How to Scale Commercial Real Estate

Feb 5, 2022

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. At BVC, Phil was responsible for acquisitions, asset management, and capital raising.

Formerly, Phil was a Senior Managing Director at RealtyMogul.com, where he created the commercial lending business and led institutional capital markets efforts. Prior, he was VP of Corporate Finance and Capital Markets at Centerline Capital Group, an NYC-based multifamily finance and asset management company with $13B in AUM.

[00:01 - 01:29] Opening Segment

• Let’s get to know Philip Block
• He talks about his journey on how he ended up in retail

[01:30 - 11:30] Why Invest In Retail Properties

• The 2 reasons why Philip’s team is investing in the southeast part of the country
• Learn from Philip on how they handled the COVID-19 pandemic in 2021
• Philip talks about the role that his company plays in the retail space

[11:31 - 16:50] Private Investor Over Institutional Capital

• Why Philip anticipates a consolidation of public REITS soon
• The right time to dispose of your properties according to Philip
• The reason he prefers private investors over institutional capital

[16:51 - 20:40] Final Four Segment

• A tool or resource you cannot live without
• • AppFolio
• A real estate mistake and how to avoid it
• • Don’t overleverage because you might lose an asset
• Your way to make the world a better place
• • Building and maintaining their properties to serve the community
• Reach out to Philip
• • See links below 
• Final words

Tweetable Quotes

“Overleveraged, to me, is the biggest risk in real estate.” -  Philip Block

“From a macro standpoint, I don't love multifamily today. I love multifamily as a general asset class, but it's a challenging asset class.” -  Philip Block

“If we're buying and maintaining the better shopping centers…it's serving these communities well. I think that's necessary for healthy communities long-term.” -  Philip Block

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Email phil@lbxinvestments.com to reach out to Phil or follow him on LinkedIn. Visit LBX Investments to identify and invest in mispriced assets opportunistically.

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Want to read the complete show notes of today's episode? Check it out below: 

Philip Block  00:00

The truth is, the assets that we like within the retail space are largely institutionally owned today and those guys don't sell for the most part, with very few exceptions, won't sell off market. It's just different than multifamily where you know, there are 1,000 apartment buildings in every city and you walk around and find owners.

Intro  00:19

Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.

Sam Wilson  00:30

Philip Block is the founding partner of LBX Investments. Philip, welcome to the show.

Philip Block  00:35

Hey, thanks so much for having me.

Sam Wilson  00:36

Hey, man, the pleasure is mine. The same three questions I ask every guest who comes on the show: Can you tell us in 90 seconds or less where you started, where you are now, and how you got there?

Philip Block  00:44

Sure. Yeah, I grew up in Philadelphia, but I worked in New York with my male partner, Rob Levy, at a company called Centerline Capital Group, which was largely a multifamily finance company. But we own C3, which was a special servicing business and a bunch of other businesses. We sold that in a kind of a series of transactions, I moved to Los Angeles, Rob stayed in New York, and we decided to partner and we both had histories in retail and started focusing on shopping centers, largely in the southeast. That's what we're doing now.

Sam Wilson  01:13

And that's fantastic. You know, that doesn't give us that much light into what you guys are doing because you guys are doing some humongous transactions, you own quite a bit of assets. And I think you've learned some really incredible lessons here in the last even few years. Because as I followed what you guys have been doing, what makes sense right now in retail?

Philip Block  01:30

Oh, man, it is a crazy, crazy market, there's no doubt. You know, I think what a lot of people said and what we saw is, from the beginning of the pandemic, it kind of highlighted and accentuated things that were already happening, trends that you were already seeing. So we have always been focused on kind of open air, grocery discount-oriented stuff. And as I mentioned, we focused on the southeast, even though I'm in California, and Rob's in New York. And the reason for that was we like the regulatory environment. We like the demographic trends. And what you saw was obviously, everybody caught on to that. So now, you know, we didn't anticipate COVID by any stretch, but we did like the regulatory environment, which is now creating a big rush to those states from places like New York and California. And we're the beneficiaries of that from an investment standpoint. I think that is absolutely going to continue to trend. The challenge is that so much capital has come into that space. And you're seeing grocery deals in the southeast trade hunt 200, 300 basis points tighter than we saw four or five years ago. I mean, it's pretty wild, honestly, but the performance is proving that out, right. Because the whole story, when we started five-ish years ago was, Amazon's taking over the world, e-commerce, retail’s dead. And we said this is oversold. That doesn't make a ton of sense to us. And which is why we focused on what we focus on, the kind of grocery and the necessity stuff. Will that continue to perform? And I think what you're seeing, which makes sense is cap rates are responding. And you're saying there is a stability of cash flow here. It's the mall space is, you know, as brutal spent buying BCD malls is you know, that's a tough space. There's a lot of, there are a lot of great groups doing redevelopment of some of those. It's not really where we focus, but a lot of that can make some sense people trying to find, you know, new uses, whether that's storage or hotel or you know, multifamily. Everybody wants to put multifamily everywhere if you can, which makes a lot of sense. So I think all those trends are going to continue. And it's interesting to watch.

Sam Wilson  03:29

Yeah, absolutely. But you guys are branching even out of the grocery store anchored centers as well, right?

Philip Block  03:35

Yeah, I mean, I said well, grocer and kind of discount stuff largely, we always kind of stay there. So we haven't been exclusive to grocer. It depends on you think about target and kind of Walmart look is, typically where we on three or four Target Centers where Target does grocer obviously we don't know the target, but it does provide the kind of base next year so maybe you don't have the income from them, but it's driving the traffic and the co-tenancy that you want, right. And we're expanding geographically to I mean, I think one of the things we saw listen when somebody zigs I just naturally zag like that. They're just kind of inherent in what and who I am I guess but when you see all capital chasing one thing it's great for existing portfolio, makes it less interesting to buy stuff because I'm not interested in buying things for a 6% return, it's just I'm not be read, Blackstone, you know, trying to hit a five that's just not that interesting. But its capital’s going to come to the Midwest, the Northeast markets are still strong. It's not like people have it's not like Philadelphia, for instance, and New York are gone right? You don't have millions of people deserting, they're still great markets that were dense and probably oversupplied. Buying the better assets in those markets still make sense. You know, we're not going to do that exclusively, but we are branching out to try to find opportunities.

Sam Wilson  04:51

Right? Yeah, that's absolutely fantastic. 2021 was a little bit of a slower deal flow year for you though. You guys did still take a couple of you know, really interesting assets down. Talk to us about kind of what you saw in 2021. That made you slow down. And then what do you predict or predict or project for 2022?

Philip Block  05:08

Well, you know, it's probably a three-month kind of ramp-up period from when a deal gets launched by a broker or seller decides to take it to market. And so at the beginning of 2021, to be honest, there just wasn't much on the market, there was nothing kind of coming out of 2020. There was interesting. And then starting kind of Q1, Q2, you started to see some sellers backed as there was some more stability, kind of, I don't want to say post-COVID, because obviously, we're not post-COVID. But post, the initial shock of COVID, I guess. So we were able, yeah, it was a bit of a slower year. But we still we bought two fantastic assets. As you said, we bought a large shopping center outside of Chicago, it was a Whole Foods anchored center, really well leased that just traded to be honest, that a cap rate that doesn't, you know, didn't make a lot of sense at the time, you know, we bought it at an eight cap or something in place, and it's gonna widen because we've got some increases in income coming. And that's, you know, today, that's probably a six cap. I mean, we just stole it, to be honest, it was a great, great asset for us. And we bought a great deal in Memphis in Germantown, which is kind of the only sub-market in Memphis that we really liked a lot. And we talked about it before the show, but the REI, Target, Best Buy, just a fantastic asset there as well, the middle, the stuff to do, so we're thrilled with the assets we bought. And now, what's interesting is the amount of capital, not just in retail, obviously, kind of everywhere that has flooded the market. I think just the pent-up demand is what we've seen, and certainly, the instant non-traded REITs, the NTRs, the BREITs, and star woods of the world are just kind of pushing pricing to levels that we've never seen. I mean, right industrial and multifamily deals, trading sub-three taps, that everything trickles down, you know. So you see that. And then people who are agnostic to asset class start looking at retail and hospitality and office and you know, everything compresses. So we're seeing that, and I think that trends going to continue. My general view is if you are focused on an asset class and a market and you know, that asset really well, you're going to find opportunities, right. From a macro standpoint, I don't love multifamily today, I love multifamily as a general asset class, but it's a challenging asset class. But I know a lot of really smart multifamily guys who that's all they do. And they find great opportunities and right so but I think I still love the retail space, partly because we know it so well and focus there for a while and partly because there's still a gap and kind of a spread differentiation between that and other asset classes. That's probably overdone, oversold, in some cases.

Sam Wilson  07:43

you guys had some unique approaches when the pandemic first came on to how you worked with both your regional tenants, I guess I'll call it your local towns have been out of, use the right word. So you know, fill in the blank here if I'm using the wrong terminology, but the local owner-operators of businesses, and then you had some national tenants, I think they kind of just said, Hey, we're not paying you. Good luck. I mean, how did you navigate all of that?

Philip Block  08:05

Yeah, I mean, it's challenging. First of all, we've got a great team, really fortunate for that. And our property managers and asset managers are kind of all over this. But we, yeah, the nationals. This isn't unique to what we experienced. But some of the nationals and I'll refrain from naming names here are more challenging to deal with. And that's largely because they have a huge team of lawyers in-house and they know you need them, which is kind of messed up. If you think about the reason that investors want the national tenants and everyone uses Ross so I'll use Ross, it’s like a Ross of the world is for their credit, right? If they stopped paying when things get tough, what's their credit worth? It's not worth anything. So it's a bit of a strange dynamic there. Meanwhile, the mom and pops were fighting like hell to survive. And now we've benefited certainly from being in the southeast, as I mentioned, because in a bunch of these places, you know, COVID didn't exist. At least they didn't believe it did. So which is great. You know, people were out shopping again, grocers, absolutely crushed it. I mean, the sales on grocers nationally is up like 20, 30%. I think inflation probably benefits them. I'm not really sure. You know, you're seeing a lot of that a lot of people staying at home more but you know, cooking at home instead of going out to restaurants. And we worked with everybody. I mean, we said from the start, first of all, we wanted to help people get PPP funds and work with governments to do whatever they could. And we restructured some stuff. And we moved some things back in the guys that we wanted long term. This was an opportunity to extend them long-term because we felt like they would come out of the pandemic doing well. And we both benefit from that. And we've seen that and you know, because we tracked it so closely and worked so closely, we collected you know, 90 plus percent of rent every month through kind of even the worst parts of the cycle and have, you know, come out a lot stronger to be honest today are income’s up, occupancies up it's looking great.

Sam Wilson  09:56

Yeah, I think that's an interesting strategy I'd forgotten about because it can attract your newsletters and kind of read what you guys were doing. And you said, hey, in exchange for maybe deferring some of your payments, we're gonna go ahead and rework this lease, we're gonna make sure that, you know, you lock in a longer period, there was I thought was really, really creative to give, you know, give a little to get a little on some of those think ways you guys worked those outs? That's really, really cool. I may have asked this question. And I know you answered it in a way by saying if you're in multifamily, you know, you're gonna find opportunity. But what are some ways that you guys are, you know, finding opportunity right now? What do you see going forward in 2022?

Philip Block  10:29

Yeah, I mean, the truth is that the assets that we like, within the retail space are largely institutionally owned today. And those guys don't sell for the most part, with very few exceptions won't sell off-market, it's just different than multifamily, where, you know, there are 1,000 apartment buildings and every city and you walk around and find owners. So these are largely owned by REITs, and other institutions. And so they're bringing him out from broker. So my job honestly, is we have to know every deal and every broker and the sellers directly. So we speak to the, you know, I have close relationships with a lot of the guys that the REITs and the institutions, and they'll say, we're bringing this to market, this is what we want, you know, so and so JLL is going to take it out for us. And we just want to show it to four or five guys, because we have to tell our board, we made a market for this, this was the market price, which makes a lot of sense. And we are working with some of the bigger guys about doing some kind of larger portfolio type deals, maybe off-market. I'd love you know, it hasn't happened yet. For us. We've seen some of those deals happen, it would be great. So I personally, I think you're going to see some consolidation in the public REITs space because the non-traded REITs you know, the public's, can't compete with them when they're raising the amount of capital that they're raising, like, I think you REITs raising, what 2 billion a month, right? I mean, they're property-agnostic. So you're putting out six, 8 billion of real estate a month you have to buy, that's, I don't know how you do that responsibly and without buying, you know, whole companies basically. So how does a public how to Kinkos and regencies of the world compete with that, it's tough. So I think, you know, they kind of go down, and then the second tier, third tier public REITs, I would expect some consolidation, which is great for us, because that means guys are disposing of assets trying to raise better, cheaper capital, which is where we started and where we saw opportunities at the beginning. So I think we're going to continue to see that.

Sam Wilson  12:19

Right. Yeah, that's absolutely fantastic. So tell us, fill up, I mean, with that kind of on the horizon, you guys there on the acquisition side, at what point in time, it makes sense for you guys to start disposing, or, you know, some of your property? Do you do any of that?

Philip Block  12:32

Yeah, it's a really good question. The way that we think about it, and this hasn't changed is, really we have a business when we acquire an asset, we have a specific business plan tied to that asset it's typically kind of three- to five-year type business plan that involves some lease-up, maybe outparcel sales, something where we're adding value. To date, there's been almost nothing that we've acquired kind of strictly for yield with no with nothing to do with that's not super interesting. I'll say that I said, you know, to step back, as in Chicago, we bought is kind of a long-term hold with not a ton to do, but the yield is so kind of outsized, that it made a lot of sense. We have one other asset that's kind of like that, that we own with a family office long-term, but in, otherwise there's always a business plan. So we're now coming to the kind of point for a bunch of our assets where we've executed and then it's really assessment of “Do you refi or do you sell right?” You need to, you should have a capital event, you should get capital back to our investors and one asset that, we own an asset in North Charleston which is fantastic, we sold the way, there were three kinds of groups about parcels, we sold them all or the product we leased up the rest, so it's fully done of leases being completed right now and then we're going to refi it initially because we need to for some of the capital and then it's a question of long-term. Do you want to own this or not? That's really we spent a lot of time kind of thinking through basically the risks and the returns to that if you have all the capital back in you're clipping you know, 20% or something, it's hard and I don't see that any real risk to that cash flow. I don't think it probably makes a ton of sense to sell for us or for our investors right? But we want to do it makes a lot of sense for the investor community because again, that's who's backing us and believing in us and we're not going to hold things just to hold in that's not particularly interesting like you know, just a clip, so we are we're kind of going through exactly that we had actually another asset I forgot to add Fultondale, Alabama we are just a fantastic asset. Same thing we sold we leased up and sold out parcels we fully leased the center so it's 100% we're clipping 20%. And we have a larger institutional investor in the deal that but it's like family office so they can be long term. And we had a long discussion with them you know, they said let's sell we bought the deal at like an 11 cap I mean, just 10.8 cap which is makes no sense at Target Center. And in their mind. They're like we could sell it for seven today that I said if we could sell for seven I might do it but we can't it's that's probably not but it's not, it's not widely offered. So we're clipping 20%. And there's not really a risk to this. I think all of our investment, we had that discussion. And ultimately they said, “We want to hold this,” you know, we just showed this is what the returns look like holding, selling. Here's where we see the risks. And we didn't see my so we, you know, we refinance all the money's out of the deal. And we're flipping.

Sam Wilson  15:19

Yeah, man, that makes a heck of a lot of sense. That's really interesting because I know you have a background in institutional capital. And I had this discussion with you a couple of years ago. And you said, “Man, I'd much rather work with private investors than institutional capital,” or in this case, you know, you got family offices, which is, you know, just a step above may be private investors. Can you give us kind of some, you know, your thoughts behind that?

Philip Block  15:40

Yeah, listen, there's no question. I think everybody who probably listen to your podcast and understands, worrying about the bigger institutions. At the end of the day, if they give you 90% of the equity in the deal, which is a typical 90-10 there, they're going to call the bigger shots, and they're gonna have their fun life where, you know, they have to have an accident five years or seven years. So you can figure out maybe a way to buy them out at that time. But it's complicated. And you're dealing with who, you know, we really pride ourselves on our reporting and our kind of, because we really do, I think we were alluding to, we pride ourselves. And we bring kind of an institutional look, and reporting and management to really kind of a private asset class. And we want to kind of continue to do that, when you're doing it for the institutions, it's a lot of you know, you're working with three levels of asset managers and decision-makers there versus “Hey, we're nimble, like, let's make the right decision for our investors,” and move forward and just be much more flexible, capital less, you know, we're answering a lot less questions, that kind of thing, which, of course, is an advantage. It's hard to raise enough private capital to do the type of deals that we want to do. But we've been really fortunate, we've performed really well. And we've got a great group of investors that's continued to grow. So that's what we're doing.

Sam Wilson  16:51

Absolutely love it. Phil, let’s jump into the final four questions. The first one is this: What is one tool or resource and, think software here, that you find you can't live without?

Philip Block  16:59

Well, we use this AppFolio? Well, there are probably a few things, but we use AppFolio for our investor reporting system. I know there are a few out there, we used to use crowd streets back-end system. And then we switched to this, just as a software, which is great. It's an easy way for us to communicate and distribute stuff to all of our investors. I mean, on the buy side, and the acquisition, there's a bunch of things, obviously, we have this thing called Credit Intel, which is fantastic, because it's a, basically a buy-side or sell-side research on retail companies, public and private, they have more information on public. But when we're evaluating shopping centers and tenants that we don't know, or even that we do, I call, I can speak to an analyst. They give us their take on what's going on with that company, just like if you're buying a stock and speaking to a stock analyst. And so we know what their credit ratings are, we know when debts maturing, we can figure out kind of what the right way to think about underwriting that for that risk is.

Sam Wilson  17:56

That's fabulous. I love that. Question number two for you. What is one mistake, if you could help others avoid one mistake in real estate, what would it be and how would you avoid it?

Philip Block  18:03

One mistake: Overleveraged, to me is the biggest risk in real estate. I mean, a lot of people think they're really smart because they leverage the heck out of an asset and it moves in the right direction. I mean, think about how many homeowners today, right, with what's going on in the housing market over the last year or so you gave 80% financing or 90% financing or whatever people put on in the market, you know, your house went up by 40%. And you look like a genius, to me that you know, listen to a part of this is from my experience at Centerline. And we had large special servicing business going through the GFC coming out of that, and seeing what leveraged did to folks and you have 80% CMBS loans that are mis-underwritten. That's how you lose the asset. If you have appropriate leverage with the appropriate institutions of banks, life companies, relationship guys, you just eliminate so much of that risk because you can work through a downtime. Nobody anticipates downtime, especially right now when things have been frothy for so long and cap rates continue to compress. At some point, we're going to have a hiccup right? It's inevitable and the best way to prepare yourself for that, in my view is not having the wrong leverage and too much leverage.

Sam Wilson  19:12

Right, man Yeah, that's absolutely true. I love that when it comes to investing in the world, what's one thing you're doing right now to make the world a better place?

Philip Block  19:19

Investing in the world? Oh, man, I wish I was doing more you know, we're not, we don't have a lot of opportunity for the green type of investing ourselves. That's not it's you know, we're buying secondhand so we're not developing a lot of stuff. But it's a great question, man. I think some of it honestly, this is gonna sound maybe cheesy because of the nature of the question. But we're, if we're buying and maintaining the better shopping centers in kind of 100 markets, secondary markets around the country and putting in and working really well with those tenants, the local tenants, the mom and pops, it's serving these communities well, you know/ I think that's necessary for healthy communities long-term.

Sam Wilson  19:56

Right? Absolutely. Philip, if our listeners want to get in touch with you, learn more about you, or how to invest with you, what is the best way to do that?

Philip Block  20:03

Our website’s the easiest. It's www.lbxinvestments.com

Sam Wilson  20:08

L-B-X. That's phonetically Lima, Bravo, X-Ray, investments dot com. Thank you, Philip for coming on the show today. I do appreciate it.

Philip Block  20:14

Thanks so much. It was great.

Sam Wilson  20:16

Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners, as well as rank higher on those directories. So I appreciate you listening. Thanks so much and hope to catch you on the next episode.