From the outside looking in, most would assume that Altus’s “product” would be defined as the best possible investment returns from real estate equity and real estate debt. We don’t see it that way. We believe our product is the best possible investment “experience”. The experience is far more encompassing than just investment returns. It includes communication, transparency, consistent reporting, and of course strong returns. But we then take it one step further and define “strong returns” as strong risk adjusted returns.
In business there are 1) things we know we know (increasing the NOI increases the relative market value), 2) things we know we don’t know (what the ten-year treasury rate will be 12 months from now), and 3) things we don’t know we don’t know (which are…undefinable). It is the last of these three categories that is far and away the most important to our ability to perform, either within the context of business or investment success. In the second category lies risk; but known risk can be quantified and often mitigated. The third category contains uncertainty, or said another way, risk that is unseen, unquantifiable, and unmitigable. Each degree we are able to broaden our vision into this third category and learn more of what we don’t know, the better we are able to reduce risk in our decision making, especially as relates to catastrophic risks (risks in which bad outcomes can sink your ship). What we don’t know we don’t know can also be known as our “blind spots”.
Many businesses produce products or experiences based on what the decision maker thinks is important. Very few turn out well. For every Steve Jobs and Elon Musk who are able create products that people didn’t know they needed but end up desperately wanting, there are hundreds, or even thousands of businesses that never gain traction because their offering just isn’t compelling.
The decision maker knows what they know (i.e. they think the food at their restaurant tastes great), but because they think their food taste great, they never bother to think about finding out what their potential clients think of their food (they don’t know what they don’t know), and so, as customer after customer finds the food distasteful and never comes back, the business flounders.
As businesses grow they become increasingly complex. Often there is more and more in the running of those businesses that we, as the decision makers, don’t know we don’t know. Tools for reducing our blind spots become key, and this is where I find so much value in “What if”.
2009 – What if home prices fall further? Homes are far below replacement cost, there is considerable rental demand and rents are producing a better yield than nearly anything else available…who cares if home prices fall further, they will have to come back some day.
2014, 2015…2021 – What if interest rates skyrocket? Investment property prices, with a focus on free and clear properties, are going to fall and owners/sellers will get in trouble due to the increase in financing cost.
2014 – What if investors don’t just want the best absolute returns, and instead are looking for the best returns for the amount of effort and stress that goes into producing those returns? Then we need to change our investment focus to find the opportunities investors want, while at the same time improving our operations to provide a vehicle that is easy to use and reduces stress as much as is possible.
2018 – What if there was a way to offer investors participation in the future growth of Altus? Lets come up with a structure so that investors can somehow own both the operating company and the real estate portfolio despite the differences in legal and tax structures.
2020 – What if there was a way to provide Altus ownership to team members to increase the likelihood of full alignment with the goals of the company, which are dependent in being in full alignment with our investment partners? We need a stock purchase plan.
2022 – What if we didn’t make any purchases for 18 or 24 months while the market figures itself out? Whew, we can stay in business.
2023 – What if there isn’t a recession?
2023 – What is interest rates keep going up?
2023 – What if interest rates suddenly move downward?
2023 – What if investors get scared due to market volatility or negative news and stop making new real estate investments?
2023 – What if, what if, what if…
The what if question helps our brains contemplate events or inputs that we might otherwise dismiss as unlikely, or because of the blind spots, not be able to contemplate at all. Altus has been extremely fortunate to have produced a line of winning investments over the years, with even some of the projects that didn’t go as planned still turning out as winners (just not as big of winners) because we had contingency plans in place from asking the what if question. There are a couple investments that did end up in losses. In all three cases our what if missed uncovering what ultimately ended up happening, in one case uninsured domestic terrorism, in another our investment partner passing away in a plane crash and the project finances being locked up because of it, and the third being severely impacted by COVID. Had our what ifs gone far enough, documentation could have been set up differently in the first example, the capital stack could have been structured differently to help mitigate the COVID impacts in the third example, and in the second example…maybe a disruption of business insurance policy could have been obtained.
In 2009, while working to recruit a panel on startup business funding, I was referred to Michael Adler. He didn’t end up helping me with the panel, but at my insistence he eventually allowed me to buy him lunch. That lunch turned into another, which eventually turned into his wife and he making an investment in an Altus project (the Altus Hybrid Growth Fund). I was even more fortunate when that investment turned into Michael being an advisor to Altus, a role he still holds today as a formal board member to what is now a much larger company. I also consider him a dear friend. If you listen to Michael talk about it, his success would seem to have been derived in tripping from one learning experience to another. Out of all those struggles Michael has accumulated a treasure chest of anecdotes and incredibly useful little sayings. One of my favorites is “Genius of the And”.
Humans by nature often think in bi-modal terms. Our brains crave explanations, and in most cases, if we aren’t vigilant we will glom onto the first thing that solves the internal dissidence of not knowing. If we aren’t a Democrat, then we must be a Republican. If we don’t support the Ukrainian war, then we must love Russia/Putin. If we get news from MSNBC then we must not get news from Fox, if we get news from Fox then we must not get news from CNN. Etc., etc… In our haste to put things into tidy little boxes our analysis becomes replete with assumptions that in business and investing can, best case, cause us to miss opportunities, and worst case, create losses. By keeping the “Genius of the And” at the forefront of our mind when doing analysis, our brain is able to expand to include other possibilities. Someone may not agree with the forced COVID vaccines AND not be against getting the vaccine itself. Someone may support the second amendment AND support Gavin Newsom’s push to use Article V in the constitution to modify or remove the second amendment. A person can make a great investment AND still lose money, and conversely, a person can make a terrible investment, and still make money (a lottery winner would certainly fit this description).
By then combining the what if with the Genius of the And we are able to put our blind spot reductions on steroids.
For instance, what if oceans rise as many experts forecast? and what if they don’t? turns into something broader like: What if ocean rise is not man-made AND is still occurring? Or, what if ocean rise is caused by man AND is going to reverse because of X, Y, Z. The second two questions are largely the same as the first two. In regards to our investments, by adding the AND we are able to acknowledge our internal beliefs (i.e. rising oceans are human caused, they aren’t, or we don’t know) AND still consider possibilities that could impact our investing. Maybe we don’t believe that government efforts around climate change are useful, but that doesn’t mean we should ignore the possibility of climate impacts if we are investing in Florida. Or conversely, maybe we 100% believe temperatures are going to continue to rise and wreak havoc, but that doesn’t mean there isn’t a possibility the outcome of those temperature increases end up being different than assumed. And it is possible the very changes that are feared could also separately create opportunity.
- What if something is difficult AND it still ends up being a good thing?
- What if we have convictions AND can still contemplate the impacts of being wrong?
- What if something appears to be the best investment ever AND we will walk away because the long tail risk is too costly?
- What if an investment appears likely to lose money AND it is an investment we should make because the potential upside severely outweighs the downside?
- What if we have investors that want low risk returns AND the best risk adjusted returns have higher risk profiles? What if our investors want higher returns AND the best risk adjusted returns are lower on the risk (and return) spectrum?
It is important for Altus to produce good returns. We couldn’t stay in business without doing so. Asking what if and using AND helps us to produce good returns. More importantly, in producing good returns, these tools help us largely avoid catastrophic impacts from unexpected events. Nowhere is this better exhibited than in the long-term fixed rate debt across our portfolio. That debt was more expensive than the adjustable-rate debt we could have used, reducing our ability to underwrite opportunities to winning prices, and in some cases reducing our apparent competitiveness to investors against other sponsors who were able to show better pro forma returns with lower financing cost assumptions. But because we used these tools, our investments remain sound, and our investors continue to receive distributions.
It goes further. In asking these questions about business matters, we have been able to focus efforts on things that are important to our clients (investors). Those items mentioned previously (consistent and timely financial reporting, strong communication, continuity of the staff, confidence that we aren’t going to chase an investment purely so we can provide a place for investors to put money, etc.) are then elevated to operating focuses, allowing us to improve in areas more quickly with less wheel spinning than we would otherwise have.
Both business building and accumulating wealth can be boiled down to some pretty simple tactics, but simple and easy are not necessarily the same thing. The more we turn what we don’t know we don’t know into things we know we don’t know or preferably things we do know, the more we are able to reduce the risks associated with our business and the investments we make.
About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at firstname.lastname@example.org.