Business context and reporting period
W. P. Carey & Co. LLC’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010, with comparisons to 2009. The company provides investment-management services to four affiliated non-listed REITs and owns commercial real estate, primarily triple-net leased properties. At quarter-end, it owned or managed 919 properties; its own portfolio comprised interests in 164 properties and had 91% occupancy.
Unless otherwise noted, financial amounts below are in U.S. dollars. The financial statements report amounts in thousands.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue, including reimbursed affiliate costs | $59.0 million | $59.2 million | $191.9 million | $170.0 million |
| Revenue, excluding reimbursed affiliate costs | $43.0 million | $45.7 million | $145.6 million | $136.3 million |
| Net income attributable to W. P. Carey members | $16.3 million | $13.4 million | $54.2 million | $46.0 million |
| Diluted earnings per share | $0.41 | $0.34 | $1.36 | $1.15 |
- Revenue mix and profitability: Nine-month revenue growth excluding reimbursed costs was about 6.9%; quarterly revenue on that basis declined about 5.8%. Reimbursed costs are matched by expenses and do not contribute to operating results. Nine-month income from continuing operations attributable to members was $59.0 million, versus $46.2 million. The filing does not provide a single consolidated operating-margin measure.
- Cash flow: Nine-month operating cash flow was $52.3 million, up from $49.4 million. Investing activities used $38.6 million, while financing activities provided $14.8 million. Cash increased by $27.8 million to $46.3 million.
- Assets and equity: At September 30, total assets were $1.158 billion, compared with $1.093 billion at December 31, 2009. Total equity was $664.0 million, including $624.1 million attributable to W. P. Carey members.
- Debt and liquidity: Non-recourse debt was $254.1 million and the revolving credit-line balance was $141.8 million, for total reported debt of $395.9 million. Cash was $46.3 million, and reported unused credit capacity was $108.3 million after outstanding letters of credit. The $250 million revolver matures in June 2011; the company could seek a one-year extension subject to conditions. The company was in compliance with its credit covenants.
- Debt characteristics: The filing classifies 64% of debt as variable-rate and 36% as fixed-rate; some debt classified as variable was swapped, capped, or subject to future rate resets. The weighted-average rates were 3.1% for variable-rate debt and 6.1% for fixed-rate debt. Nine-month interest expense was $11.8 million.
- Distributions: The quarterly distribution declared was $0.508 per share, versus $0.500 a year earlier; management described this as $2.03 annualized. Nine-month declared distributions were $1.518 per share. Cash distributions paid during the nine months totaled $72.6 million, including an $11.8 million special distribution paid in January.
Material changes versus the prior comparable periods
- Member-attributable net income rose 22% in Q3 and 18% for the nine-month period. Management attributed stronger investment-management results mainly to lower impairment charges at the CPA REITs; nine-month results also benefited from higher structured investment volume.
- Investment-management revenue increased for the nine-month period, but declined in Q3. Structuring revenue was $0.7 million in Q3 versus $5.5 million, while nine-month structuring revenue rose to $20.6 million from $16.3 million. Investments structured for the CPA REITs totaled $452.9 million year to date, versus $355.4 million.
- Real-estate-ownership revenue increased to $61.3 million for nine months from $58.2 million, but member-attributable segment income fell to $22.3 million from $28.3 million. The decline primarily reflected property-sale impairments and weaker discontinued-operations results.
- Continuing-operations impairment charges were $2.7 million for nine months, versus $0.9 million. Discontinued-operations impairment charges were $5.9 million, and the discontinued-operations loss was $4.8 million, versus a $0.1 million loss in 2009. The company sold six domestic properties for $14.6 million net of selling costs and recorded a $0.5 million net gain, apart from related impairment charges.
- Debt increased from $326.3 million at year-end 2009 to $395.9 million, principally reflecting new mortgage financing and higher revolver borrowings. Cash rose from $18.5 million to $46.3 million.
- Own-portfolio occupancy fell from 94% at December 31, 2009 to 91% at September 30, 2010, mainly after a tenant vacated in April.
Outlook, management commentary, and risks
- Management reported modest economic and financing-market improvement, higher year-to-date investment activity, and improved fundraising conditions, but stressed that recovery remained weak and uncertain. It gave no quantified earnings or revenue guidance.
- The company structured $452.9 million of investments for the CPA REITs and made $75.3 million of investments for its own portfolio during the first nine months. International transactions represented 48% of total investment volume. Management cited increased competition as a potential constraint on investment returns.
- CPA REIT fundraising included $438.7 million raised for CPA:17–Global during the first nine months and more than $1.2 billion raised since fundraising began. A possible follow-on offering of up to $1 billion was subject to successful registration and fundraising. Carey Watermark’s offering registration became effective in September; it had no investments or significant operations at quarter-end.
- Management identified tenant credit and defaults, lease renewals and expirations, property values, interest rates, foreign exchange, and fundraising and transaction volumes as important risks. Eight percent of annualized contractual lease revenue in the company’s own portfolio was scheduled to expire in the next 12 months. Management cautioned that renewed rents could be lower and lease terms shorter.
- Euro exposure is material: Euro-denominated investments represented about 11% of the company’s annualized contractual lease revenue and 29% of CPA REIT aggregate lease revenue. The stronger U.S. dollar had adversely affected the balance sheet and could weigh on future results.
- Expected cash requirements over the next 12 months included $27.3 million of mortgage balloon payments, scheduled principal and distributions. The revolver’s June 2011 maturity adds a refinancing or extension consideration.
- The filing reported no material litigation and stated that pending ordinary-course claims were not expected to materially affect financial position or results. Management said disclosure controls were effective as of September 30, 2010, and there were no material changes in internal control over financial reporting.
- CEO Trevor P. Bond was elected effective September 16, 2010, following Gordon F. DuGan’s resignation in July. The filing also noted a proposed lease-accounting change whose potential business impact could not yet be determined.
Important facts for investors to verify
- Reconcile operating cash generation with distributions paid, investment spending, and the use of borrowings; assess the sustainability of the distribution relative to cash flows.
- Review the June 2011 revolver maturity, extension conditions, available capacity, covenant headroom, and the $27.3 million of near-term mortgage balloon payments.
- Track tenant retention, occupancy, upcoming lease expirations, and any additional property or equity-investment impairments.
- Assess how CPA REIT impairment levels, estimated asset valuations, one-time gains, and fundraising volumes affect recurring investment-management earnings.
- Evaluate exposure to Euro movements, interest-rate changes, and tenant or property-sector concentrations; the filing cites geographic and tenant-industry concentrations in the directly owned portfolio.
- Confirm the progress and terms of the CPA:17–Global and Carey Watermark offerings, including whether anticipated proceeds and cost reimbursements are realized.