“We thought that the Great Recession was a once-in-a-lifetime experience in our industry. Little did we know that this pandemic was going to be worse by a factor of 10.”
That’s Jim Merkel, founder and CEO of Rockbridge, an integrated hotel investment firm that saw demand at its properties drop 80 percent this past March — worse than the impact that both 9/11 and the global financial crisis had on the business, combined.
Merkel has been through market disruptions before, and he took the CEO seat at Rockbridge in the midst of one. From day one, he and the firm have applied what they’ve learned from crises to create a system that he feels gives the company not just a buffer but a competitive advantage when the market is upended.
“We had the experience,” Merkel says. “We had prepared for the downside. It’s not any fun going through it, but you do what you have to do. We leveraged our experience. We’re more experienced as a team than we’ve ever been, and it’s definitely made a difference through this pandemic.”
Trial by recession
In 2008, when the effects of the Great Recession really began to hit the market, Merkel became CEO of Rockbridge and the firm went through a partnership reorganization.
“My inaugural leadership opportunity was leading through the global financial crisis,” Merkel says.
The company’s reorganization, he says, provided it with one leader to drive quicker decision-making. Its cash management approach was also critical to its ability to persevere, enabling it to have a strong handle on its cash position — where it’s at and the state of its reserves and protections.
That ability was gained when Rockbridge set out to create a cash management system to automate the manual generation of its reports. The company wanted to capture information, have the checks and balances to make sure that it’s accurate, and produce reports and analyses that would enable it to better manage its investments.
Rockbridge also learned through the global financial crisis that an engaged investor is the best investor. Engaged investors, Merkel says, both challenge you the most and support you the most. And when investors know what you’re doing, and they know what’s going on, they’re not shocked by circumstances or caught off guard by their investment situation.
So part of the end goal of that same project was to create an accurate, real-time report for investors that helped them understand the ins and outs and the cash needs of their investment globally across multiple vehicles.
“We wanted them to know, as transparently as we could, what was happening in their investments,” Merkel says. “People that didn’t ask questions pre-global financial crisis were asking lots of questions post-global financial crisis because their boss and their boss’s boss were asking how much cash they had. They were trying to get a grip on their financial situation.”
Lead the change
That project, however, wasn’t easy. It took longer and cost twice as much as the company expected. Rockbridge built a software development group inside the company to construct the system, but it wasn’t just an IT project.
It took a significant amount of work across the firm to put the system in place. Team members across every department had to adopt the system — something they had to do in addition to their typical work. That was hard on the team, so to ensure the project got over the finish line, Merkel applied the leadership skills that he’s learned over the years.
“I was a new CEO and I knew it was important,” Merkel says. “I think that rolling up the sleeves, being right there in the middle of it, being available and real to talk about it, empathize with what they’re going through and trying to keep at the forefront why we’re doing it — the vision that it truly was for the team and not only for the organization.”
It took about three years for the project to be fully implemented and ingrained as part of the organization. While getting everybody on board mentally at the start of such a big project had its challenges, keeping people engaged was a lot more work than Merkel expected.
“The toughest part is toward the end of the project, where people are tired and they’ve put a lot of time in and they want to see the results,” he says. “Part of a transformational change is they started getting the parts of the project a year in, so they got to see the success and how it impacts their job. And so you get to see a little bit of a glimpse. Then to fully get through it took a couple years.”
Survive the shock
During the Great Recession, Rockbridge had positioned itself to have cash reserves and was able to manage its portfolio through the difficult period and not sell off assets just to stay afloat.
Merkel says the hospitality industry is a growth business. Companies need to be prepared to weather an unexpected demand shock. And if a company can survive that shock, it stands to reap the benefits when the market comes back and assets grow beyond the prior highs.
That’s what happened to Rockbridge. It did its first post-Great Recession deal in August 2009. By February 2010, the market hit bottom and the company was able to grow its business consistently for the 10 years that followed. The hope it has now is that same pattern will repeat post-COVID, so it’s applying lessons learned and putting its systems to work to make that happen
Rockbridge made adjustments quickly when the government-mandated closings began. With its workforce working from home, it set out to manage its cash first by running open and close models — something its system enabled it to do — to determine whether to keep properties open or close them. That process started in March, and by the first week in April, the company was applying its strategies, ultimately deciding to keep the majority of its hotels open with a skeleton staff.
“You learn quickly that closing is not free,” Merkel says. “You still have fixed costs that you’ve got to pay for.”
The next step for Rockbridge was to modify the 76 loans out on its investments. Rockbridge had strategically borrowed money from balance sheet lenders it worked with to develop strong relationships, so it was able to get deferrals and had the support necessary to make it through a tough situation.
“Those strategic decisions that we made to not be overleveraged to begin with, and then having balance sheet lenders that are long-term partners, really has made a big difference in managing through this,” Merkel says.
The market started to come back around June but was about 50 percent off from typical demand. And that’s where it remained, as of the date of the interview, with the exception of some seasonal fluctuation.
So far, it seems the investment of time and effort Rockbridge put in to establish its system is paying off. It enabled the company to immediately mobilize information and build out models, which has led Rockbridge to outperformed its forecast through September.
Point of light
Merkel says leaders set the tone during a disruption, so it’s important that they’re transparent, authentic, empathetic and engaged to understand what the team is going through, but to also be the point of light that keeps people’s chins up and looking to the horizon.
Leaders should also be prepared to dive in and fix issues as they arise, as well as foster communication up through the organization so that they are aware of what’s happening. That’s facilitated by a culture in which people are comfortable sharing their feedback in a way that makes everyone better.
“That’s hard,” Merkel says. “It takes constant work. It’s harder remotely, as well, because a lot of that happens at the water cooler or in the hallways. So you’ve got to really lean in and engage and pay attention and be curious and lead your team through these difficult times. And then you’ve got to act. Ultimately, somebody’s got to make the big decisions, and you’ve got to be engaged, take in all the information, and you’ve got to make tough decisions and make them as quickly as you can. Put yourself in a position where you’re getting good information to make good decisions quickly.”
- Each crisis offers a lesson.
- Prepare your company to weather any storm.
- Transformational change requires a champion.