NEW YORK CITY-CapLease released its fourth quarter earnings on Friday and, by several measures, the REIT had a banner 2012. Part of the company's success can be attributed to the turnaround of the global economy and to the REIT's good fortune in having both debt obligations and large leases come to an end, but some of the positive results can be tied to a change in strategy, Paul McDowell, chairman and CEO, tells GlobeSt.com.
“We modestly adjusted our acquisition criteria but we stayed true to our core mission: to own commercial real estate subject to long term leases with very high credit quality tenants; most of them are investment grade,” he says. So how did CapLease change its criteria? “We generally buy single tenant assets but now we may—from time to time—buy an asset with two tenants, or one with tenants that are less than investment grade.”
For example, he continues, “we're working on a warehouse for the Vitamin Shoppe in Virginia. The company has good credit but it's below investment grade. Also, we've been active in last few years in build-to-suit. We're simply able to get better risk-adjusted yield by moving into slightly different sectors.”
The numbers bear out that mindset. CapLease's funds from operations for the year was $0.62 per share, as adjusted for comparability. “That's important because at the beginning of the year, we told investors the range would be between $0.59 and $0.62, so we came in at the high end,” McDowell says. Meanwhile, investment activity for the year was about $190 million. “That's about 10% of our portfolio; we had good, strong growth,” he adds. By contrast, in 2011, the REIT's investment activity came in at $110 million. “We had an accelerating volume in the last few years. Since the credit crisis ended four years ago, we've been ramping up acquisition activity.”
Additionally, CapLease extended 1.9 million square feet of maturing leases; repurchased or extended $152 million of maturing debt; raised $110 million of new common and preferred equity; and increased its common dividend—twice—by a total of 15%.
McDowell explains each of these winning results. “We had greater tenant rollover so it's a dramatic increase [in lease extensions]. Our average lease term is about six years and we had a lease that expired last year for three large warehouses that were on the same agreement.”
On the debt side, he says, “We had a variety of obligations come due. We were able to manage all of our debt activity with ease in 2012 by repaying some of it and extending some obligations or acquiring new debt at a discount, taking advantage of low interest rates.” The company equity is flourishing, according to McDowell, thanks to a concerted effort to increase those holdings while decreasing debt. “We are adding equities while part of our business plan is to reduce leverage. We realized a 4% to 5% decline in 2012.”
Finally, the company's dividend spiked thanks to some shrewd moves and the macro economic climate, McDowell says. “We have strong operating cash flow supporting our dividend because we've developed growing momentum as the global economy begins to recover. The combination of our share price and dividend rose about 45%.”
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Rayna Katz
Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.
