Betting Big On Retail Real Estate W/ Philip Block And Robert Levy
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Betting Big On Retail Real Estate W/ Philip Block And Robert Levy

ILB 28 | Retail Real Estate

Though headlines touting the apocalypse of retail real estate have been frequent over the past few years, our guests today take a contrarian view. With the long-term impact of e-commerce changing consumers’ buying preferences, to the more recent impact COVID had on brick and mortar retailers, this area of real estate has been particularly challenging to navigate. Philip Block and Robert Levy of LBX Investments discuss the trends occurring in the retail real estate landscape, and where they are finding opportunities. Our guests cover the surprising, positive influences of the lockdown’s effect on retail real estate, what the best retailers are doing to thrive, and even why brick-and-mortar real estate isn’t going anywhere in the digital world. Lastly, they dive into inflation’s impact on retail real estate and their investment strategies moving forward.

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Betting Big On Retail Real Estate W/ Philip Block And Robert Levy

We’ve got a great episode for you. We are joined by Philip Block and Robert Levy of LBX Investments. These guys are experts in retail and real estate investing. They’ve been doing it for quite some time. They both come from Wall Street investment banking backgrounds and have been in real estate for a long time. They got into the real estate retail sector a couple of years ago doing these national anchor tenant properties. I wanted to bring them on because retail was hit very heavily by COVID. It was very impacted but we’re seeing this resurgence of retail brick and mortar physical retail properties. I want to bring these guys on to share about where they see opportunities.

You’re going to love this episode. It gets into a lot of the trends that are going on. As a quick disclaimer, we have had the audience ask us if we bring on other operators and folks providing investment opportunities if we’ve done due diligence and invested with them. We want to make the note that we bring people on and we’re not generally invested with them.

We haven’t done full due diligence. This is purely exploratory. You got to do your due diligence if it is interesting to reach out to them on your own. We want to make that clear. We’re not promoting what they’re doing necessarily. If you want to get in touch with them, we’re happy to make introductions so you can reach out to us.

We have general email investor relations at AspenFunds.US where you can reach out to us to make a connection for you to them if you’re interested. We also appreciate your support of this show. It’s been awesome to see all the readers enjoying it, leaving reviews and subscribing. A reminder, if you’re enjoying the show, please subscribe on your preferred platform whether that’s iTunes, Spotify, or YouTube.

Don’t forget we have a YouTube channel. You can watch them all on YouTube. If you’re feeling good, you can leave us a review. We always appreciate the reviews. That helps other audiences get exposed to it and learn about it. Lastly, if you are interested in learning more about alternative investment opportunities, you can join our investor club if you go to our website AspenFunds.US and click on the Offerings tab at the top of the page. With that, I hope you enjoy this episode. Thanks for reading.

How’s it going, Jim?

I’m good, going great.

We’ve got some great guests in this episode. We’ve got the two partners of LBX Investments. LBX focuses on retail real estate investing and has a pretty impressive background. We’re excited to bring you guys on to know your thoughts on retail real estate as an asset class and investment and where you guys are finding the opportunities in this market. Robert and Philip, share a little bit of your background.

This is Rob Levy. Thank you very much for hosting us on the show. We appreciate it. I’ve been in the real estate business for many years. I have done a ton of different things from investment banking to finance. I started my career off in asset management for a large institutional investor. Philip can give his background certainly. We worked together for several years at a publicly-traded real estate company where I was the CFO and became the CEO. We were a large investment manager and finance company.

We were public and took the company private and left soon thereafter. I’ve done so many different things in and around real estate and Phil also has a very diverse background. We feel it helps us assess risk and execute our strategies. We have very deep experience and knowledge of the financing and structuring side of real estate. We’ve been around the block and done a bunch of different things in and around real estate. I’ll hand it off to Phil.

This is Phil Block. It’s great to be here. We appreciate it. Rob’s a few years on me, which I like to remind him of. I have years of working in and around the real estate space, like Rob, in various capacities from investment banking and private equity on the finance side. For years, we’ve been focused on acquiring and operating our real estate. It’s been a great partnership.

Are you guys mostly focused on the retail property?

We have diverse backgrounds but our strategy has been almost solely focused on shopping center acquisitions for the last several years.

I’m excited to dive into that asset class a little bit. Give a little context. We’ve talked about it on this show before. The story over 2020 was that retail was hit pretty hard. A lot of retailers had to close and shut down because of the virus. That created a lot of disruption in the market. People weren’t out shopping as much and in restaurants where people don’t come in. You guys put together a great market commentary at the end of this show. I want to link to it because it’s excellent to break down your analysis of this. Can you talk a little bit about how COVID fundamentally changed the retail real estate sector?

It's great when the press overstates the death of retail. This just impacts investors' ability to buy real estate at attractive yields. Share on X

I know you never want to think of it positively because of all the negative implications of COVID but from pure ownership of retail perspective, it has real positive aspects. First of all, it did support our thesis. Our thesis is if you buy good real estate in good markets with the right credit and the right visibility, demographics and all those things that you want in any good piece of retail, that property will flourish and withstand the downturns.

That’s exactly what happened with our portfolio during COVID. Our property performed great, collections were excellent and occupancy did not dip at all. We had very few failures if any. Coming out of COVID, the pace of our leasing momentum has only accelerated. We feel it’s a great validation for our investment thesis. “Can you have the worst downturn that would happen in COVID in the retail world?” Certainly, it could always be worse but it’s hard to think through something that could be worse. That’s number one.

Number two, it was somewhat of an accelerant. We’ve seen in a lot of areas of the economy that the impact of COVID accelerated certain things. In the retail world, it accelerated the downfall of some retailers who were going to fail anyway. They were bad companies and bad retailers. They had bad credit and were not good operators. It flushed some of that stuff out of the system. The better retailers and we can talk about who the real strong ones are, all flourished and grew. They took the places of the bad retailers.

The third thing that happened was interesting. The local guys all stepped up and paid their rent. The biggest issues that we had were with the nationals who were trying to take advantage of the situation. They had their lawyers, bankers and accountants knocking on our door asking for relief, which we gave some off but nothing permanent. It was deferral-type stuff.

It was very interesting because we expected the opposite. We expect the local guys to struggle with the national guys to pay their rent. That didn’t happen. What happened, therefore is we’re mid-90% occupancy and collected close to 100% of rent during COVID. Our leasing momentum is strong coming out of it. It was a positive experience for us.

It’s like the way COVID is doing on the human body. The businesses that made it through, their immune systems are stronger. They’ve tweaked their model, sharpened their pencils, accelerated improvements in their operation and come out of it stronger. If they’re stronger, it supports your model.

A lot of those businesses had comorbidities. I hate to be insensitive but that’s true. A lot of the retailers that went out of business probably were on their way out of business already. It’s interesting. I love that you are looking at the opportunity and moving up into the right instead of everything’s going to heck in a handbasket. It’s awesome.

I’ll add one more thing. A lot of it is overstated. Phil and I love when the CNNs of the world or whoever it is in the press overstates the death of retail. We think that’s a wonderful thing for our business because it impacted our ability to buy real estate at attractive yields. We remember in the middle of COVID, it was UBS going to the bank.

One of those has put out a research piece that said that there were going to be 80,000 store closings over the next few years coming out of COVID. We sat there like, “Could they be right?” It felt wrong but you never know these are smart people, at least theoretically, putting out this research. Nothing could be further than the truth. A lot of it is eye-catching headline-type stuff that is not reality.

ILB 28 | Retail Real Estate
Retail Real Estate: If you buy good real estate in good markets with the right credits and the right demographics, that property will flourish and withstand the downturns.

I love to know your thoughts on what differentiates the good retailers from the bad ones and what were the ones that were already on their way down. COVID did create a shake-down. Some retailers went out of business. It sounds like a lot of the ones that are in your properties largely remained fine. I’m assuming a lot of that was helped by the government stimulus, PPP loans and other things.

I even remember driving down and seeing a lot of restaurants, the innovation that was sparked and the creativity of the ones like, “We’re going to find a way to make it through.” A lot of these changes were already percolating and changing the industry, which accelerated both the positive and the negative side of things.

It is amazing. It’s human ingenuity. These are small business owners. When you think about the difference Rob was talking about between the large nationals and the small local guys, a small local restaurant is a family-owned business. This is their livelihood. They have no choice but to figure out how to make it work. We all saw that and it’s amazing how so many of them came through better off. You’re right. PPP funding and other government stimulus were beneficial but it’s a lot of smart people trying to figure out how to make a living and get by. Those are the last places to close.

Talk about some of the things that you saw the best retailers do in those situations, what were the ways that they were able to innovate and some trends that you see are going to be around for a while.

If you step back in terms of the accelerant, you had the enclosed mall tenants. We talked about this a lot because we’ve been focused on these scenarios, the apocalypse before COVID. This was Amazon going to eat everybody’s lunch and everybody’s going to go away. That was, in our view, an overblown media type of narrative.

That was about B and C malls where we had too much enclosed retail and people didn’t want to shop that way anymore. The retailers that were stuck in those formats struggled. COVID was an accelerant of their decline. JCPenney, which went through bankruptcy, has come out with fewer stores. We have exposure or one JCPenney store. In general, those types of stores struggled.

Old Navy has done a good job. You see them as an example of somebody who’s evolved in the Target-type centers, open-air and the right format. They’ve done a good job of driving new traffic. Whereas previously, they were in enclosed malls, stuck in the back and you don’t have the type of foot traffic in those locations anymore. Guys like that have done well. In the bigger format, the TJ Maxx, Marshalls, HomeGoods, Five Below and Ross, those stores do tremendously because of the way that they’re run.

They have a low cost of operations and they’re selling discount types of clothing versus the Macy’s of the world. The Macy’s, as Rob can tell you is performing pretty well. It’s a remarkable turnaround. They’ve done a lot in the eCommerce world. Some of those names are the ones that jump out to me. Everybody knows how well grocery has done through COVID. Everybody seems to be shopping more.

It seems like there has been a huge rebound because consumers are very flushed with cash and have  pent-up demand and stuck inside for a long time. We’ve seen some pretty strong GDP numbers and spending numbers. That’s going to benefit retail. I’d love to dive into your point. It’s been a long-term story that eCommerce is the death of brick and mortar but you make the case that there’s always going to be the need for brick and mortar. Maybe the consumer expectations or preferences have changed from indoor malls to outdoor shopping centers but there’s always going to be a need for it. Talk a little bit about why that is, how much further eCommerce can go cannibalizing brick and mortar and where you see it stabilizing.

Pure eCommerce companies are struggling because of the cost of storing. Returns are a massive cost for these companies. Share on X

First of all, if you look at the pure eCommerce companies and some of them are public, there’s not a single pure eCommerce company that is profitable, including Amazon. Amazon makes its money as a web service and cloud service company. If you look purely at their eCommerce business, it is not profitable. It is supported by their other businesses.

If you look at Wayfair, there are a few pure-play eCommerce companies. They’re struggling because the cost of storing, distribution and all this stuff returns is a massive cost for these companies especially when you can’t return to a store and you’re returning big, heavy packages across the country and world. It’s a non-profitable business.

The profitable eCommerce companies are the ones that also have physical locations. Some of the pure-play eCommerce companies that are better at what they’re doing are opening up physical locations like Amazon, which is a great example of that. With Whole Foods, Amazon Fresh and all the other stuff that they’re doing, they’re figuring out that they need to have the ability to connect with their customers and provide services, local delivery, local returns and all that stuff that a physical company can do. More old-school physical play companies like Target, Walmart and TJ Maxx are figuring out how to use the internet better to support their businesses.

Our view is that hybrid is going to be the most profitable approach and the best companies are figuring out how to do that. That’s playing out. These companies are public companies so you can look at them. Look at Target’s, TJ Maxx’s, TJX’s, Ross’, Burlington’s financials and all these companies that you would think because they’re not eCommerce companies that they’re getting their lunch handed to them. It’s not true. Look at their balance sheets and income statements. Their profit margins are strong. It seems the growth is excellent. That’s what we think is the best to anchor for our centers going forward.

You see the hybrid approach where they have a physical and an online presence. They’ve integrated those experiences for the consumer. It’s a long-term trend. The most successful retailers will do that. You guys have in your research that there’s an expansion of brick and mortar for a lot of these larger retails where they’re investing in opening more locations, which is contrary to the larger narrative for most people here.

We’re seeing that. There’s no doubt. We are in negotiations with a number of these retailers to open up locations in our centers.

I’m not somebody who studied. I’ve been in residential real estate for too many years but that’s counterintuitive to me. I’m in to find out that these big online-only like Amazon aren’t making money on there. The perception out there is the narrative, “They’re going to gobble everyone up and make money hand over foot. They’ve got the whole world cornered.”

It’s not the case. It’s fascinating how that hybrid model works. You were talking about returns, which have no accountability with them. People have shipped me the wrong lawnmower and I said, “Do you want me to send it back?” That’s an exaggeration but the cost of them having to take it back in is more than saying, “The heck with it. Keep it. It’s got a scratch in it.” That’s a huge item on their cost side or the expense side of their sheet. That’s crazy.

It’s not an exaggeration. Phil and I talked about it. This is something that we have read about and seen a bunch of, which is a bunch of eCommerce companies who are saying, “Keep it,” which is craziness. Can you imagine a company saying they should just keep a product that you don’t want to use and that you’re not going to pay for? That tells you something about pure-play eCommerce.

Retail Real Estate: Before COVID, there was talk of Amazon eating everybody’s lunch. That was just overblown by the media. There was just too much enclosed retail and people didn’t want to shop that way anymore.

They’re not just being nice and generous. That’s not the reason they’re saying, “Keep it.” It’s crazy.

During COVID, our great example is my wife loves Target but we have to let go of stores necessarily. We’re using the app, doing the drive-up and everything is brought out to you. It’s that perfect integration of still the online mobile experience but still having to go pick it up physically at the locations. It’s been a great experience. A lot of other retailers are doing that. It’s interesting. In this environment, we’re seeing these headlines and very high inflation numbers. Talk a little bit about how that impacts the retail sector. People might be more familiar with it from a residential real estate or industrial standpoint. How does it impact retail real estate properties?

Think about multifamily as an example. As taxes, construction costs and common area maintenance things go up, you’re sweeping your lawnmower. As those inputs increase, you’re eating those as an owner and investor. As a shopping center owner or commercial owner, we’re passing those expenses on to our tenants. As long as we have a full shopping center, we have triple net leases in large part. In our view, we have less exposure in the short term to increases in our inputs and costs.

On the other side, you can’t raise rents as quickly. In a hotel, you have a single-day lease. In an apartment, you have one year. In shopping centers, we have 5 to 10-year leases. In large part, we have built-in rent bumps that cover some level of inflation. If you had massive inflation for a prolonged period, our rental rates certainly would be hit. The other side to that is that in a couple of years, we’d have well below market rents. There is a staggered lease rollover so you can increase rents over time.

It depends on your view of how sustained this inflation is going to be and what that looks like. We can lock in our income in a way that they can. We don’t have the same type of exposure. Especially in this environment, in my personal view, we’re trying to protect our downside more than anything and lock in cashflow. If we hit a double-digit cashflow and inflation goes to 20%, we’re going to be hurt by that but have many bigger issues.

You’ve built-in rent bumps. They’re a pre-negotiated fixed amount as opposed to an index. Has the space experimented with indexing at all like saying, “It’s going to be the consumer price?” You probably wouldn’t find any tenants if you did that.

You couldn’t do that on a full-stop basis. There’s not zero like that. We have seen a few leases I can think of but you would rarely index like that. If we had varied and sustained high inflation, maybe you would start saying things like that but that’s not the situation. The bigger concern would be, “Are the tenants making money in the long-term as you continue to jack their costs? Is it sustainable to them?” We all know how these businesses work. Fundamentally, they’re going to increase the cost to the end-user. We’re going to pay more for the goods and services and they’ll do fine.

Arguably, inflation is good for the retailers because a lot of those increases in costs get pushed through. At least the margin may stay the same if not increased. They are going to be able to sustain an increase in the rental. You’re saying on the upside and the revenue side, you have these longer-term leases but build in these right escalators over time. You have a very high level of predictability of your cashflow.

On the expense side, you’re not going to have as much increase or exposure to the high construction costs, the high adjustments, property taxes, utilities and those kinds of things you may have in other asset classes. You hear a lie where you may attract inflation as closely but it’s not going to be negatively impacted. We’ll probably track it to a certain degree. Is that accurate?

In multifamily, you're competing against 50 other prospective investors. In retail, it's just you and three to five others. Share on X

That’s right. You have much more risk. A lot of people are talking about inflation and how that’s going to impact the revenue side. We haven’t seen inflation like this in a long time. In my estimate, you’re going to have much more pain on the expense side than gain on the revenue side in other asset classes potentially.

I would love to know your thoughts too coming from both your backgrounds in finance and in a larger scope of the real estate world of what your view of inflation is. A lot of this is being caused by  supply chain disruptions, which impact retail anyway. I’m sure you keep tabs on those topics. Where do you see this going if you have any thoughts on the bigger picture of the inflation environment and how long to sustain what we see as very high levels of inflation?

I wish I knew the answer to that question. I don’t know. We talk a lot about this stuff. My personal view is that we’re going to see some sustained inflation for the next couple of years. The supply chain issues will naturally take care of themselves because that’s what businesses do. They figure out how to deal with this stuff. I don’t think this is a 3 or 6-month thing. It’s going to take some time to get there. That’s what the market is predicting. It’s going to take a couple of years to work this way through. From our business perspective, we’ll get into how we invest in these assets and our thesis. We feel very protected.

On top of that, where we invest cashflow is king. We’re investing differently than other asset classes are because we’re investing primarily for cashflow with some potential upside. For us, as we were talking about, we can lock in some steady revenues and protect ourselves against increases in expenses and lock in cashflow with some growth over time. That’s what we love about our asset class.

I’d love to shift the conversation to more of the investment side of things. I’d love to know how you guys found your way of investing in this asset class, coming from your background of more in high finance and broader exposure to real estate. What drew you originally to retail?

We’re contrarian by nature. We are looking for an opportunity. Phil and I both have very diverse backgrounds. We spent many years in a multifamily investment and finance company. I have years of experience in the lodging space and Phil has other experiences elsewhere. We do have diverse backgrounds in real estate.

As we started to form our partnership and think through this, we felt we wanted to go to the sector where others were exiting and there was a view that there were challenges. If we felt that the capital is leaving, there might be an opportunity for us to make money there and invest well. That’s what we did years ago. We’re investing in this space and it’s been great.

We would love to invest in other asset classes. We have nibbled around multifamily over the past few years and have always come up short. When we invest in shopping centers and multifamily, it’s a very different experience. I don’t want to pick on multiple of those. There are great assets out there and a great sector but you’re typically competing against 40 or 50 other prospective investors. When we invest in retail, it’s us and 3 to 5 others. It’s a much different playing field. We think there’s an opportunity there because of the lack of capital in chasing those deals. That’s why we were attracted to retail in the first place.

In the shifting landscape of retail, where do you see the biggest opportunities? What are the types of assets that you’re targeting and going after? It’s probably not malls.

ILB 28 | Retail Real Estate
Retail Real Estate: There’s going to be some sustained inflation for the next couple of years. The supply chain issues will naturally take care of themselves because that’s what businesses do. But it’s going to take some time.

No malls. We’re open-air focused. We have focused on super high growth markets in the Southeast with the feeling that there’s a reason you’re going to have new tenants opening in those locations because you have population growth, good jobs and incomes. If you buy the better real estate there and see 5% population growth over a 2 or 3-year period, that is the recipe for success. We were right. We joked about it. We wish we had bought a lot more because everybody is rushing to the Southeast. That was one of the accelerants of COVID that’s been interesting.

When we were initially buying years ago and until COVID, the REITs were selling. We’re largely buying from the public REITs or large institutions. They were selling their assets in the Southeast. They’re one-off assets. If you listened to the CEOs on their public earnings, they’re all saying the same thing. They’re selling in the Midwest and trying to buy as much as they can in these growth markets in the Southeast. We were certainly ahead of the curve on that. Being contrarians that we are, if they’re selling in the Midwest, we start to see some opportunities there.

By nature, we’re looking for sustainable cashflow, downside protection and some ability to add income, grow our profit over time and some value add. We’ve been able to find those Target centers and grocery-anchored centers. We want a good anchor that is driving traffic to that center. We want below-market rents. There are strange opportunities, whereas Rob said we’re competing against 3 or 5 folks. If everybody is selling or all institutions are selling in some market, you can pick up the best Target center in that market, which is incredibly dense.

We bought a Whole Food center in Chicago because it’s a big deal and everybody’s scared of Chicago. There were very few bids. We bought it at an 8% cap where it’s double-digit cash-on-cash. We have long-term leases on everybody. It doesn’t make any sense and you can never replicate that in Charlotte, Atlanta or Miami.

For my education and our readers, when you say open air, are you meaning individual buildings on pad sites or strip centers that have individual entrances from the outside? Is that what you’re mostly talking about?

Yes, a strip center or power center, they call it. If you use a Target center, Marshalls and Ross and maybe there are some pad sites in front, meaning Starbucks, McDonald’s or whatever it might be out on the road. It’s that whole project. One of the things that we do often is you can buy that whole property together at a certain cap rate. You know the 1031 market. There’s so much demand for those single tenant or small strip centers. We will create a parcel for those. Maybe we buy the whole Target center at a 7.5% cap and then sell the McDonald’s at a 4.5% cap. Our basis, cashflow and what we own are enhanced that much.

Like McDonald’s, would it be on its legal order? Do you have to go through a lot of line adjustment or subdivision processes to break that off?

It depends. A few of them will be on their own and some won’t be.

You look for value add opportunities in retail. For those that are investing in multifamily or residential properties, it’s clear what that means like improving the property and getting higher market rents. Where are you finding that? You’re buying at a 7.5% cap that’s already pretty incredible but it’s parceling out. The McDonald’s lease is selling that and reducing your basis and returning capital. Is that one of the strategies? What are the primary ways that you add value aside from locking into the current place tenant cashflow?

A good value add strategy is to buy from the large owners because they really focus on buying good real estate. Share on X

That’s certainly one of the strategies. We have three basic strategies for how we’re adding value to our properties. At first, as was described, the arbitrage between buying at 7.5% and selling at 4.5% or 5%. That’s a clear value add strategy. Sometimes those outparcels are already developed. You have McDonald’s or Taco Bell. Other times, it’s vacant land. The previous owner didn’t take advantage of it. We either sell the land, lease the land, sell the leased land or do a build to suit depending on what the tenants are looking for. Some tenants like Starbucks, mostly what they do is build to suits and then others want to lease the land from you and you can sell off that ground lease.

There are different iterations on that but that’s certainly one of our key strategies. The second is that we’d love to buy from some of the larger owners because they buy good real estate and put a lot of money into that real estate but they don’t always do all the value add stuff that we would do. Some of the things they don’t do are focus on some of the small shop leasing. They focus on the big guys, the 25,000 square foot TJ Maxx.

That’s what their relationships are but they might be doing their leasing from a few hundred miles away in some corporate office somewhere. We do all of our leasings locally. We focus on creating value with the small shop space by pushing rents and occupancy on that. For example, we bought a center in Orlando, which is right next to the University of Central Florida. It’s a great location and property. We had some parcel opportunities which we’ve sold off at great attractive yields. The property was close to 90% occupied but that was because you took into consideration the big anchors.

If you take the anchors out of it, the small shop space was only about 60% occupied. We took that small shop space and did some renovations. We upgraded the façade and landscaping. The average rent at the time that we acquired the property was around $16 to $17. We’re leasing space at $24 to $25 and pushing occupancy to 90% on the small shop space. That’s how we can add value to these properties.

I want to take a step back here because some of the numbers we’re throwing around are pretty crazy when you compare them to other asset classes. You’re going in cap rate at 7.5% or 8% and getting double-digit cash-on-cash yields. That’s insane for someone more familiar with multifamily where you’re seeing deals trade and the low fours.

We’ve been hearing of some deals traded in the mid to low threes in the hot markets in Texas and other places on an ongoing basis. It gets hard to make deals pencil at those cap rates and get any cash flow. More and more, you’re relying on the rent growth projections, which in some markets could be achievable. It may be a little more speculative the lower you go. You are seeing an ongoing basis of a 7.5% cap on actual financials. Is that accurate?

Yes, in some cases, wider. We agree. It’s why we’ve struggled to buy multifamily. We were wrong. Years ago, we said the same thing about multifamily. We were right about retail, even right relative but nobody anticipated the continued cap rate compression that we’ve seen in multifamily. You’ve had certainly seen some significant rental increases as well. We liked the cashflow. We could lock in that sustained cashflow with some growth on day one.

Our feeling is that investors will be able to differentiate good asset classes from bad. As more institutional capital comes back into that space, you’ll have cap rate compression because we shouldn’t be able to hit an 18% cash-on-cash on a Whole Food center in the first year. That shouldn’t happen. As investors come back, that yield gets pushed down and our profit increases.

A lot of times, people think the cap rates are generally risk-adjusted. The higher the risk, the higher the cap rate but you’re making the argument, “If I got Whole Foods on a long-term lease, Target or TJ Maxx, those very healthy companies as my tenants then my risk is pretty low in the spread.” The difference between the cap rates on multifamily versus retail is it’s a good risk-adjusted return. It’s very interesting.

ILB 28 | Retail Real Estate
Retail Real Estate: If you lose a large tenant, you’re kind of SOL. You could be in a world of pain, which is why you have to spend time underwriting and figuring out who’s paying too much rent and not paying rent.

I got a question both in terms of a pro forma. Let’s say you’re presenting to your investors or an exit if you’re looking to sell. Let’s say you have your big anchor tenants, grocery store, TJ Maxx or whatever it is. The rest of the space constitutes all these smaller shops. What does the industry expect? Do you project X amount of vacancy? Is it all based on, “Let’s get everything full and then try to sell it based on pro forma that shows the whole thing?”

In the apartment world, there’s a lot more liquidity because its smaller units spread out over 200 small units. I always felt that in retail, if you lose one of your big tenants, your pro forma goes down the toilet. You got to assume that they’re going to stay and you got them on a long-term lease. What projections do you do in terms of the remaining space? Do you have to factor in an anticipated vacancy?

Certainly, on the rest of the space, I get 3% to 5%, depending on the submarket. There’s always a vacancy factor. On top of that, we’re modeling roles from those tenants as well as the larger tenants based on their lease timing. As you get to the end of their leases, many have options but even at that option roll period, we are taking a vacancy factor. Maybe you’re saying there’s a 75% chance that tenants are going to renew.

We think tenant by tenant. We’re discounting so you’re applying a cost and a reduced rent for some time. For twelve months, you’re going to take out 25% of that income. We’re also going to increase the dollars we have for tenant improvement, money for new tenants and leasing commissions for the new tenant to make sure that all of that’s factored in.

When we’re underwriting, that’s all baked in and we’re prepared for that. In almost all cases, we’re beating those numbers because we’re careful. If you lose a large tenant, you’re SOL. You could be in a world of pain, which is why we spend so much time underwriting and figuring out who’s paying too much rent, who’s not paying enough, how are these tenants doing, who wants to be in the market and who wants to move from a dying mall or center somewhere else within the market. We’re not gambling on this. We’re not taking a binary risk. We’re not going to do it.

Here’s the last question and you already alluded to it. Where are you seeing the opportunity going forward? Maybe more capital is moved to the Southeast and maybe they’re leaving some meat on the bone back where they’re leaving. Talk a little bit about that.

Our goal is to buy when the big guys are selling and sell to them when they’re buying. That’s our strategy. It doesn’t mean that we’re not going to find deals in the Southeast. We’re still looking. We have a deal under contract in Atlanta. There will be opportunities for us to find good deals in those better markets in the Southeast that we like but we’re also looking elsewhere. We bid on a deal outside of Detroit in Novi, Michigan. It’s a solid market with excellent incomes. This is the best piece of commercial real estate in that place. We got outbid so we didn’t get the deal.

We liked that deal a lot. We were buying that at about an eight cap. They had great tenancy, the right layout and the right demographics. We buy that in 8% cap and do all the things we’re talking about. There were outparcel opportunities to carve some off and sell at attractive yields. It was some lease-up opportunities. That’s the type of deal that we will look for outside the Southeast. We’ll find that. We’ve been talking about the deal we bought in Chicago, the Whole Foods anchor deal. We are going to be expanding our focus geographically. We’ll find plenty of opportunities in those geographies.

What’s the best way for readers to get ahold of you if they’re interested in learning more?

Our website is the best way. It’s Both Phil and my contact information is on there, also our Head of Investor Relations, Heath Binder’s contact information. We have published a bunch of research and quarterly information about the markets and the retail investment world. If you go on there, reach out to any one of us. You can also sign up on our website for the distribution of all of our research and information about new deals coming up. We’re happy if you do that as well. That’s the best way to connect with us immediately.

Thank you so much for coming on and sharing your knowledge in this space. This is very interesting. You seem to have a great handle on this space. Thanks for coming on.


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About Philip Block

ILB 28 | Retail Real Estate

Phil Block is one of the Managing Partners of LBX Investments. Prior to Launching LBX in February 2018, Phil was a partner at Big V Capital (“BVC”), an owner-operator of southeastern U.S. shopping centers. While at BVC, along with Rob Levy, he oversaw and underwrote the partnership’s 11 Southeastern U.S. shopping center acquisitions and managed all capital raising (both debt and equity) and asset management efforts.

Formerly, Phil was a Senior Managing Director at, when he created the commercial lending business and led institutional capital markets efforts. Prior he was VP of Corporate Finance and Capital Markets and Centerline Capital Group, an NYC-based multifamily finance and asset management company with $13B in AUM. Prior, he helped launch Dominion Capital Advisors, a commercial real estate advisory firm with an affiliate mezzanine /private equity lender. Phil began his real estate career as an investment banker at Cantor Fitzgerald in NYC.

Phil has a BBA, cum laude from George Washington University and graduated from the General Course at the London School of Economics with a degree in Finance.

About Robert Levy

ILB 28 | Retail Real Estate

Rob Levy is one of the Managing Partners of LBX Investments. Prior to Launching LBX in February 2018, Rob co-founded Big V Capital (“BVC”), an owner-operator of southeastern U.S. shopping centers. While at BVC he oversaw and underwrote the partnership’s 11 Southeastern U.S. shopping center acquisitions and managed all capital raising (both debt and equity) and asset management efforts.

Prior to BVC, Rob was the Chief Operating Officer of the Real Estate Group at Benefit Street Partners, a multi-family credit manager with over $11.0 billion in assets under management. Prior to Benefit Street, Rob help various positions at Centerline Capital Group, including Chief Executive Officer, President, Chief Operation Officer, and Chief Financial Officer, and was a member of the Board of Trustees of Centerline’s parent company, Centilne Holding Company. Centerline was a multifamily finance and asset management company with a national scope mortgage baking platform and over $13 billion in equity and debt under management. Rob join Centerline in 2001 as the Director of Capital Markets.

From 1998 – 2001, he was a Vice President in the Real Estate Equity Research and Investment Banking departments at Robertson Stephens, an investment baking firm. Prior to 1998, Rob worked at Prudential investment arm of the Prudential Insurance Company.

Rob received his MBA from the Leonard N. Stern School of Business at NYC and his BA from Northwestern University


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