Business context and reporting period
W. P. Carey Inc. is a REIT investing in commercial real estate, principally through long-term net leases, and advising non-traded REITs. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. Its prior-year comparisons are materially affected by the September 2012 CPA:15 merger; 2013 includes the acquired portfolio for the full periods, while 2012 does not.
At quarter-end, W. P. Carey owned full or partial interests in 421 properties, with approximately 99.0% occupancy, and managed REITs holding interests in more than 693 net-leased properties. The company reported two segments: Real Estate Ownership and Investment Management.
Financial and operating metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $137.9 million | $69.3 million | $367.4 million | $202.9 million |
| Net income attributable to W. P. Carey | $18.5 million | $2.6 million | $75.9 million | $46.7 million |
| Diluted EPS | $0.27 | $0.06 | $1.08 | $1.12 |
| Income from continuing operations attributable to W. P. Carey | $18.0 million | $9.0 million | $76.9 million | $60.9 million |
| AFFO, a non-GAAP measure | $71.1 million | $33.9 million | $216.0 million | $101.8 million |
Lease revenue was $77.6 million in Q3 and $227.9 million for the first nine months. Reported revenue includes reimbursed affiliate costs, which are offset by corresponding expenses. The filing does not provide a single company-wide operating margin measure; interpretation of net margins is also affected by the merger and acquisition-related accounting items.
Net cash provided by operating activities was $146.3 million for the first nine months, versus $31.7 million a year earlier. Investing activities used $159.3 million, compared with providing $82.6 million; financing activities used $19.0 million, compared with providing $93.2 million. Cash and cash equivalents fell to $93.6 million from $123.9 million at year-end 2012.
Total assets were $4.73 billion and total equity was $2.19 billion at September 30. Debt carrying value was $2.18 billion: $1.69 billion of non-recourse debt and $490 million under the senior credit facility and unsecured term loan. Debt was 60% fixed-rate and 40% variable-rate as classified in the filing; management said approximately 87% of long-term debt was fixed, hedged, capped, or subject to a future fixed-rate reset. Cash resources included $93.6 million cash and disclosed unused Revolver capacity of $363.5 million, excluding letters of credit. The filing also reports $556.6 million of availability under the Senior Credit Facility; these figures are presented separately in the filing.
The declared quarterly distribution was $0.86 per share, or $3.44 annualized. Cash distributions paid during the nine months were $161.0 million.
Material changes versus the prior comparable period
- Revenue growth principally reflected the CPA:15 acquired properties: lease revenues increased by $61.5 million in Q3 and $178.6 million for the nine months. The acquisition also raised depreciation, property costs, and interest expense.
- Q3 net income attributable to W. P. Carey rose to $18.5 million from $2.6 million. Nine-month diluted EPS declined to $1.08 from $1.12 despite higher net income, alongside a substantial increase in weighted-average diluted shares following the merger.
- Investment Management revenue fell $20.8 million for the nine months, mainly because asset-management fees from CPA:15 ceased after it merged into W. P. Carey. Structuring revenue increased, partly offsetting lower asset-management and dealer-manager fees.
- Operating cash flow increased substantially, primarily from the acquired properties. The company also invested $249.3 million in real estate and paid $161.0 million in shareholder distributions.
- At September 30, 2013, W. P. Carey’s portfolio occupancy was 99.0%, compared with 98.7% at December 31, 2012.
Outlook, risks, contingencies, and unusual items
- Proposed CPA:16 merger: The stock-for-stock transaction remained subject to SEC review, approvals by both companies’ stockholders, and other closing conditions. Management expected a first-quarter 2014 closing, with no assurance. Based on October 31 assumptions, the company estimated issuing approximately 28.2 million shares, valued at approximately $1.9 billion. W. P. Carey agreed to waive certain back-end fees upon closing.
- Debt maturities and liquidity: The $300 million unsecured term loan matures in July 2014, and the $190 million outstanding under the Senior Credit Facility, including its $175 million term loan, is scheduled to mature in 2014 unless extended. The filing lists $276.2 million of mortgage balloon payments due over the next 12 months and total scheduled debt principal of $894.3 million in 2014. Management expected to use operating cash, available credit, cash reserves, refinancing, or capital issuance as needed. Refinancing on favorable terms is not assured.
- Merger-related risk: The pending merger could constrain certain business actions and affect tenant decisions. If it does not close, costs already incurred may not be recoverable; termination payments may apply in specified circumstances.
- Impairments and sales: The company recorded a $1.4 million impairment on a substantially vacant French property and $5.0 million of impairment charges in discontinued operations for the nine months. A hotel sale closed in October 2013, and 19 jointly owned self-storage properties were sold in November 2013. A remaining contracted property sale was not assured.
- Accounting adjustment: A $2.3 million charge was recorded in Q3 2013 for an out-of-period tax-accounting error relating to a German equity-method investment. The company said the error had overstated 2012 income and understated Q3 2013 income, and concluded it was not material to either period.
- Other exposures: Risks include tenant credit and industry concentrations, foreign-currency movements, interest rates, and counterparty exposure on derivatives. The filing notes that stronger U.S. dollar exchange rates can adversely affect foreign operations. Management stated the company was in compliance with its credit covenants and was not involved in material litigation.
- Management outlook: Management believed operating cash flows and equity distributions would be sufficient for normal liquidity needs, with cash, borrowing capacity, mortgage financing, and possible equity or debt offerings as additional funding sources. The filing gives no specific earnings or AFFO guidance.
Important facts for investors to verify
- Whether the CPA:16 merger received required approvals, closed on the expected timetable, and resulted in share issuance and dilution consistent with estimates.
- How the company refinanced or repaid 2014 corporate and property-level maturities, including mortgage balloon payments, and whether credit availability remained adequate.
- Whether operating cash flow and recurring property income support distributions, considering that reported AFFO is non-GAAP and includes management-defined adjustments.
- How much reported growth reflects the CPA:15 merger and other acquisitions versus same-property performance; review the related increases in interest, depreciation, and amortization.
- Whether property sales, impairments, foreign-exchange exposure, and tenant or portfolio concentrations changed materially after quarter-end.