WP Carey Inc (WPC) 2011 Q3 法說會逐字稿

Good morning, and welcome to W.P. Carey & Company, LLC's financial results 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 also note, this event is being recorded.

I would now like to turn the conference over to Susan Hyde. Please go ahead, ma'am.

Thank you. Good morning, and welcome, everyone, to our third quarter 2011 earnings conference call. Joining us today are Trevor Bond, our CEO, Chief Financial Officer, Mark DeCesaris, Chief Operating Officer, Tom Zacharias and our Chairman, William Polk Carey. 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'd like to turn the call over to Trevor.

Thanks, Susan, and thanks, everyone for joining us today. If you've seen the earnings release, you know that we had a strong third quarter, with all our key metrics showing improvement over the same period from last year. Including adjusted funds from operations from both our Investment Management and Real estate ownership segments and growth in Assets under Management as well. And we'll get into those figures in a moment.

But before I do, I'd like to talk briefly about the macro environment and some of the challenges and opportunities that it presents to W.P. Carey. As I said on our last call back in August, volatility in global capital markets is becoming the norm. That said, there has been cause for optimism here in the United States. Businesses are generally reporting improved earnings; balance sheets are much stronger; and capital investment has started to rise. The housing market hasn't taken off yet, but nor has it worsened and there's been so little new supply and so much potential pent-up demand that eventually, that dynamic will foster some of the job growth and multiplier effects that we need.

The same applies to certain commercial real estate sectors and markets. Also, consumers seem to be spending more. Demand for hotel rooms is up, as people travel more. And those are all positive signs, but as we all know, the recovery has a shaky feel to it, mainly because of continued high unemployment, of course, here and also, the crisis in Europe, with lingering uncertainty about the impact on the US economy of continued deterioration over in Europe.

Also, I think there's a growing awareness that this was no ordinary recession that we're still emerging from and that it'll take time for global imbalances to right themselves. There's too much debt worldwide and too much capacity in terms of labor and capital and not enough consumption. Governments and homeowners in developed markets will continue to deleverage and austerity all around is likely to keep consumption depressed.

Eventually, it's hoped and expected that consumer demand in China, Russia, India and Brazil will make up the difference and that higher wages in the emerging markets will improve the competitiveness of our own labor market, but that'll take time too. How much time is anyone's guess, but among the several predictions that I've seen, the five-to-seven year projection offered by the economist, Nouriel Roubini, seems reasonable, and if we take that as our working assumption for now, we continue to believe W.P. Carey is well positioned for this next phase.

We expect demand for our brand of long-term, inflation-protected income investments to remain stable during this low-yield environment that's widely expected to continue in the near term. Also, our portfolios are well diversified with average lease maturities extending beyond this projected adjustment period.

And finally, as we've said on earlier calls, we've made some our best investments amidst uncertain market conditions, and I can talk more about our investment activity in a moment, but first, to take a step back and look at our third quarter, it was very solid and demonstrated the continued stability of our business model.

Overall, our adjusted funds from operations rose to $3.80 per share for the first three quarters of 2011. This is up from $2.38 per share over the same period in 2010. To break this down, AFFO from investment management increased rose to $2.16 per share, up from $0.81 per share in 2010. And AFFO attributable to real estate ownership rose from $1.57 in the first three quarters of 2011 -- I'm sorry -- 2010 to $1.64 per share for the same period this year.

To briefly summarize our core operations, fundraising was somewhat affected by a sector-wide decline that took place over the summer -- this was something that we mentioned on the last call in August -- and was possibility a reaction to the volatility in the capital markets and an increase in risk aversion amongst retail investors following the debt ceiling crisis, but since that decline, fundraising has leveled off and we've had ample capital to take advantage of the investment opportunities that have arisen.

Our total investment volume year-to-date is just shy of $1.1 billion and quite close to our total for all of 2010, and the pipeline continues to be strong. Investment activity for the quarter included a $54 million purchase of 10 self-storage properties. This was the second phase of a transaction that we announced last quarter, a portfolio with properties in California, Illinois and Hawaii. We like the self-storage sector because it tends to remain steady through short-term swings and performed well during the last recession. And we've seen performance in our own storage portfolio improve across the board this year as well.

We also entered into an $8 million sale leaseback of an industrial facility in Clarksville, Tennessee, and finally, we acquired for approximately $400 million an Italian fund that owns 20 stores leased to a subsidiary of Metro AG, a German company that is the world's fourth largest retailer and is the guarantor of the lease.

Our hotel business continues to develop according to plan. Carey Watermark Investors has raised approximately $39 million to date, which is still roughly in line with projections, and on September 6, CWI completed a joint venture investment for a hotel property located in the French Quarter of New Orleans, the Chateau Bourbon Hotel 30, which is undergoing a complete renovation and will be renamed the Hyatt French Quarter Hotel. In general, the hotel market has demonstrated growing strength this year, which is another one of the signs of fragile improvement in the US economy, and we're certainly seeing this improvement in our hotels.

To return now to the current environment, and what it means for W.P. Carey in the fourth quarter and into 2012, back in August we mentioned prevalent concerns that the US might be headed into a double-dip recession. For now, the consensus seems to be that we've dodged that possibility, but of course, as I mentioned earlier in the call, we're still at risk for a disruption in global capital markets, should there be a messy resolution of the sovereign debt crisis in Europe.

We believe that the most important stakeholders are firmly committed to keeping the Euro together and it's a positive sign that the collective European leadership, both inside and outside Greece, was able to stop the Greek (inaudible) that might have jeopardized the proposed restructuring plan, but clearly, there continue to be risks to the capital markets there that might spill over to the US. And that brings me back to a point I also made earlier and that is that our strategy works well in times of uncertainty.

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, most 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.

We don't invest in sovereign debt; we don't use high leverage. And the underlying portfolios that we 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 Europe situation trigger another recession, but we believe most will keep paying the rent.

In the meantime, these same conditions that create stress will also provide us with good investment opportunities. Our strategy is to invest in companies that we believe will consistently weather short-term cycles wherever those may occur. During the next 18 to 24 months, many good companies may have problems accessing the credit markets, and while that occurs, we will continue to be there to provide the long-term financing that they'll need to manage through this crisis and beyond.

And with that, I'll now turn the microphone over to our CFO, Mark DeCesaris, to give a more detailed summary of the financial results.

Well, thanks Trevor, and good morning, everyone. As Trevor mentioned, we're happy to present solid results for both the current quarter and year-to-date. Adjusted funds from operations increased 50% in the current quarter and 62% for the nine months ended September 30. Both the investment Management segment and the net leased segment contributed to those increases.

In the investment management segment, we've made investments on behalf of our funds under management totaling roughly $0.5 billion in the third quarter and approximately $1.1 billion for the first three quarters. Overall, structuring revenues increased $20.5 million to $21.2 million for the quarter and $22.3 million to $42.9 million year-to-date.

Assets under management at September 30 increased to $9.4 billion and generated approximately $59.6 million in revenues and distributions. We are paid an asset management fee of 0.5% on this value and in CPA-15, earn a performance fee of 0.5%. You'll recall that we have modified the structure of both CPA-16 and CPA-17 to replace the performance fee with a more tax-efficient special GP interest in those funds. This interest entitles the Company to receive 10% of the cash flows of these funds.

This interest is accounted for through the income from equity investments line items, so to understand our true economics from the management revenue stream we earn, as the advisor to these funds, these distributions must be included. Through September 30, we have received approximately $8.3 million in distributions from these and just $3.4 million in the prior year. With a current year total $8.3 million, approximately $5.8 million was received from CPA-17 in the first three quarters and $2.5 million was received from CPA-16. We received CPA-16's interest as part of the 14-16 merger that was executed on May 2, so that distribution was computed on the cash flows for that fund for the months of May and June only.

The operating contribution for the net lease portfolio also increased for both the current quarter and year-to-date.

Pro rata lease revenues increased $1.7 million to $72.2 million for the nine months ended September 30. Also included in this segment is our ownership in the CPA fund. Distributions from this ownership for the first three quarters totaled approximately $27 million this year versus $12.2 million last year. The increase is primarily related to our increased ownership in CPA-16 and the distribution from CPA-14 of $11.1 million prior to its acquisition by 16.

We currently own approximately 7.6% of the outstanding shares of CPA-15, 17.7% of the outstanding shares of CPA-16 and 0.8% of the outstanding shares of CPA-17.

Coverage ratios on distributions in CPA-15 and 16, our fully invested funds, are approximately 144% and 127% respectively on normalized cash flow. We are still raising capital in CPA-17 and therefore, recognizing the cash flow from the investments made still lags the actual timing of the investment. We are comfortable with the performance of this fund and the expected dividend coverage ratios when this fund is fully invested.

Both our management revenue stream and the distribution from our investment in the CPA funds are supported by a track record that in the first 13 funds that have gone full cycle over a 35-yearperiod have generated average annual returns of 11.4% to investors in those funds.

In our current fully invested active funds, CPA-15 is paying a 7.35% yield with 144% coverage ratio and CPA-16 is paying a 6.65% yield with 127% coverage ratio. These ratios, and the performance of these funds, have made both the management revenue stream and the distribution from our investment to very stable cash flow streams that along with the cash flow from our net lease portfolio provides solid coverage of our dividend.

As you review our results this quarter, you'll see an increase in our G&A costs. Approximately $6.3 million relates to an increase in non-cash, stock amortization expense as a result of several new grants and an increase in the expected payout of shares under the Company's performance plan. An additional $3.1 million relates to variable compensation paid on investment volume and is directly related to the investment volume increase on a year-over-year basis. Lastly, approximately $4.5 million was directly related to our participation in the CPA-14-16 merger and related to both transaction and compensation costs.

Just the cash flow from operations for the nine-month period is approximately $74.5 million or $1.84 per share versus $64.9 million or $1.63 per share in the prior year. Our coverage ratios on AFFO is approximately 234% and 113% on adjusted cash flow. You recall that we exclude the incentive and disposition revenues earned on the merger from adjusted cash flows and we utilize this as a core dividend metric.

We have increased our dividend approximately 10% over the last two quarters to reflect our increased economic interest in CPA-16, an additional interest in properties we purchased from CPA-14 prior to its acquisition. We maintain strong coverage ratios on both of these key metrics.

We continue to maintain a strong balance sheet with a total debt to total market cap ratio of approximately 28% and an unsecured debt to total market cap ratio of approximately 11.5%. We carry on our balance sheet an investment in the CPA funds of approximately $450 million. We currently have available $30 million under our bridge line and as you know, both our revolver and bridge line expire in June of 2012. We have been in negotiations with our banks on replacing both of these with a new facility and expect to conclude these discussions in the near future. There will be more to come on this at a later point in time.

Over the last two years, we have been successful in increasing both our assets under management and stabilizing the cash flow we earned from our net lease portfolio. Our results speak for themselves.

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

Thank you, Mark, and good morning, everyone. In these somewhat volatile times, I'm pleased to report that all W.P. Carey portfolios are performing very well and I will follow up with specific details.

The first part of this report will focus on the real estate ownership segment of the public company and will be presented in two sections -- our ownership interest in the CPA REIT shares and then our directly owned properties. In the second part of this report, I will discuss the managed portfolios owned by the CPA REITs and Carey Watermark Investors.

Turning first to the CPA REIT share portfolio, Mark mentioned our carrying value of REIT shares has grown to approximately $450 million and has become a significant component of our real estate segment income. Current annualized distribution from this portfolio are approximately 31.7 million. These distributions are a direct pass-through to our investors as they are not taxed at the corporate level. Mark mentioned these distributions are well covered by normalized cash flow from operations.

Our ownership stake in our three CPA REITs translates into another 11.2 million square feet of real estate. This is roughly 45% of the square footage of our entire real estate segment. Our CPA REIT share portfolio has higher occupancy and longer lease term than the directly owned portfolio. A few key statistics are as follows. First, the occupancy of our REIT share portfolio is over 98%. When combined with the 91% occupancy in the owned property portfolio, occupancy in our real estate segment is over 94%.

Second, the weighted average lease term of our REIT share is 11 years. The owned property portfolio, combined with the REIT share portfolio results in a weighted average lease term of 8.7 years for the real estate segment versus 6.6 years for the directly owned portfolio. This is a 32% increase in the weighted average lease term. You can see from these statistics the benefits of receiving a portion of our asset management fees and shares and our acquisition of additional CPA-16 shares at the time of the 14-16 merger in May.

Now, I would like to turn to the WPC portfolio of directly owned properties. We continue to upgrade the quality of our portfolio with new, high-quality assets and selected dispositions. In fact, real estate revenues for the first nine months are up $1.7 million or 2.4%, reflecting the JV assets acquired from CPA-14 in early May. Year-to-date, we have sold six small properties and have received net proceeds of $12.5 million. Square footage is now 13.7 million. The occupancy remained at approximately 91% at the end of the third quarter. In the third quarter, we entered into a new lease for 8,500 square feet and renewed four leases totaling 50,000 square feet at similar rents. We are now working on wrapping up the 2012 lease renewals.

The WPC portfolio refinancing pipeline is in very good shape. We have completed all the refinancings for 2011. We are now working on five loans coming due in 2012 totaling roughly $28 million.

As recently reported, Google has completed a spectacular buildout of their Southern California Creative Campus at our facility in Venice, California. In October, we closed on a mortgage for $24 million at 5.5% fixed for 14 years. This is a fantastic outcome for the releasing and refinancing of the iconic Frank Gehry-designed facility known as the Binoculars Building.

Now, to focus briefly on the CPA managed funds, currently, three funds have a very strong occupancy of over 98% for 106 million square feet. Year-to-date, we have completed over $195 million in refinancing at favorable rates. We are on track to refinance another $34 million in six loans by the end of this year. We are working on 250 million CPA loan refinancings for next year. We have been financing with life insurance companies, small and large banks and some CMBS conduits at rates between 5% and 6.5% for a 10-year term. These rates are 100 to 250 basis points below the rates on the loans being refinanced, which is very positive for the funds.

We have just completed our semiannual review of the financial statements of our tenants on credit risk and heightened risk. In general, there continues to be a modest strengthening of the tenant performance overall, helped by a reduction of their interest [costs]. The combined portfolios, we currently have only one tenant operating in bankruptcy.

CPA-17 portfolio, we continue to grow significantly in the third quarter. We added five new investments totaling over $466 million in cost. The portfolio is now over 27 million square feet, $2.7 billion in size and 100% occupied.

Finally, turning to the hotel fund known as Carey Watermark Investors, we continue to see attractive hotel opportunities and we are focused on raising more capital for this fund. In fact, in September as mentioned, we completed our second hotel transaction which consisted of an 80% JV interest, a 251-room hotel in the historic French Quarter of New Orleans. The property will undergo a major renovation and when completed next spring, will operate as a Hyatt.

The hotel portfolio is benefiting from increases in two key performance metrics -- occupancy and average daily rate. This is resulting in a growing net operating income for the fund.

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

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

Thanks, Tom, and (inaudible) Trevor and particularly (inaudible).

Bill, could you speak closer to the microphone, please?

(Inaudible). I think it's (inaudible) look at the success of our last year, which was dynamic, I think of some of the reasons for it and attribute it in large part to having a dynamic young Chief Executive Officer, Trevor Bond, who is just doing a wonderful job and is well respected throughout the organization and is giving us the type of leadership which we can follow and (inaudible).

Our principal business, which we are -- appears to be the leader (inaudible) corporate properties worldwide, as you know, we did approximately over $1 billion worth of new acquisitions in the past year. And I talked to (inaudible) senior investment officer and I mentioned the ones in New York first because they're close by and that's Jason Fox and Gino Sabatini who -- when I said in New York, they work out of New York and they're always (inaudible) the place and doing deals and working and making sure the deals will get done for our investors, and also Henry Cabot Lodge III, who's (inaudible) out of Europe, out of London.

(Inaudible) they feel that they can do and they did over a billion this past year, which was good. They feel they can do over $2 billion this coming year and it's (inaudible) all things being equal and the potential for growth at the present time is very significant.

Well, this is something we have to do; we have to get up and do, because we have an obligation to our country and our economy to help provide for them, growing companies, and (inaudible) prosperity wherever we invest. So we will (inaudible) to accomplish these goals and I feel confident that the resources -- get the resources to do (inaudible).

Okay. Thank you, Bill.

Thank you so much, Bill. And we'll now -- now that that concludes our presentation --

Who was that said, "Thank you, Bill?"

Sorry?

Sorry, Bill. Did you have more to say?

(Inaudible). Okay. Well, that's (inaudible).

Okay.

They're going to open up the call to question-and-answers now, so Operator, if you'd like to give everyone instructions on that?

Absolutely, ma'am. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Andrew DiZio of Janney, Montgomery, Scott. Please go ahead.

Thanks, good morning.

Good morning, Andrew.

Good morning. A question for Trevor, I guess. During your intro, you talked about what we're seeing going on and the financial situations within the US, Europe and I'm curious how that translates into where you see your investment prospects right now more heavily weighted in either continent?

Would you repeat the last, the very last part of what you said, Andrew?

Yes, just if your investment prospects going forward, you think right now are more heavily weighted toward the US or Europe?

Well, certainly, we've seen good opportunities arise in Europe over the course of the past six months and we studied very carefully and we have to consider the currency implications and it is a different set of issues than if we're just looking at the US. So I think -- we think that that will continue.

I think that we're also spending quite a lot of time looking at the emerging markets, as I've mentioned on earlier calls, because I think going forward, that's going to represent a larger part of our overall portfolio, but we're trying to be careful how we do it. We don't want to just lurch into any one of these markets. We have people on the ground; we're developing a pipeline. And for this fund and then subsequent funds, we think that'll become a more important part of our business.

At the same time, we're also seeing good opportunities in the US so that in the quarter, we did do a big international transaction, but we've become much more selective in a way because we're seeing such good opportunities, so we have a lot to choose from.

Okay. And can you remind us what your investable capital is right now in CPA-17?

Yes, I think that it's approximately $150 million. Mark is that --

Yes, currently, it's about $150 million in cash in CPA-17; we have roughly $110 million of cash in CPA-15 and approximately $60 million of cash in CPA-16.

Okay. Thanks, Mark. And then you also touched on the bond rating pace, mentioned that it's kind of leveled off from the declines that you saw early in the summer. Just curious where this is versus what you expected, specifically to Watermark, how the fundraising is going there.

Well, Watermark, we always expected that it would be -- it would take a little time to ramp up to -- it requires the signing of dealer agreements, education of the financial advisors out there. So as I mentioned, it's roughly in line with what we expected and for a new entrant into the non-traded REIT space, it's actually doing quite well. There -- as you probably know, there have been quite a lot of new entrants in the space generally over the past year and a half or so, and so we think that Carry Watermark is doing pretty well as compared to that. And so we expect that that will continue to pick up in 2012.

Okay, thanks. And then just one more question, I guess, for Tom. Last call, we talked a little bit about the debt markets and they were very unsettled at that time and you mentioned you've got some attractive financing done recently. I'm just curious what you're seeing right now in terms of rates and/or spreads in the debt markets.

Yes, right now, we're doing a lot with banks and small banks. I mentioned the deal we did with this life insurance company, the Google facility. There's been a little bit of a blip in the CMBS market. We met with the seven key participants recently. They're all -- they remain committed to the business and they're growing their conduit slowly. We think the first of the year it will come back. There, the debt has become more expensive than life insurance company debt and bank debt.

Okay. So I guess we've been seeing the CMBS deals start to come back, but that's mostly just the securitization of previously made loans. It sounds like loans for future deals filling back up the conduit are still pretty slow. Is that accurate?

That's accurate, yes.

That's great. Thank you, guys.

Thank you.

(Operator Instructions) I'm showing no further questions at this time. So this concludes our question-and-answer session. I'd like to turn the conference back over to Susan Hyde for any closing remarks.

Well, thank you so much, everyone, for joining us today. We will have a replay of the call, including podcast, available after 2PM and the information regarding the replay is available at the end of our press release. Thanks again for joining us and we look forward to speaking with you next quarter.

The conference is now concluded and we thank you for attending today's presentation. You may now disconnect your lines.