Back to GetFilings.com
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 SEPTEMBER 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: 0-20016
-------------------------------
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3602400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
---------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-----------------------------
CIP(R) has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CIP(R) HAS NO SECURITIES registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
CIP(R) (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for 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.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No[ ].
CIP(R) has no active market for common stock at November 10, 2003.
CIP(R) has 28,152,621 shares of common stock, $.001 par value outstanding at
November 10, 2003.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of September 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2003 and 2002 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 5-6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. - Controls and Procedures 21
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 22
Item 6. - Exhibits and Reports on Form 8-K 22
Signatures 23
* The summarized condensed 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-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited) (Note)
--------- ----
ASSETS:
Land and buildings, net of accumulated depreciation of $35,857,291 at
September 30, 2003 and $30,938,834 at December 31, 2002 $306,578,331 $300,808,511
Net investment in direct financing leases 122,678,356 133,955,555
Real estate under construction - 5,725,416
Assets held for sale 5,592,634 2,500,000
Equity investments 61,250,996 58,578,685
Cash and cash equivalents 19,696,167 25,782,304
Marketable securities 11,977,933 11,014,711
Other assets 12,094,691 11,861,713
------------ ------------
Total assets $539,869,108 $550,226,895
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $236,832,113 $248,519,101
Limited recourse mortgage note payable on assets held for sale 2,995,731 3,060,478
Accrued interest 1,776,006 1,550,184
Accounts payable and accrued expenses 1,332,669 1,832,633
Due to affiliates 2,459,967 2,552,528
Dividends payable 6,007,318 5,938,632
Other liabilities 6,096,316 6,259,707
------------ ------------
Total liabilities 257,500,120 269,713,263
------------ ------------
Minority interest 15,689,730 13,703,146
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares;
29,132,348 and 28,833,385 shares issued and outstanding at
September 30, 2003 and December 31, 2002 29,132 28,833
Additional paid-in capital 312,725,726 308,659,610
Dividends in excess of accumulated earnings (35,736,764) (31,519,364)
Accumulated other comprehensive income 2,004,349 956,456
------------ ------------
279,022,443 278,125,535
Less, common stock in treasury at cost, 1,063,516 and 984,755 shares
at September 30, 2003 and December 31, 2002 (12,343,185) (11,315,049)
------------ ------------
Total shareholders' equity 266,679,258 266,810,486
------------ ------------
Total liabilities, minority interest and shareholders' equity $539,869,108 $550,226,895
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date.
-2-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $ 9,516,102 $ 9,349,160 $28,518,213 $24,367,683
Interest income from direct financing
leases 3,888,984 3,750,402 11,686,342 9,947,782
Interest and other income 418,171 192,417 1,490,328 251,973
----------- ----------- ----------- -----------
13,823,257 13,291,979 41,694,883 34,567,438
----------- ----------- ----------- -----------
Expenses:
Interest 4,630,739 4,747,702 14,348,537 11,333,743
Depreciation 1,733,560 1,616,676 5,177,833 3,988,478
General and administrative 915,792 1,066,135 2,852,066 2,955,974
Property expenses 2,781,385 2,505,935 7,609,217 6,333,789
Impairment charges on real estate 3,800,000 - 4,474,372 -
Charge on early extinguishment of debt - 1,770,618 - 3,857,001
----------- ----------- ----------- -----------
13,861,476 11,707,066 34,462,025 28,468,985
----------- ----------- ----------- -----------
(Loss) income from continuing
operations before minority interest,
equity investments and gains and
losses (38,219) 1,584,913 7,232,858 6,098,453
Minority interest in income, net of charge
on early extinguishment of debt of
$1,011,353 in 2002 (779,690) (414,672) (2,246,531) (345,780)
Income from equity investments 2,518,428 2,388,924 8,009,456 6,357,368
----------- ----------- ---------- -----------
Income from continuing operations
before gains and losses 1,700,519 3,559,165 12,995,783 12,110,041
Unrealized gain on foreign currency
transactions 119,789 - 119,789 -
Reversal of unrealized gain on warrants in
connection with disposition - - - (2,128,000)
Gain on sale of warrants, net - - - 1,992,678
----------- ----------- ----------- -----------
Income from continuing operations 1,820,308 3,559,165 13,115,572 11,974,719
----------- ----------- ---------- -----------
Discontinued operations:
Income from operations of discontinued
properties 106,750 95,942 361,772 174,824
Gain on sale of real estate - 257,599 8,774
Impairment charge on assets held for sale - (1,090,347) - (1,090,347)
----------- ----------- ----------- -----------
Income (loss) from discontinued
operations 106,750 (994,405) 619,371 (906,749)
----------- ----------- ----------- -----------
Net income $ 1,927,058 $ 2,564,760 $13,734,943 $11,067,970
============ =========== =========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Basic earnings per share:
Earnings from continuing operations $ .07 $ .13 $ .47 $ .47
Earnings from discontinued operations - (.04) .02 (.04)
----------- ----------- ----------- -----------
Net income $ .07 $ .09 $ .49 $ .43
=========== =========== =========== ===========
Diluted earnings per share:
Earnings from continuing operations $ .07 $ .13 $ .46 $ .46
Earnings from discontinued operations - (.04) .02 (.03)
----------- ----------- ----------- -----------
Net income $ .07 $ .09 $ .48 $ .43
=========== =========== =========== ===========
Weighted average common shares
outstanding-basic 28,382,907 27,871,349 27,986,388 25,420,864
=========== =========== =========== ===========
Weighted average common shares
outstanding-diluted 28,946,588 28,435,030 28,550,069 25,984,545
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $1,927,058 $2,564,760 $13,734,943 $11,067,970
---------- ---------- ----------- -----------
Other comprehensive income:
Change in unrealized gain (loss) on
marketable securities 5,185 (4,616) 1,106,021 (4,616)
Change in foreign currency translation
adjustment (647,190) 133,526 (58,128) 659,946
---------- ---------- ----------- -----------
Other comprehensive (loss) income (642,005) 128,910 1,047,893 655,330
---------- ---------- ----------- -----------
Comprehensive income $1,285,053 $2,693,670 $14,782,836 $11,723,300
========== ========== =========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $13,734,943 $ 11,067,970
Adjustments to reconcile net income to net cash provided by continuing operations:
(Income) loss from discontinued operations (619,371) 906,749
Depreciation and amortization 5,742,159 4,239,359
Income from equity investments in excess of distributions received (3,190,848) (2,078,315)
Charge on extinguishment of debt - 3,857,001
Minority interest in income 2,246,531 345,780
Straight-line rent adjustments (559,580) (647,142)
Unrealized gains on foreign currency transactions (119,789) -
Reversal of unrealized gain on warrants in connection with disposition - 2,128,000
Gain on sale of warrants - (1,992,678)
Impairment charges on real estate 4,474,372 -
Issuance of shares in satisfaction of performance fees 2,685,009 2,219,269
Prepayment premium paid on extinguishment of debt - (3,439,377)
Net change in operating assets and liabilities, net of assets and
liabilities acquired (569,917) (1,729,114)
----------- ------------
Net cash provided by continuing operations 23,823,509 14,877,502
Net cash provided by (used in) discontinued operations 370,829 466,812
----------- ------------
Net cash provided by operating activities 24,194,338 15,344,314
----------- ------------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 518,537 505,679
Payment of leasing costs - (244,237)
Acquisition of real estate and additional capitalized costs (1,554,831) (2,625,746)
Redemption of dissenter interests with acquisition of business operations - (1,774,385)
Costs incurred in connection with acquisition of business operations - (615,766)
Cash acquired on acquisition of business operations - 765,493
Proceeds from sale of securities and real estate 2,361,741 4,484,315
Purchase of securities - (14,777,285)
----------- ------------
Net cash provided by (used in) investing activities 1,325,447 (14,281,932)
----------- ------------
Cash flows from financing activities:
Purchase of treasury stock (1,028,136) (1,232,731)
Prepayment of mortgage payable (9,274,825) (66,948,469)
Payments of mortgage principal (4,500,978) (3,641,487)
Proceeds from mortgages 565,185 120,110,222
Proceeds from stock issuance 1,381,406 1,067,092
Distributions to minority partners (1,961,810) (1,179,278)
Capital distributions to minority partners - (2,745,674)
Contributions from minority partners 1,496,328 257,982
Payment of financing costs (442,637) (4,157,122)
Dividends paid (17,883,657) (14,999,570)
----------- ------------
Net cash (used in) provided by financing activities (31,649,124) 26,530,965
----------- ------------
Effect of exchange rate changes on cash 43,202 14,417
----------- ------------
Net (decrease) increase in cash and cash equivalents (6,086,137) 27,607,764
Cash and cash equivalents, beginning of period 25,782,304 7,388,480
----------- ------------
Cash and cash equivalents, end of period $19,696,167 $ 34,996,244
=========== ============
- continued -
-5-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
Noncash investing activities:
A. The purchase of Corporate Property Associates 10 Incorporated on May 1, 2002
consisted of the acquisition of certain assets and liabilities at fair value
in exchange for the issuance of shares, notes payable and a cash payment to
dissenters as follows:
Real estate assets $127,721,807
Equity investment in Marcourt Investments, Inc., a real estate
investment trust 11,993,899
Cash 765,493
Other assets 5,204,479
Mortgage notes payable, net of discount of $294,273 (52,077,045)
Other liabilities (5,231,182)
Minority interest (2,092,437)
------------
Net assets acquired $ 86,285,014
============
Shares issued $ 73,155,478
Notes payable issued, net of discount of $383,737 11,355,151
Cash paid for redemption of dissenter interests 1,774,385
------------
Consideration paid $ 86,285,014
============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-6-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of Carey
Institutional Properties Incorporated (the "Company") 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 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 intercompany 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 consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale security, which
is measured at fair value with all gains and losses from changes in fair value
reported as a component of other comprehensive income as part of shareholders'
equity. As of September 30, 2003, the fair value of the Company's interest was
$11,977,933, reflecting an aggregate unrealized gain of $1,557,753 and
cumulative net amortization of $196,465 ($142,799 for the nine months ended
September 30, 2003). The fair value of the Company's interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees.
One of the key variables in determining the fair value of the subordinated
interest is current interest rates. As required by SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities,"
a sensitivity analysis of the current value of the interest based on adverse
changes in the market interest rates of 1% and 2% is as follows:
Fair Value as of
September 30, 2003 1% Adverse Change 2% Adverse Change
------------------ ----------------- -----------------
Fair value of the interests $11,977,933 $11,388,024 $10,838,242
The above sensitivity is hypothetical and changes in fair value, based on a 1%
or 2% variation, should not be extrapolated because the relationship of the
change in assumption to the change in fair value may not always be linear.
-7-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 3. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
and nine-month periods ended September 30, 2003 and 2002 were calculated as
follows:
Three Months Ended September 30,
--------------------------------
2003 2002
---- ----
Income from continuing operations $ 1,820,308 $ 3,559,165
Income (loss) from discontinued operations 106,750 (994,405)
----------- -----------
Net income $ 1,927,058 $ 2,564,760
=========== ===========
Weighted average shares - basic 28,382,907 27,871,349
Effect of dilutive securities: Stock warrants 563,681 563,681
----------- -----------
Weighted average shares - diluted 28,946,588 28,435,030
=========== ===========
Basic earnings per share from continuing operations $ .07 $ .13
Basic loss from discontinued operations - (.04)
----------- -----------
Basic earnings per share $ .07 $ .09
=========== ===========
Diluted earnings per share from continuing operations $ .07 $ .13
Diluted loss from discontinued operations - (.04)
----------- -----------
Diluted earnings per share $ .07 $ .09
=========== ===========
Nine Months Ended September 30,
--------------------------------
2003 2002
---- ----
Income from continuing operations $ 12,115,572 $11,974,719
Income (loss) from discontinued operations 619,371 (906,749)
------------ ----------
Net income $ 12,734,943 $11,067,970
============ ==========
Weighted average shares - basic 27,986,388 25,420,864
Effect of dilutive securities: Stock warrants 563,681 563,681
------------ -----------
Weighted average shares - diluted 28,550,069 25,984,545
============ ===========
Basic earnings per share from continuing operations $ .47 $ .47
Basic earnings (loss) from discontinued operations .02 (.04)
------------ -----------
Basic earnings per share $ .49 $ .43
============ ===========
Diluted earnings per share from continuing operations $ .46 $ .46
Diluted earnings (loss) from discontinued operations .02 (.03)
------------ -----------
Diluted earnings per share $ .48 $ .43
============ ===========
Note 4. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and Carey Asset Management Corp, a wholly-owned
subsidiary of W. P. Carey & Co. LLC (the "Advisor"), provides that the Advisor
receive asset management and performance fees, each of which are 1/2 of 1/% of
Average Invested Assets as defined in the Advisory Agreement. The Advisor has
elected at its option to receive the performance fee in restricted shares of
common stock of the Company rather than cash. The Advisor is also reimbursed for
the actual cost of personnel needed to provide administrative services necessary
to the operation of the Company. The Company incurred asset management fees of
$890,862 and $903,670 for the three months ended September 30, 2003 and 2002,
respectively, and $2,676,628 and $2,444,627 for the nine months ended September
30, 2003 and 2002, respectively, with performance fees in like amount. The
Company incurred personnel cost reimbursements of $364,075 and $404,141 for the
three months ended September 30, 2003 and 2002 and $1,183,708 and $1,107,947 for
the nine months ended September 30, 2003 and 2002, respectively.
-8-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 5. Lease Revenues:
The Company's operations consist of the direct and indirect investment in and
the leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the nine-month periods ended September 30,
2003 and 2002 are as follows:
2003 2002
---- ----
Per Statements of Income:
Rental income from operating leases $28,518,213 $24,367,683
Interest from direct financing leases 11,686,342 9,947,782
Adjustments:
Share of leasing revenue applicable to
minority interest (4,091,291) (1,567,855)
Share of leasing revenue from equity
investments 13,540,869 11,833,535
----------- -----------
$49,654,133 $44,581,145
=========== ===========
For the nine-month periods ended September 30, 2003 and 2002, the Company earned
its net lease revenues from its investments as follows:
2003 % 2002 %
---- - ---- -
Marriott International, Inc. (a) $ 6,738,631 14% $ 5,152,873 12%
Omnicom Group, Inc. 3,274,527 7 3,199,034 7
Information Resources, Inc. (b) 2,612,482 5 2,136,282 5
Advanced Micro Devices, Inc. (a) 2,444,203 5 2,444,203 5
Electronic Data Systems Corporation 2,255,197 5 2,121,247 5
Best Buy Co., Inc. (b) 2,221,053 4 2,237,362 5
Titan Corporation (b) 1,687,466 3 1,138,940 3
ShopRite Supermarkets, Inc. (b) 1,577,378 3 1,562,459 4
Lucent Technologies, Inc. 1,526,478 3 1,480,859 3
UTI Holdings, Inc. 1,345,114 3 1,330,472 3
EnviroWorks, Inc. 1,306,433 3 725,796 2
New WAI, L.P./Warehouse Associates 1,290,047 3 716,693 2
Garden Ridge, Inc. 1,205,404 2 1,180,019 3
Q Clubs, Inc. 1,112,443 2 1,077,374 2
Del Monte Corporation (a) 1,108,285 2 1,012,553 2
Sicor, Inc. (a) 1,104,552 2 1,104,552 3
Barnes & Noble, Inc. 1,099,641 2 1,085,946 2
Merit Medical Systems, Inc. 1,099,053 2 1,099,053 3
Childtime Childcare, Inc. 1,091,879 2 792,214 1
The Upper Deck Company (a) 1,089,165 2 1,089,165 2
Compucom Systems, Inc. (a) 1,056,033 2 1,030,188 2
Michigan Mutual Insurance Company 1,021,697 2 1,022,266 2
Plexus Corp. 958,954 2 951,520 2
Bell Sports Corp. 894,167 2 881,303 2
Other 8,533,851 18 8,008,772 18
----------- --- ----------- ---
$49,654,133 100% $44,581,145 100%
=========== === =========== ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
(b) Net of amounts applicable to minority interests.
For the nine-month period ended September 30, 2003, lessees were responsible for
the direct payment of approximately $4,946,000 of real estate taxes on behalf of
the Company.
-9-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 6. Equity Investments:
The Company owns a 47.3% interest in Marcourt Investments, Inc., a real estate
investment trust which net leases 13 hotel properties to a wholly-owned
subsidiary of Marriott International, Inc., with the remaining interests owned
by a third-party. The Company also owns interests with affiliates in properties
leased to corporations through equity interests in various partnerships and
limited liability companies and a tenancy-in-common interest subject to joint
control. The ownership interests range from 33.33% to 50%, and the underlying
investments are owned with affiliates that have similar investment objectives as
the Company. The lessees are Sicor Inc., The Upper Deck Company, Advanced Micro
Devices, Inc., Compucom Systems, Inc. and Del Monte Corporation.
Summarized financial information of the Company's equity investees is as
follows:
(in thousands) September 30, 2003 December 31, 2002
------------------ -----------------
Assets (primarily real estate) $341,066 $343,846
Liabilities (primarily mortgage notes payable) 206,586 212,820
Shareholders' and members' equity 134,480 131,026
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Revenues (primarily rental income and interest income from
direct financing leases) $ 31,407 $ 31,918
Expenses (primarily interest on mortgage and depreciation) (15,453) (15,979)
-------- --------
Net income $ 15,954 $ 15,939
======== ========
Note 7. Assets Held for Sale and Discontinued Operations:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the net income
(or loss) and gain or loss on sale of real estate for properties sold or held
for sale are to be reflected in the consolidated statements of income as
"Discontinued Operations" for all periods presented. The provisions of SFAS No.
144 are effective for disposal activities initiated by the Company's commitment
to a plan of disposition after the date it is initially applied (January 1,
2002).
The Company owns a property in Maple Heights, Ohio leased to Nicholson
Warehouse, L.P. and a vacant property in Austin, Texas which are held for sale
as of September 30, 2003. The Austin property was sold on October 24, 2003 for
approximately $2,550,000.
The results of operations of the two properties held for sale as of September
30, 2003 and properties in Broken Arrow, Oklahoma and Little Rock, Arkansas that
were sold in April 2003 and June 2002, respectively, are included as
"Discontinued Operations" and are summarized as follows:
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Revenues (primarily rental revenues and miscellaneous income) $ 725,570 $ 768,617
Expenses (primarily interest on mortgages, depreciation and
property expenses) (363,798) (593,793)
Gain on sale of real estate 257,599 8,774
Impairment charge on assets held for sale - (1,090,347)
--------- -----------
Income (loss) from discontinued operations $ 619,371 $ (906,749)
========= ===========
As a result of classifying the properties as held for sale, no depreciation has
been incurred from the date of reclassification. The effect of suspending
depreciation expense was to reduce the expense by $65,000 and $195,000 for the
three-month and nine-month periods ended September 30, 2003 and had no effect
for the three-month and nine-month periods ended September 30, 2002.
-10-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 8. Impairment Charges on Real Estate:
The Company determined that an other than temporary decline in estimated
residual value had occurred at two properties which were classified as net
investment in direct financing leases in the accompanying condensed consolidated
financial statements. The accounting for the direct financing leases was revised
using the changed estimates, which resulted in the recognition of impairment
charges of (i) $436,831 on the Company's property in Owingsville, Kentucky
leased to Custom Foods Products, Inc. and (ii) $237,539 on its property in the
United Kingdom leased to Gloystarne, Inc. ("Gloystarne"). In 2003, Gloystarne
entered into receivership and management has concluded that the existing lease
will be terminated. As a result, the property has been reclassifed to real
estate accounted for under the operating method. In connection with the
reclassification, the property was written down to its estimated fair value and
an impairment charge of $3,800,000 has been recognized.
Note 9. 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 no longer classifies gains and losses for the
extinguishment of debt as extraordinary items.
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 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 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
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company'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,
-11-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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 for valuing stock-based compensation of SFAS No. 148 are
to be applied for fiscal years ending after December 15, 2002. The Company does
not have any employees nor any stock-based compensation plans.
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. On October 8, 2003, the FASB
staff issued a FASB Staff Position ("FSP") which deferred the effective date of
FIN 46 until December 31, 2003 for VIEs created prior to February 1, 2003. The
Company's maximum loss exposure is the carrying value of its equity investments.
The Company has evaluated the potential impact and believes this interpretation
will not have a material impact on its accounting for its investments in
unconsolidated joint ventures as none of these investments are VIEs.
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 adoption of SFAS No.
149 did not have a material effect on the financial statements.
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. The FASB recently issued FSP 150-3,
which defers the provisions of paragraph 9 and 10 of SFAS No. 150 indefinitely
as they apply to mandatorily redeemable noncontrolling interests associated with
finite-lived entities. 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
has interests in four limited partnerships that are consolidated and that are
considered mandatorily redeemable controlling interests with finite lives. In
accordance with the deferral noted above, these minority interests have not been
reflected as liabilities. The carrying value and fair value of these minority
interests are approximately $9,505,000 and $34,886,000, respectively, at
September 30, 2003.
-12-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Carey Institutional
Properties Incorporated's ("CIP(R)") condensed consolidated financial statements
and notes thereto as of September 30, 2003 included in this quarterly report and
CIP(R)'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 CIP(R) 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 CIP(R) that the results or conditions described in such
statements or the objectives and plans of CIP(R) will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2002 provides a
description of CIP(R)'s business objectives, acquisition and financing
strategies and risk factors which could affect future operating results.
CRITICAL ACCOUNTING POLICIES:
Certain accounting policies are critical to the understanding of CIP(R)'s
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of CIP(R)'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, CIP(R) must assess its ability to collect rent and
other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CIP(R)'s real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods. CIP(R) generally
recognizes a provision for uncollected rents which typically ranges between
0.25% and 1% of lease revenues (rental income and interest income from direct
financing leases) and will measure its allowance against actual rent arrearages
and adjust the percentage applied.
Operating real estate is stated at cost less accumulated depreciation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. No interest was capitalized in the nine months ended September
30, 2003. CIP(R) considers a build-to-suit project as substantially completed
upon the completion of improvements, but no later than a date that is negotiated
and stated in the lease. If portions of a project are substantially completed
and occupied and other portions have not yet reached that stage, the
substantially completed portions are accounted for separately. CIP(R) allocates
costs incurred between the portions under construction and the portions
substantially completed and only capitalizes those costs associated with the
portion under construction.
In connection with CIP(R)'s acquisition of properties, purchase costs will be
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values in accordance with SFAS No. 141, "Business
Combinations." The value of the tangible assets, consisting of land, buildings
and tenant improvements, will be determined as if vacant. Intangible assets
including the above-market or below-market value of leases, the value of
in-place leases and the value of tenant relationships will be recorded at their
relative fair values.
CIP(R) records above-market and below-market in-place lease values for owned
properties based on the present value (using an interest rate reflecting the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in-place at
the time of acquisition of the properties and (ii) an estimate of fair market
lease rates for the property or equivalent property, measured over a period
equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease value is amortized as a reduction of rental income over the
remaining non-cancelable term of each lease. The capitalized below-market lease
value is amortized as an increase to rental income over the initial term and any
fixed rate renewal periods in the respective leases.
The total amount of other intangible assets is allocated to in-place lease
values and tenant relationship intangible values based on CIP(R)'s evaluation of
the specific characteristics of each tenant's lease and its overall relationship
with each tenant. Characteristics considered in allocating these values include
the nature and extent of the existing relationship with the tenant, prospects
for developing new business with the tenant, the tenant's credit quality and the
expectation of lease renewals among other factors. The aggregate value of other
intangible assets acquired is measured based on the difference between (i) the
property valued with an in-place lease adjusted to market rental rates and (ii)
the property valued as if vacant. Independent appraisals or our estimates are
considered in determining these values.
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Factors considered in the analysis include the estimated carrying costs of the
property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. CIP(R) also considers
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs will include real estate taxes, insurance,
other property operating costs and estimates of lost rentals at market rates
during the hypothetical expected lease-up periods, based on an assessment of
specific market conditions. CIP(R) estimates costs to execute leases including
commissions and legal costs to the extent that such costs are not already
incurred with a new lease that has been negotiated in connection with the
purchase of the property.
The value of in-place leases are amortized to expense over the remaining initial
term of each lease. The value of tenant relationship intangibles are amortized
to expense over the initial and renewal terms of the leases but no amortization
period for intangible assets will exceed the remaining depreciable life of the
building.
CIP(R) 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, Management 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 Management to
make its best estimate of market rent, residual value and holding period. As
CIP(R)'s investment objective is to hold properties on a long-term basis,
holding periods will range from five to ten years. In its evaluations, CIP(R)
obtains market information from outside sources; however, such information
requires Management to determine whether the information received is appropriate
to the circumstances. Depending on the assumptions made and estimates used, the
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. Because CIP(R)'s properties are leased to single
tenants, CIP(R) is more likely to incur significant writedowns when
circumstances affecting a tenant deteriorate because of the possibility that a
property will be vacated in its entirety. This makes the risk different than the
risks faced by companies that own multi-tenant properties. Events or changes in
circumstances can result in further writedowns and impact the gain or loss
ultimately realized upon sale of the asset. For its direct financing leases,
CIP(R) performs a review of its estimated residual values of properties at least
annually to determine whether there has been an other than temporary decline in
CIP(R)'s current estimate of residual value. 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 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.
When assets are identified by management as held for sale, CIP(R) 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,
CIP(R) 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.
In 2002, CIP(R) acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CIP(R) or
three of its affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests and the fair
value will be adjusted.
CIP(R) measures derivative instruments, including certain derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CIP(R)'s right or obligations under the applicable
derivative contract. For derivatives designated as fair value hedges, the
changes in the fair value of both the derivative instrument and the hedged item
are recorded in earnings (i.e., the forecasted event occurs). For derivatives
designated as cash flow hedges, the effective portions of the derivatives would
be reported in other comprehensive income and are subsequently reclassified into
earnings when the hedged item affects earnings. Changes in the fair value of
derivative instruments not designated as hedging and ineffective portions of
hedges are recognized in earnings in the affected period.
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CIP(R) and affiliated REITs are investors in certain real estate ventures.
Certain of the investments are held through incorporated or unincorporated
jointly held entities and certain investments are held directly as tenants in
common. Substantially all of these investments represent jointly purchased
properties which were net leased to a single tenant and were structured to
provide diversification and reduce concentration of a risk from a single lessee
for CIP(R) and the affiliated REIT. The placement of an investment in a jointly
held entity or tenancy in common requires the approval of the Independent
Directors. All of the jointly held investments are structured so that CIP(R) and
the affiliated REIT contribute equity, receive distributions and are allocated
profit or loss in amounts that are proportional to their ownership interests. No
fees are payable to affiliates under any of the partnership or joint venture
agreements. All of the jointly held investments are subject to contractual
agreements. The presentation of these jointly held investments and their related
results in the accompanying consolidated financial statements is based on
factors such as controlling interest, significant influence and whether each
party has the ability to make independent decisions. Equity method investments
are reviewed for impairment in the event of a change in circumstances that is
other than temporary. An investment is only impaired if Management's estimate of
the net realizable value of the investment is less than the carrying value of
the investment. To the extent that an impairment has occurred, the loss shall be
measured as the excess of the carrying amount of the investment over the fair
value of the investment.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CIP(R)'s leases provide for periodic rent increases based on formulas indexed to
increases in the CPI. CPI-based and other contingent-type rents are recognized
currently. CIP(R) recognizes rental income from sales overrides, after the level
of sales requiring a rental payment to CIP(R) is reached.
CIP(R) classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases at the inception of a lease based on
several criteria, including, but not limited to, estimates of the remaining
economic life of the leased assets and the calculation of the present value of
future minimum rents. In determining the classification of a lease, CIP(R) uses
estimates of remaining economic life provided by independent appraisals of the
leased assets. The calculation of the present value of future minimum rents
includes determining a lease's implicit interest rate which requires an estimate
of the residual value of leased assets as of the end of the non-cancelable lease
term. Different estimates of residual value result in different implicit
interest rates and could possibly affect the financial reporting classification
of leased assets. The general terms of CIP(R)'s leases are not necessarily
different for operating and direct financing leases; however the classification
is based on accounting pronouncements which are intended to indicate whether the
risks and rewards of ownership are retained by the lessor or transferred to the
lessee. Management believes that it retains certain risks of ownership
regardless of accounting classification.
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 included in charges for early extinguishment of debt if a loan
is retired.
To the extent that 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 CIP(R) 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
-15-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 or are (ii) 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 financial statements.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of its portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CIP(R)'s ability to meet distribution objectives, increase the dividend and
increase value by evaluating potential investments in single tenant net lease
real estate and by seeking opportunities such as refinancing mortgage debt at
lower rates of interest, restructuring leases or paying off lenders at a
discount to the face value of the outstanding mortgage balance. As of September
30, 2003 and 2002, CIP(R) owned real estate in the United States, the United
Kingdom and France.
RESULTS OF OPERATIONS:
For the three-month and nine-month periods ended September 30, 2003, CIP(R)'s
net income was $1,927,000 and $13,735,000, respectively, as compared with net
income of $2,565,000 and $11,068,000 for the three-month and nine-month periods
ended September 30, 2002. The results for the three-month and nine-month periods
ended September 30, 2002 included charges on the early extinguishment of debt of
$1,532,000 and $2,846,000, net of the portion of such charges applicable to
minority interest owners and, for the three-month and nine-month periods ended
September 30, 2003, the results included noncash impairment charges of
$3,800,000 and $4,474,000 respectively. Income from continuing operations
decreased by $2,739,000 and increased by $141,000 for the comparable three-month
and nine-month periods, respectively. CIP(R) results included increases in lease
revenues, interest and other income and income from equity investments which
were partially offset by increases in property expense, and for the nine-month
periods, an increase in interest expense.
On May 1, 2002, CIP(R) acquired the business operations of Corporate Property
Associates 10 Incorporated ("CPA(R):10"), an affiliate, with investments in net
lease real estate and with the same objectives as CIP(R)'s, through a merger
approved by the shareholders of both companies. CIP(R) increased its asset base
by acquiring interests in 45 properties with a fair value of $139,716,000 and
assumed interests in 17 leases with 14 tenants. CIP(R) also acquired limited
recourse mortgage debt with a fair value of $52,077,000 as of the date of
acquisition. The merger with CPA(R):10 in May 2002, had no effect on the
comparability of the three-month period; however, the merger had a substantial
effect on the comparable nine-month period.
Lease revenues increased $306,000 and $5,890,000 for the comparable three and
nine-month periods with $167,000 and $326,000 of the increases due to rent
increases and $4,213,000 in the comparable nine-month periods representing lease
revenues from interests acquired from CPA(R):10. As a result of changes in
ownership of certain properties from tenancy-in-common to controlling interests
in a limited partnership and a limited liability company, rents from Childtime
Childcare, Inc. and ShopRite Supermarket, Inc. have been consolidated in the
accounts of CIP(R) since August 2002. Prior to the change in ownership, revenues
and expenses were recorded based on a proportional basis. Such change increased
lease revenues by $381,000 and $1,139,000 for the three-month and nine-month
periods, respectively; however it had no effect on net income.
In April 2003, Kmart Corporation terminated its lease for its Denton, Texas
store in connection with its bankruptcy reorganization. Annual rent from the
Denton store was $215,000. Kmart affirmed its leases for its properties in
Drayton Plains, Michigan and Citrus Hills, California, which contribute
aggregate annual lease revenues of $390,000. Kmart's plan of reorganization was
confirmed by the bankruptcy court and it emerged from bankruptcy on May 6, 2003.
CIP(R) is seeking to re-lease the Denton property. CIP(R) leases a property in
the United Kingdom to Gloystarne & Co., Ltd. at an annual rent of approximately
$610,000. In 2003, Gloystarne entered into receivership and is selling its
business. The
-16-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
current occupant of the property is under no obligation to accept the current
lease and CIP(R) believes the lease will be terminated. CIP(R) is in discussions
with the occupant to enter into a six-month agreement at the current rent and
followed by a new lease with an initial term of five-years. There is no
assurance that an agreement will be reached nor that the rent under any lease
will reach the levels under the Gloystarne lease. As a result, CIP(R) has
written down the property to its estimated fair value and recorded an impairment
charge of $3,800,000 on the Gloystarne property as of September 30, 2003.
Interest and other income increased $226,000 and $1,238,000 for the comparable
three and nine-month periods primarily as a result of interest income earned
from CIP(R)'s subordinated interest in Carey Commercial Mortgage Trust which was
acquired in September 2002. Interest income from the mortgage trust
participation was $388,000 and $1,197,000 for the three-month and nine-month
periods ended September 30, 2003, respectively and $151,000 for both the
three-month and nine-month periods ended September 30, 2002.
Income from equity investments has increased $1,652,000 for the comparable
nine-month periods primarily as a result of CIP(R)'s ownership interest in
Marcourt Investments, Inc., a lessee of 13 Courtyard by Marriott hotels,
increasing from 24% to 47% as a result of the CPA(R):10 merger. Equity income
for both the three and nine-month periods also benefited from rent increases at
properties leased to Del Monte Corporation and Compucom Systems, Inc.
Property expense for the comparable nine-month periods increased $1,275,000,
primarily due to an increase in asset management fees and performance fees and
costs related to a property in Golden, Colorado formerly leased to Bolder
Technologies Corporation, including environmental cleanup costs of $519,000 at
the property. The cleanup was undertaken voluntarily and was not subject to any
regulatory requirements. Asset management and performance fees increased as a
result of the real estate assets acquired in the CPA(R):10 merger. Property
expense increased for the comparable three-month periods, primarily as a result
of an increase to provision for uncollected rent as a result of arrearages from
the Holiday Inn in Toulouse, France. In October 2003, CIP(R) sold its vacant
property in Austin, Texas which had been classified as a discontinued operation.
Annual carrying costs of the Austin property were $108,000. During the nine
months ended September 30, 2003, CIP(R) recognized impairment charges of
$4,474,000 on properties leased to Custom Foods Products, Inc. and Gloystarne.
Minority interest income for the three and nine-months ended September 30, 2002
includes charges on extinguishment of debt of $239,000 and $1,011,000 for
minority partners' share of charges incurred in connection with paying off
existing loans on properties leased to Best Buy Co.Inc., Childtime Childcare,
Inc. and ShopRite Supermarkets, Inc.
CIP(R) has reached an agreement to sell its property leased to Nicholson
Warehouse, L.P. for $4,350,000. Because of Nicholson's financial difficulties,
it has not been able to pay rent in excess of CIP(R)'s debt service on the
property. The proposed sale, if completed, therefore, would have little effect
on CIP(R)'s operating cash flow.
FINANCIAL CONDITION:
There has been no material change in CIP(R)'s financial condition since December
31, 2002. Cash flows from operations of $24,194,000 and equity investments of
$519,000 were sufficient to fund dividends to shareholders of $17,884,000,
scheduled mortgage principal installments of $4,501,000 and distributions to
minority partners of $1,962,000. In addition, CIP(R) received $2,550,000 from
the sale of the Austin property in October 2003.
During 2003, CIP(R)'s investing activities included receiving $2,362,000 from
the sale of a property in Broken Arrow, Oklahoma leased to Hobby Lobby, Inc.,
using $838,000 to purchase land at CIP(R)'s property and assuming an existing
ground lease, as lessor, in Conway, Arkansas leased to Kroger Co. and using
$713,000 to fund construction of an expansion at its hotel property in Toulouse,
France. The Hobby Lobby lease had contributed annual rental revenues of
$254,000. The ground lease on the Conway property will contribute additional
annual rent of $62,000. The expansion of the Toulouse hotel was completed in
February 2003; however, CIP(R) is not currently receiving rent from the lessee
until cash flows from hotel operations are in excess of certain obligations of
the lessee. Based on current cash flow projections, CIP(R) expects to start
receiving rents during the fourth quarter. The current occupancy rate at the
Toulouse hotel is 65%. There is no assurance that current projections will be
met.
-17-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In addition to the payment of dividends, scheduled principal mortgage payments
and operating distributions to minority interest partners, CIP(R)'s financing
activities for the nine months ended September 30, 2003 included using
$1,265,000 to pay off a mortgage loan in January 2003 and $8,010,000 to payoff a
mortgage loan on the Titan Corporation property in July 2003, for which CIP(R)'s
minority partner, an affiliate, provided $1,496,000 to fund its share of the
balloon payment. In addition, CIP(R) obtained $565,000 from advances on a
construction loan for the completion of the Toulouse hotel expansion. Annual
debt service on the retired loans was $1,512,000.
Balloon payments on the limited recourse mortgage debt of $12,928,000 are
scheduled in 2004. CIP(R) expects to refinance the maturing loans but may use
its available cash to satisfy a portion of the balloon payments. CIP(R)'s
financing strategy has been to purchase substantially all of its properties with
a combination of equity and limited recourse mortgage debt. A lender on a
limited recourse mortgage loan has recourse only to the property collateralizing
such debt and not to any of CIP(R)'s other assets. The use of limited recourse
mortgage debt, therefore, allows CIP(R) to limit its exposure of all of its
assets, and this strategy has allowed CIP(R) to diversify its portfolio of
properties and, thereby, limit its risk. In the event that a balloon payment
comes due, CIP(R) may seek to refinance the loan, restructure the debt with
existing lenders, evaluate its ability to pay the balloon payment from its cash
reserves or sell the property and use the proceeds to satisfy the mortgage debt.
CIP(R) may seek to finance its unencumbered properties and use the proceeds to
make additional investments in real estate. To the extent that CIP(R) obtains
such financing, it may increase CIP(R)'s overall leverage. CIP(R)'s equity
investees use the same financing strategy and have purchased their properties
with a combination of equity and limited recourse mortgage debt.
CIP(R) expects to meet its capital requirements to fund future property
acquisitions, capital expenditures on existing properties and scheduled debt
maturities through long-term limited recourse mortgages and possibly unsecured
indebtedness as well as use of its existing cash balances. CIP(R) is not
currently seeking additional sources of refinancing such as an unsecured line of
credit; however, its financing strategies could change in the future. Unsecured
financing, if obtained, would require CIP(R) to meet financial covenants such as
maintaining specific operating ratios and leverage ratios.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CIP(R)'s contractual obligations and commitments is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable (1) $239,828 $1,570 $18,984 $11,582 $5,071 $15,012 $ 187,609
Subordinated disposition fees 1,080 1,080
Commitments:
Share of minimum rents payable
under office cost-sharing
agreement 591 22 207 207 155
-------- -- ------- ------- ------ ------- ----------
$241,499 $1,592 $19,191 $11,789 $5,226 $15,012 $ 188,689
======== ====== ======= ======= ====== ======= ==========
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
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
-18-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
classified as extraordinary items unless it can be considered unusual in nature
and infrequent in occurrence. CIP(R) adopted this statement effective January 1,
2003, and the adoption did not have a material affect on CIP(R)'s financial
statements. CIP(R) no longer classifies gains and losses for the extinguishment
of debt as extraordinary items.
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 CIP(R)'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
CIP(R) 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 CIP(R)'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 for valuing stock-based compensation of SFAS No. 148 are to be
applied for fiscal years ending after December 15, 2002. CIP(R) does not have
any employees nor any stock-based compensation plans.
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. On October 8, 2003, the FASB
staff issued a FASB Staff Position ("FSP") which deferred the effective date of
FIN 46 until December 31, 2003 for VIEs created prior to February 1, 2003.
CIP(R)'s maximum loss exposure is the carrying value of its equity investments.
CIP(R) has evaluated the potential impact and believes this interpretation will
not have a material impact on its accounting for its investments in
unconsolidated joint ventures as none of these investments are VIEs.
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
-19-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 adoption of
SFAS No. 149 did not have a material effect on the financial statements.
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. The FASB recently issued FSP 150-3,
which defers the provisions of paragraph 9 and 10 of SFAS No. 150 indefinitely
as they apply to mandatorily redeemable noncontrolling interests associated with
finite-lived entities. 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. CIP(R) has
interests in four limited partnerships that are consolidated and that are
considered mandatorily redeemable controlling interests with finite lives. In
accordance with the deferral noted above, these minority interests have not been
reflected as liabilities. The carrying value and fair value of these minority
interests are approximately $9,505,000 and $34,886,000, respectively, at
September 30, 2003.
-20-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CIP(R) is exposed are interest rate risk
and foreign currency exchange risk.
The value of CIP(R)'s real estate is subject to fluctuations based on changes in
interest rates and foreign currency exchange rates, local and regional economic
conditions, changes in the creditworthiness of lessees and may affect CIP(R)'s
ability to refinance its debt when balloon payments are scheduled.
CIP(R) owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuations based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of September
30, 2003 the interests in CCMT had a fair value of approximately $11,978,000.
Approximately $221,610,000 of CIP(R)'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 annual interest rates on the fixed rate debt as of September 30, 2003
ranged from 6.95% to 10.00%. The annual interest rates on the variable rate debt
as of September 30, 2003 ranged from 3.58% to 5.63%.
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 1,143 $ 14,638 $ 7,533 $ 4,844 $ 14,729 $ 178,723 $221,610 $ 224,439
Weighted average
interest rate 8.06% 9.38% 8.32% 7.78% 8.44% 7.51%
Variable rate debt $ 427 $ 4,345 $ 4,049 $ 227 $ 284 $ 8,886 $ 18,218 $ 18,218
CIP(R) has one interest rate cap agreement contract, a derivative financial
instrument, with a notional amount of $6,750,000, and a strike of 8% based on
the one-month London Inter-Bank Offered Rate. The use of derivative financial
instruments is not currently significant to CIP(R)'s risk management.
CIP(R) has foreign operations. Accordingly, CIP(R) is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CIP(R)'s financial
position or results of operations. To date we have 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
September 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 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.
-21-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2003, no matters were submitted
to a vote of Security Holders.
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 September 30, 2003, the Company was not
required to file any reports on Form 8-K.
-22-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
11/10/2003 By: /s/ John J. Park
Date -------------------------------------
John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
11/10/2003 By: /s/ Claude Fernandez
Date -------------------------------------
Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
-23-