WP Carey Inc (WPC) 2015 Q1 法說會逐字稿

Good morning, and welcome to the W.P. Carey first quarter of 2015 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.

Good morning, everyone. Thank you for joining us on this conference call to review our 2015 first-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, and thanks everyone for joining us. I'll discuss our owned real estate portfolio and our investment management business, and then Katy will discuss our first-quarter financial results and balance sheet.

Starting with some of the headline numbers, for the 2015 first quarter, we generated adjusted funds from operations, or AFFO, of $130 million, or $1.22 per diluted share. And, during the first quarter, we raised our quarterly dividend to $0.9525 cents per share, marking our 56th consecutive quarterly increase, and equivalent to an annualized dividend rate of $3.81 per share. Based on Friday's closing stock price, this equates to an annualized dividend yield of close to 6%.

Turning to our owned real estate portfolio, which is our core business, during the first quarter we completed two acquisitions for our owned portfolio totaling $394 million, comprised first of our $351-million acquisition of a portfolio of 73 automotive retail sites located throughout the UK and net leased to Pendragon. I discussed this transaction in some detail last quarter. The second transaction was our $43-million acquisition of a logistics facility in the Port of Rotterdam, in the Netherlands, net leased to Nippon Express. Both transactions involve strategically important real estate net leased to quality companies on long-term leases with built-in rent increases, and, therefore, exemplify the types of transactions we look to do.

Our first-quarter acquisitions had a weighted-average cap rate of approximately 7% and a weighted-average lease term of approximately 14.5 years. Since quarter end we've added one additional property to our owned portfolio, a retail facility acquired for approximately $25 million, net leased to an Austrian subsidiary of Hornbach, which is a well-known German do-it-yourselfer retailer. The lease term on that is 15 years and it also includes annual CPI-based rent escalations.

First-quarter dispositions were light, totaling approximately $14 million. We expect further capital recycling this year, with a focus on extending lease term, improving credit quality, and increasing asset criticality within the portfolio.

At the end of the first quarter, the Company's owned real estate portfolio consisted of 852 net-lease properties, comprising 89.2 million square feet, leased to 219 tenants and 4 operating properties. Portfolio occupancy remained high, at 98.4%, and weighted-average lease terms stood at 9.2 years, up slightly from 9.1 years at the end of the 2014 fourth quarter, primarily due to the two deals we closed in the first quarter. As a reminder, at the end of the 2014 first quarter, a year ago, the weighted-average lease term was 8.7 years. So we feel we've made good progress towards our goal of extending the weighted-average lease term of our portfolio through these acquisitions and the capital recycling that we've done over the last 12 months.

At quarter end, approximately 65% of annualized base rent came from our US properties, with the remaining 35% generated by our international properties, which are located mainly in western and northern Europe. At the end of the first quarter, approximately 95% of our annualized base rent came from leases with contractual rent escalations, either linked to CPI or through fixed-rent increases, providing built-in revenue growth. And since they are net leases, tenants are responsible for the costs associated with operating and maintaining the properties. So we have virtually no exposure to rising operating expenses.

Looking at our same-store rent growth, rents were approximately 1.7% higher, compared to the year-ago quarter. Please note this analysis excludes any properties sold, acquired, vacated, or subject to lease modifications, and therefore captures about 85% of our owned portfolio annualized base rent, and is before the impact of currency movements. Although we are currently in a low-inflation environment, if inflation picks up we would expect upside to our same-store rent growth.

Regarding re-leasing activity, five leases were renewed or extended during the first quarter, recapturing 100% of the then-prevalent rent. We also entered into five new leases, which had a weighted-average lease term of 11.5 years, compared to 9.2 years for our overall portfolio. Please note that, in aggregate, the re-leasing and new leasing activity that I'm referring to represented just under 1.5% of our portfolio's total square footage at the end of the first quarter, clearly a very small component of our overall portfolio.

Looking ahead, the investment environment in the United States remains very competitive, as investors chase yield across primary, secondary, and even tertiary markets. Some have proven willing to compromise on lease structure in order to maintain yield. We are, however, staying disciplined. If interest rates continue to rise, eventually we would expect that to be reflected in the cap rates that buyers are willing to pay.

In Europe, investment conditions are still more favorable, given higher cap rates and lower debt costs than here in the US. However, competition for deals has picked up in 2015, as European investors are starting to return to the market and certain US investors are becoming more active in Europe, which is something we expect to see more of over time.

Turning briefly to our investment management business, during the 2015 first quarter, investor capital flows totaled $99 million. As you may recall, our first lodging fund, Carey Watermark Investors, completed its follow-on offering at the end of the fourth quarter in 2014. So, our first-quarter inflows were entirely into CPA:18 - Global through the sale of its trailing load's Class C shares. This completed CPA:18's initial public offering, and we currently expect it to be fully invested early in 2016, at which time our allocation strategy will pivot, such that all net-lease acquisitions will first be considered for our balance sheet. I want to emphasize this point, as we continue to get questions about it. Once CPA:18 is fully invested, net-lease acquisitions will be for W.P. Carey's balance sheet, therefore enhancing our growth opportunities.

And, with that, I'll hand over to Katy.

Thank you, Trevor. Good morning, everyone. I'm going to briefly review our 2015 first-quarter results and touch on some of our balance sheet metrics before turning it back to the operator for your questions.

We're reporting our earnings slightly later than usual this quarter in order to finalize the implementation of a new, firm-wide enterprise resource planning system. Specifically, we installed Oracle's JD Edwards Enterprise-One system and the Hyperion Financial Analysis suite of products, which provide a sophisticated, scalable, and global solution that integrates our accounting, tax, and financial planning systems into one platform, and provides best practices for our data management and control environment. We now have a world-class ERP system, one that's used by many of the top REITs, and we're excited by the benefits and efficiencies it will provide going forward. It has been a major undertaking for the Company, and a large number of our employees have worked tirelessly on it for many months. So I'd like to take this opportunity to thank them for all of their hard work and dedication.

Turning to AFFO, for the 2015 first quarter, we generated AFFO per diluted share of $1.22, which is up 2.5% from $1.19 per diluted share for the 2014 fourth quarter, primarily reflecting additional income generated from real estate acquisitions and lower income tax expense, which were partly offset by lower structuring revenue due to reduced investment activity on behalf of the managed REITs and the impact of a stronger US dollar, net of gains on our foreign currency hedges. Comparisons to the 2014 first quarter are not particularly meaningful in our view because, as we said at the time, AFFO per diluted share for the 2014 first quarter did not represent a run rate, given certain tax benefits and one-time items largely related to the CPA:16 merger.

Turning to the impact of foreign currency on our AFFO, as Trevor noted, approximately 35% of our annualized base rent at the end of the 2015 first quarter came from real estate located outside the US, primarily in Europe. Compared to the 2014 fourth quarter, the euro/US dollar exchange rate used in the calculation of our AFFO declined about 10%. In combination with other currency movements, and the net gains on our currency hedges, this reduced our first-quarter AFFO by approximately $0.02 per diluted share. We manage the risk to our cash flows and dividends from fluctuations in the euro by funding our European acquisitions with euro-denominated debt and by actively hedging the majority of the remaining euro-denominated net cash flows.

Last quarter, I talked about the theoretical impact of a further decline in the euro on our AFFO guidance, noting that if the euro had gone to parity on January 1 and stayed there all year, we would expect our full-year 2015 AFFO per diluted share to be reduced by approximately $0.07. Although, more recently, the euro has been less volatile, we thought it would be helpful to update that sensitivity analysis. If the euro had moved to parity with the US dollar at the start of the second quarter and remained there for the rest of the year, we would expect our full-year 2015 AFFO per diluted share to be reduced by approximately $0.05, equivalent to a 1% reduction at the midpoint of our guidance range. This is, of course, a theoretical impact, but it does illustrate the effectiveness of our hedging strategy and shows that the potential impact on our full-year AFFO guidance due to further euro weakness has narrowed since last quarter.

Turning to our balance sheet and leverage metrics, at the end of the first quarter, our pro rata net debt-to-enterprise value stood at 36.5%; total consolidated debt-to-gross-assets was about 48%; and pro rata net debt-to-adjusted EBITDA was approximately 5.6 times. We view our near-term debt maturities as very manageable, with approximately $141 million maturing over the remainder of 2015 and $264 million maturing in 2016. The end of the first quarter, we had approximately $1.3 billion of remaining capacity on our credit facility. Based on that capacity, combined with our recent debt capital markets activity, we're confident that we will be able to manage our near-term debt maturities. At quarter end, the weighted-average cost of our non-recourse debt was 5.3% and our overall weighted-average cost of debt was 4.3%.

If we look further out at the total debt maturing over the next few years, a majority is secured debt, with interest rates above where we believe we could issue unsecured debt today. While rates have moved up since our most recent bond issuance, and may continue to do so, we believe there's still a meaningful cushion between the higher rates we're currently paying on secured debt that is maturing and the interest rates we would expect to pay on newly issued unsecured debt. We also continue to make progress with growing our unencumbered pool of assets, as all on-balance-sheet acquisitions are funded with unsecured debt.

To wrap up, I'd like to quickly review our 2015 guidance. We're reaffirming our 2015 AFFO guidance range of between $4.76 and $5.02 per diluted share. This is based on assumed total acquisition volume of approximately $2.4 billion to $3.1 billion, with roughly $400 million to $600 million of that going onto W.P. Carey's balance sheet and approximately $2 billion to $2.5 billion of acquisitions for the managed REITs. It also assumes approximately $100 million to $200 million of dispositions from our owned real estate portfolio as part of our capital recycling effort.

Given the level of on-balance-sheet acquisitions we've completed year to date and deals in our pipeline, we would expect to be towards the top of our acquisition target range. However, because new acquisitions are likely to be weighted towards the second half of the year, they would have less of an impact on AFFO. So, we are maintaining our guidance range for AFFO per diluted share.

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

(Operator Instructions)

Our first question comes from Sheila McGrath with Evercore.

Yes, good morning.

Trevor, you mentioned in Q, or in the release, that CPA18 is done with fundraising. I'm just wondering if you could give us an idea, how much dry powder is there to invest for CPA18 and when you think you'll hit that crossover point in time where all of the net lease acquisitions will be on balance sheet?

Thanks for the question, Sheila. About $300 million of equity remains in CPA18. And we, as mentioned in the remarks, expect that the fund will be fully invested by early 2016, although of course as we always caveat, that can slip or be accelerated, depending on one or two large deals that may come along.

And then you've also mentioned CWI2 will be selling both A and T shares. I'm wondering, is that the same for the BDC? And how should we think about that, the mix of the classes of shares for CWI2?

That's correct. CWI2 will have the more traditional front-end load shares, and as well as the trailing shares, which are called T shares now. The BDC will have a slightly different structure. And we expect more of the weight in that towards the T shares.

That's still under SEC review. And it's not effective yet, and when it is, it will be reviewable by public.

Okay, and if you could just give us the big picture, your view of the Department of Labor, their potentially new regulations, and on fiduciary. Just your big picture view of the status of that, and if there's any impact potentially to your business?

Sure. In the short run, we're most focused on whether we have sufficient dry powder to execute our business plan in both the hotel segment and then the diversified segment. And as I mentioned, we have plenty of dry powder and we don't believe that the regulations are going to come into effect and have any impact on the current funds.

We think it will be 2017 at the earliest. So as CPA18, as we mentioned, is already through its fundraising, it won't have any impact on them. We believe it will have an impact at some point. I think that we're very well positioned with the T shares and with some of the innovations that we've put forward in the industry.

So I think that it will probably be harder for some of our competitors whose business is predicated on profitability driven by fees earned on raising capital or on accelerated turnover of funds. But that's never been our business model. In fact, capital raising for us, we've always considered to be really essentially a breakeven business.

It's a way to provide capital to grow assets under management. And we've always sought to maintain equilibrium between the money that we've raised and the opportunity sets that we see. And we're currently very much in that mode.

Okay, thank you.

The next question comes from Nick Joseph with Citigroup.

Thanks. In terms of the on balance sheet acquisitions, why not increase full-year guidance at this point, as you're already above the bottom end of the range? And then can you talk about the acquisition pipeline today and expectations in terms of volume and cap rates for the remainder of the year?

Yes, I'll take a start at that. I think I mentioned in my remarks, we do have about a little over $400 million on balance sheet already this year and we do have a fairly good pipeline building. I think in terms of guidance, we decided to keep our guidance unchanged as of right now. It's early in the year. I think most of the transactions that we're looking at would probably close later in the year and not contribute as much to AFFO this year. (Multiple speakers)

Nick, also -- I'm sorry to interrupt. There's also some inherent uncertainty, and it's really just prudence that leads us to that conclusion.

Okay.

We're in a very competitive environment. And we're looking at several large transactions, and there have been more, bigger corporate transactions that have come out. And those will all be disclosed that were competitively bid out to others.

We participated but ended up not being the winning bidder. But we are starting to see some of these large transactions. And so if more of that type of activity takes place before the end of the year, then there could be more volume. But it's just very difficult to tell what the corporate owners will be doing or thinking with respect to property dispositions.

Are you seeing those opportunities more in the US or international?

The ones that I just mentioned were in the US. I believe that as the chance -- as interest rates are in fact rising because of the bond markets and interest rate expectations rise, then you're likely to have corporate CFOs who are starting to look at sale lease-backs as potentially a viable alternative to borrowing.

But I would say a lot of the pipeline on the table that's on the table right now is in Europe.

Thanks. And you mentioned the rise in interest rates. What impact have you seen, or have you seen any thus far in terms of cap rates and deals coming to market?

Not much, to be honest. We think it certainly has made us and others more cautious. But at the same time, as I mentioned in my remarks, there's a lot of capital here in the United States now that seems to be less sensitive to that, less concerned about the rise in interest rates and therefore continuing to bid aggressively on assets that have yield, such as net-lease assets.

So I think it's causing -- it hasn't yet gotten to the point where cap rates have widened as a result of interest rates fears. Eventually as rates rise, that is likely to happen. We just haven't seen it happen yet.

Thanks.

The next question comes from Todd Stender with Wells Fargo.

Hi, thanks. Just to follow up on that last theme. Trevor, you mentioned you're bidding large sale lease-backs. How do you view your cost of capital right now compared to some of the other large players, particularly in the REITs? Is it as competitive as you'd like it right now? How do you think about that?

Well I think we would always like it to be more competitive as reflected by a higher multiple. Certainly the Company aspires to a multiple more closely related to those who are at the top end of the range. And we are optimistic that at some point we'll be able to get there, but we also are cognizant of the fact that we know the reasons that might be leading to somewhat of a lower multiple.

On the other hand, I think that our ability to raise debt in Europe gives us an advantage, at least on the cost of debt side, that then brings down the weighted average cost of capital as compared to those who are completely focused in the US. So for the deals that are in our pipeline and the deals that we've closed, they were purchased attractive risk adjusted returns and certainly at a favorable relationship to our cost of capital. And we stay patient and we don't do deals that don't bear that same relationship.

Okay, thanks. And just kind of the -- stay on the theme of the cost of capital. Now that you're shifting to only investing in that lease on balance sheet, how will your underwriting change, if any, since you have a lower cost of capital on the W.P. Carey side and don't have acquisition fees on that side as well? Maybe just thinking about the quality of assets that you'll target, and maybe not going after the higher yielding ones?

Well, in fact I think what it means is that we'll have a broader deeper pool as W.P. Carey. We still feel comfortable with the risk adjusted returns, even on the higher cap rate deals that you're referring to that go into the CPAs. And I think if we still see deals that are leased to good companies and we determine that the company will be around for the 15 to 20 years of the rent term and beyond and we can get good rent bumps as we usually do tied to CPI, et cetera, then we would continue to look at those as well. But I do think that it broadens our ability in W.P. Carey. So I would view it more constructively from that angle.

Okay, great. And shifting to dispositions, can you give us a sense of the mix of what you sold in Q1 that were vacant? And then maybe looking out for the rest of 2015, what the mix of occupied versus vacant properties, and if they are occupied, what kind of lease duration is left?

I don't have the specific breakdown of which were vacant. There weren't really that many dispositions, Todd.

Yes it was about $14 million in the first quarter. It was a lot of small properties that were older properties. And really this is part of our capital recycling effort to increase our lease term and increase the quality of the real estate. So some of them were quite old, and we thought it was best to sell them rather than continue to try to work them.

Sure. What do you think the -- is there a liquid market for, say, five years left on the lease? Is there a threshold you guys like to focus on?

Yes, typically we start that analysis about five years out. For larger assets it might even be longer than that. But these were smaller assets with buyers in local markets rather than larger buyers that would be looking for long lease terms.

Typically if we have assets in -- smaller assets that have very short lease terms, we're looking to sell to an entrepreneurial buyer who will either release or repurpose the building. We may have owned it for 15 or 20 years.

Great, thank you.

The next question comes from Juan Sanabria with Bank of America.

Hi, good morning. Katy, I was hoping you to speak a little bit to the change and it seems like the definition of your AFFO with regards to the hedging and what that means, if anything, for guidance?

Sure. As you might have seen, we detailed it in a footnote in the Supplemental where we walk through AFFO. We did change the definition of our AFFO this quarter, and really it's part of a broader review that we've been undertaking for the last year or so as we've transitioned to being a REIT a couple of years ago.

And that review includes things like our JD Edwards enterprise software system, a lot of the disclosure enhancements that you've seen over the last few quarters. We also reviewed our AFFO definition, really in an attempt to be sure that we were capturing all of the cash flow, if you will, properly.

Last year with the acquisition of CPA16, euro-denominated assets became a much larger component of our revenue. We've always had our hedging program in place, but we did not include the gains or losses from our hedges in our AFFO definition.

These are definitely cash flow items and when we thought about it, we thought it made sense to include those gains or losses in our AFFO definition. We decided to do it in the first quarter just to create comparability this year and not mix definitions year over year.

In terms of thinking about guidance, as I mentioned in my remarks, our currency gains -- the gains from our hedges this quarter were about $0.02 per diluted share of AFFO. If you just annualize that, it would be obviously $0.08, but I think it's a little difficult to do that right now because the euro could continue to move around. And that $0.02 was based on a euro at the end of the first quarter that was about $1.12.

If the euro moves around, that $0.02 could become $0.03 or it could become $0.01. So we didn't feel comfortable really moving our guidance based on just this change of AFFO. Obviously, the last point is, there are a lot of components to our AFFO. And we didn't feel that at this point, early in the year, that it made sense to increase guidance just based on this change.

Great, thank you.

And then with regards to the balance sheet, how should we be thinking of your debt capacity to fund continued acquisitions? Do you feel comfortable funding towards the high end all with leverage, or would you look to the equity markets for that?

Yes, we certainly have the capacity in terms of line of credit and what-not, but your question is really related to leverage levels. We are comfortable in the mid to high 40%, that I think of it as total debt-to-gross-assets. And as we move through the year with additional acquisitions, if they come sooner rather than later, we might consider an equity transaction at some point later in the year to reduce leverage with those acquisitions.

Great. And then just lastly from a G&A perspective, how should we think about the run rate on cash G&A, stripping out the non-cash stock comp with the new systems now in place?

Yes, the Q1 G&A is of course higher than it was, somewhat related to the systems. It's higher from last year, also related to the acquisition of CPA16. With that merger, obviously we have increased needs for asset management and accounting for those properties.

And then in addition we're doing some product development, as we've mentioned on prior calls, for our investment management business, which has increased G&A a little bit. I think the Q1 is a pretty good run rate for the year.

Great. Thanks, Katy.

Thanks.

The next question comes from Vianeet Khanna with Capital One Securities.

Yes. Hi, good morning. Most of my questions have been asked. But can you provide an update on the 12 leases that are set to expire this year?

Yes, the leases that are expiring, they are a little bit lumpy in terms of their size. There are a couple of larger ones and then a lot of smaller ones. And it's, I think, this year in 2015 we have about 2.7% of our ABR expiring throughout the year, and it's a little bit lumpy in Q2. We clearly have a plan in place for each of these assets.

And then on into 2016, we have about 3% of our ABR expiring. Again it's a little -- they're a little lumpy. One or two big assets, but then several smaller ones as well. So it's fairly evenly distributed in the next couple of years. And we clearly have a plan in place for certainly for each of the assets in 2015.

Okay, that's it for me. Thanks for taking my question.

Thanks, Vineet.

The next question comes from Dan Donlan with Ladenburg Thalmann.

Thank you, and good morning.

Just going back to Vineet's question a little bit here. So what are we expecting for tenant retention in 2015 and 2016, and how should we think about where the leases are rolling versus market?

I think -- we don't think we will retain two of the bigger tenants, Dan. And beyond that, can't speak to what will happen in this space right now. It is a little early to talk about the tenants expiring in 2016 because we're involved in negotiations with them on an ongoing basis.

So should we expect 50% to 60% of what's rolling in 2015 to go away, or how should we think about that from a modeling perspective?

Yes, I mean Dan, that's definitely baked into our guidance, our AFFO guidance. One of the larger leases in that 2.7% of ABR, we're in negotiations not to renew the lease. And I think that building perhaps will be repurposed by an entrepreneurial developer. That's been an ongoing discussion for at least a year, if not two years.

And then some of the other smaller ones, I don't have the actual color. But in terms of lease roll-down, I don't have the month-to-month comparison for you.

Okay. And then as far as your CapEx, it looks like it was about $10.8 million this quarter. I think for the full year last year it was like $45 million, which is up from $14 million in 2013. So just curious, are we into this -- is the CapEx going to jump around, or should we kind of expect $40 million to $50 million of CapEx on a going forward basis?

It's a difficult question to answer. We are opportunistic with respect to how we evaluate that. We don't have a regular CapEx program.

We'll selectively add capital to properties if we feel that it's going to result in a more solid high quality stream of earnings going forward. So, I think you can't predict whether it's going to be in the $13 range or the $40 million range, but that as our year is unfolding and we prepare our guidance, we certainly do closely calculate those items as they become more clear to us.

I think it is fair to say, obviously as a net-lease REIT, CapEx is not a big driver of returns. So it will be a relatively small number. I think it's also, as Trevor is mentioning, it's lumpy. It sort of depends on which assets are rolling. But we don't expect it to be a large component.

Okay. I'm just -- and then as far as -- it looks like you still don't include that in your AFFO. And I was just kind of curious why you decide to exclude this altogether, and maybe not include maybe even like a maintenance CapEx number as most of your peers at least include that?

Yes, that's something that we'll continue to look at. Again, we don't feel it's a particularly big driver. But we can certainly continue to look at that and see if we should be enhancing the disclosure on that.

Okay. And then as far as the -- was the $3.2 million, was that a lease termination -- was that primarily a lease termination fee, or was there anything else that might be somewhat recurring in that number?

No, that was a lease termination.

Okay. And then lastly, on a conceptual basis, Trevor. You're able to hedge fairly well your exposure to Europe through usage of debt and hedging. But curious, you can't really hedge your cost basis in some of these assets, So curious if you would ever consider spinning out the European portfolio to trade in Europe in euros, which would allow you then to buy in euros versus buy in US dollars and have to deal with the potential impact of hedging or the potential impact of currency moves relative to your cost of -- your cost basis?

Well, I think that it's something that we think about all the time. And there are tradeoffs involved with all of those. So it's a major strategic decisions. [And there are tradeoffs involved with all of those sorts of major strategic decisions.] (added by company after the call)

And it's fair to say that we're considering those things and want to do the thing that's best for the shareholders in the long run. That's not always a panacea and there are challenges involved in it. But I think right now we're quite comfortable with the broader deeper pool that being international gives us access to.

And what we like with respect to Europe right now as compared to the United States is that you have two non-correlated markets. And whereas things are quite competitive here in United States and cap rates have dipped below 6% on certain assets, in Europe that hasn't happened yet.

And also in the United States you had cap rate compressions and in some markets it feels you may be getting towards the top of the cycle. In Europe it feels quite different and you're rising off the bottom of the cycle. So that from an NAV point of view, we expect that cap rate compression will occur and that our NAVs will improve over there. So that from the point of view of managing portfolio risk, which is really our job, we still believe it's valuable to have both.

Dan, just to drill down a little bit. If you think about a NAV, which I'm sure you do, obviously assets are impacted by the lower euro negatively, but liabilities are impacted positively. So I think when we've sort of looked at that impact, based on the most recent quarter, the delta might be a NAV delta of down 1% to 2%.

Okay. And then lastly on Carey Financial, your broker-dealer business, any thoughts on, just given the Department of Labor stuff, and I know you touched on that, but any thought in separating this business out from the REIT in the next few years? I think it's something that we continue to get questions on, given that I think it probably pushes down your AFFO multiple relative to the other names. And as you're shifting to be a more on balance sheet acquirer, how do you think about that impacting your ability to do stuff accretively? If you didn't have the broker-dealer embedded in there, you might trade at a significantly higher AFFO multiple, which will allow you to do more accretive on balance sheet acquisitions.

Well, certainly that's one possibility in terms of what would happen if we spun off the investment management arm. It's not the kind of thing that you do without a lot of thought. And I would answer the question in much the same way that I discussed the possibility of a European spinoff.

Right now we think there's a tremendous amount of embedded value in the investment management platform. And we want to make sure that we are able to fully realize that for our shareholders. And so we're trying to look at that responsibly, and we've been making a lot of strides, I think, in enhancing the value of that platform while at the same time pivoting away from net-lease, so that with the addition of the hotel product, which is firmly established now, we hope for the same with our BDC business going forward and then other forms of real estate, we continue to believe we can enhance the value of the investment management platform, whether it's within the W.P. Carey umbrella, or whether at some point it's decided that it has more value outside W.P. Carey.

So that for now, we find, as we've said many times, it's helpful for us to have a non-correlated income stream that does help us to pay our dividend, because at the end of the day that's really what it's about, is growing our FFO, growing our dividend, making good use of the skills that we have in-house. And we believe that there are many participants in the market who agree with that approach, and therefore they've invested in the stock. And we still realize we have a ways to go with other investors, And so that it's something that we're thinking about all the time.

Okay. And then I guess since you're pivoting away from net-lease to some degree with the non-tradeds, is there any ability to reduce G&A associated with that? Or is because you're still going to be acquiring a significant amount of assets, those folks will just simply move -- or the people that support that enterprise will just move to being more in-house at the REIT level?

Yes, in fact most of the people, the team that's responsible for managing the net-lease portfolio is this same team that does it to either on balance sheet or on behalf of the funds. It's the same individuals.

So really you're talking about what allocation of a person's time is spent on one versus the other. So that's not something where there would be a dramatic shift as we reduce that business in the managed funds business.

Okay, thank you Trevor. Really appreciate the commentary. Katy as well.

Thank you, Dan.

(Operator Instructions)

The next question is a follow-up from Juan Sanabria with Bank of America.

Hi, thanks for the time. Just wondering if you could go a little bit further into the CapEx spend. What for the first quarter was really maintenance and what was more leasing, or redevelopment type work for any assets that may or may not be vacant? And if you can give us a sense, particularly for the office assets what the typical re-leasing costs you see are, maybe by geography if it differs materially?

Well, it's a small number, as we said. And I would say that with respect to the first part of your question, that portion which is maintenance versus repositioning or what-not, it's more the latter. These are opportunistic investments that we make.

The team presents us with the possibility, for example, of adding some capital in order to retain a tenant or to extend the lease term. And we do an NPV of that alternative, as opposed to just selling the building, perhaps without that tenant. And after looking at a lot of different possibilities, we selected the one, at least as pertains to this past quarter, the opportunities that required some capital but, as I said before, positioned us with a better quality stream of income over the next 10 to 15 years.

So typically that is going to be where we spend our CapEx. Not on typical TI dollars and leasing commissions that you would spend when you reposition a single tenant asset into multi-tenant, for instance. We typically don't have a lot of that type of expense, either because we've succeeded in getting the tenant to extend their lease or we've decide years before the lease expiration to sell the building to somebody who is willing to take more residual risk than we are.

We have very few actual operating properties, and that's one reason why. We don't want to deploy the time and the resources to doing a lot of turnover type of expenditures.

And Juan, in Q1 there was a good portion of the Q1 CapEx that you're seeing related to a single repositioning.

Okay.

And that was to a very high quality credit where we got a significant additional lease term.

Was there any material change in -- or can you compare the prior rent versus the new rent post the repositioning? Or was it really all about lease term?

Yes, I mean oftentimes we will lower rent in order to -- say, we're coming off a 15-year lease, maybe market rents, because we've been escalating them by inflation or another metric for 15 years have increased to the point where it doesn't make as much sense for the market or the tenant. So as part of that repositioning after so many years, we will often reduce rent to a more market level, create some level of TI package, and then increase the lease term and redo the lease.

That's what, obviously, people with -- that have multi-tenant office buildings struggle with constantly. We have it at the end of each lease, long lease.

Okay. And I think this was asked before, but I'm not sure if I understood -- if I heard the answer. What's sort of the market-to-market of the lease expirations, maybe this year or next year that we should be expecting? Is it down low double digits?

No, this year -- well, for the leasing activity that we're reporting in this quarter, it was -- we recaptured all the rent.

And going forward for the balance of the year?

Juan, I think it's a little hard. It's lumpy because this year -- and each year we might have one or two larger assets that we may be selling or repositioning, like the one we were just talking about, where rents might roll down. It's not a great -- I know this is frustrating to people because they want to be able to model something, but the assets are really variable.

They can be in the US, they can be in different markets in Europe. There's not really a great run rate for that activity. I mean, it's our job to keep that activity as small as possible each quarter, but there's not a great run rate answer.

Okay thank you very much.

Typically our approach has been to just talk about it on this call at the end of the quarter and reflect back and say, here is what our experience is, and actually if you, one, reviewed the earnings calls over the past several quarters you'd see exactly how that unfolded and that would be a better indicator.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Sands for any closing remarks.

Thank you. Before we wrap up this call, I wanted to just remind everyone about our upcoming Investor Day for Institutional Investors and Sell-Side Research Analysts. And it's to be held on Thursday, May 28 here in New York, and will run from 1:30 p.m. to 5:30 p.m.

If you are an institutional investor or research analyst and you did not receive the e-mail invitation, please call Investor Relations on 212-492-1110 for registration details. And for those unable to attend in person and for all other interested parties, it will be webcast, details of which will be provided on our website at wpcarey.com later this week.

Thank you all for your interest in W.P. Carey, and that concludes today's call. You may disconnect.