W. P. Carey Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. W. P. Carey is a REIT focused on long-term commercial real estate financing and ownership, primarily through net leases, and advises affiliated investment programs. Its two segments are Real Estate Ownership and Investment Management.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $214.7 million | $197.0 million | $673.1 million | $659.6 million |
| Net income attributable to W. P. Carey | $21.7 million | $27.3 million | $121.2 million | $207.6 million |
| Diluted EPS | $0.20 | $0.27 | $1.13 | $2.12 |
| Adjusted funds from operations (AFFO), non-GAAP | $126.6 million | $114.4 million | $395.7 million | $354.9 million |
- Revenue increased about 9% in Q3 and 2% year to date. Lease revenue growth reflected acquired properties; Investment Management revenue was affected by investment activity and offering-related reimbursements.
- Q3 net income fell despite revenue growth, principally reflecting higher impairment charges. Year-to-date net income also reflects the $105.9 million 2014 gain on change in control and $33.0 million of 2014 discontinued-operations income.
- Q3 Real Estate Ownership segment net operating income was $55.4 million, down from $71.1 million; nine-month segment net operating income was $208.9 million, up from $183.2 million. Q3 included $19.4 million of impairment charges.
- Nine-month operating cash flow was $330.9 million, versus $277.2 million. Investing activities used $625.2 million, including $529.8 million of real estate purchases and $155.4 million of affiliate loans; financing activities provided $309.4 million. Cash declined by $7.4 million to $191.3 million.
- At September 30, assets were $8.9 billion and total equity was $3.6 billion. Debt carrying value was approximately $4.6 billion: $2.4 billion non-recourse debt, $1.5 billion senior unsecured notes, and $685.5 million under the credit facility. Debt was 75% fixed-rate; weighted-average rates were 4.7% fixed and 2.5% variable.
- Liquidity included $191.3 million cash and $1.1 billion of unused revolver capacity. The company reported compliance with debt covenants. The $250 million term loan was due January 31, 2016, with two one-year extension options under evaluation.
- Quarterly distributions declared were $0.955 per share; the filing reports $2.8615 declared per share for the first nine months. The third-quarter distribution was paid October 15, 2015.
Material changes, outlook and risks
- Acquisition volume was $543.3 million for the first nine months, chiefly six international investments. The owned net-lease portfolio comprised 854 properties, 98.8% occupied, with an 8.9-year weighted-average lease term; 36.5% of ABR was international.
- Foreign exchange was a material headwind: the stronger U.S. dollar reduced reported values of foreign real estate and debt and weighed on lease revenue. Nine-month foreign currency transaction losses were $3.8 million; foreign currency translation contributed a $103.1 million loss to comprehensive income.
- Impairment charges rose to $22.7 million for the first nine months from $6.3 million. Q3 impairments included $8.7 million tied to an expected lease termination and $6.9 million for a building planned for demolition and redevelopment.
- On November 3, 2015, after quarter-end, the company disclosed that its board authorized management to actively explore a potential separation of its core competencies. No transaction, timing, or outcome was assured.
- Management expected to meet normal liquidity needs through operating cash flow, cash, revolver capacity, and potential debt or equity issuance. Near-term demands include acquisitions, distributions, debt service, and mortgage balloon payments; $325.8 million of consolidated mortgage balloons were due over the next 12 months. Management cautioned refinancing may not be available on favorable terms, or at all.
- Risks include interest-rate and tenant-credit exposure, foreign exchange, property valuation and impairments, and concentrations by property type and industry. No individual tenant or foreign country exceeded 10% of ABR; retail stores represented 20% of ABR.
- The 2013 CPA:16 merger lawsuit was dismissed with prejudice after plaintiffs withdrew their appeal. Other ordinary-course claims were not expected to have a material adverse effect.
- The company disclosed nonmaterial errors in its Q1 2015 foreign-currency translation and cash-flow presentation; Q2 and Q3 2015 were unaffected. Management said Q1 statements would be revised in future filings.
Key facts for investors to verify
- Progress, terms, and potential financial effects of the strategic separation review.
- Refinancing or extension plans for the January 2016 term loan and upcoming mortgage balloon maturities.
- Whether AFFO growth converts into sustainable cash available for distributions; AFFO is a non-GAAP measure and excludes certain items.
- Tenant lease performance, impairment assumptions, and exposure to currency movements, particularly in Europe.
- Repayment and collectability of $106.0 million in affiliate notes receivable, and the timing of related-party balances and transactions.