Net Lease Forum
NLF Insider: Titan’s Kevin P. Kaseff
December 6, 2005

By: Michelle Napoli

When Insignia/ESG was sold to CB Richard Ellis in the summer of 2003, its principal investment activities were not part of the package. Two of Insignia’s investment executives, Kevin P. Kaseff and Jeff Tabor, went on to set up Titan Real Estate Investment Group as their own shop. NET LEASE forum spoke to Kaseff, the managing partner who directs commercial property investments – including sale-leasebacks – from the company’s Los Angeles office. In addition to 2,500 apartment units, Titan’s current portfolio includes about four million sf of commercial space, more than half of which is single-tenant, net-lease assets.

Q: You don’t often see one investor targeting both corporate sale-leasebacks and multi-family assets. What led to the mix and to your investing in the net-lease arena?

A: It was not something we did a lot of at Insignia, but we’ve clearly over the last three years done quite a bit. We like the returns, we like the security, and when you marry that up with some very inexpensive debt, I think you have a very interesting investment . . .Most of the time I have to explain to people that we do value-added, we do core, we do sale-leasebacks, we’re doing development. Most times you don’t see an entity that handles (them all); they’re more specific about these things. With our own company, we like the idea of having consistent cash flow. We also like the development or higher return stuff, and I don’t think they have to be mutually exclusive. The way we got into net lease was not that we decided we wanted to specialize in it, but that companies came to us and said, ‘we’re not investment grade, would you do this for us.’ They wanted something specific, they wanted to know their landlord and work with entities they felt comfortable with, not just put it out and say, ‘let’s get the highest price.’

Q: I was going to ask how you win your sale-leaseback deals; I don’t have to tell you that it’s a pretty crowded investor universe. Sounds like those kinds of relationships are key.

A: Correct. We have bid on projects that have been openly marketed. But first of all, some of the very big names that have carved out for years this kind of a business are really good at the investment-grade, large transactions. But there’s another element, which is below investment grade, and also a requirement that may be unique. Let me give you an example. Input-Output is an oil services company in Houston, in the Sugar Land area; they had three buildings totaling 300,000 sf, with 8.5 years left on an existing lease and it’s a little bit over market, and they ended up doing a sale-leaseback. What was interesting was their broker called me and said, ‘it’s something unique, you’re not just going to take on a lease; we need you to rewrite this lease at a lower rent and remove one of the buildings because they’re really not using it.’ I said, great; we signed them to a long-term lease, I lowered their rent, and with one of the buildings they have the ability to force us to sell it as long as it hits a minimum strike price. We’re getting what we want out of it as long as I’m not being forced to sell it at a loss, and they have more flexibility. And one of the most important things is, their old style lease – it was basically a capital lease, which forced them, even though they didn’t own the building, they had to carry it on their books as though they did – we converted it to an operating lease.

Q: What is your outlook for the sale-leaseback market in 2006? Do you see the market being more or less active?

A: I’m very bullish on these types of activities, even though the market has zoomed up and you’re now seeing a couple of concerns on the horizon. I’m bullish, and the reason is, we’ve had a lot of this activity but interest rates are not flying up like some people predicted. They’re staying relatively low; historically, over the last 30 years, they’re still low and projected to be. Using the inverse to get a property value means that companies are seeing the value of their assets as being higher than they’ve ever been in the last 10, 15 years. We’re seeing more and more CFO’s that are being astute and saying, ‘we can put our capital to better use, into the business instead of the real estate.’ And the fact that owning real estate for a C corp. is a negative, because you have to carry a corresponding liability on your balance sheet. So, the CFO’s tend to be smarter, interest rates are low therefore the property values are higher, and overall it looks good. The economy is doing well. Other than that, what keeps me up at night are probably the things that keep you up at night as well – we hope we don’t have any great inflation that comes roaring back, we hope there’s not another terrorist attack inside the country. Those types of larger issues still keep us awake and concerned, but the economy fundamentally is doing well.

Q: In terms of the net-lease market and corporate real estate, are there any other trends you’re keeping an eye on?

A: I think you’re going to see that the ones that are going to be most favorable are going to be the more generic office and industrial use (properties). We have seen specialty use facilities hit the market and they’ve not been well received, and I don’t think they will be. We’re real estate guys, and if we, at the end of 10 or 15 years, end up with a carpet manufacturing plant in the middle of Georgia, how do you re-lease that? There’s a real danger there.