W. P. Carey Inc. (WPC) Q1 2016 Earnings Report, Transcript and Summary

Hello, and welcome to the W. P. Carey's First Quarter 2016 Earnings Conference Call. My name is Charrette, and I will be your events specialist today. [Operator Instructions] Please note that today's event is being recorded. [Operator Instructions] It is now my pleasure to turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone, and thank you all for joining us for our 2016 first quarter earnings call. I'd like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. Also, an online rebroadcast 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 1 year. And with that, I will turn the call over to Chief Executive Officer, Mark DeCesaris.

Good morning, everyone, and thank you for joining us today. I'm joined today by the following members of our senior management team: Jason Fox, W. P. Carey's President and Head of Global Investments; Hisham Kader, our Chief Financial Officer; Mark Goldberg, who is Chairman at Carey Financial and heads up capital raising for our Investment Management business; John Park, Managing Director of our Strategic Planning and Capital Markets group; and Tom Zacharias, our Chief Operating Officer. We have a lot to cover today, and I will start with the announcement we made in this morning's earnings release that we have concluded the formal strategic review of our company and the outcome of that process. After a careful and thorough review covering a wide range of alternatives, we have reaffirmed the strategic value of our diversified business model. Accordingly, with the full support of our board, management is implementing a comprehensive business plan designed to best position the company to generate long-term value for our shareholders, building on W. P. Carey's more than 4-decade track record of investment success. Over that period, we have earned an unmatched reputation in our industry as prudent managers of capital, which is something that we are both proud of and committed to continuing. With the help of JPMorgan as our independent financial adviser, the board and management team evaluated a broad range of options, and I want to assure you that we approached this entire process with an open mind and closely examined the data supporting each alternative. As I've mentioned in -- on our last earnings call, our approach was to carefully consider each of the options presented through the single lens of what will provide the most superior and sustainable risk-adjusted returns for our shareholders. As a result, we are implementing an enhanced business plan focused on 6 key priorities: growth, diversification, operational efficiency, balanced sheet strength and flexibility, proactive asset management and transparency. So let me take you through each of them in a bit more detail. First, growth. Of course, growth has always been a priority, but the strategic review has allowed us to refine our views on how best to achieve it. We will continue to grow our real estate portfolio through acquisitions of individual properties and portfolios, while also evaluating strategic acquisitions to enhance portfolio value and grow AFFO per share. When we underwrite assets, we make no distinction in the standards we apply, whether it goes on our balance sheet or into one of the funds we manage. Our new mandate, going forward, will be to acquire net lease assets on our own balance sheet when we believe our cost of capital is priced favorably. And when that is not the case, we will make net lease acquisitions for our funds. Regarding the assets in our funds. We know them well. We acquired them, we have managed them and it is natural that we would want to consider bringing them onto our balance sheet when their independent boards decide it's the appropriate time to seek liquidity. This provides another benefit to all W. P. Carey shareholders. We will also grow our investment management business through existing products and new product initiatives. This includes organic growth through new product verticals, as we did with the Carey Watermark funds and, more recently, the BDC. The second element of our plan is diversification. Our existing model offers significant optionality on several levels: through the sources of capital available to us, through our ability to invest in both the U.S. and abroad and through the diversity in our real estate portfolio. Diversification enables us to be nimble and opportunistic, allowing us to grow our business and deliver value to shareholders through a variety of market cycles. What does this mean in practice? Access to retail investor equity capital through our investment management platform, in addition to the traditional REIT capital sources of debt and equity, has proven to be an important strategic advantage by ensuring we have access to capital in almost every business cycle. For example, during the financial crisis, when public debt and equity markets were not available or were unfavorably priced, we continued to have access to retail investor capital, which allowed us to make attractive investments on behalf of our managed funds and grow our AFFO by earning fees and participation revenues without diluting our shareholders. In addition, when the capital markets recovered, we were able to bring those assets onto our balance sheet in accretive transactions. Just as we have diversified capital sources, we are committed to an unsecured debt strategy and we'll maintain our investment grade rating and financial flexibility by conservatively managing our balance sheet. Our European platform provides significant strategic advantages. Often, the U.S. and Europe are in different stages of the economic cycle, and differential pricing on investments and capital allows us to take advantage of market conditions opportunistically. Our history of investing in Europe since 1998 and the platform we have built over the last 2 decades, while requiring expertise and experience, generates a flow of attractive deals. We believe that it is an efficient way to leverage our expertise of net lease investing, which is more portable to areas outside the U.S. than other real estate sectors. Ultimately, we believe we are better net lease investors and can deliver superior returns to our shareholders through our commitment to diversification. The third element of our business plan is operational efficiency and excellence, reflecting increased focus on cost management and discipline throughout the company. This is an ongoing effort, and we will continue to streamline our business with the goal of operating at peak efficiency, including concentrating on geographic areas that deliver the greatest promise and return and pulling back from those who do not. One of the benefits of our combined business model is that we get meaningful synergies from centralized functions that support both our owned real estate portfolio and our investment management business, which will increase as we grow our platform. Over the last 60 days, we have identified opportunities to reduce our G&A expense by approximately $20 million annually. The fourth element of our plan is maintaining a strong and flexible balance sheet. We are committed to maintaining an investment grade balance sheet and strong liquidity position as well as to our goal of becoming a primarily unsecured borrower, and we will maintain access to various forms of capital to minimize our cost of capital and maximize flexibility. The fifth element of our plan is the proactive management of our owned real estate portfolio. We will maintain high portfolio occupancy rates with limited carrying costs and extend the weighted average lease term through acquisitions of new long-term leased assets and proactive management of existing assets. We will focus on geographic areas where we can build scale and leverage our credit underwriting platform, as we have done in North America and Europe. The sixth and final element of our plan is enhanced transparency through disclosure and investor outreach. We will strive to provide comprehensive and transparent disclosure, including foreign investment management business and continue to engage with current and prospective investors to ensure they fully understand the benefits of our business model. Later on this call, Hisham will discuss the disclosures added to our supplemental this quarter as part of that effort. We are confident in this plan, and we believe that as we continue to execute on these 6 points, we will deliver sustainable, long-term value to our shareholders. Turning now to our investment management business. We have a 40-plus year track record investing successfully on behalf of more than 100,000 investors. Our business plan involves leveraging our established and well-regarded investment management arm to raise new funds and expand our assets under management. Retail investor demand for our managed funds is not going away. In fact, it is most likely to grow in the future, as individuals continue to seek quality income and wealth preservation. How we access it, the structures we utilize, the fee streams we earn and the manner of providing liquidity for those investors will all likely evolve, just as they have over the past 40 years. But the ability to have a capital source beyond our own equity is an important strategic advantage that allows us to act opportunistically and nimbly, grow our business and deliver significant value to shareholders across market cycles. Our mandate, going forward, will be to acquire net lease assets on our own balance sheet as long as our cost of capital is priced favorably. And when that is not the case, we will look to other capital sources to grow our business. This flexibility allows us to produce economic benefits to our shareholders in the form of fee and participation revenues, while generating attractive investment opportunities for our funds. This week, we filed a registration statement for CPA:19 - Global, which has a broad investment strategy to acquire, own and manage diversified portfolio of income-producing commercial real estate assets, including net lease assets. The investment mandate at CPA:19 will include asset classes, such as self-storage, multi-family, student housing and mortgages that are not part of our own investment mandate. These are all asset classes that we are familiar with, having invested in them for CPA:17 and CPA:18. The net lease assets allocated to CPA:19 will be limited to deals that have met our underwriting and pricing criteria, but based on our cost of capital at that specific point in time do not work for our balance sheet. I believe our best opportunities are ahead of us. Our business is fully integrated from the acquisition process through to the asset management process and built to execute in both the U.S. and Europe. Our investments are not cookie-cutter deals, and our investment officers provide significant value in their ability to originate, underwrite and structure investments that have delivered average annual returns of 11% net of fees and expenses to investors in the 15 funds that have gone full cycle and a total shareholder return of 898% to shareholders of W. P. Carey since we went public in 1998. Equally important is the value our asset management team delivers by verifying that all these covenants are met, properties are maintained by the tenant, monitoring the financial position and credit worthiness of the tenant, interacting with the tenant to ensure potential lease expansion and lease renewal probability are examined and understanding ongoing criticality of the building to the tenant. And most importantly, pursuing opportunistic dispositions of the property when it makes sense. One of the biggest misperceptions of net lease investing is that the assets do not need the level of management required by other real estate classes. I firmly believe that in the same way that the underwriting and structuring of a lease creates value, active management of those assets is required to maintain and, in many instances, increase and harvest that value. This discipline is where W. P. Carey excels, and is exactly what we have been doing for the last 4 decades and we'll continue to do. As I've said before, we evaluate our business every day. We consider consistent, strategic review a best practice and believe, over time, it builds a stronger company. Our board and management team will continue to take decisive action when we feel there are sufficient, sustainable, long-term value creation opportunities for our shareholders. Our operating model, going forward, will have one goal, and it will be the same goal on which Bill Carey founded this firm 43 years ago. We will endeavor to provide sustainable long-term value to our shareholders by investing in assets with superior risk-adjusted returns. We will see growth opportunity through an investment lens and use the best source of capital to acquire those investments. It is this standard that has been the basis of our track record of providing value to shareholders and ensuring W. P. Carey is best positioned for future success. Now I'll hand the call over to Jason to talk about our owned real estate portfolio.

Thank you, Mark, and good morning, everyone. I'll give a brief update on our owned real estate portfolio and the market backdrop. At the end of the first quarter, the company's owned real estate portfolio included 866 net lease properties, covering roughly 89 million square feet leased to 220 tenants. Weighted average lease term was 9 years and occupancy remained high at 98.5%. At quarter end, 63% of our annualized base rent came from our properties in the U.S. and 35% from our properties in Europe. 96% of annualized base rent came from leases with contractual rent escalations either linked to CPI or through fixed rent increases. And being net leased, tenants are generally responsible for the costs associated with operating and maintaining the properties. Importantly, this provides the portfolio with built-in rent growth with very minimal exposure to rising operating costs. Same-store analysis in our supplemental shows that rents were 0.9% higher compared to the 2015 first quarter on a constant-currency basis, and this is consistent with the average increase for the last 4 quarters. Turning to our recent acquisitions. We have announced 2 acquisitions for our balance sheet so far in 2016, both during the second quarter. So they're not included in any NOI or ABR data in our first quarter supplemental. At the start of April, we entered into a sale leaseback transaction with Nord Anglia to acquire a private preparatory school campus in Florida, along with agreements to acquire 2 additional school campuses by the end of the second quarter in Florida and Texas. The purchase price for all 3 properties totaled $176 million (sic) [ $167 million ], and we agreed to provide up to an additional $128 million in build-to-suit financing over the next 4 years to fund the expansion of existing facilities. These are prestigious private schools, with long histories of profitability and success. Individually, they have strong rent coverage, with income sourced from private paid tuition fees and further supported by a guaranty from Nord Anglia, the corporate parent. Both the existing and build-to-suit facilities are subject to 25-year leases, with untapped CPI-based rent escalation, offering compelling long-term returns. Also in April, we closed the sale leaseback transaction for the acquisition of a 49 property industrial portfolio in the U.S. and Canada for $218 million with Forterra, a leading multinational manufacturer of concrete and clay infrastructure products. These are critical properties on 2 master leases, each with a 20-year term and fixed 2% annual rent escalations. Rent coverage is very strong at the portfolio level, and the tenant has shown stability through multiple business cycles over the company's more than 80-year history. Both of these acquisitions have attractive initial cap rates, with a weighted average of 7.7% for the properties closed to date; and long-term leases with a weighted average of over 20 years. And that's before factoring in lease extensions that'll take effect upon completion of the built-to-suit components of the Nord Anglia deal. As a result, these 2 transactions are highly additive to the overall weighted average lease term of our portfolio, which we are constantly focusing on extending. Under our capital, our active capital recycling program, disposition activity increased substantially during the first quarter, totaling $102 million. The bulk of this amount was comprised of 3 large office buildings. The Kraft headquarters in Northbrook, Illinois and the former Amylin headquarters outside of San Diego. The blended cap rate on these sales was approximately 6.2% and the proceeds have already been redeployed tax efficiently into higher-yielding long-term net lease assets. For the remainder of 2016, we expect capital recycling to continue at this above-average level of activity. Our guidance assumes total dispositions for full year of 2016 in the $650 million to $850 million range. The weighted average cap rate is expected to be in the 7 to 7.5 range, excluding the Carrefour disposition. We currently expect to be able to fund all of our 2016 acquisitions with proceeds from asset sales on a leverage-neutral basis. As you can see in our leasing activity schedule, re-leasing and new leasing activity relate to only a very small part of our overall portfolio. During the first quarter, we extended or modified 5 leases at approximately 91% of the existing rent, adding 8.2 years of incremental weighted average lease term. And we entered into 1 new lease with a lease term of 7.5 years. Looking ahead, we have 8 leases expiring over the remainder of the year, representing just 1.6% of total annualized base rent, which we are actively addressing. We anticipate that the bulk of these properties will be sold over the course of this year. Turning briefly to the investment environment. Net lease in the U.S. continues to be competitive although, from what we are observing, cap rates appear to be reaching a bottom. Widely marketed deals continue to attract aggressive bidding, while less marketed relationship-based deals offer better opportunities, which is where we continue to focus our efforts. In Europe, cap rates continued to come down, although attractive investments with adequate spreads remained available, given the regions' lower cost of debt. And with that, I'll hand it to Hisham to review our financial results.

Thank you, Jason, and good morning, everyone. For the 2016 first quarter, we generated AFFO of $1.31 per diluted share, up 7.4% from the 2015 first quarter. The year-over-year increase was driven by 2 key factors. First, within our investment management business, growth in assets under management generated both higher asset management fees and higher distributions from our partnership interest in the Managed REITs. Second, G&A expenses were significantly lower compared to the 2015 first quarter, which included professional fees associated with the implementation of an enterprise resource planning system. These factors are partly offset by lower structuring revenues due to lower investment volume on behalf of the Managed REITs. During the first quarter, we undertook a thorough evaluation of our cost structure and identified opportunities to streamline the operational efficiency of our business. As a result, we expect to reduce our pretax G&A expense by about $20 million on an annualized basis, which represents about a 20% reduction compared to 2015. This process is ongoing and we will continue to focus on ways to make our operations more efficient. Finally on this topic, we took a onetime charge of $11.5 million related to severance and restructuring costs, which have been excluded from our first quarter AFFO. Turning now to segment disclosure. We are constantly looking at ways to provide greater transparency into our business, and over the last few years, have significantly enhanced our supplemental disclosure. As part of that ongoing effort, I'm pleased to say that we now provide net income AFFO and adjusted EBITDA by business segment. We believe that it will provide greater insight into the operating performance of each of our businesses and support valuation analysis of our company. Looking ahead to 2016 AFFO guidance. In this morning's earnings release, we announced the 2016 AFFO guidance range of $5 to $5.20 per diluted share, which assumes acquisitions for W. P. Carey's balance sheet of between $400 million and $600 million and dispositions of between $650 million and $850 million. To date, we have announced total acquisitions of $394 million and have completed dispositions of $162 million. It also assumes acquisitions completed on behalf of the Managed REITs of approximately $1.8 billion to $2.3 billion, with roughly 60% for the CPA REIT and 40% for the CWI REIT, of which, $508 million has been completed to date, including $214 million for the CPA REIT and $294 million for the CWI REITs. Turning to our dividend. During the first quarter, we raised our quarterly cash dividend to $0.9742 per share, up 2.3% versus the year ago quarter and equivalent to an annualized dividend rate of $3.90 per share. Based on yesterday's closing stock price, this represents an annualized dividend yield of about 6.2%, and we maintained a conservative dividend payout ratio of 74.4% for the first quarter. Since going public in 1998, we have achieved a compound annual dividend growth rate of about 5%. And since becoming a REIT in September 2012, we have generated compound annual dividend growth of about 11.4% for our shareholders, while maintaining a conservative average pay out of approximately 77%. Turning briefly to our balance sheet and leverage metrics. At quarter end, pro-rata net debt to enterprise value stood at 39.4%. Total consolidated debt to growth assets was 50.1% and pro-rata net debt to adjusted EBITDA was 5.5x. The weighted average cost of our pro-rata secured debt was 5.4% and our overall weighted average cost of debt was 4%. During the first quarter, we exercised the option to extend our $250 million term loan facility by 1 year through to the end of January 2017, and have the option to further extend it an additional year. At the end of the first quarter, we had approximately $312 million of debt maturing in the remainder of 2016 compared to total liquidity at quarter end of about $1.2 billion, which includes cash and cash equivalents and the undrawn availability on our credit facility revolver. Since embarking on an unsecured debt strategy in 2014, all of the acquisitions going onto our balance sheet have been unencumbered, and all of the secured mortgages that have matured have been paid off with unsecured debt or equity. We remain committed to an unsecured debt strategy and growing our pool of unencumbered assets as well as maintaining access to public capital markets for both debt and equity. Given our anticipated disposition activity for 2016, we expect to be able to fund all the acquisitions currently in our guidance on a leverage-neutral basis. Before handing back to Mark, I'll briefly review some of the key metrics for our investment management business. The $508 million of acquisitions completed to date on behalf of the Managed REITs, which I mentioned earlier, included $412 million completed during the first quarter. Investor capital inflows for the quarter totaled approximately $171 million, up from $157 million for the fourth quarter, primarily into CWI 2, our second lodging fund. Proceeds from our DRIP programs raised an additional $35.4 million during the quarter compared to $35.8 million in the fourth quarter. And at quarter end, our managed programs had total assets under management of $11.6 billion. Accordingly, our asset management fees and revenue participation in the Managed REITs continue to grow, in aggregate, increasing 28% and 7% since the 2015 first quarter and fourth quarter, respectively. As a result of these activities, our investment management business generated adjusted EBITDA of $11.3 million for the 2016 first quarter and contributed 7.6% or $0.10 to AFFO per diluted share. And with that, I will hand it back to Mark.

Thank you, Hisham. On the topic of our investment management segment, I'd like to reflect on 2 recent regulatory changes impacting that business. Let me start by emphasizing that we view regulatory change that enhances transparency and investor protection very positively. The amended customer statement rule, referred to as FINRA 15-02 that was first passed in October of 2014 and implemented last month, is behind us. As I mentioned on our last call, we had transitioned our product offerings well in advance of the rule. And not only were we prepared, but have enjoyed additional market penetration as a result of being an early adopter of lower commission products. With regard to the final DOL fiduciary rule, we will benefit from the changes that were made from the previously released version. Our investment management products can continue to be sold to retirement savers using IRAs. Indeed, we believe pre-retirement and retirement savers looking for alternative investment products that provide income and growth outside of exchange traded markets will create positive investor capital flows into our funds for years to come. And with that, I will turn it over to the operator to take questions.

[Operator Instructions] And your first question comes from Nick Joseph.

It's Michael Bilerman here with Nick. Mark, I'm curious, it was about a year ago, almost to the week, that the prior management team announced on their first quarter call a pivot in the investment strategy so that future nontraded products wouldn't have net lease for specifically saying the potential for the perception of conflict of interest, whether real or perceived. And clearly, that was a statement and then, further down the line in the fall, the company announced their strategic review, which you've announced today is resulting in basically status quo. But the more important thing, in my view, is a pivot back to having both a perceived and real conflict of interest of being able to do net lease in both the nontraded and in the REIT. So what did the board think a year ago to announce the pivot to what the board is thinking today to pivot back?

I think the board, over the last year, and rightfully so, embarked on a strategic alternative review. They reviewed all options for the company with -- through the lens of what would provide long-term sustainable value for our shareholders. I think what we announced today is the outcome of that review. What we announced today is, in effect, a change in the investment mandate, both for W. P. Carey and for CPA:19. CPA:19 will have a much broader investor mandate, as I mentioned in my remarks, over a number of income-producing real estate classing, including net lease. But the bright line will be that we've also realized that we have to tend to our growth needs. And we will make, and give priority to, net lease investments for our own balance sheet when those investments makes sense based on our cost of capital. And when we like those investments and they pass our underwriting standards and our pricing standards, but because of our cost of capital, which isn't fully within our control, it'll make sense to put on our balance sheet, we will look to CPA:19 to put those investments in that fund.

Well, how do you judge cost of capital at the REIT versus cost of capital in the fund? And isn't there a disconnect between the fiduciary duty that you have to your net -- I mean, it just -- maybe just go back to last year, the whole pivot that the management team talked about was eliminating this conflict of buying net lease assets in the funds and buying net lease assets on the balance sheet. That was a significant concern of investors and, clearly, the board supported that decision or that announcement wouldn't have been made a year ago. Put aside the strategic alternatives and whether the company was going to be 1 company, 2 companies or 3 companies, an investment manager, a Europe and a U.S. net lease business, there was a deliberate strategy change a year ago to say we're going to do net lease on balance sheet and we're going to do all these other types of products in the nontraded to eliminate perceived conflict of interest.

Michael, I don't -- I've made it very clear since I've come on board that I view that capital source as an important strategic advantage for this company. We have a 40-year track record of dealing with that perceived issue -- that perceived conflict that you're talking about, and both our shareholders as well as the shareholders of the CPA funds under management have done very well. As I'll remind you again, the 15 funds have gone full cycle and recognized an average annual return of 11%. For me, the strategic value of that capital source is worth dealing with that conflict, and I think we've dealt with it in CPA:19. Going forward, we will put net lease assets on our balance sheet as long as our cost of capital makes sense to put them on the balance sheet. And when it doesn't, we will look to the CPA funds, which has a more stable cost of capital, to house those net lease investments. What won't change is the lens we view investments through, which is a very strong underwriting and pricing criteria. And we view that first regardless of where that ends up in our organization.

Right. Just lastly, just on the cost of capital. Well, how do we -- how do you judge and how should we judge how you view the publicly traded WPC's cost of capital? And how do you view the nontraded cost of capital, so that we have an understanding about when one entity is going to be more aggressive at buying versus the other?

Cost of capital for the public company is a function of 3 factors: the price of our equity, the cost of the debt we can put on individual deals and the cap rate that we see investments out there in the market at any point in time. And that varies and that changes. The stable -- in CPA:19, and we have filed CPA:19. You're welcome to go out and review that. I think that cost of capital is more stable. Most of the costs are absorbed as its raised. It will have a much lower upfront load. Our structuring fees will be lower. They will go from 4.5 to 2 points. So the upfront cost of raising that capital will be lower. And what varies -- the majority of what varies for that cost of capital is its dividend rate at any given point in time. That's how we view it.

Yes, I was looking for actual numbers and -- but we'll -- I'll yield the floor.

Your next question comes from Chris Lucas.

I guess kind of following up on Michael's line of thinking there. Actually, let me move on to one other topic, first. Hisham, you mentioned that you had identified $20 million of annual G&A savings. That's 20%. How much of that is -- I mean, can you give some color on where that's coming from?

Sure, Chris. So when we embarked on this cost-reduction initiative, fewer categories of cost was spared. So we focused on compensation and many other discretionary -- and other discretionary sort of areas of cost. The $20 million, you can think of it as roughly coming equally between those 2 key, high-level buckets: discretionary spending and compensation.

Headcount changes?

Yes. I mean, everything. It actually included reorganizing our functions, our departments. And some redundancies did result from that. We looked at the structure of our variable compensation. And then outside of that, within the discretionary bucket, we looked at various professional fees, projects and many other costs.

Okay. And then, I guess, can you give us a sense as to what your long-term leverage goals are for the balance sheet? I guess, one of the issues that sort of comes back to us is, heading into the strategic review, one of the questions that needed to be answered was, how do you get rid of or how do you deal with the complexity discount? How do you compete on a cost of capital basis with your peers who are trading at much higher multiples or much lower implied cap rates? And so I guess I'm trying to understand how do you grow when the cost of equity -- it seems like it's going to continuous -- be continuously trading at a discount to your peers. I guess I'm just trying to understand how things changed and then, how do you deal with managing the balance sheet in that environment?

Chris, it's Mark DeCesaris. I'll take that question. And I wouldn't jump to the conclusion that we expect our cost of equity to continue to trade at a discount. As I laid out in my comments, the answer to that question is execution of the -- of a plan that deals with our growth, our diversification, operational efficiency, our balance sheet, our portfolio management and our transparency, and that includes a significant investor outreach program. So we're prepared to not only execute on that plan. We are prepared to making clearer the benefits of that plan to our investors and prospective investors, and we'll continue to do that. But as I said, we also have an important strategic advantage in that we have an additional capital source and an investment management segment that will allow us to continue to grow this business without dilution to shareholders if the cost of our equity isn't at a price that we like.

Okay. And then let me just shift over to CPA:19. I haven't had a chance to look at the document, so maybe if you could give me some help on -- is the -- or who are the board members on that and who are the executives on that? Is there any independents relative to CPA:17 or 18? Or is there, essentially, the same composition?

No, we haven't named the board to CPA:19 yet. All the board members, with the one exception of myself, will be independent on that board. And I will be stepping aside anytime. There is a decision that has to be made that involves W. P. Carey as well. We have operated that way for 40 years in our funds. CPA is -- going back to CPA:1, all have been represented by independent boards.

Your next question comes from Sheila McGrath.

Mark, I was wondering on CPA:19. I, too, have not read it yet in earnings. But I was just wondering how is it being positioned or marketed to investors, that it'll be self-storage, multi-family and other assets that you mentioned? And only net lease assets if WPC parent is not active? Or how do you explain that to investors? And then the second part of that question would be those assets are much more management intensive, and I just wonder how you'll manage that.

That's exactly right. You hit it on the head. CPA:19 will be sold on a broad investment mandate basis with various income-producing commercial real estate classes. And it will be made clear in the prospectus that the -- our priority will be the net lease deals will go to W. P. Carey first based on its cost of capital. And when its cost of capital isn't right, those net lease assets will be given to CPA:19. It will also make clear, though, that the investment premise of investing in those assets will not change. That we will look to the investment first from both an underwriting and a pricing criteria before making that decision. What was the second part of your question?

Just those other asset classes that you mentioned are much more management intensive. So are you going to have to go out and hire third-party managers? Or just tell us how you -- will you manage that part of it?

You're right, Sheila, they are. But we've already had a history of making investments in those asset classes in CPA:17 and 18. These aren't new to us. And if you look back to our history, you'll see that we have made investments and asset classes, such as hotels, where that was really the genesis of forming this -- the hotel funds that we have out there today. And in those instances where we don't feel we have the talent in-house to manage those, we'll go out and we'll partner up with either a sub adviser or a partner, similar as we have done in the CWI series with Watermark Capital; and in the BDC series with Guggenheim. And we'll continue that process.

Okay. And then just -- you had previously -- or the company had previously mentioned of going lower on the structuring fees, which you've mentioned, but having a higher asset management or more of a recurring income stream rather than the lumpy structuring fees. And I'm just wondering if you're changing that philosophy or how should we think about those fee streams going forward.

No, not at all. In CPA:19, the structuring fee will be lower than prior CPA funds. It will drop to 2%. What won't change is the annual asset management fee and our participation in the cash flow of those investments of the fund. That will remain the same.

And your next question comes from Juan Sanabria.

Just following up on the cost cutting and the G&A. So what's the guidance for all-in G&A for 2016? And how much of the $20 million do you expect to realize through the end of the year?

So thanks, Juan. Within our guidance, our midpoint for G&A is about 80% of what we incurred in 2015. We did about $100 million. And with this -- with the cost cutting, with the cost reduction, we expect to achieve about 80-or-so percent of the $20 million in 2016. So look, as you know, G&A has a variable component and a fixed component. Our cost reduction actions targeted both buckets, but really the bigger focus was on the fixed component of cost.

And of that $20 million in savings, how much is on balance sheet versus in the funds?

It's on balance sheet. It's all on balance sheet.

Okay. And then just on Michael's point on the cost of capital, how do you think of your cost of equity? Is it just the inverse of your AFFO yield? Or do you ascribe some sort of implied growth to that? Or -- and how do you think about your NAV when thinking about issuing equity to fund acquisitions?

Well, I think that we would consider all of those factors in thinking about our equity cost of capital. And I think that what's really important is the cost of capital versus the opportunities that we see. So I think that it's really -- what we're looking for is a differential or a spread between the higher cost of capital and the investment returns that we can generate on the new investments.

Okay. And then just a question on the strategy around the investment management business. So it seems like, obviously, you're pivoting back to doing triple-net investing, depending on your cost of capital in the funds. But what's the benefit to W. P. Carey on balance sheet, a triple-net company, of doing non triple-net investing, i.e. investing in hotels, self-storage, et cetera, when that's not your core business on balance sheet?

Juan, I think that the plan that we announced with respect to CPA:19 is not being fully understood. I think that rather than -- I think what we've announced is more of a refinement of the pivot we announced, rather than a re-pivot. So what we announced last year is that we're going to invest net lease transactions on our balance sheet, and that's still the case. What we're saying is that to the extent that, for whatever reason, our cost of capital being the primary one, that we're no longer able or desirous of investing net lease deals on our balance sheet, we'd like to have the flexibility of investing those deals, provided that they met our criteria on CPA:19. So I think that's...

What's the benefit of investing in self-storage or apartments? I don't understand how that adds value to a business -- a core business on balance sheet that is a triple-net business. What are the synergies? What are the benefits?

Yes, so let me take that. So we like that capital source. We feel it gives us diversity by allowing us to invest in those other asset classes that allows us to continue to access that capital source and have it available when we need -- when we want to do it for net lease investments as well. And I'll give you an example of that. Back in 2009, we're in the middle of the crisis -- of the financial crisis. Our equity, like everybody else's equity, was significantly reduced. The debt markets weren't open. We did a deal with The New York Times, it was a terrific deal, and we did it all equity. And without that capital source, that deal doesn't get done. Today, that deal sits on W. P. Carey's balance sheet and it was a tremendous deal.

But that's a net lease asset, though.

Hold on. No, I got it, Juan, but let me finish. So not only does it give us that diversity from a strategic direction, but WPC shareholders also benefit because it allows us to continue to grow our AFFO through recognition of very sticky annual management fees and in participation in the cash flow interest of those funds. And those are 2 very sticky revenue streams on that in most cases from the CPAs are backed up by income-producing commercial real estate assets. So WPC shareholders benefit from both of those, and that allows us to grow through those cycles. Where most REITs either have to sit on the sidelines or dilute their shareholders' equity, well, we don't have to do that. We have a different capital source that allows us to continue to grow through that period of time. Let me also -- I'm sorry, we'll take the next question.

[Operator Instructions] Your next question comes from Nick Joseph.

It's Michael Bilerman again.

Michael, before you ask your question, let me just clarify one of the things you asked in your prior question, which has to do with this conflict. And I want to clarify it because CPA:19 really has a wider investment set. So that it's only the net lease in that investment set that, in your view, has a perceived conflict. And I want to be clear, the priority is that those deals will go on our balance sheet when our cost of capital is right. And when they're not, they'll go into CPA:19. That's how CPA:19 will be sold to those investors, that's how the prospectus has been written.

Right. But the issue also then comes as you seek liquidity, right? And you said in your opening comments that the goal now is for, eventually, continue exactly what happened with the 16 other CPA entities that they all eventually came on to WPC's books through M&A, rather than going to be sold to a third party. So not only is there a conflict of interest on an individual net lease acquisition when an asset is bought, but then there's a further conflict of interest as those entities pursue some form of liquidation. And I understand there's independent boards and they can hire their strategic advisers, but WPC traded 12x AFFO, and your closest peers trade at 20. I don't think it's for the 6 reasons that you outlined that you're going to be focused on that narrows that gap. And I think the prior management team, which had supported the board last year to make the decision to pivot and not have this perceived which, in some cases, could translate into a real conflict of interest, to not have net lease assets on both sides of the fence.

Well, let me address your first issue first on liquidation proceeds. There's always a perceived conflict that exists there. There's perceived conflicts in a lot of transactions. As I've said before, they do have independent boards. And it's not they can, but those boards do go out and hire independent investment banking firms. They hire independent legal firms. It is a very rigorous process that goes -- that we go through for that. And whether there's a perceived or not, the actual facts of the matter are that the conflict is not entered into those negotiations. And I'll ask John take you through the most recent transactions that have happened over the last few years and kind of give you the history of those. John, do you want to?

Sure. Michael, I think that, clearly, in a related party transaction, as with third party transactions, the 2 transactions have to work for both sets of shareholders. And if you look at our acquisition of CPA:15 and 16, we strongly believe that those transactions work for W. P. Carey shareholders as well as CPA shareholders. And I think that during the time those transactions were done, 2012 to 2014, net lease factor was probably the most active M&A factor in all of the REIT industry. And there are many, many transactions done. And while what's happened in the past is no guarantee of what's going to happen in the future, if you look at those transactions closely, you'll see that our 2 transactions had the best pricing and most accretion for W. P. Carey shareholders and really with terrific liquidity execution for CPA:15 and 16.

How will -- for 17 and 18 and eventually 19, as WPC considers the acquisition of those entities, what will you do with all the non net lease assets that are going to be a bigger scope of the nontraders going forward? Would you merge-in these entities and then sell off? Or should we expect that you will have now other types of assets on WPC's books?

I think over the long term, you should expect WPC will be a net lease or primarily net lease balance sheet. How we -- when the independent directors of those funds decide to go seek liquidity, those liquidity options can, and have, taken a number of different forms. I'm not going to speculate on what forms one of those will take until we get to that point in time, but the guidance I can give you is that W. P. Carey will primarily be a net lease balance sheet.

So we shouldn't expect -- we should expect somehow none of those assets would be sold off to a third party if you were to acquire 17 and 18, if that's ultimately what happens?

There are a number of alternatives that could be executed. As I said, what you should expect is that W. P. Carey will primarily be a net lease balance sheet.

Okay. And then just on the $20 million, just so I understand the allocation here, it's $20 million of savings. But I would assume that there's some savings within your investment management platform that, arguably, is therefore making that business more profitable for WPC. So maybe just talk about sort of where that $20 million is coming from. And I guess, is the fund -- do the funds not benefit at all from the cost initiatives that you're doing, that it all basically flows to WPC shareholders?

Look, I can describe the process for you. We did a ground-up review of our entire cost structure over the last 60 days, and identified $20 million in savings. I think where the funds benefit from that is, obviously, having an investment manager with a strong balance sheet, great financial position and a lean organizational structure. They will always benefit from that. But the $20 million is on WPC's -- is out of WPC's operating cost structure.

But where exactly is -- where -- let me guess, you do break out your segment reporting. Is any of that going to show up in your allocated costs, investment management platform that effectively could make that a more profitable or at least viewed more profitably as a business unit? I'm trying to just figure out where that $20 million is coming from.

Sure. Well -- and I think in our supplemental, Hisham breaks out the EBITDA on our investment management business. But that's not how we look at it, and there are -- that's one of the synergies that come from having both the investment management and the REIT together is that some of those costs can be performed across the organization. So I'm sure some of the allocation will drip down into the investment management as well as the REIT. Hisham, do you have anything you want to add to that?

Yes. And -- that's right, Mark. And if you think about the $20 million, how to split it between the 2 segments, think of it roughly as the way it is right now. I think about 50% or 55% in the investment management segment and the remainder in the real estate segment. I mean, on a -- the sort of -- the IM segment is where we have taxable entities and on a post-tax basis, this is about $15 million. So it's -- we get a significant tax savings as well because from the -- based on tax because we also -- it's -- on an AFFO standpoint, it's about $0.14. Once again, these are annualized sort of numbers, and not the number for 2016.

Right. And just the last one. Just in terms of all the wide range of outcomes that you've considered. You obviously spent a lot of money on tax and legal and accounting in terms of trying to evaluate different alternatives. Maybe you can just sort of hone in on, was there anything structural or cost prohibitive in breaking things apart? Ultimately, why stay the course? Why, I guess, stay the course pivoting back to where you were at the beginning of last year, one out relative to others? Was there anything cost prohibitive or structuring prohibitive or tax prohibitive that drove the decision one way or the other?

No. I think as you mentioned, we -- the money we spent, that included legal tax, investment banking representation and personnel costs. There are obviously -- in any transaction, you obviously have to look at both the regulatory and the tax hurdles of accomplishing that transaction. That was taken into consideration as part of this review, as it always is. But at the end of the day, the board reach its conclusion through a single lens, and that lens was what ultimately would provide the best opportunity to provide sustainable long-term growth to shareholders; and it came down to the strength and the diversification within our business model and the ability to operate through cycles. And continue to grow both our business and our AFFO and, ultimately, our dividend for those shareholders.

Right. Did you guys do a perception study with the institutional investment community at all? I know a lot of REITs go through that process as they consider things. I just didn't know how much input you received from the investment community, the owners of your shares and the analysts that follow you.

Yes, we performed a very, very thorough process with the help of JPMorgan. And what I -- while I won't get into the details of discussions that occurred in the boardroom, I can tell you it was a very open process and all options were looked at.

[Operator Instructions] And your next question comes from Sheila McGrath.

Yes, Mark, following up on that last question of Michael. Just -- I was wondering, in the process when you decided to stay together, was it -- did the separation or the G&A load of 3 separate entities, was that a factor? And also, I was curious if the -- how NorthStar separation and how poorly that ended up in terms of how the stocks traded, is that -- was it also a factor in the decision?

Sheila, as I said, it was a very open and thorough process, so all those factors came into play during the review. There's no -- at the end of the day, the biggest factor that drove this decision was the strength of our diversified model and our ability to provide what we feel are superior returns to our shareholders. So while all those factors come into play, at the end of the day, it was really our model strength today. And that's not a bad thing. As I stated before, for any company, to survive long term and be successful, ongoing strategic review is essential. And just because change that is being close enough but doesn't occur, that's not a bad thing because what it forces every company to do is look at its operation. We validated the fact that this business model provide -- has provided, has a proven track record of providing long-term value to our shareholders. We will continue to make tweaks to the operation, as we've done here as part of this operation and as we have done in the past. And nobody should never expect that this strategic review -- and we have a group that does it. And I think for any company to be successful, they have to dedicate that time and money to that process and that's what we've done. So I would expect that to continue. As I've said to you many times, when we walk in, in the morning, all options are always on the table. We look at them every day. We've made this current process a little more public than other points in our history when we've gone through this process, but we'll continue to do it every single day.

And one other follow-up. On the investment management business, we had, had some concerns about ceasing the distribution of CPA funds because they had, had such brand recognition in their networks. I'm just wondering if you look back at the CPA funds, their fund-raising track record in terms of volume and brand acceptance, if that was a factor versus like launching new products and CWI funds. They take longer because they're new. Was that a factor as well?

I think the way I would answer that is look at our track record, Sheila, and you're very familiar with it. We have, I feel, the best reputation by far in that industry of not only providing shareholders with value at an average annual return of 11% for the first 15 funds that have gone full cycle. But we have over 100,000 investors that have invested in our funds over history to seek those returns. So we have a blue-chip reputation in it. I don't think the capital source is going anywhere. We let our reputation and our track record stand on its own. While there have always been -- and in any industry, I think you see bad actors that come and go in that industry, we've stayed the course throughout it and our investors have benefited for it; and our investors of W. P. Carey have benefited from that business as well.

Your next question comes from Chris Lucas.

Yes. Just one real quick question and it's not strategic. There was a comment about Carrefour assets being on the market. Is that the entire portfolio or some portion of, can you maybe just give a little color on what is on the market?

Yes, sure. This is Jason. Yes, that's the entire portfolio. The plan is to exit in the second half of 2016. We're working proactively on it, but we'll provide greater clarity as we make progress on that.

At this time, I'm not showing any further questions. I will now turn the call back over to Mark DeCesaris for closing comments.

Thank you. I am very satisfied with the first quarter operating results we reported today and our 2016 full year guidance. We have accomplished a great deal over the last 90 days, including the conclusion of our formal strategic review and planning process, which has reaffirmed our diversified business model; identifying operating cost reductions of approximately $20 million per year; filing for CPA:19, which not only addresses new regulation but also generates capital for future growth; adjusting our investment mandate to give priority to the growth needs of our owned real estate portfolio; establishing a capital recycling program that addresses our 2018 lease roll; and delivering guidance that provides for continued growth in our AFFO and dividend, while maintaining a conservative payout ratio. None of this could have been accomplished without the support of our Board of Directors, our senior management team and most of all, the loyal, hard-working and focused employees of W. P. Carey, whom I am very proud to be able to have the opportunity to work with every day. We've covered a lot of ground on today's call, so I'd like to conclude by briefly reiterating our 6 key priorities going forward: growth, diversification, operational efficiency, balance sheet strength and flexibility, proactive asset management and transparency. I truly believe that we have a model built to perform and deliver growth across market cycles, and we are committed to both executing on this plan and making the benefits of it clear to investors. Thank you all for joining us on this call and for your interest in W. P. Carey.

Thanks, everyone. That concludes today's call. You may now disconnect.