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INSTITUTIONAL INVESTORS 90 • SHOPPING CENTER BUSINESS • December 2017 HARVEY : The biggest concentration of- distress is in apparel, lifestyle tenants. We have several lifestyle properties and they have a higher concentration of those ten- ants. Typically, we went after these assets because they were the dominant center in their markets and because they contained a strong diversified base of the uses that are doing well today: restaurants, enter- tainment, health and beauty, fitness, fast fashion and 'treasure hunt' retailers. Usu- ally if it's a fundamentally good asset in a good market, then we're finding that we can replace those faltering apparel, life- style tenants with other tenants that are performing well today. I guess the ques- tion that we will have to face will be; when do we have too high a concentration of restaurants? VALERO : Are you concerned about restaurants? HARVEY : It's funny — with all of these properties that I'm involved in, the restaurants are leading the charge. They are tremendously top performers. In five years, ask me again, but at least now we are replacing apparel retailers and putting in both national and local restaurants that we consider to be good traffic generators. Lifestyle centers all want the new unique tenants like Warby Parker, Bonobos, Ken- dra Scott, Soft Surroundings, Athleta, so we are trying to attract them as well. HERRING: I can provide an alternative view about the risky side of restaurant leasing. My concern is the high develop- er contribution to the build-out of these restaurants, because my timeline just to repay my investment gets to four years and even up to five years, and you think, 'is this restaurant concept going to be rel- evant five years from now after I just get my original investment returned?' A lot of restaurants may not. I look at restaurant operators it as a three-legged stool. One, the restaurant has to have good food at a good price and good service. Two, they have to be good at opening restaurants; we've had several failures where the restaurateur didn't know how to build out his restaurant, spent too much money and he was effectively out of business be- fore he served his first meal. Third, they have to be good business- men, and many times a restaurateur fails to manage their finances effectively. If any one of those three legs of the stool fall out, then the restaurant closes. Today, a developer's proforma is so tight, that you can only toler- ate one or two failures before the profitability of the development vanishes on you. If I put a bunch of money into a restaurant and it fails, then that restaurant has negative value. Every dollar you contributed to that restaurant has to be torn out for the next restaurant. Then it costs more money to put a new restaurant in there. When we hit a recession, if a couple of your restaurants fail, then it's going to hurt. RAGLAND : There's always a decision that you have to make between chef-driven concepts and national chains. Chef-driv- en concepts often work for the first two or three concepts, but they're awfully dif- ficult to scale and therefore you do run a risk of having them go under after two or three years. The national chains are ones where the price points fit most of the centers that we own; they're predictable and you've got credit, which is safer at the end of the day. You always want to have a mix of some local and some national to create consumer interest and variety. We still feel most comfortable with national restaurants. HARVEY : We have not done any chef-driv- en concepts; we're talking about either national tenants or known local operator concepts that have proven track records and verifiable performance histories. I would agree with you. It's always excit- ing to try to be the first property with a chef-driven restaurant until the rent doesn't come. CLARK : In many cases, you want unique restaurant concepts in your property — something that is going to bring your consumer in and provide an experience. Every decision is also a financial decision and when you are talking about a unique restaurant, often the operator has little in the way of credit. It is a balance between the national chains that have credit and are more predictable and the creative con- cepts that may be a better draw to your center. Restaurants in general are subject to the whims of the public and often re- quire re-tooling, which can mean more investment on the part of the shopping center owner. FRYER : We've been positively surprised over the last few years with the stability of restaurants. We're probably spoiled a bit as we go into the upcoming years where we'll likely see increased expensive turn- over. At some point a couple years ago, restaurants reached the point of satura- tion. They're just eking out 2 or 3 percent overall comp sales growth at this point and are experiencing really squeezed