Rule 1 – Focus on three “plays”
- Occupancy Plays – Properties with vacancy or upcoming lease expirations that can be purchased, leased and sold for a profit. Such opportunities may result from poor operators, from owners who lack capital or equity or from lenders who want foreclosed assets off their books.
- Transformation Plays – Properties that can be converted physically in a way that increases value and generates a profit. These opportunities might range from unattractive properties that require a face-lift to functionally inadequate properties that can be redesigned to raw land sites or properties with excess land that can be developed.
- Basis Plays – Properties available at prices that are a good value and offer cash flow and appreciation over time.
Rule 2 – Limit geographic area and product type
- Stay within what we call the “Davis 50,” the geographic area bounded by a 50-mile radius from our Newport Beach corporate office. This area stretches from Chatsworth to north of downtown LA to the Inland Empire West and includes the Mid-counties and all of Orange County. Our only exception is established areas of San Diego.
- Focus on well-located office and industrial properties
- Place special emphasis on multi-tenant projects that require limited tenant improvement costs, such as industrial business parks. More small tenants with short-term leases is best because tenants have less negotiating leverage and rental rates can be adjusted most quickly to optimize occupancy.
Rule 3 – Use good judgment
- Trust our own judgment and experience. Instead of over-relying on quantitative measures like IRRs, consider such factors as the number of bidders and how quickly buyers must perform.
- Apply an appropriate margin of safety depending on the expected investment horizon. The shorter the intended hold period, the greater margin of safety should be built into the purchase price.
- Sell when the time is right: “when everyone is buying, accommodate them.”