CapLease, Inc. Q2 2010 Earnings Call Transcript

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 |  About: Caplease, Inc. (LSE)
by: SA Transcripts

Operator

(Operator Instructions). Thank you our first question is from Sheila Mcgrath with KBW please proceed with your question.

Sheila Mcgrath - KBW

Shawn I was just wondering or Paul could you walk us through the guidance change the drivers of the change. And you also mentioned in there that it excludes investment activity. Could you talk to us about what might be in the pipeline that you think is there anything that could close this year.

Paul McDowell

The first thing is our original guidance that we provided for the market at the very beginning of the year. That we had no assumptions with respect to capital raises that we have conducted later in the year. So because we didn't when or in what level we would be doing capital raisings is very difficult to make assumption for guidance.

So guidance at the beginning of the year did not include the capital raises that we made at the end of the first quarter. Now that we have had those capital raises we are able to look forward and see the impact of the capital raises have had on the immediate results and then the impacts they will have obviously later.

The earnings result of the guidance being brought down is almost solely a function of having a large cash balance on the balance sheet which has yet to be invested in new assets which will once these investments will continue, will produce returns that will increase the amount of FFO per share.

With respect to the opportunities for transactions to close this year, there is opportunity for transactions to close this year for given how late we are in the year, any transactions we close this year will have a very minimal impact on expected results this year, but would have obviously a good impact on results in 2011.

Sheila Mcgrath - KBW

Okay. And just quickly on the Omaha asset and also Rhode Island. Is the plan there eventually to sell both those assets?

Paul McDowell

I think so, Sheila. Once the asset in Omaha are leased up, they will be producing very, very short returns on our vested equity, that said, they are multi-tenant office buildings and that is not in our core investment philosophy. So the likelihood is, once we have them leased up, we'll look at what the sales market is at that point in time and make a judgment about selling those assets and then redeploying that capital into single tenant long-term leased property.

And the same would be true, although we expect the pace to be somewhat slower with respect to the FM Global assets.

Operator

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler - KeyBanc Capital Markets

Just wanted to touch base on this pipeline a little bit more. What types of opportunities are you seeing? Are they single assets versus portfolio? The types of sellers that you're seeing in the market today and where is pricing?

Paul McDowell

I think we are seeing a variety of different types of properties in the market. As I indicated in my prepared remarks, the investment volumes continue to remain low from a historical perspective, but they picked up quite appreciably. So, at the moment they are a couple of portfolios including one or two very large portfolios in the marketplace. But mostly what we are looking at are asset-by-asset, single tenant, long-term lease properties. We are seeing a variety of them from a number of different avenues, including some from direct from developers who are on built-to-suit received.

The built-to-suite market has begun to pick back up and companies have begun to start to expand. We see that concentrated largely in the industrial sector. And then we're also seeing a wide variety of properties that are in the marketplace just from the traditional sellers, whether they be investors and the like.

With respect to cap rate, we continue to see in very well located properties, cap rates are somewhere in the seven and is not as well located. Properties are shorter, lease terms, cap rates are as wide as nine.

This continues to be a wide dispersion in cap rates depending on property type and locations, somewhat wider than a typical.

Jordan Sadler - KeyBanc Capital Markets

Okay and then as a follow-up, just the type of financing you would expect to use and what the pricing looks like on that financing.

Shawn Seale

I think the financing we would expect to use is predominantly traditional first mortgage on debt and property by property, albeit at lower leverage levels than we have historically. There is ready and kind of completely available financing for well dealt long-term lease properties. I think the financing rates are anywhere between the low five to perhaps six and where we've been hearing numbers lower than that for low leverage wells positioned properties.

But I think you know again relative to leverage level, it's probably going to be in the 50 to 60 or may be 65%, certainly much lower leverage than we've had historically at the property level but we think that's appropriate given our over all objective to pull firm leverage down over time.

Jordan Sadler - KeyBanc Capital Markets

This is that 10-year, 30 (inaudible).

Shawn Seale

Yes, I think we could do perhaps longer term if we wanted to. Somewhat we're just here and we'll have to see as we get closer to actually getting something controlled and then financed. I'll point out too that, one of the positive things about our renewed line with Wells Fargo is it does give us the flexibility to quit, a newly acquired properties and then completion of long-term financing and without any exception of cost which is great.

Jordan Sadler - KeyBanc Capital Markets

Just as a follow-up to Paul's commentary, should we expect you to do the one-off transactions rather than a larger portfolio? And is there a reason you wouldn't look at a portfolio at this point?

Paul McDowell

No there is no reason that we wouldn't look at that portfolio Jordan, it does that portfolio's credit quality, match our existing portfolio. Is it offered at a price that we think makes sense and then what are the existing liabilities that adds to that portfolio. And so, it's a variety of certain hurdles you've got to jump across the floor, big portfolio would make sense for us. That said, we are open minded that if we can find the right one. On a property-by-property basis obviously, its a little more granular so that we can look at an individual property make a judgment about it and then add it to the portfolio.

Jordan Sadler - KeyBanc Capital Markets

And then last one for Shawn, just the Dry powder question. I think at quarter end you mentioned something like 40 million in borrowing capacity I know there has been some debt reductions and you also $58 million in cash on hand now.

So I am just curious what that total cash plus availability of remaining borrowing capacity are today?

Shawn Seale

Yeah I mean we have got about $58 million currently on hand plus the capacity on the lease lines is about 40.

So you had, roughly $100 million there.

Jordan Sadler - KeyBanc Capital Markets

How much cash do you think you would hold?

Shawn Seale

I think its going to vary all the time, the new line require that we keep the lower, higher cash at $12 million as I said previously, but unless improve materially I think you are going to see us keep higher cash balances in that. Just in case we certainly won't get as much of our cash put to work as quickly as we can.

We are anxious to risen growth of earnings and the portfolio. We will just have to see how it plays out, but again I think you'll see us with increase in cash levels or increases versus historical. We already certainly hope that its less than what we have on hand today.

Operator

Our next question comes from Greg Schwartz with Citigroup, please proceed with your question.

Greg Schwartz - Citigroup

Just following on the acquisition obviously the question to able to put more direct. Do we expect has everything went according to plan can we expect magnitude in the order of around $30 to $40 million this year.

Paul McDowell

Its hard to project Greg, we would like to have that magnitude of all the acquisition activity this year. Basic to function of where we can find the appropriate acquisition opportunities and the yield that which we can achieve. We want to be patient, we want a particular capital we have on the balance sheet to work for the long term add good returns. So we have a good visibility on pipeline, we are actively working on a number of transactions but I don't want to speculate exactly how much that will equate to by the end of the year.

Greg Schwartz - Citigroup

And then on sales, do you have anything on the work or are negotiating.

Paul McDowell

We don't have anything in work so negotiating with prospective sales of existing assets but we would be open to selling assets if we think that we can recycle that capital that's freed up from the sold out and into a higher yielding and that sort of similar credit quality.

Greg Schwartz - Citigroup

Okay, and then just on Omaha and Johnston, and based on what you're seeing in the Omaha market, how long do you think it will take to get particularly the downtown assets leased up, and then on Johnston what's going on with the litigation?

Paul McDowell

With respect to the Omaha properties, we have got a little bit better or significantly better leasing momentum that we had expected on the dodge property. And we have got we think pretty decent momentum on the downtown properties getting both those properties leased up to sort of the 90% - 95% level you know hope through accomplish by some point in the early part or mid part of next year.

And we'd like to beat that but that's kind of the current expectation. With respect to FM Global, we are continuing to press forward with our litigation with FM global and as you remember that has no impact on the asset itself. Its just a function of can we get cash back from FM Global from what we believe are their obligations under the old lead.

And that is in the discovery process and we'll likely take significant amount of time to reach conclusion. But we still believe we have a very, very good case.

Operator

Our next question comes from Joshua Barber with Stifel Nicolaus please proceed with your question.

Joshua Barber - Stifel Nicolaus

Hi, good morning. Most of my questions have been asked and answered. I was just wondering on the opportunity side is there any opportunity there for buying debt on existing properties, either to own that debt for a longer term or in a more aggressive loan-to-own situation?

Paul McDowell

Josh that's an excellent question, the answer to that is yes. We've looked at couple of opportunities and exactly that frame. And that maybe an opportunity that increases over the next year or two as more and more debt come due and there is very much willingness of banks to just roll those debt over.

So we would take a look at sort of a loan to own opportunity or capture think of is very good debt. But the core off course at the asset level has got to say within our portfolio that is a very high, very strong credit quality tenant with a long term lease.

Operator

(Operator Instructions). Our next question comes from Todd Stender of Wells Fargo Securities. Please proceed with your question.

Todd Stender - Wells Fargo Securities

So just looking at the guidance, I certainly went over the high cash balances with some of the dilution. Are there any offsetting items that we can expect some improvement on in the second half, maybe it's G&A, which kind of ran a little relatively low in this quarter, can we expect that to maybe that's a good run rate going forward?

Shawn Seale

I think that if there is a little bit of room mostly in the G&A, we did have some savings this quarter versus last quarter and we hope that we can continue that through, but things do pop up unexpectedly. So I won't be surprised if we have a little higher G&A relative to this quarter and for the rest of the year, but we do hope to do a little bit better than that. And the key variability in the G&A is primarily legal fee driven.

Todd Stender - Wells Fargo Securities

Okay, thanks. And then just back to the build-to-suit space, it seems to be one of the most visible sources of new investments for you and your peers. Are you seeing more competition out there or you're really not seeing competition because these are largely off-market direct deals?

Paul McDowell

Well, I suspect there is always competition Todd, but most of the build-to-suit transactions that we've been examining are generally off market transaction. There as developers start to get some traction again with corporation is looking to expand, the commercial banking sector hasn't yet caught up with construction financing and so and so forth. So developers have gotten less financial opportunities than they did in the past. And so they turn to their past relationship and we get the phone calls. So there is less competition than there was, but there is always competition, if you know what I mean.

Joshua Barber - Stifel Nicolaus

And last question. Just as a reminder, what kind of CPI exposure do you have on leases, if any, rolling over the next 12 to 18 months?

Shawn Seale

You mean in terms of upside or?

Joshua Barber - Stifel Nicolaus

Potentially downside or not getting any ramp ups, if you have a floor.

Shawn Seale

Yes, I mean our lease is generally reset every five years not every year. I mean look back over some period of time. So I'd say yes, we have some exposure. Most of our leases do have like 1% to 2% annual increases. If there is fixed, its kind of specified in that range. So I'd say we have very limited CPI exposure. Most of our leases again have contractual fixed box over their term.

Operator

(Operator Instructions). Our next question is a follow-up from Jordan Sadler with Keybanc Capital Markets. Please proceed with your question.

Craig Mailman - Keybanc Capital Markets

Hi guys its Craig Mailman here with Jordan. Just a follow-up on the CMBS risk, could you just remind us how much generic CMBS you guys are watching? And maybe if that impact is potentially including guidance or how much you think that would have to be written down at this point?

Shawn Seale

Well we have two bonds, that we're watching, that total at their face amount, $19 million. So not a very large component of the $2 billion portfolio but not insignificant either. And those bonds when they were issued, they're generic CMBS. One bond was rated AA and the other bond was rated BBB or BBB+. So they have significant amount of subordination under them but we are watching the underlying servicing reports as loans in those various pools move to special servicing. So far there have been no realized losses in either two.

So there is really nothing to do at our bonds which are much further up the capital structure, but they are traditional CMBS loans, in some of those pools including these two, got some fresher on them, so we're monitoring them carefully.

Paul McDowell

Right, what's happened is there's more and more loans have gone into special servicing. That's kind of the first step that alone gets into trouble. So we're starting to monitor those at least quarterly and discussing with the special service there to loan level detail what's going on. And again so far there were no new loans put into that special servicing bucket in this past quarter which is good and so far there have been no realized losses incurred in either pools. So that's also a (inaudible).

Craig Mailman - Keybanc Capital Markets

Okay and guidance exclude any effect, this was half correct?

Shawn Seale

That’s correct.

Operator

Our next question is a follow-up from Sheila Mcgrath with KBW. Please proceed with your question.

Sheila Mcgrath - KBW

Yes Paul. You did mention that you have reduced debt about $17 million. I was just wondering if you look ahead over the next 18 months or so. Is there a level that you're targeting to pay down or a leverage level that you want to have the company operate at?

Paul McDowell

We'd like to continue to lower leverage Sheila and it's important to remember of course that we naturally de-leverage over time and that runs about $40 million a year or close to sort of the $0.80 a share of just natural de-leveraging. And in addition to that if we think it makes sense we can continue to pay down additional debt. We will continue to de-leverage not only naturally and maybe also by paying down that voluntarily. But we hope to de-leverage by growth. So as we can start to grow the portfolio we'll leverage those assets either not at all or at lower levels which will have a 10 feet of total leverage down.

Where the bottom, where the leverage point is where we think we need to get to is not perfectly well defined. We have very high quality assets with very long leases, so we can maintain reasonable amounts in leverage, but the property portfolio now is below 70% level. And heading down from there maybe the right numbers in somewhere in the high 50% to 60%.

Operator

There are no further question in the question at this time, I would now like to turn the floor back over management for closing comments.

Paul McDowell

Thank you very much everyone for joining us on this busy morning, and we look forward to talking with you again next quarter.

Operator

Ladies and gentlemen this does conclude today teleconference, you may disconnect your lines this time. Thank you for your participation.

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