W. P. Carey Inc. (WPC) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. This item also provides our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. The discussion also breaks down the financial results of our business by segment to provide a better understanding of how these segments and their results affect our financial condition and results of operations.

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)

__________

(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

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(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)

__________

(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)

Portfolio Diversification by Property Type

(in thousands, except percentages)

__________

(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)

__________

(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):

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):

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):

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):

__________

(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):

__________

(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):

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):

__________

(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):

____________

(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):

FFO and AFFO from Real Estate were as follows (in thousands):

FFO and AFFO from Investment Management were as follows (in thousands):

__________

(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.