#393 - Alex Nyhan - CEO @ First Washington Realty - $9B Portfolio: How Neighborhood Centers Became the Most Resilient Asset in Real Estate

Chris Powers: Alex, thank you for coming to Fort Worth and joining me today. 

Alex Nyhan: Thank you, man. What a great place to be.

Chris Powers: To those listening, Alex and I have been in a real estate forum. I think probably I've been in for... Did we join at the same time? I think it was five years ago. 

Alex Nyhan: Something like that. Yeah, it was just before COVID. 

Chris Powers: Yeah. And so had a great opportunity to learn a lot from you and become friends with you. So, it's a treat to host you in my hometown. 

Alex Nyhan: Thank you. Congrats on all your success. 

Chris Powers: Thank you. You too. I think to set the stage, you run a company that owns neighborhood retail across the country, 22 million feet. But I wanted to set the stage with maybe some more context so you could tell us more about maybe your career, kind of just leading in, and then tell us a little bit about First Washington. 

Alex Nyhan: Great. So, my real estate, I had a secret special different career for five years before real estate, which maybe we'll talk about later. But my real estate career started probably a little over 20, probably 22 years ago when I worked for the mayor of Washington, DC. So coming out of grad school, had no idea really what I wanted to do, but I knew it was something around finance, development, political strategy. Worked in the mayor's office for two and a half years. It's basically a glorified apprenticeship, if you will, because I got to do all these really complicated projects that in some ways are probably the most complex stuff I've ever worked on in my whole career, right out of the gate. So that was just super thrilling. After two and a half years, loved the work, couldn't deal with the pace of the public sector, jumped over to being a private sector real estate developer for the mighty Forst City Enterprises, which something like seven years ago sold itself to Brookfield. But that was another fantastic experience where I spent eight and a half years there doing mostly mixed-use redevelopment projects, development projects, a lot of complicated stuff, complicated cap stacks, different land uses. And that's also where I went to Brazil and we structured a JV down there, which is a whole other fun adventure. And then a little- I guess 11 years ago, right around when I turned 40, I decided that there was an opportunity that was too great to pass up, which was to become a real estate owner and become part of an investment management platform called First Washington Realty. So, I made that jump 11 years ago, and it's been a pretty wild ride there too.

Chris Powers: Okay, you just said a couple things I gotta pick on. What would a complicated capital stack look like? 

Alex Nyhan: Okay, I'll give you one example from Forest City. So, we had a project called The Yards, 42 acres, 5.5 million square feet, phased land takedown, 25 parcels over time. I'm saying we, Forest City was the environmental cleanup agent for the feds. The city needed to pay for the infrastructure because we couldn't make the land deal work without it. So the feds paid for the enviro bills. We cut a very complex series of different pilot agreements, payment and [?] taxes with the city to create infrastructure bonds to pay for new roads, parks, et cetera. But that's just to get the, if you will, the horizontal, I'm doing air quotes here, but like the horizontal land development part of life. And so, for example, one building called 1212 that I did with our team, we had 80% market rate units, 20% affordable tax exempt debt, low income housing tax credits, new markets tax credits, 110,000 square feet of retail, and that's all sitting on a base of that complicated land deal I told you about. To me, that's pretty complicated, but it was thrilling. I think what Forest City taught a lot of us who worked there was creative problem-solving. I mean, the projects were just impossible. When you sit down and look at them, there's no way this can actually happen, but you just keep grinding, and then it does. 

Chris Powers: Okay. I'm going to pull- I'm going to keep going on this a little bit. When you are under...

Alex Nyhan: Can I'll tell you something funny before you ask me that question? That building 1212 that I was telling you about, I forgot to mention this part. It also had a historic wall that we couldn't tear down and we had promised we wouldn't tear it down, but then sadly we figured out that we needed to cut a hole in it so the grocery store could have a truck come in. Then I had to go back to the state historic preservation office and be like, hey, I'm so super sorry about this, but we really need this hole and got that negotiated, and then we started construction. There were 700 plus pieces of unexploded ordnance from when the Navy used to use the site, which then stopped construction. I'll tell you this one really quick funny thing. So we get shut down. The federal cabinet level agency next to us, 8,000 employees, it gets evacuated. So every time our guys on site, our MaxX workers, found something, we have to call the police. They'd call the army. They'd evacuate everything. And I was terrified that I was going to get shut down. I wouldn't be able to deliver the grocery store on time. We'd lose the grocery lease. If we lost the grocery lease, we would lose $81 million, I'm not joking, $81 million of new markets tax credits. So I'm like, oh my goodness. So when we found these unexploded bombs, I'm like, what are we going to do here? This is so horrible. So, I go down to Fort Belvoir, literally just drove down to Fort Belvoir, find these army guys, they're just, they're doing their thing, like with their oil, like sort of checking their guns, making sure everything's working. And I'm just like, gentlemen, I don't know where else to go, but I've got a problem. And they're like, well, what's your problem, man? I'm like, well, we've come across all these unexploded bombs from a long time ago. And I'm terrified that if we get this sent to the Army Corps, they're going to shut me down. I'm going to lose my grocery store. And they're like, hey dude, here's the two guys to call. When we have this problem in the Army, these are the two dudes we call. So they gave me these two guys' names. So I called these two guys, and I wish I could remember their names. They were so awesome. These guys were, they had decades of experience, let's say. They show up to the site, not dressed in the most formal way. All the sort of big construction guys have fled because they're scared of the unexploded ordnance, understandably. Don't want to get blown up that day at work. So, these dudes roll up. They are in a pickup truck. Literally, I can see it like it was yesterday. Cigarette hanging out of the side of the mouth, like Dunkin' Donuts coffee, listening to some tunes on the radio. They drive right out onto the site, onto the actual ground we're excavating, get the piece of unexploded ordnance, look at it for a second, they're like, eh, literally throw it over their- they don't place it calmly in the bed of their pickup, just kind of like chuck it over their shoulder, take a drag of the cigarette, and roll back out. And they're like, we're good, you can tell the MaxX guys to get back to work. I'm just like, I have no idea how that works, but those guys were- I wish I knew their names, because we just owe them so much. But that's a complicated deal. 

Chris Powers: There could be a whole YouTube channel just watching those guys go find unexploded bombs around the country. Okay, but you're working for Forest City. Was this a piece of land that was for sale? Like when I think of something this complicated, is this an RFP process? Like how do you go, that's the problem that we want to fix? 

Alex Nyhan: Yeah. So a couple of things. So, I mean, I'm going to make a long history concise here. So unfortunately, it starts in 1799. I'm not joking. So literally 1799, Thomas Jefferson's like, hey, we need this land for a war, goes down, just expropriates this land down by the river. Blah, blah, blah, fast forward 150 years, and sometime like mid-20th century, the Navy is like, we just don't need this anymore. They had bomb-making factories, bomb testing, all this kind of stuff. The Navy gives it to GSA, as you know, the Federal Real Estate Arm. GSA can't figure out what to do with it because there was a perception this part of town is too dangerous, undesirable, and so forth. Couldn't get any- typically the way they would stimulate development in some of these neighborhoods, DC would get a new cabinet agency to become the occupier of a new office building, then sort of finance the construction off that. Nobody would come. And finally, Eleanor Holmes Norton, the representative of DC in Congress, got fed up with this. So she was like, well, GSA, why don't you just do a joint venture with the private sector? They were like, we can't do that. It's not legal. There's no law. She was like, all right, well, I'm going to create that law that lets you do that. Eleanor created the law, got President Clinton to sign it in 2000, and then GSA became allowed to run this competitive process. They ran an RFP for a city, won it, and basically to win that RFP, you had to model five and a half million square feet out 25 years, every dollar of infrastructure, you name it, all baked into the model, take the risk, and then negotiate the docs. Complicated deal. 

Chris Powers: And when you underwrite this over 25 years, I mean, I think when you were mentioning this, you mentioned all these different types of tax credits and bonds, do you underwrite all that in up front? Or are you kind of learning as you go, like, ooh, there's a tax credit for this, or, ooh, we can do this? Or does the city kind of hand you, like here's your menu of everything you have...? 

Alex Nyhan: Oh, no. First of all, absolutely not from the city's perspective. But from the basic underwrite, I think I was involved with a couple of these types of long-term phase land underwrites for Forest City. Basically, what you do is you model all the cash flows. If you assume that the seller, in this case municipality, wants some level of affordable housing, you model 80-20 deals with tax exempt debt and probably some low-income housing tax credit proceeds. But as it relates to the other tricky stuff like new markets tax credits or historic tax credits, I think you don’t- I don't think it's worth assuming all that up front because you don't even know if you can get those. Can you get the allocation? Can you negotiate it with the historic preservation people? Historic tax credits actually is a national thing, not even the local. So, I think those ones, you underwrite your retail rents, your dev costs, et cetera, and roll. 

Chris Powers: Then is it one equity partner through the whole thing? Are you bringing in new equity partners all the way along the way? 

Alex Nyhan: Yes. I learned a lot from how this gentleman that preceded me structured the deal at the Yards. The way it was structured was the land deal is structured basically as one entity because if you think about it, equity that's in a land deal wants a certain type of return. It was underwritten as if you buy the ground wholesale, clean up the dirty dirt, put in the infrastructure, sell it at retail, if you will, into a vertical LLC. Then that vertical LLC can be for a city or whoever, it can be a JV, it can be for a city wholly owned. So, you've got all those embedded options along the way, which I think is good because, I mean, if you're talking about 25 years, it's pretty hard to predict. 

Chris Powers: All right, before we get to FWR, I want to circle back also. So you worked for the mayor. You got a really complicated deal done in Washington, DC, one of them being a hotel site, I believe, or a hotel. 

Alex Nyhan: Yes. Yes. Yes. You're literally giving me heebie jeebies, man, talking about this project. 

Chris Powers: Well, because my first question is, in order to actually get something like that done, do you have to work for the mayor's office? Or could that have even been done through a private entity? Did you have threads and connections because you were working for the mayor that made a deal possible? 

Alex Nyhan: That deal is particularly tricky that I think did indeed require public sector leadership or facilitation, but there are plenty of other complicated deals I worked on when I was in the mayor's office that were, if you will, mixed capital structure, public and private, where if you were a private developer, you could have come up with the idea and worked to create a consensus within the public side to work together. 

Chris Powers: Okay. So, can you tell me about that one deal in particular? 

Alex Nyhan: Sure. The hotel deal was, that was a hard deal. What had happened was the city had built a new convention center, and I'm going to try to keep this one short. Therefore, there was an old convention center that could be torn down and something better developed there. The old convention center site happened to occupy literally the most valuable 10 acres of all of downtown Washington DC, pretty sweet site. So, the mayor, this is before I got there, the mayor ran an RFP process, arguably the best three mixed use developers in the country bid, Hines, Related, Forest City, Hines won it. And in the end, they actually did an awesome job with it. But unfortunately, along the way, some city council members had become convinced that there should be a new hotel that would help support the new convention center. So it's like, okay, well, fine. We can have a convention center hotel, no big deal. Lots of cities have them. But can we please go ahead and get the Hines Project jumpstarted? I think both of them together were like 7,000 jobs or something. So there became this whole dilemma of, well, where are we going to put the convention center hotel? Some folks wanted to put it on the Hines sight. And some other people, for example, the mayor, wanted to put it right across from the convention center. So my job was to get the hotel put in the right place. It sounds simple. In order to do that, there were probably three different vectors of problems to solve. There was getting the land. And this is downtown Washington DC, okay? This isn't like in the middle of nowhere. Getting the land, getting all the approvals, and figuring out the cab stack. On the land side of the house, I started working on this project 21 years ago. There had been some work afoot. There were basically two big landowners and some small landowners. One of the big landowners was – if you're in Washington, DC, this is right at 9th and Mass, northwest downtown – big landowner, multi-generational, extremely wealthy, famous family in the United States. They think in like 50, 100 year timeframes. So, I can't negotiate with them and be like, yeah, dude, but I'll buy you the land and it'll help your 10 year IRR. They couldn't have been less interested, super nice, but they had no urgency and therefore impossible to negotiate with. So around and around we go, what about a ground lease structure, participation, blah, blah, blah, couldn't get there. Then a developer downtown had this idea of a land swap. We went back to the family, and we're like, look, we will swap you guys in to the Hines site. There's this kind of strip of the Hines site that we can swap you into if you let us swap into your land there. And ultimately, that broke the logjam, which is a super cool experience figuring that out. And then we got to the other big landowner, which was the International Plumbers Union, who owned a historic building right at the corner of 9th and Mass. So with a couple of my real estate mentors and I, we rolled up there, went up to the top floor, and I was intimidated. I mean, at this point, I'm probably like 30, 31. And we go in, you just see across this cavernous, huge, empty room, walk across it. It's almost like you can hear the reverb of walking across the floor. And we see these four or five gentlemen who were big, muscular gentlemen, jewelry, clothes, and so forth, who were the union decision makers there. And they were accompanied by a real estate advisor. And we just tried to make a friend and tell them what we're trying to do. And ultimately, we're like, hey, gentlemen, we're trying to buy this building so we can do a hotel here. Their advisor had very aggressive expectations, as you can imagine, but ultimately we sorted it out. Anyway, so long story short, we get all the land. That was a key proof point because the folks that didn't want the project to go ahead were always like, yeah, but you'll never be able to get the land. And we're like, actually, we got the land. So, then we got to the cap stack bit and all the other approvals. I won't talk about the approvals, it's just too time consuming, but just trust me, it was very complicated. Cap stack's pretty interesting. The original proposal that I had inherited was that the hotel would be 100% owned by a nonprofit controlled by the city. Take the hotel in Hawaii, that's going to support the debt service, issue a bunch of bonds. But then unfortunately, for credit quality, you need some other revenue, some credit enhancement for those bonds. Just so happened that that credit enhancement was going to be these other bonds that had already been issued that were paid for by taxes on local restaurants and hotels. So I'm like the junior guy on the totem pole, but I'm like, wait a minute, let me get this straight here for a second. We're going to use public investment to create a hotel that we don't know if there's demand for. And if occupancy drops, the surrounding hotels and restaurants indirectly are going to end up basically cross-subsidizing their competitor. That doesn't sound like a great recipe for economic development. Then the more I thought about it, I was like, there's a lot of parts of DC that need a little help. There's a wide range of rich people, poor people, et cetera, in Washington, DC. Why should the taxpayers have to pay for the hotel? It's kind of crazy if you really start thinking about it. So then I felt that we should see if there was actually demand for the hotel by testing if the private sector would invest its own debt and equity. And of course, we needed to put in a TIF element to make it work. So we ultimately flipped it to a cap stack that wasn't publicly owned, privately financed, but yes, with a TIF contribution. And between that, the control of the land, and the approvals, today the hotel is at 9th and Mass. Super tough project. 

Chris Powers: So real estate isn't totally passive?

Alex Nyhan: No.

Chris Powers: There's some blocking and tackling. On a land swap with a family like that, and again, this could be it's just like the answer’s case by case, is the goal to convince them that what they're swapping for is just as valuable of what they have? Or do they kind of look at it at that point as like we're doing something to help the city and we just want to make sure we're getting like something...? How do you convince them what you've swapped them for is better, or they want it better than or equal to, or? 

Alex Nyhan: I think it has to be better than for sure. And in this case, from their perspective, what they were swapping into was a slightly better location, and that family had experience owning office buildings in downtown DC. So as you know, in big cities, one block to the other can be a big difference. And the other thing they successfully negotiated for themselves was the ability to flip the density rights, if you will, the FAR from office to resi. So, they had a lot more... effectively, they were trading in for zero price to a real option, if you will. It was one of those deals where everybody was better off for having done it because of that. Pretty cool. 

Chris Powers: All right. Can you give me a little bit more? So, 10 years ago, you make the change. You go to First Washington. Can you just give me a little more detail on where the company sits today? What are we working with? 

Alex Nyhan: So today, we have 9 billion roughly of AUM, assets under management. We're privately owned. We have an opco and a real estate partnership. Like you said, 22 million square feet, 143 shopping centers, vertically integrated. So we do leasing, development, property management, and so forth. And we have done roughly $4.4 billion of investing in the last six or so years. And so by virtue of having done that investment, finding some pretty sweet deals, the company has grown a ton. But I want to be clear that we're not about growing. We don't believe in economies of scale. We're not trying to be big. It just so happens that in our pursuit of trying to find the right real estate, we've been lucky enough to find some good stuff and we've sort of happened to grow, if you will. So now we're about 116 people, six offices, four on the West Coast, one in Kansas City, one in DC. 

Chris Powers: So, when you say, what you just said, we're not trying to, however you said it, we're not trying to achieve economies of scale... 

Alex Nyhan: That's not exactly what I mean, because we love the economies... 

Chris Powers: You just don't want scale for the sake of scale. 

Alex Nyhan: Yeah, correct. We're not into scale for scale's sake. We're not publicly traded. We don't have growth targets, et cetera. 

Chris Powers: So, you said we're a fund. Are you one fund or are you multiple funds? 

Alex Nyhan: So, we're not a fund. The way we're structured is we have private real estate partnerships. So right now, we have some partners in that partnership, and I never talk about our investors. 

Chris Powers: Yeah, that's fine. But it is one partnership though?

Alex Nyhan: For now. 

Chris Powers: Got it. Cool. Okay. At that scale, your pipeline's probably pretty robust if you're covering pretty much the whole country. I'm always curious. You see a lot. How do you end up knowing what to pull the trigger on? And how do you manage... You just see a lot. So, I'm sure your pipeline, if you're like a community company, you're probably looking at 10 deals around your city. You're probably looking at, at any one time, a hundred deals around the country. How do you know what to work on and what not to? 

Alex Nyhan: Great question. We work really hard on that. And I think the most important principle we have is intellectual modesty. That's been really our North Star as investors for the last 41 years, obviously, including before I joined. So, what that leads us to, we have investments teams that are based in the West and based in the East, and we look at roughly a hundred deals for every one... We seriously study call it a hundred deals for every one we buy. How do we figure it out? The first thing is we want to own a piece of real estate that we'll be comfortable with in a downside scenario. We always look at that first. My predecessor always used to joke like we're not smart enough to understand these other things, so we just focus on grocery anchored shopping centers. I think there's a lot of truth to that. What I mean by it is we know that if we can buy an area where there are affluent consumers with college degrees, that they're going to go to the grocery store when the chips are down in the economy. Pretty straightforward. So, we look for quality grocery anchors. We generally want to own the best in that trade area, best corner. What we've found over time is if you look at it through a multiple cycle view, or said differently, if you look at an investment through a range of sensitivities when times are good and bad, the types of assets where we've really held our discipline and insisted on quality experience a very, very, very tight variance in terms of their value changes as a function of the macro picture. That's really important to us. The other piece is pretty simple, is just that we think we can make a difference. We're not that guy that's going to pay 110 cents on the dollar for the shiny penny and just set it on the shelf and forget it because we can't make money that way. And no one would ever invest with us if that's all we did. So, I'll give you an example. We bought a deal off market in Long Island a while back, great trade area, almost no retail supply. Because the landlords had all the power, the landlords never invested in their centers. They didn't have to, never gave out TIs to tenants, so on and so forth. So, we find this kind of down on its luck looking center. We knew the fundamentals were awesome. We took out a couple of tenants, brought in LA Fitness, PetSmart, flipped the grocer, and basically increased the value by like 50% by doing that. But we did it in a neighborhood that was going to be good at the end, you know what I mean? Like we didn't do it in the middle of nowhere. We're focused on quality and the ability to make a difference, but we're especially focused on downside protection so that we can perform when the rest of the economy is [?]. And in fact, if you look at our results, what it shows is that over the last 15 years, every quarter that the S&P has been down, we've been up. And I think one of the reasons for that is we're really, when we take a deal through our investment committee, we are very tough on ourselves and we only buy- we're very selective. So we've missed tons of deals. I remember when I first started at First Washington, it was very lonely because we'd be missing deal after deal, including public to privates, big deals. You work so hard on them, came up short again, came up short again. But that's what it takes if you want to be selective. 

Chris Powers: Does everything you're buying already have a grocery store in it, or are often you bringing a grocery store to it? 

Alex Nyhan: No, definitely more often than not, there will be a grocery anchor. It's not a, quote, requirement. But we do sleep better at night knowing that we are grocery... we're 93% grocery anchored. So we don't have to have a grocery anchor, but when we have a center that doesn't have one, we love to bring one in. But we also, like Lakewood, we were talking about before here in Dallas, we don't have a grocery anchor, amazing piece of real estate. 

Chris Powers: It's just, you just bought on Main and Main and Lakewood. Okay. Well, the obvious to me when I hear of neighborhood shopping center is, or I'm sorry, grocery anchored shopping center is grocery stores, people are always coming and going. Keeps the parking full. That means all the other tenants draft off of that tenant. Is that basically it? Or is there something else you think about when you think of grocery anchored shopping center? Is it literally just demand driver? 

Alex Nyhan: Well, I mean, the demand driver is very important. I think just as important though is the neighborhood. And I think where we've been very disciplined is only buying in places where we feel there can be a competitive moat, i.e. where there are very material constraints on supply and where the discretionary buying power of the trade area is destined to outpace inflation, which obviously the proxy for that is education. I think what's a little bit of a difference for us is because we're private, we can just buy good real estate. We don't have to be constrained by what's going to look good on an investor deck or what is respectfully like a 27-year-old analyst going to say on an earnings call about it. So I'll give you an example. We did an off-market deal in the Kansas City suburbs. And I want to say this with respect to our great competitor, Federal Realty. We bought those assets 11 years before Federal decided they wanted to come to town. And the assets that we bought off-market were in a place called Prairie Village and then also in Kansas City, Missouri. The shopping center in Prairie Village is next to the third most affluent municipality in the United States. I'm going to say that again, third most affluent municipality in the United States in the Kansas City market. I never would have known that until we learned more about the asset. And then when we got into it further, we realized actually there's this famous developer named JC Nichols, kind of invented walkable development in the US 100 years ago, he developed this whole area and had all these covenants. There were embedded supply constraints in the way literally the city was laid out, the actual geography of the city. We were benefiting from supply constraints, coastal levels of wealth, and this property had basically the equivalent of a TIF that we could negotiate with the city. That's a First Washington deal, off market, coastal attributes, but maybe overlooked by some others. And then we've just been sitting there grinding, grinding, grinding on those assets for like 11 years and just cranking NOI. That's a very illustrative deal of kind of our personality. 

Chris Powers: If we were sitting here 10 years ago, I probably would have been hammering you with retail's dead and Amazon is taking over the world, ecom is taking over. 10 years have now gone by and you never hear that anymore. And retail is actually probably, maybe we'd say the most resilient or maybe the best performing asset class maybe in real estate right now. 

Alex Nyhan: It's probably the most desired by investors, I would say. Maybe right there with data centers. 

Chris Powers: If I was asking you this in 2015, did you ever buy into that narrative, or did the retail guys always see something different than like everybody that wasn't in retail? 

Alex Nyhan: Well, first of all, the narrative was half right. Let's be real about that. Enclosed malls are 1% of the retail in the United States. They occupy a larger share of the conversation, let's say. And so, in a lot of ways, you could say the internet did devour some of the mall health. Seven years ago, malls and open-air retail had the same occupancy. Now, malls have 700 bps less at least on average on a good day. If you look at department stores, as you know, the anchors of enclosed malls, average department store return over the last 10 years, the ones that didn't go bankrupt, negative 70% give or take total shareholder return. And then off-price guys like TJ Maxx, average return of call it 200% at the same time. So there's something happening with how people are shopping. And I do think that in a strange way, the rise of ecommerce both has been terribly difficult for malls and actually terribly helpful for neighborhood shopping centers, not just because, if you will, educated, the ecommerce rise educated mall tenants to make mall tenants want to leave the mall and come to neighborhood shopping centers, but it also increased the price of what you know so well. It increased the price of the substitute, i.e. industrial rents. So, if you're a retailer and you have a high shop space rent and a high industrial rent, if you can collapse that down to do more from just your shop rent, if you will, in our centers, you just make more money. So, in a strange way, it's been doubly helpful for, I always like to say like averages are misleading. So, like ecommerce, tough for malls, great for neighborhood. 

Chris Powers: Why is it the most sought after right now? 

Alex Nyhan: A couple of things. I think it's well-documented that the going in yields for neighborhood retail never got as tight as industrial and as multi did during COVID. Also, the neighborhood retail supply has always been much more limited. Industrial, you'd know this better than me, but I think industrial’s expected supply growth is something like 5X what the expected supply growth is of open-air retail, period. Supply growth for open-air retail is like 25 bps a year going forward. It's basically nothing. You've had the situation where retail sales in the US have expanded at 12.5X retail supply since the GFC, and within that basket of retail supply, you've had, I'm not going to say the failure, but it's been a less happy destiny for malls than for neighborhoods. So when you further kind of take that off the table, it really has led to a lot of demand drivers in the neighborhood space. And the last thing I'll say is, and apologies for the nerdiness of this, but if you're an institutional investor looking at these asset classes, you have to look at the standard deviation of your returns because you're marked on a risk-adjusted basis. So, if you look at neighborhood retail, the standard deviation of those returns is going to tend to be much, much tighter than the standard deviation some of the competitive asset class returns. And the last thing is data centers may even be better, quote unquote, but they're hard to find, the check sizes are huge, and there's complex power issues with data centers. 

Chris Powers: So, is it fair to say that it's hard to find someone to buy right now or is it easy to find someone to buy right now? 

Alex Nyhan: It's definitely not easy. I wouldn't even say it was easy during COVID. I remember during COVID, we bought a deal off market literally in the teeth of COVID and still had to structure a bunch of risk management type devices with a seller in San Diego. It's definitely super competitive right now to buy... We just bought a deal in suburban DC this year where we won not by paying more than anybody else, but we won because the land – similar to Lake Highland Town Center, by the way, here in Dallas – we won because the land seller had surrounding holdings. And so, it was very important to the seller that whoever they sold the shopping center part to would be a thoughtful steward, so there would be a positive value impact to their surrounding ownership. That's how we win deals in this environment. 

Chris Powers: If you can expand on that, maybe it's private, what would y'all be doing that maybe the top bidder wouldn't be doing? 

Alex Nyhan: That's the funny thing about it. I'm not sure that we would be doing anything different. I think it's more that... It's track record. And so, in this case, when we're on the phone with that seller in a [?] interview, we've got the cash. There's no financing contingency. There's no like you don't have to go in the back room and ask for someone else's permission. And our culture is we're obsessed with upholding commitments. And I think that comes through when we can point to seller after seller who’s been willing to give us the chance and we've upheld the commitment, it works. 

Chris Powers Okay. You said something I hadn't heard...

Alex Nyhan: So, in other words, it's not that as a steward, we'd come up with tenant X and the other bidder would come up with tenant Y. I think it's more that there's just like a level of like mom and apple pie quotient, that the seller was like, you know what, I feel like these guys are going to do me right during the process and they're just going to get to the finish line. 

Chris Powers: Okay, you said something, you were speaking about a deal in San Diego, but you said we negotiated some risk management devices. I've never heard anybody say that before. What's a risk management device? 

Alex Nyhan: So, what I mean is, so during COVID, I'm sure you'll remember... crazy times. 

Chris Powers: I remember the calls we would have as a forum. Wild.

Alex Nyhan: Yeah, that's right. That's exactly right. I must have gained 30 pounds from eating cookies during COVID. So, my terrific colleague in the West, Sarah Ellis, negotiated a deal off-site, off-market to buy a super in demand shopping center in a wealthy part of San Diego. During COVID, some tenants weren't paying rent. So, the only way that the seller and we would ever be able to come to terms would have some level of contingent contract where if something changed in the future, there would be a true-up of some kind. So first of all, the seller didn't want to sell. Then Sarah convinced him to sell. And what we're going to do was just do more of a traditional escrow structure, but it's like no one was that pumped about it because we had to administer it and then the seller had to leave some cash behind. It was kind of a bummer. So what we did is because we had the value of all the information of 100 plus shopping centers, we could see all the probabilities of the same types of tenants in that center, what was the rent track record to us all across the country. So we were able to flip the escrow into a much more modest credit at closing. So basically the price of insurance or risk management, if you will, was reduced to the seller, but we were comfortable taking the risk because we were sitting on like baskets and baskets of all those rent collection reports. So, we knew how it was going to work out. That's all I meant. I didn't mean to use a jargony phrase for it. 

Chris Powers: So that was more something, I guess you could use it any period of time, but it was specific to that period of time where there was all these nuanced things you had to do given the landscape. 

Alex Nyhan: I think what it was about that period of time is the level of volatility was just so ratcheted up. But unfortunately, cap rates weren't ratcheted up because of the federal government's approach to interest rates and so forth. The price for being wrong was very high in capitalized values terms, but the probability of being wrong was also very high because of the volatility of COVID. So that's why you needed a structure like that. 

Chris Powers: Talking a little bit more about tenants, I think you have 3,700. If I was to get into the retail game to go tomorrow and go buy my first building, I have no relationships with any tenants. Whatever tenants are in that building are the first relationships I'm going to have with tenants. How much would you say your scale, or I'm sure you have, I'm picking on somebody, I think I saw Sprouts at Lake Highlands. Maybe you have a few Sprouts, I'm just guessing. But how much does having the same tenant in multiple centers give you an advantage when you go buy something new or redevelop and just pick up the phone and call your contact? And again, I'm picking on Sprouts... And just say, hey, we got a new center. Why don't you come check us out? Whereas I might own the same center, but I've never met Sprouts before. They might go with you because they already know you as a landlord and they'd be like, yeah, we'll pass on that site. Is there any moat or any advantage you have to those? 

Alex Nyhan: I think there's an advantage. I don't think it's like the mall sector where you can be like, call some tenant and be like, well, we have 40 of your units. If you don't do X, then we're going to be mean to you. I don't think it's that type of vibe in the open air space. I think it's more that, first of all, these are human relationships first and foremost. It's people that you see at events, maybe you went to their wedding, maybe you went on a canoe trip, maybe their kid had a problem and they called you and you helped the kid out or something like that. It's human beings, and I think the retail industry, it's a very small industry in terms of the tenant base and specifically the people who lead the real estate departments of these tenants. A real estate leader of one of the tenants may be at tenant A and then be at tenant B the next year, but the relationship endures. I think it’s more, to me, the value comes more from the ability for our leasing team to call one of those tenants and just get an honest take on the center. Like, hey, we're doing pretty well, or you know what, this isn't one of our stronger locations, so that'll give us a higher degree of precision in our underwrite. Therefore, we can pay more or pay less, et cetera. The other piece is when you do have the inevitable difficulties that come up, oh, somebody has a common area restriction or, gosh, we found a great new tenant, but you need to work with us because there's a prohibition in your lease, but maybe we can help you come up with a new solution. There's more of like an implied sort of ex ante goodwill that you're working with that I think can help you problem solve together. 

Chris Powers Okay. It's probably easier to underwrite. 

Alex Nyhan: So therefore, I do think there's an advantage. 

Chris Powers: Yeah. So, I shouldn't go start competing. 

Alex Nyhan: Not necessarily, because you could hire a great third-party leasing broker who will assuredly have some of these relations. 

Chris Powers: So, that would be the way I begin to get around it. 

Alex Nyhan: I think it is. But there is a difference though when you're talking to somebody who's putting their own cash in and who's the decision maker as opposed to someone who just gets paid if the transaction makes. It's just a different vibe. 

Chris Powers: Yep. It's probably easier to underwrite credit tenants for obvious reasons. Maybe you'd say it's not. But retail, especially neighborhood shopping centers, tend to be filled with what we call mom and pops. Do you guys have a way that you think about mom and pops, given that they don't always have the greatest credit? Is it a way you structure deals? Like, how do you underwrite a mom and pop? And would you ever let a first time business into a center, or what would it take to let a first timer in? 

Alex Nyhan: Yeah, I think, as my kids say, the dose makes the poison. So as it relates to the shop tenants, the way we look at it is we have a portfolio of units. All of our portfolio literally is just thousands of units. So, there's an atomized situation to the risks within that basket. So first of all, let me back up for a second before we get into the shops. One of the reasons we can take risk with shop tenants is because we haven't taken a lot of risk getting a lot of the box tenants that folks who own power centers have. So, when these companies go bankrupt like Joann or Rite Aid, et cetera, we're starting from a place of having a very tiny exposure to that because of the types of centers we've bought. So, if that's your starting place, then you face the question, well, how much ballast, if you will, do you want from credit anchors, and how much juice or NOI growth do you want from the shops? It’s all about finding the cocktail of the security plus the NOI growth and dynamism that you need, not just for the economics, but the dynamism of relatability and memorability and emotional connection of tenants with our customers. Because nobody wants to go to a shopping center that has the same boring five tenants you can see anywhere. Now, you definitely, not that CVS is boring, but you want your CVS to be clean, functional, et cetera. It's a utilitarian offering. But you can't just have the same old food and beverage users everywhere. So, I think it’s about... I know I'm not really answering your question because there's only so much you can do to underwrite. I mean, you can ask for a financial statement, tax statement, and I'm not really sure how worthwhile that really is. You can have somebody's spouse on a personal guarantee, but are you going to really go – I'm sure our lawyers would not want me to say this – but how much credit does that really give you that somebody's house is there? We're not in the business of stealing people's houses. I think it's about an appropriate level of exposure to mom and pops. Now, the other thing is small shop tenants are largely not mom and pops. A small shop tenant is like Chipotle, Starbucks, JPMorgan Chase, Kava, those are not mom and pops, but they're shop tenants. So they give you the same type of NOI impact. And in some cases, same type of like excitement. And of course, there's the basically pretty low credit mom and pops who've just got that special something, and we're willing to roll the dice. I mean, in our situation, we're always between 94.5 and 96.5% occupied, except for COVID and GFC. So when you have that level of occupancy, you need to take some risks to drive the NOI growth. And these mom and pops have a great role to play in that. And I do think they punch above their weight in terms of the sort of resonance that they have. Like when you see somebody who has worked their whole life to save up money, and then they put their money where their mouth is to build out their dream, that person's going to have- the, quote, manager of that store who is the owner of that store, they're going to have an intensely high level of commitment to customer service, to knowing your name in a way that, I'm not going to pick on any tenants, but there's no national tenant that can match that because it's literally the person's life savings that they've put on the line. 

Chris Powers: Well, and we won't... on the theme of not picking on any one tenant, but if you talk to most landlords during COVID, a lot of the legal letters and I'm not paying rent were not coming from... 

Alex Nyhan: Not from the mom and pops. No, that's exactly right.

Chris Powers: So the credit of the tenant was also... It's like too big to fail. It's like they're too big. They're going to eat your lunch, unless you are a big landlord that could stand it. I mean, I knew one guy that had 15 Rosses and he wasn't messed with. And I know a guy that owned one or two Rosses or had Ross, and I guess I'm picking on somebody, but they got a letter. 

Alex Nyhan: My guess is your friend that owned the 15 of the I'll just say national tenants, I'm sure he got a letter as well, but he- because I think that the national tenant behavior was to come up with a general game plan and just execute in a sort of standardized manner. I think probably the difference was your friend that had the 15 units had more strength to be able to resist. 

Chris Powers: You said something earlier that is just stuck in my brain. I know what you kind of meant, but I want you to maybe say it again. You said something about how education helps you outpace inflation. I don't exactly know how you said it. What did you mean there? 

Alex Nyhan: I'm going to answer your question, but only if you promise me that you won't fall asleep. Is that a deal? 

Chris Powers: That's a deal. 

Alex Nyhan: Okay. So, we look at economic history to try to help us make decisions, back to the whole intellectual modesty piece. So, people with college degrees, their incomes demonstrably have outpaced inflation decades, decades, decades, decades, one over the other in the United States. And unfortunately, our fellow citizens that don't have college degrees, their incomes have fallen further and further behind. So, if you want to have a customer that's got spending power when the economy is in a bad place, you need to have a lot of college degrees. It's just that simple. 

Chris Powers: I'm awake. 

Alex Nyhan: Still awake. 

Chris Powers I'm here. I'm here. Is what you're looking for... 

Alex Nyhan: I think... I'm probably going to get this wrong, but I'm pretty sure the compound annual growth rate of college educated incomes has been like 100 bps plus higher than inflation on a multi-decade run.

Chris Powers: Is what you're looking for, could that be in any city? Because every city has ab area like that. So, you're not really constrained to the blue chip cities of the country. You're constrained to a certain demographic. So, you can literally be in any city in the country? 

Alex Nyhan: We could, hence my Kansas City example. That's exactly right. And I think that's one of the- the source of freedom that you have as a private real estate owner that if you’re REIT or a publicly traded company, sometimes the coastal markets are fashionable because that's what the analysts want you to buy. Then all of a sudden, they hate the coastal markets and it's all about sunbelt, and all of a sudden, you have to show that, oh no, just kidding, we actually are really long the Sunbelt. You know what I mean? So as a private owner, we can invest coastal, Sunbelt, the Midwest. Some of our best investments have been in the Midwest. I'll give you one example. If you look at our shopping centers that collected 100% or 99% of rent during COVID, they were either in the Midwest or places where the population density and supply constraints were just like an overwhelming combination and people just kept going to shop. 

Chris Powers: Is there any- we won't pick on any city, and we talked a lot about development and government. Especially in multi, like government in some places is getting more and more entrenched. And we don't have to pick on any one city, but is that something you think about at all is how a government behaves in a certain...? 

Alex Nyhan: Yeah, I think it's poignant for me to have to say this, but the government's approach to retail, we own, I'll just put it like this, we own one shopping center in Washington, DC. And the place we own it is in a really, really super wealthy area where the prospect of government intervention is almost impossible to imagine. But I remember one of the TIF deals I did actually in the mayor's office was to bring the first Target to Washington DC. Part of that TIF deal, and it was a thoughtful deal for all sides. It really made a lot of sense economically for everybody. But part of that deal was the city required that certain shop spaces be reserved for certain preferred demographics or first-time business owners or whatever. It's like the best of intentions to make it an inclusive project that everyone could believe in. Unfortunately, because of that constraint on what otherwise could have been a market-based leasing process, several of those units remained vacant for years and the units that didn't have the restrictions were occupied. But I think to answer your basic question, is there sort of government intervention on the horizon for retail in any quantum that's similar to multi? No. The governments actually know that the only way you're going to get greenfield development for retail is with TIFs or similar public incentives because of the rent cost equation. If you think about retail centers in the most basic sense, if you're a government official trying to balance the books, which I have empathy for, if you have a new apartment, you might have people that need fire services or schooling services and so forth, whereas if you have a shopping center, you just have businesses that pay taxes. So, it's a very different type of relationship. 

Chris Powers: When you're looking for one of those trade areas, do you want to see that it's already proven that trade area over call it a decade or multi-decade? I'm sure you've heard of Frisco, Texas, maybe one of the fastest growing cities in the country. Would you look at a place like that that has a lot of what we look for, but it's still early, it just popped on the scene? 

Alex Nyhan: We do look at those locations selectively, but I'll say the vast majority of our exposure, for us, older is better. Like 99%, I think it's the last time I checked the stat, of our properties have been just where they are for decades. And the reason we like that is not just the competitive moat aspect of it, but we think if a neighborhood center feels like the center of a community, not where you do commerce only, but where maybe you would take your mom for a brunch or you take your kid after a soccer practice, et cetera. We think there's a greater loyalty that will cause, especially nowadays when consumers are being, even our, quote, wealthier customer, everybody's making choices to deal with inflation and pricing. So when people are making those choices, you want to be the one they choose. So we think having that emotional resonance is part of having been in a community for a long time. I'll give you an example in Kansas City, Brookside, where we own. Brookside was built, I think, in 1917. Quick funny anecdote. So 2014, I'm in Kansas City, Missouri, meeting with the Brookside business owners, and they have these awnings that I just didn't think they were the best awnings, no disrespect. I had this cool rendering showing how we're going to make them all black and more contemporary and stuff. I was like, shouted down. I'm just thinking about this, why am I going to change these awnings? All we're going to do is spend our money to make the business owners frustrated. The awnings are still the same two colors they were 11 years ago. 

Chris Powers: Let's maybe end a little bit on you are on the front lines, you get to see consumer spending through your stores. 

Alex Nyhan: Yes, we do. 

Chris Powers: I feel like every day, especially in the real estate world, there's like months where I'm like, it's coming back. And then like a month later, it's like, I don't know. Right now, it feels like we're, at least what you read is the consumer is slowing down. Is the consumer slowing down?

Alex Nyhan: The average consumer is for sure slowing down. So, I think you have to decompose the consumer into its... 

Chris Powers Which has been bifurcated even more. 

Alex Nyhan: Super bifurcated. Unfortunately, like a lot of things in our country, there's a fairly big spread. And so, our consumer is the top quintile. And if you look at top quintile sort of medium and more modest consumer, the more modest consumer has always been struggling. It's the consumer in the middle to down whose fortunes have really nosedived in the last six-ish months, unfortunately. So, for retailers whose key business is serving that consumer, those consumers are rates of default on auto loans, on credit cards, unfortunately and very poignantly, even folks who do use the buy now, pay later service, 25% of the folks who use that service to buy groceries, they're doing it because they have to buy groceries on installment, which is like just awful to think about. Imagine being a parent and being like, shoot, now I have to pay down my grocery bill over several weeks. So, for us, it hasn't- really, the way that the current macro environment has affected us is more that we're starting to see some tariff-related impact on construction costs and supply chains. We have not seen literally any, well, let me be precise, with the exception of one deal that died because the company's market cap tanked on liberation day, the remaining hundreds of leasing deals we've been talking about, there's been zero effect of tariffs. And I think the reason there's been zero effect is our tenants know that their customer in our trade area is strong enough to spend money there, number one. And number two, those tenants candidly are nervous about getting frozen out when the opportunities are so few and far between for them because there's been no supply growth. But I do think the medium customer is, as you probably know, consumer sentiment is at its second to lowest that it's I think ever been since they've recorded it, the lowest was June ’22. So, it's like people have a COVID level of panic in terms of affordability issues right now. 

Chris Powers: And so, what you're seeing, that tariffs have created inflation or pricing up even on just the construction side, maybe not on the products that you're... 

Alex Nyhan: They're affecting steel, aluminum, wood, et cetera... Ultimately, that effect should work its way through to affecting asset pricing to a degree because if you think about it, if you have a model and you have to increase your cap ex, obviously, you're going to reduce your ability to pay. But there hasn't been a consumer impact yet for our consumer. I can tell you one other quick data point too. I was at the ICSC Board of Trustees in May and went around and heard from literally every single retailer that was in the room. Not one was slowing down growth plans because of tariffs or the consumer impact, however you want to characterize it. 

Chris Powers: When you hear things like we are headed towards a series of interest rate cuts, does that... I think when you talk to people that aren't in real estate, it's like, that's going to be awesome for you. 

Alex Nyhan: I'm just like, it just makes me so nervous to hear that. I'm just so nervous about it because...

Chris Powers: It's a leading indicator? Or maybe it’s a lagging indicator.  

Alex Nyhan: For me, the credibility of our monetary policy is, it's like the foundation that sits underneath asset pricing. I'm not looking for the government to bail me out with a lower interest rate. You know what I mean? I'm looking for the government to have stable, consistent, responsible choices where inflation doesn't get out of control. For me, the biggest thing that I worry about is inflation somehow breaking out of a constraint and going back to the, whatever, 30, 40 years ago, some of those inflationary dynamics. I'm really pretty indifferent, honestly, about if there's a little bit of a rate cut here or there or even a rate increase. The main thing is I just want to make sure that the Fed focuses, as they call it, on price stability, on fighting inflation. 

Chris Powers: Is there anything else just about the market in general that you think about that I haven't asked? Is there anything on your mind? 

Alex Nyhan: No, I think there's- sure, there’s a lot that I think about. I think maybe just sticking with open-air retail for a second, one of the fascinating dynamics that all of us landlords need to contend with is that people are lonely in this country, well-documented, and as business owners, it's not that we're- we’re not social workers. But if we know that people are less satisfied doing any of these tasks by themselves at home, like shopping, working, praying, et cetera, so that the more sort of human interaction that we can promote at our centers, the more likely we'll be to get foot traffic. And our statistical analysis shows that you can draw a direct line from foot traffic to sales and value growth. So, we're very focused on, at the margin, if we can lease, no disrespect to a cell phone store, but if we can lease to a cell phone store or to a user that can help us with the human dynamics, that's going to be part of our decision-making. And I think in a larger sense, overall as real estate investors, I think, and I don't mean this in a political sense, but in general, there's been a disappearance in this country of the middle, of where rational experts or people who do this for a living can keep some of the populist, very understandable concerns at bay, whether they're from the left or the right. And I'd love to see just a recommitment to, like if I'm going to go get a heart operation, I want someone who knows how to fix hearts to cut me open. You know what I mean? 

Chris Powers: Key qualification, has worked on hearts before. 

Alex Nyhan: Maybe done a couple of them before would be sweet. I'd love to see us as investors be able to enjoy just more nuanced, reasonable, common-sense decision-making that both sides can agree on. 

Chris Powers: Alex, I think that's a perfect place to bring this conversation to an end. 

Alex Nyhan: This studio is so amazing. I don't want to leave it. 

Chris Powers: We can just sit in here. We don't have to leave. Thanks for joining me today, man. 

Alex Nyhan: Oh, my pleasure, man.