W. P. Carey Inc. quarterly report, Q2 FY2015

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W. P. Carey Inc. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. W. P. Carey is a REIT focused on commercial real estate ownership and investment management, including long-term net leases and advisory services to managed investment programs.

Business context and portfolio

  • At June 30, the owned portfolio included 852 net-leased properties, 217 tenants, approximately 89.3 million square feet, 98.6% occupancy, and a 9.1-year weighted-average lease term. The portfolio spanned 19 countries; approximately 35.9% of pro rata annualized base rent was international.
  • The company acquired four foreign investments for $445.6 million, including 73 U.K. auto dealerships. Managed Programs’ assets under management were $10.38 billion, versus $9.23 billion at December 31, 2014.

Financial results and liquidity

  • Revenue: Q2 total revenue was $238.1 million, down from $253.4 million; six-month revenue was $458.5 million, versus $462.6 million. Excluding reimbursable tenant and affiliate costs, revenue grew to $224.3 million from $205.7 million for Q2, and to $429.2 million from $369.2 million for six months.
  • Profit: Net income attributable to W. P. Carey was $63.3 million ($0.59 diluted EPS) in Q2, versus $64.7 million ($0.64) a year earlier. Six-month attributable income was $99.5 million ($0.93 diluted EPS), versus $180.2 million ($1.87). Prior-year results included discontinued-operation gains and a $105.9 million merger-related gain on change in control.
  • Supplemental performance: AFFO, a non-GAAP measure, was $139.0 million in Q2 versus $122.2 million, and $269.0 million for six months versus $240.5 million. The filing cautions that AFFO is not a substitute for GAAP income or operating cash flow.
  • Cash flow: Six-month operating cash flow was $216.1 million, compared with $168.6 million. Investing activities used $522.9 million, principally reflecting property purchases and $122.4 million of loans to affiliates; financing provided $362.7 million. Cash ended the period at $233.6 million.
  • Debt and liquidity: Total debt carrying value was approximately $4.54 billion; 78% was fixed-rate. Cash plus $1.1 billion of unused revolver capacity supported liquidity. The company reported compliance with debt covenants. Ratings were BBB/Baa2.
  • Distributions: Q2 distribution declared was $0.954 per share, equivalent to $3.82 annualized; six-month distributions declared were $1.9065 per share.

Material changes versus comparable periods

  • Growth in lease revenue and AFFO reflected acquisitions, including the CPA:16 merger portfolio and properties acquired in 2014–2015. Q2 lease revenue was $162.6 million, up from $148.3 million; six-month lease revenue was $322.7 million, up from $271.3 million.
  • Investment Management structuring revenue rose to $37.8 million for Q2 from $17.3 million and to $59.5 million for six months from $35.0 million, reflecting higher investment volume. Reported total revenue was nevertheless lower in part because reimbursable costs and dealer-manager fees declined as offerings closed or slowed.
  • Interest expense was nearly flat year over year in Q2, but increased $8.8 million for six months, primarily due to additional senior notes. The company issued €500 million of 2.0% notes and $450 million of 4.0% notes in January.
  • A stronger U.S. dollar reduced reported foreign real estate and lease values and weighed on revenue. Six-month foreign-currency translation loss was $66.0 million.

Outlook, risks, contingencies, and unusual items

  • The filing provides no clear quantified AFFO forecast or other numerical earnings guidance in the supplied text. Management stated that it expects operating cash flow and other available resources to meet normal liquidity needs, while noting funding may also rely on cash, revolver capacity, and future debt or equity issuance.
  • Near-term cash requirements include $275.7 million of consolidated mortgage balloon payments and $11.4 million of unconsolidated mortgage obligations over the next 12 months; the $250 million term loan matures in January 2016 unless extended. International mortgage balloons create refinancing risk, and the filing states refinancing on favorable terms is not assured.
  • Foreign-exchange exposure, interest-rate changes, tenant credit, and industry/geographic concentrations are key risks. Retail stores accounted for 20% of portfolio ABR; no single tenant exceeded 10%. Certain foreign cash balances may be costly or restricted to repatriate.
  • The company established a $400 million at-the-market equity program in June; no shares had been issued under it by the report date. Proceeds, if any, may fund debt reduction, acquisitions, and general corporate purposes.
  • The company identified nonmaterial errors in Q1 2015 foreign-currency translation and cash-flow presentation and said it would revise the prior interim statements in a future filing. The Q2 statements were not affected; the revisions did not affect Q1 cash balances, liquidity, income, or EPS.
  • A purported class action related to the CPA:16 merger had been dismissed in full; plaintiffs could appeal by August 24, 2015. Management considered the claims without merit and intended to defend any timely appeal. Other routine claims were not expected to have a material adverse effect.
  • Management changes in June named Jason Fox president and Hisham Kader CFO. The SEC-approved FINRA rule changes for unlisted REITs and a proposed Department of Labor fiduciary rule could affect the Investment Management business; their effects were not yet determinable.

Important facts for investors to verify

  • How much AFFO growth converts to durable cash generation, and how AFFO compares with declared distributions.
  • Acquisition returns and funding costs, including the integration and performance of the U.K. dealership portfolio and other recent investments.
  • Refinancing plans for the 2015–2016 mortgage balloons and January 2016 term-loan maturity, and the company’s leverage and covenant headroom.
  • Foreign-currency effects on rental income, asset values, debt, and hedges as exchange rates change.
  • Collection and repayment of the $122.7 million due from affiliates, as well as the implications of managed-program fundraising and advisory-agreement renewals.
  • The subsequent filing’s Q1 financial-statement revisions and any developments in the merger-related appeal.