W. P. Carey Inc.
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Ladies and gentlemen, hello and welcome to WP Carey's Third Quarter 2018 Earnings Conference Call. My name is Adam, and I will be your operator for today. All lines have been placed on mute to prevent any background noise. Please note that today’s program 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 would now like to 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 third 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 hand over to our Chief Executive Officer, Jason Fox.

[Jason Fox:]

Thank you, Peter, and good morning, everyone. This morning I’m joined by our CFO, Toni Sanzone; our President, John Park; and our Head of Asset Management, Brooks Gordon. Before covering our usual earnings call topics, I want to start briefly with the announcement we made on Wednesday of this week, that we have closed our merger with CPA

[Toni Sanzone:]

Thank you, Jason. I will touch on our results for the quarter followed by some highlights from our portfolio and balance sheet. Lastly, I will give an update on how we are tracking towards full-year guidance, after taking into account the impact of closing CPA

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Manny Korchman from Citigroup. Your line is now live.

[Emmanuel Korchman:]

Just thinking about your acquisitions target for the year, if I'm factoring the $73 million of capital projects you are expected to deliver but 4Q volume seem pretty light compared to what you have been doing, am I thinking about that incorrectly?

[Toni Sanzone:]

I think we have historically done transactions that are chunkier in nature and we certainly closed some big portfolios that earlier in the year. I think based on where we are at this point in the year and what we expect to close towards the end of this year, I think any volume we do in the fourth quarter would have the significant impact on this year's guidance, but it's certainly possible the transactions at this point would be more skewed towards the first quarter.

[Emmanuel Korchman:]

And on the with that same point, I know it's early and you haven't given guidance yet, but how would you sort of help us think about transaction volumes going into 2019.

[Toni Sanzone:]

Yes, I think that it's a fair point. We are not giving 2019 guidance at this point time, as if we evaluate our opportunities set in a number way that Jason mentioned and really look at our growth there. But in terms of volume specific to the investments that we expect on balance sheet for 2019, I don't think we have a number or range to give at this point in time.

[Emmanuel Korchman:]

And the last one from me, given your comments frothy acquisition markets or transaction markets, does the merger provides you opportunities for outsize dispositions compared to where you have been you sort kind of mentioned about storage, but anything else there that you would think about that leads to bigger disposition volumes.

[Brooks Gordon:]

This is Brooks, regarding dispositions, I think it’s important to note that our strategy remains consistent. It’s too early to provide specifics, but typically we are looking to improve the portfolio, it’s a combination of harvesting value opportunistically and risk management. CPA

[Emmanuel Korchman:]

Thanks everyone.

[Operator:]

Our next question comes from the line of R.J. Milligan from Robert W. Baird. You are now live.

[William Harman:]

This is Will Harman on for R.J.. You guys mentioned that pricing still remains pretty aggressive for acquisitions. Just given the optionality to invest in different real estate sectors, which sectors are you seeing more attractive opportunities right now? And which sectors are you seeing deals that just aren’t penciling for you?

[Jason Fox:]

Yes. It’s a good question. It’s one of the benefits of diversification who we can look at a broad range of opportunities and choose to allocate capital to either the markets or the asset types that provide us best risk return at that particular time. In a market that is competitive like we are seeing right now and that is both in the U.S. and Europe. We are still focused on sale leasebacks and built-to-suits and structural transactions each of which provide us opportunities to really control the structure of the deal, which in tight markets tend to loosen generally, and we can maintain our focus on the restructures. It also allows us to get higher than market yields when there is a more complex components to deal front, it doesn’t mean the deal is anymore complex once its closed. In terms of geographies, for the year we have been most skewed towards Europe given some larger portfolio transactions that we have done, including Danske Freight and Intergamma. I think going forward it will probably be a little bit more evenly balanced between the two. And then in terms of asset types, especially when we are focusing on sale leasebacks, really the opportunities tend to be with companies whose real estate makes up relatively large percentage of their total enterprise value that tend to be companies in the manufacturing logistics space. So therefore, we tend to see more sale leasebacks in the industrial asset class and that is consistent with our portfolio I mean we are almost half of our total ABR is generated from industrial assets and I think that should continue to see some overweight towards that asset class.

[William Harman:]

That is it’s for us. Thanks guys.

[Operator:]

Our next question comes from the line of Todd Stender from Wells Fargo. You are now live.

[Todd Stender:]

Thanks. The usage split the net lease assets between CPA funds and on balance sheet several different metrics winning to that whether it was yield or lease term, but now that everything at least in net lease will be on balance sheet. Will you buy properties that once only qualified for the CPA funds on balance sheet, just any color on your combined acquisition strategy will be helpful? Thanks.

[Jason Fox:]

No, I mean our strategy won't change. Really in the past when we had raised CPA

[Todd Stender:]

Okay. Thank you. Can you give us the lease terms in cap rates maybe I missed the cap rates, but at least the lease terms on the warehouse in industrial you purchased in Q3?

[Jason Fox:]

In where I’m sorry?

[Todd Stender:]

The stud you acquired in Q3 Portugal, Netherlands, Wisconsin looks like the warehouse and industrial stuff?

[Jason Fox:]

Cap rates were in the high sixes, low sevens, we don’t talk specifically or give details on any specific deal. And then for year-to-date we have mentioned that our weighted average cap rate was right around 7% for all of our transactions, but for those specific deals it was kind of high sixes into the low sevens. Lease term on average for this year weighted average is around 20 years as well, the Sonae transaction that we did in Portugal recently was a little shorter, a little bit north of 10-years for high quality of logistics asset in a prime logistics park outside of Lisbon.

[Todd Stender:]

Alright, pretty long. So no short-term stuff the Netherlands, or the Wisconsin property.

[Jason Fox:]

That's correct. Those were all long-term. 10-years plus.

[Todd Stender:]

Thanks.

[Operator:]

Our next question comes from the line Sheila McGrath from Evercore ISI. You are now live.

[Sheila McGrath:]

Hey yes, good morning. CPA

[Jason Fox:]

Sure, hi Sheila. So yes, since our acquisition of CPA

[Sheila McGrath:]

And for the remaining funds Jason that W.P. Carey would be eligible if you hit certain hurdle rates for a back entry, is that correct?

[Jason Fox:]

That is correct. That is part of the fee structure, I think you can look in the supplemental, which outlines in detail the fee structure associated with each of those.

[Sheila McGrath:]

Okay, and then I apologize if you mentioned this already, I have to get on in progress, but the self storage assets that were part of CPA

[Brooks Gordon:]

Yes, you are right. Those are operating assets as oppose to the U-Haul assets that we have owned in W. P. Carey for a while. We are evaluating different options, we are comfortable holding those until we have the best option for us. And it’s a strong portfolio as you know, storage is an asset class, it’s an high demand very liquid. So lots of options and I would say stay tuned on what we end up doing there.

[Sheila McGrath:]

Okay, great. And then I guess maybe this is for you Toni. The new guidance implies about $1.32 for fourth quarter. That is still fourth quarters not a good run rate, because one month before the merger. So I was just wondering if factored into that implied guidance are additional structuring fees and following up on that we should assume structuring fees continue to go down relative to 2018 and 2019 is that correct?

[Toni Sanzone:]

That is right. I mean I will start with the restructuring revenue part of that. As we continue to manage the assets and those funds we expect there will be some of level of capital recycling. We have done just over 12 million year-to-date and we are holding our range at about 15 million to 20 million. Again transactions can certainly close on either side of the year given where we are in November. I think we would even expect that to come down further beyond this year, but we don’t really have the specific number to give at this point. In terms of overall run rate for the fourth quarter, you are right that there is only two months of activity reflected there. So CPA

[Sheila McGrath:]

Okay, that is super helpful. Just last question for me. I think Toni you did outlined previously the guidance for 2018 on G&A 65 to 70 and beyond the higher end. Can you remind us, there would be a little bit of pickup in G&A after acquiring CPA

[Toni Sanzone:]

Sure, I think our cash G&A expense increases on absolute dollar basis simply because we no longer collect the reimbursement from CPA

[Sheila McGrath:]

Okay. thank you.

[Operator:]

Thank you. Our next question comes from the line of John Massocca from Ladenburg Thalmann. You are now live.

[John Massocca:]

Good morning, as we look at that 1.1 billion run rate pro forma ABR you are giving in the presentation does that include the impact of kind of known tenant issues at CPA

[Brooks Gordon:]

This is Brooks. That is correct, that ABR number fully incorporates our view of the Agricore portfolio. Just as a reminder we fully underwrote a 50% share cut to contract rent when acquiring CPA

[John Massocca:]

And then looking on Page 33 those warehouse property that had a pretty decent releasing spread down in terms of rent and at least in that tenants improvement as well, you got a decent that more lease term, but maybe just some color on what situation is of those properties, those two warehouse properties.

[Brooks Gordon:]

Sure. So first to put it in the broader context for the quarter we did recover 101% of the rent versus prior rent. So I think it's important to put that into context, those two specific assets what we call tri-temp warehouses, so freezer, cooler and dry leased to Reinhart, which is a very large food distribution company. We don’t know the assets for 20 years, they have very attractive rent bumps throughout that period, and the approach we took with this renewal was to extend them by about 10-years and we are evaluating those for sales. So we think that created a lot of value and it’s a very good tenant and good properties, but those did require a roll down for that particular long-term lease expansion.

[John Massocca:]

Okay, that makes sense. And then if you kind of look at the debt capital markets going forward what do you think your capacity for additional kind of euro unsecured debt. It's kind of significant portion of your debt fact today maybe relative to what your kind of rents from Europe was but just kind of thinking as the additional capacity you have to be more euro denominated debt.

[Toni Sanzone:]

Yes, I think we obviously you are highlighting we executed a €500 million bond officering early in October with a six coupon up two in the quarter and its 7.5 term and that did help us accomplishing number of important objectives one of which you are referencing. We created capacity and flexibility and by reducing the borrowings on our revolver that we use to fund our recent acquisitions and we do risk our balance sheet by locking in a low fixed interest rates while we also increased the natural hedge on our euro denominated assets. In this issuance when it is closer to our optimal balance to euro debt and euro assets, but still needed some capacity to further levering Euros in the short-term if you get back to our three merger levels. In terms of specifics, we will monitor sort of the acquisition and disposition environment, but we do believe we have some room there.

[John Massocca:]

Understood. That is it from me. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Doug Christopher from DA Davidson. You are now live.

[Doug Christopher:]

Hi thank you for taking my question and congratulations on the really closing. Just mentioned in the early the debt, how should we think about debt to EBITDA, it would be coming down over the next eight quarters. Does it decline through a debt coming down or repayment or through EBITDA moving higher, how should we think about that? Thanks.

[Toni Sanzone:]

Yes, I think just overall I mean you will get just kind of an overview on the balance sheet in general while we view the transaction as deleveraging and hasn’t really changed our overall philosophy on how we manage the balance sheet. So with debt to growth assets coming down to about the mid-40 that remains in-line with leverage target and give this is a little bit of flexibility to work with. On net debt to EBITDA basis, the shift in our earnings mix it will bring this up to about six times after the merger. But as we continue to replace the management fees with rental revenues, we expect that come back down to under six times.

[Doug Christopher:]

Thank you so much.

[Operator:]

Thank you. Ladies and gentlemen, at this time we have no further questions in queue. I would now like to hand the call back over to Mr. Sands.

[Peter Sands:]

Thanks everybody for your interest in W. P. Carey. If you have additional questions please call Investor Relations directly on 212-492-1110. That concludes today's call. You may now disconnect.