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Call Start: 10:00

Call End: 10:33

CapLease Incorporated (LSE)

Q3 2010 Earnings Conference Call

November 3, 2010 10:00 am ET

Executives

Paul H. McDowell – Chairman and CEO

Shawn Seale - SVP and CFO

Brad Cohen – ICR

Analysts

Jordan Sadler - KeyBanc Capital Markets

Craig Mailman - Keybanc Capital Markets

Gabriel Poggi - FBR

Greg Schweitzer - Citigroup

Joshua Barber – Stifel Nicolaus & Company Inc

Phil DeFelice – Wells Fargo Securities

Sheila McGrath – KBW

Presentation

Operator

Greetings and welcome to the CapLease Second Quarter 2010 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As reminder this conference is being recorded. It is now my pleasure to introduce Brad Cohen of ICR. Thank you Mr. Cohen you may begin.

Brad Cohen

Thank you very much operator. Today I would like to remind everyone that part of our discussion this morning will include guidance and other forward looking statements, these statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We refer all of you to CapLease's third quarter 2010 earnings release and filings with the Securities and Exchange Commission, for a more detailed discussion of important factors that could cause actual results to differ materially from those contained in the company's forward looking statements. The company disclaims any obligation to update its forward looking statement.

Also during the call today, the company may be discussing funds from operation, or FFO. FFO is adjusted for compatibility and cash available for distribution or CAD which are non-GAAP financial measures. Please view the company's press release for a reconciliation of FFO. FFO is adjusted for compatibility and CAD to net income the most direct comparable GAAP measure.

It is now my pleasure to turn the call over to CapLease's Chairman and Chief Executive Officer Mr. Paul McDowell. Paul.

Paul McDowell

Thank you very much, Brad, and good morning, everyone. With me on the call today, is our Chief Financial Officer and Partner Shawn Seale.

We have a very productive third quarter and continue to make significant progress towards our business goals for the year. We have completed our new $140 million 3-year term revolving line of credit with Wells Fargo in July. We continue to further reduce overall debt through a combination of discretionary pay downs and scheduled amortization but most importantly we have begun to grow the portfolio again.

During the third quarter we closed at a roughly $10 million build to suit warehouse facility with a 10-year net lease to the U.S. subsidiary of Michelin. The 150,000 square foot property is under construction and is being built by an experienced developer with whom we have entered into a project joint venture. CapLease will own the entire property upon completion which is scheduled for March of 2011.

The economics are attractive with a CapRate during the lease term of about 9.5% and an imbedded return during the construction period of 9% on capital deploy. We are continuing to evaluate a number of build to suit opportunities and we expect that we will be able to execute on additional transactions in this sector.

In addition during the quarter we acted as a fee adviser to a borrower with whom we have a direct relationship on a complex $45 million loan, in connection with the purchase and subsequent long term lease of a hospital. We assisted the borrower in all aspects of the structuring of the transaction and the arrangement and placement of the loan. The transaction closed last Friday and we ended up roughly quarter of a million dollar free.

Finally we expect to close on a roughly $30 million property purchase before year end at initial CapRate of around 8% and an average CapRate over the more than 10 years lease term slightly above 9%. We also continue to actively work on our pipeline and hope to have some additional transactions lined up before the end of the year.

Our team leveraged our market franchise and our deep relationships to directly source this high quality opportunity at attractive return. Once added to the portfolio the new properties will be (inaudible) to both FFO and cash flow.

The investment market remained challenging as supply remains constrained and the search for yield by the broader market has led to CapRate compression over the past several months. This CapRate compression however has been outpaced by the decline of the 10-year treasury rate and the associated decline in the cost of financing these assets for first mortgage debt. As a result the spread between where net lease asset trade as compared with either the corporate bond of the same credit or the risk free rate has rarely if ever been wider. While I cannot predict the future we believe this phenomenon is likely to continue and will give us a long window in which to profitably invest.

As we add assets an utilize our existing cash in hand we will continue to monitor the evolving opportunity set and our cost of capital in a concerted efforts to not only grow the portfolio, but to do sell in a manner beneficial to share owners over the long term. Our existing $2 billion dollar portfolio continues its outstanding long term performance.

As quarter ends the weighted average underlying Standard & Poors credit rating on our single tenant portfolio was a single A minus and our single tenant owned properties remained at single A. Our portfolio remains the highest credit quality of any portfolio within our sector.

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