WP Carey Inc (WPC) 2013 Q4 法說會逐字稿

Good morning, and welcome to the W.P. Carey Fourth-Quarter and Year-End 2013 Financial Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Peter Sands, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on this conference call to review our fourth-quarter and full-year results. Joining us today are Trevor Bond, President and Chief Executive Officer; and Katy Rice, Chief Financial Officer.

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 90 days.

I would also like to inform you 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.

Now I'll turn the call over to Trevor.

Thanks, Peter, and welcome to everyone on the line. Peter recently joined us as Director of Investor Relations to focus on our growing number of institutional shareholders. Accordingly, he's someone that I'm sure many of you will get to know. And thanks, everyone, for joining us today.

We had a strong 2013, and in a moment I'll turn to the financial highlights. But in some respects, last year already seems a long time ago in light of the recent closing of our merger with CPA-16 at the beginning of February.

In connection with that, we issued approximately 30.7 million shares to shareholders of CPA-16. And since the first trading day following that issuance, roughly 36 million shares have traded. Our share price has increased modestly over that period, and we welcome those of you with us today who are new shareholders, and thank you again for your support.

Another important highlight that occurred subsequent to year end was receiving investment grade ratings from both S&P which rated us BBB, and Moody's which rated us Baa2.

Later, Katy will discuss the implications of this for our balance sheet strategy. But first I'll briefly discuss some of the 2013 financial highlights and talk a little bit about the investment climate and how 2014 is shaping up.

First, AFFO in 2013 was $4.22 per share, which represents an increase of about 12% over the 2012 AFFO of $3.76 per share. That breaks down into $3.78 from real estate ownership and $0.44 per share from our investment management segment.

Second, we raised our annualized dividend to $3.48 per share, which represented our fifty-first consecutive quarterly increase.

Third, we achieved record investment volume of approximately $1.8 billion. Of this amount, about $1.4 billion was on behalf of our managed REITs. The rest, about $347 million, was what we added directly to our balance sheet. To break down the managed REITs activity, $672 million was on behalf the CPAs, and $745 million was on behalf of Carey Watermark Investors, our hotel fund.

The fourth highlight was the liquidation of our first self-storage fund through a sale to one of the big four storage REITs. The return on the transaction was quite attractive, but more importantly, it underscored our continued ability to enhance revenues from our investment management platform through product silos other than net lease.

It's worth emphasizing again here, because not all sponsors in the non-traded REIT space share this philosophy, so it's worth emphasizing that all the revenues arising from W.P. Carey's investment management segment, all the fees of any sort earned through the management of our non-traded REITs, including our captive broker, Carey Financial, flow entirely to the benefit of our shareholder.

Put another way, no employees of W.P. Carey, including me, earn any additional compensation from any transactions involving our managed REITs beyond what W.P. Carey pays us, as is disclosed in our 10-K, our proxy, et cetera. We expect the industry will continue to evolve in this direction over time.

Turning now to 2014, as you know, we issued guidance back in January which would put our projected growth at about 7% if we were to achieve the rough midpoint. Katy will go into more detail about that in a moment. I'll only say here that we tried to remain cautious about our forecast for direct balance sheet investments because continued uncertainty in the macroenvironment, and also because of expected short-term volatility in our share price, stemming from the merger and subsequent issues of those shares that I mentioned to CPA-16 investors.

At the same time, the projected growth in assets under management underscores the strategic importance of having an investment management platform like ours, insofar as it demonstrates that we can continue to grow revenues, even should equity capital markets become less robust.

Turning to the capital-raising side of the investment management segment now. CPA-18-Global, which intends to raise $1 billion of equity, is approximately 50% subscribed.

We've also launched a $350 million follow on for CWI, and it broke escrow in February. We expect to have the selling group fully in place soon. So, we have ample capital relative to the opportunities that we are currently seeing.

There's been a lot of press about the large amounts being raised in the non-traded REIT space recently. I've said it before and it's worth repeating now; we don't measure success in terms of where we end up in the sales rankings. We believe that raising too much capital at the wrong time in the cycle is worse than raising too little capital at the right time in the cycle.

Truly sound opportunities can't be manufactured through a cookie-cutter process, as we all know. Growth can't simply be matter of throwing out a wide net and reeling in commoditized secondary deals. That higher volume segment of the market, generally involving smaller sized deals -- sometimes with investment-grade retailers, but not always -- tends to be too price-efficient and competitive. And the tenants don't generally sign leases that rise with inflation, so they've never been our primary target.

Rather than focus on paying up for investment-grade tenants, we prefer to build portfolios that are themselves investment-grade by virtue of diversification, by property type, industry, and geography, and also by conservative leverage. And the rating agencies clearly understand that approach.

So we focus, of course, on the most fundamental question -- can the tenant pay its rent, even through short-term cycles? That requires in-depth understanding of the tenant's business. Our Senior Management, including me, reviews each transaction during the underwriting and negotiation stage. Then each deal must be approved by an investment committee comprised of outside, independent board members.

This approach is somewhat time intensive, but our investment team is a productive, efficient group. It helps that our average one-off deal size is larger than the typical deal purchased by other net-lease REITs.

So with respect to fundraising, our primary goal is to maintain equilibrium between the capital raised and our ability to deploy it into investments with solid, risk-adjusted returns. And I think we are still at that equilibrium point.

The US domestic net-lease market remains competitive, but we continue to find attractive transactions that don't fit into the box for other net lease buyers for a variety of reasons. These require more work to underwrite and negotiate, but that is what we see as our core competence.

The landscape in Northern Europe continues to be attractive from a buyer's perspective, and we're still finding good risk-adjusted returns there as well. We still get, in most cases, leases that adjust upward according to the local inflation indexes.

Generally, CPI increases have not been a big contributor to our rental growth in recent years, given the low inflation rate. But if that picks up in the future, as it's likely to do, we will benefit because 69% of our portfolio has rent increases that are tied to inflation, but many of those are tied to full inflation index. The balance has fixed bumps that are averaging in excess of current inflation.

It's obviously a fluid environment, and assumptions can change as the year unfolds. The supply of attractive opportunities can be tricky to forecast, tied as it is to factors beyond our control -- the bond market, for example; or prevailing cap rates relative to our cost of capital; or prices might simply be too high relative to recent history or relative to the market cycle or to replacement cost.

Also, the supply of opportunities may expand or contract, along with the demand for capital, on the part of the corporations who would be our tenants. That said, it appears that the economy is poised for continued growth in both the US and in Europe, and that's generally good for the sale-leaseback sector. And based on our current pipeline, we're looking forward to another strong year.

And now I'll turn the microphone over to Katy.

Thanks, Trevor, and good morning, everyone. I'll start by briefly reviewing our financial results, touch on some portfolio metrics, and then finish up with an update on our balance sheet initiative and our guidance.

Before I get started, I wanted to point out that in addition to filing our earnings release, supplemental and 10-K this morning, we filed an 8-K with pro forma numbers on a combined company basis, assuming the CPA merger -- CPA-16 merger occurred on December 31, 2013. As you know, the merger actually closed on January 31 of this year. Where appropriate, the portfolio information in the supplemental is also shown on a combined company basis.

While it took a little longer for us to prepare the pro forma numbers, we thought that given the magnitude of the change, analysts and investors would find them most helpful in thinking about how the firm looks going forward.

Now let's start with our earnings. For the fourth quarter, AFFO was $78.1 million or $1.12 per diluted share. On a per-share basis, AFFO increased $0.09 from the third quarter, due primarily to increased lease revenue and increased structuring revenue.

These increases were partly offset by higher G&A expense and lower other real estate income in the fourth quarter.

Lease revenues increased with the inclusion of two recent acquisitions -- the UK government and TW Telecom buildings.

Increased structuring revenue was driven primarily by increased investment volume in CWI, our hotel managed REIT. As we've mentioned in the past, structuring revenues can vary from quarter to quarter as they are dependent on acquisition volumes within the managed REITs.

The impact of higher investment volume during the fourth quarter also shows up in G&A, which includes structuring bonuses. In addition, we typically have a true up for our quarterly bonus accrual based on Company performance for the year.

Other real estate income declined a bit as a result of a successful sale of our institutional self-storage portfolio. This was a terrific investment which generated significant returns, but obviously we will lose the income associated with it going forward.

For the 2013 full year, we reported AFFO per diluted share of $4.22 versus $3.76 in 2012.

The 2013 results include the impact of CPA-15 for a full year. Because the CPA-15 merger closed late in the third quarter of 2012, and given the significance of its portfolio, comparisons on a full-year basis are not particularly meaningful.

From a balance sheet perspective, on a combined company basis, at the end of the year we had a total equity market capitalization of $6.1 billion and an enterprise value of about $9.6 billion.

Our total debt to gross asset ratio was 45%, and our net debt to EBITDA was about 6 times.

The weighted average cost of our non-recourse debt was 5.2%. And our overall debt cost, including amounts outstanding on our line of credit, was 4.6%. Over the next three years, we have very manageable debt maturities, with between $250 million and $275 million of mortgage debt maturing in each year.

We currently have plenty of liquidity, with over $450 million available on our line of credit.

Now let's talk about the portfolio. During 2013, we acquired 7 assets for approximately $350 million, one of which is a build-to-suit, which will come online in approximately 18 months.

60% of the acquired assets, in terms of value, were located in Europe, where we generally continue to find better risk-adjusted returns. The weighted average initial cap rate was just under 7%, and the weighted average lease term is 14.8 years. All but one of these transactions has rent escalations, which are either fixed or tied to CPI increases.

In addition, as we've discussed, we are a proactive asset manager and capital recycler. In the fourth quarter, we deposed of 20 properties for total proceeds of $118 million. Notably, 19 of these properties were part of the self-storage portfolio I reference earlier, which were sold in a single transaction. This fourth quarter activity brought distribution -- dispositions for 2013 to 28 properties for total proceeds of $176 million.

On a combined company basis as of yearend, our portfolio consisted of 712 properties with 84 million square feet, leased to 236 different tenants. Approximately 68% of our contractual minimum base rent is from properties that are located in the United States, and 32% is from our international investments. Our portfolio occupancy rate was 98%, and our weighted average lease term was 9.0 years.

In 2014, we have 18 leases expiring, representing approximately 1.9% of portfolio revenue. We're in active dialogue with each of these tenants, and have a good sense of the outcomes for each of these assets.

In 2015, we have 35 leases expiring, representing approximately 8.5% of portfolio revenue. A large portion of the lease maturities in 2015 relates to Carrefour; our long-term tenant and one of the largest food retailers in the world. We have 12 distribution facilities located throughout France, which are leased to Carrefour and expire in 2015.

We've been in active dialogue with Carrefour, and are currently working together to finalize a plan for each asset. Some of the properties may be expanded and a new lease executed, some leases may simply be extended, and some of the assets may be sold. We expect the plan to develop over the coming year, and we'll update you as appropriate.

As I've mentioned on prior calls, we expect to access a greater variety of capital sources to fund our growth and lower our cost of capital. Several quarters ago, we started the process of migrating our balance sheet to becoming a primarily unsecured borrower. We expect this shift to take 12 to 18 months.

In anticipation of the CPA-16 merger, and to facilitate our balance sheet migration, we recently increased the capacity of our unsecured line of credit from $625 million to $1.25 billion, comprised of a $1.0 billion revolving line of credit and a $250 million term loan.

This increased capacity will enable us to prepay approximately $550 million of near-term mortgages. We've already prepaid approximately $240 million of mortgage debt to date, and expect to prepay the remainder over the next 12 months.

As previously announced, we recently obtained investment grade corporate ratings from Moody's and S&P. Consequently, we believe we are well-positioned should we wish to access the unsecured debt market, both to term out the existing balances on our line related to the mortgage prepayments, and as a source of capital to fund future growth.

And last but not least, we announced our AAFO guidance in January. We're maintaining our 2014 full-year AFFO guidance of between $4.40 and $4.65 sense per diluted share. Our assumptions include the following -- approximately $200 million of acquisitions for W.P. Carey; and approximately $1.4 billion for the managed REITs; and approximately $200 million of anticipated dispositions.

As we announced last summer, based upon the successful completion of the CPA-16 merger, we continue to expect an increase in our annual dividend to a minimum dividend rate of $3.52 a share.

And with that, let me open it up to questions.

We will now begin the question-and-answer session. (Operator Instructions) Sheila McGrath, Evercore.

I had a question on the guidance. The guidance that you issued had most of the acquisitions in -- skewed towards the managed REITs. What would cause that balance to shift more to acquisitions for your balance sheet?

I think that to the extent that we saw a more robust equity environment, you could see then certain transactions that currently W.P. Carey would not go after, now being appropriate for us. I think -- but what you're referring to, Sheila, is the mix. And if the overall size of our acquisition volume rises, it's likely to cause W.P. Carey's to go up more, rather than the investment platform acquisition volume to go up.

Okay. And then Trevor, most of the activity this year, the announcements say that the transactions are for CPA-18, the one that you announced yesterday in Oslo. Does that mean, is CPA-17 fully invested at this point?

That's a good question. No. CPA-17 does have capital which is reserved for to complete build-to-suit transactions. As you know, we have an active build-to-suit business, and so we need to factor that in and keep that reserved to complete projects that are already reserved for.

Additionally, when a deal comes up, we intend to have those two -- have joint ventures, [Perry Pess who] joint ventures occasionally. So there is still some dry powder left in CPA-17.

Okay. So do you anticipate that CPA-17 would be fully invested this year?

That is our expectation. We can't guarantee that, but that is our expectation.

Hey, Sheila, it's Katy. The mix, with respect to W.P. Carey and the managed funds, obviously last year we bought about $350 million. So we are trying to be conservative in our guidance number. And I think that's really reflective of what we're seeing as a, certainly state-side as a more competitive environment.

That said, we're continuing to look at a lot of investment opportunities, both here and in Europe, that we think would be good acquisition candidates for W.P.C. It will just depend on how things sort of shake out. But we wanted to start out with a pretty conservative number.

Okay. That's helpful. Also, Katy, maybe you could comment. You did receive the investment grade ratings recently. I just wondered what the plans are for tapping the unsecured markets, and if you did, what the pricing would look like, hypothetically, if you did it now.

I think we're obviously happy to have gotten the ratings and gone through the process. It was a good outcome. So we're well-positioned to tap the markets when we see an opportunity.

We'll probably -- one of my goals is to lengthen the tenure of our debt maturities, so I'll probably start out with a tenure transaction. And I think currently, pricing is sort of in the mid to high 4% range.

Okay. And last question. Can you give us your thoughts, Trevor, on FINRA's recent pronouncements on non-traded REITs and suggested disclosures, et cetera? Any -- your thoughts on what they've put out there; was it in line with your expectations? And your thoughts on any impact to kind of raising capital in the non-traded REIT space?

Sure. As you know, FINRA 14.06 has been posted to the Federal Register, and it's in its comment period. We have been expecting this for some time, and we support the proposed amendment. And at this stage, we're working towards improving the particulars so that it can be better implemented. But we're -- and so we're at the table, along with others, with the regulators.

Like I say, we support the amendment. And we don't think that it will have an overly adverse effect on our approach to fundraising, as per my earlier comments today. I think that there will still -- these are necessary improvements, I think, in transparency. And in the end, it will be a healthier environment for everyone.

Thank you very much.

Jon Woloshin, UBS.

Couple questions. First, I noticed in the press release on the fourth quarter, it looked like there was about $0.12 of AFFO that was one time from the Hellweg restructuring. Is that accurate?

Yes, we did restructure our Hellweg transaction. I can't comment on exactly the $0.12; I don't have that number off the top of my head. But yes, it was a significant transaction.

So then, I guess the reason I'm asking is the right way to look at it from a growth rate from 2013 to 2014 exclude this, so really the growth rate would actually be higher on a run rate basis?

Yes, I mean this is a one-time --

Right, okay.

Yes, exactly.

I just wanted to make sure it was one time. Okay.

Second thing is, so in the 8-K, the fully diluted share count of a little over 100 million, is this a good run rate to use for all of 2014?

Yes, the current share count is just under 100 million. So, sometimes you look at -- when you look at the 10-K, it will show the weighted average through the year, but post CPA-16 merger, we have just under 100 million shares outstanding.

Okay. And then you mentioned a minimum dividend of $2.53, is that what you said?

$3.52

$3.52

I'm sorry, $3.52. Is there going to be at an upcoming board meeting that discussion will take place, do you guys have a potential target for that?

Yes. This is what we announced in relation to completing the CPA-16 merger. It was the minimum dividend sort of at the bottom end of the range. So, obviously as the year progresses in 2014, we and the Board will evaluate the increase that we are seeing in our results from CPA-16, and if and when appropriate, increase the dividend. We have typically done that on a quarterly basis. So that's really all we can look to right now.

That's fair comment. What is your current target for when you think CPA-18 will be fully subscribed?

I think we think by the end of the year. Again, it's hard to know how the fundraising climate is going to change throughout the year, based on external factors, but that's currently our thinking.

No, understood. I just wanted to know what you guys were targeting. And just a last question from me is you guys are now a fairly substantial market capitalization. Just sort of curious where you are in terms of conversations with the sell side and the Street in terms of bringing in more coverage.

Yes, we have a number of research analysts that don't publish, but that who we've met with, Management's met with, we've spent a good bit of time. So there are definitely a number of analysts out there who understand and know the Company.

I guess is that it's difficult with current research budgets as they are for them to pick up coverage perhaps until we do an equity offering. But you're right; as one of the larger net-lease REITs in the field, it may behoove them to pick us up just to increase the coverage within the net-lease sector.

Okay. I appreciate it, thank you.

And Jon, I want to just follow up on the Hellweg discussion. Because it was a one-time event, we did add it back to AFFO. So what you were saying, it's been added back already, so the impact shouldn't be -- the quarter-over-quarter or year-over-year impact shouldn't be part of your analysis.

Okay. All right, great. Thank you.

(Operator Instructions) As there are no further questions, this concludes our question-and-answer question, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.