WP Carey Inc (WPC) 2008 Q2 法說會逐字稿

Greetings and welcome to the W. P. Carey & Co. Second Quarter 2008 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 for W. P. Carey and Co. Thank you, Miss Hyde, you may begin.

Thank you. Good morning and welcome everyone for our second quarter 2008 earnings conference call. Joining us today are W. P. Carey's Chairman, Bill Carey; CEO Gordon DuGan; Acting Chief Financial Officer Mark DeCearis; and Chief Operating Officer, Tom Zacharias.

Today's call is being simulcast on our website, Wpcarey.Com and will archived for 90 days. Before I turn to 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 thank you all for joining us. As we mentioned in the price release, the period-to-period comparison for our second quarter results is very hard to -- is a hard comparison because of the [verbal] recognition in the second quarter of last year. On a comparable basis, our results are down slightly, although our investment volume was down substantially.

I am going to speak more about the market climate and our investment volume, Mark will dive into the numbers in greater detail. While we were helped by some one-time revenue, we are pleased that the quarter-to-quarter comparison was only down slightly, even though our investment volume was down, again, fairly substantially.

In terms of market conditions, the credit mortgage market continued to be very, very challenged. Market conditions in terms of both the credit and real estate-related capital markets are worse today than they were three months ago and what we've seen is since August, when the difficulty started, things deteriorated from August until about March.

Things improved in April and May, and then started deteriorating again, and as we sit today, things are worse today than they have been generally speaking in the credit and mortgage market arena. These difficult times like this though aren't all bad for our business. And why is that? It's primarily because a period of constrained capital provides us with better investment opportunities. In terms of our competition, we're often asked, whom do you compete with? And in addition to competing with other sale/leaseback investment firms, we often end up competing with other forms of capital.

Other capital providers, whether they are real estate-related or credit-related, end up being substantial competition for us, so when as the market as deteriorated for both real estate-related and credit-related financing, that should provide us with more investment opportunities, relative to other financing forms.

I would also point out for those who will recall throughout the last top of credit cycle, we were out of fund-raising mode for a good deal of it as we saw that there was, that the world was awash in capital, and also if you will recall, our conference calls at that time, we were quite cautious about the amount of capital that was available, both in the credit markets and the real estate-related markets. So it's not a big surprise that the market has changed, and obviously all of that has changed.

Today cash is king and more and more companies will look for alternative ways to raise capital and that's very good for sale/leaseback investors such as ourselves. In terms of our second quarter investment volumes specifically, we mentioned on our last call that last year's second quarter results for investment volume would be very difficult to repeat as we had a record quarter, helped in part by a $446 million investment, single investment, that we made in Germany.

We mentioned that it would be a difficult quarter to repeat because it was a record quarter and the investment business is inherently lumpy and I believe that second quarter of '07 we mentioned that some times it's good lumpy and that was a quarter where it was good lumpy, and so we cautioned that it would be difficult to, a difficult comp to measure up to.

Our second quarter of this year we did $88 million in investment volume. That includes two sale/leasebacks in the United States, both of which we closed with mortgage financing, nonrecourse mortgage financing and three sale/leasebacks in Europe including properties in Finland, France and Germany, one of which was closed with nonrecourse mortgage financing.

In addition we did a number of small fixed income investments in the second quarter. Some of the decrease in volume that we experienced, investment volume, is due to a difficult financing market. In a difficult financing market, meaning a difficult mortgage market, effects us, is effecting us in two ways. One, it means mortgage financing is more difficult to obtain and in some cases not obtainable depending on the property type and the transaction so that is having an impact in terms of our investment volume.

The second way that it's impacting us is that deal sizes will be smaller. The larger the loan, the more difficult it is to get, and so we expect that our average deal size will be smaller, driven in part by the difficulty in getting larger mortgages.

The second piece of why investment volume is down is due to the fact that we are seeing a market where the pricing is adjusting slowly and in some cases we are able to get pricing that we think is commensurate with market conditions today and in some cases we're not and we're passing on those opportunities. But we're remaining very patient and disciplined in terms of looking for investment opportunities in today's market so again some of the decrease is due to our not seeing commensurate pricing for today's environment.

And then in the third part of why investment volume is down, is that investment volume is -- is inherently lumpy. And so it's a mix of all these three things that sees the second quarter volume at $88 million. We also mention in the press release that so far for the third quarter we have closed $127 million of investments.

That includes one sale/leaseback in Germany where we were able to obtain nonrecourse mortgage financing, and two sale/leasebacks in the United States where we were also able to obtain nonrecourse mortgage financing on both transactions. So I think an important take away, in terms of all of this activity is that one, we are still active; two, we are able to get mortgage financing in any cases but it is very difficult, and our deal size -- and number three, our deal size -- average deal size is smaller.

Again we mention the difficulty in the credit and mortgage-related capital markets is not all bad as alternative providers of capital, such as sale/leaseback investment firms such ourselves will have more opportunity. To that end, we are currently raising as we have mentioned, CPA17 Global.

We have raised over $200 million. We are hoping to raise up to $2 billion in CPA17. Our fund-raising pace so far has been very steady. We are quite pleased with that. We would like to pick up the pace of fund-raising to take advantage of what we see as the opportunities that exist today in the marketplace and that we believe are coming in the marketplace.

Lastly two other areas I want to touch on quickly, one as you see in our press release, our occupancies remain very strong across all our portfolios. We will be facing challenges in the coming years and quarters on our portfolios. In W. P. Carey we have a shorter average lease term than we do in our managed portfolios due to the duration of the time in which we have owned those assets so we will be facing lease rollover in the coming year and the other challenge is the challenge of the credit markets.

We have been cautious about the fact that all the major rating agencies expect a pickup in corporate defaults, we have not seen an effect on our portfolios to date but we are cautious about that and we are managing the portfolios very closely for that. Again, we are very pleased with how all our portfolios are performing and Tom Zacharias will give us a little bit more detail in terms of that.

The other point I wanted to make quickly is in terms of our balance sheet. We are in a very strong financial position, W. P. Carey and all of our funds in strong financial positions. Our balance sheets are liquid. We have very manageable debt maturities, and we have very little use of common-level debt. In fact, only W. P. Carey is currently utilizing company-level debt.

Our managed funds do not have any company-level debt. In terms of our approach to financing, as we've said in the past we use nonrecourse mortgage financing. That means -- the debt is not recourse to the portfolios but is recourse only to that investment that we are making which is a safer way to finance the Company. And secondly, we use long-term and fixed rate debt.

Anything less than ten years is considered short-term debt to us, so we use long-term fixed rate debt which is a very conservative way of financing a business and we think is the fundamentally correct way of financing a business. So when you take a look at our very strong financial position and -- and ability to manage the debt that we have today, combined with our equity fund-raising capabilities in the private market, our overall belief is that we are in a relatively very strong position, as we're able to get financing and raise capital in the private market place today and are not reliant on the public capital markets to continue to grow our business and our earnings. Will that, I'll turn it over to Mark to give it a little more description and go more in dept on the financial results.

Thanks, Gordon and good morning. We are pleased to report solid results for the three and six-months ended June 30, 2008. I want to highlight the fact that these are good results and while the comparability of these results to the prior year is difficult, as a result of the CPA 16 hurdle event I will walk you through the comparisons and why we feel our cooperation continues to perform well.

The CPA 16 hurdle event in June of 2007 contributed approximately $46 million in previously preferred revenues to the second quarter of last year. These revenues in turn contributed $21.6 million or $0.54 per share to net income for the three and six-months period ended June 30, 2007. And $42.3 million or $1.06 per share to our FFO. A way of comparison, if you exclude the recognition of income from meeting the hurdle, net income for the second quarter of 2008 was $19.8 million or $0.50 per share compared with $20.4 million or $0.51 per share in the prior year.

For the six months ended June 30, 2008, net income was $36.9 million or $0.93 per share, versus $31.2 million or $0.78 per share. FFO for the quarter was $35.6 million or $0.88 per share, versus $37.3 million or $0.93 per share for 2007, and $57.1 million or $1.42 per share for the six month period versus $55.8 million or $1.40 per share for the prior year. So even without the benefit of the hurdle, we continue to do well in our core business segments and I would like to discuss the contribution from each of these segments with you.

In our investment management segment, net income for the current three and six-month period was $7.1 million and $14.1 million respectively. Assets under management, which drive our recurring management stream increased 8% to approximately $8.6 billion. Recurring management revenues for the three and six-months ended were $20 million and $40.2 million respectively.

This represents an increase of approximately 10%, quarter-over-quarter, and 21% year-over-year. This revenue stream is stable and supported by assets which have had an annual after-fee return of over 11.5% to investors of the first 12 funds that have gone full cycle. In addition, investors in the current funds are enjoying both appreciate in the NAV of the funds as well as stable dividend yields.

Our assets under management have grown at a compound annual rate of approximately 23% since the year 2000. CPA 17, our latest fund, is a $2 billion offering which we began raising capital for this year. To date, we have raised over $200 million and as these funds are invested, recurring management revenues will continue to increase. We also earned $3.2 million in structuring revenue on investment volume of $88 million for the quarter. Year-to-date we have earned $6.6 million on volume of $145 million.

Our 2008 volume is low and Gordon walked you through some of the reasons for this and while our investment volume is lumpy, I think the disciplined approach we have taken in the current market is prudent, as the debt markets have been volatile and pricing conditions continue to adjust in the current environment. We believe that ultimately investment volume will increase and as a result these structuring revenues will be recognized.

To try to give you a sense of how this segment is doing, let's look at net income on a comparative basis. We reported net income for this segment at $36.5 million at June 30, 2007. Of this amount, approximately $21.6 million related to the CPA 16 hurdle. Excluding this number, we earned $14.9 million for this six months ended June 30, 2007, as compared to $14.1 million for the current six-month period. While the variance is less than $1 million, let me discuss a few of the components so you understand their impact on our results.

The lower investment volume that Gordon mentioned had an approximate $9 million impact on our net income. This number's net of any variable cost as well as effective for effected tax rate. The increase in our recurring management fees as a result of the growth and assets under management and also the net income we realized from our increased investment in the CPA funds accounted for approximately $6 million after tax to net income.

There were several other items that impacted this difference as well, debt is the primary driver for this so while lower investment volume impacted our first half results on a comparative basis, the growth in our recurring management revenues and our investment in the CPA funds provides solid, stable results in their own right, and we ultimately expect to harvest greater structuring revenues over time as we invest the proceeds of CPA 17.

In our real estate segment, lease revenues increased approximately 3% or $1 million for the six-month period to $38.6 million. This increase was primarily due to rent increases at existing properties. Net income from the real estate segment increased 28% for the quarter to $12.7 million dollars and 40% year-to-date to $22.9 million.

FFO in this segment for the quarter increased 23% to $20.9 million, 16% year-to-date to $37 million. Included in these results is the recognition of a one-time gain of approximately $3.8 million due to the successful litigation outcome involving one of our prosperities. Excluding this event, net income in FFO would have been relatively flat for the quarter and up slightly for the six-month period in this segment.

While most of our investments will continue to be made on behalf of our managed entities, we may participate in investments through a joint venture arrangements with our managed entities. We may also acquire properties from CPA funds in connection with liquid events and may acquire properties to replace properties that have been sold on an opportunistic basis.

This segment contributed approximately $45 million of rest estate revenues for the first six months and produced a stable level of cash-flow to the organization. We believe that adjusted cash flow from operations is a supplemental metric that is useful in accessing liquidity and cash available for distributions.

It is based on reported cash-flow from operations, adjusted for timing differences such as the impact of the CPA 16 deferral and the payment of liabilities when they result from timing differences between the receipt of income and the payment of liabilities, as they relate to that income, as well as ownership interests to account for cash distributions for equity investments and minority interests.

In short we think it is a good measure for evaluating the cash generated from our core operations. For the six-month period ending June 30th, adjusted cash flow from operations totaled $53.8 million or $1.34 per share as compared to $54.9 million or $1.38 per share for the previous year. Our payout ratio based on this metric is 72% for the current year and 67% for the prior year.

We continue to have a very strong balance sheet with recourse debt of $81 million or approximately 7% of the total assets of the Company. Total nonrecourse debt is approximately $262 million and represents approximately 23% of the total assets of the Company and our interest/coverage ratio is six times.

Having a strong balance sheet and the financial flexibility that comes with that as well as access to capital through our managed entities, positions us well to take advantage of opportunities in the current economic client. With that, Tom, I'll turn it over to you.

Thank you, Mark. I'd like to provide a brief portfolio report for the second quarter of 2008. For the six-month period ending June 30, 2008, as compared to the same period in 2007, real estate revenue for the owned assets increased by approximately 3%. At the end of the second quarter, occupancy was at approximately 95%.

This occupancy is down slightly from the previous quarter as we had a distribution center of 240,000 square feet in Jacksonville, Florida, roll off lease at the end of June. We have under 2% of the annual lease revenue expiring in the remainder of 2008, and 8% of the annual lease revenue in 2009. Going forward for the next three years, at least maturities are increasing and we in contact with all the tenants.

The two mortgage financings totally $40 million that mature at the end of 2008, we have financing extensions in place for both of them, so in summary, they are not significant lease rollovers and mortgage maturities for the public company in 2008 and we are focused on the lease renewals that are coming up in the future.

As of June 30 of this year, the occupancy rate for the 89 million square feet owned by the CPA REITs was in excess of 99.6%. We expect, however, that in the economic environment, the vacancy rate will creep up a little going forward. In response to our growing international portfolio of net lease investments which now approaches $3 billion, as of July 1 we opened an asset management office in Amsterdam that handles all international management and compliance matters.

In summary, the LOC portfolio and the managed CPA REIT portfolios are performing well. Now I would like to turn the call over to William Polk Carey, the Founder and Chairman of the Company.

Thank you very much, Mark. I want to thank the hardworking team which has helped us to continue to make extraordinary performance for our investors over a long period of time. It was sort of remarkable looking over the results of our managed funds last year. Investment managers know better [the] job it does for its managed funds and those funds just did terrible (technical difficulty) REIT market.

These funds performed miraculously well, delivering very strong returns, increases in value and increases in dividends. And the history of repeated, increase in dividends has been pretty amazing and -- as a reasonably large shareholder I am grateful for that and I will certainly keep a careful watch of the continued ability to perform in that direction. I feel we are going in the right direction and (technical difficulty) better and better. I should make predictions but I feel very comfortable. Thank you very much.

Thank you. That concludes our presentation this morning. We'd now like to open up the call for any questions that you have.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Michael Huffman, with Rock Point Advisors. Please go ahead with your question.

Good morning.

Good morning, Michael.

Regarding the progress on CPA 17, how does this compare to past efforts, what factors do you see that will play a roll in -- the pace of -- continuing progress?

Sure, -- it's been an interesting year so far because of all the volatility of the financial markets we've been very focused on how that would affect our fund-raising and we're raising funds at just a little over $35 million a month right now. We have only one major broker dealer that's distributing that fund but with plans to sign more broker dealers on to help raise additional capital.

And I'd say so far we've been pleased with the fund-raising pace and very pleased with the steadiness of the fund-raising pace. It does not seem to change very much -- it doesn't seem to be correlated with what's going on the public financial markets which today is a very good thing. That having been said, we would like to increase the pace from where we are today.

We think the best way to do that is increase the number of broker dealers that we have to distribute the fund and continue build a -- top notch professional sales force which I think we're doing a very good job of doing, but the best way for us to increase fund-raising pace would be to sign on additional broker dealers and we hope to have updates on that in the future.

Great. Just a further question on that. Does the current broker dealer have a threshold or an exclusive relationship for a certain period of time or can you comment on that?

Yeah, no they don't. They're -- a longstanding broker dealer relationship that we have and they were just the first to hit the ground running and so we're getting others up and running as we speak.

Okay, thank you very much.

Thanks, Michael.

Our next question or comment comes from the line of Stephanie Krewson with Janney Montgomery Scott. Please proceed with your question.

Thank you. Actually Michael asked our first question. I've got [Andrew Dideo] on the line with me as well. So we have two other questions, the first of which you probably can't say anything about, but are you able to give any update on your filing of the hotel fund and how that's going.

No, we don't have any update on that, Stephanie.

Okay and then secondly, you touched on the investment environment but can you add a little more color to it? Where are you seeing demand for sale/leaseback transactions? Is it country-specific, is it asset type specific?

Yes, you know it's always -- it's always interesting to see where we find -- transactions and right now it continues to be split pretty evenly between the United States and Europe generally speaking. In Europe, Germany has been our biggest place of investment, in part because we have managed to build a name and reputation there. But I would say that it's -- we continue to see a decent amount of deal flow in the United States and a decent amount in Europe.

In terms of tenant industry, it continues to be very broad-based. No specific focus there. We have seen a drop-off as you would expect with transactions with private equity firms acquiring companies, as private equity acquisition volume is down substantially. And so we have seen a drop-off in that but what we saw happen in '01-'02 is that at a time when new private equity acquisition volume dropped, we saw opportunities with existing portfolio companies owned by private equity firms that were looking at sale/leaseback financing as a way to help restructure their debt load.

And so we're hopeful that we'll see more of those transactions. We haven't yet but we are hopeful that we'll see more of those transactions going forward.

As a follow up to that, in Europe is there still a substantial difference between the lease lengths the original maturities that tenants would want versus in the U.S.?

Very country-specific. In Germany routinely we're able to get -- and in Scandinavia 20-year leases so there those lease terms mirror what we're able to obtain in the United States. In France, it's much harder and there we see much shorter lease terms generally speaking. Nine, 12, 15 years, would be the typical lease duration for us. Those lease durations are quite long relative to the general French marketplace. So it is very country-specific and the transactions that we're closing today are almost all long-term leases which I describe as 15 or 20 years.

Great. Thank you very much.

Thanks, Stephanie.

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

Gordon, I think you mentioned that you made some small fixed-income investments during the quarter. Could you expand on what exactly those were and whether in the future they might actually be larger than small?

Yes, hey, Everett, good morning. We made a number of investments in various traunches at CNBS, existing CNBS pools, and we were buying typically in and around the Single A traunch of those pools. It's a relatively small effort for us so I would not expect it to increase substantially.

How much was it?

-- - just an area we saw relatively value.

Okay.

[$20 million].

[$20 million], it's really peanuts for (technical difficulty) enterprise

Got you. And then this one last question, have you all taken any steps to hedge your foreign currency exposure and some of the gains you've built up in Europe?

That's a good question. We've done two things. We've borrowed in the local currency, so we are hedged on the debt-piece of our investment. And we've also brought back a substantial amount of cash recently at what are very favorable exchange rates.

We are fortunate to have a Nobel prize-winning economist on our board who gives us some macroeconomic viewpoint and his current forecast is that he does not expect a substantial change in the dollar/euro exchange rate going forward over the near or intermediate term.

Got you. All right. Thanks.

Thanks, Everett.

-- permitted to make one more comment. I used to be in the investment banking business before starting W. P. Carey and I've never in my memory saw a financial institution as conservatively financed as W. P. Carey Group. I don't believe there is any financial institution in this country anyway that has a stronger basic -- figures in respect of having almost no company level debt and it's just so, we have lots of options besides the public markets that we enjoyed so many years. We also have all kinds of other options. When you are as financially strong as this group, it has potential that other groups just don't have.

Do you have any additional questions?

There are no other questions in the queue at this time.

Okay, well, thank you. We would just like to remind you that a replay of today's call will be available after two o'clock by calling 877-660-6853 to access that replay you will need the account number 286 with conference ID of 291647. The replay is available through August 22. We would like to thank you all for joining us today and we look forward to speaking with you again next quarter.

Thank you very much.

Thank you.