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WPC > SEC Filings for WPC > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for W. P. CAREY INC.

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


7-Aug-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 June 30, 2014, manage a global investment portfolio of 1,027 properties, including 686 net-leased properties and four operating properties within our owned real estate portfolio. Our business operates in two segments - Real Estate Ownership and Investment Management.

Significant Developments

Real Estate Ownership

Investment Transactions

During the six months ended June 30, 2014, we acquired two domestic investments for $89.1 million ( Note 5 ). 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. As part of our capital recycling program, we sold 22 domestic properties and two international properties during the six months ended June 30, 2014 for total proceeds of $298.3 million. Properties sold in 2014 included 11 industrial properties, six office facilities, three sports facilities, two warehouse/distribution facilities, a retail facility, and a hotel ( Note 15 ).

Financing Transactions

During the six months ended June 30, 2014, in connection with our long-term plan to become a primarily unsecured borrower, we prepaid 19 non-recourse mortgage loans with an aggregate outstanding principal balance of $201.8 million ( Note 11 ).

Distributions

Our cash distributions totaled $1.875 per share during the six months ended June 30, 2014, comprised of total quarterly cash distributions of $1.765 per share and a special cash distribution of $0.110 per share paid on January 15, 2014 and April 15, 2014. In addition, during the second quarter of 2014, we declared a quarterly distribution of $0.900 per share, which was paid on July 15, 2014 to stockholders of record on June 30, 2014.

Investment Management

During the six months ended June 30, 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 ).

• During the six months ended June 30, 2014, we structured investments in six properties, a follow-on equity investment of $20.4 million, and an $8.4 million foreign debenture for an aggregate of $156.1 million on behalf of CPAŽ:17 - Global. One of these investments is jointly-owned with CPAŽ:18 - Global. Approximately $108.6 million was primarily invested in Europe and $47.5 million was invested in the U.S. Of the six properties acquired, three are industrial facilities, two are office facilities, and one is a retail facility.

• During the six months ended June 30, 2014, we structured investments in 17 properties for a total of $370.7 million on behalf of CPAŽ:18 - Global. One of these investments is jointly-owned with CPAŽ:17 - Global. Approximately $212.6 million was invested in the U.S. and $158.1 million was invested in Europe. Of the 17 properties acquired,

W. P. Carey 6/30/2014 10-Q - 46

eight are industrial facilities, four are office facilities, three are warehouse/distribution facilities, and two are self-storage facilities.
• During the six months ended June 30, 2014, we structured investments in five domestic hotels for a total of $407.4 million on behalf of CWI.

Financing Transactions

• During the six months ended June 30, 2014, we arranged mortgage financing totaling $52.6 million for CPAŽ:17 - Global, $275.7 million for CPAŽ:18 - Global, and $266.5 million for CWI.

Investor Capital Inflows

• CPAŽ:18 - Global commenced its initial public offering in May 2013 and through June 30, 2014 had raised approximately $1.0 billion, of which $797.7 million was raised during the six months ended June 30, 2014.

• CWI completed fundraising in its initial public offering in September 2013 and commenced its follow-on offering in December 2013. From inception through June 30, 2014, CWI raised a total of $687.1 million, of which $111.3 million was raised during the six months ended June 30, 2014.

• In May 2014, the board of directors of CPAŽ:18 - Global approved the discontinuation of sales of its class A common stock as of June 30, 2014 in order to moderate the pace of its fundraising. In order to facilitate the final sales of its class A shares as of June 30, 2014 and the continued sale of its class C shares, the board of directors of CPAŽ:18 - Global also approved the reallocation to its initial public offering of up to $250.0 million of the shares that were initially allocated to sales of its stock through its dividend reinvestment plan.

• In June 2014, we filed a registration statement with the SEC to sell up to $1.0 billion of common stock of CWI 2 in an initial public offering plus up to an additional $400.0 million of its common stock under a dividend reinvestment plan. As of the date of this Report, the registration statement has not been declared effective by the SEC and there can be no assurance as to whether or when any such offering would be commenced.

Proposed Regulatory Changes

Changes have been proposed to the rules of the Financial Industry Regulatory Authority, Inc., or FINRA, applicable to securities of unlisted REITs, like the Managed REITs, and direct participation programs, or DPPs. The rule changes propose, among other things, that: (i) FINRA members, such as our broker dealer subsidiary, Carey Financial, LLC, include in customer account statements NAVs of the unlisted entity that have been developed using a methodology reasonably designed to ensure the NAV's reliability; and (ii) NAVs disclosed from and after 150 days following the second anniversary of the admission of shareholders of the unlisted entity's public offering be based on an appraised valuation developed by, or with the material assistance of, a third-party expert and updated on at least an annual basis, which is consistent with our current practice regarding our Managed REITs. The rule changes also propose that account statements include additional disclosure regarding the sources of distributions to shareholders of unlisted entities.

An amended version of the proposed rules was recently published for public comment, and they remain subject to approval by the SEC. There can be no assurance that they will be adopted in the form currently proposed. FINRA has stated that the rule changes would become effective no earlier than 18 months after they are approved by the SEC. It is not practicable at this time to determine whether the proposed rules will adversely affect market demand for shares of unlisted REITs. We will continue to assess the potential impact of the proposed rule changes on our Investment Management business.

Financial Highlights

Our results for the three and six months ended June 30, 2014 included the following significant items:

• Total lease revenue and total property level contribution increased by $74.3 million and $39.3 million, respectively, for the three months ended June 30, 2014, and $124.9 million and $65.5 million, respectively, for the six months ended June 30, 2014 as compared to the same periods in 2013, respectively, primarily 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 $4.5 million and $7.5 million for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013 due to the cessation of asset management fees from CPAŽ:16 - Global upon completion of the CPAŽ:16 Merger on January 31, 2014;

• Costs incurred in connection with the CPAŽ:16 Merger of $30.1 million during the six months ended June 30, 2014; and

                                                 W. P. Carey 6/30/2014 10-Q - 47
--------------------------------------------------------------------------------


•      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.



(In thousands, except shares)
                                          Three Months Ended June 30,           Six Months Ended June 30,
                                             2014               2013              2014               2013
Real estate revenues (excluding
reimbursable tenant costs)             $       170,985     $     74,617     $     300,043       $    147,984
Investment management revenues
(excluding reimbursable costs from
affiliates)                                     34,248           19,097            68,453             36,675
Total revenues (excluding reimbursable
costs)                                         205,233           93,714           368,496            184,659
Net income attributable to W. P. Carey          64,739           43,167           178,915             57,348

Cash distributions paid                         90,153           57,177           158,312            102,923

Net cash provided by operating
activities                                                                        168,637             71,453
Net cash provided by (used in)
investing activities                                                              131,620            (98,639 )
Net cash used in financing activities                                            (202,904 )          (33,399 )

Supplemental financial measure:
Adjusted funds from operations (AFFO)
(a)                                            122,246           72,638           240,494            144,893

Diluted weighted average shares
outstanding                                100,995,225       69,493,902        95,857,916         69,870,849


___________


(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, referred to as a non-GAAP measure, 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 and six months ended June 30, 2014 as compared to the same periods 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 periods as compared to the same periods in the prior year.

Net cash provided by operating activities increased during the six months ended June 30, 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 and six months ended June 30, 2014 as compared to the same periods 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.

W. P. Carey 6/30/2014 10-Q - 48

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 number of properties in our Real Estate Ownership segment as well as assets owned by the Managed REITs, which are managed 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.

Real Estate Ownership

The following tables present other operating data that management finds useful
in evaluating results of operations:
                                 June 30, 2014     December 31, 2013
Occupancy (a)                          98.5 %               98.9 %
Total net-leased properties (a)         686                  418
Total operating properties (b)            4                    2


                                                Six Months Ended June 30,
                                                   2014              2013
Financings (millions) (c)                    $      1,750.0       $  113.0
Investments (millions)                                 89.1          185.2
Average U.S. dollar/euro exchange rate (d)           1.3712         1.3135
Increases in U.S. CPI (e)                               2.3 %          1.7 %
Increases in Germany CPI (e)                            0.2 %          1.5 %
Increases in France CPI (e)                             0.4 %          0.6 %
Increases in Finland CPI (e)                            0.4 %          1.1 %



(a) Amounts represent occupancy for net-leased properties as of June 30, 2014, which reflects 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 ), 11 of which were sold during the six months ended June 30, 2014.

(b) Operating properties include two self-storage properties with an average occupancy of 93.3% at June 30, 2014. Operating properties also include two hotel properties acquired from CPAŽ:16 - Global in the CPAŽ:16 Merger with an average occupancy of 83.4% at June 30, 2014. Hotel occupancy is for the six months ended June 30, 2014.

(c) The amount for the six months ended June 30, 2014 represents the $500.0 million Senior Unsecured Notes and the $1.25 billion Senior Unsecured Credit Facility ( Note 11 ).

(d) The average conversion rate for the U.S. dollar in relation to the euro increased during the six months ended June 30, 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 U.S. Consumer Price Index, or CPI, or similar indices in jurisdiction in which the property is located.

                                                 W. P. Carey 6/30/2014 10-Q - 49
--------------------------------------------------------------------------------


The following table presents the comparative results of our Real Estate
Ownership segment (in thousands):
                                      Three Months Ended June 30,               Six Months Ended June 30,
                                    2014          2013        Change        2014          2013         Change
Revenues
Lease revenues                   $ 148,253     $ 73,984     $ 74,269     $ 271,320     $ 146,444     $ 124,876
Reimbursable tenant costs            5,749        3,040        2,709        11,763         6,157         5,606
Operating property revenues          8,251          231        8,020        13,244           458        12,786
Lease termination income and
other                               14,481          402       14,079        15,479         1,082        14,397
                                   176,734       77,657       99,077       311,806       154,141       157,665
Operating Expenses
Depreciation and amortization:
Leased properties                   61,579       28,673       32,906       112,106        57,016        55,090
Operating properties                   913           44          869         1,741            88         1,653
                                    62,492       28,717       33,775       113,847        57,104        56,743
Property expenses:
Reimbursable tenant costs            5,749        3,040        2,709        11,763         6,157         5,606
Leased properties                    5,236        1,709        3,527         9,466         3,262         6,204
Operating property expenses          5,821          144        5,677         9,506           286         9,220
Property management fees               152          429         (277 )         655           499           156
                                    16,958        5,322       11,636        31,390        10,204        21,186
Merger and acquisition expenses      1,137        3,128       (1,991 )      30,751         3,249        27,502
General and administrative          10,239        4,516        5,723        21,845        10,850        10,995
Stock-based compensation expense       220          910         (690 )         440         1,084          (644 )
Impairment charges                   2,066            -        2,066         2,066             -         2,066
                                    93,112       42,593       50,519       200,339        82,491       117,848
Segment Net Operating Income        83,622       35,064       48,558       111,467        71,650        39,817
Other Income and Expenses
Gain on change in control of
interests                                -            -            -       104,645             -       104,645
Net income from equity
investments in real estate and
the Managed REITs                    9,452       32,541      (23,089 )      23,714        43,197       (19,483 )
Interest expense                   (47,733 )    (25,750 )    (21,983 )     (86,808 )     (51,334 )     (35,474 )
Other income and (expenses)         (1,044 )      2,211       (3,255 )      (6,168 )       3,320        (9,488 )
                                   (39,325 )      9,002      (48,327 )      35,383        (4,817 )      40,200
Income from continuing
operations before income taxes      44,297       44,066          231       146,850        66,833        80,017
(Provision for) benefit from
income taxes                        (3,142 )     (2,396 )       (746 )         909        (3,571 )       4,480
Income from continuing
operations                          41,155       41,670         (515 )     147,759        63,262        84,497
Income from discontinued
operations                          26,460        4,364       22,096        32,853         1,688        31,165
Loss on sale of real estate, net
of taxes                            (3,821 )       (333 )     (3,488 )      (3,742 )        (332 )      (3,410 )
Net Income from Real Estate
Ownership                           63,794       45,701       18,093       176,870        64,618       112,252
Net income attributable to
noncontrolling interests            (2,325 )     (2,594 )        269        (3,713 )      (4,819 )       1,106
Net Income from Real Estate
Ownership Attributable to W. P.
Carey                            $  61,469     $ 43,107     $ 18,362     $ 173,157     $  59,799     $ 113,358
AFFO from Real Estate Ownership  $ 111,236     $ 72,302     $ 38,934     $ 210,197     $ 135,258     $  74,939

W. P. Carey 6/30/2014 10-Q - 50

Lease Composition and Leasing Activities

As of June 30, 2014, 94% of our net leases, based on ABR, have rent increases, of which 71% have adjustments based on CPI or similar indices and 23% have fixed rent increases. CPI and similar rent adjustments are 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. Over the next 12 months, fixed rent escalations are scheduled to increase ABR by an average of 3.1% . 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 new rents on second generation leases and renewed leases for the periods presented and, therefore, 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 June 30, 2014, we signed six leases totaling approximately 0.5 million square feet of leased space. Of these leases, one was with a new tenant and five were lease renewals, extensions or expansions with existing tenants. The average new rent for this leased space is $8.92 per square foot and the average former rent was $11.39 per square foot. We also provided tenant improvement allowances on four of these leases totaling $2.3 million. During the three months ended June 30, 2013, we did not enter into new leases or modify any existing leases.

During the six months ended June 30, 2014, we signed 11 leases totaling approximately 0.7 million square feet of leased space. Of these leases, one was with a new tenant and ten were lease renewals, extensions or expansions with existing tenants. The average new rent for this leased space is $9.15 per square foot and the average former rent was $10.49 per square foot. We provided tenant improvement allowances totaling $2.3 million on four of these leases.

During the six months ended June 30, 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 is $5.68 per square foot and the average former rent was $7.88 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 into a lease extension regarding 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 former rent on this lease was $4.72 per square foot and the new rent is $4.29 per square foot.

                                                 W. P. Carey 6/30/2014 10-Q - 51
--------------------------------------------------------------------------------


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 June 30,              Six Months Ended June 30,
                                    2014          2013        Change        2014          2013         Change
Same Store Leased Properties
Lease revenues                   $  70,401     $ 70,544     $   (143 )   $ 141,758     $ 140,599     $  1,159
Property expenses                   (2,920 )     (1,523 )     (1,397 )      (4,681 )      (3,076 )     (1,605 )
Depreciation and amortization      (27,671 )    (26,915 )       (756 )     (54,792 )     (53,878 )       (914 )
Property level contribution         39,810       42,106       (2,296 )      82,285        83,645       (1,360 )

Leased Properties Acquired in
the CPAŽ:16 Merger
Lease revenues                      70,014            -       70,014       115,423             -      115,423
Property expenses                   (1,662 )          -       (1,662 )      (3,688 )           -       (3,688 )
Depreciation and amortization      (29,874 )          -      (29,874 )     (49,942 )           -      (49,942 )
Property level contribution         38,478            -       38,478        61,793             -       61,793

Recently Acquired Leased
Properties
Lease revenues                       7,194        2,687        4,507        12,616         4,269        8,347
Property expenses                     (575 )       (177 )       (398 )        (931 )        (177 )       (754 )
Depreciation and amortization       (4,034 )     (1,748 )     (2,286 )      (7,355 )      (3,118 )     (4,237 )
Property level contribution          2,585          762        1,823         4,330           974        3,356

Properties Sold
Lease revenues                         644          753         (109 )       1,523         1,576          (53 )
Property expenses                      (79 )         (9 )        (70 )        (166 )          (9 )       (157 )
Depreciation and amortization            -          (10 )         10           (17 )         (20 )          3
Property level contribution            565          734         (169 )       1,340         1,547         (207 )

Operating Properties
Revenues                             8,251          231        8,020        13,244           458       12,786
Property expenses                   (5,821 )       (144 )     (5,677 )      (9,506 )        (286 )     (9,220 )
Depreciation and amortization         (913 )        (44 )       (869 )      (1,741 )         (88 )     (1,653 )
Property level contribution          1,517           43        1,474         1,997            84        1,913

Total Property Level
Contribution
Lease revenues                     148,253       73,984       74,269       271,320       146,444      124,876
Property expenses                   (5,236 )     (1,709 )     (3,527 )      (9,466 )      (3,262 )     (6,204 )
Operating property revenues          8,251          231        8,020        13,244           458       12,786
Operating property expenses         (5,821 )       (144 )     (5,677 )      (9,506 )        (286 )     (9,220 )
Depreciation and amortization      (62,492 )    (28,717 )    (33,775 )    (113,847 )     (57,104 )    (56,743 )
Property Level Contribution         82,955       43,645       39,310       151,745        86,250       65,495
Lease termination fees and other    14,481          402       14,079        15,479         1,082       14,397
Property management fees              (152 )       (429 )        277          (655 )        (499 )       (156 )
General and administrative         (10,239 )     (4,516 )     (5,723 )     (21,845 )     (10,850 )    (10,995 )
Merger and acquisition expenses     (1,137 )     (3,128 )      1,991       (30,751 )      (3,249 )    (27,502 )
. . .
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