WS1969 The Future of Single Tenant Net Lease | Laith Hermiz

Are Single-Tenant Net Lease Properties Right for Your Investment Portfolio?This episode of the Real Estate Syndication Show dives deep into this investment strategy with Laith Hermiz, the President and Founder of Ironside Realty. With a whopping $2 billion in transactions under his belt, Laith offers invaluable insights on the evolution and current state of the STNL retail market.

Laith's journey started in real estate law before transitioning to development with major REITs. This experience fueled his passion for STNL, leading him to launch Ironside Realty in late 2021. Their focus? Acquiring prime STNL assets nationwide, with a keen eye on the ever-changing retail landscape.


Key Takeaways on the STNL Retail Market:

• Evolving Net Lease Landscape: The STNL sector is booming, attracting new investors and specializing in various submarkets like medical, industrial, and retail.
• Market Shift: A slowdown in deal volume and a widening price gap between sellers and buyers mark the current market. Rising interest rates favor all-cash buyers.
• Investment Strategies: Ironside Realty prioritizes essential service retailers with established e-commerce platforms and inflation-resistant lease structures. Creditworthiness and long-term property value are key considerations.
• Building Relationships: Laith emphasizes the importance of industry connections for accessing off-market deals and gaining a competitive edge.
• Challenges and Opportunities: While rising interest rates pose a hurdle, they also even the playing field by increasing borrowing costs for institutional investors. Value buys exist in specific sectors like dollar stores and car washes.

Connect with Laith Hermiz on LinkedIn or visit Ironside Realty's website at www.ironsiderealty.com to learn more about STNL investment strategies.

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Transcript

Laith Hermiz: you're just playing for, you buy the asset and you're just waiting for the check to come in and mail every month. So I think that there's some real opportunities from a value perspective there. I do caution folks that you've got to be careful. Again, you do your due diligence and make sure you understand the capital stack of the operator that you're buying.

SPEAKER_00: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Thank you for listening to the show. My goal is for you to become a savvy investor by learning from some of the best operators and investors in the business. I'd like to hear from you. If you have questions you would like us to ask on the show, or if you have someone you would like me to interview, please let us know by emailing info at lifebridgecapital.com. Would you please leave us a written rating and review? I would be grateful. Well, do not hesitate to let me know how we can best serve you at LifeBridge Capital. And now for an amazing interview with my friend, Ben Kogut.

Benjamin Kogut: On this episode, Laith Hermes joins me on the show. He is the president and founder of Ironside Realty, a company that specializes in acquiring single tenant net lease assets across the country. Laith has over $2 billion worth of transactions of experience under his belt. And he shares with us some incredible wisdom about not only the history of the retail market over the last decade plus, but also what's happening in the market now and where there's opportunities to make money in today's market. He shares with us some of the best tips on how to do all that. And so without further ado, welcome Laith to the show.

Laith Hermiz: Laith, welcome to the show. Ben, thank you so much. Great to be on. Appreciate the opportunity to be here with you.

Benjamin Kogut: My pleasure. Yeah. Give us 90 seconds about your background and who you are and what you're up to right now.

Laith Hermiz: Oh, great. Great. So I have been in the retail development space for about the last 20 years. I started my career as an attorney practicing real estate transactions and corporate work, and then quickly realized that I wanted to be on the other side of the table. So jumped into the real estate development sector. I spent about 17 years in the public REIT space. I'm on the development side with a company called Ramco Gershenson Properties Group, which at the time was a very large shopping center REIT. They subsequently, currently actually are being acquired by Kimco, one of the largest shopping center REITs in the world. And then in 2010, I joined a small micro cap REIT at the time called Agri Realty, helped them launch their acquisition platform. And we grew Agri from a very small company of about 73 properties to almost 1600 properties when I left to start Ironside Realty. I started Ironside Realty in late 2021. We're headquarters here in downtown, beautiful downtown Nashville, Tennessee. And we are focused on single tenant net lease retail assets. Amazing.

Benjamin Kogut: And so let's talk about single tenant net lease. What are you seeing? What is the state of that market right now?

Laith Hermiz: That's interesting. You know, net lease has gone through a significant metamorphosis over time. Right now, I think it's one of the most sort of darling sectors in commercial real estate. There's been a significant focus on new players coming into the net leased space. And then when you say net lease, generally, I think net lease can be sort of a broad scope definition, but then it is segmented into various specialty subsectors. So you've got net net lease, medical office, net lease, industrial net lease, retail, you know, our specialty or my specialty throughout the course of my career has really been more focused on the retail side.

Benjamin Kogut: Got it. Got it. And so what, uh, let's dive in a little bit deeper on that. What are you seeing what's happened over the last 12 months? What are you anticipating over the next 12 months as we're recording in March, 2024? Yeah.

Laith Hermiz: I mean, again, kind of backing up for a moment, you know, it's really interesting in 2010, when we launched the acquisition platform for Agri Realty, net leases, a sector was not really a discernible product type. And so what happened is there was a tremendous transformation in really the retailer platforms. And so the, what you would call at the time, the large scale behemoth retailers like Kmart Corporation, Borders Books, Sears Robux, those all went through series of bankruptcies. And then you had the emergence of the e-commerce platform, in particular, Amazon. You know, most people don't remember that when Amazon started, it was a book retailer and it was selling books online. Today, you can buy just about any good on Amazon. And then there was the growth of the big box retailers, the Walmarts of the world, the targets of the world, the Home Depot, the Lowe's, the subsequent growth of what we'll call the value-add retailers, the Ross Dress for Less, that whole category, TJ Maxx, Burlington, Big Lots. And then the emergence of specialty retailers, specifically in, you know, let's say the QSR space, the Starbucks of the world, the Panera breads, the Chipotles. And so as those retailers were expanding their platforms, Netlease became identified as a an actual sector and recognized by groups such as ICSC, the International Council of Shopping Centers. And then what you found post 2010 was a subsequent specialization in both from a developer perspective, but most importantly, from an investor perspective, an investment brokerage sales perspective. And so fast forward today in 2024, you have a significant number of investment sale brokers that specialize in the product type And even micro-specialized in the actual retailer within that product type. So you'll have investment sale brokers that only sell pharmacies. They only sell auto parts. They only sell collision shops. And so, you know, the long answer there is that that sector has become hyper-focused and identifiable as a growth opportunity. And if you think about it, it makes a ton of sense. The sector is so diversified. There are so many, there are thousands and thousands and thousands of small retail deals that trade on an annual basis. And if you go into any major MSA, you'll see how many QSRs are there? How many car washes are there? How many coffee shops are there? And so it's really a very large fragmented space. And it's an opportunity for investors to get into the commercial real estate sector, but at a bite size price. So I would say on average, the average ST and L retail deal is about two to two and a half million dollars. And so it allows an entrepreneurial investor to get into or acquire a commercial real estate asset without having to make a substantial multimillion dollar investment in one property. Um, but you know, what we've seen sort of over time, you know, historically since 2010, I mean, the market has really been on fire. And so what we've seen in the last 12 months has been sort of water thrown on that fire. So there's been a substantial change in property valuations and in pricing expectations. There's been a significant, I'd say a larger bid ask gap between a seller's expectation and what a buyer is willing to pay for that particular asset. Deal volume as a whole has been down substantially, depending on which national brokerage firm reports their deal volume. You've got volume, you know, reporting's down anywhere between 50 to 75% year over year. And where I think you see the most significant slowdown is in the 1031 market. In 2012 to about 2020, pre-pandemic, As other market sectors' cap rates continued to lower, specifically multifamily, you were seeing a lot of multifamily operators selling their assets in the five or sub five cap rate range, right? Selling them at historic lows and then wanting to find a flight to security. And so they were trading or 1030 wanting those proceeds into stabilized net lease assets, which had limited to no landlord responsibilities. And then where I would say probably the largest gift in the past 12 months has been interest rates. And so interest rates over the past several years, I mean, we've been playing really with free money. So as interest rates have continued to go up, that has negatively impacted the transaction volume. And so today, the majority of buyers that you see on the market are really all cash transaction buyers, such as ourselves.

Benjamin Kogut: Yeah, great, great. Oh, wow, like that was an incredible, you know, high level quick summary of what's going on over the last decade or so. And so I'm sure the listeners want to know, could you share with us where are you seeing the opportunity now and going forward?

Laith Hermiz: Sure. I think, you know, from our perspective, you know, we're an all cash buyer. What we saw or what I saw, prior to starting, I would say about four years ago before I decided to start Ironside Realty is that the market, there was a storm brewing. We knew that the market economics weren't making sense. I'll give you an example. Someone would buy a 10 year dollar general in the middle of nowhere. They were paying a mid six cap rate or a high six cap. That property would sit on the market for two years. So your burning term, which should erode the value of that asset, Subsequently, because cap rates were continuing to compress at such a rapid pace and interest rates were so low as basically free money, they were able to monetize that asset and sell it for 100 plus basis points of spread. That didn't really make any sense. And so what we saw was the storm brewing and a disruption to come in the market. And I'm a firm believer whenever there's disruption, there's opportunity and opportunity to create wealth. And so that was really the impetus for us to start Ironside was to capitalize on the disruption that was coming into the market. Kind of what we're seeing currently and what I think is going to happen over the next 12 months is cap rates are going to continue to go up, which correspondingly means pricing, sales pricing is going to go down, right? You have that inverse of relationship between cap rates and pricing. There are significantly less sellers on the market today. But those sellers that are on the market seem to be much more motivated to transact and to transact at realistic pricing. We're seeing a glut of a certain type of inventory that we haven't seen in the past. You know, as an example, in the dollar store space, there's more dollar stores on the market today than there's been in years. Car wash space. There was a flight to the car wash industry. Private equity started backing all these small regional operators. Developers started developing them. all of them with the hopes that they were going to grow their platform, they were going to flip out cash out and move on. There's been a glut of those and they're sort of sitting on the market. Although I think some of them are great buys in today's market and great opportunities in today's market.

Benjamin Kogut: Can you give an example of that? What would you see and be like, oh, that's an example of a great buy right now?

Laith Hermiz: Sure. I mean, I'm a firm believer. I'm a From my perspective, I look at real estate investing from a few different lenses, right? You're talking about, you've got to balance the needs between credit, term, and the residual on the real estate. In the car wash space in particular, there's only one publicly traded car wash, Mr. Car Wash. I've known them, I've worked with them, I've developed, I've bought a lot of their locations. They're a phenomenal operator. you know, today you can buy a Mr. Car Wash at probably 75 to a hundred basis points better than you could a year ago. Now for the right investor, there's a lot of benefits to being in the car wash space. You know, if you buy one on, let's say as an example, a sale lease back a 20 year deal or a 15 year deal, they have annual rent bumps. You can capitalize on bonus depreciation or the tax advantages that go with that. And they're a, what we like to call basically mailbox money. There's no landlord responsibilities. You're just playing for, you buy the asset and you're just waiting for the check to come in the mail every month. So I think that there's some real opportunities from a value perspective there. I do caution folks that you've got to be careful. Again, you do your due diligence and make sure you understand the capital stack of the operator that you're buying.

Benjamin Kogut: And we've seen, I think- Meaning the tenant, not the real estate. Correct, the tenant.

Laith Hermiz: Correct, because at the end of the day, what are you buying in net lease assets? You're buying 100% piece of property and you're buying it on the benefit that this thing will cash flow through the base term and the extended options that are available. And so the number one thing from my book is focusing on the credit and the credit worthiness of the tenant. That's why for our own acquisition criteria, we only focus on acquiring assets that are leased to tenants that have, we consider to be essential service retailers, right. And that have both a e-commerce platform and have some form of rental, contractual rental bumps in their leases as a hedge against inflation. So that's sort of our way of underwriting the risk. Right. That makes sense.

Benjamin Kogut: Got it. Got it. Yeah. So that was actually bringing me to my next question is how, in this ultra competitive market, how is Ironside separating yourself from your competition?

Laith Hermiz: That's a great question. I think first and foremost, it's relationships, right? We've, I've built a career on creating relationships in this space. And so there's a lot of investors, there's a lot of private real estate companies out there that do, that they transact in we'll call it multiple sectors. We don't. I consider Ironside Realty to be a subject matter expert in ST&L retail. That's all we do. We live it. We breathe it. We've done it for a number of years. The relationships within the space and within the industry are paramount to your success. Because of those relationships, which has transferred over with us over the years, given the significant number of deal volume we've done, We get access to a lot of off-market opportunities that you'll never see, that others won't see. And they come to us because they know based upon our track record, we are an all cash buyer. We put no debt on any of our assets. We have very short diligence periods. And so we've been able to utilize our history and our track record and certainty of close to our advantage. So for the right seller who doesn't wanna go through an exhaustive, marketing process, doesn't want to go through the pitfalls of having a property under contract, getting renegotiated, taking it back to the market. And especially a market, Ben, that's moving as quickly as our market is today, where there's a risk. The longer your property sits on the market, it's like having a basket of fruit on your kitchen table. It will get stale. And so, you know, a seller in this market, this is a buyer's market. I don't care what anybody says. So a seller in this market needs to find the buyer that they believe has the best opportunity for success in closing. And, you know, we've established a reputation of doing that. So it's, it's very important that we, and we emphasize, we do what we say we're going to do. We are very communicative with our sellers and with our broker partners. Listen, there's no deal that doesn't have problems. I think one of the sort of unique differentiators that Ironside Realty has is because of our development platform and our experience you know, we can take on projects that have risks or issues that I think a typical investor may not understand or may not be able to resolve. And so we've, we've had the opportunity to work on complicated deals where we've resolved those issues quickly during our diligence period to the satisfaction of the seller and get the deals closed.

Benjamin Kogut: Yeah. I'd love to hear a little bit more about that. What complications have you learned about? What are you seeing and how have you overcome those?

Laith Hermiz: Yeah. I mean, all sorts of different things, some of which could be, you know, environmental issues where we've been required to go in and do, you know, extensive phase two testing or vapor intrusion testing. You know, we had a deal recently where there was a title issue, and we had to work out an agreement with the neighboring property owner. And of course, it ended up that the two property owners hated each other and wouldn't talk to each other. So we came in as an intermediary to resolve those issues. You know certain things that I think if you're not doing this day to day, they would seem overwhelming, but if you've had the experience and you know. If you've had sort of the reps, it's just another, it's another deal and another opportunity to get through that deal. So amazing. Amazing. Yeah.

Benjamin Kogut: And so obviously, yeah, you mentioned relationships. What else are y'all doing to keep pushing things forward to, to, to find more deals and deal flow and investors and all the above? What strategies are you using?

Laith Hermiz: Yeah, again, networking. Networking is the number one priority that for myself, it's my number one thing on my task list every day. How do you continue? And I think networking is a tricky thing, right? So a lot of folks feel like, well, they're a principal in this space, so they're going to call brokers and say, what do you have for me? We take the polar opposite approach to that with our retail tenants, with our investment sale broker partners, with everybody. So it's what value can we bring to the table? to advance a relationship. And then the outcome of that ends up being deal flow. So we are very, very focused on metrics. We are very focused and attuned to what's happening in the industry today. And so we often share that information with retailers. We share that information with other investment sale brokers to provide data that they could use to their advantage when they're representing a client. Right. Both good and bad. And so I think the biggest thing for us is, is we are very, very aggressive in our outbound approach to networking. So our acquisition originators are making 500 calls a week to investment sale brokers to understanding what's in the market, what's changing, where do they see opportunities in the market? what tenants are not trading at the cap rates that they were six months ago. And we see value opportunities to maybe start trading in that space. And then you just aggregate all that information and capitalize that in the form of a deal.

Benjamin Kogut: Yeah. You mentioned metrics. What are the top metrics that you're tracking?

Laith Hermiz: So right now it is deals to market. So we often look at how many deals are on market for six months ago. particularly for a tenant that is in, a target tenant that we're interested in acquiring. And then you can see trends as an example. I alluded to this earlier. There's more dollar stores on the market today than there were six months ago. Hence, less buyers. Hence, you probably can get deals at better, you can get deals at better cap rates and better pricing. So we've been very, very focused on where deals are coming to market and more importantly, sold comps. and market rents. The biggest thing for us is we're always underwriting the residual of the real estate. So, when we're looking at a particular asset, we don't mind buying an asset that's paying market rent. We're not interested in buying an asset that's paying substantially above market rent. Obviously, the preference is to buy an asset that's paying below market rent, right? And just in case that tenant was ever to leave, it allows you more flexibility on the redevelopment of that particular deal.

Benjamin Kogut: Right. So, yeah, what we're talking about is if that tenant bounces out of there and terminates, what can we do with that real estate? Can we replace that rent? So on and so forth. What would the holding costs be, the TI, leasing commission, so on and so forth to get that value that's intrinsically in the real estate and how can we add value should we have that worst case scenario or maybe best case scenario, depending on what it is. Go ahead.

Laith Hermiz: As I say, you know, conversations create activity. That is the other thing that, you know, when you're talking to the people that are day to day doing what you do, things will come out of it. And, and I think, you know, in today's society with social, people are bombarded with social media and emails and everybody, everybody's busy. I don't know if they're actually doing anything, but everybody's busy. So it's, how do you differentiate yourself? as an actual player in your space so that when that opportunity comes, right? Part of this is us establishing credibility and rapport with investment sale brokers. So they know, okay, if this particular tenant deal is going to hit the market, I'm calling my guy at Ironside because I know they're the most qualified buyer for this piece of property. And so there's a lot of legwork that goes into, frankly, in the beginning, no results. But over time those compound and those compound and those compound. And so, you know, I guess getting back to your original question, the number one thing we're focused on is very, very proactively managing relationships and keeping our name relevant in that conversation.

Benjamin Kogut: You guys are doing a great job on that. And on the flip side of that, what kind of challenges are y'all facing in today's market?

Laith Hermiz: Um, there's a few, I mean, obviously, You know, the interest rate environment is not ideal. And, you know, fortunately for us, that's why we're an all-cash buyer. We find that provides us with a significant competitive advantage. You know, one of the things that has actually worked out in our favor is as interest rates have risen, so has the cost of capital for the institutional players. So, the REITs and the largest institutional organizations out there that are playing in their space have raised the floor on their acquisition criteria. So that has opened up the playing field for us to, to buy deals at better cap rates than we could a year ago, because frankly, they've got better cost of capital or had better cost of capital than us. So they could outbid us on deals. Um, you know, the, the other thing is really finding out which deals are real and which deals are not. We, a tremendous number of the deals that come to the table for us are off market opportunities. So really understanding the motivation of that seller. And is that seller really ready to transact or are they out there looking for a free appraisal on what they think their property is worth today? So kind of navigating through that minefield. Because at the end of the day, the most important thing we have is our time. And so we've got to protect our time at all costs. And you can't be chasing down rabbit holes constantly.

Benjamin Kogut: Regarding seller's motivations, are you seeing any trends and reasons why someone may be motivated to sell in today's market?

Laith Hermiz: Yeah, there are more and more, we'll call them small real estate investors that are having issues in other product types that are prepping loan covenants, or they're having some form of a liquidity issue and they're saying, Hey, I need to monetize this asset to offset the liquidity issue I have on another asset. And so, and we've seen that with folks specifically who were heavily invested in the multifamily sector and traded into some net lease, but still have multifamily assets that may have had floating rate debt, which has become a real issue for them. Or again, they may be tripped a loan covenant, so they're looking for a way to buy down some of that debt or just pay that debt off.

Benjamin Kogut: Are you seeing any of that in the retail space as well? Somebody had bought something and now they're bumping up against, like you were saying about the debt covenants and all that kind of stuff. I mean, it seems like we're hearing a lot about that in the multifamily sector. Is that as prolific, do you think, in the retail sector?

Laith Hermiz: Not in the ST&L retail sector, because frankly, it's one asset that's 100% occupied by that tenant. Where we have seen activity, is with retailers that have faced some headwinds from an operational perspective. I'll give Walgreens as an example. The Walgreens market, the pharmacy in general, was so hot for so many years. And now you've got Rite Aid that's filed bankruptcy. You've got Walgreens, their CEO recently left. They're going through a bit of a restructuring. And so there's been some sellers that have medium to short term pharmacy deals on the market that have just said, hey, I'm not sure where this is going to go. But at the end of the day, I don't want an empty 14,000 square foot box. I'm not in the development business. I'm just going to take my capital and I'm going to walk. And so we've had a few of those opportunities that have kind of come through.

Benjamin Kogut: Got it. Got it. Yeah, that makes that makes a lot of sense. Yeah. Yeah. Thank you so much for sharing all this wisdom about the singleton net lease market. It seems like there's a tremendous opportunity and we'll continue to do that. Let's just pivot a little bit. What, Leigh, thank you. As we wind things down, what is the number one thing that has contributed to your success?

Laith Hermiz: I would say being consistent and persistent and resilient. And so, you know, I am ultra competitive, which is why I love what I do. I'm very, very, very blessed. Then I get up every day and get to do something that I'm passionate about. Um, but I think being very, very consistent in my schedule, um, you know, like any, any entrepreneur, any investor, there's highs or lows that can happen 15 times during a day. And so being able to, to never ride too high or never ride too low and know that You got to get up every day and outwork the competition. I think that's what really, really has sort of separated me over time is, you know, you knock me down. I'll just kind of just get back up and go and get back up and go and get back up and go. And it's that constant one step up the mountain, which really pays off. And there there's a lot of days when you just want to just stay in bed. Um, but you can't let it happen. You just got to stay one step ahead of everybody else. I think that's probably the most important thing.

Benjamin Kogut: Amen. Love that. Thank you. And so if a listener would like to reach out to you, what's the best way for them to do that?

Laith Hermiz: They can connect with me on LinkedIn, get my information off of our website at www.ironsiderealty.com. Probably the best two ways to reach me.

SPEAKER_00: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.