W. P. Carey Inc.
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good morning, everyone, and welcome to the W. P. Carey Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Peter Sands, Director of Institutional Investor Relations. Sir, please go ahead.

[Peter Sands:]

Good morning, everyone, and thank you for joining us on this conference call to review our 2014 third 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 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.

[Trevor P. Bond:]

Thanks, Peter. Good morning, everyone. I'll first review some of the quarter's highlights and then briefly discuss our investment outlook before turning the floor over to Katy Rice, who'll talk about our third quarter financial results in more detail. Starting with some financial highlights. For the 2014 third quarter, we generated adjusted funds from operations, or AFFO, of $114.4 million or $1.13 per diluted share, which compares to $1.21 for the second quarter. As we've cautioned on both the second quarter and the first quarter earnings calls, since the quadrupling each of those quarters would not have accurately represented an annual run rate, because AFFO can move around from quarter-to-quarter due to structuring revenues, which is why we provide annual guidance. To that point, for the 2014 full year, we've increased and slightly narrowed our AFFO guidance range to between $4.70 and $4.86 per diluted share. That's up from $4.62 to $4.82, which we provided back in August. And it's driven primarily by updated assumptions with respect to investment volume, which Katy will discuss along with our 2015 AFFO guidance as well. During the third quarter, we paid a dividend of $0.94 a share, up from $0.90 in the second quarter. This represented our 54th consecutive quarterly increase and raised our annualized dividend rates to $3.76 per share. We're pleased with both the investment activity and fundraising on behalf of our managed REITs during the third quarter. And in fact, for the year-to-date period, fundraising activity has outpaced all prior years in our history. Looking first at investment volume. Third quarter purchases totaled approximately $286 million. The majority of this amount, approximately $163 million was for W. P. Carey Inc.'s owned real estate portfolio. The balance, $123 million was structured on behalf of the managed REITs. Investment volume during the third quarter was primarily in Europe. In Western and Northern European countries, in particular, such as Norway, Scotland and Germany. Third quarter acquisitions, including both those for W. P. Carey's balance sheet and those for the managed REITs brought total investment volume for the first 9 months of the year to $1.3 billion, and we continue to have a strong acquisition pipeline for the remainder of 2014, which is reflected in our raised 2014 AFFO guidance and the 2015 figures as well. With respect to capital recycling, the majority of our disposition activity took place in the first half of the year. In the third quarter, we disposed of just one small parcel of land, bringing total gross proceeds for the first 9 months to approximately $299 million. Later, Katy will go into more detail about capital recycling activities for 2015, which have been factored into our guidance. Turning now to fundraising on behalf of our managed REITs. For the 2014 third quarter, gross offering proceeds totaled approximately $159 million, including approximately $103 million raised on behalf of Carey Watermark Investors, the non-traded hotel REIT that we manage. This was pursuant to CWI's $350 million follow-on offering, which, through the end of the third quarter was approximately 61% subscribed. Also included in the gross proceeds were $56 million raised of behalf of CPA

[Catherine D. Rice:]

Thanks, Trevor, and good morning to everyone on the call. First, I'll briefly review our third quarter results and AFFO guidance, followed by a brief discussion of our investment management business and an update on our balance sheet and capital structure, and then I'll turn it back to the operator for questions. Starting with our financial results and guidance. For the third quarter, we reported AFFO of $1.13 per diluted share, and this compares to AFFO of $1.21 per diluted share for the second quarter. Second quarter benefited from higher structuring revenues due to higher levels of investment activity on behalf of the managed REITs. Also, the third quarter includes summer vacation period, which tends to slow deal closings, particularly in Europe. As we've mentioned in the past, acquisitions in the managed REITs generate one-time structuring revenues and the timing of deal closings can generate some quarter-to-quarter AFFO of variability. Accordingly, the timing of deal closings around year end also affects our annual AFFO guidance for both 2014 and 2016. And for that reason, they have fairly wide ranges. Trevor touched on our updated 2014 AFFO guidance, but let me take you through some of the specifics as well as our guidance for 2015. For the full year 2014, we expect to generate AFFO of between $4.70 and $4.86 per diluted share, up from our previous guidance range of $4.62 to $4.82. This updated guidance range assumes total 2014 acquisition volume of approximately $2.9 billion to $3.2 billion, with approximately $1 billion of that going into the W. P. Carey owned real estate portfolio, and approximately $1.9 billion to $2.2 billion of acquisitions on behalf of the managed REITs. Not surprisingly, the primary driver of our increased guidance range is the increase in our assumptions for acquisition volume on behalf of the managed REITs, which is up $200 million to $500 million, reflecting the strength of our acquisition pipeline. Our guidance also includes the impact of our recent $282 million equity offering. Now looking ahead to 2015, in this morning's earnings release, we announced our 2015 full year AFFO guidance range of between $4.76 and $5.02 per diluted share, which assumes total acquisition volume of between $2.4 billion and $3.1 billion, with approximately $400 million to $600 million of that going into W. P. Carey's owned real estate portfolio, and approximately $2 billion to $2.5 billion of acquisitions on behalf of the managed REITs. It also assumes dispositions from our owned real estate portfolio of approximately $100 million to $200 million. Now let's switch gears and spend a few minutes on our Investment Management business. This year, we've met with many investors who are new to our story and not as familiar with the various ways we generate fees from our Investment Management business. So we thought it might be helpful to spend a few moments briefly reviewing them on the call. Today, the company's primary business is owning and managing a global portfolio of roughly $10 billion of triple net-leased properties. However, prior to becoming a REIT in 2012, our primary business was Investment Management. We began that business in 1979 and believe that we continue to have a strong franchise in the retail capital markets. Within our Investment Management business, we have a proprietary registered broker-dealer, which sells on a wholesale basis, investment vehicles that we structure to independent financial -- to the independent financial advisory community. To date, most of these vehicles have been publicly registered nontraded REITs, where W. P. Carey acts as the advisor. More recently, we filed an offering to form a business development company, or a BDC. Our duties and responsibilities as advisor to the managed REITs are outlined in advisory contracts that are governed by an independent Board of Directors and are subject to annual renewal. The advisory contracts entitle us to certain fees and revenue streams to compensate us for structuring, marketing and selling the investment vehicle; acquiring properties or structuring investments; negotiating debt or other financings; managing the properties; maintaining the accounting and financial records in compliance with SEC and public company standards; tax compliance; and shareholder communication. Revenues from our managed REITs represented approximately 10% of third quarter total revenue, net of reimbursable cost. Although that makes it a relatively small contributor to our overall profitability, we recognize that as a point of differentiation from many of our peers. And with this in mind, we've added a table on Page 30 of our supplemental that provides additional details on the revenues and the income we earn from the managed REITs. Essentially, they fall into 4 buckets

[Operator:]

[Operator Instructions] Our first question comes from Jon Woloshin from UBS.

[Jonathan Woloshin:]

Could you expand a little bit on this new business development company that you're forming. Is it a, is it going to be publicly traded; b, how much you think you'll raise; and c, what's the target markets for it?

[Trevor P. Bond:]

Thanks for the question, Jon. This is a business development company. It will be a new vertical on the Investment Management platform. And for those unfamiliar with the business, it is a middle market lender. The thinking was that as much of our business and much of our brand franchise in the investment management space is related to our credit underwriting capabilities, there was a natural evolution for us to enter that space. That is a joint venture with Guggenheim Partners, which would be responsible for the origination for the most part. They're deeply experienced in that sector. That said, we also -- it also occurred to us that many of our customers for sale-leaseback transactions worldwide are the same types of companies that are targets in the middle market lending business in many of them see sale-leaseback, in fact, as an alternative to middle market borrowing. And so there's some natural synergies there. It will have no impact on the REIT itself. Obviously, none of those assets would ever be brought unto W.P. Carey's balance sheet. It's just simply a way for us to continue to enhance the value of the Investment Management platform.

[Operator:]

[Operator Instructions] Our next question comes from Vineet Khanna from Capital One.

[Vineet Khanna:]

Just 2 quick ones for me. First, for 2015, can you give any color on sort of what fundraising expectations are there?

[Trevor P. Bond:]

Sure. Well, as I mentioned, I think what we'll be watching for a couple of factors. Generally, we do expect some slowing of sales in the fourth quarter and going into 2015. But I think that our expectation that we've vocalized on this call and in other venues is that, we're likely to end up with a larger share of a smaller market. We can't guarantee that. And I'd also like to reiterate that for us, the actual volume of sales, while it's a useful metric in terms of some parts of our business, is less relevant than the equilibrium we're maintaining between those dollars that we raised and the investment opportunities that we're seeing. And so from my point of view, I think we will see some decline in sales because of the factors that I mentioned in my remarks. But that -- because of the dry powder we currently have, and the money that we anticipate raising, we think we'll be in pretty good shape.

[Vineet Khanna:]

Sure. Sure. And then just turning to the balance sheet, any sort of major thoughts on potential bond issuance for the maturities that are coming out?

[Catherine D. Rice:]

Yes. Actually, we are contemplating accessing the capital markets over in Europe. And that will probably be our next capital markets transaction. It's not -- it is related somewhat to some of our maturing debt. But there's not a lot matured debt, but it really relates more to the on-balance sheet acquisition pipeline, which has grown as we mentioned, quite a bit over the past 6 months. And we have a pretty robust pipeline that we think will be closing in the next quarter or -- 1 to 3 quarters. So we're looking forward to accessing the capital markets in Europe, which are very favorable from an interest rate perspective.

[Vineet Khanna:]

Sure. And I guess, 2 questions off of that. What do you think spread-wise, for the euro issuances. And then could you kind of give a breakdown of what the acquisition pipeline is Europe versus U.S.?

[Catherine D. Rice:]

Sure. What we've been talking with bankers about is for sort of 8- to 10-year euro issuance, we're in the sort of 2.25% to 2.50% coupon range on the debt side. And with respect to the WPC pipeline, I would say it's -- in the past couple of quarters, it's been skewed more towards Europe. And much of the pipeline that we're anticipating over the coming quarters is European based. So that will match fairly nicely with the euro bond issuance when we do one.

[Operator:]

[Operator Instructions] Ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

[Trevor P. Bond:]

Thank you. That concludes our call today. Thank you for your interest in W.P. Carey.

[Operator:]

Ladies and gentlemen, that does conclude today's conference today. We do thank you for attending today's presentation. You may now disconnect your telephone lines.