How are retail investors preparing to deal with everything that is happening? What kinds of things are they looking at repurposing retail spaces for? What is that process like?

Chris Ressa is the Chief Operating Officer at DLC Management Corporation, he oversees DLC’s $2.5 billion asset portfolio and is responsible for all property-level operations including leasing, property management, construction and marketing on all owned assets.

Tell us a little bit about you.
I'm the Chief Operating Officer at DLC Management Corporation. We are an owner and operator of commercial real estate. We buy and hold, or buy and flip at times, in particular, open air retail shopping centers. One of the interesting things about us is we are an owner operator. We don't third party anything, we don't hire property management, external leasing, external construction. We are completely vertically integrated. And we do all of that in house. Our model is we leverage the expertise of our platform to add value to assets. We are a people first company, assets. second. We believe if we build a best in class team, and we treat them right, they will in turn take care of the properties. We found that that model works for us. And we've had success in doing that. There are three partners, the CEO, who's the majority owner, he started the company in 1991. That's Adam Ifshin, myself and Jonathan Wigser are who is our Chief Investment Officer. And then we have a whole executive team with their general counsel, head of development, and our CFO.

You can look at our company split into what we'll call the operations and the financial side. The operations side, and the part that I oversee consists of about 50 people. It's the leasing, property management, construction and marketing. And then my counterpart oversees our acquisitions, dispositions, debt and equity markets, our underwriting team, and there's a lot of interplay between us, and we have to work together often and frequently.

What's going on in the retail space?
In my opinion, I think retail is the most complex, and therefore the most rewarding commercial real estate asset class. And I think that's because retail is not simply Class A, B, and C. If you look, there are more public REITs in retail than there are any other asset class in commercial real estate. And that's because all the different types of product lines operate so differently than each other. And you might have a Class A office building, Class B, Class C, and that's the nuts and bolts of it. In retail, you have enclosed malls, outlet centers, power centers, grocery anchored centers, freestanding buildings on anchored strip centers, lifestyle centers, mixed use developments, and all these are the same industry, but different businesses.

There are certain places that are on fire and doing really well, and there are certain places that are challenged. Right now the most challenged is the enclosed mall. And we like to say we're in the same industry, but a different business. Most of my tenants today don't have a lot of exposure. They don't operate in a in a mall, we own either grocery anchored or what we would call power centers. A Walmart anchored or a Target anchored center with a TJ Maxx, Home Goods, a McDonald's out on a pad in the parking lot. That's what I mean when I say power center. If you think about who the tenants are in those centers, they're very different than in those open air, strip centers. They're very different than the tenants you see in the enclosed mall. The enclosed mall was a destinational, retail fashion oriented shopping venue. That has shifted, it used to be driven by the department stores. And if you think about a department store, so much of it is apparel and soft goods. And that's not what a lot of the open air strip centers are today, they're either grocery or general merchandisers with a lot of what the government deemed as essential retail during the pandemic. I think the enclosed model is going through a massive transformation, compounded with what's going on with the pandemic, because it's enclosed. It was going on a massive transformation, pre-pandemic. And I think the open air is going through some transformation, but there's a lot of positive transformation that's going on.

Such as?
I think a lot of the retailers that go in open air projects are still growing and doing exceedingly well. If you think about the numbers that Walmart, Target, Costco, Home Depot, Lowe's, Dollar Tree, all these companies reported over the last couple quarters. They've done exceedingly well because of their price points and their experiences. It's more challenging to replicate online and they've incorporated a digital experience. So I often say, I don't know one retailer that was put out of business strictly because of online competition, I can't name one. And today, most of the retailers have to have an omnichannel presence. If you look at a lot of the digitally native brands who have been really successful, they have all opened up a significant amount of brick and mortar locations, like Warby Parker and Untuckit. Now those locations are typically in destination A malls.

Nonetheless, there's this convergence between online and physical retail. Today, still 84, 85% of all retail is shopped in a store. And if it's not shopped in the store, a lot of it is fulfilled by the store via BOPUS which is buy online pick up in store. I don't see that changing, especially in the value retail world. I don't know how you get to a place where it's economical for most retailers to deliver products to your house at a price point that is affordable to most Americans. It's a lot cheaper to deliver 4,000 products to one store and have you go to the store than it is to have 4,000 products delivered separately to a household. I don't know how Dollar Tree could give you the same price, pay $1 for the product and it be shipped to your home. I think the myth out there is that ecommerce is killing physical retail. I think a lot of ecommerce has made physical retail stronger, the strong stronger. And I think that a lot of physical retailers are doing more ecommerce now. And a lot ecommerce is starting to enter physical.

How are the retail investors preparing to deal with everything that is happening right now with COVID?
I think there are a couple of things going on from an operations perspective. There is definitely a lot of blocking and tackling going on because there's headline news that you're going to have a churn, that this upcoming vacancy that's going to be happening forced by COVID. Today, I would say it feels like you have the national tenant bankruptcy. In 2019, though, as far as national tenant bankruptcies, 73% of all store closures were wrapped up in 16 different brands. The headline news skews it like it's all dying, but it really was just a certain amount of retailers. I think the first thing is people are dealing with what's going on with rent deferrals, rent modifications, and lease modifications, and they're blocking, tackling and dealing with their existing tenant base. They are trying to continue to lease space.

We've been leasing space through the pandemic, we took a former Kmart that we got back in December of 2019. We signed the lease with Lidl, who is a grocery store so we turned a non grocery anchored center into grocery anchored, which hopefully lowers cap rate. We brought in Ollie's Bargain Outlet, another public company, and we brought in Harbor Freight Tools, all that which were at higher rents than Kmart was paying, we've executed on that through the pandemic. And that's just one example.

The big piece of it is less specific to retail, I think more about commercial real estate, which is 1. I think there's a bid ask problem in the marketplace in all commercial real estate where sellers aren't prepared to sacrifice on price yet, and buyers are looking for COVID pricing. And I think that's in all asset classes. Retail is no different. And then I think the debt markets are a little challenged because lenders are trying to understand how to look at rent rolls. We feel pretty confident in our rent rolls and the durability of those cash flows based on the credit worthiness of the tenant mix and what we've seen in rent payments, but I think that has to open up a little bit more. Those are the biggest things on the operation side. It's blocking and tackling on dealing with all the lease modifications, and rent modifications that might be going on. It is continuing to lease vacant space. And for us, less about the investment, it's dealing with how to operate a property in a post COVID world. We've now installed, buy online pick up in store at all our centers, we've new protocols in place for cleaning and sanitizing and things like that. And then the other piece is the bid ask on the buyer/seller and the debt market, meaning that there's a bid ask difference. The buyers and sellers are looking for COVID pricing. Those are the things investors are thinking about right now.

What kinds of things are retail property owners looking at repurposing retail space for?
What I would say is there's a lot to come on this. The first thing is, in the pre pandemic, what you were seeing was this buzzword which was experiential retailing, which was theater and entertainment venues, but they were really going to iconic destinational retail properties, where that's not the everyday retail property in America. The everyday retail property is where someone goes and gets their nails done and picks up their groceries and grabs a slice of pizza and whatnot. And I don't know that there's going to be a huge transformation. I think you're going to see different names on the doors in some properties. And some you'll see the same. If you take the example of what I talked about in Frederick, Maryland, we took a Kmart which wasn't a thriving retailer, we brought in one of the fastest growing grocery chains in America, Lidl, we brought in a general merchandiser, Ollie's Bargain Outlet, and a home improvement retailer. That could have been the lineup that you would see in a project five years ago, no different today, just because Kmart got out of the way.

I think that there's obviously going to be repurposing, you see a lot of the enclosed mall operators talking about maybe making deals with Amazon distribution, etc. There's going to be some of that mixed use stuff. I don't know that that's at scale. People say we're over stored in America. And I ask the question, why? Why are we over stored? The typical answer is the square footage per capita in America is so much higher than all of these other countries. And then I asked, Well, why does that make us over stored? And I would say, there are 464,000 stores in America, 84% of the retail sales in America are done at 464,000 stores. There are 1.8 million online retailers in the US. And so you have 16% of shopping done at 1.8 million online stores, an 84% done it 464,000 physical stores. What that tells me is, we have some retailers that aren't relevant anymore, and we need other retailers. But I don't know that that tells me that retail needs to be repurposed everywhere.

I think there are some enclosed malls where the market has shifted, and those could be at some point self storage, industrial, and multifamily. But at scale, I don't automatically go to "all retail needs to be repurposed". There are some, and what you're seeing is some mixed use. We have a shopping center where the grocery store didn't work anymore. We turned that into a trade school. In Connecticut, we have other shopping centers that we have a lot of land that we own, and we're looking to add multifamily and integrate that into the retail. We've done some hospital healthcare system deals where we've brought in large healthcare facilities and brought in a medical component because healthcare is trying to get closer to the consumer, which is typically retail properties. They're trying to get away from bringing you to the hospital because it's more costly. And so they're trying to get closer to the consumer, which typically means retail properties. That's an opportunity as well for retail investors, which is what percentage of the property could be healthcare in any one market. That's how I look at repurpose.

Is your group actively looking for new properties at this point in time?
We're trying to get to what we would call enterprise scale. Today, we're larger than some public REITs, we're smaller than most, but we want to get bigger. We're looking to buy. The transaction volume in the United States has been pretty low up until now with the exception of the NNN lease freestanding market. When things start to open up there will probably be opportunities coming into 2021, we are underwriting and looking at opportunities, and we are in growth mode to the extent you can be in this time.

I'm very curious how you guys are projecting revenues, if you're looking at properties right now, are you projecting with a certain additional vacancy in mind?
First off, we buy value add real estate. Typically, if you're buying on a capitalized rate, the vacancy is not factored into that purchase price. The second thing is that we're taking our in house retail expertise. And the way we're looking at it is we're trying to assign a probability to the durability of the cash flow stream. When you're investing in retail properties, that's probably a key piece. If you think about any retailer, whomever it is, whether it's Walmart or TJ Maxx, or Starbucks, how successful is this location? How does that location fit into their grander plans? What do you expect will happen when they come up for renewal? Will they stay? Will they leave the market? Will they want to move down the road? And those are the things that I think our in house team has the expertise to evaluate and make pretty good assumptions around. And that's the type of things we're looking at. If the question is, what has changed, it's really, some of the tenants are not as durable as maybe they were previously, and some are now more durable.

Is there anything else that you think is important for our audience to know?
When you look at repurposing, you're going to see some massive transformation in the enclosed malls, you're going to see some of the similar tenants who have gotten stronger through the pandemic, in your open air formats. That's one of the punch lines I would leave with. The other thing that I think is important is that when you're looking at retail in America, what's unique about retail versus some other asst classes, you might buy an A office building, but maybe it doesn't have any corporate enterprise tenants in it. If you look at shopping centers across America, the majority of the income stream is fortune 500 companies. In the late 90s, early 2000s, that was the allure of a lot of retail. I don't know that that has changed all that much. Other than What is your future view on that specific company?

Plus the fact that they said during the pandemic, We're not going to pay rent and we don't care what you do.
That's definitely a piece. Definitely, it felt like in the retail space, that was more challenging than other asset classes. But I think that on average between April and now, we collected north of 85% of the rent. And here's the difference. It takes a team. A lot of that is done because we've made hundreds of deals with tenants. And you have to have the team to be able to go through and cut those deals. Collecting the rent is not passive today. You have to work because you typically have to cut a deal. But I would say that tenants are paying rent.

If you're looking for mailbox money, in today's time, retail is a tough asset class. But they're paying and there's a lot of things right that we came to find out during the pandemic. There was this whole thing on defaulting national retailers. A lot of retailers that defaulted on their rent, and then when you sent them a default notice, they cured. One of the reasons they cured is because some of these public companies had other lenders and covenants that if they had been in default on their rent then they were default on their loan. So to preserve cash flow, they might not pay the rent and wait for the default notice, and once the default notice comes, they cured. That process might take 30 days, but you need to be active in that pursuit of that rent collection.

Absolutely, and I have seen that with all of the highly successful people, they were immediately reaching out to tenants, no matter in which asset class they were in.
Yes, we had a three pillar approach through the pandemic. We called it the ate's: communicate, accommodate, and mitigate. We need to do whatever we could to mitigate the virus, sanitize, clean our properties, and make them safe environments to shop. We needed to accommodate and work with our tenants where we could, and try to cut deals. And then we needed to communicate and continue open lines of communication. If there's anything that's positive that has happened through the pandemic is that we've had opened up the lines of communication with our tenants, our lenders, and everybody from a work from home environment more than they've ever been.

Chris Ressa
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