[piano intro] - Hello, I'm Nido Qubein.

Welcome to "Side By Side".

My guest today is a Navy veteran who grew up on the Outer Banks of North Carolina.

For nearly half a century, his family has many short-term rentals there.

The took over the family business, and during the global pandemic, he helped it survive.

The Harvard Business School has now turned what he did into a case study of how to build trust during a time of uncertainty and fear.

Today, we'll meet Clark Twiddy, President of Twiddy & Company.

- [Announcer] Funding for "Side by Side with Nido Qubein" is made possible by.

- [Narrator] Coca-Cola Consolidated is honored to make and serve 300 brands and flavors locally, thanks to our teammates.

[upbeat music] we are Coca-Cola Consolidated, your local bottler.

[upbeat music ends] - [Announcer] The Budd Group has been serving the southeast for over 60 years.

Specializing in janitorial, landscape, and facility solutions, our trusted staff delivers exceptional customer satisfaction.

Comprehensive facility support with the Budd Group.

- [Narrator 3] Truist.

We are here to help people, communities, and businesses thrive in North Carolina and beyond.

The commitment of our teammates makes the difference every day.

Truist: Leaders in Banking, Unwavering in Care.

[upbeat bright music] - Mr. Clark Twiddy, welcome to "Side by Side".

I read about the case study that the Harvard Business School wrote about you and your company.

You're famous, man.

- Well, I'm certainly not a celebrity.

In reality, I'm just a steward and a servant to a lot of other people, but it's a pleasure to be here, and we are fortunate to do what we do in North Carolina.

And to your point, one of the most beautiful places in the world.

- Yes.

So, tell us about the Harvard Business School.

First of all, why were they interested in you and your company, and what is it that you did that attracted the attention of that very highly-respected business school?

- We go back to the early days of the pandemic.

The early days of 2020, February and March were terrifying.

And according to Google, there are roughly 3,200 counties in America.

Dare County, where we are headquartered, the Outer Banks, was the only county that I'm aware of in North Carolina to close access.

We only access Dare County via bridges, so that when bridges are closed, access to our visitor economy, which is overwhelmingly our lifeblood, all of a sudden goes from full-speed to zero.

And the analogy I use is an airplane.

At that point, we begin, as a business, to begin to wonder how much runway we have left, how much oxygen we in the room.

So, a big chunk of our business is being a judicious and responsible steward of other people's investment money, and the way we communicated around how we were using their money, what we anticipated; most importantly, what we didn't know and the rhythms around that, I think, attracted some interest, and we were fortunate in our homeowner community to have relationships at the Harvard Business School, and that case study became a real thing.

And we had been up to the Business School to talk to students about it.

It's been a real treat.

- What was the essence of the study?

What did they marvel about and what were their conclusions?

- In a very direct sense, it's about our ability to tell you we have no idea what the future of your asset is.

And in doing so, also maintain your trust and your credibility and our ability to keep that money and put it to a productive use.

But as you can imagine, if you and I were to say, "Would you give me some money?

And I don't know if you'll get it back or how long that will take," you may not be inclined to keep it with me.

And yet, keeping it with our company was the only way we would survive.

- You close the bridges to the...

It's called Dare County because of a family.

Is that a family name?

- It historically was named after one of the first English settlers to America.

The Lost Colony, we may recall, was actually in Dare County.

So, Dare County has history going back to the 1500s, but the Outer Banks broadly is multiple counties, but the centerpiece of the Outer Banks is Dare County.

So, it's a municipal component, but they had the decision to close the bridges, - The Outer Banks begin where and end where?

- Roughly we think about it from the Virginia line, all the way down to Ocracoke.

And then, there is a school of thought that the Southern Outer Banks is also along the Crystal Coast of North Carolina.

And the takeaway there is it's one Outer Banks, but very different markets.

Raleigh and Charlotte go on vacation to the Crystal Coast.

DC Metro, Northern Virginia, Pennsylvania, come to the Northeastern, the Northern Outer Banks.

So, very different markets for one destination.

- Is Duck the heart of the Outer Banks, or just the most famous one?

- It's one of the most famous ones.

We generally think about the Wright brothers.

We generally hear Nags Head and Kill Devil Hills, but they're virtually indistinguishable from one another.

- How many people live there year-round?

- Depends a little bit on how we measure it, but we would find agreement if we said roughly 40,000.

Interestingly, in the summertime, that population will swell to 500,000, - 40,000 to 500,000.

- I tend to think it's actually more than that because it's tough to count heads and beds.

We can monitor water usage as a proxy, but we roughly think it's 10 times a seasonal population as compared to a full-time resident population.

- And the Outer Banks, is it different cities with different municipalities, or is it just one...

I'm trying to understand the governmental and the utility services and so on.

Who manages all that?

- That's a great question.

The Outer Banks, generally as a destination, doesn't have a specific zip code, and different counties will have different approaches.

For example, Dare County has several municipalities; Kill Devil Hills, Kitty Hawk, Duck.

Currituck County on the Northern Outer Banks is one of three counties in North Carolina that does not have an incorporated town.

Hyde County, Ocracoke, also doesn't have a stoplight.

So, you have three very different thinking models relative to one destination that has been good and bad.

- Mm hm.

I heard that Dare County, or perhaps Duck, that the median home value in Dare County is the highest in the state, or certainly one of the highest in the nation.

Am I right on that number?

- You were right in thinking about that, and one of the reasons that explains that is the fact that so many houses on the Outer Banks were purpose-built to be vacation homes.

Vacation homes are our factories, and they produce revenue.

- They were built for that purpose.

- They were specifically built.

The Outer Banks leads the nation in many ways in that it was one of the earliest custom-built vacation rentals.

Our earliest vacation home on the Outer Banks was built in 1850.

And today, the Outer Banks clearly is one of the national leaders in the vacation rental industry.

- Is that because there's a beach there?

What is the primary attraction to that part of the country?

- We are a day's drive from 60% of the population in the United States.

Sometimes I'll say that's a tank of gas from so many metropolitan areas.

And second, we continue to be, despite the development, one of the great unique natural environments on earth, - We do have constant fear, do we not, about hurricanes and such worrisome issues in that part of the state.

- We do.

Anytime we live between big bodies of water, we live in awe of mother nature.

We are keenly aware of how weather, climate change, all these kinds of things, sea level rise, could impact what is our overwhelmingly dominant visitor economy.

- So, when we had this pandemic, which eventually got you this study in the Harvard Business School, you said that you shut down all of the bridges, hence there was no access coming into the area.

Was that just Dare county or everywhere?

- It was just Dare county, but because of the transportation networks, that also impacted the northern Outer Banks, Corolla, and the beaches, and also Ocracoke to an extent.

So, it very much disrupted the economic activity of the destination.

- So, you shut down those bridges to make sure that people don't come in, and perhaps we have a spread of COVID.

Was that the primary purpose?

- We have a very limited healthcare capacity.

And the fear was that, should there continue to see an outbreak of the pandemic, we simply didn't have the resources to treat what would be an increasing number.

- But you still had somebody coming in to bring food and supplies and.

- Essential activities.

And there's some definitions around that.

Essential folks were still allowed on and off the island, but visitors were not.

- Mm hm.

And how did people deal with the economic downturn?

I mean, they couldn't they couldn't rent a home.

So, there goes Airbnb and variable and all the rest of it.

Obviously, restaurants and hotels, motels, you know, whatever, didn't have any business.

How did people survive?

- That was a very emotional time.

It was candidly a scary time.

When revenues go to zero and costs do not, many of our industries, of course, in North Carolina have fixed cost relative to property, plan, equipment.

Most importantly, people, the bankers don't typically say, "Don't worry, you don't have to pay me."

So, that was compounded by the decision to close the bridge was not necessarily based on a framework of variables; if this, then this.

It was an emotionally charged decision based on fear.

And that meant that, correspondingly, the decision to reopen the bridge did not have a framework.

The point of that is it was very difficult to predict when the bridge would open again.

So, if you're judging the amount of runway in front of the airplane, it's tough to know when you'll be able to stop.

And lots of folks were getting very worried; the federal government, payroll protection plans, as you can imagine.

That was very difficult.

And candidly, we were a couple of weeks from running off the end of the runway, which, financially speaking, means bankruptcy or laying off people that we'd work alongside every day, which would have been heartbreaking.

- Mm hm.

Absolutely.

Help me understand how, if the median home value is so high, how can someone justify purpose building, to use your term, a home for rental purposes?

- We have studied, for now 50 years, the financial performance of what I'll call residential-operating real estate.

We typically see the price of a home is 10 times the annual operating income of a home.

So, if a home roughly... - Is that a triple net number or is that a gross number?

- It depends on several different variables, but that's a sophisticated investor comment.

Depends on debt structure, depends on your risk tolerance.

It depends a little bit on how often you want to use your home.

One of the thing that separates a vacation rental from, for example, a treasury bill or a Exxon stock is that it has utility; you can use it.

You may, and I encourage homeowners to decide to use their home.

And as a reflection, the revenue will go down.

So, it very much depends.

But a lot of financial reporting, these homes in many cases are alternative investments to a stock market, a bond market or other investment vehicles.

- And many, I suspect, may be in trust for estate planning purposes, yes?

- There are two kinds of homeowners: the emotional homeowners who wants this to become a family legacy, and the homeowner who this is purely an investment, and I want you to maximize revenue and minimize cost for an extended period of time.

- You probably don't wanna answer this question, but is it safe to assume, therefore, if the values are so high and there's dependent so much on tourism, and there is an alternative source for revenue for these owners because they're renting their homes, the tax base, therefore, is higher.

Would that suggest that I'm paying more taxes per hundred dollars, or am I paying less taxes?

- Well, there are two... - $100 of valuation.

- That's a great question.

And you know, when it comes to tax structure, there are essentially two variables in this real estate.

There's valuation and rate.

So, when we work with local-elected governments and they say "Revenue neutral," we can obviously... - Valuation meaning how much a home is valued for.

- Exactly right.

Rate is what percent of what you're paying.

- Exactly right.

- Yes.

- So, for example, if we are targeting a revenue-neutral outcome, we can adjust valuation.

In some cases, folks will say a valuation is clearly below market.

But we can then adjust rate.

And politically, sometimes no new taxes, no tax increases.

- Well, you see that in in Figure Eight Island.

You see that in Wrightsville Beach.

You see that across the coast.

You also see it in Florida all over the place in Palm Beach and so on, where people are always trying to adjust those.

- Exactly right.

But gimme an idea, like, if a home is, I think the median value that I saw was, this may be old information, $580,000.

- It may even be north of that depending on location.

- And that's median.

- That's median - Equal number above, equal number below.

So, there's some homes that cost... - I actually think, in some communities, the median approaches a million dollars.

So, roughly speaking, if a home is a million dollars, we would guess, on a back of a napkin, the home generates a hundred thousand dollars a year in what I'll call net operating income.

- [Nido Qubein] Okay.

- And where we see that from a labor force is Dare county is the fourth-highest state in North Carolina, fourth highest county, rather, in generating taxes; a multi-billion dollar tourism economy with 40,000 population.

If you compare that to Mecklenburg and Charlotte, a much higher number, but a much higher population base.

Dare County's workers are remarkably productive from a labor force.

And the reason for that is because of these homes that are operating companies.

- Yeah.

When you say productive, what does that mean?

- In terms of what we're generating with our population base, so broadly, if we- - Oh, so it's an efficiency.

- Exactly right.

- Efficiency.

Yeah, I see.

- Because these homes hire people, they rent, they provide lots of economic benefit.

We sometimes about the visitor economy, goods and services where overwhelmingly services.

- So, if I owned a home for a million dollars in Duck, how much tax would I pay for county and city?

- You will pay... - Collectively, - We'll call it a 20% rate if we consider cost insurance.

If we begin to build in a fixed-cost baseline, and then you're essentially asking a question about markets and margins.

- [Nido Qubein] Yes.

- We would think there'd be a positive margin to your home.

And this is key.

- [Nido Qubein] Yes.

- Jimmy Carter, 1979, prime interest rate 21%.

- Productive margin means what?

That my revenues exceed my expenses?

- Exactly right.

- Yeah.

- So, we go back to the very earliest eighties, Ronald Reagan gets elected.

The point of the story is, now for more than 30 years, the Outer Banks has been astonishingly consistent in its visitor economy.

And that makes that investment surprisingly resilient across market cycles.

So, whether it's 2001, 2003, we get into 2012, the global financial crisis, folks still come on vacation.

So, those revenue streams are astonishingly consistent.

That may be attractive.

- So, what would it cost me to rent a home for a week?

- Generally speaking, I call it about $8,000.

- [Nido Qubein] Per week.

- Of course, we get the headlines that there are homes that exceed 60 and $70,000 a week, but on a per-person basis, there's still a lot of relevance to that.

But generally speaking, if you came to the Outer Banks, as I hope you do with the family, we'll call it 10,000 to $12,000 if you come during June, July and August.

- Yes, yes.

And what percentage of these homes are rented through organizations like Airbnb, Vrbo, et cetera, versus the actual owner doing it?

- Absolutely; the great majority.

- [Nido Qubein] They control the market.

- Very few are doing it all by themselves.

Most folks, in terms of a distribution network, are using online distribution platforms of some kind.

- It's like hotels.

- Absolutely.

- Hotels are all hooked to in a centralized reservation.

- Absolutely.

We have to bring a product to market, and we always think about can we grow the market?

But also, can we convert a higher percentage of that?

- You obviously know your stuff, because, in part, you're former president of North Carolina Vacation Rental Association.

- Yes.

Very important.

We are regulated in the state of North Carolina.

We are real estate.

Vacation rentals is derivative of real estate.

So, our ability to engage regulators and our elected officials constructively is very important to us.

- Is it still an IRS rule that you can rent your home for two weeks per annum and not pay any tax on the revenue of that rental?

- Now you bring up really interesting points.

The difference, for example, between a second home, an investment home, how income is accounted for; there is very much a school of thought to that.

Sophisticated investors are very engaged on that.

Folks who have a family legacy, that may not drive a decision, but it's certainly something to be aware of.

- Mm hm.

You know where that began?

- I do not.

- In High Point, North Carolina.

- I had no idea.

- That's related to the furniture market, because in High Point, North Carolina, the city was attracting so many people to the furniture markets, and there were not enough hotel rooms to care of that.

So, chambers of commerce were encouraging people to rent their homes.

And my understanding is that's where that two-week-per-year, you can rent your home, get the income, pay no tax on it; no income tax on it, began.

- I think that's wonderful.

And we so often interact with High Point.

In our portfolio alone, more than 8,000 bedrooms; that's bigger than the biggest hotel in the United States.

All of those homes, furniture, all those kinds of interior aspects.

So, we burn up the road between the Outer Banks and High Point, - What are homes in Dare County, and maybe up and down the Outer Banks, what are they appreciating at?

What rate are they appreciating per annum?

- Let's look at a market cycle.

We'll consider a real-estate market cycle to be 10 years.

Since the pandemic, home prices have effectively doubled.

Annual rents, for example, are up, on average, 46%, which is a compounded annual rate of about 8%, which is remarkable given the real estate investment.

- Over how many years?

This is a CAGR number?

- This is a CAGR number, over four years.

- Four years.

- 46%, which is astonishing.

- [Nido Qubein] Yes.

- And that's good and bad.

One person's tourism is another person's lack of affordable housing.

- So, we think about that, but generally speaking, these investments over the past four years have done astonishingly well.

If we go back out over a longer market cycle, I think we're on the backside of a reversion curve, we'll begin to see things act more normally.

Said differently, no tree grows to the sky forever.

- You graduate from VMI; a very fine institution, Virginia Military Institute.

You are a Navy veteran.

We thank you for your service to this country.

You got your master's at Texas A&M.

Who do you root for now?

Texas or VMI?

- Well, VMI, I think, probably doesn't compete at the same level, so I'll be an SEC fan and a North Carolina fan.

- I see.

And you're running a business today that effectively is a rental asset management business.

Is that a fair way to say it?

- We work with clients who invest in the Outer Banks, and we bring their investments to a market.

So, we're in the real estate business.

Hopefully, in a holistic way, we deliver hospitality through an integrated asset management mindset.

- So, if I owned a home in Duck, I would put it in your arsenal, in your inventory.

You would rent it for me, keep it up, collect the rents.

- We would begin with your vision for your asset, and then try to outperform what I'll call organizational alpha.

We would try to beat benchmarks on revenue and bring you economies of scale, and hopefully make you have one of the best home-ownership experiences on the planet.

- In your lifetime, how many hurricanes have come that way?

- Hurricanes on the Outer Banks are something we are relatively comfortable with, knock on wood.

Certainly more than 20 or 30, and seen some that amounted to nothing.

And we've been very surprised.

- You had 20 or 30 in your lifetime?

- [Clark Twiddy] Absolutely.

- And you're comfortable with it?

- Well, we're never comfortable with a hurricane.

We're comfortable with the knowledge that they exist, but we also are keenly aware that it only takes one, and that every hurricane is different.

And the enduring lesson for hurricanes is strength does not equal impact.

There are category-one hurricanes, hurricane Irene, that can be remarkably destructive, and there can be higher categories that are not as destructive.

So, any kinds of rules and systems and frameworks for hurricane management are only so useful, because every situation is different.

- What gives people comfort and faith in investing significant sums of money in an area, beautiful area of North Carolina and of America, that has had 20, 30 hurricanes in your lifetime?

- Number one, it's the surprising resilience of our visitor economy, going back now for some time.

- Obviously.

- No matter what... - Obviously.

They keep coming back.

- The economic cash flows continue to be robust.

Secondary, and I'll use a Jim Collins example, time telling and clock making.

The Outer Banks, I think, has produced a series of property managers and asset managers who are clock makers as opposed to time tellers, and their systems and processes have proven remarkably dynamic.

- Over time.

- Over time.

That's the key piece.

Not just over five years, but over decades in many cases.

- I would think that insurance to insure a home on the Outer Banks would be almost prohibitive.

That there are a lot of insurance companies, some owned by banks, some are just independent, have become very careful, thoughtful, cautious about insuring homes in turbulent areas, in areas where potential damage can take place; not just in North Carolina, but you go up and down the eastern seaboard, you'll see that in Florida.

And it's not just, you know, water; it's wind, it's other factors that could be destructive.

How did their county and many parts of the Outer Banks manage that and thrive in spite of it?

- When we think about insurance, insurance is transferring risk, and that is where we see things like climate change and sea level rise.

We don't necessarily see it in too many other places because the cause and effect loop is too far apart.

We see it in insurance.

And the reason for that is because, to your point, the insurance markets, particularly the reinsurance markets, are global, and they are seeing increasing claims from what is increasing take rates of storms, wildfires, hurricanes, and things like that.

Long story short, we continue to see revenues outpace costs, but insurance is becoming one of those things that I think suggests the future.

So, if we had to look to a single economic indicator on the Outer Banks, I believe insurance is that economic indicator, along with the labor force and the vibrancy of our labor force.

- Thank you for answering all my questions.

I've asked you a lot of hard questions, a lot of intrusive questions, but you're, you know, professional, and you've answered them beautifully, and I'm grateful for that.

Look in your eight ball and... you know, one of those little cheap eight balls that you shake.

- I remember.

I have one in the house.

- That you shake like this.

- Yes, the magic eight ball.

- Ask a question, and give us sort of a quick future view of what you see in real estate, not just on the Outer Banks, but perhaps across North Carolina.

North Carolina is a fast-growing state, as we know.

People are flocking here from everywhere.

Great place to grow a family, Great place to start a business.

Great place to find talented and committed workforce.

And you're obviously optimistic about all of that.

- I am very optimistic.

We are so fortunate to live in North Carolina.

There's a reason we're the fifth most-visited state in America, that we continue to see very high rankings on places for business, workforce.

I believe 60,000 people a year graduate in Wake County at the K12 community or university level.

The reason I'm so optimistic about this is because I think that folks will still find value in North Carolina, coming from all over America.

I think we've systemically underinvested in housing, going back to the global financial crisis.

We have a long way to go to catch up from that.

And now more than ever, America needs a place to come relax and rejuvenate and renew themselves.

We call the Outer Banks America's Seashore.

We believe this is the best time in the history of America to consider self-renewal as an economic engine, and I think our state is well positioned for that.

- You're the president of Twiddy & Company, and certainly a learning and informed person about all of this.

I thank you for being with me on "Side by side".

- Thank you for the opportunity.

[upbeat bright music] - [Announcer] Funding for "Side by Side with Nido Qubein" is made possible by.

- [Narrator] Coca-Cola Consolidated is honored to make and serve 300 brands and flavors locally, thanks to our teammates.

[upbeat music] We are Coca-Cola Consolidated, your local bottler.

[upbeat music ends] - [Announcer] The Budd Group has been serving the southeast for over 60 years.

Specializing in janitorial, landscape, and facility solutions, our trusted staff delivers exceptional customer satisfaction.

Comprehensive facility support with the Budd Group.

- [Narrator 3] Truist.

We're here to help people, communities, and businesses thrive in North Carolina and beyond.

The commitment of our teammates makes the difference every day.

Truist: Leaders in Banking, Unwavering in Care.