W. P. Carey Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. W. P. Carey is a net-lease REIT with properties primarily in the U.S. and Northern and Western Europe, plus an investment-management business. Its owned portfolio had 1,204 net-leased properties, 98.4% occupancy, and a 10.3-year weighted-average lease term.
Financial performance and position
- Revenue: Q3 revenue was $318.0 million, up 52% from $209.4 million; nine-month revenue was $921.5 million, up 51% from $612.3 million. Growth was driven chiefly by real estate acquired in the CPA:17 merger and other acquisitions. Investment Management revenue declined.
- Profit and EPS: Net income attributable to W. P. Carey was $41.3 million in Q3 versus $77.3 million, and $175.9 million for nine months versus $218.3 million. Diluted EPS was $0.24 versus $0.71 for Q3 and $1.03 versus $2.01 for nine months. The prior-year comparison is affected by the CPA:17 merger and the substantially higher share count in 2019.
- Supplemental operating measure: AFFO, a non-GAAP measure, was $224.2 million in Q3 versus $159.8 million and $634.5 million for nine months versus $440.7 million. The company cautions that AFFO is not a substitute for GAAP earnings or operating cash flow.
- Cash flow and distributions: Nine-month operating cash flow was $577.5 million, compared with $369.8 million in 2018. Investing used $421.3 million and financing used $180.7 million. Dividends paid were $525.0 million; dividends declared totaled $3.102 per share for the nine months. Cash flow was supported in part by acquired properties and tenant-related recovery proceeds.
- Debt and liquidity: Debt, net, was $6.10 billion at September 30, down from $6.38 billion at year-end 2018. Cash and cash equivalents were $331.7 million, with an additional $57.0 million of restricted cash; the unsecured revolver had $1.5 billion of available capacity. 92% of debt was fixed-rate at period-end, and the company reported compliance with debt covenants.
- Portfolio and investment: Nine-month acquisitions totaled $369.7 million, and completed construction projects totaled $79.4 million. Net investments in real estate were $11.83 billion. The company had $282.9 million of capital commitments and tenant expansion allowances.
Material changes versus the prior comparable period
- The CPA:17 merger, completed October 31, 2018, expanded real estate revenue and assets but also increased depreciation, interest expense, and common shares outstanding. The merger ended advisory fees and other income from CPA:17; nine-month 2018 revenue from that program had been $48.1 million.
- Investment Management revenue fell to $45.0 million for nine months from $81.5 million, while segment net income attributable to W. P. Carey declined to $28.1 million from $62.7 million. Management expects fewer structuring transactions because the remaining programs are fully invested and the company no longer raises capital for funds.
- Real Estate revenue rose to $876.5 million for nine months from $530.8 million, but segment net income attributable to W. P. Carey decreased to $147.7 million from $155.6 million. Higher interest costs, impairment, and lower real estate sale gains partly offset acquisition contributions.
- Debt declined overall following $912.2 million of mortgage prepayments and repayments, funded primarily through senior-note issuance and ATM equity proceeds. New 2019 debt offerings included $325 million of 3.850% notes due 2029 and €500 million of 1.350% notes due 2028; ATM sales generated $523.5 million net proceeds and materially increased shares outstanding.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical earnings or AFFO guidance is provided. Management expects operating cash flow and available cash, revolver capacity, dispositions, and potential debt or equity issuance to meet normal liquidity needs. Future cash requirements include dividends, debt service, acquisitions, construction commitments, and operating costs.
- CWI merger: CWI 1 and CWI 2 announced a proposed all-stock merger, expected to close in Q1 2020 subject to approvals and other conditions. On closing, W. P. Carey expects to receive approximately $97 million in consideration for its special partnership interests, including preferred and common stock; the combined company plans to internalize management. W. P. Carey expects to provide transition services for about 12 months.
- Impairment and transaction charges: The company recorded $25.8 million of impairment on four direct-financing-lease properties and an $8.4 million loss on change in control of interests related to CPA:17 merger accounting adjustments. Nine-month net loss on debt extinguishment was $14.8 million, primarily prepayment penalties.
- Mortgage defaults: Two non-recourse mortgages on vacant properties acquired in the CPA:17 merger were in default at September 30: approximately $57.2 million principal on six properties and $8.7 million on another property. Accrued unpaid interest, including default interest, was $5.6 million and $0.9 million, respectively. In October, the six properties and related loan were transferred to the lender.
- Other exposures: Foreign exchange movements reduced the carrying value of real estate and debt balances; nine-month foreign-currency translation adjustments were a $41.8 million loss. The company cites tenant credit, interest rates, refinancing, currency fluctuations, and derivative counterparty risk. It reported no material litigation and said controls were effective at a reasonable assurance level.
- Other post-quarter activity: A hotel with a $104.0 million carrying value was held for sale at quarter-end. October acquisitions totaled approximately $63.1 million, and further construction commitments were announced.
Key facts for investors to verify
- How acquisition-driven AFFO growth translates into per-share performance, given the large increase in shares issued through the CPA:17 merger and ATM program.
- Whether operating cash flow can sustain dividends while funding debt service, capital commitments, and planned investments.
- Resolution and recovery outcomes for the defaulted mortgages and vacant properties, and the final impact of merger purchase-accounting adjustments.
- Timing, approvals, consideration, and lost advisory income associated with the proposed CWI merger and management internalization.
- Tenant and lease exposure, including the New York Times Company’s exercised property repurchase option, which the filing says is not assured to close.