CRAIG TOMLINSON: How has the first quarter been for each of you in terms of activity?

GINO SABATINI: We had a terrific first quarter. We did over $400 million on the net lease side, and that was up from prior years.

PAUL McDOWELL: We had a very active first quarter as well. We publicly announced that our target for the first quarter is $1 billion in new acquisitions. We're seeing a very strong flow of transactions, and that flow feels like it's getting better each month.

GORDON J. WHITING: Our first quarter this year was surprisingly strong. The fourth quarter is always our largest, but in the first quarter we either closed or got under contract a little over $300 million worth of transactions. So I think it bodes well for the year.

RICHARD H. ADER: I would say our first quarter was pretty flat from last year. We're still seeing about $250 million in deals a week. We're a little bit more selective than most as to what we'll acquire. So our volume is not quite what all the gentlemen here do, but we still had a pretty good first quarter, somewhere around $100 million.

RICHARD ROUSE: We probably closed over $200 million of transactions in the first quarter. 2013 was a very good year for us, and this year looks to be better.

TOMLINSON: You've all experienced very healthy activity in the first quarter, and, overall, it seems like the deal sizes have been getting larger. What's the typical transaction size for you, in terms of the type of deal you'll consider?

ROUSE: We're very pleased with the volume we're seeing. Our average transaction size today is up to $50 million, whereas two years ago, it was probably $25 million. We recently closed a transaction for $160 million, and late last year, we completed one for $300 million. So our deal size is up dramatically.

ADER: Our deal size sits between $40 million and $60 million, which fits very well into our portfolio. Having said that, we're in the process of closing a deal at $20 million. I would say that's at the bottom of what we would look at.

WHITING: Over the past several years, our deal size has consistently grown. Our average deal size today is probably somewhere between $80 million and $85 million, but the more interesting transaction is the one that tends to generate higher returns. The ones that tend to be more fun to work on are probably in the $15-to-$20-million range or lower. If you're trying to accumulate volume, it's hard to get some real numbers out there if you're doing the smaller deals all day long.

McDOWELL: We do a very broad range of transactions. We do everything from $1-million mattress stores and dollar stores to very large corporate transactions. We have the biggest acquisitions team out there, the biggest closing team. We're able to manage flow transactions very, very efficiently. The $1 billion we closed in the first quarter is 100% organic growth, asset-by-asset versus big portfolio acquisitions.

SABATINI: We have a broad range as well. We go down to about $5 million up to about $500 million. We've done 10 deals of over $300 million. If you look at our average, it's maybe $35 million, but that's kind of a misnomer. If it's a good deal with great risk-adjusted returns, we'll spend the time on it.

I think that's what sets us apart a little from some of the other groups. We will focus on storied opportunities, and I don't just mean credit. If there's a storied real estate opportunity, there's a reason why there's a one-, two-, five- or seven-year lease in place. We will spend the time to understand it, even if it takes a month or two months of underwriting. That allows us to look at a lot of different things, but keeps the average size on the lower end.

TOMLINSON: Have any of you sought out more portfolio-type opportunities to get to your numbers or do you, for some reason, not prefer that?

ADER: We're not really portfolio buyers. We look at them, and if it's something really interesting, we would do it. We'd be more of a seller to the portfolio buyers; we build up our investments. We have decent returns, but we do much more one-off than probably most of the people I'm up here with.

WHITING: We buy a combination of single deals and portfolio deals. Typically, the larger deal sizes tend to be a couple of properties—two, three, four buildings—we've done $200-plus-million single buildings by themselves.

McDOWELL: We're indifferent toward portfolios. If they work, great. If they don't, then that is fine too. We're very active in the single-asset transactions space, but we're also active in portfolio acquisitions—buying pools of properties versus large corporate transactions, in which we've also been active. We do buy a lot of portfolios in the smaller retail segment, so it's the Dollar Generals, the Mattress Firms, the Lube Stops, etc. We'll often buy those in what we call packs—five-packs and 30-packs of transactions—but we don't have a preference. We just have a very large appetite to buy property.

SABATINI: We see more attractive portfolios in Europe than in the US. In the US, there seems to be a bit of a premium for portfolios, including the retail packages that Paul is talking about, and then you have the groups of properties that have already been put together by people like Paul. In Europe, portfolios are priced somewhat more reasonably, and we've had more success there with larger packages.

ROUSE: Gino hit the nail on the head. For portfolios of existing properties in the US, the premium is at least 20%. That's our problem with portfolios. We look at all of them. We've never been able to make sense out of any of them.

TOMLINSON: In the past six quarters or so, 20% to 30% of the net-leased properties that have traded have been in tertiary markets. Are you willing to look at those markets to get your returns?

WHITING: We don't search out a particular area. We don't want to allocate a certain percent to the Northeast or the South or West, etc. We judge each transaction on its individual merits. We look at our risk-adjusted basis and say whether we like that return. That said, given Angelo, Gordon's long-term and core competency in real estate, particularly private equity real estate, we end up buying a lot of properties that are in the secondary and tertiary markets. Sometimes tertiary would be a generous description for some of the places we're in. We're trying to identify a property in which a tenant is going to reside for the long term. Many times, that puts you in a manufacturing facility in a town you've never really heard of. So we're happy to buy the properties wherever they are. We're just going to do our analysis and figure out what we think the risk-adjusted return should be.

ADER: We're downside risk averse so we tend to look at the real estate pretty carefully. However, it also depends on the asset class and market. For example, industrial distribution centers could be in a very secondary market, but it's an asset class we like a lot. With office, we might want to be in a more primary market and in retail, you tend to follow the credit. That's what we do.

ROUSE: Unfortunately, our parameters are the same, and that's why we're always competing against you guys. We just closed a $160-million deal in Lake Jackson, TX, a 20-year lease to a BBB credit. Our return on that with a zero residual, assuming we give the property away at the end, was close to 6%. So we'll do that deal all day long and hope for a residual that gets us to 7.5%.

SABATINI: I loved that deal, by the way. We lost to you by 10 basis points. Historically, we've focused on secondary and tertiary markets and we've gotten paid to do it. But that's changed in the past 12 to 18 months. There's an automotive parts supplier deal that we lost in this past quarter. The property was probably worth $5 or $10 a foot. It sold for over $50 a foot at a 7% cap rate. In years past, we would have gotten a 9% to a 10% cap on the deal, and we would have been paid to take the risk, but that's not the case now. So we're shifting toward a more real estate-focused set of deals because we think we're getting similar returns at a much lower risk.

McDOWELL: I'd echo what Dick said. There's good retail real estate around the country, so we're really following the credit and lease term. We don't really care whether the retail store is in a primary or tertiary market. We try to capture some of that different valuation in pricing. In the office or industrial sector, it's a very different thought process. We really have to pay attention to the property's location and the long-term demand drivers in that market. So isolated corporate headquarters buildings are not particularly our kettle of fish.

The same is true within industrial. We look hard at the fundamental real estate, how long we think the tenant is going to be in place, where we think rents are going and how useful that asset may be to another tenant. For instance, we're a very big owner of FedEx assets. They're often not in primary markets, but we see FedEx as a long-term occupant and we're willing to take a little risk on the real estate.

TOMLINSON: Investment has three legs—credit, lease structure and real estate. As the market becomes more competitive, which of those criteria are you likely to bend to get a deal done?

McDOWELL: I'm not sure I would characterize it as bending the model. We're pretty active now, for example, in the build-to-suit marketplace; we have several hundred million dollars of transactions. We're trying to move up that chain in the build-to-suit markets.

We also are shortening up on the lease term. We have what we call the mid-duration strategy. So we're willing to look at shorter lease terms of under 10 years. It would be a second-generation product. Cap rates in the properties with shorter lease duration are more in the 7.5% to 9% range, versus the 15-year leases, which get done in the 6.5% to 7.5% cap rate range. So it isn't really bending the model as much as it's expanding the net as much as we can.

ROUSE: I do like the word expanding better than bending. Last year, we did expand the model, and the $300-million transaction I mentioned earlier was the purchase of three land parcels underneath three existing hotels, a senior land position, with 100-year leases. That was quite different for us. One of the funny things about that is that the analysts following our stock were always a little bit critical of our average remaining lease term of the whole portfolio, which was about seven and a half years. You do one transaction for a 100-year lease, and it expanded the whole portfolio average by about three years.

ADER: I like an unsubordinated ground position, and I'm not sure how different that is than a basic net lease, except to the people who don't understand it. We're bending—or expanding—on the credit side. We're always looking to locate the risk in a net lease. The risk in a net lease is not bankruptcy but affirmation. If we can get comfortable, we'll expand our credit parameters. We're probably getting a little more aggressive in cap rate, but we also want to see pretty aggressive bumps.

WHITING: We look at things on a risk-adjusted basis. That gives us flexibility to end up in more tertiary locations with lesser credits or with a lease structure that isn't as usual as you might like. We look at the whole investment and decide what sort of risk-adjusted return we want to have for it, and we'll go ahead and make the investment. It gives us a lot of flexibility, and it certainly allows us to do more deals than we would, but it still give our investors the returns they're looking for.

TOMLINSON: There have been indications that the Fed may not be as diligent about protecting rates as early as six months from now. How has that message sunk into your given companies and are you thinking about starting to alter your financing strategies and maybe lock in some debt, versus continuing to ride the short money?

SABATINI: Most people think rates will go up in the next few years. We recently did a $500-million bond for 10-year fixed rate money and tried to lock in some of this inexpensive money while it's still available. For our managed fund, CPA:18, which we're currently investing, we're still looking at non-recourse entity level of debt. It's still very attractive, and we'll to continue to do that while it's available.

McDOWELL: I hope interest rates go up at some point because that shows that the economy is starting to recover. The 10-year treasury needs to compete against other asset classes, and that would push more product into the market. An expanding economy is probably good for the net lease sector. At ARCP, we have an investment-grade balance sheet, so we're primarily financing our activities with unsecured debt. We did a very large bond offering, $2.5 billion, a few months ago. That will probably be the way we'll continue to finance the operation as time goes by.

ROUSE: We also have an investment-grade balance sheet, so our focus is on unsecured debt. The limitation with unsecured debt is that you can rarely go more than a 10-year maturity. So on the land deal, for example, we took out non-recourse debt at a very attractive rate, and the maturity was 20 to 25 years.

WHITING: We've historically financed our transactions with individual non-recourse mortgages at 10-year fixed rates. It tends to be a lot safer. Sure, you're paying a little bit more for that mortgage, but it allows us to sleep a little bit better at night, and we found leverage levels to still be quite attractive. We're not looking to finance a lot, though. We'll finance anywhere from 50% to 65% percent LTV and, really, the net lease business is a spread investment, with cap rates tracking 10-year swaps.

ADER: I'm surprised interest rates haven't risen more than they have, and they're probably being held down artificially. Rates over the next couple of years are going to increase fairly significantly, which is a good thing because that means the economy is doing better. The corporate economy is doing very well. Expenses are being controlled. Earnings are up. There are some pretty good stories out there.