W. P. Carey Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. W. P. Carey is a global net-lease REIT and advisor to non-traded real estate investment trusts (REITs), with Real Estate Ownership and Investment Management segments.
Business context and portfolio
- At year-end, the company owned or managed 1,021 properties in 21 countries; its owned portfolio comprised 418 net-leased properties and two self-storage properties, covering 39.5 million square feet and 98.9% occupied.
- The owned portfolio had 128 tenants, an 8.1-year average remaining lease term, and 31% investment-grade tenants. Based on annualized minimum rent, 91% of leases had rent adjustments: 67% tied to CPI or similar indices and 24% fixed.
- On January 31, 2014, after year-end, W. P. Carey completed its merger with CPA:16 Global. The merger and related financing materially expanded the company and are not reflected as a full year of operations in reported 2013 results.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $489.9 million | $352.4 million |
| Net income attributable to W. P. Carey | $98.9 million | $62.1 million |
| Income from continuing operations attributable to W. P. Carey | $84.6 million | $87.6 million |
| Diluted EPS | $1.41 | $1.28 |
| Diluted continuing-operations EPS | $1.21 | $1.80 |
| Net cash provided by operating activities | $207.9 million | $80.6 million |
| Funds from operations, as adjusted (AFFO; non-GAAP) | $294.2 million | $180.6 million |
| Total assets at year-end | $4.68 billion | $4.61 billion |
| Long-term obligations | $2.07 billion | $1.97 billion |
- Revenue and operating cash flow rose substantially, mainly because 2013 included a full year of properties acquired in the September 2012 CPA:15 merger. Lease revenue increased to $299.6 million from $119.3 million. Reported total revenue includes reimbursed affiliate costs, which are largely offset by corresponding expenses.
- Continuing-operations income attributable to the company declined despite higher revenue, with increased depreciation, amortization and interest expense among the factors. Net income growth also benefited from discontinued-operations gains, particularly a $39.6 million gain on the sale of 19 self-storage properties; that gain included $24.4 million attributable to noncontrolling interests.
- Investment Management net income attributable to W. P. Carey fell to $4.4 million from $17.2 million, while AFFO for that segment rose to $30.5 million from $21.1 million. Revenue from asset management declined, including the loss of fees from CPA:15 following its merger into W. P. Carey.
- Cash distributions paid were $220.4 million, compared with $207.9 million of operating cash flow. The filing reports $3.50 per share declared for 2013, including a $0.11 special distribution paid in January 2014; the fourth-quarter regular and special distributions were also paid in January.
- Year-end debt was $2.07 billion, with 55% fixed-rate and 45% variable-rate debt; weighted-average year-end rates were 5.3% and 2.7%, respectively. Management reported compliance with credit-facility covenants at year-end.
- Year-end cash and cash equivalents were $117.5 million, including $41.2 million held in foreign subsidiaries. Unused capacity under the then-existing revolver was $346.8 million, excluding letters of credit.
Material changes, outlook and notable items
- CPA:16 Global’s January 2014 merger consideration was approximately $1.8 billion, primarily W. P. Carey shares. The company assumed approximately $1.7 billion of CPA:16 debt. Management estimated that, giving effect to the merger, debt would be approximately $3.8 billion and net-debt-to-EBITDA leverage approximately 7.7x, versus 6.7x before the merger.
- In January 2014, W. P. Carey replaced its prior credit facilities with a $1.25 billion unsecured senior credit facility: a $1.0 billion revolver and a $250 million term loan. It drew $765 million to refinance prior facilities and CPA:16’s line of credit. The company received investment-grade ratings of BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
- For 2014, management projected that the CPA:16 merger would add approximately $324.6 million in annual lease revenue and $317.5 million in property-level cash flow, alongside higher interest expense and lower asset-management and equity-investment income. These were estimates, not formal earnings guidance.
- Management expected to use the new credit facility to address $216.1 million of mortgage balloon payments due within 12 months, as well as to fund operating needs and investments. The filing also identifies international mortgage balloon payments in 2014, 2015 and 2018; refinancing on favorable terms is not assured.
- During 2013, the company acquired seven properties for $347.1 million and sold 28 domestic properties and an equity investment for total proceeds of $175.6 million. It recognized a $4.7 million impairment on a French property after its tenant vacated and $15.4 million of impairment on its special member interest in CPA:16’s operating partnership.
- A German real estate transfer tax tied to the Hellweg 2 restructuring resulted in W. P. Carey’s approximately $8.4 million share of expense. The investee intended to appeal the assessment, with no assurance of success. A fire damaged a French property with a year-end carrying value of $18.7 million; the loss was still under investigation, and management expected insurance to cover the damages.
- A purported class action challenging the CPA:16 merger alleged unfairness, fiduciary-duty breaches and inadequate disclosure. The court denied plaintiffs’ request to block the stockholder vote; the company said it considered the claims without merit and was defending the case. Management did not expect other ordinary-course claims to have a material adverse effect.
- Key risks include lease expirations: approximately 28% of rent was associated with leases due to expire within five years. On a combined basis with CPA:16, the five largest tenants or guarantors represented approximately 26% of 2013 lease revenue. The filing also highlights currency, interest-rate, tenant-credit, refinancing, environmental, fundraising and REIT-qualification risks, plus uncertainty over proposed lease-accounting changes.
Most important facts for investors to verify
- Post-merger debt, leverage, refinancing progress and covenant headroom, including repayment of upcoming mortgage maturities.
- Whether merger-related rent and cash-flow contributions meet management’s estimates after accounting for added interest expense and other costs.
- Distribution coverage using recurring cash generation; distinguish GAAP earnings, AFFO and operating cash flow, and confirm the treatment and timing of declared distributions.
- Tenant credit quality, concentration and renewal or re-leasing outcomes for leases expiring over the next five years.
- Performance and renewal status of advisory agreements, including CPA:17’s and CPA:18’s and CWI’s agreements scheduled to expire in 2014 unless renewed.
- Resolution of the CPA:16 merger litigation, the German tax appeal and the French fire claim, together with any subsequent impairment or asset-sale developments.
The filing’s financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.