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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-13779
-------------------------
W. P. CAREY & CO. LLC
("WPC")
(FORMERLY CAREY DIVERSIFIED LLC)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3912578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |.
W. P. Carey & Co. LLC has 36,619,430 Listed Shares, no par value
outstanding at August 11, 2003.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2003 and 2002 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 5-6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-27
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. - Controls and Procedures 28
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 29
Item 6. - Exhibits and Reports on Form 8-K 29
Signatures 30
*The summarized condensed consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
- 1 -
W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
June 30, 2003 December 31, 2002
(Unaudited) (Note)
------------- -----------------
ASSETS:
Real estate leased to others:
Real estate leased to others under the operating method, net of
accumulated depreciation of $46,959 and $41,716 at June 30,
2003 and December 31, 2002 $ 428,365 $ 432,556
Net investment in direct financing leases 184,314 189,339
--------- ---------
Real estate leased to others 612,679 621,895
Operating real estate, net of accumulated depreciation of $1,665 at
December 31, 2002 -- 4,056
Real estate under construction and redevelopment 3,681 3,581
Equity investments 63,887 67,742
Assets held for sale 23,180 22,158
Cash and cash equivalents 14,884 21,304
Due from affiliates 46,611 40,241
Goodwill 49,874 49,874
Intangible assets, net of accumulated amortization of $21,887 and
$18,543 at June 30, 2003 and December 31, 2002 41,902 44,567
Other assets 21,908 18,106
--------- ---------
Total assets $ 878,606 $ 893,524
========= =========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 183,830 $ 186,049
Notes payable 28,000 49,000
Dividends payable 15,848 15,486
Accounts payable and accrued expenses 12,829 17,931
Due to affiliates 3,428 12,874
Accrued taxes 8,937 5,285
Deferred taxes, net 23,382 19,763
Other liabilities 16,236 14,764
--------- ---------
Total liabilities 292,490 321,152
--------- ---------
Minority interest 1,719 1,484
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 36,599,816 and 35,944,110 shares issued
and outstanding at June 30, 2003 and December 31, 2002 705,956 690,594
Dividends in excess of accumulated earnings (113,304) (111,970)
Unearned compensation (7,735) (5,671)
Accumulated other comprehensive loss (520) (2,065)
--------- ---------
Total members' equity 584,397 570,888
--------- ---------
Total liabilities, minority interest and members' equity $ 878,606 $ 893,524
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited consolidated financial statements at that date.
- 2 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Management income from affiliates $ 17,179 $ 18,598 $ 42,971 $ 32,083
Rental income 11,599 11,813 23,452 23,671
Interest income from direct financing leases 5,204 5,550 10,328 11,390
Other income 1,273 208 4,006 524
Other interest income 646 299 1,206 834
Revenue from other business operations 428 69 600 69
-------- -------- -------- --------
36,329 36,537 82,563 68,571
-------- -------- -------- --------
Expenses:
Interest 3,902 4,071 7,825 8,168
Depreciation 2,694 2,631 5,416 5,116
Amortization 1,756 2,310 3,911 4,620
General and administrative 10,821 9,330 22,881 16,675
Property expenses 1,434 1,054 4,101 2,854
Impairment charge on investments -- -- 272 --
-------- -------- -------- --------
20,607 19,396 44,406 37,433
-------- -------- -------- --------
Income from continuing operations before
minority interest, equity investments, gain
on sale and income taxes 15,722 17,141 38,157 31,138
Minority interest in (income) loss (58) 29 (91) 44
Income from equity investments 1,154 442 2,072 629
Gains on foreign currency transactions and sale
of securities 497 -- 497 94
-------- -------- -------- --------
Income from continuing operations before
income taxes and gain on sale of real estate 17,315 17,612 40,635 31,905
Provision for income taxes (3,338) (4,410) (10,327) (7,280)
-------- -------- -------- --------
Income from continuing operations before gain
on sale of real estate 13,977 13,202 30,308 24,625
-------- -------- -------- --------
Discontinued operations:
Income from operations of discontinued
properties 437 3,564 1,215 4,721
Gain (loss) on sale of real estate (10) (34) 154 (34)
Impairment charge on properties held for sale (1,430) (4,321) (1,430) (4,321)
-------- -------- -------- --------
(Loss) income from discontinued operations (1,003) (791) (61) 366
-------- -------- -------- --------
Gain on sale of real estate -- 11,181 -- 12,330
-------- -------- -------- --------
Net income $ 12,974 $ 23,592 $ 30,247 $ 37,321
======== ======== ======== ========
--Continued--
- 3 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share and share amounts)
(continued)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic earnings per share:
Earnings from continuing operations $ .38 $ .68 $ .83 $ 1.04
(Loss) earnings from discontinued operations (.03) (.02) -- .01
----------- ----------- ----------- -----------
Net income $ .35 $ .66 $ .83 $ 1.05
=========== =========== =========== ===========
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .67 $ .81 $ 1.03
(Loss) earnings from discontinued operations (.03) (.02) -- .01
----------- ----------- ----------- -----------
Net income $ .34 $ .65 $ .81 $ 1.04
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 36,519,037 35,588,117 36,440,831 35,440,294
=========== =========== =========== ===========
Diluted 37,758,129 36,142,003 37,471,475 36,043,107
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income: $ 12,974 $ 23,592 $ 30,247 $ 37,321
-------- -------- -------- --------
Other comprehensive income:
Change in unrealized gain on marketable
securities 1,503 (12) 840 (15)
Foreign currency translation adjustment 210 1,055 705 888
-------- -------- -------- --------
Other comprehensive income 1,713 1,043 1,545 873
-------- -------- -------- --------
Comprehensive income $ 14,687 $ 24,635 $ 31,792 $ 38,194
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 30,247 $ 37,321
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations, including gain on sale (1,369) (4,687)
Depreciation and amortization 9,746 10,147
Gain on sale of real estate and securities, net -- (12,424)
Minority interest in income (loss) 91 (44)
Straight-line rent adjustments and amortization of deferred income (102) (336)
Equity income in excess of distributions (28) (35)
Management income received in shares of affiliates (8,932) (6,675)
Costs paid by issuance of shares 106 119
Amortization of unearned compensation 1,480 1,465
Impairment charges on securities and properties held for sale 1,702 4,321
Increase in deferred income taxes 3,328 4,657
Tax benefit - share incentive plans 2,385 1,205
Increase in structuring fees receivable (7,149) (4,800)
Deferred acquisition fees received 1,495 916
Net change in other operating assets and liabilities (4,179) (4,485)
-------- --------
Net cash provided by continuing operations 28,821 26,665
Net cash provided by discontinued operations 1,413 3,122
-------- --------
Net cash provided by operating activities 30,234 29,787
-------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 8,095 1,614
Proceeds from sale of property and investments 8,958 34,540
Release of funds from escrow in connection with the sale of a property -- 9,366
Cash acquired on acquisition of subsidiary 1,300
Purchases of real estate -- (504)
Additional capital expenditures (925) (538)
Payment of deferred acquisition fees (524) (524)
-------- --------
Net cash provided by investing activities 16,904 43,954
-------- --------
Cash flows from financing activities:
Dividends paid (31,219) (29,949)
Proceeds from issuance of shares, net 4,455 6,505
Proceeds from mortgages payable and note payable 33,000 33,000
Payments of mortgage principal (4,324) (4,296)
Prepayments of mortgage principal and note payable (55,615) (73,564)
Payment of financing costs -- (7)
Payment of accrued preferred distributions -- (1,423)
-------- --------
Net cash used in financing activities (53,703) (69,734)
-------- --------
Effect of exchange rate changes on cash 145 29
-------- --------
Net (decrease) increase in cash and cash equivalents (6,420) 4,036
Cash and cash equivalents, beginning of period 21,304 8,870
-------- --------
Cash and cash equivalents, end of period $ 14,884 $ 12,906
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 5 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - (Continued)
(in thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in June
2000, the Company has an obligation to issue up to an additional
2,000,000 shares over four years if specified performance criteria
are achieved. As of June 30, 2003, 1,400,000 shares have been
issued. For the year ended December 31, 2002, one of the criteria
was achieved, and 400,000 shares were issued during the six-month
period ended June 30, 2003. For the year ended December 31, 2001,
all of the criteria were achieved, and 500,000 shares were issued
during the six-month period ended June 30, 2002. The cost
attributable to such shares of $8,910 and $10,440, for 2002 and
2001, respectively, was included in due to affiliates and goodwill
in the year achieved. During the periods ended June 30, 2003 and
2002, the amounts were initially recorded in due to affiliates and
were reflected as members' equity upon issuance of the shares.
B. In connection with the redemption of shares owned by William P.
Carey, Chairman of the Company, in W.P. Carey International LLC
("WPCI") during the six-month period ended June 30, 2003, the
Company's ownership interest in WPCI increased from 10% to 100%. As
a result of consolidating its interest in WPCI, the Company acquired
assets and liabilities of WPCI, representing a 90% ownership
interest, as follows: (see Note 3)
Intangible assets 679
Equity investments 324
Due to affiliates (including $1,898 due to
William P. Carey) (2,559)
Other assets and liabilities, net 256
-------
Net cash acquired $ 1,300
=======
In connection with the redemption, WPCI made a distribution to the
Company of 54,765 shares which the Company had previously
contributed to purchase its interest in WPCI.
C. As partial consideration for the sale of a property in 2003, the
Company received notes receivable with a fair value of $2,250.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 6 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share and per share amounts)
Note 1: Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
The accompanying condensed consolidated financial statements include the
accounts of Corporate Property Associates 16 Incorporated ("CPA(R):16"), which
was formed on June 5, 2003 and consists primarily of $200 in cash. As of June
30, 2003, the Company owns 20,000 shares of CPA(R):16 representing 100% of the
outstanding common stock of CPA(R):16. CPA(R):16 has filed a registration
statement with the United States Securities and Exchange Commission for a public
offering to sell up to 100,000,000 shares of common stock. Upon issuance of
common stock by CPA(R):16, the Company expects to own less than 50% of
CPA(R):16's voting stock, and, therefore, will account for its investment in
CPA(R):16 under the equity method of accounting at such time.
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
and six-month periods ended June 30, 2003 and 2002 were calculated as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Income from continuing operations before gain
on sale of real estate $ 13,977 $ 13,202 $ 30,308 $ 24,625
Gain on sale of real estate -- 11,181 -- 12,330
------------ ------------ ------------ ------------
Income from continuing operations $ 13,977 $ 24,383 $ 30,308 $ 36,955
(Loss) income from discontinued operations (1,003) (791) (61) 366
------------ ------------ ------------ ------------
Net income $ 12,974 $ 23,592 $ 30,247 $ 37,321
============ ============ ============ ============
Weighted average shares - basic 36,519,037 35,588,117 36,440,831 35,440,294
Effect of dilutive securities: Stock options 1,239,092 553,886 1,030,644 602,813
------------ ------------ ------------ ------------
Weighted average shares - diluted 37,758,129 36,142,003 37,471,475 36,043,107
============ ============ ============ ============
Basic earnings per share:
Earnings from continuing operations $ .38 $ .68 $ .83 $ 1.04
(Loss) earnings from discontinued operations (.03) (.02) -- .01
------------ ------------ ------------ ------------
Net income $ .35 $ .66 $ .83 $ 1.05
============ ============ ============ ============
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .67 $ .81 $ 1.03
(Loss) earnings from discontinued operations (.03) (.02) -- .01
------------ ------------ ------------ ------------
Net income $ .34 $ .65 $ .81 $ 1.04
============ ============ ============ ============
- 7 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 3. Transactions with Related Parties:
The Company earns fees as the Advisor to four real estate investment trusts,
Carey Institutional Properties Incorporated ("CIP(R)"), Corporate Property
Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates 14
Incorporated ("CPA(R):14") and Corporate Property Associates 15 Incorporated
("CPA(R):15") (collectively, the "CPA(R) REITs"). Through April 30, 2002, the
Company also earned fees as Advisor to Corporate Property Associates 10
Incorporated ("CPA(R):10"). Effective May 1, 2002, CPA(R):10 was merged into
CIP(R).
Under the advisory agreements with the CPA(R) REITs, the Company performs
various services, including but not limited to the day-to-day management of the
CPA(R) REITs and transaction-related services in connection with structuring and
negotiating real estate acquisitions and mortgage financing. In addition, the
Company's broker-dealer subsidiary earns fees in connection with the "best
efforts" public offering of CPA(R): 15. The Company earns its asset management
fee at a per annum rate of 1/2 of 1% of Average Invested Assets, as defined in
the Advisory Agreements, for each CPA(R) REIT and, based upon specific
performance criteria earns a performance fee of 1/2 of 1% of Average Invested
Assets. Fees for transaction-related services are only earned for completed
transactions. The Company is reimbursed for the cost of personnel provided for
the administration of the CPA(R) REITs.
For the three-month periods ended June 30, 2003 and 2002, the Company earned
asset-based fees and reimbursements of $13,581 and $11,052, respectively, and
transaction fees of $3,598 and $7,546 respectively. For the six-month periods
ended June 30, 2003 and 2002, the Company earned asset-based fees and
reimbursements of $25,911 and $18,786, respectively, and transaction fees of
$17,060 and $13,297, respectively.
The Company had not recognized any performance fees under its Advisory Agreement
with CPA(R):10 since the Company's management operations were acquired in June
2000. In April 2002, CPA(R):10 met its "preferred return" at which time the
performance criterion was met and the Company earned a performance fee of
$1,463, including $267 relating to 2002. In addition, the Company earned
disposition fees of $248 from CPA(R):10, representing a percentage of sales
proceeds from CPA(R):10 property sales for the period from June 28, 2000 through
April 30, 2002, the date that CPA(R):10 and CIP(R) merged.
Prior to April 1, 2003, the Company owned a 10% interest in W.P. Carey
International LLC ("WPCI"), a company that structures net lease transactions on
behalf of the CPA(R) REITs outside of the United States of America. The
remaining 90% interest in WPCI was owned by William Polk Carey ("Carey"),
Chairman of the Company. The Company's Board of Directors approved a transaction
which resulted in the Company's acquisition of 100% of WPCI through the
redemption of Carey's interest on April 1, 2003. WPCI distributed 492,881 shares
of the Company and has an obligation to distribute $1,898 of cash to Carey,
equivalent to his contributions to WPCI. The Company accounted for the
transaction as a purchase.
Based on an agreement in principle which existed prior to the redemption of
Casey's shares, on June 30, 2003, WPCI granted an incentive award to certain
officers of WPCI consisting of restricted shares and options for WPCI common
stock. Both the options and restricted stock will vest ratably over five years.
The options are exercisable for a period of ten years. Based on a valuation of
WPCI as of June 30, 2003, the awards have a fair value of $2,485 which has been
included in minority interest as a component of other liabilities and unearned
compensation as a component of shareholders' equity in accompanying condensed
consolidated financial statements. The unearned compensation will be amortized
as an expense over the vesting period. The awards will be accounted for as a
variable plan.
As a result of the transaction described above, the Company through its
approximate 87% controlling ownership interest is consolidating WPCI. Prior to
the redemption, the Company accounted for its investment in WPCI under the
equity method of accounting. The minority owners may redeem their interests,
subject to their satisfying certain conditions, starting in December 2012. Any
redemption will be subject to an independent valuation of WPCI. As a result of
this transaction, the Company through WPCI has acquired exclusive rights to
structure net lease transactions outside of the United States of America on
behalf of the CPA(R) REITs.
- 8 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 4. Lease Revenues:
The Company's real estate operations consist of the investment in and the
leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the six-month periods ended June 30, 2003 and
2002 are as follows:
2003 2002
---- ----
Per Statements of Income:
Rental income $ 23,452 $ 23,671
Interest income from direct financing leases 10,328 11,390
Adjustment:
Share of leasing revenues applicable to minority interests (631) (376)
Share of leasing revenues from equity investments 4,091 3,440
-------- --------
$ 37,240 $ 38,125
======== ========
For the six months ended June 30, 2003 and 2002, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 90 lessees. A summary of net leasing revenues is as
follows:
2003 % 2002 %
---- - ---- -
Dr Pepper Bottling Company of Texas $ 2,133 6% 2,195 6%
Detroit Diesel Corporation 2,079 6 2,079 5
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 1,798 5 2,069 5
Bouygues Telecom, S.A. (b) 1,568 4 1,412 4
Federal Express Corporation (a) 1,447 4 1,429 4
Orbital Sciences Corporation 1,328 4 1,328 3
America West Holdings Corp. 1,319 4 1,269 3
Quebecor Printing, Inc. 1,306 3 1,281 3
AutoZone, Inc. 1,183 3 1,169 3
Checkfree Holdings Corporation Inc. (a) 1,064 3 1,054 3
Sybron International Corporation 1,043 3 1,082 3
Livho, Inc. 900 2 1,284 3
Unisource Worldwide, Inc. 855 2 866 2
Lockheed Martin Corporation 853 2 978 3
BE Aerospace, Inc. 830 2 -- --
CSS Industries, Inc. 825 2 829 2
Information Resources, Inc. (a) 822 2 833 2
Sybron Dental Specialties Inc. 807 2 807 2
Sprint Spectrum, L.P. 712 2 712 2
Faurecia Exhaust Systems, Inc. 646 2 850 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 645 2 628 2
AT&T Corporation 630 2 630 2
United States Postal Service 617 2 617 2
BellSouth Telecommunications, Inc. 612 2 612 2
Brodart, Co. 573 2 760 2
Hologic, Inc. (a) 568 2 -- --
Cendant Operations, Inc. 537 1 537 1
Anthony's Manufacturing Company, Inc. 510 1 510 1
Other (c) 9,030 23 10,305 28
------- --- ------- ---
$37,240 100% $38,125 100%
======= === ======= ===
(a) Represents the Company's proportionate share of lease revenue from its
equity investment.
(b) Net of proportionate share applicable to its minority interest owners.
(c) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to minority interest
owners.
- 9 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
For the six-month period ended June 30, 2003, lessees were responsible for
approximately $3,634 of real estate taxes on behalf of the Company.
Note 5. Equity Investments:
The Company owns interests in the CPA(R) REITs. The Company's interests in the
CPA(R) REITs are accounted for under the equity method due to the Company's
ability to exercise significant influence as the Advisor to the CPA(R) REITs.
The CPA(R) REITs are publicly registered and file financial statements with the
United States Securities and Exchange Commission. In connection with earning
performance fees, the Company has elected to receive restricted shares of common
stock in the CPA(R) REITs rather than cash in consideration for such fees. As of
June 30, 2003, the Company's ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
------ -----------------------
CIP(R) 743,937 2.56%
CPA(R):12 771,043 2.48%
CPA(R):14 1,352,672 2.01%
CPA(R):15 178,526 0.21%
The Company also owns equity interests in (i) three limited partnerships as a
limited partner, (ii) two limited liability companies and (iii) a
jointly-controlled 36% tenancy-in-common interest in two properties subject to a
master lease with the remaining interests owned by affiliates and all of which
net lease real estate on a single-tenant basis.
Combined financial information of the affiliated equity investees is summarized
as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Assets (primarily real estate) $ 3,698,353 $ 3,223,783
Liabilities (primarily mortgage notes payable) 1,758,490 1,679,715
Partners' capital and shareholders' equity 1,939,863 1,544,068
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Revenue (primarily rental revenue) $ 155,651 $ 100,420
Expenses (primarily interest on mortgages
and depreciation) (116,618) (73,379)
Minority interest in income (4,801) (1,401)
Income from equity investments 21,288 9,495
Gain (loss) on sales 939 (390)
----------- -----------
Income from continuing operations 56,459 34,745
Income from discontinued operations 255 149
Gain on sale of real estate 258 312
----------- -----------
Net income $ 56,972 $ 35,206
=========== ===========
During 2003, the Company converted its 780,269 units of the operating
partnership of MeriStar Hospitality Corporation ("MeriStar"), a publicly traded
real estate investment trust which primarily owns hotels, to 780,269 shares of
common stock. As a result of the conversion, the Company is accounting for its
investment in common stock of MeriStar as an available-for-sale marketable
security. As a result, the Company no longer recognizes its share of MeriStar's
net income and is recognizing income from dividends earned from the MeriStar
investment. Prior to the conversion, the Company accounted for its investment in
MeriStar operating partnership units under the equity method of accounting.
- 10 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 6. Segment Reporting:
The Company operates in two business segments - management of affiliates and
real estate operations. The two segments are summarized as follows:
Six Months ended June 30, Management Real Estate Other(1) Total Company
------------------------- ---------- ----------- -------- -------------
Revenues:
2003 $ 42,971 $ 38,992 $ 600 $ 82,563
2002 32,083 36,419 69 68,571
Operating, interest, depreciation and
amortization expenses (excluding
provision for income taxes):
2003 $ 24,954 $ 19,452 -- $ 44,406
2002 19,496 17,937 -- 37,433
Income from equity investments:
2003 $ 486 $ 1,586 -- $ 2,072
2002 151 478 -- 629
Net operating income(2)(3)(4):
2003 $ 18,503 $ 21,126 $ 600 $ 40,229
2002 12,738 18,960 69 31,767
As of
Long-lived assets:
June 30, 2003 $ 70,417 $643,846 $ 3,911 $718,174
December 31, 2002 70,089 663,721 4,056 737,866
Total assets:
June 30, 2003 $183,578 $690,977 $ 4,051 $878,606
December 31, 2002 167,415 721,919 4,190 893,524
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for amortization of
intangibles of $3,343 and $3,653 for the six-month periods ended
June 30, 2003 and 2002, respectively.
(3) Net operating income excludes gains and losses on sales, provision
for income taxes and minority interest.
(4) Real estate net operating income excludes a loss from discontinued
operations of $61 for the six-month period ended June 30, 2003 and
income of $366 for the six-month period ended June 30, 2002.
Certain prior year amounts have been reclassified to discontinued operations.
Note 7. Discontinued Operations:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the results of
operations for properties sold or held for sale and the related gain or loss on
sale of the property are reflected in the consolidated statements of operations
as "Discontinued Operations," except for any properties where the commitment to
a plan of disposition was initiated prior to January 1, 2002.
The operations of ten properties which were sold in 2003 or are classified as
held for sale as of June 30, 2003 and the operations of eighteen properties
which were sold during 2002 or classified as held for sale as of December 31,
2002 are included as "Discontinued Operations" for all periods presented in the
condensed consolidated financial statements. A summary of discontinued
operations is as follows:
- 11 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Rental income $ 171 $ 870 $ 375 $ 1,845
Interest income from direct financing leases 172 1,215 511 2,421
Revenues of other business operations 825 1,358 1,523 2,649
Other interest income 217 193 328 193
Other income -- 12 -- 12
Settlement income -- 2,097 290 2,097
------- ------- ------- -------
1,385 5,745 3,027 9,217
------- ------- ------- -------
EXPENSES:
Interest expense -- 602 -- 1,109
Depreciation 99 250 198 497
Property expenses 227 122 393 410
General and administrative 1 13 2 43
Operating expenses of other business operations 621 1,182 1,184 2,401
Impairment charge on real estate 1,430 4,321 1,430 4,321
Taxes -- 12 35 36
------- ------- ------- -------
2,378 6,502 3,242 8,817
------- ------- ------- -------
Income (loss) before gain on sales (993) (757) (215) 400
Gain (loss) on sales of real estate (10) (34) 154 (34)
------- ------- ------- -------
Income (loss) from discontinued operations $(1,003) $ (791) $ (61) $ 366
======= ======= ======= =======
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $59 and $0 for the three-month periods ended June
30, 2003 and 2002, and $132 and $39 for the six-month periods ended June 30,
2003, and 2002, respectively.
On July 11, 2003, the Company sold a property in Lancaster, Pennsylvania for
$5,000. Prior to the sale, the property value was written down to reflect the
estimated net sales proceeds and an impairment loss on properties held for sale
of $1,430 was recognized and included in discontinued operations for the three
and six-month periods ended June 30, 2003.
On July 17, 2003, the Company sold its hotel property located in Alpena,
Michigan for $4,300. On August 4, 2003, the Company sold a property located in
Canton, Michigan for $2,675. The Lancaster, Canton and Alpena properties have
been classified as held for sale as of June 30, 2003 in the accompanying
condensed consolidated financial statements.
Note 8. Gains on Foreign Currency Transactions and Sales of Real Estate:
2003
During the six-month period ended June 30, 2003, the Company recognized $497 in
foreign currency transaction gains in connection with the transfer of cash from
foreign operating subsidiaries to the parent company. The Company subsequently
transferred the amounts received into a dollar-denominated bank account. As of
June 30, 2003, the cumulative foreign currency translation adjustment included
in accumulated other comprehensive income in shareholders' equity was a loss of
$612.
In February 2003, the Company sold its property in Winona, Minnesota to the
lessee, Peerless Chain Company ("Peerless") for $8,550, consisting of cash of
$6,300 and notes receivable with an estimated fair value of $2,250, which mature
between 2006 and 2008. The Company also received a note receivable from Peerless
of approximately $1,700 for unpaid rents which was previously included in the
allowance for uncollected rents. The Company recognized a gain on sale of
approximately $46. The Company recognized an impairment charge of $4,000 on the
Peerless property in 2002.
In March 2003, the Company sold its Schiller Park, Illinois property leased to
Wozniak Industries, Inc. ("Wozniak") for $2,390 and recognized a gain on sale of
approximately $101.
- 12 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
In May 2003, the Company sold its Apache Junction, Arizona property for $425 and
recognized a gain on sale of approximately $7.
The results of operations and gain from the sales of the Peerless, Wozniak and
Arizona properties are included in "Discontinued Operations" for the three and
six-month periods ended June 30, 2003 and 2002 (see Note 7).
2002
During the six-month period ended June 30, 2002, the Company sold six properties
in Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota; Colville,
Washington; McMinnville, Tennessee, and Casa Grande, Arizona for $10,455 and
recognized a net gain on sales of $1,126. In addition, the Company sold its Los
Angeles, California property for $24,000 and recognized a gain on sale of
$11,160.
Note 9. Intangible Assets:
SFAS No. 142 "Goodwill and Other Intangibles," was adopted by the Company as of
January 1, 2002. SFAS No. 142 primarily addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. SFAS No. 142 provides
that goodwill and indefinite-lived intangible assets no longer be amortized and
must be tested for impairment at least annually. Intangible assets acquired and
liabilities assumed in business combinations are only amortized if such assets
and liabilities are capable of being separated or divided and sold, transferred,
licensed, rented or exchanged or arise from contractual or legal rights
(including leases), and are amortized over their useful lives. Intangible assets
are summarized as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- ------------ -------------- ------------
Amortized intangible assets:
Management contracts $ 59,814 ($21,887) $ 59,135 ($18,543)
======== ======== ======== ========
June 30, 2003 December 31, 2002
Net Carrying Net Carrying
Amount Amount
------------- -----------------
Unamortized and indefinite-lived
intangible assets:
Trade name $3,975 $3,975
====== ======
Amortization was $3,343 and $3,653 for the six-month periods ended June 30, 2003
and 2002, respectively.
For each of the next five years amortization is as follows: $6,736 in 2004,
$6,646 in 2005, $4,570 in 2006, $4,494 in 2007 and $2,759 in 2008.
Note 10. Stock Options and Restricted Stock:
The Company has elected to adopt the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If stock-based compensation cost had
been recognized based upon fair value at the date of grant for options and
restricted stock awarded under the Company's share incentive plans and amortized
to expense over their respective vesting periods in accordance with the
provisions of SFAS No. 123, pro forma net income would have been as follows:
- 13 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $12,974 $23,592 $30,247 $37,321
Add: Stock based compensation included in net income as
reported, net of related tax effects 482 450 879 781
Less: Stock based compensation determined under fair value
based methods for all awards, net of related tax effects (651) (782) (1,429) (1,375)
------- ------- ------- -------
Pro forma net income $12,805 $23,260 $29,697 $36,727
======= ======= ======= =======
Net income per common share as reported
Basic $ .35 $ .66 $ .83 $ 1.05
Diluted $ .34 $ .65 $ .81 $ 1.04
Pro forma net income per common share
Basic $ .35 $ .65 $ .81 $ 1.04
Diluted $ .34 $ .64 $ .79 $ 1.02
For the six-months period ended June 30, 2003 and 2002, the changes in unearned
compensation were as follows:
2003 2002
---- ----
Beginning of period $ 5,671 $ 4,454
Issuance of shares 3,579 3,870
Forfeitures (35) (17)
Compensation expense (amortization of unearned compensation) (1,480) (1,210)
------- -------
End of period $ 7,735 $ 7,097
======= =======
For the six-months periods ended June 30, 2003 and 2002, restricted shares of
$96 and $67, respectively, were issued to directors in consideration of services
rendered.
During 2003, the Company adopted a non-qualified deferred compensation plan
under which a portion of any participating officer's cash compensation in excess
of designated amounts will be deferred and the officer will be awarded a
Partnership Equity Plan Unit (" PEP Unit"). The value of each PEP Unit is
intended to correspond to the value of a share of a CPA(R) REIT, designated at
the time of such award. Redemption will occur at the earlier of a liquidity
event of the underlying CPA(R) REIT or twelve years from the date of award. The
award is fully vested upon grant, and the Company may terminate the plan at any
time. The value of each PEP Unit will be adjusted to reflect the underlying
appraised value of the CPA(R) REIT. Additionally, each PEP Unit will be entitled
to a distribution equal to the distribution rate of the CPA(R) REIT. All
issuances of PEP Units, changes in the value of PEP Units and distributions paid
are included in compensation expense of the Company. Compensation expense under
this plan for the three and six-month periods ended June 30, 2003 was $851.
Note 11. Accounting Pronouncements:
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The Company adopted this Statement effective January
1, 2003, and the adoption did not have a material effect on the Company's
financial statements. The Company will no longer classify gains and losses for
the extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and
- 14 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on the Company's
financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 have been adopted. The Company is evaluating whether
it will change to the fair value based method.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
accounting provisions only apply for certain new transactions entered into and
existing guarantee contracts modified after December 31, 2002. The adoption of
the accounting provisions of FIN 45 is not expected to have a material effect on
the Company's financial statements. The Company has complied with the disclosure
provisions.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The Company is expecting upon
adoption in the third quarter of 2003 that it will consolidate Livho, Inc. in
its financial statements but not any of its other equity investments. The
Company's maximum loss exposure is the carrying value of its equity investments.
The Company does not expect the adoptions of the provisions of FIN 46 to have a
material effect on the Company's financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts
- 15 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company is currently evaluating whether this will have an impact
on the balance sheet.
- 16 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of June 30, 2003 of W. P.
Carey & Co. LLC and its subsidiaries ("WPC") included in this quarterly report
and WPC's Annual Report on Form 10-K for the year ended December 31, 2002. This
quarterly report contains forward-looking statements. Such statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievement of WPC to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or the objectives and plans of WPC will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2002 provides a
description of WPC's business objectives, strategies and risk factors which
could affect future operating results.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are critical to the understanding of WPC's financial
condition and results of operations. Management believes that an understanding
of financial condition and results of operations requires an understanding of
WPC's accounting policies.
The preparation of financial statements requires that management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, WPC assesses its ability to collect rent and other
tenant-based receivables and determines an appropriate allowance for uncollected
amounts. Because fewer than 35 lessees represent more than 75% of annual rents,
WPC believes that it is necessary to evaluate specific situations rather than
solely use statistical methods. WPC generally recognizes a provision for
uncollected rents and other tenant receivables which typically ranges between
0.5% and 2% of lease revenues (rental income and interest income from direct
financings leases) and measures its allowance against actual rent arrearages and
adjusts the percentage applied.
WPC also uses estimates and judgments when evaluating whether long-lived assets
are impaired. When events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, WPC performs projections of
undiscounted cash flows, and if such cash flows are insufficient, the assets are
adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires WPC to make its best
estimate of market rents, residual values and holding periods. In its
evaluations, WPC generally obtains market information from outside sources;
however, such information requires Management to determine whether the
information received is appropriate to the circumstances. As WPC's investment
objectives are to hold properties on a long-term basis, holding periods used in
the analyses generally range from five to ten years. Depending on the
assumptions made and estimates used, the future cash flow projected in the
evaluation of long-lived assets can vary within a range of outcomes. WPC will
consider the likelihood of possible outcomes in determining the best possible
estimate of future cash flows. Because in most cases, each of WPC's properties
is leased to one tenant, WPC is more likely to incur significant writedowns when
circumstances change because of the possibility that a property will be vacated
in its entirety and, therefore, it is different from the risks related to
leasing and managing multi-tenant properties. Events or changes in circumstances
can result in further noncash writedowns and impact the gain or loss ultimately
realized upon sale of the assets. WPC performs a review of its estimate of
residual value of its direct financing leases at least annually to determine
whether there has been an other than temporary decline in WPC's current estimate
of residual value of the underlying real estate assets (i.e., the estimate of
what WPC could realize upon sale of the property at the end of the lease term).
If the review indicates a decline in residual value that is other than
temporary, a loss is recognized and the accounting for the direct financing
lease will be revised to reflect the decrease in the expected yield using the
changed estimate, that is, a portion of the future cash flow from the lessee
will be recognized as a return of principal rather than as revenue.
Real estate accounted for under the operating method is stated at cost less
accumulated depreciation. Costs directly related to the development of rental
properties are capitalized. Capitalized development and construction costs
include costs essential to the development of the property, development and
construction costs, interest, property taxes, insurance, salaries and other
project costs incurred during the period of development.
- 17 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
When assets are identified by Management as held for sale, WPC discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in Management's opinion, the net sales price of the assets which
have been identified for sale is less than the net book value of the assets, an
impairment charge is recognized and a valuation allowance is established. If
circumstances arise that previously were considered unlikely and, as a result,
WPC decides not to sell a property previously classified as held for sale, the
property is reclassified as held and used. A property that is reclassified is
measured and recorded individually at the lower of (a) its carrying amount
before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, or (b) the fair value at the date of
the subsequent decision not to sell. The results of operations and gain or loss
on sales of real estate for properties sold or classified as held for sale after
January 1, 2002 are reflected in the consolidated statements of operations as
"Discontinued Operations" for all periods presented.
In connection with the net lease real estate asset management business, WPC
earns transaction and asset-based fees. Transaction fees are primarily earned in
connection with investment banking services provided in connection with
structuring acquisitions, refinancing and dispositions on behalf of the
affiliated real estate investment trusts. Transaction fees are earned upon
consummation of a transaction, that is, when a purchase has been completed by
the affiliate. Completion of a transaction includes determining that the
purchaser and seller are bound by a contract and all substantive conditions of
closing have been performed. When these conditions are met, acquisition-based
services have been completed and the fees are recognized.
Asset-based management fees are earned when services are performed. A portion of
the fees are subject to subordination provisions pursuant to the Advisory
Agreements and are based on whether each CPA(R) REIT has met specific
performance criteria. In connection with determining whether management and
performance fees are recorded as revenue, Management performs analyses on a
quarterly basis to measure whether subordination provisions have been met.
Revenue is only recognized for performance based fees when the specific
performance criteria are achieved.
WPC accounted for its acquisition of the business operations of its former
manager, Carey Management, LLC, in 2000 as a purchase. The excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill. WPC evaluates goodwill for possible impairment at least annually (as
of December 31st of each year) using a two-step process. To identify any
impairment, WPC first compares the estimated fair value of the reporting unit
(management services segment) with its carrying amount, including goodwill. WPC
calculates the estimated fair value of the management services segment by
applying a multiple, based on comparable companies, to earnings. If the fair
value of the management services segment exceeds its carrying amount, goodwill
is considered not impaired and no further analysis is required. If the carrying
amount of the management services unit exceeds its estimated fair value, then
the second step is performed to measure the amount of the impairment charge.
For the second step, WPC would determine the impairment charge by comparing the
implied fair value of the goodwill with its carrying amount and record an
impairment charge equal to the excess of the carrying amount over the fair
value. The implied fair value of the goodwill is determined by allocating the
estimated fair value of the management services segment to its assets and
liabilities. The excess of the estimated fair value of the management services
segment over the amounts assigned to its assets and liabilities is the implied
fair value of the goodwill. WPC performs tests for impairment of its management
services segment, the reportable unit of measurement, and concluded that the
goodwill is not impaired.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
written off and are included in charges for early extinguishment of debt if a
loan is retired.
Stated rental revenue is recognized on a straight-line basis and interest income
from direct financing leases is recognized such that WPC earns a constant rate
of return on its net investment, over the terms of the respective leases.
Unbilled rents receivable represent the amount by which straight-line rental
revenue exceeds rents currently billed in accordance with the lease agreements.
Most of WPC's leases provide for periodic rent increases based on formula
indexed to increases in the Consumer Price Index ("CPI"). CPI-based and other
contingent-type rents are
- 18 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
recognized currently. WPC recognizes rental income from sales overrides when
reported by lessees, that is, after the level of sales requiring a rental
payment is reached.
WPC accounts for its investments in unconsolidated joint ventures under the
equity method of accounting as it may exercise significant influence, but does
not control these entities. These investments are recorded initially at cost, as
equity investments and each investment subsequently adjusted for its
proportionate share of earnings and cash contributions and distributions. On a
periodic basis, Management assesses whether there are any indicators that the
value of equity investments may be impaired and whether or not that impairment
is other than temporary. An investment's value is impaired only if Management's
estimate of the net realizable value of the investment is less than the carrying
value of the investment. To the extent impairment has occurred, the charge shall
be measured as the excess of the carrying amount of the investment over the fair
value of the investment.
WPC accounts for stock-based compensation using the intrinsic value method.
Under the intrinsic method, compensation cost is measured as (i) the quoted
market price of WPC's shares at the date of grant for restricted shares, and
(ii) the excess of, if any, the quoted market price at date of grant over the
exercise price of the options granted. WPC accounts for its deferred
compensation plans as variable plans, that is, changes in the underlying fair
value of awards are included in compensation expense.
Significant management judgment is required in developing WPC's provision for
income taxes, including (i) the determination of partnership-level state and
local taxes, and (ii) for its taxable subsidiaries, estimating deferred tax
assets and liabilities and any valuation allowance that might be required
against the deferred tax assets. The valuation allowance is required if it is
more likely than not that a portion or all of the deferred tax assets will not
be realized. WPC has not recorded a valuation allowance because it believes
operating income of the taxable subsidiaries will be sufficient to realize the
benefit of these assets over time. For interim periods, income tax expense for
taxable subsidiaries is determined, in part, by applying an effective tax rate
which takes into account statutory federal, state and local tax rates.
WPC consolidates its foreign subsidiaries. To the extent that these investments
and subsidiaries account for their financial position and results of operations
in a functional currency other than U.S. dollars, it is necessary for the
Company to translate from the functional currency to U.S. dollars. The
functional currency is the currency of the primary economic environment in which
the real estate investments or subsidiary operates. The translation of the
functional currency for assets and liabilities uses the current exchange rate as
of the balance sheet date and for revenues and expenses uses a weighted average
exchange rate during the period. Gains and losses resulting from foreign
currency translation adjustments are reported as a component of other
comprehensive income as part of shareholders' equity.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally is included in determining net
income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss measured from the transaction date or the most recent
intervening balance sheet date, whichever is later, realized upon settlement of
a foreign currency transaction generally is included in net income from the
period in which the transaction is settled. Foreign currency transactions are
not included in determining net income but are accounted for in the same manner
as foreign currency translation adjustments and reported as a component of other
comprehensive income as part of shareholders' equity if (i) they are designated
as, and are effective as, economic hedges of a net investment and (ii) are
intercompany foreign currency transactions that are of a long-term nature (that
is, settlement is not planned or anticipated in the foreseeable future), when
the entities to the transactions are consolidated or accounted for by the equity
method in the Company's financial statements.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. WPC's management
evaluates the performance of its owned and managed real estate portfolio as a
whole, but allocates its resources between two operating segments: real estate
operations with domestic and international investments and management services.
- 19 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
RESULTS OF OPERATIONS:
WPC is engaged in two reportable operating segments, real estate operations and
management services, primarily as the Advisor to four affiliated real estate
investment trusts (the "CPA(R) REITs"). WPC reported net income of $12,974 and
$23,592 for the three-month periods ended June 30, 2003 and 2002, respectively,
and net income of $30,247 and $37,321 for the six-month periods ended June 30,
2003 and 2002, respectively. Net income for the three-month and six-month
periods ended June 30, 2002 included gains on the sale of properties of $11,147
and $12,296, respectively, and included a $11,160 gain from the sale of a
property in Los Angeles, California.
The $775 increase in income from continuing operations before gain on sale of
real estate for the comparable three-month periods ended June 30, 2003 and 2002
was due to increases in other income and income from equity investments ("equity
income"), a decrease in the provision for income taxes, and, to a lesser extent,
gains on foreign currency transactions and a decrease in amortization of
intangible assets. This was partially offset by a decrease in management income,
an increase in general and administrative expenses and, to a lesser extent, a
decrease in lease revenues. The $5,683 increase in income from continuing
operations before gain on sale of real estate for the comparable six-month
periods ended June 30, 2003 and 2002 was due primarily to an increase in
management income and other income and, to a lesser extent, an increase in
equity income. This was partially offset by an increase in the provision for
income taxes, an increase in general and administrative and property expenses,
and a decrease in lease revenues. The results for the six-month period ended
June 30, 2003 reflect a continued trend of the change in the composition of
revenue and earnings from WPC's business segments reflecting the growth in the
revenues and net operating income of management services operations.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest, and discontinued operations) increased
to $10,541 from $9,601 and to $21,126 from $18,960, respectively, for the
comparable three and six-month periods ended June 30, 2003 and 2002. The
increase for the comparable three and six-month periods is due primarily to an
increase in other income, equity income and gains on foreign currency
transactions of $497 and was partially offset by a decrease in lease revenues
and an increase in property expenses.
Other income generally consists of lease termination payments and other non-rent
related revenues from real estate operations including, but not limited to,
settlements of claims against former lessees. WPC receives settlements in the
ordinary course of business; however, the timing and amount of such settlements
cannot always be estimated. The Gap, Inc. vacated the property when the lease
expired in February 2003 and WPC received a lease termination settlement of
$2,250 in March 2003. During the three-month period ended June 30, 2003, WPC
also received approximately $830 in distributions from bankruptcy claims against
former tenants.
The increase in equity income for the comparable three and six-month periods was
due primarily to the conversion of WPC's ownership interest in the operating
partnership of MeriStar Hospitality Corporation from operating partnership units
to shares of MeriStar's publicly-traded common stock in 2003, and the
acquisition, in December 2002, of a jointly controlled tenancy-in-common
interest in the Hologic, Inc. properties. For the three and six-month periods
ended June 30, 2002, WPC recorded losses from the MeriStar investment of $171
and $498, respectively. WPC now accounts for its investment in common stock of
MeriStar as an available-for-sale security and, therefore, is no longer
recognizing its share of MeriStar's reported net income or loss. For the
three-month and six-month periods ended June 30, 2003 the Hologic investment
contributed $125 and $341, respectively, of equity income. In July 2003, WPC
contributed $1,496 to an equity investee which used this contribution along with
a contribution from the general partner to pay off a mortgage loan, and solely
as a result, WPC's annual cash distributions from this investment will increase
by $247.
For the three and six-month period ended June 30, 2003, WPC recognized $497 in
foreign currency transaction gains in connection with the transfer of cash from
foreign operating subsidiaries, which own properties in France, to the parent
company. The cash received was subsequently converted into dollars.
Lease revenues decreased by $560 and $1,281 for the comparable three and
six-month periods, respectively, as a result of several lease terminations and
expirations, including leases with Thermadyne Holdings, Inc. and Pillowtex, Inc.
in 2002, and The Gap in 2003. In August 2002, WPC contributed its 33.93%
tenancy-in-common interest in properties leased to Childtime Childcare, Inc.
into a limited partnership, with CIP(R) as the general partner. As a
- 20 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
result of contributing the Childtime interest into the limited partnership, the
investment in the Childtime properties is now being accounted for as an equity
investment. Annual rents from the Childtime properties were $440. This change in
presentation had no effect on net income. The Gap lease, which expired in
January 2003, provided annual rents of $2,205. Livho, Inc. operates a Holiday
Inn in Livonia, Michigan and its ability to pay rent has been negatively
affected by current economic conditions in its market. As a result, its annual
rent for 2003 has been reduced by $720. Lease revenues benefited from a new
lease with BE Aerospace on a property purchased during the third quarter of 2002
as well as several rent increases on existing leases. Current annual rentals
from the BE Aerospace lease is $1,421. In connection with its annual evaluation
of direct financing leases in 2002, the rates of return on several direct
financing leases were revised so that interest income from direct financing
leases for financial reporting purposes in 2003 will decrease by approximately
$1,100; however this change will not have any effect on operating cash flow, as
contractual rent from the underlying lessees is not affected by the change in
accounting estimate.
Based on current market rentals, WPC does not expect the rents for any new
leases on the The Gap property to reach the level that was paid by The Gap.
Management believes that the prospects for leasing the The Gap property on a
long-term basis are good; however, it may take up to two years to remarket the
entire property. WPC entered into a 10-year lease with Alstom Power, Inc.,
effective June 1, 2003 for 118,000 square feet at the former Gap facility
(approximately 16% of the leasable space) at an annual rent of $287 plus an
approximate 16% share of property expenses. Future operating cash flow will also
benefit from a new eight-year lease signed with a tenant at WPC's Pantin, France
property with annual rents of $210, as well as a number of renewals on existing
leases, including five-year renewals with Verizon Communications, Inc. and
Lockheed Martin with annual rents totaling $1,689.
In addition to the impact of the expiration of The Gap lease and the change in
Livho rents, future operating cash flow will be affected by lease terminations
as well as the sales of properties. In February 2003, WPC sold its property
leased to Peerless Chain Company. Annual rental income under the Peerless lease
was $1,658; however, due to its financial difficulties, Peerless was only able
to pay a portion of its rent. In connection with the sale of the property,
Peerless has agreed to pay $1,700 of its rent arrearage in installments over
several years. In March 2003 WPC sold its property leased to Wozniak, Inc. The
Wozniak lease, which provided annual rent of $497, was scheduled to expire in
December 2003. In consideration for agreeing to the early termination of Wozniak
lease, WPC received a settlement payment of $290. In July 2003, WPC sold its
Lancaster, Pennsylvania property leased to Datcon Instrument Company. Annual
rental income under the Datcon lease was $680. The results from these properties
are reflected in discontinued operations in the accompanying condensed
consolidated financial statements.
Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the
Impairment of Long-Lived Assets" requires that for disposal activities initiated
after January 1, 2002, including the sale of properties, the revenues and
expenses relating to the assets held for sale or sold be presented as a
discontinued operation for all periods presented in the financial statements.
Because WPC sells properties in the ordinary course of business, and may
reinvest the proceeds of sale to purchase new properties, WPC evaluates its
ability to fund distributions to shareholders by considering the combined effect
of income from continuing operations and discontinued operations. WPC incurred a
loss from discontinued operations of $1,003 and $791 for the comparable
three-month periods and a loss of $61 and income of $366 for the comparable
six-month periods. The results from discontinued operations for the three and
six-month periods ended June 30, 2003 and 2002 included non-cash impairment
losses on properties held for sale of $1,430 and $4,321,respectively.
WPC continues to closely monitor the financial condition of several lessees
which it believes have been affected by current economic conditions and other
trends. Such lessees include America West Holding Corp., which represents 4% of
lease revenues. America West, an air carrier, has obtained a government
guarantee of its financing and its financial prospects remain uncertain;
however, it reported net income for the quarter ended June 30, 2003.
Property expenses increased by $380 and $1,247 for the comparable three and
six-month periods. The increase in property expenses was due primarily to
increases in operating and maintenance expenses. The increases are the result of
the termination of the Thermadyne lease, the restructuring of the Faurecia
Exhaust Systems, Inc. lease in 2002 and the expiration of The Gap lease, as WPC
now incurs most of such costs at these properties. WPC attempts to remarket the
property as a single-tenant net lease property; however, there is often a
greater likelihood of re-leasing the property as a multi-tenant property. While
WPC considers single-tenant net leasing to be its core
- 21 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
business, several net leases have expired and the number of multi-tenant and
operating properties in its portfolio has increased.
Net operating income from WPC's management services operations for the three and
six-month periods ended June 30, 2003, was $5,779 and $18,503 as compared with
$7,961 and $12,738 for the three and six-month periods ended June 30, 2002. The
decrease for the comparable three-month periods is primarily the result of a
decrease in transaction fees earned and an increase in general and
administrative expenses. This was partially offset by an increase in asset-based
management fees earned, and a decrease in the provision for income taxes and
amortization of intangibles. The increase for the comparable six-month periods
is due to an increase in both transaction and asset-based fees and, to a lesser
extent, a decrease in amortization of intangibles. This was partially offset by
increases in general and administrative expense and the provision for income
taxes.
Total revenues earned by the management services operations for the three and
six-month periods ended June 30, 2003 were $17,178 and $42,971, respectively,
compared with $18,598 and $32,083 for the periods ended June 30, 2002.
Transaction fees were $3,598 and $17,060 for the three and six-month periods
ended June 30, 2003 compared with $7,546 and $13,297 for the three and six-month
periods ended June 30, 2002. Asset-based fees and reimbursements were $13,581
and $25,911 for the three and six-month periods ended June 30, 2003 and $11,052
and $18,786 for the three and six-month periods ended June 30, 2002.
Transaction fees include fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. WPC structured $59,000 and $332,000 of acquisitions
for the three-month and six-month periods ended June 30, 2003 as compared with
$169,000 and $288,000 for the three-month and six-month periods ended June 30,
2002. Acquisition activity is subject to seasonal fluctuations, and usually the
second quarter has the least activity and the fourth quarter the most.
Currently, WPC is evaluating a number of proposed transactions on behalf of the
CPA(R) REITs and the CPA(R) REITs have significant cash balances available for
investments. As of August 1, 2003, the CPA(R) REITs have approximately $420,000
available for investment. Such funds combined with mortgage financing provide
the capacity for CPA(R) REIT acquisition activity for the year to meet or exceed
last year's activity of approximately $1,000,000; however, there is no assurance
that the same level will be achieved for a sustained period. The increase in
asset-based fees resulted from an increase in the asset base of the CPA(R) REITs
over the past year and that growth is also directly related to the ability of
the CPA(R) REITs to complete acquisitions.
The asset-based management income includes fees based on the appraised value of
real estate assets under management of three of the CPA(R) REITs and the
historical cost of the real estate owned by Corporate Property Associates 15
Incorporated ("CPA(R):15"). Based on assets under management of the CPA(R) REITs
as of June 30, 2003, annualized management and performance fees under the
advisory agreements are approximately $36,950. As the real estate asset bases of
Corporate Property Associates 14 Incorporated ("CPA(R):14") and CPA(R):15
continue to increase, management and performance fees are expected to continue
to increase. CPA(R):14 completed a public offering in 2001 and still has cash
that it raised from its offering that is available for investment. CPA(R):15
fully subscribed its initial $400,000 "best efforts" public offering in November
2002, and in August 2003 completed a second "best efforts" public offering which
raised approximately $600,000. Management believes that the CPA(R) REITs are
benefiting from several trends including the increasing use of sale-leaseback
transactions by corporations as an alternative source of financing and
individual investors seeking income-oriented investments. WPC cannot predict how
long either trend will continue because much of it is determined by factors
which are beyond the control of the Company.
The increase in general and administrative costs for the comparable three and
six-month periods was due primarily to an increase in personnel-related costs
attributable to the growth of the management services operations. A portion of
personnel charges is directly related to CPA(R) REIT capital raising and
transactions activities and the increase in these activities has directly
contributed to the increase in personnel-related costs. The portion of personnel
costs necessary to administer the CPA(R) REITs is reimbursed to WPC by the
CPA(R) REITs and is included in management income. Reimbursement for
personnel-related costs for the three-month and six-month periods ended June 30,
2003 was $1,950 and $4,021, respectively, compared with $1,717 and $3,109 for
the three-month and six-month periods ended June 30, 2002. During 2003 WPC
adopted a deferred compensation plan in which a portion of any officer's cash
compensation in excess of designated amounts will be deferred with an award of
share equivalents in CPA(R) REITs. WPC believes that the awarding of the share
equivalents along with the shares of CPA(R) REITs owned by WPC will further
align the interests of WPC's officers and the REIT shareholders. This is also
intended to benefit
- 22 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
WPC as its ability to raise capital for advised entities is affected by the
advisor's efforts to increase value on behalf of CPA(R) REIT shareholders. The
decrease in amortization for the comparable three and six-month periods ended
June 30, 2003 and 2002, was due to certain intangible assets becoming fully
amortized during the fourth quarter 2002 and second quarter of 2003.
The provision for current and deferred income tax expense for the three-month
period ended June 30, 2003 decreased by $1,072 from the three-month period ended
June 30, 2002 as a result of the decrease in net operating income from
management services operations. For the comparable six-month periods ended June
30, 2003 and 2002, the provision for current and deferred income tax expense
increased by $3,047 as a result of an increase in the net operating income from
management services operations. Approximately 90% of management revenues are
earned by a taxable, wholly-owned subsidiary, and income tax expense is most
affected by its earnings.
For the three and six-month periods ended June 30, 2003, WPC recognized $429 and
$600 of development fee management income compared with $69 for the comparable
three and six-month periods ended June 30, 2002, in connection with managing the
construction of a public high school in Los Angeles, California, which is
accounted for under the percentage completion method of accounting.
WPC formed Corporate Property Associates 16 Incorporated ("CPA(R):16") in June
2003 and has filed a registration statement for a public offering to raise up to
$1,000,000 on a "best efforts" basis, with WPC as the advisor to CPA(R):16. In
addition, WPC has formed Corporate Property Associates International
Incorporated ("CPAI") in July 2003 and filed a registration statement for a
public offering of $250,000, also on a "best efforts" basis. CPAI is advised by
W. P Carey International LLC ("WPCI"), a majority-owned subsidiary of WPC. WPC
expects both of these offerings to commence this year. If these offerings are
successful and the funds raised are fully invested, they will enable WPC to
sustain the growth of transaction fee income and increase assets under
management.
On April 1, 2003, WPC increased its ownership interest in WPCI through WPCI's
redemption of William Polk Carey's 90% interest. Mr. Carey is the Chairman of
WPC. As part of this transaction, WPC acquired a full interest in certain
asset-based fees in which it previously had a 50% interest. This will increase
annual fees by more than $200. Through this transaction, WPC also acquired the
exclusive right to structure net lease transactions outside of the United States
of America on behalf of the CPA(R) REITs. Through its majority interest in WPCI,
WPC will fully benefit from the CPAI offering. As an incentive to promote the
growth and profitability of foreign net lease transactions, certain officers of
WPCI have been granted restricted equity interests in the subsidiary.
FINANCIAL CONDITION:
There has been no material change in WPC's financial condition since December
31, 2002. Management believes that WPC will generate sufficient cash from
operations and, if necessary, from the proceeds of limited recourse mortgage
loans, unsecured indebtedness and the issuance of additional equity securities
to meet its short-term and long-term liquidity needs. WPC assesses its ability
to access capital on an ongoing basis.
Cash flows from operating activities and distributions received from equity
investments for the six-month period ended June 30, 2003 of $38,329 were
sufficient to fund dividends to shareholders of $31,219. Annual cash flow from
operations is projected to fund distributions; however, operating cash flow may
fluctuate on a quarterly basis due to the timing of certain compensation costs
that are paid in the first quarter and the timing of the receipt of
transaction-related fees. In January 2003, WPC received its annual installment
of deferred acquisition fees of $1,495 in connection with structuring
transactions on behalf of CPA(R):12 and CPA(R):14. The installment which will be
payable in January 2004 is expected to be approximately $5,780, and is scheduled
to include an initial installment from CPA(R):15. The installments are subject
to certain subordination provisions. Based on the CPA(R) REIT's results as of
June 30, 2003, WPC does not expect any of the scheduled payments to be deferred.
Installments are applied to amounts due from affiliates when received.
Investing activities included using $925 for capital expenditures at existing
properties. WPC also received $8,958 in connection with the sale of three
properties. A portion of the proceeds from the sales was used to pay down a
portion of WPC's credit facility balance. In January 2003, WPC paid an
installment of deferred acquisition fees of $524 to WPC's former management
company relating to 1998 and 1999 property acquisitions. In connection with the
acquisition of W.P. Carey International LLC in April 2003, WPC acquired $1,300
in cash.
- 23 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
In addition to paying dividends to shareholders, WPC's financing activities for
the six-month period ended June 30, 2003 included reducing its outstanding
balance of its credit facility by $21,000, paying off $1,615 in limited recourse
mortgage financing on its Broomfield, Colorado property and making scheduled
principal payment installments of $4,324 on existing mortgages. WPC uses limited
recourse mortgages as a substantial portion of its long-term financing because a
lender of a limited recourse mortgage loan has recourse only to the properties
collateralizing its loan and not to any of WPC's other assets. As of June 30,
2003, approximately 50% of its properties are unencumbered with mortgage debt.
WPC also raised $4,455 from the issuance of shares primarily through WPC's
dividend reinvestment and stock purchase plan. WPC issued additional shares
pursuant to its merger agreement for the management services operations (400,000
shares valued at $8,910 were issued during the six-month period ended June 30,
2003 based on meeting one of the performance criteria as of December 31, 2002).
In connection with the WPCI transaction, WPC cancelled 54,765 shares which had
been held by the subsidiary. WPCI also has a payable as of June 30, 2003 of
$1,898 to William Polk Carey in connection with the redemption of his interests.
WPC has a revolving credit agreement which provides for an $185,000 line of
credit and with a one-time right to increase the commitment to up to $225,000.
The revolving credit agreement has financial covenants that require WPC to
maintain a minimum equity value and to meet or exceed certain operating and
coverage ratios. As advances on the credit facility are not restricted, WPC
believes that the remaining capacity on the credit line allows WPC to meet its
liquidity needs on a short-term basis, if necessary. The credit agreement
matures in March 2004 and WPC believes that renewing the facility after the
current term is likely. As of June 30, 2003, WPC has $157,000 of unused capacity
under the credit facility. Amounts drawn on the credit facility bear interest at
a rate indexed to the London Inter-Bank Offered Rate. As of August 8, 2003 the
annual interest rate on the outstanding balance of $32,000 is approximately
2.34%. Because WPC has substantially paid down the balance on its credit
facility, it will not be significantly affected by an increase in interest
rates. Amounts outstanding under the credit facility bear interest at a variable
rate. Based on the current outstanding balance, each increase of 1% in the base
rate would increase WPC's annual interest obligations by $320 and would not have
a material effect on the results of operations.
WPC expects to meet its capital requirements to fund future property
acquisitions, construction costs on build-to-suit transactions, any capital
expenditures on existing properties and scheduled debt maturities on limited
recourse mortgages through use of its cash reserves or unused amounts on its
credit facility. WPC expects to renew its credit facility when its term expires
in March 2004. WPC may issue additional shares in connection with purchases of
real estate when it is consistent with the objectives of the seller. WPC is
expected to incur capital expenditures on various properties throughout 2003 of
approximately $5,900, primarily related to tenant leasehold improvements, and
for property improvements and upgrades to enhance a property's cash flow,
marketability for re-leasing or sale. This includes approximately $1,700 in
funding for the renovation of the restaurant and bar at the Livonia hotel, which
when completed is expected to improve cash flow at the property and $1,010 for
the expected environmental costs to prepare the Red Bank property for sale to a
third party. Additionally, commitments for capital expenditures on the Livonia
hotel are currently estimated to be $3,500 under a product improvement plan
requirement necessary to renew the franchise license with Holiday Inn. The funds
are expected to be used over a three-year period beginning in the second half of
2004. WPC is evaluating redevelopment plans for the Broomfield property but has
not determined the cost of such redevelopment.
In the case of limited recourse mortgage financing that does not fully amortize
over its term or is currently due, WPC is responsible for the balloon payment
only to the extent of its interest in the encumbered property because the holder
has recourse only to the collateral. In the event that balloon payments come
due, WPC may seek to refinance the loans, restructure the debt with the existing
lenders or evaluate its ability to satisfy the obligation from its existing
resources including its revolving line of credit, to satisfy the mortgage debt.
To the extent the remaining initial lease term on any property remains in place
for a number of years beyond the balloon payment date, WPC believes that the
ability to refinance balloon payment obligations is enhanced. WPC also evaluates
all its outstanding loans for opportunities to refinance debt at lower interest
rates that may occur as a result of decreasing interest rates or improvements in
the credit rating of tenants. There are $2,500 and $16,700 in scheduled balloon
payments on limited recourse mortgage notes due in 2003 and 2004, respectively.
WPC believes it has sufficient resources to pay off the loans in the event they
are not refinanced. In addition, 76% of WPC's outstanding mortgage
- 24 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
debt has fixed rates of interest that will partially protect WPC from increases
in market rates from near-historical lows.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
WPC has provided a guarantee of $2,000 related to a development project in Los
Angeles, California.
A summary of WPC's obligations, commitments and guarantees under contractual
arrangements are as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
- -------------- ----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable $183,830 $ 6,966 $25,399 $ 8,261 $24,895 $ 14,605 $103,704
Unsecured note payable 28,000 28,000
Deferred acquisition fees 2,233 524 524 524 524 137
Commitments and Guarantees:
Capital improvements 3,500 500 1,500 1,500
Development project 2,000 2,000
Share of minimum rents
payable under office cost-
sharing agreement 1,374 211 423 423 317
-------- ------- ------- ------- ------- -------- --------
$220,937 $ 7,177 $56,846 $10,708 $27,236 $ 15,129 $103,841
======== ======= ======= ======= ======= ======== ========
In connection with the purchase of many of its properties, WPC required the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that WPC's properties were in substantial compliance
with Federal and state 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 historical on-site activities. In most
instances where contamination has been identified, tenants are actively engaged
in the remediation process and addressing identified conditions. Tenants are
generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations. In
addition, WPC's leases generally require tenants to indemnify WPC from all
liabilities and losses related to the leased properties with provisions of such
indemnification specifically addressing environmental matters. The leases
generally include provisions that allow for periodic environmental assessments,
paid for by the tenant, and allow WPC to extend leases until such time as a
tenant has satisfied its environmental obligations. Certain of the leases allow
WPC to require financial assurances from tenants such as performance bonds or
letters of credit if the costs of remediating environmental conditions are, in
the estimation of WPC, in excess of specified amounts. Accordingly, Management
believes that the ultimate resolution of environmental matters will not have a
material adverse effect on WPC's financial condition, liquidity or results of
operations.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143 "Accounting for Asset Retirement Obligations." SFAS No. 143 was issued to
establish standards for the recognition and measurement of an asset retirement
obligation. SFAS No. 143 requires retirement obligations associated with
tangible long-lived assets to be recognized at fair value as the liability is
incurred with a corresponding increase in the carrying amount of the related
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. SFAS No. 143 was adopted on January
1, 2003, and did not have a material effect on the financial statements.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. WPC adopted this statement effective January 1, 2003,
and the adoption did not have a material affect on WPC's financial statements.
WPC will no longer classify gains and losses for the extinguishment of debt as
extraordinary items and will adjust comparative periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on WPC's financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require WPC
to make payments to a guaranteed third-party based on changes in an underlying
asset, liability, or an equity security of the guaranteed party. The adoption of
the accounting provisions of FIN 45 on January 1, 2003 did not have a material
effect on WPC's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 have been adopted. WPC is evaluating whether it will
change to the fair value based method.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. WPC expects upon adoption in the
third quarter of 2003 that it will consolidate Livho, Inc. in its financial
statements but not any of its other equity investments. WPC's maximum loss
exposure is the carrying
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
value of its equity investments. WPC does not expect the adoption of the
provisions of FIN 46 to have a material effect on its financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. WPC is currently evaluating whether this will have an impact on the
financial statements.
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W. P. CAREY & CO. LLC
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest and
foreign currency exchange rates, foreign currency exchange rates and equity
prices. In pursuing its business plan, the primary risks to which WPC is exposed
are interest rate risk and foreign currency exchange risk.
The value of WPC's real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees and which may affect WPC's ability to refinance
property-level mortgage debt when balloon payments are scheduled.
$140,338 of WPC's long-term debt bears interest at fixed rates, and therefore
the fair value of these instruments is affected by changes in the market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the variable rate debt as of June 30, 2003 ranged from 2.34% to 6.44%.
The interest on the fixed rate debt as of June 30, 2003 ranged from 6.11% to
9.13%.
Advances from the line of credit bear interest at an annual rate of either (i)
the one, two, three or six-month LIBOR, plus a spread which ranges from 0.6% to
1.45% depending on leverage or corporate credit rating or (ii) the greater of
the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a
spread of up to .125% depending on WPC's leverage.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $6,187 $23,595 $6,415 $22,814 $12,293 $69,034 $140,338 $144,233
Weighted average
interest rate 7.84% 8.03% 7.43% 7.25% 7.14% 7.25%
Variable rate debt $ 779 $29,804 $1,846 $ 2,081 $ 2,312 $34,670 $ 71,492 $ 71,492
WPC conducts business in France. The foreign operations and foreign currency
translation gains and losses have not been material. Accordingly, WPC is subject
to foreign currency exchange rate risk from the effects that exchange rate
movements of foreign currencies and this may affect our future costs and cash
flows; however, exchange rate movements to date have not had a significant
effect on WPC's financial position or results of operations. For the three and
six-month period ended June 30, 2003, WPC recognized $497 in foreign currency
transaction gains in connection with the transfer of cash from foreign operating
subsidiaries to the parent company. The cumulative foreign currency translation
adjustment reflects a loss of $612. The cash received was subsequently converted
into dollars. To date, WPC has not entered into any foreign currency forward
exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
June 30, 2003.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
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W. P. CAREY & CO. LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 10, 2003, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a three-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No
---------------- ------------------- ----------------- ----------------
William P. Carey 31,841,862 31,615,712 226,150
Dr. Lawrence R. Klein 31,841,862 31,524,661 317,201
Nathaniel S. Coolidge 31,841,862 31,552,069 289,793
Charles C. Townsend, Jr. 31,841,862 31,610,188 231,674
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2003, the Company filed a report on Form
8-K dated April 29, 2003 under Item 7, "Financial Statements and Exhibits"
and Item 12, "Results of Operation and Financial Condition."
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
8/12/2003 By: /s/ John J. Park
--------- -----------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
8/12/2003 By: /s/ Claude Fernandez
--------- -----------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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