W. P. Carey Inc. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
☐ 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
![wpc-20210930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001025378/000102537821000107/wpc-20210930_g1.jpg)
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.) | |||||||
One Manhattan West, 395 9th Avenue, 58th Floor | ||||||||
New York, | New York | 10001 | ||||||
(Address of principal executive offices) | (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, $0.001 Par Value | WPC | New York Stock Exchange |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Registrant has 186,284,955 shares of common stock, $0.001 par value, outstanding at October 22, 2021.
INDEX
Page No. | ||||||||
PART I — FINANCIAL INFORMATION | ||||||||
Item 1. Financial Statements (Unaudited) | ||||||||
Item 4. Controls and Procedures | ||||||||
PART II — OTHER INFORMATION | ||||||||
Item 6. Exhibits | ||||||||
W. P. Carey 9/30/2021 10-Q – 1
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. These forward-looking statements include, but are not limited to, statements regarding: our corporate strategy and estimated or future economic performance and results, including our expectations surrounding the impact of the novel coronavirus (“COVID-19”) pandemic on our business, financial condition, liquidity, results of operations, and prospects; our future capital expenditure and leverage levels, debt service obligations, and plans to fund our liquidity needs; prospective statements regarding our access to the capital markets, including our “at-the-market” program (“ATM Program”) and settlement of our Equity Forwards (as defined herein); the outlook for the investment programs that we manage, including possible liquidity events for those programs; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust (“REIT”); and the impact of recently issued accounting pronouncements and regulatory activity.
These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable risks or uncertainties, like the risks related to the effects of pandemics and global outbreaks of contagious diseases (such as the current COVID-19 pandemic) or the fear of such outbreaks, could also have material adverse effects on our business, financial condition, liquidity, results of operations, and prospects. 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 that 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 (“SEC”), including but not limited to those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 12, 2021 (the “2020 Annual Report”). Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, potential investors are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. 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 9/30/2021 10-Q – 2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
W. P. CAREY INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
September 30, 2021 | December 31, 2020 | ||||||||||
Assets | |||||||||||
Investments in real estate: | |||||||||||
Land, buildings and improvements | $ | 11,644,851 | $ | 10,939,619 | |||||||
Net investments in direct financing leases | 633,190 | 711,974 | |||||||||
In-place lease intangible assets and other | 2,384,575 | 2,301,174 | |||||||||
Above-market rent intangible assets | 859,386 | 881,159 | |||||||||
Investments in real estate | 15,522,002 | 14,833,926 | |||||||||
Accumulated depreciation and amortization | (2,793,347) | (2,490,087) | |||||||||
Assets held for sale, net | 11,672 | 18,590 | |||||||||
Net investments in real estate | 12,740,327 | 12,362,429 | |||||||||
Equity method investments | 361,835 | 283,446 | |||||||||
Cash and cash equivalents | 129,686 | 248,662 | |||||||||
Due from affiliates | 1,992 | 26,257 | |||||||||
Other assets, net | 997,318 | 876,024 | |||||||||
Goodwill | 903,976 | 910,818 | |||||||||
Total assets (a) | $ | 15,135,134 | $ | 14,707,636 | |||||||
Liabilities and Equity | |||||||||||
Debt: | |||||||||||
Senior unsecured notes, net | $ | 5,419,419 | $ | 5,146,192 | |||||||
Unsecured term loans, net | 312,605 | 321,971 | |||||||||
Unsecured revolving credit facility | 254,463 | 82,281 | |||||||||
Non-recourse mortgages, net | 688,430 | 1,145,554 | |||||||||
Debt, net | 6,674,917 | 6,695,998 | |||||||||
Accounts payable, accrued expenses and other liabilities | 536,242 | 603,663 | |||||||||
Below-market rent and other intangible liabilities, net | 191,128 | 197,248 | |||||||||
Deferred income taxes | 147,107 | 145,844 | |||||||||
Dividends payable | 199,043 | 186,514 | |||||||||
Total liabilities (a) | 7,748,437 | 7,829,267 | |||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued | — | — | |||||||||
Common stock, $0.001 par value, 450,000,000 shares authorized; 186,284,955 and 175,401,757 shares, respectively, issued and outstanding | 186 | 175 | |||||||||
Additional paid-in capital | 9,694,226 | 8,925,365 | |||||||||
Distributions in excess of accumulated earnings | (2,121,936) | (1,850,935) | |||||||||
Deferred compensation obligation | 49,810 | 42,014 | |||||||||
Accumulated other comprehensive loss | (237,246) | (239,906) | |||||||||
Total stockholders’ equity | 7,385,040 | 6,876,713 | |||||||||
Noncontrolling interests | 1,657 | 1,656 | |||||||||
Total equity | 7,386,697 | 6,878,369 | |||||||||
Total liabilities and equity | $ | 15,135,134 | $ | 14,707,636 | |||||||
__________
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2021 10-Q – 3
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Real Estate: | |||||||||||||||||||||||
Lease revenues | $ | 314,194 | $ | 293,856 | $ | 921,269 | $ | 856,269 | |||||||||||||||
Operating property revenues | 4,050 | 1,974 | 9,474 | 9,368 | |||||||||||||||||||
Lease termination income and other | 2,597 | 1,565 | 11,059 | 9,991 | |||||||||||||||||||
320,841 | 297,395 | 941,802 | 875,628 | ||||||||||||||||||||
Investment Management: | |||||||||||||||||||||||
Asset management and other revenue | 3,872 | 3,748 | 11,792 | 18,603 | |||||||||||||||||||
Reimbursable costs from affiliates | 1,041 | 1,276 | 3,050 | 7,717 | |||||||||||||||||||
4,913 | 5,024 | 14,842 | 26,320 | ||||||||||||||||||||
325,754 | 302,419 | 956,644 | 901,948 | ||||||||||||||||||||
Operating Expenses | |||||||||||||||||||||||
Depreciation and amortization | 115,657 | 108,351 | 340,327 | 332,022 | |||||||||||||||||||
General and administrative | 19,750 | 19,399 | 62,297 | 57,616 | |||||||||||||||||||
Impairment charges | 16,301 | — | 16,301 | 19,420 | |||||||||||||||||||
Reimbursable tenant costs | 15,092 | 15,728 | 45,942 | 42,699 | |||||||||||||||||||
Property expenses, excluding reimbursable tenant costs | 13,734 | 11,923 | 36,432 | 33,649 | |||||||||||||||||||
Stock-based compensation expense | 4,361 | 4,564 | 18,790 | 10,143 | |||||||||||||||||||
Operating property expenses | 3,001 | 1,594 | 6,961 | 8,205 | |||||||||||||||||||
Reimbursable costs from affiliates | 1,041 | 1,276 | 3,050 | 7,717 | |||||||||||||||||||
Merger and other expenses | (908) | (596) | (3,983) | 665 | |||||||||||||||||||
Subadvisor fees | — | — | — | 1,469 | |||||||||||||||||||
188,029 | 162,239 | 526,117 | 513,605 | ||||||||||||||||||||
Other Income and Expenses | |||||||||||||||||||||||
Other gains and (losses) | 49,219 | 44,648 | 15,576 | 39,092 | |||||||||||||||||||
Interest expense | (48,731) | (52,537) | (149,623) | (157,259) | |||||||||||||||||||
Earnings (losses) from equity method investments | 5,735 | 1,720 | (4,154) | (10,087) | |||||||||||||||||||
Gain on sale of real estate, net | 1,702 | 20,933 | 30,914 | 32,684 | |||||||||||||||||||
Non-operating income | 1,283 | 465 | 10,704 | 10,445 | |||||||||||||||||||
9,208 | 15,229 | (96,583) | (85,125) | ||||||||||||||||||||
Income before income taxes | 146,933 | 155,409 | 333,944 | 303,218 | |||||||||||||||||||
(Provision for) benefit from income taxes | (8,347) | (5,975) | (23,434) | 28,122 | |||||||||||||||||||
Net Income | 138,586 | 149,434 | 310,510 | 331,340 | |||||||||||||||||||
Net income attributable to noncontrolling interests | (39) | (37) | (84) | (10,553) | |||||||||||||||||||
Net Income Attributable to W. P. Carey | $ | 138,547 | $ | 149,397 | $ | 310,426 | $ | 320,787 | |||||||||||||||
Basic Earnings Per Share | $ | 0.75 | $ | 0.85 | $ | 1.72 | $ | 1.84 | |||||||||||||||
Diluted Earnings Per Share | $ | 0.74 | $ | 0.85 | $ | 1.71 | $ | 1.84 | |||||||||||||||
Weighted-Average Shares Outstanding | |||||||||||||||||||||||
Basic | 185,422,639 | 174,974,185 | 180,753,115 | 173,879,068 | |||||||||||||||||||
Diluted | 186,012,478 | 175,261,812 | 181,323,128 | 174,144,038 |
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2021 10-Q – 4
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net Income | $ | 138,586 | $ | 149,434 | $ | 310,510 | $ | 331,340 | |||||||||||||||
Other Comprehensive (Loss) Income | |||||||||||||||||||||||
Foreign currency translation adjustments | (20,400) | 34,170 | (28,329) | (4,183) | |||||||||||||||||||
Unrealized gain (loss) on derivative instruments | 13,114 | (16,674) | 31,010 | (13,267) | |||||||||||||||||||
(7,286) | 17,496 | 2,681 | (17,450) | ||||||||||||||||||||
Comprehensive Income | 131,300 | 166,930 | 313,191 | 313,890 | |||||||||||||||||||
Amounts Attributable to Noncontrolling Interests | |||||||||||||||||||||||
Net income | (39) | (37) | (84) | (10,553) | |||||||||||||||||||
Unrealized gain on derivative instruments | — | (7) | (21) | (7) | |||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | (39) | (44) | (105) | (10,560) | |||||||||||||||||||
Comprehensive Income Attributable to W. P. Carey | $ | 131,261 | $ | 166,886 | $ | 313,086 | $ | 303,330 |
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2021 10-Q – 5
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(in thousands, except share and per share amounts)
W. P. Carey Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | in Excess of | Deferred | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
$0.001 Par Value | Paid-in | Accumulated | Compensation | Comprehensive | W. P. Carey | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Obligation | Loss | Stockholders | Interests | Total | |||||||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2021 | 184,253,151 | $ | 184 | $ | 9,542,171 | $ | (2,063,109) | $ | 49,815 | $ | (229,960) | $ | 7,299,101 | $ | 1,666 | $ | 7,300,767 | ||||||||||||||||||||||||||||||||||||
Shares issued under forward sale agreements, net | 2,012,500 | 2 | 147,691 | 147,693 | 147,693 | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon delivery of vested restricted share awards | 19,304 | — | (2) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock-based compensation expense | 4,361 | 4,361 | 4,361 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Delivery of vested shares, net | 5 | (5) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (48) | (48) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($1.052 per share) | (197,374) | (197,374) | (197,374) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 138,547 | 138,547 | 39 | 138,586 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (20,400) | (20,400) | (20,400) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivative instruments | 13,114 | 13,114 | 13,114 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 186,284,955 | $ | 186 | $ | 9,694,226 | $ | (2,121,936) | $ | 49,810 | $ | (237,246) | $ | 7,385,040 | $ | 1,657 | $ | 7,386,697 |
W. P. Carey Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | in Excess of | Deferred | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
$0.001 Par Value | Paid-in | Accumulated | Compensation | Comprehensive | W. P. Carey | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Obligation | Loss | Stockholders | Interests | Total | |||||||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2020 | 173,890,427 | $ | 174 | $ | 8,815,108 | $ | (1,765,892) | $ | 42,014 | $ | (290,613) | $ | 6,800,791 | $ | 1,664 | $ | 6,802,455 | ||||||||||||||||||||||||||||||||||||
Shares issued under forward sale agreements, net | 1,488,291 | 1 | 99,848 | 99,849 | 99,849 | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon delivery of vested restricted share awards | 17,440 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock-based compensation expense | 4,564 | 4,564 | 4,564 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (49) | (49) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($1.044 per share) | (184,380) | (184,380) | (184,380) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 149,397 | 149,397 | 37 | 149,434 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 34,170 | 34,170 | 34,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on derivative instruments | (16,681) | (16,681) | 7 | (16,674) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 175,396,158 | $ | 175 | $ | 8,919,520 | $ | (1,800,875) | $ | 42,014 | $ | (273,124) | $ | 6,887,710 | $ | 1,659 | $ | 6,889,369 |
(Continued)
W. P. Carey 9/30/2021 10-Q – 6
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
(in thousands, except share and per share amounts)
W. P. Carey Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | in Excess of | Deferred | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
$0.001 Par Value | Paid-in | Accumulated | Compensation | Comprehensive | W. P. Carey | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Obligation | Loss | Stockholders | Interests | Total | |||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2021 | 175,401,757 | $ | 175 | $ | 8,925,365 | $ | (1,850,935) | $ | 42,014 | $ | (239,906) | $ | 6,876,713 | $ | 1,656 | $ | 6,878,369 | ||||||||||||||||||||||||||||||||||||
Shares issued under forward sale agreements, net | 6,535,709 | 7 | 457,193 | 457,200 | 457,200 | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued under ATM Program, net | 4,225,624 | 4 | 302,619 | 302,623 | 302,623 | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon delivery of vested restricted share awards | 119,268 | — | (3,779) | (3,779) | (3,779) | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon purchases under employee share purchase plan | 2,597 | — | 176 | 176 | 176 | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock-based compensation expense | 18,790 | 18,790 | 18,790 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deferral of vested shares, net | (7,044) | 7,044 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (104) | (104) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($3.150 per share) | 906 | (581,427) | 752 | (579,769) | (579,769) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 310,426 | 310,426 | 84 | 310,510 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivative instruments | 30,989 | 30,989 | 21 | 31,010 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (28,329) | (28,329) | (28,329) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 186,284,955 | $ | 186 | $ | 9,694,226 | $ | (2,121,936) | $ | 49,810 | $ | (237,246) | $ | 7,385,040 | $ | 1,657 | $ | 7,386,697 |
W. P. Carey Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | in Excess of | Deferred | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
$0.001 Par Value | Paid-in | Accumulated | Compensation | Comprehensive | W. P. Carey | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Obligation | Loss | Stockholders | Interests | Total | |||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2020 | 172,278,242 | $ | 172 | $ | 8,717,535 | $ | (1,557,374) | $ | 37,263 | $ | (255,667) | $ | 6,941,929 | $ | 6,244 | $ | 6,948,173 | ||||||||||||||||||||||||||||||||||||
Cumulative-effect adjustment for the adoption of , Financial Instruments — Credit Losses | (14,812) | (14,812) | (14,812) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued under forward sale agreements, net | 2,951,791 | 3 | 199,478 | 199,481 | 199,481 | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon delivery of vested restricted share awards | 160,653 | — | (5,272) | (5,272) | (5,272) | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon purchases under employee share purchase plan | 5,472 | — | 299 | 299 | 299 | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock-based compensation expense | 10,143 | 10,143 | 10,143 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deferral of vested shares, net | (3,854) | 3,854 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (5,280) | (5,280) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($3.126 per share) | 1,191 | (549,476) | 897 | (547,388) | (547,388) | ||||||||||||||||||||||||||||||||||||||||||||||||
— | (9,865) | (9,865) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 320,787 | 320,787 | 10,553 | 331,340 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on derivative instruments | (13,274) | (13,274) | 7 | (13,267) | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (4,183) | (4,183) | (4,183) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 175,396,158 | $ | 175 | $ | 8,919,520 | $ | (1,800,875) | $ | 42,014 | $ | (273,124) | $ | 6,887,710 | $ | 1,659 | $ | 6,889,369 |
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2021 10-Q – 7
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Cash Flows — Operating Activities | |||||||||||
Net income | $ | 310,510 | $ | 331,340 | |||||||
Adjustments to net income: | |||||||||||
Depreciation and amortization, including intangible assets and deferred financing costs | 351,503 | 341,801 | |||||||||
Amortization of rent-related intangibles and deferred rental revenue | 41,346 | 40,291 | |||||||||
Straight-line rent adjustments | (34,034) | (39,365) | |||||||||
Gain on sale of real estate, net | (30,914) | (32,684) | |||||||||
Stock-based compensation expense | 18,790 | 10,143 | |||||||||
Impairment charges | 16,301 | 19,420 | |||||||||
Asset management revenue received in shares of Managed REITs | (9,452) | (13,585) | |||||||||
Distributions of earnings from equity method investments | 8,816 | 7,286 | |||||||||
Change in allowance for credit losses | (6,737) | 10,313 | |||||||||
Net realized and unrealized gains on extinguishment of debt, equity securities, foreign currency transactions, and other | (5,992) | (46,035) | |||||||||
Losses from equity method investments | 4,154 | 10,087 | |||||||||
Deferred income tax benefit | (3,012) | (47,414) | |||||||||
Net changes in other operating assets and liabilities | (35,883) | (35,014) | |||||||||
Net Cash Provided by Operating Activities | 625,396 | 556,584 | |||||||||
Cash Flows — Investing Activities | |||||||||||
Purchases of real estate | (1,004,433) | (350,120) | |||||||||
Proceeds from sales of real estate | 126,697 | 167,974 | |||||||||
Capital contributions to equity method investments | (97,380) | (595) | |||||||||
Funding for real estate construction, redevelopments, and other capital expenditures on real estate | (87,955) | (169,503) | |||||||||
Proceeds from repayment of short-term loans to affiliates | 62,048 | 51,702 | |||||||||
Funding of short-term loans to affiliates | (41,000) | (5,433) | |||||||||
Other investing activities, net | (22,854) | 4,602 | |||||||||
Return of capital from equity method investments | 11,611 | 12,522 | |||||||||
Proceeds from repayment of loans receivable | — | 11,000 | |||||||||
Net Cash Used in Investing Activities | (1,053,266) | (277,851) | |||||||||
Cash Flows — Financing Activities | |||||||||||
Proceeds from Unsecured Revolving Credit Facility | 1,360,312 | 777,867 | |||||||||
Repayments of Unsecured Revolving Credit Facility | (1,179,552) | (790,760) | |||||||||
Proceeds from issuance of Senior Unsecured Notes | 1,038,391 | — | |||||||||
Redemption of Senior Unsecured Notes | (617,442) | — | |||||||||
Dividends paid | (567,240) | (542,857) | |||||||||
Proceeds from shares issued under forward sale agreements, net of selling costs | 457,227 | 199,716 | |||||||||
Prepayments of mortgage principal | (427,492) | — | |||||||||
Proceeds from shares issued under ATM Program, net of selling costs | 302,506 | — | |||||||||
Scheduled payments of mortgage principal | (51,013) | (241,332) | |||||||||
Payment of financing costs | (8,201) | (9,998) | |||||||||
Payments for withholding taxes upon delivery of equity-based awards | (3,779) | (5,272) | |||||||||
Other financing activities, net | 2,252 | 7,542 | |||||||||
Distributions paid to noncontrolling interests | (104) | (5,280) | |||||||||
Proceeds from Unsecured Term Loans | — | 298,974 | |||||||||
Net Cash Provided by (Used in) Financing Activities | 305,865 | (311,400) | |||||||||
Change in Cash and Cash Equivalents and Restricted Cash During the Period | |||||||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | (7,852) | 3,918 | |||||||||
Net decrease in cash and cash equivalents and restricted cash | (129,857) | (28,749) | |||||||||
Cash and cash equivalents and restricted cash, beginning of period | 311,779 | 251,518 | |||||||||
Cash and cash equivalents and restricted cash, end of period | $ | 181,922 | $ | 222,769 |
See Notes to Consolidated Financial Statements.
W. P. Carey 9/30/2021 10-Q – 8
W. P. CAREY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Business and Organization
W. P. Carey Inc. (“W. P. Carey”) is a REIT that, together with our consolidated subsidiaries, invests primarily in operationally-critical, single-tenant commercial real estate properties located in the United States and Northern and Western Europe on a long-term basis. We earn revenue principally by leasing the properties we own to companies on a triple-net lease basis, which generally requires each tenant to pay the costs associated with operating and maintaining the property.
Founded in 1973, our shares of common stock are listed on the New York Stock Exchange under the symbol “WPC.”
We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code effective as of February 15, 2012. As a REIT, we are not subject to federal income taxes on income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We also own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. Through our taxable REIT subsidiaries (“TRSs”), we also earn revenue as the advisor to certain non-traded investment programs. We hold all of our real estate assets attributable to our Real Estate segment under the REIT structure, while the activities conducted by our Investment Management segment subsidiaries have been organized under TRSs.
On April 13, 2020, two of the non-traded REITs that we advised, Carey Watermark Investors Incorporated (“CWI 1”) and Carey Watermark Investors 2 Incorporated (“CWI 2”) (together, the “CWI REITs”), merged in an all-stock transaction, with CWI 2 as the surviving entity (the “CWI 1 and CWI 2 Merger”). Following the close of the CWI 1 and CWI 2 Merger, our advisory agreements with CWI 1 and CWI 2 were terminated, CWI 2 was renamed Watermark Lodging Trust, Inc. (“WLT”), and we began to provide certain services to WLT pursuant to a transition services agreement (which was terminated on October 13, 2021). As a result, at September 30, 2021, we were the advisor to the following entities (Note 3):
•Corporate Property Associates 18 – Global Incorporated (“CPA:18 – Global”), a publicly owned, non-traded REIT that primarily invests in commercial real estate properties; we refer to CPA:18 – Global together with the CWI REITs as the “Managed REITs” (as used throughout this Report, the term “Managed REITs” does not include CWI 1 and CWI 2 after April 13, 2020); and
•Carey European Student Housing Fund I, L.P. (“CESH”), a limited partnership formed for the purpose of developing, owning, and operating student housing properties and similar investments in Europe; we refer to the Managed REITs and CESH collectively as the “Managed Programs.”
We no longer raise capital for new or existing funds, but currently expect to continue managing CPA:18 – Global and CESH through the end of their respective life cycles (Note 3).
Reportable Segments
Real Estate — Lease revenues from our real estate investments generate the vast majority of our earnings. We invest primarily in commercial properties located in the United States and Northern and Western Europe, which are leased to companies on a triple-net lease basis. At September 30, 2021, our owned portfolio was comprised of our full or partial ownership interests in 1,264 properties, totaling approximately 152 million square feet, substantially all of which were net leased to 358 tenants, with a weighted-average lease term of 10.6 years and an occupancy rate of 98.4%. In addition, at September 30, 2021, our portfolio was comprised of full or partial ownership interests in 20 operating properties, including 19 self-storage properties and one hotel, totaling approximately 1.4 million square feet.
Investment Management — Through our TRSs, we manage the real estate investment portfolios for the Managed Programs, for which we earn asset management revenue. We may earn incentive revenue and receive other compensation through our advisory agreements with certain of the Managed Programs, including in connection with providing a liquidity event for CPA:18 – Global’s stockholders. In addition, we include equity income generated through our (i) ownership of shares and limited partnership units of the Managed Programs (Note 7) and (ii) special general partner interest in the operating partnership of CPA:18 – Global (through which we participate in its cash flows (Note 3)), in our Investment Management segment.
W. P. Carey 9/30/2021 10-Q – 9
Notes to Consolidated Financial Statements (Unaudited)
At September 30, 2021, the Managed Programs owned all or a portion of 58 net-leased properties (including certain properties in which we also have an ownership interest), totaling approximately 11.3 million square feet, substantially all of which were leased to 66 tenants, with an occupancy rate of approximately 98.8%. The Managed Programs also had interests in 66 operating properties (totaling approximately 5.1 million square feet in the aggregate) and four active build-to-suit projects at the same date.
Note 2. Basis of Presentation
Basis of Presentation
Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair presentation 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, 2020, which are included in the 2020 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2020 Annual Report.
At both September 30, 2021 and December 31, 2020, we considered 12 entities to be VIEs, of which we consolidated four and five, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in our consolidated balance sheets (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Land, buildings and improvements | $ | 423,333 | $ | 423,333 | |||||||
Net investments in direct financing leases | — | 15,242 | |||||||||
In-place lease intangible assets and other | 41,968 | 41,997 | |||||||||
Above-market rent intangible assets | 26,720 | 26,720 | |||||||||
Accumulated depreciation and amortization | (150,266) | (137,827) | |||||||||
Total assets | 354,493 | 381,953 | |||||||||
Non-recourse mortgages, net | $ | 1,585 | $ | 3,508 | |||||||
Below-market rent and other intangible liabilities, net | 20,997 | 22,283 | |||||||||
Total liabilities | 45,527 | 48,971 |
W. P. Carey 9/30/2021 10-Q – 10
Notes to Consolidated Financial Statements (Unaudited)
At September 30, 2021 and December 31, 2020, our eight and seven unconsolidated VIEs, respectively, included our interests in six and five unconsolidated real estate investments, respectively, which we account for under the equity method of accounting, and two unconsolidated investments in equity securities, which we accounted for as investments in shares of the entities at fair value. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities. As of September 30, 2021, and December 31, 2020, the net carrying amount of our investments in these entities was $584.8 million and $425.3 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Asset management revenue and structuring and other advisory revenue are now included within Asset management and other revenue in the consolidated statements of income.
We currently present Non-operating income on its own line item in the consolidated statements of income, which was previously included within Other gains and (losses). Non-operating income primarily consists of realized gains and losses on derivative instruments, dividends from equity securities, and interest income on our cash deposits and loans to affiliates.
Segment Allocation Changes
Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In addition, beginning with the second quarter of 2020, stock-based compensation expense and corporate depreciation and amortization expense are fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles. These changes between the segments had no impact on our consolidated financial statements.
In addition, our investments in WLT, and income recognized from our investments in WLT, are included within our Real Estate segment, since we are not the advisor to that company. Previously, our investments in CWI 1 and CWI 2, and income recognized from our investments in CWI 1 and CWI 2, were included within our Investment Management segment (Note 3).
Revenue Recognition
There have been no significant changes in our policies for revenue from contracts under Accounting Standards Codification (“ASC”) 606 from what was disclosed in the 2020 Annual Report. ASC 606 does not apply to our lease revenues, which constitute a majority of our revenues, but primarily applies to revenues generated from our hotel operating properties and our Investment Management segment. Revenue from contracts for our Real Estate segment primarily represented hotel operating property revenues of $2.4 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $4.9 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively (Note 15). Revenue from contracts under ASC 606 from our Investment Management segment is discussed in Note 3.
Lease revenue (including straight-line lease revenue) is only recognized when deemed probable of collection. Collectibility is assessed for each tenant receivable using various criteria including credit ratings (Note 5), guarantees, past collection issues, and the current economic and business environment affecting the tenant. If collectibility of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant.
W. P. Carey 9/30/2021 10-Q – 11
Notes to Consolidated Financial Statements (Unaudited)
Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Cash and cash equivalents | $ | 129,686 | $ | 248,662 | |||||||
Restricted cash (a) | 52,236 | 63,117 | |||||||||
Total cash and cash equivalents and restricted cash | $ | 181,922 | $ | 311,779 |
__________
(a)Restricted cash is included within Other assets, net on our consolidated balance sheets.
Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the transition. We have evaluated our contracts that are referenced to London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued and we expect to account for any necessary modifications with a replacement reference rate using the expedients and exceptions provided for in ASU 2020-04 and ASU 2021-01. We are evaluating the impact these standards may have on our financial statements.
Note 3. Agreements and Transactions with Related Parties
Advisory Agreements and Partnership Agreements with the Managed Programs
We currently have advisory agreements with CPA:18 – Global and CESH, pursuant to which we earn fees and are entitled to receive reimbursement for certain fund management expenses. Upon completion of the CWI 1 and CWI 2 Merger on April 13, 2020, as described below, our advisory agreements with CWI 1 and CWI 2 were terminated, and we no longer receive fees, reimbursements, or distributions of Available Cash from CWI 1 and CWI 2. We no longer raise capital for new or existing funds, but we currently expect to continue to manage CPA:18 – Global and CESH and earn various fees (as described below) through the end of their respective life cycles. We have partnership agreements with CPA:18 – Global and CESH, and under the partnership agreement with CPA:18 – Global, we are entitled to receive certain cash distributions from its operating partnership.
W. P. Carey 9/30/2021 10-Q – 12
Notes to Consolidated Financial Statements (Unaudited)
The following tables present a summary of revenue earned, reimbursable costs, and distributions of Available Cash received/accrued from the Managed Programs and WLT for the periods indicated, included in the consolidated financial statements (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Asset management revenue (a) (b) | $ | 3,872 | $ | 3,748 | $ | 11,792 | $ | 18,109 | |||||||||||||||
Distributions of Available Cash (c) | 1,623 | 1,168 | 4,949 | 5,113 | |||||||||||||||||||
Reimbursable costs from affiliates (a) | 1,041 | 1,276 | 3,050 | 7,717 | |||||||||||||||||||
Interest income on deferred acquisition fees and loans to affiliates (d) | 57 | — | 121 | 360 | |||||||||||||||||||
Structuring and other advisory revenue (a) (b) | — | — | — | 494 | |||||||||||||||||||
$ | 6,593 | $ | 6,192 | $ | 19,912 | $ | 31,793 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
CPA:18 – Global | $ | 5,608 | $ | 4,865 | $ | 16,578 | $ | 16,327 | |||||||||||||||
CWI 1 | — | — | — | 5,662 | |||||||||||||||||||
CWI 2 | — | — | — | 4,668 | |||||||||||||||||||
CESH | 909 | 983 | 3,054 | 3,663 | |||||||||||||||||||
WLT (reimbursed transition services) | 76 | 344 | 280 | 1,473 | |||||||||||||||||||
$ | 6,593 | $ | 6,192 | $ | 19,912 | $ | 31,793 |
__________
(a)Amounts represent revenues from contracts under ASC 606.
(b)Included within Asset management and other revenue in the consolidated statements of income.
(c)Included within Earnings (losses) from equity method investments in the consolidated statements of income.
(d)Included within Non-operating income in the consolidated statements of income.
The following table presents a summary of amounts included in Due from affiliates in the consolidated financial statements (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Reimbursable costs | $ | 1,083 | $ | 1,760 | |||||||
Asset management fees receivable | 712 | 1,054 | |||||||||
Accounts receivable | 98 | 305 | |||||||||
Current acquisition fees receivable | 95 | 136 | |||||||||
Deferred acquisition fees receivable, including accrued interest | 4 | 1,858 | |||||||||
Short-term loans to affiliates, including accrued interest | — | 21,144 | |||||||||
$ | 1,992 | $ | 26,257 |
W. P. Carey 9/30/2021 10-Q – 13
Notes to Consolidated Financial Statements (Unaudited)
Asset Management Revenue
Under the advisory agreements with the Managed Programs, we earn asset management revenue for managing their investment portfolios. The following table presents a summary of our asset management fee arrangements with the remaining Managed Programs:
Managed Program | Rate | Payable | Description | |||||||||||||||||
CPA:18 – Global | 0.5% – 1.5% | In shares of its Class A common stock and/or cash, at the option of CPA:18 – Global; payable 50% in cash and 50% in shares of its Class A common stock for 2020 through March 31, 2020; payable in shares of its Class A common stock effective as of April 1, 2020 | Rate depends on the type of investment and is based on the average market or average equity value, as applicable | |||||||||||||||||
CESH | 1.0% | In cash | Based on gross assets at fair value |
Structuring and Other Advisory Revenue
Under the terms of the advisory agreements with the Managed Programs, we may earn revenue for structuring and negotiating investments. For CPA:18 – Global and CESH, we may earn fees of 4.5% and 2.0%, respectively, of the total aggregate cost of the investments or commitments made.
Reimbursable Costs from Affiliates
The existing Managed Programs reimburse us in cash for certain personnel and overhead costs that we incur on their behalf. For CPA:18 – Global, such costs (excluding those related to our legal transactions group, our senior management, and our investments team) are charged to CPA:18 – Global based on the average of the trailing 12-month aggregate reported revenues of the Managed Programs and us, and personnel costs are capped at 1.0% of CPA:18 – Global’s pro rata lease revenues for both 2021 and 2020. Following the closing of the CWI 1 and CWI 2 Merger on April 13, 2020, we began recording reimbursements from WLT pursuant to a transition services agreement (described below) based on actual expenses incurred. On October 13, 2021, all services provided under the transition services agreement were terminated. For CESH, reimbursements are based on actual expenses incurred.
Distributions of Available Cash
We are entitled to receive distributions of up to 10% of the Available Cash (as defined in CPA:18 – Global’s partnership agreement) from the operating partnership of CPA:18 – Global, payable quarterly in arrears.
Back-End Fees and Interests in the Managed Programs
Under our advisory agreements with certain of the Managed Programs, we may also receive compensation in connection with providing liquidity events for their stockholders. Such back-end fees or interests include or may include disposition fees, interests in disposition proceeds, and distributions related to ownership of shares or limited partnership units in the Managed Programs. For CPA:18 – Global, the timing and form of any liquidity event is at the discretion of its board of directors. Therefore, there can be no assurance as to whether or when any back-end fees or interests will be realized.
Other Transactions with Affiliates
CWI 1 and CWI 2 Merger
The CWI 1 and CWI 2 Merger closed on April 13, 2020 and is discussed in detail in the 2020 Annual Report. Subsequently, CWI 2 was renamed WLT, as described in Note 1.
W. P. Carey 9/30/2021 10-Q – 14
Notes to Consolidated Financial Statements (Unaudited)
In connection with the CWI 1 and CWI 2 Merger, we entered into an internalization agreement and a transition services agreement. Immediately following the closing of the CWI 1 and CWI 2 Merger, (i) the advisory agreements with each of CWI 1 and CWI 2 and each of their respective operating partnerships terminated, (ii) the subadvisory agreements with the subadvisors for CWI 1 and CWI 2 were terminated, and (iii) we provided certain transition services at cost to WLT generally for a period of 12 months from closing. On October 13, 2021, all services provided under the transition services agreement were terminated.
Pursuant to the internalization agreement, the operating partnerships of each of CWI 1 and CWI 2 redeemed the special general partner interests that we previously held, for which we received common stock and preferred stock of WLT (which was a non-cash investing activity), as disclosed in Note 7 and Note 8, respectively. In connection with this redemption, we recognized a non-cash net gain on sale of $33.0 million, which was included within Earnings (losses) from equity method investments in the consolidated statements of income for the nine months ended September 30, 2020. This net gain on sale included a gain recognized on the redemption of the noncontrolling interest in the special general partner interests previously held by the respective subadvisors for CWI 1 and CWI 2 of $9.9 million (which is included within Net income attributable to noncontrolling interests in our consolidated statements of income and Redemption of noncontrolling interest in our consolidated statements of equity).
Loans to Affiliates
From time to time, our board of directors has approved the making of secured and unsecured loans or lines of credit from us to certain of the Managed Programs, at our sole discretion, generally for the purpose of facilitating acquisitions or for working capital purposes.
The principal outstanding balance on our line of credit to CPA:18 – Global was $21.1 million as of December 31, 2020. CPA:18 – Global repaid the principal outstanding balance in full during the nine months ended September 30, 2021.
Other
At September 30, 2021, we owned interests in ten jointly owned investments in real estate (including our investment in shares of common stock of WLT, as described in Note 7), with the remaining interests held by affiliates or third parties. We account for nine such investments under the equity method of accounting (Note 7) and consolidate the remaining investment. In addition, we owned stock of CPA:18 – Global and limited partnership units of CESH at that date. We accounted for our investment in CPA:18 – Global under the equity method of accounting and elected to account for our investment in CESH under the fair value option (Note 7).
Note 4. Land, Buildings and Improvements and Assets Held for Sale
Land, Buildings and Improvements — Operating Leases
Land and buildings leased to others, which are subject to operating leases, and real estate under construction, are summarized as follows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Land | $ | 2,122,213 | $ | 2,012,688 | |||||||
Buildings and improvements | 9,348,418 | 8,724,064 | |||||||||
Real estate under construction | 90,547 | 119,391 | |||||||||
Less: Accumulated depreciation | (1,382,006) | (1,206,912) | |||||||||
$ | 10,179,172 | $ | 9,649,231 |
During the nine months ended September 30, 2021, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro decreased by 5.6% to $1.1579 from $1.2271. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $182.0 million from December 31, 2020 to September 30, 2021.
W. P. Carey 9/30/2021 10-Q – 15
Notes to Consolidated Financial Statements (Unaudited)
In connection with changes in lease classifications due to modifications of the underlying leases, we reclassified two properties with an aggregate carrying value of $28.8 million from Net investments in direct financing leases to Land, buildings and improvements during the nine months ended September 30, 2021 (Note 5).
Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $70.8 million and $64.9 million for the three months ended September 30, 2021 and 2020, respectively, and $207.2 million and $192.9 million for the nine months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021, we determined that the tenant/seller in the January 2020 acquisition of an industrial facility in Aurora, Oregon, would not be able to secure an easement on the property. As a result, the tenant/seller forfeited $5.0 million of the initial purchase price that we held back at the time of acquisition, the release of which was contingent on securing the easement. Since we previously accounted for this as a contingent liability and included the $5.0 million holdback within our capitalized real estate, we reduced the carrying value of Land, buildings and improvements subject to operating leases by this amount during the nine months ended September 30, 2021 and removed the corresponding liability from Accounts payable, accrued expenses and other liabilities on our consolidated balance sheets.
Acquisitions of Real Estate
During the nine months ended September 30, 2021, we entered into the following investments, which were deemed to be real estate asset acquisitions (dollars in thousands):
Property Location(s) | Number of Properties | Date of Acquisition | Property Type | Total Capitalized Costs | ||||||||||||||||||||||
Grove City, Ohio, and Anderson, South Carolina | 2 | 2/2/2021 | Warehouse | $ | 19,129 | |||||||||||||||||||||
Various, New Jersey and Pennsylvania (a) | 10 | 2/11/2021 | Retail; Office | 55,115 | ||||||||||||||||||||||
Central Valley, California (b) | 4 | 2/11/2021 | Warehouse; Land | 75,008 | ||||||||||||||||||||||
Various, France (c) (d) | 3 | 4/1/2021 | Retail | 119,341 | ||||||||||||||||||||||
Searcy, Arkansas | 1 | 4/14/2021 | Industrial | 14,038 | ||||||||||||||||||||||
Detroit, Michigan | 1 | 4/27/2021 | Warehouse | 52,810 | ||||||||||||||||||||||
Solihull, United Kingdom (c) (d) | 1 | 5/4/2021 | Warehouse | 194,954 | ||||||||||||||||||||||
New Rochelle, New York | 1 | 5/5/2021 | Student Housing (Net Lease) | 26,109 | ||||||||||||||||||||||
Groveport, Ohio | 1 | 5/5/2021 | Industrial | 27,133 | ||||||||||||||||||||||
Dakota, Illinois | 1 | 5/12/2021 | Industrial | 65,043 | ||||||||||||||||||||||
San Jose, California | 1 | 5/13/2021 | Industrial | 51,949 | ||||||||||||||||||||||
Opelika, Alabama | 1 | 6/7/2021 | Warehouse | 48,897 | ||||||||||||||||||||||
Niles and Elk Grove Village, Illinois; and Guelph, Canada | 3 | 6/9/2021 | Warehouse | 42,829 | ||||||||||||||||||||||
Rome, New York | 1 | 6/10/2021 | Warehouse | 44,781 | ||||||||||||||||||||||
St. Louis, Missouri | 1 | 8/2/2021 | Office | 7,924 | ||||||||||||||||||||||
Frankfort, Indiana | 1 | 8/26/2021 | Warehouse | 113,544 | ||||||||||||||||||||||
Various, United States (e) | 6 | 9/1/2021 | Hospitality | 17,396 | ||||||||||||||||||||||
Rogers, Minnesota | 1 | 9/9/2021 | Warehouse | 26,531 | ||||||||||||||||||||||
40 | $ | 1,002,531 |
__________
(a)This acquisition is comprised of seven retail facilities and three office facilities.
(b)This acquisition is comprised of two warehouse facilities and two parcels of land.
(c)We also recorded estimated deferred tax liabilities of (i) $8.8 million on the France investment and (ii) $3.6 million on the United Kingdom investment, with corresponding increases to the asset values, due to tax and GAAP temporary differences established in connection with the acquisitions.
(d)Amount reflects the applicable exchange rate on the date of transaction.
(e)This acquisition is comprised of the land under buildings that we already own.
W. P. Carey 9/30/2021 10-Q – 16
Notes to Consolidated Financial Statements (Unaudited)
The aggregate purchase price allocation for investments disclosed above is as follows (dollars in thousands):
Total Capitalized Costs | |||||
Land | $ | 150,093 | |||
Buildings and improvements | 728,528 | ||||
Intangibles: | |||||
In-place lease (weighted-average expected life of 21.2 years) | 153,505 | ||||
Below-market rent (weighted-average expected life of 11.1 years) | (9,995) | ||||
Right-of-use assets: | |||||
Land lease right-of-use assets | 5,979 | ||||
Above-market ground lease intangibles, net | (4,155) | ||||
Prepaid rent liabilities | (15,445) | ||||
Operating lease liabilities | (5,979) | ||||
$ | 1,002,531 |
As of September 30, 2021, we committed to purchase a food production facility in Lawrence, Kansas, for approximately $27.3 million upon completion of construction of the property, which is expected to take place during the fourth quarter of 2021.
Real Estate Under Construction
During the nine months ended September 30, 2021, we capitalized real estate under construction totaling $59.3 million. The number of construction projects in progress with balances included in real estate under construction was two and five as of September 30, 2021 and December 31, 2020, respectively. Aggregate unfunded commitments totaled approximately $41.1 million and $81.8 million as of September 30, 2021 and December 31, 2020, respectively.
During the nine months ended September 30, 2021, we completed the following construction projects (dollars in thousands):
Property Location(s) | Primary Transaction Type | Number of Properties | Date of Completion | Property Type | Total Capitalized Costs (a) | |||||||||||||||||||||||||||
Mason, Ohio | Expansion | 1 | 1/15/2021 | Office | $ | 2,428 | ||||||||||||||||||||||||||
Langen, Germany (a) | Build-to-suit | 1 | 2/4/2021 | Industrial | 52,719 | |||||||||||||||||||||||||||
San Donato Milanese, Italy (a) | Renovation | 1 | 6/30/2021 | Retail; Office | 7,244 | |||||||||||||||||||||||||||
Whitehall, Pennsylvania | Redevelopment | 1 | 8/18/2021 | Warehouse | 25,769 | |||||||||||||||||||||||||||
4 | $ | 88,160 |
__________
(a)Amount reflects the applicable exchange rate on the date of transaction.
As of September 30, 2021, we committed to fund a build-to-suit project for a research center in Wageningen, the Netherlands, for an aggregate amount of $29.1 million (based on the exchange rate of the euro at September 30, 2021). We currently expect to complete the project in the second quarter of 2022.
Capitalized interest incurred during construction was $0.6 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively, and $1.9 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively, which reduces Interest expense in the consolidated statements of income.
Dispositions of Properties
During the nine months ended September 30, 2021, we sold nine properties, which were classified as Land, buildings and improvements subject to operating leases. As a result, the carrying value of our Land, buildings and improvements subject to operating leases decreased by $37.2 million from December 31, 2020 to September 30, 2021.
W. P. Carey 9/30/2021 10-Q – 17
Notes to Consolidated Financial Statements (Unaudited)
Lease Termination Income and Other
2021 — For the three and nine months ended September 30, 2021, lease termination income and other on our consolidated statements of income included: (i) interest income of $1.2 million and $3.0 million, respectively, from our loans receivable (Note 5); (ii) lease-related settlements totaling $0.8 million and $6.1 million, respectively; and (iii) income from a parking garage attached to one of our net-leased properties totaling $0.5 million and $1.4 million, respectively.
2020 — For the three and nine months ended September 30, 2020, lease termination income and other on our consolidated statements of income included: (i) lease-related settlements totaling $0.9 million and $6.6 million, respectively; (ii) income from a parking garage attached to one of our net-leased properties totaling $0.5 million and $1.7 million, respectively; and (iii) interest income from our loans receivable totaling $1.0 million during the nine months ended September 30, 2020 (Note 5).
Leases
Operating Lease Income
Lease income related to operating leases recognized and included in the consolidated statements of income is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Lease income — fixed | $ | 271,360 | $ | 249,356 | $ | 790,391 | $ | 725,321 | |||||||||||||||
Lease income — variable (a) | 27,255 | 26,871 | 81,953 | 74,424 | |||||||||||||||||||
Total operating lease income (b) | $ | 298,615 | $ | 276,227 | $ | 872,344 | $ | 799,745 |
__________
(a)Includes (i) rent increases based on changes in the U.S. Consumer Price Index and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
(b)Excludes $15.6 million and $17.6 million for the three months ended September 30, 2021 and 2020, respectively, and $48.9 million and $56.5 million for nine months ended September 30, 2021 and 2020, respectively, of interest income from direct financing leases that is included in Lease revenues in the consolidated statements of income.
Land, Buildings and Improvements — Operating Properties
At both September 30, 2021, and December 31, 2020, Land, buildings and improvements attributable to operating properties consisted of our investments in ten consolidated self-storage properties and one consolidated hotel. Below is a summary of our Land, buildings and improvements attributable to operating properties (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Land | $ | 10,452 | $ | 10,452 | |||||||
Buildings and improvements | 73,221 | 73,024 | |||||||||
Less: Accumulated depreciation | (16,065) | (14,004) | |||||||||
$ | 67,608 | $ | 69,472 |
Depreciation expense on our buildings and improvements attributable to operating properties was $0.7 million for both the three months ended September 30, 2021 and 2020, and $2.1 million for both the nine months ended September 30, 2021 and 2020.
W. P. Carey 9/30/2021 10-Q – 18
Notes to Consolidated Financial Statements (Unaudited)
Assets Held for Sale, Net
Below is a summary of our properties held for sale (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Land, buildings and improvements | $ | 12,993 | $ | 14,051 | |||||||
In-place lease intangible assets and other, net | 1,454 | 12,754 | |||||||||
Above-market rent intangible assets | 394 | 518 | |||||||||
Accumulated depreciation and amortization | (3,169) | (8,733) | |||||||||
Assets held for sale, net | $ | 11,672 | $ | 18,590 |
At September 30, 2021, we had three properties classified as Assets held for sale, net, with an aggregate carrying value of $11.7 million. At December 31, 2020, we had four properties classified as Assets held for sale, net, with an aggregate carrying value of $18.6 million. All of these properties were sold in 2021.
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases (net of allowance for credit losses), loans receivable (net of allowance for credit losses), and deferred acquisition fees. Operating leases are not included in finance receivables.
Net Investments in Direct Financing Leases
Net investments in direct financing leases is summarized as follows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Lease payments receivable | $ | 434,089 | $ | 527,691 | |||||||
Unguaranteed residual value | 598,661 | 677,722 | |||||||||
1,032,750 | 1,205,413 | ||||||||||
Less: unearned income | (389,223) | (476,365) | |||||||||
Less: allowance for credit losses (a) | (10,337) | (17,074) | |||||||||
$ | 633,190 | $ | 711,974 |
__________
(a)During the nine months ended September 30, 2021 and 2020, we recorded a net reversal of allowance for credit losses of $6.7 million and a net allowance for credit losses of $6.1 million, respectively, on our Net investments in direct financing leases due to changes in expected economic conditions, which was included within Other gains and (losses) in our consolidated statements of income.
Interest income from direct financing leases, which is included in Lease revenues in the consolidated financial statements, was $15.6 million and $17.6 million for the three months ended September 30, 2021 and 2020, respectively, and $48.9 million and $56.5 million for the nine months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021, we sold four properties accounted for as direct financing leases that had an aggregate net carrying value of $35.8 million. During the nine months ended September 30, 2021, we reclassified two properties with an aggregate carrying value of $28.8 million from Net investments in direct financing leases to Land, buildings and improvements subject to operating leases in connection with changes in lease classifications due to modifications of the underlying leases. During the nine months ended September 30, 2021, the U.S. dollar strengthened against the euro, resulting in a $18.0 million decrease in the carrying value of Net investments in direct financing leases from December 31, 2020 to September 30, 2021.
W. P. Carey 9/30/2021 10-Q – 19
Notes to Consolidated Financial Statements (Unaudited)
Loans Receivable
At both September 30, 2021 and December 31, 2020, we had two loans receivable related to a domestic investment with an aggregate carrying value of $24.1 million (net of allowance for credit losses of $12.6 million), which are included in Other assets, net in the consolidated financial statements. In the first quarter of 2021, we entered into an agreement with the borrowers, who agreed to pay us at maturity a total of $3.7 million of unpaid interest due over the previous year. We did not recognize this interest in the consolidated financial statements due to uncertainty of collectibility. Earnings from our loans receivable are included in Lease termination income and other in the consolidated financial statements, and totaled $1.2 million for the three months ended September 30, 2021, and $3.0 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively. We did not recognize income from our loans receivable during the three months ended September 30, 2020, since such income was deemed uncollectible as a result of the COVID-19 pandemic.
Credit Quality of Finance Receivables
We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. At both September 30, 2021 and December 31, 2020, other than uncollected income from our loans receivable (as noted above), no material balances of our finance receivables were past due. Other than the lease modifications noted under Net Investments in Direct Financing Leases above, there were no material modifications of finance receivables during the nine months ended September 30, 2021.
We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as CPA:18 – Global is expected to have the available cash to make such payments (Note 3).
A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable and allowance for credit losses, is as follows (dollars in thousands):
Number of Tenants / Obligors at | Carrying Value at | |||||||||||||||||||||||||
Internal Credit Quality Indicator | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
1 – 3 | 17 | 18 | $ | 514,709 | $ | 587,103 | ||||||||||||||||||||
4 | 10 | 9 | 165,554 | 141,944 | ||||||||||||||||||||||
5 | — | 2 | — | 36,737 | ||||||||||||||||||||||
$ | 680,263 | $ | 765,784 |
Note 6. Goodwill and Other Intangibles
We have recorded net lease, internal-use software development, and trade name intangibles that are being amortized over periods ranging from three years to 48 years. In-place lease intangibles, at cost are included in In-place lease intangible assets and other in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Internal-use software development and trade name intangibles are included in Other assets, net in the consolidated financial statements. Below-market rent and below-market purchase option intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.
W. P. Carey 9/30/2021 10-Q – 20
Notes to Consolidated Financial Statements (Unaudited)
Goodwill within our Real Estate segment decreased by $6.8 million during the nine months ended September 30, 2021 due to foreign currency translation adjustments, from $881.5 million as of December 31, 2020 to $874.6 million as of September 30, 2021. Goodwill within our Investment Management segment was $29.3 million as of September 30, 2021, unchanged from December 31, 2020.
Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
Finite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||
Internal-use software development costs | $ | 19,577 | $ | (17,912) | $ | 1,665 | $ | 19,204 | $ | (15,711) | $ | 3,493 | |||||||||||||||||||||||
Trade name | 3,975 | (3,382) | 593 | 3,975 | (2,786) | 1,189 | |||||||||||||||||||||||||||||
23,552 | (21,294) | 2,258 | 23,179 | (18,497) | 4,682 | ||||||||||||||||||||||||||||||
Lease Intangibles: | |||||||||||||||||||||||||||||||||||
In-place lease | 2,276,549 | (914,496) | 1,362,053 | 2,181,584 | (828,219) | 1,353,365 | |||||||||||||||||||||||||||||
Above-market rent | 859,386 | (480,780) | 378,606 | 881,159 | (440,952) | 440,207 | |||||||||||||||||||||||||||||
3,135,935 | (1,395,276) | 1,740,659 | 3,062,743 | (1,269,171) | 1,793,572 | ||||||||||||||||||||||||||||||
Indefinite-Lived Goodwill | |||||||||||||||||||||||||||||||||||
Goodwill | 903,976 | — | 903,976 | 910,818 | — | 910,818 | |||||||||||||||||||||||||||||
Total intangible assets | $ | 4,063,463 | $ | (1,416,570) | $ | 2,646,893 | $ | 3,996,740 | $ | (1,287,668) | $ | 2,709,072 | |||||||||||||||||||||||
Finite-Lived Intangible Liabilities | |||||||||||||||||||||||||||||||||||
Below-market rent | $ | (276,134) | $ | 101,717 | $ | (174,417) | $ | (270,730) | $ | 90,193 | $ | (180,537) | |||||||||||||||||||||||
Indefinite-Lived Intangible Liabilities | |||||||||||||||||||||||||||||||||||
Below-market purchase option | (16,711) | — | (16,711) | (16,711) | — | (16,711) | |||||||||||||||||||||||||||||
Total intangible liabilities | $ | (292,845) | $ | 101,717 | $ | (191,128) | $ | (287,441) | $ | 90,193 | $ | (197,248) |
During the nine months ended September 30, 2021, the U.S. dollar strengthened against the euro, resulting in a decrease of $33.4 million in the carrying value of our net intangible assets from December 31, 2020 to September 30, 2021. Net amortization of intangibles, including the effect of foreign currency translation, was $55.2 million and $54.5 million for the three months ended September 30, 2021 and 2020, respectively, and $166.9 million and $171.8 million for the nine months ended September 30, 2021 and 2020, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues and amortization of internal-use software development, trade name, and in-place lease intangibles is included in Depreciation and amortization.
Note 7. Equity Method Investments
We own interests in (i) the Managed Programs, (ii) certain unconsolidated real estate investments with CPA:18 – Global and third parties, and (iii) WLT. We account for our interests in these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences) or at fair value by electing the equity method fair value option available under GAAP.
We classify distributions received from equity method investments using the cumulative earnings approach. In general, distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
W. P. Carey 9/30/2021 10-Q – 21
Notes to Consolidated Financial Statements (Unaudited)
Managed Programs
We own interests in the Managed Programs and account for these interests under the equity method because, as their advisor, we do not exert control over, but we do have the ability to exercise significant influence over, the Managed Programs. Operating results of the Managed Programs are included in the Investment Management segment.
The following table sets forth certain information about our investments in the Managed Programs (dollars in thousands):
% of Outstanding Interests Owned at | Carrying Amount of Investment at | |||||||||||||||||||||||||
Fund | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
CPA:18 – Global (a) | 5.265 | % | 4.569 | % | $ | 60,296 | $ | 51,949 | ||||||||||||||||||
CPA:18 – Global operating partnership | 0.034 | % | 0.034 | % | 209 | 209 | ||||||||||||||||||||
CESH (b) | 2.430 | % | 2.430 | % | 4,936 | 4,399 | ||||||||||||||||||||
$ | 65,441 | $ | 56,557 |
__________
(a)During the nine months ended September 30, 2021, we received asset management revenue from CPA:18 – Global in shares of its common stock, which increased our ownership percentage in CPA:18 – Global (Note 3).
(b)Investment is accounted for at fair value.
CPA:18 – Global — We received distributions from this investment during the nine months ended September 30, 2021 and 2020 of $1.4 million and $2.2 million, respectively. We received distributions from our investment in the CPA:18 – Global operating partnership during the nine months ended September 30, 2021 and 2020 of $4.9 million and $5.1 million, respectively (Note 3).
CWI 1 — We received distributions from this investment during the nine months ended September 30, 2020 of $0.8 million.
CWI 2 — We received distributions from this investment during the nine months ended September 30, 2020 of $0.5 million.
CESH — We have elected to account for our investment in CESH at fair value by selecting the equity method fair value option available under GAAP. We record our investment in CESH on a one quarter lag; therefore, the balance of our equity method investment in CESH recorded as of September 30, 2021 is based on the estimated fair value of our investment as of June 30, 2021. We received distributions from this investment during the nine months ended September 30, 2021 of $1.3 million. We did not receive a distribution from this investment during the nine months ended September 30, 2020.
At September 30, 2021 and December 31, 2020, the aggregate unamortized basis differences on our equity method investments in the Managed Programs were $22.2 million and $18.8 million, respectively.
Interests in Other Unconsolidated Real Estate Investments and WLT
We own equity interests in properties that are generally leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. The underlying investments are jointly owned with affiliates or third parties. In addition, we own shares of WLT common stock, as described in Note 3. We account for these investments under the equity method of accounting. Operating results of our unconsolidated real estate investments are included in the Real Estate segment.
W. P. Carey 9/30/2021 10-Q – 22
Notes to Consolidated Financial Statements (Unaudited)
The following table sets forth our ownership interests in our equity method investments in real estate, excluding the Managed Programs, and their respective carrying values (dollars in thousands):
Carrying Value at | ||||||||||||||||||||||||||
Lessee/Fund/Description | Co-owner | Ownership Interest | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
Las Vegas Retail Complex (a) | Third Party | N/A | $ | 93,997 | $ | — | ||||||||||||||||||||
Johnson Self Storage | Third Party | 90% | 67,807 | 68,979 | ||||||||||||||||||||||
Kesko Senukai (b) | Third Party | 70% | 42,044 | 46,443 | ||||||||||||||||||||||
WLT (c) | WLT | 5% | 34,319 | 44,182 | ||||||||||||||||||||||
Harmon Retail Corner (d) | Third Party | 15% | 24,358 | 23,815 | ||||||||||||||||||||||
Bank Pekao (b) | CPA:18 – Global | 50% | 17,558 | 17,850 | ||||||||||||||||||||||
State Farm Mutual Automobile Insurance Co. (e) | CPA:18 – Global | 50% | 7,484 | 15,475 | ||||||||||||||||||||||
Apply Sørco AS (f) | CPA:18 – Global | 49% | 5,940 | 7,156 | ||||||||||||||||||||||
Fortenova Grupa d.d. (b) | CPA:18 – Global | 20% | 2,887 | 2,989 | ||||||||||||||||||||||
$ | 296,394 | $ | 226,889 |
__________
(a)See “Las Vegas Retail Complex” below for discussion of this equity method investment in real estate.
(b)The carrying value of this investment is affected by fluctuations in the exchange rate of the euro.
(c)Following the closing of the CWI 1 and CWI 2 Merger, we own 12,208,243 shares of common stock of WLT, which we account for as an equity method investment in real estate. We follow the hypothetical liquidation at book value (“HLBV”) model for this investment. We record any earnings from our investment in shares of common stock of WLT on a one quarter lag (Note 3). For the three and nine months ended September 30, 2021, we recognized losses of $1.4 million and $9.9 million, respectively, from our equity method investment in WLT (due to the adverse impact of the COVID-19 pandemic on its operations), which was recognized within Earnings (losses) from equity method investments in our consolidated statements of income.
(d)This investment is reported using the HLBV model, which may be different than pro rata ownership percentages, primarily due to the capital structure of the partnership agreement.
(e)We recognized an other-than-temporary impairment charge of $6.8 million on this investment during the nine months ended September 30, 2021, as described in Note 8.
(f)The carrying value of this investment is affected by fluctuations in the exchange rate of the Norwegian krone.
We received aggregate distributions of $14.1 million and $11.2 million from our other unconsolidated real estate investments for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, the aggregate unamortized basis differences on our unconsolidated real estate investments were $8.7 million and $16.1 million, respectively. This decrease was primarily due to the other-than-temporary impairment charge that we recognized on an equity method investment in real estate during the nine months ended September 30, 2021, as described above and in Note 8.
Las Vegas Retail Complex
On June 10, 2021, we entered into an agreement to fund a construction loan of approximately $224.3 million for a retail complex in Las Vegas, Nevada, at an interest rate of 6.0% and term of 36 months. Through September 30, 2021, we funded $93.5 million, with the remaining amount expected to be funded over the 15 to 22 months following closing. We hold a purchase option for two net-leased units at the complex upon its completion, as well as an equity purchase option to acquire a 47.5% equity interest in the partnership that owns the borrower. As of the agreement date, we did not deem the exercise of the purchase options to be reasonably certain.
In accordance with ASC 810, Consolidation, we determined that this loan will not be consolidated, but due to the characteristics of the arrangement (including our participation in expected residual profits), the risks and rewards of the agreement are similar to those associated with an investment in real estate rather than a loan. Therefore, the loan will be treated as an implied investment in real estate (as an equity method investment in real estate) for accounting purposes in accordance with the acquisition, development and construction arrangement sub-section of ASC 310, Receivables. Interest income from this investment was $1.4 million and $1.6 million for the three and nine months ended September 30, 2021, respectively, which was recognized within Earnings (losses) from equity method investments in our consolidated statements of income.
W. P. Carey 9/30/2021 10-Q – 23
Notes to Consolidated Financial Statements (Unaudited)
Note 8. Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.
Items Measured at Fair Value on a Recurring Basis
The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs.
Derivative Assets and Liabilities — Our derivative assets and liabilities, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are comprised of foreign currency collars, interest rate swaps, interest rate caps, and stock warrants (Note 9).
The valuation of our derivative instruments (excluding stock warrants) is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
The stock warrants were measured at fair value using valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.
Equity Method Investment in CESH — We have elected to account for our investment in CESH, which is included in Equity method investments in the consolidated financial statements, at fair value by selecting the equity method fair value option available under GAAP (Note 7). We classified this investment as Level 3 because we primarily used valuation models that incorporate unobservable inputs to determine its fair value.
Investment in Shares of Lineage Logistics — We have elected to apply the measurement alternative under ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10) to account for our investment in shares of Lineage Logistics (a cold storage REIT), which is included in Other assets, net in the consolidated financial statements. Under this alternative, the carrying value is adjusted for any impairments or changes in fair value resulting from observable transactions for similar or identical investments in the issuer. We classified this investment as Level 3 because it is not traded in an active market. We recognized non-cash unrealized gains on our investment in shares of Lineage Logistics totaling $52.9 million and $76.3 million during the three and nine months ended September 30, 2021, respectively, and $48.8 million during both the three and nine months ended September 30, 2020, due to a secondary market transaction at a higher price per share, which were recorded within Other gains and (losses) in the consolidated financial statements. In addition, during the nine months ended September 30, 2021, we received a cash dividend of $6.4 million from our investment in shares of Lineage Logistics, which was recorded within Non-operating income in the consolidated financial statements. See Note 13 for further discussion of the impact of Lineage Logistics’s conversion to a REIT during the first quarter of 2020. The fair value of this investment was $366.3 million and $290.0 million at September 30, 2021 and December 31, 2020, respectively.
W. P. Carey 9/30/2021 10-Q – 24
Notes to Consolidated Financial Statements (Unaudited)
Investment in Shares of GCIF — We account for our investment in shares of Guggenheim Credit Income Fund (“GCIF”), which is included in Other assets, net in the consolidated financial statements, at fair value. We classified this investment as Level 2 because we used a quoted price from an inactive market to determine its fair value. During the nine months ended September 30, 2021, we redeemed a portion of our investment in shares of GCIF for approximately $0.8 million and recognized a net loss of $0.1 million, which was included within Other gains and (losses) in the consolidated statements of income. During the nine months ended September 30, 2021, we received liquidating distributions from our investment in shares of GCIF totaling $1.4 million, which reduced the cost basis of our investment (in March 2021, GCIF announced its intention to liquidate and to distribute substantially all of its assets). In addition, during the nine months ended September 30, 2021 and 2020, we received distributions from our investment in shares of GCIF totaling less than $0.1 million and $0.5 million, respectively, which were recorded within Non-operating income in the consolidated financial statements. During the nine months ended September 30, 2021, we recognized unrealized gains on our investment in shares of GCIF totaling $0.6 million, which was recognized within Other gains and (losses) in the consolidated financial statements. The fair value of our investment in shares of GCIF was $4.4 million and $6.1 million at September 30, 2021 and December 31, 2020, respectively.
Investment in Preferred Shares of WLT — We account for our investment in preferred shares of WLT (Note 3), which is included in Other assets, net in the consolidated financial statements, as available-for-sale debt securities at fair value. The fair value was primarily determined by a discounted cash flow approach based on a weighted-average probability analysis of certain redemption options. We classified this investment as Level 3 because the discounted cash flow valuation model incorporates unobservable inputs to determine its fair value, including a cash flow discount rate of 15% as of September 30, 2021. During the three and nine months ended September 30, 2021, we received cash dividends of $0.8 million and $4.1 million, respectively, from our investment in preferred shares of WLT, which was recorded within Non-operating income in the consolidated financial statements. The fair value of our investment in preferred shares of WLT was $46.3 million as of both September 30, 2021 and December 31, 2020.
We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the nine months ended September 30, 2021 or 2020. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our consolidated financial statements.
Our other material financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
Level | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
Senior Unsecured Notes, net (a) (b) (c) | 2 | $ | 5,419,419 | $ | 5,766,633 | $ | 5,146,192 | $ | 5,639,586 | ||||||||||||||||||||
Non-recourse mortgages, net (a) (b) (d) | 3 | 688,430 | 690,310 | 1,145,554 | 1,148,551 |
__________
(a)The carrying value of Senior Unsecured Notes, net (Note 10) includes unamortized deferred financing costs of $27.0 million and $23.9 million at September 30, 2021 and December 31, 2020, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $0.2 million and $0.4 million at September 30, 2021 and December 31, 2020, respectively.
(b)The carrying value of Senior Unsecured Notes, net includes unamortized discount of $27.2 million and $22.6 million at September 30, 2021 and December 31, 2020, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $3.1 million and $4.5 million at September 30, 2021 and December 31, 2020, respectively.
(c)We determined the estimated fair value of the Senior Unsecured Notes using observed market prices in an open market, which may experience limited trading volume.
(d)We determined the estimated fair value of our non-recourse mortgage loans using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates consider interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
We estimated that our other financial assets and liabilities, including amounts outstanding under our Senior Unsecured Credit Facility (Note 10), but excluding finance receivables (Note 5), had fair values that approximated their carrying values at both September 30, 2021 and December 31, 2020.
W. P. Carey 9/30/2021 10-Q – 25
Notes to Consolidated Financial Statements (Unaudited)
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. There have been no significant changes in our impairment policies from what was disclosed in the 2020 Annual Report.
The following tables present information about assets for which we recorded an impairment charge and that were measured at fair value on a non-recurring basis (in thousands):
Three Months Ended September 30, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
Fair Value Measurements | Impairment Charges | Fair Value Measurements | Impairment Charges | ||||||||||||||||||||
Impairment Charges | |||||||||||||||||||||||
Land, buildings and improvements and intangibles | $ | 13,912 | $ | 16,301 | $ | — | $ | — | |||||||||||||||
$ | 16,301 | $ | — |
Nine Months Ended September 30, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
Fair Value Measurements | Impairment Charges | Fair Value Measurements | Impairment Charges | ||||||||||||||||||||
Impairment Charges | |||||||||||||||||||||||
Land, buildings and improvements and intangibles | $ | 13,912 | $ | 16,301 | $ | 12,148 | $ | 19,420 | |||||||||||||||
Equity method investments | 8,175 | 6,830 | 37,396 | 47,112 | |||||||||||||||||||
$ | 23,131 | $ | 66,532 |
Impairment charges, and their related triggering events and fair value measurements, recognized during the three and nine months ended September 30, 2021 and 2020 were as follows:
Land, Buildings and Improvements and Intangibles
The impairment charges described below are reflected within Impairment charges in our consolidated statements of income.
During the three and nine months ended September 30, 2021, we recognized an impairment charge of $16.3 million on a property in order to reduce the carrying value of the property to its estimated fair value, due to the existing tenant’s non-renewal of its lease expiring in 2022. The fair value measurement was determined by estimating discounted cash flows using four significant unobservable inputs, which were the cash flow discount rate (range of 7.00% to 9.00%), terminal capitalization rate (range of 6.00% to 7.00%), estimated market rents (range of $10 to $11 per square foot), and estimated capital expenditures ($100 per square foot).
During the nine months ended September 30, 2020, we recognized impairment charges totaling $16.0 million on two properties leased to the same tenant in order to reduce the carrying values of the properties to their estimated fair values, due to potential property vacancies. The fair value measurements were determined using a direct capitalization rate analysis based on the probability of vacancy versus the tenant continuing in the lease; the capitalization rate for the various scenarios ranged from 6.25% to 11.00%.
In addition, we recognized an impairment charge of $3.4 million on a property in order to reduce the carrying value of the property to its estimated fair value. The fair value measurement approximated its estimated selling price; it was sold in September 2020.
W. P. Carey 9/30/2021 10-Q – 26
Notes to Consolidated Financial Statements (Unaudited)
Equity Method Investments
The other-than-temporary impairment charges described below are reflected within Earnings (losses) from equity method investments in our consolidated statements of income.
During the nine months ended September 30, 2021, we recognized an other-than-temporary impairment charge of $6.8 million on a jointly owned real estate investment to reduce the carrying value of our investment to its estimated fair value, which declined due to changes in expected cash flows related to the existing tenant’s lease expiration in 2028. The fair value measurement was determined by estimating discounted cash flows using three significant unobservable inputs, which were the cash flow discount rate (5.75%), residual discount rate (7.50%), and residual capitalization rate (6.75%).
During the nine months ended September 30, 2020, we recognized other-than-temporary impairment charges of $27.8 million and $19.3 million on our equity method investments in CWI 1 and CWI 2, respectively, to reduce the carrying values of our investments to their estimated fair values, due to the adverse effect of the COVID-19 pandemic on the operations of CWI 1 and CWI 2. The fair value measurements were estimated based on implied asset value changes and changes in market capitalizations for publicly traded lodging REITs, all of which was obtained from third-party market data.
Note 9. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our Senior Unsecured Credit Facility (Note 10) and unhedged variable-rate non-recourse mortgage loans. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, Senior Unsecured Notes, other securities, and the shares or limited partnership units we hold in the Managed Programs, due to changes in interest rates or other market factors. We own investments in North America, Europe, and Japan and are subject to risks associated with fluctuating foreign currency exchange rates.
Derivative Financial Instruments
There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2020 Annual Report. At both September 30, 2021 and December 31, 2020, no cash collateral had been posted nor received for any of our derivative positions.
The following table sets forth certain information regarding our derivative instruments (in thousands):
Derivatives Designated as Hedging Instruments | Balance Sheet Location | Derivative Assets Fair Value at | Derivative Liabilities Fair Value at | |||||||||||||||||||||||||||||
September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
Foreign currency collars | Other assets, net | $ | 16,345 | $ | 3,489 | $ | — | $ | — | |||||||||||||||||||||||
Foreign currency collars | Accounts payable, accrued expenses and other liabilities | — | — | (1,683) | (15,122) | |||||||||||||||||||||||||||
Interest rate swaps | Accounts payable, accrued expenses and other liabilities | — | — | (1,295) | (5,859) | |||||||||||||||||||||||||||
16,345 | 3,489 | (2,978) | (20,981) | |||||||||||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||
Stock warrants | Other assets, net | 5,300 | 5,800 | — | — | |||||||||||||||||||||||||||
5,300 | 5,800 | — | — | |||||||||||||||||||||||||||||
Total derivatives | $ | 21,645 | $ | 9,289 | $ | (2,978) | $ | (20,981) |
W. P. Carey 9/30/2021 10-Q – 27
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Loss) (a) | ||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Foreign currency collars | $ | 12,666 | $ | (17,029) | $ | 26,294 | $ | (5,524) | ||||||||||||||||||
Interest rate swaps | 203 | 312 | 3,851 | (2,047) | ||||||||||||||||||||||
Interest rate caps | 1 | 4 | 5 | 5 | ||||||||||||||||||||||
Foreign currency forward contracts | — | — | — | (5,272) | ||||||||||||||||||||||
Derivatives in Net Investment Hedging Relationships (b) | ||||||||||||||||||||||||||
Foreign currency collars | — | (16) | — | 9 | ||||||||||||||||||||||
Total | $ | 12,870 | $ | (16,729) | $ | 30,150 | $ | (12,829) |
Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | Location of Gain (Loss) Recognized in Income | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
Interest rate swaps and caps (c) | Interest expense | $ | (196) | $ | (548) | $ | (720) | $ | (1,254) | |||||||||||||||||||||||
Foreign currency collars | Non-operating income | 14 | 1,664 | (553) | 4,565 | |||||||||||||||||||||||||||
Foreign currency forward contracts | Non-operating income | — | — | — | 5,716 | |||||||||||||||||||||||||||
Total | $ | (182) | $ | 1,116 | $ | (1,273) | $ | 9,027 |
__________
(a)Excludes net gains of $0.2 million and less than $0.1 million recognized on unconsolidated jointly owned investments for the three months ended September 30, 2021 and 2020, respectively, and net gains of $0.9 million and net losses of $0.4 million for the nine months ended September 30, 2021 and 2020, respectively.
(b)The changes in fair value of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive (loss) income.
(c)Amount for the nine months ended September 30, 2021 excludes other comprehensive income totaling $3.1 million that was released from the consolidated financial statements (along with the related liability balances) upon the termination of interest rate swaps in connection with certain prepayments of non-recourse mortgage loans during the period (Note 10).
Amounts reported in Other comprehensive (loss) income related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive (loss) income related to foreign currency derivative contracts will be reclassified to Non-operating income when the hedged foreign currency contracts are settled. As of September 30, 2021, we estimate that an additional $0.7 million and $5.5 million will be reclassified as Interest expense and Non-operating income, respectively, during the next 12 months.
The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
Amount of Gain (Loss) on Derivatives Recognized in Income | ||||||||||||||||||||||||||||||||
Derivatives Not in Cash Flow Hedging Relationships | Location of Gain (Loss) Recognized in Income | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
Foreign currency collars | Non-operating income | $ | 357 | $ | (1,368) | $ | 516 | $ | (937) | |||||||||||||||||||||||
Interest rate swaps | Interest expense | — | 11 | — | 41 | |||||||||||||||||||||||||||
Stock warrants | Other gains and (losses) | — | — | (500) | (1,300) | |||||||||||||||||||||||||||
Foreign currency forward contracts | Non-operating income | — | — | — | (43) | |||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||
Interest rate swaps | Interest expense | 223 | 627 | 1,354 | 1,491 | |||||||||||||||||||||||||||
Total | $ | 580 | $ | (730) | $ | 1,370 | $ | (748) |
See below for information on our purposes for entering into derivative instruments.
W. P. Carey 9/30/2021 10-Q – 28
Notes to Consolidated Financial Statements (Unaudited)
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek long-term debt financing on a fixed-rate basis. However, from time to time, we or our investment partners have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and caps that our consolidated subsidiaries had outstanding at September 30, 2021 are summarized as follows (currency in thousands):
Interest Rate Derivatives | Number of Instruments | Notional Amount | Fair Value at September 30, 2021 (a) | ||||||||||||||||||||
Designated as Cash Flow Hedging Instruments | |||||||||||||||||||||||
Interest rate swaps | 2 | 47,506 | EUR | $ | (1,020) | ||||||||||||||||||
Interest rate swaps | 2 | 21,895 | USD | (275) | |||||||||||||||||||
Interest rate cap | 1 | 10,842 | EUR | — | |||||||||||||||||||
$ | (1,295) |
__________
(a)Fair value amounts are based on the exchange rate of the euro or British pound sterling at September 30, 2021, as applicable.
Foreign Currency Collars
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling, the Danish krone, the Norwegian krone, and certain other currencies. In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars have maturities of 62 months or less.
The following table presents the foreign currency collars that we had outstanding at September 30, 2021 (currency in thousands):
Foreign Currency Derivatives | Number of Instruments | Notional Amount | Fair Value at September 30, 2021 | ||||||||||||||||||||
Designated as Cash Flow Hedging Instruments | |||||||||||||||||||||||
Foreign currency collars | 94 | 335,500 | EUR | $ | 13,854 | ||||||||||||||||||
Foreign currency collars | 96 | 58,300 | GBP | 808 | |||||||||||||||||||
$ | 14,662 |
Credit Risk-Related Contingent Features
We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2021. At September 30, 2021, our total credit exposure and the maximum exposure to any single counterparty was $14.9 million and $3.9 million, respectively.
W. P. Carey 9/30/2021 10-Q – 29
Notes to Consolidated Financial Statements (Unaudited)
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2021, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $3.0 million and $25.1 million at September 30, 2021 and December 31, 2020, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2021 or December 31, 2020, we could have been required to settle our obligations under these agreements at their aggregate termination value of $3.0 million and $25.6 million, respectively.
Net Investment Hedges
Borrowings under our Senior Unsecured Notes, Unsecured Revolving Credit Facility, and Unsecured Term Loans (all as defined in Note 10) denominated in euro, British pounds sterling, or Japanese yen are designated as, and are effective as, economic hedges of our net investments in foreign entities.
Exchange rate variations impact our financial results because the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of exchange rate variations being recorded in Other comprehensive (loss) income as part of the cumulative foreign currency translation adjustment. As a result, changes in the value of our borrowings under our euro-denominated senior notes and changes in the value of our euro, Japanese yen, and British pound sterling borrowings under our Senior Unsecured Credit Facility, related to changes in the spot rates, will be reported in the same manner as foreign currency translation adjustments, which are recorded in Other comprehensive (loss) income as part of the cumulative foreign currency translation adjustment. Such gains (losses) related to non-derivative net investment hedges were $92.6 million and $(140.5) million for the three months ended September 30, 2021 and 2020, respectively, and $190.5 million and $(118.5) million for the nine months ended September 30, 2021 and 2020, respectively.
Note 10. Debt
Senior Unsecured Credit Facility
On February 20, 2020, we entered into the Fourth Amended and Restated Credit Facility, which has capacity of approximately $2.1 billion, comprised of (i) a $1.8 billion unsecured revolving credit facility for our working capital needs, acquisitions, and other general corporate purposes (our “Unsecured Revolving Credit Facility”), (ii) a £150.0 million term loan (our “Term Loan”), and (iii) a €96.5 million delayed draw term loan (our “Delayed Draw Term Loan”). We refer to our Term Loan and Delayed Draw Term Loan collectively as the “Unsecured Term Loans” and the entire facility collectively as our “Senior Unsecured Credit Facility.”
The Senior Unsecured Credit Facility includes the ability to borrow in certain currencies other than U.S. dollars and has a maturity date of February 20, 2025. The aggregate principal amount (of revolving and term loans) available under the Senior Unsecured Credit Facility may be increased up to an amount not to exceed the U.S. dollar equivalent of $2.75 billion, subject to the conditions to increase set forth in our credit agreement.
As of both September 30, 2021 and December 31, 2020, we have drawn down our Unsecured Term Loans in full.
At September 30, 2021, our Unsecured Revolving Credit Facility had available capacity of approximately $1.5 billion (net of amounts reserved for standby letters of credit totaling $18.8 million). We incur an annual facility fee of 0.20% of the total commitment on our Unsecured Revolving Credit Facility, which is included within Interest expense in our consolidated statements of income.
W. P. Carey 9/30/2021 10-Q – 30
Notes to Consolidated Financial Statements (Unaudited)
The following table presents a summary of our Senior Unsecured Credit Facility (dollars in thousands):
Interest Rate at September 30, 2021 (a) | Maturity Date at September 30, 2021 | Principal Outstanding Balance at | ||||||||||||||||||||||||
Senior Unsecured Credit Facility | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||
Unsecured Term Loans: | ||||||||||||||||||||||||||
Term Loan — borrowing in British pounds sterling (b) | GBP LIBOR + 0.95% | 2/20/2025 | $ | 201,835 | $ | 204,737 | ||||||||||||||||||||
Delayed Draw Term Loan — borrowing in euros (c) | EURIBOR + 0.95% | 2/20/2025 | 111,737 | 118,415 | ||||||||||||||||||||||
313,572 | 323,152 | |||||||||||||||||||||||||
Unsecured Revolving Credit Facility: | ||||||||||||||||||||||||||
Borrowing in British pounds sterling | GBP LIBOR + 0.85% | 2/20/2025 | 192,416 | — | ||||||||||||||||||||||
Borrowing in euros (c) | EURIBOR + 0.85% | 2/20/2025 | 40,527 | 58,901 | ||||||||||||||||||||||
Borrowing in Japanese yen | JPY LIBOR + 0.85% | 2/20/2025 | 21,520 | 23,380 | ||||||||||||||||||||||
254,463 | 82,281 | |||||||||||||||||||||||||
$ | 568,035 | $ | 405,433 |
__________
(a)The applicable interest rate at September 30, 2021 was based on the credit rating for our Senior Unsecured Notes of BBB/Baa2.
(b)Balance excludes unamortized discount of $1.0 million and $1.2 million at September 30, 2021 and December 31, 2020, respectively.
(c)EURIBOR means Euro Interbank Offered Rate.
Senior Unsecured Notes
As set forth in the table below, we have euro and U.S. dollar-denominated senior unsecured notes outstanding with an aggregate principal balance outstanding of $5.5 billion at September 30, 2021 (the “Senior Unsecured Notes”).
On February 25, 2021, we completed an underwritten public offering of $425.0 million of 2.250% Senior Notes due 2033, at a price of 98.722% of par value. These 2.250% Senior Notes due 2033 have a term and are scheduled to mature on April 1, 2033. Proceeds from this offering were used to prepay non-recourse mortgage loans totaling $427.5 million (including prepayment penalties), as described below.
On March 8, 2021, we completed an underwritten public offering of €525.0 million of 0.950% Senior Notes due 2030, at a price of 99.335% of par value, issued by our wholly owned finance subsidiary, WPC Eurobond B.V., and fully and unconditionally guaranteed by us. These 0.950% Senior Notes due 2030 have a term and are scheduled to mature on June 1, 2030. Proceeds from this offering were used to redeem the €500.0 million of 2.0% Senior Notes due 2023 in March 2021. In connection with this redemption, we paid a “make-whole” amount of $26.2 million (based on the exchange rate of the euro as of the date of redemption) and recognized a loss on extinguishment of $28.2 million, which is included within Other gains and (losses) on our consolidated statements of income.
W. P. Carey 9/30/2021 10-Q – 31
Notes to Consolidated Financial Statements (Unaudited)
Interest on the Senior Unsecured Notes is payable annually in arrears for our euro-denominated senior notes and semi-annually for U.S. dollar-denominated senior notes. The Senior Unsecured Notes can be redeemed at par within three months of their respective maturities, or we can call the notes at any time for the principal, accrued interest, and a make-whole amount based upon the applicable government bond yield plus 30 to 35 basis points. The following table presents a summary of our Senior Unsecured Notes outstanding at September 30, 2021 (currency in thousands):
Principal Amount | Coupon Rate | Maturity Date | Principal Outstanding Balance at | |||||||||||||||||||||||||||||||||||
Senior Unsecured Notes, net (a) | Issue Date | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||
2.0% Senior Notes due 2023 | 1/21/2015 | € | 500,000 | 2.0 | % | Redeemed | $ | — | $ | 613,550 | ||||||||||||||||||||||||||||
4.6% Senior Notes due 2024 | 3/14/2014 | $ | 500,000 | 4.6 | % | 4/1/2024 | 500,000 | 500,000 | ||||||||||||||||||||||||||||||
2.25% Senior Notes due 2024 | 1/19/2017 | € | 500,000 | 2.25 | % | 7/19/2024 | 578,950 | 613,550 | ||||||||||||||||||||||||||||||
4.0% Senior Notes due 2025 | 1/26/2015 | $ | 450,000 | 4.0 | % | 2/1/2025 | 450,000 | 450,000 | ||||||||||||||||||||||||||||||
2.250% Senior Notes due 2026 | 10/9/2018 | € | 500,000 | 2.250 | % | 4/9/2026 | 578,950 | 613,550 | ||||||||||||||||||||||||||||||
4.25% Senior Notes due 2026 | 9/12/2016 | $ | 350,000 | 4.25 | % | 10/1/2026 | 350,000 | 350,000 | ||||||||||||||||||||||||||||||
2.125% Senior Notes due 2027 | 3/6/2018 | € | 500,000 | 2.125 | % | 4/15/2027 | 578,950 | 613,550 | ||||||||||||||||||||||||||||||
1.350% Senior Notes due 2028 | 9/19/2019 | € | 500,000 | 1.350 | % | 4/15/2028 | 578,950 | 613,550 | ||||||||||||||||||||||||||||||
3.850% Senior Notes due 2029 | 6/14/2019 | $ | 325,000 | 3.850 | % | 7/15/2029 | 325,000 | 325,000 | ||||||||||||||||||||||||||||||
0.950% Senior Notes due 2030 | 3/8/2021 | € | 525,000 | 0.950 | % | 6/1/2030 | 607,898 | — | ||||||||||||||||||||||||||||||
2.400% Senior Notes due 2031 | 10/14/2020 | $ | 500,000 | 2.400 | % | 2/1/2031 | 500,000 | 500,000 | ||||||||||||||||||||||||||||||
2.250% Senior Notes due 2033 | 2/25/2021 | $ | 425,000 | 2.250 | % | 4/1/2033 | 425,000 | — | ||||||||||||||||||||||||||||||
$ | 5,473,698 | $ | 5,192,750 |
__________
(a)Aggregate balance excludes unamortized deferred financing costs totaling $27.0 million and $23.8 million, and unamortized discount totaling $27.2 million and $22.5 million, at September 30, 2021 and December 31, 2020, respectively.
In connection with the offering of the 2.250% Senior Notes due 2033 in February 2021 and the 0.950% Senior Notes due 2030 in March 2021, we incurred financing costs totaling $8.2 million during the nine months ended September 30, 2021, which are included in Senior Unsecured Notes, net in the consolidated financial statements and are being amortized to Interest expense over the term of their respective Senior Notes.
On October 15, 2021, we completed an underwritten public offering of $350.0 million of 2.450% Senior Notes due 2032, at a price of 99.048% of par value, in our inaugural green bond offering. These 2.450% Senior Notes due 2032 have a term and are scheduled to mature on February 1, 2032 (Note 16).
Covenants
The Credit Agreement, each of the Senior Unsecured Notes, and certain of our non-recourse mortgage loan agreements include customary financial maintenance covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. There have been no significant changes in our debt covenants from what was disclosed in the 2020 Annual Report (which are consistent with debt covenants for the Senior Unsecured Notes issued during the nine months ended September 30, 2021). We were in compliance with all of these covenants at September 30, 2021.
Non-Recourse Mortgages
At September 30, 2021, the weighted-average interest rate for our total non-recourse mortgage notes payable was 4.1% (fixed-rate and variable-rate non-recourse mortgage notes payable were 4.7% and 2.1%, respectively), with maturity dates ranging from March 2022 to September 2031.
W. P. Carey 9/30/2021 10-Q – 32
Notes to Consolidated Financial Statements (Unaudited)
Repayments
During the nine months ended September 30, 2021, we (i) prepaid non-recourse mortgage loans totaling $427.5 million, and (ii) repaid non-recourse mortgage loans at maturity with an aggregate principal balance of approximately $27.5 million. We recognized an aggregate net loss on extinguishment of debt of $32.0 million on these repayments, primarily comprised of prepayment penalties totaling $32.1 million, which is included within Other gains and (losses) on our consolidated statements of income. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of repayment was 5.1%. We funded these prepayments primarily using proceeds from the issuance of the $425.0 million of 2.250% Senior Notes due 2033.
Foreign Currency Exchange Rate Impact
During the nine months ended September 30, 2021, the U.S. dollar strengthened against the euro, resulting in an aggregate decrease of $205.0 million in the aggregate carrying values of our Non-recourse mortgages, net, Senior Unsecured Credit Facility, and Senior Unsecured Notes, net from December 31, 2020 to September 30, 2021.
Scheduled Debt Principal Payments
Scheduled debt principal payments as of September 30, 2021 are as follows (in thousands):
Years Ending December 31, | Total (a) | |||||||
2021 (remainder) | $ | 5,704 | ||||||
2022 | 311,752 | |||||||
2023 | 201,156 | |||||||
2024 | 1,120,399 | |||||||
2025 | 1,112,036 | |||||||
Thereafter through 2031 | 3,982,399 | |||||||
Total principal payments | 6,733,446 | |||||||
Unamortized discount, net (b) | (31,330) | |||||||
Unamortized deferred financing costs | (27,199) | |||||||
Total | $ | 6,674,917 |
__________
(a)Certain amounts are based on the applicable foreign currency exchange rate at September 30, 2021.
(b)Represents the unamortized discount on the Senior Unsecured Notes of $27.2 million in aggregate, unamortized discount, net, of $3.1 million in aggregate primarily resulting from the assumption of property-level debt in connection with business combinations, and unamortized discount of $1.0 million on the Term Loan.
Note 11. Commitments and Contingencies
At September 30, 2021, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.
Note 12. Stock-Based Compensation and Equity
Stock-Based Compensation
We maintain several stock-based compensation plans, which are more fully described in the 2020 Annual Report. There have been no significant changes to the terms and conditions of any of our stock-based compensation plans or arrangements during the nine months ended September 30, 2021. We recorded stock-based compensation expense of $4.4 million and $4.6 million during the three months ended September 30, 2021 and 2020, respectively, and $18.8 million and $10.1 million during the nine months ended September 30, 2021 and 2020, respectively, which was included in Stock-based compensation expense in the consolidated financial statements.
W. P. Carey 9/30/2021 10-Q – 33
Notes to Consolidated Financial Statements (Unaudited)
Restricted and Conditional Awards
Nonvested restricted share awards (“RSAs”), restricted share units (“RSUs”), and performance share units (“PSUs”) at September 30, 2021 and changes during the nine months ended September 30, 2021 were as follows:
RSA and RSU Awards | PSU Awards | ||||||||||||||||||||||
Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||||||||||
Nonvested at January 1, 2021 | 260,977 | $ | 74.75 | 262,013 | $ | 88.99 | |||||||||||||||||
Granted (a) | 191,940 | 67.44 | 134,290 | 86.19 | |||||||||||||||||||
Vested (b) | (136,120) | 72.60 | (151,678) | 76.04 | |||||||||||||||||||
Forfeited | (9,883) | 71.92 | (16,463) | 93.91 | |||||||||||||||||||
Adjustment (c) | — | — | 161,125 | 75.13 | |||||||||||||||||||
Nonvested at September 30, 2021 (d) | 306,914 | $ | 71.22 | 389,287 | $ | 87.33 |
__________
(a)The grant date fair value of RSAs and RSUs reflect our stock price on the date of grant on a one-for-one basis. The grant date fair value of PSUs was determined utilizing (i) a Monte Carlo simulation model to generate an estimate of our future stock price over the three-year performance period and (ii) future financial performance projections. To estimate the fair value of PSUs granted during the nine months ended September 30, 2021, we used a risk-free interest rate of 0.2%, an expected volatility rate of 36.7%, and assumed a dividend yield of zero.
(b)The grant date fair value of shares vested during the nine months ended September 30, 2021 was $21.4 million. Employees have the option to take immediate delivery of the shares upon vesting or defer receipt to a future date pursuant to previously made deferral elections. At September 30, 2021 and December 31, 2020, we had an obligation to issue 1,104,020 and 986,859 shares, respectively, of our common stock underlying such deferred awards, which is recorded within Total stockholders’ equity as a Deferred compensation obligation of $49.8 million and $42.0 million, respectively.
(c)Vesting and payment of the PSUs is conditioned upon certain company and/or market performance goals being met during the relevant three-year performance period. The ultimate number of PSUs to be vested will depend on the extent to which the performance goals are met and can range from zero to three times the original awards. As a result, we recorded adjustments at September 30, 2021 to reflect the number of shares expected to be issued when the PSUs vest.
(d)At September 30, 2021, total unrecognized compensation expense related to these awards was approximately $30.9 million, with an aggregate weighted-average remaining term of 1.9 years.
Earnings Per Share
The following table summarizes basic and diluted earnings (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income — basic and diluted | $ | 138,547 | $ | 149,397 | $ | 310,426 | $ | 320,787 | |||||||||||||||
Weighted-average shares outstanding — basic | 185,422,639 | 174,974,185 | 180,753,115 | 173,879,068 | |||||||||||||||||||
Effect of dilutive securities | 589,839 | 287,627 | 570,013 | 264,970 | |||||||||||||||||||
Weighted-average shares outstanding — diluted | 186,012,478 | 175,261,812 | 181,323,128 | 174,144,038 |
For the three and nine months ended September 30, 2021 and 2020, there were no potentially dilutive securities excluded from the computation of diluted earnings per share.
W. P. Carey 9/30/2021 10-Q – 34
Notes to Consolidated Financial Statements (Unaudited)
ATM Program
Our ATM Program is discussed in the 2020 Annual Report. During the nine months ended September 30, 2021, we issued 4,225,624 shares of our common stock under our ATM Program at a weighted-average price of $72.50 per share, for net proceeds of $302.5 million. During the three months ended September 30, 2021, as well as the three and nine months ended September 30, 2020, we did not issue any shares of our common stock under our ATM Program. Proceeds from issuances of common stock under our ATM Program during the nine months ended September 30, 2021 were used primarily to pay down a portion of the amounts then outstanding under our Unsecured Revolving Credit Facility and for general corporate purposes. As of September 30, 2021, $310.1 million remained available for issuance under our ATM Program.
Forward Equity Offerings
From time to time, we have entered into underwriting agreements and forward sale agreements with syndicates of banks acting as underwriters, forward sellers, and/or forward purchasers in connection with public offerings of our common stock. At the closing of these transactions, the offered shares were borrowed from third parties by the banks acting as forward purchasers and sold to the underwriters for distribution at the respective gross offering prices. As a result of this forward construct, we did not receive any proceeds from the sale of shares at the closing of each offering, but rather at later settlement dates. We have determined that the forward sale agreements meet the criteria for equity classification and are therefore exempt from derivative accounting. We recorded the forward sale agreements at fair value at inception, which we determined to be zero. Subsequent changes to fair value are not required under equity classification.
We refer to our three forward equity offerings presented below as the June 2020 Equity Forwards, June 2021 Equity Forwards, and August 2021 Equity Forwards (collectively, the “Equity Forwards”) (gross offering proceeds at closing in thousands):
Agreement Date (a) | Shares Offered (b) | Gross Offering Price | Gross Offering Proceeds at Closing | Outstanding Shares as of September 30, 2021 | |||||||||||||||||||||||||
June 2020 Equity Forwards (c) | 6/17/2020 | 5,462,500 | $ | 70.00 | $ | 382,375 | — | ||||||||||||||||||||||
June 2021 Equity Forwards | 6/7/2021 | 6,037,500 | 75.30 | 454,624 | 2,012,500 | ||||||||||||||||||||||||
August 2021 Equity Forwards | 8/9/2021 | 5,175,000 | 78.00 | 403,650 | 5,175,000 | ||||||||||||||||||||||||
7,187,500 |
__________
(a)We expect to settle the Equity Forwards in full within 18 months of the respective agreement dates via physical delivery of the outstanding shares of common stock in exchange for cash proceeds, although we may elect cash settlement or net share settlement for all or a portion of our obligations under the Equity Forwards, subject to certain conditions.
(b)Includes 712,500, 787,500, and 675,000 shares of common stock purchased by certain underwriters in connection with the June 2020 Equity Forwards, June 2021 Equity Forwards, and August 2021 Equity Forwards, respectively, upon the exercise of 30-day options to purchase additional shares.
(c)All remaining outstanding shares were settled during the three months ended June 30, 2021.
The following table sets forth certain information regarding the settlement of our Equity Forwards during the periods presented (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Shares of common stock delivered | 2,012,500 | 1,488,291 | 6,535,709 | 2,951,791 | |||||||||||||||||||
Net proceeds | $ | 147,363 | $ | 99,829 | $ | 457,227 | $ | 199,716 |
Net proceeds from the settlement of our Equity Forwards were primarily used to pay down a portion of the amounts then outstanding under our Unsecured Revolving Credit Facility and for general corporate purposes.
W. P. Carey 9/30/2021 10-Q – 35
Notes to Consolidated Financial Statements (Unaudited)
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
Three Months Ended September 30, 2021 | |||||||||||||||||
Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Beginning balance | $ | (1,062) | $ | (228,898) | $ | (229,960) | |||||||||||
Other comprehensive loss before reclassifications | 12,932 | (20,400) | (7,468) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to: | |||||||||||||||||
Interest expense | 196 | — | 196 | ||||||||||||||
Non-operating income | (14) | — | (14) | ||||||||||||||
Total | 182 | — | 182 | ||||||||||||||
Net current period other comprehensive loss | 13,114 | (20,400) | (7,286) | ||||||||||||||
Ending balance | $ | 12,052 | $ | (249,298) | $ | (237,246) |
Three Months Ended September 30, 2020 | |||||||||||||||||
Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Beginning balance | $ | 16,455 | $ | (307,068) | $ | (290,613) | |||||||||||
Other comprehensive income before reclassifications | (15,558) | 34,170 | 18,612 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to: | |||||||||||||||||
Non-operating income | (1,664) | — | (1,664) | ||||||||||||||
Interest expense | 548 | — | 548 | ||||||||||||||
Total | (1,116) | — | (1,116) | ||||||||||||||
Net current period other comprehensive income | (16,674) | 34,170 | 17,496 | ||||||||||||||
Net current period other comprehensive income attributable to noncontrolling interests | (7) | — | (7) | ||||||||||||||
Ending balance | $ | (226) | $ | (272,898) | $ | (273,124) |
Nine Months Ended September 30, 2021 | |||||||||||||||||
Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Beginning balance | $ | (18,937) | $ | (220,969) | $ | (239,906) | |||||||||||
Other comprehensive income before reclassifications | 29,737 | (28,329) | 1,408 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to: | |||||||||||||||||
Interest expense | 720 | — | 720 | ||||||||||||||
Non-operating income | 553 | — | 553 | ||||||||||||||
Total | 1,273 | — | 1,273 | ||||||||||||||
Net current period other comprehensive income | 31,010 | (28,329) | 2,681 | ||||||||||||||
Net current period other comprehensive income attributable to noncontrolling interests | (21) | — | (21) | ||||||||||||||
Ending balance | $ | 12,052 | $ | (249,298) | $ | (237,246) |
W. P. Carey 9/30/2021 10-Q – 36
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2020 | |||||||||||||||||
Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Beginning balance | $ | 13,048 | $ | (268,715) | $ | (255,667) | |||||||||||
Other comprehensive loss before reclassifications | (4,240) | (4,183) | (8,423) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to: | |||||||||||||||||
Non-operating income | (10,281) | — | (10,281) | ||||||||||||||
Interest expense | 1,254 | — | 1,254 | ||||||||||||||
Total | (9,027) | — | (9,027) | ||||||||||||||
Net current period other comprehensive loss | (13,267) | (4,183) | (17,450) | ||||||||||||||
Net current period other comprehensive income attributable to noncontrolling interests | (7) | — | (7) | ||||||||||||||
Ending balance | $ | (226) | $ | (272,898) | $ | (273,124) |
See Note 9 for additional information on our derivatives activity recognized within Other comprehensive (loss) income for the periods presented.
Dividends Declared
During the third quarter of 2021, our Board declared a quarterly dividend of $1.052 per share, which was paid on October 15, 2021 to stockholders of record as of September 30, 2021.
During the nine months ended September 30, 2021, we declared dividends totaling $3.150 per share.
Note 13. Income Taxes
We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and nine months ended September 30, 2021 and 2020.
Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. We also own real property in jurisdictions outside the United States through foreign subsidiaries and are subject to income taxes on our pre-tax income earned from properties in such countries. The accompanying consolidated financial statements include an interim tax provision for our TRSs and foreign subsidiaries, as necessary, for the three and nine months ended September 30, 2021 and 2020. Current income tax expense was $9.0 million and $8.9 million for the three months ended September 30, 2021 and 2020, respectively, and $26.5 million and $19.3 million for the nine months ended September 30, 2021 and 2020, respectively. As a result of the U.S. federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020 in response to the COVID-19 pandemic, we recognized a $4.7 million current tax benefit during the nine months ended September 30, 2020 by carrying back certain net operating losses, which is included within current tax expense described above.
There have been no significant changes in our deferred tax assets and liabilities policies from what was disclosed in the 2020 Annual Report. Deferred income tax benefit was $0.7 million and $2.9 million for the three months ended September 30, 2021 and 2020, respectively, and $3.0 million and $47.4 million for the nine months ended September 30, 2021 and 2020, respectively. Benefit from income taxes for the nine months ended September 30, 2020 included a deferred tax benefit of $37.2 million as a result of the release of a deferred tax liability relating to our investment in shares of Lineage Logistics (Note 8), which converted to a REIT during the period and is therefore no longer subject to federal and state income taxes, as well as a deferred tax benefit of $6.5 million as a result of the other-than-temporary impairment charges that we recognized on our equity method investments in CWI 1 and CWI 2 during the period (Note 8).
W. P. Carey 9/30/2021 10-Q – 37
Notes to Consolidated Financial Statements (Unaudited)
Note 14. Property Dispositions
We have an active capital recycling program, with a goal of extending the average lease term through reinvestment, improving portfolio credit quality through dispositions and acquisitions of assets, increasing the asset criticality factor in our portfolio, and/or executing strategic dispositions of assets. We may decide to dispose of a property when it is vacant as a result of tenants vacating space, tenants electing not to renew their leases, tenant insolvency, or lease rejection in the bankruptcy process. In such cases, we assess whether we can obtain the highest value from the property by selling it, as opposed to re-leasing it. We may also sell a property when we receive an unsolicited offer or negotiate a price for an investment that is consistent with our strategy for that investment. When it is appropriate to do so, we classify the property as an asset held for sale on our consolidated balance sheet. All property dispositions are recorded within our Real Estate segment.
2021 — During the three and nine months ended September 30, 2021, we sold five and 17 properties, respectively, for total proceeds, net of selling costs, of $28.3 million and $126.7 million, respectively, and recognized a net gain on these sales totaling $1.7 million and $30.9 million, respectively (inclusive of income taxes totaling $3.8 million recognized upon sale during the nine months ended September 30, 2021).
2020 — During the three and nine months ended September 30, 2020, we sold four and eight properties, respectively, for total proceeds, net of selling costs, of $62.9 million and $168.0 million (inclusive of $4.7 million attributable to a noncontrolling interest), respectively, and recognized a net gain on these sales totaling $20.9 million and $32.7 million (inclusive of $0.6 million attributable to a noncontrolling interest), respectively (inclusive of income taxes totaling $3.1 million and $3.0 million, respectively, recognized upon sale). Disposition activity included the sale of one of our two hotel operating properties in January 2020 for total proceeds, net of selling costs, of $103.5 million (inclusive of $4.7 million attributable to a noncontrolling interest).
W. P. Carey 9/30/2021 10-Q – 38
Notes to Consolidated Financial Statements (Unaudited)
Note 15. Segment Reporting
We evaluate our results from operations through our two major business segments: Real Estate and Investment Management. The following tables present a summary of comparative results and assets for these business segments (in thousands):
Real Estate
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Lease revenues | $ | 314,194 | $ | 293,856 | $ | 921,269 | $ | 856,269 | |||||||||||||||
Operating property revenues (a) | 4,050 | 1,974 | 9,474 | 9,368 | |||||||||||||||||||
Lease termination income and other | 2,597 | 1,565 | 11,059 | 9,991 | |||||||||||||||||||
320,841 | 297,395 | 941,802 | 875,628 | ||||||||||||||||||||
Operating Expenses | |||||||||||||||||||||||
Depreciation and amortization (b) | 115,657 | 108,351 | 340,327 | 331,035 | |||||||||||||||||||
General and administrative (b) | 19,750 | 19,399 | 62,297 | 51,793 | |||||||||||||||||||
Impairment charges | 16,301 | — | 16,301 | 19,420 | |||||||||||||||||||
Reimbursable tenant costs | 15,092 | 15,728 | 45,942 | 42,699 | |||||||||||||||||||
Property expenses, excluding reimbursable tenant costs | 13,734 | 11,923 | 36,432 | 33,649 | |||||||||||||||||||
Stock-based compensation expense (b) | 4,361 | 4,564 | 18,790 | 9,452 | |||||||||||||||||||
Operating property expenses | 3,001 | 1,594 | 6,961 | 8,205 | |||||||||||||||||||
Merger and other expenses | (908) | (1,016) | (3,998) | (213) | |||||||||||||||||||
186,988 | 160,543 | 523,052 | 496,040 | ||||||||||||||||||||
Other Income and Expenses | |||||||||||||||||||||||
Interest expense | (48,731) | (52,537) | (149,623) | (157,259) | |||||||||||||||||||
Other gains and (losses) | 48,172 | 44,115 | 13,455 | 38,579 | |||||||||||||||||||
Earnings (losses) from equity method investments in real estate | 2,445 | 631 | (10,528) | 2,407 | |||||||||||||||||||
Gain on sale of real estate, net | 1,702 | 20,933 | 30,914 | 32,684 | |||||||||||||||||||
Non-operating income | 1,283 | 662 | 10,620 | 10,364 | |||||||||||||||||||
4,871 | 13,804 | (105,162) | (73,225) | ||||||||||||||||||||
Income before income taxes | 138,724 | 150,656 | 313,588 | 306,363 | |||||||||||||||||||
(Provision for) benefit from income taxes | (7,827) | (3,636) | (23,372) | 24,047 | |||||||||||||||||||
Net Income from Real Estate | 130,897 | 147,020 | 290,216 | 330,410 | |||||||||||||||||||
Net income attributable to noncontrolling interests | (39) | (37) | (84) | (688) | |||||||||||||||||||
Net Income from Real Estate Attributable to W. P. Carey | $ | 130,858 | $ | 146,983 | $ | 290,132 | $ | 329,722 |
W. P. Carey 9/30/2021 10-Q – 39
Notes to Consolidated Financial Statements (Unaudited)
Investment Management
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Asset management and other revenue | $ | 3,872 | $ | 3,748 | $ | 11,792 | $ | 18,603 | |||||||||||||||
Reimbursable costs from affiliates | 1,041 | 1,276 | 3,050 | 7,717 | |||||||||||||||||||
4,913 | 5,024 | 14,842 | 26,320 | ||||||||||||||||||||
Operating Expenses | |||||||||||||||||||||||
Reimbursable costs from affiliates | 1,041 | 1,276 | 3,050 | 7,717 | |||||||||||||||||||
Merger and other expenses | — | 420 | 15 | 878 | |||||||||||||||||||
General and administrative (b) | — | — | — | 5,823 | |||||||||||||||||||
Subadvisor fees | — | — | — | 1,469 | |||||||||||||||||||
Depreciation and amortization (b) | — | — | — | 987 | |||||||||||||||||||
Stock-based compensation expense (b) | — | — | — | 691 | |||||||||||||||||||
1,041 | 1,696 | 3,065 | 17,565 | ||||||||||||||||||||
Other Income and Expenses | |||||||||||||||||||||||
Earnings (losses) from equity method investments in the Managed Programs | 3,290 | 1,089 | 6,374 | (12,494) | |||||||||||||||||||
Other gains and (losses) | 1,047 | 533 | 2,121 | 513 | |||||||||||||||||||
Non-operating (loss) income | — | (197) | 84 | 81 | |||||||||||||||||||
4,337 | 1,425 | 8,579 | (11,900) | ||||||||||||||||||||
Income (loss) before income taxes | 8,209 | 4,753 | 20,356 | (3,145) | |||||||||||||||||||
(Provision for) benefit from income taxes | (520) | (2,339) | (62) | 4,075 | |||||||||||||||||||
Net Income from Investment Management | 7,689 | 2,414 | 20,294 | 930 | |||||||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | (9,865) | |||||||||||||||||||
Net Income (Loss) from Investment Management Attributable to W. P. Carey | $ | 7,689 | $ | 2,414 | $ | 20,294 | $ | (8,935) |
Total Company
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues | $ | 325,754 | $ | 302,419 | $ | 956,644 | $ | 901,948 | |||||||||||||||
Operating expenses | 188,029 | 162,239 | 526,117 | 513,605 | |||||||||||||||||||
Other income and (expenses) | 9,208 | 15,229 | (96,583) | (85,125) | |||||||||||||||||||
(Provision for) benefit from income taxes | (8,347) | (5,975) | (23,434) | 28,122 | |||||||||||||||||||
Net income attributable to noncontrolling interests | (39) | (37) | (84) | (10,553) | |||||||||||||||||||
Net income attributable to W. P. Carey | $ | 138,547 | $ | 149,397 | $ | 310,426 | $ | 320,787 |
Total Assets at | |||||||||||
September 30, 2021 | December 31, 2020 | ||||||||||
Real Estate | $ | 14,999,355 | $ | 14,582,015 | |||||||
Investment Management | 135,779 | 125,621 | |||||||||
Total Company | $ | 15,135,134 | $ | 14,707,636 |
__________
(a)Operating property revenues from our hotels include (i) $2.4 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $4.9 million and $3.4 million for the nine months ended September 30, 2021 and 2020, respectively, generated from a hotel in Bloomington, Minnesota (revenues reflect the impact of the COVID-19 pandemic on the hotel’s operations), and (ii) $1.9 million for the nine months ended September 30, 2020, generated from a hotel in Miami, Florida, which was sold in January 2020 (Note 14).
W. P. Carey 9/30/2021 10-Q – 40
Notes to Consolidated Financial Statements (Unaudited)
(b)Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In addition, beginning with the second quarter of 2020, stock-based compensation expense and corporate depreciation and amortization expense are fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles (Note 2). These changes between the segments had no impact on our consolidated financial statements.
Note 16. Subsequent Events
Issuance of Senior Unsecured Notes
On October 15, 2021, we completed an underwritten public offering of $350.0 million of 2.450% Senior Notes due 2032, at a price of 99.048% of par value, in our inaugural green bond offering. These 2.450% Senior Notes due 2032 have a term and are scheduled to mature on February 1, 2032.
Acquisition
In October 2021, we completed the acquisition of two manufacturing facilities in Chattanooga, Tennessee, for $40.7 million.
Mortgage Loan Repayments
In October 2021, we prepaid or repaid at maturity six non-recourse mortgage loans for $297.6 million with a weighted-average interest rate of 4.4%.
Dividend from our Investment in Preferred Shares of WLT
In October 2021, we received a $0.8 million quarterly cash dividend from our investment in preferred shares of WLT.
W. P. Carey 9/30/2021 10-Q – 41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. This item also provides our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. The discussion also breaks down the financial results of our business by segment to provide a better understanding of how these segments and their results affect our financial condition and results of operations. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2020 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Refer to Item 1 of the 2020 Annual Report for a description of our business.
Significant Developments
Issuance of Senior Unsecured Notes
On October 15, 2021, we completed an underwritten public offering of $350.0 million of 2.450% Senior Notes due 2032, at a price of 99.048% of par value, in our inaugural green bond offering. These 2.450% Senior Notes due 2032 have a 10.3-year term and are scheduled to mature on February 1, 2032. We intend to fully allocate an amount equal to the net proceeds from this offering to recently completed or future eligible green projects in the categories outlined in our green financing framework, which is designed to align with the International Capital Markets Association Green Bond Principles 2021 (Note 16).
COVID-19
We continue to actively engage in discussions with our tenants regarding the impact of the COVID-19 pandemic on their business operations, liquidity, and financial position. Through the date of this Report, we received from tenants over 99.5% of contractual base rent that was due during the third quarter of 2021 (based on contractual minimum annualized base rent (“ABR”) as of June 30, 2021). Given the ongoing uncertainty around the duration and severity of the impact of the COVID-19 pandemic, we are unable to predict the impact it will have on our tenants’ continued ability to pay rent. Therefore, information provided in this Report regarding recent rent collections should not serve as an indication of expected future rent collections.
Financial Highlights
During the nine months ended September 30, 2021, we completed the following (as further described in the consolidated financial statements):
Real Estate
Investments
•We entered into an agreement to fund a construction loan of approximately $224.3 million for a retail complex in Las Vegas, Nevada. Through September 30, 2021, we funded $93.5 million (Note 7).
•We committed to purchase a food production facility in Lawrence, Kansas, for approximately $27.3 million upon completion of construction of the property, which is expected to take place during the fourth quarter of 2021 (Note 4).
•We committed to fund a build-to-suit project for a research center in Wageningen, the Netherlands, for an aggregate amount of $29.1 million (based on the exchange rate of the euro at September 30, 2021). We currently expect to complete the project in the second quarter of 2022 (Note 4).
Dispositions
•As part of our active capital recycling program, we disposed of 17 properties for total proceeds, net of selling costs, of $126.7 million (Note 14).
W. P. Carey 9/30/2021 10-Q – 42
Financing and Capital Markets Transactions
•On February 25, 2021, we completed an underwritten public offering of $425.0 million of 2.250% Senior Notes due 2033, at a price of 98.722% of par value. These 2.250% Senior Notes due 2033 have a 12.1-year term and are scheduled to mature on April 1, 2033. We used the net proceeds from this offering to prepay a total of $427.5 million of non-recourse mortgage loans (including prepayment penalties totaling $31.8 million) (Note 10).
•On March 8, 2021, we completed an underwritten public offering of €525.0 million of 0.950% Senior Notes due 2030, at a price of 99.335% of par value, issued by our wholly owned finance subsidiary, WPC Eurobond B.V., and fully and unconditionally guaranteed by us. These 0.950% Senior Notes due 2030 have a 9.2-year term and are scheduled to mature on June 1, 2030. We used the net proceeds from this offering to redeem the €500.0 million of 2.0% Senior Notes due 2023, for which we paid a “make-whole” amount of $26.2 million (based on the exchange rate of the euro as of the date of redemption) (Note 10).
•On June 7, 2021, we offered 6,037,500 shares of common stock through our June 2021 Equity Forwards, for gross proceeds of approximately $454.6 million. In addition, on August 9, 2021, we offered 5,175,000 shares of common stock through our August 2021 Equity Forwards, for gross proceeds of approximately $403.7 million. During the nine months ended September 30, 2021, we settled portions of our Equity Forwards by delivering 6,535,709 shares of common stock to certain forward purchasers for net proceeds of $457.2 million. As of September 30, 2021, 7,187,500 shares remained outstanding under our Equity Forwards (Note 12).
•We issued 4,225,624 shares of our common stock under our ATM Program at a weighted-average price of $72.50 per share, for net proceeds of $302.5 million (Note 12).
Investment Management
Assets Under Management
•As of September 30, 2021, we managed total assets of approximately $2.7 billion on behalf of CPA:18 – Global and CESH. We expect that the vast majority of our Investment Management earnings will continue to be generated from asset management fees and our ownership interests in CPA:18 – Global and CESH.
Dividends to Stockholders
We declared cash dividends totaling $3.150 per share during the nine months ended September 30, 2021, comprised of three quarterly dividends per share of $1.048, $1.050, and $1.052 (Note 12).
W. P. Carey 9/30/2021 10-Q – 43
Consolidated Results
(in thousands, except shares)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues from Real Estate | $ | 320,841 | $ | 297,395 | $ | 941,802 | $ | 875,628 | |||||||||||||||
Revenues from Investment Management | 4,913 | 5,024 | 14,842 | 26,320 | |||||||||||||||||||
Total revenues | 325,754 | 302,419 | 956,644 | 901,948 | |||||||||||||||||||
Net income from Real Estate attributable to W. P. Carey | 130,858 | 146,983 | 290,132 | 329,722 | |||||||||||||||||||
Net income (loss) from Investment Management attributable to W. P. Carey | 7,689 | 2,414 | 20,294 | (8,935) | |||||||||||||||||||
Net income attributable to W. P. Carey | 138,547 | 149,397 | 310,426 | 320,787 | |||||||||||||||||||
Dividends declared | 197,374 | 184,380 | 579,769 | 547,388 | |||||||||||||||||||
Net cash provided by operating activities | 625,396 | 556,584 | |||||||||||||||||||||
Net cash used in investing activities | (1,053,266) | (277,851) | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 305,865 | (311,400) | |||||||||||||||||||||
Supplemental financial measures (a): | |||||||||||||||||||||||
Adjusted funds from operations attributable to W. P. Carey (AFFO) — Real Estate | 224,445 | 196,770 | 657,150 | 598,449 | |||||||||||||||||||
Adjusted funds from operations attributable to W. P. Carey (AFFO) — Investment Management | 6,279 | 5,185 | 18,736 | 17,956 | |||||||||||||||||||
Adjusted funds from operations attributable to W. P. Carey (AFFO) | 230,724 | 201,955 | 675,886 | 616,405 | |||||||||||||||||||
Diluted weighted-average shares outstanding | 186,012,478 | 175,261,812 | 181,323,128 | 174,144,038 |
__________
(a)We consider Adjusted funds from operations (“AFFO”), a supplemental measure that is not defined by GAAP (a “non-GAAP measure”), to be an important measure in the evaluation of our operating performance. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.
Revenues
Total revenues increased for the three and nine months ended September 30, 2021 as compared to the same periods in 2020. Real Estate revenue increased primarily due to higher lease revenues (substantially as a result of property acquisition activity, the weakening U.S. dollar, and the positive impact on rent collections as businesses recover from the initial effects of the COVID-19 pandemic, partially offset by property dispositions). Investment Management revenue decreased primarily due to lower asset management revenue and reimbursable costs earned from the Managed Programs following the termination of our advisory agreements in connection with the closing of the CWI 1 and CWI 2 Merger on April 13, 2020 (Note 3).
W. P. Carey 9/30/2021 10-Q – 44
Net Income Attributable to W. P. Carey
Net income attributable to W. P. Carey decreased for the three months ended September 30, 2021 as compared to the same period in 2020. Net income from Real Estate attributable to W. P. Carey decreased primarily due a lower aggregate gain on sale of real estate (Note 14) and an impairment charge recognized in the current year period (Note 8). These decreases were partially offset by the impact of real estate acquisitions, the weakening U.S. dollar, the positive impact on rent collections as businesses recover from the initial effects of the COVID-19 pandemic, and lower interest expense. In addition, we recognized non-cash unrealized gains on our investment in shares of Lineage Logistics during both the current and prior year periods (Note 8). Net income from Investment Management attributable to W. P. Carey increased primarily due to higher income taxes recognized during the prior year period.
Net income attributable to W. P. Carey decreased for the nine months ended September 30, 2021 as compared to the same period in 2020. Net income from Real Estate attributable to W. P. Carey decreased primarily due to loss on extinguishment of debt recognized during the current year period (Note 10) and a deferred tax benefit as a result of the release of a deferred tax liability relating to our investment in shares of Lineage Logistics during the prior year period (Note 13), partially offset by the impact of real estate acquisitions, the weakening U.S. dollar, and the positive impact on rent collections as businesses recover from the initial effects of the COVID-19 pandemic. In addition, we recognized non-cash unrealized gains on our investment in shares of Lineage Logistics during both the current and prior year periods (Note 8). Net income from Investment Management attributable to W. P. Carey increased primarily due to other-than temporary impairment charges on our equity method investments in CWI 1 and CWI 2 during the prior year period (Note 8), partially offset by a non-cash net gain recognized on the redemption of our special general partner interests in CWI 1 and CWI 2 in connection with the WLT management internalization during the prior year period (Note 3).
AFFO
AFFO increased for the three and nine months ended September 30, 2021 as compared to the same periods in 2020, primarily due to higher lease revenues from net investment activity, the positive impact on rent collections as businesses recover from the initial effects of the COVID-19 pandemic, higher lease termination and other income, cash dividends received from our investments in shares of Lineage Logistics and WLT (Note 8), and lower interest expense, partially offset by lower Investment Management revenues due to the WLT management internalization in April 2020 (Note 3).
W. P. Carey 9/30/2021 10-Q – 45
Portfolio Overview
Our portfolio is comprised of operationally-critical, commercial real estate assets net leased to tenants located primarily in the United States and Northern and Western Europe. We invest in high-quality single tenant industrial, warehouse, office, retail, and self-storage properties subject to long-term net leases with built-in rent escalators. Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our various net-leased jointly owned investments. See Terms and Definitions below for a description of pro rata amounts.
Portfolio Summary
September 30, 2021 | December 31, 2020 | ||||||||||
Number of net-leased properties | 1,264 | 1,243 | |||||||||
Number of operating properties (a) | 20 | 20 | |||||||||
Number of tenants (net-leased properties) | 358 | 350 | |||||||||
Total square footage (net-leased properties, in thousands) | 151,908 | 144,259 | |||||||||
Occupancy (net-leased properties) | 98.4 | % | 98.5 | % | |||||||
Weighted-average lease term (net-leased properties, in years) | 10.6 | 10.6 | |||||||||
Number of countries | 25 | 25 | |||||||||
Total assets (in thousands) | $ | 15,135,134 | $ | 14,707,636 | |||||||
Net investments in real estate (in thousands) | 12,740,327 | 12,362,429 |
Nine Months Ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Acquisition volume (in millions) (b) | $ | 1,096.0 | $ | 354.6 | |||||||
Construction projects completed (in millions) | 88.2 | 168.1 | |||||||||
Average U.S. dollar/euro exchange rate | 1.1961 | 1.1237 | |||||||||
Average U.S. dollar/British pound sterling exchange rate | 1.3845 | 1.2711 |
__________
(a)At both September 30, 2021 and December 31, 2020, operating properties consisted of 19 self-storage properties (of which we consolidated ten, with an average occupancy of 93.5% as of September 30, 2021) and one hotel property with an average occupancy of 43.5% for the nine months ended September 30, 2021 (due to the adverse effect of the COVID-19 pandemic).
(b)Amount for the nine months ended September 30, 2021 includes $93.5 million of funding for a construction loan (Note 7).
W. P. Carey 9/30/2021 10-Q – 46
Net-Leased Portfolio
The tables below represent information about our net-leased portfolio at September 30, 2021 on a pro rata basis and, accordingly, exclude all operating properties. See Terms and Definitions below for a description of pro rata amounts and ABR.
Top Ten Tenants by ABR
(dollars in thousands)
Tenant/Lease Guarantor | Description | Number of Properties | ABR | ABR Percent | Weighted-Average Lease Term (Years) | |||||||||||||||||||||||||||
U-Haul Moving Partners Inc. and Mercury Partners, LP | Net lease self-storage properties in the U.S. | 78 | $ | 38,751 | 3.2 | % | 2.6 | |||||||||||||||||||||||||
State of Andalucía (a) | Government office properties in Spain | 70 | 30,149 | 2.5 | % | 13.2 | ||||||||||||||||||||||||||
Hellweg Die Profi-Baumärkte GmbH & Co. KG (a) | Do-it-yourself retail properties in Germany | 35 | 29,022 | 2.4 | % | 15.4 | ||||||||||||||||||||||||||
Metro Cash & Carry Italia S.p.A. (a) | Business-to-business wholesale stores in Italy and Germany | 20 | 28,608 | 2.3 | % | 7.1 | ||||||||||||||||||||||||||
Pendragon PLC (a) | Automotive dealerships in the United Kingdom | 69 | 23,197 | 1.9 | % | 8.7 | ||||||||||||||||||||||||||
Marriott Corporation | Net lease hotel properties in the U.S. | 18 | 21,100 | 1.7 | % | 2.3 | ||||||||||||||||||||||||||
Extra Space Storage, Inc. | Net lease self-storage properties in the U.S. | 27 | 20,688 | 1.7 | % | 22.6 | ||||||||||||||||||||||||||
Advance Auto Parts, Inc. | Distribution facilities in the U.S. | 30 | 20,180 | 1.6 | % | 11.3 | ||||||||||||||||||||||||||
Nord Anglia Education, Inc. | K-12 private schools in the U.S. | 3 | 19,473 | 1.6 | % | 22.0 | ||||||||||||||||||||||||||
Forterra, Inc. (a) (b) | Industrial properties in the U.S. and Canada | 27 | 19,157 | 1.6 | % | 21.7 | ||||||||||||||||||||||||||
Total | 377 | $ | 250,325 | 20.5 | % | 11.7 |
__________
(a)ABR amounts are subject to fluctuations in foreign currency exchange rates.
(b)Of the 27 properties leased to Forterra, Inc., 25 are located in the United States and two are located in Canada.
W. P. Carey 9/30/2021 10-Q – 47
Portfolio Diversification by Geography
(in thousands, except percentages)
Region | ABR | ABR Percent | Square Footage (a) | Square Footage Percent | ||||||||||||||||||||||
United States | ||||||||||||||||||||||||||
South | ||||||||||||||||||||||||||
Texas | $ | 103,733 | 8.5 | % | 11,875 | 7.8 | % | |||||||||||||||||||
Florida | 51,093 | 4.2 | % | 4,460 | 3.0 | % | ||||||||||||||||||||
Georgia | 23,809 | 1.9 | % | 3,512 | 2.3 | % | ||||||||||||||||||||
Tennessee | 19,517 | 1.6 | % | 2,875 | 1.9 | % | ||||||||||||||||||||
Alabama | 18,347 | 1.5 | % | 3,085 | 2.0 | % | ||||||||||||||||||||
Other (b) | 15,566 | 1.3 | % | 2,356 | 1.6 | % | ||||||||||||||||||||
Total South | 232,065 | 19.0 | % | 28,163 | 18.6 | % | ||||||||||||||||||||
Midwest | ||||||||||||||||||||||||||
Illinois | 59,379 | 4.9 | % | 7,739 | 5.1 | % | ||||||||||||||||||||
Minnesota | 31,044 | 2.5 | % | 2,915 | 1.9 | % | ||||||||||||||||||||
Indiana | 26,755 | 2.2 | % | 4,734 | 3.1 | % | ||||||||||||||||||||
Ohio | 18,181 | 1.5 | % | 3,988 | 2.6 | % | ||||||||||||||||||||
Michigan | 16,867 | 1.4 | % | 2,599 | 1.7 | % | ||||||||||||||||||||
Wisconsin | 16,027 | 1.3 | % | 3,245 | 2.1 | % | ||||||||||||||||||||
Other (b) | 30,417 | 2.5 | % | 4,923 | 3.3 | % | ||||||||||||||||||||
Total Midwest | 198,670 | 16.3 | % | 30,143 | 19.8 | % | ||||||||||||||||||||
East | ||||||||||||||||||||||||||
North Carolina | 34,039 | 2.8 | % | 8,098 | 5.3 | % | ||||||||||||||||||||
Pennsylvania | 26,973 | 2.2 | % | 3,838 | 2.5 | % | ||||||||||||||||||||
New Jersey | 22,809 | 1.9 | % | 1,235 | 0.8 | % | ||||||||||||||||||||
Massachusetts | 22,107 | 1.8 | % | 1,407 | 0.9 | % | ||||||||||||||||||||
New York | 17,590 | 1.4 | % | 2,221 | 1.5 | % | ||||||||||||||||||||
South Carolina | 14,404 | 1.2 | % | 4,088 | 2.7 | % | ||||||||||||||||||||
Other (b) | 46,662 | 3.8 | % | 8,024 | 5.3 | % | ||||||||||||||||||||
Total East | 184,584 | 15.1 | % | 28,911 | 19.0 | % | ||||||||||||||||||||
West | ||||||||||||||||||||||||||
California | 67,903 | 5.6 | % | 6,430 | 4.3 | % | ||||||||||||||||||||
Arizona | 29,575 | 2.4 | % | 3,365 | 2.2 | % | ||||||||||||||||||||
Other (b) | 54,179 | 4.4 | % | 5,503 | 3.6 | % | ||||||||||||||||||||
Total West | 151,657 | 12.4 | % | 15,298 | 10.1 | % | ||||||||||||||||||||
United States Total | 766,976 | 62.8 | % | 102,515 | 67.5 | % | ||||||||||||||||||||
International | ||||||||||||||||||||||||||
Germany | 61,699 | 5.1 | % | 6,229 | 4.1 | % | ||||||||||||||||||||
United Kingdom | 61,123 | 5.0 | % | 5,099 | 3.3 | % | ||||||||||||||||||||
Spain | 57,352 | 4.7 | % | 4,708 | 3.1 | % | ||||||||||||||||||||
Poland | 54,765 | 4.5 | % | 7,214 | 4.7 | % | ||||||||||||||||||||
The Netherlands | 51,050 | 4.2 | % | 6,389 | 4.2 | % | ||||||||||||||||||||
Italy | 26,953 | 2.2 | % | 2,386 | 1.6 | % | ||||||||||||||||||||
France | 20,782 | 1.7 | % | 1,685 | 1.1 | % | ||||||||||||||||||||
Croatia | 17,964 | 1.5 | % | 1,783 | 1.2 | % | ||||||||||||||||||||
Denmark | 15,652 | 1.3 | % | 2,408 | 1.6 | % | ||||||||||||||||||||
Canada | 13,744 | 1.1 | % | 2,213 | 1.5 | % | ||||||||||||||||||||
Other (c) | 72,511 | 5.9 | % | 9,279 | 6.1 | % | ||||||||||||||||||||
International Total | 453,595 | 37.2 | % | 49,393 | 32.5 | % | ||||||||||||||||||||
Total | $ | 1,220,571 | 100.0 | % | 151,908 | 100.0 | % |
W. P. Carey 9/30/2021 10-Q – 48
Portfolio Diversification by Property Type
(in thousands, except percentages)
Property Type | ABR | ABR Percent | Square Footage (a) | Square Footage Percent | ||||||||||||||||||||||
Industrial | $ | 304,592 | 24.9 | % | 52,347 | 34.5 | % | |||||||||||||||||||
Warehouse | 290,036 | 23.8 | % | 53,702 | 35.3 | % | ||||||||||||||||||||
Office | 257,565 | 21.1 | % | 16,998 | 11.2 | % | ||||||||||||||||||||
Retail (d) | 209,460 | 17.2 | % | 17,751 | 11.7 | % | ||||||||||||||||||||
Self Storage (net lease) | 59,438 | 4.9 | % | 5,810 | 3.8 | % | ||||||||||||||||||||
Other (e) | 99,480 | 8.1 | % | 5,300 | 3.5 | % | ||||||||||||||||||||
Total | $ | 1,220,571 | 100.0 | % | 151,908 | 100.0 | % |
__________
(a)Includes square footage for any vacant properties.
(b)Other properties within South include assets in Louisiana, Arkansas, Oklahoma, and Mississippi. Other properties within Midwest include assets in Missouri, Kansas, Nebraska, Iowa, North Dakota, and South Dakota. Other properties within East include assets in Virginia, Kentucky, Maryland, Connecticut, West Virginia, New Hampshire, and Maine. Other properties within West include assets in Colorado, Utah, Oregon, Washington, Nevada, Hawaii, New Mexico, Wyoming, Montana, and Alaska.
(c)Includes assets in Lithuania, Finland, Norway, Mexico, Hungary, Portugal, the Czech Republic, Austria, Sweden, Slovakia, Japan, Latvia, Belgium, and Estonia.
(d)Includes automotive dealerships.
(e)Includes ABR from tenants within the following property types: education facility, hotel (net lease), laboratory, fitness facility, theater, student housing (net lease), land, and restaurant.
W. P. Carey 9/30/2021 10-Q – 49
Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
Industry Type | ABR | ABR Percent | Square Footage | Square Footage Percent | ||||||||||||||||||||||
Retail Stores (a) | $ | 258,231 | 21.2 | % | 31,828 | 21.0 | % | |||||||||||||||||||
Consumer Services | 105,162 | 8.6 | % | 8,029 | 5.3 | % | ||||||||||||||||||||
Automotive | 88,048 | 7.2 | % | 13,317 | 8.8 | % | ||||||||||||||||||||
Grocery | 74,354 | 6.1 | % | 7,742 | 5.1 | % | ||||||||||||||||||||
Beverage and Food | 68,203 | 5.6 | % | 9,095 | 6.0 | % | ||||||||||||||||||||
Cargo Transportation | 64,555 | 5.3 | % | 9,491 | 6.2 | % | ||||||||||||||||||||
Healthcare and Pharmaceuticals | 56,355 | 4.6 | % | 4,910 | 3.2 | % | ||||||||||||||||||||
Business Services | 53,115 | 4.4 | % | 4,563 | 3.0 | % | ||||||||||||||||||||
Construction and Building | 49,980 | 4.1 | % | 9,005 | 5.9 | % | ||||||||||||||||||||
Capital Equipment | 43,148 | 3.5 | % | 6,932 | 4.6 | % | ||||||||||||||||||||
Sovereign and Public Finance | 41,724 | 3.4 | % | 3,364 | 2.2 | % | ||||||||||||||||||||
Durable Consumer Goods | 40,098 | 3.3 | % | 9,951 | 6.5 | % | ||||||||||||||||||||
Hotel and Leisure | 39,338 | 3.2 | % | 2,197 | 1.4 | % | ||||||||||||||||||||
Containers, Packaging, and Glass | 36,381 | 3.0 | % | 6,186 | 4.1 | % | ||||||||||||||||||||
High Tech Industries | 31,134 | 2.5 | % | 3,315 | 2.2 | % | ||||||||||||||||||||
Insurance | 25,761 | 2.1 | % | 1,749 | 1.1 | % | ||||||||||||||||||||
Banking | 20,135 | 1.6 | % | 1,247 | 0.8 | % | ||||||||||||||||||||
Telecommunications | 15,386 | 1.3 | % | 1,480 | 1.0 | % | ||||||||||||||||||||
Aerospace and Defense | 15,346 | 1.3 | % | 1,357 | 0.9 | % | ||||||||||||||||||||
Chemicals, Plastics, and Rubber | 14,242 | 1.2 | % | 1,853 | 1.2 | % | ||||||||||||||||||||
Non-Durable Consumer Goods | 14,222 | 1.2 | % | 5,250 | 3.5 | % | ||||||||||||||||||||
Media: Advertising, Printing, and Publishing | 13,940 | 1.1 | % | 1,001 | 0.7 | % | ||||||||||||||||||||
Media: Broadcasting and Subscription | 13,306 | 1.1 | % | 784 | 0.5 | % | ||||||||||||||||||||
Wholesale | 12,765 | 1.0 | % | 2,005 | 1.3 | % | ||||||||||||||||||||
Other (b) | 25,642 | 2.1 | % | 5,257 | 3.5 | % | ||||||||||||||||||||
Total | $ | 1,220,571 | 100.0 | % | 151,908 | 100.0 | % |
__________
(a)Includes automotive dealerships.
(b)Includes ABR from tenants in the following industries: metals and mining, oil and gas, environmental industries, consumer transportation, forest products and paper, real estate, and finance. Also includes square footage for vacant properties.
W. P. Carey 9/30/2021 10-Q – 50
Lease Expirations
(in thousands, except percentages, number of leases, and number of tenants)
Year of Lease Expiration (a) | Number of Leases Expiring | Number of Tenants with Leases Expiring | ABR | ABR Percent | Square Footage | Square Footage Percent | ||||||||||||||||||||||||||||||||
Remaining 2021 | 8 | 8 | $ | 2,889 | 0.2 | % | 249 | 0.2 | % | |||||||||||||||||||||||||||||
2022 | 24 | 24 | 32,934 | 2.7 | % | 2,348 | 1.5 | % | ||||||||||||||||||||||||||||||
2023 | 35 | 31 | 51,997 | 4.3 | % | 5,975 | 3.9 | % | ||||||||||||||||||||||||||||||
2024 (b) | 61 | 49 | 97,010 | 7.9 | % | 12,442 | 8.2 | % | ||||||||||||||||||||||||||||||
2025 | 62 | 31 | 64,151 | 5.3 | % | 7,419 | 4.9 | % | ||||||||||||||||||||||||||||||
2026 | 42 | 30 | 58,519 | 4.8 | % | 8,676 | 5.7 | % | ||||||||||||||||||||||||||||||
2027 | 55 | 31 | 83,555 | 6.8 | % | 8,763 | 5.8 | % | ||||||||||||||||||||||||||||||
2028 | 41 | 23 | 63,469 | 5.2 | % | 4,829 | 3.2 | % | ||||||||||||||||||||||||||||||
2029 | 50 | 23 | 55,757 | 4.6 | % | 6,702 | 4.4 | % | ||||||||||||||||||||||||||||||
2030 | 26 | 21 | 66,447 | 5.4 | % | 5,657 | 3.7 | % | ||||||||||||||||||||||||||||||
2031 | 66 | 16 | 73,338 | 6.0 | % | 8,642 | 5.7 | % | ||||||||||||||||||||||||||||||
2032 | 34 | 14 | 48,826 | 4.0 | % | 6,610 | 4.3 | % | ||||||||||||||||||||||||||||||
2033 | 27 | 21 | 75,378 | 6.2 | % | 10,119 | 6.7 | % | ||||||||||||||||||||||||||||||
2034 | 47 | 15 | 75,799 | 6.2 | % | 7,765 | 5.1 | % | ||||||||||||||||||||||||||||||
Thereafter (>2034) | 211 | 100 | 370,502 | 30.4 | % | 53,357 | 35.1 | % | ||||||||||||||||||||||||||||||
Vacant | — | — | — | — | % | 2,355 | 1.6 | % | ||||||||||||||||||||||||||||||
Total | 789 | $ | 1,220,571 | 100.0 | % | 151,908 | 100.0 | % |
__________
(a)Assumes tenants do not exercise any renewal options or purchase options.
(b)Includes ABR of $38.8 million from a tenant (U-Haul Moving Partners, Inc. and Mercury Partners, LP) that holds an option to repurchase the 78 properties it is leasing in April 2024. There can be no assurance that such repurchase will be completed.
Terms and Definitions
Pro Rata Metrics — The portfolio information above contains certain metrics prepared on a pro rata basis. We refer to these metrics as pro rata metrics. We have a number of investments, usually with our affiliates, in which our economic ownership is less than 100%. On a full consolidation basis, we report 100% of the assets, liabilities, revenues, and expenses of those investments that are deemed to be under our control or for which we are deemed to be the primary beneficiary, even if our ownership is less than 100%. Also, for all other jointly owned investments, which we do not control, we report our net investment and our net income or loss from that investment. On a pro rata basis, we present our proportionate share, based on our economic ownership of these jointly owned investments, of the portfolio metrics of those investments. Multiplying each of our jointly owned investments’ financial statement line items by our percentage ownership and adding or subtracting those amounts from our totals, as applicable, may not accurately depict the legal and economic implications of holding an ownership interest of less than 100% in our jointly owned investments.
ABR — ABR represents contractual minimum annualized base rent for our net-leased properties and reflects exchange rates as of September 30, 2021. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period. ABR is not applicable to operating properties.
W. P. Carey 9/30/2021 10-Q – 51
Results of Operations
We operate in two reportable segments: Real Estate 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 segment. We focus our efforts on accretive investing and improving portfolio quality through re-leasing efforts, including negotiation of lease renewals, or selectively selling assets in order to increase value in our real estate portfolio. Through our Investment Management segment, we expect to continue to earn fees and other income from the management of the portfolios of the remaining Managed Programs until those programs reach the end of their respective life cycles. Refer to Note 15 for tables presenting the comparative results of our Real Estate and Investment Management segments.
Real Estate
Revenues
The following table presents revenues within our Real Estate segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Real Estate Revenues | |||||||||||||||||||||||||||||||||||
Lease revenues from: | |||||||||||||||||||||||||||||||||||
Existing net-leased properties | $ | 281,622 | $ | 281,282 | $ | 340 | $ | 842,945 | $ | 826,361 | $ | 16,584 | |||||||||||||||||||||||
Recently acquired net-leased properties | 32,001 | 6,241 | 25,760 | 74,442 | 11,898 | 62,544 | |||||||||||||||||||||||||||||
Net-leased properties sold or held for sale | 571 | 6,333 | (5,762) | 3,882 | 18,010 | (14,128) | |||||||||||||||||||||||||||||
Total lease revenues (includes reimbursable tenant costs) | 314,194 | 293,856 | 20,338 | 921,269 | 856,269 | 65,000 | |||||||||||||||||||||||||||||
Lease termination income and other | 2,597 | 1,565 | 1,032 | 11,059 | 9,991 | 1,068 | |||||||||||||||||||||||||||||
Operating property revenues | 4,050 | 1,974 | 2,076 | 9,474 | 9,368 | 106 | |||||||||||||||||||||||||||||
$ | 320,841 | $ | 297,395 | $ | 23,446 | $ | 941,802 | $ | 875,628 | $ | 66,174 |
Lease Revenues
“Existing net-leased properties” are those that we acquired or placed into service prior to January 1, 2020 and that were not sold or held for sale during the periods presented. For the periods presented, there were 1,138 existing net-leased properties.
For the three and nine months ended September 30, 2021 as compared to the same periods in 2020, lease revenues from existing net-leased properties increased due to the following items (in millions):
![wpc-20210930_g2.jpg](https://www.sec.gov/Archives/edgar/data/0001025378/000102537821000107/wpc-20210930_g2.jpg)
W. P. Carey 9/30/2021 10-Q – 52
![wpc-20210930_g3.jpg](https://www.sec.gov/Archives/edgar/data/0001025378/000102537821000107/wpc-20210930_g3.jpg)
__________
(a)Primarily related to (i) straight-line rent adjustments and (ii) write-offs of above/below-market rent intangibles.
“Recently acquired net-leased properties” are those that we acquired or placed into service subsequent to December 31, 2019 and that were not sold or held for sale during the periods presented. Since January 1, 2020, we acquired 33 investments (comprised of 87 properties and six land parcels under buildings that we already own) and placed two properties into service.
“Net-leased properties sold or held for sale” include (i) 17 net-leased properties disposed of during the nine months ended September 30, 2021; (ii) three net-leased properties classified as held for sale at September 30, 2021 (Note 4); and (iii) 21 net-leased properties disposed of during the year ended December 31, 2020. Our dispositions are more fully described in Note 14.
Operating Property Revenues and Expenses
For the periods presented, we recorded operating property revenues from 12 operating properties, comprised of ten self-storage operating properties (which excludes nine self-storage properties accounted for under the equity method) and two hotel operating properties (one of which was sold in January 2020, as described in Note 14). For our remaining hotel operating property, revenues and expenses increased by $1.8 million and $1.3 million, respectively, for the three months ended September 30, 2021 as compared to the same period in 2020, and by $1.5 million and $0.5 million, respectively, for the nine months ended September 30, 2021 as compared to the same period in 2020, reflecting higher occupancy as the hotel’s business recovers from the ongoing COVID-19 pandemic. In addition, for the nine months ended September 30, 2021 as compared to the same period in 2020, operating property revenues and expenses decreased by $1.9 million each due to the hotel sale in January 2020.
Lease Termination Income and Other
W. P. Carey 9/30/2021 10-Q – 53
Operating Expenses
Depreciation and Amortization
The following table presents depreciation and amortization expense within our Real Estate segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Depreciation and Amortization | |||||||||||||||||||||||||||||||||||
Net-leased properties | $ | 113,516 | $ | 106,439 | $ | 7,077 | $ | 334,338 | $ | 324,990 | $ | 9,348 | |||||||||||||||||||||||
Operating properties | 687 | 722 | (35) | 2,062 | 3,328 | (1,266) | |||||||||||||||||||||||||||||
Corporate | 1,454 | 1,190 | 264 | 3,927 | 2,717 | 1,210 | |||||||||||||||||||||||||||||
$ | 115,657 | $ | 108,351 | $ | 7,306 | $ | 340,327 | $ | 331,035 | $ | 9,292 |
For the three and nine months ended September 30, 2021 as compared to the same periods in 2020, depreciation and amortization expense for net-leased properties increased primarily due to the impact of acquisition activity and the strengthening of foreign currencies (primarily the euro) in relation to the U.S. dollar between the periods, partially offset by the in-place lease intangible assets recorded on certain net-leased self-storage properties becoming fully amortized during 2020.
Beginning with the second quarter of 2020, corporate depreciation and amortization expense is fully recognized within our Real Estate segment, consistent with the segment allocation changes described below under General and Administrative.
General and Administrative
Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles (Note 2). This change between the segments had no impact on our consolidated financial statements.
For the nine months ended September 30, 2021 as compared to the same period in 2020, general and administrative expenses allocated to our Real Estate segment increased by $10.5 million, primarily due to (i) lower overhead reimbursements from WLT following the termination of most services provided under the transition services agreement (Note 3), (ii) higher incentive compensation expense, and (iii) the change in methodology for allocation of expenses between our Real Estate and Investment Management segments discussed above.
Impairment Charges
Property Expenses, Excluding Reimbursable Tenant Costs
For the three and nine months ended September 30, 2021 as compared to the same periods in 2020, property expenses, excluding reimbursable tenant costs, increased by $1.8 million and $2.8 million, respectively, primarily due to tenant vacancies during 2020 and 2021 (which resulted in property expenses no longer being reimbursable) and higher property tax assessments at certain properties.
W. P. Carey 9/30/2021 10-Q – 54
Stock-based Compensation Expense
Beginning with the second quarter of 2020, stock-based compensation expense is fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we believe that this allocation methodology is appropriate, as described above (Note 2). This change between the segments had no impact on our consolidated financial statements.
For the nine months ended September 30, 2021 as compared to the same period in 2020, stock-based compensation expense allocated to our Real Estate segment increased by $9.3 million, primarily due to changes in projected payout for PSUs.
Merger and Other Expenses
For the three and nine months ended September 30, 2021, merger and other expenses allocated to our Real Estate segment totaled benefits of $0.9 million and $4.0 million, respectively, primarily comprised of reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with business combinations in prior years.
Other Income and (Expenses), and (Provision for) Benefit from Income Taxes
Interest Expense
For the three and nine months ended September 30, 2021 as compared to the same periods in 2020, interest expense decreased by $3.8 million and $7.6 million, respectively, primarily due to the reduction of our mortgage debt outstanding by prepaying or repaying at or close to maturity a total of $749.4 million of non-recourse mortgage loans with a weighted-average interest rate of 5.1% since January 1, 2020 ($429.8 million of such repayments were completed in February, March, and April 2021) (Note 10) and the redemption of the €500.0 million of 2.0% Senior Notes due 2023 in March 2021, partially offset by three senior unsecured notes issuances totaling $1.6 billion (based on the exchange rate of the euro on the date of issuance for our euro-denominated senior unsecured notes) with a weighted-average interest rate of 1.8% completed since January 1, 2020.
The following table presents certain information about our outstanding debt (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Average outstanding debt balance | $ | 6,936,086 | $ | 6,429,959 | $ | 6,917,578 | $ | 6,304,992 | |||||||||||||||
Weighted-average interest rate | 2.5 | % | 3.0 | % | 2.6 | % | 3.1 | % |
Gain on Sale of Real Estate, Net
Gain on sale of real estate, net, consists of gain on the sale of properties that were disposed of during the reporting period. Our dispositions are more fully described in Note 14.
W. P. Carey 9/30/2021 10-Q – 55
Other Gains and (Losses)
Other gains and (losses) primarily consists of gains and losses on (i) extinguishment of debt, (ii) the mark-to-market fair value of equity securities, and (iii) foreign currency transactions. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation. All of our foreign currency-denominated unsecured debt instruments were designated as net investment hedges during the three and nine months ended September 30, 2021 and 2020. Therefore, no gains and losses on foreign currency transactions were recognized on the remeasurement of such instruments during those periods (Note 9).
The following table presents other gains and (losses) within our Real Estate segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Other Gains and (Losses) | |||||||||||||||||||||||||||||||||||
Non-cash unrealized gains related to an increase in the fair value of our investment in shares of Lineage Logistics (Note 8) | $ | 52,931 | $ | 48,795 | $ | 4,136 | $ | 76,312 | $ | 48,795 | $ | 27,517 | |||||||||||||||||||||||
Net realized and unrealized (losses) gains on foreign currency transactions (a) | (7,005) | 5,037 | (12,042) | (11,186) | 2,487 | (13,673) | |||||||||||||||||||||||||||||
488 | (8,407) | 8,895 | 6,737 | (10,313) | 17,050 | ||||||||||||||||||||||||||||||
Loss on extinguishment of debt (b) | (99) | (142) | 43 | (60,167) | (200) | (59,967) | |||||||||||||||||||||||||||||
Other | 1,857 | (1,168) | 3,025 | 1,759 | (2,190) | 3,949 | |||||||||||||||||||||||||||||
$ | 48,172 | $ | 44,115 | $ | 4,057 | $ | 13,455 | $ | 38,579 | $ | (25,124) |
__________
(a)We make certain foreign currency-denominated intercompany loans to a number of our foreign subsidiaries, most of which do not have the U.S. dollar as their functional currency. Remeasurement of foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and short-term loans, are included in other gains and (losses).
(b)Amount for the nine months ended September 30, 2021 is related to the prepayment of mortgage loans (primarily comprised of prepayment penalties totaling $32.1 million) and redemption of the €500.0 million of 2.0% Senior Notes due 2023 in March 2021 (primarily comprised of a “make-whole” amount of $26.2 million related to the redemption) (Note 10).
Earnings (Losses) from Equity Method Investments in Real Estate
Our equity method investments in real estate are more fully described in Note 7. The following table presents earnings (losses) from equity method investments in real estate (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Earnings (Losses) from Equity Method Investments in Real Estate | |||||||||||||||||||||||||||||||||||
Losses from WLT (a) | $ | (1,376) | $ | (848) | $ | (528) | $ | (9,864) | $ | (848) | $ | (9,016) | |||||||||||||||||||||||
Earnings from Las Vegas Retail Complex | 1,352 | — | 1,352 | 1,645 | — | 1,645 | |||||||||||||||||||||||||||||
Earnings from Kesko Senukai (b) | 944 | 580 | 364 | 434 | 670 | (236) | |||||||||||||||||||||||||||||
Earnings from Johnson Self Storage (c) | 663 | 141 | 522 | 1,556 | 215 | 1,341 | |||||||||||||||||||||||||||||
— | — | — | (6,830) | — | (6,830) | ||||||||||||||||||||||||||||||
Other | 862 | 758 | 104 | 2,531 | 2,370 | 161 | |||||||||||||||||||||||||||||
$ | 2,445 | $ | 631 | $ | 1,814 | $ | (10,528) | $ | 2,407 | $ | (12,935) |
__________
(a)Losses for all periods are primarily due to the adverse impact of the COVID-19 pandemic on WLT’s operations. We record equity earnings (losses) from this investment on a one quarter lag.
(b)Increase for the three months ended September 30, 2021 as compared to the same period in 2020 is primarily due to higher rent collections at these retail properties, which were adversely impacted by the COVID-19 pandemic.
W. P. Carey 9/30/2021 10-Q – 56
(c)Increases for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 are primarily due to higher occupancy rates at these self-storage facilities.
Gain on Sale of Real Estate, Net
Gain on sale of real estate, net, consists of gain on the sale of properties that were disposed of during the reporting period. Our dispositions are more fully described in Note 14.
Non-Operating Income
Non-operating income primarily consists of realized gains and losses on derivative instruments, dividends from equity securities, and interest income on our loans to affiliates and cash deposits.
The following table presents non-operating income within our Real Estate segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Non-Operating Income | |||||||||||||||||||||||||||||||||||
$ | 813 | $ | — | $ | 813 | $ | 4,081 | $ | — | $ | 4,081 | ||||||||||||||||||||||||
Realized gains (losses) on foreign currency forward contracts and collars | 370 | 296 | 74 | (38) | 9,310 | (9,348) | |||||||||||||||||||||||||||||
Interest income related to our loans to affiliates and cash deposits | 100 | 366 | (266) | 139 | 1,054 | (915) | |||||||||||||||||||||||||||||
— | — | — | 6,438 | — | 6,438 | ||||||||||||||||||||||||||||||
$ | 1,283 | $ | 662 | $ | 621 | $ | 10,620 | $ | 10,364 | $ | 256 |
(Provision for) Benefit from Income Taxes
For the three months ended September 30, 2021 as compared to the same period in 2020, provision for income taxes within our Real Estate segment increased by $4.2 million, primarily due to (i) trade taxes of $1.8 million recognized during the current year period following the completion of a tax review on a portfolio of properties in Germany and (ii) deferred tax benefits totaling $1.3 million recognized during the prior year period related to temporary basis differences on certain properties in Germany.
For the nine months ended September 30, 2021, we recognized a provision for income taxes of $23.4 million, compared to a benefit from income taxes of $24.0 million recognized during the nine months ended September 30, 2020, within our Real Estate segment. During the nine months ended September 30, 2020, we recognized a deferred tax benefit of $37.2 million as a result of the release of a deferred tax liability relating to our investment in shares of Lineage Logistics (Note 13), which converted to a REIT during the prior year period and is therefore no longer subject to federal and state income taxes. In addition, we recognized (i) trade taxes of $1.8 million on a portfolio of properties in Germany during the current year period and (ii) deferred tax benefits totaling $1.3 million on certain properties in Germany during the prior year period, as described above.
W. P. Carey 9/30/2021 10-Q – 57
Investment Management
We earn revenue as the advisor to the Managed Programs. For the periods presented, we acted as advisor to the following Managed Programs: CPA:18 – Global, CWI 1 (through April 13, 2020), CWI 2 (through April 13, 2020), and CESH. The CWI 1 and CWI 2 Merger closed on April 13, 2020, and as a result, the advisory agreements with each of CWI 1 and CWI 2 terminated and CWI 2 was renamed Watermark Lodging Trust, Inc., for which we provided certain services pursuant to a transition services agreement (which was terminated on October 13, 2021) (Note 3). We no longer raise capital for new or existing funds, but we currently expect to continue managing CPA:18 – Global and CESH and earn the various fees described below through the end of their respective life cycles (Note 1, Note 3). As of September 30, 2021, we managed total assets of approximately $2.7 billion on behalf of the Managed Programs.
Revenues
The following table presents revenues within our Investment Management segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
Investment Management Revenues | |||||||||||||||||||||||||||||||||||
Asset management and other revenue | |||||||||||||||||||||||||||||||||||
CPA:18 – Global | $ | 3,160 | $ | 2,978 | $ | 182 | $ | 9,452 | $ | 9,056 | $ | 396 | |||||||||||||||||||||||
CWI 1 | — | — | — | — | 3,795 | (3,795) | |||||||||||||||||||||||||||||
CWI 2 | — | — | — | — | 3,367 | (3,367) | |||||||||||||||||||||||||||||
CESH | 712 | 770 | (58) | 2,340 | 2,385 | (45) | |||||||||||||||||||||||||||||
3,872 | 3,748 | 124 | 11,792 | 18,603 | (6,811) | ||||||||||||||||||||||||||||||
Reimbursable costs from affiliates | |||||||||||||||||||||||||||||||||||
CPA:18 – Global | 769 | 720 | 49 | 2,058 | 2,158 | (100) | |||||||||||||||||||||||||||||
CWI 1 | — | — | — | — | 1,867 | (1,867) | |||||||||||||||||||||||||||||
CWI 2 | — | — | — | — | 1,301 | (1,301) | |||||||||||||||||||||||||||||
CESH | 197 | 212 | (15) | 713 | 918 | (205) | |||||||||||||||||||||||||||||
WLT | 75 | 344 | (269) | 279 | 1,473 | (1,194) | |||||||||||||||||||||||||||||
1,041 | 1,276 | (235) | 3,050 | 7,717 | (4,667) | ||||||||||||||||||||||||||||||
$ | 4,913 | $ | 5,024 | $ | (111) | $ | 14,842 | $ | 26,320 | $ | (11,478) |
Asset Management and Other Revenue
Asset management and other revenue includes asset management revenue, structuring revenue, and other advisory revenue. During the periods presented, we earned asset management revenue from (i) CPA:18 – Global based on the value of its real estate-related assets under management, (ii) the CWI REITs, prior to the CWI 1 and CWI 2 Merger (Note 3), based on the value of their lodging-related real estate assets under management, and (iii) CESH based on its gross assets under management at fair value. Asset management revenue may increase or decrease depending upon changes in the Managed Programs’ asset bases as a result of purchases, sales, or changes in the appraised value of the real estate-related and lodging-related assets in their investment portfolios. For 2021, we receive asset management fees from (i) CPA:18 – Global in shares of its common stock, and (ii) CESH in cash.
We earn structuring and other advisory revenue when we structure new investments on behalf of the Managed Programs. Since we no longer raise capital for new or existing funds, and we no longer serve as advisor to CWI 1 and CWI 2 (Note 3), structuring and other advisory revenue is expected to be insignificant going forward.
For the nine months ended September 30, 2020, structuring and other advisory revenue was primarily comprised of $0.3 million for structuring a mortgage refinancing on behalf of CWI 2 and $0.2 million related to increases in build-to-suit funding commitments for certain CPA:18 – Global investments.
W. P. Carey 9/30/2021 10-Q – 58
Operating Expenses
General and Administrative, Stock-based Compensation Expense, and Depreciation and Amortization
Beginning with the second quarter of 2020, general and administrative expenses attributed to our Investment Management segment are comprised of the incremental costs of providing services to the Managed Programs, which are fully reimbursed by those funds (resulting in no net expense for us). All other general and administrative expenses are attributed to our Real Estate segment. Previously, general and administrative expenses were allocated based on time incurred by our personnel for the Real Estate and Investment Management segments. In addition, beginning with the second quarter of 2020, stock-based compensation expense and corporate depreciation and amortization expense are fully recognized within our Real Estate segment. In light of the termination of the advisory agreements with CWI 1 and CWI 2 in connection with the WLT management internalization (Note 3), we now view essentially all assets, liabilities, and operational expenses as part of our Real Estate segment, other than incremental activities that are expected to wind down as we manage CPA:18 – Global and CESH through the end of their respective life cycles (Note 2). These changes between the segments had no impact on our consolidated financial statements.
As discussed in Note 3, certain personnel costs and overhead costs are charged to the remaining Managed Programs and reimbursed to us in accordance with their respective advisory agreements. In addition, following the closing of the CWI 1 and CWI 2 Merger on April 13, 2020, we began recording reimbursements from WLT within our Investment Management segment pursuant to a transition services agreement. As of the date of this Report, all services provided under the transition services agreement have terminated, except for certain information systems and data services.
Subadvisor Fees
Pursuant to the terms of the subadvisory agreements we had with the third-party subadvisors in connection with both CWI 1 and CWI 2, we paid a subadvisory fee equal to 20% of the amount of fees paid to us by CWI 1 and 25% of the amount of fees paid to us by CWI 2. Upon completion of the CWI 1 and CWI 2 Merger on April 13, 2020 (Note 3), the subadvisory agreements were terminated, and we no longer pay subadvisory fees.
Other Income and Expenses, and Provision for Income Taxes
Earnings (Losses) from Equity Method Investments in the Managed Programs
Earnings (losses) from equity method investments in the Managed Programs is recognized in accordance with GAAP (Note 7). In addition, we are entitled to receive distributions of Available Cash (Note 3) from the operating partnership of CPA:18 – Global. The net income of our unconsolidated investments fluctuates based on the timing of transactions, such as new leases and property sales, as well as the level of impairment charges. The following table presents the details of our earnings (losses) from equity method investments in the Managed Programs (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Earnings (losses) from equity method investments in the Managed Programs: | |||||||||||||||||||||||
Earnings (losses) from equity method investments in the Managed Programs (a) | $ | 1,667 | $ | (79) | $ | 1,425 | $ | (3,504) | |||||||||||||||
Distributions of Available Cash from CPA:18 – Global (b) | 1,623 | 1,168 | 4,949 | 5,113 | |||||||||||||||||||
Other-than-temporary impairment charges on our equity method investments in CWI 1 and CWI 2 (c) | — | — | — | (47,112) | |||||||||||||||||||
Gain on redemption of special general partner interests in CWI 1 and CWI 2, net (d) | — | — | — | 33,009 | |||||||||||||||||||
Earnings (losses) from equity method investments in the Managed Programs | $ | 3,290 | $ | 1,089 | $ | 6,374 | $ | (12,494) |
__________
W. P. Carey 9/30/2021 10-Q – 59
(a)Increases for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 were due to increases of $1.7 million and $2.0 million, respectively, from our investment in shares of CPA:18 – Global. In addition, we recognized losses of $1.6 million and $1.3 million from our investments in shares of CWI 1 and CWI 2 common stock, respectively, during the nine months ended September 30, 2020 (prior to the CWI 1 and CWI 2 Merger in April 2020 (Note 3)).
(b)We are entitled to receive distributions of up to 10% of the Available Cash from the operating partnership of CPA:18 – Global, as defined in its operating partnership agreement (Note 3). Distributions of Available Cash received and earned from CPA:18 – Global fluctuate based on the timing of certain events, including acquisitions and dispositions.
(c)During the nine months ended September 30, 2020, we recognized other-than-temporary impairment charges of $27.8 million and $19.3 million on our equity method investments in CWI 1 and CWI 2, respectively, to reduce the carrying values of our investments to their estimated fair values, due to the adverse effect of the COVID-19 pandemic on the operations of CWI 1 and CWI 2 (Note 8).
(d)Immediately following the closing of the CWI 1 and CWI 2 Merger, in connection with the redemption of the special general partner interests that we previously held in CWI 1 and CWI 2, we recognized a non-cash net gain on sale of $33.0 million during the nine months ended September 30, 2020 (Note 3).
(Provision for) Benefit from Income Taxes
For the three months ended September 30, 2021 as compared to the same period in 2020, provision for income taxes within our Investment Management segment decreased by $1.8 million, primarily due to current tax expense of $1.3 million recognized during the prior year period as a result of a change in tax position for federal taxes.
For the nine months ended September 30, 2021, we recognized a provision for income taxes of less than $0.1 million, compared to a benefit from income taxes of $4.1 million recognized during the nine months ended September 30, 2020, within our Investment Management segment. During the nine months ended September 30, 2020, we recognized (i) a deferred tax benefit of $6.5 million as a result of the other-than-temporary impairment charges that we recognized on our equity method investments in CWI 1 and CWI 2 during the period, (ii) a current tax benefit of $4.7 million as a result of carrying back certain net operating losses in accordance with the CARES Act that was enacted on March 27, 2020, (iii) deferred tax expense of $6.1 million due to the establishment of a valuation allowance since we do not expect our Investment Management segment to realize its deferred tax assets, and (iv) one-time current taxes of $2.6 million incurred upon the recognition of taxable income associated with the accelerated vesting of shares previously issued by CWI 1 and CWI 2 to us for asset management services performed, in connection with the CWI 1 and CWI 2 Merger.
Net Income Attributable to Noncontrolling Interests
For the nine months ended September 30, 2020, net income attributable to noncontrolling interests within our Investment Management segment was comprised of a gain of $9.9 million recognized on the redemption of noncontrolling interests in the special general partner interests previously held by the respective subadvisors for CWI 1 and CWI 2 in connection with the CWI 1 and CWI 2 Merger (Note 3).
Liquidity and Capital Resources
Sources and Uses of Cash During the Period
We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund dividends to stockholders. Our cash flows fluctuate periodically due to a number of factors, which may include, among other things: the timing of our equity and debt offerings; the timing of purchases and sales of real estate; the timing of the repayment of mortgage loans and receipt of lease revenues; the timing and amount of other lease-related payments; the timing of settlement of foreign currency transactions; changes in foreign currency exchange rates; the receipt of asset management fees in either shares of the common stock of CPA:18 – Global or cash; the timing of distributions from equity method investments; and the receipt of distributions of Available Cash from CPA:18 – Global. Despite these fluctuations, we believe that we will generate sufficient cash from operations to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources, available capacity under our Senior Unsecured Credit Facility, proceeds from dispositions of properties, and the issuance of additional debt or equity securities, such as issuances of common stock through our forward sale agreements and ATM Program (Note 12), in order to meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.
W. P. Carey 9/30/2021 10-Q – 60
Operating Activities — Net cash provided by operating activities increased by $68.8 million during the nine months ended September 30, 2021 as compared to the same period in 2020, primarily due to an increase in cash flow generated from net investment activity and scheduled rent increases at existing properties, the positive impact on rent collections as businesses recover from the initial effects of the COVID-19 pandemic, cash dividends received from our investments in shares of Lineage Logistics and WLT during the current year period (Note 8), and lower interest expense.
Investing Activities — Our investing activities are generally comprised of real estate-related transactions (purchases and sales) and funding for build-to-suit activities and other capital expenditures on real estate. In addition to these types of transactions, during the nine months ended September 30, 2021, we used $41.0 million to fund short-term loans to the Managed Programs, while $62.0 million of such loans were repaid (Note 3). We also received $11.6 million in distributions from equity method investments.
Financing Activities — Our financing activities are generally comprised of borrowings and repayments under our Unsecured Revolving Credit Facility, issuances of the Senior Unsecured Notes, payments and prepayments of non-recourse mortgage loans, and payments of dividends to stockholders. In addition to these types of transactions, during the nine months ended September 30, 2021, we (i) redeemed the €500.0 million of 2.0% Senior Notes due 2023 for a total of $617.4 million (Note 10), (ii) received $457.2 million in aggregate net proceeds from the issuance of common stock under our Equity Forwards (Note 12), and (iii) received $302.5 million in net proceeds from the issuance of shares under our ATM Program (Note 12).
Summary of Financing
The table below summarizes our Senior Unsecured Notes, our non-recourse mortgages, and our Senior Unsecured Credit Facility (dollars in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Carrying Value | |||||||||||
Fixed rate: | |||||||||||
Senior Unsecured Notes (a) | $ | 5,419,419 | $ | 5,146,192 | |||||||
Non-recourse mortgages (a) | 543,647 | 920,378 | |||||||||
5,963,066 | 6,066,570 | ||||||||||
Variable rate: | |||||||||||
Unsecured Term Loans (a) | 312,605 | 321,971 | |||||||||
Unsecured Revolving Credit Facility | 254,463 | 82,281 | |||||||||
Non-recourse mortgages (a): | |||||||||||
Amount subject to interest rate swaps and caps | 89,177 | 147,094 | |||||||||
Floating interest rate mortgage loans | 55,606 | 78,082 | |||||||||
711,851 | 629,428 | ||||||||||
$ | 6,674,917 | $ | 6,695,998 | ||||||||
Percent of Total Debt | |||||||||||
Fixed rate | 89 | % | 91 | % | |||||||
Variable rate | 11 | % | 9 | % | |||||||
100 | % | 100 | % | ||||||||
Weighted-Average Interest Rate at End of Period | |||||||||||
Fixed rate | 2.8 | % | 3.0 | % | |||||||
Variable rate (b) | 1.2 | % | 1.6 | % | |||||||
Total debt | 2.6 | % | 2.9 | % |
__________
W. P. Carey 9/30/2021 10-Q – 61
(a)Aggregate debt balance includes unamortized discount, net, totaling $31.3 million and $28.3 million as of September 30, 2021 and December 31, 2020, respectively, and unamortized deferred financing costs totaling $27.2 million and $24.3 million as of September 30, 2021 and December 31, 2020, respectively.
(b)The impact of our derivative instruments is reflected in the weighted-average interest rates.
Cash Resources
At September 30, 2021, our cash resources consisted of the following:
•cash and cash equivalents totaling $129.7 million. Of this amount, $67.2 million, at then-current exchange rates, was held in foreign subsidiaries, and we could be subject to restrictions or significant costs should we decide to repatriate these amounts;
•our Unsecured Revolving Credit Facility, with available capacity of approximately $1.5 billion (net of amounts reserved for standby letters of credit totaling $18.8 million);
•available proceeds under our forward sale agreements of approximately $538.9 million (based on 7,187,500 remaining shares outstanding and a weighted-average net offering price of $74.97 per share as of September 30, 2021); and
•unleveraged properties that had an aggregate asset carrying value of approximately $11.6 billion at September 30, 2021, although there can be no assurance that we would be able to obtain financing for these properties.
Historically, we have also accessed the capital markets through additional debt (denominated in both U.S. dollars and euros) and equity offerings, including the $350.0 million of 2.450% Senior Notes due 2032 issued in October 2021 that was our inaugural green bond offering (Note 16). During the nine months ended September 30, 2021, we issued (i) €525.0 million of 0.950% Senior Notes due 2030 and $425.0 million of 2.250% Senior Notes due 2033 (Note 10), (ii) 6,535,709 shares of common stock under our Equity Forwards for aggregate net proceeds of $457.2 million, and (iii) 4,225,624 shares of common stock under our ATM Program for net proceeds of $302.5 million (Note 12). As of September 30, 2021, we had approximately $538.9 million of available proceeds under our forward sales agreements and $310.1 million remained available for issuance under our ATM Program (Note 12).
Our cash resources can be used for working capital needs and other commitments and may be used for future investments.
Cash Requirements and Liquidity
As of September 30, 2021, we had $129.7 million of cash and cash equivalents, approximately $1.5 billion of available capacity under our Unsecured Revolving Credit Facility (net of amounts reserved for standby letters of credit totaling $18.8 million), and available proceeds under our forward sale agreements of approximately $538.9 million (based on 7,187,500 remaining shares outstanding and a weighted-average net offering price of $74.97 per share as of that date). Our Senior Unsecured Credit Facility includes a $1.8 billion Unsecured Revolving Credit Facility and Unsecured Term Loans outstanding totaling $312.6 million as of September 30, 2021 (Note 10), and is scheduled to mature on February 20, 2025. As of September 30, 2021, scheduled debt principal payments total $5.7 million through December 31, 2021 and $317.5 million through December 31, 2022, and our Senior Unsecured Notes do not start to mature until April 2024 (Note 10).
During the next 12 months following September 30, 2021 and thereafter, we expect that our significant cash requirements will include:
•paying dividends to our stockholders;
•making scheduled interest payments on our debt obligations (future interest payments total $857.5 million, with $175.4 million due during the next 12 months; interest on unhedged variable-rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding at September 30, 2021);
•other normal recurring operating expenses.
We expect to fund these cash requirements through cash generated from operations, cash received from dispositions of properties, the use of our cash reserves or unused amounts on our Unsecured Revolving Credit Facility (as described above), issuances of common stock through our forward sale agreements and/or ATM Program (Note 12), and potential issuances of additional debt or equity securities. We may also choose to pursue the acquisitions of new investments and prepayments of
W. P. Carey 9/30/2021 10-Q – 62
certain of our non-recourse mortgage loan obligations, depending on our capital needs and improvements in market conditions at that time.
Our liquidity could be adversely affected by unanticipated costs, greater-than-anticipated operating expenses, and the adverse impact of the continuing COVID-19 pandemic. To the extent that our working capital reserve is insufficient to satisfy our cash requirements, additional funds may be provided from cash from operations to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources, available capacity under our Unsecured Revolving Credit Facility, mortgage loan proceeds, and the issuance of additional debt or equity securities to meet these needs. The extent to which the COVID-19 pandemic impacts our liquidity and debt covenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The potential impact of the COVID-19 pandemic on our tenants and properties could also have a material adverse effect on our liquidity and debt covenants.
Certain amounts disclosed above are based on the applicable foreign currency exchange rate at September 30, 2021.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use Funds from Operations (“FFO”) and AFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and AFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are provided below.
Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, gains or losses on changes in control of interests in real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO.
We also modify the NAREIT computation of FFO to adjust GAAP net income for certain non-cash charges, such as amortization of real estate-related intangibles, deferred income tax benefits and expenses, straight-line rent and related reserves, other non-cash rent adjustments, non-cash allowance for credit losses on loans receivable and direct financing leases, stock-based compensation, non-cash environmental accretion expense, amortization of discounts and premiums on debt, and amortization of deferred financing costs. Our assessment of our operations is focused on long-term sustainability and not on such non-cash items, which may cause short-term fluctuations in net income but have no impact on cash flows. Additionally, we exclude non-core income and expenses, such as gains or losses from extinguishment of debt and merger and acquisition expenses. We also exclude realized and unrealized gains/losses on foreign currency exchange transactions (other than those realized on the settlement of foreign currency derivatives), which are not considered fundamental attributes of our business plan and do not affect our overall long-term operating performance. We refer to our modified definition of FFO as AFFO. We exclude these items from GAAP net income to arrive at AFFO as they are not the primary drivers in our decision-making process and excluding these items provides investors a view of our portfolio performance over time and makes it more comparable to other REITs that are currently not engaged in acquisitions, mergers, and restructuring, which are not part of our normal business operations. AFFO also reflects adjustments for unconsolidated partnerships and jointly owned investments. We use AFFO as one measure of our operating performance when we formulate corporate goals, evaluate the effectiveness of our strategies, and determine executive compensation.
W. P. Carey 9/30/2021 10-Q – 63
We believe that AFFO is a useful supplemental measure for investors to consider as we believe it will help them to better assess the sustainability of our operating performance without the potentially distorting impact of these short-term fluctuations. However, there are limits on the usefulness of AFFO to investors. For example, impairment charges and unrealized foreign currency losses that we exclude may become actual realized losses upon the ultimate disposition of the properties in the form of lower cash proceeds or other considerations. We use our FFO and AFFO measures as supplemental financial measures of operating performance. We do not use our FFO and AFFO measures as, nor should they be considered to be, alternatives to net income computed under GAAP, or as alternatives to net cash provided by operating activities computed under GAAP, or as indicators of our ability to fund our cash needs.
Consolidated FFO and AFFO were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income attributable to W. P. Carey | $ | 138,547 | $ | 149,397 | $ | 310,426 | $ | 320,787 | |||||||||||||||
Adjustments: | |||||||||||||||||||||||
Depreciation and amortization of real property | 114,204 | 107,170 | 336,405 | 328,347 | |||||||||||||||||||
Impairment charges | 16,301 | — | 16,301 | 19,420 | |||||||||||||||||||
Gain on sale of real estate, net | (1,702) | (20,933) | (30,914) | (32,684) | |||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (a) (b) (c) (d) | 3,290 | 3,500 | 17,030 | 34,860 | |||||||||||||||||||
Proportionate share of adjustments for noncontrolling interests (e) | (4) | (4) | (12) | (14) | |||||||||||||||||||
Total adjustments | 132,089 | 89,733 | 338,810 | 349,929 | |||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey | 270,636 | 239,130 | 649,236 | 670,716 | |||||||||||||||||||
Adjustments: | |||||||||||||||||||||||
Other (gains) and losses (f) | (49,219) | (44,648) | (15,576) | (39,092) | |||||||||||||||||||
Above- and below-market rent intangible lease amortization, net | 12,004 | 12,472 | 38,503 | 37,208 | |||||||||||||||||||
Straight-line and other rent adjustments | (10,823) | (13,115) | (29,887) | (31,927) | |||||||||||||||||||
Stock-based compensation | 4,361 | 4,564 | 18,790 | 10,143 | |||||||||||||||||||
Amortization of deferred financing costs | 3,424 | 2,932 | 10,284 | 9,014 | |||||||||||||||||||
Merger and other expenses (g) | (908) | (596) | (3,983) | 665 | |||||||||||||||||||
Other amortization and non-cash items | 557 | 508 | 1,149 | 1,404 | |||||||||||||||||||
Tax benefit — deferred and other (h) (i) (j) | (290) | (715) | (3,460) | (48,867) | |||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (c) | 988 | 1,429 | 10,849 | 6,575 | |||||||||||||||||||
Proportionate share of adjustments for noncontrolling interests (e) | (6) | (6) | (19) | 566 | |||||||||||||||||||
Total adjustments | (39,912) | (37,175) | 26,650 | (54,311) | |||||||||||||||||||
AFFO attributable to W. P. Carey | $ | 230,724 | $ | 201,955 | $ | 675,886 | $ | 616,405 | |||||||||||||||
Summary | |||||||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey | $ | 270,636 | $ | 239,130 | $ | 649,236 | $ | 670,716 | |||||||||||||||
AFFO attributable to W. P. Carey | $ | 230,724 | $ | 201,955 | $ | 675,886 | $ | 616,405 |
W. P. Carey 9/30/2021 10-Q – 64
FFO and AFFO from Real Estate were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income from Real Estate attributable to W. P. Carey | $ | 130,858 | $ | 146,983 | $ | 290,132 | $ | 329,722 | |||||||||||||||
Adjustments: | |||||||||||||||||||||||
Depreciation and amortization of real property | 114,204 | 107,170 | 336,405 | 328,347 | |||||||||||||||||||
Impairment charges | 16,301 | — | 16,301 | 19,420 | |||||||||||||||||||
Gain on sale of real estate, net | (1,702) | (20,933) | (30,914) | (32,684) | |||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (a) (b) | 3,290 | 3,500 | 17,030 | 10,217 | |||||||||||||||||||
Proportionate share of adjustments for noncontrolling interests (e) | (4) | (4) | (12) | (14) | |||||||||||||||||||
Total adjustments | 132,089 | 89,733 | 338,810 | 325,286 | |||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey — Real Estate | 262,947 | 236,716 | 628,942 | 655,008 | |||||||||||||||||||
Adjustments: | |||||||||||||||||||||||
Other (gains) and losses (f) | (48,172) | (44,115) | (13,455) | (38,579) | |||||||||||||||||||
Above- and below-market rent intangible lease amortization, net | 12,004 | 12,472 | 38,503 | 37,208 | |||||||||||||||||||
Straight-line and other rent adjustments | (10,823) | (13,115) | (29,887) | (31,927) | |||||||||||||||||||
Stock-based compensation | 4,361 | 4,564 | 18,790 | 9,452 | |||||||||||||||||||
Amortization of deferred financing costs | 3,424 | 2,932 | 10,284 | 9,014 | |||||||||||||||||||
Merger and other expenses (g) | (908) | (1,016) | (3,998) | (213) | |||||||||||||||||||
Tax benefit — deferred and other (i) | (700) | (2,909) | (3,087) | (43,916) | |||||||||||||||||||
Other amortization and non-cash items | 557 | 508 | 1,149 | 1,205 | |||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (c) (k) | 1,761 | 739 | 9,928 | 631 | |||||||||||||||||||
Proportionate share of adjustments for noncontrolling interests (e) | (6) | (6) | (19) | 566 | |||||||||||||||||||
Total adjustments | (38,502) | (39,946) | 28,208 | (56,559) | |||||||||||||||||||
AFFO attributable to W. P. Carey — Real Estate | $ | 224,445 | $ | 196,770 | $ | 657,150 | $ | 598,449 | |||||||||||||||
Summary | |||||||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey — Real Estate | $ | 262,947 | $ | 236,716 | $ | 628,942 | $ | 655,008 | |||||||||||||||
AFFO attributable to W. P. Carey — Real Estate | $ | 224,445 | $ | 196,770 | $ | 657,150 | $ | 598,449 |
W. P. Carey 9/30/2021 10-Q – 65
FFO and AFFO from Investment Management were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income (loss) from Investment Management attributable to W. P. Carey | $ | 7,689 | $ | 2,414 | $ | 20,294 | $ | (8,935) | |||||||||||||||
Adjustments: | |||||||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (b) (c) (d) | — | — | — | 24,643 | |||||||||||||||||||
Total adjustments | — | — | — | 24,643 | |||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey — Investment Management | 7,689 | 2,414 | 20,294 | 15,708 | |||||||||||||||||||
Adjustments: | |||||||||||||||||||||||
Other (gains) and losses | (1,047) | (533) | (2,121) | (513) | |||||||||||||||||||
Tax expense (benefit) — deferred and other (h) (j) | 410 | 2,194 | (373) | (4,951) | |||||||||||||||||||
Merger and other expenses | — | 420 | 15 | 878 | |||||||||||||||||||
Stock-based compensation | — | — | — | 691 | |||||||||||||||||||
Other amortization and non-cash items | — | — | — | 199 | |||||||||||||||||||
Proportionate share of adjustments to earnings from equity method investments (c) | (773) | 690 | 921 | 5,944 | |||||||||||||||||||
Total adjustments | (1,410) | 2,771 | (1,558) | 2,248 | |||||||||||||||||||
AFFO attributable to W. P. Carey — Investment Management | $ | 6,279 | $ | 5,185 | $ | 18,736 | $ | 17,956 | |||||||||||||||
Summary | |||||||||||||||||||||||
FFO (as defined by NAREIT) attributable to W. P. Carey — Investment Management | $ | 7,689 | $ | 2,414 | $ | 20,294 | $ | 15,708 | |||||||||||||||
AFFO attributable to W. P. Carey — Investment Management | $ | 6,279 | $ | 5,185 | $ | 18,736 | $ | 17,956 |
__________
(a)Amount for the nine months ended September 30, 2021 includes a non-cash other-than-temporary impairment charge of $6.8 million recognized on an equity method investment in real estate (Note 7, Note 8).
(b)Equity income, including amounts that are not typically recognized for FFO and AFFO, is recognized within Earnings (losses) from equity method investments on the consolidated statements of income. This represents adjustments to equity income to reflect FFO and AFFO on a pro rata basis.
(c)Amount for the nine months ended September 30, 2020 includes a non-cash net gain of $33.0 million (inclusive of $9.9 million attributable to the redemption of noncontrolling interests that the former subadvisors for CWI 1 and CWI 2 held in the special general partner interests) recognized in connection with consideration received at closing of the CWI 1 and CWI 2 Merger (Note 3).
(d)Amount for the nine months ended September 30, 2020 includes non-cash other-than-temporary impairment charges totaling $47.1 million recognized on our equity method investments in CWI 1 and CWI 2 (Note 8).
(e)Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis.
(f)Primarily comprised of gains and losses on extinguishment of debt, the mark-to-market fair value of equity securities, and foreign currency transactions, as well as non-cash allowance for credit losses on loans receivable and direct financing leases.
(g)Amounts for the three and nine months ended September 30, 2021 are primarily comprised of reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with business combinations in prior years.
(h)Amount for the nine months ended September 30, 2020 includes one-time taxes incurred upon the recognition of taxable income associated with the accelerated vesting of shares (previously issued by CWI 1 and CWI 2 to us for asset management services performed) in connection with the CWI 1 and CWI 2 Merger.
(i)Amount for the nine months ended September 30, 2020 includes a non-cash deferred tax benefit of $37.2 million as a result of the release of a deferred tax liability relating to our investment in shares of Lineage Logistics, which converted to a REIT during the current year period and is therefore no longer subject to federal and state income taxes (Note 13).
W. P. Carey 9/30/2021 10-Q – 66
(j)Amount for the nine months ended September 30, 2020 includes a one-time tax benefit of $4.7 million as a result of carrying back certain net operating losses in accordance with the CARES Act, which was enacted on March 27, 2020 (Note 13).
While we believe that FFO and AFFO are important supplemental measures, they should not be considered as alternatives to net income as an indication of a company’s operating performance. These non-GAAP measures should be used in conjunction with net income as defined by GAAP. FFO and AFFO, or similarly titled measures disclosed by other REITs, may not be comparable to our FFO and AFFO measures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. The primary market risks that we are exposed to are interest rate risk and foreign currency exchange risk; however, we do not use derivative instruments to hedge credit/market risks or for speculative purposes. From time to time, we may enter into foreign currency collars to hedge our foreign currency cash flow exposures.
The impact of the COVID-19 pandemic both in the United States and globally continues to cause uncertainty and volatility in financial markets, including interest rates and foreign currency exchange rates. The outbreak is expected to have a continued adverse impact on market conditions for the foreseeable future and has triggered a period of global economic slowdown with no known duration. At September 30, 2021, our net-lease portfolio (which excludes operating properties) had the following concentrations (as a percentage of our ABR) for property types with heightened risk as a result of the COVID-19 pandemic:
•17.2% related to retail facilities (primarily from do-it-yourself, grocery, convenience, and wholesale stores);
•1.7% related to hotel (net lease) properties; and
•1.5% related to fitness facilities, theaters, and restaurants.
There may be an impact across all industries and geographic regions in which our tenants operate as a result of the COVID-19 pandemic. Given the significant uncertainty around the duration and severity of the COVID-19 pandemic, we are unable to predict the impact it will have on our tenants’ continued ability to pay rent.
We are also exposed to further market risk as a result of tenant concentrations in certain industries and/or geographic regions, since adverse market factors (such as the COVID-19 pandemic) can affect the ability of tenants in a particular industry/region to meet their respective lease obligations. In order to manage this risk, we view our collective tenant roster as a portfolio and we attempt to diversify such portfolio so that we are not overexposed to a particular industry or geographic region.
Interest Rate Risk
The values of our real estate and related fixed-rate debt obligations, as well as the values of our unsecured debt obligations, are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions (including the ongoing impact of the COVID-19 pandemic) and changes in the creditworthiness of lessees, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our owned and managed assets to decrease, which would create lower revenues from managed assets and lower investment performance for the Managed Programs. Increases in interest rates may also have an impact on the credit profile of certain tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek long-term debt financing on a fixed-rate basis. However, from time to time, we or our joint investment partners obtained, and may in the future obtain, variable-rate non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. See Note 9 for additional information on our interest rate swaps and caps.
W. P. Carey 9/30/2021 10-Q – 67
At September 30, 2021, a significant portion (approximately 90.7%) of our long-term debt either bore interest at fixed rates or was swapped or capped to a fixed rate. Our debt obligations are more fully described in Note 10 and Liquidity and Capital Resources — Summary of Financing in Item 2 above. The following table presents principal cash flows based upon expected maturity dates of our debt obligations outstanding at September 30, 2021 (in thousands):
2021 (Remainder) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||||||||||||||||||
Fixed-rate debt (a) (b) | $ | 4,314 | $ | 284,632 | $ | 99,660 | $ | 1,105,240 | $ | 544,001 | $ | 3,982,399 | $ | 6,020,246 | $ | 6,313,270 | |||||||||||||||||||||||||||||||
Variable-rate debt (a) | $ | 1,390 | $ | 27,120 | $ | 101,496 | $ | 15,159 | $ | 568,035 | $ | — | $ | 713,200 | $ | 710,741 |
__________
(a)Amounts are based on the exchange rate at September 30, 2021, as applicable.
(b)Amounts after 2023 are primarily comprised of principal payments for our Senior Unsecured Notes (Note 10).
The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of interest rate swaps, or that has been subject to interest rate caps, is affected by changes in interest rates. Annual interest expense on our unhedged variable-rate debt that does not bear interest at fixed rates at September 30, 2021 would increase or decrease by $3.9 million for our British pound sterling-denominated debt, by $2.1 million for our euro-denominated debt, and by $0.2 million for our Japanese yen-denominated debt, for each respective 1% change in annual interest rates.
Foreign Currency Exchange Rate Risk
We own international investments, primarily in Europe, Canada, and Japan, and as a result are subject to risk from the effects of exchange rate movements in various foreign currencies, primarily the euro, the British pound sterling, the Danish krone, the Canadian dollar, and the Japanese yen, which may affect future costs and cash flows. We have obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. We have also completed several offerings of euro-denominated senior notes, and have borrowed under our Senior Unsecured Credit Facility in foreign currencies, including the euro, British pound sterling, and Japanese yen (Note 10). Volatile market conditions arising from the COVID-19 global pandemic may result in significant fluctuations in foreign currency exchange rates. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of principal and interest, excluding balloon payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We estimate that, for a 1% increase or decrease in the exchange rate between the euro, British pound sterling, or Japanese yen and the U.S. dollar, there would be a corresponding change in the projected estimated cash flow (scheduled future rental revenues, net of scheduled future debt service payments) for our consolidated foreign operations at September 30, 2021 of $2.6 million, $0.6 million, and less than $0.1 million, respectively, excluding the impact of our derivative instruments.
In addition, we may use currency hedging to further reduce the exposure to our equity cash flow. We are generally a net receiver of these currencies (we receive more cash than we pay out), and therefore our foreign operations benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar, relative to the foreign currency.
We enter into foreign currency collars to hedge certain of our foreign currency cash flow exposures. See Note 9 for additional information on our foreign currency collars.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have similar economic risks or conditions that could cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our portfolio is well-diversified, it does contain concentrations in certain areas. There have been no material changes in our concentration of credit risk from what was disclosed in the 2020 Annual Report.
W. P. Carey 9/30/2021 10-Q – 68
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 30, 2021 at a reasonable level of assurance.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
W. P. Carey 9/30/2021 10-Q – 69
PART II — OTHER INFORMATION
Item 6. Exhibits.
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No. | Description | Method of Filing | ||||||||||||
4.1 | Eighth Supplemental Indenture, dated October 15, 2021, by and between W. P. Carey Inc., as issuer, and U.S. Bank National Association, as trustee | Incorporated by reference Exhibit 4.2 to Current Report on Form 8-K filed October 15, 2021 | ||||||||||||
4.2 | Form of 2.450% Senior Notes due 2032 | Incorporated by reference Exhibit 4.3 to Current Report on Form 8-K filed October 15, 2021 | ||||||||||||
10.1 | Forward Confirmation, dated August 9, 2021, by and among W. P. Carey Inc. and J.P. Morgan Chase Bank, National Association | Incorporated by reference to Exhibit 1.2 to Current Report on Form 8-K filed August 12, 2021 | ||||||||||||
10.2 | Forward Confirmation, dated August 9, 2021, by and among W. P. Carey Inc. and Barclays Bank PLC | Incorporated by reference to Exhibit 1.3 to Current Report on Form 8-K filed August 12, 2021 | ||||||||||||
10.3 | Forward Confirmation, dated August 11, 2021, by and among W. P. Carey Inc. and J.P. Morgan Chase Bank, National Association | Incorporated by reference to Exhibit 1.4 to Current Report on Form 8-K filed August 12, 2021 | ||||||||||||
10.4 | Forward Confirmation, dated August 11, 2021, by and among W. P. Carey Inc. and Barclays Bank PLC | Incorporated by reference to Exhibit 1.5 to Current Report on Form 8-K filed August 12, 2021 | ||||||||||||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||||||||||||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||||||||||||
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||||||||||||
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | Filed herewith | ||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
W. P. Carey 9/30/2021 10-Q – 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
W. P. Carey Inc. | |||||||||||
Date: | October 29, 2021 | ||||||||||
By: | /s/ ToniAnn Sanzone | ||||||||||
ToniAnn Sanzone | |||||||||||
Chief Financial Officer | |||||||||||
(Principal Financial Officer) | |||||||||||
Date: | October 29, 2021 | ||||||||||
By: | /s/ Arjun Mahalingam | ||||||||||
Arjun Mahalingam | |||||||||||
Chief Accounting Officer | |||||||||||
(Principal Accounting Officer) |
W. P. Carey 9/30/2021 10-Q – 71
EXHIBIT INDEX
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No. | Description | Method of Filing | ||||||||||||
4.1 | Eighth Supplemental Indenture, dated October 15, 2021, by and between W. P. Carey Inc., as issuer, and U.S. Bank National Association, as trustee | |||||||||||||
4.2 | Form of 2.450% Senior Notes due 2032 | |||||||||||||
10.1 | Forward Confirmation, dated August 9, 2021, by and among W. P. Carey Inc. and J.P. Morgan Chase Bank, National Association | |||||||||||||
10.2 | Forward Confirmation, dated August 9, 2021, by and among W. P. Carey Inc. and Barclays Bank PLC | |||||||||||||
10.3 | Forward Confirmation, dated August 11, 2021, by and among W. P. Carey Inc. and J.P. Morgan Chase Bank, National Association | |||||||||||||
10.4 | Forward Confirmation, dated August 11, 2021, by and among W. P. Carey Inc. and Barclays Bank PLC | |||||||||||||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | Filed herewith | ||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |