McDowell Sees Payoff in Focus on Investment Grade Tenants

In a luncheon Q&A session with Suzann D. Silverman, editor-in-chief of Commercial Property News, at Monday’s Net Lease Summit in New York, CapLease Inc. chairman & CEO Paul McDowell (pictured) said he is glad that his firm has kept its focus on working with investment grade tenants, given that the stressed economy will likely put pressure on below-investment-grade companies. CapLease has a diversified portfolio of net lease assets, with a $2.1 billion investment grade portfolio that consists of $1.6 billion of owned properties, $291 million in mortgage loans, and $170 million in structured securities. McDowell said there has been a significant move upward in cap rates for non-investment grade net lease properties, but cap rates for investment grade have been relatively stable. Properties in certain sectors, though, are facing stress, he said. “There is pressure on the retail sector,” McDowell said. “There has been a lot of building.” When asked what he saw as high and low risk industries, McDowell said he likes corporations that are engaged in the “hard economy,” such as a manufacturers. CapLease’s largest corporate exposure is to Nestle, while its biggest tenant is the U.S. government, he said. According to McDowell, some investors wanted CapLease to grow faster by investing in real estate with non-investment grade tenants, but he resisted buying assets at too-low cap rates. “It’s like the nerd with glasses,” McDowell said. “He’s starting to look good.” When asked by Silverman who his major competitors were, he said that well-capitalized, publicly traded companies, such as his and W.P. Carey were in the best position, and that the market should see a fallout of “high leverage, low equity players.” “TICs have been gone for a while,” he added. McDowell sees lending terms continuing to move toward more caution, particularly with the larger role that pension funds and life insurance companies are playing. These providers are “cautious by nature,” he said. With the capital crunch making lending proceeds scarce, McDowell said that lending terms that borrowers thought of recently as too stringent, such as loans with 20 or 25-year amortization, “are now starting to look good.” And while the commercial real estate sector is presented its share of challenges, he expressed optimism. “In five years, I think we’ll be pleased with where we are.” Asked for any words of advice, he said “This too will pass.”