First National Realty Partners (FNRP) was one of the most active buyers of grocery-anchored shopping centers in the U.S. in 2021. The Red Bank, N.J.-based investment firm was one of only a handful of private investors to make real estate data firm’s Real Capital Analytics’ list of top acquirers in a sector dominated by institutional investors.
Founded in 2015 by Tony Grosso and Chris Palermo with a property-agnostic investment strategy, FNRP now invests exclusively in necessity retail. The firm owns approximately 50 grocery-anchored properties in 19 states. The portfolio, totaling 7.5 million sq. ft., is valued in excess of $1 billion.
With a team of more than 90 people, the vertically-integrated FNRP handles all acquisitions, asset management and leasing and property management internally. The acquisitions team, led by Chief Investment Officer Jared Feldman, vetted hundreds of deals throughout 2021 and beat out well-established REITs and cash-flush pension funds to nearly double its footprint (based on square footage).
And now, just a couple of weeks into 2022, FNRP is anticipating another big year. With several deals already under contract, the firm’s growth will likely include new markets and new investors—perhaps even an institutional partner or two.
We recently spoke with Chris Palermo and Jared Feldman about the firm’s investment strategy and its plans for the new year.
This Q&A has been edited for length, style and clarity.
WMRE: What is FNRP’s investment strategy?
Chris Palermo: We invest exclusively in necessity retail, primarily grocery-anchored centers. Our deals range from $15 million to $40 million and include both stabilized assets and value-add properties.
Jared Feldman: We’re very disciplined in what we acquire. We have very stringent criteria and have to see key drivers related to age, population growth and income. We want to invest in centers that are close to consumers and fulfill essential needs.
WMRE: What was FNRP’s original vision and mission?
Chris Palermo: When Tony and I founded FNRP in 2015, our vision was to provide high-net-worth individuals and family offices with the opportunity to invest in institutional-quality real estate without having to buy equities (REITs and Index Funds). Though we were property-type agnostic, we had a preference for multifamily.
We came across an opportunity to invest in a smaller CVS-anchored center. CVS had about two years left on its lease, so we reached out directly to CVS and negotiated a 10-year-extension. From that moment on, we had the necessity retail bug. From there, we built a relationship with the CVS’ head of real estate and put together a few more CVS deals before deciding to focus primarily on grocery-anchored centers.
The reality is that owning grocery-anchored properties will give you fewer headaches than owning multifamily because you’re dealing with institutional-quality anchor tenants and long-term leases.
WMRE: What type of investors does FNRP target?
Chris Palermo: We started out with friends and family, and over time, as we did more deals, word spread and our investor base has grown organically. We now have about 1,200 investor partners, all individuals and family offices. No institutions. We have roughly 1.5 times more equity than we have deal flow. Most of our investors are repeat customers and invest in three or four deals. Our minimum investment is $50,000, and I’d say most investors put in $200,000.
WMRE: Do you anticipate your investor base will change in the near future?
Chris Palermo: We will continue to invest with individuals and family offices, and it’s possible that we’ll invest with institutional capital in the future. We get calls from institutions every day, and we will continue to have conversations with them because I can imagine a day when those relationships will come in handy, particularly when we want to take down portfolios. We want to acquire some large portfolio deals. If we find one, we’ll figure out a way to get it done.
WMRE: How does FNRP raise equity and attract new investors? What kind of investor outreach does the firm conduct?
Jared Feldman: We raise money for each deal utilizing direct response marketing. We buy ads on social media platforms, host webinars and podcasts and provide other types of educational material. At the end of the day, our goal is to try to educate investors. That’s the first step.
Chris Palermo: We have an investor relations team dedicated to building relationships and answering questions. We also have a technology platform that allows us to automate when we reach out to our investor partners, and we conduct webinars to unveil each deal.
WMRE: What is the range of returns that you expect on your investments?
Chris Palermo: Between 6.0 percent and 9.5 percent on annual cash flows, and IRRs between 11.0 percent to 17.0 percent.
WMRE: What is your average hold period?
Jared Feldman: Every deal is different, so we have different hold periods for each property.
WMRE: What is the most common way that you structure deals?
Christopher Palermo: Currently, they’re all structured as LPs.
WMRE: How has the pandemic impacted your investment strategy, as well as your existing portfolio, and your relationship with investors?
Christopher Palermo: The first two months of the pandemic hurt—we briefly transitioned from a commercial real estate firm to a disaster relief organization and reached out to our mom-and-pop tenants to help them get PPP loans and help them with their leases. The amount of goodwill that we generated during that time really changed our business and strengthened the relationships we have with our tenants. Some tenants did leave during COVID, and we’re now backfilling that space at rents that are three to four times higher.
From an organizational perspective, the pandemic has been a gamechanger. Instead of looking for candidates that could go to our office every day, we decided to go fully remote and focus on competency, talent and whether they fit the DNA of the company. We source candidates nationally, and our people are scattered across the U.S.
WMRE: What markets are most attractive to FNRP?
Chris Palermo: We invest across the U.S., focusing on primary markets (mostly suburban locations) and secondary markets. We don’t have any geographic preferences; instead, we rely on our tenant relationships. We go to the horse’s mouth—our tenants—and ask them about their best performing stores. We want to own the number one or number two center in the market. If we can’t get intel from our tenants on a deal, we’re not going to take the risk. If you buy a bad deal, you slow down your entire team, from leasing to asset management.
WMRE: FNRP is a fairly young company—what has been the biggest challenge so far?
Chris Palermo: We are a young company, but we’re a young company with a seasoned team of real estate veterans with centuries of cumulative experience. Our biggest challenge has been, and continues to be, sourcing deals—that is the most important part of the business. We’re committed to figuring out how to get better every year.
WMRE: The grocery-anchored retail sector is one of the hottest and most competitive asset types. How is FNRP facing competing buyers?
Jared Feldman: We’re going head-to-head with some of the biggest institutional buyers and coming out on top. When we see a deal that we’re interested in, we send out our strike force—our asset management team—to evaluate it. We do the underwriting upfront, and we’re fast and nimble. On a lot of deals, we’re getting first and last looks. Brokers love that we come to the table prepared and don’t retrade.
We’re looking at several hundred deals a year and passing on most of them. We buy on-market and off-market. We focus a lot on sellers that we’ve transacted with in the past, and we’ve asked our tenants about their best centers and reached out directly to owners and walked away with a new addition to our portfolio.
We’ve also taken advantage of the opportunity to acquire centers from institutional investors that decided to reduce their retail exposure or exit certain markets. For example, we bought The Shoppes at Cross Keys, a dual-anchored shopping center in Missouri from an institution. Schnucks and Home Depot anchor the center, which was 93 percent occupied at acquisition. We brought in our leasing team and now we’re almost fully occupied.
WMRE: What differentiates FNRP from other investment firms?
Chris Palermo: Our team is a huge differentiator. It is very difficult to become a member of the FNRP team. We have a six-step hiring process, and every person must have retail expertise and be a match for our core values. We have fewer than 100 people, but they could do the work of 200. We’re all rowing in the same direction, and we have a massive amount of buy-in and enthusiasm. Our people are accomplishing more than they thought they were capable of, and their hard work is evident in the deals that we’re doing. They deserve to be recognized.
Another differentiator is our speed in making investment decisions—the process of underwriting and due diligence. We also offer surety of close and find ways to create value where others can’t. A great example is our acquisition of City Center Crossing in Sandy Springs, Ga. It’s a Lidl-anchored center that was 77 percent leased. Before we closed, we negotiated to bring in a national tenant that added millions of dollars in value to the center overnight.
WMRE: What plans do you have for FNRP in 2022?
Chris Palermo: In 2021, we exceeded our acquisition target by 70 percent, buying more than $500 million in assets. As far as our target for 2022, I’m superstitious, so we’re just going to have to see where we land. Ultimately, I don’t care how much we acquire because it’s more about the quality of what we acquire, not the quantity. We’re not interested in doing deals. We’re interested in doing incredible deals. We don’t want to be known as the biggest operator in the business. We want to be known as the best.
WMRE: What is the biggest success that the company has experienced? What is the biggest failure?
Chris Palermo: I feel like we’ve disrupted the industry by finding a way to compete and win against institutional investors—REITs and the like. We’re the little guy beating the big guy. That’s a success.
As far as failure, we haven’t had any big setbacks, though I don’t think we’re sourcing enough deals. To be fair, we could look at thousands of deals and that still wouldn’t be enough for me. We’re like prospectors—we’re always searching for that next gold nugget.