Cole Focuses on New Public Persona

By Gail Kalinoski, Contributing Editor

Buoyed by the firm’s first earnings report since going public, the top executives of Cole Real Estate Investments Inc. expressed joy with what they call “record operating results” in the second quarter and optimism about the future of the net-lease REIT.

Now they just need to spread the word, particularly to institutional investors and sell-side analysts who write research reports.

“For us, it’s about getting the story out,” CEO Marc Nemer told Commercial Property Executive. “In terms of investing in the net lease sector, Cole has been the leader over the last decade. We’ve just done it on behalf of our private funds, so maybe we’ve flown under the radar screen a little bit.”

Nemer said they have already held meetings across the country with large institutional investors and plan to continue the road shows throughout the rest of the year to bring attention to Cole as a publicly listed company.
Born of a merger between non-listed net lease REIT Cole Credit Property Trust III and its sponsor and asset manager, Cole Holdings Corp., the firm has been in the news frequently this year, first as CCPT III fended off a nearly $10 billion hostile takeover bid by net lease rival American Realty Capital Properties and later as it completed the merger in April and went public in June. On June 20, when it became publicly listed on the NYSE, Cole announced it was beginning a modified “Dutch auction” tender offer to purchase as much as $250 million worth of shares, with an expiration date of Aug. 8. On July 3, Cole was added to the MSCI U.S. REIT index. REIT officials say they anticipate it could be added to other indices, as well, including Dow Jones Real Estate and FTSE NAREIT.

Another non-listed Cole REIT, Cole Credit Property Trust II Inc., completed a $7.4 billion merger with Arizona-based REIT Spirit Realty Capital on July 17. The combined company, which now owns approximately 1,900 freestanding, single-tenant properties in 48 states, retains the Spirit name and is run by the Spirit management team.

“(CCPT II) stockholders now have full liquidity with Spirit Capital, a proven net-lease operator,” Nemer said after the July closing.

When Cole Real Estate Investment officials released their first earnings report as a publicly listed company on Aug. 5, their excitement was evident.

“We were thrilled. We were excited to deliver great news,” Nemer said a day later in an exclusive interview with CPE. “Earnings were very strong. We increased our guidance for the remainder of the year. We were also able to increase the (dividends) distribution rate again.”

The second-quarter 2013 earnings report had many highlights. Cole reported consolidated revenue of $250.3 million and net income of $29.1 million, 91 percent and 26 percent year-over-year increases, respectively, from the second quarter of 2012. The second-quarter earnings statement also reported consolidated adjusted funds from operations (AFFO) of $0.23 per diluted share, a 44 percent year-over-year increase. The real estate investment part of the business reported revenue of $167.6 million and net income of $19.9 million, while the private capital management segment had revenue of $82.6 million and net income of $9.2 million.
Nemer described “robust” private capital flows, with $508 million worth of capital being raised on behalf of the managed REITs in the second quarter. The third quarter got off to a strong start with the private capital management segment achieving a “record-breaking month of $509 million of capital raised during July,” according to the company.

The real estate branch acquired six properties, including one through a joint venture, for $266 million in the second quarter, with a weighted annual lease yield of 7.7 percent. The company sold five properties for a total of $31.5 million during the second quarter, recognizing a $4.9 million gain.

As of June 30, the company owned 1,014 properties in 48 states with 44 million rentable square feet, including properties owned through consolidated joint ventures. The company also had interests in 12 properties with 2.3 million rentable square feet of commercial and retail space through unconsolidated joint ventures. The total portfolio was valued at $7.5 billion.

As of June 30, the company, through subsidiaries known collectively as Cole Capital, was the advisor to five publicly registered non-listed REITs, including CCPT II. By the end of the second quarter, the managed REITs owned 1,096 properties with 37 million rentable square feet of single- and multi-tenant retail and commercial space, representing $6.5 billion in value. CCPT II owned 747 of those properties, with 21.1 million square feet and valued at $3.5 billion.

“Our portfolio remains highly diversified by industry, tenancy and geography, with portfolio occupancy of 99 percent, 55 percent investment-grade tenancy and a 12.2-year weighted average remaining lease term,” Nemer said in the earnings report.

The current portfolio is 44 percent single-tenant retail, 24 percent multi-tenant retail, 18 percent office and 7 percent industrial. The remainder comprises unconsolidated joint ventures, secured notes and CMBS. The top 10 tenants are Walgreens, Albertson’s, PetSmart, CVS, BJ’s Wholesale Club, Wal-Mart, Apollo Group, LA Fitness, Amazon and Home Depot.

Jeff Holland, Cole president & COO, said the company plans to acquire $550 million in properties by the end of 2013. “We expect a very busy fall. We expect a lot of sellers will bring properties to market,” he told CPE. “We’re gearing up to be quite busy.”

Holland said “people put us in a box” because the company is known primarily as a net-lease REIT. But both Holland and Nemer stressed they will seek out the best opportunities no matter what sector they are in. “We have the capability to invest; we’re not pigeonholed into one space,” Holland said. “We have the flexibility to invest across multiple property sectors.”

During the Aug. 5 earnings call with analysts and journalists, Holland said industrial and multi-tenant retail were possible areas for growth. Holland and Nemer also said the company often looks at single purchases or small portfolios, and prices for larger portfolios are being driven up.

“We’re seeing pricing for portfolios reaching levels we’ve become uncomfortable with,” Nemer told CPE.
He added that Cole can seek out the best deals—whether they are single purchases or small or large portfolios—because of its extensive system of “boots on the ground across the whole country.”

Asked whether it would be seeking to do more build-to-suit projects, Holland said, “We build to a lease we want to own.”

He concluded: “We find that by getting involved early in the development or build-to-suit, we can get a 50 to 100 basis-point pickup in the cap rate.”

Read this article in its original format in the September 2013 issue of CPE.