Are you sure you’re executing the right strategies, or are you willing to learn more? It’s never too late to start diving in and grow your business! In this episode, Robert Levy, founding partner of LBX investments, shares his knowledge on real estate investing, specifically in retail. Robert has been in real estate for 30 plus years. He got a job with a local real estate consulting firm straight out of college and then became an investment banker and a stock analyst. Robert has been involved in many areas of real estate including asset management, finance, multifamily, retail, and hotels – this experience gives him an advantage when determining where to allocate capital. Tune in and find out more!
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Executing The Right Retail Investing Strategies With Robert Levy
I am pleased to have Rob Levy, Founding Partner of LBX Investments, with us. They focused on neighborhood and community shopping centers and they have also added class B value-add multifamily to the portfolio. We were excited to hear mostly about the retail because that is something new for us here at the show.—Rob, welcome to the show.
Thank you for having me.
The first question I always ask is, what is your journey? How did you get into real estate? How did you get into syndications? How did you get into retail and multifamily? If you could talk about how you got here, that would be a great way to start.
I appreciate you having me here. I have been in real estate my entire career. I came out of college and got a job with a local real estate consulting firm in New York where I grew up and then went from there. Mostly on the institutional side, I worked at Prudential as an example in their real estate investment group for about six years. They paid for my business school, which was wonderful while I was there. They transferred me over to the investment bank where I became an investment banker and a stock analyst covering the publicly traded real estate companies.
That is where I got my first exposure to retail. A bunch of my clients was in the retail space, so I learned well in that area. I moved to a different investment bank out in California for a few years, where I was also an investment banker and a stock analyst. I got a position at a firm in New York that I eventually became the CEO primarily focused on multifamily. We were one of the largest owners and operators of multifamily in the country and also had a large multifamily debt platform. We sold that company. We were a public company and took it private sold it to a private equity group.
I left at that time. I was there for thirteen years. I wanted to do something on my own. My partner, Philip Block, and I worked together at that company called Centerline Capital Group. We created LBX and have been investing in real estate for our company for the past years. That has been my journey. I have been in investment banking, equity research, investments and asset management, finance, almost every area of the real estate lifecycle. I have been in multifamily retail hotels. I spent about 4 or 5 years at Prudential in the hotel investment group and I have a diverse background in real estate.
Having experience with all of those different asset classes under the real estate umbrella, why did you choose to focus at least initially on retail and shopping centers? What was the reason for that?
My partner and I were contrarian by nature and looking for value. When we got back together, we sold the company called Centerline back in 2014, regrouped in 2016 together, and started thinking about what we wanted to do in the real estate space. We felt that there was a lot of money flowing into other areas of real estate. Retail was capital-starved at that time and not a lot of focus. After doing a bunch of research around it, we felt that there was a lot of noise around retail, and we thought some of it was inaccurate. We felt that what you read in the press was not necessarily appropriate and accurate as to what was happening on the ground. That was an opportunity to buy good real estate at attractive deals.
What was the noise that you mentioned that you disagreed with or thought that it was not accurate?
If you own the best retail center that everybody wants to be at with the right corner, visibility, demographics, and all those things that make a retail center work, that’s where you want to be today.
The media tends to group things into large sections. Everything is typical throwing the baby out with the bathwater. All retail is dead or dying, and that’s not true. There are pockets of retail that are struggling. The B and C mall space is struggling, but we do not invest in malls. That was something that, very early on, we were not going to focus on. There are pockets of retail that are performing very well. Our portfolio is 93% to 94% occupied. That was through a pandemic, which certainly tested all of our strategies and investments in retail.
It is not reality but if you pick up the newspaper or watch the news shows, you hear about Amazon, eCommerce, and online, which I don’t want to sound naïve. It is having an impact on retail. What it is doing is waiting out the bad retailers. There are good retailers coming into those spaces. Besides the fact that our occupancy is high, our leasing momentum is probably stronger than it has been over the past years.
Talk about the pandemic. Before the pandemic, the noise was there. The asset class retail is not going to thrive because of Amazon and all the online shopping, but then if you add onto that, the pandemic where no one can go shopping at all. Talk about how that affected things and what the outlook is. I want to dive into what the asset class is.
First of all, our exposure in our portfolio is a lot of our centers. It is either grocery-anchored or more discount-oriented. We have Ross and Targets. Those types of tenants are focused on more discount-oriented offerings. Those performed extremely well in the pandemic. They are national companies. They were able to figure out delivery systems and onsite and offsite delivery. They figured that out and performed extremely well. Most of our centers have a grocery, one of those or a couple of those, and has the local mom-and-pops.
You would think that the local mom-and-pops would be the ones that impacted during COVID, but you also have to understand that these are their livelihoods and businesses. The local pizza place and the local hair salon will do everything that they can to not close. This is 100% of their livelihood. We had very few stores closing during the pandemic and almost everybody was paying on time. We had a couple of rent deferrals we put in place, but that was it. The rent collections and occupancy were strong throughout. Everybody survived and did great, and we felt strongly about that.
One of the things that we focused on, which we should talk about, is you don’t want to own any retail. You want to own the best retail because there is risk around it. If you own the fourth-best center in a sub-market, you are probably going to not do well. If you own the best retail center that everybody wants to be at, it is at the right corner, the right visibility, demographics, egress and ingress, and all those things that make a retail center work. That is where you want to be.
A couple of questions about that. COVID didn’t affect you very much because you were in the type of properties that can survive through that. How do you pick those properties? I assume you didn’t know there was a pandemic coming, but the pandemic accelerated some of the online shopping, curbside pickup, and all that stuff that might have been coming anyway. Is that how you were preparing for the online to be more prevalent, and then the pandemic accelerated things?
That is what the pandemic is. It accelerated the trends that we already saw in the retail space. If you were good and smart enough to pick the right types of real estate in the right markets, you want to be in markets where you’re seeing demographic and income growth. We are picking properties with the right types of visibility. You don’t want to have on a center where you’re hidden behind other buildings or trees. You want good, visible ingress and egress because the right tenants need to be where their customers can get in and out easily. If you put all of those pieces together, you also want the right credit. There are good retailers and bad retailers. TJ Maxx, as an example, is a great company. It has a tremendous balance sheet and income statement. They are a very healthy retailer and you want to have those types of credits in your center. You want to have Publix, Kroger, Aldi, and those types of tenants that have the right balance sheets, income statements, and cashflow that can support themselves during tough periods. You also want the right size boxes. You don’t want to have the right tenants but in the wrong sized boxes because they adjust over time.
Burlington, as an example, is a great retailer but it used to be in 40,000 square foot stores. Now, it is in 30,000 square foot stores. You want to make sure you don’t have Burlington that is 40,000 or 45,000 square feet. There are all these variables that we look at when we are buying a center that tells us that that is a good piece of real estate or retail and something else is not.
You mentioned demographic and income growth. That is the same thing we look at when we are investing in self-storage and multifamily. That is very similar. As a passive investor, I’m going to invest with you. How do I know what to look at? How do I underwrite or analyze that as a passive investor when I look at one of your deals? I know how to look at self-storage and multifamily but when I look at your deals, I don’t know what I’m looking at. How do we get over that?
Our job is to educate and communicate with our investors. I ran a public company for several years. When we set up LBX, our goal was to create a platform where our communication and transparency were as good as a public company. That is what we did when we ran Centerline. We were noted as being fantastic in our communications and transparency with our investors. In certain ways, you had to be a public company, but there are public companies that do better and worse than that. We wanted to transform or take that focus from the public world and create a smaller real estate and private equity platform that had the same focus of transparency and communication.
Anybody who invests in our deals will tell you that we do an amazing job as far as how we communicate information to them on a monthly or quarterly basis and upfront when we are acquiring an asset. We put together a very detailed analysis of the pros and cons, why we believe this is the right type of real estate and the right market, the right pricing, and the right risk and return perspective on that piece of real estate. Anybody who reads that investment summary put together, which is very detailed, sometimes, it is too detailed for some people who don’t want to read a 25- or 30-page document, but we were happy to spend time with people, walk them through that and educate them as to why we believe this is the right asset for us.
Talk a little bit about how the deals work. You are buying real estate. You don’t own any part of Target. Target does great and you don’t get any of that revenue. Are these triple net leases? How do the leases work? How are the deals structured and the term of the deal? What happens when somebody moves out? Can you talk some about the whole process? That is a big question, but I’m not familiar with retail, so I’m trying to understand the whole deal.
Start a little bit with pricing. Where we can typically price a retail deal depends on the asset but somewhere between 6.5% to 7% cap rate up to 8%, 8.5%, or 9% cap rates. If we are buying good real estate, typically, our cashflow to our investors is strong. We are not high levered guys and not layering in significant debt to get to a strong cashflow. We are layering in relatively low, 60%, 65%, leverage to get there. On day one, we can produce strong cashflow to our investors into the property that we are underwriting. That is number one.
Stepping into the real estate, the leases are mostly triple net. Not always, typically they are triple net so they are paying their base rent, their share of common area maintenance, insurance, taxes, some utilities, and water. We are a completely vertically integrated company, so we have our property management, asset management, accounting, finance, and leasing. We do all that in-house. We have a great team headquartered in Atlanta, where most of our people are. We do all that work ourselves. When tenants move in or out, the cashflow on these deals is significant enough.
We always take a very conservative approach when we are capitalizing on our deals upfront. We capitalize it with equity so we have cash sitting on a balance sheet. We don’t over distribute to our investors. We distribute conservatively. We keep that cash there in case there is a need for capital to replace a tenant. Most of the leases are relatively long-term, between 5 and 10 years.
That is another thing we look at. It is to make sure that we don’t have a significant upfront risk of rollover and that it’s layered in properly into the property so that we don’t have one year where we have 50% of the lease is rolling. There is plenty of cashflow. Also, a lot of times, we will set up our loans so that we can draw upon a loan to pay for tenant improvements or leasing commissions when a lease rolls.
We always take a very conservative approach when we’re capitalizing our deals upfront.
The cap rates are significantly higher than multifamily. Is that because people think that retail is riskier?
It is a supply-demand, which is what we like about it. I know a lot about the multifamily world and we have looked at a bunch of multifamily deals. Because I put my own money into these deals, the question for us as an investor is, do I feel that the risk of buying a multifamily and a secondary market at a 4% cap or 3.5% cap where they are trading is more or less risky than buying a Kroger-anchored shopping center in a strong market at 7% cap? My personal view is that we can buy good real estate at very attractive yields in great locations with an upside. That is less risky.
I will give an example. We bought a center in Orlando and this center is about a mile from the University of Central Florida, which is the largest university in the country. It has 65,000 students. We bought the center for $19.8 million. It was a 20-acre parcel. We bought a shopping center, which was a good solid shopping center. We bought it at about an 8.5% cap rate. It was producing great cashflow on day one. On top of that, we bought it at land value. Land in that area is going for about $1 million an acre. To me, that was a fantastic play. If the whole thing would fall apart, which it hasn’t, we don’t want it for land value.
There is a tremendous amount of development going on in that area. If you don’t know if there is student housing going up and hotels because of the university and other growth areas around Orlando, we’re sitting on the best corner in the submarket. To me, that’s a fantastic risk-return equation. We are buying it for land value, an 8.5% cap rate. We are producing 10%, 11%, or 12% cash and cash returns to our investors, day one. At the same time, our downside is completely protected by the fact that we are buying it for the value of the land.
You mentioned the upside. What is the upside compared to something that we are more familiar with like multifamily? As far as maybe a multiple on exit, how long do you hold? What is the exit strategy? Who are you selling to resell them to reach that once you have stabilized the property? Are you selling to other people like in multifamily, you have to hold a few units where you don’t renovate? There is not that here, so what is the exit and upside?
On the upside, there are a few different strategies that we focus on. The first is a lot of times, we are buying from the REITs. We like buying from the REITs because we find that they are massive so they don’t look at all of the value creation ideas that we look at. For them to increase NOI by 5% or 10% at a property, it is not that meaningful when they are looking at a huge portfolio. For us, it is very meaningful. We feel it is a lot of meat on the bone when we are buying from one of these larger institutions, including some of the public rates. We have bought from a number of the major public rates.
The strategies are typical that, a lot of times, the tenants are paying below-market rents or the center is not properly capitalized, so they have not improved the parking lots, landscaping, facades, or all these things. If you don’t have to spend a ton of money to get there, you go into these centers. We capitalize them properly. We invest in lighting, parking lots, landscaping or facades, whatever it might be. With that, we can then push rents usually pretty significantly, especially with inflation. We are seeing inflation in rents as well. That is one strategy.
We are investing in real estate and then pushing rents. There are also opportunities at times to either develop or monetize our parcels, which are the parcels along the street that might have a Taco Bell, Kentucky Fried Chicken, or something like that. Those are very valuable because they traded very tight cap rates. Going back to the Orlando deal, we bought it for $19.8 million. We had our parcels with it. We had a Taco Bell and Amscot, which is a regional cash management player down in Florida. There was a local Chinese restaurant, which we have redeveloped with a national brand.
We bought the center at an 8.5% to 9% cap rate and we are selling those parcels out at 5% cap rates or less. That arbitrage is very valuable to us and our investors. That is another strategy that we are working on. If you ask who is buying them, there are a lot of investors out there. The REITs are starting to buy more. There are other local regional players out there buying and there are fewer buyers than in a multifamily world. One of the things we like about the retail space is that when we are bidding on a deal, we are usually 1 of 4 or 5 bidders. Whereas in the multifamily space, you are 1 of 30, 35, or 40 bidders. We liked that dynamic. This is still a liquid market, so there are still plenty of buyers out there when we’re selling.
Most of these are anchored by a grocery store like Kroger, Target, or TJ Maxx. How do you diversify? Are you jumping on every Target that is in a good market? The fear there would be, what happens if something happens to Target? If you have a Target in six of your centers and Target is gone, which I don’t know that that is going to happen, how do you deal with the diversification of the anchor tenant? Is that something you think about?
There is no single tenant that we are overexposed to. We would like more exposure to Publix. We have one Publix shopping center. We would love to have a couple more. We have a shadow-anchored with an Aldi and Aldi is a fantastic operator. We would love to have more Aldi and Kroger. There are plenty of good retailers out there to diversify our portfolio and exposures. We have three Targets but most of the Targets are shadow-anchored. We don’t own that real estate. Target owns that real estate and we own the center attached to them. It is great for us because they drive massive amounts of traffic to our center and we own the shops next to it.
If you had a choice, would you prefer to own the entire center or do you prefer the shadow anchor?
With certain tenants, you don’t have the option. The way it was developed on day one was that Target developed their store and whoever the original developer has developed it alongside them. That is a pretty typical structure. With the grocers, it is a little bit different. The grocers tend to be tenants. They don’t tend to own their real estate, although Publix has been buying back some of the centers where they are leasing space. It is a bit of a mix. Aldi owns a bunch of their real estate. It is a mix and it doesn’t matter to us. We are happy to own it and sit next to them as long as they are the right credit, the right operator, and try the right traffic to the center.
You mentioned debt. You typically are at 60% to 65% loan-to-value. How is debt different? I compare everything to multifamily because that is what most of us are investing in. Multifamily is a lot of bridge debt. There are some concerns about that. Is that the same in retail or is that structure different?
It is different. I spent thirteen years in the multifamily finance world. I know those structures well with Fannie Mae, Freddie Mac, and FHA. It is different. To get your returns in the multifamily world, if you are buying at a 4% cap, the only way to get your returns is you have to assume healthy rental growth. You have to layer in leverage to get there. That is the only way to get to compete for return on equity. In the retail world, we don’t have to push leverage to get there. You don’t want to. We are very happy being low-levered. We don’t believe in the securitized world. We don’t borrow through CMBS or structured debt because we feel it is a bad way to borrow money. We borrow money through banking relationships. We have a deep and wide set of banking relationships. We are borrowing from banks, credit unions, and some life with who we have relationships. That’s it. It is a much less risky debt structure than you might see in other sectors.
The cap rates are high, which seems counterintuitive, but high is good when you are buying. The debt structures are better. There is less competition. Why isn’t everyone investing in retail instead of multifamily?
At least you have to be careful. I don’t want to sound naive as if every retail property is a great deal. It is a space where you have to be a true expert. You don’t want to own and operate retail unless you understand it and have the right people on the ground who can help you manage it and lease it. It’s a roll up your sleeves day-to-day business. Every day my partner and I get on the phone with our asset managers, our property managers, and leasing people. It is an intense day-to-day management business. You have to have the right relationships. You have to pick up the phone and call the people at Publix, Kroger, TJ Maxx, Target, or whoever it might be. You have to have those direct relationships because you have to understand how they are operating, where they are happy, not happy, or what the issues are. You have to have that holistic view and infrastructure on the ground. If you have that and you own good retail, you will do well. There is bad retail out there and there are operators who don’t have those relationships and, in my view, that is dangerous.
Indoor malls are struggling. I have heard people talk about open-air retail. Is that what we are talking about with the anchors and then you walk to the next store or are we talking about complete, open-air malls where it is a regular mall but no roof on it? What is open-air retail?
Retail property is a space where you have to be a true expert.
From our perspective, we are buying primarily neighborhood and community shopping centers, the stuff that you or I might go to on a Saturday afternoon and go to a Costco, Target, Bison Pizza for the kids, get a haircut, or it might have a gym there. That is where we are buying everything. It is outdoor and not enclosed. The enclosed space is struggling for various reasons. Honestly, some great enclosed malls will continue to do well.
I live in Northern New Jersey and there is a property called the Garden State Plaza 15 miles from my house. I went there because my son needed something and it was an absolute mob scene. They think that there are malls that will do extremely well also, but we stay away from that space. It is a very different world, different retailers, cost structures, risks, and you have to be an expert in that area. What we are good at is something else.
I want to move on to multifamily and reverse the question. There are so many opportunities with high cap rates and all that in retail, why then go and start looking into multifamily?
We have been looking for a couple of years and haven’t bought anything. We might be wrong. I’m not saying that we are smarter than anybody else because there is great multifamily out there. What we have seen, because of inflation, is that rental rates in the multifamily space are increasing significantly. I struggled to get comfortable with it. I could be wrong and other people could be right. My partner, Phil, and I talk about this all the time. If we had bought multifamily years ago when we started, we would have done extremely well. We felt back at that time that multifamily was pricey.
We stayed away from multifamily at that time and bought retail. We have done well with retail so I’m not going to complain but we certainly would have done well if we bought multifamily at that time as well. I struggle with 3.5% and 4% cap rates. I struggle with some of these tertiary and secondary markets, with the pricing has gotten very aggressive. I struggle with some of the underwritings that I see, which is the only way you can make the numbers work, where we see these significant rental growth rates.
Everybody has the same underwriting. You spend 9,000 or 10,000 a unit. Voila, you have got 5%, 6%, or 7% annual rental growth. You sell it in years at a 4.5% cap, a 5% cap, or whatever it is and you have made a nice 16% to 17% return. All sounds great. I struggled that there is going to continue to be the rental growth that we have seen. Therefore, those numbers are aggressive for me. I also feel like you can only get there by layering in a high leverage bridge or that type of debt. If you can’t get to those numbers, then you are putting yourself at risk. I have stayed away. We have underwritten a ton of multifamily. We had a couple that we got close on but we never got there for those reasons.
Anyone could have made money in the last five years of multifamily. I own some multifamily myself and I completely mismanaged a bunch of money. It is interesting to look at it that way because multifamily is so popular, and so many people are still flocking to it. We live in a finite world. Rent can’t grow forever at some point. Something is going to have to change. Having some diversification within asset classes into something like retail would make some sense.
I’m sure there are going to be a lot of skeptics. I’m happy to talk through it, show our current deals, and show what we have looked at. We have been in business for years. We did a little bit of this beforehand as well. We have been in this strategy. LBX has been in existence for years and we have acquired eleven centers in that period. We have been very careful and we get outbid all the time and pass on a lot of deals. We have done a good job of focusing on the right real estate and we will continue to do that.
I would be happy to get on the phone with them and my partner would be the same way. We also have a gentleman who runs our investor relations and communications. He does a great job as well, having it on the phone with people and talking them through how we look at real estate and retail, why our retail is performing well, and hopefully, get some people comfortable with that.
Our community is always looking for new and quality opportunities, and this sounds super interesting to me. Before we get to your contact info, the last question I ask on the show is, what is a great podcast that you listen to?
I listen to a bunch of podcasts. My kids make a lot of fun of me for that. I love it on the weekends and go out for a nice, long, slow run. I used to be faster. Now that I’m older, it is a slow run. I listen to a lot of different podcasts while I’m doing that. There is a bunch that I do enjoy. There is one called Deep Background. His name is Noah Feldman and he has got to be one of the smartest guys I have ever listened to. I don’t agree with all of that he says. He is a Harvard law professor and he comes at all his discussions from a Constitutional Law direction. He has all these different discussions around politics, technology, and asset classes. He is a brilliant guy and speaker. I do like his podcasts a lot. I would recommend Deep Background with Noah Feldman. He is interesting.
I will check that out. I always think it is good to hear someone on a show or anywhere with opinions that you don’t agree with. That is the only way you learn something new, maybe. That is what I’m going to check out. Thank you for that. If our readers wanted to get in touch with you or LBX, what is the best way to do that?
My email address is [email protected]. Anybody can email me. Our website is LBXInvestments.com. If you go on our website, you will find my contact information, Phil Block, my partner, and Heath Binder, who runs our investor relations and communications. Any of us will be happy to reach. You will also see all of our deals and investment summaries. We do put out quarterly research on the retail space. Hopefully, some of that is also helpful and educational. We will be putting out our year-end piece shortly to give people an opportunity to learn a little bit more about the space. Any of those would be helpful.
Thank you so much. This was fantastic. Learning about a new asset class is always interesting to me. I’m always chasing shiny objects, so it is going to be hard for me to resist the next time you send out something. I will take a look at it. It is super interesting. Thank you for being on the show.
Thank you. I appreciate the time. I look forward to further discussions.
That was a fun conversation with Rob learning about a new asset class, although it is similar to what I’m already doing with some single-tenant and triple net leases. I didn’t understand what retail was every time it came up. If someone wanted me to invest in retail, I ran the other way because I didn’t know anything about it. Pre-pandemic, I didn’t like it. During the pandemic, it seemed even worse but he opened our eyes. The contrarian view is what he said they had and they are looking for value. The cap rates are certainly different and more attractive than multifamily. It’s a different asset class.
Getting into something different always adds some diversification. I talked about how they add value, which I didn’t realize you could add value on triple net leases but restructuring some things or the properties like the Taco Bell, buying it at 9% and then selling it at a 5% cap. That is a great arbitrage there. I also liked how he said they are getting outbid a lot. He said that for the multifamily but also for the retail. Although you want them to win deals, it is encouraging when they are not winning all the deals because then that makes you nervous and learn that they are going to stick to it and say, “We are not going to do a deal for the sake of doing deals.” It gives me some confidence, especially in the multifamily.
There’s a struggle in getting comfortable with multifamily.
They haven’t done a deal, although they have been looking, and that gives you some confidence that they are conservative, even on the retail stuff. They are not going to just go out there and do deals for the sake of doing deals, which some sponsors feel pressure to do that. I enjoyed the conversation. I’m going to keep track of LBX and evaluate some of the opportunities that they do send our way. It was a great conversation.
About Robert Levy
Seasoned real estate executive and leader with successful track record in developing and building profitable and growing businesses, raising diverse and significant equity and debt capital, operating real estate platforms, negotiating and executing complex transactions, managing large and varied teams of people, overseeing and communicating with a wide variety of organizational stakeholders, managing complex balance sheets and back office functions.
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