W. P. Carey Inc. quarterly report, Q1 FY2013

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W. P. Carey Inc. — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013, unless otherwise noted. W. P. Carey is a REIT focused on net-lease real estate and also earns fees as advisor to publicly traded, non-listed REITs. The September 2012 CPA:15 merger substantially expanded the owned-property business, making year-over-year comparisons less like-for-like.

Financial and operating results

  • Revenue: Total revenue was $113.4 million, versus $68.3 million in Q1 2012. Excluding reimbursed affiliate costs, revenue was $101.4 million versus $49.6 million. Lease revenue rose to $75.3 million from $16.8 million, primarily reflecting properties acquired in the merger.
  • Profit: Net income attributable to W. P. Carey was $14.2 million, versus $12.3 million. Income from continuing operations attributable to the company was $15.2 million, versus $18.1 million; basic and diluted EPS were $0.20, compared with $0.30. The filing attributes the lower continuing-operations EPS in part to the larger share count following the merger. Net income included a $1.0 million loss from discontinued operations.
  • Non-GAAP measure: AFFO was $72.3 million, versus $40.1 million. Management cited income from merger-acquired properties as the main driver. AFFO is a company-defined supplemental measure, not a substitute for GAAP income or operating cash flow; certain adjustments were significant and recurring after the merger.
  • Cash flow: Operating activities provided $17.5 million, compared with $4.1 million used in Q1 2012. Investing activities used $27.7 million; financing activities used $0.9 million. Cash declined by $12.3 million to $111.6 million. Cash distributions paid were $45.7 million; $57.1 million of first-quarter distributions declared were paid on April 15.
  • Margins: The filing does not provide a clear comparable operating-margin measure; total expenses and revenue were affected by reimbursed costs, the merger, and acquisition-related amortization.
  • Debt and liquidity: Non-recourse debt and the senior credit facility totaled $1.993 billion carrying value. About 66% was classified as fixed-rate and 34% as variable-rate; the weighted-average rates were 5.5% and 3.3%, respectively. Cash was $111.6 million, including $68.0 million held by foreign subsidiaries that could be costly or restricted to repatriate. The $625 million credit facility had $321.6 million of unused capacity after outstanding letters of credit. The company reported compliance with its credit covenants.
  • Portfolio: W. P. Carey reported interests in 422 properties, approximately 39.0 million square feet, and 98.8% occupancy. The Managed REITs reported 703 net-leased properties and approximately 98.4% average occupancy.

Material changes versus Q1 2012

  • The CPA:15 merger drove most of the increase in rental and lease revenue, but also increased depreciation and amortization and interest expense. Interest expense rose to $26.9 million from $7.3 million; $18.8 million of the increase related to mortgage debt assumed in the merger.
  • Investment Management reported a $2.5 million attributable loss, compared with $3.2 million of income. Lower asset-management revenue followed the merger’s termination of CPA:15 fees; dealer-manager revenue also fell after CPA:17’s follow-on offering ended in January 2013. Higher stock-based compensation contributed to the segment loss.
  • Real Estate Ownership attributable income increased to $16.7 million from $9.1 million, and segment AFFO rose to $63.0 million from $28.8 million, primarily due to merger-acquired properties.
  • The company recognized $3.3 million of property impairment charges and a $2.7 million other-than-temporary impairment on its special member interest in CPA:16’s operating partnership. Foreign-currency translation reduced comprehensive income.

Outlook, risks, and notable items

  • Management outlook: No specific earnings or AFFO guidance is provided. Management believes operating cash flow and equity-investment distributions, together with cash, borrowing capacity, financing, and possible equity issuance, will meet normal recurring liquidity needs.
  • Distributions: In March, the quarterly dividend was increased 24% to $0.82 per share, or $3.28 annualized. Distributions declared exceeded the quarter’s cash distributions paid; review the company’s cash-generation and distribution sustainability.
  • Debt maturities: Scheduled debt principal payments were $672.3 million in 2014, including $298.0 million outstanding under the credit facility, which matures in December 2014 unless extended. International mortgage balloon payments of $143.4 million in 2014 and $158.9 million in 2015 are also identified; refinancing on favorable terms is not assured.
  • Related-party repurchase: The company recorded a $40.0 million obligation to repurchase shares from the Estate of Wm. Polk Carey. The repurchase was completed April 4, 2013, after quarter-end.
  • Managed REIT arrangements: Advisory agreements were scheduled to expire September 30, 2013 unless renewed under their terms. CPA:16’s independent committee was evaluating potential liquidity transactions; the filing cautions that no transaction is assured.
  • Other risks and contingencies: Key exposures include tenant credit and industry concentration, interest rates, foreign exchange, and access to refinancing. The company reported no material litigation and no material adverse effect expected from ordinary-course claims. It cautions that property impairment valuations rely on estimates and that properties may not sell at expected prices.

Investor verification priorities

  1. Assess how much reported growth and AFFO depends on the CPA:15 merger, and reconcile AFFO adjustments to GAAP results and operating cash flow.
  2. Review debt maturities, refinancing plans, covenant headroom, and the company’s ability to address the 2014–2015 balloon payments.
  3. Compare the $0.82 quarterly distribution with recurring cash available after debt service, capital needs, and noncontrolling-interest distributions.
  4. Confirm renewal or other developments concerning the Managed REIT advisory agreements and any CPA:16 liquidity transaction.
  5. Evaluate the recoverability and sale prospects of impaired or held-for-sale properties, and the impact of foreign exchange and tenant concentrations.