The Private Equity Real Estate Podcast – Show 25

   

   

Summary
On this week’s episode, we discuss tenant-centric value-added investing. Our guest this week is Tony Grosso. He is the co-chairman, managing principal and founder of First National Realty Partners, one of the nation’s leading commercial real estate private equity firms.

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Announcer:
You’re listening to the Private Equity Real Estate Podcast brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real world experiences so you know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Eric Murphy:
Hello, and welcome to the Private Equity Real Estate Podcast, which is brought to you by First National Realty Partners. I’m your host, Eric Murphy. On this program, every week, we sit down with different experts in commercial real estate and we talk about a wide variety of topics across the commercial real estate landscape. This week, we’re going to get into the topic of tenant centric value added investing. Our guest this week is Tony Grosso. He is the co-chairman, managing principal and founder of First National Realty Partners, one of the nation’s leading commercial real estate private equity firms. Mr. Grosso has been involved in all phases of First National Realty Partner’s development since its founding. He’s widely regarded as one of the leading authority figures and thinkers in the commercial real estate private equity industry today. He’s been on the program before, so we’re happy to have him back. Tony, welcome back to the show.

Tony Grosso:
Hey, great to be here. Thanks for having me on.

Eric Murphy:
As I mentioned in the intro, the topic we’re going to dive into today is all about tenant centric value added investing. So let’s kick it off with what is tenant centric value added investing?

Tony Grosso:
Yeah, and it’s a mouthful and it’s actually a term that I coined probably back in 2017 or 2018. It’s actually a very, very simple concept that’s kind of a fancy way and a big piece of how we talk about our investment thesis, but in a nutshell, tenant centric value added investing is all about listening to your tenant, listening to maybe an anchor tenant or a larger tenant or a bunch of tenants at a property, listening to where they want to be, and then using the insights into what they’re looking for and what they’re looking to do and how they’re performing out of sight to make investment decisions. So I’ll give you a quick example of how this plays out, because there’s a couple of different ways it can. Let’s say our tenant is XYZ, big box anchor. I hate to use individual names because I just like to keep it generic.

Tony Grosso:
Well, if you’re able to generate a relationship with XYZ big box tenant and a real good relationship, you can kind of go around the country and when you see XYZ as a tenant at a site, you can call up and say, “Hey, how are you guys doing here? Is this a good site? Should we stay away? Are you leaving? Is it long-term?” So tenant centric and value added investing is all about developing relationships with national tenants is usually who we focus on, but it could be a regional or a local, but developing a relationship with a tenant and then using that relationship to add value and understand investments better. Hopefully that’s clear.

Eric Murphy:
And how does that differ from a property centric approach?

Tony Grosso:
Right. Now, that’s not to say here at First National Realty Partners that we don’t take a property or real estate fundamental centric or a financial centric approach, because we do that as well. We just take it to the next level with this approach. But a lot of investors might look at a piece of real estate, and I’m specifically speaking to the commercial space because you can’t really do this with small little tenants that are residential tenants. So it’s more on a commercial side of things, but a lot of investors will look at a piece of property and they’ll say, “Hey, it’s got great real estate fundamentals for a bunch of different reasons. I like this property,” or, “It doesn’t have those fundamentals. I want to stay away from it.” Then they’ll also take it the next step and they’ll say, “Hey, from a financial standpoint, the property is trading at such and such a cap rate,” whether it’s a great value or it’s expensive or it’s expensive and that’s okay because it’s got great long-term prospects.

Tony Grosso:
So most operators or investors, they looked at it from a real estate fundamental standpoint and then also from a financial standpoint. Now, we do both of those things in our investment committee, in our acquisitions group when we’re underwriting a deal, but we take it to the next level by having these relationships with a lot of national tenants. If you go on our website, which is FNRPUSA.com, all of our tenants are up there. Every property that we buy, we really make an intentional outreach to develop a relationship with the key real estate people at that specific company. Then we use that relationship to go out and either add value at a property, maybe it’s leasing space, maybe it’s getting intel. Is it a good location? Is it a bad location? Should we stay away? Should we get involved? Or to do multiple deals and say, “Hey, you guys are on the hunt in Boise, Idaho, we’ve got this property that we’ve isolated. We may be going after. Would you go in?” “Yes, I would.” And it had a tremendous amount of value.

Eric Murphy:
I know you mentioned that you don’t like to use specifics, but can you share an example or maybe a story about how First National Realty Partners has recently used this approach?

Tony Grosso:
I’ll tell you the story of kind of how I got this whole thing going, and we’re not the first people to do this. We may be the first group to name it tenant centric value added investing. There’s been people who’ve been doing blends and extends and leveraging off tenant relationships and portfolio reviews since the beginning of real estate. We’ve just kind of coined this phrase. We live, we breathe, and [inaudible 00:04:42], and sleep it. So this big light bulb went off. I was buying a small property earlier in my career, and it was anchored by a national drug store and they have two or three years of term left on the lease. We bought the property at like an 11% cap rate. It was just a really good value, specifically for having that type of tenant. It had some local mom and pop tenants in there as well.

Tony Grosso:
And going throughout due diligence, which is when you get under contract, you’ve got a free look period, and you really start to prove your hypothesis that you had before you went after the deal, make sure the numbers are right, there’s no environmental and everything is kosher. But through due diligence, we found out they were leaving. The national tenant was leaving and they’re going across the street. So here we are thinking we’re getting this a great deal on a property at an 11 cap rate, which is high really in any market, no matter where interest rates are. And now we’re not because a big part of the value of that property was based on that tenant’s income stream and them being in there. So long story short, we convinced them not to leave. We reduced their rent a little bit, which you think is bad because you want to grow [inaudible 00:05:44].

Tony Grosso:
But we got a 20 plus year extension out of it. We took them out to like 23 years. Now, our net operating income came down, but because we stabilize the property and did this 20 year extension, we added a tremendous amount of value to the property. We took it from an 11 cap, yeah, we dropped our, maybe we took a 10% across the whole property reduction and [inaudible 00:06:05], but now it’s worth a six cap, which is a much lower multiple, a higher, multiple lower cap rate and added a tremendous amount of value. And when that happened, a light bulb went off in my head and my partners head and said, “How do we do more of this? How do we make this the backbone of our investing thesis?” So we kind of backed our way into it and we’ve been using it ever since.

Eric Murphy:
And how does First National Realty Partners implement tenant centric value added investing?

Tony Grosso:
I think the success in the way that we’ve been able to apply it lies in our network of tenant relationships. If you were to come off the street, could you do this on a one-off basis where you see a property? Let’s say you’re looking at a single tenant property and it’s a national tenant, and they’ve got three years on the lease and you can buy it at a higher cap rate because everybody else who’s a 1031 trader or a core buyer is afraid to go in because of the short-term term lease. If you could get to the right person in that real estate department and develop a relationship and find out if it’s a good spot, there’s a chance that you could probably work a deal with that tenant and maybe add some value, right?

Tony Grosso:
And that’s part of what we do on a day-to-day basis, but really what allows us to be successful, we built this network of not just one tenant in one isolated situation, but we’ve cast this tremendous wide net across all these national tenants. You can go on our website and see all of our tenants. And what that allows us to do is when we are looking at a property, say, “Okay, XYZ tenants in there. Yeah. We know the guys over there, let’s get the story here.” We do that with all the regional and national guys. It’s harder to do it with the mom and pop because we buy all over the country. So with the national and regional guys, it works a little bit better and we’ll get into a property and we’ll just have a conversation. “How are you guys doing here?” And if everybody’s doing well here, there’s probably something to it. And if everyone’s saying, “Hey, sales are declining. It’s not a good location,” there may be something to the property that doesn’t meet the eye and we want to stay away. So that’s just the first way we do it.

Tony Grosso:
The second way we use it as to lease space. So we’ve got all these national tenants that we’re developing relationships with. We know where they want to be and our leasing guys, as we’re talking right now, Eric, are out there having these conversations, “Where do you want to be? How can we help you achieve your real estate goals?” So if we know that we have tenant ABC, who’s a 12,000 foot user and wants to be in Dubuque, Iowa. Well, if we come across a property in Dubuque, Iowa that’s a 12,000 foot vacancy, we may be able to add a lot of value very, very quickly because we know ABC tenant wants to be in there. So it’s two ways that we use it. One is for intel and to see how a property is performing, deciding if we want to go after it, and the number two is from a business planning standpoint, a business development standpoint, a leasing standpoint is using all these relationships as tenant network that we’ve cultivated, and then putting them in like puzzle pieces in different properties, all over the country.

Eric Murphy:
When you take this approach, when you have those discussions with tenants, what type of intelligence are you able to gain?

Tony Grosso:
It kind of goes hand in hand with those two things that I said. Number one is performance, very straightforward. Is this a longterm location for you? Are you guys committed to this site or is this something short-term that you’re going to be pulling out of? And then number two, we can also have the conversation and say, “How do we help you achieve your real estate goals? Let’s do a portfolio review. We’ve got these 37 properties. You’re looking for X amount of space. Would you want to be here, here, here, and here? If you don’t want to be in anywhere in our current portfolio, where else are you looking? Where do you have an open to buy? Where do you want to go? What markets are you looking to get into? Are you looking to get into Tampa, Florida? Well, guess what? We’ve got, our acquisitions group has five properties that they’ve made offers on in Tampa, Florida. Would any of those fit the bill for you?”

Tony Grosso:
And what you’re able to do is just through a tremendous amount of volume and a tremendous amount of relationship building, figure out areas where you can add value. That’s really what tenant centric value added investing is all about, creating a win-win between the tenant, helping them achieve their real estate goals and for ourselves in that we’re able to add value by putting tenants in and find out if the locations are good or bad.

Eric Murphy:
Well, you’re listening to the Private Equity Real Estate Podcast, which is brought to you by First National Realty Partners. A little bit about our sponsors, First National Realty Partners is a rapidly growing commercial real estate, private equity firm that owns and operates more than 3 million square feet of real estate throughout the United States with a portfolio valued in excess of $400 million. First National Realty Partner focuses on expanding its portfolio by acquiring market dominant, well located commercial assets well below replacement costs. First National Realty Partner actively manages its portfolio through an in-house team compromised of more than 30 full-time real estate professionals focused on acquisitions, property, asset management, leasing, finance, accounting, and investor relations. You can get in contact with someone at First National Realty Partners by emailing them at info@FNRPUSA.com. Well, today we’re talking about tenant centric value added investing, and our guest today is managing principal and founder of First National Realty Partners, Tony Grosso. Tony, with tenant centric value added investing, how does that benefit the First National Realty Partner tenants?

Tony Grosso:
I think from a business development standpoint, when you’re able to get chest to chest with high credit national tenants, and then kind of understand where they want to be, you’re able to get a good handle on the market. So there’ll be times when the market kind of slows up from a leasing standpoint and we’ll kind of be able to anticipate that maybe better because we’ve got these broad conversations going on. So we can, through this intelligence network, not predict, but kind of have a stronger hypothesis of where the market is headed because in our business, we do a lot of grocery anchored retail. It’s all about the tenant performance. That’s what value in these assets is derived from is how can a retailer go in there and be successful in generating revenue and kind of having your ear to the streets, so to speak, and understand what’s going on in the space and constantly being in contact with these retailers is just another dimension of intelligence and value that we can help our equity investors that get involved with us be successful.

Eric Murphy:
Well, speaking of investors, how does this approach benefit First National Realty Partner investors?

Tony Grosso:
If you wanted to go out and try to do this yourself, and let’s say you’re an individual investor, you could do it. But what would it require? A tremendous, tremendous amount of work. I mean, when we hire guys on the leasing team or gals on the leasing team, we inherit and we bring in all the relationships that come with them. So for an investor to try to go out and replicate this network, could it be done? Yeah, but it would just take a tremendous, a Herculean effort. So when investors work with us, and this is our value proposition is they’re leveraging off of all of these relationships that we’ve developed with these national tenants and they’re leveraging off our ability to make decisions based on fact, and based on real conversations with real tenants that are doing real business at these sites every single day.

Eric Murphy:
Tony, how does this make First National Realty Partners unique?

Tony Grosso:
It’s a big piece of our investment thesis. I’ll tell you that. It’s not the entire game, but it’s one of the backbones of what makes us successful. It’s in our DNA. It’s creating a win-win listening to our tenants and then going out and finding sites where we can help our tenants achieve their real estate goals. It’s not the only game. I mean, we have a proprietary asset management system called FNRB360. We do everything in house, our HR system, from how we hire A players and top grade.

Tony Grosso:
I mean, there’s a lot of different facets to what makes First National Realty Partners, in my opinion, a world-class operation. But the tenant centric value added model that we’re discussing right now on the investment thesis is just huge and it’s allowed us to find value where other investors and operators may not be able to, because if we’ve got relationships with 10 at ABC and nine other bidders on a property don’t, they may pass if there’s a short term lease, where for us, we may say, “Hey, that’s a huge opportunity.” Or they may pass because they don’t do unstabilized properties. We may say, “Hey, we’ve got a grocer in our back pocket or a certain user in our back pocket we can stick in there and that allows us to add a lot of value.

Eric Murphy:
Tony, if someone wants to get in touch with you or they have questions for you, how do they do so?

Tony Grosso:
You can email me directly AGrosso, G-R-O-S-S-O, AGrosso@FNRPUSA.com or just give us a call and my staff will be happy to set up a call.

Eric Murphy:
Excellent. Tony Grosso, co-chairman, managing principal and founder of First National Realty Partners. Thanks again for being on the show today.

Tony Grosso:
Thanks for having me. It’s been a pleasure as always.

Eric Murphy:
My thanks again to our guest, Tony Grosso. Thank you for listening to the Private Equity Real Estate Podcast, brought to you by First National Realty Partners. If you haven’t already, please remember to subscribe, rate, and review the podcast. We definitely appreciate it. I’m your host, Eric Murphy, and we’ll talk to you again next week.

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