WP Carey Inc (WPC) 2018 Q1 法說會逐字稿

Hello, and welcome to W. P. Carey's First Quarter 2018 Earnings Conference Call. My name is Diego, and I will be your operator today. (Operator Instructions) Please note that today's event is being recorded. (Operator Instructions)

I will now turn the program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone, and thank you for joining us today for our 2018 first quarter earnings call.

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.

An online replay 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 1 year.

And with that, I will hand the call over to Jason Fox, Chief Executive Officer.

Thank you, Peter, and good morning, everyone.

I'll start by briefly reviewing the market backdrop and some of our recent investments. And after that, our CFO, Toni Sanzone, will take you through the key elements of our first quarter results, balance sheet and guidance. We're joined this morning by our President, John Park; and our Head of Asset Management, Brooks Gordon, who are also available to answer your questions.

Despite volatility in the capital markets, the first quarter was relatively routine for W. P. Carey and one in which we continue to examine a significant number of investment opportunities, closing on a handful of accretive deals that enhance the quality of our portfolio.

Given our scale and long history investing in net lease, we believe we see virtually every opportunity out there, giving us unparalleled insight on market conditions. Generally, we continue to see evidence of late-cycle sentiment with motivated sellers displaying a willingness to transact, enabling buyers to regain some leverage. Market volume, especially for sale-leasebacks, remains healthy despite continued pressure on cap rates. And we have yet to see any direct evidence of cap rates reacting to the backup in 10-year treasury yields. However, if interest rates remain at current levels or move higher, we would expect to see cap rates increase later this year.

In the U.S., retail generally remains unattractive on a risk-adjusted basis, although we are finding pockets of opportunity given the negative sentiment towards the sector due to the disruption from e-commerce. In warehouse and logistics, while we view the overall business fundamentals for the sector as strong over the medium term, pricing remains very tight given the level of demand. In fact, we question whether current market yields provide enough return over the long term as we think it's likely that new supply will eventually overshoot demand.

Amid this market backdrop, we completed 2 acquisitions during the first quarter. The first was a $79 million sale-leaseback with a large regional furniture retailer in the Midwest for a portfolio of 3 properties, including a warehouse facility and 2 stand-alone retail stores. The portfolio represents highly critical real estate on a master lease with a good corporate credit, conservative management and a long operating history. The lease term is long at 25 years and has built-in fixed rent increases.

This transaction is a good example of the pockets of opportunity being created by the broader disruption in retail. We view the furniture segment of retail as largely resistant to the threat from e-commerce. And in this deal, we were able to acquire high-quality retail assets that rank among the tenant's highest grossing, with very strong site level coverage. Furthermore, the warehouse facility offers future expansion opportunities and was acquired at a significant cap rate premium to where general logistics assets are currently trading.

The other transaction we completed during the first quarter was the $6 million acquisition of a warehouse facility in Indiana within the Louisville MSA. The lease is guaranteed by the parent company, LKQ Corporation, which is the largest provider of recycled auto parts in the U.S. with an equity market cap of around $10 billion. It has more than 14 years remaining on the lease and fixed rent escalations.

Moving on to the environment in Europe, where we generate about 1/3 of our annualized base rents, or ABR, and have had an on-the-ground presence for over 20 years through our offices in London and Amsterdam. The economy in Europe generally remains strong despite a recent slowdown, and geopolitical concerns seem to have eased. As a result, we expect capital to continue to flow into Europe, maintaining pressure on cap rates. Risk tolerance appears to be increasing with foreign capital moving into regions beyond the core Northern and Western countries, although we're maintaining our focus on core markets.

Similar to the U.S., logistics continues to be among the most sought-after asset classes and yields have compressed rapidly, although in the long term, we expect it to be the most resilient. While retail has been impacted by e-commerce, there is substantial activity across Europe, particularly for convenience retail and big-box stores in good urban locations. Although we didn't complete any transactions in Europe during the first quarter, we have significant near-term pipeline in the region and feel good about the progress we're making on a number of potential transactions.

From an asset management perspective, we continue to enhance our portfolio in terms of credit quality, lease term and asset criticality. The Astellas transaction we reviewed last quarter is a good example of this. We are creating significant value by converting a suburban office building into a state-of-the-art life sciences facility.

We also continue to refine our focus. Since the end of the quarter, we've sold 1 of our 2 remaining operating hotels, leaving just 1 operating asset in our portfolio of close to 900 properties. From a geographic perspective, we continue to target North America and Northern and Western Europe as our core markets and plan to exit our 2 remaining investments in the Asia Pacific region.

Turning briefly to our sources of capital. Over the last 4 years, we've become regular issuers in the public debt markets, and in February, successfully completed our sixth public bond offering, accessing the euro debt market for the third time. Demand was strong, and we continue to build out the base of participating investors as well as reducing our issuance spread.

In addition to providing debt funding at an attractive rate of 2.125% fixed for 9 years, the offering also maintained the natural hedge we have on our euro-denominated income and investments, reduced our exposure to floating rate debt and advanced our unsecured strategy by paying down mortgage debt.

Equity market volatility was high during the first quarter and looks likely to continue given the uncertainty over the general economic outlook, impact of tax reform, trajectory of interest rates and potential actions of the Fed. By focusing on more structured off-market deals often at above-market cap rates, we continue to find attractive deals relative to our cost of capital. But we also have a sizable disposition pipeline as part of our proactive approach to asset management that provides us with the flexibility to make new investments without an immediate need to issue equity.

In closing, we continue to execute on our long-term strategy to create shareholder value by maximizing recurring revenue streams, simplifying our business and enhancing the quality of our portfolio. In the near term, given the current strength of our pipeline and the breadth of opportunities available to us, we have confidence in our ability to increase lease revenues through same-store rent growth, accretive sale-leaseback and build-to-suit transactions as well as discretionary capital projects sourced from our existing portfolio.

And with that, I'll hand the call over to Toni.

Thank you, Jason, and good morning, everyone. This morning, we announced AFFO per diluted share of $1.28 for the 2018 first quarter, representing a 2.4% increase over the year ago quarter. AFFO from our real estate portfolio was $1.06 per diluted share for the first quarter, representing 83% of total AFFO.

These results reflect same-store rent growth, lower interest expense and a stronger euro relative to the U.S. dollar. In aggregate, those factors more than offset low structuring revenues from our Investment Management business, resulting from the fully invested status of the managed funds and the strategic decision we made last year to cease raising new funds.

As announced this morning, we've affirmed our 2018 guidance and continue to expect to generate AFFO per diluted share of between $5.30 and $5.50 for the full year, with about 80% of that coming from our core real estate portfolio.

Given the expected timing of deal closings and the strength of our pipeline as well as the expected timing of structuring revenues and certain expenses that were weighted to the first quarter, our first quarter results do not reflect a run rate for the rest of the year. I will cover that in more detail shortly.

Turning to our portfolio. At quarter end, our real estate portfolio was comprised of 886 properties covering over 85 million square feet net leased to 208 tenants. ABR for all leases in place at the end of the quarter totaled $689 million. The weighted average lease term in the portfolio increased to 9.7 years while the portfolio maintained close to full occupancy at 99.7%.

Overall, same-store rent was 1.5% higher year-over-year on a constant currency basis and contributed to AFFO growth. With 68% of our ABR coming from leases with rent escalators tied to inflation, our portfolio is well positioned for continued internal growth. This is coupled with the stability of 27% of ABR coming from leases with fixed rent bumps that have a weighted average increase of about 2% per year.

Investment volume for the first quarter totaled $106 million, comprised of the 2 acquisitions that Jason discussed and the completion of a $21 million build-to-suit project. In aggregate, these investments had a weighted average cap rate of approximately 7% and a weighted average lease term of 24 years.

In addition to the deals we source externally, we continue to source attractive investment opportunities from within our existing portfolio in the form of expansions, renovations and redevelopments. During the first quarter, we committed to fund 3 new capital investment projects and we completed 1. Including the $21 million build-to-suit investment completed during the first quarter, we expect to complete 5 build-to-suit investments and 4 discretionary capital investment projects during 2018 for a total investment of $110 million.

As a reminder, investment projects expected to be completed in 2018 are included in our guidance assumption for total on-balance sheet investment volume, which remains unchanged at $500 million to $1 billion for the full year.

In addition to attractive investment returns, capital investments on existing properties are a key element of our proactive asset management strategy as they typically enable us to extend the overall lease term on the original asset, creating substantial additional asset value. The 2 lease extensions we completed during the first quarter were both tied to relatively small discretionary capital investments that nonetheless allowed us to obtain 8 years of incremental lease term on $18 million of ABR while generating average incremental yield of almost 9% on the new investment.

We are continuing to make progress on our disposition plans for the year, disposing of 5 properties during the first quarter for $35 million. As Jason mentioned, in April, we also sold 1 of our 2 remaining hotel assets for $39 million, in line with our strategy to focus on our core net lease portfolio.

We continue to expect total dispositions of between $300 million and $500 million for the full year. As a reminder, our investment and disposition guidance assumptions are not targets but our current view of what is achievable based on the visibility we have into our pipeline and expected market conditions as well as our current asset management plan.

Turning briefly to our Investment Management segment. Revenues from Investment Management, excluding reimbursable costs, were $19 million for the first quarter. Within this segment and for the company overall, revenue composition has improved dramatically over the last 12 months, reflecting our strategic decision to exit retail fundraising and the fully invested status of the remaining managed funds.

We expect structuring fees to come down significantly in 2018 to around $10 million for the full year and therefore be a minor contributor to this segment, with about 90% of Investment Management AFFO coming from more valuable recurring fee stream.

Moving on to expenses. During the first quarter, we continued to see the benefits of the sustainable reduction we have made to our cost structure over the last 2 years. It is important to note, however, that G&A may fluctuate from quarter-to-quarter and tends to run higher during the first quarter due to payroll taxes given the timing of annual compensation. Therefore, we do not view the first quarter as a run rate for this year. We continue to expect G&A expense for the full year to be between $65 million and $70 million, which is embedded in our AFFO guidance.

Interest expense declined by $3.9 million or 9% year-over-year, in part reflecting a decline in our weighted average cost of debt through the replacement of higher-rate mortgage debt with lower-rate unsecured debt over the last year. As a result of the work we've done over the last few years executing on our unsecured strategy and extending our debt maturity profile, we currently have $78 million of mortgage debt coming due through the end of 2019, a very manageable amount.

Turning to our capitalization and balance sheet. In March, we successfully accessed the euro debt market, issuing EUR 500 million denominated unsecured bonds with a 9-year term at a coupon rate of 2.125%. Net proceeds from the offerings were used to repay floating rate debt comprised primarily of mortgage debt and the outstanding balance on our euro-denominated term loan as well as reduce the balance on our euro-denominated credit revolver.

This latest eurobond offering also continued to advance our unsecured debt strategy, taking secured debt to gross assets down to 11% at the end of the first quarter compared to 19% at the end of 2016. It also extended our weighted average debt maturity to 6 years at the end of the first quarter compared to 4.7 years at the end of 2016.

We have ample liquidity totaling $1.4 billion at quarter end through cash and the available capacity on our revolver. 93% of total debt outstanding was fixed rate, primarily in the form of unsecured bonds with a well-laddered series of maturities between 2023 and 2027. A combination of limited near-term debt maturities and very moderate use of floating rate debt, therefore, continues to limit our exposure to interest rate volatility.

To wrap up, we increased our AFFO this quarter while continuing to improve the overall quality of our revenues and real estate portfolio. We continue to grow our quarterly dividends while maintaining a conservative payout ratio of 79%. Our portfolio remains well positioned for growth both through inflation-linked and fixed-rate increases as well as through expansion and redevelopment opportunities. And our balance sheet is well positioned both to minimize interest rate risk and provide flexibility in funding a healthy pipeline of investment opportunities.

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

(Operator Instructions) Our first question comes from R.J. Milligan with Robert W. Baird.

Jason, you mentioned that retail in general still wasn't very favorable in terms of the acquisition environment, but you were finding some pockets of opportunity. Any specific sectors where you're seeing that opportunity?

Well, yes. I mean, with the disruption, we think pricing is getting, in some cases, back to a level that may make some sense. I mean, we've always viewed that segment in the past as a commodity segment just given the efficiency in pricing. So I think that's starting to change some. There's a little less capital flow coming in. I would say where we're seeing our opportunities, and this is both on the recent deal we did in the U.S. as well as what our pipeline looks like in Europe, these are going to be connected to sale-leasebacks where we have -- there's a small universe of buyers who can structure those deals, and that gives us some extra pricing power. We're able to generate some excess yield to really get us comfortable with the risk-return profile make sense.

Got you. But in general, no real movement in cap rates given the movement in the 10-year?

You know what, I think there's still the lag effect happening. I think, again, in retail, there's a little less capital flows into that area. So I would think that in certain pockets, you are seeing cap rates tick up a little bit. But generally across the board for net lease, we're optimistic that it will happen, but there's still a bit of a lag. So I don't think that the -- where the 10-year treasury is right now is still -- is yet to really impact cap rates a lot. There's still a lot of money targeting net lease generally.

Got you. And then obviously, CPA:17 had filed that they were looking at some sort of strategic alternatives. Do you guys have an internal view as to what you think the time line is there on CPA:17 for them to have some sort of liquidity event?

John, do you want to cover that?

Sure. We can't add to public disclosure of CPA:17, but what I'll say is that we continue to believe that we're the most natural and best buyer for CPA:17 and we have a number of advantages over other buyers.

Our next question comes from Nicholas Joseph with Citi.

Just given your comments around the impact of interest rates on cap rates maybe moving together going forward, does it change the way -- the pace of your dispositions or acquisitions for the year?

On the disposition side, we do have a plan of assets that we think strategically makes sense to sell. In some cases, it's a bit opportunistic given how strong the disposition market is, but I don't think it's going to impact the pace. I mean, we have a business plan in place that we're going to follow. On the acquisition side, I think that it is going to be helpful. We still feel good about the guidance that we've provided, as Toni mentioned. And our near-term pipeline is probably as strong as it's been over the past 2, 2.5 years. And I think some of that is a reflection in a little bit more pricing power from the buyers.

And then just on the balance sheet, how do you view the current mix between the U.S.- and euro-denominated debt? And then if you were to do another debt deal, where would you lean today?

I think we have the ability certainly to continue issuing in both markets. Given our current weighting of European debt in the capital structure, any future issuance would probably depend largely on the acquisition and disposition activity and the market conditions, really. In the short term, we have sufficient room on our credit facility to give us the flexibility, but I think that will depend largely on the net acquisitions and where those happen.

From a current portfolio standpoint, do you think you're hedged from an asset-level perspective on the euro debt?

Yes, I think that we're comfortable. It's almost fully hedged at this point. There's probably a little bit room, but I think that's a fair statement.

Our next question comes from Todd Stender with Wells Fargo.

For the build-to-suit projects, you completed one at the Nord Anglia property in the quarter. Can you remind us what the property is going to initially yield? And then you've got 2 more coming for the remainder of the year. Any additional color around those or change in yields versus this one?

So this is Brooks. Just to remind you on the Nord Anglia portfolio, the initial yield is 7.2%, and we have 2 projects ongoing. And as a reminder, there's another tranche that we agreed to in the transaction that we think will follow in 1 to 2 years' time. And that's based off a spread to 10-year treasuries, so that's 500 basis points plus 10-year treasuries.

I think the other thing to keep in mind, Todd, is as we complete these build-to-suits, we reset the leases back to their original 25 years, so there's some upside embedded in those lease extensions as well.

So despite them being in different locations, they're all under the same yield?

That's correct.

That's correct.

Okay. And then for the 3 retail locations you acquired in the quarter, I know you're not disclosing who the tenant is, but can you give any color on the credit rating or maybe if it's private equity owned? Any color around that?

Yes, through confidentiality agreement in the lease, we're not allowed to disclose the name. But as I mentioned earlier, it's a large regional furniture retailer. They're a good size for their markets. I think what's equally important is the assets that we purchased are some of their highest-performing retail sites with over 4x coverage. So we feel pretty good about what we have there. And that's all under a 25-year lease. So again, sale-leasebacks allow us to put a good structure in place that includes a longer-than-typical lease term.

Okay. And then on dispositions, you've got 5 listed here. Any of these were handed back to the lenders or vacancies? Any color around that?

Sure. None of those were handed back to lenders. We had one small vacant asset sold for about $1.6 million. It had one small tenant. It's a multi-tenant office building that was primarily vacant. But the balance was all occupied.

(Operator Instructions) Our next question comes from John Massocca with Ladenburg Thalmann.

How should we think about the composition of the pipeline between maybe more granular transactions and bigger portfolios? I mean, would you expect kind of the acquisition activity to be kind of bulkier quarter-to-quarter or a different size quarter-to-quarter going forward?

Yes. I think it's more the latter. I mean, we tend to obsess with sale-leasebacks, tend to do larger transactions than the typical net lease investors, so these tend to be a little bit on the lumpy side. And I think that's what we're seeing in our pipeline right now. It's going to be a little bit more skewed to Europe for the near-term pipeline, but we also have some interesting opportunities we're looking at in the U.S., too.

And in terms of that European skew, I mean, you mentioned there's more capital kind of moving to riskier markets. Is there some reason why that's not maybe attractive to you given the health of Europe over the last couple of quarters and the potential to get maybe outsized yield if you were to move maybe out of some of your traditional markets in Europe, obviously not outside of Europe?

Yes. I mean, our pipeline, we're seeing some good deals that have yields that make sense for us and the risk of that particular deal in more of our core markets, Northern and Western Europe. So -- but we're open to opportunities as long as we think that we're getting paid for the risk and we can understand the risk. And we've been in Europe for 20 years now, so we've transacted in most of the market, so we have a good feel for how to structure and optimize the transactions there. So yes, I think we're open to it, but I think you'll see the bulk of our focus being on Northern and Western Europe.

At this time, I'm not showing any further questions. I'll now hand the call back to Mr. Sands.

All right. Thank you. Thank you for your interest in W. P. Carey. If you have any further questions, please feel free to call Investor Relations directly on (212) 492-1110. That concludes today's call. You may now disconnect.

Thank you. All parties may disconnect.