WP Carey Inc (WPC) 2010 Q3 法說會逐字稿

Hello, this is a Corus call operator. Welcome to the W.P. Carey third-quarter 2010 earnings release conference call.

As a reminder all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) The conference is being recorded.

At this time I would like to turn the conference over to Susan Hyde, Director of Investor Relations. Ms. Hyde?

Thank you. Welcome everyone to W.P. Carey's third-quarter 2010 earnings conference call. Joining us today are Chairman William Polk Carey, President and CEO Trevor Bond, CFO Marcus DeCesaris, and COO Tom Zacharias.

Before I turn the call over to Trevor I need to inform you that statements made on this call that are not historic fact may be deemed forward-looking statements. Actual results may differ materially based on a number of factors, including those identified in our annual report on Form 10-K as filed with the SEC, which is available on our website WPCarey.com.

Now I would like to turn the call over to Trevor.

Thank you, Susan, and thanks to everyone for joining us on the call today. Those of you who listened to our second-quarter call may remember that we talked about the mixed signals we were seeing in the economy at that time and how W.P. Carey was well positioned to compete in that environment. We all hoped to see more clarity by this point, but instead the financial markets have continued to be what some observers would call schizophrenic.

A bullish outlook in the winter and early spring gave way to fears over sovereign debt and volatility in the capital markets. Calm was restored in early summer then fears of a double-dip surfaced then subsided then surfaced again.

Finally by the fall, economists were generally saying that we would likely avert a new recession but that we should adjust our expectations to a modest, gradual recovery. And I don't think anyone knows what the impact will be of the Fed's quantitative easing program or the mid-term election results.

In other words, it seems things have circled back to where they were in July; that is better general conditions but still a scenario of anemic job growth and weak consumer confidence. We continue to think W.P. Carey is well-positioned to succeed despite or in some ways because of the continued uncertainty, and that dynamic is borne out in W.P. Carey's year-to-date results that we are about to talk about.

To put more color on that, in our own portfolio we continue to see clear improvement in underlying fundamentals -- in terms of tenant defaults, for instance, and the amount of impairments taken as compared to the depths of the recession. But at the same time our lease income for our own portfolio has declined slightly and our occupancy has also slipped somewhat to around 91%. Our Chief Operating Officer, Tom Zacharias, will get into some of the reasons for that and what we are doing about it.

But that said, just as we stated back in July, W.P. Carey believes we will continue to benefit even in this time of slow growth from having a balanced business model, which specifically means, as most of you know, that we earn revenues from two primary sources which are investment management and real estate ownership.

And so those declines in lease revenue that I just mentioned were more than offset by increased revenues from investment management. And because of this our adjusted funds from operations year-to-date as increased compared to the same period in 2009. Our CFO, Marcus DeCesaris, will break those numbers down in detail in a moment.

Looking forward we continue to see both opportunities and challenges in the new environment. The uncertain economic landscape has resulted in a splitting of our segment of the capital markets into two tiers, into what some observers have described as a world of haves and have-nots. In debt markets the haves have been able to obtain low-cost financing and increasingly we are seeing more reports of larger corporations raising cash and then hoarding it. Again, due to those same uncertainties perhaps.

On the have-not side, however, many very worthy, small- and medium-sized enterprises have been shut out of the debt markets which has made long-term sale-leaseback financing an attractive alternative. And as a result we have seen more corporate real estate owners seek to raise funds through this approach.

In contrast to that high-quality net lease investments are clearly in the have category and because of this we are finding an ample supply of non-recourse debt available to finance our purchases and our mortgage refinancings on behalf of the CPA REITs. The CMBS secure markets have returned to life.

We are seeing more life insurance companies become active as well. Of course, the loan-to-value ratios are more conservative than they were at the peak of the market and European lenders are still a bit more cautious, but overall conditions are much improved.

The splitting of markets into have and have-nots has implications for W.P. Carey going forward. On the investment side, as I just mentioned, long-term net leased assets are clearly in the have category, largely because the yields have been so attractive in this low-yield environment and because long-term leases offer protection against short-term swings in the economy.

As a result, we expect to see a continued flow of capital into this sector. In fact, our own fundraising for CPA-17 has been strong. We have raised approximately $1.2 billion thus far and currently have approximately $450 million of cash on hand to invest. The challenge will be to watch for signs that capital inflows are getting out of balance with the supply of good investment opportunities, but for now we think that is not the case.

While we closed on no new purchases in the third quarter, which is not atypical for the summer months, we have seen a lot of activity and feel there is equilibrium in the market. Our acquisition volume year-to-date is $100 million ahead of 2009 and we have a healthy pipeline of transactions that we are working on.

So that is my overview and with that I would like to turn the microphone over to our CFO, Mark DeCesaris, who will walk you through our results in more detail.

Thanks, Trevor. Good morning, everyone. I would like to talk about our revenue streams and kind of go through on an economic basis how they play into our results this quarter.

From a structuring revenue standpoint our investment volume in 2010 totaled about $453 million versus approximately $354 million in 2009. That accounted for a revenue increase of about $4.3 million. I think the important point to note today is that we have investable cash in CPA-17 today of approximately $450 million.

Our pipeline supports both the investable cash and the current rate of capital inflows in 17. And while, as Trevor mentioned, our investment volume is always lumpy and summer is typically a slower time period, I think it's fair to say that in the near term we feel we will be able to invest this capital.

From a management revenue standpoint we are actually up about $2.5 million over last year. Let me explain that for a minute. Our assets under management at September 30 totaled $8.7 billion versus $8.2 billion in 2009. When you look at our results and our management performance revenue line items you will see roughly a decrease of about $0.5 million going from $57.5 million in 2009 to $57.1 million in 2010.

Not included in there, though, is the distributions that we receive on the GP interest in 17. You will recall that when 17 came out we modified the fee structures somewhat in that we removed the performance fee and instead of that we took a GP interest in the operating partnership of CPA-17.

Our distributions received on that interest for the nine months ended were roughly $3.4 million this year versus about $600,000 in 2009 for an increase of $2.8 million. And that is what is really accounting for the increase in the manager revenue stream.

On our balance sheet we carry approximately $236.7 million in shares of the managed CPA funds. This represents an ownership of anywhere from 0.5% in CPA-17 to 9% in CPA-14. Excluding the distributions from the GP interest in 17 we received approximately $12.2 million in cash distributions in 2010 versus $9.3 million in 2009, represents an increase of about $2.9 million or 31%.

It's a very stable cash stream for us. We count on it, as well as from our dividend standpoint, and to give you some idea of the stability, included in our FFO we recognize our share of the FFO of the funds. FFO, as you know, is a coverage ratio metric that we use heavily in the CPA funds. By REITs as well.

So we recognize in our share of FFO roughly $18.5 million from the CPA funds, which is on average about 150% coverage ratio of the distributions we have received at $12.2 million. So it gives you some idea of that stability.

Trevor mentioned that our lease revenue stream is down slightly and on a pro rata basis, not just consolidated, we recognized approximately $72.9 million for the nine months ended 2010 and $76.3 million for the nine months ended 2009. Again, many of our net lease investments are accounted as joint venture interest and the pro rata rent from those interests shows up in our equity investment line item, not on the consolidated line item that you see in our income statement.

So overall they are down about $3.5 million. We were able to partially offset some of the rent reductions that occurred due to sales of properties or lease adjustments with two new acquisitions that we made this year. You will recall we have talked about the JPMorgan asset as well as the Eroski asset that we closed at the end of the second quarter. Those two assets generated roughly $3.4 million of rent this year, although on an annualized basis we expect them to generate approximately $5.7 million.

On an FFO basis we are ahead of last year at this point by about $5.1 million. That is primarily the result of higher structuring revenue and increased management revenue which include the distributions from CPA-17 on our GP interest. We remain focused on stabilizing our net lease portfolio.

The AFFO contribution from this segment was down approximately $1.1 million. We will continue and we plan to [offensively] acquire additional net lease assets as we work through some of the short-term issues in this portfolio.

From an adjusted cash flow standpoint, on a year-to-date basis we generated approximately $64.9 million versus $71.3 million in the prior year. The difference is primarily lower lease revenues and also lower payments on the deferred acquisition fee.

As you know, we have also changed the model in 17 so that rather than receiving all those fees in a lump sum in January we spread them throughout the year. But also impacting that was the relatively lower-than-average investment volume that occurred in 2008 and 2009 during the economic downturn.

I think the key metric as we look at both FFO and adjustable cash flows remain our investable cash and the capital inflows on CPA-17 which are coming in at a steady rate, and the pipeline that we look has a measure to determine whether or not we think that the investable cash flow is at the right level. As I mentioned before, we are confident that we can put that cash to work.

The other standpoint though, all the other metrics are positive. Management revenues, distributions from our ownership in the CPA funds are both increasing, and the 17 becomes more fully invested as the distributions we receive on the GP interest flow right to the bottom line from a cash flow standpoint as we don't see the dilution at the federal tax level on those distributions.

From a coverage perspective we have 156% coverage ratio on AFFO and 107% coverage on adjusted cash flow. Both strong coverages. We understand that the dividend is of the utmost importance to our customers and we focus on the health of these ratios. We are pleased that throughout the economic storm that began in 2008 we were able to put through modest increases in our dividend and, more importantly, support that dividend with solid coverage ratio.

We are in a good position from a balance sheet standpoint. Our total leverage, total market cap ratio is approximately 24%. Our recourse level debt to total market cap is approximately 8%. We have a one-year extension option on our line of credit which takes it through June 2012.

With that I will turn it over to our Chief Operating Officer, Thomas Zacharias.

Thank you, Mark. I would now like to provide a brief portfolio report for the third quarter for the public company and the fourth managed CPA funds. First, I have some general comments about the credit quality of our tenants and the current leasing, sale, and refinancing environment. Then I will provide portfolio activity related to the occupancy lease maturities and mortgage maturities for the public company and then the four managed CPA funds.

As Trevor mentioned, there has been a significant decline in tenant defaults in 2010. We have had only four tenants in our five portfolios file for bankruptcy in 2010, and two have already affirmed their leases and exited bankruptcy. And we expect a third to affirm as well.

The credit quality of the lease streams in our portfolios continue to improve in the third quarter. In the second half of this year we have seen a modest uptick in both leasing activity and buyer interest in our vacant properties.

On the debt side we have more lenders interested in providing debt and at terms more attractive than the rates that we are refinancing. Generally we are refinancing in the 5% to 6% range for a 10-year term. The prior rate being refinanced on debt placed 10 years ago is about 7.5% to 8%.

As Trevor mentioned, occupancy in the WPC portfolio at the end of the third quarter was approximately 91% on the 14 million square-foot portfolio, about 100 basis points below the prior quarter. This vacancy in the public company is as we expected because several large tenants coming off lease in 2010 we were unable to renew.

We are in the process of releasing or selling this vacant space and we have proposals out on roughly 40% of the 1.3 million square feet of vacant space. We expect that there will be a reduction in vacancy over time as we complete these transactions.

We have been aggressively renewing leases that are expiring in the next 12 months. The percentage of pro rata lease revenue in the WPC portfolio for which renewal terms have not yet been finalized is only approximately 5.5% over the next 12 months.

As Mark mentioned, total pro rata lease revenue was down about 3.8% for the first nine months as was expected while we reworked the portfolio. The portfolio has benefited from the Morgan and Eroski transactions and we would expect additional assets to be added over time.

We have one mortgage of $5 million coming due in 2010 left to refinance. In 2011 it's seven loans totaling $47 million; 2012 it's five loans totaling $28 million. So there is very little mortgage debt to refinance and we are well positioned as a company over the next three years.

Now the portfolio report for the four CPA funds. At the end of the third quarter the occupancy rate of the 95 million square feet owned and aggregate by the CPA funds was approximately 97%. No significant lease maturities coming up in these funds over the next three years and the combined weighted-average lease term is 11.8 years.

We currently expect to refinance eight loans in the CPA funds by the end of the year totaling approximately $130 million. As I mentioned, we think we will be able to refinance this debt at roughly 150 to 250 basis points below the existing rates. The amount of debt to refinance in 2011 is only about $160 million, which is about 4% of the CPA program debt outstanding.

In summary, the goal of our active portfolio management is to mitigate risk and create value for investors. In conclusion, the portfolios are performing well, credit quality is improving, and we now have additional activity on the vacant space we have available to lease or sell.

Now I would like to turn the call over to our Founder and Chairman of the Company, Mr. William Polk Carey.

Thank you very much, Tom, and thank you all for listening. I am so proud of what everybody is doing here at this firm and as far as I am concerned our prospects couldn't be brighter. I just have every confidence in the world in the team and just feel wonderful about what is going to come along in the near and distant future.

Thank you, Bill. I think now the presentation part of our conference call is over and we would like to open the call up to a Q&A session.

(Operator Instructions) David West, Davenport & Company.

Good morning. Encouraging to hear that you still feel your pipeline of activity is encouraging. Could you characterize your pipeline domestically versus that in Europe?

We are seeing about 50/50 right now some very large deals in Europe and also some large deals here, and then a mixture of medium-sized deals. As we said, it's very lumpy. We can't say exactly when they will close but we are serious about them and they fall right in our sweet spot in terms of all the fundamentals.

One of the young investment officers he said they closed two deals yesterday, so that is not too bad for starters.

And encouraging to hear, good to hear. Are you in a position to comment at all as to the early indications or activity in Carey Watermark, how that fundraising is going?

Well, we have only just really entered the market with that fund, as you may know, and we are projecting a relatively slow ramp up. And that is really all we have seen at this point. I think it will be a while before we see how that plays in the market.

All right. Thanks very much.

Andrew DiZio, Janney Montgomery Scott.

Thanks. Good morning, guys. Just kind of following up on David's last question there on the early impressions on Watermark. Can you just talk about what you are seeing as far as potential distribution agreements through advisers at this time?

Could you repeat that last part, Andrew? I am sorry, you broke up a little.

No problem. Could you talk about what you are seeing as far as distribution agreements with your advisor platform? If it's going to be similar to 17, smaller, larger, just from a number of advisers that are distributing?

Well, we are being very careful how we roll that out. Right now we have two selected dealer advisor agreements because we want to make sure that we take care to properly educate people about that opportunity. So we do expect over time, as activity picks up, to expand those relationships but right now we are just focused on those two.

Okay, that is helpful. And then looking more broadly at the fund's management platform, now that you have got a more hotel-focused fund and you have a long history of course in net lease, do you foresee looking at potentially having multiple funds out there at the same time with different property type objectives or is that just something you are playing by ear going forward?

Well, as you may know, it took us several years and then having a close working relationship with Michael Medzigian, who is our sub advisor on the hotel fund, before we got comfortable with the question of whether this was a good idea for us. So anything like that we would only follow careful thought and study at all levels. So at this point we will stick with hotels and net lease and think about others maybe in the future.

Okay, thanks. And then looking -- again maybe this is a question for Tom. When you look at your portfolio going forward, the W.P. Carey-owned portfolio, do you have any known vacancy or been informed of any move outs coming up in the next year or so?

I mentioned that we have been focused on everybody for the next 12 months. We have certain -- we have about 5% of the revenue that we have not been able to renew yet but we don't know yet whether that is going to be the outcome or what.

Okay. So you haven't been given notification, I guess, of a vacancy on any of those, it's just still out for discussion?

It's out for discussion, yes.

Okay, that is helpful. And then just last question on you talked about what you are seeing in the debt markets today from a rate perspective, is that at 60% leverage or what kind of leverage ratio is coming on that 5% to 6% 10-year debt?

Between 50% and 60%.

Okay, thanks. That is all for me.

(Operator Instructions) There are no more questions at this time. We would like to turn the conference back over to Susan Hyde for closing remarks.

Thank you. We just wanted to remind everyone that a replay of the call can be accessed after 2 p.m. today. That is by replay or podcast and you can access -- you can find the information on how to access those replays on our earnings release that we issued this morning.

We would just like to thank you all again for joining us today and we look forward to speaking with you again next time. Thank you.

Thank you all very much for participating in the W.P. Carey third-quarter 2010 earnings release conference call. This concludes today's event.