Business context and reporting period
W. P. Carey & Co. LLC filed this unaudited Form 10-Q for the quarter ended March 31, 2012. It provides sale-leaseback and build-to-suit financing, manages affiliated non-traded REITs, and owns commercial real estate, principally on triple-net leases. Its two segments are Investment Management and Real Estate Ownership. The owned portfolio included interests in 156 properties, about 12 million square feet, leased to 72 tenants, with approximately 93% occupancy; the company managed more than 970 properties overall.
Financial performance and liquidity
Dollar amounts below are in millions unless stated otherwise; comparisons are with Q1 2011.
- Revenue: Total revenue was $69.4, down 8.6%. Excluding reimbursed affiliate costs, revenue was $50.7, down 12.9%. Asset management revenue declined to $15.6 from $19.8, and structuring revenue to $7.6 from $15.9, largely reflecting lower investment volume and a reduced CPA:16 fee rate. Lease revenue rose to $17.7 from $13.9, partly due to properties acquired in 2011.
- Profit: Net income attributable to members was $12.3 versus $23.3; diluted EPS was $0.30 versus $0.58. Income from continuing operations attributable to members was $14.8 versus $21.8. Q1 2012 included $3.3 of continuing-operations property impairments and $2.4 of discontinued-operations impairments. Interest expense increased to $7.3 from $4.3.
- Cash flow and distributions: GAAP operating cash flow was negative $4.1, versus positive $6.7. Investing cash flow was positive $9.5 and financing cash flow was negative $4.2. The company reported non-GAAP AFFO of $40.1, up from $39.1, and adjusted cash flow from operating activities (ACFO) of $36.7, up from $24.2. The declared distribution was $0.565 per share, versus $0.512, equivalent to $2.26 annualized. ACFO includes adjustments for working capital and distributions from equity investments; it is not GAAP operating cash flow.
- Balance sheet and debt: Total assets were $1,459.0 and total liabilities $734.1 at March 31. Debt, including the revolving line, was $602.9, compared with $589.4 at year-end. Cash and equivalents were $30.7. The $450.0 unsecured revolver had $248.2 drawn and $183.6 available after letters of credit; it matures in December 2014, subject to extension provisions. Approximately 57% of debt was classified as variable rate, including amounts hedged or subject to rate resets. The company reported compliance with its credit covenants.
- Portfolio and operating indicators: The owned portfolio occupancy rate remained 93%. Fourteen percent of owned annualized minimum base rent was scheduled to expire in the following 12 months. About 67% of net leases had CPI- or similar index-linked adjustments, while 28% had fixed rent increases averaging 1.8% over the next 12 months.
Material changes versus the prior comparable period
- Lower structuring activity was a key revenue headwind: investments structured for the REITs were $171.7 versus $344.8 in Q1 2011.
- Investment Management member income decreased to $11.2 from $13.2, despite increased income from equity investments in REIT operating partnerships following the CPA:14/16 merger and CPA:16’s UPREIT structure.
- Real Estate Ownership member income fell to $1.1 from $10.2. Higher lease revenue was more than offset by impairment charges, higher depreciation and amortization, increased interest expense, and a discontinued-operations loss.
- GAAP operating cash flow declined, partly due to higher bonus and commission payments, lower cash structuring receipts, and merger costs. The increase in reported ACFO reflects, among other items, working-capital adjustments and higher distributions received in excess of equity income.
Outlook, management commentary, and risks
- CPA:15 merger and REIT reorganization: A February 2012 agreement proposed combining CPA:15 with a newly formed W. P. Carey Inc. subsidiary, alongside an intended internal reorganization as a REIT. CPA:15 shareholders would receive $1.25 cash and 0.2326 W. P. Carey shares per share. Estimated consideration was about $151.8 cash plus approximately 28.2 million shares. Closing was expected by Q3 2012, subject to shareholder approvals and other conditions. A $175.0 term-loan commitment was obtained to fund the cash portion, but funding was conditional and not assured.
- Business outlook: Management said it saw investment opportunities and expected to continue pursuing U.S. and international transactions in the near term, while noting that investment volume and structuring revenue depend on fundraising, deal availability, and financing conditions. No formal company earnings or revenue guidance was provided.
- Market and portfolio risks: Management cited uncertainty in Europe, financing costs and availability, tenant credit and lease expirations, interest rates, foreign exchange, and real estate values. The directly owned portfolio had notable rent concentrations in Texas (19%), California (17%), Tennessee (11%), and Georgia (10%); office properties represented 44% of annualized base rent.
- Currency and interest-rate exposure: Euro movements affect operations and asset values; management warned that a significant unhedged Euro decline could materially harm results and REIT NAVs. A 1% rate increase was estimated to raise annual expense on unhedged variable-rate debt by $2.6. The company reported no foreign-currency forward contracts at the report date.
- Unusual items and contingencies: Impairments included two vacant properties in continuing operations and a property held for sale in discontinued operations; the latter was sold in April 2012 for $13.2 net of selling costs. Merger expenses and elevated stock-based compensation also increased costs. The company reported no material litigation and no significant change in critical accounting estimates; it cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the CPA:15 merger, related shareholder approvals, REIT reorganization, and $175.0 million financing commitment were completed on the anticipated terms and schedule.
- How recurring cash generation compares with distributions: GAAP operating cash flow was negative despite positive AFFO and ACFO, and the non-GAAP measures contain significant adjustments.
- Whether structuring activity, fundraising, and asset-management revenue recover after the sharp year-over-year decline in investment volume.
- Whether the company can manage near-term lease expirations, vacant properties, impairments, debt maturities, and variable-rate exposure without weakening liquidity.
- How tenant, geographic, sector, and foreign-currency concentrations affect portfolio income and asset values; the filing’s concentration data for owned assets exclude pro rata equity investments.