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W. P. Carey Inc. (NYSE:WPC)

Q3 2012 Earnings Call

November 8, 2012 11:00 am ET

Executives

Susan C. Hyde – Managing Director

Trevor P. Bond – President, Chief Executive Officer and Board Member

Mark J. DeCesaris – Managing Director and CFO

Thomas E. Zacharias – Managing Director and COO

Analysts

Dan Donlan – Janney Capital Markets

Paul Adornato – BMO Capital Markets

Operator

Good morning and welcome to the W. P. Carey Earnings Call. All participants will be in listen-only mode. (Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Susan Hyde. Please go ahead.

Susan C. Hyde

Thank you, operator. Good morning, and welcome everyone to our third quarter 2012 earnings conference call. Joining us today are, W. P. Carey’s Chief Executive Officer, Trevor Bond; Chief Financial Officer, Mark DeCesaris; and Chief Operating Officer, Tom Zacharias. Today’s call is being simulcast on our website, wpcarey.com and will be archived for 90 days.

Before I turn the call over to Trevor, I need to inform you that statements made in this call that are not historic fact may be deemed forward-looking statements. Factors that could cause actual results to differ materially from our expectations are listed in our SEC filings.

Now with that, I’d like to turn the call over to Trevor.

Trevor P. Bond

Thanks, Susan and thanks everyone for joining us today. For those of you affected by hurricane Sandy last week we hope that you and your family and friends were able to remain out of harm’s way, and the recovery from whatever damage you may have suffered will be swift.

Many of us too were and still are affected, but thankfully our office here in New York maintained power throughout. Also we experienced no significant damage to the portfolios assets during the storm, which is certainly a blessing. The most significant event in the quarter was the close of our merger with CPA:15 and simultaneous conversion to REIT status, which took place at the close of business on Friday, September 28.

Those events rendered the results for the first three quarters somewhat less meaningful than the pro forma performance of the combined company had the merger taken place on January 1st, and we will be talking about both but before we get to that a word about our trading volume. For those of you who listened to our second quarter earnings call, you will remember that one of the stated goals and a key benefit of the merger, in fact were to significantly increase our liquidity.

It was expected that the delivery of approximately $28 million shares of CPA:15 shareholders on October 1st would result in dramatic increases in daily trading volume, and that's what has in fact occurred. Our three months average daily trading volume prior to the merger was less than 50,000 shares per day. Now it is about 448,000 shares a day. And since the merger more than 25 million shares have traded hands. To put that number in perspective a total of about 14 million of our shares traded during the entire year in 2011.

Turning now to the pro forma results, our AFFO for the combined company for three quarters would have been $2.78 per share, which represents accretion of about $0.29 per share, and it is still our expectation that the full accretion annualized will be about $0.40. Based on this and the dividend of $2.60 a share we still expect our pay out ratio to be about 70% as we have communicated in the past.

Now let me give a brief overview of the actual third quarter results. Adjusted funds from operations declined relative to last year, but if you isolate out the $52.5 million fee, which we earned by liquidating CPA:14 in 2011 you will see that AFFO from the core business actually increased slightly from $101.1 million to $101.8 million. I want to focus for a moment on two specific trends contained within that figure.

First, we saw AFFO from investment management declined by about $20.3 million primarily due to lower structuring revenues, stemming from lower investment volume as compared to our record year in 2011, but offsetting that decline was an increase of about $20.9 million in the AFFO we earned from our real estate investments. Three things to note about structuring revenues, first, we've historically seen annual investment volume of between $700 million to $1 billion, and the swing in structuring revenues that we earned within that range can be significant.

Going forward, however, the impact of that variability will become less pronounced because a much larger percentage of AFFO, about 94% in fact, is now derived from real estate investments. The thing to note is that historically the fourth quarter, I'm sorry, the other thing to note is that historically the fourth-quarter tends to be our most active in terms of investment volume, and currently we do have a strong pipeline although of course we can't be sure we'll close everything in that pipeline.

Finally, because we are accustomed to this variability of investment volume and because at the same time we are focused on dividend coverage, a critical metric for us is how much dividend coverage is provided by real estate income alone that is excluding investment management income.

For example, AFFO from real estate alone year-to-date has been $95.5 million that is up 28% by the way from $74.6 million for the same period last year. And both Mark DeCesaris, our Chief financial Officer, and Tom Zacharias, our COO, will break this segment down in more detail later in this call.

Now, that $95.5 million in real estate AFFO compares to distributions of $73.1 million for a coverage ratio of 1.31 times. That same measure for the comparable period in 2011 was 1.14, although the distributions themselves in 2011 were actually 10% less than so far this year. The point is that we feel we have pretty good dividend coverage from the real estate income alone, but it is also important to note that even within the investment management segment, about half the revenues are in the form of stable ongoing asset management fees that is the 50 basis points that we earn based on the net asset value of the managed funds CPA:16 and CPA:17.

Mark can go into more detail on that shortly, but before I turn the microphone over to him I'd like to touch briefly on the investing climate that they we are experiencing. Through September 30th we closed on about $416 million of transactions on behalf of CPA:17 Global, and about $54 million for Carey Watermark Investors, our hotel fund.

We also invested in approximately $152 million on behalf of W. P. Carey LLC, now W. P. Carey Inc. that is the REIT. As I said earlier this volume on behalf of our managed funds was lower compared with the first three quarters of 2011, which were unusually strong for us due to the C 1000 Terminal and Metro transactions. But we are fairly confident based on the current pipeline that the final quarter will be stronger than each of the first three.

Of course, as I said earlier it is difficult to say precisely where we will end up in the year in terms of total volume. We don't set fixed targets or quotas because if we're not seeing the appropriate risk return profile on any given deal we would prefer to stay on the sidelines.

As mentioned on our last call, I do think volume is likely to be less than last year mostly because in 2010-2011, we saw significant deal volume internationally, particularly in Europe. This year with are being more selective about potential transactions over there due to the ongoing uncertainty. This is not to say that we won't invest in Europe, we continue to see quite a few potential transactions but we are being more opportunistic in our approach to pricing in terms.

As far as fund-raising goes, we've raised approximately $2.6 billion for CPA:17 and $130 million for Carey Watermark Investors to date. Our managed funds currently have approximately $570 million of cash available for investments, and we expect to fully deploy that cash over the next 12 months to 18 months.

Finally, while Tom Zacharias will go into the details of our portfolio activity in a moment, I will say that it has been a typically active year for us in terms of dispositions, lease extensions, refinancings and restructurings, which reflects our view that we need to be proactive managers and to be as opportunistic on the management side as we are on the investment side of our business.

So to recap, our core business remains strong and growing, our dividend coverage is solid and the portfolio is in good shape as we enter into our first full quarter as a REIT, and with that I will turn the call over now to Mark DeCesaris.

Mark J. DeCesaris

Good morning, and thanks Trevor. As Trevor mentioned, we are pleased with the results of the company and as I walk you through these results I want to spend some time on how we generate earnings from both our real estate and investment management businesses, and the impact of the CPA:15 acquisitions on those earning streams.

On a comparative basis, the single biggest impact on our 2011 results was a one-time incentive fees that we earned on the 14/16 merger of approximately $52 million. However, just as important was the additional investment of $121 million we made in CPA:16, and the ongoing cash flow derived from that investment. In addition, as part of that merger we replaced a performance fee that we had historically earned for managing CPA:16's assets with a GP interest in the fund that generates distributions based on 10% of the cash flow of the fund.

Year-end management fees from the CPA funds under management these fees are based on the total appraised value of the funds’ assets. Historically we earned a 50 basis points management fee and a 50 basis points performance fee. Through the first nine months total fees earned approximated $47 million versus $51.2 million in the previous year. But again as part of the 14/16 merger, I mentioned that we had replaced a performance fee with an interest in the cash flow of the fund.

The distributions from this interest in CPA:16's cash flow as well as the interest in CPA:17's cash flow are not included in the above revenue streams. They flow through the income from equity investment line items on our income statement. The total distributions received from these two funds totaled approximately $21.8 million for the nine months ended 9/30/2012 compared to $8.3 million in 2011.

In total, including our GP interest, our economic revenue for managing the CPA funds increased about 16% to a total of $68.8 million versus $59.5 million in the prior year. In the supplement report we included detailed breakout of the revenues we earn on a pro rata basis. We consider the distributions received from the GP interest in the cash flows of the funds to be real estate related revenues, and as such included in the real estate segment when reporting AFFO.

I mentioned that we made an additional investment CPA:16 as part of the merger. We currently own approximately 18% of CPA:16. We receive quarterly distributions from our ownership in the CPA funds, and excluding any one time special distributions, recurring distributions increased approximately 80% to $27 million for the nine month period versus $15.4 last year.

While our share of the CPA REIT income flows through the income from equity investment line item of our income statement, it is the cash distributions that we received that reflect our true economic benefit from this ownership. CPA:16 is currently paying about a 6.7% yield with a coverage ratio of 128%. The CPA:17 is currently paying a 6.5% yield and is still in fund-raising mode. So we still have some significant cash to invest in that fund.

We view this ownership to be an investment in a well diversified portfolio of net leased assets. We consider our share of the net lease revenue from these investments part of our overall revenue streams from direct ownership in net leased assets. On a pro rata basis, this share of the CPA funds net lease revenue approximated $57.3 million for the nine months ended September 30, 2012 versus $52.1 million in 2011.

The other part of this revenue stream is lease revenues received directly from either 100% direct ownership in net leased assets, our joint venture ownership of net leased assets with the CPA funds. These revenues on a pro rata basis totaled approximately $68.7 million for the nine month period versus approximately $72.2 million in 2011. So in total our pro rata share in net lease revenues, including revenues based on our ownership in the CPA funds, was $126 million for the first three quarters of 2012 versus $124.3 million in 2011.

I want to reinforce that the cash flow we receive from these investments comes both in the form of distributions received from the CPA funds, as well as rental payments through our direct investments. In the supplemental report, we include a schedule that breaks out these various revenue streams. Also during the third quarter we increase our total annualized pro rata lease revenue stream to $319 million. This is up approximately $15 million from the $304 million we reported at the end of Q2. This increase was primarily driven by some investments and Tom Zacharias will discuss both of these acquisitions in his remarks.

Post-merger, our economic interest in the CPA:15 assets will change as we will no longer receive management fees in distributions, but rather will earn revenue on its net leased assets. For the nine months ended September 30, 2012 we received approximately $18.5 million in management performance fees, and $5.6 million in distributions from CPA:15. CPA:15’s pro rata lease revenue and other income totaled approximately $171.4 million for the same nine month period.

In the supplemental we have provided a schedule, which shows what the combined company's AFFO result would have looked like had we executed the merger on January 1 of 2012 based on our actual results for the first nine months and then annualized. As Trevor mentioned, we do expect the merger to generate approximately $0.40 a share in accretion on an annual basis.

Our structuring revenues for the first nine months were approximately $19.6 million versus $42.9 million in 2011. We structured approximately $417 million in investment volume on behalf of the managed funds and $152 million on behalf of W.P. Carey. This compares to $926 million in 2011. Structuring revenue, while recurring in nature is lumpy due both to the timing of the investments made, as well as the size of the individual investments, but for every dollar invested our recurring management revenue, as well as our interest in the cash flow of the managed funds increases.

We currently have approximately $570 million of cash to invest on behalf of CPA:17 and a solid pipeline of investments, although we can't be certain about the timing of these investments. Let me discuss our G&A cost for a few minutes. Total G&A at September 30 was $108.3 million versus $71.1 million in the previous year. But I want to break these costs down for you. The first item I want to pull out of these costs is our wholesaling revenue line item. When we are in fund raising mode, we are reimbursed by the fund for certain costs. Under GAAP both the revenue and the costs [grows up], and as a result as fund-raising increases both the G&A cost line item and the revenue line item increases.

And while there is a margin on this reimbursement, it is not significant. So when evaluating our G&A cost, I exclude this reimbursement from revenues and reduce my G&A cost by that amount. Wholesaling revenue was approximately $11.9 million in 2012 versus $8.8 million for the same nine month period in 2011. We also incurred approximately $30.6 million of one time merger and acquisition expenses in 2012 versus approximately $0.5 million in 2011. These merger and acquisition costs were primarily related to the merger with CPA:15, and the acquisition of an interest in (inaudible) portfolio of assets that is structured as a net lease.

Lastly, stock comp amortization totaled approximately $19 million in 2012 versus $12.3 million in 2011. This increase was primarily related to an increase in our share value, which has increased the amortization of new share grants, as well as an increase in the estimated payout of the performance component of shares that were already granted.

Our total shareholder return over the last two years was just over 70%, approximately 70.25% as well. So if you adjust our G&A for these three items, net G&A for 2012 would have been approximately $46.8 million versus $49.6 million in 2011, a 5.5% decrease in our core G&A year-over-year. Because of our investment management segment, we view our G&A as a percentage of the total revenues that we manage.

In our supplemental, we include a schedule that will break out the total revenues under management and through nine months this totaled approximately $750 million. Excluding stock comp amortization, G&A would have been – was approximately 6.25% of this number. Including stock comp amortization, the percentage was about 8.75% of this number.

The last thing I want to mention is that when viewing our operating metrics on a per share basis, shares outstanding increased as a result of issuing 28.2 million shares to CPA:15 shareholders on September 28. While the economics of the merger have been included in our core operating results, and won’t impact those until the fourth quarter, the average diluted shares outstanding increased in Q3.

On an AFFO basis, this impact was the lower AFFO per share by approximately a $0.01. In the combined analysis that we've included in the supplemental, we have adjusted this to show the accretion correctly. As part of the merger we put in place $1.75 million unsecured term loan, which is in addition to the $450 million unsecured revolver that we had in place.

Both of these loans have a three-year term with a one year extension. And as we sit here today we have approximately $75 million in cash and $250 million available on the revolver. In addition, we have approximately $660 million of cash available for investment across all of our funds under management. From a balance sheet perspective we have the total debt to total market cap ratio of approximately 38% and an unsecured debt to total market cap ratio of approximately 7.5%.

I would urge all of you to take a look at our supplemental this quarter. We have significantly increased the amount of financial data that we have included in that, many of that comes through quite some questions we received from various investors and analysts through the quarter, and with that I'll turn the call over to Tom Zacharias, our Chief Operating Officer.

Thomas E. Zacharias

Thank you, Mark and good morning everyone. At the end of the third quarter the portfolio in the public company expanded dramatically as a result of the addition of the CPA:15 properties. It was an ideal transaction from a portfolio management standpoint, as the average lease term was extended, the lease maturities were smoothed out and mortgage maturities became more evenly staggered.

The portfolio size increased from 11.6 million square feet to 39.3 million square feet, over a 235% increase. It is worthwhile taking a minute to provide a quick overview of a number of the statistics regarding the W.P. Carey owned portfolio post-merger. The owned real estate assets and interest in the CPA funds now provide slightly more than 80% of the revenues of the company.

The owned portfolio is now composed of 432 properties and 134 corporate tenants. The weighted average lease term is 9.1 years, up from roughly 6.5 years at the beginning of the year. The weighted average mortgage maturity is 5.5 years. The weighted average interest rate on that debt is 5%. The occupancy is a very strong 98.46%.

The portfolio annualized contracted rent, as Mark mentioned, is $319 million. Contracted rent, as Mark mentioned, is $319 million. Near term rollover between now and the end of 2004 is only 10% of the rental revenue. 96% of the lease revenue has increases that are either CPA based or fixed. Geographic diversity includes 40 states and nine countries outside the US. Property type diversity involves roughly an equal split of office, industrial, warehouse and retail.

As these statistics indicate, we are very pleased with the upgrading of the real estate portfolio through the merger with CPA:15. Now turning to W.P. Carey portfolio activity, as Trevor mentioned, in the third quarter we completed $152 million in new investments in the public company. The company acquired five Walgreens in good markets with an average remaining lease term of 18.5 years for $24.4 million.

At the end of quarter, we acquired our partner’s JV interest in 12 Marriott Courtyard hotels, net leased to Marriott International for $127.4 million. The original Marriott net lease deal was done back in 1992. We know the assets very well. We restructured the lease in 2007, and Marriott has been continuously upgrading and investing in the assets over the years.

The net lease runs for another 10 years with a 10 year renewal option after that. There was no debt on our portfolio and our institutional partner was not interested in financing it. We were able to negotiate a buyout of our 53% partner at a cap rate slightly below 7%, and we financed 100% of the purchase with 10-year debt at 5.04% interest only in the first two years.

The deal is accretive to W. P. Carey day one with roughly $2.1 million of additional cash flow, and we now control 100% of the residual, which we believe will be worth substantially more than the purchase price. Moving opportunistically to create value from the portfolio is what the asset management team is focused on doing. As Mark mentioned, the total revenue in the three components of the real estate segment was up 11% for the nine months of 2012 versus nine months of 2011.

Cash flow from the GP interest in 16/17 and a pro rata share of the revenues from the CPA investments were up $18.7 million. However, we had a small decrease of $3.6 million from the owned portfolio. The decrease in revenue was due to the 12 properties we sold for $74 million. The investment activity in the third quarter will serve to replace the lost revenue from the vacant and matured properties that were sold.

We expect going forward with a larger portfolio that we will be more opportunistic in the recycling of capital, as we sell some shorter term leased assets and replace them with new longer term leased assets. At the end of the third quarter, W. P. Carey Inc.’s occupancy, as I mentioned, was 98.46%, which is a 550 basis point improvement from the beginning of the year. This occupancy improvement was obtained by the sale and leasing of the vacant space, as well as the higher occupancy that existed in the CPA:15 portfolio.

Year-to-date we have completed 14 lease renewals and 2 new leases totaling approximately 1.6 million square feet and 12 million in annual lease revenue. We are done with only about 200,000 of [TIs] and other incentives. Two deals were early renewals with a blend in extend future that achieved a significant additional term of over 10 years, for roughly a 10% reduction in the current rent.

Year-to-date the 12 million of renewal rent is 15% below the old rent. This percent moves around depending upon the size and the nature of expiring leases. The lower rent on renewals has often been offset by the lower cost of the debt on the refinancing after we have extended the lease. The refinancing pipeline for the WPC portfolio is very manageable. In 2012, we have only one loan remaining to be refinanced totaling $9 million, and in 2013 we have 7 loans totaling $96 million.

Now turning to the managed funds, occupancy in the two CPA REITs, CPA:16 and CPA:17 averaged 97.9% over the 81 million square feet at the end of the third quarter, which is very strong. Debt coming due to refinance with CPA REIT is again very manageable. We have no debt maturing in 2012 and only 129 million in 2013.

Year-to-date in WPC and CPAs we have completed 289 million of refinancing on existing assets on 18 loans at a weighted average interest rate of 4.91%, an average term of 9.2 years that's a lot of numbers, but basically we got great refinancings. This is 242 basis points below the weighted average rate on the maturing loans.

Quickly on the Carey Watermark Investors Hotel Fund, we acquired another hotel, Western Premier Hotel in Atlanta since our last earnings call. The fund now has seven – interest in seven hotels and assets under management of 176 million.

Before concluding my report, I would like to provide a few comments about the current environment. Our sale-leaseback tenants continue to perform well. We have only one tenant operating in bankruptcy. We expect that tenant to affirm its lease. In Europe, we have approximately 35 million square feet of space, about 97% occupied and there are no tenants in default.

As far as refinancings in Europe, year-to-date we completed a small refinancing of a built-to-suit in Poland and we are working on a significant refinancing in the Netherlands. Other than this one deal in the Netherlands, we have no mortgage debt to refinance in Europe until July 2014. In the US, as I mentioned, is a very attractive refinancing market right now. The average rate is below 5% for a 10-year debt, and we are moving quickly on many of these mortgage refinancings as we can.

Now I’d like to turn the call back to our director of investor relations, Susan Hyde.

Susan C. Hyde

Thanks Tom. Well, that concludes our presentation this morning. So now we would like to open it up to your questions. Operator, if you can just come back and give some instructions on that again?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dan Donlan at Janney.

Dan Donlan – Janney Capital Markets

Thank you. Mark, first question because I kind of missed this, the annualized AFFO you gave a reason for why that came down a whole one penny, what was that again?

Mark J. DeCesaris

Net-net, for the quarter, remember this is based on our actual results, so it really came down based on the timing of our investment volume from the structuring revenue. The one penny really referred to the impact on our actual AFFO for Q3.

Dan Donlan – Janney Capital Markets

Right.

Mark J. DeCesaris

We adjusted the pro forma model that we show you in the supplemental to reflect that though. So if you looked at that pro forma that penny has already been adjusted for you.

Dan Donlan – Janney Capital Markets

Right.

Mark J. DeCesaris

The penny you are looking at is really, you know, the timing of the structuring revenue on an annualized basis.

Dan Donlan – Janney Capital Markets

Okay, and then can you talk a little bit about you know cap rates kind of US and Europe. You know, have you seen a kind of upward bias in Europe versus you know, the US and you know when do you start dipping your toe in the water, more so in Europe. I mean, what are the indicators that you guys are looking at?

Mark J. DeCesaris

Trevor, you want to handle that?

Trevor P. Bond

Yes, sure. Thanks for the question Dan. We're clearly seeing a pound to pound, you know, for comparable credits of wider spreads in Europe. There is no question there. That phenomenon we've seen really since 2011. In terms of the actuals, we have not seen the cap rates declining as much in our segments of the market, which as we have described in the past, I would describe as a more opportunistic, less price efficient segments of the market.

They have come down only slightly in both markets. And then of course, they have not gone down by as much as that. But the risk-adjusted returns and the spreads of the ten-year are still quite attractive. But the differential between the markets, it is hard to say because they are such a range of companies and credits that we look at, but there are some credits that we would look at in Europe that we would not we feel be competitive in the US. But we are competitive in Europe, and I will say that as I mentioned, we are being more selective over in Europe.

At the same time, every deal has multiple bidders. We are never in a deal to date where we are the only one, and there is a feeling of such distress that bargains can be had. That has not – the market has not reached that level of distress, and we don’t expect it to.

Dan Donlan – Janney Capital Markets

Okay. And I guess, this is a question for Tom, how has tenant traffic been at some of your vacancies, kind of first half, if you could compare and contrast first half of the year kind of to the second half of the year, and you know, are you seeing the fiscal cliff, and just people being concerned about who the president was and whatever, has that impacted, you know, traffic and has that impacted lease negotiations at all as well?

Thomas E. Zacharias

I wouldn’t say that there is – it is probably safe to say that overall the political uncertainty has slowed things a little bit. But that said we are down to only 600,000 square feet of vacant space. We did a large clean up of some assets of some particular transactions. And we have a number of that we expect to close between now and the end of the year.

So transaction volume for what we are doing in the asset management department is up significantly this year over last year. I think some of it is that the deals take longer to get done.

Dan Donlan – Janney Capital Markets

Okay, and then looking at your lease expirations, and I think I have this number correct, there is a couple of different numbers, but you don’t really have anything for ’13, but then it looks like it kind of jumps up quite a bit, maybe 8% of base rents in ’14. Could you may be talk about what that is in ’14, have you already started talking to those tenants, is that one particular tenant, any detail around that would be helpful?

Thomas E. Zacharias

Yes. We talk to our tenants three years in advance, and we have done some of that leasing that I mentioned, the 16 leases, some of that was even 2014 leases that we got done this year. In 2015, was your question ’14 or ’15?

Dan Donlan – Janney Capital Markets

Yes, it was on ’14. I think the number was…

Thomas E. Zacharias

It even jumped up more in ’15, but in ’14 there is two – the two largest tenants are ones that we’re working with. We don’t think they are going to renew, but I don’t want to give you the specific names of that, but we are working on those now.

Dan Donlan – Janney Capital Markets

Okay, you said you don’t think they are going to renew, and if that is the case what percentage of rents are those tenants?

Thomas E. Zacharias

Yes. Don’t have that right in front of me, but we’re working on finding either replacement tenants or selling.

Dan Donlan – Janney Capital Markets

Okay.

Thomas E. Zacharias

As a percentage of that, I don’t have that right in front of me.

Dan Donlan – Janney Capital Markets

Okay. Are these – what type of assets are these? Are they fundable assets, are they industrial warehouse, are they office buildings, what is the product?

Thomas E. Zacharias

Industrial warehouse.

Dan Donlan – Janney Capital Markets

Okay, and are they located in Europe or the US?

Thomas E. Zacharias

In US.

Dan Donlan – Janney Capital Markets

Okay, okay.

Thomas E. Zacharias

But we – you know, they are assets that we are currently working on. Whether we will – currently working on. Whether we find a replacement tenant or sell, we will work that out between now and the end of 2014.

Dan Donlan – Janney Capital Markets

Okay. All right. Have to follow with you off-line then as to what percentage that would be. And then, if – actually there is one more question on that, what is the reason for the tenant – for these tenants leaving?

Thomas E. Zacharias

One case it was bought by a larger company, and we thought [there was a lessor]. That is one situation. Another is that tenant decided to consolidate in a new build to suit. And both these situations we have been working on. We’re collecting good rent while we’re working on them. We have no concerns about whether the tenants will pay. But that is the circumstances.

Dan Donlan – Janney Capital Markets

Could you give me the locations?

Thomas E. Zacharias

One is Colorado, one is Wisconsin.

Dan Donlan – Janney Capital Markets

Okay, all right. And then, I think in the prior calls you guys have talked about kind of aspirations to become an unsecured borrower, you know, any update there to timing, and/or what – just timing to that?

Trevor P. Bond

I don’t think you are going to see us make an immediate change to an unsecured borrower. We like – we continue to like non-recourse debt at the asset level. It is a very safe type of debt, but I think as we start to build up some of the debt on some of the existing assets that we have acquired starts to run off, you will see it start to build a larger incumbent pool. And at that point start to look to the unsecured markets a little bit more.

But that is going to take a little time to work through. So I don’t think you are going to see in the near term Dan.

Dan Donlan – Janney Capital Markets

Okay. And then, last if not least, you guys are obviously looking for replacement for Mark at the CFO level?

Mark J. DeCesaris

Am I leaving?

Dan Donlan – Janney Capital Markets

Is there any update there, will we have an announcement before year-end, just any thoughts there would be helpful?

Trevor P. Bond

Well, we have conducted a thorough search, and we are very optimistic that we will have an announcement shortly. It has been an good pool of candidates, and we don’t have anything to announce today though.

Dan Donlan – Janney Capital Markets

Okay. All right. Thank you very much. I appreciate it.

Trevor P. Bond

Thank you.

Operator

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

Paul Adornato – BMO Capital Markets

Hi, good morning.

Trevor P. Bond

Good morning Paul.

Paul Adornato – BMO Capital Markets

Just a follow up with respect to the cap rate discussion, I was wondering if you could talk about cap rates that you are seeing on acquisitions today versus a year ago. What type of movement have you seen, and also just mention, sorry if I missed it, just the absolute level of cap rates that you are seeing?

Mark J. DeCesaris

I missed the final part of your question Paul?

Paul Adornato – BMO Capital Markets

Just what is the absolute level of cap rates that you are seeing in the market today?

Mark J. DeCesaris

Well, as I had said, I think that cap rates began to decline clearly, but we have seen that happen more dramatically, and what we refer to as the more commoditized segment of the net lease market, in which we typically don’t compete as strongly because we have some sort of minimum threshold that we need to achieve in order to cover our dividends.

The dividend that we are currently paying on CPA:17 is 6.5%. So when you factor in the expenses and the fees and what not, you know, you need to generate a certain absolute level. In terms of – but that said, cap rates have come down, but not by as much as we had expected at the beginning of the year based on the sort of trajectory at that time, and also not buy as much as the 10-year, the debt that we were getting. Because so far the spread has been favorably impacted in the deal that we are looking at.

Paul Adornato – BMO Capital Markets

Okay, and looking at the asset management side of the business, it sounds like you are trying to be more active, more proactive in managing the assets in your portfolio. I was wondering how we can benchmark how you are doing on the disposition side, what would be some relevant metrics in your view?

Trevor P. Bond

Tom, you want to…

Thomas E. Zacharias

Paul, what we look at is what our occupancy is, but we aren’t carrying vacant space because that has cost to it. And we analyze that very carefully. We are doing some recycling where we will sell leases, some deals have become multi-tenant because we don’t think there is the upside in it. It might require more capital. We benchmark it on what revenue we are losing and what revenue we are replacing it with, because our objective is to be growing the revenue in the public company through some capital recycling.

To sum up, it is where – we are at a point where we think maybe the marketplace doesn’t look at the rest the way we do, and we can sell it very opportunistically and replace it. So there is a lot of analysis that is going on on all our investments as to whether – what our strategy should be. We don’t think there is going to be, you know, wholesale recycling, but there will be some. I know, it will be good for the investors.

Trevor P. Bond

I would tell you that philosophically just over the past 2 to 3 years, we have developed a point of view that we really should start thinking opportunistically about exits with much more than three years left on the lease, so that really after the first 10 years, Tom’s group is encouraged and rewarded to think opportunistically about sales of assets where we think that – opportunistically about sales of assets where we think that while the asset may have been critical to the operations of the tenant when we first did the transaction.

That asset may no longer serve the same function strategically for the tenant, and we learn this information through our periodic inspections, annual inspection that we follow the credits of the tenants closely. So, we come to a point of view on the asset, and make a determination as to whether or not or what the probability of renewal is, and that is very difficult years in advance, but sometimes you just develop a gut feel. And for those assets, it is easier to sell them with some lease term left on them. And at the same time, because we’re very diversified book by product type and geography and tenant type, we can as Tom alluded to sell an asset to somebody who has a different point of view on the credit, on the location, on the product type, and get a good exit.

So that is something that is just a very active part of our business. We are not only selling the empty dogs, really frankly that we have owned for quite some time. But we don’t like to have the carrying cost of the vacant buildings and Tom’s group has done a good job, significantly decreasing that. And that is clearly part of what we do, but we also think more opportunistically as well.

And then, when we do have those sales, we would actively, obviously try to recycle that capital into longer term assets.

Paul Adornato – BMO Capital Markets

Okay. Thanks very much.

Trevor P. Bond

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Susan Hyde for any closing comments.

Susan C. Hyde

Thank you. I just wanted to remind everyone that a replay of today’s call, including both a web cast and pod cast will be available after 2 o’clock, and you can find that information at the end of our earnings release. Thank you so much for joining us today, and we look forward to speaking with you again with our year-end results.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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