Invesco’s R. Scott Dennis on Post-COVID Growth and Managing Its Current Assets
Invesco Real Estate CEO R. Scott Dennis breaks down the strategy behind the company’s $87 billion in assets under management — and how it’ll grow post-COVID
Savvy investment decisions have separated the haves from the have-nots in the commercial real estate industry over the past two years, and Invesco Real Estate is one company that’s firmly in the “haves” camp.
The COVID-19 market crisis only further validated the investment themes Invesco had pursued for some time within its portfolio, allowing it to uncover early-pandemic market opportunities while most were battening down the hatches, and emerge fully ready for action in the post-COVID world.
At Invesco Real Estate’s helm sits CEO R. Scott Dennis, one of its six original co-founders. In his 30-year tenure, Dennis has helped guide the platform through multiple market crises and corrections, growing it from $200 million in assets under management to a whopping $87 billion, and expanding its global footprint to 21 offices in 16 countries.
One key lesson Dennis has learned during his career is that there is opportunity for growth to be found in every crisis — if you just look for it.
The real estate industry finds itself at a pivotal moment today, as it emerges from the pandemic and enters its next iteration. Commercial Observer caught up with Dennis in late October at Invesco’s Brookfield Place offices in Manhattan to learn more about how his firm is positioned for the next 30 years.
Commercial Observer: Are you from Dallas originally?
R. Scott Dennis: Yes. I grew up in Dallas, and I spent most of my life there. When I got out of school, I moved to New York and went into investment banking, working for Bankers Trust in the mid-1980s. I loved my time up here. From there, I went to Trammell Crow Company and was investing on behalf of their commingled opportunity funds, and then had the opportunity to start at Invesco Real Estate. We were at roughly $200 million in assets under management at the time, so it was a very interesting growth opportunity.
Has that early investment banking experience helped you in your role today?
I loved investment banking. At the time, I was working on transactions at a very young age that I had no business working on [laughs]. I was thrown in the deep end of the pool, and I had to swim, which made it incredibly fun, and exhilarating. It was also fun being a Texan in New York, because the energy that’s created here is contagious. But, in terms of my career, investment banking gave me a great background and a more three-dimensional way of looking at the world.
How did your family feel about you moving to New York at a young age?
My parents were excited. They love Dallas — and I love Dallas — but they were excited I was getting out there and trying something new. My wife is a fifth-generation Texan, and her grandmother was not happy that we moved here. When my son was born … my wife’s grandmother told us she was going to ship a box of soil from East Texas to New York City. She wanted the dirt present in the delivery room so she could say her grandson was born on Texas soil. She never sent the box in the end, but the story always makes my wife and I smile.
What was your role when you first joined Invesco Real Estate 30 years ago?
I was leading acquisitions. My partner, David Ridley, was the original founder and busy capital-raising at the time. That was his passion, and he really didn’t focus much on the investment side, so he wanted to team up with somebody that had a passion for investing.
How was the general investor sentiment around real estate back then?
It was as bad as it gets [laughs]. The structure of funds was very opaque, they weren’t professionally managed, and there was no liquidity. At that point, supply clearly exceeded demand, but the savings and loan crisis then created one of the best investing environments in my career. Now, 2008 was also a lot like that, but during the global financial crisis the market recovered far more quickly than it did in the late ’80s, early ’90s.
But back when I started, real estate was much more of a tactical investment, so people would come in and out. What’s happened is it’s really earned its place in modern portfolios. It’s a strategic asset class, and I think that’s why you’ve seen so much more liquidity in the market, and such growth.
How does the COVID-19 market crisis compare with those previous crises?
Every crisis seems so tough at the time, but I think if you go into it looking at the opportunity it creates, you have a different mindset. It comes down to being optimistic and keeping your eyes focused on what needs work. If you look at Invesco Real Estate, over the last 30 years, we’ve had incrementally higher growth coming out of crises because they create those very opportunities. And, I think, if you look around at some of the other great firms today, that’s how they’ve grown.
What are the key lessons that you’ve learned over the past 20 months?
There have been a lot of lessons. The first, which I already knew, is just how blessed we are to have a great company with great people. You rely on your culture through all markets, but especially in times of crisis. But the broader lessons learned were that in today’s world you have to be flexible, regardless of industry. People have different roles and different priorities in life, and you need to account for that in order to retain top-quality talent.
What is your stance today on working from the office versus working from home?
I do believe people need to be in the office. What sustained us through this pandemic is our culture, and that culture was framed by being together. But, with technology and everything else we have today, there are also ways to be flexible.
Did you learn anything about yourself as a leader during this crisis?
I learned that you can’t control the future, and you can’t always control the present, but you’ve got to be an active listener, because connectivity is key — not in groups, but one on one. Taking the time to reach out to people was critical, and is a lesson for me going forward, in terms of how important it is to stay connected on an individual basis.
What were the key market opportunities that materialized for Invesco Real Estate this time?
Any crisis creates opportunity, especially as an investor. We tried to be on the lookout for that opportunity early on when the markets shifted, and we were able to take advantage of some distress from an investing perspective. When COVID first came into being, the markets didn’t know how to handle it. The stock market was down, there was turmoil, and liquidity became an issue. Specifically, we were able to invest in some public real estate companies — recapitalizing them— and also private real estate operating companies.
Looking broadly at your portfolio now, how did it fare during the pandemic?
Overall, it was durable. And I think it’s because we’d spent a lot of time investing in and creating a highly diversified portfolio. A focus on durable income is at the heart of how we invest, and the good thing is that we’re not reliant on one type of property, or one specific geography. We are a global investor. Historically, there were four main property sectors: office, retail, industrial, multifamily. That’s expanded now with what historically have been known as the specialties sectors — so, data centers, self-storage, single-family rental [SFR]. Those types of properties are now more mainstream and, as the market evolves, we’re more inclusive of them in our portfolio.
We’ve seen a lot of multifamily investment pivot into SFR. What’s your take on the space?
We’ve always been a big believer in having a strategic position in multifamily, because it’s very basic to a diversified portfolio. SFR is relatively new over the last few years. It’s historically been very fragmented, typically owned by individual investors, but now it’s become more institutionalized. Now, the fear is that institutions are going to come in and drive rents up, but institutions only control about 2 percent of the market right now, so it’s still very, very fragmented. I don’t think there’s a situation where large institutions are just going to come in and take the prices through the ceiling.
What is Invesco Real Estate’s competitive edge when it comes to an industrial deal or a multifamily deal today?
One thing is our footprint. We have 21 offices in 16 countries around the globe. We have boots on the ground, and, while there are a lot of intermediaries in this business, we also have a lot of direct relationships that go decades back, so we’re able to find a lot of off-market opportunities, or more negotiated types of transactions. We hire people that have history and have experience and reputation in the market; then it’s a case of making the investment and hopefully at a good basis. From there, we have terrific asset-management capabilities. We understand assets, and the ability to drive revenue growth is the ultimate goal.
I assume during the pandemic those asset-management capabilities were pretty key?
Yes. Our asset managers were working around the clock. They did an incredible job, but that’s why you have to have boots on the ground and understand what the tenants need, what they’re dealing with, and to have the empathy and to be able to respond to it. Things really changed overnight, and they had to act fast.
How is Invesco Real Estate addressing ESG in its portfolio today?
We are committed to being good stewards of the environment, in a manner that’s consistent with our fiduciary responsibilities to our clients. As our clients increasingly place value on issues, we have a responsibility to make it a priority in the way we conduct our business and sustain our investments. We recognize that embracing ESG+R best practices is important, and we continue to implement our proactive Environmental, Social, Governance and Resilience approach.
Why did you add “Resilience” to ESG?
Resilience is connected to how we mitigate risks connected to climate change. This is important for several reasons, one of which is that climate change poses increasing financial risk to owners and occupiers of real estate. To manage this risk, Invesco Real Estate developed an in-house climate risk tool that identifies and benchmarks several climate hazards, at both an asset and portfolio level, for any location around the globe. The dashboard is made available to all fund and asset managers across Invesco Real Estate, enabling risks to be swiftly identified and mitigated against.
You recently made a student housing acquisition at Kennesaw State University in Georgia. Why do you like this space?
The universities have struggled with being under-supplied from a housing perspective for some time. They have a finite amount of opportunities that they can offer to the students in the dorms on campus, so people are relegated to having to fend for themselves and find off-campus apartments, often housing that’s sub-standard. So there is a market out there that needs and wants student housing, and wants it professionally managed. Especially if you look at it from a parent’s perspective, sending your child off to college and how you evaluate that. So, we see big demand in that space. We’ve been tracking this trend, and it’s been evolving a lot over the last 15 years.
On the debt side, where are you focusing your lending activities today?
From a diversification perspective, we try to maintain that philosophy and stay diversified across the board. There’s the CLIC approach, which is Consume, Live, Innovate and Connect. So we categorize real estate within that acronym. As you can imagine, there’s some overlap, but “live” is anything with a bed, “consume” is retail and now industrial — because of e-commerce — and “innovation” is life sciences properties that we’re investing in, and then data centers, logistics and industrial also fall in that space. We build a portfolio with a focus on maintaining that diversification.
How active are you in the life sciences space today?
We’ve been involved in new development, and also buildings that have some renovation. Science is evolving, and technology is evolving in the medical fields and from a pharmaceutical perspective — not just regarding COVID, but overall. The facilities to house those capabilities are just not there. Life sciences companies need lab space, but it’s a highly bespoke space. A life sciences firm is not going to move into a regular office building, because they have certain requirements. If you have the right bones, you can do it. But it has to be the right market, and there has to be the appropriate tenant demand.
Let’s talk about retail, the redheaded stepchild of the industry…
Careful, I have two redheaded daughters [laughs].
Noted. I have redheaded cousins in Scotland. It’s an unfortunate phrase. Let’s say retail is the “unpopular” stepchild. How are you viewing retail investments today?
With retail, you really have to look at it in two segments. There’s the basic goods-and-services grocer anchor that’s actually made it fairly well through COVID, but also through a generational change. The malls obviously had been hit the hardest, and the change you’ve seen is they’ve transformed from pure retailing to more of an entertainment venue. You’ve also seen the de-malling, because one thing malls have in common is huge amounts of land. So maybe tear down some of the buildings and you can build residential, or office, or it could be senior housing or other uses. If there’s connectivity there, you can even put a data center on it.
It seems COVID was a good kick in the pants for some people to reconfigure the assets that were no longer working.
Kick in the pants is one way to say it.
Generally speaking, how is the global investor demand for U.S. real estate today?
Historically, institutions have been the largest investors in private real estate. And, in fact, most institutional investors, on average, have 10 percent [of their investment portfolio] allocated to the asset class. On the other side, retail investors, individuals, have been able to invest in real estate investment trusts and other vehicles, but they have not been able to invest directly in real estate.
Well, now through the evolution of the markets and the structure of strategies, they can invest directly in real estate. Today, retail investors are at less than one half percent in allocation. So there’s a lot of opportunity there. So we believe that opportunity is huge. And that retail market is growing. So we are pursuing that and we’ve developed some strategies that allow us to access that retail flow.
And what are the biggest headwinds for the industry, in your eyes?
Real estate houses the economy, so we’re pretty well correlated. Obviously, you can overbuild a certain segment of real estate, so we need to make sure that capital is disciplined and not over-allocating to development that exceeds demand. The good news that we’ve seen now is demand and supply seem to be in balance. So that’s created some terrific dynamics.
The other thing is, it’s viewed as expensive as fully priced, but every asset is fully priced. So you have to look at the broader economy, low interest rates and lack of other investments, and what we’ve seen is people realizing that fixed-income portfolios are not going to allow them to achieve their financial objectives, so a lot of that capital is being diverted to private assets and private markets now.
There’s a lot of capital flow, which has driven pricing up, and a lot of people are concerned about that. But, given that, you need to look at how you invest in real estate. Real estate is a long-term asset, and the revenue streams are structured that way. If you’re an investor with a long-term view, is an extra 50 basis points in cap rate going to be detrimental? It may not be. If you’re more of a tactical investor, in and out, it clearly makes a difference.
What’s next for Invesco Real Estate?
We’re a fiduciary, and we want to make sure that our funds are top tier as far as performance. So we’ve got to continue to be vigilant in our assessment of markets, our investment strategy, and evolving where we invest and how we invest. So, I think the future is very bright, and I do think there’s going to continue to be more and more capital available for the asset class, and that’s only going to generate much more opportunity.