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What makes TriNet an exciting investment opportunity?
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TriNet has established itself in a unique niche over the last ten years and has consistently generated double digit total
returns for its investors during that period. We have little competition in a business that has a huge supply of
product. Corporations are the largest owners of real estate in America, with approximately $3 trillion of real
estate assets. This gives us an exciting prospective future transaction flow, which should lead to sustainable
growth in assets and profitability.
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Why would a corporation want to sell and lease back an important operating property to TriNet?
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Corporations in America are faced with growing pressure to generate higher returns
on their capital assets, to continually find sources of capital at an economical cost and to maximize operating
flexibility. When a company is looking to raise cash, it has a number of alternatives, including selling its real
estate and leasing it back. This provides a source of cash which can be immediately re-deployed to improve
earnings, and if structured properly, provides reasonable ongoing costs of occupancy with no disruption to the
operations of the selling company.
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What is the experience of your management team, and what value do they bring to TriNet?
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Most of TriNet's senior management team have worked together for nearly ten years
and have experienced a wide variety of market environments. We have acquired, re-tenanted and sold more than
200 properties in 42 states and Canada. Over the years, TriNet has established a national network of acquisition
sources, leasing and selling brokers and building contractors. Our management's experience gives TriNet
shareholders significant benefits in both the best and worst of times.
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How does TriNet underwrite its acquisitions?
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There are three main components to any acquisition. First, we evaluate the real estate. What is the property value
in the market assuming that the building is vacant? How easily re-tenantable is the property? How long would it
take to fill the property and what would it cost? This is key in assessing any downside scenario. Next, we examine
the credit of the prospective tenant. TriNet wants to be certain that the tenant can pay the lease rent over the term
of the lease, which is generally a minimum of 10 to 15 years. Finally, we determine the importance of the
property to the ongoing trade or business of the prospective tenant. Owning a property that is operationally
important to the tenant is essential for two reasons: first, it protects TriNet on the downside if something should
happen to the tenant and it must reduce operating costs, and second, the fact that a property is operationally
important enhances the probability that the tenant will renew its lease.
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What precautions does TriNet take for higher risk tenants?
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TriNet may seek a guarantee
from a third party -- either the tenant's parent company or another related party. Another approach to mitigating
risk would be to require the tenant to put up a large security deposit or letter of credit in the amount of one or two
years' lease rent. This ensures that TriNet has the funds to carry the property if the tenant should fall on hard times
and not be able to pay the rent.
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How would you characterize the credit quality of TriNet's current portfolio?
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Since TriNet has become a public company, we have made steady improvement in the credit quality of our overall
portfolio by targeting the acquisition of properties leased to investment grade corporate tenants. As a result, the
average credit rating of TriNet's tenant mix has improved so that the majority of our revenues now comes from actual or implied
investment grade companies. In addition, we've been able to increase the diversification of our tenants, which
further enhances our portfolio's overall credit quality.
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Do rising interest rates hurt TriNet's business?
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Rising interest rates have three effects on TriNet's operations. First, interest rates generally rise in times of
inflation, and the value of real estate has typically increased in inflationary times. TriNet's nearly $700 million worth of real estate should therefore appreciate in this environment. Another typical result of inflation is
that the Consumer Price Index, or CPI, rises. When CPI increases, rents in TriNet's portfolio of leases that are tied
to CPI also rise, causing TriNet's revenues to grow. The third and most important effect of rising interest rates is
that potential corporate sellers find their cost of borrowing increasing and their potential capital sources
decreasing. Under these circumstances, the rate a selling corporation is prepared to pay in the form of rent
increases over its cost of borrowing, and TriNet is able to lock in high initial yields relative to it own cost of
capital.
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What is your existing portfolio's rental growth rate?
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Today, TriNet's 107 properties have leases with contractual rent escalations, estimated to grow at an average of
approximately 3% per year over the next ten years. Since many of the leases in TriNet's portfolio are indexed to
CPI, typically with a floor and a ceiling, the 3% growth rate assumes a 3.5% increase in CPI over the same ten year
period. If, however, we see something like 5% average annual CPI growth over the next ten years, TriNet's rental
growth will be closer to 4.25%. Remember that not all the properties' rents escalate every year, and that this
internal growth number is always changing. Every time we add a new long-term leased property to the portfolio,
the rental growth rate adjusts and its impact on FFO can be improved by the use of low cost debt.
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What ongoing property expenses does TriNet incur?
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Most of TriNet's leases provide that the tenant pays all expenses related to the ongoing maintenance and
operations of the property. All the leases that TriNet structures are triple net leases, which means that the tenant
pays for the tax, maintenance and insurance expenses. Triple net leases also require the tenant to assume the risk
of environmental liabilities. As a result of these lease obligations, TriNet receives a very predictable, increasing
stream of "net" rental income going forward, which reduces the volatility of our future cash flows. Occasionally,
TriNet has acquired, and may acquire in the future, properties subject to existing leases that require us to be responsible for certain expenses. In
these cases, TriNet factors those expenses into its purchase price.
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How have net leased properties performed compared to other property types?
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A number of studies show that triple net leased properties have been among the best performing real estate investment
types over the last ten years. Net leased real estate has two important performance characteristics: (1) there is
protection in times of falling market rental rates because net lease rents are typically fixed for the long term; and
(2) in times of inflation the rental income from a net leased portfolio often increases since rent increases are
typically indexed to CPI. The bottom line is that net leased properties provide steady growth and have little or no
volatility, and over a long period of time, tend to out-perform multi-tenant real estate. They have provided
predictable, sustainable cash flow growth and have formed the basis for TriNet's successful business strategy.
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What is TriNet's dividend policy?
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TriNet's ultimate objective is to manage our growth so that the rate of increase in Funds From Operations exceeds
the rate of growth in dividends paid to shareholders. This will reduce the company's payout ratio and will ensure
that TriNet retains more capital, which bolsters our financial strength. This internal capital is currently the least
expensive source of equity available to TriNet.
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