Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof 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.
The following discussion should be read in conjunction with our consolidated financial statements in Item 8 of this Report and the matters described under Item 1A. Risk Factors. Please see our Annual Report on Form 10-K for the year ended December 31, 2022 for discussion of our financial condition and results of operations for the year ended December 31, 2021. Refer to Item 1. Business for a description of our business.
Significant Developments
Strategic Office Exit
In September 2023, we announced a plan to exit the office assets within our portfolio by (i) spinning-off 59 office properties into NLOP, so that it became a separate publicly-traded REIT, and (ii) implementing the Office Sale Program, which is targeted to be completed in the first half of 2024.
NLOP Spin-Off
On November 1, 2023, we completed the Spin-Off of 59 office properties into NLOP, as described in further detail in Note 3. Following the closing of the Spin-Off, NLOP operates as a separate publicly-traded REIT, for which we serve as advisor pursuant to the NLOP Advisory Agreements executed in connection with the Spin-Off.
Office Sale Program
In addition to the Spin-Off, 87 of our office properties will be sold under the Office Sale Program, which is targeted to be completed in the first half of 2024. These properties generated ABR totaling approximately $76 million as of the date of the Office Sale Program announcement. Seventy-nine of the 87 office properties have been sold as of the date of this Report, for gross proceeds of approximately $608.1 million (Note 19).
Financial Highlights
During the year ended December 31, 2023, we completed the following (as further described in the consolidated financial statements):
Real Estate
Investments
•We acquired 16 investments totaling $1.2 billion (Note 6).
•We completed three construction projects at a cost totaling $60.7 million (Note 6).
•We funded approximately $38.2 million for a construction loan to build a retail complex in Las Vegas, Nevada, during the year ended December 31, 2023. Through December 31, 2023, we have funded $231.4 million (Note 9).
•We committed to fund four redevelopment or expansion projects totaling $84.1 million. We currently expect to complete the projects in 2024 and 2025 (Note 6).
•We entered into a purchase agreement to acquire four retail (car wash) facilities in the United States for approximately $20.3 million, which is expected to be completed in 2024.
Dispositions
•We disposed of 31 properties for total proceeds, net of selling costs, of $446.4 million, including eight properties sold under the Office Sale Program for total proceeds, net of selling costs, of $216.9 million (Note 17). Eight of the properties sold were hotel operating properties. These dispositions exclude properties contributed to NLOP in the Spin-Off (Note 3).
Financing and Capital Markets Transactions
•In April 2023, we entered into a new €500.0 million unsecured term loan maturing on April 2026, which was drawn in full at closing. In conjunction with the closing of this Unsecured Term Loan due 2026, we executed variable-to-fixed interest rate swaps that fix the total per annum interest rate at 4.34% through the end of 2024. The Unsecured Term Loan due 2026 was incorporated into the Senior Unsecured Credit Facility in December 2023 (Note 12).
•In December 2023, we amended and restated our multi-currency Senior Unsecured Credit Facility to (i) increase the capacity of our Unsecured Revolving Credit Facility from $1.8 billion to $2.0 billion and extend the maturity of this facility by four years to February 14, 2029, and (ii) refinance our £270.0 million GBP Term Loan due 2028 and our €215.0 million EUR Term Loan due 2028 by extending the maturity date of each term loan by three years to February 14, 2028, with an option to extend these term loans by up to an additional year, subject to certain customary conditions. As of December 31, 2023, the aggregate principal amount (of revolving and term loans) available under the Senior Unsecured Credit Facility was able to be increased up to an amount not to exceed the U.S. dollar equivalent of $4.35 billion, subject to the conditions to increase set forth in our credit agreement (Note 12).
•We settled in full our ATM Forwards by delivering 7,826,840 shares of common stock for net proceeds of approximately $634 million (Note 14).
•We reduced our mortgage debt outstanding by prepaying or repaying at maturity a total of $368.0 million of non-recourse mortgage loans with a weighted-average interest rate of 4.9% (Note 12).
Dividends to Stockholders
We declared cash dividends totaling $4.067 per share, comprised of four quarterly dividends per share of $1.067, $1.069, $1.071, and $0.860. Our fourth quarter dividend of $0.860 per share reflects both our strategic exit from the office assets within our portfolio (announced on September 21, 2023) and a lower payout ratio.
Consolidated Results
(in thousands, except shares)
Years Ended December 31,
Revenues from Investment Management 3,219 10,985
Net income from Real Estate attributable to W. P. Carey 704,837 591,603
Net income from Investment Management attributable to W. P. Carey 3,497 7,536
Net cash provided by financing activities 292,562 57,887
Supplemental financial measures (a):
__________
(a)We consider Adjusted funds from operations (“AFFO”), a supplemental measure that is not defined by U.S. generally accepted accounting principles (“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
Real Estate revenue increased in 2023 as compared to 2022, 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 on August 1, 2022 (Note 4)) and higher operating property revenues (primarily from the operating properties we acquired in the CPA:18 Merger on August 1, 2022 and the 12 hotel properties that converted from net-lease to operating properties during the first quarter of 2023), partially offset by the impact of the Spin-Off (Note 3) and lower other lease-related income (Note 6).
Net Income Attributable to W. P. Carey
Net income attributable to W. P. Carey increased in 2023 as compared to 2022. Net income from Real Estate attributable to W. P. Carey increased primarily due to higher gain on sale of real estate and the impact of real estate acquisitions (including from properties acquired in the CPA:18 Merger on August 1, 2022) (Note 6, Note 17), partially offset by higher interest expense, non-cash unrealized gains recognized on certain investments in equity securities during the prior year (Note 10), higher impairment charges and allowance for credit losses (Note 10), and the impact of the Spin-Off (Note 3). Net income from Investment Management attributable to W. P. Carey decreased primarily due to the cessation of fees and distributions previously earned from CPA:18 – Global prior to the CPA:18 Merger. We also recognized an impairment charge on goodwill within our Investment Management segment during the prior year (Note 8). In addition, we recognized a gain on change in control of interests during the prior year in connection with the CPA:18 Merger (Note 4).
AFFO
AFFO increased in 2023 as compared to 2022, primarily due to investment activity and rent escalations, partially offset by higher interest expense and the impact of the Spin-Off (Note 1, Note 3).
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, retail, and self-storage (net lease) properties subject to long-term 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
As of December 31,
Number of net-leased properties 1,424 1,449
Weighted-average lease term (in years) 11.7 10.8
Operating Properties
Number of operating properties: 96 87
Number of self-storage operating properties 89 84
Number of hotel operating properties (a) 5 1
Number of student housing operating properties 2 2
Occupancy (self-storage operating properties) 90.3 % 91.0 %
Number of countries 26 26
Years Ended December 31,
Acquisition volume (in millions) (b) $ 1,264.2 $ 1,265.5
Construction projects completed (in millions) 60.7 148.1
Average U.S. dollar/euro exchange rate 1.0813 1.0540
Average U.S. dollar/British pound sterling exchange rate 1.2433 1.2373
__________
(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 year ended December 31, 2023, we reclassified 12 consolidated hotel properties from net leases to operating properties (Note 6). We sold eight of these hotel operating properties during the third and fourth quarters of 2023 (Note 17).
(b)Amounts for the year ended December 31, 2023 and 2022 include $38.2 million and $89.5 million, respectively, of funding for a construction loan (Note 9). Amount for the year ended December 31, 2022 excludes properties acquired in the CPA:18 Merger (Note 4). Amount for the year ended December 31, 2022 includes $19.8 million of sale-leasebacks classified as loans receivable (Note 7).
Net-Leased Portfolio
The tables below represent information about our net-leased portfolio at December 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)
OBI Group (b) Do-it-yourself retail properties in Poland 26 24,857 1.9 % 7.4
Nord Anglia Education, Inc. K-12 private schools in the U.S. 3 22,245 1.7 % 19.7
__________
(a)Mercury Partners, LP (a related party of U-Haul Moving Partners Inc.) provided notice that it intends to exercise its option to repurchase the 78 properties it is leasing during the first quarter of 2024 (Note 7).
(b)ABR amounts are subject to fluctuations in foreign currency exchange rates.
(c)In January 2024, we sold this portfolio of properties (Note 19).
(d)ABR from these properties is denominated in U.S. dollars.
(e)Of the 23 properties leased to ABC Technologies Holdings Inc., nine are located in Canada, eight are located in the United States, and six are located in Mexico.
Portfolio Diversification by Geography
(in thousands, except percentages)
Region ABR ABR Percent Square Footage (a) Square Footage Percent
United States
South
Midwest
East
West
International
Portfolio Diversification by Property Type
(in thousands, except percentages)
Property Type ABR ABR Percent Square Footage (a) Square Footage Percent
__________
(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 Minnesota, Iowa, Kansas, Missouri, Nebraska, South Dakota, and North Dakota. Other properties within East include assets in Maryland, Connecticut, West Virginia, New Hampshire, and Maine. Other properties within West include assets in Colorado, Oregon, Nevada, Washington, Hawaii, Idaho, Montana, Wyoming, and New Mexico.
(c)$46.8 million (92.1%) of ABR from properties in Canada is denominated in U.S. dollars, with the balance denominated in Canadian dollars.
(d)Includes assets in Mexico, Belgium, Finland, Hungary, Norway, Mauritius, Slovakia, Portugal, the Czech Republic, Austria, Sweden, Latvia, Japan, and Estonia.
(e)Includes automotive dealerships.
(f)Includes ABR from tenants with the following property types: education facility, specialty, laboratory, hotel (net lease), research and development, and land.
Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
Industry Type ABR ABR Percent Square Footage Square Footage Percent
__________
(a)Includes automotive dealerships.
(b)Includes ABR from tenants in the following industries: wholesale, aerospace and defense, insurance, banking, environmental industries, oil and gas, media: advertising, printing, and publishing, consumer transportation, forest products and paper, and electricity. Also includes square footage for vacant properties.
Lease Expirations
(dollars and square footage in thousands)
__________
(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 provided notice of its intention to exercise its option to repurchase the 78 properties it is leasing during the first quarter of 2024 (Note 7).
(c)Includes ABR of $32.5 million from a portfolio of 70 properties leased to State of Andalusia that was sold in January 2024 (Note 19).
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 of December 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.
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 earn fees and other income from the management of NLOP and CESH. Refer to Note 18 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):
Years Ended December 31,
Real Estate Revenues
Lease revenues from:
Operating property revenues from:
Lease Revenues
“Existing net-leased properties” are those that we acquired or placed into service prior to January 1, 2022 and that were not sold, held for sale, derecognized, or reclassified to operating properties or sales-type leases during the periods presented. For the periods presented, there were 947 existing net-leased properties.
For the year ended December 31, 2023 as compared to 2022, lease revenues from existing net-leased properties increased due to the following items (in millions):
__________
(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 to December 31, 2021 and that were not sold or held for sale during the periods presented. Since January 1, 2022, we acquired 34 investments (comprised of 196 properties) and placed two properties into service.
“Net-leased properties acquired in the CPA:18 Merger” on August 1, 2022 (Note 4) consisted of 28 net-leased properties that were not sold, held for sale, or derecognized during the periods presented.
“Net-leased properties sold, held for sale, derecognized, or reclassified to operating properties or sales-type leases” include:
•23 net-leased properties disposed of during the year ended December 31, 2023;
•two net-leased properties classified as held for sale at December 31, 2023, both of which were sold in January 2024 (Note 6, Note 19);
•23 net-leased properties disposed of during the year ended December 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 the Marriott Corporation, after which we began recognizing operating property revenues and expenses from these properties (Note 6) (eight of these properties were sold during the third and fourth quarters of 2023);
•portfolios of (i) 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, and (ii) 70 net-leased office properties that were reclassified to net investments in sales-type leases in the fourth quarter of 2023, since we agreed to sell the portfolio to the tenant, resulting in a lease modification; following these transactions, we began recognizing earnings from these properties within Income from finance leases and loans receivable in the consolidated financial statements; and
•59 net-leased properties derecognized in connection with the Spin-Off (Note 3).
Our dispositions are more fully described in Note 17.
Income from Finance Leases and Loans Receivable
For the year ended December 31, 2023 as compared to 2022, income from finance leases and loans receivable increased due to the following items (in millions):
Operating Property Revenues and Expenses
“Operating properties acquired in the CPA:18 Merger” consisted of 65 self-storage properties and two student housing properties, which contributed operating property revenues, depreciation and amortization, and operating property expenses since August 1, 2022, the date of the CPA:18 Merger December 31, 2023 (Note 4).
“Operating properties sold or held for sale” are comprised of (i) the eight hotel operating properties sold during the year ended December 31, 2023 and (ii) a parking garage attached to a net-leased property that was derecognized in connection with the Spin-Off (Note 3).
“Operating properties recently reclassified from net-leased properties or recently acquired” include (i) four 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 6)) and (ii) five self-storage operating properties acquired during the year ended December 31, 2023 (Note 6).
“Existing operating properties” are those that we acquired or placed into service prior to January 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. For our hotel operating property, revenues and expenses increased by $2.3 million and $1.5 million, respectively, for the year ended December 31, 2023 as compared to 2022, reflecting higher occupancy.
Other Lease-Related Income
Other lease-related income is described in Note 6.
Operating Expenses
Depreciation and Amortization
For the year ended December 31, 2023 as compared to 2022, depreciation and amortization expense for net-leased properties and self-storage operating properties increased primarily due to the impact of net acquisition activity (including properties acquired in the CPA:18 Merger (Note 4)), partially offset by the impact of the Spin-Off (Note 3).
General and Administrative
All general and administrative expenses are recognized within our Real Estate segment.
For the year ended December 31, 2023 as compared to 2022, general and administrative expenses increased by $7.1 million, primarily due to higher compensation expense, increased employee benefits expense, increased professional fees and expenses resulting from the assets acquired in the CPA:18 Merger (Note 4), and no longer receiving reimbursements from CPA:18 – Global.
Impairment Charges — Real Estate
Our impairment charges on real estate are described in Note 10.
Property Expenses, Excluding Reimbursable Tenant Costs
For the year ended December 31, 2023 as compared to 2022, property expenses, excluding reimbursable tenant costs, decreased by $6.3 million, primarily due to the release of real estate taxes accrued for a cash basis tenant during the current year. The tenant was previously not current on real estate taxes due, and repaid the outstanding amount in the second quarter of 2023. This decrease was partially offset by the recovery of property taxes in the prior year period due to a successful court ruling and higher property expenses related to certain properties acquired in the CPA:18 Merger.
Stock-based Compensation Expense
For a description of our equity plans and awards, please see Note 15. Stock-based compensation expense is fully recognized within our Real Estate segment.
For the year ended December 31, 2023 as compared to 2022, stock-based compensation expense increased by $1.7 million, primarily due to higher amortization of restricted share units, partially offset by the impact of changes in the projected payout for performance share units.
Merger and Other Expenses
For the year ended December 31, 2023, merger and other expenses are primarily comprised of costs incurred in connection with the Spin-Off, which was completed in November 2023 (Note 3).
For the year ended December 31, 2022, merger and other expenses are primarily comprised of costs incurred in connection with the CPA:18 Merger (Note 4), which was completed in August 2022.
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 and losses on the sale of properties that were (i) disposed of, (ii) subject to the exercise of a purchase option, or (iii) subject to a purchase agreement resulting in a lease modification during the reporting period, as more fully described in Note 6, Note 7, and Note 17.
Interest Expense
For the year ended December 31, 2023 as compared to 2022, interest expense increased by $72.7 million, primarily due to (i) an increase of $35.6 million related to non-recourse mortgage loans assumed in the CPA:18 Merger on August 1, 2022 (Note 4), (ii) higher outstanding balances and interest rates on our Senior Unsecured Credit Facility, (iii) our Unsecured Term Loan due 2026 that we entered into in April 2023 (Note 12), and (iv) 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 in September 2022, partially offset by the reduction of our mortgage debt outstanding by prepaying or repaying at or close to maturity a total of $483.1 million of non-recourse mortgage loans with a weighted-average interest rate of 4.8% since January 1, 2022 (Note 12).
The following table presents certain information about our outstanding debt (dollars in thousands):
Years Ended December 31,
Weighted-average interest rate 3.2 % 2.7 %
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):
Years Ended December 31,
Non-Operating Income
Earnings from Equity Method Investments in Real Estate
Our equity method investments in real estate are more fully described in Note 9. The following table presents earnings from equity method investments in real estate (in thousands):
Years Ended December 31,
Earnings from Equity Method Investments in Real Estate
Existing Equity Method Investments:
Equity Method Investments Consolidated after the CPA:18 Merger (Note 4):
__________
(a)Increase is due to funding of this construction loan since January 1, 2022, which has an interest rate of 6.0%.
(b)Decrease is primarily due to higher rent collections at these retail properties during the prior year, where certain rents were previously disputed and subsequently collected.
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, as well as changes in the allowance for credit losses on finance receivables. 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 years ended December 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 11).
The following table presents other gains and (losses) within our Real Estate segment (in thousands):
Years Ended December 31,
Other Gains and (Losses)
Non-cash unrealized losses on non-hedging derivatives (3,918) (898) (3,020)
Gain on repayment of secured loan receivable (c) — 10,613 (10,613)
__________
(a)As a result of the declining financial position of one of our top ten tenants, we recognized a $28.8 million allowance for credit loss during the year ended December 31, 2023, based on our expectation of collecting lower rents going forward.
(b)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.
(c)We acquired a secured loan receivable with a fair value of $23.4 million in our merger with a former affiliate, Corporate Property Associates 17 – Global Incorporated, in October 2018 (“CPA:17 Merger”), for which the outstanding principal of $34.0 million was fully repaid to us in September 2022 (Note 7). Therefore, we recorded a $10.6 million gain on repayment of this secured loan receivable.
(d)This insurance receivable was acquired in the CPA:17 Merger.
Gain on Change in Control of Interests
In connection with the CPA:18 Merger, during the year ended December 31, 2022, we acquired the remaining interests in four investments in which we already had a joint interest and accounted for under the equity method. Due to the change in control of these four jointly owned investments, we recorded a gain on change in control of interests of $11.4 million reflecting the difference between our carrying values and the preliminary estimated fair values of our previously held equity interests on August 1, 2022. Subsequent to the CPA:18 Merger, we consolidated these wholly owned investments (Note 4).
Provision for Income Taxes
For the year ended December 31, 2023 as compared to 2022, provision for income taxes within our Real Estate segment increased by $23.0 million, primarily due to (i) higher current taxes as a result of rent increases driven by CPI adjustments at existing international properties, (ii) deferred tax benefits recognized during the prior year period related to the release of valuation allowances on certain foreign properties, and (iii) the impact of international property acquisitions.
Investment Management
We earn revenue as the advisor to the Managed Programs and NLOP. For the periods presented, we acted as advisor to the following Managed Programs: CPA:18 – Global (through August 1, 2022) and CESH. Upon completion of the CPA:18 Merger on August 1, 2022 (Note 4), the advisory agreement with CPA:18 – Global was terminated, and we ceased earning revenue from CPA:18 – Global. We have acted as advisor to NLOP since the Spin-Off on November 1, 2023 (Note 3).
We no longer raise capital for new or existing funds. We act as the advisor to CESH and currently expect to do so through the end of its life cycle. We also act as the advisor to NLOP pursuant to the NLOP Advisory Agreements (Note 1, Note 5).
Revenues
The following table presents revenues within our Investment Management segment (in thousands):
Years Ended December 31,
Investment Management Revenues
Asset management revenue
Other advisory income and reimbursements
Reimbursable costs from affiliates
Asset Management Revenue
During the periods presented, we earned asset management revenue from (i) NLOP (since the Spin-Off on November 1, 2023 (Note 3)) based on an annual fee of $7.5 million, which will be proportionately reduced following the disposition of a portfolio property, (ii) CESH based on its gross assets under management at fair value, and (iii) CPA:18 – Global (prior to the CPA:18 Merger) based on the value of its real estate-related assets under management. For 2023, we received asset management revenue from NLOP and CESH in cash. Asset management revenues from NLOP and CESH are expected to decline as assets are sold.
Other Advisory Income and Reimbursements
Under the advisory agreement with NLOP, we earn a base administrative amount of approximately $4.0 million annually, for certain administrative services, including day-to-day management services, investor relations, accounting, tax, legal, and other administrative matters, paid in cash.
Operating Expenses
Impairment Charges — Investment Management Goodwill
Our impairment charges on Investment Management goodwill are more fully described in Note 10.
Other Income and Expenses, and (Provision for) Benefit from Income Taxes
Gain on Change in Control of Interests
In connection with the CPA:18 Merger, during the year ended December 31, 2022, we recognized a gain on change in control of interests of $22.5 million within our Investment Management segment related to the difference between the carrying value and the preliminary estimated fair value of our previously held equity interest in shares of CPA:18 – Global’s common stock (Note 4).
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 9) (in thousands):
Years Ended December 31,
Earnings from equity method investments in the Managed Programs:
Distributions of Available Cash from CPA:18 – Global (a) $ — $ 8,746
Earnings from equity method investments in the Managed Programs (a) — 4,542
Earnings from equity method investments in the Managed Programs $ — $ 13,288
__________
(a)As a result of the completion of the CPA:18 Merger on August 1, 2022 (Note 4), we no longer recognize equity income from our investment in shares of common stock of CPA:18 – Global or receive distributions of Available Cash (as defined in CPA:18 – Global’s partnership agreement) from CPA:18 – Global.
Benefit from (Provision for) Income Taxes
For the year ended December 31, 2023 we recorded a benefit from income taxes of $0.4 million, compared to a provision for income taxes of $6.3 million recognized during the year ended December 31, 2022, within our Investment Management segment. During 2022, in connection with the CPA:18 Merger, we incurred one-time current taxes upon the recognition of taxable income associated with the accelerated vesting of shares previously issued by CPA:18 – Global to us for asset management services performed.
Liquidity and Capital Resources
Sources and Uses of Cash During the Year
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, our Senior Unsecured Notes, and our Unsecured Term Loans; the timing of our 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 on August 1, 2022 (Note 4). Despite these fluctuations, we believe that we will generate sufficient cash from operations to meet our normal recurring short-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, proceeds from dispositions of properties (including expected proceeds from the exercise of purchase options and the Office Sale Program (Note 1)), and the issuance of additional debt or equity securities, such as issuances of common stock through our ATM Program (Note 14), in order to meet our short-term and long-term liquidity 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 $69.9 million during 2023 as compared to 2022, primarily due to an increase in cash flow generated from net investment activity (including properties acquired in the CPA:18 Merger (Note 4)) and scheduled rent increases at existing properties, partially offset by higher interest expense and the impact of the Spin-Off (Note 3).
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. We also received $28.0 million from repayments of loans receivable and $10.5 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 and Unsecured Term Loans, issuances and repayments of the Senior Unsecured Notes, payments and prepayments of non-recourse mortgage loans, issuances of common equity, and payments of dividends to stockholders. In addition to these types of transactions, during the year ended December 31, 2023, we received $343.9 million in proceeds in connection with the Spin-Off (Note 3).
Summary of Financing
The table below summarizes our Senior Unsecured Notes, our non-recourse mortgages, and our Senior Unsecured Credit Facility (dollars in thousands):
December 31,
Carrying Value
Fixed rate:
Unsecured Term Loans subject to interest rate swaps (a) 549,109 —
Variable rate:
Non-recourse mortgages (a):
Amount subject to interest rate caps — 11,156
Percent of Total Debt
Variable rate 13 % 13 %
Weighted-Average Interest Rate at End of Year
Fixed rate 2.9 % 2.9 %
Variable rate (c) 5.1 % 3.5 %
Total debt 3.2 % 3.0 %
____________
(a)Aggregate debt balance includes unamortized discount, net, totaling $31.8 million and $35.9 million as of December 31, 2023 and 2022, respectively, and unamortized deferred financing costs totaling $21.5 million and $26.0 million as of December 31, 2023 and 2022, respectively.
(b)Includes non-recourse mortgages subject to variable-to-fixed interest rate swaps totaling $45.0 million and $83.0 million as of December 31, 2023 and 2022, respectively.
(c)The impact of our interest rate swaps and caps is reflected in the weighted-average interest rates.
Cash Resources
At December 31, 2023, our cash resources consisted of the following:
•cash and cash equivalents totaling $633.9 million. Of this amount, $203.1 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 $1.6 billion (net of amounts reserved for standby letters of credit totaling $6.5 million); and
•unleveraged properties that had an aggregate asset carrying value of approximately $13.6 billion at December 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 both U.S. dollars and euros) and equity offerings, as well as term loans and other bank debt.
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 December 31, 2023, we had (i) $633.9 million of cash and cash equivalents and (ii) approximately $1.6 billion of available capacity under our Unsecured Revolving Credit Facility (net of amounts reserved for standby letters of credit totaling $6.5 million). Our Senior Unsecured Credit Facility includes (i) a $2.0 billion Unsecured Revolving Credit Facility (scheduled to mature on February 14, 2029), (ii) our Unsecured Term Loans due 2028 totaling $576.5 million outstanding (scheduled to mature on February 14, 2028), and (iii) our Unsecured Term Loan due 2026 totaling $549.1 million outstanding (scheduled to mature on April 24, 2026), as of December 31, 2023 (Note 12). As of December 31, 2023, scheduled debt principal payments total $1.3 billion during 2024 and $707.3 million during 2025 (Note 12).
During the next 12 months following December 31, 2023 and thereafter, we expect that our significant cash requirements will include:
•paying dividends to our stockholders;
•funding acquisitions of new investments (Note 6);
•funding future capital commitments (Note 6) and tenant improvement allowances;
•making scheduled principal and balloon payments on our debt obligations, including (i) $500 million of senior notes due in April 2024 and (ii) €500 million of senior notes due in July 2024 (Note 12);
•making scheduled interest payments on our debt obligations (future interest payments total $939.6 million, with $229.4 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 December 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, issuances of common stock through our ATM Program (Note 14), 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 December 31, 2023.
Environmental Obligations
In connection with the purchase of many of our properties, we required the sellers to perform environmental reviews. We believe, based on the results of these reviews, that our properties were in substantial compliance with federal, state, and foreign environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with leakage from underground storage tanks, surface spills, or other on-site activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. We believe that the ultimate resolution of any environmental matters should not have a material adverse effect on our financial condition, liquidity, or results of operations. We record environmental obligations within Accounts payable, accrued expenses and other liabilities in the consolidated financial statements. See Item 1A. Risk Factors for further discussion of potential environmental risks.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. Below is a summary of certain critical accounting estimates used in the preparation of our consolidated financial statements. Please also refer to our accounting policies described under Critical Accounting Policies and Estimates in Note 2.
Accounting for Acquisitions
In accordance with the guidance for business combinations and asset acquisitions, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. When we acquire properties with leases classified as operating leases, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values.
The tangible assets consist of land, buildings, and site improvements. The intangible assets and liabilities include the above- and below-market value of leases and the in-place leases, which includes the value of tenant relationships. The recorded allocations of tangible and intangible assets incorporate discount rates, capitalization rates, interest rates, market rents, leasing commissions, and certain other assumptions and estimates. We use considerable judgment in developing such assumptions and estimates, and significant increases or decreases in these key assumptions and estimates would result in a significantly lower or higher fair value measurement of the real estate assets being acquired.
Impairments of Real Estate
For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of market rents, residual values, and holding periods. We estimate market rents and residual values using market information from outside sources such as third-party market research, external appraisals, broker quotes, or recent comparable sales.
As our investment objective is to hold properties on a long-term basis, holding periods used in the undiscounted cash flow analysis are generally ten years, but may be less if our intent is to hold a property for less than ten years. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the impairment loss as the excess of the carrying value of the property’s asset group over its estimated fair value.
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 (“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 the sale of certain real estate, 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 on the same basis.
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, merger and acquisition expenses, and spin-off 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.
Consolidated FFO and AFFO were as follows (in thousands):
Years Ended December 31,
Adjustments:
Depreciation and amortization of real property 571,750 500,764
Gain on change in control of interests (c) (d) — (33,931)
Impairment charges — Investment Management goodwill (e) — 29,334
Proportionate share of adjustments for noncontrolling interests (h) (666) (491)
FFO (as defined by NAREIT) attributable to W. P. Carey 1,061,226 1,105,613
Adjustments:
Straight-line and other leasing and financing adjustments (71,869) (54,431)
Above- and below-market rent intangible lease amortization, net 34,164 41,390
Amortization of deferred financing costs 20,544 17,203
Other amortization and non-cash items 1,735 1,931
Tax expense (benefit) — deferred and other (199) (3,759)
Proportionate share of adjustments for noncontrolling interests (h) (441) (769)
Summary
FFO (as defined by NAREIT) attributable to W. P. Carey $ 1,061,226 $ 1,105,613
FFO and AFFO from Real Estate were as follows (in thousands):
Years Ended December 31,
Net income from Real Estate attributable to W. P. Carey $ 704,837 $ 591,603
Adjustments:
Depreciation and amortization of real property 571,750 500,764
Gain on change in control of interests (c) — (11,405)
Proportionate share of adjustments for noncontrolling interests (h) (666) (491)
Adjustments:
Straight-line and other leasing and financing adjustments (71,869) (54,431)
Above- and below-market rent intangible lease amortization, net 34,164 41,390
Amortization of deferred financing costs 20,544 17,203
Other amortization and non-cash items 1,735 1,931
Tax benefit — deferred and other (199) (8,164)
Proportionate share of adjustments for noncontrolling interests (h) (441) (769)
Summary
FFO and AFFO from Investment Management were as follows (in thousands):
Years Ended December 31,
Adjustments:
Impairment charges — Investment Management goodwill (e) — 29,334
Gain on change in control of interests (d) — (22,526)
Total adjustments — 6,808
Adjustments:
Other (gains) and losses (i) (243) 1,111
Tax expense — deferred and other — 4,405
Merger and other expenses — 3
AFFO attributable to W. P. Carey — Investment Management $ 3,254 $ 17,816
Summary
AFFO attributable to W. P. Carey — Investment Management $ 3,254 $ 17,816
__________
(a)Amount for the year ended December 31, 2023 includes (i) a gain on sale of real estate of $176.2 million recognized upon receiving notice of the exercise of a purchase option for a portfolio of 78 net-lease self-storage properties and the reclassification of the investment to net investments in sales-type leases and (ii) a gain on sale of real estate of $59.1 million recognized upon entering into an agreement to sell our portfolio of 70 office properties located in Spain to the tenant occupying the properties and the reclassification of the investment to net investments in sales-type leases (Note 7).
(b)Amount for the year ended December 31, 2023 includes an impairment charge of $47.3 million recognized on the 59 properties contributed to NLOP in connection with the Spin-Off (Note 1, Note 10).
(c)Amount for the year ended December 31, 2022 represents a gain recognized on the remaining interests in four investments acquired in the CPA:18 Merger, which we had previously accounted for under the equity method (Note 4).
(d)Amount for the year ended December 31, 2022 represents a gain recognized on our previously held interest in shares of CPA:18 – Global common stock in connection with the CPA:18 Merger (Note 4).
(e)Amount for the year ended December 31, 2022 represents an impairment charge recognized on goodwill within our Investment Management segment, since future Investment Management cash flows are expected to be minimal (Note 8, Note 10).
(f)Amount for the year ended December 31, 2022 includes our $4.6 million proportionate share of an impairment charge recognized on an equity method investment in real estate (Note 9).
(g)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.
(h)Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis.
(i)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.
(j)Amount for the year ended December 31, 2023 is primarily comprised of costs incurred in connection with the Spin-Off (Note 1, Note 3). Amount for the year ended December 31, 2022 is primarily comprised of costs incurred in connection with the CPA:18 Merger (Note 4).
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 7A. 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.
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 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 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 assets to decrease. 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, we are subject to variable-rate interest on our Unsecured Term Loans, Unsecured Revolving Credit Facility, and certain of our non-recourse mortgage debt. We have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties related to certain of our variable-rate debt. See Note 11 for additional information on our interest rate swaps and caps.
Our debt obligations are more fully described in Note 12 and Liquidity and Capital Resources — Summary of Financing in Item 7 above. The following table presents principal cash flows based upon expected maturity dates of our debt obligations outstanding at December 31, 2023 (in thousands):
__________
(a)Amounts are based on the exchange rate at December 31, 2023, as applicable.
(b)Amounts include non-recourse mortgages and unsecured term loans subject to variable-to-fixed interest rate swaps. Amounts are primarily comprised of principal payments for our Senior Unsecured Notes (Note 12).
The estimated fair value of our fixed-rate debt and our variable-rate debt 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 December 31, 2023 would increase or decrease by $6.9 million for our euro-denominated debt, by $3.4 million for our British pound sterling-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 Canadian dollar, the Japanese yen, and certain other currencies 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 12). Volatile market conditions arising from certain macroeconomic factors 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 the next 12 months) for our consolidated foreign operations at December 31, 2023 of $2.6 million, $0.3 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 11 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.
For the year ended December 31, 2023, our consolidated portfolio had the following significant characteristics in excess of 10%, based on the percentage of our consolidated total revenues:
•66% related to domestic operations; and
•34% related to international operations.
At December 31, 2023, our net-lease portfolio, which excludes our operating properties, had the following significant property and lease characteristics in excess of 10% in certain areas, based on the percentage of our ABR as of that date:
•58% related to domestic properties;
•42% related to international properties;
•32% related to industrial facilities, 26% related to warehouse facilities, and 21% related to retail facilities; and
•23% related to the retail stores industry (including automotive dealerships).
Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS Page No.
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 53
Consolidated Balance Sheets as of December 31, 2023 and 2022 56
Notes to Consolidated Financial Statements 64
Schedule IV — Mortgage Loans on Real Estate as of December 31, 2023 139
Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of W. P. Carey Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets ofW. P. Carey Inc.and its subsidiaries(the “Company”) as of December 31, 2023 and 2022,and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2023in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Purchase Price Allocation for Asset Acquisitions
As described in Notes 2 and 6 to the consolidated financial statements, the Company completed real estate acquisitions for total consideration of $1.2 billion during the year ended December 31, 2023. For acquired properties with leases classified as operating leases, management allocates the purchase price to the tangible and intangible assets and liabilities based on their estimated fair values. Management determines the fair value of real estate under the income approach using either the discounted cash flow method or the direct capitalization method. For the discounted cash flow method, the fair value of real estate is determined (i) by applying a discounted cash flow analysis to the estimated net operating income for each property in the portfolio during the remaining anticipated lease term and (ii) by the estimated residual value, which is based on a hypothetical sale of the property upon expiration of a lease factoring in the re-tenanting of such property at estimated market rental rates, and applying a selected capitalization rate. For the direct capitalization method, the fair value of real estate is determined (i) by the stabilized estimated net operating income for each property in the portfolio and (ii) a selected capitalization rate. For any acquisitions that do not qualify as sale-leaseback transactions, management records above- and below-market lease intangible assets and liabilities for acquired properties based on the present value, using a discount rate reflecting the risks associated with the leases acquired. For acquired properties with tenants in place, management records in-place lease intangible assets based on the estimated value ascribed to the avoidance of costs of leasing the properties for the remaining primary in-place lease terms.
The principal considerations for our determination that performing procedures relating to the purchase price allocation for acquisitions is a critical audit matter are (i) the significant judgment by management when developing the estimated fair value of tangible and intangible assets and liabilities to allocate the purchase price; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to capitalization rates, market rental rates and discount rates used in the discounted cash flow method for tangible and intangible assets and capitalization rates used in the direct capitalization method for tangible assets; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to purchase price allocations for acquisitions, including controls over management’s development of the estimated fair value of the tangible and intangible assets and liabilities and controls over the review of significant assumptions related to capitalization rates, market rental rates and discount rates. These procedures also included, among others, for a sample of acquisitions (i) reading the executed purchase agreements and leasing documents; (ii) testing management’s process for developing the estimated fair value of tangible and intangible assets and liabilities; (iii) evaluating the appropriateness of the discounted cash flow and direct capitalization methods; (iv) testing the completeness and accuracy of underlying data used in the discounted cash flow and direct capitalization methods; (v) evaluating the reasonableness of the significant assumptions used by management related to capitalization rates, market rental rates and discount rates used in the discounted cash flow method for tangible and intangible assets and capitalization rates used in the direct capitalization method for tangible assets. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the discounted cash flow and direct capitalization methods and (ii) the reasonableness of the significant assumptions related to capitalization rates, market rental rates, and discount rates.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 9, 2024
We have served as the Company’s auditor since 1973, which includes periods before the Company became subject to SEC reporting requirements.
W. P. CAREY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
Assets
Investments in real estate:
Land, buildings and improvements — operating properties 1,256,249 1,095,892
Net investments in finance leases and loans receivable 1,514,923 771,761
Liabilities and Equity
Debt:
Accounts payable, accrued expenses and other liabilities 615,750 623,843
Below-market rent and other intangible liabilities, net 136,872 184,584
Commitments and contingencies (Note 13)
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued — —
Distributions in excess of accumulated earnings (2,891,424) (2,486,633)
__________
(a)See Note 2 for details related to variable interest entities (“VIEs”).
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
Years Ended December 31,
Revenues
Real Estate:
Investment Management:
Other advisory income and reimbursements 667 — —
Operating Expenses
Impairment charges — Investment Management goodwill — 29,334 —
Other Income and Expenses
Gain on change in control of interests — 33,931 —
Net loss (income) attributable to noncontrolling interests 70 657 (134)
Diluted Earnings Per Share $ 3.28 $ 2.99 $ 2.24
Weighted-Average Shares Outstanding
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended December 31,
Other Comprehensive Income (Loss)
Amounts Attributable to Noncontrolling Interests
Foreign currency translation adjustments (80) (5) —
Unrealized gain on derivative instruments — — (21)
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
W. P. Carey Stockholders
Distributions Accumulated
Common Stock Additional in Excess of Deferred Other Total
Shares Amount Capital Earnings Obligation Loss Stockholders Interests Total
Deferral of vested shares, net (4,521) 4,521 — —
Acquisition of noncontrolling interests 3,663 3,663 (3,663) —
Distributions to noncontrolling interests — (3,263) (3,263)
Contributions from noncontrolling interests — 2,886 2,886
Other comprehensive loss:
(Continued)
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Continued)
(in thousands, except share and per share amounts)
W. P. Carey Stockholders
Distributions Accumulated
Common Stock Additional in Excess of Deferred Other Total
Shares Amount Capital Earnings Obligation Loss Stockholders Interests Total
Deferral of vested shares, net (6,696) 6,696 — —
Distributions to noncontrolling interests — (413) (413)
Contributions from noncontrolling interests — 30 30
Other comprehensive loss:
(Continued)
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Continued)
(in thousands, except share and per share amounts)
W. P. Carey Stockholders
Distributions Accumulated
Common Stock Additional in Excess of Deferred Other Total
Shares Amount Capital Earnings Obligation Loss Stockholders Interests Total
Deferral of vested shares, net (7,044) 7,044 — —
Distributions to noncontrolling interests — (145) (145)
Other comprehensive loss:
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
Cash Flows — Operating Activities
Adjustments to net income:
Increase (decrease) in allowance for credit losses 29,074 (24,976) 266
Distributions of earnings from equity method investments 18,588 30,236 15,471
Gain on change in control of interests — (33,931) —
Impairment charges — Investment Management goodwill — 29,334 —
Net changes in other operating assets and liabilities (29,399) (14,269) (14,252)
Cash Flows — Investing Activities
Proceeds from repayment of loans receivable 28,000 34,000 —
Tenant-funded escrow for investing activities 4,959 — —
Cash paid to stockholders of CPA:18 – Global in the CPA:18 Merger — (423,435) —
Proceeds from repayment of short-term loans to affiliates — 26,000 62,048
Funding of short-term loans to affiliates — (26,000) (41,000)
Cash Flows — Financing Activities
Proceeds in connection with the Spin-Off 343,885 — —
Distributions to noncontrolling interests (3,263) (413) (145)
Contributions from noncontrolling interests 2,886 30 —
Proceeds from issuance of Senior Unsecured Notes — 334,775 1,385,059
Redemption of Senior Unsecured Notes — — (617,442)
Change in Cash and Cash Equivalents and Restricted Cash During the Year
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Supplemental Non-Cash Investing and Financing Activities:
2023 — On November 1, 2023, we completed the Spin-Off (as defined herein) (Note 3). The following table summarizes non-cash assets, liabilities, and equity derecognized in connection with the Spin-Off and provides a reconciliation to cash proceeds from the Spin-Off (in thousands):
Impact of the Spin-Off
Total liabilities and equity derecognized (438,913)
Total non-cash assets, liabilities, and equity derecognized 922,703
Reduction to Additional paid-in capital (578,818)
Proceeds in connection with the Spin-Off $ 343,885
2022 — On August 1, 2022, CPA:18 – Global (as defined herein) merged with and into one of our indirect subsidiaries in the CPA:18 Merger (as defined herein) (Note 4). The following table summarizes estimated fair values of the assets acquired and liabilities assumed in the CPA:18 Merger (in thousands):
Total Consideration
Fair value of W. P. Carey shares of common stock issued $ 1,205,750
Cash consideration paid 423,297
Cash paid for fractional shares 138
Assets Acquired at Fair Value
Land, buildings and improvements — net lease and other 881,613
Land, buildings and improvements — operating properties 1,000,447
Net investments in finance leases and loans receivable 38,517
In-place lease and other intangible assets 224,458
Above-market rent intangible assets 61,090
Assets held for sale 85,026
Other assets, net (excluding restricted cash) 25,229
Liabilities Assumed at Fair Value
Non-recourse mortgages, net 900,173
Accounts payable, accrued expenses and other liabilities 90,035
Below-market rent and other intangible liabilities 16,836
Deferred income taxes 52,320
Amounts attributable to noncontrolling interests 14,367
Net assets acquired excluding cash and restricted cash 1,414,995
Cash and cash equivalents and restricted cash acquired $ 331,063
See Notes to Consolidated Financial Statements.
W. P. CAREY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
W. P. Carey Inc. (“W. P. Carey”) is a real estate investment trust (“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 that are leased 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.
In September 2023, we announced a plan to exit the office assets within our portfolio by (i) spinning-off 59 office properties into Net Lease Office Properties (“NLOP”), so that it became a separate publicly-traded real estate investment trust (the “Spin-Off”), and (ii) implementing an asset sale program to dispose of 87 office properties retained by us (the “Office Sale Program”), which is targeted to be completed in the first half of 2024.
On November 1, 2023, we completed the Spin-Off, contributing 59 office properties to NLOP (Note 3). Following the closing of the Spin-Off, NLOP operates as a separate publicly-traded REIT, which we externally manage pursuant to certain advisory agreements (the “NLOP Advisory Agreements”).
On August 1, 2022, a non-traded REIT that we previously advised, Corporate Property Associates 18 – Global Incorporated (“CPA:18 – Global”) merged with and into one of our indirect subsidiaries (the “CPA:18 Merger”) (Note 4). At December 31, 2023, we were the advisor to Carey European Student Housing Fund I, L.P. (“CESH”), a limited partnership formed for the purpose of developing, owning, and operating student housing properties in Europe (Note 5). We refer to CPA:18 – Global (prior to the CPA:18 Merger) and CESH collectively as the “Managed Programs.”
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 December 31, 2023, our portfolio was comprised of our full or partial ownership interests in 1,424 properties, totaling approximately 173 million square feet (unaudited), substantially all of which were net leased to 336 tenants, with a weighted-average lease term of 11.7 years and an occupancy rate of 98.1% (unaudited). In addition, at December 31, 2023, our portfolio was comprised of full or partial ownership interests in 96 operating properties, including 89 self-storage properties, five hotels, and two student housing properties, totaling approximately 7.3 million square feet (unaudited).
Investment Management — We manage the real estate investment portfolios for NLOP and CESH, for which we earn asset management revenue and other advisory income and reimbursements. We may also be entitled to receive certain distributions pursuant to our advisory arrangements with CESH. At December 31, 2023, NLOP’s portfolio was comprised of its full or partial ownership interests in 55 properties. At December 31, 2023, CESH wholly owned one build-to-suit project.
Note 2. Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
Accounting for Acquisitions
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a
Notes to Consolidated Financial Statements
business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations. All transaction costs incurred during the reporting period were capitalized since our acquisitions were classified as asset acquisitions (excluding the CPA:18 Merger).
Purchase Price Allocation of Tangible Assets — When we acquire properties with leases classified as operating leases, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The tangible assets consist of land, buildings, and site improvements. The intangible assets include the above- and below-market value of leases and the in-place leases, which includes the value of tenant relationships. Land is typically valued utilizing the sales comparison (or market) approach. Buildings are valued, as if vacant, using the cost and/or income approach. Under the cost approach, the fair value of real estate is based on estimated costs to construct a vacant building with similar characteristics. Under the income approach, we use either the discounted cash flow method or the direct capitalization method. For the discounted cash flow method, the fair value of real estate is determined (i) by applying a discounted cash flow analysis to the estimated net operating income for each property in the portfolio during the remaining anticipated lease term and (ii) by the estimated residual value, which is based on a hypothetical sale of the property upon expiration of a lease factoring in the re-tenanting of such property at estimated market rental rates, and applying a selected capitalization rate. For the direct capitalization method, the fair value of real estate is determined (i) by the stabilized estimated net operating income for each property in the portfolio and (ii) a selected capitalization rate.
Assumptions used in the model are property-specific where this information is available; however, when certain necessary information is not available, we use available regional and property-type information. Assumptions and estimates include the following:
•a discount rate or internal rate of return;
•market rents, growth factors of rents, and market lease term;
•capitalization rates to be applied to an estimate of market rent at the beginning and/or the end of the market lease term;
•the marketing period necessary to put a lease in place;
•carrying costs during the marketing period; and
•leasing commissions and tenant improvement allowances.
The discount rates and residual capitalization rates used to value the properties are selected based on several factors, including:
•the creditworthiness of the lessees;
•industry surveys;
•property type;
•property location and age;
•current lease rates relative to market lease rates; and
•anticipated lease duration.
In the case where a tenant has a purchase option deemed to be favorable to the tenant, or the tenant has long-term renewal options at rental rates below estimated market rental rates, we generally include the value of the exercise of such purchase option or long-term renewal options in the determination of residual value.
The remaining economic life of leased assets is estimated by relying in part upon third-party appraisals of the leased assets and industry standards. Different estimates of remaining economic life will affect the depreciation expense that is recorded.
Purchase Price Allocation of Intangible Assets and Liabilities — For acquired properties that do not qualify as sale-leaseback transactions, we record above- and below-market lease intangible assets and liabilities for acquired properties based on the present value (using a discount rate reflecting the risks associated with the leases acquired including consideration of the credit of the lessee) of the difference between (i) the contractual rents to be paid pursuant to the leases negotiated or in place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates for the property or equivalent property, both of which are measured over the estimated lease term, which includes renewal options that have rental rates below estimated market rental rates. We discount the difference between the estimated market rent and contractual rent to a present value using an interest rate reflecting our current assessment of the risk associated with the lease acquired, which includes a consideration of the credit of the lessee. When we enter into sale-leaseback transactions with above- or below-market leases, the intangibles
Notes to Consolidated Financial Statements
will be accounted for as loan receivables or prepaid rent liabilities, respectively. We measure the fair value of below-market purchase option liabilities we acquire as the excess of the present value of the fair value of the real estate over the present value of the tenant’s exercise price at the option date. We determine these values using our estimates or by relying in part upon third-party valuations conducted by independent appraisal firms.
We amortize the above-market lease intangible as a reduction of lease revenue over the remaining contractual lease term. We amortize the below-market lease intangible as an increase to lease revenue over the initial term and any renewal periods in the respective leases. We include the value of below-market leases in Below-market rent and other intangible liabilities in the consolidated financial statements.
For acquired properties with tenants in place, we record in-place lease intangible assets based on the estimated value ascribed to the avoidance of costs of leasing the properties for the remaining primary in-place lease terms. The cost avoidance is derived first by determining the in-place lease term on the subject lease. Then, based on our review of the market, the cost to be borne by a property owner to replicate a market lease to the remaining in-place term is estimated. These costs consist of: (i) rent lost during downtime (i.e., assumed periods of vacancy), (ii) estimated expenses that would be incurred by the property owner during periods of vacancy, (iii) rent concessions (i.e., free rent), (iv) leasing commissions, and (v) tenant improvements allowances given to tenants. We determine these values using our estimates or by relying in part upon third-party valuations. We amortize the value of in-place lease intangibles to depreciation and amortization expense over the remaining initial term of each lease. The amortization period for intangibles does not exceed the remaining depreciable life of the building.
If a lease is terminated, we charge the unamortized portion of above- and below-market lease values to rental income and in-place lease values to amortization expense. If a lease is amended, we will determine whether the economics of the amended lease continue to support the existence of the above- or below-market lease intangibles.
Purchase Price Allocation of Debt — When we acquire leveraged properties, the fair value of the related debt instruments is determined using a discounted cash flow model with rates that take into account the credit of the tenants, where applicable, and interest rate risk. Such resulting premium or discount is amortized over the remaining term of the obligation. We also consider the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant, the time until maturity and the current interest rate.
Purchase Price Allocation of Goodwill — In the case of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. We allocate goodwill to the respective reporting units in which such goodwill arises. Goodwill acquired in certain business combinations was attributed to the Real Estate segment which comprises one reporting unit. In the event we dispose of a property or an investment that constitutes a business under U.S. generally accepted accounting principles (“GAAP”) from a reporting unit with goodwill, we allocate a portion of the reporting unit’s goodwill to that business in determining the gain or loss on the disposal of the business. The amount of goodwill allocated to the business is based on the relative fair value of the business to the fair value of the reporting unit. As part of purchase accounting for a business, we record any deferred tax assets and/or liabilities resulting from the difference between the tax basis and GAAP basis of the investment in the taxing jurisdiction. Such deferred tax amount will be included in purchase accounting and may impact the amount of goodwill recorded depending on the fair value of all of the other assets and liabilities and the amounts paid.
Financing Arrangements— In accordance with Accounting Standards Codification (“ASC”) 310, Receivables and ASC 842, Leases, real estate assets acquired through a sale-leaseback transaction are accounted for as a financing arrangement if the investment does not meet the criteria for sale-leaseback accounting. We record such investments within Net investments in finance leases and loans receivable on the consolidated balance sheets. Rent payments from these investments are included within Income from finance leases and loans receivable on the consolidated statements of income.
Impairments
Real Estate — We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, vacancies, an upcoming lease expiration, a tenant with credit difficulty, the termination of a lease by a tenant, or a likely disposition of the property.
Notes to Consolidated Financial Statements
For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of market rents, residual values, and holding periods. We estimate market rents and residual values using market information from outside sources such as third-party market research, external appraisals, broker quotes, or recent comparable sales.
As our investment objective is to hold properties on a long-term basis, holding periods used in the undiscounted cash flow analysis are generally ten years, but may be less if our intent is to hold a property for less than ten years. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the impairment loss as the excess of the carrying value of the property’s asset group over its estimated fair value.
Assets Held for Sale — We generally classify real estate assets that are subject to operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied, we received a non-refundable deposit, and we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we compare the asset’s fair value less estimated cost to sell to its carrying value, and if the fair value less estimated cost to sell is less than the property’s carrying value, we reduce the carrying value to the fair value less estimated cost to sell. We will continue to review the property for subsequent changes in the fair value, and may recognize an additional impairment charge, if warranted.
Equity Method Investments — We evaluate our equity method investments on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, we measure the charge as the excess of the carrying value of our investment over its estimated fair value, which is determined by calculating our share of the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint-venture agreement. For our equity investments in real estate, we calculate the estimated fair value of the underlying investment’s real estate as described in Real Estate above. The fair value of the underlying investment’s debt, if any, is calculated based on market interest rates and other market information. The fair value of the underlying investment’s other financial assets and liabilities (excluding net investment in direct financing leases) have fair values that generally approximate their carrying values.
Goodwill — We evaluate goodwill for possible impairment at least annually or upon the occurrence of a triggering event. Such a triggering event within our Investment Management segment depended on the timing and form of liquidity events for the Managed Programs (Note 4, Note 5). To identify any impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. This assessment is used as a basis to determine whether it is necessary to calculate reporting unit fair values. If necessary, we calculate the estimated fair value of the Investment Management reporting unit by utilizing a discounted cash flow analysis methodology and available net asset values. We calculate the estimated fair value of the Real Estate reporting unit by utilizing our market capitalization and the aforementioned fair value of the Investment Management segment. Impairments, if any, will be the difference between the reporting unit’s fair value and carrying amount, not to exceed the carrying amount of goodwill.
Credit Losses
The allowance for credit losses, which is recorded as a reduction to Net investments in finance leases and loans receivable on our consolidated balance sheets, is measured on a pool basis by credit ratings (Note 7), using a probability of default method based on the lessees’ respective credit ratings, the expected value of the underlying collateral upon its repossession, and our historical loss experience related to other direct financing leases. Included in our model are factors that incorporate forward-looking information. If we determine that a finance lease no longer shares risk characteristics with other finance leases in the pool, we evaluate the finance lease for expected credit losses on an individual basis. Allowance for credit losses is included in our consolidated statements of income within Other gains and (losses).
Notes to Consolidated Financial Statements
Other Accounting Policies
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. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.
At December 31, 2023 and 2022, we considered 21 and 16 entities to be VIEs, respectively, of which we consolidated 15 and 11, 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):