W. P. Carey & Co. LLC — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The filing describes a real estate investment and advisory business, providing sale-leaseback and build-to-suit financing and managing affiliated non-listed REITs. Its owned portfolio included interests in 158 properties, with approximately 91% occupancy; it also advised four REITs.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue, including reimbursed costs | $78.4 million | $58.1 million | $273.2 million | $189.5 million |
| Revenue excluding reimbursed costs | $63.7 million | $42.8 million | $223.8 million | $144.8 million |
| Net income attributable to W. P. Carey members | $25.2 million | $16.3 million | $130.0 million | $54.2 million |
| Basic earnings per share | $0.62 | $0.41 | $3.22 | $1.38 |
| AFFO, a non-GAAP measure | $41.6 million | $27.6 million | $153.6 million | $94.6 million |
- For the nine months, operating cash flow was $62.7 million, versus $52.3 million a year earlier. Investing activities used $127.9 million and financing activities provided $37.4 million. Cash declined $27.6 million to $37.1 million.
- At September 30, total assets were $1.469 billion; non-recourse debt was $335.4 million and lines of credit totaled $253.2 million. Total debt and credit facilities were $588.5 million, up from $397.0 million at year-end 2010.
- The $250 million unsecured revolver had $243.2 million drawn; a $30 million secured revolver had $10 million drawn. Management reported $20 million in aggregate unused line capacity, with $6.8 million of letters of credit reducing unsecured availability. Both facilities mature in June 2012; the company was in covenant compliance and said renewal discussions were underway.
- The declared distribution was $0.56 per share for Q3 ($2.24 annualized), compared with $0.508 in Q3 2010. Nine-month declared distributions were $64.3 million; adjusted operating cash flow, a non-GAAP measure, was $74.5 million.
- The filing does not present a standard operating-margin measure. It reports operating expenses of $58.4 million for Q3 and $162.7 million for the first nine months.
Changes versus prior comparable periods
- Revenue excluding reimbursed costs rose to $63.7 million in Q3 and $223.8 million for nine months, driven by greater investment structuring activity, acquired properties, and the CPA®:14/16 transaction.
- Nine-month earnings included $52.5 million of incentive, termination, and subordinated disposition revenue from the CPA:14/16 merger, a $27.9 million gain from obtaining control of property ventures, and other transaction-related gains. These items make reported earnings growth less indicative of recurring performance.
- Asset management revenue fell $4.4 million in Q3 and $5.8 million for nine months, partly reflecting property sales and the reduced CPA:16–Global fee rate after its UPREIT reorganization. Structuring revenue increased substantially with higher investment volume.
- Q3 net income attributable to members increased year over year, while real estate ownership segment earnings attributable to members declined $0.8 million. Nine-month real estate ownership earnings increased, including the one-time change-in-control gain.
- General and administrative expense increased $8.9 million in Q3 and $18.7 million for nine months, primarily from compensation, stock-based compensation, commissions, and professional fees.
Outlook, risks, contingencies, and unusual items
- Management said it continued to see investment opportunities in the U.S. and Europe and expected to pursue them in the near term, subject to fundraising, financing availability, transaction pricing, and competition. No specific company-wide earnings or revenue guidance was provided.
- Management cited increased uncertainty from the European sovereign debt crisis, the U.S. credit downgrade, capital-market volatility, and variable financing costs. Foreign-currency movements, tenant credit and defaults, lease expirations, occupancy, property values, and REIT fundraising are material risks.
- Fourteen percent of annualized contractual minimum base rent in the owned portfolio was scheduled to expire within 12 months. The portfolio had geographic and property-type concentrations, including 18% of rent in Texas, 17% in California, and 44% from office properties.
- A $4.9 million impairment was recorded on a multi-tenant property whose tenants had vacated; the property was being marketed for lease or sale. A separate subsidiary was deconsolidated after a receiver took possession of its property following tenant departure and cessation of debt payments; the company recorded a $1.0 million gain and said its retained interest had no value.
- Management was exploring liquidity alternatives for CPA:15, but stated there was no assurance a transaction would occur. The CPA REIT advisory agreements were renewed for three months effective October 1, 2011; CWI’s agreement was renewed for one year.
- Management reported no material litigation and said pending ordinary-course claims were not expected to have a material adverse effect. It also reported effective disclosure controls as of September 30, 2011.
Important facts for investors to verify
- How much of 2011 earnings and AFFO reflects recurring operating activity versus CPA:14/16 merger fees, gains, and purchase-accounting effects.
- Whether the June 2012 credit facilities were renewed, on what terms, and how the substantial 2012 debt maturities were addressed.
- Whether actual cash generation supports distributions after accounting for working-capital timing, affiliate distributions, and the non-GAAP adjustments used in adjusted operating cash flow.
- Tenant retention, re-leasing or sale progress for the impaired vacant property, and upcoming lease expirations representing 14% of owned-portfolio rent.
- Progress and potential conflicts or outcomes associated with CPA:15 liquidity alternatives and the company’s related-party advisory and investment arrangements.
- Exposure to currency movements, interest-rate resets, REIT performance, and the concentration of investments in CPA:16–Global.