WP Carey Inc (WPC) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the W.P. Carey & Company Third Quarter 2006 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Sammy Hood, Second Vice President of Investor Relations. Thank you, Mr. Hood. You may begin.

Thank you, Dan. Good morning and welcome everyone to our Third 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, Sammy. Good morning, everyone, thank you for listening in on our third quarter earnings call.

As you saw in the press release, despite the deferral of $4 million in revenue related to CPA(R)16 we had a good quarter. Nine month cash flow remains good. It's up 7% to $48.9 million, up from $45.9 million.

For the quarter our income from continuing operations was up 7% to $14.4 million from $13.5 million.

FFO was strong, but it did fall in the quarter to $23.3 million and for the 9 months FFO was flat.

Lastly, an important metric for us -- assets under management continue to grow. They are up to $6.8 billion and that's after netting out the effect of some opportunistic sales that we've made that Tom will discuss in a little more detail.

Mark will get into greater detail the results for the quarter and so I'll let him do that, but there are a couple of areas I did want talk about both in terms of last quarter and where we are today.

The first is investment activity. For the last quarter, we did roughly $113 million in new investments and that covered 5 new investments. That compares to Q3 of last year, which was $153 million in 6 investments. One of the things that I noticed in looking at these numbers is that not only can the volume be lumpy in terms of overall volumes, but we did 5 investments this past third quarter versus 2005, where we did 6 investments but our average size was obviously somewhat smaller. We really can't control the average size of the investments. We prefer larger investments, but our approach is to look at everything through a risk-return spectrum. So if we found better investments that were smaller, those are the investments we're going to make. And I would also emphasize that as I mentioned in the last call, we have passed on some larger deals where we did not find the risk return attractive, particularly here in the United States.

For the 9 months investment volume, we've closed 13 new investments for $451 million. That's down from 23 investments last year for $780 million. But I'd be careful again not to draw too much of a conclusion from this. Last year in the fourth quarter, which tends to be a strong quarter for us, Q4 2005 we only closed $90 million of investments and we expect to have a good fourth quarter this year. So that's why I would be careful not to draw too much of a conclusion from those three quarter numbers that you see.

So far this quarter we've closed three transactions for a little less than $30 million. Our backlog is quite good and our outstanding commitments for the quarter will put us well above last year's volume. Although, again, I would caution you, as we've said in the past and I continue to say, the deal business is highly unpredictable. We don't know what transactions will close or won't close until they actually close, and so that's about as much flavor as we can give to where we are from an investment pipeline standpoint right now.

The other thing I wanted to talk about briefly is the CPA(R)12/CPA(R)14 merger. I think it's described in good detail in the press releases you see. We will be receiving performance revenue and termination compensation of roughly $49 million if the merger goes through. It was cleared by the SEC in October. The voting has commenced. So if that does occur in the fourth quarter of this year which we expect, although we can't be certain of that; but if it does go through in the fourth quarter as we expect, we'll not only receive that revenue but we'll be purchasing additional real estates assets as outlined there. I think those are the benefits to our Company. I think we're doing a good job of going through that in the press release.

But I wanted to back up and give everybody some perspective for this again in that this is all coming about through the strong performance of CPA(R)12 and that's where our ability to generate this type of revenue for us comes from. Again, to give some background, the investors in CPA(R)12 were roughly 13,000 investors. Those investors bought in at a share price of $10.00 a share. Those receiving or taking the cash option, just to make the numbers easier, will be receiving cash of $13.30 a share off of their original $10.00 investment. So it's again the performance of the fund and our track record that we're most proud of even though we outlined the benefits for W.P. Carey in that press release. Those benefits come from a good track record and good performance of the CPA(R)12 fund and that's what we're most proud of.

Lastly, I sound a little bit like a broken record, but it's true that it remains a very competitive environment for net lease investments. We're taking advantage of that with some opportunistic dispositions that Tom will cover. But in this competitive environment, I have to say I'm extremely proud of our investment teams, both U.S. and internationally. I'm always amazed at our ability -- their ability to source and close attractive investment opportunities and that continues today. And that even though we have a world, or given the fact that we have world full of capital worldwide seeking investment opportunities, I want to assure everybody that W.P. Carey remains disciplined in our investment approach.

Thank you and with that I'll turn it over to Mark DeCesaris.

Thanks, Gordon, and good morning everyone. In our Management Services segment, assets under management increased to $6.8 billion. Asset management revenues for the third quarter increased to $14.4 million or a 7% increase over the comparable prior-year period of $13.4 million.

For the 9 months ended September 30, 2006, asset management revenues increased to $43.5 million, a 12% increase over the prior-year revenues of $38.9 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.

As Gordon mentioned, investment volume for the third quarter was $113 million and $451 million year-to-date. This compares with $153 and $780 million for the respective periods in the prior year. These investments generated structuring revenues of approximately $3.4 million for the quarter and $15.8 million for the 9 month period, as compared with $4.9 million and $25.4 million respectively in the prior year. The decrease of $1.5 million for the current quarter and $9.6 million year-to-date is due to both a reduction in the investment volume, as well as the mix of investments made on behalf of CPA(R)16.

We've discussed in prior calls the fact that a portion of both the performance and acquisition revenues are subordinated to achieving a cumulative cash distribution rate of 6% in CPA(R)16. As of the end of the current quarter, CPA(R)16 is currently paying an annualized cash distribution rate of 6.4% with a cumulative average return of 5.78%. The Company has deferred recognition of performance and structuring revenues of approximately $4.0 million for the current quarter and $10.7 million year-to-date. Cumulatively, we have deferred recognition of approximately $33.8 million of performance and structuring-based revenues and interest.

In addition to the above, we have deferred incentive and commission compensation totaling $3.5 million due to the hurdle of CPA(R)16.

Income from the Management Services segment increased 37% to $7 million for the three-month period and 4% to $20.4 million for the 9 month period. This compares with net income of $5.1 million and $19.6 million for the respective periods in the prior year.

Increases in asset management revenue and equity income, as well as a decrease in our G&A expenses, were partially offset by a reduction in the structuring revenues and accounted for this increase.

In our Real Estate segment, income from continuing operations increased 12% to $7.4 million for the third quarter, and year-to-date income from continuing operations increased 35% to $27.1 million. This compares with $8.4 and $20.0 million for the respective periods in 2005. On a quarter-to-date basis, the decrease was primarily attributable to a decrease in other operating income of approximately $1.0 million. This related to proceeds we received in a bankruptcy procedure in 2005 that was not replicated in 2006.

The Company recorded a loss from discontinued operations related to its Real Estate segment of $110,000 for the current quarter and $4.8 million year-to-date. This compares with a gain of $796,000 for the third quarter of 2005 and a loss of $2.5 million for the 9 months ended September 30, 2005.

The Company recorded no impairment charges for the current quarter and year-to-date have taken impairment charges totaling $3.4 million; $3.2 of which pertained to a single property.

On a company-wide basis, the net income was flat at approximately $14.3 million for the quarter, or $0.37 per share. For the 9 months ended, we reported net income of $42.7 million, as compared with $37.1 million in the prior year. For the 9 month period, net income per share increased 16% to $1.10 per share.

Funds from operation for the quarter were $23.3 million and $73.7 million year-to-date. This compares with $25.6 million for the prior year quarter and $74.3 million for the prior year-to-date. Cash flow from operations through the end of the third quarter totaled $48.9 million or $1.25 per share, as compared with $45.9 million or $1.17 per share in the prior year.

As of September 30, 2006, the Company had paid off its recourse debt. The Company's non-recourse debt represents less than 26% of its total assets, and of that debt approximately 80% is fixed with an average interest rate of 6.56%. The Company's interest coverage ratio on a year-to-date basis is 6.1 times.

As Gordon mentioned from a process standpoint related to the 12-14 merger, we have been declared effective by the SEC. The vote is currently underway. We have tentatively scheduled a shareholder meeting for November 30, and expect to close this merger on or about December 1.

With that I'd like to turn it over to Tom Zacharias.

Thank you, Mark. I would like to now provide a brief portfolio report for the third 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 four CPA funds that we manage, which totals approximately 78 million square feet valued at approximately $6.8 billion.

Our assets under management, our CPA funds, increased by $691 million over the 12-month period for September 30, 2005 to September 30, 2006, which is an 11% increase. This is during a period of unusually high asset sales for the managed funds, as I will explain.

Year-to-date in 2006, we completed the sale of 12 assets on behalf of the CPA funds for a combined sale price of $398 million. We achieved very attractive returns for the investors. Two assets in particular totaled over $306 million. One was the Clear Channel building in New York. The other was the ETEC building in Hayward, California. These are examples, as Gordon mentioned, where opportunistically we believed and it proved to be true that investors would value these income streams far greater than what we thought they would be valued. This is evidenced by the fact that both these sales were sold at significant amounts above the third-party appraisal that was used for determining NAV. And these two large asset sales have had very positive results for the funds.

Year-to-date we completed the sale of 5 assets in the LLC for a total of $32.4 million. Three sales were of vacant buildings and two were related to the tenants' exercise of their purchase options. We plan to reinvest the proceeds from these sales in certain CPA(R)12 assets that we will acquire from CPA(R)12 at the time of its merger with CPA(R)14.

In the LLC portfolio, occupancy is now approximately 97%. The portfolio is in excellent shape, as we have sold the smaller and weakest assets over the past 4 years. We've also renewed a number of the leases. All of the leases in 2006 were leases coming due in 2007.

If the shareholders of CPA(R)12 and CPA(R)14 approve the proposed merger, as part of the merger the LLC will be acquiring interest in 10 investments for approximately $130 million. This purchase will increase the square footage in the LLC portfolio by approximately 1.7 million square feet.

Year-to-date we have completed the financing of one asset in the LLC for $15 million. We are working on several others. Ten-year mortgage rates are often in the high 5% range, which is well below the cost of our floating rate line of credit which is in the 6.5% range now.

As of September 30 of this year, the occupancy rate for the entire W.P. Carey group's 94 million square foot portfolio, which includes both the CPA series and the LLC, was approximately 99%.

In summary, the LLC portfolio and the funds are performing very well. We remain focused on creating value for all our investors. Now, I would like to turn the call over to Mr. William Polk Carey, the Founder and Chairman of the Company.

Thank you very much, Tom. I'd like to congratulate the Investment Management Team for an absolutely spectacular job of which I am very, very proud. The record that we've had for our investment management funds is fulfilling and quite as good as I've seen anywhere. When you think of something like CPA(R)12 costing $10.00 a share and then being worth over $13 million, $13.00 a share, having paid more or less record high dividends, it's pretty good. The total returns have been considered, generally speaking, the best in the industry.

Now, I may have missed somebody and I apologize if I did in saying that. But as far as I know, they have been the best in the industry and it's attributable largely to hard work and to solid professionalism of the investment at the asset management levels. The management is hopeful and expects to have a superb fourth quarter, a great 2006 and great 2007. We're very optimistic. It isn't over until it's over, somebody said in baseball, so you can't say for sure what's going to happen. But we are an optimistic crew and we believe it's going to be very, very good quarter and year.

Thank you so much for being loyal investors and for listening to us and being tolerant of our ups and downs in whatever we do. We're working like hell to give you the best we possibly can. That's it, I'm finished.

Okay. At this time, we'd like to open the line up to any questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Mike Beall of Davenport. Please proceed with your question.

Good morning. We won't ask about the SEC or taxes, but we're thinking about them. My question relates to just the general balance between our funding availability and our ability to put investments, appropriate investments on the books. What's the constraint right now? Is the constraint the availability of deals that would allow us to increase or maintain that 6% yield on CPA(R)16, or is it we don't have enough money? Do we have more money than deals, or vice versa?

Morning, Mike, it's Gordon DuGan. We've been in a period for a number of years where we've been constrained by deals, and when I say that, I guess I mean that again I'm very impressed with the deal flow we're able to generate. I'm very impressed with the returns we're able to generate. But we live in a world and have lived in this world for a number of years where there's more capital available than good deals. So, the constraining factor today is deals. It's not that we don't have any, or we don't have any good ideas, we have quite a few and we have quite a few good ideas that we're able to execute on. But it's a world where there's an imbalance between capital and investment opportunities. It's been that way for some time. We don't see that letting up and luckily we're able to, for a variety of reasons, find some attractive investment opportunities. But we could raise much more money than we are now, so we're really constrained by investments.

It would seem that given the valuation of similar rates in the traded market that our non-traded rates that we sell are a better deal than what you can buy in the marketplace. Second sort of question, I know we do deals in the government-related area. Can you talk about that or any other asset categories that may sort of widen their scope or create more opportunities for us to put money to work?

Yeah, Mike, it's Gordon again. We have purchased building leased to governmental entities. We've seen in Europe that's more of a trend than in the United States. But interestingly, given governmental accounting, asset sales are considered revenue and we would expect at some point there to be more impetus both in the U.S. and worldwide for governments to sell their real estate the way corporations have woken up and decided that they shouldn't be in the real estate business. But while I say that, I can't point you to a lot of transactions in the United States where that's happened, so that remains to be -- that's in the category of remains to be seen, unfortunately.

So this imbalance between supply and demand and supply of the assets that we would normally buy looks -- as you pointed out has been going for a while, there's nothing that's likely to change that for a while? In other words, the main constraint to our growth will be finding deals that we think are attractive?

I think that's right. I think that will continue.

Well, last thing, as it relates to W.P. Carey, the public company we all own, it's going to take on $130 million in assets and some related liabilities. Roughly, what's the spread on that, on those assets, in terms of what sort of accretion it will create for the W.P. Carey shareholders?

Yeah, Mike, I don't have a firm number, but it is accretive because the yield is greater than our cost of the line of credit which is funding it. We're happy with that portfolio that we will be taking on, and what we will do is -- it's been changing a little bit over time and certain assets we decided to sell rather than bringing it into the LLC and CPA(R)12 shareholders have benefited from that. We will be issuing a kind of a 8-K of a pro forma balance sheet, I believe, shortly right after the deal closes, when the deal is finalized.

Last thing, just talking about capital, I see we've made some small share repurchases. Can you just comment on that activity? What's sort of the driving sort of metrics we used in determining whether we put capital towards repurchasing shares, or for instance investing in this real estate, and what can you say about this?

Yeah, we've actually put a program in place, Mike, last December, a share repurchase program for a one-year period. The program we put in place, as you know, allows us to buy shares through the blackout period, so it's a predefined set of constraints when we buy those shares back. I think to date on the program we've bought about $4 million, a little over $4 million in total back through the share repurchase program. We're currently evaluating that to make a determination of what we'd like that program to look like going forward, but that's about all I can really say about it. We feel the program that we've put in place is a good investment. Our shares are a good investment to buy back at this point.

Your share price has not reflected the growth in your assets under management in the last couple of years and have certainly been undervalued relative to some. Thank you very much.

Mike, one other just to answer your question on the accretion of those assets. We expected on the assets we're buying that they'll generate cash flow roughly in excess of approximately $5 million on an annualized basis verses a reduction in our asset management revenues from the REITs of about $1.3 million let's say, so it will be accretive to the company.

Okay, thank you very much.

Thank you, Mike.

We show no further questions in the queue. At this time, I'd like to turn the floor back over for any closing remarks.

Thanks, Dan. A replay of the call will be available after 2:00 p.m. Please call 877-660-6853, reference Account Number 286 and Conference ID Number 216680. This replay will be available through November 14. Thank you for joining us today and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.