WP Carey Inc (WPC) 2009 Q2 法說會逐字稿

Good day, and welcome to the W. P. Carey & Co. LLC Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Susan Hyde, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, and welcome everyone to our second quarter 2009 earnings conference call. Joining us today are W. P. Carey's CEO, Gordon DuGan; Acting Chief Financial Officer, Mark DeCesaris; and Chief Operating Officer, Tom Zacharias. Today's call is being simulcast on our website, wpcarey.com, and will be archived for 90 days.

Before I turn the call over to Gordon, I need to inform you that statements made in this earnings call that are not historic facts 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.

Thanks, Susan. Good morning, and thank you all for joining us today. As we mentioned in the press release, it was a largely uneventful quarter from a financial standpoint and you see the results that we achieved in the quarter. Mark will talk more in detail about those. Uneventful these days is a pretty good thing by the way, in that there was -- everything continued to click along.

My own perspective is, I thought it was a pretty good quarter considering we didn't close very much in terms of new investments and we earn revenue on new investments. So we had a decent quarter without earning very much revenue on new investments, and we're continuing to be able to play offense as we mentioned and look for opportunities. And I'll come back to the new investment pipeline and what the opportunities look like a little bit later.

The three things I wanted to touch on in this call, the first is access to capital, the second is just a quick overview of existing fund performance, and the third is this investment outlook that I mentioned I'd like to come back to. Why don't we jump into it?

In terms of access to capital, we used the phrase, `We are able to play offense today` and the key ingredient to that is having capital, having access to capital at a time when it's difficult to get capital and others aren't able to get capital. I would say, generally speaking, our access to capital has been better than we expected three or six months ago, both on the debt and equity side. And I'll explain a little bit more on -- in terms of both of those pieces.

In terms of the equity side, if you remember our last call, I mentioned that each month's fundraising had been better than the prior month's and I'd listed each month to make the point, but the point was we have seen an uptick in fundraising. I'm very pleased to say that continued for this quarter and in fact it picked up. In the first quarter of this year, we raised $71 million of equity from new investors -- from investors. In the second quarter, we raised $100 million. In July, we raised $41 million and that was in fact our best month of fundraising since we started raising CPA:17.

We also mentioned that we were trying to expand our selling group and bring in new distributors to raise capital for us and roughly 30% of the money we raised in July was through new distribution channels. One month isn't the whole year and so don't get fixated on the 30% number in which you get the idea that we've made progress in terms of raising money from new distribution channels and we've been very pleased with that.

The equity access has been good, it continues that way and I think the reason is the messages and what it is we are able to tell investors, those things are resonating with people. And I won't go through them in detail, but they include our 30-year track record. The fact that this is an income product is something that investors are finding attractive. Investors continue to look for need, reliable income and the CPA fund series is set up as an income-producing investment product.

And then lastly, I think investors understand that generally speaking net lease investments are less economically sensitive than typical commercial real estate investments. So these messages are getting across in the equity fundraising, I think is going quite well. We have a terrific team doing it, they're out in the field everyday working hard, raising money. And I'm very pleased with how that's going.

On the debt side, the access has also been better and that's -- that I would have said three or six months ago was something we're more cautious about, although I'll come back to that cautious tone in a moment. In terms of the debt activity, the numbers I'm going to talk about are for W. P. Carey and all of our CPA funds and not just specifically to W. P. Carey, because it's the same type of activity whether W. P. Carey owns the investment or the CPA funds. And it's just a couple of high-level numbers.

To date in 2009, we've refinanced roughly $75 million -- $74 million to be specific of mortgages maturities, with $76 million of new financing. Included in that are some extensions. But the interesting stance to me or the debt that we refinanced had an average existing interest rate of 7.52% and we refinanced that with 6.25% financing on average. That includes one floating rate loan that hasn't been swapped out. So it's a little bit -- it isn't completely apples-to-apples, but you get the picture that we are able to refinance the existing debt that came due overall on a lower interest rate. And the debt that we refinanced it with, including the extensions, has about a 7.5-year average term, that's a little shorter than we would like, but not bad in this marketplace. So we continue to get financing, and I'll come back to that.

In addition, we have closed $73 million of new financing. And when I'm saying new financing, I mean financing on investments that are new investments at an average interest rate of 6.31% and we have a commitment for roughly another $120 million. Anytime we talk about commitments or new deals or things in the pipeline, I learned long ago from Bill Carey, nothing's closed till it's closed, so don't count on anything that's not closed. But we are gratified that we're seeing institutions step up and lend money.

What does it all mean, in terms of my perspective on the debt access to capital? We've been able to achieve lower interest rates today than the debt maturities, which is a very pleasant surprise for 2009. Our average interest rate for 2010 of the roughly $100 million of maturities we have is 7.93%. So we're also in a good position as you look at 2010. One of the things that's troubling for a lot of conventional commercial real estate investors is they have debt coming due at very low interest rates or floating rate debt coming due and that isn't the case for us.

We've been able to achieve also refinancing amounts roughly equal to the debt coming due. And so we're in a funny position that we haven't had our borrowing rates increased and we've been able to refi the debt that we've had coming due with an equal amount of debt. And why is that? Why are we able to do those two things, which I think are enormous challenge for most people?

One reason is we typically borrow less amount upfront. We have -- our typical leverage amounts in our CPA funds has ranged between 50% and 60%. So we incur less, we have less borrowing upfront. Secondly, we use amortizing debt. So that debt gets paid down every year and that's because the sale-leaseback investments that we make have a high enough yield that they can support not only paying the interest on the loan and the cash flow to the investor, but they can also support paying back some of that principal every year to the lender. So we have debt that tends to amortize. In 2009, the average loan coming due is roughly at 50% loan-to-value. So that's why we're able to raise money that equals the amount of debt coming due.

And then the last thing I would say on this, we use long-term fixed rate financing. And the way I think about that is, it costs more to use long-term debt and it costs more to use fixed rate debt. You're either going further out on the yield curve or you're fixing the rate, which has a cost. Both of those things have a cost. We do that because it makes sense, if you have an asset that you plan to hold for a long term you should match up your assets and your liabilities. We've always used long-term fixed rate financing. It's like an insurance policy to borrow long term and to pay the extra cost of fixing it, but there's a reason that people take out insurance policies because there are times when you need them.

And so it's a more conservative approach, one we've always followed, it's serving us very well today, because we have -- because we do approach our financing and as being willing to pay the extra costs to fix it and to go long term. The one cautionary thing I'd say on the debt side, it is a very difficult market to raise debt still, we've not seen any influx of new lenders, the securitization market is still basically dead. And so while we are slogging our way through the debt side and able to access new -- access debt financing, it's still very, very difficult and it's not clear to me that it's going to get a lot better anytime soon. So we're fighting our way through it, there are reasons we can do much better in this environment than others from the debt standpoint. But it's -- we're certainly nowhere out -- the debt markets for a commercial real estate are not out of the woods yet.

In terms of portfolio performance, Tom Zacharias will discuss that more in detail, I just wanted to give my overview perspective on it. The performance is holding up in our funds. Our occupancy rates as of June 30 across all the funds are in excess of 97%. So that is holding up nicely, but we continue to take a cautious stance on corporate defaults and I think the primary reason is corporate defaults are a lagging indicator, it takes some time after the economy turns down for corporations to run into the financial difficulty where they stop paying, obviously we're very well diversified from a industry and tenant standpoint.

So some of the tenants are doing fine, but for other tenants this is a difficult environment. And corporate defaults do tend to lag, so I -- we remain cautious on it. But there are also a couple of reasons we feel a little better today than we did perhaps three or six months ago in corporate defaults. One is, the financial system has remained solvent. Three or six months ago, there was, I think, greater worry about the solvency and the health of the financial system in the United States and Europe. And it's been better than certainly it could have been on a downside scenario, so I think that's the reason for a little bit of optimism.

And the other one is that the economies in the United States, in Western Europe may be bottoming and starting to grow at some point soon. And that will help -- both of these things will help corporations pay their obligations, they'll have good access to capital if the financial system remains solvent as it has, and they'll have a better business environment to operate in, to continue to make their rent payments to us and meet their other obligations.

So there are some reasons for a little bit of optimism on that side. But overall, I think it's prudent to remain cautious in terms of corporate defaults going forward. Lastly, investment outlook. Very basically, opportunities improve for sale-leaseback investors when capital is scarce. You've heard that in the past. It is something that we feel is true.

And Q2 not much close, and we've talked a bit about the lumpiness of investment volume in the past and that's a part of what happened in Q2, it's always a little bit lumpy. But I think there's also been a little bit of what the Wall Street Journal wrote about in an article on sale-leaseback investing, where they said corporations have suffered a little bit from sticker shock, as investors such as ourselves are seeking to charge them more.

When there is sticker shock, it takes a little bit while -- a little bit longer for transactions to come about and to close. And I think there's been a little bit of sticker shock while prices adjust, but the opportunities are there and we're seeing that start to free up and get better. And we talked about The New York Times opportunity that we closed earlier this year, which we think is indicative of the types of opportunities that we can see today.

We also, in July, closed an investment with Tesco. These were two Class A logistics facilities outside of Budapest in Hungary. For Tesco, who's one of the world's largest retailers and a terrific company, obviously it's a less competitive investment environment today than it was a couple of years ago. And we were able to come to terms with Tesco on a transaction that works very well for them and works well for us. And it's a 15-year lease with Tesco on these two facilities.

And so I think as we go forward, we're going to see a good number of attractive investment opportunities, both in the U.S. and Europe. The pipeline is very good. I would say that European yields generally seem to be lower than they are in the United States right now. And it's either because those yields are lagging behind the United States in terms of being adjusted upwards, or there's a broader group of investors that will continue to buy these sale-leaseback opportunities, and we'll just have to see.

I think it's too early to say which one of those it is. I would also say that on the Tesco investment, we have a 15-year lease with that that puts in place a very high-quality income stream with a terrific tenant. And so it's hard to look at yields for a Tesco investment relative to your typical industrial or office building that may be trading in Europe today, because of the high-quality income stream coming off that Tesco investment.

Overall, we're very pleased with where we are today. As I mentioned, our access to capital has been better than we expected and quite good. Portfolio, the portfolios continue to perform and we think that the investment opportunities are going to be there. We're seeing those. The pipeline is good. And we certainly hope and expect to close more transactions as we go forward.

As I said in the past though, this macroeconomic environment will not leave us unscathed and we have our fair share of challenges today. And so this isn't all roses. We have issues that we -- that challenge us as well. But when we -- when I step away and look at it, I feel very good about our ability to grow our business today. It's a much better time to grow our business today and play offense versus 2005, 2006, 2007. And because of the steps we've taken in the past to be conservative through the last cycle, we are in a position to grow our business today, at a time when others are pulling in their horns. So we feel very good about that.

With that I'll pass it over to Mark DeCesaris to give the financial report.

Thanks, Gordon. I'd like to talk about our management segment first. We recognized management revenues of approximately $19.2 million in the second quarter and approximately $38.3 million for the first six months.

We have paid annual management revenues on the invested assets of the CPA funds, which as of June 30 was approximately $7.9 billion. Tom will get into more detail on the performance of those portfolios, but in the current economic environment we feel the asset base that supports our management revenue stream has continued to be a stable and predictable source of cash flow for the Company. Current occupancy rate in the CPA funds is approximately 98.5%.

On the structuring revenue side, for the first six months, we structured approximately $274 million in investments, $234 million of that were on behalf of the CPA funds. We also co-invested approximately $40 million in The New York Times deal along with CPA:16 and CPA:17. As a result of the investment activity, we recognized approximately $10.8 million of revenues in the six-month period.

Gordon gave you a pretty good update on the status of capital raising for CPA:17. And while investing that capital tends to be a timing issue from a revenue recognition standpoint, as that capital is invested, both our structuring revenues will increase and more importantly so will our managed asset base.

In our owned portfolio, our lease revenues were approximately $18.5 million for the quarter and $36.8 million for the six-month period. Not reflected in lease revenues is our investment in The New York Times. This investment is accounted for under the equity method of accounting and reflected in our income from equity investment line item on the income statement.

We recognized approximately $1.5 million in income and approximately $1.2 million in cash distributions from this investment in the second quarter. FFO for the Company for the quarter was approximately $30.1 million or $0.75 per share, with our owned lease portfolio contributing $18.5 million or $0.46 per share. For the six months, FFO for the Company was approximately $59 million or $1.48 per share, with the owned lease portfolio contributing approximately $33 million or $0.83 a share.

I'm going to talk a little bit about our equity ownership in the CPA funds. We reflect our share of their operating results as well in the income from equity investments line. And for the six-month period, the CPA funds recorded impairment charges of approximately $55 million, of which $15 million were recorded in the second quarter.

Our share of this had a negative impact of approximately $2.8 million for the six-month period and $0.8 million impact in the -- our second quarter results. What impacts our adjusted cash flow, however, is the distributions that we received from this equity ownership in the funds. And for the six-month period, this total was approximately $6.8 million and for the second quarter it was approximately $3.5 million.

For the three fully invested funds, CPA:14, CPA:15, and CPA:16, their coverage ratios on dividends are 137%, 132%, and 127% respectively, strong coverage ratios on all the funds.

Let's talk about adjusted cash flow for a minute. And if you look on a comparative basis, in the second quarter of last year, we recognized lease revenue related to a settlement with a tenant that had been in litigation. The rents we collected, as well as a reimbursement of legal cost totaled approximately $3.8 million and were reflected in the previous year's cash flow numbers.

When I look at our adjusted cash flow, I tend to look at the trend in the revenue streams that are predicable and recurring. For the six-month period, we received approximately $1.1 million more in cash from our management revenue stream, as a result of taking a larger percentage of that revenue stream from CPA:14 and CPA:15 in cash.

We received approximately $0.9 million more in distributions from our share ownership of the CPA funds for the six months ending June 30, '09 than the prior year's period. And with the addition of The New York Times to our owned lease portfolio, that will help offset some of the asset dispositions we see in that portfolio. So based on that I would expect our adjusted cash flow for the year to be in line with that of the previous year. To some extent our -- the timing of our investment activity will affect that and we could end up ahead based on the timing of when that investment activity hits.

From a balance sheet perspective, we continue to have a strong balance sheet with low leverage. Our total debt to market cap ratio as of June 30 was 24% and our unsecured debt to market cap ratio was 9%.

If you recall going into the second quarter, we had approximately $88 million of non-recourse debt coming due in the next three years through 2011. As of today that number has been reduced to approximately $60 million, of which $47 million is actually coming due in 2011. Tom will give you some additional details on this in his comments.

At June 30 we had approximately $125 million available on our line and $23.5 million in cash. We're currently paying an average interest rate of 1.1% on the outstanding balance. The line matures in 2011 and carries a one-year extension.

With that I'll turn the comments over to Tom Zacharias, our Chief Operating Officer. Tom?

Thank you, Mark. I would like to provide a brief portfolio report for the second quarter of 2009. We believe that our portfolio and those we manage for the CPA REITS are well diversified and do not contain any unusual concentrations of credit risk.

Year-to-date in 2009 across five funds, we have had nine tenants out of over 280 enter bankruptcy protection. These tenants represent approximately 2.4% of the total annual rent across the five funds.

Because we have large diversified funds, it's not a significant amount of cash flow in each fund. In addition, because we seek to acquire critical assets of companies, we historically have been able to achieve a reasonable recovery in the reorganization process.

At the end of the second quarter, approximately -- the occupancy in the LLC portfolio was approximately 94%, no significant change from the prior quarter. In July, we sold one vacant property for approximately $3 million in net proceeds, which has increased the occupancy of the portfolio to 95%.

In our leases, rent increases are generally indexed to the Consumer Price Index. The annualized same-tenant rent increases in the LLC for the first six months in 2009 versus 2008 were $1.3 million or approximately 2.6%. For the six-month period ended June 30, 2009 as compared to the same period in 2008, lease revenue from our real estate ownership segment for the LLC owned assets declined by 4%, despite the rental increases from the CPI index. This was due primarily to the impact of two property sales, four lease expirations and a 13% weaker euro for euro-denominated rent.

However, after including the increased revenue earned in our jointly owned $40 million equity investment in The New York Times Building, real estate revenue for the first six months was in line with the prior year. For the remainder of 2009, we have very little lease revenue scheduled to expire [and it is a] total of 2.4% of the total annual rent in 2009. We are in negotiations with all three tenants to renew or extend their leases.

We have also made significant progress in renewing the leases that composed the 17% of the revenue that is scheduled to expire in 2010. We recently executed letters of intent to extend the leases on six Medica nursing homes, which were to expire in 2010 and extended them into 2021, and eight Carrefour distribution centers, which have leases expiring in 2011 to extend their leases to 2015.

Carrefour is the largest rent paying tenant in the LLC and Medica is the fifth largest. In these renewals we have not had any downtime or required to pay any tenant allowances. Although we will have some rent reduction in that the renewal rents will start out more in line with the current market rents. We will give more clarity to these numbers when we finalize the documentation in the third quarter.

Overall, we are very positive about these transactions. These lease extensions will reduce the percentage of revenue expiring in the LLC portfolio between now and 2012 from 46% to 32% and extend that weighted average lease term of the portfolio from 5.5 years to 6.3 years.

As Mark mentioned, we had a total of $28.9 million of mortgage debt coming due in the LLC portfolio in 2009. In the second quarter, we completed the refinancing of a $11.9 million mortgage with a new 10-year loan for 14 million. Yesterday, we closed on a $15 million mortgage loan to refinance a $14.8 million mortgage loan that was coming due.

In 2010, the amount of debt to be refinanced in the LLC is three mortgages for $11.6 million. In 2011, it's eight mortgages for a total of $47 million and in 2012 it is only four mortgages totaling $20.4 million. Of these 15 mortgages, all are between $2 million and $10 million except for one with a balloon of $15 million.

As Gordon mentioned, we have a very good track record of refinancing these loans, which are generally at only 50% of the value of the asset. So on the liability side, we are well positioned as a company with very little mortgage debt to refinance over the next three years.

So in summary, there are not significant lease expirations or mortgage maturities for the public Company for the remainder of 2009 and we do not see any significant risk in 2010 and 2011. In fact I'm very encouraged by our efforts to renew these leases early [and this] success we've had in refinancing our mortgages. In addition, we have more proposals out to lease available space in the LLC portfolio now than we did in the first quarter.

As of June 30 of this year, the occupancy rate of the 92 million square feet owned by the CPA funds was approximately 98.5%. We have similar CPI rental increases in the CPA funds as in the LLC portfolio of approximately 2.2% to 3% increases between the first six months of 2009 versus the six months of 2008 on a same-tenant basis.

These rental increases serve to mitigate the effects of a lease rejected in bankruptcy or a reduced rent from a restructured lease in the workout. There are not significant lease maturities in the CPA funds over the next three years and the weighted average lease term in these four funds is between 10 years and 17 years. These long lease terms are a significant factor in the stable valuation for these funds.

That completes my report. I'd now like to turn the call back to Gordon DuGan.

Thanks, Tom. Bill couldn't join us -- Bill Carey couldn't join us on the call today, but all of you who know Bill as our Founder and Chairman know how passionately he cares about his investment in this Company and your investment and he wanted to thank all of you for your continued support and interest in W. P. Carey.

With that, I believe we'll turn it over to a Q&A session. And we'll give you the instructions on how to ask questions.

Thank you. (Operator Instructions). And our first question comes from Andrew DiZio from Janney Montgomery Scott.

Hi, good morning. You guys talked about your success in refinancing and understanding that no one takes one lender to do a deal, can you talk a little bit about the variety and maybe number of lenders that are interested in lending these days?

Well, it's a very good question. And it kind of lends into the fact, I've often said, it only takes one and in some cases we don't have a whole lot more than that. It's very hard to find loans today. What we're finding is, regional banks that are in good financial condition are lending, medium-size insurance companies are lending and they seem to be filling the void in Europe.

It's a number of -- there are still a number of banks that will lend on a very selective basis and in the U.S. it's on a very selective basis. Low loan-to-value, roughly 50%, wider spreads certainly than we've seen recently. The good news is on new investments we're able to pass through those wider spreads to get the returns we need. But it's very, very difficult and we haven't seen and that was the cautionary note I struck, one of the points was we haven't seen new lenders come in. One of the things we're waiting for is either a lender, whether it's a foreign lender or somebody else who've said we're not lending then reverse themselves and say now we're lending again.

And with that cautionary comment I would say we have a commitment, which from a foreign bank that we've not done business with and hasn't done a lot of business in the United States and they've done some, but they're not historically one of the big lenders here and they're lending today because they do see opportunity and this is a foreign lender that is -- well, I guess what I'd say is since it's a commitment, let us close the loan and then we can disclose more and talk about it.

But that would be encouraging seeing a new lender from a -- that doesn't have a lot of exposure to the market, and this lender would qualify, but we haven't seen a real uptick in the number of people who exited the market coming back and saying all right, we're back in and obviously the big issue is the securitization market, nobody knows how that's going to get fixed and what's going to happen with TALF and so I would remain very -- I'd remain cautious on this.

And while we've been able to slog through it because we're in a much better position than everybody else needing only 50% loan-to-values and having -- and refinancing long-term fixed rate debt that had higher coupons on it before, this could go either way, it could get better -- it could go one of three ways, I'll sound like an economist, but it could get better, it could stay the same or get worse. And we haven't seen a lot of evidence of it getting better.

Okay. And you mentioned TALF, can you -- do you have any comments on that relating to either Carey or CPA funds?

We've looked at what the TALF program could mean as a point of access to capital for the CPA funds. And as Tom and I both mentioned, because our loan-to-value on the debt that's coming due is roughly 50% and historically we've borrowed roughly 50% to 60% in the CPA funds. We are an investor that actually could take advantage of TALF because they're not -- the way TALF is set up, it will only allow a very low loan-to-value 40%, 45%, maybe 50%, but 40%, 45%. And so we've -- so we have two views of it, it could actually help us, but we haven't needed to do it, because we found lenders without going through the TALF program. We found lenders that are willing to lend to us. So we haven't needed to do it, number one. And number two, we're going to let somebody else pioneer that thing, and see how it works before we investigate it any further.

Okay. And then turning attention to the CPA fund, you talked about the inflows of it. Can you talk about any kind of redemption to your outflows you're seeing there?

Yes, it's a good question. We didn't touch on that. The redemption programs that we have in place allow up to 5% of the shares to be redeemed in any one year. For CPA:15, we have closed redemptions through -- for the remainder of the year, because it was at that 5% number. CPA:14 and CPA:16, the redemptions are still open, they're not at 5%. And that's a gross number. There are redemptions and then there is dividend reinvestment. And then there is a net number and the net numbers are much lower.

So it's not -- it doesn't really have a big effect on assets under management. We have a conservative view to redemptions just to keep liquidity in the funds very high. But it doesn't really impact assets under management. These are small amounts of money and we've not had -- I think as long as the dividends stay attractive in those funds, we're going to have happy investors. And that's what we've seen. So the redemptions -- and they -- that we've not seen an enormous spike in those redemptions, so we are cautiously optimistic on that front today.

Okay. Thanks. And then last question, just related to the impairments that you saw on the CPA REITs. Can you talk a little bit about your -- about how you arrive at those impairments?

Yes, we recognize impairments typically when a -- either when we're getting ready to sell a property and are holding it for sale, we'll look at the value of it versus the value we're carrying in that. And most of the impairments we took in the second quarter were related to those type of buildings.

There are times and in the fourth quarter of last year, you would have seen impairments that we take as a result of an equity ownership based on the appraisal of the assets, and accounting if we split some of our investments across the funds and then the funds that own treat it as an equity investment, they're required to look at the appraised value when it comes out and market to that if it's lower than what the carrying value is today. The $55 million impairments that we took this year that's on a $7.9 billion portfolio, that's just a little over 0.5%. So it's -- for the entire portfolio it's not significant, but we still may continue to see something, as we work through some of the tenant-related issues in this portfolio.

Yes, and I would expect that to happen. I mean, as Mark said, the two major areas of impairment that you'll see as we go through this year would be one, the default may cause an impairment, often does. And then secondly, when we go to sell the property, we got to market and make sure after selling cost that you got the right number on your books.

But that's why -- it's a number, but it's a number that needs to be kept in perspective of the aggregate situation and while the second quarter number was lower than the first quarter number in terms of impairments, it's too lumpy to draw any conclusions or trends from that.

So as we go along -- as we have defaults, you'll see impairment charges hit when we have a default often, not always, but often. And in those cases, we need a crystal ball to tell how that's going to work out in the future and we don't have a crystal ball. So I would just say that, they're all within our expectation at this point, but we remain cautious on the fact that we would expect future defaults and future -- and likely future impairments related to those defaults.

Great. That's helpful. Thank you.

And our next question will come from Mike Beall with Davenport.

Good morning. I should know this, but you indicated that the coverage ratio in the mature CPA firm -- CPA funds was 1.3, is that what we normally sort of run at and do we have the opportunity in those funds to increase the distributions and if that is the case remind us how that impacts our fee stream, if any?

I think what we typically see is, is that the fund, the older the fund gets you'll see the coverage ratios increase somewhat for a number of reasons. We do manage and we look at the cash that we keep -- we like to keep some cash on the balance sheets of the CPA funds for things like redemptions, Gordon addressed that before, but we like to maintain a strong coverage ratio of the dividend of those funds.

Mike, one of the ways I think about that is, you need a cushion for an economic environment like this, right. And we have -- on the good side, we have CPI increases that kick in every year and we get increased cash flow. On the downside if we get a default that could decrease the cash flow and in good times, you don't eat into the cushion, in bad times you can't eat into the cushion.

So we're -- they continue to -- the CPAs continue to perform and it doesn't -- in that performance the dividends show up as cash flow on our cash flow statement, but it doesn't affect our fee stream except for the once-a-year NAV calculation, one way or the other.

So the 1.3 is about normal, the coverage ratio, I mean that we have --

I've never really seen a historic analysis of that, Mike, but --

Okay.

I would say that's probably pretty normal. [We like it] higher the better, frankly.

Right, right. Well, that makes sense. And you sort of touched on this and if I missed it in the very first few minutes, I apologize. Can you just talk a little bit about the dynamics of re-leasing, when leases come up for renewal in this environment, [indiscernible] rents are going down lots of places. I guess we experienced that pressure to some extent, but maybe not as much because of the mission-critical sort of nature of the assets that we have. I mean, just anything you want to add to that thinking process?

Mike, it's Tom Zacharias. I can give a little color on the process that goes on is, generally what happens is, over the term of these leases with the CPI increases, the rents move up nicely and then you're at a time when you like to renew the lease. And we have to deal with what the market rent is today and we're able to obtain we believe without any -- in a number of cases without any tenant allowance or downtime, renewals that are above market because there is a cost for the tenant to lease.

At the same time, sometimes we're not renewing at the same rent because they've got to do what's prudent and I got to say, look I can -- there's other options I have. So there is a give and take and it takes a while to work through it. We're happy that we're able to renew these leases without that much capital at rents that we believe are above market, but it requires sometimes an adjustment down from what they were paying before.

And in a market -- I would add to that, that in a market like this, this is the worst possible market to own office space that's coming due, because that's the most --

Fungible space.

It's fungible, but it's also the most capital intensive and it's that to me the office, Mark -- the office rents have always been sort of the tail of the whip. So where we have office space this is a -- and we [indiscernible] very much by the way because we -- that tends [indiscernible] the primary asset class. But where we have office space that we're trying to lease today, that's a tougher slog than industrial or --

And we really don't have any retail space, maybe a little bit for lease but --

You always want to renew in a good economic time than a bad economic time, but I think you're right, as Tom said, because people don't want to move out of these mission-critical assets. We have a little leverage and then they've got a little bit of leverage because there is empty space, especially on the industrial side.

Industrial got a little bit -- industrials got a little overbuilt with a number of companies like ProLogis who were very aggressive about building industrial space. So you have a bigger glut of industrial space this time around. But we're doing all right with it.

Okay.

So it's a headwind, but there's nothing like it would be if you were all in the office space market or a typical sort of REIT.

I think that's exactly right.

That's correct.

All right. Thank you.

Thanks, Mike.

And that concludes our question-and-answer session for today. I'd like to turn the call back over to Susan Hyde for any additional or closing remarks.

Well, thank you again for joining us everyone. We just like to remind you that a replay of today's call will be available after 2:00 PM today through August 20 at midnight. The replay number is 888-203-1112 and the pass code you will need is 3545166.

Thanks again for joining us today, and we look forward to speaking with you again next quarter.

That concludes today's conference. Thank you for your participation.