WPC 2014 Q2 10-Q


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014
or 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to __________
 
Commission File Number: 001-13779

W. P. CAREY INC.
(Exact name of registrant as specified in its charter) 
Maryland
45-4549771
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
50 Rockefeller Plaza
 
New York, New York
10020
(Address of principal executive offices)
(Zip Code)
 
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
Registrant has 99,409,854 shares of common stock, $0.001 par value, outstanding at July 31, 2014.
 



INDEX
 
 
 
Page No.
PART I − FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
PART II − OTHER INFORMATION
 
Item 6. Exhibits


Forward-Looking Statements

This Quarterly Report on Form 10-Q, or the Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors which could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on March 4, 2014, or the 2013 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1, Financial Statements (Unaudited).


W. P. Carey 6/30/2014 10-Q – 1


PART I
Item 1. Financial Statements.

W. P. CAREY INC. 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2014
 
December 31, 2013
Assets
 

 
 

Investments in real estate:
 

 
 

Real estate, at cost (inclusive of $250,240 and $78,782, respectively, attributable to variable interest entities, or VIEs)
$
4,497,999

 
$
2,516,325

Operating real estate, at cost (inclusive of $38,714 and $0, respectively, attributable to VIEs)
84,544

 
6,024

Accumulated depreciation (inclusive of $21,806 and $18,238, respectively, attributable to VIEs)
(217,155
)
 
(168,958
)
Net investments in properties
4,365,388

 
2,353,391

Net investments in direct financing leases (inclusive of $64,716 and $18,089, respectively, attributable to VIEs)
880,000

 
363,420

Assets held for sale
—

 
86,823

Equity investments in real estate and the Managed REITs
211,225

 
530,020

Net investments in real estate
5,456,613

 
3,333,654

Cash and cash equivalents (inclusive of $2,216 and $37, respectively, attributable to VIEs)
214,971

 
117,519

Due from affiliates
39,516

 
32,034

Goodwill
698,891

 
350,208

In-place lease intangible assets, net (inclusive of $30,004 and $3,385, respectively, attributable to VIEs)
966,406

 
467,127

Above-market rent intangible assets, net (inclusive of $14,738 and $2,544, respectively, attributable to VIEs)
570,498

 
241,975

Other assets, net (inclusive of $21,144 and $4,246, respectively, attributable to VIEs)
346,853

 
136,433

Total assets
$
8,293,748

 
$
4,678,950

Liabilities and Equity
 

 
 

Liabilities:
 

 
 

Non-recourse debt (inclusive of $150,915 and $29,042, respectively, attributable to VIEs)
$
2,823,415

 
$
1,492,410

Senior credit facility and unsecured term loan
476,700

 
575,000

Senior unsecured notes
498,255

 
—

Below-market rent and other intangible liabilities, net (inclusive of $10,656 and $3,481, respectively, attributable to VIEs)
180,364

 
128,202

Accounts payable, accrued expenses and other liabilities (inclusive of $6,676 and $2,988, respectively, attributable to VIEs)
298,432

 
166,385

Deferred income taxes (inclusive of $838 and $0, respectively, attributable to VIEs)
87,991

 
39,040

Distributions payable
90,610

 
67,746

Total liabilities
4,455,767

 
2,468,783

Redeemable noncontrolling interest
6,418

 
7,436

Commitments and contingencies (Note 12)


 


Equity:
 

 
 

W. P. Carey stockholders’ equity:
 

 
 

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

 
—

Common stock, $0.001 par value, 450,000,000 shares authorized; 100,424,204 and 69,299,949 shares issued,
respectively; and 99,379,788 and 68,266,570 shares outstanding, respectively
100

 
69

Additional paid-in capital
4,024,039

 
2,256,503

Distributions in excess of accumulated earnings
(327,460
)
 
(318,577
)
Deferred compensation obligation
30,624

 
11,354

Accumulated other comprehensive income
14,215

 
15,336

Less: treasury stock at cost, 1,044,416 and 1,033,379 shares, respectively
(60,948
)
 
(60,270
)
Total W. P. Carey stockholders’ equity
3,680,570

 
1,904,415

Noncontrolling interests
150,993

 
298,316

Total equity
3,831,563

 
2,202,731

Total liabilities and equity
$
8,293,748

 
$
4,678,950

 
See Notes to Consolidated Financial Statements.

W. P. Carey 6/30/2014 10-Q – 2


W. P. CAREY INC. 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Real estate revenues:
 
 
 
 
 
 
 
Lease revenues
$
148,253

 
$
73,984

 
$
271,320

 
$
146,444

Reimbursable tenant costs
5,749

 
3,040

 
11,763

 
6,157

Operating property revenues
8,251

 
231

 
13,244

 
458

Lease termination income and other
14,481

 
402

 
15,479

 
1,082

 
176,734

 
77,657

 
311,806

 
154,141

Revenues from the Managed REITs:
 
 
 
 
 
 
 
Reimbursable costs
41,925

 
15,467

 
81,657

 
27,435

Structuring revenue
17,254

 
6,422

 
35,005

 
12,764

Asset management revenue
9,045

 
10,355

 
18,822

 
20,369

Dealer manager fees
7,949

 
2,320

 
14,626

 
3,542

 
76,173

 
34,564

 
150,110

 
64,110

 
252,907

 
112,221

 
461,916

 
218,251

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
63,445

 
29,772

 
116,118

 
59,147

Reimbursable tenant and affiliate costs
47,674

 
18,507

 
93,420

 
33,592

General and administrative
19,133

 
14,545

 
41,802

 
31,596

Property expenses, excluding reimbursable tenant costs
11,209

 
2,282

 
19,627

 
4,047

Stock-based compensation expense
7,957

 
8,429

 
15,000

 
17,578

Dealer manager fees and expenses
6,285

 
3,163

 
11,710

 
5,126

Subadvisor fees
2,451

 
985

 
2,469

 
1,670

Impairment charges
2,066

 
—

 
2,066

 
—

Merger and acquisition expenses
1,137

 
3,128

 
30,751

 
3,249

 
161,357

 
80,811

 
332,963

 
156,005

Other Income and Expenses
 
 
 
 
 
 
 
Net income from equity investments in real estate and the Managed REITs
9,452

 
32,541

 
23,714

 
43,197

Gain on change in control of interests
—

 
—

 
104,645

 
—

Interest expense
(47,733
)
 
(25,750
)
 
(86,808
)
 
(51,334
)
Other income and (expenses)
(883
)
 
2,450

 
(6,335
)
 
3,849

 
(39,164
)
 
9,241

 
35,216

 
(4,288
)
Income from continuing operations before income taxes
52,386

 
40,651

 
164,169

 
57,958

(Provision for) benefit from income taxes
(8,053
)
 
1,134

 
(10,293
)
 
2,341

Income from continuing operations before loss on sale of real estate
44,333

 
41,785

 
153,876

 
60,299

Income from discontinued operations, net of tax
26,460

 
4,364

 
32,853

 
1,688

Loss on sale of real estate, net of tax
(3,821
)
 
(333
)
 
(3,742
)
 
(332
)
Net Income
66,972

 
45,816

 
182,987

 
61,655

Net income attributable to noncontrolling interests
(2,344
)
 
(2,692
)
 
(3,921
)
 
(4,400
)
Net loss (income) attributable to redeemable noncontrolling interest
111

 
43

 
(151
)
 
93

Net Income Attributable to W. P. Carey
$
64,739

 
$
43,167

 
$
178,915

 
$
57,348

Basic Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations attributable to W. P. Carey
$
0.38

 
$
0.57

 
$
1.53

 
$
0.81

Income from discontinued operations attributable to W. P. Carey
0.26

 
0.06

 
0.35

 
0.02

Net Income Attributable to W. P. Carey
$
0.64

 
$
0.63

 
$
1.88

 
$
0.83

Diluted Earnings Per Share
 
 
 
 
 
 
 
Income from continuing operations attributable to W. P. Carey
$
0.38

 
$
0.56

 
$
1.52

 
$
0.80

Income from discontinued operations attributable to W. P. Carey
0.26

 
0.06

 
0.34

 
0.01

Net Income Attributable to W. P. Carey
$
0.64

 
$
0.62

 
$
1.86

 
$
0.81

Weighted Average Shares Outstanding
 
 
 
 
 
 
 

Basic
100,236,362

 
68,406,771

 
94,855,067

 
68,776,108

Diluted
100,995,225

 
69,493,902

 
95,857,916

 
69,870,849

Amounts Attributable to W. P. Carey
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
38,236

 
$
39,133

 
$
145,884

 
$
56,268

Income from discontinued operations, net of tax
26,503

 
4,034

 
33,031

 
1,080

Net Income
$
64,739

 
$
43,167

 
$
178,915

 
$
57,348

Distributions Declared Per Share
$
0.900

 
$
0.840

 
$
1.795

 
$
1.660

 

See Notes to Consolidated Financial Statements.

W. P. Carey 6/30/2014 10-Q – 3


W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands) 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net Income
 
$
66,972

 
$
45,816

 
$
182,987

 
$
61,655

Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,590
)
 
5,094

 
2,956

 
(4,658
)
Realized and unrealized (loss) gain on derivative instruments
 
(1,767
)
 
2,080

 
(4,564
)
 
5,255

Change in unrealized (depreciation) appreciation on marketable securities
 
(5
)
 
—

 
12

 
—

 
 
(3,362
)
 
7,174

 
(1,596
)
 
597

Comprehensive Income
 
63,610

 
52,990

 
181,391

 
62,252

 
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 

 
 

Net income
 
(2,344
)
 
(2,692
)
 
(3,921
)
 
(4,400
)
Foreign currency translation adjustments
 
113

 
(742
)
 
448

 
1,047

Comprehensive income attributable to noncontrolling interests
 
(2,231
)
 
(3,434
)
 
(3,473
)
 
(3,353
)
Amounts Attributable to Redeemable Noncontrolling Interest
 
 
 
 
 
 

 
 

Net loss (income)
 
111

 
43

 
(151
)
 
93

Foreign currency translation adjustments
 
21

 
(2
)
 
27

 
21

Comprehensive loss (income) attributable to redeemable noncontrolling interest
 
132

 
41

 
(124
)
 
114

Comprehensive Income Attributable to W. P. Carey
 
$
61,511

 
$
49,597

 
$
177,794

 
$
59,013

 
See Notes to Consolidated Financial Statements.

W. P. Carey 6/30/2014 10-Q – 4


W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 2014 and Year Ended December 31, 2013
(in thousands, except share and per share amounts)
 
W. P. Carey Stockholders
 
 
 
 
 
 
 
 
 
 
 
Distributions
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
in Excess of
 
Deferred
 
Other
 
 
 
Total
 
 
 
 
 
$0.001 Par Value
 
Paid-in
 
Accumulated
 
Compensation
 
Comprehensive
 
Treasury
 
W. P. Carey
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Obligation
 
Income (Loss)
 
Stock
 
Stockholders
 
Interests
 
Total
Balance at January 1, 2013
68,485,525

 
$
69

 
$
2,175,820

 
$
(172,182
)
 
$
8,358

 
$
(4,649
)
 
$
(20,270
)
 
$
1,987,146

 
$
270,177

 
$
2,257,323

Reclassification of Estate Shareholders’ shares from temporary equity to permanent equity
 
 
 
 
40,000

 
 
 
 
 
 
 
 
 
40,000

 
 
 
40,000

Exercise of stock options and employee purchase under the employee share purchase plan
55,423

 
 
 
2,312

 
 
 
 
 
 
 
 
 
2,312

 
 
 
2,312

Grants issued in connection with services rendered
295,304

 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
 
 
—

Shares issued under share incentive plans
47,289

 
 
 
(9,183
)
 
 
 
 
 
 
 
 
 
(9,183
)
 
 
 
(9,183
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
65,145

 
65,145

Windfall tax benefits - share incentive plans
 
 
 
 
12,817

 
 
 
 
 
 
 
 
 
12,817

 
 
 
12,817

Amortization of stock-based compensation expense
 
 
 
 
34,737

 
 
 
2,459

 
 
 
 
 
37,196

 
 
 
37,196

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(71,820
)
 
(71,820
)
Distributions declared ($3.39 per share)
 
 
 
 
 
 
(245,271
)
 
537

 
 
 
 
 
(244,734
)
 
 
 
(244,734
)
Purchase of treasury stock from related party
(616,971
)
 
 
 
 
 
 
 
 
 
 
 
(40,000
)
 
(40,000
)
 
 
 
(40,000
)
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(5
)
 
(5
)
Net income
 
 
 
 
 
 
98,876

 
 
 
 
 
 
 
98,876

 
32,936

 
131,812

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
19,965

 
 
 
19,965

 
1,883

 
21,848

Realized and unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
20

 
 
 
20

 
 
 
20

Balance at December 31, 2013
68,266,570

 
69

 
2,256,503

 
(318,577
)
 
11,354

 
15,336

 
(60,270
)
 
1,904,415

 
298,316

 
2,202,731

Shares issued to stockholders of CPA®:16 – Global in connection with the CPA®:16 Merger
30,729,878

 
31

 
1,815,490

 
 
 
 
 
 
 
 
 
1,815,521

 
 
 
1,815,521

Purchase of the remaining interests in less-than-wholly-owned investments that we already consolidate in connection with the CPA®:16 Merger
 
 
 
 
(41,374
)
 
 
 
 
 
 
 
 
 
(41,374
)
 
(239,562
)
 
(280,936
)
Purchase of noncontrolling interests in connection with the CPA®:16 Merger
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
99,947

 
99,947

Exercise of stock options and employee purchase under the employee share purchase plan
23,506

 
 
 
1,184

 
 
 
 
 
 
 
 
 
1,184

 
 
 
1,184

Grants issued in connection with services rendered
352,188

 
 
 
(15,736
)
 
 
 
 
 
 
 
 
 
(15,736
)
 
 
 
(15,736
)
Shares issued under share incentive plans
18,683

 
 
 
(534
)
 
 
 
 
 
 
 
 
 
(534
)
 
 
 
(534
)
Deferral of vested shares
 
 
 
 
(15,428
)
 
 
 
15,428

 
 
 
 
 
—

 
 
 
—

Windfall tax benefits - share incentive plans
 
 
 
 
5,449

 
 
 
 
 
 
 
 
 
5,449

 
 
 
5,449

Amortization of stock-based compensation expense
 
 
 
 
15,000

 
 
 


 
 
 
 
 
15,000

 
 
 
15,000

Redemption value adjustment
 
 
 
 
306

 
 
 
 
 
 
 
 
 
306

 
 
 
306

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(11,185
)
 
(11,185
)
Distributions declared ($1.795 per share)
 
 
 
 
3,179

 
(187,798
)
 
3,842

 
 
 
 
 
(180,777
)
 
 
 
(180,777
)
Purchase of treasury stock from related party
(11,037
)
 
 
 
 
 
 
 
 
 
 
 
(678
)
 
(678
)
 
 
 
(678
)
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
4

 
4

Net income
 
 
 
 
 
 
178,915

 
 
 
 
 
 
 
178,915

 
3,921

 
182,836

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
3,431

 
 
 
3,431

 
(448
)
 
2,983

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
(4,564
)
 
 
 
(4,564
)
 
 
 
(4,564
)
Change in unrealized appreciation on marketable securities
 
 
 
 
 
 
 
 
 
 
12

 
 
 
12

 
 
 
12

Balance at June 30, 2014
99,379,788


$
100


$
4,024,039


$
(327,460
)

$
30,624


$
14,215


$
(60,948
)

$
3,680,570


$
150,993


$
3,831,563

See Notes to Consolidated Financial Statements.

W. P. Carey 6/30/2014 10-Q – 5


W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2014

2013
Cash Flows — Operating Activities
 

 
 

Net income
$
182,987

 
$
61,655

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
123,908

 
67,658

Gain on change in control of interests
(104,645
)
 
—

Gain on sale of real estate
(23,930
)
 
(50
)
Straight-line rent and amortization of rent-related intangibles
23,350

 
9,646

Management income received in shares of Managed REITs and other
(18,045
)
 
(20,215
)
Stock-based compensation expense
15,000

 
17,578

Impairment charges
2,066

 
4,950

Income from equity investments in real estate and the Managed REITs in excess of distributions received
(1,815
)
 
(22,338
)
Unrealized gain on foreign currency transactions and other
(1,412
)
 
(3,220
)
Amortization of deferred revenue
(786
)
 
(4,718
)
Realized (gain) loss on extinguishment of debt and other
(344
)
 
181

Changes in assets and liabilities:
 
 
 
Payments for withholding taxes upon delivery of equity-based awards and exercises of stock options
(16,271
)
 
(10,435
)
Increase in income taxes, net
(12,538
)
 
(11,507
)
Deferred acquisition revenue received
11,153

 
12,402

Increase in structuring revenue receivable
(10,842
)
 
(2,285
)
Decrease (increase) in prepaid taxes
5,721

 
(16,143
)
Net changes in other operating assets and liabilities
(4,920
)
 
(11,706
)
Net Cash Provided by Operating Activities
168,637

 
71,453

Cash Flows — Investing Activities
 
 
 
Proceeds from sale of real estate and equity investments
280,795

 
48,902

Funds placed in escrow
(242,370
)
 
(73,993
)
Funds released from escrow
139,254

 
95,536

Purchases of real estate
(88,334
)
 
(183,554
)
Cash acquired in connection with the CPA®:16 Merger
65,429

 
—

Capital expenditures
(13,477
)
 
(5,806
)
Loan to affiliate
(11,000
)
 
—

Distributions received from equity investments in real estate and the Managed REITs in excess of equity income
8,889

 
21,907

Purchase of securities for the defeasance of debt
(7,664
)
 
—

Cash paid to stockholders of CPA®:16 – Global in the CPA®:16 Merger
(1,338
)
 
—

Proceeds from repayment of short-term loans
1,155

 
—

Other investing activities, net
740

 
(176
)
Capital contributions to equity investments
(459
)
 
(1,455
)
Net Cash Provided by (Used in) Investing Activities
131,620

 
(98,639
)
Cash Flows — Financing Activities
 

 
 

Repayments of senior credit facility
(1,310,000
)
 
(98,000
)
Proceeds from senior credit facility and unsecured term loan
1,042,627

 
230,000

Proceeds from issuance of senior unsecured notes
498,195

 
—

Prepayments of mortgage principal
(201,820
)
 
(40,492
)
Distributions paid
(158,312
)
 
(102,923
)
Scheduled payments of mortgage principal
(61,608
)
 
(81,344
)
Payment of financing costs and mortgage deposits, net of deposits refunded
(12,192
)
 
(305
)
Distributions paid to noncontrolling interests
(12,026
)
 
(15,228
)
Proceeds from mortgage financing
6,550

 
99,000

Windfall tax benefit associated with stock-based compensation awards
5,449

 
11,556

Proceeds from exercise of stock options
1,184

 
1,970

Purchase of treasury stock from related party
(677
)
 
(40,000
)
Funds placed in escrow
(588
)
 
(463
)
Contributions from noncontrolling interests
314

 
2,830

Net Cash Used in Financing Activities
(202,904
)
 
(33,399
)
Change in Cash and Cash Equivalents During the Period
 

 
 

Effect of exchange rate changes on cash
99

 
(554
)
Net increase (decrease) in cash and cash equivalents
97,452

 
(61,139
)
Cash and cash equivalents, beginning of period
117,519

 
123,904

Cash and cash equivalents, end of period
$
214,971

 
$
62,765

 
(Continued)

W. P. Carey 6/30/2014 10-Q – 6


W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)

Supplemental Non-cash Investing and Financing Activities:

2014 — On January 31, 2014, CPA®:16 – Global merged with and into us in the CPA®:16 Merger (Note 3). The following table summarizes estimated fair values of the assets acquired and liabilities assumed in the CPA®:16 Merger (in thousands):
Total Consideration
 

Fair value of W. P. Carey shares of common shares issued
$
1,815,521

Cash consideration for fractional shares
1,338

Fair value of our equity interest in CPA®:16 – Global prior to the CPA®:16 Merger
348,448

Fair value of our equity interest in jointly-owned investments with CPA®:16 – Global prior to the CPA®:16 Merger
172,720

Fair value of noncontrolling interests acquired
(278,187
)
 
2,059,840

Assets Acquired at Fair Value
 
Net investments in real estate
1,970,175

Net investments in direct financing leases
538,225

Equity investments in real estate
74,367

Assets held for sale
133,415

Goodwill
348,876

In-place lease intangible assets
553,723

Above-market rent intangible assets
395,824

Other assets
82,032

Liabilities Assumed at Fair Value
 
Non-recourse debt and line of credit
(1,768,288
)
Accounts payable, accrued expenses and other liabilities
(118,389
)
Below-market rent and other intangible liabilities
(57,569
)
Deferred tax liability
(58,347
)
Amounts attributable to noncontrolling interests
(99,633
)
Net assets acquired excluding cash
1,994,411

Cash acquired on acquisition of subsidiaries
$
65,429


See Notes to Consolidated Financial Statements.


W. P. Carey 6/30/2014 10-Q – 7


W. P. CAREY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business and Organization
 
W. P. Carey Inc., or W. P. Carey, is, together with its consolidated subsidiaries and predecessors, a real estate investment trust, or REIT, that provides long-term financing via sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. We invest primarily in commercial properties domestically and internationally. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily on a triple-net lease basis, which requires each tenant to pay substantially all of the costs associated with operating and maintaining the property. Through our taxable REIT subsidiaries, or TRSs, we also earn revenue as the advisor to publicly-owned, non-listed REITs under the Corporate Property Associates, or CPA®, brand name, which invest in similar properties. At June 30, 2014, we were the advisor to Corporate Property Associates 17 – Global Incorporated, or CPA®:17 – Global, and Corporate Property Associates 18 – Global Incorporated, or CPA®:18 – Global. We were also the advisor to Corporate Property Associates 16 – Global Incorporated, or CPA®:16 – Global, until its merger with us on January 31, 2014. We refer to CPA®:16 – Global, CPA®:17 – Global, and CPA®:18 – Global as the CPA® REITs. We are also the advisor to Carey Watermark Investors Incorporated, or CWI, and together with CPA® REITs, the Managed REITs, a publicly-owned, non-listed REIT that invests in lodging and lodging-related properties.

Originally founded in 1973, we reorganized as a REIT in September 2012 in connection with our merger with Corporate Property Associates 15 Incorporated, or CPA®:15. We refer to that merger as the CPA®:15 Merger. Our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”

On January 31, 2014, CPA®:16 – Global merged with and into us based on a merger agreement, dated as of July 25, 2013, which we refer to as the CPA®:16 Merger (Note 3).

We have elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code. As a REIT, we are not generally subject to United States, or U.S., federal income taxation 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 hold all of our real estate assets attributable to our Real Estate Ownership segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.

Reportable Segments
 
Real Estate Ownership — We own and invest in commercial properties principally in the U.S. and the European Union that are then leased to companies, primarily on a triple-net lease basis. We have also invested in several operating properties, such as lodging and self-storage properties. We earn lease revenues from our wholly-owned and co-owned real estate investments that we control. In addition, we generate equity income through co-owned real estate investments that we do not control and our investments in the shares of the Managed REITs (Note 7). Through our special member interests in the operating partnerships of the Managed REITs, we also participate in their cash flows (Note 4). At June 30, 2014, our owned portfolio was comprised of our full or partial ownership interests in 686 properties, substantially all of which were net leased to 216 tenants, with an occupancy rate of 98.5%, and totaled approximately 81.8 million square feet. Collectively, at June 30, 2014, CPA®:17 – Global and CPA®:18 – Global owned all or a portion of 375 properties, including certain properties in which we have an ownership interest. Substantially all of these properties, totaling approximately 39.6 million square feet, were net leased to 119 tenants, with an average occupancy rate of approximately 99.96%. CPA®:17 – Global, CPA®:18 – Global and CWI also had interests in 100 operating properties for an aggregate of approximately 10.6 million square feet at June 30, 2014.

Investment Management — Through our TRSs, we structure and negotiate investments and debt placement transactions for the Managed REITs, for which we earn structuring revenue, and manage their portfolios of real estate investments, for which we earn asset-based management revenue. We earn disposition revenue when we negotiate and structure the sale of properties on behalf of the Managed REITs, and we may also earn incentive revenue and receive other compensation in connection with providing liquidity events for the Managed REITs’ stockholders. We are currently considering alternatives for expanding our investment management operations by raising funds in addition to the existing Managed REITs, although there can be no assurance that we will pursue any of these initiatives.  These new funds could invest primarily in assets other than net-lease real estate and include funds raised through publicly traded vehicles, either in the U.S. or internationally.


W. P. Carey 6/30/2014 10-Q – 8
 
Notes to Consolidated Financial Statements (Unaudited)

Note 2. Basis of Presentation

Our interim consolidated financial statements have been prepared, without audit, 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 accounting principles generally accepted in the U.S., or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2013, which are included in the 2013 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.

The unaudited consolidated financial statements included in this Report have been retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties as discontinued operations for all periods presented.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries and our tenancy-in-common interests as described below. The portion of equity in a consolidated subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

At June 30, 2014, we had six investments in tenancy-in-common interests in various domestic and international properties, five of which we consolidate because we own 100% of these investments and account for the remaining jointly-owned investment using the equity method of accounting. Consolidation of the remaining investment is not required as such interest does not qualify as a VIE and do not meet the control requirement required for consolidation. Accordingly, we account for this investment using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of these investments.

We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease as well as certain decision-making rights within a loan can cause us to consider an entity a VIE. In connection with the CPA®:16 Merger, we acquired 12 VIEs. We consider these entities VIEs because the leases have either fixed price purchase or renewal options. In connection with our acquisition of a property during the six months ended June 30, 2014 (Note 5), we assigned the property to a third-party special purpose entity, or SPE, and provided a loan to the SPE to purchase the property. The SPE is funded solely from that loan and does not have any equity investment at risk. As such, the SPE is deemed to be a VIE in which we are the primary beneficiary and which we consolidate.

Additionally, we own interests in single-tenant net-leased properties leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. We account for these investments under the equity method of accounting. At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. At June 30, 2014, none of our equity investments had carrying values below zero.

In June 2014, we filed a registration statement with the SEC to sell up to $1.0 billion of common stock of Carey Watermark Investors 2 Incorporated, or 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 such offering would be commenced. Through June 30, 2014, the

W. P. Carey 6/30/2014 10-Q – 9
 
Notes to Consolidated Financial Statements (Unaudited)

financial activity of CWI 2, which has no significant assets, liabilities or operations, was included in our consolidated financial statements.

Recent Accounting Requirements

The following Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board are applicable to us:

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our rental revenues, but will apply to reimbursed tenant costs and revenues generated from our operating properties and our Investment Management business. Additionally, this guidance modifies disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for us in 2017, and early adoption is not permitted. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). ASU 2014-08 changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. Under this new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a “strategic shift that has or will have a major effect on an entity’s operations and financial results.” The new guidance also requires disclosures including pretax profit or loss and significant gains or losses arising from dispositions that represent an “individually significant component of an entity,” but do not meet the criteria to be reported as discontinued operations under ASU 2014-08. In the ordinary course of business we sell properties, which, under prior accounting guidance, we generally reported as discontinued operations; however, under ASU 2014-08 such property dispositions typically would not meet the criteria to be reported as discontinued operations. We elected to early adopt ASU 2014-08 prospectively for all dispositions after December 31, 2013. Consequently, individually significant properties that were sold or classified as held-for-sale during 2014 were not reclassified to discontinued operations in the consolidated financial statements, but have been disclosed in Note 15 to the consolidated financial statements. By contrast, and as required by the new guidance, the results for the current and prior year period reflect as discontinued operations in the consolidated financial statements all dispositions and assets classified as held-for-sale through December 31, 2013 that were deemed under the prior accounting guidance to be discontinued operations, as well as those assets classified as held-for-sale as part of the CPA®:16 Merger. This ASU did not have a significant impact on our financial position or results of operations for any of the periods presented.

ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit relating to a net operating loss carryforward, a similar tax loss or a tax credit carryforward as a reduction to a deferred tax asset except in certain situations. To the extent the net operating loss carryforward, similar tax loss or tax credit carryforward is not available as of the reporting date under the governing tax law to settle any additional income taxes that would result from the disallowance of the tax position, or the governing tax law does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and should not be netted against a deferred tax asset. ASU 2013-11 became effective for us at the beginning of 2014. The adoption of ASU 2013-11 did not have a material impact on our financial condition or results of operations.


W. P. Carey 6/30/2014 10-Q – 10
 
Notes to Consolidated Financial Statements (Unaudited)

Note 3. Merger with CPA®:16 – Global

On July 25, 2013, we and CPA®:16 – Global entered into a definitive agreement pursuant to which CPA®:16 – Global would merge with and into one of our wholly-owned subsidiaries, subject to the approval of our stockholders and the stockholders of CPA®:16 – Global. On January 24, 2014, our stockholders and the stockholders of CPA®:16 – Global each approved the CPA®:16 Merger, and the CPA®:16 Merger closed on January 31, 2014.

In the CPA®:16 Merger, CPA®:16 – Global stockholders received 0.1830 shares of our common stock in exchange for each of their shares of CPA®:16 – Global stock, pursuant to an exchange ratio based upon a value of $11.25 per share of CPA®:16 – Global and the volume weighted average trading price of our common stock for the five consecutive trading days ending on the third trading day preceding the closing of the transaction on January 31, 2014. CPA®:16 – Global stockholders received cash in lieu of any fractional shares in the CPA®:16 Merger. We paid total merger consideration of approximately $1.8 billion, including the issuance of 30,729,878 shares of our common stock with a fair value of $1.8 billion based on the closing price of our common stock on January 31, 2014, of $59.08 per share, to the stockholders of CPA®:16 – Global in exchange for the 168,041,772 shares of CPA®:16 – Global common stock that we and our affiliates did not previously own, and cash of $1.3 million paid in lieu of issuing any fractional shares, or collectively, the Merger Consideration. As a condition of the CPA®:16 Merger, we waived the subordinated disposition and termination fees that we would have been entitled to receive from CPA®:16 – Global upon its liquidation pursuant to the terms of our advisory agreement with CPA®:16 – Global (Note 4).

Immediately prior to the CPA®:16 Merger, CPA®:16 – Global’s portfolio was comprised of the consolidated full or partial interests in 325 leased properties, substantially all of which were triple-net leased with an average remaining life of 10.4 years and an estimated contractual minimum annualized base rent, or ABR, totaling $300.1 million, and two hotel properties. The related property-level debt was comprised of 92 fixed-rate and 18 variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $1.8 billion and a weighted-average annual interest rate of 5.6% at that date. Additionally, CPA®:16 – Global had a line of credit with an outstanding balance of $170.0 million on the date of the closing of the CPA®:16 Merger (Note 11). In addition, CPA®:16 – Global had equity interests in 18 unconsolidated investments, 11 of which were consolidated by us prior to the CPA®:16 Merger, five of which were consolidated by us subsequent to the CPA®:16 Merger and two of which were jointly-owned with CPA®:17 – Global. These investments owned 140 properties, substantially all of which were triple-net leased with an average remaining life of 8.6 years and an estimated ABR totaling $63.9 million, as of January 31, 2014. The debt related to these equity investments was comprised of 17 fixed-rate and five variable-rate non-recourse mortgage loans with an aggregate fair value of approximately $0.3 billion and a weighted-average annual interest rate of 4.8% on January 31, 2014. The lease revenues and income from continuing operations from the properties acquired from the date of the CPA®:16 Merger through June 30, 2014 were $115.9 million and $35.2 million (inclusive of $1.8 million attributable to noncontrolling interests), respectively, for the six months ended June 30, 2014, and $70.3 million and $27.5 million (inclusive of $1.8 million attributable to noncontrolling interests), respectively, for the three months ended June 30, 2014.

During the six months ended June 30, 2014, we sold all ten of the properties that were classified as held-for-sale upon acquisition in connection with the CPA®:16 Merger (Note 15). The results of operations for these properties have been included in Income from discontinued operations, net of tax in the consolidated financial statements. In addition, we sold one property subject to a direct financing lease that we acquired in the CPA®:16 Merger (Note 6). The results of operations for this property have been included in Income from continuing operations before income taxes in the consolidated financial statements.
 
Preliminary Purchase Price Allocation

We accounted for the CPA®:16 Merger as a business combination under the acquisition method of accounting. After consideration of all applicable factors pursuant to the business combination accounting rules, we were considered the “accounting acquirer” due to various factors, including the fact that our stockholders held the largest portion of the voting rights in us upon completion of the CPA®:16 Merger. Costs of $30.4 million related to the CPA®:16 Merger were expensed as incurred and classified within Merger and acquisition expenses in the consolidated financial statements for the six months ended June 30, 2014. Costs of $5.0 million were incurred and classified within Merger and acquisition expenses in the consolidated financial statements for the year ended December 31, 2013. In addition, CPA®:16 – Global incurred a total of $10.6 million of merger expenses between 2013 and 2014.
 
The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at January 31, 2014. The fair values of the lease intangibles acquired were measured in a manner consistent with our purchase price allocation policy described in our 2013 Annual Report. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the total consideration by $1.9 million, and also increased total identifiable net assets by $2.3 million, and increased amounts attributable to noncontrolling interests by $0.3 million, resulting in a $0.1 million decrease in goodwill. The following table summarizes the preliminary

W. P. Carey 6/30/2014 10-Q – 11
 
Notes to Consolidated Financial Statements (Unaudited)

estimated fair values of the assets acquired and liabilities assumed in the acquisition, based on the current best estimate of management. We are in the process of finalizing our assessment of the fair value of the assets acquired and liabilities assumed. Investments in real estate, net investments in direct financing leases, equity investments in real estate, non-recourse debt and amounts attributable to noncontrolling interests were based on preliminary valuation data and estimates. Accordingly, the fair value of these assets and liabilities and the impact to goodwill are subject to change.
(in thousands)
 
Initially Reported at March 31, 2014
 
Measurement Period Adjustments
 
As Revised at June 30, 2014
Total Consideration
 
 
 
 
 
Fair value of W. P. Carey shares of common stock issued
$
1,815,521

 
$
—

 
$
1,815,521

Cash consideration for fractional shares
1,338

 
—

 
1,338

Merger Consideration
1,816,859

 
—

 
1,816,859

Fair value of our equity interest in CPA®:16 – Global prior to the
CPA®:16 Merger
347,164

 
1,284

 
348,448

Fair value of our equity interest in jointly-owned investments with CPA®:16 – Global prior to the CPA®:16 Merger
172,720

 
—

 
172,720

Fair value of noncontrolling interests acquired
(278,829
)
 
642

 
(278,187
)
 
$
2,057,914

 
$
1,926

 
$
2,059,840

Assets Acquired at Fair Value
 
 
 
 
 

Net investments in properties
$
1,969,274

 
$
901

 
$
1,970,175

Net investments in direct financing leases
538,607

 
(382
)
 
538,225

Equity investments in real estate
74,367

 

 
74,367

Assets held for sale
132,951

 
464

 
133,415

In-place lease intangible assets
553,479

 
244

 
553,723

Above-market rent intangible assets
395,663

 
161

 
395,824

Cash and cash equivalents
65,429

 
—

 
65,429

Other assets, net
82,032

 
—

 
82,032

 
3,811,802

 
1,388

 
3,813,190

Liabilities Assumed at Fair Value
 
 
 
 
 

Non-recourse debt and line of credit
(1,768,288
)
 
—

 
(1,768,288
)
Below-market rent and other intangible liabilities
(57,209
)
 
(360
)
 
(57,569
)
Accounts payable, accrued expenses and other liabilities
(118,389
)
 
—

 
(118,389
)
Deferred tax liability
(59,629
)
 
1,282

 
(58,347
)
 
(2,003,515
)
 
922

 
(2,002,593
)
 
 
 
 
 
 
Total identifiable net assets
1,808,287

 
2,310

 
1,810,597

Amounts attributable to noncontrolling interests
(99,345
)
 
(288
)
 
(99,633
)
Goodwill
348,972

 
(96
)
 
348,876

 
$
2,057,914

 
$
1,926

 
$
2,059,840

 
Goodwill
 
The $348.9 million of preliminary estimated goodwill recorded in connection with the CPA®:16 Merger was primarily attributable to the $428.5 million premium we agreed to pay for CPA®:16 – Global’s common stock. At the time we entered into the merger agreement in July 2013, the consideration of $11.25 per common share of CPA®:16 – Global represented a premium of $2.55 per share over the December 31, 2012 estimated net asset value per share, or NAV, of CPA®:16 – Global, its most recently published NAV, which was $8.70. Management believes the premium is supported by several factors of the combined entity, including the fact that (i) it is among the largest publicly traded commercial net-lease REITs with greater operating and financial flexibility and better access to capital markets and with a lower cost of capital than CPA®:16 – Global had on a stand-alone basis; (ii) the CPA®:16 Merger eliminated costs associated with the advisory structure that CPA®:16 – Global had previously; and (iii) the combined portfolio has greater tenant and geographic diversification and an improved overall weighted-average debt maturity and interest rate. The aforementioned amount of goodwill attributable to the premium was partially offset by an increase in the fair value of the net assets acquired during the time between the December 31, 2012 NAV and the date of the CPA®:16 Merger.
 

W. P. Carey 6/30/2014 10-Q – 12
 
Notes to Consolidated Financial Statements (Unaudited)

The fair value of the 30,729,878 shares of our common stock issued in the CPA®:16 Merger as part of the consideration paid for CPA®:16 – Global of $1.8 billion was derived from the closing market price of our common stock on the acquisition date. As required by GAAP, the fair value related to the assets acquired and liabilities assumed, as well as the shares exchanged, has been computed as of the date we gained control of CPA®:16 – Global, which was the closing date of the CPA®:16 Merger, in a manner consistent with the methodology described above.
 
Goodwill acquired in the CPA®:16 Merger is not deductible for income tax purposes.

Equity Investments and Noncontrolling Interests
 
During the first quarter of 2014, we recognized a gain on change in control of interests of approximately $73.1 million, which was the difference between the carrying value of approximately $274.1 million and the preliminary estimated fair value of approximately $347.2 million of our previously-held equity interest in 38,229,294 shares of CPA®:16 – Global’s common stock. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the estimated fair value of our previously-held equity interest in shares of CPA®:16 – Global’s common stock by $1.3 million, resulting in an increase of $1.3 million in Gain on change in control of interests. In accordance with Accounting Standard Codification, or ASC, 805-10-25, we did not record the measurement period adjustments during the three months ended June 30, 2014. Rather, such amounts will be reflected in all future financial statements that include the three months ended March 31, 2014.
 
The CPA®:16 Merger also resulted in our acquisition of the remaining interests in nine investments in which we already had a joint interest and accounted for under the equity method. Upon acquiring the remaining interests in these investments, we owned 100% of these investments and thus accounted for the acquisitions of these interests utilizing the purchase method of accounting. Due to the change in control of the nine jointly-owned investments that occurred, we recorded a gain on change in control of interests of approximately $30.2 million, which was the difference between our carrying values and the preliminary estimated fair values of our previously-held equity interests on the acquisition date of approximately $142.5 million and approximately $172.7 million, respectively. Subsequent to the CPA®:16 Merger, we consolidate these wholly-owned investments. During the six months ended June 30, 2014, one of these investments was sold and is included in Income from discontinued operations, net of tax in the consolidated financial statements.
 
In connection with the CPA®:16 Merger, we also acquired the remaining interests in 12 less-than-wholly-owned investments that we already consolidate and recorded an adjustment to additional paid-in-capital of approximately $42.0 million related to the difference between our carrying values and the preliminary estimated fair values of our previously-held noncontrolling interests on the acquisition date of approximately $236.8 million and approximately $278.2 million, respectively. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the fair value of our previously-held noncontrolling interests on the acquisition date by $0.6 million, resulting in a reduction of $0.6 million to additional paid-in-capital.

The preliminary fair values of our previously-held equity interests and our noncontrolling interests are based on the estimated fair market values of the underlying real estate and related mortgage debt, both of which were determined by management relying in part on a third party. Real estate valuation requires significant judgment. We determined the significant inputs to be Level 3 with ranges for the entire portfolio as follows:
 
•
Discount rates applied to the estimated net operating income of each property ranged from approximately 4.75% to 15.25%;
•
Discount rates applied to the estimated residual value of each property ranged from approximately 4.75% to 14.00%;
•
Residual capitalization rates applied to the properties ranged from approximately 5.00% to 12.50%;
•
The fair market value of the property level debt was determined based upon available market data for comparable liabilities and by applying selected discount rates to the stream of future debt payments; and
•
Discount rates applied to the property level debt cash flows ranged from approximately 1.80% to 8.75%.
 
Other than for two investments, no illiquidity adjustments to the equity interests or noncontrolling interests were deemed necessary as the investments were generally held with affiliates and did not allow for unilateral sale or financing by any of the affiliated parties. With respect to the two investments, a discount of 5% was applied in deriving the value of such interest, reflecting the terms of the third-party jointly-owned investments in which the real estate interest is held. The discount and/or capitalization rates utilized in the appraisals also reflect the illiquidity of real estate assets. Lastly, there were no control premiums contemplated as the investments were in individual, or a portfolio of, underlying real estate and debt, as opposed to a business operation.


W. P. Carey 6/30/2014 10-Q – 13
 
Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Financial Information (Unaudited)

The following unaudited consolidated pro forma financial information has been presented as if the CPA®:16 Merger had occurred on January 1, 2013 for the three and six months ended June 30, 2014 and 2013. The pro forma financial information is not necessarily indicative of what the actual results would have been had the CPA®:16 Merger occurred on that date, nor does it purport to represent the results of operations for future periods.
 
(in thousands, except share and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Pro forma total revenues
 
$
252,907

 
$
185,568

 
$
487,032

 
$
362,085

 
 
 
 
 
 
 
 
 
Pro forma net income from continuing operations, net of tax
 
$
40,469

 
$
41,225

 
$
78,409

 
$
113,700

Pro forma net income attributable to noncontrolling interests
 
(2,344
)
 
(1,807
)
 
(2,916
)
 
(2,536
)
Pro forma net loss (income) attributable to redeemable noncontrolling interest
 
111

 
(349
)
 
(151
)
 
1,602

Pro forma net income from continuing operations, net of tax attributable to W. P. Carey
 
$
38,236

 
$
39,069

 
$
75,342

 
$
112,766

 
 
 
 
 
 


 


Pro forma earnings per share: (a)
 
 
 
 
 


 


Basic
 
$
0.38

 
$
0.39

 
$
0.75

 
$
1.13

Diluted
 
$
0.38

 
$
0.39

 
$
0.75

 
$
1.12

 
 
 
 
 
 
 
 
 
Pro forma weighted-average shares: (b)
 
 
 
 
 
 
 
 
Basic
 
100,236,362

 
99,136,649

 
99,976,714

 
99,505,986

Diluted
 
100,995,225

 
100,223,780

 
100,875,283

 
100,600,727

___________
(a)
The pro forma income attributable to W. P. Carey for the six months ended June 30, 2013 reflects the following income and expenses recognized related to the CPA®:16 Merger as if the CPA®:16 Merger had taken place on January 1, 2013: (i) combined merger expenses through June 30, 2014; (ii) an aggregate gain on change in control of interests of $104.6 million; and (iii) an income tax expense of $4.8 million due to a permanent difference from the recognition of deferred revenue as a result of the accelerated vesting of shares previously issued by CPA®:16 – Global for asset management and performance fees and the payment of deferred acquisition fees in connection with the CPA®:16 Merger.
(b)
The pro forma weighted average shares outstanding for the three and six months ended June 30, 2014 and 2013 were determined as if the 30,729,878 shares of our common stock issued to CPA®:16 – Global stockholders in the CPA®:16 Merger were issued on January 1, 2013.


W. P. Carey 6/30/2014 10-Q – 14
 
Notes to Consolidated Financial Statements (Unaudited)

Note 4. Agreements and Transactions with Related Parties
 
Advisory Agreements with the Managed REITs
 
We have advisory agreements with each of the Managed REITs, pursuant to which we earn fees and are entitled to receive cash distributions. The following tables present a summary of revenue earned and/or cash received from the Managed REITs for the periods indicated, included in the consolidated financial statements (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Reimbursable costs from affiliates
$
41,925

 
$
15,467

 
$
81,657

 
$
27,435

Structuring revenue
17,254

 
6,422

 
35,005

 
12,764

Distributions of Available Cash
5,235

 
8,677

 
15,681

 
16,568

Asset management revenue (a)
9,022

 
10,331

 
18,776

 
20,324

Dealer manager fees
7,949

 
2,320

 
14,626

 
3,542

Deferred revenue earned
—

 
2,123

 
786

 
4,246

Interest income on deferred acquisition fees and loans to affiliates
163

 
224

 
337

 
479

 
$
81,548

 
$
45,564

 
$
166,868

 
$
85,358

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
CPA®:16 – Global (b)
$
—

 
$
12,128

 
$
7,999

 
$
26,070

CPA®:17 – Global (c)
16,645

 
14,617

 
32,472

 
29,609

CPA®:18 – Global (c)
42,654

 
—

 
98,831

 
—

CWI (c)
22,249

 
18,819

 
27,566

 
29,679

 
$
81,548

 
$
45,564

 
$
166,868

 
$
85,358

___________
(a)
Excludes amounts received from third parties.
(b)
Upon completion of the CPA®:16 Merger on January 31, 2014, the advisory agreement with CPA®:16 – Global terminated. Pursuant to the terms of the merger agreement, the incentive or termination fee that we would have been entitled to receive from CPA®:16 – Global pursuant to the terms of their advisory agreement was waived upon the completion of the CPA®:16 Merger. The amount shown for the six months ended June 30, 2014 reflects transactions through January 31, 2014.
(c)
The current form of the advisory agreement is scheduled to expire on September 30, 2014, unless renewed pursuant to its terms.

The following table presents a summary of amounts Due from affiliates (in thousands):
 
June 30, 2014
 
December 31, 2013
Deferred acquisition fees receivable
$
18,515

 
$
19,684

Note receivable from CWI, including interest thereon
11,002

 
—

Accounts receivable
3,623

 
3,716

Current acquisition fees receivable
3,242

 
4,149

Organization and offering costs
1,926

 
2,700

Reimbursable costs
1,208

 
334

Asset management fee receivable
—

 
1,451

 
$
39,516

 
$
32,034


Asset Management Revenue
 
We earn asset management revenue from each Managed REIT, which is based on average invested assets and is calculated according to the respective advisory agreement. For CPA®:16 – Global, prior to the CPA®:16 Merger, we earned asset management revenue of 0.5% of average invested assets. For CPA®:17 – Global and CPA®:18 – Global, we earn asset

W. P. Carey 6/30/2014 10-Q – 15
 
Notes to Consolidated Financial Statements (Unaudited)

management revenue ranging from 0.5% to 1.75% and 0.5% to 1.5%, respectively, depending on the type of investment and based on the average market value or average equity value, as applicable. For CWI, we earn asset management revenue of 0.5% of the average market value of lodging-related investments.
 
Under the terms of the advisory agreements, we may elect to receive cash or shares of stock for asset management revenue due from each Managed REIT. In 2014 and 2013, we elected to receive all asset management revenue from CPA®:17 – Global, CPA®:18 – Global and CWI in their respective shares. For 2013, we elected to receive asset management revenue from CPA®:16 – Global in its shares until we agreed to receive those fees in cash commencing August 1, 2013 at the request of a Special Committee of the Board of Directors of CPA®:16 – Global.
 
Structuring Revenue
 
Under the terms of the advisory agreements, we earn revenue in connection with structuring and negotiating investments and related financing for the Managed REITs, which we call acquisition revenue. We may receive acquisition revenue of 4.5% of the total aggregate cost of long-term net lease investments made by each CPA® REIT. A portion of this revenue (generally 2.5%) is paid when the transaction is completed, while the remainder (generally 2%) is paid in annual installments over three years, provided the relevant CPA® REIT meets its performance criterion. For certain types of non-long term net lease investments acquired on behalf of CPA®:17 – Global, initial acquisition revenue may range from 0% to 1.75% of the equity invested plus the related acquisition revenue, with no deferred acquisition revenue being earned. For CWI, we earn initial acquisition revenue of 2.5% of the total investment cost of the properties acquired and loans originated by CWI not to exceed 6% of the aggregate contract purchase price of all investments and loans, with no deferred acquisition revenue being earned. For CWI, we may also be entitled to fees for structuring loan refinancing transactions of up to 1% of the principal amount. This loan refinancing revenue, together with the acquisition revenue, is referred to as structuring revenue.

Unpaid transaction fees, including accrued interest, are included in Due from affiliates in the consolidated financial statements. Unpaid transaction fees bear interest at annual rates ranging from 2% to 5%.

Reimbursable Costs from Affiliates and Dealer Manager Fees
 
The Managed REITs reimburse us for certain costs we incur on their behalf, primarily broker-dealer commissions, marketing costs, an annual distribution and shareholder servicing fee, or Shareholder Servicing Fee, and certain personnel and overhead costs. Since October 1, 2012, personnel and overhead costs have been charged to the CPA® REITs based on the trailing 12-month reported revenues of the CPA® 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 2014, we agreed to receive personnel cost reimbursements from CWI in shares of its common stock.

During CWI’s initial public offering, which was terminated in September 2013, we earned a selling commission of $0.70 per share sold and a dealer manager fee of $0.30 per share sold. We currently earn a selling commission of $0.70 per share sold and a dealer manager fee of $0.30 per share sold for CWI’s follow-on offering, which began in December 2013. We also earned a selling commission of $0.65 per share sold and a dealer manager fee of $0.35 per share sold during CPA®:17 – Global’s follow-on offering, which was terminated in January 2013.

For CPA®:18 – Global’s initial public offering, we receive selling commissions, depending on the class of common stock sold, of $0.70 or $0.14 per share sold, and a dealer manager fee of $0.30 or $0.21 per share sold, for its class A common stock and class C common stock, respectively. CPA®:18 – Global completed sales of its class A common stock during July 2014. We also receive a Shareholder Servicing Fee paid in connection with investor purchases of shares of class C common stock. The amount of the Shareholder Servicing Fee is 1% of the purchase price per share (or, once reported, the amount of the estimated NAV per share) for the shares of class C common stock sold in the offering. The Shareholder Servicing Fee is accrued daily and is payable quarterly in arrears. CPA®:18 – Global will cease paying the Shareholder Servicing Fee on the date at which, in the aggregate, underwriting compensation from all sources, including the Shareholder Servicing Fee, any organizational and offering fee paid for underwriting, and underwriting compensation paid by us, equals 10% of the gross proceeds from the initial public offering.

We re-allow all of the selling commissions and may re-allow a portion of the dealer manager fees to selected dealers in the offerings for CWI and CPA®:18 – Global. Dealer manager fees that are not re-allowed are classified as Dealer manager fees in the consolidated financial statements.

Pursuant to its advisory agreement, CWI is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its initial and follow-on public offerings up to a maximum amount (excluding selling commissions

W. P. Carey 6/30/2014 10-Q – 16
 
Notes to Consolidated Financial Statements (Unaudited)

and the dealer manager fee) of 2% and 4%, respectively, of the gross proceeds of its offering and distribution reinvestment plan. Through June 30, 2014, we incurred organization and offering costs on behalf of CWI of approximately $11.8 million, which CWI is obligated to reimburse us, and $11.1 million had been reimbursed as of June 30, 2014.

Pursuant to its advisory agreement, CPA®:18 – Global is obligated to reimburse us for all organization costs and a portion of offering costs incurred in connection with its initial public offering. CPA®:18 – Global is obligated to reimburse us up to 1.5% of the gross proceeds within 60 days after the end of the quarter in which the offering terminates. Through June 30, 2014, we incurred organization and offering costs on behalf of CPA®:18 – Global of approximately $7.1 million, and based on current fundraising projections, the entire amount is expected to be reimbursed by CPA®:18 – Global. As of June 30, 2014, $6.4 million had been reimbursed.
 
Distributions of Available Cash and Deferred Revenue Earned
 
We are entitled to receive distributions of our proportionate share of earnings up to 10% of the Available Cash from the operating partnerships of each of the Managed REITs, as defined in their respective operating partnership agreements. In May 2011, we acquired a special member interest, or the Special Member Interest, in CPA®:16 – Global’s operating partnership. We initially recorded this Special Member Interest at its fair value, and amortized it into earnings through the date of the CPA®:16 Merger. Cash distributions of our proportionate share of earnings from the Managed REITs’ operating partnerships as well as deferred revenue earned from our Special Member Interest in CPA®:16 – Global’s operating partnership are recorded as Income from equity investments in real estate and the Managed REITs within the Real Estate Ownership segment.

Other Transactions with Affiliates
 
Transactions with the Estate of Wm. Polk Carey
 
On March 28, 2013, we received an irrevocable notice from the Estate of Wm. Polk Carey, our chairman and founder who passed away on January 2, 2012, to exercise its final sale option under a Share Purchase Agreement that we entered into in July 2012. On April 4, 2013, we repurchased 616,971 shares of our common stock for $40.0 million from the Estate at a price of $64.83 per share at which time it was recorded as Treasury stock on our consolidated balance sheet.
 
The following table presents a reconciliation of our Redeemable securities – related party (in thousands):
 
Six Months Ended June 30,
 
2014
 
2013
Beginning balance
$
—

 
$
40,000

Redemption of securities
—

 
(40,000
)
Ending balance
$
—

 
$
—

 
Loans to Managed REITs

During 2013, our board of directors approved unsecured loans from us to CWI and CPA®:18 – Global of up to $50.0 million and up to $100.0 million, respectively, each at a rate equal to the rate at which we are able to borrow funds under our senior credit facility (Note 11), for the purpose of facilitating acquisitions approved by their respective investment committees, that they would not otherwise have sufficient available funds to complete, with any loans to be made solely at our Management’s discretion. On June 25, 2014, in order to facilitate an acquisition by CWI, we made an $11.0 million loan to CWI, with an annual interest rate of LIBOR plus 1.1% and a scheduled maturity date of June 30, 2015. The loan, including accrued interest, was repaid in full prior to maturity on July 22, 2014.
 
Treasury Stock

In February 2014, we repurchased 11,037 shares of our common stock for $0.7 million in cash from the former independent directors of CPA®:16 – Global at a price per share equal to the volume weighted average trading price. These shares were issued to them as Merger Consideration in exchange for their shares of CPA®:16 – Global common stock in the CPA®:16 Merger (Note 3) and were repurchased by agreement in order to satisfy the independence requirements set forth in the organizational documents of the remaining CPA® REITs, for which these individuals also serve as independent directors.


W. P. Carey 6/30/2014 10-Q – 17
 
Notes to Consolidated Financial Statements (Unaudited)

Other

We own interests in entities ranging from 3% to 90%, as well as jointly-controlled tenancy-in-common interests in properties, with the remaining interests generally held by affiliates, and own common stock in each of the Managed REITs. We consolidate certain of these investments and account for the remainder under the equity method of accounting.

Note 5. Net Investments in Properties
 
Real Estate

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, and real estate under construction, is summarized as follows (in thousands):
 
June 30, 2014
 
December 31, 2013
Land
$
1,107,594

 
$
534,697

Buildings
3,375,775

 
1,972,107

Real estate under construction
14,630

 
9,521

Less: Accumulated depreciation
(214,543
)
 
(168,076
)
 
$
4,283,456

 
$
2,348,249

 
As discussed in Note 3, we acquired 225 properties subject to existing operating leases in the CPA®:16 Merger, which increased the carrying value of our real estate by $2.0 billion during the six months ended June 30, 2014. In connection with restructuring two leases, we reclassified properties with an aggregate carrying value of $7.0 million from Net investments in direct financing leases to Real estate during the six months ended June 30, 2014 (Note 6).

Acquisitions of Real Estate

During the six months ended June 30, 2014, we entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, at a total cost of $89.1 million, including land of $13.3 million, building of $60.3 million and net lease intangibles of $15.5 million (Note 8):

•
an investment of $41.9 million for an office building in Chandler, Arizona on March 26, 2014; and
•
an investment of $47.2 million for a warehouse/distribution facility in University Park, Illinois on May 15, 2014.

In connection with these transactions, we expensed acquisition-related costs of $0.2 million, which are included in Merger and acquisition costs in the consolidated financial statements.

Operating Real Estate
 
Operating real estate, which consists of our investments in two hotels acquired in the CPA®:16 Merger and two self-storage properties, at cost, is summarized as follows (in thousands): 
 
June 30, 2014
 
December 31, 2013
Land
$
7,027

 
$
1,097

Buildings
77,517

 
4,927

Less: Accumulated depreciation
(2,612
)
 
(882
)
 
$
81,932

 
$
5,142



W. P. Carey 6/30/2014 10-Q – 18
 
Notes to Consolidated Financial Statements (Unaudited)

Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):
 
June 30, 2014
 
December 31, 2013
Real estate, net
$
—

 
$
62,466

Above-market rent intangible assets, net
—

 
13,872

In-place lease intangible assets, net
—

 
12,293

Below-market rent and other intangible liabilities, net
—

 
(1,808
)
Assets held for sale
$
—

 
$
86,823


At December 31, 2013, we had nine properties classified as Assets held for sale, all of which were sold during the six months ended June 30, 2014. In connection with the CPA®:16 Merger in January 2014, we acquired ten properties that were classified as Assets held for sale with a total fair value of $133.4 million, all of which were sold during the six months ended June 30, 2014. The results of operations for these properties are reflected in the consolidated financial statements as discontinued operations (Note 15).

During the six months ended June 30, 2014, we reclassified one property with a carrying value of $1.3 million to Assets held for sale, which was then subsequently sold. The results of operations for this property are included within continuing operations in the consolidated financial statements.


Note 6. 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, notes receivable and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated balance sheets.
 
Net Investments in Direct Financing Leases
 
Net investments in direct financing leases is summarized as follows (in thousands):
 
June 30, 2014
 
December 31, 2013
Minimum lease payments receivable
$
1,018,305

 
$
466,182

Unguaranteed residual value
881,192

 
363,903

 
1,899,497

 
830,085

Less: unearned income
(1,019,497
)
 
(466,665
)
 
$
880,000

 
$
363,420

 
Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $21.4 million and $9.4 million for the three months ended June 30, 2014 and 2013, respectively, and $38.6 million and $18.8 million for the six months ended June 30, 2014 and 2013, respectively. In connection with the CPA®:16 Merger in January 2014, we acquired 98 properties subject to direct financing leases with a total fair value of $538.2 million (Note 3), of which one was sold during three months ended June 30, 2014 (Note 15). During the six months ended June 30, 2014, we reclassified properties with a carrying value of $7.0 million from Net investments in direct financing leases to Real estate (Note 5), in connection with the restructuring of the underlying leases. At June 30, 2014 and December 31, 2013, Other assets, net included $2.3 million and $0.1 million, respectively, of accounts receivable related to amounts billed under these direct financing leases.


W. P. Carey 6/30/2014 10-Q – 19
 
Notes to Consolidated Financial Statements (Unaudited)

Notes Receivable

At June 30, 2014, our notes receivable, which were included in Other assets, net on the consolidated financial statements, consisted of the following:

•
A note we acquired in the CPA®:16 Merger with a carrying value of $11.1 million, representing the expected future payments under a sales type lease; and
•
A B-note we acquired in the CPA®:16 Merger with a carrying value of $9.9 million. This note has a fixed annual interest rate of 6.3% and a maturity date of February 11, 2015.

Deferred Acquisition Fees Receivable
 
As described in Note 4, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA® REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA® REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA® REITs were included in Due from affiliates in the consolidated financial statements.
 
Credit Quality of Finance Receivables
 
We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both June 30, 2014 and December 31, 2013, none of the balances of our finance receivables were past due and we had not established any allowances for credit losses. There were no modifications of finance receivables during the six months ended June 30, 2014 or the year ended December 31, 2013. 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. The credit quality evaluation of our finance receivables was last updated in the second quarter of 2014. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA® REITs are expected to have the available cash to make such payments.
 
A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Tenants
 
Net Investments in Direct Financing Leases at
Internal Credit Quality Indicator
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
December 31, 2013
1
 
4
 
3
 
$
86,064

 
$
42,812

2
 
3
 
3
 
27,630

 
27,869

3
 
21
 
8
 
622,001

 
284,968

4
 
7
 
1
 
144,305

 
7,771

5
 
—
 
—
 
—

 
—

 
 
 
 
 
 
$
880,000

 
$
363,420


A summary of our notes receivable by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Obligors at
 
Notes Receivable at
Internal Credit Quality Indicator
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
December 31, 2013
1
 
—
 
—
 
$
—

 
$
—

2
 
1