Rock Steps to Retail Wealth: Inside Andy Weiner’s Shopping Center Empire | Jake & Gino Poadcast

[00:00:10] Hi everybody, it's Jake Sanzani, I host Jake and Gino Podcast here with my co-host, the multifamily mentor, the coach, the chef, the father of six, the best selling author, the G Daddy. Gino Barbro, Gino, how's it going? Jake, two days in a row I get to spend with you in the studio. I'm doing phenomenal. How you doing brother? Always making it happen big man. Excited about today. Today's guest is the founder and president of Rock Step Capital, a real estate investment firm that's all about breathing new life into retail properties across the country.

[00:00:40] Okay? He's here to discuss the future of retail, how to spot opportunities where others don't. I'm very excited about this and what it really takes to build something that lasts in commercial real estate. I know you like that Gino. So without further ado, Andy Weiners, welcome to the show. Hey, excited to be here guys. So here's what we're going to do because I didn't give Gino here a chance to meet you and know your background. Tell us your story. Tell us how you got into commercial real estate and then we're going to go deep dive into the retail.

[00:01:09] Got it. Got it. Got it. Well, my story started in retailing. My grandfather started a chain of 159 clothing stores based in Houston and I ran the operation. Woolworth. Close. Weiner is our family name. And I ran all the operations. So I ran store operations. I ran real estate, systems, logistics. I was a retailer by background.

[00:01:33] And so that's how I got started in commercial real estate. After 12 years in retailing, I started my company 28 years ago in Houston. And that's a lot of negotiating, right? Going with merchants and everything like that. What's coming in? What's going out? Wow. I'm reading the Home Depot book right now about Bernie Marcus. And so they're always talking about this, right? Being a merchant and that's what just spurred that.

[00:02:00] So you want to maybe describe that a little bit more for folks, what that was really like? Because I'm sure it's fascinating. Yeah. So I was not the merchant side of the business. I was the operation, the stores, the movement of goods, logistics, all the people side, all the real estate. So that was what I did. So I worked with the shopping center sector. I developed an understanding of markets, competition. What was the footprint of the stores? How big?

[00:02:27] They were 20,000 square feet each, the size of a TJ Maxx, for example, or Ross stores. Half of them in big cities like Houston, San Antonio, Dallas, New Orleans. Half of them in county seat towns. Andy, I've got so many questions off of that. I think the first one is, how do you manage something like that back then without computers or without systems? I mean, you had systems obviously, but it must have been so much different than it is nowadays to aggregate data back then as it is compared to today.

[00:02:57] Interesting story. My dad, in the 1950s, was instrumental in bringing computer analysis into retail. And so this was the days of data cards. And I remember as a kid going down to IBM, their big data center, their big computer near the medical center in Houston. And we'd bring these stacks of cards of sales reports of how to dresses or blouses sell last week.

[00:03:25] And so we were one of the first in the country that was able to see how out of 500 styles, which styles sold well so you could reorder. OK, and this is very standard now. Obviously, it's very sophisticated. But we did have computers starting in the mid 1960s and it became very sophisticated. Did you like the business? Was it a business that you were attracted to? I loved the business. At 32 years old, I was managing 5,000 people.

[00:03:53] I mean, it was like a really great opportunity. Wonderful people we had. We were competing with Walmart. It's a problem. And we had some family issues in the business. So a family business always struggles as you move to the third generation. Why is that? I've heard that. That's like a common thing that you hear in movies and popular.

[00:04:15] I am an expert in family business. What you need to do is make sure that you run for the benefit of the wealth of the business. All other issues are secondary. And we did not have a board of directors. We did not have a way to make sure that we were getting expert strategy, the top strategy to compete with Walmart and Kohl's.

[00:04:41] And a big time changing landscape, too. So who started it? Granddad started it? Granddad started here in the 20s, went out of business in 1933 in the Depression. And even though he was legally not obligated to pay his bills back, he felt it was his moral obligation. He paid all of his creditors back. He couldn't find two of them. He hired a detective to find two of his creditors to pay them back, even though he legally was not responsible, required to do that.

[00:05:08] So that tradition of honor, do the right thing, pay your bills on time. That is a bit infused in how I run Rockstone. So dad brought it back up. So I'm sorry, Jim, I'm interested in this before we get into the real estate. So dad brought it back up, you carried it on, and then did you eventually sell? We did. The joke is a chapter 29. Okay. I don't know what that is. That was two 11s and a 7. Okay. It doesn't sound good. I'm not sure.

[00:05:38] And then it is 7, a liquidation. And I learned many lessons. One of them was you cannot live without consequences. We weren't operating at the highest strategic level to compete with Walmart. And even if we were, we still might not have survived Walmart, but you cannot live without consequences. At the age of 32, leadership lessons.

[00:06:04] It's really hard at the age of 32 to be a leader, to have people look at you at such a young age and say, this guy's my boss. I'm in my 50s. Why am I going to listen to him? What did you do? How did you stand out with your leadership, I guess, abilities? You have to work harder than anybody else. And you have to be able to communicate publicly about the goals of a division, a store, a process.

[00:06:31] And then you also have to see where the strategic threats are in the business. And you have to try to solve for those. I'm just taking notes. And I'm sorry, because this is, it's really, it's really interesting. The first thing is you have to work hard. So there's no four-hour work week. I guess that that's a myth. I think maybe when you get older into your career and you can start delegating. But even then, you've been ingrained. You've been doing it for so long. You love it. It's your passion. I think people confuse that.

[00:07:00] And I think people, even in the real estate business, I want to get into real estate because of financial freedom. I think that's a myth, Jake. Don't you think we got into it and then we figured out, wow, we really like this real estate thing because we're pretty good at it. And then once you start seeing you're pretty good at it, you want to continue to do it. And you want to get better at it. And then you start getting better at it. And it's like, wow, this is a pretty good gig we got going on. Don't you think, Jake? That's how I feel. Financial freedom didn't hurt. It didn't hurt. And that's what you think you're going for. And it's a great step.

[00:07:29] But I think ultimately, impact, legacy, purpose, fulfillment, autonomy, all of these things fill into it. Yeah. And you have to develop an amazing team. Okay. That is number one. And when I started this business 28 years ago, I went on the path, tried to figure out the path of creating a very high performance team. And that's what I've done here at this company. When you started, what was that first deal look like?

[00:07:57] The first deal was outside my door here in Houston. It was an assembly of 26 tracts of land and closing a street and closing a ditch. All of it had to be done simultaneous to put a Lowe's home improvement store right literally outside my building. That was my first deal. It was very tough. Very, very, very tough. That was my first real estate deal.

[00:08:27] You don't go for like duplex or quad. You just jump right into the ditch. Then I did four super center deals for Walmart. And by chance, I was trying to do a fifth when Tractor Supply wanted that same property. And I started a relationship with Tractor Supply and ended up doing a whole series of Tractor Supply. So I started focusing on secondary tertiary markets. And I just like those markets a lot better.

[00:08:57] You know, some of the brokers I was working with in the big city of Houston, sometimes it was not all on the up and up. If you don't show me, if you don't pay me X, I'm not going to show the deal to this great tenant. Some of them took their clients, the brokers, they took their clients on sex trips to Mexico. And I'm not a sex trip to Mexico kind of guy.

[00:09:19] OK, so I liked working in secondary tertiary markets where it's just simply I feel was more honorable and easy to identify opportunity, easy to understand downside risk. And so all of my business now is secondary tertiary shopping center investments. You said the word opportunity in multifamily for us.

[00:09:43] The opportunity is either operation, you know, operationally renovating the property, getting the NOI up and refinancing the deal, holding the deal. What is the opportunity in your space? Is it very similar? Like what are you looking for in a shopping center deal? So at a high level, you've got you're buying property that has positive leverage. So you're we're buying a grocery anchored center that was destroyed. I'm sorry, what kind of center? Grocery anchored in grocery anchored center that was destroyed in a hurricane in Louisiana.

[00:10:13] And it was rebuilt for 32 million, not including land and site work. And we're buying it at 20 million at an eight and a half cap. And so we're buying something at eight and a half cap, borrowing at seven. So you have positive leverage. You're in the multifamily business. Certainly in the metros, the values are four and a half, five, five and a half cap. But you got to borrow at six and a half. So you got negative leverage. So we have positive leverage and we are cash flow day one.

[00:10:40] We also play in an unusual sector in the enclosed mall space. And in the enclosed mall space, you're buying at 13 to 18 cap a yield unlevered. OK, so you put on 50 percent. Is that actual or projections? No, it's actual. This is cash flow day one. You lever, let's say you lever a 15 cap deal at 50 percent leverage at seven, seven and a half percent. Your cash on cash. What's the debt look like?

[00:11:08] The debt is community bank debt, because again, we are. So community banks are the ones lending on these malls now. Yeah, we are all about community. So we go into secondary tertiary markets. It wasn't always like that, though, right? What? It wasn't always like that, though. You could get. Yeah. Well, it depends. We're we're we're small town guys. I mean, we that's where we find value.

[00:11:28] So our model is great asset in a market that's a hometown that has essential drivers that drives population growth. We get local investors in on every one of our deals. Local business owners are part of our equity or we will not buy the deal. And we're the only ones in the country to do this in the shopping center space. And it reduces risk. Why local investors reduce risk?

[00:11:58] Entitlements. We've never had a problem with rezoning. Incentives. We get incentives, maximum incentives that exist in a jurisdiction. Property taxes. Very political. We get help from our local business leaders. Relation to the city and to the mayor and to permitting and all the city departments. That's help with local investors. And then oftentimes a mall, you shrink the amount of retail. You do something else. Multifamily. You do medical. Whatever it is.

[00:12:27] And our local investors are deputized leasing agents for alternative uses. They're on the board of the community college. They're on the board of the hospital district. They're on the board of the economic development district. They are more piped in about all of the opportunities and what's happening in the market than we are. We're operators. We know how to do a lease. We know how to do proformas. We know how to do budgets.

[00:12:50] But all of the risk and opportunity associated with that community, we reduce that risk by getting local business leaders to be part of our equity. Local lenders is the same thing. Local investors get the opportunity to buy institutional quality assets in their community with somebody who's got expertise and can bring outside capital. So, Jake, I see you're puzzled. No, I was going to ask.

[00:13:20] So, typically, investors don't like community bank debt because of the recourse factor. Has that been a hurdle? Community bank debt is non-recourse. You're getting non-recourse community bank debt. And no prepayment penalties. So, different than CMBS, different than life insurance company. This is rare. This is good. It's great. But typically, the community banks want to do it.

[00:13:46] Our secret sauce is all about community, local lenders, regional and community bank debt. And you ready? There's no prepayment penalties. So, if for some reason interest rates fall, it is a phone call to our lender. Okay, we're at 7%. Interest rates are down at 6%. Would you go ahead and amend and send me an email? That's it. We work with these guys in credit unions as well.

[00:14:13] Because typically, the way we buy, we'll buy in the front end and then send it out to Fannie or Freddie once it's stabilized. So, we're very familiar. But the question that I have is, how do I get these guys to let me go non-recourse out the gates? Okay. Think about it. Let's say you're buying a mall at a 15 count. You put on 7% debt or 7.5% debt. Your debt service coverage ratio, which is all these guys live by, the minimum is 1.25 times.

[00:14:41] They want it to be 1.5, 1.75 times to make sure it's safe. We're at three times. Three and a half times. Oh, so it's based on the LTV, the DSCR to get the non-recourse for these folks. Sure. You put enough equity in front and you have enough cash flow and your projections on coverages are north of two or two and a half. And they want to be part of an asset that affects quality of life in a community.

[00:15:09] So, when we buy a mall- At least in their prospectus, what they're putting out there, they want to be like, oh, we're the local- Yeah, I know. They're the local guys. Yeah. And often, our investors are on the board of our lender. I've got- Jake, you mind if I've got a bunch more questions? Yeah, go ahead. Let me know. Yeah. I think this is important. When did you transition to this model? Because you didn't come out of the gates with this model. Because this is really refined after years and years of tinkering and trying to add this and trying to take away that.

[00:15:36] I started in 2008 in this model in Vicksburg, Mississippi. I found a great local lender and I ended up with 17 investors from Vicksburg, Mississippi. And I said, you know what? This is a great model. And even though it's harder work, it reduces risk. And if you reduce risk, you limit your downside. And we own 14 malls right now.

[00:16:03] Now, we've never, ever handed a property back to a lender. We have never had a capital call after the acquisition capital call. And if you compare us to our competition in the mall space, Simon, Westfield, Brookfield, CBL, Preet, they've handed back dozens and dozens and dozens of properties. Okay? When did the shift take place?

[00:16:25] Because I remember, you know, 2000, going to a shopping mall, packed, all the best stores, not a vacancy, right? When did the shift start to take place? The shift took place when the periphery, when the anchors... Macy's, JCPenney. Macy's, Pennies, Sears, when they started to... When their business model got challenged. By the internet.

[00:16:52] One by the internet and, like, yeah, by the internet and their sales fell. And the amount of capital required to keep their stores fresh was much higher than alternative types of uses. So, for example, I would say the off-price industry really... Like TJ, is that TJ Maxx? Was the most dominant reason why the department stores fell.

[00:17:20] I mean, I'm talking about TJ Maxx and all their divisions and Ross and Nordstrom Rack and Burlington. And that model has a markdown sequence that is very regimented, that drives turnover of products so that it's all fresh. And the amount of capital needed to open up a TJ Maxx store compared to a Macy's or Nordstrom's or Dillard's is a fraction.

[00:17:47] And then the refresh capital in five or ten years is de minimis. In a department store, let's say a department store does $20 million making one or $2 million a year of profit. Maybe $3 million. The amount of refresh for flooring, carpet, lighting, fixtures, whatever it is, $5 million, $8 million, $10 million, there's never enough money. There's never enough money.

[00:18:11] Well, and to me, I think it seems, I'll say from 1995 till now, I think clothes are cheaper, you know, and not taking inflation in it. No, no. No, no. There's been deflation in clothing. Yeah, that's what I'm saying. For 20 years. 20 years. So you've got to sell more products to stay even. I remember jeans were like 80 to 100 bucks. And now it's like, you know, the only one up there is maybe polo or something, right? I had a pair of Armani's that I paid for in 1998, $150 for a pair of jeans.

[00:18:39] I still had the jeans, but it was incredible at the pricing. You're right. Sneakers, the same thing. They were so expensive back then compared to now. The other thing that you have is that the specialty retailers have a marketing and design flair that they're able, on the insides of a mall. And the periphery, the pennies and sears and the department stores just did not have that kind of massive spaces. Yeah, correct.

[00:19:07] So the strategy for a mall, there's three strategies. One is it operates great as a retail play. Manhattan, Kansas, we bought a mall at 17 cap, okay, on existing income. Local investors, local lender, we're returning 20% of our equity per year after a pref of eight pref is paid.

[00:19:31] There's so much cash, okay, we're just returning it, not without a refi, okay? And that's just a cash flow play. A second strategy is to arbitrage the periphery. In other words, buy a property at 15, 20 cap, sell off the restaurants in front on a ground lease at a six cap, pay back your equity, reduce your debt, and live happily ever after. The third is reducing-

[00:20:00] Sorry, when you say sell those off, then it becomes, well, like an HOA or something? What's essentially going on there? I'm trying to understand the mechanism. Let's say we have 100-acre development in Rapid City, South Dakota. We bought it at a 25 cap. We sold off the three restaurants in front and the shopping center on the side. We sold it for 1.5 times what we paid for the whole property, and we're left with a mall throwing off two and a half million.

[00:20:28] I guess what I'm saying is you're connected, so that's an HOA, you know- You have what is called an REA. It is a regime. You're HOA, and you have to live by those rules, okay? So that's called the arbitrage strategy. The third is reduce the amount of retail to the appropriate level, and then do something different. So we are demawling six of our malls, okay?

[00:20:57] One is led by Target. We're demolishing everything except for a couple other tenants with Targets coming in. We're working with Costco on another. TJ Maxx, Ross, and Five Below are the leads on three others. And then in Janesville, Wisconsin, the city is investing, it's under construction now, a $50 million hockey arena where the Sears is, okay? And as a result, we'll do multifamily and hospitality.

[00:21:23] So great real estate, you're buying stuff at a 15 cap at land value, okay? And then you do whatever makes most sense for the community and makes most sense economically. Andy, how are you buying these at 15 caps? Because multifamily investors are here listening to this right now and going, we're in the five cap space. Like, is it because of- I think multifamily stuff is crazy, very frankly.

[00:21:52] Just very- I don't understand how you operate with negative leverage. So we are all about- It's short-lived. Well, hopefully net operating income increases dramatically so that you can- I mean, that's a strategy of prayer. It's not a strategy of prayer. It's knowing the market. And just not to be too direct. You know you're- Like, we have 2,000 units, right? We know our market. So we'll see, okay, we know the market rent on this because we have multiple internal data showing what it's going to rent for.

[00:22:20] So if we buy it and we know there's $300 lift per unit there, you can really forecast where this is going to go, right? And look, a lot of times we're locked in a much more favorable rate scenario than you may be. 3%, 4%, 4%, 4%, 30%. No doubt about it. So it's just like that's- And I'm not- We don't syndicate. We don't raise from investors. We don't use our own capital. I'm just-

[00:22:46] So I'm not here like, you know, defending it to a certain extent because I care about investor money or something like that. I'm just saying, look, there's- We've done very well with it. It's just maybe not the amount of volume, right? We might do two or three deals a year or something to make that work. Yeah. So one of the things that we do, Jake, is that we do what we call base case underwriting. We make a base case that says nothing good is going to happen. We can't get a reduction in property taxes.

[00:23:14] We can't replace pennies at $2 a foot per year gross with TJ Maxx at $15 a foot triple net. We cannot get 300 units of multifamily per minute. Nothing good is going to happen. And our base case needs to be 15 to 18 IRR minimum, and then we'll try to buy it at that property. And then we call these opportunities. We work very hard at getting all these opportunities achieved. So we are all about base case.

[00:23:45] Nothing good. No increase. You're not going to fill up vacancy. Base case is what we do. Mm-hmm. So Andy, right now, people are listening and going, Jake and Gino are just losers. They're in multifamily. They're buying five caps. Andy's buying 15 cap. What mistakes do you see anybody thinking about going into the shopping space? I'm sure you've seen a lot of people trying to go into the space like we've seen in multifamily, and they've made mistakes. What mistakes have you seen investors make entering your space?

[00:24:15] Two. One, you have to understand co-tenancy risk. Okay? So co-tenancy is a concept that says if certain tenants close a department store, two department stores, a TJ Maxx, whatever those rules are. Joanne Fabrics. Joanne Fabrics. If they close, then we have a contractual right to get a lower rent. So you have to understand- That's what Home Depot did with JCPenney back in the day, Gino. Okay? Yeah.

[00:24:44] And so there's certain tenants that automatically, they create gotchas that says, okay, even though I'm supposed to pay $12 a foot for 10 years, the probability that there's going to be a gotcha is 75%, and that $12 a foot is going to go to $2 a foot. You have to understand that risk. Second, you have to look at true capital exposure.

[00:25:09] Roof, parking lot, HVAC, your tenant improvement dollars, and understanding what are your capital needs during the life of an asset. Andy, are you not afraid going forward of the internet of less shopping, less foot traffic? Does that scare you? So there's two things that are affecting the shopping center sector.

[00:25:32] Number one is that there's all these companies have been fighting against Amazon. Many did not survive. Amazon wiped out a lot of them. Those that survived, they figured it out. They have their own e-commerce platform. They have their own e-commerce distribution network. They've got a great app, and they've got a fleet of bricks and mortars. Okay.

[00:25:59] Now, they've told Wall Street, 100 stores, 150, 200 stores a year, that they've got to grow, but into an inventory that's not growing at all. There's no new shopping centers. So you've got Ross, TJ Maxx, Five Below, Hobby Lobby, Aldi, all these companies growing by hundreds and hundreds of stores, but there's no new inventory. Different. What's the common theme with all those, Gino? You tell me. What's the common theme with Hobby Lobby?

[00:26:29] They're all major affordability plays. Yeah. Well, they've got great strategy. They've got great store metrics. They've got great leadership teams. And they're- Not hating, just saying they're all reasonably- I'm not hating. They're just all very reasonably priced. They're mid-market. Yeah. They're mid-market. Yes. They're mid-market. So that's number one. And number two, we've got positive leverage.

[00:26:54] So the supply-to-demand dynamics are very much in favor of retail today. So if you own second-generation space at 70% of replacement cost, or in a mall, you own it at 20% of replacement cost. The grocery anchor deal, we're getting a brand new center. We're buying it 50% of replacement cost, the deal we're doing right now. You've got a story.

[00:27:21] You want your tenants to leave because they're at $9 a rent, and the market rents are $17. So if you have a Publix, and they're going to be gone in 20 years or something, you're okay with that? Yeah. No problem. Yeah. The problem with grocery anchored is that that's at six, six and a half, seven cap. No, your debt is at about the same thing.

[00:27:46] So debt is not accretive to value that much in those kinds of deals. Last question before we go to the short answers. Are there any markets that you're staying away from? For instance, Florida. I mean, I'm sure cap rates are lower here because there's so much more demand. There's so much more population growth. It will look anywhere. We're a red state company or a red county in a purple or blue state. We are secondary, tertiary market. We've got 75 employees.

[00:28:14] We've got a very unusual owner's manual about how we run and how we manage our people and the type of behavior we have. That's the rock steps. And we'll look anywhere, anywhere in the country. Let's look at the rock steps when we get back from the break. This episode of the Jake and Gino podcast is brought to you by Wheelbaro Profits, the premier multifamily education community. Wheelbaro Profits proof is in their results.

[00:28:43] Their members have closed over 86,000 units. That's over $5 billion in student deal volume. Are you serious about taking your real estate game to the next level? Do you have the confidence to take action? Schedule a call with the Wheelbaro Profits team today and supercharge your real estate knowledge. Build lasting relationships through unparalleled networking opportunities. Obtain lasting knowledge on how to buy multifamily real estate with intensive training. Gain hands-on experience through their live events with like-minded individuals and industry

[00:29:13] professionals, all while experiencing the personal touch and family atmosphere that set them apart. Visit wheelbaroprofits.com for more information. All right, gang, we are back. And as Gino promised, now it's time for the rock steps. You know what? My heart's going to melt here, guys. So y'all don't know what the word means because it's not a word in the dictionary. But dancers know what it is because it is a dance move.

[00:29:43] When you, I like big band music. Frank Sinatra, Ella Fitzgerald, Peggy Lee, Rosemary Clooney, 1950s, 1960s, big band. So when you swing dance, when you're ballroom dancing, when you're couples dancing, you rock step when you switch directions. One, two, three, one, two, three, rock step on count seven and eight. Ball pivot change. So if you've ever met your wedding or whatever, you're rock stepping. So we use it as a metaphor. We want to be nimble.

[00:30:13] We want to be light on our feet. We want to listen to the music in the industry, which always is changing. And so if there's an opportunity, there's a problem, we use rock step as a verb. Guys who've got a problem need a rock step. Everybody at the company knows what it means. I also wrote an owner's manual for a company, 25 rules of behavior that we call rock steps. And I wrote this word by word and we're on rock step number 19, be a brand ambassador.

[00:30:41] And these are the rules that everyone has to live by at this company. We have to live by this. This is how we deal with conflict. This is how we build trust. And I am to the mat with these rules. So 10 o'clock yesterday, the whole company on a team's call. What does it mean to be a brand ambassador? Somebody writes an essay. We talk about it. And then they call on three people at random in the company. What does it mean for you to be a brand ambassador with your family and with rock step?

[00:31:11] This is how we hire people. Jake, what are your favorite three? Rock steps and why? What are your most challenging rock steps and why? That is part of the first interview. You've got to be really good, we hope, to come to rock step. You've got to live by the rock steps to stay here. Okay? And I am to the mat serious about this stuff. Okay? Did you have that in your previous company? Did grandpa have that? Or did you guys implement that? No, but he inspired a lot of this.

[00:31:40] So one of my favorites is do the right thing always. Rock step number one. We're in the business of investments. Great. It's a great. There's a lot of gray. You have to talk about this. But my grandfather inspired that. One of my favorites, rock step number three, be punctual. On time is five minutes early. And if you're on time, it's late. You've got to pay your bills on time. Never keep people waiting. Okay? That was my grandfather's and father's philosophy.

[00:32:08] So it inspired me to come up with this. And we've got people who've come to us from CBL and from Brookfield and from Blackstone who want to be part of a high performance team and live by these rules. And we're looking for more people. Always. Shoot.

[00:32:31] If you know retail, any part of it, property management, leasing, acquisitions, construction, we are hiring. So if you can live by these rules, reach out to me. Love that. All right. Just to get a date in mind, because we breezed past this earlier. What do we think the date was when retail and the malls started to get a little wobbly? I think it was 05, 08.

[00:32:59] I would say in that period of time when Amazon started to get traction. Okay? So, again, there's a certain amount of trips people make for shopping. Let's call it 100 trips a year. And Amazon, I'm using Amazon, but Amazon and the others, but Amazon started to steal trips. That's what happened. They started to steal trips.

[00:33:22] And so there are certain types of tenants that are trip-stealing resistant. TJ Maxx. TJ Maxx is kind of entertaining. It's fun. You might have a cool thing. Certainly fitness. Certainly entertainment. Certainly retailers that have a quick turn of merchandise. Okay?

[00:33:50] Lower price points often are a little harder to be intermediated via Amazon. So retail is not dead. Okay? Amazon has killed those that can't make it. Those that have survived, have their own e-commerce strategy, and are protecting their market share if not growing it. And aren't they building a brand as well, Andy? I think that's important.

[00:34:15] If you can't stick out with a certain brand, with the kind of company you're describing, company with culture, you're sticking out. It's great you have a website, an e-commerce site, but if you're not building something where people go, I want to go and have that experience, you're not going to last in this market. I agree. And it's actually, it's more detailed than that.

[00:34:35] So the issue for a pure play, no stores, is the cost of acquiring a new customer in the early years of your company is very low. But the cost rises over time. Okay? And what retailers have found is that the lowest cost way of getting new customers and keeping customers is through bricks and mortars.

[00:35:00] And there are pure plays where the cost of acquiring a customer can be over $200 to acquire a new customer, but the lifetime value of that customer is less than $200. So that's why a lot of these people work. You need stickiness, returnability. You need stickiness. You need to touch. You need visual. You need the ability to return.

[00:35:24] And so the perfect combo to manage, to lower the cost of new customer acquisition and keep your brand relevant is the trifecta. A great fleet of bricks and mortar. An app that's robust. And then an e-commerce distribution system, either with DCs, distribution centers, or using stores as distribution centers. Okay? More combo.

[00:35:53] So that is the trifecta that's perfect. So that's why Amazon ended up going out and buying Whole Foods. It just makes total sense to me right now. Warby, Parker, Wayfair. I mean, they're all opening stores. I mean, how do you – the cost of acquiring customers gets higher and higher and higher. You go out of business. Dude, you're going to be able to skim off of like you saw with COVID, the grocery and stuff like that. But at the end of the day, how many times are you going to get your groceries delivered to have fucking three rotten apples? It gets annoying, right?

[00:36:21] So that's one of those things where I think it's hard to long-term always poach unless you're – because you get these 20-year-old kids that pack it up and there's a rotten apple and you're pissed, right? They say it's the freshest loaf of bread. But when you see people at Kroger pull the baskets for home delivery, they're not reaching in the back. No. And it's like the luggage people and they're like throwing it and like, come on. You're dealing with kids and they do stupid shit, right? Like I'm just not buying it. So 100% in alignment there.

[00:36:50] Let's talk about the types of customers a little bit more because the reason I love multifamily is that people need a place to live. And I may not be the best marketer in the world, but if I create a nice, clean and safe community, we're going to be able to get interest. We're going to be able to rely on other marketing sites, apartments.com or whatever, to help us out. I've always thought about retail but always stayed in my lane, so I never really dipped my toe in over there.

[00:37:18] But to me, I always felt comfortable with, you know, like, I don't know what the hell they're called, like super cuts or something like that. Where you have like a barber. Service-oriented neighborhood center type of product. Exactly. That always gave me comfort because I don't know of a barber service that's coming to everybody's house, right? I don't know of a coffee. People like to go out and get coffee. They just do, right?

[00:37:42] So those types of stores, if you had like a strip mall with 10 of them and it was clean and higher end, you know, I've always felt better about those. Maybe just talk to me about your thoughts there. Yeah. So first of all, multifamily will always be here and it should be a place. Knock on wood. Knock on wood. I'm not – look, you always got to be defensive. I don't know what's coming around the corner. I don't want Amazon getting involved, all right? Real estate investors generally start in multifamily.

[00:38:09] But if they need to diversify out of multifamily, they should at least consider retail. So a shopping center is a collection of tenants. That's what it is. So you need to look at tenant by tenant if they're service-oriented or grocery or experiential-based. You need to look at their management, their store metrics, which means what is the investment in a store? What's the return on that investment?

[00:38:38] What their systems are like? What is their survivability like? Okay. And you're building a collection of tenants. And there's different formats. There's these 10,000-square-foot haircut neighborhood centers. There's smaller centers, 100,000 feet with a grocery and smaller tenants. There's open-air power centers. They all have their own dynamics. Okay?

[00:39:05] But you can buy a power center in a secondary tertiary market at a nine cap. Okay? And borrow at seven and a half or seven. And in today's world, if a tenant leaves, your ability to backfill it because of this supply-demand dynamics I was telling you about at a dramatically higher rent. Because people aren't building this stuff right now. There's no building. It's 40% higher to build right now with construction costs and higher interest rates.

[00:39:34] So no one's building. Okay? And so if you own second-generation space, the chance of net operating income going down is very low in today's world. You've got to pick the right center. Okay? So our model is secondary tertiary. And we also focus on saving communities from landlords who own malls that are letting them deteriorate. Can I talk about one real quick? Go ahead.

[00:40:03] So it was probably five years ago. And Gina's heard me talk about this a few times. I was – so my parents are in New York. I think we were visiting my wife's parents. And we're in Knoxville, Tennessee. So we're looking for like this middle place to meet up. So there's like – I think we went to like Scranton. There's a lake near Scranton, Pennsylvania. We got a lake house for a week or something. We went downtown for like lunch, you know, to Scranton. And it was beautiful. I mean like old like, you know, 1900s big buildings.

[00:40:33] And there's this railroad mall. And you could tell that like in the 1990s, this was high end. Looked beautiful. Built in off the train station. And then we go in there and the infrastructure was there. But now you can just see it was a fucking ghost town. And there was like little, you know, like doodad shops. They were trying to do like something like a maze in one of them. But it was like a ghost town of weird failed businesses.

[00:41:02] And I understand it's population driven and a lot of things there. But that's like the – wow, that's – good luck turning that around, right? I think – yeah. So there's hundreds of malls around the country where the landlords have let the properties deteriorate. And communities, because these malls are – they affect quality of life. The leadership of these communities are desperate to have somebody come in and revitalize the property.

[00:41:30] So we do what's called the Rock Step Coalition. We need community support. I'm talking about city support. We need local business leaders to be part of our equity. They don't have to be all the equity. They have to be part of the equity. And we need a local lender. So we're doing a deal right now that is a property that's deteriorated. And the city is desperate for somebody to come in and help revitalize it.

[00:41:56] The city is going to give us $7 million to $10 million of equity and going to give us a major other incentives. And we're going to deem all the property. We're going to get rid of the interior, face everything out, put in – Why is that the play now? Because even in Florida, I see like new developments by Gino. Yeah, no, I need to know. You're on the economics. I'm going to run the economics too, okay? You buy something at 15 cap, okay? That's the value of an enclosed mall, 15 cap. You get rid of the inside. You face everything out.

[00:42:26] And then it becomes an 8 cap value. So then you've got to fill in for the margin. What's the cost of converting a 15 cap asset into an 8 or 9 cap asset? And if that cost is accretive to value, do it. And if not, you don't. But I guess this may sound elementary, but is it just because of the carry cost?

[00:42:56] Is the reason the mall, the interior mall is ineffective? Well, look, you have some leaseholds. Well, look. Or there's just too many spaces. Like I don't know the answer. That's what I'm asking. There's too many spaces that the periphery department stores don't drive traffic anymore. Okay, your inside tenants drive more traffic than a Sears or a Penny's. You need a Lowe's or a Target to take up 50 of those spaces. That's a different deal. That's a different deal. Okay. Yes.

[00:43:26] But the other thing is, do stores want to be on an inside corridor in secondary tertiary markets? Generally not. They need to drive up quick traffic. You can't get out and walk. That makes sense too. And then, so then you have like, you know, we were in a mall in Denver this year. It was probably, I think it was probably their nicest mall.

[00:43:54] Had the high-end stuff, you know, probably like the Louis Vuitton or whatever and the Apple and all this. But it didn't, it looked like it was busy but kind of run downish. Like it was trying to, you know, hold on. It's the same thing with the mall. There's a mall just south of Nashville. It's like they're the same thing. It just, it looks like it could be rejuvenated a little bit but they're kind of milking it. Yeah. So it depends on every market and every property.

[00:44:19] We focus on markets where there's only one mall in a market. Okay. And you're buying 40 to 100 acres at land value. And what you want to do is you want to do what's right for the community and right for the asset. And generally it means shrinking retail and bringing in multifamily or hospitality or medical. Oftentimes you'll split up a box and bring in TJ Maxx and Ross. Okay.

[00:44:48] Essentially you need to create mixed-use communities out of the existing malls is what I'm hearing. It's market by market. Everyone is different. Everyone is different. Okay. I'm going to, we're going to wrap here in a second. So for an early retail investor, do you like the, you know, the 10 store barbershop, coffee shop makeup that I described earlier? Or do you recommend getting into something that's carrying like a Kohl's and what do you think is good for an early investor? I do think you can certainly do this on your own.

[00:45:17] You could buy a small little strip on your own or you could work with a sponsor who's got experience in that. And, you know, for somebody who wants to learn about investing in retail, we have a learning center. So we have articles about all the terms, the good and the bad, the different types of shopping centers, positive leverage, negative leverage, underwriting.

[00:45:40] So we have, we want, if, if people go to rockstep.com, they can go to the learning center and they can just read about retail. Okay. The good and the bad associated with it, the risks and the opportunities. So, you know, my suggestion is that if investors like commercial real estate, you got to be in multifamily. You got to. Okay.

[00:46:06] If you want to diversify out of multifamily, you should look at retail or industrial offices a little trickier right now. And we're cashflow plays. We cashflow day one. Okay. So we are yield plays. We, we pay an eight, eight and a half pref day one because our properties cashflow day one. Cause you have positive leverage. You liking the tractor supply these days? I love tractor supply. If you get it for the right price, right?

[00:46:34] Well, I think they're a great company. Yeah. Okay. Well, it's like you'd like to own Apple, but I'm sure, you know, they charge out the ass to get, you know, an Apple store. Right. So. No, I've done probably 20 tractor supply deals. Great. Awesome. That is awesome. What, uh, what type of population are you looking for in these secondary markets? A minimum of a hundred thousand in the market.

[00:46:53] So, um, uh, you know, up to half a million, three quarters of a million somewhere where we can identify business leaders who have stroke downtown, who can guide us in the community. Houston. I can get an investor from Houston, but they have no stroke in Atlanta. No stroke. You want business leaders. Okay. So we had a shopping center where we needed signage. Signage was impossible. An act of God.

[00:47:22] It doesn't happen in this community. We needed great signage to keep some of these tenants there. So we put a signage package together of $400,000, mailed it to the city manager, copied our investors. That's how it's done. Love that. And everybody in this, we couldn't do it ourselves. We could not do it ourselves. That makes sense. Um, where can folks go to get the learning center? Rockstep.com. You'll see a little tab learning center and we've got videos. We've got articles.

[00:47:52] We've got video for every one of the rock steps. You know, so if anybody wants to, to, to learn more, each rock step is very important to behavior at our company. Gina, are you ready? I am ready to wrap the show up because to me, Jake, incredible. Every show has their own, to me, golden nuggets. But what I love about Andy's story is you've heard of shirt sleeves to shirt sleeves in three generations. That's it. That's it.

[00:48:18] It's incredible how his grandfather started it during the great depression. Went out of business in 33. Went and found everybody that he owed money to. Started the business back up. And I love the quote that he, he, he wrote that he said. And I think everyone should take this to heart because this to me personifies what we're doing as well. Running the business for the benefit of the wealth of the business. That's what you're running the business for. And I love that. I love that quote. Focusing on that.

[00:48:47] At the age of 32, Andy decides, you know what? I'm running, got 5,000 people I'm under. I'm learning all these skills. Gets into commercial real estate because he was doing these deals. You know, that skill transferred over. And he didn't say, I'm going to go into shopping centers today. And go into multifamily tomorrow. And then Bitcoin tomorrow. He took the long term view. That cathedral thinking. And what I think is really, truly important in this podcast is two takeaways.

[00:49:14] Number one, Andy kept hammering buy right. What is his buy right criteria? If you don't know what that is, then you don't know what a deal is. And the second component, he's always talking about his downside risk. And that word positive leverage was heard dozens of times in the show. A lot of times in the show. And I think it's important when you look at the totality, there is no one vehicle that we say is the best vehicle for you to invest in. For Andy, he loves shopping centers. That's what his vehicle is.

[00:49:44] For us, it's multifamily. But you need to learn the ins and outs of it. And what I love what you said at the very end was, you can go out and buy your own little strip mall. Possibly go out and find a sponsor who's doing it. But I would also say that if you're going to do and take a step like this, get into a niche like real estate, like your shopping centers, or like multifamily, you need to learn the ins and outs. Because there are certain things that you will not know on your own. And the internet's not going to tell you. So go out. I love rock steps.

[00:50:11] And the last thing I'll say, Jake, is that I think if Andy's family had had the rock steps and part of their core values and culture and mission statement, he may be Walmart part two. We'll never know that story. That's okay. But he's morphed into something completely different. And I think it's awesome. I love it. And what you didn't know, Gino, is he's actually got a rock meme coin. So he is in the crypto. You just didn't find out about that yet. So just kidding. Gang, as always, we believe in buying deals for the long term.

[00:50:41] Think in decades. I'm Jake. He is the G Daddy rocking the Peter Millar today. Looking good, Gino. And we make it happen. We'll see you next time. Thanks, Andy. Thank you, guys. Enjoyed it.