Correspondence
Mark J. DeCesaris
Chief Financial Officer
TEL +1-212-492-1140
FAX +1-212-492-8922
mdecesaris@wpcarey.com
July 8, 2011
Mr. Kevin Woody
Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
|
|
|
Re:
|
|
W. P. Carey & Co. LLC
Form 10-K for the year ended December 31, 2010
Filed February 25, 2011
File No. 1-13779 |
Dear Mr. Woody:
Set forth below are the responses to the comments of the Staff of the Division of Corporation
Finance (the Staff) contained in the Staffs letter dated June 23, 2011 with respect to the Form
10-K for the year ended December 31, 2010 filed by W. P. Carey & Co. LLC (the Company). Please
note that for the Staffs convenience, the Company has recited each of the Staffs comments in
bold, and provided the Companys response to each comment immediately thereafter.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 2
Form 10-K for the fiscal year ended December 31, 2010
Item 1. Business, page 2
1. |
|
We note that, in 2010, you made investments for your owned real estate portfolio totaling
$76.8 million. In future Exchange Act periodic reports, to the extent you have material
acquisitions or dispositions in the period, please provide capitalization rate disclosure.
Please also include a clear description of how you calculate NOI and purchase price for this
purpose. |
The Company invests primarily in commercial properties that are triple net leased to single
corporate tenants. Such arrangements require each tenant to pay substantially all of the costs
associated with operating and maintaining the property. Accordingly, in connection with the
Companys real estate portfolio, the Company calculates net
operating income (NOI) for each property as the rent that
it receives from a tenant, less debt service for any financing obtained for the Companys
investment in such property. Along these lines, the capitalization rate for an investment is a
function of (i) the purchase price that the Company is willing to pay for the investment,
coupled with (ii) the risk that the Company is taking in such investment.
To the extent that the Company makes a material acquisition or disposition in any future
period, the Company will revise its disclosure to more clearly describe how it determines the
capitalization rate, NOI and the purchase price with respect to any such an event.
2. |
|
In future Exchange Act periodic reports, to the extent practicable, please quantify the
percentage of leases that have escalators and provide a range of escalation. |
The Company notes the Staffs comment. Going forward, beginning with its third quarter filing
for fiscal 2011, the Company will revise, to the extent practicable, its disclosures to include
a quantification of the percentage of leases that have escalators and a range of escalation.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 3
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations,
pages 22
3. |
|
Please advise us whether management considers funds from operations (FFO) to be a key
performance indicator. We may have further comment. |
In evaluating the Companys performance, management considers various performance metrics
that, in managements opinion, are important to investors. Such metrics include funds from
operations, as adjusted, as well as various other metrics that are
not defined by generally accepted accounting principles in the United
States (GAAP) such as adjusted cash flow
from operating activities.
Under the Companys existing business model, several of its investments are co-owned via joint
venture agreements between the Company and the CPA® REITs that it manages. In
accordance with GAAP, such investments are accounted for under the equity method of accounting.
Management believes that traditional GAAP metrics such as net income and cash flow from
operations do not fully allow investors to evaluate the performance of the Company or
understand the true nature of the Companys cash flows. Accordingly, the Company provides
various non-GAAP metrics, including funds from operations, as adjusted, to investors through
quarterly supplemental reports furnished via filings on Form 8-K.
4. |
|
In future Exchange Act periodic reports, please expand your disclosure of your leasing
activities for the reported period to include a discussion of the volume of new or renewed
leases, tenant improvement costs, leasing commissions, tenant concessions, and a comparison of
new rents on renewed leases to prior rent. |
The Company notes the Staffs comment. Going forward, beginning with its third quarter filing
for fiscal 2011, the Company will expand its disclosure of leasing activities to include a discussion of the volume of new or renewed leases, tenant improvement
costs, leasing commissions, tenant concessions, and a comparison of new rents on renewed leases
to prior rent.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 4
Lease revenues, page 32
5. |
|
In future Exchange Act periodic reports, please disclose the impact of any tenant
concessions, such as free rent, as well as tenant expense reimbursements, on annual rental
income. |
The Company notes the Staffs comment. While the Company does not generally provide for tenant
concessions in its leases, going forward, beginning with its third quarter filing for fiscal
2011, the Company will disclose, to the extent applicable and material, the impact of any such
concession, such as free rent, as well as tenant expense reimbursements, on annual rental
income.
Financial Statements
Note 2. Summary of Significant Accounting Policies
Basis for Consolidation, page 56
6. |
|
We note that you relied upon a limited-scope deferral and applied your consolidation analysis
related to CPA REITs in accordance with previously issued guidance on VIEs. Please provide us
with an analysis that explains how you were able to reach the conclusion that you met all of
the conditions to qualify for the limited-scope deferral. |
ASC
946-10-15-3 is explicit that, while real estate investment trusts
(REITs) may
have attributes similar to investment companies, the guidance in ASC 946 does not apply to
REITs as the accounting for REITs is covered by other sections of GAAP. Further, ASC 810-10-65-2 identifies a mortgage real estate investment fund as an
example of an entity that may meet the conditions for the limited scope deferral. As further
discussed below, the Company is of the opinion that its relationship with the CPA®
REITs satisfies the requirements outlined in paragraphs (a) through (d) of ASC 946-10-15-2,
Financial Services Investment Companies, and thus qualifies for the limited-scope deferral
provided in the guidance:
|
a) |
|
Investment activity: The investment companys primary business activity
involves investing its assets, usually in the securities of other entities not under
common management, for current income, appreciation, or both. |
As outlined in their existing public disclosures, the CPA® REITs invest
primarily for current income, and to a lesser degree, for capital appreciation. Along these
lines, substantially all of the CPA® REITs investments consist of direct
ownership in real estate properties, with a smaller portion made up of real estate related
assets such as commercial mortgage backed securities and other real estate related
investments. The remaining portion of the CPA® REITs investment portfolio
consists of money market instruments, cash and other cash equivalents. Thus, the
CPA® REITs stated business purpose, to invest primarily for current income, and
to a lesser degree, for capital appreciation, is achieved through a portfolio comprised of
diversified real estate investments.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 5
While the investments of the CPA® REITs are often managed by the Company, the
Company is of the opinion that there is a distinction to be made between managing an
operating company, on the one hand, and property management, on the other. Shared management
of distinct operating companies implies a centralization of operating functions such as
production, marketing and human resources, where the goal is to
provide synergies, thus
reducing overall costs. Contrastingly, property management involves the day to day
activities required to maintain the value of a real estate investment. Real estate
investors, such as the Company, typically engage property managers to maintain the physical
property, enhance the tenant base and perform administrative recordkeeping services.
The CPA® REITs properties are managed by an affiliate of the Company, whose
services are provided at market rates and are limited to basic administrative activities
given the triple net lease structure, which, as stated above in response to the Staffs
first comment, generally requires that each tenant operate and maintain the property. Thus,
the management services performed for the CPA® REITs are less properly
categorized as property management services (because as previously stated, under the terms of the
triple net leases, such services are generally performed by the tenant) and more properly
categorized as asset management services aimed at protecting the CPA® REITs
investments.
|
b) |
|
Unit ownership: Ownership in the investment company is represented by units
of investments, such as shares of stock or partnership interests, to which proportionate
shares of net assets can be attributed. |
|
|
|
|
The ownership of the
CPA® REITs is in the form of shares of common stock, which
entitle investors to their proportionate share of net assets. |
|
c) |
|
Pooling of funds: The funds of the investment companys owners are pooled to
avail owners of professional investment management. |
The funds invested in the CPA® REITs are pooled in order to provide investors
with professional investment management through the Companys wholly-owned subsidiary,
Carey Asset Management Corp. The shares of common stock in the CPA® REITs are
quite widely held given that the CPA® REITs have a relatively low minimum
investment amount (generally $2,000).
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 6
|
d) |
|
Reporting entity: The investment company is the primary reporting
entity. |
The CPA® REITs are the primary reporting entities for their respective
investors.
Further, the Company does not have any express or implied obligations to fund the losses of
any CPA® REIT, nor does the Company provide any form of guarantee to the
CPA® REITs. Lastly, the CPA® REITs are not securitization entities,
asset-backed financing entities, or entities formerly considered qualifying special-purpose
entities.
Note 6. Equity Investments in Real Estate and CPA REITS
Interests in Unconsolidated Real Estate Investments, page 69
7. |
|
We note that you have investment interests in properties leased to U.S. Airways Group and
Consolidated Systems which are accounted for under the equity method where your interests are
75% and 60% of the respective properties. Please tell us how you determined that equity method
was the appropriate accounting treatment for these properties which you have indicated by
footnote are tenant-in-common interests. In your response, please tell us if the remaining
interests in these properties are held by affiliates and tell us how you make the policy
distinction between determining whether to consolidate or treat under the equity method as you
have described in paragraph 4 on page 64. |
The Companys investments in the properties leased to U.S. Airways Group (the remainder of
which is owned by a third party) and Consolidated Systems (the remainder of which is owned by
one of the CPA® REITs) are investments in real property owned by undivided interests
subject to joint control by the owners. The Company accounts for such investments in accordance
with guidance in ASC 970-323-25-12, Real Estate General, which requires that real estate
ventures with
ownership in the form of undivided interests that are subject to some level of joint control be
presented in the same manner as investments in non-controlled partnerships.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 7
8. |
|
Please tell us and disclose the basis for recording your investment in real estate leased by
Federal Express and Amylin Pharmaceuticals below zero. |
The negative investment balances in the aforementioned investments were primarily attributable
to distributions received by the investors from the proceeds of a non-recourse financing in
excess of the carrying value of these investments.
Distributing cash to investors in amounts that exceed the investors basis in an investment
often occurs with regard to real estate investments given the long-term appreciation of the
underlying asset combined with a refinancing transaction. Additionally, this result can often
stem from recurring break-even or GAAP losses combined with positive cash from operations being
distributed.
For purposes of evaluating whether its investment basis should be recorded below zero, the
Company sought guidance from ASC 323-10-35-19, Investments Equity Method and Joint Ventures.
This provision states that [t]he investor ordinarily should discontinue applying the equity
method when the investment (and net advances) is reduced to zero and should not provide for
additional losses unless the investor has guaranteed obligations of the investee or is
otherwise committed to provide further financial support for the investee. Thus, while
stating a general presumption that losses should not be recognized in excess of the investment,
the guidance acknowledges that recognition of losses in excess of the amount of the investment
is appropriate in some circumstances and that the recognition of such excess losses is not
limited to the situations in which the investor is committed to absorb such losses because of
its guarantee of investee obligations.
Additionally, ASC 323-10-35-21 expressly states that losses should be recognized in excess of
investment when the imminent return to profitable operations by an investee appears to be
assured. In connection with the Companys investments in the properties leased by Federal
Express and Amylin Pharmaceuticals, the Company considered the respective operating
circumstances of these investments and concluded that, because abandonment is unlikely, cash
distributions received in excess of its investments should be recognized as such amounts
represent the realization of proceeds received from a non-recourse financing associated with
the appreciated value of the real estate (that has not been recognized for GAAP purposes).
Furthermore, given that the
negative investment was generated primarily by a refinancing of the underlying assets (due to
their appreciation in value), the Company believes that these are profitable operations and that
abandonment of its investment is unlikely.
Mr. Kevin Woody
United States Securities and Exchange Commission
July 8, 2011
Page 8
For the foregoing reasons, the Company believes that it is appropriate to reduce its investment
below zero.
The Company acknowledges that:
|
|
|
the Company is responsible for the adequacy and accuracy of the disclosure in the
filing; |
|
|
|
|
Staff comments or changes to disclosure in response to Staff comments do not foreclose
the Commission from taking any action with respect to the filing; and |
|
|
|
|
the Company may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United States. |
We thank the Staff for its attention to this filing. If you have any questions regarding our
response, please contact me at 212-492-1140.
|
|
|
|
|
|
Sincerely,
|
|
|
/s/ Mark J. DeCesaris
|
|
|
Mark J. DeCesaris |
|
|
Chief Financial Officer |
|
Enclosures
cc: Howard Efron