W.P. Carey Inc. REIT (WPC): Big Dividend, Big Risks

And with regards to the impacts of the hedges, they’ve been working in WPC’s favor, but this won’t always be the case. For example, for the year ended December 31, 2015, WPC recognized $8.0 million in “other income” due to foreign currency forward contracts. And as of June 30, 2016, WPC estimates that an additional $9.9 million will be reclassified as other income during the next 12 months. And while these numbers may appear large (they are certainly significant) they’re relatively small compared to the hundreds of millions of dollars that’s being subtracted annually from retained earnings due to foreign currency translation. Specifically, the following table shows a foreign currency translation adjustment of $125.5 million and $117.9 million in the last two years.

And for additional color, these next tables show the foreign currency translation adjustments and the foreign currency derivatives notional value.

However, until these foreign currency losses are realized, they’re “below the line” recordings in “other comprehensive income” (i.e. they don’t hit net income, but they’re still very real economic losses that do impact the amount of equity on the balance sheet). And importantly, if currency exchange rates move in the wrong direction then these amounts can become very large expenses on the income statement very quickly.