Good morning everybody. Here are watching market on Bloomberg Television. We are not going to waste time. We have a big gap this morning. We will take you to the top level business stories of the morning. Shares of walmart are rising. For the first time in almost two years store sales rose in the United States. It was not by much, just 1. 5 . That the ceo Doug Macmillan is making big promise in his turnaround plan. It is a match made in marketing heaven. Shrek and the transformers. The toymaker is in talks to buy dreamworks animation. Socks stream work stream work dreamworks stocks soaring. It is Warren Buffetts power play again. Buyingre hathaway is proctor and gambles duracell battery business. 4. 7shire will turnover billion dollars in shares. That is high energy. The house votes on the controversy over he stone pipeline. An impact on nets months Senate Runoff election in louisiana. Billlandrieu how end cassidy want keystone approved. Her rover want to show independence through Democratic Leaders who oppose keystone. The information we have gotten as they plan to pass a tomorrow, let me just say hallelujah. Hallelujah. T again, president obama may veto at keystone bill and there may not be enough votes to override the veto. There is one unders you one unders feuded heavyweight champion. Manages 81 billion in property investments. Equity Office Properties for about 39 billion and Hilton Worldwide for about 26, the men overseeing all of that is here today. He is blackstones global head of real estate and a front runner as the ceo. Lamp committed the committed philanthropist. It is good to be here. Is a true blackstone is the only place you have ever worked. I started out in college. I met my wife in college. I got my job coming out of college. You cant do anything else i guess. You are here to talk about real estate. Yesterday we had a gentleman mortons, rain , he has a view on the commercial property market. He thinks it is heading for disaster. You are seeing crazy numbers from real estate. You are seeing it from new york. You are seeing it in texas, in california. Itself. Always repeats i think it will repeat itself a little sooner this time. You can see it coming. You smell a crash in the real estate market. Absolutely i do. The numbers are crazy. We are clearly pass that stress face we were coming out of in the crisis. There is more capital in the space, more that in equity. The supply demand fundamentals in real estate are pretty good today. Across the u. S. We are building about what we have half of what we have extort late half of what we have historically. We have 200,000 jobs per month. You is not a formula that generally look at for disaster. What gets real estate in trouble is lots of cranes. Back to 2005, two thousand seven, lenders lending 95 . What i would say is the rate of growth Going Forward will not be as good as what we have seen in the past. Goodll still have fundamentals but the cap rates will move lower. If you think about it in a stock market context, what drives stock are understanding of multiples. We dont think multiples understand multiples will expand from here but we think occupancies cash flows. Enginee one of the two supporting you, that shall be to some growth but not the same growth you have seen over the last few years. Lets put up some of those cap rate charts. There was a time when the spread was negatively affect did and cap ratestes have come down. To about any industry, it is the same case and hotel. Its the same case and retail. A coast is coming on in now what is going on in a post crisis low, are cap rates likely to take up or . I would say cap rates tick upward from where we are now as you see higher Interest Rates. The Earnings Growth from the assets will more than offset that. Here is the other factor in the equation. I know you cannot talk about it but blackstone is raising a new fund. This fund is likely to be as large. 70 billionking about dollars to invest. Planning tens are of millions of dollars tens of millions of dollars into the real estate market. Where does all that money go . Than 30state is more trillion globally on the commercial side. The context of this overall industry it is not so large. If you looked at the debt today it is 95 billion dollars. There is a lot less debt capital on the market. What i can say is we are focused on the opportunistic part of the spectrum. Assets that need to be repositioned. We just bought a big office tower in new york. The kinds of things sovereign wealth funds are typically focused on. I think when we look at our competitive dynamic today there arent any me arent very many people who do what they do in scale. Towers,i look at those copy . Itel doesnt mean every asset class has the same supply demand fundamentals. If you have a lot of folks building 800,000 dollar apartments you can take a sector and overbuild it. In the Hotel Business in new york city, even though demand has been strong, there have been a lot of hotels added so revenue has grown slowly. It is very possible that the growth in value is not perfect. You can continue to see strength. What you gain from a lower price point in new york . By the standards of the rest of the United States it is a very expensive place to live. They want to travel here and work here and as a result of there is a lot of demand and it is hard to build new supply. Longterm places like new york and london are going to continue to do well. It will continue to spread out along manhattan. Crimes come down. But it isay positive often possible in the super segment we could see some softness with overbuilding. There are few companies or firms that can do Real Estate Investing on the scale blackstone cam. If you are going to be putting tens of billions of dollars to work you cannot do it 500 million at a time. The big game to be found . Around the world i think in europe, if you look at portugal and spain and italy there is still a fair amount of dislocation there, a lot of distress. We have been active in spanish housing. We created this huge platform. We thought us home prices had fallen. We inc. The same kind of opportunity exists in spain. That could be up 40 billion 40 billion euros space. In china in particular where there are a lot of headlines these days, that could be creating opportunity because the economy is still flowing but there are good things happening on the ground. We think the government may prioritize some of their government owned enterprises. U. S. , whenn the Interest Rates grow up you can see stock prices tradeoff. They say should i hold onto my we have capital tied up for a long period of time. We are going to continue the conversation after this commercial break. He is the global head of real estate at the blackstone group. John chambers have cut back their spending. We will ask what this means for the longterm outlook. You are watching market the blackstoney group. It has been a few to a tough few years. The Company Forecasts profit and revenue that came up short of analyst estimates. The company is trying to have it the ship to softwarebased networking from hardware. With us this mornings John Chambers, the chairman and ceo of cisco system. Let me ask you this question great to be with you. Why is it growth is so persistently tough to find . Let me just make you a couple of comments for your regarding comments. Us. As a record quarter for if you watch what we done as a company we over achieved our on Revenue Growth and gross margins. We put to bed completely the are breaking we away from our small and large competitors. We forecast a quarter of 7 growth, which are often forecasting negative growth. If you watch the u. S. As an example, our business grew by 12 . We are on fire in the areas of security, 25 . We took back our positive growth. And we did it with great gross margins. If you watch where we are growing at 17 , whether it is security or setting the pace, we are doing very well in a digital world. Where do you find growth, digitization of countries . We are on the lead on that. The points on the quarter shows the market confidence, even when we did not we did not give guidance. We do it at a quarter at a time. To new expectations at a higher growth level were not about what was giving on what was going on. I feel very good about growth prospects. Im a very solid i am in a very solid position for the future. If it is the digitization of countries, one would think that is important to you. It is. The march to develop markets are actually growing faster. He look at a chance the large developing markets are actually growing faster. We are going to partner with players and cities like hamburg. Netanyahu in israel. President francis as well. If i were going to bet on emerging markets i would bet on india. Presentt matter if his inof his present opinion south korea, we are act in vote. People used to come to six come to cisco. Concerns what happens if cisco goes the way of ibm. It is a very fair question. Lets point out what we did 3. 5 years ago. We made a decision to transform our company. We reorganized engineering, sales, etc. We saw the market changes coming. If you are always selling a or a surferrouter or story, youre not going to be successful. Marketgrowing in that and we became the number one player in late servers in the u. S. In just four years. Think about convergence. Think about what hp may be starting on. We are seeing the results of market share. I think the market isnt giving us credit for that. You know that over the past decade the company has spent a whole lot of money, more than 100 ilion dollars on stock buybacks and 30 billion on dividends. You are close to one hundred billion dollars of authorized stock buyback. 16 billion of cap. Those numbers sidebyside i would say the ibm story looks like the cisco story. I am not going to compare myself to first hour m a story was dramatically different than what you said. Acquisitions,ix all the way up to 700 billion over the last 24 months. Secondly if you watch what we have done during the last four we have grown our revenue by 4 billion and increased our expenses by 61 million. That is one cent per dollar Revenue Growth. No one comes within a factor of 50 of that. We moved in the growth areas that are in the future. No one would disagree cisco is in the leadership and driving position. In terms of Software Capabilities we embraced that. Away at a growth rate that is four times that then the nearest startup competitor that made a lot of noise in the marketplace. We moved into areas such as switching and routing. We are different in every way so them some of the traditional ip players. I will take the bet. John chambers is the chairman and ceo of cisco systems. The company that makes the transformers want to make a big move into hollywood. When they come back as an 6 8 switch back when we come back, who is the man who will succeed Steve Schwarzman . We will speak with him. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and Stephanie Ruhle. We are back. I am Erik Schatzker. We back with jonathan gray, blackstones global head of real estate. People think of you as the guy in the real estate space. Is there someone you look to saying you would like to have that guys skills . You mean besides lebron james . There are a lot of Great Investors around the world. Everyone looks at Warren Buffett as the person who is shown himself to have the best agler between cycles, good and bad. Everyone wants to have a track record to look at businesses over a long time spans to create value for their investors. We all strive to be like warren in that way. Have greats investors. Real estate has Great Investors that have been doing this for a long time. Modernly created the industry with the companies he is taken public. Steve ross is another pioneer in the business, creating value. These are people i look up to. What are the hallmarks of real estate genius . Atthe hallmarks are looking the world in a different way, having conviction, and doing something. Things were atn the bottom in the early 1990s with sam when things were at the bottom in the early 1990s he built a real estate empire. When people are able to see things differently and act on conviction, that is impressive. Is there something you are seeing differently . There are different sect theres. For instance, and india John Chambers was talking about it is a market everyone has hated. We waited five years to make our First Investment. We have build in less than 100 a foot. We were literally the only folks buying in the market. We have built up 30 million square feet. We are doing it in scale, that makes sense. A lot of investors focus on diversification, which is good that does not generate outside returns. You have to find something you believe then, and a managing team to execute, and go all in. Your public shareholders have had to learn to live with that stocks traded at a low multiple. It is the same story if it is carlyle, or apollo management. It is a cluster between eight times trailing earnings and 13 times. It is a different story for the two euro prices for the tea for the t. Rowe price es of the world. Toi expect alternative firms move further into Asset Management, and Asset Management firms will move more alternative. There will be some convergence. Is at the way to fix the problem in your opinion . The alternative eyes the traditional asset manager to get asset premium . David. Sagree with i think there will be convergence in valuation multiples, not in the business model. When we look at these companies, we say, today we are growing at twice the rate of the traditional asset managers. We havent a percent yield. The traditional managers are at 2 , and we are trading at half the multiple. Too. At seems odd to david in real estate, the Factory Outlet centers, 10 or 15 years ago traded at half the multiple of traditional centers. They continue to perform, the multiples converged over time. As people understand companies and see how powerful they are in raising sticky capital, the margins of these companies, investors will say these are special businesses and franchises. We should only spains longterm. You will we should own these things long term. Why has there been a disconnect . Shareholders understand blackrock more than you . Part was timing. We report at a different time. We ipo would just before the ed justal meet ipo before the financial crisis. If people see the steady dividend performance, they will get more comfortable. It is a matter of time. We have to focus on executing d business, an and delivering great returns. You started at blackstone in 1992. It has expanded into credit and real estate. And into a number of other businesses. You are about to spin off your divisor he and him for structuring business. Where might blackstone go next . I will start with the spinoff. It was like to families living in a house who have outgrown the house. Our Investment Business and at kayseri business had grown so oure the idea of having Investment Business and our restructuring business had grown so large. We wanted to separate the business. We brought in a worldclass to grownt leader the business. The market will say this is a special business hidden inside the investment firm. The Spinoff Company has a bright future. In terms of blackstone Going Forward, it is a big world. We are big in the u. S. And europe. We are expanding in asia. There is opportunity and latin america to do more. There are alternative Asset ClassesLike Technology and infrastructure. We are in energy, but other natural resources. There are places to go with our firm, because we have the confidence of our investors and a rigorous investment process. This firm has been made successful because we have grown in assets and people. The basic principles have stayed the same. Pcesere do you think are going . If you deliver for investors they are calm about the compensation. Across our firm in the different , realclasses, hedge funds estate, private equity, we have delivered. At some point, steve switchman is going to retire at ceo. Schwarzman is going to retire at ceo. What happens . You, all this talent that is still very young and presumably very ambitious. I start by saying Steve Schwarzman who runs the firm and they both love their jobs and have no plans to change what they are doing. That is why i say eventually. About of the nice things blackstone, because we have other larger businesses, we are not a one trick pony, we have a lot of talent with a lot of experience. Time, i plays out over dont know. I think it will work out, because there is enough opportunity in blackstone, there is a sense of pride of being part of blackstone. The culture is very special. People have stayed for a long time. Down the road, even with a transition, there will be a lot of continuity at the firm. Is there one Real Estate Asset that you look at and want to own . Things we cant hold onto forever. I would love to own gm building in new york. I wish we had stepped up when we had opportunities. You have a whole burning in your pocket when the waldorf is sold . They will redeploy that capital. The company has been performing well. The best thing about the cell of that asset is the buyer will reinvest a lot of capital. You started at blackstone with a bachelors degree and became the global head . Could that happen again . Definitely. When you look at a firm like ours, the idea of