Philip Block (04:15):

It certainly is within the mall space, within the B and C malls in the middle of the country where you have population declines and people moving. But we said, if you buy open air shopping centers, you buy grocer and discount stuff, especially in the Sunbelt and in markets that are growing, you buy really good real estate, that stuff performs fantastically. And to be honest, if you look at e-commerce, the truth of e-commerce is they don’t make any money. I mean, Amazon doesn’t really make money on e-commerce, right? They make money on a data storage. All of these companies, the customer acquisition costs are so high that today you’re seeing those stores that started as pure play e-commerce, opening shops, opening brick and mortar stores around the country because it’s a billboard for them, right? It’s marketing. And we’re the beneficiaries of that.

Robert Levy (05:01):

The only thing I’ll add is that we, it’s kind of interesting, we kind of chuckle to each other a bit. We actually like bad news out in the marketplace, because we feel that it’s inaccurate. What’s happening on the ground in retail is different than what you’re reading in The Wall Street Journal or The New York times or hearing on CNN or wherever you get your news. It is different. So, we like the bad news because we feel people do focus on it. It makes it harder for us to raise capital. It makes it harder for us to borrow money, but there are people who understand the business well and it benefits us because we can buy stuff at better yields.

Robert Leonard (05:38):

I believe it was Warren Buffett that said this, but if it wasn’t, it was another very successful stock investor said that to beat the market, you have to be a contrarian, but you also have to be right. You can’t just be a contrarian because if you’re wrong then it doesn’t really matter. Right? So, how do you know when you’re being a contrarian and you’re right when everybody else is wrong versus when you might just be dead wrong?

Philip Block (05:59):

Well, for some of that it’s our track record, right? I mean, we own today 11 deals, a few million square feet, we bought 20 or so over the last six years. And there’s nothing that we’re not hitting 20% ish returns or more. We’re cash flowing and outperforming certainly what we feel like we could do investing in other sectors, and a lot of that is because you have credit tenants with contractual rents and right based on their leases. And so, we’re saying most of our income is coming from cashflow versus if you’re doing a multifamily development and you’re guessing on costs and you’re hoping that you sell it at three cap because that’s where the market is today, and you build to a four, five. And right, and that’s how you make your money. We’re cash flowing 10%, 12%, whatever the case might be every year.

Philip Block (06:47):

Most of our returns just coming straight from the cashflow on rents that are great tenants, and we know what their sales are. So, we can feel really, really confident in our underwriting. Our track record has shown us that we can both outperform, but out underwrite, I think, our competitors and really, really feel comfortable. There are deals that we have no interest in chasing, and a bunch of guys jump in and there are others that we certainly just take a different view and proof’s in the pudding, our returns are showing it.

Robert Levy (07:16):

And also just look at the public companies, the public retailers. Go out there and look at the TJ Maxxes of the world, the Walmarts, Target, Ross, Burlington, just look at their financial statements. They are extremely profitable companies. Their balance sheets are very, very strong. Not only did they survive the pandemic, the pandemic actually benefited retail. Because what it did was, it got rid of the stuff that was already failing. And now anything that, company that got through the pandemic well is now in a fantastic financial position. So, their profit margins are up, their balance sheets are stronger. And that’s who our main tenants are. And you have that. And then you have these local guys who are smart local entrepreneurs. They’re not giving up their space. And so, our collections have been close to 100% throughout the pandemic. Our leasing velocity today is better than it has been since we started the company. So, we see what’s going on on the ground. And that gets us very comfortable with our strategy.

Robert Leonard (08:13):

Phil, as you mentioned, your portfolio is now more than 1.8 million square feet and it’s approaching $300 million in value. But the first deal you guys did was back in 2016, it was $8 million and you needed about $2.4 million in equity. Tell us about that first deal you ever did and how it differs from deals you guys are doing today.

Philip Block (08:33):

Our background, we were at a public company for a long time, always in kind of institutional world. And we wanted to do this on our own and start our own business. And the first deal you do is scary, always, right? Because we’re going out. We said to ourselves from that moment, we’re going to find investments that we believe in. And if we believe in the investment and our returns, we’ll be able to raise the capital. But you don’t really know, right? Until you do it. We believe that. It’s proven to be true. But that first deal was scary. So, we put it under contract and then we were calling everybody we knew, right? For a small equity raise. At the time I don’t know, two and a half, 3 million bucks, whatever it was. And we were putting large checks ourselves and just scrounging, dollar for dollars as they say.

Philip Block (09:12):

So, we were trying to find the right capital and it was much smaller, but it was fundamentally the same stuff. It was in a great market that was in Nashville. We loved the Southeast, we loved the Sunbelt. We love Nashville. We still own a deal in Nashville today. So, kind of the fundamentals of the real estate were exactly what we look for today. Cap rates were wider than for this kind of thing, but it had credit tenants, it had upside, it had an outparcel to sell. It had kind of all of the fundamentals that we looked for, and in place cashflow. We rarely do deals at that size today because we’ve been fortunate and have grown and have found some more interesting opportunities in kind of larger scale.

Philip Block (09:52):

A lot of that, frankly, is because more Mom and Pops have gotten, I think, as it’s been harder to find multi-family deals. You have more kind of locals bidding up smaller deals because they can… A local rich guy can come up with a few million bucks and buy a deal like that, but they’re struggling to buy a 50, $60 million deal. So, we’ve been kind of pursuing larger deals, but the fundamentals of what we’re looking for haven’t changed. In place cash flow, upside opportunity, good credit tenants and great location. And so, that was there then, and it’s there for every deal we’re doing now.

Robert Leonard (10:21):

You mentioned that there was an outparcel to sell. Is that just an extra piece of land that you can basically subdivide and sell off?

Philip Block (10:28):

Yeah. Or develop. In that case, to develop and then sell. What’s really interesting in retail is that some of the parts is often worth more than the whole. If we can buy an overall center, let’s use kind of rough math at like an 8% cap rate. The outparcels in front, so maybe there’s piece of land or maybe there’s a McDonald’s or a Chick-fil-A or something like that that’s part of it. Well, those trade for, I mean, a Chick-fil-A will be in the sub four cap, right? And so, we can sell that, pay down debt, reduce our equity balance and really enhance our cashflow. And we look for that almost always. I mean, not every one of our deals has those opportunities, but it really, it’s a way to kind of add a lot of value. It’s very lucrative to our transactions.

Robert Leonard (11:12):

In the area where I live. There was a strip mall that was recently, it was good size. It wasn’t massive, but it was good size and it was, I would say it was failing. It was mostly empty, probably 50, 60%, a major chain of grocery store had just left. And somebody came in and bought it. And I think they did what you just mentioned is, they built the Chick-fil-A I believe in the parking lot. They put in a bank or a credit union in the other end of the parking lot. I don’t know if they sold off that part of the land or the property to do what you said, but I’m believing they’re following a similar strategy to what you mentioned.

Philip Block (11:44):

Yeah, no, it makes all the sense in the world. And would be really interesting in that, I mean, without knowing it, the grocers are your anchors typically in the REA or in their lease will control the land right in front of their store, because they would prefer you not put something that’s blocking visibility. So, my guess is when that grocer was there, you couldn’t have put a Chick-fil-A in front, they would’ve restricted it. But as soon as they go and you can, and now the value that’s created from that’s tremendous. So, they likely did very well without knowing any details.

Robert Leonard (12:13):

Did either of you have any experience with real estate prior to going into that first deal that we just talked about? Had you bought any smaller deals personally on your own or any family or anything that had been in real estate?

Robert Levy (12:25):

Our histories were more on the institutional side. As Phil said, we ran a public company, pretty large public company in New York, which was primarily a multi family finance and investment management company. We were there for many years. We were in investment banking, private equity. A lot of our history has been on the debt side, on the lending side of real estate. So, it’s kind of interesting from our perspective. We have pretty much everything in real estate except for up until six years ago, owning our own real estate. But we felt like we came to this business with massive backgrounds in how to finance, how to structure, how to buy, how to sell real estate, how to operate a company, how to operate real estate. And that’s what we’ve kind of leveraged that experience over the past six years, we have a great team now.

Robert Levy (13:14):

We have built infrastructure. We have a whole team down in Atlanta and Charlotte, which is, we’re [inaudible 00:13:20] out in LA also. That is just best in class from a property management, asset management, finance, leasing, acquisitions perspective. So, we feel like we really can run this business well. And the one thing we hadn’t done was own an operator on real estate, we felt very comfortable getting into that, considering our backgrounds. And as Phil mentioned before, we also had backgrounds in multiple types of real estate. We have backgrounds in multifamily, as we mentioned, and lodging and other areas, which is we targeted retail because of the contrarian nature and the value there. But we certainly have other sectors of real estate as well.

Robert Leonard (13:57):

Given your experience on both sides of the transactions, do you guys have a preference today? If you’re going to start all over, would you go one route over the other?

Robert Levy (14:06):

I don’t want to speak for Phil, but I think I will speak for him. I mean, we love what we’re doing now. It was really exciting running a public company. And it’s different, dealing with public shareholders and boards, and we did well with the company that we ran. We did a really good job I think, and did well for our shareholders and all the stuff that we were supposed to do as stewards of a public company. But this is great. I mean we love the entrepreneurial nature. We love building something from scratch. Six years ago it was me and Phil. And now we have a great team around us who are great partner of ours. We’ve raised great capital. We’ve made fantastic connections and relationships. So, I think what we’re doing is really exciting. And I’m a bit older than Phil, you can’t focus on the podcast, can see that. I wish every entrepreneur probably says this, I wish I did this 10 years ago.

Philip Block (14:52):

Although I’d say, yeah. I mean, I obviously echo all of that. I think our backgrounds really kind of prepared us well for this. I mean, one thing that we like to say to our investors, unless there are plenty of sponsors out there doing similar things to what we’re doing, who don’t have the backgrounds, right? I mean, Rob is the CFO and then the CEO of a public company, there aren’t too many folks, I think with that background who investors have the opportunity to entrust their capital with. Because ultimately that’s what this is, right? We’re fiduciaries for our investors. We take that really, really seriously. But I think our backgrounds in the public company space has really prepared us for that, because we try to bring more of an institutional view and risk to what we’re doing versus probably what a lot of Mom and Pop sponsors do.

Robert Leonard (15:36):

Post 1986 and post 2009 are considered to be once in a lifetime acquisition opportunities for investors who are liquid and could take advantage of those opportunities. You guys see right now as one of those generational opportunities?

Robert Levy (15:52):

In retail, we do feel like this is an amazing opportunity. Wherever there’s a dearth of capital, right? And that’s what created the opportunities that you mentioned, right? In 2009, we were in the trenches at our company, and certainly saw what opportunities were like when there was a dearth of capital. Today, there is a tremendous amount of capital out there, but it’s chasing deals that most of which we’re not chasing, right? It’s in the industrial space, it’s in the multifamily space.

Robert Levy (16:22):

And we’ve all seen significant cap rate compression in those areas. And that’s really what we love about retail, certainly. I don’t know. I mean, is certainly buying retail at our current cap rates and current yields I think is tremendous opportunity. I don’t know if we’re going to look back on it and say, wow, that was kind of the bottom, that we kind of hit the bottom well, but we don’t have to. We’re buying great real estate in great markets, demographics around us are fantastic. And we know how to buy real estate. We’re buying stuff that has all the right things from a retail perspective. And whether is perfect time or not, doesn’t really matter to us. We’re just buying the best stuff in the best markets and then operating it as well as we can and performing for our investors.

Philip Block (17:02):

I mean, I don’t know how you could compare it to those. And certainly with the amount of capital that’s out in the market today, how could you say that this is kind of generational opportunity from a macro standpoint? But as Rob said, what we’re looking for is kind of fundamentally value, right? We’re looking for cash flow, stability of cashflow that is misunderstood or mispriced by the market. And pockets of that exist in all market cycles. And we feel like we’re finding that within the retail sector today. Parts of the retails sector or you do not, I mean the compression in grocer deals in the Sunbelt today would make those kinds of transactions very challenging. That doesn’t mean you wouldn’t find any individual ones, but it would be impossible to say that they’re mispriced today, but other parts of the retail sector certainly are.

Robert Leonard (17:51):

And interesting part of your approach is that you guys often buy from REITs and other large institutional sellers. Before we dive into that strategy specifically, a lot of our audience is newer investors who are buying much, much smaller deals. We’re talking duplexes, triplexes, maybe small multifamily and not buying what is considered to be historically, at least, institutional quality real estate. So, tell us a little bit about what REITs are and what the other large institutional sellers are.

Robert Levy (18:22):

Yeah. So REITs, it stands for real estate investment trusts. It is a publicly, well, there are private REITs also, but public or private companies that are structure, there’s a tax benefit to owning and operating real estate. And it’s tax benefit is that they can pass through the income of that company to their investors, their shareholders, and the corporation does not get taxed. You only get taxed at the individual level. So, it’s a very tax efficient way to own real estate. And there’s other major institutions out there that are kind of in our space, private equity companies, insurance companies, endowments, et cetera, who are also acquiring in our space. And as you said, we love to buy from them for a number of reasons. They tend to own, they’re good at the acquisition side, they tend to own the best real estate in really good markets.

Robert Levy (19:11):

They tend to capitalize those transactions well. So, they put capital into their deals. They have new roofs or parking lots, whatever. They don’t under capitalize their properties. And so, we’re buying the best real estate in good markets that have been well cared for, but they also don’t do the small things that we do every day. I mean, retail is one of those businesses where you have to roll up your sleeves and get your hands dirty every day. It is a day to day hard business, if you really want to make money and do the best that you can.

Robert Levy (19:41):

And so, they don’t do all those small things. They don’t care as much about leasing the 1000 square foot space. They focus on leasing the 20,000 square foot space, but you make your money on the smaller spaces. And they don’t do some of the outparcel transactions that we just talked about, carving out outparcels and selling them at very accretive levels. So, it’s all those small things that we do that really creates the opportunity, and we’ve bought a number of transactions from these big public companies and some big private equity groups. And we feel like there’s just a lot of low hanging fruit in those transactions for us.

Robert Leonard (20:13):

Is that why it’s a selling point for you guys? I know you often tell that you’re buying from REITs and other large institutional sellers as a selling point. Is that because you’re getting this high quality real estate with kind of this built-in piece that you know that they are probably missing?

Philip Block (20:29):

No, I mean, you jump in Rob, but yeah, I think that certainly that is a piece of it. Buying institutional quality asset with really strong tenants and good markets, all of the things that REITs do well, as Rob said, that is I think a benefit to our investors. And the challenge with investing REITs is, have somewhat different incentives than us, which is just maximize value, maximize return to our investors. They’re trying to hit a 4% coupon to their investors and that’s it. And it’s a different way of thinking about real estate and looking at it. We’re trying to… Solid cashflow and then outsize returns, because that’s the only way that we make money. But we’re starting with really good real estate. I think that’s right.

Robert Levy (21:09):

The public companies, they have different pressures than we do, right? They have to respond to the analyst community that covers them, and the investment bankers and et cetera, and the large shareholders that are investors in their companies. We don’t have to deal with that. And so, and sometimes that pressure that they get from those investors or from the wall street community makes them make decisions that in our view are either non-economic or less economic or not strategic. It also forces them, they all kind of tend to gather and focus on all the same stuff. So, they’re all now focused in the retail space. All these public companies are now focused on buying in the Southeast and Southwest, right? Every one of them has stated publicly that they are going to be investing dollars in the high growth states. And that makes a ton of sense.

Robert Levy (21:57):

Phil and I have been doing that, LBX, we’ve been doing that for six years now. So, they’re selling assets in the Midwest and other markets maybe that are not as high growth, but great pieces of real estate, and they’re buying, everybody’s buying in the Southeast and Southwest. And so, cap rates are going down in the Southeast and Southwest. And that provides us opportunity to buy elsewhere. Right? So, we’re just trying to stay one step ahead of them. If they’re buying, we want to be selling to them. And if they’re selling, we want to be buying from them.

Philip Block (22:23):

I think you add kind of layers of complexity, which is what’s exciting and interesting and how you can add value, but you have the credit. So, if you just kind of step back, you’ve got tenants here. So, in like use multifamily, you have one year leases to individuals, right? So, you don’t have credit. I mean, you try to do, make sure that you have decent credit scores and incomes for the people that you’re renting to, but they’re individuals. For us we have TJ Maxx and Publix and Kroger, right? And Target and use big names that you know, so we can do credit analysis on the individual tenants. Then you take it another step. So, you have a credit and you have a certain amount of term on your lease, up to kind of 10 years typically. And so, when that rolls, how much money are we going to have to give them to stay?

Philip Block (23:09):

What are their sales? You’re doing a whole extra level of analysis on the kind of supply and demand for that specific space in that market, existing rents, what you think that the rents are going to go to, what the credit of alternatives are, what’s going to drive cap rates down because again, everything’s being priced on stability of cashflow flow. So, if you’re able to bring in a grocer, the view of the stability of the cashflow changes, so you can spend up a lot of money because it’s going to change the, and really kind of transform the cap rate to the overall center. Leasing is a very challenging kind of boots on the ground, roll up your sleeves and dig in business. And one of the reasons as Rob mentioned that we like buying from REITs is they mostly lease from a national headquarters, right? They do it themselves.

Philip Block (23:58):

What we found is, it’s almost impossible to do that effectively, right? You can have the national and regional relationships and do that really well, and we do. And our head of leasings in Charlotte and he’s absolutely tremendous. And so, from our experience and his experience, we bring kind of all the national and regional tenants and know how they’re performing and can pick up the phone and speak to them. And it’s really important that you have those types of relationships to be able to do what we do. But then if you’re going to lease 2000 square foot, 1000 square foot shop space and keep that occupied, you need to have people local on the ground who are going around every local telling anybody that they think might be looking to expand or move. And that’s how you really drive occupancy in the small shop space. It’s like it’s multi-layered approach, that you just don’t have any of those types of relationships or dynamics going on and use multi as an example.

Robert Leonard (24:53):

I’ve often wondered myself, why are some of those big names that you mentioned not just buying their own space? Publix, Target any of the other really big names that you’ve mentioned? Why don’t they just buy their own space? Why are they leasing it?

Philip Block (25:05):

Well, they do. I mean the biggest, so Publix owns a lot of shopping centers. And first of all, it’s capital intensive. So, for the right retailer, right? Their job is not to be a real estate company, Publix, because it’s private can do it. And it makes some sense, and they don’t have investors in the market saying this isn’t a good use of your capital. So, Publix does buy it and, but largely in Florida because that’s where they’re headquartered. So, they own a lot of shopping centers. They’ll bid against you on shopping centers. They’ll have a ROFR, right of first refusal on most of their deals in Florida, depending on when they cut the lease and how you negotiated it. Target often, the way Target developments get done is that Target does buy the land with very few exceptions. They will buy the land from the developer, build the Target, and then you build the shopping center around them.

Philip Block (25:53):

And then if you’re like a Roster, a TJ Maxx, or those types of tenants, which Burlington write really good credits off, good type folks, there’s no way the public markets want them to use their capital to buy real estate. It’s just, they’re not a large enough piece of the overall centers for it to make sense. Now why doesn’t whole foods, if you’re Amazon, I don’t know. Because I could see that making some sense. And it’s such small potatoes in the scale of a trillion dollar company or whatever Amazon is today, but they don’t. And we’re the beneficiary of those type of tenants and their credit.

Robert Leonard (26:25):

Are your tenants mostly these bigger name companies or do you have smaller mall type tenants, Mom and Pops, small businesses, I guess SMBs as well.

Philip Block (26:36):

Yeah. It’s a huge mix for sure, with very few exceptions. Like we bought a deal in Chicago that’s almost all national and regional tenants, but most shopping centers, it’s what you know, right? When you go to your local, what grocery store do you go to close by?

Robert Leonard (26:50):

So in New England, at least like New Hampshire, Massachusetts, our biggest is called Market Basket.

Philip Block (26:56):

So you go to a Market Basket and where there’s a Market Basket and maybe there’s a Starbucks and there’s a pizza place and a nail salon and, right? I mean, typically that’s your grocery anchored centers. There’s a pretty kind of common lineup that you’ll see in those types of folks. Maybe now there’s increasing medical uses and some of those will be local, some will be national like an Aspen Dental, or an Urgent Care, some of the larger chains. But it’s a mix. And then your larger power centers, box space, they’re more national, you don’t have too many local guys taking 25,000 square feet spaces. So, but those centers perform really well. So, it depends. We have both.

Robert Leonard (27:34):

People listening to the podcast and myself include, we like to hear about the numbers and yields on investments. So, talk to us a bit about how you manage between going for cashflow versus appreciation and what do you typically target for your cash yield and your IRR?

Robert Levy (27:51):

Well, that’s one of the things we really love about retail is that the lion share of our returns come from cash flow. When we’re buying an asset, it depends of course, asset by asset. But on average we’re probably buying kind of seven to eight cap rates somewhere in there. And then, we’re not high leverage borrowers. We typically are putting on 60% to 65% bank debt. We don’t use the securitized markets like CMBS or something like that, just because we feel it’s not the right way to borrow money and owning and operating real estate. So, you borrow money at three and a half or three and three quarters percent. You buy something at a seven and half or an eight cap rate, and you’re usually cash flowing in the kind of high single digits, or maybe it’s the low double digits, day one.

Robert Levy (28:30):

Hopefully that grows over time, is lease space if there’s some vacancy or we’re pushing some rental rates, whatever it might be. So, we’re kind of pushing our cash yields, our annual cash yields into the double digits in kind of 12%, 13%, 14% range. And then as Phil had mentioned before, we’re doing work on some Outparcels or something like that, and creating some value that way. And so we’re typically underwriting to kind of high single digit, low double digit cash flow and all in returns and kind of into the mid to upper teens. IRR is over a five or so year hold. That’s kind of our standard return package.

Robert Leonard (29:08):

Have you typically, I mean, you’ve been in business for about six years now, are you typically holding properties for about five years? Is that what you’ve ended up doing or have you ended up selling most of a bit earlier? Do you plan on holding longer for some of them?

Robert Levy (29:19):

Our goal is to own great real estate. And what we have found and what our investors are communicating to us is that we don’t want to sell a lot of these assets, right? We’ve been able to create value, refinance the assets, take most but not all of the equity out and then still hold onto them in cashflow at really attractive levels. Because if we returned all the equity, we sold the asset and you return everything, sure, that return would be fantastic for everybody. But then you have that cash sitting there and yields today are maybe not as attractive.

Robert Levy (29:50):

And so, in certainly, in a lot of different areas of real estate. So far, we have not sold anything. And some of that also is because we’re in the middle of our business plans, right? We’re still pushing occupancy and pushing rents and working on outparcel opportunities, whatever it might be. So, there are still things that we want to accomplish at these assets, but our goal is to own and operate great real estate, long term. Some of it we’ll certainly sell shortly. Like there’s one asset that we’ll probably be bringing to market over the next 12 to 18 months, but we’ve also been able to really effectively refinance our assets and pull a lot of equity out and continue to operate them. It’s a bit of a mixed bag.

Robert Leonard (30:28):

How do you determine if you’re ready to sell a property? What factors are you looking at?

Philip Block (30:33):

We have a business plan upfront and we’re really clear on it. And our investors all know exactly what that business plan is. And so, our job is to execute that business plan. And then what we’ve always said, and what we’ve done is we, you get to the end of that business plan, maybe that’s lease up, the 10% vacancy, sell an outparcel, and push rents on a space to two. So, now we’ve executed. And what do the capital markets look like that point? And that’s how we determine is [inaudible 00:31:00] whether does it make sense to sell? Does it make sense to refinance and get everybody their money back and continue to ride the investment long term? But we have very clear objectives upfront, and let’s know certainly can evolve and maybe opportunities present themselves in an asset that we didn’t prepare for, or didn’t expect upfront. But we have three or four objectives, sometimes more of, less of exactly what we want to do and then we know we’re tracking those. We’re reporting frankly, to our investors, how we’re doing on those specific, very kind of tangible objectives from the beginning.

Robert Leonard (31:33):

How do you determine rental rates in an asset class like this? I’m guessing you do it on a square foot basis, but how are you coming up with what you should charge on a square foot basis?

Philip Block (31:43):

I mean, that’s comps and having really good leasing folks. Honestly, the hard part’s not, the market, they’ll dictate just like anything else, right? What are people willing to pay? There are different types of tenants who pay different types of rents, and that’s largely a matter of how much money you have to spend. So, if you have… There are the centers that you probably go to, like the best local restaurants and the buildouts are crazy, right? How much money did the local developer spend for that buildout or that sushi restaurant that has no guarantee on it? It’s just, or maybe it does, but it’s a local guy and that’s a different type of risk. And some of that space is fantastic and right, it’s where you’ll go out to eat with your family. And it’s so cool. And it’s a local restaurant, but that’s a certain type of risk.

Philip Block (32:21):

And your investors have to be prepared for that type of risk, because those restaurants fail and now you’re going to spend a lot of money on the next guy. But they’ll pay increased rent because you’re taking that type of risk. The key really is underwriting it appropriately upfront, and to make sure that your objectives are attainable. And we spend a lot of time with our leasing team, with whatever the local leasing teams, we meet with kind of with everybody. Since we’re not building, we’re buying, so we know what people are paying. We’ll look at every competing center around, so we know exactly what tenants and competing centers are paying, how much money had to go to those tenants. And the larger guys are all represented by a tenant rep broker. And so, we speak to the tenant rep brokers. We know what all of the largest tenants are looking for in the market, and how much they’re willing to pay, and how much landlord’s going to have to spend to get them to come.

Robert Leonard (33:11):

When you say how much the landlord’s going to have to spend to get them to come. You’ve also mentioned briefly, a couple of different times, different terms of having to give the potential tenant money or something along those lines. What is that about in this asset class? We don’t do that typically in the smaller residential space. So, talk to us a bit about that.

Philip Block (33:27):

Yeah. Sorry. I should’ve been more clear that’s… So, tenant allowance, when a tenant is coming to our center to any center, you’ll exchange letters of intent, LOIs. And so, they’ll come and they’ll say, “I’ll pay you $15 a foot, say.” Right? And that’s quoted per year. So, $15 per square foot per year in rent plus triple net, so I’ll reimburse for my share of CAM, of Common Area Maintenance and I’ll reimburse for taxes. And for that I need 20,000 square feet and I need it to be, maybe it’s as is, right? I’ll just take it, this box exists and I’ll take exactly what’s there. Maybe it needs to be white boxed. I want four walls and I’ll do the rest. And then on top of that, they’re going to say, “I’m going to spend $5 million. Whatever it costs for a specific tenant to buildout.”

Philip Block (34:16):

“We want you, landlord, to help us with that. We’re asking for $50 a foot.” And so, how we think about it is, what’s our, like any good investor is, what’s our return on that investment, right? We’re going to spend money. We’re going to give you a tenant allowance so that you can build out your Marshall space or your TJ Maxx space or your Publix, right? You’re going to build out this beautiful store and you’re going to spend money, so you’re taking risk. And we’re willing to spend some money to take that risk, but we have to get a return on that investment. So, how much is the rent? And what you know is our payback period? Three years, is it five years? Are we going to sell it quickly? And what’s the cap rate. And so, what’s your kind of net return on that investment? But that’s how we think about it. And the conversations that we have.

Robert Leonard (35:00):

We’ve talked a bit about your guys’ opinion on the retail sector as a whole, but regardless of your opinion and what your company thinks, banks and lenders have their own opinions too, which I think probably makes financing these types of properties a little bit more difficult. So, how are you approaching financing and does the sector actually make getting financing a bit more hard?

Robert Levy (35:19):

I mean, is the pros and cons of investing in a sector that is not as well loved as some of the other sectors, right? So, you’re going to have fewer lenders. When we go out to market, let’s say we go out to 50 lenders on a transaction and we’ll get back five or six or seven sets of terms, as opposed to, if you went out with multifamily or industrial, you would get many more potential lenders kind of sending you terms. So, that’s the negative side, but the positive is that Phil and I both as we mentioned, come from the finance world. We have some great relationships with banks and credit unions and life companies. And we also have a great relationship on the broker side. We have a couple brokers who do great work with us, and help us make sure that we’re kind of hitting the whole market.

Robert Levy (36:04):

There are definitely fewer lenders out there in our space, but we build that into our underwriting. We know where our cost is going to be. We have a very good feel for how we’re going to finance it. As we mentioned before, we’re not looking for anything high leverage. We’re very conservative borrowers. We primarily focus on kind of relationship banking or life company lending, which is for us the kind of the perfect spot to be. So, it is a little bit more of a challenge, but it’s kind of a game of playing in a contrarian market. Life companies are some of the largest lenders out there in the real estate world. Yeah. They have a very specific focus. They tend to be longer term lenders. And whereas banks, you can get a little bit more short term type borrowing, but we like life company debt because it is, tends to be lower leverage, which is fine with us, tends to be kind of longer term.

Robert Levy (36:52):

The challenge with life company borrowing is that they tend to not allow for much prepayment flexibility. And we do like to be in prepayment flexibility into our loans so that if we see an opportunity in the markets to sell, we can sell and we don’t have to deal with existing debt and prepayment fees and stuff like that. And that’s where bank lending can be a little bit better for us because we can build in on the bank side a little bit more prepayment flexibility. So, it really just depends on the property, the transaction, our structuring. And we make sure that the loan that we’re putting on a property kind of matches the business plan for that transaction.

Robert Leonard (37:28):

Similar to your lenders who probably have a negative perception at least of this kind of industry of real estate, I’m guessing your investors, or at least many of them probably have a similar kind of perception. So, how do you convince them that this type of asset class isn’t actually dying and it’s worth investing in versus other popular sectors like multifamily or data warehouse storage or anything like that?

Philip Block (37:51):

We have conversations like this, I think is the real answer. I mean, it depends, right? Because we have all different types of investors, so institutions, high net worth, family offices, and so the conversations vary, but it’s honestly, it’s a lot of this, it’s a lot of the kind of hand to hand combat, we have to explain it. As I said from our first investment, when you asked about that, it’s no different from the very beginning, we have to sit down and explain if we like something, we always say we can raise the money and we still… That’s proven to be true. We always feel like that’s true. But the nature that, the dynamic that you’re discussing here is what makes retail interesting and exciting for us, because you necessarily have less demand because of the types of questions you’re asking, people are concerned.

Philip Block (38:39):

But that means we got to explain it to folks and why it makes sense. And so far we’ve been successful with that. It doesn’t change from deal to deal. I think we, again, we performed really well, and so we have a lot of repeat investors, largely repeat investors who want to continue to I invest with us, which we’re really grateful for. But we have to, we got to keep performing and adding new investors.

Robert Leonard (39:00):

Who do you guys define as your competition? Is it firms and other companies that are trying to buy the same deals as you? Is it only them, or is it really anybody that is trying to raise capital from investors, maybe the same type of investors as you guys are?

Robert Levy (39:15):

I mean, our view is that this is such a big space, right? And we compete against is, in our view is more of the folks who are investing in similar types of assets that we are. I guess, compete against any sponsor because we’re all trying to raise capital, but it’s such a big space that we don’t really, that doesn’t concern us. But what’s interesting again, about the retail world, the theme of what we’re talking about here is that there are just fewer buyers, right? I mean, if you’re bidding on a whole multifamily property today, you’re probably bidding against 40 or 50 other bidders, right? So, you’ve got to really be, in effect, you have to be aggressive to get there, right? You have to be that guy who is going to beat out 40 or 50 other bidders.

Robert Levy (39:57):

In our world it just doesn’t happen, it’s not like that. There’s just many, many, many fewer bidders. So, we’re typically bidding against three, four, five, maybe seven bidders, real bidders on a transaction. And we have a good reputation in the marketplace that the brokers know us. They know we can perform. They know that we underwrite our deals very, in a lot of detail, and that we put a number on the table that we could execute at, we will execute at that number. And so, it’s just a whole different ballgame. We’re just many fewer people out there who are focused on this space, and that’s beneficial to us. That allows us to acquire assets at better yields.

Robert Leonard (40:34):

Rob, Phil, I’ve really enjoyed talking about the retail sector. We haven’t done that here on the show yet. So, it’s definitely interesting to hear and learn a bit more about it. For those listening today that are interested in learning more about you guys, your business LBX where can they go to find you? Where’s the best place?

Philip Block (40:51):

Our website’s great www.ldxinvestments.com. That’s probably the easiest. You can sign up. Investors can sign up on there and then we’ll make sure that we by our personal call and make sure that they see our opportunities.

Robert Leonard (41:04):

I’ll be sure to put a link to that in the show notes for anybody that’s interested in checking it out. Guys. Thanks so much for joining me.

Philip Block (41:11):

Thank you. It’s been great.

Robert Levy (41:12):

Thank you very much.

Robert Leonard (41:14):

All right guys, that’s all I had for this week’s episode of real estate investing. I’ll see you again next week.

Outro (41:19):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin. And every Saturday we study billionaires and financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consultant a professional. This show is copyrighted by The Investor’s Podcaster Network. Written permission must be granted before syndication or rebroadcasting.