W. P. Carey Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; it includes quarterly data but does not present a standalone Q4 income statement summary. W. P. Carey is a self-managed REIT with two segments: Real Estate Ownership and Investment Management. Its portfolio primarily comprises long-term, triple-net-leased commercial properties, alongside advisory and fee revenue from managed investment vehicles.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $906.2 million | $489.9 million |
| Net income attributable to W. P. Carey | $239.8 million | $98.9 million |
| Diluted EPS | $2.39 | $1.41 |
| Adjusted funds from operations (AFFO; non-GAAP) | $480.5 million | $294.2 million |
| Cash from operating activities | $399.1 million | $207.9 million |
| Cash and cash equivalents at year-end | $198.7 million | $117.5 million |
| Total assets at year-end | $8.64 billion | $4.68 billion |
| Total debt at year-end | $4.09 billion | $2.07 billion |
At year-end, the owned portfolio had 783 net-leased properties and four operating properties across 18 countries, with 98.6% occupancy and a 9.1-year weighted-average remaining lease term. Approximately 65% of contractual annualized base rent was from U.S. properties and 35% from international properties. The largest tenant represented 5.6% of base rent; Germany represented 9.1%.
Net cash used in investing activities was $640.2 million, reflecting acquisition spending, while financing activities provided $343.1 million. AFFO is a management-defined non-GAAP measure and should not be treated as GAAP earnings or operating cash flow.
Material changes versus the prior comparable year
- Revenue, attributable net income, AFFO, and operating cash flow rose substantially, primarily because the January 2014 CPA:16 merger expanded the owned property base. The merger contributed $250.5 million of lease revenue and $142.6 million of property-level contribution for the year.
- The merger also produced a $105.9 million gain on change in control of interests and $30.5 million of merger costs. Reported results therefore include significant transaction-related and nonrecurring effects; growth should not be read as purely organic.
- Debt increased to approximately $4.1 billion. Interest expense rose to $178.1 million from $103.7 million, reflecting assumed mortgage debt and the 2014 bond issuance, partly offset by repayments.
- The company issued $500 million of 4.6% senior unsecured notes and raised $282.2 million net through an equity offering. It repaid or prepaid mortgage loans as part of a stated transition toward unsecured borrowing.
- Investment Management revenue increased overall, particularly structuring and dealer-manager fees, while asset-management revenue declined after advisory fees from CPA:16 ceased upon its merger. Managed REIT assets under management were $9.23 billion, down from $9.73 billion.
- Foreign currency translation and exchange-rate movements were material: the stronger U.S. dollar reduced the reported carrying value of real estate and contributed to a $117.9 million foreign-currency translation loss in other comprehensive income.
Outlook, risks, contingencies, and unusual items
- Management stated it expected operating cash flow, equity distributions, cash reserves, available credit, and access to debt or equity markets to meet normal liquidity needs. The supplied filing text does not provide a clear numerical AFFO forecast for 2015.
- In January 2015, the company increased revolving-credit capacity from $1.0 billion to $1.5 billion, with a further $500 million accordion subject to conditions. It also issued €500 million of 2.0% notes due 2023 and $450 million of 4.0% notes due 2025. Proceeds were intended partly to repay revolver borrowings and fund investments.
- Year-end liquidity included $198.7 million of cash and $192.5 million of unused revolver capacity, excluding letters of credit. $117.2 million of cash was held in foreign subsidiaries and could incur restrictions or costs if repatriated.
- Management identified mortgage balloon payments as a refinancing and liquidity risk, including $133.0 million of consolidated and $12.4 million of unconsolidated mortgage balloons expected within the next 12 months. Separately, $383.4 million of international mortgage balloons were due in 2017; refinancing on favorable terms was not assured.
- Key business risks include tenant defaults and bankruptcies, lease expirations (about 25% of base rent scheduled to expire within five years), interest-rate and currency exposure, property impairments, competition for acquisitions and fundraising, and dependence on renewable advisory agreements. Approximately 35% of base rent was international, adding legal, tax, currency, and political risks.
- The company recorded $23.8 million of impairment charges in 2014, primarily associated with tenant nonrenewal, vacancies, and residual-value declines. Two leases were terminated early, generating $13.5 million of termination income. 2014 discontinued-operations income of $33.3 million included $27.7 million of net gains on property sales.
- A purported class action relating to the CPA:16 merger was dismissed in full in October 2014; plaintiffs filed a notice of appeal. The company said it believed the claims were without merit and intended to defend them. Other ordinary-course legal proceedings were not expected to have a material adverse effect.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end. The company adopted revised discontinued-operations accounting prospectively in 2014; the change did not have a significant effect on reported results.
Important facts for investors to verify
- Separate merger-driven growth and the $105.9 million remeasurement gain from recurring earnings; review AFFO reconciliations and the merger’s pro forma results.
- Confirm debt maturities, mortgage balloon obligations, covenant headroom, and how January 2015 bond proceeds were applied.
- Assess tenant credit quality, the 2015–2019 lease-expiration schedule, and re-leasing prospects for properties with tenant or occupancy issues.
- Evaluate the sustainability of distributions against AFFO, operating cash flow, debt service, and REIT distribution requirements; the board retains discretion to change distributions.
- Track currency exposure and the concentration of base rent in Germany, Europe, and other foreign markets, as well as the cost and effectiveness of hedges.
- Check renewal and termination status of managed-vehicle advisory agreements, fundraising trends, and whether Investment Management fees remain resilient after the CPA:16 merger.
- Monitor the CPA:16 merger litigation appeal, tax matters, and environmental or other property contingencies.