Triple Net's Louis Rogers

GlobeSt.com: Last year was a busy one for you, wasn't it?

Rogers: It was. It's actually the second year of dramatic growth. In 2005 our overall equity was $495.5 million, and in '06 it was $540 million. That's nice solid growth. The industry as a whole grew from $3.2 billion in '05 to about $4 billion in '06.

GlobeSt.com: Can you speak a bit about the maturation process that the sector has seen over the years?

Rogers: Tenants in common grew out of syndications with a little wrinkle, which was that you could exchange into a property and defer your taxes under 1031 of the internal revenue code. It was a fairly novel concept, to take a partnership syndication and make it into tenants in common, and at first TICs were viewed skeptically by lenders, by investors, by broker/dealers and by others in the investment community as something that was fairly quirky and unknown. Not surprising.

GlobeSt.com: It doesn't help that there's no focused entity.

Rogers: That's the hardest thing for people to grasp. There's no partnership or corporate entity. It's really a number of owners in a single building, and the face is the sponsor, such as Triple Net. It took time for the financial world to understand that we are allowed up to35 TIC owners in a single property. They've delegated a day-to-day property manager, such as us, and when it comes to servicing the loan and maintaining the property and all the things that are ancillary to the real estate, we are that face.

GlobeSt.com: Hasn't there also been an up-tick in the quality of properties?

Rogers: In the '90s many TIC programs were value-add in secondary or tertiary markets. Many still are, of course. But in many cases, the properties have become institutional- and trophy-quality with investment-grade credit tenants. Some of the best properties in America--123 N. Wacker in Chicago, for instance--was at the time the largest TIC program in the US at $174 million. Any REIT fund or private equity group would be happy to be involved with that. That's in sharp contrast to the smaller, value-add properties that we cut our teeth on.

GlobeSt.com: But value-add certainly has its place, no?

Rogers: It's better that a TIC program be a stable, high-quality property, rather than a value-add property with a lot of lease-up and tenant improvement. That's in large part because of the debt, since most tenant-in-common programs are financed with Wall Street money. It's better to have a stable property where you can predict the need for cash and you can budget for it and reserve it at closing. For the most part, the industry has come to the same conclusion. Along the way, we've competed with some of the largest buyers in the country--funds, pension plans, REITs. There's no difference between what Triple Net will acquire and what some of the most familiar real estate companies will buy for their programs.

GlobeSt.com: Let's talk about the high point of last year, the 144A private equity offering. What does it do for you?

Rogers: We completed the 144A transaction with Friedman Billings Ramsey & Co. as the placement agent. We raised about $160 million from more than 50 institutional investors and created a new parent organization, NNN Realty Advisors. NNN owns 100% of Triple Net, which is the sponsor company; Triple Net Properties Realty Inc., the brokerage company; and NNN Capital Corp., the broker/dealer. We'll file an S-1 registration statement with the SEC by April 30 and plan to be on a national stock exchange by the end of the year.

GlobeSt.com: How would you value the company at that point?

Rogers: It hasn't been decided. We could simply become a public company and list on an exchange or we could do an IPO and raise additional capital. Those are things for our independent board and they have not been decided.

GlobeSt.com: Certainly, this is not common for sponsors.

Rogers: WP Carey is public, but they're not in the tenant-in-common business. We'll be the first of our kind to be public and have transparency and independent directors and all that sort of thing.

GlobeSt.com: It's an increasingly private world. What do you gain by going public?

Rogers: There are two things going on. First, we want to elevate NNN and its constituent companies. We want the recognition and presence that you can have only by being a public company. We want to comfort the broker/dealers who sell our securities. Doing that, our sales of securities will increase dramatically over time.

GlobeSt.com: Let's talk a little about the apartment and the office REIT.

Rogers: Both REITs were registered last year. They're just really getting started now in their capital raising. I am president and I'm on the board of the apartment REIT. We're very bullish on apartments, in large part because of demographics. There's a trend toward staying in apartments a little longer since it's not so easy to buy a starter home. We're seeing meaningful rent growth in our portfolio. We have about 6,200 apartments and we're growing between one and three communities a month.

In terms of the healthcare/office REIT, investors understand apartments but they struggle with office. They also understand healthcare. The typical investor is over 50, and they understand hip and knee replacements. As that segment of the economy grows we want to own the real estate that services them. By blending regular office with medical office we can blend risk and return. Healthcare is very stable. Once they're in a building, they stay for ever. The turnover costs--TI and leasing commissions--are much lower, but they also have flatter rents and smaller increases over time. Office properties might have more upside, so by blending the two we can get a desired return and make our investors very happy.