W. P. Carey Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Hello and welcome to W. P. Carey's Second Quarter 2018 Earnings Conference Call. My name is Kevin, and I will be your operator 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 prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today’s program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

[Peter Sands:]

Good morning, everyone, and thank you for joining us today for our 2018 second quarter earnings call. I would 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. An online replay 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 one year and where you can also find copies of our investor presentations. And with that, I will pass the call over to our Chief Executive Officer, Jason Fox.

[Jason Fox:]

Thank you, Peter, and good morning, everyone. I am joined this morning by our CFO, Toni Sanzone who will review our second quarter results, portfolio metrics, balance sheet and guidance, as well as by our President, John Park; and our Head of Asset Management, Brooks Gordon, who are also available to answer questions. The most significant event of the second quarter was undoubtedly the announcement we made in June of our proposed acquisition of CPA

[Toni Sanzone:]

Thanks, Jason, and good morning, everyone. This morning we announced AFFO per diluted share of $1.32 for the 2018 second quarter, with 82% or $1.08 per diluted share generated by our real estate segment. Net real estate revenues excluding reimbursable costs totaled $168 million for the second quarter, essentially in line with the prior year period. They do not yet reflect the impact of the larger portfolio acquisitions we closed either at or subsequent to quarter end. Investment volume for the second quarter totaled $289 million which included the acquisitions that Jason discussed, as well as the completion of three capital investment projects totaling $17 million. The Danish logistics portfolio acquisition which generates ABR of nearly $13 million closed just before the end of the quarter and therefore did not have a meaningful impact on our second quarter results. The three investments we closed after quarter end totaling $210 million bringing our total deal volume year-to-date to $605 million. These third quarter transactions add almost $15 million of ABR to our portfolio increasing total ABR to $708 million. Investment opportunities from within our existing portfolio continue to be a key element of our proactive management strategy while also allowing us to deploy capital for attractive incremental yields. During the second quarter, we committed to fund one new capital investment project and we completed three. At the end of June, our commitment to fund built-to-suit investments, as well as expansions, renovation and redevelopment projects totaled $145 million. Of this amount, we currently expect projects totaling $70 million to be completed in the second half of this year and therefore will be included in our 2018 investment volume. Based on the investments we've closed year-to-date, as well as our current pipeline, we have raised the lower end of the range for our guidance assumption on investment volume for the full year, resulting in a revised range of $700 million to $1 billion. We are currently on track with our disposition plans for the year, having closed $164 million during the first six months. Included in this total is the asset swap transaction that Jason discussed and the sale of one of our two remaining operating hotels for $39 million. We continue to actively manage our portfolio and are maintaining our assumption for dispositions of between $300 million and $500 million for the full year. Turning now to our portfolio. At quarter end, our net leased portfolio consisted of 878 properties covering 87 million square feet net leased to 208 tenants. The portfolio maintained close to full occupancy at 99.6%. The weighted average lease term of the portfolio was extended to ten years, an increase of almost half a year from where it was a year ago. Thanks to our rent, it was 1.6% higher year-over-year on a constant currency basis. We continue to focus on achieving lease terms that include rent escalators tied to CPI as was the case with the two large portfolio deals we recently closed ensuring our portfolio remains well positioned for inflation and continued internal growth. Since the end of 2016, same-store growth tied to CPI has more than doubled from 0.7% to 1.6%, reflecting the pickup in inflation, particularly in the U.S. At the end of the second quarter, 68% of ABR came from leases with rent bumps tied to inflation and 27% represent leases with fixed rent increases with a weighted average increase of about 2% per year. I’ll move briefly to our Investment Management segment. We continue to expect one-time structuring revenues to decline on a year-over-year basis given that new investments are now limited to capital recycling within our existing funds. With better visibility at this point in the year, for 2018, we currently expect to earn structuring revenue of between $15 million and $20 million based upon opportunistic recycling within our funds and that redeployment of the capital now expected to occur in the back half of this year. Moving to expenses. During the second quarter, G&A expenses were $16 million, bringing the total for the first half of the year to $35 million. This is in line with our full year estimated range of between $65 million and $70 million which is embedded in our AFFO guidance. Interest expense year-to-date declined by almost $5 million or 6% compared to 2017 impart reflecting a decline in our weighted average cost of debt through the replacement of higher rate mortgage debt with lower rate unsecured debt over the last year. On a year-to-date basis, we have reduced our weighted average interest rate from 3.7% to 3.5%. Turning to our capitalization and balance sheet. Our balance sheet remains very well positioned in terms of liquidity, leverage and a well laddered series of maturities. At the end of the quarter, we had $1.2 billion of can in available capacity on our revolver and only $82 million of debt maturing through the end of 2019. We currently expect proceeds from our disposition pipeline will fund acquisitions for the remainder of this year, allowing us to remain opportunistic on the capital market trend. We have limited exposure to interest rate volatility as our floating rate debt is predominately limited to the outstanding balance on our credit facility which stood at $397 million at the end of the second quarter. Moving on to guidance. We announced this morning that we have narrowed our AFFO guidance for the year to between $5.40 and $5.50 per diluted share by raising the lower end of the range. This positive adjustment takes into account our completed acquisition volume year-to-date, as well as the visibility we currently have into our investment management structuring revenue. As Jason noted, we are focused on closing the acquisition of CPA

[Operator:]

[Operator Instructions] Our first question is coming from Nick Joseph from Citigroup. Your line is now live.

[Nick Joseph:]

Thanks. Just want to better understand guidance. So it sounds like the structuring revenues increased by about seven tenths per share, versus your previous expectations and then you increased investment spend guidance which should also be a positive, I guess, depending on timing. So what are the offsets given on the increased overall AFFO guidance?

[Toni Sanzone:]

I think that the timing does play a factor in terms of when we expect acquisitions and dispositions to close. You are seeing the impact of the acquisitions that are hitting the first half of this year. But in terms of timing for the back half of the year, that still remains to be determined and as far as when the deals in our current pipeline would close. So I think that does play a role in it. In terms of the structuring revenue that does contribute partially to that increase which is why we lower – raised the lower end.

[Nick Joseph:]

Okay, so, I guess, relative to where guidance was with the 1Q with the acquisitions are coming later than expected, which is offsetting the $0.07 benefit from additional structuring revenues which weren’t previously in guidance.

[Toni Sanzone:]

That’s right.

[Nick Joseph:]

Okay, and then just on re-leasing square foot, it looks like they are down 13% in the quarter driven by industrial. So just wondering if you can give some more color on what happened with those three industrial assets?

[Brooks Gordon:]

Sure, this is Brooks. I can give you some color on that. It’s actually one tenant and it’s three properties. It’s a very niche situation, it’s three auto manufacturing plants representing prior rent of $6.9 million of ABR. It’s important to note about half of that rent was shifted from properties that we’ve sold in a restructuring in 2009. For the core rent where we allocated to these three properties, we actually recovered 100% of that rent and the result was we extended the lease about 14 years. And it's important to note that for the entire deal, the ROI from acquisition we talked today has been about 18.5%. It’s a very unusual situation, but now that’s fully stabilized.

[Nick Joseph:]

Thanks. And then just finally on the asset swap, is there any change to the rents that you’ll collect between the assets that you took back versus the assets that you gave up?

[Brooks Gordon:]

This is Brooks again. Yes, it’s a slight increase that brings that 600k in total increase in ABR.

[Nick Joseph:]

Thanks.

[Operator:]

[Operator Instructions] Our next question is coming from Joshua Dennerlein from Bank of America Merrill Lynch. Your line is now live.

[Joshua Dennerlein:]

Hey, good morning guys.

[Jason Fox:]

Good morning, Josh. Good morning.

[Joshua Dennerlein:]

I was curious on CPA

[Jason Fox:]

Yes, Josh this is Jason. Yes, we do own a stake in the operating company as well as, I should say, the CPA

[Joshua Dennerlein:]

Great. Thanks, Jason. And then, I guess, speaking with the topic of CPA

[Jason Fox:]

Yes, you are right. The bulk of the non-net leased assets within CPA

[Joshua Dennerlein:]

Great. Thank you.

[Jason Fox:]

Welcome.

[Operator:]

[Operator Instructions] Our next question today is coming from Sheila McGrath from Evercore. Your line is now live.

[Sheila McGrath:]

Yes, good morning.

[Jason Fox:]

Good morning, Sheila.

[Sheila McGrath:]

Good morning, Jason. Any reason why most of the transactions are in Europe is priced – so far this year’s pricing there more appealing or is it just driven by the opportunities?

[Jason Fox:]

Yes, I mean, it’s a little bit more the latter. But I think it does underscore the benefits of our diversified model. At different points in the cycle or different points in time we can choose where to allocate our capital to those best risk return opportunities. And while cap rates, in Europe have experienced meaningful compression especially given the borrowing costs, still while rising slightly or still at the lows, we are still going to generate great spreads there. And mainly, these are transactions that were unique to us. One it was a purely off-market logistics deal where we had relationships with the fund that had merged with a life insurance company and had a strategy to divest some of their – the funds that they manage and the other one was part of a sale-leaseback as part of an M&A activity. So, kind of a typical type of deal for us. But, I think it’s important to note, we are seeing and realizing great spreads in Europe. Those two deals were in the high sixes, low sevens and if you recall, our nine year fixed-rate Eurobond that we completed back in February was a two and an eighth percent. So, pretty substantial spreads and I think for that reason, we are seeing some pretty attractive opportunities in Europe.

[Sheila McGrath:]

And just with these larger portfolio transactions, if you can just remind us on the underwriting do you look at the rent coverage, replacement cost or just tell us about what you key in on these bigger portfolio transactions?

[Jason Fox:]

Yes, certainly, I mean, this is consistent with how we look at every one of our transactions and frankly how we look at our portfolio and when we consider dispositions. These two deals were long-term leases. I think one was about 18 years, the other one had about a weighted average of 15 years. The credit underwriting is certainly important if we can get comfort which we did on the creditworthiness of these tenants then, we’ll lock in a good revenue stream with high visibility. So, credit underwriting was important. We have great access to senior management understand the business that they are in, both of these companies are market leaders. I think one of them which has around 50% market share that Danske Freight in the business-to-business freight industry within Denmark. Intergamma has about 40% market share for the do-it-yourself market in the Netherlands, number one market share. So certainly credit was a key part of this. But we also like the real estate, I mean with their logistics portfolio, these are Class A logistics assets. We have several large hubs, but we also have smaller facilities that are closer into some of the population centers that serve more as last mile facilities. So, it’s really a combination of everything. And then, finally, given the size of these portfolios relative to the operations of the company, we have critical real estate. So it really checks in both of these cases all the boxes for us.

[Sheila McGrath:]

Okay and one final question. On the pipeline, both if you could comment, if it’s more U.S. versus Europe, just how the acquisition pipeline is looking? And then the second part of that question is, also on the funds, CPA

[Jason Fox:]

Right, sure. So need to talk pipeline first. Yes, the substantial amount of the deals that were closed to-date, those were in Europe. But our pipeline is still active. I would say, at the beginning of the year, that pipeline was more heavily weighted to Europe of course, because of those deals. Now it’s a bit more imbalance between the U.S. and Europe. But of course opportunities come along as you can point some time and that could change. I think our pipeline, I think I'll note that it's still our typical pipeline. We are focused on sale-leasebacks and build-to-suits where we can control deal structure and where we feel we can generate higher than market yields. So, I think you’ll see more of that as well. In terms of – John, do you want to talk CPA

[John Park:]

Sure.

[Jason Fox:]

You have the funds I should say.

[John Park:]

Good morning, Sheila. This is John.

[Sheila McGrath:]

Good morning, John.

[John Park:]

I think first of all, is that going to point out that post CPA

[Sheila McGrath:]

Okay. Thank you.

[Operator:]

Thank you. Our next question today is coming from John Massocca from Ladenburg Thalmann. Your line is now live.

[John Massocca:]

Good morning everyone.

[Jason Fox:]

Good morning, John.

[Brooks Gordon:]

Good morning, John.

[John Massocca:]

Still it's a non-asset you own at this time, but I was wondering how the credit agreement with Agrokor is going to affect CPA

[Brooks Gordon:]

Hi, John, this is Brooks. So, Agrokor is a tenant within CPA

[John Massocca:]

And has the July credit agreement settlement changed your view on at all or there is – is that kind of same as or at the time of the merger announcement?

[Brooks Gordon:]

Still the same and that’s very much a work in progress as the restructuring kind of completes. It’s a large company and a big restructuring, but they are making progress and we are very closely monitoring it.

[John Massocca:]

Okay and then another sort of CPA

[Brooks Gordon:]

So, that’s we are working on those presently. It’s important to note that the W. P. Carey owns a very high quality location warehouse leased to Bon-Ton in Allentown. So that's a Class A premier market location where we see a lot of opportunity to increase rent. On the CPA

[John Massocca:]

Understood. And then, one more kind of detailed question, other gains were up fairly sizably quarter-over-quarter. I know it’s a line item that sends out a lot of variable movement, but what was driving that this quarter?

[Toni Sanzone:]

The most significant driver there was the movement in the foreign currency rate and that’s unrealized marks on various assets in the portfolio that went through that line item.

[John Massocca:]

Understood. That’s it for me. Thank you guys very much.

[Jason Fox:]

Thanks, John.

[Brooks Gordon:]

Thank you, John.

[Operator:]

Thank you. At this time, I am not showing any further questions. I’ll now turn the call back over to Mr. Sands.

[Peter Sands:]

Thanks everyone for your interest in W. P. Carey. For any additional questions, please feel free to call Investor Relations directly on 212-492-1110. That concludes today’s call. You may now disconnect.