Hello, and welcome to this conference call hosted by W. P. Carey to discuss today's announcement. 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 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 and thank you all for joining us. I need to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward looking statements, including but not limited to statements regarding the timing and or expected impacts of the proposed merger. Factors that may 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 website at wpkerry.com, where it will be archived for approximately 1 year. And with that, I will turn the call over to Jason.
Thank you, Peter, and good morning, everyone. I'm excited to discuss the transaction we announced this morning to acquire CPA:seventeen and to answer your questions, along with our President, John Park and our CFO, Tony Sanzone. Our Board of Directors has voted unanimously to approve our acquisition of CPA:seventeen. I would like to start with a quick overview of the key terms of the deal, as well as a brief description of the assets we are acquiring. But mostly, I want to focus on why we believe this is such a compelling transaction for our shareholders.
I'm going to refer to a handful of slides, which we have filed in an 8 ks and are available in the Investor Relations section of our website. The key terms of the agreement are that W. P. Carey will issue 0.16 shares for each share of CPA:seventeen. This implies a price of $10.72 for each CPA:seventeen share based on W.
P. Carey's closing price of $67.03 on Friday. The exchange ratio is fixed and we expect to close the transaction around the end of this year. CPA:seventeen is a $6,000,000,000 non traded REIT, which we have managed for over 10 years. It is invested mostly in a diversified portfolio of net lease real estate in the U.
S. And Europe and fits nicely within our existing portfolio. We see a number of compelling benefits to W. P. Carey shareholders from this transaction, which are summarized on Slide 3.
Most importantly, after closing, our business will be simpler. Almost all of our earnings will be derived directly from real estate lease revenues, which are long term and recurring and command a higher multiple than finite life Investment Management earnings. On a pro form a basis, only about 4% of our AFFO will come from Investment Management, down significantly from about 20% currently. As a result of this transaction, we will no longer earn fees from managing CPA:seventeen, which we estimate will cause a $0.65 to 0 point 7 0 dollars reduction in AFFO from our Investment Management segment. However, we anticipate that more than half of that decline will be offset by accretion to AFFO from acquiring CPA:seventeen's real estate.
As a result, 96% of AFFO will come from our real estate segment, up from about 80% currently. Given the meaningfully higher value ascribed to real estate cash flows, we believe the net overall effect of this transaction will be to create value for our shareholders. 2nd, we are enhancing our credit profile through both simplification and the fact that our interest expense and dividend will now be covered by a much larger percentage of real estate earnings. We will continue to have a strong and flexible balance sheet and we do not expect any impact on our ratings. And third, we will gain significant scale, which will allow us to operate more efficiently.
We expect G and A as a percentage of both total balance sheet assets and as a percentage of total rental revenues to decline. We believe these key benefits will help drive long term earnings growth by improving our cost of capital and thereby increasing both the pool of accretive opportunities available to us as well as the spreads we'll be able to achieve. This transaction is an important next step in our evolution to focusing exclusively on net lease investing for our own balance sheet. It is also a truly unique opportunity for us to acquire a large high quality portfolio of real estate that fits well within our existing portfolio. These are also assets that we know extremely well.
We underwrote them, we acquired them and we currently manage them. We estimate the cap rate for the overall transaction to be just under 7%. However, taking into account CPA:seventeen's non net lease assets, which include self storage, we believe we are acquiring the net lease real estate at a cap rate above 7%. At that yield, we would view this as an investment that is accretive to both our real estate earnings and our NAV. In terms of the assets themselves, details of which start on Slide 6, they are substantially similar to our own.
The geographic diversity of the CPA:seventeen portfolio is consistent with our focus on North America and Northern and Western Europe, and it's well diversified by asset type with warehouse and industrial comprising approximately 43% of ABR. These leases include the type of rent increases that we consider most attractive, with over 60% of CPA:seventeen's ABR coming from leases with rent bumps tied to inflation. We expect the transaction to enhance the overall quality of our portfolio, including extending our weighted average lease term to 10.4 years, reducing our top 10 tenant concentration to 25.3% with only 2 tenants comprising greater than 3% of ABR and increasing the percentage of ABR from investment grade tenants. The combined portfolio will have over 1100 properties, over 300 tenants and over $1,000,000,000 of annual rent. There is virtually no integration risk and there will be no changes to our management or Board.
W. P. Carey's ranking by equity market cap will significantly increase as a result of this transaction, ranking us as the 21st largest public REIT as shown on Slide 5. We would also expect the shares issued as part of this transaction to promote greater liquidity in our stock. As shown on Slides 12 and 13, since converting to a REIT in 2012, we have created significant value for our shareholders through a combination of organic growth and large transformative transactions like this one, outperforming the broader REIT index and our net lease peer group as well.
As a result, our enterprise value has grown from $2,300,000,000 in 20.11 to $11,500,000,000 today. Pro form a for the acquisition of CPA:seventeen, we expect our enterprise value to increase to over $17,000,000,000 and cement our position as the dominant diversified net lease REIT. And with that, I'll hand the call back to the operator to take questions. Thank
Our first question comes from Sheila McGrath with Evercore. Please state your question.
Yes, good morning. Jason, I just wanted to confirm on the cap rate. Is that cash cap rate? And what are your long term plans for the self storage and cold storage assets that you would be acquiring?
Yes, sure. It is a cash cap rate. It's around our underwriting is around a 6.9% cap rate. But we think the net lease assets are above a 7% cap rate given some of the higher pull non net lease assets, some of which you mentioned. With regards to cold storage, those are net leases.
That's an asset class that we like very well, one that we know very well and one in which we've been invested for quite a long time. So there are no plans to do anything with those cold storage assets that we require. In terms of self storage, they make up the bulk of the net lease assets that are operating properties, and also beyond our core focus of being a pure play net lease REIT. Self storage is an industry that we know well. We've been investing in this space since 2004 and the portfolio is a very good group of assets.
And as a portfolio would likely command a cap rate well inside the roughly 7% cap rate that we're acquiring CPA:seventeen. It's also an asset class that's in high demand. They're very liquid. So we'll have lots of options when we choose to do something with them. But for now, we'll continue to evaluate that.
Okay. And as a follow-up, I was wondering if you could help us understand, the impact to AFFO. I understand it won't be till next year, but issuing a lot of shares, you're getting rid of the investment management fees, but taking on the more ownership of the real estate. Just help us think about impact to AFFO.
Yes, sure. So from an accretion dilution standpoint, I think you need to take into consideration the fact that the CPA:seventeen asset management fees are finite in nature and going away regardless of who requires the fund or its assets. So that's the baseline from which we look at this and I think that you need to run your analysis as well. And as I mentioned earlier, the CPA:seventeen fee income currently contributes about $0.65 to $0.70 of AFFO. That will go away.
However, the real estate transaction itself is highly accretive. We're buying high quality portfolio of net lease assets in and around a 7% cap rate, which we think is a significant spread to our cost of capital. So as a result, at a minimum, we'll make up at least half of the loss of investment management AFFO through the accretive nature of the real estate. I think more importantly from an NAV perspective, the value of the investment management cash flows lost is more than offset by the value created from acquiring the portfolio at such an attractive cap rate given the significantly higher multiple placed on real estate FFO compared to the multiple used that we would value investment management fee income. But I think in short, we talk about the $0.65 to $0.70 associated with investment management.
We think
at a
minimum, we'll make up $0.35 to $0.40 of that through the accretive nature of the real estate. And there's some upside there. And John, I don't know if you want to talk about some of the upside beyond that.
Sure. Good morning, Sheila. We do believe that there is some upside in terms of the accretion we can derive from the acquisition of real estate assets. First of all, we view these trends gross assets will decline from the high 40s to mid-twenty gross assets will decline from the high 40s to mid to low 40s. So on a leverage mutual basis, we could realize much more accretion.
If we choose to keep it, we're in the mid to low 40s, that just means that we are creating additional balance sheet flexibility, which we can use to drive earnings growth in the future. In terms of other upside that's possible is that we have not assumed any of the benefits of tools and strategies that are available to W. P. Carey that CPA:seventeen does not have. So what we have assumed is that we'll simply assume all the mortgages from CPA:seventeen and pay them off as they mature.
Obviously, we believe that there will be significant savings that we can realize from replacing them with bonds, and we may be able to pull forward some of that benefit. The other upside could be that from applying our strategy of overweighting our balance sheet to EuroDebt, which we've done. And we can do that again with CPA:seventeen's assets. And if the differential between EuroDAD and U. S.
Debt continues, we expect to realize benefits from there as well.
Okay. Thank you.
Thank you. Our next question comes from Michael Griffin with Citigroup. Please state your question.
Thanks. This is Nick with Michael. Just on the division, is there any impact of mark to market of debt in that number that you're quoting?
No, we don't take into account mark to market of debt in the AFFO numbers.
Okay. And then just in terms of the process, what sort of process is the CPA:seventeen board run and what's the exclusive?
Say that again, what type of process did CPA:seventeen run?
Right. What the independent Board, what was the process that they ran and was it an exclusive deal or was it shopped?
Yes. It was actively negotiated between us And the directors of CPA:seventeen formed a special committee to evaluate. In terms of whether it was shopped, there is a go shop in the agreement. So I think it's reasonable to assume there was not a marketing process. But really we don't have a lot of visibility into what the CPA:seventeen special committee considered.
It will obviously come out in the proxy in the coming months, but we don't have a lot of insight into what they pursued. Thanks.
And then just in terms of funding it with equity, how did you think about either issuing shares, institutional investors versus directly issuing the shares to non traded to shareholders?
Yes. This is John Park. We feel very comfortable issuing equity at current levels, and we like the fact that we're issuing them without any discount or friction cost. And we believe that it's a win win for both sides in that CPA:seventeen shareholders based on previous transactions with CPA:fifteen and CPA:sixteen value the tax deferred nature of the currency, which is substantially similar to the investment they're getting. So we believe that it's attractive to CPA:seventeen shareholders and attractive for W.
P. Carey. And we like the fact that by structuring the transaction as 100% equity, that we're creating balance sheet flexibility that we can utilize into the future.
Fine. On the balance sheet, is there anything from a rating agency perspective in terms of triggering any covenants of increasing the secured debt load?
No, not at all. We've had discussions with the rating agencies and we expect this transaction to be ratings neutral. Our secured debt ticks up modestly to 20% range, but we have plans to bring that back down to below 10% in the near future.
Thanks.
Thank you. Our next question comes from John Massocca with Ladenburg Thalmann. Please state your question.
Good morning, everyone.
Good morning, John.
Good morning, John.
I know the core business of W. B. Carey and the core business of CPA:seventeen are relatively similar. And when you stop kind of raising capital for these non traded REITs that eliminated a lot of potential G and A savings. But are there any G and A synergies you can potentially get from this transaction?
Yes. I think the way that we're thinking about it is that on a current basis, we're taking on a portfolio that increases our assets by about 50% and we only expect to increase our G and A by about 10%, which really only reflects the loss of the reimbursement that we currently receive from CPA:seventeen. That takes our run rate on cash G and A up to the mid to high $70,000,000 range. Now I think we continue to evaluate ways to achieve efficiencies over the entire platform and we'll continue to monitor that. But I think that again bringing on the scale of the assets of this size and spreading our G and A over that larger asset base, we certainly bring down our metrics from a G and A to growth assets perspective and we're comfortable there.
Okay. And then on the debt side, the numbers you're quoting and the numbers in slides 10 and 11 in the presentation, are those pro rata for your JV interests? And if not, how would those change the metrics you're quoting?
Our metrics are presented on a pro rata basis.
Okay. Thanks. That's it for me. Thank you very much.
Thank Our next question comes from Todd Stender with Wells Fargo. Please state your question. Hi, thanks. How much is the promoted interest payment that CPA-seventeen will probably not be charging WP Carry just to make it not as attractive maybe to another third party to
come in during the go shop period?
Good morning, Todd. We have several back end fees from CPA:seventeen, most significant of which is what you mentioned, which is our 15% participation above a 6% hurdle. As you mentioned, we're waiving all our fees because in essence, we'll be paying ourselves. But should there be a topping that consummates, the promo will be calculated based on the formula. In terms of third parties, in addition to our back end fees, we have several other advantages over other buyers and that we have the ability to assume all of CPA:seventeen's debt without delays or friction costs.
We have about a dozen JVs with CPA:seventeen. CPA:seventeen also has JVs with CPA:eighteen. But I would say that the most significant advantage we have is that we know the risk and opportunities with of every asset in CPA:seventeen's portfolio and we have the infrastructure and platform to extract Again,
it
really depends on
Again, it really depends on the price, but we expect it to be a significant number.
Yes. And Todd, it's a 15% over 6% hurdle is the way it's calculated.
Okay, got it. Thank you. Thank you. Our next question comes from Sheila McGrath with Evercore. Please state your question.
Yes. I was wondering if you could tell us what the net debt to EBITDA goes from and is pro form a the transaction?
Sure, Sheila. As John mentioned, this is a delevering transaction from a debt to growth assets basis, bringing us down from the high 40s to the low to mid 40s. On a net debt to EBITDA basis, we expect it will pick up to maybe just over 6 times, low 6s. And we do expect to take that down over time with some of the strategy that John mentioned.
Okay, great. And then I was wondering if you could talk about your past experience of acquiring the CPA, the managed funds in terms of selling pressure upon closing and how many shareholders stay in the stock and what might be their incentive? Is it do they when you close, are they going to have tax implication that would put some selling pressure? Just some insight there, that would be great.
Sure, Sheila. This transaction is structured very similar to transactions. And what we have experienced is that many or majority of those investors elected to stay as W. P. Carey shareholders and that they continue to get high quality income that's very secure and they are retail income investors.
And for those investors who sold after the merger is consummated, we saw some elevated trading volume for a week or 2, but orderly market dynamics thereafter.
Thank you. Our next question comes from Michael Griffin with Citigroup. Please state your question.
Hey, it's Michael Bilerman here. So just a few questions. So at the current offer price, what is the return that is delivered to CPA 17 shareholders? So you talked about the promoted 15% above the 6%. What does the transaction imply to shareholders?
Well, we paid a dividend since inception of greater than 6%. It's most recently it's been about 6.5%. So we're into that hurdle. And then the shares being sold at a 10 point 72 effective price, we would get 15% of that incremental value above the 10% plus you have to factor in the excess dividends that have been paid over the hurdle mark as well.
I think, Michael, you may be referring to the return that CK17 investors have realized, and we expect it to be around 7%.
So it would be a 10 year life.
Right. So what I mean, what is it per share that a other buyer would have to effectively break fee effectively? So what is that on a per share basis?
Our estimate, it would be north of $11
To make it equivalent on an apples to apples basis?
That's right.
And then a certain part of the real estate accretion is coming from levering up the balance sheet on a debt to EBITDA basis. And so I guess if you were to run this transaction on a leverage neutral basis, the dilution would be much greater, correct?
Michael, we don't view it that way. We believe that it's actually a delevering transaction, because the debt to EBITDA includes assumes that the fee revenue from CPA:seventeen continues. The way we view it is that once the CPA:seventeen special committee and their advisors determine that this is the right time to liquidate, the value associated with that contract or the income is limited to the present value or the duration of the time to liquidate. So we believe that the more appropriate measure of leverage is on a debt to gross assets basis.
What's the current in place cost of debt at CPA:seventeen?
Michael, could you repeat that question?
I'm sorry. What's the current cost of debt at CPA:seventeen?
Just around 4%.
And then just lastly on process. I mean, I guess, why wouldn't the special committee have run a fulsome process to try to I understand why you, WPC, are sort of advocating why you're the best to have thought. But why wouldn't the Board have undertook a more fulsome process to see if maybe carving up the portfolio to its top of the parks, finding the best buyer for self storage, finding the best buyer for the different types of properties that are there, seeking out bids, running a full process rather than giving a limited 30 day go shop. Why is that in the best interest it might be non traded shareholders?
Yes. Michael, we don't have, as I said before, a lot of visibility into what they considered. They have separate financial and legal advisors, that I assume evaluated all options for them, but we really don't have a lot of visibility. We'll all get some a look into what they did and considered when the proxy comes out, of course. But until then, we don't have a lot of insights there.
But we can tell you that this transaction has been actively negotiated. CPA 17 formed a special committee in the Q3 of last year. And as Jason said, you will read all about their process when we file the process. Yes.
We're as interested as you That's right.
Okay. Thank
you. Thank you, Michael.
Thank you. At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands.
Great. Thanks everyone for your interest in W. P. Carey. If you have additional questions, please call Investor Relations on 212-492 1110.
That concludes today's call. You may now disconnect.