W. P. Carey Inc. (WPC) Q4 2012 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the W. P. Carey Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. At this time, I'd like to turn the conference over to Susan Hyde, Managing Director. Ms. Hyde, please go ahead.

Thank you, Jamie. Good morning, and welcome, everyone, to our Fourth Quarter and Year-end 2012 Earnings Conference Call. Joining us today are W. P. Carey’s President and CEO, Trevor Bond; Chief Financial Officer, Mark DeCesaris; and Managing Director, Katy Rice. Today’s call is being simulcast on our website, wpcarey.com, and will be archived for 90 days. Before I turn the call over to Trevor, I need to inform you that statements made in this earnings call that are not historic fact may be deemed forward-looking statements. Factors that could cause actual results to differ materially from our expectations are listed in our SEC filings. Now, I'd like to turn the call over to Trevor.

Thanks, Susan, and thanks, everyone, for joining us today. A special welcome to those of you who are listing for the first time. We had a strong year and hit several performance milestones while at the same time merging with one of our managed funds, CPA:15, to nearly double our size and also converting from an LLC into a REIT on October 1 of last year. Aided by that merger, during 2012, we raised the dividend by 17% to $2.64, which represented our 47th consecutive quarterly increase. This helped us generate total shareholder return of approximately 34% for the year. Other highlights were: record-setting acquisition volume, which included just over $1 billion of investments for our managed CPA REITs, plus approximately $300 million of additional investments for W.P. Carey Inc. and Carey Watermark Investors, another managed REIT. Our adjusted funds from operations was $3.76 per share. Of this amount, $3.32 per share was from our Real Estate Ownership segment and $0.44 per share was from our Investment Management segment. In a moment, our CFO, Mark DeCesaris, will break those numbers down into more detail. But before we get to that, I want to step back and briefly review our business model and the supplemental 8-K that we file each quarter, which summarizes our GAAP results as well as some key non-GAAP metrics. I want to do this because we're aware that our 10-K is complicated, and studying the supplemental provides a clearer picture of certain vital aspects of our business. But first, a brief overview of our business model, which we believe is unique in all the right ways, of course. To begin with, as I implied a moment ago, our AFFO derives from 2 sources: a Real Estate Ownership segment and an Investment Management segment. And if you look at Page 3 of the earnings release, you will see we break it out that way. By far the bigger segment, real estate income, earns revenues through 3 sources: first, through rental income from properties that we directly own; second, through our pro rata share of rents from properties that we jointly own. By the way, we manage and control all those joint ventures, most of which are with the managed REITs themselves. And these joint ventures are summarized in the supplemental under Joint Venture Information. Now the income from these first 2 categories is summarized in more detail in the supplemental under Owned Portfolio Analysis, and it currently shows our annualized contractual minimum base rent at $317.8 million. Moving on, a third source of real estate income is the FFO we receive from our own stakes in those managed REITs. We own approximately 18% of one of those managed REITs, CPA:16, that is, and approximately 1.3% of CPA:17. Finally, we earn real estate revenues through general partnership interests that we also hold in the same managed REITs. These GP interests entitle us to 10% of the available cash flows of the managed REITs. To summarize, then, about 89% of our AFFO in 2012 stem from this Real Estate Ownership segment. This amounted to $159.5 million versus total distributions in 2012 of $113.9 million for a dividend coverage ratio of about 1.4x from the real estate income alone. And by the way, the reconciliation of GAAP income to this AFFO figure can be found on Page 5 of the earnings release, and Mark DeCesaris will go into more detail in a moment. Now the second business segment is Investment Management, which is the business of managing approximately $7.9 billion in assets, primarily in the CPA REITs 16 and 17. This segment was W. P. Carey's original business, the one Bill Carey established 40 years ago as a pioneer in the concept of offering retail investors access to securitized pools of net lease assets. And still today, nearly all the shareholders in our managed REITs are retail income-oriented investors. Over that period, we've raised 16 funds, 14 of which have gone full cycle, delivering stable dividend income to generations of investors. This track record and our long experience have created tremendous brand value and brand loyalty for W. P. Carey in this space. And of course, all the profits of that business flow to the shareholders in W. P. Carey Inc. The 2012 AFFO from this Investment Management segment, which is also reconciled to GAAP income on Page 5 of the supplemental, was $0.44 per share. And there are 2 primary ways we earn income from it: First, each time we make a purchase on behalf of the managed REITs we earn structuring revenues, essentially acquisition fees. As I mentioned earlier, investment volume in 2012 on behalf of the managed REITs was about $1 billion. Second, we earn annual asset management fees equal to 50 basis points times the gross asset value of the managed REITs. In addition, we're entitled to various other fees in connection with services provided to the managed REITs, including fees payable upon liquidation of a managed REIT subject to performance hurdles. I should point out, however, that on the most recent occasion that we were entitled to such a fee, our merger with CPA:15, that is, we waived it as part of the merger consideration. In 2011, however, we did earn a fee for the liquidation of CPA:14, which accounts for nearly all the difference in AFFO, about $0.72 per share between 2011 to 2012. Now this investment management platform is admittedly unique. We're the only major REIT that has one like it. But we think that uniqueness gives us important strategic advantages. First, the investment management platform contains a wholly owned broker-dealer, Carey Financial, which raises funds through a retail channel that is completely separate from the listed markets. In 2012, Carey Financial raised approximately $1 billion. This affords us the ability to grow our revenues without diluting our equity base. We deploy that capital through the managed REITs by investing primarily in net leased properties. And as assets under management grow, so does that very stable fee stream that we earn as a percentage of gross asset value, that 50 basis points which I mentioned earlier. Also, the cash flow that we earned through the GP interest in CPA:16 and CPA:17 increases as that capital is deployed and assets under management grow. Again, no additional public equity is required for that form of accretion, and I mean listed public equity, of course. One thing I want to emphasize in connection with the strategic value of this platform is that during the financial crisis, when traditional equity markets were in crisis mode, our continued fundraising capabilities through Carey Financial permitted us to take advantage of an opportunistic buyer's market. It also helped us maintain that streak of consecutive dividend increases that I mentioned earlier, the 47 straight quarters of increases. In summary, under this business model, revenue growth occurs through 3 primary sources. First, through the increase in assets under management, which brings fee revenues and cash flows from the GP interests. As I said earlier, the current managed portfolio is approximately $7.9 billion and we expect this to continue to grow. Second, we intend to grow the owned portfolio through accretive asset purchases. Some of these investments may be joint ventures with our managed REITs. Others may fall within the scope of our expertise, but may not work for the managed REITs either because they would not be accretive or because, at any given time, we may not have a managed REIT that is in its investment period. The third path of growth is expected to come from built-in contractual rental increases within the owned portfolio. Most of our leases have rent increases that are either fixed or tied to inflation. Of course, each year, there will be varying offsets to this internal growth depending upon lease expirations, renewals, dispositions, et cetera. We do maintain an active approach to asset management, which means we sell as opportunistically as we buy; and then we recycle the capital into new investments. Going forward, we'll keep investors abreast of major trends within the owned portfolio as they unfold each year. In a moment, Mark will provide more detail about each of the major categories I've mentioned, as well as a discussion about our G&A. Before he does, let me give a brief overview of the W. P. Carey Inc. portfolio and I'll be brief because most of this is in the supplemental as well. And we'll be happy to take any questions you have about it following our remarks. The portfolio consists of 425 properties in 300 -- I'm sorry, 38.7 million square feet. Year-end occupancy was 98.7%, which was an increase of 570 basis points from the end of 2011. In 2012, we completed 19 lease renewals and 3 new leases in the W. P. Carey portfolio, totaling over 2 million square feet. We continued our asset management program of opportunistic dispositions and the extension of average lease terms over the portfolio. In 2012, we sold a total of 17 properties totaling $117 million in proceeds. Eight of the properties were either vacant or soon-to-be vacant. The weighted average lease term at the end of the year was 8.9 years, an increase by 2.48 years, or 38% of the beginning of the year. Of course, that's as a result of the merger primarily. Looking forward in 2013, we have 5 tenants with leases expiring that represent less than 1% of the annual revenue. In 2012, we refinanced 9 loans totaling $77 million in an average interest rate of 4.76%. This was 150 basis points below the then-prevalent rate. Year-to-date in 2013, we've already refinanced $31 million and have another $27 million to refinance. In 2014, we will have $257 million debt to refinance. As mentioned earlier, we have been adding selectively to the W. P. Carey portfolio. That is the owned portfolio. In January, we acquired the Kraft headquarters in Northfield, Illinois for $72.3 million. This investment will produce another $5 million of annual rent and $3.5 million in NOI after property level debt this year. As to the CPA REIT portfolios, very briefly. Occupancies in CPA:16 and 17 average 98.2% over the 83 million square feet at year end, which is up 40 basis points from the beginning of 2012. The debt coming due to refinance in the CPA REITs is very manageable. We have $118 million in 2013 and $155 million in 2014. One final note with respect to our investment outlook. Although our annual investment volume has exceeded $1 billion in each of the past 3 years, we always begin a new year on a note of caution because it's never certain what the volume will be. We don't have an annual quota and many factors will influence the supply of deals that come to market. I will say that competition has increased for investments of a certain type, what we call the more commoditized segment of the net lease market, particularly in the retail sector. Also for well-marketed deals, there are generally more bidders. Cap rates have compressed somewhat, but the cost of debt has declined as well. So risk-adjusted leverage returns are still attractive. Also, for W. P. Carey, because we have the ability to tap into international markets and because we have the expertise and the experience in underwriting transactions that are off the radar screen of typical net lease buyers, we remain confident in our ability to continue growing both the owned portfolio and assets under management even in this more competitive climate. And with that, I'll turn the microphone over to Mark.

Well, thanks, Trevor. We're pleased to release our results for the year ended 2012 today. I want to spend some time with you this morning on the 2 segments and the impact of the CPA:15 acquisition. Let's start with our Real Estate segment. On the face of the income statement, we show approximately $124.5 million in lease revenue. This amount represents our consolidated lease revenue from continuing operations. There's another $3.6 million of lease revenue included in the discontinued operations line item on the income statement. These numbers, however, do not reflect our true economic lease revenue stream as several of the assets, which we have an ownership interest, are co-owned with the CPA funds. In our supplemental report, we've added several new disclosures to help you understand our true economic lease revenue stream that takes into consideration these joint venture arrangements with the managed funds. The first disclosures are on Pages 8 and 10 of the supplemental, and this disclosure will reconcile our GAAP income statement for both the fourth quarter and year-to-date to an income statement that shows our economic interest and then reconciles those numbers to our reported AFFO. In addition, on Page 14 of the supplemental, we also show a reconciliation of our reported GAAP lease revenue to our economic lease revenue stream, which includes the amount in discontinued operations for both the most recent quarter and year-to-date. When you review these pages, you see that our economic lease revenues for the fourth quarter were approximately $75.3 million compared to $21.7 million in the third quarter of 2012. For the year, total lease revenue was approximately $144 million compared to $97.7 million in 2011. We recognized a full quarter of lease revenue in Q4 from the CPA:15 assets, which were acquired at the end of the third quarter. In addition to recognizing a full quarter of lease revenue from the CPA:15 acquisition, we sold 8 assets in the fourth quarter. The impact of these dispositions on annualized lease revenues is approximately $4.2 million, although the revenue recognized in 2012 was approximately $2.5 million as a few of these assets were acquired from CPA:15. Net of these dispositions, total annualized rent at December 31, 2012, was approximately $317.6 million. This figure does not include an acquisition that we made in January of 2013, which will generate an additional $5 million of annualized rent, bringing that number to $322.6 million. This acquisition had a total value of approximately $72.5 million and included a 10-year $36.5 million interest-only loan with an interest rate of approximately 4.05%. During 2013, we will continue to actively manage the 425 properties we have in our own portfolio. We expect that we will selectively sell certain assets and reinvest directly in longer lease term assets. Lease revenue may fluctuate slightly, but should grow over time. Fixed rental increases and increases tied to the CPI Index are projected to be approximately $4 million in 2013. In addition to our lease revenue stream, we also include the revenue earned from our interest in the cash flow of CPA:16 and 17, two of our managed funds in this segment. As part of our advisory agreement, we received 10% of the cash flow of these managed funds. For the fourth quarter of 2012, total distributions received were approximately $8.2 million compared to $7.4 million in the prior quarter of 2012. For the year ended, we received approximately $30 million as compared to approximately $15.5 million in 2011. This revenue stream flows through the equity investment line item of our income statement and represents the actual cash distributions received from the managed funds in that quarter. While CPA:16 is fully invested and we would not expect significant growth in the distributions received from that fund, we did close approximately $736 million of investments on behalf of the managed funds in the fourth quarter and have approximately $400 million of remaining cash to invest on behalf of CPA:17. I would expect continued growth in the distributions from this interest in CPA:17. The distributions received from CPA:17 in the fourth quarter did not reflect the cash flow generated from the Q4 investment volume. The next revenue item in this segment comes from our ownership in the CPA funds. We currently own approximately 18.3% of CPA:16, or approximately 37.1 million shares. We received approximately $24.4 million in cash distributions from this ownership. We also own approximately 1.3% of CPA:17, or 4 million shares. We received approximately $1.5 million in distributions from our ownership in this fund. Historically, we have accumulated our ownership by taking part of our investment management fees and shares of the managed funds, and in the case of CPA:16, investing additional cash at the time they acquired CPA:14 in 2011. CPA:16 is currently paying an annualized dividend of $0.6704 per share and CPA:17 is currently paying a distribution of $0.65 per share. In addition to the Real Estate segment revenues discussed above, we also manage a CPA series of non-traded REITs through our Investment Management segment. We raise capital, primarily retail-based, and invest that capital primarily in net lease investments through the CPA fund structure. We have raised this capital in the CPA fund structure for 16 separate funds over the last 35 years. 14 of those funds have gone full cycle, with investors in those 14 funds recognizing average annual returns of approximately 11.3%. We earn revenues from these funds, both during the investment phase as well as ongoing fees to manage these assets. As we invest the capital raise, we earn onetime structuring fees based on the total investment amount, including debt. We also earn annual management fees on that total appraised value of the fund, including debt. As part of the advisory agreement with CPA:16 and 17, we also hold an interest that pays out 10% of the cash flow of the fund. This distribution is included in our Real Estate segment and was discussed previously. In Q4, we structured approximately $736 million of investments on behalf of the managed funds and earned approximately $28.8 million in structuring revenues. For the year, we earned approximately $48.4 million as compared to approximately $46.8 million in 2011. As Trevor mentioned, we have structured investments of approximately $1 billion to $1.2 billion on behalf of the CPA funds in each of the last 3 years. Although the structuring revenue is lumpy and hard to predict from a timing standpoint in any one quarter, on an annual basis we average anywhere from $750 million to over $1 billion in investment volume. While CPA:17 closed in December, we have approximately $400 million of cash to invest on behalf of CPA:17 today. We also earn annual management fees on the total appraised value of the managed funds. Management fees in Q4 amounted to approximately $9.6 million as compared to $15.9 million in Q3. The reduction is due to fees formerly earned from CPA:15, which, in essence, have been converted to a lease revenue stream as we acquired that fund at the end of the third quarter. For the year, we earned approximately $56.7 million as compared to $66.8 million in 2011. We earn approximately 50 basis points on the value of these funds, which was approximately $7.9 billion at 12/31/2012. On the face of the income statement, we also show a line item for wholesaling revenues. We earn approximately $0.15 per share for each share of CPA capital raised. This revenue is generally a reimbursement of expenses incurred in raising that capital. As we raise more capital, our G&A expense structure will increase and so will this reimbursement. We raised over $1 billion in capital in 2012 on behalf of the managed funds, and our reimbursement was approximately $19.9 million in 2012 versus $11.7 million in 2011. Our G&A expense in 2012 was approximately $144.8 million versus $93.7 million in 2011. Net of the wholesaling revenue reimbursement just discussed, G&A for 2012 was $124.9 million versus $82.1 million, an increase of $42.8 million. Included in our G&A expense this year is approximately $31.7 million of onetime merger-related expenses and approximately $25.7 million of amortization expense related to stock-based compensation. While there are not any significant merger-related expenses in 2011, there was approximately $17 million of amortization related to stock-based compensation. Excluding these 2 items, our core G&A for 2012 was approximately $67.5 million versus $65.1 million in 2011, an increase of approximately $2.4 million in core G&A. This increase was primarily compensation related due to higher investment volume and approximately $1 million of severance costs incurred this year. We've broken out our G&A costs and the impact on AFFO on Pages 9 and 11 of the supplemental for both the fourth quarter and year-to-date. The most common comparison of a G&A run rate is based on revenues managed. And just looking at the face of our income statement, it is difficult to make this comparison since several of our investments are jointly owned with the managed funds. And in addition, while we feel our Investment Management business is valuable, it does require a higher G&A run rate. We have put together 2 schedules on Page 16 and 18 of the supplemental report, which will aid in this analysis. Schedule on Page 16 shows the total revenues we manage within the W. P. Carey group of companies, including the managed funds. Then, on Page 18, we compare our G&A to that revenue number and what you'll find is that we're at about 6.9% for 2012 versus 6.7% for 2011. These percentages are comparable with peers in our industry. Our AFFO for the fourth quarter was $1.13 per share and for the year ended 2012, was approximately the $3.76 per share. We're currently paying an annualized distribution of $2.64 per share versus $2.25 per share at 12/31/2011, an increase of approximately 17% while maintaining a 70% payout ratio in both years. We've continued to maintain a very strong balance sheet with a debt-to-total market cap ratio of approximately 35%. Our current unsecured debt-to-total market cap ratio is about 4.5%. With that, I'd like to introduce to all of you, and it's my pleasure to do this, is Katy Rice. Katy will become our CFO immediately after the filing of all of our year-end financial statements, and I've asked her to make a few comments as well today. Katy?

Thanks, Mark. As we announced late last year, I joined the company in January and I'll assume the role of CFO shortly just after we file our year-end results. Over the past 2 months, Mark and I have been working together to create a smooth transition. I'm excited to be joining the W. P. Carey team. As an investment manager, we have a long history of providing investors with strong risk-adjusted returns. And now that we've made the transition to public REIT, we look forward to profitably growing our balance sheet by continuing to expand our owned real estate assets. Going forward, we expect to access a greater variety of capital sources to fund our growth and lower our cost of capital. While we've always maintained a strong balance sheet, with a debt-to-total market cap ratio of approximately 35% today, all of our long-term debt is currently secured. Over time, as our secured debt rolls off, we plan to build an unencumbered asset pool in anticipation of becoming an unsecured borrower. Finally, I'd like to give you a framework for thinking about our earnings this year. As we've discussed at length today, the CPA:15 merger and REIT conversion had a significant impact on the composition of our results going forward. As Mark walked you through our year-end results, he indicated that only the fourth quarter fully reflects the real estate revenues from the CPA:15 merger. So this quarterly number is a pretty good proxy for the year ahead with respect to our real estate revenues. Our asset management revenues in the fourth quarter also reflect the reduction in asset management fees associated with the CPA:15 merger and are, therefore, a reasonable estimate for our asset management revenues in the year ahead. However, our structuring revenues, which are only earned when we acquire new assets, are less predictable in any given quarter and were not impacted by the CPA:15 merger. So the full year number is a better estimate of structuring revenues going forward. With respect to new investment volume, in 2013 we expect to invest approximately $700 million to $1 billion, primarily in CPA:17, but most likely with some asset growth in WPC as well. And with that, let's open it up to questions.

[Operator Instructions] And our first question comes from Sheila McGrath from Evercore.

Trevor, you mentioned, and, Katy, you did as well, to assume about $700 million of acquisitions versus the $1 billion you acquired last year. I'm just wondering if you can remind us, first of all, how you parse what goes into W. P. Carey and the private REITs. And then if you could just give us a little color on the existing pipeline, how that looks in terms of cap rates in international versus U.S.?

Sure. Thanks for the question, Sheila. The $700 million figure that we typically use relates really only to what we would expect to sort of budget informally for the managed REITs. That's more of a historical average, although, as I've said, we've broken that in the last 3 years. It's difficult to say how the supply of owner-owned -- user-owned real estate will be in any given year. So $700 million is just for purposes of us figuring what the structuring revenues may be and things like that. We do expect, as I mentioned in my remarks, that there will be a pool of transactions that would not be suitable for -- to fall within that $700 million that would not be suitable for the CPA REITs. But we don't have -- we currently don't have a projection for what that might be. And the Kraft deal that we did in the $72 million range was an example, a good example, of what we might do along those lines. Now, could you repeat the latter part of your question?

Sure. Trevor, just also if you could tell us in terms of cap rates and how you view the pipeline investing domestically versus internationally.

Sure. Well, last year, our cap rates for the whole portfolio were about 8.4%. And as you'd imagine, there was a fairly wide range, because we do invest across most of the major property types and in many different submarkets, as well as we have a wide diversity of industries represented in our portfolio. So take the 8.4% with a grain of salt. The range goes down into the 6s on some of those and some of the high 6s and then goes up into the double digits. And it is higher -- it was higher for the 2 international deals that we did, both of which were in Poland. And we did those at cap rates closer to 9%. And we expect, with respect to your question about the pipeline, as I mentioned, we have a lot of good ways to source transactions. We have a broad, deep pool to access really worldwide. I would expect that Europe, this year, which we deemphasized somewhat last year only because we are more selective, we focused mostly in Northern Europe when we were looking for deals and we purposely put higher cap rates on some of those deals just to reflect some of the headline risk. We did have a decline in our volume over in Europe last year. This year, we continue to see some pretty good transactions. I can't guarantee anything, but I would expect a little bit more in Europe this year based on what we're seeing. Here in the U.S., as I mentioned, in the commoditized sector, in the better-marketed deals, there's a fair amount of competition. We have always thrived in the sector of the market that's more -- less efficiently priced, sort of below-the-radar-screen credit that may take a little bit more time to understand. And I think that we'll continue to see our normal steady flow as well.

One more quick question. You mentioned that over time that you would pursue a unsecured investment grade kind of strategy. I'm just wondering, is that kind of something 3 to 5 years out, is it 2 years out? Around how long do you think that would take?

Mark?

Yes, I think our strategy will be -- we like to use in our recourse debt our new investments we make until we get comfortable with that asset. But obviously, as that debt wears off and we're comparable with those assets, that's where you'll see us start to build the unencumbered pool. It's going to be a several-year issue, somewhere in the 2- to 4-year range. As this debt rolls off, obviously all of the nonrecourse debt has fees embedded in it, so we'll wait till they -- it rolls off of the portfolio to make that decision. So it will definitely be a multiyear strategy.

Our next question comes from Paul Adornato from BMO Capital Markets.

Was wondering if you could provide an update on the shares held by the Carey estate? Has there been any additional transactions?

Sure. Let's see, the number of shares, I think, has gone to about 10 million or 11 million. We did do a transaction earlier -- last fall, that is, in connection with the voter shareholder agreement that we had executed with them. And pursuant to that agreement, we purchased some of their shares and they still have the option to sell us another $40 million worth of shares this year. And other than that, I don't really have any more of an update. I think our relationship with the estate is good.

Okay, great. And just to clarify, are you buying back those shares or are you selling them to institutions?

In that particular case, we did. The shares were purchased and then sold to another investor, which was really, at the outset, sort of a matching of interests.

Okay, great. And with respect to the joint ventures between WPC and the managed funds, was wondering if we could just step back and understand what's the reasoning behind creating these joint ventures? And do you expect that, that reason would exist going forward? That is, do we expect more new joint ventures going forward?

Sure. The reasons are historical and typically they've related to concentration issues. So that in the early stages of a fund, when any given investment might represent too high a concentration at that moment, we've entered into joint ventures either with W. P. Carey or other funds that had available capital to invest. And typically, that was the primary reason for it. And I think that, that reason could continue to exist for future funds. But it's as simple as that, Paul.

Okay. And, Katy, you mentioned that you expect that the balance sheet will expand over time. Was wondering if you could tell us how you think about what's the right size for the balance sheet, and what type of balance sheet growth might we expect given the fact that we have heard that you guys will be more active selling assets as well?

Sorry, I missed the last part of that, Paul.

Sure. With respect to selling assets, how will that figure into the equation in determining the correct size of the balance sheet?

Paul, I'm going to help Katy out a little bit here, although she does have a view on this as well. But we continue -- we will continue to focus on the Investment Management segment. We think we'll see growth in that Investment Management segment through growth in the CPA funds. But obviously, managing 425 properties in our own portfolio, and we do actively manage those, there will be dispositions. We start to look at properties anywhere from 4 to 5 years in advance of the lease term. But our expectation is that we'll continue to acquire properties on our balance sheet to offset those dispositions and recycle that capital. So I expect to see continued growth both in our own portfolio and our own balance sheet, but our focus will also be to continue to expand through the Investment Management business. Katy?

Yes. And Paul, I don't know that we have a preconceived notion of what the exact right size of the balance sheet should be. But I think with the CPA:15 merger, that has gotten us into sort of a market cap range that is more substantial and I think will allow us to access different capital sources, lower cost of capital and whatnot. So I don't know that it's just simply growth for growth's sake. I think it's smart investing and smart investing on behalf of the managed funds.

Okay. And just lastly, was wondering if you could comment on dividend policy going forward. What kind of metrics do you look at in determining dividend increases?

Sure. As I said, our current dividend is $2.64. That represents about 17% growth versus 2011, the majority of it coming through the accretion from the CPA:15 merger, which we've passed through to the investor. But obviously, as we convert to a REIT as well, one of the other factors that we have to consider is making sure we distribute out 90% of the taxable income to the firm. So I can't give you a specific idea of where the dividend is going to go or what the policy is. But our factors will be that REIT test as well as an AFFO guideline for dividend growth.

Okay. How close are you to the statutory limit?

We're doing those projections now for 2013. Obviously, we didn't have an issue with it in the fourth quarter of 2012. But we're managing that process.

Our next question comes from Dan Donlan from Ladenburg, Thalmann.

Just sticking with the dividend discussion. I think your payout is probably close to 70%. Some of your net lease peers are low 80s into low 90s. Do you kind of want to maintain a cushion relative to those REITs? I know there's some lumpiness in your investment management platform, but just kind of curious now that you're much heavier, you receive a lot more income now from rents, are you willing to kind of allow that ratio to come a little closer to maybe some of your peers?

I think one of the things Trevor mentioned was the coverage we have on just the revenues generated through the Real Estate segment today versus our dividend, which was about a 1.4x. So we're pretty comfortable with the stability of the Real Estate segment. And ultimately, that's what's going to drive our dividend policy, is the stability of the revenues. But those discussions are ongoing right now. Obviously, it's a Board decision as well, so we'll have those discussions with our Board in the future. But as I said, the factors that we're going to look at is the stability of the revenue stream and the coverage of the dividend from that, our AFFO as well as our taxable income piece.

Okay. And then kind of going back to Sheila's question about the -- how you're looking at unsecured debt and investment grade ratings. And if you look at your debt maturities, you have quite a bit coming due in 2014. Is maybe the idea to allow some of that secured debt to roll off, maybe do some type of unsecured term loan to pay that down and then look to maybe do some type of unsecured bond offering in a couple of years following? How are you kind of thinking about your transition to unsecured?

Yes, the maturities that you see in 2014 include some of our lines of credit so those are not all. Although our lines are not unsecured there, they have an asset-based test to them. So really, the strategy is to, as mortgage debt rolls off, to move those assets into the line, which we would hope eventually to get the maturity to be extended. And then as we build a pool there, to go ahead and work with the rating agencies on getting a rating and do an unsecured deal that would take that line down.

Okay, understood. And then as it pertains to kind of this year when you look at your escalators that are kind of built in for 2013, where do you think that -- what's that number? I'm basically looking for something to increase my cash NOI number by.

Yes, I think in my comments, Dan, I mentioned that for 2013, we estimate that to be about $4 million based on what we see right now, both combined fixed as well as CPI based.

Okay, okay, okay. And then you don't really have hardly and rent, any leases rolling in '13. I think on the last call, in '14, we talked about 2 buildings, I think one in Wisconsin, one in Colorado. Kind of what's going on there with those lease discussions? And is there anything else that -- is there anything that concerns you when you look at that 8% number rolling in '14?

The 8%, it's about $24 million of revenue. And as we discussed last time, it's spread over several properties. Included in there are the Carrefour assets over in France and it's hard to say what's going to happen to that, although we have a lot of confidence in the assets themselves. The 2 that you're referring to include the HP Enterprise Services building. That's 400,000 feet. We do not expect HP to renew that lease, but we will be backfilling it with multi-tenant if it's adaptable to multi-tenant, and we're in discussions right now about that. The deal in Wisconsin is going to be more challenging, frankly, Dan. It's -- that's the deal that's leased to Plexus, and we're at work on that. I don't have any updates for you at this time. But for the most part, we've been very successful in 2012 in leasing up most of the situations that became available. We did some 22 leases last year, many of which were challenging in their own way at the outset. But we do have a very talented group of people working on these things. Of those 22 deals, I might point out, 9 of them were actually for deals not expiring in 2012, but expiring in 2013 and 2014. And we were successful, in most cases, in getting extensions. We did take somewhat of a decline in rent for many of those, but there was a wide range of deals, so that in some cases they went up. In some cases, they stayed flat. And in others, there were declines, as I mentioned. But it's something that we stay very focused on throughout the course of the year.

Okay. And then as it pertains to dispositions in '13, you guys provided a little bit of guidance on what your acquisition volume was going to be, but do you have any thoughts on disposition volume?

No, that's harder to say because pursuant to the fact of asset management strategy, if we can't get a deal leased up, we'll sell it as soon as we determine that we really don't think it's an attractive option to lease it up. But again, that will depend on how certain discussions go, so it's very difficult to say. Also, we're very opportunistic in our sales. So at the beginning of 2012, for instance, we did not think necessarily that we would be selling certain assets. However, the markets and product types for those assets might have heated up during the year and if we felt that we could get an opportunistic sale and we could recycle the capital accretively, we took advantage of those opportunities. And so, at this moment, it's hard to say specifically. That's something that we always focus on.

Okay. And then kind of looking at the owned portfolio dispositions, it looks like you guys sold quite a bit of multi-tenanted buildings. Is that kind of a strategy? If you have to move to a multi-tenant type of structure like you're talking about, I guess, in Colorado, once you fill that up, is it your intention to then sell it because it's not your traditional multi-tenant net lease type of deal?

Yes, that's correct.

Our next question comes from Lou Taylor from Paulson & Co.

Can you just expand a little bit, Trevor, on Sheila's question earlier? As you look at the acquisitions in 2013 versus '12, how is it likely to be different either by property type or by -- and/or by geography? I mean, you alluded to it a little bit more in Europe, but how about in terms of property mix, in terms of more office, more industrial, more retail, et cetera?

Sure. As I had said, I think I expect a bit more in Europe just because we're seeing some pretty attractive opportunities and so the risk-adjusted returns are good. I can't tell you whether that's going to be $200 million, $300 million, I don't know exactly. With respect to property types, I mean, I think that we've seen that suburban office and office generally has taken a real hit over the past couple of years. And so we've seen some attractive transactions in the office sector and I think probably we'll see more this year. Industrial seems to be getting a little hotter nationwide, as we all know, and so we may end up doing less of that. I think it's possible, and depending on the world economy, of course, but industrial real estate may be very attractively priced with respect to build-to-suits. There are several companies, as you know, that are strongly considering coming back to the United States. And when they do and they build new facilities, often they will come to us. And those facilities could be the more fungible sorts of distribution centers that we like, or in some cases, light-assembly, manufacturing-type space that's easily adaptable to other uses. Other than that, I think that it's unlikely that we will do much purchasing of retails, the big box retail and stores and things of that nature, just because the market -- it's never been something that we've favored as much because typically we find that retail stores are not as strategically important to the tenants and so it doesn't fit in generally with our strategy, so we wait until we can acquire it at very attractive pricing. I suspect we will be doing less of that this year. Again, though, you never know and every now and then a portfolio will come along that we're able to jump on.

Okay. And then second question pertains to -- if you could remind us the life, if you will, of fund 16. Is there an expiration date? Is there a liquidation date stated in the fund that we should be aware of?

Well, the fund that -- in all of our funds, or I should say, in none of our funds have we put an actual termination date, a bright line termination date because we feel that would be limiting the flexibility of the Boards of those funds and making a determination as to the right time of exit. I will say that CPA:16 is nearing that point where its liquidity options will be studied. But other than that, I don't have really more to offer on that.

[Operator Instructions] Our next question comes from David West. David McKinley West - Davenport & Company, LLC, Research Division: And I apologize. I joined late, so if you covered this, I apologize. But in the Q4, Katy in her comments mentioned that, obviously, structuring revenue volatile, maybe expect this year something similar to last. But in Q4, the structuring revenue was about 60% of the annual total. What -- could you give us some color as to why that number was so high in the quarter?

We just did. As we've often said, it's very difficult for us from a timing standpoint to predict when investment volume will close. So while we had a significant amount of deals close in Q4, those are deals that were in the pipeline for a long time. It just all happened to fall into place. Nothing magical about it. We've often told people they shouldn't look at any one quarter and try and annualize the structuring volume from that aspect, but more look at what we've done on an annual basis and come up with an average from that, so...

That's really based on when we buy assets throughout the year. And last year, it happened to be back-end loaded. David McKinley West - Davenport & Company, LLC, Research Division: Okay, very good. And of course, you've already announced the Kraft transaction. I think you mentioned that was a $70 million-plus deal. Is that going on the REIT balance sheet?

Yes.

Yes. David McKinley West - Davenport & Company, LLC, Research Division: Okay, all right, very good. And lastly, same type of question. I guess, the impairment charges in the quarter were a little -- were almost 50% of the annual total. Were the impairment charges related to the disposition of some of the vacant properties you mentioned earlier?

The impairments were really nothing more than several assets writing them down to their fair value of the impairments. There was one hotel we owned that was a majority of those amounts.

And our last question comes from Keith LaRose from Bradley Foster & Sargent. Keith Glenn LaRose - Bradley Foster & Sargent, Inc.: Could you -- it sounds like you're getting a little more optimistic on Europe and maybe moving into some areas other than Northern Europe going forward. But can you give a little more and be a little more specific on what are some of the metrics that are attracting you to do that relative to those markets?

Sure. I did not mean to suggest that we were thinking of expanding aggressively beyond Northern Europe. In fact, last year, we really held our focus to primarily Northern Europe. And I think some of the attractive transactions that we see are in the stronger, more fiscally disciplined countries like Germany and Finland, the Netherlands, and I think that'll continue. We've also seen some attractive deals in Central Europe, countries that are -- such as the Czech Republic and Poland, some of the stronger non-euro economies that are slated to join the euro but have not yet done so. So I think we'll -- but, typically, our criteria for any investment, Keith, is to first look -- we look at the credit and so is it a strong credit? Will that tenant be able to pay the rent through the 15- to 25-year period of the lease? And so can they survive the short-term swings that are in the market right now? And how will the headline risks that we all see change their ability to pay the rent? And when we do make the investment, we obviously come to the conclusion that they can continue to pay that rent throughout those short-term swings. And so the decision metrics don't change from deal-to-deal. We obviously price in any kind of hedging that we do and we try to gauge the right kind of risk premium for this general headline risk. But what we're finding is that the spreads between the types of deals that we can do in Europe and the deals that we are seeing here are attractive enough and they can be up to 50 to 100 basis points for the same type of credit and the same type of real estate. One thing that we like about Europe that has not changed is that it is difficult to build things in most of the markets that we look at. So that zoning rules are more strict and there are other regulations. The same regulations, in fact, that are preventing many of the European countries from growing actually sort of paradoxically work as barriers to entry to the real estate market, because it's just difficult to build new things. And we like that because when we do make an investment we have a sort of extra value implicit in it because of that. You don't tend to see great swings in supply like you would here, particularly in some of the retail markets, big box retail, for instance, here where it's easy to put up and you can put it on many of the retail strips that we're all familiar with. Over in Europe, it's much more difficult to do that. Keith Glenn LaRose - Bradley Foster & Sargent, Inc.: And some of the pressures we're seeing in Europe and have seen, are you seeing a significant connection between those pressures and your pipeline of opportunities?

Yes, I think we have seen that. What we've seen are some -- we've seen some funds, private funds, that have decided to exit. That could be partially tied to headline risk. It's also probably more probable that it's tied to the life cycle of the individual funds that invested over in that area. And so we've seen some deals come to us because of that. Some of it's tied to distress.

And ladies and gentlemen, that will end today's question-and-answer session. At this time, I'd like to turn the conference call back over to Susan Hyde for any closing remarks.

Thank you. Well, before we sign off today, I'd just like to remind everyone that we'll be hosting an Investor Day here in New York City on April 4. We hope that you'll be able to join us for what we think will be an informative session on all things W. P. Carey. Also, a replay of today's call will be available after 2 p.m. And the information regarding replay is available at the end of our earnings release. Thank you all for joining us today, and we look forward to speaking with you again next quarter.

And ladies and gentlemen, we do thank you for attending today's presentation. It has now concluded. You may now disconnect your telephone lines.