W. P. CAREY INC. 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 2022 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Refer to Item 1 of the 2022 Annual Report for a description of our business.
Significant Developments
Purchase Option Exercise Notice
OnFebruary 28, 2023 ,U-Haul Moving Partners, Inc. andMercury Partners, LP , the tenant of our portfolio of 78 net-lease self-storage properties located inthe United States , provided notice of its intention to exercise its option to repurchase the properties. The purchase price will be calculated using theU.S. CPI as of the closing date, which is expected on or aroundMarch 31, 2024 . ABR from this tenant totaled$38.8 million as ofMarch 31, 2023 . In accordance with ASC 842, Leases, we reclassified these net-lease assets to net investments in sales-type leases totaling$451.4 million on our consolidated balance sheets as ofMarch 31, 2023 (based on the present value of remaining rents and estimated purchase price, using the CPI rates as of the exercise notice date). We recognized an aggregate Gain on sale of real estate, net, of$176.2 million during the three months endedMarch 31, 2023 related to this transaction ( Note 5 ).
Financial Highlights
During the three months ended
Real Estate
Investments
•We acquired two investments totaling
Note
4 ). •We funded approximately$13.7 million for a construction loan to build a retail complex inLas Vegas, Nevada , during the three months endedMarch 31, 2023 . ThroughMarch 31, 2023 , we have funded$206.9 million ( Note 7 ). •We committed to fund a redevelopment project for$15.1 million . We currently expect to complete the project in the fourth quarter of 2023 ( Note 4 ).
Dispositions
•We disposed of five properties for total proceeds, net of selling costs, of
Financing and Capital Markets Transactions
•InJanuary 2023 , we entered into a Third Amendment to the Credit Agreement to (i) transition from LIBOR to SOFR and (ii) increase the aggregate principal amount (of revolving and term loans) available under the Senior Unsecured Credit Facility to an amount not to exceed theU.S. dollar equivalent of$3.05 billion , subject to the conditions to increase set forth in the credit agreement ( N ote 10 ). •We settled portions of our ATM Forwards by delivering 3,081,867 shares of common stock for net proceeds of$249.9 million . As ofMarch 31, 2023 , we had approximately$385.2 million of available proceeds under our ATM Forwards ( Note 12 ). •We reduced our mortgage debt outstanding by prepaying or repaying at maturity a total of$81.4 million of non-recourse mortgage loans with a weighted-average interest rate of 6.6% ( Note 10 ).W. P. Carey 3/31/2023 10-Q - 36
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Dividends to Stockholders
In
Consolidated Results
(in thousands, except shares)
Three Months Ended
2023 2022
Revenues from Real Estate $ 427,350 $ 344,091
Revenues from Investment Management 440 4,347
Total revenues 427,790 348,438
Net income from Real Estate attributable to W. P. Carey 293,231 146,858
Net income from Investment Management attributable to
1,149 10,137
Net income attributable to W. P. Carey 294,380 156,995
Dividends declared 229,970 205,497
Net cash provided by operating activities 282,727 235,882
Net cash used in investing activities (587,272) (229,054)
Net cash provided by financing activities 307,174 35,697
Supplemental financial measures (a):
Adjusted funds from operations attributable to
278,584 252,014
Adjusted funds from operations attributable to
635 6,812
Adjusted funds from operations attributable to
279,219 258,826
Diluted weighted-average shares outstanding 212,345,047 192,416,642
__________
(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 months endedMarch 31, 2023 as compared to the same period in 2022. Real Estate revenue increased primarily due to higher lease revenues (substantially as a result of property acquisition activity and rent escalations, as well as the net-leased properties we acquired in the CPA:18 Merger onAugust 1, 2022 ) and higher operating property revenues (primarily from the operating properties we acquired in the CPA:18 Merger onAugust 1, 2022 and the 12 hotel properties that converted from net-lease to operating properties during the first quarter of 2023).
Net Income Attributable to
Net income attributable toW. P. Carey increased for the three months endedMarch 31, 2023 as compared to the same period in 2022. Net income from Real Estate attributable toW. P. Carey increased primarily due to a higher aggregate gain on sale of real estate ( Note 5 , Note 14 ) and the impact of real estate acquisitions, partially offset by higher interest expense. Net income from Investment Management attributable toW. P. Carey decreased primarily due to the cessation of fees and distributions previously earned from CPA:18 - Global prior to the CPA:18 Merger.W. P. Carey 3/31/2023 10-Q
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AFFO
AFFO increased for the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to investment activity and rent escalations, as well as the accretive impact of the CPA:18 Merger, partially offset by higher interest expense. Portfolio Overview Our portfolio is comprised of operationally-critical, commercial real estate assets net leased to tenants located primarily inthe United States and Northern andWestern 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 Net-leased Properties March 31, 2023 December 31, 2022 ABR (in thousands)$ 1,416,637 $ 1,381,899 Number of net-leased properties 1,446
1,449
Number of tenants 397
392
Total square footage (in thousands) 176,119
175,957
Occupancy 99.2 % 98.8 % Weighted-average lease term (in years) 10.9
10.8
Operating Properties Number of operating properties: 99
87
Number of self-storage operating properties 84
84
Number of hotel operating properties (a) 13
1
Number of student housing operating properties 2
2
Occupancy (self-storage operating properties) 91.5 % 91.0 % Number of countries 26 26 Total assets (in thousands)$ 18,832,407 $ 18,102,035 Net investments in real estate (in thousands) 15,717,462 15,488,898 Three Months Ended March 31, 2023 2022 Acquisition volume (in millions) (b)$ 157.8 $ 283.0 Construction projects completed (in millions) 20.6 25.2 Average U.S. dollar/euro exchange rate 1.0720 1.1223 Average U.S. dollar/British pound sterling exchange rate 1.2137 1.3418 __________ (a)During the first quarter of 2023, the master lease expired on certain hotel properties previously classified as net-leased properties, which converted to operating properties. As a result, during the three months endedMarch 31, 2023 , we reclassified 12 consolidated hotel properties from net leases to operating properties ( Note 4 ). (b)Amounts for the three months endedMarch 31, 2023 and 2022 include$13.7 million and$18.0 million , respectively, of funding for a construction loan ( Note 7 ). W. P. Carey 3/31/2023 10-Q - 38
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Net-Leased Portfolio
The tables below represent information about our net-leased portfolio atMarch 31, 2023 on a pro rata basis and, accordingly, exclude all operating properties. See Terms and Definitions below for a description of pro rata amounts and ABR. Top Ten Tenants by ABR (dollars in thousands) Weighted-Average Lease Tenant/Lease Guarantor Description Number of Properties ABR ABR Percent Term (Years) U-Haul Moving Partners Inc. and Net lease self-storage properties in Mercury Partners, LP (a) the U.S. 78$ 38,751 2.7 % 1.0 Government office properties in State of Andalucía (b) Spain 70 32,024 2.2 % 11.7 Metro Cash & Carry Italia Business-to-business wholesale S.p.A. (b) stores in Italy and Germany 20 29,710 2.1 % 5.5 Hellweg Die Profi-Baumärkte Do-it-yourself retail properties in GmbH & Co. KG (b) Germany 35 29,704 2.1 % 13.9 Net lease self-storage properties in Extra Space Storage, Inc. the U.S. 27 25,036 1.8 % 21.1 Do-it-yourself retail properties in OBI Group (b) Poland 26 24,368 1.7 % 8.2 Grocery stores and warehouses in Fortenova Grupa d.d. (b) Croatia 19 21,062 1.5 % 11.1 Nord Anglia Education, Inc. K-12 private schools in the U.S. 3 20,981 1.5 % 20.5 Grocery stores and warehouses in Eroski Sociedad Cooperativa (b) Spain 63 20,844 1.5 % 13.0 Berry Global, Inc. Manufacturing facilities in the U.S. 9 20,830 1.5 % 13.9 Total 350$ 263,310 18.6 % 11.2 __________ (a)As ofMarch 31, 2023 , the tenant provided notice that it intends to exercise its option to repurchase the 78 properties it is leasing on or aroundMarch 31, 2024 ( Note 5 ). (b)ABR amounts are subject to fluctuations in foreign currency exchange rates. W. P. Carey 3/31/2023 10-Q - 39
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Portfolio Diversification by Geography
(in thousands, except percentages)
Square Footage
Region ABR ABR Percent Square Footage (a) Percent
United States
Midwest
Illinois $ 74,927 5.3 % 10,582 6.0 %
Minnesota 34,713 2.5 % 3,401 1.9 %
Ohio 31,465 2.2 % 6,766 3.8 %
Indiana 29,482 2.1 % 5,137 2.9 %
Michigan 28,362 2.0 % 4,705 2.7 %
Wisconsin 18,422 1.3 % 3,276 1.9 %
Other (b) 43,175 3.0 % 6,230 3.5 %
Total Midwest 260,546 18.4 % 40,097 22.7 %
South
Texas 115,613 8.2 % 12,609 7.2 %
Florida 51,785 3.7 % 4,380 2.5 %
Georgia 27,663 1.9 % 4,447 2.5 %
Tennessee 25,595 1.8 % 4,136 2.3 %
Alabama 20,072 1.4 % 3,334 1.9 %
Other (b) 15,364 1.1 % 2,400 1.4 %
Total South 256,092 18.1 % 31,306 17.8 %
East
North Carolina 39,350 2.8 % 8,404 4.8 %
Pennsylvania 32,761 2.3 % 3,574 2.0 %
New York 20,193 1.4 % 2,257 1.3 %
South Carolina 18,567 1.3 % 4,949 2.8 %
Massachusetts 18,247 1.3 % 1,387 0.8 %
Kentucky 17,375 1.2 % 2,980 1.7 %
Virginia 15,986 1.2 % 1,854 1.0 %
New Jersey 14,531 1.0 % 862 0.5 %
Other (b) 23,932 1.7 % 3,799 2.2 %
Total East 200,942 14.2 % 30,066 17.1 %
West
California 63,044 4.4 % 6,100 3.5 %
Arizona 30,493 2.2 % 3,437 1.9 %
Other (b) 63,830 4.5 % 6,821 3.9 %
Total West 157,367 11.1 % 16,358 9.3 %
United States Total 874,947 61.8 % 117,827 66.9 %
International
Germany 73,928 5.2 % 6,839 3.9 %
Spain 72,427 5.1 % 5,631 3.2 %
Poland 67,670 4.8 % 8,635 4.9 %
The Netherlands 60,368 4.3 % 7,054 4.0 %
United Kingdom 53,377 3.8 % 4,780 2.7 %
Italy 32,721 2.3 % 3,354 1.9 %
Denmark 25,039 1.8 % 3,039 1.7 %
Croatia 21,876 1.5 % 2,063 1.2 %
France 20,681 1.4 % 1,679 1.0 %
Canada 16,333 1.1 % 2,492 1.4 %
Norway 15,543 1.1 % 753 0.4 %
Other (c) 81,727 5.8 % 11,973 6.8 %
International Total 541,690 38.2 % 58,292 33.1 %
Total $ 1,416,637 100.0 % 176,119 100.0 %
W. P. Carey 3/31/2023 10-Q - 40
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Portfolio Diversification by Property Type
(in thousands, except percentages)
Square Footage
Property Type ABR ABR Percent Square Footage (a) Percent
Industrial $ 386,230 27.3 % 64,443 36.6 %
Warehouse 343,266 24.2 % 63,192 35.9 %
Retail (d) 245,821 17.4 % 20,306 11.5 %
Office 243,984 17.2 % 15,964 9.1 %
Self Storage (net lease) 63,786 4.5 % 5,810 3.3 %
Other (e) 133,550 9.4 % 6,404 3.6 %
Total $ 1,416,637 100.0 % 176,119 100.0 %
__________
(a)Includes square footage for any vacant properties.
(b)Other properties within Midwest include assets in Iowa , Missouri , Kansas ,
Nebraska , South Dakota , and North Dakota . Other properties within South include
assets in Louisiana , Arkansas , Oklahoma , and Mississippi . Other properties
within East include assets in Maryland , Connecticut , West Virginia , New
Hampshire , and Maine . Other properties within West include assets in Utah ,
Oregon , Colorado , Nevada , Washington , Hawaii , Idaho , New Mexico , Wyoming , and
Montana .
(c)Includes assets in Lithuania , Mexico , Finland , Belgium , Hungary , Mauritius ,
Slovakia , Portugal , the Czech Republic , Austria , Sweden , Latvia , Japan , and
Estonia .
(d)Includes automotive dealerships.
(e)Includes ABR from tenants within the following property types: education
facility, hotel (net lease), laboratory, specialty, fitness facility, research
and development, student housing (net lease), theater, funeral home, restaurant,
land, parking, and outdoor advertising.
W. P. Carey 3/31/2023 10-Q - 41
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Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
Square Footage
Industry Type ABR ABR Percent Square Footage Percent
Retail Stores (a) $ 293,874 20.7 % 36,258 20.6 %
Consumer Services 113,785 8.0 % 8,067 4.6 %
Beverage and Food 108,372 7.7 % 15,759 9.0 %
Grocery 87,022 6.1 % 8,404 4.8 %
Automotive 87,006 6.1 % 13,422 7.6 %
Cargo Transportation 65,770 4.6 % 9,550 5.4 %
Healthcare and Pharmaceuticals 56,506 4.0 % 5,557 3.2 %
Capital Equipment 56,080 4.0 % 8,459 4.8 %
Containers, Packaging, and Glass 49,443 3.5 % 8,266 4.7 %
Business Services 48,794 3.5 % 4,113 2.3 %
Construction and Building 48,068 3.4 % 9,233 5.2 %
Durable Consumer Goods 47,072 3.3 % 10,299 5.8 %
Sovereign and Public Finance 45,546 3.2 % 3,560 2.0 %
Hotel and Leisure 41,349 2.9 % 2,024 1.2 %
High Tech Industries 35,542 2.5 % 3,486 2.0 %
Chemicals, Plastics, and Rubber 34,727 2.5 % 6,186 3.5 %
Insurance 30,690 2.2 % 1,961 1.1 %
Telecommunications 26,126 1.9 % 2,137 1.2 %
Metals 25,782 1.8 % 4,515 2.6 %
Non-Durable Consumer Goods 25,613 1.8 % 5,971 3.4 %
Banking 24,365 1.7 % 1,426 0.8 %
Other (b) 65,105 4.6 % 7,466 4.2 %
Total $ 1,416,637 100.0 % 176,119 100.0 %
__________
(a)Includes automotive dealerships.
(b)Includes ABR from tenants in the following industries: aerospace and defense,
wholesale, media: advertising, printing, and publishing, oil and gas, media:
broadcasting and subscription, utilities: electric, environmental industries,
consumer transportation, forest products and paper, electricity, finance, and
real estate. Also includes square footage for vacant properties.
W. P. Carey 3/31/2023 10-Q - 42
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Lease Expirations
(in thousands, except percentages, number of leases, and number of tenants)
Number of
Year of Lease Number of Leases Tenants with Square Square Footage
Expiration (a) Expiring Leases Expiring ABR ABR Percent Footage Percent
Remaining 2023 28 23 $ 31,357 2.2 % 3,942 2.2 %
2024 (b) 41 35 90,900 6.4 % 11,171 6.4 %
2025 53 32 63,117 4.5 % 7,076 4.0 %
2026 48 38 68,604 4.8 % 9,200 5.2 %
2027 56 33 83,462 5.9 % 8,838 5.0 %
2028 47 29 70,118 5.0 % 5,224 3.0 %
2029 57 29 71,269 5.0 % 8,337 4.7 %
2030 34 30 75,471 5.3 % 6,165 3.5 %
2031 37 21 71,015 5.0 % 8,749 5.0 %
2032 41 22 45,872 3.2 % 6,200 3.5 %
2033 30 23 82,148 5.8 % 11,196 6.4 %
2034 50 19 93,525 6.6 % 9,023 5.1 %
2035 14 14 29,696 2.1 % 4,957 2.8 %
2036 49 19 87,133 6.2 % 13,524 7.7 %
Thereafter (>2036) 267 112 452,950 32.0 % 61,070 34.7 %
Vacant - - - - % 1,447 0.8 %
Total 852 $ 1,416,637 100.0 % 176,119 100.0 %
__________
(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 as of March 31, 2023 provided notice of its intention
to exercise its option to repurchase the 78 properties it is leasing on or
around March 31, 2024 ( Note 5 ).
Rent Collections
Through the date of this Report, we received from tenants over 99.4% of
contractual base rent that was due during the first quarter of 2023 (based on
contractual minimum ABR as of
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 certain investments 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 generally 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 ofMarch 31, 2023 . 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 3/31/2023 10-Q
- 43
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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 portfolio of CESH until it
reaches the end of its life cycle. 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 March 31,
2023 2022 Change
Real Estate Revenues
Lease revenues from:
Existing net-leased properties $ 298,799 $ 287,446 $ 11,353
Recently acquired net-leased properties 23,356 2,054 21,302
Net-leased properties acquired in the CPA:18 Merger 21,103
- 21,103
Net-leased properties sold, held for sale, or reclassified to operating properties or sales-type leases
9,078 18,225 (9,147)
Total lease revenues (includes reimbursable tenant costs)
352,336 307,725 44,611
Income from finance leases and loans receivable 20,755 18,379 2,376
Operating property revenues from:
Operating properties acquired in the CPA:18 Merger 23,183 - 23,183
Operating properties recently reclassified from
net-leased properties 12,679 - 12,679
Existing operating properties 5,024 3,865 1,159
Total operating property revenues 40,886 3,865 37,021
Other lease-related income 13,373 14,122 (749)
$ 427,350 $ 344,091 $ 83,259
W. P. Carey 3/31/2023 10-Q - 44
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Lease Revenues
"Existing net-leased properties" are those that we acquired or placed into
service prior to
For the three months ended
[[Image Removed: WPC 23Q1 MD&A Chart - Lease Revenues (QTD).jpg]] __________
(a)Excludes fixed minimum rent increases, which are reflected as straight-line rent adjustments within lease revenues. (b)Primarily comprised of higher reimbursable maintenance costs at certain properties. "Recently acquired net-leased properties" are those that we acquired or placed into service subsequent toDecember 31, 2021 and that were not sold or held for sale during the periods presented. SinceJanuary 1, 2022 , we acquired 24 investments (comprised of 139 properties) and placed two properties into service.
"Net-leased properties acquired in the CPA:18 Merger" on
1 ) consisted of 38 net-leased properties that were not sold or held for sale during the periods presented.
"Net-leased properties sold, held for sale, or reclassified to operating properties or sales-type leases" include:
•five net-leased properties disposed of during the three months endedMarch 31, 2023 ; •one net-leased property classified as held for sale atMarch 31, 2023 ; •23 net-leased properties disposed of during the year endedDecember 31, 2022 ; •a portfolio of 12 net-leased hotel properties that converted to operating properties in the first quarter of 2023 upon expiration of the master lease with theMarriott Corporation , after which we began recognizing operating property revenues and expenses from these properties ( Note 4 ); and •a portfolio of 78 net-leased self-storage properties that were reclassified to net investments in sales-type leases in the first quarter of 2023, since the tenant provided notice of its intention to exercise its option to repurchase the properties; following this transaction, we began recognizing earnings from these properties within Income from finance leases and loans receivable in the consolidated financial statements ( Note 5 ).
Our dispositions are more fully described in Note 14 .
W. P. Carey 3/31/2023 10-Q
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Income from Finance Leases and Loans Receivable
For the three months ended
Operating Property Revenues and Expenses
"Operating properties acquired in the CPA:18 Merger" on
1 ) consisted of 65 self-storage properties and two student housing
properties, which contributed operating property revenues, depreciation and
amortization, and operating property expenses during the three months ended
"Operating properties recently reclassified from net-leased properties" are the portfolio of 12 net-leased hotel properties that converted to operating properties in the first quarter of 2023, after which we began recognizing operating property revenues and expenses from these properties ( Note 4 ).
"Existing operating properties" are those that we acquired or placed into service prior toJanuary 1, 2022 and that were not sold or held for sale during the periods presented. For the periods presented, we recorded operating property revenues from 11 existing operating properties, comprised of ten self-storage operating properties (which excludes nine self-storage properties accounted for under the equity method) and one hotel operating property, as well as a parking garage attached to one of our existing net-leased properties. For our existing hotel operating property, revenues and expenses increased by$0.6 million and$0.4 million , respectively, for the three months endedMarch 31, 2023 as compared to the same period in 2022, reflecting higher occupancy.
Other Lease-Related Income
Other lease-related income is described in Note 4 .
Operating Expenses
Depreciation and Amortization
For the three months endedMarch 31, 2023 as compared to the same period in 2022, depreciation and amortization expense increased primarily due to the impact of net acquisition activity (including properties acquired in the CPA:18 Merger), partially offset by the weakening of foreign currencies (primarily the euro and British pound sterling) in relation to theU.S. dollar between the periods.W. P. Carey 3/31/2023 10-Q - 46
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General and Administrative
All general and administrative expenses are attributed to our Real Estate segment.
For the three months endedMarch 31, 2023 as compared to the same period in 2022, general and administrative expenses increased by$3.4 million , primarily due to higher compensation expense, increased professional fees and expenses resulting from the assets acquired in the CPA:18 Merger ( Note 1 ), and no longer receiving reimbursements from CPA:18 - Global.
Property Expenses, Excluding Reimbursable Tenant Costs
For the three months endedMarch 31, 2023 as compared to the same period in 2022, property expenses, excluding reimbursable tenant costs, decreased by$1.0 million , primarily due to dispositions of vacant properties (from which we previously incurred non-reimbursable property expenses), partially offset by property expenses incurred on acquisitions sinceJanuary 1, 2022 .
Merger and Other Expenses
For the three months endedMarch 31, 2022 , merger and other expenses are primarily comprised of reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with mergers in prior years and costs incurred in connection with the CPA:18 Merger.
Impairment Charges - Real Estate
Our impairment charges on real estate are more fully described in Note 8 .
Other Income and (Expenses), and Provision for Income Taxes
Gain on Sale of Real Estate, Net
Gain on sale of real estate, net, consists of gains on the sale of properties that were disposed of or subject to a purchase option during the reporting period, as more fully described in Note 5 and Note 14 .
Interest Expense
For the three months endedMarch 31, 2023 as compared to the same period in 2022, interest expense increased by$21.1 million primarily due to (i)$10.3 million of interest expense incurred during the current year period related to non-recourse mortgage loans assumed in the CPA:18 Merger, (ii) higher outstanding balances and interest rates on our Senior Unsecured Credit Facility, and (iii) two senior unsecured notes issuances totaling$334.8 million (based on the exchange rate of the euro on the dates of issuance) with a weighted-average interest rate of 3.6% completed sinceJanuary 1, 2022 , partially offset by (i) the weakening of foreign currencies (primarily the euro and British pound sterling) in relation to theU.S. dollar between the periods and (ii) the reduction of our mortgage debt outstanding by prepaying or repaying at or close to maturity a total of$196.4 million of non-recourse mortgage loans with a weighted-average interest rate of 5.3% sinceJanuary 1, 2022 ( Note 10 ). The following table presents certain information about our outstanding debt (dollars in thousands): Three Months EndedMarch 31, 2023 2022
Average outstanding debt balance
Weighted-average interest rate 3.0 % 2.5 %
W. P. Carey 3/31/2023 10-Q - 47
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Other Gains and (Losses)
Other gains and (losses) primarily consists of gains and losses on (i) the mark-to-market fair value of equity securities, (ii) extinguishment of debt, and (iii) foreign currency exchange rate movements. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation. Certain of our foreign currency-denominated unsecured debt instruments were designated as net investment hedges during the three months endedMarch 31, 2023 and 2022. Therefore, no gains and losses on foreign currency exchange rate movements 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 March 31, 2023 2022 Change
Other Gains and (Losses) Change in allowance for credit losses on finance receivables ( Note 5 )
$ 3,420 $ (773) $ 4,193 Gain (loss) on extinguishment of debt 2,753 (892) 3,645
Net realized and unrealized gains (losses) on foreign currency exchange rate movements (a)
2,477 (11,074) 13,551
Non-cash unrealized gains related to an increase in the fair value of our investment in common shares of WLT ( Note 8 ) -
28,040 (28,040)
Realized gains in connection with the redemption of our investment in preferred shares of WLT ( Note 8 )
- 18,688 (18,688)
Other (1,064) 429 (1,493)
$ 7,586 $ 34,418 $ (26,832)
__________
(a)Remeasurement of certain monetary assets and liabilities that are held by our
subsidiaries in currencies other than their functional currency are included in
other gains and (losses). This includes foreign currency-denominated
intercompany loans to our foreign subsidiaries that are scheduled for
settlement. Beginning in the first quarter of 2023, our intercompany loans
subject to remeasurement were hedged by certain of our foreign
currency-denominated unsecured debt that we de-designated as net investment
hedges.
Non-Operating Income
Non-operating income primarily consists of realized gains and losses on derivative instruments, dividends from 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 March 31,
2023 2022 Change
Non-Operating Income
Realized gains on foreign currency collars ( Note 9 ) $ 4,105 $ 3,312 $ 793 Interest income related to our loans to affiliates and cash deposits
508 10 498
Cash dividends from our investment in Lineage Logistics ( Note 8 )
- 4,308 (4,308)
Cash dividends from our investment in preferred shares of WLT
( Note 8 ) - 912 (912)
$ 4,613 $ 8,542 $ (3,929)
W. P. Carey 3/31/2023 10-Q - 48
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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
2023 2022 Change
Earnings (Losses) from Equity Method Investments in Real
Estate
Existing Equity Method Investments:
Earnings from Las Vegas Retail Complex (a) $ 3,292 $ 1,558 $ 1,734
Earnings from Johnson Self Storage 1,105 939 166
Earnings from Kesko Senukai 623 655 (32)
Earnings from Harmon Retail Center 216 273 (57)
5,236 3,425 1,811
Equity Method Investments Consolidated after the CPA:18
Merger:
Proportionate share of impairment charge recognized on Bank
Pekao - (4,610) 4,610
Other - 398 (398)
- (4,212) 4,212
$ 5,236 $ (787) $ 6,023
__________
(a)Increase for the three months ended
Provision for Income Taxes
For the three months endedMarch 31, 2023 as compared to the same period in 2022, provision for income taxes within our Real Estate segment increased by$8.5 million , primarily due to (i) the release of deferred tax assets in connection with the tax restructuring of certain international properties during the current year period, (ii) higher current taxes as a result of rent increases driven by CPI adjustments at existing international properties, and (iii) the impact of international property acquisitions.
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 (throughAugust 1, 2022 ) and CESH. Upon completion of the CPA:18 Merger onAugust 1, 2022 , the advisory agreement with CPA:18 - Global was terminated, and we ceased earning revenue from CPA:18 - Global. We no longer raise capital for new or existing funds, but we currently expect to continue managing CESH and earn the various fees described below through the end of its life cycle ( Note 1 , Note 3 ).W. P. Carey 3/31/2023 10-Q - 49
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Revenues
The following table presents revenues within our Investment Management segment
(in thousands):
Three Months Ended March 31,
2023 2022 Change
Investment Management Revenues
Asset management revenue
CESH $ 339 $ 362 $ (23)
CPA:18 - Global - 3,058 (3,058)
339 3,420 (3,081)
Reimbursable costs from affiliates
CESH 101 154 (53)
CPA:18 - Global - 773 (773)
101 927 (826)
$ 440 $ 4,347 $ (3,907)
Asset Management Revenue
During the periods presented, we earned asset management revenue from (i) CPA:18
- Global (prior to the CPA:18 Merger) based on the value of its real
estate-related assets under management and (ii) CESH based on its gross assets
under management at fair value. For 2023, we earned asset management revenue
from CESH in cash. Asset management revenues from CESH are expected to decline
as assets are sold.
Other Income and Expenses
Earnings from Equity Method Investments in the Managed Programs
The following table presents the details of our earnings from equity method investments in the Managed Programs ( Note 7 ) (in thousands):
Three
Months Ended
2023 2022
Earnings from equity method investments in the Managed Programs: Earnings from equity method investments in the Managed Programs (a)
$ - $ 2,972
Distributions of Available Cash from CPA:18 - Global (a) - 2,587
Earnings from equity method investments in the Managed Programs $ -
__________ (a)As a result of the completion of the CPA:18 Merger onAugust 1, 2022 , we no longer recognize equity income from our investment in shares of common stock of CPA:18 - Global or receive distributions of Available Cash from CPA:18 - Global.W. P. Carey 3/31/2023 10-Q - 50
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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; and the timing of distributions from equity method investments. We no longer receive certain fees and distributions from CPA:18 - Global following the completion of the CPA:18 Merger onAugust 1, 2022 ( Note 1 ). 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 term loans or other bank debt ( Note 16 ), proceeds from dispositions of properties, and the issuance of additional debt or equity securities, such as issuances of common stock through our ATM Forwards ( 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. Operating Activities - Net cash provided by operating activities increased by$46.8 million during the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to an increase in cash flow generated from net investment activity (including properties acquired in the CPA:18 Merger ( Note 1 )) and scheduled rent increases at existing properties, partially offset by higher 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, during the three months endedMarch 31, 2023 , we funded an investment deposit of$467.1 million related to an acquisition that closed inApril 2023 ( Note 16 ).
Financing Activities - Our financing activities are generally comprised of
borrowings and repayments under our Unsecured Revolving Credit Facility and
Unsecured Term Loans, 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 three
months ended
W. P. Carey 3/31/2023 10-Q
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Summary of Financing
The table below summarizes our Senior Unsecured Notes, our non-recourse mortgages, and our Senior Unsecured Credit Facility (dollars in thousands):
March 31, 2023 December 31, 2022
Carrying Value
Fixed rate:
Senior Unsecured Notes (a) $ 5,978,499 $ 5,916,400
Non-recourse mortgages (a) 812,489 824,270
6,790,988 6,740,670
Variable rate:
Unsecured Revolving Credit Facility 669,463 276,392
Unsecured Term Loans (a) 566,478 552,539
Non-recourse mortgages (a):
Floating interest rate mortgage loans 139,451 213,958
Amount subject to interest rate swaps and caps 91,868 94,189
1,467,260 1,137,078
$ 8,258,248 $ 7,877,748
Percent of Total Debt
Fixed rate 82 % 86 %
Variable rate 18 % 14 %
100 % 100 %
Weighted-Average Interest Rate at End of Period
Fixed rate 2.9 % 2.9 %
Variable rate (b) 4.3 % 3.6 %
Total debt 3.1 % 3.0 %
__________
(a)Aggregate debt balance includes unamortized discount, net, totaling $33.8
million and $35.9 million as of March 31, 2023 and December 31, 2022 ,
respectively, and unamortized deferred financing costs totaling $24.9 million
and $26.0 million as of March 31, 2023 and December 31, 2022 , respectively.
(b)The impact of our interest rate swaps and caps is reflected in the
weighted-average interest rates.
Cash Resources
At
•cash and cash equivalents totaling$147.9 million . Of this amount,$110.5 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$1.1 billion (net of amounts reserved for standby letters of credit totaling$1.9 million ); •available proceeds under our ATM Forwards of approximately$385.2 million ; and •unleveraged properties that had an aggregate asset carrying value of approximately$13.5 billion atMarch 31, 2023 , although there can be no assurance that we would be able to obtain financing for these properties. We may also access the capital markets through additional debt (denominated in bothU.S. dollars and euros) and equity offerings, as well as term loans and other bank debt ( Note 16 ).
Our cash resources can be used for working capital needs and other commitments and may be used for future investments.
W. P. Carey 3/31/2023 10-Q
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Cash Requirements and Liquidity
As ofMarch 31, 2023 , we had (i)$147.9 million of cash and cash equivalents, (ii) approximately$1.1 billion of available capacity under our Unsecured Revolving Credit Facility (net of amounts reserved for standby letters of credit totaling$1.9 million ), and (iii) available proceeds under our ATM Forwards of approximately$385.2 million . Our Senior Unsecured Credit Facility includes a$1.8 billion Unsecured Revolving Credit Facility and Unsecured Term Loans outstanding totaling$566.5 million as ofMarch 31, 2023 ( Note 10 ), and is scheduled to mature onFebruary 20, 2025 . As ofMarch 31, 2023 , scheduled debt principal payments total$325.6 million throughDecember 31, 2023 and$1.6 billion throughDecember 31, 2024 , and our Senior Unsecured Notes do not start to mature untilApril 2024 ( Note 10 ).
During the next 12 months following
•funding acquisitions of new investments ( Note 4 ); •funding future capital commitments and tenant improvement allowances ( Note 4 ); •making scheduled principal and balloon payments on our debt obligations ( Note 10 ); •making scheduled interest payments on our debt obligations (future interest payments total$925.9 million , with$253.2 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 atMarch 31, 2023 ); and •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), proceeds from term loans or other bank debt ( Note 16 ), issuances of common stock through our ATM Program ( Note 12 ), and potential issuances of additional debt or equity securities. We may also choose to prepay certain of our non-recourse mortgage loan obligations, depending on our capital needs and market conditions at that time. Our liquidity could be adversely affected by unanticipated costs and greater-than-anticipated operating expenses. 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.
Certain amounts disclosed above are based on the applicable foreign currency
exchange rate at
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, theNational Association of Real Estate Investment Trusts ("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.W. P. Carey 3/31/2023 10-Q
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We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by theBoard of Governors of NAREIT, as restated inDecember 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 or other assets incidental to the company's main business, 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 finance 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 rate movements (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. 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.W. P. Carey 3/31/2023 10-Q
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Consolidated FFO and AFFO were as follows (in thousands):
Three
Months Ended
2023 2022
Net income attributable to W. P. Carey $ 294,380 $ 156,995
Adjustments:
Gain on sale of real estate, net (a) (177,749) (11,248)
Depreciation and amortization of real property 155,868 114,646
Impairment charges - real estate - 20,179
Proportionate share of adjustments to earnings from equity method investments (b) (c)
2,606 7,683
Proportionate share of adjustments for noncontrolling interests (d)
(299) (4)
Total adjustments (19,574) 131,256
FFO (as defined by NAREIT) attributable to W. P. Carey 274,806 288,251
Adjustments:
Straight-line and other leasing and financing adjustments (15,050) (10,847) Above- and below-market rent intangible lease amortization, net 10,861 11,004 Other (gains) and losses (e) (8,100) (35,745) Stock-based compensation 7,766 7,833 Amortization of deferred financing costs 4,940 3,128 Tax expense (benefit) - deferred and other 4,366 (1,242) Other amortization and non-cash items 472 552 Merger and other expenses (f) 24 (2,322)
Proportionate share of adjustments to earnings from equity method investments (c)
(926) (1,781)
Proportionate share of adjustments for noncontrolling interests (d)
60 (5)
Total adjustments 4,413 (29,425)
AFFO attributable to W. P. Carey $
279,219
Summary
FFO (as defined by NAREIT) attributable to W. P. Carey$ 274,806 $ 288,251 AFFO attributable to W. P. Carey$ 279,219 $ 258,826 W. P. Carey 3/31/2023 10-Q - 55
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FFO and AFFO from Real Estate were as follows (in thousands):
Three
Months Ended
2023 2022
Net income from Real Estate attributable to W. P. Carey $ 293,231 $ 146,858
Adjustments:
Gain on sale of real estate, net (a) (177,749) (11,248)
Depreciation and amortization of real property 155,868 114,646
Impairment charges - real estate - 20,179
Proportionate share of adjustments to earnings from equity method investments (b) (c)
2,606 7,683
Proportionate share of adjustments for noncontrolling interests (d)
(299) (4)
Total adjustments (19,574) 131,256
FFO (as defined by NAREIT) attributable to
273,657 278,114
Adjustments:
Straight-line and other leasing and financing adjustments (15,050) (10,847) Above- and below-market rent intangible lease amortization, net 10,861 11,004 Stock-based compensation 7,766 7,833 Other (gains) and losses (e) (7,586) (34,418) Amortization of deferred financing costs 4,940 3,128 Tax (benefit) - deferred and other 4,366 (1,189) Other amortization and non-cash items 472 552 Merger and other expenses (f) 24 (2,325)
Proportionate share of adjustments to earnings from equity method investments (c)
(926) 167
Proportionate share of adjustments for noncontrolling interests (d)
60 (5)
Total adjustments 4,927 (26,100)
AFFO attributable to W. P. Carey - Real Estate $
278,584
Summary
FFO (as defined by NAREIT) attributable to
$ 273,657 $ 278,114 AFFO attributable to W. P. Carey - Real Estate$ 278,584 $ 252,014 W. P. Carey 3/31/2023 10-Q - 56
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FFO and AFFO from Investment Management were as follows (in thousands):
Three
Months Ended
2023 2022
Net income from Investment Management attributable to
$
1,149
FFO (as defined by NAREIT) attributable toW. P. Carey - Investment Management 1,149 10,137 Adjustments: Other (gains) and losses (514) (1,327) Tax expense (benefit) - deferred and other - (53) Merger and other expenses - 3
Proportionate share of adjustments to earnings from equity method investments (c)
- (1,948)
Total adjustments (514) (3,325)
AFFO attributable to
Summary
FFO (as defined by NAREIT) attributable to
$
1,149
__________ (a)Amount for the three months endedMarch 31, 2023 includes a gain on sale of real estate of$176.2 million recognized upon a tenant's notice of its intention to repurchase a portfolio of 78 net-lease self-storage properties and the reclassification of the investment to net investments in sales-type leases ( N ote 5 ). (b)Amount for the three months endedMarch 31, 2022 includes our$4.6 million proportionate share of an impairment charge recognized on an equity method investment in real estate. (c)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. (d)Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis. (e)Primarily comprised of gains and losses on extinguishment of debt, the mark-to-market fair value of equity securities, and foreign currency exchange rate movements, as well as non-cash allowance for credit losses on loans receivable and finance leases. (f)Amount for the three months endedMarch 31, 2022 is primarily comprised of reversals of estimated liabilities for German real estate transfer taxes that were previously recorded in connection with mergers in prior years and costs incurred in connection with the CPA:18 Merger. 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.
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