W. P. Carey Inc. (W. P. Carey & Co. LLC) — FY2011 Form 10-K
Reporting period: Year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. Financial amounts below are in U.S. dollars; millions are used unless noted. The filing reports selected quarterly results, including fourth-quarter 2011 revenue of $63.2 million and net income attributable to members of $9.1 million ($0.22 per diluted share).
Business context
W. P. Carey finances companies through sale-leasebacks and build-to-suit transactions, owns commercial real estate leased primarily on a triple-net basis, and advises affiliated non-listed real estate investment trusts (REITs). Its two segments are Investment Management and Real Estate Ownership. At year-end, it owned or managed more than 980 properties; its owned net-lease portfolio included interests in 157 properties leased to 73 tenants, with approximately 13 million square feet and 93% occupancy.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue, including reimbursed affiliate costs | $336.4 million | $269.9 million |
| Revenue excluding reimbursed affiliate costs | $271.6 million | $209.8 million |
| Income from continuing operations | $141.4 million | $86.2 million |
| Net income attributable to W. P. Carey members | $139.1 million; $3.42 diluted EPS | $74.0 million; $1.86 diluted EPS |
| Cash from operating activities | $80.1 million | $86.4 million |
| Adjusted cash flow from operating activities (non-GAAP) | $98.6 million | $88.6 million |
| AFFO (non-GAAP) | $188.9 million | $130.9 million |
| Cash distributions paid | $85.8 million | $92.6 million |
| Distributions declared per share | $2.19 | $2.03 |
| Total assets | $1.463 billion | $1.172 billion |
| Debt, including mortgage debt and revolver | $589.4 million | $397.0 million |
Year-end cash and cash equivalents were $29.3 million. The $450 million unsecured revolving facility had $233.2 million drawn and $210.0 million of unused capacity after letters of credit. It matures in December 2014, with a one-year extension option. The company reported compliance with its financial covenants at year-end. Debt was 44% fixed-rate and 56% variable-rate as classified in the filing; weighted average year-end rates were 5.6% for fixed-rate and 4.6% for variable-rate debt. The latter category includes some debt effectively fixed or subject to reset features.
Material changes versus the prior year
- Revenue excluding affiliate reimbursements rose about 29%, and member-attributable net income rose about 88%. Results were boosted by the CPA:14/CPA:16 merger, including $52.5 million of incentive, termination and subordinated disposition revenue, and by higher investment activity. The $52.5 million is a material, transaction-related item rather than a recurring fee stream.
- Investment Management asset-management revenue fell $9.4 million to $66.8 million, mainly following property sales and the revised CPA:16 fee arrangement. Structuring revenue increased $2.3 million to $46.8 million.
- Real Estate Ownership lease revenue rose $10.3 million to $70.2 million, primarily from acquired properties and recent investments. Owned-portfolio occupancy improved from 89% to approximately 93%.
- Operating cash flow declined $6.3 million, partly because cash asset-management fees from CPA:14 and CPA:16 were reduced or ended after the merger and restructuring. Adjusted operating cash flow increased, reflecting distributions and merger-related cash receipts, among other factors.
- Debt increased by $192.4 million year over year, including higher revolver borrowings and debt associated with acquired properties. The company entered a new $450 million revolver in December 2011, replacing its prior facilities.
Outlook, risks and unusual items
- Outlook: Management said it expected to continue pursuing investment opportunities in the U.S. and internationally in the near term, subject to fundraising, financing availability and competition. It anticipated renewing a majority of the remaining 2012-expiring leases, while noting renewed rents could be lower or lease terms shorter. The filing provides no specific earnings or AFFO guidance.
- CPA:15 proposed merger: Announced February 17, 2012, after year-end. Consideration was $1.25 cash plus 0.2326 W. P. Carey shares per CPA:15 share, estimated at approximately $151.8 million cash and 28.2 million shares. Completion was subject to shareholder approvals and other conditions; management expected a possible closing by the third quarter of 2012 but gave no assurance. A $175 million term-loan commitment was obtained for the cash component, subject to conditions. The company also proposed an internal REIT reorganization in connection with the transaction.
- Leadership: Founder and Chairman Wm. Polk Carey died on January 2, 2012; the board elected Benjamin H. Griswold IV non-executive chairman on January 4.
- Lease and tenant exposure: Approximately 31% of owned-portfolio annualized contractual minimum base rent was scheduled to expire within three years, including 13% in 2012. The five largest tenants/guarantors accounted for approximately 33% of 2011 lease revenue. Management cited tenant distress and bankruptcies, uncertain European conditions, refinancing risk, and potential effects on distributions.
- Impairments and accounting item: W. P. Carey recorded approximately $10.7 million of impairment charges in 2011; managed REITs recorded an estimated $61.7 million, of which the company’s proportionate share was approximately $7.8 million. A fourth-quarter out-of-period adjustment had a stated net income effect of $0.2 million and changed balance-sheet classifications; the filing said it was not material to prior periods or the adjustment period.
- Other risks: Foreign-exchange movements, particularly the Euro, can affect results and asset values. The filing also identifies environmental liabilities, real-estate valuation and liquidity risks, and dependence on continued capital raising and advisory agreements. No material litigation was reported; the auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2011 earnings and AFFO growth came from the nonrecurring CPA:14/CPA:16 merger, and how comparable non-GAAP measures are defined.
- The proposed CPA:15 merger’s final approvals, financing, share issuance, assumed debt and resulting leverage, as well as completion of the planned REIT reorganization.
- Lease renewals and tenant outcomes for the 13% of owned-portfolio rent due to expire in 2012, and the status of properties contracted for sale after year-end.
- Cash available for distributions: GAAP operating cash flow was below cash distributions paid, while adjusted operating cash flow was above distributions declared; assess the adjustments and sustainability of both measures.
- Debt maturities, covenant headroom and refinancing needs, especially the 2014 revolver maturity and scheduled mortgage balloon payments.
- Performance and valuation of CPA:16, which represented approximately 23% of company assets at year-end, and the impact of Euro exposure, impairments and tenant credit changes.