WP Carey Inc (WPC) 2012 Q2 法說會逐字稿

Good morning, and welcome to the W. P. Carey earnings 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 Susan Hyde. Please go ahead.

Thank you, Amy. Good morning and welcome, everyone, to our second 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 historic 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, we experienced a decline in adjusted funds from operations relative to last year, primarily because last year, we closed the mergers of CPAs 14 and 16, which had a big revenue impact for us.

But this relative decline should not be mistaken for a drop in core performance, which remained strong and on this call, I'll spend a bit more time discussing what lies behind the numbers because the underlying dynamics demonstrates why our proposed merger with CPA-15 and simultaneous conversion to being a REIT will enhance the clarity and stability of our business model.

First, I should emphasize the dividend coverage and growth remains our most important goal, and notwithstanding that decrease in AFFO, adjusted cash flow from operations did increase year-to-date from $55.9 million last year to $58.3 million so far this year.

Because we increased the dividend, the payout ratio also increased slightly from 76% to approximately 79%, but still, this demonstrates our continued ability to cover the dividend, despite some of the swing factors that I'll get into in a moment.

Returning to AFFO, we reported $1.65 per share for the first half of the year, down from $2.79 per share for the same period in 2011. As I just mentioned, the problem with this comparison is that last year's liquidation of CPA-14 skewed our first half 2001 (sic) results. For example, of that $2.70 per share AFFO that we reported for the first half of last year, $1.01 of it resulted from the recognition of $52.5 million in termination and subordination disposition revenue that we earned from that liquidation.

Without that transaction, the core business would have generated $1.78 per share during the first six months of 2011 versus that $1.65 per share that I mentioned for the same period this year. Most of the remaining $0.13 per share decline in AFFO stemmed from the fact that structuring revenues are lower so far this year compared with the same period last year. That's because we had lower deal volume, of course. As we stated on this call many times, deal volume can swing up and down due to many factors beyond our control, and I'll talk about that and our pipeline in a moment.

But as a result of this bunching or lumpiness, as we sometimes say, of deal flow from quarter-to-quarter and year-to-year, these structuring fees are a more variable source of revenues for us as compared to real estate-related income and ongoing asset management fees.

But I certainly don't want to imply that we don't like structuring fees -- far from it. The deal volume the represent, even when comparatively lower from one period to the next, still enables us to grow our assets under management, and they're a leading indicator for us of the more stable fee streams that we expect to earn in future periods on a larger portfolio. That is the ongoing asset management fees and our special GP interest and a percentage of the cash flows of CPA-16 and CPA-17 which Mark DeCesaris, our CFO, will discuss in a few minutes.

Still, structuring fees are variable and in the interest of enhancing revenue stability and predictability, we've made it a key strategic priority to reduce the percentage of total revenues that they comprise. We've been successful in accomplishing that so far by increasing our rent-earning asset base. One way to see this is to look at how much of the dividend is covered by AFFO that's related only to real estate income.

For example, AFFO from real estate alone year-to-date has been approximately $56.7 million. That's up from $47.2 million last year at the same time, by the way. And our Chief Operating Officer, Tom Zacharias, will talk in more detail about this segment later on in the call. Now, that $56.7 million in real estate AFFO compared to distributions of $46.2 million for a coverage ratio of 1.22 times, compared with a coverage ratio for the first half of last year of about 1.1, which was based on both lower AFFO from real estate at $47.2 million and lower distributions, $42.7 million. So you can see that we're comfortably covering our dividend with a more stable, predictable portion of our revenue stream.

To turn briefly to the merger with CPA-15, on July 30, the SEC declared effective the registration statement to the transaction, which means that our next milestone will be the shareholder meeting for both W.P. Carey and CPA-15 that are scheduled for September 13. If it's approved, and other closing conditions are satisfied, we currently expect that the closing will occur in the third quarter of 2012, but we obviously can't guarantee that timing.

To recap earlier calls we've had about the merger, it's an accretive acquisition of a real estate portfolio that will enable us to raise the dividend to $2.60 annually, and in fact, this is what we'll have to do in order to comply with REIT distribution requirements. Following the merger, the variability of our revenues is likely to be far less pronounced because a significantly higher percentage -- around 80% -- will derive from real estate income as opposed to assets management income, which includes those structuring revenues I discussed a moment ago.

Now, before I turn the microphone over to Mike -- to Mark, sorry -- I'd like to talk briefly about the investment climate that we're experiencing. Through June 30, we closed on about $234 million of transactions on behalf of CPA-17 Global and about $35.5 million for Carey Watermark Investors. As mentioned, this was lower volume compared with the first half of 2011, which had been an unusually strong first half for us due to the C1000 and terminal transactions.

We're fairly confident, based on the current pipeline, that the second half will be stronger than the first this year, but it's difficult to say precisely where we'll end up the year in terms of total volume. We don't set fixed targets or quotas because if we're not seeing the appropriate risk return profile on any given deal, we'd prefer to stay on the sideline.

I do think volume is likely to be somewhat less than last year for a couple of reasons. First, as I mentioned on our call in May, the supply of capital to the net lease sector seems to be increasing at a faster rate than the demand for capital. In part, that's due to the low-yield environment fostered by liquidity measures taken by central banks around the world and of course, the flight to so-called safety or income-oriented investments, particularly in this country. As a result, we've seen a corresponding increase in asset pricing, especially in the more commoditized segment of the net lease sector in the US.

The second factor is that in 2010 and 2011, we saw significant deal volume internationally, particularly in Europe, but this year, we're being more selective about potential transactions there due to the ongoing uncertainty. This is not to say that we won't invest in Europe. We continue to see quite a few potential transactions, but we're being much more opportunistic in our approach to pricing and terms.

Finally, while we've continued to become acclimated to new markets, particularly in higher growth parts of the world, we're being cautious in light of the different sorts of risks that investors face in such countries. And we prefer to wait until the right deals come along, which means until we see the appropriate risk return profile, and the right risk mitigation measures in place, before entering these markets. And over time, I do think the emerging markets will become a more important part of our asset management business.

So to recap, our core business remains strong and growing. Our dividend coverage is solid and we continue to believe the proposed merger will both significantly increase our liquidity and scale and also improve the stability and growth potential of our dividend.

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

Well, thanks, Trevor, and good morning, everyone. This morning, we reported operating results for the quarter ended June 30, 2012, and let's start with the Investment Management segment. We structured approximately $270 million worth of investments on behalf of the CPA funds under management and earned approximately $11.3 million in structuring revenues in the six-month period, as compared to approximately $594 million in volume and $21.7 million in revenue for the prior year. As Trevor mentioned, this revenue stream has the most volatility in our business and the timing of when these investments close is very hard to predict.

We also told you that they are accretive to our assets under management and we currently have approximately $9.5 billion in assets under management as of June 30, 2012. And as a result, the overall economic revenue that we earn from managing these investments have increased by approximately $5.7 million or 14.2%.

We received approximately $31.2 million in reported management revenues and approximately $14.7 million in distributions from our GP interest in CPA-16 and CPA-17 for the six-month period. This compares with approximately $36.4 million in management fees and $3.8 million in distributions from our GP interest in the prior year. You'll recall that we restructured our compensation from managing these funds to be more tax efficient, and as a result, the distributions we received from our GP interests are supported by the lease revenue streams of the CPA funds in which we have that interest. And we therefore include these distributions as part of our real estate segment.

We'll talk about the performance of the funds a little bit later in my comments, but suffice it to say that we're comfortable with the stability of this revenue stream and the support it gives our dividend.

We also earned approximately $52.5 million of revenues from the liquidation of CPA-14 last year, which had an impact of approximately $1.01 per share on an AFFO and accounts for the majority of the variance in our asset management segment.

Let's move to our Real Estate segment. Overall, pro rata revenues from our net leased assets increased slightly by approximately $200,000 to $47 million for the six months ended June 30. In addition, regular distributions received from our investments in the CPA funds, which we consider to be investments in well diversified portfolios of net leased assets, increased to $16.4 million versus $9.4 million in the prior year, an increase of approximately 74%. This comparison excludes the one-time special distribution of $11.1 million we received from CPA-14 when it liquidated last year. The majority of this increase is a result of our increased ownership in CPA-16.

I just mentioned that the distributions we received from our ownership in the CPA funds is significant. We currently own 7.8% of CPA-15, 17.9% of CPA-16, and a little over 1% of CPA-17. These funds are currently paying distribution rates of 7.35%, 6.67% and 6.5% respectively. More importantly, both CPA-15 and CPA-16, which are fully invested, have coverage ratios of approximately 150% and 129% respectively on normalized cash flow.

CPA-17 is still in fundraising mode and having raised over $2.3 billion to date through its initial and follow-on offerings, we are comfortable with the fund's performance and expect that coverage ratios when the fund is fully invested.

Our reported G&A increased approximately $7.6 million year-over-year. Let me break this increase down for you, and it's primarily due to three factors. The first one is amortization of stock compensation increase by approximately $1.1 million. We had one-time expenses related to the proposed merger with CPA-15, a total of approximately $4.7 million. The last issue was expenses related to fundraising for which we're reimbursed increased by approximately $1.7 million. The reimbursement for these expenses are included in wholesaling revenue, which saw a corresponding increase of $1.7 million as well.

As Trevor mentioned, our focus has been to grow a stable revenue stream that covers our dividend. We're doing this today through our Real Estate segment by generating approximately $1.39 per share in AFFO from this segment versus a dividend of approximately $1.13 per share for the six-month period. This number does not include the direct management revenues paid by the CPA funds in both cash and shares, which totaled approximately $31.2 million for the six-month period. If you were to include the Asset Management segment, the Company generated approximately $1.66 in AFFO for the six months. This represents a coverage ratio of approximately 146% over the dividend.

Adjusted cash flow from operations for the six months was approximately $58.3 million or $1.43 per share versus $55.9 million for the prior year or $1.39 per share.

In December, we announced that we replaced our revolving credit facilities of $280 million which was set to expire in June of 2012 with a new facility. The new $450 million revolver has a three-year term with a one-year extension at our option. There's also $125 million accordion feature which we can trigger on a best-efforts basis by our banking group.

Pricing is spread -- is based on the spread to LIBOR of 175 basis points to 250 basis points. We are currently paying 175 over and we currently have approximately $190 million available under this facility. In addition, we secured $175 million term loan that can be used when the proposed acquisition of CPA-15 closes. [If] the merger is terminated or not closed by September 30, then this loan will expire.

We continue to maintain a strong balance sheet with a total debt to total market cap ratio of approximately 24%, and an unsecured debt to total market cap ratio of approximately 9.5%.

We carry on our balance sheet an investment in the CPA funds of approximately $454 million and we have approximately $686 million of cash available across all the funds for investment.

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

Thank you, Mark, and good morning, everyone. In the second quarter, W.P. Carey continued its business plan of upgrading the quality of its real estate by harvesting select investments and selling certain vacant assets. I will provide more detail in a moment.

Turning first to top-level portfolio performance, total real estate revenues increased in the first six months of 2012 by 26% from the same period in 2011 due primarily to the increased ownership in the CPA REITs. As Mark mentioned, total pro rata net lease revenue was up slightly over the same period.

Turning now to the WPC portfolio metrics, the portfolio occupancy of the 11.6 million square foot portfolio was at 94.4% at the end of the second quarter. This is up 237 basis points from the beginning of the year. A large driver of this improvement was the sale of a vacant 437,000 square foot building in Charlotte, North Carolina, in June.

Year-to-date, we have completed 10 lease renewals and two new leases have been executed, totaling approximately 546,000 square feet and $3.5 million in annual revenue, with the vacant space currently available for lease. We have leases out or sale contracts out for roughly half of the space.

Year-to-date, we have sold six investments totaling roughly $70 million in gross proceeds and approximately $44 million in net proceeds. Four of these sales were vacant, or soon to be vacant, investments. The largest sale was a portfolio of six net leased assisted-living facilities in France, which we sold in April at an attractive cap rate of 6.2% and a very nice exit for our shareholders.

The refinancing pipeline for the WPC portfolio is very manageable. In 2012, we have only four loans remaining to be refinanced, totaling $26 million and in 2013, we have no mortgage balloons to be refinanced.

The proposed merger with CPA-15, which Trevor mentioned, will have additional benefits of expanding the [AUM] portfolio and these benefits are outlined in the proxy materials that are being sent to our shareholders later this week.

Now, turning to the managed funds, occupancy in the three CPA REITs averaged 98.5% over the 106 million square foot portfolio at the end of the second quarter, which is very strong and up 73 basis points from the beginning of the year. The debt coming due to refinancing these CPA REITs is manageable. We have $20 million remaining in 2012 and $226 million in 2013.

Year-to-date, on the refinancing front, we have completed 95 million and 13 loans at a weighted average rate of 5% for an approximate eight-year term. This is an attractive 250 basis points below the weighted average rate of the maturing loans.

As mentioned in the earnings release, our Hotel fund carried one of our investors' acquired three more hotels since the last earnings call, the Hampton Inn outside of Boston, the Hilton Garden Inn in the French Quarter of New Orleans, and the Lake Arrowhead Resort and Spa in Lake Arrowhead in California. This fund now has interest in six hotels and assets under management of approximately $135 million.

Before concluding my portfolio report, I'd like to make a few comments about the current environment. We have not seen any significant distress in our tenants, although in certain sectors, their year-over-year revenues have been down slightly.

As far as tenant defaults in our CPA funds, two small tenants have filed year -- which filed this year have affirmed their leases and two other tenants which filed have liquidated and are either leasing or selling their real estate.

In Europe, where we own approximately 35 million square feet, we are 98.3% occupied and no tenants are in default.

Now, I'd like to turn the call back to Susan Hyde.

Thanks, Tom. That concludes our remarks for this morning. So now, we'd like to open the call up for a Q&A session.

(Operator Instructions) Our first question comes from Dan Donlan at Janney Capital Markets.

Thanks and good morning.

Good morning, Dan.

Just a quick question on the lease renewals -- kind of how are your conversations going with your tenants in Europe versus the US? Are you seeing a little bit more pushback on being able to drive rents in Europe versus the US? Any commentary there would be helpful.

Dan, yes. Hi, it's Tom Zacharias. I have some numbers here, which I'll share with you as far as the lease renewals and these are for the year-to-date for the W.P. Carey portfolio, and they were all domestic renewals. There is not that much really coming up in Europe in the next couple of years as far as lease expirations, but we were -- the old rent was [698] and the new rent was [636], so that's down 9%. Now, I looked at it for all of 2011 and we were up 10% in 2011. The old rent was [790] and the new rent, [868].

So we're kind of -- it'll vary based upon whatever the activity is of the particular collection of leases coming up, but that's been our experience and we've seen some good -- more activity on the leasing front, I think, in the last six months than we did in 2011.

Okay. And what's driving that, do you think, the increase in activity? I mean, some of your industrial --

I think --

-- peers have -- go ahead.

Yes. I think people were waiting on the sidelines, finding out if they really needed to make the commitment for additional space. We have noticed that -- we're working with some of our tenants on expanding their facilities because their demand for the product is up. We're working on about three expansions right now. So I think it's a function of -- in a slow recovery, people are -- companies are now ready to commit some capital.

Okay. And then you guys talked about $226 million coming due in 2013. I was just kind of curious, how does that split amongst the funds in the REIT? And as a side point to that question, do you guys anticipate becoming more unsecured borrowers if the merger does indeed go through? What kind of is your viewpoint there on a long-term basis, given that your Company is going to be considerably larger?

Well, let's take it in two parts. Tom, why don't you address the first part?

Yes. There's very little in the current portfolio -- that's the public company was nothing coming due in 2013 as far as mortgage refinancing. There four for the remainder of this year which we are working on. So there's not much really happening, and as far as the remainder of the year for CPA REITs, we have really -- we did about $100 million and there isn't that much more we're really going to do. There are some assets in the CPA-16 line that we will refinance with longer term debt, but those are CPA-[16] assets and there's no maturity really. It's out like two and a half, three years.

As far as 2013, that's all the CPA REITs and we are working on that. Some of that, we may get -- be able to pull forward and get done at the end of this year. And we -- and Mark, you might want to address this.

On the second part of your question, Dan, which is do you see us becoming more -- utilizing more unsecured debt in the assets we acquired, I think in the short term, you're going to see us pretty much stick to our model. We like non-recourse debt. It's a very safe type of debt on this investment. We also realize there's some advantages on the public REIT side to using more of the unsecured debt, and I think over the longer term, you'll see us adjust our portfolio a little bit to that type of model, but we'll always have a pretty good component of it utilizing non-recourse debt, I think.

Okay. And then just going forward, I would imagine that if the merger is complete, would you suspect that your volatility and AFFO from fees and everything else would kind of subside, just given that it's going to be a smaller portion of your overall income?

Right. And that's the explicit goal really, one of the key goals, that is, of the transaction. As of right now, currently, if it's at 56% asset management fees versus 44%, those numbers might be slightly out of date, but roughly, 56% asset management, 44% real estate. And that's going to shift to approximately 80% real estate and 20% asset management. Of the asset management, you have a significant component which is the stable, ongoing asset management fees which are earned year-to-year as a percentage of the NAV of the portfolio, as well as the special GP interest that Mark had mentioned, the cash flow interest in CPA-16 and 17, so that those themselves are relatively stable as well. So, yes, the answer is yes, we do expect more clarity and stability.

Okay. That's it for me. Thank you.

Thanks, Dan.

Thanks, Dan.

(Operator Instructions) At this time, we show no further questions and I would like to turn the conference back over to Susan Hyde for any closing remarks.

Thank you. Just as a reminder, a replay of today's call, including a webcast and podcast, will be available after 2 o'clock and the information regarding the replay is available in our earnings release. I just want to thank you again for joining us today and we look forward to speaking with you next quarter.

The conference is now concluded. Thank you for attending today's event. You may now disconnect.