Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

New York City—The growth of some net lease REITs has been constrained not by their access to capital or availability of transactions, but from what they describe as their risk-reward tolerance and discipline. While transaction volumes were down during the third quarter this year, they expect a more active pipeline in the future.

Capital Lease Funding Inc., for example, added just $53.4 million of investments to its holdings during Q3, a relatively small amount for a firm with a portfolio of $1.4 billion. "Our quarterly investment activity was not constrained by a lack of opportunity or product, but by our continuing investment discipline," CEO Paul McDowell said during the New York City-based REIT's Nov. 2 conference call.

"We chose to let deals go and wait for conditions to improve," McDowell explained. "That discipline is now being rewarded as conditions improved markedly for us. While we faced headwinds for much of the year, at the end of the third quarter, cap rates began to move up ever so slightly. At the same time, we saw a significant decline in Treasury rates." Improved investment spreads, McDowell noted, is leading to a better pipeline of acquisitions. The REIT expects to close or have under agreement approximately $200 million of new investments during the fourth quarter, which will exceed its quarterly average of about $150 million. "I feel very good about our business going into 2007," McDowell concluded.

W.P. Carey & Co. CEO Gordon F. DuGan noted during his company's Nov. 7 call that it purchased approximately $115 million of investments during the third quarter, down from $153 million during the same period a year earlier. The figure for the first nine months of the year, $451 million, is likewise down from the same period in 2005, when it totaled $780 million.

"We expect a good fourth quarter," DuGan said. "So far this quarter, we've closed three transactions for a little less than $30 million. Our backlog is quite good and our outstanding commitments for this quarter will put us well above last year's volume." While it remains a competitive environment for net lease investments, DuGan said he still sees more capital than good deals. We don't see that letting up," he added.

NorthStar Realty Finance Corp. president and CEO David T. Hamamoto echoed those comments. "This remains a highly competitive segment of the market and one where we continue to be selective and look for off-market and strategic opportunities where we can create long-term relationships," Hammato said during that New York City-based REIT's Nov. 8 conference call. Hammato said NorthStar closed on $124 million of net lease acquisitions during the third quarter. That tally included a portfolio of nine retail stores operated by what he described as well-known $2.5 billion company that is expanding, he said.

Hamamoto was upbeat about the net lease portion of his REIT's business. "We are looking at a very full pipeline of opportunities in traditional asset classes as well as in the senior housing niche," he said.

Some REIT executives also shared thoughts about recent privatization and merger news in the net lease REIT world. That activity, said McDowell, indicates "there are investors that are interested in the space and are willing to pay a significant premium over current share prices." CapLease is interested in continuing to build its platform, he added.

David M. Brain, president and CEO of Kansas City, MO-based Entertainment Properties Trust, said during the REIT's Nov. 2 quarterly conference call that he believes those transactions are reflective of "a very strong funds flow." He contuinued, "It's really positive. I think it's notable that--while maybe not a direct competitor but we're somewhat akin to the Trustreet guys--the cap rates that are being paid for some of these portfolios are cap rates quite a bit below the implied cap rate of where we are trading."

Entertainment Properties Trust continues to "prudently" expand its scope beyond its historical focus of movie theater properties. Brain revealed the REIT signed a letter of intent to finance what he described as "an exciting new-generation live performance amphitheater" that "will be operated by a multi-decade market leading booking and promotion operator in one of America's leading cities." The investment is expected to be in the $25 million to $30 million range. The company also has agreed to another investment, this one in the $10 million to $15 million range, to develop and lease what Brain called a "new-generation indoor family entertainment center based on concepts and operating prototypes of what we consider to be one of the real leaders in this industry." He said he would wait until transaction terms are finalized before discussing either project in more detail.

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Q3 REIT Reports Suggest a Changing Market

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