WP Carey Inc (WPC) 2015 Q2 法說會逐字稿

Hello and welcome to W. P. Carey's Second Quarter 2015 Earnings Conference Call. My name is Lauren and I'll be your event specialist today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's presentation, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time.

It is now my pleasure to turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone, and thank you for joining us on this conference call to review our 2015 second quarter results. An online re-broadcast of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it'll 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.

Thank you, Peter, and good morning, everyone. As a result of the new management responsibilities we recently announced, I'm joined today by several of our senior management team. So I'll start with some introductions. We have Jason Fox with us, Jason was recently named President in addition to his role as our Head of Global Investments; Hisham Kader is here too, he was recently appointed Chief Financial Officer and had served as our Chief Accounting Officer since 2012. Katy Rice was promoted to Senior Managing Director in a newly created internal advisory role focused on how we can better delineate between our core businesses with the ultimate objective of unlocking shareholder value. Also with us is Jeremiah Gregory, who many of you would have met in our investor outreach meetings. Jeremiah was promoted the Head of Capital Markets. So it's a larger group than we've had on recent calls given their considerable experience and important roles within the Company as well as the different perspectives they provide. We thought it would be helpful to have them join the call.

I'll now briefly review our owned real estate portfolio before handing off to Jason about the new investments we made during the quarter as well as the market backdrop. Following that, I'll update you on our investment management business and Hisham will discuss our second quarter financial results and balance sheet. So I'll start with some of the headline numbers. For the 2015 second quarter, we generated adjusted funds from operations or AFFO of $139 million or $1.31 per diluted share, which is up 8.3% compared to $1.21 per diluted share for the 2014 second quarter and up 7.4% compared to $1.22 per share generated in 2015 first quarter.

During the second quarter, we raised our quarterly dividend to $0.954 per share marking our 57 consecutive quarterly increase and equivalent to an annualized dividend rate of $3.82 per share based on yesterday's closing stock price which represents a dividend yield of about 6.2%.

Turning to our owned real estate portfolio, which is of course our core business, at the end of the second quarter the Company's owned real estate portfolio consisted primarily of 852 net leased properties, comprising 89.3 million square feet leased to 217 tenants. At quarter-end, approximately 64% of annualized base rent came from our US properties and about 33% from our European properties.

Portfolio occupancy remained high at 98.6%. We remained focused on extending our weighted-average lease term, which at the end of the second quarter stood at 9.1 years. This is about six months longer than at the end of the 2014 second quarter as a result of the acquisitions and capital recycling, we completed over the last 12 months. 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 triple-net leases, tenants are responsible for the costs associated with operating and maintaining the property, so we have virtually no exposure to rising operating expenses.

As you may recall last quarter, I spoke about same-store rent growth and re-leasing activity. I'm pleased to say that as part of our ongoing effort to enhance our disclosure, we've added this information in more detail on our supplemental, which you'll find on pages 27 and 28. Looking at our same-store rent growth, rents were approximately 1.4% higher compared to the year ago quarter. Please note this analysis excludes any properties acquired, sold or vacated or subject to lease modifications during the 12-month period. It's also on a constant currency basis to enable comparability.

Regarding re-leasing activity, one lease was renewed during the second quarter recapturing 100% of the then prevalent rent. We also entered into one new lease with a lease term of nine years. Please note that in the aggregate, this re-leasing and new leasing activity represented less than 0.5% of our portfolio's total square footage, clearly a very small component of our overall portfolio. We have nine leases expiring in the remainder of 2015, representing about 1.5% of annualized base rent, which is factored into our 2015 AFFO guidance.

And now I'll hand over to Jason to talk briefly about our recent acquisitions and the market backdrop.

Thank you, Trevor, and good morning, everyone. During the second quarter, we completed two acquisitions for our owned real estate portfolio, totaling approximately $51 million, which brings total on balance sheet investment volume for the first half of the year to approximately $446 million. Both transactions were in Europe and both exemplify the types of deals we look for. Strategically important real estate, net leased to high quality companies on long-term leases with built-in rent growth. In April, we acquired a retail hypermarket and garden center in Austria for approximately $25 million. It's net leased to a subsidiary of Hornbach, which is a well-known German do-it-yourself retailer with operations in nine countries. It has an excellent track record of growth and profitability. The facility is well located on a major highway and has long-term importance to the tenants business, underscored by the fact that shortly before we acquired the property, they renewed their lease for a new 15-year term.

The lease also provides built-in rent growth through annual CPI based rent escalations. In June, we acquired a logistics facility in Sweden for approximately $26 million net leased to Scania, one of the world's leading manufacturers of commercial vehicles, particularly heavy trucks and buses. Again, this is a high quality well established tenant, that also has investment grade ratings from both S&P and Moody's.

It is a critical facility for Scania strategically located on a key highway route connecting several major Swedish cities to Mainland Europe. The Class-A building is purpose-built for Scania to provide logistic support for one of its main manufacturing plants, it was currently -- that recently underwent an expansion. With 5 years remaining on the lease, the transaction is additive to our weighted average lease term and provide built-in rent growth to annual rent escalations based on uncapped CPI.

Acquisitions for our owned portfolio during the second quarter had a weighted average cap rate of approximately 6.5% and a weighted average lease term of approximately 15 years. For the first half of the year, acquisitions for our owned portfolio had a weighted average cap rate of approximately 7% and a weighted average lease term of approximately 14.5 years. Second quarter disposition activity was fairly light, totaling approximately $11 million, bringing total dispositions for the first half of the year to $25 million.

We expect further capital recycling this year in line with the $100 million to $200 million target range factored into our AFFO guidance, with a focus on extending lease term, improving credit quality and increasing asset criticality within the portfolio.

Turning briefly to the investment environment. In United States, it remains very competitive as interest rates have moved up without [yet flowing] through to increased asset level yields.

Ultimately, however, if interest rates continue to rise, we would expect it to be reflected in higher cap rates. In Europe, investment conditions remained more favorable given higher cap rates and lower debt costs than here in the US. In fact all of our on-balance sheet acquisitions during the first half of the year were in Europe, specifically in the UK, the Netherlands, Austria and Sweden, capitalizing on this relative spread. However, competitions for deals in Europe has continued to pick-up through a combination of US capital flowing into the region and European investors continuing to come off the sidelines.

With that, I hand it back over to Trevor.

Thanks, Jason. Turning briefly to our investment management business. We do continue to make progress with our strategy of diversifying and expanding the products that we offer through our investment management platform. In May, our second non-traded REIT focused on lodging, which is Carey Watermark Investors 2, broke escrow, which enabled it to begin admitting new shareholders in its initial public offering of up to $1.4 billion. Investor inflows to date total around $34 million. Also I'm pleased to note that since quarter-end, we launched our first non-traded business development company or BDC, which is called Carey Credit Income Fund.

And with that, I'll hand it over to Hisham.

Thank you, Trevor, and good morning. Let me briefly review AFFO and our key leverage metrics before turning it back to the operator to take questions. Let's begin with AFFO. Our merger with CPA 16 closed during the first quarter of last year. Consequently, this is the first quarter for which both periods in the year-over-year comparison include the properties acquired in that merger, and will be the focus of my remarks.

As Trevor noted earlier, we generated AFFO of $1.31 per diluted share, up 8.3% compared to the $1.21 for the 2014 second quarter. This increase was driven by three key factors. First, within our investment management business, growth in assets under management resulted in both higher asset management fees and higher distributions of available cash from our interest in the operating partnerships off the managed REIT. Second, structuring revenue increased due to strong acquisition activity on behalf of the managed REITs. And thirdly, the asset we acquired for our owned real estate portfolio, since the year ago quarter had a positive net impact on AFFO.

These factors are partly offset by the impact of a stronger US dollar relative to the Euro, net of gains realized through our currency hedging program. In addition to the disclosure enhancements that Trevor mentioned, we've also added some details regarding capital expenditure. You will find this on page 11 of our supplemental. In particular, it provides a breakdown between CapEx with tenant improvements, leasing costs and maintenance versus non-maintenance CapEx for things like our build-to-suit project in Germany.

We believe it is helpful in providing investors with a better sense of CapEx that is recurring in nature versus non-recurring CapEx. And as you will see, recurring CapEx was a relatively small number, about $1.6 million for the quarter.

Turning to AFFO guidance, first and foremost, I want to caution that our second quarter AFFO is not a run rate for the remainder of the year, particularly given the strength of structuring revenue during the quarter. For the 2015 full year, we are reaffirming our AFFO guidance range of $4.76 to $5.02 per diluted share. This assumes acquisitions for W.P. Carey's balance sheet totaling approximately $400 million to $600 million and dispositions of between $100 million and $200 million. It also assumes acquisitions on behalf of the managed REIT of between $2 billion and $2.5 billion.

During our recent earnings calls, we've spoken about the theoretical impact of a decline in the Euro on our AFFO guidance. On our fourth quarter call in February, we noted that if the Euro had gone to parity with the US dollar on January 1 and stay there all year, we would expect our full year 2015 AFFO per diluted share to be reduced by approximately $0.07. Last quarter, we updated that analysis, noting that if the Euro had moved to parity with the US dollar at the start of the second quarter and remain there for the rest of the year, we would expect an approximately $0.05 reduction in 2015 AFFO per diluted share. If we roll that analysis forward and assume that Euro had gone to parity with the US dollar at the start of the third quarter, we would expect it to reduce our full year 2015 AFFO per diluted share by about $2.05. As the midpoint of our guidance range, this is equivalent to a reduction of about $0.025. Clearly, the potential impact of further Euro weakness on our full-year AFFO guidance has declined since the first quarter. This reflects both the actual Euro and US dollar exchange rate as the year has progressed and the effectiveness of our hedging strategy.

Turning to our balance sheet and leverage metrics. At the end of the second quarter, our pro rata net debt to enterprise value stood at 40.9%. Total consolidated debt to gross asset was 48.9% and pro rata net debt to adjusted EBITDA was approximately 5.2 times. We continue to view our near-term debt maturities as very manageable with approximately $163 million maturing over the remainder of 2015 and $260 million maturing in 2016. At quarter end, the weighted average cost of our pro rata non-recourse debt was 5.4% and our overall weighted average cost of debt was 4.2%. The majority of our debt maturing over the next few years is secured debt at interest rates that we believe are above where we could issue unsecured debt today. Although interest rates may move higher, we still believe there is a significant cushion between the higher rates that we're currently paying on secured debt maturing over the next few years and the lower interest rates that we would expect to pay on newly issued unsecured debt.

Lastly, at the beginning of June, we filed a prospectus supplement enabling us to issue up to $400 million of common stock under an at-the-market or ATM program. To date, we have not issued any shares under this program. Like most other REITs, we believe that it's beneficial to have an ATM program in place as it provides us with the flexibility to raise small amounts of equity capital efficiency, should the need arise.

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

At this time, we would like to take any questions you might have for us today. (Operator Instructions) Paul Adornato, BMO Capital Markets. Your line is open.

Thanks. Good morning. I was wondering as you review the lines of business, if you've considered separating international operations in one way or another. And if so, I was wondering, what forms that might take?

Thanks for the question, Paul. As you know, we've -- Katy has assumed a new role, which will look at that question within the broader context of each of our core competencies. And we do think that we have three primary core competencies one of which is the European platform, the other of course, US net lease, and the third, the investment management platform. And so, I think -- I turn it over to Katy to talk a little bit about what her role is going to be in helping us sort that through rather than give a specific answer with respect to that particular platform.

Sure. Thanks, Trevor, and good morning, Paul. Let me just step back quickly and just to give some context of this a little bit. Yes, we've accomplished a lot over the past two to three years. As you know, Jeremiah and his team have really positioned us to raise capital as a REIT and address the institutional investor market and Hisham and his team along with our IT team have updated our accounting and financial processes and implemented a new ERP system, which was no small task. So while many of these initiatives are ongoing, I think we've made tremendous progress in the last 18 months to 24 months and that's why, really at this point, Trevor and I felt very comfortable with Hisham and Jeremiah taking over the activities associated with the CFO role. And this has freed me up to take a look at some broader strategic and operational topics and to get to your point, obviously every business evaluates not only the current operating environment, but looks forward three to five years. And while we don't have a crystal ball, we do have a very seasoned senior management team and a multinational Board with diverse business experience. And as Trevor mentioned and as you guys know, we operate in a number of different arenas. In the real estate investing business, we operate primarily in the US and Europe, and we expect very different operating environments in each of those geographic areas in the next three to five years.

In addition, we run a highly-regarded investment management business that caters to US retail investors and that business environment is evolving. We've been at the forefront of that evolution and we want to be sure that we maintain that leadership and continue to expand and diversify our product offerings there. So to sum it up, we really want to be sure that we're properly positioned to take advantage of the growth and opportunities that we see in each of our businesses and geographies with the goal of course of unlocking and maximizing the value for our shareholders. So specifically with respect to Europe, it's a little premature, Paul, at this point to speculate about exactly what outcomes will come from how we're looking at this.

Okay. Great. Thanks for that color. I was wondering, Katy, if you could perhaps give us a timeframe for your review, should we expect some clarity in six months, a year, what can we expect?

Well, we just started the review and we would hope to keep you posted certainly before six months or a year as the thinking and the plan evolves.

Okay. Great. Thank you.

Dan Donlan, Ladenburg Thalmann.

Thank you and good morning. Just a question on the guidance, if I look at the midpoint relative to what is on the you've done this far, it assumes about a 7% decline the back half of the year. So we're just kind of curious, is that all structuring related revenues, is there anything else kind of going on there or you just -- are you guys just being a little bit (inaudible) because it looks like you still have another $600 million or $700 million to do at the midpoint to get to your guidance in terms of what you're going to do for the structured REIT or the structured investment group?

Thank you, Dan. Look, I mean we're comfortable with this guidance range, right. So we're comfortable with where we are in the low end of the range. For the high end, it is driven primarily for this year by structuring revenue. So if you look at our owned balance sheet, the pipeline for our owned balance sheet as well as the pipeline for the managed REIT. And if you look at the one for our owned balance sheet, we are looking at a lots of deals, it's a competitive environment and there's no guarantee we can close them in this year or if we do close them whether it'll be this year or next year. But what we are seeing is that we are going to close them in 2015. Our AFFO doesn't get much of -- 2015 AFFO doesn't get much of the benefit. We will benefit in 2016 of course. For the managed REIT, the portfolio, same thing applies, lots of deals, but also very, very competitive and there's no guarantee we can close them in this year. So we're just being, I guess, conservative to a certain extent, but it's really just been our comfort levels with where the range is at the moment. We review the range and we review our guidance at least once a quarter, if not more frequently. And then as things develop, we'll update it.

Okay. Thank you. I appreciate that. And Trevor, I think I missed this little bit in the prepared remarks, but could you comment a little bit on the back half, I know it's not much in terms of how much is rolling, but could you comment a little bit on the back half leasing roll, what type of retention, maybe we should expect there. And then as we look out to 2016 and 2017, kind of how you feel about retention, and are there any big contemplated move-outs, potentially in either of those years and back half of the year?

Well, I would repeat that it's a relatively small number as a percentage, it's a wide variety of outcomes. And I don't think there's anything untoward directionally with respect to bad or good outcomes relative to what we've done in the past Dan. There's a lot that's obviously under negotiation in several different leases although and in the aggregate it's not a large number.

Okay. And then, any large known move-outs for 2016 or 2017?

Nothing, I mean, as I said, a broad range and nothing really sticks out. We do not have in 2016, the kind of lease roll that we have, that we had to consider a couple of years ago with Carrefour, which obviously been renewed, and that kind of event doesn't take place until 2018, when we have that coming up again.

Okay. And then, just kind of curious as you look at your multiple relatives from the other name, how do you feel about, you guys have been in the business for a long time, but there seems to be quite a discount based upon single-tenant office, and to may be a little bit of lesser extent industrial relative to retail. So I'm just kind of curious, if you think that there needs to be somewhat of a discount relative to single-tenant retail or do you think that as you look at some of your asset classes and how they performed over the long-haul, how do you feel about the risk rewards of being more levered to office versus retail?

That's a good question. And the portfolio composition is always going to be influx, although you're correct in pointing out that we do have a fair amount of office, I guess in the 30% plus range. We're quite happy with our office portfolio. I think that there are possible reasons why the multiples are -- would be lower. I think that there's a reason related perhaps to a misunderstanding of the true CapEx that's required, and perhaps a misunderstanding of how critical these assets are and therefore misunderstanding the high likelihood of lease renewal.

And so, there's a variety of factors that we attempt to work on, on a regular basis in investor outreach meetings. We tend to have pretty good end of lease outcomes with these properties. They are critical and not always that easy to move -- in fact more difficult in many ways than typical multi-tenant office spaces are to move for those tenants. So we continue to like the category, but we certainly understand that they are viewed differently by investors who prefer more retail. And I think that can be a cyclical thing and taste can change overtime. But that said, we're always -- one of the good things about being a diversified REIT is that we do not see ourselves, in fact, as an office net leased REIT. We have strong confidence in the retail sector as well much of our retail does happen to be in Europe where we believe the value premise is more compelling because there are significant barriers to entry in European retail as we've noted. Once you have something it's harder to build competition and there are significantly less retail square footage per capita in Europe and in the US. That said, we certainly do look at big retail portfolios all the time and simply haven't been able to get there on price and but, we believe that with continued supply of opportunities like that from corporate users, corporate owners, et cetera, we may begin to expand our retail presence as well, just we're waiting for the right price.

Okay. And then as it pertains to the first Carey Watermark fund, how should we think about what your plans are there, the hotel REIT sector is down about 9% this year versus flat for the overall REIT index and some folks are getting somewhat nervous about the lodging cycle even though we haven't really seen too much of a decline in fundamentals. We're just kind of curious if -- how you time a potential exit from the first fund if it's even contemplated, the lodging is very, very cyclical relative to the net lease business, so just kind of hoping for some commentary on the plans for the first Carey Watermark fund?

Sure. Well, the board of CWI 1 is happy with the progress that we've made to date in investing in the capital that was raised. We have good assets, we have evolved within that portfolio from more select service in the early stages to full service in resort hotels that have higher RevPARs, which tend to be more highly valued by the public market, so we think we're positioning that portfolio for a very positive outcome when it's appropriate. When we went into that business, we recognized the cyclicality of the hotel industry and we recognized also that we were entering and this is some five, six years ago, entering into an attractive buying window and that eventually that would close. We do not believe that window has closed notwithstanding how the public markets have reacted to the share prices of publicly traded REIT.

In terms of the fundamentals of the business, it's quite strong in terms of RevPAR growth, limited supply in most markets, et cetera. So we still see good buying opportunities, however, we do believe that prior to the liquidation event of that fund, it's likely that we would see somewhat of a downturn in the market because that's just natural in the hotel business that you'll have -- that it will mirror the economic cycles of the economy that these hotels are in. And that's something that we've anticipated, the funds have conservative leverage, which is usually going to be the thing that hurts you when you enter into that down-cycle. And most of our hotels are market leaders within their sub-markets. So I think, we're very confident that notwithstanding in the next year or two, there may be a downturn in the hotel market itself that the fund values will ultimately be strong and that will continue to provide a growing income for our investors. Those investors do not focus on daily liquidity as you would with a public REIT. So I think we're pretty well covered in that regard. So the short answer to your question is that we're far away from a liquidity event where we would actually worry about public trading value of this fund.

Okay. Thank you. I appreciate that. And then just maybe lastly, I think with the merger between Kraft and Heinz, I read some speculation that most of the Kraft's employees out in the suburbs, I believe, you own an office property leased to them, were going to move potentially downtown. So I was just curious about your thoughts for that specific asset and what you�ve heard and is there anything that you're aware of?

Good question. I will let Jason field that one.

Okay. Hi, Dan. How are you? Yes, we've been monitoring that closely and have been in regular contact with Kraft. We're currently discussing a lease-termination payment with them, but it's too preliminary to really give any details. There's also a scenario in which Kraft markets the property for sub-lease instead. Either way, we're very comfortable with the situation, we still have seven and half years remaining on the lease with an investment-grade tenant. Kraft's current rent is about $7 per square foot triple net, which is a significant discount to market. So if we go to market, we think we can improve upon that. We also have a great building into which Kraft recently made a $25 million to $30 million investment and really completely renovated it into a modern office building with open floor plates. So we're very comfortable with the situation and we might even see some upside to our base case underwriting at the time we did the original deal.

Okay. Thank you. Appreciate it.

Thanks, Dan.

Nick Joseph, Citigroup.

Thanks. Going back to one of the previous questions on guidance. Could you breakdown the components driving the assumed back half deceleration or in other words, what is a good run rate to use from the second quarter?

I mean so our assumptions were that we -- I mean are you looking for the acquisition volumes or what exactly?

More probably stripping out the investment management structuring fees or anything else that you think led to an higher than what should be considered a run rate 2Q AFFO?

Right. So in my earlier comments, I noted how much -- what our key assumptions were, right with regard to what we expected, what we model, I guess, when we came up with a range, so it was about $2.5 billion of acquisitions for the managed REIT dispositions of $100 million to $200 million. We've done $25 million so far of dispositions for the first half of the year, right, of the $400 million to $600 million of acquisitions on our owned balance sheet, we've done about -- somewhere in that range -- within that range and we just don't -- like I said earlier, we don't expect -- the acquisitions on our owned balance sheet for the remainder of this year to generate much in terms of AFFO for this year, because we expect them to close, if they do, in the back half, in the fourth quarter of 2015.

And then something similar goes with the investment management business, except that over there, obviously our AFFO's benefits from the structuring revenue and I mean the same sort of economic factors apply, can we close it in 2015 or not, and if we can, I mean, will we get the AFFO.

Just to I supplement the answer there. There is a seasonality as you know to the acquisitions. And this was a very active second quarter, some of those could have slipped into the third quarter and then we would've had a more level performance, but they didn't. And that said, Europe does slowdown a lot in the summertime, and typically, third quarter is not a very active quarter for us in terms of acquisitions for the managed funds or for the balance sheet, and yet the fourth quarter is one of our more active quarters.

I think that we're trying to be conservative as was referenced earlier on the call in light of some of the headwinds with the Euro, obviously, we do have Euro exposure that's largely hedged, but not completely hedged and so we're also mindful of the volatility of the environment because of interest rate uncertainty, and therefore, cap rate uncertainty. And we're trying to be cautious and not just chase deals for the sake of building our balance sheet. We do believe that there could be cap rate adjustments at some point, and we want to be ready when that happens to buy the properties at the right price.

Thanks. And then just in terms of valuation, your net lease peers typically see a lot less quarterly earnings volatility, do you think that your quarterly volatility associated with the investment management business or the multiple applied to that business has the largest impact on your discount?

Yes. And I think also, there is as I just referenced, the uncertainty with respect to Europe. We believe strongly in the opportunity, obviously, as is demonstrated by our activity there and our long presence there, but we recognize that with the headline risks -- the headlines themselves over the past several months that that causes some trepidation on the part of some investors, so I believe that, that those too would have an impact on the multiple would have an impact on the multiple.

Thanks.

Thank you.

Chris Lucas, CapitalOne Securities.

Yes. Good morning, everyone. Trevor, Just a question on the transactions market and I think there was a comment about if rates rise, maybe there'd be some adjustment in cap rates, I guess what I would be starting to -- what I would wonder is if we're in a steady state that the two and a quarter 10-year and sort of rates stay flat where they are, do you see cap rates adjusting or do you think that the cap rate environment stays steady going forward?

It's a good question, Chris, hard to answer because there's the usual factors at play in the supply and demand for capital and opportunities, but I think there's also fresh sources of capital that are adding to the pressure on cap rate. So that it is our feeling that cap rates, sort of in the past quarter have leveled off somewhat and we're hearing more anecdotally about pick-ups in some deals and we ourselves are being very conservative and that's indicative of a trend, and others are going to be more conservative. But at the same time, there's quite a lot of dry powder raised in the private equity real estate world and single-tenant lease can be an attractive place to depart cash temporarily. And I do believe that that has affected some of the pressure on pricing, so that would be a countervailing trend that would affect the pace at which cap rates widen. And I think that's something that's likely to be there for several months.

Okay. So if I think about sort of guidance for the back half of the year, it's your flat to net negative between acquisitions and dispositions, given the environment, is that something that we should be thinking about for 2016 as well as we look at the transaction volume on balance sheet?

It's certainly something that we're looking at and that -- when we're ready to factor all that in -- and including our other lines of business and then also factoring in a different environment in Europe, that's something that we will factor in the next year's guidance. We're not prepared to really give specifics as to the actual impact of that.

Okay. And then I guess just between the two markets, the domestic market and the European market obviously, you've done pretty much everything in Europe so far this year. Is there much deal review that you're doing in the US or is it primarily the time being spent in Europe or has that not changes -- just the deals haven't come in the US because of pricing?

We have a fairly wide funnel in the US. And our teams are quite active in looking at deals. And I'd say that, in the past several months, we've seen an increase as well in larger portfolios, certainly the Lifetime deal was a high profile large deal that we did look at as well as other large portfolios that have been available to us. And we have spent quite a lot of time and have put bids in on most of those portfolios. So the answer is that we are actively looking in the United States, but we haven't found compelling investment opportunities.

Okay. And then the last question, sort of a detailed question on the lease termination fee income that you generated this quarter, is there an ABR that is associated with that?

There is. I don't have that off hand. And the loss of that ABR is factored into the guidance. Yes. I don't have the exact number. It's a good question.

Okay. I'll follow-up offline. Thank you.

Thank you, Chris.

(Operator Instructions) Sheila McGrath, Evercore.

Yes. Good morning. I'm sorry I missed a little bit of the Q&A, so I apologize if this was asked. Just on the European acquisitions, I was just wondering if this focus this year of course is because of pricing, but also if it's on -- has something to do strategically with your contemplation of spinning off, umm, some of the European assets, just what's the thought process on a potential European spin out?

Sure. We have not advanced our process and Katy, I think would agree, we haven't advanced to the point where we're making any acquisition decisions that are tied to potential strategic things that we would do in any of the platforms. So it's really more the first part of your question, those are just good, the risk adjusted returns, quality tenants, good locations and decent lease terms and they were compelling opportunities.

Okay. And then Trevor you have been pretty active on the self-storage acquisitions this year. I'm just wondering if this is a separate product that might be considered just like Carey Watermark for hotels. Is self-storage something in the future that could be a separate product for the investment management platform?

Yes. But it is different than hotels, because each average transaction size is so much smaller. And so, there's more of a risk if you have a separate fund devoted to self-storage that you'll raise capital too quickly to deploy it, and that can cause problems in terms of over-distribution et cetera. So that those -- that effort has worked well within the mixed diversified fund, the CPA fund, and continues to be a good source of deal flow for us. And in the future, it's possible that when those funds get a liquidity stage, we would have a portfolio that lends itself to a separate exit, that's for sure. We did have a fund, as you may recall, an institutional fund devoted to self-storage that liquidated a couple of years ago with a very good outcome.

So we are looking for ways to continually grow the self-storage business. We do think it's a highly fragmented market. We've developed a good core competency in that space with an internal team here, leveraging off of third-party managers who are quite good at what they do. And I think it's the business that has legs. I don't think it lends itself necessarily to a particular dedicated non-traded REIT at this time.

Okay. And on the BDC offering, it looks like the management fee structure, and I know you've highlighted this before, is quite different than the other products that you already have. I was just wondering, if you can explain the fee structure for the BDC, and then just a rationale for why it's different, just so we understand?

Sure. And I'll just note that there is a summary of the fees on a table in the supplemental, I think it's on Page 33. To the extent that I don't cover all of it, there's an advisory fee, which is a sliding scale based on average gross assets, so that 2% on average gross assets below $1 billion, it reduces to 1.875% between $1 billion and $2 billion and then 1.75% above $2 billion. There is an incentive fee, which is 20% of the net investment income above a hurdle rate of 7.5% and that's subject to a catch-up. The point I think -- the general point to make is that this fund is representative of a new generation of funds, not just in the fee structure, but also in the way that it's sold, so that we're attempting to craft funds that have lower commissions to the financial advisors, and that's obviously in anticipation of the FINRA regulations which has given us the opportunity to move towards this type of product. And also generally what it does for W. P. Carey as a manager of these funds is shifts the earnings that we derive from them towards a higher quality, a more predictable revenue stream away from the structuring revenues, which we've talked about on this call are volatile, is one word to use, lumpy is another to use, unpredictable is the third word to use. So that we're shifting our revenues more towards the predictable ongoing streams.

Okay. Thank you very much.

Thank you.

(Operator Instructions) Dan Donlan, Ladenburg Thalmann.

Just a quick question I guess for Katy and Katy, you had a pretty robust response to Paul's questions, but is the -- is Europe so big that you wouldn't be able to spin it off and externally advise it as the fees would be too great from that. Is it something you even looked at thus far? We're just kind of curious, can you still be a REIT and potentially spin that off and externally advise it which has been the structure that some of the other -- at least one REIT in your space has contemplated.

Yes. I mean, I think as we mentioned earlier, it's a bit early to sort of speculate about exactly what outcomes were we're thinking about. We're looking at everything and trying to look at all of our businesses, both operationally and strategically and make sure that we're well positioned for what we think the operating environment will look like over the next three to five years. So we do have a big European operation. I don't know the technical answer to the question you're asking about whether we could be a REIT. I assume that we could be, but I think it's a little early to speculate on exactly how that might look or if we would take that path.

Okay. Thank you. Appreciate the answer.

There are no further questions at this time. I'll turn the call back over to the presenters.

And that concludes our call for today. Thank you for joining us. You may now disconnect.

Thank you to all our participants. This concludes today's call. And you may now disconnect.