W. P. Carey Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. W. P. Carey is a diversified REIT operating through Real Estate Ownership and Investment Management, with long-term net-lease properties and advisory fees from managed investment programs.
Business context and portfolio
- Owned 869 net-leased properties and three operating properties across 19 countries, with 222 tenants and 90.1 million square feet of net-leased space.
- Portfolio occupancy was 98.8%; weighted-average remaining lease term was 9.0 years. About 64% of annualized base rent (ABR) came from the U.S. and 36% from outside the U.S.
- The top ten tenants represented 31.6% of ABR. Approximately 25% of ABR was associated with leases scheduled to expire within five years.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change or context |
|---|---|---|---|
| Total revenue | $938.4 million | $908.4 million | Up 3.3%; includes reimbursable costs |
| Revenue excluding reimbursable costs | $859.7 million | $753.4 million | Up 14.1% |
| Net income attributable to W. P. Carey | $172.3 million | $239.8 million | Down 28.2%; prior year included a $105.9 million merger gain |
| Diluted EPS | $1.61 | $2.39 | Down; same merger gain affected prior year |
| AFFO, non-GAAP | $531.2 million | $480.5 million | Up 10.6% |
| Operating cash flow | $477.3 million | $399.1 million | Up 19.6% |
| Cash distributions paid | $403.6 million | $347.9 million | FY 2015 declared distributions were $3.8261 per share |
- Real estate revenue rose to $735.4 million from $645.4 million; investment management revenue fell to $202.9 million from $263.1 million, in part because reimbursable offering costs and dealer-manager fees declined. Structuring revenue and asset-management revenue increased.
- Interest expense increased to $194.3 million from $178.1 million as average debt outstanding grew to $4.6 billion from $3.7 billion, despite a lower average interest rate of 4.2% versus 4.6%.
- At year-end, total debt was approximately $4.49 billion, cash was $157.2 million, and unused revolver capacity was approximately $1.0 billion. Management reported a total-debt-less-cash-to-EBITDA leverage ratio of approximately 6.3x. About 75% of debt was fixed-rate.
- FY 2015 investing cash outflow was $645.2 million and financing cash inflow was $152.5 million. The company acquired nine investments for approximately $688.7 million and sold 14 properties for gross proceeds of $38.5 million.
Fourth quarter and material changes
- Q4 revenue was $265.3 million; net income attributable to W. P. Carey was $51.0 million, or $0.48 per diluted share. The quarterly distribution declared was $0.9646 per share.
- Q4 results included a $25.0 million reversal of German real estate transfer-tax liabilities and $15.0 million of lease termination income. These unusual items contributed to reported earnings and should be distinguished from recurring performance.
- FY 2015 AFFO increased, supported by acquisitions, the full-year contribution from the CPA:16 merger properties, and growth in managed-program activity. GAAP net income declined, principally reflecting the prior-year merger gain and discontinued-operations income, alongside higher interest expense.
- Foreign currency movements were a headwind: the euro weakened against the U.S. dollar, reducing reported results and property values. Foreign-currency translation adjustments produced a $125.4 million loss in 2015.
Outlook, risks and unusual items
- No quantified AFFO or earnings guidance for 2016 is provided in the supplied filing text. Management said it was reviewing strategic alternatives and had engaged J.P. Morgan Securities; the review’s outcome was uncertain.
- On February 10, 2016, Mark J. DeCesaris became CEO, replacing Trevor P. Bond, who resigned. The company expected approximately $5.1 million of severance-related expense in Q1 2016. The term loan maturity was extended to January 31, 2017.
- Near-term liquidity needs include debt service, distributions, investment and build-to-suit commitments, and mortgage maturities. The company disclosed $326.2 million of mortgage balloon payments among expected cash requirements over the next 12 months; refinancing and access to capital markets remain important.
- Key risks include leverage and refinancing, tenant defaults and lease expirations, property impairments, currency exposure, and reliance on volatile managed-program fundraising and transaction fees. Advisory agreements are renewable and generally terminable on 60 days’ notice.
- Regulatory changes affecting unlisted REIT valuations and distribution disclosures, and a proposed broader ERISA fiduciary rule, could affect fundraising and advisory revenue. Environmental liabilities and REIT qualification requirements are additional risks.
- FY 2015 included $29.9 million of property impairment charges and an $8.7 million allowance for credit losses on a direct financing lease. The filing says pending routine lawsuits are not expected to materially affect financial position or results.
Investor verification priorities
- Reconcile AFFO’s non-GAAP adjustments, particularly the treatment of impairments, lease termination income, tax reversals, and strategic-alternative expenses; compare AFFO with cash available for distributions.
- Verify debt maturities, covenant headroom, the $326.2 million near-term mortgage balloon requirement, and the availability of the stated revolver capacity.
- Review tenant credit quality, the 31.6% top-ten tenant ABR concentration, and lease expirations representing about 25% of ABR within five years.
- Assess the strategic-alternatives process, CEO transition, severance costs, and renewal of managed-program advisory agreements.
- Evaluate currency sensitivity and the sustainability of investment-management revenues and fundraising under changing regulation and market conditions.