W. P. Carey Inc.
Q4 2018 Earnings Call Transcript

Published: 22 Feb 2019

[Operator:]

Hello, and welcome to W. P. Carey's Fourth 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 take questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn this 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 fourth quarter earnings call. I'd like to remind everyone that some of the statements 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 materials. And with that, I will hand the call 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, who will discuss our earnings, guidance and balance sheet, also touching upon the portfolio. And I will focus on our recent transactions and the market environment, as well as making some high level comments about where we are as a company. We're also joined this morning by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are available to answer questions. For 2018, we were a net buyer at attractive spreads to our cost of capital. In addition to the $5.9 billion of assets we acquired in our merger with CPA

[Toni Sanzone:]

Thank you, Jason, and good morning, everyone. This morning we announced AFFO per share of $1.33 for the fourth quarter and $5.39 for the 2018 full year. This represents a 1.7% increase over our full year results for the prior year. Real estate AFFO per share for 2018 increased 3.8% to $4.39, reflecting the accretive impact of our merger with CPA

[Operator:]

[Operator Instructions] Our first question today is coming from Anthony Paolone from JPMorgan. Your line is now live.

[Anthony Paolone:]

My first question is, as it relates to just the deal pipeline as you look into 2019, if you can comment on whether you're seeing more M&A type transactions or one-offs, and also similarly on the transaction side, can you give us a sense as to how your acquisition volume in your guidance for 2019 compares to what historically you've done when you combine both the fund business and the rebalance sheet?

[Jason Fox:]

Let me start with the kind of pipeline and how we characterize it. I would say that it consists mostly of sale leasebacks and build-to-suits, some of which are associated with M&A activity, and we have seen within market increased M&A activity, I think projections from various sources would suggest that that's going to accelerate throughout the year. So, while some of the sale leasebacks in our portfolio are pipeline now are M&A related, I think you can expect more of that to happen throughout the year. In terms of geography, we're seeing a little bit more opportunity right now in the U.S. relative to years past. I think some of that could be attributed to a little bit of the slowdown in Europe, but I think it's more attributed to some of the growth dynamics that we're seeing in the U.S. right now, again, some of which is M&A activity, but more of it is along the lines of growth with the companies where the through expansions, wanting to access capital through sale-leasebacks and in build-to-suits in some cases as well. The last question about where our pipeline or where our guidance for that matter is relative to years past, especially when we've done some mergers, I'm not so certain it really correlates with the mergers at all, but our guidance and our pipeline for that matter are stronger than they have been over the last several years. I think you probably have to go back to maybe 2014 and 2015 years in which across the W.P. Carey Group, we did about $3.5 billion of net lease transactions during that two-year period.

[Anthony Paolone:]

And then in the guidance, is there much impact assumed from currency? And also, any thoughts on where our leverage lands sort of at the end of 2019?

[Toni Sanzone:]

Let me start with the currency. In terms of what we're projecting now, we're looking at the current rates basically flowing through our guidance projection. So with the euro at $1.13, expecting that to carry through, but I'll say that we are very well hedged and feel comfortable that any movement in the euro would have a very minimal impact our earnings at this point. I think you kind of translate it to a 10% movement in the euro wouldn't move earnings by more than 1%. And then just in terms of your question on leverage, I'd say, we were happy to be able to bring our leverage down with the ATM execution in the fourth quarter in earlier this year. Our target leverage levels continue to be in the mid 40% range on the on debt to gross assets and in the mid to high-5s on net debt to EBITDA. So I think again we're comfortable at those levels and we gave ourselves a little bit of room with the activity that we did on the ATM.

[Operator:]

Next question today is coming from Todd Stender from Wells Fargo. Your line is now live.

[Todd Stender:]

Just wanted to flush out these self-storage acquisition. Was this taking out a partner in the JV? I noticed the 90% non-controlling interest. If you could just provide more color on that.

[Jason Fox:]

Yes, sure. This actually was the second component of a portfolio of self-storage assets that CPA

[Todd Stender:]

So, are they out and you own it - wholly-own at this point?

[Jason Fox:]

No. They are still our JV partner. They still have a 10% interest.

[Todd Stender:]

Are they managing it as well?

[Jason Fox:]

They are.

[Todd Stender:]

Can you provide pricing on that and are these stabilized assets?

[Jason Fox:]

Brooks, you can color on that.

[Brooks Gordon:]

These are not stabilized assets, so they are in various stages of lease-up right now and we expect those to stabilize over the coming quarters.

[Todd Stender:]

Any yield expectations, any color you can provide around that?

[Brooks Gordon:]

Hard to say now. I mean, it really depends on how the lease-up goes, but it's going according to plan and we are continuing to focus on the lease up there.

[Jason Fox:]

And I think keeping it for round numbers in the 6s that's kind of our expectation on a stabilized cap rate basis.

[Todd Stender:]

And then just moving to dispositions guidance, could push up to $700 million. Where these coming from? Are these CPA

[Brooks Gordon:]

Sure, this is Brooks. Again the guidance is $500 million to $700 million dispositions that does include the New York Times at $250 million. So that's really the big chunk. In terms of deal type, about 50% of that at the low end is purchase option from New York Times, maybe 30% is what we would call non-core, some of which came over in CPA

[Operator:]

Our next question is coming from Manny Korchman from Citi. Your line is now live.

[Manny Korchman:]

Jason, maybe you could help us just think about yield expectations on both the total pipeline of acquisitions and dispositions, especially in light of you discussing sort of competitive markets globally.

[Jason Fox:]

Sure, I'll let Brooks touch on dispositions, but in terms of the acquisitions, I think in the U.S., especially with our lower cost to capital, we're targeting deals in the low 6s and into the 7s. I would say in Europe, it's in that range, perhaps 25 basis points lower given the lower borrowing costs, which still allow us to achieve meaningful spreads. I mean, if you look at us historically, I think, 2018, our weighted average cap rate was in and around 7% and if you look back to the last couple of years, it's probably fallen within very close to that range as well. So that's probably something that we would hope to expect this year and achieve, but I think it all depends on market conditions.

[Brooks Gordon:]

And on the disposition front, we expect the all-in execution to be roughly in line with where we are acquiring assets in that low 7s percent cap rate range. And I'll just add that on the discretionary CapEx component of the investment volume, we have seen and continue to expect to see a meaningful premium to marketed investments from a cap rate perspective.

[Manny Korchman:]

And then, is there - are there any other sort of pipeline deals similar to what you discussed with the storage assets that are built into either CPA

[Jason Fox:]

I mean, I wouldn't say that there related to the CPA

[Operator:]

Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.

[Chris Lucas:]

Just a couple of quick questions. Jason, on the - maybe just touching on the acquisition perspective for 2019, do you have a sense as to how much potentially could come from existing customers versus new customers?

[Jason Fox:]

I mean, our pipeline right now of active projects is a little under - I should say pipeline - our current active projects is a little under $250 million, I think about $160 million of that is expected to close this year and would be included in our acquisition volume for the year. Brooks, do you want to kind of talk more generally about what we're targeting and what you can expect from capital investment projects.

[Brooks Gordon:]

Sure. I mean, I think to emphasize the benefit - one of the benefits of bringing on CPA

[Chris Lucas:]

And then Jason, just maybe refresh my memory relates to how you guys are thinking about the self-storage portfolio from a core, non-core basis and what your views are in terms of the holding period for it.

[Jason Fox:]

Yes, sure. As we've talked about in the past, I mean, we are focused on being a pure play net lease REIT. So we're not long-term holders of operating properties like storage, but it is an asset class that we know well, the high quality portfolio. So, we're going to be patient with what we decide to do there. We are currently evaluating a number of options, but there's really nothing more to report at this point in time.

[Chris Lucas:]

And then, Toni, just on the debt maturity profile, there's certainly more mortgage debt today than pre-merger in terms of the overall pro rata share. There's also a fair amount of due over the next several years. But at rates look pretty reasonable in terms of a mark-to-market. I guess, the question I have is what sort of capacity do you have within the overall balance sheet from a refi perspective that would allow you to sort of refi that mortgage debt with the euro bonds, which are obviously significantly lower cost right now.

[Toni Sanzone:]

Yes. I mean, I think just starting with the mortgage debt in general, as you mentioned, it is maturing over a couple of years and even if we were to pay that down as they mature, we'd expect to bring our secured debt back in line with where it was pre-merger levels within a couple of years. In terms of opportunity to bring that forward, we're certainly always evaluating that. I think for us we evaluate that against kind of the cost to break that at any point in time. You know, but in terms of the overall leverage euro versus U.S., we did see the CPA

[Operator:]

Our next question today is coming from Greg McGinnis from Scotiabank. Your line is now live.

[Greg McGinnis:]

Brooks, just want to dig into your comment on the 30% dispositions focused on non-core assets a bit. Is the plan to hold onto the Eastern European assets from CPA

[Brooks Gordon:]

So, first of all, specifically it's my comment those assets are not baked into that number, that's a very small component of the whole - important to note that those are high-quality properties with long-term leases and good credit tenants. I think that's about 3% of total ABR. So while those are target markets from a new investment perspective, we're certainly comfortable holding those assets, and we do like the investments themselves. And over time, we can be opportunistic with those should we choose to exit those in the future, but those aren't in the 2019 disposition guidance.

[Greg McGinnis:]

And Toni, as the stock continues to trade near all time highs, how are you thinking about ATM usage in 2019? I think you spoke about this a bit, but I'm just trying to get a sense for your thoughts on leverage versus earnings position at this point. And also, are there any additional issuances baked in the guidance?

[Toni Sanzone:]

Yes, like we said, we were very happy with the equity we raised on our ATM since December. We were able to issue capital and pretty attractively priced relative to where we can invest in accretively. And we also had the benefit of increased trading volume in our shares, which we had hoped to achieve as a result of the CPA

[Greg McGinnis:]

Yes, so guidance is not assuming any additional issuances. Thank you. And Jason, just a final question here, could you just give a few details on the decline in occupancy since Q2. Was that related to a specific tenant, are you looking to sell those vacant properties or are they making good releasing opportunities?

[Jason Fox:]

I will let Brooks cover that.

[Brooks Gordon:]

The pickup in vacancy really relates to a portfolio of former Bon-Ton locations retail stores, which we do intend to sell. Important to note that one of those is very high quality located warehouse in Allentown, Pennsylvania. I mean, we're in the process of working to redevelop that into a much larger facility, which would be a Class-A warehouse facility and we're working through the permitting process now and we expect that to be a very good outcome.

[Operator:]

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

[John Massocca:]

Can you maybe provide some additional color on what drove the sale of the Australia assets leased to Inghams. It just - a little bit maybe curious, you originally purchased those about four years ago and I know you get kind of a decent return even when factoring in the CapEx dollars you spent there but is that the simplification of the story, or was it something where you felt like these assets were as valuable as ever going to get or just maybe some color there would be helpful.

[Brooks Gordon:]

Sure, this is Brooks. Again, we did exit the Inghams portfolio which completes our exit from Australia. So there's certainly a simplification aspect to the deal itself, but I will add it was a fantastic outcome. We realized on the order of 100 basis point - 250 basis points of cap rate compression over about a 4.5-year hold, so fantastic performing asset for us, it's just Australia is not a target market of ours, we don't have scale there and it's certainly much more difficult to manage from a far. But that said, it was an opportunistic exit and we're very satisfied with the deal itself.

[Jason Fox:]

And let me just add quickly, that deal was done - it was a sale-leaseback as part of an M&A transaction. So I think that's a good example of how we are able to generate significant yield premium through the structuring of sale leaseback, especially alongside private equity firms in M&A transactions and that 250 basis point compression I think some of that was on the upfront structuring, some of it was the markets there got stronger and I think this tenant also improved it's credit. I think that's all part of our thesis on how we invest and the result was a great return. I mean, a very high returning asset for four, five-year hold.

[John Massocca:]

Do you have a general IRR on the hold?

[Brooks Gordon:]

That's about 15% unlevered IRR over that 4.5-year hold period.

[John Massocca:]

And then looking at kind of Page 14, this up tenant improvements in operating expenses were non-maintenance capital expenditures to operating properties, where maybe little high this quarter versus some past quarters, especially when it seems like, not a lot of that was maybe tied to lease renewals and extensions done in the quarter. So maybe kind of what drove that?

[Brooks Gordon:]

So, there's a couple different buckets there. This is Brooks. On the non-discretionary CapEx piece, the TIs, about $4 million or thereabouts was the actual funding of tenant improvement allowance from a deal we actually entered into in 2017, it was just funded in this particular quarter and office long term new lease with a new tenant. On the non-maintenance front, there's another line item there which relates to one of our operating hotels that's going through a renovation and I believe that's about the $6.3 million number, and that's one of the assets, which we expect to sell this year, but we will complete the renovation as well. So that's really be the kind of noise in that number this quarter.

[John Massocca:]

And then lastly, given we're kind of getting to the point here where CWI 1 kind of laid out a target for potentially seeking a liquidity event. And I know you guys do lay out kind of the exact terms of your back-end fees on Page 43 to stop, but have you started kind of formulating maybe kind of a range of what the financial benefit of a potential sale is to W.P. Carey or is it just too early for that right now?

[Toni Sanzone:]

Well, I think at this point, as you mentioned this is a process that the Directors are running is one that they're focused on. We don't have a whole lot of involvement in the direction that that will take. So I think it's certainly premature at this point to kind of put any dollar value in terms of where we see that benefiting us and we've mentioned we wouldn't bring those assets on our balance sheet, given their lodging assets, but I'm not sure there's much more there that we can assume at this point.

[Operator:]

Our next question is coming from Sheila McGrath from Evercore. Your line is now live.

[Sheila McGrath:]

I guess I was just wondering if you could update us on if anything meaningful change in the assumptions on the asset management aspect in terms of winding down fees if anything changed there?

[Toni Sanzone:]

In terms of the investment management business?

[Sheila McGrath:]

Exactly.

[Toni Sanzone:]

No, at this point, Sheila, I think we somewhere in the supplemental on the back we lay out the remaining four funds that we have. Our assumption is that we'll continue to manage those through 2019. That's what's reflected in guidance. And as I mentioned, with the CPA

[Sheila McGrath:]

And then could you update us on if the tenant watch list, are there any meaningful tenants are, just update us on the current watch list that would be great.

[Brooks Gordon:]

Sure, this is Brooks. Credit quality is very good right now. In fact, improves overall with the acquisition of CPA

[Sheila McGrath:]

Is the 50% that - you closed on the asset at the 50% rental?

[Brooks Gordon:]

So that the $11.6 million that's flowing through ABR represents a 50% haircut and reserve to contract rent. And so we expect upside relative to that.

[Sheila McGrath:]

And then could you just remind us the exact closing date of the New York Times for modeling purpose?

[Brooks Gordon:]

December 1st.

[Sheila McGrath:]

And then capital expenditure outlook in terms of TI's for this year kind of versus historical - just.

[Brooks Gordon:]

I think the way to think about TIs, it is certainly very deal specific, it's hard to handicap an exact number because in certain deals, we will take a very capital-light approach and others we will choose to invest a lot more capital. So I hesitate to handicap that with a very specific number, but it will - on the maintenance front that will pick up somewhat with the addition of the operating properties, again which Jason mentioned in the long run, those aren't assets we will own as operating properties.

[Operator:]

[Operator Instructions] Our next question is coming from John Massocca from Ladenburg Thalmann. Please proceed with your follow-up.

[John Massocca:]

Just a quick follow-up. And I know it's one out of the top 10 here with the close the merger with CPA

[Brooks Gordon:]

We have a diversified portfolio of campuses with them. Again, as you noted, it is becoming a less meaningful part of our total and filling out the top 10 and we are presently working through restructuring leases with them kind of one by one. So nothing kind of material. We already did one of them and extended that and working on the others. So each campus is different, but we're making good progress working with them.

[Operator:]

At this time I'm not showing any further questions, I'll hand the call back to Mr. Sands.

[Peter Sands:]

Thank you everyone for your interest in W.P. Carey. If anyone has additional questions, please call Investor Relations directly on 212-492-1110. That concludes today's call . You may now disconnect.

[Operator:]

Thank you. That does conclude today's teleconference and webinar. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.