W. P. Carey Inc.
Q3 2012 Earnings Call Transcript

Published: 9 Nov 2012

[Operator:]

Good morning and welcome to the W. P. Carey Earnings Call. All participants will be in listen-only mode. (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 C. Hyde:]

Thank you, operator. Good morning, and welcome everyone to our third quarter 2012 earnings conference call. Joining us today are, W. P. Carey’s Chief Executive Officer, 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 our expectations are listed in our SEC filings. Now with that, I’d like to turn the call over to Trevor.

[Trevor P. Bond:]

Thanks, Susan and thanks everyone for joining us today. For those of you affected by hurricane Sandy last week we hope that you and your family and friends were able to remain out of harm’s way, and the recovery from whatever damage you may have suffered will be swift. Many of us too were and still are affected, but thankfully our office here in New York maintained power throughout. Also we experienced no significant damage to the portfolios assets during the storm, which is certainly a blessing. The most significant event in the quarter was the close of our merger with CPA

[Mark J. DeCesaris:]

Good morning, and thanks Trevor. As Trevor mentioned, we are pleased with the results of the company and as I walk you through these results I want to spend some time on how we generate earnings from both our real estate and investment management businesses, and the impact of the CPA

[Thomas E. Zacharias:]

Thank you, Mark and good morning everyone. At the end of the third quarter the portfolio in the public company expanded dramatically as a result of the addition of the CPA

[Susan C. Hyde:]

Thanks Tom. Well, that concludes our presentation this morning. So now we would like to open it up to your questions. Operator, if you can just come back and give some instructions on that again?

[Operator:]

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

[Dan Donlan:]

Thank you. Mark, first question because I kind of missed this, the annualized AFFO you gave a reason for why that came down a whole one penny, what was that again?

[Mark J. DeCesaris:]

Net-net, for the quarter, remember this is based on our actual results, so it really came down based on the timing of our investment volume from the structuring revenue. The one penny really referred to the impact on our actual AFFO for Q3.

[Dan Donlan:]

Right.

[Mark J. DeCesaris:]

We adjusted the pro forma model that we show you in the supplemental to reflect that though. So if you looked at that pro forma that penny has already been adjusted for you.

[Dan Donlan:]

Right.

[Mark J. DeCesaris:]

The penny you are looking at is really, you know, the timing of the structuring revenue on an annualized basis.

[Dan Donlan:]

Okay, and then can you talk a little bit about you know cap rates kind of US and Europe. You know, have you seen a kind of upward bias in Europe versus you know, the US and you know when do you start dipping your toe in the water, more so in Europe. I mean, what are the indicators that you guys are looking at?

[Mark J. DeCesaris:]

Trevor, you want to handle that?

[Trevor P. Bond:]

Yes, sure. Thanks for the question Dan. We're clearly seeing a pound to pound, you know, for comparable credits of wider spreads in Europe. There is no question there. That phenomenon we've seen really since 2011. In terms of the actuals, we have not seen the cap rates declining as much in our segments of the market, which as we have described in the past, I would describe as a more opportunistic, less price efficient segments of the market. They have come down only slightly in both markets. And then of course, they have not gone down by as much as that. But the risk-adjusted returns and the spreads of the ten-year are still quite attractive. But the differential between the markets, it is hard to say because they are such a range of companies and credits that we look at, but there are some credits that we would look at in Europe that we would not we feel be competitive in the US. But we are competitive in Europe, and I will say that as I mentioned, we are being more selective over in Europe. At the same time, every deal has multiple bidders. We are never in a deal to date where we are the only one, and there is a feeling of such distress that bargains can be had. That has not – the market has not reached that level of distress, and we don’t expect it to.

[Dan Donlan:]

Okay. And I guess, this is a question for Tom, how has tenant traffic been at some of your vacancies, kind of first half, if you could compare and contrast first half of the year kind of to the second half of the year, and you know, are you seeing the fiscal cliff, and just people being concerned about who the president was and whatever, has that impacted, you know, traffic and has that impacted lease negotiations at all as well?

[Thomas E. Zacharias:]

I wouldn’t say that there is – it is probably safe to say that overall the political uncertainty has slowed things a little bit. But that said we are down to only 600,000 square feet of vacant space. We did a large clean up of some assets of some particular transactions. And we have a number of that we expect to close between now and the end of the year. So transaction volume for what we are doing in the asset management department is up significantly this year over last year. I think some of it is that the deals take longer to get done.

[Dan Donlan:]

Okay, and then looking at your lease expirations, and I think I have this number correct, there is a couple of different numbers, but you don’t really have anything for ’13, but then it looks like it kind of jumps up quite a bit, maybe 8% of base rents in ’14. Could you may be talk about what that is in ’14, have you already started talking to those tenants, is that one particular tenant, any detail around that would be helpful?

[Thomas E. Zacharias:]

Yes. We talk to our tenants three years in advance, and we have done some of that leasing that I mentioned, the 16 leases, some of that was even 2014 leases that we got done this year. In 2015, was your question ’14 or ’15?

[Dan Donlan:]

Yes, it was on ’14. I think the number was…

[Thomas E. Zacharias:]

It even jumped up more in ’15, but in ’14 there is two – the two largest tenants are ones that we’re working with. We don’t think they are going to renew, but I don’t want to give you the specific names of that, but we are working on those now.

[Dan Donlan:]

Okay, you said you don’t think they are going to renew, and if that is the case what percentage of rents are those tenants?

[Thomas E. Zacharias:]

Yes. Don’t have that right in front of me, but we’re working on finding either replacement tenants or selling.

[Dan Donlan:]

Okay.

[Thomas E. Zacharias:]

As a percentage of that, I don’t have that right in front of me.

[Dan Donlan:]

Okay. Are these – what type of assets are these? Are they fundable assets, are they industrial warehouse, are they office buildings, what is the product?

[Thomas E. Zacharias:]

Industrial warehouse.

[Dan Donlan:]

Okay, and are they located in Europe or the US?

[Thomas E. Zacharias:]

In US.

[Dan Donlan:]

Okay, okay.

[Thomas E. Zacharias:]

But we – you know, they are assets that we are currently working on. Whether we will – currently working on. Whether we find a replacement tenant or sell, we will work that out between now and the end of 2014.

[Dan Donlan:]

Okay. All right. Have to follow with you off-line then as to what percentage that would be. And then, if – actually there is one more question on that, what is the reason for the tenant – for these tenants leaving?

[Thomas E. Zacharias:]

One case it was bought by a larger company, and we thought [there was a lessor]. That is one situation. Another is that tenant decided to consolidate in a new build to suit. And both these situations we have been working on. We’re collecting good rent while we’re working on them. We have no concerns about whether the tenants will pay. But that is the circumstances.

[Dan Donlan:]

Could you give me the locations?

[Thomas E. Zacharias:]

One is Colorado, one is Wisconsin.

[Dan Donlan:]

Okay, all right. And then, I think in the prior calls you guys have talked about kind of aspirations to become an unsecured borrower, you know, any update there to timing, and/or what – just timing to that?

[Trevor P. Bond:]

I don’t think you are going to see us make an immediate change to an unsecured borrower. We like – we continue to like non-recourse debt at the asset level. It is a very safe type of debt, but I think as we start to build up some of the debt on some of the existing assets that we have acquired starts to run off, you will see it start to build a larger incumbent pool. And at that point start to look to the unsecured markets a little bit more. But that is going to take a little time to work through. So I don’t think you are going to see in the near term Dan.

[Dan Donlan:]

Okay. And then, last if not least, you guys are obviously looking for replacement for Mark at the CFO level?

[Mark J. DeCesaris:]

Am I leaving?

[Dan Donlan:]

Is there any update there, will we have an announcement before year-end, just any thoughts there would be helpful?

[Trevor P. Bond:]

Well, we have conducted a thorough search, and we are very optimistic that we will have an announcement shortly. It has been an good pool of candidates, and we don’t have anything to announce today though.

[Dan Donlan:]

Okay. All right. Thank you very much. I appreciate it.

[Trevor P. Bond:]

Thank you.

[Operator:]

Our next question comes from Paul Adornato of BMO Capital Markets.

[Paul Adornato:]

Hi, good morning.

[Trevor P. Bond:]

Good morning Paul.

[Paul Adornato:]

Just a follow up with respect to the cap rate discussion, I was wondering if you could talk about cap rates that you are seeing on acquisitions today versus a year ago. What type of movement have you seen, and also just mention, sorry if I missed it, just the absolute level of cap rates that you are seeing?

[Mark J. DeCesaris:]

I missed the final part of your question Paul?

[Paul Adornato:]

Just what is the absolute level of cap rates that you are seeing in the market today?

[Mark J. DeCesaris:]

Well, as I had said, I think that cap rates began to decline clearly, but we have seen that happen more dramatically, and what we refer to as the more commoditized segment of the net lease market, in which we typically don’t compete as strongly because we have some sort of minimum threshold that we need to achieve in order to cover our dividends. The dividend that we are currently paying on CPA

[Paul Adornato:]

Okay, and looking at the asset management side of the business, it sounds like you are trying to be more active, more proactive in managing the assets in your portfolio. I was wondering how we can benchmark how you are doing on the disposition side, what would be some relevant metrics in your view?

[Trevor P. Bond:]

Tom, you want to…

[Thomas E. Zacharias:]

Paul, what we look at is what our occupancy is, but we aren’t carrying vacant space because that has cost to it. And we analyze that very carefully. We are doing some recycling where we will sell leases, some deals have become multi-tenant because we don’t think there is the upside in it. It might require more capital. We benchmark it on what revenue we are losing and what revenue we are replacing it with, because our objective is to be growing the revenue in the public company through some capital recycling. To sum up, it is where – we are at a point where we think maybe the marketplace doesn’t look at the rest the way we do, and we can sell it very opportunistically and replace it. So there is a lot of analysis that is going on on all our investments as to whether – what our strategy should be. We don’t think there is going to be, you know, wholesale recycling, but there will be some. I know, it will be good for the investors.

[Trevor P. Bond:]

I would tell you that philosophically just over the past 2 to 3 years, we have developed a point of view that we really should start thinking opportunistically about exits with much more than three years left on the lease, so that really after the first 10 years, Tom’s group is encouraged and rewarded to think opportunistically about sales of assets where we think that – opportunistically about sales of assets where we think that while the asset may have been critical to the operations of the tenant when we first did the transaction. That asset may no longer serve the same function strategically for the tenant, and we learn this information through our periodic inspections, annual inspection that we follow the credits of the tenants closely. So, we come to a point of view on the asset, and make a determination as to whether or not or what the probability of renewal is, and that is very difficult years in advance, but sometimes you just develop a gut feel. And for those assets, it is easier to sell them with some lease term left on them. And at the same time, because we’re very diversified book by product type and geography and tenant type, we can as Tom alluded to sell an asset to somebody who has a different point of view on the credit, on the location, on the product type, and get a good exit. So that is something that is just a very active part of our business. We are not only selling the empty dogs, really frankly that we have owned for quite some time. But we don’t like to have the carrying cost of the vacant buildings and Tom’s group has done a good job, significantly decreasing that. And that is clearly part of what we do, but we also think more opportunistically as well. And then, when we do have those sales, we would actively, obviously try to recycle that capital into longer term assets.

[Paul Adornato:]

Okay. Thanks very much.

[Trevor P. Bond:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Susan Hyde for any closing comments.

[Susan C. Hyde:]

Thank you. I just wanted to remind everyone that a replay of today’s call, including both a web cast and pod cast will be available after 2 o’clock, and you can find that information at the end of our earnings release. Thank you so much for joining us today, and we look forward to speaking with you again with our year-end results.

[Operator:]

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