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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 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: 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 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
-------------------------
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 36,724,405 Listed Shares, no par value
outstanding at November 7, 2003.
W. P. CAREY & CO. LLC
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 7-17
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-29
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. - Controls and Procedures 30
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 31
Item 6. - Exhibits and Reports on Form 8-K 31
Signatures 32
*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)
September 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 $48,122 and $41,716 at September 30, 2003 and December 31, 2002 $ 415,120 $ 432,556
Net investment in direct financing leases 183,992 189,339
--------- ---------
Real estate leased to others 599,112 621,895
Operating real estate, net of accumulated depreciation of $1,665 at December 31, 2002 - 4,056
Real estate under construction and redevelopment 3,921 3,581
Equity investments 69,442 67,742
Assets held for sale 22,865 22,158
Cash and cash equivalents 17,047 21,304
Due from affiliates 51,406 40,241
Goodwill 49,874 49,874
Intangible assets, net of accumulated amortization of $23,574 and $18,543
at September 30, 2003 and December 31, 2002 40,215 44,567
Other assets 27,196 18,106
--------- ---------
Total assets $ 881,078 $ 893,524
========= =========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 177,118 $ 186,049
Notes payable 28,000 49,000
Dividends payable 15,925 15,486
Accounts payable and accrued expenses 16,237 19,250
Due to affiliates 2,795 12,874
Accrued taxes 9,742 5,285
Deferred taxes, net 28,576 19,763
Other liabilities 13,665 13,445
--------- ---------
Total liabilities 292,058 321,152
--------- ---------
Minority interest 1,740 1,484
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 36,691,584 and 35,944,110 shares issued
and outstanding at September 30, 2003 and December 31, 2002 708,072 690,594
Dividends in excess of accumulated earnings (115,175) (111,970)
Unearned compensation (6,543) (5,671)
Accumulated other comprehensive income (loss) 926 (2,065)
--------- ---------
Total members' equity 587,280 570,888
--------- ---------
Total liabilities, minority interest and members' equity $ 881,078 $ 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 September 30,
September 30, Nine Months Ended
------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Management income from affiliates $ 26,197 $ 18,669 $ 69,168 $ 50,752
Rental income 11,355 11,601 34,274 34,715
Interest income from direct financing leases 5,210 5,493 15,538 16,884
Other income 595 390 4,552 914
Other interest income 654 404 1,861 1,237
Revenue from other business operations 166 46 766 116
--------- --------- --------- ---------
44,177 36,603 126,159 104,618
--------- --------- --------- ---------
Expenses:
Interest 3,687 4,103 11,512 12,271
Depreciation 2,718 2,561 7,994 7,538
Amortization 1,693 2,310 5,603 6,930
General and administrative 12,102 10,063 34,983 26,737
Property expenses 1,607 2,163 5,299 4,739
Charge on extinguishment of debt 350 - 350 -
Impairment charge on real estate and investments 560 - 832 --
--------- --------- --------- ---------
22,717 21,200 66,573 58,215
--------- --------- --------- ---------
Income from continuing operations before minority interest,
equity investments, gains (losses) and income taxes 21,460 15,403 59,586 46,403
Minority interest in (income) loss 22 3 (69) 47
Income from equity investments 1,099 454 3,171 1,083
Gain on foreign currency transactions and sale of securities 156 - 653 94
--------- --------- --------- ---------
Income from continuing operations before income taxes and
gain on sale of real estate 22,737 15,860 63,341 47,627
Provision for income taxes (8,717) (4,016) (19,045) (11,296)
--------- --------- --------- ---------
Income from continuing operations before gain on sale
of real estate 14,020 11,844 44,296 36,331
--------- --------- --------- ---------
Discontinued operations:
Income from operations of discontinued properties 184 1,409 1,431 6,269
Gain on sale of real estate 393 2,443 547 2,409
Impairment charge on properties held for sale (550) (2,703) (1,980) (7,024)
--------- --------- --------- ---------
Income (loss) from discontinued operations 27 1,149 (2) 1,654
--------- --------- --------- ---------
Gain (loss) on sale of real estate - (8) - 12,322
--------- --------- --------- ---------
Net income $ 14,047 $ 12,985 $ 44,294 $ 50,307
========= ========= ========= =========
-- 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 Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Basic earnings per share:
Earnings from continuing operations $ .38 $ .33 $ 1.21 $ 1.37
Earnings from discontinued operations - .03 - .04
-------------- -------------- -------------- --------------
Net income $ .38 $ .36 $ 1.21 $ 1.41
============== ============== ============== ==============
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .33 $ 1.17 $ 1.35
Earnings from discontinued operations - .03 - .04
-------------- -------------- -------------- --------------
Net income $ .37 $ .36 $ 1.17 $ 1.39
============== ============== ============== ==============
Weighted average shares outstanding:
Basic 36,650,893 35,829,687 36,511,621 35,573,981
============== ============== ============== ==============
Diluted 38,239,815 36,423,026 37,728,358 36,173,636
============== ============== ============== ==============
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 Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income: $ 14,047 $ 12,985 $ 44,294 $ 50,307
-------- -------- -------- --------
Other comprehensive income:
Change in unrealized gain on marketable securities 1,549 (20) 2,389 (35)
Foreign currency translation adjustment (103) (68) 602 820
-------- -------- -------- --------
Other comprehensive income (loss) 1,446 (88) 2,991 785
-------- -------- -------- --------
Comprehensive income $ 15,493 $ 12,897 $ 47,285 $ 51,092
======== ======== ======== ========
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)
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 44,294 $ 50,307
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations, including gain on sale (1,978) (8,678)
Depreciation and amortization 14,256 15,091
Unrealized gain on foreign currency transactions (133) -
Charge on extinguishment of debt 350 -
Gain on sale of real estate and securities, net - (12,416)
Minority interest in income (loss) 69 (47)
Straight-line rent adjustments and amortization of deferred income (57) (569)
Equity income in excess of distributions (13) (62)
Management income received in shares of affiliates (13,669) (9,933)
Costs paid by issuance of shares 160 181
Amortization of unearned compensation 2,662 2,174
Impairment charges on securities, real estate and properties held for sale 2,812 7,024
Tax benefit - share incentive plans 2,470 1,177
Increase in deferred income taxes 8,522 7,920
Increase in structuring fees receivable (11,365) (9,527)
Deferred acquisition fees received 1,495 916
Net change in other operating assets and liabilities (7,720) 4,592
--------- ---------
Net cash provided by continuing operations 42,155 48,150
Net cash provided by discontinued operations 1,854 5,163
--------- ---------
Net cash provided by operating activities 44,009 53,313
--------- ---------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 2,177 2,473
Contributions to equity investments (1,496) -
Capital distributions received from equity investments 6,582 1,255
Proceeds from sale of property and investments 20,422 48,514
Release of funds from escrow in connection with the sale of a property - 9,366
Cash acquired on acquisition of subsidiary 1,300 -
Purchase of securities - (286)
Purchases of real estate - (1,268)
Additional capital expenditures (1,666) (783)
Payment of deferred acquisition fees (524) (524)
--------- ---------
Net cash provided by investing activities 26,795 58,747
--------- ---------
Cash flows from financing activities:
Dividends paid (47,060) (45,290)
Proceeds from issuance of shares, net 6,463 8,471
Proceeds from mortgages payable and note payable 54,000 54,000
Payments of mortgage principal (6,448) (6,233)
Prepayments of mortgage principal and note payable (82,131) (118,316)
Payment of financing costs - (165)
Payment of accrued preferred distributions - (1,423)
--------- ---------
Net cash used in financing activities (75,176) (108,956)
--------- ---------
Effect of exchange rate changes on cash 115 24
--------- ---------
Net (decrease) increase in cash and cash equivalents (4,257) 3,128
Cash and cash equivalents, beginning of period 21,304 8,870
--------- ---------
Cash and cash equivalents, end of period $ 17,047 $ 11,998
========= =========
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 September 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 nine-month
period ended September 30, 2003. For the year ended December 31,
2001, all of the criteria were achieved, and 500,000 shares were
issued during the nine-month period ended September 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 September 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") in April 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 of its own 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.
D. As a result of contributing its tenancy-in-common interest in
properties leased to Childtime Childcare, Inc. to a limited
partnership in August 2002, certain assets and liabilities were
reclassified as an equity investment as follows:
Land $1,674
Net investment in direct financing lease 2,413
Other assets 1
Mortgage payable (1,134)
------
Equity investment $2,954
======
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 in June 2003 and Corporate Property Associates International
Incorporated ("CPAI") formed in July 2003, each consisting primarily of $200 in
cash. As of September 30, 2003, the Company owns 20,000 shares each of CPA(R):16
and CPAI, representing 100% of the outstanding common stock of each company.
CPA(R):16 and CPAI have filed registration statements with the United States
Securities and Exchange Commission for a public offering to sell up to
100,000,000 and 27,500,000 shares of common stock, respectively. Upon issuance
of common stock by CPA(R):16 and CPAI, the Company expects to own significantly
less than 50% of CPA(R):16's and CPAI's voting stock, and, therefore, expects to
account for its investment in CPA(R):16 and CPAI under the equity method in the
future.
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 nine-month periods ended September 30, 2003 and 2002 were calculated as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2003 2002 2003 2002
----------- ------------ ------------ -----------
Income from continuing operations before gain on sale
of real estate $ 14,020 $ 11,844 $ 44,296 $ 36,331
Gain on sale of real estate -- (8) -- 12,322
----------- ------------ ------------ -----------
Income from continuing operations 14,020 11,836 44,296 48,653
Earnings (loss) from discontinued operations 27 1,149 (2) 1,654
----------- ------------ ------------ -----------
Net income $ 14,047 $ 12,985 $ 44,294 $ 50,307
=========== ============ ============ ===========
Weighted average shares - basic 36,650,893 35,829,687 36,511,621 35,573,981
Effect of dilutive securities: Stock options 1,588,922 593,339 1,216,737 599,655
----------- ------------ ------------ -----------
Weighted average shares - diluted 38,239,815 36,423,026 37,728,358 36,173,636
=========== ============ ============ ===========
Basic earnings per share:
Earnings from continuing operations $ .38 $ .33 $ 1.21 $ 1.37
Earnings from discontinued operations -- .03 -- .04
----------- ------------ ------------ -----------
Net income $ .38 $ .36 $ 1.21 $ 1.41
=========== ============ ============ ===========
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .33 $ 1.17 $ 1.35
Earnings from discontinued operations -- .03 -- .04
----------- ------------ ------------ -----------
Net income $ .37 $ .36 $ 1.17 $ 1.39
=========== ============ ============ ===========
-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 September 30, 2003 and 2002, the Company
earned asset-based fees and reimbursements of $15,465 and $8,029, respectively,
and transaction fees of $10,732 and $10,640 respectively. For the nine-month
periods ended September 30, 2003 and 2002, the Company earned asset-based fees
and reimbursements of $41,376 and $26,815, respectively, and transaction fees of
$27,792 and $23,937, 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 satisfied a performance hurdle 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 the ownership of WPCI
through the redemption of Carey's interest on April 1, 2003. WPCI distributed
492,881 shares of the Company and $1,898 of cash to Carey, equivalent to his
contributions to WPCI. The Company accounted for the acquisition as a purchase
and reflected the asset acquired and liabilities assumed at their estimated fair
value. Prior to the redemption, the Company accounted for its investment in WPCI
under the equity method of accounting. 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.
On June 30, 2003, WPCI granted an incentive award to certain officers of WPCI
consisting of 1,500,000 restricted shares, representing an approximate 13%
interest in WPCI, and 1,500,000 options for WPCI common stock with a combined
fair value of $2,485. Both the options and restricted stock will vest ratably
over five years. The options are exercisable at $1 per share for a period of ten
years. The awards are subject to redemption in 2012 if certain conditions are
met and, therefore, the fair value of the awards has been recorded as minority
interest and included in other liabilities in the accompanying condensed
consolidated financial statements. Any redemption will be subject to an
independent valuation of WPCI. The awards were also initially recorded in
unearned compensation as a component of shareholders' equity. The unearned
compensation is being amortized over the vesting periods and $444 has been
amortized into compensation expense for the three-month period ended September
30, 2003. The awards are being accounted for as a variable plan and any
subsequent changes in the fair value of the minority interest will be included
in the determination of net income.
-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 nine-month periods ended September 30,
2003 and 2002 are as follows:
2003 2002
-------- --------
Per Statements of Income:
Rental income $ 34,274 $ 34,715
Interest income from direct financing leases 15,538 16,884
Adjustment:
Share of leasing revenues applicable to minority interests (954) (581)
Share of leasing revenues from equity investments 6,390 5,219
-------- --------
$ 55,248 $ 56,237
======== ========
For the nine months ended September 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 $ 3,212 6% 3,300 6%
Detroit Diesel Corporation 3,118 6 3,118 6
Gibson Greetings, Inc., a wholly-owned subsidiary of American Greetings,
Inc 2,696 5 3,107 6
Bouygues Telecom, S.A. (b) 2,350 4 2,175 4
Federal Express Corporation (a) 2,172 4 2,147 4
America West Holdings Corp. 2,029 4 1,904 3
Orbital Sciences Corporation 1,991 4 1,991 4
Quebecor Printing, Inc. 1,969 4 1,921 3
AutoZone, Inc. 1,782 3 1,769 3
Checkfree Holdings Corporation Inc. (a) 1,596 3 1,581 3
Sybron International Corporation 1,563 3 1,623 3
Livho, Inc. 1,350 2 1,890 3
Unisource Worldwide, Inc. 1,283 2 1,299 2
CSS Industries, Inc. 1,236 2 1,243 2
Information Resources, Inc. (a) 1,233 2 1,233 2
Faurecia Exhaust Systems, Inc. 1,227 2 1,275 2
BE Aerospace, Inc. 1,225 2 110 --
Sybron Dental Specialties Inc. 1,210 2 1,210 2
Sprint Spectrum, L.P. 1,068 2 1,068 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of Lowe's
Companies Inc. 985 2 968 2
AT&T Corporation 945 2 945 2
United States Postal Service 925 2 925 2
BellSouth Telecommunications, Inc. 918 2 918 2
Lockheed Martin Corporation 910 2 731 1
Brodart, Co. 905 2 1,139 2
Hologic, Inc. (a) 852 1 -- --
Cendant Operations, Inc. 807 1 807 1
Anthony's Manufacturing Company, Inc. 764 1 764 1
Other (c) 12,927 23 15,076 27
------- ------- ------- ---
$55,248 100% $56,237 100%
======= ======= ======= ===
(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.
-9-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
(c) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to minority interest
owners.
For the nine-month period ended September 30, 2003, lessees were responsible for
approximately $5,302 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
September 30, 2003, the Company's ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
--------- -----------------------
CIP(R) 810,016 2.78%
CPA(R):12 852,404 2.74%
CPA(R):14 1,541,612 2.29%
CPA(R):15 273,993 0.26%
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:
September 30, 2003 December 31, 2002
------------------ -----------------
Assets (primarily real estate) $3,933,760 $3,223,783
Liabilities (primarily mortgage notes payable) 1,845,089 1,679,715
Partners' capital and shareholders' equity 2,088,671 1,544,068
Nine Months Ended September 30,
-------------------------------
2003 2002
--------- ---------
Revenue (primarily rental revenue) $ 237,270 $ 160,485
Expenses (primarily interest on mortgages
and depreciation) (211,616) (120,950)
Minority interest in income (7,392) (2,556)
Income from equity investments 32,017 15,152
Gain (loss) on sales 1,841 (394)
--------- ---------
Income from continuing operations 52,120 51,737
Income from discontinued operations 225 (177)
Gain on sale of real estate 258 --
--------- ---------
Net income $ 52,603 $ 51,560
========= =========
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 services and real
estate operations. The two segments are summarized as follows:
Three Months Ended September 30, Management Real Estate Other(1) Total Company
- -------------------------------- ---------- ----------- -------- -------------
Revenues:
2003 $ 26,197 $ 17,814 $ 166 $ 44,177
2002 18,669 17,888 46 36,603
Operating, interest, depreciation and
amortization expenses:
2003 $ 13,469 $ 9,248 -- $ 22,717
2002 9,795 11,405 -- 21,200
Income from equity investments:
2003 $ 324 $ 775 -- $ 1,099
2002 203 251 -- 454
Net operating income(2)(3):
2003 $ 13,052 $ 9,341 $ 166 $ 22,559
2002 9,077 6,734 46 15,857
Nine Months Ended September 30,
- -------------------------------
Revenues:
2003 $ 69,168 $ 56,225 $ 766 $ 126,159
2002 50,752 53,750 116 104,618
Operating, interest, depreciation and
amortization expenses:
2003 $ 38,423 $ 28,150 -- $ 66,573
2002 29,291 28,924 -- 58,215
Income from equity investments:
2003 $ 810 $ 2,361 -- $ 3,171
2002 354 729 -- 1,083
Net operating income(2)(3):
2003 $ 31,555 $ 30,436 $ 766 $ 62,757
2002 21,815 25,555 116 47,486
As of
- -----
Long-lived assets:
September 30, 2003 $ 73,162 $ 635,553 -- $ 708,715
December 31, 2002 70,089 663,721 4,056 737,866
Total assets:
September 30, 2003 $ 197,714 $ 683,343 $ 21 $ 881,078
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 $1,688 and $1,826 for the three-month periods ended
September 30, 2003 and 2002, respectively, and $5,031 and $5,479 for
the nine-month periods ended September 30, 2003 and 2002,
respectively.
(3) Net operating income excludes gains and losses on sales and foreign
currency transactions, provision for income taxes, minority interest
and discontinued operations.
Certain prior year amounts have been reclassified to discontinued operations.
-11-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
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 thirteen properties which were sold in 2003 or are classified
as held for sale as of September 30, 2003 and the operations of twenty three
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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
REVENUES:
Rental income $ 381 $ 882 $ 1,289 $ 3,283
Interest income from direct financing leases 55 586 566 3,007
Revenues of other business operations 170 1,351 1,694 4,000
Other interest income 103 3 431 195
Other income 28 -- 76 12
Settlement income -- -- 290 2,097
------- ------- -------- --------
737 2,822 4,346 12,594
------- ------- -------- --------
EXPENSES:
Interest expense -- 11 -- 1,119
Depreciation 70 307 407 943
Property expenses 320 99 1,124 787
General and administrative 1 (1) 3 42
Operating expenses of other business operations 162 956 1,346 3,357
Impairment charge on real estate 550 2,703 1,980 7,024
Taxes -- 41 35 77
------- ------- -------- --------
1,103 4,116 4,895 13,349
------- ------- -------- --------
(Loss) before gain on sales (366) (1,294) (549) (755)
Gain on sales of real estate 393 2,443 547 2,409
------- ------- -------- --------
Income (loss) from discontinued operations $ 27 $ 1,149 $ (2) $ 1,654
======= ======= ======== ========
In connection with the anticipated sale of the Company's McMinnville, Tennessee
property within the next twelve months, the Company has recognized an impairment
charge on properties held for sale of $550 on the writedown of the property to
its anticipated sales price, less estimated costs to sell, for the three and
nine-month periods ended September 30, 2003.
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $68 and $15 for the three-month periods ended
September 30, 2003 and 2002, and $200 and $45 for the nine-month periods ended
September 30, 2003, and 2002, respectively.
On October 20, 2003, the Company sold two properties located in Broomall,
Pennsylvania and Cuyahoga Falls, Ohio for $4,000. The properties have been
classified as held for sale as of September 30, 2003 in the accompanying
condensed consolidated financial statements.
-12-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 8. Foreign Currency Transactions and Sales of Real Estate:
2003
For the three and nine-periods ended September 30, 2003, the Company recognized
$23 and $520, respectively, 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. In addition, for the three and nine-month
periods ended September 30, 2003, the Company recognized unrealized foreign
currency gains of $133. As of September 30, 2003, the cumulative foreign
currency translation adjustment included in accumulated other comprehensive
income in shareholders' equity was a loss of $713.
During the nine-month period ended September 30, 2003, the Company sold
properties in Canton, Michigan; Alpena, Michigan; Apache Junction, Arizona and
Schiller Park, Illinois for net sales proceeds of $9,248, and recognized net
gain on sales of $530.
On July 11, 2003, the Company sold a property in Lancaster, Pennsylvania for net
proceeds of $4,946, and recognized a loss on sale of $29. 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 nine-month period ended September
30, 2003.
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.
2002
During the nine-month period ended September 30, 2002, the Company sold
properties in Fredericksburg, Virginia; Petoskey, Michigan; Urbana, Illinois;
Maumelle, Arkansas; Burnsville, Minnesota; Colville, Washington; McMinnville,
Tennessee and Casa Grande, Arizona for an aggregate of $13,604 and recognized a
net gain on sales of $1,766. In July 2002, the Company also sold six properties
leased to Saint-Gobain Corporation ("Saint-Gobain") located in New Haven,
Connecticut; Mickelton, NJ; Aurora, Ohio; Mantua, Ohio and Bristol, Rhode Island
for $26,000 and recognized a gain on sale of $1,796. In addition, the Company
sold its Los Angeles, California property for $24,000 and recognized a gain on
sale of $11,160.
Note 9. Impairment Charges on Real Estate and Other Gains and Losses:
In September 2003, the Company incurred a charge on the early extinguishment of
debt of $350 in connection with paying a prepayment premium when it paid off the
remaining balance of $2,649 on the mortgage encumbering its Toledo, Ohio
property. The loan had a stated annual interest rate of 7.63% with annual debt
service of $676 and was scheduled to mature in April 2006
The Company owns a property in Leeds, Alabama currently leased to Winn-Dixie
Stores, Inc. ("Winn-Dixie"). Winn-Dixie no longer occupies the property but has
continued to satisfy their rental obligations under a lease, which expires in
March 2004. Based on the Company's intention to sell the property, the property
has been written down to its estimated fair value less cost to sell, and
recognized an impairment charge of $560 in 2003.
-13-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 10. 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:
September 30, 2003 December 31, 2002
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Management contracts $ 59,814 $ (23,574) $ 59,135 $ (18,543)
============== ============ ============== ============
September 30, 2003 December 31, 2002
Net Carrying Amount Net Carrying Amount
------------------- -------------------
Unamortized and indefinite-
lived intangible assets:
Trade name $ 3,975 $ 3,975
=================== ===================
Amortization was $5,031 and $5,479 for the nine-month periods ended September
30, 2003 and 2002, respectively.
For each of the next five years scheduled amortization of intangibles is as
follows: $6,751 in 2004, $6,660 in 2005, $4,584 in 2006, $4,508 in 2007 and
$2,773 in 2008.
Note 11. 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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income as reported $ 14,047 $ 12,985 $ 44,294 $ 50,307
Add: Stock based compensation included in net income as reported, net of
related tax effects 466 450 1,346 1,232
Less: Stock based compensation determined under fair value based methods
for all awards, net of related tax effects (629) (774) (2,059) (2,136)
---------- ---------- ---------- ----------
Pro forma net income $ 13,884 $ 12,661 $ 43,581 $ 49,403
========== ========== ========== ==========
Net income per common share as reported
Basic $ .38 $ .36 $ 1.21 $ 1.41
Diluted $ .37 $ .36 $ 1.17 $ 1.39
Pro forma net income per common share
Basic $ .38 $ .35 $ 1.19 $ 1.39
Diluted $ .36 $ .35 $ 1.16 $ 1.37
-14-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
For the nine-months period ended September 30, 2003 and 2002, the changes in
unearned compensation were as follows:
2003 2002
------- -------
Beginning of period $ 5,671 $ 4,454
Awards 3,626 3,869
Forfeitures (92) (39)
Compensation expense (amortization of unearned compensation) (2,662) (1,918)
------- -------
End of period $ 6,543 $ 6,366
======= =======
For the nine-month periods ended September 30, 2003 and 2002, restricted shares
of $128 and $101, 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 the 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 nine-month periods ended September 30, 2003 was $697
and $1,548, respectively.
Note 12. 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.
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.
-15-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
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 did not have a material effect on the
Company's financial statements. The Company has complied with the disclosure
provisions.
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 a fair value based method for valuing stock-based
compensation.
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 that 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 adoption of FIN 46 for investments made in VIEs or modifications in
pre-existing VIEs after January 31, 2003 did not 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 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 and
expands disclosures required for such financial statements. 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 paragraphs 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
-16-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
consolidates WPCI and classifies the minority interests in this entity as a
liability in accordance with SFAS No. 150 (see Note 3). The Company has
interests in five additional joint ventures located in France that are
consolidated and have minority interests that are considered manditorily
redeemable noncontrolling interests with finite lives. In accordance with the
deferral noted above, these minority interests have not been reflected as
liabilities. The carrying value of these minority interests is $1,740 at
September 30, 2003, which approximates their estimated fair value at that date.
-17-
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 September 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 30 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.
-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)
In connection with WPC's acquisition of properties, purchase costs are allocated
to the tangible and intangible assets and liabilities acquired based on their
estimated fair values. The value of the tangible assets, consisting of land,
buildings and tenant improvements, are 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 are recorded at their
relative fair values.
WPC 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 WPC'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.
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. WPC 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. WPC 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.
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.
-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)
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 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
-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)
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.
To the extent that foreign 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 WPC 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.
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 $14,047 and
$12,985 for the three-month periods ended September 30, 2003 and 2002,
respectively, and net income of $44,294 and $50,307 for the nine-month periods
ended September 30, 2003 and 2002, respectively. Net income for the three-month
period ended September 30, 2002 included gains on the sale of properties of
$2,435. Net income for the nine-month period ended September 30, 2002 included
gains on the sale of properties of $14,731 of which $11,160 was due to the sale
of a property in Los Angeles, California.
The increase in income from continuing operations before gains on sale of real
estate of $2,176 for the comparable three-month periods ended September 30, 2003
and 2002 was due primarily to increases in management income and to a lesser
extent an increase in equity income and decreases in amortization and property
and interest expenses. This was partially offset by increases in the provision
for income taxes and general and administrative expenses and to a lesser extent
a decrease in lease revenues and an increase in impairment charges on real
estate. The increase in income from continuing operations before gain on sale of
real estate of $7,965 for the comparable nine-month periods ended September 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 and a decrease in
amortization expense. This was partially offset by an increase in the provision
for income taxes, an increase in general and administrative expenses and to a
lesser extent, a decrease in lease revenues. The results for the nine-month
period ended September 30, 2003
-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)
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. For the three and
nine-month periods ended September 30, 2003, management revenues comprised
approximately 59% and 55%, respectively, of total revenues, as compared with 51%
and 49%, respectively, for the comparable periods ended September 30, 2002.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest and discontinued operations) increased
to $9,341 from $6,734 and to $30,436 from $25,555, respectively, for the
comparable three and nine-month periods ended September 30, 2003 and 2002. The
increase for the comparable three-month periods is due primarily to an increase
in income from equity investments and decreases in interest and property
expenses and was partially offset by a decrease in lease revenues and an
increase in impairment charges on real estate of $560. The increase for the
comparable nine-month periods is due primarily to increases in other income and
income from equity investments and, to a lesser extent, gains on foreign
currency transactions of $653 and a decrease in interest expense. This was
partially offset by a decrease in lease revenues, impairment charges on real
estate and investments of $832 and, to a lesser extent, an increase in property
expense. Additionally, the three and nine-month periods ended September 30, 2003
included a charge on the early extinguishment of debt of $350 in connection with
paying off a mortgage loan.
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. WPC received a lease termination settlement of
$2,250 in March 2003 from The GAP, Inc. as well as approximately $830 in
distributions from bankruptcy claims against former tenants.
The increase in income from equity investments for the comparable three and
nine-month periods is due primarily to increases in the earnings of WPC's equity
investees and the acquisition, in December 2002, of a jointly controlled
tenancy-in-common interest in the Hologic, Inc. properties. For the three and
nine-month periods ended September 30, 2003 the Hologic investment contributed
$111 and $452, respectively, of equity income. Equity income includes $65 and
$195, for the three and nine-month periods ended September 30, 2003,
respectively, from WPC's equity investment in Childtime Childcare, Inc. In
August 2002, WPC's interest in Childtime was transferred from a
tenancy-in-common to a limited partnership. The change in ownership changed the
presentation for financial reporting purposes to the equity method but had no
effect on net income. Equity income for the comparable nine-month periods was
also affected by the conversion of WPC's ownership interest in the operating
partnership of MeriStar Hospitality Corporation to shares of MeriStar's
publicly-traded common stock in 2003. For the nine-month period ended September
30, 2002, WPC incurred a loss from the MeriStar investment of $452 which was
included in equity income. WPC now accounts for its investment in common stock
of MeriStar as an available-for-sale security and, therefore records income as
dividends are earned and no longer recognizes its share of MeriStar's reported
net income or loss.
For the three and nine-month periods ended September 30, 2003, WPC recognized
$23 and $520, respectively, 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. In addition, for the three and nine-month periods ended
September 30, 2003, WPC recognized unrealized foreign currency transaction gains
of $133.
The decrease in interest expense for the comparable three-month and nine-month
periods ended September 30, 2003 and 2002 was primarily attributable to lower
average outstanding balances and lower variable rates on WPC's $185,000 credit
facility, partially offset by increases in mortgage interest. The average
outstanding balance on the credit facility decreased by approximately $47,000
for the comparable nine-month periods. The increase in mortgage interest for the
comparable three and nine-month periods is due primarily to new mortgage
financing placed on two of WPC's properties during the third and fourth quarters
of 2002 with annual interest expense of approximately $1,025, partially offset
by decreases in interest expense on three mortgages that were paid off during
2003, with annual interest expense of $473.
Property expenses increased for the comparable nine-month periods ended
September 30, 2003 and 2002. The increase in property expenses was due primarily
to increases in operating and maintenance expenses as a result of
-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)
the expiration of the Thermadyne Holdings, Inc. lease, the restructuring of the
Faurecia Exhaust Systems, Inc. lease in 2002 and the expiration of The Gap
lease. WPC now incurs most of the costs associated with the ownership of these
properties. WPC is remarketing the properties as single-tenant net lease
properties; however, there is also a greater likelihood of re-leasing on a
multi-tenant basis. While WPC considers single-tenant net leasing to be its
primary real estate ownership, several net leases have expired and the number of
multi-tenant and operating properties in its portfolio has increased.
Lease revenues decreased by $529 and $1,787 for the comparable three and
nine-month periods, respectively, as a result of several lease terminations and
expirations, including leases with Thermadyne and Pillowtex, Inc. in 2002, and
The Gap in 2003. The Gap lease, which expired in January 2003, provided annual
rents of $2,205. Additionally, the reclassification of the Childtime interest as
an equity investment in August 2002, contributed to the decrease in lease
revenues. Annual rents from the Childtime properties were $440. 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 rent increases on existing properties, including an annual increase
of $300 on a property leased to America West Holdings Corporation, 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., Continental
Airlines Inc., Pre-Finish Metals Incorporated and Lockheed Martin Corporation
with annual rents totaling $2,047.
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 the
Wozniak lease, WPC received a settlement payment of $290. In the third quarter
2003, WPC sold its Lancaster, Pennsylvania property leased to Datcon Instrument
Company and its Canton, Michigan property leased to Harcourt General, Inc.
Annual rentals under the Datcon and Harcourt leases were $914. Since September
30, 2003, WPC sold two properties leased to Penn Crusher Corporation, the
tenant, for $4,000. Annual rental income under the lease was $380. The results
from these properties are reflected in discontinued operations in the
accompanying condensed consolidated financial statements.
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. America
West reported net income for the quarters ended June 30, 2003 and September 30,
2003.
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
-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)
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 cash flows from continuing operations and from discontinued operations. WPC's
income from discontinued operations was $27 and $1,149 for the comparable
three-month periods and was a loss of $2 and income of $1,654 for the comparable
nine-month periods. The results from discontinued operations included non-cash
impairment charges on properties held for sale of $550 and $2,703 for the
three-month periods ended September 30, 2003 and 2002, respectively, and $1,980
and $7,024 for the nine-month periods ended September 30, 2003 and 2002,
respectively.
WPC owns a property in Leeds, Alabama currently leased to Winn-Dixie Stores,
Inc. Winn-Dixie no longer occupies the property and has continued to satisfy
their rental obligations under its lease which expires in March 2004. Based on
WPC's intention to market the property for sale, the property was written down
to its estimated fair value less costs to sell, resulting in an noncash
impairment charge of $560. During 2003, WPC recognized additional impairment
charges of $272.
Net operating income from WPC's management services operations for the three and
nine-month periods ended September 30, 2003, was $13,052 and $31,555 as compared
with $9,077 and $21,815 for the three and nine-month periods ended September 30,
2002. The increase for the comparable three and nine-month periods of
approximately 44% and 45%, respectively, is primarily the result of an increase
in asset-based fees and reimbursements earned and, to a lesser extent, a
decrease in amortization of intangibles. This was partially offset by increases
in the provision for income taxes and general and administrative expenses. The
comparable nine-month periods also benefited from an increase in transaction
fees.
Total revenues earned by the management services operations for the three and
nine-month periods ended September 30, 2003 were $26,197 and $69,168,
respectively, compared with $18,669 and $50,752 for the periods ended September
30, 2002. Revenues for the three and nine-month periods ended September 30, 2003
represented a 40% and 36% increase, respectively, over the comparable 2002
periods. Transaction fees were $10,732 and $27,792 for the three and nine-month
periods ended September 30, 2003 compared with $10,640 and $23,937 for the three
and nine-month periods ended September 30, 2002. Asset-based fees and
reimbursements were $15,465 and $41,376 for the three and nine-month periods
ended September 30, 2003 and $8,029 and $26,815 for the three and nine-month
periods ended September 30, 2002.
Transaction fees include fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. WPC structured $211,000 and $542,000 of acquisitions
for the three-month and nine-month periods ended September 30, 2003 as compared
with $197,000 and $485,000 for the three-month and nine-month periods ended
September 30, 2002. Acquisition activity is subject to seasonal fluctuations,
and typically the fourth quarter has the most activity. 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
October 1, 2003, the CPA(R) REITs have approximately $470,000 available for
investment. The increase in asset-based fees resulted from a substantial
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 September 30, 2003, annualized management and performance fees under the
advisory agreements are approximately $38,320. 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 projected 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 WPC.
-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)
The increase in general and administrative costs for the comparable three and
nine-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 costs 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 reimbursements of
such costs are subject to certain limitations. Based on its ongoing evaluation
of such limitations, WPC was able to recover deferred reimbursements of $1,840
which had been expected to be above the limitations. 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 nine-month periods ended
September 30, 2003 was $1,945 and $5,966, respectively, compared with $1,696 and
$4,805 for the three-month and nine-month periods ended September 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 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 provision for income taxes for the three and nine-month periods ended
September 30, 2003 increased 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 nine-month periods ended September 30, 2003, WPC recognized
$166 and $766 of development fee management income compared with $46 and $116
for the comparable three and nine-month periods ended September 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 formed Corporate Property Associates International Incorporated
("CPAI") in July 2003 and filed a registration statement for a public offering
of $275,000, also on a "best efforts" basis. CPAI is advised by W. P Carey
International LLC ("WPCI") which is majority-owned subsidiary of WPC. If these
offerings are successful, they will allow WPC the ability to sustain or increase
its transaction fee income and increase its asset-based management income. WPC's
current objective is to further diversify the CPA(R):14 and CPA(R):15 portfolios
and reduce their cash available for investment before commencing the CPA(R):16
offering.
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.
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 nine-month period ended September 30, 2003 of $46,186 were
used to fund dividends to shareholders of $47,060. 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 will include
an initial installment from
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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)
CPA(R):15. The installments are subject to certain subordination provisions.
Installments are applied to amounts due from affiliates when received.
Investing activities included using $1,666 for capital expenditures at existing
properties. WPC also received $20,422 in connection with the sale of six
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.
In addition to paying dividends to shareholders, WPC's financing activities for
the nine-month period ended September 30, 2003 included reducing its outstanding
balance of its credit facility by $21,000, paying off $7,131 in limited recourse
mortgage financing on its Broomfield, Colorado, Toledo, Ohio and West Muffin,
Pennsylvania properties and making scheduled principal payment installments of
$6,448 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 September 30, 2003,
approximately 50% of WPC's properties are unencumbered with mortgage debt. WPC
also raised $6,463 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 nine-month period ended September 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 and made a payment of $1,898 to William Polk Carey
in connection with the redemption of his interests.
WPC has a revolving credit agreement which provides for a $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. The credit agreement matures in March
2004 and WPC believes that renewing the facility after the current term is
likely. As of September 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 November 7, 2003 the annual
interest rate on the outstanding balance of $39,000 is approximately 2.275%.
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 $390 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 and
early 2004 of approximately $5,900, primarily related to tenant leasehold
improvements, and for property improvements and upgrades to enhance a property's
cash flow or 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
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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)
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 is $14,984 in scheduled balloon payments on limited recourse
mortgage notes due in 2004. WPC believes it has sufficient resources to pay off
the loans in the event they are not refinanced. In addition, 75% of WPC's
outstanding mortgage 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 $177,118 $ 2,145 $ 24,920 $ 7,743 $ 23,482 $ 14,638 $104,190
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 1,168 96 390 390 292
-------- -------- -------- -------- -------- -------- --------
$214,019 $ 2,241 $ 56,334 $ 10,157 $ 25,798 $ 15,162 $104,327
======== ======== ======== ======== ======== ======== ========
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
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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)
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. WPC adopted this statement effective January 1, 2003,
and the adoption did not have a material affect on WPC's financial statements.
WPC 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 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 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 did not have a material effect on WPC's
financial statements. WPC has complied with the disclosure provisions.
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 for valuing stock-based compensation.
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 that
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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)
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. WPC's maximum loss exposure is the carrying value of its equity
investments. WPC adoption of FIN 46 for investments made in VIEs or
modifications in pre-existing VIEs after January 31, 2003 did not have a
material effect on WPC'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 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 and
expands disclosures required for such financial statements. 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 paragraphs 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. WPC
consolidates WPCI and classifies the minority interests in this entity as a
liability in accordance with SFAS No. 150 (see Note 3). WPC has interests in
five additional joint ventures located in France that are consolidated and have
minority interests that are considered manditorily redeemable noncontrolling
interests with finite lives. In accordance with the deferral noted above, these
minority interests have not been reflected as liabilities. The carrying value of
these minority interests is $1,740 at September 30, 2003, which approximates
their estimated fair value at that date.
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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, 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, all which may affect WPC's ability to refinance
property-level mortgage debt when balloon payments are scheduled.
$133,387 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 September 30, 2003 ranged from 2.275% to
6.44%. The interest on the fixed rate debt as of September 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 $ 1,726 $ 23,091 $ 5,871 $ 21,372 $ 12,293 $ 69,034 $133,387 $135,272
Weighted average
interest rate 7.54% 8.03% 7.42% 7.23% 7.14% 7.25%
Variable rate debt $ 419 $ 29,829 $ 1,872 $ 2,110 $ 2,345 $ 35,156 $ 71,731 $ 71,131
WPC conducts business in France. 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 nine-month
periods ended September 30, 2003, WPC recognized $23 and $520 in foreign
currency transaction gains in connection with the transfer of cash from foreign
operating subsidiaries to the parent company. The cash received was subsequently
converted into dollars. In addition, for the three and nine-month periods ended
September 30, 2003, the Company recognized unrealized foreign currency gains of
$133. The cumulative foreign currency translation adjustment reflects a loss of
$713. 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
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 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
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.
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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
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)
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