CapLease: What Difference a Year MakesA year ago CapLease was trading at around $3.30 per share and several of the company's facilities, leased to Nestle, were subject to becoming dark. The company was exposed to substantial credit risk and considerable leverage, specifically the company's cross-collateralization associated with a portfolio of Nestle-leased properties. However, since that time, CapLease has finalized the extension of the mortgage debt on the three Nestlé warehouses located in Breinigsville, Pa., Lathrop, Calif., and Fort Wayne, Ind., and these properties are now financed with a $106 million securitized first mortgage note that was scheduled to mature in August 2012. During the past year, the company obtained a note extension for up to five years, inclusive of all extension options and with the last two years subject to re-tenanting the Fort Wayne property by August 2015. The note face amount of $106 million and coupon of 6.32% were not modified by the extension, and the only immediate capital required for the extension was $3 million, which was funded into a reserve with the lender for future re-tenanting costs at the Fort Wayne property. Pursuant to the extension, CapLease agreed that any cash flow shortfalls from the properties after debt service during the extension term will be funded through an approximately $5 million reserve previously deposited with the lender.
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.
CapLease Trades at Significant Discount to Book ValueCapLease is trading today $5.37 per share -- up almost 63% in just a year -- and the current share price has plenty of more room to grow. The company's discounted cash flow stands at around $305 million -- over 10% less than the companies market cap of $359 million. Amazingly, the current share price seems to assume that the company will return all of its assets to the bank, and might sign up one of two large leases for the balance of the company's history. In short, that won't happen. The company will increase cash flow both by renewing the leases on many of its larger properties and by continuing to deploy capital from its low cost revolver, thereby significantly adding to future cash flows at no cost to investors.
Why is CapLease trading at a Discount?CapLease holds about double the amount of leverage as its peer group. (CapLease has around 75% debt to market cap). However, even if CapLease defaults on some of its loans and has to return property to lenders, the debt is nonrecourse and will not affect the other properties in the portfolio. To make the point more emphatically, even if CapLease loses half of its properties to lenders, considering the company trades almost at cash flow, you still get the other half for free. In short, a default does not affect the company on the REIT level, and the other properties remain safe. Between now and 2017, CapLease has a slew of major lease expirations coming due. The harshest of this wave will come in 2016 and 2017 when CapLease faces 12% and 13% of the leases, respectively, coming due. Additionally, in the immediate future, the company has two major leases still up in the air, one with the U.S. government in Bethesda, Md., and the remaining Nestle Holdings lease (mentioned above) in Indiana. Current management has been in this business for 17 years, and I think it has the knowledge and experience to guide the company through this tough time. In addition, insiders own over three percent of CapLease shares making the "skin in the game" proposition more compelling.