WP Carey Inc (WPC) 2009 Q3 法說會逐字稿

Good morning, and welcome to the W. P. Carey Third Quarter 2009 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Susan Hyde, Director of Investor Relations. Ms. Hyde, please go ahead.

Thank you. Good morning, and welcome everyone to our third quarter 2009 earnings conference call. Joining us today are W. P. Carey's Chairman, Bill Carey; CEO, Gordon DuGan; Acting Chief Financial Officer, Mark DeCesaris and Chief Operating Officer, Tom Zacharias. Today's call is being simulcast on our website wpcarey.com and will be 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 fact may be deemed forward-looking statements. Factors that could cause actual results to differ materially from our expectations are listed in our SEC filings. Now I would like to turn the call over to Gordon.

Thank you, Susan. Good morning, and thank you all for joining us today. As you saw from the press release, we had another good quarter. Mark is going to walk through the financial results in detail, and Tom is going to discuss the portfolio performance and the progress we are making, challenges we face there.

One comment on portfolio performance for W. P. Carey. The good news is we are doing a terrific job of dealing with our lease renewals in the portfolio. The challenge we are having is that we are seeing rent roll-downs as these leases come due, in part because of above market rents in part it is not the greatest economy in the world to have to release. So we are happy to have the renewals, but we are -- Tom will talk a little bit about some of the challenges on the rent roll down.

Let's go back to the second quarter call, and the theme that I discussed in that call is playing offense and I think that was a good theme to carry over to this call because we are stepping up that theme of playing offense to -- in order to grow our assets under management, I'll talk a little bit about how we are doing that.

We are seeing opportunities in the US and Europe, continued investment opportunities, but these are not distressed commercial real estate opportunities that a lot of people are looking for and may or may not be materializing by the way. What we are doing is different, we are working with companies that are seeking to raise capital, and wants to take the capital they have tied up in their real estate, take it out of their property assets and redeploy that capital into their core business.

And so it is a different opportunity set, and one that we are seeing -- we are seeing opportunity, and I'll come back and talk more about those opportunities later. One aspect of playing offence and stepping that up is our fund raising. We have a terrific team out in the field working on our fund raising. Mark Goldberg who oversees that team is doing a terrific job; Susan Hyde who oversees the marketing side is doing a terrific job. We have really good people in the field now and so we have a great team, but we also have a great story. We have a 30-year track record available for all to see. It's filed with the SEC. We encourage investors in either W. P. Carey and our CPA funds to review that track record critically, we are happy to compare our track record with anyone else over a 30 year period and not many people can say that their track record is not open to scrutiny, especially over a 30 year period. So we have a great 30-year track record.

We have a relatively cycle resistant strategy; we use long-term leases on critical operating assets, that's a very good story today. While we have seen the defaults that we've talked about in the past and the portfolio with all of our funds have been able to weather those, and the dividends continue to get paid and we are hopeful that that continues.

These are income-oriented investments, so the fund raising is oriented to individuals and institutions looking for income investments and that's quite -- that's resonating with investors. And the last thing is, what the other thing is resonating with investors today is that we have discipline to shut down our fund raising for the majority of the 2005 to 2007 period and that seems to resonate with investors today as well. So we have a great story to tell that's getting told out in the field. And what does this all mean? What it means is we've seen a nice pickup in fund raising this year. Q1, we raised $70 million; Q2, we raised roughly $100 million; in Q3 we raised roughly $125 million. So, you see a nice progression there and October was our best fund raising month for the fund, so we've seen a continued progression there. There is a little bit of seasonality that comes into play as we get into December, but by all the metrics and by the results we are seeing, the fund raising is going very well. So we are building a war chest to take advantage of investment opportunities.

As you see, we closed two investment opportunities in the second quarter. The first one, that we mentioned is the Tesco sale lease back. Tesco as you may know is one of the world's largest retailers. This is their -- these were two logistics facilities in Hungary that are their primary logistics facilities. In Hungary, they are both cold and dry space. It was a $94 million investment. Tesco is a major player in Hungary, so we like owning their critical distribution facilities in Hungary. And it was a 15-year lease denominated in euros that also have the CPI escalation. And so the other thing that while there is non-inflation today in the CPI escalations are not going to be meaningful in a no inflation environment, we do find that investors are seeking some exposure to inflation protection. And by having CPI escalations in our leases we are affording our investors some exposure to inflation protection through that escalation.

The other transaction was a $28 million transaction with National Express, which is a UK based company. We bought their Birmingham facility, which is newly constructed on a 25-year lease, again with CPI escalations included. So there we have a 25-year lease with National Express CPI escalations. These are the kinds of investments that I think are very attractive investments in today's environment. What we are not seeing so much is a marketplace where there are a lot of distressed sales, as there are some net lease companies that are over levered, they are not able to -- the good news is they are not really able to effectively compete with us today but at the same time we haven't seen them unloading their investments at distressed prices. And so it's not -- I wouldn't characterize it in this environment where things are being sold under great duress.

On the other hand our pipeline is good, I feel like it's getting better. We have a number of deals that we've -- that our investment committees approved that are in the process of closing, as well as a number of deals that we will be presenting to our investment committee both in the US and Europe. I would caution obviously everybody that I learned long ago that until the deal is closed you can't count on it. So we don't count on anything until it's closed, but we do have a pipeline that we like.

In terms of the markets, the US, I would say the US market is characterized by less competition, probably less deal activity than Europe, but less competition. I think we are positioned very well because we believe as activity picks up, activity will pick up faster than competition will be able to pick up. So we think we are positioned very well. In Europe it's a little bit of a different environment in that there is more competition, but there is much more deal activity as well. So the dynamics are slightly different, but we are also positioned well there.

So part of our playing offense would be adding to our investment teams. Both in New York and London, we want to step up the assets we have on our investment teams and add to those teams, build those teams, take advantage of investment opportunities and the war chest that we've built and are building.

And the last part of our playing offense that I'll mention is cash flow and liquidity. In terms of cash flow and liquidity we love to look at cash flow statements and balance sheet and we would encourage all our investors of course to look at our cash flow statements and balance sheets for W. P. Carey.

And one thing you will find as you look at the balance sheet is from December 31 through September 30, basically our debt, both non-recourse, very largely non-recourse with a line of credit, our debt has remained flat, our cash is up a little. But in that period we've distributed roughly $60 million to investors and we've made a $40 million investment in the New York Times facility, $20 million of which I should say came from a mortgage, but we still, we have been able to make distributions to our investors, make a very attractive investment in the New York Times. And the proof is in the pudding in terms of are you able to fund that out of cash flow. We haven't had any significant asset sales, so we've been funding both the distributions and this investment opportunity out of cash flow.

In terms of liquidity, equally good story across W.P. Carey in all of our funds. We've just under $600 million of cash, we're very well positioned to continue to invest. Not all of that cash will be for future investments, some of it we may use for debt maturities, may be used to fund investor redemptions. We have build-to-suits that are being completed that we'll need to fund, and of course, there is always working capital and the like. But in any -- by any measure we have a very strong liquidity position across W. P. Carey in the funds, which is nearly $600 million of cash, and so we feel very good about that.

I'll just finish by saying the theme again is, we are continuing to be to play offense and get more aggressive as we want to grow our assets under management. Fund raising trends are very good right now. We have a good pipeline, and we're adding to -- we're going to be adding to our investment teams to take advantage of the capital that we have. And then lastly, we have the cash flow and liquidity to play offense in this environment, and so we feel very good about that.

With that I will turn it over to Mark DeCesaris, who will discuss the financial results.

Thanks, Gordon. In this morning's earnings release, we reported results for the period ended September 30, which year-to-date are in line with the prior year on both an FFO and an adjusted cash flow basis. Our FFO for the quarter is down approximately $3.3 million or $0.08 per share. This is a reflection of the timing of investment activity more than anything else as we closed approximately $121 million in new investments in the third quarter of this year versus $258 million in the third quarter of last year.

Overall, FFO on a year-to-date basis is down by approximately $1.4 million or $0.01 a share, and on a year-to-date basis, we've closed transactions on behalf of the CPA funds of approximately $355 million this year versus $404 million in the prior year. Tom will talk in more detail about our lease renewal process, but as a result of both lease renewals and amendments we've seen a reduction in rents received of approximately $3.7 million on an annualized basis. This reduction will be offset to some extent by the annualized lease stream from the New York Times acquisition of approximately $4.3 million, which after debt service will generate approximately $2.8 million annually in cash flow.

We continue to have strong dividend coverage of approximately 150% on an FFO basis. We continue to focus on adjusted cash flow as a key metric to evaluating our dividend. This metric, which includes distributions we receive on investments accounted for under the equity method. These investments include the New York Times, as well as our investment in the CPA funds. And to the extent the distributions received exceed the income recognized, they would be excluded from a GAAP cash flow from operations. In our model it represents an important source of cash and we include it in our adjusted cash flow metric.

Our adjusted cash flow from operations increased year-to-date to approximately $71.3 million for a coverage ratio of 120%. As we noted in this morning's press release, year-to-date we took impairment charges of approximately $109 million on the asset base that we manage on behalf of the CPA funds, or approximately 1.4% of that base. Our year-to-date net income was impacted by approximately $6.4 million as a result of these impairments. But our results are really impacted by the CPA funds in two ways. First way is our asset management revenue stream, which is based on the appraised value of the asset base of the CPA funds not the book value. We have an appraisal performed by an outside third-party annually. We released these results in March and that's really the basis for computing our annual management revenue stream that we receive.

The other way we're impacted is the distributions that we receive from the CPA funds as a result of our ownership in these funds. These distributions have shown quarterly increases as a result of the coverage ratios on both an FFO and an adjusted cash flow basis. And year-to-date, we've received approximately $10.5 million in distributions from the CPA funds. As of the end of the previous quarter, these coverage ratios ranged from 110% to 136% and included the impact on cash flow of tenant bankruptcies that occurred in late 2008 and early 2009. And these bankruptcies are really the primary driver of the impairment charges we've taken year-to-date.

Just a few points on our balance sheet. Our total debt to market cap ratio is 20%; our unsecured debt to market cap ratio is 6%. As Gordon mentioned in his comments, we've been able to add a $20 million equity investment in the New York Times and when you look at our debt and cash balances, increased our net leverage by approximately $4.8 million.

We have approximately $11.6 million in non-recourse debt coming due in the next year as well. So we continue to maintain a very stable, high quality balance sheet for our investors. In summary, our year-to-date results have been in line overall with the prior year. We've achieved these results in a very challenging environment. We've refinanced substantially all of our 2009 non-recourse mortgage debt that was due. We've replaced the lease revenue reduction with our co-investment in New York Times, and we did this without adding significant leverage to our balance sheet.

Capital inflows for CPA 17 continue to increase on a quarter-over-quarter basis and we've continued development of new deals in our pipeline. In summary, we're well positioned for future growth.

And with that I'll turn it over to Tom Zacharias, our Chief Operating Officer.

Thank you, Mark. I'd now like to provide a brief portfolio report for the third quarter for the public Company and then for the four managed CPA funds.

While we have experienced some tenant defaults in the portfolios, we are fortunate that we have large diversified portfolios that do not contain any unusual concentrations of credit risk. Year-to-date in 2009 across five funds, we've had a total of 13 tenants out of over 275 tenants in our bankruptcy protection. These tenants represent approximately 2.9% of the total annual rent across the five funds. Because we have large diversified funds, it is not as 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 re-organization process. We anticipate a slowing of defaults in the portfolios going forward. Generally, the credit quality of the revenues of each portfolio has been improving since the first quarter of this year. The reasons for this include improving tenant performance, general de-leveraging of the Company balance sheet and the weakest credits have now either restructured or defaulted.

At the end of the third quarter, occupancy was at approximately 95% in the LLC portfolio, up approximately 80 basis points from the prior quarter, primarily as a result of the sale of a vacant facility in July. In our leases, rent increases are generally indexed to the CPI index. The annual same tenant rent increases in the LLC for the first nine months of 2009 versus 2008 were $2 million or approximately 3.1% in increases. For the nine month period ending September 30, 2009 as compared to the same period in 2008, lease revenue from our real estate ownership segment of the LLC owned assets declined 3.2% as Mark mentioned, despite these rental increases from the CPI index.

This was due primarily to the impact of three property sales, three lease expirations, two lease restructures and [it was] 10% weaker euro for euro denominated rent. However, after including the increased revenue and equity investments from the New York Times investment, it was about $2.8 million. Real estate revenue for the first nine months in 2009 is in line with last year.

For the remainder of 2009 in the LLC portfolio, we have very little lease revenues scheduled to expire and we're working on 2010 in the following years. In the past quarter, we extended six leases on the [Medica] nursing homes, which were expiring in 2010 for 11 years until 2021.

For the eight Carrefour distribution centers, which have leases expiring in 2011, we have already extended those to 2015. Carrefour is the largest tenant in the LLC portfolio and Medica is the eighth largest tenant.

Now the weighted average lease term for the LLC portfolio has been extended to six years from 5.5 years at the end of the prior quarter. In these renewals, we will have neither any down time or tenant improvement allowances, although we'll have a rent reduction of about 19% from the current contract rent, yet this is still 10% above the initial rents. Overall, we are positive about these transactions. The percentage of revenue expired in the LLC portfolio on a pro rata basis in 2010 is now down about 12% and in 2011 is now down about 10%. This is down from beginning of the year where those similar numbers were 19% and 18% for those years.

We are working on roughly 20 tenants in the LLC portfolio right now to arrange renewals for upcoming lease expirations over the next two years. We have completed all the mortgage refinancing coming due in the LLC portfolio in 2009, and in 2010 the amount of non-recourse debt to be refinanced in the LCC is only three mortgages totaling about $11.6 million. 2011, only eight mortgages totaling $47 million, and 2012 four mortgages totaling $20 million.

We have a very good track record in refinancing these loans, which are generally only about 50% of the value of the asset and have a size between $2 million and $10 million. 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 for the public Company there was not significant lease expirations or mortgage maturities for the remainder of 2009 and we do not see any significant risks in 2010 and 2011. As of the end of the third quarter of this year for the CPA fund the occupancy rate on the 93 million square feet of space was approximately 97.9%. We expect the vacancy rate will increase slightly as some of the tenants operating in bankruptcy may reject their leases over the next couple of quarters. However, it's a very strong occupancy rate for a very large portfolio.

We have had similar CPI increases in the CPA funds as in the LLC portfolio of approximately 2% to 3%, between the nine months of 2008 and the first nine months of 2009 on a same tenant basis. These rental increases serves to mitigate the effects of any (inaudible) bankruptcy or reduced rent from restructured leases and workouts. The total amount of debt to be refinanced in the CPA fund in 2010 is $90 million across 17 loans. The average loan size is $5 million and again loan to value is about 50%, we expect to be successful at most of these refinancings.

So, again in the CPA funds not significant lease maturities, not significant mortgage maturities. The combined weighted average lease term in these funds is 12.5 years. These long lease terms are contributing factor for stable valuations that these funds enjoy.

With that portfolio report, I would now like to turn the call over to our Founder and Chairman of the Company Mr. William Polk Carey.

Thank you very much Tom. I think the story has been a wonderful one and one of the areas which we haven't talked as much about as maybe we should have is risk management. The risk management of this operation has especially proved itself during the economic turmoil when most financial institutions seem to be falling flat on their noses. They turned themselves into gambling machines and we kept risk management very, very tight.

Part of the way this was set up by our first Chief Investment Officer who died in this year, but his heritage is still with us. George Stoddard, who was a wonderful man, he was graduated from Brigham Young and from Harvard Business School and Fordham Law School and did everything but his dissertation for his PhD in economics at NYU and was also a Mormon bishop, and he kept us in line. And every one of our transactions is reviewed by a totally independent investment committee and the management is not allowed to opine on its own transactions for -- in the approval process. It's the independent investment committee that works.

The other thing I'd like to mention is the importance of cash flow. Some people like to look at net income and they think that's important. It's not important in our type of investments. So one of the things we're doing is taking depreciation on the properties, which we're allowed to do by law and by accounting factors and that deprecation is a benefit because you -- it enables your cash flow to be sheltered from taxation. And even when the properties are going up in value, you keep depreciating them and I think that's a really nice thing. But I always look at cash flow and then fortunately Mark DeCesaris, our Chief Financial Officer makes adjustments to cash, says there's another metric called adjusted cash flow which I've now learned really is better because that includes the income from our investments in our REITS and that's really good cash and those investments are technically under accounting rules, it is not all cash flow from operations.

It's cash flow from operations of the REITs and our investment in them is -- but for technical reasons it doesn't come into GAAP cash flow from operations. So, basically he makes that adjustment, so we really know what we're doing and what our real coverage of dividends is. And I'm still learning from all of my people here who are obviously much better in accounting than I'd ever be and others are better in other ways and I'm learning from my team of people. And one of the things when I was at Harvard Business School, (inaudible) they said, what's the secret of your success, and I said it's knowing my own limitations and surrounding myself by people brighter than I in various fields and learning from them as we move along. And we are having a -- we have a great deal of fun doing this, knowing that we are doing a good job for our investors. And I still stay up at night caring about every investor, and we've got what close to 200,000 I guess. But as I guess we have more than that because some of them are (inaudible) funds and they have millions of other investors. But it's a -- it's very gratifying to know that we're doing a good job for our investors and we won't rest until we continue to do the best job. Thank you very much. I guess we open this to questions now.

That's right, now we'd like to open up our call to any questions that you may have.

We will now begin the question-and-answer session. (Operator Instructions). We have a question from Andrew DiZio from Janney Montgomery Scott. Please go ahead sir.

Hi. Thank you good morning. First question relates to the fund raising you guys have been doing. Have you seen a pick up in the individual advisor channels, or is the overall pick up due to add any additional advisers?

Hey Andrew, it's Gordon here, good morning. We, you know, what we've seen is and tell me if this answers the question. What we've seen is that we've been able to increase our market share at our existing broker dealers, and there are thousands and thousands of financial advisers, as well as penetrate new financial advisor networks. And -- so it's been a combination of both increasing market share at existing systems as well as adding new systems and being able to penetrate those systems. In terms of the number of financial advisors at those systems, within each system, I don't have any of those numbers handy, but from our standpoint we've increased market share and increased the playing field by adding new financial advisor networks, some of which are very, very large even if they're not household names to the general public.

The words, I think the word spreads around to within these organizations especially when everything else wasn't working, what's this one that works. And that seems to be very helpful.

Great. Thanks. That does answer my question. And then in relation to what you're seeing in the lending markets, obviously you've got the deal done back in China, are you seeing additional lenders entering the market now, or what are you seeing with that?

There seems to be some easing, we have seen in some tentative new entrants and some continued lending on behalf of the institutions who have been lending to us. So, yes, there seems to be some easing but it's, I'd call them as a falling rather -- and a -- it's been a, certainly been a stampede, it still -- lenders are still working their way through their own individual situations and some lenders like Bank of China happened to be based in the world's best economies, so their situation is different, but what we are seeing is a following and I'd say is a general improvement, but not a -- certainly not a stampede.

Okay great thanks. And then just one last question, relating to the world's largest economy. What are you guys doing in Asia these days, is that still a market that you're figuring out or are you getting closer there?

I think we're still figuring it out. We've a terrific team based in China and you may know that due to Bill's philanthropic involvement with ASU there is an executive MBA program in Shanghai sponsored by ASU in administrative finance in China. So we have very good contacts there.

(inaudible) and they're getting W. P. Carey MBAs. We're very proud and they're very proud. And these W. P. Carey MBAs are going to some of the most important people in China.

We have the reason to feel good about it, but I would underplay it until we really accomplish something more substantial.

Thanks, great. Thank you and I'll yield the floor.

(Operator Instructions). Having no further questions, this concludes our question-and-answer session, I would like to turn the conference back over to Susan Hyde for any closing remarks.

Thank you. I'd just like to remind you that a replay of the call will be available after 2.00 PM today. The replay number is 877-344-7529 with a pass code of 434585 and a replay will be available through November 19. Thank you all for joining us today and we look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.