W. P. Carey Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
W. P. Carey is a REIT focused on long-term net leases and also earns fees advising publicly traded, non-listed REITs. It reports Real Estate Ownership and Investment Management segments. At June 30, its owned portfolio included interests in 423 properties, with approximately 98.9% occupancy. Results versus 2012 are substantially affected by the September 2012 CPA:15 merger, which added a large property portfolio and reduced the advisory fee base.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue, including affiliate cost reimbursements | $119.1 | $67.1 | $231.6 | $135.4 |
| Net income attributable to W. P. Carey | $43.2 | $31.8 | $57.3 | $44.1 |
| Diluted earnings per share | $0.62 | $0.77 | $0.81 | $1.06 |
| AFFO, management-defined non-GAAP measure | $72.6 | $27.8 | $144.9 | $67.9 |
Q2 revenue excluding reimbursed costs from affiliates was $103.6 million, versus $46.6 million a year earlier. Q2 income from continuing operations attributable to the company was $40.4 million; diluted continuing-operations EPS was $0.58, compared with $0.80 in Q2 2012. The filing does not present a single headline operating-margin measure.
- Cash flow, first half: Operating activities provided $71.5 million, investing activities used $98.6 million, and financing activities used $33.4 million. Cash declined by $61.1 million to $62.8 million.
- Debt and liquidity: Debt carrying value was $2.071 billion, comprising $1.686 billion of non-recourse debt and $385 million drawn under the Senior Credit Facility. Cash was $62.8 million, including $32.0 million held in foreign subsidiaries that may be costly or difficult to repatriate. Revolver unused capacity was reported as $237.6 million, after accounting for letters of credit.
- Balance sheet: Total assets were $4.635 billion and total liabilities were $2.415 billion at June 30, 2013.
- Distributions: The Q2 distribution declared was $0.84 per share, or $3.36 annualized. Cash distributions paid in the first half totaled $102.9 million.
Changes and notable items
- Q2 total revenue rose to $119.1 million from $67.1 million, principally because properties acquired in the CPA:15 merger contributed lease revenue. The same merger drove much of the increase in depreciation and interest expense.
- Net income attributable to W. P. Carey increased, but diluted EPS declined, in part amid a materially larger weighted-average share count following the merger and share issuance.
- Investment Management revenue fell to $34.6 million in Q2 from $43.8 million; the six-month segment result was a $2.5 million attributable loss versus $6.6 million of income in 2012. The CPA:15 merger ended related advisory fees, while lower CPA:17 offering activity reduced certain fees and reimbursements.
- First-half AFFO growth reflects the expanded real estate portfolio. AFFO is management-defined and is not a substitute for GAAP income or operating cash flow.
- A $19.5 million gain on the sale of the company’s U.S. Airways investment contributed to equity investment income. The filing also reported first-half impairment charges of $1.1 million in continuing operations and $3.9 million in discontinued operations, plus $5.5 million of impairment on the CPA:16 operating partnership special member interest.
Outlook, risks and contingencies
- No quantitative earnings or AFFO guidance is provided. Management said it expected cash from operations and equity distributions, together with cash reserves and available financing, to meet normal recurring liquidity needs.
- Management identified expected cash needs over the next 12 months including distributions, operating costs and scheduled mortgage principal payments; mortgage balloon payments were estimated at $214.1 million. International mortgage balloons include $145.5 million due in 2014 and $91.3 million in 2015. Refinancing on favorable terms, or at all, is not assured.
- After quarter-end, on July 31, 2013, the company drew a $300 million unsecured term loan, primarily to repay $250 million then outstanding on its revolver. The new loan matures in July 2014, subject to extension options.
- A proposed CPA:16 merger was announced July 25, 2013, subject to stockholder approvals and other conditions. Based on the stated exchange assumptions, the company estimated issuing about 27.2 million shares, valued at approximately $1.8 billion; closing was expected by Q1 2014, but timing was not assured. The merger’s go-shop period ran through August 24, 2013.
- Managed REIT advisory agreements were scheduled to expire September 30, 2013 unless renewed under their terms. Other key exposures include interest rates, foreign exchange, tenant credit and portfolio concentrations; the filing notes concentrations above 10% of annualized contractual base rent but does not specify them in the supplied text.
- The company reported no material litigation and said disclosure controls were effective at June 30, 2013. It cautioned that property valuations and impairment estimates involve significant judgment. A 2012 out-of-period adjustment increased income from operations by $1.8 million; management deemed it immaterial.
Investor verification priorities
- Confirm the CPA:16 merger’s approvals, final consideration, share dilution and closing status, and assess the resulting debt and portfolio exposure.
- Review refinancing progress and liquidity for 2014 maturities and the international mortgage balloons, including the terms and extensions of the post-quarter term loan.
- Assess whether advisory agreements were renewed and how the CPA:15 merger and offering activity affect recurring Investment Management fees.
- Reconcile AFFO growth with GAAP earnings, operating cash flow, distributions and the non-GAAP adjustments used by management.
- Verify tenant and geographic concentrations, foreign-cash accessibility, impairment assumptions and the status of properties held for sale.