Phoenix-based Cole Cos. has been on a growth track, purchasing more than $1 billion of properties in the first eight months of 2007. It has added 65 employees since January to handle its expanding portfolio, which now includes 14.6 million sf of owned or managed properties worth $2.4 billion. The company is a sponsor of non-traded REITs and 1031 exchange TIC programs and has a growth opportunity fund. Although it purchases multi-tenant properties and, on a selective basis, single-tenant office and industrial buildings, its primary focus is on single-tenant retail assets. This conversation with with SVP of acquisitions Chris Robertson originally appeared in the most recent issue of Net Lease forum.

NLf: Can you give us a quick history of the company?

Robertson: The company started in 1979. Chris Cole is our CEO. If you go back to the late ’70s and early ’80s, most of our history is centered in local real estate deals–we did land deals, land entitlement, some value-add. In the mid- to late-’90s we bought mostly multi-tenant retail deals here in Phoenix that we repositioned. If they were 80% occupied, we’d lease them up to 90%, 95% and then sell them on a stabilized basis. So it really was a small firm–Chris, his brother, Scott, and a handful of other people. By about 2002, Chris had established such a great track record and so many relationships in the capital markets that it was a natural progression to raise money on a national level and take the firm in an institutional direction. He increased his focus on the fundraising side of the business in order to build a sound real estate firm with an ability to raise equity in the capital markets. That approach would take our firm from being a local to a national player, and that’s what he’s done. I came on around 2003, and most of the guys that he hired to take us to a national platform are still here today. But that’s how we flew under the radar screen for so long. If you weren’t doing deals in the Phoenix area, you probably had never heard of us before 2002.

NLf: The company’s focus today is on single-tenant retail properties primarily. When did Cole start to focus on this property type and why is that the focus today?

Robertson: The reason Chris decided to veer away from multi-tenant and other sorts of development plays was the management intensive nature of it. I think he saw quite a bit of single-tenant opportunities out there on a net-leased basis, and the debt conditions were very favorable. So the thought process was, why pay these cap rates we had to pay for multi-tenant and deal with all the brain damage on the management side? Why not just go toward the single-tenant? It’s a more scalable platform and, again, the debt conditions were favorable. Those conditions have deteriorated over time, but in 2002 and 2003, single-tenant assets were trading at pretty attractive cap rates, the CMBS market was starting to embrace those in terms of making fairly attractive loans on them and so the leveraged returns were very attractive and with half the headache. Obviously, since then, the cap rates have compressed on that asset class. You have all the buyers piling in and the debt conditions have gradually eroded. The leveraged yields on that asset class have come down, but I’d say, all-in-all, it’s still an asset class that we’re very comfortable with and everyone on our staff has a fair amount of experience underwriting and managing. We built the expertise of the team around the net lease arena.

NLf: You passed the $1-billion mark for 2007 acquisitions before the third quarter was even over. What’s been the strategy behind that and how do you source and win deals in that competitive market?

Robertson: The reason we’ve hit the billion-dollar mark through the end of August is primarily a function of our track record and ability to raise money in the capital markets. It’s taken the past four or five years to build the infrastructure to where it is today and be able to raise that kind of money. So it’s been a steady progression. Given the amount of money that we’re raising on a monthly basis, it’s a large enough volume to allow us to play in larger transactions. If you go back to when we were just getting started, when obviously the pace of fundraising was minimal, generally we’d be chasing one-off single-tenant transactions and bidding against the masses. Over time we’ve been able to get away from the one-off deal and into the portfolio pursuits that generally flush out a fair number of buyers, and you’re competing against institutional money, primarily. So the bidder pool is smaller and the cap rates are a little better. I wouldn’t say they’re significantly better, but there’s certainly a little more meat on the bone when you’re in the $100-million, $200-million, $300-million deal size versus $3-million, $4-million or $5-million. How did we get to that point? It’s really just hard work. We’re now competing against the Inlands and the Wells of the world, Behringer Harvard, CNL and Dividend Capital–we’re all on that same platform.

NLf: Can you give us a sense of how many of your properties go into TIC programs?

Robertson: On a percentage basis, approximately 20% of the properties we acquire might end up in our 1031 program. We tend to be extremely risk averse on 1031s, so most of the deals that work for our 1031 program will be very long-term net-leased deals that produce a lower average yield than some of our other programs target. Ten-thirty-one for us is an opportunistic deal. We don’t buy properties just to have product on the shelf. We’re trying to find something that makes sense, and when we do, we’ll package it and put it out there. Obviously right now, with the capital markets so tight, I would imagine a lot of sponsors aren’t doing a whole lot.

NLf: It seems likely that the fourth quarter will be relatively slow. How do you see market conditions in the past three months of this year?

Robertson: The cap rates haven’t moved enough to make these new quotes make sense. You can’t get positive leverage. You certainly can’t get it in the early years of a deal. The quotes are too dilutive. It seems like one of two things has to happen. The CMBS lenders need to re-engage, and I know they really can’t until they get all their inventory sold that they’re sitting on, or if the all-in rates that they’re quoting today don’t change, I think cap rates have to adjust to some reasonable level.

NLf: What do you expect in terms of acquisitions for the remainder of the year, particularly in light of the current debt markets?

Robertson: I think we’ll probably end the year somewhere around $1.5 billion to $1.6 billion. We have several large portfolios that we’ve teed up that we’re probably going to close with cash and lines of credit and not look to put permanent debt on in the short term. We’re a low-leverage borrower, typically 60%, and that doesn’t seem to matter today with the lending community. I think we’re just being lumped in the same pile as everyone else. I think in the long term we’re going to get credit from the lending community for being a low-leverage borrower and get some reasonable permanent debt that we can put on these assets that we’re taking down with shorter-term cash.

NLf: What’s your outlook for the net-lease retail sector overall?

Robertson: I think it’s going to stay very competitive. I don’t see the exchange buyers going away anytime soon, so I think they’re going to be out there doing their fair share of one-off deals. And on the institutional side, there’s still plenty of money chasing the larger transactions, whether it’s a large power center or a large net-lease portfolio. There’s still plenty of liquidity out there. I think the overall volume of transactions is a question mark. How much financing are people going to be able to get in the future? I don’t think we know the answer to that yet. If everyone has to migrate to a lower-leverage model, the overall volume of deals is probably going to shrink a bit. I think in terms of our ability to do deals in the future, and I don’t see that slowing down at all. So I’d be looking to do the same type of volume with this firm next year, if not more. Interest level is still there, you just have tight credit markets. That, I think, is a temporary phenomenon that probably starts to loosen up early part of next year.

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