W. P. Carey Inc. quarterly report, Q2 FY2022

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W. P. Carey Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Unaudited results; dollar amounts below are in millions unless noted.

Business context and portfolio

W. P. Carey is a REIT focused primarily on long-term, triple-net-leased commercial properties in the United States and Northern and Western Europe. At June 30, its portfolio included 1,357 net-leased properties across 25 countries, with 99.1% occupancy, an 11.0-year weighted-average lease term, and $1,270 million of annualized base rent. The company also operated 20 properties and advised two managed investment programs.

Financial performance

  • Q2 revenue: $344.4 million, up 7.7% from $319.7 million. Real Estate revenue was $339.8 million; Investment Management revenue was $4.6 million.
  • Q2 net income attributable to W. P. Carey: $127.7 million, up 6.2% from $120.2 million. Diluted EPS was $0.66 versus $0.67, reflecting a higher diluted share count.
  • First-half revenue: $692.8 million, up 9.8% from $630.9 million. First-half net income attributable to W. P. Carey was $284.7 million versus $171.9 million; diluted EPS was $1.47 versus $0.96.
  • Margins: GAAP net income attributable to W. P. Carey was approximately 37.1% of revenue in Q2 versus 37.6% a year earlier, and 41.1% for the first half versus 27.2%. These comparisons are affected by gains, foreign-exchange movements, and other unusual items.
  • AFFO (non-GAAP): Q2 was $254.4 million, up from $228.7 million; first-half AFFO was $513.2 million, up from $445.2 million. Management attributed the growth mainly to net investment activity and rent escalations, partly offset by currency weakness and the loss of WLT preferred-share dividends.
  • Cash flow, first half: Operating activities provided $446.9 million, compared with $398.7 million. Investing activities used $560.5 million; financing activities provided $106.5 million. Cash and restricted cash totaled $200.5 million at period-end, including $103.6 million of unrestricted cash and cash equivalents.
  • Debt and liquidity: Debt, net, was $6.77 billion, compared with $6.79 billion at year-end 2021. The company reported 84% fixed-rate and 16% variable-rate debt, with a 2.5% weighted-average rate. It had approximately $1.4 billion of available revolver capacity, $285 million of available Equity Forward proceeds, and $301 million of available ATM Forward proceeds. The company was in compliance with debt covenants.
  • Dividends: $2.116 per share was declared in the first half. Dividends paid were $407.7 million.

Material changes and unusual items

  • Real Estate revenue growth reflected acquisitions, rent escalations, and higher lease termination and other income; currency weakness and dispositions partially offset growth.
  • First-half acquisitions totaled $644.0 million in the financial highlights; 14 properties were sold for net proceeds of $115.1 million. Net gains on property sales were $42.4 million for the first half.
  • Real estate impairment charges were $26.4 million in the first half, versus none in the comparable 2021 period. Items included property impairments and a restructuring of leases with Pendragon PLC.
  • Q2 other gains and losses included $15.4 million of non-cash unrealized gains on WLT common shares and substantial foreign-currency-related losses. First-half results also included $43.4 million of WLT common-share unrealized gains and an $18.7 million gain associated with redemption of WLT preferred shares.
  • The U.S. dollar’s strengthening reduced the reported carrying value of real estate and foreign-currency debt. It also affected reported revenue and results.
  • In April, the company expanded its unsecured term loans, increasing Senior Unsecured Credit Facility capacity to approximately $2.4 billion, and used the proceeds partly to repay revolving borrowings. It issued 2.74 million shares through its prior ATM program for $218.1 million net proceeds during the first half.

Outlook, commentary, and risks

  • The CPA:18–Global merger was approved by its stockholders on July 26, 2022; W. P. Carey expected it to close on August 1. Consideration was 0.0978 W. P. Carey shares plus $3.00 cash per CPA:18–Global share. After closing, W. P. Carey expected to stop receiving CPA:18–Global advisory fees and distributions, reducing future Investment Management earnings.
  • No quantified company-wide earnings or AFFO guidance is provided in the filing. Management said it expected operating cash flow and available liquidity sources to cover normal recurring needs, with additional funding potentially from dispositions or debt and equity issuance.
  • Cash requirements include dividends, acquisitions, capital commitments, debt service, and merger consideration. Scheduled principal payments were $30.7 million for the remainder of 2022 and $178.3 million in 2023; the credit facility matures in February 2025.
  • Key risks include higher interest rates, tenant credit and concentration exposure, foreign-exchange volatility, potential property impairments, and uncertainty around the proposed merger. Management reported receiving more than 99.6% of contractual base rent due in Q2 through the report date.
  • Subsequent to quarter-end, the company completed July acquisitions totaling approximately $281.9 million and a $25.7 million build-to-suit project.

Important facts for investors to verify

  • Whether the CPA:18–Global merger closed as expected, its final cash and share consideration, and the resulting change in debt, share count, and recurring earnings.
  • How much reported net income and AFFO growth came from recurring rent and investment activity versus property-sale gains, WLT valuation gains, currency effects, and other adjustments.
  • Whether acquisitions and rent escalators continue to offset currency translation, impairments, and the expected decline in Investment Management earnings.
  • Liquidity and refinancing needs as variable rates rise, including revolver and term-loan exposure, upcoming maturities, and potential equity issuance and dilution.
  • Tenant performance and lease outcomes, particularly the U-Haul repurchase option associated with $38.8 million of ABR in 2024 and the Pendragon property dispositions.