Michael Simanovsky - A Platform Approach to Real Estate

**Patrick O'Shaughnessy** (0:00)
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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 joincolossus.com.

**SPEAKER_2** (1:44)
Patrick O'Shaughnessy is the CEO and founding partner of PositiveSum 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 PositiveSum 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 PositiveSum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (2:13)
My guest today is Mike Simanovsky. Mike is the managing partner of Conversant Capital, a real estate investment firm he founded in early 2020 Conversant 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 undersupplied 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 Simanovsky.
Mike, maybe an interesting way to frame our entire discussion of real estate is through the lens of the capital cycle. You 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?

**Michael Simanovsky** (3:08)
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 happened to be holding in my hand and I keep in my office.

**Patrick O'Shaughnessy** (3:18)
I just started his other book, The Price of Time, which is excellent as well.

**Michael Simanovsky** (3:21)
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 entrants 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 to fall well below their 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 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 you 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 sub-sectors of real estate to which the capital cycle probably doesn't apply. They're irreplaceable or they're super regulatorially 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 10 or 15 year cohort to think about it. I think a lot of people up until maybe last year forgot about real estate cyclicality.