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WPC > SEC Filings for WPC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for W. P. CAREY INC.

Form 10-Q for W. P. CAREY INC.


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

MD&A is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. The discussion also provides information about the financial results of the segments of our business to provide a better understanding of how these segments and their results affect our financial condition and results of operations. Our MD&A should be read in conjunction with our 2013 Annual Report.

Business Overview

As described in more detail in Item 1 in our 2013 Annual Report, we provide long-term financing via sale-leaseback and build-to-suit transactions for companies worldwide and, as of March 31, 2014, manage a global investment portfolio of 1,023 properties, including our owned portfolio. Our business operates in two segments - Real Estate Ownership and Investment Management.

Significant Developments

Real Estate Ownership

CPAŽ:16 Merger

On January 31, 2014, CPAŽ:16 - Global merged with and into us based on a merger agreement, dated as of July 25, 2013 ( Note 3 ).

Investment Transactions

During the three months ended March 31, 2014, we acquired a domestic office building for $43.1 million ( Note 5 ). As part of our active asset management program, we sold seven domestic properties and two international properties during the three months ended March 31, 2014 for total proceeds of $127.7 million. Properties sold in 2014 included four industrial properties, two office facilities, a retail property, a warehouse/distribution facility and a hospitality facility ( Note 16 ).

Senior Unsecured Notes

In March 2014, we issued $500.0 million of Senior Unsecured Notes at a price of 99.639% of par value or a $1.8 million discount in a registered public offering. The Senior Unsecured Notes have a ten-year term and are scheduled to mature on April 1, 2024 with an annual interest rate of 4.60% ( Note 12 ). The notes were rated Baa2 by Moody's Investors Services and BBB- by Standard and Poor's Ratings Services.

Financing Transactions

In connection with the CPAŽ:16 Merger and to assist in our migration to becoming an unsecured borrower, on January 31, 2014 we renegotiated the terms and increased the capacity of our prior-existing unsecured line of credit from $625.0 million to $1.25 billion. This Senior Unsecured Credit Facility is comprised of a $1.0 billion Revolver and a $250.0 million Term Loan Facility. The Revolver is scheduled to mature in four years and the Term Loan Facility is scheduled to mature in two years, unless extended ( Note 12 ). As part of this transaction, we increased the size of our bank syndicate from ten to 14 lenders.

During the three months ended March 31, 2014, we prepaid several non-recourse mortgages with an aggregate outstanding principal balance of $116.8 million ( Note 12 ).

Credit Ratings

In January 2014, we received an investment grade corporate rating of BBB with stable outlook from Standard & Poor's Ratings Services and an investment grade issuer rating of Baa2 with stable outlook from Moody's Investors Service.

Distributions

Our cash distributions totaled $0.980 per share during the three months ended March 31, 2014, which comprised a quarterly cash distribution of $0.870 per share and a special distribution of $0.110 per share. In addition, during the first quarter of 2014,

W. P. Carey 3/31/2014 10-Q - 41

we declared a quarterly distribution of $0.895 per share, which was paid on April 15, 2014 to stockholders of record on March 31, 2014.

Investment Management

During the three months ended March 31, 2014, we managed three funds: CPAŽ:17 - Global, CPAŽ:18 - Global and CWI. We also managed CPAŽ:16 - Global until the CPAŽ:16 Merger on January 31, 2014 ( Note 3 ).

Investment Transactions

• On July 25, 2013, CPAŽ:16 - Global, which commenced operations in 2003, entered into a definitive merger agreement with us, and we completed the CPAŽ:16 Merger on January 31, 2014 ( Note 3 ).

• We structured investments in two properties for a total of $93.0 million on behalf of CPAŽ:17 - Global. Approximately $19.0 million was invested in the U.S. and $74.0 million was invested in Europe. The properties were office facilities.

• We structured investments in nine properties for a total of $281.8 million on behalf of CPAŽ:18 - Global. One of these investments is jointly-owned with CPAŽ:17 - Global. Approximately $123.7 million was invested in the U.S. and $158.1 million was invested in Europe. Of the nine properties acquired, three are office facilities, three are industrial facilities, two are self-storage facilities and one is a distribution/warehouse facility.

Financing Transactions

• During the three months ended March 31, 2014, we arranged mortgage financing totaling $45.0 million for CPAŽ:17 - Global and $167.9 million for CPAŽ:18 - Global.

Investor Capital Inflows

• CPAŽ:18 - Global commenced its initial public offering in May 2013 and through March 31, 2014 had raised approximately $636.3 million, of which $399.0 million was raised during the first quarter of 2014.

• CWI completed fundraising in its initial public offering in September 2013 and commenced its follow-on offering in December 2013. From inception through March 31, 2014, CWI raised a total of $593.5 million, of which $17.6 million was raised during the first quarter of 2014.

• In May 2014, the board of directors of CPAŽ:18 - Global approved the discontinuation of sales of its class A common stock after June 30, 2014 in order to moderate the pace of its fundraising.

Financial Highlights

Our results for the three months ended March 31, 2014 included the following significant items:

• Increased lease revenue and property level contribution of $45.6 million and $23.3 million, respectively, for the three months ended March 31, 2014 as compared to the same period in 2013, respectively, due to revenue generated from the properties acquired in the CPAŽ:16 Merger on January 31, 2014;

• A decrease in Asset management revenue from CPAŽ:16 - Global of $3.1 million for the three months ended March 31, 2014 as compared to 2013, as a result of the CPAŽ:16 Merger on January 31, 2014, which reduced the asset base from which we earn Asset management revenue;

• Costs incurred in connection with the CPAŽ:16 Merger of $29.5 million during the three months ended March 31, 2014; and

• Issuance of 30,729,878 shares on January 31, 2014 to stockholders of CPAŽ:16 - Global as Merger Consideration in connection with the CPAŽ:16 Merger.

                                                 W. P. Carey 3/31/2014 10-Q - 42
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(In thousands, except shares)
                                                            Three Months Ended March 31,
                                                              2014                2013
Real estate revenues (excluding reimbursable tenant
costs)                                                  $      129,206       $      73,366
Investment management revenues (excluding reimbursable
costs from affiliates)                                          34,203              17,580
Total revenues (excluding reimbursable costs)                  163,409              90,946
Net income attributable to W. P. Carey                         112,892              14,181

Cash distributions paid                                         68,159              45,746

Net cash provided by operating activities                       43,696              17,475
Net cash used in (provided by) investing activities            127,619             (27,734 )
Net cash used in financing activities                          (90,466 )              (865 )

Diluted weighted average shares outstanding                 90,375,311          69,975,293

Supplemental financial measure:
Adjusted funds from operations (AFFO) (a)                      118,246              72,255


___________


(a) We consider the performance metrics listed above, including Adjusted funds from operations, previously referred to as Funds from operations - as adjusted, or AFFO, a supplemental measure that is not defined by GAAP, or non-GAAP, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.

Total revenues and Net income attributable to W. P. Carey increased significantly during the three months ended March 31, 2014 as compared to the same period in 2013. The growth in revenues and income within our Real Estate Ownership segment was generated substantially from the properties we acquired in the CPAŽ:16 Merger on January 31, 2014 ( Note 3 ). Additionally, total revenues and Net income within our Investment Management segment increased as a result of a significant increase in structuring revenue due to higher investment volume in the current year period as compared to the same period in the prior year.

Net cash provided by operating activities increased during the three months ended March 31, 2014 as compared to the same period in 2013, primarily due to operating cash flow generated from the properties we acquired in the CPAŽ:16 Merger.

AFFO increased during the three months ended March 31, 2014 as compared to the same period in 2013, primarily due to income generated from the properties we acquired in the CPAŽ:16 Merger, partially offset by the cessation of asset management revenue received from CPAŽ:16 - Global after the CPAŽ:16 Merger was completed.

Results of Operations

We have two reportable segments - Real Estate Ownership and Investment Management. We evaluate our results of operations with a primary focus on increasing and enhancing the value, quality and amount of assets in our Real Estate Ownership segment as well as assets under management by our Investment Management segment. We focus our efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals, or selectively selling assets in order to increase value in our real estate portfolio. The ability to increase assets under management by structuring investments on behalf of the Managed REITs is affected, among other things, by the Managed REITs' ability to raise capital and our ability to identify and enter into appropriate investments and financing.

                                                 W. P. Carey 3/31/2014 10-Q - 43
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Real Estate Ownership

The following tables present other operating data that management finds useful
in evaluating results of operations:
                                 March 31, 2014     December 31, 2013
Occupancy (a)                           98.3 %               98.9 %
Total net-leased properties (a)          700                  418
Total operating properties (b)             4                    2


                                              Three Months Ended March 31,
                                                 2014               2013
Financings (millions) (c)                  $       500.0       $       112.7
New consolidated investments (millions)             43.1                72.4
Average U.S. dollar/euro exchange rate (d)        1.3705              1.3209
Increases in U.S. CPI (e)                            1.4 %               1.4 %
Increases in Germany CPI (e)                         0.2 %               0.6 %
Increases in France CPI (e)                          0.4 %               0.5 %
Increases in Finland CPI (e)                         0.4 %               1.0 %



(a) Amounts as of March 31, 2014 reflect 335 properties acquired from CPAŽ:16 - Global in the CPAŽ:16 Merger in January 2014 with a total fair value of approximately $1.8 billion ( Note 3 ).

(b) Operating properties were two self-storage properties and two hotel properties acquired from CPAŽ:16 - Global in the CPAŽ:16 Merger.

(c) The amount for the three months ended March 31, 2014 represents the $500.0 million Senior Unsecured Notes ( Note 12 ).

(d) The average conversion rate for the U.S. dollar in relation to the euro increased during the three months ended March 31, 2014 as compared to the same period in 2013, resulting in a positive impact on earnings in 2014 from our euro-denominated investments.

(e) Many of our lease agreements and those of the CPAŽ REITs include contractual increases indexed to changes in the Consumer Price Index, or CPI, or other similar index.

                                                 W. P. Carey 3/31/2014 10-Q - 44
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The following table presents the comparative results of our Real Estate
Ownership segment (in thousands):
                                                        Three Months Ended March 31,
                                                     2014            2013          Change
Revenues
Lease revenues                                   $   123,213     $   72,460     $   50,753
Reimbursable tenant costs                              6,030          3,117          2,913
Operating property revenues                            4,993            227          4,766
Other                                                  1,000            679            321
                                                     135,236         76,483         58,753
Operating Expenses
Depreciation and amortization:
Leased properties                                     50,638         28,344         22,294
Operating properties                                     826             44            782
                                                      51,464         28,388         23,076
Property expenses:
Reimbursable tenant costs                              6,030          3,117          2,913
Leased properties                                      4,241          1,553          2,688
Operating property expenses                            3,685            141          3,544
Property management fees                                 503             71            432
                                                      14,459          4,882          9,577
Merger and acquisition expenses                       29,613            121         29,492
General and administrative                            11,607          6,333          5,274
Stock-based compensation expenses                        219            174             45
                                                     107,362         39,898         67,464
Segment Net Operating Income                          27,874         36,585         (8,711 )
Other Income and Expenses
Gain on change in control of interests               103,574              -        103,574
Net income from equity investments in real
estate and the Managed REITs                          14,262         10,656          3,606
Interest expense                                     (39,075 )      (25,584 )      (13,491 )
Other income and (expenses)                           (5,044 )        1,111         (6,155 )
                                                      73,717        (13,817 )       87,534
Income from continuing operations before income
taxes                                                101,591         22,768         78,823
Benefit from (provision for) income taxes              4,070         (1,174 )        5,244
Income from continuing operations                    105,661         21,594         84,067
Income (loss) from discontinued operations             6,135         (2,677 )        8,812
Net Income from Real Estate Ownership                111,796         18,917         92,879
Net income attributable to noncontrolling
interests                                             (1,389 )       (2,225 )          836
Net income from Real Estate Ownership
attributable to W. P. Carey                      $   110,407     $   16,692     $   93,715
AFFO                                             $    98,962     $   62,956     $   36,006

W. P. Carey 3/31/2014 10-Q - 45

Lease Composition and Leasing Activities

As of March 31, 2014, 94% of our net leases, based on ABR, have rent increases, comprised of 71% that have CPI and similar rent adjustments based on formulas indexed to changes in the CPI, or other similar indices for the jurisdiction in which the property is located, some of which have caps and/or floors, and 23% that have fixed rent increases for which ABR is scheduled to increase by an average of 2.7% in the next 12 months. We own international investments and, therefore, lease revenues from these investments are subject to fluctuations in exchange rate movements in foreign currencies.

The following discussion presents a summary of our leasing activity for the periods presented and does not include new acquisitions for our portfolio during the years presented or properties acquired in the CPAŽ:16 Merger.

During the three months ended March 31, 2014, we signed seven leases totaling approximately 0.3 million square feet of leased space. Of these leases, one was with a new tenant and six were lease renewals or extensions with existing tenants. The average new rent for this leased space is $9.46 per square foot and the average former rent was $8.42 per square foot, reflecting current market conditions.

During the three months ended March 31, 2013, we signed eight leases totaling approximately 0.3 million square feet of leased space. Of these leases, two were with new tenants and six were lease renewals or extensions with existing tenants. The average new rent for these leases was $5.70 per square foot and the average former rent was $7.83 per square foot, reflecting current market conditions. We provided a tenant improvement allowance of $0.4 million on one of these leases. In addition, we entered a lease extension to a 0.4 million square feet building and committed to an expansion of 0.1 million square feet at an expected cost of $6.4 million. The old rent of this lease was $4.72 per square foot and the new rent was $4.29 per square foot.

                                                 W. P. Carey 3/31/2014 10-Q - 46
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Property Level Contribution

Property level contribution includes lease and operating property revenues, less
property expenses, depreciation and amortization. When a property is leased on a
net-lease basis, reimbursable tenant costs are recorded as both income and
property expense and, therefore, have no impact on the property level
contribution. The following table presents the property level contribution for
our consolidated leased and operating properties as well as a reconciliation to
Segment net operating income (in thousands):
                                                       Three Months Ended March 31,
                                                      2014          2013        Change
Same Store Leased Properties:
Lease revenues                                    $   71,921     $ 70,614     $  1,307
Property expenses                                     (1,759 )     (1,553 )       (206 )
Depreciation and amortization                        (27,123 )    (26,963 )       (160 )
Property level contribution                           43,039       42,098          941

Leased Properties Acquired in the CPAŽ:16 Merger:
Lease revenues                                        45,554            -       45,554
Property expenses                                     (2,093 )          -       (2,093 )
Depreciation and amortization                        (20,177 )          -      (20,177 )
Property level contribution                           23,284            -       23,284

Recently Acquired Leased Properties:
Lease revenues                                         5,421        1,582        3,839
Property expenses                                       (356 )          -         (356 )
Depreciation and amortization                         (3,321 )     (1,371 )     (1,950 )
Property level contribution                            1,744          211        1,533

Properties Sold or Held-for-Sale:
Lease revenues                                           317          264           53
Property expenses                                        (33 )          -          (33 )
Depreciation and amortization                            (17 )        (11 )         (6 )
Property level contribution                              267          253           14

Operating Properties:
Revenues                                               4,993          227        4,766
Property expenses                                     (3,685 )       (141 )     (3,544 )
Depreciation and amortization                           (826 )        (43 )       (783 )
Property level contribution                              482           43          439

Total Property Level Contribution:
Lease revenues                                       123,213       72,460       50,753
Property expenses                                     (4,241 )     (1,553 )     (2,688 )
Operating property revenues                            4,993          227        4,766
Operating property expenses                           (3,685 )       (141 )     (3,544 )
Depreciation and amortization                        (51,464 )    (28,388 )    (23,076 )
Property Level Contribution                           68,816       42,605       26,211
Lease termination fees and other                       1,000          679          321
Property management fees                                (503 )        (71 )       (432 )
General and administrative                           (11,607 )     (6,333 )     (5,274 )
Merger and acquisition expenses                      (29,613 )       (121 )    (29,492 )
Stock-based compensation expenses                       (219 )       (174 )        (45 )
Segment Net Operating Income                      $   27,874     $ 36,585     $ (8,711 )

W. P. Carey 3/31/2014 10-Q - 47

Same Store Leased Properties

Same store leased properties are those we acquired prior to January 1, 2013. At March 31, 2014, there were 340 same store leased properties.

For the three months ended March 31, 2014 as compared to the same period in 2013, property level contribution from same store leased properties increased by $0.9 million, primarily due to an increase in lease revenues of $1.3 million. Lease revenues increased by $1.4 million as a result of scheduled rent increases at certain properties. Lease revenues also increased by $0.4 million as a result of the positive impact of the fluctuations of foreign currency exchange rates. These increases were partially offset by a decrease in lease revenues of $0.5 million as a result of restructuring of leases at several properties.

Leased Properties Acquired in the CPAŽ:16 Merger

In January 2014, we acquired 332 leased properties in the CPAŽ:16 Merger.

For the three months ended March 31, 2014, property level contribution from leased properties acquired in the CPAŽ:16 Merger was $23.3 million, representing the two months of activity since the date of the CPAŽ:16 Merger on January 31, 2014.

Recently Acquired Leased Properties

Recently acquired leased properties are those that we acquired subsequent to December 31, 2012.

For the three months ended March 31, 2014 as compared to the same period in 2013, property level contribution from recently acquired leased properties increased by $1.5 million. During the three months ended March 31, 2014, we acquired one investment with ABR of approximately $3.7 million. During the three months ended March 31, 2013, we acquired one investment with ABR of approximately $5.0 million. After March 31, 2013 through December 31, 2013, we acquired an additional five properties with aggregate ABR of approximately $14.3 million. Results of operations for these five properties are included in the consolidated income statement for the three months ended March 31, 2014.

Properties Sold or Held-for-Sale

During the three months ended March 31, 2014, we sold one property and entered into contracts to sell two additional properties. After March 31, 2013 through December 31, 2013, we sold our investment in a direct financing lease. Results of operations for these properties are included within continuing operations in the consolidated financial statements.

During the three months ended March 31, 2014, we also sold properties that were classified as held for sale prior to January 1, 2014. In connection with the CPAŽ:16 Merger, we acquired nine properties that were classified as held for sale from CPAŽ:16 - Global. Results of operations for these properties are included within discontinued operations discussed below.

Operating Properties

Operating properties consist of our investments in two hotels acquired in the CPAŽ:16 Merger and two self-storage properties as of March 31, 2014.

For the three months ended March 31, 2014, as compared to the same period in 2013, property level contribution from operating properties increased by $0.4 million as a result of the two hotels we acquired in the CPAŽ:16 Merger.

Other Revenues and Expenses

Merger and Acquisition Expenses

2014 - For the three months ended March 31, 2014, merger and acquisition expenses were $29.6 million, which consisted of merger-related expenses of $29.5 million and other acquisition-related expenses of $0.1 million. Merger-related expenses during 2014 represent costs incurred in connection with the CPAŽ:16 Merger. Acquisition expenses consist of acquisition-related costs incurred on the domestic office building we purchased during the three months ended March 31, 2014, which was accounted for as a business combination and for which such costs were required to be expensed under current accounting guidance.

W. P. Carey 3/31/2014 10-Q - 48

General and Administrative

As discussed in Note 4 , certain personnel and overhead costs are charged to the CPAŽ REITs and our real estate portfolio based on the trailing 12-month reported revenues of the CPAŽ REITs, CWI and us. We began to allocate personnel and overhead costs to CWI on January 1, 2014 based on the time incurred by our personnel.

For the three months ended March 31, 2014 as compared to the same period in 2013, general and administrative expenses in the Real Estate Ownership segment increased by $5.3 million, primarily due to an increase in personnel costs of $4.3 million as a result of higher allocation of personnel and overhead costs to the Real Estate Ownership segment due to the increased revenues after the CPAŽ:16 Merger. In addition, for the three months ended March 31, 2014 as compared to the same period in 2013, general and administrative expenses increased by $1.0 million as a result of higher legal and professional fees.

Gain on Change in Control of Interests

. . .

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