WP Carey Inc (WPC) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the W.P. Carey & Company's Second Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to introduce your host, Ms. Susan Hyde, Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning and welcome everyone to our Second Quarter 2006 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.

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.

Thanks Susan and good morning everyone. I'm going to keep my remarks relatively brief this morning. As you see in the release, income from continuing operations and net income was up for the second quarter. Mark is going to go through and describe in greater detail the financial results and the drivers behind some of these changes.

FFO was up 15% in the second quarter and up 3% for the six months. Cash flow was good and Mark will also describe how we used that cash flow to pay down debt. And the portfolio of properties, both the portfolio we own as well as the portfolios we manage, are performing well, and Tom will describe that in greater detail, including the fact that we didn't have an impairment charge this quarter for a change, which was a positive for us, obviously.

All of these positives in the quarter were in a quarter where, one, we continue to be affected by the CPA 16 deferral of compensation to its manager, W.P. Carey, and Mark will describe that in detail. And secondly, we had unusually low investment volume and I thought I'd spend some time focusing on the investment activity and the climate -- investment climate that we're in.

The second quarter investment volume was roughly 83 million, which was down from $262 million the year before, and for six months it was 338 million versus 627 the year before. Of that, in 2006 roughly, 60% was international versus 50% international in 2005. I thought it'd be helpful to give some perspective for 2005 investment activity because the comps this year are relative to last year's investment activity comps.

Last year was an interesting year, 72% of our investments in 2005 were completed in Qs 1 and Qs 2. And so out of the 865 million of investment volume last year, 627 was accomplished in the first two quarters, and that's an unusual circumstance -- not one that we would expect this year. And so last year's investment volume was quite front loaded. We're certainly hopeful that a good portion of our investment volume this year will be back end loaded and that's more typical. Typically the fourth quarter is the strongest investment quarter for us if you look at it over a long period of time.

The average deal size in '06 was roughly 42 million on eight transactions. In '05 it was roughly 45 million on 14 transactions. So what we see is the average deal size is about the same this year versus last year. It's just that it's an overall lower number of transactions that have been accomplished.

I would also point out that we have passed on several large transactions that were in the market place where we couldn't get comfortable with those transactions from a risk return standpoint. And so we're not -- our investment process is still driven by seeking good investments and not seeking investment volume. And we ended up passing on transactions that could have made the investment volume numbers look much better but they have to fit our risk return profile before we're interested.

The competitive environment continues -- it's still quite competitive. In the last number of years we've seen more entrants both in the US and Europe into the net lease business. And we've seen very -- specifically more competitors copying our business model of market focus on the M&A activity in the United States. And so we feel some pressure from that as well. And the market is competitive for talent as well. We've lost some investment people over the past year as the competitive environment extends to talent.

We think this competitive environment is stabilizing. I think we mentioned that last quarter -- that we see some stabilization both in the US and Europe in the competitive environment. And therefore I wouldn't read too much into the second quarter investment volume as a standalone quarter because I think that we're still able to find good investment opportunities based on several factors.

Our current activity is pretty good as of right now. We've seen a pickup in build-to-suit discussions and activity. I think that's partially because there hasn't been a lot developed over the last few years. But as the economy, even in a slow way continues to expand, we're seeing more developers in discussions on build-to-suit transactions and we expect to participate in a number of those.

M&A activity is very strong. And that's driving a number of sale leaseback discussions and activities that are occurring as we speak. And also the 5-yield curve is good for us. We've mentioned this in the past, that from a new investment standpoint having short-term rates equal to or slightly above long-term rates is -- has benefited us as people seek to do long-term transactions such as sale leasebacks.

Overall our pipeline is pretty good and I would say that because a lot of our investment activity is M&A focused, not all the deals that are in our pipeline will happen but we also know that new ones will come along to fill in some of those gaps as well.

Overall for the quarter, based on everything that you've seen, we are pleased with the results even given the low investment volume. The portfolios are performing very well. We're in a strong financial position as a company, terrifically strong financial position. And even in this competitive investment environment, we think relatively very well positioned to find investments, attract -- to find attractive investment opportunities given our brand name and reputation for getting complex deals done very quickly, both in the US and Europe.

With that, I'll turn it over to Mark to go through, in a little greater detail, the financial results for the quarter.

Thanks Gordon and good morning everyone. In our Management Services segment, assets under management increased to $6.7 billion. Asset management revenues for the second quarter increased to $14.8 million or a 15% increase over the comparable prior-year period of $12.9 million.

For the six months ended June 30, 2006, revenues increased to $29.1 million or a 14% increase over prior-year revenues of $25.5 million. Net increases in assets under management as well as increases in the annual asset valuations of the CPA REIT funds accounted for this increase.

Investment volume for the quarter was $83 million and $338 million year-to-date, as compared with $262 million and $627 million for the comparable periods in the prior year. These investments generated structuring revenues of approximately $2.5 million for the quarter and $12.4 million for the six-month period ended June 30, 2006, as compared with $9.8 million and $20.5 million respectively in the prior year.

We've discussed on prior calls the fact that a portion of both the performance and acquisition revenues are subordinated through achieving a cumulative cash distribution return of 6% in CPA 16. As of the end of the current quarter, CPA 16 is currently paying an annualized cash distribution rate of 6.35% with a cumulative average return of 5.67%. Deferred performance-based revenues were 1.3 million for the quarter and 2.5 million year-to-date.

Deferred structuring revenues were $1.6 million for the quarter and $3.7 million year-to-date. Cumulatively we have deferred recognition of $7 million of performance-based revenue and $22.8 million of structuring revenues and interest. In addition to the above, we have deferred incentive and commission compensation totaling $3.3 million.

Income from the Management Services segment decreased 19% to $5.6 million for the three-month period and 8% to $13.2 million for the six-month period. This compares with net income of $6.8 million and $14.4 million for the respective periods in the prior year.

Decrease in structuring revenues due to lower investment volume and deferred revenue recognition as it relates to the CPA 16 hurdle were partially offset by increased asset management revenues and lower G&A costs.

In our Real Estate segment income from continuing operations increased 104% to $12.5 million for the second quarter and 69% to $19.9 million year-to-date. This compares with $6.2 million and $11.7 million for the respective periods in 2005. A gain on the sale of securities of approximately $4.8 million and a lower impairment charge has accounted for the majority of this increase.

The company recorded a loss from discontinued operates related to its Real Estate segment of $739,000 for the quarter and $4.7 million year-to-date. This compares with a gain of $4 million in 2005 for the quarter and a loss of $3.3 million for the six months ended June 30th, 2005. As Gordon mentioned, there were no impairment charges for the current quarter and year-to-date we have taken impairment charges of $3.4 million, 3.2 million of which related to a single property that was sold in the first quarter.

On a company-wide basis we reported net income of approximately $17.3 million for the quarter as compared with $16.9 million in the prior year. For the six months ended June 30, '06 we reported net income of $28.4 million as compared with $22.8 million in the prior year. On a fully-diluted per share basis, net income for the quarter increased 2% to $0.44 per share. For the six-month period, net income per share increased 23% to $0.75 per share.

Funds from operations for the quarter increased to $28.4 million and $50.4 million year-to-date. This compares with $24.8 million for the prior year-to-date quarter and $48.7 million for the prior year-to-date six-month period and represents increases of 15 and 3% respectively. Cash flow from operations continues to be strong and through the end of the second quarter totaled $35.6 million or $0.92 per share. This compares with $30.3 million or $0.77 per share in the prior year.

The company's balance sheet also remains strong and during the quarter we utilized cash generated from operations to pay down $13 million of recourse debt. And as of June 30th, 2006 our recourse debt totaled $2 million, less than 1% of the total assets of the company. The company's non-recourse debt represents less than 26% of its total assets and of that debt approximately 79% is fixed with an average interest rate of 6.54%. The company's interest coverage ratio on a year-to-date basis is 5.9 times.

And with that, I'd like to turn the meeting over to Tom Zacharias.

Thank you, Mark. I would now like to provide a brief portfolio report of the second quarter of 2006. As Mark mentioned we have two lines of business, a real estate portfolio we own of approximately 16 million square feet and a series of CPA funds we manage which total approximately 77 million square feet valued at 6.7 billion.

Assets under management in the REITs increased by 729 million at the end of the second quarter of 2006 versus the second quarter of 2005, which is a 12% increase over the 12-month period. This quarter, we completed the sale of four assets on behalf of CPA REITs for a combined sale price of $259 million. We achieved in this market very attractive returns for the REIT investors with these sales. Also in the second quarter, we completed the sale of three assets in the LLC for a total of 14.3 million. One building was a vacant former Winn-Dixie and the other two sales related to the exercise of tenant purchase options. We will seek to reinvest these proceeds through 1031 exchanges and to postpone the recognitions of capital gains.

In the LLC portfolio, occupancy is now up to approximately 97% which is an increase of 160 basis points over the prior quarter. If the shareholders of CPA 12 and CPA 14 approve a proposed merger, as part of the merger W.P. Carey LLC will acquire interest in 13 investments with an average lease term of 6.3 years for approximately 199 million. This purchase will increase the square footage of the LLC portfolio by approximately 2.2 million square feet.

In the second quarter, we also completed a $30 million refinancing of the CheckFree facility at a fixed rate of 6.18% and we are working in this very attractive debt market on -- of a more similar possible refinancing. As of June 30th of this year the occupancy rate of the entire W.P. Carey Group's 93 million square foot portfolio which includes both the CPA series as well as the W.P. Carey directly-owned assets was 99%.

In conclusion we remain focused on creating value for all our investors. I would now like to turn the call over to Mr. William Polk Carey, the founder and Chairman of the company.

Thank you very much, Tom. I'm continuing to be proud of the job that our people are doing for me as an investor and for all my fellow investors. As to one of the things that I've been striving for was not to be too dependent upon investment volume because we don't want to be pressured into investing when it's not the time to do it. We want to be opportunistic. We want to purchase for our investors when it's the right time to do it. And one of the ways we've offset that from a revenue standpoint is by having -- building assets under management. The assets under management of $6.7 million will - when all our incentive fees are earned, would be $67 million right there for asset management. And that pays a lot of rent.

So it's a very good -- it's a very good source of stability for our enterprise. We don't get the full 1% until we reach our threshold in each case, but we're earning it in everyone of our funds except CPA 16 and we're hopeful that that will be earning next year. So everything is -- everything is running extremely well in my view, and I'm very enthusiastic and very happy with the job that's being done by this capable and wonderful group of people that we've been able to assemble over the years. Now let's --

And now we'd like to open up the call for any questions that you may have.

[OPERATOR INSTRUCTIONS] At this time we have a question coming from Mike Beall of Davenport.

Good morning.

Good morning Mike.

Good morning a generally positive report. I had a couple of quick questions. Could you comment a little more on this $4.8 million gain on the sale of securities? Maybe I missed it, I was just wondering exactly what securities they were and I guess that's included in the FIFO number?

The FFO number is included -

Yes it is included in our FFO number. It was a gain in security of a company where we had owned the common stock of that company.

Mike it was an old deal where we had owned a hotel. We actually owned the old Holiday Inn at the Airport New Orleans, and we contributed the hotel to a company before it was going public and that company turned out to be called MeriStar. It wasn't MeriStar at the time. And then MeriStar just went private. I think Blackstone just bought MeriStar and so we cashed out our shares in the public REIT.

So essentially it was a gain on the sale of some real estate you owned through a series of transactions?

Yes we ended up with REIT shares and we sold the shares when the company went private.

I was surprised to see that in the FIFO.

Mike's it unfortunately a more complicated story than that because we had written down those shares after 9/11 so we had shares. We took a write down after 9/11 and then this is the gain after the write down.

Well it's even more complicated because we had operating units and we converted the operating units at the time when MeriStar was trading at about $3 a share and I actually did that transaction, which I'm very proud of. And I converted the operating income to REIT share of about $3 a share and then we had about 700,000 shares and they were then bought out by Blackstone when they took MeriStar private.

Wow. So this was a zero basis asset essentially that you got almost $5 million.

Yes. Tax wise it was operating units we converted to REIT shares and then we had a basis in REIT shares which we then sold.

Well we like talking about gains. The two other just sort of quick questions, the disposition fees that we may ultimately earn on the CPA 1214 transaction, will they be in cash or shares or 50/50 or what?

There's two fees, Mike. There's an incentive fee which relates to the -- we've got a share of the capital appreciation, we got 15% of the capital appreciation. And that will be in cash and also we get a disposition fee and that is in cash. It's still in cash.

So the bulk of those fees will be cash?

Yes.

And just as an update we still think sometime in early '07 or the first half of '07, we will trigger that threshold on CPA 16 to begin recognizing the deferred incentive fees there?

We say first half in the Q.

Okay.

[inaudible]

All right well I'll be quiet for a minute. Thank you.

Thanks, Mike.

Thank you, Mike.

[OPERATOR INSTRUCTIONS] Ladies and gentlemen, we're not showing any more questions in queue. Would you like to make some remarks?

Well, if we have no more questions, we'll conclude our call. We'd just like to remind everyone that a replay of today's call will be available after 2 PM today. The number is 1-877-660-6853. You'll need both an account number of 286 and the conference ID of 208312 to access the call. And we also have the webcast available on our website and available as a podcast. So we thank you for joining us today and we look forward to speaking with you again next quarter. Thank you.

Thank you all.

Ladies and gentlemen, thank you very much for your participation in today's audio conference. You may all disconnect your lines at this time and have a wonderful day. Thank you.