W. P. Carey Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good morning and welcome to the W. P. Carey Second Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kristin Brown, Vice President of Investor Relations. Please go ahead.

[Kristin Brown:]

Thank you, Andrew. Good morning, and welcome, everyone, to our second quarter earnings conference call. Joining us today are W. P. Carey’s President and CEO, Trevor Bond; and Chief Financial Officer, Katy Rice. 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 some statements made on this call are not historic fact and may be deemed to be 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 P. Bond:]

Thanks, Kristin, and thanks, everyone, for joining us today. It was a strong quarter with some important highlights that I'll discuss before turning the floor over to our CFO, Katy Rice. Most significantly, as many of you know, we announced last week that the Boards of Directors for W. P. Carey and for one of our funds, the CPA

[Catherine D. Rice:]

Thanks, Trevor. And good morning, everyone. I would like to review our financial results for the second quarter, walk you through our portfolio metrics and then finish up with a discussion of some of our balance sheet initiatives for the remainder of the year. Let's start with our earnings. As Trevor mentioned, our second quarter earnings reflect the impact of the CPA

[Operator:]

[Operator Instructions] The first question comes from Dan Donlan of Ladenburg Thalmann.

[Daniel P. Donlan:]

I'm sorry, I was a little late getting on the call, so I wasn't sure if you guys covered this, but I was curious, could you talk about the lease role and how that looks for next year? I remember that Carrefour was kind of a bigger percentage. I don't know if that has changed and I think maybe they had -- they were supposed to notify you if they were going to renew or not. Is there any update there?

[Trevor P. Bond:]

We've addressed all the lease expirations for the remainder of 2013. And in 2014, we now have 11 leases expiring, which represents -- and this is a reduction, it represents only 3.1% of portfolio revenue because since our last call, the 8 leases on the Carrefour distribution facilities have been extended for another year.

[Daniel P. Donlan:]

Okay. How did the extension work? I mean, did they have the ability to extend for longer, or is this going to be a recurring thing, we're waiting for this? Or why weren't you able to maybe keep them for a little bit longer than that on the renewal?

[Trevor P. Bond:]

Well, by contract, they have the right to do it, 1 year at a time. But Tom Zacharias, our Chief Operating Officer, and his team are actively engaged in negotiations and in dialogue with Carrefour all the time to look at that and, obviously, it would be our preference to extend those leases. And they may want to extend some longer than others. But we think it's promising that they extended these and that they're -- generally they do tend to signal ahead of time, and it's to a different intention then we haven't to date heard any signals that would indicate a different direction. We can't promise that, though. And so we'll continue to keep you posted as that unfolds.

[Daniel P. Donlan:]

Okay. And then as far as the potential merger with CPA

[Catherine D. Rice:]

It's Katy. Really, one of the reasons that we did the new term loan facility was to create capacity for additional acquisitions on the balance sheet. So we've paid down our line of credit and we have several hundred million dollars of capacity so that we would have that incremental capital before we do a larger recast of our line of credit, probably later in the year.

[Daniel P. Donlan:]

Okay. And then, as far as potential equity down the road, is that something that you would need to actually close on the CPA

[Catherine D. Rice:]

Yes, we've outlined a couple of different scenarios. I think, to the extent we acquire CPA

[Daniel P. Donlan:]

Okay. And then, just generally speaking on, kind of, acquisitions, how are you seeing transaction volume trending, kind of the back half of the year -- is there -- it's like there's more coming available now than maybe you did it -- than you thought was going to come at the beginning of the year? And it sounds like Europe maybe is doing a little bit better. Do you think that's going to drive more volume there? Any color around that would be helpful.

[Trevor P. Bond:]

Well, I think on a risk-adjusted basis, we're clearly seeing what I would describe as better transactions in Europe. That said, we've done a fair amount here in the U.S. and it's possible that with the rise in interest rates, that our competition in the U.S. will be somewhat hamstrung. And for instance, anyone relying on short-term floating rate debt who may have been bidding up prices in certain scenarios is clearly going to be at more of a disadvantage now. And also, as I said, much of the time our primary competition in any given deal, at least a sale-leaseback deal, is the debt markets and so if the debt markets -- if the price of debt rises, then a CFO has fewer alternatives and a sale-leaseback begins to look more attractive. So it is a little bit difficult to handicap in terms of the volumes. We're off to a pretty good start. It's rare that in the second quarter call in early August that we would have achieved a volume already for the whole group of close to $900 million. I can't promise that you can just annualize that, take the first 2/3 of the year and then say that the final third of the year is going to be another $300 million. Very difficult to handicap that. But I think that we're still -- we still have a good pipeline and, as I mentioned before, it is possible that some of the things that are in the pipeline may get delayed or even canceled by us or by the seller because if we see this rise in interest rates persist, we're clearly going to price that into our price. And if that means a lower price than the seller expects, then volume may go down.

[Daniel P. Donlan:]

Okay, understood. And then just on CPA

[Trevor P. Bond:]

Well, it's very difficult to say. As you said, they tend to ramp up at different paces depending, of course, on the environment that we're in, some faster or slower. But the fund is, it's registered for $1 billion. I can't tell you when we expect that to fully fund. I will say that capital actually is not a problem for us right now because we still do have dry powder in CPA

[Daniel P. Donlan:]

Okay. And then just given that you spoke about potentially finishing up CPA

[Trevor P. Bond:]

Many, many years. CPA

[Daniel P. Donlan:]

Right. I guess what I'm saying when did the fund close its fundraising effort or when did it put its last dollar to work...

[Catherine D. Rice:]

CPA

[Trevor P. Bond:]

CPA

[Daniel P. Donlan:]

Yes.

[Catherine D. Rice:]

2008.

[Daniel P. Donlan:]

2008, so it was -- okay. So that's quite a lead time then. So even if you close CPA

[Trevor P. Bond:]

Just to point out here, there were 2 phases of that offering and the first phase was fully invested by 2005. Then there was a follow-on and that was fully invested by 2008.

[Daniel P. Donlan:]

Okay, okay. All right. And I guess, why is that? Why did it stay -- that predates when I cover the company, why did it stay outstanding for so long when you weren't doing any acquisitions? Is it just that, obviously, if it was done in 2008, the market just wasn't there. I mean, is it simply, I guess what I'm saying is if the market is there for the funds, would you consider accelerating liquidity events versus maybe what you've done in years past?

[Trevor P. Bond:]

Well, the reason for that extended offering period and the follow-on was simply that, that's been the nature of the public non-registered REIT business, and I think that's probably changing now. But in the past, you would have extended offerings and the money would be invested and it's administratively easier in many ways to have a follow-on and it also makes more sense in terms of the G&A and whatnot. So that's more of a historical fact. CPA

[Catherine D. Rice:]

But, Dan, also I think our investors, historically, in the CPA funds are focused on current income. Obviously, the IRR's important. And I think what you're getting at is how quickly you can turn the IRR. But our investors have typically been more focused on the longevity of the current income strain.

[Daniel P. Donlan:]

Right, understood. As they should. I guess what I was kind of looking for is, when shall we kind of expect CPA

[Catherine D. Rice:]

Yes, I mean, I think the liquidity events are obviously sort of in the 8- to 10-year range. But obviously, that will depend on market conditions and, as you know, the CPAs have independent boards that review those options as they enter into their liquidity periods.

[Operator:]

[Operator Instructions] The next question comes from Sheila McGrath of Evercore.

[Sheila McGrath:]

Trevor, it seems like CWI was pretty active on the acquisition front. Can you remind us was there any particular drivers of that? And can you also remind us how big that fund is and where you are kind of in the fundraising stage for that?

[Trevor P. Bond:]

Sure. Well, the activity, I think, is driven just by the very good opportunity that the CWI, the Watermark team, had unearthed in different markets across the country. It's focused on the U.S. domestically. And so like anything else, they look at a lot and invest in just a few. And those were the ones that came to our attention. So good properties in solid markets, not necessarily primary markets. But the theory is good going-in income, but also the potential to improve that income with some selected investments of capital. Some of these were somewhat capital constrained. So a little bit of capital goes a long way in improving the revenue per available room. They are not IRR-driven investments in the sense that we buy them cheap and then sell them and flip them and get much of the return from the back end. We expect more of a steady income growth scenario in those. In terms of the size of the fund or the fund is about -- should close soon because its stated life is, I think, at the end of September, September 15. And so we've seen a pickup in fundraising activity as you'd expect towards the close of a fund. I don't have the exact number for how much CWI has raised, but we expect that it will be...

[Catherine D. Rice:]

Five and a quarter. A little over...

[Trevor P. Bond:]

$525 million or so by the time. That's our best guess.

[Sheila McGrath:]

And because that's a different property type than you're typically focused on, would that eventually be considered that you would want to wholly own it or not necessarily because it's lodging?

[Trevor P. Bond:]

Actually, I did touch on that, briefly, at the beginning, maybe not as clearly. I wanted to emphasize that we don't intend to bring the storage assets that we purchased through our CPA funds or the hotels that are purchased through CWI, we do not -- it's not our goal or our intention to bring them onto W. P. Carey's balance sheet. And they have teams in place that can manage them should other options appear or be considered by us down the road.

[Sheila McGrath:]

Okay. And then I apologize if you touched on this, but on CPA

[Trevor P. Bond:]

Very little. De minimis.

[Catherine D. Rice:]

I would say, yes. Maybe a little bit in the fourth quarter, but much more so in 2014.

[Sheila McGrath:]

Okay, that's helpful. And then, Trevor, just kind of big picture wise. We've heard different companies talk about real big volumes of fundraising and then you guys -- it seems like it's a little bit smaller volumes. Can you just remind us on your philosophy of capital raising? Is it -- do you intentionally slow down the fundraising at different points in the cycle?

[Trevor P. Bond:]

We do. We have in the past. Certainly during -- just before the last crisis, we had stepped out of the market on a couple of different occasions. In this particular case, our fundraising has been not as robust simply because we closed CPA

[Sheila McGrath:]

Okay.

[Trevor P. Bond:]

And also, I'll point out, Sheila, if you don't mind. The real benefit actually from our point of view, from management's point of view, is that the sales force because there was no CPA product to sell had Carey Watermark Investors to sell, a hotel product, which was new when we first launched it a couple of years ago and it gave them a chance to focus on something different and new, which is further enhancing their ability to sell other products. So that's been a benefit because the fundraising has picked up from the hotel fund.

[Sheila McGrath:]

Okay. And then just moving over to the pending merger. CPA

[Catherine D. Rice:]

Yes, Sheila. The accretion numbers that we gave are really thinking through the timing, which would probably -- the transaction wouldn't close until the first quarter of 2014. So you can use those numbers. I don't think for CPA

[Sheila McGrath:]

Okay. And then on -- can you just remind us on the go-shop that's a couple more weeks, is it a process that, like, the investment banks running it, like, give you information, that there are other people looking and there's a big coming or you're not updated, I just don't know how that works.

[Trevor P. Bond:]

That would be nice. However, no. We will not know really anything about that process. There's a data room that is completely controlled by Barclays, the investment banker. And so they're running that process completely independently and reporting to the CPA

[Sheila McGrath:]

I see. Okay, and so what is the date -- when does it end? Like, another 2 weeks?

[Catherine D. Rice:]

August 24.

[Sheila McGrath:]

August 24, okay. And last question, and I missed the first part of the call, if you touched on this. On the estate shares, can you just update us how we should think about that? I did see that the estate filed a 144 today. Just update us how we should think about that.

[Trevor P. Bond:]

Sure. The estate now roughly controls or owns approximately 10 million shares of our 69 plus/minus. By the terms of the will and this is something that I had mentioned on earlier calls. Much of that, some 60% of it, is intended to go to the foundation, which will -- is committed long-term owner. And then the balance would be distributed amongst individual legatees, many of whom -- most of whom are family members of Bill, who also have indicated a long-term commitment to the company. So we don't expect a big overhang. The 144 that you see that's registered is for a certain amount that would cover expenses that -- tax reserves and other expenses of managing the estate. And we feel that they'll be prudent in how they actually go about obtaining that -- the proceeds of those sales.

[Operator:]

The next question comes from Dan Donlan of Ladenburg Thalmann for a follow-up.

[Daniel P. Donlan:]

Katy, just going back to the guidance on post the merger. Is that just what we should add to the annual number or is that, given the timing, just what would be added to 2014?

[Catherine D. Rice:]

Yes, I mean, the accretion numbers we gave would be the additions to 2014.

[Daniel P. Donlan:]

So is there -- so if the transaction closed exactly at year end, would there be more accretion? Or am I not -- that's what I'm trying to get at, I'm sorry.

[Catherine D. Rice:]

Okay. So no, we are assuming a January closing, either 1st or 31st, so there probably won't be a huge differentiating factor on timing. But this is subject to SEC review, shareholder vote, the go-shop, there's lots of timing, things that could change that.

[Daniel P. Donlan:]

Sure. So you're saying that if it's delayed, then the accretion is -- would be less than what you guided so I guess you're telling me that the accretion number is not as if you close at the end of the year, it is simply what you expect based upon when it's going to close under the existing -- on your existing assumptions, right?

[Catherine D. Rice:]

Yes, I mean, we thought in January sometime, so that wouldn't be that different. But remember, most of the accretion is adding the real estate revenue from CPA

[Daniel P. Donlan:]

Right. I'm just trying to get to the correct run rate on a going-forward basis, more or less. And then -- so I appreciate that color. And then from -- is there anything else external that you're assuming in that accretion? Or is that just on the deal alone? I mean, is there any type of capital raises, and I think you addressed this the last call, just wanted to double check but any type of debt or equity raises or is that just simply saying the balance sheet where we see it at the end of the year, that's the accretion that we see?

[Catherine D. Rice:]

Yes, I mean, we have an internal model that obviously we're not providing guidance at this time. We hope to at some point in the future, but for 2014, that does include additional acquisitions for WPC, increased interest rate environment, a normalization of our leverage, all the things that you would look to in a 2014 plan. So those are all included in our thought process.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.