W. P. Carey & Co. LLC — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing is unaudited. Unless stated otherwise, financial amounts below are in U.S. dollars; millions are rounded. The registrant describes two businesses: investment management for four affiliated CPA REITs and ownership of net-leased real estate.
Business context and portfolio
- At June 30, the company owned or managed 922 properties. Its own portfolio included interests in 167 properties, approximately 14 million square feet, and was 92% occupied, down from 94% at December 31, 2009.
- The CPA REITs owned all or part of more than 790 properties, approximately 95 million square feet, with 98% occupancy.
- The company structured $440.2 million of investments for the CPA REITs and made two investments for its own portfolio totaling $66.4 million during the first half. International investments were 48% of the total investment volume.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue, excluding reimbursed affiliate costs | $55.0m | $42.1m | $102.6m | $92.3m |
| Reported revenue, including reimbursed costs | $70.4m | $53.2m | $133.0m | $112.4m |
| Income from continuing operations attributable to members | $24.2m | $14.7m | $42.6m | $31.6m |
| Net income attributable to members | $23.4m | $15.0m | $37.8m | $32.7m |
| Diluted EPS | $0.59 | $0.37 | $0.94 | $0.81 |
| Distributions declared per share | $0.506 | $0.498 | $1.010 | $0.994 |
- Cash flow: First-half operating cash flow was $36.3 million, versus $34.7 million. Investing activities used $27.7 million; financing activities provided $13.6 million. Cash increased $21.0 million to $39.4 million.
- Balance sheet: Total assets were $1.124 billion and total equity $633.1 million. Net investments in real estate were $928.6 million.
- Debt: Non-recourse debt was $206.2 million and line-of-credit borrowings were $171.8 million, for total debt of $378.0 million, up from $326.3 million at year-end. The $250 million unsecured revolving facility matures in June 2011; $78.3 million of capacity was available at June 30. Average line-of-credit interest was 1.2%. The company reported compliance with facility covenants.
- Other liquidity and obligations: Cash included $5.2 million held in foreign accounts, potentially subject to repatriation restrictions or costs. Scheduled mortgage balloon payments over the next 12 months totaled $16.8 million. The filing states that the company expected operating cash, cash reserves, and available credit to fund needs; financing unleveraged properties was another potential source.
- Margins: The filing does not provide a clear consolidated margin measure.
Material changes versus prior period
- First-half revenue excluding reimbursed costs rose about 11%, largely reflecting more investment structuring for the CPA REITs. Q2 structuring revenue increased to $13.1 million from $0.4 million; first-half structuring revenue was $19.9 million versus $10.8 million.
- Investment management income attributable to members rose to $14.3 million from $6.0 million in Q2 and to $24.2 million from $12.7 million for the first half. Higher investment volume and lower impairment charges at the CPA REITs contributed to the improvement.
- Real estate ownership income attributable to members was broadly flat in Q2 at $9.1 million, but fell to $13.7 million for the first half from $20.0 million. The decline primarily reflected property-sale impairment charges and weaker discontinued-operations results.
- First-half discontinued operations recorded a $4.8 million loss, including $5.9 million of impairment charges on properties sold or held for sale. Four properties were sold for $9.2 million, net of selling costs, with a $0.5 million gain before previously recognized impairments.
- First-half comprehensive income attributable to members declined to $28.7 million from $32.4 million, including a $9.3 million other comprehensive loss, primarily reflecting foreign-currency translation and derivative movements.
Outlook, management commentary, and risks
- Management reported modest economic improvement, greater investment activity, and improved financing availability, while cautioning that recovery remained weak and lender underwriting conservative. Competition for investments and fundraising had increased.
- Management expected 2010 annualized contractual lease revenue to decrease approximately 3% in the company’s own portfolio and 4% in the CPA REIT portfolios versus 2009, based on tenant activity to date. Sixteen percent of the company’s leases, by annualized contractual revenue, were scheduled to expire in the following 12 months; renewals could involve lower rents or shorter terms.
- Management said tenant defaults had improved from elevated 2008–2009 levels. Tenants in bankruptcy, administration, or receivership represented less than 1% of CPA REIT aggregate annualized lease revenue; further defaults remained possible.
- Euro exposure is material: the U.S. dollar strengthened 15% against the Euro from year-end to June 30, contributing to a negative balance-sheet effect. Management warned that further Euro weakness could adversely affect results, particularly for the CPA REITs.
- Interest-rate, tenant-credit, property-value, refinancing, occupancy, and foreign-exchange risks remain. Approximately 53% of long-term debt was fixed, swapped, capped, or subject to future fixed-rate resets. A 1% rate increase would raise annual interest expense on unhedged variable-rate debt by an estimated $1.8 million.
- On July 6, 2010, Gordon F. DuGan resigned as CEO and director; Trevor P. Bond became interim CEO. Mark J. DeCesaris was appointed CFO. These changes occurred after quarter-end.
- After quarter-end, the company obtained $35 million of 10-year non-recourse mortgage financing for a February property acquisition; the rate was fixed at 5.5% using a swap.
- CPA REIT advisory agreements were renewed for an additional year. Carey Watermark’s proposed offering, registered for up to $1 billion plus a dividend reinvestment plan, had not been declared effective as of the filing date. The filing also notes proposed lease-accounting changes whose impact could not yet be determined.
- No material litigation was reported. Management stated that disclosure controls were effective at June 30 and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the surge in structuring revenue and CPA REIT investment volume can be sustained, and how much reported revenue converts to cash given receivables and deferred acquisition revenue timing.
- Progress on refinancing or extending the $250 million credit facility before its June 2011 maturity, and the company’s capacity to meet near-term mortgage maturities and distributions.
- Tenant renewals, vacancies, defaults, and the expected lease-revenue declines, including the 16% of own-portfolio leases due to expire within 12 months.
- Final sale prices and impairment outcomes for properties held for sale, and whether further property write-downs are required.
- Effects of the CEO transition, Euro movements, and the uncompleted Carey Watermark offering on operations, liquidity, and managed-fund growth.