How to Build Resilience in Your Organization
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In our company lately, we've heard a phrase frequently, which is good as in good as in no matter what someone says. Good. And why would you say that? We're, we're piggybacking off of Jocko Wilnick in a clip he has on YouTube where he says, whenever I get bad news, how always just say, good. And he, he uses a lot of Navy seal language around it, but for us it means, Hey, recession's coming.
Good. Hey, that deal didn't work out good. Uhhuh. Hey investor. Yeah. Pass on this one. Good? Yep. And, and why would you, why would you do that? The answer is you could spend, you can sp you could start with bad or you could start with saying, okay, I'm going to look for the positive attri attributes of why this thing is good and turn it into a positive.
Recession's coming. Good. Okay. We're gonna learn we're gonna see new opportunities that came out that weren't happening already. Recession's coming. Oh, good. Well, we've been living at the top of the market for a year or two. It's time to get more value. Yeah. Investor passed on. Deal. Good. We're learning more about how we should re-frame our future deals so they better fit what the market wants. And, and for anything there's, there's, there's a good piece to it. Yeah.
And we, we really try to build that resiliency into the organization. Yeah. Because we, throughout the organization, we're gonna be confronted with challenges, issues problems.
And the more resilient our organization can be, the more resilient each individual can be, the better we are as an organization. Yeah. Companies don't. Thrive and grow in good times. They thrive and grow in bad times, good times hide inefficiency. They, they hide problems. And it's the bad times that really kind of bring out the, the best in people.
Success is a lousy teacher. Yes. When you experience success, it reinforces how you already perceive the world. I believe we are great investors. Yes. Success happens. Well, of course we are. Yes. But difficulty is where you're honed. Difficulty is where your assumptions about yourself or your firm, your teams are chipped away and you are left looking at the bare, brutal facts as Jim Collins says.
Mm-hmm. And you must confront them. So I, brutal facts, good difficulty chipped away. Good. How can we bring this into our process, into our team?
Yeah. I think of a couple examples. First of all, I remember vividly. As we were actually in an offsite meeting together when the governor locked down the state of California for Covid and every state ultimately was locked down as well.
And that was when we were fully confronted with the reality of this completely unexpected situation, which also underscores by the way that you can't, you can engineer and anticipate as much as possible. There will always be scenarios outside of your expectations, and it's how you deal with that.
And I remember we, we kind of created a war room in here, in this, in this conference room. And and we sat down and looked property by property, loan by loan. Loan by loan. Occupancy rate. By occupancy rate, yeah. Tenant by tenant. Yeah. And really drilled down into what, what could this mean?
With our portfolio, what, what sort of impact? And it was you taking a situation that you know, clearly creates distress and problems and being able to say good. Mm-hmm. How do we build resilience out of this exercise And how, and what can we do in our portfolio that is going to you know, make us more and more resilient Coming out of this,
there's that great quote that history is the study of surprises.
If everything went according to plan, it wouldn't be the important part. It's those surprises that happen all the time, but certainly every few years. Those curve balls that make and break companies and our ability to not just know how to react to surprises, but to have the character and to have the team and to have the ability.
To be hit with a surprise and have enough dry powder, enough debt, runway, enough diversification, enough years of experience, enough courage and passion and strength. Yep. To take that surprise and say, good, good. I don't know why it's good. Why is it good? Let's think of some reasons why it's good.
Okay. What are we gonna learn out of this? What are we gonna do with this? Good. And I, our company has generally thrived on disruption. The big the bigger you know, long-term companies are, are less looking for disruption and more looking for status quo. Yeah. And disruption happens. We are able to nimbly work plans that work around those and to create opportunity.
Yeah. I think a good example is our fund one portfolio is effectively four office buildings and one small industrial property that was, that was all purchased pre covid. Yeah, in 2019 and 2020 and talk about an opportunity to say good. And, and here we stand today. I'll, I just number one, the portfolio as a whole has performed well above what one would've expected post covid.
Certainly not what we would've liked, you know, pre covid, but, you know, covid is an externality. How do we deal with that? How do we how do we respond to that? But a good example is 1651 Response Road. Yeah. And this is a property where we bought it 35% occupied. Yeah. Office building with short-term leases, with short-term leases at $76 a square foot, which is Yes. Screaming deal.
Yes. In just pre covid. Yeah. And today, probably a quarter of replacement costs. Yes.
And we learned through that. Yeah, I mean, that was an absolute learning opportunity. So for example, not surprisingly, the leasing took longer than we expected because COVID hit nobody's touring and nobody's moving.
And so the lease uptime took longer than we expected. Then add to that about a year longer. Yeah. Add to that inflation in construction costs. So meanwhile we're, we're dealing with an asset that is getting pretty substantially gutted and renovated and having escalated construction costs along the way.
And of course, fast forward to today, we now have a fully stabilized building at market occupancy. We have a cash flowing asset. And I think that certainly speaks to our team and our ability to select good investments even in the midst of covid. The leases we got done during that time were heroic.
Yeah. Heroic. They were incredible. We, we hustled around it. Yeah. But here's a good piece of that. Yeah. We learned buying office buildings in great locations. Yep. At 76 bucks a foot. Yep. That are 35% occupied. Is a hard way to make money. Yes. And it's, and it's, it has a lot of risks. Yeah. You know, when you move on that spectrum, it moves closer to development than to, you know, buying a stabilized value add property.
We, we don't buy many office buildings now. Yeah. But the most recent office building we bought was about 86% occupied at $120 foot. Yeah. Still a very low basis. Still probably a third or 40% of replacement costs. But much higher occupied with smaller tenants that are easier to replace. Yeah. Versus the other one, which was really cheap, but big tenants and difficult to replace.
But we, we got the leasing we're in, in the mid eighties now on 1651 response. And our rents on the occupancy on, on occupancy. And our rents are are either higher or, or at where we modeled. So it took, it took a year to a year and a half longer than we thought. But Yeah, but we we're cash flowing and we, we also, another thing we learned out of that was as you alluded to, we have a 10 preference for highly multi-tenant buildings.
Yeah. Instead of large floor plate tendencies, because large floor plate tendencies, they represent more risk on lease turnover. They also represent more costs should they go vacant. And since that, since that time, we've also. You know, modified our preferences around that. And we look today and primarily multi-tenant, industrial multifamily.
These are moves that came out of hardship, out of a good situation where we, where we had to look at what we're doing differently during that good piece. We moved from, I think How we were sort of raised in investing, which was more of a local look to more of a institutional scaled approach to investing.
I think prior to that certainly we were mostly office and we were thinking, all right, how are we gonna reposition this asset? What are we gonna do with this tenant And that tenant definitely post covid. We're coming out and everything we've bought has been scalable, meaning much more highly multi-tenant.
Much smaller tenant size on average. There's no one tenant that can sink us in the buildings we bought. Yeah, yeah. We, we refresh the buildings, we bring the rents to market, but these are all things that could be done over and over and over again and don't require highly selective conditions. Yeah.
A great thing about the idea of good and thank you Jocko for that is is in team culture when you've got 53 employees as we do currently, and you've got lots of teams throughout the organization. I think it's really important that we train them to approach from good. We, we are in the business of organizing chaos.
If there wasn't chaotic forces in the world, we wouldn't we wouldn't be needed. Mm-hmm. We take properties that are dysfunctional, we bring them to functional, but in the midst of disrupting the pro, the norms on those properties there's a lot of push-back. There's a lot of status quo that. Tries to say, well, it's always been this way, you know, and tries to, to block what we're doing.
So good is important and we want our teams to start with good. 'cause every day someone's going to throw a punch, or every day something's gonna happen. Not, yeah, throw a literal punch, but I mean, something's gonna enter the organization that's gonna be block things. Okay, good. What are we gonna do with that now?
Yeah. And you know, some organizations have much more of a, you know, c y a approach, which is like, you know, manage your own turf, don't stick your neck out, don't take risks. And we believe that that is absolutely contrary to a healthy investing environment. And so we ins we try to inspire our team members to be okay with.
Taking measured risks to be okay with being confronted with a problem. And how do you address that problem? Because resilience is. Perhaps one of the most important traits that an investment company can have because you, we cannot control our environment. We can simply respond to it, anticipate it, and and correct for that.
Summary
Joe and Ryan discuss how they try to build resilience in the organization.