):
You can afford 11% interest at $30,000,.
Right yeah, try doing that fora $700,000 house.
Rachel Oh (23:50):
Right?
No, for sure, for sure.
Bring up the point that ifinterest rates need to go up in
order for our economy to settledown and to kind of get back to
a more normal situation, that wemight have to take that in the.
You know, take that bite for abit in order to kind of right
things right, like we do need tobe willing to kind of endorse
some of those changes and Ithink sometimes we're not
(24:12):
willing to, or there's a lot ofrhetoric out there that we won't
be able to sustain that.
Brent Beardall (24:16):
If we really want a long-term sustainable
economy, we've got to sometimestake the pain, and right now we
haven't taken the pain quitefrankly, yeah, no, we haven't,
we really haven't, and I thinkthat it's.
Rachel Oh (24:30):
I think we're starting to see it, though, a
bit right, like I think peopleare starting to become less
worried.
I mean just, we were drunkenwith, you know, 0% Fed funds
rate for so long, and now we'rein this environment where it's a
little higher, and I thinkpeople are finally starting to
kind of get accustomed to it.
So maybe that's how you do itright.
You just kind of inch them up,and we had the huge escalation.
It shocked everyone.
But now we're kind of at a newnormal.
(24:51):
Maybe just do it little bylittle and maybe we can get
there.
I mean, something's got tohappen because we can't.
Brent Beardall (25:02):
Something's got to happen, and one of the
mistakes I think the Fed hasmade is this attempt at
transparency.
No one can predict the future.
J-pal and the Fed governorshave an incredibly tough job,
but it's made tougher by thefact that they, at every other
meeting, they have to put outtheir dot plots and they have to
say, hey, this is where wethink rates are going for the
rest of this year and the nexttwo years.
(25:23):
How can you know?
Because then they follow thatright up with saying it's going
to be data dependent and so thedata is going to dictate it.
So why even pretend to say weknow where rates are going,
because they don't?
Rachel Oh (25:35):
Yeah, no one knows.
Brent Beardall (25:38):
And the other thing is it has been so
difficult to try to getinflation to come down and we're
celebrating with what?
Three and a quarter inflation.
That's fantastic, that's realprogress.
However, that's still over 50%higher than the goal, and they
have a dual mandate exactly 2%or below, and they have a dual
(25:59):
mandate full employment, checkthe box, low inflation we're not
there yet.
It's been a lot easier for themto get inflation down to 3%
than it will be to go from 3% to2%.
Rachel Oh (26:09):
It's always that last mile right, that last little
stretch.
Brent Beardall (26:14):
It is and everybody says, well, the Fed's
going to overshoot it, which isa fair question.
Are they going to overshoot it?
Because we all know the lageffect of what happens after you
raise rates.
But the question is, whathappens if we're undershooting
it?
What happens if we don't killinflation?
And Volcker and the teamlearned in the 80s you've got to
(26:34):
get in front of inflation.
Rachel Oh (26:36):
No, I think it's good .
I think it's good to holdsteady.
I mean it's obviously not greatfor my underwriting teams, but
we need to.
I mean, we kind of take alittle bit of pain for now.
Brent Beardall (26:43):
That's exactly right and, as everyone knows,
right.
Sometimes working through thetough times, that's what
provides opportunities.
Rachel Oh (26:51):
Yeah, yeah, so opportunities.
Brent Beardall (26:54):
Then let's see where do you feel the greatest
opportunities lie right now, asyou look at things, I mean, if
somebody can figure out how toconvert office into multifamily,
that's to me the biggestopportunity out there, right?
Because you have all of thisoffice space that's going unused
(27:14):
and we have this huge need forhousing.
So if you can figure out how todo that and obviously those are
all case-specific,circumstance-specific, but if
somebody could be great at thatI see that as a potential
double-to-home run, Solid,single, still Multifamily.
I mean you have to love thediversification of the cash flow
(27:38):
that comes from a multifamilyproject.
Then you have to look at itfrom a macro perspective.
People need places to live.
We have this housing short runand ever since the Great
Recession we have beenundersupplying lots.
So that means we're going tohave to be denser in terms of
our housing.
So I see multifamily.
I'm incredibly bullish onmultifamily.
Over the long term, we may notsee the rent increases we saw
(28:01):
over the last several years, butthat's a good thing.
The rent increases we saw thelast several years have been
unsustainable, right right Now.
Rachel Oh (28:09):
You know that's.
You know, at PEG we, you know,half our portfolio is
multifamily and we've definitelysince seen that.
You know rents slow down a bitbut we also see good occupancy.
Right, it's still solidoccupancy.
We're a little overbuilt insome of our markets, including
downtown Salt Lake, but you know, everything indicates that in
the next couple of years that'llcome back right back up.
So I definitely thinkmultifamily is a great place and
(28:31):
, to your point, if we can solvefor this, all these vacancies
in offices, and figure out a way.
It was interesting when the whenwe spoke with Gensler, he did
point out a few different things.
It's not always so easy and Ithink some of the regulators
need to ease up right, causethere's it's the way and I can't
remember how he said a floorplates or something and this
much distance from the elevator,and because of that you can't
(28:52):
have this.
And so it was reallyinteresting talking to him about
that, because I think that's oneveryone's mind.
Right, how can we, what can wedo with this asset class that
has just been decimated by theeffects of COVID and we have a
huge housing shortage?
Can we marry the two?
But I think it's going to takea minute to figure that out, can
you right?
Brent Beardall (29:08):
And what's the old saying?
That necessity drivesinnovation.
Yeah, right, and so as andwe're starting to see that in
Seattle we now have a completeturnover of the city council and
the mayor is very, very probusiness, the mayor, what can we
do to help reinvigoratedowntown?
And that's what we need to seeat some of these.
(29:33):
You know code requirements interms of multifamily and some of
these things that could make itactually feasible and cost
effective to turn office intosome multifamily.
Rachel Oh (29:38):
Yeah, no, I just on a side note.
I was in Seattle recently and Inoticed that whole corridor
there, like the old Navy and theBanana Republic and the Gap
they're all gone.
Brent Beardall (29:50):
Fifth Avenue, the Banana Republic.
That's right across the streetall gone.
Rachel Oh (29:52):
Fifth Avenue, yeah, fifth Avenue, the Banana.
Brent Beardall (29:53):
Republic.
That's right across the streetfrom us.
Yes, yeah, it's right acrossthe street from our headquarters
.
So that's a perfect examplethat building, the Banana
Republic building where BananaRepublic used to be is called
the Old Coliseum Building inSeattle.
Sorry, to go off on a tangent.
Rachel Oh (30:08):
No no.
Brent Beardall (30:09):
But that was bought, I think 12 years ago for
$8 million and I think it'slike 18,000 square feet of
retail on the corner of fifthand pipe.
That's going to market.
They're going to put it out forauction for 2 million bucks.
And I look at that, I'm like $2million Now you cannot.
You know you can't go up.
You've got it's a historiclandmark, so it would have to be
(30:31):
.
You'd have to put in someseismic retrofit, so forth.
But $2 million for prime realestate in downtown Seattle and
you will see buyers come out ofthe woodwork because there's so
much money waiting on thesidelines.
So I think that's what's goingto happen.
Is you're going to find thefloor?
Is buyer say wait a second,even if I have to buy and I have
to wait four or five sevenyears I'll do it, because it's
(30:52):
going to come back.
Rachel Oh (30:53):
Well, it is a phenomenal location.
I have so many good memoriesfrom when I was young and
shopping down there and I wentgeez, I can't remember, it was
just a few months ago and I wasshocked.
It was just hard to see.
But you know, we're seeing thateverywhere, it's not just
Seattle, I was in San Franciscotoo, and that's market streets
(31:14):
just dead.
Brent Beardall (31:14):
Oh, macy's is leaving Union Square in San
Francisco.
Yeah, no, I mean we do.
We do use terms like see iteverywhere.
No, we see it in some of thelarge metropolitan areas.
What's crazy is you go 15 mileseast of Seattle to Bellevue
they are killing it.
Bellevue still leads the nationin sales per square feet.
Rachel Oh (31:30):
Really, I did not know that.
That's amazing.
Brent Beardall (31:32):
Right, so it's.
It's all about safety in access.
Rachel Oh (31:37):
Oh, and you have a new Din Tai Fung, don't you?
In Bell Square?
Brent Beardall (31:41):
too.
Yes, we do Okay.
Rachel Oh (31:44):
I'm obsessed, okay.
So anyway, again anothertangent, but just this is my.
You know you're in my hometownand, uh, you know I'm dating
myself.
But you know, back before whenMicrosoft first started, I can't
believe.
I just said that.
But Seattle has just changedover the years and it's so fun
to see.
And then going recently andjust seeing some of the changes
was hard.
But you're right, there'sopportunity and I and I do think
(32:05):
you know, give it a few moreyears and I think they'll.
Things will turn around and Ilove hearing that the whole city
council has kind of changed.
I think that'll make a hugedifference.
We have a big asset there.
We've got the old HomewoodSuites down right by the, on
Pike Street, over by theConvention Center.
That one actually, we bought asa hotel and we're converting
into apartments which has beenquite successful.
Brent Beardall (32:26):
Yeah, that's actually been quite successful.
Rachel Oh (32:27):
I'm sure it will be, and it's workforce housing, so
it's not luxury class A, it'ssolid class B.
I think it's to service, kindof that, you know, the workforce
and to service Pill Hill, rightthere just up the street.
So I think that'll be aphenomenal.
Brent Beardall (32:43):
And that's what we need in all of our markets.
Right, we don't need a wholebunch more of class A, we need
solid class B and the Lutherportfolio that we're selling the
$3 billion portfolio we'reselling it's class C and class B
, it's true.
I mean, the average loan size,I think, is $1.5 million.
(33:06):
$1.5 million average loan sizein California.
These are duplexes, these arefourplexes, they are workforce
housing and that's what we needmore of and it's an incredibly
resilient asset class.
Rachel Oh (33:19):
Yeah, no, it's so true, it's so true.
Okay, so you know we've talkeda few different things about
what you're seeing and whatnot.
Let's just talk about kind ofyour passion to your bank and
I've seen you grow the bank indeposits and just in preeminence
and also expansion intoCalifornia.
So you just completed I mean Idon't know how recent it was,
but it's a substantial bankacquisition in California.
Now you're in that state.
Tell me what that means thenfor Wafed, and are we going
(33:42):
national?
Are we going to continueexpanding?
Tell me what your plans are.
What's your world dominationplan?
Brent Beardall (33:50):
Yeah, my world domination plan is not to
dominate the world and to stickwith what we know, and we know
very little.
So on February 29th wecompleted the acquisition of
Luther Burbank.
On Thursday, the 29th ofFebruary we closed the deal.
Then, starting the next day,Friday March 1st, we started the
conversion.
The conversion was done Sundaynight, Wow.
(34:12):
We are literally the fastestclosed to conversion in.
The conversion was done Sundaynight.
We are literally the fastestclose to conversion in the
history of US banking.
I'm so proud of the teambecause what really matters is
when are you on the same system?
We're on the same system nowand since conversion, we've only
lost 1% of their deposits,which is a huge, huge win for us
.
And to be able to get us inCalifornia and you might say,
(34:33):
why in the world does WaFd wantto go into California?
Well, it turns out there's $3.5trillion of deposits in
California and I'm incrediblycompetitive and California has
every bank known to man there.
But the reality is we believewe've got something better right
.
We really do.
We believe we're kind of thesweet spot where we're big
(34:54):
enough to be relevant, smallenough to be nimble and get
things done and, at the end ofthe day, people want technology,
they want access to their money, but, most importantly, they
want a relationship.
They want to be able to speakto a decision maker and find out
what's happening with the deal.
We really think we're in thisreally, really sweet spot.
And if you think about themid-sized banks that have gone
(35:15):
away out of the Californiamarket you mentioned too right
at the get-go Silicon ValleyBank, first Republic poof gone.
Rachel Oh (35:23):
Yeah, crazy, crazy.
I can't believe it.
Brent Beardall (35:27):
Then you think Union Bank just went away.
They got acquired by US Bankabout two years ago.
Then Pacific West and Bank ofCalifornia came together.
So there's been so muchdisruption in the midsize bank
space and for a good, solid banklike WAPE to be able to come to
California, we're incrediblyexcited at the potential.
(35:47):
Now so we're in nine Westernstates.
Do we want to expand and goeverywhere?
No, no.
Not at all.
I mean, if you think about thebanking landscape, there's
really two kind of lines ofdemarcation.
As a bank grows, the $10billion threshold.
At $10 billion you lose half ofyour interchange revenue and
you get compliance regulation bythe CFPB.
(36:09):
So that is incredibly painful.
And then the next big thresholdis $100 billion.
And we've all heard recentlyabout New York Community Bank
and they just went over that$100 billion threshold and
having all kinds of problems.
In fact they had to put in abillion dollars of new capital
to be able to just make itsurvive.
The rumor on the street is itwill cost $100 million per year
(36:34):
of incremental operatingexpenses to go from $99 billion
to $100 billion.
That's nuts, that's crazy.
And so there's this overhang onbanks that are under $100
billion.
What do they do next?
And those banks nationallywould be First Horizon Bank on
the East Coast, zion's Bank inyour neck of the woods they
(36:57):
trade at discounts because of it.
Everybody says what can they do?
The biggest banks can't acquirethem because unless something's
going to fail, they're notgoing to allow the biggest banks
to acquire.
How do you grow and do itprofitably when you've got this
huge bullet of $100 million ofincremental operating expenses
coming at you.
So if you think about it, WaFdat $30 billion.
(37:17):
We've got all this runway infront of us and I'm incredibly
excited at our potential, whatwe can do just through organic
growth, and we've had this trackrecord.
We've been so blessed and sofortunate.
We went public in 1982 and ourtotal shareholder returns since
going public in 1982 is 30,000%.
Rachel.
Rachel Oh (37:35):
Oh my gosh 30,000%.
Brent Beardall (37:38):
Now, that's not like PEG, right, because you're
only talking about 8% to 12% peryear, but 8% to 12% compounded
over 40-some-odd years, thatdelivers a 30,000% return.
And that's exactly who we wantto be.
We want to be slow and steady.
Reliable Banking should beboring.
We should be there for ourcustomers.
(37:58):
We should be there for ourshareholders, and that's why I'm
excited about doing what we'redoing.
Rachel Oh (38:02):
Banking should be boring.
I'm going to quote you on that.
But you're right, you don'twant your banks to fail.
You want your banks to be solid.
You want them to be there allthe time.
You don't want to lose sleepabout your bank, right?
No, no, not at all, not.
All that you can do in thepublic markets, we do that
enough, so not in my bank, okay,well, you know, brent, we're
(38:23):
going to have had such anamazing time talking with you.
I kind of wanted to just kindof close with you've seen it a
lot, you've seen it all,probably as much as anyone can.
And so what is your best adviceto commercial real estate
investors right now, given thechallenges, given how even
regulators are making itdifficult for banks to learn?
Like, just tell us what do you,what would you tell you know
(38:45):
our commercial real estateinvestors right now?
Brent Beardall (38:47):
Yeah, my biggest piece of advice is stay in it
for the longterm right.
Look and say I always.
I always tell young people thisrun to where everybody else is
running away, right, Run towardsthe fire, Right.
So and and look to createopportunities, and I know
Cameron, the founder of PEG,does exactly that.
(39:08):
I mean he loves to be told youcan't do that.
Rachel Oh (39:11):
He does all the time Game on.
Brent Beardall (39:12):
Okay, Let me show you how we can do that
Right.
So so that would be my adviceto investors is say, hey, where
is everybody, you know fireselling things to try to get out
?
And then where's theopportunity in that for you?
And so that's kind of myperspective is hey, you know,
just because everybody elsethinks it may not make sense,
(39:33):
look further, dig deeper andunderstand it.
That's where opportunities arecreated.
John Maynard Keyes once saidthe market can stay irrational
longer than you can stay solvent.
Sometimes the market can beirrational.
That's true in equities, that'strue in commercial real estate,
that's everything.
So build yourself a balancesheet so you can stay solvent
(39:53):
longer than the market can stayirrational, and that provides
the real opportunities.
Rachel Oh (39:57):
Yeah, you got to have the money there so you can
pounce on the opportunities whenthey come.
No, absolutely.
Brent Beardall (40:04):
Better than that .
You've got to have the money atWaFd Bank.
Rachel Oh (40:07):
Awesome, okay, okay.
I grew up with WaFd.
I had friends parents that were.
They probably are people thatyou know, but I know WaFd has
always held a special place justbecause it was all over Seattle
, so absolutely.
Brent Beardall (40:22):
Well, hey, thanks for this opportunity.
I enjoy it and I sincerelyappreciate our relationship with
Peg, and there areopportunities to be had, but it
just requires work.
Rachel Oh (40:31):
Yeah, no, no, absolutely, and I know you've
been working hard.
So thank you so much, brent,for joining us this week.
Your thoughts have beenincredibly insightful and we're
grateful for your friendship too, and for your support.
So thank you so much forjoining us today.
So, in the meantime, thank youto all who have joined us.
I know that it's been achallenging environment, but I
(40:51):
think I'm hearing folks likeBrent and whatnot that we're
learning how we can make thebest of these situations.
So, from the peaks of theMountain West, I am Rachel Oh,
your host for Peaks andPortfolios by PEG Companies as
we continue to dig into allthings real estate.
Have a wonderful day, everybody.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Welcome everybody from thePeaks of the Mountain West, high
up here on the Wasatch Front.
We are excited to talk realestate, the economy and anything
else that may come about.
I want to thank you all forjoining us today for this week's
(00:48):
episode of Peaks and Portfoliosby PEC Companies.
As we are well into 2024,experts predict that we are on
track to remain in a challengingenvironment for financial
markets.
Continuing high inflation,escalating lending costs,
tightened margins, increasedregulation and cybersecurity
threats all remain relevantfactors in the current risk
(01:09):
landscape.
Additionally, the SiliconValley Bank, Silvergate and
First Republic collapses weredefining moments in 2023.
So these events have all shineda spotlight on banks in the
mainstream media, something thatwe haven't seen much of since
the GFC, and this does bringabout increased scrutiny around
regulators, investors, customersall driven by a bit of fear,
(01:33):
maybe in their investments, andso, with all of these factors in
mind, we wanted to hear fromsomeone in the banking industry
that can shed some additionallight, so we are delighted to
have as our guest today BrentBeardall, CEO for WaFd Bank.
Welcome, Brent.
Brent Beardall (01:49):
Rachel, thanks so much for having me today
Excited to be here.
There's just a little bit wehave to talk about, huh.
Rachel Oh (01:54):
Just a little bit.
Just a little bit.
I can only imagine what it'sbeen like for you lately.
It's so good to have you.
It's been a minute since youand I last met.
You're where In Seattle,correct?
How is my hometown, seattle?
Brent Beardall (02:06):
You know Seattle is doing fantastic.
We get through the dark days ofwinter and now all of a sudden
it's light till eight o'clock atnight and it is beautiful For
my money.
Literally, seattle for the nextthree to four months is the
most beautiful place on earth.
Rachel Oh (02:19):
I 1000% agree.
In fact, I've always saidthere's no other more beautiful
place than planet during thosemonths, though rest of the time
it's a little bit you pay theprice the rest of the time.
Brent Beardall (02:30):
No question about it you definitely do.
Rachel Oh (02:33):
And, um, just on a personal note, how is your
health?
I know you've had you had.
Brent Beardall (02:36):
I don't want to belabor that by any stretch, but
you're physically well, thingsare good yeah, doing, doing
great, yeah, so I what about ayear and a half since the plane
accident Doing great, probably90 plus percent, and just it's a
phenomenal perspective.
Every day I wake up grateful tobe alive and really the biggest
(02:57):
ramification for me is flyingagain.
Right, I mean, I've been onprobably a hundred plane flights
since in that year and a halfand everything's fine until you
hit turbulence and then the PTSDsets in.
But you know, in life we allhave challenges and sometimes
you just have to tackle thosechallenges.
Rachel Oh (03:15):
Yeah, yeah.
No, I appreciate that.
In fact I've been kind offollowing you and I really
appreciate the way you've turnedyou know tragedy into messages
of hope and positivity and allthe things that you're doing and
all the goods.
So kudos to you for that andthe impact that you've made.
So it has definitely been wellreceived and it's not gone
unnoticed.
So I just wanted to kind ofjust thank you for all of that,
(03:36):
because I know it's beenprobably challenging the last
little bit.
Brent Beardall (03:40):
Well, that's very nice of you to say.
I appreciate it.
And you know I've certainlylearned a lot, and you know I've
said this before and I'll sayit again Everybody has a plan
until you get punched in theface and I got punched in the
face pretty good.
But one of my key learnings wasto not be shy about telling
(04:07):
people that you love them, andit's been amazing to me, as you
open up and you becomevulnerable, just how people
express themselves to you andyou deepen relationships and
friendships, and it's reallycool.
And you know we're going to talka lot about commercial real
estate and I know a lot ofpeople in commercial real estate
and I have deep relationshipsand friendships and that matters
because in the banking industry, yeah, you know, we all have
the contracts, the paperwork welook after, but I really want to
make sure that we partner withpeople that are going to be
(04:28):
there through the good and thebad times and, uh, relationships
do matter and you really, youknow, as Warren Buffett famously
said, you never know who'sswimming naked until the tide
rolls out.
It sure feels like the tide'sabout ready to roll out, doesn't
?
Rachel Oh (04:41):
it?
Yeah, it sure does, it reallydoes, which is why we have you,
because we want you to, like youknow, substantiate or dispel
things that we're hearing.
So for those of you who may notbe as familiar, I just want to
give them a little bit ofbackground on you.
Brent Beardall is the vicechairman, president and chief
executive officer of WaFd Bank,a Washington State commercial
(05:11):
bank headquartered in myhometown of Seattle Washington,
and it is the largest bankheadquartered in Washington
State, with about $30 billion inassets.
So congratulations, brent.
I think that's gone upsubstantially since I last
looked at this.
You joined the bank in 2001 asthe vice president and
controller, and since thenyou've been CFO, chief banking
officer and, of course, thenawarded the title.
Brent Beardall (05:22):
Okay, and Rachel , I'm going to cut you off right
there.
Let's get into it.
I mean, I know I'm a lousybanker.
I've been doing it for a longtime.
Hopefully I know something, butwe'll let your listeners decide
after they get into this right.
Rachel Oh (05:32):
Yeah, no, absolutely Absolutely.
So you know, as I started off,we are, you know, we've been
seeing increased scrutiny fromregulators.
Investors and customers, youknow, may be driven by some of
the fears around theirinvestments.
And right now I know thatyou're on a bit of an education
tour, combating what the generalpublic typically hears in the
media about investments, bankingand commercial real estate.
(05:54):
So tell me why this issomething you're so passionate
about.
Brent Beardall (05:57):
Well, first of all, thanks for the opportunity.
I am on a personal vendetta tokill chicken little.
I am so tired of the talkingheads standing up and saying the
sky is falling with commercialreal estate.
They point to one or twooutliers as examples and then
people make and it's just such afoundational mistake they're
(06:18):
making when they extrapolatesomething that's happening, you
know, in St Louis or in SanFrancisco or Los Angeles and say
, oh, okay, then let's look atyour whole portfolio bank.
Or let's look at a company likePEG and say, oh, you're in
commercial real estate.
It must stop the madness.
Commercial real estate is sucha wide and varied marketplace If
(06:39):
you want to understandcommercial real estate,
especially when you want tounderstand commercial real
estate and banks.
Now let me set the recordstraight right, WaFd Bank has
the third highest concentrationin commercial real estate of any
bank in the country.
So to say we're long incommercial real estate would be
an understatement, right?
So I have a vested interest.
But you have to understandreally three things about
(07:01):
commercial real estate.
Number one you need tounderstand the category of it.
The risk factors of an officeversus stabilized multifamily,
versus a car wash versushospitality unbelievably
different risk characteristicsright.
You can't group all thosetogether.
That's number one.
You have to understand thecategory.
Number two you have tounderstand the location.
(07:24):
Everyone knows real estate.
Think about your personal realestate.
Location matters.
How close are you to schools?
How close are you to employment?
How close are you to thingsthat you want to do?
The location matters If you'rein a shady part of St Louis or
San Francisco, if you're down inthe Tenderloin, you're going to
have problems.
If you're there on the WasatchFronts, just outside you name it
(07:44):
Lehigh you're booming, you'redoing phenomenally well.
So you have to understand thecategory of CRE.
You have to understand thelocation and then, very
importantly from a bankingstandpoint, you have to
understand the amount of equitythat your client puts in.
The more skin in the game thatyou have with your borrowers,
(08:05):
the more likely they are to rideout the storm with you.
And we're a bank that's beenaround for 107 years.
Think about that 107 years,think of all of these cycles
that have transpired in 107years.
And when cycles happen, youhave to know who's on your side
and who's just in it to make theshort-term profit that can can
get a jump ship.
And by having an alignment withthe bank and your borrower.
(08:28):
That means they have equity inthe game.
So on average on our commercialreal estate portfolio we have
about 45% equity in the game.
So people that look at ourportfolio and say, oh my
goodness, I am nervous aboutyour portfolio, I'm like stop
the madness.
I literally don't lose sleepover our commercial real estate
portfolio at all.
That's not to say it's notunder stress.
(08:49):
Of course it's under stress.
Look what's happened to the NOIjust because of interest costs.
Right, and the details matter.
Specifics matter.
If you've got multifamily andyou've got rent control, you're
going to have challenges.
But let's get into thosedetails.
Let's get into the specificsand understand the portfolios
and stop just blindly paintingeverything with a wide brush
(09:11):
that, oh my goodness, commercialreal estate's a dumpster fire.
Rachel Oh (09:14):
Okay, so then let's talk about that.
Then You've just mentionedthree things that you look at
and evaluate.
Obviously, when you're lookingat what you guys are going to
underwrite or loan on, know,evaluate.
Obviously, when you're lookingat, you know what you guys are
going to underwrite or loan on.
So, asset classes what?
Where I mean?
Where do you?
Where does WaFd?
Where do you think banks aremost keen right now?
Brent Beardall (09:31):
Well, right now, unfortunately, because of the
regulatory environment, it'sanywhere but commercial real
estate.
Right, and real estateinvestors are seeing that
because everybody thinkscommercial real estate oh my
goodness, it's a scarlet letter.
But stop the madness.
Right.
And it goes back to the greatfinancial crisis.
Because where did all thelosses come from?
They came from quote unquotecommercial real estate.
(09:53):
But specifically, if you lookat the segment, they came from
land acquisition and developmentand spec construction.
That's where the losses camefrom in the Great Recession.
The losses is we're looking atit today.
That's where the losses camefrom in the Great Recession.
The losses as we're looking atit today.
In all sincerity, I see lossesprimarily in one asset category
and that's large office in largemetropolitan markets, and it
(10:15):
really is driven by the physicaloccupancy.
If you have people coming inand using the buildings, offices
are generally going to bepretty good.
If you have vacant offices,that's a problem.
Rachel Oh (10:26):
Yeah, now you know we've talked with a few
different people along the wayin different episodes, including
, you know, Gensler, as StephenPainter talked about.
You know just what they'redoing with.
You know how they view officeto multifamily example.
You know because of all thevacancies and et cetera.
So you've kind of mentioned youknow the category.
So obviously commercial realestate right now is is tough
location matters to you then.
(10:48):
So let's say you are going tolend, then there's something
that you've that the bank hasfound, your team has found, that
they really like.
Are there certain areas of thecountry then that you focus on?
I mean, where?
Where do you guys see the bestopportunities?
Where would you underwrite?
Where would you loan?
You know what kind?
I mean you mentioned maybe notthe tenderloin, but like where?
Brent Beardall (11:06):
Yeah, yeah.
So really we are very fortunate.
We are in the nine Westernstates, right, we're from
Washington all the way down toTexas.
If you think of Texas asWestern, that's where the seats
we go.
But nine Western states and thebeauty is, for the most part,
right, california has some netmigration away from California.
But you look at the eight otherstates, we have net emigration,
(11:27):
and that's where I think youhave to ask yourself location.
Do people want to live there?
It's supply and demand and weall know the barriers to
bringing on more supply.
Supply is really really tough.
The question is, is theredemand?
And you look at our eightWestern states outside of
California, you have more peoplecoming into those states than
(11:47):
ever before.
And then you compound that interms of multifamily, which is a
real positive.
Single-family residentialhousing has never been less
affordable, right?
So people are going to have tolook for somewhere to live.
That's not in single-familyhousing.
So that's multifamily.
And I do actually have somebreaking news to share with you
today, and it just so happensthis afternoon we're going to
(12:08):
file an 8K, so I can tell youthis without getting in trouble
with the SEC.
Rachel Oh (12:11):
Okay, let's not do that.
Brent Beardall (12:13):
So, yeah, let's not do that.
So we just announced that wehave signed a definitive
agreement to sell $3.2 billionof stabilized multifamily loans
to Bank of America, who's theagent for PIMCO.
So ultimately, pimco, thelargest bond fund in the world,
is the ultimate buyer.
We're selling $3.2 billion ofmultifamily loans at $0.92 on
(12:37):
the dollar.
Rachel Oh (12:38):
Wow.
Brent Beardall (12:39):
That is a home run.
The only reason we're selling itat a discount is because of
interest rates.
Rates have moved so fast sothose rates are below market.
But they have looked at theportfolio and they've said holy
cow, there's really no creditrisk in this at all.
If you can pay us for theinterest rates, then we'll do
the deal.
And that's exactly what's goingto happen.
When we announce it today, weexpect it closed by the end of
(13:00):
June.
And if that does happen andit's not done until it's done
Sure, but if it does happen,think about what that does for
commercial real estate, not onlyfor WaFd but for all midsize
banks.
Yeah, because it provesliquidity.
Yeah, as soon as you get awilling buyer and a willing
seller to come together at aprice and 92 cents on the dollar
, that's great.
Take that all day long yeah.
Rachel Oh (13:22):
Yeah, yeah.
No, that's amazing and I youknow.
Congratulations to the team forputting that together and what
an amazing.
You know something that you cando for your borrowers right,
and your folks with deposits inthe bank.
So that's a huge, huge win.
So congratulations.
And thanks for breaking newshere with us.
(13:42):
That's amazing.
Brent Beardall (13:43):
Yeah, no, it is a huge win.
And, most importantly, what itdoes for us it allows us to go
from playing defense to playingoffense.
Rachel Oh (13:51):
Now you can actually go back out.
Brent Beardall (13:53):
We can go back out and we can redeploy those
funds because, I argue today,the loans that you're
underwriting today are going tobe some of the best loans that I
have made in my 30-year bankingcareer, because you're going to
be able to demand strictercovenants, you're going to be
able to demand more capital inand you're going to be able to
get the deposits with thoseloans.
So I'm unbelievably excited.
In fact, one of my biggestworries is how do we not you
(14:16):
know how do we ferret that outover a period of several
quarters, not just have it allgo poof real quick?
Rachel Oh (14:23):
Yeah, yeah.
Well, you'll have to beselective, right, and you can.
Brent Beardall (14:26):
That's exactly right.
We can, that's right.
Rachel Oh (14:29):
So let's talk about that.
The third piece in that youknow when we kicked off and what
you were saying is trying todispel all the you know the
anxiety and whatnot aroundcommercial real estate is equity
.
So you mentioned about 45%.
Equity is sort of what you guysare seeing.
Is that going to continue?
Do you see that trend changingor holding steady?
Brent Beardall (14:48):
No, I think that continues and part of the
reason people are putting somuch equity in the deal is
because debt service is soexpensive.
I know, Right Right.
To be able to hit your debtservice coverage ratios, you've
got to put a lot of equity inthe deal.
So until interest rates startsubsiding a little bit, I do
think people are going tocontinue to put a lot of equity
in the deals, which is great forus as banks and not so great
(15:10):
for investors.
But again, the investors thatare in our sweet spot they say,
okay, how much do we need to putin?
Let's make it work, let's makesure a pencil's for everybody
and putting that much equity iswhat it requires.
And we, again, we we find moredemand than there is supply for
those good loans.
Rachel Oh (15:28):
Yeah, well, I will say, if you can make a deal,
pencil with that much equity,that's a strong I mean that's a
strong profile right there.
Brent Beardall (15:35):
So that is a phenomenal, phenomenal loan, no
question.
Rachel Oh (15:38):
Yeah, okay, okay.
So you guys are going to.
I'll have my team call you, butI'm just going to, okay.
So we've talked about assetclass, we talked about location,
we talked about equity.
Let's just then shift a littlebit to just specifically your as
(16:00):
a banker.
You have a unique perspectiveand probably unique data on what
is really going on right nowwith the consumers, right.
So you know we're seeing theFed is holding.
You know they're not going tobe lowering their rates.
The economy is, you know,unemployment is still low,
inflation is ticking up a bit.
But I'm just curious, like, atthe consumer level, you know,
what are you seeing?
Is there any worry in thefuture?
Are we?
Do you think people are doingwell, like, I'm just curious, if
(16:22):
all the data is, is, you know,proving out?
Brent Beardall (16:24):
Yeah, so I really think we kind of have a
bifurcated consumer segment, ifyou will.
The vast majority of consumersare struggling, and struggling
mightily, I think.
If you look back to about 2020and think about the cumulative
impact of inflation, thecumulative impact in the last
four to five years of inflationis like 25% increase in costs,
(16:49):
right, and we all see it.
When we go to the grocerymarket, when we go to buy gas,
everything is more expensive.
We're all seeing it right nowin insurance.
That is stressing the averageconsumer, right.
I mean, what is the stat?
Like you know, 60% of Americansare living paycheck to paycheck
, right?
It's stunning, right.
So those are the consumers thatare being stretched.
(17:12):
There is no question about it.
Now, on the other hand, you'vegot those that have savings,
that have stock.
They're doing very, very welland it's a great irony of
increasing interest rates thepeople that have deposits, that
are getting paid more for it.
They're doing very well.
They can withstand theinflation.
It's everyone else the netspenders, the net payers of
(17:35):
interest that are beingincredibly stressed, and so I
think that's really kind ofwhere we're at is.
You can look out there and youmight not get a full set of data
by going to the airport,looking at the airport, going to
restaurants and saying, oh mygoodness, look how busy it is.
You're not seeing everybody.
That is literally, you know,pinching their pennies and just
(17:55):
stretching their dollar as faras they can to make ends meet,
which is the vast majority ofAmericans right now.
Rachel Oh (18:01):
Yeah, now that's I would say that's, a very true
statement.
Again, all the data, not thedata, but the you know the
rhetoric we're hearing,especially with unemployment and
just all the creation of jobs.
You think everything is goinggreat, but yeah, I think that
the real underlying story isthat it's not always the case.
What do you think it's going totake?
Brent Beardall (18:17):
And let me follow up on that too the
creation of jobs.
What jobs are being created andat what pay rate?
Right?
So I mean just looking at thenumber of jobs.
That's one indicator, but it'sjust like when I talk to my
teams, it's the quality of jobsand what they pay, right?
Don't just look at a bank andsay loan originations Fantastic,
(18:40):
we can originate all the loanswe want.
At what kind of spread were youable to originate those loans?
Right?
So you've got to ask the nextquestion and in today's day and
age, right, we're a USA Todaysociety.
We just want the headline.
Stop the madness.
You've got to go beyond theheadline.
Stop the madness.
You've got to go beyond theheadline.
You have to understand, becausenot all jobs are created equal.
Rachel Oh (19:00):
Yeah, that's true.
That is true.
We can totally see that.
Okay.
So then, my follow-up to that,then, is what needs to change?
What do you think needs tohappen in order for this to sort
of right?
You know how do we write theship, like what needs to be done
.
Brent Beardall (19:14):
Well, first of all, how much does the ship need
to be righted?
I really don't think we're onthis precipice of terrible
things happening.
I think that the consumers aswe mentioned, there's a lot of
consumers that are really,really stretched, but I don't
think we're on the precipice ofhaving this major decline in
values on commercial real estate.
(19:35):
And one of the things that hasshocked me the most, if somebody
had said to me in 20, whatever2022, hey, we are going to
increase mortgage rates by threeand a half to 4%.
What's going to happen to thevalue of single family housing?
Typically, the rule of thumb, ifyou look back through the
(19:56):
cycles, is every one percentincrease in mortgage rates, you
should have a 10 percent declinein the value of single family
homes.
That simply has not happenedright, and that is why
affordability is in an all-timelow and I don't see it happening
.
I don't see a huge adjustmentcoming in single family housing.
I don't see a huge adjustmentcoming in multifamily.
(20:17):
Right, there certainly could bean office, but where are we
really risky right now?
I see the biggest risks, quitefrankly, is just how
overinflated it seems the equitymarkets are.
You look at some of these PEsbut you ask yourself why is that
?
And that's because there hasbeen so much cheap and easy
(20:37):
money flowing for so long rightand they're chasing for yields.
So, really, what needs to change?
From my mind, we need to see aproper slope to the yield curve
right, and that can happen intwo ways.
We're going to have 21consecutive months of an
inverted yield curve, neverbefore in our lifetimes.
Rachel Oh (20:56):
Rachel, have we seen 21?
Brent Beardall (20:56):
months of an inverted yield curve.
Never before in our lifetimes,Rachel, have we seen 21 months
of an inverted yield curve.
Typically, the inverted yieldcurve says, hey, a recession is
coming.
And we haven't had one wehaven't, and my prediction is
we're not going to have one,because here's what's nuts.
You look at the way ourgovernment is spending money.
We're spending money like adrunken sailor.
(21:18):
We have our government spendingmoney like we're trying to get
out of a recession.
Yeah, If you think about it,it's like somebody driving their
911 down the freeway in youknow six gear, going 110 miles
an hour, slammed on the gas andat the same time slamming on the
brakes.
Rachel Oh (21:34):
Yeah.
Brent Beardall (21:35):
Right, you've got the government spending
money like crazy and, by the way, you go back to jobs.
So many of their jobs arecoming from the government
sector, so you've got all thesejobs coming.
You've got the governmentspending money by the way, not
spending our own money, spendingborrowed money and then you've
got the Fed trying to slowthings down.
So we're driving with two feetright now right, one foot on the
(21:59):
gas, one foot on the brake.
So I don't see a recessionbeing imminent.
But what needs to happen?
We need to get back to a normalslope on the yield curve, and
that either happens from thelong end going up, which is what
I think probably should happenI think the long end is
artificially low or you have gotto get the short end to go down
(22:19):
, which would only happenthrough Fed cuts.
Rachel Oh (22:21):
And we've already heard that they're not going to
so, or at least anywhere in thenear term.
So it looks like then the longend needs to go up.
Tell me so help our listenersunderstand.
What do you mean by that, thenthe long end going up?
Brent Beardall (22:35):
The 10-year right Right.
If we're saying, hey, the shortend is here, around 5%, and
we're going to stay here that ishigher for longer, then why in
the world would the 10-year bebelow that?
It shouldn't be.
The 10-year should be abovethat, right.
So I don't know what the rateon the 10-year should be, but I
think it should be above the Fedfunds rate.
(22:56):
So take it to 5.5%, 6% on the10-year, but then what does that
do to mortgage rates?
That would take mortgage ratesfrom 7% up to 8% or 9%, which
probably needs to happen,because then that would take
some juice out of the housingmarket.
Rachel Oh (23:11):
Yeah, my mother always likes to remind me that
she financed during a doubledigit, so I don't know why you
guys are always, so you know,complaining, because I think I
don't remember when, but whenthey were in a double digit
environment.
Brent Beardall (23:25):
Okay, Rachel, I'm going to be your favorite
podcast host because I'm goingto tell you what you can retort
to your mom about.
Rachel Oh (23:31):
Yeah, tell me.
Brent Beardall (23:33):
That's fantastic .
It was double digits.
How much did you pay for yourhouse?
Rachel Oh (23:36):
I know and let's inflation.
Brent Beardall (23:37):
Adjust that now right, I know.
Oh, you know, I bought my housefor $45,000.
Rachel Oh (23:42):
I know I think it was $30,000.
Brent Beardall (23:43):
You can afford 11% interest at $30,000,.
Right yeah, try doing that fora $700,000 house.
Rachel Oh (23:50):
Right?
No, for sure, for sure.
Bring up the point that ifinterest rates need to go up in
order for our economy to settledown and to kind of get back to
a more normal situation, that wemight have to take that in the.
You know, take that bite for abit in order to kind of right
things right, like we do need tobe willing to kind of endorse
some of those changes and Ithink sometimes we're not
(24:12):
willing to, or there's a lot ofrhetoric out there that we won't
be able to sustain that.
Brent Beardall (24:16):
If we really want a long-term sustainable
economy, we've got to sometimestake the pain, and right now we
haven't taken the pain quitefrankly, yeah, no, we haven't,
we really haven't, and I thinkthat it's.
Rachel Oh (24:30):
I think we're starting to see it, though, a
bit right, like I think peopleare starting to become less
worried.
I mean just, we were drunkenwith, you know, 0% Fed funds
rate for so long, and now we'rein this environment where it's a
little higher, and I thinkpeople are finally starting to
kind of get accustomed to it.
So maybe that's how you do itright.
You just kind of inch them up,and we had the huge escalation.
It shocked everyone.
But now we're kind of at a newnormal.
(24:51):
Maybe just do it little bylittle and maybe we can get
there.
I mean, something's got tohappen because we can't.
Brent Beardall (25:02):
Something's got to happen, and one of the
mistakes I think the Fed hasmade is this attempt at
transparency.
No one can predict the future.
J-pal and the Fed governorshave an incredibly tough job,
but it's made tougher by thefact that they, at every other
meeting, they have to put outtheir dot plots and they have to
say, hey, this is where wethink rates are going for the
rest of this year and the nexttwo years.
(25:23):
How can you know?
Because then they follow thatright up with saying it's going
to be data dependent and so thedata is going to dictate it.
So why even pretend to say weknow where rates are going,
because they don't?
Rachel Oh (25:35):
Yeah, no one knows.
Brent Beardall (25:38):
And the other thing is it has been so
difficult to try to getinflation to come down and we're
celebrating with what?
Three and a quarter inflation.
That's fantastic, that's realprogress.
However, that's still over 50%higher than the goal, and they
have a dual mandate exactly 2%or below, and they have a dual
(25:59):
mandate full employment, checkthe box, low inflation we're not
there yet.
It's been a lot easier for themto get inflation down to 3%
than it will be to go from 3% to2%.
Rachel Oh (26:09):
It's always that last mile right, that last little
stretch.
Brent Beardall (26:14):
It is and everybody says, well, the Fed's
going to overshoot it, which isa fair question.
Are they going to overshoot it?
Because we all know the lageffect of what happens after you
raise rates.
But the question is, whathappens if we're undershooting
it?
What happens if we don't killinflation?
And Volcker and the teamlearned in the 80s you've got to
(26:34):
get in front of inflation.
Rachel Oh (26:36):
No, I think it's good .
I think it's good to holdsteady.
I mean it's obviously not greatfor my underwriting teams, but
we need to.
I mean, we kind of take alittle bit of pain for now.
Brent Beardall (26:43):
That's exactly right and, as everyone knows,
right.
Sometimes working through thetough times, that's what
provides opportunities.
Rachel Oh (26:51):
Yeah, yeah, so opportunities.
Brent Beardall (26:54):
Then let's see where do you feel the greatest
opportunities lie right now, asyou look at things, I mean, if
somebody can figure out how toconvert office into multifamily,
that's to me the biggestopportunity out there, right?
Because you have all of thisoffice space that's going unused
(27:14):
and we have this huge need forhousing.
So if you can figure out how todo that and obviously those are
all case-specific,circumstance-specific, but if
somebody could be great at thatI see that as a potential
double-to-home run, Solid,single, still Multifamily.
I mean you have to love thediversification of the cash flow
(27:38):
that comes from a multifamilyproject.
Then you have to look at itfrom a macro perspective.
People need places to live.
We have this housing short runand ever since the Great
Recession we have beenundersupplying lots.
So that means we're going tohave to be denser in terms of
our housing.
So I see multifamily.
I'm incredibly bullish onmultifamily.
Over the long term, we may notsee the rent increases we saw
(28:01):
over the last several years, butthat's a good thing.
The rent increases we saw thelast several years have been
unsustainable, right right Now.
Rachel Oh (28:09):
You know that's.
You know, at PEG we, you know,half our portfolio is
multifamily and we've definitelysince seen that.
You know rents slow down a bitbut we also see good occupancy.
Right, it's still solidoccupancy.
We're a little overbuilt insome of our markets, including
downtown Salt Lake, but you know, everything indicates that in
the next couple of years that'llcome back right back up.
So I definitely thinkmultifamily is a great place and
(28:31):
, to your point, if we can solvefor this, all these vacancies
in offices, and figure out a way.
It was interesting when the whenwe spoke with Gensler, he did
point out a few different things.
It's not always so easy and Ithink some of the regulators
need to ease up right, causethere's it's the way and I can't
remember how he said a floorplates or something and this
much distance from the elevator,and because of that you can't
(28:52):
have this.
And so it was reallyinteresting talking to him about
that, because I think that's oneveryone's mind.
Right, how can we, what can wedo with this asset class that
has just been decimated by theeffects of COVID and we have a
huge housing shortage?
Can we marry the two?
But I think it's going to takea minute to figure that out, can
you right?
Brent Beardall (29:08):
And what's the old saying?
That necessity drivesinnovation.
Yeah, right, and so as andwe're starting to see that in
Seattle we now have a completeturnover of the city council and
the mayor is very, very probusiness, the mayor, what can we
do to help reinvigoratedowntown?
And that's what we need to seeat some of these.
(29:33):
You know code requirements interms of multifamily and some of
these things that could make itactually feasible and cost
effective to turn office intosome multifamily.
Rachel Oh (29:38):
Yeah, no, I just on a side note.
I was in Seattle recently and Inoticed that whole corridor
there, like the old Navy and theBanana Republic and the Gap
they're all gone.
Brent Beardall (29:50):
Fifth Avenue, the Banana Republic.
That's right across the streetall gone.
Rachel Oh (29:52):
Fifth Avenue, yeah, fifth Avenue, the Banana.
Brent Beardall (29:53):
Republic.
That's right across the streetfrom us.
Yes, yeah, it's right acrossthe street from our headquarters
.
So that's a perfect examplethat building, the Banana
Republic building where BananaRepublic used to be is called
the Old Coliseum Building inSeattle.
Sorry, to go off on a tangent.
Rachel Oh (30:08):
No no.
Brent Beardall (30:09):
But that was bought, I think 12 years ago for
$8 million and I think it'slike 18,000 square feet of
retail on the corner of fifthand pipe.
That's going to market.
They're going to put it out forauction for 2 million bucks.
And I look at that, I'm like $2million Now you cannot.
You know you can't go up.
You've got it's a historiclandmark, so it would have to be
(30:31):
.
You'd have to put in someseismic retrofit, so forth.
But $2 million for prime realestate in downtown Seattle and
you will see buyers come out ofthe woodwork because there's so
much money waiting on thesidelines.
So I think that's what's goingto happen.
Is you're going to find thefloor?
Is buyer say wait a second,even if I have to buy and I have
to wait four or five sevenyears I'll do it, because it's
(30:52):
going to come back.
Rachel Oh (30:53):
Well, it is a phenomenal location.
I have so many good memoriesfrom when I was young and
shopping down there and I wentgeez, I can't remember, it was
just a few months ago and I wasshocked.
It was just hard to see.
But you know, we're seeing thateverywhere, it's not just
Seattle, I was in San Franciscotoo, and that's market streets
(31:14):
just dead.
Brent Beardall (31:14):
Oh, macy's is leaving Union Square in San
Francisco.
Yeah, no, I mean we do.
We do use terms like see iteverywhere.
No, we see it in some of thelarge metropolitan areas.
What's crazy is you go 15 mileseast of Seattle to Bellevue
they are killing it.
Bellevue still leads the nationin sales per square feet.
Rachel Oh (31:30):
Really, I did not know that.
That's amazing.
Brent Beardall (31:32):
Right, so it's.
It's all about safety in access.
Rachel Oh (31:37):
Oh, and you have a new Din Tai Fung, don't you?
In Bell Square?
Brent Beardall (31:41):
too.
Yes, we do Okay.
Rachel Oh (31:44):
I'm obsessed, okay.
So anyway, again anothertangent, but just this is my.
You know you're in my hometownand, uh, you know I'm dating
myself.
But you know, back before whenMicrosoft first started, I can't
believe.
I just said that.
But Seattle has just changedover the years and it's so fun
to see.
And then going recently andjust seeing some of the changes
was hard.
But you're right, there'sopportunity and I and I do think
(32:05):
you know, give it a few moreyears and I think they'll.
Things will turn around and Ilove hearing that the whole city
council has kind of changed.
I think that'll make a hugedifference.
We have a big asset there.
We've got the old HomewoodSuites down right by the, on
Pike Street, over by theConvention Center.
That one actually, we bought asa hotel and we're converting
into apartments which has beenquite successful.
Brent Beardall (32:26):
Yeah, that's actually been quite successful.
Rachel Oh (32:27):
I'm sure it will be, and it's workforce housing, so
it's not luxury class A, it'ssolid class B.
I think it's to service, kindof that, you know, the workforce
and to service Pill Hill, rightthere just up the street.
So I think that'll be aphenomenal.
Brent Beardall (32:43):
And that's what we need in all of our markets.
Right, we don't need a wholebunch more of class A, we need
solid class B and the Lutherportfolio that we're selling the
$3 billion portfolio we'reselling it's class C and class B
, it's true.
I mean, the average loan size,I think, is $1.5 million.
(33:06):
$1.5 million average loan sizein California.
These are duplexes, these arefourplexes, they are workforce
housing and that's what we needmore of and it's an incredibly
resilient asset class.
Rachel Oh (33:19):
Yeah, no, it's so true, it's so true.
Okay, so you know we've talkeda few different things about
what you're seeing and whatnot.
Let's just talk about kind ofyour passion to your bank and
I've seen you grow the bank indeposits and just in preeminence
and also expansion intoCalifornia.
So you just completed I mean Idon't know how recent it was,
but it's a substantial bankacquisition in California.
Now you're in that state.
Tell me what that means thenfor Wafed, and are we going
(33:42):
national?
Are we going to continueexpanding?
Tell me what your plans are.
What's your world dominationplan?
Brent Beardall (33:50):
Yeah, my world domination plan is not to
dominate the world and to stickwith what we know, and we know
very little.
So on February 29th wecompleted the acquisition of
Luther Burbank.
On Thursday, the 29th ofFebruary we closed the deal.
Then, starting the next day,Friday March 1st, we started the
conversion.
The conversion was done Sundaynight, Wow.
(34:12):
We are literally the fastestclosed to conversion in.
The conversion was done Sundaynight.
We are literally the fastestclose to conversion in the
history of US banking.
I'm so proud of the teambecause what really matters is
when are you on the same system?
We're on the same system nowand since conversion, we've only
lost 1% of their deposits,which is a huge, huge win for us
.
And to be able to get us inCalifornia and you might say,
(34:33):
why in the world does WaFd wantto go into California?
Well, it turns out there's $3.5trillion of deposits in
California and I'm incrediblycompetitive and California has
every bank known to man there.
But the reality is we believewe've got something better right
.
We really do.
We believe we're kind of thesweet spot where we're big
(34:54):
enough to be relevant, smallenough to be nimble and get
things done and, at the end ofthe day, people want technology,
they want access to their money, but, most importantly, they
want a relationship.
They want to be able to speakto a decision maker and find out
what's happening with the deal.
We really think we're in thisreally, really sweet spot.
And if you think about themid-sized banks that have gone
(35:15):
away out of the Californiamarket you mentioned too right
at the get-go Silicon ValleyBank, first Republic poof gone.
Rachel Oh (35:23):
Yeah, crazy, crazy.
I can't believe it.
Brent Beardall (35:27):
Then you think Union Bank just went away.
They got acquired by US Bankabout two years ago.
Then Pacific West and Bank ofCalifornia came together.
So there's been so muchdisruption in the midsize bank
space and for a good, solid banklike WAPE to be able to come to
California, we're incrediblyexcited at the potential.
(35:47):
Now so we're in nine Westernstates.
Do we want to expand and goeverywhere?
No, no.
Not at all.
I mean, if you think about thebanking landscape, there's
really two kind of lines ofdemarcation.
As a bank grows, the $10billion threshold.
At $10 billion you lose half ofyour interchange revenue and
you get compliance regulation bythe CFPB.
(36:09):
So that is incredibly painful.
And then the next big thresholdis $100 billion.
And we've all heard recentlyabout New York Community Bank
and they just went over that$100 billion threshold and
having all kinds of problems.
In fact they had to put in abillion dollars of new capital
to be able to just make itsurvive.
The rumor on the street is itwill cost $100 million per year
(36:34):
of incremental operatingexpenses to go from $99 billion
to $100 billion.
That's nuts, that's crazy.
And so there's this overhang onbanks that are under $100
billion.
What do they do next?
And those banks nationallywould be First Horizon Bank on
the East Coast, zion's Bank inyour neck of the woods they
(36:57):
trade at discounts because of it.
Everybody says what can they do?
The biggest banks can't acquirethem because unless something's
going to fail, they're notgoing to allow the biggest banks
to acquire.
How do you grow and do itprofitably when you've got this
huge bullet of $100 million ofincremental operating expenses
coming at you.
So if you think about it, WaFdat $30 billion.
(37:17):
We've got all this runway infront of us and I'm incredibly
excited at our potential, whatwe can do just through organic
growth, and we've had this trackrecord.
We've been so blessed and sofortunate.
We went public in 1982 and ourtotal shareholder returns since
going public in 1982 is 30,000%.
Rachel.
Rachel Oh (37:35):
Oh my gosh 30,000%.
Brent Beardall (37:38):
Now, that's not like PEG, right, because you're
only talking about 8% to 12% peryear, but 8% to 12% compounded
over 40-some-odd years, thatdelivers a 30,000% return.
And that's exactly who we wantto be.
We want to be slow and steady.
Reliable Banking should beboring.
We should be there for ourcustomers.
(37:58):
We should be there for ourshareholders, and that's why I'm
excited about doing what we'redoing.
Rachel Oh (38:02):
Banking should be boring.
I'm going to quote you on that.
But you're right, you don'twant your banks to fail.
You want your banks to be solid.
You want them to be there allthe time.
You don't want to lose sleepabout your bank, right?
No, no, not at all, not.
All that you can do in thepublic markets, we do that
enough, so not in my bank, okay,well, you know, brent, we're
(38:23):
going to have had such anamazing time talking with you.
I kind of wanted to just kindof close with you've seen it a
lot, you've seen it all,probably as much as anyone can.
And so what is your best adviceto commercial real estate
investors right now, given thechallenges, given how even
regulators are making itdifficult for banks to learn?
Like, just tell us what do you,what would you tell you know
(38:45):
our commercial real estateinvestors right now?
Brent Beardall (38:47):
Yeah, my biggest piece of advice is stay in it
for the longterm right.
Look and say I always.
I always tell young people thisrun to where everybody else is
running away, right, Run towardsthe fire, Right.
So and and look to createopportunities, and I know
Cameron, the founder of PEG,does exactly that.
(39:08):
I mean he loves to be told youcan't do that.
Rachel Oh (39:11):
He does all the time Game on.
Brent Beardall (39:12):
Okay, Let me show you how we can do that
Right.
So so that would be my adviceto investors is say, hey, where
is everybody, you know fireselling things to try to get out
?
And then where's theopportunity in that for you?
And so that's kind of myperspective is hey, you know,
just because everybody elsethinks it may not make sense,
(39:33):
look further, dig deeper andunderstand it.
That's where opportunities arecreated.
John Maynard Keyes once saidthe market can stay irrational
longer than you can stay solvent.
Sometimes the market can beirrational.
That's true in equities, that'strue in commercial real estate,
that's everything.
So build yourself a balancesheet so you can stay solvent
(39:53):
longer than the market can stayirrational, and that provides
the real opportunities.
Rachel Oh (39:57):
Yeah, you got to have the money there so you can
pounce on the opportunities whenthey come.
No, absolutely.
Brent Beardall (40:04):
Better than that .
You've got to have the money atWaFd Bank.
Rachel Oh (40:07):
Awesome, okay, okay.
I grew up with WaFd.
I had friends parents that were.
They probably are people thatyou know, but I know WaFd has
always held a special place justbecause it was all over Seattle
, so absolutely.
Brent Beardall (40:22):
Well, hey, thanks for this opportunity.
I enjoy it and I sincerelyappreciate our relationship with
Peg, and there areopportunities to be had, but it
just requires work.
Rachel Oh (40:31):
Yeah, no, no, absolutely, and I know you've
been working hard.
So thank you so much, brent,for joining us this week.
Your thoughts have beenincredibly insightful and we're
grateful for your friendship too, and for your support.
So thank you so much forjoining us today.
So, in the meantime, thank youto all who have joined us.
I know that it's been achallenging environment, but I
(40:51):
think I'm hearing folks likeBrent and whatnot that we're
learning how we can make thebest of these situations.
So, from the peaks of theMountain West, I am Rachel Oh,
your host for Peaks andPortfolios by PEG Companies as
we continue to dig into allthings real estate.
Have a wonderful day, everybody.
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