W. P. Carey Inc. annual report, FY2017

Vollständiges Dokument

W. P. Carey Inc. — FY2017 Form 10-K

Business context and reporting period

Annual report for the fiscal year ended December 31, 2017. W. P. Carey is an internally managed REIT focused on long-term net-leased commercial real estate, with a smaller investment-management business advising existing investment programs. The filing reports two segments: Owned Real Estate and Investment Management.

At year-end, the owned portfolio comprised 887 net-leased properties and two hotels, leased to 210 tenants across 17 countries. Net-lease occupancy was 99.8%, with a 9.6-year weighted-average lease term. Approximately 34% of ABR was international; 19% of ABR came from investment-grade tenants and 8% from tenants management considered implied investment grade.

Financial results and key metrics

  • Revenue: $848.3 million, down 9.9% from $941.5 million in 2016. Revenue excluding reimbursable costs was $775.3 million, versus $849.7 million.
  • Net income attributable to W. P. Carey: $277.3 million, up from $267.7 million. Diluted EPS was $2.56, versus $2.49.
  • AFFO: $573.0 million, up from $547.7 million. AFFO is a non-GAAP measure; the company cautions that it is not a substitute for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was $516.1 million, down from $540.8 million. Cash distributions paid were $431.2 million. Declared distributions were $4.01 per share, up from $3.9292.
  • Owned Real Estate: Segment revenue was $687.2 million, down from $755.4 million; segment net income attributable to W. P. Carey was $192.1 million, versus $202.6 million. AFFO was $456.9 million, versus $463.4 million.
  • Investment Management: Segment revenue was $161.1 million, down from $186.2 million; segment net income attributable to W. P. Carey rose to $85.2 million from $65.2 million. AFFO increased to $116.1 million from $84.3 million.
  • Assets and liquidity: Total assets were $8.23 billion, down from $8.45 billion. Cash and cash equivalents were $162.3 million, including $111.1 million held by foreign subsidiaries. The $1.5 billion revolving facility had $1.3 billion of unused capacity at year-end, excluding letters of credit.
  • Debt: Debt, net, was $4.27 billion, compared with $4.44 billion in 2016; management cited a leverage ratio of approximately 5.9. Fixed-rate debt represented 80% of debt, and the weighted-average interest rate during 2017 was 3.6%, versus 3.9% in 2016.
  • Portfolio and lease income: Contractual minimum rents under non-cancelable operating leases totaled $6.59 billion, exclusive of renewals and certain variable rent adjustments. About 27% of ABR was associated with leases expiring within five years.

Material changes versus 2016

  • Revenue fell primarily because property dispositions reduced lease revenue and 2016 included higher lease-termination income; investment-management structuring and dealer-manager fees also declined.
  • Net income increased despite lower revenue, supported by lower interest and general and administrative expenses and substantially lower impairment charges. Net gain on real estate sales was lower: $33.9 million in 2017 versus $71.3 million in 2016.
  • Operating cash flow declined, partly because certain investment-management fees were received in shares rather than cash and because of property dispositions.
  • Acquisition volume dropped to $31.8 million from $530.3 million. The company completed $65.4 million of construction projects and sold 16 properties and vacant land for $159.9 million net proceeds.
  • Debt composition shifted toward unsecured financing: the company issued €500 million of 2.25% senior notes and repaid or prepaid $482.5 million of non-recourse mortgages. Year-end debt was 80% fixed-rate, compared with 72% in 2016.
  • The quarterly declared distribution increased from $0.99 in fourth-quarter 2016 to $1.01 in fourth-quarter 2017.

Outlook, management commentary, risks and unusual items

  • Strategy change: W. P. Carey ended active non-traded retail fundraising in June 2017 and plans to focus on net-lease investing for its own balance sheet. It expects to continue advising existing programs through their life cycles, but anticipates lower future structuring revenue as those programs are substantially invested. The company resigned as advisor to CCIF effective September 11, 2017.
  • Guidance: The filing discusses an expected AFFO range in its forward-looking-statement description, but the provided filing text does not state a clear numerical forecast.
  • Tax legislation: Management expected the Tax Cuts and Jobs Act to have a minimal overall impact on operating results, cash flows and financial condition, while expecting a favorable GAAP tax-rate and net-income effect for taxable REIT subsidiaries. Some effects remained subject to interpretation and decisions regarding interest-deduction elections.
  • Debt and refinancing: $132.1 million of euro-denominated mortgage balloon payments were due in 2018. The company expected to refinance or repay them using cash, revolving-credit capacity and/or disposition proceeds. Debt covenants were reported in compliance at year-end.
  • Concentration and lease risk: The top ten tenants represented 32% of ABR; approximately 27% of ABR was tied to leases expiring in the next five years. Tenant bankruptcy, non-renewal, and difficulty re-leasing specialized single-tenant properties could reduce rent and increase costs.
  • International and market risks: Foreign operations expose the company to currency movements, local regulation and geopolitical conditions, including Brexit uncertainty. A stronger U.S. dollar may reduce translated foreign revenue and expenses. Interest-rate increases could raise costs on variable-rate debt.
  • One-time and unusual items: 2017 included $9.4 million of restructuring expenses, primarily severance, related to the fundraising exit; $2.8 million of impairment charges, compared with $59.3 million in 2016; and net foreign-currency transaction losses of approximately $18.7 million, partly offset by derivative gains. Hurricane damage was assessed as immaterial, with no losses recorded.
  • Governance and audit: CEO Mark J. DeCesaris retired at year-end; Jason E. Fox became CEO on January 1, 2018. The auditor issued an unqualified opinion on the financial statements and internal control, and management reported effective disclosure controls and internal control over financial reporting. Ordinary-course claims and lawsuits were not expected to have a material adverse effect.

Important facts for investors to verify

  • Reconcile AFFO growth with the decline in GAAP revenue and operating cash flow, and review the company’s non-GAAP adjustments and payout coverage.
  • Track repayment or refinancing of the 2018 mortgage maturities and the broader debt maturity schedule, covenant headroom and interest-rate exposure.
  • Assess lease rollover and tenant credit exposure, particularly the 27% of ABR due to expire within five years and the 32% concentration in the top ten tenants.
  • Evaluate the durability and cash realization of advisory revenue after fundraising ended, including renewals of Managed REIT advisory agreements scheduled for December 31, 2018.
  • Confirm completion and proceeds of the New York Times tenant repurchase, expected in December 2019, and monitor foreign-exchange and Brexit-related developments.