4 Real

Turning Over a New Leaf: A Decade Well Planted With CREFC's Lisa Pendergast

• Dechert LLP • Episode 34

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This year's CREFC Annual Conference drew standing-room-only panels, a sign that the market has given industry leaders plenty to talk about. In this episode of Dechert's 4 Real podcast, host Jon Gaynor and series producer Stewart McQueen sit down with Lisa Pendergast, President and CEO of CREFC, to break down the conference's biggest themes and where she thinks the industry will go from here.

Plus, Lisa shares what she's most proud of building over the last 10 years and the hosts find out who the "green thumbs" of the group are.

Jon Gaynor:

Hello, and welcome back to the Dechert 4 Real podcast, where we discuss current issues and trends in commercial real estate finance. We aim to bring market commentary about developments, updates you can use, and maybe a little bit of banter along the way. I'm Jon Gaynor, a partner based in Dechert's Philadelphia office

Stewart McQueen:

and I'm Stewart McQueen, a partner based in Dechert's Charlotte office.

Jon Gaynor:

In this episode, Stewart and I are joined by Lisa Pendergast, president and CEO of the CRE Finance Council, or CREFC. Lisa is retiring this summer after a decade leading CREFC, so this is a special one. We're going to have a wide-ranging conversation about her career and path to CREFC, what she's most proud of building over the last 10 years, the themes coming out of this month's annual conference, and where she thinks the industry and she herself will go from there. But first, let's get 4 Real with the hosts. Stewart, we're keeping it earthy today. You're down in Charlotte with a longer growing season than I get up here, do you have a green thumb? What's growing in the McQueen yard this summer, and is any of it actually surviving?

Stewart McQueen:

The short answer is yes, it is surviving, but with no contribution from me whatsoever. The short answer: I do not have a green thumb, but I should. I come from a long line of family members who do. My mom, my grandfather. I mean, I remember growing up, he had a greenhouse in his yard, things, but his parents, his family ran a large commercial nursery in Rockland County, New York, Sloatsburg, I think it's a bay area near Tuxedo Park, for years, you know. When they came over on the boat, that's what they did. And I should have a green thumb. I come from a family of green thumbs. I do not. Luckily, I married someone who does. My wife has an amazing green thumb, and you know, our yard looks wonderful through 100% of her and 0% of me.

Jon Gaynor:

What's she most proud of in that garden or yard?

Stewart McQueen:

Everything.

Jon Gaynor:

Everything? Okay.

Stewart McQueen:

Yeah, she has these visions that I could never even dream of, and she executes. And even with the drought happening in Charlotte, or the drought that did happen in Charlotte, been raining for a while, the yard still looks wonderful.

Jon Gaynor:

That's awesome. So, my at my in-laws' place, we have a little garden for the kids, and so we grow like some produce. They're really proud of their tomatoes. They turn out pretty well. Tomatoes grow pretty well in the Pennsylvania area. So that's my contribution. I don't, you know, when I move to the burbs someday and out of the city, I'll probably do more gardening. I think it's relaxing, good exercise. All right, I think that counts as getting 4 Real. Now, onto today's guest, Lisa Pendergast is president and CEO of the CRE Finance Council, the trade association for the more than US$6 trillion commercial real estate finance industry, representing roughly 400 member companies and some 19,000 individuals across lenders, investors, issuers, servicers, rating agencies and borrowers. Lisa has spent more than 30 years in CRE capital markets with senior roles at Prudential Securities, Greenwich Capital, Royal Bank of Scotland, and Jefferies, where she ran CMBS strategy. She served as CREFC's president back in 2010 through 2011 and spent nine years on its board of governors before being named to lead the organization in 2016. After a decade at the helm, she's retiring this summer. Lisa, welcome to the Dechert 4 Real podcast.

Lisa Pendergast:

Thank you very much. I'm pleased to be here, and happy to speak about the last 10 years or so.

Jon Gaynor:

That's great. Well Lisa, it's our tradition to get 4 Real with our guests. Word is, you're the actual gardener among us, so tell us about your garden, and is it true you have a soft spot for hedges?

Lisa Pendergast:

I love hedges. So my mom and her six brothers and sisters were raised by Sicilian immigrants, and my grandfather had this what felt like a farm in Quincy, Massachusetts. If you go there now, it's quite the city, and yet he had hedges, he had a giant garden, which my dad did as well, and my sister and I were the workers in that garden, digging the weeds and all that, but what was cool about my grandfather, he had one of the most amazing gardens in it, and it was large and it had hedges all around it. And so now in Weekapaug, Rhode Island where we live, and our home is there. I'm quite sure that those hedges are perfect all the time. As it was like, we spend more money on gardeners than do anybody else. Now I do all the rest of the work, I do the plantings, and to me it just.. I love being outside, and I also just love the beauty of it all, you know. And each year, being a little bit more inventful in terms, or invented, I don't know, whatever the word is, as to how we wanted that garden to look. What flowers we choose. I'm now leaning toward more sort of wild flowers, as opposed to germaniums and things like that you traditionally put in the garden.

Jon Gaynor:

Must be a lot of pretty colors and a lot of good, good fun.

Lisa Pendergast:

It's kind of my sanity after, you know, a week with CREFC. I love the job, but you know, it's sometimes interesting.

Stewart McQueen:

I would.. I may go back home and try to accompany my wife in the yard, you know, helping develop it, but I think she'll kick me out.

Lisa Pendergast:

Perhaps. Yes, my husband, every once in a while, shows up, and I'm just like, go away. It's easier without you.

Stewart McQueen:

I tend to ask a lot of questions that will annoy her.

Jon Gaynor:

So I wanted to talk a little bit about your career path, because I think it's really interesting. You originally thought you were going to head to law school, but then you had a writing job at Prudential, and that was supposed to be a placeholder. You said your time doing the work at Pru was the cheapest MBA that anybody ever got.

Lisa Pendergast:

Absolutely, all of the folks that we, that are incorporate right now, CREFC.. Were all the folks that I worked with, you know, pretty much throughout the 10 years, or actually even more that I was there was much more than that, it was about 20. At the time. I was an analyst, and the analyst had to go through all of the securitization markets, so ABS, CMBS, and all of the, you know, convolutions, if you will, of autos, credit cards, all of that. So it gave us all a really great grounding, and we all sat on the trading floor, which to this day, when I was at Greenwich and other places, I insisted that I sit there, because not to listen to the traders talk about bonds, talk to investors and inevitably any investor would call and say, "I'm looking at your new deal, and the trader would speak to them for a little while, and they'd be like, "Okay, Lisa, talk about the top 10, talk about whatever," but I think having that grounding improved securities of all the various asset classes. First of all, it quickly got to the point where I knew where I wanted to be, and that was commercial real estate. You know, you think about mortgage pass-through securities, right? If you know where rates are going and you know where VAL is, you know, then you know everything, but no one knows any of those things, right? So, it makes it extremely complicated and frustrating. But we did everything, we did, strips and CMOs, and all the things that you do in that sector, so it was a good learning experience, and yet I certainly learned that this is not something I want to do for the rest of my life, in terms of mortgage, you know, residential mortgages.

Jon Gaynor:

Right.

Lisa Pendergast:

So commercial real estate just immediately sort of drew me to it, if you will, based on the various asset classes, the structuring of various loans, and how you provide them, you know, we have so many options, and the GSEs, talking about Fannie, Freddie, Ginnie Mae. All of these things were, I wrote every week, and they used to tell me I wrote too much, but they seemed not to care at the end, it seemed like a good thing, so you know, it was about talking about real estate assets themselves, talking about the securitization part of it, the certainly the financing side of it, which, that's a puzzle, that's a fun puzzle somedays, sometimes not so fun, but generally speaking, you know, trying to find the answer that pleases the lender as well as the borrower is always a tough sort of role, and to the extent, though, that you get comfortable with talking to borrowers, understanding what they're looking for, what they're not looking for. So that's what I loved about what I did when I finally decided to do commercial real estate. I worked for Mark Finerman for a very long time. Though he was a wonderful guy, excitable guy, and so it was never boring, and he's lovely. So he's a friend. All of the lenders that I've worked with, I still keep in touch with. They're part of the CREFC community, and certainly part of my friendship community. I always thought that the puzzle of solving a financing issue was just amazingly sort of engaging, and it really required that, like I said, you go back, you need to understand the asset, you need to stand the borrower, and all the financials, obviously involved in all of that. So, it have to say, when I first started at CREFC, I kind of was like, what did I do? But what's really filled in for that is the whole, the myriad of things that you do at CREFC. You know, I really love going to the hill, and we can talk about that, but to me, that's been a to do. I still hate the fact that the GSEs are new component, and it kind of helps me not getting the law in no man land. It really, it seems to me like it's broke and fix it folks, you degree, that at least I do something, talking to a lot of lawyers in D.C., and that's been, that's been a blast, and know, and it's still working. I mean, it's still ending, and yet sometimes not a blast when they're looking at you like, it seems like a bad spot for an agency, you know, Fannie and yeah, well, now we can't do that, but we try. Freddie, that are so important to

Jon Gaynor:

Be in forever conservatorship or what have you.

Lisa Pendergast:

It makes no sense if you put that on a piece of paper and you said, isn't this a good idea? Who would say yes?

Jon Gaynor:

Yeah

Lisa Pendergast:

No one.

Stewart McQueen:

Why don't we transition into, in my mind, one of CREFC's signature contributions to the industry. It's the Investor Reporting Package, or sometimes referred to as the IRP. You know, for the younger generation out there, they may not appreciate the effort that went into creating that. Can you explain what it is, and why standardized reporting matters so much for our market?

Lisa Pendergast:

Sure, you know, on the CMBS side, the IRP has been around for decades now, but when we first started focusing on it, you know, it was nothing, and you know it's obviously grown over the years, but what it is is just sort of an understanding of the current state of a CMBS transaction, so you understand what loans are performing, what loans aren't performing, and you know, when you get into some of the detail, you can actually get a lot more color as to what that cash flow looks like. Is it up, is it down? You know. So that type of information, I think, created transparency for the CMBS market that brings liquidity, and so sure, you could buy AAA's all day long, but we can't only sell AAAs, so the fact that you buy down the stack, really, really important that you understand how this collateral is performing. Oftentimes now, I know somebody will call me as if I have something to say about this, but you know, hey, I don't love that this special servicer did this. What can you do about it? I can make a phone call and say, hey, talk to me about this loan. After that, you know, there's not much to say, and we are not a regulator, and yet there, when there are things that look and feel really egregious, we can make a phone call to say, listen, you don't necessarily want this to be something that becomes an issue, right, so think about how you might adjust, and you know, so those types of things, and so this, the CMBS market, I think, you know, I forget what version we are on the IRP, but I know it's probably in the 30s when you do the points, you know, in between the 1.0 by the 2.0 and many, many now in the teens, but to the extent that you know the fact that we have an industry that has embraced it, and we have teams of really kind of volunteers from our membership that help us to keep that up to date. And the same thing is true now for the Collateral Manager Data Report for CRE CLOs. That is something that, you know, has grown. It needs to be a bit more in depth, and it's a lot more complicated than the CMBS is. Just because of the transitional nature, and the fact you have loans coming in and out, and yet that has been a spectacular effort, and it will do for the CLO market what it did for the CMBS market, and that is more liquidity, more folks feeling comfortable about being invested in the asset class. And you know, I actually think that if we go back, if I had my druthers, if the CLO was issued first, we never may have ever seen the CMBS, right? Only because it is sort of a, it's sort of a dead structure, right? There's not a lot of, you know, volatility in terms of what you can do when things go sideways or whatever, it's limited, still a decent structure when we still use it, and it makes sense, but I do think that the reduction in the conduit supply that we've seen has a lot to do with the CLO market, and I wonder if that will transition to a more stabilized asset at some point, you know, where that.. we'll have more of that. We'll see.

Jon Gaynor:

I think the CRE CLO is such an interesting and hopeful product, because fundamentally we use it mostly for transitional loans now. I think for CMBS, you know, you got stabilized properties, it's a status quo kind of thing, and we're in times where, like, costs are going up, you know, cap rates aren't gonna, you're not gonna be exiting into a lower cap rate environment or anything like that, so you've really got to have a plan to make more of what you have, and CMBS as a structure isn't that tool.

Lisa Pendergast:

Yeah, no.

Stewart McQueen:

I think depending on how the CLO is structured, offers more flexibility to work with your borrowers. In my mind, it's near and dear to my heart, to Matt Armstrong's heart, and others that I work with, because we do a lot of it.

Lisa Pendergast:

Yeah, no. I don't know if it ever goes away, and I'm not sure it should, but it's nice to have some optionality with the CLO sector, and I suspect well, over the years, you might see that more transitioning, and what does that look like, you know? Is it a lot, is it a little, you know? And it seems to me that there are more, and I may be wrong about it. Are there sort of semi-stabilized loans, like more stabilized loans are going into the CLOs today as they than they were when they first were introduced? So that's a good sign in it. And then you know, having optionality in terms of be it a CMBS or CLO financing structure, that's a good thing. You know, and you can pick your... pick your choice, you know. I do think the evolution, though, of the marketplace has... We've grown up, right, and we have optionality in terms of how you finance various assets and asset classes. I'd like to see sort of more coming out of, you know, sort of the GSEs as well, in terms of just picking up some of the non-traditional asset classes out there. They've moved in that direction, but I think you know embracing more of that, especially given housing issues, makes a lot of sense.

Jon Gaynor:

Well, I see people building structure around kind of making their program fit within what the GSEs want, you know, maybe there's a bridge program where they have a loan that they finance elsewhere until it gets ready for agency takeout, like things like that exist and have existed.

Lisa Pendergast:

It's kind of a CLO market. It's the perfect venue for that transition, totally. And it's nice that we have that ecosystem that continues to develop and mature, and I think we'll continue to see that.

Jon Gaynor:

All right, so this month was CREFC's Annual Conference in New York. What did you most want the membership to take away from that experience?

Lisa Pendergast:

I think each conference that we do, be it January or June, brings again sort of and reinforces the notion of community, and you know, I think you see that at the conferences, you see other things too, but to the extent that you know, I thought this year's conference was fairly upbeat, even though there are pockets of concern still in the marketplace, but I do think that getting together as a community, and it's - we're a large one - it continues to grow, you know, our attendance continues to increase, which tells me that clearly we're doing something right, and the market's doing something right, and people want to be involved, you know. We try to appeal to all sorts of different participants, and you know, conference goers, and you know, comes out through oftentimes through our speakers, and there I always try to accent, let's have a little fun with some of this.

Jon Gaynor:

Yeah

Lisa Pendergast:

You know, because it just.. it's imperative, I think. At some point, you're listening to panel after panel after panel, you need something to break it up and just to have a giggle and enjoy each other's company. I think that's the community sense of the Annual Conference, as well as the January Conference. Our forums always get together at those conferences. We have a lot of committee meetings, especially on new projects that we've been working on. At some point, it gets tiring to be on Zooms or whatever you do forever, right? And so, to the extent that you can put all of these people in the room. For example, one of the things that I'm really proud of, we've been working with NCREIF on this debt fund aggregate. That's been going on for quite a number of years, it started right around COVID, frankly, but I think it's going to be another important tool for the debt fund community, and you know, and for the those who are involved in CLOs, just to make that kind of comparison, but it's quite different than what we do on the CREFC front. In fact, we're going to have sort of five or six of the core contributors to the aggregate. Now we're going to have sort of a little infomercial, if you will, as to how's it going, how are you doing contributing now. But to me, what we know is that when you create those types of reports, you immediately create increased liquidity in the marketplace, and just the transparency is what drives that, and so it's been a long project in the making, and yet it's been totally worthwhile, and the fellows from NCREIF have been absolutely tremendous partners, and you know that's with anything, that's the one thing I have learned from CREFC, if we're going to do something new, do it with the right people. Otherwise, it just doesn't always work out. We haven't had many of those instances, but it's because we go to the right folks.

Jon Gaynor:

Absolutely.

Stewart McQueen:

Before we jump into a substantive takeaway of mine from the conference, I will give a personal takeaway from just observing the conference, particularly on Monday, when we had the president in town for the Knicks playoff game that night, everybody very excited about the Knicks game that night. I walked into the conference thinking, "I think this may be lightly attended." And then one thing I noticed is when I first walked in, it was just a timing issue. It's like the booths around the rooms, there were people that were not as many people as I normally see, and they said, "Well, let me walk into one of the panels" and walked in there, and there was standing room only. Normally, I've never had trouble, especially in the back of the room, finding a seat, and it just.. it just amazed me that everybody was in the seats for every single one of these things, and the rooms were packed, and I think that's a credit to the planning committee and the co-chairs. As a former co-chair, I give credit to the current co-chairs, who really designed some great content, and with the committee for this conference. So, thank you for continuing to do this.

Lisa Pendergast:

I mean, I think, fortunately, too, the market has provided us with a lot of fodder to talk about

Jon Gaynor:

A lot to talk about.

Lisa Pendergast:

Exactly. And so we had more topics than we had, you know, time, and yet, you know, I do think, like, you know, Lea Overby in her industry leaders roundtable session. I'm gonna have to give her my right arm at one point, just to say thank you, because she's done that each year, and it's a ton of work for her, yeah, so kudos to her, she, she, and she plans, and she preps all of her, you know, participants, and I thought they were all wonderful this time around, every time, but certainly I enjoyed the June session.

Stewart McQueen:

I've often said, after my experience as a co-chair, that I never appreciated how much effort went into the conference every year, and it's just so I was, I was pleased. But let's go to some of the substantive takeaways. Let's start with securitization, near and dear to our hearts. So SASB and CRE CLO are carrying the issuance volume, conduits down or shrunk. Five year loans now dominate, and the panelists across the board said that rate volatility is a bigger constraint than the absolute level of rates. From where you sit, is that the new shape of our market, or is it a cyclical detour we eventually move past?

Lisa Pendergast:

I think it's here to stay. The question becomes "At what level?" Right? Does it grow from here? I worry about, in some ways, the CMBS market, just because, you know, I grew up doing most work for Finerman and did deals in the CMBS side. It was no such thing as a CLO. Clearly, it's an easier kind of mouse trap, if you will. And so I wonder if we will not co-op that CLO structure for other things. You know, could you do your conduit loans in a CLO perspective, and would that not make it just easier to take quicker to get deals done, and you guys are lawyers. I'm not sure if that's...

Stewart McQueen:

There was a seasoned loan portfolio executed into CLO technology earlier this year, so I could see that technology could be ported into anything, I believe.

Lisa Pendergast:

And I think that's the future. I really don't often see, like, you think about conduit.. It's hard to see that coming back to where it was. We were doing, you know, when I was at Greenwich, US$4 billion conduit deals. I think about it now, and first of all, a ton of work. It was a 300 loans, but to the extent that they worked and people bought them, and you know, they were, they were liquid, just because of their size, and so that was important. You know, that's the other thing on the CLO side. I, you know, as they continue to grow, liquidity will continue to grow as well. And if I'm an investor, that would be one of the things I would think about if I want to get in and of these bonds. Can I?

Jon Gaynor:

That's right.

Lisa Pendergast:

And AAA's probably no problem. But anything after that, you say to yourself, you know, is it there, and it is nobody's fault. It's just the size of the market needs to grow, and we need more trans, you know, the more data points you get on, you know, trading, you know, volume as well as trading dollars. You know, what are you seeing in terms of pricing? You're going to see liquidity grow as well. It's a great market, and I do think at some point we're going to see a conduit-like structure within CLOs, it seems. Does that sound crazy, or...

Stewart McQueen:

It doesn't. I think there are.. it depends on the party that's executing, that's using the structure. It really depends on what they need, you know. There are tax limitations on, depending on tax structure, there could be limitations on how far down the capital stack you can sell things of that nature, but overall it's a great structure. I think it's an evolving structure, slowly evolving structure. Yes, slowly investors have been quick to point out that they want us to pull back, and we pull back, and then work with the investors to come up with solutions, but it's a great structure. I love it, because it's every deal is way different, you know. It's they're fun to work on from a legal perspective, and they're good, they're, they perform.

Jon Gaynor:

I've always said the alignment between the kind of arranger of the CLO, like the issuer, and the ongoing maintenance of the collateral is a really key feature. You're starting to see some, like SASB deals that are sponsor-led, where there's alignment between the kind of ultimate owner of the property and the issuance, and you know, I think more and more that is a key feature of how the market is changing, and this kind of leads into my next question, which is about private credit, so it's US$2 trillion slice of the CRE landscape right now, give or take. What do you think about the relationship between the private credit operators and securitized markets? Are they competitors? Are they complements? Are they a little bit of both? And do you think that the transparency of private credit relative to CMBS worries you, or worries the ability of that market to grow.

Lisa Pendergast:

It worries me to the extent you just, your ladder, the ability for it to grow. I think heightened transparency, as we know, in any kind of structure, and autos, cards, whatever it might be, right, in the securitization markets, is absolutely a necessity. It's not a question of whether you should show or shouldn't, right? If you show transparency, and you know, I look at some of the pre-sales now, and I used to think they were long when I was like underwriting loans and the like. It's a book, so I always think to myself, all this information is great, we just need to find a better way to deliver it, and then you know, frankly, the Chat GPTs of the world, you know, throw it in if you can, and summarize it, and start there. At least you'll know where you want to focus and where you don't want to focus. So, am I going to spend my time reading 100 pages or something that may not pertain to what I'm concerned about? So, more efficiency in how I think just will come in the current environment where technology is being used more and more now, so that's that's helpful. Just like there's not a speech I gave without running it through chat, it's helpful.

Jon Gaynor:

Chat helped me do the script for this, so really, you know, you gotta, you gotta use the tools you have. Yeah, that's right.

Lisa Pendergast:

I mean, write it first, because that's like sort of the sand in the line in the sand, is like they said, put it down in your own words and put it there and live with it for a couple of days and tweak it, and then run it through chat, just, and oftentimes it's more little minor things, but the minor things that make it sound a little bit more professional, or whatever, and so you know, you use it, but you use it with a good amount of, you know, sort of concern that you don't go too far. The brain needs to still be the working part of the organization.

Stewart McQueen:

Well, speaking of transparency, or a recurring tension at the conference was on the servicing side, with the investors wanting more information, particularly on the CRE CLO side, but, but you know, some panels warned that even the most useful disclosures can actually hurt the negotiation process with the borrowers, and you know that's a balance we have to strike. CREFC, the organization sits right at the middle of this balance to the IRP committee, and the like. How do we strike that balance?

Lisa Pendergast:

It gets to the point where, when you think about a special, right? They're in the middle of negotiations, there's only so much they're going to share, you know, because you're sharing it then with your... the guy on the other side of the table, and yet to the extent that if there is more disclosure once you're able to do so, and a lot more clarity, and it's not like I don't think the specials are out there looking to hide anything significant. It's more about they putting themselves in an investor's shoe and say, what information do they need to feel comfortable with either the workout, or even it's, you know, something you know gets gets completed, and there's a significant loss. I just want to understand that loss and being clear about that. There shouldn't be any problem at that point, right? Because it's done, and the data that determine whatever that was going to be, you know, the resolution is, is should be available as well to investors. If we did a little bit more of that, and I'm not sort of down on the specials, they have a very difficult job, but if you provided more color and within a realm of reasonable, right? I think you'd get less investor suspicion as to something went sort of different than they thought it should. So to me, in some ways we shoot ourselves in the feet if in fact we don't provide enough information as a servicer, special servicer, to say this is why this happened and this is what it is. And in fact, hired Rich Carlson from the servicing community to be at CREFC, and I did it for the express purpose, for he to start writing at least a quarterly, if not more frequent, educational pieces on servicing functions and why they do what they do, show the math, give an example. If people understand more as to what they're doing on their end, and there's more sort of clarity as well as transparency. I think it kind of cuts that sort of concern level down significantly, and so those servicers who do more of that, I think probably have, you know, more benign lives.

Jon Gaynor:

If nothing else, market data out there helps narrow the bid ask ranges, right? Like, if you understand why a servicer has to make the offers they do, or what they can accept or not, that right sizes your proposal on the borrower side. Maybe it's a little easier for you to actually get a deal done and waste less time.

Lisa Pendergast:

That's right. That's right. And that's something that we didn't have back when I was in the business, and that was always an issue. What's the actual value of the asset? And so, where do you go from there if you're not comfortable with it?

Jon Gaynor:

Yeah

Lisa Pendergast:

You know, and then you fight over what that might look like. You usually end up back to what the original number was back in the day. Today, you have the level of transparency is like nothing we've ever seen.

Jon Gaynor:

Oh yeah

Lisa Pendergast:

And it's fantastic, and you know, some people might like it, and some folks might not.

Jon Gaynor:

So, we've been touching on this a little bit indirectly, and I want to move on to data centers and AI. So, data centers were a dominant theme this year, and there's a real debate about where they sit inside of the finance structure globally. Are they real estate? Are they infrastructure? Are they an ABS story? And we've seen deals executed along all those different pathways, sometimes dual tracked. How is CREFC helping the market get its arms around this asset class that doesn't neatly fit in any one of the boxes?

Lisa Pendergast:

We haven't really done much on what box it fits in. I think what we've been trying to do is to educate members on what they look like, how they function, what are the risks, what are the opportunities. So, we've had a couple of after-work seminars, I believe we put some piece out, but I know there's a bigger one coming, and that's the kind of information that I think folks need. It just, it's you need to kind of take it from the ground up and then go to into the securitization part of it, but to me, when I first thought about data centers as collateral, for say a CMBS deal, in many ways they strike me more as an operating business than an asset, and that clearly is the issue, the ying and yang of it all, you know, and what sits in the middle. And you know, I think we've decided in certain places it's going to look like X, and we're going to call it X, and some other places it's going to be Y, and until that kind of clarity, or somebody says, okay, this is what it is, then we're going to have this sort of securitization issue, whether is it an ABS kind of thing, is it a CMBS kind of thing, operating business, relative to, you know, just a debt asset that sits there. Yeah, so I think it's there's room for this to develop further, and I suspect it's not going to happen in six to 12 months. I think it's going to be, you know, at least 24-36 months before we get super clarity on how you want to think about them.

Jon Gaynor:

I'm at the point where I like, I really love watching people kind of invent the solutions to kind of solve the problems, where we blend the collateral types, and like there's a real estate component, and then there's an infrastructure component, and I think it's just cool to see us, like as an industry, across industries, across silos, working together to solve the problems, and kind of get the, get the bar, the money to work, because there's just an intense amount of interest in developing these.

Lisa Pendergast:

Yeah, no, it's true. And I think we've been spending a little bit more time with our investor base. They're, you know, concerned a little bit about more transparency that they're looking for, so anything we can deliver there, I think, would be accretive to just more folks jumping in and buying bonds as it should, right? And yet I think that there are still issues associated, even with the CMBS market, that we, you know, get concerns. Well, why did this happen? Why did that happen? And half of me says it is kind of what it is at this point, you know, and I don't see us making any significant changes to that structure anytime soon. Maybe it happens, but not certainly, you know, in the next couple of years, whereas then you go back to the CLO market, that's the one area where you could actually see, you know, change in growth in terms of what that structure looks like over time, and you know, I don't know what that will eventually mean, but I think it will be positive, and the structure, I think, will just be adopted by other sectors. You know, it already has been, right? Corporates do it, and others.

Stewart McQueen:

You brought up AI earlier. Let's shift to AI. AI came up in nearly every session at the conference. Hugely useful as a productivity tool. I know we at Dechert invested a lot in it. I know the industry is investing a lot in it. I don't think I know one person who hasn't yet embraced it. Jon has pulled me into the world significantly. So, thank you, Jon, but as one of my law professors used to say, comma, however, comma... A real concern one I have, I know others I've talked to at clients is how the automating of what some of us view as entry-level work or good training ground for our young talent, how that's eroding the talent pipeline, or could potentially erode the talent pipeline. I know you've invested a lot in the young professionals at CREFC, with the 20 under 40, the mentorship programs, which a lot of our young attorneys here love being paired up in the industry. How do we weigh that... the efficiency of upside against the risk of how the young people actually learn the business?

Lisa Pendergast:

And it's a concern, you know, if you can go to AI and whatever you use and get an answer. The fun of it, and maybe I'm a nerd, is finding that answer yourself. That doesn't mean you can't use resources. I think if you consider AI as another resource, like an encyclopedia, when you know we're writing book reports in the sixth grade. Those types of things, that's constructive. But when you're actually allowing AI to take control over what it is that you're doing, is where we go way awry, and to the extent that it also limits how you grow, that's the other side of it, right? It's not just whatever project you're working on. You don't grow if you're not thinking and trying to solve a puzzle, and you're letting AI do it. You're cheating yourself. Now I'm fine going to AI for data, like I said, throw a speech into, you know, and it and using those, which they wouldn't independently do, those usually cleans it up a little bit, but it doesn't change anything I'm saying normally. Sometimes, but usually not. are funny at the conferences. But But it does clean it up, and it looks, it looks professional, or sounds more professional, whatever you're looking for, but AI should just be that tool, it should not be the engine, you know, it should be the wheels on the car, not the engine in the car. I worry that if people stop really using their own brains to solve things, where does that go? Do you devolve as... in a nation, in a world, and I don't know what that looks like, and it's kind of scary, and you wonder what's next, actually. Also, after the AI that we know today, where does that transition to and transfer to? It's an unknown. It could be cool, it could be fun, and yet I just worry that a lot of college students now are writing papers written by AI. And how does that help you? You know, especially if you're in, even in a business like ours. Yeah, it's mostly it's a lot of math when you're underwriting alone, and yet you have somebody's got to write up the asset, somebody's gonna talk about what's good, what's bad about it, pros, cons, and you need to be able to do that in a way that you know that's literate and readable and effective, so there's uses for everything, folks. I feel like I use AI a lot when I'm just looking, it's like the new encyclopedia for me, like the things that I would look up as a kid in an, whatever you, whatever book you're using, and today it's just more of an ease of use and getting an answer quicker on basic things, and it's a starting point, and that's what I say to my staff. Do not use this as the end product, use it as one of your tools to do your work, because if you're doing that, I'm not sure why I'm paying you, you know, and so I think the CREFC staff has embraced that, where I'm not seeing things that sound a lot like AI, and not necessarily them.

Jon Gaynor:

The CREFC staff has also embraced the AI-generated video, and using those, which they wouldn't independently do, those are funny at the conferences. But

Lisa Pendergast:

I know.

Jon Gaynor:

I'm, I'm excited for it. For me, AI, like I would Google things I didn't know, and it... like almost like an encyclopedia, so in that sense it's just shifting around the process. But you can't offload the judgment, and training the judgment is going to be where I think the next generation...

Stewart McQueen:

yeah, I'm gonna steal this from a good friend and client. How they use AI a lot is more of a defensive tool than an offensive tool. Say more, like they, they come up with something, figure something out. Okay, what am I missing? Put it in there, see what am I missing?

Jon Gaynor:

Or if it can challenge you, yeah. I like that as a 'sharpening your thinking' too. I think that's great, Lisa. I want to talk about the future more. So, thinking about whoever takes your seat next, what's the part of the job that people underestimate? I'm really curious about how the CEO's role in working with the press and helping direct industry narrative is a part of your job, and I think it's a part you do well, because I don't think that's necessarily intuitive to somebody stepping into the role.

Lisa Pendergast:

It's why it's important, you know, I, my number one ask is is you providing them with a challenge that may be insurmountable, at least for the first couple of years, and you know I'm proud of the fact that every single person at CREFC I've hired, except for Ed, who's been there for forever, and he's just a wonderful guy, and runs, you know, things so smoothly. He cannot, I said to him, you can never leave, I don't care if you're 95 you cannot leave, you know the staff is all relatively, you know, under my time being there, or is everyone that I've hired, and we've done, I think, a pretty good job of doing that. And it's interesting when you run a trade association, because you're talking to your staff is everywhere. It's the folks who plan the meetings, but then it's somebody who's talking to the Hill, and it's Ed who runs sort of the operational side of all things, and he's wonderful at it. He has a, you know, sort of a history too of knowing CREFC, which is amazing and very helpful. I always say to him, "You can't leave, I'm sorry, I'll whale you out of there at 80," but to the extent that you know from thinking about how you manage the trade association, it's... the challenge to me was I was used to hiring, you know, sort of analysts to help me on the research front, so I knew how to do that, and sometimes I'd talk to a trader or whatever, just as, a team talks to some potential candidate, it, you know, and the CREFC level, there's so many different roles to be played, and yet you know, like I said, I'm very proud that pretty much everyone on staff I've hired, with the exception of Ed, but I dare say that whoever's coming in, you know, one of the things I think initially is just, especially if they've not been associated with CMBS and CREFC, you know, just learn, listen for a while and understand sort of how the I think we have it working well, and we have all of the positions that I always wanted to have are there and filled, and so that's a help. And you know, I do think, though, it should be somebody who comes from the business, for sure. One of the hardest parts of the job is really just finally being the grand ameliorator when it comes to people not coming to the same conclusions in the marketplace, and you know, we have an industry full of really, really intelligent people, they've all been doing it for quite some time, in some cases, and so they're not always, you know, willing to compromise, and yet I think eventually they do, and they find a way to move forward, and that's what I think. You know, whoever sits in the seat just needs to be able to work with people and be a little bit patient and let them come around to what you know the general public is looking to do, as opposed to one off.

Stewart McQueen:

All right, why don't we wrap up with a few fun questions?

Lisa Pendergast:

Sure, fun's good.

Stewart McQueen:

I'm gonna ask you one that I hope does not get you in any trouble.

Lisa Pendergast:

Uh oh.

Stewart McQueen:

Over the years, you've shared the stage with some terrific keynote speakers, folks in the industry who've given opening remarks, co-chairs of the conference, and the like. Let's focus in on the keynote speakers. Who's your favorite conference guest of all time?

Lisa Pendergast:

Gosh

Stewart McQueen:

You can have more than one.

Lisa Pendergast:

I enjoyed Mel Robbins, only because she grew up in a town very close to where I grew up in Massachusetts, but she.. I thought she was great. I really liked, to me, the sort of entrepreneur type of crowd that showed up, and we've had about five or six of them over the years, you know, and I, that's who we kind of focus on, you know, in terms of who we want to be, and then, like, the Colin Jost. To me, that's just fun, and we find that every other conference, or every couple of conferences, you need that personality on stage. And I thought the Allie K. Miller at the conference, talking about AI. At first, I think I, and I saw her picture, and we were chatting, and she looked kind of young, and I thought, I don't know what this is going to look like. She was phenomenal. When she spoke to us, 15 minutes in... I'm like, yes, hire her, and it was great, because she took a young person's perspective, but really translated to an entire audience of anywhere from 20 to 60, so and I thought that was that was So sometimes picking and choosing and selecting who those speakers are are very tough, and it's usually the planning committee, along with CREFC staff, myself and a few others that actually participate in that, so if you ever have suggestions, it's, you know, we welcome them because it's the funniest thing trying to find people who are truly interesting and unique, and yet you say to yourself, but no one knows them, so will people enjoy this, or will they actually even come? Right, will it sound like a better lunch thing to do, as opposed to sitting through the session, but most cases, those rooms are always packed year in, year out for that general session, and you know, I like the politicians when they come in, or the folks that, more and more importantly, speak to the D.C. environment. To me, that's really helpful, as well as entertaining sometimes in ways that probably shouldn't be, but it is what it is, but you know we do a lot of thinking about who we hire just for speakers, and...

Stewart McQueen:

I remember that back in my co-chair days, and just the amount of weekly sessions that were devoted just to the keynote, but also taking into the various constituencies across the conference, and you know the demographics, the age, the you mentioned you don't want to bring in somebody that anybody knows, or and that works both directions, right? and but there's a lot of effort and time went into and you had to kind of front load that one, right? Because you had to talk to the speakers' teams and get everybody on the same page, so it's a process.

Lisa Pendergast:

Yeah, it's a significant process. It's important, because you know some of these folks aren't inexpensive, and you want to make sure that if you're paying that kind of money, that you get what we think our members would like to hear and see.

Jon Gaynor:

Totally

Lisa Pendergast:

And you guys have done a great job. I mean, Stewart was part of this, and it's not easy, and you're always worried you're not going to please somebody, and or many bodies, but that's never been the case.

Stewart McQueen:

Once you accept that there's gonna be somebody that's not happy, then you can move forward.

Lisa Pendergast:

I've learned that that's the one thing I have learned, though. Don't get yourself down if, like, you get that one call that says Lisa, that conference was horrible. That's okay, fine, everybody gets a view.

Jon Gaynor:

What about Stewart? Well, who was your favorite conference speaker?

Stewart McQueen:

Oh, there have been so many.

Lisa Pendergast:

I have to go back.

Stewart McQueen:

Okay

Lisa Pendergast:

The one with Harris Trifon and Shaq.

Stewart McQueen:

I love that one.

Lisa Pendergast:

I think about that now, and I laugh out loud because Shaq is so big. And then he had his little, like, at the time he was wearing kind of a tighter, shorter jacket, and it was kind of the new thing to wear, and he made some comment about, like, you know, so where'd you get what little boy gave you that something like that, and I thought to myself, I'm either gonna get sued at this point. It was hysterical, you know, and it was funny, just the two sizes of those two gentlemen. It was not that he's a small guy compared to Shaq, he was,

Jon Gaynor:

I mean, we all are. Shaq, yeah, but which one?

Stewart McQueen:

A few, you know, I really enjoyed the Ron Howard. Was it last year?

Lisa Pendergast:

That was awesome. Yeah, last year.

Stewart McQueen:

I grew up, grew up, I'm gonna age myself, but I grew up, you know, watching his shows, Opie, Opie, Happy Days, and followed his career as a director.

Jon Gaynor:

Arrested Development and yeah,

Stewart McQueen:

But you spoke of the entrepreneurial side, and I had really enjoyed it. Was few years back, it was Tony Hawk.

Jon Gaynor:

Tony Hawk was like, I was so excited when he was the speaker. I said, this is because, like, in high school, I played his, like, skateboarding video game, you know what I mean?

Lisa Pendergast:

Everybody did, yeah.

Stewart McQueen:

Everybody wanted to be Tony.

Lisa Pendergast:

Yeah

Jon Gaynor:

I have those songs stuck in my head. I was gonna, I was gonna try to petition for one of those to be our opening theme, but I think the licensing was too expensive or something like that. But so last question, Lisa, you're a hard worker, you're about to get a lot of time back, and I know you're looking forward to spending more time with your family, but you know I can't imagine that's all you're going to be up to. So, after a decade of running full speed, what's next for you?

Lisa Pendergast:

I don't know if we stay in our home in Rhode Island. I was thinking, you know, running town government or something like that. I don't really want to dive deep into anything for a while, and you know I'm going to be a better golfer, yeah, sure, but I'm going to try, you know, just do some of the things and get back to reading, you know, I, we read all day long, right, so I buy books that I barely open anymore, because by the time I get to it, it's like I can't read another thing. And so then I watch a movie, which I think doesn't do a lot for your brain, but to the extent that that's reading more, you know, and just engaging more too with the family. I have been a working mom since 1983 no, 87 sorry, but since my children were young and with babies, and so, you know, kind of re-engaging with the family. I just found out I'm going to be a grandmother for the first time, and so that's exciting. And my daughter's getting married, and you know, so it seemed like a good time to break.

Jon Gaynor:

Congratulations though on that. That's super exciting news.

Lisa Pendergast:

These are, you know, working mom for forever. So now it's time to reconnect.

Jon Gaynor:

I imagine you're gonna have a well-funded city council, like Lisa is probably going to do just fine, I'm sure. Lisa, it was a real pleasure to have you on the podcast today. Thank you for joining us.

Lisa Pendergast:

You're very welcome. Thank you for inviting me. This has been great.

Jon Gaynor:

All right.

Lisa Pendergast:

All right.

Jon Gaynor:

Thank you all for joining us for another episode of Dechert's 4 Real podcast. If you have any thoughts, please share them with us at our email inbox, real podcast@dechert.com Also, if you like what you heard, give us a five-star rating on whatever platform that you found this on. This episode was hosted by Stewart McQueen and me, Jon Gaynor. Matt Armstrong, Sam Gilbert and Kate Mylod produced it. Production support is by Kara Ray, Mallory Gorham, Alyssa Norton, Peggy Heffner and Jacob Kimmel. Our editor is Andy Robbins of AudioFile Solutions. Thanks for listening, and we'll see you next time on the Dechert 4 Real podcast.

Stewart McQueen:

All right, my least favorite part of the podcast. Let's hear some bad jokes.

Jon Gaynor:

All right, fine, I'll go first. I have a couple. You stop me when you're ready to do your own, so we have mercy on our audience. How do trees access the internet? They log in. The disappointed look on your face, this is great.

Stewart McQueen:

I'm just channeling my daughters. My dad jokes don't land at all.

Jon Gaynor:

Mine don't either. Yeah, we still do this. All right, why couldn't the gardener grow any flowers?

Stewart McQueen:

Why

Jon Gaynor:

He hadn't botany.

Stewart McQueen:

Why don't I jump in with one? I'm gonna roll my own eyes, but you know... What runs all the way around a garden but never actually moves?

Jon Gaynor:

What

Stewart McQueen:

A fence.

Jon Gaynor:

It's like a riddle, all right. Lisa, do you have one?

Lisa Pendergast:

Why couldn't the gardener get married? He was too rough around the hedges.

Stewart McQueen:

Actually pretty good.

Jon Gaynor:

Yeah

Stewart McQueen:

I'm gonna use that one.