Hello and welcome to W. P. Carey's First Quarter 2017 Earnings Conference Call. My name is Diego 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'll be taking questions via the phone line. Instructions to how to do so will be given at the appropriate time. I'll now turn over today's program to Mr. Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, and thank you all for joining us for our 2017 first 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. Also an online replay of this conference call will be made available in the Investor Relations section of our Web site at wpcarey.com where it will be archived for approximately one year. And with that, I will hand the call over to Mark.

Thank you, Peter, and good morning, everyone. I'm joined this morning by Jason Fox, our President, who review the investment climate in our portfolio and Toni Sanzone, our CFO, who will take you through our first quarter results and guidance. In addition, I'm joined by John Park, Head of Strategy and Capital Markets; Brooks Gordon, Head of Asset Management Team and Mark Goldberg, Head of Carey Financial, who will all be available to take questions. From an operational and reporting standpoint, it was a very straightforward quarter, Tony will take you through the key drivers but at the high-level $1.25 of AFFO per diluted share that we reported reflect several of the proactive steps we have taken over the last year, including planned real estate dispositions, financing activities have lowered our overall cost of debt and our focus on operational efficiency. Last quarter, Jason spoke about our focus on highly structured sale lease back transactions outside of the commodity segment in net lease. This approach which differentiates us from many of our net lease competitors, place of cost all property types including retail where we have avoided the commodity segment of retail characterized by small deal size and very efficient pricing. Our investments in asset management teams have also done a tremendous job over the past decade identifying and staying ahead of the competitive threat to traditional retailers from ecommerce. As a result, we believe the extremely low level of retail tenants in our portfolio face significant competition from ecommerce. While we saw a fewer interesting investment opportunities for our portfolio during the first quarter, we have seen a pick up in the number of attractive opportunities more recently. We are however maintaining our investment discipline as we navigate the uncertainty of the current business environment. We have a strong and flexible balance sheet with approximately 1.6 billion in total liquidity at quarter end and continue to build dry powder. So, we remain well-positioned to execute on opportunities that meet our core investment criteria. With that, I will turn the call over to Jason.

Thank you, Mark, and good morning everyone. Starting with the acquisition environment, in the U.S. cap rates have remained tight mainly due to the supply demand imbalance that exist for net lease assets. The supply side has been impacted by continued uncertainty, but the current administration's ability to pass tax reform and infrastructure spending bills particularly given the circumstances surrounding healthcare reform. Also contributing to the lack of deal supply has been a slow down in M&A activity and corporate spending both of which have particular impact on the sale leaseback market. Meanwhile, demand for net lease assets has remained very strong as both domestic and international capital continues to see income producing assets and the relative safety of the U.S. dollar. In Europe, activity has picked up modestly from the levels we saw in 2016, accretive investments with adequate spreads do exist especially given the low cost of borrowing. However, absolute yields remain low resulting in high prices per square foot which tend to be meaningfully above replacement cost. Against this backdrop, we are maintaining a disciplined underwriting approach and while we have reviewed a substantial number of opportunities so far in 2017, our investments year-to-date have all been build-to-suit expansions. This includes the completion of one small construction project during the first quarter and since quarter end the substantial completion of two build to suite expansion projects for existing tenants bringing the year-to-date total to approximately $37 million at a weighted average cap rate of around 8%. We currently have one additional expansion project underway with an existing tenant which we expect to complete by the end of the year bringing the total for 2017 to about $60 million. Since quarter end, deal flow both in the U.S. and Europe has picked up, so we are cautiously optimistic…

Thank you, Jason, and good morning, everyone. This morning I will review our 2017 first quarter results touching on the key drivers of AFFO compared to the year ago quarter, our current guidance expectations and our key capitalization and leverage metrics. For the 2017 first quarter, we generated AFFO per diluted share of $1.25 and raised our quarterly cash dividend to $0.9950 per share maintaining a conservative payout ratio of 79.6% for the first quarter. Our first quarter dividend equivalent to an annualized dividend rate of $3.98 per share and based on yesterday's closing share price that represents an annualized dividend yield of 6.4%. On a segment basis, owned real estate generated about 94% of our total AFFO for the quarter with the remaining 6% coming from our investment management business. Total AFFO per diluted share was $0.06 lower as compared to the 2016 first quarter due primarily to lower revenue from both our owned real estate and investment management segments partially offset by lower interest in G&A expenses. Owned real estate revenue decreased due primarily the lower leased termination income which can fluctuate significantly from period-to-period. The remaining decline was driven by lower leased revenues resulting from plant property dispositions during 2016. Revenue from investment management declined as a result of lower structuring revenue partly offset by higher asset management revenue. In the first quarter of 2017 structuring revenues declined by $8.9 million compared to the 2016 first quarter resulting from lower investment volume on behalf of the managed fund. While we continue to expect structuring revenue decline on a year-over-year basis, the specific timing and amounts will fluctuate from quarter-to-quarter. Asset management fees and distributions from partnership interest in the managed fund both increased as a result of higher assets under management. At quarter end, total assets under…

Thank you. At this time, we will take questions. [Operator Instructions] Our first question comes from Sheila McGrath with Evercore. Please state your question.

Hi, yes. Good morning.

Good morning, Sheila.

Good morning. First quarter was pretty quiet on the acquisition front for both the balance sheet and the fund business. I'm wondering if you could just discuss in more detail of the drivers, is that, were you adjusting you're underwriting and how is the pipeline looking and how is the mix Europe versus U.S.?

Yes. I'll start and then I will let Jason chime in a little bit on that. It was an extremely light quarter from an opportunity standpoint. We've seen a recent pickup of that primarily in -- starting to come through in April. But, we're focusing on the basics. We're fixing our balance sheet; we're maintaining dry powder; we're well-positioned when we do to see opportunities come through to take advantage of it. But, as you know, we focus on our underwriting criteria and that criteria is more than just whether a transaction is accretive or not for our financial statement, it comes and play criticality of the assets. The bases we're buying into those properties, how to structure the lease we look at all those things and less than investment we check criteria. We just not going to chase it. So, we're maintaining that discipline -- we'll continue to maintain that discipline through this climate. For the U.S. versus Europe, Jason, I'll turn it over to you to talk about that a little bit.

Yes. I mean Mark is right. I mean, the market is competitive, there are certainly has been less supply of net lease assets and sale leasebacks in the marketplace. I think a lot of that as I mentioned earlier has to do with the ongoing debates about tax reform, trade policy, infrastructure spending, corporate regulation, all of that has created uncertainty in a bit more of a cautious tone now in the market. So that said, as Mark mentioned we're maintaining our underwriting discipline. We're staying patient, and we will wait until we find the right deals at the right pricing and the right structure. But, we're not going to stress to just to do deals. So, in terms of Europe and the U.S., I think a lot of those teams probably more applied to the U.S., but there has been some elections in Europe that has caused some uncertainty, but yields have compressed more in Europe as well. We start getting concerned about basis and where that is relative to replacement costs where total returns are -- so we're factoring all that in, we're staying disciplined, but as Mark said our pipeline is picking up and we do expect to be more active as the year progresses.

Okay. And as a quick follow-up, you did raise more money in the non-traded REITs than in a while. I was just wondering if there is any factors driving that and if you could update us on the regulatory environment and expectations for the DoL changes.

Yes. Let me address the last part of your question first, and then, I will turn it over to Mark to talk about some of the fund raising that occurred in the first quarter. There has not been any more clarity in that space. I think that's reflective I saw report this morning where I think capital raise in that space of the month of April was less than $300 million. I think that's reflective of both the uncertainty in the broker dealer market, on what type of structures and what business model they want to come out with as well as uncertainty dealing with the regulation around what the current administration will do with the DoL rule. There has been no clarity since our last call on that. As far as capital raising, Mark, I'll turn that to you and talk…

Hi, Sheila.

Good morning.

We did have a very strong first quarter. I attribute that to two factors, obviously the brand and the historic recognition of W.P. Carey is how it's present, but we did have two fund closings which generally garner greater capital flows towards a close. So CCIF 2016 II which is our credit fund closed April 28, so we did see a surge in the first quarter and the capital raise there and our lodging fund Carey Watermark Investors too closed as well at the end of March and that garnered the amount of capital. I think it was approximately $265 million for the first quarter, but again, that is not a run rate rather the result of closing some of those two funds temporarily. Carey Watermark too is open again. We closed that fund temporarily to appropriately appraise value of the assets and reprise the shares.

Okay. Thank you, Mark.

Thank you.

Our next question comes from Nick Joseph with Citigroup. Please state your question.

Thanks. And appreciate the additional color on guidance. Just wondering if you could walk through kind of the ramp assumed in guidance to get into the full year, you did 125 AFFO in the first quarter, it sounds like most of the acquisitions and dispositions will be tied in the back half of the year. So maybe what should we expect from a quarterly basis to achieve the midpoint.

Yes. I think we're still assuming we'd be at or around the midpoint of the guidance at this point in time. I mean, the range is there, really do account for the fluctuation in the acquisition and disposition volume. But I think generally speaking with the assumptions, we have, we are looking at the midpoint.

Okay. So, would you expect second quarter similar to first quarter and then more of a ramp in the back half of the year or there are other either one-time items, restructuring revenues that would create volatility even into the second quarter.

I think the first quarter was effected by number one overall lack of opportunity we saw both in the investment management business; we still enjoy dry powder to put to work in our funds. I think in the CPA funds we have roughly half the dry powder allocated to two follow-on deals with existing tenants in those funds that we expect to close at some point. But, I think each quarter will depend on the timing of when those acquisitions are done whether it's on our balance sheet or in the funds itself. As I said to you and I said this before from an investment standpoint, it's comes down to our underwriting criteria. We're not going to close deals just to hit a number. It's got to meet our underwriting criteria and a lot of that has to do with the structure of the lease, which takes time to negotiate. So that to some extent impacts the quarterly results that's why we give guidance on an annual basis based on that overall volume. If we see a change in our expectation on any portion of that guidance either acquisitions, dispositions or in the number overall we will announce that at point in time, but I think we're still comfortable at this point that we will meet the annual guidance given.

Thanks. And just maybe on the last point, you get two net lease deals in the managed funds in the quarter, could you just talk about the decision to put those into the managed funds not on balance sheet?

As I said before, we have a responsibility to use at the capital in those funds and invest those funds particularly net lease deals that I spoke about with existing tenants in those funds to follow-on deals at that point that utilizes half of the dry powder left on there. I would not -- as I previously announced, the likelihood is that we'll put on the lease deals on our balance sheet going forward once that capital is utilized, but we do have the responsibility to put that capital to work and I think that's what we're doing now.

Thanks.

Thank you. Our next question comes from Joshua Dennerlein with Bank of America Merrill Lynch. Please state your question.

Hey, good morning, guys.

Good morning, Josh.

The 1Q dispositions what kind of drove those sales, was it opportunistic or something else?

There are three of them totaling about $53 million, one of them was a two building vacant office in Finland that's around $28 million, the other two, one was a kind of high residual risk asset, industrial property in Germany, $24 million, and then a third was just a small piece of excess land in the U.K. So, all European dispositions relatively small relative to what we expect on the full year we should be more back half of the year weighted as Toni mentioned.

Okay. It sounds like you had things removed off the table.

That's right.

And the CESH fund, that's a Carey European Student Housing Fund, correct?

Yes.

How it flows into that business and how is the interest in it?

That funds, it's a private placement is subject to Safe Harbor provisions and we're most comfortable to directing you to the supplemental where you'll see on page 39, our acquisition volume. What I can't say is that we're taking in capital into the third quarter. We saw sufficient capital for those opportunities and we're now taking a new capital, but more than that we really can't say.

Okay. And then, on the release and the spread you said took the small percentage of your ABR, but who is going to take the negative releasing spread to sign that in-place rents or in your portfolio or well above market?

Sorry, I didn't entirely hear your question, could you repeat it please?

Yes, yes. Just like -- your releasing spread this quarter were pretty negative, I don't think that's the first time it's happened. Trying just to get a sense, is that a sign that the in-place rents in your portfolio are pretty high above the market rent?

This is Brooks. So to answer your question, first of all, keep in mind any particular quarter leasing activity represents a very, very small sample size relative to the overall portfolio. So I think it's very difficult to extrapolate across the portfolio from any quarter's activity. So I think that's the real important answer here. I know some of these leases where we own the property for a very, very long time subject to annual CPI bumps. We've reaped the benefit of those bumps over a decade in some cases. And so, in some of those cases are rent can accelerate faster than the market rent, but we reaped the benefit of that all those years. So again, I'll hesitate to extrapolate every deal is different, we have rents that are above market, below market and at market across our portfolio. So, I think it's difficult to extrapolate that from this particular quarter.

Okay. So do you think you're on average benefit more from the above market rent bumps, and then, like just kind of bumping in that rent and then not having like the rest of the annual -- selling something that got a roll down.

Yes. I think we benefit more from the rent bumps because we also cross-referenced that with the criticality of the asset. So, even if we have rent that is increased faster than market for a particular building, if we're diligent in our understanding of the criticality, we can actually renew that tenant at or above market rent and keep that rent stream continuing. And then, we see that happening all the time. So as long as we are diligent and proactive with the criticality assessment, we are benefiting more from the bumps over time than not.

Okay. Thank you.

Our next question comes from Todd Stender with Wells Fargo. Please state your question.

Hi, thanks. Just to get back to the Finland assets, looks like you handed back the keys to the lender. Can you just speak about who the tenant was maybe if there was any lease duration left and maybe just what was your purchase price there?

Yes. Sure, it was [indiscernible]. I don't have the purchase price in front of me. It was a building we bought may be 10 years ago to a Finnish company. They had vacated the property several years ago. The lease ended in 2016 and really the property itself is in need of redevelopment or likely be repositioned as a multifamily investment and under that scenario, the intrinsic value of the real estate itself was less than the debt balance. So, we choose to work with lender and proceed on a sale in that basis.

Okay. Thanks. And just switching back here to the U.S., with changes in the accounting standards, you now have tenants that have to treat their leases as debt, how do you -- or I guessing in your conversations with tenants who will do a sales leaseback, how are they thinking about doing long-term leases or maybe potentially shortening their lease duration just because that would mean maybe a larger liability on their books?

Right. You had to think of the types of deals that we do which are predominately sale leasebacks and really the purpose for those types of transactions that tenants do. And a lot of it comes down to user proceeds. They are doing deals and really occupancy cost as well. They are looking at their options to raise capital equity markets, debt markets and their assets as well. And so when they choose and do sale leasebacks with us, I think they're first and foremost looking at the economics and in many cases, none all, but in many cases depending on the real estate fundamentals, a longer lease term will translate into a lower occupancy cost and mainly in terms of cap rate are going in yield. So I still think that's going to be the primary driver of how sale leasebacks are structured. Now on the margin, I think you will see lease terms trend shorter, but again, the primary driver is going to be economics and a longer lease term will probably result in better economics for particular companies.

Okay. Thank you.

Thank you. [Operator Instructions] At this time, I'm not showing any further questions. I will now hand the call back to Mr. Sands.

Great. Thank you for your interest in W. P. Carey. If you have any follow-up questions, please call Investor Relations on 212-492-1110. That concludes today's call. You may now disconnect. Thank you.