Occupying a unique niche in the commercial real estate world is not easy, but part of San Francisco-based TriNet Corporate Realty Trust Inc.'s success is due to the fact that it found that niche and ran with it.
"We don't have much competition," says president and CEO Mark S. Whiting. "We are the only public REIT that is acquiring major corporate leases." More specifically, TriNet is the largest real estate investment trust that owns and acquires predominantly office and industrial properties net leased to major corporations nationwide.
Corporate America is by far the largest owner of real estate in the United States. This fact was the premise behind Robert Holman's and Jay Shidler's founding of Holman/Shidler Corporate Capital, the predecessor company to TriNet Corporate Realty Trust Inc., in 1985.
The two real estate entrepreneurs were searching for a business to work with these companies and help them make better use of their real estate holdings. The answer proved to be giving the companies the opportunity to trade some of their real estate for capital while retaining occupancy of the properties for their business purposes.
Holman and Shidler, today co-chairmen of the company, bought strategically important buildings (predominantly office and industrial) from major American firms and leased the properties back to the same firms with long-term, triplenet leases.
Under the triple-net lease arrangement, the tenants pay taxes, maintenance costs and insurance on the property. This provides TriNet with a predictable, recession-resistant income. And by acquiring assets that are strategically important to the corporate user, TriNet is assured of long-term occupancy. The average lease term for its properties is more than 10 years.
TriNet acquires its assets either through a purchase/leaseback transaction as described above or by purchasing a building subject to an existing net lease which may have come about through a build-to-suit transaction.
But why would companies sell their properties under a purchase/leaseback arrangement? What is to be gained?
"The reason the corporations are willing to sell to us is that they have a better use for the cash, whether it is to buy more inventory or pay off expensive debt," says Whiting, who has been at the helm of the day-to-day operations of the firm since he was hired in 1987. "They see it as a more efficient use of their capital."
The typical transaction size is between $5 million and $50 million.
Wall Street also sees the advantages to such sales. Whiting says selling corporate real estate and then leasing it back usually results in a rise in a company's stock price.
The business also proved very successful for TriNet as the company amassed $200 million portfolio by 1993. "TriNet's average total return on equity has been between 15% and 20% throughout our history," Whiting says.
Although successful as a private company, a desire for faster growth spurred Holman and Shidler to take the business public. In June 1993, the company successfully completed a $125 million initial public offering, selling 5.16 million shares at $24.25 per share.
The move has had the desired effect; since the IPO, TriNet's portfolio has quadrupled to 108 properties comprising approximately 13 million sq. ft. and worth more than $800 million. Also, its tenant mix is unsurpassed including such notable firms as AT&T, Microsoft, Bristol-Myers Squibb Co., Federal Express, Pepsico Inc. and Nike. In total, their clients include 41 major corporations representing 25 separate industries.
In August, the company's stock was trading for more than $30 a share, and the prospects for the company still looked good. "If you look at the results posted by other equity REITs, there is still room for further appreciation of TriNet's stock," says A. William Stein, the company's executive vice president and chief financial officer.
"Being public has improved our access to transactions by increasing our market presence, lowering our cost of capital and giving us access to that capital more quickly," says Whiting. "We currently have a $200 million credit facility, so we can buy a property in 24 hours if we like it."
Stein says the credit facility involved certain actions on the part of the company to prove its strength. Among them was achieving an investment grade credit rating and the other to raise $50 million of equity. The company received the in. vestment grade credit rating in April and, with nine months to raise the equity, TriNet did so in 90 days.
The investment grade rating lowered the company's interest rate on the credit facility 25 basis points to 150 over LlBOR.
TriNet has received positive "Buy" or "Outperform" ratings from numerous stock rating firms including Paine Webber, Donaldson, Lufkin & Jenrette, Smith Barney, Montgomery Securities and Merrill Lynch.
San Francisco-based Montgomery had this to say about TriNet in its first quarter report, "We believe TriNet's successful results during the first quarter of 1996, low current valuation, numerous acquisition opportunities at high capitalization rates and capital structure outlook driven by recent investment-grade credit ratings make the stock attractive at current levels."
The company also keeps its transactions in some well-defined parameters they feel present less risk.
"[TriNet] tends to focus on deals under $50 million in size and leases with remaining terms of five to 25 years, seeking to maintain an appropriate mix of tenant diversification and lease expiration exposure," according to an April 1996 Smith Barney report on the company.
"When we were a private company, we took more risks, because our capital costs were higher," says Gary Lyon, executive vice president and chief acquisitions officer in the company's Philadelphia office."But since we have gone public, we have eliminated some of those risks. Our shareholders like a certain amount of safety but, at the same time. they are investing in real estate and understand the risks and rewards."
TriNet is capable of buying leases that are less than triple net and has some in its portfolio. These leases require more management on TriNet's part. "We have a good asset management group in our Jacksonville office, and it is growing as our portfolio grows," says Lyon.
Another critical factor in limiting risk on its acquisitions involves looking for generic buildings that can be easily reconfigured if the single tenant should ever vacate the space. "What we look for are buildings that can be multitenanted with minimal capital expenditure," says Lyon.
For example, TriNet recently purchased the Federal Express World Headquarters office in Memphis, Tenn. The 241,000 sq. ft. facility is divided into three separate buildings. "Should we ever lose Federal Express as a tenant, the site already lends itself to a multitenant use with little expenditure on our part."
TriNet attempts to balance its acquisitions with regard to geography, industry and property type while remaining well within its niche.
In addition to diversifying its tenant mix among 25 different industries, the properties are in 26 states, every region of the country and are about evenly divided between suburban office and warehouse distribution space with a small amount of retail (about 5% to 10% of the portfolio) thrown in. However, Whiting says, the company will probably sell most of the retail portion because TriNet's board doesn't like the comparable instability of retail tenants in relation to the company's office tenants.
"That is definitely the plan," says Lyon. "The retail portion of our portfolio is divided between small retail spaces and supermarket locations. We are more inclined to keep the supermarket properties because the variability of the spaces is minor and just about any grocery chain could locate in the space and because people have to eat."
The company's target goal for acquisitions is $200 million this year (the company was at.$137 million in July) and includes no retail, says Lyon. "So it is becoming less and less a percentage of our portfolio."
Tenants like stability as well. And TriNet's track record with major corporate tenants is a convincing factor in negotiations.
"Large corporations, in particular, are very concerned with who their landlord is and how the landlord will deal with them," says Whiting. "In our case, the companies see who we work with every day, and they know we can deal with their needs as well."
"It is an important distinction that we deal with single-tenant properties," says Lyon. "Multitenant landlords make their money by fuming over space. They are always looking for a better tenant and, as a result, are always, in a sense, across the table from their tenants in negotiations. But we make our money by keeping the space full, so our approach is more in line with the tenants."
Stability also has an upside with regard to the acquisition process. "In many instances, we may not be the high bidder for a property, but we will get the nod from the owner, because they know the sale will be closed if they deal with TriNet," says Lyon. "So from the seller's perspective, we are a great buyer. TriNet's $200 million credit line really lets us blow the competition right out of the water."
"Our purchases are not contingent on financing," says Whiting. "We have the money and the owner is often willing to trade price for the certainty that the sale will go through."
As with any REIT, TriNet must continue to grow to be successful. Its latest effort in this area involves forming strategic relationships with development firms for the construction of build-to-suit projects. "The development firm will construct the building for a fee, and we will provide the capital," says Whiting. "It is just another way to build our portfolio."
TriNet has already done a couple of similar deals with Trammell Crow, according to Lyon. And he expects that part of the business to blossom. "Right now, it is our least common type of transaction but, in two years, I believe it will make up the largest percentage of our business."
As for increasing the company's presence internationally, Whiting does not rule it out, but he sees no immediate need. "The playing field in the U.S. is substantially untapped, and it will keep us going for several years."
