Cole's Sense of Purpose

"Cole's long-term focus has been, and continues to be, helping individual investors become the landlords of America's industry-leading corporations."

The words of company founder and executive chairman Christopher Cole sum up the 33-year track record of Cole Real Estate Investments, among the industry's most active buyers of singletenant properties, and the affiliated Cole Capital, which sponsors the non-traded REITs that are the vehicles for those individual as well as institutional investors. Cole-related entities now own and manage approximately 60 million square feet of commercial real estate in 47 states; the company has built up that portfolio conservatively and painstakingly, with a combination of discipline and purpose.

Playing the roulette wheel is not Cole's style; it zeroes in on strong, stable cash flow. "We obviously have a very small box, focused primarily on single-tenant assets, so it's hard to stray too much into other areas that have more risk," relates Thomas W. Roberts, executive vice president and head of real estate investments at Cole REIT. Between 2010 and 2011, the Phoenix-based company acquired some $5 billion worth of assets net-leased to the credit-tenant likes of Walmart, PetSmart and the University of Phoenix, but its team also winnowed out many more potential deals through the underwriting process.

"They do a great job of executing on their business model, finding quality assets that can be relied on to provide longterm stable cash flow," says Pat Duncan, CEO of USAA Real Estate in Dallas. "They'll be patient; they'll just wait for the properties that will meet their investment criteria and then they go for it. They've been one of the most sophisticated buyers that we've sold to over the past several years." Duncan notes that Cole has another $200 million worth of deals under contract with his company, and adds that another Cole hallmark is speed and efficiency of execution once an acquisition is decided upon. "They don't try to nickel-and-dime you; if there's a major issue, they sit down at the table with you and try to figure it out."

Chris Ludeman, New York City-based president of capital markets at CBRE, characterizes Cole's dealings in terms of "clarity, open and honest communication, and a high degree of certainty of close" once the company has committed to a transaction. He further defines that clarity as "the precision of the vision of the assets and the credits that they're attempting to buy," as well as "how they communicate with sellers and intermediaries like CBRE."

The themes running through Duncan's and Ludeman's comments probably could have been sounded at any time throughout Cole's history. Yet while the company's basic modus operandi hasn't changed, its platform has broadened in recent years. Office and industrial properties now are on the menu—albeit with the same emphasis on creditworthy tenants in long-term net leases—and the company is branching out into joint-venture relationships on both acquisitions and buildto-suit development.

"Over the past three years, we've focused on taking our strategy and expanding into the three major sectors of commercial real estate," says Cole REIT president and CEO Marc Nemer. "When we look at retail properties, we focus on necessity retail tenants that tend to pick up market share during down cycles and thrive during up cycles. We're expanding that investment horizon to include corporations across all the major sectors because, as we know, not all great corporations are in the retail sector." Extending Cole's reach into office and industrial means expanding that "necessity" definition to include not only creditworthy tenants in industries with bright long-term prospects but also facilities that are mission-critical to those tenants.

As a case in point, last year's $170-million sale-leaseback of Apollo Group Inc.'s University of Phoenix headquarters complex, one of the largest single-tenant office deals seen to date in Arizona, involved both a market leader in a growing industry—online education—and assets that are essential to the tenant's operations. "We like to buy those types of assets, because they're important to the tenant and, good times or bad times, they tend not to walk away from the critical assets," says Bob Micera, chief investment officer at Cole REIT.

In the industrial realm, Cole paid $91.5 million last year for a cold-storage distribution center in Riverside, CA triple netleased to Walmart. Here again, it's hard to imagine a bigger gorilla in its particular jungle than the world's largest retailer and, while a warehouse is not corporate headquarters, this 496,000-square-foot facility is crucial in that Walmart uses it to stock its West Coast stores' frozen food aisles. Locally, there aren't many leasing options; Micera notes that cold storage warehouse vacancy in Southern California is less than 2%.

Cole has done a number of one-off JVs over the years, but lately has forged a couple of programmatic JV partnerships, namely with Phoenix-based RED Development and Atlantabased North American Properties. Cole's JV with RED concentrates on opportunities in the Midwest and West, while its North American venture focuses on the Southeast. With the latter, Cole has acquired, among other assets, the note on Nature Coast Commons, a 226,000-square-foot power center in the Tampa, FL suburb of Spring Hill.

Scott Holmes, Cole REIT's senior vice president of multitenant retail acquisitions, describes Nature Coast as "75% stabilized. It needed some TLC and boots on the ground, somebody who could give it a much more hands-on approach and get that yield to a higher level." That was where North American and its local expertise came in. "We were comfortable buying the property as-is and holding it at the 75% level; it was already hitting yields that worked for us," Holmes says. "But it was a way for us to get a higher yield with a local partner, and it was a win-win for them too." He says the ultimate rationale of such programmatic JVs is "to identify properties that, after the final 20% to 25% of work that needs to be done, become the kind of assets that we would buy anyway on our own."

The company's development agreement with Trammell Crow falls into the BTS bucket: a 225,000-square-foot regional headquarters for healthcare consulting company MedAssets at the Legacy Business Park in Plano, TX. The agreement achieves a number of objectives, Micera points out. For one thing, he says, "We're building our future pipeline. It's not a sale-leaseback because the tenant doesn't own the building, but it's a brand new building and there will be a brand-new lease."

It's also an opportunity to establish another partnership with "a respected national developer." Furthermore, the MedAssets BTS marks another step toward diversifying into other industry sectors, in this case healthcare. Along similar lines, Cole REIT bought CVS Caremark's regional headquarters in Northbrook, IL for $44.2 million this past November, and in March of this year it acquired the global headquarters of the Medicines Co. in Parsippany, NJ for $53 million.

In one of the company's largest deals outside the retail sector, it acquired the 583,000-square-foot City Center office tower in Bellevue, WA, paying $310 million in May 2010 for a property that's 96% long-term leased to Microsoft Bing. The deal hints at an asset class that Cole plans to look at more closely this year—what Roberts terms "anchor-tenant office and industrial, with similar characteristics to a retail power center, whereas maybe 80%-plus is one long-term credit tenant. Because it's a building that they want to be in long term, it may be 20% multi-tenant with expansion opportunities for that anchor. We think that by expanding our bucket to do that, we probably double the universe of office and industrial deals that we'll see."

Regardless of the industry sector or asset type, one thing Cole REIT acquisitions have in common is that they're all-cash. "While we do put financing on after the close, not having a lender involved is just one less moving piece that could screw up the deal," comments Holmes. The debt financing, too, fits in with Cole's disciplined approach: "We focus on long-term fixed-rate debt, very conservative LTV ratios—right around 40%," Nemer says.

Cole's track record of certainty in getting deals done helps them win the day even when the company isn't the highest bidder, says Nemer. Especially in the case of multi-tenant power centers, Holmes says, "the sellers don't want the stigma on their properties" of having a deal fall through after 60 to 90 days' due diligence.

Making it all happen is what Nemer describes as "a seasoned, experienced, deep team and a robust and significant infrastructure." The company's strategy and research team (see sidebar, this page) provides guidance on the investment strategy: "What we should be buying, what markets provide good opportunities, sectors or corporations that we should be focusing on, either from an acquisition standpoint or a disposition standpoint." The portfolio strategy committee then distills that guidance "and essentially lays out the game plan for how we're going to assemble the portfolio." The acquisitions group makes initial determinations on whether or not particular assets would fit in with Cole's overall strategy.

On one of the first deals that Jack Fraker, managing director of investment properties for CBRE in Dallas, did with Cole two years ago, "It was a multi-building portfolio that included industrial and office properties." That meant a mix of property types, geographies and markets, all requiring different degrees of underwriting expertise. "I was really impressed with their acquisitions team in that they could do their market due diligence, the credit underwriting on the tenants and then the financial underwriting of the real estate—all in a very compressed period of time," says Fraker. "In 2010, the capital market cycle was a little bit down, and they were one of the best buyers out there."

The Cole teams considered, and passed up, around $100 billion of potential acquisitions over a two-year period to arrive at the $5 billion in deals that they did complete. Roberts provides color on what he terms "the funnel approach" to ruling out deals that don't fit with Cole's focus on "long-term, safe opportunities." Over the course of a year, "we look at $50 billion worth of potential deals, we look more seriously at $25 billion, we underwrite and analyze on $12.5 billion and we close on $2.5 billion to $3 billion," he explains. "The messier credits, shorterterm leases, distressed, value-added—those really didn't fit our criteria in the past couple of years" and therefore were easy to take out of the running.

For 2012, Cole has set its sights on up to $3 billion in acquisitions, and Roberts says about $500 million of that will come from either BTS or JVs, primarily the latter. "They're larger deals and typically a little more closely aligned to our net lease, single-tenant strategy," he says.

More broadly, Roberts takes an upbeat view of the near-term acquisitions market. "We're expecting to close $1 billion by April 30, which is obviously on track to do the $3 billion for the entire year," he says. "So we feel very good about supply and our position in the market. We have capital, we have a reputation for performance, we close all-cash and we're in very good shape to meet or exceed our goal this year." With cap rates likely to remain stable and interest rates poised to remain at their current low levels for the balance of the year, Roberts adds, "We think it's a great time to buy real estate, in some cases below replacement costs."

The Cole team is also pursuing a longer-term, overarching goal. "There is no significant brand name that the investing public identifies with real estate," says Christopher Cole. "No one else has figured out how to provide access to institutional quality real estate and we want to be that brand, we want to be that firm."