Greetings and welcome to the W. P. Carey's Second Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Sands, Director of Institutional Investor Relations. Please go ahead, sir.

Good morning everyone and thank you for joining us today for our 2017 second quarter earnings call. I would 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 replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com where it will be archived for approximately one year. And with that, I will hand the call over to Mark.

Thank you, Peter, and good morning, everyone. I’ll make some brief introductory remarks before handing it over to Jason Fox, our President, who will review the investment climate in our portfolio; followed by Toni Sanzone, our CFO, who will take you through our second quarter results and guidance. In addition, we’re joined this morning by John Park, Head of Strategy and Capital Markets and Brooks Gordon, Head of Asset Management, who will be available to take your questions. For the 2017 second quarter, I’m pleased to report that we generated $1.38 of AFFO per diluted share, up 11% compared to the second quarter of last year. We raised our quarterly cash dividend to an annualized rate of $4 per share, which represents a dividend yield of about 6% based on yesterday's closing share price and equates to a payout ratio of 76.1% on a year-to-date basis. As a company, we continue to evolve. You have often heard me say that the strategic planning process is something that occurs every day at W. P. Carey. And it is always conducted through the lens of what will generate the best long-term value for our shareholders. The decision we made in June to exit non-traded retail fundraising was no different. It was a difficult decision and something we considered very carefully. It was also the right decision given our core competency and long-term track record in net lease investing. As well as the time and scale required for new products outside of net lease to reach profitability. When you actively manage a portfolio of net lease assets as we do, you will have an appetite for all new investments to maximize the income generating capacity of that portfolio and enhance its overall quality. Structuring all net lease deals directly for our balance sheet…

Thank you, Mark, and good morning, everyone. Starting with the acquisition environment. In the U.S., we continue to face a challenging environment to secure investments that meet our risk-return criteria while ensuring that we do not chase deals at a material premium to intrinsic value. Persistently low interest rates and yield-starved investors continue to keep cap rates low and the cost basis high relative to replacement costs. Disruptions in the retail segment of the market have caused some investors to shift their focus towards warehouse and logistics assets, which are property types that we've focused on historically. In Europe, relatively strong economic growth over the past couple of years, combined with a stabilizing political climate, has improved both investor and business confidence. As a result, there continues to be substantial interest from foreign investors, causing cap rates to remain low across the continent as yield rate spreads remain attractive. That said, on the whole, we have seen relatively stronger deal flow in Europe so far in 2017 compared to the same period last year. In light of this market environment, we are staying disciplined in our underwriting. We've reviewed a significant number of opportunities year-to-date. But generally, we've not had conviction in their risk-return profiles given where they've traded. At our current cost of capital, many of these deals could have been accretive. However, we had concerns about the cost per square foot, lease term, contract rents relative to market or other factors that are fundamental to real estate investing. As a result, our investments year-to-date continue to be primarily build-to-suit expansions. In particular, we remain focused on generating accretive opportunities within our owned portfolio through expansions, renovations and follow-on acquisitions with existing tenants. As we've discussed previously, such deal flow is truly proprietary and has several benefits, enabling us…

Thank you, Jason, and good morning, everyone. This morning, I will review our 2017 second quarter results, touching on the key drivers of AFFO compared to the year ago quarter, our current guidance expectations and our key balance sheet metrics. For the second quarter, we generated AFFO per diluted share of $1.38, which is up 11% compared to $0.24 for the prior year period. On a segment basis, Owned Real Estate generated about 79% of our total AFFO for the second quarter, with the remaining 21% coming from Investment Management. As outlined in this morning's press release, we have changed the component of our segment presentation. Specifically, equity income from our interests in the managed funds, which have previously been included in our Owned Real Estate segment, now falls under Investment Management. This change is a direct result of our recent decision to exit non-traded retail fundraising and aligns all income streams associated with our managed funds within our Investment Management segment to better reflect how we currently view that business. As such, our segment results for the second quarter reflect this change, as do all prior periods, which have been reclassified to conform to the new presentation. Revenue from Owned Real Estate declined on a year-over-year basis, reflecting the impact of our net disposition activity over the last 12 months. While we remain disciplined with investment opportunities, we continue to focus on our existing portfolio, with both same-store growth and build-to-suit expansions contributing to an increase in lease revenues this quarter as compared to the first quarter of 2017. Revenue from Investment Management increased, primarily as a result of higher structuring revenue, which was driven by acquisitions for the student housing and hotel funds that we manage as well as a follow-on transaction for CPA:17 with one of these…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Nick Joseph from Citigroup. Please proceed with your question.

Thanks, Mark, appreciate the commentary on the acquisition environment and that you're remaining disciplined and more focused on the build-to-suits. Just curious, for the $140 million of net lease deals you did in the quarter for CPA:17, what was unique and attractive about those assets?

I'll let Jason talk specifically about the deal, but they were follow-on – that was a follow-on deal to an existing tenant in the fund, and that's typically where we're able to garner pretty good economics and are very comfortable with the credit of that. But Jason, do you want to talk a little bit about that?

Yes, I think that's right. I mean, the largest of those three deals was a follow-on deal in – within CPA:17. Good credit, do-it-yourself retailer with a parent – a finished parent named Tesco that is one of the larger do-it-yourself players in Europe. So a follow-on deal to one that we had done about a year and a half ago in 2017. That was the bulk of it. The other two, I think one of them was a small build-to-suit that was also a follow-on deal with an existing tenant.

Thanks. And then you mentioned a large opportunity for growth for W. P. Carey on balance sheet. Wondering what percent of the assets in CPA:17 and 18 would you consider core to W. P. Carey if you were able to acquire those at a certain point?

Well, it would be all the net lease assets within those funds that we ultimately want to come on balance sheet. We would acquire the entire fund but look to maintain the net lease assets on there. On a percentage basis, John, in CPA:17, net lease is about 80% or so.

Maybe a little higher.

And on 18?

It's a little bit lower in CPA:18. I would think about 60% of the portfolio is net lease assets.

Thanks.

Thank you, guys. [Operator Instructions] Our next question today is coming from Todd Stender from Wells Fargo.

Hi, thanks. Jason, just to start with you, you highlighted pretty good visibility into the expansion projects that could materialize over the next couple years. Can you just talk through the process that you go through with tenants? Is that something you'd bring up with a tenant with five years to go on a lease, kind of feeling out their willingness to renew upon lease maturity? Just wanted to see if you can run through that process for us.

Yes, sure. I mean, it's part of our core asset management process. We're very proactive in staying on top of our tenants, understanding how they use the facilities, whether they're trending more critical or less critical, and that helps us make asset-level decisions. And in those discussions, a lot of times, we are trying to understand their business. And one of the big benefits of doing sale-leasebacks, in particular in the industrial, in warehouse space is we do try to buy excess land as part of those acquisitions when we do structure a sale-leaseback, with the thought that as these businesses grow, we can put more capital to work. And what typically is better than market yields, we added the criticality of those assets by continuing to expand their operations so they can maintain their business levels there. And we also get nice new buildings when we can do expansions. So it's a good key part and it's something that our asset managers who are assigned a tenant base within our portfolios, they're looking out for that because it's a good way to do accretive investments from both an FFO standpoint but also from a lease term standpoint.

And just as a reminder, what's the return expectation on that incremental dollar you're investing?

It really depends on the particular deal. I would say, generally, we're getting cap rates that are 100 to medium as much as 200 basis points higher than where those assets may trade in a particular market. But a lot of the factors will depend on how much lease term we're extending, how large is the new investment relative to the existing ABR that's in place that we can extend. So there's trade-offs certainly. We might be more willing to do a more aggressive yield on a small expansion if it provides a meaningful lease extension on a much larger base of ABR.

Okay. And your acquisition guidance is unchanged. It's a pretty good range, $450 million to $650 million. It sounds like back-end weighted this year. Are you leaning closer to the low end, the high end, the middle? Maybe just directionally, where should we really shake out for our model?

Yes. Todd, it's hard – it's really hard to predict. Toni was absolutely right that we're not the commodity buyers of net lease. So we see transactions every day that come in, and it's just hard to predict where they shake out for the year. So the very best we can do is give you an update in – with the third quarter on where we shake out from that standpoint. I would say, Jason, and you can talk a little bit about what we're doing, we're seeing deals every day. But I think those deals, while they may be accretive based on our current cost of capital, we get concerned with the basis we're buying into it. So not very few of those actually make it into the pipeline of deals that we're trying to acquire.

I think that's right. And I think also, historically, our fourth quarter has been the highest quarter of the year. So we're expecting that trend to continue.

Okay, thanks. And just finally, for funding, you tapped the ATM in Q2 and sounds like in Q3 already for $23 million. Is there a method to this as far as how many shareholders would be included in that $23 million? And is it something you try to say, you know what, we need $5 million blocks, how do you guys think about that?

The way we think about the ATM and capital markets activity in general is really more a function of our volume of acquisitions and disposition activities. And as the need increases, we might look to – look at other means of funding it. And we don't have a specific target in terms of investor size.

Okay, thank you.

Thank you. [Operator Instructions] Our next question today is coming from Joshua Dennerlein from Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning, guys. Just kind of thinking about your investment acquisition spend for the rest of the year. Do you have any sense, will it be more geared to Europe or the U.S.? How are those markets doing?

Yes. I mean, it's – I think that will probably trend a little bit further towards the U.S. But we are seeing better acquisition opportunities in Europe relative to this time last year. Also, the majority of our dispositions will likely be in Europe. So I think, overall, you'll see our portfolio trend a little bit more towards the U.S.

Okay, that’s it from me. Thanks.

Thank you. Our next question today is coming from Daniel Donlan from Ladenburg Thalmann. Please proceed with your question.

Hey, this is actually John Massocca on for Dan.

Good morning.

Just quickly, how much of your disposition activity that you have in guidance is maybe more capital recycling versus strategically kind of pruning the portfolio? And if the acquisition volume comes in at the low end of your guidance or maybe even below that, would you be able to kind of slow dispositions in order to kind of offset that in effect of those lower acquisitions?

This is Brooks. To comment on your first question in terms of the types of dispositions, we expect about 65% of this year's full year disposition activity to be opportunistic in nature. About 12% of that will be what we would call residual risk dispositions, and the balance split between some vacant properties and kind of other. With respect to slowing down dispositions, we really look at them from the asset level up. So we're making the right decision on the asset level and executing the best possible transactions we can. And certainly, the timing will move around in any given year. But we're really focused on the disposition from the asset level.

Makes sense. That’s it for me. Thank you.

Thank you. Our next question today is coming from Chris Lucas from Capital One Securities. Please proceed with question.

Hey, good morning everybody. Just wanted to – I hope you guys didn't already talk about this. But on the asset management funds, particularly the non-net lease funds, what's the process for sort of the long term of those? Are those – will those wind down? Will they be effectively shifted to the subadvisors? What's the long term for those particular businesses?

So you're talking about the non-CPA funds, our BDC, our lodging funds?

Correct, yes. 17 and 18 are large enough and sustainable in whatever form they want, but the others are not quite as big.

Yes. Lodging is – the two lodging funds are fairly large. They're over $4 billion in assets on a total basis, so – and they were fixed-duration funds. So we'll continue to manage that until those directors seek to have a liquidation event. We'll look for the – help them execute the best liquidity event. We can for those investors at that point in time. The BDC is a perpetual fund. We're currently working with the Board of Directors of that fund to determine what the best outcome is for that. It's fairly small. I think it's under $1.5 billion in investments, so we're working with them at this point in time. But with the lodging fund, we'll continue to manage that until they seek liquidity. I don't remember exactly what the liquidity ranges are and that my sense is it's somewhere in the four to five-year period, though, with those funds.

And then just in terms of their – those mature funds, those two CPA funds and the CW funds, what's the – generally what's your view in terms of the buying power, if you will, or the investment power of those funds in terms of the amount of capital they can still invest and still remain within sort of the range of leverage that's prudent?

Yes. I mean, both CWI funds are effectively fully invested after taking into account the existing pipeline. Staying for the CPAs for that matter, we’re effectively fully invested there. Although you will see some – we've left some cash to invest from financings that's soon to be completed build-to-suits, the dividend reinvestment programs. And as you know, we're actively managing all of our portfolio so there will be some capital recycling opportunities to do there, too. But that said, the pipeline for the CPAs will be outside of net lease, as we've talked about before. And I think, generally, you'll continue to see structuring revenue associated with those funds decline over time.

And this would be some from just the active portfolio management that we do. We manage those portfolios much like we do our own, but I would expect that to continue to decline.

Okay. And then on the – I guess, the investment funds that you've created in Europe, particularly like the student housing one, I think that's been pretty successful for you guys. Was that capital raised through essentially a distribution network that Carey Financial would have been involved in? Or was that more of a private institutional placement approach where that business could continue without Carey Financial being part of that intermediary process of capital raising?

Yes. That was raised through the Carey Financial process. It was a private placement structure. It's a private placement, but that was raised through there. You should not expect us to continue to raise capital in future funds with that.

Okay, great. Appreciate your time this morning, thanks.

Thanks Chris.

Thanks Chris.

Thank you. Our next question today is coming from Doug Christopher from D.A. Davidson. Please proceed with your question.

Hi, thanks for taking my question. Just on the restatement…

Good morning, Doug.

Hey, good morning. Just on the restatement, anything that we should be thinking about there? Is it as simple as we go back? Or is it maybe explained? I haven't had a chance to look through the notes. But is it basically just looking at the equity earnings and then just taking out the non-controlling interest? Is that as simple or what are some of the things we should be thinking about?

Yes. Just to be clear, the presentation change we made was not a restatement. We present segments – segment reporting on a GAAP basis, and we have our real estate segment, our Investment Management segment. We have only really – as a result, the trigger was the ending of our fundraising and not really growing the investment platform – the Investment Management platform going forward. That caused us to look at how we evaluate the components of the segments, and it is just the interests we have in our managed funds that have shifted from the real estate ownership to the Investment Management side of the business in our presentation. So when we say we conform the prior period, that doesn't constitute a restatement. It really just reflects the current presentation.

Okay. And then just as we go back or just in terms of thinking about the numbers, 79% Owned Real Estate , 21% Investment Management, we kind of blanket that as we look back in time as well?

Yes. I think we've – historically – in the last quarter, you probably heard us say heard us say 95/5 is the split. You're right that the resulting change of this gives us a split that's roughly in the 80/20 range. And I think that's consistent, and it will be until each of the funds reaches liquidity phase. And at that point, you will continue to see declines from each of the funds. But historically, I think the consistency has been in that 80% to 85% range if you conform the prior period.

Great. Thank you very much.

Thank you. [Operator Instruction] We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Right, thank you. Thank you for your interest in W. P. Carey, everyone. If you do have further questions, please feel free to call Investor Relations directly on 212-492-1110. That concludes today's call. You may now disconnect.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.