Name: Why This Investing Pro Is Looking to Europe
Uploaded: 2026-06-25T19:06:00Z
Duration: 21 min 9 s
Description: "There's a bigger market, less competition," H. Cabot Lodge III, founder and senior managing director of Lodge Quai Capital Management, told Barron's editor at large Andy Serwer.

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"There's a bigger market, less competition," H. Cabot Lodge III, founder and senior managing director of Lodge Quai Capital Management, told Barron's editor at large Andy Serwer.

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Why This Investing Pro Is Looking to Europe

Hello, everyone and welcome to "At Barron's." I'm Andy Serwer, and welcome to our guest Henry Cabot Lodge III, founding partner of Lodge Quai. Cabot, great to see you. Thank you so much for joining us.

Thank you, Andy. It's a pleasure to be here.

So tell us about your investment firm Lodge Quai. What is exactly what they do?

Well, it's a business in a industry that I've been involved with for gee, 45 years I think. I've switched between running the credit tenant lease business for New York Stock Exchange companies and then going into starting my own business. The first foray was with William E. Simon, former Secretary of the Treasury, where we formed a fund that we merged into the largest publicly traded real estate company on the New York Stock Exchange. I left there to start another fund with a guy named Ray Wirta who had just formed CBRE. He was CEO and chairman. And I then went back to Europe with Bill Carey at a company called W.P. Carey and was president there for four years. And I found that Europe was very interesting for this asset class because, well, for a number of reasons, which we can get into later. But there was a point at in European history, I'm sure you'll remember the area of the PIGS where it was uncertain whether US investors wanted to invest dollars in Europe. And so I left to say this is the exact time where we ought to be investing.

The PIGS is an acronym for...

Portugal, Ireland, Greece, and Spain. I think Spain was the other one. Now, of course, Greece and Ireland are thriving economies. So Dan Quai and I, we met on a deal, a big German company that had never sold a piece of real estate called METRO. We gave them 300 million euros and bought their Italian footprint. METRO sold to the hospitality industry everything you'd need in the fourth largest tourism market in the world. And their bonds were trading at about 2 to 3%. We did an unlevered deal at 8%. With moderate leverage could return 12%. So the decision for those investors looking to invest in METRO's credit, would you rather buy the stock? Would you rather buy the bonds or would you rather have a real estate position where you could get double-digit returns? Even though it was in Italy, we took a parent guarantee because Italian legal real estate law has certain quirks, which is common in Europe. So that was a transaction where Dan and I spent a year together. Now METRO doesn't own one piece of real estate and I think it's indicative, somewhat of a bellwether for what companies in Europe are looking at for this form of financing.

Yeah, I mean, so maybe taking a step back, Cabot, what are net leases? Just give us sort of the basic 101, how does that work?

Well, we provide the intermediation between companies seeking to pull the capital out of their fixed assets and redeploy it in either paying down debt, doing an M&A deal. We don't like them to use the proceeds to pay dividends. It has to go back into the business. And the other side of that trade are investors looking for long-term safe income that is asset backed. Unlike fixed income or debt, we actually own the real property, and we own it under what's called a triple net lease, meaning that the tenant pays all the expenses that a landlord typically would suffer, insurance, taxes, maintenance. So it's somewhat of a passive landlord role and it's very much of a hybrid between credit and real estate.

And why... You explained this a little bit, but maybe you can expand. Why is Europe so much more appealing to you than the United States?

Well, for a number of reasons. First of all, there's a bigger market. There's about eight trillion of corporate-owned real estate in Europe versus four trillion in the US. There's about over 4% of the market in REITs in the US. It's less than 1% in Europe. When we compete for a deal, we're competing against maybe 5 to 10 other bidders, whereas in the US, it's 30 to 50 bidders. So there's a bigger market, less competition. The 10-year bond is trading today at 3%. The 10-year Treasury's is 4.5. So with financing rates in the 5 to 6% range, we can realize significant positive leverage on our transactions, which is tough to get in Europe. Cap rates are about the same in Europe and the US, depending on credit quality of the counterparty. I think also you have sort of a moat to entry, if you will, in Europe. It's obviously multi-linguistic, it's different legal systems, a different currency. And so it's hard for a US platform to sort of pick up and say they're going to go to Europe. You really need a team there that has those skills and can recognize those idiosyncrasies, if you want to call it that, in the market. Europe also has, it's a lot tougher to blow up a company there. Chapter 7 really doesn't exist. With the insolvency regimes, they wanna retain jobs. So if you have a company that gets into trouble, they work with you to maintain, you know, a going concern value if you will. And for that reason, what we do is focus on the most strategic or mission-critical asset of the counterparty. We like to buy the manufacturing asset, not the office building. Office is ubiquitous, you can always get cheaper office space. But to buy a plant where the tenant improvements generally are four, five, six times what you're actually buying the real estate for is a very sticky asset. So we like large industrial plants, single tenant properties that, you know, are not immune to administration, but certainly have an appeal to us because they're very hard to discard, if you will.

And what is the manufacturing environment like in Europe right now? Or do you have an AI play, data centers? Is there any of that going on or is it just good old-fashioned stuff?

It is, not as much as in the US. You know, we bought the largest copper plant in Europe, for instance. Our themes are critical materials, non-discretionary retail, consumer verticals, things that are generally immune to AI influence. Although if we looked at a data, not a data center, but a call center or some other type of real estate that has a significant number of employees that might be susceptible to AI, it's not necessarily the human capital that we're concerned with, it's what goes on. I remember I did a deal for the General Motors Electromotive Division where all the replacement parts for all the diesel engines that GM produced was in this million square foot facility. And it doesn't matter whether a robot's picking those materials or a human being is picking those materials. What was important to them is they needed that plant. So energy is another thing that I think with the energy shocks we're looking at underwriting companies who can pass that cost onto their customers, and not be subject to, you know, margin dilution. So yeah, I think some of the things that we're confronting now from a geopolitical perspective do influence how we acquire and underwrite assets.

And who are your customers and how much capital, what is your AUM or capital that you're deploying?

So right now we're about 600 million in AUM. We have institutional investors, sovereign wealth funds, family offices, pension funds, charities. It's really an array of investor types. I think the common factor is they're all looking for safety, income, highly visible income and something that is, you know, somewhat unique in terms of deciding which part of the capital stack you wanna invest in. The one thing that we don't offer is immediate liquidity. And that's why there's a premium that we get in the case of the METRO deal, 4 or 500 basis points premium over where their bonds were trading because a piece of real estate isn't as liquid as a bond. You can't trade it in a minute. It takes 45-60 days to trade. So you have an illiquidity premium, and some investors are concerned with liquidity and others don't want their money back. They just wanna keep getting the income. And the other is residual uncertainty. You know, at the end of the day, you're, probably if you make a good credit choice, gonna get par at maturity. In our case, you might get more, you might get less for the building at the end of the term.

And are these investors primarily in Europe or are they global, in the US, both?

Both. I think most of the capital in Europe though is US based coming to this market. You know, what we have... And Middle East and Asia as well. I think the European institutional capital, by and large, will do a joint venture with you. They don't wanna invest so much as a fund, but they'd like to be your partner and have discretion over what they deploy their capital in. So we're raising a fund right now which has discretion because we believe that a diversified pool of corporate assets with staggered maturities is the way to invest in this business. Others want discretion over "I like that property, I'm gonna buy it, I know what I'm doing," rather than invest in a blind pool.

Right.

I think US investors are more willing to invest in a blind pool.

You mentioned interest rates are a bit higher. How is higher longer impacting your investment thesis or your business model?

Well, real estate cap rates and interest rates do move hand in hand. It used to be a longer lag than it is today. I think that the higher rate environment is creating some concern with those corporations because they're looking at maturities that they need to refinance. And if they've never considered a sale lease back before, this is a source of capital for them where they still get a positive arbitrage. We do a lot of business with private equity funds and family offices, and the multiple they pay for the business is seven, eight times and they sell us a piece of real estate at 10 to 12 times. So they're still getting accretive capital compared to what their multiple is that they paid for the business. I think the longer that high rates exist, you're gonna see more credit funds in the market because they like that income. I think there are two things that'll challenge that. One is reduction in rates. It won't discard all of the credit funds from the market, but it'll bring back the traditional commercial banks into lending, not withstanding Basel III and IV, which has created capital requirements that they apply a cost to that private equity funds don't. And the second are these looming maturities. I think, you know, once those are met and digested, I think it would possibly pressure the credit funds to find investments elsewhere because it'll bring the commercial lenders back.

And speaking of those commercial lenders, Cabot, do you guys consider Lodge Quai to be part of this wave of disintermediation, I should say, of the traditional commercial lenders? Are you basically taking market share away from them with your work?

No, because we utilize them as part of our acquisition structure. We're generally 50% levered because this is an asset type that really lends itself to leverage, it's highly visible, highly transparent, they can underwrite it easily. They don't have to look at what market rates are for replacement costs and this type of thing. So, you know, I wouldn't call us disintermediators. I think we've been around long enough, certainly in the States and now more in Europe, to be an accepted form of financing. But because of the, I guess, complexity of dealing in Europe with different legal systems, currency, everything else, that's why these premiums exist and that's why I like Europe over the US. In a sense, we bring US technology, if you will, to Europe in how we structure these with specific covenants in the loan agreement or the leases that restrict a change of control or use of proceeds or things that aren't typically, you know, provided for in a European lease.

And speaking of Europe and the United States and maybe the entire globe, what do you make of the geopolitical situation, maybe in particular the European-United States relationship?

Well, you know, I travel a lot in Europe. They like Americans. I think America has become not, you know, the partner that it's traditionally been, but I haven't found really any friction in, you know, doing business there with... Look, I'm an American, my partner's Australian and Italian, the head of our acquisitions is German. He's supported by a South African. Our head of underwriting's French. We're really a team that presents ourself as a multicultural, you know, outfit. And so I think the friction that exists between, you know, if there is one, between America and Europe, doesn't really affect our business.

Have you ever given any thought to how you got yourself into what is, I won't call it esoteric, but a niche perhaps era, facet of finance?

I like the obscure, I like creating new businesses. I like describing. You know, when you go to investors who think they, you know, know all the asset classes and you describe this type of, you know, financing, they say, "This is great. I've never heard of this." Less so now, but years ago it was quite new in terms of, you know, those looking for long-term income, mostly insurance companies, pension funds like that.

Maybe I guess what I'm asking though also is how'd you get into it as opposed to say running long-only equities or something?

Well, this gets into a personal story, Andy.

Good.

Because there's a guy named Parker Llewellyn who used to run the Office of Career Services at Harvard Business School. And Parker and I would play golf every Saturday morning, and Parker said, "Cabot, what do you wanna do?" I said, "Well, I think I wanna get back into consulting." And the next week he says, "What do you wanna do?" "I think I want to go to investment banking." And next week he goes, "I think real estate is for me." So he knew I didn't know what I wanted to do. So the next week he shows up, he says, "Cabot, I got two leads for you. One's a guy who runs a real estate investment bank in New York, which is banking, real estate. And he's looking for someone to come in and take hold as the second position. And the other guy just sold his tech business on 128, which is the sort of Silicon Valley of Boston. And he made a lot of money and he's gonna start a new tech business, but he needs a business guy." So two days later the phone rings and the guy says, "Hi, it's Bill Carey." And I said, "Oh, yeah, you just sold your tech business on 128." I had a 50-50 chance and I blew it 'cause this guy ran the investment bank in New York. He came to Cambridge. I liked him a lot. And I said, "I never thought I'd move from Boston and live in New York, but I'm gonna take this job." And I was there for 15 years.

Speaking of where you were brought up, you come from one of America's most prominent families in terms of public service certainly. And I'm wondering what it was like sitting around the dinner table with your father George, maybe your grandfather, Henry Cabot Lodge Jr., talking about issues of the day. Did you do that? What was it like?

Yeah, I did that. Actually, one of my first memories is meeting Khrushchev when he came over to visit the US. And Mrs. Khrushchev gave us these, well, you know, the Russian dolls that fit all. I don't think the State Department allows presents being given, at least you have to pay taxes now. But then it was a different story. And grandpa had a lot of time for us. He was ambassador to, you know, Saigon and Germany and the Vatican and Paris Peace Talks, and would take us around to those locations. That gave me a sort of understanding that maybe the US isn't the center of the universe and that there are other countries, other constituents that have their own issues, own problems, own, you know, economies that I appreciate. At the same time, I think we do it better. And so what encourages me now is, as I said before, Andy, you know, how can we bring what we learned in the US to make it better in Europe, at least for this type of financing.

Did you ever consider or have you considered going into public service yourself?

The last person who died in my family or who had any money in my family died about 200 years ago. So I went to education on that and paid for me and I had to get back to work. So I didn't. My father did once run for the Senate against Teddy Kennedy when his brother went to be president and then decided he wanted to teach. So no, I never really considered politics as a career for me.

And final question, where do you see Lodge Quai going, say over the next 5 to 10 years? What's the future of the business?

Well, even though, as I told you before, you know, I've created my private equity funds and then merged them or sold them to large New York Stock Exchange companies. I'm 71, so this is my last gig. And so I see my role as passing this on to my employees with the knowledge and asset base that will create a thriving business. I work for them really at this point.

Cabot Lodge, founding partner of Lodge Quai, thank you so much for joining us.

Thank you, Andy. Appreciate it.

This is "At Barron's." I'm Andy Serwer. We'll catch you next time.