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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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________
Commission File Number: 001-13779
403834042_wpchighreslogo28.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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.001 Par Value
 
WPC
 
New York Stock Exchange
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 No
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 No
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
Accelerated filer
Non-accelerated filer  
 
 
 

 
 
Smaller reporting company
Emerging growth company
 
 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Registrant has 172,402,516 shares of common stock, $0.001 par value, outstanding at April 24, 2020.
 




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



W. P. Carey 3/31/2020 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); expectations about tenant rent collections; 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); future leverage and debt service obligations, and estimated fair values of our investments and properties; 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”); our expectations regarding the impact on our business, tenants, and prospects in light of the outbreak of the novel coronavirus (“COVID-19”) and the various effects in connection therewith, as well as the measures taken to prevent its spread; and the impact of recently issued accounting pronouncements and regulatory activity.

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 risks or uncertainties, like the risks related to effects of pandemics and global outbreaks of contagious diseases or the fear of such outbreaks, like the current COVID-19 pandemic and those additional factors discussed in reports filed with the SEC by us under the heading “Risk 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, 2019, as filed with the SEC on February 21, 2020 (the “2019 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 3/31/2020 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, 2020
 
December 31, 2019
Assets
 
 
 
Investments in real estate:
 
 
 
Land, buildings and improvements
$
10,019,597

 
$
9,856,191

Net investments in direct financing leases
844,945

 
896,549

In-place lease intangible assets and other
2,182,896

 
2,186,851

Above-market rent intangible assets
897,965

 
909,139

Investments in real estate
13,945,403

 
13,848,730

Accumulated depreciation and amortization
(2,144,252
)
 
(2,035,995
)
Assets held for sale, net

 
104,010

Net investments in real estate
11,801,151

 
11,916,745

Equity investments in the Managed Programs and real estate
276,109

 
324,004

Cash and cash equivalents
220,929

 
196,028

Due from affiliates
39,051

 
57,816

Other assets, net
623,181

 
631,637

Goodwill
929,887

 
934,688

Total assets (a)
$
13,890,308

 
$
14,060,918

Liabilities and Equity
 
 
 
Debt:
 
 
 
Senior unsecured notes, net
$
4,323,063

 
$
4,390,189

Unsecured term loans, net
289,725

 

Unsecured revolving credit facility
75,483

 
201,267

Non-recourse mortgages, net
1,433,372

 
1,462,487

Debt, net
6,121,643

 
6,053,943

Accounts payable, accrued expenses and other liabilities
479,408

 
487,405

Below-market rent and other intangible liabilities, net
202,508

 
210,742

Deferred income taxes
132,041

 
179,309

Dividends payable
181,632

 
181,346

Total liabilities (a)
7,117,232

 
7,112,745

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; 172,402,516 and 172,278,242 shares, respectively, issued and outstanding
172

 
172

Additional paid-in capital
8,712,244

 
8,717,535

Distributions in excess of accumulated earnings
(1,688,744
)
 
(1,557,374
)
Deferred compensation obligation
42,291

 
37,263

Accumulated other comprehensive loss
(295,018
)
 
(255,667
)
Total stockholders’ equity
6,770,945

 
6,941,929

Noncontrolling interests
2,131

 
6,244

Total equity
6,773,076

 
6,948,173

Total liabilities and equity
$
13,890,308

 
$
14,060,918

__________
(a)
See Note 2 for details related to variable interest entities (“VIEs”).

See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2020 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,
 
2020
 
2019
Revenues
 
 
 
Real Estate:
 
 
 
Lease revenues
$
282,110

 
$
262,939

Lease termination income and other
6,509

 
3,270

Operating property revenues
5,967

 
15,996

 
294,586

 
282,205

Investment Management:
 
 
 
Asset management revenue
9,889

 
9,732

Reimbursable costs from affiliates
4,030

 
3,868

Structuring and other advisory revenue
494

 
2,518

 
14,413

 
16,118

 
308,999

 
298,323

Operating Expenses
 
 
 
Depreciation and amortization
116,194

 
112,379

General and administrative
20,745

 
21,285

Impairment charges
19,420

 

Reimbursable tenant costs
13,175

 
13,171

Property expenses, excluding reimbursable tenant costs
10,075

 
9,912

Operating property expenses
5,223

 
10,594

Reimbursable costs from affiliates
4,030

 
3,868

Stock-based compensation expense
2,661

 
4,165

Subadvisor fees
1,277

 
2,202

Merger and other expenses
187

 
146

 
192,987

 
177,722

Other Income and Expenses
 
 
 
Interest expense
(52,540
)
 
(61,313
)
Equity in (losses) earnings of equity method investments in the Managed Programs and real estate
(45,790
)
 
5,491

Gain on sale of real estate, net
11,751

 
933

Other gains and (losses)
(4,423
)
 
955

 
(91,002
)
 
(53,934
)
Income before income taxes
25,010

 
66,667

Benefit from income taxes
41,692

 
2,129

Net Income
66,702

 
68,796

Net income attributable to noncontrolling interests
(612
)
 
(302
)
Net Income Attributable to W. P. Carey
$
66,090

 
$
68,494

 
 
 
 
Basic Earnings Per Share
$
0.38

 
$
0.41

Diluted Earnings Per Share
$
0.38

 
$
0.41

Weighted-Average Shares Outstanding
 
 
 
Basic
173,249,236

 
167,234,121

Diluted
173,460,053

 
167,434,740

 

See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2020 10-Q 4




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
Three Months Ended March 31,
 
2020
 
2019
Net Income
$
66,702

 
$
68,796

Other Comprehensive (Loss) Income
 
 
 
Foreign currency translation adjustments
(52,200
)
 
(173
)
Unrealized gain on derivative instruments
12,849

 
1,949

Unrealized gain on investments

 
537

 
(39,351
)
 
2,313

Comprehensive Income
27,351

 
71,109

 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net income
(612
)
 
(302
)
Comprehensive income attributable to noncontrolling interests
(612
)
 
(302
)
Comprehensive Income Attributable to W. P. Carey
$
26,739

 
$
70,807

 
See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2020 10-Q 5




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(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, 2020
172,278,242

 
$
172

 
$
8,717,535

 
$
(1,557,374
)
 
$
37,263

 
$
(255,667
)
 
$
6,941,929

 
$
6,244

 
$
6,948,173

Cumulative-effect adjustment for the adoption of ASU 2016-13, Financial Instruments — Credit Losses (Note 2)
 
 
 
 
 
 
(14,812
)
 
 
 
 
 
(14,812
)
 
 
 
(14,812
)
Shares issued upon delivery of vested restricted share awards
124,274

 

 
(5,012
)
 
 
 
 
 
 
 
(5,012
)
 
 
 
(5,012
)
Deferral of vested shares, net
 
 
 
 
(4,131
)
 
 
 
4,131

 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
2,661

 
 
 
 
 
 
 
2,661

 
 
 
2,661

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(4,725
)
 
(4,725
)
Dividends declared ($1.040 per share)
 
 
 
 
1,191

 
(182,648
)
 
897

 
 
 
(180,560
)
 
 
 
(180,560
)
Net income
 
 
 
 
 
 
66,090

 
 
 
 
 
66,090

 
612

 
66,702

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(52,200
)
 
(52,200
)
 
 
 
(52,200
)
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
12,849

 
12,849

 
 
 
12,849

Balance at March 31, 2020
172,402,516

 
$
172

 
$
8,712,244

 
$
(1,688,744
)
 
$
42,291

 
$
(295,018
)
 
$
6,770,945

 
$
2,131

 
$
6,773,076

 
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

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2020 10-Q 6




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2020

2019
Cash Flows — Operating Activities
 
 
 
Net income
$
66,702

 
$
68,796

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
119,483

 
115,400

Equity in losses (earnings) of equity method investments in the Managed Programs and real estate
45,790

 
(5,491
)
Deferred income tax benefit
(41,487
)
 
(1,829
)
Impairment charges
19,420

 

Amortization of rent-related intangibles and deferred rental revenue
12,794

 
15,925

Gain on sale of real estate, net
(11,751
)
 
(933
)
Straight-line rent adjustments
(11,619
)
 
(11,192
)
Realized and unrealized losses on foreign currency transactions, derivatives, and other
7,275

 
7,504

Asset management revenue received in shares of Managed REITs
(7,056
)
 
(7,681
)
Allowance for credit losses
5,499

 

Stock-based compensation expense
2,661

 
4,165

Distributions of earnings from equity method investments
2,656

 
7,080

Changes in assets and liabilities:
 
 
 
Net changes in other operating assets and liabilities
(32,119
)
 
(50,939
)
Deferred structuring revenue received
1,537

 
2,581

Increase in deferred structuring revenue receivable
(88
)
 
(540
)
Net Cash Provided by Operating Activities
179,697

 
142,846

Cash Flows — Investing Activities
 
 
 
Purchases of real estate
(197,626
)
 
(164,929
)
Proceeds from sales of real estate
105,154

 
4,851

Funding for real estate construction, redevelopments, and other capital expenditures on real estate
(53,392
)
 
(27,076
)
Proceeds from repayment of short-term loans to affiliates
20,973

 

Proceeds from repayment of loans receivable
11,000

 
161

Other investing activities, net
6,591

 
16,674

Funding of short-term loans to affiliates
(5,433
)
 

Return of capital from equity method investments
3,496

 
18,750

Capital contributions to equity method investments
(595
)
 
(2,594
)
Net Cash Used in Investing Activities
(109,832
)
 
(154,163
)
Cash Flows — Financing Activities
 
 
 
Repayments of Unsecured Revolving Credit Facility
(466,643
)
 
(128,452
)
Proceeds from Unsecured Revolving Credit Facility
348,977

 
145,225

Proceeds from Unsecured Term Loans
298,974

 

Dividends paid
(180,274
)
 
(171,408
)
Scheduled payments of mortgage principal
(21,117
)
 
(40,360
)
Payment of financing costs
(9,993
)
 

Other financing activities, net
7,269

 
1,238

Payments for withholding taxes upon delivery of equity-based awards
(5,011
)
 
(15,565
)
Distributions paid to noncontrolling interests
(4,725
)
 
(496
)
Proceeds from shares issued under ATM Program, net of selling costs

 
303,831

Prepayments of mortgage principal

 
(199,579
)
Contributions from noncontrolling interests

 
849

Net Cash Used in Financing Activities
(32,543
)
 
(104,717
)
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
(4,550
)
 
(2,350
)
Net increase (decrease) in cash and cash equivalents and restricted cash
32,772

 
(118,384
)
Cash and cash equivalents and restricted cash, beginning of period
251,518

 
424,063

Cash and cash equivalents and restricted cash, end of period
$
284,290

 
$
305,679

 

See Notes to Consolidated Financial Statements.


W. P. Carey 3/31/2020 10-Q 7




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

Note 1. Business and Organization
 
W. P. Carey Inc. (“W. P. Carey”) 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.

At March 31, 2020, 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;
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 CPA:18 – Global, as the “Managed REITs” (as used throughout this Report, the term “Managed REITs” does not include CWI 1 and CWI 2 following the closing of the CWI 1 and CWI 2 Merger described below) (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 and CESH collectively as the “Managed Programs.”

On October 22, 2019, CWI 1 and CWI 2 announced that they had entered into a definitive merger agreement under which the two companies intended to merge in an all-stock transaction, with CWI 2 as the surviving entity (the “CWI 1 and CWI 2 Merger”). The CWI 1 and CWI 2 Merger was approved by the stockholders of CWI 1 and CWI 2 on April 8, 2020 and closed on April 13, 2020, as described in Note 16. Following the close of the merger, the advisory agreements with CWI 1 and CWI 2 were terminated, CWI 2 was renamed Watermark Lodging Trust, Inc., and we provide certain management services to Watermark Lodging Trust, Inc. pursuant to a transition services agreement. We no longer raise capital for new or existing funds, but currently expect to continue managing CPA:18 – Global and CESH through the end of their respective life cycles (Note 3).

Reportable Segments

Real Estate — Lease revenues 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, 2020, our owned portfolio was comprised of our full or partial ownership interests in 1,215 properties, totaling approximately 141.1 million square feet, substantially all of which were net leased to 352 tenants, with a weighted-average lease term of 10.7 years and an occupancy rate of 98.8%. In addition, at March 31, 2020, our portfolio was comprised of full or partial ownership interests in 20 operating properties, including 19 self-storage properties and one hotel, totaling approximately 1.4 million square feet.



W. P. Carey 3/31/2020 10-Q 8


 
Notes to Consolidated Financial Statements (Unaudited)

Investment Management — Through our TRSs, we structure and negotiate investments 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.

At March 31, 2020, the Managed Programs owned all or a portion of 50 net-leased properties (including certain properties in which we also have an ownership interest), totaling approximately 10.1 million square feet, substantially all of which were leased to 65 tenants, with an occupancy rate of approximately 99.3%. The Managed Programs also had interests in 104 operating properties (totaling approximately 14.9 million square feet in the aggregate) and 16 active build-to-suit projects.

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, 2019, which are included in the 2019 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 VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2019 Annual Report.

During the three months ended March 31, 2020, we had a net decrease of four entities considered to be consolidated VIEs, primarily related to disposition activity and certain lease amendments.



W. P. Carey 3/31/2020 10-Q 9


 
Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2020 and December 31, 2019, we considered 14 and 18 entities to be VIEs, respectively, of which we consolidated seven and 11, respectively, 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, 2020
 
December 31, 2019
Land, buildings and improvements
$
458,092

 
$
493,714

Net investments in direct financing leases
15,508

 
15,584

In-place lease intangible assets and other
48,054

 
56,915

Above-market rent intangible assets
32,177

 
34,576

Accumulated depreciation and amortization
(141,408
)
 
(151,017
)
Assets held for sale, net

 
104,010

Total assets
425,426

 
596,168

 
 
 
 
Non-recourse mortgages, net
$
24,353

 
$
32,622

Total liabilities
70,590

 
98,671


At both March 31, 2020 and December 31, 2019, our seven unconsolidated VIEs included our interests in five unconsolidated real estate investments, 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, 2020 and December 31, 2019, the net carrying amount of our investments in these entities was $293.9 million and $298.3 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.

Reclassifications

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

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. ASC 606 does not apply to our lease revenues, which constitute a majority of our revenues, but primarily applies to revenues generated from our hotel operating properties and our Investment Management segment.

Revenue from contracts for our Real Estate segment primarily represented operating property revenues of $4.6 million and $6.3 million for the three months ended March 31, 2020 and 2019, 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.

Lease revenue (including straight-line lease revenue) is only recognized when deemed probable of collection. Collectibility is assessed for each tenant receivable using various criteria including credit ratings (Note 5), guarantees, past collection issues, and the current economic and business environment affecting the tenant. If collectibility of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant.



W. P. Carey 3/31/2020 10-Q 10


 
Notes to Consolidated Financial Statements (Unaudited)

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, 2020
 
December 31, 2019
Cash and cash equivalents
$
220,929

 
$
196,028

Restricted cash (a)
63,361

 
55,490

Total cash and cash equivalents and restricted cash
$
284,290

 
$
251,518


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

Recent Accounting Pronouncements

Pronouncements Adopted as of March 31, 2020

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 replaces the “incurred loss” model with an “expected loss” model, resulting in the earlier recognition of credit losses even if the risk of loss is remote. This standard applies to financial assets measured at amortized cost and certain other instruments, including loans receivable and net investments in direct financing leases. This standard does not apply to receivables arising from operating leases, which are within the scope of Topic 842.

We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective method, which requires applying changes in loss reserves through a cumulative-effect adjustment to retained earnings. Upon adoption, we recorded a net decrease in retained earnings of $14.8 million, which is reflected within our consolidated statement of equity.

The allowance for credit losses, which is recorded as a reduction to Net investments in direct financing leases on our consolidated balance sheets, was measured on a pool basis by credit ratings (Note 5), using a probability of default method based on the lessees’ respective credit ratings, the expected value of the underlying collateral upon its repossession, and our historical loss experience related to other direct financing leases. Included in our model are factors that incorporate forward-looking information. Allowance for credit losses is included in our consolidated statements of income within Other gains and (losses).

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.



W. P. Carey 3/31/2020 10-Q 11


 
Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties
 
CWI 1 and CWI 2 Merger

On October 22, 2019, CWI 1 and CWI 2 announced that they had entered into a definitive merger agreement under which the two companies intended to merge in an all-stock transaction, with CWI 2 as the surviving entity. The CWI 1 and CWI 2 Merger was approved by the stockholders of CWI 1 and CWI 2 on April 8, 2020 and closed on April 13, 2020, as described in Note 16.

Advisory Agreements and Partnership Agreements with the Managed Programs
 
As of March 31, 2020, we had advisory agreements with each of the Managed Programs, pursuant to which we earned fees and were entitled to receive reimbursement for certain fund management expenses. Upon completion of the CWI 1 and CWI 2 Merger on April 13, 2020 (Note 16), the advisory agreements with CWI 1 and CWI 2 were terminated, and we no longer receive fees, reimbursements, or distributions of Available Cash from CWI 1 and CWI 2. We no longer raise capital for new or existing funds, but we currently expect to continue to manage CPA:18 – Global and CESH and earn various fees (as described below) through the end of their respective life cycles (Note 1). As of March 31, 2020, we had 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 and distributions of Available Cash received from the Managed Programs for the periods indicated, included in the consolidated financial statements (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Asset management revenue (a)
$
9,889

 
$
9,732

Reimbursable costs from affiliates (a)
4,030

 
3,868

Distributions of Available Cash (b)
1,916

 
5,685

Structuring and other advisory revenue (a)
494

 
2,518

Interest income on deferred acquisition fees and loans to affiliates (c)
278

 
520

 
$
16,607

 
$
22,323

 
Three Months Ended March 31,
 
2020
 
2019
CPA:18 – Global 
$
5,912

 
$
7,961

CWI 1
5,040

 
7,501

CWI 2
4,200

 
5,746

CESH
1,455

 
1,115

 
$
16,607

 
$
22,323

__________
(a)
Amounts represent revenues from contracts under ASC 606.
(b)
Included within Equity in earnings of equity method investments in the Managed Programs and real estate in the consolidated statements of income.
(c)
Included within Other gains and (losses) in the consolidated statements of income.



W. P. Carey 3/31/2020 10-Q 12


 
Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
 
March 31, 2020
 
December 31, 2019
Short-term loans to affiliates, including accrued interest
$
30,760

 
$
47,721

Deferred acquisition fees receivable, including accrued interest
3,000

 
4,450

Reimbursable costs
2,759

 
3,129

Asset management fees receivable
1,388

 
1,267

Accounts receivable
908

 
1,118

Current acquisition fees receivable
236

 
131

 
$
39,051

 
$
57,816



Performance Obligations and Significant Judgments

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

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

Asset Management Revenue
 
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
CPA: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 2020 and 2019
 
Rate depends on the type of investment and is based on the average market or average equity value, as applicable
CWI 1 (a)
 
0.5%
 
In shares of its common stock and/or cash, at our election; payable in shares of its common stock for 2020 and 2019
 
Rate was based on the average market value of the investment; we were required to pay 20% of t