W. P. Carey Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 unless otherwise noted. W. P. Carey is a net-lease REIT with U.S. and international commercial properties, plus an investment-management business serving existing managed programs. The CPA:17 merger, completed in October 2018, substantially expanded the owned real estate portfolio and ended advisory income from that program.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior period | Change / context |
|---|---|---|---|
| Total revenue | $298.3 million | $201.8 million | Up 47.8%, mainly from acquired and newly purchased properties; Investment Management revenue declined. |
| Net income attributable to W. P. Carey | $68.5 million | $65.3 million | Up 4.9%. |
| Diluted earnings per share | $0.41 | $0.60 | Down 31.7%; weighted-average diluted shares increased to 167.4 million from 108.2 million, substantially reflecting shares issued in the CPA:17 merger. |
| Net margin | About 23.0% | About 32.3% | Calculated as attributable net income divided by total revenue; lower in part because of the larger acquisition-related depreciation and interest burden. |
| AFFO attributable to W. P. Carey | $201.8 million | $138.4 million | Up 45.8%; non-GAAP measure. Real Estate AFFO rose to $188.3 million; Investment Management AFFO fell to $13.4 million. |
| Cash provided by operating activities | $142.8 million | $102.9 million | Up $39.9 million, primarily from acquired properties, partly offset by higher interest expense and dispositions. |
| Cash and cash equivalents | $243.3 million | $217.6 million at Dec. 31, 2018 | Restricted cash was an additional $62.4 million at quarter-end; cash plus restricted cash was $305.7 million. |
| Total debt, net | $6.12 billion | $6.38 billion at Dec. 31, 2018 | Down $255.2 million. Revolver capacity available was approximately $1.4 billion. |
Net cash used in investing was $154.2 million, including $164.9 million of real estate purchases and $27.1 million of construction and other property investment. Financing used $104.7 million; $303.8 million of net ATM proceeds helped fund acquisitions and mortgage prepayments. The company declared a quarterly dividend of $1.032 per share.
Portfolio, changes and management commentary
- At March 31, 2019, the owned portfolio included 1,168 net-leased properties, approximately 133.5 million square feet, 310 tenants, 98.2% occupancy and a 10.2-year weighted-average lease term. Net-lease occupancy was 98.3% at December 31, 2018.
- Q1 investment activity included five acquisitions totaling $184.5 million and two completed construction projects costing $53.0 million. Management attributed the increase in Real Estate revenue chiefly to CPA:17 merger properties and other acquisitions.
- Investment Management revenue declined to $16.1 million from $24.2 million, largely because the company no longer earned CPA:17 advisory fees. Management said managed programs were fully invested, no longer raising capital, and expected structuring revenue to decline in future periods; management expects to continue advising existing programs through their respective life cycles.
- Interest expense rose to $61.3 million from $38.1 million, primarily reflecting assumed CPA:17 mortgage debt and euro-denominated notes issued in 2018. Average debt was $6.4 billion versus $4.4 billion; the weighted-average interest rate was 3.6% versus 3.4%.
- Management stated it expects operating cash flow, cash resources, credit-facility capacity and access to debt or equity markets to meet recurring liquidity needs. No specific earnings or AFFO guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- A non-recourse mortgage loan associated with six vacant properties acquired in the CPA:17 merger remained in default. Its outstanding principal was approximately $57.2 million; the loan carrying value was about $41.9 million and the properties’ carrying value was $42.9 million. The former tenant had declared bankruptcy and vacated the properties.
- The New York Times Company exercised an option to repurchase its property for $250.0 million in Q4 2019; completion is not assured. Other tenant repurchase options were also outstanding.
- Foreign exchange exposure is material: international properties represented 36% of net-lease ABR, and a stronger U.S. dollar reduced reported property and debt values. Derivatives are used to hedge selected currency and interest-rate exposures; counterparties, market movements and hedge settlement remain risks.
- Approximately 94.3% of long-term debt was fixed-rate or effectively fixed through swaps or caps. The company reported compliance with debt covenants and no material litigation expected to adversely affect results.
- Q1 had no impairment charges, versus $4.8 million in Q1 2018. The 2019 income-tax benefit included a one-time current tax benefit of approximately $6.3 million from a change in state and local tax position. The filing also notes measurement-period adjustments to CPA:17 merger accounting.
- Subsequent to quarter-end through the filing date, the company issued about $59 million of additional ATM shares and prepaid approximately $185 million of non-recourse mortgages.
Important facts for investors to verify
- Whether acquisitions and the CPA:17 merger translate into durable per-share AFFO and dividend coverage, given the substantial increase in shares outstanding and lower reported EPS.
- The status and potential resolution of the defaulted mortgage and vacant properties, and whether announced mortgage prepayments reduce interest costs as expected.
- Progress and outcomes on the New York Times property repurchase option and other tenant repurchase options.
- Future fee, distribution and structuring income from the remaining managed programs as they mature and continue capital recycling.
- Portfolio tenant credit, lease renewals and occupancy, alongside currency exposure and the scale of construction commitments and future debt maturities.