W. P. CAREY INC.
10-Ks and 10-Qs
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Table of Contents
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 June 30, 2010
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
W. P. CAREY & CO. LLC
(Exact name of registrant as specified in its charter)
|
Delaware
(State of incorporation) |
13-3912578
(I.R.S. Employer Identification No.) |
|
|
50 Rockefeller Plaza
New York, New York (Address of principal executive offices) |
10020 (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)
(212) 492-1100
(Registrant’s telephone numbers, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Registrant had 39,324,188 shares of common stock, no par value, outstanding at July 31, 2010.
INDEX
Forward-Looking Statements
This Quarterly Report on Form 10-Q, 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. It is important to note that our actual results could be
materially different from those projected in such forward-looking statements. You should exercise
caution in relying on forward-looking statements as they involve known and unknown risks,
uncertainties and other factors that may materially affect our future results, performance,
achievements or transactions. Information on factors which could impact actual results and cause
them to differ from what is anticipated in the forward-looking statements contained herein is
included in this report as well as in our other filings with the Securities and Exchange Commission
(the “SEC”), including but not limited to those described in Item 1A. Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on February 26, 2010
(the “2009 Annual Report”). We do not undertake to revise or update any forward-looking statements.
Additionally, a description of our critical accounting estimates is included in the Management’s
Discussion and Analysis of Financial Condition and Results of Operations section of our 2009 Annual
Report. There has been no significant change in our critical accounting estimates.
W. P. Carey 6/30/2010 10-Q
—
1
Table of Contents
W. P. CAREY & CO. LLC
(in thousands, except share amounts)
| June 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
||||||||
|
Investments in real estate:
|
$ | 559,441 | $ | 525,607 | ||||
|
Real estate, at cost (inclusive of amounts attributable to consolidated variable interest
entities (“VIEs”) of $52,745 and $52,625, respectively)
|
||||||||
|
Operating real estate, at cost (inclusive of amounts attributable to VIEs of $25,665
and $25,665, respectively)
|
85,960 | 85,927 | ||||||
|
Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of
$27,047 and $25,650, respectively)
|
(113,348 | ) | (112,286 | ) | ||||
|
|
||||||||
|
Net investments in properties
|
532,053 | 499,248 | ||||||
|
Net investment in direct financing leases
|
78,087 | 80,222 | ||||||
|
Assets held for sale
|
5,390 | — | ||||||
|
Equity investments in real estate and CPA
®
REITs
|
313,080 | 304,990 | ||||||
|
|
||||||||
|
Net investments in real estate
|
928,610 | 884,460 | ||||||
|
Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs
of $91 and $108, respectively)
|
39,449 | 18,450 | ||||||
|
Due from affiliates
|
29,234 | 35,998 | ||||||
|
Intangible assets and goodwill, net
|
89,359 | 85,187 | ||||||
|
Other assets, net (inclusive of amounts attributable to consolidated VIEs of $1,635
and $1,504, respectively)
|
37,754 | 69,241 | ||||||
|
|
||||||||
|
Total assets
|
1,124,406 | 1,093,336 | ||||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of
$9,743 and $9,850, respectively)
|
206,247 | 215,330 | ||||||
|
Line of credit
|
171,750 | 111,000 | ||||||
|
Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable
to consolidated VIEs of $2,175 and $2,286, respectively)
|
45,891 | 51,710 | ||||||
|
Income taxes, net
|
40,447 | 43,831 | ||||||
|
Distributions payable
|
19,849 | 31,365 | ||||||
|
|
||||||||
|
Total liabilities
|
484,184 | 453,236 | ||||||
|
|
||||||||
|
Redeemable noncontrolling interest
|
7,119 | 7,692 | ||||||
|
|
||||||||
|
Commitments and contingencies (Note 8)
|
||||||||
|
Equity:
|
||||||||
|
W. P. Carey members’ equity:
|
||||||||
|
Listed shares, no par value, 100,000,000 shares authorized; 39,323,929 and 39,204,605
shares
issued and outstanding, respectively
|
758,080 | 754,507 | ||||||
|
Distributions in excess of accumulated earnings
|
(141,571 | ) | (138,442 | ) | ||||
|
Deferred compensation obligation
|
10,249 | 10,249 | ||||||
|
Accumulated other comprehensive loss
|
(9,859 | ) | (681 | ) | ||||
|
|
||||||||
|
Total W. P. Carey members’ equity
|
616,899 | 625,633 | ||||||
|
Noncontrolling interests
|
16,204 | 6,775 | ||||||
|
|
||||||||
|
Total equity
|
633,103 | 632,408 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 1,124,406 | $ | 1,093,336 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2010 10-Q
—
2
Table of Contents
W. P. CAREY & CO. LLC
(in thousands, except share and per share amounts)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
||||||||||||||||
|
Asset management revenue
|
$ | 19,080 | $ | 19,227 | $ | 37,900 | $ | 38,335 | ||||||||
|
Structuring revenue
|
13,102 | 365 | 19,936 | 10,774 | ||||||||||||
|
Wholesaling revenue
|
2,230 | 1,597 | 4,333 | 2,690 | ||||||||||||
|
Reimbursed costs from affiliates
|
15,354 | 11,115 | 30,402 | 20,111 | ||||||||||||
|
Lease revenues
|
15,833 | 16,374 | 31,844 | 32,745 | ||||||||||||
|
Other real estate income
|
4,797 | 4,557 | 8,572 | 7,770 | ||||||||||||
|
|
||||||||||||||||
|
|
70,396 | 53,235 | 132,987 | 112,425 | ||||||||||||
|
|
||||||||||||||||
|
Operating Expenses
|
||||||||||||||||
|
General and administrative
|
(18,131 | ) | (14,334 | ) | (35,732 | ) | (33,433 | ) | ||||||||
|
Reimbursable costs
|
(15,354 | ) | (11,115 | ) | (30,402 | ) | (20,111 | ) | ||||||||
|
Depreciation and amortization
|
(5,815 | ) | (6,574 | ) | (11,991 | ) | (11,694 | ) | ||||||||
|
Property expenses
|
(2,379 | ) | (1,921 | ) | (4,628 | ) | (3,371 | ) | ||||||||
|
Other real estate expenses
|
(1,773 | ) | (1,707 | ) | (3,588 | ) | (3,838 | ) | ||||||||
|
Impairment charges
|
— | (900 | ) | (2,268 | ) | (900 | ) | |||||||||
|
|
||||||||||||||||
|
|
(43,452 | ) | (36,551 | ) | (88,609 | ) | (73,347 | ) | ||||||||
|
|
||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||
|
Other interest income
|
336 | 416 | 609 | 823 | ||||||||||||
|
Income from equity investments in real estate and CPA
®
REITs
|
7,638 | 4,875 | 16,780 | 6,262 | ||||||||||||
|
Other income and (expenses)
|
42 | 127 | (622 | ) | 3,281 | |||||||||||
|
Interest expense
|
(3,765 | ) | (3,805 | ) | (7,476 | ) | (8,000 | ) | ||||||||
|
|
||||||||||||||||
|
|
4,251 | 1,613 | 9,291 | 2,366 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations before income taxes
|
31,195 | 18,297 | 53,669 | 41,444 | ||||||||||||
|
Provision for income taxes
|
(6,751 | ) | (3,720 | ) | (10,863 | ) | (9,920 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
24,444 | 14,577 | 42,806 | 31,524 | ||||||||||||
|
|
||||||||||||||||
|
Discontinued Operations
|
||||||||||||||||
|
Income from operations of discontinued properties
|
206 | 1,202 | 626 | 2,164 | ||||||||||||
|
Gain on sale of real estate
|
56 | 478 | 460 | 343 | ||||||||||||
|
Impairment charges
|
(985 | ) | (1,380 | ) | (5,869 | ) | (1,380 | ) | ||||||||
|
|
||||||||||||||||
|
(Loss) income from discontinued operations
|
(723 | ) | 300 | (4,783 | ) | 1,127 | ||||||||||
|
|
||||||||||||||||
|
Net Income
|
23,721 | 14,877 | 38,023 | 32,651 | ||||||||||||
|
Add: Net loss attributable to noncontrolling interests
|
128 | 203 | 414 | 373 | ||||||||||||
|
Less: Net income attributable to redeemable noncontrolling interests
|
(417 | ) | (103 | ) | (592 | ) | (338 | ) | ||||||||
|
|
||||||||||||||||
|
Net Income Attributable to W. P. Carey Members
|
$ | 23,432 | $ | 14,977 | $ | 37,845 | $ | 32,686 | ||||||||
|
|
||||||||||||||||
|
Basic Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members |
$ | 0.62 | $ | 0.36 | $ | 1.08 | $ | 0.79 | ||||||||
|
(Loss) income from discontinued operations attributable to W. P. Carey
members
|
(0.03 | ) | 0.01 | (0.12 | ) | 0.03 | ||||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 0.59 | $ | 0.37 | $ | 0.96 | $ | 0.82 | ||||||||
|
|
||||||||||||||||
|
Diluted Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members |
$ | 0.62 | $ | 0.36 | $ | 1.06 | $ | 0.78 | ||||||||
|
(Loss) income from discontinued operations attributable to W. P. Carey
members
|
(0.03 | ) | 0.01 | (0.12 | ) | 0.03 | ||||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 0.59 | $ | 0.37 | $ | 0.94 | $ | 0.81 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Weighted Average Shares Outstanding
|
||||||||||||||||
|
Basic
|
39,081,064 | 39,350,684 | 39,116,126 | 39,067,391 | ||||||||||||
|
|
||||||||||||||||
|
Diluted
|
39,510,231 | 40,065,495 | 39,567,583 | 39,780,708 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to W. P. Carey Members
|
||||||||||||||||
|
Income from continuing operations, net of tax
|
$ | 24,155 | $ | 14,677 | $ | 42,628 | $ | 31,559 | ||||||||
|
(Loss) income from discontinued operations, net of tax
|
(723 | ) | 300 | (4,783 | ) | 1,127 | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 23,432 | $ | 14,977 | $ | 37,845 | $ | 32,686 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Distributions Declared Per Share
|
$ | 0.506 | $ | 0.498 | $ | 1.010 | $ | 0.994 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2010 10-Q
—
3
Table of Contents
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net Income
|
$ | 23,721 | $ | 14,877 | $ | 38,023 | $ | 32,651 | ||||||||
|
Other Comprehensive (Loss) Income:
|
||||||||||||||||
|
Foreign currency translation adjustments
|
(4,627 | ) | 3,284 | (8,034 | ) | (144 | ) | |||||||||
|
Unrealized (loss) gain on derivative instrument
|
(735 | ) | 163 | (1,295 | ) | (101 | ) | |||||||||
|
Change in unrealized appreciation on marketable securities
|
(7 | ) | 31 | (11 | ) | 13 | ||||||||||
|
|
||||||||||||||||
|
|
(5,369 | ) | 3,478 | (9,340 | ) | (232 | ) | |||||||||
|
|
||||||||||||||||
|
Comprehensive Income
|
18,352 | 18,355 | 28,683 | 32,419 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to Noncontrolling Interests:
|
||||||||||||||||
|
Net loss
|
128 | 203 | 414 | 373 | ||||||||||||
|
Foreign currency translation adjustments
|
26 | (105 | ) | 145 | (4 | ) | ||||||||||
|
|
||||||||||||||||
|
Comprehensive loss attributable to noncontrolling interests
|
154 | 98 | 559 | 369 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to Redeemable Noncontrolling
Interests:
|
||||||||||||||||
|
Net income
|
(417 | ) | (103 | ) | (592 | ) | (338 | ) | ||||||||
|
Foreign currency translation adjustments
|
16 | (10 | ) | 17 | (8 | ) | ||||||||||
|
|
||||||||||||||||
|
Comprehensive income attributable to redeemable
noncontrolling
interests
|
(401 | ) | (113 | ) | (575 | ) | (346 | ) | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Comprehensive Income Attributable to W. P. Carey Members
|
$ | 18,105 | $ | 18,340 | $ | 28,667 | $ | 32,442 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2010 10-Q
—
4
Table of Contents
W. P. CAREY & CO. LLC
(in thousands)
| Six months ended June 30, | ||||||||
| 2010 | 2009 | |||||||
|
Cash Flows — Operating Activities
|
||||||||
|
Net income
|
$ | 38,023 | $ | 32,651 | ||||
|
Adjustments to net income:
|
||||||||
|
Depreciation and amortization including intangible assets and deferred financing costs
|
12,377 | 12,757 | ||||||
|
Income from equity investments in real estate and CPA
®
REITs in excess of
distributions received
|
(5,942 | ) | (3,157 | ) | ||||
|
Straight-line rent and financing lease adjustments
|
429 | 967 | ||||||
|
Gain on sale of real estate
|
(460 | ) | (343 | ) | ||||
|
Gain on extinguishment of debt
|
— | (6,991 | ) | |||||
|
Allocation of (loss) earnings to profit sharing interest
|
(373 | ) | 3,875 | |||||
|
Management income received in shares of affiliates
|
(17,344 | ) | (15,414 | ) | ||||
|
Unrealized loss (gain) on foreign currency transactions and others
|
860 | (39 | ) | |||||
|
Realized loss (gain) on foreign currency transactions and others
|
143 | (126 | ) | |||||
|
Impairment charges
|
8,137 | 2,280 | ||||||
|
Stock-based compensation expense
|
4,936 | 5,260 | ||||||
|
Deferred acquisition revenue received
|
17,048 | 22,877 | ||||||
|
Increase in structuring revenue receivable
|
(9,352 | ) | (5,416 | ) | ||||
|
Decrease in income taxes, net
|
(6,116 | ) | (8,454 | ) | ||||
|
Net changes in other operating assets and liabilities
|
(6,075 | ) | (6,044 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
36,291 | 34,683 | ||||||
|
|
||||||||
|
|
||||||||
|
Cash Flows — Investing Activities
|
||||||||
|
Distributions received from equity investments in real estate and CPA
®
REITs
in excess of equity income
|
7,762 | 7,606 | ||||||
|
Purchases of real estate and equity investments in real estate
|
(74,904 | ) | (39,677 | ) | ||||
|
VAT paid in connection with acquisition of real estate
|
(4,222 | ) | — | |||||
|
Capital expenditures
|
(1,652 | ) | (6,929 | ) | ||||
|
Proceeds from sale of real estate
|
9,200 | 3,835 | ||||||
|
Funds released from escrow in connection with the sale of property
|
36,132 | — | ||||||
|
Proceeds from transfer of profit sharing interest
|
— | 21,928 | ||||||
|
|
||||||||
|
Net cash used in investing activities
|
(27,684 | ) | (13,237 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Cash Flows — Financing Activities
|
||||||||
|
Distributions paid
|
(52,490 | ) | (39,060 | ) | ||||
|
Contributions from noncontrolling interests
|
11,180 | 1,583 | ||||||
|
Distributions to noncontrolling interests
|
(1,444 | ) | (3,474 | ) | ||||
|
Distributions to profit sharing interest
|
(693 | ) | (3,434 | ) | ||||
|
Scheduled payments of mortgage principal
|
(10,322 | ) | (5,241 | ) | ||||
|
Prepayments of mortgage principal
|
— | (11,918 | ) | |||||
|
Proceeds from mortgage financing
|
6,315 | 39,000 | ||||||
|
Proceeds from line of credit
|
83,250 | 88,500 | ||||||
|
Prepayments of line of credit
|
(22,500 | ) | (72,018 | ) | ||||
|
Proceeds from loans from affiliates
|
— | 1,624 | ||||||
|
Payment of financing costs
|
(301 | ) | (806 | ) | ||||
|
Proceeds from issuance of shares
|
799 | 874 | ||||||
|
Windfall tax (provision) benefits associated with stock-based compensation awards
|
(159 | ) | 242 | |||||
|
Repurchase and retirement of shares
|
— | (10,686 | ) | |||||
|
|
||||||||
|
Net cash provided by (used in) financing activities
|
13,635 | (14,814 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Change in Cash and Cash Equivalents During the Period
|
||||||||
|
Effect of exchange rate changes on cash
|
(1,243 | ) | 38 | |||||
|
|
||||||||
|
Net increase in cash and cash equivalents
|
20,999 | 6,670 | ||||||
|
Cash and cash equivalents, beginning of period
|
18,450 | 16,799 | ||||||
|
|
||||||||
|
Cash and cash equivalents, end of period
|
$ | 39,449 | $ | 23,469 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2010 10-Q
—
5
Table of Contents
W.
P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
W. P. Carey & Co. LLC (“W. P. Carey” and, together with its consolidated subsidiaries and
predecessors, “we”, “us” or “our”) provides long-term financing via sale-leaseback and
build-to-suit transactions for companies worldwide and manages a global investment portfolio. We
invest primarily in commercial properties domestically and internationally that are each triple-net
leased to single corporate tenants, which requires each tenant to pay substantially all of the
costs associated with operating and maintaining the property. We also earn revenue as the advisor
to publicly owned, non-listed real estate investment trusts, which are sponsored by us under the
Corporate Property Associates brand name (the “CPA
®
REITs”) and invest in
similar properties. We are currently the advisor to the following CPA
®
REITs:
Corporate Property Associates 14 Incorporated (“CPA
®
:14”), Corporate Property
Associates 15 Incorporated (“CPA
®
:15”), Corporate Property Associates 16 —
Global Incorporated (“CPA
®
:16 — Global”) and Corporate Property Associates
17 — Global Incorporated (“CPA
®
:17 — Global”). At June 30, 2010, we owned
and managed 922 properties domestically and internationally. Our own portfolio was comprised of our
full or partial ownership interest in 167 properties, substantially all of which were net leased to
80 tenants, and totaled approximately 14 million square feet (on a pro rata basis) with an
occupancy rate of approximately 92%.
Primary Business Segments
Investment Management
— We structure and negotiate investments and debt placement transactions for
the CPA
®
REITs, for which we earn structuring revenue, and manage their portfolios of
real estate investments, for which we earn asset-based management and performance revenue. We earn
asset-based management and performance revenue from the CPA
®
REITs based on the value of
their real estate-related assets under management. As funds available to the CPA
®
REITs
are invested, the asset base from which we earn revenue increases. In addition, we also receive a
percentage of distributions of available cash from CPA
®
:17 — Global’s operating
partnership. We may also earn incentive and disposition revenue and receive other compensation in
connection with providing liquidity alternatives to CPA
®
REIT shareholders.
Real Estate Ownership
— We own and invest in commercial properties in the United States of America
(“U.S.”) and the European Union that are then leased to companies, primarily on a triple-net leased
basis. We may also invest in other properties if opportunities arise.
Our interim consolidated financial statements have been prepared, without audit, in accordance with
the instructions to Form 10-Q and, therefore, do not necessarily include all information and
footnotes necessary for a fair statement of our consolidated financial position, results of
operations and cash flows in accordance with accounting principles generally accepted in the U.S.
(“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented
in this Report reflects all normal and recurring adjustments necessary for a fair statement of
results of operations, financial position and cash flows. Our interim consolidated financial
statements should be read in conjunction with our audited consolidated financial statements and
accompanying notes for the year ended December 31, 2009, which are included in our 2009 Annual
Report, as certain disclosures that would substantially duplicate those contained in the audited
consolidated financial statements have not been included in this Report. Operating results for
interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts
in our consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to conform to the current
year presentation.
Basis of Consolidation
The consolidated financial statements affect all of our accounts, including those of our
majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not
attributable, directly or indirectly, to us is presented as noncontrolling interests. All
significant intercompany accounts and transactions have been eliminated. We hold investments in
tenant-in-common interests, which we account for as equity investments in real estate under current
authoritative accounting guidance.
W. P. Carey 6/30/2010 10-Q
—
6
Table of Contents
Notes to Consolidated Financial Statements
We formed Carey Watermark Investors Incorporated (“Carey Watermark”) in March 2008 for the
purpose of acquiring interests in lodging and lodging related properties. In April 2010, we filed a
registration statement with the SEC to sell up to $1 billion of common stock of Carey Watermark in
an initial public offering plus up to an additional $237.5 million of its common stock under a
dividend reinvestment plan. This registration statement has not been declared effective by the SEC
as of the date of this Report. As of and during the three and six months ended June 30, 2010 and
2009, the financial statements of Carey Watermark, which had no significant assets, liabilities or
operations during either period, were included in our consolidated financial statements, as we
owned all of Carey Watermark’s outstanding common stock.
In June 2009, the Financial Accounting Standard Board (“FASB”) issued amended guidance related to
the consolidation of variable interest entities (“VIEs”). The amended guidance affects the overall
consolidation analysis, changing the approach taken by companies in identifying which entities are
VIEs and in determining which party is the primary beneficiary, and requires an enterprise to
qualitatively assess the determination of the primary beneficiary of a VIE based on whether the
entity (1) has the power to direct matters that most significantly impact the activities of the
VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. The amended guidance changes the consideration of
kick-out rights in determining if an entity is a VIE, which may cause certain additional entities
to now be considered VIEs. Additionally, the guidance requires an ongoing reconsideration of the
primary beneficiary and provides a framework for the events that trigger a reassessment of whether
an entity is a VIE. We adopted this amended guidance on January 1, 2010, which did not require
consolidation of any additional VIEs, but we have reflected the assets and liabilities related to
previously consolidated VIEs, of which we are the primary beneficiary and which we consolidate,
separately in our consolidated balance sheets for all periods presented. The adoption of this
amended guidance did not affect our financial position and results of operations.
Additionally, in February 2010, the FASB issued further guidance, which provided a limited scope
deferral for an interest in an entity that meets all of the following conditions: (a) the entity
has all the attributes of an investment company as defined under AICPA Audit and Accounting Guide,
Investment Companies, or does not have all the attributes of an investment company but is an entity
for which it is acceptable based on industry practice to apply measurement principles that are
consistent with the AICPA Audit and Accounting Guide, Investment Companies, (b) the reporting
entity does not have explicit or implicit obligations to fund any losses of the entity that could
potentially be significant to the entity, and (c) the entity is not a securitization entity,
asset-based financing entity or an entity that was formerly considered a qualifying special-purpose
entity. We evaluated our involvement with the CPA
®
REITs and concluded that all three
of the above conditions were met for the limited scope deferral. Accordingly, we continued to
perform our consolidation analysis for the CPA
®
REITs in accordance with previously
issued guidance on VIEs.
In connection with the adoption of the amended guidance on consolidating VIEs, we performed an
analysis of all of our subsidiary entities, including our venture entities with other parties, to
determine whether they qualify as VIEs and whether they should be consolidated or accounted for as
equity investments in an unconsolidated venture. As a result of our quantitative and qualitative
assessment to determine whether these entities are VIEs, we identified four entities that were
deemed to be VIEs. Three of these entities were deemed VIEs as the third-party tenant that leases
property from each entity has the right to repurchase the property during the term of their lease
at a fixed price. The fourth entity was deemed a VIE as a third party was deemed to have the right
to receive the expected residual returns of the entity. The nature of operations and organizational
structure of these four VIEs are consistent with our other entities (Note 1) except for the
repurchase and residual returns rights of these entities.
After making the determination that these entities were VIEs, we performed an assessment as to
which party would be considered the primary beneficiary of each entity and would be required to
consolidate each entity’s balance sheet and results of operations. This assessment was based upon
which party (1) had the power to direct activities that most significantly impact the entity’s
economic performance and (2) had the obligation to absorb the expected losses of or right to
receive benefits from the VIE that could potentially be significant to the VIE. Based on our
assessment, it was determined that we would continue to consolidate the four VIEs. Activities that
we considered significant in our assessment included which entity had control over financing
decisions, leasing decisions and ability to sell the entity’s assets.
Because we generally utilize non-recourse debt, our maximum exposure to any VIE is limited to the
equity we have in each VIE. We have not provided financial or other support to any VIE, and there
were no guarantees or other commitments from third parties that would affect the value of or risk
related to our interest in these entities.
Acquisition Costs
In accordance with the FASB’s revised guidance for business combinations, which we adopted on
January 1, 2009, we immediately expense all acquisition costs and fees associated with transactions
deemed to be business combinations, but we capitalize these costs for transactions deemed to be
acquisitions of an asset. We may be impacted by the revised guidance through both the investments
we make for our own portfolio as well as our equity interests in the CPA
®
REITs. To the
extent we make investments for our own portfolio or on behalf of the CPA
®
REITs that are
deemed to be business combinations, our results of operations will be negatively impacted by the
immediate expensing of acquisition costs and fees incurred in accordance with the revised guidance,
whereas in the past such costs and fees would generally have been capitalized and allocated to the
cost basis of the acquisition. Post acquisition, there will be a subsequent positive impact on our
results of operations through a reduction in depreciation expense over the estimated life of the
properties.
W. P. Carey 6/30/2010 10-Q
—
7
Table of Contents
Notes to Consolidated Financial Statements
During 2010, we entered into two investments that were deemed to be real estate asset
acquisitions, and as a result we capitalized acquisition-related costs of $1.0 million and $1.1
million for the three and six months ended June 30, 2010, respectively, in each case inclusive of
amounts attributable to noncontrolling interest of $0.6 million. Acquisition-related costs and fees
capitalized by the CPA
®
REITs totaled $17.0 million and $0.1 million for the three
months ended June 30, 2010 and 2009, respectively, and $24.0 million and $10.9 million for the six
months ended June 30, 2010 and 2009, respectively. In May 2010, we acquired a hotel investment on
behalf of CPA
®
:17 — Global that was deemed to be a business combination. In connection
with this investment, CPA
®
:17 — Global expensed acquisition-related costs and fees of
$0.8 million. All investments structured on behalf of the CPA
®
REITs were deemed to be
real estate asset acquisitions except for this hotel investment.
Advisory Agreements with the CPA
®
REITs
We have advisory agreements with each of the CPA
®
REITs pursuant to which we earn certain fees. The agreements that
are currently in effect expire on September 30, 2010, but were recently renewed for an additional year pursuant to
their terms.
The following table presents a summary of revenue earned and cash received from the CPA
®
REITs in connection with providing services as the advisor to the CPA
®
REITs (in
thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Asset management revenue
|
$ | 19,080 | $ | 19,227 | $ | 37,900 | $ | 38,335 | ||||||||
|
Structuring revenue
|
13,102 | 365 | 19,936 | 10,774 | ||||||||||||
|
Wholesaling revenue
|
2,230 | 1,597 | 4,333 | 2,690 | ||||||||||||
|
Reimbursed costs from affiliates
|
15,354 | 11,115 | 30,402 | 20,111 | ||||||||||||
|
Distributions of available cash
(CPA
®
:17 — Global
only)
|
1,187 | — | 1,693 | 583 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 50,953 | $ | 32,304 | $ | 94,264 | $ | 72,493 | ||||||||
|
|
||||||||||||||||
Asset Management Revenue
We earn asset management revenue totaling 1% per annum of average invested assets, which is
calculated according to the advisory agreements for each CPA
®
REIT. A portion of this
asset management revenue is contingent upon the achievement of specific performance criteria for
each CPA
®
REIT, which is generally defined to be a cumulative distribution return for
shareholders of the CPA
®
REIT. For CPA
®
:14, CPA
®
:15 and
CPA
®
:16 — Global, this performance revenue is generally equal to 0.5% of the average
invested assets of the CPA
®
REIT. For CPA
®
:17 — Global, we earn asset
management revenue ranging from 0.5% of average market value for long-term net leases and certain
other types of real estate investments up to 1.75% of average equity value for certain types of
securities. For CPA
®
:17 — Global, we receive up to 10% of distributions of available
cash from its operating partnership. Distributions of available cash from CPA
®
:17 —
Global’s operating partnership are recorded as income from equity investments in CPA
®
REITs within the investment management segment.
Under the terms of the advisory agreements, we may elect to receive cash or shares of restricted
stock for any revenue due from each CPA
®
REIT. In both 2010 and 2009, we elected to
receive all asset management revenue in cash, with the exception of CPA
®
:17 — Global’s
asset management revenue, which we elected to receive in restricted shares. For both 2010 and 2009,
we also elected to receive performance revenue from CPA
®
:16 — Global in restricted
shares, while for CPA
®
:14 and CPA
®
:15 we elected to receive 80% of all
performance revenue in restricted shares, with the remaining 20% payable in cash.
Structuring Revenue
We earn revenue in connection with structuring and negotiating investments and related mortgage
financing for the CPA
®
REITs. We may receive acquisition revenue of up to an average of
4.5% of the total cost of all investments made by each CPA
®
REIT. A portion of this
revenue (generally 2.5%) is paid when the transaction is completed, while the remainder (generally
2%) is payable in annual installments ranging from three to eight years, provided the relevant
CPA
®
REIT meets its performance criterion. Unpaid installments bear interest at annual
rates ranging from 5% to 7%. Interest earned on unpaid installments was $0.3 million and $0.4
million for the three months ended June 30, 2010 and 2009, respectively, and $0.5 million and $0.7
million for the six months ended June 30, 2010 and 2009, respectively. For certain types of
non-long term net lease investments acquired on behalf of CPA
®
:17 — Global, initial
acquisition revenue may range from 0% to 1.75% of the equity invested plus the related acquisition
revenue, with no deferred acquisition revenue being earned. We may also be entitled, subject to
CPA
®
REIT board approval, to fees for structuring loan refinancings of up to 1% of the
principal amount. This loan refinancing revenue, together with the acquisition revenue, is referred
to as structuring revenue. In addition, we may also earn revenue related to the sale of properties,
subject to subordination provisions. We will only recognize this revenue if we meet the
subordination provisions.
W. P. Carey 6/30/2010 10-Q
—
8
Table of Contents
Notes to Consolidated Financial Statements
Reimbursed Costs from Affiliates and Wholesaling Revenue
The CPA
®
REITs reimburse us for certain costs, primarily broker/dealer commissions paid
on behalf of the CPA
®
REITs and marketing and personnel costs. In addition, under the
terms of a sales agency agreement between our wholly-owned broker-dealer subsidiary and
CPA
®
:17 — Global, we earn a selling commission of up to $0.65 per share sold, selected
dealer revenue of up to $0.20 per share sold and/or wholesaling revenue for selected dealers or
investment advisors of up to $0.15 per share sold. We re-allow all or a portion of the selling
commissions to selected dealers participating in CPA
®
:17 — Global’s offering and may
re-allow up to the full selected dealer revenue to selected dealers. If needed, we will use any
retained portion of the selected dealer revenue together with the wholesaling revenue to cover
other underwriting costs incurred in connection with CPA
®
:17 — Global’s offering. Total
underwriting compensation earned in connection with CPA
®
:17 — Global’s offering,
including selling commissions, selected dealer revenue, wholesaling revenue and reimbursements made
by us to selected dealers, cannot exceed the limitations prescribed by the Financial Industry
Regulatory Authority (“FINRA”). The limit on underwriting compensation is currently 10% of gross
offering proceeds. We may also be reimbursed up to an additional 0.5% of the gross offering
proceeds for bona fide due diligence expenses.
Other Transactions with Affiliates
We are the general partner in a limited partnership (which we consolidate for financial statement
purposes) that leases our home office space and participates in an agreement with certain
affiliates, including the CPA
®
REITs, for the purpose of leasing office space used for
the administration of our operations and the operations of our affiliates and for sharing the
associated costs. This limited partnership does not have any significant assets, liabilities or
operations other than its interest in the office lease. During each of the three month periods
ended June 30, 2010 and 2009 and each of the six month periods ended June 30, 2010 and 2009, we
recorded income from noncontrolling interest partners of $0.6 million and $1.2 million,
respectively, in each case related to reimbursements from these affiliates. The average estimated
minimum lease payments on the office lease, inclusive of noncontrolling interests, at June 30, 2010
approximates $2.9 million annually through 2016.
We own interests in entities ranging from 5% to 95%, as well as jointly-controlled tenant-in-common
interests in properties, with the remaining interests generally held by affiliates, and own common
stock in each of the CPA
®
REITs. We consolidate certain of these investments and account
for the remainder under the equity method of accounting.
One of our directors and officers is the sole shareholder of Livho, Inc. (“Livho”), a subsidiary
that operates a hotel investment. We consolidate the accounts of Livho in our consolidated
financial statements in accordance with current accounting guidance for consolidation of VIEs
because it is a VIE and we are its primary beneficiary.
Family members of one of our directors have an ownership interest in certain companies that own
noncontrolling interests in one of our French majority-owned subsidiaries. These ownership
interests are subject to substantially the same terms as all other ownership interests in the
subsidiary companies.
An employee owns a redeemable noncontrolling interest in W. P. Carey International LLC (“WPCI”), a
subsidiary company that structures net lease transactions on behalf of the CPA
®
REITs
outside of the U.S., as well as certain related entities.
Included in Accounts payable, accrued expenses and other liabilities in the consolidated balance
sheets at each of June 30, 2010 and December 31, 2009 are amounts due to affiliates totaling $0.9
million.
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows (in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
|
Land
|
$ | 110,323 | $ | 98,971 | ||||
|
Buildings
|
449,118 | 426,636 | ||||||
|
Less: Accumulated depreciation
|
(100,287 | ) | (100,247 | ) | ||||
|
|
||||||||
|
|
$ | 459,154 | $ | 425,360 | ||||
|
|
||||||||
W. P. Carey 6/30/2010 10-Q
—
9
Table of Contents
Notes to Consolidated Financial Statements
Operating Real Estate
Operating real estate, which consists primarily of our self-storage investments and our Livho
subsidiary, at cost, is summarized as follows (in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
|
Land
|
$ | 16,257 | $ | 16,257 | ||||
|
Buildings
|
69,703 | 69,670 | ||||||
|
Less: Accumulated depreciation
|
(13,061 | ) | (12,039 | ) | ||||
|
|
||||||||
|
|
$ | 72,899 | $ | 73,888 | ||||
|
|
||||||||
Real Estate Acquired
In February 2010, we entered into a domestic investment that was deemed to be a real estate asset
acquisition at a total cost of $47.6 million and capitalized acquisition-related costs of $0.1
million. We funded the investment with the escrowed proceeds of $36.1 million from a sale of
property in December 2009 in an exchange transaction under Section 1031 of the Internal Revenue
Code of 1986, as amended (the “Code”), and $11.5 million from our line of credit. In July 2010, we
obtained non-recourse mortgage financing of $35.0 million for this investment at an annual interest
rate of LIBOR plus 2.5% that has been fixed at 5.5% through the use of an interest rate swap. This
financing has a term of 10 years.
In June 2010, a venture in which we and an affiliate hold 70% and 30% interests, respectively, and
which we consolidate, entered into an investment in Spain for a total cost of $27.2 million,
inclusive of noncontrolling interest of $8.4 million. We funded our share of the purchase price
with proceeds from our line of credit. In connection with this transaction, which was deemed to be
a real estate asset acquisition, we capitalized acquisition-related costs and fees totaling $1.0
million, inclusive of amounts attributable to noncontrolling interest of $0.6 million. Dollar
amounts are based on the exchange rate of the Euro on the date of acquisition.
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 in 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 real estate to the future net undiscounted cash flow that we
expect the real estate will generate, including any estimated proceeds from the eventual sale of
the real estate. If this amount is less than the carrying value, the real estate is considered to
be impaired, and we then measure the loss as the excess of the carrying value of the real estate
over the estimated fair value of the real estate, which is primarily determined using market
information such as recent comparable sales or broker quotes. If relevant market information is not
available or is not deemed appropriate, we then perform a future net cash flow analysis discounted
for inherent risk associated with each investment.
During the first quarter of 2010, we recognized an impairment charge of $2.3 million on a property
to reduce the carrying value of a property to its estimated fair value, which reflects the
estimated selling price. This property is being marketed for sale as a result of the tenant
vacating the property.
During the second quarter of 2009, we recognized impairment charges totaling $0.9 million on two
vacant properties to reduce these properties’ carrying values to their expected selling prices at
that time. Refer to Note 13 for information on impairment charges on our discontinued operations.
Other
In connection with our acquisition of properties, we have recorded net lease intangibles of $39.7
million, which are being amortized over periods ranging from one year to 29 years. Amortization of
below-market and above-market rent intangibles is recorded as an adjustment to lease revenues,
while amortization of in-place lease and tenant relationship intangibles is included in
Depreciation and amortization. Below-market rent intangibles are included in Accounts payable,
accrued expenses and other liabilities in the consolidated financial statements. Net amortization
of intangibles was $1.3 million and $1.6 million for the three months ended June 30, 2010 and 2009,
respectively, and $3.1 million and $3.3 million for the six months ended June 30, 2010 and 2009,
respectively.
W. P. Carey 6/30/2010 10-Q
—
10
Table of Contents
Notes to Consolidated Financial Statements
Our equity investments in real estate for our investments in the CPA
®
REITs and for our
interests in unconsolidated real estate investments are summarized below.
CPA
®
REITs
We own interests in the CPA
®
REITs and account for these interests under the equity
method because, as their advisor, we do not exert control but have the ability to exercise
significant influence. Shares of the CPA
®
REITs are publicly registered and the
CPA
®
REITs file periodic reports with the SEC, but the shares are not listed on any
exchange and are not actively traded. We earn asset management and performance revenue from the
CPA
®
REITs and have elected, in certain cases, to receive a portion of this revenue in
the form of restricted common stock of the CPA
®
REITs rather than cash.
The following table sets forth certain information about our investments in the CPA
®
REITs (dollars in thousands):
| % of Outstanding Shares at | Carrying Amount of Investment at | |||||||||||||||
| Fund | June 30, 2010 | December 31, 2009 | June 30, 2010 (a) | December 31, 2009 (a) | ||||||||||||
|
CPA
®
:14
|
8.9 | % | 8.5 | % | $ | 84,191 | $ | 79,906 | ||||||||
|
CPA
®
:15
|
6.8 | % | 6.5 | % | 82,654 | 78,816 | ||||||||||
|
CPA
®
:16 — Global
|
5.1 | % | 4.7 | % | 58,218 | 53,901 | ||||||||||
|
CPA
®
:17 —
Global
(b)
|
0.5 | % | 0.4 | % | 5,374 | 3,328 | ||||||||||
|
|
||||||||||||||||
|
|
$ | 230,437 | $ | 215,951 | ||||||||||||
|
|
||||||||||||||||
| (a) | Includes asset management fee receivable at period end for which shares will be issued during the subsequent period. | |
| (b) | CPA ® :17 — Global has been deemed to be a VIE in which we are not the primary beneficiary (Note 2). |
The following tables present combined summarized financial information for the CPA
®
REITs. Amounts provided are the total amounts attributable to the CPA
®
REITs and do not
represent our proportionate share (in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
$ | 8,350,867 | $ | 8,468,955 | ||||
|
Liabilities
|
(4,475,544 | ) | (4,638,552 | ) | ||||
|
|
||||||||
|
Shareholders’ equity
|
$ | 3,875,323 | $ | 3,830,403 | ||||
|
|
||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 201,334 | $ | 190,557 | $ | 394,088 | $ | 370,487 | ||||||||
|
Expenses
|
(152,792 | ) | (158,565 | ) | (306,510 | ) | (350,701 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 48,542 | $ | 31,992 | $ | 87,578 | $ | 19,786 | ||||||||
|
|
||||||||||||||||
We recognized income from our equity investments in the CPA
®
REITs of
$4.0 million and $1.8 million for the three months ended June 30, 2010 and 2009, respectively, and
$6.8 million and $0.6 million for the six months ended June 30, 2010 and 2009, respectively. Our
proportionate share of income or loss recognized from our equity investments in the CPA
®
REITs is impacted by several factors, including impairment charges recorded by the CPA
®
REITs. During the three months ended June 30, 2010 and 2009, the CPA
®
REITs recognized
impairment charges totaling $0.5 million and $15.0 million, respectively, which reduced the income
we earned from these investments by less than $0.1 million and $0.8 million, respectively. During
the six months ended June 30, 2010 and 2009, impairment charges recognized by the CPA
®
REITs totaled $10.7 million and $54.6 million, respectively, which reduced the income we earned
from these investments by $0.7 million and $2.8 million, respectively.
Interests in Unconsolidated Real Estate Investments
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies which we do not
control, but over which we exercise significant influence, and (ii) as tenants-in-common subject to
common control. All of the underlying investments are generally owned with affiliates. We account
for these investments
under the equity method of accounting (i.e., at cost, increased or decreased by our share of
earnings or losses, less distributions, plus contributions and other adjustments required by equity
method accounting, such as basis differences from other-than-temporary impairments).
W. P. Carey 6/30/2010 10-Q
—
11
Table of Contents
Notes to Consolidated Financial Statements
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values. The carrying value of these ventures is affected by the timing
and nature of distributions (dollars in thousands):
| Ownership Interest | Carrying Value at | |||||||||||
| Lessee | at June 30, 2010 | June 30, 2010 | December 31, 2009 | |||||||||
|
Schuler A.G.
(a) (b)
|
33 | % | $ | 21,427 | $ | 23,755 | ||||||
|
The New York Times Company
|
18 | % | 19,767 | 19,740 | ||||||||
|
Carrefour France, SAS
(a)
|
46 | % | 16,294 | 17,570 | ||||||||
|
U. S. Airways Group, Inc.
(b)
|
75 | % | 8,188 | 8,927 | ||||||||
|
Medica — France, S.A.
(a) (c)
|
46 | % | 4,656 | 6,160 | ||||||||
|
Hologic, Inc.
(b)
|
36 | % | 4,555 | 4,388 | ||||||||
|
Consolidated Systems, Inc.
(b)
|
60 | % | 3,380 | 3,395 | ||||||||
|
Information Resources, Inc.
|
33 | % | 2,918 | 2,270 | ||||||||
|
Hellweg Die Profi-Baumarkte GmbH & Co.
KG
(a)
|
5 | % | 2,656 | 2,639 | ||||||||
|
Childtime Childcare, Inc.
|
34 | % | 1,831 | 1,843 | ||||||||
|
Federal Express Corporation
|
40 | % | 1,708 | 1,976 | ||||||||
|
The Retail Distribution Group
(d)
|
40 | % | — | 1,099 | ||||||||
|
Amylin Pharmaceuticals, Inc.
(e)
|
50 | % | (4,737 | ) | (4,723 | ) | ||||||
|
|
||||||||||||
|
|
$ | 82,643 | $ | 89,039 | ||||||||
|
|
||||||||||||
| (a) | Carrying value of the investment is affected by the impact of fluctuations in the exchange rate of the Euro. | |
| (b) | Represents tenant-in-common interest. | |
| (c) | The decrease in carrying value was due to cash distributions made to us by the venture. | |
| (d) | In March 2010, this venture sold its property, recognized a gain of $2.5 million and distributed the proceeds to the venture partners. We have no further economic interest in this venture. | |
| (e) | In 2007, this venture refinanced its existing non-recourse mortgage debt with new non-recourse financing of $35.4 million based on the appraised value of the underlying real estate of the venture and distributed the proceeds to the venture partners. Our share of the distribution was $17.6 million, which exceeded our total investment in the venture at that time. |
As discussed in Note 2, we adopted the FASB’s amended guidance on consolidating VIEs effective
January 1, 2010. Upon adoption of the amended guidance, we re-evaluated our existing interests in
unconsolidated entities and determined that we should continue to account for our interests in The
New York Times and Hellweg ventures using the equity method of accounting primarily because the
partners in each of these ventures has the power to direct the activities that most significantly
impact the entity’s economic performance, including disposal rights of the property. Carrying
amounts related to these VIEs are noted in the table above. Because we generally utilize
non-recourse debt, our maximum exposure to either VIE is limited to the equity we have in each VIE.
We have not provided financial or other support to either VIE, and there are no guarantees or other
commitments from third parties that would affect the value or risk of our interest in such
entities.
The following tables present combined summarized financial information of our venture properties.
Amounts provided are the total amounts attributable to the venture properties and do not represent
our proportionate share (in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
$ | 1,395,873 | $ | 1,452,103 | ||||
|
Liabilities
|
(807,484 | ) | (714,558 | ) | ||||
|
|
||||||||
|
Partners’/members’ equity
|
$ | 588,389 | $ | 737,545 | ||||
|
|
||||||||
W. P. Carey 6/30/2010 10-Q
—
12
Table of Contents
Notes to Consolidated Financial Statements
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 37,849 | $ | 37,263 | $ | 76,058 | $ | 69,011 | ||||||||
|
Expenses
|
(19,948 | ) | (16,100 | ) | (39,657 | ) | (32,721 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 17,901 | $ | 21,163 | $ | 36,401 | $ | 36,290 | ||||||||
|
|
||||||||||||||||
We recognized income from these equity investments in real estate of approximately $3.7
million and $3.1 million for the three months ended June 30, 2010 and 2009, respectively, and $9.9
million and $5.7 million for the six months ended June 30, 2010 and 2009, respectively. Income from
equity investments in real estate represents our proportionate share of the income or losses of
these
ventures as well as certain depreciation and amortization adjustments related to purchase
accounting and other-than-temporary impairment charges.
Equity Investment in Direct Financing Lease Acquired
In March 2009, an entity in which we, CPA
®
:16 — Global and CPA
®
:17 — Global
hold 17.75%, 27.25% and 55% interests, respectively, completed a net lease financing transaction
with respect to a leasehold condominium interest, encompassing approximately 750,000 rentable
square feet, in the office headquarters of The New York Times Company for approximately $233.7
million. Our share of the purchase price was approximately $40 million, which we funded with
proceeds from our line of credit. We account for this investment under the equity method of
accounting as we do not have a controlling interest in the entity but exercise significant
influence over it. In connection with this investment, which was deemed a direct financing lease,
the venture capitalized costs and fees totaling $8.7 million. In August 2009, the venture obtained
mortgage financing on the New York Times property of $119.8 million at an annual interest rate of
LIBOR plus 4.75% that has been capped at 8.75% through the use of an interest rate cap. This
financing has a term of five years.
Under current authoritative accounting guidance for 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 and swaps; and Level 3, for which little or no market data
exists, therefore requiring us to develop our own assumptions, such as certain securities.
Items Measured at Fair Value on a Recurring Basis
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis at June 30, 2010 and December 31, 2009 (in thousands):
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||
| Description | June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Money market funds
|
$ | 15,752 | $ | 15,752 | $ | — | $ | — | ||||||||
|
Other securities
|
1,717 | — | — | 1,717 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 17,469 | $ | 15,752 | $ | — | $ | 1,717 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 1,108 | $ | — | $ | 1,108 | $ | — | ||||||||
|
Redeemable
noncontrolling
interest
|
7,119 | — | — | 7,119 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 8,227 | $ | — | $ | 1,108 | $ | 7,119 | ||||||||
|
|
||||||||||||||||
W. P. Carey 6/30/2010 10-Q
—
13
Table of Contents
Notes to Consolidated Financial Statements
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||
| Description | December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Money market funds
|
$ | 4,283 | $ | 4,283 | $ | — | $ | — | ||||||||
|
Other securities
|
1,687 | — | — | 1,687 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 5,970 | $ | 4,283 | $ | — | $ | 1,687 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 634 | $ | — | $ | 634 | $ | — | ||||||||
|
Redeemable
noncontrolling
interest
|
7,692 | — | — | 7,692 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 8,326 | $ | — | $ | 634 | $ | 7,692 | ||||||||
|
|
||||||||||||||||
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated
ventures.
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interests | Securities | Interests | |||||||||||||
| Three months ended June 30, 2010 | Three months ended June 30, 2009 | |||||||||||||||
|
Beginning balance
|
$ | 1,690 | $ | 7,411 | $ | 1,620 | $ | 15,326 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
— | 417 | — | 103 | ||||||||||||
|
Included in other comprehensive income (loss)
|
4 | (16 | ) | 6 | 10 | |||||||||||
|
Purchases, issuances and settlements
|
23 | — | 45 | — | ||||||||||||
|
Distributions paid
|
— | (155 | ) | — | (201 | ) | ||||||||||
|
Redemption value adjustment
|
— | (538 | ) | — | (112 | ) | ||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,717 | $ | 7,119 | $ | 1,671 | $ | 15,126 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
The amount of total gains or losses for the
period included in earnings (or changes in net
assets) attributable to the change in
unrealized gains or losses relating to assets
still held at the reporting date
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
W. P. Carey 6/30/2010 10-Q
—
14
Table of Contents
Notes to Consolidated Financial Statements
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interests | Securities | Interests | |||||||||||||
| Six months ended June 30, 2010 | Six months ended June 30, 2009 | |||||||||||||||
|
Beginning balance
|
$ | 1,687 | $ | 7,692 | $ | 1,628 | $ | 18,085 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
— | 592 | (1 | ) | 338 | |||||||||||
|
Included in other comprehensive income (loss)
|
7 | (17 | ) | (1 | ) | 8 | ||||||||||
|
Purchases, issuances and settlements
|
23 | — | 45 | — | ||||||||||||
|
Distributions paid
|
— | (610 | ) | — | (2,969 | ) | ||||||||||
|
Redemption value adjustment
|
— | (538 | ) | — | (336 | ) | ||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,717 | $ | 7,119 | $ | 1,671 | $ | 15,126 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
The amount of total gains or losses for the
period included in earnings (or changes in net
assets) attributable to the change in
unrealized gains or losses relating to assets
still held at the reporting date
|
$ | — | $ | — | $ | (1 | ) | $ | — | |||||||
|
|
||||||||||||||||
Gains and losses (realized and unrealized) included in earnings for other securities are
reported in Other income and (expenses) in the consolidated financial statements.
We account for the noncontrolling interest in WPCI as a redeemable noncontrolling interest (Note
10). We determined the valuation of the redeemable noncontrolling interest using widely accepted
valuation techniques, including discounted cash flow on the expected cash flows of the investment
as well as the income capitalization approach, which considers prevailing market capitalization
rates.
Our financial instruments had the following carrying values and fair values as of the dates shown
(in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
|
Non-recourse debt
|
$ | 206,247 | $ | 200,272 | $ | 215,330 | $ | 201,774 | ||||||||
|
Line of credit
|
171,750 | 170,400 | 111,000 | 108,900 | ||||||||||||
|
Other securities
(a)
|
1,705 | 1,717 | 1,681 | 1,687 | ||||||||||||
| (a) | Carrying value represents historical cost for other securities. |
We determined the estimated fair value of our debt instruments and other securities using a
discounted cash flow model with rates that take into account the credit of the tenants and interest
rate risk. We estimated that our other financial assets and liabilities (excluding net investments
in direct financing leases) had fair values that approximated their carrying values at both June
30, 2010 and December 31, 2009.
Items Measured at Fair Value on a Non-Recurring Basis
We perform a quarterly assessment of the value of certain of our real estate investments in
accordance with current authoritative accounting guidance. As part of that assessment, we
determined the valuation of these assets using widely accepted valuation techniques, including
discounted cash flow on the expected cash flows of each asset as well as the income capitalization
approach,
which considers prevailing market capitalization rates. We reviewed each investment based on the
highest and best use of the investment and market participation assumptions. We determined that the
significant inputs used to value these investments fall within Level 3. We calculated the
impairment charges recorded during the three and six months ended June 30, 2010 and 2009 based on
contracted selling prices. The valuation of real estate is subject to significant judgment and
actual results may differ materially if market conditions change.
W. P. Carey 6/30/2010 10-Q
—
15
Table of Contents
Notes to Consolidated Financial Statements
The following table presents information about our nonfinancial assets that were measured on a
fair value basis for the three and six months ended June 30, 2010 and 2009. All impairment charges
were measured using unobservable inputs (Level 3) (in thousands):
| Three months ended June 30, 2010 | Six months ended June 30, 2010 | |||||||||||||||
| Total Fair Value | Total Impairment | Total Fair Value | Total Impairment | |||||||||||||
| Measurements | Charges | Measurements | Charges | |||||||||||||
|
Impairment Charges From Continuing Operations:
|
||||||||||||||||
|
Real estate
|
$ | — | $ | — | $ | 1,011 | $ | 2,268 | ||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued Operations:
|
||||||||||||||||
|
Real estate
|
5,390 | 985 | 5,390 | 5,869 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 5,390 | $ | 985 | $ | 6,401 | $ | 8,137 | ||||||||
|
|
||||||||||||||||
| Three months ended June 30, 2009 | Six months ended June 30, 2009 | |||||||||||||||
| Total Fair Value | Total Impairment | Total Fair Value | Total Impairment | |||||||||||||
| Measurements | Charges | Measurements | Charges | |||||||||||||
|
Impairment Charges From Continuing Operations:
|
||||||||||||||||
|
Real estate
|
$ | 823 | $ | 900 | $ | 823 | $ | 900 | ||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued Operations:
|
||||||||||||||||
|
Real estate
|
4,229 | 1,380 | 4,229 | 1,380 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 5,052 | $ | 2,280 | $ | 5,052 | $ | 2,280 | ||||||||
|
|
||||||||||||||||
In the normal course of our on-going business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of
default on our operations and tenants’ inability or unwillingness to make contractually required
payments. Market risk includes changes in the value of our properties and related loans, changes in
the value of our other securities and changes in the value of the shares we hold in the
CPA
®
REITs due to changes in interest rates or other market factors. In addition, we own
investments in the European Union and are subject to the risks associated with changing foreign
currency exchange rates.
Concentrations of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risks or conditions that could cause them to default
on their lease obligations to us. We regularly monitor our portfolio to assess potential
concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it
does contain concentrations in excess of 10% of current annualized lease revenues in certain areas,
as described below. Although we view our exposure from properties that we purchased together with
our affiliates based on our ownership percentage in these properties, the percentages below are
based on our consolidated ownership and not on our actual ownership percentage in these
investments.
At June 30, 2010, the majority of our directly owned real estate properties were located in the
U.S. (90%), with Texas (21%) and California (14%) representing the most significant geographic
concentrations, based on percentage of our annualized contractual minimum base rent for the second
quarter of 2010. At June 30, 2010, our directly owned real estate properties contain concentrations
in the following asset types: office (35%), industrial (32%) and warehouse/distribution (17%); and
in the following tenant industries: business and commercial services (17%), retail stores (12%) and
telecommunications (11%).
At June 30, 2010, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
We have provided certain representations in connection with divestitures of certain of our
properties. These representations address a variety of matters including environmental liabilities.
We are not aware of any claims or other information that would give rise to material payments under
such representations.
W. P. Carey 6/30/2010 10-Q
—
16
Table of Contents
Notes to Consolidated Financial Statements
Stock
Based Compensation
The total compensation expense (net of forfeitures) for our stock-based compensation plans was $2.5 million and $2.8 million for the three months ended June 30, 2010 and 2009, respectively, and $4.9 million and $5.3 million for the six months ended June 30, 2010 and 2009, respectively. The tax benefit recognized by us related to these plans totaled $1.1 million and $1.3 million for the three months ended June 30, 2010 and 2009, respectively, and $2.2 million and $2.3 million for the six months ended June 30, 2010 and 2009, respectively.
The total compensation expense (net of forfeitures) for our stock-based compensation plans was $2.5 million and $2.8 million for the three months ended June 30, 2010 and 2009, respectively, and $4.9 million and $5.3 million for the six months ended June 30, 2010 and 2009, respectively. The tax benefit recognized by us related to these plans totaled $1.1 million and $1.3 million for the three months ended June 30, 2010 and 2009, respectively, and $2.2 million and $2.3 million for the six months ended June 30, 2010 and 2009, respectively.
We have several stock-based compensation plans or arrangements, including the 2009 Share Incentive
Plan, 1997 Share Incentive Plan (under which no further grants can be made), 2009 Non-Employee
Directors’ Incentive Plan, 1997 Non-Employee Directors’ Plan (under which no further grants can be
made), and Employee Share Purchase Plan. There has been no significant activity or changes to the
terms and conditions of any of these plans or arrangements during 2010, other than those described
below.
2009 Share Incentive Plan
In January 2010, the compensation committee of our board of directors approved long-term incentive awards consisting of 140,050 restricted stock units, which represent the right to receive shares of our common stock based on established restrictions, and 159,250 performance share units, which represent the right to receive shares of our common stock based on the level of achievement during a specified performance period of one or more performance goals, under the 2009 Share Incentive Plan. The restricted stock units are scheduled to vest over three years. Vesting of the performance share units is conditioned upon certain performance goals being met by us during the performance period from January 1, 2010 through December 31, 2012. The ultimate number of shares to be issued upon vesting of performance share units will depend on the extent to which we meet the performance goals and can range from zero to three times the original “target” awards noted above. The compensation committee set goals for the 2010 grant with the expectation that the number of shares to be issued upon vesting of performance share units will be at target levels. Based in part on our results through June 30, 2010 and expectations at that date regarding our future performance, we currently anticipate that the performance goals will be met at target levels for three of the four goals and at threshold level, or 0.5 times the original award, for one goal. As a result, we currently expect to recognize compensation expense totaling approximately $9.1 million over the vesting period, of which $0.8 million and $1.4 million was recognized during the three and six months ended June 30, 2010, respectively. We will review our performance against these goals periodically and update expectations as warranted.
In January 2010, the compensation committee of our board of directors approved long-term incentive awards consisting of 140,050 restricted stock units, which represent the right to receive shares of our common stock based on established restrictions, and 159,250 performance share units, which represent the right to receive shares of our common stock based on the level of achievement during a specified performance period of one or more performance goals, under the 2009 Share Incentive Plan. The restricted stock units are scheduled to vest over three years. Vesting of the performance share units is conditioned upon certain performance goals being met by us during the performance period from January 1, 2010 through December 31, 2012. The ultimate number of shares to be issued upon vesting of performance share units will depend on the extent to which we meet the performance goals and can range from zero to three times the original “target” awards noted above. The compensation committee set goals for the 2010 grant with the expectation that the number of shares to be issued upon vesting of performance share units will be at target levels. Based in part on our results through June 30, 2010 and expectations at that date regarding our future performance, we currently anticipate that the performance goals will be met at target levels for three of the four goals and at threshold level, or 0.5 times the original award, for one goal. As a result, we currently expect to recognize compensation expense totaling approximately $9.1 million over the vesting period, of which $0.8 million and $1.4 million was recognized during the three and six months ended June 30, 2010, respectively. We will review our performance against these goals periodically and update expectations as warranted.
Earnings Per Share
Under current authoritative guidance for determining earnings per share, all unvested share-based payment awards that contain non-forfeitable rights to distributions are considered to be participating securities and therefore are included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested restricted stock units contain rights to receive non-forfeitable distribution equivalents, and therefore we apply the two-class method of computing earnings per share. The calculation of earnings per share below excludes the income attributable to the unvested restricted stock units from the numerator. The following table summarizes basic and diluted earnings per share for the periods indicated (in thousands, except share amounts):
Under current authoritative guidance for determining earnings per share, all unvested share-based payment awards that contain non-forfeitable rights to distributions are considered to be participating securities and therefore are included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested restricted stock units contain rights to receive non-forfeitable distribution equivalents, and therefore we apply the two-class method of computing earnings per share. The calculation of earnings per share below excludes the income attributable to the unvested restricted stock units from the numerator. The following table summarizes basic and diluted earnings per share for the periods indicated (in thousands, except share amounts):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 23,432 | $ | 14,977 | $ | 37,845 | $ | 32,686 | ||||||||
|
Allocation of distribution equivalents paid on unvested
restricted stock units in excess of net income
|
(453 | ) | (296 | ) | (783 | ) | (592 | ) | ||||||||
|
|
||||||||||||||||
|
Net income — basic
|
22,979 | 14,681 | 37,062 | 32,094 | ||||||||||||
|
Income effect of dilutive securities, net of taxes
|
233 | 62 | 331 | 193 | ||||||||||||
|
|
||||||||||||||||
|
Net income — diluted
|
$ | 23,212 | $ | 14,743 | $ | 37,393 | $ | 32,287 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — basic
|
39,081,064 | 39,350,684 | 39,116,126 | 39,067,391 | ||||||||||||
|
Effect of dilutive securities
|
429,167 | 714,811 | 451,457 | 713,317 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — diluted
|
39,510,231 | 40,065,495 | 39,567,583 | 39,780,708 | ||||||||||||
|
|
||||||||||||||||
Securities included in our diluted earnings per share determination consist of stock options
and restricted stock awards. Securities totaling 1.9 million shares and 1.8 million shares for the
three months ended June 30, 2010 and 2009, respectively, and 1.9 million shares and 2.0 million
shares for the six months ended June 30, 2010 and 2009, respectively, were excluded from the
earnings per share computations above as their effect would have been anti-dilutive.
W. P. Carey 6/30/2010 10-Q
—
17
Table of Contents
Notes to Consolidated Financial Statements
Other
Included in distributions payable at December 31, 2009 is a special distribution of $0.30 per share, or $11.8 million, that was paid to shareholders in January 2010.
Included in distributions payable at December 31, 2009 is a special distribution of $0.30 per share, or $11.8 million, that was paid to shareholders in January 2010.
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. There were no changes in our ownership interest in any of our consolidated
subsidiaries for the three and six months ended June 30, 2010.
The following table presents a reconciliation of total equity, the equity attributable to our
shareholders and the equity attributable to noncontrolling interests (in thousands):
| W. P. Carey | Noncontrolling | |||||||||||
| Total Equity | Members | Interests | ||||||||||
|
Balance at January 1, 2010
|
$ | 632,408 | $ | 625,633 | $ | 6,775 | ||||||
|
Shares issued
|
799 | 799 | — | |||||||||
|
Contributions
|
11,180 | — | 11,180 | |||||||||
|
Redemption value adjustment
|
538 | 538 | — | |||||||||
|
Tax impact of purchase of WPCI interest
|
(1,637 | ) | (1,637 | ) | — | |||||||
|
Net income (loss)
|
37,431 | 37,845 | (414 | ) | ||||||||
|
Stock-based compensation expense
|
4,936 | 4,936 | — | |||||||||
|
Windfall tax provision — share incentive plans
|
(159 | ) | (159 | ) | — | |||||||
|
Distributions
|
(41,824 | ) | (40,974 | ) | (850 | ) | ||||||
|
Change in other comprehensive loss
|
(9,665 | ) | (9,178 | ) | (487 | ) | ||||||
|
Shares repurchased
|
(904 | ) | (904 | ) | — | |||||||
|
|
||||||||||||
|
Balance at June 30, 2010
|
$ | 633,103 | $ | 616,899 | $ | 16,204 | ||||||
|
|
||||||||||||
| W. P. Carey | Noncontrolling | |||||||||||
| Total Equity | Members | Interests | ||||||||||
|
Balance at January 1, 2009
|
$ | 646,335 | $ | 640,103 | $ | 6,232 | ||||||
|
Shares issued
|
874 | 874 | — | |||||||||
|
Contributions
|
1,583 | 102 | 1,481 | |||||||||
|
Redemption value adjustment
|
336 | 336 | — | |||||||||
|
Net income (loss)
|
32,313 | 32,686 | (373 | ) | ||||||||
|
Stock-based compensation expense
|
5,260 | 5,260 | — | |||||||||
|
Windfall tax benefits — share incentive plans
|
242 | 242 | — | |||||||||
|
Distributions
|
(39,661 | ) | (39,005 | ) | (656 | ) | ||||||
|
Deferred compensation obligation
|
9,461 | 9,461 | — | |||||||||
|
Change in other comprehensive loss
|
(248 | ) | (244 | ) | (4 | ) | ||||||
|
Shares repurchased
|
(11,514 | ) | (11,514 | ) | — | |||||||
|
|
||||||||||||
|
Balance at June 30, 2009
|
$ | 644,981 | $ | 638,301 | $ | 6,680 | ||||||
|
|
||||||||||||
Redeemable Noncontrolling Interest
We account for the noncontrolling interest in WPCI as a redeemable noncontrolling interest, as it may become redeemable for cash in the event there are not enough shares of our common stock available to redeem the noncontrolling interest. At June 30, 2010, there were sufficient available shares to redeem this interest. The noncontrolling interest is reflected at estimated redemption value for all periods presented. Redeemable noncontrolling interests, as presented on the consolidated balance sheets, reflect an adjustment of $0.5 million and $6.8 million at June 30, 2010 and December 31, 2009, respectively, to present the noncontrolling interest at redemption value. Additionally, in December 2009, we purchased all of the interests in WPCI and certain related entities held by one of our officers for cash, at a negotiated fair market value of $15.4 million.
We account for the noncontrolling interest in WPCI as a redeemable noncontrolling interest, as it may become redeemable for cash in the event there are not enough shares of our common stock available to redeem the noncontrolling interest. At June 30, 2010, there were sufficient available shares to redeem this interest. The noncontrolling interest is reflected at estimated redemption value for all periods presented. Redeemable noncontrolling interests, as presented on the consolidated balance sheets, reflect an adjustment of $0.5 million and $6.8 million at June 30, 2010 and December 31, 2009, respectively, to present the noncontrolling interest at redemption value. Additionally, in December 2009, we purchased all of the interests in WPCI and certain related entities held by one of our officers for cash, at a negotiated fair market value of $15.4 million.
W. P. Carey 6/30/2010 10-Q
—
18
Table of Contents
Notes to Consolidated Financial Statements
The following table presents a reconciliation of redeemable noncontrolling interests (in
thousands):
| 2010 | 2009 | |||||||
|
Balance at January 1,
|
$ | 7,692 | $ | 18,085 | ||||
|
Redemption value adjustment
|
(538 | ) | (336 | ) | ||||
|
Net income
|
592 | 338 | ||||||
|
Distributions
|
(610 | ) | (2,969 | ) | ||||
|
Change in other comprehensive (loss) income
|
(17 | ) | 8 | |||||
|
|
||||||||
|
Balance at June 30,
|
$ | 7,119 | $ | 15,126 | ||||
|
|
||||||||
Income
tax provision for the three months ended June 30, 2010 and 2009 was $6.8 million and $3.7 million, respectively,
while the income tax provision for the six months ended June 30, 2010 and 2009 was $10.9 million and $9.9 million, respectively.
The difference in the provision for income taxes reflected in the consolidated statements of income as compared to the provision
calculated at the statutory federal income tax rate is primarily attributable to state and foreign income taxes, the tax classification of
entities in the consolidated group and various permanent differences
between pre-tax GAAP income and taxable income.
We have elected to be treated as a partnership for U.S. federal income tax purposes. As
partnerships, we and our partnership subsidiaries are generally not directly subject to tax. We
conduct our investment management services primarily through taxable subsidiaries. These operations
are subject to federal, state, local and foreign taxes, as applicable. We conduct business in the
U.S. and the European Union, and as a result, we or one or more of our subsidiaries file income tax
returns in the U.S. federal jurisdiction and various state and certain foreign jurisdictions. With
few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations for years before 2006. Certain of our inter-company transactions that have been
eliminated in consolidation for financial accounting purposes are also subject to taxation.
Periodically, shares in the CPA
®
REITs that are payable to our taxable subsidiaries in
consideration for services rendered are distributed from these subsidiaries to us.
At both June 30, 2010 and December 31, 2009, we had unrecognized tax benefits of $0.6 million (net
of federal benefits) that, if recognized, would favorably affect the effective income tax rate in
any future periods. We recognize interest and penalties related to uncertain tax positions in
income tax expense. At both June 30, 2010 and December 31, 2009, we had $0.1 million of accrued
interest and penalties related to uncertain tax positions.
During the next year, we currently expect the liability for uncertain taxes to be adjusted on a
similar basis to the adjustments that occurred in 2009. Our tax returns are subject to audit by
taxing authorities. Such audits can often take years to complete and settle. The tax years
2006-2010 remain open to examination by the major taxing jurisdictions to which we are subject.
Our wholly-owned subsidiary, Carey REIT II, Inc. (“Carey REIT II”), owns our real estate assets and
has elected to be taxed as a REIT under Sections 856 through 860 of the Code. We believe we have
operated, and we intend to continue to operate, in a manner that allows Carey REIT II to continue
to qualify as a REIT. Under the REIT operating structure, Carey REIT II is permitted to deduct
distributions paid to our shareholders and generally will not be required to pay U.S. federal
income taxes. Accordingly, no provision has been made for U.S. federal income taxes in the
consolidated financial statements.
W. P. Carey 6/30/2010 10-Q
—
19
Table of Contents
Notes to Consolidated Financial Statements
We evaluate our results from operations by our two major business segments — investment management
and real estate ownership (Note 1). The following table presents a summary of comparative results
of these business segments (in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Investment Management
|
||||||||||||||||
|
Revenues
(a)
|
$ | 49,766 | $ | 32,304 | $ | 92,571 | $ | 71,910 | ||||||||
|
Operating expenses
(a)
|
(33,266 | ) | (25,628 | ) | (65,752 | ) | (52,404 | ) | ||||||||
|
Other, net
(b)
|
4,611 | 2,718 | 8,020 | 2,358 | ||||||||||||
|
Provision for income taxes
|
(6,780 | ) | (3,440 | ) | (10,658 | ) | (9,205 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to W. P. Carey members
|
$ | 14,331 | $ | 5,954 | $ | 24,181 | $ | 12,659 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Real Estate Ownership
|
||||||||||||||||
|
Revenues
|
$ | 20,630 | $ | 20,931 | $ | 40,416 | $ | 40,515 | ||||||||
|
Operating expenses
|
(10,186 | ) | (10,923 | ) | (22,857 | ) | (20,943 | ) | ||||||||
|
Interest expense
|
(3,765 | ) | (3,805 | ) | (7,476 | ) | (8,000 | ) | ||||||||
|
Other, net
(b)
|
3,116 | 2,800 | 8,569 | 8,043 | ||||||||||||
|
Provision for income taxes
|
29 | (280 | ) | (205 | ) | (715 | ) | |||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to W. P. Carey members
|
$ | 9,824 | $ | 8,723 | $ | 18,447 | $ | 18,900 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Company
|
||||||||||||||||
|
Revenues
(a)
|
$ | 70,430 | $ | 53,235 | $ | 133,021 | $ | 112,425 | ||||||||
|
Operating expenses
(a)
|
(43,486 | ) | (36,551 | ) | (88,643 | ) | (73,347 | ) | ||||||||
|
Interest expense
|
(3,765 | ) | (3,805 | ) | (7,476 | ) | (8,000 | ) | ||||||||
|
Other, net
(b)
|
7,727 | 5,518 | 16,589 | 10,401 | ||||||||||||
|
Provision for income taxes
|
(6,751 | ) | (3,720 | ) | (10,863 | ) | (9,920 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to W. P. Carey members
|
$ | 24,155 | $ | 14,677 | $ | 42,628 | $ | 31,559 | ||||||||
|
|
||||||||||||||||
| Equity Investments in Real Estate at | Total Long-Lived Assets (d) at | Total Assets | ||||||||||||||||||||||
| June 30, 2010 | December 31, 2009 | June 30, 2010 | December 31, 2009 | June 30, 2010 | December 31, 2009 | |||||||||||||||||||
|
Investment Management
|
$ | 230,437 | $ | 215,951 | $ | 235,551 | $ | 222,453 | $ | 363,013 | $ | 343,989 | ||||||||||||
|
Real Estate Ownership
(c)
|
82,643 | 89,039 | 692,784 | 668,510 | 761,393 | 749,347 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Company
|
$ | 313,080 | $ | 304,990 | $ | 928,335 | $ | 890,963 | $ | 1,124,406 | $ | 1,093,336 | ||||||||||||
|
|
||||||||||||||||||||||||
| (a) | Included in revenues and operating expenses are reimbursable costs from affiliates totaling $15.4 million and $11.1 million for the three month periods ended June 30, 2010 and 2009, respectively, and $30.4 million and $20.1 million for the six months ended June 30, 2010 and 2009, respectively. | |
| (b) | Includes interest income, income from equity investments in real estate and CPA ® REITs, income (loss) attributable to noncontrolling interests and other income and (expenses). | |
| (c) | Includes investments in France, Poland, Germany and Spain that accounted for lease revenues (rental income and interest income from direct financing leases) of $1.5 million and $1.8 million for the three months ended June 30, 2010 and 2009, respectively, and $2.8 million and $3.6 million for the six months ended June 30, 2010 and 2009, respectively, as well as income from equity investments in real estate of $1.4 million and $1.3 million for the three months ended June 30, 2010 and 2009, respectively, and $3.0 million for each of the six months ended June 30, 2010 and 2009. These investments also accounted for long-lived assets at June 30, 2010 and December 31, 2009 of $64.3 million and $47.9 million, respectively. | |
| (d) | Includes net investments in real estate and intangible assets related to management contracts. |
W. P. Carey 6/30/2010 10-Q
—
20
Table of Contents
Notes to Consolidated Financial Statements
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their
leases, insolvency or lease rejection in the bankruptcy process. In these cases, we assess whether
we can obtain the highest value from the property by re-leasing or selling it. In addition, in
certain cases, we may elect to sell a property that is occupied. When it is appropriate to do so
under current accounting guidance for the disposal of long-lived assets, we classify the property
as an asset held for sale and the current and prior period results of operations of the property
are reclassified as discontinued operations.
During the six months ended June 30, 2010, we sold four properties for a total of $9.2 million, net
of selling costs, and recognized a net gain on these sales totaling $0.5 million, excluding
impairment charges totaling $5.1 million that were previously recognized in 2009. In addition, in
April and May 2010, we entered into two agreements to sell three properties for a total of
approximately $5.6 million. In connection with these proposed sales, we recorded impairment charges
totaling $1.0 million and $5.9 million in the three and six months ended June 30, 2010,
respectively, to reduce the carrying values of these properties to their contracted selling prices.
We completed one of these sales in July 2010.
In May 2009, we entered into an agreement to sell a property for approximately $3.3 million. In
connection with the sale, we recorded an impairment charge of $0.6 million in the three and six
months ended June 30, 2009 in order to reduce the carrying value of the property to its estimated
selling price. We completed this sale in July 2009.
During the six months ended June 30, 2009, we sold two properties for a total of $3.8 million, net
of selling costs, and recognized a net gain on sale of $0.3 million.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 492 | $ | 2,254 | $ | 1,419 | $ | 4,443 | ||||||||
|
Expenses
|
(286 | ) | (1,052 | ) | (793 | ) | (2,279 | ) | ||||||||
|
Gain on sale of real estate
|
56 | 478 | 460 | 343 | ||||||||||||
|
Impairment charges
|
(985 | ) | (1,380 | ) | (5,869 | ) | (1,380 | ) | ||||||||
|
|
||||||||||||||||
|
(Loss) income from discontinued operations
|
$ | (723 | ) | $ | 300 | $ | (4,783 | ) | $ | 1,127 | ||||||
|
|
||||||||||||||||
W. P. Carey 6/30/2010 10-Q
—
21
Table of Contents
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is
intended to provide the reader with information that will assist in understanding our financial
statements and the reasons for changes in certain key components of our financial statements from
period to period. MD&A also provides the reader with our perspective on our financial position and
liquidity, as well as certain other factors that may affect our future results. The discussion also
provides information about the financial results of the segments of our business to provide a
better understanding of how these segments and their results affect our financial condition and
results of operations. Our MD&A should be read in conjunction with our 2009 Annual Report.
Business Overview
We provide long-term financing via sale-leaseback and build-to-suit transactions for companies
worldwide and manage a global investment portfolio of 922 properties, including our own portfolio.
We operate in two business segments — investment management and real estate ownership, as
described below.
Investment Management
— We provide services to four affiliated publicly-owned, non-listed real
estate investment trusts: CPA
®
:14, CPA
®
:15, CPA
®
:16 — Global and
CPA
®
:17 — Global. We structure and negotiate investments and debt placement
transactions for the CPA
®
REITs, for which we earn structuring revenue, and manage their
portfolios of real estate investments, for which we earn asset-based management and performance
revenue. We earn asset-based management and performance revenue from the CPA
®
REITs
based on the value of their real estate-related assets under management. As funds available to the
CPA
®
REITs are invested, the asset base from which we earn revenue increases. In
addition, we also receive a percentage of distributions of available cash from CPA
®
:17
— Global’s operating partnership. We may also earn incentive and disposition revenue and receive
other compensation in connection with providing liquidity alternatives to CPA
®
REIT
shareholders. Collectively, at June 30, 2010 the CPA
®
REITs owned all or a portion of
over 790 properties, including certain properties in which we have an ownership interest.
Substantially all of these properties, totaling approximately 95 million square feet (on a pro rata
basis), were net leased to 221 tenants, with an occupancy rate of approximately 98%.
Real Estate Ownership
— We own and invest in commercial properties in the U.S. and the European
Union that are then leased to companies, primarily on a triple-net leased basis, which requires
each tenant to pay substantially all of the costs associated with operating and maintaining the
property. We may also invest in other properties if opportunities arise. At June 30, 2010, our
portfolio was comprised of our full or partial ownership interest in 167 properties, including
certain properties in which the CPA
®
REITs have an ownership interest. Substantially all
of these properties, totaling approximately 14 million square feet (on a pro rata basis), were net
leased to 80 tenants, with an occupancy rate of approximately 92%.
Financial Highlights
(In thousands)
(In thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Total revenue (excluding reimbursed
costs from affiliates)
|
$ | 55,042 | $ | 42,120 | $ | 102,585 | $ | 92,314 | ||||||||
|
Net income attributable to W. P. Carey members
|
23,432 | 14,977 | 37,845 | 32,686 | ||||||||||||
|
Cash flow from operating activities
|
36,291 | 34,683 | ||||||||||||||
Total revenue increased during the three and six months ended June 30, 2010 as compared to the same
periods in 2009, primarily due to a higher volume of investments structured on behalf of the
CPA
®
REITs. Revenue from our real estate ownership segment declined slightly
compared to the prior year periods.
Net income increased during the three and six months ended June 30, 2010 as compared to the same
periods in 2009. Results from operations in our investment management segment were significantly
higher during the three and six months ended June 30, 2010 primarily due to a higher volume of
investments structured on behalf of the CPA
®
REITs and lower impairment
charges recognized by the CPA
®
REITs as compared to the respective prior year
periods. Results from operations in our real estate ownership segment were flat for the three
months ended June 30, 2010 as compared to the same period in 2009 and down significantly for the
six months ended June 30, 2010 as compared to the same period in 2009. The decline in the six
months ended June 30, 2010 was primarily due to impairment charges taken in that period in
connection with the sale of properties.
W. P. Carey 6/30/2010 10-Q
—
22
Table of Contents
Cash flow from operating activities increased slightly in the six months ended June 30, 2010 as
compared to the prior year period. Increases in net income, which were driven primarily by revenues
earned in connection with higher investment volume on behalf of the CPA
®
REITs, were
partially offset by lower cash flow in our real estate ownership segment and a decline in the
amount of deferred acquisition revenue received. Deferred acquisition revenue received was lower
during the six months ended June 30, 2010 as compared to the same period in 2009, primarily due to
a shift in the timing of when deferred acquisition revenue is received and lower investment volume
by the CPA
®
REITs in prior year periods.
Our quarterly cash distribution increased to $0.506 per share for the second quarter of 2010, or
$2.02 per share on an annualized basis.
We consider the performance metrics listed above as well as certain non-GAAP performance metrics,
to be important measures in the evaluation of our results of operations, liquidity and capital
resources. We evaluate our results of operations with a primary focus on increasing and enhancing
the value, quality and amount of assets under management by our investment management segment and
seeking to increase value in our real estate ownership segment. Results of operations by reportable
segment are described below.
Changes in Management
Gordon F. DuGan resigned as Chief Executive Officer and as a member of our board of directors
effective July 6, 2010. Trevor P. Bond has been appointed as interim Chief Executive Officer
effective July 6, 2010. Mr. Bond has served as a director since April 2007 and served as a director
of several of the CPA
®
REIT programs between 2005 and 2007. Mr. Bond will
also serve as interim Chief Executive Officer of CPA
®
:14, CPA
®
:15,
CPA
®
:16 — Global and CPA
®
:17 — Global.
Also effective July 6, 2010, Mark J. DeCesaris was appointed as Chief Financial Officer. As a
result of this appointment, Mr. DeCesaris also became Chief Financial Officer of
CPA
®
:14,
CPA
®
:15, CPA
®
:16
— Global and CPA
®
:17 —
Global. Mr. DeCesaris served as acting Chief Financial Officer of W. P. Carey, CPA
®
:14,
CPA
®
:15, and CPA
®
:16 — Global since November 2005 and CPA
®
:17 —
Global since October 2007.
Effective April 29, 2010, H. Cabot Lodge, III was appointed President of our UK subsidiary, W. P.
Carey & Co. Ltd. Mr. Lodge will serve as head of European Investments and is based out of W. P.
Carey’s London office.
Current Trends
General Economic Environment
We and our managed funds are impacted by macro-economic environmental factors, the capital markets,
and general conditions in the commercial real estate market, both in the U.S. and globally. As of
the date of this Report, we have seen signs of modest improvement in the global economy following
the significant distress experienced in 2008 and 2009. We have also experienced increased
investment volume, as well as an improved financing and fundraising environment. While these
factors reflect favorably on our business, the economic recovery remains weak, and our business
remains dependent on the speed and strength of the recovery, which cannot be predicted at this
time. Nevertheless, as of the date of this Report, the impact of current financial and economic
trends on our business segments, and our response to those trends, is presented below.
Tenant Defaults
As a net lease investor, we are exposed to credit risk within our tenant portfolio, which can
reduce our results of operations and cash flow from operations. Within our managed
CPA
®
REIT portfolios, tenant defaults can reduce our asset management
revenue if they lead to a decline in the estimated annual net asset values of the
CPA
®
REITs and can also reduce our income from equity investments in the
CPA
®
REITs. Tenants experiencing financial difficulties may become
delinquent on their rent and/or default on their leases and, if they file for bankruptcy
protection, may reject our lease in bankruptcy court, all of which may require us or the
CPA
®
REITs to incur impairment charges. Even where a default has not occurred
and a tenant is continuing to make the required lease payments, we may restructure or renew leases
on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the
value of the leased asset and could in turn require us or the CPA
®
REITs
to incur impairment charges.
During 2008 and 2009, the CPA
®
REITs experienced a significant increase in
tenant defaults as companies across many industries experienced financial distress due to the
economic downturn and the seizure in the credit markets. Our experience for the first half of 2010
reflects an improvement from the unusually high level of tenant defaults experienced during 2008
and 2009. As of the date of this Report, we have no significant exposure to tenants operating under
bankruptcy protection in our own portfolio, while in the CPA
®
REIT
portfolios, tenants operating under bankruptcy protection, administration or receivership account
for less than 1% of aggregate annualized lease revenues, a decrease from recent levels. We have
observed that many of our tenants have benefited from continued improvements in general business
conditions, which we anticipate will result in reduced tenant defaults going forward; however, it
is
possible that additional tenants may file for bankruptcy or default on their leases during 2010 and
that economic conditions may again deteriorate.
W. P. Carey 6/30/2010 10-Q
—
23
Table of Contents
To mitigate these risks, we have looked to invest in assets that we believe are critically
important to a tenant’s operations and have attempted to diversify the portfolios by tenant and
tenant industry. We also monitor tenant performance through review of rent delinquencies as a
precursor to a potential default, meetings with tenant management and review of tenants’ financial
statements and compliance with any financial covenants. When necessary, our asset management
process includes restructuring transactions to meet the evolving needs of tenants, re-leasing
properties, refinancing debt and selling properties as well as protecting our rights when tenants
default or enter into bankruptcy.
Foreign Exchange Rates
We have foreign investments and, as a result, are subject to risk from the effects of exchange rate
movements. Our results of foreign operations benefit from a weaker U.S. dollar and are adversely
affected by a stronger U.S. dollar relative to foreign currencies. Investments denominated in the
Euro accounted for approximately 10% and 9% of our annualized lease revenues for the first six
months of 2010 and 2009, respectively, and 26% and 29% of aggregate annualized lease revenues for
the CPA
®
REITs for the same respective periods. The average rate for the
U.S. dollar in relation to the Euro during the first six months of 2010 was relatively unchanged in
comparison to the same period in 2009. However, the U.S. dollar has strengthened against the Euro,
as the conversion rate at June 30, 2010 decreased 15% to 1.2208 from 1.4333 at December 31, 2009.
This strengthening had a negative impact on our balance sheet at June 30, 2010 as compared to our balance sheet at December 31, 2009. A significant
decline in the value of the Euro could have a material negative impact on our future results and,
especially, on the future results, financial position and cash flows of the CPA
®
REITs, which have higher levels of international investments.
Capital Markets
We have recently seen a gradual improvement in capital market conditions. Capital inflows to both
commercial real estate debt and equity markets have helped increase the availability of mortgage
financing and asset prices have begun to recover from their credit crisis lows. Over the past few
quarters, there has been continued improvement in the availability of financing; however, lenders
remain cautious and are employing more conservative underwriting standards. We have seen commercial
real estate capitalization rates begin to narrow from credit crisis highs, especially for higher
quality assets or assets leased to tenants with strong credit. The improvement in financing
combined with a stabilization of asset prices has helped to increase transaction activity, and our
market has seen an increase in competition from both public and private investors.
Investment Opportunities
We earn structuring revenue on the investments we structure on behalf of the
CPA
®
REITs. Our ability to complete these investments, and thereby to earn
structuring revenue, fluctuates based on the pricing and availability of transactions and the
pricing and availability of financing, among other factors.
As a result of the recent improving economic conditions, we have seen an increased number of
investment opportunities that we believe will allow us to structure transactions on behalf of the
CPA
®
REITs on favorable terms. Although capitalization rates have begun to
narrow from credit crisis highs, we believe that the investment environment remains attractive and
that we will be able to achieve the targeted returns of our managed funds. We believe that the
significant amount of corporate debt that remains outstanding in the marketplace, which will need
to be refinanced over the next several years, will provide attractive investment opportunities for
net lease investors such as W. P. Carey and the CPA
®
REITs. To the extent
that these trends continue during 2010, we believe that investment volume will benefit. However, we
have recently seen an increasing level of competition for investments, both domestically and
internationally, and further capital inflows into the market place could put additional pressure on
the returns that we can generate from investments.
We structured investments on behalf of the CPA
®
REITs totaling $440.2
million during the first six months of 2010 and entered into two investments for our own real
estate portfolio totaling $66.4 million. International investments comprised 48% of total
investments during the first six months of 2010. We currently expect that international
transactions will continue to form a significant portion of the investments we structure, although
the relative portion of international investments in any given period will vary.
Financing Conditions
We have recently seen a gradual improvement in both the credit and real estate financing markets.
During the first half of 2010, we saw an increase in the number of lenders for both domestic and
international investments as market conditions improved. As a result, during the first half of
2010, we obtained non-recourse mortgage financing totaling $243.5 million on behalf of the
CPA
®
REITs. The financing bore a weighted average annual fixed interest
rate and term of 6.1% and 8.7 years, respectively. When we obtain variable-rate debt, we generally
attempt to implement interest rate caps or swaps to mitigate the impact of variable rate financing.
W. P. Carey 6/30/2010 10-Q
—
24
Table of Contents
Real Estate Sector
As noted above, the commercial real estate market is impacted by a variety of macro-economic
factors, including but not limited to growth in gross domestic product, or GDP, unemployment,
interest rates, inflation, and demographics. Since the beginning of the current credit crisis,
these macro-economic factors have negatively impacted the fundamentals of the commercial real
estate market, resulting in higher vacancies, lower rental rates, and lower demand for vacant
space. While more recently there have been some indications of stabilization in asset values, there
is still general uncertainty surrounding commercial real estate fundamentals and property
valuations. We and the CPA
®
REITs are chiefly affected by changes in the
estimated annual net asset values of our properties, inflation, lease expirations, and occupancy
rates.
Net Asset Values of the CPA
®
REITs
We own shares in each of the CPA
®
REITs and earn asset management revenue
based on a percentage of average invested assets for each CPA
®
REIT. As such,
we benefit from rising investment values and are negatively impacted when these values decrease. As
a result of the overall continued weakness in the economy during 2009 and consequent increase in
tenant defaults, the estimated net asset valuations for CPA
®
:14,
CPA
®
:15 and CPA
®
:16 — Global at December 31, 2009 were
down slightly from the estimated net asset valuations at December 31, 2008, which we expect will
negatively impact our asset management revenue during 2010 by approximately $2.3 million. We
anticipate that the negative impact of the 2009 tenant defaults will be partially mitigated by
asset management revenues earned to the extent we structure new investments on behalf of
CPA
®
:17 — Global during 2010.
The estimated net asset valuations of the CPA
®
REITs are based on a number of
variables, including individual tenant credits, tenant defaults, lease terms, lending credit
spreads, and foreign currency exchange rates, among other variables. We do not control these
variables and, as such, cannot predict how these variables will change in the future.
Inflation
Our leases and those of the CPA
®
REITs generally have rent adjustments that
are either fixed or based on formulas indexed to changes in the consumer price index (“CPI”) or
other similar indices for the jurisdiction in which the property is located. Because these rent
adjustments may be calculated based on changes in the CPI over a multi-year period, changes in
inflation rates can have a delayed impact on our results of operations. Rent adjustments during
2009 and, to a lesser extent, the first half of 2010 generally benefited from increases in
inflation rates during the years prior to the scheduled rent adjustment date. However, we continue
to expect that rent increases in our own portfolio and in the portfolios of the CPA
®
REITs will be significantly lower in coming years as a result of the current
historically low inflation rates in the U.S. and the Euro zone.
Lease Expirations and Occupancy
We actively manage our own real estate portfolio and the portfolios of the CPA
®
REITs and begin discussing options with tenants in advance of the scheduled lease
expiration. In certain cases, we obtain lease renewals from tenants; however, tenants may elect to
move out at the end of their lease terms or may elect to exercise purchase options, if any, in
their leases. In cases where tenants elect not to renew, we may seek replacement tenants or try to
sell the property. As of the date of this Report, 16% of the leases in our own portfolio are
scheduled to expire in the next twelve months, based on annualized contractual lease revenue. For
those leases that we believe will be renewed, we expect that renewed rents may be below the
tenants’ existing contractual rents and that lease terms may be shorter than existing terms,
reflecting current market conditions. Lease expirations could also affect the cash flow of certain
of the CPA
®
REITs, particularly CPA
®
:14 and
CPA
®
:15.
Our occupancy rate declined from 94% at December 31, 2009 to 92% at June 30, 2010, primarily
reflecting the impact of one tenant who vacated during April 2010. Based on tenant activity during
2009 and the first half of 2010, including lease amendments, early lease renewals and lease
rejections in bankruptcy court, we expect that 2010 annualized contractual lease revenue will
decrease by approximately 3% in our own portfolio and by approximately 4% in the
CPA
®
REIT portfolios, as compared with 2009 annualized contractual lease revenue.
This amount may fluctuate based on additional tenant activity and changes in economic conditions,
both of which are outside of our control.
Fundraising
Fundraising trends for non-traded REITs overall include an increase in average monthly volume
during the first six months of 2010, with significant increases over the second half of 2009.
Additionally, the number of offerings has increased over 2009 levels. Consequently, there has been
an increase in the competition for investment dollars.
We are currently fundraising for CPA
®
:17 — Global. While fundraising trends
are difficult to predict, our recent fundraising continues to be strong. We raised $288.3 million
for CPA
®
:17 — Global’s initial public offering in the first six months of
2010 and, through the date of this Report, have raised more than $1.1 billion on its behalf since
beginning fundraising in December 2007. We have made a
concerted effort to broaden our distribution channels and are seeing a greater portion of our
fundraising come from multiple channels as a result of these efforts. Increased competition has
modestly impacted our 2010 fundraising efforts, particularly in the months of June and July.
CPA
®
:17 — Global’s initial public offering will terminate in November 2010,
unless it is extended.
W. P. Carey 6/30/2010 10-Q
—
25
Table of Contents
In April 2010, we filed a registration statement with the SEC to sell up to $1 billion of common
stock of Carey Watermark in an initial public offering for the purpose of acquiring interests in
lodging and lodging related properties. This registration statement has not been declared effective
by the SEC as of the date of this Report.
Proposed Accounting Changes
The International Accounting Standards Board and FASB are nearing the issuance of an Exposure Draft
on a joint proposal that would dramatically transform lease accounting from the existing model.
These changes would impact most companies but are particularly applicable to those that are
significant users of real estate. The proposal outlines a completely new model for accounting by
lessees, whereby their rights and obligations under all leases, existing and new, would be
capitalized and recorded on the balance sheet. For some companies, the new accounting guidance may
influence whether or not, or the extent to which, they may enter into the type of sale-leaseback
transactions in which we specialize. At this time, we are unable to determine whether this
proposal will have a material impact on our business.
Results of Operations
We evaluate our results of operations by our two major business segments — investment management
and real estate ownership. A summary of comparative results of these business segments is as
follows:
Investment Management
(in thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| 2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Asset management revenue
|
$ | 19,080 | $ | 19,227 | $ | (147 | ) | $ | 37,900 | $ | 38,335 | $ | (435 | ) | ||||||||||
|
Structuring revenue
|
13,102 | 365 | 12,737 | 19,936 | 10,774 | 9,162 | ||||||||||||||||||
|
Wholesaling revenue
|
2,230 | 1,597 | 633 | 4,333 | 2,690 | 1,643 | ||||||||||||||||||
|
Reimbursed costs from affiliates
|
15,354 | 11,115 | 4,239 | 30,402 | 20,111 | 10,291 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
49,766 | 32,304 | 17,462 | 92,571 | 71,910 | 20,661 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
General and administrative
|
(16,750 | ) | (13,477 | ) | (3,273 | ) | (33,017 | ) | (30,659 | ) | (2,358 | ) | ||||||||||||
|
Reimbursable costs
|
(15,354 | ) | (11,115 | ) | (4,239 | ) | (30,402 | ) | (20,111 | ) | (10,291 | ) | ||||||||||||
|
Depreciation and amortization
|
(1,162 | ) | (1,036 | ) | (126 | ) | (2,333 | ) | (1,634 | ) | (699 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
(33,266 | ) | (25,628 | ) | (7,638 | ) | (65,752 | ) | (52,404 | ) | (13,348 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
289 | 377 | (88 | ) | 539 | 733 | (194 | ) | ||||||||||||||||
|
Income from equity investments in CPA
®
REITs
|
3,957 | 1,779 | 2,178 | 6,836 | 575 | 6,261 | ||||||||||||||||||
|
Other income and (expenses)
|
214 | 60 | 154 | 23 | 195 | (172 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
4,460 | 2,216 | 2,244 | 7,398 | 1,503 | 5,895 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations before income taxes
|
20,960 | 8,892 | 12,068 | 34,217 | 21,009 | 13,208 | ||||||||||||||||||
|
Provision for income taxes
|
(6,780 | ) | (3,440 | ) | (3,340 | ) | (10,658 | ) | (9,205 | ) | (1,453 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management
|
14,180 | 5,452 | 8,728 | 23,559 | 11,804 | 11,755 | ||||||||||||||||||
|
Add: Net loss attributable to noncontrolling interests
|
568 | 605 | (37 | ) | 1,214 | 1,193 | 21 | |||||||||||||||||
|
Less: Net income attributable to redeemable noncontrolling
interests
|
(417 | ) | (103 | ) | (314 | ) | (592 | ) | (338 | ) | (254 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management attributable to
W. P. Carey members
|
$ | 14,331 | $ | 5,954 | $ | 8,377 | $ | 24,181 | $ | 12,659 | $ | 11,522 | ||||||||||||
|
|
||||||||||||||||||||||||
W. P. Carey 6/30/2010 10-Q
—
26
Table of Contents
Asset Management Revenue
We earn asset-based management and performance revenue from the CPA
®
REITs
based on the value of their real estate-related assets under management. This asset management
revenue may increase or decrease depending upon (i) increases in the CPA
®
REIT asset bases as a result of new investments; (ii) decreases in the CPA
®
REIT asset bases as a result of sales of investments; (iii) increases or decreases in the annual
estimated net asset valuations of CPA
®
REIT investment portfolios; and (iv)
whether the CPA
®
REITs are meeting their performance criteria. Each
CPA
®
REIT met its performance criteria for all periods presented. The
availability of funds for new investments is substantially dependent on our ability to raise funds
for investment by the CPA
®
REITs.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, asset
management revenue decreased by $0.1 million and $0.4 million, respectively, primarily due to a
decline in the annual estimated net asset valuations of CPA
®
REITs as of December 31,
2009 as described below, substantially offset by an increase in CPA
®
:17 —
Global’s asset base as a result of new investments entered into during 2009 and 2010.
We obtain estimated net asset valuations for the CPA
®
REITs on an annual
basis and sometimes on an interim basis, which occurs generally in connection with our
consideration of potential liquidity events. Currently, annual estimated net asset valuations are
performed for CPA
®
:14, CPA
®
:15 and
CPA
®
:16 — Global. The following table presents recent estimated net asset
valuations per share for these REITs:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
CPA
®
:14
|
$ | 11.80 | $ | 13.00 | ||||
|
CPA
®
:15
|
10.70 | 11.50 | ||||||
|
CPA
®
:16 — Global
|
9.20 | 9.80 | ||||||
Structuring Revenue
We earn structuring revenue when we structure and negotiate investments and debt placement
transactions for the CPA
®
REITs. Structuring revenue is dependent on
investment activity, which is subject to significant period-to-period variation.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009,
structuring revenue increased by $12.7 million and $9.2 million, respectively, primarily due to
higher investment volume in the current year periods. We structured real estate investments on
behalf of the CPA
®
REITs totaling $291.1 million and $440.2 million for the three and
six months ended June 30, 2010, respectively, compared to $2.5 million and $234.2 million for the
three and six months ended June 30, 2009, respectively. Investments structured on behalf of the
CPA
®
REITs in 2009 included the $233.7 million New York Times Company transaction
entered into in March 2009, inclusive of our $40.0 million interest.
Reimbursed and Reimbursable Costs
Reimbursed costs from affiliates (revenue) and reimbursable costs (expenses) represent costs
incurred by us on behalf of the CPA
®
REITs, consisting primarily of
broker-dealer commissions and marketing and personnel costs, which are reimbursed by the
CPA
®
REITs. Revenue from reimbursed costs from affiliates is offset by
corresponding charges to reimbursable costs and therefore has no impact on net income.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009,
reimbursed and reimbursable costs increased by $4.2 million and $10.3 million, respectively,
primarily due to a higher level of commissions paid to broker-dealers related to CPA
®
:17
— Global’s initial public offering as funds raised in the current year periods were higher than in
the same periods in 2009.
General and Administrative
For the three months ended June 30, 2010 as compared to the same period in 2009, general and
administrative expenses increased by $3.3 million due to increases in compensation-related costs of
$2.7 million and underwriting costs in connection with CPA
®
:17 — Global’s initial
public offering of $0.6 million. Compensation-related costs were higher in the current year period
primarily due to increases in commissions to investment officers as a result of higher investment
volume during the current year period. Underwriting costs related to CPA
®
:17 — Global’s
offering are generally offset by wholesaling revenue, which we earn based on the number of shares
of CPA
®
:17 — Global sold.
W. P. Carey 6/30/2010 10-Q
—
27
Table of Contents
For the six months ended June 30, 2010 as compared to the same period in 2009, general and
administrative expenses increased by $2.4 million, primarily due to increases in
compensation-related costs of $1.5 million and underwriting costs in connection with
CPA
®
:17 — Global’s initial public offering of $1.4 million as described above. These
increases were partially offset by a decrease in professional fees of $0.7 million.
Compensation-related costs were higher in the current year period primarily due to a $2.7 million
increase in commissions to investment officers as a result of the higher investment volume during
the current year period, partially offset by a $0.9 million decrease in severance costs for former
employees. Professional fees in the prior year period included transaction-related costs of $1.0
million incurred in connection with our consolidated subsidiary, Carey Storage, exchanging a 60%
interest in its self storage portfolio to a third party for cash proceeds of $21.9 million plus a
commitment to invest up to a further $8.1 million of equity during the first quarter of 2009.
Income from Equity Investments in CPA
®
REITs
Income or loss from equity investments in CPA
®
REITs represents our proportionate share
of net income or loss (revenues less expenses) from our investments in the CPA
®
REITs in
which, because of the shares we elect to receive from them for revenue due to us, we have a
noncontrolling interest but exercise significant influence. The net income of the CPA
®
REITs fluctuates based on the timing of transactions, such as new leases and property sales, as
well as the level of impairment charges.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, income
from equity investments in CPA
®
REITs increased by $2.2 million and $6.3 million,
respectively, primarily due to lower impairment charges recognized by the CPA
®
REITs in
the current year periods, which are estimated to total approximately $0.5 million and $15.0 million
during the three months ended June 30, 2010 and 2009, and $10.7 million and $54.6 million during
the six months ended June 30, 2010 and 2009, respectively. In addition, CPA
®
14’s
results of operations during the first quarter of 2010 included a gain on extinguishment of debt of
$11.4 million and are expected to include a gain of $12.9 million on deconsolidation of a
subsidiary during the second quarter of 2010. For CPA
®
:17 — Global, we receive up to
10% of distributions of available cash from its operating partnership. For the three months ended
June 30, 2010 and 2009, we received $0.5 million and $1.2 million, respectively, in cash under this
provision. For the six months ended June 30, 2010 and 2009, we received cash of $0.5 million and
$1.7 million, respectively.
Provision for Income Taxes
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, provision
for income taxes increased by $3.3 million and $1.5 million, respectively, primarily as a result of
structuring revenue recognized from increases in investment volume in the current year periods.
Net Income from Investment Management Attributable to W. P. Carey Members
For the three and six months ended June 30, 2010 as compared to the same period in 2009, the
resulting net income from investment management attributable to W. P. Carey members increased by
$8.4 million and $11.5 million, respectively.
W. P. Carey 6/30/2010 10-Q
—
28
Table of Contents
Real Estate Ownership
(in thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| 2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Lease revenues
|
$ | 15,833 | $ | 16,374 | $ | (541 | ) | $ | 31,844 | $ | 32,745 | $ | (901 | ) | ||||||||||
|
Other real estate income
|
4,797 | 4,557 | 240 | 8,572 | 7,770 | 802 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
20,630 | 20,931 | (301 | ) | 40,416 | 40,515 | (99 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
Depreciation and amortization
|
(4,653 | ) | (5,538 | ) | 885 | (9,658 | ) | (10,060 | ) | 402 | ||||||||||||||
|
Property expenses
|
(2,379 | ) | (1,921 | ) | (458 | ) | (4,628 | ) | (3,371 | ) | (1,257 | ) | ||||||||||||
|
General and administrative
|
(1,381 | ) | (857 | ) | (524 | ) | (2,715 | ) | (2,774 | ) | 59 | |||||||||||||
|
Other real estate expenses
|
(1,773 | ) | (1,707 | ) | (66 | ) | (3,588 | ) | (3,838 | ) | 250 | |||||||||||||
|
Impairment charges
|
— | (900 | ) | 900 | (2,268 | ) | (900 | ) | (1,368 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
(10,186 | ) | (10,923 | ) | 737 | (22,857 | ) | (20,943 | ) | (1,914 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
47 | 39 | 8 | 70 | 90 | (20 | ) | |||||||||||||||||
|
Income from equity investments in real estate
|
3,681 | 3,096 | 585 | 9,944 | 5,687 | 4,257 | ||||||||||||||||||
|
Other income and (expenses)
|
(172 | ) | 67 | (239 | ) | (645 | ) | 3,086 | (3,731 | ) | ||||||||||||||
|
Interest expense
|
(3,765 | ) | (3,805 | ) | 40 | (7,476 | ) | (8,000 | ) | 524 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
(209 | ) | (603 | ) | 394 | 1,893 | 863 | 1,030 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations before income taxes
|
10,235 | 9,405 | 830 | 19,452 | 20,435 | (983 | ) | |||||||||||||||||
|
Provision for income taxes
|
29 | (280 | ) | 309 | (205 | ) | (715 | ) | 510 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations
|
10,264 | 9,125 | 1,139 | 19,247 | 19,720 | (473 | ) | |||||||||||||||||
|
(Loss) income from discontinued operations
|
(723 | ) | 300 | (1,023 | ) | (4,783 | ) | 1,127 | (5,910 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate ownership
|
9,541 | 9,425 | 116 | 14,464 | 20,847 | (6,383 | ) | |||||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
(440 | ) | (402 | ) | (38 | ) | (800 | ) | (820 | ) | 20 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate ownership attributable to
W. P. Carey members
|
$ | 9,101 | $ | 9,023 | $ | 78 | $ | 13,664 | $ | 20,027 | $ | (6,363 | ) | |||||||||||
|
|
||||||||||||||||||||||||
Our evaluation of the sources of lease revenues is as follows (in thousands):
| Six months ended June 30, | ||||||||
| 2010 | 2009 | |||||||
|
Rental income
|
$ | 26,652 | $ | 27,453 | ||||
|
Interest income from direct financing leases
|
5,192 | 5,292 | ||||||
|
|
||||||||
|
|
$ | 31,844 | $ | 32,745 | ||||
|
|
||||||||
W. P. Carey 6/30/2010 10-Q
—
29
Table of Contents
The following table sets forth the net lease revenues (i.e., rental income and interest income
from direct financing leases) that we earned from lease obligations through our direct ownership of
real estate (in thousands):
| Six months ended June 30, | ||||||||
| 2010 | 2009 | |||||||
|
CheckFree Holdings, Inc.
(a)
|
$ | 2,537 | $ | 2,477 | ||||
|
The American Bottling Company
|
2,189 | 2,298 | ||||||
|
Bouygues Telecom, S.A.
(a) (b) (c)
|
2,174 | 3,068 | ||||||
|
Orbital Sciences Corporation
(d)
|
1,955 | 1,385 | ||||||
|
JP Morgan Chase Bank, N.A.
(e)
|
1,517 | — | ||||||
|
Titan Corporation
|
1,457 | 1,457 | ||||||
|
AutoZone, Inc.
|
1,105 | 1,103 | ||||||
|
Unisource Worldwide, Inc.
(f)
|
960 | 835 | ||||||
|
Quebecor Printing, Inc.
|
958 | 970 | ||||||
|
Sybron Dental Specialties Inc.
|
909 | 977 | ||||||
|
Jarden Corporation
|
807 | 807 | ||||||
|
BE Aerospace, Inc.
|
786 | 786 | ||||||
|
CSS Industries, Inc.
|
785 | 785 | ||||||
|
Eagle Hardware & Garden, a subsidiary of Lowe’s Companies
|
771 | 771 | ||||||
|
Omnicom Group Inc.
(g)
|
771 | 626 | ||||||
|
Career Education Corporation
|
751 | 751 | ||||||
|
Sprint Spectrum, L.P.
|
712 | 712 | ||||||
|
Enviro Works, Inc.
(c)
|
640 | 723 | ||||||
|
Other
(a)(b)
|
10,060 | 12,214 | ||||||
|
|
||||||||
|
|
$ | 31,844 | $ | 32,745 | ||||
|
|
||||||||
| (a) | These revenues are generated in consolidated ventures, generally with our affiliates, and include lease revenues applicable to noncontrolling interests totaling $1.8 million for each of the six month periods ended June 30, 2010 and 2009. | |
| (b) | Amounts are subject to fluctuations in foreign currency exchange rates. | |
| (c) | Decrease was due to lease restructuring in 2009. | |
| (d) | Increase was due to an expansion at this facility completed in January 2010. | |
| (e) | We acquired this investment in February 2010, which we funded with the escrowed proceeds from the sale of a property in December 2009 in an exchange transaction under Section 1031 of the Code. | |
| (f) | Increase was due to change in estimate of unguaranteed residual value. | |
| (g) | Increase reflects adjustments to above-market rent intangibles. |
W. P. Carey 6/30/2010 10-Q
—
30
Table of Contents
We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
| Ownership Interest | Six months ended June 30, | |||||||||||
| Lessee | at June 30, 2010 | 2010 | 2009 | |||||||||
|
The New York Times Company
(a)
|
18 | % | $ | 13,285 | $ | 8,401 | ||||||
|
Carrefour France, SAS
(b)
|
46 | % | 9,993 | 10,543 | ||||||||
|
Federal Express Corporation
|
40 | % | 3,548 | 3,509 | ||||||||
|
Medica — France, S.A.
(b)
|
46 | % | 3,238 | 3,329 | ||||||||
|
Schuler A.G.
(b)
|
33 | % | 3,081 | 3,121 | ||||||||
|
Information Resources, Inc.
|
33 | % | 2,350 | 2,486 | ||||||||
|
U. S. Airways Group, Inc.
(c)
|
75 | % | 2,211 | — | ||||||||
|
Amylin Pharmaceuticals, Inc.
(d)
|
50 | % | 2,014 | 1,671 | ||||||||
|
Hologic, Inc.
|
36 | % | 1,764 | 1,658 | ||||||||
|
Consolidated Systems, Inc.
|
60 | % | 911 | 911 | ||||||||
|
Childtime Childcare, Inc.
|
34 | % | 657 | 665 | ||||||||
|
The Retail Distribution Group
(e)
|
40 | % | 205 | 489 | ||||||||
|
|
||||||||||||
|
|
$ | 43,257 | $ | 36,783 | ||||||||
|
|
||||||||||||
| (a) | We acquired our interest in this investment in March 2009. | |
| (b) | Revenue amounts are subject to fluctuations in foreign currency exchange rates. | |
| (c) | In the third quarter of 2009, we recorded an adjustment to record this entity under the equity method of accounting. During the six months ended June 30, 2009, this entity recorded lease revenue of $1.6 million. | |
| (d) | Increase was due to a CPI-based (or equivalent) rent increase and lease restructuring. | |
| (e) | In March 2010, this venture completed the sale of this property. |
The above table does not reflect our share of interest income from our 5% interest in a venture
that acquired a note receivable in April 2007. The venture recognized interest income of $13.1
million and $12.9 million for the six months ended June 30, 2010 and 2009, respectively. This
amount represents total amount attributable to the entire venture, not our proportionate share, and
is subject to fluctuations in the exchange rate of the Euro.
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or other similar indices for the jurisdiction in which the property is located, sales overrides or other periodic increases, which are intended to increase lease revenues in the future. We own international investments and, therefore, lease revenues from these investments are subject to fluctuations in exchange rate movements in foreign currencies.
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or other similar indices for the jurisdiction in which the property is located, sales overrides or other periodic increases, which are intended to increase lease revenues in the future. We own international investments and, therefore, lease revenues from these investments are subject to fluctuations in exchange rate movements in foreign currencies.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, lease
revenues decreased by $0.5 million and $0.9 million, respectively, primarily due to the impact of
recent activity, including lease restructurings, lease expirations and property sales, which
resulted in reductions to lease revenues of $1.8 million and $1.1 million, respectively. Lease
revenues also decreased $0.8 million and $1.6 million, respectively, in connection with a change in
the accounting for an investment to the equity method from a proportionate consolidated method
beginning in the third quarter of 2009. These decreases were partially offset by increases in lease
revenues of $2.5 million and $1.5 million, respectively, as a result of investments we entered into
in February and June 2010 and an expansion we placed into service in January 2010, as well as
scheduled rent increases at several properties
.
Depreciation and Amortization
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, depreciation and amortization decreased by $0.9 million and $0.4 million, respectively, primarily due to a $1.0 million write-off of intangible assets as a result of a lease termination in June 2009, resulting in higher amortization in 2009. This decrease was partially offset by depreciation and amortization of $0.3 million and $0.5 million incurred in the three and six month current year periods, respectively, on investments entered into during 2010.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, depreciation and amortization decreased by $0.9 million and $0.4 million, respectively, primarily due to a $1.0 million write-off of intangible assets as a result of a lease termination in June 2009, resulting in higher amortization in 2009. This decrease was partially offset by depreciation and amortization of $0.3 million and $0.5 million incurred in the three and six month current year periods, respectively, on investments entered into during 2010.
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Table of Contents
Property Expenses
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, property expenses increased by $0.5 million and $1.3 million, respectively, primarily due to increases in reimbursable tenant costs.
For the three and six months ended June 30, 2010 as compared to the same periods in 2009, property expenses increased by $0.5 million and $1.3 million, respectively, primarily due to increases in reimbursable tenant costs.
Impairment Charges
For the six months ended June 30, 2010, we recognized an impairment charge of $2.3 million to reduce the carrying value of a property to its estimated fair value, which reflects the estimated selling price. This property is being marketed for sale as a result of the tenant vacating the property.
For the six months ended June 30, 2010, we recognized an impairment charge of $2.3 million to reduce the carrying value of a property to its estimated fair value, which reflects the estimated selling price. This property is being marketed for sale as a result of the tenant vacating the property.
For each of the three and six months ended June 30, 2009, we recognized impairment charges totaling
$0.9 million to reduce the carrying values of two properties to their expected selling prices at
that time.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income or
loss (revenue less expenses) from investments entered into with affiliates or third parties in
which we have a noncontrolling interest but exercise significant influence.
For the three months ended June 30, 2010 as compared to the same period in 2009, income from equity
investments in real estate increased by $0.6 million, primarily due to income recognized from an
equity investment that had previously been accounted for under a proportionate consolidation
method.
For the six months ended June 30, 2010 as compared to the same period in 2009, income from equity
investments in real estate increased by $4.3 million, primarily due to a $2.5 million gain
recognized by us in connection with a venture, Retail Distribution, selling its property in March
2010, as well as income of $0.9 million recognized from an equity investment that had previously
been accounted for under a proportionate consolidation method. In addition, income earned from our
investment in The New York Times transaction completed in March 2009 contributed a $0.3 million
increase to income.
Other Income and (Expenses)
Other income and (expenses) generally consists of gains and losses on foreign currency transactions and derivative instruments. We and certain of our foreign consolidated subsidiaries have intercompany debt and/or advances that are not denominated in the entity’s functional currency. When the intercompany debt or accrued interest thereon is remeasured against the functional currency of the entity, a gain or loss may result. For intercompany transactions that are of a long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment in other comprehensive income. We also recognize gains or losses on foreign currency transactions when we repatriate cash from our foreign investments.
Other income and (expenses) generally consists of gains and losses on foreign currency transactions and derivative instruments. We and certain of our foreign consolidated subsidiaries have intercompany debt and/or advances that are not denominated in the entity’s functional currency. When the intercompany debt or accrued interest thereon is remeasured against the functional currency of the entity, a gain or loss may result. For intercompany transactions that are of a long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment in other comprehensive income. We also recognize gains or losses on foreign currency transactions when we repatriate cash from our foreign investments.
For the three and six months ended June 30, 2010, we recognized other expenses of $0.2 million and
$0.7 million, respectively, compared to other income of $0.1 million and $3.1 million,
respectively, in the same periods in 2009. Other expenses in the current year periods were
primarily due to realized and unrealized losses recognized on foreign currency transactions as a
result of changes in foreign currency exchange rates on notes receivable from international
subsidiaries. The other income in the six months ended June 30, 2009 was primarily comprised of a
$7.0 million gain recognized by Carey Storage on the repayment of the $35.0 million outstanding
balance on its secured credit facility for $28.0 million in January 2009, partially offset by a
third party investor’s profit sharing interest in the gain totaling $4.2 million. Fluctuations in
foreign currency exchange rates did not have a significant impact during the comparable 2009
periods.
(Loss) Income from Discontinued Operations
For the three and six months ended June 30, 2010, we recognized losses from discontinued operations of $0.7 million and $4.8 million, respectively, primarily due to impairment charges recognized on properties sold or held for sale of $1.0 million and $5.9 million, respectively, to reduce the carrying values of these properties to their contracted selling prices.
For the three and six months ended June 30, 2010, we recognized losses from discontinued operations of $0.7 million and $4.8 million, respectively, primarily due to impairment charges recognized on properties sold or held for sale of $1.0 million and $5.9 million, respectively, to reduce the carrying values of these properties to their contracted selling prices.
For the three and six months ended June 30, 2009, we recognized income from discontinued operations
of $0.3 million and $1.1 million, respectively, which primarily consisted of income generated from
the operations of discontinued properties of $1.2 million and $2.2 million, respectively, and net
gains on the sales of these properties of $0.5 million and $0.3 million, respectively, partially
offset by impairment charges of $1.4 million recognized in each of the three and six month periods
ended June 30, 2009 on properties sold or being marketed for sale.
W. P. Carey 6/30/2010 10-Q
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Net Income from Real Estate Ownership Attributable to W. P. Carey Members
For the three months ended June 30, 2010 as compared to the same period in 2009, the resulting net income from real estate ownership attributable to W. P. Carey members increased by $0.1 million.
For the three months ended June 30, 2010 as compared to the same period in 2009, the resulting net income from real estate ownership attributable to W. P. Carey members increased by $0.1 million.
For the six months ended June 30, 2010 as compared to the same period in 2009, the resulting net
income from real estate ownership attributable to W. P. Carey members decreased by $6.4 million.
Financial Condition
Sources and Uses of Cash During the Period
Our cash flows fluctuate period to period due to a number of factors, which may include, among other things, the nature and timing of receipts of transaction-related and performance revenue, the performance of the CPA ® REITs relative to their performance criteria, the timing of purchases and sales of real estate, timing of proceeds from non-recourse mortgage loans and receipt of lease revenue, the timing and characterization of distributions from equity investments in real estate and the CPA ® REITs, the timing of certain payments, and the receipt of the annual installment of deferred acquisition revenue and interest thereon in the first quarter from certain of the CPA ® REITs, and changes in foreign currency rates. Despite this fluctuation, we believe that we will generate sufficient cash from operations and from equity distributions in excess of equity income in real estate to meet our short-term and long-term liquidity needs. We may also use existing cash resources, the proceeds of non-recourse mortgage loans, unused capacity on our line of credit and the issuance of additional equity securities to meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.
Our cash flows fluctuate period to period due to a number of factors, which may include, among other things, the nature and timing of receipts of transaction-related and performance revenue, the performance of the CPA ® REITs relative to their performance criteria, the timing of purchases and sales of real estate, timing of proceeds from non-recourse mortgage loans and receipt of lease revenue, the timing and characterization of distributions from equity investments in real estate and the CPA ® REITs, the timing of certain payments, and the receipt of the annual installment of deferred acquisition revenue and interest thereon in the first quarter from certain of the CPA ® REITs, and changes in foreign currency rates. Despite this fluctuation, we believe that we will generate sufficient cash from operations and from equity distributions in excess of equity income in real estate to meet our short-term and long-term liquidity needs. We may also use existing cash resources, the proceeds of non-recourse mortgage loans, unused capacity on our line of credit and the issuance of additional equity securities to meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.
Operating Activities
Cash flow from operating activities increased slightly in the six months ended June 30, 2010 as
compared to the prior year period. Increases in net income, which were driven primarily by revenues
earned in connection with higher investment volume on behalf of the CPA
®
REITs, were
partially offset by lower cash flow in our real estate ownership segment and a decline in the
amount of deferred acquisition revenue received.
During the six months ended June 30, 2010, we received revenue of $20.2 million in cash from
providing asset-based management services to the CPA
®
REITs as compared to $18.6 million
in the 2009 period. This amount does not include revenue received from the CPA
®
REITs in
the form of shares of their restricted common stock rather than cash (see below). During the
current year period, we received revenue of $11.1 million in connection with structuring
investments and debt refinancing on behalf of the CPA
®
REITs as compared to $6.1 million
in the comparable prior year period. Deferred acquisition revenue received was lower during the six
months ended June 30, 2010 as compared to the same period in 2009, primarily due to a shift in the
timing of when deferred acquisition revenue is received and lower investment volume by the
CPA
®
REITs in prior year periods. For CPA
®
:14, CPA
®
:15 and
CPA
®
:16 — Global, we receive deferred acquisition revenue in annual installments each
January. For CPA
®
:17 — Global, such revenue is received annually based on the quarter
that a transaction is completed. This change for CPA
®
:17 — Global has the effect of
spreading the revenue received throughout the year as compared to receiving all deferred revenue in
January.
During the six months ended June 30, 2010, our real estate ownership segment provided cash flows
(contractual lease revenues, net of property-level debt service) of approximately $21.7 million,
which represents a decrease of $4.3 million from the 2009 period, primarily due to lower
contractual lease revenues received in the current period as a result of recent activity, including
lease restructurings, lease expirations and property sales.
In 2010, we elected to continue to receive all performance revenue from CPA
®
:16 —
Global as well as asset management revenue from CPA
®
:17 — Global in restricted shares
of their common stock rather than cash, while for CPA
®
:14 and CPA
®
:15, we
elected to receive 80% of all performance revenue in their restricted shares, with the remaining
20% payable in cash.
In
addition to cash flow from operations, we may use the following sources to fund distributions to shareholders:
distributions received from equity investments in excess of equity income, net contributions from
noncontrolling interests, borrowings under our line of credit and existing cash resources.
Investing Activities
Our investing activities are generally comprised of real estate transactions (purchases and sales) and capitalized property related costs. During the six months ended June 30, 2010, we used $74.9 million to acquire a domestic investment and an investment in Spain. We funded the domestic investment with $36.1 million from the escrowed proceeds of a sale of a property in December 2009 in an exchange transaction under Section 1031 of the Code as well as $11.5 million from our line of credit. The investment in Spain was funded with contributions received from an affiliate who holds a noncontrolling interest in the investment of $9.9 million and proceeds from our line of credit. In connection with this investment, we paid foreign valued-added taxes of $4.2 million, which we expect to recover in the future. Cash inflows during this period included $7.8 million in distributions from equity investments in real estate and the CPA ® REITs in excess of equity income, inclusive of distributions of $3.6 million received from the Retail Distributions venture in connection with the sale of its property as well as proceeds of $9.2 million from the sale of four properties.
Our investing activities are generally comprised of real estate transactions (purchases and sales) and capitalized property related costs. During the six months ended June 30, 2010, we used $74.9 million to acquire a domestic investment and an investment in Spain. We funded the domestic investment with $36.1 million from the escrowed proceeds of a sale of a property in December 2009 in an exchange transaction under Section 1031 of the Code as well as $11.5 million from our line of credit. The investment in Spain was funded with contributions received from an affiliate who holds a noncontrolling interest in the investment of $9.9 million and proceeds from our line of credit. In connection with this investment, we paid foreign valued-added taxes of $4.2 million, which we expect to recover in the future. Cash inflows during this period included $7.8 million in distributions from equity investments in real estate and the CPA ® REITs in excess of equity income, inclusive of distributions of $3.6 million received from the Retail Distributions venture in connection with the sale of its property as well as proceeds of $9.2 million from the sale of four properties.
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Financing Activities
During the six months ended June 30, 2010, we paid distributions to shareholders of $52.5 million, inclusive of a special distribution of $0.30 per share, or $11.8 million, that was paid in January 2010 to shareholders of record at December 31, 2009, and paid distributions of $2.1 million to affiliates who hold noncontrolling interests in various entities with us and a third-party who holds a profit sharing interest in Carey Storage. We also made scheduled mortgage principal payments of $10.3 million and received mortgage loan proceeds totaling $6.3 million, including $4.7 million obtained as a result of refinancing a maturing non-recourse mortgage loan and an additional $1.6 million obtained by Carey Storage that is secured by individual mortgages on, and cross-collateralized by, four properties in the Carey Storage portfolio. Borrowings under our line of credit increased overall by $60.8 million since December 31, 2009 and were comprised of gross borrowings of $83.3 million and repayments of $22.5 million. Borrowings under our line of credit were used primarily to finance our portion of the investments we acquired in 2010 and to fund distributions to shareholders. In addition, we received contributions of $11.2 million from holders of noncontrolling interests, including the $9.9 million received in connection with the investment in Spain.
During the six months ended June 30, 2010, we paid distributions to shareholders of $52.5 million, inclusive of a special distribution of $0.30 per share, or $11.8 million, that was paid in January 2010 to shareholders of record at December 31, 2009, and paid distributions of $2.1 million to affiliates who hold noncontrolling interests in various entities with us and a third-party who holds a profit sharing interest in Carey Storage. We also made scheduled mortgage principal payments of $10.3 million and received mortgage loan proceeds totaling $6.3 million, including $4.7 million obtained as a result of refinancing a maturing non-recourse mortgage loan and an additional $1.6 million obtained by Carey Storage that is secured by individual mortgages on, and cross-collateralized by, four properties in the Carey Storage portfolio. Borrowings under our line of credit increased overall by $60.8 million since December 31, 2009 and were comprised of gross borrowings of $83.3 million and repayments of $22.5 million. Borrowings under our line of credit were used primarily to finance our portion of the investments we acquired in 2010 and to fund distributions to shareholders. In addition, we received contributions of $11.2 million from holders of noncontrolling interests, including the $9.9 million received in connection with the investment in Spain.
Summary of Financing
The table below summarizes our non-recourse long-term debt and credit facility (dollars in thousands):
The table below summarizes our non-recourse long-term debt and credit facility (dollars in thousands):
| Balance | June 30, 2010 | December 31, 2009 | ||||||
|
Fixed rate
|
$ | 137,960 | $ | 147,060 | ||||
|
Variable rate
(a)
|
240,037 | 179,270 | ||||||
|
|
||||||||
|
|
$ | 377,997 | $ | 326,330 | ||||
|
|
||||||||
|
|
||||||||
|
Percent of total debt
|
||||||||
|
Fixed rate
|
36 | % | 45 | % | ||||
|
Variable rate
(a)
|
64 | % | 55 | % | ||||
|
|
||||||||
|
|
100 | % | 100 | % | ||||
|
|
||||||||
|
|
||||||||
|
Weighted average interest rate at end of period
|
||||||||
|
Fixed rate
|
6.1 | % | 6.2 | % | ||||
|
Variable rate
(a)
|
2.5 | % | 2.9 | % | ||||
| (a) | Variable rate debt at June 30, 2010 included (i) $171.8 million outstanding under our line of credit, (ii) $12.6 million that has been effectively converted to fixed rates through interest rate swap derivative instruments and (iii) $50.7 million in mortgage loan obligations that bore interest at fixed rates but have interest rate reset features that may change the interest rates to then-prevailing market fixed rates (subject to specified caps) at certain points during their term. The interest rate for one of these loans, which had an outstanding balance of $6.2 million at June 30, 2010, is scheduled to reset to a new rate in October 2010 based on market rates at that time. |
Cash Resources
At June 30, 2010, our cash resources consisted of the following:
At June 30, 2010, our cash resources consisted of the following:
| • | Cash and cash equivalents totaling $39.4 million. Of this amount, $5.2 million, at then current exchange rates, was held in foreign bank accounts, and we could be subject to restrictions or significant costs should we decide to repatriate these amounts; |
| • | A line of credit with unused capacity of $78.3 million, all of which is available to us and may also be used to loan funds to our affiliates. Our lender has issued letters of credit totaling $6.8 million on our behalf in connection with certain contractual obligations, which reduce amounts that may be drawn under this facility; and |
| • | We also had unleveraged properties that had an aggregate carrying value of $306.8 million, although given the current economic environment, there can be no assurance that we would be able to obtain financing for these properties. |
W. P. Carey 6/30/2010 10-Q
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Our cash resources can be used for working capital needs and other commitments and may be used for
future investments. We continue to evaluate financing options, such as obtaining non-recourse
financing on our unleveraged properties. Any financing obtained may be used for working capital
objectives and/or may be used to pay down existing debt balances. A summary of our unsecured
credit facility is provided below (in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Outstanding | Maximum | Outstanding | Maximum | |||||||||||||
| Balance | Available | Balance | Available | |||||||||||||
|
Line of credit
|
$ | 171,750 | $ | 250,000 | $ | 111,000 | $ | 250,000 | ||||||||
We have a $250.0 million unsecured revolving line of credit that is scheduled to mature in
June 2011. Pursuant to its terms, the line of credit can be increased up to $300.0 million at the
discretion of the lenders and, at our discretion, can be extended for an additional year subject to
satisfying certain conditions and the payment of an extension fee equal to 0.125% of the total
commitments under the facility at that time.
The line of credit provides for an annual interest rate, at our election, of either (i) LIBOR plus
a spread that ranges from 75 to 120 basis points depending on our leverage or (ii) the greater of
the lender’s prime rate and the Federal Funds Effective Rate plus 50 basis points. At June 30,
2010, the average interest rate on advances under the line of credit was 1.2%. In addition, we pay
an annual fee ranging between 12.5 and 20 basis points of the unused portion of the line of credit,
depending on our leverage ratio. Based on our leverage ratio at June 30, 2010, we paid interest at
LIBOR plus 90 basis points and paid 15 basis points on the unused portion of the line of credit.
The line of credit has financial covenants that among other things require us to maintain a minimum
equity value, restrict the amount of distributions we can pay and require us to meet or exceed
certain operating and coverage ratios. We were in compliance with these covenants at June 30, 2010.
Cash Requirements
During the next twelve months, we expect that cash payments will include paying distributions to shareholders and to affiliates who hold noncontrolling interests in entities we control and making scheduled mortgage principal payments, including mortgage balloon payments totaling $16.8 million, as well as other normal recurring operating expenses. Additionally, as described above, our line of credit matures in June 2011 and can be extended for an additional year, if necessary.
During the next twelve months, we expect that cash payments will include paying distributions to shareholders and to affiliates who hold noncontrolling interests in entities we control and making scheduled mortgage principal payments, including mortgage balloon payments totaling $16.8 million, as well as other normal recurring operating expenses. Additionally, as described above, our line of credit matures in June 2011 and can be extended for an additional year, if necessary.
We expect to fund future investments, any capital expenditures on existing properties and scheduled
debt maturities on non-recourse mortgage loans through cash generated from operations, the use of
our cash reserves or unused amounts on our line of credit.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual obligations at June 30, 2010 and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):
The table below summarizes our debt, off-balance sheet arrangements and other contractual obligations at June 30, 2010 and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):
| Less than | More than | |||||||||||||||||||
| Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
|
Non-recourse debt — Principal
|
$ | 206,247 | $ | 23,855 | $ | 50,622 | $ | 14,851 | $ | 116,919 | ||||||||||
|
Line of credit — Principal
|
171,750 | 171,750 | — | — | — | |||||||||||||||
|
Interest on borrowings
(a)
|
62,910 | 14,170 | 20,004 | 15,307 | 13,429 | |||||||||||||||
|
Operating and other lease commitments
(b)
|
13,262 | 1,114 | 2,202 | 2,148 | 7,798 | |||||||||||||||
|
Property improvement commitments
|
214 | 214 | — | — | — | |||||||||||||||
|
Other commitments
(c)
|
152 | 152 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 454,535 | $ | 211,255 | $ | 72,828 | $ | 32,306 | $ | 138,146 | ||||||||||
|
|
||||||||||||||||||||
| (a) | Interest on un-hedged variable rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding at June 30, 2010. | |
| (b) | Operating and other lease commitments consist primarily of the total minimum rents payable on the lease for our principal offices. We are reimbursed by affiliates for their share of the future minimum rents under an office cost-sharing agreement. These amounts are allocated among the entities based on gross revenues and are adjusted quarterly. The table above excludes the rental obligation under a ground lease of a venture in which we own a 46% interest. This obligation totals approximately $2.6 million over the lease term through January 2063. | |
| (c) | Includes estimates for accrued interest and penalties related to uncertain tax positions and a commitment to contribute capital to an investment in India. |
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Amounts in the table above related to our foreign operations are based on the exchange rate of the
Euro at June 30, 2010. At June 30, 2010, we had no material capital lease obligations for which we
are the lessee, either individually or in the aggregate.
We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. Generally, the underlying investments are owned with our affiliates. Summarized
financial information for these ventures and our ownership interest in the ventures at June 30,
2010 are presented below. Summarized financial information provided represents the total amounts
attributable to the ventures and does not represent our proportionate share (dollars in thousands):
| Ownership Interest | Total Third | |||||||||||||||
| Lessee | at June 30, 2010 | Total Assets | Party Debt | Maturity Date | ||||||||||||
|
Federal Express Corporation
|
40 | % | 43,482 | 39,539 | 1/2011 | |||||||||||
|
Information Resources, Inc.
|
33 | % | 47,293 | 21,529 | 1/2011 | |||||||||||
|
Childtime Childcare, Inc.
|
34 | % | 9,514 | 6,354 | 1/2011 | |||||||||||
|
U. S. Airways Group, Inc.
|
75 | % | 30,273 | 18,569 | 4/2014 | |||||||||||
|
The New York Times Company
|
18 | % | 240,789 | 117,920 | 9/2014 | |||||||||||
|
Carrefour France, SAS
(a)
|
46 | % | 127,151 | 98,013 | 12/2014 | |||||||||||
|
Consolidated Systems, Inc.
|
60 | % | 16,869 | 11,454 | 11/2016 | |||||||||||
|
Amylin Pharmaceuticals, Inc.
(b)
|
50 | % | 54,974 | 70,700 | 7/2017 | |||||||||||
|
Medica — France, S.A.
(a)
|
46 | % | 41,749 | 34,275 | 10/2017 | |||||||||||
|
Hologic, Inc.
|
36 | % | 26,984 | 14,494 | 5/2023 | |||||||||||
|
Schuler A.G.
(a)
|
33 | % | 63,524 | — | N/A | |||||||||||
|
|
||||||||||||||||
|
|
$ | 702,602 | $ | 432,847 | ||||||||||||
|
|
||||||||||||||||
| (a) | Dollar amounts shown are based on the exchange rate of the Euro at June 30, 2010. | |
| (b) | In 2007, this venture refinanced its existing non-recourse mortgage debt with new non-recourse financing of $35.4 million based on the appraised value of the underlying real estate of the venture and distributed the proceeds to the venture partners. |
The table above does not reflect our acquisition in April 2007 of a 5% interest in a venture that
made a loan (the “note receivable”) to the holder of a 75% interest in a limited partnership owning
37 properties throughout Germany at a total cost of $336.0 million. In connection with this
transaction, the venture obtained non-recourse financing of $284.9 million having a fixed annual
interest rate of 5.5% and a term of 10 years. Under the terms of the note receivable, the venture
will receive interest that approximates 75% of all income earned by the limited partnership, less
adjustments. All amounts are based on the exchange rate of the Euro at the date of acquisition.
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our properties were
in substantial compliance with Federal and state environmental statutes at the time the properties
were acquired. However, portions of certain properties have been subject to some degree of
contamination, principally in connection with leakage from underground storage tanks, surface
spills or other on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing identified conditions.
Tenants are generally subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our leases generally
require tenants to indemnify us from all liabilities and losses related to the leased properties
with provisions of such indemnification specifically addressing environmental matters. The leases
generally include provisions that allow for periodic environmental assessments, paid for by the
tenant, and allow us to extend leases until such time as a tenant has satisfied its environmental
obligations. Certain of our leases allow us to require financial assurances from tenants, such as
performance bonds or letters of credit, if the costs of remediating environmental conditions are,
in our estimation, in excess of
specified amounts. Accordingly, we believe that the ultimate resolution of environmental matters
should not have a material adverse effect on our financial condition, liquidity or results of
operations.
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Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk and foreign currency exchange risk. We are also exposed to market risk as a result of concentrations in certain tenant industries.
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk and foreign currency exchange risk. We are also exposed to market risk as a result of concentrations in certain tenant industries.
We do not generally use derivative instruments to manage foreign currency exchange rate risk
exposure and do not use derivative instruments to hedge credit/market risks or for speculative
purposes.
Interest Rate Risk
The value of our real estate and related fixed rate debt obligations is subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, all of which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the value of our owned and managed assets to decrease, which would create lower revenues from managed assets and lower investment performance for the managed funds. Increases in interest rates may also have an impact on the credit profile of certain tenants.
The value of our real estate and related fixed rate debt obligations is subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, all of which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the value of our owned and managed assets to decrease, which would create lower revenues from managed assets and lower investment performance for the managed funds. Increases in interest rates may also have an impact on the credit profile of certain tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap
agreements with lenders that effectively convert the variable rate debt service obligations of the
loan to a fixed rate. Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a specific period, and interest rate caps limit the effective borrowing rate of
variable rate debt obligations while allowing participants to share in downward shifts in interest
rates. These interest rate swaps and caps are derivative instruments designated as cash flow hedges
on the forecasted interest payments on the debt obligation. The notional, or face, amount on which
the swaps or caps are based is not exchanged. Our objective in using these derivatives is to limit
our exposure to interest rate movements. We estimate that the fair value of our interest rate
swaps, which is included in Accounts payable, accrued expenses and other liabilities in the
consolidated financial statements, was a net liability of $1.1 million at June 30, 2010.
At June 30, 2010, a significant portion (approximately 53%) of our long-term debt either bore
interest at fixed rates, was swapped or capped to a fixed rate, or bore interest at fixed rates
that were scheduled to convert to then-prevailing market fixed rates at certain future points
during their term. The estimated fair value of these instruments is affected by changes in market
interest rates. The annual interest rates on our fixed rate debt at June 30, 2010 ranged from 4.9%
to 7.8%. The annual interest rates on our variable rate debt at June 30, 2010 ranged from 1.3% to
7.3%. Our debt obligations are more fully described under Financial Condition in Item 2 above. The
following table presents principal cash flows based upon expected maturity dates of our debt
obligations outstanding at June 30, 2010 (in thousands):
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
|
Fixed rate debt
|
$ | 2,526 | $ | 26,205 | $ | 31,775 | $ | 2,678 | $ | 2,486 | $ | 72,290 | $ | 137,960 | $ | 132,005 | ||||||||||||||||
|
Variable rate debt
|
$ | 6,178 | $ | 174,244 | $ | 2,555 | $ | 2,699 | $ | 2,869 | $ | 51,492 | $ | 240,037 | $ | 238,667 | ||||||||||||||||
The estimated fair value of our fixed rate debt and our variable rate debt that currently bears
interest at fixed rates or has effectively been converted to a fixed rate through the use of
interest rate swaps or caps is affected by changes in interest rates. A decrease or increase in
interest rates of 1% would change the estimated fair value of this debt at June 30, 2010 by an
aggregate increase of $10.5 million or an aggregate decrease of $10.1 million, respectively. Annual
interest expense on our unhedged variable rate debt that does not bear interest at fixed rates at
June 30, 2010 would increase or decrease by $1.8 million for each respective 1% change in annual
interest rates. As more fully described under Financial Condition—Summary of Financing in Item 2
above, a portion of the debt classified as variable rate debt in the tables above bore interest at
fixed rates at June 30, 2010 but has interest rate reset features that will change the fixed
interest rates to then-prevailing market fixed rates at certain points during their term. Such debt
is generally not subject to short-term fluctuations in interest rates.
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Foreign Currency Exchange Rate Risk
We own investments in the European Union, and as a result we are subject to risk from the effects
of exchange rate movements of foreign currencies, primarily the Euro, which may affect future costs
and cash flows. We manage foreign currency exchange rate
movements by generally placing both our debt obligations to the lender and the tenant’s rental
obligations to us in the same currency.
We are generally a net receiver of the foreign currency (we
receive more cash than we pay out), and therefore our foreign operations benefit from a weaker U.S.
dollar, and are adversely affected by a stronger U.S. dollar, relative to the Euro. For the six
months ended June 30, 2010, we recognized net realized and unrealized foreign currency transaction
losses of $0.2 million and $0.9 million, respectively. These losses are included in Other income
and (expenses) in the consolidated financial statements and were primarily due to changes in the
value of the Euro on accrued interest receivable on notes receivable from wholly-owned
subsidiaries.
Through the date of this Report, we had not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates. We have
obtained non-recourse mortgage financing at fixed rates of interest in the local currency. To the
extent that currency fluctuations increase or decrease rental revenues as translated to dollars,
the change in debt service, as translated to dollars, will partially offset the effect of
fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency
rates.
Disclosure Controls and Procedures
Our disclosure controls and procedures include our controls and other procedures designed to
provide reasonable assurance that information required to be disclosed in this and other reports
filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the required time periods specified in the SEC’s rules and forms and
that such information is accumulated and communicated to management, including our interim chief
executive officer and chief financial officer, to allow timely decisions regarding required
disclosures. It should be noted that no system of controls can provide complete assurance of
achieving a company’s objectives and that future events may impact the effectiveness of a system of
controls.
Our interim chief executive officer and chief financial officer, after conducting an evaluation,
together with members of our management, of the effectiveness of the design and operation of our
disclosure controls and procedures at June 30, 2010, have concluded that our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective at June 30,
2010 at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | |||
| 31.1 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 31.2 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 32 |
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 101 |
The following materials from W.P. Carey & Co. LLC’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2010, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2010
and December 31, 2009, (ii) Consolidated Statements of Income for the three
months and six months ended June 30, 2010 and 2009, (iii) Consolidated
Statements of Comprehensive Income for the three months and six months ended
June 30, 2010 and 2009, (iv) Consolidated Statements of Cash Flows for the six
months ended June 30, 2010 and 2009, and (v) Notes to Consolidated Financial
Statements.*
|
|||
| * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
W. P. Carey & Co. LLC
|
||||
| Date: 8/6/2010 | By: | /s/ Mark J. DeCesaris | ||
| Mark J. DeCesaris | ||||
|
Managing Director and Chief Financial Officer
(Principal Financial Officer) |
||||
| Date: 8/6/2010 | By: | /s/ Thomas J. Ridings, Jr. | ||
| Thomas J. Ridings, Jr. | ||||
|
Executive Director and Chief Accounting Officer
(Principal Accounting Officer) |
||||
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EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | |||
| 31.1 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 31.2 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 32 |
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
|
|
||||
| 101 |
The following materials from W.P. Carey & Co. LLC’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2010, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Balance Sheets at June 30, 2010 and
December 31, 2009, (ii) Consolidated Statements of Income for the three months
and six months ended June 30, 2010 and 2009, (iii) Consolidated Statements of
Comprehensive Income for the three months and six months ended June 30, 2010 and
2009, (iv) Consolidated Statements of Cash Flows for the six months ended June
30, 2010 and 2009, and (v) Notes to Consolidated Financial Statements.*
|
|||
| * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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TABLE OF CONTENTS
Note 1. BusinessNote 2. Basis Of PresentationNote 3. Agreements and Transactions with Related PartiesNote 4. Investments in Real EstateNote 5. Equity Investments in Real Estate and Cpa ReitsNote 5. Equity Investments in Real Estate and CpaNote 6. Fair Value MeasurementsNote 7. Risk ManagementNote 8. Commitments and ContingenciesNote 9. Equity and Stock Based and Other CompensationNote 10. Noncontrolling InterestsNote 11. Income TaxesNote 12. Segment ReportingNote 13. Discontinued OperationsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 6. Exhibits