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In a sense, lean times for corporate space holders make for green pastures at Manhattan-based W.P. Carey & Co. LLC. Sale/leasebacks of office assets are less a real estate play for nervous corporate bean-counters than they are a way to trim the P&L, and Carey is more than willing to oblige. President and chief acquisitions officer Gordon F. DuGan oversees all acquisitions including those involving sale-leaseback, build-to-suit and leveraged or managed buyouts. In 2000, according to DuGan, Carey completed more than $415 million in transactions with 23 companies, an increase of more than $340 million since 1994. The executive, who started with Carey in 1988 and left the firm for a two-year stint in 1995, returned in 1997 to build the firm into one of the largest owners of net-leased properties in the United States. With more than $3 billion in assets under management, Carey currently manages or owns more than 400 properties–in excess of 46 million sf–throughout the US and Europe.

GlobeSt.com: Does all the talk about corporations scrambling for ways to cut costs make you salivate?

DuGan: Absolutely. There are actually two trends that seem to be converging. Over the past 10 years or so, there’s been a growing trend on the part of corporate space users not to own their real estate. This fundamental has met up with what is actually a more dominant influence at the moment and that influence is the credit crunch. Companies are facing a tightened debt market, and it’s not a good time to raise a lot of equity, so they’re restructuring their balance sheets and seeking alternative means of financing. Add to that the fact that some 40% of all real estate is owned by corporations. That represents an enormous opportunity, and sale/leasebacks fit right into that.

GlobeSt.com: So how’s your deal flow shaping up?

DuGan: It’s better than ever.

GlobeSt.com: Can you be a bit more specific?

DuGan: Some of that is anecdotal; it’s just a sense of the status of the market, the transactions we see and the total potential that’s out there as well as the specific deals we’ve done. That being said, we averaged $400 million in acquisition volume over the past three years. Five years ago it was between $100 and $150 million.

GlobeSt.com: Sale/leasebacks can’t be as lucrative to the corporate holder in a down cycle. What’s their justification?

DuGan: They gain the financing solution they seek. This is not a real estate play for them. They may look for fair-market value, but they’re relatively insensitive to whether the market is going up or down. Besides, if they sell it for more, their rent will be higher.

GlobeSt.com: Will you take any and all deals?

DuGan: It’s hard to quantify the number of deals we’ve passed on–such as telecom hotels, where the fundamentals–cash flow and tenant creditworthiness–are so bad it just becomes too difficult an asset to manage. They’re almost venture-capital plays.

GlobeSt.com: What other asset types will you tend to avoid?

DuGan: Assisted-living. Despite the fact that there’s always a market, we haven’t found our comfort level there yet. For whatever reason, operators are quite heavily leveraged and there are too many question marks. At the same time, we look at everything from a risk/return standpoint, and we’ll get into markets that others wouldn’t.

GlobeSt.com: Such as?

DuGan: We recently completed a three-property leaseback with Rave Reviews Cinemas. You couldn’t find a more troubled industry, but we liked Rave because they were a new operator and they didn’t have a lot of old theaters. We purchased three theaters–in Dallas and in Port St. Lucie and Pensacola, FL. Even on the downside, all of the theaters had adequate coverage; on the upside, we’ll take an equity warrant on the company’s stock.

GlobeSt.com: How often do you go after the warrants?

DuGan: We’d do it every time if we could; it’s a great kicker for the investors. But companies tend to be very tight with their equity, so we do it where it’s particularly opportunistic.

GlobeSt.com: What sort of hold does Carey look for in the properties you buy?

DuGan: We have a liquidity horizon of eight to 12 years, but we’re willing to sell assets in a shorter period. We just sold a San Diego office property to Bea Systems for $31 million, four years after we purchased it. We bought it for roughly $21 million.

GlobeSt.com: So what’s ahead for the sale/leaseback market?

DuGan: I expect it to pick up, even if the economy improves. Capital markets and lending won’t pick up as quickly, which means that corporations will still be searching for those alternative financing options.

GlobeSt.com: And when the credit crunch is over?

DuGan: We still have the fundamental trend I referenced before–corporations have been shedding real estate for the past decade. As long as corporations want to clear their balance sheets, sale/leasebacks will grow in popularity.

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