W. P. Carey Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report; fourth-quarter figures are included in the filing. The year is not directly comparable with 2011 because W. P. Carey completed its REIT reorganization and merged with CPA:15 on September 28, 2012.
Business context
W. P. Carey is a REIT focused on long-term commercial sale-leaseback and build-to-suit investments, primarily triple-net leases, and advisory services to non-listed REITs. Its two reportable segments are Real Estate Ownership and Investment Management. At year-end, it owned or managed 1,007 properties; its owned portfolio included interests in 423 properties, approximately 38.5 million square feet, leased to 124 tenants, with 98.7% occupancy and an average lease term of 8.9 years.
The CPA:15 merger involved approximately $1.5 billion of consideration, including $152.4 million cash and 28.17 million W. P. Carey shares. The company acquired 305 properties and assumed approximately $1.35 billion of non-recourse debt at fair value. The merger materially expanded the owned portfolio and contributed only from its September closing to 2012 reported results.
Financial performance and position
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| GAAP revenue | $374.0 million | $327.8 million | Up 14%; includes $98.2 million of reimbursed affiliate costs, offset by matching expenses. |
| Income from continuing operations | $79.4 million | $152.0 million | Down; 2011 included $52.5 million of non-recurring CPA:14/16 merger-related advisory revenue. |
| Net income attributable to W. P. Carey | $62.1 million | $139.1 million | Down 55%; 2012 included merger costs and lacked the 2011 liquidity-event revenue. |
| Diluted EPS | $1.28 | $3.42 | Declined; 2012 share count also increased materially following merger issuance. |
| AFFO (non-GAAP) | $180.6 million | $188.9 million | Down 4%; 2011 benefited from unusual advisory fees. |
| Cash from operating activities | $80.6 million | $80.1 million | Nearly unchanged. |
| Cash and cash equivalents | $123.9 million | $29.3 million | At December 31. |
| Total debt obligations | $1.968 billion | $589.4 million | Increase primarily reflects debt assumed in the merger and the $175 million term loan. |
2012 GAAP net income also reflected $20.7 million of gains from remeasuring previously held interests upon obtaining control, while discontinued operations recorded a $16.6 million loss, including $12.5 million of property impairment charges. Consolidated impairment charges totaled $32.9 million, versus $10.7 million in 2011.
Year-end debt was reported as 67% fixed-rate and 33% variable-rate; management stated that approximately 87% was fixed, swapped, capped, or subject to future resets to market fixed rates. The weighted-average year-end rates were 5.6% on fixed-rate debt and 3.4% on variable-rate debt. Cash, plus $365.2 million of stated unused Revolver capacity, supported liquidity; foreign subsidiaries held $61.8 million of cash that could be costly or restricted to repatriate.
Cash distributions paid were $113.9 million, compared with $85.8 million in 2011, while operating cash flow was $80.6 million. The filing reports 2012 declared distributions of $2.44 per share; the year-end annualized cash distribution rate was $2.64 per share, up from $2.25 in 2011. These are different measures and should not be conflated.
Material changes and management commentary
- Lease revenue increased $61.9 million, primarily from CPA:15 properties acquired in the merger. Rental income rose to $108.7 million from $52.4 million.
- Merger-related expenses were $31.7 million. The transaction also resulted in $268.7 million of preliminary goodwill, subject to valuation judgments and impairment risk.
- Investment Management income fell as 2011 included $52.5 million in one-time incentive, termination, and subordinated disposition revenue. Asset-management revenue also declined, partly due to advisory-fee structure changes and the CPA:15 merger.
- At year-end, 70% of net leases by annualized minimum base rent had CPI- or similar-indexed rent adjustments; 23% had fixed increases. Management reported that fixed-increase leases were scheduled to increase rent by an average of 4% over the next 12 months.
- Management expected normal recurring liquidity needs to be met through operating cash flow, distributions from equity investments, cash reserves, mortgage financing, Revolver capacity, and potential securities issuance. No specific earnings or AFFO guidance was provided.
Outlook, risks, and contingencies
- Scheduled mortgage balloon payments included $137.6 million expected within the next 12 months. The company also disclosed $147.8 million due in 2014 and $164.1 million in 2015 on five international mortgage loans; refinancing was anticipated but not assured.
- The $625 million Senior Credit Facility matures in December 2014, subject to a possible one-year extension. The company was in compliance with its financial covenants at December 31, 2012. Distribution and repurchase capacity is subject to facility restrictions.
- Tenant and lease risks remain significant: the five largest tenants or guarantors represented approximately 25% of 2012 lease revenue, and approximately 24% of leases by annualized minimum base rent were due to expire within five years. Tenant bankruptcy, non-renewal, and difficulty re-leasing specialized properties could reduce cash flow.
- Other principal risks include economic and real-estate-market weakness, competition for investments and fundraising, foreign currency and international exposure, interest-rate changes, environmental liabilities, and possible impairment of real estate, equity investments, or merger goodwill. Proposed lease-accounting changes could affect tenant demand for sale-leasebacks.
- Advisory agreements are generally renewable annually and may be terminated on 60 days’ notice; agreements were scheduled to expire September 30, 2013 unless renewed. Fundraising and transaction-based advisory revenue can fluctuate.
- The filing reported no material litigation and no unresolved SEC staff comments. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- How the CPA:15 acquisition performs on a full-year basis, including rent collection, tenant credit quality, integration costs, and the final purchase-price allocation and goodwill assessment.
- Whether AFFO and recurring operating cash flow adequately support distributions, given 2012 distributions paid exceeded operating cash flow and AFFO is a company-defined non-GAAP measure.
- The refinancing plan and available liquidity for 2013–2015 mortgage maturities and the December 2014 credit-facility maturity.
- Renewal, re-leasing, and rent outcomes for leases approaching expiration, particularly at properties with specialized uses or concentrated tenant exposure.
- Renewal or termination status and economics of Managed REIT advisory agreements, along with the sustainability of fundraising and fee revenue.
- Final outcomes of the remaining $40 million Estate share-purchase option and the Estate’s registration rights, as well as any resulting effects on leverage, liquidity, or dilution.