Cole's Corporate Finance Strategy

Mtichell Sabshon, executive vice president & COO of Cole Real Estate Investments, talked with CPE senior editor Paul Rosta about today’s capital-raising environment for real estate companies.
CPE: Can you talk about the trends you’re seeing in financing at the corporate level—preferred equity, unsecured bonds, lines of credit, etc.? Which of these finance strategies are favored today in various scenarios and why?

Sabshon: Given the near historically low interest-rate environment, financing is being provided through a broad range of sources, including issuance of unsecured corporate debt and preferred stock, as well as through secured mortgage loans and unsecured lines of credit.  While on average, rates on unsecured corporate debt and preferred equity are relatively higher than those on secured mortgage loans, the former offer far greater portfolio management flexibility.  Cole’s current strategy is to balance these competing advantages by locking in highly attractive current long-term interest rates on secured mortgage loans, while also enhancing portfolio flexibility by financing a significant portion of our assets on our unsecured lines of credit.

CPE: What are commercial lenders, institutional investors and other capital sources looking for?

Sabshon: Institutional lenders—commercial banks, life insurers and pension funds—are looking for high-quality real estate with experienced sponsorship—owners with  strong track records, and proven property management and leasing capabilities.  These lenders are focused on the primary markets and select secondary markets.  Assets in tertiary markets are being considered only if located on “Main-and-Main,” with strong underwriting fundamentals, and occupied by solid credit tenants with material remaining lease term.

In general, lenders want to see longer-term leases. For single-tenant properties, that means 12 or more years remaining on the lease. In the case of multi-tenant retail properties, like power centers and grocery-anchored centers, lenders like to see an average remaining lease term of at least six to seven years, with big-box and other anchor tenants having at least 10 years remaining lease terms.

For single-tenant properties, many lenders prefer pooling a half dozen or more assets in order to enhance risk diversification. That’s not the case for multi-tenant retail, typically because tenant diversification is naturally built into the asset.  Cross-collateralizing two or more power centers for a single secured financing may also result in more attractive loan terms.

CPE: What are some new and perennial strategies for establishing and maintaining ties with capital sources?

Sabshon: At Cole, we believe it’s imperative to maintain regular dialogue with our lenders and not merely reach out to them when we have a specific capital need. Instead, our real estate finance team and senior Cole executives across the entire firm meet regularly with our lenders. This includes meeting annually, typically in the first calendar quarter, for an overall portfolio review and a discussion of our acquisition, disposition and financing objectives for the balance of the year, as well as multiple meetings throughout the year at our lenders’ home offices, at Cole’s headquarters in Phoenix and at major industry events, such as ICSC, MBA and ULI.

We also feel it is beneficial to develop multiple lines of business with our lenders that offer other services and products beyond real estate finance. This allows both parties to learn more about each other’s culture and business and can create additional, mutually beneficial opportunities over the long term.

CPE: Can you comment about the $700 million credit line for Cole Credit Property Trust III?

Sabshon: In July of 2011, Cole Credit Property Trust III entered into a $700 million senior unsecured credit facility with a $250 million accordion component.  An additional $157.5 million of the $250 million accordion feature was exercised last December, increasing the allowable borrowings to $857.5 million.

Additionally, Cole Credit Property Trust IV secured a revolving credit facility providing for up to $50 million of borrowings in April 2012. The credit facility may be increased up to a maximum of $250 million, subject to satisfaction of certain conditions.

This is a sidebar to “Forging Bonds,” an article in the September 2012 issue of CPE about corporate financing strategies for 2013.