Rather, much focus remains on strengthening balance sheets by managing debt maturities, repurchasing debt at significant discounts and selectively disposing of properties, all in preparation for what continues to be a positive outlook for better buying opportunities in the future.
As they have for several quarters now, CapLease Inc. and Lexington Realty Trust, both based in New York City, further reduced their leverage during the early part of this year. Since the end of 2008 CapLease has repurchased $20 million of convertible notes, notes chairman and CEO Paul McDowell, for a purchase price of $9.1 million. LXP repurchased $22.5 million of exchangeable notes during the first quarter at a 34.1% discount, and president and chief executive officer noted the REIT has repurchased additional debt since the end of Q1. And Orlando-based National Retail Properties repurchased about $17 million of its debt, at what CEO Craig Macnab, like his peers, describes as a "deep discount."
"In this environment we continue to be cautious, and we have been playing a defensive game to ensure that when the economy and the capital markets improve, we will emerge as one of the stronger REITs with a balance sheet that will allow us to take advantage of the quality net lease retail acquisition opportunities that I expect to be plentiful," Macnab says.
"At the moment the best use of our free cash flow continues to be on the balance sheet, by lowering outstanding debt, particularly through purchasing our convertible and other components of our capital structure at a discount," says McDowell during CapLease's Q1 call. "That said, as the markets improve we think that we will see, for a multi-year period, a very large number of quality assets. The sale-leaseback will be one I think that is very attractive to investment-grade tenants."
While few property purchases are being made by these companies, they are selling some assets. During the first quarter National Retail Properties sold four properties (three from its core portfolio and one from its for-sale inventory) for a total of $9 million. In another example, Lexington Realty Trust sold one asset for $11.4 million (at a 9.1% cap rate) and continues to market several hundred million dollars worth of property for sale.
And CapLease so far this year has sold two assets for total consideration of $42.3 million. One, McDowell notes, was a mortgage loan on a property tenanted by Lowe's, purchased by an institutional investor at a 7.39% yield. The other, a property leased to the US government, sold at an approximate cap rate of 7.4% to in an individual investor in a privately negotiated transaction. "The strong purchase price is reflective of not only the credit quality of the tenant but also the very favorable in-place assumable mortgage debt," McDowell says.
Indeed, the CapLease executive noted that the difficult financing market created two distinct markets of net lease properties: those with investment-grade tenants and assumable debt, and those without. "There is a wide and still growing pricing differential between the two," McDowell notes.
Though his REIT hasn't been buying, McDowell said he has been seeing a steady flow of investment-grade transactions come across his desk at sub-8 cap rates. NNN's Macnab reports seeing deal flow too. "We have looked at several acquisition opportunities in the last couple of months, but have not as yet identified transactions that meet our rigorous criteria," he says.
Though it did make several acquisitions during the first quarter, W.P. Carey, too, has been waiting for investment opportunities to improve. "They've been getting more attractive. Prices are better. We can structure better transactions and we can get better returns," says president and CEO Gordon DuGan.
And he, too, is optimistic about the future. "This is the time to grow our business," says DuGan. "This is the time we've been waiting for."
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