W. P. Carey Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015, compared with December 31, 2014. W. P. Carey is a REIT focused on commercial real estate, primarily long-term net leases, and also advises publicly held, non-listed real estate investment programs.
Business context and portfolio
- The owned portfolio included 852 net-leased properties across 18 countries, leased to 219 tenants; occupancy was 98.4% and weighted-average lease term was 9.2 years.
- During the quarter, W. P. Carey acquired 73 UK auto dealerships and a logistics facility in Rotterdam. Total acquisition volume, including acquisition-related costs, was $394.2 million.
- The company operates Real Estate Ownership and Investment Management segments. Managed REIT assets under management were reported at $9.54 billion.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $220.4 million | $209.2 million |
| Lease revenue | $160.2 million | $123.1 million |
| Net income attributable to W. P. Carey | $36.1 million | $115.5 million |
| Diluted earnings per share | $0.34 | $1.27 |
| Adjusted funds from operations (AFFO), non-GAAP | $130.0 million | $118.2 million |
| Net cash provided by operating activities | $67.4 million | $43.7 million |
| Cash and cash equivalents | $207.4 million | $198.7 million at Dec. 31, 2014 |
| Total debt, carrying value | $4.34 billion | $4.09 billion at Dec. 31, 2014 |
Net cash used in investing activities was $365.4 million, principally reflecting property purchases; financing activities provided $318.8 million. The company declared distributions of $0.9525 per share for the quarter, equivalent to $3.81 annualized. The filing presents no consolidated profit-margin measure; property-level contribution was $95.1 million, up from $69.7 million.
At quarter-end, the revolving credit facility had $186.1 million outstanding and approximately $1.3 billion of unused capacity. Total Senior Unsecured Credit Facility borrowings, including the $250 million term loan, were $436.1 million. Approximately 82% of debt was fixed-rate; the weighted-average rates reported were 4.7% for fixed-rate debt and 2.6% for variable-rate debt. The company reported compliance with debt covenants.
Material changes versus the prior period
- Revenue rose about 5%, while AFFO rose about 10%. Lease revenue growth reflected acquired properties, including the 2014 CPA:16 merger and more recent acquisitions.
- Net income and EPS fell substantially because Q1 2014 included a $105.9 million gain on change in control of interests related to the CPA:16 merger. Q1 2014 also included $29.5 million of merger costs and $6.4 million of discontinued-operations income; these items make the headline comparison atypical.
- Interest expense increased $8.9 million year over year, primarily following the issuance of senior notes. In January 2015, the company issued €500 million of 2.0% Senior Euro Notes and $450 million of 4.0% Senior Notes, mainly to repay revolving borrowings.
- Property-level contribution increased, but existing-property contribution declined $2.7 million, partly due to tenant activity and currency movements. The stronger U.S. dollar reduced Q1 2015 euro-denominated results; foreign-currency translation adjustments contributed to a $63.3 million comprehensive loss attributable to W. P. Carey.
Outlook, risks, contingencies, and unusual items
- Management said it expected operating cash flow, cash resources, and available borrowing capacity to meet normal liquidity needs. It anticipated funding acquisitions, build-to-suit commitments, distributions, operating costs, and debt obligations through operating cash flow, cash, the revolver, and potentially new debt or equity. No specific company-wide earnings or AFFO guidance range is stated in the provided filing text.
- Near-term requirements included mortgage balloon payments of $176.7 million on consolidated obligations and $11.0 million on unconsolidated obligations. International mortgage balloons of $339.4 million in 2017 and $127.2 million in 2018 create refinancing risk; management expected to repay or refinance certain loans but gave no assurance of favorable refinancing.
- Foreign exchange is a significant exposure: euro strength reduced the carrying value of real estate by $190.3 million and direct financing leases by $47.4 million during the quarter. The company uses currency hedges and foreign-currency debt, but these do not eliminate exposure.
- The company recorded $2.7 million of impairment charges on two properties and recognized $1.2 million of net gains on sales of seven properties. Two lease terminations generated $2.7 million of termination income.
- A proposed U.S. Department of Labor fiduciary-advice regulation could affect fundraising by, and advisory fees from, the Managed Programs. The company said the impact was uncertain. A merger-related class action had been dismissed; plaintiffs could appeal, and W. P. Carey stated it intended to defend the case. Other ordinary-course claims were not expected to have a material adverse effect.
- Management reported effective disclosure controls as of March 31, 2015. An ERP system was implemented in January, with related updates to internal controls.
Most important facts for investors to verify
- Whether AFFO growth translates into durable per-share performance; AFFO is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- How much revenue, cash flow, and acquisition activity are exposed to foreign currencies, and how effective the hedges are.
- Ability to refinance or repay the 2017–2018 mortgage maturities and other scheduled debt while sustaining distributions and acquisition activity.
- Tenant credit quality, lease renewals and expirations, and performance of the newly acquired UK and Dutch properties.
- Effects of the proposed DOL regulation and Managed REIT fundraising on Investment Management revenue; also monitor CWI 2’s subsequent offering and deconsolidation, which occurred after quarter-end.