W. P. Carey & Co. LLC — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. The filing is for W. P. Carey & Co. LLC, not W. P. Carey Inc. It reports the full year, with unaudited quarterly data also included.
Business context
The company combines investment management—advising affiliated non-traded CPA REITs—with ownership of commercial real estate, primarily single-tenant, triple-net-leased properties. At year-end it reported 955 properties owned and managed; its owned portfolio included full or partial interests in 164 properties, approximately 14 million pro rata square feet, and about 89% occupancy.
Financial results and liquidity
| Metric | FY 2010 | FY 2009 | Change / context |
|---|---|---|---|
| Total revenue | $273.9 million | $232.4 million | Up 17.9%; includes reimbursed affiliate costs |
| Revenue excluding reimbursed affiliate costs | $213.9 million | $184.8 million | Up 15.7% |
| Net income attributable to W. P. Carey members | $74.0 million | $69.0 million | Up 7.2% |
| Continuing-operations income attributable to members | $78.6 million | $63.8 million | Up 23.2% |
| Basic and diluted EPS | $1.86 | $1.74 basic; $1.74 diluted | Continuing-operations EPS was $1.98 |
| Cash from operating activities | $86.4 million | $74.5 million | Up 15.9% |
| Distributions paid | $92.6 million | $78.6 million | Exceeded operating cash flow by about $6.2 million |
Investment management income attributable to members rose to $50.7 million from $29.3 million, led by higher structuring revenue as CPA REIT investment volume nearly doubled to $1.0 billion from $507.7 million. Real estate ownership income attributable to members fell to $23.3 million from $39.7 million, principally reflecting higher impairments and lower discontinued-operations results. A directly comparable consolidated operating-margin figure is not clearly provided.
At December 31, 2010, total assets were $1.172 billion and net investments in real estate were $947.0 million. Debt was $397.0 million: $255.2 million of non-recourse debt and $141.8 million drawn on the revolving credit facility. Cash was $64.7 million; stated unused credit capacity was $108.3 million, net of letters of credit. The $250 million unsecured facility matured in June 2011, and management intended to extend it for one year. The company was in compliance with its covenants at year-end.
Quarterly distributions declared rose from $0.504 per share in Q1 to $0.510 in Q4; total declared for 2010 was $2.03 per share. A $0.30-per-share special distribution paid in January 2010 related to 2009 taxable income. The filing does not establish that operating cash flow alone covered distributions; management also cited excess distributions from equity investments, cash, and borrowing capacity as liquidity sources.
Material changes and unusual items
- Investment management revenue from structuring transactions increased $21.3 million to $44.5 million. Asset management revenue was nearly flat at $76.2 million; wholesaling revenue increased to $11.1 million.
- Owned-portfolio lease revenue increased modestly to $63.5 million, while continuing-operations impairment charges rose to $9.5 million from $3.5 million. Total impairment charges, including discontinued operations and equity investments, were $16.8 million versus $10.4 million.
- Equity income from CPA REIT investments was $14.9 million versus a $0.3 million loss in 2009. CPA REIT impairment charges fell to an estimated $40.7 million from $170.0 million; affiliated REIT deconsolidations and debt-extinguishment gains also affected their results.
- Cash increased to $64.7 million from $18.5 million. Debt increased to $397.0 million from $326.3 million, and the variable-rate share rose to 63% from 55% (including debt hedged or subject to future rate resets, as described in the filing).
- The company sold seven properties in 2010 for $14.6 million net and recorded a $0.5 million net gain, alongside impairment charges associated with assets sold or intended for sale. Discontinued operations generated a $4.6 million loss, compared with $5.2 million income in 2009.
Outlook, risks and contingencies
Management described modest improvement in the economy, financing availability, fundraising and transaction activity, but characterized the recovery as weak and uncertain. It expected investment opportunities to continue in 2011, including in the U.S. and Europe, while warning that competition and compressed capitalization rates could pressure returns. No quantitative company earnings or distribution guidance was provided.
- Proposed affiliate merger: CPA:14 and CPA:16–Global agreed to a merger, expected by management in Q2 2011 subject to shareholder approval and other conditions. W. P. Carey expected $52.5 million of termination and subordinated disposition revenue if completed, and agreed to buy three properties for $32.1 million plus assumption of about $64.7 million of debt. The transaction and fees were contingent, not completed at the filing date.
- Merger-related exposure: If specified financing or approval conditions failed, the company could owe expenses up to $5 million for CPA:16–Global and $4 million for CPA:14. It also agreed to buy enough CPA:16–Global shares to help fund cash elections if the merger funding proved insufficient. Cash required for shareholder elections could be substantial.
- Near-term maturities: The revolving line’s $141.8 million balance was due in June 2011; scheduled 2011 debt principal payments were $176.4 million including that line. Management expected to extend the line and cited cash and financing alternatives. A subsequent $90 million loan to CPA:17–Global, funded from the line and due by March 11, 2011, was disclosed as a subsequent event.
- Property and tenant risks: Management highlighted tenant credit/default risk, lease expirations, re-leasing costs, property values and impairments. About 32% of owned-portfolio annualized contractual rent was associated with leases expiring within three years; 9% was scheduled to expire within twelve months as of the filing date. The five largest tenants/guarantors accounted for about 32% of 2010 lease revenue.
- Market and structural risks: Euro weakness reduced translated values and revenue; the company generally did not hedge foreign currency exposure. Interest-rate changes, refinancing and balloon payments, potential lease-accounting changes, environmental liabilities, and possible legislation affecting partnership tax status were also identified risks. No material litigation was reported; ordinary-course claims were not expected to have a material adverse effect.
Key investor verification points
- Reconcile recurring cash generation and distributions, including the role of noncash management fees, deferred acquisition revenue, and distributions from equity investments.
- Confirm the 2011 revolving-credit extension, covenant headroom, and funding for debt maturities and the subsequent $90 million affiliate loan.
- Track approval, financing, cash-election levels and completion of the CPA:14/CPA:16–Global merger, including W. P. Carey’s fees, share-purchase commitment and property acquisition.
- Review tenant concentration, lease rollover exposure, occupancy changes and the assumptions supporting 2010 impairment valuations.
- Assess sensitivity to Euro exchange rates, interest rates and future refinancing availability; compare subsequent results with management’s qualitative 2011 expectations.