WP Carey Inc (WPC) 2005 Q2 法說會逐字稿

Thank you for standing by and welcome to the WP Carey & Company LLC Second Quarter Earnings Results Conference Call and webcast. Just as a reminder today's teleconference is being recorded. At this time, I would like to turn the conference over to WP Carey & Company's Director of Investor Relations Ms. Susan Hyde for opening remarks and introductions. Ms. Hyde, please go ahead.

Thank you. Good morning and welcome everyone to our Second Quarter 2005 Earnings Conference Call. Joining us today are WP Carey's Chairman Bill Cary, CEO Gordon DuGan, acting Chief Financial officer, Claude Fernandez and Chief Operating Officer, Tom Zacharias. Today's call is being simulcast on our website www.wpcarey.com and will be archived for 90 days. We will also have a replay available at 1 o'clock this afternoon. The phone number for the reply is 1-888-203-1112 with an access code of 5787456.

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 actual results to differ materially from WP Carey's expectations are listed in our SEC filings. Now I'd like to turn the call over to Gordon.

Good morning, everyone and thank you for joining us this morning. I thought I would start by giving an overview of the 3 and 6 month results. Claude Fernandez, our acting Chief Financial Officer will go into more detailed numbers on the numbers behind the numbers. Also, Tom Zacharias is here with us, our Chief Operating Officer, to answer questions and be able to have all 3 of us talk more in depth about any of the details that we want to talk about with you all.

First of all, for the 3 months as you saw in the press release net income was up 9%, earnings per share were up 7.5%. And this was as detailed largely due to the sale of a property resulting in an over $9 million gain. Revenues, income from continuing operations, FFO were down for the quarter versus the prior year's quarter as investment volume for the quarter was down. It was down roughly 40%.

Let me comment on that a little bit. Investment volume for the second quarter of this year was 262 million. That was a quarter that we were pleased with. It was coming off a comparable growth quarter though with Q2 of last year of 430 million, which included our largest single transaction, a $312 million lease back with U-Haul on 78 self-storage properties. We've often talked about the lumpiness of the investment side of the business. This is an example of it. And while the quarter was down, we were pleased with the $262 million of volume.

For the 6 months, net income and earnings per share were down due to basically 3 factors. More investment in CPA 16 Global. As we've described both in our filings and our prior calls, CPA 16 in essence, has a lower profit margin for us as we are not earning our full fee schedule as some of the fees are deferred until we meet our hurdle return. The hurdle return is a 6% hurdle on dividends. We are at 5.8%. I will talk about that later and what our expectation is there.

Secondly, as you saw other income was down significantly for the 6 month period. Other income is also by its nature quite lumpy, hard to predict, and it shows in these results. Thirdly, impairment charges which we will get into greater description of later.

At the same time for the six months revenues were up to 86.5 million from $83.7 million and this is due largely to 2 factors. One, assets under management have grown from 5 billion to 5.9 billion for the respective period, we're very pleased about that, and investment activity for the 6 month period increased from 494 million to 627 million. An important subset of that is that our international investment activity increased from 44 million for that period last year to 301 million for the 6 month period this year.

To comment on that for just a moment. I wouldn't want to draw too many conclusions from that. The investment business is inherently lumpy both in the US, and internationally and primarily we are investing in Europe, although we have seen our international and specifically European investment opportunities as a growing percentage of our overall investment mix. But again, it is hard to draw too many conclusions up from either one or two quarters.

I would also just like to talk a little bit about 2 transaction examples to give a flavor of the types of things, the investment opportunities we are finding. I've said repeatedly that we are in a very competitive environment. There's a great abundance of capital available in real estate finance and corporate finance in general. So we try to be very careful about finding investment opportunity in this type of environment.

One transaction example completed was with a company called Metacoat (ph), it was roughly a $40 million sale-leaseback. These were 7 mission critical facilities, 5 in the US, 1 in Canada, one in Mexico, it's a first investment in Mexico, an industrial facility on the outskirts of Monterey. Metacoat is a terrific company. They are a market leader and their business is they are an outsource industrial coatings provider for a wide variety of industrial applications in the US. They are owned by leading private equity firms so they are somewhat leveraged but again the leading competitor in their business, the market share leader in their business.

We bought the 7 mission critical facilities in what I describe as really a custom tailored 20 year sale leaseback given the complicated nature of 7 facilities in 3 countries. It was a complicated transaction our team worked very hard to put together and we feel it met the needs, well met the needs of the company while putting in place a 20-year income stream for our investors.

Another transaction example is with a company Helweig. Helweig was a 16-store sale-leaseback completed in Germany, roughly $150 million. Helweig competes in the do-it-yourself retail segment of retailing. They are a private company. They have a top market position in the North Rhine-Westphalia region in Germany, which is Germany's largest state. This was also a complicated transaction.

The DIY market in Germany is more fragmented than it is in the US, but they are the leading player in their market in the state in which they have their greatest presence. This was a transaction where we helped, complete a sale leaseback that gave them capital for investment in their existing stores, expansion of their business. We completed the 25-year sale leaseback for them. Again, a complicated transaction that we believe again put in place an attractive income stream for our investors.

Four last points, I want to hit on before Claude goes through in greater detail on the numbers. Number one, it may be on your mind, as you all know, we are still in the process of an SEC investigation. We cannot comment on that investigation at all. We are cooperating fully and for any greater detail we would ask anyone to look at our 10-Q and 10-K filings.

Secondly, the CPA 16 global deferred, the deferred fees that are subject to a hurdle, as I mentioned our current dividend rate is 5.8%. The hurdle rate is 6%. You will see in our 10-Q filings, we have disclosed the cumulative shortfall amount. It is a cumulative hurdle so it is not just getting to 6% that triggers the deferred fees. We have to be at 6% on a cumulative average for everybody. As described in our public filings, we expect currently to meet that in 2006. In 2006, obviously some things are outside of our control in that.

Thirdly, CPA 16 global, we have not been fund-raising actively since December of last year, and that is because of the competitive investment environment. On the one hand there is the fact that there's great demand for real estate investment. We have been out of the fund-raising market to keep that in balance. We're hopeful to commence fund-raising of part 2 this year and this fall subject to SEC filings, etc.

Lastly, in terms of the market overview, we continue to see a very competitive environment. We are pleased with the volume and the investments we have made for the first 6 months. Even in this competitive environment I think it speaks to we have a terrific market presence in the US as well as our ability to find attractive investment opportunities currently in Europe. But it is very competitive. We continue to say that.

I will be happy to say when we don't see as competitive an environment, but it continues to be very competitive. We are very resistant to getting into bidding wars, and our focus is to stay disciplined in terms of our investment opportunities. With all that, and given our experience for the first 6 months, we are cautiously optimistic about our investment opportunities going forward. With that, I will turn it over to our Acting Chief Financial Officer, Claude Fernandez, who will describe the results in greater detail.

Thank you, Gordon. As Gordon mentioned, our net income for the quarter ended June increased 9% largely as a result of a sale of a property. This is a sale that was made due to our assessment of a deterioration in the credit of the lessee. The properties were 3 older properties in the Midwest and in the East. The funds generated from the sale of approximately $29 million were applied to reduce our line of credit. So, whereas at the end of March we had approximately 100 million outstanding on our line of credit, by the end of June we had brought that down to 77 million.

Income from continuing operations for the quarter, as Gordon mentioned, decreased by 6.1 million. This was largely volume related. I will take you through some of the components of what we call the management income, management income from affiliates. There are several revenue streams in that category, and it is important for us to understand how each of those revenue streams are behaving.

The acquisition fee stream, which are basically fees assessed upon the investment of funds on behalf of the CPA REITs decreased from 16.4 million to 9.1 million, or a 7.3 million decrease. The reason for the decrease is primarily related to the decrease in volume. But there's also an effect due to the deferral of recognition of fees on acquisitions accomplished for CPA 16. That is, a portion of the acquisition fees for CPA 16 are subject to meeting the preferred return. This is the 6% cumulative return that Gordon mentioned. And for the quarter, our deferral of fees, non-recognition of fees, was $2.5 million.

This deferral of recognition of fees is an accumulating number because as we continue to complete more acquisitions, the accumulated fees, which cannot be recognized until we satisfy the preferred return, has increased to approximately 14.2 million as of the end of June. And, as Gordon mentioned, we cannot bring these fees into our income stream until we meet the requirement. And as we disclosed in our first quarter report, it is our expectation that the preferred return requirement for CPA 16 will be satisfied by the end of 2006. That's assuming that we continue with our investment program, and that our leases with CPA 16 continue to perform as expected.

In terms of where we stand on our preferred return requirement, the requirement is 6%. Our current measurement indicates that we are -- on a cumulative basis we've yielded over 5% to the shareholders since inception of the fund. But what we anticipate to make gradual and steady increases, progress toward meeting the 6% return.

Another fee stream that we have within the management income category are what we call management fees. These are asset-based fees, they are assessed as a percentage of assets under management. Management fees for the quarter increased from 11.3 million to 12.9 million or a 14% increase. This increase was driven primarily by the increase in the managed asset base for the CPA REITs.

On a quarter-to-quarter basis, that is comparing second quarter of '04 to the second quarter of '05, our assets under management increased from 5 billion to 5.9 billion, or approximately an 18% increase. The difference for the differential -- the reason for the differential between the 18 and the 14% is that we are deferring a portion of the asset management fees until we satisfy the preferred return requirement. Therefore, in total, as of June 30, the total non-recognized fees are approximately 16.2 million, and those will be recognized upon satisfaction of the preferred return.

Other income on a quarter-to-quarter basis decreased from 2.6 million to approximately 400,000. The reason for the decrease is that in the prior year's quarter we had received a bankruptcy distribution of 2.1 million relating to a former tenant. As Gordon mentioned, revenues in this category can be a bit lumpy.

With respect to our lease revenues, lease revenues being our rental income from operating leases and interest income from direct financing leases, we have experienced an increase quarter-to-quarter basis of 2.9 million or about 20%. This is primarily due to the acquisition of a portfolio properties from an affiliate in 2004.

With respect to expenses, expenses have been relatively stable. We had a slight decrease in general and administrative for the quarter and a slight increase, about 1% or so, for property expenses. But they did not have a measurable effect on results for the quarter.

Net income for the 6 month period, as Gordon mentioned, decreased by 3.8 million. This was primarily due to a reduction in other operating income of 3.5 million. Again, these are the revenues that come in on a rather lumpy basis. And we also had for the 6 month period an increase in impairment charges of 7.9 million. Now most of the impairment charges for 2005 relate to a single lease in which aware currently negotiating sale of the property, pursuant to a purchase option exercised by the tenant.

With respect to our international investments, we have had a significant increase in contributions to revenues from international acquisitions. For the quarter ended June 30, 63% of our investment volume came from international acquisitions as opposed to 7% in the second quarter of 2004. On a 6 month basis we are at -- international acquisitions were about 48% of our total acquisitions again, as compared to 9% for the 6 month period in 2004.

I will touch upon FFO briefly. FFO declined by $0.22 a share for the 6 month period. The decline is primarily due to clearly a decline in acquisition fees as a result of the reduction in investment volume, and also due to a decrease in the other income category, which we touched upon before. This was -- these declines were partially offset by the increase in the management income, that is the asset-based fees that we experienced during the 6 month period.

Our balance sheet continues to be strong. As I said, we have brought down our balance outstanding on our line of credit to about 77 million. Our cost of our line of credit again continues to be quite reasonable at approximately 4.6%, it's a LIBOR based interest rate. And overall, our investment trends have been quite favorable. Just making a comparison, from 2003 we closed 725 million of transactions, 2004 we closed approximately 900 million of transactions. And for 2005 for the 6 months we have closed 627 million of transactions. That, again, keeps us on track to accomplish the investment volume that we originally anticipated for 2005.That concludes my report.

This is Tom Zacharias. I will comment briefly on the portfolio of properties in the public company. As you know, there are about 17.7 million square feet comprising 176 properties. As Claude mentioned, the earnings power of this portfolio is strong and has been increasing as we have reduced the vacancy now to 3.2%. That means that we have about 560,000 square feet vacant and currently we are working on transactions for about half of that, which would result in either some additional asset sales as well as additional leasing.

The main activity of the quarter has been related to the sale of the (inaudible) properties which resulted in a gain and then write-down on 2 properties that we are in the process of selling. And one of them is a hotel in Livonia, Michigan where we've entered into a new contract at a slightly lower price that results in a $330,000 write-down. We expect that, while it is still in due diligence, we expect that to close before the end of the year.

The other item, which has been mentioned, before relates to the Gibson Greeting 2 facility transaction where, as a result of having third-party appraisals done in this quarter, we have taken an additional write-down. For the quarter, however, because of the gain of 9.1 million and the combined write-off of 6.1 million we are still in a gain position as it relates to income from discontinued operations. I would like to turn the call over to Bill Cary.

Thank you very much Tom. I am very pleased with the results in this competitive environment. Also, I would like to point out one thing that we rarely do talk about and that is the relative lack of recourse debt that we have in our company and in our REIT affiliates. We have, as mentioned, our bank debt went down to 77 million, which for a company with a market cap of 1 billion approximately, or a little over, is almost nothing and very unusual for financially oriented firms.

Also, the REITs have almost no recourse debt. I don't know what the exact number is but if we have any, it is nominal compared to the net worth of those enterprises. So, we have a huge borrowing reserve, a huge ability it grow whenever we see appropriate opportunities. With that I -- ?

Sure. I think now we would like to conclude our portion of the call and open it up to questions and answers period.

Thank you very much.

[Operator Instructions].

The first call is from Michael Beall with Davenport.

Good morning I've got a couple or so maybe I will just do 2 of them and come back. My first question is I know the revenues tend to be lumpy depending on disposition and acquisition activity. As I recall, the expenses would be sort of lumpy, too, because of that. But, for instance, in the second quarter the revenues dropped 7 (audio gap) for reasons you described and the expenses stayed the same at 100,000. Is that normal?

In this case, yes, it is. We have not only -- depending on what causes the drop in revenue, in this case we were able to exercise -- we had very good results with respect to our property expenses, which again we had a slight increase because of work that we have been doing on some underperforming properties. But we have had very good control, basically, on our expenses. And the decline in investment volume for the quarter really did not affect us significantly.

It did Mike. There is a variable component to the expenses, which did fall in the quarter as one would expect. There were other operating expenses that were significantly higher that impacted us for the 3 months and 6 months that ameliorated what would have been the drop in the variable expenses. And a large part of that were legal expenses.

That makes a lot of sense. The yield curve, flat. Is that good or bad for us.

That is a good question. My take on it has been that -- and I have been probably criticized for being too pessimistic for saying how competitive the environment is because we continue to find opportunities. But I think part of the reason we are seeing some of the opportunities is that the flat yield curve puts companies in a position where long-term financing is more attractive relative to bank financing.

And when LIBOR was at 1, one of the most often heard objections to the sale-leaseback was I'm paying 2.5% on my line of credit. Why would I want to do a sale-leaseback? So I think the flattened yield curve is good from that standpoint and I think a low long-term interest rate is also good for us. So, in general, there are pros and cons to everything, but those are the aspects I like about the flat yield curve.

You talked about the competitive environment and there is a lot of capital everywhere so that all makes sense. How do you determine whether you are doing a good deal or not? Is there a spread? I know there is a lot of variables, in these things, that are assumed residual and everything. But-- and I believe that you are, you know, being very disciplined in looking for where you can have an add value or where you have got a niche. But is there some minimum spread threshold that you seek?

We do look at spreads, IR spreads versus Treasuries. And the prism by which we are trying to judge the situation is a risk-return prism. So, we break the risk components down to the real estate risks, the credit risk, and the structure risks, and then analyze those components relative to the returns. I would say that we are still pleased with the returns we are able to achieve relative to Treasuries. They are quite good and that debate rages on in the REIT world about cap rates versus long-term Treasury rates and people use them to justify some of the prices they are paying.

So, while we look at it through a risk-return prism, we also try to be involved in situations where one of the first questions we ask ourselves is why are we involved? And if it's we've received a book and 37 other people have received a book and we are all bidding on the same thing, we tend to shy away from those situations. So, we like complicated situations, we like situations where timing is important, and given the competitive nature, I'm always cautious about the environment, but I think we are still able to find opportunities that are attractive.

I have 2 other questions. Would you like me to come back?

No, please keep going, Mike

Hopefully, they'll be of general interest. CPA 16, how much cash do you have in there, how much dry powder do you have? And then can you explain once you hit that threshold return, we have this backlog of 16 million in deferred fees. Does that happen, boom, all of a sudden? Does that ratably show up? How does that happen?

We manage our cash available for investment based upon commitments or highly likely deals. We have less than 120 million that isn't committed or highly likely to be committed. So, and that is out of a $550 million raise. So we have done a good job of getting the money to work. We have had to stop fund-raising for the last 7 months, as I mentioned, to get there. But we have done that.

In terms of the recognition of the fees, Claude, correct this if this is wrong, but they do all come in at the point the hurdle was reached, the cumulative amount of the fees is recognized. Claude, maybe you could describe that?

Sure. We are not able to bring those fees in ratably. It is no longer -- for this type of situation that is no longer Generally Accepted Accounting Principle. So, that when we satisfy the conditions for those fees to be legally due, we would accrue them all in one period.

Now, one thing to keep in mind is that these fees would be received in the form of stock of CPA 16. That stock would be brought in and would basically be structured as restricted stock so that it would vest over a period of time and we wouldn't get the tax liability. You wouldn't have to pay the taxes basically all in one period. You can spread that out. But as far as the recognition of the actual income for financial reporting purposes, that would all come in one period.

Claude brings up a very good point. We really think we have the right structure for our fund management, which is we take a significant portion of our income in shares. It is not only, we believe, the right alignment of interests but the investments that I'm describing are investments made on behalf of those funds, but we end up being large shareholders in those funds. So we care deeply about the success of those investments and hope for success of those investments. So, that you see in our cash flow statement the amount of deferred fees that we take in shares is a growing percentage, it is a significant amount, and one that we are very happy with, not only from an alignment standpoint but also from an investment standpoint.

That all makes sense. But the bottom line is this is another lumpy thing on the way?

Another lumpy thing.

Last question for me for now -- and your LLC structure has advantages and disadvantages but does preclude institutional ownership and maybe that's a good thing. But I'm amazed at how much you pay in taxes or accrue and that continues to be the case this year. Do you still think we are at the most efficient structure for our businesses?

Mike, that's great question and I think that the -- your concern is shared by all of us and very much so by our chairman. We are having the tax structure reviewed, and we are very focused on the fact that as the business has grown the tax liability has grown, and are actively reviewing additional or different tax structures. And nothing more to say about that other than it is also an intense focus of ours as well.

Thank you very much.

Thank you Mike.

[Operator Instructions].

Ms. Hyde, it appears there are no further questions. I will turn the conference back to you for the final closing remarks.

Great, thank you very much. I would like to thank everyone for joining us this morning and we would also like to remind you that Gordon will be presenting at the Wall Street Transcript Investing in the REIT Industry Conference on August 23rd, at the Harvard Club in New York at 11:20 a.m. And we will have a web cast of that presentation available on our website. So thank you, thanks for joining us this morning ,and we look forward to speaking with you again next quarter.

Thank you all very much.

Thank you.

Thank you. That does concludes today's teleconference. Thank you all for your participation. At this time you may all disconnect.