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Executives

Brad Cohen - VP of IR

Paul McDowell - Chairman and CEO

Shawn Seale - CFO

Analysts

Gabe Poggi - FBR

Craig Mailman - KeyBanc Capital Markets

John Apgar - Citigroup

Sheila McGrath - KBW

Todd Stender - Wells Fargo

Presentation

Wright Express Corporation (WXS) Q1 2010 Earnings Call May 5, 2010 10:00 AM ET

Operator

Greetings and welcome to the CapLease first quarter 2010 earnings conference call. At this time, all participants are in a listen only mode, a brief Question-and-Answer session will follow the final presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce, Mr. Brad Cohen. Vice President of IR 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 discussions this morning will include guidance and other forward-looking statements and these statements are not guaranteed to future performance and therefore, undue reliance should not be placed on them. We refer all of you to CapLease's first quarter 2010 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 statement.

Also during the call today, the company will be discussing funds from operation, or FFO, FFO as adjusted from comparability and cash available for distribution or CAD which are non-GAAP financial measures. Please read the company’s press release for reconciliation of FFO. FFO I suggested is a comparability in cash of net income the most directly comparable GAAP measure. It’s 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 is our Chief Financial Officer and partner Shawn Seale. We had a busy and productive beginning to the year. The actions we took during the quarter are consistent with our continuing strategy to lower debt particularly recourse debt, improve financial flexibility, intensively manage our existing assets and position ourselves to reestablish portfolio growth. We made significant progress on each and everyone of those priorities in the first quarter.

Most importantly during the first quarter we demonstrated strong access to reasonably price equity capital through our aftermarket stock programs, a direct placement with a prominent new common equity investor and the public offering of our reopen series A perpetual preferred stock. In total, we raised more than $60 million in equity capital during the quarter. While also retiring an additional $26 million in debt. Cash liquidity grows to $96 million at the end of the first quarter from about $39 million at the end of the fourth.

In keeping with our discipline about issuing equity at the moment, we have all the liquidity we need and have accordingly stopped issuing either common or preferred stock under our aftermarket programs. We had good use for the capital, we have raised both for continued debt reduction activity and to fund new accretive acquisition activity. While we are pleased with the progress we have made recently, we have a lot more work ahead of us to build on that success and continue to meaningfully grow our share price. To that end, after the end of the quarter we launched a cash tender offer with the remaining outstanding balance of our 7.5% convertible senior notes critical to us in October 2012.

Our tender is at par and expires on May 10. The price we are offering will not be raised nor will tender period be extended. We are hopeful that we will be successful in retiring these notes and further reduce the recourse liabilities for the enterprise. We believe that our demonstrated access to capital and tender for these notes should put to rest any concerns about our willingness or ability to retire recourse obligations as they come. At this point, we don’t know how many notes in outstanding would be tendered to us. However, even if participation is low we have a strong use of the cash, we have on hand to further reduce outstanding debt into invest the new assets.

Although the commercial real estate market remains under stress that will continue for the next several years in our opinion. The markets are high quality net-lease properties have begun to slowly reopen. And we are confident that we will have the opportunity to begin to grow the asset base again. Our acquisitions team is actively searching for new transaction opportunities and we have several we are considering. We will keep to our 15 year core investment philosophy and will be prudent and deliberate.

While improving overall transaction volumes remained severally depressed which is not too surprising given the shock for the system we have just come through. The continued macro economic climate and a nearly complete absence of new building activity. When we do add assets, our goal would be deferred to build our portfolio with a view to increasing free cash flow per share and continuing to lower overall portfolio leverage. Turning to our existing stable $2 billion investment grade net-lease portfolio at quarter end, the weighted average underlying standard enforced tenant credit rating on our single tenant portfolio was a steady single A minus and on our single tenant owned properties remained at single A.

Our top 10 credits aggregating almost 50% of the total portfolio are all rated investment grade with an average credit rating of single A plus. As a reminder, our top five tenants are Nestle Holdings, the United States government, TJX Company, Aon Corporation and the Kroger Company. We continue to offset manage this portfolio aggressively with our primary focus on these three properties in the portfolio were we have the material opportunity to replace existing vacancy.

Although the credit quality of our portfolio has allowed us to overcome the storms in commercial and real estate and we will continue to do so. We have been impacted by the overall macro real estate environment in a very small portion of our portfolio invested in generic non-net-lease-backed CMBS from 2006.

Although outcomes from the loans in these two pools are hard to predict. We are monitoring them carefully. We also understand that we face a top leasing environment for a property in Rhode Island and to considerably lesser degree the property in Omaha. But have committed significant resources directly to get in these properties leased up. I will now turn the call over to Shawn.

Shawn Seale

Thanks, Paul. Today we reported FFO as adjusted for comparability for the first quarter of 2010 of $9.3 million or $0.18 per share. The net loss to common shareholders for the first quarter of 2010 was $2.8 million or $0.05 per share. CAD in the first quarter was $21.4 million or $0.40 per share. Total revenues for the first quarter was $41.7 million. Un-depreciated book value stands at $8.75 per share. As of today our liquidity remains very good, we have about $92 million of cash and cash equivalence on hand after paying our recent common and deferred dividends.

Although this cash liquidity will have a negative impact on FFO in the near term until its deployed that provide us with the flexibility to retire more debt and drive out our acquisition opportunities. One of the lessons we learned from the recent crisis is that outsized returns often become available in times of high stress and therefore makes long term economic sense to maintain significant levels of cash liquidity. Although, we do not have a definitive cash target, we anticipate continuing to run the enterprise going forward with higher levels of cash on hand that we did in the 2005, 2008 time period.

Obviously the story of the quarter was our highly successful capital raising activities. During the quarter we raised about $8.5 million by selling common stock at an average price of $4.67 per share under our current after market equity program before we shut off in early March. On March 30, we sold $15 million in common stock in a direct placement without using replacement agent at a price of $4.77 per share to Golden Gate Capital.

These shares were placed at the market price from the date of pricing less the same 1.5% discounts that we pay to sell shares to our after market program. In total we issued roughly $5.5 million in common shares during the quarter inclusive of stock compensation awards. On March 31, we reopened our existing 8.8 Series A cumulative redeemable preferred stock and our public offering and sold net of underwriting discounts, commissions and deal expenses roughly $40 million of preferred and an effective yield of 9%. These capital raising activities were done on an opportunistic but disciplined basis.

At the moment an absence of compelling investment opportunity, we don’t expect to raise additional equity capital until we have successfully deployed much of the capital raised in March. Turning to the bank credit facility. We have utilized some of the recently raised proceeds to further reduce our recourse borrowings and as of today the outstanding balance is down to about a $110 million from a $126 million at the end of the fourth quarter. We may use cash on hand to reduce this facility further. As we have previously reported we completed an extension of this facility in the second half of last year pursuing the maturity out on an additional year to April 2011.

We are enjoying the favorite economic returns of the existing facility while at the same time have lowered our overall exposure. We continue to actively discuss our expected financing and extended term needs with our existing lender and we expect to satisfactorily conclude those negotiations in due course.

At this point, we feel very comfortable but not only further extending our credit facility as needed. But also our ability to access conservative amounts of debt capital on both the short and long term bases to fund any asset acquisition activity we may choose to pursue. As Paul mentioned we remained focused on our leverage and we made significant strides in lowering data for the past couple of years to reflect the changed market conditions. Our capital structure was stable before we started these debt reduction efforts and is even stronger today. And looking at our liabilities, it’s important to remember that the vast majority of our debt is advertising non-recourse fixed rate first mortgage debt financed at the asset level.

This type of debt when backed by investment grade credit tenant is very stable and not subject to market upheaval. Without reason the credit quality and steady cash flows of our assets coupled with the term structures of our debt that allowed us to operate at somewhat higher initial leverage that many of our peers don’t have as high quality assets. Even so, we steadily lowered total leverage to about 72% today and expected to hit down further. We have included two new supplemental tables on our leverage at the end of our press release today that show our leverage by business segment and financing source.

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

Paul McDowell

Thanks, Shawn. We continued to execute on our business plans. Over the past 10 quarters, we have remarkably reduced recourse indebtedness significantly increased cash liquidity extended maturities on our bank term credit facility and selectively solved long dated assets that were financed in our shorter term facility.

Our recent capital raises has given us the ability to continue to reduce debt and begin to grow the portfolio again. The team at CapLease remained committed to the enterprise and I firmly believe that it’s a strongest asset we have. I am more optimistic today about CapLease and our prospects going forward, then I have been in several years.

The broad recovery of the capital market has allowed us and other public REIT to significantly improve our balance sheet. As the overall economy begins to recover, we have the resources and access to capital to take advantage of that we believe will be a long favorable investment environment. While transaction volumes remain low they have bounced off the bottom and we are beginning to see a steadily improving flow of quality acquisition opportunities.

I will now open it up to questions.

Question-and-Answer session

Operator

(Operator Instructions) Our first question comes from Gabe Poggi of FBR. Please proceed with your question.

Gabe Poggi - FBR

Two questions. Paul, you just mentioned you're seeing better pricing or you're seeing quality transactions. Can you talk about, just generically, what pricing you're seeing on those transactions? And then number 2, I wanted to ask the obligatory update on Johnston, Rhode Island, and an update the Qwest Properties.

Paul McDowell

With respect to pricing, Gabe, we are still seeing a pretty wide rate in cap rate anywhere from 7% at the very tight end of the range to 9% at the very wide end of the range, say in the investment grade sector where we typically participate that is suburban office properties in the $20 million range that’s probably around an 8% rate or so but that remains a reasonably wide dispersion on cap rate and some of that is as a result of transaction volumes still pretty low but we are seeing transaction within that range.

With respect to the Qwest and the Johnston property, Omaha, rather, and the Johnston properties, the property in Johnston, Rhode Island, not too much new to report there we have had a number of potential tenants through the building. They continue express some interest in the building but we don’t have any active lease negotiations on going at this time. We will hopeful get back changes but at this point it’s sort of still a slow and what we think is a long slog with respect to Johnston.

The information with respect to the properties in Omaha is somewhat brighter, we have been successful in converting most of the existing sub-tenants in the properties there to new long term leases so 5 year leases with growing rent schedules. We have had good momentum on finding some new tenants with particularly with respect to the suburban building and what we call the dodge building which is just outside of downtown Omaha.

Overall occupancy has been about 66% which is really just sub-tenants, existing sub-tenants in place to landmark and about 50% for the property in that what we call the Dodge property and you know we are hopeful that we can maintain the good momentum we have on leasing and that those properties will continue to lease up over the balance of the year.

Operator

Our next question comes from Jordan Sadler of KeyBanc Capital Market.

Craig Mailman - KeyBanc Capital Markets

It's actually Craig Mailman here with Jordan. Could you guys give maybe a little bit more color on the transactions you are evaluating at this point, whether they're part of larger portfolios or are they one-off and maybe the property type?

Paul McDowell

Yeah I think we are primarily looking in one off transactions, we remain open to portfolio transactions to the extent that they combine but most of the transaction in the market today seemed to be either the giant portfolio that we have seen or the one off transactions, so we think we can achieve better pricing in the one off market and that’s where we are concentrated

As far as property types we are looking a number of different property types some are brand new build on distribution type facilities and then others are in suburban office.

Craig Mailman - KeyBanc Capital Markets

And then maybe, you were talking about cap rates in the 7% to 9% range and just looking at your use of the capital, weighing, buying assets in that yield versus paying down the corporate credit notes that aren't going to be as accretive to FFO but are more accretive to cash and sort of weighing whether you want to see the accretion in FFO or you're more focused on increasing cash flow then potentially increasing the dividend?

Shawn Seale

Yeah I think our focus or preference would be to make new investments if we can get yields, the corporate credit note pay downs do give us on immediate pickup to free cash flow which is important but that reduction in leverage if you will is going to happen anyway overtime if we don’t pay an upfront but it is a good alternative for us if we don’t get good traction on the investment side so I think our preference again is to find attractive new investments that we can make.

Paul McDowell

Yeah then the investments that we do make to the extent we are able to make them, will also improve cash flow per share because those will be leveraged at lower leverage levels than we have in the past, that would materially improve free cash flow from that asset.

Craig Mailman - KeyBanc Capital Markets

And are you getting reverse inquiries from parties looking to joint venture with you on some of these transactions, or would they be wholly owned?

Paul McDowell

I think primarily whole owned, if we are to do a joint venture, it would probably be with someone who already had some existing products. One of the challenges, of course, that you face in looking at joint ventures there, its hard enough to find transactions at the moment and we are less eager to share those transactions was just a straight money partner at this stage in time so if we had somebody who came to us and had some properties either under control or that they owned and were looking for a joint venture we would do that but I think primarily you will see us buy properties on a wholly owned basis

Craig Mailman - KeyBanc Capital Markets

Then just one quick one on the Omaha properties, you said the Dodge building was 50% leased right now. Does that include the that's the one that Dex is in, right?

Paul McDowell

Yes so that includes so what we are doing is sort of looking forward so Dex will be decreasing their occupancy of that building and that number is inclusive of that decrease.

Craig Mailman - KeyBanc Capital Markets

And then that was 31% at the time of the offerings, roughly? So have you guys picked up any occupancy in that building?

Paul McDowell

We have got some good active lease negotiations going on there that we have some decent field that are going to go through.

Operator

(Operator Instructions) Our next question comes from the line of Michael Bilerman of Citigroup. Please proceed with your question.

John Apgar - Citigroup

Hi. It's John Apgar here with Michael and Greg. One follow-up question on Johnston, Rhode Island, you mentioned potentially splitting the property up in four, five to six tenants.

Paul McDowell

Yes.

John Apgar - Citigroup

Have you had any more luck marketing the property that way?

Paul McDowell

Well yes I mean we have had tenants that come through that are for of variety of sizes. I think this is really the best way to answer your question. We had 1 or 2 that looking to potentially occupy the entire property and then we have had several that are looking to occupy much smaller portions of the property.

John Apgar - Citigroup

And you're waiting on maybe getting further with the larger tenants before you settle on anything with the smaller tenants?

Paul McDowell

I wish it were that granular. What we are waiting for a solid expression of interest that is a lease proposal from potential tenant.

John Apgar - Citigroup

Okay. And just one quick on Qwest, on the Landmark building, the downtown building, you had 30% under LOI on the last call.

Paul McDowell

Yes.

John Apgar - Citigroup

Were those signed?

Paul McDowell

Almost all of those have been signed.

John Apgar - Citigroup

And then switching over to operations, were there any one-timers in operating expense for G&A?

Shawn Seale

We have had a little higher legal expense, its got non-recurring in the first quarter and that’s the only thing now that kind of comes to mind, we have got we do have a higher property expenses that we have picked up relative to the FM Global and former FM Global Omaha properties but the increase versus last quarter is mostly due to converting the Omaha properties from pure net leases under the former release with Qwest to more traditional operating leases where we have got expense caps.

John Apgar - Citigroup

And roughly how much was that?

Shawn Seale

Well year-over-year if you look this quarter it’s about a million dollars and almost exactly a million year-over-year and not all that is being passed through in terms of net income because of that. We are getting higher gross revenue on the Omaha properties versus on the previous construct, but just on the expense side its about $1 million and I think we have said preciously the just the portion attributable to the Johnston property, it is in the neighborhood of $1.5 million or so.

John Apgar - Citigroup

And last call you had mentioned that you were looking to sell a property previously released to Cott in Reading, Pennsylvania. Have you come closer to closing on that or?

Shawn Seale

Yes that transaction closed in the first quarter and we had accrued for that transaction at year end.

Operator

Our next question comes from the line of Sheila McGrath with KBW. Please proceed with your question.

Sheila McGrath - KBW

Paul, I was wondering if you could give us a little bit of information on the background of the private equity placement. Was that something that you went to a few investors with or how did that exactly come about?

Paul McDowell

No that came about through just strict reverse increase Sheila, golden gate contacted us, expressed an interest in making an investment in the company, we spend a little time getting to know that I am talking with them, there as you may or may not they are $8 billion multi strategy investment for, they had some very high profile investors in their firm and they expressed a lot of interest in CapLease and after a bit of negotiation back and fourth, we decided to allow them to make a direct equity investment into the firm.

Operator

Our next question comes from the line of Todd Stender of Wells Fargo. Please proceed with your question.

Todd Stender - Wells Fargo

You've raised the equity already on the first quarter. How about on the debt side? And by securing mortgages on new investments, is it life insurance companies that are showing more interest and if so, what types of terms are you hearing?

Paul McDowell

We haven’t accessed the debt market recently, although we of course keep a very close ear to the ground and what’s available out there, I think the primary source of financing today is life insurance company and that they are aggressive on transactions where they feel that it is sort of a down to middle type transaction though investment grade net lease property up we think characterizes it down to middle and that turns would probably be a coupon in the high fives to 6% level or for a 10 year type term. We are also seeing a reemergence of the conduit market.

Several of the large investment banks have reopened their conduit and they are also actively looking for product so I think from a one off asset bases, there continues to be a significant amount of debt capital available to the extent that you are accessing those markets or low leverage 50% to 60% leverage type loans

Todd Stender - Wells Fargo

On, say, ten year paper?

Paul McDowell

On ten year paper

Todd Stender - Wells Fargo

And do they have a preference, underwriting mortgagors, on, say, office space versus retail?

Paul McDowell

I don’t think there is a necessary preference I think there is a strong preference for high credit quality or good credit quality so you know loan home improvement center for example is a retailer with very high credit quality and when they would be pursued as actively as an office tenant that also has a similar credit rating.

Operator

There are no further questions in the queue at this time I would now like to turn the floor back over to management for closing comment.

Paul McDowell

Thank you very much everyone. We look forward to updating you again on our second quarter conference call in 3 month’s time.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: CapLease, Inc. Q1 2010 Earnings Call Transcript
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