W. P. Carey Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. W. P. Carey is a REIT focused primarily on long-term, triple-net-leased commercial real estate in the U.S. and Northern and Western Europe. Its portfolio included 1,475 net-leased properties, 398 tenants, 99.0% occupancy and an 11.2-year weighted-average lease term, plus 100 operating properties.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $452.6 million | $344.4 million | $880.4 million | $692.8 million |
| Net income attributable to W. P. Carey | $144.6 million | $127.7 million | $439.0 million | $284.7 million |
| Diluted EPS | $0.67 | $0.66 | $2.05 | $1.47 |
| AFFO, non-GAAP | $293.3 million | $254.4 million | $572.5 million | $513.2 million |
Q2 revenue rose about 31% and net income about 13% year over year. Six-month revenue rose about 27%, net income about 54%, and AFFO about 12%. The filing does not present a conventional profit-margin measure for the business; AFFO is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
For the six months, operating cash flow was $530.3 million, investing cash outflow was $905.6 million, and financing cash inflow was $435.5 million. Cash and cash equivalents were $204.1 million at June 30, 2023; cash, including restricted cash, was $286.3 million.
Debt and liquidity
Debt, net, was $8.62 billion at June 30, up from $7.88 billion at December 31, 2022. The weighted-average debt rate was 3.3%; 85% of debt was fixed-rate and 15% variable-rate. The company reported about $1.3 billion of available revolver capacity and $384.2 million of available proceeds under ATM forward agreements. It also disclosed $160.7 million of cash held in foreign subsidiaries, which may be subject to repatriation restrictions or costs.
Scheduled principal payments were $278.2 million for the remainder of 2023 and $1.24 billion in 2024, including $500 million of senior notes due in April 2024. Management expects to meet cash needs through operating cash flow, dispositions, existing cash, credit capacity and potential debt or equity issuance. The company was in compliance with debt covenants at quarter-end.
Changes, outlook and notable items
- Revenue growth reflected acquisitions, rent escalations, the August 2022 CPA:18 merger and 12 hotels that shifted from net leases to operating properties. Operating-property revenue also reflects acquired self-storage and student-housing assets.
- Interest expense increased to $75.5 million in Q2 from $46.4 million, and to $142.7 million for the first half from $92.5 million, driven by higher debt balances and rates, merger-related mortgages and new borrowings.
- Six-month GAAP income includes a $176.2 million gain following notice that a tenant-related party intends to exercise its purchase option on 78 self-storage properties. The assets were reclassified as sales-type leases; the purchase price will be calculated using CPI at closing. This materially boosts first-half reported earnings and should be distinguished from recurring operating performance.
- Investment Management revenue declined after the CPA:18 merger ended the related advisory fees and distributions. Management expects to manage CESH through its lifecycle, with its asset-management revenue expected to decline as assets are sold; W. P. Carey no longer raises capital for new or existing funds.
- Management believes cash from operations and other available funding sources will meet normal liquidity needs. No formal earnings or AFFO guidance is provided in the filing. Risks include interest-rate exposure, tenant credit and payment risk, foreign-exchange movements, refinancing needs and adverse macroeconomic conditions. The filing reports no material litigation and no material adverse effect expected from ordinary-course claims.
- After quarter-end, the company completed two property dispositions for approximately $98.7 million gross proceeds and repaid or prepaid two mortgages totaling approximately $94.0 million.
Important facts for investors to verify
- Whether the 78-property purchase option closes, the final CPI-linked price and the resulting cash proceeds.
- How much of first-half earnings growth is attributable to the one-time $176.2 million gain versus recurring rent and AFFO growth.
- Plans and costs for refinancing or repaying the $500 million April 2024 notes and other near-term maturities.
- Dividend sustainability relative to recurring cash flow and AFFO, while considering that AFFO is non-GAAP.
- Operating performance of the hotel and other operating-property portfolio, and the ongoing decline in Investment Management fees.
- Exposure to higher rates, tenant credit deterioration, foreign-exchange changes and the accessibility of cash held overseas.