Hello, welcome to this conference call hosted by W. P. Carey to discuss today's announcement. My name is Diego. 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, thank you all for joining us. I need to remind everyone that some of the statements made on this call are not historic facts, 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 wpcarey.com, where it will be archived for approximately one year. With that, I will turn the call over to Jason.
Thank you, Peter, good morning, everyone. I'm excited to discuss the transaction we announced this morning to acquire CPA:17 , to answer your questions along with our President, John Park, and our CFO, Toni Sanzone. Our board of directors has voted unanimously to approve our acquisition of CPA:17 . 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. 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-K 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:17 .
This implies a price of $10.72 for each CPA:17 share based on W. P. Carey's closing price of $67.03 on Friday. The exchange ratio is fixed. We expect to close the transaction around the end of this year. CPA:17 is a $6 billion 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, 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 three. 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, recurring, command a higher multiple than finite life investment management earnings.
On a pro forma 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:17 – Global, which we estimate will cause a $0.65-$0.70 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:17 – Global'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.
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. Third, we will gain significant scale, which will allow us to operate more efficiently. We expect G&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:17 – Global's non-net lease assets, which includes 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 six, they are substantially similar to our own. The geographic diversity of the CPA:17 – Global portfolio is consistent with our focus on North America and Northern and Western Europe. 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:17 – Global'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 1,100 properties, over 300 tenants, and over $1 billion 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 five. 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 $2.3 billion in 2011 to $11.5 billion today.
Pro forma for the acquisition of CPA:17, we expect our enterprise value to increase to over $17 billion, and cement our position as the dominant diversified net lease REIT. With that, I'll hand the call back to the operator to take questions.
Thank you. At this time, we will take questions. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number two. Once again, to ask a question, press star followed by the number one on your telephone keypad. Our first question comes from Sheila McGrath with Evercore. Please state your question.
Yes. Good morning. Jason
Sheila.
I just wanted to confirm on the cap rate. Is that a cash cap rate? What are your long-term plans for the self-storage and cold storage assets that you would be acquiring?
Yeah, sure. It is a cash cap rate. Our underwriting is around a 6.9% cap rate. We think the net lease assets are above a 7% cap rate given some of the higher multiple non-net lease assets, some of which you mentioned. With regards to cold storage, those are net leases. It'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. 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 the space since 2004.
The portfolio is a very good group of assets. As a portfolio, would likely command a cap rate well inside the roughly 7% cap rate that we're acquiring CPA :17. It's also an asset class that's in high demand. They're very liquid. We'll have lots of options when we choose to do something with them. For now, we'll continue to evaluate that.
Okay. 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. Issuing a lot of shares, you're getting rid of the investment management fees, but taking on more ownership of the real estate. Just help us think about impact to AFFO.
Yeah, sure. From an accretion dilution standpoint, I think you need to take into consideration the fact that the CPA:17 asset management fees are finite in nature and going away regardless of who acquires the fund or its assets. That's the baseline from which we look at this, and I think that you need to run your analysis as well. As I mentioned earlier, the CPA:17 fee income currently contributes about $0.65-$0.70 of AFFO. That'll 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. 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. I think in short, we talk about the $0.65-$0.70 associated with investment management. We think at a minimum, we'll make up $0.35-$0.40 of that through the accretive nature of the real estate. There's some upside there. 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's some upside in terms of the accretion we can derive from the acquisition of real estate assets. First of all, we view this transaction as a deleveraging transaction from a balance sheet perspective, as our debt to gross assets will decline from the high 40s to mid to low 40s. On a leverage neutral 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:17 does not have.
What we have assumed is that we'll simply assume all the mortgages from CPA:17 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 Euro debt, which we've done, and we can do that again with CPA:17's assets. If the differential between Euro debt 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 dilution, 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. Then just in terms of the process, what sort of process did the CPA:17 board run in this exclusive?
Say that again. What type of process did CPA:17 run?
Right. The independent board, what was the process that they ran, and was it an exclusive deal or was it shopped?
Yeah. It was actively negotiated between us. The directors of CPA:17 formed a special committee to evaluate. In terms of whether it was shopped, there is a go shop base in the agreement. I think it's reasonable to assume there was not a marketing process. Really, we don't have a lot of visibility into what the CPA:17 special committee considered. It'll obviously come out in the proxy in the coming months, but we don't have a lot of insight into what they pursued.
Just in terms of funding it with equity, how did you think about either issuing shares to institutional investors versus directly issuing the shares to the non-traded REIT shareholders?
Yes. This is John Park. We feel very comfortable issuing equity at current levels. We like the fact that we're issuing them without any discount or friction cost. We believe that it's a win-win for both sides in that CPA 17 shareholders based on previous transactions with CPA:15 and CPA:16 value the tax deferred nature of the currency, which is substantially similar to the investment they're getting. We believe that it's attractive to CPA 17 shareholders and attractive for W. P. Carey. 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.
Just finally 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, we expect this transaction to be ratings neutral. Our secured debt ticks up modestly to 20% range. 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. P. Carey and the core business of CPA:17 are relatively similar. When you stopped kind of raising capital for these non-traded REITs that eliminated a lot of potential G&A savings. Are there any G&A synergies you can potentially get from this transaction?
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&A by about 10%, which really only reflects the loss of the reimbursement that we currently receive from CPA:17. That takes our run rate on cash G&A up to the mid to high $70 million range. I think we continue to evaluate ways to achieve efficiencies over the entire platform, and we'll continue to monitor that. I think that again, bringing on the scale of the assets of this size and spreading our G&A over that larger asset base, we certainly bring down our metrics from a G&A to growth assets perspective, and we're comfortable there.
On the debt side, the numbers you're quoting and the numbers on slides 10 and 11 of the presentation, are those pro rata for your JV interests? If not, how would those change the metrics you're quoting?
Our metrics are presented on a pro rata basis.
Thanks. That's it for me. Thank you very much.
Thank you. Just a reminder, to ask a question, press star one on your telephone keypad. Once again, to ask a question, press star one on your telephone keypad. To remove yourself from the queue, press star two on your telephone keypad. 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:17 will probably not be charging W. P. Carey, 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:17. 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. Should there be a topping that consummates, our promote will be calculated based on a formula. In terms of third parties, in addition to our back-end fees, we have several other advantages over other buyers in that we have the ability to assume all of CPA:17's debt without delays or friction costs. We have about a dozen JVs with CPA:17. CPA:17 also has JVs with CPA:18.
I would say that the most significant advantage we have is that we know the risk and opportunities of every asset in CPA:17's portfolio, and we have the infrastructure and platform to extract maximum value out of those assets.
To quantify it, is it 15% of the total value? What's a number we can arrive at?
Again, it really depends on the price, but we expect it to be a significant number.
Yeah. Todd, it's a 15% over six 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 forma the transaction.
Sure, Sheila. As John mentioned, this is a de-levering transaction from a debt-to-gross 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 tick up to maybe just over six times, low sixes, and we do expect to take that down over time with some of the strategy that John mentioned.
Okay, great. Then I was wondering if you could talk about your past experience of acquiring the CPA managed funds in terms of selling pressure upon closing and how many shareholders stay in the stock and what might be their incentive. 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 the acquisition of CPA:15 and CPA:16, which were both structured as tax-deferred share transactions. What we have experienced is that many or majority of those investors elected to stay as W. P. Carey shareholders. They continue to get high-quality income that's very secure, and they are retail income investors. For those investors who sold after the merger's consummated, we saw some elevated trading volume for a week or two, but orderly market dynamics thereafter.
Okay. Thank you.
Thank you. Our next question comes from Michael Griffin with Citigroup. Please state your question.
Hey, it's Michael Borman here.
Hi, Michael.
Just a few questions. At the current offer price, what is the return that is delivered to CPA 17 shareholders? 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%. Most recently, it's been about 6.5%. We're into that hurdle. The shares being sold at a $10.72 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 CPA 17 investors have realized. We expect it to be around 7%.
Over a 10-year life.
Right. What is it per share that a other buyer would have to effectively a break fee. 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. That's right.
A certain part of the real estate accretion is coming from levering up the balance sheet on a debt to EBITDA basis. I guess if you were to run this transaction on a leverage-neutral basis, the dilution would be much greater, correct?
No, Michael, we don't view it that way. We believe that this is actually a de-leveraging transaction because the debt to EBITDA includes, assumes that the fee revenue from CPA:17 continues. The way we view it is that once the CPA:17 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. 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:17?
Michael, could you repeat that question?
I'm sorry. What's the current cost of debt at CPA:17?
It's just around 4%.
Then just lastly on process, I guess why wouldn't the special committee have run a fulsome process to try to max. I understand why you at WPC are sort of advocating why you're the best to have bought, but why wouldn't the board have undertook a more fulsome process to see if maybe carving up the portfolio to its properties parts, 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 of the non-traded shareholders?
Yeah, 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. We really don't have a lot of visibility. We'll all get a look into what they did and considered when the proxy comes out, of course. Until then we don't have a lot of insights there.
We can tell you that this transaction has been actively negotiated. CPA:17 formed a special committee in the third quarter of last year. As Jason said, you will read all about their process when we file the proxy.
Yeah, we're as interested as you are.
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.