W. P. Carey Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. W. P. Carey is a REIT focused on commercial property net leases and also manages investment programs. Its owned portfolio included 895 net-leased properties and two hotels, with 99.3% occupancy and a 9.6-year weighted-average remaining lease term.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $221.5 million | $217.3 million | $440.6 million | $487.5 million |
| Net income attributable to W. P. Carey | $64.3 million | $51.7 million | $121.8 million | $109.1 million |
| Diluted EPS | $0.59 | $0.48 | $1.13 | $1.02 |
| AFFO attributable to W. P. Carey | $148.4 million | $132.2 million | $282.7 million | $271.7 million |
| Net cash from operating activities | Not presented quarterly | $247.3 million | $244.7 million |
Q2 revenue increased about 2%, while six-month revenue fell about 10%. Six-month net income rose despite the revenue decline. The filing does not provide a comparable consolidated operating-margin figure.
- Cash and liquidity: Cash and cash equivalents were $171.6 million at June 30, 2017. The revolving credit facility had $1.3 billion of unused capacity, excluding letters of credit. Management said it expected operating cash flow to meet normal recurring liquidity needs.
- Debt: Debt, net, was $4.265 billion, down from $4.441 billion at December 31, 2016. At period-end, 81% of debt was fixed-rate; weighted-average rates were 4.0% for fixed-rate debt and 1.8% for variable-rate debt. The company reported compliance with debt covenants.
- Distributions: Distributions declared were $1.00 per share for Q2 and $1.995 per share for the first half. The Q2 distribution was paid July 14, 2017.
Changes versus the prior comparable period
- Q2 owned-real-estate revenue declined, primarily due to property dispositions; investment-management revenue rose on higher structuring and asset-management revenue. For the first half, owned-real-estate revenue also reflected the prior-year $32.2 million lease-termination income item.
- Investment Management net income attributable to W. P. Carey increased to $20.8 million in Q2 from $13.0 million and to $40.3 million for the first half from $21.9 million. Owned Real Estate net income attributable to the company rose in Q2 but declined for the first half.
- Interest expense decreased to $42.2 million in Q2 from $46.8 million and to $84.2 million for the first half from $95.1 million, reflecting lower average debt and interest rates.
- AFFO increased in both periods, while NAREIT FFO declined: Q2 FFO was $120.8 million versus $132.6 million; first-half FFO was $239.6 million versus $271.0 million.
Outlook, material events and risks
- On June 15, the board approved an exit from non-traded retail fundraising activities effective June 30. The existing Managed Programs were expected to continue under W. P. Carey’s management through their natural life cycles; offerings for CWI 2 and CESH I closed July 31. The company recorded $7.7 million of restructuring costs, primarily severance.
- The filing discusses an expected AFFO range among its forward-looking topics, but the supplied filing text does not provide a clear numeric range or specific earnings guidance.
- During the first half, the company issued €500 million of 2.25% senior notes and amended its credit facility. It also repaid or prepaid $361.1 million of non-recourse mortgage principal. Subsequent to quarter-end, it prepaid another $54.9 million of mortgages.
- Foreign exchange is a significant exposure. The weaker U.S. dollar versus the euro increased the reported carrying values of real estate and debt; the company also recorded first-half foreign-currency transaction losses of about $9 million. The filing identifies Brexit-related uncertainty and tenant credit, interest-rate, refinancing and market risks.
- There were no material litigation matters reported and no impairment charges in the first half of 2017. The prior-year period included $35.4 million of impairment charges and substantial lease-termination income, affecting comparisons.
Important facts for investors to verify
- Review the sustainability and composition of AFFO, including its non-GAAP adjustments, and compare it with operating cash flow and distributions.
- Assess the effects of ending retail fundraising on future Investment Management fees and the ongoing economics of managing existing programs.
- Check upcoming mortgage maturities and refinancing plans, particularly the disclosed €125.7 million of balloon payments due in 2018.
- Monitor foreign-currency exposure, tenant concentration and lease expirations; the ten largest tenants accounted for 31.7% of portfolio ABR.
- Confirm subsequent property-sale proceeds, capital commitments, and the status of the company’s stated liquidity and covenant position.