WP Carey Inc (WPC) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the W. P. Carey & Co. first quarter 2007 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, Miss Susan Hyde, Director of Investor Relations. Thank you, Miss Hyde, you may begin.

Thank you, Joe. Good morning and welcome, everyone, to our first quarter 2007 earnings call. Joining us today are W. P. Carey's CEO, Gordon DuGan; acting Chief Financial Officer Mark DeCesaris; and Chief Operating Officer Tom Zacharias.

Today's call is being simulcast on our website, wpcarey.com, and will be archived for 90 days.

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 actual results to differ materially from W. P. Carey's expectations are listed in our SEC filings.

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

Thank you, Susan. Good morning and welcome, everyone.

The first quarter, as you saw, was a decent quarter for us and I want to explain a little bit about some of the pros and cons of it. We had total revenues of $45.9 million versus $47.8 million for the first quarter of last year. Net income was $10.8 million versus $11.1 million in the same order last year and FFO was $18.6 million versus $21.8 million.

Mark will go in and describe in detail some of the variances in the changes but there were two effects to our first quarter results that I wanted to talk about.

The first is the CPA 16 deferral; and that is the deferral of a certain portion of our fees until a hurdle is met. We expect that the hurdle to be reached this quarter, the second quarter this year; and so the good news is that this issue will go away following our meeting of this hurdle.

The second issue I wanted to talk about was investment volume. Investment volume affects our numbers as you all know and investment volume tends to be lumpy; but there are two aspects of investment volumes that affect our numbers. One is just aggregate investment volume. The second is the mix and by mix, I mean how much goes into CPA 16, where we are deferring a portion of our fees versus going into the prior funds.

In the first quarter of this year, 95% of our investments went into CPA 16 so the impact of the mix of our investment volume going into CPA 16 was higher this quarter of this year versus the first quarter of last year. The mix, though, can go both ways. In the second quarter we've announced a large German investment. That German investment was split between three of our funds and so the mix in the second quarter we expect to be significantly lower going into CPA 16.

So the mix effect can be a positive or negative. In the first quarter the mix going into 16 was very high and therefore that also affected our results for the quarter. I would again say that this mix issue will go away upon reaching the CPA 16 hurdle this quarter.

So the mix effect of our investment volume should go away and that is another benefit to our meeting the hurdle in the second quarter.

The second part of investment volume is just what investment volume was. It was $167 million for the first quarter of this year versus $255 million for the first quarter of last year. As we say, investment volume is lumpy and the numbers are sometimes higher, sometimes lower. But to give some perspective for that we also provided year-to-date investment volume.

Year-to-date investment volume through April is $639 million versus $303 million last year. This includes the large German investment we made that was over $400 million. But you see that year-to-date volume's fairly good.

In terms of the pipeline there, the guys running our U.S. and European investment team feel very good about the pipeline in both the U.S. and Europe. And so we feel good about that. At the same time as we all know the volume is lumpy and the deal that's not closed isn't until we can count on so we don't count our chickens before they're hatched. But year-to-date volume's good and the pipeline looks good, according to our guys running those two groups. So that is some color on the investment volumes.

Another thing I wanted to talk about was our improved corporate structure which we mentioned in the press release.

Let me back up and give some perspective for this issue. Aspects of being an LLC as a corporate structure make it difficult for certain investors to own our shares. That has been true since we've been public as an LLP. We've found a way to simplify our LLC structure.

Let me just talk about what it does. One of the things it will do is get rid of state filings for our investors. Very large taxable investors might have to make state filings, depending on the income allocable to that state in a partnership structure like an LLC. So what we are doing by simplifying this is we are going to get rid of state filings for large taxable investors, and it will make it easier for mutual funds to own our shares as well.

We will also get rid of UBTI and without getting into the tax code and what all that means. It is an impediment for certain investors that we produce UBTI. We believe the restructuring will get rid of UBTI and, again, open up our shares to a class of investors that haven't been able to own our shares.

Then lastly we will have a simpler K1 which will be nice for everybody to own our shares. So the net net of the improved corporate structure is it will broaden our -- the people that can own the shares in our Company and we think that is a significant benefit to the shareholders of our Company.

The other reason it is important is, the LLC for us has been our corporate structure but it hasn't been a widely adopted corporate structure. And that is changing and I think simplifying and broadening our -- simplifying our corporate structure and broadening our appeal to investors today is especially significant because more companies are being structured as an LLC or an MLP.

You have pipeline companies that are being structured as MLPs and the most significant development for us, we think is alternative investment managers that are being structured as an LLC. Fortress -- which is a company many of you may be familiar with -- is structured as an LLC. KKR took its real estate finance company and converted from a REIT to an LLC. And Blackstone is expected to be -- the corporate structure for Blackstone is expected to be an MLP.

What all this means is not so much whether someone is an MLP or an LLC, but rather that as more high-profile companies are structured in a different form than a REIT or a C-Cor, that will drive investor interest to understand and to be able to own shares in those companies. We have been one of the relatively few number of LLCs that are publicly traded and we think the introduction of other high-quality companies into the LLC structure will be a net positive to us because large institutional investors will figure out how to own shares in Fortress and that will give us the added benefit that that'll make it easier for them to own shares in a company like W. P. Carey.

We also mentioned that we are expecting to launch CPA 16 global later this year and we expect to -- I'm sorry CPA 17 global later this year and we expect to raise up to $2.5 billion in that fund.

So I just want to close by recapping a couple of the things that we see happening. Our year-to-date investment activity is quite good and the pipeline looks good. Our assets under management have increased. We are expecting to recognize the hurdle in the second quarter, which will simplify our financial reporting and get rid of some of the volatility we have.

We are putting in place an improved corporate structure. Mark will talk a little bit about that. The corporate structure won't take effect until later this year but we are putting that in place which will broaden our appeal to a larger investor base. We are in the process of pushing forward with CPA 17 global, and our portfolio of real estate continues to perform very well.

So with that overview, I will turn it over to Mark DeCesaris for a detailed review of the financials.

Thanks, Gordon.

I would like to start out by talking about the Management Services segment of the Company. In that segment, our assets under management increased to $7.5 billion. Asset management revenues for the first quarter of 2007 increased to $15 million, a 5% increase over the prior years period of $14.4 million.

In addition, in March, we disclosed the net asset values of CPA 14 and CPA 15 increase. This increase in addition to the increase in our assets under management led to higher asset management revenues.

Investment volume for the first quarter was $167 million, compared with $255 million for the first quarter in the prior year. These investments generated structuring revenues of approximately $4.6 million for the quarter compared with $9.9 million in 2006. The decrease in structuring revenues was caused by a combination of lower investment volume of $88 million and a higher percentage of investments placed in CPA 16. We placed 95% of all investments in CPA 16 in 2007 as compared with 40% in 2006.

This is an important distinction to make because as we have discussed in prior calls, a portion of both our performance and acquisition revenues are subordinated to achieving a cumulative cash distribution rate of 6% in CPA 16. As of the end of the current quarter, CPA 16 is currently paying an annualized cash distribution rate of 6.47% with a cumulative average return of 5.98%.

The Company has deferred recognition of performance and structuring revenues in excess of $5 million for the current quarter. Cumulatively we have deferred recognition of $45.9 million in performance and structuring-based revenues and interest.

Partially offsetting this is approximately $6.2 million in deferred incentive and commission compensation. We expect to meet the hurdle in the second quarter of 2007.

Income from the Management Services segment was $4.4 million for the quarter as compared to $7.7 million for the first quarter in 2006. The decrease of $3.3 million for the quarter was primarily due to lower structuring revenues recognized as well as writing off approximately $670,000 of restructuring costs that were previously capitalized.

Moving to the Real Estate segment of the Company, revenues increased 11% to $22.8 million for the first quarter. This compares with $20.5 million for the first quarter of 2006. This increase was primarily due to lease revenue of $1.2 million earned on properties acquired from CPA 12 in the fourth quarter of 2006.

Income From Continued Operations in our Real Estate segment were $6.6 million for the first quarter compared with $7.2 million for the first quarter in 2006. The decrease of $600,000 relates primarily to a license termination fee incurred with terminating our franchise agreement on our hotel operation in Livonia, Michigan, as well as lower income related to the commencement of renovation work at the hotel.

And Tom will make a few comments about this project during his comments.

The Company recorded a loss from Discontinued Operations related to its Real Estate segment of $148,000 for the quarter as compared to a loss of $3.9 million for the first quarter of 2006. The Company did not incur any impairment charges in the current quarter, but did record an impairment of approximately $3.4 million in the first quarter of 2006.

On a Company wide basis, net income for the current quarter was $10.8 million as compared with $11.1 million for the first quarter of 2006. On a fully diluted per share basis, net income for the quarter was $0.27 per share as compared with $0.29 per share in the first quarter of 2006. Funds From Operations for the quarter were $18.6 million or $0.47 per share as compared with $21.8 million or $0.57 per share for the first quarter in 2006. The higher 2006 amount primarily reflects the effect of adding back impairment charges of approximately $3.4 million in 2006.

Cash Flows From Operations were primarily used to pay taxes, totaling $21 million on revenues earned in the CPA 12 and CPA 14 merger, as well as the selected dealer fees of approximately $4 million due on the successful conclusion of the CPA 16 Part Two Fund in December of 2006. This compares with Cash Flow From Operations of approximately $25.4 million for the first quarter of 2006.

While the timing of the payment of certain expenditures incurred in the previous period impacted our reported first quarter cash flow, there has not been any fundamental change in our underlying operation that raises a concern in our ability to generate sufficient cash flow to meet our obligations and dividend levels. In fact we are currently evaluating an additional metric which adjusts our Cash Flow From Operations for the timing of the payment of expenses incurred in the prior period, as well as normalizing the financial impact of significant events which occur on an infrequent basis.

The Company continues to have a very strong balance sheet. At March 31st, 2007, recourse debt was $26 million and represents less than 3% of the total assets of the Company. Limited recourse debt represents less than 27% of the total assets of the Company and of our total debt approximately 63% is fixed with a weighted average interest rate of 6.52%.

Our Board of Directors have approved a restructuring plan which will transfer all of W. P. Carey's real estate assets into a wholly owned REIT subsidiary. We believe that this will have a positive impact on the investors of the Company, and in its simplest form the new structure is intended to eliminate State K1 filing requirements for investors, and generate a much simpler K1 free of UBTI. This will also preserve the benefits of the LLC structure and make it easier for investors to hold their shares. We hope to complete this restructuring by the end of 2007.

As Gordon mentioned in his comments, when he discussed the Company achieving the hurdle in the second quarter of '07, what that means and what he means when he says "that takes the mix out of the equation" is that, from that point on including all acquisitions made in the quarter where we achieve the hurdle, we will recognize revenue for the full amount of revenues earned on each acquisition, where today we defer a significant piece of that until achievement of the hurdle is made. It will make our reporting much simpler. It will make our financials much easier to understand on a comparison basis going forward.

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

Thank you, Mark.

I would like to provide a brief portfolio report for the first quarter of 2007. As you know, there is one portfolio that we own and three discrete portfolios that we manage.

Real estate revenue for the owned assets increased by approximately $2.3 million or 11% over the 12-month period due primarily to the assets acquired from CPA 12. First quarter, we renewed a major lease in the LLC for $1.9 million in annual revenue as well as completed the releasing of various other spaces and renewals.

As Mark mentioned, we are in the midst of a $12 million renovation of a 226 room Radisson Hotel in Livonia, Michigan. Being renovated in phases and is planned to be completed by next April. At the end of the first quarter occupancy was at 95.3%. As mentioned in the 10-Q we recently sold a vacant building of 181,000 square feet which brings occupancy up in the LLC to 96.2%.

As we renew some of the larger tenants, attractive mortgage refinancing opportunities exist and we are working on a number of these.

As of March 31 of this year the occupancy rate for the entire (inaudible) portfolios which is about 90 million square feet was in excess of 99% and this is an excellent occupancy rate for a portfolio of this size.

As mentioned in the annual reports for the CPAs that just went out to the investors, total return for CPA 14 in 2006 was 16.3% and CPA 15 total annual return was 14.7%. We are very pleased with these returns.

As a result of receiving asset management fees of CPA shares, we are now -- own over $125 million worth of shares in these CPA funds.

In summary, the LLC portfolio and the CPA funds are performing very well. We are working hard to create value in these portfolios through re-leasing selective asset sales, reinvestment, redevelopments and refinancings.

Now I'd like to turn the call over to Gordon DuGan. Thank you.

Thank you Tom.

Bill Carey usually gives the closing remarks but Bill is traveling today, and he just wanted me to pass along his best wishes to everybody on the call for your continued support. With that we will open up the call and turn it over to questions.

(OPERATOR INSTRUCTIONS)

I am showing no questions in queue. I would like to turn the call back over to management.

Thank you very much. We'd just like to thank everyone for joining us on the call today. A replay of this call will be available after 2 PM and that information can be found on our press release that we issued this morning. Thank you for joining us 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.