W. P. CAREY INC.
Note 1. Business and Organization
W. P. Carey Inc., or (“W. P. Carey,Carey”) is together with its consolidated subsidiaries, a REIT that, provides long-term financing via sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. We investtogether with our consolidated subsidiaries, invests primarily in operationally-critical, single-tenant commercial real estate properties domesticallylocated in the United States and internationally.Northern and Western Europe on a long-term basis. We earn revenue principally by leasing the properties we own to single corporate tenants,companies on a triple-net lease basis, which generally requires each tenant to pay the costs associated with operating and maintaining the property.
Note 2. Basis of Presentation
Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a faircomplete statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States or GAAP.
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.
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries and our tenancy-in-common interest as described below.subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entitiesThere have been no significant changes in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial supportour VIE policies from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided forwhat was disclosed in the partnership agreement or other related contracts to determine whether2021 Annual Report.
Notes to Consolidated Financial Statements (Unaudited)
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| | September 30, 2017 | | December 31, 2016 (a) |
| Land, buildings and improvements | $ | 910,495 |
| | $ | 886,148 |
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| Net investments in direct financing leases | 39,897 |
| | 60,294 |
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| In-place lease and other intangible assets | 265,852 |
| | 245,480 |
|
| Above-market rent intangible assets | 102,432 |
| | 98,043 |
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| Accumulated depreciation and amortization | (231,323 | ) | | (184,710 | ) |
| Total assets | 1,129,154 |
| | 1,150,093 |
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| | | | |
| Non-recourse mortgages, net | $ | 128,659 |
| | $ | 406,574 |
|
| Total liabilities | 202,514 |
| | 548,659 |
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(a) | In 2017, we reclassified certain line items in our consolidated balance sheets, as described below. As a result, prior period amounts for certain line items included within Net investments in real estate have been reclassified to conform to the current period presentation. |
At September 30, 2017,2022 and December 31, 2021, our sevenfive and eight unconsolidated VIEs included our interests in (i) three and six unconsolidated real estate investments, respectively, which we account for under the equity method of accounting and one unconsolidated entity, which we account for under the cost method of accounting and is included within our Investment Management segment. At December 31, 2016, our seven unconsolidated VIEs included our interests in six unconsolidated real estate investments and one unconsolidated entity among our interests in the Managed Programs, all of which we accounted for under the equity method of accounting. We(we do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities.entities), and (ii) two unconsolidated investments in equity securities, which we accounted for as investments in shares of the entities at fair value. As of September 30, 20172022, and December 31, 2016,2021, the net carrying amount of our investments in these entities was $152.8$629.8 million and $152.9$581.3 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.
At September 30, 2017, we had an investment in a tenancy-in-common interest in various underlying international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control
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| W. P. Carey 9/30/2017 10-Q– 10
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Notes to Consolidated Financial Statements (Unaudited)
requirement for consolidation. Accordingly, we account for this investment using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of this investment.
At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the jointly owned investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments, nor do we have any legal obligation to fund operating deficits. At September 30, 2017, none of our equity investments had carrying values below zero.
On April 20, 2016, we formed a limited partnership, CESH I, for the purpose of developing, owning, and operating student housing properties and similar investments in Europe. CESH I commenced fundraising in July 2016 through a private placement with an initial offering of $100.0 million and a maximum offering of $150.0 million. Prior to August 30, 2016, which is the date that we had collected $14.2 million of net proceeds on behalf of CESH I from limited partnership units issued in the private placement (primarily to independent investors), we had included CESH I’s financial results and balances in our consolidated financial statements. On August 31, 2016, we determined that CESH I had sufficient equity to finance its operations and that we were no longer considered the primary beneficiary, and as a result we deconsolidated CESH I and began to account for our interest in it at fair value by electing the equity method fair value option available under GAAP. As of August 31, 2016, CESH I had assets totaling $30.3 million on our consolidated balance sheet, including $15.4 million in Cash and cash equivalents and $14.9 million in Other assets, net. In connection with the deconsolidation, we recorded offsetting amounts of $14.2 million for the nine months ended September 30, 2016 in Contributions from noncontrolling interests and Deconsolidation of affiliate in the consolidated statements of equity, and in Proceeds from limited partnership units issued by affiliate and Deconsolidation of affiliate in the consolidated statements of cash flows. We recognized a gain on deconsolidation of $1.9 million, which is included in Other income and (expenses) in the consolidated statements of income for the three and nine months ended September 30, 2016. The deconsolidation did not have a material impact on our financial position or results of operations. Following the deconsolidation, we continue to serve as the advisor to CESH I (Note 3).
Out-of-Period Adjustments
During the second quarter of 2016, we identified and recorded out-of-period adjustments related to adjustments to prior period income tax returns. We concluded that these adjustments were not material to our consolidated financial statements for any of the current or prior periods presented. The net adjustment is reflected as a $3.0 million reduction of our Benefit from income taxes in the consolidated statements of income for the nine months ended September 30, 2016.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
In 2017, we reclassified in-place lease intangible assets, net, below-market ground lease intangible assets, net (previously includedWe currently present Income from direct financing leases and loans receivable on its own line item in Other assets, net), and above-market rent intangible assets, net to bethe consolidated statements of income. Previously, income from direct financing leases was included within Net investmentsLease revenues and income from loans receivable was included within Lease termination income and other in real estate in ourthe consolidated balance sheets. The accumulated amortization on these assets is now included in Accumulated depreciation and amortization in our consolidated balance sheets. statements of income.
We also retitled the line item Real estate tocurrently present Land, buildings and improvements — net lease and other and Land, buildings and improvements — operating properties on separate line items in ourthe consolidated balance sheets. In addition, we included the line item Operating real estate, which had previously appeared in our consolidated balance sheets,Previously, land, buildings and improvements attributable to net lease properties and operating properties were aggregated within Land, buildings and improvements in ourthe consolidated balance sheets. Prior period balancessheets (Note 5).
Revenue Recognition
There have been reclassified to conform to the current period presentation.
As a result ofno significant changes in our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017 (Note 1policies for revenue from contracts under Accounting Standards Codification (“ASC”), we have revised how we view and present a component of our two reportable segments. As such, effective since the second quarter of 2017, we include (i) equity in earnings of equity method investments 606 from what was disclosed in the Managed Programs and (ii) equity investments in the Managed Programs in our Investment Management segment. Results of operations and assets by segment for prior periods have been reclassified to conform to the current period presentation.
In connection with our adoption of Accounting Standards Update, or ASU, 2016-09, Improvements to Employee Share-Based Payment Accounting, as described below, we retrospectively reclassified Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options from Net cash provided by operating activities to Net cash used in financing activities within our consolidated statements of cash flows.
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| W. P. Carey 9/30/2017 10-Q– 11
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Notes to Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-092021 Annual Report. ASC 606 does not apply to our lease revenues, which constitute a majority of our revenues, but will primarily applyapplies to revenues generated from our hotel operating properties and our Investment Management business. We will adopt this guidancesegment. Revenue from contracts for our interimReal Estate segment primarily represented hotel operating property revenues of $3.7 million and annual periods beginning January 1, 2018$2.4 million for the three months ended September 30, 2022 and 2021, respectively, and $9.1 million and $4.9 million for the nine months ended September 30, 2022 and 2021, respectively (Note 16). Revenue from contracts under ASC 606 from our Investment Management segment is discussed in Note 4.
Lease revenue (including straight-line lease revenue) is only recognized when deemed probable of collection. Collectibility is assessed for each tenant receivable using various criteria including credit ratings (Note 6), guarantees, past collection issues, and the current economic and business environment affecting the tenant. If collectibility of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant.
Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Cash and cash equivalents | $ | 186,417 | | | $ | 165,427 | |
Restricted cash (a) | 63,596 | | | 52,523 | |
| Total cash and cash equivalents and restricted cash | $ | 250,013 | | | $ | 217,950 | |
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(a)Restricted cash is included within Other assets, net on our consolidated balance sheets.
W. P. Carey 9/30/2022 10-Q– 12
Notes to Consolidated Financial Statements (Unaudited)
Note 3. Merger with CPA:18 – Global
CPA:18 Merger
On February 27, 2022, we and certain of our subsidiaries entered into a merger agreement with CPA:18 – Global, pursuant to which CPA:18 – Global would merge with and into one of two methods: retrospective restatementour indirect subsidiaries in exchange for each reporting period presented atshares of our common stock and cash, subject to approval by the stockholders of CPA:18 – Global. The CPA:18 Merger and related transactions were approved by the stockholders of CPA:18 – Global on July 26, 2022 and completed on August 1, 2022.
At the effective time of adoption,the CPA:18 Merger, each share of CPA:18 – Global common stock issued and outstanding immediately prior to the effective time of the CPA:18 Merger was canceled and, in exchange for cancellation of such share, the rights attaching to such share were converted automatically into the right to receive (i) 0.0978 shares of our common stock and (ii) $3.00 in cash, which we refer to herein as the Merger Consideration. Each share of CPA:18 – Global common stock owned by us or retrospectivelyany of our subsidiaries immediately prior to the effective time of the CPA:18 Merger was automatically canceled and retired, and ceased to exist, for no Merger Consideration. In exchange for the 141,099,002 shares of CPA:18 – Global common stock that we and our subsidiaries did not previously own, we paid total merger consideration of approximately $1.6 billion, consisting of (i) the issuance of 13,786,302 shares of our common stock with a fair value of $1.2 billion, based on the closing price of our common stock on August 1, 2022 of $87.46 per share, (ii) cash consideration of $423.3 million, and (iii) cash of $0.1 million paid in lieu of issuing any fractional shares of our common stock. Pursuant to the terms of the definitive merger agreement, in connection with the cumulative effectclosing of initially applying this guidancethe CPA:18 Merger, we waived certain back-end fees that we would have otherwise been entitled to receive from CPA:18 – Global upon its liquidation pursuant to the terms of our pre-closing advisory agreement with CPA:18 – Global.
Immediately prior to the closing of the CPA:18 Merger, CPA:18 – Global’s portfolio was comprised of full or partial ownership interests in 42 leased properties (including seven properties in which we already owned a partial ownership interest), substantially all of which were net leased with a weighted-average lease term of 7.0 years, an occupancy rate of 99.3%, and an estimated contractual minimum annualized base rent (“ABR”) totaling $81.0 million, as well as 65 self-storage operating properties and two student housing operating properties totaling 5.1 million square feet. The related property-level debt was comprised of non-recourse mortgage loans with an aggregate consolidated fair value of approximately $900.2 million with a weighted-average annual interest rate of 5.1% as of August 1, 2022. From the closing of the CPA:18 Merger through September 30, 2022, lease revenues, operating property revenues, and net loss from properties acquired were $16.5 million, $15.4 million, and $0.5 million, respectively.
Two of the net lease properties that we acquired in the CPA:18 Merger were classified as Assets held for sale, with an aggregate fair value of $85.0 million at acquisition (Note 5). From the closing of the CPA:18 Merger through September 30, 2022, lease revenues from these properties totaled $2.1 million. We sold one of these properties in August 2022 for total proceeds, net of selling costs, of $44.5 million, and recognized ata loss on sale of $0.2 million (Note 15).
Purchase Price Allocation
We accounted for the date of initial application. We have not decided whichCPA:18 Merger as a business combination under the acquisition method of adoptionaccounting. After consideration of all applicable factors pursuant to the business combination accounting rules, we will use.were considered the “accounting acquirer” due to various factors, including the fact that our stockholders held the largest portion of the voting rights in the combined company upon completion of the CPA:18 Merger. Costs related to the CPA:18 Merger have been expensed as incurred and classified within Merger and other expenses in the consolidated statements of income, totaling $17.1 million for the nine months ended September 30, 2022.
The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at August 1, 2022. The following tables summarize the preliminary consideration and estimated fair values of the assets acquired and liabilities assumed in the acquisition, based on the current best estimate of management. We are evaluatingin the impactprocess of finalizing our assessment of the new standardfair value of the assets acquired and have not yet determined if it will have a material impactliabilities assumed. Investments in land, buildings and improvements, net investments in direct financing leases, non-recourse mortgages, and noncontrolling interests were based on preliminary valuation data and estimates.
W. P. Carey 9/30/2022 10-Q– 13
Notes to Consolidated Financial Statements (Unaudited)
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| Preliminary Purchase Price Allocation (in thousands) |
| Total Consideration | |
| Fair value of W. P. Carey shares of common stock issued | $ | 1,205,750 | |
| Cash consideration paid | 423,297 | |
| Cash paid for fractional shares | 138 | |
| Merger Consideration | 1,629,185 | |
| Fair value of our equity interest in CPA:18 – Global prior to the CPA:18 Merger | 88,299 | |
| Fair value of our equity interest in jointly owned investments with CPA:18 – Global prior to the CPA:18 Merger | 28,574 | |
| $ | 1,746,058 | |
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| Preliminary Purchase Price Allocation (in thousands) |
| Assets | |
| Land, buildings and improvements — net lease and other | $ | 881,613 | |
| Land, buildings and improvements — operating properties | 1,000,447 | |
| Net investments in direct financing leases and loans receivable | 38,517 | |
| In-place lease and other intangible assets | 224,458 | |
| Above-market rent intangible assets | 61,090 | |
| Assets held for sale | 85,026 | |
| Cash and cash equivalents and restricted cash | 331,063 | |
| Other assets, net (excluding restricted cash) | 25,229 | |
| Total assets | 2,647,443 | |
| Liabilities | |
| Non-recourse mortgages, net | 900,173 | |
| Accounts payable, accrued expenses and other liabilities | 90,035 | |
| Below-market rent and other intangible liabilities | 16,836 | |
| Deferred income taxes | 52,320 | |
| Total liabilities | 1,059,364 | |
| Total identifiable net assets | 1,588,079 | |
| Noncontrolling interests | (14,367) | |
| Goodwill | 172,346 | |
| $ | 1,746,058 | |
Goodwill
The $172.3 million of goodwill recorded in the CPA:18 Merger was primarily due to the premium we paid over CPA:18 – Global’s estimated fair value. Management believes the premium is supported by several factors, including that the CPA:18 Merger (i) concludes our business or our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchangedexit from the current model,non-traded REIT business, (ii) adds a high-quality diversified portfolio of net lease assets that is well-aligned with the distinction betweenour existing portfolio, (iii) enhances certain portfolio metrics, and (iv) adds an attractive portfolio of self-storage operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. properties.
The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. In addition, it also requires lessors to record gross revenues and expenses associated with activities that do not transfer services to the lessee (such as real estate taxes and insurance). Additionally, the new standard requires extensive quantitative and qualitative disclosures. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transitionfair value of the new guidance and provides for certain practical expedients. Transition will require application13,786,302 shares of our common stock issued in the CPA:18 Merger as part of the new model atconsideration paid for CPA:18 – Global of $1.6 billion was derived from the beginning of the earliest comparative period presented. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. The ASU is expected to impact our consolidated financial statements as we have certain operating office and land lease arrangements for which we are the lessee. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 amends Accounting Standards Codification, or ASC, Topic 718, Compensation-Stock Based Compensation to simplify various aspects of how share-based payments are accounted for and presented in the financial statements including (i) reflecting income tax effects of share-based payments through the income statement, (ii) allowing statutory tax withholding requirements at the employees’ maximum individual tax rate without requiring awards to be classified as liabilities, and (iii) permitting an entity to make an accounting policy election for the impact of forfeitures on the recognition of expense. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period, with early adoption permitted.
We adopted ASU 2016-09 as of January 1, 2017 and elected to account for forfeitures as they occur, rather than to account for them based on an estimate of expected forfeitures. This election was adopted using a modified retrospective transition method, with a cumulative effect adjustment to retained earnings. The related financial statement impact of this adjustment is not material. Depending on several factors, such as theclosing market price of our common stock employee stock option exercise behavior,on the acquisition date. As required by GAAP, the fair value related to the assets acquired and corporateliabilities assumed, as well as the shares exchanged, has been computed as of the date we gained control, which was the closing date of the CPA:18 Merger, in a manner consistent with the methodology described above.
Goodwill is not deductible for income tax rates, the excess tax benefits associated with the exercise of stock options and the vesting and delivery of restricted share awards, or RSAs, restricted share units, or RSUs, and performance share units, or PSUs, could generate a significant income tax benefit in a particular interim period, potentially creating volatility in Net income attributable to purposes.
W. P. Carey 9/30/2022 10-Q– 14
Notes to Consolidated Financial Statements (Unaudited)
Equity Investments
During the third quarter of 2022, we recognized a gain on change in control of interests of approximately $22.5 million, which was the difference between the carrying value of approximately $65.8 million and basic and diluted earnings per share between interim periods. Under the former accounting guidance, windfall tax benefits related to stock-based compensation were recognized within Additional paid-in capitalfair value of approximately $88.3 million of our previously held equity interest in 8,556,732 shares of CPA:18 – Global’s common stock.
The CPA:18 Merger also resulted in our consolidated financial statements. Under ASU 2016-09,acquisition of the remaining interests in four investments in which we already had a joint interest and accounted for under the equity method. Upon acquiring the remaining interests in these amounts are reflected as a reduction to Provision for income taxes. For reference, windfall tax benefits related to stock-based compensation recorded in Additional paid-in capitalinvestments, we owned 100% of these investments and thus accounted for the years ended December 31, 2016acquisitions of these interests utilizing the purchase method of accounting. Due to the change in control of the four jointly owned investments that occurred, we recorded a gain on change in control of interests of approximately $11.4 million during the third quarter of 2022, which was the difference between our carrying values and 2015 were $6.7the fair values of our previously held equity interests on August 1, 2022 of approximately $17.2 million and $12.5approximately $28.6 million, respectively. Windfall tax benefitsSubsequent to the CPA:18 Merger, we consolidate these wholly owned investments.
The fair values of our previously held equity interests are based on the estimated fair market values of the underlying real estate and related mortgage debt, both of which were determined by management relying in part on a third party. Real estate valuation requires significant judgment. We determined the significant assumptions to stock-based compensation recordedbe Level 3 with ranges for our previously held equity interests as a deferred tax benefitfollows:
•Market rents ranged from $8.65 per square foot to $21.00 per square foot;
•Discount rates applied to the estimated net operating income of each property ranged from approximately 5.75% to 9.75%;
•Discount rates applied to the estimated residual value of each property ranged from approximately 6.50% to 8.50%;
•Residual capitalization rates applied to the properties ranged from approximately 5.75% to 8.00%;
•The fair market value of the property level debt was determined based upon available market data for comparable liabilities and by applying selected discount rates to the stream of future debt payments; and
•Discount rates applied to the property level debt cash flows ranged from approximately 2.28% to 5.50%.
Pro Forma Financial Information
The following consolidated pro forma financial information has been presented as if the CPA:18 Merger had occurred on January 1, 2021 for the three and nine months ended September 30, 2017 were $0.6 million2022 and $3.6 million, respectively.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating credit losses based on current expected credit losses for certain types of2021. The pro forma financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within
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| W. P. Carey 9/30/2017 10-Q– 12
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Notes to Consolidated Financial Statements (Unaudited)
those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, and (iv) distributions received from equity method investees. ASU 2016-15 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-15 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-17 as of January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a setinformation is not a business. The screen requires that when substantially allnecessarily indicative of what the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We elected to early adopt ASU 2017-01 on January 1, 2017 on a prospective basis. While our acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by us likelyactual results would have been considered asset acquisitions underhad the new standard. As a result, transaction costs are more likelyCPA:18 Merger on that date, nor does it purport to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.
In January 2017,represent the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years in which a goodwill impairment test is performed, with early adoption permitted. We adopted ASU 2017-04 as of April 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
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| W. P. Carey 9/30/2017 10-Q– 13
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Notes to Consolidated Financial Statements (Unaudited)
In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact of ASU 2017-05 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms and conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-09 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective operations for future periods.
(in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements.thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Pro forma total revenues | $ | 397,915 | | | $ | 372,498 | | | $ | 1,187,887 | | | $ | 1,089,031 | |
|
| |
| W. P. Carey 9/30/2017 10-Q– 14
|
Notes to Consolidated Financial Statements (Unaudited)
Note 3.4. Agreements and Transactions with Related Parties
Advisory Agreements and Partnership Agreements with the Managed Programs
We currently have advisory agreementsarrangements with each of the Managed Programs,CESH, pursuant to which we earn fees and are entitled to receive reimbursement for certain fund management expenses, as well as cash distributions. Theexpenses. Upon completion of the CPA:18 Merger on August 1, 2022 (Note 3), our advisory agreements also entitled us to fees for serving as the dealer manager of the offerings of the Managed Programs. However, as previously noted, as of June 30, 2017,with CPA:18 – Global were terminated, and we ceased all active non-traded retail fundraising activities.earning revenue from CPA:18 – Global. We facilitated the orderly processing of sales of shares of the common stock and limited partnership units of CWI 2 and CESH I, respectively, through July 31, 2017 and closed their respective offerings on that date, and as a result, stopped receiving dealer manager fees after that date. In addition, in August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017, and as a result, we no longer earned any fees from CCIF after that date. Weraise capital for new or existing funds, but we currently expect to continue to manage all existing Managed ProgramsCESH and earn various fees (as described below) through the end of their respective naturalits life cycles (Notecycle.
W. P. Carey 9/30/2022 10-Q– 15
Notes to Consolidated Financial Statements (Unaudited)
The merger between Carey Watermark Investors Incorporated (“CWI 1”) and Carey Watermark Investors 2 Incorporated (“CWI 2”), two former affiliates (the “CWI 1 and CWI 2 Merger”), closed on April 13, 2020 and is discussed in detail in the 2021 Annual Report. Subsequently, CWI 2 was renamed Watermark Lodging Trust, Inc. (“WLT”). The advisory agreementsIn connection with eachthe CWI 1 and CWI 2 Merger, we entered into a transition services agreement, under which we provided certain transition services at cost to WLT generally for a period of 12 months from closing. On October 13, 2021, all services provided under the Managed REITs have terms of one year, may be renewed for successive one-year periods, and are currently scheduled to expire on December 31, 2017, unless otherwise renewed. The advisorytransition services agreement with CESH I, which commenced June 3, 2016, will continue until terminated pursuant to its terms.were terminated.
The following tables present a summary of revenue earned, and/or cash receivedreimbursable costs, and distributions of Available Cash received/accrued from the Managed Programs and WLT for the periods indicated, included in the consolidated financial statements. Asset management revenue excludes amounts received from third partiesstatements (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Distributions of Available Cash (a) | $ | 3,345 | | | $ | 1,623 | | | $ | 8,746 | | | $ | 4,949 | |
Asset management revenue (b) (c) | 1,197 | | | 3,872 | | | 8,084 | | | 11,792 | |
Reimbursable costs from affiliates (b) | 344 | | | 1,041 | | | 2,414 | | | 3,050 | |
Interest income on deferred acquisition fees and loans to affiliates (d) | 4 | | | 57 | | | 112 | | | 121 | |
| $ | 4,890 | | | $ | 6,593 | | | $ | 19,356 | | | $ | 19,912 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Asset management revenue | $ | 17,938 |
| | $ | 15,955 |
| | $ | 53,271 |
| | $ | 45,535 |
|
| Distributions of Available Cash | 12,047 |
| | 10,876 |
| | 34,568 |
| | 32,018 |
|
| Structuring revenue | 9,817 |
| | 12,301 |
| | 27,981 |
| | 30,990 |
|
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | 45,390 |
| | 46,372 |
|
| Interest income on deferred acquisition fees and loans to affiliates | 447 |
| | 130 |
| | 1,464 |
| | 492 |
|
| Dealer manager fees | 105 |
| | 1,835 |
| | 4,430 |
| | 5,379 |
|
| Other advisory revenue | 99 |
| | 522 |
| | 896 |
| | 522 |
|
| | $ | 46,664 |
| | $ | 56,159 |
| | $ | 168,000 |
| | $ | 161,308 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
CPA:18 – Global | $ | 4,466 | | | $ | 5,608 | | | $ | 17,854 | | | $ | 16,578 | |
| CESH | 424 | | | 909 | | | 1,502 | | | 3,054 | |
| WLT (reimbursed transition services) | — | | | 76 | | | — | | | 280 | |
| $ | 4,890 | | | $ | 6,593 | | | $ | 19,356 | | | $ | 19,912 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
CPA®:17 – Global | $ | 15,383 |
| | $ | 16,616 |
| | $ | 55,645 |
| | $ | 51,820 |
|
CPA®:18 – Global | 4,042 |
| | 5,259 |
| | 18,361 |
| | 22,851 |
|
| CWI 1 | 11,940 |
| | 7,771 |
| | 26,051 |
| | 26,453 |
|
| CWI 2 | 11,643 |
| | 19,924 |
| | 45,206 |
| | 49,233 |
|
| CCIF | 1,787 |
| | 3,388 |
| | 12,777 |
| | 7,750 |
|
| CESH I | 1,869 |
| | 3,201 |
| | 9,960 |
| | 3,201 |
|
| | $ | 46,664 |
| | $ | 56,159 |
| | $ | 168,000 |
| | $ | 161,308 |
|
(b)Amounts represent revenues from contracts under ASC 606.
(c)Included within Asset management and other revenue in the consolidated statements of income.
(d)Included within Non-operating income in the consolidated statements of income.
|
| |
| W. P. Carey 9/30/2017 10-Q– 15
|
Notes to Consolidated Financial Statements (Unaudited)
The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Asset management fees receivable | $ | 352 | | | $ | 494 | |
| Accounts receivable | 159 | | | 336 | |
| Reimbursable costs | 91 | | | 974 | |
| Current acquisition fees receivable | — | | | 19 | |
| Deferred acquisition fees receivable, including accrued interest | — | | | 3 | |
| $ | 602 | | | $ | 1,826 | |
W. P. Carey 9/30/2022 10-Q– 16
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Short-term loans to affiliates, including accrued interest | $ | 132,210 |
| | $ | 237,613 |
|
| Deferred acquisition fees receivable, including accrued interest | 10,720 |
| | 21,967 |
|
| Accounts receivable | 5,358 |
| | 5,005 |
|
| Reimbursable costs | 3,943 |
| | 4,427 |
|
| Current acquisition fees receivable | 1,508 |
| | 8,024 |
|
| Asset management fees receivable | 539 |
| | 2,449 |
|
| Organization and offering costs | 58 |
| | 784 |
|
| Distribution and shareholder servicing fees | — |
| | 19,341 |
|
| | $ | 154,336 |
| | $ | 299,610 |
|
Asset Management Revenue
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the Managed Programs:
|
| | | | | | | | | | | | | | | | | | | |
| Managed Program | | Rate | | Payable | | Description |
CPA®:17CPA:18 – Global
| | 0.5% – 1.75%1.5% | | 2016 50% inIn shares of its Class A common stock and/or cash, and 50%at the option of CPA:18 – Global; payable in shares of its common stock; 2017 in shares of itsClass A common stock for 2021 through February 28, 2022; payable in cash from March 1, 2022 to August 1, 2022 (the date of the completion of the CPA:18 Merger) | | Rate dependsdepended on the type of investment and iswas based on the average market or average equity value, as applicable |
CPA®:18 – Global
CESH | | 0.5% – 1.5%1.0% | | In shares of its Class A common stock | | Rate depends on the type of investment and is based on the average market or average equity value, as applicable |
CWI 1 | | 0.5% | | 2016 in cash; 2017 in shares of its common stock | | Rate is based on the average market value of the investment; we are required to pay 20% of the asset management revenue we receive to the subadvisor |
CWI 2 | | 0.55% | | In shares of its Class A common stock | | Rate is based on the average market value of the investment; we are required to pay 25% of the asset management revenue we receive to the subadvisor |
CCIF | | 1.75% – 2.00% | | In cash prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1) | | Based on the average of gross assets at fair value; we were required to pay 50% of the asset management revenue we received to the subadvisor |
CESH I | | 1.0% | | In cash | | Based on gross assets at fair value |
|
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| W. P. Carey 9/30/2017 10-Q– 16
|
Notes to Consolidated Financial Statements (Unaudited)
Structuring Revenue
Under the terms of the advisory agreements with the Managed Programs, we earn revenue for structuring and negotiating investments and related financing. We did not earn any structuring revenue from the Managed BDCs. The following table presents a summary of our structuring fee arrangements with the Managed Programs:
|
| | | | | | |
Managed Program | | Rate | | Payable | | Description |
CPA®:17 – Global
| | 1% – 1.75%, 4.5% | | In cash; for non net-lease investments, 1% – 1.75% upon completion; for net-lease investments, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments | | Based on the total aggregate cost of the net-lease investments made; also based on the total aggregate cost of the non net-lease investments or commitments made; total limited to 6% of the contract prices in aggregate |
CPA®:18 – Global
| | 4.5% | | In cash; for all investments, other than readily marketable real estate securities for which we will not receive any acquisition fees, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments | | Based on the total aggregate cost of the investments or commitments made; total limited to 6% of the contract prices in aggregate |
CWI REITs | | 2.5% | | In cash upon completion; however, fees were paid 50% in cash and 50% in shares of CWI 1’s common stock and CWI 2’s Class A common stock for a jointly-owned investment structured on behalf of CWI 1 and CWI 2 in September 2017, with the approval of each CWI REIT’s board of directors | | Based on the total aggregate cost of the lodging investments or commitments made; loan refinancing transactions up to 1% of the principal amount; we are required to pay 20% and 25% to the subadvisors of CWI 1 and CWI 2, respectively; total for each CWI REIT limited to 6% of the contract prices in aggregate |
CESH I | | 2.0% | | In cash upon completion | | Based on the total aggregate cost of investments or commitments made, including the acquisition, development, construction, or re-development of the investments |
|
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| W. P. Carey 9/30/2017 10-Q– 17
|
Notes to Consolidated Financial Statements (Unaudited)
Reimbursable Costs from Affiliates
During their respective offering periods, the Managed Programs reimbursedCESH reimburses us for certain costs that we incurred on their behalf, which consisted primarily of broker-dealer commissions, marketing costs, and an annual distribution and shareholder servicing fee, as applicable. The offerings for CWI 2 and CESH I closed on July 31, 2017. The Managed Programs will continue to reimburse usin cash for certain personnel and overhead costs that we incur on their behalf. The following tables present summaries of such fee arrangements:its behalf, based on actual expenses incurred.
Broker-Dealer Selling Commissions
|
| | | | | | |
Managed Program | | Rate | | Payable | | Description |
CWI 2 Class A Shares | | January 1, 2016 through March 31, 2017: $0.70
April 27, 2017 through July 31, 2017: $0.84 (a)
| | In cash upon share settlement; 100% re-allowed to broker-dealers | | Per share sold |
CWI 2 Class T Shares | | January 1, 2016 through March 31, 2017: $0.19
April 27, 2017 through July 31, 2017: $0.23 (a)
| | In cash upon share settlement; 100% re-allowed to broker-dealers | | Per share sold |
CCIF Feeder Funds | | Through September 10, 2017:
0% – 3% (b)
| | In cash upon share settlement; 100% re-allowed to broker-dealers | | Based on the selling price of each share sold; the offering for Carey Credit Income Fund 2016 T (known as Guggenheim Credit Income Fund 2016 T since October 23, 2017), or CCIF 2016 T, closed on April 28, 2017 |
CESH I | | Up to 7.0% of gross offering proceeds (a)
| | In cash upon limited partnership unit settlement; 100% re-allowed to broker-dealers | | Based on the selling price of each limited partnership unit sold |
__________
| |
(a) | After the end of active fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales in the offerings of CWI 2 and CESH I through July 31, 2017, which then closed their respective offerings on that date. |
| |
(b) | In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. |
|
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| W. P. Carey 9/30/2017 10-Q– 18
|
Notes to Consolidated Financial Statements (Unaudited)
Dealer Manager Fees
|
| | | | | | |
Managed Program | | Rate | | Payable | | Description |
CWI 2 Class A Shares | | January 1, 2016 through March 31, 2017: $0.30
April 27, 2017 through July 31, 2017: $0.36 (a)
| | Per share sold | | In cash upon share settlement; a portion may be re-allowed to broker-dealers |
CWI 2 Class T Shares | | January 1, 2016 through March 31, 2017: $0.26
April 27, 2017 through July 31, 2017: $0.31 (a)
| | Per share sold | | In cash upon share settlement; a portion may be re-allowed to broker-dealers |
CCIF Feeder Funds | | Through September 10, 2017: 2.50% – 3.0% (b)
| | Based on the selling price of each share sold | | In cash upon share settlement; a portion may be re-allowed to broker-dealers; CCIF 2016 T’s offering closed on April 28, 2017 |
CESH I | | Up to 3.0% of gross offering proceeds (a)
| | Per limited partnership unit sold | | In cash upon limited partnership unit settlement; a portion may be re-allowed to broker-dealers |
__________
| |
(a) | In connection with the end of active fundraising by Carey Financial on June 30, 2017, CWI 2 and CESH I facilitated the orderly processing of sales through July 31, 2017 and closed their respective offerings on that date. |
| |
(b) | In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. |
Annual Distribution and Shareholder Servicing Fee
|
| | | | | | |
Managed Program | | Rate | | Payable | | Description |
CPA®:18 – Global Class C Shares (a)
| | 1.0% | | Accrued daily and payable quarterly in arrears in cash; a portion may be re-allowed to selected dealers | | Based on the purchase price per share sold or, once it was reported, the net asset value per share, or NAV; cease paying when underwriting compensation from all sources equals 10% of gross offering proceeds |
CWI 2 Class T Shares (a)
| | 1.0% | | Accrued daily and payable quarterly in arrears in cash; a portion may be re-allowed to selected dealers | | Based on the purchase price per share sold or, once it was reported, the NAV; cease paying on the earlier of six years or when underwriting compensation from all sources equals 10% of gross offering proceeds |
CCIF 2016 T (b)
| | 0.9% | | Payable quarterly in arrears in cash; 100% is re-allowed to selected dealers | | Based on the weighted-average net price of shares sold in the public offering; cease paying on the earlier of when underwriting compensation from all sources equals, including this fee, 10% of gross offering proceeds or the date at which a liquidity event occurs |
__________
| |
(a) | In connection with our exit from all non-traded retail fundraising activities as of June 30, 2017, beginning with the payment for the third quarter of 2017 (which was made during the fourth quarter of 2017), the distribution and shareholder servicing fee is now paid directly to selected dealers by the respective funds. As a result, our liability to the selected dealers and the corresponding receivable from the funds were removed during the third quarter of 2017. |
| |
(b) | In connection with our resignation as advisor to CCIF in August 2017, our dealer manager agreement was assigned to Guggenheim. As a result, our liability to the selected dealers and the corresponding receivable from CCIF was removed. |
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| W. P. Carey 9/30/2017 10-Q– 19
|
Notes to Consolidated Financial Statements (Unaudited)
Personnel and Overhead Costs
|
| | | | |
Managed Program | | Payable | | Description |
CPA®:17 – Global and CPA®:18 – Global
| | In cash | | Personnel and overhead costs, excluding those related to our legal transactions group, our senior management, and our investments team, are charged to the CPA® REITs based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and are capped at 2.0% and 2.2% of each CPA® REIT’s pro rata lease revenues for 2017 and 2016, respectively; for the legal transactions group, costs are charged according to a fee schedule
|
CWI 1 | | In cash | | Actual expenses incurred, excluding those related to our senior management; allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter |
CWI 2 | | In cash | | Actual expenses incurred, excluding those related to our senior management; allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter |
CCIF and CCIF Feeder Funds | | In cash, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1) | | Actual expenses incurred, excluding those related to their investment management team and senior management team |
CESH I | | In cash | | Actual expenses incurred |
Organization and Offering Costs
|
| | | | |
Managed Program | | Payable | | Description |
CWI 2 (a)
| | In cash; within 60 days after the end of the quarter in which the offering terminates | | Actual costs incurred up to 1.5% of the gross offering proceeds |
CCIF and CCIF Feeder Funds (b)
| | In cash; payable monthly, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1) | | Up to 1.5% of the gross offering proceeds; we were required to pay 50% of the organization and offering costs we received to the subadvisor |
CESH I (a)
| | N/A | | In lieu of reimbursing us for organization and offering costs, CESH I paid us limited partnership units, as described below under Other Advisory Revenue |
__________
| |
(a) | In connection with the end of active fundraising by Carey Financial on June 30, 2017, CWI 2 and CESH I facilitated the orderly processing of sales through July 31, 2017 and closed their respective offerings on that date. |
| |
(b) | In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. |
Other Advisory Revenue
Under the limited partnership agreement we have with CESH I, we paid all organization and offering costs on behalf of CESH I, and instead of being reimbursed by CESH I on a dollar-for-dollar basis for those costs, we received limited partnership units of CESH I equal to 2.5% of its gross offering proceeds. This revenue, which commenced in the third quarter of 2016, is included in Other advisory revenue in the consolidated statements of income and totaled $0.1 million and $0.7 million for the three and nine months ended September 30, 2017, respectively, and $0.5 million for both the three and nine months ended September 30, 2016, respectively. In connection with the end of active non-traded retail fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales of CESH I through July 31, 2017, which closed its offering on that date.
|
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| W. P. Carey 9/30/2017 10-Q– 20
|
Notes to Consolidated Financial Statements (Unaudited)
Expense Support and Conditional Reimbursements
Under the expense support and conditional reimbursement agreement we had with each of the CCIF Feeder Funds, we and the CCIF subadvisor were obligated to reimburse the CCIF Feeder Funds 50% of the excess of the cumulative distributions paid to the CCIF Feeder Funds’ shareholders over the available operating funds on a monthly basis. Following any month in which the available operating funds exceeded the cumulative distributions paid to its shareholders, the excess operating funds were used to reimburse us and the CCIF subadvisor for any expense payment we made within three years prior to the last business day of such month that had not been previously reimbursed by the CCIF Feeder Fund, up to the lesser of (i) 1.75% of each CCIF Feeder Fund’s average net assets or (ii) the percentage of each CCIF Feeder Fund’s average net assets attributable to its common shares represented by other operating expenses during the fiscal year in which such expense support payment from us and the CCIF’s subadvisor was made, provided that the effective rate of distributions per share at the time of reimbursement was not less than such rate at the time of expense payment. The expense support and conditional reimbursement agreement we had with each of the CCIF Feeder Funds was terminated in connection with our resignation as the advisor to CCIF effective as of September 11, 2017.
Distributions of Available Cash
We arewere entitled to receive distributions of up to 10% of the Available Cash (as defined in the respective advisory agreements)CPA:18 – Global’s partnership agreement) from the operating partnershipspartnership of each of the Managed REITs, as described in their respective operating partnership agreements,CPA:18 – Global, payable quarterly in arrears. We are required to pay 20% and 25%After completion of suchthe CPA:18 Merger on August 1, 2022 (Note 3), we no longer receive distributions to the subadvisors of CWI 1 and CWI 2, respectively.Available Cash from CPA:18 – Global.
Back-End Fees and Interests in the Managed Programs
Under our advisory agreementsarrangements with certain of the Managed Programs,CESH, we may also receive compensation in connection with providing a liquidity eventsevent for their stockholders. For the Managed REITs, the timing and form of such liquidity events are at the discretion of each REIT’s board of directors, andits investors. Such back-end fees or interests include or may include interests in certain instances, we have waived these fees in connection with the liquidity events of prior programs that we managed. Therefore, theredisposition proceeds. There can be no assurance as to whether or when any of these back-end fees or interests will be realized. Pursuant to the terms of the definitive merger agreement, in connection with the closing of the CPA:18 Merger, we waived certain back-end fees that we would have been entitled to receive from CPA:18 – Global upon its liquidation pursuant to the terms of our advisory agreement and partnership agreement with CPA:18 – Global (Note 3).
Other Transactions with Affiliates
Loans to Affiliates
From time to time, our Boardboard of directors has approved the making of secured and unsecured loans or lines of credit from us to certain of the Managed Programs, at our sole discretion, with each loan at a rate equal to the rate at which we are able to borrow funds under our senior credit facility (Note 10), generally for the purpose of facilitating acquisitions or for working capital purposes. The principal outstanding balance on our line of credit to CPA:18 – Global was $16.0 million as of June 30, 2022. No amounts were outstanding as of December 31, 2021. In July 2022, CPA:18 – Global repaid the principal outstanding balance in full. The loan agreement with CPA:18 – Global was terminated upon completion of the CPA:18 Merger on August 1, 2022. No such line of credit with CESH existed during the reporting period.
The following table sets forth certain information regardingOther
At September 30, 2022, we owned interests in ten jointly owned investments in real estate, with the remaining interests held by third parties. We consolidate six such investments and account for the remaining four investments under the equity method of accounting (Note 8). In addition, we owned limited partnership units of CESH at that date. We elected to account for our loans to affiliates (dollarsinvestment in thousands):CESH under the fair value option (Note 8).
W. P. Carey 9/30/2022 10-Q– 17
|
| | | | | | | | | | | | | | | | |
| | | Interest Rate at
September 30, 2017 | | Maturity Date at September 30, 2017 | | Maximum Loan Amount Authorized at September 30, 2017 | | Principal Outstanding Balance at (a) |
| Managed Program | | | | | September 30, 2017 | | December 31, 2016 |
CWI 1 (b) (c) (d) | | LIBOR + 1.00% | | 6/30/2018; 12/31/2018 | | $ | 100,000 |
| | $ | 97,835 |
| | $ | — |
|
CPA®:18 – Global (b) (e) | | LIBOR + 1.00% | | 10/31/2017; 5/15/2018 | | 50,000 |
| | 19,000 |
| | 27,500 |
|
CESH I (b) | | LIBOR + 1.00% | | 5/3/2018; 5/9/2018 | | 35,000 |
| | 14,461 |
| | — |
|
CWI 2 (f) | | N/A | | N/A | | N/A | | — |
| | 210,000 |
|
| | | | | | | | | $ | 131,296 |
| | $ | 237,500 |
|
__________
| |
(a) | Amounts exclude accrued interest of $0.9 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively. |
| |
(b) | LIBOR means London Interbank Offered Rate. |
| |
(c) | We entered into a secured credit facility with CWI 1 in September 2017, comprised of a $75.0 million bridge loan to facilitate an acquisition and a $25.0 million revolving working capital facility. |
|
| |
| W. P. Carey 9/30/2017 10-Q– 21
|
Notes to Consolidated Financial Statements (Unaudited)
| |
(d) | In October 2017, CWI 1 repaid $29.2 million, in aggregate, of the loans outstanding to us at September 30, 2017 (Note 17). |
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(e) | In October 2017, CPA®:18 – Global repaid in full the amount outstanding to us at September 30, 2017 (Note 17). |
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(f) | In October 2017, we entered into a secured $25.0 million revolving working capital facility with CWI 2 (Note 17). |
Other
At September 30, 2017, we owned interests ranging from 3% to 90% in jointly owned investments in real estate, including a jointly controlled tenancy-in-common interest in several properties, with the remaining interests generally held by affiliates. In addition, we owned stock of each of the Managed REITs and CCIF, and limited partnership units of CESH I. We consolidate certain of these investments and account for the remainder either (i) under the equity method of accounting, (ii) under the cost method of accounting, or (iii) at fair value by electing the equity method fair value option available under GAAP (Note 7).
Note 4.5. Land, Buildings and Improvements and Assets Held for Sale
Land, Buildings and Improvements — Operating LeasesNet Lease and Other
Land and buildings leased to others, which are subject to operating leases, and real estate under construction, are summarized as follows (in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
| Land | $ | 1,132,569 |
| | $ | 1,128,933 |
| Land | $ | 2,320,763 | | | $ | 2,151,327 | |
| Buildings | 4,194,213 |
| | 4,053,334 |
| |
| Buildings and improvements | | Buildings and improvements | 10,525,449 | | | 9,525,858 | |
| Real estate under construction | 20,373 |
| | 21,859 |
| Real estate under construction | 16,211 | | | 114,549 | |
| Less: Accumulated depreciation | (578,592 | ) | | (472,294 | ) | Less: Accumulated depreciation | (1,563,622) | | | (1,448,020) | |
| | $ | 4,768,563 |
| | $ | 4,731,832 |
| | $ | 11,298,801 | | | $ | 10,343,714 | |
As discussed in Note 3, we acquired 39 consolidated properties subject to existing operating leases in the CPA:18 Merger, which increased the carrying value of our Land, buildings and improvements — net lease and other by $881.6 million during the nine months ended September 30, 2022.
During the nine months ended September 30, 2017,2022, the U.S. dollar weakenedstrengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increaseddecreased by 12.0%13.9% to $1.1806$0.9748 from $1.0541.$1.1326. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases increased— net lease and other decreased by $160.5$601.1 million from December 31, 20162021 to September 30, 2017.2022.
In connection with changes in lease classifications due to termination of the underlying leases, we reclassified two properties with an aggregate carrying value of $30.5 million from Net investments in direct financing leases and loans receivable to Land, buildings and improvements — net lease and other during the nine months ended September 30, 2022 (Note 6).
Depreciation expense, including the effect of foreign currency translation, on our Land, buildings and improvements subject to operating leases was $36.3$76.0 million and $35.4$70.8 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $107.5$221.0 million and $107.3$207.2 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. Accumulated depreciation of real estate is included in Accumulated depreciation and amortization in the consolidated financial statements.
In connection with changes in lease classifications dueW. P. Carey 9/30/2022 10-Q– 18
Notes to
extensions of the underlying leases, we reclassified six properties with an aggregate carrying value of $1.6 million from Net investments in direct financing leases to Land, buildings and improvements during the nine months ended September 30, 2017 (Note 5).Consolidated Financial Statements (Unaudited)
AcquisitionAcquisitions of Real Estate
On June 27, 2017, we acquired an industrial facility in Chicago, Illinois, which was deemed to be a real estate asset acquisition, at a total cost of $6.0 million, including land of $2.2 million, building of $2.5 million, and an in-place lease intangible asset of $1.3 million (Note 6). We also committed to fund an additional $3.6 million of building improvements at that facility by June 2018.
Real Estate Under Construction
During the nine months ended September 30, 2017,2022, we capitalizedentered into the following investments, which were deemed to be real estate under constructionasset acquisitions, and which excludes properties acquired in the CPA:18 Merger (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property Location(s) | | Number of Properties | | Date of Acquisition | | Property Type | | Total Capitalized Costs |
| Pleasant Prairie, Wisconsin | | 1 | | 1/10/2022 | | Industrial | | $ | 20,024 | |
Various, Spain (a) | | 26 | | 2/3/2022 | | Funeral Home | | 146,364 | |
Various, Denmark (a) (b) | | 8 | | 2/11/2022 | | Retail | | 33,976 | |
Laval, Canada (a) | | 1 | | 2/18/2022 | | Industrial | | 21,459 | |
Chattanooga, Tennessee (c) | | 1 | | 3/4/2022 | | Warehouse | | 43,198 | |
| Various, United States (4 properties), Canada (1 property, and Mexico (1 property) | | 6 | | 4/27/2022; 5/9/2022 | | Industrial | | 80,595 | |
| Various, United States | | 6 | | 5/16/2022 | | Industrial; Warehouse | | 110,381 | |
Various, Denmark (a) (b) | | 10 | | 6/1/2022; 6/30/2022 | | Retail | | 42,635 | |
| Medina, Ohio | | 1 | | 6/17/2022 | | Industrial | | 28,913 | |
Bree, Belgium (a) | | 1 | | 6/30/2022 | | Warehouse | | 96,697 | |
Various, Spain (a) | | 5 | | 7/21/2022 | | Retail | | 19,894 | |
| Various, United States | | 18 | | 7/26/2022 | | Industrial; Warehouse | | 262,061 | |
Various, Denmark (a) (b) | | 8 | | 8/1/2022; 9/28/2022 | | Retail | | 29,644 | |
| Westlake, Ohio | | 1 | | 8/3/2022 | | Warehouse | | 29,517 | |
| Hebron and Strongsville, Ohio; and Scarborough, Canada | | 3 | | 8/10/2022 | | Industrial; Warehouse | | 20,111 | |
| Clifton Park, New York and West Des Moines, Iowa | | 2 | | 8/12/2022 | | Specialty | | 23,317 | |
Orzinuovi, Italy (a) | | 1 | | 8/26/2022 | | Industrial | | 14,033 | |
| | 99 | | | | | | $ | 1,022,819 | |
__________
(a)Amount reflects the applicable exchange rate on the date of transaction.
(b)We also entered into purchase agreements to acquire five additional retail facilities leased to this tenant totaling $43.5$17.7 million including net accrual activity(based on the exchange rate of $6.8 million, primarily related to construction projects on our properties. As ofthe Danish krone at September 30, 2017, we had five construction projects2022), which is expected to be completed in progress, and as2022.
(c)We also committed to fund an additional $21.9 million for an expansion at the facility, which is expected to be completed in the third quarter of December 31, 2016, we had three construction projects in progress. Aggregate unfunded commitments totaled approximately $109.6 million and $135.2 million as of September 30, 2017 and December 31, 2016, respectively.2023.
W. P. Carey 9/30/2022 10-Q– 19
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| W. P. Carey 9/30/2017 10-Q– 22
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Notes to Consolidated Financial Statements (Unaudited)
The aggregate purchase price allocation for investments disclosed above is as follows (dollars in thousands):
| | | | | |
| Total Capitalized Costs |
| Land | $ | 129,005 | |
| Buildings and improvements | 751,579 | |
| Intangible assets and liabilities: | |
| In-place lease (weighted-average expected life of 21.4 years) | 133,327 | |
| Below-market rent (expected life of 6.8 years) | (3,379) | |
| Right-of-use assets: | |
Prepaid rent (a) | 12,287 | |
| $ | 1,022,819 | |
__________
(a)Represents prepaid rent for a land lease. Therefore, there is no future obligation on the land lease asset and no corresponding operating lease liability. This asset is included in In-place lease intangible assets and other in the consolidated balance sheets.
Real Estate Under Construction
During the nine months ended September 30, 2022, we capitalized real estate under construction totaling $127.3 million (including $78.3 million related to a student housing development project acquired in the CPA:18 Merger, as discussed below under Land, Buildings and Improvements — Operating Properties). The number of construction projects in progress with balances included in real estate under construction was four and six as of September 30, 2022 and December 31, 2021, respectively. Aggregate unfunded commitments totaled approximately $38.2 million and $55.3 million as of September 30, 2022 and December 31, 2021, respectively.
During the nine months ended September 30, 2017,2022, we capitalized and completed the following construction projects at a total cost(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property Location(s) | | Primary Transaction Type | | Number of Properties | | Date of Completion | | Property Type | | Total Capitalized Costs (a) |
| Hurricane, Utah | | Expansion | | 1 | | 3/8/2022 | | Warehouse | | $ | 20,517 | |
Breda, Netherlands (a) | | Expansion | | 1 | | 3/18/2022 | | Warehouse | | 4,721 | |
| Bowling Green, Kentucky | | Renovation | | 1 | | 4/26/2022 | | Warehouse | | 72,971 | |
Wageningen, Netherlands (a) | | Build-to-Suit | | 1 | | 7/7/2022 | | Research and Development | | 26,054 | |
Radomsko, Poland (a) | | Expansion | | 1 | | 8/1/2022 | | Industrial | | 23,042 | |
| | | | 5 | | | | | | $ | 147,305 | |
__________
(a)Amount reflects the applicable exchange rate on the date of $59.0 million, of which $35.5 million was capitalized during 2016:transaction.
an expansion project at an industrial facility in Windsor, Connecticut in March 2017 at a cost totaling $3.3 million;
an expansion project at an educational facility in Coconut Creek, Florida in May 2017 at a cost totaling $18.2 million;
an expansion project at two industrial facilities in Monarto, Australia in May 2017 at a cost totaling $15.9 million; and
a build-to-suit project for an industrial facility in McCalla, Alabama in June 2017 at a cost totaling $21.6 million.
Dispositions of Properties
During the nine months ended September 30, 2017,2022, we committed to fund two build-to-suit projects for outdoor advertising structures in New Jersey, for an aggregate amount of $3.6 million. We currently expect to complete the projects in the first quarter of 2023.
Capitalized interest incurred during construction was $0.3 million and $0.6 million for the three months ended September 30, 2022 and 2021, respectively, and $1.3 million and $1.9 million for the nine months ended September 30, 2022 and 2021, respectively, which reduces Interest expense in the consolidated statements of income.
Dispositions of Properties
During the nine months ended September 30, 2022, we sold nine14 properties, and a parcel of vacant land, excluding the sale of one property that waswhich were classified as held for sale as of December 31, 2016,Land, buildings and transferred ownership of two properties to the related mortgage lender (Note 15).improvements — net lease and other. As a result, the carrying value of our Land, buildings and improvements subject to operating leases— net lease and other decreased by $72.4$74.7 million from December 31, 20162021 to September 30, 2017.2022 (Note 15).
Future Dispositions of PropertiesW. P. Carey 9/30/2022 10-Q– 20
As ofNotes to Consolidated Financial Statements (Unaudited)
Lease Termination Income and Other
2022 — For the three and nine months ended September 30, 2017, two tenants exercised options2022, lease termination income and other on our consolidated statements of income included: (i) lease termination income of $4.2 million received from a tenant during the third quarter of 2022, (ii) other lease-related settlements totaling $3.8 million and $10.0 million, respectively; (iii) income from a parking garage attached to repurchaseone of our net-leased properties totaling $0.2 million and $1.5 million, respectively, and (iv) lease termination income of $8.2 million received from a tenant during the nine months ended September 30, 2022.
2021 — For the three and nine months ended September 30, 2021, lease termination income and other on our consolidated statements of income included: (i) lease-related settlements totaling $0.8 million and $6.1 million, respectively; and (ii) income from a parking garage attached to one of our net-leased properties they are leasing from ustotaling $0.5 million and $1.4 million, respectively.
Leases
Operating Lease Income
Lease income related to operating leases recognized and included in accordance with their lease agreements for an aggregatethe consolidated statements of $23.1 million (the amount for one repurchaseincome is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Lease income — fixed | $ | 295,433 | | | $ | 271,360 | | | $ | 852,843 | | | $ | 790,391 | |
Lease income — variable (a) | 36,469 | | | 27,256 | | | 101,138 | | | 81,954 | |
| Total operating lease income | $ | 331,902 | | | $ | 298,616 | | | $ | 953,981 | | | $ | 872,345 | |
__________
(a)Includes (i) rent increases based on changes in the exchange rateU.S. Consumer Price Index and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
We assumed seven land lease arrangements in the CPA:18 Merger. As a result, we capitalized (i) right-of-use assets totaling $24.5 million (comprised of the euro as of September 30, 2017)below-market ground lease intangibles totaling $17.9 million and land lease right-of-use assets totaling $6.6 million), but there can be no assurance that such repurchases will be completed. At September 30, 2017, these two properties had an aggregate asset carrying value of $17.5 million.which are included within In-place lease intangible assets and other on our consolidated balance sheets, and (ii) operating lease liabilities totaling $6.6 million, which are included within Accounts payable, accrued expenses and other liabilities on our consolidated balance sheets.
Land, Buildings and Improvements — Operating Properties
At both September 30, 2017 and December 31, 2016,2022, Land, buildings and improvements attributable to— operating properties consisted of our investments in 75 consolidated self-storage properties, two hotels, which are summarized as followsconsolidated student housing properties, and one consolidated hotel. We acquired 65 self-storage properties, one student housing property, and one student housing development project with an aggregate fair value of $1.0 billion in the CPA:18 Merger (including $78.3 million within real estate under construction) (Note 3). In September 2022, we partially placed into service the student housing development project for total capitalized costs of $32.9 million. At December 31, 2021, Land, buildings and improvements — operating properties consisted of our investments in ten consolidated self-storage properties and one consolidated hotel. Below is a summary of our Land, buildings and improvements — operating properties (in thousands): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Land | $ | 122,317 | | | $ | 10,452 | |
| Buildings and improvements | 916,866 | | | 73,221 | |
| Real estate under construction | 45,341 | | | — | |
| Less: Accumulated depreciation | (22,118) | | | (16,750) | |
| $ | 1,062,406 | | | $ | 66,923 | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Land | $ | 6,041 |
| | $ | 6,041 |
|
| Buildings | 76,043 |
| | 75,670 |
|
| Less: Accumulated depreciation | (15,345 | ) | | (12,143 | ) |
| | $ | 66,739 |
| | $ | 69,568 |
|
Depreciation expense on our Land, buildings and improvements attributable to operating propertiesOperating real estate was $1.1$4.1 million and $0.7 million for both the three months ended September 30, 20172022 and 2016,2021, respectively, and $3.2$5.4 million and $2.1 million for both the nine months ended September 30, 20172022 and 2016. Accumulated depreciation of Land, buildings and improvements attributable2021, respectively.
W. P. Carey 9/30/2022 10-Q– 21
Notes to operating properties is included in Accumulated depreciation and amortization in the consolidated financial statements.Consolidated Financial Statements (Unaudited)
Assets Held for Sale, Net
Below is a summary of our properties held for sale (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Land, buildings and improvements — net lease and other | $ | 31,111 | | | $ | 10,628 | |
| In-place lease intangible assets and other | 7,296 | | | — | |
| Above-market rent intangible assets | 171 | | | — | |
| Accumulated depreciation and amortization | — | | | (2,359) | |
| Assets held for sale, net | $ | 38,578 | | | $ | 8,269 | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Real estate, net | $ | 6,146 |
| | $ | — |
|
| Intangible assets, net | 4,450 |
| | — |
|
| Net investments in direct financing leases | — |
| | 26,247 |
|
| Assets held for sale | $ | 10,596 |
| | $ | 26,247 |
|
At September 30, 2017,2022, we had one property classified as Assets held for sale, net, with a carrying value of $10.6$38.6 million.
At December 31, 2016, we had one property We acquired two properties classified as Assets held for sale, net, with a fair value of $85.0 million in the CPA:18 Merger (Note 3), one of which was sold in August 2022 (Note 15). At December 31, 2021 we had two properties classified as Assets held for sale, net, with an aggregate carrying value of $26.2$8.3 million. In addition, there was a deferred tax liability of $2.5 million related to this property as of December 31, 2016, which is included in Deferred income taxesThese properties were sold in the consolidated balance sheets. The property was sold during the nine months ended September 30, 2017 (Note 15).first quarter of 2022.
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| W. P. Carey 9/30/2017 10-Q– 23
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Notes to Consolidated Financial Statements (Unaudited)
Note 5.6. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases noteand loans receivable (net of allowance for credit losses), and deferred acquisition fees. Operating leases are not included in finance receivablesreceivables.
Finance Receivables
Net investments in direct financing leases and loans receivable are summarized as such amountsfollows (in thousands):
| | | | | | | | | | | | | | | | | |
| Maturity Date | | September 30, 2022 | | December 31, 2021 |
Net investments in direct financing leases (a) | 2022 – 2036 | | $ | 515,662 | | | $ | 572,205 | |
Sale-leaseback transactions accounted for as loans receivable (b) | 2038 – 2052 | | 226,433 | | | 217,229 | |
Secured loans receivable (c) | 2022 – 2024 | | 39,250 | | | 24,143 | |
| | | $ | 781,345 | | | $ | 813,577 | |
__________
(a)Amounts are not recognizednet of allowance for credit losses, as an assetdisclosed below under Net Investments in Direct Financing Leases.
(b)These investments are accounted for as loans receivable in accordance with ASC 310, Receivables and ASC 842, Leases. Maturity dates reflect the consolidated financial statements.current lease maturity dates.
(c)Amounts are net of allowance for credit losses of $2.1 million and $12.6 million as of September 30, 2022 and December 31, 2021, respectively.
Net Investments in Direct Financing Leases
Interest incomeNet investments in direct financing leases is summarized as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Lease payments receivable | $ | 338,733 | | | $ | 414,002 | |
| Unguaranteed residual value | 485,790 | | | 545,896 | |
| 824,523 | | | 959,898 | |
| Less: unearned income | (302,930) | | | (370,353) | |
Less: allowance for credit losses (a) | (5,931) | | | (17,340) | |
| $ | 515,662 | | | $ | 572,205 | |
__________
W. P. Carey 9/30/2022 10-Q– 22
Notes to Consolidated Financial Statements (Unaudited)
(a)During both the nine months ended September 30, 2022 and 2021, we recorded a net release of allowance for credit losses of $6.7 million on our net investments in direct financing leases due to changes in expected economic conditions and improved credit quality for certain tenants, which was included within Other gains and (losses) in our consolidated statements of income. In addition, during the nine months ended September 30, 2022, we reduced the allowance for credit losses balance by $4.7 million, in connection with the reclassifications of properties from Net investments in direct financing leases and loans receivable to Real estate, as described below.
Income from direct financing leases, which wasis included in Lease revenuesIncome from direct financing leases and loans receivable in the consolidated financial statements, was $16.8$13.0 million and $17.6$15.6 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $49.3$40.2 million and $53.9$48.9 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.
As discussed in Note 3, we acquired one consolidated property subject to a direct financing lease in the CPA:18 Merger, which increased the carrying value of our Net investments in direct financing leases and loans receivable by $10.5 million during the nine months ended September 30, 2022. During the nine months ended September 30, 2017,2022, we reclassified two properties with an aggregate carrying value of $30.5 million from Net investments in direct financing leases and loans receivable to Real estate in connection with changes in lease classifications due to termination of the underlying leases. During the nine months ended September 30, 2022, the U.S. dollar weakenedstrengthened against the euro, resulting in a $38.9$53.7 million increasedecrease in the carrying value of Net investments in direct financing leases and loans receivable from December 31, 20162021 to September 30, 2017. 2022.
Loans Receivable
During the nine months ended September 30, 2017,2022, we soldentered into the following sale-leaseback, which was deemed to be a loan receivable in accordance with ASC 310, Receivables and ASC 842, Leases (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property Location(s) | | Number of Properties | | Date of Acquisition | | Property Type | | Total Investment |
Various, Belgium (a) | | 5 | | 6/22/2022 | | Retail | | $ | 19,795 | |
| | 5 | | | | | | $ | 19,795 | |
__________
(a)Amount reflects the applicable exchange rate on the date of transaction.
As discussed in Note 3, we acquired one secured loan receivable in the CPA:18 Merger for $28.0 million, which pays interest at 10% per annum with a maturity date of July 2024.
In September 2022, one of our secured loans receivable was repaid to us for $34.0 million. In connection with this repayment, we recorded a release of allowance for credit losses of $10.5 million since the loan principal was fully repaid. In addition, in the first quarter of 2021, we entered into an international investment accountedagreement with the borrowers for ascertain of our secured loans receivable, who agreed to pay us at maturity a total of $3.7 million of unpaid interest due over the previous year. In connection with the repayment of the secured loan receivable in September 2022, we collected $2.3 million of this interest, which was included in Income from direct financing leaseleases and loans receivable on the consolidated statements of income for the three and nine months ended September 30, 2022. The remaining $1.4 million of unpaid interest is related to a secured loan receivable that had a net carrying valuewe still own, and has not been recognized in the consolidated financial statements due to uncertainty of $1.7 million. Duringcollectibility.
Earnings from our loans receivable are included in Income from direct financing leases and loans receivable in the consolidated financial statements, and totaled $7.6 million and $1.2 million for the three months ended September 30, 2022 and 2021, respectively, and $16.6 million and $3.0 million for the nine months ended September 30,
2017, we reclassified six properties with a carrying value of $1.6 million from Net investments in direct financing leases to Land, buildings2022 and
improvements in connection with changes in lease classifications due to extensions of the underlying leases (Note 4).
Note Receivable
At September 30, 2017 and December 31, 2016, we had a note receivable with an outstanding balance of $10.1 million and $10.4 million, respectively, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements. Earnings from our note receivable are included in Lease termination income and other in the consolidated financial statements.
Deferred Acquisition Fees Receivable
As described in Note 3, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA® REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA® REITs were included in Due from affiliates in the consolidated financial statements.2021, respectively.
Credit Quality of Finance Receivables
We generally seek investmentsinvest in facilities that we believe are critical to a tenant’s business and that we believetherefore have a lowlower risk of tenant default. As of December 31, 2016, we had an allowance for credit losses of $13.3 million on a single direct financing lease investment, including the impact of foreign currency translation. This allowance was established in the fourth quarter of 2015. During the nine months ended September 30, 2016, we increased the allowance by $7.1 million, which was recorded in Property expenses, excluding reimbursable tenant costs in the consolidated financial statements, due to a decline in the estimated amount of future payments we would receive from the tenant. We sold this direct financing lease investment in August 2017, as described above. At both September 30, 20172022 and December 31, 2016, none of the2021, other than uncollected income from our secured loans receivable (as noted above), no material balances of our finance receivables were past due. ThereOther than the lease terminations noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the nine months ended September 30, 2017.2022.
W. P. Carey 9/30/2022 10-Q– 23
Notes to Consolidated Financial Statements (Unaudited)
We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables was lastis updated in the third quarter of 2017. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA® REITs are expected to have the available cash to make such payments.quarterly.
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| W. P. Carey 9/30/2017 10-Q– 24
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Notes to Consolidated Financial Statements (Unaudited)
A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable,allowance for credit losses, is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Tenants / Obligors at | | Carrying Value at |
| Internal Credit Quality Indicator | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| 1 – 3 | | 19 | | 17 | | $ | 676,152 | | | $ | 703,280 | |
| 4 | | 8 | | 9 | | 113,224 | | | 140,230 | |
| 5 | | — | | — | | — | | | — | |
| | | | | | $ | 789,376 | | | $ | 843,510 | |
|
| | | | | | | | | | | | |
| | | Number of Tenants / Obligors at | | Carrying Value at |
| Internal Credit Quality Indicator | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| 1 - 3 | | 24 | | 27 | | $ | 604,081 |
| | $ | 621,955 |
|
| 4 | | 8 | | 5 | | 123,173 |
| | 70,811 |
|
| 5 | | — | | 1 | | — |
| | 1,644 |
|
| | | | | | | $ | 727,254 |
| | $ | 694,410 |
|
Note 6.7.Goodwill and Other Intangibles
We have recorded net lease, internal-use software development, and trade name intangibles that are being amortized over periods ranging from three yearsless than one year to 40 years. In addition, we have several ground lease intangibles that are being amortized over periods of up to 9948 years. In-place lease and below-market ground lease (as lessee) intangibles, at cost are included in In-place lease intangible assets and other intangible assets in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease below-market ground lease (as lessee), and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Internal-use software development and trade name intangibles are included in Other assets, net in the consolidated financial statements. Below-market rent above-market ground lease (as lessee), and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.
InNet lease intangibles recorded in connection with our investment activityproperty acquisitions during the nine months ended September 30, 2017 (2022 are described in Note 45. In connection with the CPA:18 Merger (Note 3), we recorded an in-placenet lease intangible asset of $1.3 million, which has an expected life of 21 years.intangibles comprised as follows (life in years, dollars in thousands): | | | | | | | | | | | |
| Weighted-Average Life | | Amount |
| Finite-Lived Intangible Assets | | | |
| In-place lease | 7.4 | | $ | 199,913 | |
| Above-market rent | 11.9 | | 61,090 | |
| | | $ | 261,003 | |
| | | |
| Finite-Lived Intangible Liabilities | | | |
| Below-market rent | 8.5 | | $ | (16,836) | |
Goodwill within our Owned Real Estate segment increased by $7.4 million during the nine months ended September 30, 2017 due to foreign currency translation adjustments, from $572.3 million as of December 31, 2016 to $579.7 million as of September 30, 2017. Goodwill within our Investment Management segment was $63.6 million as of September 30, 2017, unchanged from December 31, 2016.
In connection with our Board’s decision to exit all non-traded retail fundraising activitiescertain business combinations, including the CPA:18 Merger (Note 13), we recorded goodwill as a result of consideration exceeding the fair values of the assets acquired and liabilities assumed. The goodwill was attributed to our Real Estate reporting unit as it relates to the real estate assets we acquired in such business combinations. The following table presents a reconciliation of our goodwill (in thousands): | | | | | | | | | | | | | | | | | |
| Real Estate | | Investment Management | | Total |
| Balance at January 1, 2022 | $ | 872,195 | | | $ | 29,334 | | | $ | 901,529 | |
Acquisition of CPA:18 – Global (Note 3) | 172,346 | | | — | | | 172,346 | |
| Foreign currency translation adjustments | (21,370) | | | — | | | (21,370) | |
| — | | | (29,334) | | | (29,334) | |
| Balance at September 30, 2022 | $ | 1,023,171 | | | $ | — | | | $ | 1,023,171 | |
W. P. Carey 9/30/2022 10-Q– 24
Notes to Consolidated Financial Statements (Unaudited)
Current accounting guidance requires that we test for the recoverability of goodwill at the reporting unit level. The test for recoverability must be conducted at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In connection with the completion of the CPA:18 Merger in August 2022 (Note 3), we performed a test for impairment during the secondthird quarter of 20172022 for goodwill recorded in both segments and recognized an impairment charge of $29.3 million on goodwill recorded inwithin our Investment Management segment and no impairment was indicated.(Note 9).
|
| |
| W. P. Carey 9/30/2017 10-Q– 25
|
Notes to Consolidated Financial Statements (Unaudited)
Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Finite-Lived Intangible Assets | | | | | | | | | | | |
| Internal-use software development costs | $ | 19,700 | | | $ | (19,040) | | | $ | 660 | | | $ | 19,553 | | | $ | (18,682) | | | $ | 871 | |
| Trade name | — | | | — | | | — | | | 3,975 | | | (3,581) | | | 394 | |
| 19,700 | | | (19,040) | | | 660 | | | 23,528 | | | (22,263) | | | 1,265 | |
| Lease Intangibles: | | | | | | | | | | | |
| In-place lease | 2,449,354 | | | (983,045) | | | 1,466,309 | | | 2,279,905 | | | (934,663) | | | 1,345,242 | |
| Above-market rent | 840,943 | | | (496,376) | | | 344,567 | | | 843,410 | | | (489,861) | | | 353,549 | |
| 3,290,297 | | | (1,479,421) | | | 1,810,876 | | | 3,123,315 | | | (1,424,524) | | | 1,698,791 | |
| Goodwill | | | | | | | | | | | |
| Goodwill | 1,023,171 | | | — | | | 1,023,171 | | | 901,529 | | | — | | | 901,529 | |
| Total intangible assets | $ | 4,333,168 | | | $ | (1,498,461) | | | $ | 2,834,707 | | | $ | 4,048,372 | | | $ | (1,446,787) | | | $ | 2,601,585 | |
| | | | | | | | | | | |
| Finite-Lived Intangible Liabilities | | | | | | | | | | | |
| Below-market rent | $ | (286,446) | | | $ | 118,272 | | | $ | (168,174) | | | $ | (272,483) | | | $ | 105,908 | | | $ | (166,575) | |
| Indefinite-Lived Intangible Liabilities | | | | | | | | | | | |
| Below-market purchase option | (16,711) | | | — | | | (16,711) | | | (16,711) | | | — | | | (16,711) | |
| Total intangible liabilities | $ | (303,157) | | | $ | 118,272 | | | $ | (184,885) | | | $ | (289,194) | | | $ | 105,908 | | | $ | (183,286) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Finite-Lived Intangible Assets | | | | | | | | | | | |
| Internal-use software development costs | $ | 18,649 |
| | $ | (7,159 | ) | | $ | 11,490 |
| | $ | 18,568 |
| | $ | (5,068 | ) | | $ | 13,500 |
|
| Trade name | 3,975 |
| | (200 | ) | | 3,775 |
| | 3,975 |
| | — |
| | 3,975 |
|
| | 22,624 |
| | (7,359 | ) | | 15,265 |
| | 22,543 |
| | (5,068 | ) | | 17,475 |
|
| Lease Intangibles: | | | | | | | | | | | |
| In-place lease | 1,185,107 |
| | (398,237 | ) | | 786,870 |
| | 1,148,232 |
| | (322,119 | ) | | 826,113 |
|
| Above-market rent | 639,140 |
| | (255,152 | ) | | 383,988 |
| | 632,383 |
| | (210,927 | ) | | 421,456 |
|
| Below-market ground lease | 18,693 |
| | (1,698 | ) | | 16,995 |
| | 23,140 |
| | (1,381 | ) | | 21,759 |
|
| | 1,842,940 |
| | (655,087 | ) | | 1,187,853 |
| | 1,803,755 |
| | (534,427 | ) | | 1,269,328 |
|
| Indefinite-Lived Goodwill and Intangible Assets | | | | | | | | | | | |
| Goodwill | 643,321 |
| | — |
| | 643,321 |
| | 635,920 |
| | — |
| | 635,920 |
|
| Below-market ground lease | 970 |
| | — |
| | 970 |
| | 866 |
| | — |
| | 866 |
|
| | 644,291 |
| | — |
| | 644,291 |
| | 636,786 |
| | — |
| | 636,786 |
|
| Total intangible assets | $ | 2,509,855 |
| | $ | (662,446 | ) | | $ | 1,847,409 |
| | $ | 2,463,084 |
| | $ | (539,495 | ) | | $ | 1,923,589 |
|
| | | | | | | | | | | | |
| Finite-Lived Intangible Liabilities | | | | | | | | | | | |
| Below-market rent | $ | (136,319 | ) | | $ | 46,377 |
| | $ | (89,942 | ) | | $ | (133,137 | ) | | $ | 38,231 |
| | $ | (94,906 | ) |
| Above-market ground lease | (13,206 | ) | | 2,879 |
| | (10,327 | ) | | (12,948 | ) | | 2,362 |
| | (10,586 | ) |
| | (149,525 | ) | | 49,256 |
| | (100,269 | ) | | (146,085 | ) | | 40,593 |
| | (105,492 | ) |
| Indefinite-Lived Intangible Liabilities | | | | | | | | | | | |
| Below-market purchase option | (16,711 | ) | | — |
| | (16,711 | ) | | (16,711 | ) | | — |
| | (16,711 | ) |
| Total intangible liabilities | $ | (166,236 | ) | | $ | 49,256 |
| | $ | (116,980 | ) | | $ | (162,796 | ) | | $ | 40,593 |
| | $ | (122,203 | ) |
During the nine months ended September 30, 2022, the U.S. dollar strengthened against the euro, resulting in a decrease of $96.7 million in the carrying value of our net intangible assets from December 31, 2021 to September 30, 2022. Net amortization of intangibles, including the effect of foreign currency translation, was $38.4$62.1 million and $38.1$55.2 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $114.1$165.6 million and $125.6$166.9 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues;revenues and amortization of internal-use software development, trade name, and in-place lease intangibles is included in Depreciation and amortization; and amortization of above-market ground lease and below-market ground lease intangibles is included in Property expenses, excluding reimbursable tenant costs.amortization.
Note 7.8. Equity Method Investments in the Managed Programs and Real Estate
We own interests in the Managed Programs and certain unconsolidated real estate investments with the Managed Programs and also own interests in the Managed Programs.third parties. We account for our interests in these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences) or at fair value by electing the equity method fair value option available under GAAP.
We classify distributions received from equity method investments using the cumulative earnings approach. In general, distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
W. P. Carey 9/30/2022 10-Q– 25
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| W. P. Carey 9/30/2017 10-Q– 26
|
Notes to Consolidated Financial Statements (Unaudited)
The following table presents Equity in earnings of equity method investments in the Managed Programs and real estate, which represents our proportionate share of the income or losses of these investments, as well as certain adjustments related to amortization of basis differences related to purchase accounting adjustments (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Distributions of Available Cash (Note 3) | $ | 12,047 |
| | $ | 10,876 |
| | $ | 34,568 |
| | $ | 32,018 |
|
| Proportionate share of equity in earnings of equity investments in the Managed Programs | 886 |
| | 2,962 |
| | 4,688 |
| | 7,396 |
|
| Amortization of basis differences on equity method investments in the Managed Programs | (355 | ) | | (265 | ) | | (969 | ) | | (756 | ) |
| Total equity in earnings of equity method investments in the Managed Programs | 12,578 |
| | 13,573 |
| | 38,287 |
| | 38,658 |
|
| Equity in earnings of equity method investments in real estate | 4,244 |
| | 4,197 |
| | 11,404 |
| | 12,456 |
|
| Amortization of basis differences on equity method investments in real estate | (504 | ) | | (967 | ) | | (1,871 | ) | | (2,871 | ) |
| Total equity in earnings of equity method investments in real estate | 3,740 |
| | 3,230 |
| | 9,533 |
| | 9,585 |
|
| Equity in earnings of equity method investments in the Managed Programs and real estate | $ | 16,318 |
| | $ | 16,803 |
| | $ | 47,820 |
| | $ | 48,243 |
|
Managed Programs
We own interests in the Managed Programs and account for these interests under the equity method because, as their advisor, and through our ownership of their common stock, we do not exert control over, but we do have the ability to exercise significant influence on,over, the Managed Programs. Operating results of the Managed Programs are included in the Investment Management segment.
The following table sets forth certain information about our investments in the Managed Programs (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | | % of Outstanding Interests Owned at | | Carrying Amount of Investment at |
| Fund | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
CPA®:17 – Global | | 3.996 | % | | 3.456 | % | | $ | 120,464 |
| | $ | 99,584 |
|
CPA®:17 – Global operating partnership | | 0.009 | % | | 0.009 | % | | — |
| | — |
|
CPA®:18 – Global | | 2.298 | % | | 1.616 | % | | 25,812 |
| | 17,955 |
|
CPA®:18 – Global operating partnership | | 0.034 | % | | 0.034 | % | | 209 |
| | 209 |
|
| CWI 1 | | 1.882 | % | | 1.109 | % | | 23,351 |
| | 11,449 |
|
| CWI 1 operating partnership | | 0.015 | % | | 0.015 | % | | 186 |
| | — |
|
| CWI 2 | | 1.541 | % | | 0.773 | % | | 14,171 |
| | 5,091 |
|
| CWI 2 operating partnership | | 0.015 | % | | 0.015 | % | | 300 |
| | 300 |
|
CCIF (a) | | — | % | | 13.322 | % | | — |
| | 23,528 |
|
CESH I (b) | | 2.430 | % | | 2.431 | % | | 3,110 |
| | 2,701 |
|
| | | | | | | $ | 187,603 |
| | $ | 160,817 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % of Outstanding Interests Owned at | | Carrying Amount of Investment at |
| Fund | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
CPA:18 – Global (a) | | 100.000 | % | | 5.578 | % | | $ | — | | | $ | 60,836 | |
CPA:18 – Global operating partnership (a) | | 100.000 | % | | 0.034 | % | | — | | | 209 | |
CESH (b) | | 2.430 | % | | 2.430 | % | | 2,334 | | | 3,689 | |
| | | | | | $ | 2,334 | | | $ | 64,734 | |
__________
| |
(a) | In August 2017, we resigned as the advisor to CCIF, effective as of September 11, 2017 (Note 1). As such, we reclassified our investment in CCIF from Equity investments in the Managed Programs and real estate to Other assets, net in our consolidated balance sheets and account for it under the cost method, since we no longer share decision-making responsibilities with the third-party investment partner. Our cost method investment in CCIF had a carrying value of $23.3 million at September 30, 2017 and is included in our Investment Management segment. |
| |
(b) | Investment is accounted for at fair value. |
|
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| W. P. Carey 9/30/2017 10-Q– 27
|
Notes to Consolidated Financial Statements (Unaudited)
CPA®:17(a)On August 1, 2022, we acquired all of the remaining interests in CPA:18 – Global— The carrying value of our investment in CPA®:17 and the CPA:18 – Global operating partnership in the CPA:18 Merger (Note 3).(b)Investment is accounted for at September 30, 2017 includes asset management fees receivable, for which 243,250 shares of CPA®:17fair value.
CPA:18 – Global common stock were issued during the fourth quarter of 2017. — We received distributions from this investment during the nine months ended September 30, 20172022 and 20162021 of $6.1$1.6 million and $5.5$1.4 million, respectively. We received distributions from our investment in the CPA®:17 – Global operating partnership during the nine months ended September 30, 2017 and 2016 of $19.2 million and $17.8 million, respectively.
CPA®:18 – Global— The carrying value of our investment in CPA®:18 – Global at September 30, 2017 includes asset management fees receivable, for which 117,416 shares of CPA®:18 – Global Class A common stock were issued during the fourth quarter of 2017. We received distributions from this investment during the nine months ended September 30, 2017 and 2016 of $1.2 million and $0.6 million, respectively. We received distributions from our investment in the CPA®:CPA:18 – Global operating partnership during the nine months ended September 30, 20172022 and 20162021 of $6.1$8.7 million and $5.3$4.9 million, respectively.
CWI 1— The carrying value of our investment in CWI 1 at September 30, 2017 includes asset management fees receivable, for which 110,715 shares of CWI 1 common stock were issued during the fourth quarter of 2017. We received distributions from this investment during the nine months ended September 30, 2017 and 2016 of $0.8 million and $0.6 million, respectively. We received distributions from our investment in the CWI 1 operating partnership during the nine months ended September 30, 2017 and 2016 of $5.7 million and $6.9 million, respectively.
CWI 2— The carrying value of our investment in CWI 2 at September 30, 2017 includes asset management fees receivable, for which 68,367 shares of CWI 2 Class A common stock were issued during the fourth quarter of 2017. We received distributions from this investment during the nine months ended September 30, 2017 and 2016 of $0.2 million and less than $0.1 million, respectively. We received distributions from our investment in the CWI 2 operating partnership during the nine months ended September 30, 2017 and 2016 of $3.5 million and $2.0 million, respectively.
CCIF— We received distributions from this investment during the nine months ended September 30, 2017 and 2016 of $0.9 million and $0.6 million, respectively. Following our resignation as the advisor to CCIF, effective September 11, 2017respectively (Note 14), and the reclassification of our investment in CCIF from Equity investments in the Managed Programs and real estate to Other assets, net in our consolidated balance sheets (as described above), distributions of earnings from CCIF are recorded within Other income and (expenses) in the consolidated financial statements..
CESH I— Under the limited partnership agreement we have with CESH I, we paid all organization and offering costs on behalf of CESH I, and instead of being reimbursed by CESH I on a dollar-for-dollar basis for those costs, we received limited partnership units of CESH I equal to 2.5% of its gross offering proceeds. In connection with the end of active fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales in the CESH I offering through July 31, 2017, which then closed its offering on that date (Note 3). We have elected to account for our investment in CESH I at fair value by selecting the equity method fair value option available under GAAP. We record our investment in CESH I on a one quarter lag; therefore, the balance of our equity method investment in CESH I recorded as of September 30, 20172022 is based on the estimated fair value of our equity method investment in CESH I as of June 30, 2017.2022. We did not receivereceived distributions from this investment during the nine months ended September 30, 2017 or 2016.2022 and 2021 of $1.2 million and $1.3 million, respectively.
At September 30, 2017 and December 31, 2016,2021, the aggregate unamortized basis differences on our equity method investments in the Managed Programs were $39.5 million and $31.7 million, respectively.$23.3 million. Following the close of the CPA:18 Merger, there are no such unamortized basis differences on our equity method investments in the Managed Programs.
Interests in Other Unconsolidated Real Estate Investments and WLT
We own equity interests in single-tenant net-leased properties that are generally leased to companies through noncontrolling interests (i) in partnerships and limited liability companies that we do not control but over which we exercise significant influence or (ii) as tenants-in-common subject to common control. Generally, theinfluence. The underlying investments are jointly owned with affiliates.affiliates or third parties. We account for these investments under the equity method of accounting. In addition, we own shares of WLT common stock, which we accounted for under the equity method of accounting as of December 31, 2021, but was reclassified to equity securities at fair value within Other assets, net on our consolidated balance sheets in January 2022, as described in Note 9. Operating results of our unconsolidated real estate investments are included in the Owned Real Estate segment.
W. P. Carey 9/30/2022 10-Q– 26
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| W. P. Carey 9/30/2017 10-Q– 28
|
Notes to Consolidated Financial Statements (Unaudited)
The following table sets forth our ownership interests in our equity method investments in real estate, excluding the Managed Programs, and their respective carrying values (dollars in thousands):
|
| | | | | | | | | | | | |
| | | | | | | Carrying Value at |
| Lessee | | Co-owner | | Ownership Interest | | September 30, 2017 | | December 31, 2016 |
| The New York Times Company | | CPA®:17 – Global | | 45% | | $ | 69,510 |
| | $ | 69,668 |
|
| Frontier Spinning Mills, Inc. | | CPA®:17 – Global | | 40% | | 24,147 |
| | 24,138 |
|
Beach House JV, LLC (a) | | Third Party | | N/A | | 15,105 |
| | 15,105 |
|
ALSO Actebis GmbH (b) | | CPA®:17 – Global | | 30% | | 12,072 |
| | 11,205 |
|
Jumbo Logistiek Vastgoed B.V. (b) (c) | | CPA®:17 – Global | | 15% | | 10,505 |
| | 8,739 |
|
Wagon Automotive GmbH (b) | | CPA®:17 – Global | | 33% | | 8,323 |
| | 8,887 |
|
Wanbishi Archives Co. Ltd. (d) | | CPA®:17 – Global | | 3% | | 333 |
| | 334 |
|
| | | | | | | $ | 139,995 |
| | $ | 138,076 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Carrying Value at |
| Lessee/Fund/Description | | Co-owner | | Ownership Interest | | September 30, 2022 | | December 31, 2021 |
| Existing Equity Method Investments | | | | | | | | |
Las Vegas Retail Complex (a) | | Third Party | | N/A | | $ | 169,896 | | | $ | 104,114 | |
| Johnson Self Storage | | Third Party | | 90% | | 66,137 | | | 67,573 | |
Kesko Senukai (b) | | Third Party | | 70% | | 34,554 | | | 41,955 | |
Harmon Retail Corner (c) | | Third Party | | 15% | | 24,744 | | | 24,435 | |
WLT (d) | | WLT | | N/A | | — | | | 33,392 | |
| | | | | | 295,331 | | | 271,469 | |
Equity Method Investments Consolidated After the CPA:18 Merger (e) | | | | |
| State Farm Mutual Automobile Insurance Co. | | CPA:18 – Global | | 50% | | — | | | 7,129 | |
Apply Sørco AS (f) | | CPA:18 – Global | | 49% | | — | | | 5,909 | |
Bank Pekao (b) (g) | | CPA:18 – Global | | 50% | | — | | | 4,460 | |
Fortenova Grupa d.d. (b) | | CPA:18 – Global | | 20% | | — | | | 2,936 | |
| | | | | | — | | | 20,434 | |
| | | | | | $ | 295,331 | | | $ | 291,903 | |
__________
| |
(a) | This investment is in the form of a preferred equity interest. |
| |
(b) | The carrying value of this investment is affected by fluctuations in the exchange rate of the euro. |
| |
(c) | This investment represents a tenancy-in-common interest, whereby the property is encumbered by the debt for which we are jointly and severally liable. The co-obligor is CPA®:17 – Global and the amount due under the arrangement was approximately $75.4 million at September 30, 2017. Of this amount, $11.3 million represents the amount we are liable for and is included within the carrying value of the investment at September 30, 2017.
|
| |
(d) | The carrying value of this investment is affected by fluctuations in the exchange rate of the yen. |
(a)On June 10, 2021, we entered into an agreement to fund a construction loan of approximately $261.9 million (as of September 30, 2022) for a retail complex in Las Vegas, Nevada. Through September 30, 2022, we funded $168.9 million, including $65.2 million during the nine months ended September 30, 2022. Equity income from this investment was $6.1 million and $1.6 million for the nine months ended September 30, 2022 and 2021, respectively, which was recognized within Earnings (losses) from equity method investments in our consolidated statements of income.
(b)The carrying value of this investment is affected by fluctuations in the exchange rate of the euro.
(c)This investment is reported using the hypothetical liquidation at book value model, which may be different than pro rata ownership percentages, primarily due to the capital structure of the partnership agreement.
(d)At September 30, 2022, we owned 12,208,243 shares of common stock of WLT, which we accounted for as an equity method investment in real estate as of December 31, 2021, but was reclassified to equity securities at fair value within Other assets, net on our consolidated balance sheets in January 2022 (Note 9). WLT completed its previously announced sale to private real estate funds in October 2022 (Note 17). (e)We acquired the remaining interests in these investments from CPA:18 – Global in the CPA:18 Merger, subsequent to which we now consolidate these wholly owned investments (Note 3). (f)The carrying value of this investment is affected by fluctuations in the exchange rate of the Norwegian krone.
(g)We recognized our $4.6 million proportionate share of an impairment charge recorded on this investment during the nine months ended September 30, 2022, which was reflected within Earnings (losses) from equity method investments in our consolidated statements of income. The estimated fair value of the investment is based on the estimated selling price of the international office facility owned by the investment, and the fair value of the non-recourse mortgage encumbering the property also approximates the fair value of the property.
We received aggregate distributions of $12.1$24.2 million and $12.4$14.1 million from our other unconsolidated real estate investments for the nine months ended September 30, 20172022 and 2016,2021, respectively. At September 30, 20172022 and December 31, 2016,2021, the aggregate unamortized basis differences on our unconsolidated real estate investments were $7.1$19.3 million and $6.7$7.9 million, respectively.
W. P. Carey 9/30/2022 10-Q– 27
Notes to Consolidated Financial Statements (Unaudited)
Note 8.9. Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.
Items Measured at Fair Value on a Recurring Basis
The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs along with their weighted-average ranges.inputs.
Money Market FundsDerivative Assets and Liabilities — Our money market funds,derivative assets and liabilities, which are included in CashOther assets, net and cash equivalentsAccounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are comprised of government securities and U.S. Treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.
Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of foreign currency forward contracts, foreign currency collars, interest rate swaps, interest rate caps, and stock warrants (Note 910).
The foreign currency forward contracts, foreign currency collars,valuation of our derivative instruments (excluding stock warrants) is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate swaps,curves, spot and interest rate caps were measured atforward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value using readily observable market inputs,measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as quotations on interest rates,collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
The stock warrants were measured at fair value using valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.
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| W. P. Carey 9/30/2017 10-Q– 29
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Notes to Consolidated Financial Statements (Unaudited)
Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of foreign currency collars and interest rate swaps (Note 9). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Equity Method Investment in CESH I—We have elected to account for our investment in CESH, Iwhich is included in Equity method investments in the consolidated financial statements, at fair value by selecting the equity method fair value option available under GAAP (Note 78). We classified this investment as Level 3 because we primarily used valuation models that incorporate unobservable inputs to determine its fair value.
Investment in Shares of Lineage Logistics — We have elected to apply the measurement alternative under Accounting Standards Update 2016-01, Financial Instruments — Overall (Subtopic 825-10) to account for our investment in shares of Lineage Logistics (a cold storage REIT), which is included in Other assets, net in the consolidated financial statements. Under this alternative, the carrying value is adjusted for any impairments or changes in fair value resulting from observable transactions for similar or identical investments in the issuer. We classified this investment as Level 3 because it is not traded in an active market. We recognized non-cash unrealized gains on our investment in shares of Lineage Logistics of $76.3 million during the nine months ended September 30, 2021, due to a secondary market transaction at a higher price per share, which was recorded within Other gains and (losses) in the consolidated financial statements. In addition, during the nine months ended September 30, 2022 and 2021, we received cash dividends of $4.3 million and $6.4 million, respectively, from our investment in shares of Lineage Logistics, which was recorded within Non-operating income in the consolidated financial statements. The fair value of this investment was $366.3 million at both September 30, 2022 and December 31, 2021.
W. P. Carey 9/30/2022 10-Q– 28
Notes to Consolidated Financial Statements (Unaudited)
Investment in Shares of GCIF — We account for our investment in shares of Guggenheim Credit Income Fund (“GCIF”), which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 2 because we used a quoted price from an inactive market to determine its fair value. During the nine months ended September 30, 2022, we received liquidating distributions from our investment in shares of GCIF totaling $1.7 million, which reduced the cost basis of our investment (in March 2021, GCIF announced its intention to liquidate and to distribute substantially all of its assets). The fair value of our equity investment in CESH I approximatedshares of GCIF was $2.7 million and $4.3 million at September 30, 2022 and December 31, 2021, respectively.
Investment in Preferred Shares of WLT — In January 2022, WLT redeemed in full our 1,300,000 shares of its preferred stock for gross proceeds of $65.0 million (based on the liquidation preference of $50.00 per share). In connection with this redemption, we reclassified an unrealized gain on this investment of $18.7 million from Accumulated other comprehensive loss to Other gains and (losses) in the consolidated financial statements (Note 13). Prior to this redemption, we accounted for this investment, which was included in Other assets, net in the consolidated financial statements, as available-for-sale debt securities at fair value (Level 3). During the nine months ended September 30, 2022 and 2021, we received cash dividends of $0.9 million and $4.1 million, respectively, from our investment in preferred shares of WLT, which was recorded within Non-operating income in the consolidated financial statements. The fair value of our investment in preferred shares of WLT was $65.0 million as of December 31, 2021.
Investment in Common Shares of WLT — In January 2022, we reclassified our investment in 12,208,243 shares of common stock of WLT from equity method investments to equity securities, since we no longer have significant influence over WLT, following the redemption of our investment in preferred shares of WLT, as described above. As a result, we account for this investment, which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 3 because it is not traded in an active market. The carrying value of this investment was $33.4 million as of December 31, 2021, which was included within Equity method investments in the consolidated financial statements. We recognized non-cash unrealized gains of $43.4 million on our investment in common shares of WLT during the nine months ended September 30, 2022, reflecting the most recently published net asset value of WLT, which was recorded within Other gains and (losses) in the consolidated financial statements. The fair value of our investment in common shares of WLT was $76.8 million as of September 30, 2017 and December 31, 2016.2022. WLT completed its previously announced sale to private real estate funds in October 2022 (Note 17).
We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the three or nine months ended September 30, 20172022 or 2016.2021. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other incomegains and (expenses)(losses) on our consolidated financial statements.
Our other material financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
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| | | | September 30, 2017 | | December 31, 2016 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Unsecured Senior Notes, net (a) (b) (c) | 2 | | $ | 2,455,383 |
| | $ | 2,574,990 |
| | $ | 1,807,200 |
| | $ | 1,828,829 |
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Non-recourse mortgages, net (a) (b) (d) | 3 | | 1,253,051 |
| | 1,265,075 |
| | 1,706,921 |
| | 1,711,364 |
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Note receivable (d) | 3 | | 10,070 |
| | 9,740 |
| | 10,351 |
| | 10,046 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
| Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior Unsecured Notes, net (a) (b) (c) | 2 and 3 | | $ | 5,651,865 | | | $ | 4,943,242 | | | $ | 5,701,913 | | | $ | 5,984,228 | |
Non-recourse mortgages, net (a) (b) (d) | 3 | | 1,162,814 | | | 1,142,390 | | | 368,524 | | | 369,841 | |
__________
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(a) | The carrying value of Unsecured Senior Notes, net (Note 10) includes unamortized deferred financing costs of $15.0 million and $12.1 million at September 30, 2017 and December 31, 2016, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $1.0 million and $1.3 million at September 30, 2017 and December 31, 2016, respectively. |
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(b) | The carrying value of Unsecured Senior Notes, net includes unamortized discount of $10.2 million and $7.8 million at September 30, 2017 and December 31, 2016, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $1.4 million and $0.2 million at September 30, 2017 and December 31, 2016, respectively. |
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(c) | We determined the estimated fair value of the Unsecured Senior Notes using quoted market prices in an open market with limited trading volume, where available. In cases where there was no trading volume, we determined the estimated fair value using a discounted cash flow model using a rate that reflects the average yield of similar market participants. |
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(d) | We determined the estimated fair value of these financial instruments using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity. |
(a)The carrying value of Senior Unsecured Notes, net (Note 11) includes unamortized deferred financing costs of $26.3 million and $28.7 million at September 30, 2022 and December 31, 2021, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of less than $0.1 million at both September 30, 2022 and December 31, 2021. (b)The carrying value of Senior Unsecured Notes, net includes unamortized discount of $24.4 million and $29.2 million at September 30, 2022 and December 31, 2021, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $11.6 million and $0.8 million at September 30, 2022 and December 31, 2021, respectively.
(c)For those Senior Unsecured Notes for which there are no observable market prices (specifically, our private placement Senior Unsecured Notes (Note 11)), we used a discounted cash flow model that estimates the present value of future loan payments by discounting such payments at current estimated market interest rates. We consider these notes to be within the Level 3 category. For all other Senior Unsecured Notes, we determined the estimated fair value using observed market prices in an open market, which may experience limited trading volume. We consider these notes to be within the Level 2 category. W. P. Carey 9/30/2022 10-Q– 29
Notes to Consolidated Financial Statements (Unaudited)
(d)We determined the estimated fair value of our non-recourse mortgage loans using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates consider interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
We estimated that our other financial assets and liabilities, (excluding net investments in direct financing leases)including amounts outstanding under our Senior Unsecured Credit Facility (Note 11), but excluding finance receivables (Note 6), had fair values that approximated their carrying values at both September 30, 20172022 and December 31, 2016.2021.
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| W. P. Carey 9/30/2017 10-Q– 30
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Notes to Consolidated Financial Statements (Unaudited)
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investmentsThere have been no significant changes in real estate held for useour impairment policies from what was disclosed in the 2021 Annual Report.
The following tables present information about assets for which we recorded an impairment indicator is identified, we follow a two-step process to determine whether the investment is impairedcharge and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered to be not recoverable. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimatedwere measured at fair value of the property’s asset group, which is primarily determined using market information such as recent comparable sales, broker quotes, or third-party appraisals. If relevant market information is not available or is not deemed appropriate, we performon a future net cash flow analysis, discounted for inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 fornon-recurring basis (in thousands):
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| Three Months Ended September 30, |
| | 2022 | | 2021 |
| | Fair Value Measurements | | Impairment Charges | | Fair Value Measurements | | Impairment Charges |
| Impairment Charges | | | | | | | |
| Investment Management goodwill | $ | — | | | $ | 29,334 | | | $ | — | | | $ | — | |
| Real estate and intangibles | — | | | — | | | 13,912 | | | 16,301 | |
| Equity method investments | — | | | — | | | — | | | — | |
| | | $ | 29,334 | | | | | $ | 16,301 | |
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| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Fair Value
Measurements | | Impairment
Charges | | Fair Value
Measurements | | Impairment
Charges |
| Impairment Charges | | | | | | | |
| Investment Management goodwill | $ | — | | | $ | 29,334 | | | $ | — | | | $ | — | |
| Real estate and intangibles | 24,497 | | | 26,385 | | | 13,912 | | | 16,301 | |
| Equity method investments | — | | | — | | | 8,175 | | | 6,830 | |
| | | $ | 55,719 | | | | | $ | 23,131 | |
Impairment charges, and their related triggering events and fair value reporting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.
We did not recognize any impairment chargesmeasurements, recognized during the three orand nine months ended September 30, 2017.2022 and 2021 were as follows:
Investment Management Goodwill
The impairment charges described below are reflected within Impairment charges — Investment Management goodwill in our consolidated statements of income.
During the three and nine months ended September 30, 2016,2022, we recognized an impairment charge of $29.3 million on goodwill within our Investment Management segment in order to reduce its carrying value to its estimated fair value of $0, since future Investment Management cash flows are expected to be minimal following the CPA:18 Merger (Note 3).
W. P. Carey 9/30/2022 10-Q– 30
Notes to Consolidated Financial Statements (Unaudited)
Real Estate and Intangibles
The impairment charges described below are reflected within Impairment charges — real estate in our consolidated statements of income.
During the nine months ended September 30, 2022, we recognized impairment charges totaling $14.4 million, including an amount attributable to a noncontrolling interest of $0.6$6.2 million on 18two properties includingin order to reduce their carrying values to their estimated fair values, which approximated their estimated selling prices.
During the nine months ended September 30, 2022, we recognized an impairment charge of $10.9 million on a portfolioproperty in order to reduce its carrying value to its estimated fair value, which declined due to changes in expected cash flows related to the existing tenant’s lease expiration in 2023. The fair value measurement was determined by estimating discounted cash flows using two significant unobservable inputs, which were the cash flow discount rate (14.0%) and terminal capitalization rate (11.0%)
In March 2022, we entered into a transaction to restructure certain leases with Pendragon PLC (a tenant at certain automotive dealerships in the United Kingdom). Under this restructuring, we extended the leases on 30 properties by 11 years (no change to rent) and entered into an agreement to dispose of 1412 properties, with the tenant continuing to pay rent until the earlier of sale date or certain specified dates over the following 12 months. As a result, during the nine months ended September 30, 2022, we recognized impairment charges totaling $9.3 million on six of these properties in order to reduce the carrying values of the properties to their estimated fair values. The impairment charges recognized on the portfolio of 14 properties were in addition to charges recognized on the portfolio during the six months ended June 30, 2016 (as described below), based on the purchase and sale agreement for the portfolio. The fair value measurements for the properties which totaled $158.8were determined using a direct capitalization rate analysis; the capitalization rate for the various scenarios ranged from 4.75% to 10.00%.
During the three and nine months ended September 30, 2021, we recognized an impairment charge of $16.3 million approximated theiron a property in order to reduce the carrying value of the property to its estimated selling prices, less estimated costsfair value, due to sell. We used available information, including third-party broker information and internalthe existing tenant’s non-renewal of its lease expiring in 2022. The fair value measurement was determined by estimating discounted cash flows using four significant unobservable inputs, which were the cash flow models (Level 3 inputs)discount rate (range of 7.00% to 9.00%), terminal capitalization rate (range of 6.00% to 7.00%), estimated market rents (range of $10 to $11 per square foot), and estimated capital expenditures ($100 per square foot). We sold this property in determining the fair valueSeptember 2022.
Equity Method Investments
The other-than-temporary impairment charges described below are reflected within Earnings (losses) from equity method investments in our consolidated statements of these properties. The portfolio of 14 properties was sold in October 2016. Of the other four properties, one was sold in December 2016, two were disposed of in January 2017, and one property, which was classified as held for sale as of December 31, 2016, was sold in January 2017.income.
During the nine months ended September 30, 2016,2021, we recognized an other-than-temporary impairment charges totaling $49.9 million, including an amount attributable to a noncontrolling interestcharge of $0.6$6.8 million on 18 properties in ordera jointly owned real estate investment to reduce the carrying valuesvalue of the propertiesour investment to theirits estimated fair values. In additionvalue, which declined due to changes in expected cash flows related to the impairment charges of $14.4 million recognized during the three months ended September 30, 2016, described above, we recognized impairment charges totaling $35.4 million on the portfolio of 14 properties during the six months ended June 30, 2016,existing tenant’s lease expiration in order to reduce the carrying values of the properties to their estimated fair values at that time.2028. The fair value measurements for the properties, which totaled $158.8 million, approximated their estimated selling prices, less estimated costs to sell. We used available information, including third-party broker information and internalmeasurement was determined by estimating discounted cash flows using three significant unobservable inputs, which were the cash flow models (Level 3 inputs)discount rate (5.75%), in determining the fair value of these properties.residual discount rate (7.50%), and residual capitalization rate (6.75%).
Note 9.10. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our Senior Unsecured Credit Facility and Unsecured Senior Notes (Note 1011). and unhedged variable-rate non-recourse mortgage loans. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of ourSenior Unsecured Notes, other securities, and the shares or limited partnership units we hold in the Managed Programs, due to changes in interest rates or other market factors. We own investments in North America, Europe, Australia, and AsiaJapan and are subject to risks associated with fluctuating foreign currency exchange rates.
Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, and we may be granted common stock warrants by lessees when structuring lease transactions, which are considered to be derivative instruments. The primary risks related to our use of derivative
W. P. Carey 9/30/2022 10-Q– 31
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| W. P. Carey 9/30/2017 10-Q– 31
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Notes to Consolidated Financial Statements (Unaudited)
Derivative Financial Instruments
instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade
There have been no significant changes in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities.
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. For a derivative designated, and that qualified, as a net investment hedge, the effective portion of the changepolicies from what was disclosed in the fair value and/or the net settlement of the derivative is reported in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.
All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements.2021 Annual Report. At both September 30, 20172022 and December 31, 2016,2021, no cash collateral had been posted nor received for any of our derivative positions.
The following table sets forth certain information regarding our derivative instruments (in thousands):
| | | Derivatives Designated as Hedging Instruments | | Balance Sheet Location | | Asset Derivatives Fair Value at | | Liability Derivatives Fair Value at | Derivatives Designated as Hedging Instruments | | Balance Sheet Location | | Derivative Assets Fair Value at | | Derivative Liabilities Fair Value at |
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| Foreign currency forward contracts | | Other assets, net | | $ | 15,636 |
| | $ | 37,040 |
| | $ | — |
| | $ | — |
| |
| Foreign currency collars | | Other assets, net | | 5,837 |
| | 17,382 |
| | — |
| | — |
| Foreign currency collars | | Other assets, net | | $ | 62,583 | | | $ | 19,484 | | | $ | — | | | $ | — | |
| Interest rate swaps | | Other assets, net | | 227 |
| | 190 |
| | — |
| | — |
| |
Interest rate swaps (a) | | Interest rate swaps (a) | | Other assets, net | | 2,557 | | | — | | | — | | | — | |
| Interest rate cap | | Other assets, net | | 24 |
| | 45 |
| | — |
| | — |
| Interest rate cap | | Other assets, net | | 15 | | | 1 | | | — | | | — | |
| Foreign currency collars | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | (4,472 | ) | | — |
| Foreign currency collars | | Accounts payable, accrued expenses and other liabilities | | — | | | — | | | — | | | (1,311) | |
| Interest rate swaps | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | (1,822 | ) | | (2,996 | ) | Interest rate swaps | | Accounts payable, accrued expenses and other liabilities | | — | | | — | | | — | | | (908) | |
| | | 65,155 | | | 19,485 | | | — | | | (2,219) | |
| Derivatives Not Designated as Hedging Instruments | | | | | | | | | Derivatives Not Designated as Hedging Instruments | | | | | | | | |
| Stock warrants | | Other assets, net | | 3,551 |
| | 3,752 |
| | — |
| | — |
| Stock warrants | | Other assets, net | | 4,600 | | | 4,600 | | | — | | | — | |
Interest rate swap (a) | | Other assets, net | | 14 |
| | 9 |
| | — |
| | — |
| |
| Foreign currency collars | | Foreign currency collars | | Other assets, net | | 1,573 | | | — | | | — | | | — | |
| | | 6,173 | | | 4,600 | | | — | | | — | |
| Total derivatives | | $ | 25,289 |
| | $ | 58,418 |
| | $ | (6,294 | ) | | $ | (2,996 | ) | Total derivatives | | $ | 71,328 | | | $ | 24,085 | | | $ | — | | | $ | (2,219) | |
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(a) | This interest rate swap does not qualify for hedge accounting; however, it does protect against fluctuations in interest rates related to the underlying variable-rate debt. |
(a)In connection with the CPA:18 Merger on August 1, 2022, we acquired five interest rate swaps, which had an aggregate fair value of $0.4 million on the date of acquisition.
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| W. P. Carey 9/30/2017 10-Q– 32
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Notes to Consolidated Financial Statements (Unaudited)
The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Loss) (a) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivatives in Cash Flow Hedging Relationships | | 2022 | | 2021 | | 2022 | | 2021 |
| Foreign currency collars | | $ | 20,756 | | | $ | 12,666 | | | $ | 44,410 | | | $ | 26,294 | |
| Interest rate swaps | | 1,663 | | | 203 | | | 3,019 | | | 3,851 | |
| Interest rate caps | | 11 | | | 1 | | | 16 | | | 5 | |
| Total | | $ | 22,430 | | | $ | 12,870 | | | $ | 47,445 | | | $ | 30,150 | |
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| | | Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Loss) (Effective Portion) (a) |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivatives in Cash Flow Hedging Relationships | | 2017 | | 2016 | | 2017 | | 2016 |
| Foreign currency collars | | $ | (5,398 | ) | | $ | (439 | ) | | $ | (16,002 | ) | | $ | 3,618 |
|
| Foreign currency forward contracts | | (4,752 | ) | | (3,622 | ) | | (16,422 | ) | | (7,830 | ) |
| Interest rate swaps | | 250 |
| | 961 |
| | 779 |
| | (1,536 | ) |
| Interest rate caps | | (17 | ) | | (29 | ) | | (26 | ) | | (21 | ) |
Derivatives in Net Investment Hedging Relationships (b) | | | | | | | | |
| Foreign currency forward contracts | | (1,171 | ) | | (2,200 | ) | | (5,347 | ) | | (3,357 | ) |
| Total | | $ | (11,088 | ) | | $ | (5,329 | ) | | $ | (37,018 | ) | | $ | (9,126 | ) |
| | | | | Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive Income (Loss) (Effective Portion) | | Amount of Gain (Loss) on Derivatives Reclassified from
Other Comprehensive Income (Loss) |
| Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Three Months Ended September 30, | | Nine Months Ended September 30, | Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2022 | | 2021 | | 2022 | | 2021 |
| Foreign currency forward contracts | | Other income and (expenses) | | $ | 1,454 |
| | $ | 1,773 |
| | $ | 5,336 |
| | $ | 5,163 |
| |
| Foreign currency collars | | Other income and (expenses) | | 735 |
| | 654 |
| | 3,154 |
| | 1,259 |
| Foreign currency collars | | Non-operating income | | $ | 4,987 | | | $ | 14 | | | $ | 10,450 | | | $ | (553) | |
| Interest rate swaps and caps | | Interest expense | | (286 | ) | | (512 | ) | | (1,024 | ) | | (1,578 | ) | |
Interest rate swaps and caps (b) | | Interest rate swaps and caps (b) | | Interest expense | | (66) | | | (196) | | | (352) | | | (720) | |
| Total | | $ | 1,903 |
| | $ | 1,915 |
| | $ | 7,466 |
| | $ | 4,844 |
| Total | | $ | 4,921 | | | $ | (182) | | | $ | 10,098 | | | $ | (1,273) | |
__________
| |
(a) | Excludes net losses of $0.4 million and net gains of less than $0.1 million recognized on unconsolidated jointly owned investments for the three months ended September 30, 2017 and 2016, respectively, and net losses of $0.9 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(b) | The effective portion of the changes in fair value of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income (loss). |
(a)Excludes net gains of $1.2 million and $0.2 million recognized on unconsolidated jointly owned investments for the three months ended September 30, 2022 and 2021, respectively, and net gains of $3.5 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively.
(b)Amount for the nine months ended September 30, 2021 excludes other comprehensive income totaling $3.1 million that was released from the consolidated financial statements (along with the related liability balances) upon the termination of interest rate swaps in connection with certain prepayments of non-recourse mortgage loans during the period.
W. P. Carey 9/30/2022 10-Q– 32
|
| |
| W. P. Carey 9/30/2017 10-Q– 33
|
Notes to Consolidated Financial Statements (Unaudited)
Amounts reported in Other comprehensive (loss) income (loss) related to interest rate swapsderivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive (loss) income (loss) related to foreign currency derivative contracts will be reclassified to OtherNon-operating income and (expenses) when the hedged foreign currency contracts are settled. As of September 30, 2017,2022, we estimate that an additional $0.7$1.5 million and $7.5$26.4 million will be reclassified as interestInterest expense and otherNon-operating income, respectively, during the next 12 months.
The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amount of Gain (Loss) on Derivatives Recognized in Income |
| Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Foreign currency collars | | Non-operating income | | $ | 3,737 | | | $ | 357 | | | $ | 7,520 | | | $ | 516 | |
| Interest rate swaps | | Interest expense | | 56 | | | 223 | | | 387 | | | 1,354 | |
| Derivatives Not in Cash Flow Hedging Relationships | | | | | | | | | | |
| Foreign currency collars | | Other gains and (losses) | | 447 | | | — | | | 1,573 | | | — | |
| Stock warrants | | Other gains and (losses) | | — | | | — | | | — | | | (500) | |
| Total | | | | $ | 4,240 | | | $ | 580 | | | $ | 9,480 | | | $ | 1,370 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain (Loss) on Derivatives Recognized in Income |
| Derivatives Not in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Foreign currency collars | | Other income and (expenses) | | $ | (225 | ) | | $ | 78 |
| | $ | (718 | ) | | $ | 257 |
|
| Stock warrants | | Other income and (expenses) | | 134 |
| | 335 |
| | (201 | ) | | 134 |
|
| Foreign currency forward contracts | | Other income and (expenses) | | (19 | ) | | — |
| | (19 | ) | | — |
|
| Interest rate swaps | | Other income and (expenses) | | 2 |
| | 401 |
| | 11 |
| | 2,656 |
|
| Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | |
Interest rate swaps (a) | | Interest expense | | 153 |
| | 165 |
| | 455 |
| | 428 |
|
| Foreign currency forward contracts | | Other income and (expenses) | | (14 | ) | | (55 | ) | | (75 | ) | | 86 |
|
| Foreign currency collars | | Other income and (expenses) | | (13 | ) | | (26 | ) | | (11 | ) | | 12 |
|
| Total | | | | $ | 18 |
| | $ | 898 |
| | $ | (558 | ) | | $ | 3,573 |
|
__________
| |
(a) | Relates to the ineffective portion of the hedging relationship. |
See below for information on our purposes for entering into derivative instruments and for information on derivative instruments owned by unconsolidated investments, which are excluded from the tables above.instruments.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgagegenerally seek long-term debt financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
|
| |
| W. P. Carey 9/30/2017 10-Q– 34
|
Notes to Consolidated Financial Statements (Unaudited)
The interest rate swaps and caps that our consolidated subsidiaries had outstanding at September 30, 20172022 are summarized as follows (currency in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Derivatives | | Number of Instruments | | Notional
Amount | | Fair Value at
September 30, 2022 (a) |
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Interest rate swaps | | 5 | | 35,176 | | USD | | $ | 1,410 | |
| Interest rate swaps | | 2 | | 46,277 | | EUR | | 1,147 | |
| Interest rate cap | | 1 | | 10,530 | | EUR | | 15 | |
| | | | | | | $ | 2,572 | |
|
| | | | | | | | | | |
| | | Number of Instruments |
| Notional Amount |
| Fair Value at
September 30, 2017 (a) |
| Interest Rate Derivatives | |
|
|
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Interest rate swaps | | 11 | | 104,966 |
| USD | | $ | (1,455 | ) |
| Interest rate swap | | 1 | | 5,813 |
| EUR | | (140 | ) |
| Interest rate cap | | 1 | | 30,517 |
| EUR | | 24 |
|
| Not Designated as Cash Flow Hedging Instruments | | | | | | | |
Interest rate swap (b) | | 1 | | 2,890 |
| USD | | 14 |
|
| | | | | | | | $ | (1,557 | ) |
__________(a)Fair value amounts are based on the exchange rate of the euro at September 30, 2022, as applicable.
| |
(a) | Fair value amounts are based on the exchange rate of the euro at September 30, 2017, as applicable. |
| |
(b) | This interest rate swap does not qualify for hedge accounting; however, it does protect against fluctuations in interest rates related to the underlying variable-rate debt. |
Foreign Currency Contracts and Collars
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling the Australian dollar, and certain other currencies. We manage foreign currency exchange rate movements by generally placing our debt service obligation on an investment in the same currency as the tenant’s rental obligation to us. This reduces our overall exposure to the net cash flow from that investment. However, we are subject to foreign currency exchange rate movements to the extent that there is a difference in the timing and amount of the rental obligation and the debt service. Realized and unrealized gains and losses recognized in earnings related to foreign currency transactions are included in Other income and (expenses) in the consolidated financial statements.
In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency forward contracts and foreign currency collars have maturities of 7762 months or less.
W. P. Carey 9/30/2022 10-Q– 33
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the foreign currency derivative contractscollars that we had outstanding at September 30, 2017, which were designated as cash flow hedges2022 (currency in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Derivatives | | Number of Instruments | | Notional
Amount | | Fair Value at September 30, 2022 |
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Foreign currency collars | | 71 | | 280,600 | | EUR | | $ | 51,271 | |
| Foreign currency collars | | 77 | | 49,820 | | GBP | | 11,312 | |
| Not Designated as Cash Flow Hedging Instruments | | | | | | | |
| Foreign currency collar | | 1 | | 10,600 | | EUR | | 1,573 | |
| | | | | | | $ | 64,156 | |
|
| | | | | | | | | | |
| | | Number of Instruments | | Notional
Amount | | Fair Value at September 30, 2017 |
| Foreign Currency Derivatives | | | |
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Foreign currency forward contracts | | 25 | | 77,208 |
| EUR | | $ | 12,553 |
|
| Foreign currency collars | | 24 | | 40,750 |
| GBP | | 5,316 |
|
| Foreign currency collars | | 24 | | 87,150 |
| EUR | | (3,951 | ) |
| Foreign currency forward contracts | | 5 | | 2,680 |
| GBP | | 603 |
|
| Foreign currency forward contracts | | 9 | | 11,411 |
| AUD | | 404 |
|
| Designated as Net Investment Hedging Instruments | | | | | | | |
| Foreign currency forward contracts | | 3 | | 74,463 |
| AUD | | 2,076 |
|
| | | | | | | | $ | 17,001 |
|
|
| |
| W. P. Carey 9/30/2017 10-Q– 35
|
Notes to Consolidated Financial Statements (Unaudited)
Credit Risk-Related Contingent Features
We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2017.2022. At September 30, 2017,2022, our total credit exposure and the maximum exposure to any single counterparty was $19.9$67.3 million and $13.5$11.2 million, respectively.
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2017,2022, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $6.5 million and $3.3$2.2 million at September 30, 2017 and December 31, 2016, respectively,2021, which included accrued interest and any nonperformance risk adjustments.adjustments (there was no such liability balance at September 30, 2022). If we had breached any of these provisions at September 30, 2017 or December 31, 2016,2021, we could have been required to settle our obligations under these agreements at their aggregate termination value of $6.8 million and $3.3 million, respectively.$2.3 million.
Net Investment Hedges
At September 30, 2017, the €236.3 million borrowedBorrowings under our Senior Unsecured Notes, Unsecured Revolving Credit Facility, and Unsecured Term Loans (all as defined in Note 11) denominated in euro, outstanding under our Amended Term Loan was designated as a net investment hedge (Note 10). Additionally, we have had two issuances of euro-denominated senior notes, each with a principal amount of €500.0 million, which we refer to as the 2.0% Senior Notes and 2.25% Senior Notes (Note 10). These borrowingsBritish pounds sterling, or Japanese yen are designated as, and are effective as, economic hedges of our net investments in foreign entities. Variability in the exchange rates of the foreign currencies with respect to the U.S. dollar impacts
Exchange rate variations impact our financial results asbecause the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of changes in the foreign currencies to U.S. dollar exchange ratesrate variations being recorded in Other comprehensive (loss) income (loss) as part of the cumulative foreign currency translation adjustment. As a result, the borrowings in euro under our Amended Term Loan, 2.0% Senior Notes, and 2.25% Senior Notes are recorded at cost in the consolidated financial statements and all changes in the value of our borrowings under our euro-denominated senior notes and changes in the value of our euro, Japanese yen, and British pound sterling borrowings under our Senior Unsecured Credit Facility, related to changes in the spot rates, will be reported in the same manner as aforeign currency translation adjustment,adjustments, which isare recorded in Other comprehensive (loss) income (loss) as part of the cumulative foreign currency translation adjustment.
At September 30, 2017, we also had foreign currency forward contracts that were designated as Such gains (losses) related to non-derivative net investment hedges as discussed in“Derivativewere $215.0 million and $92.6 million for the three months ended September 30, 2022 and 2021, respectively, and $528.4 million and $190.5 million for the nine months ended September 30, 2022 and 2021, respectively.
W. P. Carey 9/30/2022 10-Q– 34
Notes to Consolidated Financial Instruments” above.Statements (Unaudited)
Note 10.11. Debt
Senior Unsecured Credit Facility
AsOn February 20, 2020, we entered into the Fourth Amended and Restated Credit Facility, which had capacity of December 31, 2016, we hadapproximately $2.1 billion, comprised of (i) a senior credit facility that provided for a $1.5$1.8 billion unsecured revolving credit facility orfor our Unsecuredworking capital needs, acquisitions, and other general corporate purposes (our “Unsecured Revolving Credit Facility, andFacility”), (ii) a $250.0£150.0 million term loan facility, or our Prior Term Loan, which we refer to collectively as the Senior Unsecured Credit Facility. At December 31, 2016, the Senior Unsecured Credit Facility also permitted (i) up to $750.0 million under our Unsecured Revolving Credit Facility to be borrowed in certain currencies other than the U.S. dollar, (ii) swing line loans up to $50.0 million under our Unsecured Revolving Credit Facility,(our “Term Loan”), and (iii) the issuance of letters of credit under our Unsecured Revolving Credit Facility in an aggregate amount not to exceed $50.0 million. On January 26, 2017, we exercised our option to extend our Prior Term Loan by an additional year to January 31, 2018.
On February 22, 2017, we amended and restated our Senior Unsecured Credit Facility to increase its capacity to approximately $1.85 billion, which is comprised of $1.5 billion under our Unsecured Revolving Credit Facility, a €236.3 million term loan, or our Amended Term Loan, and a $100.0€96.5 million delayed draw term loan or our Delayed(our “Delayed Draw Term Loan. The Delayed Draw Term Loan allows for borrowings in U.S. dollars, euros, or British pounds sterling.Loan”). We refer to our Prior Term Loan, Amended Term Loan and Delayed Draw Term Loan collectively as the Unsecured“Unsecured Term Loans.
On February 22, 2017, we drew downLoans” and the entire facility collectively as our Amended Term Loan in full by borrowing €236.3 million (equivalent to $250.0 million) to repay and terminate our $250.0 million Prior Term Loan. On June 8, 2017, we drew down our Delayed Draw Term Loan in full by borrowing €88.7 million (equivalent to $100.0 million) to partially pay down the amounts then outstanding under our“Senior Unsecured Revolving Credit Facility.”
The maturity date of the Unsecured Revolving Credit Facility is February 22, 2021. We have two options to extend the maturity date of the Unsecured Revolving Credit Facility by six months, subject to the conditions provided in the Third Amended and Restated Credit Facility dated February 22, 2017, as amended, or the Credit Agreement. The maturity date of both the Amended
|
| |
| W. P. Carey 9/30/2017 10-Q– 36
|
Notes to Consolidated Financial Statements (Unaudited)
Term Loan and Delayed Draw Term Loan is February 22, 2022. The Senior Unsecured Credit Facility is being used for working capital needs, for acquisitions, and for other general corporate purposes.
The Credit Agreement also permits (i) a sub-limit for upincludes the ability to $1.0 billion under the Unsecured Revolving Credit Facility to be borrowedborrow in certain currencies other than U.S. dollars (ii)and has a sub-limit for swing line loansmaturity date of up to $75.0 million under the Unsecured Revolving Credit Facility, and (iii) a sub-limit for the issuance of letters of credit under the Unsecured Revolving Credit Facility in an aggregate amount not to exceed $50.0 million.February 20, 2025. The aggregate principal amount (of revolving and term loans) available under the Senior Unsecured Credit AgreementFacility may be increased up to an amount not to exceed the U.S. dollar equivalent of $2.35$2.75 billion, and may be allocated as an increase to the Unsecured Revolving Credit Facility, the Amended Term Loan, or the Delayed Draw Term Loan, or if the Amended Term Loan has been terminated, an add-on term loan, in each case subject to the conditions to increase providedset forth in our Credit Agreement, as described above.
In April 2022, we entered into a Second Amendment to the Credit Agreement. In connection withAgreement to increase the amendmentTerm Loan to £270.0 million and restatementthe Delayed Draw Term Loan to €215.0 million, thereby increasing the total capacity of our Senior Unsecured Credit Facility we capitalized deferred financing costs totaling $8.5 million, which is being amortized to Interest expense overapproximately $2.4 billion. There were no other changes to the remaining terms of our Credit Agreement. We used the approximately $300 million of proceeds from this increase in the capacity of our Unsecured Term Loans to partially repay amounts outstanding under our Unsecured Revolving Credit Facility and Amended Term Loan.Facility.
At September 30, 2017,2022, our Unsecured Revolving Credit Facility had unusedavailable capacity of approximately $1.3 billion excluding(net of amounts reserved for outstanding letters of credit. As of September 30, 2017, our lenders had issuedstandby letters of credit totaling $0.1 million on our behalf in connection with certain contractual obligations, which reduce amounts that may be drawn under our Unsecured Revolving Credit Facility by the same amount.$0.6 million). We also incur aan annual facility fee of 0.20% of the total commitment on our Unsecured Revolving Credit Facility, and a feewhich is included within Interest expense in our consolidated statements of 0.20% on the unused commitments under our Delayed Draw Term Loan prior to the draw or termination of such commitments.income.
The following table presents a summary of our Senior Unsecured Credit Facility (dollars in millions)thousands):
|
| | | | | | | | | | | | |
|
| Interest Rate at
September 30, 2017 (a) |
| Maturity Date at September 30, 2017 |
| Principal Outstanding Balance at |
| Senior Unsecured Credit Facility |
|
|
| September 30, 2017 |
| December 31, 2016 |
| Unsecured Term Loans: |
|
|
|
|
|
|
|
|
Amended Term Loan — borrowing in euros (b) (c) |
| EURIBOR + 1.10% |
| 2/22/2022 |
| $ | 279.0 |
|
| $ | — |
|
Delayed Draw Term Loan — borrowing in euros (c) |
| EURIBOR + 1.10% |
| 2/22/2022 |
| 104.7 |
|
| — |
|
Prior Term Loan — borrowing in U.S. dollars (d) | | N/A | | N/A | | — |
| | 250.0 |
|
| |
|
|
|
|
| 383.7 |
|
| 250.0 |
|
| Unsecured Revolving Credit Facility: |
|
|
|
|
|
|
|
|
|
|
| Unsecured Revolving Credit Facility — borrowing in U.S. dollars |
| LIBOR + 1.00% |
| 2/22/2021 |
| 113.0 |
|
| 390.0 |
|
Unsecured Revolving Credit Facility — borrowing in euros (c) |
| EURIBOR + 1.00% |
| 2/22/2021 |
| 111.2 |
|
| 286.7 |
|
|
|
|
|
|
| 224.2 |
|
| 676.7 |
|
|
|
|
|
|
| $ | 607.9 |
|
| $ | 926.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest Rate at September 30, 2022 (a) | | Maturity Date at September 30, 2022 | | Principal Outstanding Balance at |
| Senior Unsecured Credit Facility | | | | September 30, 2022 | | December 31, 2021 |
| Unsecured Term Loans: | | | | | | | | |
Term Loan — borrowing in British pounds sterling (b) (c) (d) | | SONIA + 0.85% | | 2/20/2025 | | $ | 298,070 | | | $ | 202,183 | |
Delayed Draw Term Loan — borrowing in euros (e) | | EURIBOR + 0.85% | | 2/20/2025 | | 209,582 | | | 109,296 | |
| | | | | | 507,652 | | | 311,479 | |
| Unsecured Revolving Credit Facility: | | | | | | | | |
Borrowing in U.S. dollars (f) | | LIBOR + 0.775% | | 2/20/2025 | | 446,000 | | | — | |
Borrowing in Japanese yen (g) | | TIBOR + 0.775% | | 2/20/2025 | | 16,660 | | | 20,935 | |
| Borrowing in euros | | N/A | | 2/20/2025 | | — | | | 205,001 | |
| Borrowing in British pounds sterling | | N/A | | 2/20/2025 | | — | | | 184,660 | |
| | | | | | 462,660 | | | 410,596 | |
| | | |
| | $ | 970,312 | | | $ | 722,075 | |
__________
| |
(a) | The applicable interest rate at September 30, 2017(a)The applicable interest rate at September 30, 2022 was based on the credit rating for our Senior Unsecured Notes of BBB/Baa1. (b)SONIA means Sterling Overnight Index Average. (c)Interest rate includes both a spread adjustment to the base rate and a credit spread. (d)Balance excludes unamortized discount of $1.6 million and $0.9 million at September 30, 2022 and December 31, 2021, respectively. (e)EURIBOR means Euro Interbank Offered Rate. (f)LIBOR means London Interbank Offered Rate. (g)TIBOR means Tokyo Interbank Offered Rate.
W. P. Carey 9/30/2022 10-Q– 35
Notes to Consolidated Financial Statements (Unaudited) Senior Unsecured Senior Notes of BBB/Baa2. |
| |
(b) | Balance excludes unamortized deferred financing costs of $0.2 million and unamortized discount of $1.3 million at September 30, 2017. |
| |
(c) | EURIBOR means Euro Interbank Offered Rate. |
| |
(d) | Balance excludes unamortized deferred financing costs of less than $0.1 million at December 31, 2016. |
Unsecured Senior Notes
As set forth in the table below, we have euro and U.S. dollar-denominated senior unsecured senior notes outstanding with an aggregate principal balance outstanding of $2.5$5.7 billion at September 30, 2017. We refer to these notes collectively as the2022 (the “Senior Unsecured Senior Notes. Notes”).
On January 19, 2017,September 28, 2022, we completed a public offeringprivate placement of €500.0(i) €150.0 million of 2.25%3.41% Senior Notes at a price of 99.448% of par value, issued by our wholly owned subsidiary, WPC Eurobond B.V.,due 2029, which are guaranteed by us. These 2.25% Senior Notes have a 7.5-year7-year term and are scheduled to mature on July 19, 2024.September 28, 2029, and (ii) €200 million of 3.70% Senior Notes due 2032, which have a 10-year term and are scheduled to mature on September 28, 2032.
We redeemed the €500.0 million of 2.0% Senior Notes due 2023 in March 2021. In connection with this redemption, we paid a “make-whole” amount of $26.2 million (based on the exchange rate of the euro as of the date of redemption) and recognized a loss on extinguishment of $28.2 million, which is included within Other gains and (losses) on our consolidated statements of income for the nine months ended September 30, 2021.
|
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| W. P. Carey 9/30/2017 10-Q– 37
|
Notes to Consolidated Financial Statements (Unaudited)
Interest on the Senior Unsecured Senior Notes is payable annually in arrears for our euro-denominated senior notes and semi-annually for U.S. dollar-denominated senior notes. The Senior Unsecured Senior Notes can be redeemed at par within three months of their respective maturities, or we can call the notes at any time for the principal, accrued interest, and a make-whole amount based upon the applicable government bond yield plus 3020 to 35 basis points. The following table presents a summary of our Senior Unsecured Senior Notes outstanding at September 30, 20172022 (currency in millions)thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Original Issue Discount | | Effective Interest Rate | | | | | | Principal Outstanding Balance at |
Unsecured Senior Notes, net (a) | | Issue Date | | Principal Amount | | Price of Par Value | | | | Coupon Rate | | Maturity Date | | September 30, 2017 | | December 31, 2016 |
| 2.0% Senior Notes | | 1/21/2015 | | € | 500.0 |
| | 99.220 | % | | $ | 4.6 |
| | 2.107 | % | | 2.0 | % | | 1/20/2023 | | $ | 590.3 |
| | $ | 527.1 |
|
| 4.6% Senior Notes | | 3/14/2014 | | $ | 500.0 |
| | 99.639 | % | | $ | 1.8 |
| | 4.645 | % | | 4.6 | % | | 4/1/2024 | | 500.0 |
| | 500.0 |
|
| 2.25% Senior Notes | | 1/19/2017 | | € | 500.0 |
| | 99.448 | % | | $ | 2.9 |
| | 2.332 | % | | 2.25 | % | | 7/19/2024 | | 590.3 |
| | — |
|
| 4.0% Senior Notes | | 1/26/2015 | | $ | 450.0 |
| | 99.372 | % | | $ | 2.8 |
| | 4.077 | % | | 4.0 | % | | 2/1/2025 | | 450.0 |
| | 450.0 |
|
| 4.25% Senior Notes | | 9/12/2016 | | $ | 350.0 |
| | 99.682 | % | | $ | 1.1 |
| | 4.290 | % | | 4.25 | % | | 10/1/2026 | | 350.0 |
| | 350.0 |
|
| | | | | | | | | | | | | | | | | $ | 2,480.6 |
| | $ | 1,827.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Principal Amount | | Coupon Rate | | Maturity Date | | Principal Outstanding Balance at |
Senior Unsecured Notes, net (a) | | Issue Date | | | | | September 30, 2022 | | December 31, 2021 |
| 4.6% Senior Notes due 2024 | | 3/14/2014 | | $ | 500,000 | | | 4.6 | % | | 4/1/2024 | | $ | 500,000 | | | $ | 500,000 | |
| 2.25% Senior Notes due 2024 | | 1/19/2017 | | € | 500,000 | | | 2.25 | % | | 7/19/2024 | | 487,400 | | | 566,300 | |
| 4.0% Senior Notes due 2025 | | 1/26/2015 | | $ | 450,000 | | | 4.0 | % | | 2/1/2025 | | 450,000 | | | 450,000 | |
| 2.250% Senior Notes due 2026 | | 10/9/2018 | | € | 500,000 | | | 2.250 | % | | 4/9/2026 | | 487,400 | | | 566,300 | |
| 4.25% Senior Notes due 2026 | | 9/12/2016 | | $ | 350,000 | | | 4.25 | % | | 10/1/2026 | | 350,000 | | | 350,000 | |
| 2.125% Senior Notes due 2027 | | 3/6/2018 | | € | 500,000 | | | 2.125 | % | | 4/15/2027 | | 487,400 | | | 566,300 | |
| 1.350% Senior Notes due 2028 | | 9/19/2019 | | € | 500,000 | | | 1.350 | % | | 4/15/2028 | | 487,400 | | | 566,300 | |
| 3.850% Senior Notes due 2029 | | 6/14/2019 | | $ | 325,000 | | | 3.850 | % | | 7/15/2029 | | 325,000 | | | 325,000 | |
| 3.41% Senior Notes due 2029 | | 9/28/2022 | | € | 150,000 | | | 3.41 | % | | 9/28/2029 | | 146,220 | | | — | |
| 0.950% Senior Notes due 2030 | | 3/8/2021 | | € | 525,000 | | | 0.950 | % | | 6/1/2030 | | 511,770 | | | 594,615 | |
| 2.400% Senior Notes due 2031 | | 10/14/2020 | | $ | 500,000 | | | 2.400 | % | | 2/1/2031 | | 500,000 | | | 500,000 | |
| 2.450% Senior Notes due 2032 | | 10/15/2021 | | $ | 350,000 | | | 2.450 | % | | 2/1/2032 | | 350,000 | | | 350,000 | |
| 3.70% Senior Notes due 2032 | | 9/28/2022 | | € | 200,000 | | | 3.70 | % | | 9/28/2032 | | 194,960 | | | — | |
| 2.250% Senior Notes due 2033 | | 2/25/2021 | | $ | 425,000 | | | 2.250 | % | | 4/1/2033 | | 425,000 | | | 425,000 | |
| | | | | | | | | | $ | 5,702,550 | | | $ | 5,759,815 | |
__________
| |
(a) | Aggregate balance excludes unamortized deferred financing costs totaling $15.0 million and $12.1 million, and unamortized discount totaling $10.2 million and $7.8 million, at September 30, 2017 and December 31, 2016, respectively. |
(a)Aggregate balance excludes unamortized deferred financing costs totaling $26.3 million and $28.7 million, and unamortized discount totaling $24.4 million and $29.2 million, at September 30, 2022 and December 31, 2021, respectively.
Proceeds from the issuances of each of these notes were used primarily to partially pay down the amounts then outstanding under the unsecured revolving credit facility that we had in place at that time.
In connection with the offeringprivate placement of the 2.25%3.41% Senior Notes due 2029 and the €200 million of 3.70% Senior Notes due 2032 in January 2017,September 2022, we incurred financing costs totaling $4.0$2.3 million during the nine months ended September 30, 2017,2022, which are included in the Senior Unsecured Senior Notes, net in the consolidated financial statements and are being amortized to Interest expense over the term of the 2.25%their respective Senior Notes.
Covenants
The Senior Unsecured Credit Facility, as amended, andAgreement, each of the Senior Unsecured Senior Notes, and certain of our non-recourse mortgage loan agreements include customary financial maintenance covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. The Senior Unsecured Credit Facility also contains various customary affirmative and negativeThere have been no significant changes in our debt covenants applicable to us and our subsidiaries, subject to materiality and other qualifications, baskets, and exceptions as outlinedfrom what was disclosed in the Credit Agreement.2021 Annual Report. We were in compliance with all of these covenants at September 30, 2017.2022.
We may make unlimited Restricted Payments (as defined in the Credit Agreement), as long as no non-payment default or financial covenant default has occurred before, or would on a pro forma basis occur as a result of, the Restricted Payment. In addition, we may make Restricted Payments in an amount requiredW. P. Carey 9/30/2022 10-Q– 36
Notes to (i) maintain our REIT status and (ii) as a result of that status, not pay federal or state income or excise tax, as long as the loans under the Credit Agreement have not been accelerated and no bankruptcy or event of default has occurred.Consolidated Financial Statements (Unaudited)
Obligations under the Senior Unsecured Credit Facility may be declared immediately due and payable upon the occurrence of certain events of default as defined in the Credit Agreement, including failure to pay any principal when due and payable, failure to pay interest within five business days after becoming due, failure to comply with any covenant, representation or condition of any loan document, any change of control, cross-defaults, and certain other events as set forth in the Credit Agreement, with grace periods in some cases.
Non-Recourse Mortgages
At September 30, 2017,2022, the weighted-average interest rate for our total non-recourse mortgage notes payable bore interest at fixed annual rates ranging from 2.0% to 7.8%was 4.3% (fixed-rate and variable contractual annual rates ranging from 0.9% to 6.9%variable-rate non-recourse mortgage notes payable were 4.4% and 3.9%, respectively), with maturity dates ranging from December 2017October 2022 to June 2027.April 2039.
CPA:18 Merger
In January 2017,connection with the CPA:18 Merger on August 1, 2022 (Note 3), we assumed property-level debt comprised of non-recourse mortgage loans with fair values totaling $900.2 million and recorded an aggregate fair market value net discount of $13.1 million. The fair market value net discount will be amortized to interest expense over the remaining lives of the related loans. These non-recourse mortgage loans had a weighted-average annual interest rate of 5.1% on the merger date.
Repayments
During the nine months ended September 30, 2022, we (i) prepaid a non-recourse mortgage loan of $10.4 million and (ii) repaid two international non-recourse mortgage loans at maturity with an aggregate principal balance of approximately $243.8$35.6 million. We recognized a net gain on extinguishment of debt of $1.3 million encumbering a German investment, comprised of certain properties leased to Hellweg Die Profi-Baumärkte GmbH & Co. KG, or the Hellweg 2 Portfolio,on these repayments, which is jointly owned withincluded within Other gains and (losses) on our affiliate, CPA®:17 – Global. In connection with this repayment, CPA®:17 – Global contributed $90.3 million, which was accounted for as a contribution from a noncontrolling interest. Amounts are based on the exchange rateconsolidated statements of the euro as of the date of repayment.income. The weighted-average
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| W. P. Carey 9/30/2017 10-Q– 38
|
Notes to Consolidated Financial Statements (Unaudited)
interest rate for these non-recourse mortgage loans on the datetheir respective dates of repayment was 5.4%4.6%.
During the nine months ended September 30, 2017,2021, we (i) prepaid non-recourse mortgage loans totaling $427.5 million and (ii) repaid additionalnon-recourse mortgage loans at maturity with an aggregate principal balance of approximately $19.3$27.5 million.
During the nine months ended September 30, 2017, we prepaid non-recourse mortgage loans We recognized an aggregate net loss on extinguishment of debt of $32.0 million on these repayments, primarily comprised of prepayment penalties totaling $157.4$32.1 million, including $38.4 million encumbering properties that were disposedwhich is included within Other gains and (losses) on our consolidated statements of during the nine months ended September 30, 2017 (Note 15). Amounts are based on the exchange rate of the related foreign currency as of the date of repayment, as applicable.income. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of prepaymentrepayment was 5.5%5.1%. In connection with these payments, we recognized a gain on extinguishment of debt of $0.8 million during the nine months ended September 30, 2017, which was included in Other income and (expenses) in the consolidated financial statements.
Foreign Currency Exchange Rate Impact
During the nine months ended September 30, 2017,2022, the U.S. dollar weakenedstrengthened against the euro, resulting in an aggregate increasedecrease of $204.7$579.1 million in the aggregate carrying values of our Non-recourse mortgages, net, Senior Unsecured Credit Facility, and Senior Unsecured Senior Notes, net from December 31, 20162021 to September 30, 2017.2022.
Scheduled Debt Principal Payments
Scheduled debt principal payments during the remainderas of 2017, each of the next four calendar years following December 31, 2017, and thereafter through 2027September 30, 2022 are as follows (in thousands):
| | | | | | | | |
| Years Ending December 31, | | Total |
| 2022 (remainder) | | $ | 96,744 | |
| 2023 | | 428,242 | |
| 2024 | | 1,161,427 | |
| 2025 | | 1,769,956 | |
| 2026 | | 959,287 | |
| Thereafter through 2039 | | 3,431,674 | |
| Total principal payments | | 7,847,330 | |
| Unamortized discount, net | | (37,597) | |
| Unamortized deferred financing costs | | (26,390) | |
| Total | | $ | 7,783,343 | |
Certain amounts in the table above are based on the applicable foreign currency exchange rate at September 30, 2022.
W. P. Carey 9/30/2022 10-Q– 37
|
| | | | |
| Years Ending December 31, | | Total (a) |
| 2017 (remainder) | | $ | 40,784 |
|
| 2018 | | 278,163 |
|
| 2019 | | 99,384 |
|
| 2020 | | 221,547 |
|
| 2021 | | 384,004 |
|
| Thereafter through 2027 | | 3,320,040 |
|
| Total principal payments | | 4,343,922 |
|
| Unamortized deferred financing costs | | (16,210 | ) |
Unamortized discount, net (b) | | (12,874 | ) |
| Total | | $ | 4,314,838 |
|
__________Notes to Consolidated Financial Statements (Unaudited)
| |
(a) | Certain amounts are based on the applicable foreign currency exchange rate at September 30, 2017. |
| |
(b) | Represents the unamortized discount on the Unsecured Senior Notes of $10.2 million in aggregate, unamortized discount on the Unsecured Term Loans of $1.3 million, and unamortized discount of $1.4 million in aggregate resulting from the assumption of property-level debt in connection with both the CPA®:15 Merger and the CPA®:16 Merger (Note 1). |
Note 11.12. Commitments and Contingencies
At September 30, 2017,2022, 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.
Note 12. Restructuring and Other Compensation
Expenses Recorded During 2017
On June 15, 2017, our Board approved a plan to exit all non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial, as of June 30, 2017 (Note 1). As a result, we incurred non-recurring charges to exit our fundraising activities, consisting primarily of severance costs. During the nine months ended September 30, 2017, we recorded $8.2 million of severance and benefits and $0.9 million of other related costs, which are all included in Restructuring and other compensation in the consolidated financial statements.
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| W. P. Carey 9/30/2017 10-Q– 39
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Notes to Consolidated Financial Statements (Unaudited)
Expenses Recorded During 2016
In connection with the resignation of our then-chief executive officer, Trevor P. Bond, we and Mr. Bond entered into a letter agreement, dated February 10, 2016. Under the terms of the agreement, subject to certain conditions, Mr. Bond is entitled to receive the severance benefits provided for in his employment agreement and, subject to satisfaction of applicable performance conditions and proration, vesting of his outstanding unvested PSUs in accordance with their terms. In addition, the portion of his previously granted RSUs that were scheduled to vest on February 15, 2016, which would have been forfeited upon separation pursuant to their terms, were allowed to vest on that date. In connection with the separation agreement, we recorded $5.1 million of severance-related expenses during the nine months ended September 30, 2016, which are included in Restructuring and other compensation in the consolidated financial statements.
In February 2016, we entered into an agreement with Catherine D. Rice, our former chief financial officer, in connection with the termination of her employment, which provides for the continued vesting of her outstanding RSUs and PSUs pursuant to their terms as though her employment had continued through their respective vesting dates. In connection with the modification of these award terms, we recorded incremental stock-based compensation expense of $2.4 million during the nine months ended September 30, 2016, which is included in Restructuring and other compensation in the consolidated financial statements.
In March 2016, as part of a cost savings initiative, we undertook a reduction in force, or RIF, and realigned and consolidated certain positions within the company, resulting in employee headcount reductions. As a result of these reductions in headcount and the separations described above, during the nine months ended September 30, 2016, we recorded $8.2 million of severance and benefits, $3.2 million of stock-based compensation, and $0.5 million of other related costs, which are all included in Restructuring and other compensation in the consolidated financial statements.
As of September 30, 2017, the accrued liability for these severance obligations recorded during 2016 and 2017 was $4.8 million, which is included within Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.
Note 13. Stock-Based Compensation and Equity
Stock-Based Compensation
In June 2017, our shareholders approved the 2017 Share Incentive Plan, which replaced our predecessor plans for employees, the 2009 Share Incentive Plan, and for non-employee directors, the 2009 Non-Employee Directors’ Incentive Plan. No further awards will be granted under those predecessorWe maintain several stock-based compensation plans, which are more fully described in the 20162021 Annual Report. The 2017 Share Incentive Plan authorizesThere have been no significant changes to the issuanceterms and conditions of up to 4,000,000 sharesany of our common stock, reduced by the number of shares (279,728) that were subject to awards granted under the 2009 Share Incentive Plan and the 2009 Non-Employee Directors’ Incentive Plan after December 31, 2016 and before the effective date of the 2017 Share Incentive Plan, which was June 15, 2017. The 2017 Share Incentive Plan provides for the grant of various stock- and cash-based awards, including (i) share options, (ii) RSUs, (iii) PSUs, (iv) RSAs, and (v) dividend equivalent rights.
Duringstock-based compensation plans or arrangements during the nine months ended September 30, 2017 and 2016, we2022. We recorded stock-based compensation expense of $14.6$5.5 million and $18.2$4.4 million during the three months ended September 30, 2022 and 2021, respectively, of which $3.2and $23.1 million was included in Restructuring and other compensation for$18.8 million during the nine months ended September 30, 2016 (Note 12).2022 and 2021, respectively, which was included in Stock-based compensation expense in the consolidated financial statements.
Restricted and Conditional Awards
Nonvested restricted share awards (“RSAs”), restricted share units (“RSUs”), and performance share units (“PSUs”) at September 30, 2022 and changes during the nine months ended September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| RSA and RSU Awards | | PSU Awards |
| Shares | | Weighted-Average
Grant Date
Fair Value | | Shares | | Weighted-Average
Grant Date
Fair Value |
| Nonvested at January 1, 2022 | 306,994 | | | $ | 71.21 | | | 398,255 | | | $ | 86.86 | |
Granted (a) | 229,497 | | | 80.35 | | | 144,311 | | | 104.97 | |
Vested (b) | (154,028) | | | 72.80 | | | (165,615) | | | 92.16 | |
| Forfeited | (5,546) | | | 76.44 | | | — | | | — | |
Adjustment (c) | — | | | — | | | 84,248 | | | 88.78 | |
Nonvested at September 30, 2022 (d) | 376,917 | | | $ | 76.04 | | | 461,199 | | | $ | 92.00 | |
__________
(a)The grant date fair value of RSAs and RSUs reflect our stock price on the date of grant on a one-for-one basis. The grant date fair value of PSUs was determined utilizing (i) a Monte Carlo simulation model to generate an estimate of our future stock price over the three-year performance period and (ii) future financial performance projections. To estimate the fair value of PSUs granted during the nine months ended September 30, 2022, we used a risk-free interest rate of 1.2%, an expected volatility rate of 36.7%, and assumed a dividend yield of zero.
(b)The grant date fair value of shares vested during the nine months ended September 30, 2022 was $26.5 million. Employees have the option to take immediate delivery of the shares upon vesting or defer receipt to a future date pursuant to previously made deferral elections. At September 30, 2022 and December 31, 2021, we had an obligation to issue 1,181,947 and 1,104,020 shares, respectively, of our common stock underlying such deferred awards, which is recorded within Total stockholders’ equity as a Deferred compensation obligation of $57.0 million and $49.8 million, respectively.
(c)Vesting and payment of the PSUs is conditioned upon certain company and/or market performance goals being met during the relevant three-year performance period. The ultimate number of PSUs to be vested will depend on the extent to which the performance goals are met and can range from zero to three times the original awards. As a result, we recorded adjustments at September 30, 2022 to reflect the number of shares expected to be issued when the PSUs vest.
(d)At September 30, 2022, total unrecognized compensation expense related to these awards was approximately $39.2 million, with an aggregate weighted-average remaining term of 2.0 years.
W. P. Carey 9/30/2022 10-Q– 38
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| W. P. Carey 9/30/2017 10-Q– 40
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Notes to Consolidated Financial Statements (Unaudited)
Restricted and Conditional Awards
Nonvested RSAs, RSUs, and PSUs at September 30, 2017 and changes during the nine months ended September 30, 2017 were as follows:
|
| | | | | | | | | | | | | |
| | RSA and RSU Awards | | PSU Awards |
| | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average
Grant Date
Fair Value |
| Nonvested at January 1, 2017 | 356,865 |
| | $ | 61.63 |
| | 310,018 |
| | $ | 73.80 |
|
Granted (a) | 193,467 |
| | 62.19 |
| | 107,934 |
| | 75.39 |
|
Vested (b) | (169,560 | ) | | 62.77 |
| | (132,412 | ) | | 74.21 |
|
| Forfeited | (41,957 | ) | | 61.09 |
| | (45,258 | ) | | 76.91 |
|
Adjustment (c) | — |
| | — |
| | 28,271 |
| | 63.24 |
|
Nonvested at September 30, 2017 (d) | 338,815 |
| | $ | 61.45 |
| | 268,553 |
| | $ | 75.18 |
|
__________
| |
(a) | The grant date fair value of RSAs and RSUs reflect our stock price on the date of grant on a one-for-one basis. The grant date fair value of PSUs was determined utilizing (i) a Monte Carlo simulation model to generate an estimate of our future stock price over the three-year performance period and (ii) future financial performance projections. To estimate the fair value of PSUs granted during the nine months ended September 30, 2017, we used a risk-free interest rate of 1.5%, an expected volatility rate of 17.1%, and assumed a dividend yield of zero. |
| |
(b) | The total fair value of shares vested during the nine months ended September 30, 2017 was $20.5 million. Employees have the option to take immediate delivery of the shares upon vesting or defer receipt to a future date pursuant to previously made deferral elections. At September 30, 2017 and December 31, 2016, we had an obligation to issue 1,135,563 and 1,217,274 shares, respectively, of our common stock underlying such deferred awards, which is recorded within Total stockholders’ equity as a Deferred compensation obligation of $46.7 million and $50.2 million, respectively. |
| |
(c) | Vesting and payment of the PSUs is conditioned upon certain company and/or market performance goals being met during the relevant three-year performance period. The ultimate number of PSUs to be vested will depend on the extent to which the performance goals are met and can range from zero to three times the original awards. As a result, we recorded adjustments to reflect the number of shares expected to be issued when the PSUs vest. |
| |
(d) | At September 30, 2017, total unrecognized compensation expense related to these awards was approximately $21.4 million, with an aggregate weighted-average remaining term of 1.9 years. |
During the three and nine months ended September 30, 2017, 2,475 and 134,709 stock options, respectively, were exercised with an aggregate intrinsic value of less than $0.1 million and $4.0 million, respectively. At September 30, 2017, there were 10,324 stock options outstanding, all of which were exercisable and, if not exercised, will expire on December 31, 2017.
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| W. P. Carey 9/30/2017 10-Q– 41
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Notes to Consolidated Financial Statements (Unaudited)
Earnings Per Share
Under current authoritative guidance for determining earnings per share, all nonvested 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. Certain of our nonvested RSUs and RSAs contain rights to receive non-forfeitable distribution equivalents or distributions, respectively, 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 nonvested participating RSUs and RSAs from the numerator and such nonvested shares in the denominator. The following table summarizes basic and diluted earnings (in thousands, except share amounts)(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
| Net income — basic and diluted | $ | 104,928 | | | $ | 138,547 | | | $ | 389,601 | | | $ | 310,426 | |
| | | | | | | |
| Weighted-average shares outstanding — basic | 203,093,553 | | | 185,422,639 | | | 196,382,433 | | | 180,753,115 | |
| Effect of dilutive securities | 1,004,563 | | | 589,839 | | | 882,076 | | | 570,013 | |
| Weighted-average shares outstanding — diluted | 204,098,116 | | | 186,012,478 | | | 197,264,509 | | | 181,323,128 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to W. P. Carey | $ | 80,278 |
| | $ | 110,943 |
| | $ | 202,080 |
| | $ | 220,043 |
|
| Net income attributable to nonvested participating RSUs and RSAs | (239 | ) | | (386 | ) | | (600 | ) | | (766 | ) |
| Net income — basic and diluted | $ | 80,039 |
| | $ | 110,557 |
| | $ | 201,480 |
| | $ | 219,277 |
|
| | | | | | | | |
| Weighted-average shares outstanding — basic | 108,019,292 |
| | 107,221,668 |
| | 107,751,672 |
| | 106,493,145 |
|
| Effect of dilutive securities | 124,402 |
| | 246,361 |
| | 195,818 |
| | 360,029 |
|
| Weighted-average shares outstanding — diluted | 108,143,694 |
| | 107,468,029 |
| | 107,947,490 |
| | 106,853,174 |
|
For the three and nine months ended September 30, 20172022 and 2016, there were no2021, potentially dilutive securities excluded from the computation of diluted earnings per share.share were insignificant.
At-The-Market Equity OfferingATM Program
On March 1, 2017,May 2, 2022, we filedestablished a prospectus supplementcontinuous “at-the-market” offering program (“ATM Program”) with the SECa syndicate of banks, pursuant to which we may offer and sell shares of our common stock from time to time, up tohaving an aggregate gross sales price of $400.0 million,up to $1.0 billion may be sold (i) directly through a continuous “at-the-market,” or ATM, offering program with a consortium ofto the banks acting as sales agents. Onagents or as principal for their own accounts or (ii) participating banks or their affiliates acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement (our “ATM Forwards”). Effective as of that date, we also terminated a prior ATM programProgram that was established on June 3, 2015, under which we could also offer and sellAugust 9, 2019.
Our prior ATM Program is discussed in the 2021 Annual Report. The following table sets forth certain information regarding the issuance of shares of our common stock upunder our prior ATM Program during the periods presented (net proceeds in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Shares of common stock issued | — | | | — | | | 2,740,295 | | | 4,225,624 | |
| Weighted-average price per share | $ | — | | | $ | — | | | $ | 80.79 | | | $ | 72.50 | |
| Net proceeds | $ | — | | | $ | — | | | $ | 218,081 | | | $ | 302,506 | |
Forward Equity
We expect to an aggregate gross salessettle the ATM Forwards in full on or prior to the maturity date of each ATM Forward via physical delivery of the outstanding shares of common stock in exchange for cash proceeds. However, subject to certain exceptions, we may also elect to cash settle or net share settle all or any portion of our obligations under any ATM Forwards. The forward sale price that we will receive upon physical settlement of $400.0 million. During the threeATM Forwards will be (i) subject to adjustment on a daily basis based on a floating interest rate factor equal to a specified daily rate less a spread (i.e., if the specified daily rate is less than the spread on any day, the interest rate factor will result in a daily reduction of the applicable forward sale price) and nine months ended September 30, 2017, we issued 15,500 and 345,253(ii) decreased based on amounts related to expected dividends on shares respectively, of our common stock underduring the currentterm of the ATM program at a weighted-average price of $67.05Forwards.
We determined that our ATM Forwards meet the criteria for equity classification and $67.78 per share, respectively, for net proceeds of $0.9 million and $22.8 million, respectively. During the three and nine months ended September 30, 2016, we issued 968,535 and 1,249,836 shares, respectively, of our common stock under the prior ATM program at a weighted-average price of $68.54 and $68.52 per share, respectively, for net proceeds of $65.2 million and $84.1 million, respectively. As of September 30, 2017, $376.6 million remained available for issuance under our current ATM program.
Acquisition of Noncontrolling Interest
On May 24, 2017, we acquired the remaining 25% interest in an international jointly owned investment (which we already consolidated)are therefore exempt from the noncontrolling interest holders for €2, bringing our ownership interest to 100%. No gain or loss was recognized on the transaction.derivative accounting. We recorded an adjustment of approximately $1.8 millionthe ATM Forwards at fair value at inception, which we determined to Additional paid-in capital in our consolidated statement ofbe zero. Subsequent changes to fair value are not required under equity for the nine months ended September 30, 2017 related to the difference between the consideration transferred and the carrying value of the noncontrolling interest related to this investment. The property owned by the investment was sold on May 26, 2017 and we recognized a gain on sale of less than $0.1 million (Note 15).classification.
Redeemable Noncontrolling Interest
We account for the noncontrolling interest in our subsidiary, W. P. Carey International, LLC, or WPCI, held by a third party as a redeemable noncontrolling interest, because, pursuant to a put option held by the third party, we had an obligation to redeem the interest at fair value, subject to certain conditions. This obligation was required to be settled in shares of our common stock. On October 1, 2013, we received a notice from the holder of the noncontrolling interest in WPCI regarding the exercise of the put option, pursuant to which we were required to purchase the third party’s 7.7% interest in WPCI. Pursuant to the terms of the9/30/2022 10-Q– 39
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Notes to Consolidated Financial Statements (Unaudited)
In addition, we refer to our three forward equity offerings presented below as the June 2020 Equity Forwards, June 2021 Equity Forwards, and August 2021 Equity Forwards (collectively, the “Equity Forwards”), which are discussed in the 2021 Annual Report. Our ATM Forwards are also presented below (gross offering proceeds at closing in thousands):
related put agreement, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agreement Date (a) | | Shares Offered (b) | | Average Gross Offering Price | | Average Gross Offering Proceeds at Closing | | Outstanding Shares as of September 30, 2022 |
June 2020 Equity Forwards (c) | 6/17/2020 | | 5,462,500 | | $ | 70.00 | | | $ | 382,375 | | | — |
June 2021 Equity Forwards (d) | 6/7/2021 | | 6,037,500 | | 75.30 | | | 454,624 | | | — |
| August 2021 Equity Forwards | 8/9/2021 | | 5,175,000 | | 78.00 | | | 403,650 | | | 2,587,500 |
ATM Forwards (e) | 5/2/2022 | | 5,538,037 | | 84.81 | | | 469,697 | | | 5,538,037 |
| | | | | | | | | 8,125,537 |
__________
(a)We expect to settle the value of that interest was determined based on a third-party valuation as of October 31, 2013, which is the endEquity Forwards in full within 18 months of the month thatrespective agreement dates via physical delivery of the put option was exercised. In March 2016, we issued 217,011outstanding shares of our common stock in exchange for cash proceeds, although we may elect cash settlement or net share settlement for all or a portion of our obligations under the Equity Forwards, subject to certain conditions.
(b)Includes 712,500, 787,500, and 675,000 shares of common stock purchased by certain underwriters in connection with the holderJune 2020 Equity Forwards, June 2021 Equity Forwards, and August 2021 Equity Forwards, respectively, upon the exercise of 30-day options to purchase additional shares.
(c)All remaining outstanding shares were settled during the three months ended June 30, 2021.
(d)All remaining outstanding shares were settled during the three months ended December 31, 2021.
(e)We sold shares under our ATM Forwards during the second and third quarters of 2022. We did not settle any of the redeemable noncontrolling interest, which had a value of $13.4 million at the date of issuance, pursuant to a formula set forth in the put agreement. Through the date of this Report, the third party hasshares sold and therefore did not formally transferred his interests in WPCI to us pursuant to the put agreement because of a dispute regardingreceive any amounts that may still be owed to him.proceeds from such sales.
The following table presents a reconciliationsets forth certain information regarding the settlement of redeemable noncontrolling interest (inour Equity Forwards during the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Shares of common stock delivered | 1,337,500 | | | 2,012,500 | | | 1,337,500 | | | 6,535,709 | |
| Net proceeds | $ | 97,456 | | | $ | 147,363 | | | $ | 97,456 | | | $ | 457,227 | |
W. P. Carey 9/30/2022 10-Q– 40
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Beginning balance | $ | 965 |
| | $ | 14,944 |
|
| Distributions | — |
| | (13,418 | ) |
| Redemption value adjustment | — |
| | (561 | ) |
| Ending balance | $ | 965 |
| | $ | 965 |
|
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Gains and (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and (Losses) on Investments | | Total |
| Beginning balance | $ | 43,693 | | | $ | (309,850) | | | $ | — | | | $ | (266,157) | |
| Other comprehensive loss before reclassifications | 28,531 | | | (56,053) | | | — | | | (27,522) | |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Non-operating income | (4,987) | | | — | | | — | | | (4,987) | |
| Interest expense | 66 | | | — | | | — | | | 66 | |
| Total | (4,921) | | | — | | | — | | | (4,921) | |
| Net current period other comprehensive loss | 23,610 | | | (56,053) | | | — | | | (32,443) | |
| Net current period other comprehensive loss attributable to noncontrolling interests | — | | | 543 | | | — | | | 543 | |
| Ending balance | $ | 67,303 | | | $ | (365,360) | | | $ | — | | | $ | (298,057) | |
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2021 |
| | Gains and Losses on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and Losses on Marketable Securities | | Total | | Gains and (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and (Losses) on Investments | | Total |
| Beginning balance | $ | 24,636 |
| | $ | (267,868 | ) | | $ | (416 | ) | | $ | (243,648 | ) | Beginning balance | $ | (1,062) | | | $ | (228,898) | | | $ | — | | | $ | (229,960) | |
| Other comprehensive income before reclassifications | (8,367 | ) | | 25,417 |
| | 66 |
| | 17,116 |
| |
| Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | 12,932 | | | (20,400) | | | — | | | (7,468) | |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | | Amounts reclassified from accumulated other comprehensive loss to: | |
Gain on sale of real estate, net of tax (Note 15) | — |
| | 3,562 |
| | — |
| | 3,562 |
| |
| Interest expense | 286 |
| | — |
| | — |
| | 286 |
| Interest expense | 196 | | | — | | | — | | | 196 | |
| Other income and (expenses) | (2,189 | ) | | — |
| | — |
| | (2,189 | ) | |
| Non-operating income | | Non-operating income | (14) | | | — | | | — | | | (14) | |
| Total | (1,903 | ) | | 3,562 |
| | — |
| | 1,659 |
| Total | 182 | | | — | | | — | | | 182 | |
| Net current period other comprehensive income | (10,270 | ) | | 28,979 |
| | 66 |
| | 18,775 |
| |
| Net current period other comprehensive gain attributable to noncontrolling interests | 8 |
| | (4,716 | ) | | — |
| | (4,708 | ) | |
| Net current period other comprehensive loss | | Net current period other comprehensive loss | 13,114 | | | (20,400) | | | — | | | (7,286) | |
| | Ending balance | $ | 14,374 |
| | $ | (243,605 | ) | | $ | (350 | ) | | $ | (229,581 | ) | Ending balance | $ | 12,052 | | | $ | (249,298) | | | $ | — | | | $ | (237,246) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Gains and (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and (Losses) on Investments | | Total |
| Beginning balance | $ | 16,347 | | | $ | (256,705) | | | $ | 18,688 | | | $ | (221,670) | |
| Other comprehensive loss before reclassifications | 61,054 | | | (109,198) | | | — | | | (48,144) | |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Non-operating income | (10,450) | | | — | | | — | | | (10,450) | |
| Interest expense | 352 | | | — | | | — | | | 352 | |
Other gains and (losses) (Note 9) | — | | | — | | | (18,688) | | | (18,688) | |
| Total | (10,098) | | | — | | | (18,688) | | | (28,786) | |
| Net current period other comprehensive loss | 50,956 | | | (109,198) | | | (18,688) | | | (76,930) | |
| Net current period other comprehensive loss attributable to noncontrolling interests | — | | | 543 | | | — | | | 543 | |
| Ending balance | $ | 67,303 | | | $ | (365,360) | | | $ | — | | | $ | (298,057) | |
W. P. Carey 9/30/2022 10-Q– 41
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
| | Gains and Losses on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and Losses on Marketable Securities | | Total |
| Beginning balance | $ | 34,744 |
| | $ | (240,985 | ) | | $ | 40 |
| | $ | (206,201 | ) |
| Other comprehensive loss before reclassifications | (1,178 | ) | | (11,824 | ) | | (7 | ) | | (13,009 | ) |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 512 |
| | — |
| | — |
| | 512 |
|
| Other income and (expenses) | (2,427 | ) | | — |
| | — |
| | (2,427 | ) |
| Total | (1,915 | ) | | — |
| | — |
| | (1,915 | ) |
| Net current period other comprehensive loss | (3,093 | ) | | (11,824 | ) | | (7 | ) | | (14,924 | ) |
| Net current period other comprehensive gain attributable to noncontrolling interests | 17 |
| | (218 | ) | | — |
| | (201 | ) |
| Ending balance | $ | 31,668 |
| | $ | (253,027 | ) | | $ | 33 |
| | $ | (221,326 | ) |
|
| |
| W. P. Carey 9/30/2017 10-Q– 43
|
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Gains and (Losses) on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and (Losses) on Investments | | Total |
| Beginning balance | $ | (18,937) | | | $ | (220,969) | | | $ | — | | | $ | (239,906) | |
| Other comprehensive income before reclassifications | 29,737 | | | (28,329) | | | — | | | 1,408 | |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 720 | | | — | | | — | | | 720 | |
| Non-operating income | 553 | | | — | | | — | | | 553 | |
| Total | 1,273 | | | — | | | — | | | 1,273 | |
| Net current period other comprehensive income | 31,010 | | | (28,329) | | | — | | | 2,681 | |
| Net current period other comprehensive income attributable to noncontrolling interests | (21) | | | — | | | — | | | (21) | |
| Ending balance | $ | 12,052 | | | $ | (249,298) | | | $ | — | | | $ | (237,246) | |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | Gains and Losses on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and Losses on Marketable Securities | | Total |
| Beginning balance | $ | 46,935 |
| | $ | (301,330 | ) | | $ | (90 | ) | | $ | (254,485 | ) |
| Other comprehensive income before reclassifications | (25,108 | ) | | 68,124 |
| | (260 | ) | | 42,756 |
|
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
Gain on sale of real estate, net of tax (Note 15) | — |
| | 3,562 |
| | — |
| | 3,562 |
|
| Interest expense | 1,024 |
| | — |
| | — |
| | 1,024 |
|
| Other income and (expenses) | (8,490 | ) | | — |
| | — |
| | (8,490 | ) |
| Total | (7,466 | ) | | 3,562 |
| | — |
| | (3,904 | ) |
| Net current period other comprehensive income | (32,574 | ) | | 71,686 |
| | (260 | ) | | 38,852 |
|
| Net current period other comprehensive gain attributable to noncontrolling interests | 13 |
| | (13,961 | ) | | — |
| | (13,948 | ) |
| Ending balance | $ | 14,374 |
| | $ | (243,605 | ) | | $ | (350 | ) | | $ | (229,581 | ) |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
| | Gains and Losses on Derivative Instruments | | Foreign Currency Translation Adjustments | | Gains and Losses on Marketable Securities | | Total |
| Beginning balance | $ | 37,650 |
| | $ | (209,977 | ) | | $ | 36 |
| | $ | (172,291 | ) |
| Other comprehensive loss before reclassifications | (1,155 | ) | | (41,999 | ) | | (3 | ) | | (43,157 | ) |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 1,578 |
| | — |
| | — |
| | 1,578 |
|
| Other income and (expenses) | (6,422 | ) | | — |
| | — |
| | (6,422 | ) |
| Total | (4,844 | ) | | — |
| | — |
| | (4,844 | ) |
| Net current period other comprehensive loss | (5,999 | ) | | (41,999 | ) | | (3 | ) | | (48,001 | ) |
| Net current period other comprehensive gain attributable to noncontrolling interests | 17 |
| | (1,051 | ) | | — |
| | (1,034 | ) |
| Ending balance | $ | 31,668 |
| | $ | (253,027 | ) | | $ | 33 |
| | $ | (221,326 | ) |
DistributionsDividends Declared
During the third quarter of 2017, we2022, our Board declared a quarterly distributiondividend of $1.0050$1.061 per share, which was paid on October 16, 201714, 2022 to stockholders of record on October 2, 2017, in the aggregate amountas of $107.4 million.September 30, 2022.
During the nine months ended September 30, 2017,2022, we declared distributionsdividends totaling $3.00$3.177 per share in the aggregate amount of $320.3 million.share.
Note 14. Income Taxes
We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2017.annually. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and nine months ended September 30, 20172022 and 2016.2021.
Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. We also own real property in jurisdictions outside the United States
|
| |
| W. P. Carey 9/30/2017 10-Q– 44
|
Notes to Consolidated Financial Statements (Unaudited)
through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. The accompanying consolidated financial statements include an interim tax provision for our TRSs and foreign subsidiaries, as necessary, for the three and nine months ended September 30, 20172022 and 2016. 2021.
Current income tax expense was $3.0$8.2 million and $4.8$9.0 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $11.1$23.2 million and $14.7$26.5 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.
During the second quarter of 2016, we identified and recorded out-of-period adjustments related to adjustments to prior period Deferred income tax returns. This adjustment is reflected as a $3.0 million reduction of our Benefit from income taxes in the consolidated statements of income for the nine months ended September 30, 2016 (Note 2), and is included in current income tax expense for the nine months ended September 30, 2016.
Our TRSs and foreign subsidiaries are subject to U.S. federal, state, and foreign income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely(expense) benefit was less than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether the tax benefit of a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. Deferred tax assets (net of valuation allowance) and liabilities for our TRSs and foreign subsidiaries were recorded, as necessary, as of September 30, 2017 and December 31, 2016. The majority of our deferred tax assets relate to the timing difference between the financial reporting basis and tax basis for stock-based compensation expense. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of the assets acquired in acquisitions in which the tax basis of such assets was not stepped up to fair value for income tax purposes. (Provision for) benefit from income taxes included deferred income tax benefits of $1.2$(0.1) million and $1.6$0.7 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $8.2$1.6 million and $19.2$3.0 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.
W. P. Carey 9/30/2022 10-Q– 42
Notes to Consolidated Financial Statements (Unaudited)
Note 15. Property Dispositions
From time to time, we may decide to sell a property. We have an active capital recycling program, with a goal of extending the average lease term through reinvestment, improving portfolio credit quality through dispositions and acquisitions of assets, increasing the asset criticality factor in our portfolio, and/or executing strategic dispositions of assets. We may make a decisiondecide to dispose of a property when it is vacant as a result of tenants vacating space, tenants electing not to renew their leases, tenant insolvency, or lease rejection in the bankruptcy process. In such cases, we assess whether we can obtain the highest value from the property by selling it, as opposed to re-leasing it. We may also sell a property when we receive an unsolicited offer or negotiate a price for an investment that is consistent with our strategy for that investment. When it is appropriate to do so, we classify the property as an asset held for sale on our consolidated balance sheet. All property dispositions are recorded within our Owned Real Estate segment.segment and are also discussed in Note 5.
2017 2022— During the three and nine months ended September 30, 2017,2022, we sold fivethree and 17 properties, and 11 properties and a parcel of vacant land, respectively, for total proceeds, of $58.7 million and $102.5 million, respectively, net of selling costs, of $55.2 million and $170.3 million, respectively, and recognized a net (loss) gain on these sales of $19.3totaling $(4.7) million and $22.7$37.6 million, respectively. In connection withrespectively (inclusive of income taxes totaling $2.8 million and $2.9 million for the sale of a property in Malaysia in August 2017,three and in accordance with ASC 830-30-40, Foreign Currency Matters, we reclassified $3.6 million of foreign currency translation losses from Accumulated other comprehensive loss to Gain on sale of real estate, net of tax (as a reduction to Gain on sale of real estate, net of tax), since the sale represented a disposal of our Malaysian investments (Note 13). One of the properties sold during the nine months ended September 30, 2017 was2022, respectively, recognized upon sale). This disposition activity included one property acquired in the CPA:18 Merger classified as assets held for sale at December 31, 2016 (Note 43). In addition, in January 2017, we transferred ownership of two international properties and the related non-recourse mortgage loan, which had an aggregate asset carrying value of $31.3 million and an outstanding balance of $28.1 million (net of $3.8 million of cash held in escrow that was retained by the mortgage lender), respectively, on the dates of transfer, to the mortgage lender, resulting in a net loss of less than $0.1 million.
During the nine months ended September 30, 2017, we entered into a contract to sell one international property,Note 5), which was classified as held for sale as of September 30, 2017 (Note 4).sold in August 2022.
2016 2021— During the three and nine months ended September 30, 2016,2021, we sold threefive and 17 properties, and ten properties and a parcel of vacant land, respectively, for total proceeds, of $192.0 million and $392.6 million, respectively, net of selling costs, of $28.3 million and $126.7 million, respectively, and recognized a net gain on these sales of $37.4totaling $1.7 million and $39.9$30.9 million, respectively including amounts attributable to noncontrolling interests(inclusive of $0.9income taxes totaling $3.8 million forrecognized upon sale during the nine months ended September 30, 2016. In April 2016, we transferred ownership
2021).
W. P. Carey 9/30/2022 10-Q– 43
|
| |
| W. P. Carey 9/30/2017 10-Q– 45
|
Notes to Consolidated Financial Statements (Unaudited)
of a vacant international property and the related non-recourse mortgage loan, which had a carrying value of $39.8 million and an outstanding balance of $60.9 million, respectively, on the date of transfer, to the mortgage lender, resulting in a net gain of $16.4 million. In addition, in July 2016, a vacant domestic property with an asset carrying value of $13.7 million, which was encumbered by a $24.3 million non-recourse mortgage loan (net of $2.6 million of cash held in escrow that was retained by the mortgage lender), was foreclosed upon by the mortgage lender, resulting in a net gain of $11.6 million.
In connection with those sales that constituted businesses, during the three and nine months ended September 30, 2016 we allocated goodwill totaling $18.0 million and $32.9 million, respectively, to the cost basis of the properties for our Owned Real Estate segment based on the relative fair value at the time of the sale.
In the fourth quarter of 2015, we executed a lease amendment with a tenant in a domestic office building. The amendment extended the lease term an additional 15 years to January 31, 2037 and provided a one-time rent payment of $25.0 million, which was paid to us on December 18, 2015. The lease amendment also provided an option to terminate the lease effective February 29, 2016, with additional lease termination fees of $22.2 million to be paid to us on or five days before February 29, 2016 upon exercise of the option. The tenant exercised the option on January 1, 2016. The aggregate of the additional rent payment of $25.0 million and the lease termination fees of $22.2 million were amortized to lease termination income from the lease amendment date on December 4, 2015 through the end of the non-cancelable lease term on February 29, 2016, resulting in $15.0 million recognized during the year ended December 31, 2015 and $32.2 million recognized during the nine months ended September 30, 2016 within Lease termination income and other in the consolidated financial statements. In addition, during the fourth quarter of 2015, we entered into an agreement to sell the property to a third party and the buyer placed a deposit of $12.7 million for the purchase of the property that was held in escrow. In February 2016, we sold the property for proceeds of $44.4 million, net of selling costs, and recognized a loss on the sale of $10.7 million.
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| W. P. Carey 9/30/2017 10-Q– 46
|
Notes to Consolidated Financial Statements (Unaudited)
Note 16. Segment Reporting
We evaluate our results from operations through our two major business segments: Owned Real Estate and Investment Management. As a result of our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017 (Note 1), we have revised how we view and present a component of our two reportable segments. As such, beginning with the second quarter of 2017, we include (i) equity in earnings of equity method investments in the Managed Programs and (ii) our equity investments in the Managed Programs in our Investment Management segment. Both (i) earnings from our investment in CCIF and (ii) our investment in CCIF continue to be included in our Investment Management segment. Results of operations and assets by segment for prior periods have been reclassified to conform to the current period presentation. The following tables present a summary of comparative results and assets for these business segments (in thousands):
Owned Real Estate
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | | | | | | |
| Lease revenues | $ | 331,902 | | | $ | 298,616 | | | $ | 953,981 | | | $ | 872,345 | |
| Income from direct financing leases and loans receivable | 20,637 | | | 16,754 | | | 56,794 | | | 51,917 | |
Operating property revenues (a) | 21,350 | | | 4,050 | | | 30,279 | | | 9,474 | |
| Lease termination income and other | 8,192 | | | 1,421 | | | 24,905 | | | 8,066 | |
| 382,081 | | | 320,841 | | | 1,065,959 | | | 941,802 | |
| | | | | | | |
| Operating Expenses | | | | | | | |
| Depreciation and amortization | 132,181 | | | 115,657 | | | 362,654 | | | 340,327 | |
| General and administrative | 22,299 | | | 19,750 | | | 66,224 | | | 62,297 | |
| Reimbursable tenant costs | 18,874 | | | 15,092 | | | 52,538 | | | 45,942 | |
| Merger and other expenses | 17,667 | | | (908) | | | 17,326 | | | (3,998) | |
| Property expenses, excluding reimbursable tenant costs | 11,244 | | | 13,734 | | | 36,874 | | | 36,432 | |
| Operating property expenses | 9,357 | | | 3,001 | | | 15,335 | | | 6,961 | |
| Stock-based compensation expense | 5,511 | | | 4,361 | | | 23,102 | | | 18,790 | |
| Impairment charges — real estate | — | | | 16,301 | | | 26,385 | | | 16,301 | |
| 217,133 | | | 186,988 | | | 600,438 | | | 523,052 | |
| Other Income and Expenses | | | | | | | |
| Interest expense | (59,022) | | | (48,731) | | | (151,492) | | | (149,623) | |
| Other gains and (losses) | (13,960) | | | 48,172 | | | 303 | | | 13,455 | |
| Gain on change in control of interests | 11,405 | | | — | | | 11,405 | | | — | |
| Non-operating income | 9,264 | | | 1,283 | | | 23,781 | | | 10,620 | |
| Earnings (losses) from equity method investments in real estate | 6,447 | | | 2,445 | | | 10,189 | | | (10,528) | |
| (Loss) gain on sale of real estate, net | (4,736) | | | 1,702 | | | 37,631 | | | 30,914 | |
| (50,602) | | | 4,871 | | | (68,183) | | | (105,162) | |
| Income before income taxes | 114,346 | | | 138,724 | | | 397,338 | | | 313,588 | |
| Provision for income taxes | (3,631) | | | (7,827) | | | (16,499) | | | (23,372) | |
| Net Income from Real Estate | 110,715 | | | 130,897 | | | 380,839 | | | 290,216 | |
| Net loss (income) attributable to noncontrolling interests | 660 | | | (39) | | | 622 | | | (84) | |
| Net Income from Real Estate Attributable to W. P. Carey | $ | 111,375 | | | $ | 130,858 | | | $ | 381,461 | | | $ | 290,132 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Lease revenues | $ | 161,511 |
| | $ | 163,786 |
| | $ | 475,547 |
| | $ | 506,358 |
|
| Operating property revenues | 8,449 |
| | 8,524 |
| | 23,652 |
| | 23,696 |
|
| Reimbursable tenant costs | 5,397 |
| | 6,537 |
| | 15,940 |
| | 19,237 |
|
| Lease termination income and other | 1,227 |
| | 1,224 |
| | 4,234 |
| | 34,603 |
|
| | 176,584 |
| | 180,071 |
| | 519,373 |
| | 583,894 |
|
| | | | | | | | |
| Operating Expenses | | | | | | | |
| Depreciation and amortization | 62,970 |
| | 61,740 |
| | 186,481 |
| | 210,557 |
|
| General and administrative | 11,234 |
| | 7,453 |
| | 27,311 |
| | 25,653 |
|
| Property expenses, excluding reimbursable tenant costs | 10,556 |
| | 10,193 |
| | 31,196 |
| | 38,475 |
|
| Reimbursable tenant costs | 5,397 |
| | 6,537 |
| | 15,940 |
| | 19,237 |
|
| Stock-based compensation expense | 1,880 |
| | 1,572 |
| | 4,733 |
| | 4,316 |
|
| Other expenses | 65 |
| | — |
| | 1,138 |
| | 2,975 |
|
| Impairment charges | — |
| | 14,441 |
| | — |
| | 49,870 |
|
| Restructuring and other compensation | — |
| | — |
| | — |
| | 4,413 |
|
| | 92,102 |
| | 101,936 |
| | 266,799 |
| | 355,496 |
|
| Other Income and Expenses | | | | | | | |
| Interest expense | (41,182 | ) | | (44,349 | ) | | (125,374 | ) | | (139,496 | ) |
| Equity in earnings of equity method investments in real estate | 3,740 |
| | 3,230 |
| | 9,533 |
| | 9,585 |
|
| Other income and (expenses) | (4,918 | ) | | 3,244 |
| | (6,249 | ) | | 7,681 |
|
| | (42,360 | ) | | (37,875 | ) | | (122,090 | ) | | (122,230 | ) |
| Income before income taxes and gain on sale of real estate | 42,122 |
| | 40,260 |
| | 130,484 |
| | 106,168 |
|
| (Provision for) benefit from income taxes | (1,511 | ) | | (530 | ) | | (6,696 | ) | | 6,792 |
|
| Income before gain on sale of real estate | 40,611 |
| | 39,730 |
| | 123,788 |
| | 112,960 |
|
| Gain on sale of real estate, net of tax | 19,257 |
| | 49,126 |
| | 22,732 |
| | 68,070 |
|
| Net Income from Owned Real Estate | 59,868 |
| | 88,856 |
| | 146,520 |
| | 181,030 |
|
| Net income attributable to noncontrolling interests | (3,376 | ) | | (1,359 | ) | | (8,530 | ) | | (6,294 | ) |
| Net Income from Owned Real Estate Attributable to W. P. Carey | $ | 56,492 |
| | $ | 87,497 |
| | $ | 137,990 |
| | $ | 174,736 |
|
W. P. Carey 9/30/2022 10-Q– 44
|
| |
| W. P. Carey 9/30/2017 10-Q– 47
|
Notes to Consolidated Financial Statements (Unaudited)
Investment Management
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | | | | | | |
| Asset management and other revenue | $ | 1,197 | | | $ | 3,872 | | | $ | 8,084 | | | $ | 11,792 | |
| Reimbursable costs from affiliates | 344 | | | 1,041 | | | 2,414 | | | 3,050 | |
| 1,541 | | | 4,913 | | | 10,498 | | | 14,842 | |
| Operating Expenses | | | | | | | |
| Impairment charges — Investment Management goodwill | 29,334 | | | — | | | 29,334 | | | — | |
| Reimbursable costs from affiliates | 344 | | | 1,041 | | | 2,414 | | | 3,050 | |
| Merger and other expenses | — | | | — | | | 3 | | | 15 | |
| 29,678 | | | 1,041 | | | 31,751 | | | 3,065 | |
| Other Income and Expenses | | | | | | | |
| Gain on change in control of interests | 22,526 | | | — | | | 22,526 | | | — | |
| Earnings from equity method investments in the Managed Programs | 4,857 | | | 3,290 | | | 13,288 | | | 6,374 | |
| Other gains and (losses) | (1,060) | | | 1,047 | | | (1,324) | | | 2,121 | |
| Non-operating (loss) income | (1) | | | — | | | 2 | | | 84 | |
| 26,322 | | | 4,337 | | | 34,492 | | | 8,579 | |
| (Loss) income before income taxes | (1,815) | | | 8,209 | | | 13,239 | | | 20,356 | |
| Provision for income taxes | (4,632) | | | (520) | | | (5,099) | | | (62) | |
| Net (Loss) Income from Investment Management Attributable to W. P. Carey | $ | (6,447) | | | $ | 7,689 | | | $ | 8,140 | | | $ | 20,294 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Asset management revenue | $ | 17,938 |
| | $ | 15,978 |
| | $ | 53,271 |
| | $ | 45,596 |
|
| Structuring revenue | 9,817 |
| | 12,301 |
| | 27,981 |
| | 30,990 |
|
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | 45,390 |
| | 46,372 |
|
| Dealer manager fees | 105 |
| | 1,835 |
| | 4,430 |
| | 5,379 |
|
| Other advisory revenue | 99 |
| | 522 |
| | 896 |
| | 522 |
|
| | 34,170 |
| | 45,176 |
| | 131,968 |
| | 128,859 |
|
| Operating Expenses | | | | | | | |
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | 45,390 |
| | 46,372 |
|
| General and administrative | 6,002 |
| | 8,280 |
| | 25,878 |
| | 32,469 |
|
| Subadvisor fees | 5,206 |
| | 4,842 |
| | 11,598 |
| | 10,010 |
|
| Stock-based compensation expense | 2,755 |
| | 2,784 |
| | 9,916 |
| | 10,648 |
|
| Restructuring and other compensation | 1,356 |
| | — |
| | 9,074 |
| | 7,512 |
|
| Depreciation and amortization | 1,070 |
| | 1,062 |
| | 2,838 |
| | 3,278 |
|
| Dealer manager fees and expenses | 462 |
| | 3,028 |
| | 6,544 |
| | 9,000 |
|
| Other expenses | — |
| | — |
| | — |
| | 2,384 |
|
| | 23,062 |
| | 34,536 |
| | 111,238 |
| | 121,673 |
|
| Other Income and Expenses | | | | | | | |
| Equity in earnings of equity method investments in the Managed Programs | 12,578 |
| | 13,573 |
| | 38,287 |
| | 38,658 |
|
| Other income and (expenses) | 349 |
| | 1,857 |
| | 1,280 |
| | 1,717 |
|
| | 12,927 |
| | 15,430 |
| | 39,567 |
| | 40,375 |
|
| Income before income taxes | 24,035 |
| | 26,070 |
| | 60,297 |
| | 47,561 |
|
| (Provision for) benefit from income taxes | (249 | ) | | (2,624 | ) | | 3,793 |
| | (2,254 | ) |
| Net Income from Investment Management Attributable to W. P. Carey | $ | 23,786 |
| | $ | 23,446 |
| | $ | 64,090 |
| | $ | 45,307 |
|
Total Company
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | $ | 383,622 | | | $ | 325,754 | | | $ | 1,076,457 | | | $ | 956,644 | |
| Operating expenses | 246,811 | | | 188,029 | | | 632,189 | | | 526,117 | |
| Other income and (expenses) | (24,280) | | | 9,208 | | | (33,691) | | | (96,583) | |
| Provision for income taxes | (8,263) | | | (8,347) | | | (21,598) | | | (23,434) | |
| Net loss (income) attributable to noncontrolling interests | 660 | | | (39) | | | 622 | | | (84) | |
| Net income attributable to W. P. Carey | $ | 104,928 | | | $ | 138,547 | | | $ | 389,601 | | | $ | 310,426 | |
| | | | | | | | | | | |
| Total Assets at |
| September 30, 2022 | | December 31, 2021 |
| Real Estate | $ | 17,747,813 | | | $ | 15,344,799 | |
Investment Management (b) | 27,029 | | | 135,831 | |
| Total Company | $ | 17,774,842 | | | $ | 15,480,630 | |
__________
(a)Operating property revenues from our hotels include $3.7 million and $2.4 million for the three months ended September 30, 2022 and 2021, respectively, and $9.1 million and $4.9 million for the nine months ended September 30, 2022 and 2021, respectively, generated from a hotel in Bloomington, Minnesota (revenues reflect higher occupancy as the hotel’s business recovered from the COVID-19 pandemic).
(b)Following the CPA:18 Merger on August 1, 2022, we no longer own an equity investment in CPA:18 – Global, which was previously included within our Investment Management segment (Note 3, Note 8). In addition, during the nine months ended September 30, 2022, we recorded an impairment charge of $29.3 million on goodwill within our Investment Management segment (Note 7, Note 9).
W. P. Carey 9/30/2022 10-Q– 45
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | $ | 210,754 |
| | $ | 225,247 |
| | $ | 651,341 |
| | $ | 712,753 |
|
| Operating expenses | 115,164 |
| | 136,472 |
| | 378,037 |
| | 477,169 |
|
| Other income and (expenses) | (29,433 | ) | | (22,445 | ) | | (82,523 | ) | | (81,855 | ) |
| Gain on sale of real estate, net of tax | 19,257 |
| | 49,126 |
| | 22,732 |
| | 68,070 |
|
| (Provision for) benefit from income taxes | (1,760 | ) | | (3,154 | ) | | (2,903 | ) | | 4,538 |
|
| Net income attributable to noncontrolling interests | (3,376 | ) | | (1,359 | ) | | (8,530 | ) | | (6,294 | ) |
| Net income attributable to W. P. Carey | $ | 80,278 |
| | $ | 110,943 |
| | $ | 202,080 |
| | $ | 220,043 |
|
|
| | | | | | | |
| | Total Assets at |
| | September 30, 2017 | | December 31, 2016 |
| Owned Real Estate | $ | 7,975,925 |
| | $ | 8,104,974 |
|
| Investment Management | 358,486 |
| | 348,980 |
|
| Total Company | $ | 8,334,411 |
| | $ | 8,453,954 |
|
|
| |
| W. P. Carey 9/30/2017 10-Q– 48
|
Notes to Consolidated Financial Statements (Unaudited)
Note 17. Subsequent Events
Mortgage Loan RepaymentsCash Received for Shares of WLT
In October 2017,2022, we repaid three non-recourse mortgage loans with an aggregate principal balancereceived $82.6 million in cash proceeds as a result of approximately $25.2 million.
Repaymentscertain private real estate funds’ acquisition of Loans to Affiliates
In October 2017, CWI 1 repaid a totalall outstanding shares of $29.2 millionWLT common stock. As of the loans outstanding to us at September 30, 2017,date of which $15.0 million reduced the amount outstanding under the revolving working capital facility and $14.2 million went toward repaying the bridge loan. In October 2017, CPA®:18 – Globalrepaid in full the $19.0 million loan that was outstanding to us at September 30, 2017acquisition, we owned 12,208,243 shares of WLT common stock (Note 39). Upon completion of this transaction, we have no remaining interest in WLT.
Loan to Affiliate
On October 19, 2017, we entered into a secured $25.0 million revolving working capital facility with CWI 2. The loan bears interest at LIBOR plus 1.00% and matures on the earlier of December 31, 2018 and the expiration or termination by CWI 2 of its advisory agreement with us (Note 3).
W. P. Carey 9/30/2022 10-Q– 46
|
| |
| W. P. Carey 9/30/2017 10-Q– 49
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis item also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. The discussion also provides information aboutbreaks down the financial results of the segments of our business by segment to provide a better understanding of how these segments and their results affect our financial condition and results of operations. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 20162021 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934.
Business Overview
As described in more detail in1934, as amended (the “Exchange Act”). Refer to Item 1 of the 20162021 Annual Report for a description of our business.
Significant Developments
CPA:18 Merger
On February 27, 2022, we, provide long-term financing via sale-leasebackCPA:18 – Global, CPA:18 Limited Partnership (a subsidiary of CPA:18 – Global), and build-to-suit transactionscertain of our subsidiaries entered into a merger agreement, pursuant to which CPA:18 – Global would merge with and into one of our indirect subsidiaries in exchange for companies worldwideshares of our common stock and as of September 30, 2017, manage a global investment portfolio of 1,381 properties, including 890 net-leased properties and two operating properties within our owned real estate portfolio. Our business operates in two segments: Owned Real Estate and Investment Management.
On June 15, 2017, our Board approved a plan to exit all non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial, effective as of June 30, 2017. We currently expect to continue to manage all existing Managed Programs through the end of their respective natural life cyclescash (Note 13). The CPA:18 Merger and related transactions were approved by the stockholders of CPA:18 – Global on July 26, 2022 and completed on August 1, 2022.
Financial Highlights
During the nine months ended September 30, 2017,2022, we completed the following activities, as(as further described below and in the consolidated financial statements:statements):
| |
• | We capitalized and completed four construction projects at a cost totaling $59.0 million and acquired one investment for $6.0 million for our Owned Real Estate segment during the nine months ended September 30, 2017 (Note 4). |
| |
• | As part of our active capital recycling program, we disposed of 13 properties and a parcel of vacant land from our Owned Real Estate portfolio for total proceeds of $130.6 million, net of selling costs (Note 15). |
| |
• | On January 19, 2017, we completed a public offering of €500.0 million of 2.25% Senior Notes, at a price of 99.448% of par value, issued by our wholly owned subsidiary, WPC Eurobond B.V., which are guaranteed by us. These 2.25% Senior Notes have a 7.5-year term and are scheduled to mature on July 19, 2024 (Note 10). |
| |
• | On February 22, 2017, we amended and restated our Senior Unsecured Credit Facility to increase its capacity to $1.85 billion, which is comprised of a $1.5 billion Unsecured Revolving Credit Facility maturing in four years with two six-month extension options, a €236.3 million Amended Term Loan maturing in five years, and a $100.0 million Delayed Draw Term Loan also maturing in five years. On that date, we also drew down our Amended Term Loan in full by borrowing €236.3 million (equivalent to $250.0 million) and repaid in full, and terminated, our $250.0 million Prior Term Loan. On June 8, 2017, we drew down our Delayed Draw Term Loan in full by borrowing €88.7 million (equivalent to $100.0 million) (Note 10). |
| |
• | We reduced our mortgage debt outstanding by repaying at maturity or prepaying $417.9 million of non-recourse mortgage loans with a weighted-average interest rate of 5.4% during the nine months ended September 30, 2017 (Note 10). |
| |
• | In connection with our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017, we recorded $1.4 million and $9.1 million of restructuring expenses during the three and nine months ended September 30, 2017, respectively, primarily related to severance costs (Note 1, Note 12). |
DuringReal Estate
CPA:18 Merger
On August 1, 2022, we completed the CPA:18 Merger (Note 3).
•We acquired full or partial ownership interests in 42 properties in the CPA:18 Merger (including seven properties in which we already owned a partial ownership interest), substantially all of which were triple-net leased with a weighted-average lease term of 7.0 years, an occupancy rate of 99.3%, and an estimated ABR totaling $81.0 million. We also acquired 65 self-storage operating properties and two student housing operating properties totaling 5.1 million square feet. The related property-level debt was comprised of non-recourse mortgage loans with an aggregate consolidated fair value of approximately $900.2 million with a weighted-average annual interest rate of 5.1% as of August 1, 2022.
•We issued the following to CPA:18 – Global stockholders as part of the merger consideration: (i) 13,786,302 shares of our common stock of approximately $1.2 billion, (ii) $3.00 per share of cash consideration totaling approximately $423.3 million, and (iii) cash of $0.1 million paid in lieu of issuing any fractional shares of our common stock.
•Lease revenues and operating property revenues from properties acquired in the CPA:18 Merger were $16.5 million and $15.4 million, respectively, for both the three and nine months ended September 30, 2017, we issued 15,5002022.
•We recognized a Gain on change in control of interests of $33.9 million in connection with the CPA:18 Merger during the three and 345,253 shares, respectively,nine months ended September 30, 2022, of which $11.4 million was attributable to our common stock under the current ATM programReal Estate segment and $22.5 million was attributable to our Investment Management segment.
Investments
•We acquired 18 investments totaling $1.0 billion (Note 5, Note 6). •We completed five construction projects at a weighted-average price of $67.05 and $67.78 per share, respectively,cost totaling $147.3 million (Note 5). •We funded approximately $65.2 million for net proceeds of $0.9 million and $22.8 million, respectively.
| |
• | We structured new investments on behalf of the Managed Programs totaling $1.1 billiona construction loan to build a retail complex in Las Vegas, Nevada, during the nine months ended September 30, 2017, increasing our assets under management to $13.2 billion as of September 30, 2017. In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. CCIF was included in the Managed Programs prior to our resignation as its advisor (Note 1). |
We declared cash distributions totaling $3.00 per share in the aggregate amount of $320.3 million for the nine months ended September 30,
2017,2022. Through September 30, 2022, we have funded $168.9 million (Note 8).•We committed to fund three build-to-suit or expansion projects totaling $25.5 million. We currently expect to complete the projects in 2023 (Note 5).
W. P. Carey 9/30/2022 10-Q– 47
Dispositions
•As part of our active capital recycling program, we disposed of 17 properties for total proceeds, net of selling costs, of $170.3 million (Note 15). •In January 2022, WLT redeemed in full our 1,300,000 shares of its preferred stock for gross proceeds of $65.0 million (Note 9). •In October 2022, we received $82.6 million in cash proceeds as a result of certain private real estate funds’ acquisition of all outstanding shares of WLT common stock. As of the date of acquisition, we owned 12,208,243 shares of WLT common stock (Note 9). Upon completion of this transaction, we have no remaining interest in WLT (Note 17).
Financing and Capital Markets Transactions
•In April 2022, we increased the Term Loan to £270.0 million and the Delayed Draw Term Loan to €215.0 million, thereby increasing the total capacity of our Senior Unsecured Credit Facility to approximately $2.4 billion. We used the approximately $300 million of proceeds from this increase in the capacity of our Unsecured Term Loans to partially repay amounts outstanding under our Unsecured Revolving Credit Facility (Note 11). •On May 2, 2022, we established a $1.0 billion ATM Program, under which we may issue shares directly or defer delivery to a later date through our ATM Forwards. As of September 30, 2022, we had approximately $455.7 million of available proceeds under our ATM Forwards (Note 13). •We issued 2,740,295 shares of our common stock under our prior ATM Program at a weighted-average price of $80.79 per share, for net proceeds of $218.1 million (Note 13). •We settled portions of our Equity Forwards by delivering 1,337,500 shares of common stock for net proceeds of $97.5 million. As of September 30, 2022, 2,587,500 shares remained outstanding under our Equity Forwards for available proceeds of approximately $185.8 million (Note 13). •On September 28, 2022, we completed a private placement of (i) €150 million of 3.41% Senior Notes due 2029, which have a seven-year term and are scheduled to mature on September 28, 2029, and (ii) €200 million of 3.70% Senior Notes due 2032, which have a ten-year term and are scheduled to mature on September 28, 2032 (Note 11).
Investment Management
Assets Under Management
•As of September 30, 2022, we managed total assets of approximately $161.5 million on behalf of CESH. The vast majority of our Investment Management earnings are generated from asset management fees. Upon completion of the CPA:18 Merger (Note 3), we ceased earning advisory fees and other income previously earned when we served as advisor to CPA:18 – Global. During the nine months ended September 30, 2022, through the date of the CPA:18 Merger, such fees and other income from CPA:18 – Global totaled $17.9 million.
Dividends to Stockholders
We declared cash dividends totaling $3.177 per share during the nine months ended September 30, 2022, comprised of three quarterly dividends per share declared of $0.9950, $1.0000,$1.057, $1.059, and $1.0050.$1.061 (Note 13).
W. P. Carey 9/30/2022 10-Q– 48
|
| |
| W. P. Carey 9/30/2017 10-Q– 50
|
Consolidated Results
(in thousands, except shares)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues from Owned Real Estate | $ | 176,584 |
| | $ | 180,071 |
| | $ | 519,373 |
| | $ | 583,894 |
|
| Reimbursable tenant costs | 5,397 |
| | 6,537 |
| | 15,940 |
| | 19,237 |
|
| Revenues from Owned Real Estate (excluding reimbursable tenant costs) | 171,187 |
| | 173,534 |
| | 503,433 |
| | 564,657 |
|
| | | | | | | | |
| Revenues from Investment Management | 34,170 |
| | 45,176 |
| | 131,968 |
| | 128,859 |
|
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | 45,390 |
| | 46,372 |
|
| Revenues from Investment Management (excluding reimbursable costs from affiliates) | 27,959 |
| | 30,636 |
| | 86,578 |
| | 82,487 |
|
| | | | | | | | |
| Total revenues | 210,754 |
| | 225,247 |
| | 651,341 |
| | 712,753 |
|
| Total reimbursable costs | 11,608 |
| | 21,077 |
| | 61,330 |
| | 65,609 |
|
| Total revenues (excluding reimbursable costs) | 199,146 |
| | 204,170 |
| | 590,011 |
| | 647,144 |
|
| | | | | | | | |
Net income from Owned Real Estate attributable to W. P. Carey (a) | 56,492 |
| | 87,497 |
| | 137,990 |
| | 174,736 |
|
Net income from Investment Management attributable to W. P. Carey (a) | 23,786 |
| | 23,446 |
| | 64,090 |
| | 45,307 |
|
| Net income attributable to W. P. Carey | 80,278 |
|
| 110,943 |
|
| 202,080 |
|
| 220,043 |
|
| | | | | | | | |
| Cash distributions paid | 108,272 |
| | 104,587 |
| | 322,389 |
| | 310,509 |
|
| | | | | | | | |
| Net cash provided by operating activities | | | | | 381,877 |
| | 377,476 |
|
| Net cash provided by (used in) investing activities | | | | | 175,305 |
| | (27,984 | ) |
| Net cash used in financing activities | | | | | (549,728 | ) | | (298,096 | ) |
| | | | | | | | |
| Supplemental financial measures: | | | | | | | |
Adjusted funds from operations attributable to W. P. Carey (AFFO) — Owned Real Estate (a) (b) | 116,337 |
| | 118,030 |
| | 345,529 |
| | 352,058 |
|
Adjusted funds from operations attributable to W. P. Carey (AFFO) — Investment Management (a) (b) | 31,905 |
| | 26,441 |
| | 85,388 |
| | 64,115 |
|
Adjusted funds from operations attributable to W. P. Carey (AFFO) (b) | 148,242 |
|
| 144,471 |
|
| 430,917 |
|
| 416,173 |
|
| | | | | | | | |
| Diluted weighted-average shares outstanding | 108,143,694 |
| | 107,468,029 |
| | 107,947,490 |
| | 106,853,174 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues from Real Estate | $ | 382,081 | | | $ | 320,841 | | | $ | 1,065,959 | | | $ | 941,802 | |
| Revenues from Investment Management | 1,541 | | | 4,913 | | | 10,498 | | | 14,842 | |
| Total revenues | 383,622 | | | 325,754 | | | 1,076,457 | | | 956,644 | |
| | | | | | | |
| Net income from Real Estate attributable to W. P. Carey | 111,375 | | | 130,858 | | | 381,461 | | | 290,132 | |
| Net (loss) income from Investment Management attributable to W. P. Carey | (6,447) | | | 7,689 | | | 8,140 | | | 20,294 | |
| Net income attributable to W. P. Carey | 104,928 | | | 138,547 | | | 389,601 | | | 310,426 | |
| | | | | | | |
| Dividends declared | 222,350 | | | 197,374 | | | 633,745 | | | 579,769 | |
| | | | | | | |
| Net cash provided by operating activities | | | | | 702,528 | | | 625,396 | |
| Net cash used in investing activities | | | | | (1,019,425) | | | (1,053,266) | |
| Net cash provided by financing activities | | | | | 364,057 | | | 305,865 | |
| | | | | | | |
Supplemental financial measures (a): | | | | | | | |
| Adjusted funds from operations attributable to W. P. Carey (AFFO) — Real Estate | 273,567 | | | 224,445 | | | 772,827 | | | 657,150 | |
| Adjusted funds from operations attributable to W. P. Carey (AFFO) — Investment Management | 4,155 | | | 6,279 | | | 18,095 | | | 18,736 | |
| Adjusted funds from operations attributable to W. P. Carey (AFFO) | 277,722 | | | 230,724 | | | 790,922 | | | 675,886 | |
| | | | | | | |
| Diluted weighted-average shares outstanding | 204,098,116 | | | 186,012,478 | | | 197,264,509 | | | 181,323,128 | |
__________
| |
(a) | As a result of our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017, we have revised how we view and present a component of our two reportable segments. As such, beginning with the second quarter of 2017, we include equity in earnings of equity method investments in the Managed Programs in our Investment Management segment (Note 1). Earnings from our investment in CCIF continue to be included in our Investment Management segment. Results of operations for prior periods have been reclassified to conform to the current period presentation. |
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(b) | We consider Adjusted funds from operations, or AFFO, a supplemental measure that is not defined by GAAP, referred to as a non-GAAP measure, to be an important measure in the evaluation of our operating performance. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure. |
(a)We consider Adjusted funds from operations (“AFFO”), a supplemental measure that is not defined by GAAP (a “non-GAAP measure”), to be an important measure in the evaluation of our operating performance. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.
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| W. P. Carey 9/30/2017 10-Q– 51
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Consolidated Results
Revenues
Total revenues increased for the three and nine months ended September 30, 2022 as compared to the same periods in 2021. Real Estate revenue increased primarily due to higher lease revenues (substantially as a result of property acquisition activity and rent escalations, as well as the net-leased properties we acquired in the CPA:18 Merger on August 1, 2022 (Note 3), partially offset by the impact of the weakening euro and British pound sterling), higher operating property revenues (primarily from the operating properties we acquired in the CPA:18 Merger on August 1, 2022 (Note 3)), and higher lease termination and other income (Note 5).
Net Income Attributable to W. P. Carey
Total revenues decreased for the three months ended September 30, 2017 as compared to the same period in 2016, due to decreases within both our Investment Management and Owned Real Estate segments. Investment Management revenue decreased primarily as a result of a decrease in structuring revenue and a decrease in dealer manager fees due to our exit from all non-traded retail fundraising activities (Note 1), partially offset by an increase in asset management revenue as a result of growth in assets under management for the Managed Programs. Owned Real Estate revenue declined primarily due to a decrease in lease revenues due to dispositions of properties since July 1, 2016 (Note 15).
Total revenues decreased for the nine months ended September 30, 2017 as compared to the same period in 2016, due to decreases within our Owned Real Estate segment, partially offset by increases within our Investment Management segment. Owned Real Estate revenue declined primarily due to lease termination income recognized during the prior year period related to a domestic property sold in February 2016, as well as a decrease in lease revenues due to dispositions of properties since January 1, 2016 (Note 15), partially offset by an increase in lease revenues due to property acquisitions since January 1, 2016. Investment Management revenue increased primarily due to an increase in asset management revenue as a result of growth in assets under management for the Managed Programs, partially offset by a decrease in structuring revenue and a decrease in dealer manager fees due to our exit from all non-traded retail fundraising activities (Note 1).
Net income attributable to W. P. Carey decreased for the three months ended September 30, 20172022 as compared to the same period in 2016,2021. Net income from Real Estate attributable to W. P. Carey decreased primarily due to a non-cash unrealized gain recognized on our investment in shares of Lineage Logistics during the lower aggregate gain on saleprior year period (Note 9) and the weakening euro and British pound sterling, partially offset by the impact of real estate recognizedacquisitions. Net income from Investment Management attributable to W. P. Carey was in a loss position during the current year period, (Note 15), as well as decreases in Owned Real Estate andprimarily due to an impairment charge recognized on goodwill within our Investment Management revenues. The decreasesegment (Note 9). In addition, we recognized a gain on change in control of interests during the current year period in connection with the CPA:18 Merger (Note 3).
W. P. Carey 9/30/2022 10-Q– 49
Net income attributable to W. P. Carey was partially offset by lower interest expense during the current year period as compared to the same period in 2016. In addition, during the prior year period, we recognized impairment charges on certain international properties (Note 8), as well as a related offsetting deferred tax benefit on those impairment charges, which reduced Net income attributable to W. P. Carey for the period.
Net income attributable to W. P. Carey decreased for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to the lower aggregate gain on sale of real estate recognized during the current year period (Note 15), as well as a decrease in Owned Real Estate revenues. During the current year period, we also recognized non-recurring restructuring expenses, primarily comprised of severance costs, related to our exit from all non-traded retail fundraising activities (Note 12). The decrease in Net income attributable to W. P. Carey was partially offset by lower interest expense and general and administrative expenses during the current year period as compared to the same period in 2016. In addition, during the prior year period, we recognized impairment charges on certain international properties (Note 8), as well as a related offsetting deferred tax benefit on those impairment charges, which reduced Net income attributable to W. P. Carey for the period. During the prior year period, we recognized one-time restructuring and other compensation expenses, consisting primarily of severance costs, related to the RIF (Note 12), as well as an allowance for credit losses on a direct financing lease (Note 5).
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased for the nine months ended September 30,
20172022 as compared to the same period in
2016,2021. Net income from Real Estate attributable to W. P. Carey increased primarily due to
an increasea lower loss on extinguishment of debt (Note 11), non-cash unrealized gains recognized on our investment in cash flow generated from properties acquired during 2016common shares of WLT (Note 9), and 2017, a decrease in interest expense, and lower general and administrative expenses in the current year period. These increases wereimpact of real estate acquisitions, partially offset by lease termination income receivednon-cash unrealized gains recognized on our investment in connection with the saleshares of a propertyLineage Logistics during the prior year period (Note 9) and the impact of the weakening euro and British pound sterling. Net income from Investment Management attributable to W. P. Carey decreased primarily due to an impairment charge recognized on goodwill within our Investment Management segment (Note 9). In addition, we recognized a decreasegain on change in cash flow as a resultcontrol of property dispositionsinterests during 2016 and 2017.the current year period in connection with the CPA:18 Merger (Note 3).
AFFO
AFFO increased for the three and nine months ended September 30, 20172022 as compared to the same periodperiods in 2016,2021, primarily due to lower interest expense, higher asset management revenue,lease revenues and higher earningsoperating property revenues from our equity interestsnet investment activity (including properties acquired in the Managed Programs,CPA:18 Merger (Note 3)) and rent escalations, as well as higher lease termination income and other, partially offset by lower structuring revenues, higher generalthe impact of the weakening euro and administrative expenses, and lower lease revenues.
AFFO increased for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to lower interest expense, higher asset management revenue, lower general and administrative expenses,British pound sterling and higher earnings from our equity interests in the Managed Programs, partially offset by lower lease revenues, lease termination income received in connection with the sale of a property during the prior year period, and lower structuring revenues.interest expense.
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| W. P. Carey 9/30/2017 10-Q– 52
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Owned Real Estate
Investments
During the nine months ended September 30, 2017, we capitalized and completed construction projects at a cost totaling $59.0 million (Note 4), as follows:
an expansion project at an industrial facility in Windsor, Connecticut in March 2017 at a cost totaling $3.3 million;
an expansion project at an educational facility in Coconut Creek, Florida in May 2017 at a cost totaling $18.2 million;
an expansion project at an industrial facility in Monarto, Australia in May 2017 at a cost totaling $15.9 million; and
a build-to-suit project for an industrial facility in McCalla, Alabama in June 2017 at a cost totaling $21.6 million.
In addition, during the nine months ended September 30, 2017, we acquired an industrial facility in Chicago, Illinois for $6.0 million and committed to fund an additional $3.6 million of building improvements at that facility by June 2018.
Dispositions
During the nine months ended September 30, 2017, we sold 11 properties and a parcel of vacant land from our Owned Real EstateOur portfolio for total proceeds of $102.5 million, net of selling costs, and recorded a net gain on sale of real estate of $22.7 million. We also disposed of two properties with an aggregate carrying value of $31.3 million by transferring ownership to the mortgage lender, in satisfaction of non-recourse mortgage loans encumbering the properties totaling $28.1 million (net of $3.8 million of cash held in escrow that was retained by the mortgage lender), resulting in a net gain of less than $0.1 million (Note 15).
Financing Transactions
During the nine months ended September 30, 2017, we entered into the following financing transactions (Note 10):
On January 19, 2017, we completed a public offering of €500.0 million of 2.25% Senior Notes, at a price of 99.448% of par value, issued by our wholly owned subsidiary, WPC Eurobond B.V., which are guaranteed by us. These 2.25% Senior Notes have a 7.5-year term and are scheduled to mature on July 19, 2024.
On February 22, 2017, we amended and restated our Senior Unsecured Credit Facility to increase its capacity to $1.85 billion, which is comprised of a $1.5 billion Unsecured Revolving Credit Facility maturing in four years with two six-month extension options, a €236.3 million Amended Term Loan maturing in five years, and a $100.0 million Delayed Draw Term Loan also maturing in five years. On that date, we also drew down our Amended Term Loan in full by borrowing €236.3 million (equivalent to $250.0 million) and repaid in full, and terminated, our $250.0 million Prior Term Loan. On June 8, 2017, we drew down our Delayed Draw Term Loan in full by borrowing €88.7 million (equivalent to $100.0 million). We incur interest at LIBOR, or a LIBOR equivalent, plus 1.00% on the Unsecured Revolving Credit Facility, and at EURIBOR plus 1.10% on both the Amended Term Loan and Delayed Draw Term Loan.
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• | In January 2017, we repaid two international non-recourse mortgage loans at maturity with an aggregate principal balance of approximately $243.8 million encumbering the Hellweg 2 Portfolio, which is jointly owned with our affiliate, CPA®:17 – Global. In connection with this repayment, CPA®:17 – Global contributed $90.3 million, which was accounted for as a contribution from a noncontrolling interest. Amounts are based on the exchange rate of the euro as of the date of repayment. The weighted-average interest rate for these mortgage loans on the date of repayment was 5.4%.
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• | During the nine months ended September 30, 2017, we prepaid non-recourse mortgage loans totaling $157.4 million, including $38.4 million encumbering properties that were disposed of during the nine months ended September 30, 2017 (Note 15). Amounts are based on the exchange rate of the related foreign currency as of the date of repayment, as applicable. The weighted-average interest rate for these mortgage loans on their respective dates of prepayment was 5.5%. In connection with these payments, we recognized a gain on extinguishment of debt of $0.8 million during the nine months ended September 30, 2017, which was included in Other income and (expenses) in the consolidated financial statements. |
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| W. P. Carey 9/30/2017 10-Q– 53
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Composition
As of September 30, 2017, our Owned Real Estate portfolio consisted of 890 net-lease properties, comprising 85.9 million square feet leased to 211 tenants, and two hotels, which are classified as operating properties. As of that date, the weighted-average lease term of the net-lease portfolio was 9.5 years and the occupancy rate was 99.8%.
Investment Management
During the nine months ended September 30, 2017, we managed CPA®:17 – Global, CPA®:18 – Global, CWI 1, CWI 2, and CESH I. As of September 30, 2017, these Managed Programs had total assets under management of approximately $13.2 billion. In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. CCIF was included in the Managed Programs prior to our resignation as its advisor (Note 1).
Non-Traded Retail Fundraising Platform Closure
On June 15, 2017, our Board approved a plan to exit all non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial, as of June 30, 2017, in keeping with our long-term strategy of focusing exclusively on net lease investing for our balance sheet. We currently expect to continue to manage all existing Managed Programs through the end of their respective natural life cycles (Note 1).
Investment Transactions
During the nine months ended September 30, 2017, we structured new investments totaling $1.1 billion on behalf of the Managed Programs, from which we earned $27.4 million in structuring revenue.
CWI 2: We structured two investments in domestic hotels for $423.5 million, including acquisition-related costs. One of these investments is jointly-owned with CWI 1.
CESH I: We structured investments in six international student housing development projects and one build-to-suit expansion on an existing project for an aggregate of $287.7 million, including acquisition-related costs.
CWI 1: We structured one investment in a domestic hotel for $165.2 million, including acquisition-related costs. This investment is jointly-owned with CWI 2.
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• | CPA®:17 – Global: We structured investments in two properties and one build-to-suit expansion on an existing property for an aggregate of $158.5 million, including acquisition-related costs. Approximately $147.0 million was invested in Europe and $11.5 million was invested in the United States.
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• | CPA®:18 – Global: We structured investments in two properties and three build-to-suit expansions on existing properties, including increases in funding commitments, for an aggregate of $66.2 million, including of acquisition-related costs. Approximately $58.9 million was invested internationally and $7.3 million was invested in the United States.
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Financing Transactions
During the nine months ended September 30, 2017, we arranged mortgage financing totaling $439.9 million for CWI 2, $293.1 million for CPA®:17 – Global, $175.5 million for CWI 1, and $89.4 million for CPA®:18 – Global, from which we earned $0.6 million in structuring revenue.
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| W. P. Carey 9/30/2017 10-Q– 54
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Investor Capital Inflows
In connection with our Board’s decision to exit from non-traded retail fundraising activities, we ceased active fundraising for the Managed Programs on June 30, 2017 (Note 1). The offerings for CWI 2 and CESH I closed on July 31, 2017. In August 2017, we resigned as the advisor to CCIF, effective as of September 11, 2017. The investor capital inflows for the funds managed by us during the nine months ended September 30, 2017 were as follows:
CWI 2 commenced its initial public offering in the first quarter of 2015. Through the closing of its offering on July 31, 2017, CWI 2 had raised approximately $851.3 million through its offering, of which $235.0 million was raised during the nine months ended September 30, 2017. We earned $2.9 million in Dealer manager fees during the nine months ended September 30, 2017 related to this offering.
CESH I commenced its private placement in July 2016. Through the closing of its offering on July 31, 2017, CESH I had raised approximately $139.7 million through its offering, of which $26.9 million was raised during the nine months ended September 30, 2017. We earned $0.5 million in Dealer manager fees during the nine months ended September 30, 2017 related to this offering.
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• | Two CCIF Feeder Funds commenced their respective initial public offerings in the third quarter of 2015 and invested the proceeds that they raised in the master fund, CCIF. Through June 30, 2017, these funds had invested $195.3 million in CCIF, of which $70.2 million was invested during the nine months ended September 30, 2017. We earned $1.0 million in Dealer manager fees during the nine months ended September 30, 2017 related to these offerings. One of the CCIF Feeder Funds, CCIF 2016 T, closed its offering on April 28, 2017. In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. CCIF was included in the Managed Programs prior to our resignation as its advisor (Note 1). |
Significant Developments
Board of Directors Change
On October 3, 2017, we announced that Margaret G. Lewis, age 63, was appointed to our Board.
Management Change
On November 1, 2017, our Board appointed Mr. Jason E. Fox, our President, to succeed Mr. Mark J. DeCesaris as our Chief Executive Officer and as a Director, both effective as of January 1, 2018. Mr. DeCesaris intends to retire from his positions as Chief Executive Officer and a Director, effective as of December 31, 2017.
Upon commencement of his new duties on January 1, 2018, Mr. Fox will be stepping down as our President. Mr. John J. Park, our Director of Strategy and Capital Markets, will succeed Mr. Fox as President on that date.
Mr. Fox, age 44, has served as W. P. Carey’s President since 2015 and previously served in various capacities in the Investment Department, including as Head of Global Investments, since joining W. P. Carey in 2002. Mr. Park, age 53, has served as W. P. Carey’s Director of Strategy and Capital Markets since March 2016, after serving in various capacities since joining W. P. Carey as an investment analyst in 1987.
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| W. P. Carey 9/30/2017 10-Q– 55
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Portfolio Overview
We intend to continue to acquire a diversified portfolio of income-producingoperationally-critical, commercial real estate assets net leased to tenants located primarily in the United States and Northern and Western Europe. We invest in high-quality single tenant industrial, warehouse, office, retail, and self-storage properties and other real estate-related assets. We expectsubject to make these investments both domestically and internationally.long-term net leases with built-in rent escalators. Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our various net-leased jointly owned investments. See Terms and Definitions below for a description of pro rata amounts.
Portfolio Summary
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| ABR (in thousands) | $ | 1,333,741 | | | $ | 1,247,764 | |
Number of net-leased properties (a) | 1,428 | | | 1,304 | |
Number of operating properties (b) | 87 | | | 20 | |
| Number of tenants (net-leased properties) | 391 | | | 352 | |
| Total square footage (net-leased properties, in thousands) | 174,950 | | | 155,674 | |
| Occupancy (net-leased properties) | 98.9 | % | | 98.5 | % |
| Weighted-average lease term (net-leased properties, in years) | 10.9 | | | 10.8 | |
Number of countries (c) | 26 | | | 24 | |
| Total assets (in thousands) | $ | 17,774,842 | | | $ | 15,480,630 | |
| Net investments in real estate (in thousands) | 15,120,888 | | | 13,037,369 | |
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| | September 30, 2017 | | December 31, 2016 |
| Number of net-leased properties | 890 |
| | 903 |
|
Number of operating properties (a) | 2 |
| | 2 |
|
| Number of tenants (net-leased properties) | 211 |
| | 217 |
|
| Total square footage (net-leased properties, in thousands) | 85,883 |
| | 87,866 |
|
| Occupancy (net-leased properties) | 99.8 | % | | 99.1 | % |
| Weighted-average lease term (net-leased properties, in years) | 9.5 |
| | 9.7 |
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| Number of countries | 18 |
| | 19 |
|
| Total assets (consolidated basis, in thousands) | $ | 8,334,411 |
| | $ | 8,453,954 |
|
Net investments in real estate (consolidated basis, in thousands) (b) | 6,751,905 |
| | 6,781,900 |
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| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Financing obtained — consolidated (in millions) (c) | $ | 633.4 |
| | $ | 384.6 |
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Financing obtained — pro rata (in millions) (c) | 633.4 |
| | 367.6 |
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Acquisition volume (in millions) (d) (e) | 6.0 |
| | 385.8 |
|
Construction and expansion projects capitalized and completed (in millions) (d) (f) | 59.0 |
| | — |
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| Average U.S. dollar/euro exchange rate | 1.1130 |
| | 1.1161 |
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| Average U.S. dollar/British pound sterling exchange rate | 1.2751 |
| | 1.3939 |
|
Change in the U.S. CPI (g) | 2.2 | % | | 2.1 | % |
Change in the Germany CPI (g) | 0.7 | % | | 0.7 | % |
Change in the United Kingdom CPI (g) | 2.1 | % | | 0.8 | % |
Change in the Spain CPI (g) | (0.3 | )% | | (0.5 | )% |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Acquisition volume (in millions) (d) | $ | 1,107.8 | | | $ | 1,096.2 | |
| Construction projects completed (in millions) | 147.3 | | | 88.2 | |
| Average U.S. dollar/euro exchange rate | 1.0652 | | | 1.1961 | |
| Average U.S. dollar/British pound sterling exchange rate | 1.2589 | | | 1.3845 | |
__________
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(a) | At both September 30, 2017 and December 31, 2016, operating properties consisted of two hotel properties with an average occupancy of 85.1% for the nine months ended September 30, 2017. |
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(b) | In 2017, we reclassified certain line items in our consolidated balance sheets. As a result, Net investments in real estate as of December 31, 2016 has been revised to conform to the current period presentation (Note 2). |
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(c) | Both the consolidated and pro rata amounts for the nine months ended September 30, 2017 include the issuance of €500.0 million of 2.25% Senior Notes in January 2017 and the amendment and restatement of our Senior Unsecured Credit Facility in February 2017, which increased our borrowing capacity by approximately $100.0 million (Note 10). Both the consolidated and pro rata amounts for the nine months ended September 30, 2016 include the issuance of $350.0 million of 4.25% Senior Notes in September 2016. The consolidated amount for the nine months ended September 30, 2016 includes the refinancing of a non-recourse mortgage loan for $34.6 million, while the pro rata amount for the nine months ended September 30, 2016 includes our proportionate share of that refinancing of $17.6 million. Dollar amounts are based on the exchange rate of the euro on the dates of activity, as applicable. |
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(d) | Amounts are the same on both a consolidated and pro rata basis. |
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(e) | Amount for the nine months ended September 30, 2017 excludes a commitment for $3.6 million of building improvements in connection with an acquisition (Note 4). Amount for the nine months ended September 30, 2016 excludes an aggregate commitment for $128.1 million of build-to-suit financing. |
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(f) | Includes projects that were capitalized and partially completed in 2016. |
(a)We acquired 35 net-leased properties (in which we did not already have an ownership interest) in the CPA:18 Merger in August 2022 (Note 3). (b)At September 30, 2022, operating properties consisted of 84 self-storage properties (of which we consolidated 75) with an average occupancy of 91.9% as of September 30, 2022, two student housing properties, and one hotel property with an average occupancy of 65.3% for the nine months ended September 30, 2022. We acquired 65 self-storage properties, one student housing property, and one student housing development project in the CPA:18 Merger in August 2022 (Note 3, Note 5). At December 31, 2021, operating properties consisted of 19 self-storage properties (of which we consolidated ten) and one hotel property. W. P. Carey 9/30/2022 10-Q– 50
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| W. P. Carey 9/30/2017 10-Q– 56
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(g) | Many of our lease agreements include contractual increases indexed to changes in the U.S. Consumer Price Index, or CPI, or similar indices in the jurisdictions in which the properties are located. |
(c)We acquired investments in Belgium during the nine months ended September 30, 2022. We acquired an investment in Mauritius in connection with the CPA:18 Merger in August 2022 (Note 3). (d)Amount for the nine months ended September 30, 2022 excludes properties acquired in the CPA:18 Merger (Note 3). Amounts for the nine months ended September 30, 2022 and 2021 include $65.2 million and $93.5 million, respectively, of funding for a construction loan (Note 8).
Net-Leased Portfolio
The tables below represent information about our net-leased portfolio at September 30, 20172022 on a pro rata basis and, accordingly, exclude all operating properties. See Terms and Definitions below for a description of pro rata amounts and ABR.
Top Ten Tenants by ABR
(dollars in thousands)
| | | Tenant/Lease Guarantor | | Property Type | | Tenant Industry | | Location | | Number of Properties | | ABR | | ABR Percent | | Weighted-Average Remaining Lease Term (Years) | Tenant/Lease Guarantor | | Description | | Number of Properties | | ABR | | ABR Percent | | Weighted-Average Lease Term (Years) |
| U-Haul Moving Partners Inc. and Mercury Partners, LP | | U-Haul Moving Partners Inc. and Mercury Partners, LP | | Net lease self-storage properties in the U.S. | | 78 | | | $ | 38,751 | | | 2.9 | % | | 1.6 | |
State of Andalucía (a) | | State of Andalucía (a) | | Government office properties in Spain | | 70 | | | 26,752 | | | 2.0 | % | | 12.2 | |
Metro Cash & Carry Italia S.p.A. (a) | | Metro Cash & Carry Italia S.p.A. (a) | | Business-to-business wholesale stores in Italy and Germany | | 20 | | | 25,047 | | | 1.9 | % | | 6.1 | |
Hellweg Die Profi-Baumärkte GmbH & Co. KG (a) | | Retail | | Retail Stores | | Germany | | 53 |
| | $ | 36,265 |
| | 5.3 | % | | 12.4 |
| Hellweg Die Profi-Baumärkte GmbH & Co. KG (a) | | Do-it-yourself retail properties in Germany | | 35 | | | 24,904 | | | 1.9 | % | | 14.4 | |
| U-Haul Moving Partners Inc. and Mercury Partners, LP | | Self Storage | | Cargo Transportation, Consumer Services | | United States | | 78 |
| | 31,853 |
| | 4.7 | % | | 6.6 |
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State of Andalucia (a) | | Office | | Sovereign and Public Finance | | Spain | | 70 |
| | 28,708 |
| | 4.2 | % | | 17.2 |
| |
Pendragon PLC (a) | | Retail | | Retail Stores, Consumer Services | | United Kingdom | | 70 |
| | 21,488 |
| | 3.2 | % | | 12.6 |
| |
| Extra Space Storage, Inc. | | Extra Space Storage, Inc. | | Net lease self-storage properties in the U.S. | | 27 | | | 22,957 | | | 1.7 | % | | 21.6 | |
| Marriott Corporation | | Hotel | | Hotel, Gaming and Leisure | | United States | | 18 |
| | 20,065 |
| | 3.0 | % | | 6.1 |
| Marriott Corporation | | Net lease hotel properties in the U.S. | | 18 | | | 21,350 | | | 1.6 | % | | 1.3 | |
Forterra Building Products (a) (b) | | Industrial | | Construction and Building | | United States and Canada | | 49 |
| | 17,517 |
| | 2.6 | % | | 18.5 |
| |
| Nord Anglia Education, Inc. | | Nord Anglia Education, Inc. | | K-12 private schools in the U.S. | | 3 | | | 20,981 | | | 1.6 | % | | 21.0 | |
OBI Group (a) | | Office, Retail | | Retail Stores | | Poland | | 18 |
| | 16,295 |
| | 2.4 | % | | 6.7 |
| OBI Group (a) | | Do-it-yourself retail properties in Poland | | 26 | | | 20,192 | | | 1.5 | % | | 7.9 | |
| True Value Company | | Warehouse | | Retail Stores | | United States | | 7 |
| | 15,680 |
| | 2.3 | % | | 5.3 |
| |
| UTI Holdings, Inc. | | Education Facility | | Consumer Services | | United States | | 5 |
| | 14,484 |
| | 2.1 | % | | 4.5 |
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ABC Group Inc. (c) | | Industrial, Office, Warehouse | | Automotive | | Canada, Mexico, and United States | | 14 |
| | 13,771 |
| | 2.0 | % | | 19.2 |
| |
| Advance Auto Parts, Inc. | | Advance Auto Parts, Inc. | | Distribution facilities in the U.S. | | 29 | | | 19,851 | | | 1.5 | % | | 10.3 | |
Forterra, Inc. (a) (b) | | Forterra, Inc. (a) (b) | | Industrial properties in the U.S. and Canada | | 27 | | | 19,465 | | | 1.4 | % | | 20.7 | |
| Total | | 382 |
| | $ | 216,126 |
| | 31.8 | % | | 11.1 |
| Total | | 333 | | | $ | 240,250 | | | 18.0 | % | | 10.9 | |
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(a) | ABR amounts are subject to fluctuations in foreign currency exchange rates. |
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(b) | Of the 49 properties leased to Forterra Building Products, 44 are located in the United States and five are located in Canada. |
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(c) | Of the 14 properties leased to ABC Group Inc., six are located in Canada, four are located in Mexico, and four are located in the United States, subject to three master leases all denominated in U.S. dollars. |
(a)ABR amounts are subject to fluctuations in foreign currency exchange rates.
(b)Of the 27 properties leased to Forterra, Inc., 25 are located in the United States and two are located in Canada.
W. P. Carey 9/30/2022 10-Q– 51
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Portfolio Diversification by Geography
(in thousands, except percentages)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Region | | ABR | | ABR Percent | | Square Footage (a) | | Square Footage Percent |
| United States | | | | | | | | |
| South | | | | | | | | |
| Texas | | $ | 114,960 | | | 8.6 | % | | 12,656 | | | 7.2 | % |
| Florida | | 54,001 | | | 4.0 | % | | 4,544 | | | 2.6 | % |
| Georgia | | 28,342 | | | 2.1 | % | | 4,721 | | | 2.7 | % |
| Tennessee | | 25,243 | | | 1.9 | % | | 4,136 | | | 2.4 | % |
| Alabama | | 19,882 | | | 1.5 | % | | 3,334 | | | 1.9 | % |
Other (b) | | 14,377 | | | 1.1 | % | | 2,237 | | | 1.3 | % |
| Total South | | 256,805 | | | 19.2 | % | | 31,628 | | | 18.1 | % |
| Midwest | | | | | | | | |
| Illinois | | 73,872 | | | 5.5 | % | | 10,738 | | | 6.1 | % |
| Minnesota | | 34,766 | | | 2.6 | % | | 3,686 | | | 2.1 | % |
| Indiana | | 29,197 | | | 2.2 | % | | 5,222 | | | 3.0 | % |
| Ohio | | 28,596 | | | 2.1 | % | | 6,181 | | | 3.5 | % |
| Michigan | | 22,287 | | | 1.7 | % | | 3,652 | | | 2.1 | % |
| Wisconsin | | 18,056 | | | 1.4 | % | | 3,276 | | | 1.9 | % |
| Iowa | | 13,450 | | | 1.0 | % | | 1,817 | | | 1.0 | % |
Other (b) | | 29,446 | | | 2.2 | % | | 4,543 | | | 2.6 | % |
| Total Midwest | | 249,670 | | | 18.7 | % | | 39,115 | | | 22.3 | % |
| East | | | | | | | | |
| North Carolina | | 36,634 | | | 2.7 | % | | 8,098 | | | 4.6 | % |
| Pennsylvania | | 31,978 | | | 2.4 | % | | 3,527 | | | 2.0 | % |
| New York | | 19,306 | | | 1.4 | % | | 2,257 | | | 1.3 | % |
| Kentucky | | 18,578 | | | 1.4 | % | | 3,063 | | | 1.8 | % |
| South Carolina | | 18,462 | | | 1.4 | % | | 4,949 | | | 2.8 | % |
| Massachusetts | | 18,129 | | | 1.4 | % | | 1,387 | | | 0.8 | % |
| New Jersey | | 15,735 | | | 1.2 | % | | 943 | | | 0.5 | % |
| Virginia | | 14,580 | | | 1.1 | % | | 1,854 | | | 1.1 | % |
Other (b) | | 24,841 | | | 1.9 | % | | 3,884 | | | 2.2 | % |
| Total East | | 198,243 | | | 14.9 | % | | 29,962 | | | 17.1 | % |
| West | | | | | | | | |
| California | | 67,528 | | | 5.1 | % | | 6,417 | | | 3.7 | % |
| Arizona | | 30,471 | | | 2.3 | % | | 3,437 | | | 2.0 | % |
Other (b) | | 64,759 | | | 4.9 | % | | 6,994 | | | 4.0 | % |
| Total West | | 162,758 | | | 12.3 | % | | 16,848 | | | 9.7 | % |
| United States Total | | 867,476 | | | 65.1 | % | | 117,553 | | | 67.2 | % |
| International | | | | | | | | |
| Germany | | 64,247 | | | 4.8 | % | | 7,020 | | | 4.0 | % |
| Spain | | 58,290 | | | 4.4 | % | | 5,187 | | | 3.0 | % |
| Poland | | 57,874 | | | 4.3 | % | | 8,631 | | | 4.9 | % |
| The Netherlands | | 51,318 | | | 3.8 | % | | 7,054 | | | 4.0 | % |
| United Kingdom | | 46,967 | | | 3.5 | % | | 4,804 | | | 2.8 | % |
| Italy | | 24,570 | | | 1.8 | % | | 2,541 | | | 1.5 | % |
| Denmark | | 20,748 | | | 1.6 | % | | 2,994 | | | 1.7 | % |
| France | | 18,205 | | | 1.4 | % | | 1,685 | | | 1.0 | % |
| Norway | | 18,033 | | | 1.4 | % | | 953 | | | 0.5 | % |
| Croatia | | 17,787 | | | 1.3 | % | | 2,063 | | | 1.2 | % |
| Canada | | 15,950 | | | 1.2 | % | | 2,492 | | | 1.4 | % |
Other (c) | | 72,276 | | | 5.4 | % | | 11,973 | | | 6.8 | % |
| International Total | | 466,265 | | | 34.9 | % | | 57,397 | | | 32.8 | % |
| Total | | $ | 1,333,741 | | | 100.0 | % | | 174,950 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| Region | | ABR | | Percent | | Square Footage (a) | | Percent |
| United States | | | | | | | | |
| South | | | | | | | | |
| Texas | | $ | 56,669 |
| | 8.4 | % | | 8,192 |
| | 9.5 | % |
| Florida | | 29,407 |
| | 4.3 | % | | 2,657 |
| | 3.1 | % |
| Georgia | | 20,863 |
| | 3.1 | % | | 3,293 |
| | 3.8 | % |
| Tennessee | | 15,589 |
| | 2.3 | % | | 2,306 |
| | 2.7 | % |
Other (b) | | 11,722 |
| | 1.7 | % | | 2,280 |
| | 2.7 | % |
| Total South | | 134,250 |
| | 19.8 | % | | 18,728 |
| | 21.8 | % |
| | | | | | | | | |
| East | | | | | | | | |
| North Carolina | | 19,867 |
| | 2.9 | % | | 4,518 |
| | 5.3 | % |
| New Jersey | | 18,768 |
| | 2.8 | % | | 1,097 |
| | 1.3 | % |
| New York | | 18,244 |
| | 2.7 | % | | 1,178 |
| | 1.4 | % |
| Pennsylvania | | 16,870 |
| | 2.5 | % | | 2,525 |
| | 2.9 | % |
| Massachusetts | | 15,402 |
| | 2.3 | % | | 1,390 |
| | 1.6 | % |
| Virginia | | 7,616 |
| | 1.1 | % | | 1,025 |
| | 1.2 | % |
| Connecticut | | 6,940 |
| | 1.0 | % | | 1,135 |
| | 1.3 | % |
Other (b) | | 17,967 |
| | 2.6 | % | | 3,781 |
| | 4.4 | % |
| Total East | | 121,674 |
| | 17.9 | % | | 16,649 |
| | 19.4 | % |
| | | | | | | | | |
| West | | | | | | | | |
| California | | 42,578 |
| | 6.3 | % | | 3,303 |
| | 3.9 | % |
| Arizona | | 26,776 |
| | 3.9 | % | | 3,049 |
| | 3.5 | % |
| Colorado | | 9,834 |
| | 1.5 | % | | 864 |
| | 1.0 | % |
Other (b) | | 26,621 |
| | 3.9 | % | | 3,241 |
| | 3.8 | % |
| Total West | | 105,809 |
| | 15.6 | % | | 10,457 |
| | 12.2 | % |
| | | | | | | | | |
| Midwest | | | | | | | | |
| Illinois | | 21,689 |
| | 3.2 | % | | 3,295 |
| | 3.9 | % |
| Michigan | | 12,171 |
| | 1.8 | % | | 1,396 |
| | 1.6 | % |
| Indiana | | 9,329 |
| | 1.4 | % | | 1,418 |
| | 1.7 | % |
| Ohio | | 8,547 |
| | 1.3 | % | | 1,911 |
| | 2.2 | % |
| Minnesota | | 6,932 |
| | 1.0 | % | | 811 |
| | 0.9 | % |
Other (b) | | 24,064 |
| | 3.5 | % | | 4,385 |
| | 5.1 | % |
| Total Midwest | | 82,732 |
| | 12.2 | % | | 13,216 |
| | 15.4 | % |
| United States Total | | 444,465 |
| | 65.5 | % | | 59,050 |
| | 68.8 | % |
| | | | | | | | | |
| International | | | | | | | | |
| Germany | | 60,506 |
| | 8.9 | % | | 6,272 |
| | 7.3 | % |
| United Kingdom | | 33,570 |
| | 4.9 | % | | 2,324 |
| | 2.7 | % |
| Spain | | 30,438 |
| | 4.5 | % | | 2,927 |
| | 3.4 | % |
| Poland | | 18,321 |
| | 2.7 | % | | 2,189 |
| | 2.5 | % |
| The Netherlands | | 15,341 |
| | 2.3 | % | | 2,233 |
| | 2.6 | % |
| France | | 14,542 |
| | 2.1 | % | | 1,266 |
| | 1.5 | % |
| Finland | | 13,030 |
| | 1.9 | % | | 1,121 |
| | 1.3 | % |
| Canada | | 12,638 |
| | 1.9 | % | | 2,196 |
| | 2.6 | % |
| Australia | | 12,507 |
| | 1.8 | % | | 3,272 |
| | 3.8 | % |
Other (c) | | 23,504 |
| | 3.5 | % | | 3,033 |
| | 3.5 | % |
| International Total | | 234,397 |
| | 34.5 | % | | 26,833 |
| | 31.2 | % |
| | | | | | | | | |
| Total | | $ | 678,862 |
| | 100.0 | % | | 85,883 |
| | 100.0 | % |
W. P. Carey 9/30/2022 10-Q– 52
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| W. P. Carey 9/30/2017 10-Q– 58
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Portfolio Diversification by Property Type
(in thousands, except percentages)
|
| | | | | | | | | | | | | |
| Property Type | | ABR | | Percent | | Square Footage (a) | | Percent |
| Industrial | | $ | 203,127 |
| | 29.9 | % | | 38,564 |
| | 44.9 | % |
| Office | | 166,880 |
| | 24.6 | % | | 10,998 |
| | 12.8 | % |
| Retail | | 111,249 |
| | 16.3 | % | | 9,780 |
| | 11.4 | % |
| Warehouse | | 97,115 |
| | 14.4 | % | | 18,661 |
| | 21.7 | % |
| Self Storage | | 31,853 |
| | 4.7 | % | | 3,535 |
| | 4.1 | % |
Other (d) | | 68,638 |
| | 10.1 | % | | 4,345 |
| | 5.1 | % |
| Total | | $ | 678,862 |
| | 100.0 | % | | 85,883 |
| | 100.0 | % |
__________ | |
(a) | Includes square footage for any vacant properties. |
| |
(b) | Other properties within South include assets in Alabama, Louisiana, Arkansas, Mississippi, and Oklahoma. Other properties within East include assets in Kentucky, South Carolina, Maryland, New Hampshire, and West Virginia. Other properties within West include assets in Utah, Washington, Nevada, Oregon, New Mexico, Wyoming, Alaska, and Montana. Other properties within Midwest include assets in Missouri, Kansas, Wisconsin, Nebraska, Iowa, South Dakota, and North Dakota. |
| |
(c) | Includes assets in Norway, Hungary, Austria, Thailand, Mexico, Sweden, Belgium, and Japan. |
| |
(d) | Includes ABR from tenants within the following property types: education facility, hotel, theater, fitness facility, and net-lease student housing. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property Type | | ABR | | ABR Percent | | Square Footage (a) | | Square Footage Percent |
| Industrial | | $ | 353,348 | | | 26.5 | % | | 61,514 | | | 35.2 | % |
| Warehouse | | 320,697 | | | 24.1 | % | | 62,692 | | | 35.8 | % |
| Office | | 240,110 | | | 18.0 | % | | 17,150 | | | 9.8 | % |
Retail (d) | | 213,357 | | | 16.0 | % | | 20,284 | | | 11.6 | % |
| Self Storage (net lease) | | 61,708 | | | 4.6 | % | | 5,810 | | | 3.3 | % |
Other (e) | | 144,521 | | | 10.8 | % | | 7,500 | | | 4.3 | % |
| Total | | $ | 1,333,741 | | | 100.0 | % | | 174,950 | | | 100.0 | % |
__________
(a)Includes square footage for any vacant properties.
(b)Other properties within South include assets in Louisiana, Arkansas, Oklahoma, and Mississippi. Other properties within Midwest include assets in Missouri, Kansas, Nebraska, South Dakota, and North Dakota. Other properties within East include assets in Maryland, Connecticut, West Virginia, New Hampshire, and Maine. Other properties within West include assets in Utah, Oregon, Colorado, Washington, Nevada, Hawaii, Idaho, New Mexico, Wyoming, and Montana.
(c)Includes assets in Mexico, Lithuania, Finland, Belgium, Hungary, Mauritius, Slovakia, Portugal, the Czech Republic, Austria, Sweden, Japan, Latvia, and Estonia.
(d)Includes automotive dealerships.
(e)Includes ABR from tenants within the following property types: education facility, hotel (net lease), laboratory, specialty, fitness facility, research and development, student housing (net lease), theater, funeral home, restaurant, land, and parking.
W. P. Carey 9/30/2022 10-Q– 53
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Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
| | | Industry Type | | ABR | | Percent | | Square Footage | | Percent | Industry Type | | ABR | | ABR Percent | | Square Footage | | Square Footage Percent |
Retail Stores (a) | | $ | 119,208 |
| | 17.6 | % | | 14,916 |
| | 17.4 | % | Retail Stores (a) | | $ | 262,384 | | | 19.7 | % | | 35,734 | | | 20.4 | % |
| Consumer Services | | 71,119 |
| | 10.5 | % | | 5,604 |
| | 6.5 | % | Consumer Services | | 109,943 | | | 8.3 | % | | 8,067 | | | 4.6 | % |
| Beverage and Food | | Beverage and Food | | 104,493 | | | 7.8 | % | | 15,759 | | | 9.0 | % |
| Automotive | | 55,550 |
| | 8.2 | % | | 9,044 |
| | 10.5 | % | Automotive | | 79,628 | | | 6.0 | % | | 13,038 | | | 7.4 | % |
| Sovereign and Public Finance | | 42,798 |
| | 6.3 | % | | 3,411 |
| | 4.0 | % | |
| Construction and Building | | 36,926 |
| | 5.5 | % | | 8,142 |
| | 9.5 | % | |
| Hotel, Gaming, and Leisure | | 35,352 |
| | 5.2 | % | | 2,254 |
| | 2.6 | % | |
| Beverage, Food, and Tobacco | | 31,222 |
| | 4.6 | % | | 6,876 |
| | 8.0 | % | |
| Grocery | | Grocery | | 72,984 | | | 5.5 | % | | 8,363 | | | 4.8 | % |
| Cargo Transportation | | 28,823 |
| | 4.2 | % | | 3,860 |
| | 4.5 | % | Cargo Transportation | | 60,119 | | | 4.5 | % | | 9,550 | | | 5.5 | % |
| Hotel and Leisure | | Hotel and Leisure | | 55,498 | | | 4.2 | % | | 3,060 | | | 1.7 | % |
| Healthcare and Pharmaceuticals | | 28,203 |
| | 4.2 | % | | 1,988 |
| | 2.3 | % | Healthcare and Pharmaceuticals | | 55,036 | | | 4.1 | % | | 5,557 | | | 3.2 | % |
| Containers, Packaging, and Glass | | 27,278 |
| | 4.0 | % | | 5,325 |
| | 6.2 | % | |
| High Tech Industries | | 26,133 |
| | 3.8 | % | | 2,354 |
| | 2.7 | % | |
| Media: Advertising, Printing, and Publishing | | 25,448 |
| | 3.7 | % | | 1,588 |
| | 1.8 | % | |
| Capital Equipment | | 24,668 |
| | 3.6 | % | | 4,037 |
| | 4.7 | % | Capital Equipment | | 52,520 | | | 3.9 | % | | 8,255 | | | 4.7 | % |
| Business Services | | 14,175 |
| | 2.1 | % | | 1,730 |
| | 2.0 | % | Business Services | | 48,089 | | | 3.6 | % | | 4,113 | | | 2.3 | % |
| Wholesale | | 13,500 |
| | 2.0 | % | | 2,572 |
| | 3.0 | % | |
| Containers, Packaging, and Glass | | Containers, Packaging, and Glass | | 46,286 | | | 3.5 | % | | 8,266 | | | 4.7 | % |
| Construction and Building | | Construction and Building | | 46,021 | | | 3.5 | % | | 9,235 | | | 5.3 | % |
| Durable Consumer Goods | | 11,509 |
| | 1.7 | % | | 2,485 |
| | 2.9 | % | Durable Consumer Goods | | 45,725 | | | 3.4 | % | | 10,299 | | | 5.9 | % |
| Grocery | | 11,421 |
| | 1.7 | % | | 1,260 |
| | 1.5 | % | |
| Sovereign and Public Finance | | Sovereign and Public Finance | | 39,257 | | | 2.9 | % | | 3,560 | | | 2.0 | % |
| High Tech Industries | | High Tech Industries | | 35,043 | | | 2.6 | % | | 3,574 | | | 2.0 | % |
| Insurance | | Insurance | | 30,726 | | | 2.3 | % | | 2,024 | | | 1.2 | % |
| Chemicals, Plastics, and Rubber | | Chemicals, Plastics, and Rubber | | 29,898 | | | 2.2 | % | | 5,254 | | | 3.0 | % |
| Non-Durable Consumer Goods | | Non-Durable Consumer Goods | | 26,085 | | | 2.0 | % | | 6,244 | | | 3.6 | % |
| Banking | | Banking | | 22,821 | | | 1.7 | % | | 1,426 | | | 0.8 | % |
| Metals | | Metals | | 18,281 | | | 1.4 | % | | 3,259 | | | 1.9 | % |
| Aerospace and Defense | | 10,406 |
| | 1.5 | % | | 1,115 |
| | 1.3 | % | Aerospace and Defense | | 16,304 | | | 1.2 | % | | 1,358 | | | 0.8 | % |
| Chemicals, Plastics, and Rubber | | 9,357 |
| | 1.4 | % | | 1,108 |
| | 1.3 | % | |
| Metals and Mining | | 9,177 |
| | 1.4 | % | | 1,341 |
| | 1.6 | % | |
| Oil and Gas | | 8,659 |
| | 1.3 | % | | 368 |
| | 0.4 | % | |
| Banking | | 8,412 |
| | 1.2 | % | | 702 |
| | 0.8 | % | |
| Non-Durable Consumer Goods | | 8,115 |
| | 1.2 | % | | 1,883 |
| | 2.2 | % | |
| Telecommunications | | 7,008 |
| | 1.0 | % | | 418 |
| | 0.5 | % | Telecommunications | | 16,214 | | | 1.2 | % | | 1,686 | | | 1.0 | % |
Other (b) | | 14,395 |
| | 2.1 | % | | 1,502 |
| | 1.8 | % | Other (b) | | 60,386 | | | 4.5 | % | | 7,269 | | | 4.2 | % |
| Total | | $ | 678,862 |
| | 100.0 | % | | 85,883 |
| | 100.0 | % | Total | | $ | 1,333,741 | | | 100.0 | % | | 174,950 | | | 100.0 | % |
__________
| |
(a) | Includes automotive dealerships. |
| |
(b) | Includes ABR from tenants in the following industries: insurance, electricity, media: broadcasting and subscription, forest products and paper, and environmental industries. Also includes square footage for vacant properties. |
(a)Includes automotive dealerships.
(b)Includes ABR from tenants in the following industries: media: broadcasting and subscription, media: advertising, printing, and publishing, wholesale, oil and gas, utilities: electric, environmental industries, consumer transportation, forest products and paper, electricity, and real estate. Also includes square footage for vacant properties.
W. P. Carey 9/30/2022 10-Q– 54
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Lease Expirations
(in thousands, except percentages, number of leases, and number of leases)tenants)
| | Year of Lease Expiration (a) | | Number of Leases Expiring | | ABR | | Percent | | Square
Footage | | Percent | Year of Lease Expiration (a) | | Number of Leases Expiring | | Number of Tenants with Leases Expiring | | ABR | | ABR Percent | | Square
Footage | | Square Footage Percent |
Remaining 2017 (b) | | 3 |
| | $ | 609 |
| | 0.1 | % | | 71 |
| | 0.1 | % | |
| 2018 | | 5 |
| | 8,129 |
| | 1.2 | % | | 1,107 |
| | 1.3 | % | |
| 2019 | | 22 |
| | 31,176 |
| | 4.6 | % | | 3,132 |
| | 3.6 | % | |
| 2020 | | 24 |
| | 33,390 |
| | 4.9 | % | | 3,343 |
| | 3.9 | % | |
| 2021 | | 80 |
| | 42,214 |
| | 6.2 | % | | 6,376 |
| | 7.4 | % | |
| 2022 | | 40 |
| | 70,121 |
| | 10.3 | % | | 9,442 |
| | 11.0 | % | |
| 2023 | | 21 |
| | 41,331 |
| | 6.1 | % | | 5,811 |
| | 6.8 | % | |
| 2024 | | 43 |
| | 95,601 |
| | 14.1 | % | | 11,592 |
| | 13.5 | % | |
| Remaining 2022 | | Remaining 2022 | | 13 | | | 12 | | | $ | 7,642 | | | 0.6 | % | | 717 | | | 0.4 | % |
2023 (b) | | 2023 (b) | | 33 | | | 28 | | | 57,787 | | | 4.3 | % | | 6,939 | | | 4.0 | % |
2024 (c) | | 2024 (c) | | 42 | | | 36 | | | 91,852 | | | 6.9 | % | | 12,413 | | | 7.1 | % |
| 2025 | | 41 |
| | 34,083 |
| | 5.0 | % | | 3,689 |
| | 4.3 | % | 2025 | | 56 | | | 34 | | | 61,672 | | | 4.6 | % | | 7,325 | | | 4.2 | % |
| 2026 | | 19 |
| | 18,912 |
| | 2.8 | % | | 3,159 |
| | 3.7 | % | 2026 | | 44 | | | 34 | | | 57,810 | | | 4.3 | % | | 8,185 | | | 4.7 | % |
| 2027 | | 26 |
| | 42,632 |
| | 6.3 | % | | 6,052 |
| | 7.0 | % | 2027 | | 58 | | | 34 | | | 82,040 | | | 6.2 | % | | 8,986 | | | 5.1 | % |
| 2028 | | 10 |
| | 20,052 |
| | 3.0 | % | | 2,272 |
| | 2.6 | % | 2028 | | 44 | | | 26 | | | 65,870 | | | 4.9 | % | | 5,423 | | | 3.1 | % |
| 2029 | | 11 |
| | 19,970 |
| | 2.9 | % | | 2,897 |
| | 3.4 | % | 2029 | | 57 | | | 29 | | | 65,545 | | | 4.9 | % | | 8,341 | | | 4.8 | % |
| 2030 | | 11 |
| | 50,930 |
| | 7.5 | % | | 4,804 |
| | 5.6 | % | 2030 | | 31 | | | 27 | | | 69,011 | | | 5.2 | % | | 5,844 | | | 3.3 | % |
| Thereafter (>2030) | | 96 |
| | 169,712 |
| | 25.0 | % | | 21,953 |
| | 25.6 | % | |
| 2031 | | 2031 | | 37 | | | 21 | | | 68,117 | | | 5.1 | % | | 8,749 | | | 5.0 | % |
| 2032 | | 2032 | | 40 | | | 21 | | | 41,216 | | | 3.1 | % | | 5,715 | | | 3.3 | % |
| 2033 | | 2033 | | 30 | | | 24 | | | 76,780 | | | 5.8 | % | | 10,907 | | | 6.2 | % |
| 2034 | | 2034 | | 49 | | | 18 | | | 77,608 | | | 5.8 | % | | 8,639 | | | 4.9 | % |
| 2035 | | 2035 | | 14 | | | 14 | | | 28,332 | | | 2.1 | % | | 4,957 | | | 2.8 | % |
| Thereafter (>2035) | | Thereafter (>2035) | | 303 | | | 122 | | | 482,459 | | | 36.2 | % | | 69,930 | | | 40.0 | % |
| Vacant | | — |
| | — |
| | — | % | | 183 |
| | 0.2 | % | Vacant | | — | | | — | | | — | | | — | % | | 1,880 | | | 1.1 | % |
| Total | | 452 |
| | $ | 678,862 |
| | 100.0 | % | | 85,883 |
| | 100.0 | % | Total | | 851 | | | $ | 1,333,741 | | | 100.0 | % | | 174,950 | | | 100.0 | % |
__________
| |
(a) | Assumes tenants do not exercise any renewal options. |
| |
(b) | One month-to-month lease with ABR of $0.1 million is included in 2017 ABR. |
(a)Assumes tenants do not exercise any renewal options or purchase options.
(b)Includes ABR of $16.1 million from a tenant (Marriott Corporation) with a lease expiration in January 2023.
(c)Includes ABR of $38.8 million from a tenant (U-Haul Moving Partners, Inc. and Mercury Partners, LP) that holds an option to repurchase the 78 properties it is leasing in April 2024. There can be no assurance that such repurchase will be completed.
Rent Collections
Through the date of this Report, we received from tenants over 99.3% of contractual base rent that was due during the third quarter of 2022 (based on contractual minimum ABR as of June 30, 2022).
Terms and Definitions
Pro Rata Metrics— The portfolio information above contains certain metrics prepared under theon a pro rata consolidation method.basis. We refer to these metrics as pro rata metrics. We have a number of investments, usually with our affiliates, in which our economic ownership is less than 100%. Under theOn a full consolidation method,basis, we report 100% of the assets, liabilities, revenues, and expenses of those investments that are deemed to be under our control or for which we are deemed to be the primary beneficiary, even if our ownership is less than 100%. Also, for all other jointly owned investments, which we do not control, we report our net investment and our net income or loss from that investment. Under theOn a pro rata consolidation method,basis, we generally present our proportionate share, based on our economic ownership of these jointly owned investments, of the portfolio metrics of those investments. Multiplying each of theour jointly owned investments’ financial statement line items by our percentage ownership and adding those amounts to or subtracting those amounts from our totals, as applicable, may not accurately depict the legal and economic implications of holding an ownership interest of less than 100% in suchour jointly owned investments.
ABR —ABR represents contractual minimum annualized base rent for our net-leased properties and reflects exchange rates as of September 30, 2017.2022. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period. ABR is not applicable to operating properties.
W. P. Carey 9/30/2022 10-Q– 55
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| W. P. Carey 9/30/2017 10-Q– 61
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Results of Operations
We operate in two reportable segments: Owned Real Estate and Investment Management. We evaluate our results of operations with a primary focus on increasing and enhancing the value, quality, and number of properties in our Owned Real Estate segment, as well as assets owned by the Managed Programs, which are managed by us through our Investment Management segment. We focus our efforts on accretive investing and improving underperforming assetsportfolio quality through re-leasing efforts, including negotiation of lease renewals, or selectively selling assets in order to increase value in our real estate portfolio.
As a result of our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017, we have revised how we view and present a component of our two reportable segments. As such, beginning with the second quarter of 2017, we include equity in earnings of equity method investments in the Managed Programs in Through our Investment Management segment, (Note 1). Earnings from our investment in CCIFwe expect to continue to be included inearn fees and other income from the management of the portfolio of CESH until it reaches the end of its life cycle. Refer to Note 16 for tables presenting the comparative results of our Real Estate and Investment Management segment. Results of operations for prior periods have been reclassified to conform to the current period presentation.segments.
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| W. P. Carey 9/30/2017 10-Q– 62
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Owned Real Estate
Revenues
The following table presents the comparative results ofrevenues within our Owned Real Estate segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Real Estate Revenues | | | | | | | | | | | |
| Lease revenues from: | | | | | | | | | | | |
| Existing net-leased properties | $ | 274,434 | | | $ | 276,236 | | | $ | (1,802) | | | $ | 834,410 | | | $ | 825,285 | | | $ | 9,125 | |
| Recently acquired net-leased properties | 39,780 | | | 18,273 | | | 21,507 | | | 97,338 | | | 33,068 | | | 64,270 | |
| Net-leased properties acquired in the CPA:18 Merger | 14,068 | | | — | | | 14,068 | | | 14,068 | | | — | | | 14,068 | |
| Net-leased properties sold or held for sale | 3,620 | | | 4,107 | | | (487) | | | 8,165 | | | 13,992 | | | (5,827) | |
| Total lease revenues (includes reimbursable tenant costs) | 331,902 | | | 298,616 | | | 33,286 | | | 953,981 | | | 872,345 | | | 81,636 | |
| Income from direct financing leases and loans receivable | 20,637 | | | 16,754 | | | 3,883 | | | 56,794 | | | 51,917 | | | 4,877 | |
| Operating property revenues from: | | | | | | | | | | | |
| Operating properties acquired in the CPA:18 Merger | 15,415 | | | — | | | 15,415 | | | 15,415 | | | — | | | 15,415 | |
| Existing operating properties | 5,935 | | | 4,050 | | | 1,885 | | | 14,864 | | | 9,474 | | | 5,390 | |
| Total operating property revenues | 21,350 | | | 4,050 | | | 17,300 | | | 30,279 | | | 9,474 | | | 20,805 | |
| Lease termination income and other | 8,192 | | | 1,421 | | | 6,771 | | | 24,905 | | | 8,066 | | | 16,839 | |
| $ | 382,081 | | | $ | 320,841 | | | $ | 61,240 | | | $ | 1,065,959 | | | $ | 941,802 | | | $ | 124,157 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Revenues | | | | | | | | | | | |
| Lease revenues | $ | 161,511 |
| | $ | 163,786 |
| | $ | (2,275 | ) | | $ | 475,547 |
| | $ | 506,358 |
| | $ | (30,811 | ) |
| Operating property revenues | 8,449 |
| | 8,524 |
| | (75 | ) | | 23,652 |
| | 23,696 |
| | (44 | ) |
| Reimbursable tenant costs | 5,397 |
| | 6,537 |
| | (1,140 | ) | | 15,940 |
| | 19,237 |
| | (3,297 | ) |
| Lease termination income and other | 1,227 |
| | 1,224 |
| | 3 |
| | 4,234 |
| | 34,603 |
| | (30,369 | ) |
| | 176,584 |
| | 180,071 |
| | (3,487 | ) | | 519,373 |
| | 583,894 |
| | (64,521 | ) |
| Operating Expenses | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | |
| Net-leased properties | 61,583 |
| | 60,337 |
| | 1,246 |
| | 182,314 |
| | 206,312 |
| | (23,998 | ) |
| Operating properties | 1,067 |
|
| 1,071 |
| | (4 | ) | | 3,202 |
| | 3,174 |
| | 28 |
|
| Corporate depreciation and amortization | 320 |
| | 332 |
| | (12 | ) | | 965 |
| | 1,071 |
| | (106 | ) |
| | 62,970 |
| | 61,740 |
| | 1,230 |
| | 186,481 |
| | 210,557 |
| | (24,076 | ) |
| Property expenses: | | | | | | | | | | | |
| Operating property expenses | 6,227 |
| | 5,611 |
| | 616 |
| | 17,859 |
| | 17,117 |
| | 742 |
|
| Reimbursable tenant costs | 5,397 |
| | 6,537 |
| | (1,140 | ) | | 15,940 |
| | 19,237 |
| | (3,297 | ) |
| Net-leased properties | 4,329 |
| | 4,582 |
| | (253 | ) | | 13,337 |
| | 21,358 |
| | (8,021 | ) |
| | 15,953 |
| | 16,730 |
| | (777 | ) | | 47,136 |
| | 57,712 |
| | (10,576 | ) |
| General and administrative | 11,234 |
| | 7,453 |
| | 3,781 |
| | 27,311 |
| | 25,653 |
| | 1,658 |
|
| Stock-based compensation expense | 1,880 |
| | 1,572 |
| | 308 |
| | 4,733 |
| | 4,316 |
| | 417 |
|
| Other expenses | 65 |
| | — |
| | 65 |
| | 1,138 |
| | 2,975 |
| | (1,837 | ) |
| Impairment charges | — |
| | 14,441 |
| | (14,441 | ) | | — |
| | 49,870 |
| | (49,870 | ) |
| Restructuring and other compensation | — |
| | — |
| | — |
| | — |
| | 4,413 |
| | (4,413 | ) |
| | 92,102 |
| | 101,936 |
| | (9,834 | ) | | 266,799 |
| | 355,496 |
| | (88,697 | ) |
| Other Income and Expenses | | | | | | | | | | | |
| Interest expense | (41,182 | ) | | (44,349 | ) | | 3,167 |
| | (125,374 | ) | | (139,496 | ) | | 14,122 |
|
| Equity in earnings of equity method investments in real estate | 3,740 |
| | 3,230 |
| | 510 |
| | 9,533 |
| | 9,585 |
| | (52 | ) |
| Other income and (expenses) | (4,918 | ) | | 3,244 |
| | (8,162 | ) | | (6,249 | ) | | 7,681 |
| | (13,930 | ) |
| | (42,360 | ) | | (37,875 | ) | | (4,485 | ) | | (122,090 | ) | | (122,230 | ) | | 140 |
|
| Income before income taxes and gain on sale of real estate | 42,122 |
| | 40,260 |
| | 1,862 |
| | 130,484 |
| | 106,168 |
| | 24,316 |
|
| (Provision for) benefit from income taxes | (1,511 | ) | | (530 | ) | | (981 | ) | | (6,696 | ) | | 6,792 |
| | (13,488 | ) |
| Income before gain on sale of real estate | 40,611 |
| | 39,730 |
| | 881 |
| | 123,788 |
| | 112,960 |
| | 10,828 |
|
| Gain on sale of real estate, net of tax | 19,257 |
| | 49,126 |
| | (29,869 | ) | | 22,732 |
| | 68,070 |
| | (45,338 | ) |
| Net Income from Owned Real Estate | 59,868 |
| | 88,856 |
| | (28,988 | ) | | 146,520 |
| | 181,030 |
| | (34,510 | ) |
| Net income attributable to noncontrolling interests | (3,376 | ) | | (1,359 | ) | | (2,017 | ) | | (8,530 | ) | | (6,294 | ) | | (2,236 | ) |
| Net Income from Owned Real Estate Attributable to W. P. Carey | $ | 56,492 |
| | $ | 87,497 |
| | $ | (31,005 | ) | | $ | 137,990 |
| | $ | 174,736 |
| | $ | (36,746 | ) |
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| W. P. Carey 9/30/2017 10-Q– 63
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Lease Composition and Leasing Activities
As of September 30, 2017, 68.9% of our net leases, based on ABR, have rent increase adjustments based on CPI or similar indices and 26.2% of our net leases, based on ABR, have fixed rent increases. These leases comprise 95.1% of our portfolio. CPI and similar rent adjustments are based on formulas indexed to changes in the CPI, or other similar indices for the jurisdiction in which the property is located, some of which have caps and/or floors. Over the next 12 months, fixed rent escalations are scheduled to increase ABR by an average of 2.5%, excluding leases that are set to expire within the next 12 months. We own international investments and, therefore, lease revenues from these investments are subject to exchange rate fluctuations in various foreign currencies, primarily the euro.
The following discussion presents a summary of rents on existing properties arising from leases with new tenants and renewed leases with existing tenants for the period presented and, therefore, does not include new acquisitions or properties placed into service for our portfolio during the periods presented, as applicable.
During the three months ended September 30, 2017, we entered into one new lease for approximately 3,000 square feet of leased space. The rent for the leased space is $22.50 per square foot. In addition, during the three months ended September 30, 2017, we extended two leases with existing tenants for a total of approximately 0.1 million square feet of leased space. The average new rent for the leased space is $7.19 per square foot, compared to the average former rent of $7.18 per square foot.
During the nine months ended September 30, 2017, we entered into five new leases for a total of approximately 0.4 million square feet of leased space. The average rent for the leased space is $14.92 per square foot. We provided tenant improvement allowances for the four new leases totaling $8.8 million. In addition, during the nine months ended September 30, 2017, we extended 22 leases with existing tenants for a total of approximately 2.8 million square feet of leased space. The average new rent for the leased space is $5.27 per square foot, compared to the average former rent of $5.47 per square foot, reflecting current market conditions. We provided tenant improvement allowances on four of these leases totaling $4.0 million.
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| W. P. Carey 9/30/2017 10-Q– 64
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Property Level Contribution
The following table presents the Property level contribution for our consolidated net-leased and operating properties as well as a reconciliation to Net income from Owned Real Estate attributable to W. P. Carey (in thousands):9/30/2022 10-Q– 56
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Existing Net-Leased Properties | | | | | | | | | | | |
| Lease revenues | $ | 148,721 |
| | $ | 143,209 |
| | $ | 5,512 |
| | $ | 436,210 |
| | $ | 431,502 |
| | $ | 4,708 |
|
| Property expenses | (3,776 | ) | | (3,419 | ) | | (357 | ) | | (11,438 | ) | | (10,048 | ) | | (1,390 | ) |
| Depreciation and amortization | (56,244 | ) | | (55,111 | ) | | (1,133 | ) | | (165,834 | ) | | (165,842 | ) | | 8 |
|
| Property level contribution | 88,701 |
| | 84,679 |
| | 4,022 |
| | 258,938 |
| | 255,612 |
| | 3,326 |
|
| Recently Acquired Net-Leased Properties | | | | | | | | | | | |
| Lease revenues | 11,953 |
| | 8,099 |
| | 3,854 |
| | 35,302 |
| | 14,815 |
| | 20,487 |
|
| Property expenses | (80 | ) | | (28 | ) | | (52 | ) | | (325 | ) | | (37 | ) | | (288 | ) |
| Depreciation and amortization | (5,032 | ) | | (3,823 | ) | | (1,209 | ) | | (14,845 | ) | | (6,885 | ) | | (7,960 | ) |
| Property level contribution | 6,841 |
| | 4,248 |
| | 2,593 |
| | 20,132 |
| | 7,893 |
| | 12,239 |
|
| Properties Sold or Held for Sale | | | | | | | | | | | |
| Lease revenues | 837 |
| | 12,478 |
| | (11,641 | ) | | 4,035 |
| | 60,041 |
| | (56,006 | ) |
| Operating revenues | — |
| | — |
| | — |
| | — |
| | 61 |
| | (61 | ) |
| Property expenses | (473 | ) | | (1,139 | ) | | 666 |
| | (1,574 | ) | | (11,379 | ) | | 9,805 |
|
| Depreciation and amortization | (307 | ) | | (1,403 | ) | | 1,096 |
| | (1,635 | ) | | (33,598 | ) | | 31,963 |
|
| Property level contribution | 57 |
| | 9,936 |
| | (9,879 | ) | | 826 |
| | 15,125 |
| | (14,299 | ) |
| Operating Properties | | | | | | | | | | | |
| Revenues | 8,449 |
| | 8,524 |
| | (75 | ) | | 23,652 |
| | 23,635 |
| | 17 |
|
| Property expenses | (6,227 | ) | | (5,607 | ) | | (620 | ) | | (17,859 | ) | | (17,011 | ) | | (848 | ) |
| Depreciation and amortization | (1,067 | ) | | (1,071 | ) | | 4 |
| | (3,202 | ) | | (3,161 | ) | | (41 | ) |
| Property level contribution | 1,155 |
| | 1,846 |
| | (691 | ) | | 2,591 |
| | 3,463 |
| | (872 | ) |
| Property Level Contribution | 96,754 |
| | 100,709 |
| | (3,955 | ) | | 282,487 |
| | 282,093 |
| | 394 |
|
| Add: Lease termination income and other | 1,227 |
| | 1,224 |
| | 3 |
| | 4,234 |
| | 34,603 |
| | (30,369 | ) |
| Less other expenses: | | | | | | | | | | | |
| General and administrative | (11,234 | ) | | (7,453 | ) | | (3,781 | ) | | (27,311 | ) | | (25,653 | ) | | (1,658 | ) |
| Stock-based compensation expense | (1,880 | ) | | (1,572 | ) | | (308 | ) | | (4,733 | ) | | (4,316 | ) | | (417 | ) |
| Corporate depreciation and amortization | (320 | ) | | (332 | ) | | 12 |
| | (965 | ) | | (1,071 | ) | | 106 |
|
| Other expenses | (65 | ) | | — |
| | (65 | ) | | (1,138 | ) | | (2,975 | ) | | 1,837 |
|
| Impairment charges | — |
| | (14,441 | ) | | 14,441 |
| | — |
| | (49,870 | ) | | 49,870 |
|
| Restructuring and other compensation | — |
| | — |
| | — |
| | — |
| | (4,413 | ) | | 4,413 |
|
| Other Income and Expenses | | | | | | | | | | | |
| Interest expense | (41,182 | ) | | (44,349 | ) | | 3,167 |
| | (125,374 | ) | | (139,496 | ) | | 14,122 |
|
| Equity in earnings of equity method investments in real estate | 3,740 |
| | 3,230 |
| | 510 |
| | 9,533 |
| | 9,585 |
| | (52 | ) |
| Other income and (expenses) | (4,918 | ) | | 3,244 |
| | (8,162 | ) | | (6,249 | ) | | 7,681 |
| | (13,930 | ) |
| | (42,360 | ) | | (37,875 | ) | | (4,485 | ) | | (122,090 | ) | | (122,230 | ) | | 140 |
|
| Income before income taxes and gain on sale of real estate | 42,122 |
| | 40,260 |
| | 1,862 |
| | 130,484 |
| | 106,168 |
| | 24,316 |
|
| (Provision for) benefit from income taxes | (1,511 | ) | | (530 | ) | | (981 | ) | | (6,696 | ) | | 6,792 |
| | (13,488 | ) |
| Income before gain on sale of real estate | 40,611 |
| | 39,730 |
| | 881 |
| | 123,788 |
| | 112,960 |
| | 10,828 |
|
| Gain on sale of real estate, net of tax | 19,257 |
| | 49,126 |
| | (29,869 | ) | | 22,732 |
| | 68,070 |
| | (45,338 | ) |
| Net Income from Owned Real Estate | 59,868 |
| | 88,856 |
| | (28,988 | ) | | 146,520 |
| | 181,030 |
| | (34,510 | ) |
| Net income attributable to noncontrolling interests | (3,376 | ) | | (1,359 | ) | | (2,017 | ) | | (8,530 | ) | | (6,294 | ) | | (2,236 | ) |
| Net Income from Owned Real Estate Attributable to W. P. Carey | $ | 56,492 |
| | $ | 87,497 |
| | $ | (31,005 | ) | | $ | 137,990 |
| | $ | 174,736 |
| | $ | (36,746 | ) |
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| W. P. Carey 9/30/2017 10-Q– 65
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Lease Revenues
Property level contribution is a non-GAAP measure that we believe to be a useful supplemental measure for management and investors in evaluating and analyzing the financial results of our net-leased and operating properties included in our Owned Real Estate segment over time. Property level contribution presents the lease and operating property revenues, less property expenses and depreciation and amortization. We believe that Property level contribution allows for meaningful comparison between periods of the direct costs of owning and operating our net-leased assets and operating properties. When a property is leased on a net-lease basis, reimbursable tenant costs are recorded as both income and property expense and, therefore, have no impact on the Property level contribution. While we believe that Property level contribution is a useful supplemental measure, it should not be considered as an alternative to Net income from Owned Real Estate attributable to W. P. Carey as an indication of our operating performance.
During the three months ended September 30, 2017, certain of our properties were damaged by Hurricane Harvey and Hurricane Irma. As a result, we evaluated such properties to determine if any losses should be recognized. We determined that the damages incurred were immaterial, and as such, no losses have been recorded.
Existing Net-Leased Properties
“Existing net-leased propertiesproperties” are those that we acquired or placed into service prior to January 1, 20162021 and that were not sold or held for sale during the periods presented. For the periods presented, there were 8081,108 existing net-leased properties.
For the three and nine months ended September 30, 20172022 as compared to the same periodperiods in 2016,2021, lease revenues from existing net-leased properties increased by $2.2 milliondue to the following items (in millions):
__________
(a)Excludes fixed minimum rent increases, which are reflected as straight-line rent adjustments within lease revenues.
(b)Primarily related to (i) straight-line rent adjustments as a result of an increase in the average exchange ratecontractual rental revenue from certain leases being deemed probable of the U.S. dollar in relation to foreign currencies (primarily the euro) between the periods, $1.3 million related to scheduledcollection and (ii) write-offs of above/below-market rent increases, $1.2 million due to new leases with existing tenants, and $0.8 million related to completed build-to-suit or expansion projects on existing properties. Depreciation and amortization expense from existing net-leased properties increased primarily as a result of an increase in the average exchange rate of the U.S. dollar in relation to foreign currencies (primarily the euro) between the periods.intangibles.
For the nine months ended September 30, 2017 as compared to the same period in 2016, lease revenues from existing net-leased properties increased by $3.3 million related to scheduled rent increases, $2.8 million due to new leases with existing tenants, and $2.4 million related to completed build-to-suit or expansion projects on existing properties. These increases were partially offset by decreases of $2.2 million as a result of a decrease in the average exchange rate of the U.S. dollar in relation to foreign currencies (primarily the British pound sterling) between the periods, $1.0 million due to lease restructurings, and $1.0 million due to lease expirations.
Recently Acquired Net-Leased Properties
“Recently acquired net-leased propertiesproperties” are those that we acquired or placed into service subsequent to December 31, 2015.2020 and that were not sold or held for sale during the periods presented. Since January 1, 2016,2021, we acquired four43 investments comprised(comprised of 67168 properties 51and six land parcels under buildings that we already own) and placed two properties into service.
W. P. Carey 9/30/2022 10-Q– 57
“Net-leased properties acquired in the CPA:18 Merger” on August 1, 2022 (Note 3) consisted of 40 net-leased properties, which we acquiredcontributed two months of lease revenue, depreciation and amortization, and property expenses during the second quarterthree and nine months ended September 30, 2022.
“Net-leased properties sold or held for sale” include (i) 17 net-leased properties disposed of 2016, 15 of which we acquired during the fourth quarternine months ended September 30, 2022, (ii) one net-leased property classified as held for sale at September 30, 2022, and (iii) 24 net-leased properties disposed of 2016, and one of which we acquired during the second quarteryear ended December 31, 2021. Our dispositions are more fully described in Note 15.
W. P. Carey 9/30/2022 10-Q– 58
Income from Direct Financing Leases and Loans Receivable
We currently present Income from direct financing leases and loans receivable on its own line item in the consolidated statements of 2017.income. Previously, income from direct financing leases was included within Lease revenues and income from loans receivable was included within Lease termination income and other in the consolidated statements of income. Prior period amounts have been reclassified to conform to the current period presentation.
For the three and nine months ended September 30, 2017, property level contribution from recently acquired net-leased properties increased by $2.6 million and $12.2 million, respectively, reflecting the results of operations of our investments completed during 2016 and 2017.
Properties Sold or Held for Sale
In addition2022 as compared to the impactsame periods in 2021, income from direct financing leases and loans receivable increased due to the following items (in millions):
W. P. Carey 9/30/2022 10-Q– 59
Operating Property Revenues and Expenses
“Operating properties acquired in the CPA:18 Merger” on August 1, 2022 (Note 3) consisted of 65 self-storage properties and two student housing properties, which contributed two months of lease revenue, depreciation and amortization, and property level contribution relatedexpenses during the three and nine months ended September 30, 2022.
“Existing operating properties” are those that we acquired or placed into service prior to
properties weJanuary 1, 2021 and that were not sold or
classified as held for sale during the periods
presented. For the periods presented, we
recognized gainsrecorded operating property revenues from 11 existing operating properties, comprised of ten self-storage operating properties (which excludes nine self-storage properties accounted for under the equity method) and
losses on sale of real estate, lease termination income, impairment charges, allowancesone hotel operating property. For our hotel operating property, revenues and expenses increased by (i) $1.3 million and $0.5 million, respectively, for
credit losses, and gain (loss) on extinguishment of debt. The impact of these transactions is described in further detail below and in Note 15.
During the three months ended September 30, 2017, we disposed of five properties. During2022 as compared to the same period in 2021, and (ii) $4.2 million and $2.5 million, respectively, for the nine months ended September 30, 2017, we disposed of 13 properties, one of which was held for sale at December 31, 2016,2022 as compared to the same period in 2021, reflecting higher occupancy as the hotel’s business recovers from the ongoing COVID-19 pandemic.
Lease Termination Income and
a parcel of vacant land. At September 30, 2017, we had one property classified as held for sale (Note 4). During the year ended December 31, 2016, we disposed of 33 properties and a parcel of vacant land.Other
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| W. P. Carey 9/30/2017 10-Q– 66
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In the fourth quarter of 2015, we executed a lease amendment with a tenant in a domestic office building. The amendment extended the lease term an additional 15 years to January 31, 2037 and provided a one-time rent payment of $25.0 million, which was paid to us on December 18, 2015. The lease amendment also provided an option to terminate the lease effective February 29, 2016, with additional lease termination fees of $22.2 million to be paid to us on or five days before February 29, 2016 upon exercise of the option. The tenant exercised the option on January 1, 2016. The aggregate of the additional rent payment of $25.0 million and the lease termination fees of $22.2 million were amortized to leaseLease termination income fromand other is described in Note 5.
Operating Expenses
Depreciation and Amortization
For the lease amendment date on December 4, 2015 through the end of the non-cancelable lease term on February 29, 2016, resulting in $15.0 million recognized during the year ended December 31, 2015three and $32.2 million recognized during the nine months ended September 30, 2016 within Lease termination income and other in the consolidated financial statements. During the fourth quarter of 2015, we entered into an agreement2022 as compared to sell the property to a third party. In February 2016, we sold the property. As a result of this lease termination and sale, we recognized accelerated amortization of below-market rent intangibles of $16.7 million during the nine months ended September 30, 2016, which was recorded as an adjustment to lease revenues. In addition, for the same property, we recognized accelerated amortization of in-place lease intangibles of $20.3 million during that period, which is includedperiods in 2021, depreciation and amortization expense.
In addition, during the nine months ended September 30, 2016, we recorded an allowanceexpense for credit losses of $7.1 million on an international direct financing lease investment that was sold in August 2017, which was included in property expenses,net-leased properties increased primarily due to a declinethe impact of net acquisition activity (including properties acquired in the estimated amountCPA:18 Merger (Note 3)), partially offset by the weakening of future payments we would receive fromforeign currencies (primarily the tenant (Note 5).euro and British pound sterling) in relation to the U.S. dollar between the periods.
Operating PropertiesGeneral and Administrative
Operating properties consist ofAll general and administrative expenses are attributed to our investments in two hotels for all periods presented.Real Estate segment.
For the three and nine months ended September 30, 20172022 as compared to the same periods in 2016, property expenses for operating properties increased due to increases in costs related to room and food services, property management, and marketing.
Other Revenues and Expenses
Lease Termination Income and Other
2017 — For the nine months ended September 30, 2017, lease termination income and other was $4.2 million. We received proceeds from a bankruptcy settlement claim with a former tenant during both the second and third quarters of 2017 and recognized income during the first, second, and third quarters of 2017 related to a lease termination that occurred during the first quarter of 2017. Lease termination income and other also consists of earnings from our note receivable (Note 5).
2016 — For the nine months ended September 30, 2016, lease termination income and other was $34.6 million, primarily consisting of the $32.2 million of lease termination income related to a domestic property that was sold in February 2016, as discussed above (Note 15).
General and Administrative
Beginning with the third quarter of 2017, personnel and rent expenses included within2021, general and administrative expenses that are recordedincreased by our Owned Real Estate segment will be allocated based on time incurred by our personnel for the Owned Real Estate$2.5 million and Investment Management segments. All other overhead costs are charged$3.9 million, respectively, primarily due to our Investment Management segment based on the trailing 12-month reported revenues of the Managed Programshigher compensation expense.
Merger and us.Other Expenses
As discussed in Note 3, certain personnel costs and overhead costs are charged to the CPA® REITs based on the trailing 12-month reported revenues of the Managed Programs and us. We allocate certain personnel and overhead costs to the CWI REITs based on the time incurred by our personnel. We allocate certain personnel costs based on the time incurred by our personnel to CESH I and, prior to our resignation as the advisor to CCIF in the third quarter of 2017, to the Managed BDCs.
For the three and nine months ended September 30, 20172022 and 2021, merger and other expenses are primarily comprised of costs incurred in connection with the CPA:18 Merger (Note 3) and/or reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with mergers in prior years.
Property Expenses, Excluding Reimbursable Tenant Costs
For the three months ended September 30, 2022 as compared to the same
periodsperiod in
2016, general and administrative2021, property expenses,
in our Owned Real Estate segment, which excludes restructuring and other compensation expenses as described below, increasedexcluding reimbursable tenant costs, decreased by
$3.8$2.5 million,
and $1.7 million, respectively, primarily due to
higher property tax assessments at certain properties during the
change in methodology for allocation of expenses between our Owned Real Estate and Investment Management segments (Note 1).
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Stock-based Compensation Expense
Beginning with the third quarter of 2017, stock-basedStock-based compensation expense is being allocated tofully recognized within our Owned Real Estate and Investment Management segments based on time incurred by our personnel for those segments.segment.
For the three and nine months ended September 30, 2017, stock-based compensation expense allocated to our Owned Real Estate segment was $1.9 million and $4.7 million, respectively, substantially unchanged from the prior year periods.
Other Expenses
For the nine months ended September 30, 20172022 as compared to the same periodperiods in 2016, other expenses decreased2021, stock-based compensation expense increased by $1.8$1.2 million and $4.3 million, respectively, primarily due to advisory expenses and professional fees incurred duringchanges in the prior year period within our Owned Real Estate segment in connection with the formal strategic review that we completed in May 2016.projected payout for PSUs.
Impairment Charges — Real Estate
Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. Our impairment charges on real estate are more fully described in Note 89.W. P. Carey 9/30/2022 10-Q– 60
During the three months ended September 30, 2016, we recognized impairment charges totaling $14.4 million, including an amount attributable to a noncontrolling interest of $0.6 million, on 18 properties, including a portfolio of 14 properties, in order to reduce the carrying values of the properties to their estimated fair values. The impairment charges recognized on the portfolio of 14 properties were in addition to charges recognized on the portfolio during the six months ended June 30, 2016 (as described below)
Other Income and (Expenses), based on the purchase and sale agreementProvision for the portfolio. The fair value measurements for the properties approximated their estimated selling prices, less estimated costs to sell. The portfolio of 14 properties was sold in October 2016. Of the other four properties, one was sold in December 2016, two were disposed of in January 2017, and one property, which was classified as held for sale as of December 31, 2016, was sold in January 2017.Income Taxes
During the nine months ended September 30, 2016, we recognized impairment charges totaling $49.9 million, including an amount attributable to a noncontrolling interest of $0.6 million, on 18 properties in order to reduce the carrying values of the properties to their estimated fair values. In addition to the impairment charges of $14.4 million recognized during the three months ended September 30, 2016, described above, we recognized impairment charges totaling $35.4 million on the portfolio of 14 properties during the six months ended June 30, 2016, in order to reduce the carrying values of the properties to their estimated fair values at that time. The fair value measurements for the properties approximated their estimated selling prices, less estimated costs to sell.
Restructuring and Other Compensation
For the nine months ended September 30, 2016, we recorded total restructuring and other compensation expenses of $11.9 million, of which $4.4 million was allocated to our Owned Real Estate segment. Included in the total was $5.1 million of severance related to the employment agreement with our former chief executive officer and $6.8 million related to severance, stock-based compensation, and other costs incurred as part of the employee terminations and RIF during the period (Note 12).
Interest Expense
For the three and nine months ended September 30, 20172022 as compared to the same periods in 2016,2021, interest expense decreasedincreased by $3.2$10.3 million and $14.1$1.9 million, respectively, primarily due to an overall decrease(i) $8.0 million of interest expense incurred during August and September 2022 related to non-recourse mortgage loans assumed in the CPA:18 Merger (Note 3) and (ii) higher outstanding balances and interest rates on our weighted-average interest rate, as well as an overall decreaseSenior Unsecured Credit Facility, partially offset by (i) the weakening of foreign currencies (primarily the euro and British pound sterling) in relation to the U.S. dollar between the periods and (ii) the reduction of our averagemortgage debt outstanding debt balances. Our weighted-average interest rate was 3.5% and 3.8% during the three months ended September 30, 2017 and 2016, respectively, and 3.6% and 3.9% during the nine months ended September 30, 2017 and 2016, respectively. Our average outstanding debt balance was $4.3 billion and $4.5 billion during the three months ended September 30, 2017 and 2016, respectively, and $4.3 billion and $4.6 billion during the nine months ended September 30, 2017 and 2016, respectively. Theby prepaying or repaying at or close to maturity a total of $823.8 million of non-recourse mortgage loans with a weighted-average interest rate of our debt decreased primarily as a result of paying off certain non-recourse mortgage loans with unsecured borrowings, which bear interest at a lower rate than our mortgage loans4.8% since January 1, 2021 (Note 1011).
The following table presents certain information about our outstanding debt (dollars in thousands):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Average outstanding debt balance | $ | 7,827,346 | | | $ | 6,936,086 | | | $ | 7,193,779 | | | $ | 6,917,578 | |
| Weighted-average interest rate | 2.6 | % | | 2.5 | % | | 2.5 | % | | 2.6 | % |
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Other IncomeGains and (Expenses)(Losses)
Other incomegains and (expenses)(losses) primarily consists of gains and losses on (i) the mark-to-market fair value of equity securities, (ii) extinguishment of debt, and (iii) foreign currency transactions, derivativeexchange rate movements. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation. All of our foreign currency-denominated unsecured debt instruments were designated as net investment hedges during the three and extinguishment of debt. Gainsnine months ended September 30, 2022 and 2021. Therefore, no gains and losses on foreign currency transactions areexchange rate movements were recognized on the remeasurement of certain ofsuch instruments during those periods (Note 10). The following table presents other gains and (losses) within our euro-denominated unsecured debt instruments that are not designated as net investment hedges. Real Estate segment (in thousands):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Other Gains and (Losses) | | | | | | | | | | | |
Net realized and unrealized losses on foreign currency exchange rate movements (a) | $ | (36,288) | | | $ | (7,005) | | | $ | (29,283) | | | $ | (84,392) | | | $ | (11,186) | | | $ | (73,206) | |
Net release of allowance for credit losses on finance receivables (Note 6) | 16,184 | | | 488 | | | 15,696 | | | 17,164 | | | 6,737 | | | 10,427 | |
Gain on repayment of secured loan receivable (b) | 10,613 | | | — | | | 10,613 | | | 10,613 | | | — | | | 10,613 | |
Write-off of an insurance receivable acquired as part of a prior merger (c) | (9,358) | | | — | | | (9,358) | | | (9,358) | | | — | | | (9,358) | |
Gain (loss) on extinguishment of debt (d) | 2,342 | | | (99) | | | 2,441 | | | 1,301 | | | (60,167) | | | 61,468 | |
Non-cash unrealized gains related to an increase in the fair value of our investment in shares of Lineage Logistics (Note 9) | — | | | 52,931 | | | (52,931) | | | — | | | 76,312 | | | (76,312) | |
Non-cash unrealized gains related to an increase in the fair value of our investment in common shares of WLT (Note 9) | — | | | — | | | — | | | 43,397 | | | — | | | 43,397 | |
Realized gains in connection with the redemption of our investment in preferred shares of WLT (Note 9) | — | | | — | | | — | | | 18,688 | | | — | | | 18,688 | |
| Other | 2,547 | | | 1,857 | | | 690 | | | 2,890 | | | 1,759 | | | 1,131 | |
| $ | (13,960) | | | $ | 48,172 | | | $ | (62,132) | | | $ | 303 | | | $ | 13,455 | | | $ | (13,152) | |
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W. P. Carey 9/30/2022 10-Q– 61
(a)We make certain foreign currency-denominated intercompany loans to a number of our foreign subsidiaries, most of which do not have the U.S. dollar as their functional currency. Remeasurement of foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and short-termamortizing loans, are included in the determinationother gains and (losses).
(b)We acquired a secured loan receivable with a fair value of net income. We also recognize gains or losses on foreign currency transactions when we repatriate cash from$23.4 million in our foreign investments. In addition, we have certain derivative instruments, including common stock warrants and foreign currency contracts, that are not designated as hedges for accounting purposes,merger with a former affiliate, Corporate Property Associates 17 – Global Incorporated, in October 2018 (“CPA:17 Merger”), for which realized and unrealized gains and losses are includedthe outstanding principal of $34.0 million was fully repaid to us in earnings. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation.
2017 — For the three months ended September 30, 2017, net other expenses were $4.9 million. During the period,2022 (Note 6). Therefore, we recognized net realized and unrealized losses of $7.0recorded a $10.6 million gain on foreign currency transactions as a result of changes in foreign currency exchange rates and a net loss on extinguishment of debt totaling $1.6 million primarily related to the repayment of a non-recourse mortgagethis secured loan encumbering a domestic property thatreceivable.(c)This insurance receivable was soldacquired in July 2017 (Note 15). These losses were partially offset by realized gains of $2.3 million related to foreign currency forward contracts and foreign currency collars and interest income of $0.5 million primarily related to our loans to affiliates (Note 3).the CPA:17 Merger.
For(d)Amount for the nine months ended September 30, 2017, net other expenses were $6.2 million. During2021 is related to the period, we recognized net realizedprepayment of mortgage loans (primarily comprised of prepayment penalties totaling $32.1 million) and unrealized lossesredemption of $16.4the €500.0 million on foreign currency transactions asof 2.0% Senior Notes due 2023 in March 2021 (primarily comprised of a result“make-whole” amount of changes in foreign currency exchange rates and unrealized losses of $1.1 million primarily on foreign currency collars prior to their maturities on various dates during the period, as well as on common stock warrants that we own in connection with certain investments. These losses were partially offset by realized gains of $8.6$26.2 million related to foreign currency forward contracts and foreign currency collars and interest income of $1.5 million primarily related to our loans to affiliatesthe redemption) (Note 311).
2016 — For the three months ended September 30, 2016, net other income was $3.2 million. During the period, we recognized realized gains of $2.4 million related to foreign currency forward contracts and foreign currency collars and unrealized gains of $0.7 million recognized primarily on interest rate swaps that did not qualify for hedge accounting. In addition, we recognized a gain of $0.7 million in our Owned Real Estate segment on the deconsolidation of an affiliate, CESH I (Note 2). These gains were partially offset by a net loss on extinguishment of debt of $2.1 million primarily related to the payoff of a non-recourse mortgage loan.For the nine months ended September 30, 2016, net other income was $7.7 million. During the period, we recognized realized gains of $6.4 million related to foreign currency forward contracts and foreign currency collars, unrealized gains of $3.2 million recognized primarily on interest rate swaps that did not qualify for hedge accounting, and interest income of $0.6 million primarily related to our loans to affiliates (Note 3). In addition, we recognized a gain of $0.7 million in our Owned Real Estate segment on the deconsolidation of CESH I (Note 2). These gains were partially offset by a net loss on extinguishment of debt of $3.9 million primarily related to the payoff of two non-recourse mortgage loans.
(Provision for) Benefit from Income Taxes
For the three months ended September 30, 2017, as compared to the same period in 2016, provision for income taxes within our Owned Real Estate segment increased by $1.0 million, primarily due to (i) a decrease of $0.7 million in deferred tax benefits, primarily associated with basis differences on certain foreign properties and (ii) an increase of $0.2 million in current federal, foreign, and state franchise taxes due to higher taxable income on our domestic TRSs and foreign properties.
For the nine months ended September 30, 2017, we recognized a provision for income taxes of $6.7 million, compared to a benefit from income taxes of $6.8 million recorded during the same period in 2016, within our Owned Real Estate segment. During the nine months ended September 30, 2016, we recorded $19.7 million of deferred tax benefits associated with basis differences on certain foreign properties, primarily resulting from the impairment charges recorded in the period on certain international properties (Note 8). In addition, current federal, foreign, and state franchise taxes decreased by $1.1 million due to decreases in taxable income generated by our domestic TRSs and foreign properties.
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Gain on SaleChange in Control of Real Estate, Net of TaxInterests
Gain on sale of real estate, net of tax consists of gain onIn connection with the sale of properties, net of tax that were disposed ofCPA:18 Merger, during the three and nine months ended September 30, 20172022, we acquired the remaining interests in four investments in which we already had a joint interest and 2016accounted for under the equity method. Due to the change in control of these four jointly owned investments, we recorded a gain on change in control of interests of $11.4 million reflecting the difference between our carrying values and the preliminary estimated fair values of our previously held equity interests on August 1, 2022. Subsequent to the CPA:18 Merger, we consolidated these wholly owned investments (Note 153).
2017 — DuringNon-Operating Income
Non-operating income primarily consists of realized gains and losses on derivative instruments, dividends from securities, and interest income on our loans to affiliates and cash deposits.
The following table presents non-operating income within our Real Estate segment (in thousands):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Non-Operating Income | | | | | | | | | | | |
Realized gains (losses) on foreign currency collars (Note 10) | $ | 8,724 | | | $ | 370 | | | $ | 8,354 | | | $ | 17,970 | | | $ | (38) | | | $ | 18,008 | |
| Interest income related to our loans to affiliates and cash deposits | 540 | | | 100 | | | 440 | | | 591 | | | 139 | | | 452 | |
Cash dividends from our investment in preferred shares of WLT (Note 9) | — | | | 813 | | | (813) | | | 912 | | | 4,081 | | | (3,169) | |
Cash dividends from our investment in Lineage Logistics (Note 9) | — | | | — | | | — | | | 4,308 | | | 6,438 | | | (2,130) | |
| $ | 9,264 | | | $ | 1,283 | | | $ | 7,981 | | | $ | 23,781 | | | $ | 10,620 | | | $ | 13,161 | |
W. P. Carey 9/30/2022 10-Q– 62
Earnings (Losses) from Equity Method Investments in Real Estate
Our equity method investments in real estate are more fully described in Note 8. The following table presents earnings (losses) from equity method investments in real estate (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Earnings (Losses) from Equity Method Investments in Real Estate | | | | | | | | | | | |
| Existing Equity Method Investments: | | | | | | | | | | | |
| Earnings from Las Vegas Retail Complex | $ | 2,860 | | | $ | 1,352 | | | $ | 1,508 | | | $ | 6,228 | | | $ | 1,645 | | | $ | 4,583 | |
Earnings from Kesko Senukai (a) | 1,902 | | | 944 | | | 958 | | | 3,132 | | | 434 | | | 2,698 | |
Earnings from Johnson Self Storage (b) | 1,163 | | | 663 | | | 500 | | | 3,190 | | | 1,556 | | | 1,634 | |
| Earnings from Harmon Retail Center | 258 | | | 276 | | | (18) | | | 789 | | | 828 | | | (39) | |
Losses from WLT (c) | — | | | (1,376) | | | 1,376 | | | — | | | (9,864) | | | 9,864 | |
| 6,183 | | | 1,859 | | | 4,324 | | | 13,339 | | | (5,401) | | | 18,740 | |
Equity Method Investments Consolidated after the CPA:18 Merger (Note 3): | | | | | | | | | | | |
Proportionate share of impairment charge recognized on Bank Pekao (Note 8) | — | | | — | | | — | | | (4,610) | | | — | | | (4,610) | |
Other-than-temporary impairment charge on State Farm Mutual Automobile Insurance Co. (Note 9) | — | | | — | | | — | | | — | | | (6,830) | | | 6,830 | |
| Other | 264 | | | 586 | | | (322) | | | 1,460 | | | 1,703 | | | (243) | |
| 264 | | | 586 | | | (322) | | | (3,150) | | | (5,127) | | | 1,977 | |
| $ | 6,447 | | | $ | 2,445 | | | $ | 4,002 | | | $ | 10,189 | | | $ | (10,528) | | | $ | 20,717 | |
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(a)Increases for the three and nine months ended September 30, 2017, we sold five properties, and 11 properties and a parcel of vacant land, respectively, for net proceeds of $58.7 million and $102.5 million, respectively, and recognized a net gain on these sales, net of tax totaling $19.3 million and $22.7 million, respectively. In connection with the sale of a property in Malaysia in August 2017, and in accordance with ASC 830-30-40, Foreign Currency Matters, we reclassified $3.6 million of foreign currency translation losses from Accumulated other comprehensive loss to Gain on sale of real estate, net of tax (as a reduction to Gain on sale of real estate, net of tax), since the sale represented a disposal of our Malaysian investments (Note 13). One of the properties sold during the nine months ended September 30, 2017 was held for sale at December 31, 2016 (Note 4). In addition, in January 2017, we transferred ownership of two international properties and the related non-recourse mortgage loan, which had an aggregate asset carrying value of $31.3 million and an outstanding balance of $28.1 million (net of $3.8 million of cash held in escrow that was retained by the mortgage lender), respectively, on the dates of transfer,2022 as compared to the mortgage lender, resultingsame periods in a net loss of less than $0.1 million.2021 are primarily due to higher rent collections at these retail properties, where certain rents were previously disputed and subsequently collected.
2016 — During(b)Increases for the three and nine months ended September 30, 2016, we sold2022 as compared to the same periods in 2021 are primarily due to higher occupancy and unit rates at these self-storage facilities.
(c)Losses for the prior year periods were primarily due to the adverse impact of the COVID-19 pandemic on WLT’s operations. We recorded losses from this investment on a one quarter lag. This investment was reclassified to equity securities at fair value within Other assets, net on our consolidated balance sheets in January 2022 (Note 9).
(Loss) Gain on Sale of Real Estate, Net
(Loss) gain on sale of real estate, net, consists of losses and gains on the sale of properties that were disposed of during the reporting period. Our dispositions are more fully described in Note 15.
Provision for Income Taxes
For the three and nine months ended September 30, 2022 as compared to the same periods in 2021, provision for income taxes within our Real Estate segment decreased by $4.2 million and $6.9 million, respectively, primarily due to (i) deferred tax benefits totaling $2.4 million recognized during the current year periods related to the release of valuation allowances on certain foreign properties and ten(ii) trade taxes of $1.8 million recognized during the prior year periods as a result of the completion of a tax review on a portfolio of properties and a parcelin Germany. In addition, we recognized tax benefits of vacant land, respectively, for net proceeds of $192.0$0.7 million and $392.6 million, respectively, and recognized a net gain on these sales, net of tax totaling $37.4 million and $39.9 million, respectively, including amounts attributable to noncontrolling interests of $0.9 million forcertain foreign properties during the nine months ended September 30, 2016. In addition, in April 2016, we transferred ownership2022 as a result of a vacant international property and the related non-recourse mortgage loan, which had a carrying value of $39.8 million and an outstanding balance of $60.9 million, respectively, on the date of transfer, to the mortgage lender, resulting in a net gain of $16.4 million. Also, in July 2016, a vacant domestic property with an asset carrying value of $13.7 million, which was encumbered by a $24.3 million mortgage loan (net of $2.6 million of cash held in escrow that was retained by the mortgage lender), was foreclosed upon by the mortgage lender, resulting in a net gain of $11.6 million.tax court ruling.
W. P. Carey 9/30/2022 10-Q– 63
Investment Management
We earn revenue as the advisor to the Managed Programs. For the periods presented, we acted as advisor to the following affiliated Managed Programs: CPA®:17 – Global, CPA®:CPA:18 – Global (through August 1, 2022) and CESH. Upon completion of the CPA:18 Merger on August 1, 2022 (Note 3), the advisory agreement with CPA:18 – Global was terminated, and we ceased earning revenue from CPA:18 – Global. The CWI 1 and CWI 2 CCIF (through September 10, 2017)Merger closed on April 13, 2020, and as a result, CWI 2 was renamed Watermark Lodging Trust, Inc., and CESH I (since June 3, 2016). On June 15, 2017, our Board approvedfor which we provided certain services pursuant to a plan to exit all non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial, as of June 30, 2017. transition services agreement, which was terminated on October 13, 2021 (Note 4).
We
no longer raise capital for new or existing funds, but we currently expect to continue
to manage all existing Managed Programsmanaging CESH and earn the various fees described below through the end of
their respective naturalits life
cycles (Note 1). In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective ascycle. As of September 11, 2017. CCIF was included in the Managed Programs prior to our resignation as its advisor (Note 1).30, 2022, we managed total assets of approximately $161.5 million on behalf of CESH.
Revenues
The following tables present other operating data that management finds useful in evaluating result of operations (dollars in millions):
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| | September 30, 2017 | | December 31, 2016 |
| Total properties — Managed Programs | 627 |
| | 606 |
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Assets under management — Managed Programs (a) | $ | 13,244.8 |
| | $ | 12,874.8 |
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Cumulative funds raised — CWI 2 offering (b) (c) | 851.3 |
| | 616.3 |
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Cumulative funds raised — CCIF offering (b) (d) | 195.3 |
| | 125.1 |
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Cumulative funds raised — CESH I offering (e) | 139.7 |
| | 112.8 |
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| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Financings structured — Managed Programs | $ | 997.9 |
| | $ | 1,080.3 |
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Investments structured — Managed Programs (f) | 1,101.1 |
| | 1,047.8 |
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Funds raised — CWI 2 offering (b) (c) | 235.0 |
| | 288.8 |
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Funds raised — CCIF offering (b) (d) | 70.2 |
| | 89.2 |
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Funds raised — CESH I offering (e) | 26.9 |
| | 41.8 |
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(a) | Represents the estimated fair value of the real estate assets owned by the Managed REITs, which was calculated by us as the advisor to the Managed REITs based in part upon third-party appraisals, plus cash and cash equivalents, less distributions payable. Amounts include the fair value of the investment assets, plus cash, owned by CESH I. Amount as of December 31, 2016 also includes the fair value of the investment assets, plus cash, owned by CCIF. |
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(b) | Excludes reinvested distributions through each entity’s distribution reinvestment plan. |
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(c) | Reflects funds raised from CWI 2’s initial public offering, which commenced in February 2015. In connection with the end of active fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales in the offering by CWI 2 through July 31, 2017, which then closed its offering on that date. |
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(d) | Amount represents funding from the CCIF Feeder Funds to CCIF. We began to raise funds on behalf of the CCIF Feeder Funds in the fourth quarter of 2015. One of the CCIF Feeder Funds, CCIF 2016 T, closed its offering on April 28, 2017. In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017. |
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(e) | Reflects funds raised from CESH I’s private placement, which commenced in July 2016. In connection with the end of active fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales in the offering by CESH I through July 31, 2017, which then closed its offering on that date. |
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(f) | Includes acquisition-related costs. |
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Below is a summary of comparative results oftable presents revenues within our Investment Management segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Investment Management Revenues | | | | | | | | | | | |
| Asset management and other revenue | | | | | | | | | | | |
| CPA:18 – Global | $ | 851 | | | $ | 3,160 | | | $ | (2,309) | | | $ | 6,956 | | | $ | 9,452 | | | $ | (2,496) | |
| CESH | 346 | | | 712 | | | (366) | | | 1,128 | | | 2,340 | | | (1,212) | |
| 1,197 | | | 3,872 | | | (2,675) | | | 8,084 | | | 11,792 | | | (3,708) | |
| Reimbursable costs from affiliates | | | | | | | | | | | |
| CPA:18 – Global | 266 | | | 769 | | | (503) | | | 2,040 | | | 2,058 | | | (18) | |
| CESH | 78 | | | 197 | | | (119) | | | 374 | | | 713 | | | (339) | |
| WLT | — | | | 75 | | | (75) | | | — | | | 279 | | | (279) | |
| 344 | | | 1,041 | | | (697) | | | 2,414 | | | 3,050 | | | (636) | |
| $ | 1,541 | | | $ | 4,913 | | | $ | (3,372) | | | $ | 10,498 | | | $ | 14,842 | | | $ | (4,344) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Revenues | | | | | | | | | | | |
| Asset management revenue | $ | 17,938 |
| | $ | 15,978 |
| | $ | 1,960 |
| | $ | 53,271 |
| | $ | 45,596 |
| | $ | 7,675 |
|
| Structuring revenue | 9,817 |
| | 12,301 |
| | (2,484 | ) | | 27,981 |
| | 30,990 |
| | (3,009 | ) |
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | (8,329 | ) | | 45,390 |
| | 46,372 |
| | (982 | ) |
| Dealer manager fees | 105 |
| | 1,835 |
| | (1,730 | ) | | 4,430 |
| | 5,379 |
| | (949 | ) |
| Other advisory revenue | 99 |
| | 522 |
| | (423 | ) | | 896 |
| | 522 |
| | 374 |
|
| | 34,170 |
| | 45,176 |
| | (11,006 | ) | | 131,968 |
| | 128,859 |
| | 3,109 |
|
| Operating Expenses | | | | | | | | | | | |
| Reimbursable costs from affiliates | 6,211 |
| | 14,540 |
| | (8,329 | ) | | 45,390 |
| | 46,372 |
| | (982 | ) |
| General and administrative | 6,002 |
| | 8,280 |
| | (2,278 | ) | | 25,878 |
| | 32,469 |
| | (6,591 | ) |
| Subadvisor fees | 5,206 |
| | 4,842 |
| | 364 |
| | 11,598 |
| | 10,010 |
| | 1,588 |
|
| Stock-based compensation expense | 2,755 |
| | 2,784 |
| | (29 | ) | | 9,916 |
| | 10,648 |
| | (732 | ) |
| Restructuring and other compensation | 1,356 |
| | — |
| | 1,356 |
| | 9,074 |
| | 7,512 |
| | 1,562 |
|
| Depreciation and amortization | 1,070 |
| | 1,062 |
| | 8 |
| | 2,838 |
| | 3,278 |
| | (440 | ) |
| Dealer manager fees and expenses | 462 |
| | 3,028 |
| | (2,566 | ) | | 6,544 |
| | 9,000 |
| | (2,456 | ) |
| Other expenses | — |
| | — |
| | — |
| | — |
| | 2,384 |
| | (2,384 | ) |
| | 23,062 |
| | 34,536 |
| | (11,474 | ) | | 111,238 |
| | 121,673 |
| | (10,435 | ) |
| Other Income and Expenses | | | | | | | | | | | |
| Equity in earnings of equity method investments in the Managed Programs | 12,578 |
| | 13,573 |
| | (995 | ) | | 38,287 |
| | 38,658 |
| | (371 | ) |
| Other income and (expenses) | 349 |
| | 1,857 |
| | (1,508 | ) | | 1,280 |
| | 1,717 |
| | (437 | ) |
| | 12,927 |
| | 15,430 |
| | (2,503 | ) | | 39,567 |
| | 40,375 |
| | (808 | ) |
| Income before income taxes | 24,035 |
| | 26,070 |
| | (2,035 | ) | | 60,297 |
| | 47,561 |
| | 12,736 |
|
| (Provision for) benefit from income taxes | (249 | ) | | (2,624 | ) | | 2,375 |
| | 3,793 |
| | (2,254 | ) | | 6,047 |
|
| Net Income from Investment Management Attributable to W. P. Carey | $ | 23,786 |
| | $ | 23,446 |
| | $ | 340 |
| | $ | 64,090 |
| | $ | 45,307 |
| | $ | 18,783 |
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Asset Management and Other Revenue
We earnAsset management and other revenue includes asset management revenue, structuring revenue, and other advisory revenue. During the periods presented, we earned asset management revenue from (i) CPA:18 – Global (prior to the Managed REITsCPA:18 Merger) based on the value of theirits real estate-related and lodging-related assets under management. We also earn asset management revenue fromand (ii) CESH I based on its gross assets under management at fair value. We also earned asset management revenue from CCIF based on the average of its gross assets at fair value prior to our resignation as the advisor to CCIF in the third quarter of 2017. Asset management revenue may increase or decrease depending upon (i) increaseschanges in the Managed Programs’ asset bases as a result of new investments; (ii) decreases in the Managed Programs’ asset bases as a result ofpurchases, sales, of investments; and (iii) increases or decreaseschanges in the appraised value of the real estate-related and lodging-related assets in thetheir investment portfolios of the Managed Programs. Prior to our resignation as the advisor to CCIF in the third quarter of 2017,portfolios. For 2022, we received asset management revenue also increased or decreased depending on increases or decreasesfees from (i) CPA:18 – Global in the fair valueshares of CCIF’s investment portfolio. For 2017,its common stock through February 28, 2022; effective as of March 1, 2022, we receive asset management fees from CPA:18 – Global in cash in light of the Managed REITs in shares of their common stockCPA:18 Merger, which closed on August 1, 2022 (Note 3), and from(ii) CESH I in cash. Prior to our resignation as
Operating Expenses
Impairment Charges — Investment Management Goodwill
Our impairment charges on Investment Management goodwill are more fully described in Note 9.
Other Income and Expenses, and Provision for Income Taxes
Gain on Change in Control of Interests
In connection with the advisor to CCIF in the third quarter of 2017, we received asset management fees from CCIF in cash.
ForCPA:18 Merger, during the three and nine months ended September 30, 2017 as compared to the same periods in 2016, asset management revenue increased by $2.0 million and $7.7 million, respectively, as2022, we recognized a result of the growth in assets under management due to investment volume after September 30, 2016. Asset management revenue increased by $0.9 million and $3.2 million, respectively, from CWI 2, $0.5 million and $3.1 million, respectively, from CCIF, $0.4 million and $1.0 million, respectively, from CPA®:18 – Global, $0.3 million and $0.7 million, respectively, from CESH I, and less than $0.1 million and $0.2 million, respectively, from CWI 1. These increases were partially offset by decreases of $0.1 million and $0.4 million, respectively, in asset management revenue from CPA®:17 – Global, which sold 34 self-storage properties during 2016, resulting in a decrease in assets under management for that fund.
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Structuring Revenue
We earn structuring revenue when we structure investments and debt placement transactions for the Managed Programs. Structuring revenue is dependentgain on investment activity, which is subject to significant period-to-period variation.
For the three months ended September 30, 2017 as compared to the same period in 2016, structuring revenue decreased by $2.5 million. Structuring revenue from CWI 2 and CPA®:17 – Global decreased by $3.6 million and $1.1 million, respectively, as a result of lower investment and debt placement volume during the current year period. Structuring revenue for the three months ended September 30, 2017 also includes a $2.6 million adjustment related to a development deal for one of the Managed Programs, in accordance with ASC 605, Revenue Recognition. These decreases were partially offset by an increase of $3.5 million in structuring revenue from CWI 1 and $1.1 million of structuring revenue recognized during the current year period from CESH I.
For the nine months ended September 30, 2017 as compared to the same period in 2016, structuring revenue decreased by $3.0 million. Structuring revenue from CWI 2 and CPA®:18 – Global decreased by $5.4 million and $4.2 million, respectively, as a result of lower investment and debt placement volume during the current year period. Structuring revenue for the nine months ended September 30, 2017 also includes a $2.6 million adjustment related to a development deal for one of the Managed Programs, in accordance with ASC 605, Revenue Recognition. These decreases were partially offset by $5.5 million of structuring revenue recognized during the current year period from CESH I and increases of $3.1 million and $0.7 million in structuring revenue from CPA®:17 – Global and CWI 1, respectively.
Reimbursable Costs from Affiliates
Reimbursable costs from affiliates represent costs incurred by us on behalf of the Managed Programs. During their respective offering periods, these costs consisted primarily of broker-dealer commissions, distribution and shareholder servicing fees, and marketing and personnel costs, which were reimbursed by the Managed Programs and were reflected as a component of both revenues and expenses. As a result of our exit from all non-traded retail fundraising activities, we will no longer incur offering-related expenses, including broker-dealer commissions, distribution and shareholder servicing fees, and marketing costs, on behalf of the Managed Programs.
For the three months ended September 30, 2017 as compared to the same period in 2016, reimbursable costs from affiliates decreased by $8.3 million, primarily due to a decrease of $5.2 million of distribution and shareholder servicing fees and commissions paid to broker-dealers related to the sale of the CCIF Feeder Funds’ shares, $2.0 million of commissions paid to broker-dealers related to CESH I’s private placement, and $1.4 million in distribution and shareholder servicing fees and commissions paid to broker-dealers related to CWI 2’s initial public offering, in each case due to our exit from all non-traded retail fundraising during the current year period, as described above. These decreases were partially offset by an increase of $0.4 million in overhead reimbursed to us by the Managed Programs.
For the nine months ended September 30, 2017 as compared to the same period in 2016, reimbursable costs from affiliates decreased by $1.0 million, primarily due to a decrease of $16.8 million of distribution and shareholder servicing fees and commissions paid to broker-dealers related to the sale of the CCIF Feeder Funds’ shares. This decrease was partially offset by an increase of $15.2 million of distribution and shareholder servicing fees and commissions paid to broker-dealers related to CWI 2’s initial public offering, and an increase of $0.3 million in overhead reimbursed to us by the Managed Programs.
Dealer Manager Fees
As discussed in Note 3, we earned a dealer manager fee, depending on the class of common stock sold, of $0.30 or $0.26 per share sold, for the Class A common stock and Class T common stock, respectively, in connection with CWI 2’s initial public offering, through March 31, 2017, when CWI 2 suspended its offering in order to determine updated estimated NAVs as of December 31, 2016. As a result, CWI 2 had new offering prices and new dealer manager fees of $0.36 and $0.31 per Class A and Class T Shares, respectively, for its offering through its closing on July 31, 2017. We received dealer manager fees of 2.50% - 3.0% based on the selling price of each share sold in connection with the offerings of the CCIF Feeder Funds, which began in the fourth quarter of 2015. CCIF 2016 T’s offering closed on April 28, 2017. We also received dealer manager fees of up to 3.0% of gross offering proceeds based on the selling price of each limited partnership unit sold in connection with CESH I’s private placement, which commenced in July 2016 and closed in July 2017.
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We re-allowed a portion of the dealer manager fees to selected dealers in the offerings and reflected those amounts as Dealer manager fees and expenses in the consolidated financial statements. As discussed above, on June 15, 2017, our Board approved a plan to exit all non-traded retail fundraising activities as of June 30, 2017, and as a result, we no longer receive dealer manager fees following the completion of those fundraising activities on July 31, 2017.
For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, dealer manager fees decreased due to our exit from all non-traded retail fundraising activities.
Other Advisory Revenue
Under the limited partnership agreement we have with CESH I, we paid all organization and offering costs on behalf of CESH I, and instead of being reimbursed by CESH I on a dollar-for-dollar basis for those costs, we received limited partnership units of CESH I equal to 2.5% of its gross offering proceeds through the closing of its offering on July 31, 2017.
For the three months ended September 30, 2017 as compared to the same period in 2016, other advisory revenue decreased by $0.4 million, primarily due to the completion of CESH I fundraising in July 2017 (Note 2).
For the nine months ended September 30, 2017 as compared to the same period in 2016, other advisory revenue increased by $0.4 million, primarily due to the limited partnership units of CESH I received in connection with CESH I’s private placement, which commenced in July 2016 and closed in July 2017 (Note 2).
General and Administrative
Beginning with the third quarter of 2017, personnel and rent expenses included within general and administrative expenses that are recorded by our Investment Management segment will be allocated based on time incurred by our personnel for the Owned Real Estate and Investment Management segments. All other overhead costs are charged to our Owned Real Estate segment based on the trailing 12-month reported revenues of the Managed Programs and us.
As discussed in Note 3, certain personnel costs and overhead costs are charged to the CPA® REITs based on the trailing 12-month reported revenues of the Managed Programs and us. We allocate certain personnel and overhead costs to the CWI REITs based on the time incurred by our personnel. We allocate certain personnel costs based on the time incurred by our personnel to CESH I and, prior to our resignation as the advisor to CCIF in the third quarter of 2017, to the Managed BDCs.
For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, general and administrative expenses in our Investment Management segment, which excludes restructuring and other compensation expenses as described below, decreased by $2.3 million and $6.6 million, respectively, primarily due to an overall decline in compensation expense as a result of the reduction in headcount, including the RIF and the impact of our exit from all active non-traded retail fundraising activities as of June 30, 2017, and other cost savings initiatives implemented during 2016 as well as the change in methodology for allocationcontrol of expenses between our Owned Real Estate and Investment Management segments (Note 1).
Subadvisor Fees
As discussed in Note 3, we earn investment management revenue from CWI 1, CWI 2, and CPA®:18 – Global, and, prior to our resignation as advisor, from CCIF. Pursuant to the termsinterests of the subadvisory agreements we have with the third-party subadvisors in connection with both CWI 1 and CWI 2, we pay a subadvisory fee equal to 20% of the amount of fees paid to us by CWI 1 and 25% of the amount of fees paid to us by CWI 2, including but not limited to: acquisition fees, asset management fees, loan refinancing fees, property management fees, and subordinated disposition fees, each as defined in the advisory agreements we have with each of CWI 1 and CWI 2. We also pay to each subadvisor 20% and 25% of the net proceeds resulting from any sale, financing, or recapitalization or sale of securities of CWI 1 and CWI 2, respectively, by us, the advisor. In addition, in connection with the multi-family properties acquired on behalf of CPA®:18 – Global, we entered into agreements with third-party advisors for the day-to-day management of the properties, for which we pay 100% of asset management fees paid to us by CPA®:18 – Global. Pursuant to the terms of the subadvisory agreement we had with the third-party subadvisor in connection with CCIF (prior to our resignation as the advisor to CCIF in the third quarter of 2017), we paid a subadvisory fee equal to 50% of the asset management fees and organization and offering costs paid to us by CCIF.
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For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, subadvisor fees increased by $0.4 million and $1.6 million, respectively, primarily due to increases of $0.7 million and $0.2 million, respectively, as a result of higher fees earned from CWI 1 and increases of $0.2 million and $1.5 million, respectively, as a result of higher fees earned from CCIF, each of which paid higher asset management fees to us during the current year periods as compared to the prior year periods. For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, these increases were partially offset by decreases of $0.5 million and $0.2 million, respectively, as a result of lower fees earned from CWI 2 due to lower investment and debt placement volume during the current year periods.
Stock-based Compensation Expense
Beginning with the third quarter of 2017, stock-based compensation expense is being allocated to our Owned Real Estate and Investment Management segments based on time incurred by our personnel for those segments.
For the nine months ended September 30, 2017 as compared to the same period in 2016, stock-based compensation expense allocated to our Investment Management segment decreased by $0.7 million primarily due to the reduction in RSUs and PSUs outstanding as a result of a reduction in headcount related to our exit from all non-traded retail fundraising activities as of June 30, 2017 (Note 12).
Restructuring and Other Compensation
For the three and nine months ended September 30, 2017, we recorded total restructuring expenses of $1.4 million and $9.1 million, respectively, related to our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017. These expenses, all of which were allocated to the Investment Management segment, consist primarily of severance costs (Note 1, Note 12).
For the nine months ended September 30, 2016, we recorded total restructuring and other compensation expenses of $11.9 million, of which $7.5 million was allocated to our Investment Management segment. Included in the total was $5.1 million of severance related to the employment agreement with our former chief executive officer and $6.8 million related to severance, stock-based compensation, and other costs incurred as part of the RIF during that period (Note 12).
Other Expenses
For nine months ended September 30, 2016, we incurred advisory expenses and professional fees of $2.4$22.5 million within our Investment Management segment
related to the difference between the carrying value and the preliminary estimated fair value of our previously held equity interest in
connection with the formal strategic review that we completed in May 2016.shares of CPA:18 – Global’s common stock (Note 3).
W. P. Carey 9/30/2022 10-Q– 64
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Equity in Earnings offrom Equity Method Investments in the Managed Programs
Equity in earnings ofEarnings from our equity method investments in the Managed Programs is recognized in accordance with the investment agreement for each of our equity method investments. In addition, we are entitled to receive distributions of Available Cash (Note 3) from the operating partnerships of each of the Managed REITs. The net income of our unconsolidated investments fluctuates based on the timing of transactions, such as new leases and property sales, as well as the level of impairment charges. Equity in earnings of our equity method investment in CCIF fluctuated based on changes in the fair value of investments owned by CCIF. Following our resignation as the advisor to CCIF, effective September 11, 2017, earnings from our cost method investment in CCIF are included in Other income and (expenses) in the consolidated financial statements (Note 7). The following table presents the details of our Equity in earnings offrom equity method investments in the Managed Programs (Note 8) (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Equity in earnings of equity method investments in the Managed Programs: | | | | | | | |
Equity in earnings of equity method investments in the Managed Programs (a) | $ | 531 |
| | $ | 2,697 |
| | $ | 3,719 |
| | $ | 6,640 |
|
Distributions of Available Cash: (b) | | | | | | | |
CPA®:17 – Global | 5,459 |
| | 5,276 |
| | 19,240 |
| | 17,803 |
|
CPA®:18 – Global | 2,196 |
| | 1,662 |
| | 6,057 |
| | 5,319 |
|
| CWI 1 | 2,498 |
| | 2,838 |
| | 5,743 |
| | 6,931 |
|
| CWI 2 | 1,894 |
| | 1,100 |
| | 3,528 |
| | 1,965 |
|
| Equity in earnings of equity method investments in the Managed Programs | $ | 12,578 |
| | $ | 13,573 |
| | $ | 38,287 |
| | $ | 38,658 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Earnings from equity method investments in the Managed Programs: | | | | | | | |
Distributions of Available Cash from CPA:18 – Global (a) | $ | 3,345 | | | $ | 1,623 | | | $ | 8,746 | | | $ | 4,949 | |
Earnings from equity method investments in the Managed Programs (a) (b) | 1,512 | | | 1,667 | | | 4,542 | | | 1,425 | |
| Earnings from equity method investments in the Managed Programs | $ | 4,857 | | | $ | 3,290 | | | $ | 13,288 | | | $ | 6,374 | |
__________
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(a) | Decreases for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 were primarily due to decreases of $1.1 million and $3.0 million, respectively, from our investment in shares of common stock of CPA®:17 – Global, which recognized significant gains on the sale of real estate during each of the prior year periods. In addition, we recognized equity in earnings of our equity method investment in CCIF of $1.1 million during the three months ended September 30, 2016. We did not recognize any such earnings during the three months ended September 30, 2017.
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(b) | We are entitled to receive distributions of our share of earnings up to 10% of the Available Cash from the operating partnerships of each of the Managed REITs, as defined in their respective operating partnership agreements (Note 3). Distributions of Available Cash received and earned from the Managed REITs increased in the aggregate, primarily as a result of new investments entered into by the Managed REITs during 2017 and 2016. |
(a)As a result of the completion of the CPA:18 Merger on August 1, 2022 (Note 3), we no longer recognize equity income from our investment in shares of common stock of CPA:18 – Global or receive distributions of Available Cash from CPA:18 – Global. Other(b)Increase for the nine months ended September 30, 2022 as compared to the same period in 2021 was due to an increase of $3.1 million from our investment in shares of CPA:18 – Global.
Provision for Income and (Expenses)Taxes
For both the three and nine months ended September 30, 2016, we recognized a gain of $1.2 million in our Investment Management segment on the deconsolidation of CESH I (Note 2).
(Provision for) Benefit from Income Taxes
For the three months ended September 30, 20172022 as compared to the same periodperiods in 2016,2021, provision for income taxes within our Investment Management segment decreasedincreased by $2.4$4.1 million and $5.0 million, respectively, primarily due to one-time current taxes incurred upon the impactrecognition of lower pre-taxtaxable income recognizedassociated with the accelerated vesting of shares previously issued by our TRSs and a deferred windfall tax benefit of $0.6 million recognized duringCPA:18 – Global to us for asset management services performed, in connection with the current year period as a result of the adoption of ASU 2016-09 during the first quarter of 2017, under which such benefits are now reflected as a reduction to provision for income taxes (Note 2).CPA:18 Merger.
For the nine months ended September 30, 2017, we recorded a benefit from income taxes of $3.8 million, compared to a provision for income taxes of $2.3 million recognized during the same period in 2016, within our Investment Management segment. We recorded a benefit from income taxes during the current year period primarily due to a deferred windfall tax benefit of $3.6 million as a result of the adoption of ASU 2016-09 during the first quarter of 2017, under which such benefits are now reflected as a reduction to provision for income taxes (Note 2). We recognized a provision for income taxes during the prior year period primarily due to an out-of-period adjustment recorded during the period (Note 2).
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Liquidity and Capital Resources
Sources and Uses of Cash During the Period
We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund distributionsdividends to stockholders. Our cash flows fluctuate periodically due to a number of factors, which may include, among other things: the timing of our equity and debt offerings; the timing of purchases and sales of real estate; the timing of the receipt of proceeds from, and the repayment of mortgage loans and receipt of lease revenues; the receipttiming and amount of the annual installment of deferred acquisition revenue and interest thereon from the CPA® REITs; the receipt of the asset management fees in either shares of the common stock or limited partnership units of the Managed Programs or cash;other lease-related payments; the timing and characterization of distributions from equity investments in the Managed Programs and real estate; the receiptsettlement of distributions of Available Cash from the Managed REITs; andforeign currency transactions; changes in foreign currency exchange rates.rates; and the timing of distributions from equity method investments. We no longer receive certain fees and distributions from CPA:18 – Global following the completion of the CPA:18 Merger on August 1, 2022 (Note 3). Despite these fluctuations, we believe that we will generate sufficient cash from operations to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources, unusedavailable capacity under our Senior Unsecured Credit Facility, proceeds from dispositions of properties, proceeds of mortgage loans, net contributions from noncontrolling interests, and the issuance of additional debt or equity securities, such as salesissuances of ourcommon stock through our Equity Forwards and ATM program,Program (Note 13), in order 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 — Net cash provided by operating activities increased by $4.4$77.1 million during the nine months ended September 30, 20172022 as compared to the same period in 2016,2021, primarily due to an increase in cash flow generated from net investment activity (including properties acquired during 2016 and 2017, a decrease in interest expense, and lower general and administrative expenses in the current year period.CPA:18 Merger (Note 3)) and scheduled rent increases at existing properties, as well as higher lease termination and other income. These increases were partially offset by lease termination income received in connection with the sale of a propertymerger expenses recognized during the priorcurrent year period and a decrease in cash flow as a result of property dispositions during 2016 and 2017.related to the CPA:18 Merger (Note 3).
W. P. Carey 9/30/2022 10-Q– 65
Investing Activities — Our investing activities are generally comprised of real estate-related transactions (purchases and sales) and capitalized property-related costs.
Duringfunding for build-to-suit activities and other capital expenditures on real estate. In connection with the CPA:18 Merger, we paid $423.4 million in cash consideration and for the fractional shares of CPA:18 – Global, and acquired $331.1 million of cash and restricted cash. In addition, during the nine months ended September 30, 2017,2022, we used $123.5$26.0 million to fund short-term loans to the Managed Programs, (Note 3), while $229.7 millionall of such loans made by us in prior periods werewhich was repaid during the current year period. We sold 11 properties and a parcel of vacant land for net proceeds of $102.5 million. We used $36.7 million primarily to fund expansions on our existing properties. In addition, we used $10.8 million to invest in capital expenditures for owned real estate and $6.0 million to acquire an investmentthat period (Note 4). We also received $6.5$7.4 million in distributions from equity investments in the Managed Programs and real estate in excess of cumulative equity income.method investments.
Financing Activities — DuringOur financing activities are generally comprised of borrowings and repayments under our Unsecured Revolving Credit Facility, issuances of the Senior Unsecured Notes, payments and prepayments of non-recourse mortgage loans, and payments of dividends to stockholders. In addition to these types of transactions, during the nine months ended September 30, 2017, gross borrowings under our Senior Unsecured Credit Facility were $1.2 billion and repayments were $1.6 billion, which included the impact of the amendment and restatement of our Senior Unsecured Credit Facility in February 2017 (Note 10). We received the equivalent of $530.5 million in net proceeds from the issuance of the 2.25% Senior Notes in January 2017, which we used primarily to pay down the outstanding balance on our Unsecured Revolving Credit Facility at that time (Note 10). In connection with the issuances of these notes and the amendment and restatement our Senior Unsecured Credit Facility in February 2017 (Note 10), we incurred financing costs totaling $12.7 million. We also made scheduled and prepaid non-recourse mortgage loan principal payments of $303.5 million and $157.4 million, respectively. Additionally, we paid distributions to stockholders totaling $322.4 million related to the fourth quarter of 2016, the first quarter of 2017, and the second quarter of 2017; and also paid distributions of $16.9 million to affiliates that hold noncontrolling interests in various entities with us. We received contributions from noncontrolling interests totaling $90.5 million, primarily from an affiliate in connection with the repayment at maturity of mortgage loans encumbering the Hellweg 2 Portfolio (Note 10). In addition,2022, we received $22.8(i) $218.1 million in net proceeds from the issuance of shares under our prior ATM programProgram (Note 13) and (ii) $97.5 million in net proceeds from the issuance of common stock under our Equity Forwards (Note 13).
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| W. P. Carey 9/30/2017 10-Q– 77
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Summary of Financing
The table below summarizes our Senior Unsecured Notes, our non-recourse mortgages, our Unsecured Senior Notes, and our Senior Unsecured Credit Facility (dollars in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
| Carrying Value | | | | Carrying Value | | | |
| Fixed rate: | | | | Fixed rate: | |
Unsecured Senior Notes (a) | $ | 2,455,383 |
| | $ | 1,807,200 |
| |
Senior Unsecured Notes (a) | | Senior Unsecured Notes (a) | $ | 5,651,865 | | | $ | 5,701,913 | |
Non-recourse mortgages (a) | 985,118 |
| | 1,406,222 |
| Non-recourse mortgages (a) | 876,092 | | | 235,898 | |
| | 3,440,501 |
| | 3,213,422 |
| | 6,527,957 | | | 5,937,811 | |
| Variable rate: | | | | Variable rate: | | | |
Unsecured Term Loans (a) | 382,191 |
| | 249,978 |
| Unsecured Term Loans (a) | 506,004 | | | 310,583 | |
| Unsecured Revolving Credit Facility | 224,213 |
| | 676,715 |
| Unsecured Revolving Credit Facility | 462,660 | | | 410,596 | |
Non-recourse mortgages (a): | | | | Non-recourse mortgages (a): | |
| Amount subject to interest rate swaps and cap | 149,824 |
| | 158,765 |
| |
| Floating interest rate mortgage loans | 118,109 |
| | 141,934 |
| Floating interest rate mortgage loans | 197,178 | | | 53,571 | |
| Amount subject to interest rate swaps and caps | | Amount subject to interest rate swaps and caps | 89,544 | | | 79,055 | |
| | 874,337 |
| | 1,227,392 |
| | 1,255,386 | | | 853,805 | |
| | $ | 4,314,838 |
| | $ | 4,440,814 |
| | $ | 7,783,343 | | | $ | 6,791,616 | |
| | | | | | | | |
| Percent of Total Debt | | | | Percent of Total Debt | |
| Fixed rate | 80 | % | | 72 | % | Fixed rate | 84 | % | | 87 | % |
| Variable rate | 20 | % | | 28 | % | Variable rate | 16 | % | | 13 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Weighted-Average Interest Rate at End of Period | | | | Weighted-Average Interest Rate at End of Period | | | |
| Fixed rate | 3.9 | % | | 4.5 | % | Fixed rate | 2.9 | % | | 2.7 | % |
Variable rate (b) | 1.8 | % | | 1.9 | % | Variable rate (b) | 3.1 | % | | 1.1 | % |
| Total debt | | Total debt | 3.0 | % | | 2.5 | % |
__________
| |
(a) | Aggregate debt balance includes unamortized deferred financing costs totaling $16.2 million and $13.4 million as of September 30, 2017 and December 31, 2016, respectively, and unamortized discount totaling $12.9 million and $8.0 million as of September 30, 2017 and December 31, 2016, respectively. |
| |
(b) | The impact of our derivative instruments is reflected in the weighted-average interest rates. |
(a)Aggregate debt balance includes unamortized discount, net, totaling $37.6 million and $30.9 million as of September 30, 2022 and December 31, 2021, respectively, and unamortized deferred financing costs totaling $26.4 million and $28.8 million as of September 30, 2022 and December 31, 2021, respectively.
(b)The impact of our interest rate swaps and caps is reflected in the weighted-average interest rates.
W. P. Carey 9/30/2022 10-Q– 66
Cash Resources
At September 30, 2017,2022, our cash resources consisted of the following:
•cash and cash equivalents totaling $169.8$186.4 million. Of this amount, $84.3$89.3 million, at then-current exchange rates, was held in foreign subsidiaries, and we could be subject to restrictions or significant costs should we decide to repatriate these amounts;
•our Unsecured Revolving Credit Facility, with unusedavailable capacity of approximately $1.3 billion excluding(net of amounts reserved for outstandingstandby letters of credit;credit totaling $0.6 million);
•available proceeds under our Equity Forwards of approximately $185.8 million (based on 2,587,500 remaining shares outstanding and a net offering price of $71.81 per share as of September 30, 2022);
•available proceeds under our ATM Forwards of approximately $455.7 million (based on 5,538,037 shares outstanding and a weighted-average net offering price of $82.29 per share as of September 30, 2022); and
•unleveraged properties that had an aggregate asset carrying value of $4.4approximately $12.7 billion at September 30, 2017,2022, although there can be no assurance that we would be able to obtain financing for these properties.
WeHistorically, we have also accessaccessed the capital markets when necessary through additional debt (denominated in both U.S. dollars and euros) and equity offerings, such as the €500.0 million of 2.25% Senior Notes that we issued in January 2017 (Note 10) and our ATM program. During the three and nine months ended September 30, 2017, we issued 15,500 and 345,253 shares, respectively, of our common stock under the current ATM program at a weighted-average price of $67.05 and $67.78 per share, respectively, for net proceeds of $0.9 million and $22.8 million, respectively. During the three and nine months ended September 30, 2016, we issued 968,535 and 1,249,836 shares, respectively, of our common stock under the prior ATM program at a weighted-average price of $68.54 and $68.52 per share,offerings.
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| W. P. Carey 9/30/2017 10-Q– 78
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respectively, for net proceeds of $65.2 million and $84.1 million, respectively. As of September 30, 2017, $376.6 million remained available for issuance under our current ATM program (Note 13).Senior Unsecured Credit Facility
Our Senior Unsecured Credit Facility is more fully described in Note 10. A summary of our Senior Unsecured Credit Facility is provided below (in thousands): |
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Outstanding Balance | | Maximum Available | | Outstanding Balance | | Maximum Available |
Unsecured Term Loans, net (a) | $ | 383,695 |
| | $ | 383,695 |
| | $ | 250,000 |
| | $ | 250,000 |
|
| Unsecured Revolving Credit Facility | 224,213 |
| | 1,500,000 |
| | 676,715 |
| | 1,500,000 |
|
__________
| |
(a) | Outstanding balance excludes unamortized discount of $1.3 million at September 30, 2017. Outstanding balance also excludes unamortized deferred financing costs of $0.2 million and less than $0.1 million at September 30, 2017 and December 31, 2016, respectively. |
Our cash resources can be used for working capital needs and other commitments and may be used for future investments.
Cash Requirements and Liquidity
As of September 30, 2022, we had (i) $186.4 million of cash and cash equivalents, (ii) approximately $1.3 billion of available capacity under our Unsecured Revolving Credit Facility (net of amounts reserved for standby letters of credit totaling $0.6 million), (iii) available proceeds under our ATM Forwards of approximately $455.7 million (based on 5,538,037 remaining shares outstanding and a weighted-average net offering price of $82.29 per share as of that date), and (iv) available proceeds under our Equity Forwards of approximately $185.8 million (based on 2,587,500 remaining shares outstanding and a net offering price of $71.81 per share as of that date). Our Senior Unsecured Credit Facility includes a $1.8 billion Unsecured Revolving Credit Facility and Unsecured Term Loans outstanding totaling $506.0 million as of September 30, 2022 (Note 11), and is scheduled to mature on February 20, 2025. As of September 30, 2022, scheduled debt principal payments total $96.7 million through December 31, 2022 and $525.0 million through December 31, 2023, and our Senior Unsecured Notes do not start to mature until April 2024 (Note 11).
During the next 12 months following September 30, 2022 and thereafter, we expect that our significant cash requirements will include payments to acquire new investments, funding capital commitments such as build-to-suit projects, include:
•paying distributionsdividends to our stockholders (which we expect to be higher, following the issuance of 13,786,302 shares of our common stock in the CPA:18 Merger (Note 3)); •funding acquisitions of new investments (Note 5); •funding future capital commitments and totenant improvement allowances (Note 5); •making scheduled principal and balloon payments on our affiliates that hold noncontrolling interests in entities we control, debt obligations (Note 11); •making scheduled interest payments on our debt obligations (future interest payments total $957.6 million, with $228.5 million due during the Unsecured Senior Notes, scheduled mortgage loan principal payments, including mortgage balloon paymentsnext 12 months; interest on our consolidated mortgage loanunhedged variable-rate debt obligations was calculated using the applicable annual variable interest rates and prepayments of our consolidated mortgage loan obligations, as well as balances outstanding at September 30, 2022); and
•other normal recurring operating expenses.
We expect to fund future investments, build-to-suit commitments, any capital expenditures on existing properties, scheduled debt maturities on non-recourse mortgage loans and any loans to certain of the Managed Programs (Note 3)these cash requirements through cash generated from operations, cash received from dispositions of properties, the use of our cash reserves or unused amounts on our Unsecured Revolving Credit Facility (as described above), issuances of sharescommon stock through our ATM program,Equity Forwards and/or ATM Program (Note 13), and potential issuances of additional debt or equity or debt offerings.securities. We may also choose to pursue prepayments of certain of our non-recourse mortgage loan obligations, depending on our capital needs and market conditions at that time.
W. P. Carey 9/30/2022 10-Q– 67
Our liquidity wouldcould be adversely affected by unanticipated costs, and greater-than-anticipated operating expenses.expenses, and the adverse impact of the continuing COVID-19 pandemic. To the extent that our working capital reserve is insufficient to satisfy our cash requirements, additional funds may be provided from 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 mortgage loans, unusedavailable capacity onunder our Unsecured Revolving Credit Facility, net contributions from noncontrolling interests,mortgage loan proceeds, and the issuance of additional debt or equity securities such as through our ATM program, to meet these needs.
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Off-Balance Sheet Arrangements The extent to which the COVID-19 pandemic impacts our liquidity and Contractual Obligations
debt covenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The table below summarizespotential impact of the COVID-19 pandemic on our debt, off-balance sheet arrangements,tenants and other contractual obligations (primarily our capital commitments and lease obligations) at September 30, 2017 and theproperties could also have a material adverse effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):debt covenants.
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Unsecured Senior Notes — principal (a) (b) | $ | 2,480,600 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,480,600 |
|
Non-recourse mortgages — principal (a) | 1,255,414 |
| | 280,392 |
| | 295,517 |
| | 322,311 |
| | 357,194 |
|
Senior Unsecured Credit Facility — principal (a) (c) | 607,908 |
| | — |
| | — |
| | 607,908 |
| | — |
|
Interest on borrowings (d) | 826,420 |
| | 147,478 |
| | 270,397 |
| | 223,095 |
| | 185,450 |
|
Operating and other lease commitments (e) | 161,067 |
| | 8,439 |
| | 17,015 |
| | 9,536 |
| | 126,077 |
|
Capital commitments and tenant expansion allowances (f) | 139,654 |
| | 81,807 |
| | 53,748 |
| | 586 |
| | 3,513 |
|
Restructuring and other compensation commitments (g) | 4,829 |
| | 4,532 |
| | 297 |
| | — |
| | — |
|
| | $ | 5,475,892 |
| | $ | 522,648 |
| | $ | 636,974 |
| | $ | 1,163,436 |
| | $ | 3,152,834 |
|
__________
| |
(a) | Excludes unamortized deferred financing costs totaling $16.2 million, the unamortized discount on the Unsecured Senior Notes of $10.2 million in aggregate, the unamortized discount on the Unsecured Term Loans of $1.3 million, and the unamortized fair market value adjustment of $1.4 million resulting from the assumption of property-level debt in connection with both the CPA®:15 Merger and the CPA®:16 Merger (Note 10). |
| |
(b) | Our Unsecured Senior Notes are scheduled to mature from 2023 through 2026. |
| |
(c) | Our Unsecured Revolving Credit Facility is scheduled to mature on February 22, 2021 unless otherwise extended pursuant to its terms. Our Unsecured Term Loans are scheduled to mature on February 22, 2022. |
| |
(d) | Interest on unhedged variable-rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding at September 30, 2017. |
| |
(e) | Operating and other lease commitments consist primarily of rental obligations under ground leases and the future minimum rents payable on the leases for our principal offices. Pursuant to their respective advisory agreements with us, we are reimbursed by the Managed Programs for their share of overhead costs, which includes a portion of those future minimum rent amounts. Our operating lease commitments are presented net of $11.3 million, based on the allocation percentages as of September 30, 2017, which we estimate the Managed Programs will reimburse us for in full (Note 3). |
| |
(f) | Capital commitments include (i) $109.6 million related to build-to-suit expansions and (ii) $30.1 million related to unfunded tenant improvements, including certain discretionary commitments. |
| |
(g) | Represents severance-related obligations to our former chief executive officer and other employees (Note 12). |
Amounts in the tableCertain amounts disclosed above that relate to our foreign operations are based on the applicable foreign currency exchange rate of the local currencies at September 30, 2017, which consisted primarily of the euro. At September 30, 2017, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.2022.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use Funds from Operations or FFO,(“FFO”) and AFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and AFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are provided below.
Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), or NAREIT, an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the
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| W. P. Carey 9/30/2017 10-Q– 80
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REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revisedrestated in February 2004.December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate or other assets incidental to the company’s main business, gains or losses on changes in control of interests in real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.
We also modify the NAREIT computation of FFO to include other adjustments toadjust GAAP net income to adjust for certain non-cash charges, such as amortization of real estate-related intangibles, deferred income tax benefits and expenses, straight-line rents, stockrent and related reserves, other non-cash rent adjustments, non-cash allowance for credit losses on loans receivable and direct financing leases, stock-based compensation, gains or losses from extinguishmentnon-cash environmental accretion expense, amortization of discounts and premiums on debt, and deconsolidationamortization of subsidiaries, and unrealized foreign currency exchange gains and losses.deferred financing costs. Our assessment of our operations is focused on long-term sustainability and not on such non-cash items, which may cause short-term fluctuations in net income but have no impact on cash flows. Additionally, we exclude non-core income and expenses, such as certain lease termination income, restructuringgains or losses from extinguishment of debt and other compensation-related expenses resulting from a reduction in headcountmerger and employee severance arrangements, and other expenses (which includes expenses related to the formal strategic review that we completed in May 2016 and accruals for estimated one-time legal settlement expenses).acquisition expenses. We also exclude realized and unrealized gains/losses on foreign currency exchange transactionsrate movements (other than those realized on the settlement of foreign currency derivatives), which are not considered fundamental attributes of our business plan and do not affect our overall long-term operating performance. We refer to our modified definition of FFO as AFFO. We exclude these items from GAAP net income to arrive at AFFO as they are not the primary drivers in our decision makingdecision-making process and excluding these items provides investors a view of our portfolio performance over time and makes it more comparable to other REITs whichthat are currently not engaged in acquisitions, mergers, and restructuring, which are not part of our normal business operations. AFFO also reflects adjustments for unconsolidated partnerships and jointly owned investments. We use AFFO as one measure of our operating performance when we formulate corporate goals, evaluate the effectiveness of our strategies, and determine executive compensation.
W. P. Carey 9/30/2022 10-Q– 68
We believe that AFFO is a useful supplemental measure for investors to consider as we believe it will help them to better assess the sustainability of our operating performance without the potentially distorting impact of these short-term fluctuations. However, there are limits on the usefulness of AFFO to investors. For example, impairment charges and unrealized foreign currency losses that we exclude may become actual realized losses upon the ultimate disposition of the properties in the form of lower cash proceeds or other considerations. We use our FFO and AFFO measures as supplemental financial measures of operating performance. We do not use our FFO and AFFO measures as, nor should they be considered to be, alternatives to net earningsincome computed under GAAP, or as alternatives to net cash fromprovided by operating activities computed under GAAP, or as indicators of our ability to fund our cash needs.
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| W. P. Carey 9/30/2017 10-Q– 81
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Consolidated FFO and AFFO were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to W. P. Carey | $ | 104,928 | | | $ | 138,547 | | | $ | 389,601 | | | $ | 310,426 | |
| Adjustments: | | | | | | | |
| Depreciation and amortization of real property | 131,628 | | | 114,204 | | | 360,607 | | | 336,405 | |
Gain on change in control of interests (a) (b) | (33,931) | | | — | | | (33,931) | | | — | |
Impairment charges — Investment Management goodwill (c) | 29,334 | | | — | | | 29,334 | | | — | |
| Loss (gain) on sale of real estate, net | 4,736 | | | (1,702) | | | (37,631) | | | (30,914) | |
| Impairment charges — real estate | — | | | 16,301 | | | 26,385 | | | 16,301 | |
Proportionate share of adjustments to earnings from equity method investments (d) (e) | 2,242 | | | 3,290 | | | 12,859 | | | 17,030 | |
Proportionate share of adjustments for noncontrolling interests (f) | (189) | | | (4) | | | (197) | | | (12) | |
| Total adjustments | 133,820 | | | 132,089 | | | 357,426 | | | 338,810 | |
| FFO (as defined by NAREIT) attributable to W. P. Carey | 238,748 | | | 270,636 | | | 747,027 | | | 649,236 | |
| Adjustments: | | | | | | | |
Merger and other expenses (g) | 17,667 | | | (908) | | | 17,329 | | | (3,983) | |
Other (gains) and losses (h) | 15,020 | | | (49,219) | | | 1,021 | | | (15,576) | |
| Straight-line and other leasing and financing adjustments | (14,326) | | | (10,823) | | | (39,665) | | | (29,887) | |
| Above- and below-market rent intangible lease amortization, net | 11,186 | | | 12,004 | | | 32,738 | | | 38,503 | |
| Stock-based compensation | 5,511 | | | 4,361 | | | 23,102 | | | 18,790 | |
| Amortization of deferred financing costs | 5,223 | | | 3,424 | | | 11,498 | | | 10,284 | |
| Tax expense (benefit) — deferred and other | 1,163 | | | (290) | | | (434) | | | (3,460) | |
| Other amortization and non-cash items | 359 | | | 557 | | | 1,441 | | | 1,149 | |
Proportionate share of adjustments to earnings from equity method investments (e) | (2,156) | | | 988 | | | (2,451) | | | 10,849 | |
Proportionate share of adjustments for noncontrolling interests (f) | (673) | | | (6) | | | (684) | | | (19) | |
| Total adjustments | 38,974 | | | (39,912) | | | 43,895 | | | 26,650 | |
| AFFO attributable to W. P. Carey | $ | 277,722 | | | $ | 230,724 | | | $ | 790,922 | | | $ | 675,886 | |
| | | | | | | |
| Summary | | | | | | | |
| FFO (as defined by NAREIT) attributable to W. P. Carey | $ | 238,748 | | | $ | 270,636 | | | $ | 747,027 | | | $ | 649,236 | |
| AFFO attributable to W. P. Carey | $ | 277,722 | | | $ | 230,724 | | | $ | 790,922 | | | $ | 675,886 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to W. P. Carey | $ | 80,278 |
| | $ | 110,943 |
| | $ | 202,080 |
| | $ | 220,043 |
|
| Adjustments: | | | | | | | |
| Depreciation and amortization of real property | 62,621 |
| | 61,396 |
| | 185,439 |
| | 209,449 |
|
| Gain on sale of real estate, net | (19,257 | ) | | (49,126 | ) | | (22,732 | ) | | (68,070 | ) |
| Impairment charges | — |
| | 14,441 |
| | — |
| | 49,870 |
|
| Proportionate share of adjustments for noncontrolling interests to arrive at FFO | (2,692 | ) | | (3,254 | ) | | (7,795 | ) | | (8,541 | ) |
| Proportionate share of adjustments to equity in net income of partially owned entities to arrive at FFO | 866 |
| | 1,354 |
| | 4,416 |
| | 3,994 |
|
| Total adjustments | 41,538 |
| | 24,811 |
| | 159,328 |
| | 186,702 |
|
| FFO attributable to W. P. Carey (as defined by NAREIT) | 121,816 |
| | 135,754 |
| | 361,408 |
| | 406,745 |
|
| Adjustments: | | | | | | | |
Above- and below-market rent intangible lease amortization, net (a) | 12,459 |
| | 12,564 |
| | 37,273 |
| | 23,851 |
|
Other amortization and non-cash items (b) (c) | 6,208 |
| | (4,897 | ) | | 14,995 |
| | (7,695 | ) |
| Stock-based compensation | 4,635 |
| | 4,356 |
| | 14,649 |
| | 14,964 |
|
Straight-line and other rent adjustments (d) | (3,212 | ) | | (5,116 | ) | | (9,677 | ) | | (34,262 | ) |
| Amortization of deferred financing costs | 2,184 |
| | 1,007 |
| | 6,126 |
| | 2,271 |
|
| Loss on extinguishment of debt | 1,566 |
| | 2,072 |
| | 35 |
| | 3,885 |
|
Restructuring and other compensation (e) | 1,356 |
| | — |
| | 9,074 |
| | 11,925 |
|
| Tax benefit — deferred | (1,234 | ) | | (2,999 | ) | | (8,167 | ) | | (22,522 | ) |
| Realized (gains) losses on foreign currency | (449 | ) | | 1,559 |
| | (424 | ) | | 2,569 |
|
Other expenses (f) (g) | 65 |
| | — |
| | 1,138 |
| | 5,359 |
|
| Allowance for credit losses | — |
| | — |
| | — |
| | 7,064 |
|
| Proportionate share of adjustments to equity in net income of partially owned entities to arrive at AFFO | 3,064 |
| | 261 |
| | 5,592 |
| | 741 |
|
| Proportionate share of adjustments for noncontrolling interests to arrive at AFFO | (216 | ) | | (90 | ) | | (1,105 | ) | | 1,278 |
|
| Total adjustments | 26,426 |
| | 8,717 |
| | 69,509 |
| | 9,428 |
|
| AFFO attributable to W. P. Carey | $ | 148,242 |
| | $ | 144,471 |
| | $ | 430,917 |
| | $ | 416,173 |
|
| | | | | | | | |
| Summary | | | | | | | |
| FFO attributable to W. P. Carey (as defined by NAREIT) | $ | 121,816 |
| | $ | 135,754 |
| | $ | 361,408 |
| | $ | 406,745 |
|
| AFFO attributable to W. P. Carey | $ | 148,242 |
| | $ | 144,471 |
| | $ | 430,917 |
| | $ | 416,173 |
|
W. P. Carey 9/30/2022 10-Q– 69
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| W. P. Carey 9/30/2017 10-Q– 82
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FFO and AFFO from Owned Real Estate were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income from Real Estate attributable to W. P. Carey | $ | 111,375 | | | $ | 130,858 | | | $ | 381,461 | | | $ | 290,132 | |
| Adjustments: | | | | | | | |
| Depreciation and amortization of real property | 131,628 | | | 114,204 | | | 360,607 | | | 336,405 | |
Gain on change in control of interests (a) | (11,405) | | | — | | | (11,405) | | | — | |
| Loss (gain) on sale of real estate, net | 4,736 | | | (1,702) | | | (37,631) | | | (30,914) | |
| Impairment charges — real estate | — | | | 16,301 | | | 26,385 | | | 16,301 | |
Proportionate share of adjustments to earnings from equity method investments (d) (e) | 2,242 | | | 3,290 | | | 12,859 | | | 17,030 | |
Proportionate share of adjustments for noncontrolling interests (f) | (189) | | | (4) | | | (197) | | | (12) | |
| Total adjustments | 127,012 | | | 132,089 | | | 350,618 | | | 338,810 | |
| FFO (as defined by NAREIT) attributable to W. P. Carey — Real Estate | 238,387 | | | 262,947 | | | 732,079 | | | 628,942 | |
| Adjustments: | | | | | | | |
Merger and other expenses (g) | 17,667 | | | (908) | | | 17,326 | | | (3,998) | |
| Straight-line and other leasing and financing adjustments | (14,326) | | | (10,823) | | | (39,665) | | | (29,887) | |
Other (gains) and losses (h) | 13,960 | | | (48,172) | | | (303) | | | (13,455) | |
| Above- and below-market rent intangible lease amortization, net | 11,186 | | | 12,004 | | | 32,738 | | | 38,503 | |
| Stock-based compensation | 5,511 | | | 4,361 | | | 23,102 | | | 18,790 | |
| Amortization of deferred financing costs | 5,223 | | | 3,424 | | | 11,498 | | | 10,284 | |
| Tax (benefit) — deferred and other | (2,789) | | | (700) | | | (4,302) | | | (3,087) | |
| Other amortization and non-cash items | 359 | | | 557 | | | 1,441 | | | 1,149 | |
Proportionate share of adjustments to earnings from equity method investments (e) | (938) | | | 1,761 | | | (403) | | | 9,928 | |
Proportionate share of adjustments for noncontrolling interests (f) | (673) | | | (6) | | | (684) | | | (19) | |
| Total adjustments | 35,180 | | | (38,502) | | | 40,748 | | | 28,208 | |
| AFFO attributable to W. P. Carey — Real Estate | $ | 273,567 | | | $ | 224,445 | | | $ | 772,827 | | | $ | 657,150 | |
| | | | | | | |
| Summary | | | | | | | |
| FFO (as defined by NAREIT) attributable to W. P. Carey — Real Estate | $ | 238,387 | | | $ | 262,947 | | | $ | 732,079 | | | $ | 628,942 | |
| AFFO attributable to W. P. Carey — Real Estate | $ | 273,567 | | | $ | 224,445 | | | $ | 772,827 | | | $ | 657,150 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income from Owned Real Estate attributable to W. P. Carey (h) | $ | 56,492 |
| | $ | 87,497 |
| | $ | 137,990 |
| | $ | 174,736 |
|
| Adjustments: | | | | | | | |
| Depreciation and amortization of real property | 62,621 |
| | 61,396 |
| | 185,439 |
| | 209,449 |
|
| Gain on sale of real estate, net | (19,257 | ) | | (49,126 | ) | | (22,732 | ) | | (68,070 | ) |
| Impairment charges | — |
| | 14,441 |
| | — |
| | 49,870 |
|
| Proportionate share of adjustments for noncontrolling interests to arrive at FFO | (2,692 | ) | | (3,254 | ) | | (7,795 | ) | | (8,541 | ) |
| Proportionate share of adjustments to equity in net income of partially owned entities to arrive at FFO | 866 |
| | 1,354 |
| | 4,416 |
| | 3,994 |
|
| Total adjustments | 41,538 |
| | 24,811 |
| | 159,328 |
| | 186,702 |
|
FFO attributable to W. P. Carey (as defined by NAREIT) — Owned Real Estate (h) | 98,030 |
| | 112,308 |
| | 297,318 |
| | 361,438 |
|
| Adjustments: | | | | | | | |
Above- and below-market rent intangible lease amortization, net (a) | 12,459 |
| | 12,564 |
| | 37,273 |
| | 23,851 |
|
Other amortization and non-cash items (b) (c) | 6,808 |
| | (4,356 | ) | | 15,855 |
| | (7,587 | ) |
Straight-line and other rent adjustments (d) | (3,212 | ) | | (5,116 | ) | | (9,677 | ) | | (34,262 | ) |
| Tax benefit — deferred | (2,694 | ) | | (3,387 | ) | | (5,121 | ) | | (19,712 | ) |
| Amortization of deferred financing costs | 2,184 |
| | 1,007 |
| | 6,126 |
| | 2,271 |
|
| Stock-based compensation | 1,880 |
| | 1,572 |
| | 4,733 |
| | 4,316 |
|
| Loss on extinguishment of debt | 1,566 |
| | 2,072 |
| | 35 |
| | 3,885 |
|
| Realized (gains) losses on foreign currency | (454 | ) | | 1,559 |
| | (441 | ) | | 2,518 |
|
Other expenses (f) (g) | 65 |
| | — |
| | 1,138 |
| | 2,975 |
|
| Allowance for credit losses | — |
| | — |
| | — |
| | 7,064 |
|
Restructuring and other compensation (e) | — |
| | — |
| | — |
| | 4,413 |
|
Proportionate share of adjustments to equity in net income of partially owned entities to arrive at AFFO (h) | (79 | ) | | (103 | ) | | (605 | ) | | (390 | ) |
| Proportionate share of adjustments for noncontrolling interests to arrive at AFFO | (216 | ) | | (90 | ) | | (1,105 | ) | | 1,278 |
|
| Total adjustments | 18,307 |
| | 5,722 |
| | 48,211 |
| | (9,380 | ) |
AFFO attributable to W. P. Carey — Owned Real Estate (h) | $ | 116,337 |
| | $ | 118,030 |
| | $ | 345,529 |
| | $ | 352,058 |
|
| | | | | | | | |
| Summary | | | | | | | |
FFO attributable to W. P. Carey (as defined by NAREIT) — Owned Real Estate (h) | $ | 98,030 |
| | $ | 112,308 |
| | $ | 297,318 |
| | $ | 361,438 |
|
AFFO attributable to W. P. Carey — Owned Real Estate (h) | $ | 116,337 |
| | $ | 118,030 |
| | $ | 345,529 |
| | $ | 352,058 |
|
W. P. Carey 9/30/2022 10-Q– 70
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| W. P. Carey 9/30/2017 10-Q– 83
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FFO and AFFO from Investment Management were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income from Investment Management attributable to W. P. Carey (h) | $ | 23,786 |
| | $ | 23,446 |
| | $ | 64,090 |
| | $ | 45,307 |
|
FFO attributable to W. P. Carey (as defined by NAREIT) — Investment Management (h) | 23,786 |
| | 23,446 |
| | 64,090 |
| | 45,307 |
|
| Adjustments: | | | | | | | |
| Stock-based compensation | 2,755 |
| | 2,784 |
| | 9,916 |
| | 10,648 |
|
| Tax expense (benefit) — deferred | 1,460 |
| | 388 |
| | (3,046 | ) | | (2,810 | ) |
Restructuring and other compensation (e) | 1,356 |
| | — |
| | 9,074 |
| | 7,512 |
|
Other amortization and non-cash items (b) | (600 | ) | | (541 | ) | | (860 | ) | | (108 | ) |
| Realized losses on foreign currency | 5 |
| | — |
| | 17 |
| | 51 |
|
Other expenses (g) | — |
| | — |
| | — |
| | 2,384 |
|
Proportionate share of adjustments to equity in net income of partially owned entities to arrive at AFFO (h) | 3,143 |
| | 364 |
| | 6,197 |
| | 1,131 |
|
| Total adjustments | 8,119 |
| | 2,995 |
| | 21,298 |
| | 18,808 |
|
AFFO attributable to W. P. Carey — Investment Management (h) | $ | 31,905 |
| | $ | 26,441 |
| | $ | 85,388 |
| | $ | 64,115 |
|
| | | | | | | | |
| Summary | | | | | | | |
FFO attributable to W. P. Carey (as defined by NAREIT) — Investment Management (h) | $ | 23,786 |
| | $ | 23,446 |
| | $ | 64,090 |
| | $ | 45,307 |
|
AFFO attributable to W. P. Carey — Investment Management (h) | $ | 31,905 |
| | $ | 26,441 |
| | $ | 85,388 |
| | $ | 64,115 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net (loss) income from Investment Management attributable to W. P. Carey | $ | (6,447) | | | $ | 7,689 | | | $ | 8,140 | | | $ | 20,294 | |
| Adjustments: | | | | | | | |
Impairment charges — Investment Management goodwill (c) | 29,334 | | | — | | | 29,334 | | | — | |
Gain on change in control of interests (b) | (22,526) | | | — | | | (22,526) | | | — | |
| Total adjustments | 6,808 | | | — | | | 6,808 | | | — | |
| FFO (as defined by NAREIT) attributable to W. P. Carey — Investment Management | 361 | | | 7,689 | | | 14,948 | | | 20,294 | |
| Adjustments: | | | | | | | |
| Tax expense (benefit) — deferred and other | 3,952 | | | 410 | | | 3,868 | | | (373) | |
| Other (gains) and losses | 1,060 | | | (1,047) | | | 1,324 | | | (2,121) | |
| Merger and other expenses | — | | | — | | | 3 | | | 15 | |
Proportionate share of adjustments to earnings from equity method investments (e) | (1,218) | | | (773) | | | (2,048) | | | 921 | |
| Total adjustments | 3,794 | | | (1,410) | | | 3,147 | | | (1,558) | |
| AFFO attributable to W. P. Carey — Investment Management | $ | 4,155 | | | $ | 6,279 | | | $ | 18,095 | | | $ | 18,736 | |
| | | | | | | |
| Summary | | | | | | | |
| FFO (as defined by NAREIT) attributable to W. P. Carey — Investment Management | $ | 361 | | | $ | 7,689 | | | $ | 14,948 | | | $ | 20,294 | |
| AFFO attributable to W. P. Carey — Investment Management | $ | 4,155 | | | $ | 6,279 | | | $ | 18,095 | | | $ | 18,736 | |
__________
| |
(a) | Amount for the nine months ended September 30, 2016 includes an adjustment of $15.6 million related to the acceleration of a below-market lease from a tenant of a domestic property that was sold during that period. |
| |
(b) | Represents primarily unrealized gains and losses from foreign exchange and derivatives. |
| |
(c) | Amounts for the three and nine months ended September 30, 2016 include an adjustment of $0.6 million to exclude a portion of a gain recognized on the deconsolidation of CESH I (Note 2). |
| |
(d) | Amount for the nine months ended September 30, 2016 includes an adjustment to exclude $27.2 million of the $32.2 million of lease termination income recognized in connection with a domestic property that was sold during that period, as such amount was determined to be non-core income (Note 15). Amount for the nine months ended September 30, 2016 also reflects an adjustment to include $1.8 million of lease termination income received in December 2015 that represented core income for the nine months ended September 30, 2016. |
| |
(e) | Amounts for the three and nine months ended September 30, 2017 represent restructuring expenses resulting from our exit from all non-traded retail fundraising activities, as of June 30, 2017. Amount for the nine months ended September 30, 2016 represents restructuring and other compensation-related expenses resulting from a reduction in headcount, including the RIF, and employee severance arrangements (Note 12). |
| |
(f) | Amount for the nine months ended September 30, 2017 is primarily comprised of an accrual for estimated one-time legal settlement expenses. |
| |
(g) | Amount for the nine months ended September 30, 2016 reflects expenses related to our formal strategic review, which was completed in May 2016. |
| |
(h) | As a result of our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017, we have revised how we view and present a component of our two reportable segments. As such, beginning with the second quarter of 2017, we include equity in earnings of equity method investments in the Managed Programs in our Investment Management segment (Note 1). Earnings from our investment in CCIF continue to be included in our Investment Management segment. Results of operations for prior periods have been reclassified to conform to the current period presentation. |
(a)Amounts for the three and nine months ended September 30, 2022 represent a gain recognized on the remaining interests in four investments acquired in the CPA:18 Merger, which we had previously accounted for under the equity method (Note 3). (b)Amounts for the three and nine months ended September 30, 2022 represent a gain recognized on our previously held interest in shares of CPA:18 – Global common stock in connection with the CPA:18 Merger (Note 3). (c)Amounts for the three and nine months ended September 30, 2022 represent an impairment charge recognized on goodwill within our Investment Management segment, since future Investment Management cash flows are expected to be minimal (Note 7, Note 9). (d)Amount for the nine months ended September 30, 2022 includes our $4.6 million proportionate share of an impairment charge recognized on an equity method investment in real estate (Note 8). Amount for the nine months ended September 30, 2021 includes a non-cash other-than-temporary impairment charge of $6.8 million recognized on an equity method investment in real estate (Note 9). (e)Equity income, including amounts that are not typically recognized for FFO and AFFO, is recognized within Earnings (losses) from equity method investments on the consolidated statements of income. This represents adjustments to equity income to reflect FFO and AFFO on a pro rata basis.
(f)Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis.
(g)Amounts for the three and nine months ended September 30, 2022 and 2021 are primarily comprised of costs incurred in connection with the CPA:18 Merger (Note 3) and/or reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with mergers in prior years. (h)Primarily comprised of gains and losses on extinguishment of debt, the mark-to-market fair value of equity securities, and foreign currency exchange rate movements, as well as non-cash allowance for credit losses on loans receivable and direct financing leases.
W. P. Carey 9/30/2022 10-Q– 71
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While we believe that FFO and AFFO are important supplemental measures, they should not be considered as alternatives to net income as an indication of a company’s operating performance. These non-GAAP measures should be used in conjunction with net income as defined by GAAP. FFO and AFFO, or similarly titled measures disclosed by other REITs, may not be comparable to our FFO and AFFO measures.
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 market risks that we are exposed to are interest rate risk and foreign currency exchange risk. risk; however, we do not use derivative instruments to hedge credit/market risks or for speculative purposes. From time to time, we may enter into foreign currency collars to hedge our foreign currency cash flow exposures.
We are also exposed to further market risk as a result of tenant concentrations in certain industries and/or geographic regions, since adverse market factors (such as the COVID-19 pandemic) can affect the ability of tenants in a particular industry/region to meet their respective lease obligations. In order to manage this risk, we view our collective tenant roster as a portfolio and we attempt to diversify such portfolio so that we are not overexposed to a particular industry or geographic region.
Generally, we do not use derivative instruments to hedge credit/market risks or for speculative purposes. However, from time to time, we may enter into foreign currency forward contracts and collars to hedge our foreign currency cash flow exposures.
Interest Rate Risk
The values of our real estate and related fixed-rate debt obligations, andas well as the values of our note receivable investmentsunsecured debt obligations, are 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 (including the ongoing impact of the COVID-19 pandemic) and changes in the creditworthiness of lessees, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. 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 fair value of our owned and managed assets to decrease, which would create lower revenues from managed assets and lower investment performance for the Managed REITs.decrease. 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 historically attempted to obtain non-recourse mortgagegenerally seek long-term debt financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with lenders. Interest rate swap agreements effectively convert the variable-rate debt service obligations of a loan to a fixed rate, while interest rate cap agreements limit the underlying interest rate from exceeding a specified strike rate. Interest rate swaps are agreements in which one party exchanges a stream of interest paymentscounterparties. See Note 10 for a counterparty’s stream of cash flows 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 that, where applicable, are designated as cash flow hedgesadditional information on the forecasted interest payments on the debt obligation. The 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 September 30, 2017, we estimated that the total fair value of our interest rate swaps and cap, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, was in a net liability position of $1.6 million (Note 9).caps.
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At September 30, 2017,2022, a significant portion (approximately 83.2%85.0%) of our long-term debt either bore interest at fixed rates or 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 annual interest rates on our fixed-rate debt at September 30, 2017 ranged from 2.0% to 7.8%. The contractual annual interest rates on our variable-rate debt at September 30, 2017 ranged from 0.9% to 6.9%.rate. Our debt obligations are more fully described in Note 1011 and Liquidity and Capital Resources — Summary of Financing in Item 2 above. The following table presents principal cash outflows for the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter,flows based upon expected maturity dates of our debt obligations outstanding at September 30, 20172022 (in thousands): | | | | | | | | | | | | | | | | | | | | 2022 (Remainder) | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | Fair Value |
| | 2017 (Remainder) | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | | Fair value | |
Fixed-rate debt (a) | $ | 38,805 |
| | $ | 135,368 |
| | $ | 86,143 |
| | $ | 178,496 |
| | $ | 116,682 |
| | $ | 2,911,666 |
| | $ | 3,467,160 |
| | $ | 3,572,112 |
| |
Fixed-rate debt (a) (b) | | Fixed-rate debt (a) (b) | $ | 93,750 | | | $ | 228,840 | | | $ | 1,126,491 | | | $ | 762,259 | | | $ | 947,997 | | | $ | 3,431,674 | | | $ | 6,591,011 | | | $ | 5,800,996 | |
Variable-rate debt (a) | $ | 1,979 |
| | $ | 142,795 |
| | $ | 13,241 |
| | $ | 43,051 |
| | $ | 267,322 |
| | $ | 408,374 |
| | $ | 876,762 |
| | $ | 874,357 |
| Variable-rate debt (a) | $ | 2,994 | | | $ | 199,402 | | | $ | 34,936 | | | $ | 1,007,697 | | | $ | 11,290 | | | $ | — | | | $ | 1,256,319 | | | $ | 1,253,300 | |
__________
| |
(a) | Amounts are based on the exchange rate at September 30, 2017, as applicable. |
(a)Amounts are based on the exchange rate at September 30, 2022, as applicable.
(b)Amounts after 2023 are primarily comprised of principal payments for our Senior Unsecured Notes (Note 11).
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 that has been subject to interest rate caps, is affected by changes in interest rates. Annual interest expense on our unhedged variable-rate debt that does not bear interest at fixed rates at September 30,
20172022 would increase or decrease by
$7.2$4.7 million
for our U.S. dollar-denominated debt, by $3.4 million for our British pound sterling-denominated debt, by $3.0 million for our euro-denominated debt, and by $0.2 million for our Japanese yen-denominated debt, for each respective 1% change in annual interest rates.
As more fully described under Liquidity and Capital Resources — Summary of Financing in Item 2 above, a portion of the debt classified as variable-rate debt in the tables above bore interest at fixed rates at September 30, 2017 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. This debt is generally not subject to short-term fluctuations in interest rates.
W. P. Carey 9/30/2022 10-Q– 72
Foreign Currency Exchange Rate Risk
We own international investments, primarily in Europe, Australia, Asia,Canada, and Canada,Japan, and as a result are subject to risk from the effects of exchange rate movements in various foreign currencies, primarily the euro, the British pound sterling, the AustralianCanadian dollar, the Japanese yen, and the Canadian dollar,certain other currencies which may affect future costs and cash flows. We managehave obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. We have also completed several offerings of euro-denominated senior notes, and have borrowed under our Senior Unsecured Credit Facility in foreign currencies, including the euro, British pound sterling, and Japanese yen (Note 11). Volatile market conditions arising from the ongoing effects of the COVID-19 global pandemic, as well as other macroeconomic factors, may result in significant fluctuations in foreign currency exchange rate movements by generally placing ourrates. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service obligation(comprised of principal and interest, excluding balloon payments), as translated to U.S. dollars, will partially offset the lendereffect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We estimate that, for a 1% increase or decrease in the exchange rate between the euro, British pound sterling, or Japanese yen and the tenant’s rental obligation to usU.S. dollar, there would be a corresponding change in the same currency. This reduces our overall exposure to the netprojected estimated cash flow from that investment. (scheduled future rental revenues, net of scheduled future debt service payments for the next 12 months) for our consolidated foreign operations at September 30, 2022 of $2.5 million, $0.3 million, and less than $0.1 million, respectively, excluding the impact of our derivative instruments.
In addition, we may use currency hedging to further reduce the exposure to our equity cash flow. We are generally a net receiver of these currencies (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 foreign currency. As part of our investment strategy, we make intercompany loans to a number of our foreign subsidiaries, most of which do not have the U.S. dollar as their functional currency. Remeasurement of foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and short-term loans, are included in the determination of net income. For the nine months ended September 30, 2017, we recognized net foreign currency transaction losses (included in Other income and (expenses) in the consolidated financial statements) of $15.9 million, primarily due to the weakening of the U.S. dollar relative to the euro during the period. The end-of-period rate for the U.S. dollar in relation to the euro at September 30, 2017 increased by 12.0% to $1.1806 from $1.0541 at December 31, 2016.
The June 23, 2016 referendum by voters in the United Kingdom to exit the European Union, a process commonly referred to as “Brexit,” adversely impacted global markets, including the currencies, and resulted in a sharp decline in the value of the British pound sterling and, to a lesser extent, the euro, as compared to the U.S. dollar. Volatility in exchange rates is expected to continue as the United Kingdom negotiates its likely exit from the European Union. As of September 30, 2017, 4.9% and 24.0% of our total ABR was from the United Kingdom and other European Union countries, respectively. We currently hedge a portion of our British pound sterling exposure and our euro exposure through the next five years, thereby significantly reducing our currency risk. Any impact from Brexit on us will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results.
We enter into foreign currency forward contracts and collars to hedge certain of our foreign currency cash flow exposures. A foreign currency forward contract is a commitment to deliver a certain amount of foreign currency at a certain priceSee Note 10 for additional information on a specific date in the future. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar guarantees that the
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exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. The estimated fair value of our foreign currency forward contracts and collars, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, was in a net asset position of $17.0 million at September 30, 2017 (Note 9). We have obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. We have also issued the euro-denominated 2.0% Senior Notes and 2.25% Senior Notes, and have borrowed under our Unsecured Revolving Credit Facility and Unsecured Term Loans in foreign currencies, including the euro and the British pound sterling. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service, as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates.collars.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases for our consolidated foreign operations as of September 30, 2017 for the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lease Revenues (a) | | 2017 (Remainder) | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total |
Euro (b) | | $ | 42,817 |
| | $ | 171,565 |
| | $ | 168,207 |
| | $ | 164,933 |
| | $ | 160,199 |
| | $ | 1,251,640 |
| | $ | 1,959,361 |
|
British pound sterling (c) | | 8,357 |
| | 33,337 |
| | 33,592 |
| | 33,919 |
| | 34,165 |
| | 278,974 |
| | 422,344 |
|
Australian dollar (d) | | 3,150 |
| | 12,498 |
| | 12,498 |
| | 12,532 |
| | 12,498 |
| | 160,492 |
| | 213,668 |
|
Other foreign currencies (e) | | 4,051 |
| | 16,322 |
| | 16,819 |
| | 15,073 |
| | 15,299 |
| | 152,029 |
| | 219,593 |
|
| | | $ | 58,375 |
| | $ | 233,722 |
| | $ | 231,116 |
| | $ | 226,457 |
| | $ | 222,161 |
| | $ | 1,843,135 |
| | $ | 2,814,966 |
|
Scheduled debt service payments (principal and interest) for our Unsecured Senior Notes, Senior Unsecured Credit Facility, and non-recourse mortgage notes payable for our consolidated foreign operations as of September 30, 2017 for the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt Service (a) (f) | | 2017 (Remainder) | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total |
Euro (b) | | $ | 41,096 |
| | $ | 174,748 |
| | $ | 42,970 |
| | $ | 86,502 |
| | $ | 179,220 |
| | $ | 1,650,182 |
| | $ | 2,174,718 |
|
British pound sterling (c) | | 210 |
| | 840 |
| | 840 |
| | 840 |
| | 840 |
| | 11,595 |
| | 15,165 |
|
| Thai baht | | 497 |
| | 9,231 |
| | — |
| | — |
| | — |
| | — |
| | 9,728 |
|
| | | $ | 41,803 |
| | $ | 184,819 |
| | $ | 43,810 |
| | $ | 87,342 |
| | $ | 180,060 |
| | $ | 1,661,777 |
| | $ | 2,199,611 |
|
__________
| |
(a) | Amounts are based on the applicable exchange rates at September 30, 2017. Contractual rents and debt obligations are denominated in the functional currency of the country of each property.
|
| |
(b) | We estimate that, for a 1% increase or decrease in the exchange rate between the euro and the U.S. dollar, there would be a corresponding change in the projected estimated cash flow at September 30, 2017 of $2.2 million, excluding the impact of our derivative instruments. Amounts included the equivalent of $590.3 million of 2.0% Senior Notes outstanding maturing in January 2023; the equivalent of $590.3 million of 2.25% Senior Notes outstanding maturing in July 2024; the equivalent of $383.7 million borrowed in euro in aggregate under our Unsecured Term Loans, which are scheduled to mature on February 22, 2022; and the equivalent of $111.2 million borrowed in euro under our Unsecured Revolving Credit Facility, which is scheduled to mature on February 22, 2021 unless extended pursuant to its terms, but may be prepaid prior to that date pursuant to its terms (Note 10). |
| |
(c) | We estimate that, for a 1% increase or decrease in the exchange rate between the British pound sterling and the U.S. dollar, there would be a corresponding change in the projected estimated cash flow at September 30, 2017 of $4.1 million, excluding the impact of our derivative instruments. |
| |
(d) | We estimate that, for a 1% increase or decrease in the exchange rate between the Australian dollar and the U.S. dollar, there would be a corresponding change in the projected estimated cash flow at September 30, 2017 of $2.1 million. There is no related mortgage loan on this investment. |
| |
(e) | Other foreign currencies for future minimum rents consist of the Canadian dollar, the Swedish krona, the Norwegian krone, and the Thai baht. |
| |
(f) | Interest on unhedged variable-rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at September 30, 2017. |
|
| |
| W. P. Carey 9/30/2017 10-Q– 87
|
As a result of scheduled balloon payments on certain of our international non-recourse mortgage loans, projected debt service obligations denominated in euros exceed projected lease revenues denominated in euros in 2018. In 2018, balloon payments denominated in euros totaling $130.1 million are due on three non-recourse mortgage loans that are collateralized by properties that we own. We currently anticipate that, by their respective due dates, we will have refinanced or repaid these loans using our cash resources, including unused capacity on our Unsecured Revolving Credit Facility, as well as proceeds from dispositions of properties.
Projected debt service obligations denominated in euros exceed projected lease revenues denominated in euros in 2021 and thereafter, primarily due to amounts borrowed in euros under our Unsecured Term Loans, Unsecured Revolving Credit Facility, 2.0% Senior Notes, and 2.25% Senior Notes, as described above.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have similar economic risks or conditions that could cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our portfolio is reasonably well diversified,well-diversified, it does contain concentrations in certain areas. There have been no material changes in our concentration of credit risk from what was disclosed in the 2021 Annual Report.
For the nine months ended September 30, 2017, our consolidated portfolio had the following significant characteristics in excess of 10%, based on the percentage of our consolidated total revenues:
68% related to domestic operations; and
32% related to international operations.
At September 30, 2017, our net-lease portfolio, which excludes our operating properties, had the following significant property and lease characteristics in excess of 10% in certain areas, based on the percentage of our ABR as of that date:
65% related to domestic properties;
35% related to international properties;W. P. Carey 9/30/2022 10-Q– 73
30% related to industrial facilities, 25% related to office facilities, 16% related to retail facilities, and 14% related to warehouse facilities; and
18% related to the retail stores industry and 11% related to the consumer services industry.
|
| |
| W. P. Carey 9/30/2017 10-Q– 88
|
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our disclosure controls and procedures include internal 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, or 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 as of September 30, 2017,2022, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 30, 20172022 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 controls over financial reporting.
W. P. Carey 9/30/2022 10-Q– 74
|
| |
| W. P. Carey 9/30/2017 10-Q– 89
|
PART II — OTHER INFORMATION
Item 6. Exhibits.
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
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| | | | | | | | | | | | | |
Exhibit
No. |
| Description | Description | | Method of Filing |
31.14.1 |
| | Form of Note Representing €150,000,000 Aggregate Principal Amount of 3.41% Senior Notes due 2029 | | Filed herewith |
| | | | |
| 4.2 | | | Form of Note Representing €200,000,000 Aggregate Principal Amount of 3.70% Senior Notes due 2032 | | Filed herewith |
| | | | |
| 10.1 | | | Note Purchase Agreement, dated August 31, 2022, by and among W. P. Carey Inc. and the purchasers listed in the purchaser schedule thereto | | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed September 1, 2022 |
| | | | |
| 31.1 | | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
| 31.2 |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
| 32 |
| | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
101101.INS |
| XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | The following materials from W. P. Carey Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements. | | Filed herewith |
|
| | | | |
| 101.SCH | W. P. Carey 9/30/2017 10-Q– 90
| XBRL Taxonomy Extension Schema Document | | Filed herewith |
| | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
| | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
| | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
W. P. Carey 9/30/2022 10-Q– 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | W. P. Carey Inc. |
| Date: | November 4, 2022 | | |
| | By: | /s/ ToniAnn Sanzone |
| | | ToniAnn Sanzone |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| Date: | November 4, 2022 | | W. P. Carey Inc. |
Date: | November 3, 2017 | | |
| | By: | /s/ ToniAnn Sanzone |
| | | ToniAnn Sanzone |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
Date: | November 3, 2017 | | |
| | By: | /s/ Arjun Mahalingam |
| | | Arjun Mahalingam |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |
|
| | By: | /s/ Arjun Mahalingam |
| W. P. Carey 9/30/2017 10-Q– 91
| | Arjun Mahalingam |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |
W. P. Carey 9/30/2022 10-Q– 76
EXHIBIT INDEX
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
|
| | | | | | | | | | | | | |
Exhibit
No. |
| Description | Description | | Method of Filing |
31.14.1 |
| | Form of Note Representing €150,000,000 Aggregate Principal Amount of 3.41% Senior Notes due 2029 | | |
| | | | |
| 4.2 | | | Form of Note Representing €200,000,000 Aggregate Principal Amount of 3.70% Senior Notes due 2032 | | |
| | | | |
| 10.1 | | | Note Purchase Agreement, dated August 31, 2022, by and among W. P. Carey Inc. and the purchasers listed in the purchaser schedule thereto | | |
| | | | |
| 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 | | |
| | | | |
101101.INS |
| XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | The following materials from W. P. Carey Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.
| | Filed herewith |
| | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith |
| | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
| | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
| | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
