So it’s hard to say exactly how this happens but we feel good about the momentum and deployment. And I use my very scientific briefcase indicator, how many investment memos I’m taking home over a weekend, and it’s definitely been trending up. So I think that bodes well. It’s hard to predict exactly how it manifests itself. But it feels like, certainly, this will be a more active year than last year for deployment.
Operator: We’ll go next to Ken Worthington with JPMorgan.
Ken Worthington: Looking into BPP, net accrued performance revenue, $73 million. I assume, down on this quarter’s crystallizations. But IRRs are down to 6%, which I think is below the hurdle rate there. I know BPP is a collection of front end investments, like BioMed and Mileway. What needs to happen here for returns to recover and accrued performance fees to build into what I think are big crystallizations anticipated for next year?
Jon Gray: So Ken, you pointed it out correctly. It’s a bunch of different vehicles with different hurdle rates and different performance, some of which obviously are at higher levels, some at lower levels. It feels to us, as we’ve been talking about, that real estate has moved towards this lower ebb. And it’s fortunately a cyclical business, right? When you stop building new supply, as the cost of capital comes down, you get a recovery, and if you look back over time to the early ’90s after the 2001 downturn, certainly after the GFC. The great thing is these are long duration vehicles. The capital is going to stick with us for quite some time. And ultimately, we’ll get other opportunities when these crystallization events come up.
And so I would say the fact that we think we’re positioned in some really good sectors, really good geographies, we have big exposure to logistics, in Europe in particular. We’ve got some really high quality — we have data centers in some of our investment vehicles here as well. I would say, overall, it’s a combination of the quality of what we own and the sentiment in the sector improving. And when that happens, we’ll get these unrealized performance fees that happen on a regular basis. So to me, it’s a matter of time. It goes to the larger issue of a large portion of our earnings in hibernation, the fact that we’re still able to earn $0.98 even though incentive fees are well off what we think their long term potential are, realizations in our opportunistic funds and private equity funds below potential.
I think there’s a lot of embedded upside in this firm, and you pointed out to one area of BPP. It’s hard to put an exact date because it’s going to be a function of sort of the pace of the recovery. But we’re pretty confident that commercial real estate over time recovers and that foundation is starting to come into place.
Operator: We’ll go next to Ben Budish with Barclays.
Ben Budish: I wanted to follow up on, I think, Dan’s question earlier on the margins. Just a couple of kind of housekeeping items maybe for Michael. On the fee related performance comp ratio, it looks like that has been sort of trending — it was a bit lower in the quarter than we expected, and it looks like it’s been a little bit volatile over the last like year or so versus sort of 40% range we tend to expect. So any color there? And then sort of on the same lines, the stock based comp stepped up a little bit in the quarter. Just curious how we should be thinking about that trending throughout the rest of the year.
Michael Chae: I think on the margins on the fee related performance revenues, there is variability over time. But I think it’s important to point out, as a practical matter, we think about sort of fee revenues and comp holistically on a business by business basis. And so — and that gives us the ability, I think, to manage that, I think, thoughtfully over time. So you’ll see variability over the long run for BREP margins where some are aligned with the firm margin overall. But in the near term, you will see that move around based on the fact that we manage things holistically, I think, for the benefit of the firm and shareholders. On equity based comp, I think when you step back, there is seasonality in the first quarter around that line item.
And sort of movements between, say, Q4 of last year and Q1 are affected by that as well as other puts and takes. But if you sort of step back and look at the kind of growth trajectory. In Q1, it grew about 19% year-over-year. That’s lower than the 2023 overall growth rate, which was 23%. That, in turn, was about half the growth rate of 2022 overall. And so we do expect — you are seeing this move lower over time given sort of stable grant levels and we think that’s positive.
Operator: We’ll go next to Steve Chubak with Wolfe Research.
Steve Chubak: So it was encouraging to hear the positive commentary on private credit deployment despite the reopening of public or syndicated markets. But given the increased competition for deals, you know that credit spreads are tightening, high levels of credit dry powder. Curious if you’re seeing any tangible signs or evidence of credit underwriting standards potentially growing more lax and how that could dampen the pace of deployment across the credit platform?
Jon Gray: It’s a good [Technical Difficulty]…
Operator: Please standby as we reconnect our speakers.
Jon Gray: And obviously, at very high multiples. Today, in the first quarter on our direct lending, the average loan to value was 44%. And now part of that, of course, is driven by the fact that interest costs to have coverage given the high base rates, there’s only so much debt you can bear. So we’re definitely not seeing reckless levels in any way in terms of what we’ve seen in terms of loan to value. Spreads have come down but on direct lending today are probably 500 over, still pretty good by historic standards. Interestingly, liquid markets have tightened far further. So if you look at investment grade or high yield, we’ve seen much more movement there. So we still see this as a sector where the risk return for lending money is quite favorable.
