Business context and reporting period
W. P. Carey Inc. is a REIT focused on commercial real estate, principally through long-term net leases, and also manages non-traded REITs. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods.
The January 31, 2014 merger with CPA:16–Global materially expanded the owned portfolio and changed the company’s scale and financing. Accordingly, reported year-over-year comparisons include acquired operations for only part of 2014 and are not fully comparable. At quarter-end, the owned portfolio comprised interests in 686 properties, with 98.5% occupancy.
Financial results and position
Amounts below are in millions of dollars, except per-share amounts and where noted.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $252.9 | $112.2 | $461.9 | $218.3 |
| Net income attributable to W. P. Carey | $64.7 | $43.2 | $178.9 | $57.3 |
| Diluted EPS | $0.64 | $0.62 | $1.86 | $0.81 |
| Adjusted funds from operations (AFFO), non-GAAP | $122.2 | $72.6 | $240.5 | $144.9 |
| Cash from operating activities | Not presented by quarter | Not presented by quarter | $168.6 | $71.5 |
- Q2 income from continuing operations attributable to W. P. Carey was $38.2 million, versus $39.1 million a year earlier; diluted continuing-operations EPS was $0.38 versus $0.56. Total Q2 net income also benefited from $26.5 million of discontinued-operations income.
- Six-month net income included a $104.6 million non-cash gain on change in control of interests related to the CPA:16 merger. Merger-related expenses were $30.4 million for the six months.
- Real estate segment property-level contribution was $83.0 million in Q2 versus $43.6 million, and $151.7 million for six months versus $86.3 million. Growth largely reflected CPA:16 properties; Q2 also included $12.9 million of lease-termination income from two early lease terminations.
- Cash and equivalents were $215.0 million at June 30, including $136.7 million held in foreign subsidiaries that could be costly or restricted to repatriate. Total debt was approximately $3.80 billion: $2.82 billion non-recourse debt, $476.7 million credit-facility borrowings, and $500.0 million senior notes. Debt was 75% fixed-rate or otherwise treated as fixed-rate in the company’s debt summary.
- The $1.0 billion revolver had $773.3 million of unused capacity, excluding letters of credit. The company reported compliance with all credit-facility financial covenants.
- Six-month investing cash flow was positive $131.6 million, including $280.8 million of property and equity-sale proceeds; financing cash flow was negative $202.9 million. Cash distributions paid to stockholders were $158.3 million. The Q2 distribution declared was $0.90 per share, paid July 15, 2014.
Material changes versus the prior period
- Revenue and AFFO rose substantially, principally because of the CPA:16 merger and increased structuring activity for managed funds. Revenue includes reimbursable costs: excluding those costs, reported revenue was $205.2 million in Q2 and $368.5 million for six months.
- The merger added 30.7 million common shares and significantly increased real estate assets, debt, depreciation and amortization. It also ended advisory revenue from CPA:16–Global after January 31.
- Interest expense increased $22.0 million in Q2 and $35.5 million for six months, mainly from debt assumed in the merger and higher average borrowings. The company issued $500 million of ten-year notes at 4.60% and prepaid $201.8 million of mortgage principal as part of its plan to become primarily an unsecured borrower.
- Six-month equity investment income fell to $23.7 million from $43.2 million, partly reflecting the merger’s effect on the investment base and the prior-period contribution from investments later sold.
- Same-store leased-property contribution declined $2.3 million in Q2 and $1.4 million for six months. Management cited early lease termination, foreign-exchange effects, lease restructuring and higher property expenses; scheduled rent increases partly offset the six-month decline.
- Six-month discontinued-operations income was $32.9 million, chiefly from gains on sales. The company sold 24 properties for approximately $298.3 million of proceeds during the period.
Outlook, risks and unusual items
- No numerical company earnings or AFFO guidance is provided in the filing. Management said it expects operating cash flow, cash resources, unused revolver capacity and potential debt or equity issuance to meet normal liquidity needs.
- Management expected $194.4 million of mortgage balloon payments within the next 12 months and planned to use revolver proceeds to repay maturing loans. It also disclosed $430.5 million of international mortgage balloons due in 2017; refinancing on favorable terms, or at all, is not assured.
- At June 30, contractual commitments included $41.7 million for build-to-suit projects and $4.2 million for property improvements. Total scheduled debt principal and interest, operating and other lease commitments, and these project commitments were approximately $4.80 billion over the periods shown in the filing.
- Key exposures include interest rates, foreign currency, tenant credit, real-estate valuations and concentrations. Germany represented 12% of owned-portfolio ABR; office and industrial each represented 25%, and retail tenants 22%. A 1% interest-rate change was estimated to change annual interest expense on unhedged variable-rate debt by $5.1 million.
- The company recorded a $2.1 million property impairment in the first half. Derivative liabilities totaled $29.1 million on the balance sheet; the filing notes that a breach of certain derivative credit provisions could require settlement.
- A shareholder lawsuit seeks, among other remedies, rescission of the CPA:16 merger or damages. The company said it considers the claims without merit and is defending the case. Other ordinary-course claims were not expected to have a material adverse effect.
- The CPA:16 merger purchase-price allocation remained preliminary and subject to change. Management was evaluating the impact of the new revenue-recognition standard, effective for the company in 2017. A proposed CWI 2 offering had not been declared effective, and there was no assurance it would proceed.
Important facts for investors to verify
- How much of revenue and AFFO growth is recurring and attributable to acquired properties, versus reimbursed costs, lease-termination income, transaction activity and other nonrecurring items.
- Final CPA:16 purchase-price allocation, including goodwill and acquired debt, and the ongoing impact of merger-related costs and share issuance on per-share results.
- Cash available for distributions after recurring property needs and debt service; compare GAAP operating cash flow, non-GAAP AFFO and distributions, recognizing that AFFO is not a GAAP cash-flow measure.
- Progress refinancing the near-term $194.4 million mortgage balloons and the larger 2017 maturities, as well as covenant compliance and access to revolver capacity.
- Tenant retention and renewal economics, given lower average rents on 2014 second-generation leases than the former rents, and exposure to tenant, geographic and property-type concentrations.
- Status and potential financial impact of the merger litigation, derivative obligations, managed-REIT fundraising and the proposed CWI 2 offering.