W. P. Carey Inc.
Q2 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Good morning, and welcome to the W.P. Carey Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Peter Sands, Director of Institutional Investor Relations. Please go ahead, sir.

[Peter Sands:]

Good morning, everyone, and thank you for joining us on this conference call to review our 2014 second quarter results. Joining us today are Trevor Bond, President and Chief Executive Officer; and Katy Rice, Chief Financial Officer. An online rebroadcast of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 90 days. I would also like to remind you 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 turn the call over to Trevor.

[Trevor P. Bond:]

Thanks, Peter, and good morning to everyone on the call. In a moment, Katy will discuss the specific details. But first I'll review some of the highlights, along with the investment climate and our outlook for the remainder of the year. Starting with some financial highlights. We had another strong quarter. This is also the first full quarter since completing our merger with CPA

[Catherine D. Rice:]

Great. Thank you, Trevor, and good morning, everyone. I'm going to briefly review our second quarter results and some key portfolio metrics, followed by a quick update on our balance sheet and capital structure, and then we'll open it up for questions. As you may have noticed, we've made some further enhancements to our supplemental disclosure this quarter. In particular, we've clearly laid out the components to help calculate net asset value, or NAV, as well as providing normalized pro rata cash net operating income, or NOI, for the first time. Pro rata cash NOI is normalized, primarily by adjusting it to exclude our share of cash NOI from properties disposed of during the quarter, and including a full quarter's worth of properties acquired during the quarter. We believe this measure is helpful to investors, engaging our net operating income from in-place properties at the end of the quarter. Turning to our second quarter financial results. As Trevor mentioned, for the 2014 second quarter, we reported AFFO of $1.21 per diluted share. This compares to AFFO of $1.31 per diluted share for the first quarter, which was positively impacted by a tax benefit received in connection with the payment of annual incentive comp in February. We discussed that on last quarter's call. Consequently, we review our second quarter AFFO of $1.21 as being more of a run rate or normalized rate, and it's incorporated into our revised full year 2014 AFFO guidance of between $4.62 and $4.82 per diluted share. This roughly 4% increase in our guidance range assumes that we structure between $1.9 billion and $2.6 billion of acquisitions for the full year, including $1.4 billion to $2 billion on behalf of the managed REITs. And as Trevor mentioned, we do not expect much impact from additional disposition activity. Turning to our owned real estate portfolio, which represented approximately 83% of second quarter total revenue, net of reimbursable cost. At the end of the second quarter, our owned real estate portfolio consisted of 686 net lease properties, with approximately 82 million square feet leased to 216 tenants and 4 operating properties. Approximately 2/3 of our annualized base rent is generated by properties located in the U.S, with the remaining 1/3 coming from our international investments, primarily in Western and Northern Europe. Our Investment Management business, which represented approximately 17% of second quarter total revenue, net of reimbursable costs, had another strong quarter. The elevated acquisition and fundraising levels Trevor discussed, resulted in similarly elevated structuring revenues and dealer manager fees. Turning to the balance sheet and capitalization. We continue to pay down mortgage debt during the second quarter and build our unencumbered pool of assets. As noted in our earnings release, we prepaid $85 million of nonrecourse mortgages during the second quarter, bringing total prepayments for the first half of the year to $202 million. In addition, we made scheduled mortgage principal payments of $45 million during the second quarter, bringing the first half total to $62 million. At June 30, our unencumbered portfolio of properties had total annualized base rent of approximately $184 million. This pool will continue to grow as we acquire assets and pay down mortgages, providing strong support for any future unsecured debt issuance. We continue to view our debt maturities over the next few years as very manageable, with approximately $197 million maturing this year, $144 million in 2015 and $267 million in 2016. By comparison, we have ample liquidity, totaling approximately $988 million, comprised of $773 million remaining on our revolver and $215 million in cash and cash equivalents on our balance sheet. At quarter end, the weighted average cost of our nonrecourse debt was 5.2%, and our overall weighted average cost of debt, including our senior unsecured notes and amounts outstanding under our credit facility, was 4.6%. At the end of the first quarter, our total equity market cap was approximately $6.4 billion, and we had an enterprise value of roughly $9.9 billion. Accordingly, at June 30, our pro rata net debt to enterprise value stood at 35.4%, total consolidated debt to gross assets was 44.6%, and our pro rata net debt to adjusted EBITDA was approximately 5x. All of what we view as very healthy levels. And with that, I'll turn it back to the operator for questions.

[Operator:]

[Operator Instructions] And our first question comes from Paul Adornato of BMO Capital Markets.

[Paul E. Adornato:]

Trevor, I appreciate the discussion of cap rates. I was wondering -- sorry, if I missed this, did that apply to dispositions as well as acquisitions?

[Trevor P. Bond:]

No, that was specifically in relation to our acquisition volume.

[Paul E. Adornato:]

Okay. So can you talk about cap rates or total return on some of the larger dispositions?

[Trevor P. Bond:]

Yes. With respect to the dispositioned cap rates, those are in the mid-7%s. [indiscernible] Yes, in the mid-7s. With respect to the total return, while it's an excellent question, I don't have that, those figures, in terms of the aggregate IRR that we would have earned on each of those investments.

[Paul E. Adornato:]

Could you characterize them as being good, mediocre or not good?

[Trevor P. Bond:]

Generally speaking, what we find is that by the time we're disposing of an asset, we've held onto it for quite some time and gotten a lot of current income from it over of many years, contractually rising rents due to inflation or fixed rent increases. And since 90% of the IRR comes from that portion of the investment and the back-end residual is a small part of the overall return, it's safe to say that most of our dispositions have very healthy IRRs. On a back-end residual [ph] basis.

[Paul E. Adornato:]

Okay. And you mentioned that you might be expanding your geography. Will you be staying in Europe or perhaps Asia?

[Trevor P. Bond:]

We will be continuing to expand our footprint in Europe. And we are looking -- we have deals in the pipeline, which, of course, have not closed and may not close. But we feel comfortable that we're learning a lot about new markets, including in New Zealand and Australia, and as well as other parts of Asia.

[Paul E. Adornato:]

And can you just talk about the infrastructure that you have in those places?

[Trevor P. Bond:]

Sure. We have an office in Shanghai, which we've had since 2005, which is staffed with both acquisition officers and asset managers, and their specific function areas. It's a small office, but for the past several years, we've been using it as a base to expand into Asia, non-China, because we've found that the China market doesn't really suit our requirements in terms of risk-adjusted return profile, et cetera. But it's been a relatively centrally located office in Shanghai, and the team has done a good job in unearthing transactions in other parts of Asia.

[Operator:]

And our next question comes from Daniel Donlan of Ladenburg Thalmann.

[Daniel P. Donlan:]

Just to echo a couple of Paul's comments. Much thanks for the ad disclosures. It's very, very helpful. So I really appreciate you guys putting that together. Just to go back to his question though, out on the disposition cap rates. I mean, Trevor -- well, first off, I would imagine are you quoting cash or GAAP, when you're quoting whether it's acquisition or just disposition cap rates?

[Trevor P. Bond:]

I'm quoting cash and I'm going to correct myself. The number is 7.7%.

[Daniel P. Donlan:]

On a...

[Trevor P. Bond:]

On the dispositions, yes, on the dispositions, Dan.

[Daniel P. Donlan:]

Okay, okay. So that's just the aggregate number.

[Trevor P. Bond:]

Yes.

[Daniel P. Donlan:]

Were there any -- so if that's the case, there probably wasn't too many vacancies then. You didn't sell any vacant assets probably?

[Trevor P. Bond:]

We did. We sold 2 vacant assets.

[Daniel P. Donlan:]

Okay. And then as far as the -- actually, just one more question. Did you guys -- and this is the first quarter, did you guys sell a hotel in Miami in the first quarter? I'm just kind of curious as to why -- what happened there? It seems to be an interesting asset for you guys to own in the portfolio. It's the Soho House.

[Trevor P. Bond:]

Yes. Soho House was an asset that we acquired in connection with our mergers, with our merger activities managed funds. And we did determine that it was a noncore asset and it's really, as much a club as it is, an operating hotel. And as such, we decided it was noncore and we've got attractive offer. So we did [indiscernible] that.

[Daniel P. Donlan:]

Okay, okay. As far as the weighted average lease term is concerned, it's a little bit lower than some of your peers. So we're just kind of -- are the self storage, do you include that in that number? And kind of how do you view your weighted average lease term on a going-forward basis? I mean, you guys have been doing this for a long time. So you've been more proactive, I think, with selling assets than some of the other peers. So just kind of curious, your thoughts there?

[Trevor P. Bond:]

It does not include the self storage and you're correct. It's below the 9 years and below some of our peers. It is one of our stated goals to increase that. And so that when we're doing our capital recycling program, that's an explicit goal of the program is to sell, among other things, the shorter-lease duration assets, and recycle the capital into longer-term leases, which will eventually, as we grow the balance sheet, bring that average up. And we hope to even accomplish that, with our continued activity through the balance of the year. So as that effort unfolds, the success will become apparent as we execute.

[Catherine D. Rice:]

Yes. And Dan, to add a couple of numbers to that, our current guidance, as I mentioned, incorporates a range of acquisition volume of 1.9 to 2.6. That's total. That's for the managed REITs, as well as the balance sheet. We said 4.2 to 2 for the managed funds, which implies $500 million to $600 million for the balance sheet. And that's up from our prior guidance range for the balance sheet of about $200 million. So I think we're well aware of the lease duration and are working on backfilling some of the capital recycling activities with new deals.

[Daniel P. Donlan:]

Okay. Yes, I mean, it's not bad. I mean, I'd rather have a higher quality assets with lower-lease terms than lower-quality assets with longer-lease terms. But I'm sure you would as well. And then, as far as the lease termination fee income and other income line item, it looks like the -- that only added, call it, $4.2 million to your AFFO. What is the difference between kind of what was recognized for GAAP purposes and then what you actually decided to take out for AFFO purposes. And also, what that related to?

[Catherine D. Rice:]

Yes. Lease termination fees are obviously the one-off nonrecurring situations, where we have a tenant that wants to vacate or terminate the lease early and will pay us a lease termination fee. So I wouldn't -- we don't bake that into our guidance or unless we have them well in hand, we really don't forecast a lot of those.

[Trevor P. Bond:]

Also, I'll say that in particular this quarter, there was a high level of that because it was part of a structured transaction, where we worked out a deal with one of our tenants with Tower. And as part of the consideration, we received a large fee that we internally viewed as really revenues in lieu of sale proceeds. So that we sort of mixed those together from a management standpoint.

[Catherine D. Rice:]

Yes. The vast bulk of the -- what you're seeing on the income statement is from that one transaction.

[Daniel P. Donlan:]

Right. And I'm sorry, what was that transaction? That's what I was asking about? I know [indiscernible]

[Trevor P. Bond:]

The Tower transaction.

[Daniel P. Donlan:]

Okay. All right. And then, so what is the $4.2 million that is part of the AFFO, because it you didn't -- you obviously, took a lot out, because it is a one-time-ish. What is that exactly? Was that all lease term termination fees? Or is there some other stuff running through that?

[Catherine D. Rice:]

It's primarily lease termination fees.

[Daniel P. Donlan:]

Okay, all right. And then, and lastly, as it pertains to Carey Financial, any update in terms of new funds potentially being looked at or raised? Any clarity there would be helpful.

[Trevor P. Bond:]

Well, we currently feel, as I said on our last call, and still that they did feel that we have ample capital available from our existing funds that are under management. And the -- ample capital to deploy into the opportunities that we're seeing. And also at the same time, we're continuously evaluating new product ideas. There is one filed for another hotel fund, which is not effective. And so I really -- I can't talk much about it. But we're looking at other potential funds as well. Nothing more to announce on that, except that as I said before, just to reiterate that we do believe that our investment management platform is somewhat underutilized, and then somewhat undervalued as well and we intend to take better advantage of that over the next year or so.

[Operator:]

And our next question comes from Sheila McGrath of Evercore.

[Sheila McGrath:]

Trevor, I was wondering if you could talk about CPA

[Trevor P. Bond:]

Sure. So far, I don't have a specific percentage breakdown update, but given that it's the only game in town, it's become more focused upon by them. And we are, I think as I've mentioned in my remarks, in the mid-80% range in terms of the subscriptions. So as far as we're concerned, the pace is adequate and fine.

[Sheila McGrath:]

Okay. And then based on your investment activity and the pipeline you have, about how long do you think it will take until that fund is fully invested, CPA

[Trevor P. Bond:]

That's a good question. Very difficult to predict, given the cyclicality or seasonality of these investments.

[Catherine D. Rice:]

Well, probably 12 to 18 months.

[Trevor P. Bond:]

Yes, from now.

[Sheila McGrath:]

Okay. And then could you just clarify, in the release, you said something about reallocating $250 million from the stock repurchasing. I just wasn't clear on what that meant.

[Trevor P. Bond:]

Is that on CWI or on...

[Sheila McGrath:]

It says -- wait, what does it say? The board -- the reallocation of the IPO of up to $250 million of the shares that were initially allocated to sales of stock through the dividend reinvestment plan.

[Trevor P. Bond:]

Yes. That's just based on the demand for shares and then on the normal housekeeping concerns, which dictate that you don't want to run out of shares. That can be awkward at the tail end. And so the board did authorize us to tap into the dividend reinvestment programs, to the amount of 250 million shares -- $250 million worth of shares.

[Sheila McGrath:]

Oh, I see. I see. Okay. And then Katy, I was wondering if you could give some insight on a couple of things. G&A run rate in Q2, is that a pretty good run rate for us to think about for the balance of the year?

[Catherine D. Rice:]

Yes, Sheila. Probably in the second half of the year, the G&A run rate will go up slightly. We are in the process of implementing an ERP software that is -- for the expenses for that will start running through the income statement in the latter half of the year. And in addition, some of the R&D expenses related to the some of the new fund products that we're looking at will start hitting the income statement. Again, not material amounts, but I think the run rate or the G&A rate in Q2 was probably a little lower than we would expect in the second half.

[Sheila McGrath:]

Okay. And then similar question on structuring revenue. You always seem to beat my estimate on that end. And I'm just wondering what's reflected in the back end of the guidance? A similar level to the first half of the year, which was kind of elevated?

[Catherine D. Rice:]

Yes. I mean, look, obviously this is based on acquisition volumes. So we've given you a -- the breakdown of the acquisitions of managed REITs versus the balance sheet. And look, this is easier to do on an annualized basis than quarter-by-quarter, for sure. There's also a mix issue there, which is how much of the acquisition volume is associated with the CPAs, which have a higher structuring revenue fees than with CWI, which has a lower structuring fee. So there's a mix issue as well.

[Sheila McGrath:]

Okay, okay. And then Trevor, just on the Carrefour clarification that you said they extended till 2018. Do you consider that a good outcome? And just a little bit of color behind the decision process there, on their end.

[Trevor P. Bond:]

Yes. We think it's a fantastic outcome. Because it gives us a clear 4 years -- 4-year window of uninterrupted revenues and clearly, makes it easier for us to maneuver with respect to how we want to handle the portfolio. It also gives us more time to work with Carrefour to determine the optimal outcome for them. And I think that it's a big organization, and it has a wide variety of logistics issues and challenges, on top of all the other corporate challenges that it has. It just may take them a little while longer to sort of figure out what the ideal solution is for them.

[Sheila McGrath:]

And I would imagine, it probably gives you better execution on sale, to have a little bit longer lease term remaining?

[Trevor P. Bond:]

That's certainly true.

[Operator:]

[Operator Instructions] And our next question comes from Vineet Khanna of Capital One Securities.

[Vineet Khanna:]

Just could you guys give an update on fund raising, kind of where you are quarter to date? And what of the expected pace is for the remainder of the year?

[Trevor P. Bond:]

Sure. Well, we are 84%. Did I get the number right?

[Catherine D. Rice:]

83%, yes.

[Trevor P. Bond:]

CPA

[Vineet Khanna:]

Okay. All right. And then kind of turning to your acquisition guidance, specifically for the owned real estate portfolio. What are you thinking about the mix, by product type and geography for that?

[Trevor P. Bond:]

Well, it's an eclectic mix as per our usual approach. And it would be a mixture of office and industrial, as I mentioned before, a mixture of countries and that's -- I don't want to get into the details of the actual countries, yet. But strong, fiscally responsible new countries.

[Vineet Khanna:]

Okay. All right. And then finally, you have about $200 million left in debt maturing for the rest of this year. How you plan on repaying that?

[Catherine D. Rice:]

Yes. As mortgages come due, we are -- I don't it's actually that high, but it -- well, I went through that in my remarks, but obviously, we have about $800 million of capacity on our line of credit. So we can be using that line of credit to repay scheduled principal repayments.

[Vineet Khanna:]

Sure. And then, any thoughts on trimming that out longer-term this year?

[Catherine D. Rice:]

Yes. Look, as the pipeline turns from pipeline to closed deals and the line of credit balances go up, we obviously look to the capital markets. And we build the appropriate levels of long-term debt and equity and the cost associated with capital raising into our projections and guidance. So they're really baked into that guidance range.

[Vineet Khanna:]

Okay. And then just finally, along that, is there a certain level for the credit facility where we -- where you would start looking at the capital markets to trim something out?

[Catherine D. Rice:]

Yes. I think as the credit facility gets into the $500 million to $700 million range, obviously, you want to have enough dry powder to continue to execute the business. But yet you want to also execute effective capital markets transactions. So slightly larger deals in the bond market, et cetera. And I think, we've mentioned it before, but given all of our activities in Europe and the favorable financing climate there, we would probably expect our next bond deal to be executed in the European markets.

[Operator:]

And next we have a follow-up question from Daniel Donlan of Ladenburg Thalmann.

[Daniel P. Donlan:]

Just real quick on the acquisitions. Kind of given the guidance raise that you had and kind of what you've done thus far, it would seem to me that your modeling that the bulk of this -- the bulk of the acquisitions come in the fourth quarter. Or is that correct? Or how should we think about timing, kind of the towards the end of the -- I mean, for the back half of the year.

[Catherine D. Rice:]

Yes. Timing, obviously, is a little tricky. As there always is, there tends to be a little bit of a push at year end for transactions to close. But the pipeline, it's pretty robust. And so -- and it's about 3 quarters is identified deals that are in our projections. So obviously, some of them could slip into 2015. But I think the -- I don't think it's radical, but I think there's a little more activity in the fourth quarter.

[Trevor P. Bond:]

That said, I think that we won't -- we'll have some in the third quarter as well, Dan.

[Operator:]

And this concludes our question-and-answer session, and will also conclude today's conference. We thank you for attending today's presentation. You may now disconnect your lines.