Merger with CPA^®:16 – Global

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

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

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

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

Preliminary Purchase Price Allocation

We accounted for the CPA^®:16 Merger as a business combination under the acquisition method of accounting. After consideration of all applicable factors pursuant to the business combination accounting rules, we were considered the “accounting acquirer” due to various factors, including the fact that our stockholders held the largest portion of the voting rights in us upon completion of the CPA^®:16 Merger. Costs of $30.4 million related to the CPA^®:16 Merger were expensed as incurred and classified within Merger and acquisition expenses in the consolidated financial statements for the six months ended June 30, 2014. Costs of $5.0 million were incurred and classified within Merger and acquisition expenses in the consolidated financial statements for the year ended December 31, 2013. In addition, CPA^®:16 – Global incurred a total of $10.6 million of merger expenses between 2013 and 2014.

The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at January 31, 2014. The fair values of the lease intangibles acquired were measured in a manner consistent with our purchase price allocation policy described in our 2013 Annual Report. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the total consideration by $1.9 million, and also increased total identifiable net assets by $2.3 million, and increased amounts attributable to noncontrolling interests by $0.3 million, resulting in a $0.1 million decrease in goodwill. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in the acquisition, based on the current best estimate of management. We are in the process of finalizing our assessment of the fair value of the assets acquired and liabilities assumed. Investments in real estate, net investments in direct financing leases, equity investments in real estate, non-recourse debt and amounts attributable to noncontrolling interests were based on preliminary valuation data and estimates. Accordingly, the fair value of these assets and liabilities and the impact to goodwill are subject to change.

(in thousands)



	Initially Reported at March 31, 2014			Measurement Period Adjustments			As Revised at June 30, 2014
Total Consideration
Fair value of W. P. Carey shares of common stock issued	$	1,815,521		$	—		$	1,815,521
Cash consideration for fractional shares	1,338			—			1,338
Merger Consideration	1,816,859			—			1,816,859
Fair value of our equity interest in CPA^®:16 – Global prior to the CPA^®:16 Merger	347,164			1,284			348,448
Fair value of our equity interest in jointly-owned investments with CPA^®:16 – Global prior to the CPA^®:16 Merger	172,720			—			172,720
Fair value of noncontrolling interests acquired	(278,829		)	642			(278,187		)
	$	2,057,914		$	1,926		$	2,059,840
Assets Acquired at Fair Value
Net investments in properties	$	1,969,274		$	901		$	1,970,175
Net investments in direct financing leases	538,607			(382		)	538,225
Equity investments in real estate	74,367						74,367
Assets held for sale	132,951			464			133,415
In-place lease intangible assets	553,479			244			553,723
Above-market rent intangible assets	395,663			161			395,824
Cash and cash equivalents	65,429			—			65,429
Other assets, net	82,032			—			82,032
	3,811,802			1,388			3,813,190
Liabilities Assumed at Fair Value
Non-recourse debt and line of credit	(1,768,288		)	—			(1,768,288		)
Below-market rent and other intangible liabilities	(57,209		)	(360		)	(57,569		)
Accounts payable, accrued expenses and other liabilities	(118,389		)	—			(118,389		)
Deferred tax liability	(59,629		)	1,282			(58,347		)
	(2,003,515		)	922			(2,002,593		)

Total identifiable net assets	1,808,287			2,310			1,810,597
Amounts attributable to noncontrolling interests	(99,345		)	(288		)	(99,633		)
Goodwill	348,972			(96		)	348,876
	$	2,057,914		$	1,926		$	2,059,840

Goodwill

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

The fair value of the 30,729,878 shares of our common stock issued in the CPA^®:16 Merger as part of the consideration paid for CPA^®:16 – Global of $1.8 billion was derived from the closing market price of our common stock on the acquisition date. As required by GAAP, the fair value related to the assets acquired and liabilities assumed, as well as the shares exchanged, has been computed as of the date we gained control of CPA^®:16 – Global, which was the closing date of the CPA^®:16 Merger, in a manner consistent with the methodology described above.

Goodwill acquired in the CPA^®:16 Merger is not deductible for income tax purposes.

Equity Investments and Noncontrolling Interests

During the first quarter of 2014, we recognized a gain on change in control of interests of approximately $73.1 million, which was the difference between the carrying value of approximately $274.1 million and the preliminary estimated fair value of approximately $347.2 million of our previously-held equity interest in 38,229,294 shares of CPA^®:16 – Global’s common stock. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the estimated fair value of our previously-held equity interest in shares of CPA^®:16 – Global’s common stock by $1.3 million, resulting in an increase of $1.3 million in Gain on change in control of interests. In accordance with Accounting Standard Codification, or ASC, 805-10-25, we did not record the measurement period adjustments during the three months ended June 30, 2014. Rather, such amounts will be reflected in all future financial statements that include the three months ended March 31, 2014.

The CPA^®:16 Merger also resulted in our acquisition of the remaining interests in nine investments in which we already had a joint interest and accounted for under the equity method. Upon acquiring the remaining interests in these investments, we owned 100% of these investments and thus accounted for the acquisitions of these interests utilizing the purchase method of accounting. Due to the change in control of the nine jointly-owned investments that occurred, we recorded a gain on change in control of interests of approximately $30.2 million, which was the difference between our carrying values and the preliminary estimated fair values of our previously-held equity interests on the acquisition date of approximately $142.5 million and approximately $172.7 million, respectively. Subsequent to the CPA^®:16 Merger, we consolidate these wholly-owned investments. During the six months ended June 30, 2014, one of these investments was sold and is included in Income from discontinued operations, net of tax in the consolidated financial statements.

In connection with the CPA^®:16 Merger, we also acquired the remaining interests in 12 less-than-wholly-owned investments that we already consolidate and recorded an adjustment to additional paid-in-capital of approximately $42.0 million related to the difference between our carrying values and the preliminary estimated fair values of our previously-held noncontrolling interests on the acquisition date of approximately $236.8 million and approximately $278.2 million, respectively. During the second quarter of 2014, we identified certain measurement period adjustments that impacted the provisional accounting, which increased the fair value of our previously-held noncontrolling interests on the acquisition date by $0.6 million, resulting in a reduction of $0.6 million to additional paid-in-capital.

The preliminary fair values of our previously-held equity interests and our noncontrolling interests are based on the estimated fair market values of the underlying real estate and related mortgage debt, both of which were determined by management relying in part on a third party. Real estate valuation requires significant judgment. We determined the significant inputs to be Level 3 with ranges for the entire portfolio as follows:


•	Discount rates applied to the estimated net operating income of each property ranged from approximately 4.75% to 15.25%;


•	Discount rates applied to the estimated residual value of each property ranged from approximately 4.75% to 14.00%;


•	Residual capitalization rates applied to the properties ranged from approximately 5.00% to 12.50%;


•	The fair market value of the property level debt was determined based upon available market data for comparable liabilities and by applying selected discount rates to the stream of future debt payments; and


•	Discount rates applied to the property level debt cash flows ranged from approximately 1.80% to 8.75%.

Other than for two investments, no illiquidity adjustments to the equity interests or noncontrolling interests were deemed necessary as the investments were generally held with affiliates and did not allow for unilateral sale or financing by any of the affiliated parties. With respect to the two investments, a discount of 5% was applied in deriving the value of such interest, reflecting the terms of the third-party jointly-owned investments in which the real estate interest is held. The discount and/or capitalization rates utilized in the appraisals also reflect the illiquidity of real estate assets. Lastly, there were no control premiums contemplated as the investments were in individual, or a portfolio of, underlying real estate and debt, as opposed to a business operation.

Pro Forma Financial Information (Unaudited)

The following unaudited consolidated pro forma financial information has been presented as if the CPA^®:16 Merger had occurred on January 1, 2013 for the three and six months ended June 30, 2014 and 2013. The pro forma financial information is not necessarily indicative of what the actual results would have been had the CPA^®:16 Merger occurred on that date, nor does it purport to represent the results of operations for future periods.

(in thousands, except share and per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Pro forma total revenues	$	252,907		$	185,568		$	487,032		$	362,085

Pro forma net income from continuing operations, net of tax	$	40,469		$	41,225		$	78,409		$	113,700
Pro forma net income attributable to noncontrolling interests	(2,344		)	(1,807		)	(2,916		)	(2,536		)
Pro forma net loss (income) attributable to redeemable noncontrolling interest	111			(349		)	(151		)	1,602
Pro forma net income from continuing operations, net of tax attributable to W. P. Carey	$	38,236		$	39,069		$	75,342		$	112,766

Pro forma earnings per share: ^(a)
Basic	$	0.38		$	0.39		$	0.75		$	1.13
Diluted	$	0.38		$	0.39		$	0.75		$	1.12

Pro forma weighted-average shares: ^(b)
Basic	100,236,362			99,136,649			99,976,714			99,505,986
Diluted	100,995,225			100,223,780			100,875,283			100,600,727

___________

(a)

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


(b)	The pro forma weighted average shares outstanding for the three and six months ended June 30, 2014 and 2013 were determined as if the 30,729,878 shares of our common stock issued to CPA^®:16 – Global stockholders in the CPA^®:16 Merger were issued on January 1, 2013.