Q&A: Avoiding the Herd Mentality in Single-Tenant Industrial
- Sep 25, 2019
Before teaming up with his two partners in 2014 to launch Triple Net Acquisitions in Draper, Utah, the firm’s Chief Operating Officer Bryan Norton spent many years in private law practice at some of the nation’s leading law firms. Also a former vice president and senior counsel for Select Portfolio Servicing, Inc., a Credit Suisse company, Norton has been involved in all aspects of real estate transactions and complex financial matters. These experiences have helped shape the individualistic viewpoint that drives investment decisions at Triple Net Acquisitions. MHN recently caught up with Norton in an exclusive interview about Triple Net’s investment strategy and the decision to avoid “herd’ mentality.
Why did you and your partners decide to launch Triple Net Acquisitions?
When we founded our company in 2014, we were three principals who all had extensive commercial real estate backgrounds with insights gleaned during the mortgage meltdown. My partner Mark Weber was a private equity guy who had bought and sold a number of companies and had been involved in turnaround opportunities. Brian Garbutt is a commercial broker in southern California. Brian has been involved in billions of dollars of buy/sell transactions and he’s done hundreds of commercial leases. Between the three of us, we decided that we wanted to start a company that would focus on things that we thought most real estate investors overlooked.
We were unimpressed by the equity and debt offerings available in the marketplace and frustrated by Wall Street’s impressive ability to charge significant fees on unspectacular returns, so we decided to create our own investment strategy. We concluded that we could leverage our experience to create a portfolio of single-tenant, industrial properties that were safer than corporate bonds and which generated equity-like returns. Over the next two years, we invested over $40 million into acquiring a portfolio of 25 buildings across 11 states, comprising nearly 1.1 million square feet of manufacturing and industrial properties on over 200 acres of land, which now has a market value in excess of $170 million.
How are you different from other firms in your space?
Triple Net is not a typical real estate firm that hopes to buy low and sell high. Our returns are not created by market appreciation, marketing timing or luck. Instead, we’ve developed a unique strategy to acquire real estate of irreplaceable operational value to our tenants, which consistently generates both high and stable returns.
We don’t follow market trends or “follow the herd” in our investment decisions. We are not developers and we do not buy raw land. Instead, we focus on single-tenant assets with “Triple Net Leases” which require the tenant to pay all taxes, all insurance costs and all maintenance expenses associated with the leased properties.
We own and manage industrial real estate throughout the United States. Unlike many other real estate investors who limit their “industrial” investments to logistics and fulfillment centers or warehouses, Triple Net capitalizes on the importance of manufacturing to the U.S. economy and we purchase manufacturing facilities, yard properties, single-tenant offices and R&D flex buildings. Our tenants include publicly traded “credit” tenants and privately held “non-credit” enterprises. The diversification of Triple Net’s tenants across different geographic areas and industrial sectors creates additional stability and security in our portfolio.
Our approach is easily summarized: We buy tenants. Using our wide-ranging private equity experience, Triple Net underwrites our tenants to ensure that we’re buying real estate with successful, long-term tenant businesses that have substantial attachment to the properties. Our tenant stickiness is very high. Our buildings are mission critical to our tenants and many of the buildings have site specific regulatory permits and key geographic locations that are often irreplaceable to the tenants.
What’s it like being based in Utah?
Utah is a fast growing entrepreneurial state and it has a very vibrant economy with a highly educated workforce and high quality of life. We’ve seen in the last few years, significant relocation here from a number of tech companies. And the second largest Goldman Sachs office in the world is based in Salt Lake City.
What regions are most promising for your portfolio expansion?
Triple Net focuses on geographic locations that are well established manufacturing hubs, have a sizable population and are backed by strong underlying economic growth. For example: Reno, Nev.; Sacramento, Calif.; Phoenix, Ariz.; San Antonio, Houston and Dallas/Ft. Worth, Texas; Columbus, Ohio; and Denver, Colo.
What’s the thinking that drives your strategy?
We decided we would focus on industrial manufacturing assets, largely single- tenant, triple net, highly sticky manufacturing assets. What really sets us apart and what makes us different is our focus on underwriting and understanding the tenant business. Using our legal banking and private equity backgrounds, we look at the metrics and the financial viability of the company. There are a lot of transactions where the real estate part of the deal looks fine, but we won’t move forward with an acquisition because we don’t like the underlying tenant business or we don’t like the metrics of their business or the future of their business.
What kinds of assets does Triple Net Acquisitions look at?
By avoiding group think, we’re willing to look at markets and opportunities that most institutional investors dismiss. We’re not trapped by a lot of the conventional wisdom that I see frequently holding back real estate investment. We own a building in Cushing, Okla. For most people, its a flyover part of the country. But actually, Cushing, Okla., has the largest oil storage facility in the U.S. All of the oil pipelines in the country meet in Cushing.
We really like companies that have something unique. We like assets that are highly sticky and unusual. We own a portfolio of aerospace properties on the West Coast. Knowing the aerospace business, in order for you to actually create aircraft parts, not only is there a high level of government scrutiny and regulatory permitting that goes into the process, but the underlying customers also have a high level of approval that goes into the process.
If Boeing says you’re going to make a part, it’s going to be a 20-year process, it’s never going to leave that facility. It’s never going to leave that site. So we have a high level of comfort and confidence that that tenant is going to continue to have business into the future, which is going to make them a good credit risk.
We own a recycling center in Beacon, N.Y., that’s in between New York City and Albany. The need to recycle is going to only increase into the future. Looking at the process, it took four years just to get the permits to build the building. It took another three years to create the necessary infrastructure and equipment inside the building to be able to run the recycling business. So when you have the opportunity to buy a building that took seven years of preliminary work just to build, that tenant is not likely to leave for another building down the street where they can save on their rent.
It sounds like you’ve arrived at a good strategy.
We went through a period in 2008 to 2010 where everybody wanted to be in multifamily housing because that was the future, and that was where they thought they should be investing their money. I’ve watched now for the last few years while everybody has said they’re really interested in industrial (they really mean warehouse). And I can’t tell you how many people are convinced that if you continually build warehouses, Amazon is somehow going to fill all of them. The institutional players go and do that while we (take another direction) that I think make more sense.
Do you think there’s going to be a recession?
If you have enough economists telling people that we’re in a recession, then people psychologically put themselves into a recession. That being said, right now there’s so much money moving around in the economy that people are doing real estate deals that don’t make any sense. Frankly, I would like to see a little bit less liquidity in the market because I think it would force people to be smarter about how they approach real estate transactions. For me, the thing that is a concern—not necessarily in the short term, but in the long term—is you have institutional investors sitting on large amounts of cash and they’re out there doing real estate deals that don’t pencil out because they’ve got to deploy the capital. From our perspective, an economic downturn would not necessarily be a bad thing because it would create opportunity in the marketplace that we believe Triple Net Acquisitions is well positioned to take advantage of.