NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Business and Organization
W. P. Carey Inc. (“W. P. Carey”) is a REIT that, together with our consolidated subsidiaries, invests primarily in operationally-critical, single-tenant commercial real estate properties located in the United States and Northern and Western Europe on a long-term basis. We earn revenue principally by leasing the properties we own to companies on a triple-net lease basis, which generally requires each tenant to pay the costs associated with operating and maintaining the property.
Founded in 1973, our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”
We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code effective as of February 15, 2012. As a REIT, we are not subject to federal income taxes on income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We also own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. Through our taxable REIT subsidiaries (“TRSs”), we also earn revenue as the advisor to certain non-traded investment programs. We hold all of our real estate assets attributable to our Real Estate segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.
On April 13, 2020, two of the non-traded REITs that we advised, Carey Watermark Investors Incorporated (“CWI 1”) and Carey Watermark Investors 2 Incorporated (“CWI 2”) (together, the “CWI REITs”), merged in an all-stock transaction, with CWI 2 as the surviving entity (the “CWI 1 and CWI 2 Merger”). Following the close of the CWI 1 and CWI 2 Merger, our advisory agreements with CWI 1 and CWI 2 were terminated, CWI 2 was renamed Watermark Lodging Trust, Inc. (“WLT”), and we began to provide certain services to WLT pursuant to a transition services agreement. As a result, at September 30, 2020, we were the advisor to the following entities (Note 3):
•Corporate Property Associates 18 – Global Incorporated (“CPA:18 – Global”), a publicly owned, non-traded REIT that primarily invests in commercial real estate properties; we refer to CPA:18 – Global together with the CWI REITs as the “Managed REITs” (as used throughout this Report, the term “Managed REITs” does not include CWI 1 and CWI 2 after April 13, 2020); and
•Carey European Student Housing Fund I, L.P. (“CESH”), a limited partnership formed for the purpose of developing, owning, and operating student housing properties and similar investments in Europe; we refer to the Managed REITs and CESH collectively as the “Managed Programs.”
We no longer raise capital for new or existing funds, but currently expect to continue managing CPA:18 – Global and CESH through the end of their respective life cycles (Note 3).
Reportable Segments
Real Estate — Lease revenues from our real estate investments generate the vast majority of our earnings. We invest primarily in commercial properties located in the United States and Northern and Western Europe, which are leased to companies on a triple-net lease basis. At September 30, 2020, our owned portfolio was comprised of our full or partial ownership interests in 1,215 properties, totaling approximately 142 million square feet, substantially all of which were net leased to 351 tenants, with a weighted-average lease term of 10.6 years and an occupancy rate of 98.9%. In addition, at September 30, 2020, our portfolio was comprised of full or partial ownership interests in 20 operating properties, including 19 self-storage properties and one hotel, totaling approximately 1.4 million square feet.
Investment Management — Through our TRSs, we manage portfolios of real estate investments for the Managed Programs, for which we earn asset management revenue. We may earn incentive revenue and receive other compensation through our advisory agreements with certain of the Managed Programs, including in connection with providing liquidity events for CPA:18 – Global’s stockholders. In addition, we include equity income generated through our (i) ownership of shares and limited partnership units of the Managed Programs (Note 7) and (ii) special general partner interest in the operating partnership of CPA:18 – Global, through which we participate in its cash flows (Note 3), in our Investment Management segment.
W. P. Carey 9/30/2020 10-Q – 9
Notes to Consolidated Financial Statements (Unaudited)
At September 30, 2020, the Managed Programs owned all or a portion of 51 net-leased properties (including certain properties in which we also have an ownership interest), totaling approximately 10.2 million square feet, substantially all of which were leased to 64 tenants, with an occupancy rate of approximately 98.9%. The Managed Programs also had interests in 72 operating properties (totaling approximately 5.9 million square feet in the aggregate) and 12 active build-to-suit projects at the same date.
Note 2. Basis of Presentation
Basis of Presentation
Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2019, which are included in the 2019 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2019 Annual Report.
During the nine months ended September 30, 2020, we had a net decrease of five entities considered to be consolidated VIEs, primarily related to disposition activity and certain lease amendments, partially offset by acquisition activity.
At September 30, 2020 and December 31, 2019, we considered 13 and 18 entities to be VIEs, respectively, of which we consolidated six and 11, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Land, buildings and improvements
|
$
|
473,234
|
|
|
$
|
493,714
|
|
|
Net investments in direct financing leases
|
15,332
|
|
|
15,584
|
|
|
In-place lease intangible assets and other
|
51,500
|
|
|
56,915
|
|
|
Above-market rent intangible assets
|
33,370
|
|
|
34,576
|
|
|
Accumulated depreciation and amortization
|
(134,117)
|
|
|
(151,017)
|
|
|
Assets held for sale, net
|
—
|
|
|
104,010
|
|
|
Total assets
|
452,015
|
|
|
596,168
|
|
|
|
|
|
|
|
Non-recourse mortgages, net
|
$
|
5,766
|
|
|
$
|
32,622
|
|
|
Total liabilities
|
51,564
|
|
|
98,671
|
|
W. P. Carey 9/30/2020 10-Q – 10
Notes to Consolidated Financial Statements (Unaudited)
At both September 30, 2020 and December 31, 2019, our seven unconsolidated VIEs included our interests in five unconsolidated real estate investments, which we account for under the equity method of accounting, and two unconsolidated entities, which we accounted for at fair value. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities. As of September 30, 2020, and December 31, 2019, the net carrying amount of our investments in these entities was $340.6 million and $298.3 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.
COVID-19
The global COVID-19 pandemic has created significant uncertainty and economic disruption, both in the near-term and likely longer-term. The extent to which this pandemic could affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including: duration, scope, government actions, and other social responses.
We are closely monitoring the impact of COVID-19 on all aspects of our business, including the safety and health of our employees, our portfolio, and tenant credit health (including our tenants’ ability to pay rent), as well as our liquidity, capital allocation, and balance sheet management. We continue to actively engage in discussions with our tenants regarding the impact of COVID-19 on their business operations, liquidity, prospects, and financial position.
For the three and nine months ended September 30, 2020, approximately $5.5 million and $14.0 million, respectively, of rent was not collected as a result of COVID-19, which reduced lease revenues in our consolidated statements of income for those periods. These amounts include $3.8 million and $7.9 million, respectively, of rent that has been contractually deferred to future periods. In addition, for the three and nine months ended September 30, 2020 as compared to the same periods in 2019, for our remaining hotel operating property, revenues decreased by $3.3 million and $8.1 million, respectively, and expenses decreased by $1.8 million and $4.3 million, respectively, due to the adverse effect of COVID-19 on the hotel’s operations.
Segment Allocation Changes
Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In addition, beginning with the second quarter of 2020, stock-based compensation expense and depreciation and amortization expense are fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles. These changes within the segments had no impact on our consolidated financial statements.
In addition, our investments in WLT, and income recognized from our investments in WLT, are included within our Real Estate segment, since we are not the advisor to that company. Previously, our investments in CWI 1 and CWI 2, and income recognized from our investments in CWI 1 and CWI 2, were included within our Investment Management segment (Note 3).
Revenue Recognition
There have been no significant changes in our policies for revenue from contracts under Accounting Standards Codification (“ASC”) 606 from what was disclosed in the 2019 Annual Report. ASC 606 does not apply to our lease revenues, which constitute a majority of our revenues, but primarily applies to revenues generated from our hotel operating properties and our Investment Management segment. Revenue from contracts for our Real Estate segment primarily represented operating property revenues of $0.6 million and $7.4 million for the three months ended September 30, 2020 and 2019, respectively and $5.3 million and $21.5 million for the nine months ended September 30, 2020 and 2019, respectively (Note 15). Revenue from contracts under ASC 606 from our Investment Management segment is discussed in Note 3.
Lease revenue (including straight-line lease revenue) is only recognized when deemed probable of collection. Collectibility is assessed for each tenant receivable using various criteria including credit ratings (Note 5), guarantees, past collection issues, and the current economic and business environment affecting the tenant. If collectibility of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant.
W. P. Carey 9/30/2020 10-Q – 11
Notes to Consolidated Financial Statements (Unaudited)
Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Cash and cash equivalents
|
$
|
152,215
|
|
|
$
|
196,028
|
|
|
Restricted cash (a)
|
70,554
|
|
|
55,490
|
|
|
Total cash and cash equivalents and restricted cash
|
$
|
222,769
|
|
|
$
|
251,518
|
|
__________
(a)Restricted cash is included within Other assets, net on our consolidated balance sheets.
Recent Accounting Pronouncements
Pronouncements Adopted as of September 30, 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 replaces the “incurred loss” model with an “expected loss” model, resulting in the earlier recognition of credit losses even if the risk of loss is remote. This standard applies to financial assets measured at amortized cost and certain other instruments, including loans receivable and net investments in direct financing leases. This standard does not apply to receivables arising from operating leases, which are within the scope of Topic 842.
We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective method, under which we recorded a cumulative-effect adjustment as a charge to retained earnings of $14.8 million, which is reflected within our consolidated statement of equity.
The allowance for credit losses, which is recorded as a reduction to Net investments in direct financing leases on our consolidated balance sheets, was measured on a pool basis by credit ratings (Note 5), using a probability of default method based on the lessees’ respective credit ratings, the expected value of the underlying collateral upon its repossession, and our historical loss experience related to other direct financing leases. Included in our model are factors that incorporate forward-looking information. Allowance for credit losses is included in our consolidated statements of income within Other gains and (losses).
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The adoption of this standard did not have a material impact on our consolidated financial statements.
Note 3. Agreements and Transactions with Related Parties
CWI 1 and CWI 2 Merger
Background and Closing
On October 22, 2019, CWI 1 and CWI 2 announced that they had entered into a definitive merger agreement under which the two companies intended to merge in an all-stock transaction, with CWI 2 as the surviving entity. The CWI 1 and CWI 2 Merger was approved by the stockholders of CWI 1 and CWI 2 on April 8, 2020 and closed on April 13, 2020. Subsequently, CWI 2 was renamed WLT, as described in Note 1.
W. P. Carey 9/30/2020 10-Q – 12
Notes to Consolidated Financial Statements (Unaudited)
In connection with the CWI 1 and CWI 2 Merger, we entered into an internalization agreement and a transition services agreement, which were filed by us as exhibits to a Form 8-K filed with the SEC on October 22, 2019. Immediately following the closing of the CWI 1 and CWI 2 Merger, (i) the advisory agreements with each of CWI 1 and CWI 2 and each of their respective operating partnerships terminated, (ii) the subadvisory agreements with the subadvisors for CWI 1 and CWI 2 were terminated, (iii) pursuant to the internalization agreement, two of our representatives were appointed to the board of directors of WLT (however both representatives resigned from the board of directors of WLT on April 29, 2020), and (iv) we provide certain transition services at cost to WLT for, what is currently expected to be, a period of approximately 12 months from closing, pursuant to a transition services agreement.
Consideration Received
In accordance with the merger agreement, at the effective time of the CWI 1 and CWI 2 Merger, each issued and outstanding share of CWI 1’s common stock (or fraction thereof), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of CWI 2 Class A common stock. As a result, we exchanged 6,074,046 shares of CWI 1 common stock for 5,531,025 shares of CWI 2 Class A common stock.
Pursuant to the internalization agreement, the operating partnerships of each of CWI 1 and CWI 2 redeemed the special general partner interests that we previously held, for which we received 1,300,000 shares of CWI 2 preferred stock with a liquidation preference of $50.00 per share and 2,840,549 shares in CWI 2 Class A common stock (which was a non-cash investing activity). In connection with this redemption, we recognized a non-cash net gain on sale of $33.0 million, which was included within Equity in earnings (losses) of equity method investments in the Managed Programs and real estate in the consolidated statements of income for the nine months ended September 30, 2020. This net gain on sale was recorded based on:
•a fair value of $46.3 million for the 1,300,000 shares of CWI 2 preferred stock that we received (Note 8);
•a fair value of $11.6 million for the 2,840,549 shares in CWI 2 common stock that we received (Note 7);
•a gain recognized on the redemption of the noncontrolling interest in the special general partner interests previously held by the respective subadvisors for CWI 1 and CWI 2 of $9.9 million (which is included within Net income attributable to noncontrolling interests in our consolidated statements of income and Redemption of noncontrolling interest in our consolidated statements of equity);
•an allocation of $34.3 million of goodwill within our Investment Management segment in accordance with ASC 350, Intangibles—goodwill and other, since the WLT management internalization resulted in a sale of a portion of our Investment Management business (the allocation of goodwill was based on the relative fair value of the portion of the Investment Management business sold) (Note 6); and
•the carrying value of our previously held equity investments in the operating partnerships of CWI 1 and CWI 2 (Note 7), which totaled $0.5 million on the date of the merger.
We account for our investment in shares of WLT (formerly CWI 2) preferred stock as available-for-sale debt securities, which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 3 because we primarily used a discounted cash flow valuation model that incorporates unobservable inputs to determine its fair value. The fair value of our investment in preferred shares of WLT approximated its carrying value, which was $46.3 million as of September 30, 2020 (Note 8). We will accrue and record dividend income on these preferred shares of 5% per annum, pursuant to the internalization agreement, only recognizing such income when deemed collectible. We did not record dividend income on our investment in preferred shares of WLT during the three and nine months ended September 30, 2020.
Prior to the closing of the CWI 1 and CWI 2 Merger, we owned 3,836,669 shares of CWI 2 Class A common stock. Following the closing of the CWI 1 and CWI 2 Merger, execution of the internalization agreement, and CWI 2 being renamed WLT, we own 12,208,243 shares of WLT common stock, which we account for as an equity method investment. We follow the hypothetical liquidation at book value (“HLBV”) model and recognize within equity income our proportionate share of WLT’s earnings based on our ownership of common stock of WLT, after giving effect to preferred dividends owed by WLT. We record our investment in shares of common stock of WLT on a one quarter lag. Our investment in shares of common stock of WLT, which is included in Equity investments in the Managed Programs and real estate in the consolidated financial statements (as an equity method investment in real estate), had a carrying value of $48.4 million as of September 30, 2020 (Note 7).
W. P. Carey 9/30/2020 10-Q – 13
Notes to Consolidated Financial Statements (Unaudited)
Advisory Agreements and Partnership Agreements with the Managed Programs
We currently have advisory agreements with CPA:18 – Global and CESH, pursuant to which we earn fees and are entitled to receive reimbursement for certain fund management expenses. Upon completion of the CWI 1 and CWI 2 Merger on April 13, 2020, as described above, our advisory agreements with CWI 1 and CWI 2 were terminated, and we no longer receive fees, reimbursements, or distributions of Available Cash from CWI 1 and CWI 2. We no longer raise capital for new or existing funds, but we currently expect to continue to manage CPA:18 – Global and CESH and earn various fees (as described below) through the end of their respective life cycles. We have partnership agreements with CPA:18 – Global and CESH, and under the partnership agreement with CPA:18 – Global, we are entitled to receive certain cash distributions from its operating partnership.
The following tables present a summary of revenue earned, reimbursable costs, and distributions of Available Cash received/accrued from the Managed Programs and WLT for the periods indicated, included in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Asset management revenue (a)
|
$
|
3,748
|
|
|
$
|
9,878
|
|
|
$
|
18,109
|
|
|
$
|
29,400
|
|
|
Reimbursable costs from affiliates (a)
|
1,276
|
|
|
4,786
|
|
|
7,717
|
|
|
12,475
|
|
|
Distributions of Available Cash (b)
|
1,168
|
|
|
5,480
|
|
|
5,113
|
|
|
14,930
|
|
|
Interest income on deferred acquisition fees and loans to affiliates (c)
|
—
|
|
|
636
|
|
|
360
|
|
|
1,727
|
|
|
Structuring and other advisory revenue (a)
|
—
|
|
|
587
|
|
|
494
|
|
|
3,163
|
|
|
|
$
|
6,192
|
|
|
$
|
21,367
|
|
|
$
|
31,793
|
|
|
$
|
61,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
CPA:18 – Global
|
$
|
4,865
|
|
|
$
|
5,939
|
|
|
$
|
16,327
|
|
|
$
|
19,758
|
|
|
CWI 1
|
—
|
|
|
8,772
|
|
|
5,662
|
|
|
22,413
|
|
|
CWI 2
|
—
|
|
|
5,073
|
|
|
4,668
|
|
|
15,723
|
|
|
CESH
|
983
|
|
|
1,583
|
|
|
3,663
|
|
|
3,801
|
|
|
WLT (reimbursed transition services)
|
344
|
|
|
—
|
|
|
1,473
|
|
|
—
|
|
|
|
$
|
6,192
|
|
|
$
|
21,367
|
|
|
$
|
31,793
|
|
|
$
|
61,695
|
|
__________
(a)Amounts represent revenues from contracts under ASC 606.
(b)Included within Equity in earnings (losses) of equity method investments in the Managed Programs and real estate in the consolidated statements of income.
(c)Included within Other gains and (losses) in the consolidated statements of income.
The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Deferred acquisition fees receivable, including accrued interest
|
1,746
|
|
|
4,450
|
|
|
Reimbursable costs
|
1,174
|
|
|
3,129
|
|
|
Asset management fees receivable
|
1,017
|
|
|
1,267
|
|
|
Accounts receivable
|
280
|
|
|
1,118
|
|
|
Current acquisition fees receivable
|
130
|
|
|
131
|
|
|
Short-term loans to affiliates, including accrued interest
|
—
|
|
|
47,721
|
|
|
|
$
|
4,347
|
|
|
$
|
57,816
|
|
W. P. Carey 9/30/2020 10-Q – 14
Notes to Consolidated Financial Statements (Unaudited)
Asset Management Revenue
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the remaining Managed Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Program
|
|
Rate
|
|
Payable
|
|
Description
|
|
CPA:18 – Global
|
|
0.5% – 1.5%
|
|
In shares of its Class A common stock and/or cash, at the option of CPA:18 – Global; payable 50% in cash and 50% in shares of its Class A common stock for 2019 through March 31, 2020; payable in shares of its Class A common stock effective as of April 1, 2020
|
|
Rate depends on the type of investment and is based on the average market or average equity value, as applicable
|
|
CESH
|
|
1.0%
|
|
In cash
|
|
Based on gross assets at fair value
|
For CWI 1 and CWI 2 (prior to the closing of the CWI 1 and CWI 2 Merger on April 13, 2020), we earned asset management fees of 0.5% and 0.55%, respectively, of the average market values of their respective investment portfolios, paid in shares of their common stock and Class A common stock, respectively. We were required to pay 20% and 25% of such fees to the subadvisors of CWI 1 and CWI 2, respectively.
Structuring and Other Advisory Revenue
Under the terms of the advisory agreements with the Managed Programs, we earn revenue for structuring and negotiating investments. For CPA:18 – Global and CESH, we may earn fees of 4.5% and 2.0%, respectively, of the total aggregate cost of the investments or commitments made. For CWI 1 and CWI 2 (prior to the closing of the CWI 1 and CWI 2 Merger on April 13, 2020), we were entitled to fees for structuring investments and loan refinancings. We were required to pay 20% and 25% of such fees to the subadvisors of CWI 1 and CWI 2, respectively.
Reimbursable Costs from Affiliates
The Managed Programs reimburse us in cash for certain personnel and overhead costs that we incur on their behalf. For CPA:18 – Global, such costs, excluding those related to our legal transactions group, our senior management, and our investments team, are charged to CPA:18 – Global based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and personnel costs are capped at 1.0% of CPA:18 – Global’s pro rata lease revenues for both 2020 and 2019; for the legal transactions group, costs are charged according to a fee schedule. For the CWI REITs, the reimbursements were based on actual expenses incurred, excluding those related to our senior management, and allocated between the CWI REITs based on the percentage of their total pro rata hotel revenues for the most recently completed quarter. Reimbursements from the CWI REITs ceased following the closing of the CWI 1 and CWI 2 Merger on April 13, 2020; after that date, we began recording reimbursements from WLT pursuant to a transition services agreement (described above) based on actual expenses incurred. For CESH, reimbursements are based on actual expenses incurred.
Distributions of Available Cash
We are entitled to receive distributions of up to 10% of the Available Cash (as defined in CPA:18 – Global’s partnership agreement) from the operating partnership of CPA:18 – Global, payable quarterly in arrears. After completion of the CWI 1 and CWI 2 Merger on April 13, 2020 (Note 3), we no longer receive distributions of Available Cash from CWI 1 and CWI 2. Prior to the closing of the CWI 1 and CWI 2 Merger, we were required to pay 20% and 25% of such distributions to the subadvisors of CWI 1 and CWI 2, respectively.
W. P. Carey 9/30/2020 10-Q – 15
Notes to Consolidated Financial Statements (Unaudited)
Back-End Fees and Interests in the Managed Programs
Under our advisory agreements with certain of the Managed Programs, we may also receive compensation in connection with providing liquidity events for their stockholders. For CPA:18 – Global, the timing and form of such a liquidity event is at the discretion of its board of directors. Therefore, there can be no assurance as to whether or when any of these back-end fees or interests will be realized. Such back-end fees or interests include or may include disposition fees, interests in disposition proceeds, and distributions related to ownership of shares or limited partnership units in the Managed Programs. Back-end fees and interests related to the CWI 1 and CWI 2 Merger are described above.
Other Transactions with Affiliates
Loans to Affiliates
From time to time, our board of directors (“the Board”) has approved the making of secured and unsecured loans or lines of credit from us to certain of the Managed Programs, at our sole discretion, generally for the purpose of facilitating acquisitions or for working capital purposes.
The principal outstanding balance on our loans to CESH was $46.3 million as of December 31, 2019, excluding accrued interest of $1.5 million. CESH repaid the principal outstanding balance in full during the nine months ended September 30, 2020 and the loan matured on October 1, 2020. In addition, the loan agreements with CWI 1 and CWI 2 were terminated upon completion of the CWI 1 and CWI 2 Merger on April 13, 2020. In July 2020, we provided CPA:18 – Global with a short-term unsecured revolving line of credit (with a maximum authorized loan amount of $25.0 million), which had not been drawn upon as of September 30, 2020.
CPA:17 Merger
On October 31, 2018, Corporate Property Associates 17 – Global Incorporated (“CPA:17 – Global”), a former affiliate, merged with and into one of our wholly owned subsidiaries (the “CPA:17 Merger”), which we accounted for as a business combination under the acquisition method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at October 31, 2018. We identified certain measurement period adjustments during the third quarter of 2019 that impacted the provisional accounting. As a result, during the three and nine months ended September 30, 2019, we recorded a loss on change in control of interests of $8.4 million on the purchase of the remaining interest in a real estate investment from CPA:17 – Global in the CPA:17 Merger.
Other
At September 30, 2020, we owned interests in nine jointly owned investments in real estate (including our investment in shares of common stock of WLT, as described above), with the remaining interests held by affiliates or third parties. We account for eight such investments under the equity method of accounting (Note 7) and consolidate the remaining investment. In addition, we owned stock of CPA:18 – Global and limited partnership units of CESH at that date. We accounted for these investments under the equity method of accounting or at fair value (Note 7).
Note 4. Land, Buildings and Improvements and Assets Held for Sale
Land, Buildings and Improvements — Operating Leases
Land and buildings leased to others, which are subject to operating leases, and real estate under construction, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Land
|
$
|
1,928,108
|
|
|
$
|
1,875,065
|
|
|
Buildings and improvements
|
8,454,140
|
|
|
7,828,439
|
|
|
Real estate under construction
|
94,817
|
|
|
69,604
|
|
|
Less: Accumulated depreciation
|
(1,137,357)
|
|
|
(950,452)
|
|
|
|
$
|
9,339,708
|
|
|
$
|
8,822,656
|
|
W. P. Carey 9/30/2020 10-Q – 16
Notes to Consolidated Financial Statements (Unaudited)
During the nine months ended September 30, 2020, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increased by 4.2% to $1.1708 from $1.1234. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases increased by $96.4 million from December 31, 2019 to September 30, 2020.
In connection with changes in lease classifications due to modifications of the underlying leases, we reclassified 55 properties with an aggregate carrying value of $166.0 million from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases during the nine months ended September 30, 2020 (Note 5).
Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $64.9 million and $58.3 million for the three months ended September 30, 2020 and 2019, respectively, and $192.9 million and $169.9 million for the nine months ended September 30, 2020 and 2019, respectively.
Acquisitions of Real Estate
During the nine months ended September 30, 2020, we entered into the following investments, which were deemed to be real estate asset acquisitions, at a total cost of $354.6 million, including land of $39.1 million, buildings of $253.4 million (including capitalized acquisition-related costs of $8.9 million), and net lease intangibles of $62.1 million (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Location(s)
|
|
Number of Properties
|
|
Date of Acquisition
|
|
Property Type
|
|
Total Capitalized Costs
|
|
Newark, United Kingdom (a)
|
|
1
|
|
1/6/2020
|
|
Warehouse
|
|
$
|
111,546
|
|
|
Aurora, Oregon (b)
|
|
1
|
|
1/24/2020
|
|
Industrial
|
|
28,755
|
|
|
Vojens, Denmark (a) (c)
|
|
1
|
|
1/31/2020
|
|
Warehouse
|
|
10,611
|
|
|
Kitzingen, Germany (a)
|
|
1
|
|
3/9/2020
|
|
Office
|
|
53,666
|
|
|
Knoxville, Tennessee
|
|
1
|
|
6/25/2020
|
|
Warehouse
|
|
66,045
|
|
|
Bluffton and Plymouth, Indiana
|
|
2
|
|
9/23/2020
|
|
Industrial
|
|
44,466
|
|
|
Huntley, Illinois
|
|
1
|
|
9/30/2020
|
|
Industrial
|
|
39,523
|
|
|
|
|
|
|
|
|
|
|
$
|
354,612
|
|
__________
(a)Amount reflects the applicable exchange rate on the date of acquisition.
(b)Amount includes approximately $5.0 million in contingent consideration that will be released to the tenant/seller upon the tenant securing an easement on the property.
(c)We also recorded an estimated deferred tax liability of $0.5 million, with a corresponding increase to the asset value, since we assumed the tax basis of the acquired property.
The acquired net lease intangibles are comprised of (i) in-place lease intangible assets totaling $53.9 million, which have a weighted-average expected life of 19.4 years and (ii) above-market rent intangible assets totaling $8.2 million, which have a weighted average expected life of 18.7 years.
Real Estate Under Construction
During the nine months ended September 30, 2020, we capitalized real estate under construction totaling $198.1 million. The number of construction projects in progress with balances included in real estate under construction was four and three as of September 30, 2020 and December 31, 2019, respectively. Aggregate unfunded commitments totaled approximately $80.8 million and $227.8 million as of September 30, 2020 and December 31, 2019, respectively.
W. P. Carey 9/30/2020 10-Q – 17
Notes to Consolidated Financial Statements (Unaudited)
During the nine months ended September 30, 2020, we completed the following construction projects, at an aggregate cost of $168.1 million (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Location(s)
|
|
Primary Transaction Type
|
|
Number of Properties
|
|
Date of Completion
|
|
Property Type
|
|
Total Capitalized Costs (a)
|
|
Westborough, Massachusetts
|
|
Redevelopment
|
|
1
|
|
1/15/2020
|
|
Laboratory
|
|
$
|
53,060
|
|
|
San Antonio, Texas (b)
|
|
Build-to-Suit
|
|
1
|
|
6/25/2020
|
|
Industrial
|
|
78,726
|
|
|
Marktheidenfeld, Germany (c)
|
|
Expansion
|
|
1
|
|
6/30/2020
|
|
Warehouse
|
|
8,254
|
|
|
Azambuja, Portugal (c)
|
|
Expansion
|
|
1
|
|
9/21/2020
|
|
Warehouse
|
|
28,067
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
168,107
|
|
__________
(a)Amount includes capitalized interest.
(b)Amount includes land of $4.0 million related to a purchase option that we expect to exercise.
(c)Amount reflects the applicable exchange rate on the date of transaction.
Dispositions of Properties
During the nine months ended September 30, 2020, we sold seven properties, which were classified as Land, buildings and improvements subject to operating leases. As a result, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $40.0 million from December 31, 2019 to September 30, 2020.
Leases
Operating Lease Income
Lease income related to operating leases recognized and included in the consolidated statements of income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Lease income — fixed
|
$
|
249,356
|
|
|
$
|
229,155
|
|
|
$
|
725,321
|
|
|
$
|
666,330
|
|
|
Lease income — variable (a)
|
26,871
|
|
|
24,304
|
|
|
74,424
|
|
|
67,917
|
|
|
Total operating lease income (b)
|
$
|
276,227
|
|
|
$
|
253,459
|
|
|
$
|
799,745
|
|
|
$
|
734,247
|
|
__________
(a)Includes (i) rent increases based on changes in the U.S. Consumer Price Index (“CPI”) and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
(b)Excludes $17.6 million and $25.4 million for the three months ended September 30, 2020 and 2019, respectively, and $56.5 million and $77.3 million for nine months ended September 30, 2020 and 2019, respectively, of interest income from direct financing leases that is included in Lease revenues in the consolidated statements of income.
In the second quarter of 2020, our lease of new office space in New York commenced, with a lease maturity date of March 2036. As a result, we capitalized an office lease right-of-use asset and corresponding operating lease liability, which had carrying values of $59.9 million and $61.4 million, respectively, as of September 30, 2020, and are included within Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, on our consolidated balance sheets.
W. P. Carey 9/30/2020 10-Q – 18
Notes to Consolidated Financial Statements (Unaudited)
Land, Buildings and Improvements — Operating Properties
At both September 30, 2020, and December 31, 2019, Land, buildings and improvements attributable to operating properties consisted of our investments in ten consolidated self-storage properties and one consolidated hotel. As of December 31, 2019, we reclassified another consolidated hotel to Assets held for sale, net and sold it in January 2020, as described below. Below is a summary of our Land, buildings and improvements attributable to operating properties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Land
|
$
|
10,452
|
|
|
$
|
10,452
|
|
|
Buildings and improvements
|
73,017
|
|
|
72,631
|
|
|
Less: Accumulated depreciation
|
(13,315)
|
|
|
(11,241)
|
|
|
|
$
|
70,154
|
|
|
$
|
71,842
|
|
Depreciation expense on our buildings and improvements attributable to operating properties was $0.7 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $2.1 million and $6.2 million for the nine months ended September 30, 2020 and 2019, respectively.
Assets Held for Sale, Net
Below is a summary of our properties held for sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Land, buildings and improvements
|
$
|
12,210
|
|
|
$
|
105,573
|
|
|
In-place lease intangible assets and other, net
|
1,233
|
|
|
—
|
|
|
Accumulated depreciation and amortization
|
(2,817)
|
|
|
(1,563)
|
|
|
Assets held for sale, net
|
$
|
10,626
|
|
|
$
|
104,010
|
|
At September 30, 2020, we had two properties classified as Assets held for sale, net, with an aggregate carrying value of $10.6 million. One of these properties was sold in October 2020 (Note 16). At December 31, 2019, we had one hotel operating property classified as Assets held for sale, net, with an aggregate carrying value of $104.0 million. The property was sold in January 2020 (Note 14).
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases (net of allowance for credit losses), loans receivable (net of allowance for credit losses), and deferred acquisition fees. Operating leases are not included in finance receivables.
Net Investments in Direct Financing Leases
Net investments in direct financing leases is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Lease payments receivable
|
$
|
542,005
|
|
|
$
|
686,149
|
|
|
Unguaranteed residual value
|
677,924
|
|
|
828,206
|
|
|
|
1,219,929
|
|
|
1,514,355
|
|
|
Less: unearned income
|
(490,915)
|
|
|
(617,806)
|
|
|
Less: allowance for credit losses (a)
|
(13,473)
|
|
|
—
|
|
|
|
$
|
715,541
|
|
|
$
|
896,549
|
|
__________
W. P. Carey 9/30/2020 10-Q – 19
Notes to Consolidated Financial Statements (Unaudited)
(a)In accordance with ASU 2016-13 (Note 2), we applied changes in loss reserves through a cumulative-effect adjustment to retained earnings totaling $14.8 million. During the nine months ended September 30, 2020, we recorded a net allowance for credit losses of $6.1 million on our Net investments in direct financing leases due to changes in expected economic conditions, which was included within Other gains and (losses) in our consolidated statements of income. In addition, during the nine months ended September 30, 2020, we reduced the allowance for credit losses balance by $7.4 million, in connection with the reclassification of certain properties from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases, as described below.
Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $17.6 million and $25.4 million for the three months ended September 30, 2020 and 2019, respectively, and $56.5 million and $77.3 million for the nine months ended September 30, 2020 and 2019, respectively.
During the nine months ended September 30, 2020, we reclassified 55 properties with an aggregate carrying value of $166.0 million from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases in connection with changes in lease classifications due to modifications of the underlying leases (Note 4). During the nine months ended September 30, 2020, we sold one property accounted for as a direct financing lease that had a net carrying value of $0.3 million. During the nine months ended September 30, 2020, the U.S. dollar weakened against the euro, resulting in a $9.3 million increase in the carrying value of Net investments in direct financing leases from December 31, 2019 to September 30, 2020.
Loans Receivable
At December 31, 2019, we had two loans receivable related to a domestic investment with an aggregate carrying value of $47.7 million. In March 2020, one of these loans was partially repaid to us for $11.0 million. In addition, during the three and nine months ended September 30, 2020, we recorded an allowance for credit losses of $4.2 million on one of these loans due to changes in expected economic conditions, which was included within Other gains and (losses) in our consolidated statements of income. Our loans receivable are included in Other assets, net in the consolidated financial statements and had a carrying value of $32.5 million (net of allowance for credit losses of $4.2 million) at September 30, 2020. Earnings from our loans receivable are included in Lease termination income and other in the consolidated financial statements, and totaled $1.5 million for the three months ended September 30, 2019, and $1.0 million and $4.9 million for the nine months ended September 30, 2020 and 2019, respectively. We did not recognize income from our loans receivable during the three months ended September 30, 2020, since such income was deemed uncollectible as a result of COVID-19 (Note 2).
Credit Quality of Finance Receivables
We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. At both September 30, 2020 and December 31, 2019, no material balances of our finance receivables were past due. Other than the lease modifications noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the nine months ended September 30, 2020.
We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as CPA:18 – Global is expected to have the available cash to make such payments (Note 3).
A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable and allowance for credit losses, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Tenants / Obligors at
|
|
Carrying Value at
|
|
Internal Credit Quality Indicator
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2020
|
|
December 31, 2019
|
|
1 – 3
|
|
18
|
|
28
|
|
$
|
574,399
|
|
|
$
|
798,108
|
|
|
4
|
|
10
|
|
8
|
|
154,615
|
|
|
146,178
|
|
|
5
|
|
2
|
|
—
|
|
36,737
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
765,751
|
|
|
$
|
944,286
|
|
W. P. Carey 9/30/2020 10-Q – 20
Notes to Consolidated Financial Statements (Unaudited)
Note 6. Goodwill and Other Intangibles
We have recorded net lease, internal-use software development, and trade name intangibles that are being amortized over periods ranging from three years to 48 years. In-place lease intangibles, at cost are included in In-place lease intangible assets and other in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Internal-use software development and trade name intangibles are included in Other assets, net in the consolidated financial statements. Below-market rent and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.
The following table presents a reconciliation of our goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
Investment Management
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
871,081
|
|
|
$
|
63,607
|
|
|
$
|
934,688
|
|
|
Foreign currency translation adjustments
|
3,660
|
|
|
—
|
|
|
3,660
|
|
Allocation of goodwill based on portion of Investment Management business sold (Note 3)
|
—
|
|
|
(34,273)
|
|
|
(34,273)
|
|
|
Balance at September 30, 2020
|
$
|
874,741
|
|
|
$
|
29,334
|
|
|
$
|
904,075
|
|
Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use software development costs
|
$
|
19,032
|
|
|
$
|
(14,955)
|
|
|
$
|
4,077
|
|
|
$
|
19,582
|
|
|
$
|
(13,491)
|
|
|
$
|
6,091
|
|
|
Trade name
|
3,975
|
|
|
(2,587)
|
|
|
1,388
|
|
|
3,975
|
|
|
(1,991)
|
|
|
1,984
|
|
|
|
23,007
|
|
|
(17,542)
|
|
|
5,465
|
|
|
23,557
|
|
|
(15,482)
|
|
|
8,075
|
|
|
Lease Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease
|
2,127,810
|
|
|
(796,959)
|
|
|
1,330,851
|
|
|
2,072,642
|
|
|
(676,008)
|
|
|
1,396,634
|
|
|
Above-market rent
|
900,503
|
|
|
(435,340)
|
|
|
465,163
|
|
|
909,139
|
|
|
(398,294)
|
|
|
510,845
|
|
|
|
3,028,313
|
|
|
(1,232,299)
|
|
|
1,796,014
|
|
|
2,981,781
|
|
|
(1,074,302)
|
|
|
1,907,479
|
|
|
Indefinite-Lived Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
904,075
|
|
|
—
|
|
|
904,075
|
|
|
934,688
|
|
|
—
|
|
|
934,688
|
|
|
Total intangible assets
|
$
|
3,955,395
|
|
|
$
|
(1,249,841)
|
|
|
$
|
2,705,554
|
|
|
$
|
3,940,026
|
|
|
$
|
(1,089,784)
|
|
|
$
|
2,850,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-Lived Intangible Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market rent
|
$
|
(265,251)
|
|
|
$
|
89,516
|
|
|
$
|
(175,735)
|
|
|
$
|
(268,515)
|
|
|
$
|
74,484
|
|
|
$
|
(194,031)
|
|
|
Indefinite-Lived Intangible Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market purchase option
|
(16,710)
|
|
|
—
|
|
|
(16,710)
|
|
|
(16,711)
|
|
|
—
|
|
|
(16,711)
|
|
|
Total intangible liabilities
|
$
|
(281,961)
|
|
|
$
|
89,516
|
|
|
$
|
(192,445)
|
|
|
$
|
(285,226)
|
|
|
$
|
74,484
|
|
|
$
|
(210,742)
|
|
During the nine months ended September 30, 2020, the U.S. dollar weakened against the euro, resulting in an increase of $20.0 million in the carrying value of our net intangible assets from December 31, 2019 to September 30, 2020. Net amortization of intangibles, including the effect of foreign currency translation, was $54.5 million and $64.5 million for the three months ended September 30, 2020 and 2019, respectively, and $171.8 million and $204.1 million for the nine months ended September 30, 2020 and 2019, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues and amortization of internal-use software development, trade name, and in-place lease intangibles is included in Depreciation and amortization.
W. P. Carey 9/30/2020 10-Q – 21
Notes to Consolidated Financial Statements (Unaudited)
Note 7. Equity Investments in the Managed Programs and Real Estate
We own interests in (i) the Managed Programs, (ii) certain unconsolidated real estate investments with CPA:18 – Global and third parties, and (iii) WLT. We account for our interests in these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences) or at fair value by electing the equity method fair value option available under GAAP.
We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
The following table presents Equity in earnings (losses) of equity method investments in the Managed Programs and real estate, which represents our proportionate share of the income or losses of these investments, as well as certain adjustments related to other-than-temporary impairment charges and amortization of basis differences related to purchase accounting adjustments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Distributions of Available Cash (Note 3)
|
$
|
1,168
|
|
|
$
|
5,480
|
|
|
$
|
5,113
|
|
|
$
|
14,930
|
|
|
Amortization of basis differences on equity method investments in the Managed Programs
|
(158)
|
|
|
(385)
|
|
|
(726)
|
|
|
(1,070)
|
|
|
Proportionate share of equity in earnings (losses) of equity investments in the Managed Programs
|
79
|
|
|
96
|
|
|
(2,778)
|
|
|
621
|
|
Other-than-temporary impairment charges on our equity method investments in CWI 1 and CWI 2 (Note 8)
|
—
|
|
|
—
|
|
|
(47,112)
|
|
|
—
|
|
Gain on redemption of special general partner interests in CWI 1 and CWI 2, net (Note 3)
|
—
|
|
|
—
|
|
|
33,009
|
|
|
—
|
|
|
Total equity in earnings (losses) of equity method investments in the Managed Programs
|
1,089
|
|
|
5,191
|
|
|
(12,494)
|
|
|
14,481
|
|
|
Equity in earnings of equity method investments in real estate
|
630
|
|
|
896
|
|
|
2,882
|
|
|
2,232
|
|
|
Amortization of basis differences on equity method investments in real estate
|
1
|
|
|
(318)
|
|
|
(475)
|
|
|
(1,502)
|
|
|
Total equity in earnings of equity method investments in real estate
|
631
|
|
|
578
|
|
|
2,407
|
|
|
730
|
|
|
Equity in earnings (losses) of equity method investments in the Managed Programs and real estate
|
$
|
1,720
|
|
|
$
|
5,769
|
|
|
$
|
(10,087)
|
|
|
$
|
15,211
|
|
W. P. Carey 9/30/2020 10-Q – 22
Notes to Consolidated Financial Statements (Unaudited)
Managed Programs
We own interests in the Managed Programs and account for these interests under the equity method because, as their advisor, we do not exert control over, but we do have the ability to exercise significant influence over, the Managed Programs. Operating results of the Managed Programs are included in the Investment Management segment.
The following table sets forth certain information about our investments in the Managed Programs (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Outstanding Interests Owned at
|
|
Carrying Amount of Investment at
|
|
Fund
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2020
|
|
December 31, 2019
|
|
CPA:18 – Global (a)
|
|
4.337
|
%
|
|
3.851
|
%
|
|
$
|
47,173
|
|
|
$
|
42,644
|
|
|
CPA:18 – Global operating partnership
|
|
0.034
|
%
|
|
0.034
|
%
|
|
209
|
|
|
209
|
|
|
CWI 1 (b) (c)
|
|
—
|
%
|
|
3.943
|
%
|
|
—
|
|
|
49,032
|
|
|
CWI 1 operating partnership (b)
|
|
—
|
%
|
|
0.015
|
%
|
|
—
|
|
|
186
|
|
|
CWI 2 (b) (c)
|
|
—
|
%
|
|
3.755
|
%
|
|
—
|
|
|
33,669
|
|
|
CWI 2 operating partnership (b)
|
|
—
|
%
|
|
0.015
|
%
|
|
—
|
|
|
300
|
|
|
CESH (d)
|
|
2.430
|
%
|
|
2.430
|
%
|
|
4,200
|
|
|
3,527
|
|
|
|
|
|
|
|
|
$
|
51,582
|
|
|
$
|
129,567
|
|
__________
(a)During the nine months ended September 30, 2020, we received asset management revenue from CPA:18 – Global primarily in shares of its common stock, which increased our ownership percentage in CPA:18 – Global (Note 3).
(b)The CWI 1 and CWI 2 Merger closed on April 13, 2020, as described in Note 3.
(c)We recognized other-than-temporary impairment charges on these investments during the nine months ended September 30, 2020, as described in Note 8.
(d)Investment is accounted for at fair value.
CPA:18 – Global — The carrying value of our investment in CPA:18 – Global at September 30, 2020 includes asset management fees receivable, for which 125,869 shares of CPA:18 – Global Class A common stock were issued during the fourth quarter of 2020. We received distributions from this investment during the nine months ended September 30, 2020 and 2019 of $2.2 million and $2.5 million, respectively. We received distributions from our investment in the CPA:18 – Global operating partnership during the nine months ended September 30, 2020 and 2019 of $5.1 million and $5.6 million, respectively (Note 3).
CWI 1 — We received distributions from this investment during the nine months ended September 30, 2020 (through April 13, 2020, the date of the CWI 1 and CWI 2 Merger (Note 3)) and 2019 of $0.8 million and $2.0 million, respectively. We received a distribution from our investment in the CWI 1 operating partnership during the nine months ended September 30, 2019 of $4.9 million (Note 3). We did not receive such a distribution during 2020 (through April 13, 2020), as a result of the adverse effect of COVID-19 on the operations of CWI 1.
CWI 2 — We received distributions from this investment during the nine months ended September 30, 2020 (through April 13, 2020, the date of the CWI 1 and CWI 2 Merger (Note 3)) and 2019 of $0.5 million and $1.2 million, respectively. We received a distribution from our investment in the CWI 2 operating partnership during the nine months ended September 30, 2019 of $4.5 million (Note 3). We did not receive such a distribution during 2020 (through April 13, 2020), as a result of the adverse effect of COVID-19 on the operations of CWI 2.
CESH — We have elected to account for our investment in CESH at fair value by selecting the equity method fair value option available under GAAP. We record our investment in CESH on a one quarter lag; therefore, the balance of our equity method investment in CESH recorded as of September 30, 2020 is based on the estimated fair value of our investment as of June 30, 2020. We did not receive distributions from this investment during the nine months ended September 30, 2020 or 2019.
At September 30, 2020 and December 31, 2019, the aggregate unamortized basis differences on our equity investments in the Managed Programs were $17.7 million and $47.0 million, respectively. This decrease was primarily due to the other-than-temporary impairment charges that we recognized on our equity investments in CWI 1 and CWI 2 during the nine months ended September 30, 2020, as described in Note 8.
W. P. Carey 9/30/2020 10-Q – 23
Notes to Consolidated Financial Statements (Unaudited)
Interests in Other Unconsolidated Real Estate Investments and WLT
We own equity interests in properties that are generally leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. The underlying investments are jointly owned with affiliates or third parties. In addition, we own shares of WLT common stock, as described in Note 3. We account for these investments under the equity method of accounting. Operating results of our unconsolidated real estate investments are included in the Real Estate segment.
The following table sets forth our ownership interests in our equity investments in real estate, excluding the Managed Programs, and their respective carrying values (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
|
|
Lessee/Fund
|
|
Co-owner
|
|
Ownership Interest
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Johnson Self Storage
|
|
Third Party
|
|
90%
|
|
$
|
69,404
|
|
|
$
|
70,690
|
|
|
WLT (a)
|
|
WLT
|
|
5%
|
|
48,362
|
|
|
—
|
|
|
Kesko Senukai (b)
|
|
Third Party
|
|
70%
|
|
44,091
|
|
|
46,475
|
|
|
Bank Pekao (b)
|
|
CPA:18 – Global
|
|
50%
|
|
26,173
|
|
|
26,388
|
|
|
BPS Nevada, LLC (c)
|
|
Third Party
|
|
15%
|
|
23,535
|
|
|
22,900
|
|
|
State Farm Mutual Automobile Insurance Co.
|
|
CPA:18 – Global
|
|
50%
|
|
15,903
|
|
|
17,232
|
|
|
Apply Sørco AS (d)
|
|
CPA:18 – Global
|
|
49%
|
|
6,536
|
|
|
8,040
|
|
|
Fortenova Grupa d.d. (b)
|
|
CPA:18 – Global
|
|
20%
|
|
2,858
|
|
|
2,712
|
|
|
|
|
|
|
|
|
$
|
236,862
|
|
|
$
|
194,437
|
|
__________
(a)Following the closing of the CWI 1 and CWI 2 Merger, we own 12,208,243 shares of common stock of WLT, which we account for as an equity method investment in real estate. The initial fair value of this investment was based on third-party market data, including implied asset values and market capitalizations for publicly traded lodging REITs. We follow the HLBV model for this investment and recognize within equity earnings our proportionate share of WLT’s earnings based on our ownership of common shares of WLT, after giving effect to preferred dividends owed by WLT (our investment in preferred shares of WLT is included within Other assets, net on our consolidated balance sheets as available-for-sale debt securities). We record any earnings from our investment in shares of common stock of WLT on a one quarter lag (Note 3).
(b)The carrying value of this investment is affected by fluctuations in the exchange rate of the euro.
(c)This investment is reported using the HLBV model, which may be different than pro rata ownership percentages, primarily due to the capital structure of the partnership agreement.
(d)The carrying value of this investment is affected by fluctuations in the exchange rate of the Norwegian krone.
We received aggregate distributions of $11.2 million and $14.6 million from our other unconsolidated real estate investments for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, the aggregate unamortized basis differences on our unconsolidated real estate investments were $24.7 million and $25.2 million, respectively.
Note 8. 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, interest rate swaps, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.
W. P. Carey 9/30/2020 10-Q – 24
Notes to Consolidated Financial Statements (Unaudited)
Items Measured at Fair Value on a Recurring Basis
The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs.
Derivative Assets and Liabilities — Our derivative assets and liabilities, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are comprised of foreign currency collars, interest rate swaps, interest rate caps, and stock warrants (Note 9).
The valuation of our derivative instruments (excluding stock warrants) is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These 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.
The stock warrants were measured at fair value using valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.
Equity Investment in CESH — We have elected to account for our investment in CESH, which is included in Equity investments in the Managed Programs and real estate in the consolidated financial statements, at fair value by selecting the equity method fair value option available under GAAP (Note 7). We classified this investment as Level 3 because we primarily used valuation models that incorporate unobservable inputs to determine its fair value.
Investment in Shares of a Cold Storage Operator — We have elected to apply the measurement alternative under ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10) to account for our investment in shares of a cold storage operator, which is included in Other assets, net in the consolidated financial statements. Under this alternative, the carrying value is adjusted for any impairments or changes in fair value resulting from observable transactions for similar or identical investments in the issuer. We classified this investment as Level 3 because it is not traded in an active market. During the three and nine months ended September 30, 2020, we recognized non-cash unrealized gains on our investment in shares of a cold storage operator totaling $48.8 million due to additional outside investments at a higher price per share, which was recorded within Other gains and (losses) in the consolidated financial statements. See Note 13 for further discussion of the impact of this cold storage operator’s conversion to a REIT during the first quarter of 2020. The fair value of this investment approximated its carrying value, which was $195.0 million and $146.2 million at September 30, 2020 and December 31, 2019, respectively. In October 2020, we purchased additional shares of this cold storage operator for $95.5 million (Note 16).
Investment in Shares of GCIF — We account for our investment in shares of Guggenheim Credit Income Fund (“GCIF”), which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 2 because we used a quoted price from an inactive market to determine its fair value. During the nine months ended September 30, 2020, we redeemed a portion of our investment in shares of GCIF for approximately $3.7 million and recognized a net loss of $0.4 million, which was included within Other gains and (losses) in the consolidated statements of income. Distributions of earnings from GCIF and unrealized gains or losses recognized on GCIF are recorded within Other gains and (losses) in the consolidated financial statements. During the nine months ended September 30, 2020, we recognized unrealized losses on our investment in shares of GCIF totaling $0.3 million, due to a decrease in the net asset value of the investment. The fair value of our investment in shares of GCIF approximated its carrying value, which was $7.7 million and $12.2 million at September 30, 2020 and December 31, 2019, respectively.
Investment in Preferred Shares of WLT — We account for our investment in preferred shares of WLT (Note 3), which is included in Other assets, net in the consolidated financial statements, as available-for-sale debt securities at fair value. The fair value was primarily determined by a discounted cash flow approach based on a weighted-average probability analysis of certain redemption options. We classified this investment as Level 3 because the discounted cash flow valuation model incorporates unobservable inputs to determine its fair value, including a cash flow discount rate of 15%. The fair value of our investment in preferred shares of WLT approximated its carrying value, which was $46.3 million as of September 30, 2020.
W. P. Carey 9/30/2020 10-Q – 25
Notes to Consolidated Financial Statements (Unaudited)
We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the nine months ended September 30, 2020 or 2019. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our consolidated financial statements.
Our other material financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Level
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Senior Unsecured Notes, net (a) (b) (c)
|
2
|
|
$
|
4,513,243
|
|
|
$
|
4,856,950
|
|
|
$
|
4,390,189
|
|
|
$
|
4,682,432
|
|
|
Non-recourse mortgages, net (a) (b) (d)
|
3
|
|
1,234,197
|
|
|
1,240,191
|
|
|
1,462,487
|
|
|
1,487,892
|
|
__________
(a)The carrying value of Senior Unsecured Notes, net (Note 10) includes unamortized deferred financing costs of $20.3 million and $22.8 million at September 30, 2020 and December 31, 2019, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $0.4 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively.
(b)The carrying value of Senior Unsecured Notes, net includes unamortized discount of $18.5 million and $20.5 million at September 30, 2020 and December 31, 2019, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $4.8 million and $6.2 million at September 30, 2020 and December 31, 2019, respectively.
(c)We determined the estimated fair value of the Senior Unsecured Notes using observed market prices in an open market with limited trading volume.
(d)We determined the estimated fair value of our non-recourse mortgage loans using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates consider interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
We estimated that our other financial assets and liabilities, including amounts outstanding under our Senior Unsecured Credit Facility (Note 10) and our loans receivable, but excluding net investments in direct financing leases, had fair values that approximated their carrying values at both September 30, 2020 and December 31, 2019.
Items Measured at Fair Value on a Non-Recurring Basis (Including 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. There have been no significant changes in our impairment policies from what was disclosed in the 2019 Annual Report.
The following tables present information about assets for which we recorded an impairment charge and that were measured at fair value on a non-recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Three Months Ended September 30, 2019
|
|
|
Fair Value
Measurements
|
|
Total Impairment
Charges
|
|
Fair Value
Measurements
|
|
Total Impairment
Charges
|
|
Impairment Charges
|
|
|
|
|
|
|
|
|
Net investment in direct financing leases
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,418
|
|
|
$
|
25,781
|
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
25,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
Fair Value
Measurements
|
|
Total Impairment
Charges
|
|
Fair Value
Measurements
|
|
Total Impairment
Charges
|
|
Impairment Charges
|
|
|
|
|
|
|
|
|
Equity investments in the Managed Programs
|
$
|
37,396
|
|
|
$
|
47,112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Land, buildings and improvements and intangibles
|
12,148
|
|
|
19,420
|
|
|
—
|
|
|
—
|
|
|
Net investment in direct financing leases
|
—
|
|
|
—
|
|
|
24,418
|
|
|
25,781
|
|
|
|
|
|
$
|
66,532
|
|
|
|
|
$
|
25,781
|
|
W. P. Carey 9/30/2020 10-Q – 26
Notes to Consolidated Financial Statements (Unaudited)
Impairment charges, and their related triggering events and fair value measurements, recognized during the nine months ended September 30, 2020 and the three and nine months ended September 30, 2019 were as follows (we did not recognize any impairment charges during the three months ended September 30, 2020):
Equity Investments in the Managed Programs
During the nine months ended September 30, 2020, we recognized other-than-temporary impairment charges of $27.8 million and $19.3 million on our equity investments in CWI 1 and CWI 2, respectively, to reduce the carrying values of our investments to their estimated fair values, due to the ongoing COVID-19 pandemic, which had an adverse effect on the operations of CWI 1 and CWI 2. The fair value measurements were estimated based on implied asset value changes and changes in market capitalizations for publicly traded lodging REITs, all of which was obtained from third-party market data. These other-than-temporary impairment charges are reflected within Equity in earnings (losses) of equity method investments in the Managed Programs and real estate in our consolidated statements of income.
Land, Buildings and Improvements and Intangibles
During the nine months ended September 30, 2020, we recognized impairment charges totaling $16.0 million on two properties leased to the same tenant in order to reduce the carrying values of the properties to their estimated fair values, due to potential property vacancies. The fair value measurements for the properties were determined by a direct capitalization rate analysis.
In addition, we recognized an impairment charge of $3.4 million on a property in order to reduce the carrying value of the property to its estimated fair value. The fair value measurement for this property approximated its estimated selling price; it was sold in September 2020.
Net Investments in Direct Financing Leases
During the three and nine months ended September 30, 2019, we recognized impairment charges totaling $25.8 million on a portfolio of four properties accounted for as Net investments in direct financing leases, based on the cash flows expected to be derived from the underlying assets (discounted at the rate implicit in the lease), in accordance with ASC 310, Receivables.
Note 9. 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 four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our Senior Unsecured Credit Facility and Senior Unsecured Notes (Note 10). Credit risk is the risk of default on our operations and our 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 or limited partnership units we hold in the Managed Programs due to changes in interest rates or other market factors. We own investments in North America, Europe, and Japan and are subject to risks associated with fluctuating foreign currency exchange rates.
W. P. Carey 9/30/2020 10-Q – 27
Notes to Consolidated Financial Statements (Unaudited)
Derivative Financial Instruments
There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2019 Annual Report. At both September 30, 2020 and December 31, 2019, no cash collateral had been posted nor received for any of our derivative positions.
The following table sets forth certain information regarding our derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
Derivative Assets Fair Value at
|
|
Derivative Liabilities Fair Value at
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Foreign currency collars
|
|
Other assets, net
|
|
$
|
11,415
|
|
|
$
|
14,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate caps
|
|
Other assets, net
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Foreign currency forward contracts
|
|
Other assets, net
|
|
—
|
|
|
9,689
|
|
|
—
|
|
|
—
|
|
|
Interest rate swaps
|
|
Accounts payable, accrued expenses and other liabilities
|
|
—
|
|
|
—
|
|
|
(6,356)
|
|
|
(4,494)
|
|
|
Foreign currency collars
|
|
Accounts payable, accrued expenses and other liabilities
|
|
—
|
|
|
—
|
|
|
(3,813)
|
|
|
(1,587)
|
|
|
|
|
|
|
11,416
|
|
|
24,150
|
|
|
(10,169)
|
|
|
(6,081)
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants
|
|
Other assets, net
|
|
3,700
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap (a)
|
|
Other assets, net
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap (a)
|
|
Accounts payable, accrued expenses and other liabilities
|
|
—
|
|
|
—
|
|
|
(62)
|
|
|
(93)
|
|
|
|
|
|
|
3,700
|
|
|
5,008
|
|
|
(62)
|
|
|
(93)
|
|
|
Total derivatives
|
|
|
|
$
|
15,116
|
|
|
$
|
29,158
|
|
|
$
|
(10,231)
|
|
|
$
|
(6,174)
|
|
__________
(a)These interest rate swaps do not qualify for hedge accounting; however, they do protect against fluctuations in interest rates related to the underlying variable-rate debt.
W. P. Carey 9/30/2020 10-Q – 28
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized on Derivatives in
Other Comprehensive Income (Loss) (a)
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency collars
|
|
$
|
(17,029)
|
|
|
$
|
13,661
|
|
|
$
|
(5,524)
|
|
|
$
|
17,539
|
|
|
Interest rate swaps
|
|
312
|
|
|
(398)
|
|
|
(2,047)
|
|
|
(2,775)
|
|
|
Interest rate caps
|
|
4
|
|
|
50
|
|
|
5
|
|
|
199
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
361
|
|
|
(5,272)
|
|
|
(809)
|
|
|
Derivatives in Net Investment Hedging Relationships (b)
|
|
|
|
|
|
|
|
|
|
Foreign currency collars
|
|
(16)
|
|
|
18
|
|
|
9
|
|
|
19
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
8
|
|
|
—
|
|
|
7
|
|
|
Total
|
|
$
|
(16,729)
|
|
|
$
|
13,700
|
|
|
$
|
(12,829)
|
|
|
$
|
14,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) on Derivatives Reclassified from
Other Comprehensive Income (Loss)
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of Gain (Loss) Recognized in Income
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency collars
|
|
Other gains and (losses)
|
|
$
|
1,664
|
|
|
$
|
1,241
|
|
|
$
|
4,565
|
|
|
$
|
3,614
|
|
|
Interest rate swaps and caps
|
|
Interest expense
|
|
(548)
|
|
|
(432)
|
|
|
(1,254)
|
|
|
(2,046)
|
|
|
Foreign currency forward contracts
|
|
Other gains and (losses)
|
|
—
|
|
|
2,271
|
|
|
5,716
|
|
|
6,825
|
|
|
Total
|
|
|
|
$
|
1,116
|
|
|
$
|
3,080
|
|
|
$
|
9,027
|
|
|
$
|
8,393
|
|
__________
(a)Excludes net gains of less than $0.1 million and net losses of $0.4 million recognized on unconsolidated jointly owned investments for the three months ended September 30, 2020 and 2019, respectively, and net losses of $0.4 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively.
(b)The changes in fair value of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income (loss).
Amounts reported in Other comprehensive income (loss) related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to Other gains and (losses) when the hedged foreign currency contracts are settled. As of September 30, 2020, we estimate that an additional $3.2 million and $2.2 million will be reclassified as interest expense and other gains, respectively, during the next 12 months.
W. P. Carey 9/30/2020 10-Q – 29
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) on Derivatives Recognized in Income
|
|
Derivatives Not in Cash Flow Hedging Relationships
|
|
Location of Gain (Loss) Recognized in Income
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency collars
|
|
Other gains and (losses)
|
|
$
|
(1,368)
|
|
|
$
|
543
|
|
|
$
|
(937)
|
|
|
$
|
738
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
11
|
|
|
7
|
|
|
41
|
|
|
15
|
|
|
Foreign currency forward contracts
|
|
Other gains and (losses)
|
|
—
|
|
|
805
|
|
|
(43)
|
|
|
544
|
|
|
Stock warrants
|
|
Other gains and (losses)
|
|
—
|
|
|
(300)
|
|
|
(1,300)
|
|
|
(600)
|
|
|
Interest rate swaps
|
|
Other gains and (losses)
|
|
—
|
|
|
(98)
|
|
|
—
|
|
|
(124)
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
627
|
|
|
340
|
|
|
1,491
|
|
|
(773)
|
|
|
Interest rate caps
|
|
Interest expense
|
|
—
|
|
|
(104)
|
|
|
—
|
|
|
(199)
|
|
|
Foreign currency forward contracts
|
|
Other gains and (losses)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132)
|
|
|
Foreign currency collars
|
|
Other gains and (losses)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Total
|
|
|
|
$
|
(730)
|
|
|
$
|
1,193
|
|
|
$
|
(748)
|
|
|
$
|
(524)
|
|
See below for information on our purposes for entering into derivative instruments.
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 generally seek long-term debt financing on a fixed-rate basis. However, from time to time, we or our investment partners have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans and, as a result, we have entered into, and may continue to 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 a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and caps that our consolidated subsidiaries had outstanding at September 30, 2020 are summarized as follows (currency in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
|
|
Number of Instruments
|
|
Notional
Amount
|
|
Fair Value at
September 30, 2020 (a)
|
|
Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
5
|
|
74,453
|
|
USD
|
|
$
|
(4,744)
|
|
|
Interest rate swaps
|
|
2
|
|
48,734
|
|
EUR
|
|
(1,612)
|
|
|
Interest rate cap
|
|
1
|
|
11,154
|
|
EUR
|
|
1
|
|
|
Interest rate cap
|
|
1
|
|
6,394
|
|
GBP
|
|
—
|
|
|
Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Interest rate swap (b)
|
|
1
|
|
4,520
|
|
EUR
|
|
(62)
|
|
|
|
|
|
|
|
|
|
$
|
(6,417)
|
|
__________
(a)Fair value amounts are based on the exchange rate of the euro or British pound sterling at September 30, 2020, as applicable.
(b)This interest rate swap does not qualify for hedge accounting; however, it does protect against fluctuations in interest rates related to the underlying variable-rate debt.
W. P. Carey 9/30/2020 10-Q – 30
Notes to Consolidated Financial Statements (Unaudited)
Foreign Currency Collars
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling, the Danish krone, the Norwegian krone, and certain other currencies. In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars have maturities of 62 months or less.
The following table presents the foreign currency collars that we had outstanding at September 30, 2020 (currency in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Derivatives
|
|
Number of Instruments
|
|
Notional
Amount
|
|
Fair Value at September 30, 2020
|
|
Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
Foreign currency collars
|
|
88
|
|
308,000
|
|
EUR
|
|
$
|
5,975
|
|
|
Foreign currency collars
|
|
65
|
|
44,000
|
|
GBP
|
|
1,620
|
|
|
Foreign currency collar
|
|
1
|
|
700
|
|
NOK
|
|
7
|
|
|
|
|
|
|
|
|
|
$
|
7,602
|
|
Credit Risk-Related Contingent Features
We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2020. At September 30, 2020, our total credit exposure and the maximum exposure to any single counterparty was $8.1 million and $2.9 million, respectively.
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2020, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $14.4 million and $9.6 million at September 30, 2020 and December 31, 2019, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2020 or December 31, 2019, we could have been required to settle our obligations under these agreements at their aggregate termination value of $14.8 million and $9.9 million, respectively.
Net Investment Hedges
We have completed five offerings of euro-denominated senior notes, each with a principal amount of €500.0 million, which we refer to as the 2.0% Senior Notes due 2023, 2.25% Senior Notes due 2024, 2.250% Senior Notes due 2026, 2.125% Senior Notes due 2027, and 1.350% Senior Notes due 2028 (Note 10). In addition, at September 30, 2020, the amount borrowed in Japanese yen outstanding under our Unsecured Revolving Credit Facility (Note 10) was ¥2.4 billion. Also, at September 30, 2020, the amounts borrowed in British pound sterling and euro outstanding under our Unsecured Term Loans (Note 10) were £150.0 million and €96.5 million, respectively. These borrowings are designated as, and are effective as, economic hedges of our net investments in foreign entities. Exchange rate variations impact our financial results because the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of exchange rate variations being recorded in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. As a result, changes in the value of our borrowings under our euro-denominated senior notes and changes in the value of our euro, Japanese yen, and British pound sterling borrowings under our Senior Unsecured Credit Facility, related to changes in the spot rates, will be reported in the same manner as foreign currency translation adjustments, which are recorded in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. Such (losses) gains related to non-derivative net investment hedges were $(140.5) million and $108.8 million for the three months ended September 30, 2020 and 2019, respectively, and $(118.5) million and $122.3 million for the nine months ended September 30, 2020 and 2019, respectively.
W. P. Carey 9/30/2020 10-Q – 31
Notes to Consolidated Financial Statements (Unaudited)
Note 10. Debt
Senior Unsecured Credit Facility
On February 20, 2020, we amended and restated our senior unsecured credit facility to increase its capacity from approximately $1.85 billion to approximately $2.1 billion, comprised of (i) a $1.8 billion unsecured revolving credit facility for our working capital needs, acquisitions, and other general corporate purposes (our “Unsecured Revolving Credit Facility”), (ii) a £150.0 million term loan (our “Term Loan”), and (iii) a €96.5 million delayed draw term loan (our “Delayed Draw Term Loan”). We refer to our Term Loan and Delayed Draw Term Loan collectively as the “Unsecured Term Loans” and the entire facility collectively as our “Senior Unsecured Credit Facility.”
The Senior Unsecured Credit Facility includes the ability to borrow in certain currencies other than U.S. dollars and has a maturity date of February 20, 2025. The aggregate principal amount (of revolving and term loans) available under the Senior Unsecured Credit Facility may be increased up to an amount not to exceed the U.S. dollar equivalent of $2.75 billion, subject to the conditions to increase set forth in our credit agreement. In connection with the amendment and restatement our Senior Unsecured Credit Facility, we capitalized deferred financing costs totaling $10.0 million, which are being amortized to Interest expense over the remaining term of the Senior Unsecured Credit Facility.
On February 20, 2020, we drew down our Term Loan in full by borrowing £150.0 million (equivalent to $193.1 million). On March 27, 2020, we drew down our Delayed Draw Term Loan in full by borrowing €96.5 million (equivalent to $105.9 million).
At September 30, 2020, our Unsecured Revolving Credit Facility had available capacity of approximately $1.6 billion (net of amounts reserved for standby letters of credit totaling $20.1 million). We incur an annual facility fee of 0.20% of the total commitment on our Unsecured Revolving Credit Facility, which is included within Interest expense in our consolidated statements of income.
The following table presents a summary of our Senior Unsecured Credit Facility (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate at September 30, 2020 (a)
|
|
Maturity Date at September 30, 2020
|
|
Principal Outstanding Balance at
|
|
Senior Unsecured Credit Facility
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Unsecured Term Loans:
|
|
|
|
|
|
|
|
|
|
Term Loan — borrowing in British pounds sterling (b)
|
|
GBP LIBOR + 0.95%
|
|
2/20/2025
|
|
$
|
192,492
|
|
|
$
|
—
|
|
|
Delayed Draw Term Loan — borrowing in euros (c)
|
|
EURIBOR + 0.95%
|
|
2/20/2025
|
|
112,982
|
|
|
—
|
|
|
|
|
|
|
|
|
305,474
|
|
|
—
|
|
|
Unsecured Revolving Credit Facility:
|
|
|
|
|
|
|
|
|
|
Borrowing in dollars
|
|
LIBOR + 0.85%
|
|
2/20/2025
|
|
160,000
|
|
|
—
|
|
|
Borrowing in Japanese yen
|
|
JPY LIBOR + 0.85%
|
|
2/20/2025
|
|
22,799
|
|
|
22,295
|
|
|
Borrowing in euros
|
|
N/A
|
|
N/A
|
|
—
|
|
|
131,438
|
|
|
Borrowing in British pounds sterling
|
|
N/A
|
|
N/A
|
|
—
|
|
|
47,534
|
|
|
|
|
|
|
|
|
182,799
|
|
|
201,267
|
|
|
|
|
|
|
|
|
$
|
488,273
|
|
|
$
|
201,267
|
|
__________
(a)The applicable interest rate at September 30, 2020 was based on the credit rating for our Senior Unsecured Notes of BBB/Baa2.
(b)Balance excludes unamortized discount of $1.3 million at September 30, 2020.
(c)EURIBOR means Euro Interbank Offered Rate.
W. P. Carey 9/30/2020 10-Q – 32
Notes to Consolidated Financial Statements (Unaudited)
Senior Unsecured Notes
As set forth in the table below, we have euro and U.S. dollar-denominated senior unsecured notes outstanding with an aggregate principal balance outstanding of $4.6 billion at September 30, 2020 (the “Senior Unsecured Notes”).
Interest on the Senior Unsecured Notes is payable annually in arrears for our euro-denominated senior notes and semi-annually for U.S. dollar-denominated senior notes. The Senior Unsecured Notes can be redeemed at par within three months of their respective maturities, or we can call the notes at any time for the principal, accrued interest, and a make-whole amount based upon the applicable government bond yield plus 30 to 35 basis points. The following table presents a summary of our Senior Unsecured Notes outstanding at September 30, 2020 (currency in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Issue Discount
|
|
Effective Interest Rate
|
|
|
|
|
|
Principal Outstanding Balance at
|
|
Senior Unsecured Notes, net (a)
|
|
Issue Date
|
|
Principal Amount
|
|
Price of Par Value
|
|
|
|
Coupon Rate
|
|
Maturity Date
|
|
September 30, 2020
|
|
December 31, 2019
|
|
2.0% Senior Notes due 2023
|
|
1/21/2015
|
|
€
|
500.0
|
|
|
99.220
|
%
|
|
$
|
4.6
|
|
|
2.107
|
%
|
|
2.0
|
%
|
|
1/20/2023
|
|
$
|
585.4
|
|
|
$
|
561.7
|
|
|
4.6% Senior Notes due 2024
|
|
3/14/2014
|
|
$
|
500.0
|
|
|
99.639
|
%
|
|
$
|
1.8
|
|
|
4.645
|
%
|
|
4.6
|
%
|
|
4/1/2024
|
|
500.0
|
|
|
500.0
|
|
|
2.25% Senior Notes due 2024
|
|
1/19/2017
|
|
€
|
500.0
|
|
|
99.448
|
%
|
|
$
|
2.9
|
|
|
2.332
|
%
|
|
2.25
|
%
|
|
7/19/2024
|
|
585.4
|
|
|
561.7
|
|
|
4.0% Senior Notes due 2025
|
|
1/26/2015
|
|
$
|
450.0
|
|
|
99.372
|
%
|
|
$
|
2.8
|
|
|
4.077
|
%
|
|
4.0
|
%
|
|
2/1/2025
|
|
450.0
|
|
|
450.0
|
|
|
2.250% Senior Notes due 2026
|
|
10/9/2018
|
|
€
|
500.0
|
|
|
99.252
|
%
|
|
$
|
4.3
|
|
|
2.361
|
%
|
|
2.250
|
%
|
|
4/9/2026
|
|
585.4
|
|
|
561.7
|
|
|
4.25% Senior Notes due 2026
|
|
9/12/2016
|
|
$
|
350.0
|
|
|
99.682
|
%
|
|
$
|
1.1
|
|
|
4.290
|
%
|
|
4.25
|
%
|
|
10/1/2026
|
|
350.0
|
|
|
350.0
|
|
|
2.125% Senior Notes due 2027
|
|
3/6/2018
|
|
€
|
500.0
|
|
|
99.324
|
%
|
|
$
|
4.2
|
|
|
2.208
|
%
|
|
2.125
|
%
|
|
4/15/2027
|
|
585.4
|
|
|
561.7
|
|
|
1.350% Senior Notes due 2028
|
|
9/19/2019
|
|
€
|
500.0
|
|
|
99.266
|
%
|
|
$
|
4.1
|
|
|
1.442
|
%
|
|
1.350
|
%
|
|
4/15/2028
|
|
585.4
|
|
|
561.7
|
|
|
3.850% Senior Notes due 2029
|
|
6/14/2019
|
|
$
|
325.0
|
|
|
98.876
|
%
|
|
$
|
3.7
|
|
|
3.986
|
%
|
|
3.850
|
%
|
|
7/15/2029
|
|
325.0
|
|
|
325.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,552.0
|
|
|
$
|
4,433.5
|
|
__________
(a)Aggregate balance excludes unamortized deferred financing costs totaling $20.3 million and $22.8 million, and unamortized discount totaling $18.5 million and $20.5 million, at September 30, 2020 and December 31, 2019, respectively.
Proceeds from the issuances of each of these notes were used primarily to partially pay down the amounts then outstanding under the senior unsecured credit facility that we had in place at that time and/or to repay certain non-recourse mortgage loans.
On October 14, 2020, we completed a public offering of $500.0 million of 2.400% Senior Notes due 2031, at a price of 99.099% of par value. These 2.400% Senior Notes due 2031 have a 10.3-year term and are scheduled to mature on February 1, 2031 (Note 16).
Covenants
The Credit Agreement, each of the Senior Unsecured Notes, and certain of our non-recourse mortgage loan agreements include customary financial maintenance covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. There have been no significant changes in our debt covenants from what was disclosed in the 2019 Annual Report. We were in compliance with all of these covenants at September 30, 2020.
Non-Recourse Mortgages
At September 30, 2020, the weighted-average interest rates for our fixed-rate and variable-rate non-recourse mortgage notes payable were 4.9% and 2.9%, respectively, with maturity dates ranging from November 2020 to September 2031.
A non-recourse mortgage loan encumbering a vacant property, with an outstanding principal balance and carrying value of approximately $3.0 million, was in default as of September 30, 2020. The property has been vacant since 2018. This loan currently bears interest at 6.9% (there is no additional default interest) and is collateralized by the property, which we wholly-own. Interest expense of $0.2 million on this loan has been accrued and unpaid as of September 30, 2020. As of September 30, 2020, the carrying value of the property was $3.7 million.
W. P. Carey 9/30/2020 10-Q – 33
Notes to Consolidated Financial Statements (Unaudited)
Repayments During the Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020, we repaid non-recourse mortgage loans at or close to maturity with an aggregate principal balance of approximately $202.5 million. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of repayment was 5.0%. Amounts are based on the exchange rate of the related foreign currency as of the date of repayment, as applicable.
Repayments During the Nine Months Ended September 30, 2019
During the nine months ended September 30, 2019, we (i) prepaid non-recourse mortgage loans totaling $872.8 million, and (ii) repaid non-recourse mortgage loans at maturity with an aggregate principal balance of approximately $39.4 million. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of repayment was 4.9%. Amounts are based on the exchange rate of the related foreign currency as of the date of repayment, as applicable. We primarily used proceeds from issuances of common stock under our ATM Program (Note 12) and proceeds from the issuances of senior notes to fund these prepayments.
Foreign Currency Exchange Rate Impact
During the nine months ended September 30, 2020, the U.S. dollar weakened against the euro, resulting in an aggregate increase of $129.8 million in the aggregate carrying values of our Non-recourse mortgages, net, Senior Unsecured Credit Facility, and Senior Unsecured Notes, net from December 31, 2019 to September 30, 2020.
Scheduled Debt Principal Payments
Scheduled debt principal payments as of September 30, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Total (a)
|
|
2020 (remainder)
|
|
$
|
28,717
|
|
|
2021
|
|
144,112
|
|
|
2022
|
|
460,944
|
|
|
2023
|
|
928,188
|
|
|
2024
|
|
1,208,377
|
|
|
Thereafter through 2031
|
|
3,509,419
|
|
|
Total principal payments
|
|
6,279,757
|
|
|
Unamortized discount, net (b)
|
|
(24,592)
|
|
|
Unamortized deferred financing costs
|
|
(20,705)
|
|
|
Total
|
|
$
|
6,234,460
|
|
__________
(a)Certain amounts are based on the applicable foreign currency exchange rate at September 30, 2020.
(b)Represents the unamortized discount on the Senior Unsecured Notes of $18.5 million in aggregate, unamortized discount, net, of $4.8 million in aggregate primarily resulting from the assumption of property-level debt in connection with business combinations, and unamortized discount of $1.3 million on the Term Loan.
Note 11. Commitments and Contingencies
At September 30, 2020, 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.
W. P. Carey 9/30/2020 10-Q – 34
Notes to Consolidated Financial Statements (Unaudited)
Note 12. Stock-Based Compensation and Equity
Stock-Based Compensation
We maintain several stock-based compensation plans, which are more fully described in the 2019 Annual Report. There have been no significant changes to the terms and conditions of any of our stock-based compensation plans or arrangements during the nine months ended September 30, 2020. We recorded stock-based compensation expense of $4.6 million and $4.7 million during the three months ended September 30, 2020 and 2019, respectively, and $10.1 million and $13.8 million during the nine months ended September 30, 2020 and 2019, respectively, which was included in Stock-based compensation expense in the consolidated financial statements.
Restricted and Conditional Awards
Nonvested restricted share awards (“RSAs”), restricted share units (“RSUs”), and performance share units (“PSUs”) at September 30, 2020 and changes during the nine months ended September 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSA and RSU Awards
|
|
PSU Awards
|
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Nonvested at January 1, 2020
|
283,977
|
|
|
$
|
68.51
|
|
|
331,242
|
|
|
$
|
80.90
|
|
|
Granted (a)
|
141,384
|
|
|
81.48
|
|
|
90,518
|
|
|
104.65
|
|
|
Vested (b)
|
(159,456)
|
|
|
69.57
|
|
|
(156,838)
|
|
|
80.42
|
|
|
Forfeited
|
(5,555)
|
|
|
71.69
|
|
|
(6,715)
|
|
|
88.94
|
|
|
Adjustment (c)
|
—
|
|
|
—
|
|
|
(18,426)
|
|
|
80.27
|
|
|
Nonvested at September 30, 2020 (d)
|
260,350
|
|
|
$
|
74.83
|
|
|
239,781
|
|
|
$
|
90.83
|
|
__________
(a)The grant date fair value of RSAs and RSUs reflect our stock price on the date of grant on a one-for-one basis. The grant date fair value of PSUs was determined utilizing (i) a Monte Carlo simulation model to generate an estimate of our future stock price over the three-year performance period and (ii) future financial performance projections. To estimate the fair value of PSUs granted during the nine months ended September 30, 2020, we used a risk-free interest rate of 1.6%, an expected volatility rate of 15.2%, and assumed a dividend yield of zero.
(b)The grant date fair value of shares vested during the nine months ended September 30, 2020 was $23.7 million. Employees have the option to take immediate delivery of the shares upon vesting or defer receipt to a future date pursuant to previously made deferral elections. At September 30, 2020 and December 31, 2019, we had an obligation to issue 986,859 and 893,713 shares, respectively, of our common stock underlying such deferred awards, which is recorded within Total stockholders’ equity as a Deferred compensation obligation of $42.0 million and $37.3 million, respectively.
(c)Vesting and payment of the PSUs is conditioned upon certain company and/or market performance goals being met during the relevant three-year performance period. The ultimate number of PSUs to be vested will depend on the extent to which the performance goals are met and can range from zero to three times the original awards. As a result, we recorded adjustments at September 30, 2020 to reflect the number of shares expected to be issued when the PSUs vest.
(d)At September 30, 2020, total unrecognized compensation expense related to these awards was approximately $23.2 million, with an aggregate weighted-average remaining term of 1.8 years.
W. P. Carey 9/30/2020 10-Q – 35
Notes to Consolidated Financial Statements (Unaudited)
Earnings Per Share
Under current authoritative guidance for determining earnings per share, all nonvested share-based payment awards that contain non-forfeitable rights to dividends 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. During the prior year period, certain of our nonvested RSUs contained rights to receive non-forfeitable dividend equivalents or dividends, respectively, 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 nonvested participating RSUs from the numerator and such nonvested shares in the denominator. The following table summarizes basic and diluted earnings (in thousands, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net income attributable to W. P. Carey
|
$
|
149,397
|
|
|
$
|
41,339
|
|
|
$
|
320,787
|
|
|
$
|
175,871
|
|
|
Net income attributable to nonvested participating RSUs
|
—
|
|
|
(10)
|
|
|
—
|
|
|
(44)
|
|
|
Net income — basic and diluted
|
$
|
149,397
|
|
|
$
|
41,329
|
|
|
$
|
320,787
|
|
|
$
|
175,827
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding — basic
|
174,974,185
|
|
|
172,235,066
|
|
|
173,879,068
|
|
|
170,276,085
|
|
|
Effect of dilutive securities
|
287,627
|
|
|
251,440
|
|
|
264,970
|
|
|
269,580
|
|
|
Weighted-average shares outstanding — diluted
|
175,261,812
|
|
|
172,486,506
|
|
|
174,144,038
|
|
|
170,545,665
|
|
For the three and nine months ended September 30, 2020 and 2019, there were no potentially dilutive securities excluded from the computation of diluted earnings per share.
ATM Program
During the three and nine months ended September 30, 2020, we did not issue any shares of our common stock under our ATM Program, which is discussed in the 2019 Annual Report. During the three and nine months ended September 30, 2019, we issued 1,502,572 and 6,672,412 shares, respectively, of our common stock under our former ATM Program at a weighted-average price of $88.76 and $79.70 per share, respectively, for net proceeds of $131.4 million and $523.5 million, respectively. As of September 30, 2020, $616.6 million remained available for issuance under our current ATM Program.
Forward Equity Offering
On June 17, 2020, we entered into an underwriting agreement, as well as certain forward sale agreements, with a syndicate of banks acting as underwriters, forward sellers, and/or forward purchasers in connection with an underwritten public offering of 4,750,000 shares of common stock at an initial forward sale price of $68.35 per share. The underwriters were granted a 30-day option to purchase up to an additional 712,500 shares of common stock at the initial forward sale price, which they fully exercised on June 18, 2020. Therefore, at closing on June 22, 2020, the forward purchasers borrowed from third parties and sold to the underwriters an aggregate of 5,462,500 shares of common stock, which the underwriters sold at a gross offering price of $70.00 per share, for gross proceeds of approximately $382.4 million. As a result of this forward construct, we did not receive any proceeds from the sale of such shares at closing.
During the three and nine months ended September 30, 2020, we settled a portion of the equity forwards by physically delivering 1,488,291 and 2,951,791 shares, respectively, of common stock to certain forward purchasers for net proceeds of $99.8 million and $199.7 million, respectively, which were primarily used to partially pay down amounts outstanding under our Unsecured Revolving Credit Facility and for general corporate purposes. As of September 30, 2020, 2,510,709 shares remained outstanding under the forward sale agreements. We expect to settle the forward sale agreements in full within 18 months of the offering date via physical delivery of the outstanding shares of common stock in exchange for cash proceeds, although we may elect cash settlement or net share settlement for all or a portion of our obligations under the forward sale agreements, subject to certain conditions. The forward sale price that we will receive upon physical settlement of the agreements will be (i) subject to adjustment on a daily basis based on a floating interest rate factor equal to a specified daily rate less a spread (i.e., if the specified daily rate is less than the spread on any day, the interest rate factor will result in a daily reduction of the applicable forward sale price) and (ii) decreased based on amounts related to expected dividends on shares of our common stock during the term of the forward sale agreements.
W. P. Carey 9/30/2020 10-Q – 36
Notes to Consolidated Financial Statements (Unaudited)
We determined that the forward sale agreements meet the criteria for equity classification and are therefore exempt from derivative accounting. We recorded the forward sale agreements at fair value at inception, which we determined to be zero. Subsequent changes to fair value are not required under equity classification.
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
Gains and (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Gains and (Losses) on Investments
|
|
Total
|
|
Beginning balance
|
$
|
16,455
|
|
|
$
|
(307,068)
|
|
|
$
|
—
|
|
|
$
|
(290,613)
|
|
|
Other comprehensive income before reclassifications
|
(15,558)
|
|
|
34,170
|
|
|
—
|
|
|
18,612
|
|
|
Amounts reclassified from accumulated other comprehensive loss to:
|
|
|
|
|
|
|
|
|
Other gains and (losses)
|
(1,664)
|
|
|
—
|
|
|
—
|
|
|
(1,664)
|
|
|
Interest expense
|
548
|
|
|
—
|
|
|
—
|
|
|
548
|
|
|
Total
|
(1,116)
|
|
|
—
|
|
|
—
|
|
|
(1,116)
|
|
|
Net current period other comprehensive income
|
(16,674)
|
|
|
34,170
|
|
|
—
|
|
|
17,496
|
|
|
Net current period other comprehensive income attributable to noncontrolling interests
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(7)
|
|
|
Ending balance
|
$
|
(226)
|
|
|
$
|
(272,898)
|
|
|
$
|
—
|
|
|
$
|
(273,124)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Gains and (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Gains and (Losses) on Investments
|
|
Total
|
|
Beginning balance
|
$
|
12,645
|
|
|
$
|
(273,451)
|
|
|
$
|
(11)
|
|
|
$
|
(260,817)
|
|
|
Other comprehensive loss before reclassifications
|
16,323
|
|
|
(37,412)
|
|
|
11
|
|
|
(21,078)
|
|
|
Amounts reclassified from accumulated other comprehensive loss to:
|
|
|
|
|
|
|
|
|
Other gains and (losses)
|
(3,512)
|
|
|
—
|
|
|
—
|
|
|
(3,512)
|
|
|
Interest expense
|
432
|
|
|
—
|
|
|
—
|
|
|
432
|
|
|
Total
|
(3,080)
|
|
|
—
|
|
|
—
|
|
|
(3,080)
|
|
|
Net current period other comprehensive loss
|
13,243
|
|
|
(37,412)
|
|
|
11
|
|
|
(24,158)
|
|
|
Ending balance
|
$
|
25,888
|
|
|
$
|
(310,863)
|
|
|
$
|
—
|
|
|
$
|
(284,975)
|
|
W. P. Carey 9/30/2020 10-Q – 37
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Gains and (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Gains and (Losses) on Investments
|
|
Total
|
|
Beginning balance
|
$
|
13,048
|
|
|
$
|
(268,715)
|
|
|
$
|
—
|
|
|
$
|
(255,667)
|
|
|
Other comprehensive loss before reclassifications
|
(4,240)
|
|
|
(4,183)
|
|
|
—
|
|
|
(8,423)
|
|
|
Amounts reclassified from accumulated other comprehensive loss to:
|
|
|
|
|
|
|
|
|
Other gains and (losses)
|
(10,281)
|
|
|
—
|
|
|
—
|
|
|
(10,281)
|
|
|
Interest expense
|
1,254
|
|
|
—
|
|
|
—
|
|
|
1,254
|
|
|
Total
|
(9,027)
|
|
|
—
|
|
|
—
|
|
|
(9,027)
|
|
|
Net current period other comprehensive loss
|
(13,267)
|
|
|
(4,183)
|
|
|
—
|
|
|
(17,450)
|
|
|
Net current period other comprehensive income attributable to noncontrolling interests
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(7)
|
|
|
Ending balance
|
$
|
(226)
|
|
|
$
|
(272,898)
|
|
|
$
|
—
|
|
|
$
|
(273,124)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Gains and (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Gains and (Losses) on Investments
|
|
Total
|
|
Beginning balance
|
$
|
14,102
|
|
|
$
|
(269,091)
|
|
|
$
|
(7)
|
|
|
$
|
(254,996)
|
|
|
Other comprehensive loss before reclassifications
|
20,179
|
|
|
(41,772)
|
|
|
7
|
|
|
(21,586)
|
|
|
Amounts reclassified from accumulated other comprehensive loss to:
|
|
|
|
|
|
|
|
|
Other gains and (losses)
|
(10,439)
|
|
|
—
|
|
|
—
|
|
|
(10,439)
|
|
|
Interest expense
|
2,046
|
|
|
—
|
|
|
—
|
|
|
2,046
|
|
|
Total
|
(8,393)
|
|
|
—
|
|
|
—
|
|
|
(8,393)
|
|
|
Net current period other comprehensive loss
|
11,786
|
|
|
(41,772)
|
|
|
7
|
|
|
(29,979)
|
|
|
Ending balance
|
$
|
25,888
|
|
|
$
|
(310,863)
|
|
|
$
|
—
|
|
|
$
|
(284,975)
|
|
See Note 9 for additional information on our derivatives activity recognized within Other comprehensive income (loss) for the periods presented.
Dividends Declared
During the third quarter of 2020, our Board declared a quarterly dividend of $1.044 per share, which was paid on October 15, 2020 to stockholders of record as of September 30, 2020.
During the nine months ended September 30, 2020, we declared dividends totaling $3.126 per share.
Note 13. Income Taxes
We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2020. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and nine months ended September 30, 2020 and 2019.
In light of the COVID-19 outbreak during the first quarter of 2020, we are monitoring domestic and international tax considerations and the potential impact on our consolidated financial statements. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (U.S. federal legislation enacted on March 27, 2020 in response to COVID-19) provides that net operating losses incurred in 2018, 2019, or 2020 may be carried back to offset taxable income earned during the five-year period prior to the year in which the net operating loss was incurred. As a result, we recognized a $4.7 million current tax
W. P. Carey 9/30/2020 10-Q – 38
Notes to Consolidated Financial Statements (Unaudited)
benefit during the nine months ended September 30, 2020 by carrying back certain net operating losses, which is included within current tax benefit described below.
Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. We also own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. The accompanying consolidated financial statements include an interim tax provision for our TRSs and foreign subsidiaries, as necessary, for the three and nine months ended September 30, 2020 and 2019. Current income tax expense was $8.9 million and $5.2 million for the three months ended September 30, 2020 and 2019, respectively, and $19.3 million and $8.3 million for the nine months ended September 30, 2020 and 2019, respectively. Provision for income taxes for the nine months ended September 30, 2019 included a current tax benefit of approximately $6.3 million due to a change in tax position for state and local taxes.
Our TRSs and foreign subsidiaries are subject to U.S. federal, state, and foreign income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether the tax benefit of a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. The majority of our deferred tax assets relate to the timing difference between the financial reporting basis and tax basis for stock-based compensation expense. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of the assets acquired in acquisitions in which the tax basis of such assets was not stepped up to fair value for income tax purposes. Deferred income tax benefit was $2.9 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively, and $47.4 million and $3.2 million for the nine months ended September 30, 2020 and 2019, respectively. Benefit from income taxes for the nine months ended September 30, 2020 included a deferred tax benefit of $37.2 million as a result of the release of a deferred tax liability relating to our investment in shares of a cold storage operator (Note 8), which converted to a REIT during the current year period and is therefore no longer subject to federal income taxes, as well as a deferred tax benefit of $6.5 million as a result of the other-than-temporary impairment charges that we recognized on our equity investments in CWI 1 and CWI 2 during the period (Note 8).
Note 14. Property Dispositions
We have an active capital recycling program, with a goal of extending the average lease term through reinvestment, improving portfolio credit quality through dispositions and acquisitions of assets, increasing the asset criticality factor in our portfolio, and/or executing strategic dispositions of assets. We may make a decision to dispose of a property when it is vacant as a result of tenants vacating space, tenants electing not to renew their leases, tenant insolvency, or lease rejection in the bankruptcy process. In such cases, we assess whether we can obtain the highest value from the property by selling it, as opposed to re-leasing it. We may also sell a property when we receive an unsolicited offer or negotiate a price for an investment that is consistent with our strategy for that investment. When it is appropriate to do so, we classify the property as an asset held for sale on our consolidated balance sheet. All property dispositions are recorded within our Real Estate segment.
2020 — During the three and nine months ended September 30, 2020, we sold four and eight properties, respectively, for total proceeds, net of selling costs, of $62.9 million and $168.0 million (inclusive of $4.7 million attributable to a noncontrolling interest), respectively, and recognized a net gain on these sales totaling $20.9 million and $32.7 million (inclusive of $0.6 million attributable to a noncontrolling interest), respectively (inclusive of income taxes totaling $3.1 million and $3.0 million, respectively, recognized upon sale). Disposition activity included the sale of one of our two hotel operating properties in January 2020 for total proceeds, net of selling costs, of $103.5 million (inclusive of $4.7 million attributable to a noncontrolling interest), which was held for sale as of December 31, 2019 (Note 4).
2019 — During the three and nine months ended September 30, 2019, we sold four and nine properties, respectively, for total proceeds, net of selling costs, of $13.9 million and $26.5 million, respectively, and recognized a net gain on these sales totaling $0.1 million and $0.7 million, respectively (inclusive of income taxes totaling $0.2 million for both periods recognized upon sale).
In addition, in June 2019, a loan receivable was repaid in full to us for $9.3 million, which resulted in a net loss of $0.1 million.
W. P. Carey 9/30/2020 10-Q – 39
Notes to Consolidated Financial Statements (Unaudited)
Note 15. Segment Reporting
We evaluate our results from operations through our two major business segments: Real Estate and Investment Management. The following tables present a summary of comparative results and assets for these business segments (in thousands):
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
Lease revenues
|
$
|
293,856
|
|
|
$
|
278,839
|
|
|
$
|
856,269
|
|
|
$
|
811,580
|
|
|
Operating property revenues (a)
|
1,974
|
|
|
9,538
|
|
|
9,368
|
|
|
40,970
|
|
|
Lease termination income and other
|
1,565
|
|
|
14,377
|
|
|
9,991
|
|
|
23,951
|
|
|
|
297,395
|
|
|
302,754
|
|
|
875,628
|
|
|
876,501
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization (b)
|
108,351
|
|
|
108,573
|
|
|
331,035
|
|
|
332,652
|
|
|
General and administrative (b)
|
19,399
|
|
|
13,973
|
|
|
51,793
|
|
|
44,162
|
|
|
Reimbursable tenant costs
|
15,728
|
|
|
15,611
|
|
|
42,699
|
|
|
42,699
|
|
|
Property expenses, excluding reimbursable tenant costs
|
11,923
|
|
|
10,377
|
|
|
33,649
|
|
|
30,204
|
|
|
Stock-based compensation expense (b)
|
4,564
|
|
|
3,435
|
|
|
9,452
|
|
|
9,717
|
|
|
Operating property expenses
|
1,594
|
|
|
8,547
|
|
|
8,205
|
|
|
30,015
|
|
|
Merger and other expenses
|
(1,016)
|
|
|
70
|
|
|
(213)
|
|
|
912
|
|
|
Impairment charges
|
—
|
|
|
25,781
|
|
|
19,420
|
|
|
25,781
|
|
|
|
160,543
|
|
|
186,367
|
|
|
496,040
|
|
|
516,142
|
|
|
Other Income and Expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
(52,537)
|
|
|
(58,626)
|
|
|
(157,259)
|
|
|
(179,658)
|
|
|
Other gains and (losses)
|
44,777
|
|
|
(12,938)
|
|
|
48,943
|
|
|
(13,330)
|
|
|
Gain on sale of real estate, net
|
20,933
|
|
|
71
|
|
|
32,684
|
|
|
642
|
|
|
Equity in earnings of equity method investments in real estate
|
631
|
|
|
578
|
|
|
2,407
|
|
|
730
|
|
|
Loss on change in control of interests
|
—
|
|
|
(8,416)
|
|
|
—
|
|
|
(8,416)
|
|
|
|
13,804
|
|
|
(79,331)
|
|
|
(73,225)
|
|
|
(200,032)
|
|
|
Income before income taxes
|
150,656
|
|
|
37,056
|
|
|
306,363
|
|
|
160,327
|
|
|
(Provision for) benefit from income taxes
|
(3,636)
|
|
|
(3,511)
|
|
|
24,047
|
|
|
(12,689)
|
|
|
Net Income from Real Estate
|
147,020
|
|
|
33,545
|
|
|
330,410
|
|
|
147,638
|
|
|
Net (income) loss attributable to noncontrolling interests
|
(37)
|
|
|
11
|
|
|
(688)
|
|
|
94
|
|
|
Net Income from Real Estate Attributable to W. P. Carey
|
$
|
146,983
|
|
|
$
|
33,556
|
|
|
$
|
329,722
|
|
|
$
|
147,732
|
|
W. P. Carey 9/30/2020 10-Q – 40
Notes to Consolidated Financial Statements (Unaudited)
Investment Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
Asset management revenue
|
$
|
3,748
|
|
|
$
|
9,878
|
|
|
$
|
18,109
|
|
|
$
|
29,400
|
|
|
Reimbursable costs from affiliates
|
1,276
|
|
|
4,786
|
|
|
7,717
|
|
|
12,475
|
|
|
Structuring and other advisory revenue
|
—
|
|
|
587
|
|
|
494
|
|
|
3,163
|
|
|
|
5,024
|
|
|
15,251
|
|
|
26,320
|
|
|
45,038
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Reimbursable costs from affiliates
|
1,276
|
|
|
4,786
|
|
|
7,717
|
|
|
12,475
|
|
|
Merger and other expenses
|
420
|
|
|
—
|
|
|
878
|
|
|
—
|
|
|
General and administrative (b)
|
—
|
|
|
3,237
|
|
|
5,823
|
|
|
14,062
|
|
|
Subadvisor fees
|
—
|
|
|
1,763
|
|
|
1,469
|
|
|
5,615
|
|
|
Stock-based compensation expense (b)
|
—
|
|
|
1,312
|
|
|
691
|
|
|
4,131
|
|
|
Depreciation and amortization (b)
|
—
|
|
|
944
|
|
|
987
|
|
|
2,876
|
|
|
|
1,696
|
|
|
12,042
|
|
|
17,565
|
|
|
39,159
|
|
|
Other Income and Expenses
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of equity method investments in the Managed Programs
|
1,089
|
|
|
5,191
|
|
|
(12,494)
|
|
|
14,481
|
|
|
Other gains and (losses)
|
336
|
|
|
536
|
|
|
594
|
|
|
1,212
|
|
|
|
1,425
|
|
|
5,727
|
|
|
(11,900)
|
|
|
15,693
|
|
|
Income (loss) before income taxes
|
4,753
|
|
|
8,936
|
|
|
(3,145)
|
|
|
21,572
|
|
|
(Provision for) benefit from income taxes
|
(2,339)
|
|
|
(646)
|
|
|
4,075
|
|
|
7,542
|
|
|
Net Income from Investment Management
|
2,414
|
|
|
8,290
|
|
|
930
|
|
|
29,114
|
|
|
Net income attributable to noncontrolling interests
|
—
|
|
|
(507)
|
|
|
(9,865)
|
|
|
(975)
|
|
|
Net Income (Loss) from Investment Management Attributable to W. P. Carey
|
$
|
2,414
|
|
|
$
|
7,783
|
|
|
$
|
(8,935)
|
|
|
$
|
28,139
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
$
|
302,419
|
|
|
$
|
318,005
|
|
|
$
|
901,948
|
|
|
$
|
921,539
|
|
|
Operating expenses
|
162,239
|
|
|
198,409
|
|
|
513,605
|
|
|
555,301
|
|
|
Other income and (expenses)
|
15,229
|
|
|
(73,604)
|
|
|
(85,125)
|
|
|
(184,339)
|
|
|
(Provision for) benefit from income taxes
|
(5,975)
|
|
|
(4,157)
|
|
|
28,122
|
|
|
(5,147)
|
|
|
Net income attributable to noncontrolling interests
|
(37)
|
|
|
(496)
|
|
|
(10,553)
|
|
|
(881)
|
|
|
Net income attributable to W. P. Carey
|
$
|
149,397
|
|
|
$
|
41,339
|
|
|
$
|
320,787
|
|
|
$
|
175,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Real Estate
|
$
|
14,072,029
|
|
|
$
|
13,811,403
|
|
|
Investment Management (c)
|
117,481
|
|
|
249,515
|
|
|
Total Company
|
$
|
14,189,510
|
|
|
$
|
14,060,918
|
|
__________
W. P. Carey 9/30/2020 10-Q – 41
Notes to Consolidated Financial Statements (Unaudited)
(a)Operating property revenues from our hotels include (i) $0.6 million and $3.9 million for the three months ended September 30, 2020 and 2019, respectively, and $3.4 million and $11.4 million for the nine months ended September 30, 2020 and 2019, respectively, generated from a hotel in Bloomington, Minnesota (revenues decreased due to the adverse effect of COVID-19 on the hotel’s operations), and (ii) $3.5 million for the three months ended September 30, 2019, and $1.9 million and $10.1 million for the nine months ended September 30, 2020 and 2019, respectively, generated from a hotel in Miami, Florida, which was sold in January 2020 (Note 14).
(b)Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In addition, beginning with the second quarter of 2020, stock-based compensation expense and depreciation and amortization expense are fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles (Note 2). These changes within the segments had no impact on our consolidated financial statements.
(c)Following the WLT management internalization and redemption of the special general partner interests in CWI 1 and CWI 2 on April 13, 2020, we no longer own equity investments in those funds, which were previously included within our Investment Management segment (Note 2, Note 3, Note 7). Our investment in shares of common stock of WLT is included within our Real Estate segment (as an equity method investment in real estate) (Note 7). In addition, we allocated $34.3 million of goodwill within our Investment Management segment during the nine months ended September 30, 2020, since the WLT management internalization resulted in a sale of a portion of our Investment Management business (Note 3, Note 6).
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Notes to Consolidated Financial Statements (Unaudited)
Note 16. Subsequent Events
Issuance of Senior Unsecured Notes
On October 14, 2020, we completed an underwritten public offering of $500.0 million of 2.400% Senior Notes due 2031, at a price of 99.099% of par value. These 2.400% Senior Notes due 2031 have a 10.3-year term and are scheduled to mature on February 1, 2031.
Acquisitions
In October 2020, we completed three investments for a total purchase price of approximately $186.8 million, as follows:
•a three-property industrial portfolio in Winter Haven, Florida; Belvidere, Illinois; and Fayetteville, North Carolina, with a lease term of 20 years for an aggregate purchase price of approximately $51.0 million on October 12, 2020;
•a 27-property grocery store portfolio in Spain with a lease term of 20 years for an aggregate purchase price of approximately $101.8 million (based on the exchange rate of the euro on the date of acquisition) on October 30, 2020; and
•a food manufacturing/headquarters facility in Little Canada, Minnesota, with a lease term of 20 years for approximately $34.0 million on October 30, 2020.
It is not practicable to disclose the preliminary purchase price allocations for these transactions given the short time period between the acquisition dates and the filing of this Report.
Investment in Shares of a Cold Storage Operator
In October 2020, we purchased additional shares of a cold storage operator for $95.5 million. This increased the carrying value of our investment to approximately $290 million (Note 8).
Dispositions
In October 2020, we sold two cold storage properties in Rincon and Unadilla, Georgia, for gross proceeds totaling $95.5 million. The buyer was the cold storage operator noted directly above.
In addition, in October 2020, we sold a retail facility in Rockport, Texas, for gross proceeds of $5.2 million. This property was classified as held for sale as of September 30, 2020.
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