WP Carey Inc (WPC) 2007 Q3 法說會逐字稿

Greetings and welcome to the W.P. Carey and Company. Third 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 following presentation. (Operator Instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Susan Hyde, Director of Investor Relations for W.P. Carey and Company. Thank you. Ms. Hyde, you may begin.

Thank you, Anthony. Good morning and welcome, everyone, to our third 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, wpcarey.com, and will be available for 90 days. It will also be available for a podcast.

Before I turn the call over to our CEO, Gordon DuGan, I need to inform you that the 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.

Thank you, Susan. Good morning and thank you all for joining us this morning. We are pleased with our results for the third quarter and year to date for this year, and those results are outlined in this morning's press release, and we're very happy about them.

I want to make some comments on highlights of our financial results. Additionally, I want to make some comments about the current environment we're operating in. As you see in the press release, assets under management have continued to grow nicely and stand at approximately $8 billion. Revenues, net income, and FFO were all up for the quarter and year to date. Mark will discuss those in greater detail. We additionally have added the metric of adjusted cash flow from operations, and this is a new metric for us that we think is a good metric to look at the core cash earnings of our business. Based on that metric, our results for the nine months are $68 million, which is up from last year's $59 million, an increase of 15%.

In terms of investment activity, we've had a very good year so far. Our third quarter of 2007 we had investment activity of $214 million, which compares to the third quarter of 2006 investment activity of $113 million for the nine months, which we think is a better measure always on the longer period, because quarter by quarter, as we've said many times, the investment volume can be lumpy. And so for the nine months, our investment volume is $950 million for 2007 relative to $450 million for 2006. Year to date we've exceeded $1 billion in investment volume and again, we're quite pleased with the efforts of our investment teams, both in Europe and in the United States.

We've experienced strong investment volume in Europe. The third quarter our international investments were over 50% of our overall investments, and we've recently seen a pickup in activity in the United States. While we don't count deals that haven't closed, and use the old line of not counting our chickens before the eggs have hatched, our pipeline is very good right now.

In terms of the credit crunch effects, there are a few things I wanted to highlight. First of all, one thing that we've seen is there are fewer highly leveraged competitors competing for investment opportunities. The more restrictive lending practices have made it difficult for people who rely on high levels of leverage, and that's good for us, as we are not, we're not typically utilizing very high levels of leverage.

Secondly, the overall environment favors well capitalized firms with access to equity, and we're clearly in that position with a very strong balance sheet and access to equity.

Thirdly, we have seen some more restrictive lending practices, and financing for our investments is harder to get than it was before. And that's especially true in Europe. The European market seems to be somewhat more restrictive than the market in the United States. But that having been said, we've closed since mid-August four loans in the United States and one in Europe, and so we continue to believe that financing is available for our deals, and we're able to close deals with that financing because we aren't using, again, very high levels of leverage, and we're well capitalized and can put the equity in to make the investment.

Lastly, we have not seen a pickup in defaults among our tenants. We are cautious about this because if the credit market worsens substantially or the economy worsens, we could see a pickup in defaults. But we have not seen that yet.

In terms of our own portfolio, it continues to perform well with solid cash flows, although the shorter term nature of these leases requires a much higher degree of management work to keep, to produce that cash flow as these leases run off. Tom Zacharias will speak more about that in a moment.

We also want to update you on CPA 17. CPA 17 is, we're seeking to raise $2 billion for this fund. For those who don't know, it's our sixteenth fund dating back to 1979, and for perspective, CPA 16 was $1.1 billion. We were informed by the SEC that they have no further comments, so we expect to begin fundraising for this fund very shortly.

We also announced in the press release the restructuring of W.P. Carey. The restructuring was completed October 1. And basically, we hope this will allow us to expand our investor base. And the early feedback we have received from the investment community has been positive. Our effective tax rate is something that is unusually high in this quarter. We're not happy about that, and we're working on initiatives to bring that in line over time. Mark will discuss that in greater detail.

Lastly, as we look to the end of 2007 and to 2008, we do so with a few things in mind. Number one, we are a market leader in our investment segment, and we see a lot of opportunity in our investment segment. Number two, we're generating strong and growing cash flows at W.P. Carey. Number three, we have a terrific balance sheet, and we are in very good financial position. And number four, we don't need to access the base capital markets to continue to grow earnings as we utilize third-party assets under management. I think all of these things highlight the strength of the business model that we have, and we're gratified by the results that we've been able to generate in the third quarter and year to date.

With that, I'll turn it over to Mark DeCesaris.

Thanks, Gordon. Overall, net income for the Company net of an out-of-period adjustment of $4.8 million, which I will discuss in a few minutes, increased 9% for the quarter to approximately $15.6 million, or $0.39 per share, and 60% year to date, to approximately $68.4 million, or $1.72 per share. FFO increased 38% to $32 million for the quarter, or $0.81 per share, and 77% year to date to approximately $130 million, or $3.28 per share.

Our investment management segment continues to be the primary growth driver of our business. Revenues from this segment accounted for 67% of the total revenue stream of the business for the nine months ended September 30, 2007. The drivers for this segment are investment volume made on behalf of the CPA series of funds as well as growth in our third-party assets under management. Investment volume increased 89% to $214 million in the third quarter compared with $113 million in the prior year's quarter, and on a year-to-date basis increased 111% to $950 million as compared to $451 million in the prior year.

Structuring revenues associated with this volume increased $6.3 million to $9.8 million for the quarter, and on a year-to-date basis increased $52 million to $67.8 million. These increases were driven by three factors--increases in our investment volume, our ability to recognize 100% of the revenue stream as it relates to investments placed in CPA 16, and recognition of approximately $31 million of previously deferred revenue related to CPA 16 achieving its hurdle in the second quarter.

Third-party assets under management increased to $8 billion. On an annual basis, third-party assets under management have grown at a compound annual rate of 24% since 2001. Manager revenues associated with this portfolio have increased 30%, to $18.6 million for the quarter and have increased 47% to $63.9 million year to date. Increases in our assets under management, our ability to recognize 100% of this revenue stream from CPA 16, and the recognition of approximately $11.5 million of previously deferred revenue related to CPA 16 achieving its hurdle in the second quarter accounted for these increases.

Our pre-tax income, excluding the out-of-period adjustment of approximately $5.7 million, increased 39% to $28.2 million for the quarter and 82% to $115.7 million year to date.

In our real estate segment, leased revenues increased $1.7 million to $19.8 for the quarter and an increase of $5 million to $59.1 million year to date. These increases were primarily related to properties acquired in December of 2006 from CPA 12 prior to its merger with CPA 14, as well as rent increases at existing properties.

FFO generated from the real estate segment increased 14% for the quarter to $15.2 million, and 7% on a year-to-date basis to $46.9 million. The prior year's numbers are impacted as a result of the Company recognizing a $4.8 million gain on the sale of a security. Excluding that gain from the prior year, FFO would have increased 17% year to date on the core real estate operation.

Overall, excluding the out-of-period adjustment, net income for the quarter increased 9% to $15.6 million. Impacting the results this quarter was an impairment charge of approximately $2.3 million related to a property in our real estate portfolio that was subsequently sold in the fourth quarter of this year.

On a year-to-date basis, net income increased 60% to $68.4 million. Impacting our results for the year, in addition to the items just mentioned, was a recognition of approximately $21.6 million of income, net of compensation and tax and expenses, related to the previously deferred revenues from CPA 16 meeting its hurdle in the second quarter.

Gordon spoke about our adjusted cash flow metric. We feel that the adjusted cash flow supplemental metric is useful in assessing liquidity and cash generated from our core operation that is available for dividends. It is based on cash flow from operations adjusted for timing differences, such as the impact of the 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 liabilities associated with that income, as well as ownership adjustments to account for distributions from our equity investments.

For the nine months ended September 30, 2007, adjusted cash flow from operations totaled $68 million as compared to $59 million in the prior year, an increase of approximately 15%.

As Gordon mentioned, we are taking steps to reduce our effective tax rate. This initiative will primarily be focused on moving certain components of our income stream out of our taxable C corp. This may have the effect of increasing our effective rate in the short term in order to achieve a lower effective rate on a long-term basis. Additionally, we have changed our revenue stream from CPA 17 to receive that revenue in a more tax-efficient manner.

From the balance sheet perspective, our recourse debt is approximately 5% of the total assets of the Company, and total limited recourse debt is approximately 25% of the total assets of the Company. And we currently have an interest coverage ratio of nine times.

During the quarter, we repurchased approximately $19 million worth of stock, and to date have repurchased approximately $21 million worth.

Let me discuss with you for a moment the out-of-period adjustment which had the impact of increasing income in the current period. During the third quarter, we determined that a longer schedule of amortization of assets in certain of our equity method investments should appropriately be applied to reflect the lives of the underlying assets rather than the expected holding period of these investments. This determination resulted in a one-time cumulative out-of-period adjustment in the third quarter of 2007. The effect of this adjustment was to increase our income from continuing operations by $5.7 million and increased net income by $4.8 million. Because this adjustment dealt solely with the amount of amortization expense recognized, there was no associated impact or cash flow from operations or on any of our supplemental metrics, including EBITDA, FFO, and adjusted cash flow from operations.

Basically, what we did, we had taken a conservative view in prior years on the amortization of certain assets in our equity investment portfolio. As we reviewed that in the current quarter, we felt that we should amortize that over the underlying assets within those investments, which had the effect of amortizing them over a longer period of time. This basically would have increased income in those years. We've determined that the effect of the income adjustment in those years was immaterial to any of those years. We believe it is not material to the 2007 year in total and elected to take it as an out-of-period adjustment in the current quarter.

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

Thank you, Mark. I would like to provide a brief portfolio report for the third quarter of 2007. And our segment announced that the earnings for the first nine months of 2007 were 17.8 million square feet of properties owned by the LLC produced funds from operations of $46.9 million, which equates to $1.18 per share. Therefore, the owned real estate portfolio produces a significant contribution to the current annual dividend of $1.89 per share. However, the growth of the CPA asset management revenue is the growth engine for the Company, as it grows far faster than the real estate revenues. Our CPA assets under management at the end of the second quarter were approximately $8 billion, and this is a $1.2 billion increase over the last 12 months. As Mark has mentioned, our top line asset management revenue has grown by over 47% year to date.

In the LLC portfolio in the third quarter, we completed various space renewals and new leasebacks. For 2007, of the $6.9 million of lease revenue coming due in 12 leases, we have renewed 66% of it and sold one of the buildings back to the tenant. At the end of the third quarter, occupancy in the LLC portfolio was at 96.5%, which is up slightly from the prior quarter. In the LLC portfolio, the revenue weighted average lease term is 5.5 years with 110 tenants. In the CPA REIT, this average lease term is a lot longer. It's between 12.3 and 16.5 years. As of today, we have approximately $4 million of lease revenue coming up for renewal in 2008 in the LLC, and we are already in discussions with all the tenants.

Last week the LLC sold its interest in four ventures that we had with a partner in France for approximately $20 million and achieved an IRR over the last nine years of over 25%. We now have approximately $16 million available in a qualified intermediary account for 1031 exchange, which will be used in order to buy another building and therefore postpone the tax gains on that transaction.

As of September 30 of this year, the occupancy rate of the entire W.P. Carey group of 103 million square feet, which includes both the CPA series of funds as well as the directly owned assets, was approximately 99.3%, so we have a very well occupied portfolio.

As a result of receiving asset management fees and shares, we now own over $147 million in shares in the CPA REIT. Year to date it has been an increase of over $40 million in investment in our CPA REIT.

In summary, the LLC portfolio and the CPA REITs are performing well, and we are working to create value through re-leasing, asset sales, redevelopment, and refinancing. Steady increase in our assets under management is providing attractive revenue growth for the Company.

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

Thank you, Tom. I'd like to discuss (inaudible) out of this, but I'm very happy to see what appears to be a record year, another record year, and that we've had this steady performance for our investors over a good number of years, good times and bad, cycles and we've been somewhat countercyclical, we've been able to deliver great rising income for investors in our REITs, and the saying is that no investment manager is any better than what he does for the investors in the managed funds, and that we're very grateful, we're very happy that we've done extremely well for those investors in the managed funds and given them average returns which are significantly higher than most other measures available. I would say it's been good times, and I'm mostly grateful for the people that we've, the group that we have here. It's an outstanding group of people. People of high character and who go into the Company's investments to do good while we're doing well and investing a lot of time. So I'm grateful and welcome your questions and thank you for your, investing in our, with us, and we'll continue to do the best we can for you.

As that concludes our presentation for this morning, and now we'd like to open the call up for any questions that you might have.

Thank you. We will now conduct a question-and-answer session. (Operator Instructions.) Our first question comes from the line of Alex Crips with H.G. Wellington. Please proceed with your question.

Hi, good morning, everyone, and congratulations on a stellar quarter. My question is about the income from equity investments in the CPAs under the Other Income and Expenses and the significant increase from last year. Is that primarily related to the 40 million additional shares owned in the CPA REITs, or were there other significant drivers to that increase in income?

Part of it is the, relates to the adjustment that we took as well.

That's it for me.

All right. Thanks, Alex.

Our next question comes from the line of Michael Huffman from Rock Point Advisors. Please proceed with your question.

Good morning.

Good morning, Michael.

Educate me, please, on the foreign currency impacts of your European and Asian real estate ownership, either directly or through the CPA vehicle.

We have, to some extent we mitigate our FX exposure. On an investment, we make an investment. We leverage that investment in the same currency as that country. So really, what's at risk is our equity under that investment. We evaluate our exposure more from the incoming cash flows that we have through these mezzanine debt structures and what the foreign currency can do, exposure can do to that as we look to that from a dividend coverage standpoint. As the dollar weakens, we actually gain by receiving a higher cash stream from those investments. So at this point, with the dollar weakening where it is, the cash end we receive on those mez-debt structures is actually increased.

Yes, and Michael, you would see the increase in the revenues that we derive closer to areas, either rental income if we own the property in the majority ownership. And then secondly through this equity investment line that we were just talking about, in that we have both equity investments in properties in Europe as well as CPA shares that, in portfolios that have fairly large foreign holdings. And that flows through the equity investment income. So what we've, what we've had in Europe recently, for instance, is an increase both in rents in Euros, and then obviously we've benefited from the dollar's decline against the Euro, and we've received both of those benefits.

And there is a little bit of hedging (inaudible) that shows up in your financials that definitely relates to financing in particular, or?

Yes, we've borrowed, we've taken the approach of borrowing in Euros so that we're hedged on, if our borrowing is 70% of the investment, we're hedged on 70%. And we've been, because we're long-term holders of these assets, we've been comfortable with the equities, the equity not being hedged because it's very inefficient to hedge it over a 10- or 12-year period. We've benefited from that and we haven't seen a let-up in that benefit, but that's been good for us recently.

Okay, thank you very much.

Thank you, Mike.

Our next question comes from the line of Everett Reveley with Davenport and Company. Please proceed with your questions.

Good morning.

Good morning, Everett.

Just a couple of quick questions. Looking at your new cash flow metric, I saw just in the quarter itself, it was a little low. I think it was like $13 million. I assume that's just a timing thing that's going on?

We--you mean as compared to the six-month period?

Yes.

Our adjusted cash flow from operations are primarily impacted. Most of the deferred acquisition fees that we receive, we receive at the beginning of the year. So in effect, it's front-loaded to some extent at the beginning part of the year, and then as the year goes on, it tends to even out. I think that's really what you're seeing, Everett.

There's a little seasonality to it, so that the first quarter is the best quarter from a cash flow standpoint.

Gotcha. And then I had a question just about the dividend growth in relation to the growth in your cash flow from operations, which is growing 15%, as you said, and then the dividends have kind of been growing around 4% right now or so? What do you see going forward as far as the dividend growth?

We've always had a very conservative dividend policy, and it's one that has benefited us, because we've been able to have a steadier increase in dividends in the variety of cycles. And so I think overall we have a relatively conservative dividend policy. That having been said, in September of '06, our annualized dividend for that quarter was $1.82. In September of '07, our annualized dividend was $1.89. So the trend has been upward, and if we can grow--for us, it's all about, if we're able to grow our adjusted cash flow, we'd like to see continued growth in the dividend. And that's really, we don't have any projection as to how that might go in the future, but there has been some growth, and we're hopeful to be able to grow our adjusted cash flow and dividend in the future. And the rate of that growth, we'll just have to see as we discuss it with the Board.

Do you think buybacks, stock buybacks, will become a more regular part of your operation, or is it just kind of a one-time thing you're doing now?

It's always been opportunistic for us, so I wouldn't, I would say we'd continue to be opportunistic.

All right. Great. Thanks.

Thanks, Everett.

There are no questions in the queue at this time. (Operator Instructions.) Our next question comes from the line of Michael Beall with Davenport. Please proceed with your questions.

Good morning.

Good morning, Mike.

Gordon, you addressed this once, and I guess it's sort of I'd just like to hear it again. But the net of your commentary about the credit crunch and how it impacted, it seemed to be that it's more good than bad. And I guess I ask you, would you feel like our investors, and ultimately W.P. Carey, is able to get a higher risk-adjusted rate of return when your investments in these triple-net lease assets didn't, say, six or eight months ago--in other words, the returns that we are able to get, do they sort of reflect the widening of credit spreads? And then, sort of secondary to that, is there a competitive position in that world held by the fact that we use only 50% leverage? And that might have been a--presumably a disadvantage at one time.

Yes, I think that's exactly right, Mike. To take them in sort of opposite order, it's been a disadvantage to be, to having, to not being a highly leveraged investor, and the mortgage markets have become more restrictive, and we've seen the drawing up of the highly leveraged investors except in very specialized situations. And so we view that as a competitive, a positive competitive development. And I would say that in terms of the overall pros and cons on the credit crunch, we--generally speaking, the sale leaseback business does get higher risk-adjusted returns when credit gets tight. Now, when we have a credit crunch like we did in August, there's a dislocation in the market that can have some short-term shakeouts. We have seen a pullback from our European lenders. They're lending less than they were before, which makes our deals harder to do. Even if we can increase our pricing, they're harder to do. But the net effect of all the pros and cons is we see a better investment environment from a risk return standpoint following the credit crunch.

And I should know this. Our typical lease deal has an escalator that is CPI or some price index oriented. There's always the debate about core inflation and energy and all that sort of thing. Can you just remind us what our typical escalator might look like?

I think that the typical escalator is the CPI, and the CPI is calculated on an all-items basis, so it's, there's sometimes a discussion about narrowing it down. But it's the standard all-items CPI, but we also use fixed increases, percentage of sales, et cetera. But the typical one is the standard CPI adjustment based on all items. I think that's how they define it, the government definition.

All right. Thank you very much.

Thanks, Mike.

There are no questions in the queue at this time. (Operator Instructions.)

I guess if we have no further calls or questions, rather, we'll just inform you and remind you that a replay of the call will be available after two o'clock today by calling 877-660-6853, account number 286. And the conference I.D. for that is 254758. The replay will be available through November 15. We'd like to thank you all for joining us today and participating in our call, and we look forward to speaking with you again in the next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.