WP Carey Inc (WPC) 2005 Q4 法說會逐字稿

Good day, and welcome to the W. P. Carey & Company, LLC fourth quarter and year end earnings 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 W. P. Carey & Company's Director of Investor Relations, Ms. Susan Hyde. Please go ahead.

Thank you. Good morning, and welcome, everyone, to our fourth quarter and year end 2005 earnings conference call.

Joining us today are W. P. Carey's Chairman, Bill Carey; CEO, Gordon DuGan; acting Chief Financial Officer, Mark DeCesaris; 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 1:00 this afternoon. The phone number for the replay is 1-888-203-1112 with an access code of 3018944. Before I turn the call over to Gordon, 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 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.

I thought I'd start by just highlighting how we're going to go through the call this morning. I'm going touch on a couple of highlights, turn it over to Mark DeCesaris who will go through the financial figures in detail, then Tom Zacharias is going to talk about our portfolio activity, and then I wanted to drawback to some of the business drivers - key business drivers for us and how we see those today. Bill Carey will hopefully give us some of his thoughts, and then we'd like to turn it over to Q&A for the group.

Let me start with a couple of highlights. As you saw on our press release, our revenues for the fourth quarter were $41.9 million. That's up from $36.9 million in 2004. Net income was $11.4 million, up from $4.1 million in 2004. FFO was $24.2 million, up from the prior year of $20.7 million. For the year, revenues were $74 million as opposed to $222 million. Net income was $48 million as opposed to $65 million in 2004. And FFO was $98.6 million as opposed to $135.1 million. Mark's going to walk through in detail a breakdown of these figures as well as the drivers of the variances, both on a quarterly and annual basis, and so we'll - we'll come to that in a moment. Secondly, the investment volume in the fourth quarter of last year was $86.8 million versus $55.2 million in the prior year. Those are both below our typical quarterly figures. As - as you all know, our acquisition or investment volume is lumpy, as we call it, or variable; but both for - for the fourth quarter of 2004 and for 2005, the numbers were - were - were lower than we typically see in a quarter, and I'm going to come back and touch on that and - and why we see that, and - and what - what the - what the environment is like today.

With that, let me turn it over the Mark to dig into the figures, and walk everybody through both the financial results and the variances.

Thanks, Gordon, and good morning, everyone.

As we discuss our results today, and we'll discuss them for both the fourth quarter and year-to-date, as we have mentioned in previous calls our results tend to fluctuate on a quarter-by-quarter basis and may not be comparable. So as we discuss the results, we really focus on the year-over-year variances and what goes into the makeup of those variance as well. In addition as I discuss the results for the calendar year ended December 31st, 2005, we'll focus on two events - the impact of the deferral of revenues as they relate to achieving the hurdle of CPA:16 - Global, and the decision to receive a portion of our fees in shares of the CPA REITs. We believe that these events impact our current financial results from a timing perspective, but add long-term value to our franchise. Revenues for the fourth quarter were approximately $41.9 million as compared with $36.9 million in the fourth quarter of 2004; and $174.1 million for the year ended December 31st, 2005 as compared with $222.2 million for the year ended 2004. Please remember that included in the 2004 numbers are approximately $53.6 million of revenue related to the successful liquidation of the CIP fund.

Asset management revenues for 2005 were approximately $62.3 million, as compared with $61.2 million in 2004. For a net increase of $1.1 million. But as you look at that variance, we actually have to - to look at primarily three components that went into that. Revenue growth due to new investments approximated $11.3 million. This increase was offset by two factors. A decline in the asset management revenue stream of approximately $4.8 million due to the purchase of properties by the Company from CIP prior to its merger. In addition, historically, when we are in fund-raising mode, we absorb - we pay costs for the issuer and are then reimbursed for those costs. The reimbursement of those costs are included as revenue in asset management. As you know, the public offering for CPA:16 - Global was terminated early in the year; and as a result of that, we recognized approximately $5.4 million less in marketing costs in the revenue component of asset management revenues. Also not included in the above-amounts for 2005 are approximately $3.7 million in performance revenues which have been deferred as a result of not achieving the cumulative cash distribution hurdle for CPA:16 - Global. To date, including 2005, total performance revenues deferred are $4.5 million.

Total structuring revenues for 2005 were $28.2 million, this compares with $45.2 million in 2004, or a variance of $17 million. Of this difference, approximately $11.5 million related to revenues earned on the liquidation of CIP. The remaining $5.5 million was mainly attributable due to lower acquisition volume in 2005 of $865 million versus $890 million in 2004, and a higher percentage mix of acquisitions placed in CPA:16 - Global of 68% in 2005 versus 44% in 2004. Not included in the above revenue for 2005 is approximately $10.3 million as it relates to not meeting the cumulative return hurdle for CPA:16 - Global. To date, including 2005 the recognition of approximately $17.7 million of restructuring revenues have been deferred until the hurdle is met.

Let me discuss the hurdle as it relates to CPA:16 - Global for just a minute. A portion of both the performance revenues and the structuring revenues are subordinated to achieving a cumulative cash distribution return on CPA:16 - Global. We have historically had this type of deferral arrangements in the funds we manage for the CPA REIT. The hurdle for CPA:16 - Global is 6%. We are currently paying a 6.25% distribution rate, and at December 31st, 2005, the cumulative return is 4 - 5.42%. To date, we have deferred approximately $23.1 million of revenue, which will be recognized upon achieving the hurdle.

Rental income for the year ended 2005 increased $7.6 million to $52.4 million. Approximately $7.1 million of this increase was related to the asset - assets purchased by the Company from CIP prior to its merger. Approximately $1.5 million was earned in increased rents with existing tenants, while another $1.2 million was earned from rents - increased rents with new tenants. These increases were offset by approximately $1.5 million in rent reductions as they relate to lease expirations. Operating expenses for the fourth quarter of 2005 were $28.7 million as compared with $23.7 million in 2004. For the year ended 2005, total operating expenses were $104.8 million, as compared with $96.7 million for the year ended December 31, 2004. G&A costs increased by approximately $4.3 million for the current year. Increases in costs of approximately $8 million that would not be considered a permanent component of our cost structure were offset by a reduction in the marketing compensation that we paid on behalf of the issuer as a result of the termination of the offering for CPA16 - Global. This amounted to approximately $4.1 million.

In 2005, we sold approximately $45.4 million of real estate at a gain of $10.5 million. In addition, we recorded approximately $21.8 million of impairment charges, of which $14.7 [sic] pertained to one property. Interest expense for the year ended 2005 increased by approximately $2.3 million to $16.8 million. Approximately $2.1 million of this increase was due to a higher average outstanding balance on our line of credit in 2005 versus 2004. And an increase in the average interest rate of approximately 1.8% in 2005. In addition, $1.2 million of increased interest expense was related to the properties acquired from CIP. These increases were offset by a decrease in interest expense of $1 million as a result of paying off mortgages and making mortgage payments.

Net income for the current quarter was $11.5 million, as compared with net income of $4.1 million for the fourth quarter of 2004. And $48.6 million for the year ended December 31st, 2005, as compared with $65.8 million for the year ended 2004. Diluted earnings per share totaled $0.30 for the fourth quarter. And $1 25 year-to-date versus $0.10 for the fourth quarter of 2004 and $1.69 per share for the year ended December 31st, 2004. FFO for the fourth quarter was $24.2 million or approximately $0.63 on a diluted per share basis. This compares with $20.7 million for the fourth quarter of 2004 or $0.53 per share on a diluted per share basis. For the year ended December 31st, 2005, FFO was $98.6 million or $2.53 on a diluted per share basis, as compared with $135.1 million in 2004, or $3.47 on a diluted per share basis.

Our balance sheet remains very strong at December 31st, 2005. The outstanding balance on the Company's $175 million credit facility was $15 million at a floating rate of interest of 4.98% at December 31st, 2005. Our total [limited recourse] debt totaled $231.1 million with a weighted average interest rate of approximately 6.35%. Total debt outstanding represents less than 33% of the net real estate assets shown on the Company's balance sheet as of December 31st, 2005. In addition, the Company took advantage of the opportunity provided by the flattening of the yield curve to refinance approximately $66.4 million in floating rate debt to limited recourse fixed rate debt with a rate of 5.1%. At December 31st, 2005, we have effectively fixed 75% of our total debt.

Lastly, I would like to discuss our cash flow from operations. First, our cash flow from operations decreased in 2005 by approximately $46.1 million to $52.7 million. This decrease was caused by three factors. In 2004, the CIP merger generated approximately $27 million of net income. In addition, payment of revenues that we elected to receive in shares of stock from the CPA REITs totaled $31.9 million in 2005, an increase of $11 million over 2004. And finally, we paid approximately $6 million of our 2004 tax liability out of 2005 operating cash flows. Our dividends paid in 2005 were $67 million, or $1.79 on a diluted per share basis. This compares with dividends paid in 2004 of $65 million or $1.76 on a diluted per share basis. We evaluate dividend coverage on both an adjusted cash flow and an FFO basis and feel we have adequate dividend coverages in 2005.

With that, I'd like to turn it back to Gordon.

Thanks, Mark. Tom Zacharias, our Chief Operating Officer, also heads up or asset management team, is going to walk through the portfolio activity for W. P. Carey.

Thank you, Gordon.

I would now like to provide an overview of the highlights of the 2005 asset management activity in the LLC portfolio. The 172 properties in the LLC portfolio are performing well. Our lease revenue in the portfolio grew by 11.3% in 2005 due in part to the full year of operations from additional properties acquired in September of 2004. Occupancy is now up to approximately 95% with approximately $17 million square feet of primarily net lease industrial, office, warehouse, and retail properties. This is an increase in occupancy from approximately 89% from the end of 2004. In 2005, vacancy was reduced by over $1.5 million square feet through leasing and asset sales of vacant buildings. In this portfolio, approximately 25% of the annualized contractual lease revenue will be expiring in the next 3 years. We have contacted most of the tenants with leasing expiring this period to discuss or confirm renewals, and we have made good progress in negotiating these renewals. As Mark DeCesaris mentioned earlier, a total of 9 properties were sold in this portfolio in 2005 for approximately $45.4 million, representing a GAAP gain of $10.5 million. This selective selling of assets and redevelopment of assets is part of our ongoing effort to upgrade the quality of this portfolio. The sales proceeds have been used to pay down the line of credit that funded the acquisition of $142 million of new properties in 2004. We believe that attractive mortgage refinancing opportunities exist in this portfolio, especially as some of the larger tenants exercise their renewal terms. The refinancing of six properties in 2005 at a fixed rate of 5.1% for an average term of 9 years was very attractive, and we are working on more possible refinancing. Finally, as referenced in the press release, the asset management of the CPA series of funds continues to grow. At year end 2005, the funds under management were valued at approximately $6.5 billion, which represents an 18% increase over the year end 2004. We remain very focused on creating value for all our investors.

I would now like to turn the call back to Gordon DuGan, our Chief Executive Officer.

Thanks, Tom.

As both Tom and Mark outlined, there are a number of positive drivers to our business that we've been managing, among those are rent growth, secondly, maximizing the portfolio value. Tom described a number of both sales as well as lease renewals that we're very actively focused on in terms of driving the business. Lastly, our management of our interest rate exposure by fixing interest rates in a flat yield curve, while fairly straightforward, is an important part of our business in terms of driving both earnings but also the risk of the business.

The piece I'd like to spend a little bit of time on is the primary driver of our business and our assets under management growth that Tom outlined. And that is the investment perspective as we see it today. Despite a particularly competitive environment, we are - we remain able to find attractive investment opportunities, and I think it's because we have a differentiated and disciplined investment process. And let me just highlight how I break that down. First of all in the United States, we think we have a terrific market presence and brand reputation that allows us to see a lot of investment opportunities that other people don't. And that's a brand name that we've built up over many, many years; and we think we're able to see attractive investment opportunities based upon having that kind of market presence and being focused on a variety of different market types and industries and seeking the best risk return as we see them in those industries. Secondly, the driver for our investment growth has been our international investments. As I've said in past calls, the sale lease back or net lease business we believe is the most transferable discipline in the real estate finance arena, in large measure because credit and structuring techniques are the - equally important or more important than real estate fundamentals in structuring a lot of our investment opportunities. So we - we find that the international expansion that we've done has been a - a complementary part of our business, and I should remind our investors that we have been investing in Europe since 1998, so this is not a new - this is not a new arena for us. And we have a London office with origination professionals in London seeking investment opportunities. As part of our - our international investment, last year was the first year our international investments were over 50% of our overall investments, and those included investments in eight different countries. Interestingly, we closed our first investment last year in Canada, and we closed our first investment last year in Mexico. And - and also interestingly, both of these investment opportunities came about through relationships that originated in the United States with existing relationships with - that existed here where the companies had international properties that we were able to negotiate the sales lease-back of, based again on our relationship in the United States.

Couple of interesting statistics on our investment - our investments last year. Our average lease term in the United States upon investment was 19.7 years, and our average lease term on our international investments for 2005 was 18.3 years. Our average debt term was 14.7 years - or I should say debt duration, and our average international debt duration was 12.1 years. So we're able to find not only long-term investment - attractive long-term investment opportunities, we're putting in place long-term financing to match that and not taking debt duration risk as part of our investment approach. And I should also say that the investments I'm talking about are investments made on behalf of our managed funds and that is the driver, again, of our assets under management.

Another area is additional investment opportunities. As we've mentioned, we originated over a $50 million mortgage loan that we kept a B note on, which has been an attractive investment for us; and we also originated a number of investment opportunities with our existing properties - or existing tenants, that were essentially expansions of existing properties. We like these types of investments, because, again, they're a proprietary deal flow, and we closed on four expansion investments, totaling $20 million last year. This, again, is an indication of the active management of our portfolio to find attractive investment opportunities.

I mentioned earlier Q4 of 2005 and Q4 of 2004 were not terribly strong in terms of investment volume, and what - what I think we're finding is - and it may just be a coincidence - that both in 2004 and 2005 a number of investments that we expected to close by year end ended up being pushed into the first quarter of the following year. In 2005 we had a very strong first quarter and today our pipeline is very strong on the investment side, and we've already closed, as has been publicly announced, a $52 million build-to-suit investment that has already close for this quarter. Again, overall we think we have a differentiated and disciplined investment process that is a very - is, I think, one of - our most important asset in what is a very competitive environment. And you've heard me say in the past that it's - that it is a very competitive environment both in the U.S. and Europe, and - and we find that it is, but with our differentiated investment process, we think - or approach, we think we're able to find attractive investment opportunities for our investors.

Two final points as we start 2006. We have a strong balance sheet, as Mark outlined. We have low leverage and we have not a great exposure to rising interest rates, and so as we go into this year, we're - we're thankful that we have a strong balance sheet as we go forward. And then lastly, before I turn it over to Bill, I hope everybody saw on our press release the - the comment that we made about our distribution history. In totaling up our distributions made by our CPA funds and W. P. Carey over the years, we found that we've paid over $1.9 billion in cash distributions to our investors since the beginning of CPA 1979. We plan to exceed $2 billion in cash distributions in April, and I think that's just a terrific number and - and one that we're very proud of. And we are, all of us - all 125 employees, are dedicated to continuing this proud tradition of providing our investors with attractive risk-adjusted returns.

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

Thank you very much, Gordon.

I have been very pleased with the conduct of our management - our young management and the prospects for the future of the firm. I tend to look at it more as - as an investment management firm, and so I tend to be more concerned, almost, with the performance of our managed funds than in - in the advisory itself. Because the advisory will do well in the long run if the managed funds do well. This is reflected in the incentive fees we [inaudible] at time of disposition. We wouldn't get those incentive fees and those subordinated disposition fees unless we did very well for our investors. We've done very well for every one of the funds up to now, and it's my hope and expectation to continue to do well for those funds, and that will also be reflected [in the incentive fees] continuing to come to the [advisor.]

Thanks very much.

Thank you, Bill. We're going to turn it over to Q&A now. Just to remind everybody, as we've said in the past, the Company remains under SEC investigation. We cannot comment on that at all, but with that let's turn it over to Q&A.

[OPERATOR INSTRUCTIONS]. [Phil Wilhelm], Stark Investments.

Hi, good afternoon, gentlemen. I have a question for you. How much - I mean, do you have any expectations as to how much money you are going to put to work for your funds in 2006? And what the breakdown would be between what - that amount Europe versus U.S.?

Bill, this is Gordon again. That's - that's a great question. We - we have our own internal guidelines or projections that we make, but it's a very important point that we don't - we aren't able to predict because we look at everything through a risk/return prism, and so we'll only - we won't know until l- as- until we go through the year, because we just don't know what investments we're going to find acceptable. It is very competitive. We find people doing - making investments on terms that we would not make them, and so we - and that's the disciplined part, I hope, of - of our investment process. So we - we don't - we don't have a feeling for the mix because it's - it's an opportunistic investment strategy and we just - we run everything through our risk/return analysis, and hopefully find the best investments we can by doing so, but it also doesn't allows to know where the mix is going to come from, but I can tell you that we have a lot of hard-working investment people looking for investments both in North America and throughout Europe.

In general, do you think you're going to see an increased emphasis on investments aboard because that - there's just more opportunity there? Or is that trend not necessarily going to continue?

It's - again, I learned long ago not to predict, but I - I would say the - if you look at 2005, it is interesting that the majority of our investment opportunity was outside the United States, and we can't - we can't predict where it'll come from in the future, but that - that is where it has been over the last 12 months.

Okay. My next question relates to the deferred performance fee. Do you expect to realize those - the deferred performance fee from 2005 at some point in 2006?

We - we are- we feel we'll receive those somewhere - we'll achieve that hurdle somewhere in the first half of 2007 at this point.

In 2007. Okay. Okay. That's - that's all. Thank you.

Thanks, Phil.

[OPERATOR INSTRUCTIONS]. Mike Beall, Davenport.

Good morning.

Good morning, Mike.

Sort of a general question. I mean, it's a competitive environment. You've indicated that for a couple of quarters or longer, how about the idea that maybe you should be selling more assets, both for yourself and - don't we have a - a fund that is approaching its liquidation or end of life and - and would you be looking to maybe have a year of a lot of dispositions as opposed to acquisitions?

Yes. Mike, hi. It's Tom Zacharias. How are you?

Fine.

It's an excellent question, and we have a strategy as it relates to exactly your question. And we expect to implement the strategy over the year. We meet quarterly and review exactly where our portfolios are and what make senses to - to sell, what makes sense to - to hold, and we were - we are working on - on various things. And I think your - your observation is a good one; that people are paying a lot more for some assets that we bought and we think that people maybe are going to value them more than what - what we think they are. So we are looking at some interesting situations right now.

And I would say, Mike, that I think in our public disclosure for CPA:12 we had mentioned that we're evaluating alternatives for CPA:12.

Right. And that's sort of the next one up to be considered for that sort of activity, I presume.

That's correct. That's next in the sequence.

And - and while we're talking about that, again, we had a pretty substantial number of writedowns and impairment charges, a little over $20 million. Again, I know we had a gain. I guess I'm sort of amazed to see that continue even in the fourth quarter given how robust the markets are. Can you comment at all as to - again, as to why this occurs and anything that you might be able to say that would help us think about whether it will continue to occur?

Mike, it's Tom Zacharias again. In that number of - of $22 million, one particular transaction which we've talked about before, the [Gibson greeting] represented the bulk of that. The other ones are kind of a conservative approach to asset values when there's a significant event, and the next biggest one was a - a Wal-Mart store that isn't going to be - at the end of their lease, is not going to be able to be released for retail, and so that's a - I think Mark it was 3-point -

About $2.7 million.

$2.7 million impairment. That was the next biggest one. The rest are sort of smaller things, and it happens. I mean, we have a situation where tenants exercise purchase options. We think we've got the - we're carrying it at what that purchase option might be, and you don't know exactly until they exercise and you go through what the formula provides for it.

The only other thing I'd say, Mike, it's not a net number it's - those are the - we take the impairments as we go and we have actually have to sell a property to realize the gains, and we - so, it's - but we share - we share your point of view on that.

Right. And presumably there are unrealized gains - unrealized that we don't see, so. We just see the bad ones and not the good ones at least in the short run.

That was what my comment related to as far as the net gain of $10.5 million on $45 million of assets sold.

The - two other things, and then I'll let somebody else go. We had, I think, thought before that the - and I know it's dependent on a number of factors - that the deferred fees that we've been setting aside, structuring and otherwise, would probably flow back to us in late '06, and now we're saying early '07. And it might be the difference between December and January, so I'm maybe putting too fine of point on it, but has there been something occur here that would make us be a little more conservative in that outlook?

Mike, it's Mark DeCesaris. I don't think so. I think it's just our conservative view as of December of '05 where we feel we're going to hit that. There hasn't been any event that has occurred that - other than a conservative view that causes us to change that outlook.

And the SG&A expense, which one would have thought would have gone down this year and didn't, and you were kind enough to share with us that $8 million sort of layer that we didn't think was sort of a recurring, and I assume that was S-Ox-related and litigation-related. You also mentioned $4.2 million, which I guess was an offset to that. Could you explain again exactly what that was?

What happens is we - we incur and pay expenses on behalf of the issue - issuer when we are in a fund-raising mode. For the majority of 2005, we were not in a fund-raising mode. As a result of that, as you compare those results to 2004, we paid less in marketing commissions on behalf of the issuer. The other side of that is we also recognized less in revenues reimbursed from the issuer, which is reflected in the asset management revenue section of our income statement.

It's - it's essentially a flow through.

It's a pass-through - Yes. - in effect, when we're in fund-raising mode, which we weren't in '05.

Right. So those sort of wash. The fact is we spent about $8 million more in '05 than we would expect to normally spend, net of reimbursements.

That's correct. And the majority of those dealt with S-Ox 404 compliance, and some ongoing litigation in certain areas.

Okay. I'll hop off. Thank you very much.

Thanks, Mike.

[OPERATOR INSTRUCTIONS]. And we have no further questions showing. I'd like to turn the call back over to Ms. Hyde for any additional or closing remarks.

Thank you.

Before we conclude our call, I'd like to mention several upcoming speaking engagements we have scheduled. On March 30th, Tom Zacharias will be speaking at the New York Society of Securities Analysts annual REIT conference; and on April 5th, Gordon will be speaking at NYU's Real Estate Symposium. Additional information regarding these events can be found on our website. Thank you for joining us today. If you have any additional questions or comments, feel free, as always, to contact any of us or our investor relations department. We look forward to speaking with you again next quarter.

Thank you.

Thank you all.

A sound bite digital replay will be available beginning today at 2 p.m Eastern time and will run through March 8, 2006, by dialing 888-203-1112 domestically, or 719-457-0820 internationally. The pass code you will need to access the conference is 3018944. At this time that does conclude today's conference. You may now disconnect.