W. P. Carey Inc. quarterly report, Q2 FY2012

Business context and reporting period

W. P. Carey & Co. LLC (the registrant named in this 10-Q) reported unaudited results for the quarter and six months ended June 30, 2012. The company provides investment-management services to affiliated real estate investment trusts (REITs) and owns commercial real estate, primarily under triple-net leases. It reported more than 970 owned or managed properties; its directly owned net-lease portfolio had approximately 94% occupancy.

Financial performance and liquidity

Amounts below are in millions of dollars except per-share data. “Revenue excluding reimbursements” removes affiliate cost reimbursements, which are offset by corresponding expenses.

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$68.0	$116.8	$137.4	$192.7
Revenue excluding affiliate reimbursements	$47.6	$99.7	$98.2	$157.9
Net income attributable to W. P. Carey members	$31.8	$81.4	$44.1	$104.8
Diluted earnings per share	$0.77	$1.99	$1.06	$2.58
Adjusted funds from operations (AFFO, non-GAAP)	$27.8	$73.0	$67.9	$112.2

Quarterly distributions declared were $0.567 per share, or $2.27 annualized. First-half distributions declared were $1.132 per share.
Cash provided by operating activities was $11.8 million for the first half, down from $48.6 million. Adjusted cash flow from operating activities (ACFO, non-GAAP) was $58.3 million versus $55.9 million.
At June 30, cash and cash equivalents were $39.8 million; total assets were $1.44 billion and total equity was $728.6 million.
Debt was approximately $579.7 million, comprising $346.5 million of non-recourse and limited-recourse debt and $233.2 million drawn on the revolving credit facility. The $450 million facility matures in December 2014; reported unused capacity was $194.9 million, after letters of credit. The company said it was in compliance with its financial covenants.
Scheduled debt principal payments include $242.2 million in 2014, including the outstanding revolving credit balance. The company also expected $27.0 million of mortgage balloon payments within the next 12 months.

Material changes versus the prior comparable period

Revenue and earnings fell sharply, principally because 2011 included $52.5 million of incentive, termination and subordinated disposition revenue related to the CPA:14/16 merger, plus a $27.9 million gain on acquiring property interests. Neither item recurred in 2012.
Investment-management structuring revenue fell as transaction volume declined: investments structured for managed REITs were $98.0 million in Q2 2012 and $269.7 million in the first half, compared with $249.2 million and $594.0 million, respectively, in 2011.
Real-estate ownership revenue increased, but segment earnings attributable to members declined year over year, reflecting the absence of the prior-year merger-related gain. First-half equity-investment income rose to $42.3 million from $21.3 million, including a $15.1 million share of a gain on the sale of a Medica investment.
First-half interest expense rose to $14.6 million from $9.7 million. The company cited financing costs, a higher average line-of-credit balance and mortgages associated with acquired properties.
First-half continuing-operations impairment charges totaled $7.2 million, including $3.7 million on two vacant properties and $3.5 million on an investment in the CPA:16–Global operating partnership. Discontinued operations included a further $3.1 million impairment charge.
The stronger U.S. dollar reduced the translated value of European assets and revenues; the company reported a 7.5% lower average euro exchange rate for first-half operating results versus 2011.

Outlook, transactions, risks and unusual items

The proposed merger with CPA:15 and an internal reorganization to REIT status remained subject to shareholder and stockholder approvals and other closing conditions. The company expected a third-quarter 2012 closing, but gave no assurance. The proposed consideration included approximately $151.5 million cash and 28.19 million shares; a $175 million term-loan commitment was obtained to help fund the cash portion, subject to conditions.
CPA:15’s portfolio was reported at 305 properties, approximately 99% occupied, with a 9.9-year average remaining lease term. The company expected to assume CPA:15 property debt with estimated fair value of approximately $1.1 billion on a pro rata basis.
After quarter-end, the company repurchased 561,418 shares from the founder’s estate for $25 million using its credit line. The estate retained options to sell up to another $60 million of shares under the agreement.
Management said it expected sufficient operating cash flow, equity-investment distributions, existing cash and available financing to meet normal liquidity needs. It anticipated investment opportunities in the near term, while noting increased competition, uncertain European conditions, financing constraints and possible pressure on investment returns.
Key exposures include tenant defaults and lease renewals, property and regional concentrations, interest rates, foreign exchange, and refinancing. Seven percent of annualized base rent was scheduled to expire within 12 months; management expected to renew most leases scheduled to expire in 2012, while acknowledging renewal rents or terms could be less favorable. Texas represented 20% of directly owned annualized base rent.
A second-quarter out-of-period accounting adjustment increased continuing-operations income by $1.8 million; management said it was not material to either the prior period or the adjustment period. The filing reported no material litigation and no significant change in critical accounting estimates. Management concluded disclosure controls were effective at a reasonable level of assurance.
The CFO announced plans to resign after a transition period and was appointed to the board in July 2012.

Important facts for investors to verify

Approval, financing conditions and closing timing for the CPA:15 merger and REIT reorganization, including the final consideration and debt assumed.
Available revolver capacity and refinancing plans for the 2014 maturity concentration, upcoming mortgage balloons and any further estate share repurchases.
Whether operating cash flow, distributions from equity investments and AFFO support the declared distribution; AFFO and ACFO are non-GAAP measures and are not substitutes for GAAP cash flow or earnings.
Durability of earnings excluding the 2011 merger-related revenue and gains and the 2012 Medica sale gain; also monitor impairments, tenant credit, vacancy, rent renewals and currency effects.
Progress in replacing the CFO and the effects of merger-related costs and the proposed corporate restructuring.