WP Carey Inc (WPC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the W. P. Carey & Company second quarter earnings release conference call and Web cast. At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I would now like to turn the conference over to Susan Hyde, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and welcome, everyone, to our second quarter 2004 earnings conference call. Joining us today are Chairman Bill Carey, co-CEO, Gordon DuGan, and Chief Financial Officer, John Park. Today's call is being simulcast on our Website www.wpcarey.com and will be archived for 90 days. We'll also have a replay available this afternoon at 1:00. The telephone number for the replay is 1-800-428-6051 with the access code of 361632.

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

Now, I'd like to turn the call over to Gordon.

Good morning, everyone. This is Gordon DuGan. As you see from our press release, we had another very good quarter in the second quarter of this year. Our FFO increased to 86 cents per share from 60 cents on a quarterly basis and was $1.41 versus $1.35 on a six month basis. Revenues for the quarter increased from $35 million in the prior year to $53 million for the second quarter of this year. The six month period revenues went from $80 million up to $90 million, another strong increase. John will detail a little bit more the effects on net income. As you saw, the net income per share for the quarter was up strongly, for the six month period it was down. Taxes and asset impairments are the story there and John will go into greater detail.

Cash flow from operations for the six month period, as detailed in our press release, was very strong, up from $30 million to $41 million. For the six month period, the investment volume increased from $332 million to $494 million. The increase for the second quarter was quite significant, but, as we've said in the past, we expect some lumpiness in our quarterly investment volume so we try not to highlight it too much, both in up quarters and in down quarters. For the six month period of this year we had, roughly, a [inaudible] dollar average investment size. What we're finding in the marketplace is that we're still able to find opportunities that aren't widely available or marketed. We're very pleased with the investment volume and the investments we've made this year. We continue to focus on investment opportunities where relationship, speed, certainty of execution or complexity are the driving factors of the transaction rather than just who will pay more or make their money available more cheaply.

To that point, as we've said in the past, we remain cautious about the marketplace, in general, in terms of the availability of capital. Both the corporate finance, real estate finance markets have readily available capital from a variety of sources. We would say that, in general, there's more capital than opportunity. In a situation like that, we are very focused and are trying to be very disciplined about our investments. Again, we're pleased that we continue to find investment opportunities where our relationships, the complexity of the transaction or our brand name and ability and certain of close are the driving factors and that's where we're concentrating our time on the investment side.

In terms of the third quarter, as you may have seen in our press release, we've closed a number of transactions recently and we're off to a good start.

On the asset management side, we continue to aggressively manage our portfolios. We have a truly terrific team focused on both increasing portfolio revenues and increasing occupancies and we're making progress there, even though the fundamentals in a lot of the product types that we have, including industrial, are OK at best. We have, again, assembled a team that's really very focused and is doing a terrific job.

One question that we get all the time, and we make some reference to our press release this morning, is the effective increasing interest rates on our business in general. As you see from the press release, we don't use much floating rate debt. We are big believers in long-term fixed-rate financing across our portfolios and, in fact, big believers in non-recourse fixed-rate financing. By long-term, we borrow, generally, on terms anywhere from 10 to 20 years and those are fixed-rate financings typically for that period. Rising interest rate environment, from that standpoint, would have a lessened effect.

The other aspect of what's going on in the interest rate environment today that could be quite positive for us is a potential flattening of the yield curve. We've been through a period, over the last year to two years, where short-term rates have been very low. [Liborgh] has been one percent, roughly speaking. Ten year treasuries have hovered between - - call it four percent and five percent on a yield basis. At the upper end of that range, at five percent, the difference between short-term rates and long-term rates is quite large. What we found is that providers of long-term financing, such as ourselves, are at a slight disadvantage when you have a very steep yield curve because it's quite tempting for corporations to borrow short-term off of that cheap one percent index rather than borrow long-term. We see somewhat of a flattening of a yield curve. Most economists are predicting a flattening of the yield curve and, in general, that would be good for our business.

I'll turn it over to John in a moment to go through the details of the financial statements, but I just want to summarize the fact, again, that we had a very good quarter. We're executing our business very well and we would caution that with there continues to be abundant capital available in the corporate finance and real estate finance markets.

With that, I'll turn it over to John.

Good morning, ladies and gentlemen. We had a strong quarter fueled by high investment volume. The activity has more than made up for the first quarter but, as we've said many times before, our quarterly results do fluctuate due to investment volume. We urge all of our shareholders to take a long-term outlook in investing with us.

Let me take you through the details of the income statement. On the revenue side, our management revenues increased almost $7 million for the first six months. The increase was driven by a higher investment volume, as well as increases in assets under management and resulting management fees. Rental revenues were relatively flat over last year. As Gordon mentioned, we're doing a very good job to stay even in this market. We expect this trend to continue with the foreseeable future.

The other operating income increased slightly by about $.5 million. In the second quarter we received $2.1 million from Integra and in the first quarter of this year we received $1.5 million from Casper.

The revenue of other business operations includes the [inaudible] Hotel, which is now consolidated as part of 1046. For comparison purposes, it really should be netted against the operating expenses of 3.3 for net of $800,000 versus $600,000 of last year.

On the expense side, interest expense decreased slightly due to lower debt balances. G&A expenses increased by about $2.2 million and about one-third of that was incurred on behalf of the GPAs, where we are reimbursed. The remainder is related to increases in business volume.

In the second quarter, we had impairment charges of $950,000 that were related to [Athizone] and Windex GN Rochester Button that we have had on for a long time and, also, down below in the Discontinued Operation, $4.7 million, due to an asset east of [inaudible]. That sale actually was consummated in July.

Overall, the company's fundamentals remain very strong. I think that, in addition to the volume of investment activity, we also had a very strong fund raising. Over the last 12 trailing months, we've had the investment volume of $900 million and fund raising of $450. Given our strategy of using non-report stat of approximately 50 percent of our purchase price, two-to-one is an ideal ratio. We continue to have a disciplined and balanced approach. In addition to our performance at W P Carey, the CPAs that we manage continue to perform very well. Other news that I would like to report is that the CIP's liquidation or merger with GPA 15 has been going very well. The voting has been overwhelmingly positive, in each case, better than 96 percent approval rate, which is consistent with our past transactions.

In closing, I think that we're well positioned to take advantage of [inaudible] going forward. Our balance sheet is in great shape. We only have $29 million of company level debt. One more thing I'd like to add in terms of effect on rising interest rate is that the rising interest rate generally correlates with higher inflation rates and the majority of our leases are tied to CPI so that, over time, we'll receive - - the high inflation will translate into higher rental revenues for us.

With that, I'll turn it over to Bill Carey for his concluding remarks.

Thank you, John and Gordon. I'm very pleased with the progress for this period. By most measures, this is the best second quarter and the best first half in our history. As Gordon and John have said, the periodic results with fluctuate. The long-term prospects are really very good. The reason why I believe they're good is really what one of the analysts said a few years ago, "W P Carey is a better brand". It's not just a better brand, it's a better integrity. The interest in one of our models is doing well and this really works. It works in attracting the best people and attracting people who are going to be interested in the best interest of our constituencies. We have two constituencies, one, our investors, and, two, our tenants, the people that use our customers. We have to look out for both of them to make sure that everything works for everybody. This is really a great success story which I feel comfortable that is going to continue and that's why you haven't seen me sell a lot of my stock. I'm going for the long run. I believe in it for the long run. It's a definite long-term hold in my view.

With that, we'd now like to open the phones up for any of our callers who might have any questions.

The question and answer session will begin at this time. If you are using a speaker phone, please pickup the handset before pressing any numbers. Should you have a question, please press *1 on your push button telephones. If you wish to withdraw that question, please press *2. Your questions will be taken in the order that they are received. Please stand by for your first question. Our first question comes from Dave [Oppugn] of A G Edwards. Please state your question.

John, on the impairment charge on the property [Athizone] that actually was transacted in July, the third quarter, but it flowed through in the second quarter, can you explain that?

Sure. We are required to take the write-down as soon as we know that the asset value has been impaired. Even though it was transacted in third quarter, by the time we prepared the six month results, we knew that that had taken place. We're taking a write-down in this quarter instead of taking a loss in the third quarter. It is the proper accounting treatment. It has no economic difference.

Gordon, at the beginning of this year you talked about how your initial drive, in terms of acquisitions, was trying to get more portfolios. I think you transacted one in the first half, the U-Haul deal, what is your outlook in terms of portfolio deals going forward? Is it still active, are they more pricey, or are you having to go global in terms of finding those opportunities?

Dave, that's one of the reasons I mentioned the average investment size of $50 million is that's a pretty good number, in our view. We are looking for larger transactions that are more efficient, from our standpoint, and we are focused in that area. In an environment like this, especially, we try to stay very disciplined about what we're doing, so while we're focused on larger transactions, we're only focused on larger transactions that are good transactions for us. We think the U-Haul portfolio is one of those and we're actively seeking out other larger transactions, but with the caveat that we're probably not alone in that. We need to be very nimble and we need to be disciplined. We like the larger transactions. I did mention that we're going to focus on them. We've had one quite significant one close on the third quarter. We did a press release on a transaction in Finland and that was a larger transaction. We are finding some opportunities for larger transactions, but we never predict the future and can't predict it now, but it is a focus of ours.

Have you spotted any trends, any marked changes in the trends of these deals within the last quarter?

No, I think the comments about capital availability that I made today are probably quite similar to the ones that I make last quarter and the quarter before. We haven't seen a change in that, for better or for worse, but it's an observation of ours that continues a tremendous amount of capital availability.

When you're looking at the spectrum of deals that you have in front of you, are you finding that the pricing just makes more sense when you're buying? For example, the deal that you announced yesterday, the deal in Finland, and the foreign deals, again, the pricing is better on those versus domestic?

I would not conclude that. I would say that the pricing on both is attractive and we do hold up a relative analysis of where are the returns on a relative basis. We find that they're both attractive. What the set of potential investment opportunities in the U.S. versus internationally are we don't fully know, but in terms of the - - we're just as excited about the investments we've made in the U.S. as we are about the investments we've made in Europe. I wouldn't make any sweeping generalization about that.

In terms of sectors, has your opinion changed or is beginning to change in terms of better opportunities in, let's say, office now has seen the bottom of the cycle and, hopefully, going forward now for the next couple of years, versus retail or industrial or anything else?

It's interesting that you say that. Our opportunities come about, primarily, because of our interaction with the company. The secondary aspect is what assets do they own, like the sell and lease-back. I wouldn't say that that changes our investment outlook. I would say that a lot of the predictors we've seen on office vacancies show a declining office vacancy, but not as substantially as one might think. We try to underwrite the asset type very conservatively and we're still fairly conservative about office assets. It's still a tenant's market so whether we have an empty building or we're making a new investment with an office asset, we try to be relatively conservative about the re-lease prospects because, as you know better than we do, Dave, it continues to be a tenant's market rather than a landlord's market even though it does seem to be improving.

Is there any property type, regardless of the relationship, that's just a non-starter at this point?

No, I wouldn't say that there's anything that's a non-starter, but we have a conservative investment committee made up of people in their 60's and 70's that have long memories and a great deal of experience. We never say never and we rely on the sage input of our investment committee.

Can you comment on the most recent trends on the fund raising side?

The fund raising continues to be very strong. I think, one of the points that John made about the relationship between our investment volume and our fund raising volume, is the fact that we manage that closely and we have, in the past year, stopped fund raising when we saw that our investment volume wasn't keeping up with fund raising or, perspectively, might not keep up with fund raising. We're back and fund raising is very strong, but we monitor closely the relationship between investment volume and fund raising. We will not raise more money than we can prudently invest. We keep an eye to that. We don't judge ourselves on our fund raising, we judge ourselves on our investment ability. Our viewpoint is that if you invest money well, there's always capital to be raised to do that.

Does the prospect of potentially larger transactions change your strategy at all on the fund raising side? Are you taking more risks there you think?

No. I think the fund sizes are quite large today so we have the ability to do large transactions. CPA-15 raised, roughly, $1.1 billion. CPA-16 Global, we hope to raise a similar amount. These are quite large equity funds that have the ability to do large transactions. The fund raising strategy and the investment strategy, I think, are in sync.

Last question. Any update on the Dr. Pepper situation?

Yes. Dr. Pepper has elected not to exercise their purchase option, which is good news for our shareholders because it would be a difficult asset to replace in this current environment.

Great. Thank you, guys. Excellent quarter.

Our next question comes from Mike Beal of Davenport. Please state your question.

Good morning. I'll try to keep the questions short. Could you go back to this impairment charge and remind us why that is a discontinued item?

This is something that I actually disagree with the Accounting Board, where anytime that we sell an asset it's considered a Discontinued Operation, whereas, we believe that we're in the business of owning and selling assets. Basically, anytime that an asset is classified as held for sale, it gets classified as Discontinued Operation. This is an asset that was disposed in the third quarter, in early July.

I agree with you. Just some color on that, it's indicative of some trends that we're seeing. It's a pretty big hit for us.

It may seem like that, but there is a history to this transaction. This transaction goes back into the 90's, a long time ago. It was, at one point, restructured with the tenant where we took a lease buy-out from the tenant. Based on the criteria for impairment analysis for GAPP, even after the lease buy-out, it did not require an impairment charge. Economically, our shareholders fared fine, but, in essence, the lease buy-out is amortized over the remaining lease term and we're taking the charge all at once upon sale of the property.

Not to beat this, but one would expect over time that this impairment - - you wouldn't see large charges like this when an asset is sold because, presumably, we would have been setting aside a reserve over time. Would that be a generally correct statement? If we see an impairment over time, by the time we get around to selling it, we should have already written it down, is that correct?

Again, the impairment is not necessarily related to depreciation or devaluation. There is no such thing as a write-up in accounting, but only write-downs. Over time, what we have shown over the last 30 years is that the properties that we've purchased generally appreciate in value rather than go down. On any particular asset, there will be write-downs or losses upon disposition.

Can you just comment briefly on the company's balance sheet, $29 million in debt, way under levered? What, sort of, is the game plan or is there one? You just sort of see what happens, in terms of putting more assets on W P Carey's balance sheet?

Yes, we're working on that. As I mentioned, we're working on a CIP transaction where a portion of CIP's portfolio will be purchased by W P Carey at appraised value. That will utilize approximately $114 million of cash, plus assumption of debt. We will be adding real estate assets onto our balance sheet. We believe that it's a good use of our borrowing power. Even after that transaction, our balance sheet will remain pristine and very under-levered and we'll continue to look for opportunities to maximize shareholder return.

I'll just caveat that by saying that the transaction's ongoing and is in the process right now.

Last question. Looking at the six month's numbers, and I know we don't want to look quarter-to-quarter, but this is at least two quarters, we have management income of almost $50 million versus about $43 million, what's sort of the makeup between those two in terms of property acquisition fees versus sort of ongoing management's fees?

It's mostly about the $20 million of the $49 is related to structuring fees and the remainder is management fees. I think that's a ratio that continues to improve over time as we add more and more assets under management.

OK. Thank you very much.

Again, as a reminder, should you have any questions, please press *1 on your push button telephones at this time. Please stand by for any further questions. Again, should you have a question, please press *1 on your push button telephone at this time. At this time, there are no further questions in queue.

Thank you. One thing that we just wanted to remind you all of before we sign off this morning is that Gordon will be presenting his upcoming Wall Street transcripts "Investing in the Industry conference at the Harvard Club here in New York City on Tuesday, August 17th. His presentation will be at 11:20 in the morning and a Web cast will be available on our Web site after the event. We hope that you're able to turn in to that and we look forward to speaking with you again next quarter. Thank you.

Thank you very much.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 361632. This concludes our conference call for today. Thank you all for participating and have a great day. All participants may now disconnect.