W. P. Carey Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. Amounts are U.S. dollars unless stated otherwise. W. P. Carey is a REIT focused on single-tenant commercial properties, with Owned Real Estate and Investment Management segments.
Financial performance and position
- Revenue: $201.8 million, down 7.9% from $219.1 million. Excluding reimbursable tenant and affiliate costs, revenue was $190.3 million, up from $188.1 million. Owned Real Estate revenue rose to $177.6 million from $168.7 million; Investment Management revenue fell to $24.2 million from $50.3 million.
- Profit: Net income was $68.1 million and net income attributable to W. P. Carey was $65.3 million, versus $59.8 million and $57.5 million, respectively. Basic and diluted EPS were $0.60, up from $0.53. The results included a $6.7 million after-tax real-estate sale gain and a $6.0 million income-tax benefit.
- Supplemental operating measure: AFFO, a company-defined non-GAAP measure, was $138.4 million, up from $134.2 million. Management attributed the increase chiefly to higher lease revenue and lower interest expense, partly offset by lower structuring revenue.
- Cash flow: Operating cash flow was $102.9 million, down from $111.7 million. Investing activities used $40.1 million; financing activities used $60.2 million. Cash and cash equivalents were $171.3 million at quarter-end; cash plus restricted cash was $215.4 million.
- Debt and liquidity: Debt, net, was $4.39 billion, compared with $4.27 billion at year-end. The company issued €500 million of 2.125% senior notes due 2027 and used proceeds in part to repay its term loans and reduce other borrowings. The revolver had $267.4 million drawn and $1.2 billion of unused capacity. The company reported covenant compliance. Its financing summary showed 91% of debt fixed-rate and a 3.4% weighted-average borrowing rate during the quarter.
- Distribution: The quarterly distribution declared was $1.015 per share, versus $0.995 a year earlier; it was paid April 16, 2018.
- Portfolio: The owned portfolio comprised 886 net-leased properties and two hotels, with 99.7% occupancy and a 9.7-year weighted-average lease term. Net-leased annualized base rent was $689.5 million; 34.6% was international.
Material changes versus Q1 2017
- Total revenue declined primarily because the company exited non-traded retail fundraising in 2017: reimbursable affiliate costs and dealer-manager fees dropped, and investment structuring activity was lower. Management expects structuring activity to decline further as existing managed funds are substantially invested and no new fundraising is planned.
- Owned Real Estate lease revenue grew, partly due to euro strength, scheduled rent increases, new leases, and completed construction projects. The stronger euro also increased translated property and debt values.
- Net income increased mainly because of the larger real-estate sale gain. Operating cash flow declined, while AFFO increased.
- Interest expense decreased to $38.1 million from $42.0 million; management cited a lower weighted-average interest rate, 3.4% versus 3.8%.
Outlook, risks, and unusual items
- No specific AFFO guidance range is stated in the supplied filing text. Management said it expects sufficient cash from operations to meet normal recurring liquidity needs, with cash, revolver capacity, dispositions, and future debt or equity issuance among potential funding sources.
- Capital commitments and tenant expansion allowances totaled $185.3 million, including approximately $130.7 million for construction and redevelopment projects. The company also described scheduled debt service, distributions, and mortgage maturities as expected cash requirements.
- Risk factors include interest-rate and foreign-exchange movements, tenant credit and concentration exposure, property values, refinancing needs, and reliance on capital-market access. Retail stores represented 18.6% of net-lease base rent; international assets represented 34.6%.
- The company recorded $4.8 million of impairment charges on two properties: $3.8 million following a tenant bankruptcy and likely vacancy, and $1.0 million following lease expiration and vacancy. It also recorded about $4.2 million of stock-based compensation associated with modification of awards following the former CEO’s retirement.
- A deferred tax benefit of approximately $6.2 million resulted from releasing a tax liability after a property-holding company’s tax classification changed. The company reported no material litigation and said its disclosure controls were effective.
- Subsequent to quarter-end, the company sold a hotel for gross proceeds of $39.0 million and extended two loans to affiliate CESH I by one year, to May 2019.
Important facts for investors to verify
- Reconcile the sources and sustainability of AFFO growth with declining operating cash flow and the company’s distribution obligations; AFFO is non-GAAP and is not a substitute for cash flow.
- Review the debt maturity schedule, variable-rate exposure, covenant headroom, and access to the revolver and capital markets.
- Assess expected revenue and earnings from the managed programs as fundraising has ended and management anticipates fewer structuring transactions.
- Monitor the tenant bankruptcy, vacancy and impairment exposure, as well as the status of the New York Times tenant repurchase option and other anticipated property sales.
- Consider foreign-exchange effects, international exposure, and the concentration of rent among major tenants and industries.