W. P. Carey Inc. annual report, FY2016

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W. P. Carey Inc. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.

Business context

W. P. Carey is a self-managed REIT with two segments: Owned Real Estate, principally long-term triple-net leases, and Investment Management, which advises public and private investment programs. At year-end, the owned portfolio included 903 net-leased properties and two hotels across 19 countries; occupancy was 99.1%, with a 9.7-year weighted-average remaining lease term. Managed Programs had approximately $12.9 billion of assets under management.

Financial and operating performance

  • Revenue: $941.5 million, up 0.3% from $938.4 million in 2015. Excluding reimbursable costs, revenue was $849.7 million, down from $859.7 million. Owned Real Estate revenue rose to $755.4 million; Investment Management revenue declined to $186.2 million.
  • Profit: Net income attributable to W. P. Carey was $267.7 million, or $2.50 per diluted share, versus $172.3 million, or $1.61, in 2015. The increase reflected, among other items, higher property-sale gains and lease termination income; it should not be read as recurring earnings growth. GAAP operating margins are not presented as a principal performance measure in the filing.
  • FFO/AFFO: AFFO, a company-defined non-GAAP measure, increased 3.1% to $547.7 million from $531.2 million. Owned Real Estate AFFO rose to $518.7 million; Investment Management AFFO fell to $29.0 million from $48.4 million, primarily with lower structuring revenue.
  • Cash flow and distributions: Operating cash flow was $517.8 million, up from $477.3 million. Cash distributions paid were $416.7 million; declared distributions totaled $3.9292 per share for the year. The fourth-quarter declared distribution was $0.9900 per share.
  • Debt and liquidity: Year-end debt carrying value was approximately $4.44 billion (principal payments schedule: $4.46 billion). Cash and equivalents were $155.5 million, and unused Revolver capacity was $823.3 million, excluding letters of credit. Approximately 72% of debt was fixed-rate; the weighted-average interest rate was 3.9% for 2016. The filing also cites approximately $3.2 billion of unleveraged properties at carrying value.
  • Fourth quarter: Revenue was $228.8 million; net income attributable to W. P. Carey was $47.7 million, or $0.44 per diluted share. Quarterly declared distributions were $0.9900 per share.

Material changes versus 2015

  • Owned Real Estate revenue increased, supported by acquisitions and $32.2 million of lease termination income. Net income from the segment attributable to W. P. Carey rose to $252.4 million from $146.8 million, including higher sale gains, while impairment charges also increased.
  • Investment Management revenue decreased principally because structuring revenue fell to $47.3 million from $92.1 million as investment volume declined. Asset management revenue increased to $62.0 million from $50.0 million as assets under management grew.
  • Impairment charges rose to $59.3 million from $29.9 million. General and administrative expenses declined by $20.8 million company-wide, primarily following cost-saving measures and a workforce reduction; restructuring and other compensation expense was $11.9 million.
  • The company acquired three owned investments for $530.3 million, committed an additional $128.1 million to build-to-suit financing, and sold 30 properties and land for net proceeds of $542.4 million. It issued $350 million of 4.25% senior notes and repaid or prepaid substantial mortgage debt.

Outlook, risks and unusual items

  • Management said it expected operating cash flow and available financing sources to meet normal recurring liquidity needs. The filing discusses expected AFFO but the supplied filing text does not provide a clear numerical AFFO guidance range.
  • Key risks include tenant credit and single-tenant exposure; the top ten tenants represented approximately 31% of ABR. About 19% of ABR was scheduled to expire within five years. Re-leasing could entail lower rents or significant costs.
  • International operations generated 34% of ABR and expose results to foreign exchange, country-specific regulation and economic conditions. Management highlighted uncertainty following the U.K. Brexit referendum and the impact of a stronger U.S. dollar.
  • Fundraising for non-traded investment products was significantly lower industry-wide in 2016. Uncertainty around the Department of Labor Fiduciary Rule contributed to the delay of the planned CPA:19 offering and may affect advisory fees and future fundraising.
  • Unusual and potentially non-recurring items included $59.3 million of impairments, $71.3 million of net gains on real estate sales, $32.2 million of lease termination income, and $11.9 million of restructuring and other compensation expense. A $3.0 million out-of-period tax adjustment increased 2016 tax expense; management said it was not material to the periods presented.
  • After year-end, W. P. Carey issued €500 million of 2.25% senior notes and amended its credit facility, increasing capacity to $1.85 billion. It also reported repayments of affiliate loans, including CWI 2’s repayment of a $210 million loan in January and February 2017.

Most important facts for investors to verify

  • Reconcile the debt disclosures: the balance-sheet and debt schedules show approximately $4.44 billion carrying value and $4.46 billion principal, while a risk-factor passage separately cites $5.0 billion of consolidated indebtedness.
  • Assess recurring earnings and dividend coverage independently of sale gains, lease termination income, impairments and other adjustments; compare GAAP income, AFFO and operating cash flow.
  • Review the $13.3 million allowance associated with a single direct financing lease and the credit condition of that tenant.
  • Track upcoming mortgage maturities, refinancing or repayment plans, and the post-year-end credit-facility changes; scheduled debt principal payments included $768.5 million in 2017.
  • Monitor lease expirations, tenant concentration, fundraising trends and the effects of currency movements and Brexit on international rents and reported results.