Podcast Summary
Streamlining Investment Research with Tigus: Tigus provides a unified platform for fundamental investors, offering qualitative content sets, financial data, and more to streamline the research process. Understanding the capital cycle in real estate investing is crucial for making informed decisions and navigating the market effectively.
Investing requires a significant amount of effort and resources to gather valuable insights. Tigus, a research platform for fundamental investors, offers a unified end-to-end solution to streamline the research process, combining robust qualitative content sets, up-to-date financial data, and more. Additionally, Mike Symanofsky, the managing partner of Conversant Capital, discussed the importance of understanding the capital cycle in real estate investing. The capital cycle refers to the idea that high valuations of assets encourage new entrants, leading to increased competition and eventually lower returns. However, an improving supply side picture can lead to returns in excess of the required cost of capital, making it an ideal time to enter a space. By keeping this cycle in mind, investors can make more informed decisions and navigate the market more effectively.
Understanding Real Estate Cycles through Capital Cycle Framework: Real estate experiences overlapping financial, operating, and market cycles. Historical examples like senior living sector show how supply and demand imbalances impact the sector. Understanding capital cycles helps investors identify opportunities and risks.
Real estate is a highly cyclical asset class with long supply and demand cycles. It requires significant capital investment and is sensitive to the prevailing cost of capital due to its reliance on debt financing. The capital cycle framework is an effective lens to understand real estate, as it can experience overlapping cycles of financial, operating, and market conditions. A historical example of this can be seen in the senior living sector. In the late 1990s, there was a significant supply surge, leading to a distressed period at the turn of the century. Post-GFC, capital returned to the sector, leading to a new supply cycle that extended until 2019. However, the senior living sector was less affected by the financial crisis than other asset classes, such as multifamily or office. Unfortunately, the sector was heavily impacted by COVID-19, with occupancy falling over 1,000 basis points due to tour restrictions and labor costs increasing in 2022. Overall, understanding the capital cycle in real estate provides valuable insights into the asset class's behavior and potential investment opportunities.
Senior living real estate: An attractive long-term investment opportunity: The senior living real estate sector presents a long-term investment opportunity due to a bottoming capital cycle, demographic trends, and potential supply constraints.
The senior living real estate sector presents an opportunity due to the confluence of a bottoming capital cycle, demographic trends, and potential for supply constraints. The capital cycle is at a trough, with a large portion of underperforming assets potentially being converted into other uses or going out of business. The demographic picture shows a growing population of older adults, particularly those aged 80 and above, who will drive demand for senior living facilities. Supply growth may even go negative or flatline due to the current supply downturn. These factors make for an attractive long-term investment opportunity, especially for those who are excited about owning the assets for an extended period. Real estate, with its tangible nature and potential for steady income, drew the speaker's career due to its unique combination of asset value, income generation, and the ability to make a significant impact on people's lives.
Understanding Real Estate's Scalability and Flexibility: Real estate's long reinvestment runways, fragmented market, institutionalization, and need for affordable housing make it an attractive sector for investors seeking business growth, market navigation, and economic impact.
Real estate is a tremendously scalable and flexible sector with long reinvestment runways. The speaker's experience at a distressed real estate firm before the 2008 financial crisis gave him a deep understanding of the market's downside and its potential for constant opportunity. Real estate is highly fragmented, with major players like Prologis controlling only a small percentage of the market. The sector's institutionalization over the last few decades has attracted some of the sharpest investors, making it an excellent place to find top talent. However, there is a significant need for affordable housing for the average American earning between $60,000 and $100,000 per year. The speaker believes that addressing this need could have a positive impact on the US economy. Additionally, no two crises are the same, and the housing market's response to the GFC highlights the importance of capital availability and flexibility during economic downturns. Overall, real estate offers a unique opportunity for investors to build businesses, navigate across public and private markets, and make a meaningful impact on the economy.
Office market facing a supply surplus and potential adjustments: Speakers predict office market adjustments, focusing on class A offices, and suggest targeting various returns through real estate investments in private markets.
The office market is experiencing a surplus of supply, particularly in central business districts and suburban areas, due to trends that predate the COVID-19 pandemic. This surplus has been highlighted by the work-from-home phenomenon, leading some to draw parallels with the retail sector's "death" narrative. However, the speakers believe that the office market will eventually go through its own supply-demand adjustment, with class A offices potentially becoming more valuable as class B and C offices lose appeal. Regarding real estate investments, the speakers suggest that investors can target various returns depending on their risk tolerance and investment strategy. They prioritize seeking opportunistic returns and view private markets as a way to access unique opportunities, either by incubating platforms or investing in existing ones. For instance, their investment in Quinn Residences, a private platform for single-family rentals, was initiated before the pandemic and reflects their long-term interest in the space.
Emergence of Single Family Rentals as Institutional Asset Class: The single family rental market emerged as an institutional asset class due to distress and dislocation, revealing potential for rental growth, limited new lot development, and the need for reliable operators. Opportunity lies in catering to renters aging out of multifamily and into single family, seeking larger, amenitized living experiences.
The single family rental market emerged as an institutional asset class around 2010 due to significant distress and dislocation. This period of learning revealed the potential for rental growth, limited new lot development, and the need for a reliable operator. Despite consolidation among the best operators, the sector still faced challenges with disparate quality of homes. Observing the demographic trends, there was an opportunity to cater to renters aging out of multifamily and into single family, who desired larger, amenitized living experiences. The single family rental sector's unique characteristics, including the aging cohort and the lack of large, amenitized options, set the stage for the emergence of dedicated build-to-rent platforms.
Building a resilient real estate portfolio through thematic thinking and flexible capital: Focus on sectors with favorable long-term supply-demand dynamics and high-quality rental growth streams. Be a flexible capital provider and consider various investment strategies. Maximize returns and give investors access to private markets.
Successful real estate asset management involves thematic thinking, evaluating asset-level returns, and building a platform with resilience, scalability, and optionality. The speakers discussed their approach to building a portfolio of 39 communities with over 5,000 homes by focusing on sectors with favorable long-term supply-demand dynamics and high-quality rental growth streams. They emphasized the importance of being a flexible capital provider and considering various investment strategies, from passive public equities to control-minded private real estate. Their goal is to maximize returns, not necessarily firm size, and they aim to give investors opportunities to co-invest and access private markets, which are much larger than public markets in real estate. Ultimately, their platform approach involves real estate businesses with a focus on building a strong management team and taking advantage of market opportunities.
Flexible and skilled team with the right incentives for best returns: Successful real estate investing requires a team that can adapt and skilled in various aspects, with incentives aligned for the best return opportunities. Despite careful consideration, risks such as misjudging capital cycles or supply and demand dynamics can still impact investments.
Successful real estate investing, whether private or public, requires a flexible and skilled team with an incentive structure that seeks the best return opportunity. However, even with careful consideration and long-term trends, there are risks such as getting the capital cycle or supply and demand dynamics wrong. A notable mistake in public market investing was an investment in Macy's based on a real estate thesis, but the direction of the company's numbers ultimately proved more important than the special situation. Conversely, the best investment decision was finding a company undergoing transformation with the potential for a significant increase in return on invested capital.
From Complexity to Simplicity: Digital Bridge's Successful Business Model Transformation: Identifying and investing in businesses that simplify complex operations and focus on attractive asset-light, low-leverage profiles can lead to successful business model transformations and attractive long-term returns.
Successful business model transformations occur when complexity gives way to simplicity. The example of Digital Bridge, a company acquired in 2020, underwent a significant pivot from having multiple businesses, including healthcare, hospitality, mortgage REIT, and Digital Bridge itself, to becoming a digital infrastructure asset manager. This transformation was challenging due to the complexity involved but became exceptional as the management team, led by Mark Gansey, successfully simplified the business model and focused on an asset-light, low-leverage profile. Data centers, a highly capital-intensive real estate asset class, are another example of complexity that can lead to simplicity and attractive investment opportunities. Despite the significant capital expenditures required for maintenance and the risk of obsolescence, data centers benefit from the digitization of the world and have the potential for high returns on investment (ROIC) in the long term. The key is to identify and invest in businesses that can navigate the complexity and successfully simplify their operations to deliver value to investors.
Understanding unique real estate sub-sectors: Successful real estate investment strategy requires deep understanding of specific sub-sectors and their underlying trends: data centers, marinas, cold storage.
Real estate is not a one-size-fits-all investment. The speaker emphasizes that there are various sub-sectors within real estate, each with unique characteristics and investment opportunities. For instance, data centers are currently attractive due to the increasing demand for artificial intelligence and the risk of obsolescence in older assets. On the other hand, marinas can be a compelling investment due to regulatory supply constraints and rising consumption. Cold storage, another sub-sector, benefits from resilient demand dynamics as it caters to the food industry regardless of consumption trends. Overall, the key takeaway is that a successful real estate investment strategy requires a deep understanding of the specific sub-sectors and their underlying trends.
Cold storage and data centers: Two resilient real estate sectors: Despite economic downturns, cold storage and data centers show resilience and growth potential due to essential roles in food supply chain and tech advancements. Up to 38 gigawatts of demand for data centers by 2030.
Certain real estate sectors, such as cold storage and data centers, have shown resilience and exciting growth potential despite economic downturns and changing market conditions. Cold storage, with its various applications and consolidation, has proven to be a resilient business due to its essential role in the food supply chain and last-mile delivery. Data centers, on the other hand, are experiencing significant demand due to the rapid adoption of AI and chatbot technology, which requires large amounts of computing power and data storage. The potential opportunity for data centers could be as large as the public cloud opportunity, with estimates suggesting up to 38 gigawatts of demand by 2030. Overall, these sectors, along with others like senior living and digital billboards, pique the curiosity and focus of investors due to their unique challenges and growth prospects.
Real Estate Growth Cycle and Energy Needs: Real estate investors face challenges in servicing energy needs at a reasonable cost, with obsolete facilities and limited public opportunities being major concerns. REITs, well-capitalized after a decade of delevering, are poised to benefit from improving fundamentals and receive premium valuations.
The real estate industry is experiencing a significant growth cycle, but the ability to manifest this growth is dependent on the ability to service energy needs at a reasonable cost. Old and obsolete facilities are a concern due to their size and energy holding capacity. Private asset managers have already bought up most public opportunities, making it challenging for new investors. The most common pitfalls for real estate investors are cyclicality, operating leverage, and financial leverage. Real estate assets have high operating leverage due to their capital-intensive nature. During different points in the cycle, credit availability and valuations can lead investors to take on excessive financial leverage, which can be detrimental when cyclicality ensues. REITs, on average, have spent the last decade delevering and are now the best capitalized players in the market. As fundamentals potentially start to improve, REITs are poised to receive premium valuations, allowing them to play offense and compound NAV growth. If I could invite three guests to a dinner party for real estate investors, I would invite Sam Zell, who was a pioneer in real estate platforms, Charlie Munger for his multifamily portfolio and unique perspective on companies and markets, and Kevin Marchetti, the founder of Limbidge Logistics, for insights into day-to-day asset management and building a successful real estate business.
Identifying transformative situations in real estate: Successful real estate investors adapt and focus on transformative opportunities, such as identifying cyclical inflection points and partnering with high-quality management teams.
Successful real estate investing involves adaptability and a focus on identifying and investing in transformative situations. This was exemplified by an investor who built a large portfolio through persistent acquisition, starting from being approached in his neighborhood decades ago. To assess the potential of a real estate investor, it's important to understand their approach throughout various points in the real estate cycle. A defining moment in one investor's career came when they identified an opportunity for cyclical inflection in Las Vegas through Caesars' reorganization, seeing potential for significant value creation. The platform approach to building an investing firm in real estate or other sectors relies on identifying a high-quality management team and providing them with the necessary resources to execute and replicate the firm's strategies. This allows for a vertically integrated platform and the potential to become a strategic player, rather than just a financial buyer.
A shift in the real estate market with reduced credit, increased debt costs, and decreased equity flows: Investors must consider asset durability, reinvestment runway, and team strength in current market of reacquitization following years of low rates and high capital inflows.
We're currently experiencing a shift in the real estate market, marked by a reduction in the availability of credit, an increase in the cost of debt capital, and a decrease in equity flows. This has led to elevated spreads and declining asset values, particularly in sectors like multifamily, life sciences, self-storage, and industrial. When evaluating investment opportunities in this environment, it's important to consider the durability of the asset, the reinvestment runway, and the strength of the team. As for where we are in the cycle, the speaker sees the current market as a period of reacquitization following a few years of low rates, low risk premiums, and high capital inflows, which led to elevated valuations. With capital now flowing away from real estate, investors must be cautious and selective in building their portfolios.
Real Estate's Period of Deleveraging: Opportunities Amidst Challenges: During the current real estate market's deleveraging phase, opportunities lie in rescue financing, structured corporate financing, discounted publicly traded companies, and loan sales. Favored sectors include multifamily, life sciences, and industrial due to short-term supply issues. Patience and decisiveness are key.
The current real estate market is experiencing a period of significant deleveraging, which may lead to meaningful asset and company-specific opportunities. Banks and borrowers are recalibrating their financial structures to align with changing economic conditions. This period, referred to as the "reacquitization of real estate," is expected to be characterized by pay down and extend rather than amend and extend. Opportunities include rescue financing for companies facing debt service coverage ratio issues, structured corporate financing, discounted publicly traded companies, and loan sales from banks and lenders. The favored sectors are those with short-term supply issues like multifamily, life sciences, and industrial. Despite the challenges, the lack of new development capital available could lead to a better supply picture in the future. John Wooden's philosophy of being quick but not hurrying is applicable to the current market situation, as it's important to make decisive moves but also be patient. Overall, this conversation highlights the complexity and multifaceted nature of the real estate market.
The impact of a mentor's validation and encouragement: A mentor's belief in your abilities can give you the confidence to pursue your goals and start a business.
The kindness and support of mentors can significantly impact one's professional growth. The speaker shared a personal story about how a mentor, Sunny Kelsey, validated his abilities and encouraged him to believe in his hustle and forward thinking, rather than relying solely on his large balance sheet, when he was considering starting his own asset management firm. This conversation gave the speaker the confidence he needed to take the leap into entrepreneurship. It serves as a reminder that mentors can provide valuable insights and validation that can lead to personal and professional growth.
