Attached files

file filename
EX-32 - EXHIBIT 32 - W. P. Carey Inc.wpc2017q310-qexh32.htm
EX-31.2 - EXHIBIT 31.2 - W. P. Carey Inc.wpc2017q310-qexh312.htm
EX-31.1 - EXHIBIT 31.1 - W. P. Carey Inc.wpc2017q310-qexh311.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 September 30, 2017
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
wpchighreslogoa05.jpg
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
 
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company o
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 106,909,474 shares of common stock, $0.001 par value, outstanding at October 27, 2017.
 




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; the general economic outlook; 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, including the effects of the United Kingdom’s decision to exit the European Union; 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 and dispositions by us and our investment management programs; the Managed Programs 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 impact of recently issued accounting pronouncements; 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 proceeds from that program; our estimated future growth; our projected assets under management; our future capital expenditure levels; our future financing transactions; 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, 2016, as filed with the SEC on February 24, 2017, or the 2016 Annual Report. 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 9/30/2017 10-Q 1
                    



PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

W. P. CAREY INC. 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Land, buildings and improvements
$
5,429,239

 
$
5,285,837

Net investments in direct financing leases
717,184

 
684,059

In-place lease and other intangible assets
1,204,770

 
1,172,238

Above-market rent intangible assets
639,140

 
632,383

Assets held for sale
10,596

 
26,247

Investments in real estate
8,000,929

 
7,800,764

Accumulated depreciation and amortization
(1,249,024
)
 
(1,018,864
)
Net investments in real estate
6,751,905

 
6,781,900

Equity investments in the Managed Programs and real estate
327,598

 
298,893

Cash and cash equivalents
169,770

 
155,482

Due from affiliates
154,336

 
299,610

Other assets, net
287,481

 
282,149

Goodwill
643,321

 
635,920

Total assets
$
8,334,411

 
$
8,453,954

Liabilities and Equity
 
 
 
Debt:
 
 
 
Unsecured senior notes, net
$
2,455,383

 
$
1,807,200

Unsecured term loans, net
382,191

 
249,978

Unsecured revolving credit facility
224,213

 
676,715

Non-recourse mortgages, net
1,253,051

 
1,706,921

Debt, net
4,314,838

 
4,440,814

Accounts payable, accrued expenses and other liabilities
255,911

 
266,917

Below-market rent and other intangible liabilities, net
116,980

 
122,203

Deferred income taxes
86,581

 
90,825

Distributions payable
109,187

 
107,090

Total liabilities
4,883,497

 
5,027,849

Redeemable noncontrolling interest
965

 
965

Commitments and contingencies (Note 11)


 


 
 
 
 
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued

 

Common stock, $0.001 par value, 450,000,000 shares authorized; 106,897,515 and 106,294,162 shares, respectively, issued and outstanding
107

 
106

Additional paid-in capital
4,429,240

 
4,399,961

Distributions in excess of accumulated earnings
(1,017,901
)
 
(894,137
)
Deferred compensation obligation
46,711

 
50,222

Accumulated other comprehensive loss
(229,581
)
 
(254,485
)
Total stockholders’ equity
3,228,576

 
3,301,667

Noncontrolling interests
221,373

 
123,473

Total equity
3,449,949

 
3,425,140

Total liabilities and equity
$
8,334,411

 
$
8,453,954


 See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2017 10-Q 2
                    



W. P. CAREY INC. 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Owned Real Estate:
 
 
 
 
 
 
 
Lease revenues
$
161,511

 
$
163,786

 
$
475,547

 
$
506,358

Operating property revenues
8,449

 
8,524

 
23,652

 
23,696

Reimbursable tenant costs
5,397

 
6,537

 
15,940

 
19,237

Lease termination income and other
1,227

 
1,224

 
4,234

 
34,603

 
176,584

 
180,071

 
519,373

 
583,894

Investment Management:
 
 
 
 
 
 
 
Asset management revenue
17,938

 
15,978

 
53,271

 
45,596

Structuring revenue
9,817

 
12,301

 
27,981

 
30,990

Reimbursable costs from affiliates
6,211

 
14,540

 
45,390

 
46,372

Dealer manager fees
105

 
1,835

 
4,430

 
5,379

Other advisory revenue
99

 
522

 
896

 
522

 
34,170

 
45,176

 
131,968

 
128,859

 
210,754

 
225,247

 
651,341

 
712,753

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
64,040

 
62,802

 
189,319

 
213,835

General and administrative
17,236

 
15,733

 
53,189

 
58,122

Reimbursable tenant and affiliate costs
11,608

 
21,077

 
61,330

 
65,609

Property expenses, excluding reimbursable tenant costs
10,556

 
10,193

 
31,196

 
38,475

Subadvisor fees
5,206

 
4,842

 
11,598

 
10,010

Stock-based compensation expense
4,635

 
4,356

 
14,649

 
14,964

Restructuring and other compensation
1,356

 

 
9,074

 
11,925

Dealer manager fees and expenses
462

 
3,028

 
6,544

 
9,000

Other expenses
65

 

 
1,138

 
5,359

Impairment charges

 
14,441

 

 
49,870

 
115,164

 
136,472

 
378,037

 
477,169

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(41,182
)
 
(44,349
)
 
(125,374
)
 
(139,496
)
Equity in earnings of equity method investments in the Managed Programs and real estate
16,318

 
16,803

 
47,820

 
48,243

Other income and (expenses)
(4,569
)
 
5,101

 
(4,969
)
 
9,398

 
(29,433
)
 
(22,445
)
 
(82,523
)
 
(81,855
)
Income before income taxes and gain on sale of real estate
66,157

 
66,330

 
190,781

 
153,729

(Provision for) benefit from income taxes
(1,760
)
 
(3,154
)
 
(2,903
)
 
4,538

Income before gain on sale of real estate
64,397

 
63,176

 
187,878

 
158,267

Gain on sale of real estate, net of tax
19,257

 
49,126

 
22,732

 
68,070

Net Income
83,654

 
112,302

 
210,610

 
226,337

Net income attributable to noncontrolling interests
(3,376
)
 
(1,359
)
 
(8,530
)
 
(6,294
)
Net Income Attributable to W. P. Carey
$
80,278

 
$
110,943

 
$
202,080

 
$
220,043

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
0.74

 
$
1.03

 
$
1.87

 
$
2.06

Diluted Earnings Per Share
$
0.74

 
$
1.03

 
$
1.87

 
$
2.05

Weighted-Average Shares Outstanding
 
 
 
 
 
 
 
Basic
108,019,292

 
107,221,668

 
107,751,672

 
106,493,145

Diluted
108,143,694

 
107,468,029

 
107,947,490

 
106,853,174


 
 
 
 
 
 
 
Distributions Declared Per Share
$
1.0050

 
$
0.9850

 
$
3.0000

 
$
2.9392

 

See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2017 10-Q 3
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Income
$
83,654

 
$
112,302

 
$
210,610

 
$
226,337

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
28,979

 
(11,824
)
 
71,686

 
(41,999
)
Realized and unrealized loss on derivative instruments
(10,270
)
 
(3,093
)
 
(32,574
)
 
(5,999
)
Change in unrealized gain (loss) on marketable securities
66

 
(7
)
 
(260
)
 
(3
)
 
18,775

 
(14,924
)
 
38,852

 
(48,001
)
Comprehensive Income
102,429

 
97,378

 
249,462

 
178,336

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(3,376
)
 
(1,359
)
 
(8,530
)
 
(6,294
)
Foreign currency translation adjustments
(4,716
)
 
(218
)
 
(13,961
)
 
(1,051
)
Realized and unrealized loss on derivative instruments
8

 
17

 
13

 
17

Comprehensive income attributable to noncontrolling interests
(8,084
)
 
(1,560
)
 
(22,478
)
 
(7,328
)
Comprehensive Income Attributable to W. P. Carey
$
94,345

 
$
95,818

 
$
226,984

 
$
171,008

 
See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2017 10-Q 4
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2017 and 2016
(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
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Loss
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2017
106,294,162

 
$
106

 
$
4,399,961

 
$
(894,137
)
 
$
50,222

 
$
(254,485
)
 
$
3,301,667

 
$
123,473

 
$
3,425,140

Shares issued under “at-the-market” offering, net
345,253

 
1

 
22,856

 
 
 
 
 
 
 
22,857

 
 
 
22,857

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
90,487

 
90,487

Acquisition of noncontrolling interest
 
 
 
 
(1,845
)
 
 
 
 
 
 
 
(1,845
)
 
1,845

 

Shares issued upon delivery of vested restricted share awards
219,540

 

 
(9,678
)
 
 
 
 
 
 
 
(9,678
)
 
 
 
(9,678
)
Shares issued upon exercise of stock options and purchases under employee share purchase plan
38,560

 

 
(1,595
)
 
 
 
 
 
 
 
(1,595
)
 
 
 
(1,595
)
Delivery of deferred vested shares, net
 
 
 
 
3,734

 
 
 
(3,734
)
 
 
 

 
 
 

Amortization of stock-based compensation expense
 
 
 
 
14,649

 
 
 
 
 
 
 
14,649

 
 
 
14,649

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(16,910
)
 
(16,910
)
Distributions declared ($3.0000 per share)
 
 
 
 
1,158

 
(325,844
)
 
223

 
 
 
(324,463
)
 
 
 
(324,463
)
Net income
 
 
 
 
 
 
202,080

 
 
 
 
 
202,080

 
8,530

 
210,610

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
57,725

 
57,725

 
13,961

 
71,686

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(32,561
)
 
(32,561
)
 
(13
)
 
(32,574
)
Change in unrealized loss on marketable securities
 
 
 
 
 
 
 
 
 
 
(260
)
 
(260
)
 
 
 
(260
)
Balance at September 30, 2017
106,897,515

 
$
107

 
$
4,429,240

 
$
(1,017,901
)
 
$
46,711

 
$
(229,581
)
 
$
3,228,576

 
$
221,373

 
$
3,449,949






 
W. P. Carey 9/30/2017 10-Q 5
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
Nine Months Ended September 30, 2017 and 2016
(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
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Loss
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2016
104,448,777

 
$
104

 
$
4,282,042

 
$
(738,652
)
 
$
56,040

 
$
(172,291
)
 
$
3,427,243

 
$
134,185

 
$
3,561,428

Shares issued under “at-the-market” offering, net
1,249,836

 
2

 
83,784

 
 
 
 
 
 
 
83,786

 
 
 
83,786

Shares issued to a third party in connection with the redemption of a redeemable noncontrolling interest
217,011

 

 
13,418

 
 
 
 
 
 
 
13,418

 
 
 
13,418

Contributions from noncontrolling interests (Note 2)
 
 
 
 
 
 
 
 
 
 
 
 

 
14,319

 
14,319

Shares issued upon delivery of vested restricted share awards
326,176

 

 
(14,505
)
 
 
 
 
 
 
 
(14,505
)
 
 
 
(14,505
)
Shares issued upon exercise of stock options and purchases under employee share purchase plan
32,873

 

 
(1,491
)
 
 
 
 
 
 
 
(1,491
)
 
 
 
(1,491
)
Delivery of deferred vested shares, net
 
 
 
 
5,712

 
 
 
(5,712
)
 
 
 

 
 
 

Deconsolidation of affiliate (Note 2)
 
 
 
 
 
 
 
 
 
 
 
 

 
(14,184
)
 
(14,184
)
Amortization of stock-based compensation expense
 
 
 
 
18,170

 
 
 
 
 
 
 
18,170

 
 
 
18,170

Redemption value adjustment
 
 
 
 
561

 
 
 
 
 
 
 
561

 
 
 
561

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(13,418
)
 
(13,418
)
Distributions declared ($2.9392 per share)
 
 
 
 
1,672

 
(316,259
)
 
248

 
 
 
(314,339
)
 
 
 
(314,339
)
Net income
 
 
 
 
 
 
220,043

 
 
 
 
 
220,043

 
6,294

 
226,337

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(43,050
)
 
(43,050
)
 
1,051

 
(41,999
)
Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(5,982
)
 
(5,982
)
 
(17
)
 
(5,999
)
Change in unrealized loss on marketable securities
 
 
 
 
 
 
 
 
 
 
(3
)
 
(3
)
 
 
 
(3
)
Balance at September 30, 2016
106,274,673

 
$
106

 
$
4,389,363

 
$
(834,868
)
 
$
50,576

 
$
(221,326
)
 
$
3,383,851

 
$
128,230

 
$
3,512,081


See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2017 10-Q 6
                    



W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2017

2016
Cash Flows — Operating Activities
 
 
 
Net income
$
210,610

 
$
226,337

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
195,298

 
216,002

Investment Management revenue received in shares of Managed REITs and other
(53,170
)
 
(22,088
)
Distributions of earnings from equity investments
49,365

 
48,303

Equity in earnings of equity method investments in the Managed Programs and real estate
(47,820
)
 
(48,243
)
Amortization of rent-related intangibles and deferred rental revenue
37,210

 
(8,796
)
Gain on sale of real estate
(22,732
)
 
(68,070
)
Stock-based compensation expense
14,649

 
18,170

Straight-line rent
(13,511
)
 
(12,138
)
Realized and unrealized losses (gains) on foreign currency transactions, derivatives, extinguishment of debt, and other
13,112

 
(6,921
)
Deferred income taxes
(8,167
)
 
(19,094
)
Impairment charges

 
49,870

Allowance for credit losses

 
7,064

Changes in assets and liabilities:
 
 
 
Deferred structuring revenue received
15,256

 
18,161

Net changes in other operating assets and liabilities
(4,526
)
 
(15,771
)
Increase in deferred structuring revenue receivable
(3,697
)
 
(5,310
)
Net Cash Provided by Operating Activities
381,877

 
377,476

Cash Flows — Investing Activities
 
 
 
Proceeds from repayment of short-term loans to affiliates
229,696

 
37,053

Funding of short-term loans to affiliates
(123,492
)
 
(20,000
)
Proceeds from sale of real estate
102,503

 
392,867

Funding for real estate construction and expansions
(36,741
)
 
(41,874
)
Capital expenditures on owned real estate
(10,819
)
 
(7,104
)
Change in investing restricted cash
9,588

 
7,775

Return of capital from equity investments
6,482

 
3,522

Purchases of real estate
(6,000
)
 
(385,835
)
Other investing activities, net
5,728

 
2,549

Capital contributions to equity investments in real estate
(1,291
)
 
(6
)
Capital expenditures on corporate assets
(349
)
 
(846
)
Deconsolidation of affiliate (Note 2)

 
(15,408
)
Investment in assets of affiliate (Note 2)

 
(14,861
)
Proceeds from limited partnership units issued by affiliate (Note 2)

 
14,184

Net Cash Provided by (Used in) Investing Activities
175,305

 
(27,984
)
Cash Flows — Financing Activities
 
 
 
Repayments of Senior Unsecured Credit Facility
(1,557,814
)
 
(837,575
)
Proceeds from Senior Unsecured Credit Facility
1,189,591

 
720,568

Proceeds from issuance of Unsecured Senior Notes
530,456

 
348,887

Distributions paid
(322,389
)
 
(310,509
)
Scheduled payments of mortgage principal
(303,538
)
 
(113,420
)
Prepayments of mortgage principal
(157,370
)
 
(193,030
)
Contributions from noncontrolling interests
90,487

 
135

Proceeds from shares issued under “at-the-market” offering, net of selling costs
22,833

 
84,093

Distributions paid to noncontrolling interests
(16,910
)
 
(13,418
)
Payment of financing costs
(12,672
)
 
(2,949
)
Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options
(11,423
)
 
(15,943
)
Change in financing restricted cash
(2,097
)
 
926

Proceeds from mortgage financing
969

 
33,935

Proceeds from exercise of stock options and purchases under the employee share purchase plan
149

 
204

Net Cash Used in Financing Activities
(549,728
)
 
(298,096
)
Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents
6,834

 
860

Net increase in cash and cash equivalents
14,288

 
52,256

Cash and cash equivalents, beginning of period
155,482

 
157,227

Cash and cash equivalents, end of period
$
169,770

 
$
209,483

 

See Notes to Consolidated Financial Statements.


 
W. P. Carey 9/30/2017 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, 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, on a triple-net lease basis, which generally requires each tenant to pay the costs associated with operating and maintaining the property.

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. On January 31, 2014, Corporate Property Associates 16 – Global Incorporated, or CPA®:16 – Global, merged with and into us, which we refer to as the CPA®:16 Merger. Our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”

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 taxable REIT subsidiaries, or 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 also own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. We hold all of our real estate assets attributable to our Owned Real Estate segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.

Through our 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 and invest in similar properties. At September 30, 2017, 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 refer to CPA®:17 – Global and CPA®:18 – Global together as the CPA® REITs.

At September 30, 2017, we were also the advisor to Carey Watermark Investors Incorporated, or 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 1 and CWI 2 together as the CWI REITs and, together with the CPA® REITs, as the Managed REITs (Note 3).

At September 30, 2017, we were also the advisor to Carey European Student Housing Fund I, L.P., or CESH I, a limited partnership formed for the purpose of developing, owning, and operating student housing properties and similar investments in Europe (Note 3). We refer to the Managed REITs and CESH I collectively as the Managed Programs.

On June 15, 2017, our board of directors, or the Board, approved a plan to exit all non-traded retail fundraising activities carried out by our wholly-owned broker-dealer subsidiary, Carey Financial LLC, or Carey Financial, as of June 30, 2017. We currently expect to continue to manage all existing Managed Programs through the end of their respective natural life cycles (Note 3).

In August 2017, we resigned as the advisor to Carey Credit Income Fund (known as Guggenheim Credit Income Fund since October 23, 2017), or CCIF, and by extension, its feeder funds, or the CCIF Feeder Funds, each of which is a business development company, or BDC (Note 3). We refer to CCIF and the CCIF Feeder Funds collectively as the Managed BDCs. The board of trustees of CCIF approved our resignation and appointed CCIF’s subadvisor Guggenheim Partners Investment Management, LLC, or Guggenheim, as the interim sole advisor to CCIF, effective as of September 11, 2017. The shareholders of CCIF approved Guggenheim’s appointment as sole advisor on a permanent basis on October 20, 2017. The Managed BDCs were included in the Managed Programs prior to our resignation as their advisor.



 
W. P. Carey 9/30/2017 10-Q 8
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Reportable Segments
 
As a result of our Board’s decision to exit all non-traded retail fundraising activities, described above, we have revised how we view and present a component of our two reportable segments. As such, beginning with the second quarter of 2017, we include equity income generated through our (i) ownership of shares and limited partnership units of the Managed Programs and (ii) special general partner interests in the operating partnerships of the Managed REITs in our Investment Management segment. Previously, these items were recognized within our Owned Real Estate segment. We also include our equity investments in the Managed Programs in our Investment Management segment. Both (i) earnings from our investment in CCIF and (ii) our investment in CCIF continue to be included in our Investment Management segment. Results of operations and assets by segment for prior periods have been reclassified to conform to the current period presentation.

Owned Real Estate — We own and invest in commercial properties principally in North America, Europe, Australia, and Asia, which are leased to companies, primarily on a triple-net lease basis. We also own two hotels, which are considered operating 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 (Note 7). At September 30, 2017, our owned portfolio was comprised of our full or partial ownership interests in 890 properties, totaling approximately 85.9 million square feet, substantially all of which were net leased to 211 tenants, with an occupancy rate of 99.8%.

Investment Management — Through our TRSs, we structure and negotiate investments and debt placement transactions for the Managed Programs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset management revenue. We also earned asset management revenue from CCIF based on the average of its gross assets at fair value through the effective date of our resignation as its advisor. We may 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 through our advisory agreements with certain of the Managed Programs, including in connection with providing liquidity events for the Managed REITs’ stockholders.

In addition, we generate equity income through our ownership of shares and limited partnership units of the Managed Programs (Note 7). Through our special general partner interests in the operating partnerships of the Managed REITs, we also participate in their cash flows (Note 3). Our Board’s decision to exit all non-traded retail fundraising activities through Carey Financial as of June 30, 2017, as discussed above, will not affect the continuation of these current revenue streams. At September 30, 2017, the CPA® REITs collectively owned all or a portion of 461 properties (including certain properties in which we have an ownership interest), totaling approximately 54.1 million square feet, substantially all of which were net leased to 207 tenants, with an occupancy rate of approximately 99.7%. The Managed Programs also had interests in 166 operating properties, totaling approximately 20.2 million square feet in the aggregate.

Note 2. 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 generally accepted accounting principles 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, 2016, which are included in the 2016 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 9/30/2017 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 interest as described below. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain 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 or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the 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 liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At September 30, 2017, we considered 28 entities to be VIEs, 21 of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2017
 
December 31, 2016 (a)
Land, buildings and improvements
$
910,495

 
$
886,148

Net investments in direct financing leases
39,897

 
60,294

In-place lease and other intangible assets
265,852

 
245,480

Above-market rent intangible assets
102,432

 
98,043

Accumulated depreciation and amortization
(231,323
)
 
(184,710
)
Total assets
1,129,154

 
1,150,093

 
 
 
 
Non-recourse mortgages, net
$
128,659

 
$
406,574

Total liabilities
202,514

 
548,659

__________
(a)
In 2017, we reclassified certain line items in our consolidated balance sheets, as described below. As a result, prior period amounts for certain line items included within Net investments in real estate have been reclassified to conform to the current period presentation.

At September 30, 2017, our seven unconsolidated VIEs included our interests in six unconsolidated real estate investments, which we account for under the equity method of accounting, and one unconsolidated entity, which we account for under the cost method of accounting and is included within our Investment Management segment. At December 31, 2016, our seven unconsolidated VIEs included our interests in six unconsolidated real estate investments and one unconsolidated entity among our interests in the Managed Programs, all of which we accounted for under the equity method of accounting. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities. As of September 30, 2017 and December 31, 2016, the net carrying amount of our investments in these entities was $152.8 million and $152.9 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.

At September 30, 2017, we had an investment in a tenancy-in-common interest in various underlying international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control


 
W. P. Carey 9/30/2017 10-Q 10
                    

 
Notes to Consolidated Financial Statements (Unaudited)

requirement for consolidation. Accordingly, we account for this investment using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of this investment.

At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the jointly owned investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments, nor do we have any legal obligation to fund operating deficits. At September 30, 2017, none of our equity investments had carrying values below zero.

On April 20, 2016, we formed a limited partnership, CESH I, for the purpose of developing, owning, and operating student housing properties and similar investments in Europe. CESH I commenced fundraising in July 2016 through a private placement with an initial offering of $100.0 million and a maximum offering of $150.0 million. Prior to August 30, 2016, which is the date that we had collected $14.2 million of net proceeds on behalf of CESH I from limited partnership units issued in the private placement (primarily to independent investors), we had included CESH I’s financial results and balances in our consolidated financial statements. On August 31, 2016, we determined that CESH I had sufficient equity to finance its operations and that we were no longer considered the primary beneficiary, and as a result we deconsolidated CESH I and began to account for our interest in it at fair value by electing the equity method fair value option available under GAAP. As of August 31, 2016, CESH I had assets totaling $30.3 million on our consolidated balance sheet, including $15.4 million in Cash and cash equivalents and $14.9 million in Other assets, net. In connection with the deconsolidation, we recorded offsetting amounts of $14.2 million for the nine months ended September 30, 2016 in Contributions from noncontrolling interests and Deconsolidation of affiliate in the consolidated statements of equity, and in Proceeds from limited partnership units issued by affiliate and Deconsolidation of affiliate in the consolidated statements of cash flows. We recognized a gain on deconsolidation of $1.9 million, which is included in Other income and (expenses) in the consolidated statements of income for the three and nine months ended September 30, 2016. The deconsolidation did not have a material impact on our financial position or results of operations. Following the deconsolidation, we continue to serve as the advisor to CESH I (Note 3).

Out-of-Period Adjustments

During the second quarter of 2016, we identified and recorded out-of-period adjustments related to adjustments to prior period income tax returns. We concluded that these adjustments were not material to our consolidated financial statements for any of the current or prior periods presented. The net adjustment is reflected as a $3.0 million reduction of our Benefit from income taxes in the consolidated statements of income for the nine months ended September 30, 2016.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

In 2017, we reclassified in-place lease intangible assets, net, below-market ground lease intangible assets, net (previously included in Other assets, net), and above-market rent intangible assets, net to be included within Net investments in real estate in our consolidated balance sheets. The accumulated amortization on these assets is now included in Accumulated depreciation and amortization in our consolidated balance sheets. We also retitled the line item Real estate to Land, buildings and improvements in our consolidated balance sheets. In addition, we included the line item Operating real estate, which had previously appeared in our consolidated balance sheets, within Land, buildings and improvements in our consolidated balance sheets. Prior period balances have been reclassified to conform to the current period presentation.

As a result of our Board’s decision to exit all non-traded retail fundraising activities as of June 30, 2017 (Note 1), we have revised how we view and present a component of our two reportable segments. As such, effective since the second quarter of 2017, we include (i) equity in earnings of equity method investments in the Managed Programs and (ii) equity investments in the Managed Programs in our Investment Management segment. Results of operations and assets by segment for prior periods have been reclassified to conform to the current period presentation.

In connection with our adoption of Accounting Standards Update, or ASU, 2016-09, Improvements to Employee Share-Based Payment Accounting, as described below, we retrospectively reclassified Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options from Net cash provided by operating activities to Net cash used in financing activities within our consolidated statements of cash flows.



 
W. P. Carey 9/30/2017 10-Q 11
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, which constitute a majority of our revenues, but will primarily apply to revenues generated from our operating properties and our Investment Management business. We will adopt this guidance for our interim and annual periods beginning January 1, 2018 using one of two methods: retrospective restatement for each reporting period presented at the time of adoption, or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We have not decided which method of adoption we will use. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. In addition, it also requires lessors to record gross revenues and expenses associated with activities that do not transfer services to the lessee (such as real estate taxes and insurance). Additionally, the new standard requires extensive quantitative and qualitative disclosures. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. The ASU is expected to impact our consolidated financial statements as we have certain operating office and land lease arrangements for which we are the lessee. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 amends Accounting Standards Codification, or ASC, Topic 718, Compensation-Stock Based Compensation to simplify various aspects of how share-based payments are accounted for and presented in the financial statements including (i) reflecting income tax effects of share-based payments through the income statement, (ii) allowing statutory tax withholding requirements at the employees’ maximum individual tax rate without requiring awards to be classified as liabilities, and (iii) permitting an entity to make an accounting policy election for the impact of forfeitures on the recognition of expense. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period, with early adoption permitted.

We adopted ASU 2016-09 as of January 1, 2017 and elected to account for forfeitures as they occur, rather than to account for them based on an estimate of expected forfeitures. This election was adopted using a modified retrospective transition method, with a cumulative effect adjustment to retained earnings. The related financial statement impact of this adjustment is not material. Depending on several factors, such as the market price of our common stock, employee stock option exercise behavior, and corporate income tax rates, the excess tax benefits associated with the exercise of stock options and the vesting and delivery of restricted share awards, or RSAs, restricted share units, or RSUs, and performance share units, or PSUs, could generate a significant income tax benefit in a particular interim period, potentially creating volatility in Net income attributable to W. P. Carey and basic and diluted earnings per share between interim periods. Under the former accounting guidance, windfall tax benefits related to stock-based compensation were recognized within Additional paid-in capital in our consolidated financial statements. Under ASU 2016-09, these amounts are reflected as a reduction to Provision for income taxes. For reference, windfall tax benefits related to stock-based compensation recorded in Additional paid-in capital for the years ended December 31, 2016 and 2015 were $6.7 million and $12.5 million, respectively. Windfall tax benefits related to stock-based compensation recorded as a deferred tax benefit for the three and nine months ended September 30, 2017 were $0.6 million and $3.6 million, respectively.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating credit losses based on current expected credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within


 
W. P. Carey 9/30/2017 10-Q 12
                    

 
Notes to Consolidated Financial Statements (Unaudited)

those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, and (iv) distributions received from equity method investees. ASU 2016-15 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-15 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-17 as of January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We elected to early adopt ASU 2017-01 on January 1, 2017 on a prospective basis. While our acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by us likely would have been considered asset acquisitions under the new standard. As a result, transaction costs are more likely to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years in which a goodwill impairment test is performed, with early adoption permitted. We adopted ASU 2017-04 as of April 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.



 
W. P. Carey 9/30/2017 10-Q 13
                    

 
Notes to Consolidated Financial Statements (Unaudited)

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact of ASU 2017-05 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms and conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-09 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements.



 
W. P. Carey 9/30/2017 10-Q 14
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties
 
Advisory Agreements with the Managed Programs
 
We have advisory agreements with each of the Managed Programs, pursuant to which we earn fees and are entitled to receive reimbursement for fund management expenses, as well as cash distributions. The advisory agreements also entitled us to fees for serving as the dealer manager of the offerings of the Managed Programs. However, as previously noted, as of June 30, 2017, we ceased all active non-traded retail fundraising activities. We facilitated the orderly processing of sales of shares of the common stock and limited partnership units of CWI 2 and CESH I, respectively, through July 31, 2017 and closed their respective offerings on that date, and as a result, stopped receiving dealer manager fees after that date. In addition, in August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017, and as a result, we no longer earned any fees from CCIF after that date. We currently expect to continue to manage all existing Managed Programs through the end of their respective natural life cycles (Note 1). The advisory agreements with each of the Managed REITs have terms of one year, may be renewed for successive one-year periods, and are currently scheduled to expire on December 31, 2017, unless otherwise renewed. The advisory agreement with CESH I, which commenced June 3, 2016, will continue until terminated pursuant to its terms.

The following tables present a summary of revenue earned and/or cash received from the Managed Programs for the periods indicated, included in the consolidated financial statements. Asset management revenue excludes amounts received from third parties (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Asset management revenue
$
17,938

 
$
15,955

 
$
53,271

 
$
45,535

Distributions of Available Cash
12,047

 
10,876

 
34,568

 
32,018

Structuring revenue
9,817

 
12,301

 
27,981

 
30,990

Reimbursable costs from affiliates
6,211

 
14,540

 
45,390

 
46,372

Interest income on deferred acquisition fees and loans to affiliates
447

 
130

 
1,464

 
492

Dealer manager fees
105

 
1,835

 
4,430

 
5,379

Other advisory revenue
99

 
522

 
896

 
522

 
$
46,664

 
$
56,159

 
$
168,000

 
$
161,308

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
CPA®:17 – Global
$
15,383

 
$
16,616

 
$
55,645

 
$
51,820

CPA®:18 – Global 
4,042

 
5,259

 
18,361

 
22,851

CWI 1
11,940

 
7,771

 
26,051

 
26,453

CWI 2
11,643

 
19,924

 
45,206

 
49,233

CCIF
1,787

 
3,388

 
12,777

 
7,750

CESH I
1,869

 
3,201

 
9,960

 
3,201

 
$
46,664

 
$
56,159

 
$
168,000

 
$
161,308




 
W. P. Carey 9/30/2017 10-Q 15
                    

 
Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
 
September 30, 2017
 
December 31, 2016
Short-term loans to affiliates, including accrued interest
$
132,210

 
$
237,613

Deferred acquisition fees receivable, including accrued interest
10,720

 
21,967

Accounts receivable
5,358

 
5,005

Reimbursable costs
3,943

 
4,427

Current acquisition fees receivable
1,508

 
8,024

Asset management fees receivable
539

 
2,449

Organization and offering costs
58

 
784

Distribution and shareholder servicing fees

 
19,341

 
$
154,336

 
$
299,610


Asset Management Revenue
 
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
CPA®:17 – Global
 
0.5% – 1.75%
 
2016 50% in cash and 50% in shares of its common stock; 2017 in shares of its common stock
 
Rate depends on the type of investment and is based on the average market or average equity value, as applicable
CPA®:18 – Global
 
0.5% – 1.5%
 
In shares of its Class A common stock
 
Rate depends on the type of investment and is based on the average market or average equity value, as applicable
CWI 1
 
0.5%
 
2016 in cash; 2017 in shares of its common stock
 
Rate is based on the average market value of the investment; we are required to pay 20% of the asset management revenue we receive to the subadvisor
CWI 2
 
0.55%
 
In shares of its Class A common stock
 
Rate is based on the average market value of the investment; we are required to pay 25% of the asset management revenue we receive to the subadvisor
CCIF
 
1.75% – 2.00%
 
In cash, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1)
 
Based on the average of gross assets at fair value; we were required to pay 50% of the asset management revenue we received to the subadvisor
CESH I
 
1.0%
 
In cash
 
Based on gross assets at fair value


 
W. P. Carey 9/30/2017 10-Q 16
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Structuring Revenue
 
Under the terms of the advisory agreements with the Managed Programs, we earn revenue for structuring and negotiating investments and related financing. We did not earn any structuring revenue from the Managed BDCs. The following table presents a summary of our structuring fee arrangements with the Managed Programs:
Managed Program
 
Rate
 
Payable
 
Description
CPA®:17 – Global
 
1% – 1.75%, 4.5%
 
In cash; for non net-lease investments, 1% – 1.75% upon completion; for net-lease investments, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments
 
Based on the total aggregate cost of the net-lease investments made; also based on the total aggregate cost of the non net-lease investments or commitments made; total limited to 6% of the contract prices in aggregate
CPA®:18 – Global
 
4.5%
 
In cash; for all investments, other than readily marketable real estate securities for which we will not receive any acquisition fees, 2.5% upon completion, with 2% deferred and payable in three interest-bearing annual installments
 
Based on the total aggregate cost of the investments or commitments made; total limited to 6% of the contract prices in aggregate
CWI REITs
 
2.5%
 
In cash upon completion; however, fees were paid 50% in cash and 50% in shares of CWI 1’s common stock and CWI 2’s Class A common stock for a jointly-owned investment structured on behalf of CWI 1 and CWI 2 in September 2017, with the approval of each CWI REIT’s board of directors
 
Based on the total aggregate cost of the lodging investments or commitments made; loan refinancing transactions up to 1% of the principal amount; we are required to pay 20% and 25% to the subadvisors of CWI 1 and CWI 2, respectively; total for each CWI REIT limited to 6% of the contract prices in aggregate
CESH I
 
2.0%
 
In cash upon completion
 
Based on the total aggregate cost of investments or commitments made, including the acquisition, development, construction, or re-development of the investments



 
W. P. Carey 9/30/2017 10-Q 17
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Reimbursable Costs from Affiliates
 
During their respective offering periods, the Managed Programs reimbursed us for certain costs that we incurred on their behalf, which consisted primarily of broker-dealer commissions, marketing costs, and an annual distribution and shareholder servicing fee, as applicable. The offerings for CWI 2 and CESH I closed on July 31, 2017. The Managed Programs will continue to reimburse us for certain personnel and overhead costs that we incur on their behalf. The following tables present summaries of such fee arrangements:

Broker-Dealer Selling Commissions
Managed Program
 
Rate
 
Payable
 
Description
CWI 2 Class A Shares
 
January 1, 2016 through March 31, 2017: $0.70

April 27, 2017 through July 31, 2017: $0.84 (a)
 
In cash upon share settlement; 100% re-allowed to broker-dealers
 
Per share sold
CWI 2 Class T Shares
 
January 1, 2016 through March 31, 2017: $0.19

April 27, 2017 through July 31, 2017: $0.23 (a)
 
In cash upon share settlement; 100% re-allowed to broker-dealers
 
Per share sold
CCIF Feeder Funds
 
Through September 10, 2017:
0% – 3% (b)
 
In cash upon share settlement; 100% re-allowed to broker-dealers
 
Based on the selling price of each share sold; the offering for Carey Credit Income Fund 2016 T (known as Guggenheim Credit Income Fund 2016 T since October 23, 2017), or CCIF 2016 T, closed on April 28, 2017
CESH I
 
Up to 7.0% of gross offering proceeds (a)
 
In cash upon limited partnership unit settlement; 100% re-allowed to broker-dealers
 
Based on the selling price of each limited partnership unit sold
__________
(a)
After the end of active fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales in the offerings of CWI 2 and CESH I through July 31, 2017, which then closed their respective offerings on that date.
(b)
In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017.



 
W. P. Carey 9/30/2017 10-Q 18
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Dealer Manager Fees
Managed Program
 
Rate
 
Payable
 
Description
CWI 2 Class A Shares
 
January 1, 2016 through March 31, 2017: $0.30

April 27, 2017 through July 31, 2017: $0.36 (a)
 
Per share sold
 
In cash upon share settlement; a portion may be re-allowed to broker-dealers
CWI 2 Class T Shares
 
January 1, 2016 through March 31, 2017: $0.26

April 27, 2017 through July 31, 2017: $0.31 (a)
 
Per share sold
 
In cash upon share settlement; a portion may be re-allowed to broker-dealers
CCIF Feeder Funds
 
Through September 10, 2017: 2.50% – 3.0% (b)
 
Based on the selling price of each share sold
 
In cash upon share settlement; a portion may be re-allowed to broker-dealers; CCIF 2016 T’s offering closed on April 28, 2017
CESH I
 
Up to 3.0% of gross offering proceeds (a)
 
Per limited partnership unit sold
 
In cash upon limited partnership unit settlement; a portion may be re-allowed to broker-dealers
__________
(a)
In connection with the end of active fundraising by Carey Financial on June 30, 2017, CWI 2 and CESH I facilitated the orderly processing of sales through July 31, 2017 and closed their respective offerings on that date.
(b)
In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017.

Annual Distribution and Shareholder Servicing Fee
Managed Program
 
Rate
 
Payable
 
Description
CPA®:18 – Global Class C Shares (a)
 
1.0%
 
Accrued daily and payable quarterly in arrears in cash; a portion may be re-allowed to selected dealers
 
Based on the purchase price per share sold or, once it was reported, the net asset value per share, or NAV; cease paying when underwriting compensation from all sources equals 10% of gross offering proceeds
CWI 2 Class T Shares (a)
 
1.0%
 
Accrued daily and payable quarterly in arrears in cash; a portion may be re-allowed to selected dealers
 
Based on the purchase price per share sold or, once it was reported, the NAV; cease paying on the earlier of six years or when underwriting compensation from all sources equals 10% of gross offering proceeds
CCIF 2016 T (b)
 
0.9%
 
Payable quarterly in arrears in cash; 100% is re-allowed to selected dealers
 
Based on the weighted-average net price of shares sold in the public offering; cease paying on the earlier of when underwriting compensation from all sources equals, including this fee, 10% of gross offering proceeds or the date at which a liquidity event occurs
__________
(a)
In connection with our exit from all non-traded retail fundraising activities as of June 30, 2017, beginning with the payment for the third quarter of 2017 (which was made during the fourth quarter of 2017), the distribution and shareholder servicing fee is now paid directly to selected dealers by the respective funds. As a result, our liability to the selected dealers and the corresponding receivable from the funds were removed during the third quarter of 2017.
(b)
In connection with our resignation as advisor to CCIF in August 2017, our dealer manager agreement was assigned to Guggenheim. As a result, our liability to the selected dealers and the corresponding receivable from CCIF was removed.


 
W. P. Carey 9/30/2017 10-Q 19
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Personnel and Overhead Costs
Managed Program
 
Payable
 
Description
CPA®:17 – Global and CPA®:18 – Global
 
In cash
 
Personnel and overhead costs, excluding those related to our legal transactions group, our senior management, and our investments team, are charged to the CPA® REITs based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and are capped at 2.0% and 2.2% of each CPA® REIT’s pro rata lease revenues for 2017 and 2016, respectively; for the legal transactions group, costs are charged according to a fee schedule
CWI 1
 
In cash
 
Actual expenses incurred, excluding those related to our senior management; allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter
CWI 2
 
In cash
 
Actual expenses incurred, excluding those related to our senior management; allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter
CCIF and CCIF Feeder Funds
 
In cash, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1)
 
Actual expenses incurred, excluding those related to their investment management team and senior management team
CESH I
 
In cash
 
Actual expenses incurred

Organization and Offering Costs
Managed Program
 
Payable
 
Description
CWI 2 (a)
 
In cash; within 60 days after the end of the quarter in which the offering terminates
 
Actual costs incurred up to 1.5% of the gross offering proceeds
CCIF and CCIF Feeder Funds (b)
 
In cash; payable monthly, prior to our resignation as the advisor to CCIF, effective September 11, 2017 (Note 1)
 
Up to 1.5% of the gross offering proceeds; we were required to pay 50% of the organization and offering costs we received to the subadvisor
CESH I (a)
 
N/A
 
In lieu of reimbursing us for organization and offering costs, CESH I paid us limited partnership units, as described below under Other Advisory Revenue
__________
(a)
In connection with the end of active fundraising by Carey Financial on June 30, 2017, CWI 2 and CESH I facilitated the orderly processing of sales through July 31, 2017 and closed their respective offerings on that date.
(b)
In August 2017, we resigned as the advisor to CCIF, and our advisory agreement with CCIF was terminated, effective as of September 11, 2017.

Other Advisory Revenue

Under the limited partnership agreement we have with CESH I, we paid all organization and offering costs on behalf of CESH I, and instead of being reimbursed by CESH I on a dollar-for-dollar basis for those costs, we received limited partnership units of CESH I equal to 2.5% of its gross offering proceeds. This revenue, which commenced in the third quarter of 2016, is included in Other advisory revenue in the consolidated statements of income and totaled $0.1 million and $0.7 million for the three and nine months ended September 30, 2017, respectively, and $0.5 million for both the three and nine months ended September 30, 2016, respectively. In connection with the end of active non-traded retail fundraising by Carey Financial on June 30, 2017, we facilitated the orderly processing of sales of CESH I through July 31, 2017, which closed its offering on that date.



 
W. P. Carey 9/30/2017 10-Q 20
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Expense Support and Conditional Reimbursements

Under the expense support and conditional reimbursement agreement we had with each of the CCIF Feeder Funds, we and the CCIF subadvisor were obligated to reimburse the CCIF Feeder Funds 50% of the excess of the cumulative distributions paid to the CCIF Feeder Funds’ shareholders over the available operating funds on a monthly basis. Following any month in which the available operating funds exceeded the cumulative distributions paid to its shareholders, the excess operating funds were used to reimburse us and the CCIF subadvisor for any expense payment we made within three years prior to the last business day of such month that had not been previously reimbursed by the CCIF Feeder Fund, up to the lesser of (i) 1.75% of each CCIF Feeder Fund’s average net assets or (ii) the percentage of each CCIF Feeder Fund’s average net assets attributable to its common shares represented by other operating expenses during the fiscal year in which such expense support payment from us and the CCIF’s subadvisor was made, provided that the effective rate of distributions per share at the time of reimbursement was not less than such rate at the time of expense payment. The expense support and conditional reimbursement agreement we had with each of the CCIF Feeder Funds was terminated in connection with our resignation as the advisor to CCIF effective as of September 11, 2017.
 
Distributions of Available Cash
 
We 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 described in their respective operating partnership agreements, payable quarterly in arrears. We are required to pay 20% and 25% of such distributions to the subadvisors of CWI 1 and CWI 2, respectively.

Back-End Fees and Interests in the Managed Programs

Under our advisory agreements with certain of the Managed Programs, we may also receive compensation in connection with providing liquidity events for their stockholders. For the Managed REITs, the timing and form of such liquidity events are at the discretion of each REIT’s board of directors, and in certain instances, we have waived these fees in connection with the liquidity events of prior programs that we managed. Therefore, there can be no assurance as to whether or when any of these back-end fees or interests will be realized.

Other Transactions with Affiliates
 
Loans to Affiliates

From time to time, our Board has approved the making of secured and unsecured loans from us to certain of the Managed Programs, at our sole discretion, with each loan at a rate equal to the rate at which we are able to borrow funds under our senior credit facility (Note 10), generally for the purpose of facilitating acquisitions or for working capital purposes.

The following table sets forth certain information regarding our loans to affiliates (dollars in thousands):
 
 
Interest Rate at
September 30, 2017
 
Maturity Date at September 30, 2017
 
Maximum Loan Amount Authorized at September 30, 2017
 
Principal Outstanding Balance at (a)
Managed Program
 
 
 
 
September 30, 2017
 
December 31, 2016
CWI 1 (b) (c) (d)
 
LIBOR + 1.00%
 
6/30/2018; 12/31/2018
 
$
100,000

 
$
97,835

 
$

CPA®:18 – Global (b) (e)
 
LIBOR + 1.00%
 
10/31/2017; 5/15/2018
 
50,000

 
19,000

 
27,500

CESH I (b)
 
LIBOR + 1.00%
 
5/3/2018; 5/9/2018
 
35,000

 
14,461

 

CWI 2 (f)
 
N/A
 
N/A
 
N/A
 

 
210,000

 
 
 
 
 
 
 
 
$
131,296

 
$
237,500

__________
(a)
Amounts exclude accrued interest of $0.9 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.
(b)
LIBOR means London Interbank Offered Rate.
(c)
We entered into a secured credit facility with CWI 1 in September 2017, comprised of a $75.0 million bridge loan to facilitate an acquisition and a $25.0 million revolving working capital facility.


 
W. P. Carey 9/30/2017 10-Q 21
                    

 
Notes to Consolidated Financial Statements (Unaudited)

(d)
In October 2017, CWI 1 repaid $29.2 million, in aggregate, of the loans outstanding to us at September 30, 2017 (Note 17).
(e)
In October 2017, CPA®:18 – Global repaid in full the amount outstanding to us at September 30, 2017 (Note 17).
(f)
In October 2017, we entered into a secured $25.0 million revolving working capital facility with CWI 2 (Note 17).

Other

At September 30, 2017, we owned interests ranging from 3% to 90% in jointly owned investments in real estate, including a jointly controlled tenancy-in-common interest in several properties, with the remaining interests generally held by affiliates. In addition, we owned stock of each of the Managed REITs and CCIF, and limited partnership units of CESH I. We consolidate certain of these investments and account for the remainder either (i) under the equity method of accounting, (ii) under the cost method of accounting, or (iii) at fair value by electing the equity method fair value option available under GAAP (Note 7).

Note 4. Land, Buildings and Improvements and Assets Held for Sale
 
Land, Buildings and Improvements — Operating Leases

Land and buildings leased to others, which are subject to operating leases, and real estate under construction, are summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Land
$
1,132,569

 
$
1,128,933

Buildings
4,194,213

 
4,053,334

Real estate under construction
20,373

 
21,859

Less: Accumulated depreciation
(578,592
)
 
(472,294
)
 
$
4,768,563

 
$
4,731,832

 
During the nine months ended September 30, 2017, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increased by 12.0% to $1.1806 from $1.0541. As a result of this fluctuation in foreign exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases increased by $160.5 million from December 31, 2016 to September 30, 2017.

Depreciation expense, including the effect of foreign currency translation, on our Land, buildings and improvements subject to operating leases was $36.3 million and $35.4 million for the three months ended September 30, 2017 and 2016, respectively, and $107.5 million and $107.3 million for the nine months ended September 30, 2017 and 2016, respectively. Accumulated depreciation of real estate is included in Accumulated depreciation and amortization in the consolidated financial statements.

In connection with changes in lease classifications due to extensions of the underlying leases, we reclassified six properties with an aggregate carrying value of $1.6 million from Net investments in direct financing leases to Land, buildings and improvements during the nine months ended September 30, 2017 (Note 5).

Acquisition of Real Estate

On June 27, 2017, we acquired an industrial facility in Chicago, Illinois, which was deemed to be a real estate asset acquisition, at a total cost of $6.0 million, including land of $2.2 million, building of $2.5 million, and an in-place lease intangible asset of $1.3 million (Note 6). We also committed to fund an additional $3.6 million of building improvements at that facility by June 2018.

Real Estate Under Construction

During the nine months ended September 30, 2017, we capitalized real estate under construction totaling $43.5 million, including net accrual activity of $6.8 million, primarily related to construction projects on our properties. As of September 30, 2017, we had five construction projects in progress, and as of December 31, 2016, we had three construction projects in progress. Aggregate unfunded commitments totaled approximately $109.6 million and $135.2 million as of September 30, 2017 and December 31, 2016, respectively.



 
W. P. Carey 9/30/2017 10-Q 22
                    

 
Notes to Consolidated Financial Statements (Unaudited)

During the nine months ended September 30, 2017, we capitalized and completed the following construction projects, at a total cost of $59.0 million, of which $35.5 million was capitalized during 2016:

an expansion project at an industrial facility in Windsor, Connecticut in March 2017 at a cost totaling $3.3 million;
an expansion project at an educational facility in Coconut Creek, Florida in May 2017 at a cost totaling $18.2 million;
an expansion project at two industrial facilities in Monarto, Australia in May 2017 at a cost totaling $15.9 million; and
a build-to-suit project for an industrial facility in McCalla, Alabama in June 2017 at a cost totaling $21.6 million.

Dispositions of Properties

During the nine months ended September 30, 2017, we sold nine properties and a parcel of vacant land, excluding the sale of one property that was classified as held for sale as of December 31, 2016, and transferred ownership of two properties to the related mortgage lender (Note 15). As a result, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $72.4 million from December 31, 2016 to September 30, 2017.

Future Dispositions of Properties

As of September 30, 2017, two tenants exercised options to repurchase the properties they are leasing from us in accordance with their lease agreements for an aggregate of $23.1 million (the amount for one repurchase is based on the exchange rate of the euro as of September 30, 2017), but there can be no assurance that such repurchases will be completed. At September 30, 2017, these two properties had an aggregate asset carrying value of $17.5 million.

Land, Buildings and Improvements — Operating Properties
 
At both September 30, 2017 and December 31, 2016, Land, buildings and improvements attributable to operating properties consisted of our investments in two hotels, which are summarized as follows (in thousands): 
 
September 30, 2017
 
December 31, 2016
Land
$
6,041

 
$
6,041

Buildings
76,043

 
75,670

Less: Accumulated depreciation
(15,345
)
 
(12,143
)
 
$
66,739

 
$
69,568


Depreciation expense on our Land, buildings and improvements attributable to operating properties was $1.1 million for both the three months ended September 30, 2017 and 2016, and $3.2 million for both the nine months ended September 30, 2017 and 2016. Accumulated depreciation of Land, buildings and improvements attributable to operating properties is included in Accumulated depreciation and amortization in the consolidated financial statements.

Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):
 
September 30, 2017
 
December 31, 2016
Real estate, net
$
6,146

 
$

Intangible assets, net
4,450

 

Net investments in direct financing leases

 
26,247

Assets held for sale
$
10,596

 
$
26,247


At September 30, 2017, we had one property classified as Assets held for sale with a carrying value of $10.6 million.

At December 31, 2016, we had one property classified as Assets held for sale with a carrying value of $26.2 million. In addition, there was a deferred tax liability of $2.5 million related to this property as of December 31, 2016, which is included in Deferred income taxes in the consolidated balance sheets. The property was sold during the nine months ended September 30, 2017 (Note 15).



 
W. P. Carey 9/30/2017 10-Q 23
                    

 
Notes to Consolidated Financial Statements (Unaudited)

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 receivables portfolio consists of our Net investments in direct financing leases, note 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
 
Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $16.8 million and $17.6 million for the three months ended September 30, 2017 and 2016, respectively, and $49.3 million and $53.9 million for the nine months ended September 30, 2017 and 2016, respectively.

During the nine months ended September 30, 2017, the U.S. dollar weakened against the euro, resulting in a $38.9 million increase in the carrying value of Net investments in direct financing leases from December 31, 2016 to September 30, 2017. During the nine months ended September 30, 2017, we sold an international investment accounted for as a direct financing lease that had a net carrying value of $1.7 million. During the nine months ended September 30, 2017, we reclassified six properties with a carrying value of $1.6 million from Net investments in direct financing leases to Land, buildings and improvements in connection with changes in lease classifications due to extensions of the underlying leases (Note 4).

Note Receivable

At September 30, 2017 and December 31, 2016, we had a note receivable with an outstanding balance of $10.1 million and $10.4 million, respectively, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements. Earnings from our note receivable are included in Lease termination income and other in the consolidated financial statements.

Deferred Acquisition Fees Receivable
 
As described in Note 3, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA® REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA® REITs were included in Due from affiliates in the consolidated financial statements.
 
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. As of December 31, 2016, we had an allowance for credit losses of $13.3 million on a single direct financing lease investment, including the impact of foreign currency translation. This allowance was established in the fourth quarter of 2015. During the nine months ended September 30, 2016, we increased the allowance by $7.1 million, which was recorded in Property expenses, excluding reimbursable tenant costs in the consolidated financial statements, due to a decline in the estimated amount of future payments we would receive from the tenant. We sold this direct financing lease investment in August 2017, as described above. At both September 30, 2017 and December 31, 2016, none of the balances of our finance receivables were past due. There were no modifications of finance receivables during the nine months ended September 30, 2017.

We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables was last updated in the third quarter of 2017. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA® REITs are expected to have the available cash to make such payments.
 


 
W. P. Carey 9/30/2017 10-Q 24
                    

 
Notes to Consolidated Financial Statements (Unaudited)

A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable, is as follows (dollars in thousands):
 
 
Number of Tenants / Obligors at
 
Carrying Value at
Internal Credit Quality Indicator
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
1 - 3
 
24
 
27
 
$
604,081

 
$
621,955

4
 
8
 
5
 
123,173

 
70,811

5
 
 
1
 

 
1,644

 
 
 
 
 
 
$
727,254

 
$
694,410


Note 6. Goodwill and Other Intangibles

We have recorded net lease, internal-use software development, and trade name intangibles that are being amortized over periods ranging from three years to 40 years. In addition, we have several ground lease intangibles that are being amortized over periods of up to 99 years. In-place lease and below-market ground lease (as lessee) intangibles, at cost are included in In-place lease and other intangible assets in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease, below-market ground lease (as lessee), and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Internal-use software development and trade name intangibles are included in Other assets, net in the consolidated financial statements. Below-market rent, above-market ground lease (as lessee), and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.

In connection with our investment activity during the nine months ended September 30, 2017 (Note 4), we recorded an in-place lease intangible asset of $1.3 million, which has an expected life of 21 years.

Goodwill within our Owned Real Estate segment increased by $7.4 million during the nine months ended September 30, 2017 due to foreign currency translation adjustments, from $572.3 million as of December 31, 2016 to $579.7 million as of September 30, 2017. Goodwill within our Investment Management segment was $63.6 million as of September 30, 2017, unchanged from December 31, 2016. In connection with our Board’s decision to exit all non-traded retail fundraising activities (Note 1), we performed a test for impairment during the second quarter of 2017 on goodwill recorded in our Investment Management segment, and no impairment was indicated.



 
W. P. Carey 9/30/2017 10-Q 25
                    

 
Notes to Consolidated Financial Statements (Unaudited)

Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Internal-use software development costs
$
18,649

 
$
(7,159
)
 
$
11,490

 
$
18,568

 
$
(5,068
)
 
$
13,500

Trade name
3,975

 
(200
)
 
3,775

 
3,975

 

 
3,975

 
22,624

 
(7,359
)
 
15,265

 
22,543

 
(5,068
)
 
17,475

Lease Intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-place lease
1,185,107

 
(398,237
)
 
786,870

 
1,148,232

 
(322,119
)
 
826,113