OAK BROOK, IL—As a REIT, locally based RPAI is focused on driving NOI growth via multiple paths throughout the portfolio management process. In past stories, EVP, COO and CIO Shane Garrison has explained that major tenets of that initiative are remerchandising and a focus not on the existing retail configuration, but on the underlying real estate. In this exclusive interview, he now takes us behind those concepts to explain how they work.

GlobeSt.com: How do you choose a prospective acquisition based on its potential for long-term value?

Shane Garrison: Obviously we start with the 10 markets we've identified as part of our long-term strategy, our core markets. The two most important considerations when looking at an acquisition are existing sales and underlying real estate quality. We want to feel strongly about the existing sales, and really understand what drives the site long term. [Editor's Note: Those markets are Seattle; Phoenix; Dallas; Austin; Houston; San Antonio; Chicago; Atlanta; Washington DC/Baltimore; and New York City.]

It's hard to overcome a site that has historically weak sales as it is typically not based on a fundamental configuration flaw. On the other hand, if a site has one or two really strong lead tenants, we try to understand why the sales are exceptional, and the disconnect with other seemingly weak tenants and sales productivity.  We then look at what we can do long-term to increase the overall profile of the center through retenanting remerchandising or some form of redevelopment

GlobeSt.com: What's the tipping point? When does a retailer become too big a risk?

Garrison: It's relative to the submarket occupancy, and market rents versus what's in place now. Ideally, most of the tenants are below market in a tight supply environment and we feel strongly about our ability to drive longer-term rent and increase sales. It becomes tougher when there are one or two lead tenants that are doing great but they're at market already from an occupancy-cost standpoint, or tenants that are doing poorly and they're paying at, or above-market, relative to what we think we could reset. For us that becomes the tipping point. It's a great question. If we can't drive rent through existing low relative occupancy cost(s), or we are not below market, it's tough to underwrite confidently and invest in those deals.

GlobeSt.com: Is it your responsibility to increase lackluster retail performance or remerchandise?

Garrison: Helping a marginal retailer is a very tough road to travel. There are a myriad of issues and while we understand retail, we aren't retailers. In this market, it's all relative to where you are in the cycle. If you have sites where there is optionality and a tight supply environment like this, especially in our core markets, clearly our time is better spent looking at remerchandising, driving rents and better uses through that process.

GlobeSt.com: Give us some examples of some successful projects you've completed this year.

Garrison: The largest ongoing effort this year relates to our broader remerchandising efforts. We have recaptured a little over 500k SF this year, much of it in Q2. To date we have relet approximately 300k Sf of that inventory. Through that process we have reduced our exposure to tenants and those categories on our watch list while driving significant rental comps as well. At Q3 we had achieved comparables in that pool of 20%+. At the individual asset level, we closed in January on a center in Gaithersburg, MD, that was recently developed and occupied in the 60% range. It had very strong in-place sales, so we are focused on finalizing the merchandise mix based on our vision for the center, leasing around those uses and tenants that are doing very well. By year end, we'll be occupied at 90%…and that's been less than a year.  Now it's a site with very strong entertainment and restaurant sales and certainly a great residential component—with approximately 2,200 units expected at completion.

GlobeSt.com: What's a typical upcharge in rent?

Garrison: As our portfolio continues to shift into our 10 core markets and supply remains tight we are seeing tangible growth and compelling rental comp trajectory overall. Over the last the last few years we have run 5-7% rent comps annualized. Over the last few quarters we have been at or near 10% blended which includes new and renewal leases I think this speaks to our aggressiveness, local knowledge and quality overall. 

GlobeSt.com: How do you define long-term?

Garrison: Companies in our space view it differently, depending on individual investment thesis, cost of capital, and risk tolerance. For RPAI we are not merchant developers and as such, we generally target assets we want to hold forever, or generational real estate. With that thought process in mind, we focus on the right submarkets within our 10 core MSAs. We use our knowledge on the ground to filter through that process quickly and efficiently. And that's a unique skill set for us. Our teams on the ground have grown up in these markets and they bring a unique knowledge of the local conditions, and deep understanding as to what drives certain submarkets and locations within those markets. When you think about buying real estate for the long term, we want to use our local real estate intelligence and relationships to drive rent and ideally add density over time. 

GlobeSt.com: Why is it better for you—generally, because you've done both—to remerchandise than redevelop?

Garrison: As a public company we are measured on several metrics, but the most critical are responsible capital allocation and tangible NOI growth. In a portfolio of scale there are multiple components to that effort, largely driven by contractual increases in our current leases, as well as occupancy gains, remerchandising to drive outsized rental increases, and redevelopment. At this point of the cycle, we continue to complete a high level of remerchandising while supply remains tight and we can drive significant rental increases, while also improving the merchandising mix and the growth and credit profile of the overall portfolio. From a true redevelopment and development standpoint, when we do redevelop we undertake anything from simply adding in-line GLA to an existing center, to adding pads all the way up, to scraping the site and adding significant density. The largest projects we have in the pipeline today involve those that are infill and or transit oriented wherein we will redevelop through the monetization of air rights for a vertical residential component.

GlobeSt.com: When we've spoken before you've mentioned your focus not so much on the retail as the real estate. But how can you separate the two?

Garrison: You really can't. But you can ask yourself why does a retail site work long term? For example, is it a TOD or infill site with significant long term value drivers, or a power center in a low growth market? How does the city or county think about the site longer term? What are the real barriers to entry that make that site more desirable to our retail partners? These are all important considerations as we look at long term investments.

GlobeSt.com: So it's still a good time to be a landlord?  

Garrison: It's a great time to be a retail landlord of scale and quality. The biggest opportunities for us remain in the small shop space and I think we can get another 2% to 3% in occupancy from where we are today. That represents another $10 million or so in base rent before we get to stabilization. We also continue to be very focused on driving contractual annual increases in our leasing efforts and the overall environment is conducive to that effort. We are in a place where occupancies are at historically high levels and we believe new supply will remain very tight. Accordingly, we continue to focus on driving rents, not occupancy.