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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-99.1 - EXHIBIT 99.1 - W. P. Carey Inc.c18545exv99w1.htm
EX-99.3 - EXHIBIT 99.3 - W. P. Carey Inc.c18545exv99w3.htm
EX-23.1 - EXHIBIT 23.1 - W. P. Carey Inc.c18545exv23w1.htm
Exhibit 99.4
Item 8.  
Financial Statements and Supplementary Data.
The following financial statements and schedule are filed as a part of this Report:
         
Report of Independent Registered Public Accounting Firm
    2  
Consolidated Balance Sheets
    3  
Consolidated Statements of Income
    4  
Consolidated Statements of Comprehensive Income
    5  
Consolidated Statements of Equity
    6  
Consolidated Statements of Cash Flows
    7  
Notes to Consolidated Financial Statements
    9  
Schedule III — Real Estate and Accumulated Depreciation
    47  
Notes to Schedule III
    50  
Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of W. P. Carey & Co. LLC:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of W. P. Carey & Co. LLC and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 2011, except with respect to our opinion insofar as it relates to the effects of the discontinued operations and segment reporting as discussed in Notes 1, 2, 6, 11, 13, 16, 17, 18, and 20, as to which the date is June 8, 2011.

 

2


 

W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)
                 
    December 31,  
    2010     2009  
Assets
               
Investments in real estate:
               
Real estate, at cost (inclusive of amounts attributable to consolidated variable interest entities (“VIEs”) of $39,718 and $52,625, respectively)
  $ 560,592     $ 525,607  
Operating real estate, at cost (inclusive of amounts attributable to consolidated VIEs of $25,665 and $25,665, respectively)
    109,851       85,927  
Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $20,431 and $25,650, respectively)
    (122,312 )     (112,286 )
 
           
Net investments in properties
    548,131       499,248  
Net investments in direct financing leases
    76,550       80,222  
Equity investments in real estate and CPA® REITs
    322,294       304,990  
 
           
Net investments in real estate
    946,975       884,460  
Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs of $86 and $108, respectively)
    64,693       18,450  
Due from affiliates
    38,793       35,998  
Intangible assets and goodwill, net
    87,768       85,187  
Other assets, net (inclusive of amounts attributable to consolidated VIEs of $1,845 and $1,504, respectively)
    34,097       69,241  
 
           
Total assets
  $ 1,172,326     $ 1,093,336  
 
           
 
               
Liabilities and Equity
               
Liabilities:
               
Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $9,593 and $9,850, respectively)
  $ 255,232     $ 215,330  
Line of credit
    141,750       111,000  
Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable to consolidated VIEs of $2,275 and $2,286, respectively)
    40,808       51,710  
Income taxes, net
    41,443       43,831  
Distributions payable
    20,073       31,365  
 
           
Total liabilities
    499,306       453,236  
 
           
Redeemable noncontrolling interest
    7,546       7,692  
 
           
Commitments and contingencies (Note 8)
               
Equity:
               
W. P. Carey members’ equity:
               
Listed shares, no par value, 100,000,000 shares authorized; 39,454,847 and 39,204,605 shares issued and outstanding, respectively
    763,734       754,507  
Distributions in excess of accumulated earnings
    (145,769 )     (138,442 )
Deferred compensation obligation
    10,511       10,249  
Accumulated other comprehensive loss
    (3,463 )     (681 )
 
           
Total W. P. Carey members’ equity
    625,013       625,633  
Noncontrolling interests
    40,461       6,775  
 
           
Total equity
    665,474       632,408  
 
           
Total liabilities and equity
  $ 1,172,326     $ 1,093,336  
 
           
See Notes to Consolidated Financial Statements.

 

3


 

W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)
                         
    Years ended December 31,  
    2010     2009     2008  
Revenues
                       
Asset management revenue
  $ 76,246     $ 76,621     $ 80,714  
Structuring revenue
    44,525       23,273       20,236  
Wholesaling revenue
    11,096       7,691       5,208  
Reimbursed costs from affiliates
    60,023       47,534       41,100  
Lease revenues
    61,951       61,045       65,506  
Other real estate income
    18,570       14,907       20,660  
 
                 
 
    272,411       231,071       233,424  
 
                 
 
                       
Operating Expenses
                       
General and administrative
    (73,429 )     (63,819 )     (62,669 )
Reimbursable costs
    (60,023 )     (47,534 )     (41,100 )
Depreciation and amortization
    (23,712 )     (22,127 )     (22,771 )
Property expenses
    (10,746 )     (7,023 )     (6,278 )
Other real estate expenses
    (8,121 )     (7,308 )     (8,196 )
Impairment charges
    (7,244 )     (3,516 )     (473 )
 
                 
 
    (183,275 )     (151,327 )     (141,487 )
 
                 
Other Income and Expenses
                       
Other interest income
    1,268       1,713       2,883  
Income from equity investments in real estate and CPA® REITs
    30,992       13,425       14,198  
Gain on sale of investment in direct financing lease
                1,103  
Other income and (expenses)
    1,407       7,357       1,444  
Interest expense
    (16,234 )     (14,979 )     (18,598 )
 
                 
 
    17,433       7,516       1,030  
 
                 
Income from continuing operations before income taxes
    106,569       87,260       92,967  
Provision for income taxes
    (25,822 )     (22,793 )     (23,541 )
 
                 
Income from continuing operations
    80,747       64,467       69,426  
 
                 
Discontinued Operations
                       
Income from operations of discontinued properties
    1,881       5,308       9,717  
Gains on sale of real estate, net
    460       7,701        
Impairment charges
    (8,137 )     (6,908 )     (538 )
 
                 
(Loss) income from discontinued operations
    (5,796 )     6,101       9,179  
 
                 
Net Income
    74,951       70,568       78,605  
Add: Net loss attributable to noncontrolling interests
    314       713       950  
Less: Net income attributable to redeemable noncontrolling interests
    (1,293 )     (2,258 )     (1,508 )
 
                 
Net Income Attributable to W. P. Carey Members
  $ 73,972     $ 69,023     $ 78,047  
 
                 
Basic Earnings Per Share
                       
Income from continuing operations attributable to W. P. Carey members
  $ 2.01     $ 1.59     $ 1.75  
(Loss) income from discontinued operations attributable to W. P. Carey members
    (0.15 )     0.15       0.23  
 
                 
Net income attributable to W. P. Carey members
  $ 1.86     $ 1.74     $ 1.98  
 
                 
Diluted Earnings Per Share
                       
Income from continuing operations attributable to W. P. Carey members
  $ 2.01     $ 1.59     $ 1.72  
(Loss) income from discontinued operations attributable to W. P. Carey members
    (0.15 )     0.15       0.23  
 
                 
Net income attributable to W. P. Carey members
  $ 1.86     $ 1.74     $ 1.95  
 
                 
Weighted Average Shares Outstanding
                       
Basic
    39,514,746       39,019,709       39,202,520  
 
                 
Diluted
    40,007,894       39,712,735       40,221,112  
 
                 
Amounts Attributable to W. P. Carey Members
                       
Income from continuing operations, net of tax
  $ 79,768     $ 62,922     $ 68,868  
(Loss) income from discontinued operations, net of tax
    (5,796 )     6,101       9,179  
 
                 
Net income
  $ 73,972     $ 69,023     $ 78,047  
 
                 
See Notes to Consolidated Financial Statements.

 

4


 

W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)
                         
    Years ended December 31,  
    2010     2009     2008  
Net Income
  $ 74,951     $ 70,568     $ 78,605  
Other Comprehensive (Loss) Income:
                       
Foreign currency translation adjustment
    (1,227 )     619       (3,199 )
Unrealized loss on derivative instruments
    (757 )     (482 )     (419 )
Change in unrealized appreciation on marketable securities
    6       53       (29 )
 
                 
 
    (1,978 )     190       (3,647 )
 
                 
Comprehensive Income
    72,973       70,758       74,958  
 
                 
 
                       
Amounts Attributable to Noncontrolling Interests:
                       
Net loss
    314       713       950  
Foreign currency translation adjustment
    (816 )     (31 )     81  
 
                 
Comprehensive (income) loss attributable to noncontrolling interests
    (502 )     682       1,031  
 
                 
 
                       
Amounts Attributable to Redeemable Noncontrolling Interests:
                       
Net income
    (1,293 )     (2,258 )     (1,508 )
Foreign currency translation adjustment
    12       (12 )      
 
                 
Comprehensive income attributable to redeemable noncontrolling interests
    (1,281 )     (2,270 )     (1,508 )
 
                 
 
                       
Comprehensive Income Attributable to W. P. Carey Members
  $ 71,190     $ 69,170     $ 74,481  
 
                 
See Notes to Consolidated Financial Statements.

 

5


 

W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended December 31, 2010, 2009 and 2008

(in thousands, except share and per share amounts)
                                                                 
    W. P. Carey Members                    
                    Distributions             Accumulated                    
                    in Excess of     Deferred     Other     Total              
            Listed     Accumulated     Compensation     Comprehensive     W. P. Carey     Noncontrolling        
    Shares     Shares     Earnings     Obligation     Income (Loss)     Members     Interests     Total  
Balance at January 1, 2008
    39,216,493     $ 740,873     $ (117,051 )   $     $ 2,738     $ 626,560     $ 6,150     $ 632,710  
Cash proceeds on issuance of shares, net
    961,648       23,133                               23,133               23,133  
Shares issued in connection with services rendered
    7,128       217                               217               217  
Shares issued under share incentive plans
    50,400                                                      
Contributions
                                                  2,582       2,582  
Forfeitures of shares
    (12,565 )     (8 )                             (8 )             (8 )
Distributions declared ($1.96 per share)
                    (77,986 )                     (77,986 )             (77,986 )
Distributions to noncontrolling interest
                                                  (1,469 )     (1,469 )
Windfall tax benefits — share incentive plans
            2,156                               2,156               2,156  
Stock-based compensation expense
            7,285                               7,285               7,285  
Repurchase and retirement of shares
    (633,510 )     (15,413 )                             (15,413 )             (15,413 )
Redemption value adjustment
            (322 )                             (322 )             (322 )
Net income
                    78,047                       78,047       (950 )     77,097  
Change in other comprehensive loss
                                    (3,566 )     (3,566 )     (81 )     (3,647 )
 
                                               
Balance at December 31, 2008
    39,589,594       757,921       (116,990 )           (828 )     640,103       6,232       646,335  
 
                                               
Cash proceeds on issuance of shares, net
    84,283       1,507                               1,507               1,507  
Grants issued in connection with services rendered
                            787               787               787  
Shares issued under share incentive plans
    222,600                       9,462               9,462               9,462  
Contributions
            102                               102       2,845       2,947  
Forfeitures of shares
    (2,528 )     (77 )                             (77 )             (77 )
Distributions declared ($2.00 per share) (a)
                    (90,475 )                     (90,475 )             (90,475 )
Distributions to noncontrolling interest
                                                  (1,661 )     (1,661 )
Windfall tax benefits — share incentive plans
            143                               143               143  
Stock-based compensation expense
            8,626                               8,626               8,626  
Repurchase and retirement of shares
    (689,344 )     (11,759 )                             (11,759 )             (11,759 )
Redemption value adjustment
            (6,773 )                             (6,773 )             (6,773 )
Tax impact of purchase of WPCI interest
            4,817                               4,817               4,817  
Net income
                    69,023                       69,023       (713 )     68,310  
Change in other comprehensive income
                                    147       147       72       219  
 
                                               
Balance at December 31, 2009
    39,204,605       754,507       (138,442 )     10,249       (681 )     625,633       6,775       632,408  
 
                                               
Cash proceeds on issuance of shares, net
    196,802       3,724                               3,724               3,724  
Grants issued in connection with services rendered
                            450               450               450  
Shares issued under share incentive plans
    368,012                                                      
Contributions
                                                  14,261       14,261  
Forfeitures of shares
    (47,214 )     (1,517 )                             (1,517 )             (1,517 )
Distributions declared ($2.03 per share)
                    (81,299 )                     (81,299 )             (81,299 )
Distributions to noncontrolling interest
                                                  (3,305 )     (3,305 )
Windfall tax benefits — share incentive plans
            2,354                               2,354               2,354  
Stock-based compensation expense
            8,149               (188 )             7,961               7,961  
Repurchase and retirement of shares
    (267,358 )     (2,317 )                             (2,317 )             (2,317 )
Redemption value adjustment
            471                               471               471  
Tax impact of purchase of WPCI interest
            (1,637 )                             (1,637 )             (1,637 )
Reclassification of the Investor’s interest in Carey Storage (Note 4)
                                                  22,402       22,402  
Net income
                    73,972                       73,972       (314 )     73,658  
Change in other comprehensive income
                                    (2,782 )     (2,782 )     642       (2,140 )
 
                                               
Balance at December 31, 2010
    39,454,847     $ 763,734     $ (145,769 )   $ 10,511     $ (3,463 )   $ 625,013     $ 40,461     $ 665,474  
 
                                               
 
     
(a)  
Distributions declared per share excludes special distribution of $0.30 per share declared in December 2009 (Note 14).
See Notes to Consolidated Financial Statements.

 

6


 

W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
                         
    Years ended December 31,  
    2010     2009     2008  
Cash Flows — Operating Activities
                       
Net income
  $ 74,951     $ 70,568     $ 78,605  
Adjustments to net income:
                       
Depreciation and amortization including intangible assets and deferred financing costs
    24,443       24,476       27,197  
(Income) loss from equity investments in real estate and CPA® REITs in excess of distributions
    (4,920 )     (2,258 )     1,866  
Straight-line rent and financing lease adjustments
    286       2,223       2,227  
Gain on sale of real estate and investment in direct financing lease
    (460 )     (7,701 )     (1,103 )
Gain on extinguishment of debt
          (6,991 )      
Gain on lease termination (a)
                (4,998 )
Allocation of (loss) earnings to profit-sharing interest
    (781 )     3,900        
Management income received in shares of affiliates
    (35,235 )     (31,721 )     (40,717 )
Unrealized loss (gain) on foreign currency transactions and others
    300       (174 )     2,656  
Realized gain on foreign currency transactions and others
    (731 )     (257 )     (2,250 )
Impairment charges
    15,381       10,424       1,011  
Stock-based compensation expense
    7,082       9,336       7,278  
Deferred acquisition revenue received
    21,204       25,068       48,266  
Increase in structuring revenue receivable
    (20,237 )     (11,672 )     (10,512 )
Decrease in income taxes, net
    (1,288 )     (9,276 )     (8,079 )
Decrease in settlement provision
                (29,979 )
Net changes in other operating assets and liabilities
    6,422       (1,401 )     (8,221 )
 
                 
Net cash provided by operating activities
    86,417       74,544       63,247  
 
                 
 
                       
Cash Flows — Investing Activities
                       
Distributions received from equity investments in real estate and CPA® REITs in excess of equity income
    18,758       39,102       19,852  
Capital contributions to equity investments
          (2,872 )     (1,769 )
Purchases of real estate and equity investments in real estate
    (96,884 )     (39,632 )     (201 )
VAT paid in connection with acquisition of real estate
    (4,222 )            
VAT refunded in connection with acquisition of real estate
                3,189  
Capital expenditures
    (5,135 )     (7,775 )     (14,051 )
Proceeds from sale of real estate, net investment in direct financing lease and securities
    14,591       43,487       5,062  
Funds placed in escrow in connection with the sale of property
    (1,571 )     (36,132 )      
Funds released from escrow in connection with the sale of property
    36,620             636  
Proceeds from transfer of profit-sharing interest
          21,928        
Payment of deferred acquisition revenue to affiliate
                (120 )
 
                 
Net cash (used in) provided by investing activities
    (37,843 )     18,106       12,598  
 
                 
 
                       
Cash Flows — Financing Activities
                       
Distributions paid
    (92,591 )     (78,618 )     (87,700 )
Contributions from noncontrolling interests
    14,261       2,947       2,582  
Distributions to noncontrolling interests
    (4,360 )     (5,505 )     (5,607 )
Contributions from profit-sharing interest
    3,694              
Distributions to profit-sharing interest
    (693 )     (5,645 )      
Purchase of noncontrolling interest
          (15,380 )      
Scheduled payments of non-recourse debt
    (14,324 )     (9,534 )     (9,678 )
Prepayments of non-recourse debt
          (13,974 )      
Proceeds from non-recourse debt financing
    56,841       42,495       10,137  
Proceeds from line of credit
    83,250       150,500       129,300  
Prepayments of line of credit
    (52,500 )     (148,518 )     (111,572 )
Proceeds from loans from affiliates
          1,625        
Repayments of loans from affiliates
          (1,770 )     (7,569 )
Payment of financing costs
    (1,204 )     (862 )     (375 )
Funds placed in escrow in connection with financing
                (400 )
Proceeds from issuance of shares (b)
    3,724       1,507       23,350  
Windfall tax benefits associated with stock-based compensation awards
    2,354       143       2,156  
Repurchase and retirement of shares
          (10,686 )     (15,413 )
 
                 
Net cash used in financing activities
    (1,548 )     (91,275 )     (70,789 )
 
                 
 
                       
Change in Cash and Cash Equivalents During the Year
                       
Effect of exchange rate changes on cash
    (783 )     276       (394 )
 
                 
Net increase in cash and cash equivalents
    46,243       1,651       4,662  
Cash and cash equivalents, beginning of year
    18,450       16,799       12,137  
 
                 
Cash and cash equivalents, end of year
  $ 64,693     $ 18,450     $ 16,799  
 
                 
(Continued)

 

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Non-cash activities
(a)  
In October 2008, we terminated the lease on a domestic property in exchange for a gross termination fee of $7.5 million. The termination fee consisted of tenant’s assumption of the existing $6.0 million debt balance by substituting one of their owned assets as collateral and a $1.5 million cash payment. In connection with the lease termination, we wrote off $0.8 million of straight line rent adjustments and $0.2 million of unamortized leasing commission.
 
(b)  
We issued restricted shares valued at $0.5 million in 2010, $0.8 million in 2009 and $0.2 million in 2008, to certain directors in consideration of service rendered. Stock-based awards (net of adjustment — Note 15) valued at $10.2 million, $6.7 million and $9.6 million in 2010, 2009 and 2008, respectively, were issued to officers and employees and were recorded to Listed shares, of which $1.5 million, $0.1 million and less than $0.1 million, respectively, was forfeited in 2010, 2009 and 2008.
Supplemental cash flows information (in thousands):
                         
    Years ended December 31,  
    2010     2009     2008  
Interest paid, net of amounts capitalized
  $ 15,351     $ 14,845     $ 18,753  
 
                 
Income taxes paid
  $ 24,307     $ 35,039     $ 33,280  
 
                 
See Notes to Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
W. P. Carey, its consolidated subsidiaries and predecessors provides long-term financing via sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. We invest primarily in commercial properties domestically and internationally that are each triple-net leased to single corporate tenants, which requires each tenant to pay substantially all of the costs associated with operating and maintaining the property. We also earn revenue as the advisor to publicly owned, non-listed CPA® REITs that invest in similar properties. We are currently the advisor to the following CPA® REITs: CPA®:14, CPA®:15, CPA®:16 — Global and CPA®:17 — Global. At December 31, 2010, we owned and managed 955 properties domestically and internationally. Our owned portfolio was comprised of our full or partial ownership interest in 164 properties, substantially all of which were net leased to 75 tenants, and totaled approximately 14 million square feet (on a pro rata basis) with an occupancy rate of approximately 89%.
Primary Business Segments
Investment Management — We structure and negotiate investments and debt placement transactions for the CPA® REITs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset-based management and performance revenue. We earn asset-based management and performance revenue from the CPA® REITs based on the value of their real estate-related assets under management. As funds available to the CPA® REITs are invested, the asset base from which we earn revenue increases. In addition, we also receive a percentage of distributions of available cash from CPA®:17 — Global’s operating partnership. We may also earn incentive and disposition revenue and receive other compensation in connection with providing liquidity alternatives to CPA® REIT shareholders.
Real Estate Ownership — We own and invest in commercial properties in the U.S. and the European Union that are then leased to companies, primarily on a triple-net leased basis. We may also invest in other properties if opportunities arise.
Effective January 1, 2011, we include our equity investments in the CPA® REITs in our real estate ownership segment. The equity income or loss from the CPA® REITs that is now included in our real estate ownership segment represents our proportionate share of the revenue less expenses of the net-leased properties held by the CPA® REITs. This treatment is consistent with that of our directly-owned properties (Note 20).
Organization
We commenced operations on January 1, 1998 by combining the limited partnership interests of nine CPA® partnerships, at which time we listed on the New York Stock Exchange. On June 28, 2000, we acquired the net lease real estate management operations of Carey Management LLC (“Carey Management”) from Wm. Polk Carey, our Chairman and then Chief Executive Officer, subsequent to receiving the approval of the transaction by our shareholders. The assets acquired included the advisory agreements with four affiliated CPA® REITs, our management agreement, the stock of an affiliated broker-dealer, investments in the common stock of the CPA® REITs, and certain office furniture, fixtures, equipment and employees required to carry on the business operations of Carey Management.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements reflect all of our accounts, including those of our majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated. We hold investments in tenant-in-common interests, which we account for as equity investments in real estate under current authoritative accounting guidance.
We formed Carey Watermark in March 2008 for the purpose of acquiring interests in lodging and lodging-related properties. In April 2010, we filed a registration statement with the SEC to sell up to $1.0 billion of common stock of Carey Watermark in an initial public offering plus up to an additional $237.5 million of its common stock under a dividend reinvestment plan. This registration statement was declared effective by the SEC in September 2010. As of and during the years ended December 31, 2010, 2009 and 2008, the financial statements of Carey Watermark, which had no significant assets, liabilities or operations during either period, were included in our consolidated financial statements, as we owned all of Carey Watermark’s outstanding common stock.

 

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In June 2009, the FASB issued amended guidance related to the consolidation of VIEs. The amended guidance affects the overall consolidation analysis, changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary, and requires an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE, and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amended guidance changes the consideration of kick-out rights in determining if an entity is a VIE, which may cause certain additional entities to now be considered VIEs. Additionally, the guidance requires an ongoing reconsideration of the primary beneficiary and provides a framework for the events that trigger a reassessment of whether an entity is a VIE. We adopted this amended guidance on January 1, 2010, which did not require consolidation of any additional VIEs, but we have disclosed the assets and liabilities related to previously consolidated VIEs, of which we are the primary beneficiary and which we consolidate, separately in our consolidated balance sheets for all periods presented. The adoption of this amended guidance did not have a material impact on our financial position and results of operations.
Additionally, in February 2010, the FASB issued further guidance, which provided a limited-scope deferral for an interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under the American Institute of Certified Public Accountants’ (“AICPA”) Audit and Accounting Guide, Investment Companies, or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide, Investment Companies, (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity, and (c) the entity is not a securitization entity, asset-based financing entity or an entity that was formerly considered a qualifying special-purpose entity. We evaluated our involvement with the CPA® REITs and concluded that all three of the above conditions were met for the limited scope deferral. Accordingly, we continued to perform our consolidation analysis for the CPA® REITs in accordance with previously issued guidance on VIEs.
In connection with the adoption of the amended guidance on the consolidation of VIEs, we performed an analysis of all of our subsidiary entities, including our venture entities with other parties, to determine whether they qualify as VIEs and whether they should be consolidated or accounted for as equity investments in an unconsolidated venture. As a result of our quantitative and qualitative assessment to determine whether these entities are VIEs, we identified four entities that were deemed to be VIEs. Three of these entities were deemed VIEs as the third-party tenant that leases property from each entity has the right to repurchase the property during the term of their lease at a fixed price. The fourth entity was deemed a VIE as a third party was deemed to have the right to receive the expected residual returns of the entity. The nature of operations and organizational structure of these four VIEs are consistent with our other entities (Note 1) except for the repurchase and residual returns rights of these entities.
After making the determination that these entities were VIEs, we performed an assessment as to which party would be considered the primary beneficiary of each entity and would be required to consolidate each entity’s balance sheet and results of operations. This assessment was based upon which party (i) had the power to direct activities that most significantly impact the entity’s economic performance and (ii) had the obligation to absorb the expected losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on our assessment, it was determined that we would continue to consolidate the four VIEs. Activities that we considered significant in our assessment included which entity had control over financing decisions, leasing decisions and ability to sell the entity’s assets. In September 2010, one of these entities amended its lease with the third-party tenant to remove the tenant’s right to repurchase the property at a fixed price during the term of the lease. As a result of the lease amendment, this entity is no longer considered a VIE. We will continue to consolidate this entity.
Because we generally utilize non-recourse debt, our maximum exposure to any VIE is limited to the equity we have invested in each VIE. We have not provided financial or other support to any VIE, and there were no guarantees or other commitments from third parties that would affect the value of or risk related to our interest in these entities.
Out-of-Period Adjustment
During the third quarter of 2009, we recorded an adjustment to record an entity on the equity method that had been incorrectly accounted for under a proportionate consolidation method since its acquisition in 1989. This adjustment was recorded as a reduction to Real estate and Non-recourse debt of approximately $23.3 million and $15.0 million, respectively, and an increase to Equity investment in real estate and CPA® REITs of $7.8 million on our consolidated balance sheet at September 30, 2009, and an adjustment to classify approximately $1.2 million of net earnings to income from equity investments in real estate and CPA® REITs for the nine months ended September 30, 2009, respectively, which did not result in any change to previously reported net income attributable to W. P. Carey members. We have concluded that the effect of this adjustment was not material to any of our previously issued financial statements, nor was it material to the quarter or fiscal year in which it was recorded. As such, this adjustment was recorded in our consolidated balance sheets and statements of income at September 30, 2009 and for the nine months ended September 30, 2009. Prior period financial statements have not been revised in the current filing, nor will such amounts be revised in subsequent filings.

 

10


 

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.
Reclassifications and Revisions
Certain prior year amounts have been reclassified from continuing operations to discontinued operations and to conform to the current year presentation.
Purchase Price Allocation
When we acquire properties accounted for as operating leases, we allocate the purchase costs to the tangible and intangible assets and liabilities acquired based on their estimated fair values. We determine the value of the tangible assets, consisting of land and buildings, as if vacant, and record intangible assets, including the above-market and below-market value of leases, the value of in-place leases and the value of tenant relationships, at their relative estimated fair values. See Real Estate Leased to Others and Depreciation below for a discussion of our significant accounting policies related to tangible assets. We include the value of below-market leases in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.
We record above-market and below-market lease values for owned properties based on the present value (using an interest rate reflecting the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates for the property or equivalent property, both of which are measured over a period equal to the estimated market lease term. We amortize the capitalized above-market lease value as a reduction of rental income over the estimated market lease term. We amortize the capitalized below-market lease value as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases.
We allocate the total amount of other intangibles to in-place lease values and tenant relationship intangible values based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with each tenant. The characteristics we consider in allocating these values include estimated market rent, the nature and extent of the existing relationship with the tenant, the expectation of lease renewals, estimated carrying costs of the property if vacant and estimated costs to execute a new lease, among other factors. We determine these values using our estimates or by relying in part upon third-party appraisals. We amortize the capitalized value of in-place lease intangibles to expense over the remaining initial term of each lease. We amortize the capitalized value of tenant relationships to expense over the initial and expected renewal terms of the lease. No amortization period for intangibles will exceed the remaining depreciable life of the building.
If a lease is terminated, we charge the unamortized portion of each intangible, including above-market and below-market lease values, in-place lease values and tenant relationship values, to expense.
Operating Real Estate
We carry land and buildings and personal property at cost less accumulated depreciation. We capitalize improvements, while we expense replacements, maintenance and repairs that do not improve or extend the lives of the respective assets as incurred.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money-market funds. Our cash and cash equivalents are held in the custody of several financial institutions, and these balances, at times, exceed federally insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions.

 

11


 

Other Assets and Liabilities
We include prepaid expenses, deferred rental income, tenant receivables, deferred charges, escrow balances held by lenders, restricted cash balances, marketable securities, derivative assets and corporate fixed assets in Other assets. We include derivative instruments; miscellaneous amounts held on behalf of tenants; and deferred revenue, including unamortized below-market rent intangibles in Other liabilities. Other liabilities at December 31, 2009 also included our profit-sharing obligation related to our Carey Storage subsidiary. The profit-sharing obligation was reclassified to Noncontrolling interest in 2010 as a result of Carey Storage amending its agreement with the third-party investor (Note 4). Deferred charges are costs incurred in connection with mortgage financings and refinancings that are amortized over the terms of the mortgages and included in Interest expense in the consolidated financial statements. Deferred rental income is the aggregate cumulative difference for operating leases between scheduled rents that vary during the lease term, and rent recognized on a straight-line basis. Marketable securities are classified as available-for-sale securities and reported at fair value with unrealized gains and losses on these securities reported as a component of OCI until realized.
Real Estate Leased to Others
We lease real estate to others primarily on a triple-net leased basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. We charge expenditures for maintenance and repairs, including routine betterments, to operations as incurred. We capitalize significant renovations that increase the useful life of the properties. For the years ended December 31, 2010, 2009 and 2008, although we are legally obligated for payment, lessees were responsible for the direct payment to the taxing authorities of real estate taxes of approximately $7.7 million, $8.8 million and $9.3 million, respectively.
We diversify our real estate investments among various corporate tenants engaged in different industries, by property type and by geographic area. Substantially all of our leases provide for either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in the CPI or similar indices or percentage rents. CPI-based adjustments are contingent on future events and are therefore not included in straight-line rent calculations. We recognize rents from percentage rents as reported by the lessees, which is after the level of sales requiring a rental payment to us is reached.
We account for leases as operating or direct financing leases, as described below:
Operating leases — We record real estate at cost less accumulated depreciation; we recognize future minimum rental revenue on a straight-line basis over the term of the related leases and charge expenses (including depreciation) to operations as incurred (Note 4).
Direct financing method — We record leases accounted for under the direct financing method at their net investment (Note 5). We defer and amortize unearned income to income over the lease term so as to produce a constant periodic rate of return on our net investment in the lease.
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and determine an appropriate allowance for uncollected amounts. Because we have a limited number of lessees (18 lessees represented 70% of lease revenues during 2010), we believe that it is necessary to evaluate the collectibility of these receivables based on the facts and circumstances of each situation rather than solely using statistical methods. Therefore, in recognizing our provision for uncollected rents and other tenant receivables, we evaluate actual past due amounts and make subjective judgments as to the collectability of those amounts based on factors including, but not limited to, our knowledge of a lessee’s circumstances, the age of the receivables, the tenant’s credit profile and prior experience with the tenant. Even if a lessee has been making payments, we may reserve for the entire receivable amount if we believe there has been significant or continuing deterioration in the lessee’s ability to meet its lease obligations.
Acquisition Costs
In accordance with the FASB’s revised guidance for business combinations, which we adopted on January 1, 2009, we immediately expense all acquisition costs and fees associated with transactions deemed to be business combinations, but we capitalize these costs for transactions deemed to be acquisitions of an asset. We are impacted by the revised guidance through both the investments we make for our owned portfolio as well as our equity interests in the CPA® REITs. To the extent we make investments for our owned portfolio or on behalf of the CPA® REITs that are deemed to be business combinations, our results of operations will be negatively impacted by the immediate expensing of acquisition costs and fees incurred in accordance with the revised guidance, whereas in the past such costs and fees would generally have been capitalized and allocated to the cost basis of the acquisition. Subsequent to the acquisition, there will be a positive impact on our results of operations through a reduction in depreciation expense over the estimated life of the properties.

 

12


 

Revenue Recognition
We earn structuring revenue and asset management revenue in connection with providing services to the CPA® REITs. We earn structuring revenue for services we provide in connection with the analysis, negotiation and structuring of transactions, including acquisitions and dispositions and the placement of mortgage financing obtained by the CPA® REITs. Asset management revenue consists of property management, leasing and advisory revenue. Receipt of the incentive revenue portion of the asset management revenue (“performance revenue”), however, is subordinated to the achievement of specified cumulative return requirements by the shareholders of the CPA® REITs. At our option, the performance revenue may be collected in cash or shares of the CPA® REIT (Note 3).
We recognize all revenue as earned. We earn structuring revenue upon the consummation of a transaction and asset management revenue when services are performed. We recognize revenue subject to subordination only when the performance criteria of the CPA® REIT is achieved and contractual limitations are not exceeded.
We are also reimbursed for certain costs incurred in providing services, including broker-dealer commissions paid on behalf of the CPA® REITs, marketing costs and the cost of personnel provided for the administration of the CPA® REITs. We record reimbursement income as the expenses are incurred, subject to limitations on a CPA® REIT’s ability to incur offering costs.
We earn wholesaling revenue of $0.15 per share sold in connection with CPA®:17 — Global’s initial public offering. This revenue is used to cover the cost of wholesaling activities.
Depreciation
We compute depreciation of building and related improvements using the straight-line method over the estimated useful lives of the properties (generally 40 years) and furniture, fixtures and equipment (generally up to seven years). We compute depreciation of tenant improvements using the straight-line method over the lesser of the remaining term of the lease or the estimated useful life.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived assets, including goodwill, may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, the vacancy of a property that is not subject to a lease; a lease default by a tenant that is experiencing financial difficulty; the termination of a lease by a tenant; or the rejection of a lease in a bankruptcy proceeding. We may incur impairment charges on long-lived assets, including real estate, direct financing leases, assets held for sale and equity investments in real estate. We may also incur impairment charges on marketable securities and goodwill. Our policies for evaluating whether these assets are impaired are presented below.
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property to the future net undiscounted cash flow that we expect the property will generate, including any estimated proceeds from the eventual sale of the property. The undiscounted cash flow analysis requires us to make our best estimate of market rents, residual values and holding periods. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining the best possible estimate of future cash flows. If the future net undiscounted cash flow of the property is less than the carrying value, the property is considered to be impaired. We then measure the loss as the excess of the carrying value of the property over its estimated fair value.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an other-than-temporary decline in the current estimate of residual value of the property. The residual value is our estimate of what we could realize upon the sale of the property at the end of the lease term, based on market information. If this review indicates that a decline in residual value has occurred that is other-than-temporary, we recognize an impairment charge and revise the accounting for the direct financing lease to reflect a portion of the future cash flow from the lessee as a return of principal rather than as revenue. While we evaluate direct financing leases if there are any indicators that the residual value may be impaired, the evaluation of a direct financing lease can be affected by changes in long-term market conditions even though the obligations of the lessee are being met.

 

13


 

Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied and we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we calculate its estimated fair value as the expected sale price, less expected selling costs. We then compare the asset’s estimated fair value to its carrying value, and if the estimated fair value is less than the property’s carrying value, we reduce the carrying value to the estimated fair value. We will continue to review the initial impairment for subsequent changes in the estimated fair value, and may recognize an additional impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, we reclassify the property as held and used. We measure and record a property that is reclassified as held and used at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, or (b) the estimated fair value at the date of the subsequent decision not to sell.
Equity Investments in Real Estate and CPA® REITs
We evaluate our equity investments in real estate and in the CPA® REITs on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent impairment has occurred, we measure the charge as the excess of the carrying value of our investment over its estimated fair value. For equity investments in real estate, we calculate estimated fair value by multiplying the estimated fair value of the underlying venture’s net assets by our ownership interest percentage. For our investments in the CPA® REITs, we calculate the estimated fair value of our investment using the most recently published net asset value of each CPA® REIT.
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below cost basis is considered other-than-temporary. In determining whether the decline is other-than-temporary, we consider the underlying cause of the decline in value, the estimated recovery period, the severity and duration of the decline, as well as whether we plan to sell the security or will more likely than not be required to sell the security before recovery of its cost basis. If we determine that the decline is other-than-temporary, we record an impairment charge to reduce our cost basis to the estimated fair value of the security. Beginning in 2009, the credit component of an other-than-temporary impairment is recognized in earnings while the non-credit component is recognized in OCI. Prior to 2009, all portions of other-than-temporary impairments were recorded in earnings.
Goodwill
We evaluate goodwill recorded by our investment management segment for possible impairment at least annually using a two-step process. To identify any impairment, we first compare the estimated fair value of our investment management segment with its carrying amount, including goodwill. We calculate the estimated fair value of the investment management segment by applying a multiple, based on comparable companies, to earnings. If the fair value of the investment management segment exceeds its carrying amount, we do not consider goodwill to be impaired and no further analysis is required. If the carrying amount of the investment management segment exceeds its estimated fair value, we then perform the second step to measure the amount of the impairment charge.
For the second step, we determine the impairment charge by comparing the implied fair value of the goodwill with its carrying amount and record an impairment charge equal to the excess of the carrying amount over the implied fair value. We determine the implied fair value of the goodwill by allocating the estimated fair value of the investment management segment to its assets and liabilities. The excess of the estimated fair value of the investment management segment over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill.

 

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Stock-Based Compensation
We have granted restricted shares, stock options, restricted share units (“RSUs”) and performance share units (“PSUs”) to certain employees and independent directors. Grants were awarded in the name of the recipient subject to certain restrictions of transferability and a risk of forfeiture. The forfeiture provisions on the awards generally expire annually, over their respective vesting periods. We granted stock options to certain employees during 2008 and prior years. Stock-based compensation expense for all stock-based compensation awards is based on the grant date fair value estimated in accordance with current accounting guidance for share-based payments. We recognize these compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award. We include stock-based compensation within the listed shares caption of equity.
Foreign Currency Translation
We have interests in real estate investments in the European Union for which the functional currency is the Euro. We perform the translation from the Euro to the U.S. dollar for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. We report the gains and losses resulting from such translation as a component of OCI in equity. At December 31, 2010 and 2009, the cumulative foreign currency translation adjustment (losses) gains were ($1.9) million and $0.2 million, respectively.
Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in the exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of that transaction. That increase or decrease in the expected functional currency cash flows is an unrealized foreign currency transaction gain or loss that generally will be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later), realized upon settlement of a foreign currency transaction generally will be included in net income for the period in which the transaction is settled. Foreign currency transactions that are (i) designated as, and are effective as, economic hedges of a net investment and (ii) inter-company foreign currency transactions that are of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transactions are consolidated or accounted for by the equity method in our financial statements, are not included in determining net income but are accounted for in the same manner as foreign currency translation adjustments and reported as a component of OCI in equity. International equity investments in real estate were funded in part through subordinated intercompany debt.
Foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and the translation to the reporting currency of subordinated intercompany debt with scheduled principal payments, are included in the determination of net income. We recognized net unrealized (losses) gains of ($0.3) million, $0.2 million and ($2.4) million from such transactions for the years ended December 31, 2010, 2009 and 2008, respectively. For the years ended December 31, 2010, 2009 and 2008, we recognized net realized (losses) gains of ($0.1) million, less than $0.1 million and $2.3 million, respectively, on foreign currency transactions in connection with the transfer of cash from foreign operations of subsidiaries to the parent company.
Derivative Instruments
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. If a derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in OCI until the hedged item is recognized in earnings. For cash flow hedges, the ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
Income Taxes
We have elected to be treated as a partnership for U.S. federal income tax purposes. Deferred income taxes are recorded for the corporate subsidiaries based on earnings reported. The provision for income taxes differs from the amounts currently payable because of temporary differences in the recognition of certain income and expense items for financial reporting and tax reporting purposes. Income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities (Note 16).

 

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Real Estate Ownership Operations
Our real estate operations are conducted through a subsidiary REIT. As a REIT, our real estate operations are generally not subject to federal tax, and accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements for these operations. These operations are subject to certain state, local and foreign taxes, as applicable.
In October 2007, we transferred our real estate assets from a wholly-owned subsidiary into Carey REIT II, Inc. (“Carey REIT II”), a newly-formed wholly-owned REIT subsidiary. On January 1, 2008, we merged our subsidiary Carey REIT, Inc. (“Carey REIT”) into Carey REIT II with Carey REIT II as the survivor. Carey REIT held certain properties, including certain properties acquired from Corporate Property Associates 12 Incorporated in 2006. To the extent that the fair value of Carey REIT property in the merger exceeded its tax basis at the time of the merger, Carey REIT II would be subject to corporate level taxes to the extent of this “built-in-gain” if the properties were to be sold in a taxable transaction within ten years from the date of the merger. At the time of the merger, Carey REIT owned three properties whose tax values were not significantly different from their fair values. We do not expect to trigger any “built-in-gains” nor do we expect any significant “built-in-gains” tax if triggered.
Carey REIT II elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), with the filing of its 2007 return. We believe we have operated, and we intend to continue to operate, in a manner that allows Carey REIT II to continue to qualify as a REIT. Under the REIT operating structure, Carey REIT II is permitted to deduct distributions paid to our shareholders and generally will not be required to pay U.S. federal income taxes. Accordingly, no provision has been made for U.S. federal income taxes related to Carey REIT II in the consolidated financial statements.
Investment Management Operations
We conduct our investment management operations primarily through taxable subsidiaries. These operations are subject to federal, state, local and foreign taxes, as applicable. Our financial statements are prepared on a consolidated basis including these taxable subsidiaries and include a provision for current and deferred taxes on these operations.
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common shareholders, as adjusted for unallocated earnings attributable to the unvested RSUs by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects potentially dilutive securities (options, restricted shares and RSUs) using the treasury stock method, except when the effect would be anti-dilutive.
Future Accounting Requirements
In December 2010, the FASB issued ASU 2010-28, which clarifies when step two of the goodwill impairment test must be performed for entities whose reporting units have a negative carrying value. This ASU will be applicable to us for our annual goodwill impairment evaluation beginning with the year ending December 31, 2011. We do not anticipate that it will have a material impact on our financial position or results of operations.
Note 3. Agreements and Transactions with Related Parties
Advisory Agreements with the CPA® REITs
We have advisory agreements with each of the CPA® REITs pursuant to which we earn certain fees. The advisory agreements were renewed for an additional year pursuant to their terms effective October 1, 2010. The following table presents a summary of revenue earned and cash received from the CPA® REITs in connection with providing services as the advisor to the CPA® REITs (in thousands):
                         
    Years ended December 31,  
    2010     2009     2008  
Asset management revenue
  $ 76,246     $ 76,621     $ 80,714  
Structuring revenue
    44,525       23,273       20,236  
Wholesaling revenue
    11,096       7,691       5,208  
Reimbursed costs from affiliates
    60,023       47,534       41,100  
Distributions of available cash (CPA®:17 — Global only)
    4,468       2,160        
 
                 
 
  $ 196,358     $ 157,279     $ 147,258  
 
                 

 

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Asset Management Revenue
We earn asset management revenue totaling 1% per annum of average invested assets, which is calculated according to the advisory agreements for each CPA® REIT. A portion of this asset management revenue is contingent upon the achievement of specific performance criteria for each CPA® REIT, which is generally defined to be a cumulative distribution return for shareholders of the CPA® REIT. For CPA®:14, CPA®:15 and CPA®:16 — Global, this performance revenue is generally equal to 0.5% of the average invested assets of the CPA® REIT. For CPA®:17 — Global, we earn asset management revenue ranging from 0.5% of average market value for long-term net leases and certain other types of real estate investments up to 1.75% of average equity value for certain types of securities. For CPA®:17 — Global, we do not earn performance revenue, but we receive up to 10% of distributions of available cash from its operating partnership. Distributions of available cash from CPA®:17 — Global’s operating partnership are recorded as income from equity investments in CPA® REITs within the investment management segment.
Under the terms of the advisory agreements, we may elect to receive cash or shares of restricted stock for any revenue due from each CPA® REIT. In both 2010 and 2009, we elected to receive all asset management revenue in cash, with the exception of CPA®:17 — Global’s asset management revenue, which we elected to receive in restricted shares. For both 2010 and 2009, we also elected to receive performance revenue from CPA®:16 — Global in restricted shares, while for CPA®:14 and CPA®:15 we elected to receive 80% of all performance revenue in restricted shares, with the remaining 20% payable in cash.
Structuring Revenue
We earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA® REITs. We may receive acquisition revenue of up to an average of 4.5% of the total cost of all investments made by each CPA® REIT. A portion of this revenue (generally 2.5%) is paid when the transaction is completed, while the remainder (generally 2%) is payable in equal annual installments ranging from three to eight years, provided the relevant CPA® REIT meets its performance criterion. Unpaid deferred installments totaled $30.5 million and $31.0 million at December 31, 2010 and 2009, respectively, and were included in Due from affiliates in the consolidated financial statements (Note 5). Unpaid installments bear interest at annual rates ranging from 5% to 7%. Interest earned on unpaid installments was $1.1 million, $1.5 million and $2.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. For certain types of non-long term net lease investments acquired on behalf of CPA®:17 — Global, initial acquisition revenue may range from 0% to 1.75% of the equity invested plus the related acquisition revenue, with no deferred acquisition revenue being earned. We may also be entitled, subject to CPA® REIT board approval, to fees for structuring loan refinancings of up to 1% of the principal amount. This loan refinancing revenue, together with the acquisition revenue, is referred to as structuring revenue. In addition, we may also earn revenue related to the sale of properties, subject to subordination provisions. We will only recognize this revenue if we meet the subordination provisions.
Reimbursed Costs from Affiliates and Wholesaling Revenue
The CPA® REITs reimburse us for certain costs, primarily broker-dealer commissions paid on behalf of the CPA® REITs and marketing and personnel costs. In addition, under the terms of a sales agency agreement between our wholly-owned broker-dealer subsidiary and CPA®:17 — Global, we earn a selling commission of up to $0.65 per share sold, selected dealer revenue of up to $0.20 per share sold and/or wholesaling revenue for selected dealers or investment advisors of up to $0.15 per share sold. We re-allow all or a portion of the selling commissions to selected dealers participating in CPA®:17 — Global’s offering and may re-allow up to the full selected dealer revenue to selected dealers. If needed, we will use any retained portion of the selected dealer revenue together with the wholesaling revenue to cover other underwriting costs incurred in connection with CPA®:17 — Global’s offering. Total underwriting compensation earned in connection with CPA®:17 — Global’s offering, including selling commissions, selected dealer revenue, wholesaling revenue and reimbursements made by us to selected dealers, cannot exceed the limitations prescribed by the Financial Industry Regulatory Authority. The limit on underwriting compensation is currently 10% of gross offering proceeds. We may also be reimbursed up to an additional 0.5% of the gross offering proceeds for bona fide due diligence expenses.

 

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Other Transactions with Affiliates
Proposed Merger of Affiliates
On December 13, 2010, two of the CPA® REITs we manage, CPA®:14 and CPA®:16 — Global, entered into a definitive agreement pursuant to which CPA®:14 will merge with and into a subsidiary of CPA®:16 — Global, subject to the approval of the shareholders of CPA®:14. The closing of the Proposed Merger is also subject to customary closing conditions, as well as the closing of the CPA®:14 Asset Sales. If the Proposed Merger is approved, we currently expect that the closing will occur in the second quarter of 2011, although there can be no assurance of such timing.
In connection with the Proposed Merger, we have agreed to purchase three properties from CPA®:14, in which we already have a joint venture interest, for an aggregate purchase price of $32.1 million, plus the assumption of approximately $64.7 million of indebtedness. These properties all have remaining lease terms of less than 8 years, which are shorter than the average lease term of CPA®:16 — Global’s portfolio of properties. Consequently, CPA®:16 — Global required that these assets be sold by CPA®:14 prior to the Proposed Merger. This asset sale to us is contingent upon the approval of the Proposed Merger by the shareholders of CPA®:14.
If the Proposed Merger is consummated, we expect to earn revenues of $31.2 million in connection with the termination of the advisory agreements with CPA®:14 and $21.3 million of subordinated disposition revenues. We currently expect to receive our termination fee in shares of CPA®:14, which will then be exchanged into shares of CPA®:16 — Global in order to facilitate this transaction. In addition, based on our ownership of 8,018,456 shares of CPA®:14 at December 31, 2010, we will receive approximately $8.0 million as a result of a special $1.00 cash distribution to be paid by CPA®:14 to its shareholders, in part from the proceeds of the CPA®:14 Asset Sales, immediately prior to the Proposed Merger, as described below. We have agreed to elect to receive stock of CPA®:16 — Global in respect of our shares of CPA®:14 if the Proposed Merger is consummated. CAM has also agreed to waive any acquisition fees payable by CPA®:16 — Global under its advisory agreement with CAM in respect of the properties being acquired in the Proposed Merger and has also agreed to waive any disposition fees that may subsequently be payable by CPA®:16 — Global upon a sale of such assets.
In the Proposed Merger, CPA®:14 shareholders will be entitled to receive $11.50 per share, which is equal to the NAV of CPA®:14 as of September 30, 2010. The Merger Consideration will be paid to shareholders of CPA®:14, at their election, in either cash or a combination of the $1.00 per share special cash distribution and 1.1932 shares of CPA®:16 — Global common stock, which equates to $10.50 based on the $8.80 per share NAV of CPA®:16 — Global as of September 30, 2010. We computed these NAVs internally, relying in part upon a third-party valuation of each company’s real estate portfolio and indebtedness as of September 30, 2010. The board of directors of each of CPA®:16 — Global and CPA®:14 have the ability, but not the obligation, to terminate the transaction if more than 50% of the shareholders of CPA®:14 elect to receive cash in the Proposed Merger. Assuming that holders of 50% of CPA®:14’s outstanding stock elect to receive cash in the Proposed Merger, then the maximum cash required by CPA®:16 — Global to purchase these shares would be approximately $416.1 million, based on the total shares of CPA®:14 outstanding at December 31, 2010. If the cash on hand and available to CPA®:14 and CPA®:16 — Global, including the proceeds of the CPA®:14 Asset Sales and a new $300.0 million senior credit facility of CPA®:16 — Global, is not sufficient to enable CPA®:16 — Global to fulfill cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to purchase a sufficient number of shares of CPA®:16 — Global stock from CPA®:16 — Global to enable it to pay such amounts to CPA®:14 shareholders.
Other
We are the general partner in a limited partnership (which we consolidate for financial statement purposes) that leases our home office space and participates in an agreement with certain affiliates, including the CPA® REITs, for the purpose of leasing office space used for the administration of our operations and the operations of our affiliates and for sharing the associated costs. This limited partnership does not have any significant assets, liabilities or operations other than its interest in the office lease. During each of the years ended December 31, 2010, 2009 and 2008, we recorded income from noncontrolling interest partners of $2.4 million, in each case related to reimbursements from these affiliates. The average estimated minimum lease payments on the office lease, inclusive of noncontrolling interests, at December 31, 2010 approximates $3.0 million annually through 2016.
We own interests in entities ranging from 5% to 95%, including jointly-controlled tenant-in-common interests in properties, with the remaining interests generally held by affiliates, and own common stock in each of the CPA® REITs and Carey Watermark. We consolidate certain of these investments and account for the remainder under the equity method of accounting.
One of our directors and officers is the sole shareholder of Livho, a subsidiary that operates a hotel investment. We consolidate the accounts of Livho in our consolidated financial statements in accordance with current accounting guidance for consolidation of VIEs because it is a VIE and we are its primary beneficiary.
Family members of one of our directors have an ownership interest in certain companies that own noncontrolling interests in one of our French majority-owned subsidiaries. These ownership interests are subject to substantially the same terms as all other ownership interests in the subsidiary companies.
An officer owns a redeemable noncontrolling interest in W. P. Carey International LLC (“WPCI”), a subsidiary company that structures net lease transactions on behalf of the CPA® REITs outside of the U.S., as well as certain related entities.
Included in Accounts payable, accrued expenses and other liabilities in the consolidated balance sheets at each of December 31, 2010 and 2009 are amounts due to affiliates totaling $0.9 million.

 

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In December 2007, we received a loan totaling $7.6 million from two affiliated ventures in which we have interests that are accounted for under the equity method of accounting. The loan was used to fund the acquisition of certain tenancy-in-common interests in Europe and was repaid in March 2008. During the year ended December 31, 2008, we incurred interest expense of $0.1 million in connection with this loan.
Advisory Agreement with Carey Watermark
Effective September 15, 2010, we entered into an advisory agreement with Carey Watermark to perform certain services, including managing Carey Watermark’s offering and its overall business, identification, evaluation, negotiation, purchase and disposition of lodging-related properties and the performance of certain administrative duties. We are currently fundraising for Carey Watermark; however, as of December 31, 2010, Carey Watermark had no investments or significant operating activity. Costs incurred on behalf of Carey Watermark totaled $3.4 million through December 31, 2010. We anticipate being reimbursed for all or a portion of these costs in accordance with the terms of the advisory agreement if the minimum offering proceeds are raised.
Note 4. Net Investments in Properties
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as operating leases, is summarized as follows (in thousands):
                 
    December 31,  
    2010     2009  
Land
  $ 111,660     $ 98,971  
Buildings
    448,932       426,636  
Less: Accumulated depreciation
    (108,032 )     (100,247 )
 
           
 
  $ 452,560     $ 425,360  
 
           
Real Estate Acquired
In February 2010, we entered into a domestic investment that was deemed to be a real estate asset acquisition at a total cost of $47.6 million and capitalized acquisition-related costs of $0.1 million. We funded the investment with the escrowed proceeds of $36.1 million from a sale of property in December 2009 in an exchange transaction under Section 1031 of the Code, and $11.5 million from our line of credit. In July 2010, we obtained non-recourse mortgage financing of $35.0 million for this investment at an annual interest rate of LIBOR plus 2.5% that has been fixed at 5.5% through the use of an interest rate swap. This financing has a term of 10 years.
In June 2010, a venture in which we and an affiliate hold 70% and 30% interests, respectively, and which we consolidate, entered into an investment in Spain for a total cost of $27.2 million, inclusive of a noncontrolling interest of $8.4 million. We funded our share of the purchase price with proceeds from our line of credit. In connection with this transaction, which was deemed to be a real estate asset acquisition, we capitalized acquisition-related costs and fees totaling $1.0 million, inclusive of amounts attributable to a noncontrolling interest of $0.6 million. Dollar amounts are based on the exchange rate of the Euro on the date of acquisition.

 

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Operating Real Estate
Operating real estate, which consists primarily of our self-storage investments through Carey Storage and our Livho subsidiary, at cost, is summarized as follows (in thousands):
                 
    December 31,  
    2010     2009  
Land
  $ 24,030     $ 16,257  
Buildings
    85,821       69,670  
Less: Accumulated depreciation
    (14,280 )     (12,039 )
 
           
 
  $ 95,571     $ 73,888  
 
           
In January 2009, Carey Storage completed a transaction whereby it received cash proceeds of $21.9 million, plus a commitment to invest up to a further $8.1 million of equity, from the Investor to fund the purchase of self-storage assets in the future in exchange for a 60% interest in its self-storage portfolio (“Carey Storage venture”). We reflect the Carey Storage venture’s operations in our real estate ownership segment. Costs totaling $1.0 million incurred in structuring the transaction and bringing in the Investor into these operations are reflected in General and administrative expenses in our investment management segment during 2009. Prior to September 2010, we accounted for this transaction under the profit-sharing method because Carey Storage had a contingent option to repurchase this interest from the Investor at fair value. During the third quarter of 2010, Carey Storage amended its agreement with the Investor to, among other matters, remove the contingent purchase option in the original agreement. However, Carey Storage retained a controlling interest in the Carey Storage venture. As of September 30, 2010, we have reclassified the Investor’s interest from Accounts payable, accrued expenses and other liabilities to Noncontrolling interests on our consolidated balance sheet.
In connection with the January 2009 transaction, the Carey Storage venture repaid in full, the $35.0 million outstanding balance on its secured credit facility at a discount for $28.0 million, terminated the facility, and recognized a gain of $7.0 million on the repayment of this debt, inclusive of the Investor’s interest of $4.2 million. The debt repayment was financed with a portion of the proceeds from the exchange of the 60% interest and non-recourse debt with a new lender totaling $25.0 million, which is secured by individual mortgages on, and cross-collateralized by, the thirteen properties in the Carey Storage portfolio at the time of the January 2009 transaction. The new financing bears interest at a fixed rate of 7% per annum and has a 10-year term with a rate reset after 5 years. The $7.0 million gain recognized on the debt repayment and the Investor’s $4.2 million interest in this gain are both reflected in Other income and (expenses) in the consolidated financial statements.
In August 2009, the Carey Storage venture borrowed an additional $3.5 million that is collateralized by individual mortgages on, and cross-collateralized by, seven properties in the Carey Storage portfolio and distributed the proceeds to its profit-sharing interest holders. This loan has an annual fixed interest rate of 7.25% and a term of 9.6 years with a rate reset after 5 years. As part of this transaction, the Carey Storage venture distributed $1.9 million to the Investor, which has been reflected as a reduction of the profit-sharing obligation.
During 2010, the Carey Storage venture acquired seven self-storage properties in the U.S. at a total cost of $19.2 million, inclusive of amounts attributable to the Investor’s interest of $11.5 million. These investments were deemed to be business combinations, and as a result, the venture expensed acquisition-related costs of $0.4 million, inclusive of amounts attributable to the Investor’s interest of $0.2 million. In connection with these investments, the Carey Storage venture obtained new non-recourse mortgage financing and assumed existing mortgage loans from the sellers totaling $13.7 million, inclusive of amounts attributable to the Investor’s interest of $8.2 million. The mortgage loans have a weighted-average annual fixed interest rate and term of 6.3% and 8.2 years, respectively.
During 2010, an entity owned 100% by Carey Storage acquired another self-storage property in the U.S. for $2.8 million that was deemed to be a business combination, and as a result, it expensed acquisition-related costs of less than $0.1 million. In connection with this investment, Carey Storage obtained new non-recourse mortgage financing of $1.9 million with an annual fixed interest rate of 6.3% and a term of 10 years.

 

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Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future CPI-based increases under non-cancelable operating leases, at December 31, 2010 are as follows (in thousands):
         
Years ending December 31,        
2011
  $ 51,326  
2012
    43,477  
2013
    39,050  
2014
    36,851  
2015
    31,231  
Thereafter through 2030
    141,716  
Percentage rent revenue was approximately $0.1 million in each of 2010, 2009 and 2008.
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivable portfolios consist of direct financing leases and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated balance sheets.
Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows (in thousands):
                 
    December 31,  
    2010     2009  
Minimum lease payments receivable
  $ 57,380     $ 64,201  
Unguaranteed residual value
    75,595       78,526  
 
           
 
    132,975       142,727  
Less: unearned income
    (56,425 )     (62,505 )
 
           
 
  $ 76,550     $ 80,222  
 
           
During 2008, we sold our net investment in a direct financing lease for $5.0 million, net of selling costs, and recognized a net gain on sale of $1.1 million. During the years ended December 31, 2010, 2009 and 2008, in connection with our annual reviews of the estimated residual values of our properties, we recorded impairment charges related to four direct financing leases of $1.1 million, $2.6 million and $0.5 million, respectively. Impairment charges relate primarily to other-than-temporary declines in the estimated residual values of the underlying properties due to market conditions (see Note 13). At both December 31, 2010 and 2009, Other assets included $0.3 million of accounts receivable, net of allowance for uncollectible accounts of less than $0.1 million, related to amounts billed under these direct financing leases.
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, percentage of sales rents and future CPI-based adjustments, under non-cancelable direct financing leases at December 31, 2010 are as follows (in thousands):
         
Years ending December 31,        
2011
  $ 10,607  
2012
    10,488  
2013
    10,093  
2014
    7,518  
2015
    4,599  
Thereafter through 2022
    14,075  
Percentage rent revenue approximated $0.1 million in each of 2010, 2009 and 2008.
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 ranging from three to eight years, provided the relevant CPA® REIT meets its performance criterion. Unpaid deferred installments, including accrued interest, from all of the CPA® REITs totaled $31.4 million and $32.4 million at December 31, 2010 and 2009, respectively, and were included in Due from affiliates in the consolidated financial statements. Unpaid installments bear interest at annual rates ranging from 5% to 7%.

 

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Credit Quality of Finance Receivables
We generally seek investments in facilities that are critical to the tenant’s business and that we believe have a low risk of tenant defaults. At December 31, 2010, none of the balances of our finance receivables were past due and we had not established any allowances for credit losses. Additionally, there have been no modifications of finance receivables. We evaluate the credit quality of our tenant receivables utilizing an internal 5-point credit rating scale, with 1 representing the highest credit quality and 5 representing the lowest. The credit quality evaluation of our tenant receivables was last updated in the fourth quarter of 2010. We believe the credit quality of our deferred acquisition fees receivable falls under category 1, as all of the CPA® REITs are expected to have the available cash to make such payments.
A summary of our tenant receivables by internal credit quality rating at December 31, 2010 is as follows (in thousands):
                         
Internal                 Net Investments in  
Credit Quality     Number         Direct Financing  
Rating     of Tenants         Leases  
  1       9    
 
  $ 49,533  
  2       5    
 
    24,447  
  3       0    
 
     
  4       1    
 
    2,570  
  5       0    
 
     
               
 
     
               
 
  $ 76,550  
               
 
     
Note 6. Equity Investments in Real Estate and CPA® REITs
Our equity investments in real estate for our investments in the CPA® REITs and for our interests in unconsolidated real estate investments are summarized below.
CPA® REITs
We own interests in the CPA® REITs and account for these interests under the equity method because, as their advisor, we do not exert control but have the ability to exercise significant influence. Shares of the CPA® REITs are publicly registered and the CPA® REITs file periodic reports with the SEC, but the shares are not listed on any exchange and are not actively traded. We earn asset management and performance revenue from the CPA® REITs and have elected, in certain cases, to receive a portion of this revenue in the form of restricted common stock of the CPA® REITs rather than cash.
The following table sets forth certain information about our investments in the CPA® REITs (dollars in thousands):
                                 
    % of Outstanding Shares at     Carrying Amount of Investment at  
    December 31,     December 31,  
Fund   2010     2009     2010 (a)     2009 (a)  
CPA®:14
    9.2 %     8.5 %   $ 87,209     $ 79,906  
CPA®:15
    7.1 %     6.5 %     87,008       78,816  
CPA®:16 – Global
    5.6 %     4.7 %     62,682       53,901  
CPA®:17 – Global (b)
    0.6 %     0.4 %     8,156       3,328  
 
                           
 
                  $ 245,055     $ 215,951  
 
                           
 
     
(a)   Includes asset management fee receivable at period end for which shares will be issued during the subsequent period.
 
(b)   CPA®:17 — Global has been deemed to be a VIE of which we are not the primary beneficiary (Note 2).

 

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The following tables present combined summarized financial information for the CPA® REITs. Amounts provided are the total amounts attributable to the CPA® REITs and do not represent our proportionate share (in thousands):
                 
    December 31,  
    2010     2009  
Assets
  $ 8,533,899     $ 8,468,955  
Liabilities
    (4,632,709 )     (4,638,552 )
 
           
Shareholders’ equity
  $ 3,901,190     $ 3,830,403  
 
           
                         
    Years ended December 31,  
    2010     2009     2008  
Revenues
  $ 774,861     $ 757,780     $ 730,207  
Expenses
    (588,137 )     (759,378 )     (633,492 )
 
                 
Net income
  $ 186,724     $ (1,598 )   $ 96,715  
 
                 
We recognized income (loss) from our equity investments in the CPA® REITs, which is reflected in the real estate segment, of $10.5 million, ($2.5) million and $6.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. In addition, we received distributions of available cash from CPA ®:17 — Global’s operating partnership of $4.5 million and, $2.2 million for the years ended December 31, 2010 and 2009, respectively, which we recorded as income from equity investments in the CPA® REITs within the investment management segment. Our proportionate share of income or loss recognized from our equity investments in the CPA® REITs is impacted by several factors, including impairment charges recorded by the CPA® REITs. During 2010, 2009 and 2008, the CPA® REITs recognized impairment charges totaling approximately $40.7 million, $170.0 million and $40.4 million, respectively, which based upon our proportionate ownership reduced the income we earned from these investments by $3.0 million, $11.5 million and $2.1 million, respectively.
Interests in Unconsolidated Real Estate Investments
We own interests in single-tenant net leased properties leased to corporations through noncontrolling interests in (i) partnerships and limited liability companies that we do not control but over which we exercise significant influence, and (ii) as tenants-in-common subject to common control. Generally, the underlying investments are jointly owned with affiliates. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from other-than-temporary impairments).
The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values (dollars in thousands):
                         
    Ownership     Carrying Value at  
    Interest at     December 31,  
Lessee   December 31, 2010     2010     2009  
Schuler A. G. (a) (b) (c)
    33 %   $ 20,493     $ 23,755  
The New York Times Company
    18 %     20,191       19,740  
Carrefour France, SAS (a)
    46 %     18,274       17,570  
U. S. Airways Group, Inc. (b) (d)
    75 %     7,934       8,927  
Medica — France, S.A. (a)
    46 %     5,232       6,160  
Hologic, Inc.
    36 %     4,383       4,388  
Consolidated Systems, Inc. (b)
    60 %     3,388       3,395  
Information Resources, Inc. (e)
    33 %     3,375       2,270  
Childtime Childcare, Inc.
    34 %     1,862       1,843  
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a)
    5 %     1,086       2,639  
The Retail Distribution Group (f)
    40 %           1,099  
Federal Express Corporation (g)
    40 %     (4,272 )     1,976  
Amylin Pharmaceuticals, Inc. (h)
    50 %     (4,707 )     (4,723 )
 
                   
 
          $ 77,239     $ 89,039  
 
                   
 
     
(a)   The carrying value of the investment is affected by the impact of fluctuations in the exchange rate of the Euro.
 
(b)   Represents tenant-in-common interest.

 

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(c)   In 2010, we recognized an other-than-temporary impairment charge of $1.4 million to reflect the decline in the estimated fair value of the investment’s underlying net assets in comparison with the carrying value of our interest in the investment.
 
(d)   The decrease in carrying value was due to cash distributions made to us by the venture.
 
(e)   The increase in carrying value was due to operating contributions we made to the venture.
 
(f)   In March 2010, this venture sold its property and distributed the proceeds to the venture partners. We have no further economic interest in this venture.
 
(g)   In 2010, this venture refinanced its maturing non-recourse mortgage debt with new non-recourse financing and distributed the net proceeds to the venture partners. Our share of the distribution was $5.5 million, which exceeded our total investment in the venture at that time.
 
(h)   In 2007, this venture refinanced its existing non-recourse mortgage debt with new non-recourse financing based on the appraised value of its underlying real estate and distributed the proceeds to the venture partners. Our share of the distribution was $17.6 million, which exceeded our total investment in the venture at that time.
As discussed in Note 2, we adopted the FASB’s amended guidance on the consolidation of VIEs effective January 1, 2010. Upon adoption of the amended guidance, we re-evaluated our existing interests in unconsolidated entities and determined that we should continue to account for our interests in The New York Times and Hellweg ventures using the equity method of accounting primarily because the partners in each of these ventures has the power to direct the activities that most significantly impact the entity’s economic performance, including disposal rights of the property. Carrying amounts related to these VIEs are noted in the table above. Because we generally utilize non-recourse debt, our maximum exposure to either VIE is limited to the equity we have in each VIE. We have not provided financial or other support to either VIE, and there are no guarantees or other commitments from third parties that would affect the value or risk of our interest in such entities.
The following tables present combined summarized financial information of our venture properties. Amounts provided are the total amounts attributable to the venture properties and do not represent our proportionate share (in thousands):
                 
    December 31,  
    2010     2009  
Assets
  $ 1,151,859     $ 1,452,103  
Liabilities
    (818,238 )     (714,558 )
 
           
Partners’/members’ equity
  $ 333,621     $ 737,545  
 
           
                         
    Years ended December 31,  
    2010     2009     2008  
Revenues
  $ 146,214     $ 119,265     $ 88,713  
Expenses
    (79,665 )     (61,519 )     (65,348 )
 
                 
Net income
  $ 66,549     $ 57,746     $ 23,365  
 
                 
We recognized income from these equity investments in real estate of $16.0 million, $13.8 million and $8.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Income from equity investments in real estate represents our proportionate share of the income or losses of these ventures as well as certain depreciation and amortization adjustments related to purchase accounting and other-than-temporary impairment charges.
We have a 5% interest in a Lending Venture that made a loan, the Note Receivable, to the Partner who held a 75.3% interest in the Partnership owning 37 properties throughout Germany at a total cost of $336.0 million. Concurrently, our affiliates also acquired an interest in a Property Venture that acquired the remaining 24.7% ownership interest in the Partnership as well as an option to purchase an additional 75% interest from the Partner by December 2010. Also in connection with this transaction, the Lending Venture obtained non-recourse financing of $284.9 million having a fixed annual interest rate of 5.5%, a term of 10 years and is collateralized by the 37 German properties. In November 2010, the Property Venture exercised a portion of its call option via the Lending Venture whereby the Partner exchanged a 70% interest in the limited partnership for a $295.7 million reduction in the Note Receivable due to the Lending Venture. Subsequent to the exercise of the option, the Property Venture now owns a 94.7% interest in the Partnership and retains options to purchase the remaining 5.3% interest from the Partner by December 2012. All dollar amounts are based on the exchange rates of the Euro at the dates of the transactions, and dollar amounts provided represent the total amounts attributable to the ventures and do not represent our proportionate share.

 

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Equity Investment in Direct Financing Lease Acquired
In March 2009, an entity in which we, CPA®:16 — Global and CPA®:17 — Global hold 17.75%, 27.25% and 55% interests, respectively, completed a net lease financing transaction with respect to a leasehold condominium interest, encompassing approximately 750,000 rentable square feet, in the office headquarters of The New York Times Company for approximately $233.7 million. Our share of the purchase price was approximately $40.0 million, which we funded with proceeds from our line of credit. We account for this investment under the equity method of accounting, as we do not have a controlling interest in the entity but exercise significant influence over it. In connection with this investment, which was deemed a direct financing lease, the venture capitalized costs and fees totaling $8.7 million. In August 2009, the venture obtained mortgage financing on the New York Times property of $119.8 million at an annual interest rate of LIBOR plus 4.75% that has been capped at 8.75% through the use of an interest rate cap. This financing has a term of five years.
Note 7. Intangible Assets and Goodwill
In connection with our acquisition of properties, we have recorded net lease intangibles of $41.1 million, which are being amortized over periods ranging from approximately one year to 40 years. Amortization of below-market and above-market rent intangibles is recorded as an adjustment to lease revenues, while amortization of in-place lease and tenant relationship intangibles is included in Depreciation and amortization. Below-market rent intangibles are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.
Intangibles and goodwill are summarized as follows (in thousands):
                 
    December 31,  
    2010     2009  
Amortized Intangibles Assets
               
Management contracts
  $ 32,765     $ 32,765  
Less: accumulated amortization
    (29,035 )     (26,262 )
 
           
 
    3,730       6,503  
 
           
Lease Intangibles:
               
In-place lease
    23,028       18,614  
Tenant relationship
    10,251       9,816  
Above-market rent
    9,737       8,085  
Less: accumulated amortization
    (26,560 )     (25,413 )
 
           
 
    16,456       11,102  
 
           
Unamortized Goodwill and Indefinite-Lived Intangible Assets
               
Goodwill
    63,607       63,607  
Trade name
    3,975       3,975  
 
           
 
    67,582       67,582  
 
           
 
  $ 87,768     $ 85,187  
 
           
Amortized Below-Market Rent Intangible
               
Below-market rent
  $ (1,954 )   $ (2,009 )
Less: accumulated amortization
    1,270       641  
 
           
 
  $ (684 )   $ (1,368 )
 
           
Net amortization of intangibles was $5.6 million, $6.6 million and $7.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Based on the intangible assets at December 31, 2010, annual net amortization of intangibles for each of the next five years is as follows: 2011 — $3.1 million, 2012 — $2.6 million, 2013 — $2.3 million, 2014 — $1.1 million, and 2015 — $0.9 million.

 

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Note 8. Debt
Scheduled debt principal payments during each of the next five years following December 31, 2010 and thereafter are as follows (in thousands):
         
Years ending December 31,   Total  
2011(a)
  $ 176,438  
2012
    35,334  
2013
    6,408  
2014
    6,414  
2015
    46,449  
Thereafter through 2021
    125,939  
 
     
Total
  $ 396,982  
 
     
 
     
(a)   Includes $141.8 million outstanding under our line of credit, which is scheduled to mature in June 2011. We currently intend to extend this line for an additional year.
Non-recourse debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of real property and direct financing leases, with an aggregate carrying value of $367.5 million at December 31, 2010. Our mortgage notes payable had fixed annual interest rates ranging from 3.1% to 7.8% and variable annual interest rates ranging from 1.2% to 7.3%, with maturity dates ranging from 2011 to 2021 at December 31, 2010.
In January 2009, Carey Storage repaid, in full, the $35.0 million outstanding under its $105.0 credit facility at a discount for $28.0 million and terminated the facility.
Line of credit
We have a $250.0 million unsecured revolving line of credit that is scheduled to mature in June 2011. Pursuant to the terms of the credit agreement, the line of credit can be increased up to $300.0 million at the discretion of the lenders. Additionally, as long as there has been no default, we may extend the line of credit at our discretion, within 90 days of, but not less than 30 days prior to, expiration, for an additional year. Such extension is subject to the payment of an extension fee equal to 0.125% of the total commitments under the facility at that time. We currently intend to extend this line for an additional year.
The line of credit provides for an annual interest rate, at our election, of either (i) LIBOR plus a spread that ranges from 75 to 120 basis points depending on our leverage, or (ii) the greater of the lender’s prime rate and the Federal Funds Effective Rate plus 50 basis points. In addition, we pay an annual fee ranging between 12.5 and 20 basis points of the unused portion of the line of credit, depending on our leverage ratio. Based on our leverage ratio at December 31, 2010, we pay interest at LIBOR, or 0.25%, plus 90 basis points and pay 15 basis points on the unused portion of the line of credit.
The credit agreement stipulates six financial covenants that require us to maintain the following ratios and benchmarks at the end of each quarter (the quoted variables are specifically defined in the credit agreement):
(i)   a “maximum leverage” ratio, which requires us to maintain a ratio for “total outstanding indebtedness” to “total value” of 60% or less;
(ii)   a “maximum secured debt” ratio, which requires us to maintain a ratio for “total secured outstanding indebtedness” (inclusive of permitted “indebtedness of subsidiaries”) to “total value” of 50% or less;
(iii)   a “minimum combined equity value,” which requires us to maintain a “total value” less “total outstanding indebtedness” of at least $550.0 million. This amount must be adjusted in the event of any securities offering by adding 85% of the “fair market value of all net offering proceeds”;
(iv)   a “minimum fixed charge coverage ratio,” which requires us to maintain a ratio for “adjusted total EBITDA” to “fixed charges” of 1.75 to 1.0;
(v)   a “maximum dividend payout,” which requires us to ensure that the total of “restricted payments” made in the current quarter, when added to the total for the three preceding fiscal quarters, shall not exceed 90% of “adjusted total EBITDA” for the four preceding fiscal quarters. “Restricted payments” include quarterly dividends and the total amount of shares repurchased by us in excess of $10.0 million per year; and
(vi)   a limitation on “recourse indebtedness,” which prohibits us from incurring additional secured indebtedness other than “non-recourse indebtedness” or indebtedness that is recourse to us that exceeds $50.0 million or 5% of the “total value,” whichever is greater.

 

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We were in compliance with these covenants at December 31, 2010.
Note 9. Settlement of SEC Investigation
In March 2008, we entered into a settlement with the SEC with respect to all matters relating to a previously disclosed investigation. In anticipation of this settlement, we recognized a charge of $30.0 million and an offsetting $9.0 million tax benefit in the fourth quarter of 2007. As a result, the settlement is reflected as Decrease in settlement provision in our Consolidated Statement of Cash Flows for the year ended December 31, 2008. We also recognized a gain of $1.8 million for the year ended December 31, 2008 related to an insurance reimbursement of certain professional services costs incurred in connection with the SEC investigation.
Note 10. Commitments and Contingencies
At December 31, 2010, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.
We have provided certain representations in connection with divestitures of certain of our properties. These representations address a variety of matters including environmental liabilities. We are not aware of any claims or other information that would give rise to material payments under such representations.
Proposed Merger of Affiliates
As discussed in Note 3, in connection with the Proposed Merger, we have agreed to purchase three properties from CPA®:14, in which we already have a joint venture interest, for an aggregate purchase price of $32.1 million, plus the assumption of approximately $64.7 million of indebtedness.
If the cash on hand and available to CPA®:14 and CPA®:16 — Global, including the proceeds of the CPA®:14 Asset Sales and a new $300.0 million senior credit facility of CPA®:16 — Global, is not sufficient to enable CPA®:16 — Global to fulfill cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to purchase a sufficient number of shares of CPA®:16 — Global stock from CPA®:16 — Global to enable it to pay such amounts to CPA®:14 shareholders. Assuming that holders of 50% of CPA®:14’s outstanding stock elect to receive cash in the Proposed Merger, then the maximum cash required by CPA®:16 — Global to purchase these shares would be approximately $416.1 million, based on the total shares of CPA®:14 outstanding at December 31, 2010.
The merger agreement also contains certain termination rights for both CPA®:14 and CPA®:16. If the merger agreement is terminated because the closing condition that CPA®:16 — Global obtain funding pursuant to the debt financing and, if applicable, the equity financing described above is not satisfied or waived, we have agreed to pay CPA®:16 — Global’s and CPA®:14’s out-of-pocket expenses up to $5.0 million and $4.0 million, respectively. We have also agreed to pay CPA®:14’s out-of-pocket expenses if the merger agreement is terminated due to more than 50% of CPA®:14’s shareholders electing to receive cash in the Proposed Merger or CPA®:14 failing to obtain the requisite shareholder approval. Costs incurred by CPA®:14 and CPA®:16 — Global related to the Proposed Merger totaled approximately $1.2 million and $1.8 million, respectively, through December 31, 2010.
In connection with the Proposed Merger, CAM has agreed to indemnify CPA®:16 — Global if it suffers certain losses arising out of a breach by CPA®:14 of its representations and warranties under the merger agreement and having a material adverse effect on CPA®:16 — Global after the Proposed Merger, up to the amount of fees received by CAM in connection with the Proposed Merger. We have evaluated the exposure related to this indemnification and believe the exposure to be minimal.

 

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Note 11. Fair Value Measurements
Under current authoritative accounting guidance for fair value measurements, the fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps and swaps; and Level 3, for which little or no market data exists, therefore requiring us to develop our own assumptions, such as certain securities.
Items Measured at Fair Value on a Recurring Basis
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Money Market Funds — Our money market funds consisted of government securities and treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.
Derivative Assets and Liabilities — Our derivative assets and liabilities primarily comprised of interest rate swaps or caps. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates. Our derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Other Securities — Our other securities primarily comprised of our investment in an India growth fund and our interest in a commercial mortgage loan securitization. These funds are not traded in an active market. We estimated the fair value of these securities using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3.
Redeemable Noncontrolling Interest — We account for the noncontrolling interest in WPCI as redeemable noncontrolling interest. We determined the valuation of redeemable noncontrolling interest using widely accepted valuation techniques, including discounted cash flow on the expected cash flows of the investment as well as the income capitalization approach, which considers prevailing market capitalization rates. We classified this liability as Level 3.

 

28


 

The following tables set forth our assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2010 and 2009 (in thousands):
                                 
            Fair Value Measurements at December 31, 2010 Using:  
            Quoted Prices in              
            Active Markets for     Significant Other     Unobservable  
            Identical Assets     Observable Inputs     Inputs  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets:
                               
Money market funds
  $ 37,154     $ 37,154     $     $  
Other securities
    1,726                   1,726  
Derivative assets
    312             312        
 
                       
Total
  $ 39,192     $ 37,154     $ 312     $ 1,726  
 
                       
Liabilities:
                               
Derivative liabilities
  $ 969     $     $ 969     $  
Redeemable noncontrolling interest
    7,546                   7,546  
 
                       
Total
  $ 8,515     $     $ 969     $ 7,546  
 
                       
                                 
            Fair Value Measurements at December 31, 2009 Using:  
            Quoted Prices in              
            Active Markets for     Significant Other     Unobservable  
            Identical Assets     Observable Inputs     Inputs  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets:
                               
Money market funds
  $ 4,283     $ 4,283     $     $  
Other securities
    1,687                   1,687  
 
                       
Total
  $ 5,970     $ 4,283     $     $ 1,687  
 
                       
Liabilities:
                               
Derivative liabilities
  $ 634     $     $ 634     $  
Redeemable noncontrolling interest
    7,692                   7,692  
 
                       
Total
  $ 8,326     $     $ 634     $ 7,692  
 
                       
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated ventures.
                                 
    Fair Value Measurements Using  
    Significant Unobservable Inputs (Level 3 Only)  
    Year ended December 31, 2010     Year ended December 31, 2009  
    Assets     Liabilities     Assets     Liabilities  
          Redeemable           Redeemable  
    Other     Noncontrolling     Other     Noncontrolling  
    Securities     Interest     Securities     Interest  
Beginning balance
  $ 1,687     $ 7,692     $ 1,628     $ 18,085  
Total gains or losses (realized and unrealized):
                               
Included in earnings
    4       1,293       (2 )     2,258  
Included in other comprehensive income (loss)
    12       (12 )     16       12  
Purchases
    23             45          
Settlements
                        (15,380 )
Distributions paid
          (956 )           (4,056 )
Redemption value adjustment
          (471 )           6,773  
 
                       
Ending balance
  $ 1,726     $ 7,546     $ 1,687     $ 7,692  
 
                       
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
  $ 4     $     $ (2 )   $  
 
                       
We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during the years ended December 31, 2010 and 2009. Gains and losses (realized and unrealized) included in earnings for other securities are reported in other income and (expenses) in the consolidated financial statements.

 

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Our other financial instruments had the following carrying values and fair values as of the dates shown (in thousands):
                                 
    December 31, 2010     December 31, 2009  
    Carrying Value     Fair Value     Carrying Value     Fair Value  
Deferred acquisition fees receivable
  $ 31,419     $ 32,485     $ 32,386     $ 32,800  
Non-recourse debt
    255,232       255,460       215,330       201,774  
Line of credit
    141,750       140,600       111,000       108,900  
We determine the estimated fair value of our debt instruments using a discounted cash flow model with rates that take into account the credit of the tenants and interest rate risk. We estimate that our other financial assets and liabilities (excluding net investment in direct financing leases) had fair values that approximated their carrying values at both December 31, 2010 and 2009.
Items Measured at Fair Value on a Non-Recurring Basis
We perform an assessment, when required, of the value of certain of our real estate investments in accordance with current authoritative accounting guidance. As part of that assessment, we determined the valuation of these assets using widely accepted valuation techniques, including expected discounted cash flows or an income capitalization approach, which considers prevailing market capitalization rates. We reviewed each investment based on the highest and best use of the investment and market participation assumptions. We determined that the significant inputs used to value these investments fall within Level 3. We calculated the impairment charges recorded during the years ended December 31, 2010, 2009 and 2008 based on contracted or expected selling prices. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions change.
The following table presents information about our nonfinancial assets that were measured on a fair value basis for the years ended December 31, 2010 and 2009. All of the impairment charges were measured using unobservable inputs (Level 3) (in thousands):
                                                 
    Year ended December 31, 2010     Year ended December 31, 2009     Year ended December 31, 2008  
    Total Fair Value     Total Impairment     Total Fair Value     Total Impairment     Total Fair Value     Total Impairment  
    Measurements     Charges     Measurements     Charges     Measurements     Charges  
Impairment Charges From Continuing Operations:
                                               
Real estate
  $ 5,260     $ 6,104     $ 823     $ 900     $     $  
Net investments in direct financing leases
    3,548       1,140       23,571       2,616       4,201       473  
Equity investments in real estate
    22,846       1,394                          
 
                                   
 
    31,654       8,638       24,394       3,516       4,201       473  
 
                                               
Impairment Charges From Discontinued Operations:
                                               
Real estate
    6,402       8,137       9,719       6,908       3,751       538  
 
                                   
 
  $ 38,056     $ 16,775     $ 34,113     $ 10,424     $ 7,952     $ 1,011  
 
                                   
Note 12. 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 three main components of economic risk: interest rate risk, credit risk and market risk. We are subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of default on our operations and tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other securities and the shares we hold in the CPA® REITs due to changes in interest rates or other market factors. In addition, we own investments in the European Union and are subject to the risks associated with changing foreign currency exchange rates.
Foreign Currency Exchange
We are exposed to foreign currency exchange rate movements, primarily in the Euro. We manage foreign currency exchange rate movements by generally placing both our debt obligation to the lender and the tenant’s rental obligation to us in the same currency, but we are subject to foreign currency exchange rate movements to the extent of the difference in the timing and amount of the rental obligation and the debt service. We also face challenges with repatriating cash from our foreign investments. We may encounter instances where it is difficult to repatriate cash because of jurisdictional restrictions or because repatriating cash may result in current or future tax liabilities. 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.

 

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Use of Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to derivative instruments that we enter into on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, and we may own common stock warrants, granted to us by lessees when structuring lease transactions, that are considered to be derivative instruments. The primary risks related to our use of derivative instruments are that a counterparty to a hedging arrangement could default on its obligation or that the credit quality of the counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction. While we seek to mitigate these risks by entering into hedging arrangements with counterparties that are 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. If a derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in OCI until the hedged item is recognized in earnings. For cash flow hedges, the ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
The following table sets forth certain information regarding our derivative instruments at December 31, 2010 and 2009 (in thousands):
                                     
        Asset Derivatives Fair Value     Liability Derivatives Fair Value  
Derivatives designated as       at December 31,     at December 31,  
hedging instruments   Balance Sheet Location   2010     2009     2010     2009  
Interest rate swaps
  Other assets, net   $ 312     $     $     $  
Interest rate swaps
  Accounts payable, accrued expenses and other liabilities                 (969 )     (634 )
The following table presents the impact of derivative instruments on OCI within our consolidated financial statements (in thousands):
                         
    Amount of (Loss) Gain Recognized in  
    OCI on Derivative (Effective Portion)  
    Years ended December 31,  
Derivatives in Cash Flow Hedging Relationships   2010     2009     2008  
Interest rate swaps (a)
  $ (45 )   $ (243 )   $ (419 )
 
     
(a)   During the years ended December 31, 2010, 2009 and 2008, no gains or losses were reclassified from OCI into income related to effective or ineffective portions of hedging relationships or to amounts excluded from effectiveness testing.
See below for information on our purposes for entering into derivative instruments and for information on derivative instruments owned by unconsolidated ventures, which are excluded from the tables above.
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 mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our venture partners may obtain variable rate non-recourse mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable rate debt service obligations of the 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.

 

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The interest rate swap derivative instruments that we had outstanding at December 31, 2010 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
                                             
        Notional     Effective     Effective     Expiration        
    Type   Amount     Interest Rate     Date     Date     Fair Value  
3-Month Euribor (a)
  “Pay-fixed” swap   $ 8,522       4.2 %     3/2008       3/2018     $ (757 )
1-Month Libor
  “Pay-fixed” swap     4,681       3.0 %     4/2010       4/2015       (212 )
1-Month Libor
  “Pay-fixed” swap     34,804       3.0 %     7/2010       7/2020       312  
 
                                         
 
                                      $ (657 )
 
                                         
 
     
(a)   Amounts are based upon the Euro exchange rate at December 31, 2010.
The interest rate cap derivative instruments that our unconsolidated ventures had outstanding at December 31, 2010 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
                                                             
    Ownership Interest                                              
    in Venture at         Notional                     Effective     Expiration        
    December 31, 2010     Type   Amount     Cap Rate (a)     Spread     Date     Date     Fair Value  
3-Month LIBOR
    17.75 %   Interest rate cap   $ 116,684       4.0 %     4.8 %     8/2009       8/2014     $ 733  
1-Month LIBOR
    78.95 %   Interest rate cap     18,310       3.0 %     4.0 %     9/2009       4/2014       122  
 
                                                         
 
                                                      $ 855  
 
                                                         
 
     
(a)   The applicable interest rates of the related loans were 5.0% and 4.3% at December 31, 2010; therefore, the interest rate caps were not being utilized at that date.
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest payments are made on our non-recourse variable-rate debt. At December 31, 2010, we estimate that an additional $1.3 million will be reclassified as interest expense during the next twelve months.
Some of the agreements we have with derivative counterparties contain certain credit contingent provisions that could result in a declaration of default against us regarding our derivative obligations if we either default or are capable of being declared in default on certain of our indebtedness. At December 31, 2010, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives that were in a net liability position was $0.8 million at December 31, 2010, which includes accrued interest but excludes any adjustment for nonperformance risk. If we had breached any of these provisions at December 31, 2010, we could have been required to settle our obligations under these agreements at their termination value of $0.9 million.
Portfolio Concentration Risk
Concentrations of credit risk arise when a group of tenants is engaged in similar business activities or is subject to similar economic risks or conditions that could cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it does contain concentrations in excess of 10% of current annualized lease revenues in certain areas, as described below. The percentages in the paragraph below represent our directly-owned real estate properties and do not include our pro rata share of equity investments.

 

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At December 31, 2010, the majority of our directly-owned real estate properties were located in the U.S. (89%), with Texas (20%), California (14%), Arizona (11%) and Georgia (11%) representing the most significant geographic concentrations, based on percentage of our annualized contractual minimum base rent for the fourth quarter of 2010. At December 31, 2010, our directly-owned real estate properties contained concentrations in the following asset types: office (38%), industrial (30%) and warehouse/distribution (17%); and in the following tenant industries: retail stores (13%), business and commercial services (12%) and telecommunications (12%).
Note 13. Impairment Charges
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investments in real estate in which an impairment indicator is identified, we follow a two-step process to determine whether the investment is impaired and to determine the amount of the charge. First, we compare the carrying value of the real estate to the future net undiscounted cash flow that we expect the real estate will generate, including any estimated proceeds from the eventual sale of the real estate. If this amount is less than the carrying value, the real estate is considered to be impaired, and we then measure the loss as the excess of the carrying value of the real estate over the estimated fair value of the real estate, which is primarily determined using market information such as recent comparable sales or broker quotes. If relevant market information is not available or is not deemed appropriate, we then perform a future net cash flow analysis discounted for inherent risk associated with each investment.
The following table summarizes impairment charges recognized during the years ended December 31, 2010, 2009, and 2008 (in thousands):
                         
    Years ended December 31,  
    2010     2009     2008  
Real estate
  $ 6,104     $ 900     $  
Net investments in direct financing leases
    1,140       2,616       473  
 
                 
Total impairment charges included in expenses
    7,244       3,516       473  
Equity investments in real estate (a)
    1,394              
 
                 
Total impairment charges included in continuing operations
    8,638       3,516       473  
Impairment charges included in discontinued operations
    8,137       6,908       538  
 
                 
Total impairment charges
  $ 16,775     $ 10,424     $ 1,011  
 
                 
     
(a)   Impairment charges on our equity investments in real estate are included in Income from equity investments in real estate and CPA® REITs within the consolidated financial statements.
Impairment Charges on Real Estate
During the years ended December 31, 2010 and 2009, we recognized impairment charges on various properties totaling $6.1 million and $0.9 million, respectively. These impairments were primarily the result of writing down the properties’ carrying values to their respective estimated fair values in connection with potential sales due to tenants vacating or not renewing their leases.
Impairment Charges on Direct Financing Leases
In connection with our annual review of the estimated residual values on our properties classified as net investments in direct financing leases, we determined that an other-than-temporary decline in estimated residual value had occurred at various properties due to market conditions, and the accounting for these direct financing leases was revised using the changed estimates. The changes in estimates resulted in the recognition of impairment charges totaling $1.1 million, $2.6 million and $0.5 million in 2010, 2009 and 2008, respectively.
Impairment Charges on Equity Investments in Real Estate
During the year ended December 31, 2010, we recognized an other-than-temporary impairment charge of $1.4 million on a venture to reflect the decline in the estimated fair value of the venture’s underlying net assets in comparison with the carrying value of our interest in the venture.

 

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Impairment Charges on Properties Sold
During the years ended December 31, 2010, 2009 and 2008, we recognized impairment charges on properties sold totaling $8.1 million, $6.9 million and $0.5 million, respectively. These impairment charges, which are included in discontinued operations, were the result of reducing these properties’ carrying values to their estimated fair values (Note 17).
Note 14. Equity
Distributions Payable
We declared a quarterly distribution of $0.510 per share in December 2010, which was paid in January 2011 to shareholders of record at December 31, 2010; and a quarterly distribution of $0.502 per share and a special distribution of $0.30 per share in December 2009, which were paid in January 2010 to shareholders of record at December 31, 2009. The special distribution was approved by our board of directors as a result of an increase in our 2009 taxable income.
Redeemable Noncontrolling Interest
We account for the noncontrolling interest in WPCI held by one of our officers as a redeemable noncontrolling interest, as we have an obligation to repurchase the interest from that officer, subject to certain conditions. The officer’s interest is reflected at estimated redemption value for all periods presented. Redeemable noncontrolling interests, as presented on the consolidated balance sheets, reflect adjustments of ($0.5) million, $6.8 million and $0.3 million at December 31, 2010, 2009 and 2008, respectively, to present the officer’s interest at redemption value. See Note 15.
The following table presents a reconciliation of redeemable noncontrolling interest (in thousands):
                         
    2010     2009     2008  
Balance at beginning of year
  $ 7,692     $ 18,085     $ 20,394  
Redemption value adjustment
    (471 )     6,773       322  
Net income
    1,293       2,258       1,508  
Distributions
    (956 )     (4,056 )     (4,139 )
Purchase of noncontrolling interests
          (15,380 )      
Change in other comprehensive (loss) income
    (12 )     12        
 
                 
Balance at end of year
  $ 7,546     $ 7,692     $ 18,085  
 
                 
Accumulated Other Comprehensive Loss
The following table presents accumulated other comprehensive loss reflected in equity, net of tax. Amounts include our proportionate share of other comprehensive income or loss from our unconsolidated investments (in thousands):
                 
    December 31,  
    2010     2009  
Unrealized gain on marketable securities
  $ 48     $ 42  
Unrealized loss on derivative instruments
    (1,658 )     (901 )
Foreign currency translation adjustment
    (1,853 )     178  
 
           
Accumulated other comprehensive loss
  $ (3,463 )   $ (681 )
 
           

 

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Earnings Per Share
Under current authoritative guidance for determining earnings per share, all unvested share-based payment awards that contain non-forfeitable rights to distributions are considered to be participating securities and therefore are included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our unvested RSUs contain rights to receive non-forfeitable distribution equivalents, and therefore we apply the two-class method of computing earnings per share. The calculation of earnings per share below excludes the income attributable to the unvested RSUs from the numerator. The following table summarizes basic and diluted earnings per share for the periods indicated (in thousands, except share amounts):
                         
    Years ended December 31,  
    2010     2009     2008  
Net income attributable to W. P. Carey members
  $ 73,972     $ 69,023     $ 78,047  
Allocation of distributions paid on unvested RSUs in excess of net income
    (440 )     (1,127 )     (295 )
 
                 
Net income — basic
    73,532       67,896       77,752  
Income effect of dilutive securities, net of taxes
    724       1,250       840  
 
                 
Net income — diluted
  $ 74,256     $ 69,146     $ 78,592  
 
                 
Weighted average shares outstanding — basic
    39,514,746       39,019,709       39,202,520  
Effect of dilutive securities
    493,148       693,026       1,018,592  
 
                 
Weighted average shares outstanding — diluted
    40,007,894       39,712,735       40,221,112  
 
                 
Securities included in our diluted earnings per share determination consist of stock options, warrants and restricted stock. Securities totaling 1.8 million shares, 2.6 million shares and 2.4 million shares for the years ended December 31, 2010, 2009, and 2008, respectively, were excluded from the earnings per share computations above as their effect would have been anti-dilutive.
Share Repurchase Programs
In June 2007, our board of directors approved a share repurchase program through December 31, 2007 that was later extended through March 2008. During the term of the program, we repurchased a total of $30.7 million of our common stock. In October 2008, the Executive Committee of our board of directors (the “Executive Committee”) approved a program to repurchase up to $10.0 million of our common stock through December 15, 2008. During the term of this program, we repurchased a total of $8.5 million of our common stock. In December 2008, the Executive Committee approved a further program to repurchase up to $10.0 million of our common stock through March 4, 2009 or the date the maximum was reached, if earlier. During the term of this program, we repurchased a total of $9.3 million of our common stock. In March 2009, the Executive Committee approved an additional program to repurchase up to $3.5 million of our common stock through March 27, 2009 or the date the maximum was reached, if earlier. During the term of this program, we repurchased a total of $2.8 million of our common stock.
Note 15. Stock-Based and Other Compensation
Stock-Based Compensation
At December 31, 2010, we maintained several stock-based compensation plans as described below. The total compensation expense (net of forfeitures) for these plans was $7.4 million, $9.3 million and $7.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total stock-based compensation expense for the year ended December 31, 2010 included net forfeitures of $2.0 million as a result of the resignation of two senior officers. The tax benefit recognized by us related to these plans totaled $3.3 million, $4.2 million and $3.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
2009 Incentive Plan and 1997 Incentive Plans
We maintain the 1997 Share Incentive Plan (as amended, the “1997 Incentive Plan”), which authorized the issuance of up to 6,200,000 shares of our common stock. In June 2009, our shareholders approved the 2009 Share Incentive Plan (the “2009 Incentive Plan”) to replace the 1997 Incentive Plan, except with respect to outstanding contractual obligations under the 1997 Incentive Plan, so that no further awards can be made under that plan. The 2009 Incentive Plan authorizes the issuance of up to 3,600,000 shares of our common stock, of which 218,644 were issued or reserved for issuance upon vesting of RSUs and PSUs at December 31, 2010. The 1997 Incentive Plan provided for the grant of (i) share options, which may or may not qualify as incentive stock options under the Code, (ii) performance shares or PSUs, (iii) dividend equivalent rights and (iv) restricted shares or RSUs. The 2009 Incentive Plan provides for the grant of (i) share options, (ii) restricted shares or RSUs, (iii) performance shares or PSUs, and (iv) dividend equivalent rights. The vesting of grants under both plans is accelerated upon a change in our control and under certain other conditions. During 2010, grants under our long-term incentive program (the “LTIP”) were made under the 2009 Incentive Plan.

 

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In December 2007, the Compensation Committee approved the LTIP and terminated further contributions to the Partnership Equity Unit Plan described below. In 2008, the Compensation Committee approved long-term incentive awards consisting of 153,900 RSUs and 148,250 PSUs under the LTIP through the 1997 Incentive Plan. In 2009, the Compensation Committee granted 126,050 RSUs and 152,000 PSUs under the LTIP through the 1997 Incentive Plan. In 2010, the Compensation Committee granted 140,050 RSUs and 159,250 PSUs under the LTIP through the 2009 Incentive Plan.
As a result of issuing these awards, we currently expect to recognize compensation expense totaling approximately $18.1 million over the vesting period, of which $5.7 million, $4.2 million and $2.4 million was recognized during 2010, 2009 and 2008, respectively.
2009 Non-Employee Directors Incentive Plan and 1997 Non-Employee Directors’ Plan
We maintain the 1997 Non-Employee Directors’ Plan (the “1997 Directors’ Plan”), which authorized the issuance of up to 300,000 shares of our Common Stock. In June 2007, the 1997 Director’s Plan, which had been due to expire in October 2007, was extended through October 2017. In June 2009, our shareholders approved the 2009 Non-Employee Directors’ Incentive Plan (the “2009 Directors’ Plan”) to replace the 1997 Directors’ Plan, except with respect to outstanding contractual obligations under the predecessor plan, so that no further awards can be made under that plan. The 1997 Directors’ Plan provided for the grant of (i) share options, which may or may not qualify as incentive stock options, (ii) performance shares, (iii) dividend equivalent rights and (iv) restricted shares. The 2009 Directors’ Plan authorizes the issuance of 325,000 shares of our common stock in the aggregate and initially provided for the automatic annual grant of RSUs with a total value of $50,000 to each director. In the discretion of our board of directors, the awards may also be in the form of share options or restricted shares, or any combination of the permitted awards. Grants under the 2009 Directors Plan totaled 47,565 RSUs at December 31, 2010.
Employee Share Purchase Plan
We sponsor an Employee Share Purchase Plan (“ESPP”) pursuant to which eligible employees may contribute up to 10% of compensation, subject to certain limits, to purchase our common stock. Employees can purchase stock semi-annually at a price equal to 85% of the fair market value at certain plan defined dates. The ESPP is not material to our results of operations. Compensation expense under this plan for the years ended December 31, 2010, 2009 and 2008 was $0.2 million, $0.4 million and $0.1 million, respectively.
Carey Management Warrants
In January 1998, the predecessor of Carey Management was granted warrants to purchase 2,284,800 shares of our common stock exercisable at $21 per share and warrants to purchase 725,930 shares exercisable at $23 per share as compensation for investment banking services in connection with structuring the consolidation of the CPA® Partnerships. During the year ended December 31, 2008, a corporation wholly-owned by our Chairman, Wm. Polk Carey, exercised warrants under a 1998 grant (the “Carey Management Warrants”) to purchase a total of 695,930 shares of our common stock at $23 per share, for which we received proceeds of $16.1 million. All other Carey Management Warrants were exercised prior to 1998 or expired without value.
Partnership Equity Unit Plan
During 2003, we adopted a non-qualified deferred compensation plan (the “Partnership Equity Plan”, or “PEP”) under which a portion of any participating officer’s cash compensation in excess of designated amounts was deferred and the officer was awarded Partnership Equity Plan Units (“PEP Units”). The value of each PEP Unit was intended to correspond to the value of a share of the CPA® REIT designated at the time of such award. During 2005, further contributions to the initial PEP were terminated and it was succeeded by a second PEP. As amended, payment under these plans will occur at the earlier of December 16, 2013 (in the case of the initial PEP) or twelve years from the date of award. The award is fully vested upon grant. Each of the PEPs is a deferred compensation plan and is therefore considered to be outside the scope of current accounting guidance for stock-based compensation and subject to liability award accounting. The value of each PEP Unit will be adjusted to reflect the underlying appraised value of the designated CPA® REIT. Additionally, each PEP Unit will be entitled to distributions equal to the distribution rate of the CPA® REIT. All issuances of PEP Units, changes in the fair value of PEP Units and distributions paid are included in our compensation expense.

 

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The value of the plans is reflected at fair value each quarter and is subject to changes in the fair value of the PEP units. Compensation expense under these Plans for the years ended December 31, 2010, 2009 and 2008 was $0.1 million, $0.2 million and $0.9 million, respectively. Further contributions to the second PEP were terminated at December 31, 2007; however, this termination did not affect any awardees’ rights pursuant to awards granted under this plan. In December 2008, participants in the PEPs were required to make an election to either (i) remain in the PEPs, (ii) receive cash for their PEP Units (available to former employees only) or (iii) convert their PEP Units to fully vested RSUs (available to current employees only) to be issued under the 1997 Incentive Plan on June 15, 2009. Substantially all of the PEP participants elected to receive cash or convert their existing PEP Units to RSUs. In January 2009, we paid $2.0 million in cash to former employee participants who elected to receive cash for their PEP Units. As a result of the election to convert PEP Units to RSUs, we derecognized $9.3 million of our existing PEP liability and recorded a deferred compensation obligation within W. P. Carey members’ equity in the same amount during the second quarter of 2009. The PEP participants that elected RSUs received a total of 356,416 RSUs, which was equal to the total value of their PEP Units divided by the closing price of our common stock on June 15, 2009. The PEP participants electing to receive RSUs were required to defer receipt of the underlying shares of our common stock for a minimum of two years. While employed by us, these participants are entitled to receive dividend equivalents equal to the amount of dividends paid on the underlying common stock during the deferral period. At December 31, 2010, we are obligated to issue 356,416 shares of our common stock underlying these RSUs, which is recorded within W. P. Carey members’ equity as a Deferred compensation obligation of $10.5 million. The remaining PEP liability pertaining to participants who elected to remain in the plans was $0.8 million at December 31, 2010.
WPCI Stock Options
On June 30, 2003, WPCI granted an incentive award to two officers of WPCI consisting of 1,500,000 restricted units, representing an approximate 13% interest in WPCI, and 1,500,000 options for WPCI units with a combined fair value of $2.5 million at that date. Both the options and restricted units vested ratably over five years, with full vesting occurring December 31, 2007. During 2008, the officers exercised all of their 1,500,000 options to purchase 1,500,000 units of WPCI at $1 per unit. Upon the exercise of the WPCI options, the officers had a total interest of approximately 23% in WPCI. The terms of the vested restricted units and units received in connection with the exercise of options of WPCI by noncontrolling interest holders provided that the units could be redeemed, commencing December 31, 2012 and thereafter, solely in exchange for our shares and that any redemption would be subject to a third party valuation of WPCI. In connection with a reorganization of WPCI into three separate entities in 2008, the officers also owned equivalent interests in the three new entities.
In December 2009, one of those officers resigned from W. P. Carey, WPCI and all affiliated entities pursuant to a mutually agreed separation. As part of this separation, we effected the purchase of all of the interests in WPCI and certain related entities held by that officer for cash, at a negotiated fair market value of $15.4 million. The tax effect of approximately $4.8 million relating to the acquisition of this interest, which resulted in an increase in contributed capital, was recorded as an adjustment to Listed shares in the consolidated balance sheets. The remaining officer currently has a total interest of approximately 7.7% in each of WPCI and the related entities.
Stock Options
Option and warrant activity at December 31, 2010 and changes during the year ended December 31, 2010 were as follows:
                                 
                    Weighted        
                    Average        
            Weighted     Remaining        
            Average     Contractual     Aggregate  
    Shares     Exercise Price     Term (in Years)     Intrinsic Value  
Outstanding at beginning of year
    2,255,604     $ 27.55                  
Granted
                           
Exercised
    (399,507 )     22.26                  
Forfeited / Expired
    (156,396 )     30.24                  
 
                           
Outstanding at end of year
    1,699,701     $ 28.57       4.26     $ 5,700,775  
 
                       
Vested and expected to vest at end of year
    1,671,438     $ 28.57       4.25     $ 5,661,591  
 
                       
Exercisable at end of year
    1,231,863     $ 27.86       3.93     $ 4,981,162  
 
                       

 

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Option and warrant activity for 2009 and 2008 was as follows:
                                                 
    Years ended December 31,  
    2009     2008  
                    Weighted                     Weighted  
                    Average                     Average  
                    Remaining                     Remaining  
            Weighted     Contractual             Weighted     Contractual  
            Average     Term             Average     Term  
    Shares     Exercise Price     (in Years)     Shares     Exercise Price     (in Years)  
Outstanding at beginning of year
    2,543,239     $ 27.16               3,428,170     $ 25.87          
Granted
                        20,000       31.56          
Exercised
    (201,701 )     22.29               (882,931 )     22.15          
Forfeited / Expired
    (85,934 )     28.46               (22,000 )     30.27          
 
                                       
Outstanding at end of year
    2,255,604     $ 27.55       4.80       2,543,239       27.16       5.52  
 
                                   
Exercisable at end of year
    2,220,902     $ 27.50               1,242,076     $ 24.38          
 
                                       
Options granted under the 1997 Incentive Plan generally have a 10-year term and generally vest in four equal annual installments. Options granted under the 1997 Directors’ Plan have a 10-year term and vest generally over three years from the date of grant. We did not issue any option awards during 2010 and 2009. The weighted average grant date fair value of options granted during the years ended December 31, 2008 was $2.42. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was $2.8 million, $1.0 million and $1.9 million, respectively.
At December 31, 2010, approximately $7.3 million of total unrecognized compensation expense related to nonvested stock-based compensation awards was expected to be recognized over a weighted-average period of approximately 1.8 years.
We have the ability and intent to issue shares upon stock option exercises. Historically, we have issued authorized but unissued common stock to satisfy such exercises. Cash received from stock option exercises and purchases under the ESPP during the years ended December 31, 2010, 2009 and 2008 was $3.7 million, $1.5 million and $4.0 million, respectively.
Restricted and Conditional Awards
Nonvested restricted stock, RSUs and PSUs at December 31, 2010 and changes during the year ended December 31, 2010 were as follows:
                                 
    Nonvested Restricted Stock and RSU Awards     Nonvested PSU Awards  
            Weighted Average             Weighted Average  
            Grant Date             Grant Date  
    Shares     Fair Value     Shares     Fair Value  
Nonvested at January 1, 2009
    454,452     $ 30.50       90,469     $ 37.88  
Granted
    159,362       23.97       152,000       30.42  
Vested (a)
    (194,741 )     29.77              
Forfeited
    (37,195 )     23.00       (20,625 )     32.33  
Adjustment (b)
                (51,469 )     26.50  
 
                       
Nonvested at December 31, 2009
    381,878     $ 28.87       170,375     $ 32.33  
Granted
    156,682       28.34       159,250       36.16  
Vested (a)
    (175,225 )     28.58              
Forfeited
    (99,515 )     29.75       (65,725 )     36.26  
Adjustment (b)
                (19,906 )     28.49  
 
                       
Nonvested at December 31, 2010
    263,820     $ 28.42       243,994     $ 36.18  
 
                       
 
     
(a)   The total fair value of shares vested during the years ended December 31, 2010, 2009 and 2008 was $5.0 million, $7.2 million and $4.4 million, respectively.
 
(b)   Vesting and payment of the PSUs is conditional on certain company and 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. Pursuant to a review of our current and expected performance versus the performance goals, we revised our estimate of the ultimate number of certain of the PSUs to be vested. As a result, we recorded an adjustment in 2010 and 2009 to reflect the number of shares expected to be issued when the PSUs vest.

 

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At the end of each reporting period, we evaluate the ultimate number of PSUs we expect to vest based upon the extent to which we have met and expect to meet the performance goals and where appropriate revise our estimate and associated expense. Upon vesting, the RSUs and PSUs may be converted into shares of our common stock. Both the RSUs and PSUs carry dividend equivalent rights. Dividend equivalent rights on RSUs are paid in cash on a quarterly basis whereas dividend equivalent rights on PSUs accrue during the performance period and may be converted into additional shares of common stock at the conclusion of the performance period to the extent the PSUs vest. Dividend equivalent rights are accounted for as a reduction to retained earnings to the extent that the awards are expected to vest. For awards that are not expected to vest or do not ultimately vest, dividend equivalent rights are accounted for as additional compensation expense.
Fair Value Assumptions
We estimate the fair value of our options and warrants using the Black-Scholes option pricing formula, which involves the use of assumptions that are used in estimating the fair value of share-based payment awards. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based upon the trailing quarterly distribution for the four quarters preceding the award expressed as a percentage of our stock price. Expected volatilities are based on a review of the five- and ten-year historical volatility of our stock as well as the historical volatilities and implied volatilities of common stock and exchange-traded options of selected comparable companies. The expected term of awards granted is derived from an analysis of the remaining life of our awards giving consideration to their maturity dates and remaining time to vest. We use historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. We did not grant any stock option or warrant awards during 2010 and 2009. For the year ended December 31, 2008, the following assumptions and weighted average fair values were used:
         
    Year ended  
    December 31, 2008  
Risk-free interest rates
    3.3% – 3.8 %
Dividend yields
    5.4% – 6.3 %
Expected volatility
    15% – 16.4 %
Expected term in years
    6.3  
Other Compensation
Profit-Sharing Plan
We sponsor a qualified profit-sharing plan and trust covering substantially all of our full-time employees who have attained age 21, worked a minimum of 1,000 hours and completed one year of service. We are under no obligation to contribute to the plan and the amount of any contribution is determined by and at the discretion of our board of directors. Our board of directors can authorize contributions to a maximum of 15% of an eligible participant’s compensation, limited to less than $0.1 million annually per participant. For the years ended December 31, 2010, 2009 and 2008, amounts expensed for contributions to the trust were $3.3 million, $3.3 million and $2.8 million, respectively. The profit-sharing plan is a deferred compensation plan and is therefore considered to be outside the scope of current accounting guidance for stock-based compensation.
Other
We have employment contracts with certain senior executives. These contracts provide for severance payments in the event of termination under certain conditions including a change of control. During 2010, 2009 and 2008, we recognized severance costs totaling approximately $1.1 million, $1.7 million and $0.7 million, respectively, related to several former employees. Such costs are included in General and administrative expenses in the accompanying consolidated financial statements.

 

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Note 16. Income Taxes
The components of our provision for income taxes for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
                         
    2010     2009     2008  
Federal
                       
Current
  $ 17,737     $ 19,796     $ 22,266  
Deferred
    (2,409 )     (6,388 )     (6,123 )
 
                 
 
    15,328       13,408       16,143  
 
                 
State, Local and Foreign
                       
Current
    12,250       12,722       10,614  
Deferred
    (1,756 )     (3,337 )     (3,216 )
 
                 
 
    10,494       9,385       7,398  
 
                 
Total Provision
  $ 25,822     $ 22,793     $ 23,541  
 
                 
Deferred income taxes at December 31, 2010 and 2009 consist of the following (in thousands):
                 
    December 31,  
    2010     2009  
Deferred tax assets
               
Unearned and deferred compensation
  $ 14,937     $ 10,121  
Other
    82       4,899  
 
           
 
    15,019       15,020  
 
           
Deferred tax liabilities
               
Receivables from affiliates
    14,290       13,478  
Investments
    35,267       39,116  
Other
    755       247  
 
           
 
    50,312       52,841  
 
           
Net deferred tax liability
  $ 35,293     $ 37,821  
 
           
The difference between the tax provision and the tax benefit recorded at the statutory rate at December 31, 2010, 2009 and 2008 is as follows (in thousands):
                                                 
    Years ended December 31,  
    2010     2009     2008  
Pre-tax income from taxable subsidiaries
  $ 49,253             $ 41,943             $ 56,151          
Federal provision at statutory tax rate (35%)
    17,238       35.0 %     14,680       35.0 %     19,653       35.0 %
State and local taxes, net of federal benefit
    4,303       8.7 %     4,246       10.1 %     3,522       6.3 %
Amortization of intangible assets
    854       1.7 %     855       2.0 %     856       1.5 %
Other
    272       0.6 %     101       0.3 %     211       0.4 %
 
                                   
Tax provision — taxable subsidiaries
    22,667       46.0 %     19,882       47.4 %     24,242       43.2 %
 
                                         
Other state, local and foreign taxes
    3,155               2,911               (701 )        
 
                                         
Total tax provision
  $ 25,822             $ 22,793             $ 23,541          
 
                                         
Included in income taxes in the consolidated balance sheets at December 31, 2010 and 2009 are accrued income taxes totaling $6.1 million and $5.3 million, respectively, and deferred income taxes totaling $35.3 million and $37.8 million, respectively.
We have elected to be treated as a partnership for U.S. federal income tax purposes. As partnerships, we and our partnership subsidiaries are generally not directly subject to tax. We conduct our investment management services primarily through taxable subsidiaries. These operations are subject to federal, state, local and foreign taxes, as applicable. We conduct business in the U.S. and the European Union, and as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and certain foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2007. Certain of our inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Periodically, shares in the CPA® REITs that are payable to our taxable subsidiaries in consideration for services rendered are distributed from these subsidiaries to us.

 

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
                 
    2010     2009  
Balance at January 1,
  $ 1,033     $ 1,022  
Additions based on tax positions related to the current year
           
Additions for tax positions of prior years
          11  
Reductions for tax positions of prior years
    (1,033 )      
Settlements
           
 
           
Balance at December 31,
  $     $ 1,033  
 
           
During the third quarter of 2010, we reversed unrecognized tax benefits of $0.6 million (net of federal benefits), including all related interest totaling $0.1 million, as they were no longer required.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to complete and settle. The tax years 2007-2010 remain open to examination by the major taxing jurisdictions to which we are subject.
Carey REIT II owns our real estate assets and has elected to be taxed as a REIT under Sections 856 through 860 of the Code. We believe we have operated, and we intend to continue to operate, in a manner that allows Carey REIT II to continue to qualify as a REIT. Under the REIT operating structure, Carey REIT II is permitted to deduct distributions paid to our shareholders and generally will not be required to pay U.S. federal income taxes. Accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements.
Note 17. Discontinued Operations
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their leases, insolvency or lease rejection in the bankruptcy process. In these cases, we assess whether we can obtain the highest value from the property by re-leasing or selling it. In addition, in certain cases, we may try to sell a property that is occupied. When it is appropriate to do so under current accounting guidance for the disposal of long-lived assets, we classify the property as an asset held for sale and the current and prior period results of operations of the property are reclassified as discontinued operations.
During the first quarter of 2011, we sold two domestic properties for $9.2 million, net of selling costs, and recognized a net gain on these sales of $0.8 million, excluding impairment charges of $2.3 million previously recognized in 2010. The net results of operations of each of these properties have been reclassified to discontinued operations for the years ended December 31, 2010, 2009 and 2008 (Note 20).
2010 — We sold seven properties for a total of $14.6 million, net of selling costs, and recognized a net gain on these sales totaling $0.5 million, excluding impairment charges totaling $5.9 million and $6.0 million that were previously recognized in 2010 and 2009, respectively.
2009 — We sold five properties for $43.5 million, net of selling costs, and recognized a net gain on sale of $7.7 million, excluding impairment charges of $0.9 million recognized in 2009, $0.5 million recognized in 2008 and $0.6 million recognized in 2007.
2008 —In June 2008, we received $3.8 million from a former tenant in connection with the resolution of a lawsuit.
The results of operations for properties that are held for sale or have been sold are reflected in the consolidated financial statements as discontinued operations for all periods presented and are summarized as follows (in thousands):
                         
    Years ended December 31,  
    2010     2009     2008  
Revenues
  $ 3,159     $ 9,525     $ 14,327  
Expenses
    (1,278 )     (4,217 )     (4,610 )
Gains on sales of real estate, net
    460       7,701        
Impairment charges
    (8,137 )     (6,908 )     (538 )
 
                 
(Loss) income from discontinued operations
  $ (5,796 )   $ 6,101     $ 9,179  
 
                 

 

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Note 18. Segment Reporting
We evaluate our results from operations by our two major business segments — investment management and real estate ownership (Note 1). Effective January 1, 2011, we include our equity investments in the CPA® REITs in our real estate ownership segment. The equity income or loss from the CPA® REITs that is now included in our real estate ownership segment represents our proportionate share of the revenue less expenses of the net-leased properties held by the CPA® REITs. This treatment is consistent with that of our directly-owned properties. Results of operations for the years ended December 31, 2010, 2009 and 2008 have been reclassified to conform to the current presentation (Note 20). The following table presents a summary of comparative results of these business segments (in thousands):
                         
    Years ended December 31,  
    2010     2009     2008  
Investment Management
                       
Revenues (a)
  $ 191,890     $ 155,119     $ 147,258  
Operating expenses (a)
    (133,682 )     (110,160 )     (101,202 )
Other, net (b)
    7,026       7,913       5,023  
Provision for income taxes
    (23,661 )     (21,813 )     (20,803 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 41,573     $ 31,059     $ 30,276  
 
                 
Real Estate Ownership
                       
Revenues
  $ 80,521     $ 75,952     $ 86,166  
Operating expenses
    (49,593 )     (41,167 )     (40,285 )
Interest expense
    (16,234 )     (14,979 )     (18,598 )
Other, net (c)
    25,662       13,037       14,047  
Provision for income taxes
    (2,161 )     (980 )     (2,738 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 38,195     $ 31,863     $ 38,592  
 
                 
Total Company
                       
Revenues (a)
  $ 272,411     $ 231,071     $ 233,424  
Operating expenses (a)
    (183,275 )     (151,327 )     (141,487 )
Interest expense
    (16,234 )     (14,979 )     (18,598 )
Other, net (b)
    32,688       20,950       19,070  
Provision for income taxes
    (25,822 )     (22,793 )     (23,541 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 79,768     $ 62,922     $ 68,868  
 
                 
                                 
    Total Long-Lived Assets(d)     Total Assets  
    as of December 31,     as of December 31,  
    2010     2009     2010     2009  
Investment Management
  $ 3,729     $ 6,503     $ 123,921     $ 128,039  
Real Estate Owners hip
    946,976       884,460       1,048,405       965,297  
 
                       
Total Company
  $ 950,705     $ 890,963     $ 1,172,326     $ 1,093,336  
 
                       
 
     
(a)   Included in revenues and operating expenses are reimbursable costs from affiliates totaling $60.0 million, $47.5 million and $41.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(b)   Includes interest income, cash distributions from CPA®:17 — Global’s operating partnership, income (loss) attributable to noncontrolling interests and other income and (expenses). Other income and (expenses) in 2009 includes other income of $4.0 million related to a settlement of a dispute with a vendor regarding certain fees we paid in prior years for services they performed.
 
(c)   Includes interest income, income from equity investments in real estate and CPA® REITs, income (loss) attributable to noncontrolling interests and other income and (expenses).
 
(d)   Includes real estate, real estate under construction, net investment in direct financing leases, equity investments in real estate, operating real estate and intangible assets related to management contracts and leases.

 

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Geographic information for our real estate ownership segment is as follows (in thousands):
                         
2010   Domestic     Foreign (a)     Total  
Revenues
  $ 72,815     $ 7,706     $ 80,521  
Operating expenses
    (45,851 )     (3,742 )     (49,593 )
Interest expense
    (14,492 )     (1,742 )     (16,234 )
Other, net (b)
    21,719       3,943       25,662  
Provision for income taxes
    (2,131 )     (30 )     (2,161 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 32,060     $ 6,135     $ 38,195  
 
                 
Total assets
  $ 965,418     $ 82,987     $ 1,048,405  
Total long-lived assets
  $ 877,850     $ 69,126     $ 946,976  
                         
2009   Domestic     Foreign (a)     Total  
Revenues
  $ 67,979     $ 7,973     $ 75,952  
Operating expenses
    (38,748 )     (2,419 )     (41,167 )
Interest expense
    (12,928 )     (2,051 )     (14,979 )
Other, net (b)
    7,248       5,789       13,037  
Provision for income taxes
    (17 )     (963 )     (980 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 23,534     $ 8,329     $ 31,863  
 
                 
Total assets
  $ 900,432     $ 64,865     $ 965,297  
Total long-lived assets
  $ 836,549     $ 47,911     $ 884,460  
                         
2008   Domestic     Foreign (a)     Total  
Revenues
  $ 78,331     $ 7,835     $ 86,166  
Operating expenses
    (37,014 )     (3,271 )     (40,285 )
Interest expense
    (16,450 )     (2,148 )     (18,598 )
Other, net (b)
    10,684       3,363       14,047  
Provision for income taxes
    (2,035 )     (703 )     (2,738 )
 
                 
Income from continuing operations attributable to W. P. Carey members
  $ 33,516     $ 5,076     $ 38,592  
 
                 
Total assets
  $ 908,371     $ 57,169     $ 965,540  
Total long-lived assets
  $ 886,975     $ 48,541     $ 935,516  
 
     
(a)   At December 31, 2010, our international investments were comprised of investments in France, Germany, Poland and Spain.
 
(b)   Includes interest income, income from equity investments in real estate, income (loss) attributable to noncontrolling interests and other income and (expenses).

 

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Note 19. Selected Quarterly Financial Data (unaudited)
(Dollars in thousands, except per share amounts)
                                 
    Three months ended  
    March 31, 2010     June 30, 2010     September 30, 2010     December 31, 2010  
Revenues (a)
  $ 62,272     $ 69,650     $ 58,559     $ 81,930  
Expenses (a)
    42,767       42,512       42,396       55,600  
Net income
    14,302       23,721       16,371       20,557  
Add: Net loss attributable to noncontrolling interests
    286       128       81       (181 )
Less: Net income attributable to redeemable noncontrolling interests
    (175 )     (417 )     (106 )     (595 )
 
                       
Net income attributable to W. P. Carey members
    14,413       23,432       16,346       19,781  
 
                       
 
                               
Earnings per share attributable to W. P. Carey members —
                               
Basic
    0.36       0.59       0.41       0.50  
Diluted
    0.36       0.59       0.41       0.50  
Distributions declared per share
    0.504       0.506       0.508       0.510  
                                 
    Three months ended  
    March 31, 2009     June 30, 2009     September 30, 2009     December 31, 2009  
Revenues (a)
  $ 59,748     $ 52,487     $ 58,865     $ 59,971  
Expenses (a)
    37,562       36,210       37,579       39,976  
Net income
    17,774       14,877       14,184       23,733  
Add: Net loss attributable to noncontrolling interests
    170       203       186       154  
Less: Net income attributable to redeemable noncontrolling interests
    (235 )     (103 )     (1,019 )     (901 )
 
                       
Net income attributable to W. P. Carey members
    17,709       14,977       13,351       22,986  
 
                       
Earnings per share attributable to W. P. Carey members —
                               
Basic
    0.45       0.37       0.33       0.59  
Diluted
    0.44       0.37       0.34       0.59  
Distributions declared per share
    0.496       0.498       0.500       0.502 (b) 
 
     
(a)   Certain amounts from previous quarters have been reclassified to discontinued operations (Note 17).
 
(b)   Excludes a special distribution of $0.30 per share paid in January 2010 to shareholders of record at December 31, 2009.

 

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Note 20. Subsequent Events
Loan to Affiliate
In January 2011, we made a $90.0 million loan to CPA®:17 — Global to fund acquisitions that were closed within the first two weeks of the year. The principal and accrued interest thereon at 1.15% per annum are due to us no later than March 11, 2011. We funded the loan with proceeds from our line of credit.
Retrospective Adjustment for Discontinued Operations and Segment Reporting
During the first quarter of 2011, we sold two domestic properties for $9.2 million, net of selling costs, and recognized a net gain on these sales of $0.8 million, excluding impairment charges of $2.3 million previously recognized in 2010. In accordance with current authoritative guidance for accounting for disposal of long-lived assets, the accompanying consolidated statements of income have been retrospectively adjusted and the net results of operations of each of these properties have been reclassified to Discontinued Operations for the years ended December 31, 2010, 2009 and 2008. The net effect of the reclassification represents an increase of $1.2 million, or 1%, in our previously reported income from continuing operations for the year ended December 31, 2010, and decreases of $0.9 million, or 1%, and $0.8 million, or 1%, in our previously reported income from continuing operations for the years ended December 31, 2009 and 2008, respectively. There is no effect on our previously reported net income, financial condition or cash flows.
Additionally, effective January 1, 2011, we reclassified our equity investments in the CPA® REITs from our investment management segment to our real estate ownership segment. The equity income or loss from the CPA® REITs that is now included in our real estate ownership segment represents our proportionate share of the revenue less expenses of the net-leased properties held by the CPA® REITs. This treatment is consistent with that of our directly-owned properties. Results of operations for the years ended December 31, 2010, 2009 and 2008 have been reclassified to conform to the current presentation. The net effect of the reclassification represents a decrease in net income of $9.1 million and $4.6 million for the years ended December 31, 2010 and 2008, respectively, and an increase in net income of $1.7 million for the year ended December 31, 2009 in the investment management segment, with the corresponding increase and decrease in the real estate ownership segment. In addition, each of equity investments in real estate, total long-lived assets and total assets in the investment management segment decreased by $245.1 million and $216.0 million at December 31, 2010 and 2009, respectively, with the corresponding increase in the real estate ownership segment. There is no effect on our previously reported consolidated net income, financial condition or cash flows.
Merger of Affiliates
On May 2, 2011, CPA®:14 merged with and into a subsidiary of CPA®:16 — Global based on a definitive merger agreement executed on December 13, 2010 (the “Merger”).
In connection with the Merger, on May 2, 2011, we purchased three properties from CPA®:14, in which we already had a joint venture interest, for an aggregate purchase price of approximately $32.1 million, plus the assumption of approximately $64.7 million of indebtedness.
Upon consummation of the Merger, we expect to earn fees of $31.2 million in connection with the termination of the advisory agreements with CPA®:14 and $21.3 million of subordinated disposition revenues. We elected to receive our termination fee in shares of CPA®:14, which we exchanged into approximately 3.2 million shares of CPA®:16 — Global. In addition, we will receive approximately $11.1 million as a result of the $1.00 per share special cash distribution to be paid by CPA®:14 to its shareholders. Upon closing of the Merger, we received approximately 13.2 million shares of common stock of CPA®:16 — Global in respect of our shares of CPA®:14.
Carey Asset Management (“CAM”), our subsidiary that acts as the advisor to the REITs, has waived any acquisition fees payable by CPA®:16 — Global under its advisory agreement with CAM in respect of the properties acquired in the Merger and also waived any disposition fees that may subsequently be payable by CPA®:16 — Global upon a sale of such assets. Additionally, on May 2, 2011, we entered into an amended and restated advisory agreement with CPA®:16 — Global which changes our fee arrangement with CPA®:16 — Global under its new UPREIT structure. Changes include, among others, a reduction in our asset management fee from 1% to 0.5% of the property value of the assets under management and the distribution of 10% of the available cash of CPA®:16 — Global’s operating partnership.

 

45


 

In the Merger, CPA®:14 shareholders were entitled to receive $11.50 per share, which is equal to the NAV of CPA®:14 as of September 30, 2010. The merger consideration of approximately $534.4 million was paid by CPA®:16 — Global, including payment of approximately $486.3 million to liquidating shareholders and approximately $48.1 million to shareholders merging into CPA®:16 — Global. In connection with the Merger, we agreed to purchase a sufficient number of shares of CPA®:16 — Global common stock from CPA®:16 — Global to enable it to pay the merger consideration if the cash on hand and available to CPA®:14 and CPA®:16 — Global, including the proceeds of the CPA®:14 asset sales and a new $320.0 million senior credit facility of CPA®:16 — Global, were not sufficient. Accordingly, we purchased approximately 13.8 million shares of CPA®:16 — Global on May 2, 2011 for approximately $121.0 million, based on an NAV of $8.8 per share, which we funded with cash on hand and available credit facilities, including $121.4 million drawn on our existing line of credit. Subsequent to the Merger we own approximately 34.5 million shares, or 17.3%, of CPA®:16 — Global.
Financing
On May 2, 2011, we obtained a $30.0 million secured revolving line of credit from Bank of America. The secured line of credit provides for an annual interest rate (as defined in the credit facility agreement) of either: (i) the Adjusted LIBO Rate plus 2.50%, or (ii) the Alternative Base Rate plus 3.50%. In addition, we paid a commitment fee of 0.25%, or $75,000, and are required to pay an annual fee on the unused portion of the line of credit of 50 basis points. This new line of credit is collateralized by five properties with a carrying value of approximately $51.4 million and is coterminous with the unsecured line of credit, expiring in June 2012. Through the date of this Report, we have borrowed $10.0 million on this line and used a portion of it to fund a short-term $4.0 million loan to Carey Watermark.

 

46


 

SCHEDULE III — REAL ESTATE and ACCUMULATED DEPRECIATION
at December 31, 2010
(in thousands)
                                                                                         
                                                                                    Life on which  
                                                                                    Depreciation in  
                            Costs Capitalized     Increase     Gross Amount at which Carried                     Latest Statement  
            Initial Cost to Company     Subsequent to     (Decrease) in Net     at Close of Period(c)     Accumulated     Date     of Income is  
Description   Encumbrances     Land     Buildings     Acquisition(a)     Investments(b)     Land     Buildings     Total     Depreciation(c)     Acquired     Computed  
       
Real Estate Under Operating Leases:
                                                                                       
Office facilities in Broomfield, CO
  $     $ 248     $ 2,538     $ 4,844     $ (1,784 )   $ 2,928     $ 2,918     $ 5,846     $ 1,070     Jan. 1998   40 yrs.
Distribution facilities and warehouses in Erlanger, KY
    9,593       1,526       21,427       2,952       141       1,526       24,520       26,046       7,903     Jan. 1998   40 yrs.
Retail stores in Montgomery and Brewton, AL
          855       6,762       103       (6,121 )     407       1,192       1,599       718     Jan. 1998   40 yrs.
Land in Commerce, CA
          4,573                         4,573             4,573           Jan. 1998     N/A  
Office facility in Beaumont, TX
          164       2,344       967             164       3,311       3,475       1,201     Jan. 1998   40 yrs.
Office and industrial facilities in Bridgeton, MO
          270       5,100       4,166             270       9,266       9,536       2,131     Jan. 1998   40 yrs.
Partially vacant industrial/office and distribution facilities in Salisbury, NC
          247       5,035       2,702             247       7,737       7,984       2,871     Jan. 1998   40 yrs.
Office facility in Raleigh, NC
          1,638       2,844       157       (2,554 )     828       1,257       2,085       312     Jan. 1998   20 yrs.
Office facility in King of Prussia, PA
          1,219       6,283       1,295             1,219       7,578       8,797       2,264     Jan. 1998   40 yrs.
Warehouse and distribution facility in Fort Lauderdale, FL
          1,893       11,077       703       (8,449 )     1,173       4,051       5,224       1,221     Jan. 1998   40 yrs.
Industrial facilities in Pinconning, MS
          32       1,692                   32       1,692       1,724       550     Jan. 1998   40 yrs.
Industrial facilities in San Fernando, CA
    8,256       2,052       5,322             152       2,052       5,474       7,526       1,769     Jan. 1998   40 yrs.
Land leased in several cities in the following states: Alabama, Florida, Georgia, Illinois, Louisiana, Missouri, New Mexico, North Carolina, South Carolina and Texas
    728       9,382                   (172 )     9,210             9,210           Jan. 1998     N/A  
Industrial facility in Milton, VT
          220       1,579                   220       1,579       1,799       513     Jan. 1998   40 yrs.
Land in Glendora, CA
          1,135                   17       1,152             1,152           Jan. 1998     N/A  
Office facilities in Bloomingdale, IL
          1,075       11,453       997             1,090       12,435       13,525       3,877     Jan. 1998   40 yrs.
Industrial facility in Doraville, GA
          3,288       9,864       246       275       3,288       10,385       13,673       3,287     Jan. 1998   40 yrs.
Office facilities in Collierville, TN
          335       1,839                   335       1,839       2,174       598     Jan. 1998   40 yrs.
Land in Irving and Houston, TX
    8,992       9,795                         9,795             9,795           Jan. 1998     N/A  
Industrial facility in Chandler, AZ
    13,259       5,035       18,957       7,435       541       5,035       26,933       31,968       7,392     Jan. 1998   40 yrs.
Warehouse and distribution facilities in Houston, TX
          167       885       60             167       945       1,112       295     Jan. 1998   40 yrs.
Industrial facility in Prophetstown, IL
          70       1,477             (909 )     70       568       638       121     Jan. 1998   40 yrs.
Office facilities in Bridgeton, MO
          842       4,762       1,627       71       842       6,460       7,302       992     Jan. 1998   40 yrs.
Industrial facility in Industry, CA
          3,789       13,164       1,380       318       3,789       14,862       18,651       3,708     Jan. 1998   40 yrs.
Warehouse and distribution facilities in Memphis, TN
          1,051       14,037       510       (2,571 )     1,051       11,976       13,027       8,695     Jan. 1998   7 yrs.
Retail stores in Drayton Plains, MI and Citrus Heights, CA
          1,039       4,788       165       193       1,039       5,146       6,185       791     Jan. 1998   35 yrs.

 

47


 

                                                                                         
                                                                                    Life on which  
                                                                                    Depreciation in  
                            Costs Capitalized     Increase     Gross Amount at which Carried                     Latest Statement  
            Initial Cost to Company     Subsequent to     (Decrease) in Net     at Close of Period(c)     Accumulated     Date     of Income is  
Description   Encumbrances     Land     Buildings     Acquisition(a)     Investments(b)     Land     Buildings     Total     Depreciation(c)     Acquired     Computed  
Real Estate Under Operating Leases (Continued):
                                                                                       
Warehouse and distribution facilities in New Orleans, LA; Memphis, TN and San Antonio, TX
          328       1,463                   328       1,463       1,791       187     Jan. 1998   15 yrs.
Retail store in Bellevue, WA
    8,784       4,125       11,812       393             4,494       11,836       16,330       3,760     Apr. 1998   40 yrs.
Office facility in Houston, TX
    5,000       3,260       22,574       801       (3,765 )     2,785       20,085       22,870       6,469     Jun. 1998   40 yrs.
Office facility in Rio Rancho, NM
    7,853       1,190       9,353       1,316             1,467       10,392       11,859       3,073     Jul. 1998   40 yrs.
Vacant office facility in Moorestown, NJ
    5,285       351       5,981       919       42       351       6,942       7,293       2,412     Feb. 1999   40 yrs.
Office facility in Norcross, GA
    29,138       5,200       25,585       11,822             5,200       37,407       42,607       10,456     Jun. 1999   40 yrs.
Office facility in Tours, France
    6,401       1,034       9,737       226       4,210       1,455       13,752       15,207       3,465     Sep. 2000   40 yrs.
Office facility in Illkirch, France
    15,650             18,520             9,189             27,709       27,709       7,464     Dec. 2001   40 yrs.
Industrial, warehouse and distribution facilities in Lenexa, KS; Winston-Salem, NC and Dallas, TX
    8,159       1,860       12,539             5       1,860       12,544       14,404       2,666     Sep. 2002   40 yrs.
Office buildings in Venice, CA
          2,032       10,152             1       2,032       10,153       12,185       1,597     Sep. 2004   40 yrs.
Retail store in West Mifflin, PA and warehouse and distribution facility in Greenfield, IN
          2,807       10,335       210       (7,161 )     2,127       4,064       6,191       773     Sep. 2004   40 yrs.
Office facility in San Diego, CA
          4,647       19,712       8       40       4,647       19,760       24,407       3,107     Sep. 2004   40 yrs.
Warehouse and distribution facilities in Birmingham, AL
    4,681       1,256       7,704                   1,256       7,704       8,960       1,212     Sep. 2004   40 yrs.
Industrial facility in Scottsdale, AZ
    1,353       586       46                   586       46       632       7     Sep. 2004   40 yrs.
Retail stores in Hope, Little Rock and Hot Springs, AZ
          850       2,939       2       (2,160 )     85       1,546       1,631       244     Sep. 2004   40 yrs.
Industrial facilities in Apopka, FL
          362       10,855       474             362       11,329       11,691       1,715     Sep. 2004   40 yrs.
Retail facility in Jacksonville, FL
          975       6,980       20             975       7,000       7,975       1,099     Sep. 2004   40 yrs.
Retail facilities in Charlotte, NC
          1,639       10,608       172       24       1,639       10,804       12,443       1,843     Sep. 2004   40 yrs.
Land in San Leandro, CA
          1,532                         1,532             1,532           Dec. 2006     N/A  
Educational facility in Mendota Heights, MN
    6,599       2,484       9,078             (5,623 )     2,484       3,455       5,939       1,199     Dec. 2006   30.9 yrs.
Industrial facility in Sunnyvale, CA
          1,663       3,571                   1,663       3,571       5,234       540     Dec. 2006   27 yrs.
Fitness and recreational sports center in Austin, TX
    2,766       1,725       5,168                   1,725       5,168       6,893       740     Dec. 2006   28.5 yrs.
Retail store in Wroclaw, Poland
    8,522       3,600       10,306             (1,927 )     3,313       8,666       11,979       662     Dec. 2007   40 yrs.
Office facility in Fort Worth, TX
    34,804       4,600       37,580                   4,600       37,580       42,180       861     Feb. 2010   40 yrs.
Warehouse and distribution facility in Mallorca, Spain
          11,109       12,636             2,279       12,192       13,832       26,024       202     Jun. 2010   40 yrs.
 
                                                                     
 
  $ 185,823     $ 111,155     $ 428,463     $ 46,672     $ (25,698 )   $ 111,660     $ 448,932     $ 560,592     $ 108,032                  
 
                                                                     
                                                     
                                            Gross Amount at      
                            Costs Capitalized     Increase     which Carried      
            Initial Cost to Company     Subsequent to     (Decrease) in Net     at Close of     Date
Description   Encumbrances     Land     Buildings     Acquisition(a)     Investments(b)     Period Total     Acquired
Direct Financing Method:
                                                   
Warehouse and distribution facilities in Anchorage, Alaska and Commerce, California
  $     $ 332     $ 12,281     $     $ (375 )   $ 12,238     Jan. 1998
Office facility in Toledo, Ohio
    2,381       224       2,684             (338 )     2,570     Jan. 1998
Industrial facility in Goshen, Indiana
          239       3,339             (2,399 )     1,179     Jan. 1998
Retail stores in several cities in the following states: Alabama, Florida, Georgia, Illinois, Louisiana, Missouri, New Mexico, North Carolina, South Carolina and Texas
    1,083             16,416             (867 )     15,549     Jan. 1998
Office and industrial facilities in Glendora, California and Romulus, Michigan
          454       13,251       9       (2,684 )     11,030     Jan. 1998
Industrial facilities in Thurmont, Maryland and Farmington, New York
          729       6,093             (121 )     6,701     Jan. 1998
Warehouse and distribution facilities in New Orleans, Louisiana; Memphis, Tennessee and San Antonio, Texas
          1,882       5,846       38       (3,584 )     4,182     Jan. 1998
Industrial facilities in Irving and Houston, Texas
    21,206             27,599             (4,498 )     23,101     Jan. 1998
 
                                       
 
  $ 24,670     $ 3,860     $ 87,509     $ 47     $ (14,866 )   $ 76,550      
 
                                       

 

48


 

                                                                                                         
                                                                                                    Life on which  
                                                                                                    Depreciation  
                                    Costs     Increase     Gross Amount at which Carried                     in Latest  
            Initial Cost to Company     Capitalized     (Decrease)     at Close of Period(c)                     Statement of  
                            Personal     Subsequent to     in Net                     Personal             Accumulated     Date     Income is  
Description   Encumbrances     Land     Buildings     Property     Acquisition(a)     Investments(b)     Land     Buildings     Property     Total     Depreciation(c)     Acquired     Computed  
Operating Real Estate:
                                                                                                       
Hotel located in Livonia, Michigan
  $     $ 2,765     $ 11,087     $ 3,277     $ 19,291     $ (9,971 )   $ 2,765     $ 14,755     $ 8,929     $ 26,449     $ 9,242     Jan. 1998   7-40 yrs.
Self-storage facilities in Taunton, North Andover, North Billerica and Brockton, Massachusetts
    8,406       4,300       12,274             214       (478 )     4,300       12,010             16,310       1,359     Dec. 2006   25-40 yrs.
Self-storage facility in Newington, Connecticut
    2,153       520       2,973             217       (121 )     520       3,069             3,589       309     Dec. 2006   40 yrs.
Self-storage facility in Killeen, Texas
    3,350       1,230       3,821             337       (179 )     1,230       3,979             5,209       402     Dec. 2006   30 yrs.
Self-storage facility in Roehnert Park, California
    3,136       1,761       4,989             39             1,761       5,028             6,789       493     Jan. 2007   40 yrs.
Self-storage facility in Fort Worth, Texas
    1,565       1,030       4,176             33             1,030       4,209             5,239       415     Jan. 2007   40 yrs.
Self-storage facility in Augusta, Georgia
    1,947       970       2,442             48             970       2,490             3,460       241     Feb. 2007   39 yrs.
Self-storage facility in Garland, Texas
    1,490       880       3,104             58             880       3,162             4,042       301     Feb. 2007   40 yrs.
Self-storage facility in Lawrenceville, Georgia
    2,403       1,410       4,477             69             1,410       4,546             5,956       468     Mar. 2007   37 yrs.
Self-storage facility in Fairfield, Ohio
    1,617       540       2,640             19             540       2,659             3,199       331     Apr. 2007   30 yrs.
Self-storage facility in Tallahassee, Florida
    3,199       850       5,736             7             850       5,743             6,593       522     Apr. 2007   40 yrs.
Self-storage facility in Lincolnshire, Illinois
    2,029       1,477       1,519             67             1,477       1,586             3,063       36     Jul. 2010   18 yrs.
Self-storage facility in Chicago, Illinois
    1,096       823       912             580             823       1,492             2,315       32     Jul. 2010   15 yrs.
Self-storage facility in Chicago, Illinois
    1,178       700       733             482             700       1,215             1,915       22     Jul. 2010   15 yrs.
Self-storage facility in Bedford Park, Illinois
    1,111       809       1,312             169             809       1,481             2,290       29     Jul. 2010   20 yrs.
Self-storage facility in Bentonville, Arkansas
    2,090       1,050       1,323                         1,050       1,323             2,373       18     Sep. 2010   24 yrs.
Self-storage facility Tallahassee, Florida
    3,947       570       3,447                         570       3,447             4,017       29     Sep. 2010   30 yrs.
Self-storage facility in Pensacola, Florida
    1,872       560       2,082                         560       2,082             2,642       17     Sep. 2010   30 yrs.
Self-storage facility in Chicago, Illinois
    2,150       1,785       2,616                         1,785       2,616             4,401       14     Oct. 2010   32 yrs.
 
                                                                                 
 
  $ 44,739     $ 24,030     $ 71,663     $ 3,277     $ 21,630     $ (10,749 )   $ 24,030     $ 76,892     $ 8,929     $ 109,851     $ 14,280                  
 
                                                                                 

 

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NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
     
(a)   Consists of the cost of improvements and acquisition costs subsequent to acquisition, including legal fees, appraisal fees, title costs, other related professional fees and purchases of furniture, fixtures, equipment and improvements at the hotel properties.
 
(b)   The increase (decrease) in net investment is primarily due to (i) the amortization of unearned income from net investment in direct financing leases, which produces a periodic rate of return that at times may be greater or less than lease payments received, (ii) sales of properties, (iii) impairment charges, (iv) changes in foreign currency exchange rates and (v) adjustments in connection with purchasing certain noncontrolling interests.
 
(c)   Reconciliation of real estate and accumulated depreciation (see below).
                         
    Reconciliation of Real Estate Subject to  
    Operating Leases  
    December 31,  
    2010     2009     2008  
Balance at beginning of year
  $ 525,607     $ 603,044     $ 602,109  
Additions
    67,787       4,754       4,972  
Dispositions
    (18,896 )     (46,951 )      
Foreign currency translation adjustment
    (2,142 )     966       (2,608 )
Reclassification from (to) equity investment, direct financing lease, intangible assets or assets held for sale
    1,790       (28,977 )     (891 )
Impairment charge
    (13,554 )     (7,229 )     (538 )
 
                 
Balance at end of year
  $ 560,592     $ 525,607     $ 603,044  
 
                 
                         
    Reconciliation of  
    Accumulated Depreciation  
    December 31,  
    2010     2009     2008  
Balance at beginning of year
  $ 100,247     $ 103,249     $ 88,704  
Depreciation expense
    13,437       12,841       15,007  
Depreciation expense from discontinued operations
    578       1,298        
Foreign currency translation adjustment
    (839 )     285       (462 )
Reclassification from (to) equity investment, direct financing lease, intangible assets or assets held for sale
    187       (6,451 )      
Dispositions
    (5,578 )     (10,975 )      
 
                 
Balance at end of year
  $ 108,032     $ 100,247     $ 103,249  
 
                 
                         
    Reconciliation of Operating Real Estate  
    December 31,  
    2010     2009     2008  
Balance at beginning of year
  $ 85,927     $ 84,547     $ 81,358  
Additions/Capital expenditures
    23,924       1,380       3,189  
 
                 
Balance at end of year
  $ 109,851     $ 85,927     $ 84,547  
 
                 
                         
    Reconciliation of Accumulated  
    Depreciation for Operating Real Estate  
    December 31,  
    2010     2009     2008  
Balance at beginning of year
  $ 12,039     $ 10,013     $ 8,169  
Depreciation expense
    2,241       2,026       1,844  
 
                 
Balance at end of year
  $ 14,280     $ 12,039     $ 10,013  
 
                 
At December 31, 2010, the aggregate cost of real estate that we and our consolidated subsidiaries own for federal income tax purposes is approximately $827.1 million.

 

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