Greetings, welcome to the W. P. Carey Inc. 2019 Annual Meeting of Stockholders. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Fox. Thank you, Mr. Fox. You may begin.
Thank you. Will the meeting please come to order? I'm Jason Fox, CEO and member of the board of directors. It's my pleasure to welcome all of you to W. P. Carey's 2019 annual meeting of shareholders. With us today are the following current board members: Mark Alexander, Peter Farrell, Ben Griswold, Bob Flanagan, Axel Hansing , Jean Hoysradt , Margaret Lewis, Chris Niehaus, Nick Van Ommen . I'd also like to introduce you to some of the officers of the company who are here present. To my right is John Park. Tony Sanzone. Sapna. Sapna, your last name. Brooks Gordon, Head of Asset Management. I don't know if Brooks is here right now. Peter Sands, Director of Institutional Investor Relations. There's Peter. Others. We have Will Carey, who's in our risk department. Among others as well.
Mr. Seth Promisel of PricewaterhouseCoopers LLP, the company's independent auditors, is also here and available to answer appropriate questions. Susan Hyde, the Corporate Secretary of the company, will act as secretary of the meeting.
Thank you, Jason. This meeting has been called pursuant to due notice, dated April 4th, 2019, sent to all stockholders of record on or about April 9th, 2019. Proxies were solicited on behalf of the board of directors of the company for this meeting. Copy of the notice, proxy statement, proxy card, and annual report will be open to examination by any stockholder during the meeting. Stockholders of common stock of record on April 2nd were entitled to one vote for each share held of meeting. The total number of outstanding shares entitled to vote is 169,800,027. The presence at this meeting in person or by proxy of a majority of the shares entitled to vote will constitute a quorum. I'll now ask Peter Destevich, who's acting as Inspector of Election.
There are present today, in person or by proxy, holders of 152,029,907 shares of W. P. Carey Inc. This represents more than a majority of the shares of the company entitled to vote at this meeting. Accordingly, I declare that a quorum is present and that this meeting is duly convened.
Terrific. Thank you. The first order of business is the election of 10 directors. The following persons have been nominated as directors of the company: Mark Alexander, Peter Farrell, Robert Flanagan, Jason Fox, Benjamin Griswold, Axel Hansing, Jean Hoysradt, Margaret Lewis, Christopher Niehaus, and Nick Van Ommen. The second order of business is the consideration of an advisory vote on executive compensation. The third order of business is the consideration to ratify the appointment of PricewaterhouseCoopers as W. P. Carey's independent registered public accounting firm for 2019. A share vote will now be taken by ballot. If you've already cast your vote, your shares will already be counted, in accordance with the instructions on the proxy. If you have not already voted your proxy, please indicate so, and we'll collect your proxy cards to be included in the meeting. Okay.
While the votes are tallied, we will deliver our presentation to investors.
Great. Thanks, Susan. I'm going to give a company overview, Toni's going to walk through some of the financial statements as well. W. P. Carey. Publicly traded on the New York Stock Exchange. We're a publicly listed REIT. We specialize in sale leaseback financing, primarily investing in net lease assets. Geography-wise, we are focused on the U.S. as well as Northern and Western Europe. As a result of our merger with CPA 17 at the end of last year, we are now ranked as one of the top 20 largest REITs in the MSCI U.S. REIT Index. One of the characteristics that helps define us is the fact that we are focused on diversification, which I'll talk about further in a little bit.
We've been around since 1973. During that time, we've really had a couple business models. I'll talk about how the business structure has shifted and where it is now. Currently, we have about a $19 billion enterprise value based on share price in the balance sheet at the end of March 31st of this year. That's really comprised of two components. The largest of which, subsequent to the CPA Seventeen merger, now accounts for about 95% of our earnings or AFFO, and that's our real estate portfolio. I'll go into some of the details in a slide in a second. The next part of the company that accounts for about 5% of our earnings is our investment management platform.
Currently about $7.6 billion of assets under management that are spread across four fund vehicles, CPA 18, Carey Watermark Investors I and II, as well as our Carey European Student Housing Fund. Digging into the real estate portfolio a little bit further, some high-level numbers here that highlights our diversification. We have 1,168 properties leased to 310 different tenants, about 134 million sq ft of real estate that generates approximately $1.1 billion of annualized base rent. As I mentioned, we're diversified across the U.S. and Europe, with about two-thirds of our real estate by ABR, annualized base rent, generated through the U.S., one-third coming from Europe. We are focused on long-term net lease transactions. Typically, when we purchase that are between 15-20 years long. Currently, the weighted average lease term is just over 10 years.
We're also focused on annual rent increases, about two-thirds of which are tied to inflation, with the remaining tied to fixed rent increases. We'll talk about some of the further diversification in a second as well. We're virtually 100% occupied, which we've been currently 98.2%, so just under 100%. Moving on to diversification. It's really across all facets of diversification. By property type, our largest asset class is industrial, that we have subcategories of warehouse and industrial/manufacturing. That makes up just under 50% of our portfolio. Following that is office and retail. Retail, we've been relatively vocal for a number of years, perhaps even decades, of being underweight retail, in particular in the U.S. We've maintained that stance with just four of that 18% invested in retail, invested here in the U.S. Self-storage rounds out the pie chart for property type.
That's net lease self-storage. That's going to grow based on a transaction that we announced last week, where we converted a large percentage of our self-storage operating properties to net lease. That category will probably be above 5% once those are accounted for. We're also well-diversified across industry type. A pretty colorful pie. Top 10 tenants. We have one of the lowest top 10 tenant concentrations out of our net lease peer group, which is a good thing. Again, we value diversification. Just 23% of our ABR is from our top 10 tenant list. I think many of these top 10 tenants are your household names, with the largest being U-Haul. Those are a large diversified group of self-storage assets under a long-term net lease with U-Haul, which is a strong credit. Moving on to geographic diversification.
As I mentioned, about two-thirds or 64% of our ABR is generated from the U.S., with about a third or 34% coming from the U.S. I also mentioned that virtually all of our leases have contractual rent increases. In fact, 99% have rent built-in. Of those 63%, roughly two-thirds, are based on CPI, either uncapped CPI or CPI that tends to have formulas related to CPI, such as a floor and a cap. Exposure that we seek in negotiating new investments, we view it as a possible hedge against rising interest rates, which tend to be correlated with rising inflation. One-third that are fixed increases, those tend to average in and around 2% per year, but it's clearly each lease. As I mentioned, we are focused on long-term net leases.
Currently, the weighted average lease term is 10.2 years, with a well-diversified first lease maturity schedule that you can see here in particular. A quick flavor of some deals that we've done recently. This first one is a transaction, Orgill, which is the world's largest independent distributor of hardware goods. It's not True Value, but it's the independent version of True Value. Their $38 million warehouse that we purchased, it's actually in West Virginia on a very strong logistics corridor on I-81, just south of the I-70 interchange, close proximity to Baltimore, Washington. Well-located from a distribution standpoint. Long lease term, fixed annual rent escalations. Second deal highlights a couple aspects of our business. Number one, it's a European investment. This is a logistics property leased to Nippon Express. It's located in the Port of Rotterdam, which is the largest port in Europe.
This is actually an expansion of an existing facility that we've already owned. It highlights our ability to do follow-on transactions with our existing tenant base so we can generate what we view as incremental yield to the market, new buildings, long lease term, especially given the strength of this market. Again, this one is a CPI-based construction. I'm going to turn the presentation over to Toni to walk through our balance sheet.
Thanks, Jason. Since becoming a REIT in 2012, our strategy's been focused on maintaining our investment-grade ratings, remaining committed to our unsecured debt strategy, and ensuring we have access to a variety of capital sources and ample liquidity to give us flexibility in executing our business plan. In the past year, we further enhanced our credit profile. We have substantially improved our leverage metrics, both through the issuance of equity in the CPA 17 transaction and through our capital markets activity. We accessed the ATM program, taking advantage of a significant improvement in our cost of capital. We also successfully accessed both the U.S. and European bond markets. Last year alone, we issued EUR 1 billion of bonds in Europe, and those were at coupons just over 2%. In the U.S. this week, actually, we just announced the pricing on a 10-year U.S. bond, $325 million, 3.85%.
We've had a good amount of success in the capital markets. We'll continue to look to do that. We've continued to pay down our secured debt, including the debt we acquired from CPA 17 in that transaction. We'll do that in advance of maturity, and that maturity wherever we can, increasing our unencumbered pool of assets. If you just take a look at our current balance sheet position, our leverage levels are well within our target ranges. We have a clear path to bringing our secured debt below 10%. We have debt maturities that are very well laddered and manageable over the foreseeable future. We have substantial availability on our unsecured credit facility, leaving us well positioned to address near-term maturities that we can act opportunistically when the markets are well positioned for us.
I'm going to flip now to the dividend and stock performance. 2018 marked our 21st consecutive year of providing rising dividends to W. P. Carey shareholders. That's something we're very proud of and we continue to remain focused on. We will continue growing our real estate earnings to support that. Finally, most importantly, I think what you'll see here is a graphic demonstration of the total returns that W. P. Carey has realized for its shareholders since going public in 1998, how those returns have dramatically outpaced the broader market, which we're very happy to see. We will continue to execute on our strategy and our business plans to ensure that we're continuing to see those returns going forward. With that, I will turn it back to Susan.
Yeah, terrific. Thank you. Now that we've done our presentation, we'll open up for questions, if anyone has questions.
Howard, I assume you have a question.
I'll give you three, and then I'll wait for the rest.
Okay.
Oh, I'm sorry. Actually, my first question is a simple one. As my fellow CPA, when you just mentioned about the bonds and notes that we just issued, do they have sinking fund provisions and callable provisions in those notes and funds, out of curiosity?
Most of the bonds that we issue, all of them are callable just right before maturity, in a short window before maturity.
What about the sinking fund? Any sinking fund provisions in those bonds?
Protections against? No, there's nothing.
Okay. My second question is regarding our office in Great Britain and our properties there. I know it's about only 3.6%. I know I've asked you this last year, but due to the chaos in Brexit, and we also have an office, I understand, in London as well, how is that affecting our operations, not only in Britain, but the fact that the whole EU is in a quagmire as a result of Brexit? Since we got the properties, and you mentioned in the Netherlands, and there's also, I think I have seen one in Denmark, since that's part of EU. How is that affecting our strategies in terms of that as well?
It's a good question, one that we get from a lot of our investors. First of all, when you think about our business model, we're buying long-term net leases. We have credit-worthy tenants. They tend to be highly critical real estate to the operation of these companies. We build our portfolio for these very economic environments that you're talking about, when there's uncertainty, when there's perhaps low growth, perhaps even some dislocation as well. We do monitor all of our tenants to make sure that the health of the tenant is such that we think that there's no risk of them not being able to pay our rent. The short answer to your question is we don't have a lot in the U.K.
Right.
We do have a lot across Europe. Our tenants across Europe are generally very healthy. There's not a lot of concerns. In the U.K. specific, a lot of our exposure is in two areas, really one prime area. That's car dealerships, we haven't seen too much weakness in that space yet, especially since a big component of the profitability of that industry is in parts and service, which tends to be less exposed to any cycles or disruptions. Another large building that we have in the U.K. is leased to the U.K. government and their taxing authority, the U.K. version of the IRS. I don't think that's going anywhere anytime soon.
We feel good about our tenant base. In fact, if anything, when there is uncertainty, when there is dislocation, that could create opportunity for us. Companies that need to access capital, they may look to their real estate to do sale leasebacks. As Toni mentioned, we do like to keep our balance sheet flexible with a lot of liquidity. We're virtually undrawn in our credit facility, to the extent there is some disruption opportunity, we'll have the liquidity to take advantage of it.
Okay. I understand from what I've read, since Brexit, the British commercial market has been stagnant. It's actually gone down a little bit. That's why I mention that.
Yeah. I think a lot of that is focused in the office space in Central London. That's probably taken the biggest hit. You're right. I mean, Trade has slowed down. There's uncertainty, there's less transaction volume. There's probably incrementally less liquidity in the marketplace. It's something that we monitor.
I just want to ask one last question for now before I hand it over, because I know I don't want to hog up the floor. Even though potentially, there's potential privatization of Fannie Mae and Freddie Mac, which is solely in the residential area, how would that ramification, if they do turn private, affect, let's say, the commercial side and specifically our company, if that should occur?
You're right, they're focused on the residential, which is an area we don't play. We also don't rely on mortgages either to finance our investments. We've transitioned from a strategy in which, in the CPA programs and when we were borrowing mortgages to now an unsecured strategy where we have the ability, because of our investment-grade rating, to access the bond markets. It's a completely different marketplace, and anything that happens there wouldn't necessarily impact our ability to access the type of bonds that we just issued or the bond markets, such as what we just issued last week.
Okay, thank you. I'll be back.
Joe.
Mr. Fox, nice to see you again.
You as well.
Thank you for doing a great job and helping this company grow.
Sure.
By the way, I assume there's going to be a board meeting after this, and that we may have a vote on maybe another percentage increase on the dividend at the board meeting. Is that a possibility? Because I think there's one due at the end of June, right?
We'll issue a press release on the dividends.
I'm just trying to see if I have psychic powers, that's all.
Doesn't mean you don't.
I'm reading in here, we have in five years, about 19% of the leases are supposed to be up for renewal.
Right.
Generally speaking, that's not a major concern because 19% in five years doesn't seem like a very large number. Am I right in assuming that?
Yeah, I think that's right. We showed the slide earlier on our maturity profile. The way we manage our assets, we're very proactive in the approach, where we're looking two, three, four years, sometimes even longer ahead. You'll see that the profile of the lease maturities come down as we get closer into those years. I think the biggest year out of those four or five years is 2022. I think 2024 as well is actually a big year. We're already working on those. We feel comfortable with those years. 2024, which now I think about, is the biggest spike. A big piece of that is The New York Times headquarters that we own here in Manhattan. That lease does expire in 2024. The New York Times will exercise their purchase option to buy back that facility at the end of this year.
When that happens, you'll see that tower in 2024 come down as well.
Okay, that's great. Before the meeting started, I asked you something about the hotels. We have two hotels that isn't mentioned here. I said, "I think we ought to sell them," you said you were already contemplating that idea. You think it's a possibility we sell them this year?
Well, we're focused on, as you can tell from the transitions or the progressions we've made, being a pure-play net lease REIT. Owning operating assets long-term are not part of our model, our expectations are that at least one of those hotels, we will try to sell this year. The other one, which is going through a renovation, a planned renovation. We'll complete that renovation, look to stabilize the asset in terms of its ramp-up after having been closed some, then we would likely look to sell that as well. You're right. That's our plan. Ultimately, we want to be a pure-play net lease REIT. We're almost there. There are some incremental moves that we can make to get us there.
Another short question. I might have asked this question last year because Howard and I, we go to a lot of shareholders' meetings, I seem to have this thing on my mind. I can't get it off. It's the blockchain.
You asked that last year.
I did, I know. I ask it all the time at every company I go to. The thing moves very quickly, this blockchain technology. It's moving quickly. I'm wondering if the companies explore that possibility, maybe dealing with IBM or one of the major players in the blockchain space. Do you think there's any room for that in this organization or not? Then a side note, cryptocurrencies. Again, they're hot, up and down. I understand they're very volatile and all that. Bitcoin this morning is $8,200.
Well, I will say I can probably have a little bit more insight to your question this year than last year because I'm reading right now a book called "Bitcoin Billionaires.
You must be one.
By Ben Mezrich, it's about the Winklevoss twins.
Yeah
How they became Bitcoin billionaires.
Yeah.
The shorter answer is, it's not all that impactful at this point on our business. The currency side of it, I think that down the road, perhaps if that becomes more mainstream, will tenants look to transact? Perhaps, but I don't have visibility into that. In terms of the blockchain technology, there could be applications. I think that's a growing industry that has wide-ranging applications and our head of IT certainly is more in tune in that than I would, but that's kind of the extent of any interactions we would have with that.
Just a question on the accounting here. Do most of the tenants that pay the rents and all that, are they paying their rents electronically, or are they still using things like checks?
The majority are now doing it electronically. You'd be surprised though that we do still get a handful of checks in the office.
You still get checks?
I would say the majority, the vast majority, are now electronically.
I got it. Thanks.
Okay. If there's no more questions. Oh, you have another one, Howard? Okay.
I'm back. I'm just curious, what is the vacancy rate of our properties? I know it's a lot harder to do it in net lease than acquiring the property, have we figured what our vacancy rate is overall?
Yeah. It's currently just over 98% is our occupancy. The vacancy is just 1.8%. That'll fluctuate. Vacancy is in the, I would say, 1%-3% range, depending on where we are with transitioning a particular asset. We're comfortable in that zone.
In terms of By the way, I think the average is something like 96%, at least in New York metropolitan area, so we're above that. Have we ever done an analytical study, what these vacancies are costing us on our balance sheet? I know it's pretty hard to distinguish when you got properties, let's say, if you got security, because they got to do the whole thing whether you have a vacant space or not. Have we ever done some type of study what these vacancies of the 1.8% is in terms of the carrying cost on our books?
I think that's something we evaluate on an ongoing basis. Given that we have been able to maintain occupancy in the 99% range, it has not really been a significant expense for us on any of our assets. It's certainly something that we're mindful of, and that's why when there is a vacancy, we've either addressed it ahead of time or quickly thereafter, and we'll look to dispose the property or re-lease it pretty efficiently. Definitely not a heavy vacancy carrying cost for us.
These few vacancy properties that we've had, what's usually the timeframe from the termination from the tenant to a new tenant? In other words, how long these vacancies usually remain?
Big range. I mean, as Toni mentioned, we stay on top of the assets, and we typically have a lot of dialogue with our tenants well in advance of their lease expiration. We have good ideas which assets may become vacant and which ones will get renewed. We stay ahead of it. That being said, it's really market specific. It could be vacant for a very short period of time, less than a couple of months. Depending on the depth of the market and how long we want to hold out for certain rent levels, it could be substantially longer than that.
Finally, any of our buildings here in New York City area are built out of steel, since according to our comrade mayor, we're going to have to tear it down?
Yes. The answer to that is yes. We do have a lot of steel-structured buildings.
If we have to tear it down, what we're going to do, build it from cardboard and tinfoil?
We have one in Manhattan, we have some self-storage properties that'll have some steel skeleton. We'll figure that out when that time comes.
Okay, I just have a comment after the meeting's over to you.
Great.
Thank you.
For the questions. Yes.
Matt Paulshipper. I'm a private trustee from Boston. We have clients who have a fair number of shares.
Great.
Very pleased.
Great to hear.
We are concerned that interest rates from current level in due course will go up, how does Carey respond today to the likelihood that rates will go up higher, at least higher than they are?
That's a good question. I think in terms of our balance sheet and where we're positioned right now, we have very limited exposure to variable rate debt. I think our credit facility is the bulk of it, and we keep that at very low balances. With our business model, we look to lock in fixed rates so that we are not subject to volatility on the interest expense side.
Fixed rate as opposed to hedged.
Variable rate.
Floating rate.
Right. Not hedged. You're right. These are fixed rate debt.
I think on the asset side, what's important is that because we have CPI increases built into majority of our leases, as the interest rates rises, typically it's associated with inflation rates, and we're going to capture the increase in inflation rate in our lease escalations. That will hedge the impact on the valuation of our assets. That's one of the ways how we build in the protections against different cycles, including rising interest rate environments.
You would not hedge in the sense of hedging your gains.
No.
Right. No financial instruments. That's right.
Keep in mind also, we own hard assets. To the extent we're in an inflationary environment, we would expect our hard assets to increase in value as well. It's not a bond that gets eroded. These are hard assets that do have, as John mentioned, cash flow characteristics that should do well in inflation, but also a hard asset itself.
Okay. Terrific. Thank you. Now that we are finished with the Q&A, will the inspector of elections please announce the results?
With respect to proposals, all directors have been elected, and all proposals have been approved.
All right.
Great. If there's no further business to come before the meeting, I'll now entertain a motion to adjourn. Is there a second?
Second.
Great. There's been a move and second that the meeting will be adjourned. All in favor say aye.
Aye.
Opposed? The ayes have it. The meeting's adjourned. Thanks for joining us. See you all next year.
Thank you.
Thanks.