Q&A WITH TONY THOMPSON

What’s the mission of Thompson National Properties?

Amateur hour is over. It was easy to make money in commercial real estate from 2003 until 2006, but now with the economy slowing and the debt crisis, you really have to understand how to operate real estate. Investors that want to asset-allocate – whether they’re large pension funds or foreign investors that are taking advantage of the currency arbitrage – are looking for experienced, qualified operators to help them invest their funds appropriately and take advantage of those opportunities. So we have built a team of people that have worked with me, either at Triple Net or Grubb or elsewhere, and we’ll have a number of offices nationwide. These people are experienced in operating real estate, and the opportunities will avail themselves because of the relationships we have built. Cash and finance are important, but off-market transactions happen because of those relationships.

How and why did you start Thompson National Properties?

With the successful completion of the reverse merger with Grubb & Ellis, my job was done at NNN Realty, and as the credit crunch played out, I saw opportunity in the downturn. I wanted to form a private company for that purpose, with the flexibility and maneuverability that come with being private, because those are essential in the tough new market. The great thing about being private is that you can take advantage of what the market gives you.

The new company means getting into the details of creating value out of chaos. At NNN Realty, we bought stable, cash-flow-oriented properties for our TICs, which was entirely appropriate. But the opportunity to make money in an environment like this isn’t in properties like that – it’s in value-add properties that have vacancies or cash-flow issues. It’s roll-up-your-sleeves real estate investing.

A lot of sophisticated, well-capitalized investors are entering the markets, and that bodes well for us. We’ll be investing for our own account, and for high-net-worth individuals and institutions, both foreign and domestic. The thing they have in common is access to equity.

The bottom line is this: current market conditions offer strong opportunities for real estate operators that have cash, experience, discipline and an understanding of markets. It’s a chance to buy debt and equity at discounts we haven’t seen in 15 years.

To what extent was the merger [of Grubb & Ellis and Triple Net] an exit strategy for you, and why did you choose not to stay on?

When we started Triple Net 10 years ago, we capitalized it with $3.6 million in equity from friends, employees, investors and ourselves. When we did the reverse merger with Grubb, that $3.6 million had grown to nearly $300 million in equity. So we had built a sizeable company. So it was an exit that worked out well for both our equity investors and the investors in our programs because it provided a company whose performance, because of corporate governance, is much easier to evaluate.

The opportunities were so compelling to me in areas we weren’t focused on and didn’t have the mission statement for. All our products were very stable income-producing assets, and there was no mechanism as chairman of the board of Grubb & Ellis to do any investing that wasn’t within our focus. To sit on the sidelines, and miss what I thought was a once-in-a-lifetime opportunity to invest in troubled real estate, was like being a sprinter waiting at the starting block. So I finally grabbed the starter’s gun and shot it off myself.

What is “value-add”?

Value-add, opportunistic investing and vulture investing all fall into the same category. It’s when a vacancy is created by subprime lenders that have gone out of business, or by the downsizing of the financial services industry, or hedge funds that were on the wrong side of commodity or debt plays.

What geographies is TNP targeting?

In terms of geographies, we’re targeting the top 25 MSAs, where jobs and populations are still growing.

You’ve said, “Buy into fear and sell into greed.” It’s not the warmest and fuzziest of quotes. How does it fit into TNP’s philosophy?

On behalf of investors, we sold over $1.8 billion of real estate into a very strong market in 2006 and 2007. And there were a lot of people trying to get into the game. There’s so much fear on the part of investors; however, having seen four recessions I felt there was a wealth of opportunity. People were pulling back dramatically because credit was too easy to get before and it’s too hard to get now. There’s a large gap between reality and perception, and someone like myself had to get in there and take advantage of it.

For disciplined investors, that phrase has proven true over every cycle. You just need to know when to get out. Fear is unwarranted today, but it creates tremendous opportunities for our co-investors and we’re happy to take advantage of it.

Given the market, how do you play debt and equity, and do it in a smart way?

There’s a school of thought that debt is a more risk-adjusted area to be in than equity, but it’s an overreaction. There’s opportunity in both debt and equity. It just depends on what’s coming your way at a particular time, and there’s opportunity to make high teens and low 20% IRRs in each. We’re looking at both.

How is the current real estate slump different this time, as compared to the one in the early ‘90s?

Back then, because of easy money and tax incentives before the Tax Reform Act of 1986, there was tremendous overbuilding in almost every asset class, but especially retail and office. It took a decade of almost no building to fill up a lot of that excess space. In general today, there isn’t the issue of overbuilding with office or retail, which is the good news.

On the other hand, today we’re faced with a serious crisis because leverage got so out of hand. It was too easy to get debt because it was being packaged and resold around the world, which had never happened before. So we have almost a standstill in lending, along with an overall decline in job growth and inflationary pressures from commodity prices. The causes are different, but the end result is about the same: values are falling, and transaction volume is down – probably half of what it was a year ago.

How long will this tough new environment last?

It’s impossible to say exactly, but I see a continuing difficult landscape all the way through 2009 because it will be a watershed year of refinancing. A lot of highly leveraged commercial loans placed in 2004 will have to be refinanced in 2009. Their rates were in the high 4s or low 5s – today the rate would be 100 basis points higher.

Cash is readily available internationally and the weak dollar is working in favor of international investors that are coming in for trophy assets like never before. I see this continuing through 2009 and into 2010.

What is the biggest pitfall in the real estate industry today?

The same influences that both politically and financially have a great deal of impact on every industry. We’re in a classic situation today where debt on property is too hard to get. The real estate industry is suffering unfairly when it comes to the amount of debt projects we are now able to acquire, whereas just a year ago debt was too easy to obtain. Mark Twain said that “history doesn’t repeat itself, but it does rhyme.” We’re seeing a classic overreaction by the regulators. They’re sometimes late in regulating, then they over-regulate.

What non-real estate experience is in your background that you draw upon in your real estate work?

I started my career as a life insurance salesman in 1969, and learned a lot about finances, taxes, retirement planning and things of that nature. I was in that career for about 10 years. Being a salesperson, I met a lot of people from many different walks of life as well as a diverse group of professionals and businesses. That experience of meeting people and being involved in the sales process of life insurance, which is a very unselfish gift that people give their families, taught me a lot about human nature and how to deal with different types of people. It taught me negotiation skills and how to build long-term relationships. And I think that’s an important background in any entrepreneurial endeavor, whether it’s real estate or software or any other business.

What, for you, has been the most challenging aspect of starting TNP?

It always has been and always will be the judgment part of hiring your people when you’re building a quality organization. At the heart of your organization are the people—they’re the ones that have to execute your business plan and make your investors’ dreams come true. So it’s always challenging to find and interview them, and ultimately make the decision whether to hire, train and mentor them, and be their partner in good times and bad. You spend as much time with your co-workers as you do with your spouse. That’s the most important part of running any business – finding the right people at the right time for the right positions.