A Case For Retail Commercial Real Estate

Presenter:

What's up everybody, and welcome back to another episode of Loop It In, the DoorLoop podcast where we pick the brains of experts in property management, real estate and investing. Tech, we cover it. Marketing, that too. So whether you want actionable tips or the insider scoop from top performers in their industries, this is one show you won't want to miss. Be sure to subscribe so you won't miss out on any future episode.

David:

Hey everyone, this is David Bitton, co-founder and CMO at DoorLoop. I'm going to be hosting this show today with our guest, Hue Chen. He's originally from California with parents from Taiwan and has built a successful career in commercial real estate since graduating from the University of Florida. Hue is the president of Saglo companies, responsible for increasing their portfolio of properties by acquiring and developing shopping centers throughout Florida. He's also very active in the community and numerous charities and organizations. And today we're going to be discussing retail, commercial real estate and Hue is going to be making his case for getting involved in that space.

And it's actually funny, I met Hue through a mutual friend and he's always been a wealth of knowledge and always loved being at the forefront of technology. So that being said, Hue welcome to the show.

Hue:

Thank you David. Thanks for the introduction and I'm glad to be on. I know you had told me about your podcast, so I'm excited to be a part of it now. I'm actually talking about something that's a segment of commercial real estate that I feel is a little bit more niche, I guess, than what maybe a lot of your audience is used to talking about and that's shopping centers. I actually am part of the FIU Masters of Science in International Real Estate where one day out of their semester I help teach a class along with Alyona Tsutskova, who's our senior commercial real estate leasing person. She graduated from FIU's MSIRE several years ago and the professors invite us on. I'm actually taking something that I spoke to the students of that program and talking to your audience about, which is a case for retail, commercial real estate, or shopping centers.

David:

That's awesome. Excited to dive in. And before we dive straight in, let's give a quick... Maybe give some more background about, information about yourself and what you're doing today.

Hue:

Sure. So I have been involved in commercial real estate since the year 2000. I studied finance at the University of Florida and after graduating I spoke with one of my friends who had already joined the business the year prior, and he told me about this world of commercial real estate, specifically shopping centers. And I had no idea. I mean, it's one of those things where unless you are in the business, how are you supposed to know there's something called the leasing agent that brings tenants to a shopping center? So it was pretty fascinating and I wanted to give it a try. So I ended up looking for a job and finding one with Terranova Corporation out of Miami Beach, and that's where I got started.

The lady who gave me my first opportunity is actually still very involved in our industry, Beth Azor. She's actually kind of a legend now where she helps a lot of people.

David:

I know her.

Hue:

She helps a lot of people in the industry, so good person to know.

And I've been in shopping centers ever since, which is pretty interesting. I know a little bit about the other food groups of commercial real estate. Not enough to really talk intelligently about it, but enough to know what they are. But really we decided or I decided to be a mile deep just in retail and in shopping centers.

From Terranova, which was at the time one of the largest-third party leasing and management companies for shopping centers in the state of Florida. From Terranova, I went to Woolbright Development. Woolbright Development, their business model was more of a merchant developer. So what that means is they would buy a shopping center that was undervalued and lease it up, redevelop it, make it look very nice, and within a year or two, sell it at a great profit and then take the proceeds from that transaction and do it all over again. So I was with them for a number of years. After that I spent about a year and a month with Ram Realty Partners out of Palm Beach Gardens. They developed both retail and residential. I worked on their retail division, but they were more of a fund model type of commercial real estate company that would buy portfolios of shopping centers within a fund and operate them for a little bit longer term, maybe more of a five to 10 year term.

So about 10 years ago, I joined Saglo Development, which is a family office, and I joined Saglo after talking to Jack Glottmann, the principal of Saglo. He had actually called me to pick my brain about something else, to pick my brain about leasing, actually, not to try to hire me for leasing, but he was looking for a leasing agent at the time, and he wanted to know who I thought would be good for his company. And we got to talking and I expressed interest in maybe doing something other than leasing. Long story short is I joined them as an acquisitions associate or vice president of acquisitions. And from there I took on more responsibility and eventually ran the entire company.

But the interesting thing about that is actually I met Jack initially while working at Terranova way back when my very first company. So I met him in about 2002 or 2003, and we just kept in touch for about a decade. So lesson learned is you never know where your next opportunity might come from. It might be the guy that you met 10 years ago or 20 years ago. A lot of the people that I knew 15 years ago or 20 years ago are in much different positions today. Don't burn any bridges and you never know where your next opportunity may come from.

David:

I love how your whole journey really just came around full circle till where you are today. That's amazing. Before we get into your slides, I just want to let everyone know this show is going to be published as both a podcast and a webinar version. So if you are tuning in now into our podcast, that's audio only, you can also watch the video version and see the slides that we have up on the screen as we walk through them. So with that being said, Hue take it away and tell us about what we're going to be covering today.

Hue:

Sure. So a little bit about Saglo before we start. We own and operate shopping centers throughout the state of Florida and also now in Georgia. We're looking to expand into other states such as the Carolinas and maybe Virginia, maybe Texas. So we're looking around, all we own are shopping centers. Specifically within shopping centers where we own really mostly class B, class C type of properties, think neighborhood strip centers, some grocery, some non-grocery, some discount anchored. That's a little bit about who we are. And when I would speak with the audience over at FIU's MSIRE program, a lot of the students, when I speak with them, I get the feeling that the hot sectors of commercial real estate are really multifamily and industrial. Everybody wants to get into multifamily, everybody wants to get into industrial. Office is a little bit more out of favor right now. Actually retail was the most out of favor for a period of time, but I think now offices. Unless you own in Brickell or something like that.

So this is really geared for that I guess a perspective where, hey, look with multifamily, pretty straightforward. You have apartment buildings of varying sizes. I think everyone's lived in an apartment at one point, so you know what that is. Everyone signed a lease at one point. These assets usually go for some of the lowest cap rates amongst the four food groups. We're talking 4% cap rates at today's debt levels. And you're talking one-year leases with mostly gross rents. And with apartment buildings, neighborhoods matter, but not really like the specific corner like with shopping centers, the northwest corner of an intersection might be a lot better than the southeast corner, for example. So this is more neighborhood matters and amenities and the condition of the buildings are really the differentiator, that's how one landlord can get more rent than another.

With industrial type of buildings, we're talking warehouses and logistics centers, manufacturing, that's a pretty hot asset class right now, especially with a lot of the e-commerce and server farms and all sorts of stuff. These are longer term leases. They're not the one-year leases that the multifamily asset group has. These are five plus year leases, but they're also gross leases and a lot of them have over the base here operating expense reimbursements.

David:

What have you seen post-COVID that's changed with leasing or state of the market today?

Hue:

For retail specifically?

David:

Yep.

Hue:

Post-COVID it's actually surprising. We've seen a huge uptick in leasing velocity towards the end of 2020 and going into 2021, specifically in Florida and maybe some of the Sunbelt states. And I think what we attribute that to is a ton of domestic migration from states like California and New York and Illinois to Florida. And typically when you see that type of population growth, you're going to see some pretty dramatic sales numbers from the tenants and that drives demand for space and that drives rental rates. And so we witnessed that, you add on top of that a lot of the stimulus money that just-

David:

Free money.

Hue:

Increased sales that much more dramatically. I spoke with some retailers that would tell me in some of these areas that we own in that are a little bit lower income areas, "Hey, look, now the customers are coming in and they're buying, they can't buy it. I can't keep enough lobster and steak in the deli department." It was a night and day difference.

David:

Great prompt to have today.

Hue:

Yep. That has slowed down though, so I can tell you that. It was more of a curve that went up and I think now it's a little bit tapering off right now.

David:

Agreed.

Hue:

And so for the retail food group that the cap rates are higher than industrial, higher than multifamily, you have your five-year leases, but they're mostly triple net leases. The specific corner of the intersection really matters. And the leases are really complex because the co-tenancy matters. So within the leases of the retail, within the retail leases, there's all sorts of provisions such as co-tenancy clauses, opening co-tenancy, ongoing co-tenancy, exclusive use clauses, use restrictions, and then you go into caps on CAM and all of these other things, which I don't think that the other leases go into as much. So that's kind of the differentiator.

David:

Got it.

Hue:

Within retail, there's the subgroup, so you got your enclosed malls, your neighborhood strip centers, your street retail, and your regional power centers. We really focus in on the neighborhood strip centers. So if you think Publix or Winn-Dixie or even Save a Lot, that's typically our anchor, maybe Big Lots or Marshalls or T.J. Maxx. A lot of the times the tenant mix is mostly essential uses or necessity uses. There's a mixture of national and local tenants, so we deal with a lot of mom-and-pops or companies with maybe two to 10 locations. Customer convenience is really important. They typically draw from two to three miles where enclosed malls are drawing from 15 to 20 miles. Street retail is unique to those urban environments and the power centers draw from a little bit longer.

David:

Are you not seeing retail getting affected by online sales and e-commerce, Amazon?

Hue:

Yeah, that's a good question. So I know that that was a big fear over the last number of years and maybe it still is. I think that's what keeps the cap rates for retail a little bit higher than, or a lot higher than let's say multifamily and industrial. I think that online retail certainly has affected enclosed malls dramatically. Power centers quite a bit. I think Bed Bath & Beyond just filed bankruptcy this past weekend.

David:

Wow, I did not know that.

Hue:

So that. I think there's a few others that are... I think David-

David:

Close.

Hue:

Yeah, I think David's Bridal, there's some concerns over David's Bridals longevity. But yeah, no, e-commerce has really taken a bite out of a lot of the retailers business I guess.

For what we do, we really try to focus on the necessity type of retail. When you're dealing with a lot of medical and services and the deep discount retailers, a lot of that stuff really isn't online and that we haven't been as affected. That being said, I'm sure that there's some effect there and we try to stay up to date on the newest trends so that we're not caught off guard.

David:

You're mentioning a few terms that I want to clarify for some people that are new to commercial real estate or just new time investors in general. So if you can give some definitions for... Let's start off with discount anchored.

Hue:

Sure. Discount anchored can be anything from a thrift store, which we actually deal with quite a few thrift stores. One of the ones that are in multiple centers of ours is called Red, white & Blue. And we actually also do the tenant rep, tenant representation for them. They are about a 30 to 40,000 square foot thrift store that operates in 20 states across the United States. They have an incredible operations. When you go in, it looks like a T.J. Maxx or a Marshalls in that everything's organized and it's clean and is well lit. The amount of staff that there is incredible, and you can find things pretty, pretty easily. Everything's color coded, everything's organized by size, and when you go there, you're able to buy pants for less than $10, a jacket for less than $10. When you're dealing with that type of product...

And by the way they call that treasure hunting or something like that, that's the phenomenon that keeps customers coming back and has them traveling from 20, 30 miles away. That's hard to recreate online. That would be this deep discount. Big Lots is also discount, and I don't believe that they have much of an online presence, if any. Dollar Tree, Family Dollar, that type of retail I feel is somewhat insulated from e-commerce.

David:

Got it, okay. So if someone was just getting started and wanted something safe, as you call it, what food group would you recommend they go into?

Hue:

Yeah, yeah, that's a really good question. Within retail, I know that one of the very popular subgroups is your single tenant in net lease, your triple net deals. And what's nice about them is that they're very hands off from a management standpoint. So for example, an example of that would be if you were to buy a Chick-fil-A, I think that's like the gold standard, like the chance. So you buy the Chick-fil-A and it's a single tenant in that lease deal. All you do is collect a rent. The tenant themselves, they handle paying the real estate taxes and the insurance, and they ensure their own building and they clean up their own parcel and you don't really need to deal with them too much.

And the chances that you're going to get the rent every month are pretty high because let's say it's Chick-fil-A, or a McDonald's or I don't know, Wawa for example, or Walgreens. The chance that you're going to get the rent is pretty high, but they trade at a pretty low cap rate. So that cap rate is still higher than, let's say, multifamily but it's the lowest of all of the retail subgroups.

With the neighborhood shopping centers, why we're bullish on that is we feel like that's got a pretty good risk-adjusted return where if you're able to buy a strip center with a number of tenants that are somewhat e-commerce resistant or that has a lot of essential uses for let's say six and a half or a 7% cap rate, and you could put your money in that, or let's say you were to put your money in multifamily at a four or four and a half percent cap rate. That's a big difference. That's a big difference in yield.

And the question is, is that strip center that much more risky, that that type of yield would match that type of risk? I don't think that it it is. So we've been in business for about 47 years and we've had strip centers for all 47 years. Even in the Great Financial Crisis and the shutdowns, they've been humming along great. It's not to say that they've never had any speed bumps, but I think every asset class has. I'm pretty bullish right now on strip centers, and that's really what we're looking at right now.

David:

During COVID, what I remember happening even for my own investments was tenants couldn't pay rent. So then landlords had to be creative and deferent, but then some tenants could also apply for stimulus and the landlords were even helping them. So at the end of the day, you got paid, it might not have been in full right away, but eventually you made up for the losses and lost time. Is that correct?

Hue:

Yeah, absolutely.

David:

For the most part.

Hue:

So we have about 450 tenants, and I think we lost one or two during the COVID shutdowns.

David:

It's incredible.

Hue:

Everybody else, we either worked with them in some way or they were an essential use, so they actually weren't affected at all. So they were just fine. But we ended up collecting close to 99% of all the rents.

David:

Ah, that's incredible.

Hue:

Maybe almost a hundred percent of the rents. So knock on wood-

David:

Yeah, you might be a unicorn example, but from my understanding, people made out pretty good. You might think that they'd all be close and going out of business, but not the case.

Hue:

Absolutely. I think that we're unique because we're in Florida. I know that we have friends in the business that own in other states, and I don't think all of the states saw what we saw. So a little bit of luck played into that.

David:

For sure.

Why are you trying to go outside of Florida now though?

Hue:

We want diversity in geography also. I don't want all of my eggs in the Florida basket. Number one, the insurance is very high here. I don't know if, how many-

David:

Why, are there hurricanes or anything?

Hue:

Yeah, right. Just a little bit of a breeze here and there.

David:

Yeah, there's very few insurance companies left in Florida.

Hue:

Our insurance costs have increased dramatically, but it could have been worse because just 10 years ago we were almost entirely invested only in South Florida. And now we're throughout the whole state, we're in Atlanta and we love to be in Texas and the Carolinas just to have a little bit more diversity in that geography. I think there is a lot of great cities out there to invest in. Really, that's what we... When we're looking at a new market we really have to be convinced that it's a market that is going to continue to grow in the future, that has job creators, where that's going to lead people to move to those markets. As people move to the markets that's where retail can really thrive. So we're looking at Huntsville, which I think is already... The word's already out, secret's out there. We're looking at Asheville, Charlotte, Raleigh, we're looking at Dallas and San Antonio, Greenville. So several really, really cool towns, cool cities.

David:

Yeah, it sounds like the key lesson here is don't put your eggs in one basket, diversify as much as you can across all portfolio types, maybe even, or just location. You do a little bit of... Would you say you diversified in portfolio types?

Hue:

I would say that... We might look at some more power type of centers. We're not really looking at street retail. We're not looking at single tenant net lease. We're not really looking at malls, although some of these mall cap rates are pretty high, but I think that's because they're really hard to finance right now.

David:

So what you're saying is you're focusing on your niche market, your specific expertise.

Hue:

Yeah, yeah. That's what we know. We've been successful at it. The slide that I have up now is called barriers to entry.

David:

Let's get into that.

Hue:

And that's the reason, it's because retail, especially what we do, it's pretty difficult. It's complex. I feel like you do a lot of work for it, and that's really your moat. That keeps your competition out. A lot of people don't want to do retail for all of those reasons. And so because of that, we figured, if we know retail very well, why don't we just stick with that? And that's been successful for us in the past, then I'm sure it'll be fine in the future.

David:

And you've ridden out the dot-com boom, '09, 2020. I mean, you've ridden out a few busts over here, so you're going the right direction. You guys are doing things just fine, I think.

Hue:

Yep, absolutely. On this slide here, because I know you're on... This is also a podcast and not everyone will be able to see it, but I listed out a number of bullet points on things that are unique to retail. So for example, we have the triple net lease. What that means is that our tenants are billed separately, their base rent, and then their operating expenses and their base rent more or less is pretty predictable. Usually it's either growing by 3% a year or maybe just CPI or maybe a combination of 3% or CPI. But the operating expenses can go up and down depending on what those costs actually are.

Like I mentioned, insurance has gone up quite a bit. So this year our insurance line item expense has gone up quite a bit for our expense reimbursements. So the good news is that as our expenses go up and down, we're going to get that reimbursed. So it's going to be more or less not as much of an effect on us as compared to, let's say, apartment buildings.

David:

Break even.

Hue:

So if you're an apartment building owner, that increase in insurance, until that next renewal, you can try to increase the rents to offset it, but it's a little bit different.

Like I mentioned, co-tenancy is really important in shopping centers because there's some synergy there. For example, if you have a property with T.J. Maxx, for example. If you focus on the customer, so that T.J. Maxx customer are typically women, they're coming in with the mindset already of shopping for soft goods, clothing, furniture, accessories, something like that. So that's your anchor. And if you were to put, let's say, a shoe store next to them and next to them maybe a med spa and a day spa and a hair salon, that's all catering to the same customer base. And so you get synergy from there. And that as you continue to bring in more and more of that same customer, in this case it would be the female shopper that is looking to spend money on goods. It reinforces itself that traffic. So it builds on itself, meaning, so as you become more of a destination for that shopper, then you can bring in other retailers that also cater to that shopper. And then at some point you can start charging a little bit more rent as you have more traffic.

David:

Makes total sense. And I'm assuming before you obviously start even filling your first lease out, you're looking at demographics, population, population growth, before you even get into that shopping center and acquire it?

Hue:

Yeah, there's a science behind it and technology today, it's been pretty amazing. We use a software called Placer.ai, which I don't know if you've heard of it before.

David:

No.

Hue:

They're a data company that takes geolocation data and compiles it and gives you something that you can work with. So using Placer.ai, we can see if there is more foot traffic going into one store versus another store. Not only that, we can see what type of customers are actually going to the property as opposed to just what type of customers live around the property.

David:

So are you saying they're taking data from, let's say, Google Maps, which knows where you're going, what directions you're looking for, and they can tell you based on that?

Hue:

They're taking data from cell phones, actually. So a lot of your cell phones, a lot of cell phones out there have applications that you grant access to your location data, I guess. And so then in your terms and services, it says that they can use that location data, then-

David:

For third party and goodbye.

Hue:

Right, exactly. Not that they're tracking you as a person. They're not tracking-

David:

It's anonymous-

Hue:

Hue or David, but they're looking at patterns, at large data patterns. And by using that, you can determine, Hey, where's your real trade area? So if you own a shopping center and right next to a train tracks, are you really drawing from the other side of the tracks or not? And by going to Placer.ai, you can really see if that's the case. Or you can even see, hey, we own this Winn-Dixie shopping center in Amelia Island. Is there any cross traffic with the Publix? Are people going to Winn-Dixie and Publix and using that technology? You can see, oh yeah, no, there's quite a bit of cross traffic between Publix and Winn-Dixie or Walmart and Publix or whatever.

David:

You could just ask me. My wife always does both. There we go, there's your data.

Hue:

Yep. Yep. So yeah, it's amazing what technology has allowed us to do, but no, we look at average household incomes. We look at the population density and population growth as a percentage. We look at average age. In some cases, we'll look and see if the percentage of the people that live around there, are they mostly owners of their homes or are they renters? Because that's... There's a difference there.

David:

Yep. There's so many metrics. And I'm assuming you're preparing a presentation for the investors before you acquire anything, obviously.

Hue:

Yes. Yeah, that's a little bit of the secret sauce. So I can't disclose too much, but there's-

David:

Argus.

Hue:

Many, many, many data points that you look at before we buy a property and we do use Argus. So we're a pretty technology-forward company.

David:

Yeah, I love that. Every time I speak to you, every few months, there's always some new tool you're using and you're always so curious, what are we using? How can we use it? Which is so cool. And there's so much new technology coming out. It's unreal how fast this world is moving, especially in the direction of AI that you've probably seen. Chat GPT, we could have a whole webinar just on that.

Hue:

Yep. Yeah, that's something that I don't know enough about to you talk intelligently about, and I'm just starting to use it. Between that and I think Google has their own version called Bard and another company has their own version. So I think the adoption of that is going to be much, much quicker than what people think.

David:

For sure. It's already being integrated into so many tools even that we use today for everything customer support, everything, onboarding, hiring, there's tons of AI tools that we're using internally. It's making the job easier, we're doing a better job at it, and it's letting us get more done in less time with great results. So it's been a game changer for us and for our business internally.

Hue:

We'll see where it takes us. I'm excited-

David:

But cautious.

Hue:

And maybe it'll make this type of work a lot easier. AI can just spit out which properties we should buy and how much, that would be perfect.

David:

One day. One day, but then everyone can do it. There goes your barrier to entry.

Hue:

Yeah, exactly.

On the bullet points of unique to retail, one of the things that's really unique to retail is that the location where the transaction takes place is... This is where e-commerce changes it a little bit, but historically, retail is, that's where the transaction took place. It was at the store. That's where the customer came and you had the cash register, and that's where it happened. So it was that much more important and hard to replicate. And you had to be on a major road and you had to be easy to find and easy to get into. With e-commerce, it definitely changes things quite a bit, where now things are delivered to you, but if you have a lot of essential uses like doctor's office and beauty salons and dry cleaners, all of that still holds true. That's where the transaction happens, and that's where the service happens.

The fact that shopping centers more or less have to be on major roads and they're low density, so they're on major thoroughfares, but they're mostly parking lots. If you think about it, a shopping center is about a quarter. The building itself is about a quarter of the land, and three quarters of the land are shopping center is at landscaping and drainage and everything else.

David:

Parking lots, you're saying. Three quarters are parking lots.

Hue:

Three quarters are parking lots. So that makes it a little bit unique in that. What do you call it? You can do a lot with it. Where, let's just say an office building that's 10 stories high might be on, I don't know, two acres or three acres, if you took the square footage of the office building, if that was a shopping center, maybe that would be the equivalent of 20 acres and on a major thoroughfare. So once you have that much land on a major thoroughfare, you can do a lot with it. And I think you're seeing that right now. You're seeing that there's a lot of redevelopment into mixed use. You're seeing a lot of shopping centers getting... Part of it getting demolished and going vertical, and you're seeing some apartment buildings, maybe even hotels getting put in its place.

David:

Why is that?

Hue:

I think that housing is still in... There's an undersupply of housing still, especially down here. So where there's such a demand in housing, I think wherever you can find land to develop into multifamily, you're going to have some interest from a developer. And I think that as the really easy lots are taken up where it's just grass or dirt, as those are harder and harder to come by, these shopping centers are almost like the next best thing.

David:

Got it. Got it, okay. Cool.

Hue:

And for a while, these shopping centers had the highest yields out of the other asset classes. I think that we like yield. So when they-

David:

Name of the game.

Hue:

Yeah. So when we're evaluating a shopping center, we talked about we're really looking at the neighborhood, the population growth, the job generators, where is the retail nodes, the types of tenants in the area. We're also looking at accessibility, visibility. The topography sometimes, not so much in South Florida, but if you get into some other states, sometimes a shopping center might be way below street level or way above street level. We look at the rent-roll, the expiration dates make a big difference on how safe an asset is or not.

David:

And just to clarify, expiration dates for the lease is coming up.

Hue:

For the lease. Yeah, right, exactly. So-

David:

How many you have to renew, basically.

Hue:

Yeah, yeah. So if you're buying a public center, does that public's lease expire next year or in 10 years? That makes a big difference.

David:

But it's my understanding that if it is expiring and then very near term, you have the ability to find out or start, I don't know if you can negotiate with them, but they already are pre-negotiating, so to put some ease in the deal. Is that correct?

Hue:

Yeah. Yeah, yeah. If an anchor tenant has a lease expiration coming up within 12 months and that seller decided to put the property out to market before renewing them, it always makes us think like, "Why didn't they just renew them and then put the property out to sell?"

David:

Right. What's the story?

Hue:

What's the story there? But yes, you can certainly during your due diligence period, figure out if that tenant plans on renewing or not.

David:

Got it.

Hue:

We look at the financials, expense reimbursement ratio. We look at the historic vacancy, we look at the delinquency report, and then we look at some of those finance ratios, the IRR, the CAGR. We look at what kind of debt we can get in the market and what's our debt service coverage ratio.

David:

So to me, what I'm hearing is if you're new to this and you're listening to this or watching this, it's going to be very difficult for you to do this by yourself obviously. So probably work for another company, build your own company or grow. And then two, if you are already doing this, is there any special piece of advice you can give regarding this slide of evaluating, anything someone might not be looking or overlooking that they should be looking into more?

Hue:

Yes. So if you're looking to redevelop a shopping center, you got to just make sure that you understand how much rights the anchor tenants or the tenants have in general. I think a lot of the people that aren't in shopping centers don't realize how much rights the tenants have here. Meaning that if you have an anchor tenant like T.J. Maxx, a lot of the times they'll tell "You can't change this part of the property" or the property at all. So you cannot redevelop it. And then at that point, you have to talk to that tenant and see if you can work something out with them. I would just say pay attention to that if you plan on redeveloping a property.

David:

So these are rights that the tenant has and the landlord have agreed to previously in their original contract, lease agreement.

Hue:

And it's to protect the tenant also. If the T.J. Maxx is going into the property based on the way that the property's configured and the tenants that are there at that time, that's what they bought essentially.

David:

Exactly.

Hue:

That's what they like, so.

David:

They don't want a competitor coming up next door basically.

Hue:

If you can provide something that's even more attractive than, I think that generally they're pretty open to it, but they just don't want to be in a situation that they're in a worse off property at the end of the day.

David:

Yep. Makes sense.

Hue:

So one of the shopping centers that we bought pretty early on at Saglo where , with my time at Saglo was in 2015, we bought a shopping center. So this is a case study where I'm giving you a case study, it's a shopping center that we bought in 2015 called Florida and Waters. It's in the Tampa market. We since renamed it to Seminole Heights Plaza because Florida and Water just didn't sound quite as good.

David:

Yeah, I agree.

Hue:

So this shopping center, we actually bought through a 1031 exchange. We bought a property in 2013 and sold it in 2015. So we bought the property in 2013 for 4.4 million. We sold it in 2015 for 6.45 million, and then did a 1031 exchange into Florida Water Shopping Center that we bought for 8.25 million. So we had to put a little bit more money in, not a whole lot, but most recently, the most recent appraisal, we actually had the property appraised at 14.3 million in 2019. When we did a cash-out refi. I'm sure today that would probably be closer to 16 million or something like that. But this is a good example of where you could buy a property for $4.4 million, put 65% loan to value on that acquisition so that your equity is 1.54 million. You cut a check for 1.54 million and you own that shopping center, then you sell it and you roll the 3.6 million of equity that it turned into into the next shopping center. And then in 2019, that debt equity ends up being 9.65 million all-

David:

All from the 1.4 original.

Hue:

Yeah, exactly. And that's really that wealth creation process, that value creation. And real estate's one of those asset groups that you can leverage, you could depreciate while it's appreciating, which is pretty interesting.

David:

Wow, I love that line. I love that.

Hue:

Certainly we've taken a advantage of the depreciation that's been available. And then, you get your annual yield, it's high-yielding. Shopping centers, at least that part of it. So this was-

David:

And the investors get their K-1s with their distributions and 0% tax. Everything's been written off and depreciated.

Hue:

It's been great. So Florida and Waters has been one of our great case studies on how to do it right.

David:

And let's talk about the investors for a second. Who are the investors, normal people or anyone with over a million in assets or institutions?

Hue:

So Florida and Water is actually just us internally, this particular one. With CBS Plaza in 2013, our intent was to bring in outside money to invest into the deal, friends and family really. But because that was our very first acquisition, and by the time we got the documents right and figured it out, it had already been over a year. So we said, "All right, we're just going to keep this one in house."

David:

But today you have accredited investors also?

Hue:

Yes, we do. We have something on the magnitude of 150 to 160 different accredited investors across all of the funds and investments that we have.

David:

And when you're-

Hue:

friends and family money.

David:

So when you said fund, are they investing in a portfolio, like 12 properties in the next five years you're going to acquire or is every single deal different investment, different fundraise?

Hue:

Starting in 2019, we started more of a fund model because prior to then we were just buying one property or two properties at a time, and then raising the money with those one or two properties.

David:

It's so much work. And also the investor doesn't get the diversification.

Hue:

Right. And so in 2019, we decided, "Hey, let's put together a fund." Our initial target raise was going to be for 35 million, but the two properties that we're going to buy to close out that fund, we were going to close in 2020. And those got delayed. And so we ended up just closing that 2019 fund off at like 20... I don't know, 25 million or so with three properties. And then in 2021, we started a $40 million fund that was seeded by those couple of properties that were supposed to be in the 2019 fund, but got so delayed that they ended up going into the 2021 fund. Plus we bought four other properties. So that ended up being six properties in that 2021 fund.

And then we're going to be starting another fund later this year that's going to end up buying six to eight properties throughout the southeast. So that's been, I guess, our way of doing it. And it's become, like you said, both geographically and shopping center wise, you got a lot of diversity. So you don't have one tenant as 60% of your income, which is a little bit scary sometimes. The largest tenant might be, I don't know, 10, 12% of your portfolio. So it's not too bad.

David:

And if someone is tuning in, are they able to invest with Saglo or is it only pretty much referrals and right now it's pretty much oversold?

Hue:

No, no, it's not oversold yet. We're bringing in... I have to be careful because we're the Reg D, Rule 506(b) as opposed to 506(c), which means I can't generally solicit, so I'm not going to be generally soliciting for funds, but it's not oversold and we're still raising money for it.

David:

Okay, understood. I can solicit for you if you're interested, contact, contact. That's not the point of this class, but if you're interested, contact you, even for... I know that you just love giving advice, you love helping out and giving others... And even mentoring. So I'm assuming that if anyone has questions, they could just reach out on LinkedIn and message you?

Hue:

If anyone asks questions, happy to answer them.

David:

Awesome.

Hue:

So actually our second... I said CBS Plaza was our first property and we didn't get to bring in outside money for it, but Sun Point, which is my other case study, that was actually one of the two properties that we bought in 2014 that we were able to bring in outside money. Interestingly enough, I mentioned the Regulation D, rule 506(b) and 506(c), Sun Point, we brought in some equity through crowdfunding. And crowdfunding had just started a year or two prior to that. So this was really early on in that crowdfunding mechanism of raising money.

This property, Sun Point, is in the Tampa market. It's in Ruskin. We bought that for seven and a quarter million dollars in 2014, and it's 132,000 square foot shopping center. So we put 65%, loaned the value on it. So our equity was 2.5 million. We repainted the property, we leased up the vacancy, we replaced a 30,000 square foot church with a higher paying church. And in 2020, this property was appraised for $13 million and we did a cash-out refi. So what was initially a two and a half million dollar equity ended up being closer to eight and a quarter million dollars of equity just a few years later. And so that's your value creation and your wealth building.

David:

And I think you have a slide on this. I know we have a few minutes left only, but we have a lot more, we can keep going for hours. So maybe hit us like the last two or three best slides.

Hue:

All right.

David:

Adding value the next one. That's what we were talking about. Yeah, adding value.

Hue:

Sure. All right, so adding value. So increasing the value of your shopping center. It can occur through a combination of things. You can increase your gross revenue by leasing up the vacancies or replacing tenants that are under-market rents, that have under-market rents with market rents. You can decrease your expenses and increase your expense reimbursement ratio, basically increase your operational efficiency. That's going to get you some higher value at your property. You can lower the cap rate, which is kind of out of your control, but some of it is within your control. Like I mentioned before, the tenant mix makes a lot of difference. So you're going to have a lower cap rate for a Publix at your property versus a Save a Lot, for example. So if you bring in more desirable tenants, that's going to lower your cap rate. You can expand the property, you can redevelop the property to multifamily or even self-storage. I've seen it. Bringing a hotel-

David:

Not so familiar with expanding a property. How do you do that? You just acquire the adjacent lot?

Hue:

We actually just bought a property in the Melbourne area that's a 50,000 square foot fresh market property that actually has about one and a half acres of land that you could just build the expansion, the sellers never did it but we think that there's an ability to do that later on. So it's just expanding the property.

David:

And you're obviously looking at the zoning restrictions or whatever it's zoned for already before you acquire it?

Hue:

Yep, absolutely. We're not buying it with leases in place or anything, so there's a lot of speculation there and there's a lot of assumptions, but we think we can do something with it.

David:

Great.

Hue:

That's what we do. And I have other slides that go more in depth into how to increase income and examples of operational efficiency. There's talks about ways that cap rates can get lowered and a little bit about expansion or and redevelopment. But I think that if anyone has questions, they can certainly reach out to me and I'll be happy to answer.

David:

Awesome. And for those tuning into the podcast, Hue just scrolled through some of those slides at the end, so if you do want to check them out, there is a lot of value. We could easily keep going for another hour just in those four or five slides alone. So definitely check it out and you could save them, screenshot them, whatever you like. And for you, where can people contact you or follow you online? LinkedIn?

Hue:

Sure. LinkedIn's probably the best place. I'm pretty active on it. So if you go to LinkedIn, look for Hue Chen. I think there might be only one that is in commercial real estate that's in Florida, but look for me on LinkedIn.

David:

Awesome, awesome. Hue thank you so much again for joining us. I really appreciate it.

Hue:

All right, thanks David. This was great.

David:

Yeah, it was fun. And for everyone tuning in, don't forget, you can go to doorloop.com/webinars or doorloop.com/podcast to see all of our other episodes or join future episodes and to also watch the recording and the video and the slides where we're going to share everything over there, including a transcript of everything if you ever want to search through it. Thank you again, that wraps it up for today, and we'll see you in the next one. Take care.

Presenter:

Thanks for listening all the way to the end. Don't forget to give us a good rating on whatever platform you're tuning in from. And we'll be back soon with another new episode. We hope to see you there. And until next time, this has been Loop It In.

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