W. P. Carey Inc. (WPC) Q4 2013 Earnings Report, Transcript and Summary

Good morning and welcome to the W. P. Carey, fourth quarter and year end 2013 financial results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Peter Sands, Director of Investor Relations. Please go ahead.

Good morning everyone and thank you for joining us on this conference call to review our fourth quarter and full year 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 second of our website at www.wpcarey.com, where it will be archived for 90 days. I would also like to inform 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. Now, I'll turn the call over to Trevor.

Thanks Peter and welcome to everyone on the line. Peter recently joined us as Director of Investor Relations to focus on our growing number of institutional shareholders. Accordingly he’s someone that I’m sure many of you will get to know and thanks everyone for joining us today. We had a strong 2013 and in a moment I’ll turn to the financial highlights. But in some respects last year already seems a long time ago in light of the recent closing of our merger with CPA®:16 at the beginning of February. In connection with that we issued approximately 30.7 million shares to shareholders of CPA®:16 and since the first trading date fallowing that issuance, roughly 36 million shares have traded. Our share price has increased modestly over that period and we welcome those of you who with us today who are new shareholders and thank you again for your support. Another important highlight that occurred subsequent to year-end was receiving investment grade ratings from both S&P, which rated us BBB and Moody’s, which rated us Baa2. Later Katy will discuss the implications of this, for our balance sheet strategy, but first I’ll briefly discuss some of the 2013 financial highlights and talk a little bit about the investment climate and how 2014 is shaping up. First, AFFO in 2013 was $4.22 per share, which represents an increase of about 12% over the 2012 AFFO of $3.76 per share. That breaks down into $3.78 from real-estate ownership and $0.44 per share from our investment management segment. Second, we raised our annualized dividend to $3.48 per share, which represented our 51 consecutive quarterly increase. Third, we achieved record investment volume of approximately $1.8 billion. Of this amount about $1.4 billion was on behalf of our managed REITs, the rest, about $347 million was…

Great. Thanks Trevor and good morning everyone. I’ll start by briefly reviewing our financial results, touch on some portfolio metrics and then finish up with an update on our balance sheet initiatives and our guidance. Before I get started I wanted to point out that in addition to filing our earnings release, supplemental and 10-K this morning, we filed an 8-K with pro-forma numbers on a combined company basis, assuming the CPA®:16 merger occurred on December 31, 2013. As you know the merger actually closed on January 31 of this year. Where appropriate, the portfolio information in the supplemental is also shown on a combined company basis. While it took a little longer for us to prepare the pro-forma numbers, we thought that given the magnitude of the change, analysts and investors would find them most helpful in thinking about how the firm looks goings forward. So now lets start with our earnings. For the fourth quarter AFFO was $78.1 million or a $1.12 per diluted share. On a per share basis AFFO increased $0.09 from the third quarter, due primarily to increased lease revenue and increased structuring revenue. These increases are partly offset by higher G&A expanse and lower other real-estate income in the fourth quarter. Lease revenues increased with the inclusion of two recent acquisitions; the U.K. government and TW Telecom Buildings. Increased structuring revenue was driven primarily by increased investment volume in CWI, our hotel managed REIT. As we’ve mentioned in the past, structuring revenues can vary from quarter-to-quarter, as they are dependant on acquisition volumes within the managed REITs. The impact of higher investment volume during the fourth quarter also shows up in G&A, which includes structuring bonuses. In addition, we typically have a true up for our quarterly bonus accrual based on company performance for…

(Operator Instructions) The first question comes from Sheila McGrath with Evercore. Please go ahead.

Yes, good morning. I had a question on the guidance. The guidance that you issued had most of the acquisitions skewed towards the managed REIT. What would cause that balance to shift more to acquisitions for your balance sheet?

I think that to the extent that we saw a more robust equity environment, you could see then certain transactions that currently W.P. Carey did not go after, some now being appropriate for us. But what your refereeing to Sheila is the mix and if the overall size of our acquisition volume rises, its likely that it cause W.P. Carey’s to go up more rather than the investment platform acquisition volume to go up.

Okay, and then, Trevor, most of the activity this year, the announcement says that the transactions are for CPA®:18, the one that you announced yesterday in AFFO. Does that mean, is CPA®:17 fully invested at this point?

That’s a good question. No. CPA®:17 does have capital, which is reserved to complete build-to-suit transactions. As you know we have an active build-to-suit business and so we need to factor that in and keep that reserved to complete projects that are already reserved for. Additionally when a deal comes up, we intend to have those two (inaudible) joint ventures occasionally, so there is still some dry powder left in CPA®:17.

Okay. So do you anticipate that CPA®:17 would be fully invested this year?

That is our expectation. We can’t guarantee that, but that is our expectation.

Hey Sheila, it’s Katy. The mix with respect to W.P. Carey and the managed funds, obviously last year we bought about $350 million, so we are trying to be conservative in our guidance number and I think that’s really reflective of what we’re seeing as a – certainly state side as a more competitive environment. That said, I mean we’re continuing to look at a lot of investment opportunities, both here and in Europe that we think would be good acquisition candidates for WPC, so it will just depend on how things sort of shake out, but we wanted to start out with a pretty conservative number.

Okay, that’s helpful. Also Katy maybe you could comment, you did receive the investment grade ratings recently. I just wondered what the plans are for tapping the unsecured markets and if you did what the pricing would look like, you know hypothetically if you did it now.

Yes, I mean I think that we’re obviously happy they have gotten ratings and gone through the process. That was a good outcome and so we’re well positioned to tap the markets when we see an opportunity. Well probably, one of my goals is to lengthen the tenure of our debt maturities, so probably start out with a 10 year transaction and I think currently pricing is sort of in the mid to high 4% range.

Okay, and last question, can you give us your thoughts Trevor on FINRAs recent pronouncement on non-traded REITs and suggested disclosures etcetera. Your thoughts on what they’ve put out there? Was it in line with your expectations and your thoughts on any impact to kind of raising capital in the non-traded REIT space?

Sure. As you know FINRA 1406 has been posted to the federal register in its common period. So we have been expecting this for some time and we support the proposed amendment and at this stage we’re working towards improving the particulars, so that it can be better implemented, but until we’re at the table along with others, with the regulators. Like I said, we support the amendment and we don’t think that it will have an overly adverse effect on our approach to fund raising as per my earlier comments today. I think that they will still – these are necessary improvements I think in transparency and in the end it will be a healthier environment for everyone.

Thank you very much.

The next question comes from Jon Woloshin with UBS. Please go ahead. Jon Woloshin – UBS: Good morning, a couple of questions. First, I noticed in the press release, in the fourth quarter it looked like it was about $0.12 of AFFO that was one time from the Hellweg restructuring, is that accurate?

Yes, we did restructure our Hellweg transaction. I can’t comment on exactly the $0.12, I don’t have the number off the top of my head, but yes it was a significant transaction. Jon Woloshin – UBS: I guess the reason I’m asking is, is it the right way to look at it from a growth rate from ’13 to ’14, exclude this. So really the growth rate would actually be higher on a run rate basis.

Yes, I mean this is a one time. Jon Woloshin – UBS: Right okay.

Yes, exactly. Jon Woloshin – UBS: I just wanted to make sure it was one time, okay. The second thing is so in the 8-K, the fully diluted share count of a little over $100 million, is this is a good run rate to use for ’14?

Yes, the current share count is just under $100 million, so sometimes when you look at the 10-K it will show the weighted average through the year, but post CPA®:16 merger we have just under 100 million shares outstanding. Jon Woloshin – UBS: Okay. And then you mentioned a minimum dividend of $2.53, is that what you said.

$3.52 Jon Woloshin – UBS: I’m sorry, $3.52. Is that going to be at an upcoming board meeting, that discussion will take place? You guys have a visible target for that.

Yes, I mean this was what we announced in relation to completing the CPA®:16 merger. It was the minimum dividend, sort of at the bottom end of the range. So obviously as the year progresses in 2014, we and the board will evaluate the increase we’re seeing in our results from CPA®:16 and if and when appropriate increase the dividend. We have typically done that on a quarterly basis, so that’s really all we can look to right now. Jon Woloshin – UBS: That’s a fair comment. What is your current target for when you think CPA®: 2 will be fully subscribed?

I think we think by the end of the year, than if hard to know how the fund raising climate is going to change throughout the year based on external factors, but that’s currently our thinking. Jon Woloshin – UBS: No, I understood. I just wanted to know what you guys were targeting and just the last question for me is, you guys are now a fairly substantial market capitalization. Just sort of curious, where you are in terms of conversations with the south side industry in terms of bringing in more coverage.

Yes, we have a number of research analysts that don’t publish, but who we’ve met with, management’s met with, we’ve spent a good bit of time. So there are definitely a number of analysts out there who understand and know the company. My guess is that it’s difficult with current research budgets as they are for them to pick up coverage, perhaps until we do an equity offering. But your right, as one of the larger net leased REITs in the field, maybe hove them to pick us up just to increase the coverage within the net lease sector. Jon Woloshin – UBS: Okay, I appreciate it. Thank you.

And Jon, I want to just follow up on the Hellweg discussion. Because it was a one-time event, we did add it back to AFFO. So what you were saying, its been added back already, so the quarter-over-quarter or year-over-year impact shouldn’t be a part of your analysis. Jon Woloshin – UBS: Okay, all right great. Thank you.

(Operator Instructions). As there are no further questions, this concludes our question-and-answer session and the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.