W. P. Carey Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited. The quarter includes the CPA®:15 merger only from its September 28 closing, so reported results are not directly comparable with a full-period combined business.
Business context
W. P. Carey provides long-term real estate financing and manages investment portfolios. Its two segments are Investment Management and Real Estate Ownership. The company completed its conversion to a REIT structure and merged with CPA®:15 on September 28, 2012. The merger substantially expanded owned real estate and debt; it also changed the scale and composition of the balance sheet.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $71.0 million | $76.7 million | $208.0 million | $268.9 million |
| Net income attributable to common stockholders | $2.6 million | $25.2 million | $46.7 million | $130.0 million |
| Diluted EPS | $0.06 | $0.62 | $1.12 | $3.19 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $31.7 million | $62.7 million |
| AFFO, a non-GAAP measure | $33.9 million | $41.6 million | $101.8 million | $153.6 million |
| Distributions declared per share | $0.650 | $0.560 | $1.782 | $1.622 |
Revenue includes reimbursed affiliate costs, which are offset by reimbursable expenses. The filing does not report a conventional operating-margin measure; margins are also difficult to compare given pass-through costs, merger expenses, and the prior-year unusual revenue. Interest expense was $7.9 million for Q3 and $22.5 million for the first nine months, versus $6.0 million and $15.7 million, respectively, in 2011.
At September 30, cash and equivalents were $236.7 million, total assets $4.78 billion, total liabilities $2.48 billion, and total equity $2.23 billion. Debt comprised $1.72 billion of non-recourse and limited-recourse debt and $418.2 million under the senior credit facility, or approximately $2.14 billion combined. The company reported $101.1 million of unused credit availability after borrowing-base limits and letters of credit; it was in compliance with its credit covenants.
Material changes versus prior periods
- Q3 revenue fell $5.6 million year over year; nine-month revenue fell $60.9 million. Structuring revenue declined $12.9 million for Q3 and $23.3 million for the first nine months, reflecting lower investment volume. The nine-month comparison also includes $52.5 million of prior-year incentive, termination, and subordinated disposition revenue related to the CPA®:14/16 merger.
- Common-stockholder net income declined substantially. Q3 results included $25.9 million of merger costs within general and administrative expense, a $5.5 million real estate impairment, and a $20.8 million gain on change in control of interests. Merger-related costs totaled $30.6 million for the nine-month period.
- Operating cash flow fell $30.9 million year over year, primarily reflecting prior-year cash disposition fees, lower structuring receipts, and merger costs. Cash increased to $236.7 million, largely reflecting cash acquired in the CPA®:15 merger and financing activity.
- The CPA®:15 merger consideration was approximately $1.53 billion, comprising $152.4 million cash and 28.17 million shares. The company assumed approximately $1.35 billion of debt and recorded preliminary goodwill of $275.0 million. The acquired portfolio included 305 properties, with estimated annualized contractual minimum base rent of $218.9 million.
- Owned portfolio occupancy was 98.4%, up from December 2011 primarily because of the acquired occupied properties. Annualized minimum base rent scheduled to expire in the next 12 months was 1.9%.
Outlook, risks, and contingencies
- Management said it expected to continue pursuing investment opportunities in the U.S. and internationally in the near term. It structured approximately $468 million of investments for the REITs in the first nine months of 2012. Management also cited increased competition and variability in transaction financing and returns.
- The company said REIT qualification requires distribution of at least 90% of annual net taxable income, excluding net capital gains. Its Q3 distribution increased to $0.65 per share, equivalent to $2.60 annualized.
- Management identified tenant credit, vacancies, lease renewals, property values, interest rates, foreign exchange, and European economic conditions as risks. Euro weakness reduced the average translation rate by 8.9% year over year and adversely affected international results.
- Scheduled debt principal payments were $791.4 million in 2014, including the $418.2 million senior credit facility balance then scheduled to mature. Separately, $143.8 million and $159.9 million of balloon payments on property loans were due in 2014 and 2015, respectively. Management anticipated refinancing certain loans but cautioned that favorable refinancing was not assured.
- At September 30, a further $60 million of share repurchases from the Estate of the company’s founder remained committed; $20 million was completed on October 9, leaving $40 million. On October 19, the company issued shares to an institutional investor for $45 million.
- Management reported no material litigation and did not expect ordinary-course claims to materially affect financial position or results. Disclosure controls were considered effective as of September 30.
Important facts for investors to verify
- How the finalized CPA®:15 purchase-price allocation, goodwill, and acquired portfolio performance compare with the preliminary estimates.
- Whether investment structuring activity, fee revenue, and AFFO recover from the lower 2012 levels, and how much reported earnings depend on nonrecurring gains or adjustments.
- The company’s refinancing plan and covenant headroom for the 2014 credit-facility maturity and upcoming property-loan balloon payments.
- Cash funding and dilution implications of the remaining founder-estate repurchase commitment, alongside REIT distribution requirements.
- Tenant credit, rent renewal terms, and exposure to European economic and currency developments; assess AFFO alongside GAAP results because the filing notes that excluded items can still become realized losses.