WP Carey Inc (WPC) 2005 Q3 法說會逐字稿

Thank you for standing by and welcome to the W.P. Carey & Company LLC Third Quarter Earnings Release Conference Call and Web cast. 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, Susan Hyde. Please go ahead, Ms. Hyde.

Thank you. Good morning and welcome, everyone, to our third quarter 2005 earnings conference call. Joining us today are Chairman Bill Carey, CEO Gordon Dugan, Acting Chief Financial Officer, Claude Fernandez and Chief Operating Officer Tom Zacharias. Today's call is being simulcast on our Web site, W.P.Carey.com, and will be archived for 90 days.

Before I turn the call over to our CEO, 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. As you saw from our press release this morning, we have released our third quarter results. Those results, as we mentioned are - the first challenge is they're difficult to compare to last year's period due to the roughly $53 million of revenue related to the CIP/CPA 15 merger, and so both the three-month and nine month figures are affected by that and it makes the comparisons a little bit difficult.

But let us walk you through the results for the third quarter. I'll give some high-level discussion in terms of the events in the third quarter. Tom Zacharias, our Chief Operating Officer, will walk you through a portfolio report for the properties, and Claude Fernandez will give some more detail on the numbers as you see them in the press release.

The good news about the revenues we received last year from the Carey Institutional Properties merger is along with a credit facility we took those revenues and reinvested them into property and what you'll see in our income statement is that real estate income is up roughly $2 million for the three months and roughly $8 million for the nine months, and that is partially or largely affected by the fact that we reinvested that money into real estate.

In terms of investment volume, as we describe in the release for the three months ended September 30th of '05, we completed roughly $153 million in investments versus $335 in '04. That is obviously down. I would say that as you will recall we describe the fact that that business is lumpy quarter-to-quarter and it was down for the three-month period versus the three-month period last year.

For the nine-month period we completed roughly $780 million of new investments. That also is down but down from $823 million. We continue to think the best way to look at investment volume is over a more smooth period than a quarterly period. Nine months or 12 months is a somewhat better way of looking at it although the three-month period does reflect what the activity for that period.

In terms of the international mix, as you saw in the release for the third quarter of '05, $125 million were international investments. That number is down in the aggregate from '04 of $201 million but is higher as a percentage.

For the nine-month period our international investments are roughly $426 million. That is up from $254 million, and so that number is not only in the aggregate but as a percentage of the investments.

For the fourth quarter -- we feel we have a reasonably good pipeline for the fourth quarter. It's usually a busy time for investment activity. Although, as you know, until those transactions are closed we can not count on any of them, but we are pleased with our pipeline through the fourth quarter.

I have said in the past on this call and will continue to say we continue to see a very competitive environment for net lease property. That competitive environment has not abated. We are trying to remained disciplined in that competitive environment. We are also trying to find situations where we can compete on speed of execution, reputation for completing transactions quickly and on terms and those types of situations.

I would point again for the fact that for the nine-month period our volume was $780 million versus last year, 823, and that is, again, in the face of a - of a competitive environment.

On the positive side assets under management have grown from $5.2 million as of this time last year to $6.0 - I'm sorry, $5.2 billion, excuse me, to $6 billion roughly as of this time, and that is a healthy signal for the business.

We also described in the press release the fee deferrals for CPA 16-Global. A large portion of our fees are deferred subject to meeting a hurdle return. Our revenue was impacted due to that. We currently have a total deferral of roughly $19 million that has been deferred to date for CPA 16-Global. That is subject to the 6% cumulative return that we described. The current distribution for CPA 16-Global is 6%, but we have not met the cumulative aspect of that deferral and that will take us some time to meet the cumulative aspect.

One interesting aspect of the environments we see today is the flattening of the yield curve. Short-term rates have gone up much more than long-term rates. Long-term rates have -- 10-year is up somewhat but the short-term interest rates have been going up steadily, and we've taken advantage of this situation to approach our portfolio and our balance and our - the liability side of our balance sheet and move some of our floating rate debt to fixed rate debt.

Tom Zacharias will describe a little bit more detail what we've accomplished on that front, but we think it's an excellent time to take again the liability side of our balance sheet and move from floating rate debt to fixed rate debt and again, it's described in the press release, and Tom will give a little bit more description of that.

Before I turn it over to Tom, I've hit on the highlights of the quarter. From where we stand we're happy that we have a strong balance sheet. We continue to remain disciplined in our investment approach in what's a very competitive environment and everyone here is dedicated to continuing to do that in a competitive environment and do our best for our investors. With that, I'll turn it over to Tom Zacharias who will describe in a little bit more detail the results from the portfolio.

Thank you very much, Gordon. I have a brief portfolio report that I'd like to run through. Real estate revenue from the portfolio was up, as Gordon mentioned, for the third quarter but on a net income basis by 2.5% and for the first nine months, up 14.7%. This reflects additional properties from CIP that were acquired September 1, 2004. The portfolio currently consists of 173 properties and in total is approximately 17.7 million square feet.

As far as leasing activity we currently have approximately 600,000 square feet that are vacant which is about 3.3% of the portfolio. We have been successful over the last year in reducing the vacancy to that number.

For 2005 we have completed renewals on all the space - nearly all the space that was coming up, and in 2006 we have a total of 17 leases that are coming up or expiring and we have to address nearly all of this in either early renewal or, in a few cases, possible asset sales. So in 2006, just that - that number is about 900,000 square feet that we have renewed or there's one or two assets we will sell.

As far as additional disposition activity we are constantly working on the assets and upgrading the portfolio and the LLC. We have two properties that are currently vacant that are under contract for sale. They expect to close next year. They are expected to net approximately $10.8 million and also eliminate the negative carrying costs. That would be a very positive event when both those transactions close.

As Gordon mentioned, on the financing front we have completed to date $45.9 million in property level mortgage financing for an average term of 9.2 years at a weighted average interest rate of 5.13%. We were able to lock the rates right after Labor Day, right after the 10-year treasury went down related to uncertainty related to the economy around Katrina, and that long-term money corresponds to our short-term floating rate line of credit now which is 5.07%.

So what we have effectively done is switch from floating on the line of credit to mortgage-level debt at very attractive rates. There is an additional mortgage of $10.75 million that is expected to close in mid-November. Now I would like to turn it over to Claude Fernandez for the detailed financial results.

Thank you, Tom. I'd like to -- as Gordon mentioned, we had a significant drop-off in revenues of about $53 million due to the closing of a merger transaction between two of our affiliates in 2004. That merger generated just over $53 million of transaction revenues. Those revenues were earned in a taxable subsidiary of our company that cannot be recognized in the parent company because that type of revenues does not allow the parent company to qualify for its taxable/non-taxable status.

So looking at the income earned in the taxable subsidiaries we had some offset for expenses and the largest expense was clearly the tax bill that had to be paid for that income. Our effective tax rate in that subsidiary is approximately 44%. But you can see not all of that revenue dropped down to the bottom line because of -- primarily because of the taxes that had to be paid on it.

With respect to our -- what I'd like to do now is go through our revenue items and just describe in a little bit more detail the factors that cause variation. With respect to our structuring fees which are the -- tend to have a high degree of variability as you can see we've had a decrease from $23.3 million in the third quarter of 2004 to $4.9 million in the third quarter of 2005. The $23.3 million included approximately $11.5 million of revenue related to the merger between CIP and CPA 15.

Taking those aside we had recognized $11.8 million of structuring fees in 2004 based on transactions completed with third parties on behalf of the CPA REITs. This compares to $4.9 million of structuring fees realized in the third quarter of 2005, and as Gordon mentioned the primary reason for the drop off here is a reduction in acquisition volume between 2004 and 2005. Volume reduction of 54% had a significant impact on this revenue for the quarter.

However, if we look at the nine month comparison we'll see that the volume comparisons were much more in line -- that is volume for the nine month period decreased from $839 million to $780 million, roughly a 7% decrease. So that tends to put the operations - or the variability of these transactional fees from quarter to quarter in more perspective.

International acquisitions continue to be a significant portion of our business -- 82% of our third quarter volume was concentrated in international acquisitions versus 60% in the third quarter of 2004.

I'd like to chart our asset management income which is growing -- as certain components that are growing and is not quite evident from the results of the financial statements but is the asset management line of income we have two revenue streams. One is an asset management fee which is basically a 1% fee assessed on the asset base we manage on behalf of our CPA REITs. Half of this fee 50 basis points is collected currently and half of this fee is deferred and collection is subject to achievement of certain performance targets. In the case of CPA 16, it's achievement of a 6% cumulative return.

For the three months of 2005, our asset management fees were $13.4 million. For the three months ended September of 2004, Putshaw(ph) asset management fees were 11.9 million or an increase of 1.5 million. The reason this increase is not -- is not showing through in the overall results in that the other component of revenues for this category, which are basically reimbursements for the, if you want to call it the personnel of the company, decreased primarily because we have been out of the capital raising markets for most of this year.

Those revenues in 2004 were approximately $2 million, yet again because we were out of the capital raising market, we did not receive any reimbursements for 2005, so that the increase in the asset management fees was more than offset by the reduction in the reimbursement revenues.

This is a little more evident in the nine-month comparison, where the management fee income was 38.9 million versus 33.9 million in the nine months of 2004. This $4.9 million increase or roughly 14% is indicative of a healthy growth in our asset management business. Again, this increase was masked by the fact that reimbursement income was reduced approximately $5 million.

With respect to our trends, Gordon touched briefly upon the deferral of fees of 19.5 million. What I would like to add is that - there are two components to those deferred fees. There's the $16.1 million component that relates to cumulative deferred acquisition fees and these fees will be once CPA 16 achieves its preferred return, will be -- can be collected in cash over a period of three years, with interest - that's back - interest bearing at 5%. The remaining 3.4 million represents to asset management performance fees and those will be collected in the four months shares of CPA 16, vesting over a period of five years.

With respect to rental income, we've had an increase in this three-month period comparison of 2 million and over the nine-month comparison period of 7.6 million. The bulk of this increase is due to the properties acquired from CIP in 2004. As you may recall, as part of the, prior to the merger transaction, the company acquired $142 million worth of real estate - net leased properties from CIP. It was a slight variability on other operating income, which increased for the quarter by about 1.2 million and this was due to the receipt of some bankruptcy proceeds from a prior tenant.

The drop off in other operating income for the nine-month period again, is due to the collection of approximately $3 million of bankruptcy proceeds in 2004. This revenue stream is variable and is related to the periodic settlement with our tenants.

I'd like to turn to our expenses at this point and as we can see, general administrative expenses decreased on a quarter-to-quarter comparison by approximately $3.2 million. The reason for the decrease is primarily variable expenses related to acquisitions activity and also to capital raising actives.

We also had a drop off in our amortization expense in the quarter-to-quarter comparison. And this is primarily due to the termination of the CIP contract in 2004 when it merged with CPI 15 in that merger. We had originally acquired these series of advisory contracts when we acquired the management pipe to the CPA REIT and upon the consummation of the merger the contract was no longer - was terminated.

Property expenses increased a bit primarily due to increased carrying costs on certain properties. And interest expense also increased, primarily as a result of additional borrowings that were undertaken, partially to finance the acquisition of properties from CIP in 2004 and partially from the increase in interest rate during the last year. That concludes my report.

I'd just like to add my thanks to our investors for your continued support. We've been going through some interesting and challenging times and I believe we're ready to cope with them. We have some very brilliant investment officers and some very brilliant investment committee members who've run about $1 trillion worth of investments elsewhere. And we've - they're basically focusing on the opportunities that are available today and we believe we'll take advantage of them to the greatest opportunity for our investors.

Thanks Bill. As we turn it over to questions and comments, I just want to remind everybody that the company is subject to an ongoing SEC investigation and that touches, as you realize, we cannot comment or comment any way on any questions relating to that. So let's turn it over and get to comments - to questions from all of you.

Thank you Mr. Ritter. (Operator Instructions). And our first question comes from Dave Appachon(ph) with AG Edwards.

Thank you, good morning.

Hey Dave, good morning.

Claude, appreciate the additional detail on the deferral, the fee deferrals. Just want to make clear though, whether it's on the cash side or on the share side the 16.1 million or the 3.4 million from a GAAP perspective once you cross that 6% cumulative return it hits the income statement and then you would just amortize over the respective periods?

This is Claude, that's right Dave. The way it would work for financial reporting purposes is once that preferred return is achieved the entire amount of the deferral would be put on the books in one period. And then the collection would just ensue, but it was all paid in one quarter.

Okay, and then interest expense, Claude, can you give what your total debt outstanding was at the end of the quarter?

At the end of the quarter, primarily with respect to the, on the line of credit we had 78 million outstanding. We've currently, as a result of some refinancings that were touched upon before, we've brought that down currently to about $44 million.

Okay. And then any - can you remind me what the mortgage balance is, if any?

The mortgage balances were substantially unchanged from the, from the prior period. The refinancings that occurred, occurred in October -

Okay.

June 30 to September 30, mortgage balance probably decreased a little bit because of scheduled amortization.

That's right.

And, and then the refinancing - the financings we described should push the mortgage balances up.

Okay, and then could you give maybe your overall cost of, your weighted average cost to debt right now then? Including everything that you've done subsequent to the quarter end?

Dave, I think we're going to have to get back to you. After quarter end we don't have the 45 million in new finances. But I gave you the rate of that.

Okay.

On, I think the average rate on the line of credit, Dave, is 5.07. And -- but I don't, I don't have it - at least not at my fingertips the average cost to debt on the existing mortgages plus the new mortgages.

Okay, that's fine. Gordon, you've, I guess elaborated numerous times before, I guess, in a rising interest rate environment, it hopefully makes your ability to execute your business model a little easier. Have you seen any indication relative to recent transactions that would give you more encouragement going forward relative to your ability to acquire additional properties?

Well, I think Dave, as you've heard, and I think I mentioned last time, I'm accused of being pessimistic about the market, and yet we are still able to find transactions and attractive investment opportunities, even in a very competitive environment.

I've not seen the competitive environment abate yet. And, I've - we think a potential positive trend is this flattening of the yield curve, where companies see that their long-term financing costs are similar to their short term financing costs. But we, we remain in a competitive environment. So at any time I think there are trends pushing us in either way and we've not yet seen a let up in the competitive environment.

And again, the - more of your investments are - more and more at least, according to the latest stats have been coming from the international side. Do you view the -- you mentioned the fourth quarter looks to be -- have a reasonably good pipeline, is that mix going to change in your - from what you see now?

Well the pipeline is a mix of international and domestic. I think that we - we have had a good number of attractive international opportunities and the fourth quarter pipeline to mix, from our - we're opportunistic in our investing so its always hard to say exactly where the deals are going to be and how they're going to materialize, and frankly if they're going to materialize, which is one reason we don't give guidance in terms of, in terms of volume because it's just not, it's too hard to do. But it continues to be a mix.

Any change in the pace of acquisitions when you're speaking and negotiating with these companies, any change in the pace, I guess over the last couple of quarters, relative to business, relative to the business and economic climate and/or the interest rate movements.

There was an interesting piece Bear Stern had on corporate real estate and the pick up in sale lease back volume and I think we've seen an increased pace of sale lease back volume. Our key is finding the investment opportunities that we like within that general pick up. And we have seen a pick up in sale lease back volume over the last few years and - but we're trying to stay disciplined to the investments we like.

And in regards to that, typically what you said in the past is the mix of what you actually see, your opportunities versus what actually gets to the investment committee tends to be a very low percentage. Has that ratio still stayed around the same number?

Still, yes, it's still a low -- it's a low amount that we're able to find, meet our risk return criteria relative to the volume we see.

Okay, and my last question is, how much - how much cash do you have at this point in time waiting to be invested?

I don't have that statistic up. We have an internal cash available for investment run but I don't think that's a public number.

Okay, thank you.

(Operator Instructions). And we'll move to our next question with Jonathan Simon, JP Morgan.

Good morning.

Good morning Jonathan.

I was going to ask mainly about the environment but I think David's questions and your answers addressed most of it, I guess maybe from an anecdotal stand point in the United States, I know its incredibly lumpy, but this is a very slow quarter for closings for you in the United States and I'd be interested to know if you can give us any anecdotal evidence of what sort of competitive - what your competitive are accepting in terms of cap rates versus what you might accept. Have you -- have you lost a lot of deals recently through competitive bidding whereby the, they're prepared to go into a much lower yield than you would.

I think there's - it's a combination of factors. They're - I would say that we've seen competitors willing to accept either lower yields or willing to accept other terms such as escalations or lease terms that are outside of our requirements from a risk return standpoint. We try to look at everything from a risk return standpoint and either people are - have a lower expectation of risk than we do or a higher expectation of return because we can't make a lot of the investments work at some of what's being underwritten. I wouldn't say all of it, obviously. We from time to time lose opportunities that we probably wish we hadn't lost but we have seen a good number of things that are being priced, we think too aggressively.

So the bottom line is that there's still plenty of activity out there.

There's still plenty of activity out there. And for those who haven't seen that there's a good piece Bear Sterns put out --

Okay.

-- on just general corporate real estate trends.

Okay, a couple of other things. I think as Claude just brushed over the increase in property expenses, the small increase is actually a triple from 800,000 to $2.5 million in property expenses, I wondered if that's a recurring number or whether you had to invest the money to get the occupancy up in your properties or whether we should assume that $2.5 million quarterly run rate as being a sort of good number going forward.

I - this is Claude, I would not assume that that entire amount would be part of the quarterly run rate. One of the, again, one of the things that we're not seeing here is that part of the expenses that are being charged off through that category are also reimbursed in what we call pass through income. So not all of the increase in expenses is hitting the bottom line. We also - during the period we had - well, we had an increase in property expenses, what we call the pass through income for the two quarters also increased, which basically offset the, the bottom line effect of the property expenses.

So what you're saying is those property expenses aren't just the properties that are on your balance sheet, that they include some past reason - invest properties that are in the partnerships.

No, they're properties that are on our balance sheet, but when we incur certain - for certain leases, we incur the charges, pay them and then -

Oh, okay.

-- collect the - when we collect from the tenant we take that collection through our revenue line.

Okay. And then finally, just a question on the dividend cover. I'm curious as to how you look at that. It seems like you're now getting to a point, and I applaud your break down of revenues where, I look at your revenues and I see the rental income and the interest being come from direct financing leases and the asset management fees as being sort of income we like. Seems to be there quarter after quarter. Do you feel that the profits and cash flow from those revenue streams can more than cover the dividend as it stands at the moment?

Well, we feel - we feel comfortable with our dividend payout right now. I would say that - one of - if you look at our cash flow statement we're taking a significant number, a significant amount of our keys and shares of the entities for the nine month period. I think it's roughly $23 million and - that is - another way of looking at that is that's really a capital transaction in that we're investing in the shares of our affiliates. But we're comfortable with our dividends. We do have this increasing number of fee saving shares and that effects the cash flow statement. But again, we're comfortable with our dividend figure.

Okay. Thank you very much.

And we'll move to Mike Deal(ph) with Davenport and Company.

Good morning. Could you tell me how much money you have left to invest in CPA 16, I guess, which is the current most active fund and when do you anticipate re-opening that?

Mike, this is Gordon DuGan, good morning. We - as I mentioned earlier, I think we're in the process of filing the Q. We keep a - so that isn't a public number so I don't have that to give right now. I would say that, as we've mentioned in the past we want to match our fundraising with investment opportunity and we are in the process of having CPA 16 Part 2 ready to raise capital and are going through that process. But we have capital less to invest so we're not -- we're in a position where we still have capital in 16 left to invest and don't need 16 Part 2 open yet. I don't know that we have a projection as to when that'll reopen at this point.

On the deferral of fees is it -- is the lag time we're seeing here between the time we're doing the transactions and opening the fund until we're able to recognize and begin receiving the deferral of fees. Is it taking longer than normal to realize those?

Gordon DuGan I wouldn't say that it was normal to this, because with 16, because the -- because cash yields were so low, we made a conscious decision to keep the dividend rate at a blend below what we were earning on real estate and have created this and have therefore this fee deferral issue. But, I wouldn't say that it is taking us longer than -- or I wouldn't say that -- I can't relate it to anything that has occurred before because we haven't had this specific issue before. What I can tell you is we're doing are best to invest the money in a disciplined fashion and at the same time we're moderating our fundraising, so that we don't raise too much money so as to make the returns for the fund go down.

Is the deferral of funds more a function of the fees more a function of the cash you had on hand or the current interest rate environment? And the 6% is that what we normally use?

I believe it is the hurdle for the last several funds, Claude?

Yes and then we've had higher hurdle than different interest rate environments in the past. But, in the current environment we have been using 6% as an appropriate hurdle rate and we did, just to touch up on this, we in prior programs we raised capital in a much more gradual manner with what we have experienced recently as the capital raising markets were - - basically we're very generous. And we had a substantial flow of capital into CPA 16 in a rather short period of time. And what we are trying to do is reach a better balance between the cash off hand and the cash invested and do that in a very steady manner.

One -- sorry, guys we have a fire truck or something going by. For those who have been to our office, you'll know we are on the second floor of Rockefeller Center and so we occasionally have some noisy outside environment. But the cash situation, Mike, I would say has gotten better. As you know, returns on cash have gone up substantially due to increases in short-term interest rates. And so that is -- the cash we have on hand is earning substantially more today than it was 1.5 years ago before that started.

Well, forgive me for just asking this, the 6% threshold, is that a cash return, is that a total -- total return, does it require an appraisal be made before you can really book it and just -- I'm looking at the return on the Dow Jones real estate I shares of the current yield on those is 4.15 which is well below 6, so --

Yes, the 6% is the cash distribution return.

Yes. So that's really a pretty high threshold in today's environment.

I would say it's higher today than it has been that is true and that is one of the reasons we have not been actively fundraising, is that it's a competitive environment to get money invested and we need to be disciplined about that.

Last thing, thank you. Tom was going over the re-leasing, refinancing activities in the real estate (inaudible). I guess the net of all that is is all of the things being equal, we would hope that the net income from our ownership at WP Carey of real estate should be rising. Was that sort of the message of all that?

Mike, it's Tom Zacharias. Yes, we're rising -- currently because of leasing and because of the additional CIP properties. There will be some harvesting of assets and sale of some assets, so it's not going to continually be rising, because we are going to be electing to sell certain assets over time.

Okay, thank you all.

Thanks, Mike.

And our next question comes from Charles Glennon (ph) with UBS.

Excuse me. Given the fact that you're talking about acquisitions overseas, have you given any thought to hedging your currency risk?

Good morning, Charles, this is Gordon DuGan. Yes we have and our approach has been that we're able to find attractive financing over -- in our overseas investments. And so what we do to hedge is the - let's take a Euro denominated asset in France or Germany. The asset will be in Euros, the rent will be in Euros. We'll then borrow our liability -- our mortgage borrowings will be also in Euros, therefore we're matching our liability and our asset in the same currency. The debt service will be due in Euros, our average borrowings are roughly 75% and so we're -- by extrapolation we're roughly 75% hedged on the purchase of the asset. The equity is not hedged in that case, but the asset itself we're largely hedged.

Thank you.

[Operator Instructions] And we'll move to Jason Stankowski with Clayton Capital.

Hi guys. I was just curious, I know you can't comment on the SEC investigation, but it just seems like it has been a real long process with them on a - - from an outsider seems like a fairly simple issue. Is it something you guys envision getting handled in a year, in six months, in a couple of years - what's the normal time line for these type of things.

Jason, we really just can't comment on it at all. So I can't say anything about it.

Okay, and with regard to your risk/reward allocation. Do you evaluate purchasing WP Carey shares themselves from time to time?

Yes, Jason, I think the answer to that is we do. We have in the past had a share repurchase program and do from time to time evaluate the potential for share repurchase. But we have not announced any at this point, nor recommended anything.

Okay, great. Thanks guys.

Thanks Jason.

And Mr. Ritter there appears to be no other questions at this time. I'd like to turn the conference back over to you for an additional or closing remarks.

Thank you very much, everyone, for joining us today. A replay of the call will be available after 1:00 at 1-888-203-1112. We thank you again for joining us and we look forward to speaking with you again next quarter. Thanks.

And this concludes today's conference. We thank you for your participation and you may disconnect now.