WP Carey Inc (WPC) 2014 Q2 法說會逐字稿

Good morning, and welcome to W.P. Carey's Second Quarter 2014 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 Institutional Investor Relations. Please go ahead, sir.

Good morning, everyone. And thank you for joining us on this conference call to review our 2014 second quarter 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 approximately 90 days. I would also like to remind 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. And with that, I will turn the call over to Trevor.

Thanks, Peter, and good morning to everyone on the call. In a moment Katy will discuss the specific details, but first I will review some of the highlights along with the investment climate and our outlook for the remainder of the year. Starting with some financial highlights. We had another strong quarter. This is also the first full quarter since completing our merger with CPA 16. And as such it provides greater visibility into our earnings capacity as a combined Company.

We generated adjusted funds from operations, or AFFO, of $122.2 million or $1.21 per diluted share. As result of this and ongoing activities, we have raised our full year 2014 AFFO guidance range to between $4.62 and $4.82 per diluted share. That is up from its prior range of $4.40 to $4.65. This increase reflects both the AFFO we generated during the first six months of the year and our expectations for the second half, in particular for increased deal volume, which Katy will discuss.

During the second quarter we paid a dividend of $0.90 per share, which represented our 53rd consecutive quarterly increase and raised our annualized dividend rate to $3.60 per share. Both investment activity and fund raising on behalf of our managed REITs exceeded first quarter levels, which we already considered high relative to our history. Specifically investment volume for the second quarter totaled approximately $606 million of which we structured $559 million of investments on behalf of the managed REITs and $47 million for our balance sheet. 94% of that second quarter total deal volume was in the United States primarily due to activity in our managed hotel fund Carey Watermark Investors. The other 6% of second quarter volume was generated outside of the U.S. primarily in Europe. This brings our total acquisition volume for the first half of the year to just over $1 billion.

As mentioned fund raising on behalf of our managed REITs remains strong during the second quarter. Gross offering proceeds totaled $492 million including approximately $400 million on behalf of CPA 18, which through the end of the second quarter was approximately 83% subscribed. We also raised approximately $94 million on behalf of CWI as part of its $350 million follow-on offering. And this brings the total raised on behalf of our managed REITs for the six months of the year to $909 million.

With respect to our capital plan we also disposed of 15 properties during the second quarter for total gross proceeds of $171 million, which brings our total year-to-date to approximately $298 million. We expect to complete a modest amount of further sales this year, but the transaction team's efforts are now primarily focused on possible 2015 dispositions. The proceeds from these sales have been earmarked for new acquisitions and repayment of secured indebtedness in line with plans discussed with the rating agencies and set forth on earlier calls. While we have closed on only about $90 million year-to-date for W.P. Carey Inc.'s balance sheet, we do have a pipeline of identified transactions that exceeds our original expectations in terms of volume, which we expect will let us grow the balance sheet by more than merely the amount of recycled proceeds from sales. And that is one factor behind the increase in our guidance levels.

Turning briefly to the portfolio. Occupancy remains high at 98.5% and our weighted average lease term was 8.6 years. As always our transaction team continuously engages with tenants about possible lease extensions and expansions. Our leasing activity for the first half of the year amounted to about 749,000 square feet. Most of this was lease extensions and expansions. The average rental decrease was 12.8%, and that is baked into our guidance as well. For the remainder of 2014 we have 9 leases expiring, representing approximately 1.1% of total annualized base rent excluding operating properties. In 2015 we have 17 leases expiring, representing approximately 3.3% of total annualized rent.

I should note here that this figure has been reduced significantly since our last earnings release from 8.3% to 3.3%. And that is mostly do to the decision by Carrefour to not exercise its lease termination option in 2015. As a result the Carrefour lease remains in place through 2018 at which time there is another option to terminate. So over the next four years we will continue to work with Carrefour as it determines how each property fits into its corporate logistics strategy, and as a result, we may dispose of some or all of the stores prior to lease end.

Before I turn to our investment outlook for the remainder year, let me first summarize the cap rates associated with our investment activity through the first half. Across all net lease investments whether for W.P. Carey Inc. or for its managed REITs the weighted average cap rate was about 7.5%, but the range was wide between 6.25% and 11%. And please keep in mind this covers a broad range of property types, tenant quality and geographic markets. Also as you all know information about cap rate alone does not convey the full picture of investment quality, and in itself it is an incomplete metric. A high cap rate for example may be associated with shorter lease duration or an above market rent. And by contrast a low cap rate may be associated with solid contractual rent increases or below market rents with a high likelihood of renewal. So we offer our cap rate summary with that caveat along with the general comment that our purchases continue to be accretive relative to cost of capital, whether we are buying for our managed REITs or for W.P. Carey's balance sheet.

To comment briefly now on the investment outlook. As I mentioned earlier, we have already crossed the $1 billion mark in total volume, and we have never accomplished that before in the first half of any year. But this figure masks a little bit how competitive the market has become for some type of investment, particularly the domestic net lease market in the U.S. So that if you look at our figures we stated that 94% of our second quarter deal volume was in the United States, but a high percentage of that was in our hotel fund Carey Watermark Investors. And that activity in particular has been driven by the solid risk adjusted returns that our team continues to find in the hotel sector and it has of course, helped us to grow assets under management which in turn drives higher AFFO through the fee stream that we earn on that AUM.

In contrast however our domestic U.S. net lease volume has been somewhat constrained by an increasingly frothy pricing environment. As a result, we have seen cap rates fall below 6% in several competitive situations involving larger higher quality properties and tenants. In these transactions we were not the winning bidder because we lacked conviction about the real estate fundamentals in each case. We do continue to find some deals that make sense in the United States. Deals with better risk adjusted return profiles more in line with our traditional target that is higher yielding, unrated or non rated tenants, but these have tended to be smaller. I'm not sure why, but it appears that investment grade sellers of larger properties in the U.S. have been more active of late than sellers/tenants of the noninvestment grade variety. And those noninvestment grade transactions that we have seen as I said, have been smaller. The Red Lobster transaction was clearly an exception to this, but that was somewhat of a special situation.

Deal flow from this segment may increase after interest rates begin to rise and sale-leaseback financing looks more attractive on a relative basis, as compared to debt for these types of tenants. Also it's possible that the flow of strategic portfolio sales will pick up with increased M&A activity as GDP growth gathers pace.

And the picture remains more optimistic in Europe. In contrast to the U.S., where our average transaction size to date has been in the low- to mid-$20 million range, in Europe, it's been about $65 million. Anecdotally, it seems that, there too, the investment-grade sellers have been more active and the deal sizes have been larger. But in Europe, we've been able to find better risk-adjusted returns and real estate fundamentals as compared to in the U.S. Perhaps, that's because international markets contain natural barriers to entry and therefore, fewer competitors who are willing to overcome those barriers. We're clearly quite comfortable in that environment, and in fact, we expect to grow our geographic footprint this year by expanding into new countries. We think this approach offers us a much broader and deeper pool of opportunities upon which we grow both our balance sheet and assets under management, even while conditions here in the U.S., domestic market are becoming less opportunistic.

And with that, I'll turn the microphone over to Katy to talk about our results and the portfolio in some more detail.

Great. Thank you, Trevor, and good morning, everyone. I'm going to briefly review our second quarter results and some key portfolio metrics, followed by a quick update on our balance sheet and capital structure, and then we'll open it up for questions.

As you may have noticed, we've made some further enhancements to our supplemental disclosure this quarter. In particular, we've clearly laid out the components to help calculate net asset value, or NAV, as well as providing normalized pro rata cash net operating income, or NOI, for the first time. Pro rata cash NOI is normalized, primarily by adjusting it to exclude our share of cash NOI from properties disposed of during the quarter, and including a full quarter's worth of properties acquired during the quarter. We believe this measure is helpful to investors, in gauging our net operating income from in-place properties at the end of the quarter.

Turning to our second quarter financial results. As Trevor mentioned, for the 2014 second quarter, we reported AFFO of $1.21 per diluted share. This compares to AFFO of $1.31 per diluted share for the first quarter, which was positively impacted by a tax benefit received in connection with the payment of annual incentive comp in February. We discussed that on last quarter's call.

Consequently, we view our second quarter AFFO of $1.21 as being more of a run rate or normalized rate, and it's incorporated into our revised full year 2014 AFFO guidance of between $4.62 and $4.82 per diluted share. This roughly 4% increase in our guidance range assumes that we structure between $1.9 billion and $2.6 billion of acquisitions for the full year, including $1.4 billion to $2 billion on behalf of the managed REITs. And as Trevor mentioned, we do not expect much impact from additional disposition activity.

Turning to our owned real estate portfolio, which represented approximately 83% of second quarter total revenue, net of reimbursable cost. At the end of the second quarter, our owned real estate portfolio consisted of 686 net lease properties, with approximately 82 million square feet leased to 216 tenants and 4 operating properties. Approximately two-thirds of our annualized base rent is generated by properties located in the U.S. with the remaining one-third coming from our international investments, primarily in Western and Northern Europe.

Our Investment Management business, which represented approximately 17% of second quarter total revenue, net of reimbursable cost, had another strong quarter. The elevated acquisition and fundraising levels Trevor discussed, resulted in similarly elevated structuring revenues and dealer manager fees.

Turning to the balance sheet and capitalization. We continue to pay down mortgage debt during the second quarter and build our unencumbered pool of assets. As noted in our earnings release, we prepaid $85 million of nonrecourse mortgages during the second quarter, bringing total prepayments for the first half of the year to $202 million. In addition, we made scheduled mortgage principal payments of $45 million during the second quarter, bringing the first half total to $62 million.

At June 30, our unencumbered portfolio properties had total annualized base rent of approximately $184 million. This pool will continue to grow as we acquire assets and pay down mortgages, providing strong support for any future unsecured debt issuance. We continue to view our debt maturities over the next few years as very manageable with approximately $197 million maturing this year, $144 million in 2015 and $267 million in 2016.

By comparison, we have ample liquidity, totaling approximately $988 million, comprised of $773 million remaining on our revolver and $215 million in cash and cash equivalents on our balance sheet. At quarter end, the weighted average cost of our nonrecourse debt was 5.2%, and our overall weighted average cost of debt, including our senior unsecured notes and amounts outstanding under our credit facility, was 4.6%. At the end of the first quarter, our total equity market cap was approximately $6.4 billion, and we had an enterprise value of roughly $9.9 billion.

Accordingly, at June 30, our pro rata net debt to enterprise value stood at 35.4%, total consolidated debt to gross assets was 44.6%, and our pro rata net debt to adjusted EBITDA was approximately 5 times. All of what we view as very healthy levels.

And with that, I'll turn it back to the operator for questions.

Thank you. (Operator Instructions). And our first question comes from Paul Adornato of BMO Capital Markets. Please go ahead.

Thanks. Good morning. Trevor, appreciate the discussion of cap rates. Was wondering, sorry if I missed this, did that apply to dispositions as well as acquisitions?

No, that was specifically in relation to our acquisition volume.

Okay. Can you talk about cap rates or total return on some of the larger dispositions?

Yes, with respect to the dispositioned cap rates, those are in the mid 7%. I believe, Tom, is that -- yes, in the mid 7%. With respect to the total return, while it is an excellent question I don't have those figures in terms of the aggregate IRR that we would have earned on each of those investments.

Could you characterize them as being good, mediocre or not good?

Generally speaking what we find is by the time we are disposing of an asset, we've held on to it for quite some time and gotten a lot of current income from it over many years, contractually rising rents due to inflation or fixed rent increases. And since 90% of the IRR comes from that portion of the investment and the back-end residual is a small part of the overall return, it is safe to say to say that most of our dispositions have very healthy IRRs on a back-end basis.

Okay, thanks. And you mentioned that you might be expanding your geography. Will you be staying in Europe or perhaps Asia?

We will be continuing to expand our footprint in Europe. And we have deals in the pipeline which of course have not closed and may not close, but we feel comfortable that we are learning a lot about new markets including in New Zealand, Australia as well as other parts of Asia.

All right. And can you just talk about the infrastructure that you have in those places?

Sure. We have an office in Shanghai which we have had since 2005, which is staffed with both acquisition officers and assets managers and then specific function areas. It is a small office, but for the past several years we have been using it as a base to expand into Asia non-China, because we found that the China market doesn't really suit our requirements in terms of the risk adjusted return profile, et cetera. But it has been a relatively centrally located office in Shanghai. And the team has done a good job in unearthing transactions in other parts of Asia.

Okay, thanks. And Thanks for the disclosure. It looks great.

Thank you for the questions, Paul.

And our next question comes from Daniel Donlan of Ladenburg Thalmann. Please go ahead, sir.

Thank you and good morning. Just to echo Paul's comment, much thanks for the add disclosure. It is very, very, very helpful. So I really appreciate you guys putting that together. To go back to his question though on the disposition cap rates. Trevor, first off I would imagine are you quoting cash or GAAP when you are quoting whether it is acquisition or disposition cap rates?

I am quoting cash, and I am going to correct myself. The number is 7.7%.

Okay. On a --

On the dispositions. Yes, On the dispositions, Dan.

Okay. So that is just the aggregate number. So if that's case, there probably wasn't too many vacancies then. You didn't sell any vacant assets probably?

We did. We sold two vacant assets.

Okay. And then as far as the -- actually just one more question. Did you guys -- and this is the first quarter, did you guys sell a hotel in Miami in the first quarter? I am curious why what happened there? It seems to be an interesting asset for you guys to own in the portfolio. It is the Soho House.

Yes, Soho House was an asset that we acquired in connection with our merger activities of managed funds, and we did determine that it was a non-core assets. And it is really as much a club as it is an operating hotel, and as such, we decided it was non-core. And we got an attractive offer, so we did sell that.

Okay, thank you. As far as the weighted average lease term is concerned, it is a little bit lower than some of your peers. Are the self storage do you include that in that number? And how do you view your weighted average lease term on a going forward basis? You guys have been doing this a long time, so you have been more proactive I think with selling assets than some of your other peers, so just curious your thoughts there.

It does not include the self storage and you are correct it is below the 9 years and below some of our peers. It is one of our stated goals to increase that, and so that when we are doing our capital recycling program that is an explicit goal of the program is to sell among other things the shorter lease duration assets and recycle that capital into longer term leases, which will eventually as we grow the balance sheet bring that average up. We hope to even accomplish that with our continued activity through the balance of the year. So as that effort unfolds, the success will become apparent as we execute.

Yes, and, Dan, to add a couple of numbers to that, our current guidance as I mentioned, incorporates a range of acquisition volume of $1.9 billion to $2.6 billion. That's total. That's for the managed REITs as well as the balance sheet. We said 4.2 to 2 for the managed funds, which implies $500 million to $600 million for the balance sheet, and that is up from our prior guidance range for the balance sheet of about $200 million. I think we are well aware of the lease duration and are working on backfilling some of the capital recycling activities with new deals.

Okay. Yes, it's not bad. I would rather have higher quality assets with lower lease terms than lower quality assets with longer lease terms, and I am sure you would as well. And then as far as the lease termination fee income and other income line item, it looks like that only added call it $4.2 million to your AFFO. What is the difference between what was recognized for GAAP purposes and then what you actually decided to take out for AFFO purposes, and also what that related to?

Lease termination fees are obviously the one-off nonrecurring situations where we have a tenant that wants to vacate or terminate the lease early and will pay us a lease termination fee. We don't bake that into our guidance unless we have them well in hand. We really don't forecast a lot of those.

Sure.

Also I will say that in particular this quarter there was a high level of that because it was part of a structured transaction where we worked out a deal with one of our tenants, with Tower, and as part of the consideration we received a large fee that we internally viewed as revenues in lieu of sale proceeds, so we sort of mixed those together from a management stand point.

Yes, the vast bulk of what you are seeing on the income statement is from that one transaction.

Right. And I'm sorry. What was that transaction? That's what I was asking about. I know it is lease termination.

It was the Tower transaction.

Okay. All right. And then what is the $4.2 million that is part of the AFFO, because you obviously took a lot out because it is one time-ish. What is that exactly? Is that all lease termination fees or is there some other stuff running through that?

It is primarily lease termination fees.

Okay. All right. And then lastly as it pertains to Carey Financial, any update in terms of new funds potentially being looked at or raised and any clarity there would be helpful.

We currently feel, as I said on the last call and still continue to feel, that we have ample capital available from our existing funds that are under management, ample capital to deploy into the opportunity sets that we are seeing and also at the same time we are continuously evaluating new product ideas. There is one filed for another hotel fund which is not effective, so I can't talk much about it.

Sure.

And then we are looking at other potential funds as well. Nothing more to announce on that except that as I said before, just to reiterate, we do believe that our investment management platform is somewhat under utilized and then somewhat undervalued as well. And we intend to take better advantage of that over the next year or so.

Okay. Thank you, Trevor.

And our next question comes from Sheila McGrath of Evercore Partners. Please go ahead.

Yes, good morning. Trevor, I was wondering if you could talk about CPA 18. Right now is that the only option for investors is that just via the Class C shares, and if you could talk about how demand is going for the Class C shares versus the higher load option?

Sure. So far I don't have a specific percentage break down update, but given it is the only game in town it has become more focused upon by them. And we are, I think as I mentioned in my remarks, in the mid 80% range in terms of the subscription. So as far as we are concerned the pace is adequate and fine.

Okay. And then based on your investment activity and the pipeline you have about how long do you think it will take until that fund is fully invested, CPA 18?

That's a good question. Very difficult to predict given the cyclicality or seasonality of these investments.

Well, probably 12 to 18 months.

Yes, from now.

Okay. And then could you just clarify, in the release you said something about reallocating $250 million from the stock repurchasing. I just wasn't clear on what that meant.

Is that on CWI or on --

It says, wait what does it say. "reallocation of the IPO of up to $250 million of the shares that were initially allocated to sales of stock through the dividend reinvestment plan."

Yes, that is just based on the demand for the shares and then on the normal housekeeping concerns, which dictate that you don't want to run out of shares. That can be awkward at the tail-end, so the Board did authorize us to tap into the dividend reinvestment program to the amount of $250 million worth of shares.

I see. I see. Okay. And then, Katy, I was wondering if you could give some insight on a couple of things. G&A run rate in Q2 is that a pretty good run rate for us to think about for the balance of the year?

Yes, Sheila, probably in the second half of the year the G&A run rate will go up slightly. We are in the process of implementing an ERP software that the expenses for that will start running through the income statement in the latter half of the year.

Okay.

And in addition some of the R&D expenses related to some of the new fund products that we are looking at will start hitting the income statement. Again, not material amounts but I think the G&A rate in Q2 is probably a little lower than we would expect in the second half.

Okay. And then similar question on structuring revenue. You always seem to beat my estimate on that end, and I am just wondering what is reflected in the back end of the guidance. A similar level to the first half of the year which was kind of elevated?

Yes, look obviously this is based on acquisition volumes, so we have given you the break down of the acquisitions of managed REITs versus the balance sheet. And look this is easier to do on an annualized basis than quarter-by-quarter for sure. There is also a mix issue there which is how much of the acquisition volume is associated with the CPAs which have higher structuring revenue fees than with CWI which has a lower structuring fee. So the is a mix issue as well.

Okay. And then, Trevor, just on the Carrefour clarification that you said that they extended till 2018. Do you consider that a good outcome and just a little bit of color behind the decision process there on their end?

Yes, we think it is a fantastic outcome because it gives us a clear 4 year window of uninterrupted revenues, and clearly makes it easier for us to maneuver with respect to how we want to handle the portfolio. It also gives us more time to work with Carrefour to determine the optimal outcome for them. I think that it is a big organization and it has a wide variety of logistic issues and challenges on top of all the other corporate challenges it has and it just may take them a little while longer to figure out what the ideal solution is for them.

And I would imagine it probably gives you better execution on sale to have a little bit longer lease term remaining?

That is certainly true.

Okay. All right. Thank you.

Thank you.

(Operator Instructions). And our next question comes from Vineet Khanna of Capital One Securities. Please go ahead.

Good morning. Could you give an update on fund raising, where you are quarter to date and what the expected pace is for the remainder of the year?

Sure. Well, we are 84%, did I get that number right, through --

83%, yes.

Through CPA 18. I think you can do the math on that. We do expect that fund to be closed by the end of the year, probably by the fourth quarter. I believe the same goes for the hotel fund. Both those funds should be closed by year end.

Okay. All right. And then turning to your acquisition guidance specifically for the owned real estate portfolio. What are you thinking about the mix by product type and geography for that?

It is an eclectic mix as per our usual approach. And it would be a mixture of office and industrial, as I mentioned before, a mixture of countries. I don't want to get into the details of the actual countries yet, but strong fiscally responsible new countries.

Okay. All right, thanks. And then finally you have about $200 million left in debt maturing for the rest of this year. How do you plan on repaying that?

Yes, as mortgages come due we are -- I don't think it is actually that high. I went through that in my remarks. But obviously we have about $800 million of capacity on our line of credit, so we can be using that line of credit to repay scheduled principle repayments.

Sure. Any thoughts on terming that out longer term this year?

Yes, look, as the pipeline turns from pipeline to closed deals and the line of credit balances goes up, we obviously look to the capital markets. And we build the appropriate levels of long-term debt and equity and the cost associated with capital raising into our projections and guidance, so they are really baked into that guidance range.

Okay. And then just finally along that, is there a certain level for the credit facility where you would start looking at the capital markets to term something out?

Yes, I think as the credit facility gets into the $500 million to $700 million range. Obviously you want to have enough dry powder to continue to execute the business, but yet you want to also execute effective capital markets transactions, so slightly larger deals in the bond market, et cetera. I think we have mentioned it before, but given all of our activities in Europe and the favorable financing climate there we would probably expect our next bond deal to be executed in the European markets.

Okay. All right. Well, Thanks guys.

Thank you.

And next we have a follow up question from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

Thank you. Just real quick on the acquisitions, given the guidance raised that you had and what you have done this far, it would seem to me that you are modeling the bulk of the acquisitions to come in the fourth quarter, is that correct or how should we think about timing for the half of the year?

Timing obviously is a little tricky. As there always is, there tends to be a little bit of a push at year end for transactions to close. But the pipeline is pretty robust and about three-quarters of it is identified deals that are in our projections. So obviously some of them could slip into 2015. But I don't think it is ratable, but I think there is a little more activity in the fourth quarter.

Okay.

That said, I think we will have some in the third quarter as well, Dan.

Okay. All right. Thank you so much.

Thank you.

And this concludes our question-and-answer session, and will also conclude today's conference. We thank you for attending today's presentation. You may now disconnect your lines.