W. P. Carey Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited quarter and six months ended June 30, 2018. W. P. Carey is a REIT focused on single-tenant commercial real estate in North America and Europe, with Owned Real Estate and Investment Management segments. At quarter-end, its net-lease portfolio included 878 properties, 86.6 million square feet, 208 tenants, 99.6% occupancy and a 10.0-year weighted-average lease term.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $201.1m | $221.5m | $403.0m | $440.6m |
| Net income attributable to W. P. Carey | $75.7m | $64.3m | $141.0m | $121.8m |
| Diluted EPS | $0.70 | $0.59 | $1.30 | $1.13 |
| AFFO attributable to W. P. Carey | $142.6m | $148.4m | $281.0m | $282.7m |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $228.9m | $247.8m |
At June 30, total assets were $8.27bn, net real estate investments $6.77bn and total debt $4.40bn. Cash and cash equivalents were $122.4m; the $1.5bn revolving facility had $1.1bn unused capacity. Debt was 88% fixed-rate and 12% variable-rate; weighted-average interest rate at period-end was 3.5% overall for the quarter and 3.5% for the six-month period. Distributions declared were $1.020 per share for Q2 and $2.035 per share for the first half.
Material changes versus prior comparable periods
- Q2 revenue declined 9%, mainly reflecting lower Investment Management revenue: structuring activity and reimbursed offering-related costs fell as managed programs were substantially invested and fundraising had ended. Owned Real Estate lease revenue rose, but lower hotel revenue after a hotel sale offset the increase.
- Investment Management revenue was $27.2m in Q2 versus $47.5m a year earlier; first-half revenue was $51.4m versus $97.8m. Management expects structuring revenue to continue declining as managed programs are substantially invested.
- Net income rose year over year, largely due to higher real estate sale gains. Q2 AFFO fell about 4% and first-half AFFO fell about 1%, reflecting lower structuring revenue and equity earnings, partly offset by higher lease revenue.
- First-half operating cash flow decreased $18.8m. Investing cash flow was a $211.4m outflow, reflecting acquisitions and property investment; financing cash flow was a $58.3m outflow. Cash and restricted cash declined $45.9m from year-end.
- First-half acquisitions totaled $357.3m, including a $85.5m property acquired in exchange for 23 properties. Seven properties were sold for $77.7m net proceeds. Lease occupancy eased from 99.8% at year-end to 99.6%; weighted-average lease term increased from 9.6 to 10.0 years.
Outlook, commentary, risks and unusual items
- Proposed merger: Agreement with CPA:17–Global provides for each eligible CPA:17–Global share to convert into 0.160 W. P. Carey shares. Closing was expected around December 31, 2018, subject to regulatory and shareholder approvals and other conditions; no assurance was given. The go-shop period ended without a qualifying alternative proposal. Merger costs incurred through June 30 were approximately $3.6m, including 2017 costs.
- Liquidity and commitments: Management believed operating cash flows and available funding sources would meet normal liquidity needs. Cash needs include acquisitions, construction commitments, distributions, debt service and merger costs. Contractual obligations and commitments totaled $5.59bn, including $175.2m of capital commitments and tenant expansion allowances. The company noted that some foreign cash could be costly or restricted to repatriate.
- Debt and market exposure: In March, the company issued €500m of 2.125% senior notes due 2027 and repaid its unsecured term loans; it also prepaid or repaid $174.4m of mortgage principal. It reported compliance with debt covenants. Risks include refinancing and interest-rate exposure, foreign-exchange movements, tenant credit/default risk and property value changes. A 1% rate move was estimated to change annual interest on unhedged variable-rate debt by about $4m in total.
- Unusual items: First-half results included $4.8m of impairments on two properties, including $3.8m related to a tenant bankruptcy and likely vacancy. Real estate sale gains included a $6.3m gain on the property exchange; a $6.2m deferred tax benefit arose from a change in tax classification. Currency translation reduced comprehensive income in Q2.
- Contingencies: The filing reported no material litigation, while noting ordinary-course claims not expected to materially affect results. Failure of the proposed merger could leave the company with transaction costs and, in certain circumstances, responsibility for CPA:17–Global expenses.
- The filing provides no clear numerical AFFO guidance or specific forward dividend amount beyond distributions declared to date. The company said interim results may not indicate full-year results.
Important facts for investors to verify
- Merger approval status, final terms, expected timing, share issuance and potential costs if it does not close.
- Whether AFFO and operating cash flow stabilize as Investment Management structuring activity declines.
- Tenant credit quality, the bankruptcy-related property impairment and the portfolio’s high occupancy and lease renewal outcomes.
- Liquidity available after distributions, acquisition and construction spending, and scheduled debt maturities; confirm covenant headroom and interest-rate exposure.
- Effects of currency movements and the distinction between GAAP earnings boosted by sale gains and recurring operating performance.