WP Carey Inc (WPC) 2008 Q1 法說會逐字稿

Greetings and welcome to the W. P. Carey & Co. first quarter 2008 earnings conference call. At this time, all participants are on 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, Ms. Kristina McMenamin. Thank you, Ms. McMenamin. You may now begin.

Thank you, [Latonya.] Good morning, and welcome, everyone, to our first quarter earnings conference call. Joining us today are W.P.Carey's chairman, Bill Carey, CEO, Gordon DuGan and Acting Chief Financial Officer, Mark DeCesaris. Today's call is being simulcast on our web site, 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 would like to turn the call over to Gordon.

Thank you, Kristina. Good morning and thank you, all, for joining us this morning. As you saw our results in our release this morning, I think it was a pretty straightforward quarter for us in that there were'nt a lot of onetime items. Revenues were higher in both our investment management and real estate segments. And Mark will describe n greater detail the results and the variances from the prior quarter the year before. As you see from the press release, our FFO increased in the first three months of this year relative to last year to $21.5 million from $18.6 million. EBITDA was up nicely to $35.4 million from $29 million in the prior year. And adjusted cash flow from operations also increased, although more slightly. I would also point out that assets thunder management as of March 31st, 2008, were up from from the prior period, prior year period to $8.76 billion. I would like to comment in our press release, since 2001, assets under management have more than tripled. I would also point out that assets under management as of March 31st, 2008, are up 14.2% from the prior period, from the prior year period to $8.6 billion. And I also like to comment on our press release that since 2001, our assets under management have more than tripled. I want to talk a little bit about the investment activity in the investment environment we see. As you'll see in the first quarter, we closed $57 million in investments. And year-to-date, we've closed two sale-leasebacks from the United States. One is a nursery in the Pacific northwest. Another sale-leaseback that we closed was the number of food manufacturing facilities located across the United States. So, those have been the two sale-leasebacks in the United States. Additionally, we've closed two sale-leasebacks in Europe. One is a logistics facility in Finland, and the other is a plastic packaging facility in Germany.

In addition to that, we've made a small number of discreet fixed-income investments. What I find interesting about this is that we are able to find investments today on our sale-leaseback investments. We are finding mortgage financing for those investments and closing the mortgage financing is part of our sale-leaseback financing. We are able to find attractive investment opportunities and closed attractive investment opportunities. But I'd also comment, as you see, the quarter was down versus the prior year, $57 million versus $167 million. And to some extent, it's because the business is lumpy quarter to quarter, the investment business. We've discussed that many times, and it continues to be lumpy. But I think it's a little bit more than that as well. I think we are going through a period of pricing adjustments with the mortgage and credit and capital markets in the disarray that they've been in. We're seeing some increase in the returns on our sale-leasebacks, but there's an adjustment period while the market gets used to it. And I think that to some extent, what we're seeing in the first quarter is not so much that we didn't see more investment opportunities, but we are not making investments today that don't meet our pricing criteria. And we think that by waiting, we'll continue to see attractive investment opportunities and that hopefully, returns will increase over that time.

The other comment I would make is in terms of the second quarter, last year, our second quarter was a record quarter. We closed an investment in Germany that was over $400 million. And I would just say to our investors that I wouldn't necessarily expect us to repeat the second quarter last year this year given the second quarter last year was, again, a record in terms of investment volumes. So, from an investment volume standpoint, I would not expect us to reach the same investment volume. I'd love to be happily surprised on that. But at this point, I would not expect that. At the same time, while we're going through this pricing adjustment, we do have a strong pipeline. I reviewed the pipeline this morning. We have a strong pipeline assigned investment opportunities, and we expect that time will continue to be on our side in terms of presenting us with attractive investment opportunities given the very difficult mortgage and credit Capital Markets. Again I would remind everybody that the dynamics of the sale-leasebacks are different from other commercial real estate investments. Sale-leasebacks occur because companies want to raise capital for their business. And generally speaking, when money is tight, the opportunities improve for investors.

To take advantage of these investment opportunities that we are seeing, we have begun, as we mentioned, raising CPA 17 global. It's our 16th in our series of funds. We skipped 13 for numerology reasons. And so, we're on to CPA 17 global. We've raised over $110 million in the fund. We hope to raise up to $2 billion, and we've been pleased with the steady pace of fund-raising that we are seeing with our fund-raising CPA 17 Global, especially in this very volatile capital market. We have seen a nice steady pace of fund-raising. We are seeking to increase the pace of fund-raising, but it has been a nice, steady pace. And I think there are two reasons for that. One is our track record. We've built up a track record over 30 years through various different cycles. We've had 12 of our funds go full cycle. And so, investors have a very clear, cycle-tested track record in terms of what we do to look to. And I think that's helping us raise money in what's a volatile capital market period. The second thing though, I just touched on the financial firms that we raised, financial advisers that we raise our money through, tend to use financial planning and asset allocation in terms of their investment decisions. And the asset allocation model where people will allocate a certain percentage to equities, a certain percentage to fixed income and perhaps a certain percentage to alternative investments tends to create a more steady stream of flows for investment the managers because there is not a lot of market timing going on. The investment plans are set up based upon factors such as age, whether or not they're currently earning an income, when they plan to retire and how long they plan to be retired for. And so again, they are using more of an asset allocation model to build their portfolio of investments, and it tends not to be, again, a market-timing exercise, so it tends to mean that there are fairly steady flows going to the various investment segments. We would like to continue to benefit from that in the future, but we have been pleased with the steadiness of the capital ratings so far this year.

One last comment you saw in our release, a comment about Carey-Watermark. I would just comment on that. We would like to keep everybody's expectations very low about that. We have a great partner. We've made investments with our partner before. And we believe there is a terrific strategy for this but it is just the beginning of the process, but not something that we would expect to see any meaningful contribution from. Because it's at the very beginning of the process, we would like to keep people's expectations low about where and how that comes to pass. Lastly, before I turn it over to Mark DeCesaris, I would just like to summarize my viewpoint for the first quarter. We thought it was a good quarter from an operating results standpoint. Investment activity is still occurring, we're still closing investments. It is a little bit lower than last year for Q1 and we expect to see it for Q2. But we have a strong investment pipeline of attractive investment opportunities, and we think the dynamics of wide sale-leaseback transactions occur, play very much to future investment opportunities. When money is tight, companies seek to sell their real estate as another means of raising capital. Lastly, we are very pleased with the steady flow into our CPA 17 global funds. We would like to increase that fund-raising but we have been pleased with the steadiness of the inflows in the CPA 17 global. With that I'll turn it over to Mark to give a little bit more detailed view on the results for the quarter.

Thanks, Gordon. I would like to start with our investment management segment. Our assets under management increased $8.6 billion. This represents an increase of approximately 14% over the prior year. We currently manage approximately 88 million square feet owned by the CPA funds with an occupancy rate of over 99%. These portfolios performed well for the investors of these funds as a total return for investors of CPA 14 was approximately 15.7%. And for CPA 15 totaled 13.6% for 2007. Asset management revenues for the first quarter of 2008 increased to $20.1 million, a 34% increase over the prior year amount of $15 million. The net asset values of both CpA 14 and CPA 15, based on appraisal as of December 31st, 2007, increased. This increase, in addition to the increase in our assets under management, led to higher asset management revenues and represented approximately $3.1 million of the revenue increase. The remaining $2 million increase related to our ability to recognize 100% of the performance revenue on CPA 16 assets.

As Gordon mentioned, investment volume for the quarter was $57 million. And that compares with $167 million for the same quarter last year. This lower volume resulted in structuring revenues of approximately $3.4 million for the quarter compared with $4.6 million in 2007. It was offset in part by our ability to recognize 100% of the acquisition revenue on investments placed in CPA 16. All of our volume in Q1 was placed in CPA 16 for domestic investments. EBITDA for the Investment Management Segment increased by 27% to approximately $14.7 million, an increase of $3.2 million. Net income increased $6.9 million for the quarter as compared to $4.4 million for the first quarter of 2007. These increases were primarily driven by the increases in the Management Revenue Segment of $5.1 million. Moving to the real estate segment of the company, revenues increased 3% to $22.3 million for the first quarter. This compares with $21.6 million for the first quarter of 2007. This increase was due primarily to rent increases, and lease revenues generated by two properties acquired at the end of 2007. Occupancy on our own investments was approximately 96.5%. Net income from the Real Estate Segment was $10.2 million for the first quarter compared with $6.4 million for the first quarter in 2007. The increase of $3.8 million was primarily due to recognition of approximately $2.6 million in foreign currency translation gains.

On a company-wide basis, net income for the quarter was $17.1 million as compared to $10.6 million for the first quarter of 2007. And on the fully diluted per-share basis, net income for the quarter was $0.43 per share as compared to $0.27 per share for the first quarter of 2007. Funds from operations for the quarter was $21.5 million or $0.54 per share as compared with $18.6 million, or $0.47 per share for the first quarter of 2007. Our cash flow from operations approximated $10.8 million for the quarter. We received a payment for deferred acquisition revenues in January for approximately $46.7 million. $28.3 million of which pertained to deferred revenues from CPA 16 that were recognized when the preferred return was met by that fund. Adjusted cash flow from operations totaled $38.7 million compared with $37.4 million in the previous year. The company continues to have a very strong balance sheet. In March 31st 2008, total debt represented approximately 23% of the total market cap of the company. Total unsecured debt represented approximately 5% of the total market cap of the company. Approximately 77% of our total debt is secured at the property level, and approximately 98% of that debt is currently fixed. We feel we are well-positioned today. We had access to capitol as you heard Gordon's comments on CPA 17. We haven't placed a four-year $250 million revolver which gives us financial flexibility in addition to our strong balance sheet. With that I would now like to turn the call over to Mr. William P. Carey, the founder and chairman of the company.

Thank you very much, Mark. I just want to say that I am extremely proud at the wonderful job that the management team and the investment officers have gone through these turbulent times. Of course, let's not forget our risk management, which is led by our investment committee, totally independent people who experience every cycle imaginable. And they basically--I thank them from the bottom of my heart for having helped us to avoid trouble and emerge as one of the most successful investment managers in the world. I am proud of you. As a large shareholder, a lot of the benefit of this when I joined--the other shareholders are equally blessed, and also the shareholders in our managed funds, it has been said that investment managers know better than the job it does for the advantage funds. And as somebody mentioned, the vacancy rate is less than 1%. I just checked on it yesterday. It is actually a 0.39%. It is less than four-tenths of 1%. That is a pretty good record. And I congratulate everybody on the team for having made that possible.

We are ready for questions.

Thank you. We will now, conduct a Q&A session. (OPERATOR INSTRUCTIONS) One moment while we poll for questions. Our first question comes from Alex [Prist] of H.G. Wellington Please proceed with your question.

Hi, guys. Nice quarter. Just one question about asset raising on CPA 17 here. I think, last time we spoke, may be Ameriprise was the primary broker helping you guys get funds for this. I'm wondering if anyone else is helping out substantially there yet.

Hey, Alex. Good morning. At this point, we've just rolled out the product Ameriprise, as you may know, Ameriprise has over 10,000 financial advisers. We have a very long track record with them, and so at this point, it's primarily Ameriprise. But we'll seek to add other dealers in the future.

Thank you.

Thank you, Alex.

Our next question comes from Everett Reveley with Davenport & Company. Please proceed with your question.

Good morning. I've got a few questions for you. To start off, just a numbers question. Could you walk through how we get from net income to FFO? I know I've asked this before but specifically what the Investment Management Segment for the Non-cash Addbacks, and then with the Real Estate Segment, why the Addbacks kind of--they went down this time versus where they have been in the past.

On the investment management segment, Everett, we start with net income, we will addback amortization and deferred charges and other non-cash charges as well.

Deferred taxes?

Deferred taxes. And then we will add back FFO from our equity investments as well to get to an FFO from our Investment Management Segment.

Is there any way to forecast that at all, or was it fairly random?

I think the difficult piece for you to forecast is the FFO from our equity investments. It should stay fairly consistent. I think the biggest piece of that probably comes from our ownership in the CPA funds. And I think, by taking a look at--We are going to start with this quarter when we filed the CPA fund Qs releasing FFO from those funds. So, I think it will be somewhat easier for you to get to at that point.

And then the amortization and deferred taxes and other non-cash charges, how do you think about that, or how should I think about that going forward.

The amortization, you can pick up off of, obviously, the income statement. That doesn't tend to fluctuate significantly in that segment. I think the deferred taxes is the biggest piece that fluctuates from there. And it's difficult right now because over the next two years, I think you've heard us announce before the we have a kind of a two-year plan to lower our overall effective tax rate. But over the next two years, in any one quarter, we could still see some fluctuation from that provision. The biggest piece of what generates a deferred tax is both the deferral of the 2% of the acquisition fee that we earn on investments as well as the deferral of the portion of our revenues that we earned through our management segment that we received in shares of the funds as well. And those are deferred over a vested period that's typically done over a three-year period. So, I think you can--from that aspect, you can work that in. That is a discussion that we can have offline.

And then, just quickly, beyond CPA 17, what kind of available capacity do you have as far as funds to invest for the other CPA?

Well, I guess, 16 at this point is committed, but as we-- It has been committed in terms of investment. Fully committed in terms of investment profile. We do have some funds available in CPA 15, CPA 14. As we sell properties, we have a choice of distributing those proceeds or reinvesting those proceeds. And in the later, the recent fund, 15 and 16, we still have the ability to reinvest those proceeds. So, we have capital there, but our primary, going forward from here, our primary investment vehicle is going to be CPA 17, except to the extent we need to split a deal for diversification purposes. So, 17 will be the going forward, the investment vehicle. The others, for the most part, are fully invested. But at the same time, if we had a large deal that we needed to split, those funds are very large, very liquid, if they needed to invest in a piece of the deal they could. CPA 14, 15 and 16 are both raised over $1.1 billion of equity. So, they are quite large funds that have [dry powder] called upon. What I would expect to see is the new investments going into 17. I hope that answers that, Everett.

And then for this new investment, the Carey-Watermark thing. I know it's still fairly early. How much capital from W. P. Carey are you looking to invest or is that purely a managed fund?

That is purely a managed fund.

And then kind of a last big-picture question. Could you talk about your process as far as capital between share buybacks or raising the dividend or investing in the CPA funds? How you go through all that thought process.

Sure, why don't I take a crack at that? Our investment in CPA funds is a little bit more on autopilot in a sense that we take a part of our fees in shares of those funds. And so the growing piece of our balance sheet that represents our share in the CPA funds really comes about from taking fees in shares rather than in cash. And so that tends to be less part of the equation. In terms of the stock buyback, we have had a plan in place. Since, you know, we terminated in March. We have the ability to restart the plan when we want. And it's really a question of how we view the deployment of capital in our own stock versus other opportunities. Right now, we're comfortable not having a stock buyback plan in place, and we haven't announced any other opportunities that we have reserved for our capital at this point. That's really--Right now, it's simply a question of do we want to have a stock buyback plan in place at the moment? An we don't at the moment. In terms of our dividend, the last thing I'll say on that, and Mark with any other comment," is this adjusted cash flow from operations is the metrics that we use to guide dividend growth, our dividends have grown steadily over the last few years and our adjusted cash flow from operations has grown faster than our dividend growth. And that's what we'd like continue to see. Hopefully we are able to grow our adjusted cash flow from operations and then grow our dividend along with that. That's why we've been using this metric. We have tended to look at the dividend as a different decision than the stock buyback.

Yes, I think Gordon's right. We came out with the adjusted cash flow metric as a way to filter out all of these special events that tend to occur and make our normal cash flow fairly lumpy. We think measuring our normal dividend in terms of that metric is probably the best way. We have increased it steadily. As a result of the special events, if we determine the best use of that cash, a special distribution will make it. We did that in December of last year, so we would continue to evaluate that based on the time we're in.

The last point I would make, Everett, we certainly have the balance sheet to have this sort of flexibility to do one or all of those things as we need to.

Alright. Well, what kind of other opportunities are there out there for you to do? You're generating a lot of cash and paying a lot of dividend, but you are generating more cash than dividend.

I think part of that is the current period we're in. We think having a strong balance sheet in this economic climate, that we're going to see opportunities. We don't necessarily know what they are today, but I think with what's going on in the market we're confident we are going to see those. And I think maintaining that balance sheet flexibility is very important to us.

And the moment we have anything to report on that, we will.

I think one thing certainly--I hope I am accurate in this number, they combine a net worth (inaudible) about $5 billion. And our--times interest charges earned on company or fund level, that is something like 53 times. I don't know of any financial institution with a better position to raise money when needed than the W. P. Carey Group.

One last question. You mentioned Mark is going through a pricing adjustment, how big of an adjustment have you all seen and how big do you think it will get over time?

That is the $64,000 question. I would say we are seeing cap rates come up. We have seen pricing changes are slow and steady, but there are also other aspects of the transactions that are harder to quantify in pricing terms such as lease terms and the availability of rental increases throughout the term of the lease. And so, what I would basically say is the markets becoming more investor friendly, but it is going through an adjustment period. There is still competition, plenty of competition for sale-leasebacks. It is certainly not a marketplace where there's a complete lack of capital, and we are able to dictate terms. But clearly, money has become tighter, and clearly, the investment opportunities get better as we provide capital to companies through the sale-leaseback in the time of tight money. But it takes a little while. People still remember pricing from last summer. And we say that unless someone can get in a time machine and go back to last summer, those days are over. There is a period of adjustment. It's not a severe adjustment. It's a slight adjustment. In our view, if we have the capital, we want to get higher returns than we are willing to wait.

Alright. Thanks.

Thanks, Everett.

(OPERATOR INSTRUCTIONS ) Next question comes from [Mike Bill] with Davenport & Company. Please proceed with your question.

Good morning.

Good morning, Mike.

Got to get on the same phone and save us some money. Well, first of all, it is good to see you in an eventful quarter. That is a good thing these days. The occupancy rate, as Mr. Carey and both of you alluded to, is quite high. We do tend to do these transactions with fairly level players. Can you comment in general, anything you want to add to that in terms of the health (inaudible) of the ones that you own and the funds and just any sort of process you have for early identification and problems? Although, I don't know what you would do if you identified one.

It's something we have spent a lot of time on, and you'll see in our SEC disclosure, we do expect corporate defaults to increase all of the major rating agencies, expect greater corporate default from the coming years than we have experienced over the last few years. We will not be immune from that. We expect our tenants to have a higher incidence of financial difficulty as we move toward that. We expect that and we manage that. The way we manage to that is we have these portfolios very broadly diversified by tenant and by tenant industry to reduce the correlation of potential corporate defaults. And that's proved to work very well for us in past cycles. We are not overexpose to anyone tenants or anyone one tenant industry. That has an ameliorating effect when you go through increased corporate default. And the second thing I say is, Mike, we seek to buy--and hopefully we do a good job at this. We seek to buy properties that are critically important to a tenants operation. So we've had many cases, some in the last year, where tenants have filed for bankruptcy. They need our properties to continue to operate profitably. Their problems may relate to something unrelated to the operations in our property and an over-leveraged balance sheet, etcetera. They will continue to pay rent in bankruptcy and affirm our lease as part of the bankruptcy proceeding if that property is critically important to their profitable operations. And so a key aspect of our investment approach is to find properties that are critically important that they need to operate in regardless of the cycle they are experiencing and whether or not they are experiencing financial difficulty. And we've seen over the years that that is another thing that is amelioraited a period in which we see an increase in corporate defaults. All that having been said, we are spending more time on the asset management side focussed on our tenant house, trying to be out in front of these situations. And some percentage (inaudible) an expected part of our business, so there's nothing we haven't seen in this before.

We don't reserve when we see situations--If somebody quits paying, then we may take an impairment charge, but we don't reserve or provide for that in advance of it happening. Is that correct?

We don't. We only reserve on rent that we are not receiving, and we don't expect to receive. Then we might take an impairment if there is a negative credit situations such as Chapter 11 filing. But we don't reserve as we go. We match up the problems with the impairments.

Your balance sheet is as strong as it has ever been. We have the FCC problem behind us. And among the opportunities you might see is to invest in real estate, but I presume we would do that via our funds, not our sales. Is that the generally true statement?

I think that is correct. If for some reason an investment is too large for the funds, we might take a piece of it. But our investment opportunities that we find attractive are allocated to our funds.

We've always had sort of a role--We do share responsibility to the funds. We give them (inaudible) on any opportunity that we have of a situation where someone says, "Oh you're cherry picking. You're picking the ones, the really hot ones. They got all of the good investment opportunities that we see.

Typically, the real estate we buy is when these funds are liquidated and we take the shorter lease ones are not attractive for a new fund.

That's correct.

All that said, I guess I'll end with a comment speech is all that said I will end with a comment. I find it curious that we suspended our stock buyback when there is not a lot of obvious uses for the money and the stock market is pretty volatile. Anyway, not that buying in your stock is the end all of what you ought to do, but I'll just close with that. It would seem like you would at least want the flexibility to do that given just the volatility in the market that exists. But good job, thank you, all. Thank, Mike. And we reserve the right--you know, the board has reserved the right to put a buyback in place as we see fit . But thank you,

There are no further questions at this time. I would like to turn the call over to Ms. McMenamin for closing comments.

A replay of the call will be available after 2:00 p.m. Call (877)660-6853, account number 286, Conference ID 280515. This replay will be available through May 23rd. Thank you for joining us today, and we look forward to speaking with you next quarter.

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