NLF: How has the transition gone, and can you give us an update on our investment activities?

Fleischer: That's one of the benefits of being private. We're thrilled with our new partners. We were taken private by a private equity consortium with Macquarie Bank Ltd. in the lead. Our thought process, on the equity side, is to bring global pension and global institutional capital to the US net-lease market, which is a model that would be new for the US. There are firms that have a retail investment strategy, and there are firms that have a US institutional strategy, and so the different twist here is to find the most efficient pockets of global equity capital and direct it to the market here. We're excited about it.

It's similar to how Macquarie has funded their infrastructure groups and their other investments in North America, so we're basically looking at that style of investment and we're actively calling on investors in the US, Australia, Europe and elsewhere to set up a fund so that long-term, we've got a callable vehicle to fund the market here. In the interim we've got great partners. When we're funding transactions today we just fund them on a call basis, and all our partners have participated in our calls since we've gone private, and everybody has stepped up and written checks to fund our growth. Our growth, through the end of last year, was pretty similar to what you saw when we were public, so there hasn't been a big change there, although obviously the debt dynamics have changed pretty dramatically, and that's translated into the purchase price where you can buy assets and that's translated to increased cap rates in the marketplace.

NLF: In terms of bringing global capital to the US net-lease market, how would you characterize interest?

Fleischer: Long-term it's an excellent model. Short-term, the market presents certain challenges in the next six months. Whenever you launch a new fund, the idea is to get an initial investor who's a lead, and then have other investors who roll in. We'll see how that turns out. We haven't actually launched the fund, but we're preparing for that. Long-term it's going to be a lot more efficient than, for example, going back to the same institutional investors in the US.

The calls we've made so far have been very successful. I think we have a long track record going back to Franchise Finance Corp. of America, which we sold to GE Capital, and to Spirit, where we showed investors how we underwrite credits and look at cash flow on a store-by-store basis and use underwriting techniques to tranche non-investment grade credits. We're basically standing at the front of the line so that when we have issues, have economic downturns, your recovery rates tend to be very good. And it's still a very efficient financing tool.

NLF: Can you give us an example of a recent deal you've closed on?

Fleischer: We funded an $82-million restaurant transaction on Dec. 31 for Sun Capital, which acquired the Smokey Bones restaurant chain from Darden Restaurants. We helped with the sale-leaseback and a small piece of senior financing. We've funded a number of distribution and industrial transactions in Q1, one in the $20-million range, one in the $52-million range, with cap rates around 9%. Those have not yet closed so I probably shouldn't give you the specific names.

NLF: The debt market has changed quite a bit since last August. How are the broader market conditions impacting business?

Fleischer: We've been doing this since 1980. There's probably not a direct comparison to any of the previous dislocations. I think there was an expectation last year that people would come back and renew allocations come the New Year and put fresh capital in the market, and actually the reverse has happened. We've seen an increase in fear and we've seen the Federal Reserve lower rates a few times, and the effect has been that spreads have widened dramatically, in the conduit markets, which have been the most dramatically impacted; in CMBS or the asset-backed conduit markets; and then in the REIT universe. Investment-grade REITs have probably gapped out from borrowing at 250 over to today, and if you look at BBB REITs, their financing is about 450 over. And so the best estimate, where last summer, the cost of debt was in the high 5s/low 6s, to today it's easily in the 7s. And in some recent quotes you're looking at a cost of debt of 8 to 8.5. For most of the customers on the other side, the businesses can't afford that kind of pass-through. If people are continuing to fund transactions at the same cap rate levels as last year, then obviously there's a significant decrease in the equity returns. But realistically, we're seeing a lot of transactions being pulled from the marketplace. So we're looking more aggressively to alternative sources of debt and seeing if transactions can be funded on a shorter-term basis, and in some cases bridging the debt execution, albeit at higher cap rates.

NLF: Are you seeing results?

Fleischer: We saw results at the end of the year, and I think as we're going into this year, one of the benefits of being private is that we're not really forced to make acquisitions on any regular schedule. So if you find yourself in a circumstance where you don't have a lot of clarity on the liability side, and you don' think that you're going to get the appropriate return on the equity, then you can just pass. We have that flexibility now, although on average when we were public we were clearing around 8.40 or 8.50. I would say that the cap rates through Q4 and early into this year have been in the 8.75-to-9.50 range. As you start pushing up into 10 or 11, I don't think there's much of a market there. Either that or you're getting so far out on the credit spectrum that it just doesn't make underwriting sense.

NLF: So how do you see the prospects for acquisition opportunities this year?

Fleischer: What's happened is good news and bad news--you're moving from an auction market a year ago when there was tons of capital chasing deals to where there are companies that may not have considered using sale-leasebacks as a viable financing tool. They're calling us back and saying, "What can you do to help us? Our banks are pulling back and we need to find alternative sources of liquidity."

There is a stack of deals on my desk right now that's about three feet high. We've typically funded 5% to 10% of what we look at. So you do tend to look at a lot of opportunities, and there are a lot of things out there. There's a $1-trillion market of just single-tenant net-lease retail and industrial assets in the US alone, and probably less than 5% of that has already been securitized or institutionally held. So there's no lack of product. What the market is telling us today--and its way overblown in our opinion--is that in the short-term asset values are going to fall and that essentially you can earn an equity risk for holding a debt asset.

NLF: Any market trends or shifts you're keeping an eye on?

Fleischer: Broadly, sellers are getting more realistic as to what assets should be valued at and where businesses should be valued. So where we saw retail businesses trade at nine, 10, 11 multiples, we're now seeing transactions that are more at historic levels of five, six or seven times. And that translates into an ability to buy real estate for asset prices that make more sense. There has been a bit of a gap in time for CEOs and CFOs of retail companies who don't necessarily live in the capital markets all day, between their current expectations in terms of seeing where their businesses were valued a year ago versus the kind of capital that's available today. That's going to continue for a while.

In our view, this is probably systemic this time and not an isolated problem. It will last Whether you're talking about model lines or how much room banks have for commercial mortgages or about sovereign funds coming in, our view is that we're probably looking at next year before things start to return to they were in 2007.