W. P. Carey Inc. (WPC) Q2 2016 Earnings Report, Transcript and Summary

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

Good morning, and thank you all for joining us for our 2016 second 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 hand the call over to Mark.

Good morning, everyone, and thank you for joining us today. I'm joined 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's Chairman of Carey Financial and heads up our capital raising for Investment Management business; John Park, Managing Director of our Strategic Planning and Capital Markets Group; and Tom Zacharias, our Chief Operating Officer. The second quarter was characterized by renewed focus on our day-to-day business, in particular, on the 6 key priorities I outlined on our last earnings call, including considerable reengagement with our investors. To date, I'm pleased with the feedback we've received, but it will be an ongoing effort and one that we are committed to. On that note, I'd like to take this opportunity to say how proud I am of the focus and dedication I've seen from all of our employees as we execute on our business plan. For the 2016 second quarter, we generated AFFO per share of $1.24 and $2.55 for the first half of the year. During the quarter, we raised our quarterly cash dividend to $0.98 per share, up 2.7% versus a year ago quarter and equivalent to an annualized dividend rate of $3.92 per share. Based on yesterday's closing stock price, this represents an annual yield of about 5.5%, and we maintained a conservative dividend payout ratio of 79%. We made progress towards our AFFO guidance, completing 2 investments for our balance sheet, including a build-to-suit component, and continued to execute on our disposition plan, the details of which Jason will discuss. We also made progress on the operational efficiency front, realizing G&A expense reductions. We remain focused on our balance sheet and utilized our ATM facility for the first time, raising gross equity proceeds of $57.1 million since we started using under -- the ATM in mid-June, the details of which Hisham will review. Some of our leverage metrics were somewhat higher at the end of the second quarter, reflecting the fact that the timing of acquisitions and dispositions don't always align perfectly. However, we expect our leverage to come down by the end of the year as we execute our capital plan. As I mentioned, we also embarked on an extensive outreach program with both equity and fixed income investors in order to ensure access to capital markets and diversity in our sources of capital. I'm currently spending about 1/4 of my time engaging directly with our stakeholders, and since our last earnings call, we have met in person or held conference calls with over 150 investors: 70-plus equity investors in New York, Boston and Canada; and 80-plus fixed income investors in the U.S. and Europe. Within Investment Management, the recurring income streams that we value most continue to grow, driven by our year-over-year growth in assets under management. We also continued to make investments on behalf of the Managed REITs, the timing of which may vary from quarter-to-quarter. And while we have the available capital, the actual timing of putting it to work is not always easy to predict, but it will eventually be invested. We also continue to raise capital for CWI 2 and our BDC even as the industry adapts to new regulation. And we made further improvements to our supplemental disclosure, reorganizing and enhancing some of the information on the Investment Management fees we generate. Finally, just a few comments about our international exposure. We have a relatively small U.K. portfolio and both our U.K. and euro exposure are appropriately hedged, so we expect minimal impact on our financial results, which Hisham will address in his comments. What I would say is that while the lead up to the Brexit referendum kept a lot of business on the sidelines, historically, we see some of our best deals in times of uncertainty. And while there's nothing specific on the radar right now, we are seeing increased activity, and we'll not hesitate to invest in either region should the right deal come along. Before handing it over to Jason, I'd like to welcome Peter Farrell to our Board of Directors. Peter, who has many years of commercial real estate and public REIT experience, joined our board in June, and we look forward to working with him. And with that, I will turn the call over to Jason to discuss our Owned Real Estate portfolio and investment environment.

Thank you, Mark, and good morning, everyone. At the of the second quarter, the company's Owned Real Estate portfolio included 914 net lease properties, covering roughly 93 million square feet leased to 221 tenants. Weighted average lease term was 9.4 years, up from 9 years at the end of the first quarter, reflecting our commitment to enhance portfolio quality and extend lease term. And occupancy remained high at 98.8%. 99% of annualized base rent, or ABR, came from leases with contractual rent escalations providing built-in growth. And as you can see in the same-store analysis provided in our supplemental, overall rents were close to 1% higher year-over-year on a constant currency basis. At quarter end, 64% of our annualized base rent came from our properties in the U.S. and 33% from our properties in Europe. Although relatively small in the context of our overall portfolio, we thought it would be helpful to briefly review our U.K. portfolio in light of the U.K.'s decision to exit the European Union. At June 30, we had 7 tenants in the U.K. generating approximately $35 million in ABR, which is equivalent to 5% of the total. Almost 2/3 of our U.K. exposure is comprised of a portfolio of 73 automotive retail sites net leased to Pendragon, which is the largest automotive retailer in the U.K. It's critical real estate for the tenant's operations, representing about 1/3 of its dealership footprint. It's well diversified geographically as well as being diversified across brands and price points, selling both new and used vehicles, in addition to providing on-site servicing and repairs. The portfolio has a long lease term with 13.6 years remaining, built-in escalations and strong site-level rent coverage. The remainder of our U.K. portfolio is primarily comprised of 3 high-quality office buildings net leased to the U.K. government tax authority, a gas and electricity utility and an insurance company. Our U.K. tenants primarily serve the local U.K. market, are strong credits and have a combined weighted average lease term of over 13 years. In summary, our U.K. exposure is relatively small, and we do not expect Brexit to have a significant impact on either our tenants' operations or our net cash flows, which are well hedged. In fact, as Mark noted, we view any disruption in the U.K. real estate market resulting from the Brexit vote as potentially creating attractive acquisition opportunities for us. Turning to our recent acquisitions. We've announced 2 acquisitions for our balance sheet so far in 2016, both of which I discussed in some detail on last quarter's earnings call. At the start of April, we entered into a sale-leaseback with Nord Anglia to acquire 3 private prep schools for $168 million. We also 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, which will effectively extend the overall lease terms of these assets up to 4 years past their initial 25-year terms. Also in April, we closed a sale-leaseback transaction for the acquisition of a 49 property industrial portfolio, with 43 properties in the U.S. and 6 in Canada, for $218 million with Forterra, a leading multinational manufacturer of concrete and clay infrastructure products. Both of these acquisitions have attractive initial cap rates averaging in the mid-7s. With lease terms of 25 and 20 years, respectively, they are also highly additive to the overall weighted average lease term of our portfolio, something that we are constantly focused on extending. As part of our active capital recycling program, during the second quarter, we disposed 4 properties from our Owned Real Estate portfolio for total proceeds of $160 million, bringing total dispositions for the first half of 2016 to $262 million. Including deals that have closed since the end of the second quarter, dispositions year-to-date totaled approximately $470 million. This includes the sale of an office facility in Sunnyvale, California leased to AMD, which was previously among our top 10 tenants by ABR. Approximately 96% of our year-to-date closed dispositions proceeds came from office buildings. As a result, we have reduced our office exposure as a percentage of ABR from 30% at the end of 2015 to below 25% today, including the recently closed AMD disposition. We continue to expect total dispositions for 2016 to fall in the $650 million to $850 million range built into our guidance with a weighted average cap rate in the 7% to 7.5% range. These cap rates exclude our Carrefour assets, which we are currently in active negotiations to sell, working towards a closing in the fourth quarter of this year. Turning to leasing activity, which relates to only a very small part of our overall portfolio of about 1% of ABR. Two leases were extended or modified during the second quarter. One was a relatively small industrial property for which we recaptured 100% of the existing rent. The other was a FedEx World Technology Center in Collierville, Tennessee, a 390,000 square foot office campus with 4 years remaining on its lease. After years of rent escalations that outpaced the market, contract rent was well above market rates, in contrast to the lease's renewal option at 95% of fair market value. In return for a rent reduction and moderate tenant improvements, we obtained a 25-year lease term with annual rent bumps to an investment-grade tenant. We view this as the optimal outcome for this asset and one that has meaningfully increased its NAV. Separately, during the second quarter, we entered into 3 new leases with a weighted average lease term of 16.3 years, which was additive to the overall weighted average lease term of our owned portfolio. Turning to our upcoming lease expirations. As shown on our supplemental, at June 30, we had 6 leases expiring in the second half of 2016, representing 1.3% of total ABR, the majority of which has already been addressed by our asset management team. We have 15 leases expiring in 2017, representing 3.7% of total ABR; and 26 leases expiring in 2018, representing 5.6% of total ABR, which is primarily Carrefour. Including AMD, about 3/4 of our 2017 expirations have now been addressed. Similarly, including the anticipated Carrefour sale later this year, we expect approximately 2/3 of our 2018 expirations to be addressed by the end of this year. So as you can see, we are usually successful in addressing lease expirations 2 to 3 years in advance of the actual expiration date. Lastly, I'll briefly review the acquisition environment. As has been the case in recent quarters, net lease in the U.S. remains very competitive with widely marketed deals continuing to attract aggressive bidding. While there's some evidence of a modest uptick in cap rates across the net lease market generally, we have seen a more a noticeable increase within the markets we traditionally target. For example, we estimate that cap rates for the deals currently in our pipeline have moved up 25 to 50 basis points compared to where they might have been 3 to 6 months ago. In Europe, cap rates continue to be on a downward trajectory in both primary and secondary markets, although attractive investments with adequate spreads remain available given the region's lower cost of debt. While we see growing competition in Europe, our established presence and reputation for reliable execution continues to give us access to attractive deals that are not heavily marketed. In contrast, we have seen moderately rising cap rates in the U.K. in the aftermath of the Brexit vote, primarily among high-profile U.K. properties being sold by funds facing increased redemptions. And with that, I'll hand it over to Hisham to review our financial results.

Thank you, Jason, and good morning, everyone. As Mark mentioned, for the 2016 second quarter, we generated AFFO per diluted share totaling $1.24. Looking at this by business segment. Owned Real Estate generated AFFO of $1.22 per diluted share, up 5% from the 2015 second quarter, due primarily to additional lease revenues from both acquisitions and contractual rent bumps on existing properties. Investment Management generated AFFO of $0.02 per diluted share compared to $0.15 for the 2015 second quarter. This decline was primarily driven by lower structuring revenues due to lower acquisition volume on behalf of the Managed REITs. This was partly offset by higher asset management fees resulting from stronger year-over-year growth in assets under management. Importantly, both segments saw year-over-year growth in their recurring income streams, reflecting the underlying growth in our business. In addition, G&A expenses for both segments were lower compared to the 2015 second quarter, due in large part to the cost reduction efforts we implemented in the first quarter of this year as well as higher professional fees in the prior year period related to the implementation of a firm-wide enterprise resource planning system. Turning to AFFO guidance and the progress we've made towards it. In this morning's release, we affirmed our 2016 AFFO guidance range of $5 to $5.20 per diluted share. Our AFFO guidance assumes acquisitions for W. P. Carey's balance sheet of between $400 million and $600 million. During the first quarter -- first half of 2016, we completed acquisitions totaling $386 million and in addition, entered into commitments to provide build-to-suit financing of $128 million. So we're very comfortable with the progress we've made with the acquisitions for our balance sheet. Our guidance also assumes dispositions from our Owned Real Estate portfolio of between $650 million and $850 million. During the first half of 2016, we completed dispositions totaling $262 million. And for the year-to-date period through today, we have completed approximately $470 million. Lastly, we are maintaining our assumption that acquisitions completed on behalf of the Managed REITs will be between $1.8 billion and $2.3 billion with roughly 50% to 60% for the CPA REIT and 40% to 50% for the CWI REIT. During the first half of 2016, we structured new investments totaling $594 million on behalf of the Managed REITs, including $240 million for the CPA REITs and $354 million for the CWI REITs. And since quarter end, we have structured roughly $315 million of additional acquisitions, bringing the total year-to-date through today to roughly $910 million. As you know, investment volume does not occur evenly across quarters and often increases significantly at year-end. AFFO is also impacted by numerous other factors, such as the timing of dispositions and the size and timing of any capital-raising. As the second half of the year progresses and we have greater visibility into such factors, we will update our guidance accordingly. Given the recent declines in the pound sterling and the euro in the aftermath of the U.K.'s Brexit referendum, I would like to reiterate that we continue to expect FX movements to have a very minimal impact on our 2016 AFFO. At the end of the second quarter, approximately 5% of ABR was derived from leases denominated in sterling and 27% from leases denominated in the euro. We're always mindful of protecting our cash flows and dividends from foreign exchange fluctuations. Accordingly, the majority of both our sterling- and euro-denominated cash flows are hedged through a combination of the natural hedges we created by having debt denominated in those currencies and derivative contracts under our active currency hedging program. Turning briefly to our capitalization and balance sheet. As Mark mentioned, in mid-June, we commenced issuing shares under the ATM offering program that we established last year. We issued a total of 830,219 shares at a weighted average share price of $68.74, raising a total of $57.1 million in gross proceeds or $56.2 million, net of fees. Turning to our key leverage metrics. At quarter end, pro rata net debt to enterprise value stood at 37.7%. Total consolidated debt to gross assets was 51%, and pro rata net debt to adjusted EBITDA was 6x. The weighted average cost of our pro rata secured debt was 5.3%, and our overall weighted average cost of debt was 3.8%. At the end of the second quarter, we had approximately $210 million of debt maturing in the remainder of 2016 compared to total liquidity at quarter end of $879 million, which includes cash and cash equivalents and the undrawn availability on our $1.5 billion credit facility revolver. The leverage and liquidity numbers that I just discussed are, of course, as of quarter end. So it's important to note that they do not reflect property dispositions or issuance under our ATM program since that time. We are executing on our capital plan according to schedule. And as we close additional dispositions scheduled for the third and fourth quarters, we expect to further reduce our leverage by the end of the year. We remain committed to our unsecured debt strategy and growing our pool of unencumbered assets as well as maintaining access to public capital markets for both debt and equity, which we continue to monitor. Before handing over to the operator for Q&A, I'll briefly review some of the key metrics for our Investment Management business. Investor capital inflows for the Managed Programs, including DRIP proceeds and net of redemptions, totaled $135 million for the second quarter and were primarily into CWI 2, our second lodging fund; and CCIF, our business development company. At quarter end, total assets under management for the Managed Programs was $11.7 billion, up 13% from $10.4 billion as of June 30, 2015. And with that, I'll hand it back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Chris Lucas with Capital One Securities.

Jason, quick question on the portfolio allocation. You've made a conscious comment about the reduction in office exposure from 30% to less than 25%. Is that a goal of your -- of the company's? And how are you thinking about where you would like office or just the general buckets to sort of filter out to?

Yes, I mean, we're optimistic in our approach of how we look at new investments. I mean, certainly from an asset management standpoint, we're very focused on extending our weighted average lease term, improving criticality of the buildings and reducing residual risk. And I think a lot of the reason why you've seen us dispose of some of our office assets -- or I should say, the bulk of our dispositions have been in the office asset class. It is trying to improve on those metrics right there; in particular, the residual risk associated with those office assets. But there's no hard and fast target. I mean, we are opportunistic. We certainly like diversification, and we'll always be cognizant of that, but there's no hard and fast target.

Okay, great. And then I do have a detailed question. I'm just trying to sort of wrap our hands around our model relative to the results. And one of the things that we're struggling with is that there were -- if I go back to last quarter, there was a fairly significant run up in lease revenues and then it sort of fell back down this quarter. And then there were 2 other items that were pretty large deltas. One was related to taxes, and the other one was related to the above and below market lease numbers. So if you could maybe walk through maybe what we're seeing there and give us a little background on those, please.

Sure, Chris. So lease revenues, I mean, that's -- it's not just rental income. There are also GAAP-related noise that goes through it. So lease revenues in the last quarter was impacted by the Kraft transaction. So we had below and above market lease intangible assets that had to be accelerated. So that's a primary reason for the volatility, I would say, in the GAAP lease and revenues line item. I think your other question was around taxes, right?

Right, exactly.

Yes, so same. So taxes is impacted this quarter by a large impairment that we took in our financial statements for the Carrefour portfolio and so that resulted in a write-down of a deferred tax liability, so it pushed us into a benefit position. And I'm sorry, I think there was a third point that you were also looking at.

Yes, just on above and below amortization item for this quarter.

Yes, same thing, it's related to the Kraft transaction, where we had a spike in activity from an acceleration of the amortization in Q1 compared to this quarter.

Okay, great. And then last question, just as you mentioned Carrefour, just what the progress are you making there on the disposition of that portfolio?

Yes, we're working towards a closing in Q4. We're not going to share any specifics on pricing until later once that's completed, for competitive reasons. But we're on it, and we expect it to be closed by the end of the year.

Our next question comes from the line of Paul Adornato with BMO Capital Markets.

Jason, I think you said in your remarks that you noticed the cap rates in the U.S. for your product type, that would be, I guess, larger transaction sizes, actually increasing a little bit and was wondering if you could provide a little bit more detail. Is that because of lower credit quality? Or is this just a repricing, all else being equal, of the same credits?

I think in the market that we target, we are seeing, across-the-board, some increases. We're also finding a lot of success in doing direct sale-leasebacks, which over the last 1.5, 2 years, the bulk of what we've been doing have been direct sale-leasebacks and especially more recently, with portfolio companies' private equity firms. I think given the complexity of those types of transactions and the expertise required to underwrite and structure those transactions, we think we're able to generate some outsized returns relative to other similar net lease properties or portfolios that trade in the secondary market. So I think that had something to do with it. That we're out structuring more sale-leasebacks, so a little bit less efficient market than its traded assets and certainly less efficient than what we do at the commodity net lease market, in a lot of the retail trades out there.

Yes. Oh, great. And in your negotiations, what are some of the hot buttons that you encounter in terms of tenant demands?

Well, I mean, it's the typical stuff. Obviously, pricing is important to everyone. In many cases, timing, how short of a due diligence period and closing period that we can deliver upon. Lease terms are always heavily negotiated. We tend to fight for longer lease terms and perhaps provide more flexibility in other areas or we'll sacrifice a little bit of pricing and yield to lock in a longer lease term. But it's the big issues, as you would expect. There are details in leases that various tenants will focus on or various private equity firms, such as transfer provisions, change of control, signing of leases, but we're pretty good at getting what we need in our leases for those types of provisions.

Okay. And finally, CPA:17 is nearing, I guess, its liquidity event window. And so was wondering -- I realize it's not your decision, but was wondering if you had any visibility on what we might expect in terms of a liquidity event from CPA:17.

Yes. I think -- Paul, it's Mark. As we've said in the past, the CPA:17 is approaching its natural liquidity phase, and the directors of those funds have a lot of flexibility, both in timing as well as the options they pursue on that. We do have the ability to purchase them and it's something we evaluate at a high level from time to time, but ultimately, that decision belongs to those independent directors. As you've heard me say many times, we would be interested in those assets like any M&A deal. We would evaluate it from the factors, including strategic benefits, impact on our overall portfolio metrics, impact on the NAV and FFO accretion, dilution. So a number of factors go into that decision, but ultimately, at the end of the day, it's a responsibility of those directors to determine that.

And a related question, I guess, on the managed funds. You mentioned as well a slowdown or a digesting of the new regulations in terms of the new product sales. Was wondering if you could provide a little bit more detail, is that because of the product that is being offered is not necessarily aligned with the new regulations or just a lower appetite from retail investors?

I'm going to ask Mark Goldberg, who's in that every day, to respond to your question from that.

Paul, there has been a disruption. And I refer to it as a disruption as opposed to fundamental shift. It comes for 2 regulatory changes that I know you're familiar with, 15-02 and obviously, the Department of Labor's fiduciary rule. But the way we look at the marketplace is that it is about, at least on the nontraded equity side, about an $8 billion to $10 billion steady-state market for new capital and about a $3 billion capital flow for the business development companies. If you go back about 6, 7 years, that is the normal rate. There were 2 outsized years that were on the upside. 2014, '15, we don't think those are normal years. But if you really look at it, there hasn't been a performance change. There isn't a change in the need for income or desire from FAs and their investors for our products. What's happened is a regulatory shift, and that's created a disruption. There's a lot of education that needs to be had by both the financial advisers and ultimately to the investors. There has to be new forms, new compliance controls put within the broker-dealers, and that's the disruption that's taking place today and why you see the market has come down some 55%, 60% year-over-year in terms of sales. But the fundamentals that we focus on, brand, our performance, the need for income, are all there. And in time, the market will return to its historic norms. So we feel very confident that none of the fundamentals have changed relative to the need for these products.

Our next question comes from the line of Dan Donlan with Ladenburg Thalmann.

Just had a couple of quick questions here. Number one, it looks like you need to do about $1.2 billion in the managed funds to kind of hit the low end of your guidance range; call it, $1.4 million, $1.5 billion to hit the midpoint in the managed funds. So just curious how confident you guys are in hitting that. Is that something you might revisit? I realized it's -- you guys have done this before, but you only really have 5 months left in the year. So just curious your thoughts on hitting those target ranges.

Yes, sure. Dan, this is Jason. So yes, we're comfortable we can achieve the balance of our acquisition volume based on that range. In prior years, as you've probably seen, it's not unusual for our acquisition volume to be much more heavily weighted towards the second half or really even the fourth quarter of the year, as companies look to have real deadlines. And that's really when we excel, when there's hard and fast deadlines and short deal closings. But of course, there's always risk that at the end of the year, those deals can take longer than you'd expect, and it could slip past December 31. But either way, we're going to get these deals done, and at this point, we're comfortable we can do them this year, but we'll update you as we get closer to that point.

And Dan, what I would tell you, through today, we've closed about $910 million of that, so we're roughly halfway to the lower end of that guidance range. But as Jason said, ultimately, the capital gets put to work. We're going to deal with the best deals we see, and the timing of those would be what it is. Whether that gets done this year or slips into early next year, ultimately, we'll recognize the benefits of that.

Okay. I thought the $900 million included what you did on balance sheet, but that's actually what you put in the funds and that's a big tick up. So you've done about, call it, $300-plus million in the managed funds since the end of the quarter, is that right?

That's right.

That's right.

Okay, okay. That makes more sense, okay. And then just kind of curious on -- and maybe question for Mr. Goldberg, but the CPA:19 has been registered. Historically, you guys have done a lot of these. When do you -- when do these things kind of get up and running in terms of capital rates? What's the, call it, the incubation period for these things?

So if historicals mean anything today within the process, we're somewhat at the mercy of the process we go through at the SEC. That's sort of the first step. We're well into that. And based on somewhat of a historical point of view, we feel we'll be through that. It's not even in our control, but sometime in the first part of 2017. So we'll be able to reintroduce, we hope, our product -- our flagship product in 2017. Beyond that, there's the sign-up of the broker-dealer community. We're really benefiting a great deal from this current market environment with the flight to quality, particularly as sponsors exit the business and there's been a fair amount of that. So I expect the sign-up to be pretty quick on that front. And so prospects today look good, but again, I have to caution that we're subject to the timing and the comments of the SEC. But I would feel more confident about CPA:19 as a sign up and quick startup than any other fund that we do.

Okay, yes, that was going to be my next question and you already answered it. And just curious as it pertains to the hotel product. That market has been quite volatile over the last 1.5 years, particularly the stock price. Is there any thought process to potentially shut off those funds at some point in time? I realize you want to be buying hotels when other people aren't, but in the past, you have shut down your programs when you couldn't put money to work accretively. Just kind of curious for how you look at that in terms of the macro lens. If there's -- if you start to get nervous about the economy, do you stop putting folks into those? Do you shut down these programs? How do you guys look at that?

I think the strategy of funds and how we've executed both CWI 1 and 2 -- and since CWI 2 is in offering, I have to be somewhat cautious about my comments, but the strategy is a value-add strategy, could be capital-constrained by the seller. They could be overleveraged. We could see a particular opportunity. Based on the pipeline that we see, in working with Watermark Capital, we see plenty of opportunity on the horizon. That doesn't mean that ultimately, there's -- the fund extends or it doesn't extend, but today, we look through March of 2016. As the current registration statement will expire, we'll evaluate it then. We'll make a determination if there's an opportunity there. But I would point out that CWI 1, which is not in offering today, has been one of the best-performing funds as we benefit not just in our space, not just from sort of the uptick in what we've had in terms of the hotel industry metrics, but because of value creation. So I think the strategy will be determined in terms of the pipeline, but we don't know whether there's going to be an extension of that offering or new offering. We'll evaluate that come the end of the offering.

Yes, Dan, what I would say to you is, as you mentioned, we're an investment-driven firm. So to the extent that we continue to see attractive investments, and I know there's a lot of press out there about where we are in the hotel cycle, but we're still seeing attractive investments today. And as long as we continue to see that, we'll continue to have product in that space as well.

Okay, that's helpful. I guess -- and then lastly on the lease roll, it sounds like you guys have knocked up quite a bit in '17 and '18. Was just kind of curious, and I'm sorry if I missed this in prepared remarks, what type of CapEx requirements, if any, that require to kind of get these lease extensions pushed through?

Are you referring to the FedEx lease extension?

Yes.

Yes. So I mean, that's a bit of a unique situation, and we had 4 years remaining on that asset. The criticality was a little uncertain at this -- at that point in time. Utilization was lower and the tenant was considering alternatives. So we cut a new date deal there well in advance of the expiration. We did give a rent concession, obviously, but we did get a new 25-year lease with an investment-grade credit. We put in -- I think the commitment is $18 per square foot, but that's split half in 2019 and then half 10 years later in 2029, so it's out quite a ways. And I think the result is -- I mean, if you look at the -- you have a 25-year lease with FedEx, and we think we've made a meaningful improvement in the asset value, which translates into the incremental increase in our NAV as a portfolio.

Sure, sure. 25-year leases are rare to come by these days. And I guess, just lastly on weighted average lease term, your -- some of your more mature peers have seen their WALTs go below 10 years and some of the less mature now well above 10- into the 11-year range. Was just kind of curious, how cognizant are you of this? Is this something that you think you can get above 10 years? How do you -- how are you thinking about that on a going-forward basis? Is there a goal that you have in mind that you want to stay at over the next, call it, 5 to 10 years? Just kind of curious your thoughts there.

I mean, the goal is certainly always to try to extend the weighted average lease term. We look at that with new investments when we try to structure the best deals with the longest lease terms. Obviously, there's concessions as we go further out, and we take those into consideration on new deals. I mean, certainly on the renewals and retenanting, that's something we look at. We focus on TI and what kind of lease term we can get. And sometimes, you'll see us have a little bit more roll down in retenanting compared to others because we are focused on really pushing out that lease term and minimizing TI dollars. Now is there a -- will we get to 10 years or longer? I think a lot of that depends on the new acquisitions and how we treat each negotiation as leases expire.

Our next question comes from Josh Dennerlein with Bank of America.

So you guys issued the ATM -- on ATM the first time in 2Q. How should we expect TDs[ph] going forward? How do you view that?

I think from our standpoint, we'll access the -- we may assess the equity or bond markets between now and the end of 2016. The details for size, pricing, timing all depend on the valuation of the options and where we think we'll get the best execution. We wouldn't expect capital markets issuance to take us outside of our existing range, even it resulted in a slight increase or decrease in AFFO. But for us, a decision comes down to looking at both the key metrics on our balance sheet as well as our acquisition pipeline. And if we're comfortable with the acquisition pipeline and seeing accretive investments, we wouldn't hesitate to build up some dry powder whether those investments fall within this year or next year, regardless of our guidance range. And if we felt it did have a material impact, we'd certainly let our investors know and give them the rationale behind why we're using it.

Okay. So I guess, more specifically, is there a quarterly run rate you see yourself using the ATM for the rest of the year? I assume that's what you did in 2Q or...

Yes, nothing specific. As I said, we view it more -- it's an ongoing evaluation that we review more from a balance sheet and a pipeline standpoint.

Okay. I'm not sure if I missed it in the opening remarks, but do you have any acquisitions that are pending?

Yes, for the balance sheet. I mean, we're -- we've reaffirmed our guidance range of $400 million to $600 million for the year. So there's -- certainly, there's a pipeline. We're looking at opportunities, and we're going to update you as we close this.

Okay, but nothing that's closed since 2Q?

Nothing that has closed since the end of Q2. That's correct.

Our next question comes from the line of Nick Joseph with Citigroup.

It's Michael Bilerman here with Nick. Mark, I was wondering if you can walk through the 2 net lease deals you did in CPA:17 in the quarter, the 2 that are listed on Page 42. Can you walk through just sort of the dynamics of why does went into the nontraded REIT versus on-balance sheet? What were the cost of capital decisions? What were the cap rates? What sort of drove those there versus balance sheet?

Yes, I think as we previously announced, we will finish putting the capital to work for CPA:17 and 18. We have a fiduciary duty to do that this year. To the extent investments go onto our balance sheet, it's either because we're satisfying some 1031 activity that we need to do or we feel they're better suited for our balance sheet. Ultimately, as we get through 17 and 18 and come out with CPA:19, at that point, we'll look to put all net lease deals on our balance sheet assuming they makes sense. And should they not make sense, we'll look to see if they makes sense using the capital to CPA fund. So that's a strategy behind it.

So this debt just went to the nontraded because they had capacity. There weren't even viewed for balance sheet depending on where your cost of capital or accretiveness that could have happened on balance sheet?

That's correct. We have an obligation. CPA:17 was primarily a net lease fund. We have capital to work for that, and we'll complete that and finish that off.

As you think about the volatility that you had with quarterly results and clearly coming from the nontraded business and creating clearly a headwind also for the shares, how do you sort of think about the net lease business as one of stability, long-duration, yield driven. But your company's got this tail of Investment Management business that creates a lot of discussion. I guess, do these quarters where you do get this volatility make you sort of requestion the pivot that you made back?

No, I think as we -- look, as we've announced the -- in our previous earnings calls, going forward, as we come out of CPA:19, we'll look to putting net deals on our balance sheet. Our Investment Management business, while it won't decline, will become of less -- smaller and smaller piece of our overall AFFO results. I think on a 6-month period, we're generating, like, 95% of our AFFO from the net lease business and roughly 5% from the Investment Management business. But as we look at the revenue streams, we value in that Investment Management business, which are the asset management revenues based on AUM, that's a very steady flow of income for our business. That's not something we're looking to -- that has a tail in my mind or anything else. We like that source of capital. We like the asset management revenues we generate from that. And from my standpoint, from a strategic position, that gives us access to a capital source beyond our own equity and debt, which is important in times of an economic downturn, and allows us to continue to grow our business and grow our dividend for investors.

You raised about $100 million in the nontraded platform in the quarter. Clearly, there's a lot of things going on that probably dampened that a little bit. It sounds like the existing cash that you have left to fund plus the leverage capacity would sort of, assuming no additional flows, would get you to the high end of your acquisition guidance in the funds. I just want to make sure that correct. And then secondarily, as we start to think about 2017, I guess, the capital raising is going to be dependent on whether the new -- the 19 comes out and you're able to raise capital to be able to put out and keep an acquisition guidance for next year that would be in a similar range to this year.

Yes, let me take the first part of your question, first. We do have the available capital to hit the -- our guidance range from an acquisition standpoint for our managed funds. Whether they -- as I've -- as we've said before, what drives that is the investment premise behind it not hitting a certain number within guidance. That money will be put to work, whether it's put to work this year or next year. Ultimately, we'll recognize the benefits from that through higher AUM and increased asset management revenue fee. As far as 2017 goes, we'll give guidance on that somewhere around the end of the year based on where our acquisitions -- once we have clarity on where our acquisitions are falling this year. That will be a combination of both acquisitions on our balance sheet, using our own sources of capital, as well as where we're in the process with future products for the Investment Management business.

You talked about $20 million of annualized cost-saving initiatives. How much of that is reflective in the 2Q results?

I mean, a good portion of it, Michael. This is Hisham. So the $20 million that we described was an annualized number, a pretax annualized number. And it was in it -- so but we see that -- you can see that, in fact, when you look -- compare this quarter to the same quarter last year. It's coming through. We have achieved our reductions from compensation -- through compensation. And there are other reductions in professional fees that we began to see in this quarter and we continue to see over the remainder of this year. So we're on track to achieving that target.

And that will be an ongoing process, managing our cost structure, to bring it -- to make it as efficient as possible and achieve the scale as we grow the business.

I'm just saying that from a modeling standpoint, if you did a $1.24 this quarter, how much savings are in there that are not yet reflected that are coming in the back half that would let you achieve something in your guidance range?

I mean, I would say you can think of it as roughly about 20%.

20% to go?

Yes -- and so -- no, sorry, I mean like 20% over the last quarter, right? It's -- the thing about fee compensation, we all know, occurs evenly over the course of a year, but not these other discretionary noncompensation-related costs. They occurred in 2015 at various times over the year and not a smooth number, and the same thing will be the case this year.

Right. Mark, can you talk -- you talked in the press release that you took significant investor outreach to ensure continued access to capital markets and diversify your income, your capital sources. Can you give a little bit of flavor of the types of capital sources you were meeting with over the course of the quarter? Obviously, I know from an equity perspective, you spent a lot of time with institutional shareholders, but what other sort of capital sources would fall into that? And I was wondering if you could talk about how much time did you spend talking about the nontraded business versus the REIT? And whether that was disproportionate relative to the 10% of the company that's REIT?

Yes, we meet with both equity and fixed income investors both from the U.S., Canada and in Europe. And what I would tell you that the feedback I received from the majority of the meetings was positive. We still have some work to do, as I mentioned earlier. On the fixed income side, primarily in Europe, we've seen some increased activity in the bonds that we have over there. Our spreads have tightened roughly 50 basis points since we conducted the outreach, so I think that's a positive sign for us as well. So overall, it's pretty positive. I talk about the business, Michael. I don't tend to talk about disproportionately our Investment Management from our real estate business, from our net lease business. I talk about the businesses as a whole because that's what our model represents for me and what the advantages of that model are. And as I said, I've been -- had some pretty good feedback on that as well.

No, I just wondered whether you got more questions on the nontraded business relative to...

No, most of it is on the business overall. Most of it was on acquisition activity we see and our cost structures and our philosophy on how we run the business and how we look at investments, and I think that's all positive.

Last question. Just there was a comment Hisham I think you made that you would update your guidance accordingly depending on volumes and other things that would happen in the back half of the year. And I just want to know whether that was supposed to be a cautionary note that there's some chances that you may not hit certain structuring revenues or acquisition to nontraded or other things that are more volatile that you don't know yet now where you sit and you'll update later. I just wanted to make sure I understood the context upon which you sort of said that comment.

No, that's a good question. It's not intended to be cautionary. So as you know, our investments and acquisitions occur unevenly over the course of the year, right? And in our recent history, we've seen that bunch up towards the end of the year and maybe even the fourth quarter. This is just to reiterate that point, that at this stage, we're comfortable with our guidance range where they are, where it is. And as we get closer to the end of the year, we'll take another look based on how successful we've been in closing those deals.

What I would sell say to you, Michael, is investments, no matter whether they go on our balance sheet or on the balance sheet of one of our managed funds, are uneven. They're hard to predict the closing of, especially when you're getting into the type of structuring that we do with some of our net lease investments overall. We will never look to close investments just to hit a number. We're going to put the capital to work in the best investments that we see. And whatever the timing to get the right structure the lease requires, that's what we're going to put into it. And it falls where it falls from a timing standpoint, and ultimately, we'll harvest the value of that over the long term, and that's how we view it. And I think it's up to us to update our investors on how the timing of those investments work and what the impact it has on our results in any -- in both the short term as well as the long term.

Our next question comes from the line of Sheila McGrath with Evercore.

Most of my questions have been answered, but specifically, maybe this question is for Jason. On the Nord Anglia transaction or just in general, what kind of pricing premium would you get for a forward build-to-suit versus buying in just a regular in-place net lease acquisition?

Yes, some of it depends on how far forward you're committing. I think in this case, it was all negotiated as part of the deal as a whole, the sale-leaseback and the build-to-suit. But generally speaking, it also certainly depends on what our expectations are on borrowing costs going forward. We'll look at the forward curve, but we'll also take other things in consideration too. I would say generally, to give you a number, it's probably 50 to 75 basis points, but it does depend on the asset and these other characteristics that I mentioned.

Okay, great. And I think you touched on this, but I'll just ask a different way. On the G&A run rate of all your cost initiatives, do you think there could be continued downward improvement on the G&A line item in the back half of the year?

I mean, so we're always looking for ways to drive up our operational efficiency and to tighten our cost structure. But the number that we put out, the 20%, that is what we're targeting for this year, and that's what we expect to hit as well. But just once again, just to reaffirm, we're always looking at ways to manage our costs and drive it down.

Our next question comes from the line of David West with Davenport & Company.

My question goes to the impairment charge of $35 million. Was that entirely related to Carrefour? Or were any other assets impaired?

Yes, it was entirely related to Carrefour. At the end of the quarter, we -- when we review our portfolio and given where that asset is in its disposition state, we classify it as held for sale and that figure is a requirement for us to look at its value, and so we wrote it down to our estimate of its fair value.

There are no additional questions at this time. I'd like to turn the floor back to Mr. Sands.

Thank you for your interest in W. P. Carey. If you have follow-up questions, please call Institutional Investor Relations at (212) 492-1110. This concludes today's call. You may now disconnect.