W. P. Carey Inc. annual report, FY2018

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W. P. Carey Inc. — FY 2018 Form 10-K

Reporting period: Year ended December 31, 2018; filed February 22, 2019. This is an annual filing, not a standalone quarterly report. Fourth-quarter figures are included below where relevant.

Business context

W. P. Carey is an internally managed REIT focused on long-term, largely triple-net leases of commercial properties, primarily in the United States and Northern and Western Europe. At year-end, its net-lease portfolio comprised 1,163 properties, 304 tenants, 25 countries, approximately 131.0 million square feet, 98.3% occupancy and a 10.2-year weighted-average lease term. The CPA:17 merger, completed October 31, 2018, added a substantial real-estate portfolio and operating properties. The company also manages investment programs but exited new non-traded retail fundraising in 2017.

Financial and operating highlights

  • Revenue: $885.7 million, up 4.4% from $848.3 million in 2017. Real Estate revenue rose to $779.1 million from $687.2 million; Investment Management revenue fell to $106.6 million from $161.1 million. Total revenue includes reimbursable costs; revenue excluding reimbursable costs was $835.7 million.
  • Profit: Net income attributable to W. P. Carey was $411.6 million, versus $277.3 million; diluted EPS was $3.49, versus $2.56. Results benefited materially from $118.6 million in net real-estate sale gains and a $47.8 million gain on change in control of interests associated with the merger. The reported increase should not be read as equivalent growth in recurring operations.
  • Supplemental operating measure: AFFO, a non-GAAP measure defined by the company, increased 10.8% to $634.6 million from $573.0 million. Real Estate AFFO was $516.5 million and Investment Management AFFO was $118.1 million. The company cautions that AFFO is not a substitute for GAAP income or operating cash flow.
  • Cash flow: Operating cash flow was $509.2 million, down from $520.7 million. Investing activities used $266.1 million, including real-estate purchases and property investment, partly offset by $431.6 million of property-sale proceeds. Financing activities used $24.3 million; dividends paid were $440.4 million.
  • Dividends: $4.09 per share declared for 2018, up from $4.01. The Board sets future dividends and does not guarantee their level.
  • Debt and liquidity: Debt, net, was $6.38 billion, versus $4.27 billion, largely reflecting the merger and assumed mortgages. The filing cites a leverage ratio of approximately 6.8. Year-end cash and cash equivalents were $217.6 million; $127.6 million was held in foreign subsidiaries and could face restrictions or costs if repatriated. The $1.5 billion revolving facility had $1.4 billion available. 84% of debt was fixed-rate; management reported approximately 92.7% of long-term debt was fixed, swapped or capped. The company was in compliance with debt covenants.
  • Q4: Revenue was $273.4 million and net income attributable to W. P. Carey was $193.3 million, or $1.33 diluted EPS. The quarter included the merger and $47.8 million of change-in-control gains, as well as $99.6 million of real-estate sale gains.

Material changes versus prior periods

  • The CPA:17 merger issued 53.85 million W. P. Carey shares, valued at approximately $3.6 billion, and added properties with estimated ABR of $364.4 million immediately before closing. It also added approximately $1.85 billion of property-level mortgage debt. Merger-related expenses were approximately $41.8 million in 2018. The preliminary purchase-price allocation included $280.3 million of goodwill and remained subject to final valuation.
  • Net investments in real estate increased to $11.93 billion from $6.70 billion, and total assets rose to $14.18 billion from $8.23 billion, principally reflecting the merger.
  • Real Estate revenue growth reflected acquired and other properties, partly offset by dispositions. Investment Management revenue declined as fundraising-related reimbursements and dealer-manager fees ended, structuring activity fell, and the CPA:17 advisory relationship terminated at merger completion. Management expects fewer investment structuring opportunities and lower overall asset-management revenue following the merger.
  • Occupancy in the net-leased portfolio decreased to 98.3% from 99.8%; portfolio size, tenant count and lease term all increased substantially after the merger.

Outlook, risks and unusual items

  • The company provided no quantified earnings or acquisition guidance in the supplied filing text. It expects to continue its historical dividend practice but says the Board determines future amounts. Management believes operating cash flow and available financing sources should meet normal recurring liquidity needs.
  • Near-term cash demands include dividends on the enlarged share base, debt service and mortgage maturities, and capital commitments. Contractual obligations included $243.8 million of capital commitments and tenant expansion allowances, with $148.7 million due in less than one year.
  • Approximately 19% of year-end ABR was associated with leases expiring within five years. The top ten tenants represented 23.5% of ABR; one tenant’s exercised purchase option related to a $250 million property repurchase planned for Q4 2019, which was not assured.
  • Key exposures include tenant credit and bankruptcy, competition and re-leasing risk, real-estate values, interest rates and refinancing, foreign currency, and international regulation. International properties generated 36.6% of ABR; the filing specifically discussed Brexit uncertainty and LIBOR’s anticipated phaseout. The company reported $4.8 million of property impairment charges in 2018.
  • Self-storage properties acquired in the merger had 85.2% average occupancy at year-end; the two hotels had 74.6% average occupancy for 2018. These operating assets differ from the company’s core net-lease model.
  • Various ordinary-course claims and lawsuits were pending; management did not expect them to materially affect consolidated financial position or results. The filing reported effective disclosure controls and internal control over financial reporting, and the auditor issued an unqualified opinion.

Important facts for investors to verify

  1. How much of reported earnings growth is recurring, given merger accounting gains, disposition gains and merger costs; compare GAAP results with AFFO and operating cash flow.
  2. Final CPA:17 merger valuations, goodwill and acquired debt, plus the acquired portfolio’s contribution over a full reporting period.
  3. Debt maturities, refinancing capacity, leverage and the ability to fund dividends and capital commitments after the merger.
  4. Tenant credit quality, the 2019 New York Times property repurchase and lease expirations, vacancies and renewals.
  5. Future Investment Management fee income as existing programs mature and advisory agreements renew or terminate; also monitor international, currency and operating-property risks.