Business context and reporting period
W. P. Carey Inc. is a REIT focused on commercial real estate, primarily triple-net leased properties, and management of affiliated non-traded REITs. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with Q1 2013. On January 31, 2014, the company completed its merger with CPA®:16 Global, materially expanding its owned portfolio and changing the comparability of results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $209.2 million | $106.0 million |
| Net income attributable to W. P. Carey | $112.9 million; diluted EPS $1.25 | $14.2 million; diluted EPS $0.20 |
| AFFO (non-GAAP) | $118.2 million | $72.3 million |
| Cash provided by operating activities | $43.7 million | $17.5 million |
| Cash and cash equivalents | $198.9 million | $117.5 million at Dec. 31, 2013 |
| Total debt carrying value | $3.83 billion | $2.07 billion at Dec. 31, 2013 |
| Occupancy | 98.3% | 98.9% at Dec. 31, 2013 |
Reported revenue growth reflected the acquired properties and higher Investment Management activity; reported revenue includes reimbursable costs. Excluding reimbursable costs, total revenue was $163.4 million versus $90.9 million. Net income included a $103.6 million gain on change in control of interests and was partly offset by $29.6 million of merger and acquisition expenses. Thus, GAAP earnings growth is not a direct measure of recurring performance. AFFO, management’s non-GAAP supplemental measure, increased 64% year over year.
At March 31, the company reported $3.0 billion of non-recourse debt, $366.3 million outstanding under its senior unsecured credit facility, and $498.2 million of senior unsecured notes. The $1.0 billion revolver had $883.7 million of unused capacity, excluding letters of credit. Approximately 77% of debt was classified as fixed-rate; the filing also notes variable-rate debt effectively hedged by swaps or caps. Cash distributions paid were $68.2 million; distributions declared were $0.895 per share. The company reported $1.5 billion of unleveraged properties, subject to its ability to obtain financing.
Material changes versus the prior period
- The CPA®:16 merger issued 30.7 million W. P. Carey shares and added 335 properties, including leased and operating properties. The acquisition contributed $45.8 million of lease revenue from closing through quarter-end.
- Lease revenue rose by $50.8 million, largely reflecting the merger. Same-store leased-property contribution increased $0.9 million.
- Investment Management revenue rose to $73.9 million from $29.5 million, primarily due to structuring activity and CPA®:18 Global offering fees; asset management revenue declined slightly as the CPA®:16 advisory agreement ended.
- Debt increased with the enlarged portfolio. The company expanded its unsecured credit facility to $1.25 billion, issued $500 million of 4.60% notes due 2024, and prepaid $116.8 million of mortgages.
- In January 2014, the company received investment-grade ratings: BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Outlook, risks, contingencies and unusual items
Management said it expects cash from operations and equity distributions, together with cash reserves, debt capacity and potential capital-market access, to meet recurring liquidity needs. It cited no numerical earnings or AFFO guidance. During the next 12 months, expected cash needs include distributions, operating costs, scheduled debt service and $256.1 million of mortgage balloon payments; management expects to use revolver proceeds for maturing mortgages. The filing cautions that refinancing may not be available on favorable terms, or at all.
The merger’s preliminary purchase-price allocation included $349.0 million of goodwill; valuations and related amounts remained subject to change. The company early adopted new discontinued-operations guidance prospectively for 2014 dispositions, affecting presentation and comparison with prior periods. Foreign exchange, interest rates, tenant credit and portfolio concentrations are principal risks; the portfolio’s Q1 ABR included 12% from Germany, 26% industrial, 25% office and 22% retail. A put option on a third-party 7.7% interest in W. P. Carey International had been exercised, but the company could not estimate the timing of redemption.
A purported class action alleges fiduciary-duty violations relating to the CPA®:16 merger and seeks rescission or damages. The company said it believed the claims were without merit and was defending the case. Other ordinary-course claims were not expected to have a material adverse effect. Management reported effective disclosure controls as of March 31, 2014, and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How the final CPA®:16 purchase-price allocation, including goodwill and acquired debt, compares with the preliminary estimates.
- Recurring earnings and cash generation excluding the $103.6 million merger-related gain, merger costs, discontinued operations and other unusual items; review AFFO alongside GAAP results.
- The refinancing plan and available liquidity for upcoming mortgage maturities, including the $256.1 million expected within 12 months and international balloon payments.
- Tenant, geographic and currency exposures after the merger, including whether occupancy and lease cash flows remain resilient.
- Developments in the merger-related litigation, the timing and cost of the W. P. Carey International interest redemption, and the renewal status of Managed REIT advisory agreements scheduled to expire in 2014.