W. P. Carey Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. W. P. Carey is a REIT providing long-term commercial real estate financing and operating a global net-lease portfolio, alongside an investment-management business advising affiliated investment programs.
Business and portfolio
- Owned portfolio: 900 net-leased properties and two hotels, across 19 countries; 86.6 million square feet, 214 tenants, 99.1% occupancy, and a 9.6-year weighted-average lease term.
- Managed Programs had approximately $13.0 billion of assets under management. The company structured $111.0 million of investments for them during the quarter.
- Net-lease ABR was 67% domestic and 33% international. Industrial, office, retail, and warehouse properties represented 30%, 25%, 16%, and 14% of ABR, respectively.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $219.1 million | $270.2 million |
| Net income attributable to W. P. Carey | $57.5 million | $57.4 million |
| Basic and diluted EPS | $0.53 | $0.54 |
| Net cash provided by operating activities | $112.1 million | $120.4 million |
| AFFO attributable to W. P. Carey | $134.2 million | $139.5 million |
| Cash distributions paid | $106.8 million | $102.2 million |
- Revenue excluding reimbursable costs was $188.1 million, versus $244.2 million. The filing does not report a single consolidated operating-margin measure.
- Owned Real Estate net income attributable to W. P. Carey was $51.1 million, down from $60.5 million. Investment Management income was $6.4 million, versus a $3.1 million loss.
- At March 31, cash and cash equivalents were $152.8 million; total assets were $8.20 billion and total equity was $3.46 billion.
- Debt carrying value was $4.17 billion, compared with $4.44 billion at year-end. Approximately 83% was fixed-rate; the weighted-average rates at quarter-end were 4.1% for fixed-rate debt and 1.9% for variable-rate debt. Interest expense was $42.0 million, versus $48.4 million.
- Cash provided by investing activities was $199.6 million and cash used in financing activities was $314.4 million. Cash declined by $2.6 million during the quarter.
Changes versus prior year and unusual items
- Revenue fell 19%, chiefly because Q1 2016 included $32.2 million of lease termination income related to a property subsequently sold. Lower lease revenue also reflected property dispositions; 2016 acquisitions partly offset the decline.
- Investment Management structuring revenue fell $8.9 million amid lower investment volume, while asset-management revenue increased $2.8 million as assets under management grew.
- Net income attributable to W. P. Carey was nearly unchanged despite lower revenue. Lower depreciation and amortization, reduced interest and overhead costs, and the absence of prior-year restructuring and strategic-review costs helped offset weaker real-estate income.
- AFFO declined about 4%, reflecting lower structuring and lease revenue and the prior-year termination income, partly offset by lower interest and general and administrative costs and higher asset-management revenue.
- Q1 2017 included a $2.2 million deferred tax benefit from adopting new share-based compensation guidance and a $0.9 million loss on extinguishment of debt, primarily related to the credit-facility amendment. No real-estate impairment charges were recorded in either comparison period.
Financing, outlook, and risks
- The company issued €500 million of 2.25% senior notes due 2024 and amended its unsecured credit facility to approximately $1.85 billion of capacity. At quarter-end, the revolver had $1.3 billion of unused capacity and the $100 million delayed-draw term loan was undrawn. The company reported compliance with debt covenants.
- It repaid or prepaid $286.1 million of mortgage loans during the quarter, including repayment of loans on the Hellweg 2 Portfolio. Capital commitments, including build-to-suit projects and tenant improvements, totaled approximately $148.7 million.
- Management said it expected operating cash flow to meet normal recurring liquidity needs and identified cash, facility capacity, asset dispositions, and future debt or equity issuance as potential funding sources. The supplied filing text does not provide a clear numerical AFFO guidance range or other specific earnings guidance.
- Key exposures include tenant credit and concentration, interest rates, foreign exchange, and refinancing property-level debt. The filing notes euro-denominated balloon payments of $117.8 million due in 2018 and expects to refinance or repay them using available resources. Brexit-related currency and operating uncertainty was also identified; 4.9% of ABR came from the UK.
- Other items to monitor include the CWI 2 offering suspension to update NAV and its subsequent relaunch, advisory-agreement renewals, and the disputed transfer of a third party’s WPCI interest following a prior share settlement. Management reported no material litigation and effective disclosure controls.
Investor verification priorities
- Separate recurring rental and fee performance from the $32.2 million prior-year lease-termination item; assess the continuing impact of dispositions and the pace of new investment activity.
- Review AFFO reconciliations and the effect of non-GAAP exclusions, then compare recurring AFFO with distributions and cash flow.
- Confirm debt maturities, refinancing plans for the 2018 euro mortgage balloons, facility availability, and compliance with covenants.
- Track tenant credit quality, lease renewals and rent spreads, major tenant and industry exposures, and foreign-currency effects and hedges.
- Assess Managed Program fundraising, investment volume, related-party fee and loan balances, offering status, and advisory renewals.