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8-K - FORM 8-K - W. P. Carey Inc. | c18545e8vk.htm |
EX-99.2 - EXHIBIT 99.2 - W. P. Carey Inc. | c18545exv99w2.htm |
EX-99.3 - EXHIBIT 99.3 - W. P. Carey Inc. | c18545exv99w3.htm |
EX-99.4 - EXHIBIT 99.4 - W. P. Carey Inc. | c18545exv99w4.htm |
EX-23.1 - EXHIBIT 23.1 - W. P. Carey Inc. | c18545exv23w1.htm |
Exhibit 99.1
Item 1A. Risk Factors.
Our business, results of operations, financial condition and ability to pay distributions at the
current rate could be materially adversely affected by various risks and uncertainties, including
the conditions below. These risk factors may have affected, and in the future could affect, our
actual operating and financial results and could cause such results to differ materially from those
in any forward-looking statements. You should not consider this list exhaustive. New risk factors
emerge periodically, and we cannot assure you that the factors described below list all material
risks to us at any later time.
The recent financial and economic crisis adversely affected our business, and the continued
uncertainty in the global economic environment may adversely affect our business in the future.
Although we have seen signs of modest improvement in the global economy following the significant
distress in 2008 and 2009, the economic recovery remains weak, and our business in still dependent
on the speed and strength of that recovery, which cannot be predicted at the present time. To date,
its effects on our business have been somewhat limited, primarily in that a number of tenants,
particularly in the portfolios of the CPA® REITs, have experienced increased levels of
financial distress, with several having filed for bankruptcy protection, although our experience in
2010 reflected an improvement from 2008 and 2009.
Depending on how long and how severe this crisis is, we could in the future experience a number of
additional effects on our business, including higher levels of default in the payment of rent by
our tenants, additional bankruptcies and impairments in the value of our property investments, as
well as difficulties in refinancing existing loans as they come due. Any of these conditions may
negatively affect our earnings, as well as our cash flow and, consequently, our ability to sustain
the payment of dividends at current levels.
Our managed funds may also be adversely affected by these conditions, and their earnings or cash
flow may also be adversely affected by other events, such as increases in the value of the U.S.
Dollar relative to other currencies in which they receive rent, as well as the need to expend cash
to fund increased redemptions. Additionally, the ability of CPA®:17 Global to make
new investments will be affected by the availability of financing as well as its ability to raise
new funds. Decreases in the value of the assets held by the CPA® REITs will affect the
asset management revenues payable to us, as well as the value of the stock we hold in the CPA®
REITs, and decreases in these funds earnings or ability to pay distributions may also affect
their ability to make the payments due to us, as well as our income and cash flow from CPA®
REIT distribution payments.
Earnings from our investment management operations are subject to volatility.
Growth in revenue from our investment management operations is dependent in large part on future
capital raising in existing or future managed entities, as well as on our ability to make
investments that meet the investment criteria of these entities, both of which are subject to
uncertainty, including with respect to capital market and real estate market conditions. This
uncertainty creates volatility in our earnings because of the resulting fluctuation in
transaction-based revenue. Asset management revenue may be affected by factors that include not
only our ability to increase the CPA® REITs portfolio of properties under management,
but also changes in valuation of those properties, as well as sales of CPA® REIT
properties. In addition, revenue from our investment management operations, including our ability
to earn performance revenue, as well as the value of our holdings of CPA® REIT interests
and dividend income from those interests, may be significantly affected by the results of
operations of the CPA® REITs. Each of the CPA® REITs has invested
substantially all of its assets (other than short-term investments) in triple-net leased properties
substantially similar to those we hold, and consequently the results of operations of, and cash
available for distribution by, each of the CPA® REITs, is likely to be substantially
affected by the same market conditions, and subject to the same risk factors, as the properties we
own. Four of the sixteen CPA®funds temporarily reduced the rate of distributions to
their investors as a result of adverse developments involving tenants.
Each of the CPA® REITs we currently manage may incur significant debt. This significant
debt load could restrict their ability to pay revenue owed to us when due, due to either liquidity
problems or restrictive covenants contained in their borrowing agreements. In addition, the revenue
payable under each of our current investment advisory agreements is subject to a variable annual
cap based on a formula tied to the assets and income of that CPA® REIT. This cap may
limit the growth of our management revenue. Furthermore, our ability to earn revenue related to the
disposition of properties is primarily tied to providing liquidity events for CPA® REIT
investors. Our ability to provide that liquidity, and to do so under circumstances that will
satisfy the applicable subordination requirements noted above in Item 1, Business Other Revenue,
will depend on market conditions at the relevant time, which may vary considerably over a period of
years. In any case, liquidity events typically occur several years apart, and income from our
investment management operations is likely to be significantly higher in those years in which such
events occur. If the Proposed Merger between CPA®:14 and CPA®:16 Global is
approved by the shareholders and the other closing conditions are satisfied, we
currently expect that the transaction will be completed in the second quarter of 2011, although
there can be no assurance of such timing.
The revenue streams from the investment advisory agreements with the CPA®REITs are
subject to limitation or cancellation.
The agreements under which we provide investment advisory services may generally be terminated by
each CPA® REIT upon 60 days notice, with or without cause. There can be no assurance
that these agreements will not be terminated. A termination without cause may, however, entitle us
to termination revenue, equal to 15% of the amount by which the net fair value of the relevant
CPA® REITs assets exceeds the remaining amount necessary to provide investors with total
distributions equal to their investment plus a preferred return. For CPA®:17 Global,
and CPA®:16 Global if the UPREIT reorganization is approved by CPA®:16
Globals shareholders, they have the right, but not the obligation, upon certain terminations to
repurchase our interests in their operating partnerships at fair market value. If such right is not
exercised, we would remain as a limited partner of the operating partnerships. Nonetheless, any
such termination could have a material adverse effect on our business, results of operations and
financial condition.
Changes in investor preferences or market conditions could limit our ability to raise funds or make
new investments.
Substantially all of our and the CPA® REITs current investments, as well as the
majority of the investments we expect to originate for the CPA® REITs in the near term,
are investments in single-tenant commercial properties that are subject to triple-net leases. In
addition, we have relied predominantly on raising funds from individual investors through the sale
by participating selected dealers to their customers of publicly-registered, non-traded securities
of the CPA® REITs. Although we have increased the number of broker-dealers we use for
fundraising, historically the majority of our fundraising efforts have been through one major
selected dealer. If, as a result of changes in market receptivity to investments that are not
readily liquid and involve high selected dealer fees, or for other reasons, this capital raising
method were to become less available as a source of capital, our ability to raise funds for
CPA® REIT programs and Carey Watermark, and consequently our ability to make investments
on their behalf, could be adversely affected. While we are not limited to this particular method of
raising funds for investment (and, among other things, the CPA® REITs and Carey
Watermark may themselves be able to borrow additional funds to invest), our experience with other
means of raising capital is limited. Also, many factors, including changes in tax laws or
accounting rules, may make these types of investments less attractive to potential sellers and
lessees, which could negatively affect our ability to increase the amount of assets of this type
under management.
We face active competition.
In raising funds for investment by the CPA® REITs and Carey Watermark, we face
competition from other funds with similar investment objectives that seek to raise funds from
investors through publicly registered, non-traded funds, publicly-traded funds and private funds.
This competition could adversely affect our ability to make acquisitions and to raise funds for
future investments, which in turn could ultimately reduce, or limit the growth of, revenues from
our investment management operations.
We face active competition for our investments from many sources, including insurance companies,
credit companies, pension funds, private individuals, financial institutions, finance companies and
investment companies, among others. These institutions may accept greater risk or lower returns,
allowing them to offer more attractive terms to prospective tenants. In addition, our evaluation of
the acceptability of rates of return on behalf of the CPA® REITs is affected by such
factors as the cost of raising capital, the amount of revenue we can earn and the performance
hurdle rates of the relevant CPA® REITs. Thus, the effect of the cost of raising capital
and the revenue we can earn may be to limit the amount of new investments we make on behalf of the
CPA® REITs, which will in turn limit the growth of revenues from our investment
management operations.
A substantial amount of our leases will expire within the next three years, and we may have
difficulty in re-leasing or selling our properties if tenants do not renew their leases.
Within the next three years, approximately 32% of our leases, based on annualized contractual
minimum base rent, are due to expire. If these leases are not renewed, or if the properties cannot
be re-leased on terms that yield payments comparable to those currently being received, then our
lease revenues could be substantially adversely affected. The terms of any new or renewed leases of
these properties may depend on market conditions prevailing at the time of lease expiration. In
addition, if properties are vacated by the current tenants, we may incur substantial costs in
attempting to re-lease such properties. We may also seek to sell these properties, in which event
we may incur losses, depending upon market conditions prevailing at the time of sale.
Real estate investments generally lack liquidity compared to other financial assets, and this lack
of liquidity will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. Some of our net leases are for properties that are specially suited
to the particular needs of the tenant. With these properties, we may be required to renovate the
property or to make
rent concessions in order to lease the property to another tenant. In addition, if we are forced to
sell the property, we may have difficulty selling it to a party other than the tenant due to the
special purpose for which the property may have been designed. These and other limitations may
affect our ability to re-lease or sell properties without adversely affecting returns to
shareholders.
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International investments involve additional risks.
We have invested in and may continue to invest in properties located outside the U.S. These
investments may be affected by factors particular to the laws of the jurisdiction in which the
property is located. These investments may expose us to risks that are different from and in
addition to those commonly found in the U.S., including:
| Foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar; | ||
| Changing governmental rules and policies; |
| Enactment of laws relating to the foreign ownership of property and laws relating to the ability of foreign entities to remove invested capital or profits earned from activities within the country to the United States; | ||
| Expropriation; |
| Legal systems under which the ability to enforce contractual rights and remedies may be more limited than would be the case under U.S. law; |
| The difficulty in conforming obligations in other countries and the burden of complying with a wide variety of foreign laws; |
| Adverse market conditions caused by changes in national or local economic or political conditions; |
| Tax requirements vary by country and we may be subject to additional taxes as a result of our international investments; | ||
| Changes in relative interest rates; |
| Changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies; |
| Changes in real estate and other tax rates and other operating expenses in particular countries; | ||
| Changes in land use and zoning laws; and | ||
| More stringent environmental laws or changes in such laws. |
Also, we may rely on third-party asset managers in international jurisdictions to monitor
compliance with legal requirements and lending agreements with respect to properties we own or
manage on behalf of the CPA® REITs. Failure to comply with applicable requirements may
expose us or our operating subsidiaries to additional liabilities.
Our portfolio growth is constrained by our obligations to offer property transactions to the
CPA® REITs.
Under our investment advisory agreements with the CPA® REITs, we are required to use our
best efforts to present a continuing and suitable investment program to them. In recent years, new
property investment opportunities have generally been made available by us to the CPA®
REITs. While the allocation of new investments to the CPA® REITs fulfills our duty
to present a continuing and suitable investment program and enhances the revenues from our
investment management operations, it also restricts the potential growth of revenues from our real
estate ownership and our ability to diversify our portfolio.
We may recognize substantial impairment charges on our properties.
Historically, we have incurred substantial impairment charges, which we are required to recognize
whenever we sell a property for less than its carrying value or we determine that the carrying
amount of the property is not recoverable and exceeds its fair value (or, for direct financing
leases, that the unguaranteed residual value of the underlying property has declined). By their
nature, the timing or
extent of impairment charges are not predictable. We may incur impairment charges in the future,
which may reduce our net income, although it will not necessarily affect our cash flow from
operations.
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Our use of debt to finance investments could adversely affect our cash flow.
Most of our investments are made by borrowing a portion of the total investment and securing the
loan with a mortgage on the property. If we are unable to make our debt payments as required, a
lender could foreclose on the property or properties securing its debt. This could cause us to lose
part or all of our investment, which in turn could cause the value of our portfolio, and revenues
available for distribution to our shareholders, to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity invested in the
property.
Some of our financing may also require us to make a lump-sum or balloon payment at maturity. Our
ability to make balloon payments on debt will depend upon our ability either to refinance the
obligation when due, invest additional equity in the property or to sell the related property. When
the balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable
as the original loan or sell the property at a price sufficient to make the balloon payment. Our
ability to accomplish these goals will be affected by various factors existing at the relevant
time, such as the state of the national and regional economies, local real estate conditions,
available mortgage rates, our equity in the mortgaged properties, our financial condition, the
operating history of the mortgaged properties and tax laws. A refinancing or sale could affect the
rate of return to shareholders.
Our leases may permit tenants to purchase a property at a predetermined price, which could limit
our realization of any appreciation or result in a loss.
In some circumstances, we grant tenants a right to repurchase the property they lease from us. The
purchase price may be a fixed price or it may be based on a formula or the market value at the time
of exercise. If a tenant exercises its right to purchase the property and the propertys market
value has increased beyond that price, we could be limited in fully realizing the appreciation on
that property. Additionally, if the price at which the tenant can purchase the property is less
than our purchase price or carrying value (for example, where the purchase price is based on an
appraised value), we may incur a loss.
We do not fully control the management of our properties.
The tenants or managers of net leased properties are responsible for maintenance and other
day-to-day management of the properties. If a property is not adequately maintained in accordance
with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures
or other liabilities once the property becomes free of the lease. While our leases generally
provide for recourse against the tenant in these instances, a bankrupt or financially troubled
tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies
against such a tenant. In addition, to the extent tenants are unable to conduct their operation of
the property on a financially successful basis, their ability to pay rent may be adversely
affected. Although we endeavor to monitor, on an ongoing basis, compliance by tenants with their
lease obligations and other factors that could affect the financial performance of our properties,
such monitoring may not in all circumstances ascertain or forestall deterioration either in the
condition of a property or the financial circumstances of a tenant.
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real estate. While the
revenues from our leases and those of the CPA® REITs are not directly dependent upon the
value of the real estate owned, significant declines in real estate values could adversely affect
us in many ways, including a decline in the residual values of properties at lease expiration;
possible lease abandonments by tenants; a decline in the attractiveness of REIT investments that
may impede our ability to raise new funds for investment by CPA® REITs and a decline in
the attractiveness of triple-net lease transactions to potential sellers. We also face the risk
that lease revenue will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. General risks associated with the ownership of real estate
include:
| Adverse changes in general or local economic conditions, | ||
| Changes in the supply of or demand for similar or competing properties, | ||
| Changes in interest rates and operating expenses, |
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| Competition for tenants, | ||
| Changes in market rental rates, | ||
| Inability to lease or sell properties upon termination of existing leases, | ||
| Renewal of leases at lower rental rates, | ||
| Inability to collect rents from tenants due to financial hardship, including bankruptcy, | ||
| Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate, | ||
| Uninsured property liability, property damage or casualty losses, | ||
| Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws; and | ||
| Acts of God and other factors beyond the control of our management. |
The inability of a tenant in a single-tenant property to pay rent will reduce our revenues.
Most of our properties are occupied by a single tenant and, therefore, the success of our
investments is materially dependent on the financial stability of these tenants. Revenues from
several of our tenants/guarantors constitute a significant percentage of our lease revenues. Our
five largest tenants/guarantors represented approximately 33%, 35%
and 33% of total lease revenues
in 2010, 2009 and 2008, respectively. Lease payment defaults by tenants negatively impact our net
income and reduce the amounts available for distributions to shareholders. As our tenants generally
may not have a recognized credit rating, they may have a higher risk of lease defaults than if our
tenants had a recognized credit rating. In addition, the bankruptcy of a tenant could cause the
loss of lease payments as well as an increase in the costs incurred to carry the property until it
can be re-leased or sold. We have had tenants file for bankruptcy protection. In the event of a
default, we may experience delays in enforcing our rights as landlord and may incur substantial
costs in protecting the investment and re-leasing the property. If a lease is terminated, there is
no assurance that we will be able to re-lease the property for the rent previously received or sell
the property without incurring a loss.
We are subject to possible liabilities relating to environmental matters.
We own commercial properties and are subject to the risk of liabilities under federal, state and
local environmental laws. These responsibilities and liabilities also exist for properties owned by
the CPA® REITs and if they become liable for these costs, their ability to pay for our
services could be materially affected. Some of these laws could impose the following on us:
| Responsibility and liability for the cost of investigation and removal or remediation of hazardous substances released on our property, generally without regard to our knowledge of or responsibility for the presence of the contaminants; |
| Liability for the costs of investigation and removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances; |
| Potential liability for common law claims by third parties based on damages and costs of environmental contaminants; and | ||
| Claims being made against us by the CPA® REITs for inadequate due diligence. |
Our costs of investigation, remediation or removal of hazardous or toxic substances, or for
third-party claims for damages, may be substantial. The presence of hazardous or toxic substances
at any of our properties, or the failure to properly remediate a contaminated property, could give
rise to a lien in favor of the government for costs it may incur to address the contamination or
otherwise adversely affect our ability to sell or lease the property or to borrow using the
property as collateral. While we attempt to mitigate identified environmental risks by
contractually requiring tenants to acknowledge their responsibility for complying with
environmental laws and to assume liability for environmental matters, circumstances may arise in
which a tenant fails, or is unable, to fulfill its contractual obligations. In addition,
environmental liabilities, or costs or operating limitations imposed on a tenant to comply with
environmental
laws, could affect its ability to make rental payments to us. Also, and although we endeavor to
avoid doing so, we may be required, in connection with any future divestitures of property, to
provide buyers with indemnification against potential environmental liabilities.
5
A potential change in U.S. accounting standards regarding operating leases may make the leasing of
facilities less attractive to our potential domestic tenants, which could reduce overall demand for
our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a
capital lease if the significant risks and rewards of ownership are considered to reside with the
tenant. This situation is considered to be met if, among other things, the non-cancellable lease
term is more than 75% of the useful life of the asset or if the present value of the minimum lease
payments equals 90% or more of the leased propertys fair value. Under capital lease accounting for
a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease
does not meet any of the criteria for a capital lease, the lease is considered an operating lease
by the tenant and the obligation does not appear on the tenants balance sheet; rather, the
contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus,
entering into an operating lease can appear to enhance a tenants balance sheet in comparison to
direct ownership. In response to concerns caused by a 2005 SEC study that the current model does
not have sufficient transparency, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board conducted a joint project to re-evaluate lease accounting.
In August 2010, the FASB issued a Proposed Accounting Standards Update titled Leases, providing
its views on accounting for leases by both lessees and lessors. The FASBs proposed guidance may
require significant changes in how leases are accounted for by both lessees and lessors. As of the
date of this Report, the FASB has not finalized its views on accounting for leases. Changes to the
accounting guidance could affect both our and the CPA® REITs accounting for leases as
well as that of our and the CPA® REITs tenants. These changes may affect how the real
estate leasing business is conducted both domestically and internationally. For example, if the
accounting standards regarding the financial statement classification of operating leases are
revised, then companies may be less willing to enter into leases in general or desire to enter into
leases with shorter terms because the apparent benefits to their balance sheets could be reduced or
eliminated. This in turn could make it more difficult for the company to enter leases on terms the
company finds favorable.
Proposed legislation may prevent us from qualifying for treatment as a partnership for U.S. federal
income tax purposes, which may significantly increase our tax liability and may affect the market
value of our shares.
Members of the U. S. Congress have introduced legislation that would, if enacted, preclude us from
qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly
traded partnership rules. If this or any similar legislation or regulation were to be enacted and
to apply to us, we would incur a material increase in our tax liability and the market value of our
shares could decline materially.
We depend on key personnel for our future success.
We depend on the efforts of our executive officers and key employees. The loss of the services of
these executive officers and key employees could have a material adverse effect on our operations.
Our governing documents and capital structure may discourage a takeover.
Wm. Polk Carey, Chairman, is the beneficial owner of approximately 30% of our outstanding shares at
December 31, 2010. The provisions of our Amended and Restated Limited Liability Company Agreement
and the share ownership of Mr. Carey may discourage a tender offer for our shares or a hostile
takeover, even though these may be attractive to shareholders.
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