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Section 1: 10-Q (10-Q)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2013

 

or

 

£                                              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 R No £

 

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 R No £

 

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 R

Accelerated filer £

Non-accelerated filer £

Smaller reporting company £

 

 

(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 £ No R

 

Registrant has 68,254,789 shares of common stock, $0.001 par value, outstanding at October 31, 2013.

 

 


Table of Contents

 

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

39

Item 3. Quantitative and Qualitative Disclosures About Market Risk

58

Item 4. Controls and Procedures

60

 

 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

61

Item 6. Exhibits

62

Signatures

63

 

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”) and in “Part II, Item 1A. Risk Factors” herein. 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 9/30/2013 10-Q — 1


Table of Contents

 

PART I

Item 1. Financial Statements.

 

W. P. CAREY INC.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

September 30, 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)

 

$

2,515,475

 

$

2,334,488

Operating real estate, at cost

 

83,896

 

99,703

Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $17,709 and $16,110, respectively)

 

(170,085)

 

(136,068)

Net investments in properties

 

2,429,286

 

2,298,123

Net investments in direct financing leases (inclusive of amounts attributable to consolidated VIEs of $18,057 and $23,921, respectively)

 

360,240

 

376,005

Assets held for sale

 

17,975

 

1,445

Equity investments in real estate and the Managed REITs

 

557,513

 

565,626

Net investments in real estate

 

3,365,014

 

3,241,199

Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs of $14 and $17, respectively)

 

93,620

 

123,904

Due from affiliates

 

42,249

 

36,002

Goodwill

 

327,973

 

329,132

In-place lease intangible assets, net (inclusive of amounts attributable to consolidated VIEs of $3,492 and $3,823, respectively)

 

487,527

 

447,278

Above-market rent intangible assets, net (inclusive of amounts attributable to consolidated VIEs of $2,601 and $2,773, respectively)

 

261,900

 

279,885

Other intangible assets, net (inclusive of amounts attributable to consolidated VIEs of $270 and $297, respectively)

 

15,519

 

10,200

Other assets, net (inclusive of amounts attributable to consolidated VIEs of $4,685 and $4,232, respectively)

 

132,558

 

141,442

Total assets

 

$

4,726,360

 

$

4,609,042

 

 

 

 

 

Liabilities and Equity

 

 

 

 

Liabilities:

 

 

 

 

Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $29,344 and $30,326, respectively)

 

$

1,685,556

 

$

1,715,397

Senior credit facility and unsecured term loan

 

490,000

 

253,000

Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable to consolidated VIEs of $7,072 and $7,659, respectively)

 

282,489

 

265,132

Income taxes, net

 

11,232

 

24,959

Distributions payable

 

59,439

 

45,700

Total liabilities

 

2,528,716

 

2,304,188

Redeemable noncontrolling interest

 

7,316

 

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; 69,287,115 and 68,901,933 shares issued, respectively; and 68,253,736 and 68,485,525 shares outstanding, respectively

 

69

 

69

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

 

-

 

-

Additional paid-in capital

 

2,243,186

 

2,175,820

Distributions in excess of accumulated earnings

 

(273,850)

 

(172,182)

Deferred compensation obligation

 

11,354

 

8,358

Accumulated other comprehensive income (loss)

 

8,626

 

(4,649)

Less, treasury stock at cost, 1,033,379 and 416,408 shares, respectively

 

(60,270)

 

(20,270)

Total W. P. Carey stockholders’ equity

 

1,929,115

 

1,987,146

Noncontrolling interests

 

261,213

 

270,177

Total equity

 

2,190,328

 

2,257,323

Total liabilities and equity

 

$

4,726,360

 

$

4,609,042

 

See Notes to Consolidated Financial Statements.

 

 

W. P. Carey 9/30/2013 10-Q — 2


 

Table of Contents

 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

Revenues

 

 

 

 

 

 

 

 

Lease revenues:

 

 

 

 

 

 

 

 

Rental income

 

$

68,391

 

$

14,245

 

$

199,778

 

$

43,401

Interest income from direct financing leases

 

9,235

 

1,881

 

28,158

 

5,919

Total lease revenues

 

77,626

 

16,126

 

227,936

 

49,320

Asset management revenue from affiliates

 

10,961

 

15,850

 

31,330

 

47,088

Structuring revenue from affiliates

 

14,775

 

8,316

 

27,539

 

19,576

Dealer manager fees from affiliates

 

3,787

 

4,012

 

7,329

 

11,878

Reimbursed costs from affiliates

 

23,259

 

19,879

 

50,694

 

59,100

Other real estate income

 

7,506

 

5,095

 

22,547

 

15,977

 

 

137,914

 

69,278

 

367,375

 

202,939

Operating Expenses

 

 

 

 

 

 

 

 

General and administrative

 

28,761

 

28,930

 

84,733

 

77,701

Merger and acquisition expenses

 

3,630

 

25,897

 

6,879

 

30,616

Reimbursable costs

 

23,259

 

19,879

 

50,694

 

59,100

Depreciation and amortization

 

31,560

 

6,120

 

92,741

 

18,549

Property expenses

 

5,746

 

2,069

 

16,307

 

7,112

Other real estate expenses

 

1,654

 

1,557

 

5,064

 

4,619

Impairment charges

 

1,416

 

-

 

1,416

 

-

 

 

96,026

 

84,452

 

257,834

 

197,697

Other Income and Expenses

 

 

 

 

 

 

 

 

Other interest income

 

367

 

252

 

1,053

 

910

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

 

9,180

 

10,477

 

52,377

 

52,808

Gain on change in control of interests

 

-

 

20,794

 

-

 

20,794

Other income and (expenses)

 

2,484

 

503

 

5,453

 

2,026

Interest expense

 

(27,482)

 

(7,845)

 

(81,187)

 

(22,253)

 

 

(15,451)

 

24,181

 

(22,304)

 

54,285

Income from continuing operations before income taxes

 

26,437

 

9,007

 

87,237

 

59,527

Provision for income taxes

 

(5,375)

 

(379)

 

(3,020)

 

(192)

Income from continuing operations

 

21,062

 

8,628

 

84,217

 

59,335

Discontinued Operations

 

 

 

 

 

 

 

 

Income (loss) from operations of discontinued properties

 

349

 

(458)

 

3,332

 

(1,060)

Gain (loss) on sale of real estate

 

239

 

(409)

 

622

 

(888)

Gain on extinguishment of debt

 

-

 

-

 

84

 

-

Impairment charges

 

-

 

(5,535)

 

(4,950)

 

(12,262)

Income (loss) from discontinued operations, net of tax

 

588

 

(6,402)

 

(912)

 

(14,210)

Net Income

 

21,650

 

2,226

 

83,305

 

45,125

Net (income) loss attributable to noncontrolling interests

 

(2,912)

 

325

 

(7,312)

 

1,383

Net (income) loss attributable to redeemable noncontrolling interest

 

(232)

 

37

 

(139)

 

146

Net Income Attributable to W. P. Carey

 

$

18,506

 

$

2,588

 

$

75,854

 

$

46,654

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

 

 

 

Income from continuing operations attributable to W. P. Carey

 

$

0.26

 

$

0.22

 

$

1.11

 

$

1.49

Income (loss) from discontinued operations attributable to W. P. Carey

 

0.01

 

(0.16)

 

(0.01)

 

(0.35)

Net income attributable to W. P. Carey

 

$

0.27

 

$

0.06

 

$

1.10

 

$

1.14

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

 

 

Income from continuing operations attributable to W. P. Carey

 

$

0.26

 

$

0.21

 

$

1.09

 

$

1.47

Income (loss) from discontinued operations attributable to W. P. Carey

 

0.01

 

(0.15)

 

(0.01)

 

(0.35)

Net income attributable to W. P. Carey

 

$

0.27

 

$

0.06

 

$

1.08

 

$

1.12

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

68,397,176

 

40,366,298

 

68,719,264

 

40,398,433

Diluted

 

69,400,825

 

41,127,404

 

69,846,320

 

41,029,578

 

 

 

 

 

 

 

 

 

Amounts Attributable to W. P. Carey

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

18,021

 

$

8,990

 

$

76,920

 

$

60,864

Income (loss) from discontinued operations, net of tax

 

485

 

(6,402)

 

(1,066)

 

(14,210)

Net income attributable to W. P. Carey

 

$

18,506

 

$

2,588

 

$

75,854

 

$

46,654

 

 

 

 

 

 

 

 

 

Distributions Declared Per Share

 

$

0.860

 

$

0.650

 

$

2.520

 

$

1.782

See Notes to Consolidated Financial Statements.

 

 

W. P. Carey 9/30/2013 10-Q — 3


Table of Contents

 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

Net Income

 

$

21,650

 

$

2,226

 

$

83,305

 

$

45,125

Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

17,675

 

2,164

 

13,017

 

(141)

Realized and unrealized (loss) gain on derivative instruments

 

(4,013)

 

(92)

 

1,242

 

(673)

Change in unrealized depreciation on marketable securities

 

-

 

(2)

 

-

 

(7)

 

 

13,662

 

2,070

 

14,259

 

(821)

Comprehensive Income

 

35,312

 

4,296

 

97,564

 

44,304

 

 

 

 

 

 

 

 

 

Amounts Attributable to Noncontrolling Interests

 

 

 

 

 

 

 

 

Net (income) loss

 

(2,912)

 

325

 

(7,312)

 

1,383

Foreign currency translation adjustments

 

(2,031)

 

(230)

 

(984)

 

67

Comprehensive (income) loss attributable to noncontrolling interests

 

(4,943)

 

95

 

(8,296)

 

1,450

 

 

 

 

 

 

 

 

 

Amounts Attributable to Redeemable Noncontrolling Interest

 

 

 

 

 

 

 

 

Net (income) loss

 

(232)

 

37

 

(139)

 

146

Foreign currency translation adjustments

 

(21)

 

(9)

 

-

 

(4)

Comprehensive (income) loss attributable to redeemable noncontrolling interest

 

(253)

 

28

 

(139)

 

142

Comprehensive Income Attributable to W. P. Carey

 

$

30,116

 

$

4,419

 

$

89,129

 

$

45,896

 

See Notes to Consolidated Financial Statements.

 

W. P. Carey 9/30/2013 10-Q — 4


Table of Contents

 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the Nine Months Ended September 30, 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) Income

 

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 CPA®:15 Merger

 

(39,834,827)

 

39,834,827

 

40

 

(40)

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

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

 

 -

 

28,170,643

 

28

 

1,380,333

 

 -

 

 -

 

 -

 

 -

 

1,380,361

 

 -

 

1,380,361

Purchase of noncontrolling interests in connection with the CPA®:15 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)

Cancelation of shares

 

 -

 

(85,671)

 

 -

 

(25,000)

 

 -

 

 -

 

 -

 

25,000

 

 -

 

 -

 

 -

Net income

 

 -

 

 -

 

 -

 

 -

 

62,132

 

 -

 

 -

 

 -

 

62,132

 

607

 

62,739

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Reclassification of Estate shareholders shares

 

 -

 

 -

 

 

 

40,000

 

 -

 

 -

 

 -

 

 -

 

40,000

 

 -

 

40,000

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

 

 -

 

49,054

 

 -

 

1,970

 

 -

 

 -

 

 -

 

 -

 

1,970

 

 -

 

1,970

Shares issued under share incentive plans

 

 -

 

336,128

 

 -

 

(9,190)

 

 -

 

 -

 

 -

 

 -

 

(9,190)

 

 -

 

(9,190)

Contributions from noncontrolling interests

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

2,830

 

2,830

Windfall tax benefits - share incentive plans

 

 -

 

 -

 

 -

 

11,614

 

 -

 

 -

 

 -

 

 -

 

11,614

 

 -

 

11,614

Stock-based compensation expense

 

 -

 

 -

 

 -

 

22,972

 

 -

 

2,459

 

 -

 

 -

 

25,431

 

 -

 

25,431

Distributions to noncontrolling interests

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

(20,093)

 

(20,093)

Distributions declared ($2.52 per share)

 

 -

 

 -

 

 -

 

 -

 

(177,522)

 

537

 

 -

 

 -

 

(176,985)

 

 -

 

(176,985)

Purchase of treasury stock from related party (Note 3)

 

 -

 

(616,971)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(40,000)

 

(40,000)

 

 -

 

(40,000)

Foreign currency translation

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

3

 

3

Net income

 

 -

 

 -

 

 -

 

 -

 

75,854

 

 -

 

 -

 

 -

 

75,854

 

7,312

 

83,166

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,033

 

 -

 

12,033

 

984

 

13,017

Unrealized gain on derivative instruments

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,242

 

 -

 

1,242

 

 -

 

1,242

Balance at September 30, 2013

 

 -

 

68,253,736

 

$

69

 

$

2,243,186

 

$

(273,850)

 

$

11,354

 

$

8,626

 

$

(60,270)

 

$

1,929,115

 

$

261,213

 

$

2,190,328

 

See Notes to Consolidated Financial Statements.

 

 

W. P. Carey 9/30/2013 10-Q  — 5


Table of Contents

 

W. P. CAREY INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

Cash Flows — Operating Activities

 

 

 

 

Net income

 

$

83,305

 

$

45,125

Adjustments to net income:

 

 

 

 

Depreciation and amortization, including intangible assets and deferred financing costs

 

102,679

 

22,532

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

 

(22,138)

 

(18,557)

Straight-line rent and amortization of rent-related intangibles

 

15,684

 

(2,229)

Amortization of deferred revenue

 

(7,077)

 

(7,077)

Gain on sale of real estate

 

(290)

 

(1,564)

Unrealized gain on derivative instruments and others

 

(5,608)

 

(17)

Realized loss on foreign currency transactions and other

 

36

 

579

Management income received in shares of Managed REITs

 

(26,709)

 

(21,272)

Gain on change in control of interests

 

-

 

(20,794)

Impairment charges

 

6,366

 

12,262

Stock-based compensation expense

 

25,430

 

19,560

Deferred acquisition revenue received

 

13,496

 

17,017

Increase in structuring revenue receivable

 

(3,967)

 

(8,502)

Decrease in income taxes, net

 

(13,673)

 

(20,000)

(Increase) decrease in prepaid taxes

 

(9,257)

 

5,115

Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options

 

(11,484)

 

(5,155)

Net changes in other operating assets and liabilities

 

(466)

 

14,716

Net Cash Provided by Operating Activities

 

146,327

 

31,739

 

 

 

 

 

Cash Flows — Investing Activities

 

 

 

 

Cash paid to stockholders of CPA®:15 in the CPA®:15 Merger

 

-

 

(152,356)

Cash acquired in connection with the CPA®:15 Merger

 

-

 

178,945

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

 

32,982

 

27,241

Capital contributions to equity investments

 

(1,945)

 

(377)

Purchases of real estate

 

(249,289)

 

(2,679)

Capital expenditures

 

(10,164)

 

(2,930)

Proceeds from sale of real estate and equity investments

 

56,495

 

32,586

Funding of short-term loan to an affiliate

 

(15,000)

 

-

Funds placed in escrow

 

(163,025)

 

(11,716)

Funds released from escrow

 

190,698

 

13,540

Other investing activities, net

 

(5)

 

314

Net Cash (Used in) Provided by Investing Activities

 

(159,253)

 

82,568

 

 

 

 

 

Cash Flows — Financing Activities

 

 

 

 

Distributions paid

 

(160,953)

 

(69,180)

Contributions from noncontrolling interests

 

2,830

 

2,319

Distributions paid to noncontrolling interests

 

(20,427)

 

(1,866)

Purchase of treasury stock from related party (Note 3)

 

(40,000)

 

(25,000)

Scheduled payments of mortgage principal

 

(160,763)

 

(12,455)

Proceeds from mortgage financing

 

113,000

 

1,250

Proceeds from senior credit facility and unsecured term loan

 

585,000

 

215,000

Repayments of senior credit facility

 

(348,000)

 

(30,000)

Return of tenant security deposits

 

(1,054)

 

-

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

 

(2,202)

 

(1,687)

Proceeds from exercise of stock options and employee purchase under the employee share purchase plan

 

1,970

 

5,964

Windfall tax benefit associated with stock-based compensation awards

 

11,614

 

8,865

Net Cash (Used in) Provided by Financing Activities

 

(18,985)

 

93,210

 

 

 

 

 

Change in Cash and Cash Equivalents During the Period

 

 

 

 

Effect of exchange rate changes on cash

 

1,627

 

(70)

Net (decrease) increase in cash and cash equivalents

 

(30,284)

 

207,447

Cash and cash equivalents, beginning of period

 

123,904

 

29,297

Cash and cash equivalents, end of period

 

$

93,620

 

$

236,744

 

(Continued)

 

 

W. P. Carey 9/30/2013 10-Q — 6


Table of Contents

 

W. P. CAREY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Continued)

 

Supplemental non-cash investing and financing activities:

 

A summary of our non-cash investing and financing activities for the periods presented is as follows (dollars in thousands):

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

Reclassification of Net investments in direct financing leases to Real estate (Note 4)

 

$

13,739

 

$

-

Reclassification of Real estate to Assets held for sale (Note 4)

 

21,478

 

-

Reclassification of Intangible assets, net to Assets held for sale (Note 4)

 

1,283

 

-

Reclassification of Operating real estate to Assets held for sale (Note 4)

 

3,627

 

-

Reclassification of Additional paid-in capital to Redeemable securities (Note 3)

 

-

 

85,000

Third quarter distributions declared

 

59,439

 

44,301

 

On September 28, 2012, we merged with Corporate Property Associates 15 Incorporated (“CPA®:15”) through a series of transactions (the “CPA®:15 Merger”). In this transaction, CPA®:15 stockholders received $1.25 in cash and 0.2326 shares of our common stock for each share of CPA®:15 common stock held at the completion of the CPA®:15 Merger (Note 3). The purchase price was allocated to the assets acquired and liabilities assumed based upon their preliminary fair values. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in the acquisition based on the current best estimate of management (in thousands).

 

Assets Acquired at Fair Value

 

 

Investments in real estate

 

$

1,758,372

Net investment in direct financing leases

 

315,789

Equity investments in real estate

 

164,886

Intangible assets

 

694,411

Other assets

 

83,838

Liabilities Assumed at Fair Value

 

 

Non-recourse debt

 

(1,350,755)

Accounts payable, accrued expenses and other liabilities

 

(187,712)

Amounts attributable to noncontrolling interests

 

(238,038)

Net assets acquired excluding cash

 

1,240,791

Fair value of common shares issued

 

(1,380,362)

Cash consideration

 

(152,356)

Fair value of W. P. Carey & Co. LLC equity interest in CPA®:15 prior to the CPA®:15 Merger

 

(107,147)

Fair value of W. P. Carey & Co. LLC equity interest in jointly-owned investments with CPA®:15 prior to the CPA®:15 Merger

 

(54,822)

Goodwill

 

274,951

Cash acquired on acquisition of subsidiaries

 

$

(178,945)

 

See Notes to Consolidated Financial Statements

 

 

W. P. Carey 9/30/2013 10-Q — 7


Table of Contents

 

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.

 

We have sponsored a series of seventeen income-generating funds that invest in commercial 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”), Corporate Property Associates 17 – Global Incorporated (“CPA®:17 – Global”) and Corporate Property Associates 18 – Global Incorporated (“CPA®:18 – Global”). We are also the advisor to Carey Watermark Investors Incorporated (“CWI” and, together with CPA®:16 – Global, CPA®:17 – Global, and CPA®:18 – 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, CPA®:15 merged with and into us, with CPA®:15 surviving as an indirect, wholly-owned subsidiary of ours. In connection with the CPA®:15 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 CPA®:15 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.”

 

On July 25, 2013, we and CPA®:16 – Global entered into a merger agreement pursuant to which CPA®:16 – Global will merge with and into one of our subsidiaries in exchange for shares of our common stock (the “Proposed Merger,” Note 3). On October 1, 2013, we filed a registration statement with the SEC to register the shares of our common stock to be issued to stockholders of CPA®:16 – Global in connection with the Proposed Merger. If the Proposed Merger is approved by our stockholders and the stockholders of CPA®:16 – Global and the other closing conditions are met, we expect that the closing will occur during the first quarter of 2014, although there can be no assurance of such timing.

 

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 September 30, 2013, our portfolio was comprised of our full or partial ownership interest in 421 properties. Substantially all of these properties, totaling approximately 39.4 million square feet, were net leased to 125 tenants, with an occupancy rate of approximately 99.0%. Collectively, at September 30, 2013, the Managed REITs owned all or a portion of over 693 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 218 tenants, with an average occupancy rate of approximately 98.8%. The Managed REITs also had interests in 91 operating properties for an aggregate of approximately 8.1 million square feet at September 30, 2013.

 

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 CPA®:16 – Global and CWI, to fees for structuring loan

 

 

W. P. Carey 9/30/2013 10-Q — 8

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

refinancing transactions. 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 events do not occur every year. However, in the event they do occur, we may waive the incentive or termination fee we would have been entitled to receive from the Managed REITs pursuant to the terms of our advisory agreements with the Managed REITs, which was the case in the CPA®:15 Merger and will be the case under the terms of the merger agreement between us and CPA®:16 – Global (Note 3). We will not receive a termination payment in circumstances where we receive 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 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 nine months ended September 30, 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 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. This

 

 

W. P. Carey 9/30/2013 10-Q — 9

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

registration statement was declared effective by the SEC on May 7, 2013. Through July 25, 2013, the financial activity of CPA®:18 – Global, which at that time had no significant assets, liabilities or operations, was included in our consolidated financial statements as we owned 100% of its outstanding common stock. On July 25, 2013, upon CPA®:18 – Global reaching its minimum offering proceeds and admitting new stockholders, our ownership of its outstanding common stock was immediately reduced to 8.5% and we deconsolidated CPA®:18 – Global and began to account for our interests in it under the equity method. As the advisor, we do not exert control over, but we have the ability to exercise significant influence on, CPA®:18 – Global (Note 6).

 

Accounting Policy

 

Internal-Use Software Development Costs – In accordance with Accounting Standards Codification 350-40-25, we expense costs associated with the assessment stage of software development projects. Upon completion of the preliminary project assessment stage, we capitalize internal and external costs associated with the application development stage, including the costs associated with software that allows for the conversion of our old data to our new system. We expense the costs of training and data conversion. We also expense costs associated with the post-implementation and operation stage, including maintenance and specified upgrades; however, we capitalize internal and external costs associated with significant upgrades to existing systems that result in additional functionality. Capitalized costs are amortized on a straight-line basis over the software’s estimated useful life, which is three to five years. Periodically, we reassess the useful life considering technology, obsolescence and other factors.

 

Change in Accounting Principle

 

During the fourth quarter of 2013, we elected to change the date of our annual impairment test for goodwill in our Real Estate Ownership segment from June 30 to October 1. This change is preferable because moving the test to October 1 aligns the goodwill testing of the Real Estate Ownership segment with that of our Investment Management segment, which is also tested annually in the fourth quarter. Additionally, October 1 is more closely aligned with our business planning and forecasting cycle. As a result of this change, there will not be more than a 12-month span between testing dates because our last goodwill test for the Real Estate Ownership segment was completed on June 30, 2013 for the goodwill that was acquired on September 28, 2012. The change in testing dates does not accelerate, delay or avoid a potential impairment charge. Additional goodwill impairment testing may be required at interim dates when and if triggering events occur in the future.

 

Out-of-Period Adjustment

 

During the third quarter of 2013, we identified an error in the consolidated financial statements for the year ended December 31, 2012 in connection with the finalization of a tax return for an investment in Germany, which is accounted for using the equity method of accounting. The error originated based upon the application of a tax law change that became effective in 2012, but for which the accounting was not finalized and recorded until the third quarter of 2013. As a result of this error, both our net income and income from continuing operations from our proportionate share of this investment were overstated by $2.3 million in 2012 ($0.04 per share basic and diluted), and understated by $2.3 million for the three months ended September 30, 2013 ($0.03 per share basic and diluted). We have concluded that this adjustment is not material to the current period or any prior period’s consolidated financial statements. As such, this cumulative charge was recorded in the statement of operations for the three months ended September 30, 2013, rather than restating prior periods.

 

During the second quarter of 2012, we identified an error in the consolidated financial statements related to the misapplication of accounting guidance on the expropriation of land related to two investments. We concluded that this adjustment was not material, individually or in the aggregate, to our results for this or any of the prior periods, and as such, we recorded an out-of-period adjustment to increase our income from operations by $1.8 million within continuing operations primarily attributable to an increase in Other income and (expenses) of $2.0 million in the consolidated statements of income for the nine months ended September 30, 2012.

 

Recent Accounting Requirements

 

The following Accounting Standards Updates (“ASUs”) promulgated by the 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 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 has been 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, is applicable to us for our interim and annual reports beginning in 2013 and has been applied retrospectively. The related additional disclosures are located in Note 12.

 

 

W. P. Carey 9/30/2013 10-Q — 10

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

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.

 

ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, a Consensus of the FASB Emerging Issues Task Force — In July 2013, the FASB issued ASU 2013-10, which permits the Fed Funds Effective Swap Rate, also referred to as the “Overnight Index Swap Rate,” to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the U.S. government and London Interbank Offered Rate (“LIBOR”) swap rate. The update also removes the restriction on the use of different benchmark rates for similar hedges. This ASU will be applicable to us for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  Through the date of this Report, we had not entered into any transactions to which this ASU applies.

 

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. The following tables present a summary of revenue earned and/or cash received from the Managed REITs, as well as from CPA®:15 through the date of the CPA®:15 Merger, included in the consolidated statements of income (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Asset management revenue (a)

 

$

10,939

 

$

15,828

 

$

31,262

 

$

47,020

 

Structuring revenue

 

14,775

 

8,316

 

27,539

 

19,576

 

Dealer manager fees

 

3,787

 

4,012

 

7,329

 

11,878

 

Reimbursed costs from affiliates (a)

 

23,259

 

19,676

 

50,714

 

58,493

 

Distributions of Available Cash

 

7,323

 

7,352

 

23,891

 

21,789

 

Deferred revenue earned

 

2,123

 

2,123

 

6,369

 

6,369

 

 

 

$

62,206

 

$

57,307

 

$

147,104

 

$

165,125

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

CPA®:15

 

$

-

 

$

7,147

 

$

-

 

$

21,563

 

CPA®:16 – Global (b)

 

13,041

 

12,005

 

39,632

 

37,554

 

CPA®:17 – Global (b)

 

20,823

 

34,895

 

49,436

 

98,314

 

CPA®:18 – Global (c) (d) 

 

3,253

 

-

 

3,253

 

-

 

CWI (e)

 

25,089

 

3,260

 

54,783

 

7,694

 

 

 

$

62,206

 

$

57,307

 

$

147,104

 

$

165,125

 

 

 

W. P. Carey 9/30/2013 10-Q — 11

 


Table of Contents

 

Notes to Consolidated Financial Statements

__________

 

(a)         Excludes amounts received from third-parties.

(b)         The advisory agreements with CPA®:16 – Global and CPA®:17 – Global, which were scheduled to expire on September 30, 2013, were extended through January 31, 2014 in light of the Proposed Merger.

(c)          The advisory agreement with CPA®:18 – Global, which was entered into in May 2013, is scheduled to expire on September 30, 2014.

(d)         Amount excludes deferred acquisition fees related to CPA®:18 – Global’s acquisition during the three months ended September 30, 2013 because CPA®:18 – Global had not yet achieved its preferred return as specified in the advisory agreement.

(e)          The CWI advisory agreement, which was scheduled to expire on September 30, 2013, was renewed for an additional year pursuant to its terms, effective as of October 1, 2013.

 

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

 

 

 

September 30, 2013

 

December 31, 2012

 

Deferred acquisition fees receivable

 

$

19,126

 

$

28,654

 

Reimbursable costs

 

1,019

 

1,457

 

Organization and offering costs

 

4,287

 

4,920

 

Accounts receivable

 

1,292

 

182

 

Asset management fee receivable

 

1,491

 

789

 

Note receivable from CPA®:18 – Global, including interest thereon

 

15,034

 

-

 

 

 

$

42,249

 

$

36,002

 

 

Asset Management Revenue

 

We earn asset management revenue from each of the Managed REITs, which is based on average invested assets and is calculated according to the respective advisory agreement. For CPA®:15 prior to the CPA®:15 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 the average market value of assets under long-term net leases and certain other types of real estate investments up to 1.75% of average equity value for certain types of securities. For CPA®:18 – Global, we earn asset management revenue ranging from 0.5% to 1.5%, depending on the type of investment and based on the average market value or average equity value, as applicable. 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 of the Managed REITs. In 2013, we elected to receive all asset management revenue from CPA®:17 – Global and CWI in their respective shares. For 2013, we had initially elected to receive asset management revenue from CPA®:16 – Global in its shares. However, in light of the announcement of the Proposed Merger discussed below, a Special Committee of the Board of Directors of CPA®:16 – Global (“the CPA®:16 – Global Special Committee”) requested that we elect to receive the asset management revenue in cash, which became effective as of August 1, 2013.  For 2012, we elected to receive all asset management revenue from CPA®:15 prior to the CPA®:15 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 to fees for structuring loan

 

 

W. P. Carey 9/30/2013 10-Q — 12

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

refinancing transactions 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 2% to 7%.

 

Reimbursed Costs from Affiliates and Dealer Manager Fees

 

The Managed REITs reimburse us for certain costs we incur on their behalf, primarily broker/dealer commissions, marketing costs, and certain personnel and overhead costs. Since October 1, 2012, personnel costs have been charged to CPA®:16 – Global and CPA®:17 – Global based on the trailing twelve-month reported revenues of CPA®:16 – Global, CPA®:17 – Global, CWI and us rather than the method utilized before that date, which involved an allocation of personnel costs based on the time incurred by our personnel for CPA®:16 – Global and CPA®:17 – Global. As of September 30, 2013, we have not allocated any personnel costs to CPA®:18 – Global or CWI.

 

During CPA®:17 – Global’s public offering, which was terminated in January 2013, we earned a selling commission of $0.65 per share sold and a dealer manager fee of $0.35 per share sold. In addition, during CWI’s primary offering, which was terminated in September 2013, we earned a selling commission of $0.70 per share sold and a dealer manager fee of $0.30 per share sold.

 

For CPA®:18 – Global, we receive selling commissions, depending on the class of common stock sold, of $0.70 or $0.14 per share sold, and a dealer manager fee of $0.30 or $0.21 per share sold, for its class A common stock and class C common stock, respectively. We also receive an annual distribution and shareholder servicing fee (“Shareholder Servicing Fee”) paid in connection with investor purchases of shares of class C common stock. The amount of the Shareholder Servicing Fee is 1.0% of the purchase price per share (or, once reported, the amount of the estimated net asset value per share) for the shares of class C common stock sold in the offering. The Shareholder Servicing Fee is accrued daily and is payable quarterly in arrears. CPA®:18 – Global will cease paying the Shareholder Servicing Fee on the date at which, in the aggregate, underwriting compensation from all sources, including the Shareholder Servicing Fee, any organizational and offering fee paid for underwriting, and underwriting compensation paid by us, equals 10% of the gross proceeds from the initial public offering. We re-allow all or a portion of the dealer manager fees to selected dealers in the offering. Dealer manager fees that are not re-allowed and the Shareholder Servicing Fee 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 initial public 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 the closing of its initial public offering in September 2013, we incurred organization and offering costs on behalf of CWI of approximately $9.4 million, of which CWI is obligated to reimburse us all of these costs, and $9.2 million had been reimbursed as of September 30, 2013.

 

Pursuant to its advisory agreement, CPA®:18 – Global is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its initial public offering. CPA®:18 – Global is obligated to reimburse us up to 4% of the gross proceeds of its offering if the gross proceeds are less than $500.0 million, 2% of the gross proceeds if the gross proceeds are $500.0 million or more but less than $750.0 million, and 1.5% of the gross proceeds if the gross proceeds are $750.0 million or more within 60 days after the end of the quarter in which the offering terminates. Through September 30, 2013, we incurred organization and offering costs on behalf of CPA®:18 – Global of approximately $4.0 million, and based on current fundraising projections, the entire amount is expected to be reimbursed by CPA®:18 – Global. As of September 30, 2013, none of these costs had been reimbursed.

 

Distributions of Available Cash and Deferred Revenue Earned

 

We are entitled to receive distributions of our proportionate share of earnings up to 10% of the Available Cash, as defined in the respective advisory agreements, from the operating partnerships of each of the Managed REITs. 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 (“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 CPA®:18 – Global and CWI’s operating partnerships.

 

 

W. P. Carey 9/30/2013 10-Q — 13

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

Other Transactions with Affiliates

 

Transactions with the 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. 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 at which time it was recorded as Treasury stock on our consolidated balance sheets.

 

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

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Balance - beginning of period

 

$

40,000

 

$

-

 

Reclassification from permanent equity to temporary equity

 

-

 

85,000

 

Redemption of securities

 

(40,000)

 

(25,000)

 

Balance - end of period

 

$

-

 

$

60,000

 

 

CPA®:15 Merger

 

On September 28, 2012, CPA®:15 merged with and into one of our subsidiaries, with CPA®:15 surviving as our indirect, wholly-owned subsidiary. In the CPA®:15 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 CPA®:15 Merger as a business combination. 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.

 

Proposed Merger with CPA®:16 – Global

 

On July 25, 2013, we and CPA®:16 – Global entered into a merger agreement pursuant to which CPA®:16 – Global will merge with and into one of our subsidiaries in exchange for shares of our common stock. On October 1, 2013, we filed a registration statement with the SEC to register the shares of our common stock to be issued to stockholders of CPA®:16 – Global in connection with the Proposed Merger, which as of the date of this Report remains subject to SEC review. Special meetings will be scheduled to obtain the approval of the Proposed Merger by our stockholders and by CPA®:16 – Global’s stockholders, and the closing of the Proposed Merger also is subject to customary closing conditions. If the Proposed Merger is approved by our stockholders and the stockholders of CPA®:16 – Global and the other closing conditions are met, we expect that the closing will occur during the first quarter of 2014, although there can be no assurance of such timing.

 

Subject to the terms and conditions of the merger agreement, CPA®:16 – Global stockholders will receive shares of our common stock in exchange for their shares of CPA®:16 – Global stock, pursuant to an exchange ratio based upon a value of $11.25 per share of CPA®:16 – Global and the volume weighted average trading price (“VWAP”) of our common stock for the five consecutive trading days ending on the third trading day preceding the closing date of the transaction. The exchange ratio is subject to a 12% collar based on the VWAP of our common stock on July 22, 2013 and July 23, 2013, which results in an exchange ratio of not more than 0.1842 shares and not less than 0.1447 shares of our common stock for each share of CPA®:16 – Global, (the “Per Share Merger Consideration”). CPA®:16 – Global stockholders will receive cash in lieu of any fractional shares in the Proposed Merger.

 

Based on the outstanding common stock of CPA®:16 – Global of approximately 206,300,000 shares at September 30, 2013, of which we owned approximately 38,200,000 shares, and the Per Share Merger Consideration, based on the VWAP of our common stock for the five days ended October 31, 2013 of 0.1676 shares, in the Proposed Merger we would issue approximately 28,200,000 shares of our common stock to stockholders of CPA®:16 – Global in exchange for the shares of CPA®:16 – Global we do not currently own. The estimated aggregate value of such shares issued in the Proposed Merger would be approximately $1.9 billion, based on the closing price of our common stock on October 31, 2013, of $66.61 per share. The nominal value of the Per Share Merger Consideration and

 

 

W. P. Carey 9/30/2013 10-Q — 14

 


Table of Contents

 

Notes to Consolidated Financial Statements

 

estimated total merger consideration may be higher or lower as of the date of the completion of the Proposed Merger due to changes in the market price of our common stock, subject to the limitations of the collar discussed above.

 

Under the terms of the merger agreement, the CPA®:16 – Global Special Committee was allowed to solicit, receive, evaluate and enter into negotiations with respect to alternative proposals from third parties for 30 days following the execution of the merger agreement (the “Go Shop Period”). The Go Shop Period expired on August 24, 2013 with no qualifying proposals or offers being received.

 

The merger agreement contains certain termination rights for both us and CPA®:16 – Global. Each party has agreed to pay the other party’s out-of-pocket expenses in the event that the merger agreement is terminated because such party has breached any of its representations, warranties, covenants or agreements. Through September 30, 2013, we and CPA®:16 – Global have incurred merger expenses totaling approximately $2.8 million and $2.4 million, respectively.

 

Pursuant to the terms of the advisory agreement between us and CPA®:16 – Global, we are entitled to be paid the subordinated disposition fees and certain profit interests in connection with any liquidity event regarding CPA®:16 – Global as described above (collectively, the “Back End Amounts”). In the merger agreement, we have agreed to waive our rights to receive the Back End Amounts upon consummation of the Proposed Merger. However, in the event that the merger agreement is terminated under certain circumstances in connection with a CPA16 Superior Competing Transaction (as defined in the merger agreement), CPA®:16 – Global has agreed to pay us an up-front termination fee (the “CPA16 Termination Fee”) of $57.0 million. The CPA16 Termination Fee would be offset against the sum of the Back End Amounts.

 

At September 30, 2013, CPA®:16 – Global’s portfolio was comprised of the consolidated full or partial interests in 336 leased properties, substantially all of which were triple-net leased with an average remaining life of 10.5 years and an estimated annual contractual minimum base rent totaling $305.8 million, and two hotel properties. The related property-level debt was comprised of 97 fixed-rate and 17 variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $1.6 billion and a weighted-average annual interest rate of 5.6% at September 30, 2013. In addition, CPA®:16 – Global had equity interests in 19 unconsolidated investments holding 141 properties, substantially all of which were triple-net leased with an average remaining life of 8.8 years and an estimated annual contractual minimum base rent totaling $63.4 million. The debt related to these equity investments was comprised of 18 fixed-rate and five variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $0.3 billion and a weighted-average annual interest rate of 5.0% at September 30, 2013. We currently consolidate 11 and hold equity interests in six of these investments. If the Proposed Merger occurs, we expect to consolidate five of the six investments in which we have equity interests. The portfolio and debt of CPA®:16 – Global is subject to change based on normal business activity.

 

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.

 

During 2013, our board of directors approved loans from us to CWI and CPA®:18 – Global of up to $50.0 million and up to $100.0 million, respectively, at a rate of LIBOR plus 1.75%, which is equal to the rate at which we currently borrow funds under our Senior Credit Facility (Note 10), for the purpose of facilitating acquisitions approved by their respective investment committees, that they would not otherwise have sufficient available funds to complete, with any loans to be made solely at our Management’s discretion. On August 20, 2013, in order to facilitate an acquisition by CPA®:18 – Global, we made a $15.0 million loan to CPA®:18 – Global, which was repaid in full prior to maturity on October 4, 2013. In connection with this loan, we earned interest income from CPA®:18 – Global totaling less than $0.1 million during the period it was outstanding, from August 20, 2013 through September 30, 2013.

 

 

W. P. Carey 9/30/2013 10-Q — 15

 


Table of Contents

 

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):

 

 

 

September 30, 2013

 

December 31, 2012

 

Land

 

$

539,289

 

$

509,530

 

Buildings

 

1,976,186

 

1,824,958

 

Less: Accumulated depreciation

 

(159,536)

 

(116,075)

 

 

 

$

2,355,939

 

$

2,218,413

 

 

During the nine months ended September 30, 2013, we entered into the following investments, which were deemed to be real estate asset acquisitions because we entered into new leases with the sellers, at a total cost of $124.4 million, including net lease intangibles of $26.5 million (Note 7) and acquisition-related costs of $1.5 million, which were capitalized:

 

·                  a domestic investment for $72.4 million for an office building, which we funded in part with 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 (Note 10); and

·                  an investment in Finland for $52.0 million for an office and research and development facility.

 

During the nine months ended September 30, 2013, we also entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, at a total cost of $124.1 million, including land of $12.5 million, buildings of $70.1 million and net lease intangibles of $41.5 million (Note 7):

 

·                  an investment in the United Kingdom for $63.3 million for an office building;

·                  an investment in the Netherlands for $35.3 million for a logistics facility; and

·                  a domestic investment for $25.5 million for an office building, which we funded with the escrowed proceeds from the sale of the property leased to U. S. Airways Group, Inc. (“U. S. Airways”) in an exchange transaction under Section 1031 of the Code (Note 6).

 

In connection with these business combinations, we expensed aggregate acquisition-related costs of $4.0 million, which are included in General and administrative expenses in the consolidated financial statements.

 

Dollar amounts above are based on the exchange rate of the euro and the British pound sterling on the dates of acquisition, as applicable.

 

Assets disposed of and reclassified as held-for-sale during the nine months ended September 30, 2013 are discussed in Note 13. Impairment charges recognized on these properties are discussed in Note 8. During this period, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro at September 30, 2013 increased by 2.3% to $1.3525 from $1.3218 at December 31, 2012. The impact of this weakening was a $14.8 million increase in the carrying value of Real estate from December 31, 2012 to September 30, 2013. In connection with restructuring five leases, we reclassified $13.7 million of properties from Net investments in direct financing leases to Real estate during the nine months ended September 30, 2013 (Note 5). In connection with anticipated sales of properties during the nine months ended September 30, 2013, we reclassified five domestic properties with an aggregate carrying value of $26.4 million to Assets held for sale, which includes real estate, net of $21.5 million, operating real estate, net of $3.6 million and net lease intangibles of $1.3 million. We completed the sale of three of these properties during the nine months ended September 30, 2013 and one of these properties in October 2013 (Note 13). There can be no assurance that the remaining property will be sold at the contracted price or at all.

 

 

W. P. Carey 9/30/2013 10-Q — 16


Table of Contents

 

Notes to Consolidated Financial Statements

 

Operating Real Estate

 

Operating real estate, which consists of our investments in 21 self-storage properties through our Carey Storage Management LLC (“Carey Storage,” Note 15) subsidiary and our Livho Inc. hotel subsidiary, at cost, is summarized as follows (in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

Land

 

$

21,291

 

$

22,158

 

Buildings

 

62,605

 

77,545

 

Less: Accumulated depreciation

 

(10,549)

 

(19,993)

 

 

 

$

73,347

 

$

79,710

 

 

In May 2013, we entered into a contract to sell our hotel. In connection with the potential sale, we recognized an impairment charge of $1.1 million to write down the hotel’s carrying value to its estimated fair value (Note 8) and reclassified the asset, which had a carrying value of $3.6 million, to Assets held for sale (Note 13). We completed the sale of the hotel in October 2013.

 

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 September 30, 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 nine months ended September 30, 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 third 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

 

September 30, 2013

 

December 31, 2012

 

September 30, 2013

 

December 31, 2012

 

 

3

 

3

 

$

43,036

 

$

46,398

 

 

3

 

4

 

27,982

 

49,764

 

 

8

 

8

 

281,383

 

257,281

 

 

1

 

4

 

7,839

 

22,562

 

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

$

360,240

 

$

376,005

 

 

During the nine months ended September 30, 2013, we reclassified $13.7 million of properties from Net investment in direct financing leases to Real estate (Note 4) in connection with the restructuring of five leases. Additionally, during the nine months ended September 30, 2013, we sold our net investment in a direct financing lease, which we acquired in the CPA®:15 Merger, for $5.5 million, net of selling costs, and recognized a loss on the sale of $0.3 million.

 

 

W. P. Carey 9/30/2013 10-Q — 17


Table of Contents

 

Notes to Consolidated Financial Statements

 

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

 

We own interests in certain unconsolidated real estate investments with the Managed REITs and also own interests in 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Equity earnings from equity investments in the Managed REITs

 

$

2,584

 

$

187

 

$

3,668

 

$

5,683

 

Other-than-temporary impairment charges on the Special Member Interest in CPA®:16 – Global’s operating partnership

 

(6,554)

 

(2,244)

 

(12,082)

 

(5,776)

 

Distributions of Available Cash (Note 3)

 

7,323

 

7,352

 

23,891

 

21,789

 

Deferred revenue earned (Note 3)

 

2,123

 

2,123

 

6,369

 

6,369

 

Equity in net income from the Managed REITs

 

5,476

 

7,418

 

21,846

 

28,065

 

Equity in net earnings from other equity investments

 

3,704

 

3,059

 

30,531

 

24,743

 

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

 

$

9,180

 

$

10,477

 

$

52,377

 

$

52,808

 

 

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.

 

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

 

September 30, 2013

 

December 31, 2012

 

September 30, 2013 (a)

 

December 31, 2012

 

CPA®:16 – Global (b)

 

18.531%

 

18.330%

 

$

289,724

 

$

296,301

 

CPA®:16 – Global operating partnership (c)

 

0.015%

 

0.015%

 

4,350

 

17,140

 

CPA®:17 – Global (d)

 

1.746%

 

1.290%

 

52,907

 

38,977

 

CPA®:17 – Global operating partnership (e)

 

0.015%

 

0.015%

 

-

 

-

 

CPA®:18 – Global (f)

 

1.138%

 

100.000%

 

219

 

-

 

CPA®:18 – Global operating partnership (g)

 

0.015%

 

N/A

 

209

 

-

 

CWI

 

0.393%

 

0.400%

 

2,364

 

727

 

CWI operating partnership

 

0.015%

 

0.015%

 

-

 

-

 

 

 

 

 

 

 

$

349,773

 

$

353,145

 

 

__________

 

(a)         Includes asset management fees receivable, for which 193,094 shares, 2,357 shares and 29,982 shares of CPA®:17 – Global, CPA®:18 – Global and CWI, respectively, were issued during the fourth quarter of 2013.

(b)         We received distributions of $18.9 million and $18.2 million from this investment during the nine months ended September 30, 2013 and 2012, respectively.

(c)          During the nine months ended September 30, 2013 and 2012, we recognized other-than-temporary impairment charges of $12.1 million and $5.8 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 $11.2 million and $11.6 million from this investment during the nine months ended September 30, 2013 and 2012, respectively.

(d)         We received distributions of $2.1 million and $1.0 million from this investment during the nine months ended September 30, 2013 and 2012, respectively.

(e)          We received distributions of $12.7 million and $10.2 million from this investment during the nine months ended September 30, 2013 and 2012, respectively.

 

 

W. P. Carey 9/30/2013 10-Q — 18


Table of Contents

 

Notes to Consolidated Financial Statements

 

(f)           On September 13, 2012, we purchased 1,000 shares of CPA®:18 – Global common stock, par value $0.001 per share, for an aggregate purchase price of $9,000. On December 14, 2012, we made a capital contribution of $0.2 million in exchange for 22,222 shares of CPA®:18 – Global common stock. On July 25, 2013, upon CPA®:18 – Global reaching its minimum offering proceeds and admitting new stockholders, we began to account our interests in it under the equity method of accounting (Note 2).

(g)          On July 3, 2013, we purchased a 0.015% special general partnership interest in CPA®:18 – Global’s operating partnership for $0.2 million. This special general partnership interest entitles us to receive distributions of our proportionate share of earnings up to 10% of the Available Cash from CPA®:18 – Global’s operating partnership (Note 3).

 

The following tables present estimated 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):

 

 

 

September 30, 2013

 

December 31, 2012

 

Real estate, net

 

$

6,805,133

 

$

6,049,926

 

Other assets

 

2,075,663

 

2,002,620

 

Total assets

 

8,880,796

 

8,052,546

 

Debt

 

(3,952,124)

 

(3,509,394)

 

Accounts payable, accrued expenses and other liabilities

 

(502,891)

 

(450,362)

 

Total liabilities

 

(4,455,015)

 

(3,959,756)

 

Redeemable noncontrolling interests

 

(22,252)

 

(21,747)

 

Noncontrolling interests

 

(200,098)

 

(170,140)

 

Stockholders’ equity

 

$

4,203,431

 

$

3,900,903

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues

 

$

211,102

 

$

207,852

 

$

573,969

 

$

620,484

 

Expenses

 

(198,286)

 

(174,290)

 

(528,847)

 

(523,111)

 

Net income from continuing operations

 

$

12,816

 

$

33,562

 

$

45,122

 

$

97,373

 

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

 

$

18,303

 

$

28,179

 

$

45,389

 

$

121,099

 

 

_________

 

(a)         Inclusive of impairment charges recognized by the Managed REITs totaling $0.5 million and $6.5 million during the three months ended September 30, 2013 and 2012, respectively, and $22.2 million and $9.0 million during the nine months ended September 30, 2013 and 2012, respectively. These impairment charges reduced our income earned from these investments by approximately $0.1 million and $1.2 million during the three months ended September 30, 2013 and 2012, respectively, and $4.1 million and $1.3 million during the nine months ended September 30, 2013 and 2012, respectively.

(b)         Amounts included net gains (losses) on sale of real estate recorded by the Managed REITs totaling $2.4 million and $(2.9) million during the three and nine months ended September 30, 2013, respectively, and net (losses) gains totaling $(0.4) million and $31.5 million during the three and nine months ended September 30, 2012, respectively.

 

 

W. P. Carey 9/30/2013 10-Q — 19


Table of Contents

 

Notes to Consolidated Financial Statements

 

Interests in Other Unconsolidated Real Estate Investments

 

We own equity interests in single-tenant net leased properties that are generally 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. Earnings for each investment are recognized in accordance with each respective investment agreement. Investments in unconsolidated investments are required to be evaluated periodically. We periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds fair value and such decline is determined to be other than temporary.

 

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 September 30, 2013

 

September 30, 2013

 

December 31, 2012

 

Schuler A.G. (a) (b) (d)

 

67%

 

$

68,067

 

$

62,006

 

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

 

40%

 

39,794

 

42,387

 

Advanced Micro Devices (c) (d) 

 

33%