Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to .
Commission file number: 001-13779
W. P. CAREY & CO. LLC
(Exact name of registrant as specified in its charter)
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Delaware
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13-3912578 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
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50 Rockefeller Plaza |
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New York, New York
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10020 |
(Address of principal executive offices)
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(Zip code) |
Registrants telephone numbers, including area code:
Investor Relations (212) 492-8920
(212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of exchange on which registered |
Listed Shares, No Par Value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2010, the aggregate market value of the registrants Listed Shares held by
non-affiliates was $743.6 million.
As of February 14, 2011, there are 39,505,273 Listed Shares of registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2011
Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Forward-Looking Statements
This Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of Part II 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. It is important to note that our actual results could be
materially different from those projected in such forward-looking statements. 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 which 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
(the SEC), including but not limited to those described in Item 1A. Risk Factors of this Report.
We do not undertake to revise or update any forward-looking statements. Additionally, a description
of our critical accounting estimates is included in the Managements Discussion and Analysis of
Financial Condition and Results of Operations section of this Report.
W. P. Carey 2010 10-K 1
PART I
(a) General Development of Business
Overview:
W. P. Carey & Co. LLC (W. P. Carey and, together with its consolidated subsidiaries and
predecessors, we, us or our) provides long-term sale-leaseback and build-to-suit transactions
for companies worldwide and manages a global investment portfolio. We invest primarily in
commercial properties domestically and internationally that are each triple-net leased to single
corporate tenants, which requires each tenant to pay substantially all of the costs associated with
operating and maintaining the property. We also earn revenue as the advisor to publicly owned,
non-actively traded real estate investment trusts (REITs), which are sponsored by us under the
Corporate Property Associates brand name (the CPA® REITs) and that invest in similar
properties. We are currently the advisor to the following CPA® REITs: Corporate Property
Associates 14 Incorporated (CPA®:14), Corporate Property Associates 15 Incorporated
(CPA®:15), Corporate Property Associates 16 Global Incorporated
(CPA®:16 Global) and Corporate Property Associates 17 Global Incorporated
(CPA®:17 Global).
We are also the advisor to Carey Watermark Investors Incorporated (Carey Watermark), which we
formed in March 2008 for the purpose of acquiring interests in lodging and lodging-related
properties. A registration statement to sell up to $1.0 billion of common stock of Carey Watermark
was declared effective by the Securities and Exchange Commission (the SEC) in September 2010. We
are currently fundraising for Carey Watermark, however Carey Watermark has had no investments or
significant operating activity as of the date of this Report.
Most of our properties were either acquired as a result of our consolidation with certain
affiliated Corporate Property Associates limited partnerships or subsequently acquired from other
CPA® REIT programs in connection with the provision of liquidity to shareholders of
those REITs, as further described below. Because our advisory agreements with each of the existing
CPA® REITs require that we use our best efforts to present to them a continuing and
suitable program of investment opportunities that meet their investment criteria, we generally
provide investment opportunities to these funds first and earn revenues from transaction and asset
management services performed on their behalf. Our principal focus on our owned real estate
portfolio in recent years has therefore been on enhancing the value of our existing properties.
Under the advisory agreements with the CPA® REITs, we manage the CPA® REITs
portfolios of real estate investments, for which we earn asset-based management and performance
revenue, and we structure and negotiate investments and debt placement transactions for them, for
which we earn structuring revenue. We also receive a percentage of distributions of available cash
from CPA®:17 Globals operating partnership. In addition, we earn incentive and
disposition revenue and receive other compensation in connection with providing liquidity
alternatives to CPA® REIT shareholders. The CPA® REITs also reimburse us for
certain costs, primarily broker-dealer commissions paid on their behalf and marketing and personnel
costs. As a result of electing to receive certain payments for services in shares, we also hold
ownership interests in the CPA® REITs.
We were formed as a limited liability company under the laws of Delaware on July 15, 1996. We
commenced operations on January 1, 1998 by combining the limited partnership interests of nine
CPA® partnerships, at which time we listed on the New York Stock Exchange under the
symbol WPC. As a limited liability company, we are not subject to federal income taxation as long
as we satisfy certain requirements relating to our operations and pass through any tax liabilities
or benefits to our shareholders; however, certain of our subsidiaries are engaged in investment
management operations and are subject to United States (U.S.) federal, state and local income
taxes, and some of our subsidiaries may also be subject to foreign taxes.
Our principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020, and our
telephone number is (212) 492-1100. At December 31, 2010, we employed 170 individuals through our
wholly-owned subsidiaries.
Significant Developments during 2010 include:
Acquisition Activity During 2010, we structured investments on behalf of the CPA®
REITs totaling $1.0 billion and entered into several investments for our owned real estate
portfolio totaling $76.8 million. International investments comprised 43% of these investments.
Amounts are based on the exchange rate of the foreign currency at the date of acquisition, as
applicable.
Fundraising Activities Since beginning fundraising for CPA®:17 Global in December
2007, we have raised more than $1.4 billion on its behalf through the date of this Report. Included
in this amount is $593.1 million that we raised during 2010 and $84.8 million that we have raised
so far in 2011 through the date of this Report. We earn a wholesaling fee of up to $0.15 per share
sold, which we use, along with any retained portion of selected dealer revenue, to cover
underwriting costs incurred in connection with CPA®:17 Globals offering and are
reimbursed for marketing and personnel costs incurred in raising capital on behalf of
CPA®:17 Global, subject to certain limitations.
W. P.
Carey 2010 10-K 2
CPA®:17 Global has filed a registration statement with the SEC for a possible
continuous public offering of up to an additional $1.0 billion of common stock, which we currently
expect will commence after the initial public offering terminates. We refer to the possible public
offering as the follow-on offering. There can be no assurance that CPA®:17 Global
will actually commence the follow-on offering or successfully sell the full number of shares
registered. The initial public offering for CPA®:17 Global will terminate on the
earlier of the date on which the registration statement for the follow-on offering becomes
effective or May 2, 2011.
Financing Activity During 2010, we obtained mortgage financing totaling $626.1 million on behalf
of the CPA® REITs and $70.3 million for our owned real estate portfolio, including
financing for new transactions and refinancing of maturing debt. Amounts are based on the exchange
rate of the foreign currency at the date of financing, as applicable.
Impairment Charges During 2010, we recorded impairment charges on our owned portfolio totaling
$15.4 million. We currently estimate that the CPA® REITs will record impairment charges
aggregating approximately $40.7 million of which our proportionate share is $3.0 million for 2010.
Our cash distributions from the CPA® REITs are not affected by the impairment charges
recognized by them.
Proposed Merger of Affiliates On December 13, 2010, two of the CPA® REITs we manage,
CPA®:14 and CPA®:16 Global, entered into a definitive agreement pursuant
to which CPA®:14 will merge with and into a subsidiary of CPA®:16 Global,
subject to the approval of the shareholders of CPA®:14 (the Proposed Merger). In
connection with this Proposed Merger, CPA®:16 Global filed a registration statement
with the SEC, which has not been declared effective by the SEC as of the date of this Report.
Special shareholder meetings for both CPA®:14 and CPA®:16 Global are
currently expected to be scheduled during the first half of 2011 to obtain CPA®:14 shareholder
approval of the Proposed Merger and the alternate merger described below, and CPA®:16
Global shareholder approval of the alternate merger, the UPREIT reorganization described below, and
a charter amendment to increase the number of authorized shares of CPA®:16 Global in
order to ensure that it will have sufficient shares to issue in the Proposed Merger. The alternate
merger is intended to provide an alternate tax-efficient transaction if the amount of cash to be
received by CPA®:14 shareholders in the Proposed Merger could cause the Proposed Merger
to be a taxable transaction. The closing of the Proposed Merger is also subject to customary
closing conditions, as well as the closing of the CPA®:14 asset sales described below.
If the Proposed Merger is approved, we currently expect that the closing will occur in the second
quarter of 2011, although there can be no assurance of such timing.
In connection with the Proposed Merger, we have agreed to purchase three properties from
CPA®:14, in which we already have a joint venture interest, for an aggregate purchase
price of $32.1 million, plus the assumption of approximately $64.7 million of indebtedness. These
properties all have remaining lease terms of less than 8 years, which are shorter than the average
lease term of CPA®:16 Globals portfolio of properties. Consequently,
CPA®:16 Global required that these assets be sold by CPA®:14 prior to the
Proposed Merger. This asset sale to us and the sale of three other properties to another affiliate,
CPA®:17 Global (the CPA®:14 Asset Sales), are contingent upon the
approval of the Proposed Merger by the shareholders of CPA®:14.
If the Proposed Merger is consummated, we expect to earn revenues of $31.2 million in connection
with the termination of the advisory agreements with CPA®:14 and $21.3 million of
subordinated disposition revenues. In addition, based on our ownership of 8,018,456 shares of
CPA®:14 at December 31, 2010, we expect to receive approximately $8.0 million as a result of
a special $1.00 cash distribution to be paid by CPA®:14 to its shareholders, in part
from the proceeds of the CPA®:14 Asset Sales, immediately prior to the Proposed Merger,
as described below.
We have agreed to elect to receive stock of CPA®:16 Global in respect of our shares
of CPA®:14 if the Proposed Merger is consummated. Carey Asset Management (CAM), our
subsidiary that acts as the advisor to the CPA® REITs, has also agreed to
waive any acquisition fees payable by CPA®:16 Global under its advisory
agreement with CAM in respect of the properties being acquired in the Proposed Merger and has also
agreed to waive any disposition fees that may subsequently be payable by
CPA®:16 Global upon a sale of such assets.
In the Proposed Merger, CPA®:14 shareholders will be entitled to receive $11.50 per share, the "Merger Consideration," which is equal to the estimated net asset value ("NAV") of CPA®:14 as of September 30, 2010. The Merger Consideration will
be paid to shareholders of CPA®:14, at their election, in either cash or a combination of the $1.00 per share special cash distribution and 1.1932 shares of CPA®:16 - Global common stock,
which equates to $10.50 based on the $8.80 per share NAV of CPA®:16 - Global as of September 30, 2010. We computed these NAVs internally, relying in part upon a
third-party valuation of each companys real estate portfolio and indebtedness as of September 30,
2010. The board of directors of each of CPA®:16 Global and CPA®:14 have
the ability, but not the obligation, to terminate the transaction if more than 50% of the shareholders of CPA®:14
elect to receive cash in the Proposed Merger. Assuming that holders of 50% of CPA®:14s
outstanding stock elect to receive cash in the Proposed Merger, then the maximum cash required by
CPA®:16 Global to purchase these shares would be approximately
$416.1 million, based on the total shares of CPA®:14 outstanding at December 31, 2010.
If the cash on hand and available to CPA®:14 and CPA®:16 Global, including
the proceeds of the CPA®:14 Asset Sales and a new $300.0 million senior credit facility
of CPA®:16 Global, is not sufficient to enable CPA®:16 Global to
fulfill cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to
purchase a sufficient number of shares of CPA®:16 Global stock from
CPA®:16 Global to enable it to pay such amounts to CPA®:14 shareholders.
W. P. Carey 2010 10-K 3
We currently expect to receive our $31.2 million termination fee in shares of CPA®:14,
which will then be exchanged at our election into shares of CPA®:16 Global in order to facilitate
this transaction. In addition, we currently expect to use the special $1.00 per share cash distribution
received from our ownership of CPA®:14 shares, the post-tax proceeds from the
disposition revenues, cash on hand, and amounts available under our line of credit to finance our potential obligations in connection with the Proposed Merger and the CPA®:14 Asset Sales, as necessary.
In connection with the Proposed Merger, CPA®:16 Global proposes to implement an
UPREIT reorganization. The proposed UPREIT reorganization is an internal reorganization of
CPA®:16 Global into an umbrella partnership real estate investment trust,
known as an UPREIT, to hold substantially all of its assets in an operating partnership, which is
how CPA®:17 Global is currently structured. While the asset management
fees to be paid by CPA®:16 Global to CAM are expected to decline as a
result of the UPREIT reorganization, the pre-tax fees will be paid in a more tax-efficient manner
and will result in a higher level of after-tax cash flow received by CAM.
(b) Financial Information About Segments
Refer to Note 18 in the accompanying consolidated financial statements for financial information
about segments.
(c) Narrative Description of Business
Business Objectives and Strategy
We have two primary business segments, investment management and real estate ownership. These
segments are each described below. Our objective is to increase shareholder value and earnings
through expansion of our investment management operations and prudent management of our owned real
estate assets.
Investment Management
We earn revenue as the advisor to the CPA® REITs. Under the advisory agreements with the
CPA® REITs, we perform various services, including but not limited to the day-to-day
management of the CPA® REITs and transaction-related services. The advisory agreements
allow us to elect to receive restricted stock for any revenue due from a CPA® REIT.
Because of limitations on the amount of non-real estate-related income that may be earned by a
limited liability company that is taxed as a publicly traded partnership, our investment management
operations are currently conducted primarily through taxable subsidiaries.
From time to time, we explore alternatives for expanding our investment management operations
beyond advising the CPA® REITs. Any such expansion could involve the purchase of
properties or other investments as principal, either for our owned portfolio or with the intention
of transferring such investments to a newly-created fund, as well as the sponsorship of one or more
funds to make investments other than primarily net lease investments.
Asset Management Revenue
Under the terms of the advisory agreements for CPA®:14, CPA®:15 and
CPA®:16 Global, we earn asset management revenue totaling 1% per annum of average
invested assets, which is calculated according to the advisory agreements for each CPA®
REIT. A portion of this asset management revenue is contingent upon the achievement of specific
performance criteria for each CPA® REIT, which is generally defined to be a cumulative
distribution return for shareholders of the CPA® REIT. For CPA®:14,
CPA®:15 and CPA®:16 Global, this performance revenue is generally equal to
0.5% of the average invested assets of the CPA® REIT. For CPA®:17 Global,
we earn asset management revenue ranging from 0.5% of average market value for long-term net leases
and certain other types of real estate investments up to 1.75% of average equity value for certain
types of securities. For CPA®:17 Global, we do not earn performance revenue, but we
receive up to 10% of distributions of available cash from its operating partnership. If
CPA®:16 Globals UPREIT reorganization is approved, we will no longer earn
performance revenue from CPA®:16 Global but will instead receive up to 10% of
distributions of available cash from its newly-formed operating partnership. We seek to increase
our asset management revenue and performance revenue by increasing real estate-related assets under
management, both as the CPA® REITs make new investments and from organizing new
investment entities. Such revenue may also increase, or decrease, based on changes in the appraised
value of the real estate assets of the individual CPA® REITs. Assets under management,
and the resulting revenue earned by us, may also decrease if investments are disposed of, either
individually or in connection with the liquidation of a CPA® REIT.
W. P. Carey 2010 10-K 4
Structuring Revenue
Under the terms of the advisory agreements, we earn revenue in connection with structuring and
negotiating investments for the CPA® REITs, which we call acquisition revenue. Under
each of the advisory agreements, we may receive acquisition revenue of up to an average of 4.5% of
the total cost of all investments made by each CPA® REIT. A portion of this revenue
(generally 2.5%) is paid to us when the transaction is completed, while the remainder (generally
2%) is payable to us in equal annual installments ranging from three to eight years, provided the
relevant CPA® REIT meets its performance criterion. Unpaid installments bear interest at
annual rates ranging from 5% to 7%. For certain types of non-long term net lease investments
acquired on behalf of CPA®:17 Global, initial acquisition revenue may range from 0%
to 1.75% of the equity invested plus the related acquisition revenue, with no deferred acquisition
revenue being earned. We may also be entitled, subject to CPA® REIT board approval, to
loan refinancing revenue of up to 1% of the principal amount refinanced in connection with
structuring and negotiating investments. This loan refinancing revenue, together with the
acquisition revenue, is referred to as structuring revenue.
Other Revenue
We may also earn revenue related to the disposition of properties, subject to subordination
provisions, which will only be recognized as the relevant conditions are met. Such revenue may
include subordinated disposition revenue of no more than 3% of the value of any assets sold,
payable only after shareholders have received back their initial investment plus a specified
preferred return, and subordinated incentive revenue of 15% of the net cash proceeds distributable
to shareholders from the disposition of properties, after recoupment by shareholders of their
initial investment plus a specified preferred return. We may also, in connection with the
termination of the advisory agreements for CPA®:14, CPA®:15 and
CPA®:16 Global, be entitled to a termination payment based on the amount by which the
fair value of a CPA® REITs properties, less indebtedness, exceeds investors capital
plus a specified preferred return. CPA®:17 Global and, if the UPREIT reorganization
is approved by CPA®:16 Globals shareholders, CPA®:16 Global, will have
the right, but not the obligation, upon certain terminations to repurchase our interests in their
operating partnerships at fair market value. We will not receive a termination payment in
circumstances where we receive subordinated incentive revenue.
In past years, we have earned substantial disposition and incentive or termination revenue in
connection with providing liquidity to CPA® REIT shareholders. In general, we begin
evaluating liquidity alternatives for CPA® REIT shareholders about eight years after a
CPA® REIT has substantially invested the net proceeds received in its initial public
offering. These liquidity alternatives may include listing the CPA® REITs shares on a
national securities exchange, selling the assets of the CPA® REIT or merging the
affected CPA® REIT with another entity, which could include another CPA®
REIT. However, the timing of liquidity events depends on market conditions and may also depend on
other factors, including approval of the proposed course of action by the independent directors,
and in some instances the shareholders, of the affected CPA® REIT, and may occur well
after the eighth anniversary of the date that the net proceeds of an offering have been
substantially invested. Because of these factors, CPA® REIT liquidity events have not
typically taken place every year. In consequence, given the relatively substantial amounts of
disposition revenue, as compared with the ongoing revenue earned from asset management and
structuring investments, income from this business segment may be significantly higher in those
years where a liquidity event takes place. If the Proposed Merger between CPA®:14 and
CPA®:16 Global is approved by the shareholders and the other closing conditions are
satisfied, we currently expect that the transaction will be completed in the second quarter of
2011, although there can be no assurance of such timing.
The CPA® REITs reimburse us for certain costs, primarily broker-dealer commissions paid
on behalf of the CPA® REITs and marketing and personnel costs. The CPA® REITs
also reimburse us for many of our costs associated with the evaluation of transactions on their
behalf that are not completed. Marketing and personnel costs are apportioned based on the assets of
each entity. These reimbursements may be substantial. These reimbursements, together with asset
management revenue payable by a specific CPA® REIT, may be subject to deferral or
reduction if they exceed a specified percentage of that CPA® REITs income or invested
assets. We also earn a wholesaling fee from CPA®:17 Global of up to $0.15 per share
sold, which we use, along with any retained portion of the selected dealer revenue, to cover other
underwriting costs incurred in connection with CPA®:17 Globals offering.
Effective September 15, 2010, we entered into an advisory agreement with Carey Watermark to perform
certain services, including managing Carey Watermarks offering and its overall business,
identification, evaluation, negotiation, purchase and disposition of lodging-related properties and
the performance of certain administrative duties.
We are currently fundraising for Carey Watermark; however, as of December 31, 2010, Carey Watermark
had no investments or significant operating activity. Costs incurred on behalf of Carey Watermark totaled
$3.4 million through December 31, 2010. We anticipate being reimbursed for all or a portion of
these costs in accordance with the terms of the advisory agreement if the minimum offering proceeds
are raised.
Equity Investments in CPA® REITs
As discussed above, we may elect to receive certain of our revenues from the CPA® REITs
in restricted shares of those entities. At December 31, 2010, we owned 9.2% of the outstanding
shares of CPA®:14, 7.1% of the outstanding shares of CPA®:15, 5.6% of the
outstanding shares of CPA®:16 Global and 0.6% of the outstanding shares of
CPA®:17 Global.
W. P. Carey 2010 10-K 5
Real Estate Ownership
We own and invest in commercial properties in the U.S. and the European Union that are then leased
to companies, primarily on a single-tenant, triple-net leased basis. While our acquisition of new
properties is constrained by our obligation to provide a continuing and suitable investment program
to the CPA® REITs, we seek to maximize the value of our existing portfolio through
prudent management of our real estate assets, which may involve follow-on transactions,
dispositions and favorable lease modifications, as well as refinancing of existing debt. In
connection with providing liquidity alternatives to CPA® REIT shareholders, we may
acquire additional properties from the liquidating CPA® REIT, as we did during 2006 and
plan to do in 2011 with the CPA®:14 Asset Sales in connection with the Proposed Merger
of CPA®:14 and CPA®:16 Global. We have also acquired properties and
interests in properties through tax-free exchanges and as part of joint ventures with the
CPA® REITs. We may also, in the future, seek to increase our portfolio by making
investments, including non-net lease investments and investments in emerging markets, that may not
meet the investment criteria of the CPA® REITs, particularly investments that are not
current-income oriented. See Our Portfolio below for an analysis of our portfolio at December 31,
2010.
No tenant at any of our consolidated investments represented more than 10% of our total lease
revenues from our real estate ownership during 2010.
The Investment Strategies, Financing Strategies, Asset Management, Competition and Environmental
Matters sections described below pertain to both our investment management and real estate
ownership segments.
Investment Strategies
The following description of our investment process applies to investments we make on behalf of the
CPA® REITs. In general, we would expect to follow a similar process in connection with
any investments in triple-net lease, single-tenant commercial properties we may make directly, but
we are not required to do so.
In analyzing potential investments, we review all aspects of a transaction, including tenant and
real estate fundamentals, to determine whether a potential investment and lease can be structured
to satisfy the CPA® REITs investment criteria. In evaluating net lease transactions, we
generally consider, among other things, the following aspects of each transaction:
Tenant/Borrower Evaluation We evaluate each potential tenant or borrower for its
creditworthiness, typically considering factors such as management experience, industry position
and fundamentals, operating history, and capital structure, as well as other factors that may be
relevant to a particular investment. We seek opportunities in which we believe the tenant may have
a stable or improving credit profile or credit potential that has not been recognized by the
market. In evaluating a possible investment, the creditworthiness of a tenant or borrower often
will be a more significant factor than the value of the underlying real estate, particularly if the
underlying property is specifically suited to the needs of the tenant; however, in certain
circumstances where the real estate is attractively valued, the creditworthiness of the tenant may
be a secondary consideration. Whether a prospective tenant or borrower is creditworthy will be
determined by our investment department and the investment committee, as described below.
Creditworthy does not mean investment grade.
Properties Important to Tenant/Borrower Operations We generally will focus on properties that we
believe are essential or important to the ongoing operations of the tenant. We believe that these
properties provide better protection generally as well as in the event of a bankruptcy, since a
tenant/borrower is less likely to risk the loss of a critically important lease or property in a
bankruptcy proceeding or otherwise.
Diversification We attempt to diversify the CPA® REIT portfolios to avoid dependence
on any one particular tenant, borrower, collateral type, geographic location or tenant/borrower
industry. By diversifying these portfolios, we seek to reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or geographic region. While we
have not endeavored to maintain any particular standard of diversity in our owned portfolio, we
believe that our owned portfolio is reasonably well diversified (see Our Portfolio below).
Lease Terms Generally, the net leased properties in which the CPA® REITs and we
invest will be leased on a full recourse basis to the tenants or their affiliates. In addition, we
seek to include a clause in each lease that provides for increases in rent over the term of the
lease. These increases are fixed or tied generally to increases in indices such as the Consumer
Price Index (CPI). In the case of retail stores and hotels, the lease may provide for
participation in gross revenues of the tenant at the property above a stated level. Alternatively,
a lease may provide for mandated rental increases on specific dates, and we may adopt other methods
in the future.
W. P. Carey 2010 10-K 6
Collateral Evaluation We review the physical condition of the property, and conduct a market
evaluation to determine the likelihood of replacing the rental stream if the tenant defaults or of
a sale of the property in such circumstances. We also generally engage a third party to conduct, or
require the seller to conduct, Phase I or similar environmental site assessments (including a
visual inspection for the potential presence of asbestos) in an attempt to identify potential
environmental liabilities associated with a property prior to its acquisition. If potential
environmental liabilities are identified, we generally require that identified environmental issues
be resolved by the seller prior to property acquisition or, where such issues cannot be resolved
prior to acquisition, require tenants contractually to assume responsibility for resolving
identified environmental issues post-closing and provide indemnification protections against any
potential claims, losses or expenses arising from such matters. Although we generally rely on our
own analysis in determining whether to make an investment on behalf of the CPA® REITs,
each real property to be purchased by them will be appraised by an independent appraiser. The
contractual purchase price (plus acquisition fees, but excluding acquisition expenses, for
properties acquired on behalf of the CPA® REITs) for a real property we acquire for
ourselves or on behalf of a CPA® REIT will not exceed its appraised value. The
appraisals may take into consideration, among other things, the terms and conditions of the
particular lease transaction, the quality of the lessees credit and the conditions of the credit
markets at the time the lease transaction is negotiated. The appraised value may be greater than
the construction cost or the replacement cost of a property, and the actual sale price of a
property if sold may be greater or less than the appraised value. In cases of special purpose real
estate, a property is examined in light of the prospects for the tenant/borrowers enterprise and
the financial strength and the role of that asset in the context of the tenants overall viability.
Operating results of properties and other collateral may be examined to determine whether or not
projected income levels are likely to be met. We will also consider factors particular to the laws
of foreign countries, in addition to the risks normally associated with real property investments,
when considering an investment outside the U.S.
Transaction Provisions to Enhance and Protect Value We attempt to include provisions in the
leases that we believe may help protect an investment from changes in the operating and financial
characteristics of a tenant that may affect its ability to satisfy its obligations to the
CPA® REIT or reduce the value of the investment. Such provisions include requiring our
consent to specified tenant activity, requiring the tenant to provide indemnification protections,
and requiring the tenant to satisfy specific operating tests. We may also seek to enhance the
likelihood of a tenants lease obligations being satisfied through a guaranty of obligations from
the tenants corporate parent or other entity or a letter of credit. This credit enhancement, if
obtained, provides additional financial security. However, in markets where competition for net
lease transactions is strong, some or all of these provisions may be difficult to negotiate. In
addition, in some circumstances, tenants may retain the right to repurchase the property leased by
the tenant. The option purchase price is generally the greater of the contract purchase price and
the fair market value of the property at the time the option is exercised.
Other Equity Enhancements We may attempt to obtain equity enhancements in connection with
transactions. These equity enhancements may involve warrants exercisable at a future time to
purchase stock of the tenant or borrower or their parent. If warrants are obtained, and become
exercisable, and if the value of the stock subsequently exceeds the exercise price of the warrant,
equity enhancements can help achieve the goal of increasing investor returns.
As other opportunities arise, we may also seek to expand the CPA® REIT portfolios to
include other types of real estate-related investments, such as:
|
|
|
equity investments in real properties that are not long-term net leased to a
single-tenant and may include partially leased properties, multi-tenanted properties, vacant
or undeveloped properties and properties subject to short-term net leases, among others; |
|
|
|
mortgage loans secured by commercial real properties; |
|
|
|
subordinated interests in first mortgage real estate loans, or B Notes; |
|
|
|
mezzanine loans related to commercial real estate, which are senior to the borrowers
equity position but subordinated to other third-party financing; |
|
|
|
commercial mortgage-backed securities, or CMBS; and |
|
|
|
equity and debt securities (including preferred equity and other higher-yielding
structured debt and equity investments) issued by companies that are engaged in
real-estate-related businesses, including other REITs. |
To date, our investments on behalf of the CPA® REITs have not included significant
amounts of these types of investments.
Investment Committee We have an investment committee that provides services to the
CPA® REITs and may provide services to us. Our investment department, under the
oversight of our chief investment officer, is primarily responsible for evaluating, negotiating and
structuring potential investment opportunities. Before a property is acquired by a CPA®
REIT, the transaction is generally reviewed by the investment committee. The investment committee
is not directly involved in originating or negotiating potential investments but instead functions
as a separate and final step in the investment process. We place special emphasis on having
experienced individuals serve on our investment committee and, subject to limited exceptions,
generally do not invest in a transaction
on behalf of the CPA® REITs unless the investment committee approves it. The investment
committee may delegate its authority, such as to investment advisory committees with specialized
expertise in the particular geographic market, like our Asia Advisory Committee for potential
investments in China. However, we do not currently expect that the investments delegated to these
advisory committees will account for a significant portion of the investments we make in the near
term.
W. P. Carey 2010 10-K 7
In addition, the investment committee may at the request of our board of directors or executive
committee also review any initial investment in which we propose to engage directly, although it is
not required to do so. Our board of directors or executive committee may also determine that
certain investments that may not meet the CPA® REITs investment criteria (particularly
transactions in emerging markets and investments that are not current income oriented) may be
acceptable to us. For transactions that meet the investment criteria of more than one
CPA® REIT, our chief investment officer may allocate the investment to one of the
CPA® REITs or among two or more of the CPA® REITs. In cases where two or more
CPA® REITs (or one or more CPA® REITs and us) will hold the investment, a
majority of the independent directors of each CPA® REIT investing in the property must
also approve the transaction.
The following people currently serve on our investment committee:
|
|
|
Nathaniel S. Coolidge, Chairman Former senior vice president and head of the bond and
corporate finance department of John Hancock Mutual Life Insurance (currently known as John
Hancock Life Insurance Company). Mr. Coolidges responsibilities included overseeing its
entire portfolio of fixed income investments. |
|
|
|
Axel K.A. Hansing Currently serving as a senior partner at Coller Capital, Ltd., a
global leader in the private equity secondary market, and responsible for investment
activity in parts of Europe, Turkey and South Africa. |
|
|
|
Frank J. Hoenemeyer Former vice chairman and chief investment officer of the
Prudential Insurance Company of America. As chief investment officer, he was responsible for
all of Prudential Insurance Company of Americas investments including stocks, bonds and
real estate. |
|
|
|
Jean Hoysradt Currently serving as the chief investment officer of Mousse Partners
Limited, an investment office based in New York. |
|
|
|
Dr. Lawrence R. Klein Currently serving as professor emeritus of economics and finance
at the University of Pennsylvania and its Wharton School. Recipient of the 1980 Nobel Prize
in economic sciences and former consultant to both the Federal Reserve Board and the
Presidents Council of Economic Advisors. |
|
|
|
Richard C. Marston Currently the James R.F. Guy professor of economics and finance at
the University of Pennsylvania and its Wharton School. |
|
|
|
Nick J.M. van Ommen Former chief executive officer of the European Public Real Estate
Association (EPRA), currently serves on the supervisory boards of several companies,
including Babis Vovos International Construction SA, a listed real estate company in Greece,
Intervest Retail and Intervest Offices, listed real estate companies in Belgium, BUWOG /
ESG, a residential leasing and development company in Austria and IMMOFINANZ, a listed real
estate company in Austria. |
|
|
|
Dr. Karsten von Köller Currently chairman of Lone Star Germany GMBH, a US private
equity firm, Chairman of the Supervisory Board of Düsseldorfer Hypothekenbank AG and Vice
Chairman of the Supervisory Boards of IKB Deutsche Industriebank AG, Corealcredit Bank AG
and MHB Bank AG. |
Messrs. Coolidge, Klein and von Köller also serve as members of our board of directors.
We are required to use our best efforts to present a continuing and suitable investment program to
the CPA® REITs but we are not required to present to the CPA® REITs any
particular investment opportunity, even if it is of a character which, if presented, could be taken
by one or more of the CPA® REITs.
Self-Storage Investments
In November 2006, we formed a subsidiary, Carey Storage Management LLC (Carey Storage), for the
purpose of investing in self-storage real estate properties and their related businesses within the
U.S. In January 2009, Carey Storage completed a transaction whereby it received cash proceeds, plus
a commitment to invest additional equity, from a third party (the Investor) to fund the purchase
of self-storage assets in the future in exchange for a 60% interest in its self-storage portfolio.
During 2010, Carey Storage
amended its agreement with the Investor to, among other things; remove a contingent purchase option
held by Carey Storage to repurchase the Investors interest in the venture at fair value. Further
information about current Carey Storage activity is described in Part II, Item 8, Note 4. Net
Investments in Properties Operating Real Estate.
W. P. Carey 2010 10-K 8
Our Portfolio
At December 31, 2010, we owned and managed 955 properties domestically and internationally,
including our owned portfolio. Our portfolio was comprised of our full or partial ownership
interest in 164 properties, substantially all of which were triple-net leased to 75 tenants, and
totaled approximately 14 million square feet (on a pro rata basis) with an occupancy rate of
approximately 89%. Our portfolio has the following property and lease characteristics:
Geographic Diversification
Information regarding the geographic diversification of our properties at December 31, 2010 is set
forth below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Region |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South |
|
$ |
24,897 |
|
|
|
37 |
% |
|
$ |
3,019 |
|
|
|
12 |
% |
West |
|
|
19,002 |
|
|
|
28 |
|
|
|
2,113 |
|
|
|
8 |
|
Midwest |
|
|
10,755 |
|
|
|
16 |
|
|
|
1,630 |
|
|
|
6 |
|
East |
|
|
5,984 |
|
|
|
8 |
|
|
|
6,575 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. |
|
|
60,638 |
|
|
|
89 |
|
|
|
13,337 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe (c) |
|
|
7,423 |
|
|
|
11 |
|
|
|
12,446 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,061 |
|
|
|
100 |
% |
|
$ |
25,783 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(c) |
|
Represents investments in France, Germany, Poland and Spain. |
Property Diversification
Information regarding our property diversification at December 31, 2010 is set forth below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Property Type |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
Office |
|
$ |
25,472 |
|
|
|
38 |
% |
|
$ |
9,717 |
|
|
|
38 |
% |
Industrial |
|
|
20,656 |
|
|
|
30 |
|
|
|
5,254 |
|
|
|
20 |
|
Warehouse/Distribution |
|
|
11,252 |
|
|
|
17 |
|
|
|
7,520 |
|
|
|
29 |
|
Retail |
|
|
5,725 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Other Properties (c) |
|
|
4,956 |
|
|
|
7 |
|
|
|
3,292 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,061 |
|
|
|
100 |
% |
|
$ |
25,783 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(c) |
|
Other properties include education and childcare, healthcare, hospitality, land and leisure
properties. |
W. P. Carey 2010 10-K 9
Tenant Diversification
Information regarding our tenant diversification at December 31, 2010 is set forth below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Tenant Industry (c) |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
Retail Stores |
|
$ |
8,770 |
|
|
|
13 |
% |
|
$ |
7,464 |
|
|
|
29 |
% |
Business and Commercial Services |
|
|
8,409 |
|
|
|
12 |
|
|
|
3,332 |
|
|
|
13 |
|
Telecommunications |
|
|
7,957 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Beverages, Food, and Tobacco |
|
|
4,949 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
|
4,907 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Healthcare, Education and Childcare |
|
|
4,420 |
|
|
|
7 |
|
|
|
3,292 |
|
|
|
13 |
|
Forest Products and Paper |
|
|
4,034 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Banking |
|
|
3,861 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Electronics |
|
|
3,701 |
|
|
|
5 |
|
|
|
1,270 |
|
|
|
5 |
|
Transportation Personal |
|
|
3,524 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Consumer Goods |
|
|
2,438 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Media: Printing and Publishing |
|
|
2,337 |
|
|
|
3 |
|
|
|
4,358 |
|
|
|
17 |
|
Hotels and Gaming |
|
|
1,810 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Federal, State and Local Government |
|
|
1,170 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Chemicals, Plastics, Rubber, and Glass |
|
|
1,150 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Mining, Metals, and Primary Metal Industries |
|
|
529 |
|
|
|
1 |
|
|
|
948 |
|
|
|
3 |
|
Transportation Cargo |
|
|
325 |
|
|
|
|
|
|
|
2,869 |
|
|
|
11 |
|
Machinery |
|
|
190 |
|
|
|
|
|
|
|
2,250 |
|
|
|
9 |
|
Other (d) |
|
|
3,580 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,061 |
|
|
|
100 |
% |
|
$ |
25,783 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(c) |
|
Based on the Moodys Investors Service, Inc.s classification system and information provided
by the tenant. |
|
(d) |
|
Includes revenue from tenants in our consolidated investments in the following industries:
automobile (1%), construction (1%), grocery (1%), leisure (1%) and textiles (1%). |
W. P. Carey 2010 10-K 10
Lease Expirations
At December 31, 2010, lease expirations of our properties are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Year of Lease Expiration |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
2011 |
|
$ |
7,216 |
|
|
|
11 |
% |
|
$ |
554 |
|
|
|
2 |
% |
2012 |
|
|
8,898 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
2013 |
|
|
5,563 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
2014 |
|
|
11,313 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
2015 |
|
|
6,297 |
|
|
|
9 |
|
|
|
6,440 |
|
|
|
25 |
|
2016 |
|
|
5,247 |
|
|
|
8 |
|
|
|
1,584 |
|
|
|
6 |
|
2017 |
|
|
5,841 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
2018 |
|
|
3,808 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
2019 2023 |
|
|
6,455 |
|
|
|
9 |
|
|
|
9,649 |
|
|
|
38 |
|
2024 2029 |
|
|
1,171 |
|
|
|
2 |
|
|
|
7,556 |
|
|
|
29 |
|
2030 |
|
|
6,252 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,061 |
|
|
|
100 |
% |
|
$ |
25,783 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
Financing Strategies
Consistent with our investment policies, we use leverage when available on terms we believe are
favorable. Substantially all of our mortgage loans, as well as those of the CPA® REITs,
are non-recourse and bear interest at fixed rates, or have been converted to fixed rates through
interest rate caps or swap agreements. We may refinance properties or defease a loan when a decline
in interest rates makes it profitable to prepay an existing mortgage loan, when an existing
mortgage loan matures or if an attractive investment becomes available and the proceeds from the
refinancing can be used to purchase such investment. The benefits of the refinancing may include an
increased cash flow resulting from reduced debt service requirements, an increase in distributions
from proceeds of the refinancing, if any, and/or an increase in property ownership if some
refinancing proceeds are reinvested in real estate. The prepayment of loans may require us to pay a
yield maintenance premium to the lender in order to pay off a loan prior to its maturity.
A lender on non-recourse mortgage debt generally has recourse only to the property collateralizing
such debt and not to any of our other assets, while full recourse financing would give a lender
recourse to all of our assets. The use of non-recourse debt, therefore, helps us to limit the
exposure of all of our assets to any one debt obligation. Lenders may, however, have recourse to
our other assets in limited circumstances not related to the repayment of the indebtedness, such as
under an environmental indemnity or in the case of fraud.
We also have an unsecured line of credit that can be used in connection with refinancing existing
debt and making new investments, as well as to meet other working capital needs. Our line of credit
is discussed in detail in the Cash Resources section of Part II, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations Financial Condition.
W. P. Carey 2010 10-K 11
Some of our financing may require us to make a lump-sum or balloon payment at maturity. We are
actively seeking to refinance loans that mature within the next several years but believe we have
sufficient financing alternatives and/or cash resources to make these payments, if necessary. At
December 31, 2010, scheduled balloon payments for the next five years are as follows (in
thousands):
|
|
|
|
|
2011 |
|
$ |
169,075 |
(a) (b) |
2012 |
|
|
28,260 |
|
2013 |
|
|
|
|
2014 |
|
|
|
(a) |
2015 |
|
|
40,253 |
|
|
|
|
(a) |
|
Excludes our pro rata share of mortgage obligations of equity investments in real estate
totaling $9.2 million in 2011 and $68.7 million in 2014. |
|
(b) |
|
Includes amounts that will be due upon maturity of our unsecured revolving line of credit in
June 2011. At December 31, 2010, we had drawn $141.8 million from this line of credit. We
intend to extend this line by an additional year. See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition Cash
Resources. |
Asset Management
We believe that effective management of our assets is essential to maintain and enhance property
values. Important aspects of asset management include restructuring transactions to meet the
evolving needs of current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
We monitor, on an ongoing basis, compliance by tenants with their lease obligations and other
factors that could affect the financial performance of any of our properties. Monitoring involves
receiving assurances that each tenant has paid real estate taxes, assessments and other expenses
relating to the properties it occupies and confirming that appropriate insurance coverage is being
maintained by the tenant. For international compliance, we often rely on third party asset
managers. We review financial statements of tenants and undertake regular physical inspections of
the condition and maintenance of properties. Additionally, we periodically analyze each tenants
financial condition, the industry in which each tenant operates and each tenants relative strength
in its industry.
Competition
In raising funds for investment by the CPA® REITs and Carey Watermark, we face active
competition from other funds with similar investment objectives that seek to raise funds from
investors through publicly registered, non-traded funds, publicly-traded funds and private funds,
such as hedge funds. In addition, we face broad competition from other forms of investment.
Currently, we raise substantially all of our funds for investment in the CPA® REITs and
Carey Watermark within the U.S.; however, in the future we may seek to raise funds for investment
from outside the U.S.
We face active competition from many sources for investment opportunities in commercial properties
net leased to major corporations both domestically and internationally. In general, we believe that
our managements experience in real estate, credit underwriting and transaction structuring should
allow us to compete effectively for commercial properties. However, competitors may be willing to
accept rates of return, lease terms, other transaction terms or levels of risk that we may find
unacceptable.
Environmental Matters
We and the CPA® REITs have invested, and expect to continue to invest, in properties
currently or historically used as industrial, manufacturing and commercial properties. Under
various federal, state and local environmental laws and regulations, current and former owners and
operators of property may have liability for the cost of investigating, cleaning-up or disposing of
hazardous materials released at, on, under, in or from the property. These laws typically impose
responsibility and liability without regard to whether the owner or operator knew of or was
responsible for the presence of hazardous materials or contamination, and liability under these
laws is often joint and several. Third parties may also make claims against owners or operators of
properties for personal injuries and property damage associated with releases of hazardous
materials. As part of our efforts to mitigate these risks, we typically engage third parties to
perform assessments of potential environmental risks when evaluating a new acquisition of property
and we frequently obtain contractual protection (indemnities, cash reserves, letters of credit or
other instruments) from property sellers, tenants, a tenants parent company or another third party
to address known or potential environmental issues.
W. P. Carey 2010 10-K 12
(d) Financial Information About Geographic Areas
See Our Portfolio above and Note 18 of the consolidated financial statements for financial data
pertaining to our geographic operations.
(e) Available Information
All filings we make with the SEC, including our Annual Report on Form 10-K, our quarterly reports
on Form 10-Q and our current reports on Form 8-K, and any amendments to those reports, are
available for free on our website, www.wpcarey.com, as soon as reasonably practicable after they
are filed or furnished to the SEC. Our SEC filings are available to be read or copied at the SECs
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the
operation of the Public Reference
Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for
free on the SECs Internet site at http://www.sec.gov. We are providing our website address solely
for the information of investors. We do not intend our website to be an active link or to otherwise
incorporate the information contained on our website into this report or other filings with the
SEC. We will supply to any shareholder, upon written request and without charge, a copy of this
Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC. Generally,
we also post the dates of our upcoming scheduled financial press releases, telephonic investor
calls and investor presentations on the Investor Relations portion of our website at least ten days
prior to the event. Our investor calls are open to the public and remain available on our website
for at least two weeks thereafter.
Our business, results of operations, financial condition and ability to pay distributions at the
current rate could be materially adversely affected by various risks and uncertainties, including
the conditions below. These risk factors may have affected, and in the future could affect, our
actual operating and financial results and could cause such results to differ materially from those
in any forward-looking statements. You should not consider this list exhaustive. New risk factors
emerge periodically, and we cannot assure you that the factors described below list all material
risks to us at any later time.
The recent financial and economic crisis adversely affected our business, and the continued
uncertainty in the global economic environment may adversely affect our business in the future.
Although we have seen signs of modest improvement in the global economy following the significant
distress in 2008 and 2009, the economic recovery remains weak, and our business in still dependent
on the speed and strength of that recovery, which cannot be predicted at the present time. To date,
its effects on our business have been somewhat limited, primarily in that a number of tenants,
particularly in the portfolios of the CPA® REITs, have experienced increased levels of
financial distress, with several having filed for bankruptcy protection, although our experience in
2010 reflected an improvement from 2008 and 2009.
Depending on how long and how severe this crisis is, we could in the future experience a number of
additional effects on our business, including higher levels of default in the payment of rent by
our tenants, additional bankruptcies and impairments in the value of our property investments, as
well as difficulties in refinancing existing loans as they come due. Any of these conditions may
negatively affect our earnings, as well as our cash flow and, consequently, our ability to sustain
the payment of dividends at current levels.
Our managed funds may also be adversely affected by these conditions, and their earnings or cash
flow may also be adversely affected by other events, such as increases in the value of the U.S.
Dollar relative to other currencies in which they receive rent, as well as the need to expend cash
to fund increased redemptions. Additionally, the ability of CPA®:17 Global to make
new investments will be affected by the availability of financing as well as its ability to raise
new funds. Decreases in the value of the assets held by the CPA® REITs will affect the
asset management revenues payable to us, as well as the value of the stock we hold in the
CPA® REITs, and decreases in these funds earnings or ability to pay distributions may
also affect their ability to make the payments due to us, as well as our income and cash flow from
CPA® REIT distribution payments.
Earnings from our investment management operations are subject to volatility.
Growth in revenue from our investment management operations is dependent in large part on future
capital raising in existing or future managed entities, as well as on our ability to make
investments that meet the investment criteria of these entities, both of which are subject to
uncertainty, including with respect to capital market and real estate market conditions. This
uncertainty creates volatility in our earnings because of the resulting fluctuation in
transaction-based revenue. Asset management revenue may be affected by factors that include not
only our ability to increase the CPA® REITs portfolio of properties under management,
but also changes in valuation of those properties, as well as sales of CPA® REIT
properties. In addition, revenue from our investment management operations, including our ability
to earn performance revenue, as well as the value of our holdings of CPA® REIT interests
and dividend income from those interests, may be significantly affected by the results of
operations of the CPA® REITs. Each of the CPA® REITs has invested
substantially all of its assets (other than short-term investments) in triple-net leased properties
substantially similar to those we hold, and consequently the results of operations of, and cash
available for distribution by, each of the CPA® REITs, is likely to be substantially
affected by the same market conditions, and subject to the same risk factors, as the properties we
own. Four of the sixteen CPA® funds temporarily reduced the rate of distributions to
their investors as a result of adverse developments involving tenants.
W. P. Carey 2010 10-K 13
Each of the CPA® REITs we currently manage may incur significant debt. This significant
debt load could restrict their ability to pay revenue owed to us when due, due to either liquidity
problems or restrictive covenants contained in their borrowing agreements. In addition, the revenue
payable under each of our current investment advisory agreements is subject to a variable annual
cap based on a formula tied to the assets and income of that CPA® REIT. This cap may
limit the growth of our management revenue. Furthermore,
our ability to earn revenue related to the disposition of properties is primarily tied to providing
liquidity events for CPA® REIT investors. Our ability to provide that liquidity, and to
do so under circumstances that will satisfy the applicable subordination requirements noted above
in Item 1, Business Other Revenue, will depend on market conditions at the relevant time, which
may vary considerably over a period of years. In any case, liquidity events typically occur several
years apart, and income from our investment management operations is likely to be significantly
higher in those years in which such events occur. If the Proposed Merger between CPA®:14
and CPA®:16 Global is approved by the shareholders and the other closing conditions
are satisfied, we currently expect that the transaction will be completed in the second quarter of
2011, although there can be no assurance of such timing.
The revenue streams from the investment advisory agreements with the CPA® REITs are
subject to limitation or cancellation.
The agreements under which we provide investment advisory services may generally be terminated by
each CPA® REIT upon 60 days notice, with or without cause. There can be no assurance
that these agreements will not be terminated. A termination without cause may, however, entitle us
to termination revenue, equal to 15% of the amount by which the net fair value of the relevant
CPA® REITs assets exceeds the remaining amount necessary to provide investors with total
distributions equal to their investment plus a preferred return. For CPA®:17 Global,
and CPA®:16 Global if the UPREIT reorganization is approved by CPA®:16
Globals shareholders, they have the right, but not the obligation, upon certain terminations to
repurchase our interests in their operating partnerships at fair market value. If such right is not
exercised, we would remain as a limited partner of the operating partnerships. Nonetheless, any
such termination could have a material adverse effect on our business, results of operations and
financial condition.
Changes in investor preferences or market conditions could limit our ability to raise funds or make
new investments.
Substantially all of our and the CPA® REITs current investments, as well as the
majority of the investments we expect to originate for the CPA® REITs in the near term,
are investments in single-tenant commercial properties that are subject to triple-net leases. In
addition, we have relied predominantly on raising funds from individual investors through the sale
by participating selected dealers to their customers of publicly-registered, non-traded securities
of the CPA® REITs. Although we have increased the number of broker-dealers we use for
fundraising, historically the majority of our fundraising efforts have been through one major
selected dealer. If, as a result of changes in market receptivity to investments that are not
readily liquid and involve high selected dealer fees, or for other reasons, this capital raising
method were to become less available as a source of capital, our ability to raise funds for
CPA® REIT programs and Carey Watermark, and consequently our ability to make investments
on their behalf, could be adversely affected. While we are not limited to this particular method of
raising funds for investment (and, among other things, the CPA® REITs and Carey
Watermark may themselves be able to borrow additional funds to invest), our experience with other
means of raising capital is limited. Also, many factors, including changes in tax laws or
accounting rules, may make these types of investments less attractive to potential sellers and
lessees, which could negatively affect our ability to increase the amount of assets of this type
under management.
We face active competition.
In raising funds for investment by the CPA® REITs and Carey Watermark, we face
competition from other funds with similar investment objectives that seek to raise funds from
investors through publicly registered, non-traded funds, publicly-traded funds and private funds.
This competition could adversely affect our ability to make acquisitions and to raise funds for
future investments, which in turn could ultimately reduce, or limit the growth of, revenues from
our investment management operations.
We face active competition for our investments from many sources, including insurance companies,
credit companies, pension funds, private individuals, financial institutions, finance companies and
investment companies, among others. These institutions may accept greater risk or lower returns,
allowing them to offer more attractive terms to prospective tenants. In addition, our evaluation of
the acceptability of rates of return on behalf of the CPA® REITs is affected by such
factors as the cost of raising capital, the amount of revenue we can earn and the performance
hurdle rates of the relevant CPA® REITs. Thus, the effect of the cost of raising capital
and the revenue we can earn may be to limit the amount of new investments we make on behalf of the
CPA® REITs, which will in turn limit the growth of revenues from our investment
management operations.
W. P. Carey 2010 10-K 14
A substantial amount of our leases will expire within the next three years, and we may have
difficulty in re-leasing or selling our properties if tenants do not renew their leases.
Within the next three years, approximately 32% of our leases, based on annualized contractual
minimum base rent, are due to expire. If these leases are not renewed, or if the properties cannot
be re-leased on terms that yield payments comparable to those currently being received, then our
lease revenues could be substantially adversely affected. The terms of any new or renewed leases of
these properties may depend on market conditions prevailing at the time of lease expiration. In
addition, if properties are vacated by the current tenants, we may incur substantial costs in
attempting to re-lease such properties. We may also seek to sell these properties, in which event
we may incur losses, depending upon market conditions prevailing at the time of sale.
Real estate investments generally lack liquidity compared to other financial assets, and this lack
of liquidity will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. Some of our net leases are for properties that are specially suited
to the particular needs of the tenant. With these properties, we may be required to renovate the
property or to make rent concessions in order to lease the property to another tenant. In addition,
if we are forced to sell the property, we may have difficulty selling it to a party other than the
tenant due to the special purpose for which the property may have been designed. These and other
limitations may affect our ability to re-lease or sell properties without adversely affecting
returns to shareholders.
International investments involve additional risks.
We have invested in and may continue to invest in properties located outside the U.S. These
investments may be affected by factors particular to the laws of the jurisdiction in which the
property is located. These investments may expose us to risks that are different from and in
addition to those commonly found in the U.S., including:
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Foreign currency risk due to potential fluctuations in exchange rates between foreign
currencies and the U.S. dollar; |
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Changing governmental rules and policies; |
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Enactment of laws relating to the foreign ownership of property and laws relating to the
ability of foreign entities to remove invested capital or profits earned from activities
within the country to the United States; |
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Legal systems under which the ability to enforce contractual rights and remedies may be
more limited than would be the case under U.S. law; |
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The difficulty in conforming obligations in other countries and the burden of complying
with a wide variety of foreign laws; |
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Adverse market conditions caused by changes in national or local economic or political
conditions; |
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Tax requirements vary by country and we may be subject to additional taxes as a result of
our international investments; |
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Changes in relative interest rates; |
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Changes in the availability, cost and terms of mortgage funds resulting from varying
national economic policies; |
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Changes in real estate and other tax rates and other operating expenses in particular
countries; |
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Changes in land use and zoning laws; and |
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More stringent environmental laws or changes in such laws. |
Also, we may rely on third-party asset managers in international jurisdictions to monitor
compliance with legal requirements and lending agreements with respect to properties we own or
manage on behalf of the CPA® REITs. Failure to comply with applicable requirements may
expose us or our operating subsidiaries to additional liabilities.
W. P. Carey 2010 10-K 15
Our portfolio growth is constrained by our obligations to offer property transactions to the CPA®
REITs.
Under our investment advisory agreements with the CPA® REITs, we are required to use our
best efforts to present a continuing and suitable investment program to them. In recent years, new
property investment opportunities have generally been made available by us to the CPA®
REITs. While the allocation of new investments to the CPA® REITs fulfills our duty to
present a continuing and suitable investment program and enhances the revenues from our investment
management operations, it also restricts the potential growth of revenues from our real estate
ownership and our ability to diversify our portfolio.
We may recognize substantial impairment charges on our properties.
Historically, we have incurred substantial impairment charges, which we are required to recognize
whenever we sell a property for less than its carrying value or we determine that the carrying
amount of the property is not recoverable and exceeds its fair value (or, for direct financing
leases, that the unguaranteed residual value of the underlying property has declined). By their
nature, the timing or extent of impairment charges are not predictable. We may incur impairment
charges in the future, which may reduce our net income, although it will not necessarily affect our
cash flow from operations.
Our use of debt to finance investments could adversely affect our cash flow.
Most of our investments are made by borrowing a portion of the total investment and securing the
loan with a mortgage on the property. If we are unable to make our debt payments as required, a
lender could foreclose on the property or properties securing its debt. This could cause us to lose
part or all of our investment, which in turn could cause the value of our portfolio, and revenues
available for distribution to our shareholders, to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity invested in the
property.
Some of our financing may also require us to make a lump-sum or balloon payment at maturity. Our
ability to make balloon payments on debt will depend upon our ability either to refinance the
obligation when due, invest additional equity in the property or to sell the related property. When
the balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable
as the original loan or sell the property at a price sufficient to make the balloon payment. Our
ability to accomplish these goals will be affected by various factors existing at the relevant
time, such as the state of the national and regional economies, local real estate conditions,
available mortgage rates, our equity in the mortgaged properties, our financial condition, the
operating history of the mortgaged properties and tax laws. A refinancing or sale could affect the
rate of return to shareholders.
Our leases may permit tenants to purchase a property at a predetermined price, which could limit
our realization of any appreciation or result in a loss.
In some circumstances, we grant tenants a right to repurchase the property they lease from us. The
purchase price may be a fixed price or it may be based on a formula or the market value at the time
of exercise. If a tenant exercises its right to purchase the property and the propertys market
value has increased beyond that price, we could be limited in fully realizing the appreciation on
that property. Additionally, if the price at which the tenant can purchase the property is less
than our purchase price or carrying value (for example, where the purchase price is based on an
appraised value), we may incur a loss.
We do not fully control the management of our properties.
The tenants or managers of net leased properties are responsible for maintenance and other
day-to-day management of the properties. If a property is not adequately maintained in accordance
with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures
or other liabilities once the property becomes free of the lease. While our leases generally
provide for recourse against the tenant in these instances, a bankrupt or financially troubled
tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies
against such a tenant. In addition, to the extent tenants are unable to conduct their operation of
the property on a financially successful basis, their ability to pay rent may be adversely
affected. Although we endeavor to monitor, on an ongoing basis, compliance by tenants with their
lease obligations and other factors that could affect the financial performance of our properties,
such monitoring may not in all circumstances ascertain or forestall deterioration either in the
condition of a property or the financial circumstances of a tenant.
W. P. Carey 2010 10-K 16
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real estate. While the
revenues from our leases and those of the CPA® REITs are not directly dependent upon the
value of the real estate owned, significant declines in real estate values could adversely affect
us in many ways, including a decline in the residual values of properties at lease expiration;
possible lease abandonments by tenants; a decline in the attractiveness of REIT investments that
may impede our ability to raise new funds for investment by CPA® REITs and a decline in
the attractiveness of triple-net lease transactions to potential sellers. We also face the risk
that lease revenue will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. General risks associated with the ownership of real estate
include:
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Adverse changes in general or local economic conditions, |
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Changes in the supply of or demand for similar or competing properties, |
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Changes in interest rates and operating expenses, |
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Competition for tenants, |
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Changes in market rental rates, |
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Inability to lease or sell properties upon termination of existing leases, |
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Renewal of leases at lower rental rates, |
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Inability to collect rents from tenants due to financial hardship, including bankruptcy, |
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Changes in tax, real estate, zoning and environmental laws that may have an adverse
impact upon the value of real estate, |
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Uninsured property liability, property damage or casualty losses, |
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Unexpected expenditures for capital improvements or to bring properties into compliance
with applicable federal, state and local laws; and |
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Acts of God and other factors beyond the control of our management. |
The inability of a tenant in a single-tenant property to pay rent will reduce our revenues.
Most of our properties are occupied by a single tenant and, therefore, the success of our
investments is materially dependent on the financial stability of these tenants. Revenues from
several of our tenants/guarantors constitute a significant percentage of our lease revenues. Our
five largest tenants/guarantors represented approximately 32%, 30% and 28% of total lease revenues
in 2010, 2009 and 2008, respectively. Lease payment defaults by tenants negatively impact our net
income and reduce the amounts available for distributions to shareholders. As our tenants generally
may not have a recognized credit rating, they may have a higher risk of lease defaults than if our
tenants had a recognized credit rating. In addition, the bankruptcy of a tenant could cause the
loss of lease payments as well as an increase in the costs incurred to carry the property until it
can be re-leased or sold. We have had tenants file for bankruptcy protection. In the event of a
default, we may experience delays in enforcing our rights as landlord and may incur substantial
costs in protecting the investment and re-leasing the property. If a lease is terminated, there is
no assurance that we will be able to re-lease the property for the rent previously received or sell
the property without incurring a loss.
We are subject to possible liabilities relating to environmental matters.
We own commercial properties and are subject to the risk of liabilities under federal, state and
local environmental laws. These responsibilities and liabilities also exist for properties owned by
the CPA® REITs and if they become liable for these costs, their ability to pay for our
services could be materially affected. Some of these laws could impose the following on us:
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Responsibility and liability for the cost of investigation and removal or remediation of
hazardous substances released on our property, generally without regard to our knowledge of
or responsibility for the presence of the contaminants; |
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Liability for the costs of investigation and removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the disposal or treatment of
such substances; |
W. P. Carey 2010 10-K 17
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Potential liability for common law claims by third parties based on damages and costs of
environmental contaminants; and |
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Claims being made against us by the CPA® REITs for inadequate due diligence. |
Our costs of investigation, remediation or removal of hazardous or toxic substances, or for
third-party claims for damages, may be substantial. The presence of hazardous or toxic substances
at any of our properties, or the failure to properly remediate a contaminated property, could give
rise to a lien in favor of the government for costs it may incur to address the contamination or
otherwise adversely affect our ability to sell or lease the property or to borrow using the
property as collateral. While we attempt to mitigate identified environmental risks by
contractually requiring tenants to acknowledge their responsibility for complying with
environmental laws and to assume liability for environmental matters, circumstances may arise in
which a tenant fails, or is unable, to fulfill its contractual obligations. In addition,
environmental liabilities, or costs or operating limitations imposed on a tenant to comply with
environmental laws, could affect its ability to make rental payments to us. Also, and although we
endeavor to avoid doing so, we may be required, in connection with any future divestitures of
property, to provide buyers with indemnification against potential environmental liabilities.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of
facilities less attractive to our potential domestic tenants, which could reduce overall demand for
our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a
capital lease if the significant risks and rewards of ownership are considered to reside with the
tenant. This situation is considered to be met if, among other things, the non-cancellable lease
term is more than 75% of the useful life of the asset or if the present value of the minimum lease
payments equals 90% or more of the leased propertys fair value. Under capital lease accounting for
a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease
does not meet any of the criteria for a capital lease, the lease is considered an operating lease
by the tenant and the obligation does not appear on the tenants balance sheet; rather, the
contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus,
entering into an operating lease can appear to enhance a tenants balance sheet in comparison to
direct ownership. In response to concerns caused by a 2005 SEC study that the current model does
not have sufficient transparency, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board conducted a joint project to re-evaluate lease accounting.
In August 2010, the FASB issued a Proposed Accounting Standards Update titled Leases, providing
its views on accounting for leases by both lessees and lessors. The FASBs proposed guidance may
require significant changes in how leases are accounted for by both lessees and lessors. As of the
date of this Report, the FASB has not finalized its views on accounting for leases. Changes to the
accounting guidance could affect both our and the CPA® REITs accounting for leases as
well as that of our and the CPA® REITs tenants. These changes may affect how the real
estate leasing business is conducted both domestically and internationally. For example, if the
accounting standards regarding the financial statement classification of operating leases are
revised, then companies may be less willing to enter into leases in general or desire to enter into
leases with shorter terms because the apparent benefits to their balance sheets could be reduced or
eliminated. This in turn could make it more difficult for the company to enter leases on terms the
company finds favorable.
Proposed legislation may prevent us from qualifying for treatment as a partnership for U.S. federal
income tax purposes, which may significantly increase our tax liability and may affect the market
value of our shares.
Members of the U. S. Congress have introduced legislation that would, if enacted, preclude us from
qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly
traded partnership rules. If this or any similar legislation or regulation were to be enacted and
to apply to us, we would incur a material increase in our tax liability and the market value of our
shares could decline materially.
We depend on key personnel for our future success.
We depend on the efforts of our executive officers and key employees. The loss of the services of
these executive officers and key employees could have a material adverse effect on our operations.
Our governing documents and capital structure may discourage a takeover.
Wm. Polk Carey, Chairman, is the beneficial owner of approximately 30% of our outstanding shares at
December 31, 2010. The provisions of our Amended and Restated Limited Liability Company Agreement
and the share ownership of Mr. Carey may discourage a tender offer for our shares or a hostile
takeover, even though these may be attractive to shareholders.
W. P. Carey 2010 10-K 18
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Item 1B. |
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Unresolved Staff Comments. |
None.
Our principal corporate offices are located at 50 Rockefeller Plaza, New York, NY 10020 and our
primary international investment offices are located in London and Amsterdam. We also have office
space domestically in Dallas, Texas and internationally in Shanghai. We lease all of these offices
and believe these leases are suitable for our operations for the foreseeable future.
See Item 1, Business Our Portfolio for a discussion of the properties we hold for rental
operations and Part II, Item 8, Financial Statements and Supplemental Data Schedule III Real
Estate and Accumulated Depreciation for a detailed listing of such properties.
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Item 3. |
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Legal Proceedings. |
At December 31, 2010, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
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Item 4. |
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Removed and Reserved. |
PART II
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Item 5. |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
Listed Shares and Distributions
Our common stock is listed on the New York Stock Exchange under the ticker symbol WPC. At
December 31, 2010 there were 29,095 holders of our common stock. The following table
shows the high and low prices per share and quarterly cash distributions declared for the past two
fiscal years:
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|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
Distributions |
|
Period |
|
High |
|
|
Low |
|
|
Declared |
|
|
High |
|
|
Low |
|
|
Declared |
|
First quarter |
|
$ |
30.32 |
|
|
$ |
24.69 |
|
|
$ |
0.504 |
|
|
$ |
24.00 |
|
|
$ |
16.15 |
|
|
$ |
0.496 |
|
Second quarter |
|
|
31.00 |
|
|
|
26.61 |
|
|
|
0.506 |
|
|
|
29.89 |
|
|
|
19.75 |
|
|
|
0.498 |
|
Third quarter |
|
|
30.86 |
|
|
|
26.49 |
|
|
|
0.508 |
|
|
|
30.67 |
|
|
|
22.50 |
|
|
|
0.500 |
|
Fourth quarter |
|
|
33.97 |
|
|
|
28.83 |
|
|
|
0.510 |
|
|
|
29.80 |
|
|
|
25.50 |
|
|
|
0.502 |
(a) |
|
|
|
(a) |
|
Excludes a special distribution of $0.30 per share that was paid in January 2010 to
shareholders of record at December 31, 2009. The special distribution was approved by our
board of directors as a result of an increase in our 2009 taxable income. |
Our line of credit contains covenants that restrict the amount of distributions that we can pay.
See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition Cash Resources.
W. P.
Carey 2010 10-K 19
Stock Price Performance Graph
The graph below provides an indicator of cumulative total shareholder returns for our common stock
for the period December 31, 2005 to December 31, 2010 compared with the S&P 500 Index and the FTSE
NAREIT Equity REITs Index. The graph assumes a $100 investment on December 31, 2005, together with
the reinvestment of all dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
W. P. Carey & Co. LLC |
|
$ |
100.00 |
|
|
$ |
126.68 |
|
|
$ |
149.41 |
|
|
$ |
113.39 |
|
|
$ |
146.22 |
|
|
$ |
177.06 |
|
S&P 500 Index |
|
|
100.00 |
|
|
|
115.79 |
|
|
|
122.16 |
|
|
|
76.96 |
|
|
|
97.33 |
|
|
|
111.99 |
|
FTSE NAREIT Equity REITs Index |
|
|
100.00 |
|
|
|
135.06 |
|
|
|
113.87 |
|
|
|
70.91 |
|
|
|
90.76 |
|
|
|
116.13 |
|
The stock price performance included in this graph is not necessarily indicative of future stock
price performance.
W. P. Carey 2010 10-K 20
|
|
|
Item 6. |
|
Selected Financial Data. |
The following selected financial data should be read in conjunction with the consolidated financial
statements and related notes in Item 8 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Data (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations (b) |
|
$ |
273,910 |
|
|
$ |
232,350 |
|
|
$ |
234,700 |
|
|
$ |
253,867 |
|
|
$ |
259,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
79,579 |
|
|
|
65,345 |
|
|
|
70,193 |
|
|
|
68,559 |
|
|
|
81,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
74,951 |
|
|
|
70,568 |
|
|
|
78,605 |
|
|
|
88,789 |
|
|
|
87,115 |
|
Add: Net loss (income) attributable to noncontrolling interests |
|
|
314 |
|
|
|
713 |
|
|
|
950 |
|
|
|
(4,781 |
) |
|
|
220 |
|
Less: Net income attributable to redeemable noncontrolling interests |
|
|
(1,293 |
) |
|
|
(2,258 |
) |
|
|
(1,508 |
) |
|
|
(4,756 |
) |
|
|
(1,032 |
) |
Net income attributable to W. P. Carey members |
|
|
73,972 |
|
|
|
69,023 |
|
|
|
78,047 |
|
|
|
79,252 |
|
|
|
86,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable W. P. Carey members |
|
|
1.98 |
|
|
|
1.61 |
|
|
|
1.77 |
|
|
|
1.55 |
|
|
|
2.13 |
|
Net income attributable to W. P. Carey members |
|
|
1.86 |
|
|
|
1.74 |
|
|
|
1.98 |
|
|
|
2.08 |
|
|
|
2.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable W. P. Carey members |
|
|
1.98 |
|
|
|
1.61 |
|
|
|
1.74 |
|
|
|
1.55 |
|
|
|
2.07 |
|
Net income attributable to W. P. Carey members |
|
|
1.86 |
|
|
|
1.74 |
|
|
|
1.95 |
|
|
|
2.05 |
|
|
|
2.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share |
|
|
2.03 |
|
|
|
2.00 |
(c) |
|
|
1.96 |
|
|
|
1.88 |
(c) |
|
|
1.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate (d) |
|
$ |
946,975 |
|
|
$ |
884,460 |
|
|
$ |
918,741 |
|
|
$ |
918,734 |
|
|
$ |
850,107 |
|
Total assets |
|
|
1,172,326 |
|
|
|
1,093,336 |
|
|
|
1,111,136 |
|
|
|
1,153,284 |
|
|
|
1,093,010 |
|
Long-term obligations (e) |
|
|
396,982 |
|
|
|
326,330 |
|
|
|
326,874 |
|
|
|
316,751 |
|
|
|
279,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
86,417 |
|
|
$ |
74,544 |
|
|
$ |
63,247 |
|
|
$ |
47,471 |
|
|
$ |
119,940 |
|
Cash distributions paid |
|
|
92,591 |
|
|
|
78,618 |
|
|
|
87,700 |
|
|
|
71,608 |
|
|
|
68,615 |
|
Payment of mortgage principal (f) |
|
|
14,324 |
|
|
|
9,534 |
|
|
|
9,678 |
|
|
|
16,072 |
|
|
|
11,742 |
|
|
|
|
(a) |
|
Certain prior year amounts have been reclassified from continuing operations to discontinued
operations. |
|
(b) |
|
For 2007, includes revenue earned in connection with CPA®:16 Global meeting its
performance criterion, and for 2006, includes revenue earned in connection with a
CPA® REIT merger transaction. |
|
(c) |
|
Excludes special distributions of $0.30 per share and $0.27 per share paid in January 2010
and January 2008 to shareholders of record at December 31, 2009 and December 31, 2007,
respectively. |
|
(d) |
|
Net investments in real estate consists of net investments in properties, net investments in
direct financing leases, equity investments in real estate and CPA® REITs and
assets held for sale, as applicable. |
|
(e) |
|
Represents mortgage and note obligations. |
|
(f) |
|
Represents scheduled mortgage principal payment. |
W. P. Carey 2010 10-K 21
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Managements discussion and analysis of financial condition and results of operations (MD&A) is
intended to provide the reader with information that will assist in understanding our financial
statements and the reasons for changes in certain key components of our financial statements from
period to period. MD&A also provides the reader with our perspective on our financial position and
liquidity, as well as certain other factors that may affect our future results. The discussion also
provides information about the financial results of the segments of our business to provide a
better understanding of how these segments and their results affect our financial condition and
results of operations.
Business Overview
As described in more detail in Item 1 of this Report, we operate in two operating segments,
investment management and real estate ownership. Within our investment management segment, we are
currently the advisor to the following affiliated publicly-owned, non-actively traded real estate
investment trusts: CPA®:14, CPA®:15, CPA®:16 Global and
CPA®:17 Global.
Financial Highlights
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Total revenue (excluding reimbursed costs from affiliates) |
|
$ |
213,887 |
|
|
$ |
184,816 |
|
|
$ |
193,600 |
|
Net income attributable to W. P. Carey members |
|
|
73,972 |
|
|
|
69,023 |
|
|
|
78,047 |
|
Cash flow from operating activities |
|
|
86,417 |
|
|
|
74,544 |
|
|
|
63,247 |
|
Total revenue increased in 2010 as compared to 2009, primarily due to the impact of increased
investment volume on our investment management and real estate ownership segments.
Net income increased in 2010 as compared to 2009. Results from operations in our investment
management segment were significantly higher in 2010, primarily due to the increased volume of
investments structured on behalf of the CPA® REITs as well as lower impairment charges
recognized by the CPA® REITs. Results from operations in our real estate ownership
segment were significantly lower, however, primarily as a result of impairment charges taken in
connection with the sale or potential sale of certain properties.
Cash flow from operating activities increased in 2010 as compared to 2009, primarily due to
increases in net income as a result of the higher volume of investments structured on behalf of the
CPA® REITs, partially offset by lower cash flow in our real estate ownership segment and
a decline in the amount of deferred acquisition revenue received.
Current Trends
General Economic Environment
We and our managed funds are impacted by macro-economic environmental factors, the capital markets,
and general conditions in the commercial real estate market, both in the U.S. and globally. As of
the date of this Report, we have seen signs of modest improvement in the global economy following
the significant distress experienced in 2008 and 2009. Our experience during 2010 reflects
increased investment volume over the prior year, as well as an improved financing and fundraising
environment. While these factors reflect favorably on our business, the economic recovery remains
weak, and our business remains dependent on the speed and strength of the recovery, which cannot be
predicted at this time. Nevertheless, as of the date of this Report, the impact of current
financial and economic trends on our business, and our response to those trends, is presented
below.
Foreign Exchange Rates
We have foreign investments and, as a result, are subject to risk from the effects of exchange rate
movements. Our results of foreign operations benefit from a weaker U.S. dollar and are adversely
affected by a stronger U.S. dollar relative to foreign currencies. During 2010, the Euro weakened
primarily as a result of sovereign debt issues in several European countries. Investments
denominated in the Euro accounted for approximately 11% of our annualized contractual minimum base
rent and 29% of aggregate annualized contractual
minimum base rent for the CPA® REITs for 2010. During 2010, the U.S. dollar
strengthened against the Euro, as the average conversion rate for the U.S. dollar in relation to
the Euro decreased by 5% in comparison to 2009. Additionally, the end-of-period conversion rate of
the Euro at December 31, 2010 decreased 8% to $1.3253 from $1.4333 at December 31, 2009. This
strengthening had a negative impact on our balance sheet at December 31, 2010 as compared to our
balance sheet at December 31, 2009. While we actively manage our foreign exchange risk, a
significant unhedged decline in the value of the Euro could have a material negative impact on our
net asset values, future results, financial position and cash flows. Such a decline would
particularly impact the CPA® REITs, which have higher levels of international
investments than we have in our owned portfolio.
W. P. Carey 2010 10-K 22
Capital Markets
We have recently seen evidence of a gradual improvement in capital market conditions, including new
issuances of CMBS debt. Capital inflows to both commercial real estate debt and equity markets have
helped increase the availability of mortgage financing and asset prices have begun to recover from
their credit crisis lows. Over the past few quarters, there has been continued improvement in the
availability of financing; however, lenders remain cautious and are employing more conservative
underwriting standards. We have seen commercial real estate capitalization rates begin to narrow
from credit crisis highs, especially for higher-quality assets or assets leased to tenants with
strong credit. The improvement in financing conditions combined with a stabilization of asset
prices has helped to increase transaction activity, and our market has seen an increase in
competition from both public and private investors.
Investment Opportunities
We earn structuring revenue on the investments we structure on behalf of the CPA® REITs.
Our ability to complete these investments, and thereby earn structuring revenue, fluctuates based
on the pricing and availability of transactions and the pricing and availability of financing,
among other factors.
As a result of the recent improving economic conditions and increasing seller optimism, we have
seen an increased number of investment opportunities that we believe will allow us to structure
transactions on behalf of the CPA® REITs on favorable terms. Although capitalization
rates have remained compressed over the past few quarters compared to their credit crisis highs, we
believe that the investment environment remains attractive and that we will be able to achieve the
targeted returns of our managed funds. We believe that the significant amount of corporate debt
that remains outstanding in the marketplace, which will need to be refinanced over the next several
years, will provide attractive investment opportunities for net lease investors such as W. P. Carey
and the CPA® REITs. To the extent that these trends continue, we believe that investment
volume will benefit. However, we have recently seen an increasing level of competition for
investments, both domestically and internationally, and further capital inflows into the
marketplace could put additional pressure on the returns that we can generate from investments.
We structured investments on behalf of the CPA® REITs totaling $1.0 billion during 2010
and entered into several investments for our owned real estate portfolio totaling $76.8 million,
and based on current conditions, we expect that in 2011 we will be able to continue to take
advantage of the investment opportunities we are seeing in both the U.S. and Europe. International
investments comprised 43% of total investments during 2010. We currently expect that international
transactions will continue to form a significant portion of the investments we structure, although
the relative portion of international investments in any given period will vary.
Financing Conditions
We have recently seen a gradual improvement in both the credit and real estate financing markets.
During 2010, we saw an increase in the number of lenders for both domestic and international
investments as market conditions improved compared to prior years. However, during the fourth
quarter of 2010, the cost of debt rose, but we anticipate that this may be recoverable either
through deal pricing or if lenders adjust their spreads, which had been unusually high during the
crisis. The increase was primarily a result of a rise in the 10-year treasury rates for domestic
deals and due to the impact of the sovereign debt issues in Europe. During 2010, we obtained
non-recourse mortgage financing totaling $626.1 million on behalf of the CPA® REITs and
$70.3 million for our owned real estate portfolio.
Real Estate Sector
As noted above, the commercial real estate market is impacted by a variety of macro-economic
factors, including but not limited to growth in gross domestic product, unemployment, interest
rates, inflation, and demographics. Since the beginning of the credit crisis, these macro-economic
factors have persisted, negatively impacting commercial real estate market fundamentals, which has
resulted in higher vacancies, lower rental rates, and lower demand for vacant space. While more
recently there have been some indications of stabilization in asset values and slight improvements
in occupancy rates, general uncertainty surrounding commercial real estate
fundamentals and property valuations continues. We and the CPA® REITs are chiefly
affected by changes in the appraised values of our properties, tenant defaults, inflation, lease
expirations, and occupancy rates.
W. P. Carey 2010 10-K 23
Net Asset Values of the CPA® REITs
We own shares in each of the CPA® REITs and earn asset management revenue based on a
percentage of average invested assets for each CPA® REIT. As such, we benefit from
rising investment values and are negatively impacted when these values decrease. As a result of
continued weakness in the economy and a weakening of the Euro versus the dollar during 2010 and
2009, the NAVs for CPA®:14 and CPA®:16 Global at September 30, 2010, which
were calculated in connection with the Proposed Merger, were lower than the NAVs at December 31,
2009, and we currently expect that the NAV for CPA®:15 at December 31, 2010, which is
not yet available, will also be lower. However, the negative impact on our asset management revenue
related to tenant defaults during 2009 was substantially offset by asset management revenues earned
related to new investments structured on behalf of CPA ®:17 Global during 2010.
The
following table presents recent NAVs per share for these CPA® REITs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
CPA®:14 |
|
$ |
11.50 |
|
|
$ |
11.80 |
|
|
$ |
13.00 |
|
|
$ |
14.50 |
|
CPA®:15 |
|
|
N/A |
|
|
|
10.70 |
|
|
|
11.50 |
|
|
|
12.20 |
|
CPA®:16 Global |
|
|
8.80 |
|
|
|
9.20 |
|
|
|
9.80 |
|
|
|
10.00 |
|
The NAVs of the CPA® REITs are based on a number of variables, including individual
tenant credits, lease terms, lending credit spreads, foreign currency exchange rates, and tenant
defaults, among others. We do not control these variables and, as such, cannot predict how they
will change in the future.
Tenant Defaults
As a net lease investor, we are exposed to credit risk within our tenant portfolio, which can
reduce our results of operations and cash flow from operations if our tenants are unable to pay
their rent. Within our managed CPA® REIT portfolios, tenant defaults can reduce our
asset management revenue if they lead to a decline in the appraised value of the assets of the
CPA® REITs and can also reduce our income from equity investments in the CPA®
REITs. Tenants experiencing financial difficulties may become delinquent on their rent and/or
default on their leases and, if they file for bankruptcy protection, may reject our lease in
bankruptcy court resulting in reduced cash flow which may negatively impact net asset values and
require us or the CPA® REITs to incur impairment charges. Even where a default has not
occurred and a tenant is continuing to make the required lease payments, we may restructure or
renew leases on less favorable terms, or the tenants credit profile may deteriorate, which could
affect the value of the leased asset and could in turn require us or the CPA® REITs to
incur impairment charges.
As of the date of this Report, we have no significant exposure to tenants operating under
bankruptcy protection in our owned portfolio, while in the CPA® REIT portfolios, tenants
operating under bankruptcy protection, administration or receivership account for less than 1% of
aggregate annualized contractual minimum base rent, a decrease from levels experienced during the
crisis. During 2008 and 2009, the CPA® REITs experienced a significant increase in
tenant defaults as companies across many industries experienced financial distress due to the
economic downturn and the seizure in the credit markets. Our experience for 2010 reflected an
improvement from the unusually high level of tenant defaults experienced during 2008 and 2009 due
to the economic downturn. We have observed that many of our tenants have benefited from continued
improvements in general business conditions, which we anticipate will result in reduced tenant
defaults going forward; however, it is possible that additional tenants may file for bankruptcy or
default on their leases during 2011 and that economic conditions may again deteriorate.
To mitigate these risks, we have historically looked to invest in assets that we believe are
critically important to a tenants operations and have attempted to diversify the portfolios by
tenant, tenant industry and geography. We also monitor tenant performance through review of rent
delinquencies as a precursor to a potential default, meetings with tenant management and review of
tenants financial statements and compliance with any financial covenants. When necessary, our
asset management process includes restructuring transactions to meet the evolving needs of tenants,
re-leasing properties, refinancing debt and selling properties, as well as protecting our rights
when tenants default or enter into bankruptcy.
W. P. Carey 2010 10-K 24
Inflation
Our leases and those of the CPA® REITs generally have rent adjustments that are either
fixed or based on formulas indexed to changes in the CPI or other similar indices for the
jurisdiction in which the property is located. Because these rent adjustments may be calculated
based on changes in the CPI over a multi-year period, changes in inflation rates can have a delayed
impact on our results of operations. Rent adjustments during 2009 and, to a lesser extent, 2010
generally benefited from increases in inflation rates during the years prior to the scheduled rent
adjustment date. However, despite recent signs of inflationary pressure, we continue to expect that
rent increases in our owned portfolio and in the portfolios of the CPA® REITs will be
significantly lower in coming years as a result of the current historically low inflation rates in
the U.S. and the Euro zone.
Lease Expirations and Occupancy
We actively manage our owned real estate portfolio and the portfolios of the CPA® REITs
and begin discussing options with tenants in advance of the scheduled lease expiration. In certain
cases, we obtain lease renewals from our tenants; however, tenants may elect to move out at the end
of their term or may elect to exercise purchase options, if any, in their leases. In cases where
tenants elect not to renew, we may seek replacement tenants or try to sell the property. As of the
date of this Report, 9% of the annualized contractual minimum base rent in our owned portfolio is
scheduled to expire in the next twelve months. For those leases that we believe will be renewed, we
expect that renewed rents may be below the tenants existing contractual rents and that lease terms
may be shorter than historical norms, reflecting current market conditions.
The occupancy rate for our owned real estate portfolio declined from 94% at December 31, 2009 to
90% as of the date of this Report, primarily reflecting the impact of two tenants who vacated
during 2010.
Fundraising
Fundraising trends for non-traded REITs overall include an increase in average monthly volume
during 2010 compared to 2009. Additionally, the number of offerings has increased over 2009 levels. Consequently,
there has been an increase in the competition for investment dollars.
We are currently fundraising for CPA®:17 Global. While fundraising trends are
difficult to predict, our recent fundraising continues to be strong. We raised $593.1 million for
CPA®:17 Globals initial public offering in 2010 and, through the date of this
Report, have raised more than $1.4 billion on its behalf since beginning fundraising in December
2007. We have made a concerted effort to broaden our distribution channels and are seeing a greater
portion of our fundraising come from an expanded network of broker-dealers as a result of these
efforts.
CPA®:17 Global has filed a registration statement with the SEC for a possible
continuous public offering of up to an additional $1.0 billion of common stock, which we currently
expect will commence after the initial public offering terminates. There can be no assurance that
CPA®:17 Global will actually commence the follow-on offering or successfully sell the
full number of shares registered. The initial public offering for CPA®:17 Global will
terminate on the earlier of the date on which the registration statement for the follow-on offering
becomes effective or May 2, 2011.
We are currently fundraising for Carey Watermark, which has filed a registration statement to sell up to $1.0 billion of common stock in an
initial public offering for the purpose of acquiring interests in lodging and lodging-related
properties.
Proposed Accounting Changes
The International Accounting Standards Board and FASB have issued an Exposure Draft on a joint
proposal that would dramatically transform lease accounting from the existing model. These changes
would impact most companies but are particularly applicable to those that are significant users of
real estate. The proposal outlines a completely new model for accounting by lessees, whereby their
rights and obligations under all leases, existing and new, would be capitalized and recorded on the
balance sheet. For some companies, the new accounting guidance may influence whether or not, or the
extent to which, they may enter into the type of sale-leaseback transactions in which we
specialize. At this time, the proposed guidance has not been finalized and as such we are unable to
determine whether this proposal will have a material impact on our business.
W. P. Carey 2010 10-K 25
The Emerging Issues Task Force (EITF) of the FASB discussed the accounting treatment for
deconsolidating subsidiaries in situations other than a sale or transfer at its September 2010
meeting. While the EITF did not reach a consensus for exposure, the EITF determined that further
research was necessary to more fully understand the scope and implications of the matter, prior to
issuing a consensus for exposure. If the EITF reaches a consensus for exposure, we will evaluate
the impact on such conclusion on our financial statements. During 2010, each of CPA®:14,
CPA®:15 and CPA®:16 Global deconsolidated a subsidiary and recognized a
net gain on deconsolidation of $12.9 million, $12.8 million and $7.1 million, respectively.
How We Evaluate Results of Operations
We evaluate our results of operations with a primary focus on increasing and enhancing the value,
quality and amount of assets under management by our investment management segment and seeking to
increase value in our real estate ownership segment. We focus our efforts on improving
underperforming assets through re-leasing efforts, including negotiation of lease renewals, or
selectively selling assets in order to increase value in our real estate portfolio. The ability to
increase assets under management by structuring investments on behalf of the CPA® REITs
is affected, among other things, by the CPA® REITs ability to raise capital and our
ability to identify and enter into appropriate investments and financing.
Our evaluation of operating results includes our ability to generate necessary cash flow in order
to fund distributions to our shareholders. As a result, our assessment of operating results gives
less emphasis to the effects of unrealized gains and losses, which may cause fluctuations in net
income for comparable periods but have no impact on cash flows, and to other non-cash charges such
as depreciation and impairment charges. We do not consider unrealized gains and losses resulting
from short-term foreign currency fluctuations when evaluating our ability to fund distributions.
Our evaluation of our potential for generating cash flow includes an assessment of the long-term
sustainability of both our real estate portfolio and the assets we manage on behalf of the
CPA® REITs.
We consider cash flows from operating activities, cash flows from investing activities, cash flows
from financing activities and certain supplemental metrics that are not defined by GAAP
(non-GAAP) performance metrics to be important measures in the evaluation of our results of
operations, liquidity and capital resources. Cash flows from operating activities are sourced
primarily by revenues earned from structuring investments and providing asset-based management
services on behalf of the CPA® REITs we manage and long-term lease contracts from our
real estate ownership. Our evaluation of the amount and expected fluctuation of cash flows from
operating activities is essential in evaluating our ability to fund operating expenses, service
debt and fund distributions to shareholders.
We consider cash flows from operating activities plus cash distributions from equity investments in
real estate and CPA® REITs in excess of equity income as a supplemental measure of
liquidity in evaluating our ability to sustain distributions to shareholders. We consider this
measure useful as a supplemental measure to the extent the source of distributions in excess of
equity income is the result of non-cash charges, such as depreciation and amortization, because it
allows us to evaluate the cash flows from consolidated and unconsolidated investments in a
comparable manner. In deriving this measure, we exclude cash distributions from equity investments
in real estate and CPA® REITs that are sourced from sales of equity investees assets or
refinancing of debt because they are deemed to be returns on our investment.
We focus on measures of cash flows from investing activities and cash flows from financing
activities in our evaluation of our capital resources. Investing activities typically consist of
the acquisition or disposition of investments in real property and the funding of capital
expenditures with respect to real properties. Financing activities primarily consist of the payment
of distributions to shareholders, borrowings and repayments under our lines of credit and the
payment of mortgage principal amortization.
W. P. Carey 2010 10-K 26
Results of Operations
A summary of comparative results of these business segments is as follows:
Investment Management (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
76,246 |
|
|
$ |
76,621 |
|
|
$ |
(375 |
) |
|
$ |
76,621 |
|
|
$ |
80,714 |
|
|
$ |
(4,093 |
) |
Structuring revenue |
|
|
44,525 |
|
|
|
23,273 |
|
|
|
21,252 |
|
|
|
23,273 |
|
|
|
20,236 |
|
|
|
3,037 |
|
Wholesaling revenue |
|
|
11,096 |
|
|
|
7,691 |
|
|
|
3,405 |
|
|
|
7,691 |
|
|
|
5,208 |
|
|
|
2,483 |
|
Reimbursed costs from affiliates |
|
|
60,023 |
|
|
|
47,534 |
|
|
|
12,489 |
|
|
|
47,534 |
|
|
|
41,100 |
|
|
|
6,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,890 |
|
|
|
155,119 |
|
|
|
36,771 |
|
|
|
155,119 |
|
|
|
147,258 |
|
|
|
7,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(69,007 |
) |
|
|
(58,819 |
) |
|
|
(10,188 |
) |
|
|
(58,819 |
) |
|
|
(55,587 |
) |
|
|
(3,232 |
) |
Reimbursable costs |
|
|
(60,023 |
) |
|
|
(47,534 |
) |
|
|
(12,489 |
) |
|
|
(47,534 |
) |
|
|
(41,100 |
) |
|
|
(6,434 |
) |
Depreciation and amortization |
|
|
(4,652 |
) |
|
|
(3,807 |
) |
|
|
(845 |
) |
|
|
(3,807 |
) |
|
|
(4,515 |
) |
|
|
708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,682 |
) |
|
|
(110,160 |
) |
|
|
(23,522 |
) |
|
|
(110,160 |
) |
|
|
(101,202 |
) |
|
|
(8,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
1,145 |
|
|
|
1,538 |
|
|
|
(393 |
) |
|
|
1,538 |
|
|
|
2,261 |
|
|
|
(723 |
) |
Income (loss) from equity investments in CPA® REITs |
|
|
14,948 |
|
|
|
(340 |
) |
|
|
15,288 |
|
|
|
(340 |
) |
|
|
6,211 |
|
|
|
(6,551 |
) |
Other income and (expenses) |
|
|
334 |
|
|
|
4,099 |
|
|
|
(3,765 |
) |
|
|
4,099 |
|
|
|
1,850 |
|
|
|
2,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,427 |
|
|
|
5,297 |
|
|
|
11,130 |
|
|
|
5,297 |
|
|
|
10,322 |
|
|
|
(5,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
74,635 |
|
|
|
50,256 |
|
|
|
24,379 |
|
|
|
50,256 |
|
|
|
56,378 |
|
|
|
(6,122 |
) |
Provision for income taxes |
|
|
(25,052 |
) |
|
|
(21,038 |
) |
|
|
(4,014 |
) |
|
|
(21,038 |
) |
|
|
(22,432 |
) |
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from investment management |
|
|
49,583 |
|
|
|
29,218 |
|
|
|
20,365 |
|
|
|
29,218 |
|
|
|
33,946 |
|
|
|
(4,728 |
) |
Add: Net loss attributable to noncontrolling interests |
|
|
2,372 |
|
|
|
2,374 |
|
|
|
(2 |
) |
|
|
2,374 |
|
|
|
2,420 |
|
|
|
(46 |
) |
Less: Net income attributable to redeemable noncontrolling
interests |
|
|
(1,293 |
) |
|
|
(2,258 |
) |
|
|
965 |
|
|
|
(2,258 |
) |
|
|
(1,508 |
) |
|
|
(750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from investment management attributable to
W. P. Carey members |
|
$ |
50,662 |
|
|
$ |
29,334 |
|
|
$ |
21,328 |
|
|
$ |
29,334 |
|
|
$ |
34,858 |
|
|
$ |
(5,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management Revenue
We earn asset-based management and performance revenue from the CPA® REITs based on the
value of their real estate-related assets under management. This asset management revenue may
increase or decrease depending upon (i) increases in the CPA® REIT asset bases as a
result of new investments; (ii) decreases in the CPA® REIT asset bases as a result of
sales of investments; (iii) increases or decreases in the appraised value of the real
estate-related assets in the CPA® REIT investment portfolios; and (iv) whether the
CPA® REITs are meeting their performance criteria. Each CPA® REIT met its
performance criteria for all periods presented. The availability of funds for new investments is
substantially dependent on our ability to raise funds for investment by the CPA® REITs.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, asset management revenue
decreased by $0.4 million. Asset management revenue from the CPA® REITs decreased by
$3.1 million as a result of declines in the appraised value of the real estate-related assets of
CPA®:14, CPA®:15 and CPA®:16 Global at December 31, 2009. This decrease was
substantially offset by an increase in revenue of $2.6 million from CPA®:17 Global as
a result of new investments entered into during 2009 and 2010.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, asset management revenue
decreased by $4.1 million, primarily due to declines in the appraised value of the real
estate-related assets of CPA®:14, CPA®:15 and CPA®:16 Global at December 31, 2008.
W. P. Carey 2010 10-K 27
Structuring Revenue
We earn structuring revenue when we structure and negotiate investments and debt placement
transactions for the CPA® REITs. Structuring revenue is dependent on investment
activity, which is subject to significant period-to-period variation. Investment volume on behalf
of the CPA® REITs was $1.0 billion in 2010, $507.7 million in 2009 and $457.3 million in
2008. Included in the 2010 and 2008 investment activity were $91.7 million of real estate-related
loans originated by us and $20.0 million of CMBS, respectively,
acquired on behalf of CPA®:17 Global, for which we earned structuring revenues of 1%
compared to an average of 4.5% that we generally earn for structuring long-term net lease
investments.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, structuring revenue
increased by $21.3 million, primarily due to higher investment volume in 2010 compared to 2009.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, structuring revenue
increased by $3.0 million, primarily due to higher investment volume in 2009 compared to 2008.
Wholesaling Revenue
We earn wholesaling revenue based on the number of shares sold in connection with
CPA®:17 Globals initial public offering. Wholesaling revenue earned is offset by
underwriting costs incurred in connection with the offering, which are included in general and
administrative expenses.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, wholesaling revenue
increased by $3.4 million primarily due to an increase in the number of shares sold related to
CPA®:17 Globals initial public offering in 2010 compared to 2009. As described in
Current Trends Fundraising above, we have made a concerted effort over the past two years to
broaden our distribution channels, which has led to stronger fundraising results in each year.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, wholesaling revenue
increased by $2.5 million primarily due to an increase in the number of shares sold related to
CPA®:17 Globals initial public offering in 2009 compared to 2008.
Reimbursed and Reimbursable Costs
Reimbursed costs from affiliates (revenue) and reimbursable costs (expenses) represent costs
incurred by us on behalf of the CPA® REITs, consisting primarily of broker-dealer
commissions and marketing and personnel costs, which are reimbursed by the CPA® REITs.
Revenue from reimbursed costs from affiliates is offset by corresponding charges to reimbursable
costs and therefore has no impact on net income.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, reimbursed and
reimbursable costs increased by $12.5 million, primarily due to a higher level of commissions paid
to broker-dealers related to CPA®:17 Globals initial public offering related to a
corresponding increase in funds raised.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, reimbursed and
reimbursable costs increased by $6.4 million, primarily due to a higher level of commissions paid
to broker-dealers related to CPA®:17 Globals initial public offering related to a
corresponding increase in funds raised.
General and Administrative
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, general and
administrative expenses increased by $10.2 million, primarily due to increases in
compensation-related costs of $5.8 million, underwriting costs of $3.7 million and business
development costs of $0.9 million. Compensation-related costs were $6.8 million higher in 2010
primarily due to an increase in commissions to investment officers and our expected bonus payout as
a result of the higher investment volume during 2010, partially offset by a $2.0 million decrease
in stock-based compensation expense due to the resignations of two senior officers during 2010.
Underwriting costs related to CPA®:17 Globals offering are generally offset by
wholesaling revenue, which we earn based on the number of shares of CPA®:17 Global
sold.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, general and
administrative expenses increased by $3.2 million, primarily due to increases in
compensation-related costs of $4.8 million and underwriting costs of $2.3 million. These increases
were partially offset by decreases in professional fees of $2.9 million and business development
costs of $1.4 million.
W. P. Carey 2010 10-K 28
Compensation-related costs were higher in 2009 due to several factors, including an increase of
$2.3 million in the amortization of stock-based compensation to key officers and directors, which
reflected two years of grants under a new long-term incentive program initiated in 2008, and a $1.7
million increase in bonuses resulting primarily from higher investment volume in 2009 as compared
to 2008. Professional fees primarily represent auditing, tax, legal and consulting services.
Professional fees overall were lower in 2009
primarily due to the write-off in 2008 of previously capitalized offering costs totaling $1.6
million related to the proposed offering of Carey Watermark (Note 2) and fees incurred in 2008 in
connection with a settlement we entered into with the SEC with respect to a previously disclosed
investigation (Note 9) and the opening of our asset management office in Amsterdam. These decreases
in professional fees were partially offset by transaction-related costs of $1.0 million incurred in
connection with a Carey Storage transaction during 2009 (Note 4).
Income (Loss) from Equity Investments in CPA® REITs
Income or loss from equity investments in CPA® REITs represents our proportionate share
of net income or loss (revenues less expenses) from our investments in the CPA® REITs in
which, because of the shares we elect to receive from them for revenue due to us, we have a
noncontrolling interest but exercise significant influence. The net income of the CPA®
REITs fluctuates based on the timing of transactions, such as new leases and property sales, as
well as the level of impairment charges.
2010 vs. 2009 For the year ended December 31, 2010, we recognized income from equity investments
in the CPA® REITs of $14.9 million, compared to a loss of $0.3 million in 2009,
primarily due to a reduction in impairment charges recognized by the CPA® REITs, which
are estimated to total approximately $40.7 million in 2010, compared to $170.0 million in 2009. In
addition, CPA®:14s results of operations during 2010 included a gain on extinguishment
of debt of $11.4 million and a gain on deconsolidation of a subsidiary of $12.9 million.
CPA®:15 and CPA®:16 Globals results of operations during 2010 each also
included a gain on the deconsolidation of a subsidiary of $12.8 million and $7.1 million,
respectively. For CPA®:17 Global, we receive up to 10% of distributions of available
cash from its operating partnership. For 2010 and 2009, we received $4.5 million and $2.2 million,
respectively, in cash under this provision.
2009 vs. 2008 For the year ended December 31, 2009, loss from equity investments in the
CPA® REITs was $0.3 million, compared to income of $6.2 million in 2008, primarily due
to higher impairment charges recognized by the CPA® REITs, which totaled $170.0 million
in 2009, compared to $40.4 million in 2008. In addition, the CPA® REITs recognized
income totaling $20.0 million during 2008 related to the SEC Settlement. These factors were
partially offset by an increase in net gains on sales of properties totaling $25.8 million
recognized by the CPA® REITs in 2009 over 2008 as well as the $2.2 million cash
distribution received in 2009 from CPA®:17 Globals operating partnership.
Other Income and (Expenses)
2010 During 2010, we recognized other income of $0.3 million primarily due to gains realized on
foreign currency transactions for the repatriation of cash from foreign countries.
2009 During 2009, we recognized other income of $4.1 million primarily related to a settlement
of a dispute with a vendor regarding certain fees we paid in prior years for services they
performed.
2008 We recognized other income of $1.9 million during 2008 primarily related to an insurance
reimbursement of certain professional services costs incurred in connection with the now settled
SEC investigation.
Provision for Income Taxes
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, our provision for income
taxes increased by $4.0 million, primarily due to an increase in income from continuing operations
before income taxes.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, our provision for income
taxes decreased by $1.4 million, primarily due to a reduction in income from continuing operations
before income taxes.
Net Income from Investment Management Attributable to W. P. Carey Members
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, the resulting net income
from investment management attributable to W. P. Carey members increased by $21.3 million.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, the resulting net income
from investment management attributable to W. P. Carey members decreased by $5.5 million.
W. P. Carey 2010 10-K 29
Real Estate Ownership (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
|
$ |
63,450 |
|
|
$ |
62,324 |
|
|
$ |
1,126 |
|
|
$ |
62,324 |
|
|
$ |
66,784 |
|
|
$ |
(4,460 |
) |
Other real estate income |
|
|
18,570 |
|
|
|
14,907 |
|
|
|
3,663 |
|
|
|
14,907 |
|
|
|
20,658 |
|
|
|
(5,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,020 |
|
|
|
77,231 |
|
|
|
4,789 |
|
|
|
77,231 |
|
|
|
87,442 |
|
|
|
(10,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(19,317 |
) |
|
|
(18,631 |
) |
|
|
(686 |
) |
|
|
(18,631 |
) |
|
|
(18,567 |
) |
|
|
(64 |
) |
Property expenses |
|
|
(10,888 |
) |
|
|
(7,113 |
) |
|
|
(3,775 |
) |
|
|
(7,113 |
) |
|
|
(6,496 |
) |
|
|
(617 |
) |
General and administrative |
|
|
(4,422 |
) |
|
|
(5,000 |
) |
|
|
578 |
|
|
|
(5,000 |
) |
|
|
(7,082 |
) |
|
|
2,082 |
|
Other real estate expenses |
|
|
(8,121 |
) |
|
|
(7,308 |
) |
|
|
(813 |
) |
|
|
(7,308 |
) |
|
|
(8,196 |
) |
|
|
888 |
|
Impairment charges |
|
|
(9,512 |
) |
|
|
(3,516 |
) |
|
|
(5,996 |
) |
|
|
(3,516 |
) |
|
|
(473 |
) |
|
|
(3,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,260 |
) |
|
|
(41,568 |
) |
|
|
(10,692 |
) |
|
|
(41,568 |
) |
|
|
(40,814 |
) |
|
|
(754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
123 |
|
|
|
175 |
|
|
|
(52 |
) |
|
|
175 |
|
|
|
622 |
|
|
|
(447 |
) |
Income from equity investments in real estate |
|
|
16,044 |
|
|
|
13,765 |
|
|
|
2,279 |
|
|
|
13,765 |
|
|
|
7,987 |
|
|
|
5,778 |
|
Gain on sale of investment in direct financing lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103 |
|
|
|
(1,103 |
) |
Other income and (expenses) |
|
|
1,073 |
|
|
|
3,258 |
|
|
|
(2,185 |
) |
|
|
3,258 |
|
|
|
(406 |
) |
|
|
3,664 |
|
Interest expense |
|
|
(16,234 |
) |
|
|
(14,979 |
) |
|
|
(1,255 |
) |
|
|
(14,979 |
) |
|
|
(18,598 |
) |
|
|
3,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,006 |
|
|
|
2,219 |
|
|
|
(1,213 |
) |
|
|
2,219 |
|
|
|
(9,292 |
) |
|
|
11,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
30,766 |
|
|
|
37,882 |
|
|
|
(7,116 |
) |
|
|
37,882 |
|
|
|
37,336 |
|
|
|
546 |
|
Provision for income taxes |
|
|
(770 |
) |
|
|
(1,755 |
) |
|
|
985 |
|
|
|
(1,755 |
) |
|
|
(1,089 |
) |
|
|
(666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
29,996 |
|
|
|
36,127 |
|
|
|
(6,131 |
) |
|
|
36,127 |
|
|
|
36,247 |
|
|
|
(120 |
) |
(Loss) income from discontinued operations |
|
|
(4,628 |
) |
|
|
5,223 |
|
|
|
(9,851 |
) |
|
|
5,223 |
|
|
|
8,412 |
|
|
|
(3,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from real estate ownership |
|
|
25,368 |
|
|
|
41,350 |
|
|
|
(15,982 |
) |
|
|
41,350 |
|
|
|
44,659 |
|
|
|
(3,309 |
) |
Less: Net income attributable to noncontrolling interests |
|
|
(2,058 |
) |
|
|
(1,661 |
) |
|
|
(397 |
) |
|
|
(1,661 |
) |
|
|
(1,470 |
) |
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from real estate ownership attributable to
W. P. Carey members |
|
$ |
23,310 |
|
|
$ |
39,689 |
|
|
$ |
(16,379 |
) |
|
$ |
39,689 |
|
|
$ |
43,189 |
|
|
$ |
(3,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2010 10-K 30
The following table presents the components of our lease revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Rental income |
|
$ |
53,356 |
|
|
$ |
51,705 |
|
|
$ |
55,856 |
|
Interest income from direct financing leases |
|
|
10,094 |
|
|
|
10,619 |
|
|
|
10,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,450 |
|
|
$ |
62,324 |
|
|
$ |
66,784 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the net lease revenues (i.e., rental income and interest income
from direct financing leases) that we earned from lease obligations through our direct ownership of
real estate (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
Lessee |
|
2010 |
|
|
2009 |
|
|
2008 |
|
CheckFree Holdings, Inc. (a) |
|
$ |
5,103 |
|
|
$ |
4,964 |
|
|
$ |
4,829 |
|
The American Bottling Company |
|
|
4,390 |
|
|
|
4,591 |
|
|
|
4,563 |
|
Bouygues Telecom, S.A. (a) (b) (c) (d) |
|
|
3,852 |
|
|
|
6,410 |
|
|
|
6,215 |
|
Orbital Sciences Corporation (e) |
|
|
3,611 |
|
|
|
2,771 |
|
|
|
2,939 |
|
JP Morgan Chase Bank, N.A. (f) |
|
|
3,448 |
|
|
|
|
|
|
|
|
|
Titan Corporation |
|
|
2,912 |
|
|
|
2,912 |
|
|
|
2,912 |
|
AutoZone, Inc. |
|
|
2,241 |
|
|
|
2,228 |
|
|
|
2,210 |
|
Unisource Worldwide, Inc. (g) |
|
|
1,923 |
|
|
|
1,668 |
|
|
|
1,678 |
|
Quebecor Printing, Inc. |
|
|
1,916 |
|
|
|
1,919 |
|
|
|
1,941 |
|
Sybron Dental Specialties Inc. (d) |
|
|
1,816 |
|
|
|
1,953 |
|
|
|
1,770 |
|
Jarden Corporation |
|
|
1,614 |
|
|
|
1,614 |
|
|
|
1,625 |
|
BE Aerospace, Inc. |
|
|
1,580 |
|
|
|
1,580 |
|
|
|
1,580 |
|
Eagle Hardware & Garden, a subsidiary of Lowes Companies |
|
|
1,568 |
|
|
|
1,574 |
|
|
|
1,486 |
|
Omnicom Group Inc. (h) |
|
|
1,518 |
|
|
|
1,251 |
|
|
|
1,251 |
|
CSS Industries, Inc. |
|
|
1,516 |
|
|
|
1,570 |
|
|
|
1,570 |
|
Career Education Corporation |
|
|
1,502 |
|
|
|
1,502 |
|
|
|
1,502 |
|
Sprint Spectrum, L.P. |
|
|
1,425 |
|
|
|
1,425 |
|
|
|
1,425 |
|
Enviro
Works, Inc. (c) |
|
|
1,255 |
|
|
|
1,426 |
|
|
|
1,421 |
|
Other (a) (b) |
|
|
20,260 |
|
|
|
20,966 |
|
|
|
25,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,450 |
|
|
$ |
62,324 |
|
|
$ |
66,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These revenues are generated in consolidated ventures, generally with our affiliates, and on
a combined basis, include lease revenues applicable to noncontrolling interests totaling $3.8
million, $3.7 million and $3.6 million for the years ended December 31, 2010, 2009 and 2008,
respectively. |
|
(b) |
|
Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for
the U.S. dollar in relation to the Euro during both 2010 and 2009 strengthened by
approximately 5% in comparison to the respective prior years, resulting in a negative impact
on lease revenues for our Euro-denominated investments in 2010 and 2009. |
|
(c) |
|
The decrease in 2010 was due to lease restructuring in January 2010. |
|
(d) |
|
The increase in 2009 was due to CPI-based (or equivalent) rent increase. |
|
(e) |
|
The increase in 2010 was due to an expansion at this facility completed in January 2010. |
|
(f) |
|
We acquired this investment in February 2010. |
|
(g) |
|
The increase in 2010 was due to a rent increase as a result of a lease renewal in October
2009. |
|
(h) |
|
The increase in 2010 reflects the accelerated amortization of below-market rent intangibles
as a result of the tenant not renewing its lease with us. |
W. P. Carey 2010 10-K 31
We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
Interest at |
|
|
Years ended December 31, |
|
Lessee |
|
December 31, 2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
The New York Times Company (a) |
|
|
18 |
% |
|
$ |
26,768 |
|
|
$ |
21,751 |
|
|
$ |
|
|
Carrefour France, SAS (b) |
|
|
46 |
% |
|
|
19,618 |
|
|
|
21,481 |
|
|
|
21,387 |
|
Federal Express Corporation |
|
|
40 |
% |
|
|
7,121 |
|
|
|
7,044 |
|
|
|
6,967 |
|
Medica France, S.A. (b) |
|
|
46 |
% |
|
|
6,447 |
|
|
|
6,917 |
|
|
|
7,169 |
|
Schuler A.G. (b) |
|
|
33 |
% |
|
|
6,208 |
|
|
|
6,568 |
|
|
|
6,802 |
|
U. S. Airways Group, Inc. (c) |
|
|
75 |
% |
|
|
4,421 |
|
|
|
4,356 |
|
|
|
|
|
Information Resources, Inc. (d) |
|
|
33 |
% |
|
|
4,164 |
|
|
|
4,973 |
|
|
|
4,972 |
|
Amylin Pharmaceuticals, Inc. (e) |
|
|
50 |
% |
|
|
4,027 |
|
|
|
3,635 |
|
|
|
3,343 |
|
Hologic, Inc. |
|
|
36 |
% |
|
|
3,528 |
|
|
|
3,387 |
|
|
|
3,317 |
|
Consolidated Systems, Inc. |
|
|
60 |
% |
|
|
1,831 |
|
|
|
1,831 |
|
|
|
1,831 |
|
Childtime Childcare, Inc. |
|
|
34 |
% |
|
|
1,303 |
|
|
|
1,332 |
|
|
|
1,248 |
|
The Retail Distribution Group (f) |
|
|
40 |
% |
|
|
206 |
|
|
|
1,020 |
|
|
|
808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,642 |
|
|
$ |
84,295 |
|
|
$ |
57,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We acquired our interest in this investment in March 2009. |
|
(b) |
|
Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for
the U.S. dollar in relation to the Euro during both 2010 and 2009 strengthened by
approximately 5% in comparison to the respective prior years, resulting in a negative impact
on lease revenues for our Euro-denominated investments in 2010 and 2009. |
|
(c) |
|
In 2009, we recorded an adjustment to record this entity under the equity method. This entity
had previously been accounted for under the proportionate consolidation method (Note 2).
During 2008, this entity recorded lease revenue of $3.1 million. |
|
(d) |
|
The decrease in 2010 was due to lease restructuring in 2010. |
|
(e) |
|
The increase in 2010 was due to a CPI-based (or equivalent) rent increase and lease
restructuring. |
|
(f) |
|
In March 2010, this venture completed the sale of this property and we have no further
economic interest in this venture. The increase in 2009 was due to CPI-based (or equivalent)
rent increase. |
The above table does not reflect our share of interest income from our 5% interest in a venture
that has a note receivable. The venture recognized interest income of $24.2 million, $27.1 million
and $37.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. This amount
represents the total amount attributable to the entire venture, not our proportionate share, and is
subject to fluctuations in the exchange rate of the Euro.
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or
other similar indices for the jurisdiction in which the property is located, sales overrides or
other periodic increases, which are intended to increase lease revenues in the future. We own
international investments, and therefore lease revenues from these investments are subject to
fluctuations in exchange rates in foreign currencies.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, lease revenues increased
by $1.1 million, primarily due to $6.0 million in lease revenue from investments we entered into
and an expansion we placed into service during 2010, which was substantially offset by the impact
of recent tenant activity (including lease restructurings, lease expirations and property sales),
which reduced lease revenues by $5.2 million.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, lease revenues decreased
by $4.5 million, primarily due to the impact of recent tenant activity (including lease
restructurings, lease expirations and property sales), which resulted in a reduction to lease
revenues of $3.4 million. In addition, the reclassification of the U.S. Airways Group, Inc.
property to an equity investment in real estate in 2009 resulted in a decrease of $3.1 million to
lease revenues. These decreases were partially offset by scheduled rent increases at several
properties totaling $1.6 million.
W. P. Carey 2010 10-K 32
Other Real Estate Income
Other real estate income generally consists of revenue from Carey Storage, a subsidiary that
invests in domestic self-storage properties, and Livho, Inc. (Livho), a subsidiary that operates
a hotel franchise in Livonia, Michigan. Other real estate income also includes lease termination
payments and other non-rent related revenues from real estate ownership including, but not limited
to, settlements of claims against former lessees. We receive settlements in the ordinary course of
business; however, the timing and amount of settlements cannot always be estimated.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, other real estate income
increased by $3.7 million, primarily due to increases in reimbursable tenant costs of $2.7 million
as well as income of $1.5 million from the eight properties that Carey Storage acquired in the
third quarter of 2010. These increases were partially offset by a decrease in lease termination
income of $1.0 million. Reimbursable tenant costs are recorded as both revenue and expenses and
therefore have no impact on our results of operations.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, other real estate income
decreased by $5.8 million, primarily due to lower lease termination income recognized in 2009. In
2008, we recorded lease termination fees totaling $7.5 million, partially offset by the write-off
of certain intangible assets totaling $1.0 million. Increases in reimbursable tenant costs were
substantially offset by a reduction in income from Livho, whose operations were impacted by the
economic downturn.
Depreciation and Amortization
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, depreciation and
amortization increased by $0.7 million primarily due to depreciation and amortization of $2.3
million related to investments we entered into and an expansion we placed into service during 2010,
partially offset by a $1.0 million write-off of intangible assets as a result of a lease
termination in June 2009, resulting in higher amortization in 2009, and a $0.5 million decrease in
depreciation and amortization as a result of several assets becoming fully depreciated or
amortized.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, depreciation and
amortization increased by $0.1 million. The $1.0 million write-off of intangible assets in 2009 was
substantially offset by a decrease in depreciation and amortization of $0.7 million as a result of
a reclassification of a property in 2009 to an equity investment that had previously been accounted
for under the proportionate consolidation method.
Property Expenses
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, property expenses
increased by $3.8 million primarily due to an increase in reimbursable tenant costs of $2.7
million. The remainder of the increase in property expenses was due to two tenants vacating
properties during 2010.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, property expenses
increased by $0.6 million primarily due to increases in reimbursable tenant costs.
General and Administrative
General and administrative expenses were $4.4 million, $5.0 million and $7.1 million in 2010, 2009
and 2008, respectively. The $2.1 million decrease in general and administrative expenses for the
year ended December 31, 2009 as compared to 2008 was primarily due to decreases in professional
expenses of $1.1 million and business development costs of $0.5 million. Professional fees in 2008
reflected costs incurred in connection with opening our asset management office in Amsterdam.
W. P. Carey 2010 10-K 33
Impairment Charges
For the years ended December 31, 2010, 2009 and 2008, we recorded impairment charges related to our
continuing real estate ownership operations totaling $9.5 million, $3.5 million and $0.5 million,
respectively. The table below summarizes the impairment charges recorded for the past three fiscal
years for both continuing and discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lessee |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Triggering Events |
|
The American Bottling Company |
|
$ |
|
|
|
$ |
1,571 |
|
|
$ |
|
|
|
Decline in unguaranteed residual value of properties |
Brown Institute Ltd. |
|
|
5,623 |
|
|
|
|
|
|
|
|
|
|
Tenant not renewing lease and debt maturing |
Faurecia Exhaust Systems, Inc. |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
Decline in unguaranteed residual value of property |
Penberthy Inc. |
|
|
481 |
|
|
|
|
|
|
|
|
|
|
Tenant not renewing lease; potential sale |
Sybron Dental Specialties Inc. |
|
|
1,140 |
|
|
|
996 |
|
|
|
473 |
|
|
Decline in unguaranteed residual value of properties |
Sams East Inc. |
|
|
2,268 |
|
|
|
|
|
|
|
|
|
|
Potential sale |
Winn-Dixie Montgomery, Inc. |
|
|
|
|
|
|
900 |
|
|
|
|
|
|
Tenant vacated; potential sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges from
continuing operations |
|
$ |
9,512 |
|
|
$ |
3,516 |
|
|
$ |
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated Foods Southwest, Inc. |
|
$ |
308 |
|
|
$ |
1,200 |
|
|
$ |
|
|
|
Properties sold for less than carrying value |
BellSouth Telecommunications, Inc. |
|
|
|
|
|
|
3,138 |
|
|
|
|
|
|
Property sold for less than carrying value |
PPD Development, L. P. |
|
|
5,561 |
|
|
|
|
|
|
|
|
|
|
Properties sold for less than carrying value |
Tranco Logistics LLC |
|
|
|
|
|
|
580 |
|
|
|
538 |
|
|
Property sold for less than carrying value |
Vertafore Inc. |
|
|
|
|
|
|
1,990 |
|
|
|
|
|
|
Property sold for less than carrying value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges from
discontinued operations |
|
$ |
5,869 |
|
|
$ |
6,908 |
|
|
$ |
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income
(revenue less expenses) from investments entered into with affiliates or third parties in which we
have a noncontrolling interest but over which we exercise significant influence.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, income from equity
investments in real estate increased by $2.3 million, primarily due to income of $2.5 million
recognized by us from a venture, Retail Distribution, in connection with selling its property in
March 2010, as well as an increase in income of $0.7 million in 2010 due to higher foreign taxes
incurred in 2009 on our international ventures. In addition, income from the Amylin venture
increased by $0.4 million as a result of its purchase accounting adjustment becoming fully
amortized as well as higher rental income recognized in connection with a lease restructuring in
2009. These increases were partially offset by the other-than-temporary impairment charge of $1.4
million recognized during 2010 on the Schuler venture to reflect the decline in the estimated fair
value of the ventures underlying net assets in comparison with the carrying value of our interest.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, income from equity
investments in real estate increased by $5.8 million, primarily due to our investment in The New
York Times transaction in March 2009, which contributed income of $3.5 million in 2009. In
addition, during 2009 we recorded income of $1.6 million from an equity investment that had
previously been accounted for under the proportionate consolidation method (Note 2).
Gain on Sale of Investment in Direct Financing Lease
During the year ended December 31, 2008, we sold our investment in a direct financing lease for
$5.0 million, net of selling costs, and recognized a gain on sale of $1.1 million.
Other Income and (Expenses)
Other income and (expenses) consists primarily of gains and losses on foreign currency transactions
and derivative instruments as well as the Investors profit-sharing interest in income or losses
from Carey Storage. We and certain of our foreign consolidated subsidiaries have intercompany debt
and/or advances that are not denominated in the entitys functional currency. When the intercompany
debt or accrued interest thereon is remeasured against the functional currency of the entity, a
gain or loss may result. For intercompany transactions that are of a long-term investment nature,
the gain or loss is recognized as a cumulative translation adjustment in other comprehensive
income. We also recognize gains or losses on foreign currency transactions when we repatriate cash
from our foreign investments.
W. P. Carey 2010 10-K 34
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, other income decreased
by $2.2 million. Results for 2009 included a $7.0 million gain recognized by Carey Storage on the
repayment of the $35.0 million outstanding balance on its secured credit facility for $28.0
million, partially offset by the Investors profit-sharing interest in the gain totaling $4.2
million.
2009 vs. 2008 For the year ended December 31, 2009, we recognized other income of $3.3 million,
compared to other expenses of $0.4 million in 2008. The other income in 2009 was primarily
comprised of the net gain recognized by Carey Storage as described
above. The other expenses in 2008 were primarily due to foreign currency transactions. Fluctuations
in foreign currency exchange rates did not have a significant impact in 2009.
Interest Expense
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, interest expense
increased by $1.3 million, primarily as a result of mortgage financing obtained in connection with
our investment activities during 2010.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, interest expense
decreased by $3.6 million, including $1.8 million resulting from Carey Storages repayment of its
$35.0 million outstanding balance on its secured credit facility in January 2009. In addition,
interest expense on our line of credit decreased by $1.1 million compared to 2008, primarily due to
a lower average annual interest rate, partially offset by a higher average outstanding balance
during 2009. The weighted average annual interest rate on advances on the line of credit at
December 31, 2009 was 1.3%, compared to 2.6% at December 31, 2008. An out-of-period adjustment as
described in Note 2 also resulted in a reduction of $1.1 million in interest expense for 2009.
(Loss) Income from Discontinued Operations
2010 For the year ended December 31, 2010, loss from discontinued operations was $4.6 million,
primarily due to impairment charges recognized of $5.9 million. These charges were partially offset
by income generated from the operations of these properties of $0.8 million and a net gain on the
sales of these properties of $0.5 million.
2009 For the year ended December 31, 2009, we earned income from discontinued operations of $5.2
million. During 2009, we sold five domestic properties and recognized a net gain of $7.7 million.
We also recognized income generated from the operations of these properties of $4.4 million. These
increases in income were partially offset by impairment charges recognized on these properties of
$6.9 million.
2008 For the year ended December 31, 2008, we earned income from discontinued operations of $8.4
million, which primarily consisted of income generated from the operations of properties that were
sold of $5.1 million and proceeds received from a former tenant in payment of a $3.8 million legal
judgment in our favor, partially offset by a $0.5 million impairment charge.
Impairment charges relating to our continuing operations for 2010, 2009 and 2008 are described in
Impairment Charges above.
Net Income from Real Estate Ownership Attributable to W. P. Carey Members
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, the resulting net income
from real estate ownership attributable to W. P. Carey members decreased by $16.4 million.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, the resulting net income
from real estate ownership attributable to W. P. Carey members decreased by $3.5 million.
Financial Condition
Sources and Uses of Cash during the Year
Our cash flows fluctuate period to period due to a number of factors, which may include, among
other things, the nature and timing of receipts of transaction-related and performance revenue, the
performance of the CPA® REITs relative to their performance criteria, the timing of
purchases and sales of real estate, the timing of proceeds from non-recourse mortgage loans and
receipt of lease revenue, the timing and characterization of distributions from equity investments
in real estate and the CPA® REITs, the timing of certain payments, and the receipt of
the annual installment of deferred acquisition revenue and interest thereon in the first quarter
from certain of the CPA® REITs, and changes in foreign currency exchange rates. Despite
this fluctuation, we believe that we will generate sufficient cash from operations and from equity
distributions in excess of equity income in real estate to meet our short-term and long-term
liquidity needs. We may also use existing cash resources, the proceeds of non-recourse mortgage
loans, unused capacity on our line of credit and the issuance of additional equity securities to
meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses
of cash during the year are described below.
W. P. Carey 2010 10-K 35
Operating Activities
Cash flow from operating activities increased in 2010 as compared to 2009. Increases in net income,
which were driven primarily by revenues earned in connection with higher investment volume on
behalf of the CPA® REITs, were partially offset by a decline in the amount of deferred
acquisition revenue received and lower cash flow in our real estate ownership segment.
During 2010, we received revenue of $40.3 million in cash from providing asset-based management
services to the CPA® REITs as compared to $42.1 million in 2009. This amount does not
include revenue received from the CPA® REITs in the form of shares of their restricted
common stock rather than cash (see below). During 2010, we received revenue of $25.4 million in
connection with structuring investments and debt refinancing on behalf of the CPA® REITs
as compared to $13.1 million in 2009. Deferred acquisition revenue received was lower during 2010
as compared to 2009, primarily due to a shift in the timing of when deferred acquisition revenue is
received as well as lower investment volume by the CPA® REITs in prior year periods. For
CPA®:14, CPA®:15 and CPA®:16 Global, we receive deferred
acquisition revenue in annual installments each January. For CPA®:17 Global, such
revenue is received annually based on the quarter that a transaction is completed.
During 2010, our real estate ownership segment provided cash flows (contractual lease revenues, net
of property-level debt service) of approximately $49.9 million, which represents a decrease of $7.0
million from 2009, primarily due to lower contractual lease revenues received in 2010 as a result
of recent tenant activity (including lease restructurings, lease expirations and property sales).
In 2010, we elected to continue to receive all performance revenue from CPA®:16
Global as well as asset management revenue from CPA®:17 Global in restricted shares
of their common stock rather than cash, while for CPA®:14 and CPA®:15, we
elected to receive 80% of all performance revenue in their restricted shares, with the remaining
20% payable in cash.
In addition to cash flow from operating activities, we may use the following sources to fund
distributions to shareholders: distributions received from equity investments in excess of equity
income, net contributions from noncontrolling interests, borrowings under our line of credit and
existing cash resources.
Investing Activities
Our investing activities are generally comprised of real estate-related transactions (purchases and
sales) and capitalized property-related costs. During 2010, we used $96.9 million to acquire
several investments, including $47.6 million for a domestic investment, $27.2 million for an
investment in Spain and $22.1 million for Carey Storages investments in eight self-storage
properties. We partially funded the domestic investment with $36.1 million from the escrowed
proceeds of a sale of a property in December 2009. In connection with the Spain investment, we paid
foreign valued-added taxes of $4.2 million, which we expect to recover in the future. Cash inflows
during 2010 included $18.8 million in distributions from equity investments in real estate and the
CPA® REITs in excess of cumulative equity income, inclusive of distributions of $5.5
million from the Federal Express venture as a result of refinancing its maturing debt and $3.6
million received from the Retail Distribution venture in connection with the sale of its property.
We also received proceeds of $14.6 million from the sale of seven properties in 2010.
Financing Activities
During 2010, we paid distributions to shareholders of $92.6 million, inclusive of a special
distribution of $0.30 per share, or $11.8 million, that was paid in January 2010 to shareholders of
record at December 31, 2009, and paid distributions of $5.1 million to affiliates who hold
noncontrolling interests in various entities with us and an Investor who holds a profit-sharing
interest in Carey Storage. We also made scheduled mortgage principal payments of $14.3 million and
received mortgage loan proceeds totaling $56.8 million, including $35.0 million obtained for an
investment we entered into in February 2010 and $15.5 million obtained in connection with Carey
Storages investment in eight self-storage facilities in 2010. Borrowings under our line of credit
increased overall by $30.8 million since December 31, 2009 and were comprised of gross borrowings
of $83.3 million and repayments of $52.5 million. Borrowings under our line of credit were used
primarily to finance our portion of the investments we acquired in 2010 and to fund distributions
to shareholders. In addition, we received contributions of $18.0 million from holders of
noncontrolling interests and a profit-sharing interest, including the $9.6 million received in
connection with the investment in Spain and $3.7 million received in connection with the
self-storage investments. During 2010, we also received $3.7 million from the issuance of shares of
our common stock in connection with our stock-based compensation plans.
W. P. Carey 2010 10-K 36
Summary of Financing
The table below summarizes our non-recourse long-term debt and credit facility (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Balance |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
147,872 |
|
|
$ |
147,060 |
|
Variable rate (a) |
|
|
249,110 |
|
|
|
179,270 |
|
|
|
|
|
|
|
|
|
|
$ |
396,982 |
|
|
$ |
326,330 |
|
|
|
|
|
|
|
|
Percent of total debt |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
37 |
% |
|
|
45 |
% |
Variable rate (a) |
|
|
63 |
% |
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Weighted average interest rate at end of year |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6.0 |
% |
|
|
6.2 |
% |
Variable rate (a) |
|
|
2.5 |
% |
|
|
2.9 |
% |
|
|
|
(a) |
|
Variable rate debt at December 31, 2010 included (i) $141.8 million outstanding under our
line of credit, (ii) $48.0 million that had been effectively converted to fixed rates through
interest rate swap derivative instruments and (iii) $54.4 million in mortgage obligations that
bore interest at fixed rates but which have interest rate reset features that may change the
interest rates to then-prevailing market fixed rates (subject to specified caps) at certain
points during their term. |
Cash Resources
At December 31, 2010, our cash resources consisted of the following:
|
|
|
Cash and cash equivalents totaling $64.7 million. Of this amount, $7.1 million, at then
current exchange rates, was held in foreign bank accounts, and we could be subject to
restrictions or significant costs should we decide to repatriate these amounts; |
|
|
|
A line of credit with unused capacity of $108.3 million. The line of credit is available
to us and may also be used to loan funds to our affiliates. Our lender has issued letters of
credit totaling $6.8 million on our behalf in connection with certain contractual
obligations, which reduce amounts that may be drawn under this facility. In addition, in
January 2011, we made a $90.0 million short-term loan due in March of 2011 to an affiliate
for the purpose of acquiring an investment, which we funded with
proceeds from our line of credit; and |
|
|
|
We also had unleveraged properties that had an aggregate carrying value of $232.6
million, although given the current economic environment, there can be no assurance that we
would be able to obtain financing for these properties. |
Our cash resources can be used for working capital needs and other commitments and may be used for
future investments. We continue to evaluate fixed-rate financing options, such as obtaining
non-recourse financing on our unleveraged properties. Any financing obtained may be used for
working capital objectives and/or may be used to pay down existing debt balances.
Line of Credit
A summary of our line of credit is provided below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Outstanding |
|
|
Maximum |
|
|
Outstanding |
|
|
Maximum |
|
|
|
Balance |
|
|
Available |
|
|
Balance |
|
|
Available |
|
Line of credit |
|
$ |
141,750 |
|
|
$ |
250,000 |
|
|
$ |
111,000 |
|
|
$ |
250,000 |
|
W. P. Carey 2010 10-K 37
We have a $250.0 million unsecured revolving line of credit that is scheduled to mature in
June 2011. Pursuant to the terms of the credit agreement, the line of credit can be increased up to
$300.0 million at the discretion of the lenders. Additionally, as long as there has been no
default, we may extend the line of credit at our discretion, within 90 days of, but not less than
30 days prior to, expiration, for an additional year. Such extension is subject to the payment of
an extension fee equal to 0.125% of the total commitments under the facility at that time. We
currently intend to extend this line for an additional year.
The line of credit provides for an annual interest rate, at our election, of either (i) London
inter-bank offered rate (LIBOR) plus a spread that ranges from 75 to 120 basis points depending
on our leverage, or (ii) the greater of the lenders prime rate and the Federal Funds Effective
Rate plus 50 basis points. In addition, we pay an annual fee ranging between 12.5 and 20 basis
points of the unused portion of the line of credit, depending on our leverage ratio. Based on our
leverage ratio at December 31, 2010, we pay interest at LIBOR, or 0.25%, plus 90 basis points and
pay 15 basis points on the unused portion of the line of credit.
The credit agreement stipulates six financial covenants that require us to maintain the following
ratios and benchmarks at the end of each quarter (the quoted variables are specifically defined in
the credit agreement):
(i) |
|
a maximum leverage ratio, which requires us to maintain a ratio for total outstanding
indebtedness to total value of 60% or less; |
(ii) |
|
a maximum secured debt ratio, which requires us to maintain a ratio for total secured
outstanding indebtedness (inclusive of permitted indebtedness of subsidiaries) to total
value of 50% or less; |
(iii) |
|
a minimum combined equity value, which requires us to maintain a total value less total
outstanding indebtedness of at least $550.0 million. This amount must be adjusted in the
event of any securities offering by adding 85% of the fair market value of all net offering
proceeds; |
(iv) |
|
a minimum fixed charge coverage ratio, which requires us to maintain a ratio for adjusted
total EBITDA to fixed charges of 1.75 to 1.0; |
(v) |
|
a maximum dividend payout, which requires us to ensure that the total of restricted
payments made in the current quarter, when added to the total for the three preceding fiscal
quarters, shall not exceed 90% of adjusted total EBITDA for the four preceding fiscal
quarters. Restricted payments include quarterly dividends and the total amount of shares
repurchased by us in excess of $10.0 million per year; and |
(vi) |
|
a limitation on recourse indebtedness, which prohibits us from incurring additional secured
indebtedness other than non-recourse indebtedness or indebtedness that is recourse to us
that exceeds $50.0 million or 5% of the total value, whichever is greater. |
We were in compliance with these covenants at December 31, 2010.
Cash Requirements
During 2011, we expect that cash payments will include paying distributions to shareholders and to
our affiliates who hold noncontrolling interests in entities we control and making scheduled
mortgage principal payments, including mortgage balloon payments totaling $27.3 million, as well as
other normal recurring operating expenses. In addition, our share of balloon payments during the
next twelve months on our unconsolidated ventures totals $9.2 million. See below for cash
requirements related to the Proposed Merger.
We expect to fund future investments, any capital expenditures on existing properties and scheduled
debt maturities on non-recourse mortgage loans through use of our cash reserves or unused amounts
on our line of credit.
Expected Impact of Proposed Merger and Asset Sale
If approved, we currently expect the Proposed Merger of CPA®:14 and CPA®:16
Global and the asset sale from CPA®:14 to us to have the following impact on our
liquidity and results of operations; however there can be no assurance that these transactions will
be completed.
In connection with the Proposed Merger, we expect to earn $52.5
million in disposition and termination fees from
CPA®:14.
We currently expect to receive our $31.2 million termination fee in
shares of
CPA®:14,
which will then be exchanged at our election into shares of
CPA®:16Global
in order to facilitate this transaction. Based on our ownership of
CPA®:14
common stock as of December 31, 2010, we also expect to receive
distributions totaling approximately $8.0 million, as part of the
special $1.00 per share cash distribution to CPA®:14
shareholders. We have agreed to purchase three properties from
CPA®:14,
in which we already have a joint venture interest, for an aggregate
purchase price of $32.1 million, plus the assumption of approximately
$64.7 million of indebtedness. These properties all have remaining
lease terms of less than 8 years, which are shorter than the average
lease term of CPA®
:16Globals portfolio of properties. Consequently,
CPA®:16Global
required that these assets be sold by
CPA®:14
prior to the Proposed Merger.
W. P. Carey 2010 10-K 38
The board of directors of each of CPA®:16 Global and CPA®:14 have the
ability, but not the obligation, to terminate the transaction if more than 50% of the shareholders of CPA®:14
elect to receive cash in the Proposed Merger. Assuming that holders of 50% of CPA®:14s
outstanding stock elect to receive cash in the Proposed Merger, then the maximum cash required by
CPA®:16 Global to purchase these shares would be approximately $416.1 million, based
on the total shares of CPA®:14 outstanding at December 31, 2010. If the cash on hand and
available to CPA®:14 and CPA®:16 Global, including the proceeds of the
CPA®:14 Asset Sales and the $300.0 million senior credit facility of
CPA®:16 Global, is not sufficient to enable CPA®:16 Global to fulfill
cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to
purchase a sufficient number of shares of CPA®:16 Global stock from
CPA®:16 Global to enable it to pay such amounts to CPA®:14 shareholders.
We currently expect to use the special $1.00
per share cash distribution received from our ownership of CPA®:14 shares,
the post-tax proceeds from the disposition revenues, cash on hand, and amounts available under our line
of credit to finance our potential obligations in connection with the Proposed Merger and the CPA®:14 Asset Sales, as necessary.
We currently estimate that the properties to be acquired from CPA®:14 will generate
annual lease revenue and cash flow totaling approximately $8.8 million and $4.0 million,
respectively. This additional cash flow will be partially offset by lower annual asset management
revenue approximating $1.0 million, lower annual equity income of approximately $0.9 million, and
interest expense incurred related to any borrowing under our credit facility to finance this
transaction and the interest payments on the existing non-recourse mortgages relating to the
properties to be acquired. Each of these properties has its lease expiration between December 2015
and July 2024, renewable at the tenants option. There are no scheduled balloon payments on any of
the properties to be acquired from CPA®:14 until July 2017.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual
obligations at December 31, 2010 and the effect that these arrangements and obligations are
expected to have on our liquidity and cash flow in the specified future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 years |
|
Non-recourse debt Principal |
|
$ |
255,232 |
|
|
$ |
34,688 |
|
|
$ |
41,742 |
|
|
$ |
52,863 |
|
|
$ |
125,939 |
|
Line of credit Principal |
|
|
141,750 |
|
|
|
141,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings (a) |
|
|
78,987 |
|
|
|
14,753 |
|
|
|
23,441 |
|
|
|
20,160 |
|
|
|
20,633 |
|
Operating and other lease commitments (b) |
|
|
10,790 |
|
|
|
1,042 |
|
|
|
2,065 |
|
|
|
2,013 |
|
|
|
5,670 |
|
Property improvements |
|
|
1,716 |
|
|
|
1,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commitments (c) |
|
|
53 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
488,528 |
|
|
$ |
194,002 |
|
|
$ |
67,248 |
|
|
$ |
75,036 |
|
|
$ |
152,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest on un-hedged variable rate debt obligations was calculated using the applicable
variable interest rates and balances outstanding at December 31, 2010. |
|
(b) |
|
Operating and other lease commitments consist primarily of the total minimum rents payable on
the lease for our principal offices. We are reimbursed by affiliates for their share of the
future minimum rents under an office cost-sharing agreement. These amounts are allocated among
the entities based on gross revenues and are adjusted quarterly. The table above excludes the
rental obligation under a ground lease of a venture in which we own a 46% interest. This
obligation totals approximately $2.9 million over the lease term through January 2063. |
|
(c) |
|
Represents a commitment to contribute capital to an investment in India. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
Euro at December 31, 2010. At December 31, 2010, we had no material capital lease obligations for
which we are the lessee, either individually or in the aggregate.
Proposed Merger of Affiliates
Assuming that holders of 50% of CPA®:14s outstanding stock elect to receive cash in the
Proposed Merger, then the maximum cash required by CPA®:16 Global to purchase these
shares would be approximately $416.1 million, based on the total shares of CPA®:14
outstanding at December 31, 2010. If the cash on hand and available to CPA®:14 and
CPA®:16 Global, including the proceeds of the CPA®:14 Asset Sales and a
new $300.0 million senior credit facility of CPA®:16 Global, is not sufficient to
enable CPA®:16 Global to fulfill cash elections in the Proposed Merger by
CPA®:14 shareholders, we have agreed to purchase a sufficient number of shares of
CPA®:16 Global stock from CPA®:16 Global to enable it to pay such
amounts to CPA®:14 shareholders.
W. P. Carey 2010 10-K 39
In connection with the Proposed Merger, we entered into a sale and purchase agreement with
CPA®:14 pursuant to which we have agreed to purchase CPA®:14s interests in
three properties for an aggregate purchase price of $32.1 million, plus the assumption of
approximately $64.7 million of debt. The purchase price was determined by us, relying in part upon a valuation of the properties
as of September 30, 2010 performed by a third-party valuation firm. The completion of the sale of
assets to us is a condition to the closing of the Proposed Merger. The closing of the
CPA®:14 Asset Sales is subject to the closing of the Proposed Merger.
In connection with the Proposed Merger, CAM has agreed to indemnify CPA®:16 Global if
it suffers certain losses arising out of a breach by CPA®:14 of its representations and
warranties under the merger agreement and having a material adverse effect on CPA®:16
Global after the Proposed Merger, up to the amount of fees received by CAM in connection with the
Proposed Merger. We have evaluated the exposure related to this indemnification and determined the
exposure to be minimal. We have also agreed to pay the expenses of CPA®:14 and
CPA®:16 Global if the merger agreement is terminated under certain circumstances up
to a maximum of $4.0 million and $5.0 million, respectively.
Equity Investments in Real Estate
We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. Generally, the underlying investments are jointly owned with our affiliates.
Summarized financial information for these ventures and our ownership interest in the ventures at
December 31, 2010 are presented below. Summarized financial information provided represents the
total amounts attributable to the ventures and does not represent our proportionate share (dollars
in thousands):
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Ownership |
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Interest at |
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Total Third |
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Lessee |
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December 31, 2010 |
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Total Assets |
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Party Debt |
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Maturity Date |
|
Information Resources, Inc. (a) |
|
|
33 |
% |
|
$ |
46,033 |
|
|
$ |
21,222 |
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|
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1/2011 |
|
Childtime Childcare, Inc. (b) |
|
|
34 |
% |
|
|
9,335 |
|
|
|
6,276 |
|
|
|
1/2011 |
|
U. S. Airways Group, Inc. |
|
|
75 |
% |
|
|
29,724 |
|
|
|
18,310 |
|
|
|
4/2014 |
|
The New York Times Company |
|
|
18 |
% |
|
|
241,846 |
|
|
|
116,684 |
|
|
|
9/2014 |
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Carrefour France, SAS (c) |
|
|
46 |
% |
|
|
136,315 |
|
|
|
103,876 |
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|
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12/2014 |
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Consolidated Systems, Inc. |
|
|
60 |
% |
|
|
16,794 |
|
|
|
11,369 |
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|
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11/2016 |
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Amylin Pharmaceuticals, Inc. |
|
|
50 |
% |
|
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36,617 |
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|
|
35,197 |
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|
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7/2017 |
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Medica France, S.A. (c) |
|
|
46 |
% |
|
|
45,277 |
|
|
|
36,474 |
|
|
|
10/2017 |
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Federal Express Corporation (d) |
|
|
40 |
% |
|
|
43,203 |
|
|
|
54,000 |
|
|
|
1/2020 |
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Hologic, Inc. |
|
|
36 |
% |
|
|
26,627 |
|
|
|
14,143 |
|
|
|
5/2023 |
|
Schuler A.G. (c) |
|
|
33 |
% |
|
|
68,198 |
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|
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|
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N/A |
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|
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|
|
|
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|
|
|
|
|
|
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$ |
699,969 |
|
|
$ |
417,551 |
|
|
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(a) |
|
In January 2011, this venture refinanced its existing non-recourse mortgage debt for new
non-recourse financing of $15.0 million. |
|
(b) |
|
In January 2011, this venture repaid its maturing non-recourse mortgage loan. |
|
(c) |
|
Dollar amounts shown are based on the exchange rate of the Euro at December 31, 2010. |
|
(d) |
|
In December 2010, this venture refinanced its existing non-recourse mortgage debt with new
non-recourse financing of $54.0 million based on the appraised value of the underlying real
estate of the venture at that time and distributed the proceeds to the venture partners. |
The table above does not reflect our 5% interest in a venture (Lending Venture) that holds a note
receivable (the Note Receivable) from the holder (the Partner) of a 75.3% interest in a limited
partnership (Partnership) owning 37 properties throughout Germany at a total cost of $336.0
million. Concurrently, our affiliates also acquired an interest in a second venture (the Property
Venture) that acquired the remaining 24.7% ownership interest in the Partnership as well as an
option to purchase an additional 75% interest from the Partner by December 2010. Also in connection
with this transaction, the Lending Venture obtained non-recourse financing of $284.9 million having
a fixed annual interest rate of 5.5%, a term of 10 years and is collateralized by the 37 German
properties. In November 2010, the Property Venture exercised a portion of its call option via the
Lending Venture whereby the Partner exchanged a 70% interest in the Partnership for a $295.7
million reduction in the Note Receivable. Subsequent to the exercise of the option, the Property
Venture now owns a 94.7% interest in the Partnership and retains options to purchase the remaining
5.3% interest from the Partner by December 2012. All dollar amounts are based on the exchange rates
of the Euro at the dates of the transactions, and dollar amounts provided represent the total
amounts attributable to the ventures and do not represent our proportionate share.
W. P. Carey 2010 10-K 40
Environmental Obligations
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our properties were
in substantial compliance with Federal and state environmental statutes at the time the properties
were acquired. However, portions of certain properties have been subject to some degree of
contamination, principally in connection with leakage from underground storage tanks, surface
spills or other on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing identified conditions.
Tenants are generally subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our leases generally
require tenants to indemnify us from all liabilities and losses related to the
leased properties with provisions of such indemnification specifically addressing environmental
matters. The leases generally include provisions that allow for periodic environmental assessments,
paid for by the tenant, and allow us to extend leases until such time as a tenant has satisfied its
environmental obligations. Certain of our leases allow us to require financial assurances from
tenants, such as performance bonds or letters of credit, if the costs of remediating environmental
conditions are, in our estimation, in excess of specified amounts. Accordingly, we believe that the
ultimate resolution of environmental matters should not have a material adverse effect on our
financial condition, liquidity or results of operations.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements. Many of these accounting policies require judgment and the use of estimates and
assumptions when applying these policies in the preparation of our consolidated financial
statements. On a quarterly basis, we evaluate these estimates and judgments based on historical
experience as well as other factors that we believe to be reasonable under the circumstances. These
estimates are subject to change in the future if underlying assumptions or factors change. Certain
accounting policies, while significant, may not require the use of estimates. Those accounting
policies that require significant estimation and/or judgment are listed below.
Classification of Real Estate Assets
We classify our directly-owned leased assets for financial reporting purposes at the inception of a
lease, or when significant lease terms are amended, as either real estate leased under operating
leases or net investment in direct financing leases. This classification is based on several
criteria, including, but not limited to, estimates of the remaining economic life of the leased
assets and the calculation of the present value of future minimum rents. We estimate remaining
economic life relying in part upon third-party appraisals of the leased assets. We calculate the present value of
future minimum rents using the leases implicit interest rate, which requires an estimate of the
residual value of the leased assets as of the end of the non-cancelable lease term. Estimates of
residual values are generally determined by us relying in part upon third-party appraisals. Different estimates of residual
value result in different implicit interest rates and could possibly affect the financial reporting
classification of leased assets. The contractual terms of our leases are not necessarily different
for operating and direct financing leases; however, the classification is based on accounting
pronouncements that are intended to indicate whether the risks and rewards of ownership are
retained by the lessor or substantially transferred to the lessee. We believe that we retain
certain risks of ownership regardless of accounting classification. Assets classified as net
investment in direct financing leases are not depreciated but are written down to expected residual
value over the lease term. Therefore, the classification of assets may have a significant impact on
net income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate Acquisitions
In connection with our acquisition of properties accounted for as operating leases, we allocate
purchase costs to tangible and intangible assets and liabilities acquired based on their estimated
fair values. We determine the value of tangible assets, consisting of land and buildings, as if
vacant, and record intangible assets, including the above- and below-market value of leases, the
value of in-place leases and the value of tenant relationships, at their relative estimated fair
values.
We determine the value attributed to tangible assets in part using a discounted cash flow model
that is intended to approximate both what a third party would pay to purchase the vacant property
and rent at current estimated market rates. In applying the model, we assume that the disinterested
party would sell the property at the end of an estimated market lease term. Assumptions used in the
model are property-specific where this information is available; however, when certain necessary
information is not available, we use available regional and property-type information. Assumptions
and estimates include a discount rate or internal rate of return, marketing period necessary to put
a lease in place, carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of these rents, market lease term and a
cap rate to be applied to an estimate of market rent at the end of the market lease term.
W. P. Carey 2010 10-K 41
We acquire properties subject to net leases and determine the value of above-market and
below-market lease intangibles based on the difference between (i) the contractual rents to be paid
pursuant to the leases negotiated and in place at the time of acquisition of the properties and
(ii) our estimate of fair market lease rates for the property or a similar property, both of which
are measured over a period equal to the estimated market lease term. We discount the difference
between the estimated market rent and contractual rent to a present value using an interest rate
reflecting our current assessment of the risk associated with the lease acquired, which includes a
consideration of the credit of the lessee. Estimates of market rent are generally determined by us
relying in part upon a
third-party appraisal obtained in connection with the property acquisition and can include
estimates of market rent increase factors, which are generally provided in the appraisal or by
local brokers.
We evaluate the specific characteristics of each tenants lease and any pre-existing relationship
with each tenant in determining the value of in-place lease and tenant relationship intangibles. To
determine the value of in-place lease intangibles, we consider estimated market rent, estimated
carrying costs of the property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, based on assessments of specific market conditions. In
determining the value of tenant relationship intangibles, we consider the expectation of lease
renewals, the nature and extent of our existing relationship with the tenant, prospects for
developing new business with the tenant and the tenants credit profile. We also consider estimated
costs to execute a new lease, including estimated leasing commissions and legal costs, as well as
estimated carrying costs of the property during a hypothetical expected lease-up period. We
determine these values using our estimates or by relying in part upon third-party appraisals.
Basis of Consolidation
When we obtain an economic interest in an entity, we evaluate the entity to determine if it is
deemed a variable interest entity (VIE) and, if so, whether we are deemed to be the primary
beneficiary and are therefore required to consolidate the entity. 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 under current authoritative accounting guidance, 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 a VIE based
on whether the entity (i) has the power to direct the activities that most significantly impact the
economic performance of the VIE, and (ii) has the obligation to absorb losses or the right to
receive benefits of the VIE that could potentially be significant to the VIE.
For an entity that is not considered to be a VIE, the general partners in a limited partnership (or
similar entity) are presumed to control the entity regardless of the level of their ownership and,
accordingly, may be required to consolidate the entity. We evaluate the partnership agreements or
other relevant contracts to determine whether there are provisions in the agreements that would
overcome this presumption. If the agreements provide the limited partners with either (a) the
substantive ability to dissolve or liquidate the limited partnership or otherwise remove the
general partners without cause or (b) substantive participating rights, the limited partners
rights overcome the presumption of control by a general partner of the limited partnership, and,
therefore, the general partner must account for its investment in the limited partnership using the
equity method of accounting.
When we obtain an economic interest in an entity that is structured at the date of acquisition as a
tenant-in-common interest, we evaluate the tenancy-in-common agreements or other relevant documents
to ensure that the entity does not qualify as a VIE and does not meet the control requirement
required for consolidation. We also use judgment in determining whether the shared decision-making
involved in a tenant-in-common interest investment creates an opportunity for us to have
significant influence on the operating and financial decisions of these investments and thereby
creates some responsibility by us for a return on our investment. We account for tenancy-in-common
interests under the equity method of accounting.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived assets,
including goodwill, may be impaired or that their carrying value may not be recoverable. These
impairment indicators include, but are not limited to, the vacancy of a property that is not
subject to a lease; a lease default by a tenant that is experiencing financial difficulty; the
termination of a lease by a tenant; or the rejection of a lease in a bankruptcy proceeding. We may
incur impairment charges on long-lived assets, including real estate, direct financing leases,
assets held for sale and equity investments in real estate. We may also incur impairment charges on
marketable securities and goodwill. Estimates and judgments used when evaluating whether these
assets are impaired are presented below.
W. P. Carey 2010 10-K 42
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. We estimate market rents and residual values using
market information from outside sources such as broker quotes or recent comparable sales. In cases
where the available market information is not deemed appropriate, we perform a future net cash flow
analysis discounted for inherent risk associated with each asset to determine an estimated fair
value. As our investment objective is to hold properties on a long-term basis, holding periods used
in the undiscounted cash flow analysis generally range from five to ten years. Depending on the
assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived
assets
can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining
the best possible estimate of future cash flows. If the future net undiscounted cash flow of the
property is less than the carrying value, the property is considered to be impaired. We then
measure the loss as the excess of the carrying value of the property over its estimated fair value.
The propertys estimated fair value is primarily determined using market information from outside
sources such as broker quotes or recent comparable sales.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information from outside sources such as broker quotes or recent
comparable sales. If this review indicates that a decline in residual value has occurred that is
other-than-temporary, we recognize an impairment charge and revise the accounting for the direct
financing lease to reflect a portion of the future cash flow from the lessee as a return of
principal rather than as revenue. While we evaluate direct financing leases if there are any
indicators that the residual value may be impaired, the evaluation of a direct financing lease can
be affected by changes in long-term market conditions even though the obligations of the lessee are
being met.
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we
have entered into a contract to sell the property, all material due diligence requirements have
been satisfied and we believe it is probable that the disposition will occur within one year. When
we classify an asset as held for sale, we calculate its estimated fair value as the expected sale
price, less expected selling costs. We base the expected sale price on the contract and the
expected selling costs on information provided by brokers and legal counsel. We then compare the
assets estimated fair value to its carrying value, and if the estimated fair value is less than
the propertys carrying value, we reduce the carrying value to the estimated fair value. We will
continue to review the initial impairment for subsequent changes in the estimated fair value, and
may recognize an additional impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We measure and record a property that is reclassified as held and used at the lower of (a)
its carrying amount before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been continuously classified
as held and used, or (b) the estimated fair value at the date of the subsequent decision not to
sell.
Equity Investments in Real Estate and CPA® REITs
We evaluate our equity investments in real estate and in the CPA® REITs on a periodic
basis to determine if there are any indicators that the value of our equity investment may be
impaired and to establish whether or not that impairment is other-than-temporary. To the extent
impairment has occurred, we measure the charge as the excess of the carrying value of our
investment over its estimated fair value, which is determined by multiplying the estimated fair
value of the underlying ventures net assets by our ownership interest percentage. For our
unconsolidated ventures in real estate, we calculate the estimated fair value of the underlying
ventures real estate or net investment in direct financing lease as described in Real Estate and
Direct Financing Leases above. The fair value of the underlying ventures debt, if any, is
calculated based on market interest rates and other market information. The fair value of the
underlying ventures other financial assets and liabilities (excluding net investment in direct
financing leases) have fair values that approximate their carrying values. For our investments in
the CPA® REITs, we calculate the estimated fair value of our investment using the most
recently published NAV of each CPA® REIT.
W. P. Carey 2010 10-K 43
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is considered other-than-temporary. In determining whether the decline is
other-than-temporary, we consider the underlying cause of the decline in value, the estimated
recovery period, the severity and duration of the decline, as well as whether we plan to sell the
security or will more likely than not be required to sell the security before recovery of its cost
basis. If we determine that the decline is other-than-temporary, we record an impairment charge to
reduce our cost basis to the estimated fair value of the security. Beginning in 2009, the credit
component of an other-than-temporary impairment is recognized in earnings while the non-credit
component is recognized in Other comprehensive income (OCI). Prior to 2009, all portions of
other-than-temporary impairments were recorded in earnings.
Goodwill
We evaluate goodwill recorded by our investment management segment for possible impairment at least
annually using a two-step process. To identify any impairment, we first compare the estimated fair
value of our investment management segment with its carrying amount, including goodwill. We
calculate the estimated fair value of the investment management segment by applying a multiple,
based on comparable companies, to earnings. If the fair value of the investment management segment
exceeds its carrying amount, we do not consider goodwill to be impaired and no further analysis is
required. If the carrying amount of the investment management segment exceeds its estimated fair
value, we then perform the second step to measure the amount of the impairment charge.
For the second step, we determine the impairment charge by comparing the implied fair value of the
goodwill with its carrying amount and record an impairment charge equal to the excess of the
carrying amount over the implied fair value. We determine the implied fair value of the goodwill by
allocating the estimated fair value of the investment management segment to its assets and
liabilities. The excess of the estimated fair value of the investment management segment over the
amounts assigned to its assets and liabilities is the implied fair value of the goodwill.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (18 lessees represented 68% of lease revenues during 2010), we believe that it is necessary
to evaluate the collectability of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount from the lessee if we believe there has been
significant or continuing deterioration in the lessees ability to meet its lease obligations.
Determination of Certain Asset-Based Management and Performance Revenue
We earn asset-based management and performance revenue for providing property management, leasing,
advisory and other services to the CPA® REITs. For certain CPA® REITs, this
revenue is based on third-party annual estimated valuations of the underlying real estate assets of
the CPA® REIT. The valuation uses estimates, including but not limited to market rents,
residual values and increases in the CPI and discount rates. Differences in the assumptions applied
would affect the amount of revenue that we recognize. The effect of any changes in the annual
valuations will affect both revenue and compensation expense and therefore the determination of net
income.
Income Taxes
Real Estate Ownership Operations
We have elected to be treated as a partnership for U.S. federal income tax purposes. As
partnerships, we and our partnership subsidiaries were generally not directly subject to tax and
the taxable income or loss of these operations was included in the income tax returns of the
members; accordingly, no provision for income tax expense or benefit related to these partnerships
was reflected in the consolidated financial statements. Subsequent to September 30, 2007, our real
estate operations have been conducted through a subsidiary REIT. In order to maintain its
qualification as a REIT, the subsidiary is required to, among other things, distribute at least 90%
of its REIT net taxable income to its shareholders (excluding net capital gains) and meet certain
tests regarding the nature of its income and assets. As a REIT, the subsidiary is not subject to
U.S. federal income tax with respect to the portion of its income that meets certain criteria and
is distributed annually to its shareholders. Accordingly, no provision has been made for U.S.
federal income taxes related to the REIT subsidiary in the consolidated financial statements. We
believe we have operated, and we intend to continue to operate, in a manner that allows the
subsidiary to continue to meet the requirements for taxation as a REIT. Many of these requirements,
however, are highly technical and complex. If we were to fail to meet these requirements, the
subsidiary would be subject to U.S. federal income tax. These operations are subject to certain
state, local and foreign taxes and a provision for such taxes is included in the consolidated
financial statements.
W. P. Carey 2010 10-K 44
Investment Management Operations
We conduct our investment management operations primarily through taxable subsidiaries. These
operations are subject to federal, state, local and foreign taxes, as applicable. Our financial
statements are prepared on a consolidated basis including these taxable subsidiaries and include a
provision for current and deferred taxes on these operations.
Our consolidated effective income tax rate is influenced by tax planning opportunities available to
us in the various jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions. We establish tax reserves
in accordance with current authoritative accounting guidance for uncertainty in income taxes. This
guidance is based on a benefit recognition model, which we believe could result in a greater amount
of benefit (and a lower amount of reserve) being initially recognized in certain circumstances.
Provided that the tax position is deemed more likely than not of being sustained, the guidance
permits a company to recognize the largest amount of tax benefit that is greater than 50% likely of
being ultimately realized upon settlement. The tax position must be derecognized when it is no
longer more likely than not of being sustained.
Future Accounting Requirements
In December 2010, the FASB issued Accounting Standards Update (ASU) 2010-28, which clarifies when
step two of the goodwill impairment test must be performed for entities whose reporting units have
a negative carrying value. This ASU will be applicable to us for our annual goodwill impairment
evaluation beginning with the year ending December 31, 2011. We do not anticipate that it will have
a material impact on our financial position or results of operations.
Subsequent Event
In January 2011, we made a $90.0 million loan to CPA®:17 Global to fund acquisitions
that were closed within the first two weeks of the year. The principal and accrued interest thereon
at 1.15% per annum are due to us no later than March 11, 2011. We funded the loan with proceeds
from our line of credit.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk
and foreign currency exchange risk. We are also exposed to market risk as a result of
concentrations in certain tenant industries.
We do not generally use derivative financial instruments to manage foreign currency exchange rate
risk exposure and do not use derivative instruments to hedge credit/market risks or for speculative
purposes.
Interest Rate Risk
The value of our real estate and related fixed rate debt obligations is subject to fluctuations
based on changes in interest rates. The value of our real estate is also subject to fluctuations
based on local and regional economic conditions and changes in the creditworthiness of lessees, all
of which may affect our ability to refinance property-level mortgage debt when balloon payments are
scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political conditions, and other factors
beyond our control. An increase in interest rates would likely cause the value of our owned and
managed assets to decrease, which would create lower revenues from managed assets and lower
investment performance for the managed funds. Increases in interest rates may also have an impact
on the credit profile of certain tenants.
W. P. Carey 2010 10-K 45
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and, as such, may enter into interest rate swap agreements or interest rate cap
agreements with lenders that effectively convert the variable rate debt service obligations of the
loan to a fixed rate. Interest rate swaps are agreements in which one party exchanges a stream of
interest payments for a counterpartys stream of cash flow over a specific period, and interest
rate caps limit the effective borrowing rate of variable rate debt obligations while allowing
participants to share in downward shifts in interest rates. These interest rate swaps and caps are
derivative instruments designated as cash flow hedges on the forecasted interest payments on the
debt obligation. The notional, or face, amount on which the swaps or caps are based is not
exchanged. Our objective in using these derivatives is to limit our exposure to interest rate
movements. At December 31, 2010, we estimate that the fair value of our interest rate swaps and
interest rate caps, which are included in Other assets, net and Accounts payable, accrued expenses
and other liabilities in the consolidated financial statements, was a net liability of $0.7 million
(Note 12).
At December 31, 2010, a significant portion (approximately 63%) of our long-term debt either bore
interest at fixed rates, was swapped or capped to a fixed rate, or bore interest at fixed rates
that were scheduled to convert to then-prevailing market fixed rates at certain future points
during their term. The estimated fair value of these instruments is affected by changes in market
interest rates. The annual interest rates on our fixed rate debt at December 31, 2010 ranged from
3.1% to 7.8%. The annual interest rates on our variable rate debt at December 31, 2010 ranged from
1.2% to 7.3%. Our debt obligations are more fully described in Financial Condition above. The
following table presents principal cash flows based upon expected maturity dates of our debt
obligations at December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Fair value |
|
Fixed rate debt |
|
$ |
26,986 |
|
|
$ |
32,556 |
|
|
$ |
3,466 |
|
|
$ |
3,280 |
|
|
$ |
39,155 |
|
|
$ |
42,429 |
|
|
$ |
147,872 |
|
|
$ |
148,106 |
|
Variable rate debt |
|
$ |
149,452 |
|
|
$ |
2,778 |
|
|
$ |
2,942 |
|
|
$ |
3,134 |
|
|
$ |
7,294 |
|
|
$ |
83,510 |
|
|
$ |
249,110 |
|
|
$ |
247,954 |
|
The estimated fair value of our fixed rate debt and our variable rate debt that currently
bears interest at fixed rates or has effectively been converted to a fixed rate through the use of
interest rate swaps or caps is affected by changes in interest rates. A decrease or increase in
interest rates of 1% would change the estimated fair value of such debt at December 31, 2010 by an
aggregate increase of $13.6 million or an aggregate decrease of $12.8 million, respectively. Annual
interest expense on our unhedged variable-rate debt that does not bear interest at fixed rates at
December 31, 2010 would increase or decrease by $1.5 million for each respective 1% change in
annual interest rates. As more fully described in Financial Condition Summary of Financing in
Item 7 above, a portion of the debt classified as variable-rate debt in the tables above bore
interest at fixed rates at December 31, 2010 but has interest rate reset features that will change
the fixed interest rates to then-prevailing market fixed rates at certain points during their term.
Such debt is generally not subject to short-term fluctuations in interest rates.
Foreign Currency Exchange Rate Risk
We own investments in the European Union and as a result are subject to risk from the effects of
exchange rate movements, primarily in the Euro, which may affect future costs and cash flows. We
manage foreign currency exchange rate movements by generally placing both our debt obligations to
the lender and the tenants rental obligations to us in the same currency. We are generally a net
receiver of the foreign currency (we receive more cash than we pay out), and therefore our foreign
operations benefit from a weaker U.S. dollar, and are adversely affected by a stronger U.S. dollar,
relative to the Euro. For the year ended December 31, 2010, we recognized net realized and
unrealized foreign currency transaction losses of $0.1 million and $0.3 million, respectively.
These losses are included in Other income and (expenses) in the consolidated financial statements
and were primarily due to changes in the value of the Euro on accrued interest on notes receivable
from wholly-owned subsidiaries.
Through the date of this Report, we had not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates. We have
obtained non-recourse mortgage financing in the local currency. To the extent that currency
fluctuations increase or decrease rental revenues as translated to dollars, the change in debt
service, as translated to dollars, will partially offset the effect of fluctuations in revenue and,
to some extent, mitigate the risk from changes in foreign currency rates.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases and
scheduled payments for mortgage notes payable (principal and interest) for our foreign real estate
operations during each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
Future minimum rents (a) |
|
$ |
6,621 |
|
|
$ |
6,380 |
|
|
$ |
3,603 |
|
|
$ |
3,377 |
|
|
$ |
3,377 |
|
|
$ |
44,525 |
|
|
$ |
67,883 |
|
Mortgage notes payable (a) (b) |
|
$ |
3,483 |
|
|
$ |
3,408 |
|
|
$ |
3,413 |
|
|
$ |
3,438 |
|
|
$ |
6,356 |
|
|
$ |
18,327 |
|
|
$ |
38,425 |
|
|
|
|
(a) |
|
Based on the exchange rate of the Euro at December 31, 2010. |
|
(b) |
|
Interest on unhedged variable debt obligations was calculated using the applicable annual
interest rates and balances outstanding at December 31, 2010. |
W. P. Carey 2010 10-K 46
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
The following financial statements and schedule are filed as a part of this Report:
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
96 |
|
Financial statement schedules other than those listed above are omitted because the required
information is given in the financial statements, including the notes thereto, or because the
conditions requiring their filing do not exist.
W. P. Carey 2010 10-K 47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of W. P. Carey & Co. LLC:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of W. P. Carey & Co. LLC and its
subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2010 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included under Item 9A. Our responsibility is to express opinions on
these financial statements, on the financial statement schedule, and on the Companys internal
control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 2011
W. P. Carey 2010 10-K 48
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Investments in real estate: |
|
|
|
|
|
|
|
|
Real estate, at cost (inclusive of amounts attributable to consolidated variable interest entities (VIEs) of $39,718 and $52,625, respectively) |
|
$ |
560,592 |
|
|
$ |
525,607 |
|
Operating real estate, at cost (inclusive of amounts attributable to consolidated VIEs of $25,665 and $25,665, respectively) |
|
|
109,851 |
|
|
|
85,927 |
|
Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $20,431 and $25,650, respectively) |
|
|
(122,312 |
) |
|
|
(112,286 |
) |
|
|
|
|
|
|
|
Net investments in properties |
|
|
548,131 |
|
|
|
499,248 |
|
Net investments in direct financing leases |
|
|
76,550 |
|
|
|
80,222 |
|
Equity investments in real estate and CPA® REITs |
|
|
322,294 |
|
|
|
304,990 |
|
|
|
|
|
|
|
|
Net investments in real estate |
|
|
946,975 |
|
|
|
884,460 |
|
Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs of $86 and $108, respectively) |
|
|
64,693 |
|
|
|
18,450 |
|
Due from affiliates |
|
|
38,793 |
|
|
|
35,998 |
|
Intangible assets and goodwill, net |
|
|
87,768 |
|
|
|
85,187 |
|
Other assets, net (inclusive of amounts attributable to consolidated VIEs of $1,845 and $1,504, respectively) |
|
|
34,097 |
|
|
|
69,241 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,172,326 |
|
|
$ |
1,093,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $9,593 and $9,850, respectively) |
|
$ |
255,232 |
|
|
$ |
215,330 |
|
Line of credit |
|
|
141,750 |
|
|
|
111,000 |
|
Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable to consolidated VIEs of $2,275 and $2,286, respectively) |
|
|
40,808 |
|
|
|
51,710 |
|
Income taxes, net |
|
|
41,443 |
|
|
|
43,831 |
|
Distributions payable |
|
|
20,073 |
|
|
|
31,365 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
499,306 |
|
|
|
453,236 |
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest |
|
|
7,546 |
|
|
|
7,692 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
W. P. Carey members equity: |
|
|
|
|
|
|
|
|
Listed shares, no par value, 100,000,000 shares authorized; 39,454,847 and 39,204,605 shares issued and outstanding, respectively |
|
|
763,734 |
|
|
|
754,507 |
|
Distributions in excess of accumulated earnings |
|
|
(145,769 |
) |
|
|
(138,442 |
) |
Deferred compensation obligation |
|
|
10,511 |
|
|
|
10,249 |
|
Accumulated other comprehensive loss |
|
|
(3,463 |
) |
|
|
(681 |
) |
|
|
|
|
|
|
|
Total W. P. Carey members equity |
|
|
625,013 |
|
|
|
625,633 |
|
Noncontrolling interests |
|
|
40,461 |
|
|
|
6,775 |
|
|
|
|
|
|
|
|
Total equity |
|
|
665,474 |
|
|
|
632,408 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
1,172,326 |
|
|
$ |
1,093,336 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
W. P. Carey 2010 10-K 49
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
76,246 |
|
|
$ |
76,621 |
|
|
$ |
80,714 |
|
Structuring revenue |
|
|
44,525 |
|
|
|
23,273 |
|
|
|
20,236 |
|
Wholesaling revenue |
|
|
11,096 |
|
|
|
7,691 |
|
|
|
5,208 |
|
Reimbursed costs from affiliates |
|
|
60,023 |
|
|
|
47,534 |
|
|
|
41,100 |
|
Lease revenues |
|
|
63,450 |
|
|
|
62,324 |
|
|
|
66,784 |
|
Other real estate income |
|
|
18,570 |
|
|
|
14,907 |
|
|
|
20,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,910 |
|
|
|
232,350 |
|
|
|
234,700 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(73,429 |
) |
|
|
(63,819 |
) |
|
|
(62,669 |
) |
Reimbursable costs |
|
|
(60,023 |
) |
|
|
(47,534 |
) |
|
|
(41,100 |
) |
Depreciation and amortization |
|
|
(23,969 |
) |
|
|
(22,438 |
) |
|
|
(23,082 |
) |
Property expenses |
|
|
(10,888 |
) |
|
|
(7,113 |
) |
|
|
(6,496 |
) |
Other real estate expenses |
|
|
(8,121 |
) |
|
|
(7,308 |
) |
|
|
(8,196 |
) |
Impairment charges |
|
|
(9,512 |
) |
|
|
(3,516 |
) |
|
|
(473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(185,942 |
) |
|
|
(151,728 |
) |
|
|
(142,016 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
1,268 |
|
|
|
1,713 |
|
|
|
2,883 |
|
Income from equity investments in real estate and CPA® REITs |
|
|
30,992 |
|
|
|
13,425 |
|
|
|
14,198 |
|
Gain on sale of investment in direct financing lease |
|
|
|
|
|
|
|
|
|
|
1,103 |
|
Other income and (expenses) |
|
|
1,407 |
|
|
|
7,357 |
|
|
|
1,444 |
|
Interest expense |
|
|
(16,234 |
) |
|
|
(14,979 |
) |
|
|
(18,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
17,433 |
|
|
|
7,516 |
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
105,401 |
|
|
|
88,138 |
|
|
|
93,714 |
|
Provision for income taxes |
|
|
(25,822 |
) |
|
|
(22,793 |
) |
|
|
(23,521 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
79,579 |
|
|
|
65,345 |
|
|
|
70,193 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued properties |
|
|
781 |
|
|
|
4,430 |
|
|
|
8,950 |
|
Gains on sale of real estate, net |
|
|
460 |
|
|
|
7,701 |
|
|
|
|
|
Impairment charges |
|
|
(5,869 |
) |
|
|
(6,908 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(4,628 |
) |
|
|
5,223 |
|
|
|
8,412 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
74,951 |
|
|
|
70,568 |
|
|
|
78,605 |
|
Add: Net loss attributable to noncontrolling interests |
|
|
314 |
|
|
|
713 |
|
|
|
950 |
|
Less: Net income attributable to redeemable noncontrolling interests |
|
|
(1,293 |
) |
|
|
(2,258 |
) |
|
|
(1,508 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to W. P. Carey Members |
|
$ |
73,972 |
|
|
$ |
69,023 |
|
|
$ |
78,047 |
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to W. P. Carey members |
|
$ |
1.98 |
|
|
$ |
1.61 |
|
|
$ |
1.77 |
|
(Loss) income from discontinued operations attributable to W. P. Carey members |
|
|
(0.12 |
) |
|
|
0.13 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to W. P. Carey members |
|
$ |
1.86 |
|
|
$ |
1.74 |
|
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to W. P. Carey members |
|
$ |
1.98 |
|
|
$ |
1.61 |
|
|
$ |
1.74 |
|
(Loss) income from discontinued operations attributable to W. P. Carey members |
|
|
(0.12 |
) |
|
|
0.13 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to W. P. Carey members |
|
$ |
1.86 |
|
|
$ |
1.74 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,514,746 |
|
|
|
39,019,709 |
|
|
|
39,202,520 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
40,007,894 |
|
|
|
39,712,735 |
|
|
|
40,221,112 |
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to W. P. Carey Members |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
78,600 |
|
|
$ |
63,800 |
|
|
$ |
69,635 |
|
(Loss) income from discontinued operations, net of tax |
|
|
(4,628 |
) |
|
|
5,223 |
|
|
|
8,412 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
73,972 |
|
|
$ |
69,023 |
|
|
$ |
78,047 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
W. P. Carey 2010 10-K 50
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net Income |
|
$ |
74,951 |
|
|
$ |
70,568 |
|
|
$ |
78,605 |
|
Other Comprehensive (Loss) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(1,227 |
) |
|
|
619 |
|
|
|
(3,199 |
) |
Unrealized loss on derivative instruments |
|
|
(757 |
) |
|
|
(482 |
) |
|
|
(419 |
) |
Change in unrealized appreciation on marketable securities |
|
|
6 |
|
|
|
53 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,978 |
) |
|
|
190 |
|
|
|
(3,647 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
72,973 |
|
|
|
70,758 |
|
|
|
74,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to Noncontrolling Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
314 |
|
|
|
713 |
|
|
|
950 |
|
Foreign currency translation adjustment |
|
|
(816 |
) |
|
|
(31 |
) |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to noncontrolling interests |
|
|
(502 |
) |
|
|
682 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to Redeemable Noncontrolling Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(1,293 |
) |
|
|
(2,258 |
) |
|
|
(1,508 |
) |
Foreign currency translation adjustment |
|
|
12 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to redeemable noncontrolling interests |
|
|
(1,281 |
) |
|
|
(2,270 |
) |
|
|
(1,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income Attributable to W. P. Carey Members |
|
$ |
71,190 |
|
|
$ |
69,170 |
|
|
$ |
74,481 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
W. P. Carey 2010 10-K 51
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended December 31, 2010, 2009 and 2008
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey Members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Excess of |
|
|
Deferred |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Listed |
|
|
Accumulated |
|
|
Compensation |
|
|
Comprehensive |
|
|
W. P. Carey |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
Earnings |
|
|
Obligation |
|
|
Income (Loss) |
|
|
Members |
|
|
Interests |
|
|
Total |
|
Balance at January 1, 2008 |
|
|
39,216,493 |
|
|
$ |
740,873 |
|
|
$ |
(117,051 |
) |
|
$ |
|
|
|
$ |
2,738 |
|
|
$ |
626,560 |
|
|
$ |
6,150 |
|
|
$ |
632,710 |
|
Cash proceeds on issuance of shares, net |
|
|
961,648 |
|
|
|
23,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,133 |
|
|
|
|
|
|
|
23,133 |
|
Shares issued in connection with services rendered |
|
|
7,128 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217 |
|
|
|
|
|
|
|
217 |
|
Shares issued under share incentive plans |
|
|
50,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,582 |
|
|
|
2,582 |
|
Forfeitures of shares |
|
|
(12,565 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
Distributions declared ($1.96 per share) |
|
|
|
|
|
|
|
|
|
|
(77,986 |
) |
|
|
|
|
|
|
|
|
|
|
(77,986 |
) |
|
|
|
|
|
|
(77,986 |
) |
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,469 |
) |
|
|
(1,469 |
) |
Windfall tax benefits share incentive plans |
|
|
|
|
|
|
2,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,156 |
|
|
|
|
|
|
|
2,156 |
|
Stock-based compensation expense |
|
|
|
|
|
|
7,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,285 |
|
|
|
|
|
|
|
7,285 |
|
Repurchase and retirement of shares |
|
|
(633,510 |
) |
|
|
(15,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,413 |
) |
|
|
|
|
|
|
(15,413 |
) |
Redemption value adjustment |
|
|
|
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(322 |
) |
|
|
|
|
|
|
(322 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
78,047 |
|
|
|
|
|
|
|
|
|
|
|
78,047 |
|
|
|
(950 |
) |
|
|
77,097 |
|
Change in other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,566 |
) |
|
|
(3,566 |
) |
|
|
(81 |
) |
|
|
(3,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
39,589,594 |
|
|
|
757,921 |
|
|
|
(116,990 |
) |
|
|
|
|
|
|
(828 |
) |
|
|
640,103 |
|
|
|
6,232 |
|
|
|
646,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds on issuance of shares, net |
|
|
84,283 |
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
1,507 |
|
Grants issued in connection with services rendered |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787 |
|
|
|
|
|
|
|
787 |
|
|
|
|
|
|
|
787 |
|
Shares issued under share incentive plans |
|
|
222,600 |
|
|
|
|
|
|
|
|
|
|
|
9,462 |
|
|
|
|
|
|
|
9,462 |
|
|
|
|
|
|
|
9,462 |
|
Contributions |
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
2,845 |
|
|
|
2,947 |
|
Forfeitures of shares |
|
|
(2,528 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
Distributions declared ($2.00 per share) (a) |
|
|
|
|
|
|
|
|
|
|
(90,475 |
) |
|
|
|
|
|
|
|
|
|
|
(90,475 |
) |
|
|
|
|
|
|
(90,475 |
) |
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,661 |
) |
|
|
(1,661 |
) |
Windfall tax benefits share incentive plans |
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
143 |
|
Stock-based compensation expense |
|
|
|
|
|
|
8,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,626 |
|
|
|
|
|
|
|
8,626 |
|
Repurchase and retirement of shares |
|
|
(689,344 |
) |
|
|
(11,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,759 |
) |
|
|
|
|
|
|
(11,759 |
) |
Redemption value adjustment |
|
|
|
|
|
|
(6,773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,773 |
) |
|
|
|
|
|
|
(6,773 |
) |
Tax impact of purchase of WPCI interest |
|
|
|
|
|
|
4,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,817 |
|
|
|
|
|
|
|
4,817 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
69,023 |
|
|
|
|
|
|
|
|
|
|
|
69,023 |
|
|
|
(713 |
) |
|
|
68,310 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
147 |
|
|
|
72 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
39,204,605 |
|
|
|
754,507 |
|
|
|
(138,442 |
) |
|
|
10,249 |
|
|
|
(681 |
) |
|
|
625,633 |
|
|
|
6,775 |
|
|
|
632,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds on issuance of shares, net |
|
|
196,802 |
|
|
|
3,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,724 |
|
|
|
|
|
|
|
3,724 |
|
Grants issued in connection with services rendered |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450 |
|
|
|
|
|
|
|
450 |
|
|
|
|
|
|
|
450 |
|
Shares issued under share incentive plans |
|
|
368,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,261 |
|
|
|
14,261 |
|
Forfeitures of shares |
|
|
(47,214 |
) |
|
|
(1,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
|
|
(1,517 |
) |
Distributions declared ($2.03 per share) |
|
|
|
|
|
|
|
|
|
|
(81,299 |
) |
|
|
|
|
|
|
|
|
|
|
(81,299 |
) |
|
|
|
|
|
|
(81,299 |
) |
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,305 |
) |
|
|
(3,305 |
) |
Windfall tax benefits share incentive plans |
|
|
|
|
|
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354 |
|
|
|
|
|
|
|
2,354 |
|
Stock-based compensation expense |
|
|
|
|
|
|
8,149 |
|
|
|
|
|
|
|
(188 |
) |
|
|
|
|
|
|
7,961 |
|
|
|
|
|
|
|
7,961 |
|
Repurchase and retirement of shares |
|
|
(267,358 |
) |
|
|
(2,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,317 |
) |
|
|
|
|
|
|
(2,317 |
) |
Redemption value adjustment |
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
471 |
|
Tax impact of purchase of WPCI interest |
|
|
|
|
|
|
(1,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,637 |
) |
|
|
|
|
|
|
(1,637 |
) |
Reclassification of the Investors interest in Carey Storage (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,402 |
|
|
|
22,402 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
73,972 |
|
|
|
|
|
|
|
|
|
|
|
73,972 |
|
|
|
(314 |
) |
|
|
73,658 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,782 |
) |
|
|
(2,782 |
) |
|
|
642 |
|
|
|
(2,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
39,454,847 |
|
|
$ |
763,734 |
|
|
$ |
(145,769 |
) |
|
$ |
10,511 |
|
|
$ |
(3,463 |
) |
|
$ |
625,013 |
|
|
$ |
40,461 |
|
|
$ |
665,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Distributions declared per share excludes special distribution of $0.30 per share
declared in December 2009 (Note 14). |
See Notes to Consolidated Financial Statements.
W. P. Carey 2010 10-K 52
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,951 |
|
|
$ |
70,568 |
|
|
$ |
78,605 |
|
Adjustments to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization including intangible assets and deferred financing costs |
|
|
24,443 |
|
|
|
24,476 |
|
|
|
27,197 |
|
(Income)
loss from equity investments in real estate and
CPA®
REITs in excess of distributions received |
|
|
(4,920 |
) |
|
|
(2,258 |
) |
|
|
1,866 |
|
Straight-line rent and financing lease adjustments |
|
|
286 |
|
|
|
2,223 |
|
|
|
2,227 |
|
Gain on sale of real estate and investment in direct financing lease |
|
|
(460 |
) |
|
|
(7,701 |
) |
|
|
(1,103 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
(6,991 |
) |
|
|
|
|
Gain on lease termination (a) |
|
|
|
|
|
|
|
|
|
|
(4,998 |
) |
Allocation of (loss) earnings to profit-sharing interest |
|
|
(781 |
) |
|
|
3,900 |
|
|
|
|
|
Management income received in shares of affiliates |
|
|
(35,235 |
) |
|
|
(31,721 |
) |
|
|
(40,717 |
) |
Unrealized loss (gain) on foreign currency transactions and others |
|
|
300 |
|
|
|
(174 |
) |
|
|
2,656 |
|
Realized gain on foreign currency transactions and others |
|
|
(731 |
) |
|
|
(257 |
) |
|
|
(2,250 |
) |
Impairment charges |
|
|
15,381 |
|
|
|
10,424 |
|
|
|
1,011 |
|
Stock-based compensation expense |
|
|
7,082 |
|
|
|
9,336 |
|
|
|
7,278 |
|
Deferred acquisition revenue received |
|
|
21,204 |
|
|
|
25,068 |
|
|
|
48,266 |
|
Increase in structuring revenue receivable |
|
|
(20,237 |
) |
|
|
(11,672 |
) |
|
|
(10,512 |
) |
Decrease in income taxes, net |
|
|
(1,288 |
) |
|
|
(9,276 |
) |
|
|
(8,079 |
) |
Decrease in settlement provision |
|
|
|
|
|
|
|
|
|
|
(29,979 |
) |
Net changes in other operating assets and liabilities |
|
|
6,422 |
|
|
|
(1,401 |
) |
|
|
(8,221 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
86,417 |
|
|
|
74,544 |
|
|
|
63,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from equity investments in real estate and CPA® REITs
in excess of equity income |
|
|
18,758 |
|
|
|
39,102 |
|
|
|
19,852 |
|
Capital contributions to equity investments |
|
|
|
|
|
|
(2,872 |
) |
|
|
(1,769 |
) |
Purchases of real estate and equity investments in real estate |
|
|
(96,884 |
) |
|
|
(39,632 |
) |
|
|
(201 |
) |
VAT paid in connection with acquisition of real estate |
|
|
(4,222 |
) |
|
|
|
|
|
|
|
|
VAT refunded in connection with acquisition of real estate |
|
|
|
|
|
|
|
|
|
|
3,189 |
|
Capital expenditures |
|
|
(5,135 |
) |
|
|
(7,775 |
) |
|
|
(14,051 |
) |
Proceeds from sale of real estate, net investment in direct financing lease and securities |
|
|
14,591 |
|
|
|
43,487 |
|
|
|
5,062 |
|
Funds placed in escrow in connection with the sale of property |
|
|
(1,571 |
) |
|
|
(36,132 |
) |
|
|
|
|
Funds released from escrow in connection with the sale of property |
|
|
36,620 |
|
|
|
|
|
|
|
636 |
|
Proceeds from transfer of profit-sharing interest |
|
|
|
|
|
|
21,928 |
|
|
|
|
|
Payment of deferred acquisition revenue to affiliate |
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(37,843 |
) |
|
|
18,106 |
|
|
|
12,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(92,591 |
) |
|
|
(78,618 |
) |
|
|
(87,700 |
) |
Contributions from noncontrolling interests |
|
|
14,261 |
|
|
|
2,947 |
|
|
|
2,582 |
|
Distributions to noncontrolling interests |
|
|
(4,360 |
) |
|
|
(5,505 |
) |
|
|
(5,607 |
) |
Contributions from profit-sharing interest |
|
|
3,694 |
|
|
|
|
|
|
|
|
|
Distributions to profit-sharing interest |
|
|
(693 |
) |
|
|
(5,645 |
) |
|
|
|
|
Purchase of noncontrolling interest |
|
|
|
|
|
|
(15,380 |
) |
|
|
|
|
Scheduled payments of non-recourse debt |
|
|
(14,324 |
) |
|
|
(9,534 |
) |
|
|
(9,678 |
) |
Prepayments of non-recourse debt |
|
|
|
|
|
|
(13,974 |
) |
|
|
|
|
Proceeds from non-recourse debt financing |
|
|
56,841 |
|
|
|
42,495 |
|
|
|
10,137 |
|
Proceeds from line of credit |
|
|
83,250 |
|
|
|
150,500 |
|
|
|
129,300 |
|
Prepayments of line of credit |
|
|
(52,500 |
) |
|
|
(148,518 |
) |
|
|
(111,572 |
) |
Proceeds from loans from affiliates |
|
|
|
|
|
|
1,625 |
|
|
|
|
|
Repayments of loans from affiliates |
|
|
|
|
|
|
(1,770 |
) |
|
|
(7,569 |
) |
Payment of financing costs |
|
|
(1,204 |
) |
|
|
(862 |
) |
|
|
(375 |
) |
Funds placed in escrow in connection with financing |
|
|
|
|
|
|
|
|
|
|
(400 |
) |
Proceeds from issuance of shares (b) |
|
|
3,724 |
|
|
|
1,507 |
|
|
|
23,350 |
|
Windfall tax benefits associated with stock-based compensation awards |
|
|
2,354 |
|
|
|
143 |
|
|
|
2,156 |
|
Repurchase and retirement of shares |
|
|
|
|
|
|
(10,686 |
) |
|
|
(15,413 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,548 |
) |
|
|
(91,275 |
) |
|
|
(70,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Cash and Cash Equivalents During the Year |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(783 |
) |
|
|
276 |
|
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
46,243 |
|
|
|
1,651 |
|
|
|
4,662 |
|
Cash and cash equivalents, beginning of year |
|
|
18,450 |
|
|
|
16,799 |
|
|
|
12,137 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
64,693 |
|
|
$ |
18,450 |
|
|
$ |
16,799 |
|
|
|
|
|
|
|
|
|
|
|
(Continued)
W. P. Carey 2010 10-K 53
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
, CONTINUED
Non-cash activities
(a) |
|
In October 2008, we terminated the lease on a domestic property in exchange for a gross
termination fee of $7.5 million. The termination fee consisted of tenants assumption of the
existing $6.0 million debt balance by substituting one of their owned assets as collateral and
a $1.5 million cash payment. In connection with the lease termination, we wrote off $0.8
million of straight line rent adjustments and $0.2 million of unamortized leasing commission. |
(b) |
|
We issued restricted shares valued at $0.5 million in 2010, $0.8 million in 2009 and $0.2
million in 2008, to certain directors in consideration of service rendered. Stock-based awards
(net of adjustment Note 15) valued at $10.2 million, $6.7 million and $9.6 million in 2010,
2009 and 2008, respectively, were issued to officers and employees and were recorded to Listed
shares, of which $1.5 million, $0.1 million and less than $0.1 million, respectively, was
forfeited in 2010, 2009 and 2008. |
Supplemental cash flows information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest paid, net of amounts capitalized |
|
$ |
15,351 |
|
|
$ |
14,845 |
|
|
$ |
18,753 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
24,307 |
|
|
$ |
35,039 |
|
|
$ |
33,280 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
W. P. Carey 2010 10-K 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
W. P. Carey, its consolidated subsidiaries and predecessors provides long-term financing via
sale-leaseback and build-to-suit transactions for companies worldwide and manages a global
investment portfolio. We invest primarily in commercial properties domestically and internationally
that are each triple-net leased to single corporate tenants, which requires each tenant to pay
substantially all of the costs associated with operating and maintaining the property. We also earn
revenue as the advisor to publicly owned, non-listed CPA® REITs that invest in similar
properties. We are currently the advisor to the following CPA® REITs:
CPA®:14, CPA®:15, CPA®:16 Global and CPA®:17
Global. At December 31, 2010, we owned and managed 955 properties domestically and internationally.
Our owned portfolio was comprised of our full or partial ownership interest in 164 properties,
substantially all of which were net leased to 75 tenants, and totaled approximately 14 million
square feet (on a pro rata basis) with an occupancy rate of approximately 89%.
Primary Business Segments
Investment Management We structure and negotiate investments and debt placement transactions for
the CPA® REITs, for which we earn structuring revenue, and manage their portfolios of
real estate investments, for which we earn asset-based management and performance revenue. We earn
asset-based management and performance revenue from the CPA® REITs based on the value of
their real estate-related assets under management. As funds available to the CPA® REITs
are invested, the asset base from which we earn revenue increases. In addition, we also receive a
percentage of distributions of available cash from CPA®:17 Globals operating
partnership. We may also earn incentive and disposition revenue and receive other compensation in
connection with providing liquidity alternatives to CPA® REIT shareholders.
Real Estate Ownership We own and invest in commercial properties in the U.S. and the European
Union that are then leased to companies, primarily on a triple-net leased basis. We may also invest
in other properties if opportunities arise.
Organization
We commenced operations on January 1, 1998 by combining the limited partnership interests of nine
CPA® partnerships, at which time we listed on the New York Stock Exchange. On June 28,
2000, we acquired the net lease real estate management operations of Carey Management LLC (Carey
Management) from Wm. Polk Carey, our Chairman and then Chief Executive Officer, subsequent to
receiving the approval of the transaction by our shareholders. The assets acquired included the
advisory agreements with four affiliated CPA® REITs, our management agreement, the stock
of an affiliated broker-dealer, investments in the common stock of the CPA® REITs, and
certain office furniture, fixtures, equipment and employees required to carry on the business
operations of Carey Management.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements reflect all of our accounts, including those of our
majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not
attributable, directly or indirectly, to us is presented as noncontrolling interests. All
significant intercompany accounts and transactions have been eliminated. We hold investments in
tenant-in-common interests, which we account for as equity investments in real estate under current
authoritative accounting guidance.
We formed Carey Watermark in March 2008 for the purpose of acquiring interests in lodging and
lodging-related properties. In April 2010, we filed a registration statement with the SEC to sell
up to $1.0 billion of common stock of Carey Watermark in an initial public offering plus up to an
additional $237.5 million of its common stock under a dividend reinvestment plan. This registration
statement was declared effective by the SEC in September 2010. As of and during the years ended
December 31, 2010, 2009 and 2008, the financial statements of Carey Watermark, which had no
significant assets, liabilities or operations during either period, were included in our
consolidated financial statements, as we owned all of Carey Watermarks outstanding common stock.
W. P. Carey 2010 10-K 55
Notes to Consolidated Financial Statements
In June 2009, the FASB issued amended guidance related to the consolidation of VIEs. The amended
guidance affects the overall consolidation analysis, changing the approach taken by companies in
identifying which entities are VIEs and in determining which party is the primary beneficiary, and
requires an enterprise to qualitatively assess the determination of the primary beneficiary of a
VIE based on whether the entity (i) has the power to direct the activities that most significantly
impact the economic performance of the VIE, and (ii) has the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to
the VIE. The amended guidance changes the consideration of kick-out rights in determining if an
entity is a VIE, which may cause certain additional entities to now be considered VIEs.
Additionally, the guidance requires an ongoing reconsideration of the primary beneficiary and
provides a framework for the events that trigger a reassessment of whether an entity is a VIE. We
adopted this amended guidance on January 1, 2010, which did not require consolidation of any
additional VIEs, but we have disclosed the assets and liabilities related to previously
consolidated VIEs, of which we are the primary beneficiary and which we consolidate, separately in
our consolidated balance sheets for all periods presented. The adoption of this amended guidance
did not have a material impact on our financial position and results of operations.
Additionally, in February 2010, the FASB issued further guidance, which provided a limited-scope
deferral for an interest in an entity that meets all of the following conditions: (a) the entity
has all the attributes of an investment company as defined under the American Institute of
Certified Public Accountants (AICPA) Audit and Accounting Guide, Investment Companies, or does
not have all the attributes of an investment company but is an entity for which it is acceptable
based on industry practice to apply measurement principles that are consistent with the AICPA Audit
and Accounting Guide, Investment Companies, (b) the reporting entity does not have explicit or
implicit obligations to fund any losses of the entity that could potentially be significant to the
entity, and (c) the entity is not a securitization entity, asset-based financing entity or an
entity that was formerly considered a qualifying special-purpose entity. We evaluated our
involvement with the CPA® REITs and concluded that all three of the above conditions
were met for the limited scope deferral. Accordingly, we continued to perform our consolidation
analysis for the CPA® REITs in accordance with previously issued guidance on VIEs.
In connection with the adoption of the amended guidance on the consolidation of VIEs, we performed
an analysis of all of our subsidiary entities, including our venture entities with other parties,
to determine whether they qualify as VIEs and whether they should be consolidated or accounted for
as equity investments in an unconsolidated venture. As a result of our quantitative and qualitative
assessment to determine whether these entities are VIEs, we identified four entities that were
deemed to be VIEs. Three of these entities were deemed VIEs as the third-party tenant that leases
property from each entity has the right to repurchase the property during the term of their lease
at a fixed price. The fourth entity was deemed a VIE as a third party was deemed to have the right
to receive the expected residual returns of the entity. The nature of operations and organizational
structure of these four VIEs are consistent with our other entities (Note 1) except for the
repurchase and residual returns rights of these entities.
After making the determination that these entities were VIEs, we performed an assessment as to
which party would be considered the primary beneficiary of each entity and would be required to
consolidate each entitys balance sheet and results of operations. This assessment was based upon
which party (i) had the power to direct activities that most significantly impact the entitys
economic performance and (ii) had the obligation to absorb the expected losses of or right to
receive benefits from the VIE that could potentially be significant to the VIE. Based on our
assessment, it was determined that we would continue to consolidate the four VIEs. Activities that
we considered significant in our assessment included which entity had control over financing
decisions, leasing decisions and ability to sell the entitys assets. In September 2010, one of
these entities amended its lease with the third-party tenant to remove the tenants right to
repurchase the property at a fixed price during the term of the lease. As a result of the lease
amendment, this entity is no longer considered a VIE. We will continue to consolidate this entity.
Because we generally utilize non-recourse debt, our maximum exposure to any VIE is limited to the
equity we have invested in each VIE. We have not provided financial or other support to any VIE,
and there were no guarantees or other commitments from third parties that would affect the value of
or risk related to our interest in these entities.
Out-of-Period Adjustment
During the third quarter of 2009, we recorded an adjustment to record an entity on the equity
method that had been incorrectly accounted for under a proportionate consolidation method since its
acquisition in 1989. This adjustment was recorded as a reduction to Real estate and Non-recourse
debt of approximately $23.3 million and $15.0 million, respectively, and an increase to Equity
investment in real estate and CPA® REITs of $7.8 million on our consolidated balance
sheet at September 30, 2009, and an adjustment to classify approximately $1.2 million of net
earnings to income from equity investments in real estate and CPA® REITs for the nine
months ended September 30, 2009, respectively, which did not result in any change to previously
reported net income attributable to W. P. Carey members. We have concluded that the effect of this
adjustment was not material to any of our previously issued financial statements, nor was it
material to the quarter or fiscal year in which it was recorded. As such, this adjustment was
recorded in our consolidated balance sheets and statements of income at September 30, 2009 and for
the nine months ended September 30, 2009. Prior period financial statements have not been revised
in the current filing, nor will such amounts be revised in subsequent filings.
W. P. Carey 2010 10-K 56
Notes to Consolidated Financial Statements
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP) requires management to make estimates and assumptions that
affect the reported amounts and the disclosure of contingent amounts in our consolidated financial
statements and the accompanying notes. Actual results could differ from those estimates.
Reclassifications and Revisions
Certain prior year amounts have been reclassified from continuing operations to discontinued
operations and to conform to the current year presentation.
Purchase Price Allocation
When we acquire properties accounted for as operating leases, we allocate the purchase costs to the
tangible and intangible assets and liabilities acquired based on their estimated fair values. We
determine the value of the tangible assets, consisting of land and buildings, as if vacant, and
record intangible assets, including the above-market and below-market value of leases, the value of
in-place leases and the value of tenant relationships, at their relative estimated fair values. See
Real Estate Leased to Others and Depreciation below for a discussion of our significant accounting
policies related to tangible assets. We include the value of below-market leases in Accounts
payable, accrued expenses and other liabilities in the consolidated financial statements.
We record above-market and below-market lease values for owned properties based on the present
value (using an interest rate reflecting the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in
place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates
for the property or equivalent property, both of which are measured over a period equal to the
estimated market lease term. We amortize the capitalized above-market lease value as a reduction of
rental income over the estimated market lease term. We amortize the capitalized below-market lease
value as an increase to rental income over the initial term and any fixed rate renewal periods in
the respective leases.
We allocate the total amount of other intangibles to in-place lease values and tenant relationship
intangible values based on our evaluation of the specific characteristics of each tenants lease
and our overall relationship with each tenant. The characteristics we consider in allocating these
values include estimated market rent, the nature and extent of the existing relationship with the
tenant, the expectation of lease renewals, estimated carrying costs of the property if vacant and
estimated costs to execute a new lease, among other factors. We determine these values using our
estimates or by relying in part upon third-party appraisals. We amortize the capitalized value of in-place lease
intangibles to expense over the remaining initial term of each lease. We amortize the capitalized
value of tenant relationships to expense over the initial and expected renewal terms of the lease.
No amortization period for intangibles will exceed the remaining depreciable life of the building.
If a lease is terminated, we charge the unamortized portion of each intangible, including
above-market and below-market lease values, in-place lease values and tenant relationship values,
to expense.
Operating Real Estate
We carry land and buildings and personal property at cost less accumulated depreciation. We
capitalize improvements, while we expense replacements, maintenance and repairs that do not improve
or extend the lives of the respective assets as incurred.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and
have a maturity of three months or less at the time of purchase to be cash equivalents. Items
classified as cash equivalents include commercial paper and money-market funds. Our cash and cash
equivalents are held in the custody of several financial institutions, and these balances, at
times, exceed federally insurable limits. We seek to mitigate this risk by depositing funds only
with major financial institutions.
W. P. Carey 2010 10-K 57
Notes to Consolidated Financial Statements
Other Assets and Liabilities
We include prepaid expenses, deferred rental income, tenant receivables, deferred charges, escrow
balances held by lenders, restricted cash balances, marketable securities, derivative assets and
corporate fixed assets in Other assets. We include derivative instruments; miscellaneous amounts
held on behalf of tenants; and deferred revenue, including unamortized below-market rent
intangibles in Other liabilities. Other liabilities at December 31, 2009 also included our
profit-sharing obligation related to our Carey Storage subsidiary.
The profit-sharing obligation was reclassified to Noncontrolling interest in 2010 as a result of
Carey Storage amending its agreement with the third-party investor (Note 4). Deferred charges are
costs incurred in connection with mortgage financings and refinancings that are amortized over the
terms of the mortgages and included in Interest expense in the consolidated financial statements.
Deferred rental income is the aggregate cumulative difference for operating leases between
scheduled rents that vary during the lease term, and rent recognized on a straight-line basis.
Marketable securities are classified as available-for-sale securities and reported at fair value
with unrealized gains and losses on these securities reported as a component of OCI until realized.
Real Estate Leased to Others
We lease real estate to others primarily on a triple-net leased basis, whereby the tenant is
generally responsible for all operating expenses relating to the property, including property
taxes, insurance, maintenance, repairs, renewals and improvements. We charge expenditures for
maintenance and repairs, including routine betterments, to operations as incurred. We capitalize
significant renovations that increase the useful life of the properties. For the years ended
December 31, 2010, 2009 and 2008, although we are legally obligated for payment, lessees were
responsible for the direct payment to the taxing authorities of real estate taxes of approximately
$7.7 million, $8.8 million and $9.3 million, respectively.
We diversify our real estate investments among various corporate tenants engaged in different
industries, by property type and by geographic area. Substantially all of our leases provide for
either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in
the CPI or similar indices or percentage rents. CPI-based adjustments are contingent on future
events and are therefore not included in straight-line rent calculations. We recognize rents from
percentage rents as reported by the lessees, which is after the level of sales requiring a rental
payment to us is reached.
We account for leases as operating or direct financing leases, as described below:
Operating leases We record real estate at cost less accumulated depreciation; we recognize
future minimum rental revenue on a straight-line basis over the term of the related leases and
charge expenses (including depreciation) to operations as incurred (Note 4).
Direct financing method We record leases accounted for under the direct financing method at
their net investment (Note 5). We defer and amortize unearned income to income over the lease term
so as to produce a constant periodic rate of return on our net investment in the lease.
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (18 lessees represented 68% of lease revenues during 2010), we believe that it is necessary
to evaluate the collectibility of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount if we believe there has been significant or continuing
deterioration in the lessees ability to meet its lease obligations.
Acquisition Costs
In accordance with the FASBs revised guidance for business combinations, which we adopted on
January 1, 2009, we immediately expense all acquisition costs and fees associated with transactions
deemed to be business combinations, but we capitalize these costs for transactions deemed to be
acquisitions of an asset. We are impacted by the revised guidance through both the investments we
make for our owned portfolio as well as our equity interests in the CPA® REITs. To the
extent we make investments for our owned portfolio or on behalf of the CPA® REITs that
are deemed to be business combinations, our results of operations will be negatively impacted by
the immediate expensing of acquisition costs and fees incurred in accordance with the revised
guidance, whereas in the past such costs and fees would generally have been capitalized and
allocated to the cost basis of the acquisition. Subsequent to the acquisition, there will be a
positive impact on our results of operations through a reduction in depreciation expense over the
estimated life of the properties.
W. P. Carey 2010 10-K 58
Notes to Consolidated Financial Statements
Revenue Recognition
We earn structuring revenue and asset management revenue in connection with providing services to
the CPA® REITs. We earn structuring revenue for services we provide in connection with
the analysis, negotiation and structuring of transactions, including acquisitions and dispositions
and the placement of mortgage financing obtained by the CPA® REITs. Asset management
revenue consists of property management, leasing and advisory revenue. Receipt of the incentive
revenue portion of the asset management
revenue (performance revenue), however, is subordinated to the achievement of specified
cumulative return requirements by the shareholders of the CPA® REITs. At our option, the
performance revenue may be collected in cash or shares of the CPA® REIT (Note 3).
We recognize all revenue as earned. We earn structuring revenue upon the consummation of a
transaction and asset management revenue when services are performed. We recognize revenue subject
to subordination only when the performance criteria of the CPA® REIT is achieved and
contractual limitations are not exceeded.
We are also reimbursed for certain costs incurred in providing services, including broker-dealer
commissions paid on behalf of the CPA® REITs, marketing costs and the cost of personnel
provided for the administration of the CPA® REITs. We record reimbursement income as the
expenses are incurred, subject to limitations on a CPA® REITs ability to incur offering
costs.
We earn wholesaling revenue of $0.15 per share sold in connection with CPA®:17
Globals initial public offering. This revenue is used to cover the cost of wholesaling activities.
Depreciation
We compute depreciation of building and related improvements using the straight-line method over
the estimated useful lives of the properties (generally 40 years) and furniture, fixtures and
equipment (generally up to seven years). We compute depreciation of tenant improvements using the
straight-line method over the lesser of the remaining term of the lease or the estimated useful
life.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived assets,
including goodwill, may be impaired or that their carrying value may not be recoverable. These
impairment indicators include, but are not limited to, the vacancy of a property that is not
subject to a lease; a lease default by a tenant that is experiencing financial difficulty; the
termination of a lease by a tenant; or the rejection of a lease in a bankruptcy proceeding. We may
incur impairment charges on long-lived assets, including real estate, direct financing leases,
assets held for sale and equity investments in real estate. We may also incur impairment charges on
marketable securities and goodwill. Our policies for evaluating whether these assets are impaired
are presented below.
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. Depending on the assumptions made and estimates used,
the future cash flow projected in the evaluation of long-lived assets can vary within a range of
outcomes. We consider the likelihood of possible outcomes in determining the best possible estimate
of future cash flows. If the future net undiscounted cash flow of the property is less than the
carrying value, the property is considered to be impaired. We then measure the loss as the excess
of the carrying value of the property over its estimated fair value.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information. If this review indicates that a decline in residual
value has occurred that is other-than-temporary, we recognize an impairment charge and revise the
accounting for the direct financing lease to reflect a portion of the future cash flow from the
lessee as a return of principal rather than as revenue. While we evaluate direct financing leases
if there are any indicators that the residual value may be impaired, the evaluation of a direct
financing lease can be affected by changes in long-term market conditions even though the
obligations of the lessee are being met.
W. P. Carey 2010 10-K 59
Notes to Consolidated Financial Statements
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we
have entered into a contract to sell the property, all material due diligence requirements have
been satisfied and we believe it is probable that the disposition will occur within one year. When
we classify an asset as held for sale, we calculate its estimated fair value as the expected sale
price, less expected selling costs. We then compare the assets estimated fair value to its
carrying value, and if the estimated fair value is less than the propertys carrying value, we
reduce the carrying value to the estimated fair value. We will continue to review the initial
impairment for subsequent changes in the estimated fair value, and may recognize an additional
impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We measure and record a property that is reclassified as held and used at the lower of (a)
its carrying amount before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been continuously classified
as held and used, or (b) the estimated fair value at the date of the subsequent decision not to
sell.
Equity Investments in Real Estate and CPA® REITs
We evaluate our equity investments in real estate and in the CPA® REITs on a periodic
basis to determine if there are any indicators that the value of our equity investment may be
impaired and whether or not that impairment is other-than-temporary. To the extent impairment has
occurred, we measure the charge as the excess of the carrying value of our investment over its
estimated fair value. For equity investments in real estate, we calculate estimated fair value by
multiplying the estimated fair value of the underlying ventures net assets by our ownership
interest percentage. For our investments in the CPA® REITs, we calculate the estimated
fair value of our investment using the most recently published net asset value of each
CPA® REIT.
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is considered other-than-temporary. In determining whether the decline is
other-than-temporary, we consider the underlying cause of the decline in value, the estimated
recovery period, the severity and duration of the decline, as well as whether we plan to sell the
security or will more likely than not be required to sell the security before recovery of its cost
basis. If we determine that the decline is other-than-temporary, we record an impairment charge to
reduce our cost basis to the estimated fair value of the security. Beginning in 2009, the credit
component of an other-than-temporary impairment is recognized in earnings while the non-credit
component is recognized in OCI. Prior to 2009, all portions of other-than-temporary impairments
were recorded in earnings.
Goodwill
We evaluate goodwill recorded by our investment management segment for possible impairment at least
annually using a two-step process. To identify any impairment, we first compare the estimated fair
value of our investment management segment with its carrying amount, including goodwill. We
calculate the estimated fair value of the investment management segment by applying a multiple,
based on comparable companies, to earnings. If the fair value of the investment management segment
exceeds its carrying amount, we do not consider goodwill to be impaired and no further analysis is
required. If the carrying amount of the investment management segment exceeds its estimated fair
value, we then perform the second step to measure the amount of the impairment charge.
For the second step, we determine the impairment charge by comparing the implied fair value of the
goodwill with its carrying amount and record an impairment charge equal to the excess of the
carrying amount over the implied fair value. We determine the implied fair value of the goodwill by
allocating the estimated fair value of the investment management segment to its assets and
liabilities. The excess of the estimated fair value of the investment management segment over the
amounts assigned to its assets and liabilities is the implied fair value of the goodwill.
Stock-Based Compensation
We have granted restricted shares, stock options, restricted share units (RSUs) and performance
share units (PSUs) to certain employees and independent directors. Grants were awarded in the
name of the recipient subject to certain restrictions of transferability and a risk of forfeiture.
The forfeiture provisions on the awards generally expire annually, over their respective vesting
periods. We granted stock options to certain employees during 2008 and prior years. Stock-based
compensation expense for all stock-based compensation awards is based on the grant date fair value
estimated in accordance with current accounting guidance for share-based
payments. We recognize these compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award. We include stock-based
compensation within the listed shares caption of equity.
W. P. Carey 2010 10-K 60
Notes to Consolidated Financial Statements
Foreign Currency Translation
We have interests in real estate investments in the European Union for which the functional
currency is the Euro. We perform the translation from the Euro to the U.S. dollar for assets and
liabilities using current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. We report the gains and
losses resulting from such translation as a component of OCI in equity. At December 31, 2010 and
2009, the cumulative foreign currency translation adjustment (losses) gains were ($1.9) million and
$0.2 million, respectively.
Foreign currency transactions may produce receivables or payables that are fixed in terms of the
amount of foreign currency that will be received or paid. A change in the exchange rates between
the functional currency and the currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flows upon settlement of that
transaction. That increase or decrease in the expected functional currency cash flows is an
unrealized foreign currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss
(measured from the transaction date or the most recent intervening balance sheet date, whichever is
later), realized upon settlement of a foreign currency transaction generally will be included in
net income for the period in which the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a net investment and (ii)
inter-company foreign currency transactions that are of a long-term nature (that is, settlement is
not planned or anticipated in the foreseeable future), when the entities to the transactions are
consolidated or accounted for by the equity method in our financial statements, are not included in
determining net income but are accounted for in the same manner as foreign currency translation
adjustments and reported as a component of OCI in equity. International equity investments in real
estate were funded in part through subordinated intercompany debt.
Foreign currency intercompany transactions that are scheduled for settlement, consisting primarily
of accrued interest and the translation to the reporting currency of subordinated intercompany debt
with scheduled principal payments, are included in the determination of net income. We recognized
net unrealized (losses) gains of ($0.3) million, $0.2 million and ($2.4) million from such
transactions for the years ended December 31, 2010, 2009 and 2008, respectively. For the years
ended December 31, 2010, 2009 and 2008, we recognized net realized (losses) gains of ($0.1)
million, less than $0.1 million and $2.3 million, respectively, on foreign currency transactions in
connection with the transfer of cash from foreign operations of subsidiaries to the parent company.
Derivative Instruments
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is designated
as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in OCI until the hedged item is recognized in earnings.
For cash flow hedges, the ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings.
Income Taxes
We have elected to be treated as a partnership for U.S. federal income tax purposes. Deferred
income taxes are recorded for the corporate subsidiaries based on earnings reported. The provision
for income taxes differs from the amounts currently payable because of temporary differences in the
recognition of certain income and expense items for financial reporting and tax reporting purposes.
Income taxes are computed under the asset and liability method. The asset and liability method
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between tax bases and financial bases of assets and
liabilities (Note 16).
Real Estate Ownership Operations
Our real estate operations are conducted through a subsidiary REIT. As a REIT, our real estate
operations are generally not subject to federal tax, and accordingly, no provision has been made
for U.S. federal income taxes in the consolidated financial statements for these operations. These
operations are subject to certain state, local and foreign taxes, as applicable.
W. P. Carey 2010 10-K 61
Notes to Consolidated Financial Statements
In October 2007, we transferred our real estate assets from a wholly-owned subsidiary into Carey
REIT II, Inc. (Carey REIT II), a newly-formed wholly-owned REIT subsidiary. On January 1, 2008,
we merged our subsidiary Carey REIT, Inc. (Carey REIT) into Carey REIT II with Carey REIT II as
the survivor. Carey REIT held certain properties, including certain properties acquired from
Corporate Property Associates 12 Incorporated in 2006. To the extent that the fair value of Carey
REIT property in the merger
exceeded its tax basis at the time of the merger, Carey REIT II would be subject to corporate level
taxes to the extent of this built-in-gain if the properties were to be sold in a taxable
transaction within ten years from the date of the merger. At the time of the merger, Carey REIT
owned three properties whose tax values were not significantly different from their fair values. We
do not expect to trigger any built-in-gains nor do we expect any significant built-in-gains tax
if triggered.
Carey REIT II elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the Code), with the filing of its 2007 return. We believe we have
operated, and we intend to continue to operate, in a manner that allows Carey REIT II to continue
to qualify as a REIT. Under the REIT operating structure, Carey REIT II is permitted to deduct
distributions paid to our shareholders and generally will not be required to pay U.S. federal
income taxes. Accordingly, no provision has been made for U.S. federal income taxes related to
Carey REIT II in the consolidated financial statements.
Investment Management Operations
We conduct our investment management operations primarily through taxable subsidiaries. These
operations are subject to federal, state, local and foreign taxes, as applicable. Our financial
statements are prepared on a consolidated basis including these taxable subsidiaries and include a
provision for current and deferred taxes on these operations.
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common shareholders, as
adjusted for unallocated earnings attributable to the unvested RSUs by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per share reflects
potentially dilutive securities (options, restricted shares and RSUs) using the treasury stock
method, except when the effect would be anti-dilutive.
Future Accounting Requirements
In December 2010, the FASB issued ASU 2010-28, which clarifies when step two of the goodwill
impairment test must be performed for entities whose reporting units have a negative carrying
value. This ASU will be applicable to us for our annual goodwill impairment evaluation beginning
with the year ending December 31, 2011. We do not anticipate that it will have a material impact on
our financial position or results of operations.
Note 3. Agreements and Transactions with Related Parties
Advisory Agreements with the CPA® REITs
We have advisory agreements with each of the CPA® REITs pursuant to which we earn
certain fees. The advisory agreements were renewed for an additional year pursuant to their terms
effective October 1, 2010. The following table presents a summary of revenue earned and cash
received from the CPA® REITs in connection with providing services as the advisor to the
CPA® REITs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Asset management revenue |
|
$ |
76,246 |
|
|
$ |
76,621 |
|
|
$ |
80,714 |
|
Structuring revenue |
|
|
44,525 |
|
|
|
23,273 |
|
|
|
20,236 |
|
Wholesaling revenue |
|
|
11,096 |
|
|
|
7,691 |
|
|
|
5,208 |
|
Reimbursed costs from affiliates |
|
|
60,023 |
|
|
|
47,534 |
|
|
|
41,100 |
|
Distributions of available cash (CPA®:17 Global only) |
|
|
4,468 |
|
|
|
2,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,358 |
|
|
$ |
157,279 |
|
|
$ |
147,258 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2010 10-K 62
Notes to Consolidated Financial Statements
Asset Management Revenue
We earn asset management revenue totaling 1% per annum of average invested assets, which is
calculated according to the advisory agreements for each CPA® REIT. A portion of this
asset management revenue is contingent upon the achievement of specific performance criteria for
each CPA® REIT, which is generally defined to be a cumulative distribution return for
shareholders of the CPA® REIT. For CPA®:14, CPA®:15 and
CPA®:16 Global, this performance revenue is generally equal to 0.5% of the average
invested assets of the CPA® REIT. For CPA®:17 Global, we earn asset
management revenue ranging from 0.5% of average market value for long-term net leases and certain
other types of real estate investments up to 1.75% of average equity value for certain types of
securities. For CPA®:17 Global, we do not earn performance revenue, but we receive up
to 10% of distributions of available cash
from its operating partnership. Distributions of available cash from CPA®:17 Globals
operating partnership are recorded as income from equity investments in CPA® REITs
within the investment management segment.
Under the terms of the advisory agreements, we may elect to receive cash or shares of restricted
stock for any revenue due from each CPA® REIT. In both 2010 and 2009, we elected to
receive all asset management revenue in cash, with the exception of CPA®:17 Globals
asset management revenue, which we elected to receive in restricted shares. For both 2010 and 2009,
we also elected to receive performance revenue from CPA®:16 Global in restricted
shares, while for CPA®:14 and CPA®:15 we elected to receive 80% of all
performance revenue in restricted shares, with the remaining 20% payable in cash.
Structuring Revenue
We earn revenue in connection with structuring and negotiating investments and related mortgage
financing for the CPA® REITs. We may receive acquisition revenue of up to an average of
4.5% of the total cost of all investments made by each CPA® REIT. A portion of this
revenue (generally 2.5%) is paid when the transaction is completed, while the remainder (generally
2%) is payable in equal annual installments ranging from three to eight years, provided the
relevant CPA® REIT meets its performance criterion. Unpaid deferred installments totaled
$30.5 million and $31.0 million at December 31, 2010 and 2009, respectively, and were included in
Due from affiliates in the consolidated financial statements (Note 5). Unpaid installments bear
interest at annual rates ranging from 5% to 7%. Interest earned on unpaid installments was $1.1
million, $1.5 million and $2.3 million for the years ended December 31, 2010, 2009 and 2008,
respectively. For certain types of non-long term net lease investments acquired on behalf of
CPA®:17 Global, initial acquisition revenue may range from 0% to 1.75% of the equity
invested plus the related acquisition revenue, with no deferred acquisition revenue being earned.
We may also be entitled, subject to CPA® REIT board approval, to fees for structuring
loan refinancings of up to 1% of the principal amount. This loan refinancing revenue, together with
the acquisition revenue, is referred to as structuring revenue. In addition, we may also earn
revenue related to the sale of properties, subject to subordination provisions. We will only
recognize this revenue if we meet the subordination provisions.
Reimbursed Costs from Affiliates and Wholesaling Revenue
The CPA® REITs reimburse us for certain costs, primarily broker-dealer commissions paid
on behalf of the CPA® REITs and marketing and personnel costs. In addition, under the
terms of a sales agency agreement between our wholly-owned broker-dealer subsidiary and
CPA®:17 Global, we earn a selling commission of up to $0.65 per share sold, selected
dealer revenue of up to $0.20 per share sold and/or wholesaling revenue for selected dealers or
investment advisors of up to $0.15 per share sold. We re-allow all or a portion of the selling
commissions to selected dealers participating in CPA®:17 Globals offering and may
re-allow up to the full selected dealer revenue to selected dealers. If needed, we will use any
retained portion of the selected dealer revenue together with the wholesaling revenue to cover
other underwriting costs incurred in connection with CPA®:17 Globals offering. Total
underwriting compensation earned in connection with CPA®:17 Globals offering,
including selling commissions, selected dealer revenue, wholesaling revenue and reimbursements made
by us to selected dealers, cannot exceed the limitations prescribed by the Financial Industry
Regulatory Authority. The limit on underwriting compensation is currently 10% of gross offering
proceeds. We may also be reimbursed up to an additional 0.5% of the gross offering proceeds for
bona fide due diligence expenses.
Other Transactions with Affiliates
Proposed Merger of Affiliates
On December 13, 2010, two of the CPA® REITs we manage, CPA®:14 and
CPA®:16 Global, entered into a definitive agreement pursuant to which
CPA®:14 will merge with and into a subsidiary of CPA®:16 Global, subject
to the approval of the shareholders of CPA®:14. The closing of the Proposed Merger is
also subject to customary closing conditions, as well as the closing of the CPA®:14
Asset Sales. If the Proposed Merger is approved, we currently expect that the closing will occur in
the second quarter of 2011, although there can be no assurance of such timing.
In connection with the Proposed Merger, we have agreed to purchase three properties from
CPA®:14, in which we already have a joint venture interest, for an aggregate purchase
price of $32.1 million, plus the assumption of approximately $64.7 million of indebtedness. These
properties all have remaining lease terms of less than 8 years, which are shorter than the average
lease term of CPA®:16 Globals portfolio of properties. Consequently,
CPA®:16 Global required that these assets be sold by CPA®:14 prior to the
Proposed Merger. This asset sale to us is contingent upon the approval of the Proposed Merger by
the shareholders of CPA®:14.
W. P. Carey 2010 10-K 63
Notes to Consolidated Financial Statements
If the Proposed Merger is consummated, we expect to earn revenues of $31.2 million in connection
with the termination of the advisory agreements with CPA®:14 and $21.3 million of
subordinated disposition revenues. We currently expect to receive our termination fee in shares of
CPA®:14, which will then be exchanged into shares of CPA®:16 Global in
order to facilitate this
transaction. In addition, based on our ownership of 8,018,456 shares of CPA®:14 at
December 31, 2010, we will receive approximately $8.0 million as a result of a special $1.00 cash
distribution to be paid by CPA®:14 to its shareholders, in part from the proceeds of the
CPA®:14 Asset Sales, immediately prior to the Proposed Merger, as described below. We have agreed to elect
to receive stock of CPA®:16 Global in respect of our shares of CPA®:14 if
the Proposed Merger is consummated. CAM has also agreed to waive any acquisition fees payable by
CPA®:16 Global under its advisory agreement with CAM in respect of the
properties being acquired in the Proposed Merger and has also agreed to waive any disposition fees
that may subsequently be payable by CPA®:16 Global upon a sale of such
assets.
In the Proposed Merger, CPA®:14 shareholders
will be entitled to receive $11.50 per share, which is equal to the NAV of CPA®:14 as of September 30, 2010. The Merger
Consideration will be paid to shareholders of CPA®:14, at their
election, in either cash or a combination of the $1.00 per share special cash distribution and 1.1932 shares of CPA®:16 -
Global common stock, which equates to $10.50 based on the $8.80 per share NAV of CPA®:16 - Global as of September 30, 2010. We computed these NAVs internally, relying in part upon a third-party valuation of each
companys real estate portfolio and indebtedness as of September 30, 2010. The board of directors
of each of CPA®:16 Global and CPA®:14 have the ability, but not the obligation, to terminate the
transaction if more than 50% of the shareholders of CPA®:14 elect to receive cash in the
Proposed Merger. Assuming that holders of 50% of CPA®:14s outstanding stock elect to
receive cash in the Proposed Merger, then the maximum cash required by CPA®:16 Global
to purchase these shares would be approximately $416.1 million, based on the total shares of
CPA®:14 outstanding at December 31, 2010. If the cash on hand and available to
CPA®:14 and CPA®:16 Global, including the proceeds of the
CPA®:14 Asset Sales and a new $300.0 million senior credit facility of
CPA®:16 Global, is not sufficient to enable CPA®:16 Global to fulfill
cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to
purchase a sufficient number of shares of CPA®:16 Global stock from
CPA®:16 Global to enable it to pay such amounts to CPA®:14 shareholders.
Other
We are the general partner in a limited partnership (which we consolidate for financial statement
purposes) that leases our home office space and participates in an agreement with certain
affiliates, including the CPA® REITs, for the purpose of leasing office space used for
the administration of our operations and the operations of our affiliates and for sharing the
associated costs. This limited partnership does not have any significant assets, liabilities or
operations other than its interest in the office lease. During each of the years ended December 31,
2010, 2009 and 2008, we recorded income from noncontrolling interest partners of $2.4 million, in
each case related to reimbursements from these affiliates. The average estimated minimum lease
payments on the office lease, inclusive of noncontrolling interests, at December 31, 2010
approximates $3.0 million annually through 2016.
We own interests in entities ranging from 5% to 95%, including jointly-controlled tenant-in-common
interests in properties, with the remaining interests generally held by affiliates, and own common
stock in each of the CPA® REITs and Carey Watermark. We consolidate certain of these
investments and account for the remainder under the equity method of accounting.
One of our directors and officers is the sole shareholder of Livho, a subsidiary that operates a
hotel investment. We consolidate the accounts of Livho in our consolidated financial statements in
accordance with current accounting guidance for consolidation of VIEs because it is a VIE and we
are its primary beneficiary.
Family members of one of our directors have an ownership interest in certain companies that own
noncontrolling interests in one of our French majority-owned subsidiaries. These ownership
interests are subject to substantially the same terms as all other ownership interests in the
subsidiary companies.
An officer owns a redeemable noncontrolling interest in W. P. Carey International LLC (WPCI), a
subsidiary company that structures net lease transactions on behalf of the CPA® REITs
outside of the U.S., as well as certain related entities.
Included in Accounts payable, accrued expenses and other liabilities in the consolidated balance
sheets at each of December 31, 2010 and 2009 are amounts due to affiliates totaling $0.9 million.
In December 2007, we received a loan totaling $7.6 million from two affiliated ventures in which we
have interests that are accounted for under the equity method of accounting. The loan was used to
fund the acquisition of certain tenancy-in-common interests in Europe and was repaid in March 2008.
During the year ended December 31, 2008, we incurred interest expense of $0.1 million in connection
with this loan.
W. P. Carey 2010 10-K 64
Notes to Consolidated Financial Statements
Advisory Agreement with Carey Watermark
Effective September 15, 2010, we entered into an advisory agreement with Carey Watermark to perform
certain services, including managing Carey Watermarks offering and its overall business,
identification, evaluation, negotiation, purchase and disposition of
lodging-related properties and the performance of certain administrative duties.
We are currently fundraising for Carey Watermark; however, as of
December 31, 2010, Carey Watermark had no investments or significant operating activity. Costs incurred on
behalf of Carey Watermark totaled $3.4 million through December 31, 2010. We anticipate being
reimbursed for all or a portion of these costs in accordance with the terms of the advisory
agreement if the minimum offering proceeds are raised.
Note 4. Net Investments in Properties
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
111,660 |
|
|
$ |
98,971 |
|
Buildings |
|
|
448,932 |
|
|
|
426,636 |
|
Less: Accumulated depreciation |
|
|
(108,032 |
) |
|
|
(100,247 |
) |
|
|
|
|
|
|
|
|
|
$ |
452,560 |
|
|
$ |
425,360 |
|
|
|
|
|
|
|
|
Real Estate Acquired
In February 2010, we entered into a domestic investment that was deemed to be a real estate asset
acquisition at a total cost of $47.6 million and capitalized acquisition-related costs of $0.1
million. We funded the investment with the escrowed proceeds of $36.1 million from a sale of
property in December 2009 in an exchange transaction under Section 1031 of the Code, and $11.5
million from our line of credit. In July 2010, we obtained non-recourse mortgage financing of $35.0
million for this investment at an annual interest rate of LIBOR plus 2.5% that has been fixed at
5.5% through the use of an interest rate swap. This financing has a term of 10 years.
In June 2010, a venture in which we and an affiliate hold 70% and 30% interests, respectively, and
which we consolidate, entered into an investment in Spain for a total cost of $27.2 million,
inclusive of a noncontrolling interest of $8.4 million. We funded our share of the purchase price
with proceeds from our line of credit. In connection with this transaction, which was deemed to be
a real estate asset acquisition, we capitalized acquisition-related costs and fees totaling $1.0
million, inclusive of amounts attributable to a noncontrolling interest of $0.6 million. Dollar
amounts are based on the exchange rate of the Euro on the date of acquisition.
Operating Real Estate
Operating real estate, which consists primarily of our self-storage investments through Carey
Storage and our Livho subsidiary, at cost, is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
24,030 |
|
|
$ |
16,257 |
|
Buildings |
|
|
85,821 |
|
|
|
69,670 |
|
Less: Accumulated depreciation |
|
|
(14,280 |
) |
|
|
(12,039 |
) |
|
|
|
|
|
|
|
|
|
$ |
95,571 |
|
|
$ |
73,888 |
|
|
|
|
|
|
|
|
In January 2009, Carey Storage completed a transaction whereby it received cash proceeds of
$21.9 million, plus a commitment to invest up to a further $8.1 million of equity, from the
Investor to fund the purchase of self-storage assets in the future in exchange for a 60% interest
in its self-storage portfolio (Carey Storage venture). We reflect the Carey Storage ventures
operations in our real estate ownership segment. Costs totaling $1.0 million incurred in
structuring the transaction and bringing in the Investor into these operations are reflected in
General and administrative expenses in our investment management segment during 2009. Prior to
September 2010, we accounted for this transaction under the profit-sharing method because Carey
Storage had a contingent option to repurchase this interest from the Investor at fair value. During
the third quarter of 2010, Carey Storage amended its agreement with the Investor to, among other
matters, remove the contingent purchase option in the original agreement. However, Carey Storage
retained a
controlling interest in the Carey Storage venture. As of September 30, 2010, we have reclassified
the Investors interest from Accounts payable, accrued expenses and other liabilities to
Noncontrolling interests on our consolidated balance sheet.
W. P. Carey 2010 10-K 65
Notes to Consolidated Financial Statements
In connection with the January 2009 transaction, the Carey Storage venture repaid in full, the
$35.0 million outstanding balance on its secured credit facility at a discount for $28.0 million,
terminated the facility, and recognized a gain of $7.0 million on the repayment of this debt,
inclusive of the Investors interest of $4.2 million. The debt repayment was financed with a
portion of the proceeds from the exchange of the 60% interest and non-recourse debt with a new
lender totaling $25.0 million, which is secured by individual mortgages on, and
cross-collateralized by, the thirteen properties in the Carey Storage portfolio at the time of the
January 2009 transaction. The new financing bears interest at a fixed rate of 7% per annum and has
a 10-year term with a rate reset after 5 years. The $7.0 million gain recognized on the debt
repayment and the Investors $4.2 million interest in this gain are both reflected in Other income
and (expenses) in the consolidated financial statements.
In August 2009, the Carey Storage venture borrowed an additional $3.5 million that is
collateralized by individual mortgages on, and cross-collateralized by, seven properties in the
Carey Storage portfolio and distributed the proceeds to its profit-sharing interest holders. This
loan has an annual fixed interest rate of 7.25% and a term of 9.6 years with a rate reset after 5
years. As part of this transaction, the Carey Storage venture distributed $1.9 million to the
Investor, which has been reflected as a reduction of the profit-sharing obligation.
During 2010, the Carey Storage venture acquired seven self-storage properties in the U.S. at a
total cost of $19.2 million, inclusive of amounts attributable to the Investors interest of $11.5
million. These investments were deemed to be business combinations, and as a result, the venture
expensed acquisition-related costs of $0.4 million, inclusive of amounts attributable to the
Investors interest of $0.2 million. In connection with these investments, the Carey Storage
venture obtained new non-recourse mortgage financing and assumed existing mortgage loans from the
sellers totaling $13.7 million, inclusive of amounts attributable to the Investors interest of
$8.2 million. The mortgage loans have a weighted-average annual fixed interest rate and term of
6.3% and 8.2 years, respectively.
During 2010, an entity owned 100% by Carey Storage acquired another self-storage property in the
U.S. for $2.8 million that was deemed to be a business combination, and as a result, it expensed
acquisition-related costs of less than $0.1 million. In connection with this investment, Carey
Storage obtained new non-recourse mortgage financing of $1.9 million with an annual fixed interest
rate of 6.3% and a term of 10 years.
Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future
CPI-based increases under non-cancelable operating leases, at December 31, 2010 are as follows (in
thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
51,326 |
|
2012 |
|
|
43,477 |
|
2013 |
|
|
39,050 |
|
2014 |
|
|
36,851 |
|
2015 |
|
|
31,231 |
|
Thereafter through 2030 |
|
|
141,716 |
|
Percentage rent revenue was approximately $0.1 million in each of 2010, 2009 and 2008.
W. P. Carey 2010 10-K 66
Notes to Consolidated Financial Statements
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are
referred to as finance receivables. Our finance receivable portfolios consist of direct financing
leases and deferred acquisition fees. Operating leases are not included in finance receivables as
such amounts are not recognized as an asset in the consolidated balance sheets.
Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Minimum lease payments receivable |
|
$ |
57,380 |
|
|
$ |
64,201 |
|
Unguaranteed residual value |
|
|
75,595 |
|
|
|
78,526 |
|
|
|
|
|
|
|
|
|
|
|
132,975 |
|
|
|
142,727 |
|
Less: unearned income |
|
|
(56,425 |
) |
|
|
(62,505 |
) |
|
|
|
|
|
|
|
|
|
$ |
76,550 |
|
|
$ |
80,222 |
|
|
|
|
|
|
|
|
During 2008, we sold our net investment in a direct financing lease for $5.0 million, net of
selling costs, and recognized a net gain on sale of $1.1 million. During the years ended December
31, 2010, 2009 and 2008, in connection with our annual reviews of the estimated residual values of
our properties, we recorded impairment charges related to four direct financing leases of $1.1
million, $2.6 million and $0.5 million, respectively. Impairment charges relate primarily to
other-than-temporary declines in the estimated residual values of the underlying properties due to
market conditions (see Note 13). At both December 31, 2010 and 2009, Other assets included $0.3
million of accounts receivable, net of allowance for uncollectible accounts of less than $0.1
million, related to amounts billed under these direct financing leases.
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, percentage of
sales rents and future CPI-based adjustments, under non-cancelable direct financing leases at
December 31, 2010 are as follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
10,607 |
|
2012 |
|
|
10,488 |
|
2013 |
|
|
10,093 |
|
2014 |
|
|
7,518 |
|
2015 |
|
|
4,599 |
|
Thereafter through 2022 |
|
|
14,075 |
|
Percentage rent revenue approximated $0.1 million in each of 2010, 2009 and 2008.
Deferred Acquisition Fees Receivable
As described in Note 3, we earn revenue in connection with structuring and negotiating investments
and related mortgage financing for the CPA® REITs. A portion of this revenue is due in
equal annual installments ranging from three to eight years, provided the relevant CPA®
REIT meets its performance criterion. Unpaid deferred installments, including accrued interest,
from all of the CPA® REITs totaled $31.4 million and $32.4 million at December 31, 2010
and 2009, respectively, and were included in Due from affiliates in the consolidated financial
statements. Unpaid installments bear interest at annual rates ranging from 5% to 7%.
Credit Quality of Finance Receivables
We generally seek investments in facilities that are critical to the tenants business and that we
believe have a low risk of tenant defaults. At December 31, 2010, none of the balances of our
finance receivables were past due and we had not established any allowances for credit losses.
Additionally, there have been no modifications of finance receivables. We evaluate the credit
quality of our tenant receivables utilizing an internal 5-point credit rating scale, with 1
representing the highest credit quality and 5 representing the lowest. The credit quality
evaluation of our tenant receivables was last updated in the fourth quarter of 2010. We believe the
credit quality of our deferred acquisition fees receivable falls under category 1, as all of the
CPA® REITs are expected to have the available cash to make such payments.
W. P. Carey 2010 10-K 67
Notes to Consolidated Financial Statements
A summary of our tenant receivables by internal credit quality rating at December 31, 2010 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investments in |
|
|
|
|
|
|
|
Number |
|
|
Direct Financing |
|
Internal
Credit Quality Rating |
|
|
|
|
|
of Tenants |
|
|
Leases |
|
1 |
|
|
|
|
|
|
9 |
|
|
$ |
49,533 |
|
2 |
|
|
|
|
|
|
5 |
|
|
|
24,447 |
|
3 |
|
|
|
|
|
|
0 |
|
|
|
|
|
4 |
|
|
|
|
|
|
1 |
|
|
|
2,570 |
|
5 |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
76,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Equity Investments in Real Estate and CPA
® REITs
Our equity investments in real estate for our investments in the CPA® REITs and for our
interests in unconsolidated real estate investments are summarized below.
CPA® REITs
We own interests in the CPA® REITs and account for these interests under the equity
method because, as their advisor, we do not exert control but have the ability to exercise
significant influence. Shares of the CPA® REITs are publicly registered and the
CPA® REITs file periodic reports with the SEC, but the shares are not listed on any
exchange and are not actively traded. We earn asset management and performance revenue from the
CPA® REITs and have elected, in certain cases, to receive a portion of this revenue in
the form of restricted common stock of the CPA® REITs rather than cash.
The following table sets forth certain information about our investments in the CPA®
REITs (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Outstanding Shares at |
|
|
Carrying Amount of Investment at |
|
|
|
December 31, |
|
|
December 31, |
|
Fund |
|
2010 |
|
|
2009 |
|
|
2010 (a) |
|
|
2009 (a) |
|
CPA®:14 |
|
|
9.2 |
% |
|
|
8.5 |
% |
|
$ |
87,209 |
|
|
$ |
79,906 |
|
CPA®:15 |
|
|
7.1 |
% |
|
|
6.5 |
% |
|
|
87,008 |
|
|
|
78,816 |
|
CPA®:16 Global |
|
|
5.6 |
% |
|
|
4.7 |
% |
|
|
62,682 |
|
|
|
53,901 |
|
CPA®:17 Global(b) |
|
|
0.6 |
% |
|
|
0.4 |
% |
|
|
8,156 |
|
|
|
3,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
245,055 |
|
|
$ |
215,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes asset management fee receivable at period end for which shares will be issued during
the subsequent period. |
|
(b) |
|
CPA®:17 Global has been deemed to be a VIE of which we are not the primary
beneficiary (Note 2). |
The following tables present combined summarized financial information for the CPA®
REITs. Amounts provided are the total amounts attributable to the CPA® REITs and do not
represent our proportionate share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
$ |
8,533,899 |
|
|
$ |
8,468,955 |
|
Liabilities |
|
|
(4,632,709 |
) |
|
|
(4,638,552 |
) |
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
3,901,190 |
|
|
$ |
3,830,403 |
|
|
|
|
|
|
|
|
W. P. Carey 2010 10-K 68
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
774,861 |
|
|
$ |
757,780 |
|
|
$ |
730,207 |
|
Expenses |
|
|
(588,137 |
) |
|
|
(759,378 |
) |
|
|
(633,492 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
186,724 |
|
|
$ |
(1,598 |
) |
|
$ |
96,715 |
|
|
|
|
|
|
|
|
|
|
|
We recognized income (loss) from our equity investments in the CPA® REITs of $14.9
million, ($0.3) million and $6.2 million for the years ended December 31, 2010, 2009 and 2008,
respectively. Our proportionate share of income or loss recognized from our equity investments in
the CPA® REITs is impacted by several factors, including impairment charges recorded by
the CPA® REITs. During 2010, 2009 and 2008, the CPA® REITs recognized
impairment charges totaling approximately $40.7 million, $170.0 million and $40.4 million,
respectively, which based upon our proportionate ownership reduced the income we earned from these investments by $3.0 million, $11.5
million and $2.1 million, respectively.
Interests in Unconsolidated Real Estate Investments
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies that we do not control
but over which we exercise significant influence, and (ii) as tenants-in-common subject to common
control. Generally, the underlying investments are jointly owned with affiliates. We account for
these investments under the equity method of accounting (i.e., at cost, increased or decreased by
our share of earnings or losses, less distributions, plus contributions and other adjustments
required by equity method accounting, such as basis differences from other-than-temporary
impairments).
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
Carrying Value at |
|
|
|
Interest at |
|
|
December 31, |
|
Lessee |
|
December 31, 2010 |
|
|
2010 |
|
|
2009 |
|
Schuler A.G. (a) (b) (c) |
|
|
33 |
% |
|
$ |
20,493 |
|
|
$ |
23,755 |
|
The New York Times Company |
|
|
18 |
% |
|
|
20,191 |
|
|
|
19,740 |
|
Carrefour France, SAS (a) |
|
|
46 |
% |
|
|
18,274 |
|
|
|
17,570 |
|
U. S. Airways Group, Inc. (b) (d) |
|
|
75 |
% |
|
|
7,934 |
|
|
|
8,927 |
|
Medica France, S.A. (a) |
|
|
46 |
% |
|
|
5,232 |
|
|
|
6,160 |
|
Hologic, Inc. (b) |
|
|
36 |
% |
|
|
4,383 |
|
|
|
4,388 |
|
Consolidated Systems, Inc. (b) |
|
|
60 |
% |
|
|
3,388 |
|
|
|
3,395 |
|
Information Resources, Inc. (e) |
|
|
33 |
% |
|
|
3,375 |
|
|
|
2,270 |
|
Childtime Childcare, Inc. |
|
|
34 |
% |
|
|
1,862 |
|
|
|
1,843 |
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) |
|
|
5 |
% |
|
|
1,086 |
|
|
|
2,639 |
|
The Retail Distribution Group (f) |
|
|
40 |
% |
|
|
|
|
|
|
1,099 |
|
Federal Express Corporation (g) |
|
|
40 |
% |
|
|
(4,272 |
) |
|
|
1,976 |
|
Amylin Pharmaceuticals, Inc. (h) |
|
|
50 |
% |
|
|
(4,707 |
) |
|
|
(4,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,239 |
|
|
$ |
89,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The carrying value of the investment is affected by the impact of fluctuations in the
exchange rate of the Euro. |
|
(b) |
|
Represents tenant-in-common interest. |
|
(c) |
|
In 2010, we recognized an other-than-temporary impairment charge of $1.4 million to reflect
the decline in the estimated fair value of the investments underlying net assets in
comparison with the carrying value of our interest in the investment. |
|
(d) |
|
The decrease in carrying value was due to cash distributions made to us by the venture. |
|
(e) |
|
The increase in carrying value was due to operating contributions we made to the venture. |
|
(f) |
|
In March 2010, this venture sold its property and distributed the proceeds to the venture
partners. We have no further economic interest in this venture. |
|
(g) |
|
In 2010, this venture refinanced its maturing non-recourse mortgage debt with new
non-recourse financing and distributed the net proceeds to the venture partners. Our share of
the distribution was $5.5 million, which exceeded our total investment in the venture at that
time. |
|
(h) |
|
In 2007, this venture refinanced its existing non-recourse mortgage debt with new
non-recourse financing based on the appraised value of its underlying real estate and
distributed the proceeds to the venture partners. Our share of the distribution was $17.6
million, which exceeded our total investment in the venture at that time. |
W. P.
Carey 2010 10-K 69
Notes to Consolidated Financial Statements
As discussed in Note 2, we adopted the FASBs amended guidance on the consolidation of VIEs
effective January 1, 2010. Upon adoption of the amended guidance, we re-evaluated our existing
interests in unconsolidated entities and determined that we should continue to account for our
interests in The New York Times and Hellweg ventures using the equity method of accounting
primarily because the partners in each of these ventures has the power to direct the activities
that most significantly impact the entitys economic performance, including disposal rights of the
property. Carrying amounts related to these VIEs are noted in the table above. Because we generally
utilize non-recourse debt, our maximum exposure to either VIE is limited to the equity we have in
each VIE. We have not provided financial or other support to either VIE, and there are no
guarantees or other commitments from third parties that would affect the value or risk of our
interest in such entities.
The following tables present combined summarized financial information of our venture properties.
Amounts provided are the total amounts attributable to the venture properties and do not represent
our proportionate share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
$ |
1,151,859 |
|
|
$ |
1,452,103 |
|
Liabilities |
|
|
(818,238 |
) |
|
|
(714,558 |
) |
|
|
|
|
|
|
|
Partners/members equity |
|
$ |
333,621 |
|
|
$ |
737,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
146,214 |
|
|
$ |
119,265 |
|
|
$ |
88,713 |
|
Expenses |
|
|
(79,665 |
) |
|
|
(61,519 |
) |
|
|
(65,348 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
66,549 |
|
|
$ |
57,746 |
|
|
$ |
23,365 |
|
|
|
|
|
|
|
|
|
|
|
We recognized income from these equity investments in real estate of $16.0 million, $13.8
million and $8.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Income
from equity investments in real estate represents our proportionate share of the income or losses
of these ventures as well as certain depreciation and amortization adjustments related to purchase
accounting and other-than-temporary impairment charges.
We have a 5% interest in a Lending Venture that made a loan, the Note Receivable, to the Partner who held a
75.3% interest in the Partnership owning 37 properties throughout Germany at a total cost of
$336.0 million. Concurrently, our affiliates also acquired an interest in a Property Venture that
acquired the remaining 24.7% ownership interest in the Partnership as well as an option to purchase
an additional 75% interest from the Partner by December 2010. Also in connection with this
transaction, the Lending Venture obtained non-recourse financing of $284.9 million having a fixed
annual interest rate of 5.5%, a term of 10 years and is collateralized by the 37 German properties.
In November 2010, the Property Venture exercised a portion of its call option via the Lending
Venture whereby the Partner exchanged a 70% interest in the limited partnership for a $295.7
million reduction in the Note Receivable due to the Lending Venture. Subsequent to the exercise of
the option, the Property Venture now owns a 94.7% interest in the Partnership and retains options
to purchase the remaining 5.3% interest from the Partner by December 2012. All dollar amounts are
based on the exchange rates of the Euro at the dates of the transactions, and dollar amounts
provided represent the total amounts attributable to the ventures and do not represent our
proportionate share.
Equity Investment in Direct Financing Lease Acquired
In March 2009, an entity in which we, CPA®:16 Global and CPA®:17 Global
hold 17.75%, 27.25% and 55% interests, respectively, completed a net lease financing transaction
with respect to a leasehold condominium interest, encompassing approximately 750,000 rentable
square feet, in the office headquarters of The New York Times Company for approximately $233.7
million. Our share of the purchase price was approximately $40.0 million, which we funded with
proceeds from our line of credit. We account for this investment under the equity method of
accounting, as we do not have a controlling interest in the entity but exercise significant
influence over it. In connection with this investment, which was deemed a direct financing lease,
the venture capitalized costs and fees totaling $8.7 million. In August 2009, the venture obtained
mortgage financing on the New York Times property of $119.8 million at an annual interest rate of
LIBOR plus 4.75% that has been capped at 8.75% through the use of an interest rate cap. This
financing has a term of five years.
W. P. Carey 2010 10-K 70
Notes to Consolidated Financial Statements
Note 7. Intangible Assets and Goodwill
In connection with our acquisition of properties, we have recorded net lease intangibles of $41.1
million, which are being amortized over periods ranging from approximately one year to 40 years.
Amortization of below-market and above-market rent intangibles is recorded as an adjustment to
lease revenues, while amortization of in-place lease and tenant relationship intangibles is
included in Depreciation and amortization. Below-market rent intangibles are included in Accounts
payable, accrued expenses and other liabilities in the consolidated financial statements.
Intangibles and goodwill are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Amortized Intangibles Assets |
|
|
|
|
|
|
|
|
Management contracts |
|
$ |
32,765 |
|
|
$ |
32,765 |
|
Less: accumulated amortization |
|
|
(29,035 |
) |
|
|
(26,262 |
) |
|
|
|
|
|
|
|
|
|
|
3,730 |
|
|
|
6,503 |
|
|
|
|
|
|
|
|
Lease Intangibles: |
|
|
|
|
|
|
|
|
In-place lease |
|
|
23,028 |
|
|
|
18,614 |
|
Tenant relationship |
|
|
10,251 |
|
|
|
9,816 |
|
Above-market rent |
|
|
9,737 |
|
|
|
8,085 |
|
Less: accumulated amortization |
|
|
(26,560 |
) |
|
|
(25,413 |
) |
|
|
|
|
|
|
|
|
|
|
16,456 |
|
|
|
11,102 |
|
|
|
|
|
|
|
|
Unamortized Goodwill and Indefinite-Lived
Intangible Assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
63,607 |
|
|
|
63,607 |
|
Trade name |
|
|
3,975 |
|
|
|
3,975 |
|
|
|
|
|
|
|
|
|
|
|
67,582 |
|
|
|
67,582 |
|
|
|
|
|
|
|
|
|
|
$ |
87,768 |
|
|
$ |
85,187 |
|
|
|
|
|
|
|
|
Amortized Below-Market Rent Intangible |
|
|
|
|
|
|
|
|
Below-market rent |
|
$ |
(1,954 |
) |
|
$ |
(2,009 |
) |
Less: accumulated amortization |
|
|
1,270 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
$ |
(684 |
) |
|
$ |
(1,368 |
) |
|
|
|
|
|
|
|
Net amortization of intangibles was $5.6 million, $6.6 million and $7.3 million for the years
ended December 31, 2010, 2009 and 2008, respectively.
Based on the intangible assets at December 31, 2010, annual net amortization of intangibles for
each of the next five years is as follows: 2011 $3.1 million, 2012 $2.6 million, 2013 $2.3
million, 2014 $1.1 million, and 2015 $0.9 million.
W. P. Carey 2010 10-K 71
Notes to Consolidated Financial Statements
Note 8. Debt
Scheduled debt principal payments during each of the next five years following December 31, 2010
and thereafter are as follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
Total |
|
2011(a) |
|
$ |
176,438 |
|
2012 |
|
|
35,334 |
|
2013 |
|
|
6,408 |
|
2014 |
|
|
6,414 |
|
2015 |
|
|
46,449 |
|
Thereafter through 2021 |
|
|
125,939 |
|
|
|
|
|
Total |
|
$ |
396,982 |
|
|
|
|
|
|
|
|
(a) |
|
Includes $141.8 million outstanding under our line of credit, which is scheduled to mature
in June 2011. We currently intend to extend this line for an additional year. |
Non-recourse debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of
real property and direct financing leases, with an aggregate carrying value of $367.5 million at
December 31, 2010. Our mortgage notes payable had fixed annual interest rates ranging from 3.1% to
7.8% and variable annual interest rates ranging from 1.2% to 7.3%, with maturity dates ranging from
2011 to 2021 at December 31, 2010.
In January 2009, Carey Storage repaid, in full, the $35.0 million outstanding under its $105.0
credit facility at a discount for $28.0 million and terminated the facility.
Line of credit
We have a $250.0 million unsecured revolving line of credit that is scheduled to mature in June
2011. Pursuant to the terms of the credit agreement, the line of credit can be increased up to
$300.0 million at the discretion of the lenders. Additionally, as long as there has been no
default, we may extend the line of credit at our discretion, within 90 days of, but not less than
30 days prior to, expiration, for an additional year. Such extension is subject to the payment of
an extension fee equal to 0.125% of the total commitments under the facility at that time. We
currently intend to extend this line for an additional year.
The line of credit provides for an annual interest rate, at our election, of either (i) LIBOR plus
a spread that ranges from 75 to 120 basis points depending on our leverage, or (ii) the greater of
the lenders prime rate and the Federal Funds Effective Rate plus 50 basis points. In addition, we
pay an annual fee ranging between 12.5 and 20 basis points of the unused portion of the line of
credit, depending on our leverage ratio. Based on our leverage ratio at December 31, 2010, we pay
interest at LIBOR, or 0.25%, plus 90 basis points and pay 15 basis points on the unused portion of
the line of credit.
The credit agreement stipulates six financial covenants that require us to maintain the following
ratios and benchmarks at the end of each quarter (the quoted variables are specifically defined in
the credit agreement):
(i) |
|
a maximum leverage ratio, which requires us to maintain a ratio for total outstanding
indebtedness to total value of 60% or less; |
(ii) |
|
a maximum secured debt ratio, which requires us to maintain a ratio for total secured
outstanding indebtedness (inclusive of permitted indebtedness of subsidiaries) to total
value of 50% or less; |
(iii) |
|
a minimum combined equity value, which requires us to maintain a total value less total
outstanding indebtedness of at least $550.0 million. This amount must be adjusted in the
event of any securities offering by adding 85% of the fair market value of all net offering
proceeds; |
(iv) |
|
a minimum fixed charge coverage ratio, which requires us to maintain a ratio for adjusted
total EBITDA to fixed charges of 1.75 to 1.0; |
(v) |
|
a maximum dividend payout, which requires us to ensure that the total of restricted
payments made in the current quarter, when added to the total for the three preceding fiscal
quarters, shall not exceed 90% of adjusted total EBITDA for the four preceding fiscal
quarters. Restricted payments include quarterly dividends and the total amount of shares
repurchased by us in excess of $10.0 million per year; and |
(vi) |
|
a limitation on recourse indebtedness, which prohibits us from incurring additional secured
indebtedness other than non-recourse indebtedness or indebtedness that is recourse to us
that exceeds $50.0 million or 5% of the total value, whichever is greater. |
W. P. Carey 2010 10-K 72
Notes to Consolidated Financial Statements
We were in compliance with these covenants at December 31, 2010.
Note 9. Settlement of SEC Investigation
In March 2008, we entered into a settlement with the SEC with respect to all matters relating to a
previously disclosed investigation. In anticipation of this settlement, we recognized a charge of
$30.0 million and an offsetting $9.0 million tax benefit in the fourth quarter of 2007. As a
result, the settlement is reflected as Decrease in settlement provision in our Consolidated
Statement of Cash Flows for the year ended December 31, 2008. We also recognized a gain of $1.8
million for the year ended December 31, 2008 related to an insurance reimbursement of certain
professional services costs incurred in connection with the SEC investigation.
Note 10. Commitments and Contingencies
At December 31, 2010, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
We have provided certain representations in connection with divestitures of certain of our
properties. These representations address a variety of matters including environmental liabilities.
We are not aware of any claims or other information that would give rise to material payments under
such representations.
Proposed Merger of Affiliates
As discussed in Note 3, in connection with the Proposed Merger, we have agreed to purchase three
properties from CPA®:14, in which we already have a joint venture interest, for an
aggregate purchase price of $32.1 million, plus the assumption of approximately $64.7 million of
indebtedness.
If the cash on hand and available to CPA®:14 and CPA®:16 Global, including
the proceeds of the CPA®:14 Asset Sales and a new $300.0 million senior credit facility
of CPA®:16 Global, is not sufficient to enable CPA®:16 Global to
fulfill cash elections in the Proposed Merger by CPA®:14 shareholders, we have agreed to
purchase a sufficient number of shares of CPA®:16 Global stock from
CPA®:16 Global to enable it to pay such amounts to CPA®:14 shareholders.
Assuming that holders of 50% of CPA®:14s outstanding stock elect to receive cash in the
Proposed Merger, then the maximum cash required by CPA®:16 Global to purchase these
shares would be approximately $416.1 million, based on the total shares of CPA®:14
outstanding at December 31, 2010.
The merger agreement also contains certain termination rights for both
CPA®:14 and CPA®:16. If the merger agreement is
terminated because the closing condition that CPA®:16 Global obtain
funding pursuant to the debt financing and, if applicable, the equity financing described above is
not satisfied or waived, we have agreed to pay CPA®:16 Globals and
CPA®:14s out-of-pocket expenses up to $5.0 million and $4.0 million,
respectively. We have also agreed to pay CPA®:14s out-of-pocket expenses if
the merger agreement is terminated due to more than 50% of CPA®:14s
shareholders electing to receive cash in the Proposed Merger or CPA®:14
failing to obtain the requisite shareholder approval. Costs incurred by
CPA®:14 and CPA®:16 Global related to the Proposed
Merger totaled approximately $1.2 million and $1.8 million, respectively, through December 31,
2010.
In connection with the Proposed Merger, CAM has agreed to indemnify CPA®:16
Global if it suffers certain losses arising out of a breach by CPA®:14 of
its representations and warranties under the merger agreement and having a material adverse effect
on CPA®:16 Global after the Proposed Merger, up to the amount of fees
received by CAM in connection with the Proposed Merger. We have evaluated the exposure related to
this indemnification and believe the exposure to be minimal.
W. P. Carey 2010 10-K 73
Notes to Consolidated Financial Statements
Note 11. Fair Value Measurements
Under current authoritative accounting guidance for fair value measurements, the fair value of an
asset is defined as the exit price, which is the amount that would either be received when an asset
is sold or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The guidance establishes a three-tier fair value hierarchy based on the
inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for
identical instruments are available in active markets, such as money market funds, equity
securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted
prices included within Level 1 that are observable for the instrument, such as certain derivative
instruments including interest rate caps and swaps; and Level 3, for which little or no market data
exists, therefore requiring us to develop our own assumptions, such as certain securities.
Items Measured at Fair Value on a Recurring Basis
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Money Market Funds Our money market funds consisted of government securities and treasury bills.
These funds were classified as Level 1 as we used quoted prices from active markets to determine
their fair values.
Derivative Assets and Liabilities Our derivative assets and liabilities primarily comprised of
interest rate swaps or caps. These derivative instruments were measured at fair value using readily
observable market inputs, such as quotations on interest rates. Our derivative instruments were
classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank
counterparties that are not traded in an active market.
Other Securities Our other securities primarily comprised of our investment in an India growth
fund and our interest in a commercial mortgage loan securitization. These funds are not traded in
an active market. We estimated the fair value of these securities using internal valuation models
that incorporate market inputs and our own assumptions about future cash flows. We classified these
assets as Level 3.
Redeemable Noncontrolling Interest We account for the noncontrolling interest in WPCI as
redeemable noncontrolling interest. We determined the valuation of redeemable noncontrolling
interest using widely accepted valuation techniques, including discounted cash flow on the expected
cash flows of the investment as well as the income capitalization approach, which considers
prevailing market capitalization rates. We classified this liability as Level 3.
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis at December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
37,154 |
|
|
$ |
37,154 |
|
|
$ |
|
|
|
$ |
|
|
Other securities |
|
|
1,726 |
|
|
|
|
|
|
|
|
|
|
|
1,726 |
|
Derivative assets |
|
|
312 |
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,192 |
|
|
$ |
37,154 |
|
|
$ |
312 |
|
|
$ |
1,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
969 |
|
|
$ |
|
|
|
$ |
969 |
|
|
$ |
|
|
Redeemable
noncontrolling
interest |
|
|
7,546 |
|
|
|
|
|
|
|
|
|
|
|
7,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,515 |
|
|
$ |
|
|
|
$ |
969 |
|
|
$ |
7,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2010 10-K 74
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
4,283 |
|
|
$ |
4,283 |
|
|
$ |
|
|
|
$ |
|
|
Other securities |
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,970 |
|
|
$ |
4,283 |
|
|
$ |
|
|
|
$ |
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
634 |
|
|
$ |
|
|
|
$ |
634 |
|
|
$ |
|
|
Redeemable
noncontrolling
interest |
|
|
7,692 |
|
|
|
|
|
|
|
|
|
|
|
7,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,326 |
|
|
$ |
|
|
|
$ |
634 |
|
|
$ |
7,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated
ventures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3 Only) |
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
Redeemable |
|
|
|
|
|
Redeemable |
|
|
|
Other |
|
|
Noncontrolling |
|
|
Other |
|
|
Noncontrolling |
|
|
|
Securities |
|
|
Interest |
|
|
Securities |
|
|
Interest |
|
Beginning balance |
|
$ |
1,687 |
|
|
$ |
7,692 |
|
|
$ |
1,628 |
|
|
$ |
18,085 |
|
Total gains or losses (realized and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
4 |
|
|
|
1,293 |
|
|
|
(2 |
) |
|
|
2,258 |
|
Included in other comprehensive income (loss) |
|
|
12 |
|
|
|
(12 |
) |
|
|
16 |
|
|
|
12 |
|
Purchases |
|
|
23 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,380 |
) |
Distributions paid |
|
|
|
|
|
|
(956 |
) |
|
|
|
|
|
|
(4,056 |
) |
Redemption value adjustment |
|
|
|
|
|
|
(471 |
) |
|
|
|
|
|
|
6,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,726 |
|
|
$ |
7,546 |
|
|
$ |
1,687 |
|
|
$ |
7,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period
included
in earnings (or changes in net assets) attributable to the
change in unrealized gains or losses relating to assets
still
held at the reporting date |
|
$ |
4 |
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during
the years ended December 31, 2010 and 2009. Gains and losses (realized and unrealized) included in
earnings for other securities are reported in Other income and (expenses) in the consolidated
financial statements.
Our other financial instruments had the following carrying values and fair values as of the dates
shown (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
Deferred
acquisition fees
receivable |
|
$ |
31,419 |
|
|
$ |
32,485 |
|
|
$ |
32,386 |
|
|
$ |
32,800 |
|
Non-recourse debt |
|
|
255,232 |
|
|
|
255,460 |
|
|
|
215,330 |
|
|
|
201,774 |
|
Line of credit |
|
|
141,750 |
|
|
|
140,600 |
|
|
|
111,000 |
|
|
|
108,900 |
|
We determine the estimated fair value of our debt instruments using a discounted cash flow
model with rates that take into account the credit of the tenants and interest rate risk. We
estimate that our other financial assets and liabilities (excluding net investment in direct
financing leases) had fair values that approximated their carrying values at both December 31, 2010
and 2009.
W. P. Carey 2010 10-K 75
Notes to Consolidated Financial Statements
Items Measured at Fair Value on a Non-Recurring Basis
We perform an assessment, when required, of the value of certain of our real estate investments in
accordance with current authoritative accounting guidance. As part of that assessment, we
determined the valuation of these assets using widely accepted valuation techniques, including
expected discounted cash flows or an income capitalization approach, which considers prevailing
market capitalization rates. We reviewed each investment based on the highest and best use of the
investment and market participation assumptions. We determined that the significant inputs used to
value these investments fall within Level 3. We calculated the impairment charges recorded during
the years ended December 31, 2010, 2009 and 2008 based on contracted or expected selling prices.
The valuation of real estate is subject to significant judgment and actual results may differ
materially if market conditions change.
The following table presents information about our nonfinancial assets that were measured on a fair
value basis for the years ended December 31, 2010 and 2009. All of the impairment charges were
measured using unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 |
|
|
Year ended December 31, 2008 |
|
|
|
Total Fair Value |
|
|
Total Impairment |
|
|
Total Fair Value |
|
|
Total Impairment |
|
|
Total Fair Value |
|
|
Total Impairment |
|
|
|
Measurements |
|
|
Charges |
|
|
Measurements |
|
|
Charges |
|
|
Measurements |
|
|
Charges |
|
Impairment Charges From
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
6,271 |
|
|
$ |
8,372 |
|
|
$ |
823 |
|
|
$ |
900 |
|
|
$ |
|
|
|
$ |
|
|
Net investments in direct
financing
leases |
|
|
3,548 |
|
|
|
1,140 |
|
|
|
23,571 |
|
|
|
2,616 |
|
|
|
4,201 |
|
|
|
473 |
|
Equity investments in real estate |
|
|
22,846 |
|
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,665 |
|
|
|
10,906 |
|
|
|
24,394 |
|
|
|
3,516 |
|
|
|
4,201 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Charges From
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
5,391 |
|
|
|
5,869 |
|
|
|
9,719 |
|
|
|
6,908 |
|
|
|
3,751 |
|
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,056 |
|
|
$ |
16,775 |
|
|
$ |
34,113 |
|
|
$ |
10,424 |
|
|
$ |
7,952 |
|
|
$ |
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of
default on our operations and tenants inability or unwillingness to make contractually required
payments. Market risk includes changes in the value of our properties and related loans, as well as
changes in the value of our other securities and the shares we hold in the CPA® REITs
due to changes in interest rates or other market factors. In addition, we own investments in the
European Union and are subject to the risks associated with changing foreign currency exchange
rates.
Foreign Currency Exchange
We are exposed to foreign currency exchange rate movements, primarily in the Euro. We manage
foreign currency exchange rate movements by generally placing both our debt obligation to the
lender and the tenants rental obligation to us in the same currency, but we are subject to foreign
currency exchange rate movements to the extent of the difference in the timing and amount of the
rental obligation and the debt service. We also face challenges with repatriating cash from our
foreign investments. We may encounter instances where it is difficult to repatriate cash because of
jurisdictional restrictions or because repatriating cash may result in current or future tax
liabilities. Realized and unrealized gains and losses recognized in earnings related to foreign
currency transactions are included in Other income and (expenses) in the consolidated financial
statements.
Use of Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in
interest rates. We have not entered, and do not plan to enter into, financial instruments for
trading or speculative purposes. In addition to derivative instruments that we enter into on our
own behalf, we may also be a party to derivative instruments that are embedded in other contracts,
and we may own common stock warrants, granted to us by lessees when structuring lease transactions,
that are considered to be derivative instruments. The primary risks related to our use of
derivative instruments are that a counterparty to a hedging arrangement could default on its
obligation or that the credit quality of the counterparty may be downgraded to such an extent that
it impairs our ability to sell or assign our side of the hedging transaction. While we seek to
mitigate these risks by entering into hedging arrangements with counterparties
that are large financial institutions that we deem to be creditworthy, it is possible that our
hedging transactions, which are intended to limit losses, could adversely affect our earnings.
Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such
as transaction or breakage fees. We have established policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument activities.
W. P. Carey 2010 10-K 76
Notes to Consolidated Financial Statements
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is designated
as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in OCI until the hedged item is recognized in earnings.
For cash flow hedges, the ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings.
The following table sets forth certain information regarding our derivative instruments at December
31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value |
|
|
Liability Derivatives Fair Value |
|
Derivatives designated as |
|
|
|
at December 31, |
|
|
at December 31, |
|
hedging instruments |
|
Balance Sheet Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest rate swaps |
|
Other assets, net |
|
$ |
312 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest rate swaps |
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
|
|
|
|
(969 |
) |
|
|
(634 |
) |
The following table presents the impact of derivative instruments on OCI within our
consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in |
|
|
|
OCI on Derivative (Effective Portion) |
|
|
|
Years ended December 31, |
|
Derivatives in Cash Flow Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest rate swaps (a) |
|
$ |
(45 |
) |
|
$ |
(243 |
) |
|
$ |
(419 |
) |
|
|
|
(a) |
|
During the years ended December 31, 2010, 2009 and 2008, no gains or losses were
reclassified from OCI into income related to effective or ineffective portions of hedging
relationships or to amounts excluded from effectiveness testing. |
See below for information on our purposes for entering into derivative instruments and for
information on derivative instruments owned by unconsolidated ventures, which are excluded from the
tables above.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap
agreements with counterparties. Interest rate swaps, which effectively convert the variable rate
debt service obligations of the loan to a fixed rate, are agreements in which one party exchanges a
stream of interest payments for a counterpartys stream of cash flow over a specific period. The
notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit
the effective borrowing rate of variable rate debt obligations while allowing participants to share
in downward shifts in interest rates. Our objective in using these derivatives is to limit our
exposure to interest rate movements.
W. P. Carey 2010 10-K 77
Notes to Consolidated Financial Statements
The interest rate swap derivative instruments that we had outstanding at December 31, 2010 were
designated as cash flow hedges and are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective |
|
|
Effective |
|
|
Expiration |
|
|
|
|
|
|
Type |
|
|
Amount |
|
|
Interest Rate |
|
|
Date |
|
|
Date |
|
|
Fair Value |
|
3-Month
Euribor
(a) |
|
Pay-fixed swap |
|
|
$ |
8,522 |
|
|
|
4.2 |
% |
|
|
3/2008 |
|
|
|
3/2018 |
|
|
$ |
(757 |
) |
1-Month Libor |
|
Pay-fixed swap |
|
|
|
4,681 |
|
|
|
3.0 |
% |
|
|
4/2010 |
|
|
|
4/2015 |
|
|
|
(212 |
) |
1-Month Libor |
|
Pay-fixed swap |
|
|
|
34,804 |
|
|
|
3.0 |
% |
|
|
7/2010 |
|
|
|
7/2020 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are based upon the Euro exchange rate at December 31, 2010. |
The interest rate cap derivative instruments that our unconsolidated ventures had outstanding at
December 31, 2010 were designated as cash flow hedges and are summarized as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Venture at |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
Expiration |
|
|
|
|
|
|
December 31, 2010 |
|
|
Type |
|
|
Amount |
|
|
Cap Rate (a) |
|
|
Spread |
|
|
Date |
|
|
Date |
|
|
Fair Value |
|
3-Month LIBOR |
|
|
17.75 |
% |
|
Interest rate cap |
|
|
$ |
116,684 |
|
|
|
4.0 |
% |
|
|
4.8 |
% |
|
|
8/2009 |
|
|
|
8/2014 |
|
|
$ |
733 |
|
1-Month LIBOR |
|
|
78.95 |
% |
|
Interest rate cap |
|
|
|
18,310 |
|
|
|
3.0 |
% |
|
|
4.0 |
% |
|
|
9/2009 |
|
|
|
4/2014 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The applicable interest rates of the related loans were 5.0% and 4.3% at December 31,
2010; therefore, the interest rate caps were not being utilized at that date. |
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest
payments are made on our non-recourse variable-rate debt. At December 31, 2010, we estimate that an
additional $1.3 million will be reclassified as interest expense during the next twelve months.
Some of the agreements we have with derivative counterparties contain certain credit contingent
provisions that could result in a declaration of default against us regarding our derivative
obligations if we either default or are capable of being declared in default on certain of our
indebtedness. At December 31, 2010, we had not been declared in default on any of our derivative
obligations. The estimated fair value of our derivatives that were in a net liability position was
$0.8 million at December 31, 2010, which includes accrued interest but excludes any adjustment for
nonperformance risk. If we had breached any of these provisions at December 31, 2010, we could have
been required to settle our obligations under these agreements at their termination value of $0.9
million.
Portfolio Concentration Risk
Concentrations of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risks or conditions that could cause them to default
on their lease obligations to us. We regularly monitor our portfolio to assess potential
concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it
does contain concentrations in excess of 10% of current annualized lease revenues in certain areas,
as described below. The percentages in the paragraph below represent our directly-owned real estate
properties and do not include our pro rata share of equity investments.
At December 31, 2010, the majority of our directly-owned real estate properties were located in the
U.S. (89%), with Texas (20%), California (14%), Arizona (11%) and Georgia (11%) representing the
most significant geographic concentrations, based on percentage of our annualized contractual
minimum base rent for the fourth quarter of 2010. At December 31, 2010, our directly-owned real
estate properties contained concentrations in the following asset types: office (38%), industrial
(30%) and warehouse/distribution (17%); and in the following tenant industries: retail stores
(13%), business and commercial services (12%) and telecommunications (12%).
W. P. Carey 2010 10-K 78
Notes to Consolidated Financial Statements
Note 13. Impairment Charges
We periodically assess whether there are any indicators that the value of our real estate
investments may be impaired or that their carrying value may not be recoverable. For investments in
real estate in which an impairment indicator is identified, we follow a two-step process to
determine whether the investment is impaired and to determine the amount of the charge. First, we
compare the carrying value of the real estate to the future net undiscounted cash flow that we
expect the real estate will generate, including any estimated proceeds from the eventual sale of
the real estate. If this amount is less than the carrying value, the real estate is considered to
be impaired, and we then measure the loss as the excess of the carrying value of the real estate
over the estimated fair value of the real estate, which is primarily determined using market
information such as recent comparable sales or broker quotes. If relevant market information is not
available or is not deemed appropriate, we then perform a future net cash flow analysis discounted
for inherent risk associated with each investment.
The following table summarizes impairment charges recognized during the years ended December 31,
2010, 2009, and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Real estate |
|
$ |
8,372 |
|
|
$ |
900 |
|
|
$ |
|
|
Net investments in direct financing leases |
|
|
1,140 |
|
|
|
2,616 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges included in expenses |
|
|
9,512 |
|
|
|
3,516 |
|
|
|
473 |
|
Equity investments in real estate (a) |
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges included in continuing
operations |
|
|
10,906 |
|
|
|
3,516 |
|
|
|
473 |
|
Impairment charges included in discontinued operations |
|
|
5,869 |
|
|
|
6,908 |
|
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges |
|
$ |
16,775 |
|
|
$ |
10,424 |
|
|
$ |
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Impairment charges on our equity investments in real estate are
included in Income from equity investments in real estate and CPA® REITs within the
consolidated financial statements. |
Impairment Charges on Real Estate
During the years ended December 31, 2010 and 2009, we recognized impairment charges on various
properties totaling $8.4 million and $0.9 million, respectively. These impairments were primarily
the result of writing down the properties carrying values to their respective estimated fair
values in connection with potential sales due to tenants vacating or not renewing their leases.
Impairment Charges on Direct Financing Leases
In connection with our annual review of the estimated residual values on our properties classified
as net investments in direct financing leases, we determined that an other-than-temporary decline
in estimated residual value had occurred at various properties due to market conditions, and the
accounting for these direct financing leases was revised using the changed estimates. The changes
in estimates resulted in the recognition of impairment charges totaling $1.1 million, $2.6 million
and $0.5 million in 2010, 2009 and 2008, respectively.
Impairment Charges on Equity Investments in Real Estate
During the year ended December 31, 2010, we recognized an other-than-temporary impairment charge of
$1.4 million on a venture to reflect the decline in the estimated fair value of the ventures
underlying net assets in comparison with the carrying value of our interest in the venture.
Impairment Charges on Properties Sold
During the years ended December 31, 2010, 2009 and 2008, we recognized impairment charges on
properties sold totaling $5.9 million, $6.9 million and $0.5 million, respectively. These
impairment charges, which are included in discontinued operations, were the result of reducing
these properties carrying values to their estimated fair values (Note 17).
W. P. Carey 2010 10-K 79
Notes to Consolidated Financial Statements
Note 14. Equity
Distributions Payable
We declared a quarterly distribution of $0.510 per share in December 2010, which was paid in January
2011 to shareholders of record at December 31, 2010; and a quarterly distribution of $0.502 per
share and a special distribution of $0.30 per share in December 2009, which were paid in January
2010 to shareholders of record at December 31, 2009. The special distribution was approved by our
board of directors as a result of an increase in our 2009 taxable income.
Redeemable Noncontrolling Interest
We account for the noncontrolling interest in WPCI held by one of our officers as a redeemable
noncontrolling interest, as we have an obligation to repurchase the interest from that officer,
subject to certain conditions. The officers interest is reflected at estimated redemption value
for all periods presented. Redeemable noncontrolling interests, as presented on the consolidated
balance sheets, reflect adjustments of ($0.5) million, $6.8 million and $0.3 million at December
31, 2010, 2009 and 2008, respectively, to present the officers interest at redemption value. See
Note 15.
The following table presents a reconciliation of redeemable noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
7,692 |
|
|
$ |
18,085 |
|
|
$ |
20,394 |
|
Redemption value adjustment |
|
|
(471 |
) |
|
|
6,773 |
|
|
|
322 |
|
Net income |
|
|
1,293 |
|
|
|
2,258 |
|
|
|
1,508 |
|
Distributions |
|
|
(956 |
) |
|
|
(4,056 |
) |
|
|
(4,139 |
) |
Purchase of noncontrolling interests |
|
|
|
|
|
|
(15,380 |
) |
|
|
|
|
Change in other comprehensive
(loss) income |
|
|
(12 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
7,546 |
|
|
$ |
7,692 |
|
|
$ |
18,085 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The following table presents accumulated other comprehensive loss reflected in equity, net of tax.
Amounts include our proportionate share of other comprehensive income or loss from our
unconsolidated investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Unrealized gain on marketable
securities |
|
$ |
48 |
|
|
$ |
42 |
|
Unrealized loss on derivative
instruments |
|
|
(1,658 |
) |
|
|
(901 |
) |
Foreign currency translation adjustment |
|
|
(1,853 |
) |
|
|
178 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(3,463 |
) |
|
$ |
(681 |
) |
|
|
|
|
|
|
|
W. P. Carey 2010 10-K 80
Notes to Consolidated Financial Statements
Earnings Per Share
Under current authoritative guidance for determining earnings per share, all unvested share-based
payment awards that contain non-forfeitable rights to distributions are considered to be
participating securities and therefore are included in the computation of earnings per share under
the two-class method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common shares and participating security according to
dividends declared (or accumulated) and participation rights in undistributed earnings. Our
unvested RSUs contain rights to receive non-forfeitable distribution equivalents, and therefore we
apply the two-class method of computing earnings per share. The calculation of earnings per share
below excludes the income attributable to the unvested RSUs from the numerator. The following table
summarizes basic and diluted earnings per share for the periods indicated (in thousands, except
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net income attributable to W. P. Carey members |
|
$ |
73,972 |
|
|
$ |
69,023 |
|
|
$ |
78,047 |
|
Allocation of distributions paid on unvested RSUs
in excess of net income |
|
|
(440 |
) |
|
|
(1,127 |
) |
|
|
(295 |
) |
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
|
73,532 |
|
|
|
67,896 |
|
|
|
77,752 |
|
Income effect of dilutive securities, net of taxes |
|
|
724 |
|
|
|
1,250 |
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
74,256 |
|
|
$ |
69,146 |
|
|
$ |
78,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
39,514,746 |
|
|
|
39,019,709 |
|
|
|
39,202,520 |
|
Effect of dilutive securities |
|
|
493,148 |
|
|
|
693,026 |
|
|
|
1,018,592 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
40,007,894 |
|
|
|
39,712,735 |
|
|
|
40,221,112 |
|
|
|
|
|
|
|
|
|
|
|
Securities included in our diluted earnings per share determination consist of stock options,
warrants and restricted stock. Securities totaling 1.8 million shares, 2.6 million shares and 2.4
million shares for the years ended December 31, 2010, 2009, and 2008, respectively, were excluded
from the earnings per share computations above as their effect would have been anti-dilutive.
Share Repurchase Programs
In June 2007, our board of directors approved a share repurchase program through December 31, 2007
that was later extended through March 2008. During the term of the program, we repurchased a total
of $30.7 million of our common stock. In October 2008, the Executive Committee of our board of
directors (the Executive Committee) approved a program to repurchase up to $10.0 million of our
common stock through December 15, 2008. During the term of this program, we repurchased a total of
$8.5 million of our common stock. In December 2008, the Executive Committee approved a further
program to repurchase up to $10.0 million of our common stock through March 4, 2009 or the date the
maximum was reached, if earlier. During the term of this program, we repurchased a total of $9.3
million of our common stock. In March 2009, the Executive Committee approved an additional program
to repurchase up to $3.5 million of our common stock through March 27, 2009 or the date the maximum
was reached, if earlier. During the term of this program, we repurchased a total of $2.8 million of
our common stock.
Note 15. Stock-Based and Other Compensation
Stock-Based Compensation
At December 31, 2010, we maintained several stock-based compensation plans as described below. The
total compensation expense (net of forfeitures) for these plans was $7.4 million, $9.3 million and
$7.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total stock-based
compensation expense for the year ended December 31, 2010 included net forfeitures of $2.0 million
as a result of the resignation of two senior officers. The tax benefit recognized by us related to
these plans totaled $3.3 million, $4.2 million and $3.2 million for the years ended December 31,
2010, 2009 and 2008, respectively.
2009 Incentive Plan and 1997 Incentive Plans
We maintain the 1997 Share Incentive Plan (as amended, the 1997 Incentive Plan), which authorized
the issuance of up to 6,200,000 shares of our common stock. In June 2009, our shareholders approved
the 2009 Share Incentive Plan (the 2009 Incentive Plan) to replace the 1997 Incentive Plan,
except with respect to outstanding contractual obligations under the 1997 Incentive Plan, so that
no further awards can be made under that plan. The 2009 Incentive Plan authorizes the issuance of
up to 3,600,000 shares of our common stock, of which 218,644 were issued or reserved for issuance
upon vesting of RSUs and PSUs at December 31, 2010. The 1997 Incentive Plan provided for the grant
of (i) share options, which may or may not qualify as incentive stock options under the Code, (ii)
performance shares or PSUs, (iii) dividend equivalent rights and (iv) restricted shares or RSUs.
The 2009 Incentive Plan provides for
the grant of (i) share options, (ii) restricted shares or RSUs, (iii) performance shares or PSUs,
and (iv) dividend equivalent rights. The vesting of grants under both plans is accelerated upon a
change in our control and under certain other conditions. During 2010, grants under our long-term
incentive program (the LTIP) were made under the 2009 Incentive Plan.
W. P. Carey 2010 10-K 81
Notes to Consolidated Financial Statements
In December 2007, the Compensation Committee approved the LTIP and terminated further
contributions to the Partnership Equity Unit Plan described below. In 2008, the Compensation
Committee approved long-term incentive awards consisting of 153,900 RSUs and 148,250 PSUs under the
LTIP through the 1997 Incentive Plan. In 2009, the Compensation Committee granted 126,050 RSUs and
152,000 PSUs under the LTIP through the 1997 Incentive Plan. In 2010, the Compensation Committee
granted 140,050 RSUs and 159,250 PSUs under the LTIP through the 2009 Incentive Plan.
As a result of issuing these awards, we currently expect to recognize compensation expense totaling
approximately $18.1 million over the vesting period, of which $5.7 million, $4.2 million and $2.4
million was recognized during 2010, 2009 and 2008, respectively.
2009 Non-Employee Directors Incentive Plan and 1997 Non-Employee Directors Plan
We maintain the 1997 Non-Employee Directors Plan (the 1997 Directors Plan), which authorized
the issuance of up to 300,000 shares of our Common Stock. In June 2007, the 1997 Directors Plan,
which had been due to expire in October 2007, was extended through October 2017. In June 2009, our
shareholders approved the 2009 Non-Employee Directors Incentive Plan (the 2009 Directors Plan)
to replace the 1997 Directors Plan, except with respect to outstanding contractual obligations
under the predecessor plan, so that no further awards can be made under that plan. The 1997
Directors Plan provided for the grant of (i) share options, which may or may not qualify as
incentive stock options, (ii) performance shares, (iii) dividend equivalent rights and (iv)
restricted shares. The 2009 Directors Plan authorizes the issuance of 325,000 shares of our common
stock in the aggregate and initially provided for the automatic annual grant of RSUs with a total
value of $50,000 to each director. In the discretion of our board of directors, the awards may also
be in the form of share options or restricted shares, or any combination of the permitted awards.
Grants under the 2009 Directors Plan totaled 47,565 RSUs at December 31, 2010.
Employee Share Purchase Plan
We sponsor an Employee Share Purchase Plan (ESPP) pursuant to which eligible employees may
contribute up to 10% of compensation, subject to certain limits, to purchase our common stock.
Employees can purchase stock semi-annually at a price equal to 85% of the fair market value at
certain plan defined dates. The ESPP is not material to our results of operations. Compensation
expense under this plan for the years ended December 31, 2010, 2009 and 2008 was $0.2 million, $0.4
million and $0.1 million, respectively.
Carey Management Warrants
In January 1998, the predecessor of Carey Management was granted warrants to purchase 2,284,800
shares of our common stock exercisable at $21 per share and warrants to purchase 725,930 shares
exercisable at $23 per share as compensation for investment banking services in connection with
structuring the consolidation of the CPA® Partnerships. During the year ended December
31, 2008, a corporation wholly-owned by our Chairman, Wm. Polk Carey, exercised warrants under a
1998 grant (the Carey Management Warrants) to purchase a total of 695,930 shares of our common
stock at $23 per share, for which we received proceeds of $16.1 million. All other Carey Management
Warrants were exercised prior to 1998 or expired without value.
Partnership Equity Unit Plan
During 2003, we adopted a non-qualified deferred compensation plan (the Partnership Equity Plan,
or PEP) under which a portion of any participating officers cash compensation in excess of
designated amounts was deferred and the officer was awarded Partnership Equity Plan Units (PEP
Units). The value of each PEP Unit was intended to correspond to the value of a share of the
CPA® REIT designated at the time of such award. During 2005, further contributions to
the initial PEP were terminated and it was succeeded by a second PEP. As amended, payment under
these plans will occur at the earlier of December 16, 2013 (in the case of the initial PEP) or
twelve years from the date of award. The award is fully vested upon grant. Each of the PEPs is a
deferred compensation plan and is therefore considered to be outside the scope of current
accounting guidance for stock-based compensation and subject to liability award accounting. The
value of each PEP Unit will be adjusted to reflect the underlying appraised value of the designated
CPA® REIT. Additionally, each PEP Unit will be entitled to distributions equal to the
distribution rate of the CPA® REIT. All issuances of PEP Units, changes in the fair
value of PEP Units and distributions paid are included in our compensation expense.
W. P. Carey 2010 10-K 82
Notes to Consolidated Financial Statements
The value of the plans is reflected at fair value each quarter and is subject to changes in the
fair value of the PEP units. Compensation expense under these Plans for the years ended December
31, 2010, 2009 and 2008 was $0.1 million, $0.2 million and $0.9 million, respectively. Further
contributions to the second PEP were terminated at December 31, 2007; however, this termination did
not affect any awardees rights pursuant to awards granted under this plan. In December 2008,
participants in the PEPs were required to make an election to either (i) remain in the PEPs, (ii)
receive cash for their PEP Units (available to former employees only) or (iii) convert their PEP
Units to fully vested RSUs (available to current employees only) to be issued under the 1997
Incentive Plan on June 15, 2009. Substantially all of the PEP participants elected to receive cash
or convert their existing PEP Units to RSUs. In January 2009, we paid $2.0 million in cash to
former employee participants who elected to receive cash for their PEP Units. As a result of the
election to convert PEP Units to RSUs, we derecognized $9.3 million of our existing PEP liability
and recorded a deferred compensation obligation within W. P. Carey members equity in the same
amount during the second quarter of 2009. The PEP participants that elected RSUs received a total
of 356,416 RSUs, which was equal to the total value of their PEP Units divided by the closing price
of our common stock on June 15, 2009. The PEP participants electing to receive RSUs were required
to defer receipt of the underlying shares of our common stock for a minimum of two years. While
employed by us, these participants are entitled to receive dividend equivalents equal to the amount
of dividends paid on the underlying common stock during the deferral period. At December 31, 2010,
we are obligated to issue 356,416 shares of our common stock underlying these RSUs, which is
recorded within W. P. Carey members equity as a Deferred compensation obligation of $10.5 million.
The remaining PEP liability pertaining to participants who elected to remain in the plans was $0.8
million at December 31, 2010.
WPCI Stock Options
On June 30, 2003, WPCI granted an incentive award to two officers of WPCI consisting of 1,500,000
restricted units, representing an approximate 13% interest in WPCI, and 1,500,000 options for WPCI
units with a combined fair value of $2.5 million at that date. Both the options and restricted
units vested ratably over five years, with full vesting occurring December 31, 2007. During 2008,
the officers exercised all of their 1,500,000 options to purchase 1,500,000 units of WPCI at $1 per
unit. Upon the exercise of the WPCI options, the officers had a total interest of approximately 23%
in WPCI. The terms of the vested restricted units and units received in connection with the
exercise of options of WPCI by noncontrolling interest holders provided that the units could be
redeemed, commencing December 31, 2012 and thereafter, solely in exchange for our shares and that
any redemption would be subject to a third party valuation of WPCI. In connection with a
reorganization of WPCI into three separate entities in 2008, the officers also owned equivalent
interests in the three new entities.
In December 2009, one of those officers resigned from W. P. Carey, WPCI and all affiliated entities
pursuant to a mutually agreed separation. As part of this separation, we effected the purchase of
all of the interests in WPCI and certain related entities held by that officer for cash, at a
negotiated fair market value of $15.4 million. The tax effect of approximately $4.8 million
relating to the acquisition of this interest, which resulted in an increase in contributed capital,
was recorded as an adjustment to Listed shares in the consolidated balance sheets. The remaining
officer currently has a total interest of approximately 7.7% in each of WPCI and the related
entities.
Stock Options
Option and warrant activity at December 31, 2010 and changes during the year ended December 31,
2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in Years) |
|
|
Intrinsic Value |
|
Outstanding at beginning of year |
|
|
2,255,604 |
|
|
$ |
27.55 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(399,507 |
) |
|
|
22.26 |
|
|
|
|
|
|
|
|
|
Forfeited / Expired |
|
|
(156,396 |
) |
|
|
30.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|