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Section 1: 10-Q (10-Q)

Document


 

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 September 30, 2018
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
395620798_wpchighreslogo20.jpg
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
 
 
 
Smaller reporting company o
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 161,063,481 shares of common stock, $0.001 par value, outstanding at November 1, 2018.
 




INDEX
 
 
 
Page No.
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
Item 6. Exhibits



 
W. P. Carey 9/30/2018 10-Q 1



Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. These forward-looking statements include, but are not limited to, statements regarding: the impact of the CPA:17 Merger discussed and defined herein; our expected range of Adjusted funds from operations, or AFFO; the amount and timing of any future dividends; statements regarding our corporate strategy and estimated or future economic performance and results, including our projected assets under management, underlying assumptions about our portfolio (e.g., occupancy rate, lease terms, and tenant credit quality, including our expectations about tenant bankruptcies and interest coverage), possible new acquisitions and dispositions, and our international exposure and acquisition volume; our capital structure, future capital expenditure levels (including any plans to fund our future liquidity needs), and future leverage and debt service obligations; capital markets, including our credit ratings and ability to sell shares under our “at-the market” program and the use of proceeds from that program; the outlook for the investment programs that we manage, including their earnings, as well as possible liquidity events for those programs; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust, or REIT, and the Tax Cuts and Jobs Act in the United States; the impact of recently issued accounting pronouncements; other regulatory activity, such as the General Data Protection Regulation in the European Union or other data privacy initiatives; and the general economic outlook. These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on our business, financial condition, liquidity, results of operations, AFFO, and prospects. 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 that 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, or the SEC, including but not limited to those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 23, 2018, or the 2017 Annual Report, and in Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, as filed with SEC on August 3, 2018. Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, potential investors are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. 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.

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 9/30/2018 10-Q 2



PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

W. P. CAREY INC. 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Investments in real estate:
 
 
 
Land, buildings and improvements
$
5,794,494

 
$
5,457,265

Net investments in direct financing leases
702,151

 
721,607

In-place lease and other intangible assets
1,199,785

 
1,213,976

Above-market rent intangible assets
626,390

 
640,480

Investments in real estate
8,322,820

 
8,033,328

Accumulated depreciation and amortization
(1,485,056
)
 
(1,329,613
)
Assets held for sale, net
108,730

 

Net investments in real estate
6,946,494

 
6,703,715

Equity investments in the Managed Programs and real estate
366,306

 
341,457

Cash and cash equivalents
176,612

 
162,312

Due from affiliates
82,547

 
105,308

Other assets, net
305,295

 
274,650

Goodwill
641,734

 
643,960

Total assets
$
8,518,988

 
$
8,231,402

Liabilities and Equity
 
 
 
Debt:
 
 
 
Senior unsecured notes, net
$
3,007,453

 
$
2,474,661

Unsecured revolving credit facility
696,380

 
216,775

Unsecured term loans, net

 
388,354

Non-recourse mortgages, net
959,951

 
1,185,477

Debt, net
4,663,784

 
4,265,267

Accounts payable, accrued expenses and other liabilities
265,676

 
263,053

Below-market rent and other intangible liabilities, net
105,898

 
113,957

Deferred income taxes
98,933

 
67,009

Dividends payable
111,688

 
109,766

Total liabilities
5,245,979

 
4,819,052

Redeemable noncontrolling interest
1,300

 
965

Commitments and contingencies (Note 11)


 


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

 

Common stock, $0.001 par value, 450,000,000 shares authorized; 107,214,394 and 106,922,616 shares, respectively, issued and outstanding
107

 
107

Additional paid-in capital
4,445,426

 
4,433,573

Distributions in excess of accumulated earnings
(1,165,914
)
 
(1,052,064
)
Deferred compensation obligation
36,159

 
46,656

Accumulated other comprehensive loss
(254,055
)
 
(236,011
)
Total stockholders’ equity
3,061,723

 
3,192,261

Noncontrolling interests
209,986

 
219,124

Total equity
3,271,709

 
3,411,385

Total liabilities and equity
$
8,518,988

 
$
8,231,402


See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2018 10-Q 3



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,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Real Estate:
 
 
 
 
 
 
 
Lease revenues
$
167,088

 
$
161,511

 
$
492,935

 
$
475,547

Reimbursable tenant costs
5,979

 
5,397

 
17,931

 
15,940

Operating property revenues
4,282

 
8,449

 
16,365

 
23,652

Lease termination income and other
1,981

 
1,227

 
3,603

 
4,234

 
179,330

 
176,584

 
530,834

 
519,373

Investment Management:
 
 
 
 
 
 
 
Asset management revenue
17,349

 
17,938

 
51,602

 
53,271

Structuring revenue
6,553

 
9,817

 
12,718

 
27,981

Reimbursable costs from affiliates
6,042

 
6,211

 
16,883

 
45,390

Other advisory revenue
110

 
99

 
300

 
896

Dealer manager fees

 
105

 

 
4,430

 
30,054

 
34,170

 
81,503

 
131,968

 
209,384

 
210,754

 
612,337

 
651,341

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
67,825

 
64,040

 
198,119

 
189,319

General and administrative
15,863

 
17,236

 
50,888

 
53,189

Reimbursable tenant and affiliate costs
12,021

 
11,608

 
34,814

 
61,330

Property expenses, excluding reimbursable tenant costs
7,953

 
10,556

 
26,760

 
31,196

Subadvisor fees
3,127

 
5,206

 
7,014

 
11,598

Stock-based compensation expense
2,475

 
4,635

 
14,392

 
14,649

Merger and other expenses
1,673

 
65

 
4,328

 
1,138

Restructuring and other compensation

 
1,356

 

 
9,074

Dealer manager fees and expenses

 
462

 

 
6,544

Impairment charges

 

 
4,790

 

 
110,937

 
115,164

 
341,105

 
378,037

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(41,740
)
 
(41,182
)
 
(121,125
)
 
(125,374
)
Equity in earnings of equity method investments in the Managed Programs and real estate
18,363

 
16,318

 
46,246

 
47,820

Other gains and (losses)
8,875

 
(4,569
)
 
16,698

 
(4,969
)
 
(14,502
)
 
(29,433
)
 
(58,181
)
 
(82,523
)
Income before income taxes and gain on sale of real estate
83,945

 
66,157

 
213,051

 
190,781

Provision for income taxes
(2,715
)
 
(1,760
)
 
(2,975
)
 
(2,903
)
Income before gain on sale of real estate
81,230

 
64,397

 
210,076

 
187,878

Gain on sale of real estate, net of tax
343

 
19,257

 
18,987

 
22,732

Net Income
81,573

 
83,654

 
229,063

 
210,610

Net income attributable to noncontrolling interests
(4,225
)
 
(3,376
)
 
(10,760
)
 
(8,530
)
Net Income Attributable to W. P. Carey
$
77,348

 
$
80,278

 
$
218,303

 
$
202,080

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
0.71

 
$
0.74

 
$
2.02

 
$
1.87

Diluted Earnings Per Share
$
0.71

 
$
0.74

 
$
2.01

 
$
1.87

Weighted-Average Shares Outstanding
 
 
 
 
 
 
 
Basic
108,073,969

 
108,019,292

 
108,063,826

 
107,751,672

Diluted
108,283,666

 
108,143,694

 
108,253,841

 
107,947,490


 
 
 
 
 
 
 
Dividends Declared Per Share
$
1.025

 
$
1.005

 
$
3.060

 
$
3.000

 

See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2018 10-Q 4



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Income
$
81,573

 
$
83,654

 
$
229,063

 
$
210,610

Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
Foreign currency translation adjustments
(8,102
)
 
28,979

 
(29,401
)
 
71,686

Realized and unrealized gain (loss) on derivative instruments
772

 
(10,270
)
 
6,453

 
(32,574
)
Change in unrealized (loss) gain on investments
(269
)
 
66

 
101

 
(260
)
 
(7,599
)
 
18,775

 
(22,847
)
 
38,852

Comprehensive Income
73,974

 
102,429

 
206,216

 
249,462

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(4,225
)
 
(3,376
)
 
(10,760
)
 
(8,530
)
Foreign currency translation adjustments
945

 
(4,716
)
 
4,797

 
(13,961
)
Realized and unrealized loss on derivative instruments
1

 
8

 
6

 
13

Comprehensive income attributable to noncontrolling interests
(3,279
)
 
(8,084
)
 
(5,957
)
 
(22,478
)
Comprehensive Income Attributable to W. P. Carey
$
70,695

 
$
94,345

 
$
200,259

 
$
226,984

 
See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2018 10-Q 5



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2018 and 2017
(in thousands, except share and per share amounts)
 
W. P. Carey Stockholders
 
 
 
 
 
 
 
 
 
 
 
Distributions
 
 
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Additional
 
in Excess of
 
Deferred
 
Other
 
Total
 
 
 
 
 
$0.001 Par Value
 
Paid-in
 
Accumulated
 
Compensation
 
Comprehensive
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Loss
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2018
106,922,616

 
$
107

 
$
4,433,573

 
$
(1,052,064
)
 
$
46,656

 
$
(236,011
)
 
$
3,192,261

 
$
219,124

 
$
3,411,385

Shares issued upon delivery of vested restricted share awards
289,707

 

 
(13,501
)
 
 
 
 
 
 
 
(13,501
)
 
 
 
(13,501
)
Shares issued upon purchases under employee share purchase plan
2,071

 

 
125

 
 
 
 
 
 
 
125

 
 
 
125

Delivery of deferred vested shares, net
 
 
 
 
10,497

 
 
 
(10,497
)
 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
14,392

 
 
 
 
 
 
 
14,392

 
 
 
14,392

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
71

 
71

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(15,166
)
 
(15,166
)
Redemption value adjustment
 
 
 
 
(335
)
 
 
 
 
 
 
 
(335
)
 
 
 
(335
)
Dividends declared ($3.060 per share)
 
 
 
 
675

 
(332,153
)
 
 
 
 
 
(331,478
)
 
 
 
(331,478
)
Net income
 
 
 
 
 
 
218,303

 
 
 
 
 
218,303

 
10,760

 
229,063

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(24,604
)
 
(24,604
)
 
(4,797
)
 
(29,401
)
Realized and unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
6,459

 
6,459

 
(6
)
 
6,453

Change in unrealized gain on investments
 
 
 
 
 
 
 
 
 
 
101

 
101

 
 
 
101

Balance at September 30, 2018
107,214,394

 
$
107

 
$
4,445,426

 
$
(1,165,914
)
 
$
36,159

 
$
(254,055
)
 
$
3,061,723

 
$
209,986

 
$
3,271,709




 
W. P. Carey 9/30/2018 10-Q 6



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
Nine Months Ended September 30, 2018 and 2017
(in thousands, except share and per share amounts)
 
W. P. Carey Stockholders
 
 
 
 
 
 
 
 
 
 
 
Distributions
 
 
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Additional
 
in Excess of
 
Deferred
 
Other
 
Total
 
 
 
 
 
$0.001 Par Value
 
Paid-in
 
Accumulated
 
Compensation
 
Comprehensive
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Loss
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2017
106,294,162

 
$
106

 
$
4,399,961

 
$
(894,137
)
 
$
50,222

 
$
(254,485
)
 
$
3,301,667

 
$
123,473

 
$
3,425,140

Shares issued under “at-the-market” offering, net
345,253

 
1

 
22,856

 
 
 
 
 
 
 
22,857

 
 
 
22,857

Acquisition of noncontrolling interest
 
 
 
 
(1,845
)
 
 
 
 
 
 
 
(1,845
)
 
1,845

 

Shares issued upon delivery of vested restricted share awards
219,540

 

 
(9,678
)
 
 
 
 
 
 
 
(9,678
)
 
 
 
(9,678
)
Shares issued upon exercise of stock options and purchases under employee share purchase plan
38,560

 

 
(1,595
)
 
 
 
 
 
 
 
(1,595
)
 
 
 
(1,595
)
Delivery of deferred vested shares, net
 
 
 
 
3,734

 
 
 
(3,734
)
 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
14,649

 
 
 
 
 
 
 
14,649

 
 
 
14,649

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
90,487

 
90,487

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(16,910
)
 
(16,910
)
Dividends declared ($3.000 per share)
 
 
 
 
1,158

 
(325,844
)
 
223

 
 
 
(324,463
)
 
 
 
(324,463
)
Net income
 
 
 
 
 
 
202,080

 
 
 
 
 
202,080

 
8,530

 
210,610

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
57,725

 
57,725

 
13,961

 
71,686

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(32,561
)
 
(32,561
)
 
(13
)
 
(32,574
)
Change in unrealized loss on investments
 
 
 
 
 
 
 
 
 
 
(260
)
 
(260
)
 
 
 
(260
)
Balance at September 30, 2017
106,897,515

 
$
107

 
$
4,429,240

 
$
(1,017,901
)
 
$
46,711

 
$
(229,581
)
 
$
3,228,576

 
$
221,373

 
$
3,449,949


See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2018 10-Q 7



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2018

2017
Cash Flows — Operating Activities
 
 
 
Net income
$
229,063

 
$
210,610

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
201,983

 
195,298

Distributions of earnings from equity method investments
47,173

 
49,365

Equity in earnings of equity method investments in the Managed Programs and real estate
(46,246
)
 
(47,820
)
Investment Management revenue received in shares of Managed REITs and other
(40,049
)
 
(53,170
)
Amortization of rent-related intangibles and deferred rental revenue
36,405

 
37,210

Gain on sale of real estate
(18,987
)
 
(22,732
)
Stock-based compensation expense
14,392

 
14,649

Straight-line rent adjustments
(12,142
)
 
(13,511
)
Realized and unrealized (gains) losses on foreign currency transactions, derivatives, and other
(9,293
)
 
15,223

Deferred income taxes
(5,123
)
 
(8,167
)
Impairment charges
4,790

 

Changes in assets and liabilities:
 
 
 
Net changes in other operating assets and liabilities
(35,173
)
 
(2,548
)
Deferred structuring revenue received
7,834

 
15,256

Increase in deferred structuring revenue receivable
(4,868
)
 
(3,697
)
Net Cash Provided by Operating Activities
369,759

 
385,966

Cash Flows — Investing Activities
 
 
 
Purchases of real estate
(530,114
)
 
(6,000
)
Proceeds from sales of real estate
95,130

 
102,503

Funding for real estate construction, redevelopments, and other capital expenditures on real estate
(64,010
)
 
(47,560
)
Proceeds from repayment of short-term loans to affiliates
37,000

 
229,696

Return of capital from equity method investments
12,129

 
6,482

Funding of short-term loans to affiliates
(10,000
)
 
(123,492
)
Capital contributions to equity method investments
(715
)
 
(1,291
)
Other investing activities, net
(576
)
 
5,728

Capital expenditures on corporate assets
(388
)
 
(274
)
Net Cash (Used in) Provided by Investing Activities
(461,544
)
 
165,792

Cash Flows — Financing Activities
 
 
 
Proceeds from Senior Unsecured Credit Facility
982,538

 
1,189,591

Repayments of Senior Unsecured Credit Facility
(904,868
)
 
(1,558,091
)
Proceeds from issuance of Senior Unsecured Notes
616,355

 
530,456

Dividends paid
(329,552
)
 
(322,389
)
Prepayments of mortgage principal
(164,908
)
 
(159,204
)
Scheduled payments of mortgage principal
(59,048
)
 
(303,538
)
Distributions paid to noncontrolling interests
(15,166
)
 
(16,910
)
Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options
(13,840
)
 
(11,423
)
Payment of financing costs
(4,286
)
 
(12,672
)
Other financing activities, net
(3,291
)
 
(1,451
)
Proceeds from mortgage financing
857

 
969

Contributions from noncontrolling interests
71

 
90,487

Proceeds from shares issued under “at-the-market” offering, net of selling costs

 
22,833

Net Cash Provided by (Used in) Financing Activities
104,862

 
(551,342
)
Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(7,953
)
 
7,997

Net increase in cash and cash equivalents and restricted cash
5,124

 
8,413

Cash and cash equivalents and restricted cash, beginning of period
209,676

 
210,731

Cash and cash equivalents and restricted cash, end of period
$
214,800

 
$
219,144

 

See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2018 10-Q 8



W. P. CAREY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business and Organization
 
W. P. Carey Inc. is a REIT that, together with its consolidated subsidiaries, invests primarily in operationally-critical, single-tenant commercial real estate properties located in the United States and Northern and Western Europe. We earn revenue principally by leasing the properties we own to companies on a triple-net lease basis, which generally requires each tenant to pay the costs associated with operating and maintaining the property.

Founded in 1973, our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”

On June 17, 2018, we, Corporate Property Associates 17 – Global Incorporated, or CPA:17 – Global, a publicly owned, non-listed REIT advised by us, and certain of our subsidiaries entered into an agreement and plan of merger, or Merger Agreement, pursuant to which CPA:17 – Global would merge with and into one of our subsidiaries in exchange for shares of our common stock, or the CPA:17 Merger, subject to certain conditions, including approvals of our stockholders and the stockholders of CPA:17 – Global (Note 3). The CPA:17 Merger and related transactions were approved by both sets of stockholders on October 29, 2018 and completed on October 31, 2018, as described in Note 17.

We have elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code. As a REIT, we are not generally subject to United States federal income taxation other than from our taxable REIT subsidiaries, or TRSs, as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. Through our TRSs, we also earn revenue as the advisor to certain publicly owned, non-listed REITs. We hold all of our real estate assets attributable to our Real Estate segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.

At September 30, 2018, we were the advisor to the following entities:
 
CPA:17 – Global and Corporate Property Associates 18 – Global Incorporated, or CPA:18 – Global, publicly owned, non-listed REITs that primarily invest in commercial real estate properties leased to companies on a triple-net lease basis; we refer to CPA:17 – Global and CPA:18 – Global together as the CPA REITs;
Carey Watermark Investors Incorporated, or CWI 1, and Carey Watermark Investors 2 Incorporated, or CWI 2, two publicly owned, non-listed REITs that invest in lodging and lodging-related properties; we refer to CWI 1 and CWI 2 together as the CWI REITs and, together with the CPA REITs, as the Managed REITs (Note 3); and
Carey European Student Housing Fund I, L.P., or CESH I, a limited partnership formed for the purpose of developing, owning, and operating student housing properties and similar investments in Europe (Note 3); we refer to the Managed REITs and CESH I collectively as the Managed Programs.

In June 2017, our board of directors, or the Board, approved a plan to exit non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial LLC, or Carey Financial, as of June 30, 2017. As a result, we will no longer be raising capital for new or existing funds that we manage, but we do expect to continue managing our existing Managed Programs through the end of their respective life cycles (Note 3).

In August 2017, we resigned as the advisor to Carey Credit Income Fund (known since October 23, 2017 as Guggenheim Credit Income Fund, or GCIF), or CCIF, and by extension, its feeder funds, or the CCIF Feeder Funds, each of which is a business development company, or BDC (Note 3). We refer to CCIF and the CCIF Feeder Funds collectively as the Managed BDCs. The board of trustees of CCIF approved our resignation and appointed CCIF’s subadvisor, Guggenheim Partners Investment Management, LLC, or Guggenheim, as the interim sole advisor to CCIF, effective as of September 11, 2017. The shareholders of CCIF approved Guggenheim’s appointment as sole advisor on a permanent basis on October 20, 2017. The Managed BDCs were included in the Managed Programs prior to our resignation as their advisor. We have retained our initial investment in shares of CCIF (now GCIF), which is included within Other assets, net in the consolidated financial statements (Note 7).



 
W. P. Carey 9/30/2018 10-Q 9

 
Notes to Consolidated Financial Statements (Unaudited)

Reportable Segments

Real Estate — Lease revenues and equity income (Note 7) from our real estate investments generate the vast majority of our earnings. We invest primarily in commercial properties located in the United States and Northern and Western Europe, which are leased to companies on a triple-net lease basis. We also owned one hotel at September 30, 2018, which is considered an operating property. At September 30, 2018, our owned portfolio was comprised of our full or partial ownership interests in 913 properties, totaling approximately 89.3 million square feet, substantially all of which were net leased to 210 tenants, with a weighted-average lease term of 10.2 years and an occupancy rate of 98.7%.

Investment Management — Through our TRSs, we structure and negotiate investments and debt placement transactions for the Managed Programs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset management revenue. We also earned asset management revenue from CCIF based on the average of its gross assets at fair value through the effective date of our resignation as its advisor. We may earn disposition revenue when we negotiate and structure the sale of properties on behalf of the Managed REITs, and we may also earn incentive revenue and receive other compensation through our advisory agreements with certain of the Managed Programs, including in connection with providing liquidity events for the Managed REITs’ stockholders. In addition, we include equity income generated through our (i) ownership of shares and limited partnership units of the Managed Programs (Note 7) and (ii) special general partner interests in the operating partnerships of the Managed REITs, through which we participate in their cash flows (Note 3), in our Investment Management segment.

At September 30, 2018, the CPA REITs collectively owned all or a portion of 461 properties (including certain properties in which we have an ownership interest), totaling approximately 53.7 million square feet, substantially all of which were net leased to 204 tenants, with an occupancy rate of approximately 97.6%. The Managed Programs also had interests in 172 operating properties, totaling approximately 19.7 million square feet in the aggregate.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared 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 generally accepted accounting principles in the United States, or 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 financial position, results of operations, 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, 2017, which are included in the 2017 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 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.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries and our tenancy-in-common interest as described below. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. 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


 
W. P. Carey 9/30/2018 10-Q 10

 
Notes to Consolidated Financial Statements (Unaudited)

decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At both September 30, 2018 and December 31, 2017, we considered 28 entities to be VIEs, 21 of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2018
 
December 31, 2017
Land, buildings and improvements
$
952,534

 
$
916,001

Net investments in direct financing leases
38,847

 
40,133

In-place lease and other intangible assets
235,578

 
268,863

Above-market rent intangible assets
92,226

 
103,081

Accumulated depreciation and amortization
(253,067
)
 
(251,979
)
Total assets
1,245,053

 
1,118,727

 
 
 
 
Non-recourse mortgages, net
$
113,901

 
$
128,230

Total liabilities
208,206

 
201,186


At both September 30, 2018 and December 31, 2017, our seven unconsolidated VIEs included our interests in six unconsolidated real estate investments, which we account for under the equity method of accounting, and one unconsolidated entity, which we accounted for at fair value as of September 30, 2018 and under the cost method of accounting as of December 31, 2017 (Note 7), and is included within our Investment Management segment. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities. As of September 30, 2018 and December 31, 2017, the net carrying amount of our investments in these entities was $150.3 million and $152.7 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.

At September 30, 2018, we had an investment in a tenancy-in-common interest in various underlying international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control requirement for consolidation. Accordingly, we account for this investment 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 this investment.

At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the jointly owned 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. At September 30, 2018, none of our equity investments had carrying values below zero.



 
W. P. Carey 9/30/2018 10-Q 11

 
Notes to Consolidated Financial Statements (Unaudited)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Restricted Cash — In connection with our adoption of Accounting Standards Update, or ASU, 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as described below, we revised our consolidated statements of cash flows to include restricted cash when reconciling the beginning-of-period and end-of-period cash amounts shown on the statement of cash flows. As a result, we retrospectively revised prior periods presented to conform to the current period presentation. Restricted cash primarily consists of security deposits and amounts required to be reserved pursuant to lender agreements for debt service, capital improvements, and real estate taxes. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
176,612

 
$
162,312

Restricted cash (a)
38,188

 
47,364

Total cash and cash equivalents and restricted cash
$
214,800

 
$
209,676

__________
(a)
Restricted cash is included within Other assets, net on our consolidated balance sheets.

Recent Accounting Pronouncements

Pronouncements Adopted as of September 30, 2018

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, which constitute a majority of our revenues, but will primarily apply to revenues generated from our operating properties and our Investment Management business. We adopted this guidance for our interim and annual periods beginning January 1, 2018 using the modified retrospective transition method applied to any contracts not completed as of that date. There were no changes to the prior period presentations of revenue. Results of operations for reporting periods beginning January 1, 2018 are presented under Topic 606. The adoption of Topic 606 did not have a material impact on our consolidated financial statements.

Revenue is recognized when, or as, control of promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. At contract inception, we assess the services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, we consider all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

Revenue from contracts under Accounting Standards Codification, or ASC, 606 in our Real Estate segment primarily represented operating property revenues of $4.3 million and $8.4 million for the three months ended September 30, 2018 and 2017, respectively, and $16.4 million and $23.7 million for the nine months ended September 30, 2018 and 2017, respectively. Operating property revenues are primarily comprised of revenues from room rentals and from food and beverage services at our hotel operating properties during those periods. We sold one of our two hotels in April 2018 (Note 15). We identified a single performance obligation for each distinct service. Performance obligations are typically satisfied at a point in time, at the time of sale, or at the rendering of the service. Fees are generally determined to be fixed. Payment is typically due immediately following the delivery of the service. Revenue from contracts under ASC 606 from our Investment Management segment is discussed in Note 3.



 
W. P. Carey 9/30/2018 10-Q 12

 
Notes to Consolidated Financial Statements (Unaudited)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires all equity investments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in the fair value recognized through net income. We adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, and (iv) distributions received from equity method investees. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. As a result, we reclassified debt extinguishment costs from net cash provided by operating activities to net cash used in financing activities on the consolidated statement of cash flows for the nine months ended September 30, 2017. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. See Restricted Cash above for additional information.

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to non-customers, including partial sales. Nonfinancial assets within the scope of this Subtopic include the sale of land, buildings, and intangible assets. ASU 2017-05 further clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We adopted this guidance for our interim and annual periods beginning January 1, 2018 and applied the modified retrospective transition method (applicable to any contracts not completed as of that date). The adoption of ASU 2017-05 did not have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms and conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes, modifies, and adds certain fair value disclosure requirements. We adopted this guidance for our interim period beginning July 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements.



 
W. P. Carey 9/30/2018 10-Q 13

 
Notes to Consolidated Financial Statements (Unaudited)

Pronouncements to be Adopted after September 30, 2018

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract, the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely equivalent to the current model, with the distinction between operating, sales-type, and direct financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard.

Early application is permitted for all entities. ASU 2016-02 provides two transition methods. The first transition method allows for application of the new model at the beginning of the earliest comparative period presented. Under the second transition method, comparative periods would not be restated, with any cumulative effect adjustments recognized in the opening balance of retained earnings in the period of adoption. In addition, a practical expedient was recently issued by the FASB which allows lessors to combine non-lease components with related lease components if certain conditions are met. We will adopt this guidance for our interim and annual periods beginning January 1, 2019 and expect to use the second transition method. ASU 2016-02 will require extensive quantitative and qualitative disclosures.

In addition, under ASU 2016-02, lessors will only capitalize incremental direct leasing costs. We have historically not capitalized internal legal and leasing costs incurred, and thus do not expect to be impacted by the change. Lessors are also expected to record costs paid directly by a lessee on behalf of a lessor (e.g., real estate taxes and insurance costs) on a gross basis. Further, in March 2018, the FASB approved, but has not yet finalized or issued, an update to allow lessors to make a policy election to record certain costs (e.g., insurance) paid directly by the lessee net, if the uncertainty regarding these variable amounts is not expected to ultimately be resolved.

ASU 2016-02 is expected to impact our consolidated financial statements as we have certain operating office and land lease arrangements for which we are the lessee and also certain lease arrangements that include common area maintenance services (non-lease components) where we are the lessor. We are evaluating the impact of ASU 2016-02 and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating credit losses based on current expected credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2019.

Note 3. Agreements and Transactions with Related Parties
 
CPA:17 Merger
 
On June 17, 2018, we, CPA:17 – Global, and certain of our subsidiaries entered into the Merger Agreement, pursuant to which CPA:17 – Global would merge with and into one of our subsidiaries in exchange for shares of our common stock, subject to certain conditions, including approvals of our stockholders and the stockholders of CPA:17 – Global. The CPA:17 Merger and related transactions were approved by both sets of stockholders on October 29, 2018 and completed on October 31, 2018, as described in Note 17.



 
W. P. Carey 9/30/2018 10-Q 14

 
Notes to Consolidated Financial Statements (Unaudited)

Through September 30, 2018, we have incurred expenses related to the CPA:17 Merger totaling approximately $4.6 million (including expenses incurred in 2017), which are included in Merger and other expenses in the consolidated financial statements.

Advisory Agreements and Partnership Agreements with the Managed Programs
 
As of September 30, 2018, we had advisory agreements with each of the Managed Programs, pursuant to which we earn fees and are entitled to receive reimbursement for certain fund management expenses. Upon completion of the CPA:17 Merger on October 31, 2018 (Note 17), the advisory agreements with CPA:17 – Global were terminated. The advisory agreements also entitled us to fees for serving as the dealer manager for the offerings of the Managed Programs. However, we ceased all active non-traded retail fundraising activities as of June 30, 2017 and facilitated the orderly processing of sales for CWI 2 and CESH I until their offerings closed on July 31, 2017, at which point we no longer received dealer manager fees. In addition, we resigned as CCIF’s advisor in August 2017 and our advisory agreement with CCIF was terminated effective as of September 11, 2017, at which point we no longer earned any fees from CCIF. We currently expect to continue to manage all existing Managed Programs and earn various fees (as described below) through the end of their respective life cycles, such as the CPA:17 Merger (Note 1, Note 17). The advisory agreements with each of the remaining Managed REITs have one-year terms that are currently scheduled to expire on December 31, 2018, and may be renewed for successive periods. The advisory agreement with CESH I, which commenced on June 3, 2016, will continue until terminated pursuant to its terms.

As of September 30, 2018, we had partnership agreements with each of the Managed REITs, pursuant to which we are entitled to receive certain cash distributions. We also have a partnership agreement with CESH I, pursuant to which we received limited partnership units of CESH I equal to 2.5% of its gross offering proceeds in lieu of reimbursement of certain organizational expenses prior to the closing of CESH I’s offering on July 31, 2017.

The following tables present a summary of revenue earned and/or cash received from the Managed Programs for the periods indicated, included in the consolidated financial statements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Asset management revenue (a)
$
17,349

 
$
17,938

 
$
51,602

 
$
53,271

Distributions of Available Cash
13,135

 
12,047

 
32,413

 
34,568

Structuring revenue (a)
6,553

 
9,817

 
12,718

 
27,981

Reimbursable costs from affiliates (a)
6,042

 
6,211

 
16,883

 
45,390

Interest income on deferred acquisition fees and loans to affiliates
493

 
447

 
1,541

 
1,464

Other advisory revenue (a)
110

 
99

 
300

 
896

Dealer manager fees (a)

 
105

 

 
4,430

 
$
43,682

 
$
46,664

 
$
115,457

 
$
168,000

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
CPA:17 – Global
$
17,794

 
$
15,383

 
$
48,131

 
$
55,645

CPA:18 – Global 
11,377

 
4,042

 
29,411

 
18,361

CWI 1
8,204

 
11,940

 
20,826

 
26,051

CWI 2
5,537

 
11,643

 
14,982

 
45,206

CCIF

 
1,787

 

 
12,777

CESH I
770

 
1,869

 
2,107

 
9,960

 
$
43,682

 
$
46,664

 
$
115,457

 
$
168,000

__________
(a)
Amounts represent revenues from contracts under ASC 606.



 
W. P. Carey 9/30/2018 10-Q 15

 
Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
 
September 30, 2018
 
December 31, 2017
Short-term loans to affiliates, including accrued interest
$
58,350

 
$
84,031

Deferred acquisition fees receivable, including accrued interest
9,782

 
12,345

Asset management fees receivable
6,058

 
356

Reimbursable costs
4,972

 
4,315

Accounts receivable
1,706

 
4,089

Current acquisition fees receivable
1,679

 
83

Organization and offering costs

 
89

 
$
82,547

 
$
105,308


Performance Obligations and Significant Judgments

The fees earned pursuant to our advisory agreements are considered variable consideration. For the agreements that include multiple performance obligations, including asset management and investment structuring services, revenue is allocated to each performance obligation based on estimates of the price that we would charge for each promised service if it were sold on a standalone basis.

Judgment is applied in assessing whether there should be a constraint on the amount of fees recognized, such as amounts in excess of certain threshold limits with respect to the contract price or any potential clawback provisions included in certain of our arrangements. We exclude fees subject to such constraints to the extent it is probable that a significant reversal of those amounts will occur.

Asset Management Revenue
 
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
CPA:17 – Global
 
0.5% – 1.75%
 
In shares of its common stock and/or cash, at the option of CPA:17 – Global; payable in shares of its common stock through May 31, 2018; payable in cash effective as of June 1, 2018 in light of the CPA:17 Merger
 
Rate depends on the type of investment and was based on the average market or average equity value, as applicable
CPA:18 – Global
 
0.5% – 1.5%
 
In shares of its Class A common stock and/or cash, at the option of CPA:18 – Global; payable in shares of its Class A common stock for 2018 and 2017
 
Rate depends on the type of investment and is based on the average market or average equity value, as applicable
CWI 1
 
0.5%
 
In shares of its common stock and/or cash, at our election; payable in shares of its common stock for 2018 and 2017
 
Rate is based on the average market value of the investment; we are required to pay 20% of the asset management revenue we receive to the subadvisor
CWI 2
 
0.55%
 
In shares of its Class A common stock and/or cash, at our election; payable in shares of its Class A common stock for 2018 and 2017
 
Rate is based on the average market value of the investment; we are required to pay 25% of the asset management revenue we receive to the subadvisor
CCIF
 
1.75% – 2.00%
 
In cash, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1)
 
Based on the average of gross assets at fair value; we were required to pay 50% of the asset management revenue we received to the subadvisor
CESH I
 
1.0%
 
In cash
 
Based on gross assets at fair value



 
W. P. Carey 9/30/2018 10-Q 16

 
Notes to Consolidated Financial Statements (Unaudited)

The performance obligation for asset management services is satisfied over time as services are rendered. The time-based output method is used to measure progress over time, as this is representative of the transfer of the services. We are compensated for our services on a monthly or quarterly basis. However, these services represent a series of distinct daily services under ASU 2014-09. Accordingly, we satisfy the performance obligation and resolve the variability associated with our fees on a daily basis. We apply the practical expedient and, as a result, do not disclose variable consideration attributable to wholly or partially unsatisfied performance obligations as of the end of the reporting period.

In providing asset management services, we are reimbursed for certain costs. Direct reimbursement of these costs does not represent a separate performance obligation. Payment for asset management services is typically due on the first business day following the month of the delivery of the service.

Structuring Revenue
 
Under the terms of the advisory agreements with the Managed Programs, we earn revenue for structuring and negotiating investments and related financing. We did not earn any structuring revenue from the Managed BDCs. The following table presents a summary of our structuring fee arrangements with the Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
CPA:17 – Global
 
1% – 1.75%, 4.5%
 
In cash; for non net-lease investments, 1% – 1.75% upon completion; for net-lease investments, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments
 
Based on the total aggregate cost of the net-lease investments made; also based on the total aggregate cost of the non net-lease investments or commitments made; total limited to 6% of the contract prices in aggregate
CPA:18 – Global
 
4.5%
 
In cash; for all investments, other than readily marketable real estate securities for which we will not receive any acquisition fees, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments
 
Based on the total aggregate cost of the investments or commitments made; total limited to 6% of the contract prices in aggregate
CWI REITs
 
1% – 2.5%
 
In cash upon completion; loan refinancing transactions up to 1% of the principal amount; 2.5% of the total investment cost of the properties acquired, however, fees were paid 50% in cash and 50% in shares of CWI 1’s common stock and CWI 2’s Class A common stock for a jointly owned investment structured on behalf of CWI 1 and CWI 2 in September 2017, with the approval of each CWI REIT’s board of directors
 
Based on the total aggregate cost of the lodging investments or commitments made; we are required to pay 20% and 25% to the subadvisors of CWI 1 and CWI 2, respectively; total for each CWI REIT limited to 6% of the contract prices in aggregate
CESH I
 
2.0%
 
In cash upon acquisition
 
Based on the total aggregate cost of investments or commitments made, including the acquisition, development, construction, or redevelopment of the investments

The performance obligation for investment structuring services is satisfied at a point in time upon the closing of an investment acquisition, when there is an enforceable right to payment, and control (as well as the risks and rewards) has been transferred. Determining when control transfers requires management to make judgments that affect the timing of revenue recognized. Payment is due either on the day of acquisition (current portion) or deferred, as described above (Note 5). We do not believe the deferral of the fees represents a significant financing component.



 
W. P. Carey 9/30/2018 10-Q 17

 
Notes to Consolidated Financial Statements (Unaudited)

Reimbursable Costs from Affiliates
 
During their respective offering periods, the Managed Programs reimbursed us for certain costs that we incurred on their behalf, which consisted primarily of broker-dealer selling commissions, dealer manager fees, organization and offering costs, marketing costs, and annual distribution and shareholder servicing fees, as applicable. As a result of our exit from non-traded retail fundraising activities in June 2017, we ceased raising funds on behalf of the Managed Programs in the third quarter of 2017 and no longer incur these costs. The Managed Programs will continue to reimburse us for certain personnel and overhead costs that we incur on their behalf, a summary of which is presented in the table below:
Managed Program
 
Payable
 
Description
CPA:17 – Global and CPA:18 – Global
 
In cash
 
Personnel and overhead costs, excluding those related to our legal transactions group, our senior management, and our investments team, are charged to the CPA REITs based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and are capped at 1.0% and 2.0% of each CPA REIT’s pro rata lease revenues for 2018 and 2017, respectively; for the legal transactions group, costs are charged according to a fee schedule
CWI 1 and CWI 2
 
In cash
 
Actual expenses incurred, excluding those related to our senior management; allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter
CCIF and CCIF Feeder Funds
 
In cash
 
Actual expenses incurred, excluding those related to their investment management team and senior management team, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1)
CESH I
 
In cash
 
Actual expenses incurred
 
Distributions of Available Cash
 
We are entitled to receive distributions of up to 10% of the Available Cash (as defined in the respective partnership agreements) from the operating partnerships of each of the Managed REITs, payable quarterly in arrears. We are required to pay 20% and 25% of such distributions to the subadvisors of CWI 1 and CWI 2, respectively. After completion of the CPA:17 Merger on October 31, 2018 (Note 17), we no longer receive distributions of Available Cash from CPA:17 – Global.

Back-End Fees and Interests in the Managed Programs

Under our advisory agreements with certain of the Managed Programs, we may also receive compensation in connection with providing liquidity events for their stockholders. For the Managed REITs, the timing and form of such liquidity events are at the discretion of each REIT’s board of directors. Therefore, there can be no assurance as to whether or when any of these back-end fees or interests will be realized. Such back-end fees or interests may include disposition fees, interests in disposition proceeds, and distributions related to ownership of shares or limited partnership units in the Managed Programs. As a condition of the CPA:17 Merger, we waived certain back-end fees that we would have been entitled to receive from CPA:17 – Global upon its liquidation pursuant to the terms of our advisory agreement and partnership agreement with CPA:17 – Global (Note 17).

Other Transactions with Affiliates
 
Loans to Affiliates

From time to time, our Board has approved the making of secured and unsecured loans or lines of credit from us to certain of the Managed Programs, at our sole discretion, with each loan at a rate equal to the rate at which we are able to borrow funds under our Senior Unsecured Credit Facility (Note 10), generally for the purpose of facilitating acquisitions or for working capital purposes.



 
W. P. Carey 9/30/2018 10-Q 18

 
Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth certain information regarding our loans or lines of credit to affiliates (dollars in thousands):
 
 
Interest Rate at September 30, 2018
 
Maturity Date at September 30, 2018
 
Maximum Loan Amount Authorized at September 30, 2018
 
Principal Outstanding Balance at (a)
Managed Program
 
 
 
 
September 30, 2018
 
December 31, 2017
CWI 1 (b) (c)
 
LIBOR + 1.00%
 
6/30/2019
 
$
65,802

 
$
41,637

 
$
68,637

CESH I (b)
 
LIBOR + 1.00%
 
5/3/2019
 
35,000

 
14,461

 
14,461

CPA:18 – Global
 
N/A
 
N/A
 
50,000

 

 

CWI 2
 
N/A
 
N/A
 
25,000

 

 

 
 
 
 
 
 
 
 
$
56,098

 
$
83,098

__________
(a)
Amounts exclude accrued interest of $2.3 million and $0.9 million at September 30, 2018 and December 31, 2017, respectively.
(b)
LIBOR means London Interbank Offered Rate.
(c)
Maximum loan amount authorized at December 31, 2017 to CWI 1 was $100.0 million.

Other

At September 30, 2018, we owned interests ranging from 3% to 90% in jointly owned investments in real estate, including a jointly controlled tenancy-in-common interest in several properties, with the remaining interests generally held by affiliates. In addition, we owned stock of each of the Managed REITs and limited partnership units of CESH I. We consolidate certain of these investments and account for the remainder under the equity method of accounting or at fair value (Note 7).

Note 4. Land, Buildings and Improvements and Assets Held for Sale
 
Land, Buildings and Improvements — Operating Leases

Land and buildings leased to others, which are subject to operating leases, and real estate under construction, are summarized as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Land
$
1,130,930

 
$
1,125,539

Buildings and improvements
4,596,754

 
4,208,907

Real estate under construction
24,430

 
39,772

Less: Accumulated depreciation
(699,584
)
 
(613,543
)
 
$
5,052,530

 
$
4,760,675

 
During the nine months ended September 30, 2018, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro decreased by 3.5% to $1.1576 from $1.1993. As a result of this fluctuation in foreign exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $58.6 million from December 31, 2017 to September 30, 2018.

Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $39.2 million and $36.3 million for the three months ended September 30, 2018 and 2017, respectively, and $113.1 million and $107.5 million for the nine months ended September 30, 2018 and 2017, respectively.



 
W. P. Carey 9/30/2018 10-Q 19

 
Notes to Consolidated Financial Statements (Unaudited)

Acquisitions of Real Estate

During the nine months ended September 30, 2018, we entered into the following investments, which were deemed to be real estate asset acquisitions, at a total cost of $617.1 million, including land of $84.4 million, buildings of $447.0 million (including capitalized acquisition-related costs of $14.3 million), net lease intangibles of $90.6 million, and net other liabilities assumed of $4.9 million:

an investment of $6.1 million for a warehouse facility in Sellersburg, Indiana, on February 21, 2018;
an investment of $79.1 million for one warehouse facility in Waukesha, Wisconsin, and two retail facilities in Appleton and Madison, Wisconsin, on March 15, 2018;
an investment of $85.5 million for a manufacturing facility in Bessemer, Alabama, on June 5, 2018; the property was acquired as part of a nonmonetary transaction in exchange for 23 manufacturing facilities in various locations in the United States and Canada leased to the same tenant; this swap was recorded based on the fair value of the property acquired and was a non-cash investing activity (Note 15);
an investment of $186.6 million for 14 logistics facilities and one office building in various locations in Denmark on June 28, 2018. In addition, we recorded an estimated deferred tax liability of $33.2 million, with a corresponding increase to the asset value, since we assumed the tax basis of the acquired portfolio;
an investment of $177.8 million for 36 retail facilities in various locations in the Netherlands on July 13, 2018;
an investment of $9.1 million for a manufacturing facility in Oostburg, Wisconsin, on July 17, 2018;
an investment of $22.9 million for an office/warehouse facility in Kampen, the Netherlands, on July 19, 2018; and
an investment of $49.9 million for a logistics facility in Azambuja, Portugal, on September 28, 2018. In addition, we recorded an estimated deferred tax liability of $10.5 million, with a corresponding increase to the asset value, since we assumed the tax basis of the acquired property.

The acquired net lease intangibles are comprised of (i) in-place lease intangible assets totaling $80.9 million, which have a weighted-average expected life of 19.5 years, (ii) above-market rent intangible assets totaling $5.7 million, which have a weighted-average expected life of 14.2 years, (iii) indefinite-lived below-market ground lease intangible assets totaling $5.5 million, and (iv) below-market rent intangible liabilities totaling $1.6 million, which have a weighted-average expected life of 10.2 years.

Dollar amounts are based on the exchange rates of the foreign currencies on the dates of activity, as applicable.

Real Estate Under Construction

During the nine months ended September 30, 2018, we capitalized real estate under construction totaling $46.8 million. The number of construction projects in progress with balances included in real estate under construction was three and five as of September 30, 2018 and December 31, 2017, respectively. Aggregate unfunded commitments totaled approximately $119.7 million and $147.9 million as of September 30, 2018 and December 31, 2017, respectively.

During the nine months ended September 30, 2018, we completed the following construction projects, at a total cost of $74.8 million, of which $29.8 million was capitalized during 2017:

an expansion project at an education facility in Houston, Texas, in January 2018 at a cost totaling $21.1 million, including capitalized interest;
a build-to-suit project for an industrial facility in Zawiercie, Poland, in April 2018 at a cost totaling $11.4 million, including capitalized interest;
a renovation project at two industrial facilities in Albemarle and Old Fort, North Carolina, in April 2018 at a cost totaling $2.2 million (this investment is included within Net investments in direct financing leases in the consolidated balance sheets);
a renovation project at an industrial facility in Chicago, Illinois, in June 2018 at a cost totaling $3.5 million;
an expansion project at an education facility in Windermere, Florida, in August 2018 at a cost totaling $15.1 million, including capitalized interest;
a renovation project at a retail facility in Kennesaw, Georgia, in August 2018 at a cost totaling $5.5 million; and
a build-to-suit project for an industrial facility in Radomsko, Poland, in August 2018 at a cost totaling $16.0 million, including capitalized interest.



 
W. P. Carey 9/30/2018 10-Q 20

 
Notes to Consolidated Financial Statements (Unaudited)

During the nine months ended September 30, 2018, we committed to fund an aggregate of $19.9 million (based on the exchange rate of the euro at September 30, 2018) for an expansion project for an existing tenant at a warehouse facility in Rotterdam, the Netherlands. We currently expect to complete the project in the third quarter of 2019.

Dollar amounts are based on the exchange rates of the foreign currencies on the dates of activity, as applicable.

Dispositions of Properties

During the nine months ended September 30, 2018, we sold eight properties and completed a nonmonetary transaction, which included the disposition of 23 properties in exchange for the acquisition of one property (as described in Acquisitions of Real Estate above), all of which were classified as Land, buildings and improvements subject to operating leases. As a result, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $102.6 million from December 31, 2017 to September 30, 2018.

Future Dispositions of Real Estate

As of September 30, 2018, one of our tenants had exercised its option to repurchase the property it is leasing for $8.0 million, but there can be no assurance that such repurchase will be completed. At September 30, 2018, this property had an aggregate asset carrying value of $6.0 million.

In addition, as of September 30, 2018, one of our tenants had exercised its option to repurchase the three properties it is leasing for a price to be determined at a future date, but there can be no assurance that such repurchase will be completed. At September 30, 2018, these properties had an aggregate asset carrying value of $14.6 million.

Land, Buildings and Improvements — Operating Properties
 
At September 30, 2018 and December 31, 2017, Land, buildings and improvements attributable to operating properties consisted of our investments in one hotel and two hotels, respectively. In April 2018, we sold one hotel, and as a result, the carrying value of our Land, buildings and improvements attributable to operating properties decreased by $33.2 million from December 31, 2017 to September 30, 2018 (Note 15). Below is a summary of our Land, buildings and improvements attributable to operating properties (in thousands):
 
September 30, 2018
 
December 31, 2017
Land
$
3,874

 
$
6,041

Buildings and improvements
38,506

 
77,006

Less: Accumulated depreciation
(8,039
)
 
(16,419
)
 
$
34,341

 
$
66,628


Depreciation expense on our buildings and improvements attributable to operating properties was $0.5 million and $1.1 million for the three months ended September 30, 2018 and 2017, respectively, and $2.0 million and $3.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Assets Held for Sale, Net

Below is a summary of our properties held for sale (in thousands):
 
September 30, 2018
 
December 31, 2017
Land, buildings and improvements
$
74,628

 
$

In-place lease and other intangible assets
51,009

 

Above-market rent intangible assets
8,570

 

Accumulated depreciation and amortization
(25,477
)
 

Assets held for sale, net
$
108,730

 
$


At September 30, 2018, we had nine properties leased to the same tenant classified as Assets held for sale, net with an aggregate carrying value of $108.7 million.


 
W. P. Carey 9/30/2018 10-Q 21

 
Notes to Consolidated Financial Statements (Unaudited)


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 receivables portfolio consists of our Net investments in direct financing leases, note receivable, and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as assets in the consolidated financial statements.
 
Net Investments in Direct Financing Leases
 
Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $16.7 million and $16.8 million for the three months ended September 30, 2018 and 2017, respectively, and $50.7 million and $49.3 million for the nine months ended September 30, 2018 and 2017, respectively.

During the nine months ended September 30, 2018, the U.S. dollar strengthened against the euro, resulting in a $13.6 million decrease in the carrying value of Net investments in direct financing leases from December 31, 2017 to September 30, 2018. During the nine months ended September 30, 2018, we sold a property accounted for as a direct financing lease that had a net carrying value of $5.1 million.

Note Receivable

At September 30, 2018 and December 31, 2017, we had a note receivable with an outstanding balance of $9.7 million and $10.0 million, respectively, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements. Earnings from our note receivable are included in Lease termination income and other in the consolidated financial statements.

Deferred Acquisition Fees Receivable
 
As described in Note 3, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA REITs. A portion of this revenue is due in equal annual installments over three years. Unpaid deferred installments, including accrued interest, from the CPA REITs were included in Due from affiliates in the consolidated financial statements.
 
Credit Quality of Finance Receivables
 
We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. At both September 30, 2018 and December 31, 2017, none of the balances of our finance receivables were past due. There were no material modifications of finance receivables during the nine months ended September 30, 2018.

We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly. We believe the credit quality of our deferred acquisition fees receivable falls under category one, 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, excluding our deferred acquisition fees receivable, is as follows (dollars in thousands):
 
 
Number of Tenants / Obligors at
 
Carrying Value at
Internal Credit Quality Indicator
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
1 - 3
 
26
 
24
 
$
628,744

 
$
608,101

4
 
6
 
8
 
83,058

 
123,477

5
 
 
 

 

 
 
 
 
 
 
$
711,802

 
$
731,578




 
W. P. Carey 9/30/2018 10-Q 22

 
Notes to Consolidated Financial Statements (Unaudited)

Note 6. Goodwill and Other Intangibles

We have recorded net lease, internal-use software development, and trade name intangibles that are being amortized over periods ranging from 3 years to 40 years. In addition, we have several ground lease intangibles that are being amortized over periods of up to 99 years. In-place lease and below-market ground lease (as lessee) intangibles, at cost are included in In-place lease and other intangible assets in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease, below-market ground lease (as lessee), and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Internal-use software development and trade name intangibles are included in Other assets, net in the consolidated financial statements. Below-market rent, above-market ground lease (as lessee), and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.

Goodwill within our Real Estate segment decreased by $2.3 million during the nine months ended September 30, 2018 due to foreign currency translation adjustments, from $580.4 million as of December 31, 2017 to $578.1 million as of September 30, 2018. Goodwill within our Investment Management segment was $63.6 million as of September 30, 2018, unchanged from December 31, 2017.

Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Internal-use software development costs
$
18,814

 
$
(9,972
)
 
$
8,842

 
$
18,649

 
$
(7,862
)
 
$
10,787

Trade name
3,975

 
(997
)
 
2,978

 
3,975

 
(401
)
 
3,574

 
22,789

 
(10,969
)
 
11,820

 
22,624

 
(8,263
)
 
14,361

Lease Intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
1,175,176

 
(460,774
)
 
714,402

 
1,194,055

 
(421,686
)
 
772,369

Above-market rent
626,390

 
(314,487
)
 
311,903

 
640,480

 
(276,110
)
 
364,370

Below-market ground lease
18,238

 
(2,172
)
 
16,066

 
18,936

 
(1,855
)
 
17,081

 
1,819,804

 
(777,433
)
 
1,042,371

 
1,853,471

 
(699,651
)
 
1,153,820

Indefinite-Lived Goodwill and Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill
641,734

 

 
641,734

 
643,960

 

 
643,960

Below-market ground lease
6,371

 

 
6,371

 
985

 

 
985

 
648,105

 

 
648,105

 
644,945

 

 
644,945

Total intangible assets
$
2,490,698

 
$
(788,402
)
 
$
1,702,296

 
$
2,521,040

 
$
(707,914
)
 
$
1,813,126

 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
$
(133,547
)
 
$
54,015

 
$
(79,532
)
 
$
(135,704
)
 
$
48,657

 
$
(87,047
)
Above-market ground lease
(13,159
)
 
3,504

 
(9,655
)
 
(13,245
)
 
3,046

 
(10,199
)
 
(146,706
)
 
57,519

 
(89,187
)
 
(148,949
)
 
51,703

 
(97,246
)
Indefinite-Lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market purchase option
(16,711
)
 

 
(16,711
)
 
(16,711
)
 

 
(16,711
)
Total intangible liabilities
$
(163,417
)
 
$
57,519

 
$
(105,898
)
 
$
(165,660
)
 
$
51,703

 
$
(113,957
)



 
W. P. Carey 9/30/2018 10-Q 23

 
Notes to Consolidated Financial Statements (Unaudited)

Net amortization of intangibles, including the effect of foreign currency translation, was $40.5 million and $38.4 million for the three months ended September 30, 2018 and 2017, respectively, and $118.2 million and $114.1 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues; amortization of internal-use software development, trade name, and in-place lease intangibles is included in Depreciation and amortization; and amortization of above-market ground lease and below-market ground lease intangibles is included in Property expenses, excluding reimbursable tenant costs.

Note 7. Equity Investments in the Managed Programs and Real Estate
 
We own interests in certain unconsolidated real estate investments with the Managed Programs and also own interests in the Managed Programs. 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) or at fair value by electing the equity method fair value option available under GAAP.

We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
 
The following table presents Equity in earnings of equity method investments in the Managed Programs and real estate, which represents our proportionate share of the income or losses of these investments, as well as certain adjustments related to amortization of basis differences related to purchase accounting adjustments (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Distributions of Available Cash (Note 3)
$
13,135

 
$
12,047

 
$
32,413

 
$
34,568

Proportionate share of equity in earnings of equity investments in the Managed Programs
1,136

 
886

 
4,166

 
4,688

Amortization of basis differences on equity method investments in the Managed Programs
(607
)
 
(355
)
 
(1,919
)
 
(969
)
Total equity in earnings of equity method investments in the Managed Programs
13,664

 
12,578

 
34,660

 
38,287

Equity in earnings of equity method investments in real estate
5,264

 
4,244

 
13,251

 
11,404

Amortization of basis differences on equity method investments in real estate
(565
)
 
(504
)
 
(1,665
)
 
(1,871
)
Total equity in earnings of equity method investments in real estate
4,699

 
3,740

 
11,586

 
9,533

Equity in earnings of equity method investments in the Managed Programs and real estate
$
18,363

 
$
16,318

 
$
46,246

 
$
47,820

 


 
W. P. Carey 9/30/2018 10-Q 24

 
Notes to Consolidated Financial Statements (Unaudited)

Managed Programs
 
We own interests in the Managed Programs and account for these interests under the equity method because, as their advisor, we do not exert control over, but we do have the ability to exercise significant influence over, the Managed Programs. Operating results of the Managed Programs are included in the Investment Management segment.
 
The following table sets forth certain information about our investments in the Managed Programs (dollars in thousands):
 
 
% of Outstanding Interests Owned at
 
Carrying Amount of Investment at
Fund
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
CPA:17 – Global (a)
 
4.572
%
 
4.186
%
 
$
130,145

 
$
125,676

CPA:17 – Global operating partnership
 
0.009
%
 
0.009
%