W. P. Carey Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance sheet as of June 30, 2020. W. P. Carey is a REIT focused primarily on long-term, triple-net leases of commercial real estate in the U.S. and Northern and Western Europe. Its portfolio included 1,216 net-leased properties, 352 tenants, 98.9% occupancy and a 10.7-year weighted-average lease term.
Key financial metrics
| Metric | Q2 2020 | Six months 2020 |
|---|---|---|
| Total revenue | $290.5 million, down 4.8% year over year | $599.5 million, down 0.7% |
| Net income attributable to W. P. Carey | $105.3 million; diluted EPS $0.61 | $171.4 million; diluted EPS $0.99 |
| AFFO attributable to W. P. Carey (non-GAAP) | $197.9 million, down 5.1% | $414.5 million, up 1.0% |
| Cash provided by operating activities | Not separately reported for the quarter | $340.1 million, versus $328.2 million |
| Debt, net | $6.12 billion at June 30, 2020 |
Q2 lease revenue was $280.3 million, up from $269.8 million a year earlier, while investment management revenue fell to $6.9 million from $13.7 million. The filing does not provide a clear consolidated operating-margin measure. Interest expense was $52.2 million in Q2 and $104.7 million for the six months, down year over year. Six-month results included a $34.1 million income-tax benefit, compared with a $1.0 million tax provision in the prior-year period.
Liquidity, cash flow and capital
- At June 30, cash and cash equivalents were $137.2 million; the company also reported approximately $1.8 billion of available revolver capacity and about $269.1 million of potential proceeds from unsettled forward equity sales.
- Six-month investing cash outflow was $202.4 million and financing cash outflow was $183.6 million. The company paid $360.6 million in dividends during the period.
- Debt carried a 3.1% weighted-average interest rate at period-end; 91% was classified as fixed-rate in the financing summary. The amended $2.1 billion credit facility matures in February 2025. The company reported compliance with debt covenants.
- Scheduled principal payments were $128.9 million for the remainder of 2020 and $243.6 million in 2021. Senior unsecured notes begin maturing in 2023.
- The board declared a Q2 dividend of $1.042 per share, payable July 15, 2020. Six-month declared dividends totaled $2.082 per share.
Material changes and unusual items
- COVID-19 and rent collection: Approximately $7.8 million of Q2 rent and $8.2 million for the six-month period was not collected as a result of COVID-19 and reduced lease revenue. By the filing date, the company had received approximately 96% of Q2 contractual base rent due and 98% of July rent due. Management cautioned that these collection rates do not predict future collections.
- One-time and non-cash earnings effects: Q2 results included a $33.0 million non-cash gain tied to the CWI 1/CWI 2 merger and redemption of special general partner interests. Six-month results also included $47.1 million of impairment charges on investments in CWI 1 and CWI 2 and $19.4 million of real-estate impairment charges. A $37.2 million deferred tax benefit followed the conversion of a cold-storage investment to REIT status; these items materially affect comparisons of reported earnings.
- Managed-program transition: The CWI 1/CWI 2 merger closed April 13, ending W. P. Carey’s advisory agreements with those funds. The company received WLT preferred and common shares and expects to provide transition services for about 12 months. It no longer raises capital for funds and expects to manage CPA:18–Global and CESH through their respective life cycles; managed assets were approximately $2.7 billion.
- Portfolio and investment activity: The company acquired five investments for $270.6 million, completed construction projects costing $140.0 million, and sold four properties for $105.1 million net proceeds, including a hotel sold in January. Acquisition activity and lower interest expense supported real-estate earnings; hotel weakness, COVID-affected collections and lower investment-management revenue weighed on results.
- Outlook and risks: Management expected ordinary cash needs—including dividends, debt service, operating costs and capital commitments—to be funded through operating cash flow, dispositions, cash, credit capacity and debt or equity markets. It provided no specific earnings or AFFO guidance. It warned that pandemic duration and severity, tenant credit deterioration, property values, rent collections, capital-market access, refinancing conditions and covenant headroom could adversely affect results and liquidity.
Important facts for investors to verify
- Whether rent collections and tenant credit quality held up after the reported Q2 and July collection figures, especially for more exposed property types and tenants.
- How much reported earnings depended on the merger gain and tax benefits, versus recurring property operations; review AFFO’s non-GAAP adjustments alongside GAAP results.
- Whether the remaining 3,999,000 forward-sale shares were settled and how resulting proceeds, share dilution and dividends affected per-share cash generation.
- Progress on capital commitments, upcoming mortgage repayments and refinancing needs, while monitoring debt covenants and available liquidity.
- Revenue and earnings trends after termination of the CWI advisory agreements, including the ongoing economics of WLT holdings and the wind-down of managed programs.