Hello, and welcome to W. P. Carey's Second Quarter 2019 Earnings Conference Call. My name is Kevin, and I will be your operator for 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 be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us today for our 2019 second quarter earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts, and maybe 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 Web site at wpcarey.com where it will be archived for approximately one year, and where you can also find copies of our investor presentation. And with that, I will now hand over to our Jason Fox, Chief Executive Officer.

Thank you, Peter and good morning everyone. We had an active second quarter, which included credibly converting the bulk of our operating self-storage assets to net leases, selectively adding several industrial properties and successfully accessing the capital markets, all of which I'll go through in my remarks this morning. Then, I'll hand it over to our CFO, Toni Sanzone, to review our second quarter results, guidance and balance sheet. And after that we'll take questions along with our President John Park and our Head of Asset Management, Brooks Gordon who are joining us on today's call. Starting with the investment backdrop, central banks, both in the U.S. and Europe have signed their to intention to keep interest rates low, that they may go even lower as global growth continues to slow. The search for investment yield has kept demand for net lease assets high. And while this means that our portfolio is more valuable than ever, it has also kept the acquisition environment very competitive. Within industrial and logistics, which continues to be sought after asset classes, our longstanding presence in sale leasebacks and ability to provide certainty of close ensured we continue to see a significant number of opportunities, executing on those that met our underwriting criteria. Given our improved cost of capital and increased number of higher quality industrial assets at tighter cap rates provide us sufficient spread to be accretive, and we are actively bidding on deals we like. Other property types presented a good number of opportunities but ultimately their deal structures do not provide an adequate risk return trade-off. We are unwilling to accept shorter lease terms in office, for example, and remained very selective in retail, which we view as generally unattractive as it continues to adjust to the disruption from e-commerce. Amid this…

Thank you, Jason and good morning everyone. This morning, we announced AFFO of $1.22 per share for the 2019 second quarter with 96% or $1.17 per share generated by our core real estate segment. Annualized based rent or ABR grew just over $1.1 billion at quarter end, primarily reflecting our second quarter investments and leasing activity, and same-store rent growth of 1.6% year-over-year. The majority of our second quarter investments were completed towards the end of the period, so their impact will be fully reflected in lease revenues beginning in the third quarter. And we also expect our same-store to bump up in the third quarter, driven by a scheduled rent increase from one of our largest tenants. As Jason, discussed our year-to-date investment volume through today totaled $440 million, and we currently have about $100 million capital investment projects scheduled to be completed during the remainder of this year. Our near-term pipeline remains active and we continue to expect our full year investment volume to be in line with our guidance assumptions. During the second quarter, we sold five industrial properties for gross proceeds of $17 million, bringing disposition to the first half of the year to $22 million. For the full-year, we continue to anticipate total dispositions of between $500 and $700 million. The majority of which are expected to close towards the end of the year, including two larger dispositions in the fourth quarter, comprising The New York Times repurchase. And the anticipated sale of one of our two remaining operating hotel properties, which is currently under contract. Turning to leasing activity. We were extremely active on asset management front during the second quarter with re-leasing activity impacting about 3% of ADR. We executed 28 lease renewals and extensions with existing tenants that in aggregate recaptured just…

Thank you. We'll now be conducting a question-and-answer session [Operator instructions]. Our first question today is coming from the line of Spenser Allaway from Green Street Advisors. Your line is now live.

Could you I mean provide some color on the disposition pricing in the quarter, perhaps just like an average cap rate and then maybe how these came about, or are these reverse inquiries or are these opportunistic sales?

While we won't comment on specific cap rates for this quarter, I can tell you, for the year we expect our average disposition cap rate roughly in line with acquisition. So in around 7%. These particular deals were pretty small, one with a small purchase option of industrial property in Las Vegas. And the other four was actually a put option of some printing facilities which the tenant bought back.

Thank you. Our next question today is coming from Tony Paolone from JPMorgan. Your line is now live.

Can you talk about just first half deal flow and whether it came in above below expectations, in terms of like the stuff that you all looked at, or did you feel your hit rate was out of the ordinary? Just trying to understand backend loading as we get through the year here on the transactions side.

So as Toni mentioned, we feel like we are on good pace for this year. The first half of acquisitions, it was around $450 million closing to-date. So that included two deals that closed after quarter end that you won't see in the supplemental yet. It was focused more on industrial, I think year-to-date. About 80% of what we purchase has been industrial. We certainly continue to value diversification and look at a wide range of opportunities, but industrial is where we've seen better opportunities. I think they almost all been sale leaseback, certainly in the second quarter and what we've closed since quarter end. They've all been sale leasebacks. So that's a typical theme. Structured transactions where we can get some incremental yield. They've also all been in the U.S. The pipeline has picked up some year in Europe. But given how low rates have moved in Europe, there has been some more meaningful cap rate compression and more capital inflows looking for the stability of net lease. We do expect to get some deals there, but it has become a little bit more competitive. I think Toni also mentioned that, we tend to see a pickup in deals going towards year-end. So again, we're optimistic about our acquisition range. And then lastly, we also have a number of what we call capital investment projects, expansions and some build-to-suits that are currently under construction that once complete will flow through our rental income and be part of our acquisition volume for the year.

And as you look into the rest of the year, do you think that bent toward U.S. and industrial will continue to be the case?

I think that, that's where our pipeline is a little bit more weighted right now. I do think that we'll do some European deals this year that we haven't year-to-date, or nothing significant size for that matter. So that will change. But I think by enlarge it still will be weighted towards the U.S. and towards industrial, and probably for sale leasebacks as well.

And then maybe a question for Toni, if we think about just the capital sourcing you talked, and you have New York Times coming out. Where do you think net debt-to-EBITDA lands at the end of the year when you factor all these things in?

I think that is one that moves around again depending on the quarter activity. We see that trending downwards with a ramp up in earnings as the year progresses, continuing our debt strategy where we are now. So I do see that coming down a bit towards the end of the year, but still within the range what we're expecting. And I think we normally highlight our target range in the mid to high 5 times.

So the 5, 8 in the last couple of quarters, maybe comes down a little bit, but not -- or you're not probably going to below 5, it sounds like?

And any movement again could be temporary, could go up and down in any one quarter. But we do see that trending down slightly for back half of this year.

Thank you. Our next question is coming from Emmanuel Korchman from Citi. Your line is now live.

Toni, the lease term and other revenue items that you run through in your opening remarks. Were those already included in prior guidance? Or are those incremental to the information you gave us previously?

Those have already been baked in at some degree. I think at the beginning of the year, we had line of sight to the activity that we expected this year. I would say, we refine that as the year progressed and certainly the Agrokor done, that's the big portion of that. So I would say it was certainly contemplated when we went into the guidance range this year.

And then in terms of the ATM issuance, it looks like the majority of that was concentrated in April. But the stock has certainly moved up since then. So how did you think about the ATM issuance? And why didn't you guys issue more into the more recent strength in the stocks?

I think we look at the uses of capital as well. And we did identify a fair amount of mortgages that we could prepay fairly efficiently in the early part of this year, and continue to looking -- to look for those opportunities. But I would say that in large part we are trying to match with uses of capital, so bringing down the line. We also have the bond offering in the middle of the quarter as well. So factoring that in, I think we're just mindful of what the source and uses of cash are at any one point in time, and just balancing that out over the year.

Thank you. Our next question today is coming from Todd Stender from Wells Fargo. Your line is now live.

So just to stay on that theme of the permanent capital. You've been more conservative, you've tapped and been opportunistic. But you've tapped the ATM and the bond market as opposed to running up your line balance, which you could have gotten a little more accretion, I guess. Is that the push and pull that you had to decide in the quarter, which ultimately I guess brought down your AFFO guidance at the high end?

Yes, I think we're certainly always mindful of the dilution impact. But we do look to run with the most amount of flexibility that we can give ourselves to fund acquisitions in the long term. So running the line-up high is not a part of our strategy. We like to that flexibility to do significant deal volume as we need to. So it is a balance as we look at timing throughout the year. But I think we were happy with what we executed and the timing of when we did. And we continue to keep the balance on our line fairly low.

And I guess switching gears just to the income statement. Your property operating expenses, we would have thought would have come down, I guess in Q2 versus maybe an elevated number in Q1. Any color there? I don't know if you've covered it already.

I think that line item is running around consistent with how it has in prior quarters, and that's in line with our expectation. I mean, I think the vacancy rate has stayed fairly consistent quarter-over-quarter. And as we're working through some of those vacancies, we do expect that'll come down over time. But I think it's still in line with what our expectations were quarter-over-quarter.

And have you guided for a number for the full year?

No, we really don't guide on property expense. But I think in terms of the percentage of revenues, roughly in line with where we are now, shouldn't move meaningfully.

Thank you. Our next question today is coming from Greg McGinniss from Scotiabank. Your line is now live.

Toni, I apologize, it's a bit of a repeat of my question from last quarter. But the full year earnings guidance range implies a fair bit of acceleration into the back half of the year. And I know you mentioned the increase in same store growth is expected in later quarter acquisitions. And I'm curious anything else needs to happen to reach the top end of the guidance range this year? I mean, this $700 million of back half acquisitions still seem like a reasonable goal given the more competitive environment you guys have noticed?

Yes, I mean I think we still feel good about the opportunity set we see. We held our guidance assumptions in that regard. But in terms of the factors that are driving this up, I think I did mention the bulk of them. I would say the transaction timing is certainly meaningful, causing variations from quarter-to-quarter. So we will see the deals that we closed just at the end of the quarter and just after quarter end take effect on the full year. Depending on where you place the remaining transaction volume for the back half of the year, we'll certainly have an impact. And our disposition activity really is weighted towards the very end of the year, as I mentioned. So combining that with some of the other items, the lower G&A expenses that we're seeing towards the back half of the year and the higher lease termination income largely due to Agrokor and some other settlements we're expecting, those are really the points that are driving us up in the back half and we will see that ramp up put us in line with our guidance range.

And Jason, can you just give us maybe an idea of like the level of deals that are in discussion right now in terms of acquisitions?

I mean, we don't typically talk numbers. We've been doing this long enough where we know that these deals don't close until they close, but we do feel good about the pipeline. As mentioned earlier, characteristics are more U.S. focused, more industrial focused. I think it's been a consistent size throughout the year, the pipeline. We do hope that and expect that it will build a little bit more as we get into the fourth quarter that's typically what we see coming into the end of each year. And then lastly, we do have full visibility into our capital investment projects. Those are properties that are under construction that we expect to complete this year, and those get added to that volume at that point in time. We have done -- I think there is $200 million, call it, $185 million to $200 million under construction right now. We expect about $100 million of those to close by year end, the rest of that would fall into the pipeline for 2020.

Thank you. Our next question today is coming from Karin Ford from MUFG Securities. Your line is now live.

How much do you think cap rates have come down with the recent move in rates? And I know you mentioned in your prepared remarks that you're willing to go lower on the spectrum given your cost of capital improvement. How low are you willing to go? And where do you think investment spreads will end up in 2019?

So, first part of question on cap rates. I think in the U.S., they have come down. It's hard to put a number on it. But broadly, I would probably say 25 basis points, perhaps over the last quarter, as interest rates have really continued to move down lower. Europe, throughout the year, it's probably been more than that. We're probably down at least 50 basis points in Europe, maybe even a little bit more depending on the country and the asset class. I think generally speaking, we're still finding deals, I would say, in the 6s and into the 7s. As you did mention, we are continuing to look at deals that are inside of six, call it maybe low to mid fives is where we would start to focus. And a lot of that as our cost of capital has come down where equity multiple has expanded certainly expanded, we have -- our spreads have come in. As I mentioned earlier, we had the lowest spread and coupon for U.S. bond issuance since our inception. So all that's trending positively for us on the cost-to-capital standpoint, and think we can pick up some incremental deal volume by looking at what we expect to be higher quality deals at tighter yields, deals that may have better located real estate or higher growth built within them.

And what specifically -- what type of characteristics would a deal have to have to -- for you to be willing to pay a cap rate in the low to 5s?

There's a lot of variables that we look at, and some of those are the strength of the tenant behind the lease, the length of the lease term, the fundamentals of the market in which they're in, more primary markets once we expect to have long term positive trends and dynamics. Those are factors. Certainly, how we look at the real estate itself, we'd like to be in a market or below market rents, perhaps to give us some mark-to-market opportunity replacement cost matters, basis matters. So all those factors will impact where we bid on deals and it's really individual deal specific.

And then last one for me, I know we talked about this a little bit on the last call. But have you seen any impact in the recent quarter in Europe, competition wise or deal wise, from realty incomes entry into the European market?

We really haven't seen them in Europe yet. And generally, we tend not to overlap with them a lot in the U.S. So perhaps that'll hold true. In Europe, as we mentioned before, we think it's a big enough market where there's plenty of room for a new competitor to the extent and we do overlap some and it adds credibility to our business model. But we really haven't seen much of them yet.

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

On the self storage transaction, if you look at the NOI that you were receiving before the transaction. Should we just assume you converted that into rent? Or was it structured considering some coverage ratio to account for property fluctuations? Just want to understand how that's structured a little bit?

I mean, it's roughly in line with our NOI. I think there's a couple of exceptions and that's looking backwards roughly in line. CapEx was factored into the formula to set rent. So when those were operating properties, those did not run through our income statement. But now that they've been set relative to rent, they will decrease the net lease rent relative to NOI. Going forward, they'll probably be a little bit of cushion. We hope there will be as these properties continue to grow but by enlarge I think it's roughly in line with NOI.

And then you mentioned in your release that you converted some more. Is it the same structure with the same parties, is that…

It was under the same deal with Extra Space. There really was just timing differences on the 36 assets. So some closed in June, as Tony mentioned, some just converted August 1st. And then there is I think another nine properties that are stabilizing, and one stabilized over the next year to two years, those would convert as well.

And do you think that this is a one-off, because you were in a position where you own the assets? Or do you think there's other opportunity in that segment to add to your balance sheet?

We think there's opportunity here. I mean, we've been in this space since 2004. When we first did the U-Haul transaction, a large sale leaseback, it was 78 properties the deal that I worked on, at this point, 15 years ago. So we know the space well. We've been a very active investor in the space within the funds, which is how we acquired these asset to begin with through the CPA:17 transaction. We have a deal team in place that's evaluating deals. So it could be operating assets that are converted. We're in discussions with some of the operators to see if there are opportunities for sale leasebacks to their existing portfolios as they look to perhaps shift a little bit more to a asset-light strategy. And there is also private players out there that could play into. So, hard to tell how big that opportunity will be for us, time will tell of course. But it falls under the diversified business model for us where we have lots of opportunities in terms of asset classes and geographies to allocate capital and look for the best opportunities.

And then on the mortgage prepayments, just curious do you target the mortgages that have burnt through a prepayment penalty to unencumbered those? Or do you owe prepayment penalties?

I mean, generally, that's our objective is to minimize that to a little possible, and that's where we're trying to be efficient there in identifying those opportunities. But we have been able to keep that number fairly low this year with around $500 million of prepayments.

And last question, just on the transaction that you mentioned in U.S. and Maxico. Is that all industrial? And are the rental revenues all in U.S. dollars?

Yes, all industrial and all U.S. denominated rents, and it's a U.S. company as well.

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

So apologies if I missed this in your leasing commentary in prepared remarks. But you look at Page 32 of this up. What drove the rental down in five warehouse properties that were renewed or extended in the quarter? Just any color there would be helpful.

This is Brooks. Those were a portfolio of warehouses across the U.S. leased to True Value. We were able to extend leases by 12 years. We did absorb a bit of a roll down and contributed a small amount of TI, which is spread over about six years in terms of the actual payment. And we think the deal added tremendous asset value and really locked in the criticality of that portfolio with True Value. But, yes, a slight roll down.

Okay, so essentially a blend and extend?

Correct.

And then following up on your comments on the potential for converting operating self storage assets to a net lease structure. Do you think there are opportunities with other operating properly types that you could may be bring on to balance sheet as operating properties and then transition into net lease? And maybe more specifically, I was thinking is that the possibility in the student housing space?

I mean, we've done a number of transactions like this where we've taken operating assets and converted them to net lease, and this goes back a long time. We think back in the 90s, we did a large sale leaseback in the hotel space with Marriott, and still own number of those properties. As you know and I mentioned earlier, the sale leaseback that we did with U-Haul in 2004 and obviously the Extra Space conversion we just did right now. We're also pioneers in cold storage, probably 15, 25 years ago moving that operating business into a net lease model as well. So I think there are opportunities. For us, what's important here is that we make sure that we're balancing the risk return. We don't want to take too much of the downside if we're not getting all the upside in our operating property. So that would mean that we want to see longer lease terms. We want to see See strong credits behind them. I think student housing is a space that could be interesting to the extent there are operators out there that are that we deem creditworthy that we can put on long term leases. We're not doing anything actively right now, although, we do have a couple of those assets within our portfolio that we've done with some universities over the years. So I think it's a possibility. And I think again given our diversified model, there's a wide opportunity set for us to consider those different types of opportunities.

Thank you. We reached to the end of our question and answer session. I would like to turn the floor back over for the further closing comments.

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

Thank you. And that concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.