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This Small Cap REIT Is a Diamond in the Rough

With just the Pennsylvania and California properties leased, the $5 million reserve is sufficient to cover expected shortfalls for the full term of the extension. CapLease also agreed to pay substantially all excess cash flows from the properties to reduce the principal amount of the debt. The company is permitted to prepay the loan at any time without payment of a penalty of premium to the lender.

CapLease previously extended the leases on two of the Nestlé properties where the leases were scheduled to mature in December. The extension of the approximately 1 million-square-foot Pennsylvania property is with the existing tenant Nestlé for five years commencing Jan. 1, 2013.

The extension of the approximately 750,000-square-foot California property is with the existing subtenant Del Monte and is also for five years also commencing Jan. 1, 2013. CapLease said it is continuing to actively market the Fort Wayne property for release at the end of Nestlé's

What Does CapLease Look Like Today?

CapLease owns 64 properties valued at $1.8 billion, which it leases on a triple net basis (lessee responsible for all operating costs) to creditworthy tenants across the country. CapLease also has a debt portfolio consisting of fully amortizing first position mortgages on single tenant properties valued at $30 million, and a CMBS portfolio valued at $63 million. In the past few years, the company has moved away from holding debt securities and shifted into the real property area.

CapLease holds significantly more debt than its peers. Currently, the company holds $1.17 billion in long-term debt and $121 million in preferreds, giving it an 11.7 times net debt and preferred to EBITDA ratio, nearly double its peers, according to pages 56-57 in its 2011 10-K. CapLease has taken steps to mitigate the risk of this high debt load, by structuring 86% of its debt as non-recourse, long-term, fixed rate debt, secured by individual assets. Additionally, the debt amortizes, which gives the company additional advantages (as we will discuss a bit later).

One attraction to CapLease is that the company has a book value of nearly $600 million but as of the writing of this article trades at only $340 million, a 53% discount. Most of its peers trade either at, or at a premium to book value, making CapLease much more attractive relative to its peers.
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