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EX-32.0 - EXHIBIT 32.0 - W. P. Carey Inc.wpc2015q210-qexh32.htm
EX-10.1 - EXHIBIT 10.1 - W. P. Carey Inc.wpc2015q210-qexh101.htm
EX-31.1 - EXHIBIT 31.1 - W. P. Carey Inc.wpc2015q210-qexh311.htm
EX-31.2 - EXHIBIT 31.2 - W. P. Carey Inc.wpc2015q210-qexh312.htm
EX-10.5 - EXHIBIT 10.5 - W. P. Carey Inc.wpc2015q210-qexh105.htm
EX-10.2 - EXHIBIT 10.2 - W. P. Carey Inc.wpc2015q210-qexh102.htm


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015
or 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to __________
 
Commission File Number: 001-13779

W. P. CAREY INC.
(Exact name of registrant as specified in its charter) 
Maryland
45-4549771
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
50 Rockefeller Plaza
 
New York, New York
10020
(Address of principal executive offices)
(Zip Code)
 
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
Registrant has 104,398,173 shares of common stock, $0.001 par value, outstanding at July 31, 2015.
 




INDEX
 
 
 
Page No.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements include, but are not limited to, statements regarding capital markets, tenant credit quality, general economic overview, our expected range of Adjusted funds from operations, or AFFO, our corporate strategy, our capital structure, our portfolio lease terms, our international exposure and acquisition volume, our expectations about tenant bankruptcies and interest coverage, statements regarding estimated or future economic performance and results, including our underlying assumptions, occupancy rate, credit ratings, and possible new acquisitions by us and our investment management programs, the Managed REITs discussed herein, including their earnings, statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust, or REIT, the amount and timing of any future dividends, our existing or future leverage and debt service obligations, our ability to sell shares under our “at the market” program and the use of any such proceeds from that program, our future prospects for growth, our projected assets under management, our future capital expenditure levels, our historical and anticipated funds from operations, our future financing transactions, our estimates of growth, and our plans to fund our future liquidity needs. These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on our business, financial condition, liquidity, results of operations, AFFO, and prospects. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC on March 2, 2015, as amended by a Form 10-K/A filed with the SEC on March 17, 2015, or the 2014 Annual Report, and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 as filed with the SEC on May 18, 2015. Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, potential investors are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).

 
W. P. Carey 6/30/2015 10-Q 1
                    



PART I
Item 1. Financial Statements.

W. P. CAREY INC. 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate, at cost (inclusive of $183,810 and $184,417, respectively, attributable to variable interest entities, or VIEs)
$
5,296,054

 
$
5,006,682

Operating real estate, at cost (inclusive of $38,714 and $38,714, respectively, attributable to VIEs)
85,237

 
84,885

Accumulated depreciation (inclusive of $23,552 and $19,982, respectively, attributable to VIEs)
(324,136
)
 
(258,493
)
Net investments in properties
5,057,155

 
4,833,074

Net investments in direct financing leases (inclusive of $59,829 and $61,609, respectively, attributable to VIEs)
783,832

 
816,226

Assets held for sale

 
7,255

Net investments in real estate
5,840,987

 
5,656,555

Cash and cash equivalents (inclusive of $1,749 and $2,652, respectively, attributable to VIEs)
233,629

 
198,683

Equity investments in the Managed Programs and real estate
263,418

 
249,403

Due from affiliates
176,796

 
34,477

Goodwill
687,084

 
692,415

In-place lease and tenant relationship intangible assets, net (inclusive of $19,513 and $21,267, respectively, attributable to VIEs)
948,547

 
993,819

Above-market rent intangible assets, net (inclusive of $12,784 and $13,767, respectively, attributable to VIEs)
498,746

 
522,797

Other assets, net (inclusive of $18,775 and $18,603, respectively, attributable to VIEs)
318,397

 
300,330

Total assets
$
8,967,604

 
$
8,648,479

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt, net (inclusive of $122,712 and $125,226, respectively, attributable to VIEs)
$
2,443,212

 
$
2,532,683

Senior Unsecured Credit Facility - Revolver
350,234

 
807,518

Senior Unsecured Credit Facility - Term Loan
250,000

 
250,000

Senior Unsecured Notes, net
1,501,061

 
498,345

Below-market rent and other intangible liabilities, net (inclusive of $8,830 and $9,305, respectively, attributable to VIEs)
171,544

 
175,070

Accounts payable, accrued expenses and other liabilities (inclusive of $4,012 and $5,573, respectively, attributable to VIEs)
312,521

 
293,846

Deferred income taxes (inclusive of $535 and $587, respectively, attributable to VIEs)
89,036

 
94,133

Distributions payable
101,517

 
100,078

Total liabilities
5,219,125

 
4,751,673

Redeemable noncontrolling interest
13,374

 
6,071

Commitments and contingencies (Note 13)


 


Equity:
 
 
 
W. P. Carey stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued

 

Common stock, $0.001 par value, 450,000,000 shares authorized; 105,421,626 and 105,085,069 shares issued, respectively; and 104,377,210 and 104,040,653 shares outstanding, respectively
105

 
105

Additional paid-in capital
4,298,574

 
4,322,273

Distributions in excess of accumulated earnings
(575,404
)
 
(465,606
)
Deferred compensation obligation
57,395

 
30,624

Accumulated other comprehensive loss
(120,777
)
 
(75,559
)
Less: treasury stock at cost, 1,044,416 shares
(60,948
)
 
(60,948
)
Total W. P. Carey stockholders’ equity
3,598,945

 
3,750,889

Noncontrolling interests
136,160

 
139,846

Total equity
3,735,105

 
3,890,735

Total liabilities and equity
$
8,967,604

 
$
8,648,479


 See Notes to Consolidated Financial Statements.

 
W. P. Carey 6/30/2015 10-Q 2
                    



W. P. CAREY INC. 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Real estate revenues:
 
 
 
 
 
 
 
Lease revenues
$
162,574

 
$
148,253

 
$
322,739

 
$
271,320

Operating property revenues
8,426

 
8,251

 
15,538

 
13,244

Reimbursable tenant costs
6,130

 
5,749

 
12,069

 
11,763

Lease termination income and other
3,122

 
14,988

 
6,331

 
16,175

 
180,252

 
177,241

 
356,677

 
312,502

Revenues from the Managed Programs:
 
 
 
 
 
 
 
Structuring revenue
37,808

 
17,254

 
59,528

 
35,005

Asset management revenue
12,073

 
9,045

 
23,232

 
18,822

Reimbursable costs
7,639

 
41,925

 
17,246

 
81,657

Dealer manager fees
307

 
7,949

 
1,581

 
14,626

Incentive, termination and subordinated disposition revenue

 

 
203

 

 
57,827

 
76,173

 
101,790

 
150,110

 
238,079

 
253,414

 
458,467

 
462,612

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
65,166

 
63,445

 
130,566

 
116,118

General and administrative
26,376

 
19,134

 
56,144

 
41,804

Reimbursable tenant and affiliate costs
13,769

 
47,674

 
29,315

 
93,420

Property expenses, excluding reimbursable tenant costs
11,020

 
11,211

 
20,384

 
19,630

Stock-based compensation expense
5,089

 
7,957

 
12,098

 
15,000

Subadvisor fees
4,147

 
2,451

 
6,808

 
2,469

Dealer manager fees and expenses
2,327

 
6,285

 
4,699

 
11,710

Merger and property acquisition expenses
1,897

 
1,137

 
7,573

 
30,751

Impairment charges
591

 
2,066

 
3,274

 
2,066

 
130,382

 
161,360

 
270,861

 
332,968

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(47,693
)
 
(47,733
)
 
(95,642
)
 
(86,808
)
Equity in earnings of equity method investments in the Managed Programs and real estate
14,272

 
9,452

 
25,995

 
23,714

Other income and (expenses)
7,641

 
(1,378
)
 
3,335

 
(7,019
)
Gain on change in control of interests

 

 

 
105,947

 
(25,780
)
 
(39,659
)
 
(66,312
)
 
35,834

Income from continuing operations before income taxes and gain (loss) on sale of real estate
81,917

 
52,395

 
121,294

 
165,478

Provision for income taxes
(15,010
)
 
(8,021
)
 
(16,990
)
 
(10,274
)
Income from continuing operations before gain (loss) on sale of real estate
66,907

 
44,374

 
104,304

 
155,204

Income from discontinued operations, net of tax

 
26,421

 

 
32,828

Gain (loss) on sale of real estate, net of tax
16

 
(3,823
)
 
1,201

 
(3,743
)
Net Income
66,923

 
66,972

 
105,505

 
184,289

Net income attributable to noncontrolling interests
(3,575
)
 
(2,344
)
 
(6,041
)
 
(3,921
)
Net loss (income) attributable to redeemable noncontrolling interest

 
111

 

 
(151
)
Net Income Attributable to W. P. Carey
$
63,348

 
$
64,739

 
$
99,464

 
$
180,217

Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations attributable to W. P. Carey
$
0.60

 
$
0.38

 
$
0.94

 
$
1.55

Income from discontinued operations attributable to W. P. Carey

 
0.26

 

 
0.34

Net Income Attributable to W. P. Carey
$
0.60

 
$
0.64

 
$
0.94

 
$
1.89

Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations attributable to W. P. Carey
$
0.59

 
$
0.38

 
$
0.93

 
$
1.53

Income from discontinued operations attributable to W. P. Carey

 
0.26

 

 
0.34

Net Income Attributable to W. P. Carey
$
0.59

 
$
0.64

 
$
0.93

 
$
1.87

Weighted-Average Shares Outstanding
 
 
 
 
 
 
 
Basic
105,764,032

 
100,236,362

 
105,532,976

 
94,855,067

Diluted
106,281,983

 
100,995,225

 
106,355,402

 
95,857,916

Amounts Attributable to W. P. Carey
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
63,348

 
$
38,275

 
$
99,464

 
$
147,211

Income from discontinued operations, net of tax

 
26,464

 

 
33,006

Net Income
$
63,348

 
$
64,739

 
$
99,464

 
$
180,217

Distributions Declared Per Share
$
0.9540

 
$
0.9000

 
$
1.9065

 
$
1.7950

 

See Notes to Consolidated Financial Statements.

 
W. P. Carey 6/30/2015 10-Q 3
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net Income
$
66,923

 
$
66,972

 
$
105,505

 
$
184,289

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
48,090

 
(1,590
)
 
(65,989
)
 
2,956

Realized and unrealized (loss) gain on derivative instruments
(9,619
)
 
(1,767
)
 
17,199

 
(4,564
)
Change in unrealized (loss) gain on marketable securities

 
(5
)
 
14

 
12

 
38,471

 
(3,362
)
 
(48,776
)
 
(1,596
)
Comprehensive Income
105,394

 
63,610

 
56,729

 
182,693

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(3,575
)
 
(2,344
)
 
(6,041
)
 
(3,921
)
Foreign currency translation adjustments
(1,585
)
 
113

 
3,558

 
448

Comprehensive income attributable to noncontrolling interests
(5,160
)
 
(2,231
)
 
(2,483
)
 
(3,473
)
Amounts Attributable to Redeemable Noncontrolling Interest
 
 
 
 
 
 
 
Net loss (income)

 
111

 

 
(151
)
Foreign currency translation adjustments

 
21

 

 
27

Comprehensive loss (income) attributable to redeemable noncontrolling interest

 
132

 

 
(124
)
Comprehensive Income Attributable to W. P. Carey
$
100,234

 
$
61,511

 
$
54,246

 
$
179,096

 
See Notes to Consolidated Financial Statements.

 
W. P. Carey 6/30/2015 10-Q 4
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 2015
(in thousands, except share and per share amounts)

 
W. P. Carey Stockholders
 
 
 
 
 
 
 
 
 
 
 
Distributions
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
in Excess of
 
Deferred
 
Other
 
 
 
Total
 
 
 
 
 
$0.001 Par Value
 
Paid-in
 
Accumulated
 
Compensation
 
Comprehensive
 
Treasury
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Income (Loss)
 
Stock
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2015
104,040,653

 
$
105

 
$
4,322,273

 
$
(465,606
)
 
$
30,624

 
$
(75,559
)
 
$
(60,948
)
 
$
3,750,889

 
$
139,846

 
$
3,890,735

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
483

 
483

Exercise of stock options and employee purchases under the employee share purchase plan
4,738

 

 
256

 
 
 
 
 
 
 
 
 
256

 
 
 
256

Grants issued in connection with services rendered
288,142

 

 
(14,533
)
 
 
 
 
 
 
 
 
 
(14,533
)
 
 
 
(14,533
)
Shares issued under share incentive plans
43,677

 

 
(870
)
 
 
 
 
 
 
 
 
 
(870
)
 
 
 
(870
)
Deferral of vested shares
 
 
 
 
(24,935
)
 
 
 
24,935

 
 
 
 
 

 
 
 

Windfall tax benefits - share incentive plans
 
 
 
 
6,524

 
 
 
 
 
 
 
 
 
6,524

 
 
 
6,524

Amortization of stock-based compensation expense
 
 
 
 
12,098

 
 
 
 
 
 
 
 
 
12,098

 
 
 
12,098

Redemption value adjustment
 
 
 
 
(7,303
)
 
 
 
 
 
 
 
 
 
(7,303
)
 
 
 
(7,303
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(6,652
)
 
(6,652
)
Distributions declared ($1.9065 per share)
 
 
 
 
5,064

 
(209,262
)
 
1,836

 
 
 
 
 
(202,362
)
 
 
 
(202,362
)
Net income
 
 
 
 
 
 
99,464

 
 
 
 
 
 
 
99,464

 
6,041

 
105,505

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(62,431
)
 
 
 
(62,431
)
 
(3,558
)
 
(65,989
)
Realized and unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
17,199

 
 
 
17,199

 
 
 
17,199

Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
 
 
14

 
 
 
14

 
 
 
14

Balance at June 30, 2015
104,377,210

 
$
105

 
$
4,298,574

 
$
(575,404
)
 
$
57,395

 
$
(120,777
)
 
$
(60,948
)
 
$
3,598,945

 
$
136,160

 
$
3,735,105





 
W. P. Carey 6/30/2015 10-Q 5





W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
Six Months Ended June 30, 2014
(in thousands, except share and per share amounts)
 
W. P. Carey Stockholders
 
 
 
 
 
 
 
 
 
 
 
Distributions
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
in Excess of
 
Deferred
 
Other
 
 
 
Total
 
 
 
 
 
$0.001 Par Value
 
Paid-in
 
Accumulated
 
Compensation
 
Comprehensive
 
Treasury
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Income (Loss)
 
Stock
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2014
68,266,570

 
$
69

 
$
2,256,503

 
$
(318,577
)
 
$
11,354

 
$
15,336

 
$
(60,270
)
 
$
1,904,415

 
$
298,316

 
$
2,202,731

Shares issued to stockholders of CPA®:16 – Global in connection with the CPA®:16 Merger
30,729,878

 
31

 
1,815,490

 
 
 
 
 
 
 
 
 
1,815,521

 
 
 
1,815,521

Purchase of the remaining interests in less-than-wholly-owned investments that we already consolidate in connection with the CPA®:16 Merger
 
 
 
 
(41,374
)
 
 
 
 
 
 
 
 
 
(41,374
)
 
(239,562
)
 
(280,936
)
Purchase of noncontrolling interests in connection with the CPA®:16 Merger
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
99,947

 
99,947

Exercise of stock options and employee purchases under the employee share purchase plan
23,506

 
 
 
1,184

 
 
 
 
 
 
 
 
 
1,184

 
 
 
1,184

Grants issued in connection with services rendered
352,188

 
 
 
(15,736
)
 
 
 
 
 
 
 
 
 
(15,736
)
 
 
 
(15,736
)
Shares issued under share incentive plans
18,683

 
 
 
(534
)
 
 
 
 
 
 
 
 
 
(534
)
 
 
 
(534
)
Deferral of vested shares
 
 
 
 
(15,428
)
 
 
 
15,428

 
 
 
 
 

 
 
 

Windfall tax benefits - share incentive plans
 
 
 
 
5,449

 
 
 
 
 
 
 
 
 
5,449

 
 
 
5,449

Amortization of stock-based compensation expense
 
 
 
 
15,000

 
 
 
 
 
 
 
 
 
15,000

 
 
 
15,000

Redemption value adjustment
 
 
 
 
306

 
 
 
 
 
 
 
 
 
306

 
 
 
306

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(11,185
)
 
(11,185
)
Distributions declared ($1.7950 per share)
 
 
 
 
3,179

 
(187,798
)
 
3,842

 
 
 
 
 
(180,777
)
 
 
 
(180,777
)
Purchase of treasury stock from related party
(11,037
)
 
 
 
 
 
 
 
 
 
 
 
(678
)
 
(678
)
 
 
 
(678
)
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
4

 
4

Net income
 
 
 
 
 
 
180,217

 
 
 
 
 
 
 
180,217

 
3,921

 
184,138

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
3,431

 
 
 
3,431

 
(448
)
 
2,983

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(4,564
)
 
 
 
(4,564
)
 
 
 
(4,564
)
Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
 
 
12

 
 
 
12

 
 
 
12

Balance at June 30, 2014
99,379,788

 
$
100

 
$
4,024,039

 
$
(326,158
)
 
$
30,624

 
$
14,215

 
$
(60,948
)
 
$
3,681,872

 
$
150,993

 
$
3,832,865


See Notes to Consolidated Financial Statements.





 
W. P. Carey 6/30/2015 10-Q 6




W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2015

2014
Cash Flows — Operating Activities
 
 
 
Net income
$
105,505

 
$
184,289

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
134,129

 
123,908

Straight-line rent and amortization of rent-related intangibles
19,793

 
23,350

Stock-based compensation expense
12,098

 
15,000

Management income received in shares of Managed REITs and other
(10,699
)
 
(18,045
)
Impairment charges
3,274

 
2,066

Realized and unrealized loss (gain) on foreign currency transactions, derivatives, extinguishment of debt and other
1,452

 
(1,756
)
Equity in earnings of equity method investments in the Managed Programs and real estate in excess of
distributions received
(1,417
)
 
(1,815
)
Gain on sale of real estate
(1,201
)
 
(23,930
)
Gain on change in control of interests

 
(105,947
)
Amortization of deferred revenue

 
(786
)
Changes in assets and liabilities:
 
 
 
Increase in structuring revenue receivable
(17,896
)
 
(10,842
)
Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options
(15,402
)
 
(16,271
)
Deferred acquisition revenue received
14,084

 
11,153

Net changes in other operating assets and liabilities
(27,668
)
 
(11,737
)
Net Cash Provided by Operating Activities
216,052

 
168,637

Cash Flows — Investing Activities
 
 
 
Purchases of real estate
(435,915
)
 
(88,334
)
Funding of loans to affiliates
(122,447
)
 
(11,000
)
Change in investing restricted cash
31,692

 
(103,116
)
Proceeds from sale of real estate
24,016

 
280,795

Investment in real estate under construction
(21,638
)
 
(2,835
)
Proceeds from repayment of note receivable
9,964

 

Capital contribution to equity investments in real estate
(8,643
)
 
(459
)
Distributions received from equity investments in the Managed Programs and real estate in excess of equity
    income
3,383

 
8,889

Capital expenditures on corporate assets
(2,312
)
 
(8,637
)
Capital expenditures on owned real estate
(2,026
)
 
(2,005
)
Other investing activities, net
977

 
740

Cash acquired in connection with the CPA®:16 Merger

 
65,429

Purchase of securities

 
(7,664
)
Cash paid to stockholders of CPA®:16 – Global in the CPA®:16 Merger

 
(1,338
)
Proceeds from repayment of short-term loan to affiliate

 
1,155

Net Cash (Used in) Provided by Investing Activities
(522,949
)
 
131,620

Cash Flows — Financing Activities
 
 
 
Proceeds from issuance of Senior Unsecured Notes
1,022,303

 
498,195

Repayments of Senior Unsecured Credit Facility
(913,868
)
 
(1,310,000
)
Proceeds from Senior Unsecured Credit Facility
484,122

 
1,042,627

Distributions paid
(200,915
)
 
(158,312
)
Scheduled payments of mortgage principal
(36,095
)
 
(61,608
)
Proceeds from mortgage financing
17,778

 
6,550

Payment of financing costs
(10,886
)
 
(12,192
)
Distributions paid to noncontrolling interests
(6,652
)
 
(12,026
)
Windfall tax benefit associated with stock-based compensation awards
6,524

 
5,449

Contributions from noncontrolling interests
483

 
314

Change in financing restricted cash
(342
)
 
(588
)
Proceeds from exercise of stock options and employee purchases under the employee share purchase plan
256

 
1,184

Prepayments of mortgage principal

 
(201,820
)
Purchase of treasury stock from related party

 
(677
)
Net Cash Provided by (Used in) Financing Activities
362,708

 
(202,904
)
Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash
(20,865
)
 
99

Net increase in cash and cash equivalents
34,946

 
97,452

Cash and cash equivalents, beginning of period
198,683

 
117,519

Cash and cash equivalents, end of period
$
233,629

 
$
214,971

 
See Notes to Consolidated Financial Statements.

 
W. P. Carey 6/30/2015 10-Q 7
                    



W. P. CAREY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business and Organization
 
W. P. Carey Inc., or W. P. Carey, is, together with its consolidated subsidiaries and predecessors, a REIT that provides long-term financing via sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. We invest primarily in commercial properties domestically and internationally. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily on a triple-net lease basis, which generally requires each tenant to pay substantially all of the costs associated with operating and maintaining the property. Through our taxable REIT subsidiaries, or TRSs, we also earn revenue as the advisor to publicly-owned, non-listed REITs, which are sponsored by us under the Corporate Property Associates, or CPA®, brand name that invest in similar properties. At June 30, 2015, we were the advisor to Corporate Property Associates 17 – Global Incorporated, or CPA®:17 – Global, and Corporate Property Associates 18 – Global Incorporated, or CPA®:18 – Global. We were also the advisor to Corporate Property Associates 16 – Global Incorporated, or CPA®:16 – Global, until its merger with us on January 31, 2014. We refer to CPA®:16 – Global, CPA®:17 – Global, and CPA®:18 – Global together as the CPA® REITs. At June 30, 2015, we were also the advisor to Carey Watermark Investors Incorporated, or CWI (which we also refer to as CWI 1), and Carey Watermark Investors 2 Incorporated, or CWI 2, two publicly-owned, non-listed REITs that invest in lodging and lodging-related properties. We refer to CWI and CWI 2 as the CWI REITs, and, together with the CPA® REITs, as the Managed REITs (Note 5). We have also invested in Carey Credit Income Fund, or CCIF, a newly formed business development company, or BDC (Note 8), with a third-party investment partner, that is the master fund in a master/feeder fund structure.

In September 2014, we filed two registration statements on Form N-2, as amended, with the SEC regarding the organization of two feeder funds that are affiliated with CCIF.  The registration statements enable each of the newly organized feeder funds to sell common shares up to $1.0 billion each and to invest that equity capital into CCIF. The advisor to CCIF is wholly owned by us. We refer to CCIF and the two feeder funds collectively as the Managed BDCs and, together with the Managed REITs, as the Managed Programs. The registration statements were declared effective by the SEC in July 2015.

Originally founded in 1973, we reorganized as a REIT in September 2012 in connection with our merger with Corporate Property Associates 15 Incorporated. We refer to that merger as the CPA®:15 Merger. Our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”

On January 31, 2014, CPA®:16 – Global merged with and into us based on a merger agreement, dated as of July 25, 2013 (Note 4), which we refer to as the CPA®:16 Merger.

We have elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code. As a REIT, we are not generally subject to United States federal income taxation other than from our TRSs as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We hold all of our real estate assets attributable to our Real Estate Ownership segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.

Reportable Segments
 
Real Estate Ownership — We own and invest in commercial properties principally in the United States, Europe, and Asia that are then leased to companies, primarily on a triple-net lease basis. We have also invested in several operating properties, such as lodging and self-storage properties. We earn lease revenues from our wholly-owned and co-owned real estate investments that we control. In addition, we generate equity income through co-owned real estate investments that we do not control and through our ownership of shares of the Managed REITs (Note 8). Through our special member interests in the operating partnerships of the Managed REITs, we also participate in their cash flows (Note 5). At June 30, 2015, our owned portfolio was comprised of our full or partial ownership interests in 852 properties, substantially all of which were net leased to 217 tenants, with an occupancy rate of 98.6%, and totaled approximately 89.3 million square feet.

Investment Management — Through our TRSs, we structure and negotiate investments and debt placement transactions for the Managed REITs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset-based management revenue. We earn disposition revenue when we negotiate and structure the sale of properties on behalf of the Managed REITs, and we may also earn incentive revenue and receive other compensation in connection with providing liquidity events for the Managed REITs’ stockholders. At June 30, 2015, CPA®:17 – Global and CPA®:18 – Global collectively owned all or a portion of 422 properties, including certain properties in which we have an ownership interest.

 
W. P. Carey 6/30/2015 10-Q 8
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Substantially all of these properties, totaling approximately 47.3 million square feet, were net leased to 192 tenants, with an average occupancy rate of approximately 99.9%. The Managed REITs also had interests in 149 operating properties for an aggregate of approximately 17.1 million square feet at June 30, 2015. We have begun to explore alternatives for expanding our investment management operations by raising funds beyond advising the existing Managed REITs. Any such expansion could involve the purchase of properties or other investments as principal, either for our owned portfolio or with the intention of transferring such investments to a newly-created fund, as well as the sponsorship of one or more funds to make investments other than primarily net lease investments, such as the CWI REITs and the Managed BDCs. These new funds could invest primarily in assets other than net-lease real estate and could include funds raised through private placements or publicly-traded vehicles, either in the United States or internationally.

Note 2. Revisions of Previously-Issued Financial Statements

During the second quarter of 2015, we identified errors in the March 31, 2015 interim consolidated financial statements related to the calculation of foreign currency translation of the assets and liabilities of a foreign investment acquired in January 2015 and the presentation of certain foreign currency losses within the consolidated statement of cash flows for the three months ended March 31, 2015. We evaluated the impact on the previously issued financial statements and concluded that these errors were not material to our consolidated financial statements as of and for the three months ended March 31, 2015. However, in order to correctly present such foreign currency translation and certain foreign currency losses, we will revise the consolidated statements of comprehensive (loss) income, equity, and cash flows for the three months ended March 31, 2015 when such statements are presented in our future public filings. The interim consolidated financial statements as of and for the three months ended June 30, 2015, are not impacted by these adjustments.
If the correct foreign currency translation adjustments had been recorded during the three months ended March 31, 2015, Total assets and Total liabilities and equity each would have been higher by $17.6 million, comprised of increases in Real estate, at cost of $14.8 million and In-place lease intangibles of $2.8 million with a corresponding increase of $0.3 million in Below-market rent and other intangible liabilities, net and a $17.3 million decrease in Accumulated other comprehensive loss on the consolidated balance sheet and consolidated statement of equity as of and for the three months ended March 31, 2015. Additionally, Other comprehensive loss, Comprehensive loss and Comprehensive loss attributable to W. P. Carey within the consolidated statement of comprehensive loss each would have been reduced by $17.3 million for the three months ended March 31, 2015.
In addition, if foreign currency losses had been properly presented within the consolidated statement of cash flows for the three months ended March 31, 2015, Net cash provided by operating activities for that period would have increased by $13.6 million with a corresponding decrease to the Effect of exchange rate changes on cash.
The revisions described above had no effect on our cash balances or liquidity as of March 31, 2015, the consolidated statements of income or basic and diluted earnings per common share for the three months ended March 31, 2015.

Note 3. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with accounting principles generally accepted in the United States, or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2014, which are included in the 2014 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.


 
W. P. Carey 6/30/2015 10-Q 9
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries and our tenancy-in-common interests as described below. The portion of equity in a consolidated 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 have an investment in a tenancy-in-common interest in various underlying international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control requirement for consolidation. Accordingly, we account for this investment using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of this investment. We also have certain investments in wholly-owned tenancy-in-common interests, which we now consolidate after we obtained the remaining interests in the CPA®:16 Merger.

At June 30, 2015, we had 18 VIEs. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease as well as certain decision-making rights within a loan can cause us to consider an entity a VIE.

Additionally, we own interests in single-tenant, net-leased properties leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. We account for these investments under the equity method of accounting. At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. At June 30, 2015, none of our equity investments had carrying values below zero.

In June 2014, CWI 2 filed a registration statement on Form S-11 with the SEC to sell up to $1.0 billion of common stock in an initial public offering plus up to an additional $400.0 million of its common stock under a distribution reinvestment plan. In January 2015, CWI 2 amended the registration statement to increase the offering size to $1.4 billion of its class A common stock plus up to an additional $600.0 million of its class A common stock through its distribution reinvestment plan. The registration statement was declared effective by the SEC on February 9, 2015. An amended registration statement adding the class T common stock was declared effective by the SEC on April 13, 2015, so that the offering amounts noted can be in any combination of class A or class T shares. Through May 15, 2015, the financial activity of CWI 2 was included in our consolidated financial statements. On May 15, 2015, upon CWI 2 reaching its minimum offering proceeds and admitting new stockholders, we deconsolidated CWI 2 and began to account for our interest in it under the equity method. The deconsolidation did not have a material impact on our financial position or results of operations.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The consolidated financial statements included in this Report have been retrospectively adjusted to reflect the disposition of certain properties as discontinued operations and certain measurement period adjustments related to purchase accounting for all periods presented.

Recent Accounting Requirements

The following Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board are applicable to us:

ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30) — ASU 2015-03 changes the presentation of debt issuance costs, which are currently recognized as a deferred charge (that is, an asset) and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for periods beginning after December 15, 2015, early adoption is permitted and retrospective application is required. We are currently evaluating the impact of ASU 2015-03 on our consolidated financial statements.


 
W. P. Carey 6/30/2015 10-Q 10
                    

 
Notes to Consolidated Financial Statements (Unaudited)

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) — ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, but will apply to reimbursed tenant costs and revenues generated from our operating properties and our Investment Management business. Additionally, this guidance modifies disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In April 2015, the Financial Accounting Standards Board issued a proposed ASU to defer the effective date of ASU 2014-09 by one year. In July 2015, the Financial Accounting Standards Board affirmed its proposal to defer the effective date of the new revenue standard for all entities by one year and directed the staff to draft a final ASU for vote by written ballot. Upon issuance of the final ASU deferring the effective date, ASU 2014-09 will be effective beginning in 2018, and early adoption is permitted but not before 2017, the original public company effective date. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

Note 4. Merger with CPA®:16 – Global

On July 25, 2013, we and CPA®:16 – Global entered into a definitive agreement pursuant to which CPA®:16 – Global would merge with and into one of our wholly-owned subsidiaries, subject to the approval of our stockholders and the stockholders of CPA®:16 – Global. On January 24, 2014, our stockholders and the stockholders of CPA®:16 – Global each approved the CPA®:16 Merger, and the CPA®:16 Merger closed on January 31, 2014.

In the CPA®:16 Merger, CPA®:16 – Global stockholders received 0.1830 shares of our common stock in exchange for each share of CPA®:16 – Global stock owned, pursuant to an exchange ratio based upon a value of $11.25 per share of CPA®:16 – Global and the volume weighted-average trading price of our common stock for the five consecutive trading days ending on the third trading day preceding the closing of the transaction on January 31, 2014. CPA®:16 – Global stockholders received cash in lieu of any fractional shares in the CPA®:16 Merger. We paid total merger consideration of approximately $1.8 billion, including the issuance of 30,729,878 shares of our common stock with a fair value of $1.8 billion based on the closing price of our common stock on January 31, 2014, of $59.08 per share, to the stockholders of CPA®:16 – Global in exchange for the 168,041,772 shares of CPA®:16 – Global common stock that we and our affiliates did not previously own, and cash of $1.3 million paid in lieu of issuing any fractional shares, or collectively, the Merger Consideration. As a condition of the CPA®:16 Merger, we waived the subordinated disposition and termination fees that we would have been entitled to receive from CPA®:16 – Global upon its liquidation pursuant to the terms of our advisory agreement with CPA®:16 – Global (Note 5).

Immediately prior to the CPA®:16 Merger, CPA®:16 – Global’s portfolio was comprised of the consolidated full or partial interests in 325 leased properties, substantially all of which were triple-net leased with an average remaining life of 10.4 years and an estimated contractual minimum annualized base rent, or ABR, totaling $300.1 million, and two hotel properties. The related property-level debt was comprised of 92 fixed-rate and 18 variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $1.8 billion and a weighted-average annual interest rate of 5.6% at that date. Additionally, CPA®:16 – Global had a line of credit with an outstanding balance of $170.0 million on the date of the closing of the CPA®:16 Merger. In addition, CPA®:16 – Global had equity interests in 18 unconsolidated investments, 11 of which were consolidated by us prior to the CPA®:16 Merger, five of which were consolidated by us subsequent to the CPA®:16 Merger, and two of which were jointly-owned with CPA®:17 – Global. These investments owned 140 properties, substantially all of which were triple-net leased with an average remaining life of 8.6 years and an estimated ABR totaling $63.9 million, as of January 31, 2014. The debt related to these equity investments was comprised of 17 fixed-rate and five variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $0.3 billion and a weighted-average annual interest rate of 4.8% on January 31, 2014. The lease revenues and income from continuing operations from the properties acquired from the date of the CPA®:16 Merger through June 30, 2014 were $115.9 million and $35.2 million (inclusive of $1.8 million attributable to noncontrolling interests), respectively.

During 2014, we sold all ten of the properties that were classified as held-for-sale upon acquisition in connection with the CPA®:16 Merger (Note 16). The results of operations for all ten of these properties have been included in Income from discontinued operations, net of tax in the consolidated financial statements. In addition, we sold one property subject to a direct financing lease that we acquired in the CPA®:16 Merger. The results of operations for this property have been included in Income from continuing operations before income taxes in the consolidated financial statements.

 
W. P. Carey 6/30/2015 10-Q 11
                    

 
Notes to Consolidated Financial Statements (Unaudited)

 
Purchase Price Allocation

We accounted for the CPA®:16 Merger as a business combination under the acquisition method of accounting. After consideration of all applicable factors pursuant to the business combination accounting rules, we were considered the “accounting acquirer” due to various factors, including the fact that our stockholders held the largest portion of the voting rights in us upon completion of the CPA®:16 Merger. Costs of $30.5 million related to the CPA®:16 Merger were incurred in 2014, of which $30.4 million were incurred and expensed during the six months ended June 30, 2014 and classified within Merger and property acquisition expenses in the consolidated financial statements. In addition, CPA®:16 – Global incurred a total of $10.6 million of merger expenses prior to January 31, 2014.
 
Equity Investments and Noncontrolling Interests
 
During the first quarter of 2014, we recognized a gain on change in control of interests of approximately $73.1 million, which was the difference between the carrying value of approximately $274.1 million and the preliminary estimated fair value of approximately $347.2 million of our previously-held equity interest in 38,229,294 shares of CPA®:16 – Global’s common stock. During 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the estimated fair value of our previously-held equity interest in shares of CPA®:16 – Global’s common stock by $2.6 million, resulting in an increase of $2.6 million in Gain on change in control of interests. In accordance with Accounting Standards Codification, or ASC, 805-10-25, we did not record the measurement period adjustments during the periods they occurred. Rather, such amounts are reflected in the financial statements for the three months ended March 31, 2014.
 
The CPA®:16 Merger also resulted in our acquisition of the remaining interests in nine investments in which we already had a joint interest and accounted for under the equity method. Upon acquiring the remaining interests in these investments, we owned 100% of these investments and thus accounted for the acquisitions of these interests utilizing the purchase method of accounting. Due to the change in control of the nine jointly-owned investments that occurred, we recorded a gain on change in control of interests of approximately $30.2 million during the first quarter of 2014, which was the difference between our carrying values and the estimated fair values of our previously-held equity interests on the acquisition date of approximately $142.5 million and approximately $172.7 million, respectively. Subsequent to the CPA®:16 Merger, we consolidate these wholly-owned investments.
 
In connection with the CPA®:16 Merger, we also acquired the remaining interests in 12 less-than-wholly-owned investments that we already consolidate and recorded an adjustment to additional paid-in-capital of approximately $42.0 million during the first quarter of 2014 related to the difference between our carrying values and the preliminary estimated fair values of our previously-held noncontrolling interests on the acquisition date of approximately $236.8 million and $278.2 million, respectively. During 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the fair value of our previously-held noncontrolling interests on the acquisition date by $0.6 million, resulting in a reduction of $0.6 million to additional paid-in-capital.

Pro Forma Financial Information (Unaudited)

The following unaudited consolidated pro forma financial information has been presented as if the CPA®:16 Merger had occurred on January 1, 2013 for the three and six months ended June 30, 2014. The pro forma financial information is not necessarily indicative of what the actual results would have been had the CPA®:16 Merger occurred on that date, nor does it purport to represent the results of operations for future periods.
 

 
W. P. Carey 6/30/2015 10-Q 12
                    

 
Notes to Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts):
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Pro forma total revenues
$
252,907

 
$
487,032

 
 
 
 
Pro forma net income from continuing operations, net of tax
$
40,469

 
$
78,409

Pro forma net income attributable to noncontrolling interests
(2,344
)
 
(2,916
)
Pro forma net loss (income) attributable to redeemable noncontrolling interest
111

 
(151
)
Pro forma net income from continuing operations, net of tax attributable to W. P. Carey (a)
$
38,236

 
$
75,342

 
 
 
 
Pro forma earnings per share: (a)
 
 
 
Basic
$
0.38

 
$
0.75

Diluted
$
0.38

 
$
0.75

 
 
 
 
Pro forma weighted-average shares: (b)
 
 
 
Basic
100,236,362

 
99,976,714

Diluted
100,995,225

 
100,875,283

___________
(a)
The pro forma income attributable to W. P. Carey for the three and six months ended June 30, 2014 reflects the following income and expenses recognized related to the CPA®:16 Merger as if the CPA®:16 Merger had taken place on January 1, 2013: (i) combined merger expenses through December 31, 2014; (ii) an aggregate gain on change in control of interests; and (iii) an income tax expense from a permanent difference upon recognition of deferred revenue associated with accelerated vesting of shares previously issued by CPA®:16 – Global for asset management and performance fees in connection with the CPA®:16 Merger.
(b)
The pro forma weighted-average shares outstanding for the three and six months ended June 30, 2014 were determined as if the 30,729,878 shares of our common stock issued to CPA®:16 – Global stockholders in the CPA®:16 Merger were issued on January 1, 2013.

Note 5. Agreements and Transactions with Related Parties
 
Advisory Agreements with the Managed REITs
 
We have advisory agreements with each of the Managed REITs, pursuant to which we earn fees and are entitled to receive cash distributions. The following tables present a summary of revenue earned and/or cash received from the Managed REITs for the periods indicated, included in the consolidated financial statements (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Structuring revenue
$
37,808

 
$
17,254

 
$
59,528

 
$
35,005

Asset management revenue
12,073

 
9,022

 
23,185

 
18,776

Distributions of Available Cash
9,256

 
5,235

 
18,062

 
15,681

Reimbursable costs from affiliates
7,639

 
41,925

 
17,246

 
81,657

Interest income on deferred acquisition fees and loans to affiliates
442

 
163

 
596

 
337

Dealer manager fees
307

 
7,949

 
1,581

 
14,626

Incentive, termination and subordinated disposition revenue

 

 
203

 

Deferred revenue earned

 

 

 
786

 
$
67,525

 
$
81,548

 
$
120,401

 
$
166,868

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
CPA®:16 – Global (a)
$

 
$

 
$

 
$
7,999

CPA®:17 – Global (b)
20,484

 
16,645

 
42,161

 
32,472

CPA®:18 – Global (b)
24,725

 
42,654

 
43,666

 
98,831

CWI (b)
16,897

 
22,249

 
29,155

 
27,566

CWI 2 (b)
5,419

 

 
5,419

 

 
$
67,525

 
$
81,548

 
$
120,401

 
$
166,868

___________
(a)
The amount for the six months ended June 30, 2014 reflects transactions through January 31, 2014, the date of the CPA®:16 Merger.
(b)
The advisory agreements with each of the CPA® REITs are scheduled to expire on December 31, 2015 and the advisory agreements with CWI and CWI 2 are scheduled to expire on September 30, 2015 and December 31, 2015, respectively, unless otherwise renewed.


 
W. P. Carey 6/30/2015 10-Q 13
                    

 
Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
 
June 30, 2015
 
December 31, 2014
Notes receivable from affiliates, including interest thereon
$
122,724

 
$

Deferred acquisition fees receivable
30,725

 
26,913

Current acquisition fees receivable
6,650

 
2,463

Reimbursable costs
5,600

 
301

Accounts receivable
5,068

 
2,680

Asset management fees receivable
3,092

 

Organization and offering costs
2,937

 
2,120

 
$
176,796

 
$
34,477


Asset Management Revenue
 
We earn asset management revenue from each Managed REIT based on each REIT’s Average Invested Assets (as defined in the respective advisory agreements). For CPA®:16 – Global, prior to the CPA®:16 Merger, we earned asset management revenue of 0.5% of average invested assets. For CPA®:17 – Global and CPA®:18 – Global, we earn asset management revenue ranging from 0.5% to 1.75% and 0.5% to 1.5%, respectively, depending on the type of investment and based on the average market value or average equity value, as applicable. For CWI and CWI 2, we earn asset management revenue of 0.5% and 0.55%, respectively, of the average market value of their lodging-related investments.
 
Through December 31, 2014, under the terms of the respective advisory agreements with the CPA® REITs, we could elect to receive cash or shares of stock for asset management revenue due from each REIT. Effective January 1, 2015, the independent directors of the CPA® REITs have the option to approve, after consultation with us, paying the annual asset management revenue due to us in cash, shares of stock, or a combination of both. In 2014, we elected to receive all asset management revenue from CPA®:17 – Global, CPA®:18 – Global, and CWI in shares of their respective common stock. For CPA®:16 – Global, we elected to receive its January 2014 asset management revenue due to us in cash. In 2015, CPA®:17 – Global elected to pay 50% of its asset management fees due to us in cash, with the remaining 50% paid in shares of its common stock, while CPA®:18 – Global elected to pay its asset management fees due to us in shares of its Class A common stock.

Under the terms of the advisory agreements with each of the CWI REITs, we may elect to receive the annual asset management revenue in cash or in shares of their common stock. For 2015, we elected to receive asset management fees due to us from CWI in cash and from CWI 2 in shares of its Class A common stock.
 
Structuring Revenue
 
Under the terms of the advisory agreements, we earn revenue in connection with structuring and negotiating investments and related financing for the Managed REITs, which we refer to as acquisition revenue. We may receive acquisition revenue of 4.5% of the total aggregate cost of long-term net-lease investments made by each CPA® REIT, of which 2.5% is paid when the transaction is completed and 2.0% is paid in annual installments over three years, provided the relevant CPA® REIT meets its performance criterion. For certain types of non-long term net-lease investments acquired on behalf of CPA®:17 – Global, we receive initial acquisition revenue up to 1.75% of the equity invested plus the related acquisition revenue, with no deferred acquisition revenue being earned. For each of the CWI REITs, we earn initial acquisition revenue of 2.5% of the total investment cost of the properties acquired and loans originated by them, with no deferred acquisition revenue being earned. Total acquisition revenue from each of the Managed REITs cannot exceed 6.0% of the aggregate contract purchase price of all investments and loans. For each of the CWI REITs, we may also be entitled to fees for structuring loan refinancing transactions of up to 1.0% of the principal amount. This loan refinancing revenue, together with the acquisition revenue, is referred to as structuring revenue.

Unpaid deferred acquisition fees, including accrued interest, are included in Due from affiliates in the consolidated financial statements. Unpaid deferred acquisition fees bear interest at annual rates ranging from 2.0% to 5.0%.


 
W. P. Carey 6/30/2015 10-Q 14
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Reimbursable Costs from Affiliates and Dealer Manager Fees
 
The Managed REITs reimburse us for certain costs we incur on their behalf, primarily broker-dealer commissions, marketing costs, an annual distribution and shareholder servicing fee, or Shareholder Servicing Fee, in the case of CPA®:18 – Global and CWI 2, and certain personnel and overhead costs. Personnel and overhead costs are charged to the CPA® REITs based on the average of the trailing 12-month reported revenues of the CPA® REITs, the CWI REITs, and us. Under the amended and restated advisory agreements for the CPA® REITs, in 2015 and 2016, the amount of personnel costs, excluding costs related to our legal transactions group, allocated to the CPA® REITs is capped at 2.4% and 2.2%, respectively, of pro rata lease revenues for each year. In 2017 and thereafter, the cap decreases to 2.0% of pro rata lease revenues for that year. Costs related to our legal transactions group are based on a schedule of expenses for different types of transactions, including 0.25% of the total investment cost of an acquisition. We allocate personnel and overhead costs to the CWI REITs based on the time incurred by our personnel. Effective April 1, 2015, we amended the advisory agreement with each of the CWI REITs so that personnel and overhead costs allocated between them based upon the percentage of their total pro rata hotel revenues for the most recently completed quarter. For 2015, we will receive personnel cost reimbursements from the CWI REITs in cash, but for 2014, we agreed to receive such reimbursements from CWI in shares of its common stock.

During CWI’s follow-on offering, which began in December 2013 and terminated in December 2014, we earned a selling commission of $0.70 per share sold and a dealer manager fee of $0.30 per share sold.

For CPA®:18 – Global’s initial public offering, which commenced in May 2013 and terminated in April 2015, we received selling commissions of $0.70 or $0.14 per share sold, and a dealer manager fee of $0.30 or $0.21 per share sold, for its class A common stock and class C common stock, respectively. CPA®:18 – Global completed sales of its class A common stock and class C common stock during June 2014 and April 2015, respectively. We also receive a Shareholder Servicing Fee in connection with sales of shares of class C common stock. The amount of the Shareholder Servicing Fee is 1% of the purchase price per share (or, once reported, the amount of the estimated NAV per share) for the shares of class C common stock sold in the offering. The Shareholder Servicing Fee is accrued daily and is payable quarterly in arrears. CPA®:18 – Global will cease paying the Shareholder Servicing Fee on the date at which, in the aggregate, underwriting compensation from all sources, including the Shareholder Servicing Fee, any organizational and offering fee paid for underwriting, and underwriting compensation paid by us, equals 10% of the gross proceeds from the initial public offering.

For CWI 2’s initial public offering, which began to admit new stockholders on May 15, 2015, we receive selling commissions of $0.70 or $0.19 per share sold, and a dealer manager fee of $0.30 or $0.26 per share sold, for its class A common stock and class T common stock, respectively. We also receive a Shareholder Servicing Fee paid in connection with investor purchases of shares of class T common stock. The amount of the Shareholder Servicing Fee is 1% of the purchase price per share (or, once reported, the amount of the estimated NAV per share) for the shares of class T common stock sold in the offering. The Shareholder Servicing Fee is accrued daily and is payable quarterly in arrears. CWI 2 will cease paying the Shareholder Servicing Fee at the earlier of: (i) the date at which, in the aggregate, underwriting compensation from all sources, including the Shareholder Servicing Fee, any organizational and offering fee paid for underwriting, and underwriting compensation paid by us, equals 10% of the gross proceeds from the initial public offering; and (ii) the sixth anniversary of the end of the quarter in which CWI 2’s initial public offering terminates.

We re-allowed all of the selling commissions and Shareholder Servicing Fees, if any, and re-allowed a portion of the dealer manager fees to selected dealers in the offerings for CWI, CWI 2, and CPA®:18 – Global. Dealer manager fees that were not re-allowed were classified as Dealer manager fees in the consolidated financial statements.

Pursuant to its advisory agreement, CWI was obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its follow-on public offering, which terminated in December 2014, up to a maximum amount (excluding selling commissions and the dealer manager fee) of 4% of the gross proceeds of its offering. Through June 30, 2015, we incurred organization and offering costs on behalf of CWI of approximately $13.0 million, substantially all of which had been reimbursed by CWI as of June 30, 2015.

Pursuant to its advisory agreement, CWI 2 is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its initial public offering, which began to admit new stockholders on May 15, 2015, up to a maximum amount (excluding selling commissions and the dealer manager fee) ranging from 1.5% and 4%, depending upon the gross proceeds of its offering. Through June 30, 2015, we incurred organization and offering costs on behalf of CWI 2 of approximately $3.0 million, of which CWI 2 is obligated to reimburse us $0.7 million, and $0.1 million of which had been reimbursed as of June 30, 2015.


 
W. P. Carey 6/30/2015 10-Q 15
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Pursuant to its advisory agreement, CPA®:18 – Global is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its initial public offering, which terminated in April 2015. CPA®:18 – Global is obligated to reimburse us up to 1.5% of the gross proceeds within 60 days after the end of the quarter in which the offering terminates. Through June 30, 2015, we incurred organization and offering costs on behalf of CPA®:18 – Global of approximately $8.6 million. As of June 30, 2015, substantially all of the organization and offering costs had been reimbursed by CPA®:18 – Global.
 
Distributions of Available Cash and Deferred Revenue Earned
 
We are entitled to receive distributions of up to 10% of the Available Cash (as defined in the respective advisory agreements) from the operating partnerships of each of the Managed REITs, as defined in their respective operating partnership agreements. In May 2011, we acquired a special member interest, or the Special Member Interest, in CPA®:16 – Global’s operating partnership. We initially recorded this Special Member Interest at its fair value, and amortized it into earnings through the date of the CPA®:16 Merger. Cash distributions of our proportionate share of earnings from the Managed REITs’ operating partnerships, as well as deferred revenue earned from our Special Member Interest in CPA®:16 – Global’s operating partnership, are recorded as Equity in earnings of equity method investments in real estate and the Managed REITs within the Real Estate Ownership segment.

Other Transactions with Affiliates
 
Loans to Affiliates

During 2015 and 2014, our board of directors approved unsecured loans from us to CPA®:17 – Global of up to $75.0 million, CPA®:18 – Global of up to $100.0 million, CWI and CWI 2 of up to $110.0 million in the aggregate, and CCIF of up to $50.0 million, with each loan at a rate equal to the rate at which we are able to borrow funds under our senior credit facility (Note 12), for the purpose of facilitating acquisitions approved by their respective investment committees.

The following table presents a summary of our unsecured loans to the Managed Programs, all of which were made at an interest rate of London Interbank Offered Rate, or LIBOR, plus1.1%, (in thousands):
 
 
 
 
 
 
 
 
Carrying Amount at
Managed Program
 
Issue Date
 
Principal Amount
 
Maturity Date
 
June 30, 2015
 
December 31, 2014
CWI 2
 
4/1/2015
 
$
37,170

 
3/31/2016
 
$
37,170

 

CWI 2
 
5/1/2015
 
65,277

 
12/30/2015
 
65,277

 

CCIF
 
5/28/2015
 
10,000

 
12/30/2015
 
10,000

 

CCIF
 
6/10/2015
 
10,000

 
12/30/2015
 
10,000

 

Principal
 
 
 
 
 
 
 
122,447

 

Accrued interest
 
 
 
 
 
 
 
277

 

 
 
 
 
 
 
 
 
$
122,724

 
$


On June 25, 2014, we made an $11.0 million loan to CWI, with a scheduled maturity date of June 30, 2015. The loan, including accrued interest, was repaid in full prior to maturity on July 22, 2014. In July 2015, we made two loans to CPA®:17 – Global for $10.0 million and $15.0 million, both of which have an interest rate of LIBOR plus 1.1% and mature on December 30, 2015. In July 2015, CWI 2 repaid $25.0 million of its outstanding loans.

Treasury Stock

In February 2014, we repurchased 11,037 shares of our common stock for $0.7 million in cash from the former independent directors of CPA®:16 – Global at a price per share equal to the volume weighted-average trading price of our stock utilized in the CPA®:16 Merger. These shares were issued to them as their portion of the Merger Consideration in exchange for their shares of CPA®:16 – Global common stock (Note 4) and were repurchased by agreement in order to satisfy the independence requirements set forth in the organizational documents of the remaining CPA® REITs, for which these individuals also serve as independent directors.


 
W. P. Carey 6/30/2015 10-Q 16
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Other

At June 30, 2015, we owned interests ranging from 3% to 90% in jointly-owned investments, including a jointly-controlled tenancy-in-common interest in several properties, with the remaining interests generally held by affiliates, and own common stock in each of the Managed REITs. We consolidate certain of these investments and account for the remainder under the equity method of accounting.

Note 6. Net Investments in Properties
 
Real Estate

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, and real estate under construction, is summarized as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Land
$
1,182,707

 
$
1,146,704

Buildings
4,063,736

 
3,829,981

Real estate under construction
49,611

 
29,997

Less: Accumulated depreciation
(317,136
)
 
(253,627
)
 
$
4,978,918

 
$
4,753,055

 
During the six months ended June 30, 2015, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro at June 30, 2015 decreased by 8.0% to $1.1189 from $1.2156 at December 31, 2014. As a result, the carrying value of our Real estate decreased by $103.7 million from December 31, 2014 to June 30, 2015.

Acquisitions of Real Estate

During the six months ended June 30, 2015, we entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, for which the sellers were not the lessees, at a total cost of $437.9 million, including land of $72.3 million, buildings of $301.2 million, and net lease intangibles of $64.4 million (Note 9):

an investment of $345.9 million for 73 auto dealership properties in various locations in the United Kingdom on January 28, 2015;
an investment of $42.4 million for a logistics facility in Rotterdam, the Netherlands on February 11, 2015;
an investment of $23.3 million for a retail facility in Bad Fischau, Austria on April 10, 2015; and
an investment of $26.3 million for a logistics facility in Oskarshamn, Sweden on June 17, 2015.

In connection with these transactions, we also expensed acquisition-related costs totaling $7.7 million, which are included in Merger and property acquisition expenses in the consolidated financial statements. Dollar amounts are based on the exchange rates of the foreign currencies on the dates of acquisitions.

Real Estate Under Construction
 
In December 2013, we entered into a build-to-suit transaction for the construction of an office building located in Mönchengladbach, Germany for a total projected cost of up to $65.0 million, including acquisition expenses. During the six months ended June 30, 2015, we funded approximately $21.6 million. At June 30, 2015, the unfunded commitment was $3.8 million, based on the exchange rate of the euro at June 30, 2015.

 
W. P. Carey 6/30/2015 10-Q 17
                    

 
Notes to Consolidated Financial Statements (Unaudited)


Operating Real Estate
 
Operating real estate, which consists of our investments in two hotels and two self-storage properties, at cost, is summarized as follows (in thousands): 
 
June 30, 2015
 
December 31, 2014
Land
$
7,104

 
$
7,074

Buildings
78,133

 
77,811

Less: Accumulated depreciation
(7,000
)
 
(4,866
)
 
$
78,237

 
$
80,019


Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):
 
June 30, 2015
 
December 31, 2014
Real estate, net
$

 
$
5,969

Above-market rent intangible assets, net

 
838

In-place lease intangible assets, net

 
448

Assets held for sale
$

 
$
7,255


At December 31, 2014, we had four properties classified as Assets held for sale, all of which were sold during the six months ended June 30, 2015.

Note 7. Finance Receivables
 
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases, notes receivable, and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements.
 
Net Investments in Direct Financing Leases
 
Net investments in direct financing leases is summarized as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Minimum lease payments receivable
$
851,243

 
$
904,788

Unguaranteed residual value
786,871

 
818,334

 
1,638,114

 
1,723,122

Less: unearned income
(854,282
)
 
(906,896
)
 
$
783,832

 
$
816,226

 
Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $18.7 million and $21.4 million for the three months ended June 30, 2015 and 2014, respectively, and $37.4 million and $38.6 million during the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2015, the U.S. dollar strengthened against the euro, resulting in a $29.9 million decrease in the carrying value of Net investments in direct financing leases from December 31, 2014 to June 30, 2015. During the six months ended June 30, 2014, we reclassified properties with a carrying value of $7.0 million from Net investments in direct financing leases to Real estate (Note 6), in connection with the restructuring of the underlying leases.

At June 30, 2015 and December 31, 2014, Other assets, net included $1.6 million and $1.4 million of accounts receivable, respectively, related to amounts billed under these direct financing leases.

Notes Receivable

At June 30, 2015, we had a note receivable with an outstanding balance of $10.8 million, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements.

In February 2015, a note receivable with an outstanding balance of $10.0 million was repaid in full to us.

Deferred Acquisition Fees Receivable
 
As described in Note 5, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA® REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA® REITs were included in Due from affiliates in the consolidated financial statements.
 
Credit Quality of Finance Receivables
 
We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both June 30, 2015 and December 31, 2014, none of the balances of our finance receivables were past due and we had not established any allowances for credit losses. Other than the lease restructurings noted under “Net Investment in Direct Financing Leases” above, there were no modifications of finance receivables during the six months ended June 30, 2015 or the year ended December 31, 2014. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables was last updated in the second quarter of 2015. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA® REITs are expected to have the available cash to make such payments.
 
A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Tenants / Obligors at
 
Carrying Value at
Internal Credit Quality Indicator
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
1
 
3
 
3
 
$
134,406

 
$
79,343

2
 
3
 
4
 
27,068

 
37,318

3
 
22
 
22
 
510,232

 
592,631

4
 
7
 
7
 
122,956

 
127,782

5
 
 
 

 

 
 
 
 
 
 
$
794,662

 
$
837,074



 
W. P. Carey 6/30/2015 10-Q 18
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Note 8. Equity Investments in Real Estate and the Managed Programs
 
We own interests in certain unconsolidated real estate investments with the Managed Programs and also own interests in the Managed Programs. We account for our interests in these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences).
 
The following table presents Equity in earnings of equity method investments in the Managed Programs and real estate, which represents our proportionate share of the income or losses of these investments, as well as certain adjustments related to other-than-temporary impairment charges and amortization of basis differences related to purchase accounting adjustments (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proportionate share of earnings from equity investments in the Managed Programs
$
686

 
$
769

 
$