W. P. CAREY INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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 (Address of principal executive office) |
10020
(Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)
(212) 492-1100
(Registrant’s telephone numbers, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Registrant has 39,714,382 shares of common stock, no par value, outstanding at August 1, 2011.
INDEX
Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”), including Management’s Discussion and Analysis
of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains
forward-looking statements within the meaning of the federal securities laws. These forward-looking
statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar expressions. 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, 2010 as filed with the SEC on February 25, 2011
(the “2010 Annual Report”) and in the Current Report on Form 8-K filed with the SEC on June 10,
2011. 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 2010 Annual Report. There
has been no significant change in our critical accounting estimates.
W. P. Carey 6/30/2011 10-Q —
1
Table of Contents
| Item 1. | Financial Statements |
W. P. CAREY & CO. LLC
(in thousands, except share amounts)
| June 30, 2011 | December 31, 2010 | |||||||
|
Assets
|
||||||||
|
Investments in real estate:
|
||||||||
|
Real estate, at cost (inclusive of amounts attributable to consolidated variable
interest entities (“VIEs’’) of $40,108 and $39,718, respectively)
|
$ | 646,923 | $ | 560,592 | ||||
|
Operating real estate, at cost (inclusive of amounts attributable to consolidated
VIEs of $26,264 and $25,665, respectively)
|
109,748 | 109,851 | ||||||
|
Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of
$21,373 and $20,431, respectively)
|
(129,072 | ) | (122,312 | ) | ||||
|
|
||||||||
|
Net investments in properties
|
627,599 | 548,131 | ||||||
|
Net investments in direct financing leases
|
76,114 | 76,550 | ||||||
|
Equity investments in real estate and the REITs
|
528,012 | 322,294 | ||||||
|
|
||||||||
|
Net investments in real estate
|
1,231,725 | 946,975 | ||||||
|
Cash and cash equivalents (inclusive of amounts attributable to consolidated
VIEs of $268 and $86, respectively)
|
26,461 | 64,693 | ||||||
|
Due from affiliates
|
32,014 | 38,793 | ||||||
|
Intangible assets and goodwill, net
|
130,122 | 87,768 | ||||||
|
Other assets, net (inclusive of amounts attributable to consolidated VIEs of
$2,722 and $1,845, respectively)
|
39,384 | 34,097 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,459,706 | $ | 1,172,326 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of
$14,451 and $9,593, respectively)
|
$ | 342,941 | $ | 255,232 | ||||
|
Line of credit
|
233,160 | 141,750 | ||||||
|
Accounts payable, accrued expenses and other liabilities (inclusive of amounts
attributable to consolidated VIEs of $2,109 and $2,275, respectively)
|
64,774 | 40,808 | ||||||
|
Income taxes, net
|
58,239 | 41,443 | ||||||
|
Distributions payable
|
21,784 | 20,073 | ||||||
|
|
||||||||
|
Total liabilities
|
720,898 | 499,306 | ||||||
|
|
||||||||
|
Redeemable noncontrolling interest
|
6,792 | 7,546 | ||||||
|
|
||||||||
|
Commitments and contingencies (Note 10)
|
||||||||
|
|
||||||||
|
Equity:
|
||||||||
|
W. P. Carey members’ equity:
|
||||||||
|
Listed shares, no par value, 100,000,000 shares authorized; 39,707,156 and 39,454,847
shares issued and outstanding, respectively
|
765,808 | 763,734 | ||||||
|
Distributions in excess of accumulated earnings
|
(85,874 | ) | (145,769 | ) | ||||
|
Deferred compensation obligation
|
10,511 | 10,511 | ||||||
|
Accumulated other comprehensive income (loss)
|
2,904 | (3,463 | ) | |||||
|
|
||||||||
|
Total W. P. Carey members’ equity
|
693,349 | 625,013 | ||||||
|
Noncontrolling interests
|
38,667 | 40,461 | ||||||
|
|
||||||||
|
Total equity
|
732,016 | 665,474 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 1,459,706 | $ | 1,172,326 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2011 10-Q —
2
Table of Contents
W. P. CAREY & CO. LLC
(in thousands, except share and per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues
|
||||||||||||||||
|
Asset management revenue
|
$ | 16,619 | $ | 19,080 | $ | 36,439 | $ | 37,900 | ||||||||
|
Structuring revenue
|
5,735 | 13,102 | 21,680 | 19,936 | ||||||||||||
|
Incentive, termination and subordinated disposition revenue
|
52,515 | — | 52,515 | — | ||||||||||||
|
Wholesaling revenue
|
2,922 | 2,741 | 6,202 | 5,283 | ||||||||||||
|
Reimbursed costs from affiliates
|
17,059 | 14,838 | 34,778 | 29,440 | ||||||||||||
|
Lease revenues
|
17,839 | 15,444 | 33,299 | 31,135 | ||||||||||||
|
Other real estate income
|
5,709 | 4,796 | 11,017 | 8,572 | ||||||||||||
|
|
||||||||||||||||
|
|
118,398 | 70,001 | 195,930 | 132,266 | ||||||||||||
|
|
||||||||||||||||
|
Operating Expenses
|
||||||||||||||||
|
General and administrative
|
(24,585 | ) | (18,647 | ) | (45,908 | ) | (36,694 | ) | ||||||||
|
Reimbursable costs
|
(17,059 | ) | (14,838 | ) | (34,778 | ) | (29,440 | ) | ||||||||
|
Depreciation and amortization
|
(7,305 | ) | (5,743 | ) | (12,742 | ) | (11,828 | ) | ||||||||
|
Property expenses
|
(3,066 | ) | (2,310 | ) | (6,204 | ) | (4,494 | ) | ||||||||
|
Other real estate expenses
|
(2,942 | ) | (1,773 | ) | (5,499 | ) | (3,588 | ) | ||||||||
|
Impairment charges
|
(41 | ) | — | (41 | ) | — | ||||||||||
|
|
||||||||||||||||
|
|
(54,998 | ) | (43,311 | ) | (105,172 | ) | (86,044 | ) | ||||||||
|
|
||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||
|
Other interest income
|
560 | 336 | 1,235 | 609 | ||||||||||||
|
Income from equity investments in real estate and the REITs
|
12,465 | 7,638 | 18,681 | 16,780 | ||||||||||||
|
Gain on change in control of interests
|
27,859 | — | 27,859 | — | ||||||||||||
|
Other income and (expenses)
|
4,758 | 47 | 5,239 | (610 | ) | |||||||||||
|
Interest expense
|
(5,396 | ) | (3,765 | ) | (9,836 | ) | (7,476 | ) | ||||||||
|
|
||||||||||||||||
|
|
40,246 | 4,256 | 43,178 | 9,303 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations before income taxes
|
103,646 | 30,946 | 133,936 | 55,525 | ||||||||||||
|
Provision for income taxes
|
(24,760 | ) | (6,751 | ) | (32,334 | ) | (10,863 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
78,886 | 24,195 | 101,602 | 44,662 | ||||||||||||
|
|
||||||||||||||||
|
Discontinued Operations
|
||||||||||||||||
|
(Loss) income from operations of discontinued properties
|
(36 | ) | 455 | 83 | 1,038 | |||||||||||
|
(Loss) gain on sale of real estate
|
(121 | ) | 56 | 660 | 460 | |||||||||||
|
Impairment charges
|
— | (985 | ) | — | (8,137 | ) | ||||||||||
|
|
||||||||||||||||
|
(Loss) income from discontinued operations
|
(157 | ) | (474 | ) | 743 | (6,639 | ) | |||||||||
|
|
||||||||||||||||
|
Net Income
|
78,729 | 23,721 | 102,345 | 38,023 | ||||||||||||
|
Add: Net loss attributable to noncontrolling interests
|
384 | 128 | 714 | 414 | ||||||||||||
|
Less: Net income attributable to redeemable noncontrolling interest
|
(1 | ) | (417 | ) | (604 | ) | (592 | ) | ||||||||
|
|
||||||||||||||||
|
Net Income Attributable to W. P. Carey Members
|
$ | 79,112 | $ | 23,432 | $ | 102,455 | $ | 37,845 | ||||||||
|
|
||||||||||||||||
|
Basic Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to W. P. Carey members
|
$ | 1.96 | $ | 0.60 | $ | 2.52 | $ | 1.11 | ||||||||
|
(Loss) income from discontinued operations attributable to W. P. Carey members
|
— | (0.01 | ) | 0.02 | (0.16 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 1.96 | $ | 0.59 | $ | 2.54 | $ | 0.95 | ||||||||
|
|
||||||||||||||||
|
Diluted Earnings Per Share
|
||||||||||||||||
|
Income from continuing operations attributable to W. P. Carey members
|
$ | 1.94 | $ | 0.60 | $ | 2.50 | $ | 1.11 | ||||||||
|
(Loss) income from discontinued operations attributable to W. P. Carey members
|
— | (0.01 | ) | 0.02 | (0.16 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 1.94 | $ | 0.59 | $ | 2.52 | $ | 0.95 | ||||||||
|
|
||||||||||||||||
|
Weighted Average Shares Outstanding
|
||||||||||||||||
|
Basic
|
39,782,796 | 39,081,064 | 39,760,676 | 39,116,126 | ||||||||||||
|
|
||||||||||||||||
|
Diluted
|
40,243,548 | 39,510,231 | 40,192,418 | 39,567,583 | ||||||||||||
|
|
||||||||||||||||
|
Amounts Attributable to W. P. Carey Members
|
||||||||||||||||
|
Income from continuing operations, net of tax
|
$ | 79,269 | $ | 23,906 | $ | 101,712 | $ | 44,484 | ||||||||
|
(Loss) income from discontinued operations, net of tax
|
(157 | ) | (474 | ) | 743 | (6,639 | ) | |||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 79,112 | $ | 23,432 | $ | 102,455 | $ | 37,845 | ||||||||
|
|
||||||||||||||||
|
Distributions Declared Per Share
|
$ | 0.550 | $ | 0.506 | $ | 1.062 | $ | 1.010 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2011 10-Q —
3
Table of Contents
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net Income
|
$ | 78,729 | $ | 23,721 | $ | 102,345 | $ | 38,023 | ||||||||
|
Other Comprehensive Income (Loss):
|
||||||||||||||||
|
Foreign currency translation adjustments
|
1,945 | (4,627 | ) | 7,671 | (8,034 | ) | ||||||||||
|
Unrealized loss on derivative instrument
|
(1,061 | ) | (735 | ) | (239 | ) | (1,295 | ) | ||||||||
|
Change in unrealized appreciation on marketable securities
|
(2 | ) | (7 | ) | (3 | ) | (11 | ) | ||||||||
|
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||||||||||||||||
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882 | (5,369 | ) | 7,429 | (9,340 | ) | ||||||||||
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|
||||||||||||||||
|
Comprehensive income
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79,611 | 18,352 | 109,774 | 28,683 | ||||||||||||
|
|
||||||||||||||||
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|
||||||||||||||||
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Amounts Attributable to Noncontrolling Interests:
|
||||||||||||||||
|
Net loss
|
384 | 128 | 714 | 414 | ||||||||||||
|
Foreign currency translation adjustments
|
(278 | ) | 26 | (1,053 | ) | 145 | ||||||||||
|
|
||||||||||||||||
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Comprehensive loss (income) attributable to noncontrolling interests
|
106 | 154 | (339 | ) | 559 | |||||||||||
|
|
||||||||||||||||
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|
||||||||||||||||
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Amounts Attributable to Redeemable Noncontrolling Interest:
|
||||||||||||||||
|
Net income
|
(1 | ) | (417 | ) | (604 | ) | (592 | ) | ||||||||
|
Foreign currency translation adjustments
|
(2 | ) | 16 | (9 | ) | 17 | ||||||||||
|
|
||||||||||||||||
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Comprehensive income attributable to redeemable
noncontrolling interest
|
(3 | ) | (401 | ) | (613 | ) | (575 | ) | ||||||||
|
|
||||||||||||||||
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Comprehensive Income Attributable to W. P. Carey Members
|
$ | 79,714 | $ | 18,105 | $ | 108,822 | $ | 28,667 | ||||||||
|
|
||||||||||||||||
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2011 10-Q —
4
Table of Contents
W. P. CAREY & CO. LLC
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2011 | 2010 | |||||||
|
Cash Flows — Operating Activities
|
||||||||
|
Net income
|
$ | 102,345 | $ | 38,023 | ||||
|
Adjustments to net income:
|
||||||||
|
Depreciation and amortization including intangible assets and deferred financing costs
|
12,782 | 12,377 | ||||||
|
Income from equity investments in real estate and the REITs in excess of distributions received
|
223 | (5,942 | ) | |||||
|
Straight-line rent and financing lease adjustments
|
(1,386 | ) | 429 | |||||
|
Amortization of deferred revenue
|
(1,573 | ) | — | |||||
|
Gain on sale of real estate
|
(660 | ) | (460 | ) | ||||
|
Unrealized (gain) loss on foreign currency transactions and others
|
(371 | ) | 860 | |||||
|
Realized (gain) loss on foreign currency transactions and others
|
(1,188 | ) | 143 | |||||
|
Allocation of loss to profit-sharing interest
|
— | (373 | ) | |||||
|
Management income received in shares of affiliates
|
(52,142 | ) | (17,344 | ) | ||||
|
Gain on conversion of shares
|
(3,806 | ) | — | |||||
|
Gain on change in control of interests
|
(27,859 | ) | — | |||||
|
Impairment charges
|
41 | 8,137 | ||||||
|
Stock-based compensation expense
|
8,628 | 4,936 | ||||||
|
Deferred acquisition revenue received
|
15,462 | 17,048 | ||||||
|
Increase in structuring revenue receivable
|
(9,222 | ) | (9,352 | ) | ||||
|
Increase (decrease) in income taxes, net
|
16,256 | (6,116 | ) | |||||
|
Net changes in other operating assets and liabilities
|
(11,543 | ) | (6,075 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
45,987 | 36,291 | ||||||
|
|
||||||||
|
|
||||||||
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Cash Flows — Investing Activities
|
||||||||
|
Distributions received from equity investments in real estate and the REITs in excess of equity income
|
14,498 | 7,762 | ||||||
|
Capital contributions to equity investments
|
(2,297 | ) | — | |||||
|
Purchase of interests in CPA
®
: 16 — Global
|
(121,315 | ) | — | |||||
|
Purchases of real estate and equity investments in real estate
|
(24,323 | ) | (74,904 | ) | ||||
|
VAT paid in connection with acquisition of real estate
|
— | (4,222 | ) | |||||
|
Capital expenditures
|
(1,375 | ) | (1,652 | ) | ||||
|
Cash acquired on acquisition of subsidiaries
|
57 | — | ||||||
|
Proceeds from sale of real estate
|
10,643 | 9,200 | ||||||
|
Proceeds from sale of securities
|
777 | — | ||||||
|
Funding of short-term loans to affiliates
|
(94,000 | ) | — | |||||
|
Proceeds from repayment of short-term loans from affiliates
|
94,000 | — | ||||||
|
Funds placed in escrow
|
(3,899 | ) | — | |||||
|
Funds released from escrow
|
2,030 | 36,132 | ||||||
|
|
||||||||
|
Net cash used in investing activities
|
(125,204 | ) | (27,684 | ) | ||||
|
|
||||||||
|
|
||||||||
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Cash Flows — Financing Activities
|
||||||||
|
Distributions paid
|
(40,849 | ) | (52,490 | ) | ||||
|
Contributions from noncontrolling interests
|
1,459 | 11,180 | ||||||
|
Distributions to noncontrolling interests
|
(2,822 | ) | (1,444 | ) | ||||
|
Purchase of noncontrolling interest
|
(7,502 | ) | — | |||||
|
Distributions to profit-sharing interest
|
— | (693 | ) | |||||
|
Scheduled payments of mortgage principal
|
(9,897 | ) | (10,322 | ) | ||||
|
Proceeds from mortgage financing
|
7,438 | 6,315 | ||||||
|
Proceeds from lines of credit
|
231,410 | 83,250 | ||||||
|
Payments of lines of credit
|
(140,000 | ) | (22,500 | ) | ||||
|
Payment of financing costs
|
(831 | ) | (301 | ) | ||||
|
Proceeds from issuance of shares
|
1,018 | 799 | ||||||
|
Windfall tax benefit (provision) associated with stock-based compensation awards
|
872 | (159 | ) | |||||
|
|
||||||||
|
Net cash provided by financing activities
|
40,296 | 13,635 | ||||||
|
|
||||||||
|
|
||||||||
|
Change in Cash and Cash Equivalents During the Period
|
||||||||
|
Effect of exchange rate changes on cash
|
689 | (1,243 | ) | |||||
|
|
||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(38,232 | ) | 20,999 | |||||
|
Cash and cash equivalents, beginning of period
|
64,693 | 18,450 | ||||||
|
|
||||||||
|
Cash and cash equivalents, end of period
|
$ | 26,461 | $ | 39,449 | ||||
|
|
||||||||
|
|
||||||||
(Continued)
W. P. Carey 6/30/2011 10-Q —
5
Table of Contents
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
(Continued)
Supplemental noncash investing activities:
On May 2, 2011, in connection with entering into an amended and restated advisory agreement with Corporate Property Associates 16 — Global
Incorporated, we received a special
membership interest in Corporate Property Associates 16 — Global Incorporated’s operating
partnership and we recorded as consideration a $28.3 million adjustment to Equity investments in real estate and the
REITs to reflect the fair value of our special interest in the operating partnership (Note 3).
Also on May 2, 2011, we exchanged 11,113,050 shares of Corporate Property Associates 14
Incorporated for 13,260,091 shares of Corporate Property Associates 16 — Global Incorporated,
resulting in a gain of approximately $2.8 million.
In connection with the acquisition of properties from Corporate Property Associates 14
Incorporated, we assumed two non-recourse mortgages on the related properties with an aggregate
fair value of $87.6 million at the date of acquisition (Note 4).
See Notes to Consolidated Financial Statements.
W. P. Carey 6/30/2011 10-Q —
6
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. At June 30, 2011, we were the advisor to the following CPA
®
REITs: 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”), and we were the advisor to Corporate Property
Associates 14 Incorporated (“CPA
®
:14”) until its merger with a subsidiary of
CPA
®
:16 — Global on May 2, 2011 (the “CPA
®
:14/16 Merger”). We are also the
advisor to Carey Watermark Investors Incorporated (“CWI” and, together with the CPA
®
REITs, the “REITs”), which we formed in March 2008 for the purpose of acquiring interests in
lodging and lodging-related properties. At June 30, 2011, we owned and/or managed 990 properties
domestically and internationally. Our owned portfolio was comprised of our full or partial
ownership interest in 162 properties, substantially all of which were net leased to 76 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 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 REITs based on the value of their real estate-related
and lodging-related assets under management. As funds available to the 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 the operating partnerships of CPA
®
:17 — Global and
CWI, as well as the operating partnership of CPA
®
:16 — Global after the
CPA
®
:14/16 Merger (Note 3). We may also earn incentive and disposition revenue and
receive other compensation in connection with providing liquidity alternatives to the 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.
Effective January 1, 2011, we include our equity investments in the REITs in our Real Estate
Ownership segment. The equity income or loss from the REITs that is now included in our Real Estate
Ownership segment represents our proportionate share of the revenue less expenses of the net-leased
properties held by the REITs. This treatment is consistent with that of our directly-owned
properties.
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, 2010, which are included in our 2010 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.
W. P. Carey 6/30/2011 10-Q —
7
Table of Contents
Notes To Consolidated Financial Statements
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.
In April 2010, we filed a registration statement with the SEC to sell up to $1.0 billion of common
stock of CWI 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. Through December 31, 2010, the financial statements of CWI, which had no
significant assets, liabilities or operations, were included in our consolidated financial
statements, as we owned all of CWI’s outstanding common stock. Beginning in 2011, we have accounted
for our interest in CWI under the equity method of accounting because, as the advisor, we do not
exert control but we have the ability to exercise significant influence.
Future Accounting Requirements
The following Accounting Standards Updates (“ASUs”) promulgated by the Financial Accounting
Standards Board (“FASB”) are applicable to us in current or future reports, as indicated:
ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations
— In
December 2010, the FASB issued an update to Accounting Standards Codification Topic (“ASC”) 805,
Business Combinations
. The amendments in the update clarify that the pro forma disclosures
required under ASC 805 should depict revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of the beginning of
the comparable prior annual reporting period. Additionally, the amendments expand the supplemental
pro forma disclosures to include a description of the nature and amount of material, nonrecurring
pro forma adjustments directly attributable to the business combination(s) included in the reported
pro forma revenue and earnings. These amendments impact the form of our disclosures only, are
applicable to us prospectively and are effective for our business combinations for which the
acquisition date is on or after December 15, 2010.
ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs
— In May 2011, the FASB issued an update to ASC 820,
Fair Value Measurements
.
The amendments in the update explain how to measure fair value and do not require additional fair
value measurements, nor are they intended to establish valuation standards or affect valuation
practices outside of financial reporting. These new amendments will impact the level of
information we provide, particularly for level 3 fair value measurements and the measurement’s
sensitivity to changes in unobservable inputs, our use of a nonfinancial asset in a way that
differs from that asset’s highest and best use, and the categorization by level of the fair value
hierarchy for items that are not measured at fair value in the balance sheet but for which the fair
value is required to be disclosed. These amendments are expected to impact the form of our
disclosures only, are applicable to us prospectively and are effective for our interim and annual
periods beginning in 2012.
ASU 2011-05, Presentation of Comprehensive Income
— In June 2011, the FASB issued an update to ASC
220,
Comprehensive Income
. The amendments in the update change the reporting options applicable to
the presentation of other comprehensive income and its components in the financial statements. This
update eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity. Additionally, the update requires the consecutive
presentation of the statement of net income and other comprehensive income. Finally, the update
requires an entity to present reclassification adjustments on the face of the financial statements
from other comprehensive income to net income. These amendments impact the form of our disclosures
only, are applicable to us retrospectively and are effective for our interim and annual periods
beginning in 2012.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
Notes To Consolidated Financial Statements
Advisory Agreements with the REITs
We have advisory agreements with each of the REITs pursuant to which we earn certain fees or are
entitled to receive distributions of cash flow. The terms of the advisory agreements are outlined
in our 2010 Annual Report except as otherwise stated below. The CPA
®
REIT advisory
agreements were renewed for an additional year pursuant to their terms effective October 1, 2010.
Effective September 15, 2010, we entered into an advisory agreement with CWI to perform certain
services, including managing CWI’s offering and its overall businesses, identification, evaluation,
negotiation, purchase and disposition of lodging-related properties and performance of certain
administrative duties. In connection with CPA
®
:16 — Global’s internal reorganization on
May 2, 2011 following the CPA
®
:14/16 Merger, we entered into an amended and restated
advisory agreement with CPA
®
:16 — Global (see “CPA
®
:16 — Global
UPREIT Reorganization” below). The following table presents a summary of revenue earned and/or cash
received from the REITs in connection with providing services as the advisor to the REITs (in
thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Asset management revenue
(a)
|
$ | 16,619 | $ | 19,080 | $ | 36,439 | $ | 37,900 | ||||||||
|
Structuring revenue
(b)
|
5,735 | 13,102 | 21,680 | 19,936 | ||||||||||||
|
Incentive, termination and subordinated
disposition revenue
(c)
|
52,515 | — | 52,515 | — | ||||||||||||
|
Wholesaling revenue
|
2,922 | 2,741 | 6,202 | 5,283 | ||||||||||||
|
Reimbursed costs from affiliates
(d)
|
17,059 | 14,838 | 34,778 | 29,440 | ||||||||||||
|
Distributions of available cash
(e)
|
1,973 | 1,187 | 3,788 | 1,693 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 96,823 | $ | 50,948 | $ | 155,402 | $ | 94,252 | ||||||||
|
|
||||||||||||||||
| (a) | We earn asset management revenue from each REIT, which is based on average invested assets and is calculated according to the advisory agreement for each REIT. For CPA ® :16 — Global prior to the CPA ® :14/16 Merger and for CPA ® :15, this revenue generally totals 1% per annum, with a portion of this revenue, or 0.5%, contingent upon the achievement of specific performance criteria. For CPA ® :16 — Global subsequent to the CPA ® :14/16 Merger, we earn asset management revenue of 0.5% of average invested assets. 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 type of securities. For CWI, we earn asset management revenue of 0.5% of the average market value of lodging-related investments. We do not earn performance revenue from CPA ® :17 — Global, CWI and, subsequent to the CPA ® :14/16 Merger, from CPA ® :16 — Global (see “e” below). In 2011, we elected to receive all asset management revenue from CWI in cash and, subsequent to the CPA ® :14/16 Merger, from CPA ® :16 — Global in shares. | |
| (b) | We earn revenue in connection with structuring and negotiating investments and related mortgage financing for the 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. For CWI, we earn initial acquisition revenue of 2.5% of the total investment cost of the properties acquired and loans originated by us not to exceed 6% of the aggregate contract purchase price of all investments and loans with no deferred acquisition revenue being earned. | |
| Unpaid transaction fees, including accrued interest, are included in Due from affiliates in the consolidated financial statements. Unpaid transaction fees bear interest at annual rates ranging from 5% to 7%. The following tables present the amount of unpaid transaction fees and interest earned on these fees (in thousands): |
| At June 30, 2011 | At December 31, 2010 | |||||||
|
Unpaid deferred acquisition fees
|
$ | 25,179 | $ | 31,419 | ||||
|
|
||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Interest
earned on unpaid
deferred
acquisition fees
|
$ | 310 | $ | 289 | $ | 642 | $ | 538 | ||||||||
|
|
||||||||||||||||
| (c) | In connection with providing a liquidity event for CPA ® :14 shareholders, we earned termination revenue of $31.2 million and subordinated disposition revenue of $21.3 million, which we elected to receive in shares of CPA ® :14 and cash, respectively, as described below. | |
| (d) | The REITs reimburse us for certain costs, primarily broker/dealer commissions paid on behalf of the REITs and marketing and personnel costs. In addition, we earn a selling commission of up to $0.65 per share sold, and a dealer manager fee of up to $0.35 per share sold from CPA ® :17 — Global. Effective September 15, 2010, we entered into a dealer manager agreement with CWI, whereby we receive a selling commission of up to $0.70 per share sold and a dealer manager fee of up to $0.30 per share sold. Pursuant to the advisory agreement, upon reaching the minimum offering amount of $10.0 million on March 3, 2011, CWI became obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its offering, up to a maximum amount (excluding selling commissions and the dealer manager fee) of 2% of the gross proceeds of its offering and distribution reinvestment plan. Through June 30, 2011, we have incurred organization and offering costs on behalf of CWI of approximately $4.2 million. However, at June 30, 2011, CWI was only obligated to reimburse us $0.6 million of these costs because of the 2% limitation described above, and no such costs had been reimbursed as of that date. | |
| (e) | We receive up to 10% of distributions of available cash from the operating partnerships of CPA ® :17 — Global, CWI and, subsequent to the CPA ® :14/16 Merger in May 2011, CPA ® :16 — Global. Amounts in the table above relate to CPA ® :17 — Global only. We will receive these distributions from CPA ® :16 — Global beginning in the third quarter of 2011, and we have not yet received any cash distributions of available cash from CWI’s operating partnership because CWI had no available cash through June 30, 2011. |
W. P. Carey 6/30/2011 10-Q —
9
Table of Contents
Notes To Consolidated Financial Statements
Other Transactions with Affiliates
CPA
®
:14/16 Merger
On May 2, 2011, CPA
®
:14 merged with and into a subsidiary of CPA
®
:16 —
Global. In connection with the CPA
®
:14/16 Merger, on May 2, 2011, we purchased three
properties from CPA
®
:14, in which we already had a partial ownership interest, for an
aggregate purchase price of $31.8 million, plus the assumption of $87.6 million of indebtedness
(Note 4). The purchase price was based on the appraised values of the properties and debt.
Together with the three properties sold by CPA
®
:14 to CPA
®
:17 — Global on
that date, as well as certain other properties sold to third parties in anticipation of the
CPA
®
:14/16 Merger, these sales are referred to herein as the CPA
®
:14 Asset
Sales.
In the CPA
®
:14/16 Merger, CPA
®
:14 shareholders were entitled to receive
$11.50 per share, which was equal to the estimated net asset value (“NAV”) of CPA
®
:14 as
of September 30, 2010. For each share of CPA
®
:14 stock owned, each CPA
®
:14
shareholder received a $1.00 per share special cash dividend and a choice of either (i) $10.50 in
cash or (ii) 1.1932 shares of CPA
®
:16 — Global. The merger consideration of $954.5
million was paid by CPA
®
:16 — Global, including payment of $444.0 million to
liquidating shareholders and issuing 57,365,145 shares of common stock with a fair value of $510.5
million on the date of closing to shareholders of CPA
®
:14 in exchange for 48,076,723
shares of CPA
®
:14 common stock. The $1.00 per share special cash distribution, totalling
$90.4 million in the aggregate, was paid by CPA
®
:14 immediately prior to the
CPA
®
:14/16 Merger from the proceeds of the CPA
®
:14 Asset Sales. In connection
with the CPA
®
:14/16 Merger, we agreed to purchase a sufficient number of shares of
CPA
®
:16 — Global common stock from CPA
®
:16 — Global to enable it to pay the
merger consideration if the cash on hand and available to CPA
®
:14 and CPA
®
:16
— Global, including the proceeds of the CPA
®
:14 Asset Sales and a new $320.0 million
senior credit facility of CPA
®
:16 — Global, were not sufficient. Accordingly, we
purchased 13,750,000 shares of CPA
®
:16 — Global on May 2, 2011 for $121.0 million,
which we funded, along with other obligations, with cash on hand and $121.4 million drawn on our
existing line of credit.
Upon consummation of the CPA
®
:14/16 Merger, we earned revenues of $31.2 million in
connection with the termination of the advisory agreement with CPA
®
:14 and $21.3 million
of subordinated disposition revenues. We elected to receive our termination revenue in 2,717,138
shares of CPA
®
:14, which were exchanged into 3,242,089 shares of CPA
®
:16 —
Global. In addition, we received $11.1 million in cash as a result of the $1.00 per share special
cash distribution paid by CPA
®
:14 to its shareholders. Upon closing of the
CPA
®
:14/16 Merger, we received approximately 13.3 million shares of common stock of
CPA
®
:16 — Global in respect of our shares of CPA
®
:14.
Carey Asset Management Corp. (“CAM”), our subsidiary that acts as the advisor to the
CPA
®
REITs, has waived any acquisition fees payable by CPA
®
:16 — Global
under its advisory agreement with CAM in respect of the properties acquired in the
CPA
®
:14/16 Merger and also waived any disposition fees that may subsequently be payable
by CPA
®
:16 — Global upon a sale of such assets. As the advisor to CPA
®
:14,
CAM earned acquisition fees related to those properties acquired by CPA
®
:14 and
disposition fees on those properties upon the liquidation of CPA
®
:14 and, as a result,
CAM and CPA
®
:16 — Global agreed that CAM should not receive fees upon the acquisition
or disposition of the same properties by CPA
®
:16 — Global.
CPA
®
:16 — Global UPREIT Reorganization
Immediately following the CPA
®
:14/16 Merger on May 2, 2011, CPA
®
:16 — Global
completed an internal reorganization whereby CPA
®
:16 — Global formed an umbrella
partnership real estate investment trust, or UPREIT which was approved by CPA
®
:16 —
Global shareholders in connection with the CPA
®
:14/16 Merger. In connection with the
formation of the UPREIT, CPA
®
:16 — Global contributed substantially all of its assets
and liabilities to an “Operating Partnership” in exchange for a managing member interest and units
of membership interest in the Operating Partnership, which together represent a 99.985% capital
interest of the “Managing Member” (representing the CPA
®
:16 — Global shareholders’
interest). Through our subsidiary, Carey REIT III, Inc. (the “Special General Partner”), we
acquired a special membership interest (“Special Interest”) of 0.015% in the Operating Partnership
for $0.3 million, entitling us to receive certain profit allocations and distributions of cash.
W. P. Carey 6/30/2011 10-Q —
10
Table of Contents
Notes To Consolidated Financial Statements
As consideration for the Special Interest, we amended our advisory agreement with
CPA
®
:16 — Global to give effect to this UPREIT reorganization and to reflect a revised
fee structure whereby (i) our asset management fees are prospectively reduced to 0.5% from 1.0% of
the asset value of a property under management, (ii) the former 15% subordinated incentive fee and
termination fees have been eliminated and replaced by (iii) a 10% Special General Partner Available
Cash Distribution and (iv) the 15% Final Distribution, each defined below. The sum of the new 0.5%
asset management fee and the Available Cash Distribution is expected to be lower than the original
1.0% asset management fee; accordingly, the Available Cash Distribution is contractually limited to
0.5% of the value of CPA
®
:16 — Global’s assets under management. However, the amount
of after-tax cash we receive pursuant to this revised structure is anticipated to be greater than
the amount we received under the previous arrangement. The fee structure related to initial
acquisition fees, subordinated acquisition fees and subordinated disposition fees for
CPA
®
:16 — Global remains unchanged.
As Special General Partner, we are entitled to 10% of the Operating Partnership’s available cash
(the “Available Cash Distribution”), which is defined as the Operating Partnership’s cash generated
from operations, excluding capital proceeds, as reduced by operating expenses and debt service,
excluding prepayments and balloon payments. We may elect to receive our Available Cash
Distribution in shares of CPA
®
:16 — Global’s common stock. In the event of a capital
transaction such as a sale, exchange, disposition or refinancing of CPA
®
:16 — Global’s
assets, we are also entitled to receive a “Final Distribution” equal to 15% of residual returns
after giving effect to a 100% return of the Managing Member’s invested capital plus a 6% priority
return.
We recorded the Special Interest as an equity investment at its fair value of $28.3 million (Note
6). We will recognize the deferred revenue earned from our Special Interest in the Operating
Partnership into earnings on a straight-line basis over the expected period of performance, which
is currently estimated at three years based on the stated intended life of CPA
®
:16 —
Global as described in its offering documents. The amount of deferred revenue recognized during the
three and six months ended June 30, 2011 was $1.4 million, which is net of $0.2 million associated
with the amortization of the basis differential generated by the Special Interest in the Operating
Partnership and our underlying claim on the net assets of CPA
®
:16 — Global. We
determined the fair value of the Special Interest based upon a discounted cash flow model, which
included assumptions related to estimated future cash flows of CPA
®
:16 — Global and the
estimated duration of the fee stream.
Other
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 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. The average estimated minimum lease
payments for the office lease, inclusive of noncontrolling interests, at June 30, 2011 approximates
$3.0 million annually through 2016. The table below presents income from noncontrolling interest
partners related to reimbursements from these affiliates (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Income from noncontrolling interest partners
|
$ | 644 | $ | 568 | $ | 1,196 | $ | 1,214 | ||||||||
|
|
||||||||||||||||
The following table presents deferred rent due to affiliates related to this limited partnership,
which are included in Accounts payable, accrued expenses and other liabilities in the consolidated
balance sheets (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||
|
Deferred rent due to affiliates
|
$ | 830 | $ | 854 | ||||
|
|
||||||||
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 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 because it is a variable interest entity 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.
W. P. Carey 6/30/2011 10-Q —
11
Table of Contents
Notes To Consolidated Financial Statements
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.
During May 2011, we loaned $4.0 million at a rate of 30-day London inter-bank offered rate
(“LIBOR”) plus 2.5% to CWI which was repaid on June 6, 2011. In addition, during February 2011, we
loaned $90.0 million at a rate of 1.15% to CPA
®
:17 — Global which was repaid on April
8, 2011, its maturity date.
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||
|
Land
|
$ | 114,800 | $ | 111,660 | ||||
|
Buildings
|
532,123 | 448,932 | ||||||
|
Less: Accumulated depreciation
|
(113,380 | ) | (108,032 | ) | ||||
|
|
||||||||
|
|
$ | 533,543 | $ | 452,560 | ||||
|
|
||||||||
Operating Real Estate
Operating real estate, which consists primarily of our self-storage investments through Carey
Storage Management LLC (“Carey Storage”) and our Livho subsidiary, at cost, is summarized as
follows (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||
|
Land
|
$ | 24,030 | $ | 24,030 | ||||
|
Buildings
|
85,718 | 85,821 | ||||||
|
Less: Accumulated depreciation
|
(15,692 | ) | (14,280 | ) | ||||
|
|
||||||||
|
|
$ | 94,056 | $ | 95,571 | ||||
|
|
||||||||
Real Estate Acquired
As discussed in Note 3, in connection with the CPA
®
:14/16 Merger in May 2011,
we purchased the remaining interests in certain properties, in which we already had a joint
interest, from CPA
®
:14 as part of the CPA
®
:14 Asset Sales. These three
properties, which were leased to Checkfree, Federal Express and Amylin, had a fair value of $174.8
million at the date of acquisition. As part of the transaction, we assumed the related non-recourse
mortgages on the Federal Express and Amylin properties. These two mortgages and the mortgage on the
Checkfree property had an aggregate fair value of $117.1 million at the date of acquisition.
Amounts provided are the total amounts attributable to the venture properties and do not represent
the proportionate share that we purchased. We had previously consolidated the Checkfree property
and accounted for the Federal Express and Amylin properties under the equity method. Upon
acquiring the remaining interests in the properties leased to Federal Express and Amylin, we owned
100% of these entities and accounted for these acquisitions as step acquisitions utilizing the
purchase method of accounting. Due to the change in control of the ventures that occurred, and in
accordance with ASC 810 involving a step acquisition where control is obtained and there is a
previously held equity interest, we recorded an aggregate gain of approximately $27.9 million
related to the difference between our respective carrying values and the fair values of our
previously held interests on the acquisition date. Subsequent to our acquisition, we consolidate
all of these wholly-owned properties. The consolidation of these properties resulted in an increase
of $90.2 million and $40.8 million to Real estate, net and net lease intangibles, respectively,
from December 31, 2010 to June 30, 2011.
Other
In connection with our prior acquisitions of properties, we have recorded net lease intangibles of
$81.8 million, which are being amortized over periods ranging from one year to 40 years. In-place
lease, tenant relationship and above-market rent intangibles are included in Intangible assets and
goodwill, net in the consolidated financial statements. Below-market rent intangibles are included
in Accounts payable, accrued expenses and other liabilities in the consolidated financial
statements. 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.
Net amortization of intangibles, including the effect of foreign currency translation, was $1.7
million and $1.3 million for the three months ended June 30, 2011 and 2010, respectively, and $2.2
million and $3.1 million for the six months ended June 30, 2011 and 2010, respectively.
W. P. Carey 6/30/2011 10-Q —
12
Table of Contents
Notes To Consolidated Financial Statements
Assets representing rights to receive money on demand or at fixed or determinable dates are
referred to as finance receivables. Our finance receivable portfolios consist of direct financing
leases and deferred acquisition fees. Operating leases are not included in finance receivables as
such amounts are not recognized as an asset in the consolidated balance sheets.
Deferred Acquisition Fees Receivable
As described in Note 3, we earn revenue in connection with structuring and negotiating investments
and related mortgage financing for the REITs. A portion of this revenue is due in equal annual
installments ranging from three to four years, provided the relevant CPA
®
REIT meets its
performance criterion. Unpaid deferred installments, including accrued interest, from all of the
CPA
®
REITs were included in Due from affiliates in the consolidated financial
statements.
Credit Quality of Finance Receivables
We generally seek investments in facilities that are critical to the tenant’s business and that we
believe have a low risk of tenant defaults. At June 30, 2011 and December 31, 2010, none of the
balances of our finance receivables were past due and we had not established any allowances for
credit losses. Additionally, there have been no modifications of finance receivables. We evaluate
the credit quality of our tenant receivables utilizing an internal 5-point credit rating scale,
with 1 representing the highest credit quality and 5 representing the lowest. The credit quality
evaluation of our tenant receivables was last updated in the second quarter of 2011. We believe the
credit quality of our deferred acquisition fees receivable falls under category 1, as all of the
CPA
®
REITs are expected to have the available cash to make such payments.
A summary of our finance receivables by internal credit quality rating is as follows (dollars in
thousands):
| Number of Tenants at | Net Investments in Direct Financing Leases at | |||||||||||||||
| Internal Credit Quality Rating | June 30, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | ||||||||||||
|
1
|
9 | 9 | $ | 49,222 | $ | 49,533 | ||||||||||
|
2
|
5 | 5 | 24,327 | 24,447 | ||||||||||||
|
3
|
1 | — | 2,565 | — | ||||||||||||
|
4
|
— | 1 | — | 2,570 | ||||||||||||
|
5
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 76,114 | $ | 76,550 | ||||||||||||
|
|
||||||||||||||||
At both June 30, 2011 and December 31, 2010, Other assets, net included $0.3 million of accounts
receivable related to amounts billed under these direct financing leases.
W. P. Carey 6/30/2011 10-Q —
13
Table of Contents
Notes To Consolidated Financial Statements
Our equity investments in real estate for our investments in the REITs and for our interests in
unconsolidated real estate investments are summarized below.
REITs
We own interests in the REITs and account for these interests under the equity method because, as
their advisor and through our ownership in their common shares, we do not exert control but have
the ability to exercise significant influence. Shares of the REITs are publicly registered and the
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 REITs and have elected,
in certain cases, to receive a portion of this revenue in the form of restricted common stock of
the REITs rather than cash.
The following table sets forth certain information about our investments in the REITs (dollars in
thousands):
| % of Outstanding Shares at | Carrying Amount of Investment at | |||||||||||||||
| Fund | June 30, 2011 | December 31, 2010 | June 30, 2011 (a) | December 31, 2010 (a) | ||||||||||||
|
CPA
®
:14
(b)
|
0.0 | % | 9.2 | % | $ | — | $ | 87,209 | ||||||||
|
CPA
®
:15
|
7.4 | % | 7.1 | % | 90,004 | 87,008 | ||||||||||
|
CPA
®
:16 — Global
(c)
|
17.5 | % | 5.6 | % | 332,463 | 62,682 | ||||||||||
|
CPA
®
:17 — Global
|
0.8 | % | 0.6 | % | 14,401 | 8,156 | ||||||||||
|
CWI
(d)
|
0.8 | % | 100.0 | % | 129 | — | ||||||||||
|
|
||||||||||||||||
|
|
$ | 436,997 | $ | 245,055 | ||||||||||||
|
|
||||||||||||||||
| (a) | Includes asset management fees receivable, for which shares will be issued during the subsequent period. | |
| (b) | As described in Note 3, on May 2, 2011, CPA ® :14 merged with and into a subsidiary of CPA ® :16 — Global. In connection with the CPA ® :14/16 Merger, we earned termination fees of $31.2 million, which were received in shares of CPA ® :14. Upon closing of the CPA ® :14/16 Merger, our shares of CPA ® :14 were exchanged into 13,260,091 shares of CPA ® :16 — Global with a fair value of $118.0 million. In connection with this share exchange, we recognized a gain of $2.8 million, which is the difference between the carrying value of our investment in CPA ® :14 and the estimated fair value of consideration received in shares of CPA ® :16 — Global. This gain is included in Other income and (expenses) within our Investment Management segment. | |
| (c) | In addition to normal operating activities, the increase in carrying value was due to several factors, including (i) our purchase of 13,750,000 shares of CPA ® :16 — Global for $121.0 million; (ii) an increase of $118.0 million as a result of the exchange of our shares of CPA ® :14 into shares of CPA ® :16 — Global in the CPA ® :14/16 Merger; (iii) a $0.3 million contribution to acquire the Special Interest in CPA ® :16 — Global’s Operating Partnership; and (iv) $28.3 million to reflect the fair value of the Special Interest in CPA ® :16 — Global’s Operating Partnership (Note 3). | |
| (d) | Prior to 2011, the financial statements of CWI, which had no significant assets, liabilities or operations, were included in our consolidated financial statements, as we owned all of CWI’s outstanding common stock. |
The following tables present combined summarized financial information for the REITs. Amounts
provided are expected total amounts attributable to the REITs and do not represent our
proportionate share (in thousands):
| At June 30, 2011 | At December 31, 2010 | |||||||
|
Assets
|
$ | 9,239,065 | $ | 8,533,899 | ||||
|
Liabilities
|
(5,008,673 | ) | (4,632,709 | ) | ||||
|
|
||||||||
|
Shareholders’ equity
|
$ | 4,230,392 | $ | 3,901,190 | ||||
|
|
||||||||
W. P. Carey 6/30/2011 10-Q —
14
Table of Contents
Notes To Consolidated Financial Statements
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues
|
$ | 204,105 | $ | 201,334 | $ | 402,773 | $ | 394,088 | ||||||||
|
Expenses
(a)
|
(126,530 | ) | (151,906 | ) | (272,374 | ) | (293,530 | ) | ||||||||
|
Impairment charges
(b)
|
(29,831 | ) | (886 | ) | (39,839 | ) | (12,980 | ) | ||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 47,744 | $ | 48,542 | $ | 90,560 | $ | 87,578 | ||||||||
|
|
||||||||||||||||
| (a) | Total net expenses expected to be recognized by the REITs during each of the three and six month periods in 2011 included the following items related to the CPA ® :14/16 Merger: (i) $78.8 million of net gains recognized by CPA ® :14 in connection with the CPA ® :14 Asset Sales, of which our share is approximately $7.4 million; (ii) a net gain of $13.7 million recognized by CPA ® :16 — Global in connection with the CPA ® :14/16 Merger as a result of the fair value of CPA ® :14 exceeding the total merger consideration, of which our share is approximately $2.4 million; (iii) a contract termination fee of $34.3 million incurred by CPA ® :16 — Global related to its UPREIT reorganization, of which our share is approximately $4.9 million; (iv) $8.5 million of expenses incurred by CPA ® :16 — Global related to the CPA ® :14/16 Merger, of which our share is approximately $1.5 million; and (v) a $2.8 million net loss recognized by CPA ® :16 — Global in connection with the prepayment of certain non-recourse mortgages, of which our share is approximately $0.5 million. | |
| (b) | As a result of the impairment charges expected to be recognized by the REITs, our income earned from these investments was reduced by $4.4 million and $0.1 million during the three months ended June 30, 2011 and 2010, respectively, and by $5.1 million and $0.7 million during the six months ended June 30, 2011 and 2010, respectively. |
We recognized income from our equity investments in the REITs of $6.8 million and $2.8 million for
the three months ended June 30, 2011 and 2010, respectively, and $8.6 million and $5.1 million for
the six months ended June 30, 2011 and 2010, respectively. In addition, we received distributions
of available cash from CPA
®
:17 — Global’s operating partnership of $2.0 million and
$1.2 million during the three months ended June 30, 2011 and 2010, respectively, and $3.8 million
and $1.7 million for the six months ended June 30, 2011 and 2010, respectively, which we recorded
as Income from equity investments in the REITs within the Investment Management segment. Our
proportionate share of income or loss recognized from our equity investments in the REITs is
impacted by several factors, including impairment charges recorded by the REITs.
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).
W. P. Carey 6/30/2011 10-Q —
15
Table of Contents
Notes To Consolidated Financial Statements
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values (dollars in thousands):
| Ownership Interest | Carrying Value at | |||||||||||
| Lessee | at June 30, 2011 | June 30, 2011 | December 31, 2010 | |||||||||
|
Schuler A.G.
(a) (b)
|
33 | % | $ | 23,246 | $ | 20,493 | ||||||
|
Carrefour France, SAS
(a)
|
46 | % | 20,856 | 18,274 | ||||||||
|
The New York Times Company
|
18 | % | 19,275 | 20,191 | ||||||||
|
U.S. Airways Group, Inc.
(b)
|
75 | % | 7,738 | 7,934 | ||||||||
|
Medica — France, S.A.
(a)
|
46 | % | 5,085 | 5,232 | ||||||||
|
Hologic, Inc.
(b)
|
36 | % | 4,728 | 4,383 | ||||||||
|
Childtime Childcare, Inc.
(c)
|
34 | % | 4,140 | 1,862 | ||||||||
|
Consolidated Systems, Inc.
(b)
|
60 | % | 3,400 | 3,388 | ||||||||
|
Symphony IRI Group, Inc.
(d)
|
33 | % | 1,437 | 3,375 | ||||||||
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG
(a)
|
5 | % | 1,110 | 1,086 | ||||||||
|
Federal Express Corporation
(e) (g)
|
100 | % | — | (4,272 | ) | |||||||
|
Amylin Pharmaceuticals, Inc.
(f) (g)
|
100 | % | — | (4,707 | ) | |||||||
|
|
||||||||||||
|
|
$ | 91,015 | $ | 77,239 | ||||||||
|
|
||||||||||||
| (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. | |
| (c) | In January 2011, we made a contribution of $2.1 million to the venture to pay off our share of its maturing mortgage loan. | |
| (d) | The decrease in carrying value in the current period was due to our portion of an $8.6 million impairment charge recognized in the first quarter of 2011 on the venture property to reduce the carrying value of the property to its contracted selling price. In addition, we recognized an other-than-temporary impairment charge of $0.2 million 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. | |
| (e) | In 2010, this venture refinanced its maturing non-recourse mortgage debt with new non-recourse financing and distributed the net proceeds to the venture partners. Our share of the distribution was $5.5 million, which exceeded our total investment in the venture at that time. | |
| (f) | 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. | |
| (g) | In connection with the CPA ® :14/16 Merger in May 2011, we purchased the remaining interest in this investment from CPA ® :14. Subsequent to the acquisition, we consolidate this investment as our ownership interest in the investment is now 100% (Note 4). |
The following tables present combined summarized financial information of our venture properties.
Amounts provided are the total amounts attributable to the venture properties and do not represent
our proportionate share (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||
|
Assets
|
$ | 1,106,283 | $ | 1,151,859 | ||||
|
Liabilities
|
(766,170 | ) | (818,238 | ) | ||||
|
|
||||||||
|
Partners’/members’ equity
|
$ | 340,113 | $ | 333,621 | ||||
|
|
||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues
|
$ | 30,364 | $ | 37,849 | $ | 60,918 | $ | 76,058 | ||||||||
|
Expenses
|
(20,090 | ) | (19,948 | ) | (40,738 | ) | (39,657 | ) | ||||||||
|
Impairment charges (a)
|
(40 | ) | — | (8,602 | ) | — | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 10,234 | $ | 17,901 | $ | 11,578 | $ | 36,401 | ||||||||
|
|
||||||||||||||||
| (a) | Represents impairment charges incurred by a venture that leases property to the Symphony IRI Group, Inc. in connection with a potential sale of the property. |
W. P. Carey 6/30/2011 10-Q —
16
Table of Contents
Notes To Consolidated Financial Statements
We recognized income from equity investments in real estate of $3.7 million and $6.3 million for
the three and six months ended June 30, 2011, respectively, and $3.7 million and $9.9 million for
the three and six months ended June 30, 2010, 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 other-than-temporary impairment
charges.
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 methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Money Market Funds —
Our money market funds consisted of government securities and U.S. Treasury
bills. These funds were classified as Level 1 as we used quoted prices from active markets to
determine their fair values.
Derivative Assets and Liabilities —
Our derivative assets and liabilities primarily comprised of
interest rate swaps or caps. These derivative instruments were measured at fair value using readily
observable market inputs, such as quotations on interest rates. Our derivative instruments were
classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank
counterparties that are not traded in an active market.
Other Securities —
Our other securities primarily comprised of our investment in an India growth
fund and our interest in a commercial mortgage loan securitization. These funds are not traded in
an active market. We estimated the fair value of these securities using internal valuation models
that incorporate market inputs and our own assumptions about future cash flows. We classified these
assets as Level 3.
Redeemable Noncontrolling Interest —
We account for the noncontrolling interest in WPCI as
redeemable noncontrolling interest. We determined the valuation of 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. We classified this liability as Level 3.
W. P. Carey 6/30/2011 10-Q —
17
Table of Contents
Notes To Consolidated Financial Statements
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis. Assets and liabilities presented below exclude assets and liabilities owned by
unconsolidated ventures (in thousands):
| Fair Value Measurements at June 30, 2011 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
|
$ | 35 | $ | 35 | $ | — | $ | — | ||||||||
|
Other securities
|
1,601 | — | — | 1,601 | ||||||||||||
|
Derivative assets
|
14 | — | 14 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,650 | $ | 35 | $ | 14 | $ | 1,601 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 904 | $ | — | $ | 904 | $ | — | ||||||||
|
Redeemable noncontrolling interest
|
6,792 | — | — | 6,792 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 7,696 | $ | — | $ | 904 | $ | 6,792 | ||||||||
|
|
||||||||||||||||
| Fair Value Measurements at December 31, 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
|
$ | 37,154 | $ | 37,154 | $ | — | $ | — | ||||||||
|
Other securities
|
1,726 | — | — | 1,726 | ||||||||||||
|
Derivative assets
|
312 | — | 312 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 39,192 | $ | 37,154 | $ | 312 | $ | 1,726 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 969 | $ | — | $ | 969 | $ | — | ||||||||
|
Redeemable noncontrolling interest
|
7,546 | — | — | 7,546 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 8,515 | $ | — | $ | 969 | $ | 7,546 | ||||||||
|
|
||||||||||||||||
W. P. Carey 6/30/2011 10-Q —
18
Table of Contents
Notes To Consolidated Financial Statements
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interest | Securities | Interest | |||||||||||||
|
Beginning balance
|
$ | 1,607 | $ | 6,920 | $ | 1,620 | $ | 15,326 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
(4 | ) | 1 | — | 103 | |||||||||||
|
Included in other
comprehensive (loss)
income
|
(2 | ) | 2 | 6 | 10 | |||||||||||
|
Purchases
|
— | — | 45 | — | ||||||||||||
|
Distributions paid
|
— | (131 | ) | — | (201 | ) | ||||||||||
|
Redemption value adjustment
|
— | — | — | (112 | ) | |||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,601 | $ | 6,792 | $ | 1,671 | $ | 15,126 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
$ | (4 | ) | $ | — | $ | — | $ | — | |||||||
|
|
||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||
| Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Redeemable | Redeemable | |||||||||||||||
| Other | Noncontrolling | Other | Noncontrolling | |||||||||||||
| Securities | Interest | Securities | Interest | |||||||||||||
|
Beginning balance
|
$ | 1,726 | $ | 7,546 | $ | 1,628 | $ | 18,085 | ||||||||
|
Total gains or losses (realized and unrealized):
|
||||||||||||||||
|
Included in earnings
|
(2 | ) | 604 | (1 | ) | 338 | ||||||||||
|
Included in other
comprehensive (loss)
income
|
(3 | ) | 9 | (1 | ) | 8 | ||||||||||
|
Purchases
|
53 | — | 45 | — | ||||||||||||
|
Settlements
|
(173 | ) | — | — | — | |||||||||||
|
Distributions paid
|
— | (676 | ) | — | (2,969 | ) | ||||||||||
|
Redemption value adjustment
|
— | (691 | ) | — | (336 | ) | ||||||||||
|
|
||||||||||||||||
|
Ending balance
|
$ | 1,601 | $ | 6,792 | $ | 1,671 | $ | 15,126 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
$ | (2 | ) | $ | — | $ | (1 | ) | $ | — | ||||||
|
|
||||||||||||||||
We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during the
three and six months ended June 30, 2011 and 2010. Gains and losses (realized and unrealized)
included in earnings for other securities are reported in Other income and (expenses) in the
consolidated financial statements.
W. P. Carey 6/30/2011 10-Q —
19
Table of Contents
Notes To Consolidated Financial Statements
Our other financial instruments had the following carrying values and fair values as of the dates
shown (in thousands):
| At June 30, 2011 | At December 31, 2010 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
|
Deferred acquisition fees receivable
|
$ | 25,179 | $ | 24,340 | $ | 31,419 | $ | 32,485 | ||||||||
|
Non-recourse debt
|
342,941 | 352,956 | 255,232 | 255,460 | ||||||||||||
|
Line of credit
|
233,160 | 230,400 | 141,750 | 140,600 | ||||||||||||
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 June 30, 2011 and December
31, 2010.
Items Measured at Fair Value on a Non-Recurring Basis
We perform an 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 calculate impairment charges based on market
conditions and assumptions that existed at the time of the impairment. The valuation of real estate
is subject to significant judgment and actual results may differ materially if market conditions or
the underlying assumptions change.
The following table presents information about our other assets that were measured on a fair value
basis for the periods presented. All of the impairment charges,were measured using unobservable
inputs (Level 3) and were recorded based on market conditions and assumptions that existed at the
time (in thousands):
| Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | |||||||||||||||
| Total Impairment | Total Impairment | |||||||||||||||
| Total Fair Value | Charges or Allowance | Total Fair Value | Charges or Allowance | |||||||||||||
| Measurements | for Credit Losses | Measurements | for Credit Losses | |||||||||||||
|
Impairment Charges From Continuing
Operations:
|
||||||||||||||||
|
Real estate
|
$ | 350 | $ | 41 | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued
Operations:
|
||||||||||||||||
|
Real estate
|
— | — | 5,390 | 985 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 350 | $ | 41 | $ | 5,390 | $ | 985 | ||||||||
|
|
||||||||||||||||
W. P. Carey 6/30/2011 10-Q —
20
Table of Contents
Notes To Consolidated Financial Statements
| Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 | |||||||||||||||
| Total Impairment | Total Impairment | |||||||||||||||
| Total Fair Value | Charges or Allowance | Total Fair Value | Charges or Allowance | |||||||||||||
| Measurements | for Credit Losses | Measurements | for Credit Losses | |||||||||||||
|
Impairment Charges From Continuing
Operations:
|
||||||||||||||||
|
Real estate
|
$ | 350 | $ | 41 | $ | — | $ | — | ||||||||
|
Equity investments in real estate
|
1,554 | 206 | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
1,904 | 247 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Impairment Charges From Discontinued
Operations:
|
||||||||||||||||
|
Real estate
|
— | — | 6,401 | 8,137 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 1,904 | $ | 247 | $ | 6,401 | $ | 8,137 | ||||||||
|
|
||||||||||||||||
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 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.
Portfolio Concentration Risk
Concentration of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risk 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%, based on the percentage of our annualized contractual
minimum base rent for the second quarter of 2011, in certain areas, as shown in the table below.
The percentages in the table below represent our directly-owned real estate properties and do not
include our pro rata share of equity investments.
| At June 30, 2011 | ||||
|
Region:
|
||||
|
Texas
|
17 | % | ||
|
California
|
16 | % | ||
|
Tennessee
|
12 | % | ||
|
Georgia
|
9 | % | ||
|
Other U.S.
|
36 | % | ||
|
|
||||
|
Total U.S.
|
90 | % | ||
|
Total Europe
|
10 | % | ||
|
|
||||
|
Total
|
100 | % | ||
|
|
||||
|
|
||||
|
Asset Type:
|
||||
|
Office
|
42 | % | ||
|
Industrial
|
29 | % | ||
|
Warehouse/Distribution
|
15 | % | ||
|
Other
|
14 | % | ||
|
|
||||
|
Total
|
100 | % | ||
|
|
||||
|
|
||||
|
Tenant Industry:
|
||||
|
Business and commercial services
|
17 | % | ||
|
Retail stores
|
12 | % | ||
|
Other
|
71 | % | ||
|
|
||||
|
Total
|
100 | % | ||
|
|
||||
W. P. Carey 6/30/2011 10-Q —
21
Table of Contents
Notes To Consolidated Financial Statements
There were no significant concentrations, individually or in the aggregate, related to our
unconsolidated ventures.
Lines of Credit
We have a $250.0 million unsecured revolving line of credit with various lenders that was scheduled
to mature in June 2011. In June 2011, we extended this line of credit for an additional year
through June 2012.
The unsecured 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. In
addition, we pay an annual fee ranging between 12.5 and 20 basis points on the unused portion of
the unsecured line of credit, depending on our leverage ratio. Based on our leverage ratio at June
30, 2011, we pay interest at LIBOR, or 0.19% at that date, plus 90 basis points and pay 15 basis
points on the unused portion of the unsecured line of credit. At June 30, 2011, the outstanding
balance on the unsecured line of credit was $233.2 million, an increase of $91.4 million since
December 31, 2010. Net borrowings under our unsecured line of credit were primarily used to fund
the purchase of CPA
®
:16 — Global shares from CPA
®
:16 — Global in order to
facilitate the CPA
®
:14/16 Merger (Note 3).
On May 2, 2011, we obtained a $30.0 million secured revolving line of credit from Bank of America.
The secured line of credit provides for an annual interest rate (as defined in the credit facility
agreement) of either: (i) the “Adjusted LIBO Rate” plus 2.5%, or (ii) the “Alternative Base Rate”
plus 3.50%. In addition, we paid a commitment fee of 0.25%, or $0.1 million, and are required to
pay an annual fee on the unused portion of the line of credit of 0.5%. This new line of credit is
collateralized by five properties with a carrying value of approximately $51.2 million at June 30,
2011, and is coterminous with the unsecured line of credit, expiring in June 2012. As of June 30,
2011, there was no balance outstanding on this line of credit.
The secured line of credit facility agreement stipulates six financial covenants that are similar
to those of our unsecured revolving line of credit, as discussed in our 2010 Annual Report, that
require us to maintain certain ratios and benchmarks at the end of each quarter. We were in
compliance with these covenants at June 30, 2011 on both our secured and unsecured lines of credit.
Non-Recourse Debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of
real property and direct financing leases, with an aggregate carrying value of $449.4 million at
June 30, 2011. Our mortgage notes payable had fixed annual interest rates ranging from 3.1% to 7.8%
and variable annual interest rates ranging from 1.1% to 7.3%, with maturity dates ranging from 2011
to 2021 at June 30, 2011.
In connection with our acquisition of three properties from CPA
®
:14 in May 2011 as part
of the CPA
®
:14 Asset Sales (Note 4), we assumed two non-recourse mortgages with an
aggregate fair value of $87.6 million (and a carrying value of
$88.7 million) on the date of acquisition and recorded a net fair market
value adjustment of $1.1 million. The fair market value adjustment is amortized to interest expense
over the remaining lives of the loans. These mortgages have a weighted average annual fixed
interest rate and remaining term of 5.8% and 8.3 years, respectively.
W. P. Carey 6/30/2011 10-Q —
22
Table of Contents
Notes To Consolidated Financial Statements
Scheduled Debt Principal Payments
Scheduled debt principal payments during each of the next five calendar years following June 30,
2011 and thereafter are as follows (in thousands):
| Total (b) | ||||
|
2011 (remainder)
|
$ | 21,565 | ||
|
2012
(a)
|
270,514 | |||
|
2013
|
8,544 | |||
|
2014
|
12,303 | |||
|
2015
|
48,824 | |||
|
Thereafter through 2021
|
215,491 | |||
|
|
||||
|
Total
|
$ | 577,241 | ||
|
|
||||
| (a) | Includes $233.2 million outstanding at June 30, 2011 under our unsecured line of credit, which is scheduled to mature in June 2012. | |
| (b) | Amounts exclude the fair market value of debt adjustment of $1.1 million at June 30, 2011. |
Certain amounts in the table above are based on the applicable foreign currency exchange rate at
June 30, 2011.
At June 30, 2011, 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.
Stock-Based Compensation
The total compensation expense (net of forfeitures) for our stock-based compensation plans was $6.2
million and $2.5 million for the three months ended June 30, 2011 and 2010, respectively, and $8.7
million and $4.9 million for the six months ended June 30, 2011 and 2010, respectively, all of
which are included in General and administrative expenses in the consolidated financial statements.
Total stock-based compensation expense for each of the three and six months ended June 30, 2011
included an additional $2.4 million of compensation expense as a result of revising the expected
vesting of the performance share units (“PSUs”) issued in 2009 and 2010. The tax benefit
recognized by us related to these plans totaled $2.8 million and $1.1 million for the three months
ended June 30, 2011 and 2010, respectively, and $3.9 million and $2.2 million for the six months
ended June 30, 2011 and 2010, respectively.
There has been no significant activity or changes to the terms and conditions of any of our
stock-based compensation plans or arrangements during 2011, other than those described below.
2009 Share Incentive Plan
In January 2011, the compensation committee of our board of directors approved long-term incentive
(“LTIP”) awards consisting of 178,550 restricted stock units (“RSUs”), which represent the right to
receive shares of our common stock based on established restrictions, and 191,600 PSUs, 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. The RSUs are scheduled to vest
over three years. Vesting of the PSUs is conditioned upon certain performance goals being met by us
during the performance period from January 1, 2011 through December 31, 2013. The ultimate number
of shares to be issued upon vesting of PSUs 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.
In March 2011, the compensation committee approved additional LTIP awards consisting of 160,000
RSUs with a vesting period of four years and 120,000 PSUs with a
W. P. Carey 6/30/2011 10-Q —
23
Table of Contents
Notes To Consolidated Financial Statements
vesting period of three years. In June 2011, the compensation committee approved 60,000 RSUs with a
vesting periods ranging from one to five years and 86,000 RSUs that are scheduled to vest over
three years. On the grant dates, the compensation committee set goals for the 2011 PSU grants.
Based in part on our results through June 30, 2011 and expectations at that date regarding our
future performance, we currently anticipate that the performance goals for the PSUs granted in 2011
will be met at target levels. As a result of the 2011 awards, we currently expect to recognize
compensation expense totaling approximately $29.7 million over the vesting period, of which $1.6
million and $2.6 million was recognized during the three and six months ended June 30, 2011,
respectively. During the second quarter of 2011, in connection with a review of our current and
expected performance versus the performance goals on the PSUs that were issued in 2009 and 2010, we
revised our estimate of the ultimate number of certain of the PSUs to be vested. As a result, we
recorded an additional $2.4 million of stock-based compensation expense to reflect the number of
shares expected to be issued when these PSUs vest in 2012 and 2013. We review our
performance against these goals on an ongoing basis and update expectations as warranted.
Earnings Per Share
Under current authoritative guidance for determining earnings per share, all unvested share-based
payment awards that contain non-forfeitable rights to distributions are considered to be
participating securities and therefore are included in the computation of earnings per share under
the two-class method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common shares and participating security according to
dividends declared (or accumulated) and participation rights in undistributed earnings. Our
unvested RSUs 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 RSUs from the numerator. The following table
summarizes basic and diluted earnings for the periods indicated (in thousands, except share
amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net income attributable to W. P. Carey members
|
$ | 79,112 | $ | 23,432 | $ | 102,455 | $ | 37,845 | ||||||||
|
Allocation of distribution equivalents paid on unvested
restricted stock units in excess of net income
|
(1,166 | ) | (453 | ) | (1,510 | ) | (783 | ) | ||||||||
|
|
||||||||||||||||
|
Net income — basic
|
77,946 | 22,979 | 100,945 | 37,062 | ||||||||||||
|
Income effect of dilutive securities, net of taxes
|
1 | 233 | 333 | 331 | ||||||||||||
|
|
||||||||||||||||
|
Net income — diluted
|
$ | 77,947 | $ | 23,212 | $ | 101,278 | $ | 37,393 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — basic
|
39,782,796 | 39,081,064 | 39,760,676 | 39,116,126 | ||||||||||||
|
Effect of dilutive securities
|
460,752 | 429,167 | 431,742 | 451,457 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding — diluted
|
40,243,548 | 39,510,231 | 40,192,418 | 39,567,583 | ||||||||||||
|
|
||||||||||||||||
Securities included in our diluted earnings per share determination consist of stock options and
restricted stock awards. Securities totaling 0.1 million shares and 0.9 million shares for the
three months ended June 30, 2011 and 2010, respectively, and 0.1 million shares and 0.9 million
shares for the six months ended June 30, 2011 and 2010, respectively, were excluded from the
earnings per share computations above as their effect would have been anti-dilutive.
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. Other than our acquisition of the noncontrolling interest in a property
from CPA
®
:14 in connection with the CPA
®
:14 Asset Sales (Note 4), there were
no changes in our ownership interest in any of our consolidated subsidiaries for the six months
ended June 30, 2011.
W. P. Carey 6/30/2011 10-Q —
24
Table of Contents
Notes To Consolidated Financial Statements
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, 2011
|
$ | 665,474 | $ | 625,013 | $ | 40,461 | ||||||
|
Shares issued
|
1,018 | 1,018 | — | |||||||||
|
Contributions
|
1,459 | — | 1,459 | |||||||||
|
Redemption value adjustment
|
691 | 691 | — | |||||||||
|
Purchase of noncontrolling interest
(a)
|
(7,491 | ) | (5,879 | ) | (1,612 | ) | ||||||
|
Net income (loss)
|
101,741 | 102,455 | (714 | ) | ||||||||
|
Stock-based compensation expense
|
8,628 | 8,628 | — | |||||||||
|
Windfall tax provision — share incentive plans
|
872 | 872 | — | |||||||||
|
Distributions
|
(44,725 | ) | (42,561 | ) | (2,164 | ) | ||||||
|
Change in other comprehensive income
|
7,604 | 6,367 | 1,237 | |||||||||
|
Shares repurchased
|
(3,255 | ) | (3,255 | ) | — | |||||||
|
|
||||||||||||
|
Balance at June 30, 2011
|
$ | 732,016 | $ | 693,349 | $ | 38,667 | ||||||
|
|
||||||||||||
| W. P. Carey | Noncontrolling | |||||||||||
| Total Equity | Members | Interests | ||||||||||
|
Balance at January 1, 2010
|
$ | 632,408 | $ | 625,633 | $ | 6,775 | ||||||
|
Shares issued
|
799 | 799 | — | |||||||||
|
Contributions
|
11,180 | — | 11,180 | |||||||||
|
Redemption value adjustment
|
538 | 538 | — | |||||||||
|
Tax impact of purchase of WPCI interest
|
(1,637 | ) | (1,637 | ) | — | |||||||
|
Net income (loss)
|
37,431 | 37,845 | (414 | ) | ||||||||
|
Stock-based compensation expense
|
4,936 | 4,936 | — | |||||||||
|
Windfall tax benefits — share incentive plans
|
(159 | ) | (159 | ) | — | |||||||
|
Distributions
|
(41,824 | ) | (40,974 | ) | (850 | ) | ||||||
|
Change in other comprehensive loss
|
(9,665 | ) | (9,178 | ) | (487 | ) | ||||||
|
Shares repurchased
|
(904 | ) | (904 | ) | — | |||||||
|
|
||||||||||||
|
Balance at June 30, 2010
|
$ | 633,103 | $ | 616,899 | $ | 16,204 | ||||||
|
|
||||||||||||
| (a) | In May 2011, we purchased the noncontrolling interest in the Checkfree venture from CPA ® :14 at a total cost of $7.5 million as part of the CPA ® :14 Asset Sales. In connection with the purchase, we recorded a $5.9 million reduction in Listed shares, which represents the excess of the fair value of the noncontrolling interest over its carrying value. |
Redeemable Noncontrolling Interest
We account for the noncontrolling interest in WPCI held by one of our officers as a redeemable
noncontrolling interest, as we have an obligation to repurchase the interest from that officer,
subject to certain conditions. The officer’s interest is reflected at estimated redemption value
for all periods presented. Redeemable noncontrolling interest, as presented on the consolidated
balance sheets, reflects an adjustment of ($0.7) million and ($0.5) million at June 30, 2011 and
December 31, 2010, respectively, to present the noncontrolling interest at redemption value.
W. P. Carey 6/30/2011 10-Q —
25
Table of Contents
Notes To Consolidated Financial Statements
The following table presents a reconciliation of redeemable noncontrolling interests (in
thousands):
| Six Months Ended June 30, | ||||||||
| 2011 | 2010 | |||||||
|
Balance at January 1,
|
$ | 7,546 | $ | 7,692 | ||||
|
Redemption value adjustment
|
(691 | ) | (538 | ) | ||||
|
Net income
|
604 | 592 | ||||||
|
Distributions
|
(676 | ) | (610 | ) | ||||
|
Change in other comprehensive income (loss)
|
9 | (17 | ) | |||||
|
|
||||||||
|
Balance at June 30,
|
$ | 6,792 | $ | 7,119 | ||||
|
|
||||||||
Income tax provision for the three months ended June 30, 2011 and 2010 was $24.8 million and $6.8
million, respectively, while the income tax provision for the six months ended June 30, 2011 and
2010 was $32.3 million and $10.9 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.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to
complete and settle. The tax years 2007 through 2011 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 real estate investment trust under Sections 856 through 860 of the
Internal Revenue 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 real estate investment trust. Under
the real estate investment trust 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 related to Carey REIT II.
W. P. Carey 6/30/2011 10-Q —
26
Table of Contents
Notes To Consolidated Financial Statements
We evaluate our results from operations by our two major business segments — Investment Management
and Real Estate Ownership (Note 1). Effective January 1, 2011, we include our equity investments in
the REITs in our Real Estate Ownership segment. The equity income or loss from the REITs that is
now included in our Real Estate Ownership segment represents our proportionate share of the revenue
less expenses of the net-leased properties held by the REITs. This treatment is consistent with
that of our directly-owned properties. Results for the three and six months ended June 30, 2010
have been reclassified to conform to the current period presentation. The following table presents
a summary of comparative results of these business segments (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Investment Management
|
||||||||||||||||
|
Revenues
(a)
|
$ | 94,850 | $ | 49,761 | $ | 151,614 | $ | 92,559 | ||||||||
|
Operating expenses
(a)
|
(41,315 | ) | (33,266 | ) | (80,238 | ) | (65,752 | ) | ||||||||
|
Other, net
(b)
|
4,510 | 1,846 | 7,226 | 2,889 | ||||||||||||
|
Provision for income taxes
|
(26,056 | ) | (6,373 | ) | (33,436 | ) | (9,948 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members
|
$ | 31,989 | $ | 11,968 | $ | 45,166 | $ | 19,748 | ||||||||
|
|
||||||||||||||||
|
Real Estate Ownership
(c)
|
||||||||||||||||
|
Revenues
|
$ | 23,548 | $ | 20,240 | $ | 44,316 | $ | 39,707 | ||||||||
|
Operating expenses
|
(13,683 | ) | (10,045 | ) | (24,934 | ) | (20,292 | ) | ||||||||
|
Interest expense
|
(5,396 | ) | (3,765 | ) | (9,836 | ) | (7,476 | ) | ||||||||
|
Other, net
(b)
|
41,515 | 5,886 | 45,898 | 13,712 | ||||||||||||
|
Benefit from
(provision for) income taxes
|
1,296 | (378 | ) | 1,102 | (915 | ) | ||||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members
|
$ | 47,280 | $ | 11,938 | $ | 56,546 | $ | 24,736 | ||||||||
|
|
||||||||||||||||
|
Total Company
|
||||||||||||||||
|
Revenues
(a)
|
$ | 118,398 | $ | 70,001 | $ | 195,930 | $ | 132,266 | ||||||||
|
Operating expenses
(a)
|
(54,998 | ) | (43,311 | ) | (105,172 | ) | (86,044 | ) | ||||||||
|
Interest expense
|
(5,396 | ) | (3,765 | ) | (9,836 | ) | (7,476 | ) | ||||||||
|
Other, net
(b)
|
46,025 | 7,732 | 53,124 | 16,601 | ||||||||||||
|
Provision for income taxes
|
(24,760 | ) | (6,751 | ) | (32,334 | ) | (10,863 | ) | ||||||||
|
|
||||||||||||||||
|
Income from continuing operations attributable to
W. P. Carey members
|
$ | 79,269 | $ | 23,906 | $ | 101,712 | $ | 44,484 | ||||||||
|
|
||||||||||||||||
| Total Long-Lived Assets (d) at | Total Assets at | |||||||||||||||
| June 30, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||
|
Investment Management
|
$ | 3,088 | $ | 3,729 | $ | 120,001 | $ | 123,921 | ||||||||
|
Real Estate Ownership
|
1,231,727 | 946,976 | 1,339,705 | 1,048,405 | ||||||||||||
|
|
||||||||||||||||
|
Total Company
|
$ | 1,234,815 | $ | 950,705 | $ | 1,459,706 | $ | 1,172,326 | ||||||||
|
|
||||||||||||||||
| (a) | Included in revenues and operating expenses are reimbursable costs from affiliates totaling $17.1 million and $14.8 million for the three months ended June 30, 2011 and 2010, respectively, and $34.8 million and $29.4 million for the six months ended June 30, 2011 and 2010, respectively. | |
| (b) | Includes Interest income, Income from equity investments in real estate and the REITs, Gain on change in control of interests, Income (loss) attributable to noncontrolling interests and Other income and (expenses). | |
| (c) | Included within the Real Estate Ownership segment is our total investment in CPA ® :16 — Global, which represents approximately 23% of our total assets at June 30, 2011 (Note 6). | |
| (d) | Includes Net investments in real estate and intangible assets related to management contracts. |
W. P. Carey 6/30/2011 10-Q —
27
Table of Contents
Notes To Consolidated Financial Statements
At June 30, 2011, our international investments within our Real Estate Ownership segment were
comprised of investments in France, Poland, Germany and Spain. The following tables present
information about these investments (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Lease revenues
|
$ | 2,134 | $ | 1,450 | $ | 4,132 | $ | 2,836 | ||||||||
|
Income from equity investments in real estate
|
1,627 | 1,416 | 3,149 | 2,976 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 3,761 | $ | 2,866 | $ | 7,281 | $ | 5,812 | ||||||||
|
|
||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||
|
Long-lived assets
|
$ | 74,239 | $ | 69,126 | ||||
|
|
||||||||
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 on our consolidated balance sheet and the current and prior period
results of operations of the property are reclassified as discontinued operations.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues
|
$ | 2 | $ | 882 | $ | 222 | $ | 2,128 | ||||||||
|
Expenses
|
(38 | ) | (427 | ) | (139 | ) | (1,090 | ) | ||||||||
|
(Loss) gain on sale of real estate
|
(121 | ) | 56 | 660 | 460 | |||||||||||
|
Impairment charges
|
— | (985 | ) | — | (8,137 | ) | ||||||||||
|
|
||||||||||||||||
|
(Loss) income from discontinued operations
|
$ | (157 | ) | $ | (474 | ) | $ | 743 | $ | (6,639 | ) | |||||
|
|
||||||||||||||||
2011 —
During the six months ended June 30, 2011, we sold four domestic properties for $10.6
million, net of selling costs, and recognized a net gain on these sales of $0.7 million, excluding
impairment charges of $2.3 million previously recognized during the six months ended June 30, 2010.
Net gain recognized during the six months ended June 30, 2011 included a net loss of $0.1 million
related to properties sold during the second quarter of 2011.
2010 —
During the six months ended June 30, 2010, we sold four domestic properties for $9.2
million, net of selling costs, and recognized a net gain on these sales of $0.5 million, excluding
impairment charges of $5.1 million that were previously recognized in 2009. In addition, in April
and May 2010, we entered into two agreements to sell three properties for a total of approximately
$5.6 million. In connection with these proposed sales, we recorded impairment charges totaling $1.0
million and $5.9 million in the three and six months ended June 30, 2010, respectively, to reduce
the carrying values of these properties to their contracted selling prices. We completed these
sales during the third quarter of 2010.
W. P. Carey 6/30/2011 10-Q —
28
Table of Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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. Our MD&A should be
read in conjunction with our 2010 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 990 properties, including our own portfolio.
We operate in two business segments — Investment Management and Real Estate Ownership, as
described below.
Investment Management
— As of June 30, 2011, we provided services to four affiliated
publicly-owned, non-listed real estate investment trusts: CPA
®
:15, CPA
®
:16 —
Global, CPA
®
:17 — Global and CWI. In May 2011, another affiliated publicly-owned,
non-listed real estate investment trust, CPA
®
:14 merged with and into a subsidiary of
CPA
®
:16 — Global. We structure and negotiate investments and debt placement
transactions for the 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 and, for CWI, its lodging-related assets under management. As funds
available to the 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 the operating
partnerships of CPA
®
:17 — Global, CWI, and after the CPA
®
:14/16 Merger,
CPA
®
:16 — Global. We may also earn incentive and disposition revenue and receive other
compensation in connection with providing liquidity alternatives to the REIT shareholders , as we
did for CPA
®
:14 shareholders with the CPA
®
:14/16 Merger. Collectively, at June 30, 2011, the CPA
®
REITs owned all or a portion of over 860 properties, including
certain properties in which we have an ownership interest. Substantially all of these properties,
totaling approximately 104 million square feet (on a pro rata basis), were net leased to 226
tenants, with an average occupancy rate of approximately 98%. In addition, CWI currently has an
interest in a venture that owns two domestic hotel properties.
Real Estate Ownership
— We own and invest in commercial properties in the U.S. and the European
Union that are then leased to companies, primarily on a triple-net leased basis, which requires
each tenant to pay substantially all of the costs associated with operating and maintaining the
property. We may also invest in other properties if opportunities arise. At June 30, 2011, our
portfolio was comprised of our full or partial ownership interest in 162 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 76 tenants, with an occupancy rate of approximately 91%.
Financial Highlights
(In thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Total revenues (excluding reimbursed
costs from affiliates)
|
$ | 101,339 | $ | 55,163 | $ | 161,152 | $ | 102,826 | ||||||||
|
Net income attributable to W. P. Carey members
|
79,112 | 23,432 | 102,455 | 37,845 | ||||||||||||
|
Cash flow from operating activities
|
45,987 | 36,291 | ||||||||||||||
Total revenues increased during the three and six months ended June 30, 2011 as compared to the
same periods in 2010, primarily due to incentive, termination and subordinated disposition revenue
recognized in connection with providing a liquidity event for CPA
®
:14 shareholders.
Net income increased during the three and six months ended June 30, 2011 as compared to the same
periods in 2010. Results from operations in our Investment Management segment were significantly
higher during the three and six months ended June 30, 2011, primarily due to incentive, termination
and subordinated disposition revenue recognized in connection with fees earned in connection with
the CPA
®
:14/16 Merger, which provided a liquidity event for CPA
®
:14
shareholders. Results from operations in our Real Estate Ownership segment benefited from gains
recognized in May 2011 in connection with the CPA
®
:14 Asset Sales, which included three
properties that we purchased from CPA
®
:14 in connection with the CPA
®
:14/16
Merger.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
Cash flow from operating activities increased during the three and six months ended June 30, 2011
as compared to the same periods in 2010 primarily due to subordinated disposition revenues received
in connection with providing a liquidity event to CPA
®
:14 shareholders through the
CPA
®
:14/16 Merger.
Our quarterly cash distribution increased to $0.55 per share for the second quarter of 2011, which
equates to $2.20 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 in
Results of Operations.
Recent Developments
In its initial offering documents, CPA
®
:15 stated its intention to consider
liquidity events for investors generally commencing nine to 12 years following the investment of
substantially all of the net proceeds from that offering, which occurred in 2003. As a result,
during the second quarter of 2011, we began actively considering liquidity alternatives on behalf
of CPA
®
:15 as its advisor and have discussed with its board of directors a
number of those alternatives. The board of directors of CPA
®
:15 has formed a
special committee of independent directors to explore possible liquidity transactions, including
transactions proposed by us. CPA
®
:15’s special committee is authorized to
retain, and has retained, legal and financial advisors to assist the committee in its review. A
liquidity transaction could take a variety of forms, including, without limitation, a merger and/or
sale of assets either on a portfolio basis or individually, or listing of
CPA
®
:15’s shares on a stock exchange, and similar to prior liquidity
transactions undertaken by other CPA
®
programs, including
CPA
®
:14, it could involve one or more other CPA
®
REITs
and/or our affiliates. The execution of a liquidity transaction could be affected by a variety of
factors, such as the availability of financing on acceptable terms, conditions in the economy and
the commercial real estate market and the performance of CPA
®
:15’s tenants,
many of which are outside of our control. There can be no assurance that our efforts or those of
CPA
®
:15’s special committee will result in the occurrence of a liquidity
transaction in the near future or at all.
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. Through the end of
the second quarter of 2011, we saw slow improvement in the global economy following the
significant distress experienced in 2008 and 2009 and, as a result, we and the CPA
®
REITs experienced increased investment volume, as well as an improved
financing environment during the six months ended June 30, 2011 as compared to the prior year period. As recent
geopolitical events have shown, however, the economic environment remains volatile, rendering any discussion of the
future impact of these trends uncertain. Nevertheless, as of the date of this Report, our views of the effects of the current
financial and economic trends on our business, as well as our response to those trends,
is presented below.
Foreign Exchange Rates
We have foreign investments and, as a result, are subject to risk from the effects of exchange rate
movements. Our results of foreign operations benefit from a weaker U.S. dollar and are adversely
affected by a stronger U.S. dollar relative to foreign currencies. Investments denominated in the
Euro accounted for approximately 10% of our annualized contractual minimum base rent and 29% of
aggregate annualized contractual minimum base rent for the CPA
®
REITs for the six months
ended June 30, 2011. During the same period, the U.S. dollar weakened in relation to the Euro as
evidenced by the change in the end-of-period conversion rate of the Euro, which increased by 9% to
$1.4391 at June 30, 2011 from $1.3253 at December 31, 2010. This weakening had a favorable impact
on our balance sheet, and especially those of the CPA
®
REITs, at June 30, 2011 as
compared to the balance sheet at December 31, 2010. During the six months ended June 30, 2011, the
average conversion rate for the U.S. dollar in relation to the Euro increased by 5% in comparison
to the same period in 2010. This increase had a favorable impact on 2011 year-to-date results of
operations of the CPA
®
REITs as compared to the prior year period. As a result, our
equity in earnings was modestly impacted. While we actively manage our foreign exchange risk, a
significant unhedged decline in the value of the Euro could have a material negative impact on our
net asset values, future results, financial position and cash flows. Such a decline would
particularly impact the CPA
®
REITs, which have higher levels of international
investments than we have in our owned portfolio.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
Capital Markets
Capital market conditions continue to exhibit evidence of post-crisis improvement, including new
issuances of commercial mortgage-backed securities debt. Over the past several quarters, capital
inflows to both commercial real estate debt and equity markets have helped increase the
availability of mortgage financing and asset prices continue to recover from their credit crisis
lows. The availability of financing for domestic secured transactions has expanded during the first
six months of 2011; however, lenders remain cautious and continue to employ conservative
underwriting standards. Commercial real estate capitalization rates remain low compared to 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 prices for high quality
assets has helped to increase transaction activity; however, increased competition from both public
and private investors continues. During the beginning of the third quarter of 2011, we noted
increased volatility in the capital markets; however, it is not yet possible to determine whether
this recent activity will have any impact on our business.
Investment Opportunities
We earn structuring revenue on the investments we structure on behalf of the REITs. Our ability to
complete these investments on behalf of the REITs, and thereby earn structuring revenue, fluctuates
based on the pricing and availability of transactions and the pricing and availability of
financing, among other factors.
We continue to see an increased number of investment opportunities that we believe will allow us to
structure transactions on behalf of the REITs on favorable terms. Although capitalization rates
have remained low 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 continue to experience an increased competition for investments, both
domestically and in Europe, and further capital inflows into the marketplace could put additional
pressure on the returns that we can generate from investments. However, we expect to continue to
expand our ability to source deals in other markets.
We structured investments on behalf of the REITs totaling $594.0 million during the six months
ended June 30, 2011, and based on current conditions, we expect that we will be able to continue to
take advantage of the investment opportunities we are seeing in both
the U.S. and Europe in the near term. International investments comprised 36% (on a pro rata basis)
of total investments during the six months ended June 30, 2011. While international activity
fluctuates from quarter to quarter, we currently expect that such 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
Over the past several quarters, we have seen a gradual improvement in both the credit and real
estate financing markets. During the second quarter of 2011, we continued to see an increase in the
number of lenders for domestic investments as market conditions improved compared to prior years.
However, also during the second quarter of 2011, the sovereign debt issues in Europe have had the
impact of increasing the cost of debt in certain international markets and have made it more
challenging to obtain debt for certain international deals. During the six months ended June 30,
2011, we obtained non-recourse mortgage financing totaling $433.7 million on behalf of the
CPA
®
REITs and $37.1 million for our owned real estate portfolio (each on a pro rata
basis).
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, unemployment, interest
rates, inflation and demographics. Despite improvements in expectations, these macro-economic
factors have persisted since the beginning of the credit crisis, negatively impacting commercial
real estate market fundamentals, which has resulted in higher vacancies, lower rental rates and
lower demand for vacant space. Recently, there have been some indications of stabilization in asset
values and slight improvements in occupancy rates. We and the REITs are chiefly affected by changes
in the appraised values of our properties, tenant defaults, inflation, lease expirations and
occupancy rates.
Net Asset Values of the REITs
We own shares in each of the REITs and earn asset management revenue based on a percentage of
average invested assets for each REIT. As such, we benefit from rising investment values and are
negatively impacted when these values decrease. As a result of continued weakness in the economy
and a weakening of the Euro versus the dollar during 2010 and 2009, the NAVs for CPA
®
:15
and CPA
®
:16 — Global during 2010 were lower than the NAVs at December 31, 2009.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
The following table presents recent NAVs per share for certain CPA
®
REITs:
| CPA ® :15 | CPA ® :16 — Global | |||||||
|
December 31, 2009
|
$ | 10.70 | $ | 9.20 | ||||
|
September 30, 2010
|
N/A | 8.80 | ||||||
|
December 31, 2010
|
10.40 | N/A | ||||||
The NAVs 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 others. We do not control these variables and, as such, cannot predict how they
will change in the future.
Credit Quality of Tenants
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 portfolios, tenant defaults can reduce our asset management revenue
if they lead to a decline in the appraised value of the assets of the CPA
®
REITs and can
also reduce our income and distributions 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
resulting in reduced cash flow, which may negatively impact net asset values and 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.
The continued improvements in general business conditions have favorably impacted the overall
credit quality of our and the CPA
®
REITs’ tenants. As of the date of this Report, we
have no significant exposure to tenants operating under bankruptcy protection in our owned
portfolio, while in the CPA
®
REIT portfolios, tenants operating under bankruptcy
protection, administration or receivership account for less than 1% of aggregate annualized
contractual minimum base rent, a decrease from levels experienced during the crisis.
It is possible, however, that tenants may file for bankruptcy or default on their leases in the
future and that economic conditions may again deteriorate.
To mitigate credit risk, we have historically looked to invest in assets that we believe are
critically important to our tenants’ operations and have attempted to diversify the portfolios by
tenant, tenant industry and geography. 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.
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. While we have seen recent signs of inflationary
pressure during 2011, the historically low inflation rates in the U.S. and the Euro zone during
2009 and 2010 will limit rent increases in our owned portfolio and in the portfolios of the
CPA
®
REITs in coming years.
Lease Expirations and Occupancy
We actively manage our owned real estate portfolio and the portfolios of the CPA
®
REITs
and begin discussing options with tenants in advance of scheduled lease expirations. In certain
cases, we obtain lease renewals from our tenants; however, tenants may elect to move out at the end
of their term 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, 10% of the annualized contractual minimum base rent in our owned portfolio is
scheduled to expire in the next twelve months. For those leases that we believe will be renewed, it
is possible that renewed rents may be below the tenants’ existing contractual rents and that lease
terms may be shorter than historical norms.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
The occupancy rate for our owned real estate portfolio increased slightly from 89% at December 31,
2010 to 91% as of June 30, 2011.
Fundraising
Fundraising trends for non-traded real estate investment trusts overall include an increase in
average monthly volume during the six months ended June 30, 2011 compared to the prior year period.
For the current offerings of CPA
®
:17 — Global and CWI, 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. We continue to witness
increased competition for investment dollars.
CPA
®
:17 — Global’s registration statement for a continuous public offering of up to an
additional $1.0 billion of common stock, which we refer to as the follow-on offering, was declared
effective by the SEC on April 7, 2011 and as a result, its initial public offering was terminated.
Through the termination of CPA
®
:17 — Global’s initial public offering, we raised $163.8
million during 2011 and more than $1.5 billion on its behalf since beginning fundraising in
December 2007. From the beginning of the follow-on offering on May 2, 2011 through June 30, 2011,
we raised $151.0 million for CPA
®
:17 — Global.
For CWI, we raised $29.7 million from the beginning of its offering on September 15, 2010 through June 30,
2011. CWI filed a registration statement to sell up to $1.0 billion of common stock in an
initial public offering for the purpose of acquiring interests in lodging and lodging-related
properties and broke escrow on March 3, 2011.
Proposed Accounting Changes
The International Accounting Standards Board (“IASB”) 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. The FASB and IASB met during July 2011 and voted to re-expose the proposed
standard. A revised exposure draft for public comment is expected in the fourth quarter of 2011,
with a final standard by mid-2012. The boards also reached decisions, which are tentative and
subject to change, on a single lessor accounting model and the accounting for variable lease
payments, along with several presentation and disclosure issues. As of the date of this Report, the
proposed guidance has not yet been finalized, and as such we are unable to determine whether this
proposal will have a material impact on our business.
Additionally, the Emerging Issues Task Force, or EITF, of the FASB, has reached a
consensus-for-exposure on the following Issue:
EITF Issue 10-E, Accounting for Deconsolidation of a Subsidiary That Is In-Substance Real Estate
—
At its June 2011 meeting, the EITF reached a consensus-for-exposure that an investor that
consolidates a single-purpose entity that is capitalized, in whole or in part, with nonrecourse
debt used to purchase real estate should apply the guidance in ASC 360-20, which provides
accounting guidance for the sale of real estate other than retail land, to determine whether to
derecognize real estate owned by the in-substance real estate entity. This consensus will impact
the timing of our recognition of gains in the event a property is placed into receivership. Prior
to implementation of this guidance, it was permissible to deconsolidate the entity and recognize a
gain related to the excess of the carrying value of the debt over the related property based on
losing control over the entity.
W. P. Carey 6/30/2011 10-Q —
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Table of Contents
Results of Operations
We evaluate our results of operations by our two major business segments — Investment Management
and Real Estate Ownership. Effective January 1, 2011, we include our equity investments in the
REITs in our Real Estate Ownership segment. The equity income or loss from the REITs that is now
included in our Real Estate Ownership segment represents our proportionate share of the revenue
less expenses of the net-leased properties held by the REITs. This treatment is consistent with
that of our directly-owned properties. Results for the three and six months ended June 30, 2010
have been reclassified to conform to the current period presentation. A summary of comparative
results of these business segments is as follows:
Investment Management
(in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Asset management revenue
|
$ | 16,619 | $ | 19,080 | $ | (2,461 | ) | $ | 36,439 | $ | 37,900 | $ | (1,461 | ) | ||||||||||
|
Structuring revenue
|
5,735 | 13,102 | (7,367 | ) | 21,680 | 19,936 | 1,744 | |||||||||||||||||
|
Incentive, termination and
subordinated disposition
revenue
|
52,515 | — | 52,515 | 52,515 | — | 52,515 | ||||||||||||||||||
|
Wholesaling revenue
|
2,922 | 2,741 | 181 | 6,202 | 5,283 | 919 | ||||||||||||||||||
|
Reimbursed costs from affiliates
|
17,059 | 14,838 | 2,221 | 34,778 | 29,440 | 5,338 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
94,850 | 49,761 | 45,089 | 151,614 | 92,559 | 59,055 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
General and administrative
|
(23,389 | ) | (17,266 | ) | (6,123 | ) | (43,791 | ) | (33,979 | ) | (9,812 | ) | ||||||||||||
|
Reimbursable costs
|
(17,059 | ) | (14,838 | ) | (2,221 | ) | (34,778 | ) | (29,440 | ) | (5,338 | ) | ||||||||||||
|
Depreciation and amortization
|
(867 | ) | (1,162 | ) | 295 | (1,669 | ) | (2,333 | ) | 664 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
(41,315 | ) | (33,266 | ) | (8,049 | ) | (80,238 | ) | (65,752 | ) | (14,486 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
539 | 289 | 250 | 1,196 | 539 | 657 | ||||||||||||||||||
|
Income from equity
investments in the REITs
|
3,388 | 1,187 | 2,201 | 5,203 | 1,693 | 3,510 | ||||||||||||||||||
|
Other income and (expenses)
|
32 | 219 | (187 | ) | 235 | 35 | 200 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
3,959 | 1,695 | 2,264 | 6,634 | 2,267 | 4,367 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing
operations before income taxes
|
57,494 | 18,190 | 39,304 | 78,010 | 29,074 | 48,936 | ||||||||||||||||||
|
Provision for income taxes
|
(26,056 | ) | (6,373 | ) | (19,683 | ) | (33,436 | ) | (9,948 | ) | (23,488 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management
|
31,438 | 11,817 | 19,621 | 44,574 | 19,126 | 25,448 | ||||||||||||||||||
|
Add: Net loss
attributable to
noncontrolling
interests
|
552 | 568 | (16 | ) | 1,196 | 1,214 | (18 | ) | ||||||||||||||||
|
Less: Net loss
(income)
attributable to
redeemable
noncontrolling
interests
|
(1 | ) | (417 | ) | 416 | (604 | ) | (592 | ) | (12 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from investment management
attributable to
W. P. Carey members
|
$ | 31,989 | $ | 11,968 | $ | 20,021 | $ | 45,166 | $ | 19,748 | $ | 25,418 | ||||||||||||
|
|
||||||||||||||||||||||||
Asset Management Revenue
We earn asset-based management and performance revenue from the 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 REIT asset bases as a result of new investments; (ii) decreases
in the REIT asset bases as a result of sales of investments; (iii) increases or decreases in the
appraised value of the real estate-related assets in the 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 REITs.
W. P. Carey 6/30/2011 10-Q —
34
Table of Contents
For the three and six months ended June 30, 2011 as compared to the same periods in 2011, asset
management revenue decreased by $2.5 million and $1.5 million, respectively. Asset management
revenue from CPA
®
:14 and CPA
®
:16 — Global decreased by $4.1 million and $4.5
million, respectively, primarily due to recent property sales and the change in our fee arrangement
with CPA
®
:16 — Global under its new UPREIT structure after the CPA
®
:14/16
Merger. As discussed in Note 3, immediately after the CPA
®
:14/16 Merger, our asset
management revenue from CPA
®
:16 — Global was reduced from 1% to 0.5% of the property
value of the assets under management and we now receive a distribution of 10% of the available cash
of CPA
®
:16 — Global’s Operating Partnership, which we record as Income from equity
investments in the REITs within the Investment Management segment. This decrease was partially
offset by an increase in revenue of $1.8 million and $3.7 million, respectively, from
CPA
®
:17 — Global as a result of new investments entered into during 2010 and 2011.
Structuring Revenue
We earn structuring revenue when we structure and negotiate investments and debt placement
transactions for the REITs. Structuring revenue is dependent on investment activity, which is
subject to significant period-to-period variation. We structured real estate investments on behalf
of the REITs totaling $249.2 million and $594.0 million during the three and six months ended June
30, 2011, respectively, compared to $291.1 million and $440.2 million for the three and six months
ended June 30, 2010, respectively. Included in the 2011 investment activity were $89.4 million of
self-storage properties acquired on behalf of CPA
®
:17 — Global during the second
quarter of 2011, for which we earned structuring revenue of 1.75% of total equity invested, $43.6
million of hotel properties acquired on behalf of CWI during the second quarter of 2011, for which
we earned structuring revenue of 2.5% of the total investment cost of the properties and $30.3
million of real estate-related loans originated by us on behalf of CPA
®
:17 — Global
during the second quarter of 2011, for which we earned structuring revenue of 1%, compared to an
average of 4.5% that we generally earn for structuring long-term net lease investments on behalf of
the CPA
®
REITs.
For the three months ended June 30, 2011 as compared to the same period in 2010, structuring
revenue decreased by $7.4 million, primarily due to lower investment volume in the current year
period, as well as a lower rate of structuring revenue earned on the self-storage and hotel
properties and the note receivable that we acquired on behalf of the REITs in the second quarter of
2011.
For the six months ended June 30, 2011 as compared to the same period in 2010, structuring revenue
increased by $1.7 million, primarily due to higher investment volume in the current year period,
partially offset by a lower rate of structuring revenue earned on the self-storage and hotel
properties and the note receivable that we acquired on behalf of the REITs in 2011.
Incentive, Termination and Subordinated Disposition Revenue
Incentive, termination and disposition revenue is generally earned in connection with events in
which we provide liquidity or alternatives to the REITs’ shareholders. These events do not occur
every year and no such event occurred during the three or six months ended June 30, 2010.
In connection with providing a liquidity event for CPA
®
:14 shareholders, in May 2011, we
earned termination revenue of $31.2 million and subordinated disposition revenue of $21.3 million,
which we received in shares of CPA
®
:14 and cash, respectively.
We have agreed to waive any structuring revenue due from CPA
®
:16 — Global under its
advisory agreement with us in connection with its acquisition of assets from CPA
®
:14 in
the CPA
®
:14/16 Merger. We also agreed to waive any disposition revenue that may
subsequently be payable by CPA
®
:16 — Global to us upon a sale of the assets they
acquired from CPA
®
:14 in the CPA
®
:14/16 Merger.
Reimbursed and Reimbursable Costs
Reimbursed costs from affiliates (revenue) and reimbursable costs (expenses) represent costs
incurred by us on behalf of the REITs, consisting primarily of broker-dealer commissions and
marketing and personnel costs, which are reimbursed by the 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 six months ended June 30, 2011 as compared to the same periods in 2010,
reimbursed and reimbursable costs increased by $2.2 million and $5.3 million, respectively. The
increases were primarily due to $1.3 million and $2.5 million of commissions paid during the three
and six months ended June 30, 2011, respectively, to broker-dealers related to CWI’s initial public
offering, which commenced in September 2010. In addition, commissions paid to broker-dealers
related to CPA
®
:17 — Global’s
public offering increased by $0.7 million and $2.4 million during the three and six months ended
June 30, 2011, respectively, as compared to the same periods in 2010, as a result of a
corresponding increase in funds raised.
W. P. Carey 6/30/2011 10-Q —
35
Table of Contents
General and Administrative
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, general
and administrative expenses increased by $6.1 million and $9.8 million, respectively. The increases
were primarily due to increases in compensation-related costs of $5.3 million and $7.3 million,
respectively, professional fees of $0.7 million and $1.2 million, respectively, and underwriting
costs of $0.2 million and $0.8 million, respectively. The increase in compensation-related costs
during each of the three and six month periods was primarily related to amortization of stock-based
compensation due to changes in the expected vesting of the PSUs and an increase in the number of
awards issued to officers and employees in 2011. Professional fees were higher in the current year
periods primarily due to professional fees incurred in connection with the CPA
®
:14/16
Merger. Underwriting costs related to the offerings of CPA
®
:17 — Global and CWI are
generally offset by wholesaling revenue, which we earned based on the number of shares sold.
Income from Equity Investments in the REITs
Distributions of available cash from CPA
®
:17 — Global, CWI and subsequent to the
CPA
®
:14/16 Merger, CPA
®
:16 — Global’s operating partnerships are recorded as
income from equity investments in the REITs within the investment management segment.
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, income
from equity investments in the REITs increased by $2.2 million and $3.5 million, respectively,
primarily due to an increase of $0.8 million and $2.1 million, respectively, of cash distributions
received and earned from CPA
®
:17 — Global’s operating partnership as a result of new
investments entered into during 2011 and 2010. In addition, income from equity investments in the
REITs also increased by $1.4 million during each of the three and six months periods as a result of
the deferred revenue earned from our Special Interest in CPA
®
:16 — Global’s Operating
Partnership. As of June 30, 2011, we had not received any cash distributions from CWI’s operating
partnership as it did not have significant operations. We will receive distributions from
CPA
®
:16 — Global for the period after the CPA
®
:14/16 Merger, beginning in
the third quarter of 2011.
Provision for Income Taxes
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, provision
for income taxes increased by $19.7 million and $23.5 million, respectively, primarily due to
higher pre-tax income as a result of the $52.5 million incentive, termination and subordinated
disposition income recognized in connection with the CPA
®
:14/16 Merger.
Net Income from Investment Management Attributable to W. P. Carey Members
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, the
resulting net income from investment management attributable to W. P. Carey members increased by
$20.0 million and $25.4 million, respectively.
W. P. Carey 6/30/2011 10-Q —
36
Table of Contents
Real Estate Ownership (in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Lease revenues
|
$ | 17,839 | $ | 15,444 | $ | 2,395 | $ | 33,299 | $ | 31,135 | $ | 2,164 | ||||||||||||
|
Other real estate income
|
5,709 | 4,796 | 913 | 11,017 | 8,572 | 2,445 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
23,548 | 20,240 | 3,308 | 44,316 | 39,707 | 4,609 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating Expenses
|
||||||||||||||||||||||||
|
Depreciation and amortization
|
(6,438 | ) | (4,581 | ) | (1,857 | ) | (11,073 | ) | (9,495 | ) | (1,578 | ) | ||||||||||||
|
Property expenses
|
(3,066 | ) | (2,310 | ) | (756 | ) | (6,204 | ) | (4,494 | ) | (1,710 | ) | ||||||||||||
|
General and administrative
|
(1,196 | ) | (1,381 | ) | 185 | (2,117 | ) | (2,715 | ) | 598 | ||||||||||||||
|
Other real estate expenses
|
(2,942 | ) | (1,773 | ) | (1,169 | ) | (5,499 | ) | (3,588 | ) | (1,911 | ) | ||||||||||||
|
Impairment charges
|
(41 | ) | — | (41 | ) | (41 | ) | — | (41 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
(13,683 | ) | (10,045 | ) | (3,638 | ) | (24,934 | ) | (20,292 | ) | (4,642 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Other Income and Expenses
|
||||||||||||||||||||||||
|
Other interest income
|
21 | 47 | (26 | ) | 39 | 70 | (31 | ) | ||||||||||||||||
|
Income from equity investments in
real estate and the REITs
|
9,077 | 6,451 | 2,626 | 13,478 | 15,087 | (1,609 | ) | |||||||||||||||||
|
Gain on change in control of
interests
|
27,859 | — | 27,859 | 27,859 | — | 27,859 | ||||||||||||||||||
|
Other income and (expenses)
|
4,726 | (172 | ) | 4,898 | 5,004 | (645 | ) | 5,649 | ||||||||||||||||
|
Interest expense
|
(5,396 | ) | (3,765 | ) | (1,631 | ) | (9,836 | ) | (7,476 | ) | (2,360 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
36,287 | 2,561 | 33,726 | 36,544 | 7,036 | 29,508 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations
before income taxes
|
46,152 | 12,756 | 33,396 | 55,926 | 26,451 | 29,475 | ||||||||||||||||||
|
Benefit from
(provision for) income taxes
|
1,296 | (378 | ) | 1,674 | 1,102 | (915 | ) | 2,017 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income from continuing operations
|
47,448 | 12,378 | 35,070 | 57,028 | 25,536 | 31,492 | ||||||||||||||||||
|
(Loss) income from discontinued
operations
|
(157 | ) | (474 | ) | 317 | 743 | (6,639 | ) | 7,382 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate
ownership
|
47,291 | 11,904 | 35,387 | 57,771 | 18,897 | 38,874 | ||||||||||||||||||
|
Less: Net income attributable to
noncontrolling interests
|
(168 | ) | (440 | ) | 272 | (482 | ) | (800 | ) | 318 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income from real estate
ownership attributable to
W. P. Carey members
|
$ | 47,123 | $ | 11,464 | $ | 35,659 | $ | 57,289 | $ | 18,097 | $ | 39,192 | ||||||||||||
|
|
||||||||||||||||||||||||
The following table presents the components of our lease revenues (in thousands):
| Six Months Ended June 30, | ||||||||
| 2011 | 2010 | |||||||
|
Rental income
|
$ | 28,389 | $ | 25,943 | ||||
|
Interest income from direct financing leases
|
4,910 | 5,192 | ||||||
|
|
||||||||
|
|
$ | 33,299 | $ | 31,135 | ||||
|
|
||||||||
W. P. Carey 6/30/2011 10-Q —
37
Table of Contents
The following table sets forth the net lease revenues (i.e., rental income and interest income from
direct financing leases) that we earned from lease obligations through our direct ownership of real
estate (in thousands):
| Six Months Ended June 30, | ||||||||
| Lessee | 2011 | 2010 | ||||||
|
CheckFree Holdings, Inc.
(a)
|
$ | 2,594 | $ | 2,537 | ||||
|
The American Bottling Company
|
2,184 | 2,189 | ||||||
|
Bouygues Telecom, S.A.
(a)
(c)
(d)
|
1,972 | 2,174 | ||||||
|
JP Morgan Chase Bank, N.A.
(b)
|
1,931 | 1,517 | ||||||
|
Orbital Sciences Corporation
(e)
|
1,656 | 1,955 | ||||||
|
Eroski Sociedad Cooperativa
(a)
(c)
(f)
|
1,629 | 168 | ||||||
|
Titan Corporation
|
1,457 | 1,457 | ||||||
|
Federal Express Corporation
(g)
|
1,293 | — | ||||||
|
AutoZone, Inc.
|
1,114 | 1,105 | ||||||
|
Quebecor Printing, Inc.
|
968 | 958 | ||||||
|
Unisource Worldwide, Inc.
|
963 | 960 | ||||||
|
Google, Inc. (formerly leased to Omnicom Group Inc.)
(h)
|
944 | 771 | ||||||
|
Career Education Corporation
(i)
|
902 | 751 | ||||||
|
Sybron Dental Specialties, Inc.
|
885 | 909 | ||||||
|
Jarden Corporation
|
807 | 807 | ||||||
|
BE Aerospace, Inc.
|
786 | 786 | ||||||
|
Eagle Hardware & Garden, a subsidiary of Lowe’s Companies
|
742 | 771 | ||||||
|
Amylin Pharmaceuticals, Inc.
(g)
|
727 | — | ||||||
|
Sprint Spectrum, L.P.
|
721 | 712 | ||||||
|
CSS Industries, Inc.
(d)
|
678 | 785 | ||||||
|
Enviro Works, Inc.
|
608 | 640 | ||||||
|
Other
(c)
|
7,738 | 9,183 | ||||||
|
|
||||||||
|
|
$ | 33,299 | $ | 31,135 | ||||
|
|
||||||||
| (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 $1.7 million and $1.8 million for the six months ended June 30, 2011 and 2010, respectively. | |
| (b) | We acquired this investment in February 2010. | |
| (c) | 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 six months ended June 30, 2011 increased by approximately 5% in comparison to the same period in 2010, resulting in a positive impact on lease revenues for our Euro-denominated investments in the six months ended June 30, 2011. | |
| (d) | The decrease was due to a lease restructuring. | |
| (e) | We completed an expansion at this facility in January 2010, at which time we recognized deferred rental income of $0.3 million. | |
| (f) | We acquired this investment in June 2010. | |
| (g) | In connection with the CPA ® :14 Asset Sales, we purchased the remaining interest in this investment from CPA ® :14. Subsequent to the acquisition, we consolidate this investment as our ownership in this investment is now 100%. We had previously accounted for this investment under the equity method. | |
| (h) | The lease with Omnicom Group Inc. expired in September 2010. In January 2011, we signed a new 15-year lease with Google, Inc. | |
| (i) | The increase was due to changes in amortization of below-market rent intangibles as a result of tenant not renewing its lease with us. |
W. P. Carey 6/30/2011 10-Q —
38
Table of Contents
We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
| Ownership Interest | Six Months Ended June 30, | |||||||||||
| Lessee | at June 30, 2011 | 2011 | 2010 | |||||||||
|
The New York Times Company
|
18 | % | $ | 14,024 | $ | 13,285 | ||||||
|
Carrefour France, SAS
(a)
|
46 | % | 10,170 | 9,993 | ||||||||
|
Medica — France, S.A.
(a)
(b)
|
46 | % | 3,418 | 3,238 | ||||||||
|
Schuler A.G.
(a)
|
33 | % | 3,257 | 3,081 | ||||||||
|
Federal Express Corporation
(c)
|
100 | % | 2,391 | 3,548 | ||||||||
|
U. S. Airways Group, Inc.
|
75 | % | 2,211 | 2,211 | ||||||||
|
Hologic, Inc.
|
36 | % | 1,764 | 1,764 | ||||||||
|
Amylin Pharmaceuticals, Inc.
(c)
|
100 | % | 1,342 | 2,014 | ||||||||
|
Symphony IRI Group, Inc.
(d)
|
33 | % | 1,108 | 2,350 | ||||||||
|
Consolidated Systems, Inc.
|
60 | % | 911 | 911 | ||||||||
|
Childtime Childcare, Inc.
|
34 | % | 635 | 657 | ||||||||
|
The Retail Distribution Group
(e)
|
N/A | — | 205 | |||||||||
|
|
||||||||||||
|
|
$ | 41,231 | $ | 43,257 | ||||||||
|
|
||||||||||||
| (a) | 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 six months ended June 30, 2011 increased by approximately 5% in comparison to the same period in 2010, resulting in a positive impact on lease revenues for our Euro-denominated investments in the six months ended June 30, 2011. | |
| (b) | The increase was due to a CPI-based (or equivalent) rent increase. | |
| (c) | In connection with the CPA ® :14 Asset Sales, we purchased the remaining interest in this investment from CPA ® :14 (Note 3). Subsequent to the acquisition, we consolidate this investment. | |
| (d) | The decrease was due to the tenant vacating a building in January 2011. During the first quarter of 2011, the venture recognized an impairment charge of $8.6 million in connection with a potential sale. In addition, we recognized an other-than-temporary impairment charge of $0.2 million to reflect the decline in the fair value of our interest in the venture. | |
| (e) | In March 2010, this venture completed the sale of this property. We have no further economic interest in this venture. |
The table above does not reflect our 5% interest in a venture (“Lending Venture”) that holds a note
receivable (the “Note Receivable”) from the holder (the “Partner”) of a 75.3% interest in a limited
partnership (“Partnership”) owning 37 properties throughout Germany at a total cost of $336.0
million. Concurrently, our affiliates also acquired an interest in a second venture (the “Property
Venture”) that acquired the remaining 24.7% ownership interest in the Partnership as well as an
option to purchase an additional 75% interest from the Partner by December 2010. Also in connection
with this transaction, the Lending Venture obtained non-recourse financing of $284.9 million having
a fixed annual interest rate of 5.5%, a term of 10 years and is collateralized by the 37 German
properties. In November 2010, the Property Venture exercised a portion of its call option via the
Lending Venture whereby the Partner exchanged a 70% interest in the Partnership for a $295.7
million reduction in the Note Receivable. Subsequent to the exercise of the option, the Property
Venture now owns a 94.7% interest in the Partnership and retains options to purchase the remaining
5.3% interest from the Partner by December 2012. All dollar amounts are based on the exchange rates
of the Euro at the dates of the transactions, and dollar amounts provided represent the total
amounts attributable to the ventures and do not represent our proportionate share. For the six
months ended June 30, 2011 and 2010, the venture recognized interest income of $0.9 million and
$13.1 million, respectively. These amounts represent total amounts attributable to the entire
venture, not our proportionate share, and are 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.
W. P. Carey 6/30/2011 10-Q —
39
Table of Contents
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, lease
revenues increased by $2.4 million and $2.2 million, respectively, primarily due to new investments
we entered into during 2010 and 2011, including the properties we purchased in May 2011 from
CPA
®
:14 in connection with the CPA
®
:14 Asset Sales, which contributed to an
increase to lease revenues of $2.6 million and $3.9 million, respectively. In addition, lease
revenues increased by $0.5 million as a result of scheduled rent increases at several properties
during the six months ended June 30, 2011. These increases were partially offset by the impact of
recent tenant activity, including lease restructurings, lease expirations and property sales, which
resulted in a reduction to lease revenues of $0.4 million and $2.2 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 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 six months ended June 30, 2011 as compared to the same periods in 2010, other
real estate income increased by $0.9 million and $2.4 million, respectively, primarily due to
income generated from the self-storage properties that Carey Storage acquired during 2010.
Depreciation and Amortization
For the three and six months ended June 30, 2011 as compared to the same periods in 2010,
depreciation and amortization increased by $1.9 million and $1.6 million, respectively, primarily
due to depreciation and amortization incurred on investments entered into during 2011 and 2010,
including the properties we purchased from CPA
®
:14 in May 2011 (Note 3).
Property Expenses
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, property
expenses increased by $0.8 million and $1.7 million, respectively, primarily due to increases in
reimbursable tenant costs of $0.3 million and $0.8 million, respectively. Property expenses also
increased as a result of several tenants vacating properties during 2010.
Other Real Estate Expenses
Other real estate expenses generally consists of operating expenses from Carey Storage and Livho as
described in “Other Real Estate Income” above.
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, other
real estate expenses increased by $1.2 million and $1.9 million, respectively, primarily due to
$0.7 million and $1.3 million, respectively, of operating expenses from the self-storage properties
that Carey Storage acquired during 2010. In addition, operating expenses from Livho increased by
$0.5 million and $0.6 million during the three and six months ended June 30, 2011 as compared to
the same periods in 2010.
Income from Equity Investments in Real Estate and the REITs
Income from equity investments in real estate and the REITs represents our proportionate share of
net income or loss (revenue less expenses) from our interests in unconsolidated real estate
investments and our investments in the REITs. The net income of the 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 months ended June 30, 2011 as compared to the same period in 2010, income from equity
investments in real estate and the REITs increased by $2.6 million, primarily due to our share of
the net gains recognized by CPA
®
:14 on the CPA
®
:14 Asset Sales, which
resulted in an increase to income of $7.4 million. This increase was partially offset by our share
of the net expenses recognized by CPA
®
:16 — Global in connection with the
CPA
®
:14/16 Merger as described below. Results of operations for CPA
®
:16 —
Global during the second quarter of 2011 included a charge of $34.3 million related to its UPREIT
reorganization, $8.5 million of expenses incurred in connection with the CPA
®
:14/16
Merger and a net gain of $13.7 million recognized as a result of the fair value of
CPA
®
:14 exceeding the merger consideration. In addition, results of operations from
CPA
®
:15 and CPA
®
:16 — Global during the second quarter of 2011 included
impairment charges of $8.1 million and $21.8 million, respectively.
W. P. Carey 6/30/2011 10-Q —
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For the six months ended June 30, 2011 as compared to the same period in 2010, income from equity
investments in real estate and the REITs decreased by $1.6 million, primarily due to our share of
the net expenses recognized by CPA
®
:16 — Global in connection with the
CPA
®
:14/16 Merger and the impairment charges recognized by CPA
®
:15 and
CPA
®
:16 — Global as described above. In addition, income from equity investments in
real estate and the REITs during the current year period decreased by $2.5 million as a result of
the net gains recognized by the Retail Distribution venture in connection with the sale of its
property in March 2010, and by$1.5 million as a result of our share of the $8.6 million impairment
charge recognized by the Symphony IRI venture in connection with a potential sale as well as a $0.2
million other-than-temporary impairment charge recognized by us to reflect the decline in fair
value of our interest in the Symphony IRI venture in the second quarter of 2011. These decreases
in income were partially offset by an increase in income of $7.4 million to reflect our share of
the net gains recognized by CPA
®
:14 in connection with the Asset Sales as described
above.
Gain on Change in Control of Interests
As discussed in Note 4, in May 2011 we purchased the remaining interests in the Federal Express and
Amylin ventures from CPA
®
:14, which we had previously accounted for under the equity
method. In connection with purchasing these properties, we recognized
a net gain of $27.9 million
during the three and six months ended June 30, 2011 to adjust the carrying value of our existing
interests in these ventures to their estimated fair values.
Other Income and (Expenses)
For the three and six months ended June 30, 2011, we recognized other income of $4.7 million and
$5.0 million, respectively, compared to other expenses of $0.2 million and $0.6 million in the same
periods in 2010, respectively. In connection with the
CPA
®
:14/16 Merger, we agreed to receive shares of CPA
®
:16 — Global in
respect of our shares of CPA
®
:14. As a result, during the three and six months ended
June 30, 2011, we recognized a gain of $2.8 million on the conversion of our shares of
CPA
®
:14 to shares of CPA
®
:16 — Global to reflect the carrying value of our
investment at its estimated fair value. In addition, we recognized a gain of $1.1 million in the
second quarter of 2011 on the conversion of our termination revenue to shares of CPA
®
:14
as a result of the termination revenue exceeding the fair value of the shares we received. Other income during
the three and six months ended June 30, 2011 also included a net gain of $0.6 million as a result of
exercising certain warrants granted to us by lessees. Other expenses during the three and six months ended June 30, 2010 were
primarily due to realized and unrealized losses recognized
during the respective period on foreign currency transactions as a result of changes in foreign
currency exchanges rates on notes receivable from international subsidiaries.
Interest Expense
For the three and six months ended June 30, 2011 as compared to the same periods in 2010, interest
expense increased by $1.6 million and $2.4 million, respectively, primarily as a result of mortgage
financing obtained in connection with our investment activities during 2011 and 2010, as well as
mortgages assumed in connection with the acquisition of properties from CPA
®
:14 (Note
4).
(Loss) Income from Discontinued Operations
For the three months ended June 30, 2011, we recognized a loss from discontinued operations of $0.2
million, primarily due to net losses recognized on sales of properties. For the three months ended
June 30, 2010, we recognized a loss from discontinued operations of $0.5 million, primarily due to
impairment charges of $1.0 million recognized on properties sold to reduce their carrying values to
their contracted selling prices, partially offset by income generated from the operations of
discontinued properties of $0.5 million.
For the six months ended June 30, 2011, we recognized income from discontinued operations of $0.7
million, compared to a loss from discontinued operations of $6.6 million recognized in the same
period in 2010. Income recognized in the current year period included net gains on sales of
properties of $0.7 million. The loss recognized in the prior year period included impairment
charges of $8.1 million recognized on properties sold to reduce their carrying values to their
contracted selling prices, partially offset by income generated from the operations of discontinued
properties of $1.0 million and net gains on sale of properties of $0.5 million.
Net Income from Real Estate Ownership Attributable to W. P. Carey Members
For the three and six months ended June 30, 2011 , the resulting net income from real estate
ownership attributable to W. P. Carey members increased by $35.7 million and $39.2 million,
respectively.
W. P. Carey 6/30/2011 10-Q —
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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
others, 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 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 normal recurring 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
lines 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 by $9.7 million in the six months ended June 30, 2011
as compared to the same period in 2010, primarily due to the following reasons:
| • | During the six months ended June 30, 2011, we received $21.3 million of subordinated disposition revenues from CPA ® :14 in connection with the CPA ® :14/16 Merger; |
| • | During the current year period, we received revenue of $13.1 million in connection with structuring investments and debt refinancing on behalf of the REITs as compared to $11.1 million in the comparable prior year period; |
| • | During the six months ended June 30, 2011, we received revenue of $15.5 million in cash for providing asset-based management services to the REITs as compared to $20.2 million in the 2010 period. This amount does not include revenue received from the REITs in the form of shares of their restricted common stock rather than cash (see below); |
| • | Cash distributions received from CPA ® :17 — Global’s operating partnership increased by $2.1 million as a result of investments entered into during 2011 and 2010; |
| • | Deferred acquisition revenue received was $1.6 million lower during the six months ended June 30, 2011 as compared to the same period in 2010, 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; and |
| • | During the six months ended June 30, 2011, our real estate ownership segment provided cash flows (contractual lease revenues, net of property-level debt service) of approximately $19.2 million, which represents a decrease of $2.5 million from the 2010 period as a result of several tenants vacating properties. |
As described in Note 3, in both 2011 and 2010, we elected to receive all asset management revenue
in cash, with the exception of CPA
®
:17 — Global’s asset management fee, which we
elected to receive in restricted shares. For both 2011 and 2010, 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
their restricted shares, with the remaining 20% payable in cash. Subsequent to CPA
®
:16
— Global’s UPREIT reorganization in May 2011, we no longer earn performance revenue from
CPA
®
:16 — Global, but we receive a distribution of available cash from its Operating
Partnership. We also elected to receive asset management revenue from CPA
®
:16 — Global
in restricted shares after the CPA
®
:14/16 Merger. For CWI, we elected to receive all
asset management revenue in cash for 2011.
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 lines 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 six months ended June 30, 2011, we used
$121.0 million to purchase newly issued shares of CPA
®
:16 — Global to enable it to pay
the merger consideration in the CPA
®
:14/16 Merger (Note 3) and we also made a $0.3
million contribution to its Operating Partnership. We also made contributions to unconsolidated
ventures totaling $2.3 million, including $2.1 million paid to a venture to pay off our share of
its maturing non-recourse mortgage loan. We also used $24.3 million to purchase two properties
from CPA
®
:14 in connection with the CPA
®
:14 Asset Sales. In addition, we used
$94.0 million to make two loans to affiliates which were repaid in the same period. Cash inflows
during the current year period included $14.5 million in distributions from equity investments in
real estate and the REITs in excess of cumulative equity income, including $11.1 million received
as a result of the $1.00 per share special cash distribution paid by CPA
®
:14 to its
shareholders. We also received cash proceeds of $10.6 million from the sale of four properties.
W. P. Carey 6/30/2011 10-Q —
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Financing Activities
During the six months ended June 30, 2011, we paid distributions to shareholders of $40.8 million
and paid distributions of $2.8 million to affiliates who hold noncontrolling interests in various
entities with us. We used $7.5 million to purchase the noncontrolling interest in an entity from
CPA
®
:14 in connection with the CPA
®
:14
Asset Sales. We also made scheduled mortgage principal payments of $9.9 million and obtained
mortgage financing of $7.4 million. Net borrowings under our lines of credit increased overall by
$91.4 million since December 31, 2010 and were comprised of gross borrowings of $231.4 million and
repayments of $140.0 million. Net borrowings under our lines of credit were used primarily to fund
the $121.0 million purchase of CPA
®
:16 — Global shares described above and our
acquisition of properties in the CPA
®
:14 Asset Sales (Note 3).
Summary of Financing
The table below summarizes our non-recourse debt and credit facility (dollars in thousands):
| June 30, 2011 | December 31, 2010 | |||||||
|
Balance
|
||||||||
|
Fixed rate
|
$ | 232,990 | $ | 147,872 | ||||
|
Variable rate
(a)
|
343,111 | 249,110 | ||||||
|
|
||||||||
|
Total
|
$ | 576,101 | $ | 396,982 | ||||
|
|
||||||||
|
|
||||||||
|
Percent of total debt
|
||||||||
|
Fixed rate
|
40 | % | 37 | % | ||||
|
Variable rate
(a)
|
60 | % | 63 | % | ||||
|
|
||||||||
|
|
100 | % | 100 | % | ||||
|
|
||||||||
|
Weighted average interest rate at end of period
|
||||||||
|
Fixed rate
|
5.8 | % | 6.0 | % | ||||
|
Variable rate
(a)
|
2.6 | % | 2.5 | % | ||||
| (a) | Variable-rate debt at June 30, 2011 included (i) $233.2 million outstanding under our unsecured line of credit, (ii) $48.3 million that has been effectively converted to fixed rates through interest rate swap derivative instruments and (iii) $57.1 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 June 30, 2011, our cash resources consisted of the following:
| • | Cash and cash equivalents totaling $26.5 million. Of this amount, $4.6 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; |
| • | Two lines of credit with unused capacity of $40.0 million. The lines of credit are available to us and may also be used to loan funds to our affiliates. Our lender has issued letters of credit totaling $6.8 million on our behalf in connection with certain contractual obligations, which reduce amounts that may be drawn under the unsecured line of credit; and |
| • | We also had unleveraged properties that had an aggregate carrying value of $254.3 million at June 30, 2011, although 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 fixed-rate 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.
W. P. Carey 6/30/2011 10-Q —
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Lines of Credit
Our credit facilities are more fully described in Note 9. A summary of our lines of credit is
provided below (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| Outstanding | Maximum | Outstanding | Maximum | |||||||||||||
| Balance | Available | Balance | Available | |||||||||||||
|
Unsecured line of credit
|
$ | 233,160 | $ | 250,000 | $ | 141,750 | $ | 250,000 | ||||||||
|
Secured line of credit
|
— | 30,000 | N/A | N/A | ||||||||||||
Cash Requirements
During the next 12 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
$18.3 million, as well as other normal recurring operating expenses. In addition, each of our lines
of credit matures in June 2012.
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.
Impact of CPA
®
:14/16 Merger and CPA
®
:14 Asset Purchase
We estimate that the financial impact of the CPA
®
:14/16 Merger and the purchase of the
assets in the CPA
®
:14 Asset Sales (Note 3) will be as follows on an annualized pro forma
basis, although there can be no assurance that we will achieve these results:
| • | An increase in dividends of approximately $11.3 million associated with our incremental investment in CPA ® :16 — Global resulting in projected net cash flow after tax of $10.3 million; |
| • | An increase in lease revenues and cash flow totaling approximately $8.8 million and $4.0 million, respectively, related to the properties acquired from CPA ® :14 in the CPA ® :14 Asset Sales; |
| • | A tax benefit of approximately $6.4 million related to the change in our advisory fee arrangement with CPA ® :16 — Global in connection with its UPREIT reorganization; |
| • | A reduction in asset management fee revenue from CPA ® :16 — Global of approximately $5.5 million as a result of the modification of our advisory agreement with CPA ® :16 — Global in connection with its UPREIT reorganization; |
| • | A reduction in asset management revenue approximating $2.1 million related to assets sold by CPA ® :14 to us and to third parties in the CPA ® :14 Asset Sales; |
| • | A reduction in annual equity income of approximately $0.9 million related to the consolidation of the two ventures acquired from CPA ® :14 in the CPA ® :14 Asset Sales; and |
| • | An increase in interest expense of approximately $5.9 million related to interest payments on the existing non-recourse mortgages relating to the properties acquired in the CPA ® :14 Asset Sales and incremental borrowings under our unsecured credit facility to finance the CPA ® :14/16 Merger. |
The properties we acquired from CPA
®
:14 have lease expirations between December 2015 and
August 2019, renewable at the tenant’s option. There are no scheduled balloon payments on any of
the long-term debt obligations to be assumed in connection with the merger transaction until June
2016.
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Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual
obligations at June 30, 2011 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
(a)
|
$ | 344,081 | $ | 27,450 | $ | 48,064 | $ | 83,227 | $ | 185,340 | ||||||||||
|
Lines of credit — Principal
(b)
|
233,160 | 233,160 | — | — | — | |||||||||||||||
|
Interest on borrowings
(c)
|
116,060 | 21,409 | 33,516 | 29,391 | 31,744 | |||||||||||||||
|
Operating and other lease commitments
(d)
|
10,443 | 1,053 | 2,080 | 2,040 | 5,270 | |||||||||||||||
|
Property improvement commitments
|
7,594 | 7,594 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 711,338 | $ | 290,666 | $ | 83,660 | $ | 114,658 | $ | 222,354 | ||||||||||
|
|
||||||||||||||||||||
| (a) | Excludes $1.1 million of purchase accounting adjustments required in connection with the CPA ® :14/16 Merger, which are included in Non-recourse debt at June 30, 2011. | |
| (b) | Each of our lines of credit matures in June 2012. | |
| (c) | Interest on un-hedged variable-rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding at June 30, 2011. | |
| (d) | 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 of a venture in which we own a 46% interest. Our share of this obligation totals approximately $3.0 million over the lease term through January 2063. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
local currencies at June 30, 2011. At June 30, 2011, we had no material capital lease obligations
for which we are the lessee, either individually or in the aggregate.
Equity Method Investments
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
June 30, 2011 are presented below. Summarized financial information provided represents the total
amounts attributable to the ventures and does not represent our proportionate share (dollars in
thousands):
| Ownership Interest | Total Third- | |||||||||||||||
| Lessee | at June 30, 2011 | Total Assets | Party Debt | Maturity Date | ||||||||||||
|
U. S. Airways Group, Inc.
|
75 | % | $ | 29,158 | $ | 18,051 | 4/2014 | |||||||||
|
The New York Times Company
|
18 | % | 246,257 | 124,424 | 9/2014 | |||||||||||
|
Carrefour France, SAS
(a)
|
46 | % | 147,176 | 109,769 | 12/2014 | |||||||||||
|
Consolidated Systems, Inc.
|
60 | % | 16,725 | 11,279 | 11/2016 | |||||||||||
|
Medica — France, S.A.
(a)
|
46 | % | 48,384 | 38,711 | 10/2017 | |||||||||||
|
Symphony IRI Group, Inc.
(b)
|
33 | % | 23,615 | 14,912 | 2/2021 | |||||||||||
|
Hologic, Inc.
|
36 | % | 26,271 | 13,772 | 5/2023 | |||||||||||
|
Schuler A.G.
(a)
|
33 | % | 73,437 | — | N/A | |||||||||||
|
Childtime Childcare, Inc.
(c)
|
34 | % | 9,144 | — | N/A | |||||||||||
|
|
||||||||||||||||
|
|
$ | 620,167 | $ | 330,918 | ||||||||||||
|
|
||||||||||||||||
| (a) | Dollar amounts shown are based on the exchange rate of the Euro at June 30, 2011. | |
| (b) | In January 2011, this venture refinanced its existing non-recourse mortgage debt for new non-recourse financing of $15.0 million. | |
| (c) | In January 2011, this venture repaid its maturing non-recourse mortgage loan. |
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Environmental Obligations
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
and the provisions of such indemnifications specifically address 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 6/30/2011 10-Q —
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Table of Contents
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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 financial instruments to manage foreign currency exchange rate
risk exposure and do not use derivative instruments to hedge credit/market risks or for speculative
purposes.
Interest Rate Risk
The value of our real estate and related fixed rate debt obligations is subject to fluctuations
based on changes in interest rates. The value of our real estate is also subject to fluctuations
based on local and regional economic conditions and changes in the creditworthiness of lessees, all
of which may affect our ability to refinance property-level mortgage debt when balloon payments are
scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political conditions, and other factors
beyond our control. An increase in interest rates would likely cause the value of our owned and
managed assets to decrease, which would create lower revenues from managed assets and lower
investment performance for the managed funds. Increases in interest rates may also have an impact
on the credit profile of certain tenants.
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 one party exchanges a stream of
interest payments for a counterparty’s stream of cash flow 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. At June 30, 2011, we estimate that the fair value of our interest rate swaps, which are
included in Other assets, net and Accounts payable, accrued expenses and other liabilities in the
consolidated financial statements, was a net liability of $0.9 million.
At June 30, 2011, a significant portion (approximately 59%) of our long-term debt either bore
interest at fixed rates, was swapped or capped to a fixed rate, or bore interest at fixed rates
that were scheduled to convert to then-prevailing market fixed rates at certain future points
during their term. The estimated fair value of these instruments is affected by changes in market
interest rates. The annual interest rates on our fixed-rate debt at June 30, 2011 ranged from 3.1%
to 7.8%. The annual interest rates on our variable-rate debt at June 30, 2011 ranged from 1.1% to
7.3%. Our debt obligations are more fully described under “Financial Condition” in Item 2 above.
The following table presents principal cash flows based upon expected maturity dates of our debt
obligations outstanding at June 30, 2011 (in thousands):
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
|
Fixed rate debt
|
$ | 20,009 | $ | 34,181 | $ | 5,196 | $ | 5,109 | $ | 41,337 | $ | 127,158 | $ | 232,990 | $ | 227,071 | ||||||||||||||||
|
Variable rate debt
|
$ | 1,556 | $ | 236,333 | $ | 3,348 | $ | 7,194 | $ | 7,487 | $ | 87,193 | $ | 343,111 | $ | 356,285 | ||||||||||||||||
The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears
interest at fixed rates or has effectively been converted to a fixed rate through the use of
interest rate swaps or caps is affected by changes in interest rates. A decrease or increase in
interest rates of 1% would change the estimated fair value of this debt at June 30, 2011 by an
aggregate increase of $18.0 million or an aggregate decrease of $16.9 million, respectively. Annual
interest expense on our unhedged variable rate debt that does not bear interest at fixed rates at
June 30, 2011 would increase or decrease by $2.4 million for each respective 1% change in annual
interest rates. As more fully described under Financial Condition — Summary of Financing in Item 2
above, a portion of the debt classified as variable-rate debt in the tables above bore interest at
fixed rates at June 30, 2011 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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Table of Contents
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 six months ended June 30, 2011, we recognized net realized and
unrealized foreign currency transaction gains of $0.6 million and $0.4 million, respectively. These
gains 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.
| Item 4. | Controls and Procedures |
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 June 30, 2011, have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of June 30, 2011
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.
W. P. Carey 6/30/2011 10-Q —
48
Table of Contents
| Item 6. | Exhibits |
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | |||
| 10.1 |
Credit Agreement dated as of May 2, 2011, by and among Corporate
Property Associates 9, L.P., Paper Limited Liability Company, Torrey
Pines Limited Partnership and WALS (IN) LLC (collectively, the
“Borrowers”), W. P. Carey & Co. LLC as guarantor, the Lenders from time
to time party thereto, and Bank of America, N.A., as Administrative
Agent. (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on May 6, 2011)
|
|||
|
|
||||
| 10.2 |
Amended and Restated Advisory Agreement, dated May 2, 2011, by and
among Carey Asset Management Corp., Corporate Property Associates 16 —
Global Incorporated and CPA 16 LLC (Incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K filed May 6, 2011 by
Corporate Property Associates 16 — Global Incorporated, Commission
File No. 001-32162)
|
|||
|
|
||||
| 10.3 |
Asset Management Agreement, dated May 2, 2011, by and among W. P. Carey
& Co. B.V., Corporate Property Associates 16 — Global Incorporated and
CPA 16 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 June 30, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated Balance
Sheets at June 30, 2011 and December 31, 2010, (ii) Consolidated
Statements of Income for the three and six months ended June 30, 2011,
and 2010, (iii) Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2011 and 2010, (iv) Consolidated
Statements of Cash Flows for the six months ended June 30, 2011, and
2010, 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 Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
W. P. Carey 6/30/2011 10-Q —
49
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: August 9, 2011 | By: | /s/ Mark J. DeCesaris | ||
| Mark J. DeCesaris | ||||
|
Chief Financial Officer
(Principal Financial Officer) |
||||
| Date: August 9, 2011 | By: | /s/ Thomas J. Ridings, Jr. | ||
| Thomas J. Ridings, Jr. | ||||
|
Chief Accounting Officer
(Principal Accounting Officer) |
||||
W. P. Carey 6/30/2011 10-Q —
50
Table of Contents
EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | |||
| 10.1 |
Credit Agreement dated as of May 2, 2011, by and among Corporate
Property Associates 9, L.P., Paper Limited Liability Company, Torrey
Pines Limited Partnership and WALS (IN) LLC (collectively, the
“Borrowers”), W. P. Carey & Co. LLC as guarantor, the Lenders from time
to time party thereto, and Bank of America, N.A., as Administrative
Agent. (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on May 6, 2011)
|
|||
|
|
||||
| 10.2 |
Amended and Restated Advisory Agreement, dated May 2, 2011, by and
among Carey Asset Management Corp., Corporate Property Associates 16 —
Global Incorporated and CPA 16 LLC (Incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K filed May 6, 2011 by
Corporate Property Associates 16 — Global Incorporated, Commission
File No. 001-32162)
|
|||
|
|
||||
| 10.3 |
Asset Management Agreement, dated May 2, 2011, by and among W. P. Carey
& Co. B.V., Corporate Property Associates 16 — Global Incorporated and
CPA 16 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 June 30, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated Balance
Sheets at June 30, 2011 and December 31, 2010, (ii) Consolidated
Statements of Income for the three and six months ended June 30, 2011,
and 2010, (iii) Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2011 and 2010, (iv) Consolidated
Statements of Cash Flows for the six months ended June 30, 2011, and
2010, 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 Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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. Finance ReceivablesNote 6. Equity Investments in Real Estate and The ReitsNote 7. Fair Value MeasurementsNote 8. Risk ManagementNote 9. DebtNote 10. Commitments and ContingenciesNote 11. Equity and Stock-based and Other CompensationNote 12. Noncontrolling InterestsNote 13. Income TaxesNote 14. Segment ReportingNote 15. 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 ProceduresItem 6. Exhibits