Podcast: Acquisitions – An Interview with a Private Equity Insider

Updated on September 16, 2020

The Private Equity Real Estate Podcast – Show 12

               

               

Summary

On this weeks episode we have the Matt Annibale, the Director of Acquisitions at First National Realty Partners. Matt gives us impressive insights into the process of what it takes to consistently source quality deals  

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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 can know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Nick Cucci:
Hey, what’s going on everyone? Welcome to another episode of The Private Equity Real Estate Podcast, brought to you by First National Realty Partners. This is the ultimate resource for passive real estate investors. I’m your host, Nick Cucci. 

Nick Cucci:
Today on our show, we have Matt Annibale. Matt is the director of acquisitions here at FNRP, he’s extremely close to all of the deal flow that we have coming through the company, and we’ve got a lot to talk with him about today.

Nick Cucci:
We’re excited to have you on the show, Matt. How are you doing?

Matt Annibale:
I’m doing great. Thanks for having me, excited to be get started here.

Nick Cucci:
Yeah, absolutely. You know, there’s a lot of people that are listening who are meeting you for the first time. I’m wondering, can you give us a little bit of a background into who you are, and how you ended up where you are today? 

Matt Annibale:
Yeah, sure. I have about six or seven years in real estate acquisitions. I joined First National as the director of acquisitions about a month ago, and have been primarily responsible for sourcing deal flow for the company, underwriting deals, and pitching new potential acquisitions. 

Matt Annibale:
Prior to joining First National, I worked in acquisitions at ShopOne Centers REIT, where we similarly focused on grocery-anchored retail, a Manhattan based company, looking for value add deals all throughout the country. And then, prior to ShopOne, I worked at M&M Realty Partners, which is a New Jersey based developer, primarily focused on ground up acquisition deals, both residential and retail. 

Matt Annibale:
Happy to be a member of the First National team, and start getting some deals underway here. 

Nick Cucci:
Yeah, absolutely. When you were back at Lehigh, you studied real estate in college. It seems like you’ve always done commercial real estate. Did you know? When did you know you wanted to work in commercial real estate? 

Matt Annibale:
So I’ve always had a passion for commercial real estate. My father’s in the business, growing up he was working real estate and development for McDonald’s, and he has since been with Costco for 20 years.

Nick Cucci:
Oh, wow. 

Matt Annibale:
It’s always just something that’s really resonated with me. It’s tangible, it’s something you could see, and feel, and touch. I really like the process, from site selection, to deal negotiation, all the way through due diligence, and in certain deals construction. It’s really always something that fascinated me. I’ve always liked how you can enter real estate from a variety of backgrounds, there’s no one direct path. There are all sorts of ways that anyone can get involved, and contribute to a deal. That’s just something that I’ve always found very appealing. 

Nick Cucci:
Yeah, absolutely. I think a lot of people feel the same way. Real estate, there’s a million ways to do deals in real estate. How cool, that your dad worked for McDonald’s back in the day. I remember, I love the story of Ray Crock with a bunch of little kids asking them, “What do I do for a living? What business am I in?”

Matt Annibale:
Yeah. 

Nick Cucci:
They said, “You’re a restaurateur, you’re in the hamburger business.” He said, “No, I’m in the real estate business.” 

Matt Annibale:
Exactly. 

Nick Cucci:
Yeah. What an amazing education for you, that you got to watch your dad as you came up, and then stuck with the business and wanted to land there.

Matt Annibale:
Yeah. Similar to McDonald’s, Costco looks the same way. They’re a real estate organization first, looking for grade A, A+ locations. No matter what the future holds, if you own assets in good locations, they’re always going to have value. 

Nick Cucci:
Without a doubt. 

Nick Cucci:
So take us through the general day of the director of acquisitions. How do you spend your time, to make the most out of your day? 

Matt Annibale:
Yeah, sure. First and foremost my role, as I touched on earlier, is sourcing deal flow. I’m on the phone, I’m talking to brokers, lenders, tenants, landlords, getting a feel for the market. I’m monitoring deal flow online, because there’s a lot of properties out there. You really need to stay on top of it to see which ones are going to be best suited for our company here. That’s one part of it.

Matt Annibale:
The second part is actually doing the work, and following up, doing the due diligence, reading the market reports, and running the underwriting and models to see where we shake out on our deal metrics. If it’s something that I feel would be a good investment for First National, and then I will pitch it, and present it to the rest of our acquisitions committee team here, and see if it’s something worth pursuing. 

Nick Cucci:
Yeah. You know, when it comes to that, finding the good fit for First National, for First National’s investors, how do you shortlist those targets? 

Matt Annibale:
Yeah, sure. First National tries to be very versatile and opportunistic in our investments. Primarily, our focus is grocery-anchored retail, but we will pursue other acquisitions that are comprised of internet resistant and essential tenants. But, I would say our bread-and-butter is the grocery-anchored. Grocery stores have performed very well through the pandemic, and it’s good to have a best-in-class grocer at the center, with a strong tenant lineup. 

Matt Annibale:
We want to see that sales are trending in the right direction, that foot traffic volume is strong. And then, of course it has to make sense financially, that the purchase price has to be reasonable, the cashflows have to make sense for us, and a large part of that is sourcing good debt. 

Nick Cucci:
Now, you were just talking on grocery-anchored stores a little bit. Let’s dig into that. What really makes a great deal in the grocery-anchored … Well, a great retail deal, with a grocery-anchored tenant? 

Matt Annibale:
I would say, our ideal site would have a market-leading grocer. So if we’re in the Northeast, we’re talking Stop & Shop, ShopRite. Florida, Publix. We’re looking at a couple Whole Foods deals. So we want a strong grocer, with sales trending upwards. We have to be a little aware of the inflated sales as a result of the pandemic, all grocery stores have been doing very well, with the sales over 150% of their prior year numbers. So just be careful not to be fooled by that, and really have a good understanding of historical sales volume.

Matt Annibale:
But, we want to see term on the grocer as well. If the grocer is expiring in three to four years, we would like to leverage our relationships with that grocer, see if we could possibly work out some sort of an extension to get them longterm. Ideally, we’d like to have at least 10 years of term on any grocery-anchored deal. 

Nick Cucci:
Talk about amazing investor value, right there, not just for FNRP. But, when you’re able to walk into a deal, leverage your existing relationships to have your tenants extend their leases because they’re comfortable with who the owner is going to be, that’s tremendous value. 

Matt Annibale:
Yeah. That’s something I feel that First National is able to bring to the table on any deal. I mean, we have a best-in-class platform here, we have in-house property management and leasing, and we’re able to deliver on all of our acquisitions. That’s something I feel that all tenants are comfortable and confident in committing to centers where we invest in, given our reputation and our track record. 

Nick Cucci:
We say here that we sort through 1000 deals to pick one, and I feel like you’re probably closer to that than most at the company. I wonder if you could tell us a little bit about that? 

Matt Annibale:
Yeah, sure. My job is to make sure any deal that hits the market that might be a fit for us, that I get eyes on it and I’m screening it, and getting the backstory on it. I mean, plain and simple, you’ve got to kiss a lot of frogs. We’re looking at a lot of deals, every single day. Unfortunately, due to the pandemic, the debt markets have frozen up a little bit, it’s been difficult to get good financing on multi-tenanted retail. It’s not exactly a hot commodity by most lenders right now. 

Matt Annibale:
We have to throw a lot of things at the wall, and see what sticks. What I mean by that is we have to be in the game on lots of different acquisitions. We’re active bidders on many different deals, because you have to get the financing, and the numbers have to line up and make sense, or it’s not going to be a good fit and you’re not going to get to the finish line. We are sourcing many, many deals every single day. We have an ongoing pipeline of probably close to 100 properties that we’re reviewing at any given time. It’s just a process to funnel it down, to the one or two that are actually going to work and make sense for the company. 

Nick Cucci:
But, when you can create a process and keep it moving, and just keep that pipeline moving, that’s when you find success, as you guys have. 

Nick Cucci:
If we can, let’s drill down into criteria a little bit. What do you need to see on a deal? 

Matt Annibale:
Yeah, sure. Well, we like to see a strong performing anchor tenant, and in most cases it’s got to be a grocer. But, we will explore deals that are anchored by other essential retailers, such as home improvement stores, or wholesale clubs. 

Nick Cucci:
Okay. 

Matt Annibale:
We want to see population density and high income areas. Rough rule of thumb, for a three mile radius, we like to see incomes of $75,000 and population density of about 75,000 as well. 

Nick Cucci:
Where are you looking geographically for deals right now? Is one area better than the next for any reason? 

Matt Annibale:
One nice thing about First National is that we like to be opportunistic, and we could go into any market. It’s really a deal-by-deal decision, a deal-by-deal basis. We can make the deals in the primary markets, secondary, or even tertiary, as long as we have a performing anchor tenant. Which, as I mentioned, is usually a grocery store. But, if we’re in the secondary or tertiary markets, we like to be either the one or two top player in town, there can’t be a lot of competition out there. Whereas in the primary markets, you’re going to see more competition. 

Matt Annibale:
It’s just really on a deal-by-deal basis, and as long as we can get the pricing and the debt to work, we can make a deal anywhere. 

Nick Cucci:
That’s great. You guys are completely deal driven, it doesn’t matter. You’re region agnostic. Anywhere in the country, it works. 

Matt Annibale:
We’re looking at deals in downstate New York, upstate New York, Florida, California, Washington, Oregon, throughout the Midwest. Our pipeline is full of deals in all different markets throughout the country. 

Nick Cucci:
That’s great. I guess this is where the vertical integration really pays off, because you’re not worried about who the property management is going to be in that market. 

Matt Annibale:
Yeah, exactly. Everything is handled in house. 

Nick Cucci:
That’s fantastic. Cool?

Matt Annibale:
Yeah. 

Nick Cucci:
in all the deals that you’ve seen, there’s so many ways to structure a deal, what are some of the most creative deal structures that you’ve seen? 

Matt Annibale:
Yeah, sure. Well certainly, as a result of the pandemic, we’ve had to be more creative in the way we’re structuring our deals. On the debt side, we’re toying with CMBS deals more so than we would have in the past. It’s not our preference to work in the CMBS world, but sometimes finding bank loans, or life insurance company loans are tough to find. That’s one thing that we’re starting to explore. 

Matt Annibale:
And then also, just deal specific, you’re seeing a lot of motivated sellers who are willing to backstop the rents for some of their struggling tenants. As we all know, many tenants were struggling as a result of the pandemic, they were forced to close for an extended period of time, and had fallen behind on their payments. It is very difficult to underwrite accurately how these tenants are going to perform in the future. If they’ve been closed for five months, you have no sales data. This really is more about the Mom-and-Pop tenants, less so about the nationals. We try to work out rent backstops, where the sellers will guarantee the rent at least through the term, and we’ve seen that many sellers have been receptive to that. It’s a way for us to progress through deals that we otherwise would not have been able to. 

Nick Cucci:
Yeah. That’s a great negotiating tactic right there. It helps both sides, and it also provides you guys with some runway through these uncertain times. 

Nick Cucci:
You’ve mentioned a little bit about the impacts of COVID-19, but I’m wondering if we can dig in there. From the acquisition side, what other impacts have you seen? 2020 has been an extremely unusual year. 

Matt Annibale:
Yeah. 

Nick Cucci:
Let’s talk it out a little bit. 

Matt Annibale:
Yeah, sure. Well, as I touched on, there are going to be winners and losers in every industry within retail. I don’t care if it’s apparel, or automotive, or salons, whatever it is, there’s going to be some groups that come out as winners, and some that are less successful. It’s not always easy to tell who is who, so it makes the due diligence process all the more important, and to really get as much information on these tenants as possible. Doing tenant interviews, talking to them, getting a feel for how business is doing because it’s just very difficult to make assumptions right now on the future performance of tenants that have been closed. 

Matt Annibale:
That’s also part of the reason why it’s difficult to obtain financing and good debt, because lenders are not confident about many of the multi-tenanted retail properties, for that reason. 

Nick Cucci:
Which makes sense, but I think creative navigation, like you mentioned previously, is what’s going to separate the good operators from the bad operators during this time. It’s the people who are going to find the way to get the deals done, and make it beneficial for all parties involved, are the people that are going to come out on top. 

Matt Annibale:
Exactly. 

Nick Cucci:
Now, how about any positive trends that you’ve seen this year, given the COVID-19 environment? Has there been any upside? 

Matt Annibale:
Unfortunately, I’d say there’s been a lot more downside than upside. Deal flow has been slow, you have a lot of landlords who have decided to sit and hold on their dispositions for the year, to wait and see how the market responds, and how the debt markets respond in the next few months, so we’re hoping that deal flow picks up. 

Matt Annibale:
But, if I had to just say one positive, I would say that the grocers are crushing it. Pretty much across the board, all grocery sales are up. It goes beyond grocery, all essential retail has really been performing well, so your home improvement stores, your wholesales clubs. Any tenant that has stayed open throughout the pandemic, for the most part, we have seen an increase in sales. 

Nick Cucci:
That’s interesting. That’s really good information. 

Nick Cucci:
What are your expectations for commercial real estate in the future? You tell me how many years you want to throw it out. If you had a crystal ball, what do you think we’ll see? 

Matt Annibale:
Yeah, sure. I think, first and foremost, that there’s going to be an even more heightened emphasis on grocery-anchored retail. That’s the hottest thing right now that everyone wants. They’re recession-proof, pandemic-proof. They are a staple in the retail market, the grocery-anchored retailers. I definitely think that there’s going even be more demand than there’s been in the past.

Matt Annibale:
But longterm, I think that retail, while it may change, there will always be a place for it in the world. I know that some people have different outlooks on it, but I just think of it more as it may redefine itself, but there will always be value in retail real estate. 

Nick Cucci:
I wholeheartedly agree with you, it’s not going anywhere. Any neighborhood, people in the neighborhood want a place to go.

Matt Annibale:
Exactly.

Nick Cucci:
People want a place to go, and yes that’s going to change. And what that might be in 10 to 15 years, who knows? A different variation of what we’re seeing today? Most likely. But is it still going to be a place that people want to go out to, and have some form of experience? Absolutely. 

Matt Annibale:
That’s why, when we look at acquisitions, we’re looking to by at main, and main locations that will always have value, no matter what the future holds. 

Nick Cucci:
We have a lot of passive investors that listen to this show. So I’m wondering, what are the first questions that you would as an operator that you’re considering investing with? 

Matt Annibale:
Yeah. I would want to understand the big picture of the deal. Is the leasing and property management going to be handled in-house? Or, is it going to be outsourced? What’s the game plan, what’s the exit strategy, how long is the holding period? Of course, what did the return metrics look like? What’s my cash on cash return, and what’s the IRR for the deal? I’d really just want to get an understanding of the big picture, what the game plan is for the asset, so those are all questions I would want to know.

Nick Cucci:
I’m going to ask you three quick questions before we close up the show. But before I ask, are there any final thoughts on investing in commercial real estate that the director of acquisitions can lend those thoughts to investors that might be listening? 

Matt Annibale:
Yeah, sure. I would just say that the deals are out there. It doesn’t matter what type of market there is, or how the economy is performing, there are always deals to be had. It’s just a matter of going out there, putting in the work, and finding them. 

Nick Cucci:
Great. Three quick questions for you. Number one, what was your first real job? 

Matt Annibale:
My first real job out of college was as an associate at PriceWaterhouseCoopers. I worked in the real estate valuation team, where I was responsible for validating client valuation models, all day long. Not exactly the most glamorous job, but got my feet wet in the real estate market. It helped me build my foundation in real estate, in what I learned there. 

Nick Cucci:
Very nice. What’s your favorite business book? 

Matt Annibale:
Am I supposed to say The Art of Commercial Real Estate? 

Nick Cucci:
Well I mean, that’s obviously your favorite. What’s your second favorite business book? 

Matt Annibale:
I would say, I really like Rich Dad, Poor Dad. I know it’s a classic, but I just like the concepts it teaches there, about being wealthy versus being rich, and the importance of getting your money to work for you. 

Nick Cucci:
Absolutely. Yeah, it is one of the classics. You know, I might have to put a disclaimer moving forward, that what’s your favorite business book, besides The Art of Commercial Real Estate, and Rich Dad, Poor Dad, because those keep coming up. 

Matt Annibale:
I haven’t got my signed copy yet. 

Nick Cucci:
Well, Tony’s around, I’m sure he’ll get one for you.

Nick Cucci:
If you could travel anywhere in the world tomorrow, where would you go? 

Matt Annibale:
This is tough. I love the Caribbean, I’ve been to the Caribbean a bunch and always love going down there. I would probably say Sicily.

Nick Cucci:
Nice. 

Matt Annibale:
I’m part Sicilian, I have a Sicilian mother. I’ve been to Italy a few times, but never Sicily. I hear it’s beautiful, and I’ve always wanted to go. 

Nick Cucci:
I’ve never been there, either. I would love to check it out, I’ve heard it’s gorgeous. 

Nick Cucci:
Well hey, Matt, thanks for taking the time to join us on the show today. Best of luck with all the future acquisitions, hope to have you back on again soon. 

Matt Annibale:
All right, thank you. Thanks for having me, it was a lot of fun. 

Nick Cucci:
Absolutely. And thanks to everyone for listening, to The Private Equity Real Estate Podcast. If you like what you’re hearing, please leave a review, subscribe, and share the show. If there’s anything you would like to hear us discuss, please reach out to us and let us know. This show is brought to you by First National Realty Partners, one of the top private equity commercial real estate firms in the country. If you’re interested in learning more about FNRP, or would like to get access to our private offerings, please click the link in the show notes or visit fnrpusa.com.

Nick Cucci:
Remember that this show is for educational purposes only, and should not be considered a solicitation to purchase securities, or be construed as tax, legal, investment, or accounting advice. Thanks again for listening, everyone. We will see you again soon. 

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