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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended March 31, 2019
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
397796789_wpchighreslogo23.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 170,396,695 shares of common stock, $0.001 par value, outstanding at April 26, 2019. The registrant’s shares of common stock are listed on the New York Stock Exchange under the ticker symbol “WPC.”
 




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



W. P. Carey 3/31/2019 10-Q 1




Forward-Looking Statements

This Quarterly Report on Form 10-Q (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: our corporate strategy and estimated or future economic performance and results, 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; prospective statements regarding our capital markets program, including our credit ratings and “at-the market” program (“ATM Program”); the outlook for the investment programs that we manage, including possible liquidity events for those programs; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust (“REIT”); the impact of recently issued accounting pronouncements and regulatory activity; 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, Adjusted funds from 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 (“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, 2018, dated February 25, 2019 (the “2018 Annual Report”). 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 3/31/2019 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)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate:
 
 
 
Land, buildings and improvements
$
9,396,426

 
$
9,251,396

Net investments in direct financing leases
1,279,122

 
1,306,215

In-place lease intangible assets and other
2,101,473

 
2,009,628

Above-market rent intangible assets
922,427

 
925,797

Investments in real estate
13,699,448

 
13,493,036

Accumulated depreciation and amortization
(1,681,942
)
 
(1,564,182
)
Net investments in real estate
12,017,506

 
11,928,854

Equity investments in the Managed Programs and real estate
320,066

 
329,248

Cash and cash equivalents
243,325

 
217,644

Due from affiliates
71,477

 
74,842

Other assets, net
584,855

 
711,507

Goodwill
918,673

 
920,944

Total assets
$
14,155,902

 
$
14,183,039

Liabilities and Equity
 
 
 
Debt:
 
 
 
Senior unsecured notes, net
$
3,513,268

 
$
3,554,470

Unsecured revolving credit facility
106,899

 
91,563

Non-recourse mortgages, net
2,503,321

 
2,732,658

Debt, net
6,123,488

 
6,378,691

Accounts payable, accrued expenses and other liabilities
452,920

 
403,896

Below-market rent and other intangible liabilities, net
217,506

 
225,128

Deferred income taxes
167,294

 
173,115

Dividends payable
176,965

 
172,154

Total liabilities
7,138,173

 
7,352,984

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; 169,636,526 and 165,279,642 shares, respectively, issued and outstanding
170

 
165

Additional paid-in capital
8,483,301

 
8,187,335

Distributions in excess of accumulated earnings
(1,256,754
)
 
(1,143,992
)
Deferred compensation obligation
37,263

 
35,766

Accumulated other comprehensive loss
(252,683
)
 
(254,996
)
Total stockholders’ equity
7,011,297

 
6,824,278

Noncontrolling interests
6,432

 
5,777

Total equity
7,017,729

 
6,830,055

Total liabilities and equity
$
14,155,902

 
$
14,183,039


See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2019 10-Q 3




W. P. CAREY INC. 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues
 
 
 
Real Estate:
 
 
 
Lease revenues
$
262,939

 
$
169,432

Operating property revenues
15,996

 
7,218

Lease termination income and other
3,270

 
942

 
282,205

 
177,592

Investment Management:
 
 
 
Asset management revenue
9,732

 
16,985

Reimbursable costs from affiliates
3,868

 
5,304

Structuring and other advisory revenue
2,518

 
1,929

 
16,118

 
24,218

 
298,323

 
201,810

Operating Expenses
 
 
 
Depreciation and amortization
112,379

 
65,957

General and administrative
21,285

 
18,583

Reimbursable tenant costs
13,171

 
6,219

Operating property expenses
10,594

 
5,670

Property expenses, excluding reimbursable tenant costs
9,912

 
4,229

Stock-based compensation expense
4,165

 
8,219

Reimbursable costs from affiliates
3,868

 
5,304

Subadvisor fees
2,202

 
2,032

Merger and other expenses
146

 
(37
)
Impairment charges

 
4,790

 
177,722

 
120,966

Other Income and Expenses
 
 
 
Interest expense
(61,313
)
 
(38,074
)
Equity in earnings of equity method investments in the Managed Programs and real estate
5,491

 
15,325

Other gains and (losses)
955

 
(2,763
)
Gain on sale of real estate, net
933

 
6,732

 
(53,934
)
 
(18,780
)
Income before income taxes
66,667

 
62,064

Benefit from income taxes
2,129

 
6,002

Net Income
68,796

 
68,066

Net income attributable to noncontrolling interests
(302
)
 
(2,792
)
Net Income Attributable to W. P. Carey
$
68,494

 
$
65,274

 
 
 
 
Basic Earnings Per Share
$
0.41

 
$
0.60

Diluted Earnings Per Share
$
0.41

 
$
0.60

Weighted-Average Shares Outstanding
 
 
 
Basic
167,234,121

 
108,057,940

Diluted
167,434,740

 
108,211,936

 

See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2019 10-Q 4




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
Three Months Ended March 31,
 
2019
 
2018
Net Income
$
68,796

 
$
68,066

Other Comprehensive Income
 
 
 
Unrealized gain (loss) on derivative instruments
1,949

 
(8,392
)
Change in unrealized gain on investments
537

 
428

Foreign currency translation adjustments
(173
)
 
18,516

 
2,313

 
10,552

Comprehensive Income
71,109

 
78,618

 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net income
(302
)
 
(2,792
)
Foreign currency translation adjustments

 
(3,782
)
Unrealized loss on derivative instruments

 
3

Comprehensive income attributable to noncontrolling interests
(302
)
 
(6,571
)
Comprehensive Income Attributable to W. P. Carey
$
70,807

 
$
72,047

 
See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2019 10-Q 5




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Three Months Ended March 31, 2019 and 2018
(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, 2019
165,279,642

 
$
165

 
$
8,187,335

 
$
(1,143,992
)
 
$
35,766

 
$
(254,996
)
 
$
6,824,278

 
$
5,777

 
$
6,830,055

Shares issued under ATM Program, net
4,053,623

 
4

 
303,827

 
 
 
 
 
 
 
303,831

 
 
 
303,831

Shares issued upon delivery of vested restricted share awards
303,261

 
1

 
(15,566
)
 
 
 
 
 
 
 
(15,565
)
 
 
 
(15,565
)
Deferral of vested shares, net
 
 
 
 
(1,445
)
 
 
 
1,445

 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
4,165

 
 
 
 
 
 
 
4,165

 
 
 
4,165

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
849

 
849

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(496
)
 
(496
)
Dividends declared ($1.032 per share)
 
 
 
 
4,985

 
(181,256
)
 
52

 
 
 
(176,219
)
 
 
 
(176,219
)
Net income
 
 
 
 
 
 
68,494

 
 
 
 
 
68,494

 
302

 
68,796

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
1,949

 
1,949

 
 
 
1,949

Change in unrealized gain on investments
 
 
 
 
 
 
 
 
 
 
537

 
537

 
 
 
537

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(173
)
 
(173
)
 
 
 
(173
)
Balance at March 31, 2019
169,636,526

 
$
170

 
$
8,483,301

 
$
(1,256,754
)
 
$
37,263

 
$
(252,683
)
 
$
7,011,297

 
$
6,432

 
$
7,017,729




W. P. Carey 3/31/2019 10-Q 6




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
Three Months Ended March 31, 2019 and 2018
(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
271,824

 

 
(13,543
)
 
 
 
 
 
 
 
(13,543
)
 
 
 
(13,543
)
Delivery of deferred vested shares, net
 
 
 
 
10,509

 
 
 
(10,509
)
 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
8,219

 
 
 
 
 
 
 
8,219

 
 
 
8,219

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(5,224
)
 
(5,224
)
Dividends declared ($1.015 per share)
 
 
 
 
675

 
(110,625
)
 
 
 
 
 
(109,950
)
 
 
 
(109,950
)
Net income
 
 
 
 
 
 
65,274

 
 
 
 
 
65,274

 
2,792

 
68,066

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
14,734

 
14,734

 
3,782

 
18,516

Unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(8,389
)
 
(8,389
)
 
(3
)
 
(8,392
)
Change in unrealized gain on investments
 
 
 
 
 
 
 
 
 
 
428

 
428

 
 
 
428

Balance at March 31, 2018
107,194,440

 
$
107

 
$
4,439,433

 
$
(1,097,415
)
 
$
36,147

 
$
(229,238
)
 
$
3,149,034

 
$
220,471

 
$
3,369,505


See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2019 10-Q 7




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2019

2018
Cash Flows — Operating Activities
 
 
 
Net income
$
68,796

 
$
68,066

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
115,400

 
65,837

Amortization of rent-related intangibles and deferred rental revenue
15,925

 
11,455

Straight-line rent adjustments
(11,192
)
 
(3,722
)
Investment Management revenue received in shares of Managed REITs and other
(7,681
)
 
(16,505
)
Realized and unrealized losses on foreign currency transactions, derivatives, and other
7,504

 
4,267

Distributions of earnings from equity method investments
7,080

 
15,289

Equity in earnings of equity method investments in the Managed Programs and real estate
(5,491
)
 
(15,325
)
Stock-based compensation expense
4,165

 
8,219

Deferred income tax benefit
(1,829
)
 
(12,155
)
Gain on sale of real estate, net
(933
)
 
(6,732
)
Impairment charges

 
4,790

Changes in assets and liabilities:
 
 
 
Net changes in other operating assets and liabilities
(50,939
)
 
(23,893
)
Deferred structuring revenue received
2,581

 
4,080

Increase in deferred structuring revenue receivable
(540
)
 
(725
)
Net Cash Provided by Operating Activities
142,846

 
102,946

Cash Flows — Investing Activities
 
 
 
Purchases of real estate
(164,929
)
 
(85,197
)
Funding for real estate construction, redevelopments, and other capital expenditures on real estate
(27,076
)
 
(20,548
)
Return of capital from equity method investments
18,750

 
3,244

Other investing activities, net
16,835

 
380

Proceeds from sales of real estate
4,851

 
35,691

Capital contributions to equity method investments
(2,594
)
 
(715
)
Proceeds from repayment of short-term loans to affiliates

 
37,000

Funding of short-term loans to affiliates

 
(10,000
)
Net Cash Used in Investing Activities
(154,163
)
 
(40,145
)
Cash Flows — Financing Activities
 
 
 
Proceeds from shares issued under ATM Program, net of selling costs
303,831

 

Prepayments of mortgage principal
(199,579
)
 
(164,908
)
Dividends paid
(171,408
)
 
(109,407
)
Proceeds from Senior Unsecured Credit Facility
145,225

 
292,964

Repayments of Senior Unsecured Credit Facility
(128,452
)
 
(650,722
)
Scheduled payments of mortgage principal
(40,360
)
 
(22,472
)
Payments for withholding taxes upon delivery of equity-based awards
(15,565
)
 
(13,883
)
Other financing activities, net
1,238

 
(137
)
Contributions from noncontrolling interests
849

 

Distributions paid to noncontrolling interests
(496
)
 
(5,224
)
Proceeds from issuance of Senior Unsecured Notes

 
616,355

Payment of financing costs

 
(3,590
)
Proceeds from mortgage financing

 
857

Net Cash Used in Financing Activities
(104,717
)
 
(60,167
)
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
(2,350
)
 
3,073

Net (decrease) increase in cash and cash equivalents and restricted cash
(118,384
)
 
5,707

Cash and cash equivalents and restricted cash, beginning of period
424,063

 
209,676

Cash and cash equivalents and restricted cash, end of period
$
305,679

 
$
215,383

 

See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2019 10-Q 8




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

Note 1. Business and Organization
 
W. P. Carey Inc. (“W. P. Carey”) is a REIT that, together with our consolidated subsidiaries, invests primarily in operationally-critical, single-tenant commercial real estate properties located in the United States and Northern and Western Europe on a long-term basis. 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.”

We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code effective as of February 15, 2012. As a REIT, we are not subject to federal income taxes on income and gains that we distribute to our stockholders 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 also 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 taxable REIT subsidiaries (“TRSs”), we also earn revenue as the advisor to certain publicly owned, non-traded investment programs. 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.

On October 31, 2018, one of the non-traded REITs that we advised, Corporate Property Associates 17 – Global Incorporated (“CPA:17 – Global”), merged with and into one of our wholly owned subsidiaries (the “CPA:17 Merger”) (Note 3). At March 31, 2019, we were the advisor to the following entities:
 
Corporate Property Associates 18 – Global Incorporated (“CPA:18 – Global”), a publicly owned, non-traded REIT that primarily invests in commercial real estate properties; we refer to CPA:17 – Global (until the closing of the CPA:17 Merger on October 31, 2018) and CPA:18 – Global together as the “CPA REITs;”
Carey Watermark Investors Incorporated (“CWI 1”) and Carey Watermark Investors 2 Incorporated (“CWI 2”), two publicly owned, non-traded 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. (“CESH”), 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 (including CPA:17 – Global prior to the CPA:17 Merger) and CESH collectively as the “Managed Programs.”

We no longer raise capital for new or existing funds, but currently expect to continue managing our existing Managed Programs through the end of their respective life cycles (Note 3).

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. At March 31, 2019, our owned portfolio was comprised of our full or partial ownership interests in 1,168 properties, totaling approximately 133.5 million square feet, substantially all of which were net leased to 310 tenants, with a weighted-average lease term of 10.2 years and an occupancy rate of 98.2%. In addition, at March 31, 2019, our portfolio was comprised of full or majority ownership interests in 48 operating properties, including 46 self-storage properties and two hotels, totaling approximately 3.4 million square feet.

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 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.



W. P. Carey 3/31/2019 10-Q 9


 
Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2019, CPA:18 – Global owned all or a portion of 56 net-leased properties (including certain properties in which we also have an ownership interest), totaling approximately 10.0 million square feet, substantially all of which were leased to 90 tenants, with an occupancy rate of approximately 97.8%. CPA:18 – Global and the other Managed Programs also had interests in 129 operating properties, totaling approximately 15.5 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 (“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, 2018, which are included in the 2018 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. 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 (“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 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.

During the three months ended March 31, 2019, we received a full repayment of our preferred equity interest in an unconsolidated VIE entity. As a result, this preferred equity interest is now retired and is no longer considered a VIE (Note 7).



W. P. Carey 3/31/2019 10-Q 10


 
Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2019 and December 31, 2018, we considered 31 and 32 entities to be VIEs, respectively, of which we consolidated 24 as of both period ends, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in our consolidated balance sheets (in thousands):
 
March 31, 2019
 
December 31, 2018
Land, buildings and improvements
$
798,667

 
$
781,347

Net investments in direct financing leases
300,896

 
305,493

In-place lease intangible assets and other
99,620

 
84,870

Above-market rent intangible assets
43,763

 
45,754

Accumulated depreciation and amortization
(171,527
)
 
(164,942
)
Total assets
1,137,418

 
1,112,984

 
 
 
 
Non-recourse mortgages, net
$
149,701

 
$
157,955

Total liabilities
215,443

 
227,461


At March 31, 2019 and December 31, 2018, our seven and eight unconsolidated VIEs, respectively, included our interests in five and six unconsolidated real estate investments, respectively, which we account for under the equity method of accounting, and two unconsolidated entities, which we accounted for at fair value. 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 March 31, 2019 and December 31, 2018, the net carrying amount of our investments in these entities was $281.1 million and $301.6 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.

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 March 31, 2019, none of our equity investments had carrying values below zero.

Reclassifications

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

We currently present Operating property expenses on its own line item in the consolidated statements of income, which was previously included within Property expenses, excluding reimbursable tenant costs. In addition, in accordance with the SEC’s adoption of certain rule and form amendments on August 17, 2018, we moved Gain on sale of real estate, net in the consolidated statements of income to be included within Other Income and Expenses. Also, structuring revenue and other advisory revenue are now included within Structuring and other advisory revenue in the consolidated statements of income.

In connection with our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as described below in Recent Accounting Pronouncements, reimbursable tenant costs (within Real Estate revenues) are now included within Lease revenues in the consolidated statements of income. In addition, we currently present Reimbursable tenant costs and Reimbursable costs from affiliates (both within operating expenses) on their own line items in the consolidated statements of income. Previously, these line items were included within Reimbursable tenant and affiliate costs.

Revenue Recognition

Revenue from contracts under Accounting Standards Codification (“ASC”) 606 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.



W. P. Carey 3/31/2019 10-Q 11


 
Notes to Consolidated Financial Statements (Unaudited)

Revenue from contracts for our Real Estate segment primarily represented operating property revenues of $6.3 million and $7.2 million for the three months ended March 31, 2019 and 2018, respectively. Such 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 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.

Restricted Cash

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):
 
March 31, 2019
 
December 31, 2018
Cash and cash equivalents
$
243,325

 
$
217,644

Restricted cash (a)
62,354

 
206,419

Total cash and cash equivalents and restricted cash
$
305,679

 
$
424,063

__________
(a)
Restricted cash is included within Other assets, net in our consolidated balance sheets. The amount as of December 31, 2018 includes $145.7 million of proceeds from the sale of a portfolio of Australian properties in December 2018. These funds were transferred from a restricted cash account to us in January 2019.

Recent Accounting Pronouncements

Pronouncements Adopted as of March 31, 2019

In February 2016, the Financial Accounting Standards Board (“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, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented. We elected the package of practical expedients as permitted under the transition guidance, which allowed us to not reassess whether arrangements contain leases, lease classification, and initial direct costs. The adoption of the lease standard did not result in a cumulative effect adjustment recognized in the opening balance of retained earnings as of January 1, 2019.

As a Lessee: we recognized $115.6 million of land lease right-of-use (“ROU”) assets, $12.7 million of office lease ROU assets, and $95.3 million of corresponding lease liabilities for certain operating office and land lease arrangements for which we were the lessee on January 1, 2019, which included reclassifying below-market ground lease intangible assets, above-market ground lease intangible liabilities, prepaid rent, and deferred rent as a component of the ROU asset (a net reclassification of $33.0 million). See Note 4 for additional disclosures on the presentation of these amounts in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. We determine if an arrangement contains a lease at contract inception and determine the classification of the lease at commencement. Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We do not include renewal options in the lease term when calculating the lease liability unless we are reasonably certain we will exercise the option. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments


W. P. Carey 3/31/2019 10-Q 12


 
Notes to Consolidated Financial Statements (Unaudited)

consist of increases as a result of the Consumer Price Index (“CPI”) or other comparable indices, taxes, and maintenance costs. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The implicit rate within our operating leases is generally not determinable and, as a result, we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities across domestic and international markets, utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term.

As a Lessor: a practical expedient allows lessors to combine non-lease components (lease arrangements that include common area maintenance services) with related lease components (lease revenues), if both the timing and pattern of transfer are the same for the non-lease component and related lease component, the lease component is the predominant component, and the lease component would otherwise be classified as an operating lease. We elected the practical expedient. For (i) operating lease arrangements involving real estate that include common area maintenance services and (ii) all real estate arrangements that include real estate taxes and insurance costs, we present these amounts within lease revenues in our consolidated statements of income. We record amounts reimbursed by the lessee in the period in which the applicable expenses are incurred.

Under ASU 2016-02, lessors are allowed to only capitalize incremental direct leasing costs. Historically, we have not capitalized internal legal and leasing costs incurred, and, as a result, will not be impacted by this change.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and eliminates the requirements to separately measure and disclose 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. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard impacted our consolidated financial statements for both cash flow hedges and net investment hedges. Changes in the fair value of our hedging instruments are no longer separated into effective and ineffective portions. The entire change in the fair value of these hedging instruments included in the assessment of effectiveness is now recorded in Accumulated other comprehensive loss. The impact to our consolidated financial statements as a result of these changes was not material.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees, which will align the accounting for such payments to nonemployees with the existing requirements for share-based payments granted to employees (with certain exceptions). These share-based payments will now be measured at the grant-date fair value of the equity instrument issued. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

Pronouncements to be Adopted after March 31, 2019

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating 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. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 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.



W. P. Carey 3/31/2019 10-Q 13


 
Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties
 
Advisory Agreements and Partnership Agreements with the Managed Programs
 
We have advisory agreements with each of the existing 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 1), the advisory agreements with CPA:17 – Global were terminated, and we no longer receive fees or reimbursements from CPA:17 – Global. We no longer raise capital for new or existing funds, but 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 (Note 1). We have partnership agreements with each of the Managed Programs, and under the partnership agreements with the Managed REITs, we are entitled to receive certain cash distributions from their respective operating partnerships.

The following tables present a summary of revenue earned from the Managed Programs for the periods indicated, included in the consolidated financial statements (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Asset management revenue (a)
$
9,732

 
$
16,985

Distributions of Available Cash
5,685

 
10,502

Reimbursable costs from affiliates (a)
3,868

 
5,304

Structuring and other advisory revenue (a)
2,518

 
1,929

Interest income on deferred acquisition fees and loans to affiliates (b)
520

 
553

 
$
22,323

 
$
35,273

 
Three Months Ended March 31,
 
2019
 
2018
CPA:17 – Global (c)
$

 
$
15,784

CPA:18 – Global 
7,961

 
6,887

CWI 1
7,501

 
6,979

CWI 2
5,746

 
5,037

CESH
1,115

 
586

 
$
22,323

 
$
35,273

__________
(a)
Amounts represent revenues from contracts under ASC 606.
(b)
Included within Other gains and (losses) in the consolidated statements of income.
(c)
We no longer earn revenue from CPA:17 – Global following the completion of the CPA:17 Merger on October 31, 2018 (Note 1).

The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
 
March 31, 2019
 
December 31, 2018
Short-term loans to affiliates, including accrued interest
$
59,312

 
$
58,824

Deferred acquisition fees receivable, including accrued interest
6,704

 
8,697

Reimbursable costs
2,643

 
3,227

Asset management fees receivable
1,653

 
563

Accounts receivable
997

 
1,425

Current acquisition fees receivable
168

 
2,106

 
$
71,477

 
$
74,842




W. P. Carey 3/31/2019 10-Q 14


 
Notes to Consolidated Financial Statements (Unaudited)

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 existing Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
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 50% in cash and 50% in shares of its Class A common stock for 2019; payable in shares of its Class A common stock for 2018
 
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 2019 and 2018
 
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 2019 and 2018
 
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
CESH
 
1.0%
 
In cash
 
Based on gross assets at fair value

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.



W. P. Carey 3/31/2019 10-Q 15


 
Notes to Consolidated Financial Statements (Unaudited)

Structuring and Other Advisory Revenue
 
Under the terms of the advisory agreements with the Managed Programs, we earn revenue for structuring and negotiating investments and related financing. For the Managed REITs, the combined total of acquisition fees and other acquisition expenses are limited to 6% of the contract prices in aggregate. The following table presents a summary of our structuring fee arrangements with the existing Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
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
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
 
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
CESH
 
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.

In addition, we may earn fees for dispositions and mortgage loan refinancings completed on behalf of the Managed Programs.

Reimbursable Costs from Affiliates
 
The existing Managed Programs 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: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 CPA:18 – Global based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and personnel costs are capped at 1.0% of CPA:18 – Global’s pro rata lease revenues for both 2019 and 2018; 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
CESH
 
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 existing 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.



W. P. Carey 3/31/2019 10-Q 16


 
Notes to Consolidated Financial Statements (Unaudited)

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.

Other Transactions with Affiliates
 
CPA:17 Merger
 
On October 31, 2018, CPA:17 – Global merged with and into one of our wholly owned subsidiaries, primarily in exchange for shares of our common stock, which we accounted for as a business combination under the acquisition method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at October 31, 2018. During the first quarter of 2019, we identified certain measurement period adjustments that impacted the provisional accounting, which increased equity investments in real estate by $2.6 million, decreased other assets, net by $3.0 million, and decreased deferred income taxes by $0.7 million, resulting in a $0.3 million decrease in goodwill. We are in the process of finalizing our assessment of the fair value of the assets acquired and liabilities assumed. Accordingly, the fair value of these assets and liabilities and the impact to goodwill are subject to change during the measurement period, which will end up to one year from the acquisition date.

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.

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

 
$
41,637

 
$
41,637

CESH (c)
 
LIBOR + 1.00%
 
5/31/2020
 
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

 
$
56,098

__________
(a)
Amounts exclude accrued interest of $3.2 million and $2.7 million at March 31, 2019 and December 31, 2018, respectively.
(b)
Maturity date does not take into account extension option.
(c)
LIBOR means London Interbank Offered Rate.
(d)
On April 24, 2019, CWI 1 borrowed an additional $5.0 million under its line of credit with us.

Other

At March 31, 2019, we owned interests in nine jointly owned investments in real estate, with the remaining interests held by affiliates or third parties. We consolidate two such investments and account for the remaining seven investments under the equity method of accounting (Note 7). In addition, we owned stock of each of the existing Managed REITs and limited partnership units of CESH at that date. We account for these investments under the equity method of accounting or at fair value (Note 7).



W. P. Carey 3/31/2019 10-Q 17


 
Notes to Consolidated Financial Statements (Unaudited)

Note 4. Land, Buildings and Improvements
 
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):
 
March 31, 2019
 
December 31, 2018
Land
$
1,780,858

 
$
1,772,099

Buildings and improvements
7,114,453

 
6,945,513

Real estate under construction
28,800

 
63,114

Less: Accumulated depreciation
(777,458
)
 
(724,550
)
 
$
8,146,653

 
$
8,056,176

 
During the three months ended March 31, 2019, 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 1.9% to $1.1235 from $1.1450. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $40.3 million from December 31, 2018 to March 31, 2019.

In connection with a change in lease classification due to an extension of the underlying lease, we reclassified one property with a carrying value of $16.6 million from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases during the three months ended March 31, 2019 (Note 5).

Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $55.1 million and $37.2 million for the three months ended March 31, 2019 and 2018, respectively.

Acquisitions of Real Estate

During the three months ended March 31, 2019, we entered into the following investments, which were deemed to be real estate asset acquisitions, at a total cost of $184.5 million, including land of $18.9 million, buildings of $132.3 million (including capitalized acquisition-related costs of $0.9 million), net lease intangibles of $34.1 million, and a debt premium of $0.8 million (related to the non-recourse mortgage loan assumed in connection with an acquisition, as described below):

an investment of $32.7 million for an educational facility in Portland, Oregon, on February 20, 2019;
an investment of $48.3 million for an office building in Morrisville, North Carolina, on March 7, 2019;
an investment of $37.6 million for a distribution center in Inwood, West Virginia, on March 27, 2019, which is encumbered by a non-recourse mortgage loan that we assumed on the date of acquisition with an outstanding principal balance of $20.2 million (Note 10);
an investment of $49.3 million for an industrial facility in Hurricane, Utah, on March 28, 2019; and
an investment of $16.6 million for an industrial facility in Bensenville, Illinois, on March 29, 2019.

The acquired net lease intangibles are comprised of (i) in-place lease intangible assets totaling $43.6 million, which have a weighted-average expected life of 15.9 years, and (ii) below-market rent intangible liabilities totaling $9.6 million, which have a weighted-average expected life of 15.0 years.

Real Estate Under Construction

During the three months ended March 31, 2019, we capitalized real estate under construction totaling $18.6 million. The number of construction projects in progress with balances included in real estate under construction was two and four as of March 31, 2019 and December 31, 2018, respectively. Aggregate unfunded commitments totaled approximately $198.7 million and $204.5 million as of March 31, 2019 and December 31, 2018, respectively.



W. P. Carey 3/31/2019 10-Q 18


 
Notes to Consolidated Financial Statements (Unaudited)

During the three months ended March 31, 2019, we completed the following construction projects, at a total cost of $53.0 million:

an expansion project at a warehouse facility in Zabia Wola, Poland, in March 2019 at a cost totaling $5.6 million, including capitalized interest; and
a built-to-suit project for a warehouse facility in Dillon, South Carolina, in March 2019 at a cost totaling $47.4 million, including capitalized interest.

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

Dispositions of Properties

During the three months ended March 31, 2019, we sold one property, which was 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 $3.3 million from December 31, 2018 to March 31, 2019.

Future Dispositions of Real Estate

As of March 31, 2019, two of our tenants had exercised their options to repurchase the properties they are leasing for an aggregate of $8.6 million (the amount for one repurchase option is based on the exchange rate of the euro as of March 31, 2019), but there can be no assurance that such repurchases will be completed. At March 31, 2019, these two properties had an aggregate asset carrying value of $6.5 million.

Leases

Operating Lease Income

Lease income related to operating leases recognized and included in the consolidated statements of income is as follows (in thousands):

Three Months Ended March 31, 2019
Lease income — fixed
$
215,118

Lease income — variable (a)
21,263

Total operating lease income (b)
$
236,381

__________
(a)
Includes (i) rent increases based on changes in the CPI and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
(b)
Excludes $26.6 million of interest income from direct financing leases that is included in Lease revenues in the consolidated statement of income.


W. P. Carey 3/31/2019 10-Q 19


 
Notes to Consolidated Financial Statements (Unaudited)


Scheduled Future Lease Payments
 
Scheduled future lease payments, exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable operating leases at March 31, 2019 are as follows (in thousands): 
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
704,412

2020
 
933,380

2021
 
914,977

2022
 
880,940

2023
 
822,002

Thereafter
 
6,560,712

Total
 
$
10,816,423


Scheduled future lease payments, exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable operating leases at December 31, 2018 are as follows (in thousands): 
Years Ending December 31, 
 
Total
2019
 
$
920,044

2020
 
915,411

2021
 
896,083

2022
 
861,688

2023
 
802,509

Thereafter
 
6,151,480

Total
 
$
10,547,215


Lease Cost

Certain information related to the total lease cost for operating leases for the three months ended March 31, 2019 is as follows (in thousands):
 
Three Months Ended March 31, 2019
Fixed lease cost
$
3,814

Variable lease cost
136

Total lease cost
$
3,950


During the three months ended March 31, 2019, we received sublease income totaling approximately $1.5 million, which is included in Lease revenues in the consolidated statement of income.



W. P. Carey 3/31/2019 10-Q 20


 
Notes to Consolidated Financial Statements (Unaudited)

Other Information

Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands):
 
Location on Consolidated Balance Sheets
 
March 31, 2019
Operating ROU assets — land leases
In-place lease intangible assets and other
 
$
113,708

Operating ROU assets — office leases
Other assets, net
 
11,415

Total operating ROU assets
 
 
$
125,123

 
 
 
 
Operating lease liabilities
Accounts payable, accrued expenses and other liabilities
 
$
92,351

 
 
 
 
Weighted-average remaining lease term — operating leases
 
 
36.7 years

Weighted-average discount rate — operating leases
 
 
7.7
%
Number of land lease arrangements
 
 
61

Number of office space arrangements
 
 
6

Lease term range (excluding extension options not reasonably certain of being exercised)
 
1 – 101 years


Cash paid for operating lease liabilities included in Net cash provided by operating activities totaled $3.9 million for the three months ended March 31, 2019. There are no land or office direct financing leases for which we are the lessee, therefore there are no related ROU assets or lease liabilities.

Undiscounted Cash Flows

A reconciliation of the undiscounted cash flows for operating leases recorded on the consolidated balance sheet within Accounts payable, accrued expenses and other liabilities as of March 31, 2019 is as follows (in thousands):
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
11,029

2020
 
14,946

2021
 
8,447

2022
 
7,591

2023
 
7,444

Thereafter
 
255,495

Total lease payments
 
304,952

Less: amount of lease payments representing interest
 
(212,601
)
Present value of future lease payments/lease obligations
 
$
92,351


Scheduled future lease payments (excluding amounts paid directly by tenants) for the years subsequent to the year ended December 31, 2018 are: $14.5 million for 2019, $13.5 million for 2020, $7.9 million for 2021, $7.1 million for 2022, $7.0 million for 2023, and $246.7 million for the years thereafter.



W. P. Carey 3/31/2019 10-Q 21


 
Notes to Consolidated Financial Statements (Unaudited)

Land, Buildings and Improvements — Operating Properties
 
At both March 31, 2019 and December 31, 2018, Land, buildings and improvements attributable to operating properties consisted of our investments in 37 consolidated self-storage properties and two consolidated hotels. Below is a summary of our Land, buildings and improvements attributable to operating properties (in thousands):
 
March 31, 2019
 
December 31, 2018
Land
$
102,478

 
$
102,478

Buildings and improvements
365,494

 
363,572

Real estate under construction
4,343

 
4,620

Less: Accumulated depreciation
(12,832
)
 
(10,234
)
 
$
459,483

 
$
460,436


Depreciation expense on our buildings and improvements attributable to operating properties was $2.8 million and $1.1 million for the three months ended March 31, 2019 and 2018, respectively.

For the three months ended March 31, 2019, Operating property revenues totaling $16.0 million were comprised of $13.2 million in lease revenues and $2.8 million in other income (such as food and beverage revenue) from 37 consolidated self-storage properties and two consolidated hotels. For the three months ended March 31, 2018, Operating property revenues totaling $7.2 million were comprised of $5.1 million in lease revenues and $2.1 million in other income from two consolidated hotels. We derive self-storage revenue primarily from rents received from customers who rent storage space under month-to-month leases for personal or business use. We derive hotel revenue primarily from room rentals, as well as food, beverage, and other services.

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, loans receivable, and deferred acquisition fees. Operating leases are not included in finance receivables. See Note 2 and Note 4 for information on ROU operating lease assets recognized in our consolidated balance sheets.
 
Net Investments in Direct Financing Leases
 
Net investments in direct financing leases is summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Lease payments receivable
$
1,117,679

 
$
1,160,977

Unguaranteed residual value
944,902

 
966,826

 
2,062,581

 
2,127,803

Less: unearned income
(783,459
)
 
(821,588
)
 
$
1,279,122

 
$
1,306,215


Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $26.6 million and $17.2 million for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, we reclassified one property with a carrying value of $16.6 million from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases in connection with a change in lease classification due to an extension of the underlying lease (Note 4). During the three months ended March 31, 2019, the U.S. dollar strengthened against the euro, resulting in a $5.5 million decrease in the carrying value of Net investments in direct financing leases from December 31, 2018 to March 31, 2019.

As of March 31, 2019, we had exercised our option to sell four properties leased to the same tenant (which were accounted for as Net investments in direct financing leases) back to the tenant for $7.7 million. At March 31, 2019, these properties had an aggregate asset carrying value of $6.4 million. These properties were sold in April 2019.



W. P. Carey 3/31/2019 10-Q 22


 
Notes to Consolidated Financial Statements (Unaudited)

Scheduled Future Lease Payments

Scheduled future lease payments, exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable direct financing leases at March 31, 2019 are as follows (in thousands):
Years Ending December 31, 

Total
2019 (remainder) (a)

$
340,942

2020

96,592

2021

94,595

2022

85,254

2023

79,495

Thereafter

420,801

Total

$
1,117,679


Scheduled future lease payments, exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable direct financing leases at December 31, 2018 are as follows (in thousands)
Years Ending December 31, 
 
Total
2019 (a)
 
$
373,632

2020
 
98,198

2021
 
95,181

2022
 
85,801

2023
 
80,033

Thereafter
 
428,132

Total
 
$
1,160,977

__________
(a)
Includes $250.0 million for a bargain purchase option. As of both March 31, 2019 and December 31, 2018, The New York Times Company, a tenant at one of our properties, exercised its bargain purchase option to repurchase the property for $250.0 million in the fourth quarter of 2019. There can be no assurance that such repurchase will be completed. At March 31, 2019, this property had an aggregate asset carrying value of $260.5 million.

Loans Receivable

At both March 31, 2019 and December 31, 2018, we had four loans receivable related to a domestic investment with an aggregate carrying value of $57.8 million. In addition, at March 31, 2019 and December 31, 2018, we had a loan receivable representing the expected future payments under a sales type lease with a carrying value of $9.4 million and $9.5 million, respectively. As of March 31, 2019, the tenant at the property underlying this loan receivable had exercised its option to repurchase the property for $9.3 million, but there can be no assurance that such repurchase will be completed. Our loans receivable are included in Other assets, net in the consolidated financial statements. Earnings from our loans 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 CPA:18 – Global. A portion of this revenue is due in equal annual installments over three years. Unpaid deferred installments, including accrued interest, from CPA:18 – Global were included in Due from affiliates in the consolidated financial statements.
 


W. P. Carey 3/31/2019 10-Q 23


 
Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2019 and December 31, 2018, none of the balances of our finance receivables were past due. Other than the lease extension noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the three months ended March 31, 2019.

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 CPA:18 – Global is 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
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
1 - 3
 
35
 
36
 
$
1,108,250

 
$
1,135,321

4
 
10
 
10
 
227,620

 
227,591

5
 
1
 
1
 
10,381

 
10,580

 
 
 
 
 
 
$
1,346,251

 
$
1,373,492


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 two years to 48 years. In-place lease intangibles, at cost are included in In-place lease intangible assets and other 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 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 and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.

The following table presents a reconciliation of our goodwill (in thousands):
 
Real Estate
 
Investment Management
 
Total
Balance at December 31, 2018
$
857,337

 
$
63,607

 
$
920,944

Foreign currency translation adjustments
(1,928
)
 

 
(1,928
)
CPA:17 Merger measurement period adjustments (Note 3)
(343
)
 

 
(343
)
Balance at March 31, 2019
$
855,066

 
$
63,607

 
$
918,673




W. P. Carey 3/31/2019 10-Q 24


 
Notes to Consolidated Financial Statements (Unaudited)

Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
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
$
19,115

 
$
(11,373
)
 
$
7,742

 
$
18,924

 
$
(10,672
)
 
$
8,252

Trade name
3,975

 
(1,395
)
 
2,580

 
3,975

 
(1,196
)
 
2,779

 
23,090

 
(12,768
)
 
10,322

 
22,899

 
(11,868
)
 
11,031

Lease Intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
1,987,765

 
(541,360
)
 
1,446,405

 
1,960,437

 
(496,096
)
 
1,464,341

Above-market rent
922,427

 
(350,292
)
 
572,135

 
925,797

 
(330,935
)
 
594,862

Below-market ground lease (a)

 

 

 
42,889

 
(2,367
)
 
40,522

 
2,910,192

 
(891,652
)
 
2,018,540

 
2,929,123

 
(829,398
)
 
2,099,725

Indefinite-Lived Goodwill and Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill
918,673

 

 
918,673

 
920,944

 

 
920,944

Below-market ground lease (a)

 

 

 
6,302

 

 
6,302

 
918,673

 

 
918,673

 
927,246

 

 
927,246

Total intangible assets
$
3,851,955

 
$
(904,420
)
 
$
2,947,535

 
$
3,879,268

 
$
(841,266
)
 
$
3,038,002

 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
$
(262,430
)
 
$
61,635

 
$
(200,795
)
 
$
(253,633
)
 
$
57,514

 
$
(196,119
)
Above-market ground lease (a)

 

 

 
(15,961
)
 
3,663

 
(12,298
)
 
(262,430
)
 
61,635

 
(200,795
)
 
(269,594
)
 
61,177

 
(208,417
)
Indefinite-Lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market purchase option
(16,711
)
 

 
(16,711
)
 
(16,711
)
 

 
(16,711
)
Total intangible liabilities
$
(279,141
)
 
$
61,635

 
$
(217,506
)
 
$
(286,305
)
 
$
61,177

 
$
(225,128
)
__________
(a)
In connection with our adoption of ASU 2016-02 (Note 2), in the first quarter of 2019, we prospectively reclassified below-market ground lease intangible assets and above-market ground lease intangible liabilities to be a component of ROU assets within In-place lease intangible assets and other in our consolidated balance sheets. As of December 31, 2018, below-market ground lease intangible assets were included in In-place lease intangible assets and other in the consolidated balance sheets, and above-market ground lease intangible liabilities were included in Below-market rent and other intangible liabilities, net in the consolidated balance sheets.

Net amortization of intangibles, including the effect of foreign currency translation, was $69.4 million and $38.8 million for the three months ended March 31, 2019 and 2018, 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 was included in Property expenses, excluding reimbursable tenant costs, prior to the reclassification of above-market ground lease and below-market ground lease intangibles to ROU assets in the first quarter of 2019, as described above and in Note 2.



W. P. Carey 3/31/2019 10-Q 25


 
Notes to Consolidated Financial Statements (Unaudited)

Note 7. Equity Investments in the Managed Programs and Real Estate
 
We own interests in certain unconsolidated real estate investments with CPA:18 – Global and third parties, 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 March 31,
 
2019
 
2018
Distributions of Available Cash (Note 3)
$
5,685

 
$
10,502

Proportionate share of equity in earnings of equity investments in the Managed Programs
213

 
1,863

Amortization of basis differences on equity method investments in the Managed Programs
(329
)
 
(398
)
Total equity in earnings of equity method investments in the Managed Programs
5,569

 
11,967

Equity in earnings of equity method investments in real estate
562

 
3,903

Amortization of basis differences on equity method investments in real estate
(640
)
 
(545
)
Total equity in (losses) earnings of equity method investments in real estate
(78
)
 
3,358

Equity in earnings of equity method investments in the Managed Programs and real estate
$
5,491

 
$
15,325

 
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 existing Managed Programs (dollars in thousands):
 
 
% of Outstanding Interests Owned at
 
Carrying Amount of Investment at
Fund
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
CPA:18 – Global (a)
 
3.571
%
 
3.446
%
 
$
40,524

 
$
39,600

CPA:18 – Global operating partnership
 
0.034
%
 
0.034
%
 
209

 
209

CWI 1 (a)
 
3.271
%
 
3.062
%
 
40,945

 
38,600

CWI 1 operating partnership
 
0.015
%
 
0.015
%
 
186

 
186

CWI 2 (a)
 
3.039
%
 
2.807
%
 
27,505

 
25,200

CWI 2 operating partnership
 
0.015
%
 
0.015
%
 
300

 
300

CESH (b)
 
2.430
%
 
2.430
%
 
4,032

 
3,495

 
 
 
 
 
 
$
113,701

 
$
107,590

__________


W. P. Carey 3/31/2019 10-Q 26


 
Notes to Consolidated Financial Statements (Unaudited)

(a)
During the three months ended March 31, 2019, we received asset management revenue from the existing Managed REITs primarily in shares of their common stock, which increased our ownership percentage in each of the existing Managed REITs (Note 3).
(b)
Investment is accounted for at fair value.

CPA:17 – Global On October 31, 2018, we acquired all of the remaining interests in CPA:17 – Global and the CPA:17 – Global operating partnership in the CPA:17 Merger (Note 3). We received distributions from CPA:17 – Global during the three months ended March 31, 2018 of $2.4 million. We received distributions from our investment in the CPA:17 – Global operating partnership during the three months ended March 31, 2018 of $6.2 million (Note 3).

CPA:18 – Global — The carrying value of our investment in CPA:18 – Global at March 31, 2019 includes asset management fees receivable, for which 55,419 shares of CPA:18 – Global Class A common stock were issued during the second quarter of 2019. We received distributions from this investment during the three months ended March 31, 2019 and 2018 of $0.8 million and $0.6 million, respectively. We received distributions from our investment in the CPA:18 – Global operating partnership during the three months ended March 31, 2019 and 2018 of $1.8 million and $1.9 million, respectively (Note 3).

CWI 1 — The carrying value of our investment in CWI 1 at March 31, 2019 includes asset management fees receivable, for which 117,857 shares of CWI 1 common stock were issued during the second quarter of 2019. We received distributions from this investment during the three months ended March 31, 2019 and 2018 of $0.6 million and $0.4 million, respectively. We received distributions from our investment in the CWI 1 operating partnership during the three months ended March 31, 2019 and 2018 of $1.9 million and $1.0 million, respectively (Note 3).

CWI 2 The carrying value of our investment in CWI 2 at March 31, 2019 includes asset management fees receivable, for which 82,861 shares of CWI 2 Class A common stock were issued during the second quarter of 2019. We received distributions from this investment during the three months ended March 31, 2019 and 2018 of $0.4 million and $0.2 million, respectively. We received distributions from our investment in the CWI 2 operating partnership during the three months ended March 31, 2019 and 2018 of $1.9 million and $1.5 million, respectively (Note 3).

CESH We have elected to account for our investment in CESH at fair value by selecting the equity method fair value option available under GAAP. We record our investment in CESH on a one quarter lag; therefore, the balance of our equity method investment in CESH recorded as of March 31, 2019 is based on the estimated fair value of our equity method investment in CESH as of December 31, 2018. We did not receive distributions from this investment during the three months ended March 31, 2019 or 2018.

At March 31, 2019 and December 31, 2018, the aggregate unamortized basis differences on our equity investments in the Managed Programs were $38.1 million and $35.2 million, respectively.

Interests in Other Unconsolidated Real Estate Investments

We own equity interests in properties that are generally leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. The underlying investments are jointly owned with affiliates or third parties. We account for these investments under the equity method of accounting. Operating results of our unconsolidated real estate investments are included in the Real Estate segment.



W. P. Carey 3/31/2019 10-Q 27


 
Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our ownership interests in our equity investments in real estate, excluding the Managed Programs, and their respective carrying values (dollars in thousands):
 
 
 
 
 
 
Carrying Value at
Lessee
 
Co-owner
 
Ownership Interest
 
March 31, 2019
 
December 31, 2018
Johnson Self Storage
 
Third Party
 
90%
 
$
72,187

 
$
73,475

Kesko Senukai (a)
 
Third Party
 
70%
 
51,074

 
52,432

Bank Pekao S.A. (a)
 
CPA:18 – Global
 
50%
 
29,154

 
29,086

BPS Nevada, LLC (b)
 
Third Party
 
15%
 
22,392

 
22,292

State Farm Automobile Co.
 
CPA:18 – Global
 
50%
 
18,489

 
18,927

Apply Sørco AS (referred to as Apply) (c) (d)
 
CPA:18 – Global
 
49%
 
9,937

 
7,483

Konzum d.d. (referred to as Agrokor) (a)
 
CPA:18 – Global
 
20%
 
3,132

 
2,858

Beach House JV, LLC (e)
 
Third Party
 
N/A
 

 
15,105

 
 
 
 
 
 
$
206,365

 
$
221,658

__________
(a)
The carrying value of this investment is affected by fluctuations in the exchange rate of the euro.
(b)
This investment was reported using the hypothetical liquidation at book value model, which may have been different than pro rata ownership percentages, primarily due to the capital structure of the partnership agreement.
(c)
The carrying value of this investment is affected by fluctuations in the exchange rate of the Norwegian krone.
(d)
During the first quarter of 2019, we identified measurement period adjustments that impacted the provisional accounting for this investment, which was acquired in the CPA:17 Merger on October 31, 2018 (Note 3). As such, the CPA:17 Merger purchase price allocated to this jointly owned investment increased by approximately $5.2 million, of which our proportionate share was $2.6 million.
(e)
On February 27, 2019, we received a full repayment of our preferred equity interest in this investment totaling $15.0 million. As a result, this preferred equity interest is now retired.

We received aggregate distributions of $3.4 million and $4.4 million from our other unconsolidated real estate investments for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019 and December 31, 2018, the aggregate unamortized basis differences on our unconsolidated real estate investments were $25.6 million and $23.7 million, respectively.

Note 8. Fair Value Measurements
 
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs.

Money Market Funds — Our money market funds, which are included in Cash and cash equivalents in the consolidated financial statements, are comprised of government securities and U.S. Treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.

Derivative Assets and Liabilities — Our derivative assets and liabilities, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are comprised of foreign currency forward contracts, foreign currency collars, interest rate swaps, interest rate caps, and stock warrants (Note 9).



W. P. Carey 3/31/2019 10-Q 28


 
Notes to Consolidated Financial Statements (Unaudited)

The valuation of our derivative instruments (excluding stock warrants) is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

The stock warrants were measured at fair value using valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.

Equity Investment in CESH We have elected to account for our investment in CESH, which is included in Equity investments in the Managed Programs and real estate in the consolidated financial statements, at fair value by selecting the equity method fair value option available under GAAP (Note 7). We classified this investment as Level 3 because we primarily used valuation models that incorporate unobservable inputs to determine its fair value. The fair value of our equity investment in CESH approximated its carrying value as of March 31, 2019 and December 31, 2018.

Investment in Shares of a Cold Storage Operator We account for our investment in shares of a cold storage operator, which is included in Other assets, net in the consolidated financial statements, at fair value using valuation models that incorporated the following significant unobservable inputs: a 15.6x multiple of a comparable public company and a 25% EBITDA growth rate. We classified this investment as Level 3 because it is not traded in an active market. During the first quarter of 2019, we identified measurement period adjustments that impacted the provisional accounting for this investment, which was acquired in the CPA:17 Merger on October 31, 2018 (Note 3). As such, the CPA:17 Merger purchase price allocated to this investment decreased by approximately $3.0 million. The fair value of this investment approximated its carrying value, which was $113.3 million and $116.3 million at March 31, 2019 and December 31, 2018, respectively.

Investment in Shares of GCIF We account for our investment in shares of Guggenheim Credit Income Fund (“GCIF”), which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 2 because we used a quoted price from an inactive market to determine its fair value. The fair value of our investment in shares of GCIF approximated its carrying value, which was $22.5 million and $23.6 million at March 31, 2019 and December 31, 2018, respectively. Distributions of earnings from GCIF and unrealized gains or losses recognized on GCIF are recorded within Other gains and (losses) in the consolidated financial statements.

We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the three months ended March 31, 2019 or 2018. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our consolidated financial statements, except for gains and losses recognized on our equity investment in CESH, which are reported within Other comprehensive income.

Our other material financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Senior Unsecured Notes, net (a) (b) (c)
2
 
$
3,513,268

 
$
3,631,030

 
$
3,554,470

 
$
3,567,593

Non-recourse mortgages, net (a) (b) (d)
3
 
2,503,321

 
2,515,119

 
2,732,658

 
2,737,861

Loans receivable (d)
3
 
67,129

 
66,828

 
67,277

 
67,123

__________
(a)
The carrying value of Senior Unsecured Notes, net (Note 10) includes unamortized deferred financing costs of $18.8 million and $19.7 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $0.8 million at both March 31, 2019 and December 31, 2018.


W. P. Carey 3/31/2019 10-Q 29


 
Notes to Consolidated Financial Statements (Unaudited)

(b)
The carrying value of Senior Unsecured Notes, net includes unamortized discount of $14.9 million and $15.8 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $21.0 million and $21.8 million at March 31, 2019 and December 31, 2018, respectively.
(c)
We determined the estimated fair value of the Senior Unsecured Notes using observed market prices in an open market with limited trading volume.
(d)
We determined the estimated fair value of these financial instruments using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.

We estimated that our other financial assets and liabilities, including amounts outstanding under our Senior Unsecured Credit Facility (Note 10) but excluding net investments in direct financing leases, had fair values that approximated their carrying values at both March 31, 2019 and December 31, 2018.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investments in real estate held for use for which an impairment indicator is identified, we follow a two-step process to determine whether the investment is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered to be not recoverable. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information such as recent comparable sales, broker quotes, or third-party appraisals. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 for fair value reporting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.

We did not recognize any impairment charges during the three months ended March 31, 2019.

During the three months ended March 31, 2018, we recognized impairment charges totaling $4.8 million on two properties in order to reduce the carrying values of the properties to their estimated fair values, which was $3.9 million in each case. We recognized an impairment charge of $3.8 million on one of those properties due to a tenant bankruptcy and the resulting vacancy, and the fair value measurement for the property was determined by estimating discounted cash flows using market rent assumptions. We recognized an impairment charge of $1.0 million on the other property due to a lease expiration and resulting vacancy, and the fair value measurement for the property approximated its estimated selling price.

Note 9. Risk Management and Use of Derivative Financial Instruments

Risk Management
 
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our Senior Unsecured Credit Facility and Senior Unsecured Notes (Note 10). Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other securities and the shares or limited partnership units we hold in the Managed Programs due to changes in interest rates or other market factors. We own investments in North America, Europe, and Japan and are subject to risks associated with fluctuating foreign currency exchange rates.