Special Episode | MA Financial’s Julian Biggins on Building an Enduring Business

Built to Last

From navigating market cycles to building a more resilient financial firm, MA Financial co-CEO Julian Biggins joins Steve Johnson for a special episode of Stocks Neat.

Julian reflects on what makes businesses endure when conditions get tougher, and why long-term success comes not from chasing every opportunity, but from surviving the cycle.

As he puts it: “You don’t need to win everywhere. You just need to survive the cycle.”

Transcript

[0:00:02] ANNOUNCER: Welcome to the Forager Funds podcast. Before we get started, a quick note. The information shared in this podcast is general in nature and does not take into account your personal objectives, financial situation, or needs. You should consider whether it's appropriate for you, seek advice, and read the relevant product disclosure statement before making any investment decisions. 

You can find the product disclosure statement and target market determination for the Forager Australian Shares Fund and the Forager International Shares Fund on our website at foragerfunds.com. Both funds issued by the trust company RE Services Limited, who is also the responsible entity. The funds are appropriate for investors with high risk and return profiles. And a suitable investor is prepared to accept high risk in the pursuit of capital growth with a medium to long-term investment time frame. And remember, past performance is not a reliable indicator of future performance. Now, let's get into today's episode.

[INTERVIEW]

[0:01:03] SJ: Welcome to episode 41 of Stocks Neat. I'm Steve Johnson, Chief Investment Officer here at Forager Funds, and this is one of our special guest podcasts where we bring in someone from outside the little space of direct active equities that we play in and talk about a different asset class and a few listed companies. And today we've got Julian Biggins, who's the co-CEO of a $ 1.5 billion listed ASX company called MA Financial. Welcome, Julian. 

[0:01:31] JB: Okay. Thank you, Steve. Thanks for having me on board. 

[0:01:34] SJ: Thank you, too, for coming down to the basement here. For the listeners at home, Julian and I actually work in the same building above Wynyard Station. It's called Brookfield Place in Sydney. Julian's on the top floor though, and we're down here in the basement. And in my view, MA Financial, some of the nicest offices in Sydney. I don't want to offend anyone else out there. But really, really nice fit out up there. 

[0:01:54] JB: Pretty special. And I think, luckily, we did it in COVID. So we got a pretty good deal out of Brookfield. And yeah, we do get a lot of compliments on it. But really, it's for our people. We have very high attendance rate, actually, analysis, which is great. 

[0:02:05] SJ: If you ever get an invite at home, make sure you turn up. Julian, you and I crossed paths many, many years ago back in the early 2010s. It was post financial crisis. There were a few very small troubled property trusts listed on the ASX that we had become shareholders in and were trying to work out. And you were trying to help solve some of their problems as an adviser. You were working for a company called Moelis back then, which was very, very small here in Australia. Now you're co-CEO of a $1.5 billion company that Moelis that you were working for back then became. Paint us the path from little Moelis to big MA financial. 

[0:02:43] JB: Well, I'm glad. Well, in the early days, essentially, Ken Moelis had founded a company called Moelis & Company in the US in 2007. And Ken had been the president of the UBS sort of investment bank in the North Americas and had been responsible for Australia as well. He always had ambitions to be in Australia. And we became his sort of outpost. And in 2009, we set up as a joint venture with Ken. 

I was thinking just as you say the word Moelis, in the early days, is that no one could actually pronounce. It was Moelis. And for Italian, I think, is quite potty. But anyway, early days for us was a room not much bigger than this. It's all going. It's actually a lot of fun. But it was – things start small, and everything's got to start somewhere. 

We had an ambition to build an investment bank. We'd started off in sort of corporate finance and equities, in trading. And they were tough years to be starting a business like that. I think if you fast forward, I think in the first year we probably had three – went five of us through to, I want to say, sort of 40 or 45. We grew quite quickly, but then we stalled a bit. 

And really, when I think about what we were trying to do, actually, I think I built the spreadsheet. And I told about spreadsheets. I built the first model, the budget. What was MA Financial limit was Moelis & Company. But it was wrong within about 5 minutes of building it, I reckon. It's just like Excel was very easy, but that's you got to execute stuff, right? 

[0:03:58] SJ: Maybe just quickly for people. That original. We'll get on to what the business is now, but that original advisory business. Maybe really longtime investors of Forager might remember RCU was the name of one of the property trusts and RNY. These were listed property trusts that had problems with their balance sheet. Maybe just your business model in terms of how that investment banking advisory piece works. 

[0:04:20] JB: Yeah, really from a corporate advisory you sort of get – well, you have a reputation for fixing problems or finding solutions to whether it's helping people through acquisitions. Might be a disposal. Might be I need capital. I need to get a solution, right? In those are early days, post the GFC. There was a lot of balance sheet issues. We had a very strong franchise in real estate. We had a very strong franchise that was building and restructuring around debt issues. 

I think for both of those entities involved in US real estate, Australian listed probably didn't have longevity sort of in their veins. And I think at the end of the day – I was reflecting on this, and I hadn't thought about it for a fair while, which might surprise you. But I was thinking about it as just leverage is the killer. Leverage, really, if you have obligations, whether it's debt, or you've made unconditional obligations that you cannot fund, that's what kills businesses. Right? 

And making that statement stay is quite relevant what's going on in the business world or markets generally. And we're seeing some of that play through the markets and the volatility. But over my career, over the test of time, I think it's probably been a consistent theme that brings down businesses. And we definitely saw that with Rexit and with RCU. 

I think the underlying real estate turned out to probably be okay, probably turned out to be pretty good. And people that bought that real estate at that point in the cycle probably did pretty well. But the people that can't afford to hold on or have their hand forced to sell things at the wrong time, it hurts, you know? And that's what got caught up in there. 

And then there's all sorts of issues around sort of how they end up in that spot, right? How did you get to that spot? And it's never clear-cut sometimes. It is, I guess. But that was where we were at that point in time. And trying to solve balance sheet issues or assets that didn't have longevity in the Australian listed market. 

And one of the things I think about – today, what is our business? Moelis & Company became MA financial. And we listed it just to change name. Nothing else. And then we became MA Financial sort of probably three years ago now. But what do we do? We still have the advisory business. It's about 10% of our business roughly. About 60 people that sit in advisory. And we do small end of town, big end of town, but very much we know our space where we're good. And you just can't hunt everything. I think that's a theme across our whole business. 

The asset management business is really the line share of the business. And that's got about 15 billion of AUM. Strong focus on private credit and real estate, really income-focused, defensive, can sort of work through cycles. And then the middle piece is really a lending business and a business called Finsure. The lending business is a direct lending business to residential mom and dads, home loans. And that's called MA Money. And then Finsure is basically a pipe that connects the banks to the residential brokers. 

One in nine home loans in the country come down this pipe called Finsure. We're a very large distribution a piece of distribution infrastructure for the banks and for the non-bank lenders. And I love the residential market. I think it's great. Hard institutionally, but great market. And that's our business today. We've got 900 people. Were headquartered here in Sydney. Melbourne, Perth, Brisbane, Hong Kong, Singapore, Shanghai, Beijing, New York. So it's very broad business, but it's quite diverse as well. 

And the common thread. So Andrew Pridham, Chris Wyke, and I are the founders. And we've worked together for a very long time. But when you come back to the essence of what are you trying to build, we talk about building something that's enduring value, that can endure sort of cycles. And we've got a lot of our own wealth in the business is how do you build something with recurring revenue? Your investment banking is a really tough business. It's a clean sheet of paper, hand-to-hand combat. Asset management in the right structures. And if you've got the reputation, you've got the track record, you got the performance, it can be more recurring nature sort of revenue streams, which we like. And that's why we went into asset management in 2012. 

[0:08:07] SJ: Yeah. Look, if you'd said to me a decade ago, how many more investment banks does Australia need? I would have said zero. It felt like it was already overbanked. 

[0:08:14] JB: A few less. Yeah. 

[0:08:16] SJ: But we have had – I mean, you think Barrenjoey has become a significant business from nowhere. I mean, it was sort of a lift and shift out of UBS, I guess, rather than starting from scratch. But that business become quite big. Jefferies has become quite big certainly in our space and in the advisory space here in Australia. You've built up a very successful business. What's been the market opportunity there that people are taking advantage of given it was already a pretty competitive space? 

[0:08:41] JB: I think Australians tend to be quite entrepreneurial. So to go out and do your own thing is not uncommon in Australia. And in investment banking, I think the real value, value comes in – there are services. There's things that you can sort of provide to a client. But a lot about it is being a trusted adviser and coming up with innovative solutions or providing paths, the capital, that they may or may not other otherwise have. That's always been worked well by a number of the participants that have grown businesses here. 

I think it is overbanked when you look at like revenue per head in Australia. Investment banking is actually a very tough business. It's not super profitable either. It's good for the bankers. It's not so good for the owners. And I do love our banking business, by the way. I think it's a really good trading ground for the rest of our business. It's a great – call it an academy of just training talent. And then they can go on to run different parts of our businesses, or come out and help us do different things. 

And so I do love investment banking as a field. And I think people that are good at it can do very well out of it. Is it a great enduring sort of revenue stream? There's been plenty of issues in banking as well. You go back to the Caliburn days, and recreating sort of Greenhill and stuff. But there's been some train wrecks there as well. 

I think one of the things for me is around what value do you put on revenue streams. Yeah. And so asset management, if you can – we might get to this. But when I think about our business, got quite a bit of tenure on our AUM. So whether it's in real estate or wherever. We've also got a very big macro tailwind in the super system, right? You always want to play with tailwinds, I think. Probably one of the things I've learned through investing is sometimes you might have a really bright idea, but if you're swim against the tide, probably better not to be there. It's not so forgiving. 

[0:10:19] SJ: Even within the asset classes you touched earlier, it's a very strong property credit focus. They're recurring revenue streams, and then there are recurring revenue streams in the asset management business. Shareholders in businesses like Platinum and Magellan will know that equities in particular can be a very volatile space. What else have you done there to try and establish that predictability of revenues? 

[0:10:42] JB: I often talk about diversification as being important. Now, I'll contradict myself a little bit. You've got to be really good at what you do. It's a really competitive world. Real estate, private credit, we're very deep in operational capability in both asset classes. We originate our own acquisitions, or we originate our own loans. And we understand real estate's the easiest way to give you examples. Because in retail shopping centers, we do everything from acquiring, development, leasing, property management, set management, all owned by us integrated model, which we think delivers the best outcome for investors. In pubs where the strategy is we do everything. In marinas, we're tying ropes at the birth. 

I think being really deep capability in what you do. And my point about diversification and why it's important is, 3, 4 years ago, real estate was sort of yielding. People bought industrial sheds in the low 3s. And you sort of sat there and went – if I'm trying to generate a return in the sort of – 

[0:11:42] SJ: 10 Julian's talking about a capitalization rate there, for the listener. 

[0:11:46] JB: Sorry. A yield. A cap rate or a yield, buying at a three or something percent yield. 

[0:11:50] SJ: Yeah. And interest rates were zero, and people on a three looks all right relative to zero? 

[0:11:54] JB: Yeah. Interest rates change, and lower for long. Sort of did work out that way. You think about what risk are you taking. And so we went out of real estate and we were being very forward in private credit, where you were achieving low double digit returns or, yeah, maybe slightly south of that because interest rates were zero. And you might have got a 7% or 8% return, which was the total return coming out of a shed. And I think people call it different language these days. But yeah, there's fancy words for sheds these days. 

[0:12:21] SJ: AI factory. 

[0:12:22] JB: Yeah. Well, you sort of sit there and go, "What do I need to assume to get back to this?" And you went, "Well, credit." Structurally, you're senior. And your equity has to lose all its money before it gets to me. This is a pretty sensible place to put our money. And so we, through being diversified in those two asset classes, we can come in and out of the different sectors. 

And then I go to this is when I think about the strength of an asset management business. You talk about Magellan, Platinum. I think about the individuals in a business. You don't want a business so centered around someone that if he was a brazen – if you got hit by a bus, what happens? I was around Hunter Hall when Peter Hall exited Hunter Hall, and that was a disaster for equity investors in the manager. 

We wanted to make sure that we had diversification by capability and people on the bench. But then you go to where do I actually get my capital from? And this is something I've been super focused on is how do we keep diversifying access to capital. Early days, we had a visa product that many people know us for. It was a visa path into Australia. It was $5 million. And we built quite a large asset management business around that product alone. 

But we knew that that product alone had regulatory risk and one day could just disappear. And it did. And so off the back of that though we built track record capability. And then we went into domestic distribution. You think about the Australian super system and the different places to play. And we really went into the independent financial advisor world. We went into the platforms, private credit, predictable income streams, transparency, governance. We're a fiduciary of money. We understand the rules. 

And then that built track record and awareness of our brand and also capability. And now we've gone into the listed market around, say, the private credit funds. We also still raise a lot of money offshore. It's just how do you build diversity into a business so no one thing can kill you is sort of where I'm going. But also, the common thread for us is capability in those investment strategies. But also, we're a lower risk sort of offering because we're just happy to take income as a focus to total return. 

[0:14:20] SJ: You touched on the general tailwind of a growing superannuation pool here in Australia. I think your business has a tailwind within that tailwind. That investor pool is getting older. They're getting more risk averse. I think there is more demand. And we've probably always been underserviced here in Australia in terms of the lower risk part of people's portfolios skewed towards equities. Are there other adjacencies here that make a lot of sense? Or is there a lot of growth in your business just in the property and credit side of things? 

[0:14:50] JB: I think everything. When we think about strategy at the group level, we're trying to go into large addressable markets where we've got some sort of capability or edge to win. And so these markets, whether it's private credit or real estate, we only manage seven billion dollars in private credit. Qualitas manages 10 billion. And that's their single silo, right? 

We have multiple sort of, I guess, private credit strategies within our private credit strategy. So there's so much growth opportunity in that. And we think there's a macro tailwind in private credit that was really identified through the restructuring business and what they saw at the tail of the GFC, where the banks are essentially being forced by APRA to become deposit-taking prime home loan lenders. And the banks are slowly sort of being forced to derisk their books. The loans that we're writing are loans the banks would ordinarily like to write. It's just that APRA is trying to derisk. Call it Australia's balance sheet to be a fortress balance sheet. 

[0:15:52] SJ: It's actually a topic we've talked about on a previous podcast about some of the listed non-bank lenders plenty being a good example that we actually own our portfolio. It's exactly the same dynamic. And interestingly, the banks are providing. In those cases, they're providing the warehouse facility and a lot of the funding. They're getting very low capital requirements in relation to that piece of it. And they get to make their small margins. There's money there for people that can manage that risk carefully. 

[0:16:16] JB: And what we're trying to identify is exactly that, where you can take the same risk that the bank was happy to take at say 600, and we get 700 points for it. Right? So you're basically getting an arbitrage because of that behavior in terms of forcing the bank's hands a bit. That creates a fair bit of noise in the market. Because, obviously, there's some participants in the market that don't like that and will be active vocally in saying that. 

That's private credit income. The tailwind around the aging population, 100%. Yeah, I did some work probably six, nine months ago around sort of where the belly weight of the wealth of Australia sits. And there's no surprise where it sits in the sort of, I guess, 50-plus sort of bracket. Probably a little bit older, to be honest. 

And as you see that moving through, going from chasing growth style returns to I just don't want to blow up my capital, and the volatility equity markets plays into that. I think Australia's always been a very strong equity sort of investor mindset. And in the early days, and this goes back to 2017, 2018, we're running educational road shows talking about what credit is. And people are thinking, "Well, this is crazy. You want me to invest in leverage?" You're like, "No, credit is the asset you're investing into. It's not levered." Yeah. But hang on. No, no, this is debt. No, no, no. The debt is the asset you're bought. And it was just such a – and you said, we're probably a fair bit behind globally, where some of the other sophisticated or more mature markets are in private credit. That's definitely the case. 

And we talked about private credit. You think about your strategy. Think about someone that's running a long-short fund, six times leverage fund. Within equities, there's so many different strategies that you could be applying to put your money into index funds. Private credit is sort of the same. Yeah. Are you in corporate loans? And we're very asset-backed as a majority of our business is asset-backed because we like the backing of assets. 

[BREAK]

[0:18:04] ANNOUNCER: If you're looking for a different approach to investing, you might like to take a closer look at Forager Funds. We manage the Forager Australian Shares Fund and the Forager International Shares Fund. These are run with a high conviction, long-term mindset, and a willingness to be both opportunistic and patient when investing. You can learn more about the funds, browse our recent quarterly reports, and read the latest news articles at foragerfunds.com. 

Before investing, you should consider whether the funds are appropriate for you, and read the relevant product disclosure statement and target market determinations. Both funds are issued by the trust company RE Services Limited, who is also the responsible entity. The funds are appropriate for investors with high risk and return profiles, and a suitable investor is prepared to accept high risk in the pursuit of capital growth with a medium to long-term investment time frame. And remember, past performance is not a reliable indicator of future performance. 

Now, let's get back to the discussion. 

[INTERVIEW CONTINUED]

[0:19:02] SJ: I think it's actually a really, really important message for people out of this that it's being pitched as an asset class, right? And that is exactly saying equities is an asset class. Yes, it is, but you can do a whole lot of different things within it. And I think even more so in this credit space, you can have something that is riskier than WestFarmers or something, right? Like an unlevered equity can be a safer investment than a very, very highly levered piece of credit. And then vice versa, you can have something that is a very, very safe investment. 

[0:19:33] JB: A beautiful example of that is something we won't do, right? A residential developer might go and borrow 70% of their construction costs, or maybe even 80% of their construction cost to do a project, right? Okay, if property prices fall by 20% or 30%, then I've got a problem. You go, "That probably never happened in Australia." But it could happen. But that still feels pretty safe. 

So then they go, I'll take your $70 up against the 100. And they might go and say, I'll get a mezzanine piece for five. Now that mezzanine piece for five sits between 70 and 75 for your loss. But if something goes wrong, the person who owns the 70 can just rinse the five very quick. 

[0:20:08] SJ: Yeah. You lose 100 before the senior person – 

[0:20:11] JB: Before the senior's even lost. And the senior doesn't care because they're going 70 back. Bad luck to your five. And we saw that play out as part of the GFC. And the banks, they just want their money back. And so one thing we won't do is put a mezzanine piece in. But your mezzanine piece might pay you 15 and the senior might pay or the stretch senior might pay you eight. 

And the thing I find with Australia a little bit in terms of – I have fair bit of sympathy for this actually because most people don't understand intimately or in detail what they're investing into. What's put on the ticket? What's the sale price? What can look, "Oh, that sounds fair. That's private credit equities." Little do you know you got six times leverage in your equity strategy, right? The detail is important. But also, I think that goes to sort of the track record of the manager. Are they true to what's their style? That's the same. 

[0:21:00] SJ: One of my favourites back in the day – I do want to move on here to property, which is your area of expertise, and I think a really interesting one for our listeners. But back in the day, there were a couple of – we won't name any names, but infrastructure vehicles listed that were toll roads. And the toll road hadn't opened, so you had no idea how many cars were going to drive on it. But they paid a yield from the day that it IPOed. And it was basically just giving you some of your money back that those products were sold on yield when you had no idea what the actual yield of the asset was going to be. You do need to be very careful in those. And I think it's a really healthy thing for people to be thinking outside just equities in terms of their portfolios. But I think we're in an environment where there has been a lot of talk about it and there's a lot of stuff being sold that quite frankly is not great. And people need to be careful at the moment. 

[0:21:45] JB: I agree. I think what ASIC are doing is great. Let's talk about property. 

[0:21:48] SJ: Let's do that. Your experience is in commercial property, and we're going to talk about that. Because one of the things for me when we owned these property trusts, you mentioned REX, and the ticker was RNY back in the day. And they owned all of this commercial office buildings. 

We went and visited one of them that you could see Manhattan. Maybe 10ks away as the crow flies. Car park was empty. The building was about 60% occupancy. They weren't making enough money to pay the debt on that asset. And I just stood there, and I went 10 kilometers, and this thing is worthless. And the property that's just over there is worth hundreds of millions of dollars, billions of dollars in a lot of cases. 

For me, that was a bit of a shock. It's an office, it's an office, it's an office. And whatever the cap rate is, the cap rate is. But those assets became very, very distressed operationally rather than just the financial structure of them. What are some of the keys that you look at when you're thinking about commercial property in terms of what works and what doesn't, and some of the risks that people need to look out for? 

[0:22:56] JB: Your analogy is actually a pretty good one. The story is right. Some of the lessons coming out of the GFC, we'd bought a lot of international real estate on behalf of Australian investors. And real estate's such a local knowledge asset, right? We've got about seven billion, roughly five billion in retail shopping centres. 

If you sit there and you sort of compare a catchment from one location to the next, is there a river going between that stops the cars from getting access to the car park? Or is there a left turn instead of a right turn? How does the flow of the shopping center go into getting past the anchors and the specialties? They're just incredibly detailed sort of operational assets. 

I talk about this, I love the broad brush strokes of real estate, and I love thinking about Western Corridor Sydney. Great catchment growth, wage growth, population growth. Hard to get access to that zone, right? If you want to get into the real nuts and bolts of how to make money out of shopping centers, this is where we have our teams. 

There's a guy in our core real estate business, Greg Miles. Probably did 25 years of, I say, hard labour. Hard work for Centre Group or Westfield Group in the early days. And so understood Australian, the sort of shopping center landscape here. Did time in the US. Probably about five or 10 years as the chief operating officer in the US. But there's very few shopping centers in Australia that Greg doesn't know. He doesn't walk into, and I've been here before. Or Myra doing this, or Myra's got to slow down and need – just that sort of knowledge. 

I think sometimes people think real estate sort of is a passive asset. Now if you go and buy Bunnings that's got a 15-year lease with CPI indexation, pretty passive. You want to think about 15 years’ time. I don't know what's going on in three years’ time. But have a think about it. But if that's in a good location and that is what it is. That's a bond with a bit of indexation. 

If you're buying active assets, you need active management. For me, cash flow is king. Incentives. You talked a little bit about structuring. REXON had multiple layers of structuring there. People can make funny things happen with accounting. Really understanding cash flows, incentives, capex. What actually comes out of the asset at the end of the day to the equity owners? And I think pre-debt. Sort of you start off with just free cash flow, pre-debt. What's a clean asset? 

A good a good example – and again, I don't love this asset class, but it's a really good example of how these things, Steve – I love residential, but I don't love build to rent. But if you think about build to rent and people to move in and out, the maintenance capex in build to rent is very small. And because you've got so many tenants in an asset, the occupancy risk is quite low. This variable is – yeah, it's very steady cash flow streams. 

[0:25:28] SJ: These are typically apartment buildings that people have built to rent out on – maybe a student accommodation and shorter term stuff, or – 

[0:25:36] JB: This is more – it's a nascent sector here, but very big globally, called multifamily. But it's more of, say, having 200 apartments in one block owned by one institutional owner. 

[0:25:45] SJ: And managed by. 

[0:25:47] JB: And managed, and let for long-term leases right. And the government's right behind trying to get this thing started. 

[0:25:53] SJ: Why is your capex so low in something like that? I would have thought people are ringing you up about the shower not working and – 

[0:25:57] JB: Just small numbers. If I've got to do a lobby of a Brookfield place, that's going to cost a fair bit. MA Financial signed their lease. 

[0:26:06] SJ: And when it's 15 years tied, nobody wants to move here because there's a new office building down the road. 

[0:26:10] JB: It's a commodity. But we also signed our lease, and we might have got a 35% or 40% incentive. Go back to my old yield thing, when you've got, say, a 6% yield, and that's done on pre-incentive cash flow. Hang on. This capital spend that I had to spend to get that tenant in is actually quite important. Suddenly, you're starting in the fives or fours as a free cash flow. 

And so my point here is cash is king for me. The residential one, like the pubs – there's not a heap of capex that goes into a pub, right? So you get an 8% cash flow yield. And they're pretty light maintenance. Marinas are similar. They're a little bit different. They're lease hold. Our thing is trying to seek out, I guess, really stable sort of cash flow to start with high yield. 

Why I didn't love sheds back in 2020. The yield premium. While it was good to the bond at the time, if you're starting with a 4 and a half, you got to assume so much growth to get back to an 8% or a 9% return. And so you try. If you can start with a 7-and-a-half cash yield, you sort of – as long as you're underwriting solid assets that aren't over rented, the tenants are robust, you've already done three-quarters of your heavy lifting in terms of your underwriting. 

And when I started talking about Moelis and what we did early days, an Excel model. Excel was easy. Executing plans is harder. And if you can derisk through cash flow in the early part of your analysis, then that's a great place to start. Interest rates are another thing that's sort of very relevant at the moment. I think Tuesday, obviously, RBA meet. We've both lived through it. We've seen almost 30 years of interest rates coming down and supporting a yield tightening, or a cap rate tightening, or a valuation super cycle. 

Now you've got to really – yeah, you've got to work your assets hard. The other thing we're always looking for core in assets, and it's a very common theme across what we do, is, operationally, we're very active in those assets. And how can you grow the earnings of it to offset? There can be wage pressure, or there can be interest rates. You don't want to – I go back to the Bunnings on a 15-year lease. It's very little to do about that cash flow. You've just got to buy it exceptionally well. 

[0:28:08] SJ: Yeah. People sitting at home maybe looking at listed property trusts and options that are out, there's maybe a few key things that you've touched on there that capex line I find doesn't get a lot of attention in some of these assets. It's all this is the cap rate. This is the operating cash flow to the valuation of the vehicle. But that capex line's a very important one to keep your eye on. And maybe they're even just age of assets. When was it built? 

[0:28:32] JB: And different asset class. Again, if I think about the three core asset classes in Australia, you always think about the tenant for me as you think about the end user. Whether our offices are in Brookfield Place, or we used to be in Governor Phillip Tower. Could be in either, right? If the offering is similar. In retail, if you're at Rundle Mall, and I want to be covering that, where else do I go as a flagship sort of tenant? Chadstone? Yeah. Chadstone, sorry, is not going to do it for me because that's not the same catchment. There's real location sort of value in retail. 

Industrial was really squeezed very tight through the supply side, and that was very much part of the e-commerce. And COVID really pulled that on. Land supply is constrained. The other core tenant is supply and demand. I think that's key in any sort of investment case, but we focus very much on that as well. 

[0:29:20] SJ: Maybe we just touch on office quickly there. It sounds like it's maybe not one of your favourite asset classes there at the moment. There was talk through COVID 5 years ago, and nobody was ever coming back to work. Those assets seem to have held up okay. And my feel is the city is full Tuesday, Wednesday, Thursday, quiet Monday, Friday. But people are still paying rent. 

[0:29:40] JB: For me, the hardest thing with office has always been the capex side of the equation. And I've got some very good friends that are very good at investing, buying office, but it's more for me a trading asset. And the idea of incentives in Australia is quite new to Australia. It's not something that's sort of global phenomenon, where your incentive in Perth, if I sign a 10-year lease and I pay $100 of rent, I might get a 70% incentive. And that means that 70% of my $100 is given back to the tenants. They're really paying $30 of rent. And it's just the ability to sort of arbitrage these sort of numbers in a sale process or an acquisition is quite real. And that's something that's quite unique to Australia. 

I guess, again, being a cash flow investor, and we're sort of a bit more longer-dated, is we just find office a little bit difficult to underwrite at this point in the cycle. I think what you've said is fair about Sydney. And we've had a very good attendance rate in our office, but it's not consistent across the city. Different businesses do well, and some are struggling still. I think there's an overlay now with sort of white collar and what's going on with AI, and I think it's real. But how that plays through will be interesting to watch. I was framing, there's just easier ways to make money. 

[0:30:51] SJ: Yeah, it feels like people companies are trying to attract people back to the office. One of the ways they want to do that is have a really nice office building for people to come into. The in-between looks like it's in a fair bit of trouble to me in terms of you don't have an A-grade office space here. People are moving out of them and into the new build stuff. 

[0:31:10] JB: I think, again, come back to my thread around you always think about what can the tenant pay. With us, Brookfield Place, the rent is a percentage of our overall revenue is meaningful. But if it was 20% or 30% higher, it wouldn't be great, but it could still be done. We've got capacity to pay more rent if we had to. And we value being in an office. 

Now not everyone can say that. But the reason I give you that is there's another really important sort of characteristic of this market at this point is the increased construction cost to develop real estate. What we saw through COVID, construction cost, they haven't come backwards. It's probably up 40%, 60%, 70% to build the same office tower as what it would have cost pre-COVID. And that means that I need to pay 40%, 50%, 60% more rent to have that office built. And rents haven't done that. So nothing's being built. 

And then I go, "That's fine. Okay." But for someone to pay that rent, can someone actually afford to pay that rent, make that feasibility stack up? There's not many of us, but there's a few of us. But you're right. Premium office, right? 

Now, if you go to retail, we can buy – we've just bought a big asset up in Queensland, Hyperdome, at probably 65 cents and a dollar replacement value, right? Can those tenants afford to pay a 30% or 40% premium to the rents they're paying today? No. But what it means is there's no new supply coming on until they can. 

Now, either your rents run really quickly and bring on new supply, or there's just going to be a void of new supply for a very long time. And I think that's a great place to be investing in quality real estate today. And in my career, we've seen interest rates move. But probably be similar to you, you seen interest rates move before, and what liquidity squeezes impact can have on real estate. But we haven't seen the interest rate cycle coupled with a supply shock around construction costs that mean that replacement costs are just so far out of reach in most feasibilities today, yeah, that you've got certainty on supply. 

[0:33:08] SJ: I mean, it's sort of transitioned a bit to the whole problem with resi property in a way. I mean, everyone whinges about the prices, but you can't build half of the housing stock for the very expensive prices that we have. That's what causes the supply problems. But we'll leave that for another podcast. 

All right, that's been great, Julian. Thanks a lot for that. Maybe just quickly, you've touched on interest rates there. Is that what you see as the biggest risk to the whole space? Or what else can you see causing problems over the next three years? 

[0:33:37] JB: I think interest rates are obviously a real lifetime uncertainty at the moment. I think reflecting on sort of the last 25, 30 years, you sort of sit there and go – we saw a couple of wars, right? We saw early 90s was Bush Sr. We saw 2000 after September 11, saw Afghan and Iraq. And then that was basically a 20-year gap to Ukraine. Maybe a bit more actually. And now we're seeing Iran. The geopolitical environment today is just so uncertain. And I think that's something that we just got to live with. You can't sort of – yeah, these things are out of your control, but it's something you got to be aware about. But I think volatility is here to stay at the moment. And that's going to create wild swings in the markets. It's going to create wild sort of swings in policy. How we think about inflation. 

I think oil, that's a shock to the market. It's not something that stays around forever, but it's a serious shock to the market today that will influence the RBA on Tuesday. But probably just had one or one-and-a-half rises through just petrol prices at Bowser. These sort of things we've just got to live with. 

I think the Australian economy as a general – Australia is a place to invest. Geopolitically, it's pretty secure. Is pretty safe. Even though people will have a view on government, it's actually a pretty stable sort of environment respectively or relatively. And then you sit there and go, "You know, from a supply demand, we're in a good spot. We've got wage growth, population growth." The economy is actually pretty robust. And when you look at Asia, Australia is actually screening very well versus Asia as a safe place to invest. I think capital's probably going to flow into Australia as a general thesis. 

[0:35:04] SJ: The fiscal, I'd add to that as well. I know. Again, very frustrated about how some of the money gets spent. But relative to the rest of the western world at least, we're in a good place in terms of government debt and fiscal position. 

[0:35:16] JB: That puts us in a pretty good place to invest. And it's about buying the right assets. And I sort of think as a general principle, you've got to be realistic about what sort of returns you want to chase. And this goes a bit to the aging population. But also, what is a good return? And if you're in the listed market, it's great. There's opportunities in the listed market. You just got to accept the volatility. You got to make sure you don't have too much debt and get a draw out. 

[0:35:39] SJ: Yeah. You touched on this message about your business earlier. I think it's true of the whole environment. That concept of resilience. We saw it come up a lot through COVID, this whole debate we're having about petrol supplies in Australia and thing. I think everyone is going to need to build more resilience into all sorts of different aspects. And I think when you're looking at a business, or a property, or whatever it is, how resilient is this to the potential shocks that might come is a really important consideration. 

One last question, Julian. One piece of investment advice from your decades of experience and all the cycles we've been through. 

[0:36:12] JB: You've sort of nailed the point there around resilience. But for me, it's endurance. It's how we go about building the company. It's how we build investment portfolios. It's how you manage wealth is generally over a long period of time. I think Australia is a great place to invest. You can pick where you have the expertise to invest. 

For me, I'd say data centers, I don't know enough about. But I'd say Marinas. I love Marinas. So you pick where you go, but then your indebtedness and being able to survive through cycles is the most important thing. Because if you stay the cycle and you stay the duration, you'll probably do very, very well. But you don't have to invest everywhere. You don't need to win in everything. You just need to pick a few that you're very good at and and go through the cycle. 

[0:36:48] SJ: Fantastic. Thanks for your time today. Any questions you've got at home, please feel free to send them through MA Financials, the company. MAF is the ticker on the ASX. And you can get plenty of information about the business on their website. Appreciate your time. 

[0:37:01] JB: Great. Thank you for having me.

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