W. P. Carey Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
W. P. Carey is a REIT focused on long-term sale-leaseback and build-to-suit financing and property ownership, alongside an investment management business advising non-listed REITs and a business development company. At quarter-end, its owned portfolio comprised 866 net-leased properties and two hotels, with 98.5% occupancy and a 9.0-year weighted-average lease term. Managed Programs had approximately $11.6 billion of assets under management.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $270.2 | $220.4 |
| Net income attributable to W. P. Carey | $57.4 | $36.1 |
| Diluted EPS | $0.54 | $0.34 |
| AFFO attributable to W. P. Carey (non-GAAP) | $139.5 | $130.0 |
| Net cash provided by operating activities | $113.1 | $80.9 |
- Total revenue increased 22.6%; net income attributable to the company increased 59.0%. Revenue excluding reimbursable costs was $244.2 million, versus $204.8 million.
- Owned Real Estate segment net operating income was $94.9 million, up from $70.8 million. Investment Management recorded a $3.1 million attributable net loss, compared with $6.0 million of income a year earlier.
- Cash and cash equivalents were $267.1 million at March 31, compared with $157.2 million at year-end. The revolving credit facility had $935.4 million of unused capacity, excluding letters of credit.
- Total debt carrying value was approximately $4.56 billion. Fixed-rate debt was 74% of total debt and variable-rate debt 26%; weighted-average interest rates were 4.7% and 2.1%, respectively. The company reported compliance with debt covenants.
- Q1 distributions declared were $0.9742 per share, equivalent to an annualized $3.90. Cash distributions paid during the quarter were $102.2 million.
Material changes versus Q1 2015
- Owned Real Estate revenue increased, substantially reflecting $32.2 million of lease termination income related to a property sold during the quarter, as well as contributions from investments acquired in 2015. Lease termination income and other totaled $32.5 million, versus $3.2 million.
- Investment Management asset management revenue rose $3.5 million to $14.6 million, while structuring revenue fell $9.0 million to $12.7 million due to lower Managed REIT investment volume. The segment’s attributable result declined to a $3.1 million loss, including restructuring costs and strategic-review expenses.
- Operating cash flow rose $32.1 million, primarily due to receipt of lease termination income and cash flow from 2015 investments. Investing cash flow was positive $94.2 million, compared with a $365.4 million outflow, reflecting $103.7 million of property-sale proceeds and no property acquisitions in Q1 2016.
- AFFO increased 7.3%, although it includes management-defined adjustments and is not a GAAP measure. The company excludes certain items, including specified lease termination income, restructuring expenses and strategic-review costs.
Outlook, management commentary and risks
- The company said its May 2016 strategic review reaffirmed the strategic value of its diversified business model. No numerical AFFO guidance range is provided in the supplied filing text.
- Mark J. DeCesaris became CEO on February 10, 2016, succeeding Trevor P. Bond. The quarter included $11.5 million of restructuring and other compensation expense, including severance and costs related to a workforce reduction; $5.5 million of professional and advisory expenses was associated with the strategic review.
- A $7.1 million allowance for credit losses was recorded on a direct financing lease after a decline in estimated future tenant payments, including the possibility of early lease termination. The allowance rose to $15.8 million; the filing states no finance receivable balances were past due.
- The company identified $703.0 million of mortgage balloon payments due over the next 12 months in its cash requirements discussion. It also anticipated international mortgage balloon payments of $182.0 million in 2016, $348.6 million in 2017 and $133.5 million in 2018, and expected to repay them using cash resources, including revolver capacity.
- Key exposures include tenant credit risk, interest rates, foreign exchange, and concentration by industry and geography. Approximately 37% of net-lease ABR was international; retail stores represented 21%. A 1% change in relevant currency exchange rates was estimated to change projected property-level cash flow by $3.0 million for euros, $4.9 million for British pounds and $2.0 million for Australian dollars.
- After quarter-end, the company completed sale-leaseback acquisitions totaling approximately $266.5 million and agreed to provide an additional $128.0 million of build-to-suit financing over four years. It also filed to register CPA:19–Global for a proposed capital raise of up to $1.5 billion; commencement remained subject to regulatory review.
- The filing reports no material litigation and states disclosure controls were effective at a reasonable level of assurance. It also notes that Q1 2015 comprehensive income, equity and cash-flow statements were revised for previously identified foreign-currency presentation errors; the company said the errors were not material and did not affect cash balances, income statements or EPS.
Important facts for investors to verify
- How much of the earnings and AFFO increase reflects recurring property operations versus the $32.2 million lease termination item and other adjustments.
- The tenant, expected payment profile and downside assumptions behind the $7.1 million direct-financing-lease credit allowance.
- Refinancing or repayment plans for mortgage maturities and balloon payments, particularly the $703.0 million due within 12 months.
- Whether occupancy, lease renewals and rent escalations offset pressure in existing properties; the filing cites lower rents on five lease extensions than the prior in-place rents.
- The effect of lower structuring revenue, regulatory changes affecting unlisted investment products, and the proposed CPA:19–Global offering on Investment Management earnings and fundraising.
- The sustainability of distributions relative to AFFO, while considering that AFFO is a non-GAAP measure and the filing cautions it is not a substitute for GAAP earnings or operating cash flow.