W. P. Carey Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. W. P. Carey is a REIT focused primarily on single-tenant commercial properties leased on a triple-net basis, with Real Estate and Investment Management segments.
Business context and portfolio
- At quarter-end, the owned net-lease portfolio included 913 properties, 89.3 million square feet and 210 tenants; occupancy was 98.7% and weighted-average lease term was 10.2 years. Occupancy declined from 99.8% at December 31, 2017.
- Pro rata annualized base rent was $713.8 million: 64.5% from U.S. properties and 35.5% international. Industrial, office, retail and warehouse represented 27.9%, 23.0%, 17.3% and 16.1% of ABR, respectively.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $209.4 million | $210.8 million | $612.3 million | $651.3 million |
| Net income attributable to W. P. Carey | $77.3 million | $80.3 million | $218.3 million | $202.1 million |
| Diluted EPS | $0.71 | $0.74 | $2.01 | $1.87 |
| AFFO attributable to W. P. Carey | $159.8 million | $148.2 million | $440.7 million | $430.9 million |
- Real Estate revenue increased year over year, principally from acquisitions; Investment Management revenue fell as structuring activity and reimbursable affiliate costs declined. Total revenue was down 0.7% in Q3 and 6.0% year to date.
- Q3 net income declined mainly because real-estate sale gains were lower than in the prior-year quarter; nine-month net income increased, aided by foreign-currency gains, lower interest expense and the absence of prior-year restructuring costs.
- Operating cash flow was $369.8 million for the first nine months, versus $386.0 million. Investing activities used $461.5 million, including real-estate purchases; financing activities provided $104.9 million. Dividends paid were $329.6 million.
- Quarterly dividends declared were $1.025 per share, compared with $1.005 in Q3 2017. Dividends declared for the first nine months totaled $3.060 per share.
Debt, liquidity and capital allocation
- At September 30, 2018, debt, net was $4.664 billion, up from $4.265 billion at year-end 2017. The balance included $3.007 billion of senior unsecured notes, $696.4 million drawn on the revolving facility and $960.0 million of non-recourse mortgages; unsecured term loans had been repaid.
- Cash and cash equivalents were $176.6 million; the $1.5 billion revolving facility had $803.6 million of unused capacity. Management said it expected operating cash flow and other available funding sources to cover normal recurring liquidity needs. The company was in compliance with debt covenants.
- During the first nine months, W. P. Carey acquired investments totaling $617.1 million, completed $74.8 million of construction projects and sold ten properties for $95.1 million of net proceeds. It issued €500 million of 2.125% notes due 2027 and repaid its unsecured term loans.
Material changes, outlook and risks
- CPA:17 merger: Approved and completed after quarter-end, on October 31, 2018. W. P. Carey issued 53.85 million shares valued at approximately $3.6 billion for the remaining CPA:17 interests and repaid approximately $180.3 million of CPA:17 credit-facility borrowings. The company had not completed purchase accounting and did not provide the merger’s pro forma earnings impact.
- Post-quarter financing: On October 9, 2018, W. P. Carey issued €500 million of 2.250% senior notes due 2026; proceeds were used to partially repay the revolver. Management expected post-merger dividends and scheduled mortgage principal payments to rise, including from approximately $1.8 billion of mortgage debt assumed in the merger.
- Management expected Investment Management structuring revenue to decline as managed funds were substantially invested, fundraising had ended and CPA:17 management fees and cash distributions ceased following the merger. The filing gives no clear numerical AFFO guidance range in the supplied text.
- Unusual items included $4.8 million of property impairments related to a tenant bankruptcy and likely vacancy, and a lease expiration resulting in vacancy. Currency movements affected reported asset and debt values; the stronger U.S. dollar reduced translated foreign property values.
- Risks include tenant credit and vacancy, foreign-exchange and interest-rate exposure, refinancing balloon maturities, and dependence on access to capital. The company reported no material litigation and stated that disclosure controls were effective.
Key facts for investors to verify
- Merger purchase accounting, acquired debt and the resulting effect on leverage, interest expense, dividends and AFFO.
- Whether post-merger cash flow and available credit can support higher dividend obligations and debt maturities.
- Occupancy trends, tenant credit quality and leasing or disposition outcomes for impaired and held-for-sale properties.
- The pace of decline in Investment Management fees and structuring revenue after the CPA:17 merger.
- How much AFFO growth reflects recurring property operations versus adjustments, and how AFFO compares with GAAP earnings and cash available for distributions.