W. P. Carey Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparative periods are 2016. Amounts are in U.S. dollars unless stated otherwise.
Business context
W. P. Carey is a REIT that provides long-term real-estate financing and leases commercial properties, primarily to corporate tenants on a triple-net basis. It reports Owned Real Estate and Investment Management segments. At quarter-end, its owned portfolio included 890 net-leased properties and two hotels, with 99.8% occupancy and a 9.5-year weighted-average lease term. The net-leased portfolio spanned 18 countries.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $210.8 million | $225.2 million | $651.3 million | $712.8 million |
| Net income attributable to W. P. Carey | $80.3 million | $110.9 million | $202.1 million | $220.0 million |
| Diluted earnings per share | $0.74 | $1.03 | $1.87 | $2.05 |
| AFFO attributable to W. P. Carey | $148.2 million | $144.5 million | $430.9 million | $416.2 million |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $381.9 million | $377.5 million |
- Nine-month Owned Real Estate revenue was $519.4 million, down from $583.9 million; Investment Management revenue was $132.0 million, up from $128.9 million. Total revenue excludes neither reimbursable costs nor tenant costs; management also presents revenue excluding reimbursements.
- Q3 net income included a $19.3 million gain on real-estate sales, compared with $49.1 million in Q3 2016. Nine-month gains were $22.7 million versus $68.1 million. No impairment charges were recorded in 2017; 2016 included $49.9 million over nine months.
- Nine-month investing cash flow was positive $175.3 million, including property-sale proceeds and affiliate loan repayments; financing cash flow was negative $549.7 million. Cash and cash equivalents were $169.8 million at September 30, 2017.
- Total debt, net, was $4.315 billion, versus $4.441 billion at December 31, 2016. Fixed-rate debt was 80% of total debt; the weighted-average period-end rates were 3.9% for fixed-rate and 1.8% for variable-rate debt. The company reported $1.3 billion of unused revolving-credit capacity and compliance with debt covenants.
- Cash distributions declared were $1.005 per share for Q3 and $3.00 per share for the first nine months. Nine-month cash distributions paid to stockholders were $322.4 million.
Material changes and management commentary
- Revenue and GAAP net income declined year over year, largely reflecting lower property-sale gains and, for the nine-month comparison, the absence of $32.2 million in 2016 lease-termination income. Owned Real Estate lease revenue also faced the effects of property dispositions.
- AFFO increased 2.6% for Q3 and 3.5% for the nine-month period. Management attributed the increases mainly to lower interest expense, higher asset-management revenue and stronger earnings from equity interests in Managed Programs, partly offset by lower lease and structuring revenue.
- Interest expense fell to $125.4 million for nine months from $139.5 million. Management cited lower average debt balances and a lower weighted-average borrowing rate.
- The company exited active non-traded retail fundraising as of June 30, 2017, consistent with a strategy focused on net-lease investing for its own balance sheet. It expected to continue managing existing Managed Programs through their natural life cycles. The exit generated $9.1 million of restructuring expenses in the first nine months, primarily severance.
- W. P. Carey resigned as advisor to CCIF effective September 11, 2017. The offerings of CWI 2 and CESH I closed July 31, 2017. Managed Programs’ assets under management were approximately $13.2 billion at quarter-end; $1.1 billion of investments were structured for them during the nine-month period.
- Management said it expected operating cash generation to meet normal recurring liquidity needs and identified cash, the revolving facility, property dispositions, and additional debt or equity issuance as potential funding sources. The filing text provided here does not give a clear numeric AFFO guidance range.
Risks, contingencies and unusual items
- Foreign-exchange exposure is material: the company reported $15.9 million of net foreign-currency transaction losses for nine months, while the weaker U.S. dollar increased the translated carrying values of certain foreign assets and debt. Brexit-related currency and regulatory uncertainty remained a stated risk; the company hedged a portion of euro and sterling exposure.
- Approximately $130.1 million of euro-denominated mortgage balloon payments were due in 2018. Management anticipated refinancing or repayment using cash resources, revolving capacity and/or disposition proceeds. Unhedged variable-rate debt would change annual interest expense by approximately $7.2 million for each 1% rate movement.
- At quarter-end, $84.3 million of cash was held in foreign subsidiaries and could be subject to restrictions or significant repatriation costs. Tenant credit, interest rates, property values, refinancing access and geographic or industry concentrations are also identified risks.
- Various ordinary-course claims and lawsuits were pending; management did not expect them to materially adversely affect financial position or results. Hurricane Harvey and Irma caused immaterial property damage, with no losses recorded. The company reported no material litigation.
- The filing cautions that AFFO is a non-GAAP measure, not a substitute for GAAP net income or operating cash flow; some excluded losses may ultimately be realized.
Most important facts for investors to verify
- How much of reported earnings and period-to-period change reflects property-sale gains, prior-year lease-termination income, and nonrecurring restructuring costs.
- Whether AFFO growth persists after fundraising-related fees end, and how much ongoing Investment Management revenue is received in shares rather than cash.
- The refinancing or repayment plan for 2018 mortgage maturities, covenant headroom, and access to the $1.3 billion unused revolver.
- Tenant credit quality and concentration, lease renewals, and whether high occupancy and contractual rent escalations are maintained.
- Foreign-currency sensitivity, hedge coverage and the practical availability of cash held overseas.