WP Carey Inc (WPC) 2011 Q2 法說會逐字稿

Hello. This is the Chorus Call Operator. Welcome to W.P. Carey's second quarter 2011 earnings release conference call. (Operator instructions.) Today's conference is being recorded.

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

Thank you. Good morning, and welcome, everyone, to our second quarter 2011 earnings conference call. Joining us today are W.P. Carey's CEO, Trevor Bond, 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 Trevor, 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 Trevor.

Thanks, Susan. And thanks, everyone for joining us today.

In preparing for this call I was struck more than usual by the difference in perceptions about global economic conditions as of June 30th versus now, six weeks later, as we report on that earlier period. Events have been moving so rapidly that it's difficult to get a handle on the near-term prospects for the economy and for capital markets. Headline risk continues to command investors' attention, and with that comes uncertainty and fear. And that dynamic is, in itself, starting to feel normal.

But although our attention is focused on the news as events unfold because we're constantly reevaluating what each new crisis means to our business, the good news continues to be that the success of W.P. Carey's business model is not significantly affected by short-term volatility per se. It's more dependent on solid execution of a balanced plan based on a long-term view.

Our success lies in our ability to invest in assets that deliver stable inflation protected dividends in all kinds of macro conditions for our shareholders and for our CPA investors, despite short-term swings and sentiment and paper values. That said, the short-term fluctuations we're seeing now are likely to affect the opportunity set available to us in a positive way we think. And I'll speak about that in a moment.

But, first, to take a step back and look at our second quarter, it was very solid and demonstrated the continued stability of our business model. Overall our adjusted funds from operations rose from $1.69 per share in the first half of 2010 to $2.78 per share in the first half of this year.

In breaking this down, AFFO from investment management rose to $1.71 per share, up from $0.63 per share in 2010. And AFFO attributable to real estate ownership rose from $1.06 in the first of 2010 to $1.07 in the first half of this year.

Mark DeCesaris, our CFO, will walk you through the numbers in detail after I speak, so I'll just make two brief points about the results. The first point is the merger of CPA-14 and CPA-16, which closed in May, was a significant milestone for W.P. Carey, not only because it was the thirteenth time we've successfully liquidated a fund but also because the merger resulted in W.P. Carey adding assets to its balance sheet, including net leased assets, as well as an increase in our own stake in CPA-16, all of which will be accretive to our adjusted cash flow from operations going forward. And Mark will get into more details about that later on.

The second point I wanted to make is that the earnings from the merger obscured somewhat the fact that our ongoing core operations also performed steadily during the second quarter. And if you back out the merger related results, which were about $1.11 per share, we still earned AFFO of about $1.69 a share, which was about the same as the first half of last year.

To briefly summarize our core operations, fundraising continued to be strong through the second quarter and through the month of July, and we've raised approximately $365 million year-to-date for CPA-17 global. The total investment volume year-to-date is approximately $540 million, which is ahead of where we were at this time last year, and the pipeline continues to be strong.

Our investments for the second quarter included an $86 million purchase of a self storage portfolio with properties in California, Hawaii, and Illinois. We like the self storage sector, and we have an experienced in-house management team that specializes in it. We've come to know that sector well, beginning with a $312 million sale/leaseback we concluded with U-Haul back in 2004, and more recently through an institutional fund that we manage separately. As an asset class storage performed well during the last recession, and we believe these properties will provide balance and diversification, as well as an enhanced yield to the CPA-17 portfolio.

We also entered into a $51 million sale/leaseback for four industrial facilities with Flanders Corporation, which is a leader in the production of filters for heating and air-conditioning units. Also we closed on a $14.5 million build-to-suit transaction for ICF International for an operations center in Martinsville, West Virginia.

Our hotel business continues to develop according to plan. Carey Watermark Investors has raised approximately $34 million to date, which is roughly in line with initial projections, perhaps slightly off. And, as we had mentioned during our last earnings call, that fund closed its first acquisition on May 5th on two hotels in Long Beach, California.

To get back now to the current environment and what it means for W.P. Carey, it's worth emphasizing again that our business model is less vulnerable to short-term volatility because most of our revenues, whether from the fee based asset management segment or from the real estate ownership segment, a substantial portion of our ongoing revenue stream arises from the rents paid by corporations on their most critical real estate, their headquarters for example or their key distribution or manufacturing facilities.

And, as Tom Zacharias, our Chief Operating Officer, will discuss in more detail, the underlying portfolios that we either manage or own are well occupied by a diverse group of tenants from a wide variety of industries. Some of these tenants may experience distress should the economy go into a new recession, but in the cost cutting environment that often takes place in such a climate paying the rent typically remains a high priority.

In looking at the macro picture it's possible for us to see some silver lining. For perhaps the first time in history the downgrade of a AAA borrower, that is the U.S. Treasury, of course, has caused a spike in demand for that same issuer's debt. That phenomenon in the broader flight to quality may extend the low rate environment further into the near term. The debt ceiling resolution seems to ensure that fiscal stimulus is not in the cards for the moment, which leaves the Fed with the choice of doing nothing or trying to lower rates again and add to liquidity.

In any event, we believe this environment will favor suppliers of income yielding, inflation protected investment, such as W.P. Carey. And after emotions in the financial markets have stabilized somewhat we think that demand for our type of investment program will accelerate. I should note that in the very short run, however, fund raising may fall-off somewhat as investors retreat to the sideline.

On the investment side we have sufficient dry powder from funds already raised this year to take advantage of the pipeline of opportunities that we're seeing. And we believe that if fear of weakening in the global economy continues to exacerbate actual weakening then we will be well positioned to offer long-term capital to good companies which are otherwise shut-out of the credit markets.

For those of you who have been with us through the ups and downs of more than 30 years' worth of economic cycles you will recall that times such as these have created some of our best investment opportunities in the past.

And, with that, I'll turn the microphone over to our Chief Financial Officer, Mark DeCesaris.

Well, thanks, Trevor. Good morning.

We reported solid results today for the second quarter and year-to-date. As I walk you through the numbers I will spend some time on both the second quarter, as well as the ongoing impact of the merger between two of our managed funds, CPA-14 and CPA-16. I'll also talk about the continued strength of our core operations, both the investment management segment, as well as our net lease segment, which includes both our portfolio of net leased assets as well as our direct ownership in our managed funds.

We reported AFFO of approximately $112 million or $2.78 per share versus $67 million or $1.69 per share in the prior year. The impact of the merger on AFFO in the second quarter was approximately $44.6 million or $1.11 per share.

In our investment management segment we made investments on behalf of the managed REITs of $594 million during the six months ended June 30th versus $440 million in the previous year. These investments generated structuring revenues of approximately $21.7 million, an increase of $1.7 million over the previous year.

Fundraising in both CPA-17 part two and CWI remains on pace. We currently have available approximately $235 million in CPA-17 and $9 million in CWI for investment.

Overall base asset management revenues excluding revenues earned in the merger increased to $40.2 million for the six-month period. We earned $36.4 million in asset management revenues and an additional $3.8 million in distributions from the special GP interest we hold in CPA-17.

Keep in mind the fact that while overall management revenue still increased year-over-year by approximately $0.6 million it was without the benefit of two months of performance revenues from both CPA-14 and CPA-16. When the merger was executed on May 2nd we stopped receiving performance revenues on the combined asset base of CPA-14 and 16. While we received distributions from the conversion to a specialty P interest in the combined entity for May and June, they will be included in our third quarter results. The impact of this on our revenue stream was a temporary decline of about $3.2 million or approximately $0.08 per share. This also would have impacted both our AFFO and our adjusted cash flow by approximately $0.04 to $0.045 per share.

AFFO from our net lease segment increased to $43 million. This was driven both by new investments in leased assets, as well as increased ownership in our managed portfolios. As part of the merger we purchased CPA-14 share of three assets in which we had previously held a joint venture interest with CPA-14. We also increased our ownership in CPA-16 to approximately 17.5%, which we will discuss in a minute.

G&A for the six-month period increased approximately $8 million net of wholesaling revenue received. Amortization of stock compensation increased approximately $3.8 million due primarily to the expected increase in the payout of performance share units. And professional fees increased approximately $1.3 million, the majority of which were incurred in connection with the merger.

Adjusted cash flow from operations increased to $55.9 million or $1.39 per share. These amounts do not include the termination revenue or the disposition revenues received in the 14, 16 merger. Our coverage ratio on adjusted cash flow is approximately 130%.

Let's discuss the economics of the merger for a few minutes. We earned approximately $31.2 million in termination revenues on the liquidation of CPA-14 and $21.3 million in disposition revenues. We received shares of CPA-14 for the termination revenues, which were subsequently exchanged for approximately 3.2 million shares of CPA-16. While we recognize the full impact, the full tax impact in our provision the actual tax on those, on that revenue will be paid over the next five years.

We received our disposition fees in cash and will recognize both the tax and the payment of those taxes this year. We also received a distribution of approximately $11.1 million from our ownership of shares in CPA-14 immediately prior to the merger, a portion of which was subject to approximately $2.2 million of current taxes.

All of the shares we've previously owned in CPA-14 were exchanged for shares in CPA-16. And, in addition, we purchased 13.75 million shares of CPA-16 for $121 million. The additional shares acquired through our cash purchase, as well as those received for the termination revenue, are expected to generate approximately $11.2 million in additional distributions on an annualized basis.

As I mentioned before, we also purchased a joint venture interest of three assets from CPA-14 for approximately $32.1 million in cash and the assumption of $64.7 million of debt. These assets are expected to generate approximately $8.8 million of additional net lease revenue and $4 million in additional cash flow annually.

Lastly, as part of the merger we converted a portion of our annual management fee, the performance portion, to a special GP interest in the merge entity. The best way to understand the impact is to look at the post-merger entity CPA-16, which has approximately $3.9 billion in assets. Prior to the conversion this would have generated approximately $19.5 million in management revenues, which post tax generated about $13 million in net revenue.

The specialty P interest in CPA-16 post merger is expected to generate in the vicinity of $14 million to $15 million per year in distributions, which is good income for REIT purposes and does not flow through the taxable C Corp. This is expected to deliver $1 million to $2 million in additional cash flow annually and will lower CPA-16's expenses by approximately $4.5 million to $5.5 million annually.

So on an annualized basis I would expect to increase cash flow in the $16 million to $17 million range or approximately $0.40 per share. This does not include our cost of debt. We utilized approximately $120 million of debt to acquire these additional interests, while our current interest cost is just under 1.1% and our cost may increase as we renew our line of credit.

As of June 30th we drew down on our line of credit to fulfill our commitment to the merger, and currently have approximately $40 million available under the original line, as well as the short-term facility we put in place in April. These facilities expire in June of 2012, and we're currently working on the renewal.

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

Thank you, Mark.

The first part of this report will focus on the WPC portfolio and will be presented in two sections -- our interest in the portfolios of the CPA REITs through ownership of CPA REIT shares, and our portfolio of directly owned properties and equity interests. The second part of this report will cover the CPA REITs and Carey Watermark Investors.

We believe it is important to mention the specifics of our portfolio of CPA REIT shares as it represents an important component of real estate revenue. After the completion of the CPA-14, CPA-16 merger in May we now own approximately 45.6 million shares in CPA REITs, the carrying value of $437 million. The current annualized distributions from this portfolio are approximately $30.8 million. The REIT share distributions are very stable and tend to grow over time.

Now a few key statistics about our CPA REIT share portfolio. Our ownership stake in the shares of the CPA REITs translates into another 11.2 million square feet of real estate, or roughly 44% of the square footage of the entire real estate segment portfolio. The occupancy of our REIT share portfolio is over 98% compared to the roughly 91% for the owned portfolio. The combined occupancy is 94%. Also, the weighted average lease term of REITs shared portfolio is 11.2 years compared to 6.3 years for the owned portfolio. Combining the two the average weighted lease term is 8.7 years.

The WPC owned portfolio was expanded in the second quarter, as Mark mentioned, with the purchase of three JV interests from CPA-14. The square footage now is slightly over 14 million square feet and the occupancy is at 91%. That is a 200 basis increase from the first of the year. In the second quarter we completed some leasing and sold two small vacant assets for net proceeds of approximately $3 million.

The refinancing pipeline for the WPC portfolio is in very good shape. We just completed the refinancing of an $8.5 million loan on a building leased to Sprint at a rate of 4.85% fixed for a five-year term. Recently we've been getting very attractive terms. There's one loan to refinance in 2011, roughly $2.7 million, and we are already working on the five loans coming due next year, totaling $28 million.

Now to focus briefly on the portfolio report for the three CPA managed funds. Occupancy in our funds is very strong, averaging over 98% occupied for the 104 million square feet, the average lease term in the CPA REITs is 12.4 years.

We have had very active portfolio management in CPA-16 after the merger with CPA-14. With the number of assets that have 10-year debt coming due it was more advantageous to exit certain assets rather than refinance and hold. Year-to-date in CPA-16 we've sold $147 million of assets, netting proceeds of slightly over $100 million, and have used these proceeds to pay down debt.

Year-to-date we have completed over $150 million in refinancing at favorable rates in the CPAs, and we have another $90 million in loans we are seeking to refinance by the end of the year. We are working on about $200 million of refinancing in the CPAs for next year. While there is economic uncertainty in a number of the areas of the economy the credit quality of our leased (inaudible) continue to remain stable.

Now I'd like to provide a brief portfolio report for our new fund, Carey Watermark Investors. In May we completed the first acquisition for CWI which consists of 49% joint venture interest in two waterfront hotels in Long Beach, California. The portfolio now consists of 372 rooms, and we have hotels operating as a Marriott residence in Flag and the Hilton Doubletree Flag. The occupancy of the portfolio in June was 76.3%, which is an increase of over 13.5% from a year ago. The rev par average for June in the portfolio was $105, and that's a 29.9% increase from a year ago. We continue to see attractive opportunities, and we are focused on capital raising for this fund.

In summary, the portfolios continue to perform well. We are pleased with the progress we have made in leasing, refinancings, restructurings, and selected dispositions to maximize the returns for our investors.

Now I would like to turn the call over to Susan Hyde, Director of Investor Relations.

Thank you, Tom. Well, that concludes this morning's presentation, and so now we would like to open-up the call for a Q&A session.

(Operator instructions.)

And our first question comes from Andrew DiZio from Janney Capital Markets. Please go ahead with your question.

Thanks. Good morning. A question for probably Trevor. There's been a lot of press in the last few months on the nontraded REIT industry, mostly surrounding some of your competitors and some practices that I know Carey doesn't engage in. But I wondered if you could comment a little bit about what you're seeing in the industry and you think the future of it looks like?

Yes, sure. Thanks for the question, Andrew. The firms that were noted in the article are -- we consider them somewhat of an outlier in the nontraded REIT space in that they really pursue a different kind of a model than we do, relying far more on direct sales to investors and television advertising and things like that. So they're not a firm that we have come to know quite as well as some of our more traditional competitive set within the nontraded REIT space. We know of them more by reputation.

But I think that, that said, we have noted as a result of some of the fallout of the press and perhaps some of the substantive things that were being investigated that there's been some increased scrutiny by the SEC and by FINRA on sales practices industry wide, with the key theme I think being their desire for more transparency about such things as NAVs, dividend coverage, FFO definitions, and things like that.

And I think the bottom line for us is that that plays to our strengths more than anything and helps set us apart because some of the things that we've been preaching about for many years and actually following in practice are things that are going to become the norm in the future. So it's always better to be the front runner on that regard. So we believe our track record and our business practices inspire confidence amongst the network of financial advisors who sell CPA-17 on our behalf.

And so in our discussions with broker/dealers in that channel, many of whom do not use these same dealers that were highlighted in the article that you mentioned, but in our conversations with them we continue to stress that we're one of the only significant public company sponsors in the nontraded REIT space, that that helps us spread-out decision making, causes an increase in controls over the process, spreads out, as I said, the decision making, and then we have an active independent Board of Directors, Investment Committee, and so a whole slew of controls and things that prevent the kinds of practices that end up causing problems.

And among the things that we do that's probably different than many of the other sponsors in the space is we have a long-term incentive program which awards stock, distributed stock to our key employees to align their interests with shareholders. And I think that's something that's very well received.

So the bottom line impact for us has been that it sets us apart. It has not caused a notable decline in the flow of funds going into the nontraded REIT space. And, as I mentioned in my remarks, that might change because of macro conditions but so far it doesn't seem to have changed because of any press related to bad sales practices.

Okay. Thanks. And then kind of along the same lines, I know some of your closer competitive set have some funds in registration that would act more like traditional mutual funds in terms of withdrawal of capital, that sort of thing. Just curious if you guys are thinking about that route in the future?

Well, we always watch it with great interest and curiosity. And I think today we've concluded that real estate is an illiquid asset class, and so that right now to try to make it liquid is something that's a bit of challenge. So we certainly see the reason for interest in it, and having that kind of a product in term of generating the sales. But, for us, there's still a bit of a mismatch, and if we can figure that one out then we would have subsequent announcements about it. But right now we have no immediate plans to offer that kind of a product.

Okay. Thanks. And then a question I guess either for Mark or Tom. Obviously, out in the market looking at refinancing some debt or pulling debt on the recent acquisitions, can you talk about if you've seen any changes in spreads or capital availability just over the last few days with everything that's happened in the credit market?

Yes, absolutely. We're in the market all the time, and we had some interesting calls yesterday on some loans we are negotiating on. I think there's going to be a bit of a shake-out over the next couple weeks. My personal view is that well underwritten deals there's demand for but there's going to be because of some -- a couple of deals that didn't go well, there's going to be a bit of a bump in the road for awhile.

Long term I think the securitization market makes a lot of sense. I think it's going to be fits and starts. We've noticed that stuff that we've gotten done we're very pleased with. We've noticed there's going to be a little bit of a hiatus now I think while the market is priced properly, the terms of the securitizations. I mean what's happened is rates came down, as you know, on the 10-year but the spreads have widened a bit.

Okay. So the all-in cost, I guess the delta between the change in the 10-year in the change in the spreads the all-in cost has gone a little up, a little down?

Yes, but that moves around. So we think it's going to take a couple weeks before it settles down again.

Okay, that's fair. Thanks. And then just one other question, I guess probably for Mark. With the structure now of CPA-16 and 17 does that change, at all, the affect of any taxes you would pay and related to income from future liquidations of those funds or is it just the ongoing cash flows?

No, as part of that our incentive portion was modified, as well, so that will change the tax -- it'll be handled much like the GP interest on the annual fee that we get now. So that'll be considered good REIT income for us.

Okay. Thanks. And then just one last question I guess for Tom. On the occupancy rate within the core owned portfolio at 91%, is that -- can you talk about where that would be not counting the three 100% leased properties that came on this quarter?

Yes, I don't have that in front of me, but there was an increase of the denominator which does help a bit, but we also did sell some vacant assets and did some leasing, so it's a combination.

Okay, and then that measure, is that -- that is true occupancy, right? Or is that a leased percentage? In other words, for the leasing that you've done where the move-ins haven't happened yet, is that captured in that 91%?

It's what's leased. We may have something where it's leased but they aren't using it all but it's what's leased and rent paying.

Okay, great. That's all for me. Thanks, guys.

Thank you.

(Operator instructions.)

And I'm showing no additional questions, I would now like to turn the conference call back over to Management for any closing remarks.

Well, thank you, again, for joining us today. Just as a reminder, the replay will be available as a webcast and podcast after two o'clock. Information regarding the replays is available at the end of our earnings press release that you all have. So thank you, again, for joining us today, and we look forward to speaking with you again next quarter.

Thank you, all, very much for participating in the WPC second quarter 2011 earnings release conference call. That concludes today's event. You may now disconnect your telephone lines.