W. P. Carey Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. W. P. Carey is a REIT providing long-term financing through sale-leasebacks and build-to-suit transactions, and operates Owned Real Estate and Investment Management segments.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $225.2 million | $214.7 million | $712.8 million | $673.1 million |
| Net income attributable to W. P. Carey | $110.9 million | $21.7 million | $220.0 million | $121.2 million |
| Diluted EPS | $1.03 | $0.20 | $2.05 | $1.13 |
| AFFO attributable to W. P. Carey | $144.5 million | $126.6 million | $416.2 million | $395.7 million |
| Cash provided by operating activities | Not separately stated | Not separately stated | $361.5 million | $330.9 million |
- Q3 revenue rose about 5%; nine-month revenue rose about 6%. Net income and EPS increased substantially, largely reflecting property-sale gains rather than solely recurring operations.
- Q3 net gain on sale of real estate was $49.1 million; the nine-month amount was $68.1 million. Nine-month results also included $32.2 million of lease termination income.
- Nine-month AFFO rose about 5% year over year; Q3 AFFO rose about 14%. AFFO is a non-GAAP measure, and the company cautions it is not a substitute for GAAP earnings or operating cash flow.
- At September 30, cash and cash equivalents were $209.5 million, total assets $8.47 billion, and total liabilities $4.96 billion. Debt carrying value was approximately $4.39 billion, versus $4.48 billion at December 31, 2015.
- The revolving credit facility had $1.1 billion of unused capacity. The company reported compliance with its financial covenants. Approximately 78% of debt was fixed-rate; management’s market-risk disclosure states about 82.3% was fixed, swapped, or capped.
- Nine-month distributions paid were $310.5 million. The Q3 declared distribution was $0.985 per share, equivalent to $3.94 annualized.
Business and portfolio
- The owned net-lease portfolio comprised 910 properties, 91.8 million square feet, 222 tenants, 19 countries, 99.1% occupancy, and a 9.4-year weighted-average lease term. About 37% of portfolio ABR was international.
- Owned Real Estate acquired investments totaling $385.8 million during the first nine months, including school campuses and manufacturing facilities, and committed a further $128.1 million to build-to-suit expansions.
- Managed Programs’ assets under management were approximately $12.2 billion. Investment Management structured $1.0 billion of investments in the nine-month period; structuring revenue fell from $67.7 million to $31.0 million as investment volume declined.
Material changes, outlook and risks
- Property disposals generated $392.6 million of net proceeds in the first nine months. The company also transferred a vacant international property to its mortgage lender and had a vacant domestic property foreclosed; both transactions generated reported gains.
- Impairment charges increased to $49.9 million for the nine months from $22.7 million a year earlier. A $7.1 million allowance was recorded on a direct financing lease after a decline in expected tenant payments, including possible early termination.
- Management cited lower interest expense, acquisition contributions, higher asset-management revenue, and cost reductions as favorable factors. Restructuring and other compensation costs were $11.9 million for the nine months. The former CEO and CFO departed; an interim CFO was serving at filing, and a permanent successor search was underway.
- Management said it expected cash from operations and other available sources to meet recurring liquidity needs. No numeric company-wide AFFO guidance range is stated in the supplied filing text. The Term Loan Facility’s $250 million maturity was scheduled for January 2017, with an extension option; management also identified substantial upcoming mortgage principal payments and balloon maturities.
- Foreign exchange is a material exposure. Management noted the post-Brexit decline in sterling, with 4.9% of ABR from the U.K.; it hedged part of its sterling and euro exposure. A 1% interest-rate move would change annual interest expense on unhedged variable-rate debt by an estimated $7.8 million.
- Sixteen properties with $128.5 million of carrying value were held for sale at quarter-end. Subsequent to quarter-end, 16 international properties were sold for $132.3 million gross, and the company repaid associated mortgages of $40.7 million.
- The company reported no material litigation and stated that disclosure controls were effective at a reasonable level of assurance.
Important facts for investors to verify
- How much of the sharp increase in GAAP net income reflects realized property gains and termination income, versus sustainable operating performance; compare with AFFO and cash flow.
- The status and economics of upcoming mortgage maturities, the January 2017 term-loan maturity and extension, and the company’s refinancing or repayment plans.
- Tenant credit and lease outcomes related to the impaired properties and the direct financing lease allowance, including any further losses or recoveries.
- Post-quarter sale proceeds, debt repayments, and any resulting gains or losses on the held-for-sale properties.
- The effect of sterling and euro movements, and whether hedges adequately offset currency exposure.
- Progress on the CFO succession and the impact of restructuring and cost-saving actions on ongoing expenses.