6 Questions for Cole Real Estate's Tom Roberts

PHOENIX – Local Cole Real Estate Investments acquires income-producing commercial real estate assets, targeting primarily net-leased single-tenant and multi-tenant properties boasting long-term leases with creditworthy tenants. The Cole’s portfolio also contains single-tenant office and industrial properties. Executives with the company have been busy during 2011, acquiring assets nationwide. Thomas W. Roberts, Cole’s EVP and head of real estate investments took some time to discuss the current market, Cole’s strategies and what to expect in the near term.

GlobeSt.com: What is Cole’s acquisition criteria, and how has that applied to some of your recent deals?

Roberts: Our business model focuses on acquiring quality commercial real estate, leased to creditworthy tenants under long-term net leases. We invest across a number of industry sectors including retail, industrial and office. Our foundation was built on discount and value-oriented retail tenants because of their “necessity” based business models and their earnings endurance, even through recessions. This has been expanded to include strategic corporate assets in the office and industrial sector. We will also invest in power centers and grocery anchored centers which have multiple national or regional anchor tenants that contribute the majority of the center’s revenue.

A good example of this is Winchester Station, a 98% leased, 169,000-square-foot power center in Winchester, VA that we acquired in October. The center includes a strong tenant line-up of hhgregg, Michaels, Ross Dress for Less, Old Navy, Ulta and Bed Bath & Beyond – all leaders in their respective retail categories. The national and super-regional tenants at the center account for more than 90% of the rental income and occupied square footage, and more than 70% of the GLA is attributable to tenants that are deemed creditworthy. Additionally, the center is located in the area’s prime regional retail corridor, just west of Interstate-81.

GlobeSt.com: Where, from your perspective, are the opportunities in retail?

Roberts: Based on our experience and track record, we continue to believe opportunities exist in retail for single tenant assets, power centers and grocery-anchored centers. Areas where we see additional opportunity include build-to-suits, as well as re-positioning and re-capitalization of multi-tenant centers.

We have formed partnerships with RED Development in the West and North American Properties in the Southeast to provide local expertise while we leverage our capital position and underwriting processes. In many instances, we envision the multi-tenant centers to have “value-add” opportunities in leasing or future development. We have also talked to several retailers about providing build-to-suit development capital as they begin to expand. Earlier this year, we worked with Continental Properties on a build-to-suit for Kohl’s.

GlobeSt.com: Some of your buys this past year have involved sales-leaseback transactions. What are the advantages of such transactions?

Roberts: Executing a sale-leaseback can provide a company with fixed-rate, long-term permanent capital, control of the asset for 20-plus years (with extension options), 100% financing, an increased rate of return on real estate equity that is monetized by putting it to work in the business, and the ability to pay down existing bank debt. From an investor standpoint, we are able to negotiate terms that are important to us with a new, long-term triple-net lease.

GlobeSt.com: I see Cole is also investing in the office and industrial sector. How much of your portfolio does this represent, and what is the acquisition strategy?

Roberts: We still anticipate the majority of our investments to be in the retail sector of commercial real estate going forward, but have found success applying the same investment strategy to the single-tenant office and industrial sectors. Across our consolidated portfolio, we have 64 “necessity corporate” properties totaling 15.5 million square feet and valued at more than $1.8 billion across 30 states. Cole’s office and industrial portfolio is actually larger than some publicly listed office and industrial REITs. As corporate America continues to recover, we anticipate additional opportunity with sale-leaseback transactions, build-to-suits and capital contributions.

Some recent transactions include the 356,000-square-foot PetSmart headquarters in Phoenix for $102.5 million, a 496,000-square-foot Walmart freezer and cold storage facility in Riverside, CA for $91.5 million, the 600,000-square-foot sale-leaseback of Apollo Group’s University of Phoenix office complex in Phoenix for $170 million and a 719,000-square-foot ConAgra Foods distribution facility in Milton, PA for $28.5 million.

GlobeSt.com: What are some of the challenges these days when it comes to real estate investment, especially in the sectors in which you're involved?

Roberts : We are seeing increased competition on one-off deals in the single-tenant retail sector as individual investors seek quality investment opportunities in a lower price range. They may not have the resources to buy a shopping center or an office building at higher price points, but they can buy a Walgreens or Advanced Auto retail outlet because the deal size is within their budget or 1031 exchange requirement. At the same time, there continues to be little new development, resulting in less available product in the market. While some retailers are beginning to ramp up their expansion efforts, we won’t see this product for a year or two.

We are seeing more quality product come to market in terms of multi-tenant retail and larger single-tenant portfolios, increasing the volume of these transactions. These larger opportunities require more underwriting and due diligence. The experienced team we have in place and proven process allows us to screen more deals and we are then able to pick and choose the deals that best meet our acquisition criteria and investment strategy.

GlobeSt.com: Without giving away trade secrets, can you tell me what Cole has done to position itself during the recent downturn and how has it been positioned for the recovery, whenever that will occur?

Roberts:  Our experience in investing in commercial real estate through diverse economic and interest rate cycles for more than 30 years has helped refine our conservative strategy, allowing us to grow while others faced hurdles. Because we focus our acquisitions on assets with creditworthy, “necessity” tenants under long-term leases, our portfolio has shown a relatively low degree of volatility.

Our investment strategy is defined by stringent underwriting standards, which did not waiver during the recent downturn. We conduct extensive underwriting, due diligence and on-site property inspections with every asset we acquire, and maintain our focus on tenant creditworthiness, property type and location, and lease terms.

I believe that one of the key factors that will sustain our success is the reputation we have built as a credible buyer with significant access to capital. Sellers know that Cole will close on its deals. We have sellers choose us over other buyers because they have confidence in our ability to close on the deal. Another important factor is the strong relationships we have built with the real estate brokerage community, developers and financial institutions. We feel like they view us a partner and that contributes to all of our success.

GlobeSt.com: What is your market outlook, and what will your strategy be in the coming months?

Roberts: In addition to core product acquisitions in retail, office and industrial, we are starting to see increased activity with sale-leasebacks. We have recently completed sale-leasebacks with several restaurants, a warehouse club, convenience stores, grocery stores and office buildings. The last few months have also seen an increased interest in build-to-suits of corporate facilities. We believe this area will continue to grow as the economy recovers, allowing us to build a pipeline of products for 2013 and beyond.

After acquiring $2.5 billion of assets last year, we are on target for $3 billion of quality acquisitions in 2011. Of our total acquisitions, we expect approximately 50% to be in single-tenant retail and 25% each in the multi-tenant and office and industrial sectors. Assuming market fundamentals remain positive, in 2012 we anticipate that we will maintain or exceed our pace for this year. We plan to focus on the same core property types going forward, but the percentage mix of product type could change. 

To expand acquisition opportunities, we have a programmatic effort for the re-positioning and re-capitalization of multi-tenant centers. With some of these opportunities, we may form a joint venture with a regional firm that can provide local expertise while we leverage our capital position and underwriting processes.