Demographics Driving Real Estate - [Business Breakdowns, EP.190]
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Welcome back to business breakdowns. This is matt russo, and my guest today is fernando daily on founder of lay on capital. When I first came across fernando in his business, I was interested to see what felt like a mix of a private equity portfolio, a family office and a diversified.

And the more I duggin, the more interested I was. Fernando Operates fourteen different businesses under fully on capital umbrella, and they vary across real estate, health care and financial services. But as you will hear in our conversation, the businesses are connected and instruct one another.

I'd say there's an underlying theme or connective tissue throughout this conversation, and it's how demographic insight, since underneath everything is the foundation to me of what makes this business possible. And as you will hear, there's no Better person to talk about demographic dynamics then, fernandez. So please enjoy this breakdown that is part thematic, part insight into a modern day Operation.

All right, fernando, very excited to have you here to talk today. You have built a fascinating business, and we were discussing where we could go with this conversation. There were truly no ends in sight in terms of how many different topics we could talk about.

But one of the main things that I want to get into is your interesting perspective on demographics, real estate, how that fuel a lot of what you've done. And I thought a good place to start is just with your story. I was hearing some of the antic dotes about IT going to school in two different countries in the same day, some of these fascinating dynamics. So maybe you could just sketch out your path to where you are today in in the thermal version, however you think is best to share IT. But I think that background is going to be really helpful to shape the conversation.

sure. First all, thank you for having me. I'm expecting this to be a lot of fun and appreciate you inviting me on the show.

I was pretty lucky in that I was born in a very interesting part of the world. I was born alongside the southern texas and the northern mexico border. And so I got to scramble two different countries on a daily basis.

I got to go back and forth between mexico and the united states to school in the morning in texas and went to school in the evening in mexico. And when you do that reflexively, you learn how to contrast people and systems. And so I taken a lot of those lessons as almost like a social systems engineer, a person that is able to contrast what happens in either the united states or other countries.

And I learn to have a real appreciation for things that are a very productive in the united states. And that was a daily thing. I got my learning, my education on demographics, on social structure and hierarchy, on economics.

I got my education at a very realistic, pragmatic level by scrambling bad border. And that border happens to be an incredibly interesting one. Even historically, texas was a republic in nineteen forty six.

The border of texas has change multiple times. There was the one country that was part of the united states that was part of mexico before mexico is a country that was part of the new spain. And so as these borders change, I think you get a lot of very interesting things happening between the borders of the united states.

Shares that are unlike the borders that you would see in parts of europe, pe or asia. There's not that much economic discrepancy to speak of. I think probably the only border that that has more economic discrepancy in the united states in mexico is probably north korea and south korea. And so the system where I grew up contrast that a lot, and I gave me a lot of lessons about how things could be made to be more productive. And so I think of myself a little bit in my career as a person that has designed organizations and businesses with those lessons in mind.

Yet your point on systems definitely bring true just in terms of how you've been building things in one of the things that we talked about last week, which I thought you frames very well and I wouldn't dare try to frame IT again myself, is the importance of demographics to real state. So could you sketch that out a bit just in terms of your thought process and viewing real estate through the idea and theme of demographics?

yeah. So real state is a broad asset class. In real estate, you have digital, which is telephonically equipment, data centers, cell tower assets like that, that are all generating revenue.

You have office building, shopping centers or we call net least retail, which has restaurants and banks and pharmacies. You have warehousing and logistics. You have housing, rental housing and for sale housing. And so those are primarily the real estate asset classes that govern our self storage and a few others that govern the real state industry. And all of those subsets, all of them are effectively spaces that human beings need to conduct whatever life activity that they want to conduct.

It's either where they live, where they work, where they shop, or it's the data center where they upload their photos or the self storage facility where they put some other valuables and so on. And so for so every space that is developed in real state has a purpose and the people that use those spaces constitute uh, market that is all about the demographics of that consumer base. So if you think about in the rental housing business, we have renters that typically are at twenty four to thirty five thirty seven years of age.

They have disposable income. They usually spend twenty five or thirty percent of their income on housing, and then they allocate their budgets, their disposable income, based on their preferences. But we understand how they consume everything, for instance, are giving example.

We were really be footles by the fact that we saw the budgets of renters change from housing. Their housing costs, the biggest part of their budget then car payments, school loans, you have food. But second, bigger payment cost was technology.

That's not that surprising. So netflix accounts and cloud services, everything the people pay for. But inside the technology spent, one of their biggest sub line items was gaining.

And we saw that the gaming business was going to get a big part of the wallet share of our renter base. And so we see these trends in real time because we understand them as our customers in the housing business. And so many times when we have moved to make investments outside of real state, we learned how to underwrite credit from the demographics of our tenants.

So for instance, when we got into the dental business, we entered the dental business because we had a shopping setter. We learned about the dental office, we learned their p nl. We learned that they were generating about two million dollars in revenue in that location.

They had about a thirty percent margin. So we said, oh, well, why don't we build the second one and support this business? So we did the second one, third one. And then that business, eventually, we use our real state capabilities to build a three hundred location dental business, but we undervote the credit of the tenant in the shopping center.

So everything we've learned in business, we've learned through the ownership of real state, whether it's households or individual renters or its tenants in our shopping centers or tenants in our warehouses, we learn the demographic experience. The warehouse when we develop warehouses, we develop close to the rooftops because people want delivery of their goods. IT used to beat up.

The expectation for all of us was a three or four, five day turnaround for the every of this product. Now the expectation is you want at the same day. And that means that the warehouses that we develop have to be much closer to the rooftops that ordered these goods.

And so all of these things are about human beings consuming things, buying things, living somewhere, how they spend their money. And so we ve learned through the real state business about everything that relates to the american consumer. That way.

I think you have fourteen different businesses now that essentially feel like their offshoots are very much time to realize, but they have some complimentary pieces to them that can be associated with real state like you just described.

I'm curious, when you go back to the idea of the systems thinking, has IT been the case that you can take that model of the dental practice and apply that generally elsewhere nationally? Is IT something where there's limitations to certain regions? I know you have global businesses. So just thinking about that where the system either works incredibly well and where IT starts to break down, when you think about those various borders I just discussed.

first of all, our businesses mainly consulted in three verticals. We owned three businesses in real estate where we build warehouses, housing and health care real state. We own three businesses in the financial services sector, so insurance financing premiums and medical device listing and consumer lending.

And and then we own six Operating companies and health care that provide services in automotive, gy, dental, cardiology, mental health and set up. So those businesses, I think about them as complimented in some sense, but also most importantly, we consider them essential services, essential needs. But there is housing or health care.

These are things that americans really want and need. And we have about six million americans that consume our goods and our services. And so I think about them that way. Yes, I think many of them, when we ventured them, we start by understanding what's happening in that business, what's happening in that industry, where are their imperfections, where are their productivity gains, where can we do something different than the status quo or the state of the art, and where we can improve IT according to our advantages. We have some advantages that others don't like.

For instance, if we wanted to grow a dental business, we would say, hey, let's leverage our real estate teams to find those locations that we think of the best demographics. And so in pediatric dental care, we find that those locations are in suburban locations that have household formation. We like places in nash, bill and dallas and osten in tampa, in denver that are receiving a lot of immigration, a lot of household formations where families are relocating from other coastal markets.

And we can go build dental clinics where there is strong household formation. We know their families there, so pediatric dental care can benefit from those demography, taye wins. And so we can leverage our real state teams, build a clinic of facility, build a brick mortar.

We don't think that amazon is gonna disrupt dental care because we think that is hard for an algorithm to put races on a Young men or women. And therefore, we think some of these businesses are less disruptive by technology. So we need those physical spaces until we can leverage our real state teams and continue to grow that dental business.

And there's quite a bit of synergy there and then we can work on things like insurance for our properties and so on and so forth. Or the medical device leasing business may lease a medical device to the dental clinic. And so that's how we think about these ecosystems.

We think about them as systems. And that logic sometimes applies Better than others. But yeah, we tend to understand what happening in those industries and find these openings where we can develop value for people, for customers, for human beings that can benefit from our services. And then if they like what we delivered to them, then they'll .

reward us yet very much midy growing economies in their own ways and building the ecosystem for them. On your point of managing these different businesses, there's clearly synergies just in terms of information and visibility. When you think about underwriting as a congruent, there's always the question of where do the benefits come in.

IT sounds like these are Operated as separate businesses, but i'm just curious on that point, are there ways that you can shift your underwriting strategy to view IT as a mix of these multiple businesses? And the net result is going to be Better even if it's at the expense of one in the short term. Do you change your approach at all when you think about underwriting?

Let me back up a little bit. So I started this business with very little resources. I didn't have a lot of capital.

So every time I started a business or my initial business, I was Operating with a very finite resources like all entrepreneurs do when they're getting started. And that scarcity of resources makes you very efficient. And I think we have always maintain that DNA of we have finite resources.

We have to use them wisely. We have a couple of rules. We say there is no such thing as a small cost. The in discipline of having, uh, unnecessary cost means that IT undermines everything that we do. There is no such thing as a small piece of revenue because small revenues can turn into larger companies.

Every single large company in amErica came from a small piece of revenue, and that emerged and into a large piece of revenue. So I tell you that because my mentality has always been, I need to protect my downside. When I started something new, i'll give you a couple examples.

And we started in the veteran business, I said, well, the demographics of urban areas have this skyrocketing pet ownership, but urban areas are very difficult to find real estate locations. And our team went into these urban areas and found difficult to develop real state. And then we made that into a vet clinic, which resulted in great Operating gains for the practice.

But when we develop the real estate, we made a profit on that real estate, and then we use that profit to open a new store with the profits from the real state. So we can sort of predict that we built a clinic for a hundred dollars, that we could sell that rule state for hundred and thirty dollars, and then use that thirty dollars of gain to open up the actual Operating location in that real estate or in another location. So we had some downside protection, and that's how we built all of our businesses with a little bit of downside protection, maybe some prophets profits that we reinvested into the gains of an Operating business.

And Frankly, all of the people that i've always admired in business have used some version of that to protect their downside and to go and pursue some kind of research and development gain. If you look at amazon web services or who started doing IT for their own account and then grew into a massive business or L B M H, that developed protocol o strategies when their first investment in the r and things like that, there was always a downside protection from an accessary business where you could be bold enough and have the audacity to go explore a new business line. And that's how I tried to do that same thing.

And insurance. I was tired of pain, huge premiums. And I said, we need to start building an insurance business to protect the value of our real state, because those premiums keep escalating and growing.

And our real estate always vision property and casual insurance. And so little by little, we went into that business. And we also, to your question on systems, we understood that the insurance system had a supply chain where there were intermediates that made the cost of the policy more expensive.

So as you had insurance broke ridge and insurance, reinsurance, all of those incremental costs made IT more expensive. And I could build a business that didn't need a broker to sell me insurance, I could remove some of that cost because I was my own customer. Things like that, that we understood about flashing out a system and accepting IT and reconstructing that system to understand where value was. And then we could emerge IT with something we were already doing. So we can build a self sufficient company that also benefit something else we were already doing yet.

An interesting framing of reinvestment opportunities. Anything that need scaling, you require the profit from the actual acid and then the reinvestment opportunity that attractive. R Y, particularly interesting here when you have those examples of the vet clinics in the real estate itself and how that can trickle on.

Imagine some of those markets. And IT feels like there's a real secular story behind what's happening there. I'm curious, is that primarily your focus, these regions, which might be changing and have a lot of opportunity basically as you go through the list of businesses that you built out? I tend to think of real state as this historically cyclical thing that can the cycles may be various periods long in terms of years. But i'm just wondering, do you differentiate between the two?

Yeah, no. I think there are certainly signal elements of real estate, although those have changed significantly over the years as the pool of capital has brought them to support realistic development.

So one of the things that we've seen over the last twenty years is that large poles of capital with their insurance companies, asset managers, wealth management firms, R I S, private equity asset managers, pension funds, corporate and public pension funds have all allocated more and more dollars to a real estate asset class. And so as that has become institutionalize ed, you have this underlying support of capital that supports values in certain segments, summer, more institutional and others. I would say digital infrastructure, housing and logistics are the primary beneficiaries of that capital support.

And as all of that capital has come into the real state industry, the specificity of those valuations has been diminished somewhat. The other consequence of the specificity of real estate and incorporate new capital sources into those industries and asset classes. What is also happened is that it's made IT more competitive where you have a lot of buyers that are insurance companies and asset managers and all of those pools of capital, and they are buyers of the asset from manufacturer like us in that supply chain.

We are manufacturers of housing. We developed that housing. And then ultimately, that housing is acquired by a large pool of capital, eventually acquired by the large asset managers or insurance companies or pension fund, separate accounts with an asset manager.

But our job is to do all of the groundwork to buy a piece of land, to entitled to get zoning permits and to do all of that work, and then ultimately to design that housing in that jurisdiction and then developed build IT, understand all of the supply chain of construction. And then ultimately, once we've done building IT, we have to lease IT and then manage IT and then cash for IT. And then that asset, eventually, we owe some for the long hall.

But most of the time, they are acquired by large institutional investors who own large portfolio OS of these kinds of assets. And what we do is pretty difficult. In housing, for instance, every jurisdiction is different.

So if we build in dale's or in tampa or in phoenix s every small town remembred, a city like phoenix x could have five different suburbs, or a city like dallas could have twenty different suburbs. And every one of them has different jurisdictions and building codes has different laws that govern how to build housing. And so if testers trying to build a car in a factory, they have a contained environment.

This is where we make the chasa. This is where we make the IP. This is where we make the glass.

This is where we assemble IT and the all contained environments that you can replicate over and over. But the housing business does not allow us to do that. Every new place where we build has different topography, different building codes, different city restrictions.

And so that makes IT very hard to manufactured housing at scale. And we're one of the few that are private developers and manufacturers of housing that do IT at scale. Every year, we build three thousand units of housing, almost a billion dollars of housing every year that we develop.

And IT takes a while to do that. Every project has a three or four year life cycle, and it's very difficult to do at scale. So we've perfected those systems to build that housing at scale.

And we do that understanding that there are markets that have much higher growth potential than others. So we look at markets in the sun belt primarily. So places like rally north CarOlina or Austin or denver, if you'd like, we can go into why we pick those markets. But I think it's fascinating what's happening in those sittings from a demography.

Yeah maybe you can elaborate what would the characteristics be that you look for and maybe what's happening there .

that drives up those cities have primarily forer ingredients. One is that they are business friendly states where companies have been setting up their Operation. So you go to a place like phoenix, you have in terms of digital infrastructure.

T S M C is building a giant facility in the northern valley of phoenix where they're creating thousands of jobs. And so evidently we're going to develop housing nearby. But you have a nearshore ing of companies like T S M C, their billing chip plants in the northern valley of phoenix.

You have the same happening in Austin where Taylor samsung has done the same, build a giant facility there. You have biotechnology companies in rally that have changed dramatically. The demographics of a place like rally, north Caroline await used to be the main industries in a place like north CarOlina, or tobacco and furniture and old school industries like that, that are no longer now.

You have a viBrant biotechnology industry in the research triangle and rally. And that's primarily because you have universities like duke, wake forest, U N C, chapel hill, you have a giant educational ecosystem that is developing engineers and talent that when they graduate from those colleges, they go straight into these businesses. So you have a reengineering of the base of industry in markets like that, that presents a great opportunity for us to develop housing.

And when we develop housing there, we're making a decision on that household formation, that business friendly climate. We're looking at cost of living that is attainable, families coming there or what are we gna build that. We build housing where we're probably going to build a dental clinic.

And if we build a dental clinic, then those families are probably going to order things on amazon. So we should build logistics centers that, that will be leased to e. Commerce companies and to the vaccine manufacturer and rally that need storage space and things like that.

So all of these are very complex systems that we tend to develop our business models around, and they're pretty complementary to places that are seen job growth like denver, Austin, pinions, tampa, rally and mashill. These markets are the new generational demographic places that are receiving influx of Young people. Part of IT is cost of living Young people and households that have seen a cost of living lack of obtainable market in two of the coastal .

markets primary. And do you think when you described the chAllenges of every region or even every city has its own zoning dynamics, which make Operating at scale chAllenging? The synergy are there to a certain extent, but he hit a certain point where he asked to be customized.

So that makes each in particular city need to be big enough on its own. How big is that opportunity set when you think about whether it's the U. S. And I don't even know if you would potentially do this abroad, but how many cities or regions or areas do you think exist out there where you could break into? And is there just enough runway existing in those markets that you mentioned to make IT valuable?

Focusing on that, there are probably twelve cities that we would concentrate the bulk of our real state development activities and our health care activities, but there are plenty of markets where we find opportunity that are not within those main cities. Often times, let's say that we have an agreement with a large commerce company to build a warehouse in indian apples or in a semi rural part of west texas to fulfill the energy industry.

I don't mean to imply that those are the only cities that we would bet on because this is a giant economy. Those are preferred cities. But our businesses have participation and investment in so many secondary markets, places like savana, George, there are plenty of rural areas where we build health care facilities because we think that they're underserved.

And so sometimes you could go to a place like dallas and want to develop health care and its very healthcare clinics. And they could be completely saturated because they have so much population already. And so you're Better off going to a rural part of georgia and providing health care services there or developing logistics and distribution in some of those secondary markets that have not been arty saturated.

So I think we have to taken into account some of those supply and demand dynamics to pick in our markets. But I mean, it's a giant economy. We have a thirty trillion dollar GDP economy. No shortage of places where we can build both really estate Operating companies growth and then any of the other services businesses in lending or an insurance where we can do them anywhere really. Yeah.

there's always opportunity somewhere. I didn't appreciate the precision in terms of the number even though I appreciate that there's there's secondary markets as well and some of those can evolve into those primary markets. One of the things that you mentioned before was near shoring and IT was in the context of things happening in the us, which manufacturing I think you can look at north amErica broadly and think about nearing trends.

About a decade ago, there was a lot of discussion about bringing more the auto plan cy there into mexico or elsewhere. Just in general, as you think about the trend of nearing the opportunity, the reality, how would you frame IT both from A U. S. Standpoint, but then also from a mexico standpoint as well?

sure. Like I think we went through a period of globalization where the chinese economy grew from over the last forty years into the second largest economy in the world, and we have been organized in the western capital system across europe, the united states, that america, to be reliant on this globalized economic and trade system. And over the last thing since the pandemic, but even slightly before the pandemic, we have seen a decoupling need.

What we all saw during the pandemic was supply chains that were disrupted, shipping that was disrupted, and we couldn't get basic things, whether there were respirators or equipment for hospitals or medications or ingredients to make medications. We were reliant on a globalized economic trade system that was slow. And we have begun a decoupling of sorts to do that.

Some of IT is geopolitical and nature. So you have an over reliance on china for massive imports. And I think we have said politically that we would rather bring ship production, for instance, at T S M, C or samsung g to the united states IT, to ensure that or to reassure that in the united states, we also wanted to create jobs.

So I think there was a political imperative to create manufacturing jobs in the next states. So that is also part of our objective as a country. And so what we've seen as these demands for space when we build logistics centers and manufacturing facilities in the united states, some of IT, is the effect of those geopolitical elements that we all move too well in ukraine and the taiwan risk and so in middle east as well.

So we have reassured near shared some of those supply chains to be less reliant globally. Secondly, I think we also have begun to developed space for food production. For instance, we see the cold storage business where the demand for that supply chain used to be reliant on agricultural producers in other parts of life, america, america.

And so now the cold storage supply chain has become this almost like a security need for us to be able to protect our food in our own homegrown logistics chain in the united states. So we see a lot of growth also in the food and called storage distribution chain. Certain ly e commerce has reassured a lot of facility and inventory to the nine states.

So to give you an example, china, today, about almost thirty percent of all retail sales are done online. And all retail cells, meaning everything we buy in terms of hard goods in the united states, were roughly at about thirteen or fourteen percent of all retail sales are done online. So if we catch up to china, that extra seventeen percent of e commerce picture is a whole lot of distribution facilities and logistics enablers.

And so that's going to be a massive reassuring Operation for us to become more reliant on our own centers for distribution and supply chains and to essentially hold more inventory stateside in the event of geopolitical disruptions. So there are some of the things we see. Mexico is the closest place to the united states geographically, where IT has a great deal of labour advantages and cost advantages.

We've already seen a great move. You mention the automotive industry. Automotive industry has been in mexico for three or four decades, and importantly, IT has developed the engineering talent and the supply chain of human capital in order to be able to manage facilities.

Volts wagon, for instance, has its most productive auto manufacturing plant in the world, is based in mexico. They become very productive as a Young population. So there's a sufficient labor to mend these plants and also, I mean, labor costs.

I mean, china is now three times more expensive on a labor of cost and mexico. And so you have serious advantages for the country to be able to develop manufacturing base and to have some of those manufacturing plans resigned in mexico. So I think it'll be a more baLanced combination of some manufacturing being near our shares in mexico and some of that being reassured to the united states. And some of those are political imperatives, geopolitical imperatives, a gradual economic and globalized, the coupling of our trade systems.

And when you think about that from an investment perspective, does the more free markets, the labor cost in china skyrocketing, the mexico now being much more economically viable, even economically advantaged, that being one opportunity set versus the more politically driven, perhaps with some things like chip manufacturing driving the case in the us, when you look at those two things, do you view them differently in terms of the opportunity? Is one more attractive than the other?

When I think about the allocation of my capital in the holding company, when I think about that capital allocation question, I can simplify IT this way. If you invested in china, I don't feel like you actually have a rule of law that protects your property rights the way the united states does us. So that has a severe disadvantage to the united states.

When I think about the political systems in that america, they tend to be more volatile. And you have to account for that india risk and return adjustment. So you have to get paid for that risk. When I think about western europe, I think about demographics that are growing at a very low rate, relativity, united states growth.

What I think about any other country, the viBrant y of their capital flow and their capital supply, I just don't see anything where the value of your assets is as protected through a role law, through a robust capital system that can value your assets in neither a public or private setting, and property rights that are protected through a stable system of governance in this country. So between growth road law and the robustness of the capital system that values your asset is not even a close call. This is the greatest place in the world to invest. And then when I appeal back another layer, and I say, well, wear in the united states, what I invest, I find that those cities that have great household formation that I mentioned, like dallas and Austin and phoenix and denver and tampa and rally, i'm in love with those places because of their household formation and the robustness of their economic growth for the foreseeable future. So not even a close call map on how we think about capital allocation.

I appreciate the reframing of that IT was ultimately where I was getting to that was effectively done on the point on logistics hubs and the e commerce ells. We've seen this big shift. Where do you think we are just in terms of the brick mortar, the retail footprint in terms of real estate, which obviously we've seen a lot of change with walls and everything that happened. But if you were to think about the opportunity set there is, is still the secular shift away. Are the opportunities that you see on the retail side or the industrial opportunity significantly more interesting at this point?

Yeah, first of all, what we saw a few years ago, several years ago, was that there was a displacement. Take an example of that. Bath and beyond.

They have a lot of hard goods. They have tupper aware. They have towels, they have all sorts of things at this selling.

And you used to go to that store and buy IT, and now you can go online and you get to delivered. And it's a much easier experience. And the users and our consumers and the states have spoken clearly that they prefer to do that.

So it's not surprised that you see a lot less brick mortar bed bath beyond stores and more online delivery. And so that has already happened. We saw that start to happen many years ago.

And like I said, all retail cells today, about thirteen percent of all retail cells are done through online sources or means until I don't expect that, that will stop. I think that, that goes from thirteen two about where the chinese are today. About thirty percent of their sales are done online.

So even when you see what happened with the pandemic, I mean, you saw a lot of adoption of things like in the card, and you saw an older population that wasn't necessarily going to be an instance card customer. You saw seventy year old consumers that decided to use in the car to have their groceries delivered. And that may come now out of a cold storage facility, by the way, instead of from the Albertsons.

And so that person was a seventy year old consumer that maybe wasn't supposed to be. Technologically adapt to install ard, but they did because they had to. During the pandemic, we saw this massive acceleration of adoption of those kinds of technologies that changed the need for brick motor retail.

Having said that, and almost ironically, because we haven't built any retail in a lot of years, there hasn't been a lot of new development of new space supply, then it's all occupied. So we have this interesting phenomenon where a lot of the real state retail real state in amErica is least at over ninety five percent today across the board. You still need space for starbucks in chapter, and you need experiential space for even busters.

And to go play video games or whatever people are doing that requires a brick and modern occasion. There are still many places. There are places like home deepo that cannot go online because what they sell is really bulky and it's hard to deliver.

So if you've got equipment en or tools or big pieces of water and things like that, it's hard to deliver that through we commerce. So some of that is still in bricking murder for some retailers that will maintain their brick mortar presence at a pretty stable level. So there are some of the dynamics that .

play in that field. Yeah, that certainly seems like the supply base has corrected properly. So now you have an interesting at least reset there on the storage age tub logistics networks. It's very interesting where you have these businesses that needed to have a centralized tub or maybe a couple of regional hubs, but they're not necessarily designed for the next day delivery in the same way that amazon has. And i'm curious if you see much movement there where I think there was face one of e commerce, where a lot of this was being done out of stores, which maybe aren't necessarily set up to make those deliveries. What innings you feel like we might be at with the industrial opportunity, particularly on what supports the retail sales Operations in anything that would be related to e commerce?

yeah. So there's been massive evolution in the logistics centers, mostly through the automation of their equipment inside of the facilities. So sorting facilities, the equipment, the automation, the robotics. We have a tenant that was telling me that they have about three and a half million dollars of automation equipment to move furniture around.

That's a three hundred thousand school foot facility with three and half million hours of robotics and automated equipment that allows them to move furniture out of their facility for delivery. And so you're seen massive innovation in that infrastructure. Certainly, amazon and a large players have been way ahead of the game in the development of that infrastructure.

But even smaller, medium size companies are spending a lot of money to build out their equipment, their automation. Interestingly, we realize that some of these automation equipment and h sorting and robotics in some of these facilities that IT was hard to underwrite the warranty risk. And so our insurance company is currently looking at that business at ensuring warranties for equipment like that because a lot of IT was new and the actuarial tables for the useful life of equipment like that was hard to evaluate.

So there were some inefficiencies and that warrand t and insurance market that we've started to look into. But the point is as we evolve to more online consumption, yeah, we are seen massive innovation and automation in robotics, in the management skills and the facilities that we build that are much more modern today, not a prising ly. Our warehouses that we build, the used to be twenty eight or thirty foot in clear height.

So the ceiling hyde was twenty eight feet are thirty twenty years ago. Maybe he was twenty feet today. We're going all the way to forty or forty two feet high because that way there's more volume than you can store for delivery in those warehouses are.

So those are some of the few innovations that are happening in the development of of that modern distribution space. And they are happening real time. And there's a lot of innovators that are building is interesting to see the robotics and the software that goes into moving goods around and putting them on trucks and then they learn those goods to us. The software, the robotics has grown and been innovated eight hundred percent over the last four years. I would say, I mean, it's a massive overhaul of how these sorting and distribution facilities have become much more efficient.

And curious mostly on the tenant, in that case, to invest in the upgrades. Is the owner of the real estate ever making those investments? I imagine IT be hard just giving them customization for each time.

But we have a term in real estate that we could build to suit. And so sometimes we build to shoot a tenant. And in that type of transaction, they ask us prospect levels.

So specifications that require some level of upgrade or improvement, some of IT is infrastructure base. Sometimes it's power, sometimes it's energy and power that we have to customize to that. And user, sometimes that is the spec level and sometimes that is a little bit of technological infrastructure that has to go into the building.

So IT all depends on the contract that we have with our tenants. But I will tell you that on the question of power, it's been interesting. The struggle for finding power, developing logistics centers of manufacturing centers that we build and to find adequate energy and power sources, especially ally in competition with data centres that are garbling up data energy at a exponential .

rate from an investment opportunity perspective. Is there something that you view is the natural capital there, whether it's the super clean sources in nuclear, obviously being in the press a lot more recently, anything that you're seeing, whether just as an observer or from an investment opportunity perspective?

Yeah on the energy source, I definitely nuclear can fill the void. I think natural gas in places like texas, we've seen wind and solar. I mean, a big part of the grid is now receiving energy from solar and renewables in texas.

So we've seen that. I haven't had an opportunity see anything that is much more innovative than that. But we do see that the states where we are investing are providing incentives to solar and wind energy developers to provide that energy.

And I think the mindset of any given place to allow that infrastructure from sprouting will have economic development related to IT. And so the states, the friendly er they are with incentives to those developers to create renewable energy sources. The more you're gonna attract increasingly in this fight for energy, you're going to attract new businesses for manufacturing or distribution or anything else. I think you know cities and states would be wise to be more public about their incentives to lure renewable energy producers to their state.

And on the data at our point, just thinking about the investment opportunity there, whether there is one it's been incredibly popular in the markets. How do you view IT from your perspective, whether it's opportunity too competitive, something else, where would you bucket IT?

I think in that business is very capital intensive. The numbers are very, very large and staggering. You need to be a very large asset manager or public company to be able to deploy capital at those levels.

I think in that space, we are going to be more pigs and shovel, and we're going to be selling into that market without having to compete on the development and ownership of them because their very sizable capital, intense investments that we're not likely to be competitive right now. And those markets are very efficient. So the rates of return are gona be almost like public utilities, I suspect.

And so not something that is the right thing for us in this moment in time. But again, pick and shovel something that we can sell into the market, maybe its land, maybe its construction services, maybe it's taking land near power sources that we can approve for zoning and entitlement and then contributed to the large data center owners that have a lower cost of capital. But there are sufficient places where we can play that trade.

We will start to wind down here. This has been a fascinating, wide ranging conversation. I think we've talked about a lot of different themes that you see, some of them secular, some of them maybe more cyclical.

But as you approached as a business, how quickly can you respond to some of these things? I'm sure it's a chAllenge, but IT feels increasingly important, whether it's the automation and upgrading of logistics centers to the data center and figuring out the right opportunity there. How do you approach that in terms of timeline to actually allocate capital and do things the way I .

think about that? I've always said that organization here at lynn capital is a place where we can do a lot of research and development to study and experiment with new ideas, a playground for entrepreneurs that can come and developed new ideas. We ve had great success doing that.

When people come to us with something new that we want to understand our research and develop, we incubated great businesses like cc, which is a technology business and i'm very proud of today, has four million users that come to the site every month to get data and information for real state. And we're a marked place where a data provider, an auction house, and that's a business that we incubate here with a few guys, a few people that have had a great idea to build a real state technology business. And we used all of our knowledge from real state to support them to build this amazing company that were very proud of that is very valuable and that has this extraordinary place in the market.

And so we constantly respond to these opportunity sets. And I think our only advantage is to be limbo and to be quick and to be flexible with our thinking. So can we go to first principles and break down an industry and have a Better understand of what's really happening in the value creation process so that we can position ourselves in a sweet spot to create value, to provide value and then ultimately to extract value for our partners or or entrepreneurs or the people that work with us.

But I do think this is a place. It's a very fun environment where people are constantly debating ideas, and we can be very nimble about responding to things that come in the door pretty quickly and is generally a DNA here culture that is intellectually curious. We went into the mental health business because I was really curious about what was happening to cognitive health of americans.

There's things like that, that we can jump on really quickly. And there's an economic thesis around IT. There's an idea where we can position ourselves in the right part of the curve to create value, and we can do IT Better than others.

I think generally speaking, we have a group of people here that are get excited about things like that and are quick to jump on them. So I think it's a special place. Obviously.

i'm a little biased, understandably, and i'll close out just with a forward looking question. And I think you've provided a lot of forward thinking thoughts in terms of where we are. But in five years, when you think about the opportunity said that you have, do you think that there's anything that will be dominating the conversation if we were to have the same one five years from now, which maybe didn't take up as much of the discussion or maybe wasn't even mentioned? When you think about the forward outlook, is there something that you would point to that will be increasingly important?

yeah. So I think as our society becomes more complex, most of the things that we consume, more that we need and services will have a larger technological footprint. So most of the delivery of services and goods will have a more impact for footprint for anything related to tack or to enabled.

And so we are already managing systems in A I and everything that impacts our ability to do what we do today through technology. So I suspect that in the total delivery of what we do out of one hundred percent, twenty five or thirty percent was technologically driven over the last fifteen years. I would say that sixty five or seventy five percent of everything that we do in touch will come from a technological innovation or from a technological product that we are either investing in or incorporating into businesses to make them Better and faster. So I suspect that our entire capital allocation will be much more reliant and skilled towards technology related businesses. And technology related elements is .

fascinating to hear how you ve of all of the business as the economy evolves and very much along side and and will continue to do so. Your lens into this world is very interesting. Thank you so much for sharing the knowledge, fernanda.

Absolutely not. Thank you for having me been a fun discussion .

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