W. P. Carey Inc.
Q2 2012 Earnings Call Transcript

Published: 8 Aug 2012

[Operator:]

Good morning and welcome to the W. P. Carey Earnings Call. All participants will be in 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.

[Susan Hyde:]

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.

[Trevor Bond:]

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

[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. 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 earned 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

[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 leased 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 sales of the 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 a 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 with a portfolio of fixed net lease assisted living facilities in France, which we sold in April at an attractive cap rate of 6.2%, 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 loans to be refinanced. The proposed merger with CPA

[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:]

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

[Dan Donlan:]

Thanks and good morning.

[Trevor Bond:]

Good morning, Dan.

[Mark DeCesaris:]

(inaudible).

[Dan Donlan:]

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

[Tom Zacharias:]

Dan yes, hi. This is 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 at $698 (ph), the new rent was $636 (ph), so that is down 9%. Now I looked at it for all of 2011 and we were up 10% in 2011, that old rent was $790 (ph), and the new rent $868 (ph). So we’re kind of, it will 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 the last six months that we did in 2011.

[Dan Donlan:]

Okay. And what’s driving that do you think, the increase in activity, I mean some of your industrial peers have – go ahead.

[Tom Zacharias:]

Yeah I think people were waiting on the sidelines, finding out if they really needed the – to make the commitment for additional space. We have noticed that we are 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 they’re I think the function of, in a slow recovery people are, companies are now ready to commit some capital.

[Dan Donlan:]

Okay. And then you guys talked about $226 million coming due in 2013. Just kind of curious how does that spill up for amongst the funds and 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 view point there on a long-term basis given that your company is going to be considerably larger.

[Trevor Bond:]

Let’s take it in two parts. Tom, why don’t you address the first (inaudible)?

[Tom Zacharias:]

Yeah, there is very little in the current portfolio. As in a public company there was nothing coming due in 2013 as far as mortgage refinancings. There is four for the remainder of this year which we are working on. So there is not much really happening and as far as the remainder of the year from CPA REITs, we have really – we did about $100 million and the reason that much more we’re really going to do, there are some assets in the CPA

[Mark DeCesaris:]

On the second part of your question, Dan, which is do you see us becoming more – utilizing more in secured 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 is some advantages on the public REIT side to using more of the unsecured debt. And I think over the longer term you will see us adjust our portfolio a little bit to that type of model, but we’ll always have pretty good component of a utilizing non-recourse debt I think.

[Dan Donlan:]

Okay. And then just going forward I would imagine that if the merger is complete, would you suspect that your volatility in 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?

[Trevor Bond:]

Right Dan, that’s the explicit goal really, one of the key goals that is of the transaction. So that right now, currently 56% asset management fees versus 44%, those numbers might be slightly out of date but roughly 56% asset management, 44% real estate 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

[Dan Donlan:]

Okay, that’s it for me. Thank you.

[Susan Hyde:]

Thanks Dan.

[Trevor Bond:]

Thanks Dan.

[Operator:]

(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.

[Susan Hyde:]

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

[Operator:]

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