W. P. Carey Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless stated otherwise, figures are in U.S. dollars; financial statement amounts are in millions. W. P. Carey is a net-lease REIT with 1,215 net-leased properties across 25 countries, 98.9% occupancy and a 10.6-year weighted-average lease term. It also manages two remaining investment programs; advisory agreements with CWI 1 and CWI 2 ended after their April merger into Watermark Lodging Trust (WLT).
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $302.4 | $318.0 | $901.9 | $921.5 |
| Net income attributable to W. P. Carey | $149.4 | $41.3 | $320.8 | $175.9 |
| Diluted EPS | $0.85 | $0.24 | $1.84 | $1.03 |
| AFFO attributable to W. P. Carey | $202.0 | $224.2 | $616.4 | $634.5 |
| Cash from operations | Not provided by quarter | $556.6 | $577.5 |
Revenue declined 4.9% in Q3 and 2.1% for the first nine months year over year. GAAP net income rose sharply, but included substantial unusual and noncash items, notably a $48.8 million unrealized gain on a cold-storage investment in Q3, property-sale gains, and—year to date—a $37.2 million deferred tax benefit. AFFO, a company-defined non-GAAP measure, fell 9.9% in Q3 and 2.8% year to date. Management attributed the AFFO decline to COVID-related rent shortfalls, lower Investment Management revenue and distributions, and a prior-year bankruptcy-claim receipt, partly offset by lower interest expense, rent escalations and investment activity.
Q3 Real Estate revenue was $297.4 million; Investment Management revenue was $5.0 million, down from $15.3 million. Nine-month Real Estate income attributable to W. P. Carey was $329.7 million; Investment Management recorded an $8.9 million loss, including $47.1 million of impairments on CWI investments, partly offset by a $33.0 million noncash gain related to the merger and internalization.
Cash flow and distributions: Nine-month operating cash flow was $556.6 million, down $20.9 million. Investing used $277.9 million and financing used $311.4 million. Cash and cash equivalents were $152.2 million at quarter-end; cash plus restricted cash was $222.8 million. Dividends declared were $3.126 per share year to date, including $1.044 for Q3. Dividends declared totaled $547.4 million versus AFFO of $616.4 million for the first nine months.
Debt and liquidity: Debt, net, was $6.23 billion at September 30, versus $6.05 billion at December 31, 2019. Total debt was 89% fixed-rate and 11% variable-rate; the weighted-average rate was 3.0%. The company reported approximately $1.6 billion of available revolver capacity and $166.1 million of expected proceeds from outstanding forward equity shares, in addition to cash. It was compliant with debt covenants. Scheduled principal payments were $28.7 million for the remainder of 2020 and $144.1 million in 2021; senior notes begin maturing in January 2023.
Material changes and unusual items
- COVID-19 reduced lease revenue by approximately $5.5 million in Q3 and $14.0 million year to date; some $3.8 million and $7.9 million, respectively, was contractually deferred. The company collected about 98% of Q3 contractual base rent due and 99% of October rent due as of the report date, but cautioned that these collections do not predict future performance.
- The remaining hotel was severely affected: occupancy averaged 27.2% for the first nine months. The company sold one hotel in January 2020.
- Investment Management revenue and related cash distributions declined after the CWI 1/CWI 2 merger ended the advisory agreements. W. P. Carey expects to manage CPA:18–Global and CESH through their respective life cycles and no longer raises capital for funds.
- Year-to-date property-sale proceeds were $168.0 million, generating $32.7 million of net gains. The company acquired investments totaling $354.6 million and completed construction projects costing $168.1 million.
- At September 30, 2020, one approximately $3.0 million mortgage on a vacant property was in default; the property’s carrying value was $3.7 million. No material litigation was reported.
Outlook, risks and subsequent events
No numeric earnings or AFFO guidance was provided in the supplied filing text. Management said it expects operating cash flow, cash reserves, revolver capacity, property-sale proceeds and debt or equity issuance to meet normal liquidity needs. It expects near-term cash needs for dividends, debt service, construction commitments and operations, while noting that COVID-19 could materially affect rent collections, liquidity, covenant compliance, asset values and the ability to maintain dividends. The filing also highlights interest-rate, tenant-credit, market and foreign-currency risks.
After quarter-end, W. P. Carey issued $500 million of 2.400% senior notes due 2031, acquired three investments for approximately $186.8 million, purchased an additional $95.5 million of cold-storage operator shares, and sold two cold-storage properties for $95.5 million gross proceeds plus a retail property for $5.2 million.
Investor verification priorities
- Assess underlying recurring performance separately from the cold-storage fair-value gain, tax benefits, sale gains and merger-related accounting items; compare GAAP net income with AFFO and its reconciliation.
- Track rent collections, deferred rent recovery, tenant credit quality and exposure to hotel, retail, fitness, theater and restaurant tenants as pandemic conditions evolve.
- Verify dividend coverage against recurring cash flow and AFFO, and consider that the filing identifies COVID-19 as a risk to maintaining the current dividend.
- Review debt maturities, refinancing access, revolver usage, forward equity settlement and covenant headroom; assess the defaulted property-level mortgage and foreign-exchange exposure.
- Monitor the wind-down of Investment Management revenues and distributions following the CWI merger, along with the valuation and performance of WLT and the cold-storage investment.