A Roadmap, With Shortcuts

By Paul Bubny
Whoever coined the phrase “on the straight and narrow” probably never grew a company, and certainly not one in the commercial real estate space. The pathway to growth, from a company’s founding to its attainment of a market-leading position, isn’t necessarily linear. There may be detours as well as traffic jams and, conversely, unexpected shortcuts may arise that speed up the pace.

However, from interviews with industry leaders, each with a different story to tell of managing growth, some basic tenets emerge. One is to build on prior successes while learning lessons from the past. Another is to be on the lookout for opportunities, whether to achieve linear growth or enlarge the platform through acquisitions. Yet arguably the most essential principle of managing growth is having a sense of direction, and communicating it to your employees. “In 2007, I went to hear Jack Daly speak,” says Walker & Dunlop’s Willy Walker, referring to the renowned motivational speaker and author of such books as Hyper Sales Growth: Street-Proven Systems and Processes. Walker recalls, “It was a group of CEOs and company presidents, and Jack said, ‘The most important job you have as a CEO is not to manage the business but to tell everyone where you’re going.’ ”

At that executive conference, Walker recalls, Daly drew an analogy of pulling up in front of the convention center in a brand new red Ferrari and inviting an audience member to climb into the passenger seat. “The first question out of your mouth would not be ‘how much did it cost?’ or ‘how does it drive?’ but ‘where are we going?’ ” Walker recalls Daly saying. “And he said that unless you’re answering that question every day for your people, you’re not doing your job as CEO. Since that day, I’ve done little more than continuously tell my team where we’re going.”
The 80-year-old business that Walker now leads as chairman and CEO was a long way from becoming a CRE finance powerhouse when he joined in 2003. “When I came to the company, it had one office and 46 employees.” Today, Walker & Dunlop numbers 28 offices with more than 550 employees. In early May, the company, which went public in 2010, reported 68% year-over-year growth in first-quarter revenues on transaction volume of $5 billion, a 92% increase from Q1 2016.

When Walker came aboard the mortgage business his grandfather had founded in 1937, “The first thing I wanted to do was put my stamp on it,” he recalls. “There were some very significant thoughts about how to grow the company, but when I joined, we were in the midst of a very robust market. So to try to grow the company in 2004, 2005, 2006 was very difficult. We didn’t have a lot of capital, we didn’t have a big brand and we didn’t have a national footprint.”

June 2016 RETS Capture from REFThe company “grew nicely” during those years, recalls Walker, but didn’t really expand. It was left to larger firms to reap the rewards of an expansionary economy.

Then opportunity appeared along the roadside in the form of the 2008 financial crisis. “When the crisis hit and competitors had bad loans on their balance sheets, had gotten too big and had to lay off people, we were still small and had a clean balance sheet,” Walker says. “So when everybody else was pulling back, we moved forward.”

As such, the firm launched an acquisition strategy in 2009, which ultimately brought half a dozen companies into the Walker & Dunlop fold over the next seven and a half years, including two acquisitions that effectively doubled the company’s size each time.

Strategic acquisitions have also been the foundation of the growth that Apple Leisure Group has experienced since CEO Alejandro Zozaya founded AMResorts, a sales, marketing and brand management company, in 2001. To AMResorts Zozaya and his team added first Apple Vacations, a tour operator to Mexico and the Caribbean, and then B2B tour operator Travel Impressions and online vacation booking site CheapCarribean.com. Along the way, AMResorts capitalized on the post-9/11 downturn in travel and lodging to begin amassing a portfolio of hotels and repositioning them for US travelers. The ALG platform also includes destination management company Amstar DMC and Unlimited Vacation Club, a loyalty program for AMResorts guests.

The sum of these strategic moves created what is reportedly the only hospitality company in the US with a vertically integrated business model. At the end of 2016, ALG announced that funds affiliated with KKR and KSL Capital Partners would acquire it for an undisclosed sum. Bain Capital had made an undisclosed investment in the company in 2012, helping to fuel ALG’s entity-level acquisitions.

“There were certainly strong synergies among these businesses,” Zozaya says in charting ALG’s growth. Regarding the tour consumers, “We were able to sell them the package with the destination services and hotel,” coupled with the fact that the hotels were “tailored for the American market looking for luxury in the all-inclusive segment. That was a big overlap between what the business plan would like and what we were already delivering—just organize it, put it together and make it happen.”

In turn, he says, the success of the hotels in turn was anticipated because of the traffic from the tour operator driving bookings at the properties, “especially during the two year period normally required to stabilize a lodging property in terms of occupancy and ADR.” Most hotel operators don’t have the built-in customer base of a tour operator to fill rooms, he points out. Moreover, adds Zozaya, “We’re still a very important driver of traffic to hotels outside of AMResorts,” since 78% of Apple Vacations passengers stay at other properties.

ALG’s level of success took years and multiple acquisitions to achieve. For STORE Capital’s founders, it was a matter of years in the net lease sector and multiple companies to accrue the wisdom that they distilled into STORE’s business plan from the outset. “We’ve taken lessons that we’ve learned in the past with regard to debt structure, and combined solutions that
we’ve invented at other, prior companies to create the balance sheet that we have at STORE,” says president and CEO Christopher Volk, who cofounded the company in 2011 with other industry veterans.

When launching a net lease finance company and guiding it through its early growth, “there are some things you can’t change easily,” Volk says. “One of them is investment diversity. Last year, our top 10 tenants represented about 17% of our total exposure. Meanwhile, 80% of our revenues come from tenants that pay us less than 1% of our revenues. It’s hard to change diversity over time. If you have a tenant that represents 5% or 6% of revenues, it’s hard to make them 3% of revenues.”

Compared to previous firms, STORE is “far more diversified from an investment perspective,” he says. “You’re going to have vacancies and tenants with problems from time to time. Diversity really helps insulate you from some of those issues.”

Rent increases are another area where “you have to set the ground rules early,” says Volk. “It’s very hard to change the rent increase profile as you build these companies up. We’ve made sure that our dividend was well protected. In prior companies that we’ve taken public, we started off with virtually no dividend protection at all and then grew the revenues in such a way that, over time, the dividends had some protection.

“When we took STORE public in 2014, the dividend was very highly protected,” he continues. “Today, it’s even more so, and we’ve done that while increasing the dividend 16% over the past couple of years.”

The result: greater revenue growth for STORE shareholders than in any of Volk’s prior vehicles, including Spirit Finance. “Again, you have to set it up from day one; it takes years to be able to see reap fruits.”

More so than in any of Volk’s previous organizations, STORE focuses squarely on profit center real estate, and also puts an even greater emphasis on directly contacting potential tenants. “We have more relationship managers here than at any company we’ve ever run,” he says. “We’ve really put the focus on our sense of outreach.”

If its employee base has grown in some areas, it’s also been reduced in others. “We outsource things that we used to do internally,” says Volk. “Today we run STORE with about 70 employees out of Scottsdale, AZ”—and that for an investment portfolio of about 1,750 properties across 48 states. “In prior companies with this asset base, we might have had 200 employees. So we’ve learned to run the company much more efficiently in that sense,” Volk says.

Greg Murphy’s 17 years with Natixis have been times of expansion—and contraction. In fact, expansion followed by contraction followed by a rebound to his group’s precontraction size. “When I first joined, the real estate team consisted of 16 or 17 people,” recalls the New York City-based managing director. “It was a new business for Natixis, in its formative stages. At our peak
we had about 55 people. After the 2008 financial crisis we shrunk to 18 or 20, and now we’re back up to about 50 people comprising the real estate finance group.”

Managing growth the second time around has meant doing things differently. “The way we’ve grown the platform over the past seven or eight years has been to focus on our clients and on the life cycle of the real estate finance market,” Murphy says. “We’re one of the few that have a completely integrated platform in that sense.” Prior to the downturn, platform focused mainly on fixed-rate securitizations.

He charts the different types of financing a Natixis client might seek at different stages of a property’s life cycle. “If one of our important clients is buying a parcel of land or a building that they’re transforming to a new use, we can make a loan on that,” Murphy explains. “If they’re acquiring a property that perhaps has been under-managed and they want to transition it, we can make a loan on that and provide funding for future expenditures like capital improvements, tenant improvements and leasing commissions. We can also provide permanent financing on an already-stabilized property. We’re not simply offering a CMBS loan or a bank balance sheet loan; we’re offering what we like to think of as whole-client solutions.”

Hand in hand with that wide-ranging approach to CRE finance is the breadth of experience among the senior lenders who have joined Murphy’s shop since the downturn. “Natixis’ senior bankers have a wide range of backgrounds in bank and nonbank financing, insurance company financing, so they understand the broad range of CRE financing,” he says.

In the view of Jana Turner, principal with CRE search firm RETS Associates, a key element of company growth is having “a defined recruitment and retention strategy. This is not just a project; it has to be a priority. An organization has to put as much time and money into the acquisition of talent as it puts into deals,” because it’s the talent that makes the deals happen.
“There are a lot of firms that are constantly recruiting because their work environments are terrible,” says Turner. “They don’t want to hear it, but you have to do that gut check.”

A key motivator in employee decisions to seek other opportunities, she says, is managers’ failure to provide a clearly defined career path. “You can’t just hire for today,” she says. “You’ve got to be able to articulate what their life would look like down the road. It’s not necessarily about climbing the ladder, but rather, what additional learning and skill sets they can gain
from coming to this organization.”

From the standpoint of what organizations can gain from their new hires, Zozaya says it’s important to attract and retain talent who are “not only knowledgeable but also engaged and passionate
about what they do.” Helping to fuel that engagement and passion is the company’s ability to convey its objectives to both current and prospective employees.

“We have more than doubled the company in the past three and a half years, and the goal is to double it again in the next four years,” he says. “We have communicated those plans in a realistic and understandable way, and that makes the people who are already part of our group become committed to stay, push for the goal and obviously participate in the success.”

Goals can and do evolve over time, of course. In Walker’s view, it’s essential to keep establishing them, to keep moving forward. “When I joined Walker & Dunlop, did I ever think the company would have over 5% market share of all multifamily lending in the US?” he asks. “No. At the same time, I’m a reasonably ambitious person and I’ve been successful at consistently setting new goals and markers for us to march toward.

“So if you asked me that question in 2003, I would have said, ‘No way, not in my lifetime.’ In 2010, I would have said, ‘Yeah, maybe we can get there.’ And if you asked me that question in 2012, I would have said, “I’ve got a perfect strategy to get there.’ We accomplished that goal in 2016, and now it’s on to the next growth objective.” ◆