WP Carey Inc (WPC) 2015 Q4 法說會逐字稿

Hello and welcome to W. P. Carey's Fourth Quarter and Full-Year 2015 Earnings Conference Call. My name is Amanda and I will be your event specialist today. (Operator instructions). Please note that this event is being recorded. After today's presentation we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time.

It is now my pleasure to turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone, and thank you all for joining us on this conference call to review our 2015 fourth quarter and full-year results. I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. Lastly, an online rebroadcast of this conference call will be made available in the Investor Relations section of our website at wpcarey.com where it will be archived for approximately one year.

And with that, I will turn the call over to Mark.

Well, thank you, Peter, and good morning everyone and thank you for joining us today.

For those of you who don't know me, I have been with W. P. Carey for more than a decade, having previously served as an executive of the Company from 2005 until 2013, including as the Company's Chief Financial Officer. I have also served on the Board of Directors since 2012.

I am fortunate to be able to work with a very talented senior management team, all of whom I have worked closely with during my tenure as CFO. I have asked several of them to join me on this call today: Jason Fox, W. P. Carey's President and Head of Global Investments; Hisham Kader, our Chief Financial Officer; Mark Goldberg, who is Chairman of Carey Financial and heads up capital raising for our Investment Management business; John Park, Managing Director of our Strategic Planning and Capital Markets Group; and Tom Zacharias, our Chief Operating Officer and Head of Asset Management.

Before we talk about our 2015 results, I want to make a few comments about the direction of our company. Along with the board and management team, I recognize that there has been some uncertainty about what's next for W. P. Carey. As we noted earlier this month, we are continuing our review of a range of strategic alternatives with the assistance of JPMorgan. We remain focused on evaluating the most effective avenues to enhance our growth and value for our shareholders. We are committed to reaching a conclusion as expeditiously as possible. However, as we noted earlier this month, we will not be commenting further until that strategic alternative process is completed.

Separately, W. P. Carey evaluates its business every day. We always have and we always will. We are constantly reviewing our structure, new products, liquidation alternatives for our funds under management, and new markets, both from a capital-raising standpoint and an investment standpoint. We have always viewed these alternatives through a single lens, asking ourselves a fundamental question: do they provide superior risk-adjusted returns that create sustainable, long-term value for our shareholders. When we believe that value is created, we execute on that strategy. And if you look at our history, this execution has ranged from our public listing beginning in 1998 of the first 9 funds, the internalization of our manager in 2000, to our REIT conversion in 2012. This process is ongoing and will not stop.

For the time being, we will continue to generate value for our shareholders by executing our current model. We will further optimize our balance sheet through acquisitions, dispositions, and active asset management in order to improve portfolio quality and extend its weighted average lease term.

We will also continue to grow our investment management business. Our current business model offers significant diversity in terms of capital sources, our ability to invest both in the US and abroad, and the diversity within our real estate portfolios which helps protect shareholder value during industry-specific downturns. We believe it's a model that allows us to perform across business cycles. For example, our shareholders have benefited greatly from our investment management business. We have made some of our best investments during some of the most challenging economic periods as a direct result of our ability to access multiple sources of capital.

At W. P. Carey we have a 40-year track record of managing complexity and our shareholders have benefited from that expertise. We will continue to work with our stakeholders to be transparent in the supplemental financial information we provide and make decisions related to both capital and investment allocations based on what we believe to be in the best interest of all of our investors. We are committed to building on our successful track record of delivering value to shareholders of W. P. Carey and the shareholders of the funds we manage.

Now I'll hand it over to Jason to talk about our owned real estate portfolio.

Thank you, Mark. Good morning, everyone.

I will start with a brief recap of our owned real estate portfolio followed by some comments on the market environment.

At the end of the fourth quarter the Company's owned real estate portfolio was comprised primarily of 869 properties covering just over 90 million square feet net leased to 222 tenants. At year end 64% of our annualized base rent came from properties in the US and 33% from Europe. Portfolio occupancy remained high at 98.8% and 95% of annualized base rent came from leases with contractual rent escalations either linked to CPI or through fixed rent increases. And the portfolio's weighted average lease term stood at nine years, which is up slightly from the prior quarter.

Our same-store analysis shows that rents were about 1% higher compared to the 2014 fourth quarter. Please note our same-store data is presented on a constant currency basis for purposes of comparability.

As shown in the leasing activity schedule provided on page 31 of our supplemental, during the fourth quarter we extended or modified seven leases at approximately 91% of the existing rent, adding just over 10 years in incremental weighted average lease term. The average rent of the new leases over that 10-year period is 3.9% above the existing rent and the TI and leasing commissions for those seven deals were very low at only $1.29 per square foot. We also entered into two new leases with a weighted average lease term of about 14 years.

Looking ahead, we have 14 leases expiring in 2016 representing 2.6% of annualized base rent and we are currently in active discussions to address these maturities. As you look at our lease maturity schedule, keep in mind that because we proactively manage our portfolio we begin lease negotiations with tenants very early on, typically negotiating and extending leases three to five years ahead of their expiration.

Given the rent growth built into our leases and their long duration, we generally experience a roll down in rent when leases are renewed or extended, which over the past three years has averaged between 7% and 8%. However, average rents over the term of the extended lease tend to be above the prior rent. And because our leases are triple net with tenants renewing critical facilities, typically very little CapEx is required. Over the last three years on 87 lease renewals the TIs and leasing commissions averaged just $2.65 per square foot. And as we've said on prior calls, releasing and new leasing activity is a very small component of our overall portfolio. For example, for the 2015 fourth quarter it represented less than 2% of total annualized base rent.

Turning to our recent acquisitions and the market environment, during the fourth quarter we completed three acquisitions for our owned real estate portfolio totaling $145 million, bringing total on-balance sheet investment volume for 2015 to $689 million. In October we acquired a net lease portfolio of six Courtyard by Marriott hotels in the US for $52 million with a remaining lease term of approximately 11 years and fixed rent escalations. The portfolio has shown strong operating performance in recent years with very strong NOI coverage providing downside protection and a high likelihood of renewal.

In November we completed a sale/lease transaction with Stern Group for a portfolio of 10 automotive retail and service sites in the Netherlands for about $62 million. The facilities are strategically located in and around three of Netherlands largest cities and are among the best performing in Stern's portfolio. The acquired portfolio is triple net leased for a 17-year term and includes full Dutch CPI annual rent escalations.

And finally, in December we closed on the acquisition of a creative office facility in Irvine, California for $31 million net leased to Harvest Christian Fellowship, a not-for-profit organization, to serve as its Orange County campus. It is a high-quality office facility, well located in a strong submarket with a remaining lease term of just over 13 years and 3% annual fixed rent escalations.

So combined, acquisitions for our owned portfolio during the fourth quarter had a weighted average initial cap rate of 7.2% and acquisitions completed in 2015 had a weighted average initial cap rate of approximately 7%.

As always, we are focused on extending the overall weighted average lease term of our portfolio. The deals we completed in the fourth quarter were all additive to it with a weighted average lease term of approximately 14 years, which was also the weighted average lease term for total acquisitions completed during 2015.

Disposition activity remained fairly light during the fourth quarter totaling $6.7 million, bringing total dispositions for the 2015 full year to about $39 million. We currently expect 2016 to be an active year for capital recycling with significantly higher dispositions than we had in 2015, enabling us to fund the vast majority of our acquisition pipeline with proceeds from asset sales. We will provide specific details on our expected acquisition disposition volumes in conjunction with AFFO guidance on our first quarter earnings call.

Turning briefly to the investment environment, net lease in the US remains competitive. However, we are seeing an increased emphasis on certainty of close and execution rather than purely on price, which we view as a function of several factors: weakness in the CMBS market, reduced capital flows into the market from established investors, and volatility and uncertainty in financial markets in general.

As we've previously said, Europe remains at a different point in the cycle. Cap rates are continuing to compress as US investors become increasingly more comfortable with investing in the region, thereby creating capital inflows. However, given the lower cost of debt in Europe, attractive investments with significant spreads are still available.

And with that, I'll hand it over to Hisham to discuss our financial results.

Thank you, Jason, and good morning, everyone.

For the 2015 full year we generated AFFO of $4.99 per diluted share, up 3.7% compared to $4.81 per diluted share for the 2014. This increase was driven by three key factors. First, the real estate that we acquired for our owned real estate portfolio had a positive net impact on AFFO. Second, within our investment management business, growth in assets under management resulted in both higher asset management fees and higher distributions from our general partnership interests in the managed REITs. And thirdly, structuring revenues, net of associated costs, increased as a result of higher investment volume on behalf of the managed REITs. These factors were partly offset by the impact of a stronger US dollar and higher G&A expenses, mostly related to a new accounting software system we implemented in 2015.

For the 2015 fourth quarter we generated AFFO of $1.27 per diluted share. This is up $0.067 compared to $1.19 per diluted share for the 2014 fourth quarter, due primarily to two key factors; first, growth in assets under management within our investment management business and, second, the positive net impact of acquisitions on our balance sheet. These factors are partly offset by lower structuring revenues due to lower investment volume on behalf of the managed REITs and the impact of a stronger US dollar year over year. As previously announced, we will provide 2016 AFFO guidance on our first quarter earnings call in early May.

Turning to dividend, during the fourth quarter we raised our quarterly cash dividend to $0.9646 per share, equivalent to an annualized dividend rate of $3.86 per share. Based on yesterday's closing stock price, this represents an annualized dividend yield of about 7%. Dividends declared during 2015 totaled $3.83 per share, an increase of 3.8% over 2014, reflecting the growth in our business, as well as a full-year payout ratio of 76.8%.

Turning briefly to our balance sheet and leverage metrics, at year end pro rata net debt to enterprise value stood at 40.9%, total consolidated debt to gross assets was 49.2% and pro rata net debt to adjusted EBITDA was 5.5 times. Also at year end the weighted average cost of our pro rata secured debt was 5.5%, and our overall weighted average cost of debt was 4.1%. We have approximately $309 million of debt maturing in 2016 compared to total liquidity at year end of about $1.2 billion, which includes cash and cash equivalents and the undrawn availability on our credit facility revolver.

Now before I turn it back to Mark, I'll briefly touch upon some of the key metrics for our investment management business.

Three of our six funds are in the initial public offering stage, CWI-2 and our BDC funds. For the 2015 fourth quarter investment capital inflows totaled approximately $157 million, up from $76 million for the third quarter, and were primarily into CWI-2, our second lodging fund. This brought total investment capital inflows for the 2015 full year to $349 million. In addition, dividend reinvestment proceeds net of redemptions for the managed REITs totaled approximately $135 million for 2015.

Over the course of 2015 we structured $2.5 billion of investments on behalf of the managed REITs and at year end our managed programs had total assets under management of $11 billion, up about 20% from $9.2 billion at the end of 2014. This growth is reflected in the year-over-year growth of both our asset management fees and cash distributions from our general partnership interest in the managed REITs and ultimately in AFFO as I discussed earlier.

And with that, I'll hand it back to Mark.

Thanks, Hisham.

Following on Hisham's comments, we plan to continue to grow our investment management business and in 2016 expect assets under management to grow as we raise and invest inflows into our lodging and BDC strategies. Currently we are focused on reviewing and refining our business plans for the year ahead and therefore have postponed providing 2016 guidance until our first quarter earnings call. The purpose of today's call is to discuss our 2015 results, so I ask that you please keep your questions focused on the Company's results and operations.

And with that, I will hand it back to the operator to take any questions.

(Operator instructions). Sheila McGrath, Evercore.

Yes, good morning. I was wondering if you--.

Good morning, Sheila.

I was wondering if you could describe to us how much dry powder the CPA 17 and 18 have left to invest. And also, given your stock price below NAV, is there any consideration to revisiting raising capital for net lease again through the non-traded REIT funds?

Well, let me answer the second part of your question first then I'll turn it over to Jason to answer the first part of your question. Clearly our equity cost of capital is not as favorable as it was at some points in the past year. But as you said, our ability to access other capital sources, recycle capital in our portfolio with an eye on improving portfolio metrics, as well as extending lease term, and with over $1 billion in liquidity, that will limit our need to access the equity market in the near term. We are reviewing ways to grow our investment management business and have not ruled anything out at this point, Sheila, so everything is on the table.

And Jason, do you want to take the first part of Sheila's question?

Yes, sure. In terms of dry powder for CPA 17 and 18, it's in the $200 million to $300 million range and most of that is spoken for given our pipeline coming into the year.

Okay. And then also, maybe it would be helpful if you talked about the non-traded REIT fundraising business in light of the recent regulatory changes, FINRA, Department of Labor. How do you view this business in 2016 and beyond?

Well that's one of the things we're working on. As we evaluate new funds, obviously we're evaluating them through the lens of 15-02 and the Department of Labor regulations. I'm going to ask Mark Goldberg to comment on that who heads up our capital raising.

Hi, Sheila. Good to hear--.

Good morning.

Good morning. As you know, we've had good visibility both on 15-02 and the DOL in terms of our engagement with the regulators and the Department of Labor over the years. And we generally view that in the context of increased transparency and potentially, as intended by the DOL, as reducing the cost of raising capital. So as a general rule, we view them as positives with the understanding that any regulatory change at times causes short-term disruptions. Our funds today on a going basis for the fourth quarter, over 60% of our sales took place in low-cost funds, low or no-cost funds. That's 2% or under. We feel we're very well positioned for 2016 beyond when the April implementation date of 15-02 takes place. And as Mark pointed out, we stand ready for the fiduciary rule as well.

Okay. Thank you.

Juan Sanabria with Bank of America.

Hi. Good morning, guys. Thanks for the time.

Good morning, Juan.

Just wondering if you can give us a sense of what the dollar number should be for the on-balance sheet portfolio on a go-forward basis with regards to maintenance and leasing CapEx given you have a significant office and industrial portfolio.

Yes. This is Jason. I can tackle that. I mean we've averaged over the last couple years on our releasing and renewals less than $3.00 per square foot.

And total gross dollar volume including CapEx would be what, sorry?

Less than $3.00 per square foot.

Okay. And is that just what you're rolling or as a percentage of the total? How should we think about that on a--?

That's just what's rolling. I mean our leases are predominantly triple net, almost exclusively, so there would be very little reserves on a go-forward basis except for those assets that are renewing or releasing that we think we need to provide some level of CapEx.

Okay. And could you give any color on the $15 million term fee? Was that a tenant previously on the watch list? Did somebody go bankrupt? And then how has the watch list been trending?

Juan, I'll take that, but just before I respond to that question I just want to correct something I said during my prepared remarks. I said that pro rata our net debt to adjusted EBITDA was 5.5%. It's 5.5 times. But now coming to your question, it relates to the disposition of Kraft. I think we have discussed that on earlier calls, that Kraft, after its acquisition, it's moving its headquarters and we had this great sale -- opportunity to sell this asset. So it's the termination income associated with the Kraft sale. Most of the $15 million is exactly that.

Okay.

And I should add to that quickly that, as Hisham has said, we are in a contract to sell the asset. So combining the termination payment with the sales price, we'll exit at a low- to mid-5 cap rate, which is a great outcome for us.

Okay. And are any of the funds, particularly I guess CPA 17, when should we be thinking about those maybe looking at a liquidation scenario?

That's highly dependent on what we view to be the best interest of the shareholders of their funds and that's linked to some extent on what the current market conditions are. The CPA directors have a great deal of latitude both in the timing of those liquidations and the form they may take as independent directors on that, so there's currently no timeframe in mind for that.

Okay, great. Thanks. I'll hop back in the queue.

Nick Joseph, Citigroup.

Hey, good morning. It's Michael Bilerman here with Nick.

Good morning, Michael.

So on page 8, foot note C, there was expenses related to the strategic alternatives of $4.5 million in the quarter. And granted it's been a long time since I was an investment banker, but $4.5 million seems like a big amount for like a retainer fee to explore sort of alternatives. I'm just curious what are you spending money on? How should we think about what you're going to spend? And maybe just give us a little bit more color given the size of the cost.

The $4.5 million was primarily related to legal, tax, accounting fees associated with that. We won't have any color on any additional fees until we conclude the process.

But $4.5 million is -- that's -- I mean what goes into legal and accounting and tax that it's such a high number? What type of work is being done to cause such a massive expense?

Just a review of our legal, tax and accounting fees. We have tax issues both internationally and domestically. So other than categorizing it in those three categories, that's about as much detail as I can give you.

And who's running the process right now and what's the timing? I know Katy had previously been put into that role and was promoted, so I'm not sure if she's still doing it or -- I guess just what color can you give us there?

John Park, who's been with the Company for close to 30 years and has headed up the strategic planning for the Company and has been involved in every major transaction the Company has undertaken, is heading up that process. And as we've said, he's working with JPMorgan to study those alternatives and when they complete that process we'll discuss it at that point.

Okay. And then Mark, can you give us a little bit of color sort of on the CEO transition process? And the reason I ask is the last two board members, and nothing against your experience and your knowledge of the Company, but the last two CEOs to be put in place came right from the board without sort of any external process or an interim type role. And so you go back to when Gordon left abruptly and Bond came in and came off the board and then Bond left abruptly and you came on. What confidence can you give us that the board is thinking externally and trying to think about the right roles? And why wasn't an interim -- why weren't you given an interim title, sort of get through the strategic review process and then figure out what the right level is?

So as I mentioned in previous discussions with a lot of you, the board felt that based on my experience with the Company, my understanding of the business, most importantly my relationship with the rest of the senior management team that have a tenure on average of about 15 years, that I was the best individual suited to take over as CEO. What we focused on in the transition clearly is coming in and reviewing, refining our business plans, trying to grow the Company. Even a lot of that process is going on. And I don't believe that growing the Company, quite frankly, is mutually exclusive of any of the alternatives on the table being studied. So that's what we're focused on right now. It's been a smooth transition so far. We haven't really skipped a beat. I'm very comfortable working with the senior team. They're a talented group of people, as I'm sure you can ascertain from some of the answers you're getting on this call, and that's what we're doing.

Right. And there's no doubt that that's important, but in a number of other cases you've seen companies name an interim internal person, run a process to make sure that they're getting outside perspectives into the company. And it's just surprising that the last two times this company has not, or this board, has not gone down the road and tried to at least seek some external advice. So that would just be that perspective.

Can you just give us -- the last one is just the dollars that will be expensed for Trevor's departure this year as additional cost? And I don't know if you can confirm or not whether Katy is also out and whether there's costs associated with that, just from a modeling perspective.

Any costs associated with Trevor has been filed and I would point to our public filings related to that and feel better if you look at those numbers exactly. As I have said before on earlier calls, Katy Rice is not with the firm at the present time. We thank both Trevor and Katy for their contributions and wish them well in the future endeavors. But as I said, we're focused on right now running this business and growing it. That's our main focus today and we're reviewing those plans. We expect in the first quarter earnings call to come out with a plan that will describe in detail that to you as well as provide guidance for the current year.

Okay. Thank you.

Paul Adornato, BMO Capital Markets.

Good morning.

Good morning, Paul.

Was wondering if you could talk about the European net lease business just in terms of the risk/reward that you see in Europe versus US for new investment? And also, at 33%, how big do you want that business to be and what sort of European exposure should we expect over the longer term?

Well let me just first give you my view of having European exposure and being able to do business in Europe. As I said in my opening comments, I view both the diversity and our ability to access different capital sources, as well as invest that capital in both the US and aboard, as a real value to our shareholders. There are different economic cycles that the two continents hit at certain points and times and at certain points we see more attractive investments in Europe and at certain times we see more attractive investments in the US. So for me, I think that's a big benefit to us.

I'll turn it over to Jason, though, to kind of give you some color on what we're seeing over there and what the value is.

Right. And just to reiterate, it is an important part of our business model to allocate capital where we think the best risk/return opportunities are. And if you look at our last four or five years, you'll see that on certain years we've meaningfully more weighted to one region over the other and that's one of the benefits. We can choose where those best risk/return opportunities are.

In terms of Europe right now, the investment environment, competition is increasing and we are seeing some cap rate compression. But by and large, there still are sufficient spreads over there given the cost of debt to make it an attractive and favorable investment environment for us.

In the US we are seeing cap rates, at least at the types of deals that we look at, tick up slightly. I would say, if I had to put a number on it, maybe around 25 basis points on average. I think this year it looks like that the pipeline may shift a little bit more heavily weighted towards the US compared to Europe, which has been the opposite in the past.

And would you say that there are any limits as to European exposure or if the opportunities are very, very great that that portfolio could grow to more than a third of the--?

We don't put any limits on ourselves. As I said, we view it more through the lens of what do we feel as a team will deliver the most value to our shareholders and we view the investments through that lens.

Thank you.

Jon Woloshin, UBS.

You mentioned shareholders--.

Good morning, Jon.

Hi. You mentioned shareholders a lot in your prepared remarks. I just have a couple of observations for you. Over the last two years you've underperformed Realty Income by 4,600 basis points, triple N by 3,800 and VNQ, just as a broad measure of REITs, by 2,100 basis points. You've been looking at this restructuring as a company for the last almost eight months now. Your CEO leaves with very little detail. So the question I have for you is, as shareholders, what are we supposed to do with all of this? I mean I go back to Mike Bilerman's question, which I thought was pretty fair, about is the Company really looking at its shareholders or is it looking internally because right now I'm really kind of scratching my head a little bit.

Yes. I think -- and it's a fair question and I think you're looking at it through the lens of the current environment. From a strategic planning process and a shareholder return process I tend -- and I think as a company and management team we tend to look at it over a much longer term. What I would point out to you is -- and go back 10 years. If you look back over the past 10 years and through the current date, through 2016, we've had a total shareholder return of about 306% to our shareholders. And I think if you compare it to some of the names you've mentioned you'll see that we're probably in line with that.

If you take it back through the end of 2014, and the reason I do that is because our shares did face some significant pressure in 2015, but if you take it through the end of 2014 we've returned about 392% in total shareholder return to our investors, which outperforms the shareholder return of some of the names you have mentioned in the past, too. So I tend to look at it through that lens, on a longer-term basis as opposed to a shorter term.

No, I--.

But they're fair questions. And as I said, I think we have a 42-year history of delivering value to our shareholders. We're focused on the long term on continuing that record and that's what we plan to do with it.

Well the market has spoken about your business model, at least the institutional market. So I guess my question to you is, is the message that we should internalize -- and I'm asking, I'm not telling you. Is the message we are running this long term for the individual shareholder. If the institutional shareholder is not comfortable with our business model we respect that and we understand it and there are companies that have business models you may be more comfortable with.

I think what we're telling you is that we're going to run the business today based on our current business model through the lens of what we need to do to increase shareholder value for our shareholders today. We look at strategic alternatives to our model, to our capital sources, to our investment allocations every single day. We'll continue to do that and we'll do it through the lens of looking at it on how we increase overall shareholder value.

Okay. Thank you.

Dan Donlan, Ladenburg.

Thank you and good morning.

Good morning, Dan. How are you?

Good, good. Just wanted to kind of go back to your comments on the strategic alternatives. Should we expect a conclusion of that potentially with first quarter earnings or is there any other type of concrete timeframe we could get?

I really can't. When we're completed with it I'll -- we'll give a conclusion to it.

Okay. And then switching gears to the non-traded business, was just curious if you could comment on the fundraising effort with the BDC and kind of how that's progressing. The sales seem to have been -- to slow, so just kind of curious where you think that's going to progress going forward and has there been some different hurdles that you've had to encounter there versus your traditional non-traded REIT product?

Sure. I'm going to ask Mark Goldberg, Dan, to address that.

Hi, Dan. CCIF, much like our other funds, goes through a process of registration, building up a selling group and then introducing the product. And in my experience, CCIF is following a very familiar pattern, one that we experience all the time, including in the introduction of our Carey Watermark funds, our lodging funds. That fund itself was declared effective in late July. We have about one-third of our selling group, our typical selling group, in place. We see week-over-week improvements in the numbers. And we feel very comfortable that the pattern of engaging with our broker/dealers in terms of signups, our flows, is following very familiar patterns in our fundraising and we expect good flows into those funds in the coming quarters.

Okay, that's helpful. And then Mark, just maybe sticking with this. The Department of Labor legislation that's going through, could you maybe update us on some of the changes that that could encounter? Specifically, if the legislation goes through as currently proposed, would you be able to sell non-traded REITs and/or the BDC product into retirement accounts?

Right. It's a good question, Dan. I think it's a question that's on everybody's mind. The rule as it's currently proposed -- let me step back from the DOL and describe what it is and what it's not because there seems to be at times confusion about it. The DOL, or as I refer to it as the fiduciary rule, is a real -- really a rule not governing investment managers, per se, but governing the delivery of services or investment advice through the financial intermediary market. So the impact is more to our distribution partners than it is to us as an investment management business. What they're trying to do is to increase transparency and lower the cost of that advice. So from the perspective of an investment manager, we certainly embrace the idea of transparency and would certainly appreciate the benefits of raising capital at less cost.

So the rule as proposed -- getting to the core of your question, the rule as proposed, before it went into the comment period and ultimately the editing period that was submitted to the OMB and should come out in a few weeks, specifically said that a -- with regard to one of the exemptions that were offered, which was referred to as the Best Interests Contract Exemption, the BIC Exemption, is that if you're going to sell a commissionable product it needs to be a common security. And common securities are many, but not on the list was non-traded REITs. And as such, the conclusion was arrived that non-traded REITs would not be able to be sold to IRA investors. That is not entirely accurate in the sense that if the rule does go through exactly as it was written before, W. P. Carey will be prepared to offer the same investment -- similar investment management programs offering the same historic opportunities for investors to invest in our vehicles that do comply with the rule as it's currently proposed. We'll all wait and see how the rule comes out and then, as I mentioned earlier and as Mark reiterated, we stand ready to have products available for our 150,000 existing customers if the DOL rule goes through as proposed.

Okay, Mark, thanks. That's hugely helpful. And then just maybe touching on potential resurgence in the CPAs. Is that something you guys have started to recently think about or is that something that you've started to think about because of advisors maybe looking for that bread-and-butter product that you guys have kind of put out for 35 or 40-plus years?

Yes. I can only discuss it through the view of since I've been on board and, as I've said, Dan, nothing is off the table. My view is, while this process goes on, our job is to run the business in the best way we know how to, which is in our current model which we think delivers significant value to our shareholders. So we will continue, as I said, to work on our own balance sheet. We'll continue to grow the IM process and, as part of that, all products are currently being reviewed to see what makes the most sense for the business.

Okay. And then the last question from me, I was just curious if there are any large known tenant move outs in 2016 that we need to be aware of?

Nothing significant I'm aware of, but I'll turn it over to Jason for some--.

Yes, we'll have a couple new vacancies, a 220,000 square foot office building and roughly 30,000 square feet in San Diego. That's kind of Q1 and Q2-ish. So nothing substantial. That's kind of our outlook at this point in time.

Okay. Thanks so much. I really appreciate it.

Thanks, Dan.

Chris Lucas, Capital One Securities.

Good morning, everyone.

Good morning, Chris.

Can you give us -- WPC has done a good job of executing both in the US and in Europe as it relates to the bond market. I guess I was wondering about a couple of things. One is what is the pricing differential that exists right now for long-term unsecured debt between the two markets for you guys? And then what sort of capacity do you have to continue to issue Eurobonds given your investment and exposure to Europe?

Yes. I'll ask John Park to address that, Chris.

Obviously there is -- the pricing depends on market conditions at the time, but there is significant spread between the bond pricing for -- between Europe and US. I think it's about 150 basis points or even greater. And I think that the -- where we issue debt it will depend on our portfolio mix and current market conditions and pricing at the time.

Okay. And then if I could get some color maybe on the $8.7 million of credit loss that was reported in the quarter, just in terms of NOI exposure and maybe what was going on there.

Yes. That's an international asset that we have where we have a finance lease. So at year end we were reviewing that lease and when we saw that the tenant was in some distress so we have put in an allowance against the receivable. The key point here, though, is that the tenant -- there's another 13-plus years remaining on the lease term and the tenant's current on his payments. It's a sort of a non-GAAP adjustment. It has no impact on our AFFO.

Okay, great. Thank you.

Juan Sanabria, Bank of America.

Hi. Thanks for taking a follow-up question. Just wondering, in the low sort of CPI environment, how should we think about base bumps from here as we think about 2016?

Yes. I mean it's -- as you know, we have a fair amount of leases, I think greater than 50%, that have CPI-based increases, whether uncapped or with some structure around it. So I think it all depends on where inflation goes and that's going to have a meaningful impact on our rental increases year over year.

Okay. What percentage is uncapped?

Yes. I think if you go to page 29 in our supplemental, it's around 40% is uncapped CPI, 28% is CPI based. And this is on just the net lease portfolio.

And when you say uncapped that means that it's -- basically it's whatever CPI is at at that point in time?

That's correct.

Okay. And just I guess a question for Mark. It seems like -- trying to read in-between the lines. You really like the funds management business. You really like the European exposure giving you sort of more flexibility. Is there a chance that the strategic review yields no change?

Look, the strategic -- as I said, the strategic review process is ongoing. I like our current business model. I think it's delivered significant return to our shareholders. I like the diversity in the capital sources. I like the diversity of being able to invest that both here and abroad because I think it allows us as a firm to really perform across economic cycles and it gives us great flexibility in that. I understand there's complexity in it and, as I said in my opening comments, we have a 40-year track record of managing that complexity and delivering value to our shareholders. So that's the model I'm currently focused on utilizing to grow our business. When the strategic process is done and whatever the outcome of that is, we'll make a decision at that point in time and announce it and go forward with it, but all alternatives are on the table for that.

And with regards to all alternatives being on the table, are you running a separate or a concurrent structure where you're looking at potentially selling pieces of the business that may or may not be spun out as an alternative?

The only thing I can tell you is what I've said, that we're working with JPMorgan to review alternatives and when that's done I'll have comment on it.

Okay. Thank you.

(Operator instructions). Nick Joseph, Citigroup.

Yes, thanks for taking a follow up. It's Michael Bilerman.

Good morning, Mike.

Mark, just sticking with sort of the non-traded business with the REIT, and you sort of talked about managing the conflicts successfully over the last 40 years. I'm just curious. Now that W. P. Carey is a REIT, and you think about the higher level of focus on conflict of interest, whether they're perceived or whether they're real, in every other instance between your non-traded funds they were always merged together or merged into the parent and I think that concern is something that is significantly weighing on the stock. And I'm curious. As much as you can have independent directors, how do you ever get over the conflict of what's good for W. P. Carey the REIT and what's good for the non-traded shareholders? If in fact there's this risk in some of the legacy net lease funds, how can that not be a conflict, whether it's perceived or real?

What I said is we have a 40-year track record in managing the complexity of our business model and delivering that value to shareholders. Each of those funds have their own independent directors and have various options available to them when they study liquidation. As I said, I think if you look at our track record, look at our long-term total shareholder return not only for W. P. Carey shareholders but for the shareholders of the liquidated funds, which on average is about 10% a year over the life of those funds, we've done a pretty good job of managing through that process. And we will continue to make decisions based on -- both from a capital and an investment allocation standpoint based on what's best for all of our shareholders.

Okay. And then just from a disclosure perspective and materiality, why wasn't Katy Rice's departure released as an 8K or as a press release? She was CFO of the Company last June. At that point it said she was promoted, so arguably to a higher level, so arguable a more senior level than being CFO of the Company. Why -- it sounds like this was discussed with potential investors or analysts in private that she was out. Why wasn't an 8K or press release put out at the same time like you did with Trevor?

Whatever 8Ks and press releases we were required to file, we filed. It wasn't discussed in private. It was in answer to questions during -- as we talk with analysts and investors after releasing the transition to my becoming CEO and as a direct answer to a question of whether Katy Rice was with the firm or not. As I've said before, and it's about all I'm going to comment on it, we wish both Trevor and Katy well. We thank them for their contribution. But quite frankly, both myself and the rest of the senior management team are focused on growing this business right now and that's what we'll continue to focus on.

Okay. Thank you.

At this time I am not showing any further questions. I would like to turn the call back over to Peter Sands for closing remarks.

Thanks, everyone, for joining us today and for your interest in W. P. Carey. This concludes today's call and you may now disconnect.

1