WP Carey Inc (WPC) 2006 Q1 法說會逐字稿

Thank you for standing by, and welcome to W.P. Carey & Company, LLC first quarter 2006 earnings release conference call and webcast.

Just as a reminder, today's teleconference is being recorded.

At this time, I'd like turn the conference over to W.P. Carey & Company's Director of Investor Relations, Miss Susan Hyde, for opening remarks and introductions.

Thank you.

Good morning, and welcome, everyone, to our first quarter 2006 earnings conference call.

Join 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 webcast on our website, wpcarey.com, and will be archived for 90 days.

Before I turn the call over to our CEO, Gordon DuGan, I need to inform that you statements made in this earnings call that are not historic fact may be deemed forward-looking statements. Factors that could cause actual differs to differ materially from our expectations are listed in our SEC filings.

Now, I would like to turn the call over to Gordon.

Thank you, Susan.

Good morning, everyone.

I'm going to start with some brief comments, and I think it was a pretty straight-forward quarter for us this quarter, and we'll go through in detail some of the figures.

From an overall standpoint, as you saw, our assets under management continue to grow. Assets under management at end of first quarter stand at roughly 6.6 billion, an increase 15% from this time March 31, 2005, of last year. Consequently, revenues are up 6% to roughly $47.9 million for the quarter. The assets under management revenues are driven partially by the investment volume that we managed to generate. Obviously, dispositions would decrease that number, so the assets under management is the net of those two activities.

Investment volume was solid in the first-quarter. It was roughly $255 million, and to put that into a bit of perspective, last year's Q1 was 365 million, so it's down from last year's, but last year's was an extraordinary first quarter, generated over 40% of our investment volume for the year. Another point of perspective, the fourth-quarter of last year was roughly 90 million.

Generally, if there has been seasonality to our business, it's been the fourth-quarter that has been the busiest. That has not been the case the last couple of years, but I wouldn't necessarily say that we would expect that -- the first quarter to continue to be our biggest quarter. All things being equal, we would still hope, if there is any seasonality, it would be oriented towards the fourth-quarter, and it's not really seasonality in terms of how a retailer would think of it, rather, just companies completing transactions before the year-end and including the sale and lease-back of their real estate as part of that, so when I use "seasonality," that is what I mean.

I would also like to point out what we describe as the lumpiness in the acquisition volume has two components. We've talked about it historically, on a quarter-over-quarter basis, where the investment basis will rise and fall based upon the number of investment opportunities we found attractive that quarter, but what you are also seeing in the first quarter of this year is the lumpiness between the mix of volume for U.S. investments versus international investments.

In the first-quarter, we closed more investments in the United States than internationally, but we closed a large investment internationally that caused the percentage of volume to be quite high in the first-quarter. Because of the lumpiness, as we have said in the past, it's hard to draw conclusions quarter-over-quarter in terms of overall volume. I would say the same is true, and that it's hard to draw conclusions quarter-over-quarter between the mix of our international and our U.S. investments.

In the first quarter, we closed a number of transactions totaling the $255, and one of the aspects of our investment philosophy is they bridge a number of different industries. We closed a sale-leaseback in a company in the oil field services business, a company in the software business, a company in the retail business, that the OB transaction as described, which was a portfolio of retail sites in Poland leased to a large DIY retailer based in Germany. The lease is guaranteed by the German company and is denominated in Euros as we mentioned, but that was an investment made in the retail industry, and also, we made an investment in the for-profit education industry with Corinthian.

The deal flow is good, and the backlog is good for our business. I think the two positive trends in the business are the flat-yield curve, should all things being equal be good for the leaseback business, and we have a flat-yield curve environment that we hope pushes companies to find sale-leaseback financing more attractive relative to short-term financing, because the difference in cost between going out on the yield curve is quite low.

Also, there is a great amount of mergers and acquisitions activity in a large number of our tractions. Historically, our sale-leaseback tractions have been associated with mergers and acquisitions activity. So, those are two positive trends facing us.

The negative trend, and I know I sound like a broken record, is that it's otherwise a very competitive market with a great deal of capital looking for yield. That has not abated significantly. That continues to be the case, and I will continue to say that at the risk of sounding like a broken record on the competitive environment.

Cash flow was solid in the first-quarter, and the 10-Q -- we'll disclose that in a little bit more detail, but we point you to the 10-Q to go through the cash flow statement and also, its effect on the balance sheet, which, when you see them, will be positive.

Net income up to 11.1 million. Mark DeCesaris will go through, in greater detail, the variables that make that up.

FFO was down last year to this year, but at 22 million, was still a solid quarter. Overall, as we look at the first quarter, we think the overall performance is very good.

Our CPA fund series continues to perform well, producing steady cash flow streams for the tens of thousands of individual investors in those funds, and we're very gratified about that. The CPA 16 hurdle, Mark will also discuss in greater detail. Our current dividend for CPA16 is about the 6% hurdle, but as we have said in the past, there is a cumulative catch-up nature to the hurdle, so we have not met the hurdle yet. Again, Mark will go into greater detail.

The portfolio of assets is doing well, as Tom Zacharias will touch on, both our own and managed portfolios. And lastly, and you will see this in detail with our filing of the 10-Q, we maintain a very conservative balance sheet. We have low overall leverage, very low company-level debt, and a low exposure to variable-rate debt. We think this strong balance sheet is a valuable asset for the Company, and I think that is an asset that is, again, under appreciated.

With that introduction, I'll turn it over -- I will turn it over to Mark DeCesaris to walk us through, in greater detail, some of the results from the first quarter.

Thanks, Gordon, and good morning.

In our management services segment, net income increased 1% to $7.7 million, or $0.20 per share. This compares with net income of $7.6 million, or $0.19 per share, in the same quarter last year.

Investment volume for the quarter was $255 million, 72% of which was international. These investments generated structuring revenues of $9.9 million as compared with investment volume of $367 million in 2005, and structuring revenues of $10.7 million.

Structuring revenues deferred related to the subordinated cumulative cash distribution hurdle for CPA16 was 2.1 million and $4.2 million in their respective quarters. Cumulative deferred structuring revenues that relate to this hurdle totalled $20.9 million as of 3/31/06.

For the current quarter, assets under management for the CPA funds increased to $6.6 billion. Asset management revenues for the first quarter increased 12.5% to $17.4 million. This represents an increase of $1.9 million over previous year's revenues of $15.5 million.

In addition, asset management revenues deferred related to the CPA16 hurdle was $1.2 million in the current quarter versus $650,000 in the same period last year. Cumulative asset management revenues that have been deferred total $5.9 million.

We have discussed in prior calls the fact that a portion of both the performance and structuring revenues are subordinated to achieving a cumulative cash distribution return of 6% in CPA16. As of the end of the current quarter, CPA16 is currently paying an annualized cash distribution rate of 6.3% with a cumulative return of 5.56%.

In our real estate segment, net income from continuing operations increased 27% to $7.2 million, or $0.19 per share for the first-quarter. This compares with in the revenue -- net income from continuing operations of $5.7 million, or $0.15 per share, in the first quarter of 2005.

Revenues increased by $1.5 million, which was primarily attributable to adoption of accounting guidance regarding control over a limited partnership, which required the Company to consolidate an entity, which was formerly treated an equity investment. This accounted for an increase in revenues this quarter of approximately $1.1 million. The overall impact of this change on net income was less than $50,000.

The Company recorded a loss from discontinued operations related to its real estate segment of $3.9 million, or $0.10 per share, for the current quarter. This compares with a loss of $7.5 million, or $0.19 per share, for the same period in the prior year.

Impairment charges on properties held for sale for the quarter were $3.4 million, and of these charges, $3.2 million pertained to a single property that is currently under contract to be sold. Impairment charges for the same quarter last year totaled $9.7 million.

Funds from operations for the quarter totaled $21.8 million, or $0.57 per share. This compares with $23.9 million, or $0.61 per share, for the previous year. Part of the decrease was due to the fact that the Company absorbed approximately $1.4 million in unreimbursed marketing costs as a result of not raising funds on behalf of CPA16 global during the first quarter of 2006.

Cash flow from operations continues to be strong, and in the first-quarter, totaled $25.3 million, or $0.66 per share. This compares with $27.5 million, or $0.70 per share, in the prior year. Negatively impacting cash flow, in addition to the unreimbursed marketing costs previously mentioned, was an increase of an additional 850,000 of management income received in shares of the CPA funds over the prior year.

The Company's balance sheet remains strong. During the quarter, we utilized cash generated from operations to pay down $9 million of recourse debt, and as of March 31, 2006, our total recourse debt totaled $6 million, less than 1% of the total assets of the Company. The Company's non-recourse debt represents less than 25% of its total assets. Of that debt, approximately 72% is fixed, with an average interest rate of 6.6%.

The Company's interest coverage ratio is a healthy 5.1 times.

With that, I would like it to turn the call to our Chief Operating Officer, Tom Zacharias.

Thank you, Mark.

I would like to provide a brief portfolio report for the first quarter of 2006.

As Mark DeCesaris mentioned, we have two lines of business -- our real estate portfolio we own of 17-million square-feet; and a series of CPA funds that we manage that total 78 million square-feet valued 6.6 billion. Our assets under management, or REIs, increased by 834 million over the last 12 months, which a 15% increase over the period. In the first quarter, we renewed a major lease in the LLC for $2 million in annual revenue, as well as completed the leasing of a number of other spaces and lease renewals.

In the LLC portfolio, the occupancy is now up to approximately 95.4%, and we have transactions in the works to further reduce the vacancy over the next six months. We believe that attractive mortgage refinancing opportunities exist in this portfolio, especially as some of the larger tenant exercise their renewal terms, and we're working on a number of additional possible re-financings.

As of March 31 of this year, the occupancy rate for the entire W.P. Carey Groups 95-million square-foot portfolio, which includes both the CPA series of funds, as well as the W.P. Carey directly owned assets, was approximately 99%.

In conclusion, we remain very focused on creating value for all our investors.

Now, I would like to turn call over to William Polk Carey, the founder and Chairman of the Company.

Thank you very much, Tom.

I simply want to say how much I appreciate the wonderful work being done by the management of the Company -- Gordon DuGan, our CEO; and Tom Zacharias, our Chief Operating Officer; and Mark DeCesaris, our Acting Chief Financial Officer. I think it's amazing to have 99% occupancy in the real estate portfolio, and it's a great credit to the quality of the transactions and the quality of the personnel managing them.

The upside, as we all know, comes in the REITs, typically, which are tied to CPI increases. So, expect that to protect us in good times and bad, and in times with higher interest rates, and in times with other types of real estates may decline in value. I value so highly the investors in this Company and in our REITs, who basically give us such loyalty and such appreciation for the hard work we're try doing for them.

Thank you.

Thank you.

We would now like to open the call up to questions.

[OPERATOR INSTRUCTIONS]

And we'll take our first question from Dave AuBuchon from A.G. Edwards.

Thank you.

Gordon, you mentioned, still, very competitive marks on the investment side. We have been hearing of a lease in [Domerly] that the lower class buildings -- the B and C quality buildings -- have seen a little bit of an uptick in cap rates. How have you managed your investment process, maybe, to look at some of those assets, or are you still interested in the bread-and-butter, class A buildings thats you have invested in the past?

Well, we have always look at investment side through a risk return prism, and the quality of the transactions has -- because of the competitive nature, we have had to keep a disciplined view on the investment side.

We have heard anecdotally, there is a slight uptick in some cap rates. We're seeing a bit of that. I think it's too early to say that that's a permanent trend, but Dave, we have always tried to look at both of the quality of tenant and quality of the asset, and through the prism of are we getting paid enough for the risk we're taking here, and what we'veseen is the lower-quality tenants and lower-quality buildings -- that people have not been pricing enough risk into those transactions, and we're hopeful that is starting to change.

1031 exchanges are getting more picky about the types of properties they are investing in. I spoke at No Lease Conference and said individuals should not, in my view, be buying a lot of special purpose properties in a 1031 exchange because they are very difficult to work your way through if you have a default in the future.

So, we're seeing a little bit more caution returning and a little bit more understanding of the risks inherent with either lower-rated tenants or lower-quality assets.

What is your opinion, generally, where we are in the point in the cycle relative to tenant risk or industry risk? Are there certain areas of the economy that you want to stay away from or maybe targeting a little bit more aggressively going forward?

Well, you know, it's interesting if look at industries that we did transactions with in the first quarter, something like oil field services is a more easy industry today because that is a very strong business, but our investment approach -- one of the reasons I walked through the different industries is one, to show that we're active across a number of industries, but two, the hallmark of our investment approach has always been diversification, and that was another comment I made at the Net Lease Conference that the way to structure a portfolio of these types of investments -- the best and safest way -- is with a broad diversification by industry and by tenant.

And I think that we're very opportunistic about that, Dave, so we would not say that there are industries that we would totally avoid or industries that we're very excited about.

For-profit education has been an industry that we have been underwriting going back to 1992, so we like that business. The cash flows are good. We're a little worried about over-building in that business, and the -- there is always talk of changes in the regulations regarding reimbursement of student tuition in that business, which is also something to be a little cautious about, but we have seen enough to know that we don't have a crystal ball and that the best protection for our investors is to be very diversified.

Okay.

And I guess the same commentary would apply on the property tax -- the real estate side -- versus office, industry, retail, apartments, whatever?

For us, the property-type tends to be based upon the whatever the company we're talking to, whatever they happen to own. So, it's almost a by-product of our investment process that we're diversified by property type. I would say this, that because of the broad ownership of property type, some property types, such as office, are doing a little better, and we own 95 million square-feet. So, I guess that I would say its a by-product on the investment side, but, Tom, maybe you would comment on what we're seeing in terms of portfolio activity on our property.

Of the 95 million square-feet, our largest concentration is in industrial distribution and warehouse, and that market, as you know, has improved quite dramatically over the last 24 months. That has been reflected in the leasing that we have done in our portfolio, but you can see it in a lot of other of the industrial REITs.

The diversification of the property type, I think, is actually one of the strengths of the portfolio because we aren't over-concentrated in one particular property type, and we have been doing a little more retail of late. And I think we have been doing retail with very strong companies with good futures.

And you are seeing -- I guess it's fair to say that you're seeing more pricing power on the industrial side versus--?

Yes. The companies who, generally, were reluctant two years ago to commit to take space, to -- we think their space needs, and as cost of space starting moving up, and they became more sure about their space needs, there has been a lot more absorption going in many markets all over the country.

Do you track your occupancy and your portfolio by property type?

Well, we don't have very much vacancy.

So, it's across the board -- is good?

It's really -- it's more manufacturing/industrial, than anything else, that is vacant right now. It's not a lot.

Okay.

Two more questions -- you mentioned in the press release $50 million was raised in April. Gordon, do you feel comfortable with that pace for the balance of the year, or how does that -- what is the broader health of the fundraising environment right now?

Going back to the comment I made earlier, one of the great lessons that we have all learned from Bill is no one has a perfect crystal ball. So, we try to stay away from making too many predictions, but fundraising has continued to be strong since the close of the quarter, and our approach has always been that we're investment-driven and the fundraising follows that. We were out of the market for a period of time, and we're comfortable right now with the pace of the fundraising as it relates to our investment process, so we're happy with it.

Okay.

And then, last question is the $1.4 million of unreimbursed marketing cost in the first quarter. Is there some sort of mechanism that you can get reimbursed for that unreimbursed cost over the balance of year?

We're currently evaluating that right now. No decisions have been made, though, as far as the reimbursement of those costs.

Okay.

Thank you.

And next, we'll go to Mike Beall with Davenport.

Thank you, and good morning.

Good morning, Mike.

Tax payments, and you all have alluded to in this call, that we're look at ways to reduce the amount of taxes that we pay. We're an LLC, which keeps a lot of people from buying us, but yet, we seem to pay a lot of taxes. Is will anything you can report on that front -- the structuring of the Company to reduce the cash tax payment?

I will take a cut at it, and then, Mark or Tom or Bill will chime in, but I guess what I would say, Mike, we seem to be paying some professional service fees in order to come up with some ideas and potential solutions for it. It is something we're working on. We don't have anything to announce at this point, but we have law firms engaged. So, we're looking at some options.

Mike, I would say that is something that we constantly review. You're not alone in that. We get a daily reminder from our Chairman on the amount of tax we pay, and how to alleviate that situation. So, we're actively looking at methods to do that.

And while on the cash flow issue, I thought we were going to be taking less of our fees in shares?

This year, we did elect to receive less of our fees in shares, however, with the build-up the asset management base, higher dollar amount of that income is still received in shares.

A lower mix and a higher aggregate dollar amount--.

But, over time, we will -- that mix would favor more cash as opposed to shares? I think it's 50/50 right now.

It's 50/50 right now, with the exception of one fund, and as that that fund matures, and we elect to split that as well. You are correct in that assumption.

Where are we on the disposition/liquidation phase of any of our older funds? Do we anticipate that happening any time soon?

We have begun evaluating liquidity alternatives for CPA12. We currently anticipate an event may take place during 2006, however, no decisions have been made regarding the timing or what form that event may take.

Are they -- evaluations, have they been done for all of our CPA funds for 2005 year-end?

Yes, except for 16.

The net asset value calculation?

Yes.

Yes.

And that is on the website--.

Okay.

The increase on the NAVs was between, I think, Tom, 2.5% and 7%, depending on the particular fund. That was the range of increase on the NAV.

Okay.

Last question, and I hate to always belabor this, but the impairment charges just continue to be there. Fortunately, not as much this time, but it seems to jump around. Is this a function of the residual values being overstated -- estimated? Is it a function of tenants having financial problems and abandoning the property earlier, or none of the above?

Mike, it's Tom, and I can speak to that.

Interestingly enough, the item that was in this quarter is the final phase of something that we have been talking about for a year-and-a-half, which was the Gibson Greetings deal, which was a fabulous transaction as an investment.

At the time of the roll-up, as we explained, went in at a high value, reflecting the cash flow from the leases, and they had a favorable purchase option that we worked through, I think, in a very positive way, and what actually happened was they bought one property less than what we were carrying on it.

The second property, they didn't buy, but we negotiated a lease-termination payment of $3 million, which we received last quarter -- the end of '05 -- and now, this year, we're selling that building to a subtenant, we recognized a loss of $3 million. In essence, it was just two different kinds of compensation.

One was a lease-termination payment came in as income, and then, when we sell this thing, we are recognizing a loss.

So, my opinion and belief is that we have worked through these unusual circumstances related to a number of the assets that you have seen over the last three years.

Okay. I hope so.

Thank you very much.

As you know, our balance of funds in liquidation have reduced significant profits over the years. So, it depends sometimes with the appraisal at time of merger, which may have been higher than it should have been, but it's in balance. The performance is going to be terrific, in my view.

And the tax things is really an item of extreme focus for me, which, Mike, you will appreciate, and sometimes -- I spent a lot of time on it, and I think we're going make some progress.

We do have a follow-up question from Dave Aubuchon.

Tom, you mentioned the big lease renewal, and I can't remember if you said $2 million of rent, or is it 2-million square-foot renewal. Could you give more detail on that and talk about any kind of Cap Ex that had to be paid by WPC?

There was no CapEx. It was the end of the initial term with Titan, out in Torrey Pines, California. Titan was recently bought by L3 Communication, and we had a very good relationship with this tenant, and we entered into a ten-year renewal with the first-five is definite, they have an option for the next five, provided we provide some additional parking, which we're getting permits to do.

There will be is some cost to provide that parking, but we'll have a lease rental increase that will more than cover the cost.

I'm assuming it's structured parking?

Yes

Okay.

And then, there was no TI's or anything like that related to just the initial renewal?

The parking -- we're still figuring out the cost of that, but there is some cost there. The reason we like the way the transaction ended up being finalized is that that is of value to the landlord -- the additional parking -- not the tenant.

Okay.

And then, what would you say your standard rent escalation -- your ability to -- what is the standard rate you can get now in terms of your increase year-over-year in rent on your deals?

Yes. It varies.

I don't have the statistic at the my fingertips, but the -- we just are completing another lease that, unfortunately, I can't mention yet, but we're getting a significant increase over their prior rent.

Where do you stand on your role this year -- your remaining role?

We've pretty much addressed all the leases coming up for renewal for '06, and we're working on '70 now.

Okay.

Should I assume, given your comments about the impairment charges, that you have worked through most of the them the balance of the year we should see a significant charge or one big assets, or--?

David, you can't put those words in my mouth.

I was giving an opinion about the what we have seen in the past and what we may see going forward.

Okay.

A couple more questions and I will let you go.

Gordon, why or why not -- Canada, Mexico, South Asia, and anywhere else in the world -- it seems like you have gained a lot of traction in Europe. Can you talk about other opportunities in other markets? It seems like in the broader real estate world that where a tremendous amount of focus now is being placed in terms of growth, and the restructure is getting more and more acceptance. Can you talk about the global opportunities?

As we've said in the past, we believe the sale-leaseback is the most transferable form of real estate finance investment because it's credit and structure-oriented. It's not just real estate oriented, if not more so.

So, we have, in some ways, led the way internationally, our first Canadian deal though, and our first Mexican deal, interestingly, were driven by relationships in the United States, where companies happen to have facilities in in those countries, and they were part of a package of facilities that included the United States. I think that is one of the advantages we have been able to bring to bear is the fact that by being able to do cross-border deals, we are able to enter into discussions with companies where we can provide a solution not only in the United States, but to have U.S. properties, and European properties, and United States and Mexican properties, et cetera.

So, it's a key part of our strategy, and we think that the diversification of not having all of our investment in dollar-denominated investments is also part of the strategy.

So, we can't project forward. We didn't make a conscious decision to go and make an investment in Poland, but rather, had a transaction with a German company that happened to have Polish assets.

So, again, what I would emphasize is that the sale-leaseback is the most transferable real estate finance type of investment that we have been able to establish a variety of cross-border deals that we think give us some competitive advantage, but people are following, and we're seeing others do transactions both in Europe and Mexico and Canada.

So, I don't want to minimize how competitive those businesses are either, because they are -- we're not the Lone Ranger -- there are other investors both European investors in Europe, as well as American investors coming to Europe.

We're pleased with it, but we wouldn't over-emphasize the fact that -- or I would say -- we would point to the fact that those are also competitive businesses.

And do you have a date on when your 10-Q will be released?

It will be filed tomorrow morning.

Okay.

Thank you.

OPERATOR INSTRUCTIONS]

We have no question as of this time.

I will turn the conference back to our speakers for any closing or additional remarks.

Thank you.

Before we sign-off, we would just like to let you know that Gordon DuGan and Mark DeCesaris will be presenting at the upcoming NAREIT Institutional Investor Conference, which is being held at the Waldorf-Astoria Hotel in New York. Their presentation is schedule for Thursday, June 8, at 11 A.M. We hope that you can either join us there or listen to the webcast of their presentation, which will be available on our website.

Thank you for joining us today, and we look forward to speaking with you again next quarter.

And as a reminder, sound by digital replay will be available beginning today at 2:00 p.m. Eastern time, and will run through May 15, 2006, by dialing 888-203-1112 domestically, or 719-457-0820 internationally. The passcode you will need to access the conference is 9980480.

And that does conclude our conference today.

We thank you for your participation, and have a wonderful day.