CapLease Q4 2007 Earnings Call Transcript

Mar.18.08 | About: Caplease, Inc. (LSE)

CapLease, Inc. (NYSE:LSE)

Q4 2007 Earnings Call

February 27, 2008 12:00 pm ET

Executives

Brad Cohen – Investor Relations

Paul H. McDowell - Chairman of the Board & Chief Executive Officer

Shawn P. Seale – Chief Financial Officer, Senior Vice President & Treasurer

Analysts

Ambika Goel – Citigroup Investment Research

Jeffrey Donnelly – Wachovia Capital Markets, LLC

Josh Barber – Stifel Nicolaus & Company, Inc.

Operator

Good afternoon ladies and gentlemen and welcome to the CapLease, Inc. fourth quarter 2007 earnings conference call. At this time all participants are in a listen only mode. Following today’s presentation instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded today, Wednesday, February 27, 2008. I’d now like to turn the conference over to Mr. Brad Cohen. Please go ahead, sir.

Brad Cohen

Today I would like to remind everyone that part of our discussion this morning will include guidance and other forward-looking statements and these statements do not guarantee the future performance and therefore undue reliance should not be placed on them. We refer all of you to CapLease’s fourth quarter and full year 2007 earnings release and filings with the Securities and Exchange Commission for more detailed discussion of important factors that could actual results to differ materially from those contained in the company’s forward-looking statements. The company disclaims any obligation to update this forward-looking statement. Also during the call today the company will be discussing funds from operations or FFO and cash available for distribution or CAD which are non-GAAP financial measures. Please see the company’s press release for a reconciliation of FFO 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 H. McDowell

Good afternoon everyone. With me on the call today as usual is partner, Shawn Seale, who is our Chief Financial Officer.

This morning CapLease announced its results for the fourth quarter and full year 2007 showing significant sequential growth as compared to the corresponding period a year ago. By any operational measure 2007 was another very successful year for CapLease. The highlights for 2007 were continued solid progress our long term business plan as evidenced by our significant revenue and FFO growth as compared to 2006 driven in part by the addition of close to half a billion of new property investments. We have in place a very high quality asset base with growing and predictable revenues that support our solid FFO, CAD and dividend streams. These provide the foundation for building long term shareholder value. 2007 also saw CapLease obtain $326 million of long term, fixed rate financing on the portfolio including a $130 million term financing completed in December on a portion of our debt portfolio previously financed on the warehouse line. We also raised $198 million of additional capital during the year through our common and convertible offerings to continue to fund the growth in our business plan. While our operational metrics were great and bode well for us over the long term the share price at the end of the year, like that of most REITs, wasn’t great. In large measure this was a result of the macro environment that affected not only REITs but a huge swap of the financial markets in the second half of the year.

I wish I could tell you that market conditions are improving but so far they haven’t. The turmoil in the financial markets and now the broader economy is well publicized and I suspect that none of this is news to anyone listening on this call. The question we need to answer for you today as best we can is what is the impact of these unprecedented market conditions on CapLease? The answer has three components. First, not much when analyzing our current portfolio which is well positioned and supports our dividend, CAD and FFO expectations for 2008. Second, asset growth will be limited until financing market conditions stabilize with our best estimate being that that does not occur until the second half of the year. Third, while it may feel like it now current conditions won’t last forever and based on our more than 12 years in this business we think that over the intermediate to longer term that the market is coming strongly in our direction and that we will see great opportunities in the months and years ahead with diminished competition.

Turning first to CapLease’s current portfolio it continues to perform in 2008 as flawlessly as it did during 2007. Our $2.1 billion investment portfolio is of very high credit quality with an average corporate tenant credit rating of A- from Standard & Poors and it continues to deliver stable and predictable long term cash flows. It is worth noting that our portfolio size reflects our value for financial reporting purposes before depreciation and amortization and does not include the appreciation in value on our owned property we believe has occurred since we acquired them. This existing portfolio drove increasing dividend coverage in 2007 with the dividend representing 78% of our FFO for the year. Coverage will continue to grow and we expect the current dividend to be in the range of 80% of CAD and about 75% of FFO in 2008. Given that our dividend yield is currently over 9% it’s covered by our existing strong credit quality portfolio and its tax advantage we believe our shares offer a compelling and secure investment in these difficult market conditions. Our current portfolio will also benefit in 2008 from the $130 million of attractive long term fixed rate financing added in December. The assets were financed with an institutional lender outside of the structured credit markets a reflection of the transparency and high credit quality of our investments and our more than 12 year history in financing net lease assets. We believe this financing strategy can be replicated in the months and years ahead. Our current liquidity position is also strong, with $52 million of cash in our balance sheet, another $30 million of undrawn capacity on the working capital revolver and $5.6 million of restricted cash in the CDO.

Turning now to our asset growth expectations, we continue to see most of the transactions in the marketplace and are closely monitoring market conditions. While we have recently seen some modest up tick in cap rates for investment grade net lease assets they have largely remained steady throughout the current crisis. This is in stark contrast to the upward movement in cap rates for net lease assets leased to below investment grade tenants and most particularly for non-credit retail properties, restaurant properties and those industries largely dependent upon discretionary consumer spending. But even the spread widening caused by the recent rally in Treasuries and modest cap rate movement the opportunities we are seeing today while better priced and more numerous than we saw in the third and fourth quarters continue to be unattractive to us because of the continued financing costs uncertainty. As we have seen before investment grade net lease cap rates are very sticky in this type of market as the cap rate widening that is usually driven by increased financing costs is being offset somewhat by a slight [dequality] that you don’t see for below investor grade net lease assets.

Credit quality matters more than ever and that has an impact on the price of the types of high quality assets we invest in. We will resume new investment activity once the real estate finance markets stabilize and re-open and we can add assets at attractive, risk adjusted returns. Given current market conditions we anticipate that any new investment activity for 2008 will be concentrated in the second half of the year and therefore will have minimal impact on 2008 financial results.

Finally let me discuss CapLease’s growth prospects for the intermediate to long term. We believe that once conditions stabilize, hopefully later in the year, that there will be significant opportunities to resume our portfolio growth by continuing to executive on our strategy of investing in properties net leased on a long term basis to high credit quality tenants. We have a proven track record of being conservative, disciplined and patient capital allocators and we will wait for what we expect will be conditions that will present us with both abundant opportunity and the defined ability to finance those opportunities so we can maximize shareholder value over the long term. Our view is that the new era now being painfully formed will usher in a multi-year period where assets are realistically priced for the risks and competition will be muted as compared to the period from 2004 through the first half of 2007. We are positioned to take advantage of these opportunities as they arise. The most valuable asset we have at CapLease is our strong investment platform built through the course of a variety of market conditions over our more than 12 year history. This platform provides us with a competitive advantage in this asset class over other market participants and will be the engine of our growth in the future as it has in the past.

In the period that ended during the summer of 2007 assets were hard to come by at reasonable risk adjusted return levels while debt capital was abundant and cheap. Although assets were hard to fin our market franchise allowed us to build a very high quality $2.1 billion investment portfolio that is extremely attractively financed and produces strong long term returns. The markets are now swinging hard the other way. Capital, particularly long term mortgage capital, is now very hard to find at reasonable terms and that is now starting to drive price adjustments for assets which are consequently getting easier to find as a result of fewer buyers in the market. This dynamic is still occurring and has in our opinion well overshot the mark with respect to mortgage debt capital availability particularly with respect to investment grade net lease commercial real estate where sound credit statistics and favorable supply and demand fundamentals stand in stark contrast to the residential market and other less creditworthy sectors of the commercial real estate market.

This financing volatility will settle down in time and as it does capital will be attracted to business platforms like ours that have long term demonstrated franchise values, relationships and expertise. We have never been and are not now complacent, rather we continue to actively review a number of opportunities to enhance our access to capital and the ability to continue to grow the portfolio such as true potential co-investment and joint venture arrangements. After studying these initiatives with a variety of market participants we are optimistic about our ability to access the capital we will need in order to add attractive assets in the future as they become available. While we are excited about the potential business opportunities we obviously cannot make any assurance that we will be able to enter into any specific transaction.

Before I turn the call over to Shawn I want to comment very briefly on net asset value or NAV and the effect rising cap rates have on our portfolio. In the current environment NAV has come back into vogue as a value measurement. We believe that NAV is but a single measure of a company’s value and is naturally influenced by a number of factors including calculation methodologies that may apply to one company but not another. We believe that with match funded high credit quality assets recurring cash flows coupled with dividend stability are a better measure of our company’s value. That said when looking at CapLease’s portfolio in an environment where cap rates are moving it is not appropriate to simply cap existing portfolio net operating income or NOI and derive a value. While there are a variety of factors that impact these calculations it is important to value both our assets and our existing very favorable long term mortgage financings on those properties in your NAV calculation. Our website has a reasonably detailed explanation of this in the Frequently Asked Questions section. In general rising cap rates are a good thing for CapLease as they have no impact on the returns of our existing finance portfolio but do allow us to add new assets at attractive prices and financing spread.

In summary the story of 2007 is that we continue to deliver solid growth and the strength of our business model was evident as our portfolio continued to perform well despite the unstable market conditions. We are adapting our asset financing strategies and remain optimistic about our ability to execute on our business strategy and grow and enhance the portfolio over the long term.

I will now turn the call over to Shawn.

Shawn P. Seale

Today we reported 2007 FFO within the range of our previously announced guidance and that exceeded the endless consensus estimates by $0.02 per share. Our FFO for the year was $42.4 million or $1.03 per share and net loss to common shareholders was $5.1 million or $0.13 per share. The difference between FFO and GAAP earnings consisted primarily of depreciation and amortization expense of approximately $47.5 million. Total revenues for the year were $172.2 million up 38% from $124.6 million in 2006. Fourth quarter FFO was $12.5 million or $0.28 per share and net loss to common shareholders was $905,000 or $0.02 per share. Total revenues for the quarter were $46.8 million up 33% from $35.1 million in the fourth quarter of 2006. G&A for the year was up $890,000 from 2006 levels primarily due to the addition of two senior personnel late in 2006 and higher legal fees a significant piece of which was related to the [entrecap] debt repayment.

G&A was below budget and is not expected to grow materially in 2008. Total G&A inclusive of stock-based compensation is about 7% of revenues which was down from 10% of revenues in 2006. We believe this compares very favorably with some of the most respected REITs in the marketplace and we still have significant room to scale our operating platform. At year end our overall portfolio was $2.1 billion in investment assets, about 78% of which are owned properties. Our diverse owned property portfolio includes 62 properties across 26 states leased to 33 different tenants and exceed 10 million square feet. CapLease has assembled a very credit quality portfolio and this truly differentiates us among REITs in our sector. The weighted average underlying Standard & Poors tenant credit rating on our entire portfolio is A- and on our owned properties is A. Our two largest tenant exposures are the US Government and Nestle Holdings, Inc. These tenants are rated AAA and AA respectively and comprise about 10.3% and 9.3% respectively of our portfolio. Our top ten tenant exposures are all rated investment grade, have an average credit rating of A+ and aggregate approximately 50% of our portfolio. We believe that the credit and real estate quality of our portfolio is unmatched in the net lease space.

While the structured finance market has had a very short credit history corporate credit data has been tracked and analyzed for decades. Corporate balance sheets and the ratings derived from them are very transparent to investors. To give a sense of how strong our credits are during the past 35 years or so the cumulative default rate for Moodys’ rated corporate credit within 10 years of the initial rating date is 1.3% for those rated A and 0.5% for those rated AA. As Paul mentioned earlier during the fourth quarter we obtained $130 million of ten year secured fixed rate non-recourse financing on $163 million of assets pledged on our warehouse line. The financing has a fixed interest coupon of 5.81% per annum, is non mark-to-market and our effective borrowing cost on this loan is approximately 6.05% annually including hedge and closing costs.

We also raised $75 million of long term capital through a 7.5% convertible senior note offering in October of last year. We used about $26 million of proceeds from this offering to repay warehouse borrowings and another $15 million to repurchase common stock. Through these two transactions we were able to repay $151 million of borrowings on our warehouse line in the fourth quarter of 2007. Overall our portfolio leverage stood at approximately 80% at December 31 which reflects the very high credit quality of our assets. We note that the leverage we employ on our owned properties includes significant components of principal amortization and is scheduled to decline to slightly above 60% by the end of the financing term. As of December 31, 2007 approximately 85% of our overall portfolio is financed with long term match funded non-mark-to-market fixed rate debt including 88% of our owned property portfolio. Our cost and the terms of financing of these assets are not and will not be impacted by the current conditions in the credit markets. At December 31, the company had $34 million of cash and cash equivalents plus about $12 million in cash held inside the CDO pending reinvestment. We had $1.6 billion in net real estate investments, $269 million in loan investments and $205 million in various net lease securities including CNBX. Overall total assets were $2.2 billion.

On the liability side at December 31, we had $233 million of debt outstanding on our warehouse line, $984 million of long term fixed rate mortgage debt on individual property investments, $268 million financed under our fixed rate CDO and $130 million financed on our December 2007 term loan. We also had $75 million of the 7.5% convertible senior notes outstanding that we issued in October. Our effective borrowing rate on the convertible debt has approximately 8.24%. As of today we have approximately $52 million of cash and cash equivalents, no outstanding borrowings under a $30 million general purpose revolver, $5.6 million in the CDO pending reinvestment and roughly $233 million outstanding of the warehouse. The value of the collateral securing our borrowings under the warehouse is about $425 million inclusive of the inter-company mortgage notes on our owned properties pledged to the lender and our cash equity invested in those properties.

In the fourth quarter we continued to record declines in the value of our securities portfolio due to changes in market and credit spreads. Consistent with prevailing accounting standards we recorded these changes in value as a component of other comprehensive income on our balance sheet as we believe that these value declines are temporary particularly when compared with out expected holding period. We recorded a decline of $6.3 million in the fourth quarter the net unrealized loss on the securities available for sale stood at $13.7 million at December 31. We have not experienced and do not currently expect any change in the cash flows from these securities we own or losses on the underlying collateral and we intend to hold the securities for a sufficient time to allow for a full recovery in value.

Now let me discuss our guidance for the first quarter and for the year. We expect the following for first quarter of 2008, FFO to be in the range of $0.28 to $0.29 per share and earnings per share to be in the range of -$0.02 to -$0.01 per share. In addition we expect the following for full year 2008, FFO to be in the range of $1.07 to $1.10 per share and earnings per share to be in the range of -$0.12 to -$0.09 per share. As Paul mentioned earlier in light of current market conditions we expect that any new asset activity for 2008 will likely occur in the second half of the year with minimal impact on our 2008 results. As a result our guidance figures reflect maintaining the current portfolio level through 2008. As a reference point if we add $200 million in assets during the second half of the year at the net spreads we have achieved on the existing portfolio the positive impact FFO on a yearly run rate basis into 2009 would be approximately $0.06 per share. Our guidance figures also reflect a variety of other assumptions discussed in today’s press release.

With respect to our first quarter guidance the expected results are positively impacted by the low cost of financing our current assets in the warehouse line driven by lower LIBOR rates. This is not anticipated to continue as we anticipate financing these assets on a long term fixed rate basis during the year in accordance with our business plan. As a reminder we compute FFO based on the NAREIT definition, differences between FFO and earnings per share, our add backs for deprecation and amortization on our real estate properties and minority interest on our operating partnership units. FFO includes a deduction for stock-based compensation expense which was $0.04 per share in 2007 and is estimated to be roughly $0.04 per share in 2008. However in analyzing the earnings power of the company we believe it appropriate to adjust FFO to add back stock-based compensation since it impacts reported FFO by both lowering FFO and increasing the share count. For the first quarter of 2008 we expect stock-based compensation expense to be approximately $0.01 per share.

The straight line rent adjustment for the fourth quarter and full year were $10.5 million and $13.8 million respectively. The large adjustment in the fourth quarter is driven by a number of the entrecap properties that have large semi-annual rent payments due in early 2008. The straight line rent adjustment is expected to be about $6.1 million over the next 12 months.

I’ll now turn the call back to Paul for some final comments.

Paul H. McDowell

CapLease had solid progress on its growth strategy in 2007 with revenue and FFO per share growth of 38% and 11% respectively. The strength of our business model was evident in 2007 as our portfolio continued to perform well and that solid performance is expected to continue in the months and years ahead. While market conditions are obviously not conducive to immediately adding new assets we believe that market conditions will increasingly favor us and are highly optimistic about our ability to grow the portfolio once conditions stabilize.

We’re now ready to answer any questions that you may have. Operator, could you please open the phone lines.

Question-Answer-Session

Operator

Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Ambika Goel with Citigroup Investment Research. Please go ahead.

Ambika Goel – Citigroup Investment Research

Hi this is Ambika with Michael Billerman. Could you provide some color I guess on the long term growth profile for CapLease, we think about the CDO markets and how potentially who knows at what level they will return when they do return, how should we think about CapLease funding their business, getting high tenant credits which means lower cap rates and then on top of that the lack of the CDO market means that you can’t really get that extra leverage and then where the soft rates, so just all those different equations how do we think about the long term growth profile of the company.

Paul H. McDowell

Well I think the most important thing to start with, Ambika, is CapLease has been financing net lease assets for 12 years. In that 12 year history we’ve done one single CDO. We financed this asset class in a variety of different manner including as recently as December where we financed a portfolio where a pool group of our debt assets with a single lender on a term basis. The net lease asset class has always been an attractive one for financing by life insurance companies, pension funds and other large institutional capital sources and we think that in the months and perhaps years ahead that we’ll be able to access that market to finance our acquisition strategy. So we’re actually very comfortable and maybe increasingly comfortable with the ability to finance this asset class away from the CDO market.

Ambika Goel – Citigroup Investment Research

And then just two follow up questions to that, if we think about cap rates, where do you see them on the property a tenant credits, where do see those cap rates today and then on top of that where do you I guess leverage going forward? Do you think essentially maintain the same leverage that you have today or are you going to have to slowly bring that down? I know that the amortization of the debt does naturally bring down the leverage, but we’re just talking about acquisitions going forward.

Paul H. McDowell

I think with respect to where cap rates settle out I think that’s unclear. They’re currently in the low sevens, whether they end up in the high sevens or not, we’re not exactly sure. Some of that of course is going to be dependent upon when financing markets stabilize and where the ten year Treasury Rate ends up. Of course you need to remember that there are sort of three critical numbers for investing in that lease asset, particularly in the investment grade sector. One is what is the cap rate but the other one that’s very important is where is the underlying risk free ten year Treasury? Over the past few months the ten year Treasury has rallied and interest rates have declined so the actual spread to the cap rate has widened. However it has not yet widened as much as the increased financing costs, the increased financing costs we’re seeing in the market so what we need to wait for is for those financing costs to settle out over time and then that will inform where cap rates settle out.

Ambika Goel – Citigroup Investment Research

And then where do you see running leverage on our property basis going forward on acquisitions?

Paul H. McDowell

Well traditionally net lease, the investment grade sector is of such high credit quality and the proxy for default on an investment grade net lease asset is not leverage, right, but the likelihood that the credit default, and as you might recall from our prepared remarks, for a A rated tenant over any sort of ten year time horizon, that risk of default is 1% or so. So life insurance companies and pension funds for many years have provided financing or leverage in the 80 to 90% level. I will say that on a going forward basis as we look to finance assets, new acquisitions we’ll look carefully at the cost benefit from having increased leverage and the cost of higher leverage versus the lower cost of a lower leverage and find where the appropriate return levels are. We think that leverage at the 80% level once conditions stabilize will be available for investment grade net lease assets. We’ll then need to consider whether it’s worth spending the money on.

Ambika Goel – Citigroup Investment Research

And then on guidance, what kind of refinancing assumptions for the balance of the line is assumed?

Shawn P. Seale

I think we’ve assumed that we get the balance of the assets that are currently on the line financed on a long term basis sometime during 2008, but we’re not prepared to talk about exactly when we’ve made that assumption. But it’s safe to assume that during the year we expect to finance those assets out on a term basis.

Ambika Goel – Citigroup Investment Research

And how about the cost of the financing? Would it be comparable with the financing done in December?

Shawn P. Seale

Yes, we certainly hope that that is the case. We think that the transaction we did in December is representative of what’s available out there in the marketplace, attractive terms and we certainly expect that we can do something in the same neighborhood.

Operator

(Operator Instructions) Our next question is from the line of Jeff Donnelly with Wachovia. Please go ahead.

Jeffrey Donnelly – Wachovia Capital Markets, LLC

I just wanted to build I guess off of Ambika’s question, in your comments I think you mentioned that you expect that a return to stabilization in the credit markets might allow you guys to resume your strategy, but as part of that effort I guess I’m assuming you will need the ability to eventually issue equity particularly if you might explore lower leverage on acquisitions going forward, but your stock like a lot of REITs out there is 20, 25% below where you last issued, do you guys need your stock to surpass its last issuance price for your investment model to begin working again or is that not a hurdle for you guys?

Shawn P. Seale

I don’t really think it’s a hurdle for us, it largely depends on what the investment opportunities out there look like. As long as we can find opportunities that are accretive to us, the stock price while we certainly would like it to be higher at our next issuance, doesn’t necessarily have to be back where we issued last time but all things being equal we would prefer to issue equity at higher prices but if we have a good opportunity set of investments that will give us accretive earnings that’s certainly an option for us.

Paul H. McDowell

We do have some dry powder, Jeff, and we also have got a variety of other options that may not include the issuance of common stock. For example doing a joint venture or something like that. We’re going to look at that panoply of options that are open to us as we look to continue to grow the portfolio.

Jeffrey Donnelly – Wachovia Capital Markets, LLC

And I’m curious, aside from sort of waiting for normalcy strategy, what other steps can you guys do? I know a lot of people’s hands are tied right now but maybe to bolster your equity valuation? Can you guys for example right now accretively recycle capital right now I guess in your own asset portfolio when there’s an opportunity to maybe sell, just thinking higher credit quality, higher value assets and maybe re-deploy into assets that might right now in the marketplace seem more stressed from their pricing but you guys longer term are going to be just as good or –

Paul H. McDowell

Obviously there are a variety of things we can do and selling non-core assets is one of those options. We’ve got a couple of assets, we’ve got a number of assets financed on the warehouse line that are otherwise encumbered, those assets are readily saleable and as we said we could potentially do a joint venture with some of our existing assets to recycle capital. So, yeah, there are a number of things that we can look at to get capital out of lower yielding assets and put them into higher yielding assets as we find them. And let me stress, we will do that. We’ve been able to grow this firm pretty consistently since our IPO and we fully intend to continue to do so. These market conditions, like we said before, feel incredibly bad to all of us but they’re not going to last forever and the net lease investment sector of the commercial real estate business in the investment grade sector is a very attractive investment sector. And it’s one that will attract capital. We think we are the best investors in the investment grade net lease sector so we will attract capital accordingly and we are constantly fielding inbound calls from potential capital providers to figure out how we can work together and we’re trying to figure out exactly how we can do that.

Jeffrey Donnelly – Wachovia Capital Markets, LLC

And just a question I guess on the debt markets, Paul, anecdotally we continue to hear that the opportunity to purchase structured real estate debt seems to be a better opportunity than buying hard assets at this point just given the relative discount that it’s trading at, I guess I’m curious, do you share that view or is that your opinion and are you guys seeing, I know you mentioned some of this in your initial comments, but are you seeing continued deterioration in the debt markets, do they seem to be finding a bottom and I guess lastly are you guys seeing opportunities to make attractive investments on the debt side of the equation?

Paul H. McDowell

We absolutely think that the structured debt markets are mispriced, the current [inaudible], right? I mean you look at where at least some of the indexes are trading like CNBX which just seems to be to some degree disengaged from the reality of the quality of the assets underneath it. To the extent that we can find structured assets that have got a net lease component to them, and they are priced attractively, we definitely would invest in that. We also have an active mortgage business or have had an active mortgage business and we do see continuing opportunities on that side of the business in many ways more attractive than currently buying properties. I think overall though the business strategy remains intact, that is buy net leased properties, make mortgage investments when it makes sense. With respect to whether or not the mortgage markets are finding a bottom, I sort of hope every day that I come in that that in fact is the case and then everyday you seem to sort of open the Wall Street Journal and the next shoe seems to drop with respect to whatever it is, auction rates securities or whatever. And it seems to set us back another six months. Hopefully this thing will start to burn out at some level, we’ll find a bottom but I’m not sure we’ve seen it exactly yet.

Jeffrey Donnelly – Wachovia Capital Markets, LLC

Would you ever consider selling real estate assets to buy debt securities?

Paul H. McDowell

We might. We might. The idea is if we think that we can recycle assets, capital invested in net lease assets into other net lease assets that may or may not be mortgages we may do that, although I would stress that you will not likely see a wholesale sort of readjustment or realignment of our portfolio from the own side which is about 78%, then the mortgage side which is about 22%. You’re not going to see that change dramatically but at the margin you might.

Jeffrey Donnelly – Wachovia Capital Markets, LLC

And then just one last question, and Shawn, I’m probably simplifying this too much, but I think you were saying that your Q1 FFO you’re looking for $0.28 to $0.29 a share. Just looking at your annual guidance I think that implies sort of a quarterly run rate of about $0.26 to $0.27 a share thereafter. I apologize if I missed this in your remarks but what’s responsible for the jump up a little bit in Q1 versus the deterioration in future quarters?

Shawn P. Seale

As I mentioned during the prepared remarks, we’re benefiting right now from lower cost of financing, having some assets on the warehouse line at 4.1% or so effective cost of borrowing and we’re assuming that we get the rest of these asserts financed on a term basis during the year and that’s been going to hold the number down to that quarterly run rate that you mentioned.

Operator

(Operator Instructions) Our next question is from the line of David Fick with Stifel Nicolaus. Please go ahead.

Josh Barber – Stifel Nicolaus & Company, Inc.

Hi, it’s Josh Barber with Dave. Just wondering based on your comments about cap rates, have you seen any portfolio transactions in the current, I don’t know, in the last six months or is that more on a one off basis?

Paul H. McDowell

We have seen some portfolios, bank branch portfolios and the likes that have come back that are in the high sixes, low sevens but most of that is sort of on the one off transactions and we’re being propped all the time to buy properties, so we just see an absolutely steady flow of offers of net lease properties and like we said in the prepared remarks, cap rates haven’t moved around a lot. I will also say though I don’t know how much investment activity there really has been so I think the offer prices have remained reasonably steady. I don’t know how much they’ve actually traded.

Operator

At this time there are no additional questions. I’ll turn it back to management for any closing remarks.

Paul H. McDowell

Thank you all very much for joining the call today. We appreciate your time and we look forward to updating you on our next conference call after the first quarter. Thanks very much. Take care.

Operator

Ladies and gentlemen, this concludes the CapLease, Inc. fourth quarter 2007 earnings conference call. If you’d like to listen to a replay of today’s conference, please call 1-800-406-7325 or 303-590-3030 using the access code 3847919#. Thank you for your participation. You may now disconnect.

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