Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.
New York City—European capital on the equity side and franchise loans on the debt side are two new initiatives Capital Lease Funding Inc. is using to grow its business. There are hints at other growth-minded developments in the future, too.
"We continue to examine opportunities in addition to our ordinary course of business and those I just mentioned," CEO Paul H. McDowell said during the REIT's second quarter conference call on Aug. 3. "We believe we will further significantly leverage our operating platform and grow CapLease significantly in the years ahead."
While the second quarter may not have been its most active for acquisitions, CapLease was busy with its new initiatives. One is an agreement to joint venture an existing property with what McDowell described as a new investment management business led by an experienced team (including former Carlyle executives) with capital from European investors. "We also expect making a modest investment in their management company to maintain an alignment of interest," McDowell said.
The relationship, he continues, will result in some small fee income. More importantly, it "will provide us with a diversified source of low-cost equity capital that is not tied to the US capital markets to help us continue our growth." While the JV does not, the CEO adds, represent a fundamental shift in how the company plans to grow its portfolio, the JV is not intended to be a one-off opportunity. "Joint ventures give us the opportunity to potentially purchase properties with capital that we're able to raise from European investors who have lower yield targets, thus a lower cost of capital for us." The company investment is expected to close during the third quarter and the first property JV by early 2007.
On the debt side, CapLease has started pursuing what McDowell describes as some modest lending in the franchise loan area in a co-investment partnership with National Franchise Acceptance Corp., a Lombard, IL-based company that lends to top-tier franchisees of Yum! Brands and Burger King restaurants. "Franchise lending has many similarities to our existing lending business but demands specialized expertise," said McDowell.
In other news, CapLease used its downREIT structure for the first time, using the issuance of operating partnership units to acquire a property, and expects to close a CDO in either the third or the fourth quarter. The CDO "will contain some new structures we've been developing that will allow us to more efficiently finance our own properties and maintain spread, as well as decrease the aggregation period between our CDO issuances," McDowell said.
"These initiatives reflect our commitment to utilize our expertise in credit analysis, structuring techniques and capital markets experience to find ways to grow CapLease's diversified portfolio," McDowell concluded.
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