W. P. Carey Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020, compared with December 31, 2019. W. P. Carey is a net-lease REIT with 1,215 net-leased properties and 20 operating properties across 25 countries. Net-leased occupancy was 98.8%, with a 10.7-year weighted-average lease term.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $309.0 million | $298.3 million |
| Net income attributable to W. P. Carey | $66.1 million; diluted EPS $0.38 | $68.5 million; diluted EPS $0.41 |
| Net income margin, calculated | 21.4% | 23.0% |
| AFFO, non-GAAP | $216.5 million | $201.8 million |
| Net cash from operating activities | $179.7 million | $142.8 million |
| Net cash used in investing / financing | $(109.8) million / $(32.5) million | $(154.2) million / $(104.7) million |
| Total debt, net | $6.12 billion | $6.05 billion |
| Cash and cash equivalents | $220.9 million | $196.0 million |
| Available revolving-credit capacity | Over $1.7 billion | Not stated here |
Revenue rose 3.6% year over year, driven mainly by property acquisitions and rent increases; GAAP net income fell 3.5%, while AFFO increased 7.3%. Interest expense declined to $52.5 million from $61.3 million; the company reported a 3.2% weighted-average interest rate on total debt at quarter-end. Approximately 92.9% of long-term debt was fixed-rate or hedged/capped to a fixed rate. The board declared a quarterly dividend of $1.04 per share, paid April 15, 2020.
Material changes and notable items
- Q1 real-estate acquisitions totaled $204.6 million. Four property dispositions generated $105.2 million net proceeds and an $11.8 million gain, including the January sale of a hotel for $103.5 million.
- COVID-19-related and other impairment charges included $19.4 million on real estate and $47.1 million on equity investments in lodging-focused CWI 1 and CWI 2. The latter contributed to a $34.8 million Investment Management segment loss attributable to W. P. Carey, versus $15.1 million of segment income a year earlier.
- Reported net income included a $41.7 million income-tax benefit. Management attributed $37.2 million to release of a deferred tax liability after a cold-storage investment converted to a REIT; the CARES Act also generated a $7.2 million current tax benefit. These items, plus impairments and the hotel sale, make GAAP earnings less representative of recurring operations.
- The company adopted the expected-credit-loss standard, recording a $14.8 million opening retained-earnings reduction and a further $5.5 million allowance in Q1. It also recorded $3.1 million of straight-line rent write-offs based on collectibility analysis.
- On February 20, 2020, W. P. Carey amended and expanded its credit facility to approximately $2.1 billion, including a $1.8 billion revolver and term loans. It drew the term loans in full, adding approximately $299 million of borrowings; the facility matures in February 2025.
Outlook, risks, and contingencies
- Management reported receiving substantially all contractual base rent due in March and approximately 95% of April rent by the report date. It cautioned that these collections do not predict future collections and said COVID-19’s effects on tenants, rent payments, property values, liquidity, and results remained highly uncertain.
- Management gave no specific earnings or AFFO guidance. It expected to meet normal cash needs using operating cash flow, cash reserves, dispositions, the revolver, and potential debt or equity issuance. It warned COVID-19 could constrain capital access and affect covenant compliance and the dividend; there is no assurance dividend levels can be maintained.
- After quarter-end, the CWI 1/CWI 2 merger closed on April 13, terminating W. P. Carey’s advisory agreements and associated fees, reimbursements, and cash distributions. The company received preferred and common shares in the surviving Watermark Lodging Trust and provides transition services. It expected lower investment-management revenue and anticipated an impairment of a significant portion of its $63.6 million Investment Management goodwill.
- Scheduled debt principal payments were $142.5 million for the remainder of 2020 and $385.3 million through 2021; senior unsecured notes begin maturing in January 2023. Capital commitments and tenant expansion allowances totaled $316.9 million. The company reported compliance with its debt covenants at quarter-end and no material litigation.
- Key exposures include tenant credit/default risk, COVID-19 impacts on retail, lodging, fitness, and theater tenants, foreign-currency movements, interest rates, and refinancing needs. The stronger U.S. dollar reduced reported values of foreign assets and liabilities during the quarter.
Important facts for investors to verify
- Subsequent rent collections, tenant requests for rent relief, and any changes in lease collectibility or occupancy as the pandemic develops.
- The earnings and cash-flow effects of the CWI merger, including lost advisory income, value of consideration received, transition-service revenue, and the expected goodwill impairment.
- Whether Q1 tax benefits and impairment charges recur, and how AFFO reconciles to GAAP earnings; AFFO is a non-GAAP measure and is not a substitute for operating cash flow.
- Liquidity, covenant headroom, debt maturities, capital commitments, and the company’s ability to sustain its $1.04 quarterly dividend.
- Credit quality of tenants and finance receivables, including the new expected-credit-loss allowance, and performance of hotel and other COVID-sensitive assets.