WP Carey Inc (WPC) 2004 Q3 法說會逐字稿

Thank you for standing by and welcome to the WP Carey and Company LLC third quarter earnings release conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to WP Carey and Company's Director of Investor Relations, Ms. Susan Hyde for opening remarks and introductions.

Ms. Hyde, please go ahead.

Thank you Erica.

Good morning and welcome everyone to our third quarter 2004 earnings conference call. Joining us today are WP Carey's Chairman, Bill Carey; Co-CEO, Gordon DuGan; and Chief Financial Officer, John Park.

Today's call is being simulcast on our website, WPCarey.com, and will be archived for 90 days. We will also have a replay available beginning at 1:00 this afternoon. The telephone number for the replay is 888-203-1112 with an access code of 814264.

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 our expectations are listed in our SEC filings.

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

Thank you Susan.

Good morning and thank you all for joining us this morning.

As you saw in the press release we had very strong results in the third quarter and for the first 9 months of this year. But let me make a couple of comments before we get into the body of my discussions and go through the good results in detail.

First of all, as we've mentioned in many calls in the past, we don't manage our business for quarterly earnings and I think the press release needs to be viewed with that in mind.

Secondly, as we also mentioned in the press release, because some of these earnings, the large part of these earnings were based upon back end performance and incentive fees realized in the liquidation of a fund, these results are not something that we think investors should look to as the new baseline and may not be repeatable year to year.

Let me jump into it. Again, by every measure we had a very strong third quarter and 9 months of 2004. And largely this was due to the realization of these back end incentive and performance based fees that I mentioned, due to the liquidation of our 11th fund, Carey Institutional Properties. I'll talk a little bit more about that in a second.

Overall picture for the 9 months, revenues increased from 69 million to 89 million. Net income is up from 44 million to approximately 62 million and FFO, as we measure it, is up from 78 million to 114 million.

CIP(R) is our 11th in our series of funds. It was also our 11th successful fund liquidation. We successfully liquidated that fund with a very high approval rate from our investors. The average annual return for the fund was 11.2%.

I wanted to pause and mention this, because I think it's important that we focus on this, because the value of our franchise as an investment manager is largely tied to our ability to deliver results to our investors. We're very proud of the fact, and probably proudest of the fact that this is the 11th successful liquidation and the 11th successful fund out of the 11 funds that we've liquidated. We have been able to deliver those results to our investors. In liquidating the fund we realized roughly 42 million in incentive and performance based fees upon the liquidation. We -- in essence we have taken those fees and reinvested those fees in net lease real estate. As part of liquidation WP Carey purchased 142 million of net lease real estate. In that 142 million we have roughly 2 million square feet. It's a mixture of office, industrial, retail and warehouse located across 9 states. We financed that acquisition by assuming roughly 28 million of debt, incurring indebtedness -- increasing our indebtedness at the Company, reinvesting the incentive and performance based fees as well as cash flow from operations and dispositions.

The reason I focus on this, or pay particular attention to it, is I think this is a testament to our flexible business model that we've talked about in the past. We were able to make this acquisition, reinvest our incentive fees, increase the real estate assets in the portfolio without suffering any dilution on behalf of our fellow investors. So again, I think we've talked about our flexible business model, and I think this transaction is a testament to that flexibility.

In terms of investment activity in the third quarter, it was a very busy quarter. We closed 7 transactions for a total of $310 million on behalf of our managed entities. Those investments were made across -- in 4 different countries; the U.S., Canada, Finland and France. And for the first 9 months of this year, we've completed over 800 million of new investments on behalf of our managed entities.

Our disposition activity has also been active. We have -- in our -- in WP Carey we sold 4 properties in the third quarter, 2 retail properties and 2 industrial manufacturing properties. We also sold a property in one of our managed entities which was a warehouse distribution facility. In both the investment activity and our disposition and portfolio management activity we are seeking to find value added transactions where we can actively manage the portfolios to the benefit of our investors.

The environment today, as you got a glimpse of in the press release, we continue to believe that there is excess capital in the real estate finance and corporate finance markets, and we're somewhat cautious about the level of competition. That having been said, I think our position as a market leader, our ability to understand very complex financial situations and our long-standing and deep relationships across many sectors, gives us opportunities to continue to create value-added investments for our CPA(R) investors and our shareholders alike.

One last piece of news that I wanted to end on before turning it over to John Park, our CFO, who will get into the details of the results, is the President recently signed legislation that is the new tax bill that contains a provision which makes it easier for mutual funds to invest in publicly traded partnerships. As we are organized as a limited liability company, for Federal tax purposes we're a partnership, and that -- that provision will go into effect as of 2005. We don't, frankly, know exact -- all the details haven't been ironed out, at least we don't understand all -- how all the details will affect us, but we do think that this is potentially a piece of interesting news for us and our shareholders. It should allow us to have a larger potential market of investors as historically mutual funds have been -- have had some restrictions on their amount of investments in Companies that have our corporate structure. There's more to follow on that. And if you want further information on that, please contact Curt Ritter. Again, not everything has been ironed out and it doesn't go into effect until 2005. But it is a piece of news we thought we'd share with you.

With that, I'll turn it over to John Park, our CFO, to go through the results in detail.

Thank you, Gordon.

Good morning everyone and thank you for joining us.

As Gordon mentioned earlier we had a very strong quarter and he highlighted the revenues generated from the CIP(R) liquidation. But aside from that transaction, we had a very strong quarter fueled by high investment volume on behalf of the managed affiliates. Obviously, those incentive fees and subordinated disposition fees provided significant revenues, but as Gordon mentioned, I think they highlight something we treasure, which is our track record, and they also illustrate the high quality service we provide to our CPA(R) investors and the value we add. And these will generate future fee revenues and increase the value of our franchise for the long run. As we have said many times, in strong quarters and not as strong quarters, our quarterly results do fluctuate and I think it's -- while it’s certainly pleasant to have quarters like this, we concentrate on building shareholder value over the long run, and we hope that our shareholders share our view.

Let me take you through the details of the first 3 quarters. Obviously, we had a big jump in revenues. Our management revenues increased by almost $20 million. This was driven by higher investment volume and increases in management fees. Gordon mentioned the incentive fees on the back end. And the net contribution to net income was approximately 21 million -- $21.6 million after taxes.

Rental revenues, which are a combination of rental income and interest income from direct financing leases, were approximately flat over last year. Our same property rental revenues increased about 1%, which is an improvement over the previous years. We expect this to go up, as the CIP(R) acquisition properties start to contribute rental revenues to the bottom line.

Other operating income increased slightly by 800,000. 2004 numbers include 2.1 million from Integra and 1.5 from Casper. And 2003 results include 2.2 million make whole(ph) payments from GAAP. The revenues from other business operations are not directly comparable year to year. For comparison purposes, the revenue of 4 million should be netted against the expense of 4.8 for a net loss of 800,000 compared to income of 766 last year. A major reason for this was reversal of previously recognized revenue associated with the LAUSD project.

On the expense side, G&A expenses increased by 4.7 million, mainly due to variable expenses related to the revenue generation. Impairment charges went up. They were $9.3 million. Of that, 6.5 million is recognized this quarter. The major contributor there was a $7.5 million write down on our hotel in Livonia. It was partly offset by $1 million we recognized from Peerless note. As you may recall, in the second quarter we wrote off the note receivable of 2.25 from Peerless due to deterioration of the financial condition. And I think at the time we said that, while we wrote it off, we'll do everything we can and vigorously pursue the (inaudible) of value and our efforts have paid off in this quarter.

Interest expense decreased as a result of lower balances. (technical difficulties due to microphone movement) But we expect this to increase in the coming quarters, because the -- again, the acquisition we made, the mortgages that we assumed, and the higher credit facility will lead to higher interest expense going forward.

Overall, our Company's fundamentals remain extremely solid. While we are concerned about the ultra competitive environment for the investments, we've been able to generate sufficient volume of investment opportunities on behalf of our CPAs. Over the last 12 months, our investment volume has been just over a billion dollars. And with the fund raising of 420 over the same period, we've been able to exceed our target ratio of 2 to 1.

In closing, I believe we're extremely well-positioned for the future, as Gordon mentioned, by funding a significant part of the CIP(R) acquisition from operating cash flow, and we're able to increase asset base without unduly increasing our credit facility balance which is only $95 million. So our balance sheet is still in great shape and we still have tremendous financial flexibility to take advantage of our opportunities.

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

Well I have very little to say, except I have enormous respect for the young officers who are really running this company. We have a President who is not 40 yet. We have a CFO who's just past 40, and we have -- we still have the old watch dogs, like George Stoddard, who has been with us as Chairman of our Investment Committee for many years; and Frank Carey, who's Vice Chairman; and myself. And we're watching, but it's a wonderful thing to see a group of talented, I think brilliant, young officers running this Company and taking it to the next dimension.

Thank you. We'd now like to open up the call for any questions that you may have.

If anyone does have a question, you can signal by pressing star 1 on your touchtone telephone at this time. If you're on a speaker phone, please make sure your mute function has been turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question.

We'll take our first question from Dave Aubuchon with AG Edwards.

Good morning, everyone.

Good morning, Dave.

Good morning, Dave.

Okay, where do I start?

The $142 million acquisition, can you, again, break down how you financed that between debt and the cash on hand and the assumed mortgage?

Sure. 28 million of that was through assumed mortgages.

Okay.

And we invested the net proceeds of the incentive fees net of taxes, and the rest of it was through the increased borrowing. So we went from approximately 35 million of credit facility outstanding to 95.

That's where you stand quarter-end?

It's as we stand today.

Okay. The yield on this acquisition is what and can you go through the process of how that was negotiated?

Sure. The simple cap rate for that portfolio was approximately 9%. And because it's an affiliated transaction, the purchase price was on an appraised value based on independent 3rd -party appraisal. And we feel comfortable purchasing that asset, and also facilitating the liquidation of our 11th fund.

Yeah, the one -- the one color I might give to that Dave, is there was some assumed debt, and that assumed debt has higher than market interest rates associated with it, as well as the properties have a shorter lease term because they are more mature properties from a lease term perspective. And so the cap rate we think, you know, fairly reflects both of those aspects.

Do you anticipate it to be a fairly stable yield?

Yes.

Yes.

All things considered? Okay. And this closed September 1st, or thereabouts?

It closed on September 1st.

Okay. And Gordon, you mentioned a little bit about the detail of the portfolio, but is there any particular lease or company that is driving a substantial amount of the revenue from that portfolio?

No. It's like all of our portfolios that we manage, it's a very diversified portfolio by tenant, as well as property type and location.

And industry, yeah.

Yeah. So it's very similar to, you know, the portfolio that we have.

Okay. Is it possible, Gordon, to describe a little bit more detail about the incentive fee that you received? You mentioned the annual returns to CIP(R) holders were about 11.2%.

Right.

Can you maybe go through a little bit more detail in how that $42 million was achieved, what type of threshold you had to cross?

No I would -- Dave, if I might have John answer the specifics, but the one thing that we should make very clear, that 11.2% is net of all fees.

Right.

So that's after our incentive fees. But John can describe the details of the structure.

Sure. The biggest component of the back end was our incentive fee and that incentive fee is basically 15% of the profits that we've generated on top of the investor's capital and minimal return.

And that minimal return hurdle was what?

In that case was 8%.

Okay. And then when you mentioned, when you talked about 22 million net in the release, that is just purely taking out taxes? There’s no kind of G&A that was kind of double booked in that number?

All the costs associated with the transaction was -- is booked into that -- is baked into that number.

Okay.

Impairment charges, is this, do they occur just kind of a general, normal review of your portfolio or are they occurring due to specific events like an asset sale?

You know, Dave, that's a very good question.

We've seen, every quarter we go through the portfolio, our head of Asset Management, Tom Zacharias, goes through and combs through where we stand along with his team. I would say one thing about these assets. When we did the consolidation in 1998, the assets were all written up to appraised value. So unlike a lot of public real estate companies, we had a writeup for book purposes of the assets. And so that means any time we see a deterioration, it's off of an appraised value rather than our old basis. So we do seem to -- I don't know relatively where we stand, but we do seem to have to have these impairment charges.

The large one for the quarter was on our Livonia hotel. It's a Holiday Inn in Livonia, Michigan. It's a well located hotel. That hotel market did not come bouncing back. We've been waiting for some pick-up. It's very tied, as you know, to the auto industry. And the -- it seems as though the travel budgets of auto-related companies have not come back. That hotel has not come back, so we thought it prudent to take an impairment charge. And I think our, you know, our attitude is to be as straightforward and as conservative with these as possible. And so we look at it every quarter.

And the impairment charge in the quarter was 7.5 million, correct?

7.5 and netted against that was $1 million recovery on the Peerless note, which we took a charge on in the second quarter.

Right. Okay. And so what would you guess the hotel was as a percentage of the impairment charge in the quarter?

More than 100%.

Oh, okay.

But I think that just to answer your question, I think we obviously look at this every quarter, but we do look at it on an event driven basis also. So it's just something that we monitor. And I'll also point out that, because this is accounting, we don't get to write up any assets that appreciate in value either. It's a 1 way street and somewhat skewed.

There's a little bit of an adverse selection process.

Right. Last question is: Gordon, you mentioned the environment's still pretty competitive for real estate assets. First, most of your acquisitions were in foreign countries. Do you believe that the competition is less over there, number 1? And then number 2, do you care to give expectations for acquisitions in Q4?

Well, I'll start with the last question. No, we don't have any expectations for Q4. We're very opportunity driven and I would say that -- and quarterly volume is by its nature lumpy. So we -- it's not something we can accurately anticipate.

In terms of our acquisitions, I think we have a -- the majority this year have been in the United States. We do have strong volume outside the United States. And I think that -- I think the U.S. is very competitive. Europe is very competitive. But in both places, we have a brand name and an approach that I think allows us opportunities that we find relatively attractive. And I think that in, you know, we have a terrific team executing in Europe. We have a terrific team executing the U.S. investments or North American investments, I should say. So the approach doesn't differ and quarter to quarter that mix is going to move around. I would stay away from making any blanket statements about relative attractiveness of investments.

So the ramp up in Europe is more to do with the strategic type of issues, I guess, versus pricing?

Well, I would say it's not so strategic as it is we've found, you know, some good opportunities, and that business is as lumpy as the U.S. business. The team has been doing a great job. We found some attractive investments. I think that -- you know, things can change so quickly that our focus is to be flexible and opportunistic and not try to bake in numbers from an investment standpoint, because -- you need to be very flexible, very opportunistic and work very hard at it, and hustle.

Great.

It's also fair to say that we -- this is Bill Carey -- that George has trained us to be highly diversified. So we see merit in having properties in different parts of the world and we see merits in having properties and Companies that tend to serve different industries in terms of kinds of properties. Everything is basically designed so that we are less likely to have a situation -- very unlikely to have a situation where we can't take good care of our investors who are largely -- we think we have a large percentage of retirees and other income oriented investors, so we want to protect them and do the best job we can.

Much appreciated. Great job. Thanks.

Thanks, Dave.

Once again, it is star 1at this time if you do have a question. We'll pause for just a moment.

And a final reminder press star 1 now if you do have a question. We have no further questions at this time.

If I might make just a final follow-up remark. For anyone interested in the legislation regarding publicly traded partnerships, the website you can get information from is www.PTPcoalition.org. And there should be as much information at least as we have on that site relating to how the new tax legislation will effect companies with a similar corporate structure as ours. Thank you very much.

Thank you everyone for joining us. If you do have any further questions always feel free to call our Investor Relations department at 1-800-WPCarey and we look forward to speaking with you again next quarter. Bye.

A sound byte digital replay will be available beginning today at 2PM Eastern time and will run through November 1st, 2004, by dialing 888-203-1112 domestically or 719-457-0820 internationally. The passcode you will need to access the conference is 814264. Thank you for joining and have a great day.