Business context and reporting period
W. P. Carey Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The REIT owns and leases commercial real estate, primarily under triple-net leases, and manages non-traded REITs through its Investment Management segment. Dollar amounts below are in millions unless stated otherwise.
The January 31, 2014 merger with CPA:16 Global substantially expanded the owned portfolio and affects comparisons with 2013, which did not include the acquired operations for most of the year.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $195.9 | $132.6 | $657.9 | $350.8 |
| Net income attributable to W. P. Carey | $27.3 | $18.5 | $206.3 | $75.9 |
| Diluted EPS | $0.27 | $0.27 | $2.10 | $1.08 |
| AFFO, a non-GAAP measure | $114.4 | $71.1 | $354.9 | $216.0 |
| Distributions declared per share | $0.940 | $0.860 | $2.735 | $2.520 |
Q3 Real Estate Ownership property-level contribution was $89.4 million versus $45.2 million; segment net operating income was $70.0 million versus $34.5 million. The filing reports no consolidated operating margin percentage.
- Cash flow: Nine-month cash from operating activities was $277.2 million, up from $146.3 million. Investing activities provided $46.1 million versus using $159.3 million; financing activities provided $99.1 million versus using $19.0 million.
- Liquidity: Cash and cash equivalents were $530.3 million at September 30, including $180.0 million held in foreign subsidiaries that could face restrictions or significant repatriation costs. Revolver availability was $631.1 million, excluding letters of credit.
- Debt: Total debt carrying value was approximately $3.82 billion, compared with $2.07 billion at December 31, 2013. It included $2.70 billion of non-recourse debt, $618.9 million under the unsecured credit facility and $498.3 million of senior unsecured notes. Approximately 72% of debt was fixed-rate, hedged or otherwise fixed at period-end. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $8.50 billion, liabilities $4.49 billion and total equity $4.01 billion at September 30, 2014.
Material changes versus the prior comparable period
- Revenue and operating cash flow increased substantially, mainly because of properties acquired in the CPA:16 merger. The merger added $183.8 million of lease revenue and $102.4 million of property-level contribution in the first nine months.
- Nine-month net income included a $104.6 million gain on change in control of interests related to the merger. It also included $30.4 million of merger expenses and $12.9 million of lease termination income from two leases. These items make GAAP earnings less directly comparable with recurring performance.
- Q3 Investment Management revenue fell to $31.7 million from $52.8 million; the segment recorded a $1.4 million attributable loss versus $4.8 million of income. Nine-month segment revenue rose, largely reflecting higher structuring and dealer-manager revenue, including activity for CPA:18 Global.
- Interest expense rose to $46.5 million in Q3 from $26.3 million and to $133.3 million for nine months from $77.6 million, mainly due to debt assumed in the merger and higher average borrowings.
- Weighted-average net-leased portfolio occupancy was 98.1%, down from 98.9% at December 31, 2013; weighted-average lease term increased from 8.1 to 8.5 years. Portfolio scale increased to 688 net-leased properties and 80.8 million square feet.
- Foreign-currency translation and other comprehensive items were volatile: Q3 comprehensive loss was $10.6 million versus income of $35.3 million a year earlier. The stronger U.S. dollar also reduced the reported carrying value of euro-denominated assets.
Outlook, risks and unusual items
- Management said it expected operating cash flow, equity distributions, cash reserves and available financing to meet normal recurring liquidity needs. The filing gives no specific numerical earnings or AFFO guidance.
- The company intends to continue acquiring income-producing commercial real estate and recycling capital through property sales and reinvestment. October 2014 subsequent events included use of $225.8 million of offering proceeds to repay revolver borrowings and three investments costing approximately $225.6 million.
- Management identified refinancing risk. Cash requirements for the next 12 months included mortgage balloon payments totaling $179.1 million; the filing cautions that refinancing may not be available on favorable terms, or at all. Scheduled debt principal and interest obligations are also substantial.
- Other risks include interest-rate changes, tenant credit and concentration exposure, foreign-exchange movements, and the possibility of property impairments or losses on sale. Nine-month impairment charges were $6.3 million. The owned portfolio had geographic and property-type concentrations, although no individual tenant exceeded 10% of annualized base rent.
- The IRS issued a Notice of Proposed Adjustment concerning a subsidiary’s 2011 tax return; the company was reviewing it and expected to file a protest. A class action relating to the CPA:16 merger was dismissed in its entirety in October 2014. Other ordinary-course claims were not expected to have a material adverse effect.
- The company early-adopted revised discontinued-operations guidance prospectively for dispositions after December 31, 2013, affecting presentation of property sale results. It also noted proposed FINRA rules for non-traded REITs; the eventual effect on demand for managed-fund shares was uncertain.
Important facts for investors to verify
- Separate recurring operating performance from the merger-related $104.6 million gain, merger costs, lease termination income and property-sale results; review the company’s AFFO reconciliation and non-GAAP limitations.
- Confirm post-quarter debt repayment and investment funding, remaining revolver availability, and the timing and financing plan for upcoming mortgage maturities.
- Assess whether elevated distributions remain supported by recurring cash generation, particularly given the merger-expanded debt and share base.
- Monitor occupancy, lease renewals and tenant credit, including the reported lower rents on leases signed during 2014 versus prior rents.
- Track foreign-exchange exposure, refinancing conditions, the IRS matter and regulatory developments affecting the Investment Management business.