Michael Simanovsky - A Platform Approach to Real Estate - [Invest Like the Best, EP.344]

Transcript from https://podmenti.com/t/1b5072ba89d9480b

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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best.
This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.
Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.
Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
My guest today is Mike Simonovsky. Mike is the managing partner of Conversion Capital, a real estate investment firm he founded in early 2020.
Conversion is unique in that it aims to be the most flexible capital provider in real estate.
investing across public and private markets, as well as through equity and credit.
The firm will also incubate platforms where they see an opportunity to take advantage of a compelling theme.
and there are no existing business models to invest in.
We cover the most undersuppl part of the market, why he's building conversant to be so flexible,
and the surprising appeal of billboards.
Please enjoy my conversation with Mike Simonovsky.
Um
Mike, maybe an interesting way to frame our entire discussion of real estate is through the lens of the capital cycle. Just told me on a long enough time horizon everything is sort of cyclical.
What is the capital cycle and why is it an interesting lens through which to view real estate investing?
Yeah, sure. So I think at the highest level early in my career, I learned about the capital cycle through this book.
Capital returns by Edward Chancellor, which I happen to be holding in my hand and I keep in my office.
I just started his other book, The Price of Time, which is excellent as well.
I actually haven't read that one, so it's next on the list. But it's a book I keep in my office and it really influenced me. And I think the basic premise of it is that high valuation of businesses or assets.
Encourage a supply side response as new entrance to the space.
become excited about the prospect of high returns.
Ultimately.
What I find so interesting is that rising competition
For some period of time won't
really deter returns, but eventually rising competition causes returns

cost of capital or through the cycle cost of capital. And then investment declines as people are like, wait, I thought I was getting a really high return, but now I'm getting
a lower return, then a lot of consolidation will exist. And that consolidation could be bankruptcy, it could be
selling a company. It could just be capital.
fleeing a space. And ultimately that to me is the best time to think about entering a space, which is
an improving supply side picture.
causes returns to
return to a point in excess of the required cost of capital.
I think what's so interesting to me is at the peak of the capital cycle, investors tend to be the most optimistic and they extend their duration. So they look really far out.
To get the required return.
There's a lot of imagination required in that.
And I'd say as fundamentals are deteriorating, naturally you're seeing asset
Values change.
You're seeing multiples or cap rates in the case of real estate.
change and you're seeing meaningful asset value or share price under performance.
And then ultimately get to the bottom of the capital cycle where investors are max pessimistic with the shortest possible duration.
possible. And to us, that's a really, really interesting lens.
To think about real estate.
There are assets in real estate and there are several subsectors of real estate.
to which the capital cycle probably doesn't apply. They're irreplaceable or they're super
Regulatorily supply constrained.
But overall, on average, I think
Real estate is a commodity style sector and it benefits
greatly to look at it through the capital cycle lens. And if you actually think about
Some high level principles very generally about real estate. I'd say number one
It is a highly cyclical asset class.
But often with very long
supply cycles and very long demand cycles. Depending on the asset, it could take a year or three or four years.
to build an asset before you actually see that deterioration of fundamentals.
On the demand side.
You could be looking at millennials aging into housing and you have a ten or fifteen year
Cohort.
To think about it.
I think a lot of people
Up until maybe last year.
Forgot about.
Real estate cyclicality.
On top of its cyclicality, it is highly capital intensive.
The land is an asset.
that in theory appreciates in value, but the building on top of the land.
Constantly needs capital.
To stay refreshed.
And it's often financed through debt capital to facilitate those capital needs.
To make sure you can meet your equity return objectives.
And because of that reliance on debt, it's naturally more sensitive.
to the prevailing cost of capital.
And then on top of it
Just
sort of to the side and related, there's a ton of operating leverage if you own a fixed cost asset.
And so you have this dynamic where you can have cyclicality overlapping with operating leverage, overlapping with financial leverage.
And that is an amazing lens, in my opinion, to use the capital cycle.
Is there a favorite example?
whether you want to zoom in on housing or office or I don't really care the category
that you could tell us like a historical
you know, end to end version of this cycle just to nail home this point of how it actually works in practice in the real world.
I think the example I would use would be senior living. So I'll give you twenty, twenty five years.
Of history at a very, very high level.
And
Senior living is a more operationally intensive business.
Then
most other real estate asset classes. So I guess with that caveat, there was a big supply surge in the late
Nineteen nineties.
And ultimately at the turn of the century
the capital cycle caught up too.
The senior living.
Such that a number of distressed funds came into the space and took over the existing asset bases. So
Kind of that bottom of the capital cycle dynamic.
A lot of distress funds naturally aren't thinking
Quite a bit about it.
Development they're thinking
Let's rationalize what we have. Let's consolidate the industry.
Let's create large platforms. Well, there was some development. There was modest development.
between two thousand one and two thousand eight, like the GFC.
relative to what happened in the late nineteen nineties.
As a result of that
The senior living space went through the GFC.
And unlike multifamily or office or industrial
It actually didn't have a drawdown in its operating performance.
And it skated through unscathed.
So naturally thinking about the capital cycle framework, what happened?
Capital saw that it performed better than multifamily, et cetera.
And
Capital came back to the space very significantly coming out of twenty eleven.
There was a very large supply cycle that started in twenty thirteen.
On average, let's say it takes about twenty four to thirty months to deliver a property.
You started to see the impact of that.
supply in twenty fifteen, which was probably the peak of the prior cycle.
And it extended all the way until
Q four of twenty nineteen, if you actually look at nationwide
Data
Absorption
Which would be demand minus supply.
turned positive.
for the first quarter in about four and a half or five years.
In Q four of twenty nineteen.
Take it a step further. Unfortunately, Covet happened and senior living was at the epicenter of that.
The way to think about growth in the senior living space.
Is you
Try to acquire a customer.
You get a lead.
That lead becomes a tour, that tour becomes a move in.
And then net of your move outs you try to grow opency over time.
And so what we saw was no tours allowed during the COVID period and you saw industry occupancy fall a thousand basis points.
So you went from roughly eighty eight percent in the month before Covid.
To about seventy eight percent of its trough.
And then to make matters worse, in twenty twenty two in particular.
because labor is the largest component of the cost structure of senior living. Remember earlier I mentioned it's an operating business.
In addition to real estate business. It had
pretty significant sort of negative operational performance for a period of time.
What we see today is an opportunity where
Occupancy has started to mean revert to its prior Covet highs.
However, supply is down eighty percent from its high in the twenty tens.
Yet you have an environment where if you think about it through three lenses, one is
What's the capital cycle? We think we're at a
Troughing supply.
I would argue that the bottom decile of assets are gonna be converted.
into some other asset, drug and alcohol recovery, whatever it may be. You may not necessarily but you may have a situation
where supply growth actually goes negative or flat lines for a period of time.
It's a pretty good setup when you think about the capital cycle.
Then the next thing we ask is okay, capital cycles then cohorts with the demographic picture.
Do you have an asset base that's roughly half independent living?
And half assisted living.
The average age of entry today is about eighty three years old.
All that supply that was built on the back of the outperformance
In the post UFC period.
I think presumed a seventy five plus age cohort.
What I think the reality is is you got to evaluate the eighty and eighty five plus cohorts.
I always make two jokes when I talk about
demographics one is I follow my sister in law around
She was born in nineteen ninety. That is the peak millennial.
Whatever she's up to, I wanna do. And the second thing is
I always follow my parents around. They were born in nineteen forty seven.
That's peak boomer. There's a large trend.
behind them.
They will turn eighty three in twenty thirty one.
On our mask.
The growth rates
Excelerate from
Earlier this year.
Through twenty thirty one.
As that eighty plus cohort gets bigger and bigger and bigger.
And so what we see is a dynamic where
Feels like bottom of the capital cycle.
There are banks that are getting tired and selling non performing loans.
There are fatigue sellers.
There's a long runway of growth.
One of my mentors, my old boss, Doug Silverman, taught me
Don't do distress for the sake of it. Do it'cause you're excited.
about the opportunity to own the asset for a long period of time.
And I think that applies in this case.
And then lastly
We ask ourselves
Where can we play in the capital structure? And right now we're seeing
A lot of defaulted loans on developments that were started in twenty seventeen that
Just having gotten the occupancy that the bank and the operator thought they would.
We're seeing a lot of private equity firms that are just fatigued. They got in in twenty sixteen and
It hasn't gone the way they wanted and they're just ready to move on because everything else is
gone really well. So that's probably the end to end two cycle
Example I give you.
When you're thinking about
capital cycle
using that as a great lens to evaluate the broader opportunity set, say senior living writ large, before you decide here's exactly surgically
at the asset or even the cap structure level, where we want to play.
You're just making a bigger evaluation.
Do you find that evaluation of supply or demand
Is easier.
To help you suss out.
where you might be in a capital cycle? Or is it just both?
I think the
easier thing to get your head around and get excited about.
Is
Supply.
We feel comfortable.
that supply's coming down. It will take this amount of time to rationalize.
You tend to see
People exiting the space.
At times like this and
We recapped a senior living portfolio eighteen months ago. We've been working to grow it. It feels a little lonely out there buying assets and
Hopefully that turns out to be okay.
But I think to get really, really excited about the opportunity, you have to believe
That you would make an attractive enough return in a benign demand environment.
We can make a terrifically exciting return.
in a growing demand environment. So that's the lens. I think with supply is step one.
Demand is step two.
What's the best way to participate in the capital structure? That's step three. That's our lens.
Having talked to you several times about real estate
It's pretty clear like you're fairly
surgical investor, like you're really interested in all the variables that go into a good investment.
With that in mind, why real estate? Like what is it about real estate that drew your career?
rather than equities or anything else that you could have done with the same skill set or the same interest and curiosity.
What is it about this asset class that made you pick it?
Yeah, so I think from an asset class perspective
I
grew up I was on the sell side for a couple years before the financial crisis. I had the opportunity to go to a firm that had a a major distressed bias in two thousand eight. I joined the month before
Lehmann failed. It was an unbelievable apprenticeship on understanding how to think.
Through
The downside of things, but it was also an unbelievable opportunity to see how big
the real estate market is and how scalable it is.
And you have the opportunity to evaluate bonds of a distressed small company or
buy residential mortgage backed securities. You just have a great opportunity.
to understand that there's literally always something to do in real estate.
And so that's the motto.
around which conversant was built. It was built around there's always something to do and
the next step on that is that we're the most flexible possible capital provider.
So we don't think about
Equities or credit.
Or public or private. We do all of them. But it's a hyper cyclical sector
It's one that has really long reinvestment runways. It's highly scalable.
The example I always think about is Prologis is the largest read.
Around has about a hundred and fifteen.
billion dollar market cap.
It is an owner.
of warehouse and distribution facilities in the US.
And
They only control
Five is percent.
Of the stock of the US and they've been building that company.
For thirty plus years.
And so when you think about it through that one it's in a tremendously
Scalable sector.
I think if you take it even farther
Prologis and all the other industrial roots combined on less than ten percent of the industrial stock in the US.
And so when you think about fragmentation
It's just an opportunity to really build businesses.
Which is one of the reasons we take a platform approach to real estate when we do it. It allows us to
Seamlessly navigate across public and private markets.
It seems like a disproportionate percent of the
billionaires whose name you've never heard are real estate owners and investors.
Do you think that on average the quality of investor in real estate is any different from in equities or anywhere else?
your competition, let's say, or just in general.
Professional, institutionalized
real estate investors.
Are they
of a similar caliber as you'd find in the best equity shops or the best credit shops or what have you.
Do you think about
individuals and the billionaire comment you made, my view
There is there's a ton of tax efficiency in owning real estate and owning it for long, long periods of time.
I think as a result of that, there's a lot of people that bought assets.
The nineties, two thousands, twenty tens, whatever it may be, and the benefit of having
the ability w to withstand the volatility and duration.
Has actually been
A massive competitive advantage. So that's on the billionaire point. On the private equity point, I think the space is institutionalized so much over the last
fifteen or twenty years. I think some of the smartest investors I've ever met focus on real estate.
Something about it the way we do, something about it at a single asset level.
I think there's a great opportunity to find great investors in the biggest private equity.
Firms in the world, the biggest asset managers, real estate generally is a huge component of what they're doing.
If you think about the needs of the country, let's say. So
If you thought about a version of the US which was
thriving in as many ways as possible.
Where some of that thriving would be enabled by
it's physical infrastructure, it's various different kinds of real estate assets.
What is most missing?
From that picture. Like if you could inject
X, Y, and Z, or whatever.
into
the stock of real estate in the US.
What do you think it most needs?
I'm curious the other side too, like what it has too much of, if anything.
I think the American that earns on average between sixty thousand and a hundred thousand a year has a dirt of affordable and available housing. I'm sure you've seen the charts that are floating around, but there's lots of charts showing
Housing stock over four hundred thousand dollars, yeah, prevailing rates.
The most unaffordable it's ever been.
I think for a person making several hundred thousand dollars.
given the availability of credit today, I think it's very challenging to be
in reach of that housing and then circling back to the capital cycle.
comment I think given what happened in the GFC.
No two crises in a row are ever the same. And I think what happened is you had a significant pullback in
Capital availability of housing, which is
I think in some ways created
the home price appreciation that we see. And so to me
If there was some way to provide
The
sort of median consumer in the US with an affordable housing objective.
And you could inject it into the veins of the United States and do it everywhere.
I think it would be a tremendous positive.
What about the other side? Anything that we have just way too much of?
There's this narrative around office.
That it's about work from home.
And
We think work from home simply expedited.
the fundamentals that were already prevailing.
In some ways it's funny because I laugh when I hear people say, Well, Covid moved people into the suburbs. If you actually track the data, it started in twenty seventeen, which is what
When you would have expected it to start given the aging of the millennial cohort. The same dynamic, in our opinion, is occurring
in office but to the other way. We just have had
Too much supply.
And we've had too much supply in the C B D's in the central business districts of major cities. We've had too much suburban office supply, which doesn't get used the same way it used to.
And our general view is that
I think this work from home phenomenon.
has highlighted
A couple things.
As highlighted.
this narrative around office. You can look in New York City, which is near and dear
to your heart and my heart being probably exactly in between us and
We delivered
One Vanderbilt.
Hudson Yards, Manhattan West.
All around the same time class A plus office.
And what's interesting to me is if you actually look at demand data for office
And you look at a city like New York City.
Over one hundred percent of the incremental absorption.
From the GFC through
The Covid time period was related to tech or tech related users.
That includes we work. We weren't went from non existent to several million square feet of space.
And so our view is office, it just needs to go through its supply demand dynamic
I think it needs to go through the somewhat same scenario that Malls went through.
The death of retail conversation started
in twenty fifteen
I think malls have probably gotten to a point where they rationalize themselves as we sit here today in twenty twenty three.
And I think what we've observed is that the class A mall
It's probably more valuable than it ever has been because
Class B and C malls.
have gotten a lot less interesting and worth less.
I think as you've seen other asset classes appreciate in value and be able to drive higher rent.
you've been able to see the ability to switch
From a class C mall to something else.
I think that is a good playbook to think through the office sector.
And our view is that's gonna take a few years to sort of materialize.
As you think about returns.
for investors in real estate, especially with your lens of
Public, private, credit, equity. You can do anything you want.
Are you just targeting the highest possible return? Are you targeting the best risk adjusted return?
How do you think about the range of available returns to
A real estate investor
with an open mandate like you have.
versus equities where it seems like there's sort of an accepted wisdom that
You earn about ten percent a year in equities, public equities over time.
over the very long term before inflation.
And there's sort of just like a gravity to it.
That's kinda what equity returns are. Is there something similar
in real estate, or do you think about it differently?
Yeah, so I think when people think about real estate, they generally quantify them in
Core returns, core plus returns, value add returns.
And opportunistic returns. And I think depending on the prevailing cost of capital, those numbers move around a little bit.
But that core capital is sort of mid single digits.
Return on equity, that core plus is high single digits, that value add is low teens, and then opportunistic is equity like returns.
our view, given that we can constantly and to use the word used earlier, be surgical.
about where we spend our time.
We're happy to look in through the cyclicality.
We're constantly seeking opportunistic returns. That's something that we're looking for across private markets and public markets. And the way we think about private markets is twofold.
We're always investing in platforms where we can either incubate them ourselves.
If it's the best way to take advantage of a particular opportunity or we can
buy into a platform.
If there's a capital need for whatever reason. So on the incubation side.
We're building a platform, we're identifying a theme.
We're finding a management team.
And ultimately that management team is exclusively working for us and we're building a vertically integrated platform.
But we're doing that when we otherwise can't get access to a business model. One of our largest investments is a company called Quinn Residences. It's a private platform. We started it right before COVID.
It owns
entire communities of single family rentals all over the south east.
I've been studying the single family rental space for the better part of the twenty tens.
Super, super excited about the space in twenty nineteen.
Started learning more about this dedicated rental.
community approach, what people call build to rent.
And the thought was you can bring in brand new product highly amenetized with an operational focus that looks and feels like multifamily, which is very different.
than scattered site single family rental.
But when we looked at the available options to invest in the public side.
There are three great public companies.
There's American homes for rent, there's invitation homes, and there's Tricon.
None of them were pure play on what we were really, really excited about, which was the built to run concept.
And so we were able to partner with the great management team, a few other founders, and incubate this business that we think is now one of the larger
dedicated build to rent platforms.
In the country.
And then conversely, we're happy to buy into
a platform where there's dislocation or distress, like how we entered our senior living business almost eighteen months ago.
Can you talk me through what it was like to study a market like single family for a decade before making a decision like this? So like what were
If you think back on that period of learning.
What were the biggest
Insights that stand out.
from all that study that coalesced into the
idea behind this platform. Like what are the ingredients
that became the platform.
So I think that every incremental real estate asset class that institutionalizes comes out of some dislocation. So I think about
Towers.
They
became an institutional asset class as the
cable companies and fiber providers had to work through their debt issues in two thousand one, two thousand two, that's when the towers became
A real asset class. You think about multifamily became an asset class. If you think about ninety two, ninety three.
That was out of that crisis. That's when REITs really became
what they are today or the early start of what they are today.
And I think that two thousand
Ten, eleven time period birth, single family rental as an institutional asset class.
It was a natural time to do it. There was a lot of distress. There's a lot of dislocation.
I think having made investments in the space early in the twenty tens and elevens and getting really close to investing
In a platform in my prior firm
What we observed was could you price the asset at such a discount to replacement costs?
Could you make a view again on the capital cycle, there was gonna be limited new
lot development for some period of time.
Such that
Knowing the demographic trends that you get really excited about rental growth. So would you be really excited
about buying an asset at such a discount, that you'd be just fine with it, quote unquote being a trade.
And I think the big question mark for a long period of time.
Was is there
a good operator or set of operators.
around the asset. I think in around twenty fifteen, sixteen, seventeen, eighteen you saw a lot of consolidation.
American Homes Rent acquired some other companies, invitation homes acquired
Some other companies and the best operators took
the largest swath of assets.
But you still have this dynamic where
These homes were scattered all over the place. And imagine a city like Atlanta.
You had a cohort of homes up
North of town, you had a cohort of
Homes West of Town, et cetera.
And a lot of these homes were bought.
at the courthouse steps in twenty twelve and thirteen.
Or they were bought through other portfolios.
And so there's a massive disparate
Quality feature of the homes.
And so
We said to ourselves, this is a super interesting sector.
There's not a lot of supply.
At least in twenty nineteen.
There's a great demand setup, which I can walk you through. The average age of a renter in the US is about thirty nine.
years old, you think about the single family cohort being
Thirty five to forty nine years old.
That cohort is gonna grow from here through the end of the twenty thirties.
At about two X the population growth.
So not quite as fast as senior living we talked about earlier, but
Faster than
The population cohort.
It's gonna grow much faster than what we describe as the multifamily cover, which would be twenty to thirty four year old
And so we saw an opportunity
If you actually think about the complexion of
That cohort aging out of multifamily, aging into single family.
What did they have in multifamily and what could they achieve?
In single family. So
A lot of folks had reasonably new apartments.
They had an amenitized experience.
They had a doorman or something like that.
And so that didn't exist.
And
single family rental.
On top of it, according to data that we track from John Burns, which is a great consultant around the space.
Eighty eight percent of all multifamily is studios ones or two bedrooms.
So as you as you age into
Family formation.
There wasn't a renter option that gave you that.
New
Large enough amenitize experience.
And we started to hear about Bill Durant in twenty eighteen and twenty nineteen and just met every operator we could and turned over every rock and
Ultimately that landed on meeting the team behind Quinn and
Putting in place, in our opinion, a best in class management team.
To grow it. And so now we have a portfolio with
Thirty nine communities and over five thousand homes all over the south east.
Do you think about that like you just
Starting a new company versus
building a portfolio of assets. Everything you just described is like product thinking, not
So much acid.
Evaluation or something like that.
So it's at the highest level.
We have to start with the sort of thematic thinking if we're gonna
Try to take advantage of a sector. And then the question is
What are the asset level returns? How do we think about
the short, medium, and long duration opportunity set.
So the holy grail for us is to build a platform or buy into a platform that has
What we call resilience.
It has scalability and it has optionality.
And what I mean by resilience is
A high quality, reasonably predictable.
Rental growth.
Stream and sort of earnings stream.
The perfect ones are defensive or counter cyclical, like single family rental, but
senior living has proven to be a little bit more cyclical.
And there's a favorable long term supply demand dynamic, especially when we start to get involved.
So that's how we think about the resilience of the asset.
And then we say in to my example earlier about the industrial market.
How large is the market?
What's the length of the reinvestment runway?
Are we able to acquire assets
And an attractive return.
in what is likely a growing addressable market.
And then the question is optionality. Can we
use our platform to keep growing over time.
To get better return on invested capital.
And then ultimately
Can the space institutionalize in a way
Or valuation.
Parameters.
look and feel very different than when we started.
Maybe there's a bunch of mom and pop at the beginning.
And there's a bunch of institutions at the end.
And the optionality is maybe we'll get a platform premium. But at the end of the day
We're still doing the asset level work that every single asset owner
is gonna do. But that's how we think about building these businesses. They're real estate businesses.
With a platform approach.
Maybe even one step back from the platform approach, which we can dive into more in a minute.
I'd be curious to hear your philosophy on
building an asset manager in the first place.
You're catching me at a time and I've been spending some time.
As I'm building one, studying
lots of different models. There's so many interesting historical examples of different kinds of asset manager.
How have you thought about
the trade offs and the choices that are key
As you build
your firm because
That'll let us, I think, understand your platform approach even better.
So I've mentioned a couple of times and I'm probably mentioned it a couple of times more, but the thing that I'll say every day in our office is there's always something to do. So we need to figure out what it is and then we need to go attack it. We need to study it.
We need to find a way
to take advantage of it or deploy capital into it.
And in order to do that, we have to be
A totally flexible capital provider.
We need to have the ability to invest passively.
In public equities. We need to have the ability
to take a control minded approach.
in the private real estate markets again with a platform approach.
And then we need to do the things in the middle and the things in the middle tend to be credit oriented, which would be
Providing capital.
Up in the capital structure.
Pretty relevant today, given what's going on in the market.
Or the distressed opportunity set when it presents itself.
So every decision that we've made.
surrounds that. I think another thing that we say around here is we're not for everyone and that's absolutely okay. So
were very hard to put into
A box. Every decision that we've made at this firm.
Is simply about
being flexible and making sure that we can maximize the return opportunity.
not necessarily maximize the size of the firm.
That's why we have a hybrid fund. That's why we offer a lot of co investments to our investors.
That's why as we think about the natural progression of our business
We think about giving us more private capacity'cause
The private markets are much, much bigger in real estate than the public markets are. We usually think nine times the size.
And so the every decision that we've made here
is about ensuring that. So then you go down one layer further.
Yeah.
A lot of great real estate managers only do privates, or a lot of great real estate managers only do public.
And I think our view is
We had a blank sheet of paper at the beginning.
To educate folks on the way that we invest.
And to build a team around that with a flexible skill set.
And ensure an incentive structure.
In place.
to where everyone is indifferent to investing in the public markets or the private markets. We're simply seeking
the best return opportunity that we can.
And so I think
That was the key decision making framework for me at the beginning.
Where do things most commonly go wrong?
For you.
Do you think?
Like this seems like such a considered
Approach.
with really long term
You said resiliency, like really long term trends.
Thoughtful about the capital cycle.
with a good sense of what's gonna drive the outcomes. It's not like you're taking
big product risk or something.
So where do things go really wrong if they do?
We get the capital cycle wrong.
We get the supply dynamic
generally correct, but the demand we're just wrong. There's obsolescence in the asset class.
For example, so to the extent we're wrong in senior living and could be around that independent living is gonna merge with a new form of asset, which is age restricted apartment housing.
And that IL stock's not actually gonna be needed in the same way it was in the past.
It could be that that eighty three year old average age of entry moves to eighty six or eighty seven
down the road and we're a handful of years early, it could be that nursing staff continues to be harder and harder.
To make sure that the residents have a great experience.
It could be that we buy into the sector and we hold too long and the capital cycle does its thing again, and in twenty twenty six there's a lot more supply.
coming back online than we think. I think those are the ways that
we generally would get it wrong.
There's obviously a cost of capital dynamic occurring.
today that's been occurring for the better part of
eighteen months and I think
We're very fortunate to only have a
handful of platforms that we
got involved in in twenty twenty and so we're
Looking to play offense into this environment.
Can you tell the story of the worst investment mistake you've ever made?
The worst investment mistake I've ever made on the public side.
Was actually
In twenty fifteen at my prior firm.
It was an investment into Macy's.
On a real estate thesis in the public markets.
And
The reality was there was a lot of real estate value there.
But unless you had a way to assert control over that.
the direction of fundamentals is far more important than the quote unquote special situation, which would be
Extracting value.
And so that's led me to
largely avoid situations like that.
Going forward.
Say a bit more about like how
the mistake became clear to you. So you make the investment on a thesis.
It's a powerful lesson.
I just want to pick it apart a little bit more. Like what came out? Was it just price action against fundamentals?
So
The company
There was a cohort of investors
Who had the same thesis. There was an activist who became involved.
In the company.
None the less, the activist wasn't able to
Get the management team or the board
To get excited.
about separating the real state this activist
And had quite a bit of success.
In a similar company.
In the restaurant space and so
They weren't able to get the board.
to sort of focus on the real estate effort and over the course of two or three quarters.
We saw numbers deteriorate and deteriorate. When I say numbers, I don't mean price action. I mean actually
Direction of revenue, direction of earnings.
Was deteriorating.
to the point where it didn't matter if they owned all the real estate, they weren't gonna do anything with it.
And so again, to simplify the lesson, it's the direction of numbers is far more important than the special situation.
What about what you view as the opposite, the best investment decision you ever made?
I'm a big believer that in the public markets
The direction of return on invested capital is far more important than the
static level of R O I C said another way.
I would be really excited.
about finding something that has a zero or two percent ROI C that could become a six or eight rather than buying a fourteen that just stays a fourteen.
'Cause the fourteen that stays a fourteen, everybody knows it. In theory it's priced into the multiple.
And so
One of the key attributes of the way that
I think about public market investing is not just a capital cycle framework.
But it's also where
Is a company specific transformation occurring?
And that company specific transformation could be the result of jettisoning a bad business.
It could be
A new management team.
It could be
acquiring an asset that's misunderstood for whatever reason, there's probably some special situation.
component to it. And so
One of the best investments I think you and I have talked about in the past.
was an investment we made in July of twenty twenty was to acquire a large stake of a company then called Colony Capital.
Now called Digital Bridge.
And
It actually had three transformations going on at one time.
It had many businesses. One was
A healthcare real estate business.
Two was a hospitality business. Three was a mortgage read.
And four was they had just acquired a company called Digital Bridge, which I knew pretty well.
Those businesses except Digital Bridge were all particularly impacted by Covid.
As part of the acquisition of Digital Bridge, they named Mark Gansy the new CO. So he had a management team transition.
He had a business model pivot. His plan was to
Exit.
Healthcare.
hospitality and the mortgage business and all the private equity assets.
And you had an interesting balance sheet pivot.
Every single one of those verticals
had its own non recourse balance sheet, meaning if you actually study the balance sheet.
You could have bankrupt the hotel business and it wouldn't have impacted
The balance sheet of Digital Bridge.
And so over the course of twenty twenty
After dealing with our one lone corporate maturity.
Yeah, Mark Yanze, Jackie Wu, the whole team over there, they pivoted that business aggressively and today
They're largely a digital infrastructure asset manager.
They have a few assets they own on their balance sheet, but they're continuing to pivot away into a completely asset light balance sheet with a fairly low leverage.
profile and it's something that we've been involved in since twenty twenty and continue to own to this day.
What about that whole story?
stands out to you as most exceptional.
That's a big switch. So any pivot of that size with that amount of
Dollars at stake, I'm sure is just
hard from a complexity standpoint.
But is there anything about that whole
Change that.
feels the most exceptional to you looking back on it?
Yeah, and I think this is probably the same for all
business model transformations. It's
You get paid when complexity becomes simplicity, when it's very easy to see through
The numbers.
Of something that's really complex or hairy with a big balance sheet over levered.
really bad R O I Cs because of where they found themselves in the capital cycle or investment cycle.
And
When you spent time with the management team, if you understood the balance sheet
You could really clearly hear them say, This business is gonna look totally different.
And it's actually gonna be very, very simple.
They did the heavy lifting in twenty twenty and twenty one.
And they're doing the last of the cleanup now. And we think when we look into twenty twenty four, it'll be a pure play asset light.
As a manager with an incredibly high ROIC.
That's growing with tailwinds from digital infrastructure with a particular focus on data centers, cell towers.
fiber billboards, et cetera. So I think it's that complexity to simplicity.
Which is the key thing'cause otherwise if it's complex and stays complex.
I think you'll never get the multiple that you think it should deserve in the public markets.
Do you have your comment on data centers maybe think
Or wonder whether or not you have a philosophy on CapEx. And I remember Will Thorndike telling me one time
You could compare like a data center real estate business to like a record storage business and
He loves the record storage because there's like you don't ever have to do anything. It's some walls and some shelves. You put papers on them and they just sit there.
Whereas a data center, like you gotta buy new servers all the time, there's a lot more maintenance capex that is required.
Give me your reaction just like maintenance capex as a concept and how it relates to the attractiveness of different investments in real estate.
Data centers to me.
They're huge assets. They're highly capital intensive.
They
actually have more obsolescence risk than probably any other real estate asset class, at least on a shorter time horizon.
But they benefit from the d digitization of the world, right? We started the iPhone in oh seven and now every day you can't look at Twitter or pick up a newspaper without hearing about AI or NVIDIA.
Or whatever it may be. And so our view is
They from a
analog perspective, look and feel the most like office and malls. Meaning
They're big chunky assets.
There's a period of time where they had an amazing tailwind. Think about Malls.
From the nineteen eighties to the
early twenty tens. I mean they just grew
All the time.
Yes, they have a lot of capital, but because of the institutionalized nature of the asset class, they're constantly receiving that capital.
Offices are a similar dynamic, a lot of attention from sovereign wealth funds and large institutional investors, because you could write
A two, three, four hundred million dollar check.
per office deploy a lot of capital very quickly.
But I've always had a hard time with the office building'cause through the cycle I don't think it actually earns.
It's cost of capital when you actually consider true CapEx.
So our view on data centers is that finds itself in a really good moment right now. The data centers that are adaptable for
Artificial intelligence, I think.
It creating a very, very tight market.
I think there is a high degree of obsolescence risk in really, really old assets.
And I would worry about the capital needs and those assets. I'd be really concerned about that.
So maintenance CapEx is just a case by case thing. There's not a sweeping statement to make about it.
I don't think so because you look at
maintenance cap X for industrial or self storage is very, very low.
So the way we think about it is let's just look at true free cash with recycling.
What is something about real estate
investing that
people think is true from the outside, but isn't.
People on the outside think real estate is one big thing.
But it's actually.
Not. It's the quite the opposite. In fact
If you have a curious mind and you have the ability to have a flexible mandate, it's probably the most unbelievably curious endeavor
You can have because we've had a conversation today
about senior living. Just talked about data centers. We've talked about malls and offices.
We could talk about cold storage and ground leases and we could talk about
So many different things. We can talk about marinas.
And so from my perspective
is the basic premise that there's something called real estate isn't actually
The case
There's so many different sub ecosystems.
That are proliferating at the same time.
that you have to dig in and find where the great opportunities are. Where is that really good business?
That owns a lot of hard assets.
That has the ability to reinvest over a long period of time.
And so we're constantly thinking about so what does AI mean for data center? Who wins, who loses.
What are the biggest population courts and how do we think about investing in that asset class?
What are the trends in e commerce? What does that mean for retail?
What's been going on in retail over the last
Ten years. And so to me
Outside looking in.
The nomenclature of real estate just means something that's a hard asset to me, but there's so much
Subtext and context below it.
Can you tell me about it, Marinas?
I know nothing about marinas.
We don't have a marina investment. There's one
public company that has a component of its business.
that invests in marinas, but there are some asset classes
That are regulatorily supply constrained.
The example I would give you, actually stepping back, is if you go to
Los Angeles, it's really hard to build a new house in Beverly Hills.
But you can go into the valley where there's a lot of land and there's no supply constraints. And so the question is
Where's the Beverly Hills of
Some real estate subsector and there are pockets of marinas that fall into regulatorily supply constrained
because folks don't want more marinas on handful of lakes or on ocean waters.
And so there's this interesting dynamic. I think you can say
Parts of the economy around cold storage, billboards.
Probably most specifically
Cell towers, there's just lots of regulatory supply constraints.
that exist around that. When we think about marinas, we think about
A business that has more supply constraints than the average real estate business.
Has had rise in consumption.
It got
Very exciting, I think, from a consumption perspective.
During Covid.
But it's had rising consumption and if you have a boat, you need to store it somewhere, you need to put it in the lake.
And so
Looks and feels like a storage business combined with a hospitality business.
What about cold storage? That seems like an interesting sub sector that
I don't know much about how the businesses work or how the economics work relative to other
Types of real estate.
Yeah, so Cold Storage is refrigerated warehousing. We have an investment in a private company here in my prior firm, we actually had a large investment in a
Cold storage operator.
finds itself in the public markets. There's been a lot of consolidation in the space with the top two players in the US own
I forgot the exact number of the fifty or sixty percent.
Of the market share. And then I think quite similarly to some of the other things that we have, there's lots of
productivity enhancements in the new facilities with
Robotics, et cetera.
But it's an industry that has pretty resilient demand dynamics.
Cold storage doesn't care if you eat out or eat at home. They just care that you eat.
And so if you look through the GFC
There was a very, very low drawdown.
in revenue, uh, through cold storage.
And I think'cause of consolidation, there's been interesting changes into the contract structure, which has made the asset base
More resilient. It is a far smaller business than
ambient industrial, like we talked about with pro lodges earlier.
But it's a business that we need and there's different types of cold storage. There's cold storage that sits next to the farm.
There's cold storage that houses your poultry and then there's last mile.
Delivery.
So it's a business that
we find really exciting and just due to its resiliency and the way that the two biggest players have been able to scale it.
If I could somehow level set the potential returns that you would earn across all these different subsectors and credit and equity and there was some like normalizing function.
And I said you just earn a return based on
the amount of curious attention that you give something.
So that's the only thing that matters.
Which parts of real estate would you personally get the most drawn to then? Like if that equalizer was laid on top of you. I guess another way of asking is which ones
pique your curiosity the most, or do you like learning about the most?
It's the ones I spend a lot of time thinking about today.
Maybe obsessing over would be senior living.
That's one that we've talked about.
Here today.
We think
The billboard space is a super interesting space. Everyone thinks about it as a poll.
On the side of the highway, but
A little bit less than a third of the space has been converted to digital.
There's an opportunity to continue
converting to digital, there's an opportunity to converge the way
You track advertising consumption with geospatial technology and so forth.
And that's a business that we find really, really exciting because the quality of the assets
is really, really good. But then there's public market companies that have
some unique issue that makes them potentially very attractive to invest in.
At the moment.
From a curiosity perspective, we spend a lot of time
Thinking about
data centers because
It's something that
Everyone else is focused on and thinking about
And our view is we're very, very focused on
How the expansion will occur.
Who's gonna win, who's gonna lose, because I don't think it's gonna be as simple as everybody wins.
And I said earlier in the conversation
But we would love to figure out a way.
And we spend a lot of time thinking about it.
to make investments in affordable housing ecosystem.
that also meet our return expectations because those tend to be lower returns.
than what we've seen and we've spent some time with some really interesting folks that have some really interesting ideas.
And we just haven't found a way to make it work just yet.
Maybe just give us a behind the scenes look at
what you're talking about as you consider sorting the winners from losers in data centers and also what will AI do to this world.
You hear lots of stories now about
it being a real supply problem that the demand for
GPU farms is gonna be
growing at a rate that we just literally cannot accommodate based on how long it takes to build these things, the CapEx, the literal locations where they go and how you cool them, things like this.
So
when you're with your team or whatever talking about data centers.
How do you think about
the impact of AI and whether or not we can keep up with it and who might benefit and who might not.
So I think from us it's like where's the content creation? And I think what we found find super interesting is that
Chat G B T adoption was the fastest adoption on record of any
Consumer technology. So the questions that we're asking ourselves is what are the commercial applications?
And
What is the computing power required?
to assess those commercial applications in our view is
A lot of these compute heavy workloads are housed in data centers.
And so
What we're trying to do is size the opportunity.
of what AI means for data centers. And I think just to give you some context.
The last big explosion of data center demand occurred around public cloud utilization.
Which itself drove
thirteen gigawatts globally of incremental demand for data centers.
Which was
A real demand drive over the last several years.
And so
It's way too early to tell, but our view is we think the opportunity set
could be at least as big as the public cloud opportunity, if not larger.
Some of the large infrastructure funds that we talked to have quoted numbers as high as
Thirty eight.
Gigawatts?
And there's a lot of industry studies that show demand
Uh data center needs will double.
between this year and twenty thirty.
And so
It probably means we're in the massive
Innings of a growth cycle. But then the question becomes
In order to manifest that compute power.
How are you gonna service your energy needs?
How much is that gonna cost?
What's the return on invested capital?
And we think that ultimately there's a handful of facilities, or there's more than a handful of facilities
that are just functionally obsolete, whether due their size.
Whether to do with the amount of energy they can hold.
And so that's something that we've been working on real time trying to assess over the last little bit.
I'd say unfortunately all the big private asset managers have taken
most of the public opportunities away.
So Blackstone bought QTS, Digital Bridge bought
Switch
G I P and K K R bought.
Another one.
There's not many public opportunities.
And there's so much interest on the private side that it's hard to see how we can
Make it work with our cost of capital.
If you think about the most common
trip up or tripwires for real estate investors, what comes to mind? Like what is the most common reason that
An otherwise smart and capable
investor trying to earn a good return fails to do so in this sector.
I think
Again, if we're talking about the sector writ large, I think
You have to look at it through the lens of
Cyclicality, operating leverage, and financial leverage.
And so I think
Most real estate assets just by nature of being hard asset and capital consumption had a lot of operating leverage.
And we've talked earlier, but at different points in the cycle, credit availability is really robust and
Today it's not as robust.
But maybe you took capital and valuations are really high.
Put a lot of financial leverage on it.
to justify a return on equity or equity IRR.
That made sense for your cost of capital.
And then unfortunately maybe cyclicality ensued.
And so I think the biggest mistakes occur.
When people forget about the cyclicality.
It's sort of exacerbated rather.
Bye.
the financial leverage and operating leverage. What I think super interesting.
is if you take a typical levered private equity buyer
The buying asset.
They'll put sixty five, seventy, eighty percent loan to cost.
On the asset.

a cost of capital opportunity or how can you drive rental growth?
Operating improvement.
Well what's interesting to me is the public reads on average.
I've spent the better part of the last twelve or thirteen years d levering.
So most streets have sub forty percent.
Loan to value.
Based on the implied valuation in the public market.
And I think that's a lesson that they learned and read investors learned through the GFC.
Where you had these great assets.
And it had to be recapped and really
distress valuations causing lots of dilution in two thousand
Nine, ten, eleven.
And you have the
On average, there's obviously
Exceptions to this, but you have the opposite dynamic today.
Where the REITs are actually the best capitalized, have access to the bond market.
Aren't reliant solely on
Agency financing or bank or insurance companies.
And they have this dynamic where
We think
looking into twenty four and twenty five.
As fundamentals.
Potentially start to turn back up.
the best cap allocators in Reeks are actually gonna get
premium valuations to let them go play offense.
And sort of allow a compounding effect of NAV growth on top of
their normal course free cash flow per share growth over time.
If you're hosting a
dinner party just for real estate.
Investors.
can be someone at the peak of their powers or a legend or whatever.
And you can invite three guests to it.
Who do you think would be the
Tree.
I think I would invite
Sam Zell, unfortunately passed.
earlier this year. I had an opportunity to meet him last year.
He was the original thinker around real estate platforms from my lens, and so
He did it in a way where he in essence securitize real estate and so I want to spend
a lot of time with him. I'd actually want to invite Charlie Munger because he has got a huge, huge multifamily portfolio. He's got this amazing lens of thinking about companies.
I don't need to describe on this podcast, but he's got a huge multifamily portfolio and he's created a lot of incremental wealth.
For himself.
I'd actually want to talk to him about comparing and contrasting
what he sees in the equities market and what he sees in the real estate markets.
And the third would probably be my friend Kevin Marchetti, who's the founder of Lineage Logistics, which is a cold storage company. I'd bring him because he actually founded and operated and ran
From nothing to what's probably
Tens of billions of dollars of real estate value creation.
Just to have a conversation about what it's like day to day running those assets.
And building a business.
You know the origin of Munger's multifamily portfolio? Was there some insight there that led to that build up?
I don't know the specifics, my understanding is there was a relentless person in his neighborhood in LA who kept knocking on his door and saying, Hey, you got to look at this multifamily stuff and this was twenty, thirty years ago and
started acquiring assets together and they built up a very large portfolio.
If you think about just like other real estate investors and you had to put like a L P hat on rather than a G P hat on.
What would be like
one or two questions that you think would really get at the heart of whether or not
that investor had something interesting going on. Like what would be the most impactful questions that you could ask?
A real estate investor.
To suss out their skill.
I think you would probably focus the questioning around what are you doing at various points
In the cycle.
Because I think a lot of people
Are really good at
Just investing in real estate equity or
One type of acid.
I would just ask them what they're doing at various points in the cycle and I'd repeatedly ask the same question and see
How the business evolves over time.
How the investment style evolves over time.
And so I understand what you're sussing out there is
Is this just a person that knew how to do one thing that's valuable in a certain environment, but if
conditions change, that skill may become way less valuable. So it's how adaptable is their skill set.
Do you think about your career so far?
And I ask you to conjure up
what you would think to be like the defining moment.
Of your career. What would the moment be?
In twenty sixteen.
So
Seven or eight years ago.
We were
I'm a prior firm.
Invested in the various bonds of Caesars, the largest gaming company.
And at some point
That you're
The company came out with its planetary org.
Which finalize the equity splits in the new restructure company into the various different creditor groups.
The day that came out
A lot of folks
We're simply doing analysis around okay, well, what's the bond trading at versus what the recovery is.
I think the defining moment for me
And this was again.
Something my old boss and mentor Doug taught me is when you're looking at a distress situation, you wanna be excited about what can happen next.
And I think what we saw was an opportunity
for cyclical inflection in Las Vegas, the company had reinvested considerably
Through bankruptcy in his rooms.
Upgraded the quality of its asset.
And the defining moment for me was going back and saying, look, all of these other distressed ones we know are selling.
But these bonds can be worth two or three times what they're trading at if we actually look at it.
over three or four years. And it's just got me
Really, really excited about
the opportunity to invest in companies going through transformations and
That can happen through distress, it can happen through the public markets, it can happen through
All kinds of different situations. But I think that moment was a defining moment in my career. We made it a very large position and went from there.
If you had to teach a class on this platform approach to building an investing firm in real estate or otherwise
Anything else that we haven't talked about?
around that approach that you think is really important to doing it well.
Premise of the platform approach is that you're identifying a sector or asset type and you're going after it, you're leaning in.
But the only way to do it is with a really quality management team?
And so the thing we haven't talked about is you find that great management team.
You put your
capital, your time, your resources behind them.
And you put'em behind that one team. It's not like
We're focused on
Building this
industrial company over here and building another industrial company on the other side of the country or
Some competitive way.
And so the question becomes
How do you assess?
the track record of a team or their ability to work for you.
Because that team works for us, which allows us to create a vertically integrated platform.
We wanna let that management team go.
execute. We want them to replicate what our playbook is at the asset level.
We compliment those teams.
With
significant
strategic support.
Cap allocation decision making framework. Hey guys, we should be leaning in.
This is what we're seeing. We should be
thinking about these different geographies, this is what we're seeing.
And they're constantly giving us
feedback if done the right way with a really good
business, a really good management team.
We don't become a financial buyer, we become a real
Vertically integrated.
Strategic player.
And that means we'll get looks.
That's single family rental loan portfolios that commercial banks are selling off because they're overexposed.
And we'll get them at Conversant because we're the controlling shareholder of Quinn.
Which we probably wouldn't have gotten in the absence of that.
What I would say in that class is I would focus in on
How durable.
is the asset, what's the reinvestment runway, and what's the team and the characteristics of the team.
That you need to execute on your math.
So we started the conversation with
A discussion of the capital cycle and then
You just said when we're evaluating another investor
One great question to ask them would be how they act and what they look for at various points in the cycle and maybe even where we are in the cycle. So maybe I'll just turn that question on you in closing to talk about the broad landscape where you see opportunity.
Where you think we are in the cycle very specifically.
and how you take that information and
Build a portfolio.
Before we get into the specifics, our view of the current cycle
Is that we describe it as broadly the re equitization
Of real estate. I'd frame the last couple of years with twenty twenty and twenty twenty one as a period of low rates.
A period of low risk premiums, probably a little bit or a FOMO.
ease of raising capital and all that led to elevated valuations, which
I think people also got excited about the prospect of ever higher valuations given what was going on.
in the environment. And so that landed us at the peak of the market.
In twenty twenty one. So said another way, and circling back to the premise of this conversation, good returns attracted a lot of capital. And it attracted a lot of capital in both debt and equity.
On the other hand, if you think about today, as we sit here in the middle of twenty twenty three, capital is now flowing away from real estate.
We'd characterize the current market for real estate by three of pretty abrupt changes. One, an abrupt change in the availability of credit.
to an abrupt increase in the cost of that debt capital.
And then lastly, meaningfully reduced equity flows to the space. It probably does make sense to touch on those.
A little bit. So in terms of reduced availability of credit.
I would say it's if you read the paper, it's pretty well documented that banks have
pulled back quite a bit from US real estate.
But it's probably more important to zoom in on the regional banks. And the regional banks are the most important provider of development and regional capital for
Real estate and what we're seeing from them is a pretty sharp pullback. So specifically, there's a data source called DREP that we use.
And of the more than four thousand and seven hundred banks, over seven hundred and fifty of them
have CRE concentration issues well in excess of FDIC guidance.
So when we think about that, that's sixteen percent of all banks in the country.
In excess of the FDIC guidance.
You have an issue that's really affecting the local and regional bank, the lifeblood
of commercial real estate and a lot less affecting the real
large nationwide bank. So what you're seeing is a significant amount of pressure
So pull back on CRE lending and as a result, debt capital has pulled back.
We think about the second point, which is the rapid increase in the cost of capital.
Base rates were effectively nil.
five or six quarters ago and
Today they're about five hundred bips.
And because of the availability of credit that I just described has pulled back.
Spreads it probably widened a hundred basis points or so.
Obviously spreads will be fluid based on the availability.
of capital, but as of today what used to be a three or three and a half percent loan is an eight
eight and a half, nine percent loan. So this have been a real meaningful jump.
And the cost of capital.
And then lastly, I'd say on the equity retrenching
you can look at the public REIT index, which is a good proxy
for the direction of real estate values at times, and it's down twenty seven percent from its peak at the end of twenty twenty one.
Obviously there are some names in there that are more levered.
that are down quite a bit more.
That's proxy one, that's a good directional indicator for asset value.
And then some of the core funds and other low returning buyers are having some well documented redemption issues. And so you're seeing people
pull back from the space. We also have general uncertainty in the economy.
And then elevated supply in the sectors that people were most attracted to, naturally, given the capital cycle dynamic. And so I'd say specifically.
multifamily life sciences, self storage industrial have a probably have a period of
Digestion of that supply.
situation where
Transaction activity is down more than fifty percent year over year. Values are down quite a bit.
interest burden is up and loan to value thresholds are breached and debt service coverage ratios
Quite real.
And so to compare it to another bottom of the capital cycle, if the GFC were characterized by let's say amend and extend.
Our view is that this period will be characterized by pay down and extend. So banks need to recalibrate their credit risk.
to get capital ratios in line and borrowers need to recalibrate.
capital structures to get debt service ratios in line. But given that there aren't a lot of lenders
in the space you may be paying down your existing loan.
with some capital to get your existing lender to play ball and extend with you.
And so this probably means fresh equity.
or structured financing needs to come in at the asset or company level.
It may mean forced or motivated selling of assets. It may mean
Pretty interesting and significant recapitalizations.
That's why we call this period the reequitization of real estate. It's gonna be a period of meaningful asset and company specific.
Deleveraging said another way, a lot of liquidity is leaving the system.
I think you and I
Are both big fans of basketball and I'm a huge, huge fan of John Wooden.
Former head coach of UCLA men's basketball team, ten national championships.
And he has a line that I love.
Be quick, but don't hurry.
And that line has always stuck with me.
About life to me, it means
It's important to be able to make quick and decisive decisions, but don't rush it.
There's a time to be patient and time to be impatient. And as I apply that to where we are in the cycle.
I think the last few years have been a time to be patient.
And I'm hopeful that we're on the cusp of a
Time to be impatient.
given the flight of liquidity and capital out of the space. And of course
I could be wrong about a lot of things. The economy could get worse or fundamentals could deteriorate.
But also lack of liquidity today.
is driving a handful of opportunities. Number one
Will be rescue financing. So many companies
Or collections of assets.
won't be able to refinance their debt or will have issues with debt survey to coverage ratios like we talked about earlier.
It will need capital on an expedited basis.
I think the second one would be structured corporate opportunity. So that'd be public or private companies that need liquidity.
And I think what's interesting about that liquidity is it could be for defense.
or offense, defense meaning to shore up their capital structure, or offense meaning
to go acquire something, but they don't wanna just take
very punitive, pure equity cost of capital. They're willing to take something structured.
I think third will be, and it's probably setting up to be an interesting time as we look out over the next year, not necessarily today.
To look at discounted publicly traded companies.
Whether that's to own them passively or whether that's to evaluate them as take private candidates.
And then lastly, given the uncertainty and challenges that I described earlier with the banks, there's gonna be a lot of loan sales from banks and other lenders.
And there's gonna be some pressure.
to monetize those loans and hopefully they might come and attract devaluations.
And so I think a lot of these opportunities will present themselves in what were the favored sectors, the ones that have the short term supply issues, like multifamily life sciences, possibly even
industrial where there's been a lot of supply added in a pretty short period of time at
The positive here is that there's no new development capital.
available today. So when you look into twenty six and twenty seven and twenty eight, the supply picture
Could get a lot better.
You imagine how good of a podcast guest John Wooden would have been?
Oh my God, it was an amazing what a great coach, philosopher, teacher.
Is there anything else from him that
I remember reading all his
Bucks.
in my twenties and just thinking this guy I would do anything to have played for this guy in some capacity. I think the best ones are you hear players talk about him and they're all excited to go play for John Wooden at UCLA winning as coach.
Experience.
And they get to practice the first day.
And he teaches them how to put their socks on.
Teaches them how to tie their shoes because if they can't get the fundamentals right.
How can they get anything else right?
Very cool.
Such a interesting, wide ranging conversation. Real estate, every time I talk about it, like you said, it is so fascinating because it's so multifaceted. We could probably do two hours on any one of the topics that you mentioned and get into all sorts of weird nitty gritty detail.
Maybe we'll use business breakdowns, another show of ours to do that at some point on towers or cold storage or marinas or something like that.
But I've really appreciated all the insight and all the time.
My traditional closing question for everybody is to ask, what is the kindest thing that anyone's ever done for you?
There's been so many kind acts that people have done for me both personally.
And professionally.
But the one that sticks out to me is when I was considering leaving
My prior firm and stepping off the proverbial plank into this world of entrepreneurialism and building
My own asset management firm
And
Taking this approach to real estate.
I was very fortunate that a mentor of mine, Sonny Kelsey, who runs a
Large real estate firm called Bentle Green Oaks.
sat down with me and what I thought was gonna be a thirty minute conversation.
Turned into a two or two hour plus
Conversation and
The worry for me when stepping off the proverbial plank was
How much of what I had done in my career was because I had a very large balance sheet behind me.
And how much of it was because of the hustle.
And forward thinking or trying to find new ideas.
And I went in to talk to Sonny and
He said come in and let's talk through everything you've worked on.
And we spent two, two and a half hours together.
And at the end of the two and a half hours he said to me, something I'll never forget, he said
When you walked in here, I thought you were gonna tell me seventy thirty in favor of
Big balance sheet.
Great brand behind you.
But I actually think it's the other way. Seventy thirty in favor of your hustle.
He's like, You know what to do. And that was the kindest thing anyone's done for me professionally. Incredible.
Such a cool story. Thanks so much for your time.
Thanks, man.
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