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CapLease, Inc. (NYSE:LSE)

Q4 2012 Earnings Call

February 15, 2013 10:00 PM ET

Executives

Brad Cohen - ICR

Paul McDowell - CEO

Shawn Seale - SVP and CFO

Analysts

Joshua Barber - Stifel Nicolaus

Mitch Germain - JMP Securities

Craig Mailman - Keybanc Capital Markets

Hall Jones - AEW Capital

Operator

Greetings and welcome to the CapLease Incorporate Fourth Quarter 2012 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As reminder this conference is being recorded.

It is now my pleasure to introduce your host Brad Cohen of ICR. Thank you. Mr. Cohen, you may begin.

Brad Cohen

Thank you very much operator. Today I would like to remind everyone that part of our discussion this morning will include guidance and other forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. We refer all of you to CapLease's fourth quarter and year end 2012 earnings release and filings with the Securities and Exchange Commission, for a more detailed discussion of important factors that could cause actual results to differ materially from those contained in the Company's forward-looking statements. The Company disclaims any obligation to update its forward-looking statements.

Also during the call today, the Company may be discussing Funds From Operations, or FFO. FFO is adjusted for comparability and Cash Available for Distribution or CAD which are non-GAAP financial measures. Please view the Company's Press Release for a reconciliation of FFO. FFO is adjusted for comparability and CAD to net income the most directly comparable GAAP measure.

It is now my pleasure to turn the call over to CapLease's Chairman and Chief Executive Officer, Mr. Paul McDowell. Paul?

Paul McDowell

Thank you very much, Brad and good morning, everyone. With me on the call today as usual is our Chief Financial Officer Shawn Seale. By any measure CapLease had a remarkable year in 2012 and we expect that success to continue in 2013. We grew the portfolio by about 10%, continued to lower leverage while financing new acquisitions at historically attractive rates, extended our debt maturities and renewed critical leases.

Furthermore we continue to expand our financial flexibility, resulting in the common dividend being raised by 15%. These strong operational results translated to our common stock holders with a total return for the year of roughly 45%.

The key story for the year was our very strong asset growth. In 2012, we added eight properties to the portfolio totaling approximately 1.2 million square feet for a total purchase price of about $188 million. Our average cap rate across these new assets is a very healthy 8.5% and when coupled with positive financing spreads in the 400 basis point range, these acquisitions are accretive to earnings and very accretive to cash flow. We expect to continue this growth in 2013 and beyond.

A significant portion of our acquisition activity came late in the fourth quarter as a result of sellers racing to beat the so-called fiscal cliff and associated tax increases. Our ability to source underwrite and close these deals in tight timeframes gave us a competitive advantage and some pricing power.

To bring you up-to-date on our acquisition since the third quarter call, in December we had two Class A office properties in Texas and two in Colorado. In Houston’s strong energy corridor market, we bought for $35.5 million, a 145,000 square foot office building built in 2009 and leased primarily to WorleyParsons, an investment grade quality public Australian Energy Engineering Company.

The average cap rate is 8.2% on below market rents and we were able to finance the property with 55% loan-to-value, 10 year debt at a 4% coupon. Also in Texas, we bought a 96,000 square foot office building in the Northwest Submarket of San Antonio built in 2008. The purchase price was $18.1 million and the property has two investment grade tenants; Backton, Dickinson in 71% of the space and United Health Group in 29%. Returns on this asset are strong with an average cap rate of 9%.

We have locked financing with the life company at a 3.95% coupon at 55% leverage and expect to close in the first quarter. Also in December, we closed on a two property portfolio of our office buildings in the Inverness, Southeast Submarket of Denver. The combined purchase price was $26.1 million. The first property is a three storey, 95,000 square foot Class A office building built in 2009 and leased to Pulte Mortgage, the captive mortgage arm of Pulte Group, the largest home builder in the United States.

The second building is immediately adjacent to the Pulte building and is a single storey 61,000 square foot office building built in 1999 and leased to investment grade Comcast Corp as a call center. Unlevered returns are very attractive with the Pulte building having an average cap rate of 8.8% and the Comcast building at an average of 9.4%. These properties are unfinanced, and we are in the process of adding them to the collateral pool for our revolving line of credit to increase our liquidity.

When you look at all the progress we have made over the past several years, bringing down our leverage, selling the debt portfolio and managing the existing portfolio, it’s easy to overlook the fact that over that same time period we have also grown the owned property portfolio pretty significantly. In total we have added about $340 million in new high quality acquisitions for a total of 2.2 million square feet over the past several years.

These two acquisitions including the two built-to-suit transactions we have coming online in 2013 have bolstered the overall portfolio and will generate strong and growing cash flows for years to come. That said, acquisition markets remain highly competitive and they have, not surprisingly slowed somewhat as we entered 2013, given the high level of activity in the fourth quarter of last year.

However activity should pick up as the year goes by and we expect that the strong acquisition momentum we demonstrated in 2012 will continue over the balance of 2013 and beyond. It is no surprise to anyone, that real estate transaction volumes are closely tied to overall economic activity.

At CapLease, we see the economy continuing the long slog out of the great recession and with that we should enjoy continued slow expansion of potential transactions both in the built-to-suit space and in existing product. We recognize that cost of capital is one of the most important drivers of our ability to grow CapLease. In 2012 our blended cost of capital improved significantly, allowing us to be competitive as we looked at acquisitions.

Long term financing rates remained at historic lows throughout the year, allowing us to borrow money at coupons in the 4% range and even below. The net positive spread of 4% mortgage rates as against 8.5% cap rates is the widest it has ever been in my career.

While financing rates are exceptionally low, we continue to be conservative in the absolute level of our borrowing with no asset purchased in 2012, financed at a level greater than at 55% loan to value. Looking back over the year, we demonstrated our continuing discipline in supporting our acquisition activity with the best available capital. Early in the year we raised an additional $50 million of perpetual preferred capital to support acquisition activity.

As our share price grew and our acquisition momentum remained strong, we judiciously utilized our existing ATM to cost-effectively support our growth. We believe that carefully targeted use of the ATM gives us the flexibility to raise capital to meet our near-term needs in the manner that is most favorable to our existing stockholders.

From an earnings perspective, 2013 will be a transition year for us before we reestablish earnings growth momentum. In looking at our prospects and expected results for 2013, we need to examine our recent history. Over the past several years, we sold most of our more highly leveraged debt portfolio including our CDO in 2011, thus shrinking our overall portfolio.

Given the higher leverage, the returns on equity were stronger and selling the portfolio has put down our pressure on earnings; however, these actions reduced our leverage meaningfully and freed up capital that we have since reinvested into new, lower leverage property investments with good cash flow.

At the end of 2012, we faced expected but still significant vacancy and rent roll down at three of our large distribution properties. We renewed two of the properties at lower rent levels and the third property in Fort Wayne went vacant the very end of the year. We will feel the full impact of these events in 2013.

Additionally, we will impacted in the second quarter of this year with a major tenant in our Silver Spring Office building and the sole tenant in our Las Colinas Texas office building will vacate these properties which will temporarily impact earnings until they are re-leased. Taken together, these are the primary reasons why we expect earnings to be temporarily down modestly year-over-year.

The negative earnings impact of these events has been largely but not entirely mitigated by the positive impact of new property acquisition activity. For example, rental revenue was about 7% higher in 2012 than in 2011. The increase in 2012 includes virtually no rental revenue from our December 2012 acquisitions and no rental revenue from the two built-to suit projects currently in progress which will come online during the second quarter of 2013.

Looking out further, as we continue to lower leverage, our cash flows that support the dividend will grow meaningfully and as we add additional assets to the portfolio the impacts from vacancy in 2013 will largely disappear.

We recognize the success in releasing these three properties will be of particular importance both to us and to investors this year. The Fort Wayne property at 764,000 square feet is a bit more binary than is typical in our portfolio. The building itself is a very high quality class A distribution facility but it is located in a viable but still somewhat secondary market.

As such the universe of large tenants that can occupy the whole building and that will look in this market is not as large as in a primary market. Even so we've had traffic through the building in the past several months and we remain confident that over time we will get it leased.

The Silver Spring and Los Colinas properties are quite different. In Silver Spring we already have about 25% of the 224,000 square foot property leased to other tenants and we expect to have this building fully leased on a multi-tenant basis in 12-18 months. The Silver Spring asset is a highly fungible office building in a good market. Consistent with our view with respect to nearly the entirety of the existing portfolio, we expect new rents to be comparable with existing rents.

The Dallas Los Colinas market is very active, reflecting the overall strong Texas economy. Our property there is about a 100,000 square feet and is ideally situated to attract the larger call center type tenants that dominate that market.

The lease does not mature until May and the property is already attracting significant interest. We expect to lease the building to one or two tenants over the next 12 months at rents comparable to the existing rents. We will aggressively work to resolve these situations as promptly as possible during 2013, while still remaining disciplined so we can reap long term value.

To reflect our approach, our 2013 guidance includes conservative releasing and refinancing assumptions for these properties. It is also worth noting that these and other properties with maturing leases in the months and years ahead will present refinancing opportunities to CapLease.

As part of the financing structures we have put in place the related debt will mature generally, simultaneously with the lease which should allow us to continue to reduce debt service payments given the current very favorable financing environment.

The weighted average mortgage financing rate of our maturities over the next few years is 5.6%, and with amortization factored in, the current pay rate is over 8.5%. Conversely the new mortgages we have obtained in 2012 have been at lower leverage and at a rate in the 4% range, a full 150 basis points or so lower.

To the extent we decide to refinance some of these assets on our line of credit, that rate is currently is floating at 3%; refinancing at lower leverage but at significantly lower interest rates and amortization should have a positive impact on earnings and cash flow in coming years as we have debt maturing which we can refinance.

Finally turning to the dividend, the strong progress we have made on our business plan, coupled with our positive outlook for our business and our portfolio cash flows in the coming years culminated in the decision by the Board to raise the common dividend twice in 2012 by a total of 15%.

By the traditional metrics of FFO and cash available for distribution, we have a low dividend payout ratio, supported by diversified and growing largely investment great portfolio of assets with growing income. As we further grow the portfolio in the years ahead, we will continue to strengthen our post year cash flows which will continue to support a well-covered and rising dividend.

I will now turn the call over to Shawn. Shawn?

Shawn Seale

Thanks Paul. Today we reported FFO as adjusted for comparability for 2012 of $42 million or $0.62 per share which hit the top range of our guidance. The net loss to common shareholders for 2012 was $11.7 million or $0.17 per share. Total revenues for 2012 were $162 million, compared to 2011 revenues of $162.3 million.

Reflecting property acquisition momentum, rental revenue rose 7% in 2012 to $137.1 million from a $128 million in 2011; while interest income fell 60% from $19.7 million in 2011 to $7.8 million in 2012, largely as a result of the 2011 sale of most of the debt portfolio. Interest expense also fell about 12% from $76.6 million in 2011 to $67.1 million in 2012 as we have continued to de-lever and finance new acquisitions at lower rates.

For the fourth quarter, FFO was $10.3 million or $0.15 per share. FFO as adjusted for comparability was $10.7 million or $0.16 per share. The net loss to common shareholders for the fourth quarter of 2012 was $2 million or $ 0.03 per share. Total revenues for the fourth quarter of 2012 were $41.6 million, as compared to $39 million in the comparable period of 2011.

Turning to our balance sheet, from a liability perspective, one of our biggest achievements for the year was the reduction and extension of the mortgage debt on the three Nestle warehouses. We repurchased the $11 million junior note from a private investor for a purchase price including transaction costs of $2 million. We also extended the $106 million senior note.

The new five year term is inclusive of extension options with the last two years subject to re-tenanting the Fort Wayne Indiana property by August 2015. You may prepay the loan at any time without prepayment penalties and we expect to do so to take advantage of low rates once the Fort Wayne property is re-tenanted. With respect to our recourse debt, we retired $15.8 million of our 7.5% convertible notes and extended the remaining $19.2 million for an additional five years that we may call those note at any time.

We added a new $100 million revolving three year credit facility with Wells Fargo which will be our primary short-term borrowing facility. At yearend, we had roughly $57 million outstanding on the line, up from $38 million at the end of the third quarter as a result of fourth quarter acquisition volume.

During the fourth quarter, we also established a new lending relationship with Keybanc to refinance our small remaining debt portfolio and we had an outstanding balance of about $10 million on that facility at yearend. This facility may be extended through 2017.

Overall, our leverage continued to fall. Our total leverage is down about 5 percentage points to 61% at yearend. Leverage on the owned property portfolio is even lower, finishing the year at 59%. We will continue to drive leverage down further in the months and years ahead in a disciplined and economically efficient manner. As we drive leverage down, our equity in the portfolio will continue to grow meaningfully and that will have a positive impact on our future cash flows.

We also continue to have strong financial flexibility and liquidity. We have about $53 million of cash on hand and $14 million of immediate availability under our revolver, which will grow to about $30 million once the Comcast and Pulte properties, are added to the borrowing base. Finally, in terms of our guidance for the full year 2013, we estimate FFO to be in the range of $0.55 to $0.60 per share and earnings per share to be in the range of minus $0.07 to minus $0.03.

As Paul mentioned, we have three warehouse properties with leases originally to Nestle that expired at the end of 2012. We also had two properties that have expiring leases in May of this year. While we have extended two of the three warehouse properties with new leases, the impact of the rental roll downs at those two properties and the expected downtime in property expenses associated with other expected property vacancies has contributed to the expected decline in our year-over-year per share FFO included in our guidance.

New property investments from last year, the completion of our two existing build-to-suit projects, and expected new investments in 2013 will offset those declines to a large degree, but not completely for the current year. As we release the properties that have lease terminations this year, those new leases will add to earnings in future years.

Our annual guidance for 2013 also includes a variety of other assumptions discussed in today’s Press Release. Consistent with past practice, for a variety of reasons, we do not disclose acquisition specific targets. As we make acquisitions, as we have in the past we will disclose their material terms.

I will now turn the call over to Paul for some final comments before we open it up for questions; Paul?

Paul McDowell

Thanks Shawn. 2012 was terrific for us as we maintained our strong acquisition momentum throughout the year. We continued to evaluate additional opportunities in the acquisition markets. Our liquidity remained strong, our portfolio cash flows are good and we have access to additional capital as we need it.

Finally we raised our common dividend twice during the year. As we look out into 2013 and beyond, we firmly believe that CapLease’s prospects are good and getting better all the time, and we remain quite positive that we will continue to add more value for this company in the future.

I will now open it up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Joshua Barber with Stifel Nicolaus. Please proceed with your question.

Joshua Barber - Stifel Nicolaus

Paul, in light of your comments and some of the acquisitions that you guys have done this year; I’m just curious CapLease’s posture about doing more multi-tenant buildings. Certainly with things like the Sliver Spring lease and other assets like some of the Omaha assets, but even the number of the Woodland’s building, is your posture overall changing from being more of a pure net lease company to being alright with taking on certain multi-tenant assets in good markets or is that just going to be more one-off basis?

Paul McDowell

The answer to that Josh is largely no. With respect to the Silver Springs and the Omaha properties, those are formally single tenant properties that now converting to multi-tenant. We may or may not hold those assets if they produce strong returns or we may sell them as time goes by. A good example is the property on Dodge Road in Omaha. That property we now have fully re-leased to a handful of tenants and that produces unlevered returns of 10% or so. So that’s a good asset.

With respect to new acquisitions, I think our focus continues to be on buying assets that are net leased primarily to a single tenant. That said, if we find assets that are dominated by one tenant much as you see for example in WorleyParsons transaction that we recently purchased in December in the Energy Corridor in Houston, there WorleyParsons is 90% of the property and there is another tenant in there for 10% or so.

So, I think you might see us do that to some degree but not move into sort of the multi-tenant arena.

Joshua Barber - Stifel Nicolaus

And when it came acquisition commentary, I know it’s always tough to see what’s going on in the coming year, but can you give us some commentary on the built-to-suit market? Is that still very a good area especially with banks starting to come back into more of the construction space? Do you think that’s still going to be a good area for CapLease or is that increasingly getting a bit more crowded out?

Paul McDowell

I think it’s still a good area, but there is also more competition than before. Unlike I think pre-credit crisis, although the banks are now back and willing to do construction financing, they’re not willing to do the type of construction financing they did pre-credit crisis which is a 100% of construction cost and 100% of development cost. They still now require very sizable equity components and very often that equity to go in before their construction loan started to be drawn. So we think that in 2013 and 2014 the built-to-suit markets will continue to be fertile ground for us, but we will face competition. On the other front of course, to the extent that the United States economy continues to recover, hopefully we'll see some more volume in the built-to-suit markets than we've seen in past years.

Operator

(Operator instructions). Our next question comes from the line of Mitch Germain with JMP Securities; please proceed with your question.

Mitch Germain - JMP Securities

Just curious Paul, and with your commentary with regards to some of the leasing activity, seems like you're a bit more positive about Silver Springs in Dallas than you are about Fort Wayne. I was looking at last transcript seeing that you are probably a bit more positive on some of the prospect activity in Fort Wayne. Did you see a bit of a slowdown over the quarter, or is it just really looking at the market itself and the type of asset and trying to manage your expectations with regards to leasing it up at that point.

Paul McDowell

Well I think the difference between the two properties or two sets of properties Mitch is really that the Fort Wayne property is a 764,000 square foot warehouse. So it's an enormous property, really configure best for single tenant although we can divide it into two. So it’s a little like elephant hunting. If you find one and its right there, then you sign them up and you've now leased up the property more quickly. But it takes time to find a tenant, and of course the type of tenant that can occupy that big a property is a very large tenant and that market isn’t quite as deep as say some other distribution markets.

So I wouldn't take my comments as being downbeat necessarily, just being realistic. We could find a large tenant that comes tomorrow and we could announce in our next call that we've leased it, or that large tenant may not show up until several months from now.

With respect to the Silver Spring property and the Los Colinas properties, those properties are in very deep markets and we can lease up the Silver Spring property on an incremental tenant by tenant basis. So you can have tenants who take 5000 feet, tenants who take 10,000 feet, so on and so forth. so a little more linear in the way those properties are expected to lease up.

Mitch Germain - JMP Securities

And then looking at your acquisition pipeline, obviously it seemed like you picked up steam in the fourth quarter, taxed motivated sellers. You said that you guessed your reference that it's come down a bit. Versus year ago levels, is it consistent with where you sat, is it still above this time last year?

Paul McDowell

Yes, probably a little bit above what this time last year. I think in general, in my career in commercial real estate such as it is, you very often see a flurry of year-end transactions, even when there isn't tax motivated selling and then a pause where everyone recaptures their breath right after the holidays and then you start to see new transactions enter the market late in the first quarter or early in the second quarter.

So, I think traditionally we've generally seen acquisitions volumes weighted towards the second half of the year and that feels like what will happen this year as well. We are looking at transactions now. We are seeing some good transactions. So the transaction flow isn’t zero. It’s just not as heavy as it was at the end of last year.

Mitch Germain - JMP Securities

And pricing, have you seen any further contraction in cap rates?

Paul McDowell

Not so much, from the fourth quarter so far to the first. There is downward pressure on cap rates given strong financing ability, right? When you can finance an asset at 4% and even less, that puts downward pressure on cap rates. That said, in the sector in which we traffic with longer term leases, that has a natural tendency to, everyone recognizes it over time. You need a certain level of yield, so our cap rates and our market don't compresses radically as you might see for example in a CBD market.

Operator

(Operator Instructions). Our next question comes from the line of Craig Mailman with Keybanc Capital Markets. Please proceed with your question.

Craig Mailman - Keybanc Capital Markets

Just a follow up on that last question, you did nearly $200 million of acquisitions or investment in 2012. I know you don’t have anything implicitly in guidance here, but is that a level that you think could be repeated here, given what you have in the pipeline and where you see yields are or do you expect that could slow in 13?

Paul McDowell

I expect Craig it could be either. Clearly our view is to add as many properties that we possibly can. So we’d like to add more than $200 million if we can find those properties, but we are going to be disciplined because once we buy these properties, we are going to own them for many, many years. So we focus not so much on absolute acquisition volumes because we can buy as many properties as we want, but more of finding those properties that give us the returns that we’re happy with for the long term.

So if you look back in last year I think the average cap rate on the acquisitions we bought was 8.5%. That is level that produces strongly accretive cash flows for us. We are going to continue to look for that type of level of acquisition activity this year and hopefully we can find more of them.

Craig Mailman - Keybanc Capital Markets

I guess my question partly is, we have seen some larger transactions here in the public space and there is a lot of demand for triple net leases here, just given where bond yields are. Do you think it’s going to get harder and harder to find assets in your targeted range or is there less competition in the asset you guys are going after from better capitalized players, so where you feel that there is enough of an opportunity in those targeted ranges to still kind a get a good investment volume here?

Paul McDowell

It’s never easy and it’s never been easy in our career to find these assets. But we’ve generally been resourceful in finding those transactions that through our great network of contacts; we’ve been in this business for close to 20 years. So we were able to find transactions maybe that some others aren’t seeing as quite as much. We are able to meet competition.

And one of the reasons too is that we also focus on rather than these big portfolio acquisitions, where you see cap rates being driven down to very, very tight time frames, we are happy to originate assets by asset where we get a better cap rate and one of the other things we look at too is we are looking at some of these properties where rather than have just one tenant, there is an anchor tenant that occupies 80% to 90% of the building and there is another tenant that occupies somewhat less than that and in no circumstances we find in that sector somewhat less competition and better cap rates and conversely better financing rates.

Craig Mailman - Keybanc Capital Markets

Okay and then for Shawn, it sounds like you guys have between cash-on-hand and kind of pro forma availability on the line, over a $100 million of dry powder here for investments, just kind of wonder how you think about that versus the potential to maybe you have to take the choice or Omnicom mortgages on the balance sheet and kind of what’s your current thinking for that now, just also, as you look to expand capacity, given where the stock price is versus where the preferred market is, what would be your preferred choice here to blend in with some secured debt on future acquisitions.

Shawn Seale

We certainly like to maintain flexibility in terms of how we grow the portfolio, how we finance our existing properties and so on. So as you’ve seen us we do in the past, we will be diligent raising capital in the right sizes and in right portions of our capital stack where it makes sense to do so.

Yes, we did a small offering, as you saw earlier in the first quarter with a new Series C preferred which is showing up as at least a 100 basis point drop in that level of our cost to capital. As you mentioned we may in fact payoff certain of the property mortgages and put them in the balance sheet or put them in the line. So we feel like we are continuing to make good steady progress on building that financing flexibility. We feel like we’ve got very good access to common preferred secured debt capital right now. So things are feeling very good.

Operator

Thank you. (Operator Instructions). Our next question is for Hall Jones with AEW Capital. Please proceed with your question.

Hall Jones - AEW Capital

Yes, I would like to ask a question kind of the same lines, and if you have mentioned this earlier, I apologize, but as far as the competition for acquisitions, how much are entities like American Realty Inc. dipping into the waters that you typically are swimming in when you are looking for acquisitions?

Paul McDowell

We see them relatively infrequently, and the reason is that they have a tendency to focus on the smaller asset classes like bank branches and CVSs and Walgreen in the retail sector, which is the sector that we don’t particularly traffic in. In the larger office sector they look for assets, $80 million, $100 million, sort of the trophy office building if you will, whereas we look for fungible office buildings in the smaller footprint of $30 million to $40 million. So, I don’t want to say there isn’t competition, there is; but we don’t typically see the non-traded rates as much.

Hall Jones - AEW Capital

Are there any new players that you have seen come in the last year or two, or is it the usual players that you have been competing against?

Paul McDowell

Yes, it’s a pretty diffused market, right. We often don’t know who the competition is. You certainly don’t know during the process when you are looking to buy the building and sometimes you find out later. I would say there is no category killer competition competitor that we have seen in our sector of the market. We continue to have to face pretty stiff competition as we go out there, but I don’t see the competition as particularly greater in the past year or two years than it has been, say over the past six or seven years.

Hall Jones - AEW Capital

So the drive for yield hasn’t quite made it into your pond yet.

Paul McDowell

No, it has to some degree but I also think on the other side of the component what has changed is that we used to face competition from lots of smaller entities that could finance the assets at 95% loan-to-value ratios. So, you didn’t have to have a lot of equity to play in our sector. That’s changed, right, and now you have to have 40, 50, 60 points of equity to buy these assets. So the sheer number of competitors is down.

However, the competitors that remain are all reasonably well capitalized and everyone is trying to chase yield. The long term nature of our leases, you can never trick yourself as to where you think yield is going in the next few years. You can’t immediately raise rents. So that has a tendency to mute the cap rate compression.

And actually one other point I want to make too is that, the spreads where we’re able to finance these assets are as wide as we’ve ever seen them. So even though we’ve seen some cap rate compression we’re able to finance the assets at very, very low interest rates. So, our total net spread of 400 basis points is very wide and that’s driven very, very strong cash-on-cash returns.

Operator

(Operator Instructions). Mr. McDowell, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Paul McDowell

Thank you everyone and we look forward to updating you on our first quarter conference call in several months.

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