GI314: Investing in Shopping Malls with Andy Weiner

GI314: Investing in Shopping Malls with Andy Weiner

Andy Weiner, the President and founder of RockStep Capital Corporation, established in 1996. This vertically integrated real estate firm, based in Houston, focuses on shopping centers. Andy has built and acquired over 10 million square feet of shopping centers throughout the United States. Before founding RockStep Capital, he served as Vice President of Operations for Weiner Stores, a chain of 159 family clothing stores with locations in Mississippi, Louisiana, and Texas.

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Andy Weiner, the President and founder of RockStep Capital Corporation, established in 1996. This vertically integrated real estate firm, based in Houston, focuses on shopping centers. Andy has built and acquired over 10 million square feet of shopping centers throughout the United States. Before founding RockStep Capital, he served as Vice President of Operations for Weiner Stores, a chain of 159 family clothing stores with locations in Mississippi, Louisiana, and Texas. Thank you so much for being on the show!

Andy:
Hey, Charles, excited to be here.

Charles:
So can you give us a little background on yourself before getting involved with investing in shopping centers and real estate in general?

Andy:
Sure, sure. So my background was my grandfather started a clothing store chain in Houston in 1920 and built a chain of 159 stores each store of the size of a TJ Maxx, about 20,000 square feet. And I ran these stores, I ran operations for the company, so I ran stores, store operations, real estate, finance, logistics systems, hr, and really just learned retail. And then in 1996, as you mentioned, I started doing shopping center investments and we’ve been doing investments since then. Built a little over 10 million square feet of shopping centers, and we have assets in 11 states, three types, grocery, open air, non grocery. They’re called power centers or neighborhood centers. And then we also buy enclosed malls. And our target is to buy these properties in secondary and tertiary markets.

Charles:
Fantastic. So before getting into kind of what you’re doing with real estate, can you tell us a little bit about your experience with your family’s business and how that really contribute to what you’re doing now with Rock Step?

Andy:
Well, I, I learned a lot in my family business. One, I learned a lot about retail and how to think about retail, how inventory is managed, how do you plan store metrics. Store metrics, is the investment in a new store, capital required profitability, return on investment? So how does a retailer think about making money? Okay. And the operations involved with that. So that’s kind of where I came from. And there’s different strategies of pricing of inventory management, and that helps me in real estate, investing in the shopping centers because I can think about a tenant and look at a tenant and get a pretty good sense of its durability of its survivability. And so I use that skill to assess risk credit worthiness of a tenant.

Charles:
Now, when you were growing your business and I mean, I guess for the last, first for 40 or 50 years of your business, there wasn’t as much competition, I guess, in what your family was doing, but obviously around the sixties, seventies and eighties, we have Walmart that came in. I mean, how did you guys compete with Walmart who also started not in Houston, but in the south, south Southeast?

Andy:
I will tell you, we did not compete very effectively. I will tell you a quick story. So a buyer of our ladies merchandise came in and said, Hey Andy, I’m thinking of buying 1,800 dozen of this lady’s blouse and marking it with a low margin for 8 99. Walmart is buying the same de blouse. They’re buying 1,000,600 thousand dozen, okay? And they’re marketing, marketing it at 7 99. And so they, I mean, Walmart just has buying power and they are, prices are very, very competitive. So we look, we, we were competing against Walmart. We did not survive because of Walmart. And we had some family issues as well. So we did not have the best strategy to compete with Walmart. Even if we had a great strategy to compete with Walmart, we might not have survived. So

Charles:
Being in retail and growing up in that, is that what really propelled you to getting into malls and specifically shopping centers?

Andy:
Yes. Yes, because we were operating in the shopping center business as a retailer. So I visited markets. I understand competition between stores and between shopping centers. I’ve been into, I dunno, 500 Walmarts probably more than that. Okay. I’ve been into several thousand markets. And the more you see and the more you see competitive environments, it builds a certain ability to assess opportunity and risk. And so I, it was natural for me to go into the shopping center sector after I started out in retail.

Charles:
So you talked about the three different malls types that you guys invest into. Can you tell us a little bit more, you kind of went over it a little bit quickly about the markets and sub-markets and how you successfully choose them to invest into, ’cause I imagine this is very, very important, even more so with retail versus maybe other real estate asset classes.

Andy:
Yeah. So we look for secondary and tertiary markets that have essential drivers in these markets. Something about these drivers that drive population stability and growth. So you want to have a university, you want to have major fortune 1000 companies, major hospital districts, tourism per, you know, government, military, or some research facility. Something deriving population growth in that market. So an example is a deal we’re doing right now in a city called Lake Charles, Louisiana. Okay. This is a city of a hundred thousand market, about 250,000 southwest corner of Louisiana. We’re buying a, a grocery anchored center that was demolished in Hurricane Laura in 2020, rebuilt for $33 million to withstand 140 mile an hour winds. So it has a new roof and a new HVAC and new interior, new facade very good looking asset. We’re buying it for $20 million at an eight and a half cap, a grocery anchored center.

Andy:
And we’re borrowing at 7%. So we have positive leverage. In other words, our yield, our cap rate on the acquisition is less than the interest rate at which we’re borrowing. And that market has some essential drivers. Number one three weeks ago was announced the largest investment in the history of Louisiana, a 17.5 billion l and g terminal, liquified natural gas terminal construction, 8,500 workers for four years in a row. And there’s three other major construction projects that are occurring from the highway department and two additional ones in LNG terminal construction. So a market of a hundred thousand in the city, 250,000 is gonna be inundated over the next four or five years. In addition, our property is near McNee State University right down the street, and we have two casinos in the market. So there’s a lot of tourism for people who come from the Houston area.

Andy:
So this market has essential drivers. We just put this property under contract and three weeks ago. And something that is very interesting in every one of these markets, we get local investors to be part of our equity. We get local lender, and as a result, we do that to reduce risk. So every time we buy a shopping center in a tertiary or secondary market, we make the effort of getting local business leaders to be a part of our equity. And they help us with entitlements and incentives and property taxes relations to this city or county or parish. And also they’ll help us lease out alternative uses. They’re on the boards of the community college and the hospital district and economic development district. And so we’re the only ones in the country to do that. So we go into these markets that have essential drivers.

Andy:
We buy a great asset with positive leverage, and then we get local investors and local lenders aligned with the city. We call it the Rock Step Coalition. And that is our formula. So we buy grocery anchored centers like we’re buying in Lake Charles. We buy open air centers non grocery like power centers, and then we buy enclosed malls. We own 14 enclosed malls. There’s $50 billion of insolvent debt underlying these properties. And you can buy and close malls at 13 to 17 cap. So at, at a yield of 13 to 17%, you put on 50% leverage. Your cash on cash returns are over 20%. And there’s very few buyers, there’s lots of sellers. Washington Prime is liquidating, other companies are liquidating all their assets. A lot of these properties are coming to market at dramatically lower basises, often at land value or close to land value at mid-teens type of cap rates.

Andy:
So that’s what we do. We specialize in secondary and tertiary market shopping centers where we have positive leverage. The yield or the cap rate is higher than your interest rate. Little bit different than the multi-family sector where oftentimes certainly if you’re building new, you’re exiting at five or five and a half cap, your interest rates might not be that low. You might have negative leverage. So we’re in a positive leverage world where the Amazon effect has killed off the weak retailers and those that have survived have their own e-commerce strategy. They can protect market share against Amazon, and they’re growing dramatically. They’re telling stories to Wall Street, we need 50 stores, a hundred, 150 stores, but there’s no new inventory. So you’re growing into, you have stories of growth of retailers that have survived Amazon with strong balance sheets growing into an inventory of shopping centers that’s not growing.

Charles:
If you love real estate, you like the idea of passive income and believe that income producing properties will appreciate over time, go to invest with harborside.com. That’s invest with harborside.com. Yeah, that’s great. When you’re talking about your Lake Charles asset, a couple things I see there is, number one is I was just reading an article on this. On l and g, there’s like four pipelines that go down to Southern Louisiana and we have so much LNG, we ship it to Europe, we ship to Asia. I mean, this is something where when you’re telling me your strategy, I hear a lot of diversity of employers and diversity of industries. So it’s, those are great metrics for picking markets and really knowing something that’s gonna grow. And if something shuts down you have the rest of the economy, that local submarkets who kind of push through and keep people in that area.

Andy:
Our timing is perfect. This is a property we just put under co We just started a raise. We are looking for equity capital to close out this deal and we’ll close out in the next couple of weeks. And again, on this deal, we typically we’re targeting a 1213 IRR with a current cash yield of 8% on our mall deals. We target an 18 IRR with cashflow day one. And then we have a fund called Hometown America, which is targeting a 17 18% IRR with a five year.

Charles:
So this is obviously a newer asset. There’s not gonna be much redevelopment if any that goes into this property, but for other assets that you purchase. Can you talk a little bit about how you underwr underwrite the base cases, the potential upsides, and kind of like alongside cap rates?

Andy:
Yeah, so when we buy part, any property, we underwrite what is called a base case. Charles, we say to ourselves, yeah, nothing good’s gonna happen. We’re not gonna be able to replace tenants. We’re not gonna be able to get multifamily approved in this market. We can’t lower property taxes. We can’t lease up the property and it has to work. The property’s got to work at a threshold IRR in grocery, it’s gotta be a 12 IRR in in closed malls. It’s gotta be a 1516 IRR as if nothing good is gonna happen. And then we’re vertically integrated. We have 75 employees, people from Brookfield and Blackstone and CBL, all these REITs who have come to us and we’ll talk about the rock steps in a second, but we’ve got this team that can take advantage of these opportunities and go after and try to improve on the base case. And that’s how we structure our underwriting and that’s how we structure our strategy.

Charles:
Interesting. So you mentioned before about the strength of tenants recognizing that because of your retail background. Can you tell us a little bit about how that process goes? ’cause When you’re buying these properties, I imagine you’re putting people in for 10 years with a couple different renewals on top of it, maybe longer, whatever that initial lease is. Can you tell us a little bit about how you vet a potential tenant and how that whole process goes? So

Andy:
In general, there’s two types of tenants. Charles, there are national tenants, most of whom are investment grade. I’ll give you an example. TJ Maxx. TJ Maxx has multiple divisions. They’ve got home goods and Sierra and Marshalls and TJ Maxx, but the parent company is investment grade rating. It virtually has no debt, and it just, I mean, 20, $30 billion of sales. And we’re working with TJ Maxx throughout the country. Aldi another grocery store. German grocery store is investment grade credit. Ross is investment grade credit, others are good credit, but not necessarily investment grade credit. And then as you move down the credit profile to weaker credit, you have to change the nature of the deal you do with them. So as you move to lower credit type of retailers or restaurants, you limit the amount of tenant improvement dollars that you give. And oftentimes you’ll say, okay, you tenant, you put tenant improvement dollars in, we’ll lower the rent for you. And instead of giving you tenant improvement dollars where we need more rent to justify that, we’ll lower the rent. So it’s a balancing act,

Charles:
Right? They’re gonna bring, you’re not gonna bend over as much backwards for a tenant maybe that has not as not as strong of a background. What are some of the challenges you, you know, with operating malls and these three different types of malls that you, you guys work with? I

Andy:
I, I will tell you one of the biggest challenges Charles, is that in the mall space

Andy:
There are several dominant buyers of malls who’ve bought hundreds of malls who run a more asset depletion strategy. And cut expenses oftentimes might not pay all the bills. And many communities are suffering and retailers are suffering with these type of operators. And we come in and we will work. We, we do what we call the Rock Step Coalition. We find an opportunity to redevelop and save an enclosed mall. We bring in local investors, we bring in a local lender, and we’ll work with the city in some kind of incentive structure to basically move the asset from a almost a death experience to something that has 30, 40, 50 years of life. So there’s an example of a property we’re working on in Texas, an enclosed mall where we’re bringing in medical office, we’re demoing the property, in other words, no more interior facing, everything out, new facade.

Andy:
There will be, we’ll add a grocery store, we’ll add a sporting goods store, we’ll add medical office from the hospital across the street. And we’re working with a city who’s giving us both cash incentives and other sales tax and property incentives. And in that market, we’ll end up with our investors getting over 20 IRR on that deal. And we’re working on these kind of opportunities throughout the country. There’s opportunities to transform and stabilize in ENC closed mall and often make it hybrid. Part of it is open air, part of it is enclosed mall. And the key to the closed mall business is that you have to be able to confirm and underwrite that you have stable net operating income. The reason why you’re buying it at a 15 cap is one, debt is hard to find. And number two, there’s a belief that net operating income is not stable and it’s falling.

Andy:
So we have a very good ability, a refined ability to analyze whether stable NOI net operating income can be stable. And if it’s stable at a 15 cap or a 14 cap at 50% leverage, at 7% interest rate you have, it’s just a cash flow play. And so we have several of our assets where we pay an eight pref current and we’re returning 20% of the capital per year from excess cash without a refi. Yeah. So it, it, this is a the retail sector. I know your, your, your podcast really focuses on multifamily, but, and multifamily is a great, great sector to invest in, and most people do invest in multifamily for all the reasons that you have on your podcast. For those who want to diversify out of, or in addition to multifamily retail offers positive leverage where you can buy great assets at eight and a half, nine, nine and a half cap rate for open air centers and enclosed malls at 13 to 18 cap. So it’s just a different, it’s a high cash flow strategy. So when you do an investment, 40, 50% of your total return is from cashflow during the five years of your life. And it’s not backend loaded like other investments.

Charles:
You mentioned before about the lack of new inventory and product coming on the market in retail and in multifamily 2024, we had unprecedented almost a half million units come on. Can you tell us a little bit about how this is affecting what you’re buying and maybe how this has maybe changed your business plan or how you’ve adapted it with properties you’re looking at?

Andy:
Yeah. So because construction costs went up by about 30% in the shopping center sector, and interest rates went from four to 5% to seven to 8%, the, the actual cost of construction is up by about 40% between interest rates and real construction costs and tenant sales are not up by 40%. So, so it doesn’t justify new construction.

Andy:
That’s be, that means that second generation space where you can buy it at 60 70% of replacement cost or in Lake Charles, we’re buying effectively a new center at 50% of replacement cost. That is a very, very good investment with downside protection. We like that story in the malls space, you’re buying 50 or a hundred acres of half a million square feet of, of shopping center at 20% of replacement costs. I mean, it’s, it’s, you, you, it, it’s, it’s just a great opportunity. And of our 14 malls right now, we’re demo malling, six of ’em one is led by Target, one’s led by Costco, three are led by TJ Maxx and Ross, and one’s led by a $50 million hockey arena. So there’s all these different opportunities and optionality associated with the enclosed mall space.

Charles:
Interesting. Interesting. Andy, as we’re starting to wrap up here, can you tell us a little bit you’ve been doing this almost 30 years in real estate how your relationship with money has changed over the years,

Andy:
How my relationship with money has changed

Charles:
Personally in business, whatever.

Andy:
Well, yeah. Our goal is to not lose money and to be to focus on downside protection. That’s why we make the extra effort of getting the community to buy in into an investment. Local investors, local lender, city support, very, very I important to us. And the second thing we do is that we focus on people. So the word rock step Charles is not a word in the dictionary, but it is a dance move. And I love big band music and swing music. And so when you’re swing dancing, couples dancing, you rock step when you switch directions. And so we use it as a metaphor, Charles, we got an issue here. We got a challenge. We need a rock step. We need to switch directions. We use it as a verb. And then we also have 25 rules of behavior, Charles, that w that I wrote as our owner’s manual.

Andy:
We call them rock steps. And so rock step number 21, which is the rock step of the week, take pride in your appearance. The whole company talks about the rock step of the week 21 this week. What does it mean to take pride in your appearance personally, professionally, why is it important? And then we’ll go next week to rock Step 22. Don’t be a jerk. We don’t allow jerks at our company. We certainly don’t allow brilliant jerks, okay? Which is more of a challenge. And so these are the rules of behavior. It’s how we hire people. Charles, you know, if you were gonna come to an interview, what are your favorite three and why? What are your most challenging three and why? You’ve gotta be really good at what you do to come to rock step. You gotta live by the rock steps to stay a rock step, okay. And so I’d say that that living by the rock steps, going to the mat on the rock steps for us is the most important thing to build a team. And if we build a high performance team that lives by the rock steps, we can execute on all of our goals for our investors, for our tenants, for our employees, for our communities. Perfect.

Charles:
Andy, how can our listeners learn more about you and your business?

Andy:
Rock step.com. R-O-C-K-S-T-E-P, like step on a rock rock step.com. They can reach out to me, they can call me, they can email me, they can request information, they can go to our learning center. Our learning center. Our goal at our learning center is to train anybody who wants to know about shopping centers and investment in shopping centers. They can go read articles, they can go look at videos, all the good, all the bad, simply as a way to diversify from multifamily, which everybody should be doing great sector. But for those of you who wanna diversify, please consider rock

Charles:
Step. Yeah, definitely. Thank you so much for coming on. And also I was, you know, I extensively went through your website. There’s a lot of information on there about your different projects, about the tenants that you work with, a lot of big names, like you said before, national people. So we’ll put those links to the show notes. And Andy, thank you so much for coming on today.

Andy:
Hey Charles, thank you so much.

Links and Contact Information Mentioned In The Episode:

About Andy Weiner

Andy Weiner is the President and founder of RockStep Capital Corporation, established in 1996. RockStep is a vertically integrated real estate firm based in Houston that focuses on shopping centers.

Andy has over thirty years of experience in the retail industry, a Stanford degree in Economics and Political Science, an MBA from the University of Texas, and completion of Harvard’s business program for retailing executives.

In addition to his passion for retail, Andy has a deep love and respect for Hometown America. From interacting with the local community to revitalizing local shopping centers, Andy and his team are devoted to revitalizing smaller American towns.

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