This month’s REIT Focus is on Cole Credit Property Trust II Inc. (Cole), a non-traded real estate investment trust that owns primarily single tenant restaurant and retail properties. Cole is a third-party-managed Maryland real estate investment trust that is the general partner and owner of a 99.99% partner interest in Cole Operating Partnership II LP, the UpReit partnership that owns the assets of Cole.
Cole owns 753 properties comprising 21.2 million square feet located in 45 states and the U.S. Virgin Islands. Cole also owns 69 mortgage notes receivable secured by 43 restaurant properties and 26 single-tenant retail properties. Cole’s tenants are primarily specialty retail, drugstores and restaurants, and major tenants include Walgreens (WAG), Circle K, CVS (NYSE:CVS) and Tractor Supply (NASDAQ:TSCO). The average occupancy of Cole’s portfolio as of June 30, 2012, was 96%. Cole was incorporated in the state of Maryland in 2004 and is based in Phoenix, AZ.
Cole’s initial (and follow-on) stock offerings resulted in gross proceeds of $2.3 billion, out of which, $171.8 million was paid for selling commissions and dealer manager fees, $70.4 million for acquisition fees, $23.3 million for finance coordination fees and $16.3 million for organization and offering costs to its adviser or affiliates.
Cole has 210 million shares outstanding and a capitalization of $2.1 billion at the $10 per share initial offering price. Cole’s management team includes Christopher Cole, executive chairman, and Mark Nemer, president and CEO. Cole is one of the leading sponsors of non-traded REITs, and their various REIT funds own more than $11 billion in CRE assets.
Select financial data for Cole as of the June 30, 2012 10-Q and for the period 1/1-6/30/12 is as follows (in millions where applicable):
|Real Estate Assets, Gross||$3,626|
|Notes Payable and Lines of Credit||$1,747|
|Earnings Per Share||$.08|
|Cash Flow from Operations||$61|
|Unsecured Credit Facility||$350|
|Capitalization at $10 Initial Offering Price||$2,100|
|Gross Real Estate Assets||48%|
|Real Estate Assets Per Sq. Ft.||$171|
|Dividend Per Share||.31|
|NOI and Value Calculation:|
|Revenue Per Above Annualized||$284|
|Less: Operating Expenses||$54|
|Projected NOI 2012||$230|
|Projected Inflation Rate||x103.5%|
|Projected NOI for Next Year||$238|
|Projected Cap Rate||8%|
|Projected Value of Company||$2,975|
|Less: Total Debt||($1,747)|
|Projected Value of Company Equity||$1,228|
|Projected Value Per Share||$5.84|
|Initial Offering Price Per Share||$10|
As shown above, our value for Cole is $5.84 per share versus the initial offering price of $10 per share. During the period ending June 30, 2012, Cole redeemed 1.5 million shares of common stock at $9.32 per share. At the $9.32 per share redemption prices, Cole is valued at a cap rate of approximately 6.4%. Current cap rates for net leased retail properties per CBRE and Real Capital Analytics investment surveys are in the 6% to 9% range, depending on the credit of the tenant and location of the property. We have used a cap rate of 8% due to Cole’s portfolio being primarily single tenant leases with noninvestment grade tenants. At a price of $5.84 per share, Cole’s dividend yield is 5.3% which we consider appropriate for the portfolio. Cole’s gross real estate assets, net income and funds from operations for 2010 to June 30, 2012 are shown below.
|Gross Real Estate Assets||$3,510||$3,625||$3,626|
|Funds from Operations||$122||$138||$64|
Author: Joseph Ori, Managing Director, Paramount Capital Corporation