#360 - Andy Weiner - President @ RockStep Capital - Investing in Shopping Malls in Secondary / Tertiary Markets at 15-25% Cap Rates

Chris Powers: Andy, welcome to the show. 

Andy Weiner: Excited to be here, Chris.

Chris Powers: Since we met at IMN this year, you've had one of the best stories, and spending time with you for the last hour, I'm excited to peel back the onion. All right, let's start. You're in retail. You're a prolific investor in malls.

We're going to get there before we get there. We have to know how you got interested in the retail business. 

Andy Weiner: I grew up in retail. My grandfather started a chain of clothing stores called Weiner's Stores in Houston. In its heyday, we had 159 stores. Beginning in 1924, it stores in Texas and Louisiana, half big cities and half county seat towns.

I grew up running the company's operations. When I was about 30, I managed our company's 159 stores, the distribution system, IIT, HR, finance, etc. 

Chris Powers: And what did you all sell? What would you all do?  

Andy Weiner: We sold value-priced men's, women's, kids', and family clothing, Levi's, and Nike, at a price point similar to Walmart, maybe a little higher.

Chris Powers: You love Walmart, even though you told me they might've been part of why Wieners eventually. 

Andy Weiner: Yes. Walmart is a fantastic company. So one of the stories I told you, Chris, was one of our ladies buyers came to me and said, Andy, I'm thinking of buying this lady's blouse and these colours, and we're going to market at 7.99 at a low market. We're going to make a little money. I am figuring out what to do here. Walmart will retail it at 6. 99. We will buy 800 dozen. Okay, we're going to buy a lot of this stuff. Walmart will retail it at 6. 99, and they will buy a million one hundred thousand. Okay. What do we do?

That buying power is incredible; they just had low prices daily. It was a very, very strong format. We went out of business in the nineties for Walmart reasons and had some strategic challenges in our company. But I learned a lot about retail. I love retail. It's a great business.

I understand retail and store metrics. What makes a store profitable? What kind of investment ROIC do you have on a store? Our company's issue was that we needed better inventory planning or a great inventory strategy, which is retail's core.

Our challenge was that my dad ran the company's operations, and I eventually took over the operations. My uncle ran the marketing and buying, and my uncle was a very, very honest, very hardworking man. However, he was a little set in his ways, so we needed a structured buying plan with definitive buying strategies and limits.

He loved to buy and wouldn't mark the goods down at the end of the season to clear. And so, at the end of the season, we would bring back millions of units of ladies' sportswear and dresses called LY last year's goods. And we'd storm in body bags in a warehouse. And then the following season, we would bring them back out, and we marked the price up a little bit while they were hanging up there before we hung them up there, and they would come out, and our, the problem was our customers knew that they were last year's good.

We had two problems. The customer knew, so that's problem number one. Problem two was that you were inflating your profits because you didn't mark your goods down. If you're inflating your earnings, you're paying taxes on phantom profits, and at a private company, you have to manage cash. So, we went out of business between that strategy and Walmart.

So, one of the big lessons I learned in life is that you can't live without consequences. I also learned about some of the more effective pricing structures and some of the more effective business models out there. So, we had a high and low pricing structure.

Chris Powers: Explain to me what high, low, low, low. 

Andy Weiner: So, in retail, there are generally two pricing structures. There's a high market, which should be promoted in some cadence. It could be 52 weeks a year. It could be a different kind of cadence at a low price to drive or run it on sale on a weekend sale. You know, these 29 blouses.

Now they're 9. 99 on Saturday and Sunday. Come and get them. Okay, that's called high low. Penny's runs high low, Kohl's runs high low, Kroger is high low, and the jewellery store is high low. Okay, it's always, and, and, and the furniture store is high low. That's one strategy. The other strategy is everyday low-pricing EDLB.

That's Walmart, H E B, Neiman Sachs, the off-price stores. It's a fixed price. They might clear it at the end of the season, but they don't have the promotional cadence. Both can be very effective in a high load, but they're a different type of strategy. So we ran high and low, but we didn't manage our inventories as well as other high- and low users, like pennies or coals.

The other thing I learned is that there are some very successful retail formats, one of which is off-price. Off-price is the TJ Maxx, Ross, and Burlington. They have figured out how to buy some of their merchandise with sexy brands and mark it low, primarily to entice female customers to come in and get excited about buying a fantastic brand at a low price. That merchandise is scattered in the more visible places in the store. The rest of the store has made for TJ Maxx made for Ross. But the perception is you're getting the department store brands at a discount. The thing that these companies have also done is

They have a very rigid markdown structure. After a certain period, they mark it down again, which means you have a high turnover of goods. It's done in a store environment of 20,000 square feet, which is inexpensive to build and maintain.

These are highly profitable models. Some TJ Max's and Ross's do more in 20,000 square feet than a 100,000—or 200,000-square-foot department store. 

Chris Powers: Interesting. Okay. So, real quick. So on high low, they're, I'm not saying it's a fake price, but it's a price that they would never really sell.

Andy Weiner: You’re stupid. Suppose you buy it at a regular price. 

Chris Powers: Well, it's like, it's like sometimes, you know, somebody will come to you, and they'll say, like, I saved 20, and I'm like, no, you still spent 10. 

Andy Weiner: Or you can't afford to save so much money. It's really about the price you pay.

On all these TV shows and stores, my wife goes to TJ Maxx and buys a sweater for 59. 99 was initially 229 at some department store, and she gets excited. It's fun. So it's a perception of price. 

Chris Powers: Off-priced products are just the genius of how you lay out your store and market it.

So you think you're coming to TJ Maxx because they offer Nike, but the real goal is to use Nike to get you there, but then sell you all the other stuff. 

Andy Weiner: In the early generation of off-price stores, most were high-end department stores, but now there are not enough department stores selling them.

The products are made for these stores and take a lower markup. So, in other words, they won't market like pennies or coals. Let's say pennies buy an item at 10; they'll sell it at 29. 99 and then promote it at 19—99 on sale. T. J. Maxx buys something at 10; they'll market it at 18 and never promote it.

Okay, so it's cheaper.

Chris Powers: Yeah, I got you. And just a dumb question: What would Chanel be? Like a high, high? It's because the prices are always high. 

Andy Weiner: No, Chanel is everyday low pricing at its extremely high price, but it's everyday low pricing. You know, though. And they won't mark it down in their stores.

I don't know how they move it out, but the high-end stores are generally at EDLP, with low and high prices daily. 

Chris Powers: They're good at going. We might have one more in the back; if you come tomorrow, it'll be gone. We've not been getting any more for ten years. All right.

I can't wait to hear about your strategy, which is one of the best in the country. I would also like to know how you fell in love with small-town America and why that's important to you. 

Andy Weiner: The first deals I did in shopping centres were Walmart deals.

So even though Walmart put our company out of business, they're a stunningly excellent company with great people. I also did Walmart-type developments in the Houston region. And I found that some of the brokers we worked with. Weren't that honourable, Andy? If you don't pay us this amount of commission, I'm not going to tell the significant tenant that you have a site to look at, or they will go and take the tenant reps to take their clients on sex trips to Mexico.

Okay. It is real stuff. I mean, this is how it works, and we're not sex trip to Mexico kind of guys. Okay. That's not. That's not part of the rock step way. And so we had a chance in Navasota, Texas. Tractor Supply wanted to have us build a store, so we started a relationship with Tractor Supply, the largest farm and ranch store in the United States, and we started doing a series of tractor supplies. We did 11 in a row, all in small towns in Louisiana and Texas. And I realized what a great place to work. People care. People live by their word in general. It's fun. You have none of this crazy stuff. You have to drive there and travel a bit more, but it's a great place to be.

And I started realizing there's something extraordinary about secondary and tertiary markets. You have communities that care, communities that work together, communities where the different ethnic groups work together for the benefit of the community. And it's just a beautiful and fun place to work.

Tractor Supply got me into that geography. Then, with the GFC, I started to have a rate to raise funds, and I had never raised funds before. The first deal I wanted to do was in the Civil War city of Vicksburg, Mississippi. TJ Maxx wished to come into that market, and they wanted to either go into an empty Kroger or down the street, the mall.

And I said, you know what? Let's buy both. Let's buy both. So we'll at least get TJ Maxx in one of them. I started networking in the city and came up with a model I have done ever since. And that is getting local investors in on the deal. And I networked in the town and got 17 investors from Vicksburg, Mississippi, to invest in these two assets.

In addition, I found River Hills Bank, a community bank with one of the most gorgeous bank buildings. It's an 1839, you know, pre-civil war bank building in Port Gibson. They were not only our lender but also took equity. It has never happened since, but they took equity in about five deals. They're holding companies.

So, I started this model where you get the community to participate. Yep. And it is a great model. It reduces risk. We've replicated that model across the country as we have gone into the mall space, local investors, local business leaders who care about their community, and local community bank or regional bank lenders.

And you put that together. That's been our model as we advance. 

Chris Powers: Okay, so spoiler alert. You are among the few people in the country investing in malls. Okay. So let's describe quickly: What types of malls are there, and which are you focused on? 

Andy Weiner: Okay. So, first of all, the word mall can mean a couple of things.

We use it to mean an enclosed mall; some people think a mall is a shopping centre, but generally, it is an enclosed mall. And there are different grades of malls. There are A-plus malls, of which Simon owns a good portion in this country. So, the Galleria in Houston. King of Prussia in the Philadelphia area.

These malls produce $800 to above a thousand dollars a foot. Then you take the grade down to A minus B, B minus C, D, E, and F; generally, it's based on sales per square foot. You're in that D or C grade if you get below $200 or $250 a foot. There were about 1200 malls. I don't know how many there are now, but most of the malls in the United States are insolvent right now.

And there's 50 billion dollars of insolvent debt that is going to get to the clearance rack. Okay. They're going on sale. There's retail. It's like it's on clearance. And they're going to get re-priced. It's like irreplaceable real estate that will get re-priced at dramatically lower values.

It is often re-priced at land value at mid-teens cap rates. That's the sexy part of the mall opportunity. The hard part is that they're hard to operate—very tricky. There are various moving pieces and issues, and I think we have improved at operating.

We've made many mistakes, but we've gotten better at understanding, managing, leasing, shrinking retail, and thinking about opportunities for alternative uses. 

Chris Powers: Okay. And then describe the tiny town mall versus the big one, like how you think about that distinct.

Andy Weiner:So the big town malls, generally, you'll have, in Dallas, Fort Worth, you might have 15 or 20 in the region. Small-town malls have one, and a secondary market like Omaha might have three or four. Okay, so when you have one and the closest mall is 30 miles or 200 miles away, you've got a few defensive capabilities in the big metros like Dallas, Houston, and Atlanta, and you'll have some winners.

You must be very careful about laggards, and then you'll have some. They will probably require some redevelopment, which is a different issue. 

Chris Powers: Okay. We'll talk about operations in a bit, but I want to talk about the checklist of things you're looking for in the malls you're buying when you're underwriting this stuff.

Andy Weiner: When we look at a secondary, tertiary market, we look for the right market, which has to have essential drivers. You have to have something that drives demography and the population. It's got to have a major university. It's got to have a government or military. We love the military theme right now, next to an army base, research centres, etc.

It would help if you had tourism, a significant hospital district, Fortune 1000 companies, or a combination. If it doesn't have one or two of those five essential drivers, you've got to think pretty hard. You want to avoid seeing the population fall, and you also like to see if there's some other kind of theme.

We like the Texas and Mexican borders—the onshore, the offshoring from China, and all the growth along the Mexican border. We appreciate that theme as well. 

Chris Powers: And then, as far as the structures itself. Are you looking for things that are mismanaged there? There are a lot of vacancies already.

What's the state of the actual operations in the malls that you're buying? 

Andy Weiner: In a perfect world, you're buying a mall that has been de-risked already. So what are the risks? The risk is tenants have closed. The risks are what co-tenancy violations are. Uh, what is a co-tenancy violation?

Chris Powers: Explain.

Andy Weiner: Okay. So, co-tenancy violation says that if Dillard's Macy's and Penny's are in the mall. If one or two of the three are close and are not replaced with something comparable, then there are contractual rights among other tenants to have lower rent. So, there's a violation of the co-tenancy obligations.

You want those violations to have occurred before you buy it, not after. That helps. 

Chris Powers: So when you're underwriting, you'll ask that question to see if. 

Andy Weiner: Well, you'll know this is part of your underwriting. Part of your due diligence is determining what a co-tenancy exposure is.

What is the percentage of occupancy? What is the occupancy cost? If tenants pay 20 per cent of their rent for occupancy, that's too high. They should be at six to 10. 

Chris Powers: Okay. What cap rate are you usually entering these deals at?

Andy Weiner: The mall cap rate is typically between 12 and 18 caps. Okay, so we bought one in Rapid City at 25 caps.

We recently bought one in Manhattan, Kansas, at a 17 cap. And that's unleveled. Okay. Then, we put on 50 per cent leverage with a local bank. So if you put on 50 per cent leverage at 8 per cent, your cash-on-cash returns are pretty good. They're above 20%. 

Chris Powers: Okay. Let's talk about the numbers. So you said, I said, well, how do you underwrite these?

And you said we underwrite the base case. Explain the base. The base is so extensive that every possible lever is just upside down. So when you say we're thumbs up, what has to have been proven true to you? 

Andy Weiner: So we go in, analyze every tenant, and say, okay, what rent should they be?

Will they stay in the mall? Will they threaten to leave? Will we blank? Their rent goes from this to this, and we underwrite the lower rent. And then that is our base case. The broker says the seller broker says this is 2. 8 million in net operating income. We say it's only 2. 3, and we buy it at 2.3 and look at all expenses. We say, okay, we can lower costs here. It could be higher, et cetera. And then once we buy it, okay, that's how we underwrite NOI. Then, we look at opportunities. Lower taxes, reduce density, bring in multifamily, replace this tenant, and bring somebody in at higher rents.

But you can't guarantee any of that. They're called ups. Those are opportunities. Let's say a property has three, four, or five opportunities. It bothers me when you don't underwrite that. If you buy something at 12,000,000 and it's on the tax books at 50,000,000, you don't underwrite that you will reduce taxes to 12,000,000.

It's a political issue. You are still determining if it's going to happen. So you have to go in at a base case. And then you work very hard. You can use your secret sauce, your skill set as a company, and your relationships with your existing investors to help out, and you should be able to achieve two or three of what we call these ups or opportunities to exceed your base case.

Chris Powers: Okay. What does getting consent mean? 

Andy Weiner: Okay. So, a mall is a gerrymandered ownership structure. Sometimes, you can buy a hundred acres and 600,000 square feet of building and own all of it—other times. Dillard's owns their building and their parking lot. Penny's owns their Dillard and their parking lot.

Other significant tenants like Kohl's also have rights, so if you want to shrink retail, change the driveway system, or demolish a portion of the mall to put in multifamily, a hotel, or a sports complex, you need consent. Some people are straightforward.

Some are not. Brooke, there was an article in Wall Street yesterday about how Brookfield was trying to redevelop 40 malls. They've only redeveloped two. Part of the reason is that it's expensive. Number two, consent is complicated because you need to know if it's pennies, Kohl's, or Dillard's.

Are you going to say yes to what you want to do? They're going to say not only no, hell no, or they're going to say yes, but write this check. And so you only know the economics of a redevelopment after you buy a property. You can only underwrite a redevelopment if you have three or four weeks to commit to once you find out about a property. It moves that fast in the insolvent mall space.

Chris Powers: Did you say that some of these major retailers have consent departments where this is almost a business item? 

Andy Weiner: some of these retailers have dozens, if not hundreds, of consents. They're. They're working at a time, and some are in; some are incentivized with bonuses based with bonuses based on how much pain they can extract from the consent.

Chris Powers: Total sidebar question and this is a rumour. It could not be accurate, but Neiman Marcus came to Simon's Mall here, they moved them, and we have Louis Vuitton and things like that. And then I've always heard that they probably wouldn't have come to this market, but because they're in so many Simon stores, Simon can tell them like.

There is leverage for this location on Broadway or in the grand malls. 

Andy Weiner: There is leverage. The big boys have leverage. So that's one thing you must be careful about when buying at a mall. So let's say. Victoria's Secret is paying 200 000. If they're in, the seller might have been GGP or one of the big boys who could do massive negotiations and get them to pay 200,000.

We're not the big boys, so we'll mark that down to 100,000. In terms of rent, we'll underwrite that because we know that they'll stay at a hundred thousand. If we can keep it at 200, it's all gravy. 

Chris Powers: Okay. And, again, how many malls would fit your buy box in the country right now?

Andy Weiner: They are available today or in the next few days. We might be interested in buying over the next 3 to 5 years.

Chris Powers: Okay. What's like some deal killers? It's like everything looks great, but this thing, if it's like, if it has this thing, or maybe it's deal by deal, but what is a, you know, you love it so much, but there's just one thing that can kill the whole thing, not including the price. Let's assume the price is the obvious one.

Andy Weiner: The price is evident if we still need local investors for our deal. Yeah, if we don't buy the deal. So, we're the only one in the country that will require local business leaders to join them as part of our due diligence, and we do that to reduce risk. Regional business leaders who care about their community invest with somebody whose mission is our mission, which is to make these communities better by bringing capital and expertise to assets that affect the quality of life.

If we don't buy the property, the largest buyers of malls right now, and several groups have bought over 125 in the last six years, are called asset depletion buyers. They cut expenses. They often piss off retailers. They often piss off cities. Sometimes, they don't pay their bills.

Sometimes, they don't maintain the properties. Well, we're the opposite. We are community-centric. We aim to do what's suitable for the asset and what's profitable. These communities and investors often want somebody like us to buy the asset. And so that's part of how we get local investors to come in on our deals.

We are making a considerable effort to get local business leaders to invest alongside our existing investors and me. The value is that it helps with incentives, entitlements, property taxes, and relationships with the police department and the mayor.

As we shrink the retail on a mall, sometimes you'll shrink it. You'll want to do alternative uses. Our local investors are deputized leasing agents. And alternative uses because they're on the board of the hospital district. They're on the board of the community college and the board of the economic development district.

So they're piped in. So one example is one of our investors in the Midwest called us seven weeks ago and said, Hey Andy, I heard the rumour the school district is looking for a lot of space. As a result, we're now negotiating with the school district to take 60,000 feet in one of our properties. We would have never heard that. 

The other thing that local investors will do is give us bad news. You want to hear bad news. Hey, Andy, my daughter was going to the movie theatre with her friends, and some gang of kids shouted at him and said nasty stuff. And there's a problem. We would have never heard that. The following day, we were on the phone with our property manager, and we devised a plan of action.

You get great feedback. It's all part of what we do and a lot of fun. These communities are great places, so we're believers in hometowns. And hometowns are hard to do in Dallas, Houston, Atlanta, and Chicago. 

Chris Powers: Okay. Because nobody cares. When there are 15 malls in Dallas, nobody cares that one of them is saved.

Maybe North Park Mall. But nobody has influenced downtown. Right. 

Andy Weiner: Nobody has had a kind of influence downtown. 

Chris Powers: Okay, then this is important. It is unique that this is yours; this is how you've raised capital to date. You also had said, look, when we see a deal, we have four weeks to underwrite it and make sure we're going to do it.

How do you go from? We have a deal, a few weeks to underwrite, a couple more months to close, and a parallel path. We got to meet all the leaders in the business community and convince them to be investors in this. Or do you often close and then backfill it with how do these, how do these run?

Andy Weiner: The world is changing. It used to be that you had two or three months to line up a deal and line up investors. Yeah. Visit the market, visit your lenders, and get a list of community leaders. Look who's on the board of the bank. Look who's on the hospital and museum districts' boards, and try to connect with some of them and say, Hey, we're buying this asset.

We're buying it at a steal of a price. We'd like you to come in on this deal. We will pay you a 15 per cent IRR or 18 per cent IRR. Would you be interested? Here's our track record, all those kinds of things. And you go through that effort, the world's changing slightly. Do you want to talk about that now?

There's so much distressed mall debt that's getting re-priced. The cadence and timing of acquisitions have gotten faster. You used to have two to three months to look at a deal, think about it, underwrite it, visit it, develop a strategy, and work on your debt. Now you have three weeks. And so you have to underwrite it.

You have to look at it. You have to devise a strategy but need more time to syndicate or raise investors' funds than you used to. So what you'll do is win the deal, and the only way to beat the agreement today is to have funds. And so we're switching our business model right now.

It's one of the most significant changes in our company. We're moving from the deal to the deal because we can't get the best deals. We lost four deals, Chris, in the last 15 months on that clearance rack. They were cheap, great screamers of an agreement. But the sellers, which were lenders. It said you had to have committed capital.

So we're moving to a hometown America fund, which invests in secondary and tertiary markets. Two-thirds of the market will be malls, and one-third will be open-air centres like TJ Maxx. 

Chris Powers: In that situation, you close with the fund and maybe backfill an allocation of local community members so that you'll always have the.

Andy Weiner: If we can win, we'll network through the lender. Through economic development, through people we might already know in the market, through lawyers, through CPAs, depending on the market size, and we'll introduce ourselves. And, if nobody likes me or Rock Step or likes that asset or the city, it could be better. So, it's part of our due diligence. 

Chris Powers: So what do you do? Do you throw a local barbecue at the park to say, come here about your local real estate investment and see who comes in, or do you start like, how do you make your way around the city? 

Andy Weiner: A perfect world is where you have a guide or several guides.

Chris Powers: Which are, describe a guide.

Andy Weiner: A guide is somebody like a lender; hey Andy, use my conference room, let's, you know, come in at five, you know, come in at noon for an hour, coming at five o'clock for an hour, I'll bring in 10 of the business leaders, tell your story. Okay. And we'll do the story in a maximum of one hour, not one hour, one minute, one hour.

Okay. We're religious about that. And so it's, generally, 20 to 30 minutes on the story. It's who we are, how we think about this asset, what can go wrong, what the returns are, track record, etc., and Q and A. And generally, now we've had 17 investors in one city, 12 investors in another, the last deal we had seven investors in Manhattan, we had Kansas, we had four investors, and these are the business leaders.

New Orleans has the best collection of business leaders on any investment deal. The city has a great collection of leaders; they have been our guides as we work on and take a property and try to improve it. 

Chris Powers: Okay. If we can pick on Manhattan, Kansas. 

Andy Weiner: We can pick on Manhattan, Kansas. K State University. 

Chris Powers: So go K State, but don't beat TCU, beat everybody else but TCU. 

Andy Weiner: K State University is in Manhattan, Kansas. It has about 15,000 students. A nearby military base and a new government research centre for disease control are nearby. Okay, okay. So you've got government, and you've got university.

We bought the mall for 12 million at a 17 cap. We got four local investors who were all involved with K-State University somehow. Either students are on the board, or they work with them. Several of them are on the board of our lender, which is a local lender in that market. We will need permits and consent to do certain things in the city.

And they will guide us on the best way to get that. And that will help us get new tenants there. So, in that deal, we underwrote, put 50 per cent leverage in, and paid 12 million. The seller took a significant markdown on it. And we underwrote 2 million flat of NOI. We said NOI is not going to rise. For five years, and if NOI does, and we bought it a 17 cap, we underwrote an exit at a 16 cap at the end of year five.

If we achieve that, we will hit a 16 IRR for our investors. We thought that was conservative underwriting because we said if we can keep NOI, net operating income, steady for five years, there's value to cash flow. And that value will be worth at least a 16 cap. If somebody sells a multifamily in California to five caps and wants to trade into something, they'll consider a 16-cap deal.

We underwrote it at 16 caps because lending will be a little more accessible—part of why malls are challenging now. You can buy them so cheaply that lending is difficult. If lending is more accessible, the cap rates will come down. The values will be higher.

If we sell it at a 15 cap, a 14 cap, or a 13 cap, it will be a grand slam home run. 

Chris Powers: And that's assuming you didn't even raise NOI a dollar. 

Andy Weiner: Correct, so we're in the asset's first year. We'll hit 2. 65 million of NOI, and our investors right before the end of July one—they don't know this is going to be on public now—are going to get a 10 per cent return on capital just because we have so much cash or are sitting on cash.

We have too much cash, so these are cash machines. It is a boring cash flow play—that's what it is—a boring cash flow plan. 

Chris Powers: How'd you get that 650 just leasing up? 

Andy Weiner: Cut expenses, leased up. We renegotiated with Penny's. Penny's got a reduction during COVID, and we got them to go back to a higher rent.

We wanted Penny's to leave because three tenants will pay five times what Penny's has. Okay, but we didn't underwrite it. That's an upside for the next buyer. We're not underwriting upside. We underwrote a base case. Our base case is 60 IRR. We should do above a 20. 

Chris Powers: Okay. You just said they're tricky to operate. What makes these tricky to operate? 

Andy Weiner: The tricky part of operating a mall is figuring out the right amount of retail. In today's world, it was built 20 years, 30 years, and 40 years ago. Is today's retail the right amount?

If the answer is no, how do you reduce retail, and what does that look like? Every market is different. What does that market need? Jamesville, Wisconsin, needed a hockey arena. So, the city of Janesville is investing 50 million in our property to build one. As a result of the hockey arena, we'll get one or two hotels on the property, and several one or two multifamily developers will also come on the property.

That will be a true multi-use where we shrink retail by 50%, maybe 60%. We still have coals. We still have dicks. We still have Ulta but will shrink the rest of the retail sports complex, multifamily, and hospitality. That's what you did. You needed consent. Everyone is different. The other issue you have is that, generally, the periphery of a mall is more accessible to underwrite than the mall's centre.

Sometimes, the mall's periphery can be sold off and arbitraged. So, in Rapid City, South Dakota, we paid 12 million for the property on a 25 cap, okay? We have sold off some restaurant pads. And we're selling off an adjacent shopping centre for more than 12 million. So the remaining mall will have zero bases, and we'll throw off 3 million a year.

We'll end up above 40 IRR 3X in three years, but that's an arbitrage strategy. So, every mall is different. Manhattan is retail, Janesville is multi-use, shrink retail, Hot Springs is tiny, keep Dillard's, keep Penny's, bring in major retail users, and or demolish everything. Virginia, Minnesota, is the reuse of the department store for Hobby Lobby, reuse of the Kmart for a grocery store, and then email the centre with TJ Maxx.

Chris Powers: And when you say shrink retail.

Andy Weiner: Shrink the square footage of retail. 

Chris Powers: How do you reach the conclusion that needs to be reached? Is it an analysis of the market?

Andy Weiner: That's what we do.

Chris Powers: We've got 300,000 feet of retail, and we could do better with 200,000 feet. 

Andy Weiner: Correct; in other words, today's demand is 200 000.

The other challenge you have is, what do you do on the inside? The inside is tricky. The interior of the malls, a lot of times, is where the nationals don't want to be. They want to face out. So you have to figure out there might be a deterioration of the inside. That's what you saw as you walked through the mall.

You saw the deterioration of the inside. The outsides are fine. It's the inside that's a problem. 

Chris Powers: Well, let's talk about that mall. It's, I don't know the mall enough to, well, to talk about it. 

Well, we don't have to talk about that one specific, but just what I experienced there, I'm sure you experienced in other places, which were zombie malls.

It's zombie malls. So you have a few stores that have stayed open, but the mall owners' leases require them to keep all the common areas open and air-conditioned. And so you're walking through this mall that looks like a time machine. 

Andy Weiner: Okay. So, let's talk about a zombie mall. Zombie malls can be good, but they can also be harmful.

We've got a zombie mall in Hutchinson, Kansas. Do you own one? We own one. 25, 000. You walk on the inside. It's dead. 

Chris Powers: 25, 000 square feet? 

Andy Weiner: No, the city is 25 000. We bought the mall at 200,000 NOI. We're at a million eight. And we're about to do another round of development. We'll hit two and a half million dollars, and it's a zombie mall.

Chris Powers: So why is that good? 

Andy Weiner: Your basis is de Minimis, and it's throwing off two and a half million dollars of cash. 

Chris Powers: So how did you increase it in a while? Most were 10 X, but it's a zombie mall.

Andy Weiner: We took the empty Dillard's building and put in TJ Maxx, Ulta, and Dollar Tree. We took the empty Sears and put in Dunham Sporting Goods. We took the empty pennies and put them in Ollie's.

Chris Powers: So where's the zombie in all this? It sounds pretty cool.

Andy Weiner: They're facing out. The inside is a zombie, and it has a negative value. You could sell it for a dollar, and we could sell a hundred thousand feet on the inside for somebody to store for a dollar, and our NOI would go up.

No, our NOI would increase if we sold her to a couple hundred thousand dollars higher. 

Chris Powers: Because you wouldn't have to pay to correct it. 

Andy Weiner: Yeah, it's wild. 

Chris Powers: Are there any good ideas for what to do with these zombie parts of the mall? 

Andy Weiner: Well, it will end up being stored or could be educational.

It could be demolished. 

Chris Powers: I'll tell you what they did. The one I was in was a train set, and I was riding around the mall with my kid on this train through a time. It was the most depressing hour of my life. My kid loved it. That's weird. But we just rode this train around the mall. 

Andy Weiner: So look, eventually, it will be something else. It could be a pickleball. 

Chris Powers: Have you done a pickleball court in one of your malls yet? 

Andy Weiner: We have yet to find suitable operators, even though we've talked to multiple operators. We'll end up doing pickle balls and some of ours.

Chris Powers: Bowling?

Andy Weiner: I still need to go bowling; I have yet to go bowling.

It would help if you had operators, and whenever you invest, you have to be very rigid about the return on investment calculations. You need to know that if a new tenant comes in the income, the cash from that new tenant is a numerator. The denominator is the total cost of putting them in with zero value for the property.

And you have to be. What do you mean by zero value for the property? So, the only thing in the denominator is the marginal cost of getting that tenant. You want to be generally above 12 or 13 for a significant tenant; at least, you prefer an above 20 per cent return. That's accretive.

If it's valued at 15 caps, you want to be above a 15 cap.

Chris Powers: And in most of these small-town tertiary markets, are the odds of success of getting government dollars or specific programs to get city funding probably higher in these markets?

Andy Weiner: It depends upon the state—Nebraska's good. Texas is pretty good.

Louisiana's good. It depends upon the state. In Nebraska, we just got a two-cent sales tax on our property, and we'll end up with 500 000 a year of unbudgeted NOI coming in that we'll use to reimburse us for TJ Maxx, Ross, and all the tenants coming into the property. We're discovering that we are more than twice as busy as ever with new store construction today.

The Amazon COVID effect has destroyed weak retailers. Those who have survived have a very effective strategy for dealing with Amazon. They've got great balance sheets, and they're expanding in a market where construction costs are up 30 per cent and interest rates are higher.

There's virtually no new product. So they're expanding into second-generation space, and the tailwinds are behind us. 

Chris Powers: So, what is their strategy for fighting off Amazon? 

Andy Weiner: Well, off-price, you can't, it's tough to do, the convenience of being able to get it, it's tough to do off the price, but they, but Dick's and Cole's they're distributing in Walmart, and they're distributing from their stores.

They're using their stores as their fulfilment centre. They've got great apps. That, you know, they've got a fleet of brick-and-mortar stores. One of the things that is very apparent for retail is that the issue with pure play with somebody who only has a website is that the cost of customer acquisition of new customer acquisition is inexpensive in your company's infancy.

But as you want to grow, you must buy customers, pay for Google search ads, etc. The cost of acquiring customers becomes so high that it becomes unprofitable. So, they have found that the lowest-cost way of getting new customers, protecting your brand, and protecting your existing customers is having bricks and mortar.

That's why pure plays like Amazon are opening stores. Other pure plays are opening stores as well. 

Chris Powers: So this is the pathway back to department stores. 

Andy Weiner: Well, back to stores, department stores. They are not a growth channel of prices but a gross channel. The department stores are opening up their off-price divisions.

Nordstrom has a Nordstrom rack. Macy's has two off-price divisions: TJ Maxx and Ross Burlington. They're growing very fast, and the growth is in the off-price model. 

Chris Powers: So we've talked about city incentives. We've talked about getting consents that allow you to do things. We've talked about selling off sites to multifamily or to sports arenas.

We've talked about lowering expenses. Do you pull any other magic levers when driving these malls forward?

Andy Weiner: If you can, try to get sports complexes or something else, particularly in tertiary markets. Youth sports tourism is a big business. And you know what youth sports tourism is just, it's all the parents who have kids that play softball, baseball, volleyball, hockey, and they go and play on these teams and every other weekend they're in this city for that term and that it is a huge business.

And so a lot of communities are building sports complexes as a way for economic development. They're investing in hockey arenas, ball fields, etc. So we are very involved with the communities to do sports complexes at the mall. You have a great parking field and restaurants for people to visit. It's a great place to do it.

In Janesville, the city invested 50 million on our property to build a hockey arena, volleyball courts, and basketball courts.

Chris Powers: We've clarified that you properly manage everything you own. 

Andy Weiner: We are vertically integrated.

Chris Powers: So you'll have your regionals or super regionals, maybe down in Houston, but then you'll have boots on the ground at all these properties.

Andy Weiner: We were remote before COVID. We have more than forty-five employees, ten of whom are at our headquarters. The rest are scattered around the country. We were remote before COVID helped us. It became a standard communication method because it helped us Zoom and teams. And so, because we're in a small town in America, our properties are scattered around the country.

So our leasing directors are in Missouri, and our tour here in Dallas's directors of mall management are in Minnesota, and Mississippi's head of acquisitions is on our leadership team. He's out of Chicago. Our goal is to find the best people. We will not rip them off, rip their families up, or move them to Houston.

We'll get to the Rock Steps in a little bit. We are in Rock. Step 24, the week of Rock. Step 24. Keep family first. 

Chris Powers: Okay, we can't just skip over this now. Let's discuss it so you have the rock-step approach, which is unique to your business.

Andy Weiner: Let me tell you first about the word rock step. So, rock step is not a word in the dictionary. But it is a dance move, and most dancers know what a rock step is. So, I like big band music. Frank Sinatra, Ella Fitzgerald, Peggy Lee, Rosemary Clooney, many names you might not know.

1950s, 60s genre, swing, big band, swing. Even ballroom. So, when you rock step on count seven and eight, okay, you switch directions. No one's done this. John, I'm going to do it for you. Here we go, baby. Here we go. Here we go. Get on that. So, a rock step is to make sure you get this. Here we go. It's one, two, three.

One, two, three. Rock step. So, on counts seven and eight, the ball pivot changes. On the left foot for the guy. On the right foot for the girl. You're rock-stepping. As a company, our goal is to be nimble. We need to be light on our feet and listen to music in the industry. And when there's a problem switching directions,

Even though it's not a word in the dictionary, everyone at Rock Step knows it's a verb. Guys, we've got a problem. We've got a Rock step. Everybody knows what it is. We also use it as a noun. And so, about nine years ago, I created an owner's manual for the company. It's 25 specific rules of behaviour.

You know what, or you don't. These are the rules that I wrote word by word. I'll go to the mat, and we will call them the rock stepway. We call them rock steps. The rock step. Rock steps. Close, close, Chris. And we have. So we have these 25 rules, which are called rock steps.

We have a rock step of the week. We're on week 24, and every 25 weeks, we start over. We start again. So, Rock step 24. So you get through each one twice a year. Correct. And somebody in the company has to write how they feel about the Rock step of the week. What does keeping family first at Rock Step 24 mean to me personally and means to me professionally in the whole company?

At 10 o'clock central on Monday, he talks about it, and whoever leads it gets to call on other people randomly; okay, Chris, what does it mean to you to keep family first? And you're on. And we talk about it. We talk about the nuances. Don't be a jerk—rock step 22. So, two weeks ago, we talked about how if you have a jerk, you have to get rid of it.

But what if you have a jerk in your family? What do you do? How do you get rid of a jerk in your family? Okay? So, these are the kinds of things we talk about. So, this is the language we use. I got to speak straight with you—rock step number 8. Keep family first—rock step 24. Do the right thing always—rock step number 1.

Be punctual. On-time is five minutes early, and you're late if you arrive on time. That's rock step number three: practice A plus ness. And my kids used to joke about it. If they do, they will read this. Hey, Dad, we got to practice anus. No, there's a big difference, Chris. There's a big difference between A plus and an anus.

Isn't there a big difference? There's a big difference. Okay. So, but it's the language we use. Hey guys, we're not operating A plus here. How do we get to a plus? It is how we hire. So if you, Chris, come to your interview, what are your favourite three and why, and what are your most challenging three and why, and that's the conversation.

We'll spend five minutes and two hours talking about it. We want people who will live by the rock steps. I will go to the mat. We will only grow our company if we find people living by these rock steps. And we've gotten fortunate because we have a great team of people who live by the rock steps.

We could be better. Okay, this is how we fire people. Sorry, Chris. You were nameless. And we're required to treat each other by these rules at rock steps: Be relentless about improvement. Honour commitments. That's rock step number nine. Be prepared. Rock step number six: Be a fanatic about response time.

Rock step number four: we're required to treat our communities, our tenants, our lawyers, our investors, and people who can hold us accountable. So people will come to me and say, Hey, Andy, you're not living by rock step number X., And I hate when they do that when they call me on it. But they have the right to contact me; we can call anybody in our company on this.

Do you treat your lawyers nicely? We live by this, Chris. To lawyers? Even to lawyers. I'm married to a lawyer. 

Chris Powers: Okay. We're not going to cross that line. You said okay. So, but. Rock Step’s been around for how many years?

Andy Weiner: We've been around for 27 years. 

Chris Powers: But you said you created these nine years ago. 

Andy Weiner: I created the Rock Stepway nine years ago. 

Chris Powers: Which were these 25 principles? Sobe, what made you feel you had to get these on paper? 

Andy Weiner: So I brought in our leadership team, and I said, you know, what are the rules here?

What are the rules? I had an advisor help me write down a hundred. What do we want in the company? We wrote down about a hundred ideas. We spent all day doing this. Then, I narrowed it down to 30, representing my core more. Then, I narrowed it down to 25 and started looking at the wording.

And the wording is important. What do you mean? Be punctual. Let's see here. Pay bills, deliver reports, and meet obligations on time. Let's see. 

Chris Powers: Where's the pay bills one? 

Andy Weiner:

1. Pay bills and be punctual right down the road.
2. So, do the right thing always.
3. If you make a mistake, own up to it, apologize, and make it right.

Be impeccable with your word. And so, we talk about the wording of each one of these. It's not just don't be a jerk, but it's the two or three sentences behind it. And the whole company talks about this. And if anybody wants to take advantage of me, I explain how they can do it. Just tell me they like the rock steps.

Then I melt, and they can do whatever they want. Okay. So Chris, tell me you like the rock steps if you want anything. 

Chris Powers: I like the rock steps. They're hard to forget. You brought these up the first time we met. I'm thinking of your favourite three.

Andy Weiner: I'm going to tell you my favourite three.

So, I will ask you about your favourite three, Chris. I'll tell you my favourite three and my most challenging three. Do the right thing always. Number one, for a reason: we're in the investment business. The investment business is a world of grey. Yup. So you have to ask, Hey guys, what do we do here?

What's the right way to handle this? Do we allocate this expense across all those kinds of grey areas? You're in the same business. You're in the investment business. Number three, be punctual on time. I'm a big believer that being punctual is about respect. And so, for me, five minutes early is on time, and then on time is late.

I believe that. And then, number 24, keep family first. So, that means you have to take care of your body. You have to take care of your health. You have to get sleep. It would help if you cared for your family before caring for Rock Step. And if you can't take care of yourself and your family, you're unable to take care of Rock Step.

So we have situations at our company where family issues come up, and we literally use this language: Hey, Susan, take two weeks off. Take a month off. We're going to cover for you. Keep family first. There are times when there are crises. And so we believe it, and we will cover for people.

We will cover for people, and that's the language we use. So those are my favourites. I'll tell you my most challenging—number seven. Listen generously. My wife will tell me. Justifiably, this is a big problem for me. I don't listen as well as I should. That's an excellent way of putting it. I'm impatient, and I interrupt.

Okay. Because I'm worried that I will forget what I say and what I want to say. It's a nasty habit. I'm trying to get better. Speak straight. Rock step number eight is a weakness of mine. I'm not confrontational. Chris, we have a problem here. We got to go through this. It's hard for me to do that. And then rock step 25.

Have fun. As my wife says, Andy, you take the fun out of fun. Okay. So, I am very serious on the outside. I have a ball on the inside. I'm very calm. My wife is entertaining on the outside. She's a tear on the inside, nervous as all get out, but she's happy. So that is a problem. I've got to have it.

I've got to learn how to have a little more fun. 

Chris Powers: We're pretty similar. Please do the right thing; it's always a hundred per cent. It would be something I'm a champion for. Let's see, investing in relationships. 

Andy Weiner: I think you're good at that, Chris. Yeah. Just a little, I know you. I've listened to many of your podcasts, and the way you communicate is powerful.

Chris Powers: There's a lot on here. I could pick keeping family first. It's hard not to if that one's not essential. All these other things should be in question. The listening that you said was challenging. Since I was a kid, people would say I could be staring. If I'm not interested in what you're saying, I can be staring at you, looking like I'm listening, and it is just in one ear and out the other.

Andy Weiner: Do women listen better than men? Maybe. I think so.

Chris Powers: Okay. They do a lot of things better than men. I am speaking straight. I don't have as much of a problem with that. I don't enjoy doing it; nobody likes it.

Andy Weiner: No, I wouldn't say I like it; I don't particularly appreciate doing it.

Chris Powers: But man, I always feel good once I've done it. I will say this: you won't like me for this.

I got to work on it punctually. That's okay. I usually fly in by the seat of my pants. So I'm going to work on that for you, Andy. That's great. 

Andy Weiner: That's great. By the way, thank you. Chris.

Chris Powers: You were here an hour early today. 

Andy Weiner: I was here early. That, sometimes, it can be too early.

Chris Powers: So you wrote these down, and then I think about what all companies do. What's most impressive about you is that it's easy to write these things down or have an offsite retreat and say it's essential. Now you're, I mean, the people that I've met that know you. It is one of the things that has become a staple in the company's core.

How did you embed it into the culture 16 years ago? 

Andy Weiner: So the first thing is you have to believe it. If you don't think it, it won't work. Number two, you have to go to the mat for it, and I will go to them. We will not only care if we care about people who live by the rock steps. Hopefully, people who one day want to join a company that's a great team are listening to this.

You can live by the rock steps, reach out to us, and then ritualize it. It has to be a routine. It has to be a religious ritual. So we just hired three people last week. The new people on the Monday call have three weeks of grace before they get called upon, and then they have five weeks before they start the rotation of having to write something that goes to the whole company.

When we started this, I had to do 25 weeks in a row. I wrote it. Okay, I'm the boss. I got to do it. Then, we do rotations for everybody in the company. New people generally have three; they do three to five over a year, and we want them to get, we want them to learn the language, and we want everybody to see.

It's very intimate when we talk about family issues as they relate to all these and business issues. And you have to talk about it. It is an owner's manual. It is detailed. It's not values or culture; that's not what this is. These are specific conversations twice a year, minimum. But we will use this language multiple times a day.

I have to speak straight with you, Susan. Have we got to talk straight, okay? Keep family first, have fun, do all these things, and be relentless about improvement. Guys, it's not A. We're not at A plus here. It needs to be better. It's the language we use; it's the criteria we use. It is to the max.

Chris Powers: Okay. You got 25 of them. I'm assuming in nine years, you've probably been like, there's a 26 we could add. How do you keep it? Do you ever switch these out? Is it, this is it forever? 

Andy Weiner: The only one I would consider adding is to make the place better, make, leave it better. If you're doing something for your city community team, whatever is better, we'll leave them the same.

I'm set in my ways. 

Chris Powers: Yeah. I love it. All right. We're going to stop right there. Andy. 

Andy Weiner:Thank you, Chris. It's been a real pleasure. It is an absolute pleasure. Thank you for honouring the rock steps. Okay. Thank you for honouring the rock steps. 

Chris Powers: Thank you.