WP Carey Inc (WPC) 2012 Q1 法說會逐字稿

Good morning, and welcome to the W. P. Carey conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Susan Hyde. Ms. Hyde, the floor is yours, ma'am.

Thank you. Good morning and welcome, everyone, to our first-quarter 2012 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 call that are not historical fact may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are listed in our SEC filings.

Now, I'd like to turn the call over to Trevor.

Thanks, Susan. And thanks, everyone, for joining us today. To briefly summarize our financial results, our adjusted cash flow from operations increased by 51%, from $0.60 per share in the first quarter of 2011 to $0.91 per share in the first quarter 2012. Adjusted funds from operations rose slightly, from $0.97 per share to $0.99.

What is notable about these increases is that they occurred despite lower investment volume as compared to the first quarter of 2011. As we often say in this forum, investment volume fluctuates throughout the year. And last year's first quarter was fairly strong; and, therefore, it was a high bar to clear. But, despite that, we had increases in AFFO and adjusted cash flow. And that demonstrates, again, the stability of our business model.

In a few minutes, our Chief Financial Officer, Mark DeCesaris, will break those figures down in terms of the two main segments of our business, Investment Management and Real Estate Ownership, to give you a sense for how each performed.

Another thing we frequently state is that maintaining the balance between investment volume and capital raising is an important objective for us, and we believe the two are still in equilibrium, despite some challenges that I'll talk about more in a minute.

Investment volume in the first quarter was approximately $171 million, which was due to our purchase of Blue Cross and Blue Shield of Minnesota's headquarters campus outside Minneapolis. After the first quarter ended, we also invested another $26 million in a warehouse build-to-suit in Poland, on behalf of Nippon Sheet Glass, a Japanese manufacturer.

We have an active pipeline of potential purchases; but, of course, the conversion of potential to actual closings depends upon a number of factors beyond our control.

On the capital-raising side, fundraising for Corporate Property Associates' 17 Global continues to be strong. Year-to-date, we have raised approximately $250 million. We've also raised approximately $21 million for our hotel fund, Carey Watermark Investors, and continue to see solid investment opportunities in the hotel space.

To turn now to how we're being affected by global economic conditions, during our last earnings call on February 28, I talked about the sense of calm that seem to have returned to the capital markets. The risk from Europe had lessened somewhat following the ECB's liquidity-boosting measures, as well as tentative moves by European governments toward fiscal and labor reforms. But now, two months later, the tone has shifted again. The reforms have been less rigorous than economists had hoped. And the European public shows evidence of austerity fatigue.

New governments in France and Greece and the Netherlands are likely to push for pro-growth policies that might alienate the bond markets as well as the Germans, who are essentially that system's lender of last resort. And Italian and Spanish debt yields are back on the rise, which further ratchets up pressure on the system. So, we've entered a new phase. And it remains to be seen how the austerity versus growth debate will be resolved. And we'll be watching it very carefully.

But meanwhile, our euro-denominated cash flows are substantially hedged. And our European tenants continue to pay their rent. It is worth repeating here, as we often do, that we do not buy sovereign debt. We invest in companies that we think will continue to survive in difficult economic environments. And we also think that some of the best buying opportunities arise from uncertain conditions such as we're finding here in Europe.

Offsetting this situation is the fragile but persistent recovery in the US, where most of our investments are located. Continued recovery would be welcome, of course, but it also means we're starting to face a changed landscape on the investment side. To take a step back and look at it more broadly, our supply of opportunities derives from the demand for capital from corporate owners of real estate. We expect this demand to increase as the economy continues to expand, as companies shift from deleveraging to expansion, and as merger and acquisitions activity picks up.

But so far, the supply of capital to this sector -- or, seen another way, the demand for opportunities -- seems to be increasing at a faster rate, in part, due to the low-yield environment fostered by the liquidity measures taken by central banks around the world.

And as with all supply/demand curves, if the supply of capital shifts upward faster than the demand, there will be a corresponding increase in asset pricing. And while this will positively affect the performance of our existing portfolios, both owned and managed, it could have a dampening effect on our investment volume in 2012; that is, if prices rise higher than we think prudent.

Mitigating this is the fact that one of W. P. Carey's great strengths is its ability to source attractive transactions from a broader, deeper pool than our competitors by investing internationally, for example; or in situations that are more difficult to underwrite; with care, of course, and based on our long-term investment approach.

We expect that having this capability will help offset some of the potential slowdown in investment volume that might result from rapid asset appreciation in the traditional net lease sector here in United States.

Over the years, we've experienced numerous cycles of this nature, and we've come to regard them as two-edged swords. While rising asset values may cause us to tactically retreat from certain submarkets, they also offer us the chance to exit certain assets at opportune points in the cycle. And over the past year, our asset management group has actively pursued this approach.

Still, cycles can be uncomfortable. And in recognition of the inherent volatility in the Investment Management segment of our business, we have gradually shifted the mix of our revenues to favor investment revenues over asset management revenues. This strategy will find its culmination in our proposed conversion to a REIT, and simultaneous merger with one of our managed REITs, Corporate Property Associates 15.

We announced this transaction back in February; and, of course, it's still subject to the approval of shareholders of both firms. We have a PowerPoint presentation on our website that goes into more detail. But I'll briefly describe what we think are the four primary benefits of the transaction.

First, it will substantially increase our financial strength, scale, and liquidity. Second, it will facilitate dividend growth through an accretive acquisition of assets that we already manage and therefore know well. Third, it will enhance long-term shareholder value by bringing an increased clarity to our form -- that is, shifting from being an LLC to being a REIT -- and to our strategic focus, by shifting the mix of our revenues to those derived from ownership as opposed to asset management fees.

And, finally, the transaction would represent the fourteenth time that we have taken a fund full cycle, a track record that sets us apart from the field and our sector of the asset management industry.

As I said, there's much more detail about the transaction in that presentation on our website, which I'd urge you to review. And we'll provide more information as the process unfolds. But we're very enthusiastic about it, and think it will result in a positive outcome for all our shareholders and for those of CPA-15 as well.

And with that, I'll now turn the floor over to our CFO, Mark DeCesaris.

Thanks, Trevor, and good morning, everyone. This morning, we reported operating results for the first quarter with overall increases to both adjusted funds from operations and adjusted cash flow from operations. Let's start with the Investment Management segment, as AFFO in this segment decreased approximately $0.07 per share, primarily related to lower investment volume in the first quarter of this year versus the same quarter in 2011.

We closed one investment with a value of approximately $172 million this year versus approximately $345 million last year.

From a management revenue standpoint, overall management revenues increased by approximately $1 million. Management and performance revenues from the managed funds totaled approximately $15.6 million. In addition, distributions from our participation interest in CPA-16 and CPA-17 totaled approximately $7 million in the first quarter versus $1.8 million last year.

Taken together, our revenue stream totaled approximately $22.6 million in this quarter versus $21.6 million in the first quarter of last year. As you will be call, we converted the performance revenues from CPA-14 and CPA-16 into a participation interest in the cash flows of those funds as part of the merger last year. This allows us to receive our economic revenue in a more tax-efficient manner, which shows up in our results as a lower overall tax provision. Tables showing the detail of these revenue streams has been provided in our earnings release.

We've also modified our cash share election from the CPA managed funds. We are now receiving 100% of the management and performance revenues in cash from CPA-15. In CPA-16, we received 50% of the management fee in cash and 50% in shares; and we're taking 100% of the participation interest in cash. In CPA-17, we received 100% of the management fee in shares, and 100% of the participation interest in cash.

In the net lease segment, overall AFFO increased approximately $0.09 per share. Pro-rata leased revenues on our own portfolio increased slightly by approximately $600,000. Distributions from our ownership in the CPA funds increased by approximately $3.6 million, to a total of $8.1 million for the quarter.

We currently own approximately 7.9% of CPA-15; 18% of CPA-16; and a little over 1% of CPA-17. These funds are currently paying distribution rates of 7.35%; 6.68%; and 6.5%, respectively. CPA-15 and CPA-16, which are both fully invested, have coverage ratios of approximately 150% and 125%, respectively. CPA-17 is still raising capital, having raised over $2 billion to date.

Our G&A increased approximately $5.6 million over the first quarter of last year. Increases in the amortization expense of stock compensation of $2.7 million, and merger expenditures of $2.2 million related to the proposed acquisition of CPA-15, accounted for the majority of these increases.

Overall, adjusted funds from operations increased by approximately $0.9 million to $40.1 million or $0.99 per share. AFFO from our owned assets, including our ownership of the CPA funds, increased $3.6 million to $22.1 million or $0.55 per share. And our Investment Management segment decreased by approximately $2.6 million, or $0.44 per share.

Revenue streams from our management of the CPA funds, ownership of our net lease assets, and ownership in the CPA funds, all reported quarter-over-quarter increases, while structuring revenues reported a decrease.

Adjusted cash flow from operations increased $12.4 million to $36.7 million or $0.91 per share. Increases in the participation interest in CPA-16 and 17, increases in distributions from our ownership in the CPA funds -- both of which are very tax efficient -- as well as receiving 100% of our revenue from CPA-15 in cash, were the main drivers of this increase.

Our distributions to shareholders are being paid out an annualized rate of $2.26 per share, with a coverage ratio of about 175% on AFFO and 161% on adjusted cash flow.

We continue to maintain a strong balance sheet, with a total debt to total market cap ratio of approximately 24%, and a recourse debt to total market cap ratio of 10%.

We currently have approximately $200 million available under our credit facility; and across all of that W. P. Carey group of companies have available approximately $575 million of cash.

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

Thank you, Mark, and good morning, everyone. In the first quarter of 2012, W. P. Carey continued its portfolio business plan of upgrading the quality of its real estate income by executing a number of lease renewals and selling certain vacant assets.

There are three areas I would like to cover in today's report -- a review of the to the WPC portfolio performance; an update of the WPC portfolio metrics; and an overview of the CPA funds.

Turning first to WPC portfolio performance, the first quarter of 2012 real estate adjusted funds from operations was up by 11.3% from the first quarter last year. This was due primarily to the assets acquired from CPA-14 in May of 2011.

Turning to WPC portfolio metrics, the first-quarter occupancy was at 93% in the owned portfolio, which is the same as year-end 2011. In the first quarter, 8 lease renewals and 1 new lease were executed, totaling approximately 365,000 square feet and $2.3 million in annual revenue; with a weighted average lease term of 3.8 years.

The renewal rents for the 9 leases were in line with expiring rents. Of the vacant space currently available for lease in the WPC portfolio, we have leases out or sales contracts out for roughly two-thirds of this space. This is the most active it has been in the last few years.

Year-to-date, we have sold 4 investments totaling $60.9 million in gross sales proceeds, and approximately $35 million in net proceeds in the WPC portfolio. Two of these transactions closed in early April -- a building that was coming off lease in Torrey Pines, California; the sale of a portfolio of 6 nursing homes in France, of the joint venture with CPA-15.

The sales of French assets was an opportunistic sale to a French REIT at a very attractive cap rates of 6.2%; a great return for WPC's shareholders on this investment, with the positive currency exchange benefits over the 10 years we held it; with a 4 times multiple on invested equity and a 26% IRR after taxes. This harvested capital will be reinvested in new properties in an accretive fashion in the future.

The refinancing pipeline for the WPC portfolio is very manageable. In 2012, there's only five loans, totaling $28 million maturing. And 2013 has no mortgage balloons to refinance.

The proposed merger with CPA-15, which Trevor mentioned, will have additional benefits for the owned portfolio. These are outlined in the presentation on our website.

Now turning to the CPA REITs, occupancy in the three managed funds averaged 98% over the 107 million square feet at the end of the first quarter, very strong.

The debt coming due to refinance in the CPA REITs is very manageable. They have $110 million remaining in 2012 and $230 million in 2013. This, as you know, is on an asset base of roughly $10 billion in assets. Year-to-date, we have completed the refinancing of seven loans totaling $57.8 million at weighted average rate of 5.45% and an average term of eight years. This is 163 basis points below the weighted average rate of the maturing loans.

These reduce mortgage rates, combined with the growing rent from CPI increases, will drive attractive equity rent increases for the fund.

Before concluding my report, I would like to provide a few comments about the current environment. In our credit watch meetings, we review the financials of our 270 tenants. In general, our Company's credit metrics and balance sheets have continued to improve over the last 12 months. There continues a deleveraging of the capital structures, and improved profit margins. We are seeing credit upgrades by rating agencies and from M&A activity.

As far as tenant defaults in the CPA funds, only two small tenants have filed year to date in 2012. We are seeing our Companies expand in certain properties and reinvesting in their businesses. The refinancing markets today are attractive for our transactions, especially in the US. With leverage levels of 50% to 60%, we are now doing 10-year mortgages with [conduits] banks and life insurance companies at rates in the 5% to 6% range, which is often 150 to 200 basis points below the maturing debt.

Finally, the asset management group is working down the vacant space at a faster rate than we did in 2011; of LOIs, or contracts out, were roughly 40% of the total available space.

I look forward to providing an update during our next quarter's portfolio report. That concludes my report.

And I would like to turn the call back to Susan Hyde.

Wonderful. Thanks, Tom. That concludes our presentation this morning. So now, we would like to open up the call for a Q&A session. So Operator, could you perhaps give the instructions one more time?

(Operator Instructions). Dan Donalan, Janney Capital Markets.

Could you guys talk a little bit about cap rates in the US, where you're seeing deals these days -- and, maybe, bifurcated between office and maybe industrial?

Sure. As I mentioned, in the more commoditized net lease transactions, which tend to be the better credits than in some of the retail-oriented deals that we sometimes bid on, we've seen cap rates come in anywhere from 100 to 150 basis points in the last year. We usually -- we participate in bids of that nature. We don't usually win on the more competitive things because they are heavily marketed. But we usually find ourselves on the short list of final bidders. And so that's how we are able to get the information at the end of the day.

I think that most of those have been more distribution center type space, so the industrial. We have not bid very actively in the office sector, so I can't really comment on that.

I would say that the range of cap rates that we're seeing globally is really anywhere from 6.25% to even 12%. And that would -- along that spectrum, it would depend upon, obviously, how specialized the story is and how remote the market may be, or other factors like that.

Okay. And is the cap recompression -- what do you contribute that to? Is it just increased competition? Or is it lower debt, lower interest rates on debt out there? Or what is driving the compression?

Yes, I think certainly the availability of debt is -- the yield curve has shifted down. There is -- and it's very flat on the lower portion of the spectrum. So I think that more people are using 5-year debt as opposed to 10-year debt. I think that has somewhat of an impact.

I had also mentioned earlier the perceived flight to safety that is represented by the net lease sector. Because the same things that we like about it -- the long-term nature of it, the inflation protection that you get from fixed-rent bumps or CPI bumps -- is appealing to many other types of investors. And there's been quite a lot of capital raised in that sector as well. So I think that's -- it is demand for those opportunities that is driving it.

And then on Europe, can you talk a little bit about how cap rates have moved there? Have you seen a shift upward in the last, call it, six months? Or has it been steady over the last year, year and a half?

Well, it hasn't been -- it has moved in the other direction, relative to a year ago; widening of cap rates. But it hasn't been a dramatic, abrupt shift. There's still plenty of competition for each new deal, because there's still a lot of capital over there that senses a buying opportunity in Europe right now.

But we've seen it -- I think that from our standpoint, the primary benefit is that we're able to get better credits for the same return or better than we would have a year ago. That helps us mitigate -- as we look at these deals, that helps mitigate some of the risk that is inherent just in the Euro Zone generally.

And then -- I think you guys have bought properties in the past in Asia. Is that still a strong target market for you guys? And then, how do you look at maybe, let's say, South America on a going-forward basis?

Sure. Well, first, with respect to Asia, it's true that we have had an office in Shanghai for a number of years. We've only closed on one transaction. That was at the end of 2010. We're very cautious about how we proceed there. And I would say that, within China itself, the regulatory environment and the tax code are probably the biggest impediments to us having closed on more deals. We simply don't yield enough for the risk that we take.

That said, we've shifted to thinking of the Shanghai office as more of a hub for the rest of Asia. And we've seen some countries become much more attractive recently, so that we've had an increased flow of possible opportunities in Japan and then Korea, as well.

And again, we can't be certain that we will close on any of those deals this year. But, certainly, the quality of the pipeline has improved somewhat. And we'll continue to look in newer markets over there, as well.

With respect to Latin America, I think the same answer, really. We've been working on Brazil now for a little over a year. We've got good contacts down there. And we're very impressed with the people that we meet, and then the corporate owners of real estate, et cetera. It's a very sophisticated market.

What has happened, however, is that because of all of the liquidity that is sloshing around the world, the Real became a very attractive destination for investor dollars. And so that has driven the yields down considerably in Brazil. Just since we've been looking, yields have gone down by 100 to 200 basis points; so that, I think, we'll be very cautious about that. And we're also looking at other markets in Latin America, with the same kind of cautionary note that I'd sound about Asia.

Okay. And then I think, Tom, you mentioned you had quite a considerable uptick in LOIs in some of the vacant properties. Can you maybe talk about where that's coming from, why that's happening? Is it people expanding? Is it maybe just some musical chairs from tenants? What is going on in those markets? It sounds like the activity for some of your vacant spaces has started to pick up a little bit.

Yes. We've had a lot of people kicking tires in the last two years. And now we actually have some transactions that we feel have a high likelihood of closing. There's a bit of -- we were showing out LOIs and the tenant would stay where they were rather than take our space, because there really wasn't that much demand. And now, the transactions we're working on, some are actually sold to some people who want to take the redevelopment risk. And some are sold to users. And I'll have an update, I think, in about three months, in where a lot of these transactions are.

Okay. All right. Well, that is pretty much it for me, so I will just go ahead and yield the floor.

Thanks, Dan.

(Operator Instructions). Well, it appears that we have no further questions at this time. We'll go ahead and conclude our question-and-answer session.

I would now like to turn the conference back over to Ms. Susan Hyde for any closing remarks.

Ma'am?

Thank you. Well, thanks again, everyone, for joining and participating on our call today. A replay, including the webcast and podcast, will be available after 2 PM. You can find that information on the earnings release that we issued this morning as well as on our website. Thanks for joining us today, and we'll speak with you again next quarter. Thank you.

And we thank you, ma'am, and to the rest of management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and take care.