Cap Rate vs Interest Rate: The Secret to Profitable Retail Deals

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Show Summary

In this conversation, Andy Weiner, founder and president of Rock Step Capital, shares insights into the shopping center investment landscape, focusing on secondary and tertiary markets. He discusses the importance of community factors driving growth, the impact of economic conditions on retail, and the significance of creating an engaging shopping experience. Weiner also elaborates on the philosophy behind Rock Step Capital, emphasizing agility and a strong company culture.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • RockStep’s Website
    • Andy Weiner on LinkedIn
    • The Shopping Center Channel on Youtube
    • RockStep on Learning Center
    • The Shopping Center on Instagram

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Andy Weiner (00:00)
  Number one, we have positive leverage, Dylan. That means our cap rate is higher than our, the interest rate on our debt. We bought a shopping center, a grocery anchored center at a nine cap recently. 9 % yield. Our debt was at 7%. So by adding debt, you increase the cash return to your investors. We’re buying a shopping center, an enclosed mall. own 14 enclosed malls.

  We’re buying one at a 16 cap and our debt is at six and a half percent. So our cash on cash yield is over 20 % to our investors.

  Dylan Silver (02:06)
  Hey folks, welcome back to the show. Today’s guest, Andy Weiner is the founder and president of Rock Step Capital, a vertically integrated real estate investment firm based in Houston, focused on shopping centers and secondary and tertiary markets. He earned degrees in economics and political science from Stanford, an MBA from the University of Texas, and completed Harvard’s retail executive program. You can find him at rockstep.com. Andy, thanks for taking the time today.

  Andy Weiner (02:33)
  Hey, excited to be on Dylan, thanks.

  Dylan Silver (02:35)
  Now, when we talk about ⁓ shopping centers, I’m a little bit of a fish out of water in this space. I’d like to start off at the top and ask you how you got started in the shopping center space.

  Andy Weiner (02:45)
  Sure.

  So I got started a long time ago. Our family, my grandfather started a chain of 150 clothing stores called Weiner Stores, our last name. And I ran operations for the company. So I learned all about retail, about retailers, about shopping centers. And then in 1997, I started this business investing in shopping centers and have been doing that for almost 30 years. We built or acquired about 10 million square feet of shopping centers.

  and we have them in 11 states.

  Dylan Silver (03:18)
  Now these days I’ve heard a lot of talk about how it’s difficult to do new construction in so many different realms. For folks who are getting into shopping centers right now, are most shopping centers deals right now being built from the ground up or are they acquiring pre-existing structures and then transitioning them into shopping centers?

  Andy Weiner (03:38)
  Great

  question. almost all of the shopping centers today are existing. Very few are being built because the cost of construction has gone up by about 40 % in the last three or four years and interest rates went up and retailers aren’t paying that additional rent to justify new construction.

  Dylan Silver (03:58)
  So now when folks are looking at which markets to get involved in, which areas to put shopping centers in, and then also acquisitions costs, this is again, fish out of market in this space. But what are some of the key factors which you’re looking for to determine, is this gonna be an area where we want to acquire property?

  Andy Weiner (04:20)
  So great question, Dylan. We ⁓ invest in what we call hometowns. We define it as hometowns. We have a fund called Hometown America. And these are secondary tertiary markets that have something driving growth. You have to have great quality of life, school system, low crime, ⁓ an invested community. But you have to have something driving population growth. One of five things at least, university, tourism, growing hospital districts.

  military base, Fortune 1000 companies. So these are cities under a million, more than a hundred thousand that have something dynamic related to population growth. Those are hometown markets that we target.

  Dylan Silver (05:51)
  Now, shopping centers specifically is an interesting niche, because I’m imagining, and I could be totally off base here, that this is very much impacted by the jobs and how well people are doing, and when people are not doing as well and when markets may be down, they’re going to be less likely to do things that you might find in a shopping center. Am I off base in that, or is there some accuracy?

  Andy Weiner (06:16)
  You know what? I generally think that in the smaller communities, even if there’s a recession, they’re generally steadier. They don’t go up as much when times are good and they don’t go down as much. kind of ⁓ boring cash flow plays, which is where we like to invest. That’s the geography we like. And our product type is open air grocery, open air non-grocery and enclosed malls.

  And in retail, there’s two things going for it today. Why it’s such a favorite class.

  Number one, we have positive leverage, Dylan. That means our cap rate is higher than our, the interest rate on our debt. We bought a shopping center, a grocery anchored center at a nine cap recently. 9 % yield. Our debt was at 7%. So by adding debt, you increase the cash return to your investors. We’re buying a shopping center, an enclosed mall. own 14 enclosed malls.

  We’re buying one at a 16 cap and our debt is at six and a half percent. So our cash on cash yield is over 20 % to our investors.

  So one, you’ve got positive leverage. It’s the yield sector. Number two, Amazon and COVID killed the weak players. Those that are left have their own e-commerce strategy and are holding market share. And they’re telling Wall Street that we’re going to grow Aldi 225 stores a year.

  TJ Maxx, 140 new stores a year, Burlington, 110 stores a year, Ross, 100 stores a year, and on and on and on, but there’s no new shopping centers. Different than multifamily where they’re still being built. If you own a second generation existing shopping center and all these companies want to open up thousands of stores, that’s a good position to be in supply demand wise.

  Dylan Silver (07:51)
  Hmm.

  Now for folks who are looking at getting involved in this space and they’re looking at you know What type of tenants to work with I’ve heard for instance, you know If you’re going to go with a higher-end corporate tenant that they’re gonna have a standard to which they’re gonna want the the the property to be at so you may have to put in more ⁓ time and money into rehabbing the property to get it up to their standard versus someone who’s not gonna be a national or a corporate tenant and I’m also thinking you know if you’re talking about

  Andy Weiner (08:14)
  Yes.

  Dylan Silver (08:36)
  tenants who need lots of space, this is now a larger upfront cost that you have to outlay when dealing with a national corporate tenant.

  Andy Weiner (08:45)
  You know, when you buy a center, generally shopping centers are 90 to 95 % least. So there’s not a lot of vacancy. Now, if there is a new tenant that wants to come in, you and their national tenant, you have to make a decision whether you want to invest in their tenant improvement dollars that you have to give them or whatever work you have to do. And that’s just a return on investment calculation. Do you get a 12 to 15 % return minimum for a national

  credit tenant on return on investment. Income received divided by total cost of getting that tenant in. If this shopping center is worth an eighth cap and you can bring a tenant in that has anything significantly above an 8 % return, you’re producing value. So those are the decisions that you make all day long. You become an investment manager for that shopping center.

  Dylan Silver (09:40)
  Now, specifically, you mentioned open air. And I think that this is an interesting concept, right? Because I think it talks to the type of experience that people want to have. And I think when people are making the time to go out to go shopping versus order online, it’s because they’re looking for some type of experience in many cases. Are you seeing this as being a trend across the board, not just in secondary tertiary markets, but everywhere where if you have some type of shopping center

  that it’s got to be an experience in addition to just being a place where people can go to buy things.

  Andy Weiner (10:51)
  The answer is yes, but I will also add that what retailers have found is that if they just had a pure play, if they didn’t have stores, their cost of acquiring new customers gets so prohibitive that it becomes unprofitable. They need stores to protect their brand, build their brand, and it’s the lowest cost of customer acquisition. So when they open up a store, what’s interesting is

  their e-commerce sales and that geography rise. They don’t go down. So it’s a, the perfect situation for a retailer is a great set of bricks and mortar stores, a wonderful app, and then an e-commerce fulfillment strategy that connects all the dots. so retail stores are really an important part of that strategy for these retailers that have survived COVID.

  Dylan Silver (11:44)
  So it’s a huge thing that I, you you’re the first person to bring it to my attention like that. You know, this is marketing, right? So yes, they’re they’re selling a physical product, whatever that may be, you know, but it’s it’s marketing as well, because if someone can, you know, has so many different options and ways where even food they can get, you know, delivered or pick up or just drive and someone will walk out with their groceries. Why go to one place versus another? It’s because they’re going to have some level of

  you know, brand loyalty, whether it is an Aldi or whether it is, you know, a Whole Foods or wherever they’re doing their shopping at, right?

  Andy Weiner (12:18)
  Yes. And then the other piece is that one of the big drivers of the growth of the shopping center sector is off price retailers, TJ Max, Marshall’s, Nordstrom Rack, Ross, Bell’s Outlet, ⁓ Burlington. So these companies are opening up hundreds and hundreds of stores and women in particular, the experience of finding great buys really pulls a lot of women into stores. It’s very

  know, is online doesn’t quite do it. And these companies are extremely profitable and they’re growing dramatically.

  Dylan Silver (12:55)
  I actually am thinking about that right now as you’re talking about it. This idea, hey, I found, I went in and took my time and found something that’s like this niche buy. Hey, I had this great experience. That’s part of the process for them more so than it might be if they were just buying online, right?

  Andy Weiner (13:11)
  Yeah, and I just did a video. So we have an education center at rockstep.com and our goal is to become the leading, to be the leading, leading educator of investing in shopping centers. So we have over a hundred articles for people who don’t understand the sector. We’ve got videos and we just released a video. ⁓ We have a YouTube channel called the shopping center channel and there’s a video on it about TJ Maxx and it tells the story about off price and why it is so successful. And so

  For people listening to your podcast who want to learn more about retail and shopping centers, I encourage them either to go to the shopping center channel or to go to rockstep.com to the education center and just delve into the videos. have over 200 articles on everything about shopping centers. We have dozens of videos about every aspect of shopping centers, really just to educate people.

  Dylan Silver (14:06)
  I do want to pivot a bit here Andy and ask specifically about the name Rockstab. We were talking before hopping on here. I know it’s an interesting ⁓ name, right?

  Andy Weiner (14:14)
  It

  is a very important name for me, Dylan, but it’s not a word that you would find in the dictionary. It is a dance move. Okay. So do you, it comes from swing music, swing music, the swing era of the 1950s, 1960s, Frank Sinatra. When you swing dance with your partner, you switch directions on count seven and eight, one, two, three, one, two, three, rock step. So dancers know the word.

  So they know what it is. Most other people don’t know what it is. So we use it as a metaphor to be nimble, to be agile, to be responsive, to listen to the music and the industry.

  And so as a verb, know, Dylan, we got a problem. We got a rock step or Dylan. a, you know, there’s great opportunity. Let’s all rock step together and everybody in our company, we have about a hundred employees. They know what that verb means. Second, I wrote 26 very, very, very detailed rules of behavior.

  that are called Rock Steps. everybody at Rock Step is required to live by these Rock Steps. And we have a Rock Step of the Week. We’ve been doing it for 10 years, twice a year. The whole company gets on a Teams call at 10 o’clock Central on Monday, and we talk about the Rock Step of the Week. This week, it is Rock Step number nine, listen generously. One person writes an essay, an inspirational essay. What does it mean to listen generously?

  with our personal lives and our business lives. And then they call it random, two or three other people, Dylan, what does it mean to you to listen generous? Everybody’s on their seat thinking about what does it mean? And next week we do Rockstep number 10, speak straight to somebody else, writes an essay. And we go through this exercise twice a year. And there’s nothing more important to this company than our Rocksteps. I am emotional to the mat about it. If anybody comes for an interview,

  at Rockstep, we’re always looking for great people. got to go to rockstep.com. Look at the 26 Rocksteps here and you got to come prepared. What are your favorite three Rocksteps and why? What are your most challenging three Rocksteps and why my favorite? I’ll give them to you real quick. Rockstep number one, do the right thing. Always. We’re the investment business to world of gray. You got to stop. You got to figure it out. Rockstep number two, keep family first health first family first, then Rockstep.

  Rock step number five, be punctual. On time for me is five minutes early. And if you’re on time, you’re late. It’s about courtesy. Most challenging for me, rock step number five, six, be responsive. It’s hard for me to keep up. Too much coming at me. Rock step number nine, this week, listen generously. My wife would say, Andy, you’ve got room for improvement here. don’t, I don’t, I’m impatient. It’s an issue I’m working on. And then rock step 26, keep things fun.

  My wife says, Andy, you take the fun out of fun. I’m very serious. Okay. And so this is central to who we are. This is what we use to build trust, to build a team, to resolve conflict. We’re required to live by these rules with our tenants, our investors, our communities, our lenders, our service providers. This rock step is the critical part. I wrote every word. I wrote every sentence and we have this ritual for 10 years.

  Every week we have a rock step of the week. We have people from Blackstone and Brookfield and CBL, some of the big reeds who work with us. One of the reasons I think they work with us, I hope, is that we really try to live by this. Not perfect, but I go to the mat on this stuff. So thank you for asking.

  Dylan Silver (18:37)
  Absolutely, as you were ⁓ talking about Rockstep and the genesis of the name, I’m thinking about ⁓ my country dancing that I did in San Antonio.

  Andy Weiner (18:47)
  You were

  rockstepping. You were rockstepping. Absolutely. You probably have heard the word if you had a teacher there, were telling you, okay, ball pivot change. they used it from rockstep.

  Dylan Silver (18:49)
  There is definitely a rock step or two.

  We are coming up on time here though, Andy, any new projects that you’re working on and then as well, what’s the best way for folks to reach out to your team?

  Andy Weiner (19:09)
  So the best way is to go to our website rockstep.com and you can learn, you can certainly contact me on the website. I recommend going to the education center and just going through retailing 101, investing 101, RockStep 101, and then you can go to more advanced articles and videos and just educate yourself. That’s the best way to reach me.

  And then if somebody really likes what we do, we have a fund called Hometown America where we can give you information on our goals to double people’s money in five to six years ⁓ by investing in income producing shopping centers in Hometown America.

  Dylan Silver (19:51)
  Andy, thank you so much for coming on the show. Thanks for your time today.

  Andy Weiner (19:54)
  You’re welcome, Dylan. My pleasure.