W. P. Carey Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. 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 performance and position
- Revenue: $348.4 million, up 12.0% from $311.2 million. Real Estate revenue rose 12.4% to $344.1 million; Investment Management revenue declined 13.0% to $4.3 million.
- Net income: $157.0 million, or $0.82 per diluted share, compared with $51.6 million, or $0.29 per diluted share. Net margin was approximately 45.1%, versus 16.6%; both periods include material non-operating items, so the comparison is not a clean measure of recurring performance.
- AFFO (non-GAAP): $258.8 million, up 19.6% from $216.5 million. Approximate AFFO per diluted share was $1.35 versus $1.22, based on reported AFFO and diluted weighted-average shares.
- Cash flow: Operating cash flow was $235.9 million, up from $188.4 million. Investing used $229.1 million, compared with $76.5 million; financing provided $35.7 million, versus $132.8 million used in Q1 2021.
- Debt and liquidity: Debt, net, was $6.78 billion at March 31, versus $6.79 billion at year-end. Cash and cash equivalents were $205.4 million; revolving-credit availability was approximately $1.3 billion. Fixed-rate debt was 87% of total debt, and the weighted-average interest rate was 2.5%. The company reported covenant compliance.
- Portfolio and dividend: The net-leased portfolio had 1,336 properties, 98.5% occupancy, a 10.8-year weighted-average lease term and $1.263 billion of annualized base rent. The quarterly dividend declared was $1.057 per share.
Changes and significant items
- Revenue growth reflected acquisitions and rent escalations, partly offset by dispositions. Lease termination and other income increased to $14.1 million from $1.6 million, including $8.2 million of termination income and $4.7 million of other lease-related settlements.
- Net income benefited from a $28.0 million non-cash unrealized gain on WLT common shares, an $18.7 million gain reclassified on redemption of WLT preferred shares, lower debt-extinguishment losses than in the prior year, and stronger lease-related income. Q1 2021 included significant debt-extinguishment losses and a $23.4 million non-cash unrealized gain on Lineage Logistics shares.
- Q1 2022 included $20.2 million of real estate impairment charges, including charges tied to a tenant lease expiration and a Pendragon lease restructuring. The company also recognized a $4.6 million proportionate impairment on an equity-method investment.
- The company acquired five investments for $265.0 million, completed two construction projects costing $25.2 million, and sold six properties for $26.7 million net proceeds. It raised $179.0 million net through its at-the-market equity program.
- In February, W. P. Carey agreed to acquire CPA:18–Global for 0.0978 WPC shares plus $3.00 cash per CPA:18–Global share. Completion was subject to shareholder approval and other conditions; management expected a closing in early August 2022, but gave no assurance it would occur. Following completion, management expected Investment Management earnings to decline because fees and distributions from CPA:18–Global would cease.
Outlook, risks and contingencies
- Management said it expected cash generated from operations, dispositions, cash reserves, credit availability and potential debt or equity issuance to meet liquidity needs. The filing provides no earnings or AFFO guidance.
- The company reported collecting more than 99.7% of contractual base rent due in Q1 through the report date, but cautioned that this is not an indication of future collections given uncertainty around COVID-19 and tenant conditions.
- Key exposures include tenant credit and industry/geographic concentration, interest rates, foreign exchange, refinancing and balloon payments, and property values. A 1% rate change would affect annual interest expense on unhedged variable-rate debt by an estimated $8.3 million in aggregate across the currencies disclosed.
- Potential merger risks include failure to close, transaction costs, integration and management of expanded operations, and possible goodwill impairment. The company reported no material litigation; ordinary-course claims were not expected to have a material adverse effect.
Investor verification priorities
- Separate recurring operating performance from gains, lease termination income, impairment charges and other non-cash or episodic items; review the AFFO reconciliation and its limitations.
- Track CPA:18–Global merger approval, closing conditions, cash and share consideration, and the expected reduction in Investment Management earnings.
- Monitor debt maturities, interest-rate exposure, currency movements, covenant headroom and use of equity issuance to fund investment and liquidity needs.
- Assess tenant rent collections and credit quality, including lease expirations and the Pendragon restructuring; reported Q1 collections do not guarantee future performance.
- Confirm that acquisitions, construction commitments, dispositions and the dividend remain supportable by operating cash flow and available capital.