By Matt Slepin, founder & managing partner, Terra Search Partners[dropcap]T[/dropcap]his interview series is framed by my belief that great companies in the real estate succeed in the long run not just by their great assets, but also by an inherent DNA in their business platform. The DNA of a business platform is defined by intangibles like culture, technology and systems, training, people and structure, diversity and maybe culminates in succession. This interview is with Kennard (“Ken”) Perry, the President and CEO of The Swig Company. The Swig Company is a family-owned company with holdings comprised of approximately 8.5 million square feet of diversified, limited-risk, urban office property. Here we talk about the unique aspects of being a family-owned organization and how that shapes the organization’s DNA and weighs on operational strategies.
Matt Slepin: We are here to talk about what I call the two sides to the real estate organization. The side that is always in the press about, “What do you own? What do you buy? What do you sell? What do you finance? How much money do you make? What big leases have you signed?” What we hear less about are the organizations that sit behind the assets, and the longevity that can be created through those organizations. I call it the DNA of an organization. Does the DNA of a real estate organization matter? Or is it really just all about the collection of assets? Can DNA help distinguish between the value of the collection of the assets, and the value of the ongoing enterprise that you create? And how does this question fit into the context of a multi-generational family owned, but professionally managed business?
Ken Perry: DNA is fundamental. I think it matters a lot, and I don’t think you can separate it from the role assets play. That DNA is parallel to the culture, and it is absolutely intertwined with your transactional and tactical strategies. Ours is a generational investment company. Another company looking at the same assets we’re looking at might be an opportunistic, transactional company, so they are trying to generate big returns quickly. Our DNA is focused on longer-term thinking, so we look at assets differently. That means we also recruit different people with different kinds of skill sets. It is incredibly important for a company like ours to match our DNA with our people. If our professionals were all highly motivated by quickly getting in and out of assets and moving on to the next thing, that would be a problem for us because it would be a mismatch with our DNA.
Slepin: I think of the word velocity as an important concept to differentiate different real estate businesses. High-velocity people won’t be happy in a long-term hold company.
Perry: That’s a great way of saying it. It’s important to think about this with the right words. A high-velocity shop doesn’t mean people don’t have a long-term perspective. It could be a high-velocity shop that has existed for a long period of time, with a lot of tenure amongst its people, and the culture is important to them. The DNA of the organization is important to them, too. It isn’t just about velocity of transactions.
At The Swig Company, we are a generational investment company, so the velocity of transactions matters less. Our image in the community might be one of a conservative family company, but that’s probably because we only do a few transactions a year. It’s sort of the slow and steady approach, and if we look in the last 20 years, it’s served this company and its ownership incredibly well.
Slepin: So let me put a separate concept alongside velocity. The different vector is “risk-tolerance.”
Perry: We’re very low-risk.
The mission of the company is to provide to a group of investors, which in this case happen to be family members, a stable, growing and predictable income stream. In our case, we do that with a portfolio of commercial real estate. We’re conservative in our underwriting, we maintain meaningful liquidity and we don’t over leverage. We work very hard to make sure we’re not forced to do something at the wrong time. That might drive us to the lower-risk part of the profile, but that’s fine because being forced to do things at the wrong point in time is how people lose a lot of money in real estate.
Slepin: How do you convince the family that a diversified, financial approach with an investment advisor isn’t the way to go instead of putting all the eggs in the basket of this company, in this sector?
Perry: We make it very clear that we’re not a family office. We tell our investors to think of us as the real estate portion of their personal investment portfolio. We don’t say, “Give us your money, and we’ll put it in a diversified pool of investments across asset classes for diversification purposes.” We think we can create a stable, growing, predictable, income stream from real estate, and that is our investment thesis.
Slepin: How concerned is the family about the way the business – which obviously has their name on it – is perceived in the marketplace?
Perry: We have for many years now, as an operating company, been of the mind that if you treat vendors, brokers and tenants well, that goodwill will come back to you. We are not a rigid company. We recently asked brokers, “What is it like to bring a tenant to a Swig building?”
“I like bringing tenants to Swig buildings,” is what we hear. “They do what they say, say what they’re going to do, pay on time, and are relatively easy to work with.” I think that reflects on the family in the community. I think they like hearing this is a good company, and that helps us as an organization. The family always provides direction, but as long as we’re meeting their needs and the people they interact with here at the company and out in the community are providing positive feedback, they’re going let the company keep doing what it’s doing.
Slepin: How does governance work with a family company, and how does it pass from generation to generation? To what degree are family members involved and how you structure that for the long-term?
Perry: I think the most important part is that each member of the family individually has to decide that they want to stay together as part of a family business. It’s more difficult to survive generational transitions if you don’t have that piece of the puzzle sort of put to bed. Then you can begin to deal with governance; things like who’s on the board and how are people represented. Each new generation can add complexity. We’re in a transition from third to fourth generation, and it’s conceivable that the current arrangement begins to blur. As the fourth generation comes along, they are more culturally and geographically dispersed than their elders, so they could decide to govern in a different way.
Slepin: Let me shift gears and talk about leadership transition. You succeeded Jeanne Myerson when she retired. Going through a generational change with the family is one thing, but what was it like to make that kind of change on the senior management team?
Perry: It was seamless. What made that work so well was that Jeanne had built an organization that was fully in place. It’s kind of a funny thing, but there shouldn’t be anybody in an organization that is irreplaceable. That’s a bad strategy for an organization. It can sound like a sort of Catch-22, but no single employee should be in a position where no one else can do what they do. Because then if you’re gone, that’s a problem for the organization as a whole. You need back-up and cross-training and flexibility. What happened with Jeanne’s decision to step down is we were fortunate that she and I had worked together for a long time, and especially fortunate that I had been able to work with the family for a long time. That meant there was a lot of confidence amongst the board, the owners and the employees that the transition would be smooth.
That kind of transition at a family company is massively different than what might take place at a large corporation or public company. What’s unique about a family company senior management transition is the personal aspect, because ultimately the new leader will have to be able to relate to the family members.
Slepin: Within the framework of what you have described, how do you structure compensation for people who will be with the company for 20-plus years to make sure they are incentivized alongside the family?
Perry: You can create a circumstance where people are incentivized to grow the wealth of a company, and grow the company, and remain here over a long period of time. It’s just that we have to package it in a slightly different way. Frankly, one of the ways we do that – and I think it would be music to your ears – is making sure compensation is about more than just dollars; it is about culture. For example, what I tell someone looking at coming to work at Swig is that we don’t want people to work 80 hours a week forever and ever. They might be asked to work those kinds of hours occasionally, but if they are working those kinds of hours consistently, then we’re doing something wrong. What we have is a proactive group of professionals that is also quite stable. In 2008-2009, we didn’t lay anybody off. We paid bonuses. This is who we are and it is part of our brand, just as our new office space and our new Web site. Some people want more aggressive, transactional positions. That’s fine. But there are quality-of-life benefits that attract the right people who are incentivized to follow the same mission as the family: stable, predictable growth. Those are the things we try to do.
Slepin: You mentioned a new Web site. When we did our Web site, we tried to hone in on like ten words that describe the company.
Perry: We did something similar, and it was quite interesting and even lovely. We asked the Web site firm to interview various stakeholders, some owners, family members, some partners, some brokers, people in the community, and then we asked them to interview a number of our employees. They came up with a few key words to describe the company, and we used those concepts as part of creating our message. It was fascinating, and it gets us right back to this culture issue.
Slepin: Right back where we started. Thank you!