WP Carey Inc (WPC) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the W.P. Carey & Co. Second Quarter 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host, Ms. Susan Hyde, Director of Investor Relations. Thank you. Ms. Hyde, you may now begin.

Thank you, Jackie. Good morning and welcome everyone to our second quarter 2007 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, wpccarey.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 our expectations are listed in our SEC filings.

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

Thank you, Susan. Good morning, everyone. As you see, we've reported strong operating results this morning. Some of this is due to the performance hurdle being met in our most recent fund CPA:16 - Global. But without that we still had a very strong quarter. Mark will go into the operating results in greater detail for both the three month and six month period in his remarks.

I wanted to touch on three things. One, our business model and discuss that a little bit. Number two, the investment environment; and number three, what we see happening in the credit markets today.

First of all, in the business model as you saw the majority of our earnings are derived from invested management activity. We're essentially an investment manager with a portfolio of net lease investments and the growth in our business has come from the investment management side.

As of June 30, we have roughly $8 billion in assets under management and that's an increase of $1.4 billion over the same period last year, or 20%. Since 2001, we've had a compound annual growth rate of 25% in growth in assets under management. And that's essentially new investment volume plus appreciation of assets, minus investments that we have sold.

What I find interesting about those numbers is we've done this -- we've had this growth in assets under management with a conservative and disciplined investment philosophy and approach over this time period. So we've had -- we've been able to grow nicely but remain disciplined and true to our investment thesis. And, as I mentioned earlier, I think you can really see the benefits of this investment management model in the results that we released this morning.

In addition, you'll see that we've added a couple of supplemental disclosure -- additional disclosure -- we've added additional disclosure on supplemental performance metrics. The first is EBITDA. We've added an EBITDA calculation and we did that in part because it's a fairly standard measure of investment management company earnings and we thought our investors would benefit from that disclosure.

Secondly, we've added an adjusted cash flow. It's another supplemental performance metric that we're calling adjusted cash flow. Mark alluded to it in our last call and he'll go into greater detail in terms of what it is but we think, again, it will help investors by providing somewhat of a normalized core cash flow measure adjusted for a lot of the timing issues. Again, it's there for all of you to see and Mark will describe that in greater detail.

The second area I want to talk about is our investment environment. Our investment volume, as you saw, was very strong for the quarter and six month period and for those who have been on these calls in the past, I think for a lot of last year I wasn't terribly optimistic about the investment environment and was quite cautious about it given how competitive the environment has been and how aggressive we saw other investors being. While our investment environment continues to be competitive in our niche, we believe it is getting better and our position as a leading, if not the leading, firm in our business should hold us in good stead as we hope the environment improves.

Investment volume for the six months, as you see, was $666 million and was helped a great deal by a large $440 million investment in Germany. We completed four investments in the second quarter, two in Europe and two in the United States. Today, our pipeline is quite good although I'll repeat what I always say on these calls which is, investment volume by its nature is very lumpy; and two, a deal isn't closed until it's closed. So we don't count those chickens.

The last thing I wanted to touch on was the credit markets. The ripple effect through the credit markets of the sub-prime losses is obviously occurring and is not yet fully shaken out we don't think. But we do see two things. One, in the past we have said that we felt that credit has been too cheap and too available. In certain cases, risk wasn't being fully priced into a lot of credit investment decisions. I think with respect to credit-related investments, one thing that's occurring today is that has probably changed. Risk will be priced into credit-related decisions and we think that will auger will for our investment opportunities. We tend to have better investment opportunities when money is tight.

At the same time, a liquidity squeeze on corporations might cause more corporations to get into financial difficulty and default and we are monitoring our portfolio very closely, all of our portfolios very closely for that. Today our occupancy rate is roughly 99%. We haven't seen a pick-up in any corporate defaults but if we worry about potential shake-outs of a credit squeeze, that could be one.

The second area that we've seen is the pull back in the credit markets has affected the financing markets as well, across the board. But it's not had an effect on our ability to leverage our net lease investments. Let me explain, we use traditional mortgage financing to make our net lease investments and this mortgage financing is traditionally known as non-recourse debt. And we utilize what is considered moderate leverage, 60% to 70% in the U.S., a bit higher in Europe, and we have not seen a pull back in the financing available for us at those types of levels. We do think that investors that have been using very highly leveraged capital structures are probably having a difficult time and hopefully that will be good for us as we have competed with those investors.

We've also seen a slight or an increase in the cost of financing although it hasn't been that tremendous yet. Spreads on our non-recourse debt have widened from roughly 120 basis points to somewhere in the 160 to 200 over but at the same time the last couple of weeks treasuries have rallied from roughly 5.1% to 4.75%. So our borrowing cost today is up roughly 10 to 40 basis points. This is very manageable although the market is still clearly digesting the credit problems and that may change. But as of now that's very manageable. And as I said earlier, we believe that the pull back in the credit market should or could be very positive for our investment business.

Lastly, as we move to the second half of this year we have a very strong balance sheet with the new $250 million line of credit that Mark will discuss in greater detail and we are in terrific financial shape.

Lastly, we are moving forward with our latest investment fund, CPA:17 - Global, which is a $2 billion global investment fund which we expect to have available later this year. With that I'll turn it over to Mark to go through in greater detail the results.

Thank you, Gordon and good morning. Overall, the Company had a very strong quarter. Net income increased 143% for the quarter to $42 million and 86% year-to-date to $52.8 million. FFO increased 179% to $79.6 million for the quarter and 95% to $98.1 million year-to-date. Before I discuss the contribution that each of our primary segments had on the results, I would like to review the CPA:16 hurdle recognition.

Included in the second quarter results our investment manager revenues not recognized in prior periods as a result of CPA:16 not meeting the hurdle in those periods. Total investment management revenues recognized in this period are $45.9 million. This recognition increased net income by $21.6 million, or $0.54 per share, and FFO by $42.3 million, or $1.06 per share on both a quarter and year-to-date basis.

While the recognition of this revenue is an important milestone for us, just as important is the ongoing impact that this event will have on our results. Beginning with the current quarter results, the true impact of the increase in our third-party assets under management will be recognized in our financial results as we begin to recognize 100% of the structuring revenues that we earn on investment volume and 100% of the annual asset management revenues that we derive from third-party assets under management.

Our investment management segment accounted for approximately 79% of the total revenues reported. We earn both asset manager revenues based on third-party assets under management and structuring revenues on new investment volume made on behalf of the CPA funds.

Excluding the hurdle-related revenue, we are having a very strong year in this segment. Both structuring revenue from investment volume as well as annual asset management revenues earned on third-party assets under management have increased this year.

Excluding revenue from the hurdle recognition, we earned $18.3 million in asset manager revenue, an increase of 24% or $3.5 million over the prior year's quarter. On a year-to-date basis we earned $33.3 million, an increase of 14% or $4.2 million over the prior year.

We also earned $21.8 million in structuring revenue for the quarter, excluding the deferred revenue recognized in the CPA:16 hurdle. This was based on investment volume of $493 million for the quarter. Year-to-date, excluding the hurdle-related revenue, we earned $26.4 million in structuring revenues on volume of $660 million, a 113% increase over the prior year.

While the revenue stream from our investment management segment looked more volatile in prior years due to the distortion created by the CPA:16 hurdle, our revenues are actually very stable and I want to reinforce the fact that going forward, beginning with the current quarter, we will recognize 100% of all investment manager revenue, both structuring and asset management in the quarter in which it is earned.

Net income from the investment management business for the quarter was $32.1 million or $0.85 a share and $36.5 million year-to-date, or $0.96 per share.

In our real estate investment segment, lease revenues increased $1.7 million for the quarter and $3.2 million year-to-date to $20 million and $39.6 million respectively. These increases were primarily due to properties acquired from CPA:12 prior to its liquidation and rent increases from existing properties.

Net income from the real estate investment segment decreased 16% for the quarter to $9.9 million and increased 8% year-to-date to $16.3 million. FFO for the quarter decreased 6% to $17 million and increased 3% to $31.7 million year-to-date. On a comparative basis, 2006 year-to-date net income and FFO were skewed as a result of the Company realizing a one-time gain on the sale of a security in the second quarter of 2006. Excluding the impact from this gain on 2006 results, FFO from the real estate investment segment would have increased $3.8 million or 29% for the quarter and $5.8 million or 23% year-to-date.

For the six month period ending June 30th, 2007, cash flow from operations totaled $11.6 million as compared with $35.6 million in the prior year. The current year was impacted by two items where the timing of payments was in the quarter after the expenses were recognized. The payment of approximately $21 million in taxes that related to revenues received in December of 2006 from the successful liquidation of CPA:12, as well as the payment of approximately $3.2 million in selected dealer fees on the successful conclusion of the CPA:16 Part II fund offering in December of 2006.

Because our reported cash flow from operations tend to be affected both by these types of timing differences and by the timing of realization of revenue streams that have been built up over time, we have released in this quarter a metric which we utilize in conjunction with various other metrics to evaluate dividend coverage. We believe that adjusted cash flow from operations is a supplemental metric that is useful in assessing liquidity and cash available for distributions. It is based on reported cash flow from operations, adjusted for timing differences such as the impact of CPA:16 deferral over the past three years and the payment of liabilities when they result from timing differences between the receipt of income and the payment of the liabilities as they relate to that income as well as ownership adjustments to account for cash distributions for our equity investments and minority interests.

For the six month period ending June 30th, 2007, adjusted cash flow from operations totaled $54.9 million, or $1.38 per share, as compared to $46.2 million, or $1.19 per share, for the previous year. Our payout ratio based on this metric is 64% for the current year and 74% for the prior year.

We have a very strong balance sheet with recourse debt of $28 million or less than 2.5% of the total assets of the Company. Total limited recourse debt is approximately $294 million and represents less than 27% of the total assets of the Company. Our interest coverage ratio is 9.3 times. During the second quarter of 2007 we entered into a $250 million revolving credit facility to replace our existing $175 million facility. The facility matures in June of 2011 and can be increased to $300 million. As part of the new four-year facility, we were able to lower our terms to LIBOR, plus a spread which ranges from 75 to 120 basis points depending on leverage. And as of June 30th, 2007, we are currently paying interest at a rate of LIBOR plus 75 basis points with an outstanding balance of $28 million.

During our last call we announced a restructuring plan which would eliminate investor's state filing requirements and generate a much simpler K-1 free of UBTI. I'm happy to report that this plan is on track and should be completed by the end of 2007.

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

Thank you, Mark. I would like to provide a very brief portfolio report for the second quarter of 2007. In our segment analysis of the earnings for the first six months of 2007, the 18 million square feet of properties owned by the LLC produced funds from operations of $31.7 million which equates to $0.80 a share. Therefore, the owned real estate portfolio produces a significant contribution to the current annual dividend of $1.87 per share. However, as Gordon has mentioned, the growth in the CPA Asset Management revenues is the growth engine of the Company as it grows far faster than real estate revenues. Our CPA assets under management are now approximately $8 billion and this is a $1.3 billion increase over the last 12 months.

In the LLC portfolio in the second quarter we completed the leasing of various spaces and renewals and completed a significant refinancing of a property on favorable terms after extending the lease. The end of the second quarter occupancy was at 96.2%. This is a 90 basis point increase since the end of the first quarter. In the second quarter we also completed the sale of two small properties for proceeds of $6 million.

As we renew some of the larger leases we are pursuing additional mortgage refinancing opportunities. The use of low-cost fixed-rate financing over the last six months to pay down the higher-cost floating-rate line-of-credit has been beneficial for the Company.

As of June 30th of this year the occupancy rate of the entire W.P. Carey group's 103 million square foot portfolio which includes both the CPA series of funds as well as the LLC directly owned assets, was in excess of 99%. As a result of receiving asset management fees and shares, we now own over $137 million in shares of the CPA [REITs].

In summary, the LLC portfolio and the CPA REITs are performing well as we are working to create value through releasing asset sales through redevelopments and refinancings. The steady increase in our assets under management is providing attractive revenue growth for the Company.

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 think that a lot of our many activity and interest that's been stimulated by one of our large shareholders, Mike Beall. I want to encourage shareholders to contact us and tell us what they think and what we're doing and how we could serve them better. It's just -- what he was pointing out was we were being considered to be like a REIT or a real estate operating company when, in fact, the majority of our business was in the investment management business. And that's what it is. And that's deliberate. We've intended to build the assets under management for a number of years. It's one of my goals to make the Company stronger and stronger by having a more steady revenue associated with asset management business. It's been very, very good for us and we intend to keep increasing it as best as we can. I think that being close to $10 billion in assets is nice. It's been a goal of mine to be $10 billion for a long time. Now we hit the $10 billion, we'll have to set a new goal.

But it's a great enterprise. We are the leading provider of long-term financing buy-net-lease in the world so far as I know. But we're also the best equipped to make judgments on what's a good investment. And this has basically proven itself in the record for our managed funds and their shareholders. We've done a -- we've given them a record which is pretty much unsurpassed and giving good solid dividends rising and protection against inflation with a (inaudible)-type security of an absolute net lease plus ownership of property.

What we do is we look forward -- while we're looking primarily at the credit of the tenant, we're also looking at the real estate and we have independent appraisals to make sure that the real estate is worth as much or more than we're paying for it, plus the full facing credit of the tenant. And it's a very good investment for us, our managed funds, and it's proven itself over a great many years. I think it's going to continue for at least the next 50 years of my life.

It's a lot of funds (inaudible) work and I feel like we're doing a great job for both our investors and our public companies and investors in our [REITs].

I thank you very much for being our loyal shareholders and helping us help you.

Thank you, Bill. Well, that concludes the presentation part of our call. We'd now like to open up for any questions that you may have.

Thank you. (OPERATOR INSTRUCTIONS) Michael Huffman, Rock Point Advisors.

Good morning. Could you please update me on the SEC inquiry that's been ongoing for awhile? And then also on the UBTI issue, can you speculate on what this year's returns will look like in terms of UBTI content?

Michael, it's Gordon DuGan. We don't have any update on the SEC investigation or disclosure. We'll just point you to the disclosure we have in our filings. Mark, on UBTI up?

Yes. This year's K-1 will still include a -- will still be -- include a mix as we convert to the new structure. The 2008 K-1 will be clean. We don't have the current projection. We expect to -- those projections we typically do in the September/October timeframe and don't currently have one that would list us at this point.

And it's been awhile since I've looked at this. Will the UBTI -- is it typically spread out over the year or can you characterize it on a quarter-by-quarter basis. In other words, if you're looking at buying the shares today, obviously, I can make my own guesses and assume the timing of UBTI; but if UBTI occurs randomly over the course of the year --?

Yes. It does. It's spread out throughout the year.

We'll hold off. Thank you.

Alex [Crips] of H.G. Wellington & Company.

Good morning. Congratulations. I apologize if I missed this in the beginning but I have a very simple math question. I'm just looking at your income from continuing operations of $39.2 million, your diluted share count, $40 million and I'm getting $0.98 per share versus the $1.03 on your statement and what am I missing in terms of an add back or wrong share count?

One of the things in our earnings per share calculation that you have to take into consideration, we have as part of minority ownership in our international operation we have the ability to exercise a put on the shares of the LLC. That creates a dilutive effect on our outstanding shares but in order not to double count for purposes of the earnings per share calculation, we add back the impact of the minority income dilution that those shareholders have in that entity.

Thank you very much.

Everett Reveley, Davenport & Company.

Good morning. I have a question about the investment environment. You all mention that you are more optimistic about it. Is that mainly because of the tightening in the credit market or is there other dynamics in play?

That's a good question, Everett. This is Gordon DuGan. I think there are two factors. One, we've seen a pick-up in volume and we've seen a good pipeline throughout this year prior to this latest -- to the credit market issues that have arisen. And so I think one is just an ambient deal flow that's been reasonably good.

And the second part of it is more perspective which is we tend to have better investment opportunities when money is tight and given what's playing out in the credit market a potential scenario is money will be tighter in the future and that tends to be a good time for us on the investment side.

Has the tightening in the credit market so far been beneficial or does it need to get worse from where it is right now?

It's only been really two weeks since the lot of sub-prime scare started to flow over to the high yield market and I think it's too early to tell. There's always a little bit of a lag and so we -- it's still perspective at this point. I can't point you to one or two deals that we have because other financing forms fell away. That has not happened yet but as a general rule we have more investment opportunities when money is tight so we're -- but it's somewhat anticipatory.

And you all did most of your investment activity in the second quarter internationally. Is the international market more appealing than the U.S. at the moment or is that just kind of a fluke?

Well, it switches back and forth. The international team is doing a great job finding investment opportunities and Europe has been a very good marketplace for us. But there's a tendency for that to be lumpy, as well. So in the first quarter there were more investments in the U.S. Second quarter there was much more in Europe. But both -- we're finding both markets are fairly strong and the groups are reasonably optimistic about the pipeline in both markets today. So it's hard to make a relative judgment on that.

And I guess just generally, are there any segments in the commercial real estate market that are causing you concern more than the others or look better than others at the moment?

Everett, it's interesting because the fundamentals are still quite good in the commercial real estate markets and the sourcing of our deals are really driven more by the Company's financing needs and so our real estate that we're buying is a real mix between distribution, office, some manufacturing, some retail and generally the -- just across the market these things are -- the markets are -- the fundamentals are quite good.

A lot of people would point out that the commercial real estate market is not (what) -- where we look at the real estate we basically -- when you're dealing with a company and providing it with long-term financing, you want to find what real estate do they have that would make sense to do a sale lease-back on. And we've -- obviously some seem more desirable than others like office buildings, warehouses and whatnot but we don't -- the commercial real estate market, I can't really see a huge impact on our business, with what's happened in the commercial real estate market. We're buying corporate properties which are under single tenant. Most people think of commercial real estate being multi-tenant properties which is not our business.

Just one last accounting question. On the investment management FFO, can you give me a little bit more detail on what the non-cash expenses were? I clearly [whiffed] on that.

Primarily the largest portion of it is the deferred tax piece of it. It's amortization, deferred taxes and other non-cash charges but certainly the largest piece of that component is our deferred tax.

And how are the -- it's just --

Well, what impacted it this quarter, obviously, was the realization of the CPA:16 hurdle which generated about $45.9 million in revenues, the majority of which we'll pay tax in the future on. As we take the payment of that revenue and both the combination of shares of CPA:16 as well as defer the acquisition fee over a period of three years, the impact of that is to increase our deferred, not our current portion of the tax.

And I take it you all have not done any share repurchases in the second quarter?

We did. In the second quarter through June 30th we repurchased approximately $2 million worth of shares.

We have a current share repurchase program in place and are purchasing shares under that program.

And then just kind of a last housekeeping question. Are you all going to have a quarterly supplemental this quarter and if it is, is it out there yet?

It's not out there yet. We expect to file it in conjunction with the Q tomorrow.

Great. Thanks.

Ben Shepherd, KCI Communications.

Good morning. Mine is really very basis. I just happened to miss your current occupancy rate.

I gave a number for the LLC portfolio that the 18 million square feet and that's at 96.2% and when you book it -- we also gave a number which is the owned asset plus our managed funds and that's greater than 99% occupied.

Great. Thank you.

Both portfolios are very healthy. All portfolios are very healthy.

(OPERATOR INSTRUCTIONS) Mike Beall, Davenport & Company.

I appreciate you all's efforts on the UBTI and other issues. Gordon, I know this credit crunch sort of thing is in the early stages. We're also a borrower for half the purchase price of our deals. What have we seen or what do you feel like is happening with the spreads that we're having to pay, our borrowing costs? Are they being impacted yet?

Yes. They are, Mike. And just round numbers, again, let's say an average spread was 125 over, we've seen that widen to 160 to 200 over and that widening may not be finished. So the spreads have widened, we'll call it 35 to 75 basis points. Treasury rates have come down a bit, 30, 35 basis points. So the net effect so far has been 10 to 40 basis points. But what I don't know, we don't have a crystal ball whether we're in the early stages of this or the middle innings or it's the bottom of the ninth. So we don't know what impact it will have beyond that.

I will say that impact on us is very relatively minor and we have competed with people using highly leveraged structures to buy net lease investments and from what we understand that is much harder to do and it's gotten much more expensive and so our use of moderate amounts of leverage has not been a competitive advantage over the last couple of years but should be a competitive advantage going forward because we don't rely on lots of cheap easy money.

And would it be fair to say that we can basically pass that cost on?

Yes. I think there is always a little bit of a lag potentially but generally the pricing in the sale lease-back transaction reflects interest rates and spreads at that time and that's the accepted market practice, so, yes.

And you may have mentioned it and I missed it. I know it's a small part but self-storage was an area we were sort of beginning to work in. Can you just update us on that?

Yes. I think we mentioned we have a small initiative in storage where we've bought a number of properties. I would continue to describe it as a small initiative and more of something that is not a primary thrust of our business but an initiative to understand that asset class better and to -- and we've invested on the order of $25 million of equity in that business. But that is -- that is what it is.

Was that going into funds or was that in W.P. Carey's account alone?

It's currently a W.P. Carey's account alone. And we've explored what alternatives we have in terms of whether we keep it as our account and continue to explore whether that's appropriate for a fund or not.

Thank you.

There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Thank you. As a reminder, a replay of the call will be available after two o'clock today by calling 877-660-6853. This week they will be available through August 15th. We also will have a podcast available of the call that will be available after two o'clock today and that can be downloaded at wpcarey.com/podcast. So we'd like to thank you all for joining us today and we look forward to speaking with you again next quarter. Thank you.

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