WP Carey Inc (WPC) 2004 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] Thank you all for standing by and welcome to the W.P. Carey & Co. LLC fourth quarter earnings release conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to W.P. Carey & Company’s Director of Investor Relations, Miss Susan Hyde for opening remarks and introductions.

Miss Hyde, please go ahead.

Thank you, Cindy.

Good morning and welcome everyone to our fourth quarter and full year 2004 earnings conference call. Joining us today are our 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 beginning at 1:00 p.m. this afternoon. The telephone number for the replay is 1-888-203-1112 with an access code of 4564892.

Before I turn the call over to Gordon, I need to inform you that statements made in this earnings call that are not historic facts 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 would like to turn this call over to Gordon.

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

I thought I would give a brief overview of how we see the marketplace in general today. I will turn it over to John to walk through the numbers in detail. We will follow that with Bill’s comments and then Q&A so you all can ask some questions.

As you saw from our press release, we are very pleased with the results for 2004. The investment pace for the year was strong. We closed $890 million of new investments. As we have mentioned in the past, that investment pace does tend to be lumpy, and the fourth quarter was an example of that where we closed $55 million, which was down from the pace the year earlier. The flipside of that lumpiness is Q1 of ’05 is off to a strong start, and I thought I would just touch on 2 of our announced deals as an indication of the type of activity that is occurring.

The first is a sale lease back with a company called HMS Healthcare. This is a $19 million sale lease back on their corporate headquarters’ building outside of Detroit, and this is a transaction that is closed and announced. The thing I wanted to highlight here is the comments that we got from the private equity firm that owns HMS Healthcare, and I will just read it to you. This was in a press release that we already released.

Mark King, Founder and Managing Director for private equity fund KRG Capital Partners said, “W.P. Carey was an excellent partner during the entire sales process, and we could not be happier with the outcome of the transaction. W.P. Carey distinguished themselves by crafting a structure that maximized the value of the real estate asset without compromising our important business needs. Moreover, during the due diligence and closing process, W.P. Carey remained committed to working through complex issues that ultimately resulted in a win/win transaction for both parties.”

The second announced deal that I wanted to just touch on is $110 million sale leased back we completed in Finland with a company called [Poiula], which I am probably slightly mispronouncing and to stay away from completely mispronouncing the present CEO’s name of Poiula, I will just read his quote. He stated, “We had several both domestic and foreign parties interested in acquiring this property. We chose W.P. Carey because the company has extensive experience in real estate investing, and we are pleased with the results.” That was $110 million sale lease back of their corporate headquarters.

Both of these I highlight because they are examples of our working with our corporate clients to structure transactions that meet their needs and are innovative, highly-structured transactions. But at the same time, the result of this work-- that we create investment. That is, to own property, in this case 2 corporate headquarters’ buildings, on long-term leases with companies that we have thoroughly underwritten. That investment is a very attractive investment-- owning the real estate with the long-term lease is an attractive investment type to income-oriented investors.

Today, the popularity of income-oriented investments in general and the popularity of our programs in particular has created a situation where we have temporarily suspended fundraising in our most recent offering, CPA16-Global, as we have disclosed previously. We suspended fundraising in January. We have not reopened it, as we want to manage the fundraising pace and investment pace to make sure they are aligned as well as they can be, and we are having -- as I mentioned with these 2 transactions, we are off to a good start to do that.

While 2005 is off to a good start, we remain cautious about the marketplace. In general, there is too much money chasing opportunity in the real estate markets and the real estate finance markets. Additionally, credit spreads are at relatively low levels, indicating that investors are willing to get paid less for a given amount of risk. These are all factors that cause us to remain cautious.

To combat this environment, we are committed to remaining disciplined in our investment process, and we are completely focused on situations where the investment --where the deterring factors are determining factors of the investment -- our certainty, structure, and reputation and not price-- and those are the investment opportunities that we are seeking today.

With that overview, I will turn it over to John Park for his comments on the numbers.

Thank you, Gordon. Good morning everyone and thank you for joining us.

We had a relatively weak quarter. Traditionally, 4th quarter has been a strong quarter for investment activities as companies seek to complete sale lease back transactions prior to year end. But, as Gordon said before, our quarterly results do fluctuate. However, on an annualized basis, our investment and fundraising activities have been fairly consistent over the last few years, as we have steadily increased assets under management.

The full-year results were extremely strong. They were fueled by higher investment volume, as Gordon mentioned, and liquidation of CIP(R) 11th fund. With the completion of the transaction, we have liquidated 11 of the 15 funds successfully (indiscernible). We believe that the best way to build long-term value is to deliver high-quality service that meet or exceed our investors expectation. Such execution will maintain and advance our track record and allow us to generate incremental management revenues in the future.

Let me take you through the details. On the revenue side, our management revenues decreased slightly for the quarter, for reasons we have already mentioned, but increased by $18 million for the full year. That increase was, again, driven by higher investment volume and increases in management fees. We recognized $42 million in back end incentive fees from CIP. The net contribution to net income was approximately $22 million.

Rental revenues, which is the sum of rental income and interest income from financed leases, increased by $2.5 million for the quarter and $3.3 million for the year. The main reason for the increase was the contribution from assets we acquired from CIP. Prior to 2004, we had done a net sell over (indiscernible) those sales over the last couple of years as we pruned our portfolio, and we have replenished our asset base with the purchase. We will continue to actively manage our portfolio into the future.

Another contributing factor to the rental revenues was that our same property rental revenues were up almost 2% for 2004, again, a positive trend.

Our other operating income increased slightly by $600,000. Our 2004 number includes $2.1 million from Integra and $1.5 million of proceeds from Casper and 2003 results of $2.2 million of Makol payment from GAAP.

Revenues from other business operations are not directly comparable. The revenues of 5.7 in 2004 should be netted against the expenses of 6.3 for a net loss of 600,000 compared to income of 1.3 million last year. The main reason for the decrease is a reversal of previously recognized revenues associated with the LAUSD project which amounts to $1.7 million.

On the expense side, G&A expenses increased by 7.3 million. Out of this increase, 3.4 million was reimbursed expenses we incurred on behalf of our affiliates. The rest of the increase was primarily due to variable expenses related to the business volume.

Impairment charges were $6.6 million for the quarter and $22 million for the year. The biggest component of this was a charge we took on our hotel in Nagonia (ph)(indiscernible) for approximately $7.5 million. Another significant write-down was on our property in Ohio, [Foracia] property, for $4.7 million. That property was sold in the 3rd quarter.

Interest expense increased by $600,000 for the quarter, and it was relatively flat for the year. This, again, reflects the higher balances on our credit facility, as well as mortgages we have assumed in the purchase of CIP assets.

I also think that it is fair to assume that the short-term interest rate will continue to climb and result in higher interest costs on our line. Let me briefly touch on the impact of the higher interest rate on our company. Obviously, higher short-term interest rate increases are interest costs related to our credit facility, but our balance on our line is approximately $100 million. That represents a small slice of our overall capital structure, and it should not have a meaningful impact on our bottom line. On the other hand, higher short-term interest rate, subsequent flattening of the yield curve, does make a credit environment in which more companies will consider an extra (indiscernible) of their transactions and equity (indiscernible)

And lastly, I will mention that higher interest rates generally accompany higher inflation, which could lead to higher rental revenues and most of our leases have CPI (indiscernible).

Lastly, on the expense side, taxes increased by $8 million for the quarter, and 43% for the year. I’m afraid this is the price we have to pay for having an extraordinary year like we did in 2004. Much of the increase was related to the incentive (indiscernible) fees and acquisition(indiscernible) fee from the CIP transaction.

As Gordon said earlier, we continue to be cautious about the future and competitive environment for investment. So far, we have been able to generate sufficient volume of the investment opportunity. Over the last 12 months, our investment volume has been just over $1 billion, and our fundraising has been just under $500 million. We have been able to maintain our target ratio 2 to 1. As Gordon mentioned, we have been able to achieve this partly by suspending fundraising, with CPA 16 since the year end. We believe that this is the prudent course to take for the shareholders of both CPA 16 and W.P. Carey.

In closing, I believe we are well positioned to tackle the challenges in 2005. 2004 was an extraordinary year, and we will be hard pressed to repeat it, but we remain focused on creating value for the long term and extending our franchise. Even after the acquisition of CIP assets, our balance sheet is in great shape, with only $100 million of any (indiscernible) debt, and we have financial flexibility to take advantage of opportunities as we go forward.

I will turn it over to Bill Carey for his concluding remarks.

Thank you John and Gordon. I have always mentioned-- I think I may have mentioned before that the basic strength of this enterprise is the key to our success is a group of brilliant loyal, mostly young officers with enthusiasm and hard-working, moderated by some older types with memories of less brilliant times. By having these people around, we have seen everything that can go wrong and it has been a wonderful influence on our overall performance. And, we expect to keep going at it, to keep cautious, but also to keep building. This is a growing enterprise, and it is going – it has grown pretty consistently over the years into a much, much bigger company. We started this very, very small office on Wall Street with 3 people and now we have millions of dollars under management, and we expect that to grow over the years and to the benefit of the shareholders.

We thank you for being our shareholders and for having confidence in us, and anytime you have any questions, feel free to call us and find out what is going on. Thank you.

That ends our presentation, and now we would like to open up to any questions that any of you have.

[OPERATOR INSTRUCTIONS] We will take our first question from [Tom Gainer] of [Marsell].

I was wondering if you could elaborate a little bit on the impairment charge. It is my understanding that you assumed some economic depreciation in the buildings when you structured the deals at the front end. So, fairly, if you have to have an impairment, something changed relative to your initial assumptions. Could you just walk me through that process a little bit and what changed and the current state of the market for what prospectively we can expect on that front?

Sure. We evaluate all of our assets on a 4-day basis for possible impairments, and obviously, I should preface my remarks by saying that in accounting there is only one way that there are no assets that we can write-up. We only write-down assets. Whenever there is new information regarding the facility of properties, we will try to reflect that in our GAAP financials. So, it is very difficult to predict what the future trends are going to be, but we have been applying a consistent process quarter-over-quarter.

To elaborate on 2 of the write-downs, that are reflective I think of the general environment. Our property in [Lovonia] is a Holiday Inn property. It is very well located at the intersection in Lovonia, right off the highway. But the property had deteriorating operating results and in our analysis of the assets, the impairment charge was appropriate.

Another property that John mentioned is an industrial property that was in Toledo, Ohio, that we sold. And, what we found generally speaking is industrial properties have been impacted by some of the flight out of the United States of manufacturing capacity, and so to the extent possible, we have been doing this for some time. We have been trying to prune the portfolio of some of the properties that we believe are obsolete or have seen there better days. In the quarter, we found a buyer, sold it, and the property value was less than had been estimated before. I think largely because I think some of the older industrial properties have been impacted by a flight of manufacturing capacity out of the United States and less demand for that type of property.

I understand the economics, and I clearly agree with the actions and the importance of being conservative. I also understand that you write-down things - you can never write them up. I understand that, but can you talk about your process for how much real depreciation you assumed because it is in my memory and understanding that you factor some of that in at the front end? So, I guess I am trying to figure out, are you going to prospectively change your methodology or what is that happens that has surprised you on these 2 in particular that caused your front-end estimates not to be enough?

All our assets are depreciated generally over 40 years, and that’s something that has not changed and will not change going forward. However, some of our leases are classified as financing leases are not depreciated. So, the depreciation is not based on our estimates but rather based on GAAP principles. And as I mentioned before those properties who are classified as financing leases are not depreciated again based on GAAP.

Thank you and now we will move on to Mike Beall of Davenport.

Good morning. Looking at the taxes it just seems like we’ve paid a lot this year. I assume that’s because a lot of gains when – on that winding up that one partnership were done in the taxable subsidiary. I guess if I take the $53 million tax prevision and assume a 35% rate that, it gives you a 145 million in taxable income, so I assume that REIT side sort of actually for this year would have shown a loss and the management side a huge gain.

We’re—all of – almost all of our management activities are conducted through our sequence (ph) subsidiary. Which is obviously taxable and for the LLC we did not generate our taxable loss because the impairment charges are not tax deductible. So we had a highly profitable year on our management side and as a consequence we paid high taxes. Another contributing factor is that the fees that we elect to take in the shares of [TPA] they vest over a 5 years time table and as we increase our ownership in those affiliates and as those shares vest they result in significant taxes as well.

One sets up an LLC like this to reduce your taxes.

That’s right, Mike. But, this year was 43%, but it just seemed anyway…

Well no, the two other avenues as John mentioned, Mike you have to – you can’t – you don’t get a charge for the impairments against taxable income. You have to add those back, plus we have New York City and state, local state taxation as well on a good portion of that income. So, the effective taxed rate is – has to be looked at with those two variables considered.

Mike I think you make an excellent point that – we are structured the way we are to minimize taxes and we’ve done, we are -- by allocating all our real estate rental income to the LLC we avoid subjecting those revenues to double layers of taxation. It’s only the management revenues that are subject to the taxes, corporate level taxes.

Your differed taxes were about 10 million, so you still paid a lot of cash taxes. Early on when you made the comment about the incentive and subordinated disposition fees being 42 million. You followed up and you said net 22 million or said 22 million. What was that 22 million? This is very early in your comments.

Yes, that was the net after all the taxes associated with those fees.

That’s just the net income contributions.

Net income contributions.

Okay.

(indiscernible) to (indiscernible) the taxes and that’s the net number.

And some direct expenses.

That’s correct.

All right and last thing not to beat this impairment thing which seems to make some of us uncomfortable a little bit. Can you just describe the process again? I think you did it at another conference call but briefly how you compute this impairment charge and it is something – it’s obviously a task you do it. Is there a discount factor or is it an undiscounted some of the rents relative to the carrying value? Can you just sort of quickly go through that and I guess with the end of it being are a lot of these when you do it close to being impaired anyway?

There are a lot of questions that are embedded in your long question, let me try to answer it the best way I can. I think that there are a couple different treatments based on whether the asset is classified as a financing lease or operating lease.

In the case of financing leases we take an estimate of residuals at the end of the lease on an annual basis. So that process happens in the 4th quarter of each year. We rely on market data either through third parties or our own asset management team to estimate that residual and we take a charge if appropriate in the 4th quarter.

In the case of operating leases, we look at that on an annual quarterly basis and typically these charges that are triggered by some event. It could be related to a decision that we decide to dispose of the property and as part of the marketing process, we find out what the market price is worth, and then we take an immediate write down based on the new information.

So really, what we try to do is get the best data possible and evaluate them on a quarterly basis and hopefully we are – we hope that we are taking a conservative approach.

That lastly, is there is discount rate? In other words if interest rates go up will that tend to increase the likelihood of impairment charges or is that not how it works?

No, not really. It’s really more market kind of conditions.

[OPERATOR INSTRUCTIONS] At this time it appears we have no further questions at this time.

Okay, thank you very much. Before we sign off I just wanted to let you know that Gordon will be presenting at the NYU REIT Center 10th Annual Symposium on March 17th and also at the New York Societies Security Analysts REIT Conference on April 12th. For additional details and web cast information on these and other up coming events, please visit the events section of our website. Thank you very much for joining us today and we look forward to speaking with you again next quarter.

That will conclude our conference. I would like to let you all know that a digital replay will be available beginning today at 2:00 PM EST and will run from March 7th 2005 by dialing 888-203-1112 domestically or 719-457-0820 internationally. The password you will need to access the conference is 4565892, once again it is 4565892. We thank you all for your participation and have a great day.