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Section 1: 10-Q (10-Q)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2013

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                      to                     

 

Commission File Number: 001-13779

 

GRAPHIC

 

W. P. CAREY INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

45-4549771

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

50 Rockefeller Plaza

 

 

New York, New York

 

10020

(Address of principal executive offices)

 

(Zip Code)

 

Investor Relations (212) 492-8920

(212) 492-1100

(Registrant’s telephone numbers, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No þ

 

Registrant has 68,145,288 shares of common stock, $0.001 par value, outstanding at April 26, 2013.

 

 

 


 

INDEX

 

 

Page No.

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

Consolidated Balance Sheets

2

Consolidated Statements of Income

3

Consolidated Statements of Comprehensive Income

4

Consolidated Statements of Equity

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

49

Item 4. Controls and Procedures

51

 

 

PART II - OTHER INFORMATION

 

Item 6. Exhibits

52

Signatures

53

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (the “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors which could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (the “SEC”), including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on February 26, 2013 (the “2012 Annual Report”). Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

 

Additionally, a description of our critical accounting estimates is included in the MD&A section of our 2012 Annual Report. There has been no significant change in our critical accounting estimates. All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1, Financial Statements (Unaudited).

 

W. P. Carey 3/31/2013 10-Q — 1


 

PART I

Item 1. Financial Statements

 

W. P. CAREY INC.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

March 31, 2013

 

 

December 31, 2012

 

Assets

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

Real estate, at cost (inclusive of amounts attributable to consolidated variable interest entities (“VIEs”) of $78,745 and $78,745, respectively)

 

$

2,373,912

 

 

$

2,334,488

 

Operating real estate, at cost

 

98,690

 

 

99,703

 

Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $16,648 and $16,110, respectively)

 

(150,207

)

 

(136,068

)

Net investments in properties

 

2,322,395

 

 

2,298,123

 

Net investments in direct financing leases (inclusive of amounts attributable to consolidated VIEs of $23,900 and $23,921, respectively)

 

364,078

 

 

376,005

 

Assets held for sale

 

1,505

 

 

1,445

 

Equity investments in real estate and the Managed REITs

 

564,092

 

 

565,626

 

Net investments in real estate

 

3,252,070

 

 

3,241,199

 

Cash (inclusive of amounts attributable to consolidated VIEs of $10 and $17, respectively)

 

111,564

 

 

123,904

 

Due from affiliates

 

34,625

 

 

36,002

 

Goodwill

 

328,474

 

 

329,132

 

In-place lease, net (inclusive of amounts attributable to consolidated VIEs of $3,707 and $3,823, respectively)

 

468,132

 

 

447,278

 

Above-market rent, net (inclusive of amounts attributable to consolidated VIEs of $2,716 and $2,773, respectively)

 

267,845

 

 

279,885

 

Other intangible assets, net (inclusive of amounts attributable to consolidated VIEs of $287 and $297, respectively)

 

10,484

 

 

10,200

 

Other assets, net (inclusive of amounts attributable to consolidated VIEs of $4,733 and $4,232, respectively)

 

136,420

 

 

141,442

 

Total assets

 

$

4,609,614

 

 

$

4,609,042

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $30,040 and $30,326, respectively)

 

$

1,695,335

 

 

$

1,715,397

 

Senior credit facility

 

298,000

 

 

253,000

 

Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable to consolidated VIEs of $7,656 and $7,659, respectively) (Note 3)

 

317,520

 

 

265,132

 

Income taxes, net

 

20,847

 

 

24,959

 

Distributions payable

 

57,128

 

 

45,700

 

Total liabilities

 

2,388,830

 

 

2,304,188

 

Redeemable noncontrolling interest

 

7,404

 

 

7,531

 

Redeemable securities - related party (Note 3)

 

-

 

 

40,000

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

W. P. Carey stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value, 450,000,000 shares authorized;
69,178,667 and 68,901,933 shares issued and outstanding, respectively

 

69

 

 

69

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized;
None issued

 

-

 

 

-

 

Additional paid-in capital

 

2,184,387

 

 

2,175,820

 

Distributions in excess of accumulated earnings

 

(218,191

)

 

(172,182

)

Deferred compensation obligation

 

13,411

 

 

8,358

 

Accumulated other comprehensive loss

 

(9,414

)

 

(4,649

)

Less, treasury stock at cost, 416,408 and 416,408 shares, respectively

 

(20,270

)

 

(20,270

)

Total W. P. Carey stockholders’ equity

 

1,949,992

 

 

1,987,146

 

Noncontrolling interests

 

263,388

 

 

270,177

 

Total equity

 

2,213,380

 

 

2,257,323

 

Total liabilities and equity

 

$

4,609,614

 

 

$

4,609,042

 

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 3/31/2013 10-Q — 2


 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

 

2012

 

Revenues

 

 

 

 

 

 

Lease revenues:

 

 

 

 

 

 

Rental income

 

$

65,785

 

 

$

14,652

 

Interest income from direct financing leases

 

9,512

 

 

2,126

 

Total lease revenues

 

75,297

 

 

16,778

 

Asset management revenue from affiliates

 

10,015

 

 

15,602

 

Structuring revenue from affiliates

 

6,342

 

 

7,638

 

Dealer manager fees

 

1,223

 

 

3,787

 

Reimbursed costs from affiliates

 

11,968

 

 

18,737

 

Other real estate income

 

8,541

 

 

5,772

 

 

 

113,386

 

 

68,314

 

Operating Expenses

 

 

 

 

 

 

General and administrative

 

28,973

 

 

26,909

 

Reimbursable costs

 

11,968

 

 

18,737

 

Depreciation and amortization

 

30,876

 

 

6,463

 

Property expenses

 

5,152

 

 

2,072

 

Other real estate expenses

 

2,734

 

 

2,499

 

Impairment charges

 

3,279

 

 

-

 

 

 

82,982

 

 

56,680

 

Other Income and Expenses

 

 

 

 

 

 

Other interest income

 

370

 

 

503

 

Net income from equity investments in real estate and the Managed REITs

 

10,656

 

 

13,986

 

Other income and (expenses)

 

1,091

 

 

306

 

Interest expense

 

(26,906

)

 

(7,280

)

 

 

(14,789

)

 

7,515

 

Income from continuing operations before income taxes

 

15,615

 

 

19,149

 

Benefit from (provision for) income taxes

 

1,233

 

 

(1,695

)

Income from continuing operations

 

16,848

 

 

17,454

 

Discontinued Operations

 

 

 

 

 

 

(Loss) income from operations of discontinued properties

 

(148

)

 

120

 

Loss on sale of real estate

 

(931

)

 

(181

)

Gain on extinguishment of debt

 

70

 

 

-

 

Impairment charges

 

-

 

 

(5,724

)

Loss from discontinued operations, net of tax

 

(1,009

)

 

(5,785

)

Net Income

 

15,839

 

 

11,669

 

Net (income) loss attributable to noncontrolling interests

 

(1,708

)

 

578

 

Add: Net loss attributable to redeemable noncontrolling interest

 

50

 

 

43

 

Net Income Attributable to W. P. Carey

 

$

14,181

 

 

$

12,290

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

 

Income from continuing operations attributable to W. P. Carey

 

$

0.21

 

 

$

0.44

 

Loss from discontinued operations attributable to W. P. Carey

 

(0.01

)

 

(0.14

)

Net income attributable to W. P. Carey

 

$

0.20

 

 

$

0.30

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

Income from continuing operations attributable to W. P. Carey

 

$

0.21

 

 

$

0.44

 

Loss from discontinued operations attributable to W. P. Carey

 

(0.01

)

 

(0.14

)

Net income attributable to W. P. Carey

 

$

0.20

 

 

$

0.30

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

Basic

 

68,967,209

 

 

40,037,496

 

Diluted

 

69,975,293

 

 

40,487,652

 

 

 

 

 

 

 

 

Amounts Attributable to W. P. Carey

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

15,190

 

 

$

18,075

 

Loss from discontinued operations, net of tax

 

(1,009

)

 

(5,785

)

Net income attributable to W. P. Carey

 

$

14,181

 

 

$

12,290

 

Distributions Declared Per Share

 

$

0.820

 

 

$

0.565

 

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 3/31/2013 10-Q — 3


 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

 

2012

 

Net Income

 

$

15,839

 

 

$

11,669

 

Other Comprehensive (Loss) Income

 

 

 

 

 

 

Foreign currency translation adjustments

 

(9,752

)

 

2,518

 

Realized and unrealized gain on derivative instruments

 

3,175

 

 

356

 

Change in unrealized depreciation on marketable securities

 

-

 

 

(3

)

 

 

(6,577

)

 

2,871

 

Comprehensive Income

 

9,262

 

 

14,540

 

 

 

 

 

 

 

 

Amounts Attributable to Noncontrolling Interests

 

 

 

 

 

 

Net (income) loss

 

(1,708

)

 

578

 

Foreign currency translation adjustments

 

1,789

 

 

(331

)

Comprehensive loss attributable to noncontrolling interests

 

81

 

 

247

 

 

 

 

 

 

 

 

Amounts Attributable to Redeemable Noncontrolling Interest

 

 

 

 

 

 

Net loss

 

50

 

 

43

 

Foreign currency translation adjustments

 

23

 

 

(9

)

Comprehensive income attributable to redeemable noncontrolling interest

 

73

 

 

34

 

Comprehensive Income Attributable to W. P. Carey

 

$

9,416

 

 

$

14,821

 

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 3/31/2013 10-Q — 4


 

W. P. CAREY INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2013 and the Year Ended December 31, 2012

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

W. P. Carey Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

in Excess of

 

Deferred

 

Other

 

 

 

Total

 

 

 

 

 

 

No Par Value

 

$0.001 Par Value

 

Paid-in

 

Accumulated

 

Compensation

 

Comprehensive

 

Treasury

 

W. P. Carey

 

Noncontrolling

 

 

 

 

Shares

 

Shares

 

Amount

 

Capital

 

Earnings

 

Obligation

 

Loss

 

Stock

 

Stockholders

 

Interests

 

Total

Balance at January 1, 2012

 

39,729,018

 

-

 

 $

-

 

 $

779,071

 

 $

(95,046)

 

 $

7,063

 

 $

(8,507)

 

 $

-

 

 $

682,581

 

 $

33,821

 

 $

716,402

Exchange of shares of W. P. Carey & Co. LLC for shares of W. P. Carey Inc. in connection with the Merger

 

(39,834,827)

 

39,834,827

 

40

 

(40)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Shares issued to stockholders of CPA®:15 in connection with the Merger

 

-

 

28,170,643

 

28

 

1,380,333

 

-

 

-

 

-

 

-

 

1,380,361

 

-

 

1,380,361

Purchase of noncontrolling interests in connection with the Merger

 

-

 

-

 

-

 

(154)

 

-

 

-

 

-

 

-

 

(154)

 

237,513

 

237,359

Reclassification of Estate shareholders shares

 

-

 

-

 

-

 

(40,000)

 

-

 

-

 

-

 

-

 

(40,000)

 

-

 

(40,000)

Exercise of stock options and employee purchase under the employee share purchase plan

 

30,993

 

13,768

 

-

 

1,553

 

-

 

-

 

-

 

-

 

1,553

 

-

 

1,553

Cash proceeds on issuance of shares to third party, net

 

-

 

937,500

 

1

 

44,999

 

-

 

-

 

-

 

-

 

45,000

 

-

 

45,000

Grants issued in connection with services rendered

 

427,425

 

3,822

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Shares issued under share incentive plans

 

238,728

 

27,044

 

-

 

646

 

-

 

-

 

-

 

-

 

646

 

-

 

646

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

3,291

 

3,291

Forfeitures of shares

 

(29,919)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Windfall tax benefits - share incentive plans

 

-

 

-

 

-

 

10,185

 

-

 

-

 

-

 

-

 

10,185

 

-

 

10,185

Stock-based compensation expense

 

-

 

-

 

-

 

25,067

 

-

 

971

 

-

 

-

 

26,038

 

-

 

26,038

Redemption value adjustment

 

-

 

-

 

-

 

(840)

 

-

 

-

 

-

 

-

 

(840)

 

-

 

(840)

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(6,649)

 

(6,649)

Distributions declared ($2.44 per share)

 

-

 

-

 

-

 

-

 

(139,268)

 

324

 

-

 

-

 

(138,944)

 

-

 

(138,944)

Purchase of treasury stock from related parties (Note 3)

 

(561,418)

 

(416,408)

 

-

 

-

 

-

 

-

 

-

 

(45,270)

 

(45,270)

 

-

 

(45,270)

Cancellation of shares

 

-

 

(85,671)

 

-

 

(25,000)

 

-

 

-

 

-

 

25,000

 

-

 

-

 

-

Net income

 

-

 

-

 

-

 

-

 

62,132

 

-

 

-

 

-

 

62,132

 

607

 

62,739

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

6,127

 

-

 

6,127

 

1,594

 

7,721

Unrealized loss on derivative instruments

 

-

 

-

 

-

 

-

 

-

 

-

 

(2,262)

 

-

 

(2,262)

 

-

 

(2,262)

Change in unrealized appreciation on marketable securities

 

-

 

-

 

-

 

-

 

-

 

-

 

(7)

 

-

 

(7)

 

-

 

(7)

Balance at December 31, 2012

 

-

 

68,485,525

 

69

 

2,175,820

 

(172,182)

 

8,358

 

(4,649)

 

(20,270)

 

1,987,146

 

270,177

 

2,257,323

Cash proceeds from exercise of stock options

 

-

 

778

 

-

 

25

 

-

 

-

 

-

 

-

 

25

 

-

 

25

Shares issued under share incentive plans

 

-

 

275,956

 

-

 

(6,855)

 

-

 

-

 

-

 

-

 

(6,855)

 

-

 

(6,855)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

2,463

 

2,463

Windfall tax benefits - share incentive plans

 

-

 

-

 

-

 

10,764

 

-

 

-

 

-

 

-

 

10,764

 

-

 

10,764

Stock-based compensation expense

 

-

 

-

 

-

 

4,633

 

-

 

4,516

 

-

 

-

 

9,149

 

-

 

9,149

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(9,181)

 

(9,181)

Distributions declared ($0.82 per share)

 

-

 

-

 

-

 

-

 

(60,190)

 

537

 

-

 

-

 

(59,653)

 

-

 

(59,653)

Foreign currency translation

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

10

 

10

Net income

 

-

 

-

 

-

 

-

 

14,181

 

-

 

-

 

-

 

14,181

 

1,708

 

15,889

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

(7,940)

 

-

 

(7,940)

 

(1,789)

 

(9,729)

Unrealized gain on derivative instruments

 

-

 

-

 

-

 

-

 

-

 

-

 

3,175

 

-

 

3,175

 

-

 

3,175

Balance at March 31, 2013

 

-

 

68,762,259

 

 $

69

 

 $

2,184,387

 

 $

(218,191)

 

 $

13,411

 

 $

(9,414)

 

 $

(20,270)

 

 $

1,949,992

 

 $

263,388

 

 $

2,213,380

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 3/31/2013 10-Q — 5

 


 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

2013

 

2012

Cash Flows — Operating Activities

 

 

 

 

Net income

 

$

15,839

 

$

11,669

Adjustments to net income:

 

 

 

 

Depreciation and amortization, including intangible assets and deferred financing costs

 

33,803

 

7,881

Income from equity investments in real estate and the Managed REITs in excess of distributions received

 

(991)

 

(1,716)

Straight-line rent, financing lease adjustments and amortization of rent-related intangibles

 

4,459

 

(1,135)

Amortization of deferred revenue

 

(2,359)

 

(2,359)

Loss on sale of real estate

 

931

 

181

Unrealized gain on foreign currency transactions and other

 

(1,002)

 

(212)

Realized loss (gain) on foreign currency transactions and other

 

100

 

(75)

Management income received in shares of Managed REITs

 

(9,942)

 

(6,889)

Impairment charges

 

3,279

 

5,724

Stock-based compensation expense

 

9,149

 

5,261

Deferred acquisition revenue received

 

8,561

 

8,722

Increase in structuring revenue receivable

 

(1,437)

 

(3,916)

(Decrease) increase in income taxes, net

 

(4,144)

 

1,317

Increase in prepaid taxes

 

(15,721)

 

(6,980)

Net changes in other operating assets and liabilities

 

(23,050)

 

(21,533)

Net Cash Provided by (Used in) Operating Activities

 

17,475

 

(4,060)

 

 

 

 

 

Cash Flows — Investing Activities

 

 

 

 

Distributions received from equity investments in real estate and the Managed REITs in excess of equity income

 

11,955

 

7,370

Capital contributions to equity investments

 

(1,418)

 

(90)

Purchases of real estate

 

(71,131)

 

-

Capital expenditures

 

(1,826)

 

(1,481)

Proceeds from sale of real estate

 

11,065

 

2,422

Funds placed in escrow

 

(27,128)

 

(722)

Funds released from escrow

 

50,749

 

1,954

Other investing activities, net

 

-

 

11

Net Cash (Used in) Provided by Investing Activities

 

(27,734)

 

9,464

 

 

 

 

 

Cash Flows — Financing Activities

 

 

 

 

Distributions paid

 

(45,746)

 

(22,792)

Contributions from noncontrolling interests

 

2,463

 

750

Distributions paid to noncontrolling interests

 

(9,232)

 

(992)

Scheduled payments of mortgage principal

 

(102,612)

 

(2,357)

Proceeds from mortgage financing

 

99,000

 

-

Proceeds from senior credit facility

 

55,000

 

15,000

Repayments of senior credit facility

 

(10,000)

 

-

Payment of financing costs and mortgage deposits, net of deposits refunded

 

(570)

 

(75)

Funds placed in escrow

 

43

 

-

Proceeds from exercise of stock options

 

25

 

4,249

Payment of tax withholding liability related to stock-based compensation awards

 

-

 

(2,553)

Windfall tax benefit associated with stock-based compensation awards

 

10,764

 

4,597

Net Cash Used in Financing Activities

 

(865)

 

(4,173)

 

 

 

 

 

Change in Cash and Cash Equivalents During the Period

 

 

 

 

Effect of exchange rate changes on cash

 

(1,216)

 

185

Net (decrease) increase in cash and cash equivalents

 

(12,340)

 

1,416

Cash and cash equivalents, beginning of period

 

123,904

 

29,297

Cash and cash equivalents, end of period

 

$

111,564

 

$

30,713

 

(Continued)

 

W. P. Carey 3/31/2013 10-Q — 6

 


 

W. P. CAREY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(Continued)

 

Supplemental noncash investing and financing activities:

 

During the three months ended March 31, 2013, we reclassified $5.6 million of properties from Net investment in direct financing leases to Real estate in connection with the restructuring of two leases (Note 4).

 

During the first quarter of 2013, we declared distributions totaling $57.1 million, which were paid on April 15, 2013.

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 3/31/2013 10-Q — 7

 


 

W. P. CAREY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Business and Organization

 

W. P. Carey Inc. (“W. P. Carey” and, together with its consolidated subsidiaries and predecessors, “we”, “us” or “our”) is a real estate investment trust (“REIT”) that seeks to achieve superior, risk-adjusted returns by providing long-term net-lease financing via sale-leaseback and build-to-suit transactions for companies worldwide. We invest primarily in commercial properties domestically and internationally. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily on a triple-net leased basis, which requires each tenant to pay substantially all of the costs associated with operating and maintaining the property. We also earn revenue as the advisor to publicly-owned, non-listed REITs.

 

Since our founding in 1973, we have maintained a singular focus on providing investors with a steady source of income accompanied with capital preservation. Since 1979, we have sponsored a series of sixteen income-generating funds that invest in real estate, under the Corporate Property Associates brand name (the “CPA® REITs”). We are currently the advisor to Corporate Property Associates 16 – Global Incorporated (“CPA®:16 – Global”) and Corporate Property Associates 17 – Global Incorporated (“CPA®:17 – Global”). We are also the advisor to Carey Watermark Investors Incorporated (“CWI” and, together with CPA®:16 – Global and CPA®:17 – Global, the “Managed REITs”), which invests in lodging and lodging-related properties.

 

We were formed as a corporation under the laws of Maryland on February 15, 2012. On September 28, 2012, Corporate Property Associates 15 Incorporated (“CPA®:15”) merged with and into us, with CPA®:15 surviving as an indirect, wholly-owned subsidiary of ours (the “Merger”). In connection with the Merger, W. P. Carey & Co. LLC (our “predecessor”), which was formed under the laws of Delaware on July 15, 1996, completed an internal reorganization whereby our predecessor and its subsidiaries merged with and into us with W. P. Carey as the surviving corporation, succeeding to and continuing to operate the existing business of our predecessor (“REIT Reorganization”). Upon completion of the Merger and the REIT Reorganization, the shares of our predecessor were delisted from the New York Stock Exchange (“NYSE”) and canceled, and our common stock became listed on the NYSE under the same symbol, “WPC.”

 

Primary Reportable Segments

 

Real Estate Ownership — We own and invest in commercial properties primarily in the United States (“U.S.”) and Europe that are leased to companies, primarily on a triple-net lease basis. At March 31, 2013, our portfolio was comprised of our full or partial ownership interest in 422 properties. Substantially all of these properties, totaling approximately 39.0 million square feet, were net leased to 124 tenants, with an occupancy rate of approximately 98.8%. Collectively, at March 31, 2013, the Managed REITs owned all or a portion of over 703 properties, including certain properties in which we have an ownership interest. Substantially all of these properties, totaling approximately 78.6 million square feet, were net leased to 211 tenants, with an average occupancy rate of approximately 98.4%.

 

We earn lease revenues from our wholly-owned and co-owned real estate investments. In addition, we generate equity income through our investments in the shares of the Managed REITs (Note 6). Through our special member interests in the operating partnerships of the Managed REITs, we also participate in their cash flows (Note 3). Lastly, we earn other real estate revenues through our investments in self-storage facilities and a hotel in the U.S.

 

Investment Management — We earn revenue as the advisor to the Managed REITs. Under the respective advisory agreements with each of the Managed REITs, we perform various services, including the day-to-day management of the Managed REITs and transaction-related services. We structure and negotiate investments and debt placement transactions for the Managed REITs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset management revenue.

 

We generate acquisition revenue when we structure and negotiate investments and related financing for the Managed REITs. We may also be entitled, subject to the approval by the boards of directors of certain of the Managed REITs, to fees for structuring loan refinancings. This loan refinancing revenue, together with the acquisition revenue, is referred to as structuring revenue. We earn ongoing asset management revenue from each Managed REIT, which is based on average invested assets and is calculated according to the advisory agreement for each Managed REIT. We may also earn revenue related to the disposition of properties, subject to subordination provisions, which will only be recognized as the relevant conditions are met. Such revenue may include subordinated disposition revenue when assets are sold as well as a percentage of the net cash proceeds distributable to stockholders from the disposition of properties, after recoupment by stockholders of their initial investment plus a specified preferred return. We may earn incentive or termination revenue in connection with providing liquidity to the stockholders of the Managed REITs, although these

 

W. P. Carey 3/31/2013 10-Q — 8

 


 

Notes to Consolidated Financial Statements

 

events do not occur every year. We will not receive a termination payment in circumstances where we receive subordinated incentive revenue.

 

Note 2. Basis of Presentation

 

Our interim consolidated financial statements have been prepared, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the U.S. (“GAAP”).

 

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2012, which are included in the 2012 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. The unaudited consolidated financial statements included in this Report have been retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties as discontinued operations for all periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Basis of Consolidation

 

The consolidated financial statements reflect all of our accounts, including those of our majority-owned and/or controlled subsidiaries and our tenancy-in-common interests as described below. The portion of equity in a consolidated subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

 

We have investments in tenancy-in-common interests in various domestic and international properties. Consolidation of these investments is not required as such interests do not qualify as VIEs and do not meet the control requirement required for consolidation. Accordingly, we account for these investments using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of these investments.

 

We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease as well as certain decision-making rights within a loan can cause us to consider an entity a VIE. During the three months ended March 31, 2013, we did not identify any new VIEs.

 

Additionally, we own interests in single-tenant net leased properties leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. We account for these investments under the equity method of accounting. At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits.

 

In November 2012, we filed a registration statement with the SEC to sell up to $1.0 billion of common stock of Corporate Property Associates 18 – Global Incorporated (“CPA®:18 – Global”) in an initial public offering plus up to an additional $400.0 million of its common stock under a dividend reinvestment plan. Through March 31, 2013, the financial activity of CPA®:18 – Global, which had no significant assets, liabilities or operations, was included in our consolidated financial statements.

 

W. P. Carey 3/31/2013 10-Q — 9

 


 

Notes to Consolidated Financial Statements

 

New Accounting Requirements

 

The following Accounting Standards Updates (“ASUs”) promulgated by Financial Accounting Standards Board (“FASB”) are applicable to us as indicated:

 

ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities — In January 2013, the FASB issued an update to ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 of Topic 815 or subject to an enforceable master netting or similar arrangement. These amendments did not have a significant impact on our financial position or results of operations and are applicable to us for our interim and annual reports beginning in 2013 and shall be applied retrospectively.

 

ASU 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income — In February 2013, the FASB issued ASU 2013-02 requiring entities to disclose additional information about items reclassified out of accumulated other comprehensive income. This ASU impacts the form of our disclosures only, and is applicable to us for our interim and annual reports beginning in 2013 and shall be applied retrospectively. The related additional disclosures are located in Note 12.

 

ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, a consensus of the FASB Emerging Issues Task Force — In February 2013, the FASB issued ASU 2013-04, which requires entities to measure obligations resulting from joint and several liability arrangements (in our case, tenancy-in-common arrangements, Note 6) for which the total amount of the obligation is fixed as the sum of the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This ASU is applicable to us for our interim and annual reports beginning in 2014 and shall be applied retrospectively; however, we elected to adopt this ASU early in 2013 and it did not have a significant impact on our financial position or results of operations for any of the periods presented.

 

ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity — In March 2013, the FASB issued ASU 2013-05, which indicates that a cumulative translation adjustment (“CTA”) is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Therefore, the entire amount of the CTA associated with the foreign entity would be released into earnings when there has been a sale of a foreign subsidiary or group of assets within a foreign subsidiary, a loss of a controlling financial interest upon deconsolidation of an investment in a foreign entity or a step acquisition in a foreign entity. This ASU will be applicable to us for derecognition transactions after December 31, 2013.

 

W. P. Carey 3/31/2013 10-Q — 10

 


 

Notes to Consolidated Financial Statements

 

Note 3. Agreements and Transactions with Related Parties

 

Advisory Agreements with the Managed REITs

 

We have advisory agreements with each of the Managed REITs pursuant to which we earn fees and are entitled to receive cash distributions. These agreements are scheduled to expire on September 30, 2013 unless otherwise renewed pursuant to their terms. The following table presents a summary of revenue earned and/or cash received from the Managed REITs included in the consolidated statements of income (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Asset management revenue

 

$

10,015

 

$

15,602

 

Structuring revenue

 

6,342

 

7,638

 

Dealer manager fees

 

1,223

 

3,787

 

Reimbursed costs from affiliates

 

11,968

 

18,737

 

Distributions of Available Cash

 

7,891

 

6,974

 

Deferred revenue earned

 

2,123

 

2,123

 

 

 

$

39,562

 

$

54,861

 

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

CPA®:15

 

$

-

 

$

7,368

 

CPA®:16 – Global

 

13,924

 

13,124

 

CPA®:17 – Global

 

14,756

 

32,983

 

CWI

 

10,860

 

1,146

 

Other

 

22

 

240

 

 

 

$

39,562

 

$

54,861

 

 

The following table presents a summary of Due from affiliates (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

Deferred acquisition fees receivable

 

$

21,530

 

$

28,655

 

Reimbursable costs

 

5,640

 

1,457

 

Organization and offering costs

 

5,066

 

4,920

 

Accounts receivable

 

2,371

 

181

 

Asset management fee receivable

 

18

 

789

 

 

 

$

34,625

 

$

36,002

 

 

The following table presents a summary of amounts due to affiliates, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated balance sheet (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

Due to the Estate

 

$

40,000

 

$

-

 

Due to other affiliates

 

673

 

673

 

 

 

$

40,673

 

$

673

 

 

Asset Management Revenue

 

We earn asset management revenue from each Managed REIT, which is based on average invested assets and is calculated according to the advisory agreement for each Managed REIT. For CPA®:15 prior to the Merger, this revenue generally totaled 1% per annum, with a portion of this revenue, or 0.5%, contingent upon the achievement of specific performance criteria. For CPA®:16 – Global, we earn asset management revenue of 0.5% of average invested assets. For CPA®:17 – Global, we earn asset management revenue ranging from 0.5% of average market value for long-term net leases and certain other types of real estate investments up to 1.75% of

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 11

 

 


 

Notes to Consolidated Financial Statements

 

average equity value for certain types of securities. For CWI, we earn asset management revenue of 0.5% of the average market value of lodging-related investments. We also receive up to 10% of distributions of Available Cash, as defined in the respective advisory agreements, from the operating partnerships of each of the Managed REITs.

 

Under the terms of the advisory agreements, we may elect to receive cash or shares of stock for asset management revenue due from each Managed REIT. In 2013, we elected to receive all asset management revenue from each Managed REIT in its respective shares. For 2012, we elected to receive all asset management revenue from CPA®:15 prior to the Merger in cash, 50% of asset management revenue from CPA®:16 – Global in its shares with the remaining 50% payable in cash and all asset management revenue from CPA®:17 – Global and CWI in their respective shares.

 

Structuring Revenue

 

Under the terms of the advisory agreements, we earn revenue in connection with structuring and negotiating investments and related financing for the Managed REITs, which we call acquisition revenue. We may receive acquisition revenue of 4.5% of the total aggregate cost of long-term net lease investments made by each CPA® REIT. A portion of this revenue (generally 2.5%) is paid when the transaction is completed, while the remainder (generally 2%) is payable in annual installments ranging from three to eight years, provided the relevant CPA® REIT meets its performance criterion. For certain types of non-long term net lease investments acquired on behalf of CPA®:17 – Global, initial acquisition revenue may range from 0% to 1.75% of the equity invested plus the related acquisition revenue, with no deferred acquisition revenue being earned. For CWI, we earn initial acquisition revenue of 2.5% of the total investment cost of the properties acquired and loans originated by us not to exceed 6% of the aggregate contract purchase price of all investments and loans with no deferred acquisition revenue being earned. We may also be entitled, subject to the approval by the boards of directors of certain Managed REITs, to fees for structuring loan refinancings of up to 1% of the principal amount. This loan refinancing revenue, together with the acquisition revenue, is referred to as structuring revenue.

 

Unpaid transaction fees, including accrued interest, are included in Due from affiliates in the consolidated financial statements. Unpaid transaction fees bear interest at annual rates ranging from 5% to 7%.

 

Reimbursed Costs from Affiliates and Dealer Manager Fees

 

The Managed REITs reimburse us for certain costs, primarily broker/dealer commissions paid on behalf of the Managed REITs and marketing and personnel costs. Since October 1, 2012, when advisory agreements with the CPA® REITs were amended, personnel costs are allocated based on the revenues of each of the CPA® REITs rather than the method utilized before that date, which involved an allocation of time charges incurred by our personnel for each of the CPA® REITs. In addition, we earned a selling commission of up to $0.65 per share sold and a dealer manager fee of up to $0.35 per share sold from CPA®:17 – Global through its public offering, which was terminated in January 2013. We also receive a selling commission of up to $0.70 per share sold and a dealer manager fee of up to $0.30 per share sold from CWI. We re-allow all or a portion of the dealer manager fees to selected dealers in the offerings. Dealer manager fees that are not re-allowed are classified as Dealer manager fees.

 

Pursuant to its advisory agreement, CWI is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its offering, up to a maximum amount (excluding selling commissions and the dealer manager fee) of 2% of the gross proceeds of its offering and distribution reinvestment plan. Through March 31, 2013, we have incurred organization and offering costs on behalf of CWI of approximately $7.9 million. However, at March 31, 2013, CWI was only obligated to reimburse us $4.6 million of these costs because of the 2% limitation described above, and $3.5 million had been reimbursed as of that date.

 

Distributions of Available Cash and Deferred Revenue Earned

 

We receive distributions of our proportionate share of earnings up to 10% of the Available Cash from the Managed REITs, as defined in the respective advisory agreements, from their operating partnerships. In connection with the merger in the second quarter of 2011 between Corporate Property Associates 14 Incorporated (“CPA®:14”) and CPA®:16 – Global, we acquired a special member interest in CPA®:16 – Global’s operating partnership. We initially recorded this special member interest at its fair value, which is amortized into earnings over the expected period of performance considering the estimated life of the entity. Cash distributions of our proportionate share of earnings from the CPA®:16 – Global and CPA®:17 – Global operating partnerships as well as deferred revenue earned from our special member interest in CPA®:16 – Global’s operating partnership are recorded as Income from equity investments in real estate and the Managed REITs within the Real Estate Ownership segment. We have not yet earned or received any distributions of our proportionate share of earnings from CWI’s operating partnership because CWI has not yet generated Available Cash.

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 12

 

 


 

Notes to Consolidated Financial Statements

 

Other Transactions with Affiliates

 

Transactions with Estate of Wm. Polk Carey

 

As discussed in the 2012 Annual Report, we entered into a share purchase agreement with the Estate of Wm. Polk Carey and its affiliated entities (collectively, the “Estate”) pursuant to which we agreed to repurchase up to an aggregate amount of $85.0 million of our common stock beneficially owned by the Estate, in three transactions between August 6, 2012 and March 31, 2013. As of December 31, 2012, we completed two transactions totaling $45.0 million. On March 28, 2013, we received an irrevocable notice (the “Notice”) from the Estate to exercise the final sale option. Accordingly, as the Notice resulted in a fixed and determinable obligation at March 31, 2013, we reclassified $40.0 million from Redeemable securities – related party to Accounts payable, accrued expenses and other liabilities. On April 4, 2013, we repurchased 616,971 shares of our common stock for $40.0 million from the Estate at a price of $64.83 per share.

 

The following table presents a reconciliation of our Redeemable securities – related party (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2013

 

Balance - beginning of period

 

$

40,000

 

Reclassification to a liability upon receipt of notice

 

(40,000)

 

Balance - end of period

 

$

-

 

 

Merger with CPA®:15

 

On September 28, 2012, CPA®:15 merged with and into us with CPA®:15 surviving as an indirect, wholly-owned subsidiary. In the Merger, we acquired CPA®:15’s portfolio, which was comprised of full or partial ownership in 305 properties, substantially all of which were triple-net leased to 76 tenants, and totaled approximately 27.0 million square feet, with an occupancy rate of approximately 99%.

 

We accounted for the Merger as a business combination under the acquisition method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed, based upon their fair values. The fair values of the lease intangibles acquired were measured in a manner consistent with our purchase price allocation policy described in the 2012 Annual Report.

 

Other

 

We own interests in entities ranging from 3% to 95%, as well as jointly-controlled tenancy-in-common interests in properties, with the remaining interests generally held by affiliates, and own common stock in each of the Managed REITs. We consolidate certain of these investments and account for the remainder under the equity method of accounting.

 

Family members of one of our directors have an ownership interest in certain companies that own noncontrolling interests in one of our French majority-owned subsidiaries. These ownership interests are subject to substantially the same terms as all other ownership interests in the subsidiary companies.

 

In January 2013, our board of directors approved loans to CWI up to $50.0 million to be made at our discretion.

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 13

 

 


 

Notes to Consolidated Financial Statements

 

Note 4. Net Investments in Properties

 

Real Estate

 

Real estate, which consists of land and buildings leased to others under operating leases and are carried at cost, is summarized as follows (in thousands):

 

 

 

March 31, 2013

 

 

December 31, 2012

 

 

Land

 

$

521,032

 

 

$

509,530

 

 

Buildings

 

1,852,880

 

 

1,824,958

 

 

Less: Accumulated depreciation

 

(129,580

)

 

(116,075

)

 

 

 

$

2,244,332

 

 

$

2,218,413

 

 

 

Real Estate Acquired — During the three months ended March 31, 2013, we entered into a domestic investment at a total cost of $72.4 million, including acquisition costs and net lease intangibles of $13.3 million (Note 7). We funded the investment in part with the escrowed proceeds of $25.3 million from a sale of property in December 2012 in an exchange transaction under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and non-recourse mortgage financing of $36.5 million.

 

Assets disposed of and reclassified as held-for-sale during the three months ended March 31, 2013 are discussed in Note 13. Impairment charges recognized on these properties are discussed in Note 8. During this period, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro at March 31, 2013 decreased by 3.0% to $1.2821 from $1.3218 at December 31, 2012. The impact of this strengthening was a $15.3 million decrease in Real estate from December 31, 2012 to March 31, 2013. In connection with restructuring two leases, we reclassified $5.6 million of properties from Net investment in direct financing leases to Real estate during the quarter ended March 31, 2013 (Note 5).

 

Operating Real Estate

 

Operating real estate, which consists of our investments in 21 self-storage properties through Carey Storage Management LLC (“Carey Storage”) and our Livho Inc. (“Livho”) hotel subsidiary, at cost, is summarized as follows (in thousands):

 

 

 

March 31, 2013

 

 

December 31, 2012

 

 

Land

 

$

21,962

 

 

$

22,158

 

 

Buildings

 

76,728

 

 

77,545

 

 

Less: Accumulated depreciation

 

(20,627

)

 

(19,993

)

 

 

 

$

78,063

 

 

$

79,710

 

 

 

During the three months ended March 31, 2013, we recognized an impairment charge of $1.1 million on our hotel property to write down the property’s carrying value to its estimated fair value (Note 8).

 

Note 5. Finance Receivables

 

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivable portfolios consist of our Net investments in direct financing leases and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated balance sheets.

 

Deferred Acquisition Fees Receivable

 

As described in Note 3, a portion of our structuring revenue is due in equal annual installments ranging from three to eight years, provided the CPA® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from all of the CPA® REITs were included in Due from affiliates in the consolidated financial statements.

 

Credit Quality of Finance Receivables

 

We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant defaults. At both March 31, 2013 and December 31, 2012, none of our finance receivables were past due and we had not established any allowances for credit losses. There were no modifications of finance receivables for the three months ended March 31,

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 14

 

 


 

Notes to Consolidated Financial Statements

 

2013 or for the year ended December 31, 2012. We evaluate the credit quality of our tenant receivables utilizing an internal 5-point credit rating scale, with 1 representing the highest credit quality and 5 representing the lowest. The credit quality evaluation of our tenant receivables was last updated in the first quarter of 2013. We believe the credit quality of our deferred acquisition fees receivable falls under category 1, as the CPA® REITs are expected to have the available cash to make such payments.

 

A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):

 

 

 

Number of Tenants at

 

Net Investments in Direct Financing Leases at

 

Internal Credit Quality Indicator

 

March 31, 2013

 

December 31, 2012

 

March 31, 2013

 

December 31, 2012

 

 

3

 

3

 

$

46,386

 

$

46,398

 

 

3

 

4

 

28,192

 

49,764

 

 

8

 

8

 

269,573

 

257,281

 

 

3

 

4

 

19,927

 

22,562

 

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

$

364,078

 

$

376,005

 

 

During the three months ended March 31, 2013, we reclassified $5.6 million of properties from Net investment in direct financing leases to Real estate (Note 4) in connection with the restructuring of two leases.

 

Note 6. Equity Investments in Real Estate and the Managed REITs

 

We own interests in certain unconsolidated real estate investments and the Managed REITs. We account for our interests in these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from other-than-temporary impairments). The following table presents net income from equity investments in real estate and the Managed REITs, which represents our proportionate share of the income or losses of these investments as well as certain adjustments related to other-than-temporary impairment charges and amortization of basis differences related to purchase accounting adjustments (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Equity earnings from equity investments in the Managed REITs

 

$

22

 

$

1,848

 

Other-than-temporary impairment charges on our special member interest in CPA®:16 – Global operating partnership

 

(2,684)

 

(298)

 

Distributions of Available Cash (Note 3)

 

7,891

 

6,974

 

Deferred revenue earned (Note 3)

 

2,123

 

2,123

 

Equity in net income from the Managed REITs

 

7,352

 

10,647

 

Equity in net earnings from other equity investments

 

3,304

 

3,339

 

Total net income from equity investments in real estate and the Managed REITs

 

$

10,656

 

$

13,986

 

 

Managed REITs

 

We own interests in the Managed REITs and account for these interests under the equity method because, as their advisor and through our ownership in their common stock, we do not exert control over, but we do have the ability to exercise significant influence on, the Managed REITs.

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 15

 

 


 

Notes to Consolidated Financial Statements

 

The following table sets forth certain information about our investments in the Managed REITs (dollars in thousands):

 

 

 

% of Outstanding Shares Owned at

 

Carrying Amount of Investment at

 

Fund

 

March 31, 2013

 

December 31, 2012

 

March 31, 2013 (a)

 

December 31, 2012

 

CPA®:16 – Global (b)

 

18.456%

 

18.330%

 

$

294,339

 

$

296,301

 

CPA®:16 – Global operating partnership (c)

 

0.015%

 

0.015%

 

14,220

 

17,140

 

CPA®:17 – Global (d)

 

1.429%

 

1.290%

 

43,368

 

38,977

 

CPA®:17 – Global operating partnership (e)

 

0.015%

 

0.015%

 

-

 

-

 

CWI

 

0.447%

 

0.400%

 

1,147

 

774

 

CWI operating partnership

 

0.015%

 

0.015%

 

(47)

 

(47)

 

 

 

 

 

 

 

$

353,027

 

$

353,145

 

 


 

(a)         Includes asset management fees receivable, for which 171,808 shares, 175,316 shares and 15,236 shares of CPA®:16 – Global, CPA®:17 – Global and CWI, respectively, were issued during the second quarter of 2013.

(b)         We received distributions of $6.2 million and $6.0 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(c)          During the three months ended March 31, 2013 and 2012, we recognized other-than-temporary impairment charges of $2.7 million and $0.3 million, respectively, on this investment to reduce the carrying value of our interest in the investment to its estimated fair value (Note 8). In addition, we received distributions of $3.6 million and $4.3 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(d)         We received distributions of $0.6 million and $0.3 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(e)          We received distributions of $4.3 million and $2.7 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

 

The following tables present preliminary combined summarized financial information for the Managed REITs. Certain prior year amounts have been retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties as discontinued operations. Amounts provided are expected total amounts attributable to the Managed REITs and do not represent our proportionate share (in thousands):

 

 

 

March 31, 2013

 

 

December 31, 2012

 

 

Real estate, net

 

$

6,193,018

 

 

$

6,049,926

 

 

Other assets

 

2,025,509

 

 

2,002,620

 

 

Total assets

 

8,218,527

 

 

8,052,546

 

 

Debt

 

(3,676,503

)

 

(3,509,394

)

 

Accounts payable, accrued expenses and other liabilities

 

(456,211

)

 

(450,362

)

 

Total liabilities

 

(4,132,714

)

 

(3,959,756

)

 

Redeemable noncontrolling interests

 

(21,094

)

 

(21,747

)

 

Noncontrolling interests

 

(167,140

)

 

(170,140

)

 

Stockholders’ equity

 

$

3,897,579

 

 

$

3,900,903

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2013

 

 

2012

 

 

Revenues

 

$

178,685

 

 

$

212,890

 

 

Expenses

 

(171,253

)

 

(175,440

)

 

Net income from continuing operations

 

$

7,432

 

 

$

37,450

 

 

Net income attributable to the Managed REITs (a) (b)

 

$

10,352

 

 

$

33,197

 

 

 


(a)         Inclusive of impairment charges recognized by the Managed REITs totaling $9.3 million and $1.2 million during the three months ended March 31, 2013 and 2012, respectively. These impairment charges reduced our income earned from these investments by approximately $1.7 million and $0.1 million during the three months ended March 31, 2013 and 2012, respectively.

(b)         Amounts included net gains (losses) on sale of real estate recorded by the Managed REITs totaling $2.7 million and ($2.1) million during the three months ended March 31, 2013 and 2012, respectively.

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 16

 

 


 

Notes to Consolidated Financial Statements

 

Interests in Unconsolidated Real Estate Investments

 

We own interests in single-tenant net leased properties that are leased to companies through noncontrolling interests (i) in partnerships and limited liability companies that we do not control but over which we exercise significant influence or (ii) as tenants-in-common subject to common control. Generally, the underlying investments are jointly-owned with affiliates. We account for these investments under the equity method of accounting.

 

The following table sets forth our ownership interests in our equity investments in real estate, excluding the Managed REITs, and their respective carrying values (dollars in thousands):

 

 

 

Ownership Interest

 

Carrying Value at

 

Lessee

 

at March 31, 2013

 

March 31, 2013

 

December 31, 2012

 

Schuler A.G. (a) (b) (d)

 

67%

 

$

62,564

 

 

$

62,006

 

 

Hellweg Die Profi-Baumärkte GmbH & Co. KG (Hellweg 2) (a) (e)

 

40%

 

40,236

 

 

42,387

 

 

Advanced Micro Devices (c) (d) 

 

33%

 

24,027

 

 

23,667

 

 

The New York Times Company (e)

 

18%

 

20,836

 

 

20,584

 

 

C1000 Logistiek Vastgoed B.V. (a) (c) (f) 

 

15%

 

13,824

 

 

14,929

 

 

Del Monte Corporation (c) (d) 

 

50%

 

7,969

 

 

8,318

 

 

U. S. Airways Group, Inc. (c)

 

75%

 

7,928

 

 

7,995

 

 

The Talaria Company (Hinckley) (d) 

 

30%

 

7,842

 

 

7,702

 

 

The Upper Deck Company (d) 

 

50%

 

7,187

 

 

7,198

 

 

Waldaschaff Automotive GmbH and Wagon Automotive Nagold GmbH (a) (f)

 

33%

 

6,173

 

 

6,323

 

 

Builders FirstSource, Inc. (d) 

 

40%

 

5,097

 

 

5,138

 

 

PetSmart, Inc. (d) 

 

30%

 

3,825

 

 

3,808

 

 

Consolidated Systems, Inc. (c) (d) 

 

60%

 

3,249

 

 

3,278

 

 

Wanbishi Archives Co. Ltd. (a) (f) (g) (h)

 

3%

 

484

 

 

(736

)

 

SaarOTEC (a) (d) (h)

 

50%

 

(176

)

 

(116

)

 

 

 

 

 

$

211,065

 

 

$

212,481

 

 

 


(a)         The carrying value of the investment is affected by the impact of fluctuations in the exchange rate of the foreign currency.

(b)         Represents a tenancy-in-common interest, under which the investment is under common control by us and our investment partner.

(c)          These investments are tenancy-in-common interests whereby the property is encumbered by debt for which we are jointly and severally liable.  The co-obligors include our Managed REITs, and the aggregate amount due under the arrangements was approximately $241.6 million.  Of this amount, $113.6 million represents the aggregate amount we agreed to pay and is included within the carrying value of each of these investments, where applicable. The carrying value of these investments also includes the undepreciated cost of the related properties.

(d)         This investment is jointly-owned with CPA®:16 – Global.

(e)          This investment is jointly-owned with CPA®:16 – Global and CPA®:17 – Global.

(f)           This investment is jointly-owned with CPA®:17 – Global.

(g)          We acquired our interest in this investment in December 2012. In January 2013, we made a purchase accounting adjustment of $1.3 million to this investment.

(h)         At March 31, 2013 and December 31, 2012, as applicable, we intended to fund our share of the investment’s future operating deficits if the need arose. However, we had no legal obligation to pay for any of the investment’s liabilities nor did we have any legal obligation to fund operating deficits.

 

Note 7. Intangible Assets and Liabilities and Goodwill

 

In connection with our acquisitions of properties, we have recorded net lease intangibles which are being amortized over periods ranging from one year to 40 years. In-place lease and above-market rent are included in In-place lease, net and Above-market rent, net in the consolidated financial statements.  Tenant relationship, trade name, management contracts and software license intangibles are included in Other intangible assets, net in the consolidated financial statements. Below-market rent, above-market ground lease, and

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 17

 

 


 

Notes to Consolidated Financial Statements

 

below-market purchase option intangibles are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.

 

In connection with our investment activity during the three months ended March 31, 2013, we have recorded net lease intangibles comprised as follows (dollars in thousands):

 

 

 

Weighted-Average

 

 

 

 

 

Life

 

Amount

 

Amortizable Intangible Assets

 

 

 

 

 

In-place lease

 

10.0

 

$

41,963

 

 

 

 

 

 

 

Amortizable Intangible Liabilities

 

 

 

 

 

Below-market rent

 

20.0

 

$

(28,646)

 

 

The following table presents a reconciliation of our goodwill (in thousands):

 

 

 

Real Estate

 

Investment

 

 

 

 

 

Ownership

 

Management

 

Total

 

Balance - beginning of period

 

$

265,525

 

$

63,607

 

$

329,132

 

Allocation of goodwill to dispositions of properties within the reporting unit (a)

 

(658)

 

-

 

(658)

 

Balance - end of period

 

$

264,867

 

$

63,607

 

$

328,474

 

 


(a)         Amount is included in Loss on sale of real estate within discontinued operations.

 

 

 

 

W. P. Carey 3/31/2013 10-Q — 18

 

 


 

Notes to Consolidated Financial Statements

 

Intangible assets and liabilities and goodwill are summarized as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

Gross

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Amortizable Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management contracts

 

$

32,765

 

 

$

(31,561

)

 

$

1,204

 

 

$

32,765

 

 

$

(31,283

)

 

$

1,482

 

Software license

 

600

 

 

-

 

 

600

 

 

-

 

 

-

 

 

-

 

 

 

33,365

 

 

(31,561

)

 

1,804

 

 

32,765

 

 

(31,283

)

 

1,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-place lease

 

509,394

 

 

(41,262

)

 

468,132

 

 

474,629

 

 

(27,351

)

 

447,278

 

Tenant relationship

 

8,143

 

 

(3,438

)

 

4,705

 

 

8,149

 

 

(3,406

)

 

4,743

 

Above-market rent

 

290,676

 

 

(22,831

)

 

267,845

 

 

293,627

 

 

(13,742

)

 

279,885

 

 

 

808,213

 

 

(67,531

)

 

740,682

 

 

776,405

 

 

(44,499

)

 

731,906

 

Unamortizable Goodwill and Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill