WP Carey Inc (WPC) 2014 Q3 法說會逐字稿

Good morning everyone and welcome to the W.P. Carey Third Quarter 2014 Financial Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please also note, today's event is being recorded.

At this time, I'd like turn the conference call over to Mr. Peter Sands, Director of Institutional Investor Relations. Sir, please go ahead.

Good morning everyone and thank you for joining us on this conference call to review our 2014 third 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 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. And with that, I will hand the call over to Trevor.

Thanks, Peter. Good morning everyone. I'll first review some of the quarter's highlights and then briefly discuss our investment outlook before turning the floor over to Katy Rice, who will talk about our third quarter financial results in more detail.

Starting with some financial highlights. For the 2014 third quarter, we generated adjusted funds from operations or AFFO of $114.4 million or $1.13 per diluted share, which compares to $1.21 for the second quarter. As we had cautioned on both the second quarter and the first quarter earnings calls, simply quadrupling each of those quarters would not have accurately represented an annual run rate because AFFO can move around from quarter-to-quarter due to structuring revenues, which is why we provide annual guidance.

To that point, for the 2014 full year, we've increased and slightly narrowed our AFFO guidance range to between $4.70 and $4.86 per diluted share. That's up from $4.62 to $4.82, which we provided back in August. And it's driven primarily by updated assumptions with respect to investment volume, which Katy will discuss along with our 2015 AFFO guidance as well.

During the third quarter, we paid a dividend of $0.94 a share, up from $0.90 in the second quarter. This represented our 54th consecutive quarterly increase and raised our annualized dividend rate to $3.76 per share. Proposed -- pleased with both of the investment activity and fundraising on behalf of our managed REITs during the third quarter and in fact, for the year-to-date period, fundraising activity has outpaced all prior years in our history.

Looking first at investment volume, third quarter purchases totaled approximately $286 million. The majority of this amount, approximately $163 million, was for W.P. Carey Inc.'s owned real estate portfolio; the balance, $123 million, was structured on behalf of the managed REITs. Investment volume during the third quarter was primarily in Europe, in Western and Northern European countries in particular such as Norway, Scotland and Germany.

Third quarter acquisitions including both those for W.P. Carey's balance sheet and those for the managed REITs brought total investment volume for the first nine months of the year to $1.3 billion and we continue to have a strong acquisition pipeline for the remainder of 2014, which is reflected in our raised 2014 AFFO guidance and the 2015 figures as well.

With respect to capital recycling, the majority of our disposition activity took place in the first half of the year. In the third quarter, we've disposed of just one small parcel of land, bringing total gross proceeds for the first nine months to approximately $299 million. Later, Katy will go into more detail about capital recycling activities for 2015, which have been factored into our guidance.

Turning now to fundraising on behalf of our managed REITs. For the 2014 third quarter, gross offering proceeds totaled approximately $159 million, including approximately $103 million raised on behalf of Carey Watermark Investors, the non-traded hotel REIT that we manage. This was pursuant to CWI's $350 million follow-on offering, which through the end of the third quarter was approximately 61% subscribed.

Also included in the gross proceeds were $56 million raised on behalf of CPA:18, which through the end of September was approximately 87% subscribed. You may recall that in order to moderate the fund of its fundraising -- the pace, I'm sorry, of its fundraising, we discontinued sales of CPA:18's Class A common stock at the end of June, continuing only with its Class C shares, which have received growing acceptance among financial advisors. This fundraising brought the total raised on behalf of our managed REITs for the first nine months of the year to a little over $1 billion. If we raise no more this year, it would still be our best year ever. So we continue to have sufficient capital to deploy to the investment opportunities that we're finding.

Turning to our owned real estate portfolio, which represented approximately 90% of third quarter total revenue, net of reimbursable costs. At the end of the third quarter, our owned real estate portfolio consisted of 688 net-leased properties with approximately 81 million square feet leased to 215 tenants and four operating properties. Approximately two-thirds of our annualized base rent was generated by properties located in the US. The remaining portion, roughly one-third, stems from our international investments, primarily in Western and Northern Europe. Occupancy remains high at 98.1% and our weighted average lease term at the end of the third quarter was 8.5 years. It's our expectation that this average lease duration will increase following net growth in our balance sheet from deals that were closed subsequent to the quarter's end and those that are in the pipeline.

Our transactions team continuously engages with tenants about possible lease extensions and expansions. Our leasing activity for the first nine months of the year amounted to approximately 825,000 square feet, mostly in the form of lease extensions and expansions. For the remainder of 2014, we have seven leases expiring, representing approximately 0.8% of total annualized base rent excluding operating properties. In 2015, we have 16 leases expiring, representing approximately 3.2% of total annualized base rent. Our expectations for outcomes of these are factored into our guidance.

Before getting into our investment outlook for the fourth quarter, I'll briefly summarize the cap rates associated with our investment activity through the first three quarters. Across all non-hotel investments, whether for W.P. Carey's Inc. or for its manage REITs, the weighted average cap rate was 7.6%. But as always, the range is wide from below 6% to just over 11% in fact. And as we always point out, this covers a broad range of property types, tenant quality, geographic markets, and of course, different rental increase formulas.

We're looking for rent growth in addition to initial yield. We underwrite one deal at a time, looking at the IRRs assuming both ten year and lease term holding scenarios using reasonable residual assumptions. The common denominator is that each deal must stand on its own. It must offer an attractive risk-adjusted return over the long haul, no matter what the initial accretion may be. That said, our purchases do continue to be accretive relative to our cost of capital whether we're buying for our manage REITs or for W.P. Carey's balance sheet.

To turn briefly to the investment outlook, investment conditions are still favorable in Europe due to the slow pace at which growth is returning to all areas and the continued availability of lower cost debt. In the United States, attractively priced transactions are still somewhat scarce due to heavy competition. We continue to have to work harder to find lightly marketed deals and those tend to be smaller. But I think conditions may improve moving into 2015 as capital flowing into the non-traded net-lease space abates somewhat, which would reduce the competitive pressure on the buy side.

A reduction in sales might occur due to several factors. We'll be watching for three in particular. First, certain scheduled fund liquidations may close more slowly than expected which would result in less cash being recycled into new funds. Another factor, may be the initial reaction to the new FINRA rules which by the way, we fully embrace and welcome, but which might cause some financial advisors to pause until they better understand the impact of the rules.

Finally, it is possible that pending the sorting out of recently disclosed accounting irregularities of one of our competitors, sales may slow at the sponsors that are affiliated with its broker-dealer, which typically generate more than 50% of all non-traded REIT sales. So it's possible that pricing pressure from the non-traded net-lease sector will take a break.

At the same time, if economic growth in the United States continues and more companies begin to spend money, it's likely that more corporations will re-explore sale leasebacks as an attractive alternative to debt, which would of course expand the supply of opportunities available to us. That would be a welcome change. But of course, we don't know for certain how all or any of these factors will affect our actual investment volume. But meanwhile, we will remain patient and disciplined.

And with that, I'll now ask Katy to talk about our results and the portfolio summary in more detail. Katy?

Great. Thanks, Trevor, and good morning to everyone on the call. First, I'll briefly review our third quarter results and AFFO guidance followed by a brief discussion of our investment management business and an update on our balance sheet and capital structure. And then I'll turn it back to the operator for questions.

So starting with our financial results and guidance. For the third quarter, we reported AFFO of $1.13 per diluted share and this compares to AFFO of $1.21 per diluted share for the second quarter. Second quarter benefited from higher structuring revenues due to higher levels of investment activity on behalf of the managed REITs. Also, the third quarter includes summer vacation period, which tends to slow deal closings, particularly in Europe.

As we've mentioned in the past, acquisitions in the managed REITs generate one time structuring revenues and the timing of deal closings can generate some quarter-to-quarter AFFO variability. Accordingly, the timing of deal closings around year-end also affects our annual AFFO guidance for both 2014 and 2015. And for that reason, they have fairly wide ranges.

Trevor touched on our updated 2014 AFFO guidance, but let me take you through some of the specifics as well as our guidance for 2015. For the full year 2014, we expect to generate AFFO of between $4.70 and $4.86 per diluted share, up from our previous guidance range of $4.62 to $4.82. This updated guidance range assumes total 2014 acquisition volume of approximately $2.9 billion to $3.2 billion with approximately $1 billion of that going into the W.P. Carey owned real estate portfolio and approximately $1.9 billion to $2.2 billion of acquisitions on behalf of the managed REITs. Not surprisingly, the primary driver of our increased guidance range is the increase in our assumptions for acquisition volume on behalf of the managed REITs, which is up $200 million to $500 million, reflecting the strength of our acquisition pipeline. Our guidance also includes the impact of our recent $282 million equity offering.

Now looking ahead to 2015, in this morning's earnings release, we announced our 2015 full year AFFO guidance range of between $4.76 and $5.02 per diluted share, which assumes total acquisition volume of between $2.4 billion and $3.1 billion, with approximately $400 million to $600 million of that going into W.P. Carey's owned real estate portfolio and approximately $2 billion to $2.5 billion of acquisitions on behalf of the managed REITs. It also assumes dispositions from our owned real estate portfolio of approximately $100 million to $200 million.

Now let's switch gears and spend a few minutes on our investment management business. This year, we've met with many investors who are new to our story and not as familiar with the various ways we generate fees from our investment management business. So we thought it might be helpful to spend a few moments briefly reviewing them on the call. Today, the Company's primary business is owning and managing, a global portfolio of roughly $10 billion of triple-net-lease properties. However, prior to becoming a REIT in 2012, our primary business was investment management. We began that business in 1979 and believe that we continue to have a strong franchise in the retail capital markets.

Within our investment management business, we have a proprietary registered broker dealer, which sells on a wholesale basis, investment vehicles that we structure, the independent financial to the independent financial advisory community. Today, most of these vehicles have been publicly registered non-traded REITs, where W.P. Carey act as the advisor. More recently, we filed an offering to form a business development company or a BDC. Our duties and responsibilities as adviser to the managed REITs are outlined in advisory contracts that are governed by an independent Board of Directors and are subject to an annual renewal.

The advisory contracts entitle us to certain fees and revenue streams that compensate us for structuring, marketing and selling the investment vehicle, acquiring properties or structuring investments, negotiating debt or other financings, managing the properties, maintaining the accounting and financial records in compliance with SEC and public company standards, tax compliance and shareholder communications. Revenues from our managed REITs represented approximately 10% of third quarter total revenue, net of reimbursable costs. Although that makes it a relatively small contributor to our overall profitability, we recognize that it's a point of differentiation from many of our peers.

And with this in mind, we've added a table on page 30 of our supplemental that provides additional details on the revenues and the income we earned from the managed REITs. Essentially they fall into four buckets, asset management revenue, structuring revenue, dealer manager related revenue and profits interests. Taking these in turn and starting with the asset management revenue we receive for managing over $8 billion of client assets. These are among the most consistent and recurring fees we received from our investment management business. For the vast majority of these assets, we earn an annual fee of 50 basis points on the gross purchase price or if the assets have been appraised for an NAV, then 50 basis points on the appraised value.

Next, structuring revenues, which are the acquisition fees we earn for structuring and negotiating investments on behalf of the managed REITs. These fees are based on total cost of the acquired assets. For net-leased properties acquired on behalf of our CPA REITs, we generally earn a fee of 4.5% of total cost. And for operating properties acquired primarily on behalf of our lodging REIT, CWI, we generally earn a fee of 2% of the total cost. As mentioned, the inherent variability in the timing and volume of deal closings from one quarter to the next means that structuring revenues are the most variable form of revenue we generate. However, I want to emphasize that it comprises a relatively small portion of our overall revenue.

For example, for the second quarter, when we had strong acquisition volume, structuring revenue was roughly 7% of our total revenue. And for the third quarter, which was a much lighter quarter volume-wise, it was around 3%.

Thirdly, dealer manager-related revenues which include things like reimbursable costs, selling commissions and dealer manager fees, all of which, I'll discuss together. The Managed REIT reimburses us for certain costs we incur on their behalf, and this includes things like for dealer selling commissions and marketing costs as well as certain overhead costs related to the distribution administration of the Managed REITs. Although the reimbursement of these costs is considered to be revenue, it is largely offset by an equivalent expense. We also receive dealer manager fees which we retain a portion of.

However, in the context of our overall business, the net impact of our -- on our earnings is usually very small particularly once G&A costs are taken into account. And for that reason these fees when netted with costs are not a significant driver of overall valuation.

Lastly, and in addition to the fees we receive, we also receive profits interests from our special general partnership interests in each of the managed REITs. Generally, these interests entitle us to 10% of the available cash generated by the managed REIT. Being a profits interest, however this flows into our income statement not as revenue but as net income from equity investments. These profits interests are very stable form of real estate income similar to asset management fees, but because it's derived from the profits from real estate ownership, it's good REIT income. And it also helps to align our interests as an advisor with our shareholders. So that's a summary of how we earn revenues from our investment management business and we hope you'll find the added disclosure in the supplemental helpful.

Okay. With that, let's turn to our balance sheet and capitalization. From a balance sheet perspective, the most significant event for the third quarter was the successful completion of our inaugural public equity offering, which raised approximately $282 million. At the end of the third quarter, our total equity market cap stood at approximately $6.6 billion and our enterprise value was roughly $9.8 billion.

Our key credit metrics, all remained at very healthy levels. Specifically, at September 30, our pro rata net debt to enterprise value was 32.7%, our total consolidated debt to growth assets was 43.7% and our pro rata net debt to adjusted EBITDA was about 5 times. We continue to view our debt maturities over the next few years as very manageable with approximately $111 million maturing this year, a $142 million in 2015 and $284 million in 2016. At the end of the quarter, we had ample liquidity, totaling approximately $1.2 billion. At quarter end, the weighted average cost of our non-recourse 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 4.5%.

And with that, I would like to turn the call back to the operator and take your questions.

And ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). Jon Woloshin, UBS.

Morning, Trevor. Could you expand a little bit on this new business development company that you're forming? Is it -- A, is it going to be publicly traded? B, how much you think you'll raise in fee, C, what's the target market for it? Thanks.

Thanks for the question, Jon. This is a business development company, it will be a new vertical on the investment management platform. And for those unfamiliar with the business, it is a middle market lender. The thinking was that as much of our business and much of our brand franchise in the investment management space is related to our credit underwriting capabilities, there was a natural evolution for us to enter that space. That is a joint venture with Guggenheim Partners, which would be responsible for the origination for the most part, they are deeply experienced in that sector.

That said, we also -- it also occurred to us that many of our customers for our sale leaseback transactions worldwide are the same types of companies that are targets in the middle-market lending business and many of them see sale leaseback, in fact, as an alternative to a middle market borrowing. And so there are some natural synergies there. It will have no impact on the REIT itself, obviously none of those assets whatever would be brought on to W.P. Carey's balance sheet. It's just simply a way for us to continue to enhance the value of the investor management platform.

All right. Thank you.

Thank you.

(Operator Instructions). Vineet Khanna, Capital One.

Yeah. Hi, guys. Thanks for taking my questions. Two quick ones for me. First, for 2015, can you give any color on sort of what fundraising expectations are there?

Sure. Well, as I mentioned, I think we will be watching for a couple of factors. Generally, we do expect some slowing of sales in the fourth quarter and going into 2015, but I think that our expectation that we've vocalized on this call and in other venues is that we're likely to end up with a larger share of a smaller market. We can't guarantee that. And I'd also like to reiterate that for us the actual volume of sales, while, it's a useful metric in terms of some parts of our business, is less relevant than the equilibrium we're maintaining between those dollars that we raise and the investment opportunities that we're seeing.

And so, from my point of you, I think we will see some decline in sales because of the factors that I mentioned in my remarks, but that's because of the dry powder we currently have and the money that we anticipate raising, we think we will be in pretty good shape.

Sure, sure. And then just turning to the balance sheet, any sort of updated thoughts on potential bond issuance for the maturities that are coming up?

Yes, actually we are contemplating accessing the capital markets over in Europe and that will probably our next capital markets transaction, it's not -- it is related somewhat to some of our maturing debt, but there's not a lot of maturing debt, but it's really relates more to the on-balance sheet acquisition pipeline, which has grown, as we mentioned, quite a bit over the past six months and we have a pretty robust pipeline that we think we will be closing in the next quarter or one to three quarters. So we're looking forward to accessing the capital markets in Europe, which are very favorable from an interest rate perspective.

Sure. And I guess two questions off of that, what do you think spread wise for the euro issuance is and then could you kind of give a breakdown of what the acquisition pipeline is, Europe versus US?

Sure. What we've been talking with bankers about is for sort of eight to 10-year euro issuance. We're in the sort of 2.25% to 2.50% coupon range on the debt side and with respect to the WPC pipeline, I would say, in the past couple of quarters, it's been skewed more towards Europe and much of the pipeline that we're anticipating over the coming quarters is European based. So that will match really nicely with the euro bond issuance when we do one.

Sure. Congrats on a great quarter and thanks for taking my questions.

Thanks.

Thank you.

(Operator Instructions) Ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you. That concludes our call today. Thank you for your interest in W. P. Carey.

Ladies and gentleman, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.