W. P. Carey & Co. LLC — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011, compared with the three months ended March 31, 2010, unless otherwise noted. The filing identifies the registrant as W. P. Carey & Co. LLC.
Business context
The company provides long-term financing through sale-leasebacks and build-to-suit transactions, owns and leases commercial real estate, and advises affiliated non-traded REITs. At quarter-end, it managed 970 properties; its owned portfolio included interests in 162 properties, with approximately 14 million square feet and 90% occupancy. The REIT portfolios collectively held all or part of more than 840 properties, with approximately 98% occupancy. CWI had no properties at March 31.
Financial results and position
| Metric | Q1 2011 / March 31, 2011 | Comparable period / December 31, 2010 |
|---|---|---|
| Total revenue | $77.5 million, including $17.7 million of reimbursed affiliate costs | $62.3 million, including $14.6 million reimbursed costs |
| Revenue excluding reimbursed costs | $59.8 million | $47.7 million |
| Net income attributable to W. P. Carey members | $23.3 million | $14.4 million |
| Continuing income attributable to members | $22.4 million | $20.5 million |
| Basic and diluted EPS | $0.58 | $0.36 |
| Operating cash flow | $6.7 million | $13.6 million |
| Cash and cash equivalents | $34.1 million | $64.7 million |
| Total assets / total equity | $1,144.2 million / $675.0 million | $1,172.3 million / $665.5 million |
| Non-recourse debt / line of credit | $251.0 million / $121.8 million | $255.2 million / $141.8 million |
| Declared distribution per share | $0.512 | $0.504 |
Operating cash flow was below net income; management attributed the year-over-year decrease largely to changes in deferred acquisition-fee collection timing, more management fees received in REIT shares, and lower prior-year investment volume. Investing cash flow was $9.1 million, while financing activities used $46.9 million, including $20.3 million of shareholder distributions and $7.3 million of scheduled mortgage principal payments.
Debt totaled approximately $372.7 million at March 31. The filing classifies 62% as variable-rate debt; the reported weighted average rate was 3.3% on variable-rate debt and 5.9% on fixed-rate debt. The $250 million unsecured revolver had $121.8 million outstanding and $128.3 million of stated unused capacity, net of letters of credit. The company reported compliance with its credit covenants.
Material changes and unusual items
- Revenue excluding reimbursed costs rose approximately 25% year over year, driven mainly by structuring revenue, which increased to $15.9 million from $6.8 million. The company structured $344.8 million of investments for CPA REITs, versus $149.1 million a year earlier.
- Member-attributable net income increased to $23.3 million from $14.4 million. Investment management member income rose to $13.2 million from $7.8 million. Real estate ownership member income was $10.2 million versus $6.6 million, with the comparison benefiting from discontinued-property impairments recorded in 2010.
- Income from equity investments in real estate and the REITs fell to $6.2 million from $9.1 million. The comparison included a prior-year property-sale gain and lower results from a venture that recorded an $8.6 million impairment related to a potential sale; W. P. Carey also recorded a $0.2 million impairment on its venture interest.
- On May 2, 2011, after quarter-end, CPA:14 merged into a subsidiary of CPA:16–Global. W. P. Carey acquired three properties for approximately $32.1 million and assumed approximately $64.7 million of debt. It also invested approximately $121 million in CPA:16–Global shares, funded in part with a $121.4 million draw on its existing line of credit. Following the transaction, it held approximately 17.3% of CPA:16–Global.
- The merger generated a $31.2 million advisory-agreement termination fee and $21.3 million of subordinated disposition revenue, both to be recorded in Q2 2011. The amended CPA:16–Global advisory agreement reduced the asset-management fee from 1% to 0.5% of property value, among other changes.
- Management estimated annualized pro forma effects from the merger and property purchases, including $11.3 million of additional dividends and $8.8 million of lease revenue, offset by lower fee revenue and approximately $5.9 million of additional interest expense. These are estimates, not guidance, and are subject to uncertainty.
Outlook, risks and contingencies
Management described economic and financing conditions as improving modestly, while emphasizing that recovery remained slow and investment competition was increasing. It expected investment opportunities to continue in the near term, with international transactions remaining a significant but variable share. No specific company-wide earnings or revenue guidance was provided.
- Tenant defaults, bankruptcies, vacancies, lease renewals at lower rents, and scheduled lease expirations could reduce rental income and property values. About 9% of owned-portfolio annualized minimum rent was scheduled to expire within 12 months; owned occupancy was 90% at quarter-end.
- Foreign exchange is a significant exposure: Euro-denominated investments represented approximately 12% of W. P. Carey’s annualized minimum base rent. A stronger U.S. dollar could adversely affect results and asset values; the company had not entered into foreign-currency forward contracts by the report date.
- Interest-rate risk remains relevant. Management estimated that a 1% change in rates would change annual interest expense on unhedged variable-rate debt by approximately $1.3 million. A $22.0 million mortgage balloon maturity was expected within the next 12 months.
- The company reported no material litigation and did not expect pending ordinary-course claims or environmental matters to have a material adverse effect. Tax years 2007–2011 remained open to examination in major jurisdictions.
- Management stated that disclosure controls were effective at a reasonable level of assurance and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q1 structuring revenue and investment volumes are repeatable, and how the CPA:14 merger changes ongoing advisory fees, distributions, and earnings.
- The cash and borrowing impact of the May 2 transactions, including the subsequent revolver draw and the company’s remaining liquidity after funding the investment.
- Whether operating cash flow can support distributions and scheduled debt service, given Q1 operating cash flow of $6.7 million and distributions paid of $20.3 million.
- Tenant credit, upcoming lease expirations, occupancy trends, and the potential effects of the Symphony IRI venture impairment and other property valuation changes.
- Exposure to variable interest rates, near-term debt maturities, and foreign-currency movements, particularly the Euro.