Hello, and welcome to this conference call hosted by W. P. Carey to discuss this morning's announcement. My name is Kevin, and I'll be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we'll be taking questions via the phone line. Instructions on how to do so will be given at that time. I will now hand the program over to Peter Sands, Director of Investor Relations. Mr. Sands, please go ahead.
Good morning, everyone, and thank you for joining us. Before we begin, I want to briefly 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 described in our Form 10-K filed with the SEC on February 11th of this year and the Form 8-K announcing the proposed merger filed this morning.
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'll turn the call over to our Chief Executive Officer, Jason Fox.
Thank you, Peter, and good morning, everyone. I'm excited to discuss this morning's announcement regarding our proposed acquisition of CPA:18, the non-traded REIT we've managed over the past 7 years. Total consideration for the acquisition is $2.7 billion, comprised of stock and cash, and includes the assumption of CPA:18 debt. A presentation summarizing the proposed transaction's main terms and benefits, as well as its key impacts on our portfolio and balance sheet, is available in the investor relations section of our website and has also been filed in an 8-K.
Joining me on this call are John Park, our President; Toni Sanzone, our CFO; and Brooks Gordon, our Head of Asset Management, who are available to answer questions. Let's start with a brief overview of the deal itself.
We agreed to acquire CPA:18 for $10.45 per share, consisting of $7.45 per share of stock and $3 per share of cash, with each share of CPA:18 converted to a W. P. Carey share at a fixed exchange ratio of 0.0978x . We expect to fund the cash component mostly through asset dispositions, both pre- and post-closing, but we also have ample liquidity through our revolving credit facility and amounts available under our existing equity forward to fund the cash consideration without the need to access any new capital.
Once the transaction is closed, W. P. Carey shareholders are expected to own approximately 93% of the combined company's equity, and CPA:18 shareholders are expected to own approximately 7%.
In terms of timing, we currently expect the transaction to close in the third quarter of 2022, subject to customary closing conditions, including CPA:18's need to obtain shareholder approval. The transaction does not require approval by W. P. Carey shareholders. It has the unanimous support from both W. P. Carey's Board of Directors and CPA:18's special committee. No changes to our Management or Board will result from the transaction, and in our view, there's effectively no integration risk, having managed the funds since its inception and given our prior successful acquisitions of other CPA funds.
For W. P. Carey, the transaction provides a number of compelling benefits. First, we expect it to be immediately accretive to our real estate AFFO per share, about 2% on a full year basis.
This accretion is expected to replace over half of the estimated $0.15 per share of income we earned from managing CPA:18 with higher quality lease revenues. The resulting impact on total AFFO per share is therefore expected to be about a $0.06 decline. I also want to highlight that this transaction replaces finite life investment management income with stable and recurring real estate revenues. Similar to our acquisition of CPA:17, we believe that by transitioning to higher quality income, we're improving the nature of our earnings that cover our dividend and debt obligations going forward.
I'm extremely pleased with the progress we've made in recent years, delivering value to our shareholders as we've transitioned away from investment management and focused on growth through acquisitions.
While we will achieve cost synergies from combining the two companies, primarily from the elimination of public company costs within CPA:18, overall, our G&A is expected to modestly increase by about $4 million on an annualized basis, since we will no longer be reimbursed by CPA:18 for certain costs. It's also important to note, however, that pro forma for the transaction, our G&A will support a larger owned portfolio and remain in line with some of the most efficient net lease REITs. Another benefit of the transaction is that CPA:18's net lease assets fit well with our current portfolio.
Given the similarities and the small size of CPA:18 compared to W. P. Carey, our overall portfolio metrics will remain relatively similar pro forma for the transaction. CPA:18's portfolio is also high quality and well-diversified by asset type, geography, tenant, and tenant industry.
Our top 10 tenant concentration will be reduced to approximately 19%, with no new tenants being added to our top 10 list. The percentage of annualized base rent, or ABR, we generate from investment-grade tenants will increase, although our weighted average lease term will decrease slightly. Like W. P. Carey, virtually all of CPA:18's ABR comes from leases with built-in rent growth. Including over 40% of the ABR from CPA:18's net lease portfolio that has rent bumps tied to CPI, ensuring we continue to see potential upside to our same-store growth from inflation.
We expect ABR from both office and Europe to remain consistent with our current levels as we've targeted certain CPA:18 European office buildings for disposition to help fund the cash consideration in the transaction. I want to also highlight that CPA:18 assembled a desirable portfolio of operating self-storage assets.
These are assets with strong rent growth profiles comprising 65 properties over 5 million sq ft, which by comparison, is more than twice the size of the operating self-storage portfolio we acquired in our previous merger with CPA:17. The acquired self-storage portfolio gives us lots of optionality going forward and interesting upside potential. One possibility is to convert some or all of these self-storage assets to long-term triple net leases with an established self-storage operator, similar to the transaction we did in 2019.
In that scenario, our U.S. net lease ABR would increase significantly, and our overall asset mix would be enhanced. We would also expect to see positive impacts on certain key portfolio metrics, including weighted average lease term and the percentage of ABR from investment-grade tenants.
Another attractive option would be to sell the operating self-storage assets at tight cap rates, enabling us to accretively fund future net lease investments or potentially reduce debt. They're operating assets that we know well, primarily managed by Extra Space Storage and CubeSmart, and we are very comfortable with the existing management agreements and potential near-term growth from these properties. We have a variety of interesting options to evaluate, and we'll take our time to achieve the optimal outcome for our investors.
The final point I want to address this morning is the impact of the transaction on our balance sheet. Given the relatively small size of the fund and its current leverage profile, we don't expect it to meaningfully affect our key balance sheet metrics.
While leverage will tick up slightly, we expect to remain within our target leverage ranges of mid to high fives on net debt to EBITDA and low to mid-forties on debt to gross assets. We also expect to remain well within the secured debt limits expected by the rating agencies, despite adding mortgage debt with this transaction. Refinancing this debt may in fact present an opportunity for additional accretion through interest cost savings, especially if we issue Euro bonds, which would also optimize our debt levels for purposes of hedging our European cash flows.
Any potential interest savings have not, however, been factored into our AFFO accretion calculations. Importantly for the balance sheet, we don't expect to have any equity or debt issuance needs associated with the closing of the transaction.
Planned asset sales, primarily CPA:18 student housing assets and certain of its European office buildings that we've targeted for disposition, will generate net proceeds that cover almost the entire cash component of the deal. In closing, we view the acquisition of CPA:18 as a unique opportunity to acquire a portfolio that we know well with embedded upside while generating real estate AFFO accretion for our shareholders, effectively concluding our transition to higher quality and more valuable real estate earnings and further increasing our scale.
We believe all of this will lead to operational and capital markets benefits, enhancing both our cost of capital and growth profile going forward. With that, I'll hand the call back to the operator to take questions.
Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment please while we poll for questions. Our first question today is coming from Brad Heffern from RBC Capital Markets. Your line is now live.
Hey, good morning, everyone. Congrats on getting this over the finish line.
Thanks, Brad.
Anything you can tell us about the process here? Was it competitive? Were there other bidders? Thanks.
Yeah, sure. CPA:18, it's around the ninth year from when we began raising the fund. Based on the prospectus, the guidelines in the prospectus, you know, this was timely to consider liquidity options for the fund. It was really the natural time to begin discussions with the independent directors of CPA:18. It was actively negotiated between us and CPA:18 in an arm's length process. I think as you know, when we file the S-4, you know, you'll see specific details of the back and forth, but you know, that's basically what we can tell you right now.
Okay, got it. Can you talk about what the implied cap rate is here and maybe give the NOI number for the self-storage business?
Yeah, sure. The going-in cash cap rate is in and around 6%, for the entire portfolio, and pro forma for the dispositions and really the main one that moves the needle is the student housing portfolio that we would expect to be sold as part of the change of control with the purchase option that's embedded in a prior transaction that we've talked about.
Pro forma for that disposition as well as some other office assets that we expect to sell, it's going to be closer to the mid-6%, for the portfolio. I think from there you could probably, you know, back into, you know, generally NOI.
I think with regards to self-storage, it's in and around a third of the portfolio, once you factor in, or I should say, take out the student housing assets, just to give you kind of a big round number of the relative scale of the storage relative to the rest of the net lease portfolio.
Okay. Thank you.
You're welcome.
Thank you. Next question is coming from John Kim from BMO Capital Markets. Your line is now live.
Thanks. Good morning. How does this acquisition impact your guidance for the year as far as the acquisition guidance of $1.5 billion-$2 billion?
Yeah, we're not updating guidance on this call. I think that we'll wait until the transaction closes, which we would expect to be sometime during the third quarter. I think at that point in time, we'll update guidance. Obviously, the contribution from the transaction does depend on the timing, so we prefer to wait until that point in time.
I would just say in relation-
Okay.
To investment guidance, this is, you know, this is separate and apart from the range that we gave at the beginning of the year for investment volume.
Yeah. Sorry. I missed that part of the question. We're not going to update any of the guidance numbers. Sorry, I missed the part on the investment volume. We're still expecting $1.5 billion-$2 billion, and I think we'll continue to evaluate as the year goes on in updated earnings calls.
Just to clarify, the $1.5 billion-$2 billion, is that additive to CPA:18?
Yes. That was prior to the CPA transaction. If you want to add that, you would add the $2.7 billion to it, if that makes sense.
Where does leverage go to? I know you're funding this with cash and stock, but where does it go pro forma for this transaction?
Toni, do you want to touch on that?
Yeah. I think we largely view the transaction as leverage neutral in relation to kind of our overall target leverage levels. You know, we do expect that on a net debt to EBITDA basis that the you know, the investment management fees are going away, so we would see a temporary tick-up perhaps to the top end of our range, maybe slightly higher. Again, we view that as pretty temporary, and you know, something that we would be very manageable for us as we continue growing our real estate earnings. No major concerns there from a leverage perspective.
Jason, you mentioned on the self-storage portfolio you had a few different options. One was to sell it, another was to convert to a net lease structure. I'm wondering if there were any other options that you're considering that would potentially allow you to capture more upside in the growth of the portfolio.
Well, I mean, certainly the other option is we can continue to hold it as operating assets. We're comfortable with the managers that we have in place. It's primarily Extra Space and CubeSmart. I think ultimately, you know, long term, we are focused on owning net lease, given we're a net lease REIT. But that's certainly an option to consider, you know, as we look through other options as well.
Great. Thank you.
You're welcome.
Thank you. Our next question today is coming from Manny Korchman from Citigroup. Your line is now live.
Hey, everyone. Good morning.
Hey, good morning, Manny.
Jason, if I flip through the presentation deck you put out, you've got a slide on G&A, and you guys still sort of end up middle of the pack there on the slide at least. You know, how does the end of the investment management business maybe alter that? Can we expect G&A to come down as a percentage of the portfolio over time, or is that where we're expecting it to be going forward?
Toni, do you want to touch on that a little bit?
Yeah. Thanks, Manny. I think, you know, what you're highlighting is really this is the culmination of the end of the investment management platform. The shift that you're seeing here, which is we're saying is a, you know, loss of the remaining investment management fees, and that's this is the bulk of it. Adding about $4 million of G&A, which we were previously sharing that cost with CPA:18, you know, it's the same size platform, it's the same people managing the assets. I think we feel really good, as we've said about, you know, no integration risk.
You know, when you really look beneath that and think about that there is no change in the actual platform, we are, you know, gaining a lot of operating leverage in that, you know, we're spreading that over a significantly higher asset base. You know, I think we're happy with the level of G&A where we are now. We continue to look for efficiency, certainly through, you know, technology and other areas, but we don't view this transaction as having a material impact, you know, in terms of how we operate.
Certainly, Manny, you know, going forward, you know, this is a very scalable business. As we add scale, I could expect us to continue to become more efficient, you know, based on that metric that you're looking at.
I think.
Manny, I think you broke up on me there.
Manny, if you can hear us, we cannot hear you. Manny, please re-queue. Our next question is coming from Greg McGinnis from Scotiabank. Your line is now live.
Hey, good morning. Sorry.
Hey, Greg.
Apologize if I missed this one, but was there a bid process for CPA: 18, and is there other competing offers? If not, how did you guys come to this offer price?
Yeah. The Independent Directors did form a special committee, and we don't have a lot of visibility into, you know, what they considered. They did retain their own financial and legal advisors, but, you know, we'll find out more about the process and what they considered when the S-4 is filed in the kind of coming weeks. What was the second half of your question?
How did you determine which price to pay for these assets?
Well, look, you know, we know these assets well. I think that from our perspective, you know, we're buying a high-quality portfolio, well-diversified. As we mentioned, it's got a highly desirable self-storage portfolio on top of the net lease. We looked at this from different angles, but certainly importantly, as we've mentioned, the transaction is about 2% accretive to real estate AFFO. We think that's a good level of accretion given the size of this portfolio.
Okay, great. Which % of the cash portion of this deal do you think will be covered by the purchase option?
You know, it's probably of the $3, it's probably in and around, call it $2.50, and that's from proceeds from the student housing sale, as well as we have four other assets that we've identified, three of which are European office assets.
What will that leave you with?
Well, it's a marginal amount after that. You know, it's under $100 million of cash requirements after that. That's you know, something that we could certainly use our revolver or other sources for that matter. We also have some of our equity forwards that have yet to be settled. It's not a meaningful cash component that's going to be impactful at all.
Okay. Will there be any office assets left after those office sales?
There will. It's a diversified portfolio. It's, you know, has all of the major asset classes within it. We are selling, it's probably about 1/3 of the office ABR that we're acquiring as part of our expected dispositions, and I think we would continue to look at others, if it makes sense.
Is this kind of similar office to some of the other parts of your portfolio where it's connected to some, you know, other assets, other industrial or warehouse-type assets? Or is this just-
Well, in other words, are they on master leases or?
Yeah.
I think it's typical of the rest of our portfolio. I mean, a lot of it is standalone office. The assets that we're looking at in Europe are, you know, well located. Some of them are in city centers, strong tenants. It's consistent with the office that we have in the rest of the portfolio.
Okay, thank you.
You're welcome.
Thank you. Next question is coming from Anthony Paolone from JPMorgan. Your line is now live.
Yeah, thanks. Good morning. I guess first thing.
Good morning, Tony.
Good morning. The $0.15 that you'll be losing from this, you know, what's the bridge just in terms of, like, dollars? Because I thought the actual base fee was, like, $12 million or $13 million a year, and then I guess the rest is your pro rata. Just trying to get, like, the dollar amounts that, and where they go or what's being lost.
Toni, do you want to touch on that?
Yeah. Within kind of the Investment Management segment, there's, you know, a number of line items. The significant portion of that is our asset management fees and the interest that we receive from our SLP interest, so the cash flow that you're seeing coming through there. Those are the two lines. We also have ownership, existing ownership in the AFFO of CPA:18, as well as the G&A reimbursement. There's a handful of lines, but I think they're spelled out in our supplemental in a fair amount of detail, if you kind of refer to the Investment Management page there.
Okay. We'll take a look at that. In terms of the total deal price, so it sounds like about $375 million, you know, goes with the student housing and the office stuff. You mentioned $1.1 billion of assumed debt, but what's a little closer to $1.25 billion of debt for CPA: 18 at the end of the year?
Toni, do you have those numbers?
Yeah. I think what you're referring to, the differential there is somewhat related to the debt that's encumbering the assets that we would be disposing of in relation to the dispositions that Jason highlighted in his remarks, so before the closing. There's debt on those transactions that again, we would retire as we sell those assets. The net amount that you're seeing is really what remains that we would take on.
Okay.
Manny, just to be clear, the funding of cash for the cash portion of the deal through the dispositions, that's a net proceeds amount after the debt that Toni referenced.
Okay. That $3, that's cash no matter what, wherever it goes, because it sounds like some debt will go with the student housing and office assets.
That's correct. I was just clarifying if you were thinking about the gross sale value of those student housing assets as well as the office assets that we're targeting to sell. Just want to make sure it was clear. It's not the cash number you mentioned, that's net proceeds. The gross asset value would be higher.
Okay.
...in the debt that's in place.
If we're thinking about really that 6% pro forma cash cap rate or I'm sorry the mid-6% that's it's really on something closer to like $2.3 billion you know $2.3 billion and change it sounds like.
It's going to be lower than that because the gross assets are greater than, you know, the cash proceeds that we mentioned. Toni, I don't know if you have some backup there to Tony's, and-
Yeah. It's about you know, I think the high level that you're trying to get to pro forma for the dispositions, you know, we're taking on about $2 billion of assets at about that mid-6% cap rate that Jason referenced.
$2 billion at a mid-sixes.
That's right.
Right. Wait, sorry for the confusion, but like the going from the $2.7 billion to the $2 billion. You're saying the roughly $375 million, call it roughly, that's net. That's the net cash from the disposition. The gross is something closer to, like, $700 million thereabouts.
Yeah, that's correct. That's...
Of the various components. Yes. The different dispositions, that's the ballpark. Right.
Okay. Got it. Thank you.
Thank you. Next question today is coming from Sheila McGrath from Evercore. Your line is now live.
Yeah, just high level, Toni, if you could just walk us through. I think you said G&A will go up $4 million. Just walk us through the numbers to help us model, like, on how much investment fees go away, et cetera. That would be helpful.
Are you speaking specific to the G&A, or you want the different line items?
Well, also the asset management fees, just so we can model, like, upon closing what's going away and, you know, and the NOI. It sounds like we're modeling at 6.5% cap rate on $2 billion of assets. I think we just got to that.
Yeah. You know, I think the starting point when you look at the midpoint of our guidance range that we previously announced, there's $0.15 of investment management earnings in at the midpoint of that range. You know, all but about $0.01 of that goes away. We retain kind of one smaller fund, our student housing in Europe, which is much smaller. That's that penny that will remain with us. You know, really kind of wipes out everything on the investment management side of the ledger.
Then you're shifting $4 million of G&A over to the real estate platform as we're no longer getting reimbursements. You know, I think there's definitely a line-by-line kind of pick that you can do there. And as I mentioned, those lines are available in the supplemental.
The easiest way to think about it is, you know, $0.14 of the $0.15 of investment management earnings goes away, and we pick up an additional $4 million of G&A expense while adding, again, $2 billion of assets at about a 6.5% cap rate.
Okay. Perfect. Just on the self-storage piece, can you remind us again how you did convert self-storage assets to a net lease and what kind of cap rate was that? I forget what that was.
It was a conversion. It wasn't a sale. So, it didn't really have a cap rate associated to it. You know, like, we're going to earn with the CPA: 18 assets upon conclusion of the merger. These will be operating assets. We'll earn the NOI. What we did in the prior transaction when we converted it to a net lease, we set a rent level, you know, roughly in line with the NOI level, protecting our downside, participating in the upside.
That was really the structure that we had in mind at that point in time. I would imagine if we did something this time around, it would follow a similar blueprint.
Okay, thank you.
You're welcome.
Thank you. Our next question today is coming from John Massocca from Ladenburg Thalmann. Your line is now live.
Good morning.
Morning, John.
I understand it may need to be general ranges, but what are you assuming in terms of cap rates on the office property sales?
Brooks, do you have any color around the disposition cap rates? I mean, these are assets that we expect to market, but we have some general ideas.
Yeah. I think for competitive reasons, we wouldn't want to get too granular on the cap rates specifically. As you can see in the overall math that we've just been discussing, we do expect those cap rates on the dispositions as a whole to be inside of the overall CPA acquisition cap rate, you know, thereby enhancing what's left from a cap rate perspective. You know, these are liquid office assets. We think they'll trade very well, but I'd hesitate to specifically predict on an asset-by-asset basis.
Yeah. John, maybe the-
Sorry.
Maybe what you're looking for is the, you know, we mentioned the going in cap rate on the whole transaction of around 6% pro forma for both student housing and the other 4 asset dispositions gets us to a mid-6%. That should give you the high-level math. Sorry, did you have a follow on?
No. I guess where do those assets kind of sit, would you think, in the barbell of the office portfolio in CPA: 18?
Brooks, do you want to-
In terms of where do they sit? Sure. In terms of the gradient of office assets, you know, these are pretty high-quality assets, two in the Netherlands, one in Norway. You know, we think they'll trade very attractively. We've had historical interest in these assets from unsolicited from third parties. You know, I think these are middle to higher end of the pack in terms of overall office assets. You know, it's a diversified pool.
Okay.
Part of our focus on these three assets, John, is that, you know, they are some of the larger ones as well. From an execution standpoint, fewer moving parts.
Okay. I know it doesn't really impact the pro forma total company ABR, but I noticed that the CPA:18 had a little bit of shorter lease term assets that were coming due in 2023. I mean, can you provide any color around what those are? Is that just because of the operating component in that portfolio or just kind of wondering what that was.
Brooks, do you want to give some color on that?
Sure. I mean, the lease expiration schedule in CPA:18 is pretty light. Really nothing in 2022, a few in 2023 and 2024. You know, I think the key is that we don't expect it to materially change our overall lease expiration outlook on a combined company basis. You know, I think the important point here is that since we acquired.
We have managed these properties for their entire life cycle. We have really excellent insight into the lease expiration schedule and each tenant specifically. That's really fully baked into our how we underwrote the offer. We feel very good about the near-term lease expiration outlook. You know, I'm pretty confident that we'll be able to manage through that very effectively.
Okay. That's it for me. Thank you very much.
Thank you. Before I take our next question, I'd like to remind everyone it's star one to be placed in the question queue. Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.
Hey, good morning, everybody. Jason, congratulations on getting this done.
Thank you, Chris.
Just a couple of quick questions. Hey, just following up on Tony's question, sort of the delta between $700 million in gross sales and the proceeds, is that all mortgage debt? Is there cross-ownership issues? What is the sort of delta? What is that? What is the delta? What causes the delta there?
It should be all mortgage debt, but go ahead, Toni, if you have anything to add.
Yeah, I think that's in large part there. I mean, the student housing assets have some minor ownership, third-party ownership, but we're talking 1%-2%, so it's really the mortgage debt that's the biggest differential.
Okay. Toni, while I have you, what's the cross-ownership NOI between CPA: 18 and WPC? Is there much of that?
There is. I don't have the number at my fingertips, but it's relatively small. Let me see if I can pull that up for you. I think, you know, there's a very small handful of assets that we will now own 100%. One of them is in the disposition pool, actually, that we're, you know, looking to dispose of before the acquisition, but beyond that, it's a really small component of our ABR.
Okay. On the timing of the dispositions, is that pretty well set in terms of, you know, when those are expected, or is there some lead time where some of this might, you know, run into 2023?
No, I think what we've talked about for the disposition pipeline related to this transaction, we would expect that we can sell those assets prior to the closing of the merger. Of course, it all depends on the process. We have a lot of flexibility, but that's our expectation right now, and that's how we've modeled the transaction.
Okay. Then the last question. Actually, I'll leave it at that. Thank you for your time this morning.
Okay. Welcome, Chris.
Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Peter for any 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.
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