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 September 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 | 13-3912578 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 50 Rockefeller Plaza | ||
| New York, New York | 10020 | |
| (Address of principal executive offices) | (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)
(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
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
Registrant had 39,439,852 shares of common stock, no par value, outstanding at October 29, 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 9/30/2010 10-Q
—
1
Table of Contents
W. P. CAREY & CO. LLC
(in thousands, except share amounts)
| September 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
||||||||
|
Investments in real estate:
|
||||||||
|
Real estate, at cost (inclusive of amounts attributable to consolidated variable interest entities (“VIEs”) of $39,718 and
$52,625, respectively)
|
$ | 567,933 | $ | 525,607 | ||||
|
Operating real estate, at cost (inclusive of amounts attributable to consolidated VIEs of $25,665 and $25,665, respectively)
|
103,343 | 85,927 | ||||||
|
Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $19,978 and $25,650, respectively)
|
(118,510 | ) | (112,286 | ) | ||||
|
|
||||||||
|
Net investments in properties
|
552,766 | 499,248 | ||||||
|
Net investments in direct financing leases
|
77,892 | 80,222 | ||||||
|
Equity investments in real estate and CPA
®
REITs
|
323,742 | 304,990 | ||||||
|
|
||||||||
|
Net investments in real estate
|
954,400 | 884,460 | ||||||
|
Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs of $102 and $108, respectively)
|
46,250 | 18,450 | ||||||
|
Due from affiliates
|
28,217 | 35,998 | ||||||
|
Intangible assets and goodwill, net
|
88,994 | 85,187 | ||||||
|
Other assets, net (inclusive of amounts attributable to consolidated VIEs of $1,762 and $1,504, respectively)
|
39,869 | 69,241 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,157,730 | $ | 1,093,336 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $9,659 and $9,850, respectively)
|
$ | 254,144 | $ | 215,330 | ||||
|
Line of credit
|
141,750 | 111,000 | ||||||
|
Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable to consolidated VIEs of $2,144 and
$2,286, respectively)
|
34,030 | 51,710 | ||||||
|
Income taxes, net
|
36,916 | 43,831 | ||||||
|
Distributions payable
|
20,008 | 31,365 | ||||||
|
|
||||||||
|
Total liabilities
|
486,848 | 453,236 | ||||||
|
|
||||||||
|
Redeemable noncontrolling interest
|
6,887 | 7,692 | ||||||
|
|
||||||||
|
Commitments and contingencies (Note 8)
|
||||||||
|
Equity:
|
||||||||
|
W. P. Carey members’ equity:
|
||||||||
|
Listed shares, no par value, 100,000,000 shares authorized; 39,481,027 and 39,204,605 shares issued and outstanding, respectively
|
762,505 | 754,507 | ||||||
|
Distributions in excess of accumulated earnings
|
(145,519 | ) | (138,442 | ) | ||||
|
Deferred compensation obligation
|
10,699 | 10,249 | ||||||
|
Accumulated other comprehensive loss
|
(3,592 | ) | (681 | ) | ||||
|
|
||||||||
|
Total W. P. Carey members’ equity
|
624,093 | 625,633 | ||||||
|
Noncontrolling interests
|
39,902 | 6,775 | ||||||
|
|
||||||||
|
Total equity
|
663,995 | 632,408 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 1,157,730 | $ | 1,093,336 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2010 10-Q —
2
Table of Contents
W. P. CAREY & CO. LLC
(in thousands, except share and per share amounts)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
||||||||||||||||
|
Asset management revenue
|
$ | 19,219 | $ | 19,106 | $ | 57,119 | $ | 57,441 | ||||||||
|
Structuring revenue
|
708 | 5,476 | 20,644 | 16,250 | ||||||||||||
|
Wholesaling revenue
|
2,260 | 1,869 | 6,593 | 4,426 | ||||||||||||
|
Reimbursed costs from affiliates
|
15,908 | 13,503 | 46,310 | 33,747 | ||||||||||||
|
Lease revenues
|
16,203 | 15,573 | 48,047 | 46,732 | ||||||||||||
|
Other real estate income
|
4,656 | 3,657 | 13,228 | 11,427 | ||||||||||||
|
|
||||||||||||||||
|
|
58,954 | 59,184 | 191,941 | 170,023 | ||||||||||||
|
|
||||||||||||||||
|
Operating Expenses
|
||||||||||||||||
|
General and administrative
|
(14,828 | ) | (14,969 | ) | (50,560 | ) | (48,269 | ) | ||||||||
|
Reimbursable costs
|
(15,908 | ) | (13,503 | ) | (46,310 | ) | (33,747 | ) | ||||||||
|
Depreciation and amortization
|
(6,067 | ) | (5,438 | ) | (18,058 | ) | (16,795 | ) | ||||||||
|
Property expenses
|
(3,220 | ) | (1,903 | ) | (7,848 | ) | (5,247 | ) | ||||||||
|
Other real estate expenses
|
(1,987 | ) | (1,758 | ) | (5,575 | ) | (5,596 | ) | ||||||||
|
Impairment charges
|
(481 | ) | — | (2,749 | ) | (900 | ) | |||||||||
|
|
||||||||||||||||
|
|
(42,491 | ) | (37,571 | ) | (131,100 | ) | (110,554 | ) | ||||||||
|
|
||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||
|
Other interest income
|
329 | 476 | 938 | 1,299 | ||||||||||||
|
Income from equity investments in real estate and CPA
®
REITs
|
6,066 | 2,923 | 22,846 | 9,866 | ||||||||||||
|
Other income and (expenses)
|
1,184 | 251 | 562 | 3,532 | ||||||||||||
|
Interest expense
|
(4,298 | ) | (3,786 | ) | (11,774 | ) | (11,245 | ) | ||||||||
|
|
||||||||||||||||
|
|
3,281 | (136 | ) | 12,572 | 3,452 | |||||||||||
|
|
||||||||||||||||
|
Income from continuing operations before income taxes
|
19,744 | 21,477 | 73,413 | 62,921 | ||||||||||||
|
Provision for income taxes
|
(3,377 | ) | (6,018 | ) | (14,240 | ) | (15,938 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
16,367 | 15,459 | 59,173 | 46,983 | ||||||||||||
|
|
||||||||||||||||
|
Discontinued Operations
|
||||||||||||||||
|
Income from operations of discontinued properties
|
4 | 1,115 | 630 | 3,279 | ||||||||||||
|
Gain on sale of real estate
|
— | — | 460 | 343 | ||||||||||||
|
Impairment charges
|
— | (2,390 | ) | (5,869 | ) | (3,770 | ) | |||||||||
|
|
||||||||||||||||
|
Income (loss) from discontinued operations
|
4 | (1,275 | ) | (4,779 | ) | (148 | ) | |||||||||
|
|
||||||||||||||||
|
Net Income
|
16,371 | 14,184 | 54,394 | 46,835 | ||||||||||||
|
Add: Net loss attributable to noncontrolling interests
|
81 | 186 | 495 | 559 | ||||||||||||
|
Less: Net income attributable to redeemable noncontrolling interests
|
(106 | ) | (1,019 | ) | (698 | ) | (1,357 | ) | ||||||||
|
|
||||||||||||||||
|
Net Income Attributable to W. P. Carey Members
|
$ | 16,346 | $ | 13,351 | $ | 54,191 | $ | 46,037 | ||||||||
|
|
||||||||||||||||
|
Basic Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members |
$ | 0.41 | $ | 0.36 | $ | 1.50 | $ | 1.16 | ||||||||
|
Income (loss) from discontinued operations attributable to W. P. Carey
members
|
— | (0.03 | ) | (0.12 | ) | (0.01 | ) | |||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 0.41 | $ | 0.33 | $ | 1.38 | $ | 1.15 | ||||||||
|
|
||||||||||||||||
|
Diluted Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members |
$ | 0.41 | $ | 0.37 | $ | 1.48 | $ | 1.16 | ||||||||
|
Income (loss) from discontinued operations attributable to W. P. Carey
members
|
— | (0.03 | ) | (0.12 | ) | (0.01 | ) | |||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 0.41 | $ | 0.34 | $ | 1.36 | $ | 1.15 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Weighted Average Shares Outstanding
|
||||||||||||||||
|
Basic
|
39,180,719 | 39,727,460 | 39,161,086 | 39,163,186 | ||||||||||||
|
|
||||||||||||||||
|
Diluted
|
39,717,931 | 40,368,946 | 39,774,122 | 39,770,196 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to W. P. Carey Members
|
||||||||||||||||
|
Income from continuing operations, net of tax
|
$ | 16,342 | $ | 14,626 | $ | 58,970 | $ | 46,185 | ||||||||
|
Income (loss) from discontinued operations, net of tax
|
4 | (1,275 | ) | (4,779 | ) | (148 | ) | |||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 16,346 | $ | 13,351 | $ | 54,191 | $ | 46,037 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Distributions Declared Per Share
|
$ | 0.508 | $ | 0.500 | $ | 1.518 | $ | 1.494 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2010 10-Q —
3
Table of Contents
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net Income
|
$ | 16,371 | $ | 14,184 | $ | 54,394 | $ | 46,835 | ||||||||
|
Other Comprehensive Income (Loss):
|
||||||||||||||||
|
Foreign currency translation adjustments
|
9,359 | 2,258 | 1,326 | 2,114 | ||||||||||||
|
Unrealized loss on derivative instrument
|
(1,808 | ) | (495 | ) | (3,103 | ) | (596 | ) | ||||||||
|
Change in unrealized appreciation on marketable securities
|
17 | 21 | 5 | 35 | ||||||||||||
|
|
||||||||||||||||
|
|
7,568 | 1,784 | (1,772 | ) | 1,553 | |||||||||||
|
|
||||||||||||||||
|
Comprehensive Income
|
23,939 | 15,968 | 52,622 | 48,388 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to Noncontrolling Interests:
|
||||||||||||||||
|
Net loss
|
81 | 186 | 495 | 559 | ||||||||||||
|
Foreign currency translation adjustments
|
(1,291 | ) | (66 | ) | (1,146 | ) | (71 | ) | ||||||||
|
|
||||||||||||||||
|
Comprehensive (income) loss attributable to noncontrolling interests
|
(1,210 | ) | 120 | (651 | ) | 488 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to Redeemable Noncontrolling Interests:
|
||||||||||||||||
|
Net income
|
(106 | ) | (1,019 | ) | (698 | ) | (1,357 | ) | ||||||||
|
Foreign currency translation adjustments
|
(10 | ) | 2 | 7 | (6 | ) | ||||||||||
|
|
||||||||||||||||
|
Comprehensive income attributable to redeemable noncontrolling
interests
|
(116 | ) | (1,017 | ) | (691 | ) | (1,363 | ) | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Comprehensive Income Attributable to W. P. Carey Members
|
$ | 22,613 | $ | 15,071 | $ | 51,280 | $ | 47,513 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2010 10-Q —
4
Table of Contents
W. P. CAREY & CO. LLC
(in thousands)
| Nine months ended September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Cash Flows — Operating Activities
|
||||||||
|
Net income
|
$ | 54,394 | $ | 46,835 | ||||
|
Adjustments to net income:
|
||||||||
|
Depreciation and amortization including intangible assets and deferred financing costs
|
18,496 | 18,385 | ||||||
|
Income from equity investments in real estate and CPA
®
REITs in excess of
distributions received
|
(5,373 | ) | (4,303 | ) | ||||
|
Straight-line rent and financing lease adjustments
|
144 | 1,560 | ||||||
|
Gain on sale of real estate
|
(460 | ) | (343 | ) | ||||
|
Gain on extinguishment of debt
|
— | (6,991 | ) | |||||
|
Allocation of (loss) earnings to profit-sharing interest
|
(781 | ) | 3,976 | |||||
|
Management income received in shares of affiliates
|
(26,262 | ) | (23,451 | ) | ||||
|
Unrealized loss (gain) on foreign currency transactions and others
|
143 | (257 | ) | |||||
|
Realized loss (gain) on foreign currency transactions and others
|
176 | (260 | ) | |||||
|
Impairment charges
|
8,618 | 4,670 | ||||||
|
Stock-based compensation expense
|
6,695 | 7,777 | ||||||
|
Deferred acquisition revenue received
|
19,248 | 23,109 | ||||||
|
Increase in structuring revenue receivable
|
(9,900 | ) | (8,196 | ) | ||||
|
Decrease in income taxes, net
|
(9,461 | ) | (11,137 | ) | ||||
|
Net changes in other operating assets and liabilities
|
(3,409 | ) | (1,991 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
52,268 | 49,383 | ||||||
|
|
||||||||
|
Cash Flows — Investing Activities
|
||||||||
|
Distributions received from equity investments in real estate and CPA
®
REITs
in excess of equity income
|
9,964 | 33,917 | ||||||
|
Capital contributions to equity investments
|
— | (3,709 | ) | |||||
|
Purchases of real estate and equity investments in real estate
|
(93,059 | ) | (39,632 | ) | ||||
|
VAT paid in connection with acquisition of real estate
|
(4,222 | ) | — | |||||
|
Capital expenditures
|
(2,008 | ) | (6,110 | ) | ||||
|
Proceeds from sale of real estate
|
14,591 | 6,927 | ||||||
|
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) provided by investing activities
|
(38,602 | ) | 13,321 | |||||
|
|
||||||||
|
|
||||||||
|
Cash Flows — Financing Activities
|
||||||||
|
Distributions paid
|
(72,625 | ) | (58,787 | ) | ||||
|
Contributions from noncontrolling interests
|
11,403 | 2,137 | ||||||
|
Distributions to noncontrolling interests
|
(2,022 | ) | (4,589 | ) | ||||
|
Contributions from profit-sharing interest
|
3,694 | — | ||||||
|
Distributions to profit-sharing interest
|
(693 | ) | (5,372 | ) | ||||
|
Scheduled payments of mortgage principal
|
(12,218 | ) | (7,527 | ) | ||||
|
Prepayments of mortgage principal
|
— | (11,918 | ) | |||||
|
Proceeds from mortgage financing
|
52,816 | 42,494 | ||||||
|
Proceeds from line of credit
|
83,250 | 116,500 | ||||||
|
Prepayments of line of credit
|
(52,500 | ) | (125,518 | ) | ||||
|
Proceeds from loans from affiliates
|
— | 1,625 | ||||||
|
Payment of financing costs
|
(1,083 | ) | (849 | ) | ||||
|
Proceeds from issuance of shares
|
3,537 | 1,356 | ||||||
|
Windfall tax benefits associated with stock-based compensation awards
|
1,226 | 275 | ||||||
|
Repurchase and retirement of shares
|
— | (10,686 | ) | |||||
|
|
||||||||
|
Net cash provided by (used in) financing activities
|
14,785 | (60,859 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Change in Cash and Cash Equivalents During the Period
|
||||||||
|
Effect of exchange rate changes on cash
|
(651 | ) | 364 | |||||
|
|
||||||||
|
Net increase in cash and cash equivalents
|
27,800 | 2,209 | ||||||
|
Cash and cash equivalents, beginning of period
|
18,450 | 16,799 | ||||||
|
|
||||||||
|
Cash and cash equivalents, end of period
|
$ | 46,250 | $ | 19,008 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2010 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 September 30, 2010, we owned
and managed 919 properties domestically and internationally. Our own portfolio was comprised of our
full or partial ownership interest in 164 properties, substantially all of which were net leased to
78 tenants, and totaled approximately 14 million square feet (on a pro rata basis) with an
occupancy rate of approximately 91%.
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 reflect 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 9/30/2010 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 was
declared effective by the SEC in September 2010. As of and during the three and nine months ended
September 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 Standards 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 (i) has the power to direct the activities that most significantly impact the economic
performance of the VIE, and (ii) has the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE. The 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 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 the consolidation of 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 (i) had the power to direct activities that most significantly impact the entity’s
economic performance and (ii) 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. In September 2010, one of
these entities amended its lease with the third-party tenant to remove the tenant’s right to
repurchase the property at a fixed price during the term of the lease. As a result of the lease
amendment, this entity is no longer considered a VIE. We will continue to consolidate this entity.
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 are 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. Subsequent to
the acquisition, there will be a positive impact on our results of operations through a reduction
in depreciation expense over the estimated life of the properties.
W. P. Carey 9/30/2010 10-Q —
7
Table of Contents
Notes to Consolidated Financial Statements
During the nine months ended September 30, 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
$1.1 million, inclusive of amounts attributable to noncontrolling interest of $0.6 million. During
the third quarter of 2010, Carey Storage Management LLC (“Carey Storage”), a subsidiary that
invests in self-storage properties and their related businesses within the U.S., acquired seven
self-storage properties that were deemed to be business combinations, and as a result, it expensed
acquisition-related costs of $0.3 million, inclusive of amounts attributable to a third-party
investor’s profit-sharing interest of $0.2 million. Acquisition-related costs and fees capitalized
by the CPA
®
REITs totaled $1.2 million and $6.2 million for the three months ended
September 30, 2010 and 2009, respectively, and $23.2 million and $17.2 million for the nine months
ended September 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 advisory agreements were renewed for an additional year pursuant to their
terms effective October 1, 2010. 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 September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Asset management revenue
|
$ | 19,219 | $ | 19,106 | $ | 57,119 | $ | 57,441 | ||||||||
|
Structuring revenue
|
708 | 5,476 | 20,644 | 16,250 | ||||||||||||
|
Wholesaling revenue
|
2,260 | 1,869 | 6,593 | 4,426 | ||||||||||||
|
Reimbursed costs from affiliates
|
15,908 | 13,503 | 46,310 | 33,747 | ||||||||||||
|
Distributions of available cash (CPA
®
:17 — Global only)
|
1,720 | — | 3,413 | 583 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 39,815 | $ | 39,954 | $ | 134,079 | $ | 112,447 | ||||||||
|
|
||||||||||||||||
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.
W. P. Carey 9/30/2010 10-Q —
8
Table of Contents
Notes to Consolidated Financial Statements
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 September 30, 2010 and 2009, respectively, and $0.8 million and
$1.1 million for the nine months ended September 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.
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 September 30, 2010 and 2009 and each of the nine month periods ended September 30, 2010 and
2009, we recorded income from noncontrolling interest partners of $0.6 million and $1.8 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 September 30,
2010 approximates $3.0 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 September 30, 2010 and December 31, 2009 are amounts due to affiliates totaling
$0.9 million.
Effective September 15, 2010, we entered into an advisory agreement with Carey Watermark to perform
certain services, including managing Carey Watermark’s offering and its overall business,
identification, evaluation, negotiation, purchase and disposition of lodging-related properties and
the performance of certain administrative duties; however, as of September 30, 2010, Carey
Watermark had no investments or significant operating activity. Costs incurred on behalf of Carey
Watermark totaled $2.6 million through September 30, 2010. We anticipate being reimbursed for all
or a portion of these costs in accordance with the terms of the advisory agreement if the minimum
offering proceeds are raised.
W. P. Carey 9/30/2010 10-Q —
9
Table of Contents
Notes to Consolidated Financial Statements
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):
| September 30, 2010 | December 31, 2009 | |||||||
|
Land
|
$ | 112,119 | $ | 98,971 | ||||
|
Buildings
|
455,814 | 426,636 | ||||||
|
Less: Accumulated depreciation
|
(104,904 | ) | (100,247 | ) | ||||
|
|
||||||||
|
|
$ | 463,029 | $ | 425,360 | ||||
|
|
||||||||
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 a 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 a noncontrolling interest of $0.6 million. Dollar
amounts are based on the exchange rate of the Euro on the date of acquisition.
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):
| September 30, 2010 | December 31, 2009 | |||||||
|
Land
|
$ | 23,607 | $ | 16,257 | ||||
|
Buildings
|
79,736 | 69,670 | ||||||
|
Less: Accumulated depreciation
|
(13,606 | ) | (12,039 | ) | ||||
|
|
||||||||
|
|
$ | 89,737 | $ | 73,888 | ||||
|
|
||||||||
Operating Real Estate Acquired
During the third quarter of 2010, a venture in which Carey Storage and a third-party investor
(“Investor”) hold 40% and 60% interests, respectively, and which we consolidate, acquired six
self-storage properties in the U.S. at a total cost of $15.4 million, inclusive of amounts
attributable to the Investor’s profit-sharing interest of $9.2 million. These investments were
deemed to be business combinations, and as a result, the venture expensed acquisition-related costs
of $0.3 million, inclusive of amounts attributable to the Investor’s interest of $0.2 million. In
connection with these investments, the venture obtained new mortgage financing and assumed existing
mortgage loans from the sellers totaling $11.5 million, inclusive of amounts attributable to the
Investor’s interest of $6.9 million. The mortgage loans have a weighted average annual fixed
interest rate and term of 6.2% and 7.9 years, respectively.
During the third quarter of 2010, Carey Storage amended its agreement with the Investor, which
among other things, removed a contingent purchase option held by Carey Storage.
However, Carey Storage retained a controlling interest in the entity that owns these self-storage
properties. We have reclassified the Investor’s interest from Accounts payable, accrued expenses
and other liabilities to Noncontrolling interests on our consolidated balance sheet.
During the third quarter of 2010, an entity wholly-owned by Carey Storage acquired a
self-storage property in the U.S. for $2.8 million in a transaction that was deemed to be a business combination,
and as a result, it expensed acquisition-related costs of less than $0.1 million. Carey Storage
funded this acquisition with existing cash resources.
W. P. Carey 9/30/2010 10-Q —
10
Table of Contents
Notes to Consolidated Financial Statements
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 third quarter of 2010, we recognized an impairment charge of $0.5 million to reduce a
property’s carrying value to its estimated fair value due to the tenant not renewing its lease with
us. In addition, during the first quarter of 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.
During the second quarter of 2009, we recognized impairment charges totaling $0.9 million on two
vacant properties to reduce their 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 $41.0
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 $1.2 million and $1.5 million for the three months ended September 30, 2010 and
2009, respectively, and $4.3 million and $4.9 million for the nine months ended September 30, 2010
and 2009, respectively.
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 at our option, 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 | September 30, 2010 | December 31, 2009 | September 30, 2010 (a) | December 31, 2009 (a) | ||||||||||||
|
CPA
®
:14
|
9.0 | % | 8.5 | % | $ | 84,540 | $ | 79,906 | ||||||||
|
CPA
®
:15
|
7.0 | % | 6.5 | % | 85,143 | 78,816 | ||||||||||
|
CPA
®
:16 — Global
|
5.3 | % | 4.7 | % | 60,559 | 53,901 | ||||||||||
|
CPA
®
:17 — Global
(b)
|
0.5 | % | 0.4 | % | 6,726 | 3,328 | ||||||||||
|
|
||||||||||||||||
|
|
$ | 236,968 | $ | 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). |
W. P. Carey 9/30/2010 10-Q —
11
Table of Contents
Notes to Consolidated Financial Statements
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):
| September 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
$ | 8,665,657 | $ | 8,468,955 | ||||
|
Liabilities
|
(4,557,004 | ) | (4,638,552 | ) | ||||
|
|
||||||||
|
Shareholders’ equity
|
$ | 4,108,653 | $ | 3,830,403 | ||||
|
|
||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 193,116 | $ | 190,964 | $ | 571,019 | $ | 560,264 | ||||||||
|
Expenses
|
(131,426 | ) | (191,823 | ) | (438,648 | ) | (542,696 | ) | ||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | 61,690 | $ | (859 | ) | $ | 132,371 | $ | 17,568 | |||||||
|
|
||||||||||||||||
We recognized income (loss) from our equity investments in the CPA
®
REITs of
$3.6 million and $(0.7) million for the three months ended September 30, 2010 and 2009,
respectively, and $10.4 million and $(0.2) million for the nine months ended September 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 September 30, 2010 and
2009, the CPA
®
REITs recognized impairment charges totaling $16.6 million and $54.1
million, respectively, which reduced the income we earned from these investments by $1.3 million
and $3.6 million, respectively. During the nine months ended September 30, 2010 and 2009,
impairment charges recognized by the CPA
®
REITs totaled $27.7 million and $108.7
million, respectively, which reduced the income we earned from these investments by $2.1 million
and $6.4 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 that we do not control
but over which we exercise significant influence, and (ii) as tenants-in-common subject to common
control. Generally, the underlying investments are jointly owned with affiliates. We account for
these investments under the equity method of accounting (i.e., at cost, increased or decreased by
our share of earnings or losses, less distributions, plus contributions and other adjustments
required by equity method accounting, such as basis differences from other-than-temporary
impairments).
The following table 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 September 30, 2010 | September 30, 2010 | December 31, 2009 | |||||||||
|
Schuler A.G.
(a) (b) (c)
|
33 | % | $ | 22,846 | $ | 23,755 | ||||||
|
The New York Times Company
|
18 | % | 19,902 | 19,740 | ||||||||
|
Carrefour France, SAS
(a)
|
46 | % | 18,554 | 17,570 | ||||||||
|
U. S. Airways Group, Inc.
(b) (d)
|
75 | % | 7,821 | 8,927 | ||||||||
|
Medica — France, S.A.
(a) (d)
|
46 | % | 5,188 | 6,160 | ||||||||
|
Hologic, Inc.
(b)
|
36 | % | 4,383 | 4,388 | ||||||||
|
Consolidated Systems, Inc.
(b)
|
60 | % | 3,374 | 3,395 | ||||||||
|
Information Resources, Inc.
(e)
|
33 | % | 3,176 | 2,270 | ||||||||
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG
(a)
|
5 | % | 2,842 | 2,639 | ||||||||
|
Childtime Childcare, Inc.
|
34 | % | 1,846 | 1,843 | ||||||||
|
Federal Express Corporation
(d)
|
40 | % | 1,563 | 1,976 | ||||||||
|
The Retail Distribution Group
(f)
|
40 | % | — | 1,099 | ||||||||
|
Amylin Pharmaceuticals, Inc.
(g)
|
50 | % | (4,721 | ) | (4,723 | ) | ||||||
|
|
||||||||||||
|
|
$ | 86,774 | $ | 89,039 | ||||||||
|
|
||||||||||||
| (a) | The 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. |
W. P. Carey 9/30/2010 10-Q —
12
Table of Contents
Notes to Consolidated Financial Statements
| (c) | During the third quarter of 2010, we recognized an other-than-temporary impairment charge of $1.4 million to reflect the decline in the estimated fair value of the investment’s underlying net assets in comparison with the carrying value of our interest in the investment. | |
| (d) | The decrease in carrying value was due to cash distributions made to us by the venture. | |
| (e) | The increase in carrying value was due to the operating contributions we made to the venture. | |
| (f) | 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. | |
| (g) | In 2007, this venture refinanced its existing non-recourse mortgage debt with new non-recourse financing based on the appraised value of its underlying real estate 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 the consolidation of 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):
| September 30, 2010 | December 31, 2009 | |||||||
|
Assets
|
$ | 1,494,869 | $ | 1,452,103 | ||||
|
Liabilities
|
(855,912 | ) | (714,558 | ) | ||||
|
|
||||||||
|
Partners’/members’ equity
|
$ | 638,957 | $ | 737,545 | ||||
|
|
||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 35,086 | $ | 37,657 | $ | 111,144 | $ | 108,255 | ||||||||
|
Expenses
|
(19,292 | ) | (21,870 | ) | (58,949 | ) | (55,496 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 15,794 | $ | 15,787 | $ | 52,195 | $ | 52,759 | ||||||||
|
|
||||||||||||||||
We recognized income from these equity investments in real estate of approximately $2.5 million and
$3.7 million for the three months ended September 30, 2010 and 2009, respectively, and $12.4
million and $10.0 million for the nine months ended September 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.
W. P. Carey 9/30/2010 10-Q —
13
Table of Contents
Notes to Consolidated Financial Statements
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 September 30, 2010 and December 31, 2009 (in thousands):
| Fair Value Measurements at September 30, 2010 Using: | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||
| Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Money market funds
|
$ | 19,091 | $ | 19,091 | $ | — | $ | — | ||||||||
|
Other securities
|
1,723 | — | — | 1,723 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 20,814 | $ | 19,091 | $ | — | $ | 1,723 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 2,897 | $ | — | $ | 2,897 | $ | — | ||||||||
|
Redeemable noncontrolling interest
|
6,887 | — | — | 6,887 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 9,784 | $ | — | $ | 2,897 | $ | 6,887 | ||||||||
|
|
||||||||||||||||
| Fair Value Measurements at December 31, 2009 Using: | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||
| Description | Total | (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.
W. P. Carey 9/30/2010 10-Q —
14
Table of Contents
Notes to Consolidated Financial Statements
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Three months ended September 30, 2010 | Three months ended September 30, 2009 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interests | Securities | Interests | |||||||||||||
|
Beginning balance
|
$ | 1,717 | $ | 7,119 | $ | 1,671 | $ | 15,126 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
2 | 106 | (1 | ) | 1,019 | |||||||||||
|
Included in other comprehensive income
(loss)
|
4 | 10 | 13 | (2 | ) | |||||||||||
|
Purchases, issuances and settlements
|
— | — | — | — | ||||||||||||
|
Distributions paid
|
— | (200 | ) | — | (622 | ) | ||||||||||
|
Redemption value adjustment
|
— | (148 | ) | — | (732 | ) | ||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,723 | $ | 6,887 | $ | 1,683 | $ | 14,789 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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
|
$ | 2 | $ | — | $ | (1 | ) | $ | — | |||||||
|
|
||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Nine months ended September 30, 2010 | Nine months ended September 30, 2009 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interests | Securities | Interests | |||||||||||||
|
Beginning balance
|
$ | 1,687 | $ | 7,692 | $ | 1,628 | $ | 18,085 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
2 | 698 | (2 | ) | 1,357 | |||||||||||
|
Included in other comprehensive income (loss)
|
11 | (7 | ) | 12 | 6 | |||||||||||
|
Purchases, issuances and settlements
|
23 | — | 45 | — | ||||||||||||
|
Distributions paid
|
— | (810 | ) | — | (3,591 | ) | ||||||||||
|
Redemption value adjustment
|
— | (686 | ) | — | (1,068 | ) | ||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,723 | $ | 6,887 | $ | 1,683 | $ | 14,789 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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
|
$ | 2 | $ | — | $ | (2 | ) | $ | — | |||||||
|
|
||||||||||||||||
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.
W. P. Carey 9/30/2010 10-Q —
15
Table of Contents
Notes to Consolidated Financial Statements
Our financial instruments had the following carrying values and fair values as of the dates shown
(in thousands):
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
|
Non-recourse debt
|
$ | 254,144 | $ | 250,246 | $ | 215,330 | $ | 201,774 | ||||||||
|
Line of credit
|
141,750 | 140,700 | 111,000 | 108,900 | ||||||||||||
We determined the estimated fair value of our debt instruments 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 September 30, 2010 and
December 31, 2009.
Items Measured at Fair Value on a Non-Recurring Basis
We perform a quarterly assessment, when required, 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 expected discounted cash flows or an 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 nine months ended September 30, 2010 and 2009 based on contracted or
expected selling prices. The valuation of real estate is subject to significant judgment and actual
results may differ materially if market conditions change.
The following table presents information about our nonfinancial assets that were measured on a fair
value basis for the three and nine months ended September 30, 2010 and 2009. All of the impairment
charges were measured using unobservable inputs (Level 3) (in thousands):
| Three months ended September 30, 2010 | Nine months ended September 30, 2010 | |||||||||||||||
| Total Fair Value | Total Impairment | Total Fair Value | Total Impairment | |||||||||||||
| Measurements | Charges | Measurements | Charges | |||||||||||||
|
Impairment Charges From Continuing Operations:
|
||||||||||||||||
|
Real estate
|
$ | 521 | $ | 481 | $ | 1,532 | $ | 2,749 | ||||||||
|
Equity investments in real estate
|
22,846 | 1,394 | 22,846 | 1,394 | ||||||||||||
|
|
||||||||||||||||
|
|
23,367 | 1,875 | 24,378 | 4,143 | ||||||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued Operations:
|
||||||||||||||||
|
Real estate
|
— | — | 5,391 | 5,869 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 23,367 | $ | 1,875 | $ | 29,769 | $ | 10,012 | ||||||||
|
|
||||||||||||||||
| Three months ended September 30, 2009 | Nine months ended September 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 | ||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued Operations:
|
||||||||||||||||
|
Real estate
|
3,181 | 2,390 | 6,273 | 3,770 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 3,181 | $ | 2,390 | $ | 7,096 | $ | 4,670 | ||||||||
|
|
||||||||||||||||
In the normal course of our ongoing 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, as well as
changes in the value of our other securities and 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.
W. P. Carey 9/30/2010 10-Q —
16
Table of Contents
Notes to Consolidated Financial Statements
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 contractual lease revenues in
certain areas, as described below. The percentages in the paragraph below represent our directly-owned
real estate properties and do not include our pro rata share of equity investments.
At September 30, 2010, the majority of our directly owned real estate properties were located in
the U.S. (89%), with Texas (22%), California (16%) and Georgia (12%) representing the most
significant geographic concentrations, based on percentage of our annualized contractual minimum
base rent for the third quarter of 2010. At September 30, 2010, our directly owned real estate
properties contained concentrations in the following asset types: office (35%), industrial (32%)
and warehouse/distribution (17%); and in the following tenant industries: business and commercial
services (16%), retail stores (13%) and telecommunications (12%).
At September 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.
Stock-Based Compensation
The total compensation expense (net of forfeitures) for our stock-based compensation plans was $1.8
million and $2.5 million for the three months ended September 30, 2010 and 2009, respectively, and
$6.7 million and $7.8 million for the nine months ended September 30, 2010 and 2009, respectively,
all of which are included in General and administrative expenses in the consolidated financial
statements. The tax benefit recognized by us related to these plans totaled $0.8 million and $1.1
million for the three months ended September 30, 2010 and 2009, respectively, and $2.9 million and
$3.5 million for the nine months ended September 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 September 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 $8.1 million over the
vesting period, of which $0.7 million and $2.0 million was recognized during the three and nine
months ended September 30, 2010, respectively. We will review our performance against these goals
periodically and update expectations as warranted.
W. P. Carey 9/30/2010 10-Q —
17
Table of Contents
Notes to Consolidated Financial Statements
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):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 16,346 | $ | 13,351 | $ | 54,191 | $ | 46,037 | ||||||||
|
Allocation of distribution equivalents paid on
unvested restricted stock units in excess of net
income
|
(116 | ) | (298 | ) | (348 | ) | (889 | ) | ||||||||
|
|
||||||||||||||||
|
Net income — basic
|
16,230 | 13,053 | 53,843 | 45,148 | ||||||||||||
|
Income effect of dilutive securities, net of taxes
|
66 | 562 | 398 | 748 | ||||||||||||
|
|
||||||||||||||||
|
Net income — diluted
|
$ | 16,296 | $ | 13,615 | $ | 54,241 | $ | 45,896 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — basic
|
39,180,719 | 39,727,460 | 39,161,086 | 39,163,186 | ||||||||||||
|
Effect of dilutive securities
|
537,212 | 641,486 | 613,036 | 607,010 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — diluted
|
39,717,931 | 40,368,946 | 39,774,122 | 39,770,196 | ||||||||||||
|
|
||||||||||||||||
Securities included in our diluted earnings per share determination consist of stock options
and restricted stock awards. Securities totaling 1.9 million shares and 2.8 million shares for the
three months ended September 30, 2010 and 2009, respectively, and 1.8 million shares and 2.8
million shares for the nine months ended September 30, 2010 and 2009, respectively, were excluded
from the earnings per share computations above as their effect would have been anti-dilutive.
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.
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 nine months ended September 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
|
3,537 | 3,537 | — | |||||||||
|
Contributions
|
11,403 | — | 11,403 | |||||||||
|
Redemption value adjustment
|
686 | 686 | — | |||||||||
|
Tax impact of purchase of WPCI interest
|
(1,637 | ) | (1,637 | ) | — | |||||||
|
Net income (loss)
|
53,696 | 54,191 | (495 | ) | ||||||||
|
Stock-based compensation expense
|
6,695 | 6,695 | — | |||||||||
|
Reclassification of the Investor’s interest in Carey Storage (Note 4)
|
22,402 | — | 22,402 | |||||||||
|
Windfall tax provision — share incentive plans
|
1,226 | 1,226 | — | |||||||||
|
Distributions
|
(62,479 | ) | (61,267 | ) | (1,212 | ) | ||||||
|
Change in other comprehensive loss
|
(1,882 | ) | (2,911 | ) | 1,029 | |||||||
|
Shares repurchased
|
(2,060 | ) | (2,060 | ) | — | |||||||
|
|
||||||||||||
|
Balance at September 30, 2010
|
$ | 663,995 | $ | 624,093 | $ | 39,902 | ||||||
|
|
||||||||||||
W. P. Carey 9/30/2010 10-Q —
18
Table of Contents
Notes to Consolidated Financial Statements
| W. P. Carey | Noncontrolling | |||||||||||
| Total Equity | Members | Interests | ||||||||||
|
Balance at January 1, 2009
|
$ | 646,335 | $ | 640,103 | $ | 6,232 | ||||||
|
Shares issued
|
1,356 | 1,356 | — | |||||||||
|
Contributions
|
2,137 | 102 | 2,035 | |||||||||
|
Redemption value adjustment
|
1,068 | 1,068 | — | |||||||||
|
Net income (loss)
|
45,478 | 46,037 | (559 | ) | ||||||||
|
Stock-based compensation expense
|
7,777 | 7,777 | — | |||||||||
|
Windfall tax benefits — share incentive plans
|
275 | 275 | — | |||||||||
|
Distributions
|
(60,012 | ) | (58,827 | ) | (1,185 | ) | ||||||
|
Deferred compensation obligation
|
9,461 | 9,461 | — | |||||||||
|
Change in other comprehensive loss
|
1,633 | 1,476 | 157 | |||||||||
|
Shares repurchased
|
(11,604 | ) | (11,604 | ) | — | |||||||
|
|
||||||||||||
|
Balance at September 30, 2009
|
$ | 643,904 | $ | 637,224 | $ | 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 September 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 $0.7 million and $6.8 million at
September 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.
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
|
(686 | ) | (1,068 | ) | ||||
|
Net income
|
698 | 1,357 | ||||||
|
Distributions
|
(810 | ) | (3,591 | ) | ||||
|
Change in other comprehensive (loss) income
|
(7 | ) | 6 | |||||
|
|
||||||||
|
Balance at September 30,
|
$ | 6,887 | $ | 14,789 | ||||
|
|
||||||||
Income tax provision for the three months ended September 30, 2010 and 2009 was $3.4 million and
$6.0 million, respectively, while the income tax provision for the nine months ended September 30,
2010 and 2009 was $14.2 million and $15.9 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 2007. 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 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 period. We recognize interest and penalties related to uncertain tax positions in
income tax expense. At December 31, 2009, we had $0.1 million of
accrued interest and penalties related to uncertain tax positions. During the third quarter of 2010, we reversed these unrecognized tax benefits,
including all related interest and penalties, as they were no longer required.
W. P. Carey 9/30/2010 10-Q —
19
Table of Contents
Notes to Consolidated Financial Statements
Our tax returns are subject to audit by taxing
authorities. Such audits can often take years to complete and settle. The tax years 2007-2010
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.
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 September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Investment Management
|
||||||||||||||||
|
Revenues
(a)
|
$ | 38,095 | $ | 39,954 | $ | 130,666 | $ | 111,864 | ||||||||
|
Operating expenses
(a)
|
(31,492 | ) | (28,614 | ) | (97,244 | ) | (81,018 | ) | ||||||||
|
Other, net
(b)
|
4,380 | (675 | ) | 12,400 | 1,683 | |||||||||||
|
Provision for income taxes
|
(3,253 | ) | (5,606 | ) | (13,911 | ) | (14,811 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
attributable to W. P. Carey members
|
$ | 7,730 | $ | 5,059 | $ | 31,911 | $ | 17,718 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Real Estate Ownership
|
||||||||||||||||
|
Revenues
|
$ | 20,859 | $ | 19,230 | $ | 61,275 | $ | 58,159 | ||||||||
|
Operating expenses
|
(10,999 | ) | (8,957 | ) | (33,856 | ) | (29,536 | ) | ||||||||
|
Interest expense
|
(4,298 | ) | (3,786 | ) | (11,774 | ) | (11,245 | ) | ||||||||
|
Other, net
(b)
|
3,174 | 3,492 | 11,743 | 12,216 | ||||||||||||
|
Provision for income taxes
|
(124 | ) | (412 | ) | (329 | ) | (1,127 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
attributable to W. P. Carey members
|
$ | 8,612 | $ | 9,567 | $ | 27,059 | $ | 28,467 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Company
|
||||||||||||||||
|
Revenues
(a)
|
$ | 58,954 | $ | 59,184 | $ | 191,941 | $ | 170,023 | ||||||||
|
Operating expenses
(a)
|
(42,491 | ) | (37,571 | ) | (131,100 | ) | (110,554 | ) | ||||||||
|
Interest expense
|
(4,298 | ) | (3,786 | ) | (11,774 | ) | (11,245 | ) | ||||||||
|
Other, net
(b)
|
7,554 | 2,817 | 24,143 | 13,899 | ||||||||||||
|
Provision for income taxes
|
(3,377 | ) | (6,018 | ) | (14,240 | ) | (15,938 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
attributable to W. P. Carey members
|
$ | 16,342 | $ | 14,626 | $ | 58,970 | $ | 46,185 | ||||||||
|
|
||||||||||||||||
| Equity Investments in Real Estate at | Total Long-Lived Assets (d) at | Total Assets at | ||||||||||||||||||||||
| September 30, 2010 | December 31, 2009 | September 30, 2010 | December 31, 2009 | September 30, 2010 | December 31, 2009 | |||||||||||||||||||
|
Investment Management
|
$ | 236,968 | $ | 215,951 | $ | 241,391 | $ | 222,453 | $ | 360,676 | $ | 343,989 | ||||||||||||
|
Real Estate Ownership
(c)
|
86,774 | 89,039 | 717,432 | 668,510 | 797,054 | 749,347 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Company
|
$ | 323,742 | $ | 304,990 | $ | 958,823 | $ | 890,963 | $ | 1,157,730 | $ | 1,093,336 | ||||||||||||
|
|
||||||||||||||||||||||||
| (a) | Included in revenues and operating expenses are reimbursable costs from affiliates totaling $15.9 million and $13.5 million for the three month periods ended September 30, 2010 and 2009, respectively, and $46.3 million and $33.7 million for the nine months ended September 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 $1.8 million and $1.9 million for the three months ended September 30, 2010 and 2009, respectively, and $4.6 million and $5.5 million for the nine months ended September 30, 2010 and 2009, respectively, as well as income from equity investments in real estate of $0.2 million and $1.3 million for the three months ended September 30, 2010 and 2009, respectively, and $3.2 million and $4.3 million for the nine months ended September 30, 2010 and 2009, respectively. These investments also accounted for long-lived assets at September 30, 2010 and December 31, 2009 of $71.2 million and $47.9 million, respectively. | |
| (d) | Includes net investments in real estate and intangible assets related to management contracts. |
W. P. Carey 9/30/2010 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 try 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 nine months ended September 30, 2010, we sold six domestic properties for a total of
$14.6 million, net of selling costs, and recognized a net gain on these sales totaling $0.5
million, excluding impairment charges totaling $5.6 million and $5.1 million that were previously
recognized in 2010 and 2009, respectively. In addition, in April 2010, we entered into an agreement
to sell a property. In connection with the proposed sale, we recorded an impairment charge of $0.3
million during the nine months ended September 30, 2010, to reduce the carrying value of the
property to its contracted selling price.
During the nine months ended September 30, 2009, we sold three domestic properties for a total of
$6.9 million, net of selling costs, and recognized a net gain on these sales of $0.3 million,
excluding impairment charges of $0.6 million recognized in 2009 and a total of $1.1 million in
prior years.
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 September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues
|
$ | 141 | $ | 1,990 | $ | 1,560 | $ | 6,434 | ||||||||
|
Expenses
|
(137 | ) | (875 | ) | (930 | ) | (3,155 | ) | ||||||||
|
Gain on sale of real estate
|
— | — | 460 | 343 | ||||||||||||
|
Impairment charges
|
— | (2,390 | ) | (5,869 | ) | (3,770 | ) | |||||||||
|
|
||||||||||||||||
|
Income (loss) from discontinued operations
|
$ | 4 | $ | (1,275 | ) | $ | (4,779 | ) | $ | (148 | ) | |||||
|
|
||||||||||||||||
W. P. Carey 9/30/2010 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 919 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
September 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
224 tenants, with an average occupancy rate of approximately 97%.
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 September 30, 2010, our
portfolio was comprised of our full or partial ownership interest in 164 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 78 tenants, with an occupancy rate of approximately 91%.
Financial Highlights
(In thousands)
(In thousands)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Total revenues (excluding reimbursed costs from affiliates)
|
$ | 43,046 | $ | 45,681 | $ | 145,631 | $ | 136,276 | ||||||||
|
Net income attributable to W. P. Carey members
|
16,346 | 13,351 | 54,191 | 46,037 | ||||||||||||
|
Cash flow from operating activities
|
52,268 | 49,383 | ||||||||||||||
Total revenues from our investment management segment decreased during the three months ended
September 30, 2010 and increased significantly during the nine months ended September 20, 2010 as
compared to the same periods in 2009, primarily due to the fluctuations in the volume of
investments structured on behalf of the CPA
®
REITs. Total revenues from our
real estate ownership segment increased during both the three and nine months ended September 30,
2010 as compared to the same periods in 2009, primarily as a result of new investments we entered
into during 2010.
Net income increased during the three and nine months ended September 30, 2010 as compared to the
respective prior year periods. Results from operations in our investment management segment were
significantly higher during the three and nine months ended September 30, 2010, primarily due to
lower impairment charges recognized by the CPA
®
REITs as compared to the
respective prior year periods, as well as a higher volume of investments structured on behalf of
the CPA
®
REITs during the nine months ended September 30, 2010 as compared to
the same prior year period. Results from operations in our real estate ownership segment were
slightly higher during the three months ended September 30, 2010 as compared to the same period in
2009 and down significantly for the nine months ended September 30, 2010 as compared to the same
period in 2009. The decline in the nine months ended September 30, 2010 was primarily due to
impairment charges taken in that period in connection with the sale of properties.
W. P. Carey 9/30/2010 10-Q —
22
Table of Contents
Cash flow from operating activities increased slightly in the nine months ended September 30, 2010
as compared to the prior year period. Increases in net income 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 nine months ended
September 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 $0.508 per share for the third quarter of 2010, which
equates to $2.03 per share on an annualized basis.
We consider the performance metrics listed above as well as certain non-GAAP metrics such as
earnings before interest, taxes depreciation and amortization, funds from operations — as adjusted,
and adjusted cash flow from operating activities 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
Effective September 16, 2010, Trevor P. Bond, who had been our Interim Chief Executive Officer
since July 6, 2010 when Gordon F. DuGan resigned, was elected as Chief Executive Officer. 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
Chief Executive Officer of CPA
®
:14, CPA
®
:15,
CPA
®
:16 — Global and CPA
®
:17 — Global.
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. Our year-to-date experience reflects
increased investment volume over the prior year, 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, 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 if our tenants are unable to pay
their rent. 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.
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 contractual lease revenues, a decrease from recent levels. 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 nine months ended September 30, 2010 reflects an
improvement from the unusually high level of tenant defaults experienced during 2008 and 2009. 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 9/30/2010 10-Q —
23
Table of Contents
To mitigate these risks, we have historically 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 11% and 10% of our annualized contractual lease revenues for the
nine months ended September 30, 2010 and 2009, respectively, and 29% of aggregate annualized
contractual lease revenues for the CPA
®
REITs for each of the same periods. The U.S.
dollar has strengthened against the Euro, as the average rate for the U.S. dollar in relation to
the Euro during the nine months ended September 30, 2010 decreased by 4% in comparison to the same
period in 2009. Additionally, the end-of-period conversion rate at September 30, 2010 decreased 5%
to $1.3612 from $1.4333 at December 31, 2009. This strengthening had a negative impact on our
balance sheet at September 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, including new issuances
of commercial mortgage-backed securities debt. 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 conditions 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 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 and increasing seller optimism, 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 remained compressed over the past few quarters compared to their 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, 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 $452.9 million during the
nine months ended September 30, 2010 and entered into several investments for our own real estate
portfolio totaling $75.3 million. Year to date acquisition volume has increased as compared with
the same period in 2009, and going forward we feel that we will be able to continue to take
advantage of the investment opportunities we are seeing in both the U.S. and Europe. International
investments comprised 48% of total investments during the nine months ended September 30, 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 nine months ended September 30, 2010, we saw an increase in the number of
lenders for both domestic and international investments as market conditions improved. As a result,
during that period, we obtained non-recourse mortgage financing totaling $314.0 million on behalf
of the CPA
®
REITs and $45.9 million for our own real estate portfolio.
W. P. Carey 9/30/2010 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 recent credit crisis, these
macro-economic factors have persisted, negatively impacting the fundamentals of the commercial real
estate market, which has resulted 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
and slight improvements in occupancy rates, general uncertainty surrounding commercial real estate
fundamentals and property valuations continues. 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. However, the negative impact on our asset management revenue
related to the 2009 tenant defaults has been substantially offset by asset management revenues
earned related to new investments structured 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, lease terms, lending credit spreads, foreign currency exchange
rates, and tenant defaults, 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 nine months ended September 30, 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, 8% of the annualized contractual lease revenue in our own portfolio is
scheduled to expire in the next twelve months. 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 historical norms, reflecting current market conditions. Lease expirations could
also affect the cash flow of the CPA
®
REITs, particularly CPA
®
:14 and
CPA
®
:15.
The occupancy rate for our own real estate portfolio declined from 94% at December 31, 2009 to 91%
at September 30, 2010, primarily reflecting the impact of one tenant who vacated during April 2010.
Fundraising
Fundraising trends for non-traded REITs overall include an increase in average monthly volume
during the nine months ended September 30, 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 $438.7 million for
CPA
®
:17 — Global’s initial public offering in the nine months ended September 30, 2010
and, through the date of this Report, have raised more than $1.2 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 an expanded network of
broker-dealers as a result of these efforts.
W. P. Carey 9/30/2010 10-Q —
25
Table of Contents
CPA
®
:17 — Global has filed a registration statement with the SEC for a possible
continuous public offering of up to $1.0 billion of common stock, which we currently expect will
commence after the initial public offering terminates. We refer to the possible public offering as
the “follow-on offering.” There can be no assurance that CPA
®
:17 — Global will actually
commence the follow-on offering or successfully sell the full number of shares registered. The
initial public offering for CPA
®
:17 — Global will terminate on the earlier of the date
on which the registration statement for the follow-on offering becomes effective or May 2, 2011.
The registration statement 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 was declared effective by the SEC on September 15, 2010. We are currently fundraising
for Carey Watermark; however Carey Watermark had no investments or significant operating activity
as of September 30, 2010.
Proposed Accounting Changes
The International Accounting Standards Board and FASB have issued 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.
W. P. Carey 9/30/2010 10-Q —
26
Table of Contents
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 September 30, | Nine months ended September 30, | |||||||||||||||||||||||
| 2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Asset management revenue
|
$ | 19,219 | $ | 19,106 | $ | 113 | $ | 57,119 | $ | 57,441 | $ | (322 | ) | |||||||||||
|
Structuring revenue
|
708 | 5,476 | (4,768 | ) | 20,644 | 16,250 | 4,394 | |||||||||||||||||
|
Wholesaling revenue
|
2,260 | 1,869 | 391 | 6,593 | 4,426 | 2,167 | ||||||||||||||||||
|
Reimbursed costs from affiliates
|
15,908 | 13,503 | 2,405 | 46,310 | 33,747 | 12,563 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
38,095 | 39,954 | (1,859 | ) | 130,666 | 111,864 | 18,802 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
General and administrative
|
(14,428 | ) | (13,987 | ) | (441 | ) | (47,445 | ) | (44,513 | ) | (2,932 | ) | ||||||||||||
|
Reimbursable costs
|
(15,908 | ) | (13,503 | ) | (2,405 | ) | (46,310 | ) | (33,747 | ) | (12,563 | ) | ||||||||||||
|
Depreciation and amortization
|
(1,156 | ) | (1,124 | ) | (32 | ) | (3,489 | ) | (2,758 | ) | (731 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
(31,492 | ) | (28,614 | ) | (2,878 | ) | (97,244 | ) | (81,018 | ) | (16,226 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
301 | 394 | (93 | ) | 840 | 1,127 | (287 | ) | ||||||||||||||||
|
Income (loss) from equity investments in CPA
®
REITs
|
3,564 | (744 | ) | 4,308 | 10,400 | (169 | ) | 10,569 | ||||||||||||||||
|
Other income and (expenses)
|
57 | 102 | (45 | ) | 80 | 297 | (217 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
3,922 | (248 | ) | 4,170 | 11,320 | 1,255 | 10,065 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations before income taxes
|
10,525 | 11,092 | (567 | ) | 44,742 | 32,101 | 12,641 | |||||||||||||||||
|
Provision for income taxes
|
(3,253 | ) | (5,606 | ) | 2,353 | (13,911 | ) | (14,811 | ) | 900 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management
|
7,272 | 5,486 | 1,786 | 30,831 | 17,290 | 13,541 | ||||||||||||||||||
|
Add: Net loss attributable to noncontrolling interests
|
564 | 592 | (28 | ) | 1,778 | 1,785 | (7 | ) | ||||||||||||||||
|
Less: Net income attributable to redeemable noncontrolling interests
|
(106 | ) | (1,019 | ) | 913 | (698 | ) | (1,357 | ) | 659 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management attributable to
W. P. Carey members
|
$ | 7,730 | $ | 5,059 | $ | 2,671 | $ | 31,911 | $ | 17,718 | $ | 14,193 | ||||||||||||
|
|
||||||||||||||||||||||||
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 months ended September 30, 2010 as compared to the same period in 2009, asset
management revenue increased by $0.1 million, primarily due to an increase in revenue of $0.7
million from CPA
®
:17 — Global as a result of new investments entered into
during 2009 and 2010, substantially offset by a decrease in revenue of $0.6 million from the
CPA
®
REITs as a result of the decline in the annual estimated net asset valuations of
the CPA
®
REITs as of December 31, 2009 as described below.
For the nine months ended September 30, 2010 as compared to the same period in 2009, asset
management revenue decreased by $0.3 million, primarily due to a reduction in revenue of $2.2
million from the CPA
®
REITs as a result of a decline in the annual estimated net asset
valuations of the CPA
®
REITs as of December 31, 2009, partially offset by an increase in
revenue of $1.9 million from CPA
®
:17 — Global as a result of new investments
entered into during 2009 and 2010.
W. P. Carey 9/30/2010 10-Q —
27
Table of Contents
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 months ended September 30, 2010 as compared to the same period in 2009, structuring
revenue decreased by $4.8 million, primarily due to lower investment volume in the current year
period. We structured real estate investments on behalf of the CPA
®
REITs totaling $12.7
million for the three months ended September 30, 2010, compared to $121.1 million in the same prior
year period.
For the nine months ended September 30, 2010 as compared to the same period in 2009, structuring
revenue increased by $4.4 million, primarily due to higher investment volume in the current
year-to-date period. We structured real estate investments on behalf of the CPA
®
REITs
totaling $452.9 million during the nine months ended September 30, 2010, compared to $355.4 million
in the same prior year period. 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 our results of
operations.
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
reimbursed and reimbursable costs increased by $2.4 million and $12.6 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 September 30, 2010 as compared to the same period in 2009, general and
administrative expenses increased by $0.4 million, primarily due to an increase in underwriting
costs in connection with CPA
®
:17 — Global’s initial public offering. 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.
For the nine months ended September 30, 2010 as compared to the same period in 2009, general and
administrative expenses increased by $2.9 million, primarily due to increases in underwriting costs
in connection with CPA
®
:17 — Global’s initial public offering of $2.1 million as
described above and compensation-related costs of $1.3 million. These increases were partially
offset by a decrease in professional fees of $0.6 million. Compensation-related costs were higher
in the current year period primarily due to an increase in commissions to investment officers and
expected bonus payout for the current year as a result of the higher investment volume during the
current year period totaling $2.4 million, partially offset by a $0.6 million decrease in severance
costs for former employees and a $0.9 million decrease in stock-based compensation expense due to
the resignation of a senior officer during the third quarter of 2010. Professional fees in the
prior year period included transaction-related costs of $1.0 million incurred during the first
quarter of 2009 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.
W. P. Carey 9/30/2010 10-Q —
28
Table of Contents
Income (Loss) 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 nine months ended September 30, 2010, we recognized income from equity
investments in CPA
®
REITs of $3.6 million and $10.4 million, respectively, compared to
losses of $0.7 million and $0.2 million during the same periods in 2009, respectively, primarily
due to lower impairment charges recognized by the CPA
®
REITs in the current year
periods, which are estimated to total approximately $16.6 million and $54.1 million during the
three months ended September 30, 2010 and 2009, respectively, and $27.7 million and $108.7 million
during the nine months ended September 30, 2010 and 2009, respectively. In addition,
CPA
®
:14’s results of operations during the nine months ended September 30, 2010 included
a gain on extinguishment of debt of $11.4 million and a gain on deconsolidation of a subsidiary of
$12.9 million. CPA
®
:15’s results of operations during the three and nine months ended
September 30, 2010 also included a gain on deconsolidation of a subsidiary of $12.8 million. For
CPA
®
:17 — Global, we receive up to 10% of distributions of available cash from its
operating partnership. For the three and nine months ended September 30, 2010, we received $1.7
million and $3.4 million, respectively, in cash under this provision. For the nine months ended
September 30, 2009, we received cash of $0.6 million. We did not receive any cash for the three
months ended September 30, 2009.
Provision for Income Taxes
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
provision for income taxes decreased by $2.4 million and $0.9 million, respectively, primarily due
to reductions in both tax-generating intercompany transactions and the amount of shares in the
CPA
®
REITs that we hold in taxable subsidiaries.
Net Income from Investment Management Attributable to W. P. Carey Members
For the three and nine months ended September 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
$2.7 million and $14.2 million, respectively.
Real Estate Ownership
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
| 2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Lease revenues
|
$ | 16,203 | $ | 15,573 | $ | 630 | $ | 48,047 | $ | 46,732 | $ | 1,315 | ||||||||||||
|
Other real estate income
|
4,656 | 3,657 | 999 | 13,228 | 11,427 | 1,801 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
20,859 | 19,230 | 1,629 | 61,275 | 58,159 | 3,116 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
Depreciation and amortization
|
(4,911 | ) | (4,314 | ) | (597 | ) | (14,569 | ) | (14,037 | ) | (532 | ) | ||||||||||||
|
Property expenses
|
(3,220 | ) | (1,903 | ) | (1,317 | ) | (7,848 | ) | (5,247 | ) | (2,601 | ) | ||||||||||||
|
General and administrative
|
(400 | ) | (982 | ) | 582 | (3,115 | ) | (3,756 | ) | 641 | ||||||||||||||
|
Other real estate expenses
|
(1,987 | ) | (1,758 | ) | (229 | ) | (5,575 | ) | (5,596 | ) | 21 | |||||||||||||
|
Impairment charges
|
(481 | ) | — | (481 | ) | (2,749 | ) | (900 | ) | (1,849 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
(10,999 | ) | (8,957 | ) | (2,042 | ) | (33,856 | ) | (29,536 | ) | (4,320 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
28 | 82 | (54 | ) | 98 | 172 | (74 | ) | ||||||||||||||||
|
Income from equity investments in real estate
|
2,502 | 3,667 | (1,165 | ) | 12,446 | 10,035 | 2,411 | |||||||||||||||||
|
Other income and (expenses)
|
1,127 | 149 | 978 | 482 | 3,235 | (2,753 | ) | |||||||||||||||||
|
Interest expense
|
(4,298 | ) | (3,786 | ) | (512 | ) | (11,774 | ) | (11,245 | ) | (529 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
(641 | ) | 112 | (753 | ) | 1,252 | 2,197 | (945 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations before income taxes
|
9,219 | 10,385 | (1,166 | ) | 28,671 | 30,820 | (2,149 | ) | ||||||||||||||||
|
Provision for income taxes
|
(124 | ) | (412 | ) | 288 | (329 | ) | (1,127 | ) | 798 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations
|
9,095 | 9,973 | (878 | ) | 28,342 | 29,693 | (1,351 | ) | ||||||||||||||||
|
Income (loss) from discontinued operations
|
4 | (1,275 | ) | 1,279 | (4,779 | ) | (148 | ) | (4,631 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate ownership
|
9,099 | 8,698 | 401 | 23,563 | 29,545 | (5,982 | ) | |||||||||||||||||
|
Less: Net income attributable to noncontrolling
interests
|
(483 | ) | (406 | ) | (77 | ) | (1,283 | ) | (1,226 | ) | (57 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate ownership attributable to
W. P. Carey members
|
$ | 8,616 | $ | 8,292 | $ | 324 | $ | 22,280 | $ | 28,319 | $ | (6,039 | ) | |||||||||||
|
|
||||||||||||||||||||||||
W. P. Carey 9/30/2010 10-Q —
29
Table of Contents
The following table presents the components of our lease revenues (in thousands):
| Nine months ended September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Rental income
|
$ | 40,402 | $ | 38,796 | ||||
|
Interest income from direct financing leases
|
7,645 | 7,936 | ||||||
|
|
||||||||
|
|
$ | 48,047 | $ | 46,732 | ||||
|
|
||||||||
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):
| Nine months ended September 30, | ||||||||
| 2010 | 2009 | |||||||
|
CheckFree Holdings, Inc.
(a)
|
$ | 3,813 | $ | 3,714 | ||||
|
The American Bottling Company
|
3,292 | 3,445 | ||||||
|
Bouygues Telecom, S.A.
(a) (b) (c)
|
2,985 | 4,712 | ||||||
|
Orbital Sciences Corporation
(d)
|
2,783 | 2,078 | ||||||
|
JP Morgan Chase Bank, N.A.
(e)
|
2,482 | — | ||||||
|
Titan Corporation
|
2,185 | 2,185 | ||||||
|
AutoZone, Inc.
|
1,666 | 1,658 | ||||||
|
Omnicom
Group Inc.
(f)
|
1,518 | 939 | ||||||
|
Unisource
Worldwide, Inc.
(g)
|
1,442 | 1,252 | ||||||
|
Quebecor Printing, Inc.
|
1,437 | 1,445 | ||||||
|
Sybron Dental Specialties Inc.
|
1,364 | 1,466 | ||||||
|
Jarden Corporation
|
1,210 | 1,210 | ||||||
|
BE Aerospace, Inc.
|
1,181 | 1,181 | ||||||
|
CSS Industries, Inc.
|
1,177 | 1,177 | ||||||
|
Eagle Hardware & Garden, a subsidiary of Lowe’s Companies
|
1,169 | 1,169 | ||||||
|
Career Education Corporation
|
1,126 | 1,126 | ||||||
|
Sprint Spectrum, L.P.
|
1,068 | 1,068 | ||||||
|
Enviro Works, Inc.
(c)
|
948 | 1,084 | ||||||
|
Other
(a)(b)
|
15,201 | 15,823 | ||||||
|
|
||||||||
|
|
$ | 48,047 | $ | 46,732 | ||||
|
|
||||||||
| (a) | These revenues are generated in consolidated ventures, generally with our affiliates, and on a combined basis, include lease revenues applicable to noncontrolling interests totaling $2.8 million and $2.7 million for the nine months ended September 30, 2010 and 2009, respectively. | |
| (b) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the nine months ended September 30, 2010 strengthened by approximately 4% in comparison to 2009, resulting in a negative impact on lease revenues for our Euro-denominated investments in 2010. | |
| (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 reflects the accelerated amortization of below-market rent intangibles as a result of tenant not renewing its lease with us. | |
| (g) | Increase was due to rent increase as a result of a lease renewal in October 2009. | |
W. P. Carey 9/30/2010 10-Q
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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 | Nine months ended September 30, | |||||||||||
| Lessee | at September 30, 2010 | 2010 | 2009 | |||||||||
|
The New York Times Company
(a)
|
18 | % | $ | 19,985 | $ | 15,034 | ||||||
|
Carrefour France, SAS
(b)
|
46 | % | 14,823 | 15,923 | ||||||||
|
Federal Express Corporation
|
40 | % | 5,328 | 5,270 | ||||||||
|
Medica — France, S.A.
(b)
|
46 | % | 4,811 | 5,169 | ||||||||
|
Schuler A.G.
(b)
|
33 | % | 4,602 | 4,821 | ||||||||
|
Information Resources, Inc.
|
33 | % | 3,389 | 3,729 | ||||||||
|
U. S. Airways Group, Inc.
|
75 | % | 3,316 | 3,251 | ||||||||
|
Amylin Pharmaceuticals, Inc.
(c)
|
50 | % | 3,020 | 2,541 | ||||||||
|
Hologic, Inc.
|
36 | % | 2,646 | 2,505 | ||||||||
|
Consolidated Systems, Inc.
|
60 | % | 1,373 | 1,373 | ||||||||
|
Childtime Childcare, Inc.
|
34 | % | 981 | 1,000 | ||||||||
|
The Retail Distribution Group
(d)
|
40 | % | 206 | 754 | ||||||||
|
|
||||||||||||
|
|
$ | 64,480 | $ | 61,370 | ||||||||
|
|
||||||||||||
| (a) | We acquired our interest in this investment in March 2009. | |
| (b) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the nine months ended September 30, 2010 strengthened by approximately 4% in comparison to 2009, resulting in a negative impact on lease revenues for our Euro-denominated investments in 2010. | |
| (c) | The increase was due to a CPI-based (or equivalent) rent increase and lease restructuring. | |
| (d) | In March 2010, this venture completed the sale of this property. We have no further economic interest in this venture. |
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 $19.5
million and $19.9 million for the nine months ended September 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.
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
lease revenues increased by $0.6 million and $1.3 million, respectively, primarily due to increases
in lease revenues of $1.7 million and $3.7 million, respectively, as a result of investments we
entered into and an expansion we placed into service during 2010. These increases were partially
offset by the impact of recent activity, including lease restructurings, lease expirations and
property sales, which resulted in reductions to lease revenues of $1.0 million and $2.6 million,
respectively.
Other Real Estate Income
Other real estate income generally consists of revenue from Carey Storage, a subsidiary that
invests in domestic self-storage properties, and Livho, a subsidiary that operates a Radisson hotel
franchise in Livonia, Michigan. Other real estate income also includes lease termination payments
and other non-rent related revenues from real estate ownership including, but not limited to,
settlements of claims against former lessees. We receive settlements in the ordinary course of
business; however, the timing and amount of settlements cannot always be estimated.
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
other real estate income increased by $1.0 million and $1.8 million, respectively, primarily due to
increases in reimbursable tenant costs of $0.7 million and $2.1 million, respectively, as well as
income of $0.4 million from the seven properties that Carey Storage acquired in the third quarter
of 2010. In addition, other real estate income for the nine months ended September 30, 2010
included $0.4 million in reimbursements from tenants for property expenses we paid in prior years.
The increases in other real estate income for the nine months ended September 30, 2010 were
partially offset by a decrease in lease termination income of $1.1 million. Reimbursable tenant
costs are recorded as both revenue and expenses and therefore have no impact on our results of
operations.
W. P. Carey 9/30/2010 10-Q
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Depreciation and Amortization
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
depreciation and amortization increased by $0.6 million and $0.5 million, respectively, primarily
due to depreciation and amortization of $0.7 million and $1.5 million, respectively, related to
investments we entered into and an expansion we placed into service during 2010. The increase in
the nine month period was partially offset by 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.
Property Expenses
For the three and nine months ended September 30, 2010 as compared to the same periods in 2009,
property expenses increased by $1.3 million and $2.6 million, respectively, primarily due to
increases in reimbursable tenant costs of $0.7 million and $2.1 million, respectively. Property
expenses also increased as a result of two tenants vacating properties during 2010.
Impairment Charges
For the three months ended September 30, 2010, we recorded an impairment charge of $0.5 million.
For the nine months ended September 30, 2010 and 2009, we recorded impairment charges totaling $2.7
million and $0.9 million, respectively. The table below summarizes the impairment charges recorded
for both continuing and discontinued operations (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||
| Lessee | 2010 | 2009 | 2010 | 2009 | Triggering Events | |||||||||||||
|
Penberthy Inc.
|
$ | 481 | $ | — | $ | 481 | $ | — | Tenant not renewing lease; potential sale | |||||||||
|
Sam’s East Inc.
|
— | — | 2,268 | — | Potential sale | |||||||||||||
|
Winn-Dixie Montgomery, Inc.
|
— | — | — | 900 | Tenant vacated; potential sale | |||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Impairment charges from continuing operations
|
$ | 481 | $ | — | $ | 2,749 | $ | 900 | ||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Affiliated Foods Southwest, Inc.
|
$ | — | $ | 400 | $ | 308 | $ | 1,200 | Properties sold or contracted for sale for less than carrying value | |||||||||
|
PPD Development, L.P.
|
— | — | 5,561 | — | Properties sold for less than carrying value | |||||||||||||
|
Vertafore Inc.
|
— | 1,990 | — | 1,990 | Property sold for less than carrying value | |||||||||||||
|
Tranco Logistics LLC
|
— | — | — | 580 | Property sold for less than carrying value | |||||||||||||
|
|
||||||||||||||||||
|
Impairment charges from discontinued operations
|
$ | — | $ | 2,390 | $ | 5,869 | $ | 3,770 | ||||||||||
|
|
||||||||||||||||||
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 over which we exercise significant influence.
For the three months ended September 30, 2010 as compared to the same period in 2009, income from
equity investments in real estate decreased by $1.2 million primarily due to an
other-than-temporary impairment charge of $1.4 million recognized during the third quarter of 2010
on the Schuler venture to reflect the decline in the estimated fair value of the venture’s
underlying net assets in comparison with the carrying value of our interest in the venture.
For the nine months ended September 30, 2010 as compared to the same period in 2009, income from
equity investments in real estate increased by $2.4 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 an increase of $0.5 million in income from the Amylin venture as a
result of its purchase accounting adjustment becoming fully amortized
and higher rental income recognized by the venture in connection with a lease restructuring
in 2009. In addition, higher foreign taxes incurred in 2009 on our international ventures
resulted in a $0.5 million increase in income in 2010 and income earned from our investment in The
New York Times transaction completed in March 2009 contributed another $0.2 million increase to
income. These increases were partially offset by the other-than-temporary impairment charge of $1.4
million recognized during the third quarter of 2010 on the Schuler venture described above.
W. P. Carey 9/30/2010 10-Q
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Other Income and (Expenses)
Other income and (expenses) generally consists of gains and losses on foreign currency transactions
and derivative instruments as well as the Investor’s profit-sharing interest in income or losses
from Carey Storage. 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 months ended September 30, 2010 as compared to the same period in 2009, other income
and (expenses) increased by $1.0 million, primarily due to the Investor’s profit-sharing interest
in the loss from Carey Storage of $0.4 million during the third quarter of 2010, compared to income
of $0.1 million in the same prior year period. In addition, net realized and unrealized gains
recognized on foreign currency transactions increased by $0.4 million as a result of changes in
foreign currency exchange rates on notes receivable from international subsidiaries.
For the nine months ended September 30, 2010 as compared to the same period in 2009, other income
and (expenses) decreased by $2.8 million, primarily due to 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 the Investor’s profit-sharing interest in
the gain totaling $4.2 million. In addition, we recognized net realized and unrealized losses on
foreign currency transactions of $0.4 million during the current year period compared to net gains
of $0.3 million in the same prior year period. These gains and losses were partially offset by the
Investor’s profit-sharing interest in the loss from Carey Storage of $0.8 million during the
current year-to-date period.
Income (Loss) from Discontinued Operations
For the nine months ended September 30, 2010, we recognized losses from discontinued operations of
$4.8 million, primarily due to impairment charges recognized on properties sold or held for sale of
$5.9 million, to reduce the carrying values of these properties to their contracted selling prices,
partially offset by income generated from the operations of discontinued properties of $0.6 million
and net gains on the sales of these properties of $0.5 million.
For the three and nine months ended September 30, 2009, we recognized losses from discontinued
operations of $1.3 million and $0.1 million, respectively, which primarily consisted of impairment
charges of $2.4 million and $3.8 million, respectively, recognized on properties sold or being
marketed for sale, partially offset by income generated from the operations of discontinued
properties of $1.1 million and $3.3 million, respectively.
Net Income from Real Estate Ownership Attributable to W. P. Carey Members
For the three months ended September 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
$0.3 million.
For the nine months ended September 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 $6.0
million.
W. P. Carey 9/30/2010 10-Q
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33
Table of Contents
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, the 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 exchange 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 in the nine months ended September 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 nine months ended September 30, 2010, we received revenue of $30.3 million in cash from
providing asset-based management services to the CPA
®
REITs as compared to $27.9 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 $11.6 million in connection with structuring
investments and debt refinancing on behalf of the CPA
®
REITs as compared to $9.2 million
in the comparable prior year period. Deferred acquisition revenue received was lower during the
nine months ended September 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 nine months ended September 30, 2010, our real estate ownership segment provided cash
flows (contractual lease revenues, net of property-level debt service) of approximately
$32.3 million, which represents a decrease of $6.5 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 operating activities, 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 related transactions (purchases and
sales) and capitalized property related costs. During the nine months ended September 30, 2010, we
used $93.1 million to acquire several investments, including $47.6 million for a domestic
investment, $27.2 million for an investment in Spain and $18.3 million for Carey Storage’s
investments in seven self-storage properties. 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. In connection with
the Spain 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 $10.0 million in distributions from
equity investments in real estate and the CPA
®
REITs in excess of cumulative equity
income, inclusive of distributions of $3.6 million received from the Retail Distribution venture in
connection with the sale of its property as well as proceeds of $14.6 million from the sale of six
properties.
Financing Activities
During the nine months ended September 30, 2010, we paid distributions to shareholders of $72.6
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 $2.7 million
to affiliates who hold noncontrolling interests in various entities
with us and an Investor who
holds a profit-sharing interest in Carey Storage. We also made scheduled mortgage principal
payments of $12.2 million and received mortgage loan proceeds totaling $52.8 million, including
$35.0 million obtained for an investment we entered into in February 2010, $11.5 million obtained
in connection with Carey Storage’s investment in the six self-storage facilities in the third
quarter of 2010, $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 $30.8 million since December 31, 2009 and
were comprised of gross borrowings of $83.3 million and repayments of $52.5 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 $15.1
million from holders of noncontrolling interests and a profit-sharing interest, including the $9.9
million received in connection with the investment in Spain and $3.7 million received in connection
with the self-storage investments.
W. P. Carey 9/30/2010 10-Q
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Table of Contents
Summary of Financing
The table below summarizes our non-recourse long-term debt and credit facility (dollars in
thousands):
| September 30, 2010 | December 31, 2009 | |||||||
|
Balance
|
||||||||
|
Fixed rate
|
$ | 142,767 | $ | 147,060 | ||||
|
Variable rate
(a)
|
253,127 | 179,270 | ||||||
|
|
||||||||
|
|
$ | 395,894 | $ | 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)
|
3.1 | % | 2.9 | % | ||||
| (a) | Variable rate debt at September 30, 2010 included (i) $141.8 million outstanding under our line of credit, (ii) $48.4 million that has been effectively converted to fixed rates through interest rate swap derivative instruments and (iii) $57.9 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. |
Cash Resources
At September 30, 2010, our cash resources consisted of the following:
| • | Cash and cash equivalents totaling $46.3 million. Of this amount, $6.2 million, at then-current exchange rates, was held in foreign bank accounts, but we could be subject to restrictions or significant costs should we decide to repatriate these amounts; |
| • | A line of credit with unused capacity of $108.3 million. 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 $262.7 million, although given the current economic environment, there can be no assurance that we would be able to obtain financing for these properties. |
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):
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| Outstanding | Maximum | Outstanding | Maximum | |||||||||||||
| Balance | Available | Balance | Available | |||||||||||||
|
Line of credit
|
$ | 141,750 | $ | 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 September 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 September 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
September 30, 2010.
W. P. Carey 9/30/2010 10-Q
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Table of Contents
Cash Requirements
During the next twelve months, we expect that cash payments will include paying distributions to
our shareholders and to our affiliates who hold noncontrolling interests in entities we control and
making scheduled mortgage loan principal payments, including mortgage balloon payments totaling
$27.3 million, as well as other normal recurring operating expenses. Additionally, as described
above, our line of credit matures in June 2011, but it can be extended for an additional year
pursuant to its terms, 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 September 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
|
$ | 254,144 | $ | 35,003 | $ | 41,942 | $ | 24,443 | $ | 152,756 | ||||||||||
|
Line of credit — Principal
|
141,750 | 141,750 | — | — | — | |||||||||||||||
|
Interest on borrowings
(a)
|
81,191 | 15,519 | 23,676 | 20,245 | 21,751 | |||||||||||||||
|
Operating and other lease commitments
(b)
|
11,083 | 1,045 | 2,078 | 2,018 | 5,942 | |||||||||||||||
|
Property improvement commitments
|
127 | 127 | — | — | — | |||||||||||||||
|
Other commitments
(c)
|
53 | 53 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 488,348 | $ | 193,497 | $ | 67,696 | $ | 46,706 | $ | 180,449 | ||||||||||
|
|
||||||||||||||||||||
| (a) | Interest on un-hedged variable rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding at September 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. Our share of this obligation totals approximately $2.9 million over the lease term through January 2063. | |
| (c) | Represents a commitment to contribute capital to an investment in India. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
Euro at September 30, 2010. At September 30, 2010, we had no material capital lease obligations for
which we are the lessee, either individually or in the aggregate.
W. P. Carey 9/30/2010 10-Q
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36
Table of Contents
We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. Generally, the underlying investments are jointly owned with our affiliates.
Summarized financial information for these ventures and our ownership interest in the ventures at
September 30, 2010 is 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 September 30, 2010 | Total Assets | Party Debt | Maturity Date | ||||||||||
|
Federal Express Corporation
|
40 | % | $ | 42,915 | $ | 39,336 | 1/2011 | |||||||
|
Information Resources, Inc.
|
33 | % | 46,747 | 21,379 | 1/2011 | |||||||||
|
Childtime Childcare, Inc.
|
34 | % | 9,426 | 6,316 | 1/2011 | |||||||||
|
U. S. Airways Group, Inc.
|
75 | % | 29,923 | 18,439 | 4/2014 | |||||||||
|
The New York Times Company
|
18 | % | 240,902 | 117,317 | 9/2014 | |||||||||
|
Carrefour France, SAS
(a)
|
46 | % | 142,276 | 107,987 | 12/2014 | |||||||||
|
Consolidated Systems, Inc.
|
60 | % | 16,813 | 11,413 | 11/2016 | |||||||||
|
Amylin Pharmaceuticals, Inc.
(b)
|
50 | % | 54,781 | 70,644 | 7/2017 | |||||||||
|
Medica — France, S.A.
(a)
|
46 | % | 46,544 | 37,839 | 10/2017 | |||||||||
|
Hologic, Inc.
|
36 | % | 26,805 | 14,320 | 5/2023 | |||||||||
|
Schuler A.G.
(a)
|
33 | % | 70,305 | — | N/A | |||||||||
|
|
||||||||||||||
|
|
$ | 727,437 | $ | 444,990 | ||||||||||
|
|
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| (a) | Dollar amounts shown are based on the exchange rate of the Euro at September 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.
W. P. Carey 9/30/2010 10-Q
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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.
We do not generally use derivative instruments to manage foreign currency exchange rate 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.
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 $2.9 million at September 30, 2010.
At September 30, 2010, a significant portion (approximately 62%) 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 September 30, 2010 ranged from
4.9% to 7.8%. The annual interest rates on our variable rate debt at September 30, 2010 ranged from
1.2% 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 September 30, 2010 (in thousands):
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
|
Fixed rate debt
|
$ | 1,297 | $ | 26,285 | $ | 31,859 | $ | 2,767 | $ | 2,582 | $ | 77,977 | $ | 142,767 | $ | 138,876 | ||||||||||||||||
|
Variable rate debt
|
$ | 5,810 | $ | 145,139 | $ | 3,458 | $ | 3,619 | $ | 3,810 | $ | 91,291 | $ | 253,127 | $ | 252,070 | ||||||||||||||||
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 September 30, 2010 by an
aggregate increase of $13.4 million or an aggregate decrease of $12.7 million, respectively. Annual
interest expense on our unhedged variable rate debt that does not bear interest at fixed rates at
September 30, 2010 would increase or decrease by $1.5 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 September 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 are subject to risk from the effects of
exchange rate movements, primarily in 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 nine months ended September 30, 2010, we recognized net realized and
unrealized foreign currency transaction losses of $0.2 million and $0.1 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 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, as amended (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
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 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 September 30, 2010, have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 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 | |||
| 10.1 |
Advisory Agreement dated September 15, 2010, between Carey Watermark Investors
Incorporated, CWI OP, LP, and Carey Lodging Advisors, LLC
|
|||
|
|
||||
| 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
|
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|
|
||||
| 101 |
The following materials from W. P. Carey & Co. LLC’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2010, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets at September 30,
2010 and December 31, 2009, (ii) Consolidated Statements of Income for the
three months and nine months ended September 30, 2010 and 2009, (iii)
Consolidated Statements of Comprehensive Income for the three months and nine
months ended September 30, 2010 and 2009, (iv) Consolidated Statements of Cash
Flows for the nine months ended September 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. |
W. P. Carey 9/30/2010 10-Q
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Table of Contents
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: 11/5/2010
|
By: | /s/ Mark J. DeCesaris | ||||
|
|
Managing Director and Chief Financial Officer (Principal Financial Officer) |
|||||
|
|
||||||
|
Date: 11/5/2010
|
By: | /s/ Thomas J. Ridings, Jr. | ||||
|
|
Executive Director and Chief Accounting Officer (Principal Accounting Officer) |
|||||
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Table of Contents
EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | |||
| 10.1 |
Advisory Agreement dated September 15, 2010, between Carey Watermark Investors
Incorporated, CWI OP, LP, and Carey Lodging Advisors, LLC
|
|||
|
|
||||
| 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 September 30, 2010, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets at September 30,
2010 and December 31, 2009, (ii) Consolidated Statements of Income for the
three months and nine months ended September 30, 2010 and 2009, (iii)
Consolidated Statements of Comprehensive Income for the three months and nine
months ended September 30, 2010 and 2009, (iv) Consolidated Statements of Cash
Flows for the nine months ended September 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. |
W. P. Carey 9/30/2010 10-Q
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TABLE OF CONTENTS
Part IItem 1. Financial StatementsNote 1. BusinessNote 2. Basis Of PresentationNote 3. Agreements and Transactions with Related PartiesNote 4. Net Investments in PropertiesNote 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