W. P. Carey Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. W. P. Carey is a REIT focused primarily on long-term, triple-net leases of commercial properties in the U.S. and Northern and Western Europe.
Financial and operating highlights
- Revenue: $427.8 million, up 22.8% from $348.4 million a year earlier. Growth reflected acquisitions, rent escalations, the CPA:18 merger, and hotels newly operated directly by the company.
- Profit: Net income attributable to W. P. Carey was $294.4 million, or $1.39 per diluted share, versus $157.0 million, or $0.82, in Q1 2022. The increase was substantially affected by a $176.2 million gain tied to a tenant’s purchase option exercise; the total reported gain on real estate sales was $177.7 million. GAAP profit and margin therefore include a significant unusual item.
- AFFO: Adjusted funds from operations, a non-GAAP measure, was $279.2 million, up 7.9% from $258.8 million. Management attributed growth to investment activity, rent escalations, and the CPA:18 merger, partly offset by higher interest expense. AFFO is not a substitute for GAAP earnings or operating cash flow.
- Cash flow: Operating cash flow was $282.7 million, versus $235.9 million. Investing activities used $587.3 million, including a $467.1 million deposit for an acquisition completed in April. Financing activities provided $307.2 million. Dividends paid were $226.7 million.
- Margins: The filing does not provide a headline operating-margin measure. GAAP net income is elevated by the purchase-option gain, so it is not directly indicative of recurring operating performance.
- Debt and liquidity: Debt, net, was $8.26 billion at March 31, compared with $7.88 billion at year-end. Cash and cash equivalents were $147.9 million; the company also reported about $1.1 billion of available revolver capacity and $385.2 million of available ATM forward proceeds. Total cash and restricted cash was $230.8 million. The company reported compliance with debt covenants.
- Portfolio: Net-leased portfolio occupancy was 99.2%, with 1,446 properties, 397 tenants, and a 10.9-year weighted-average lease term. The company collected over 99.4% of contractual base rent due for Q1 through the report date.
Material changes versus Q1 2022
- Real Estate revenue rose to $427.4 million from $344.1 million, largely due to acquired properties and rent increases. Operating-property revenue also increased as 12 hotels converted from net leases to operating properties.
- Interest expense increased by $21.1 million to $67.2 million. Management cited debt assumed in the CPA:18 merger, higher balances and rates on the credit facility, and new note issuances.
- Investment Management revenue fell to $0.4 million from $4.3 million, and segment net income attributable to W. P. Carey declined to $1.1 million from $10.1 million. CPA:18-related advisory fees and distributions ended after its August 2022 merger.
- Net income also reflects different nonrecurring and market-related items across the periods: Q1 2023 included the large purchase-option gain; Q1 2022 included real estate impairment charges and gains related to WLT investments.
Outlook, risks, and unusual items
- The filing provides no specific earnings or AFFO guidance. Management stated it expects operating cash flow and available financing sources to meet normal recurring liquidity needs, while noting liquidity could be affected by unexpected costs or higher operating expenses.
- The tenant at 78 U.S. self-storage properties gave notice it intends to exercise a purchase option, with closing expected on or around March 31, 2024. Those properties generated $38.8 million of annualized base rent at quarter-end. The company reclassified the assets as sales-type lease investments and recognized the $176.2 million gain; the purchase price will reflect CPI at closing.
- Subsequent to quarter-end, the company completed acquisitions totaling approximately $565.7 million. It also closed a €500 million term loan due 2026, using proceeds to repay debt, including revolver borrowings; a swap fixes its rate at 4.34% through the end of 2024.
- Debt and liquidity considerations include $325.6 million of scheduled principal payments for the remainder of 2023, $1.24 billion in 2024, and the Senior Unsecured Credit Facility maturity in February 2025. The filing estimates $253.2 million of interest payments due in the next 12 months.
- Principal risks include rising interest rates, foreign-currency movements, tenant credit and rent collection, property and tenant concentration, and access to capital markets. Management reported no material litigation and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Expected timing, CPI-based purchase price, and completion of the U-Haul-related repurchase; also the effect of losing the associated $38.8 million of annualized base rent.
- Recurring operating performance apart from the $176.2 million purchase-option gain; compare AFFO with GAAP net income and operating cash flow.
- Funding and integration of the April acquisitions, and the effect of the new term loan and debt maturities on interest expense and liquidity.
- Whether high rent collections and portfolio occupancy persist, and how tenant credit quality performs amid economic and interest-rate pressures.
- Dividend coverage and future equity issuance, given dividends, acquisition commitments, and the use of ATM forward proceeds.