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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-13779
W. P. CAREY & CO. LLC
("WPC")
(FORMERLY CAREY DIVERSIFIED LLC)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3912578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
LISTED SHARES, NO PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
As of June 30, 2003, the aggregate market value of the Registrants' Listed
Shares held by non-affiliates was $778,220,456.
As of March 5, 2004, there are 36,771,273 Listed Shares of Registrant
outstanding.
WPC incorporates by reference its definitive Proxy Statement with respect
to its 2004 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of its fiscal year, into
Part III of this Report.
W. P. CAREY & CO. LLC
PART I
Item 1. Business.
W. P. Carey & Co. LLC (the "Company" or "WPC") is a real estate investment and
advisory company that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis and earns fees as the
advisor to five affiliated CPA(R) REITs that each make similar investments.
Under the advisory agreements with the CPA(R) REITs, the Company performs
services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. W. P. Carey & Co. LLC now both owns and manages
commercial and industrial properties located in 41 states and Europe, net leased
to more than 260 tenants. As of December 31, 2003, WPC's portfolio consisted of
171 properties in the United States and 15 properties in Europe and totaled more
than 18.4 million square feet. In addition, W. P. Carey & Co. LLC manages over
500 additional net leased properties on behalf of the CPA(R) REITs: Carey
Institutional Properties Incorporated ("CIP(R)"), Corporate Property Associates
12 Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated
("CPA(R):14"), Corporate Property Associates 15 Incorporated ("CPA(R):15") and
Corporate Property Associates 16-Global Incorporated ("CPA(R):16 - Global").
WPC's core real estate investment strategy for itself and on behalf of the
CPA(R) REITs is to purchase properties leased to a variety of companies on a
single tenant net lease basis that are either owned outright or owned by an
entity managed by WPC.
These leases generally place the economic burden of ownership on the tenant by
requiring them to pay the costs of maintenance, insurance, taxes, structural
repairs and other operating expenses. WPC also generally seeks to include in its
leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index or other
indices in the jurisdiction in which the property is located or,
when appropriate, increases tied to the volume of sales at the
property;
- covenants restricting the activity of the tenant to reduce the risk
of a change in credit quality;
- indemnification of WPC for environmental and other liabilities; and
- guarantees from parent companies or other entities.
Under the advisory agreements with the CPA(R) REITs, the Company performs
services related 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. The Company earns an asset
management fee at a per annum rate of 1/2 of 1% of Average Invested Assets, as
defined in the Advisory Agreement, for each CPA(R) REIT and, based upon specific
performance criteria for each CPA(R) REIT, may be entitled to receive 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.
The Company was formed as a limited liability company under the laws of Delaware
on July 15, 1996. Since January 1, 1998, the Company has been consolidated with
nine Corporate Property Associates limited partnerships and their successors and
is the General Partner and owner of all of the limited partnership interests in
each partnership. The Company's shares began trading on the New York Stock
Exchange on January 21, 1998. As a limited liability company, WPC is not subject
to federal income taxation as long as it satisfies certain requirements relating
to its operations; however, certain subsidiaries of its management operations
are subject to federal and state income taxes and certain subsidiaries may be
subject to foreign taxes.
WPC's principal executive offices are located at 50 Rockefeller Plaza, New York,
NY 10020 and its telephone number is (212) 492-1100. WPC's website address is
http://www.wpcarey.com. As of December 31, 2003, WPC employed no employees
directly, however a wholly-owned subsidiary of WPC employs 120 individuals who
perform services for WPC and on behalf of the CPA(R) REITs.
BUSINESS OBJECTIVES AND STRATEGY
WPC's objective is to increase shareholder value and earnings through prudent
management of its real estate assets and opportunistic investments and through
the expansion of its asset and private equity management business. WPC expects
to evaluate a number of different opportunities in a variety of property types
and geographic locations and to pursue the most attractive opportunities based
upon its analysis of the risk/return tradeoffs. WPC will continue to own
properties as long as it believes ownership helps attain its objectives.
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W. P. CAREY & CO. LLC
WPC presently intends to:
- increase revenues from the management business by increasing assets
under management as the CPA(R) REITs acquire additional property and
organizing new investment entities;
- seek additional investment and other opportunities that leverage
core management skills (which include in-depth credit analysis,
asset valuation and sophisticated structuring techniques)
- optimize the current portfolio of properties through expansion of
existing properties, timely dispositions and favorable lease
modifications;
- utilize its size and access to capital to refinance existing debt;
and
- increase its access to capital.
SIGNIFICANT DEVELOPMENTS DURING 2003
[DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
WPC and affiliates structured approximately $725,000 of acquisitions on behalf
of the CPA(R) REITs in 2003, and generated $88,060 of management revenues
In August 2003, CPA(R):15 completed a second "best efforts" public offering
which raised $647,000.
WPC formed CPA(R):16 - Global in June 2003 and in December 2003 commenced a
public offering to raise up to $1,100,000 on a "best efforts" basis, with WPC as
the advisor to CPA(R):16 - Global.
During 2003, WPC reduced the outstanding balance of its credit facility by
$20,000, while additionally paying off $18,203 in mortgage financing on its
Broomfield, Colorado, Williamsport, Pennsylvania, Toledo, Ohio, West Mifflin,
Pennsylvania, Houston, Texas and Pantin, France properties. The mortgage on the
Pantin, France property, which was refinanced in December 2003 for $12,683 (Euro
10,156), had a balance of $7,603 (Euro 6,137) at the time of the refinancing. In
addition, WPC sold nine properties for $34,440 in 2003.
Prior to April 1, 2003, WPC 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 and Co-Chief
Executive Officer of WPC. In April 2003, WPC acquired 100% of the ownership of
WPCI through the redemption of Carey's interest on April 1, 2003. WPCI
distributed 492,881 shares of WPC and $1,898 of cash to Carey, equivalent to his
contributions to WPCI. As a result of this transaction, WPC 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
estimated fair value of $2,485 at that date. 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. Any redemption will be subject to an independent
valuation of WPCI. The fair value of these interests at December 31, 2003 was
$1,615.
In November 2003, WPC, through a majority owned subsidiary, completed the
purchase of a 22.5% equity interest in an existing limited liability company,
which owns eight properties located in France, from CPA(R):12 and CPA(R):15 for
a net purchase price of approximately $9,744. The purchase price was based on
the appraised value of the properties, net of mortgage debt. The properties are
leased to affiliates of Carrefour, S.A. The leases have nine-year terms,
expiring from December 2011 to November 2012, and provide for aggregate annual
rent of Euro 11,799 ($14,809 as of December 31, 2003), with annual rent
increases based on a formula indexed to increases in the INSEE, a French
construction cost index. The properties are subject to limited recourse mortgage
financing of Euro 96,697 ($121,422 as of December 31, 2003.) The Carrefour loans
provide for quarterly payments of interest at an annual interest rate of 5.55%
and stated principal payments with scheduled increases over their terms. The
loans mature in December 2014 at which time balloon payments are due.
During June 2003, WPC entered into a purchase and sales agreement to sell its
property in Cincinnati, Ohio for $10,088. The buyer has until December 31, 2004
to complete the purchase.
ACQUISITION STRATEGIES
WPC has a well-developed process with established procedures and systems for
acquiring net leased property for itself and it its capacity as advisor to the
CPA(R) REITs. As a result of its reputation and experience in the industry and
the contacts maintained by its professionals, WPC has a presence in the net
lease market that has provided it with the opportunity to
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W. P. CAREY & CO. LLC
invest in a significant number of transactions on an ongoing basis. In
evaluating opportunities, WPC carefully examines the credit, management and
other attributes of the tenant and the importance of the property under
consideration to the tenant's operations. Careful credit analysis is a crucial
aspect of every transaction. WPC believes that it has one of the most extensive
underwriting processes in the industry and has an experienced staff of
professionals involved with underwriting transactions. WPC seeks to identify
those prospective tenants whose creditworthiness is likely to improve over time.
WPC believes that its experience in structuring sale-leaseback transactions to
meet the needs of a prospective tenant enables it to obtain a higher return for
a given level of risk than would typically be available by purchasing a property
subject to an existing lease.
WPC's strategy in structuring net lease investments is to:
- combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent
in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of
facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from the
tenant when possible, such as warrants to purchase tenant common
stock.
FINANCING STRATEGIES
Consistent with its investment policies, WPC uses leverage when available on
favorable terms. WPC has in place a credit facility of up to $225 million, which
it has used and intends to continue to use in connection with acquiring
additional properties, funding build-to-suit projects and refinancing existing
debt. The credit facility has a three-year term through March 2004. As of
December 31, 2003, WPC had $29,000 outstanding under the line of credit and
approximately $180,194 in limited recourse property-level debt outstanding. The
facility has been extended on a short-term basis through June 1, 2004 and will
either be renewed or replaced. WPC continually seeks opportunities and considers
alternative financing techniques to refinance debt, reduce interest expense or
improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions for itself and on behalf of the CPA(R)
REITs, WPC reviews and structures many aspects of a transaction, including the
tenant, the real estate and the lease, to determine whether a potential
acquisition can be structured to satisfy its acquisition criteria. The aspects
of a transaction which are reviewed and structured by WPC include the following:
Tenant Evaluation. WPC evaluates each potential tenant for its credit,
management, position within its industry, operating history and profitability.
WPC seeks tenants it believes will have stable or improving credit. By leasing
properties to these tenants, WPC can generally charge rent that is higher than
the rent charged to tenants with recognized credit and thereby enhance its
current return from these properties as compared with properties leased to
companies whose credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of WPC's or the CPA(R)
REIT's property will likely increase (if all other factors affecting value
remain unchanged). WPC may also seek to enhance the likelihood of a tenant's
lease obligations being satisfied, such as through a letter of credit or a
guaranty of lease obligations from the tenant's corporate parent. This credit
enhancement provides WPC and the CPA(R) REITs with additional financial
security. In evaluating a possible investment, the creditworthiness of a tenant
generally will be a more significant factor than the value of the property
absent the lease with such tenant. While WPC will select tenants it believes are
creditworthy, tenants will not be required to meet any minimum rating
established by an independent credit rating agency. WPC's and the investment
committee's standards for determining whether a particular tenant is
creditworthy vary in accordance with a variety of factors relating to specific
prospective tenants. The creditworthiness of a tenant is determined on a tenant
by tenant, case by case basis. Therefore, general standards for creditworthiness
cannot be applied.
Leases with Increasing Rent. WPC seeks to include a clause in each lease that
provides for increases in rent over the term of the lease. These increases are
generally tied to increases in indices such as the consumer price index. In the
case of retail stores, the lease may provide for participation in gross sales
above a stated level. The lease may also provide for mandated rental increases
on specific dates or other methods that may not be in existence or contemplated
by us as of the date of this report. WPC seeks to avoid entering into leases
that provide for contractual reductions in rents during their primary term.
Properties Important to Tenant Operations. WPC generally seeks to acquire
properties with operations that are essential or important to the ongoing
operations of the tenant. WPC believes that these properties provide better
protection in the event a tenant files for bankruptcy, since leases on
properties essential or important to the operations of a bankrupt tenant are
less likely to be terminated by a bankrupt tenant. WPC also seeks to assess the
income, cash flow and profitability of the business conducted at the property so
that, if the tenant is unable to operate its business, it and the CPA(R) REITs
can either
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W. P. CAREY & CO. LLC
continue operating the business conducted at the property or re-lease the
property to another entity in the industry which can operate the property
profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, WPC attempts
to include provisions in its leases that require its consent to specified tenant
activity or require the tenant to satisfy specific operating tests. These
provisions include, for example, operational and financial covenants of the
tenant, prohibitions on a change in control of the tenant and indemnification
from the tenant against environmental and other contingent liabilities. These
provisions protect WPC and the CPA(R) REITs' investment from changes in the
operating and financial characteristics of a tenant that may impact its ability
to satisfy its obligations to WPC and the CPA(R) REITs or could reduce the value
of their properties.
Diversification. WPC will attempt to diversify its and the CPA(R) REITs'
portfolio to avoid dependence on any one particular tenant, type of facility,
geographic location or tenant industry. By diversifying the portfolios, WPC
reduces the adverse effect of a single under-performing investment or a downturn
in any particular industry or geographic region.
WPC uses a variety of other strategies in connection with its acquisitions.
These strategies include attempting to obtain equity enhancements in connection
with transactions. Typically, these equity enhancements involve warrants to
purchase stock of the tenant or the stock of the parent of the tenant. If the
value of the stock exceeds the exercise price of the warrant, equity
enhancements help WPC and the CPA(R) REITs to achieve their goal of increasing
funds available for the payment of distributions.
As a transaction is structured, it is evaluated by the chairman of WPC's
investment committee. Before a property is acquired, the transaction is reviewed
by the investment committee to ensure that it satisfies WPC's and the CPA(R)
REIT's investment criteria. The investment committee is not directly involved in
originating or negotiating potential acquisitions, but instead functions as a
separate and final step in the acquisition process. WPC places special emphasis
on having experienced individuals serve on its investment committee and does not
invest in a transaction unless it is approved by the investment committee.
WPC believes that the investment committee review process gives it a unique
competitive advantage over other net lease companies because of the substantial
experience and perspective that the investment committee has in evaluating the
blend of corporate credit, real estate and lease terms that combine to make an
acceptable risk.
The following people serve on the investment committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance Society
of the United States and has been involved with the CPA(R) programs
for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President --
Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibility included
overseeing fixed income investments for Hancock, its affiliates and
outside clients.
- Lawrence R. Klein is the Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton School.
Dr. Klein has been awarded the Alfred Nobel Memorial Prize in
Economic Sciences and currently advises various governments and
government agencies.
- Ralph F. Verni, is a private investor and business consultant and
formerly Chief Investment Officer of The New England Mutual Life
Insurance Company.
- Karsten von Koller, was formerly Chairman and Member of the Board of
Managing Directors of Eurohypo AG, the leading commercial real
estate financing company in Europe.
ASSET MANAGEMENT
WPC believes that effective management of net lease assets is essential to
maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
WPC monitors, on an ongoing basis, compliance by tenants with their lease
obligations and other factors that could affect the financial performance of any
of its properties. Monitoring involves receiving assurances that each tenant has
paid real estate taxes, assessments and other expenses relating to the
properties it occupies and confirming that appropriate insurance coverage is
being maintained by the tenant. WPC reviews financial statements of its tenants
and undertakes regular physical
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W. P. CAREY & CO. LLC
inspections of the condition and maintenance of its properties. Additionally,
WPC periodically analyzes each tenant's financial condition, the industry in
which each tenant operates and each tenant's relative strength in its industry.
COMPETITION
WPC faces competition for the acquisition of commercial properties in general,
and such properties net leased to major corporations in particular, from
insurance companies, credit companies, pension funds, private individuals,
investment companies and CPA(R) REITs. WPC also faces competition from
institutions that provide or arrange for other types of commercial financing
through private or public offerings of equity or debt or traditional bank
financings. WPC believes its management's experience in real estate, credit
underwriting and transaction structuring will allow it to compete effectively
for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. WPC's leases often provide
that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
WPC typically undertakes an investigation of potential environmental risks when
evaluating an acquisition. Phase I environmental assessments are performed by
independent environmental consulting and engineering firms for all properties
acquired by WPC and the CPA(R) REITs. Where warranted, Phase II environmental
assessments are performed. Phase I assessments do not involve subsurface
testing, whereas Phase II assessments involve some degree of soil and/or
groundwater testing. WPC or the CPA(R) REITs may acquire a property which is
known to have had a release of hazardous materials in the past, subject to a
determination of the level of risk and potential cost of remediation. WPC and
the CPA(R) REITs normally require property sellers to indemnify them fully
against any environmental problem existing as of the date of purchase.
Additionally, WPC often structures leases to require the tenant to assume most
or all responsibility for compliance with the environmental provisions of the
lease or environmental remediation relating to the tenant's operations and to
provide that non-compliance with environmental laws is a lease default. In some
cases, WPC may also require a cash reserve, a letter of credit or a guarantee
from the tenant, the tenant's parent company or a third party to assure lease
compliance and funding of remediation. The value of any of these protections
depends on the amount of the collateral and/or financial strength of the entity
providing the protection. Such a contractual arrangement does not eliminate
statutory liability or preclude claims against WPC and the CPA(R) REITs by
governmental authorities or persons who are not a party to the arrangement.
Contractual arrangements in leases may provide a basis for WPC and the CPA(R)
REITs to recover from the tenant damages or costs for which it has been found
liable.
Some of the properties are located in urban and industrial areas where fill or
current or historic industrial uses of the areas may have caused site
contamination at the properties. In addition, WPC is aware of environmental
conditions at certain of the properties that require some degree of remediation.
All such environmental conditions are primarily the responsibility of the
respective tenants under their leases. WPC, with assistance from consultants,
estimates that the majority of the aggregate cost of addressing environmental
conditions known to require remediation at the properties is covered by existing
letters of credit and corporate guarantees. WPC believes that the tenants are
taking or will soon be taking all required remedial action with respect to any
material environmental conditions at the properties. However, WPC and the CPA(R)
REITs could be responsible for some or all of these costs if one or more of the
tenants fails to perform its obligations or to indemnify WPC and the CPA(R)
REITs, as applicable. Furthermore, no assurance can be given that the
environmental assessments that have been conducted at the properties disclosed
all environmental liabilities, that any prior owner did not create a material
environmental condition not known to the Company, or that a material condition
does not otherwise exist as to any of the properties.
OPERATING SEGMENTS
WPC operates in two operating segments, real estate operations, with investments
in the United States and Europe, and management operations. For the year ended
December 31, 2003, no lessee represented 10% or more of the total lease revenues
of WPC. The management operations derives substantially all of its revenues from
the affiliated CPA(R) REITs.
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W. P. CAREY & CO. LLC
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
WPC wishes to take advantage of the "safe harbor" provisions of the Act and is
therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
Future results may be affected by certain risks and uncertainties including the
following:
The revenue streams from the investment advisory agreements with the CPA(R)
REITs are subject to limitation or cancellation.
The agreements under which we provide investment advisory services may generally
be terminated by each CPA(R) REIT upon 60 days notice, with or without cause. In
addition, the fees payable under each agreement are subject to a variable annual
cap based on a formula tied to the assets and income of that CPA(R) REIT. This
cap may limit the growth of the management fees. There can be no assurance that
these agreements will not be terminated or that our income will not be limited
by the cap on fees payable under the agreements. The elimination of or any cap
on fees could have a material adverse effect on our business, results of
operations and financial condition.
Our advisory business exposes us to more volatility in earnings than our real
estate investment business.
The growth in revenue from the management business is dependent in large part on
future capital raising in existing or future managed entities and our ability to
invest the money accordingly, which is subject to uncertainty and is subject to
capital market and real estate market conditions. This uncertainty can create
more volatility in our earnings because of the resulting increased volatility in
transaction based fee revenue from the real estate advisory and management
business as compared to historic revenue from ownership of real estate subject
to triple net leases, which historically has been less volatile.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
We expect that most of our properties and those of the CPA(R) REITs will each be
occupied by a single tenant and, therefore, the success of the investments is
materially dependent on the financial stability of such tenants. Lease payment
defaults by tenants could cause us to reduce the amount of distributions to
shareholders, either from a direct loss of revenue or reduced fees payable by
the CPA(R) REITs. In the event of a default, we and the CPA(R) REITs may
experience delays in enforcing their rights as landlord and may incur
substantial costs in protecting the investment and reletting the property. If a
lease is terminated, there is no assurance that we or the CPA(R) REITs will be
able to lease the property for the rent previously received or sell the property
without incurring a loss.
We depend on major tenants.
Revenues from several of our tenants and/or their guarantors constitute a
significant percentage of our consolidated rental revenues. Our five largest
tenants/guarantors, which occupy 10 properties, represented approximately 27% of
total real estate rental revenues. The default, financial distress or bankruptcy
of any of the tenants of these properties could cause interruptions in the
receipt of lease revenues from these tenants and/or result in vacancies in the
respective properties, which would reduce our revenues until the affected
property is re-let, and could decrease the ultimate sale value of each such
property.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy,
a tenant has the option of vacating a property instead of paying rent. Until
such a property is released from bankruptcy, our revenues
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W. P. CAREY & CO. LLC
would be reduced and could cause us to reduce distributions to shareholders. We
have highly leveraged tenants at this time, and we may have additional highly
leveraged tenants in the future.
The bankruptcy of tenants may cause a reduction in revenue.
Bankruptcy of a tenant could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms which may provide an option to purchase a property by
the tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
We and the CPA(R) REITs have had tenants file for bankruptcy protection and are
involved in litigation. Four of the prior thirteen CPA(R) funds reduced the rate
of distributions to their investors as a result of adverse developments
involving tenants.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
We can borrow a significant amount of funds. The CPA(R) REITs may also borrow a
significant amount of funds.
We have incurred, and may continue to incur, indebtedness (collateralized and
unsecured) in furtherance of our activities. Neither our operating agreement nor
any policy statement formally adopted by our board of directors limits either
the total amount of indebtedness or the specified percentage of indebtedness
(based upon our total market capitalization) which may be incurred. Accordingly,
we could become more highly leveraged, resulting in increased risk of default on
our obligations and in an increase in debt service requirements which could
adversely affect our financial condition and results of operations and our
ability to pay distributions. Our current unsecured revolving credit facility
contains various covenants which limit the amount of secured and unsecured
indebtedness we may incur.
Each of the CPA(R) REITs we advise and manage may also incur significant debt.
This significant debt load could restrict their ability to pay fees owed to us
when due, due to either liquidity problems or restrictive covenants contained in
their borrowing agreements.
We may not be able to refinance balloon payments on our mortgage debts.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. Scheduled balloon payments, including our pro rata
share of mortgages on equity investments, for the next five years are as
follows:
2004 - $14.9 million; 2005 - $0 million; 2006 - $24 million; 2007 - $6 million;
and 2008 - $0 million
Our credit facility, which was scheduled to mature in March 2004 has been
extended on a short-term basis through June 1, 2004 and will either be renewed
or replaced. As of December 31, 2003, we had $29,000 drawn from the line of
credit. Our ability to make balloon payments on debt will depend upon our
ability either to refinance the obligation when due, invest additional equity in
the property or to sell the related property. Our ability to accomplish these
goals will be affected by
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W. P. CAREY & CO. LLC
various factors existing at the relevant time, such as the state of the national
and regional economies, local real estate conditions, available mortgage rates,
our equity in the mortgaged properties, our financial condition, the operating
history of the mortgaged properties and tax laws.
International investments involve additional risks.
We and the CPA(R) REITs may purchase property located outside the United States.
These investments may be affected by factors peculiar to the laws of the
jurisdiction in which the property is located. These laws may expose us to risks
that are different from and in addition to those commonly found in the United
States. Foreign investments could be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of property and
laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within the country to the
person's or corporation's country of origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or local
economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds
resulting from varying national economic policies;
- changes in real estate and other tax rates and other operating
expenses in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
We may incur costs to finish build-to-suit properties.
We and the CPA(R) REITs may sometimes acquire undeveloped or partially developed
land parcels for the purpose of owning to-be-built facilities for a prospective
tenant. Oftentimes, completion risk, cost overruns and on-time delivery are the
obligations of the prospective tenant. To the extent that the tenant or the
third-party developer experiences financial difficulty or other complications
during the construction process we or the CPA(R) REIT may be required to incur
project costs to complete all or part of the project within a specified time
frame. The incurrence of these costs or the non-occupancy by the tenant may
reduce the project's and our portfolio returns.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. The net leases
we or the CPA(R) REITs may enter into or acquire may be for properties that are
specially suited to the particular needs of the tenant. With these properties,
if the current lease is terminated or not renewed, we or the CPA(R) REITs may be
required to renovate the property or to make rent concessions in order to lease
the property to another tenant. In addition, in the event we or the CPA(R) REITs
are forced to sell the property, it may be difficult to sell to a party other
than the tenant due to the special purpose for which the property may have been
designed. These and other limitations may affect the ability to sell properties
without adversely affecting returns to shareholders. Our own scheduled lease
expirations, as a percentage of annualized rental revenues for the next five
years, are as follows:
2004 - 3.2%; 2005 - 4.1%; 2006 - 4.8%; 2007 - 2.2%; and 2008 -4.1%.
Our participation in joint ventures creates additional risk.
We may participate in joint ventures or purchase properties jointly with other
entities, some of which may be unaffiliated with us. There are additional risks
involved in these types of transactions. These risks include the potential of
our joint venture partner becoming bankrupt and the possibility of diverging or
inconsistent economic or business interests of us and our partner. These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that we or our board may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
We do not fully control the management of our properties.
The tenants or managers of net lease properties are responsible for maintenance
and other day-to-day management of the properties. Because our revenues are
largely derived from rents and advisory fees, which in turn, are derived from
rents collected by the CPA(R) REITs, our financial condition is dependent on the
ability of net lease tenants to operate the properties successfully. If tenants
are unable to operate the
-8-
W. P. CAREY & CO. LLC
properties successfully, the tenants may not be able to pay their rent, which
could adversely affect our financial condition.
We are subject to possible liabilities relating to environmental matters.
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. These
responsibilities and liabilities also exist for properties owned by the CPA(R)
REITs and in the event they become liable for these costs, their ability to pay
our fees could be materially affected. Some of these laws could impose the
following on us:
- Responsibility and liability for the cost of investigation and
removal or remediation of hazardous substances released on our
property, generally without regard to our knowledge or
responsibility of the presence of the contaminants;
- Liability for the costs of investigation and removal or remediation
of hazardous substances at disposal facilities for persons who
arrange for the disposal or treatment of such substances; and
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
- Being sued by the CPA(R) REITs for inadequate due diligence.
We may be unable to make acquisitions on an advantageous basis.
A significant element of our business strategy is the enhancement of our
portfolio and the CPA(R) REIT portfolios through acquisitions of additional
properties. The consummation of any future acquisition will be subject to
satisfactory completion of our extensive analysis and due diligence review and
to the negotiation of definitive documentation. There can be no assurance that
we will be able to identify and acquire additional properties or that we will be
able to finance acquisitions in the future. In addition, there can be no
assurance that any such acquisition, if consummated, will be profitable for us
or the CPA(R) REITs. If we are unable to consummate the acquisition of
additional properties in the future, there can be no assurance that we will be
able to increase the cash available for distribution to our shareholders, either
through net income on properties we own or through net income generated by the
advisory business.
We may suffer uninsured losses.
There are certain types of losses (such as due to wars or some natural
disasters) that generally are not insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of the
limits of our insurance occur, we could lose capital invested in a property, as
well as the anticipated future revenues from a property, while remaining
obligated for any mortgage indebtedness or other financial obligations related
to the property. Any such loss would adversely affect our financial condition.
Changes in market interest rates could cause our stock price to go down.
The trading prices of equity securities issued by real estate companies have
historically been affected by changes in broader market interest rates, with
increases in interest rates resulting in decreases in trading prices, and
decreases in interest rates resulting in increases in such trading prices. An
increase in market interest rates could therefore adversely affect the trading
prices of any equity securities issued by us. The stock price could be affected
by factors other than changes in interest rates.
We face intense competition.
We face competition for the acquisition of office and industrial properties in
general, and such properties not leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. We also face competition from institutions
that provide or arrange for other types of commercial financing through private
or public offerings of equity or debt or traditional bank financings.
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real
estate. In particular, we face the risk that rental revenue from the properties
will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. Additional real estate ownership risks
include:
- Adverse changes in general or local economic conditions,
- Changes in supply of or demand for similar or competing properties,
- Changes in interest rates and operating expenses,
-9-
W. P. CAREY & CO. LLC
- Competition for tenants,
- Changes in market rental rates,
- Inability to lease properties upon termination of existing leases,
- Renewal of leases at lower rental rates,
- Inability to collect rents from tenants due to financial hardship,
including bankruptcy,
- Changes in tax, real estate, zoning and environmental laws that may
have an adverse impact upon the value of real estate,
- Uninsured property liability, property damage or casualty losses,
- Unexpected expenditures for capital improvements or to bring
properties into compliance with applicable federal, state and local
laws, and
- Acts of God and other factors beyond the control of our management.
We depend on key personnel for our future success.
We depend on the efforts of the executive officers and key employees. The loss
of the services of these executive officers and key employees could have a
material adverse effect on our operations.
WPC's business, results of operations or financial condition could be materially
adversely affected by the above conditions. The risk factors may have affected,
and in the future could affect, WPC's actual operating and financial results and
could cause such results to differ materially from those in any forward-looking
statements. You should not consider this list exhaustive. New risk factors
emerge periodically, and the Company cannot completely assure you that the
factors described above list all material risks to WPC at any specific point in
time. The Company has disclosed many of the important risk factors discussed
above in its previous filings with the Securities and Exchange Commission.
-10-
W. P. CAREY & CO. LLC
Item 2. Properties.
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2003:
LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE
LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR LEASE TERM MAXIMUM TERM
------------- -------------- ----------- --------------- -------- ---------- ------------
DR PEPPER BOTTLING COMPANY OF TEXAS
Irving and Houston, Texas 721,947 6.20 4,474,721 CPI Jun. 2014 Jun. 2029
DETROIT DIESEL CORPORATION(b)
Detroit, MI 2,730,750 1.52 4,157,524 PPI Jun. 2020 Jun. 2040
GIBSON GREETINGS, INC.
Berea, KY and Cincinnati, OH 1,194,840 3.11 3,720,000 Stated Nov. 2013 Nov. 2023
BOUYGUES TELECOM SA(b)
Tours, France 107,618 13.47 1,377,036(h) INSEE(i) Sep. 2009 Sep. 2012
Illkirch, France 107,639 27.16 2,192,926(r) INSEE(i) Jul. 2013 Jul. 2013
------- ---------
Total: 215,257 3,569,962
SOCIETE LOGIDIS AND SOCIETE CV LOGISTIQUE (CARREFOUR FRANCE, SA AND CARREFOUR HYPERMARCHES FRANCE, SA) (b)(c)
Cholet, Ploufragan, Colomiers, Crepy en
Vallois, Lens, Nimes (2), and Thuit
Hebert, France 2,940,004 4.50 2,975,629 INSEE Various None
FEDERAL EXPRESS CORPORATION
College Station, TX 12,080 5.51 66,600 Stated Apr. 2007 Apr. 2009
Colliersville, TN (b)(e) 390,380 17.02 2,657,852 CPI Aug. 2019 Aug. 2029
Corpus Christi, TX 30,212 6.55 197,896 Stated May 2007 May 2017
------- ---------
Total: 432,672 2,922,348
AMERICA WEST HOLDINGS CORPORATION(b)(d)
Tempe, AZ 225,114 16.90 2,837,889 CPI Apr. 2014 Apr. 2024
QUEBECOR PRINTING INC.
Doraville, GA (b) 432,559 3.52 1,522,498 CPI Dec. 2009 Dec. 2034
Olive Branch, MS (b) 285,500 4.16 1,186,578 Fixed Jun. 2008 Jun. 2033
------- ---------
Total: 718,059 2,709,076
ORBITAL SCIENCES CORPORATION(b)
Chandler, AZ 335,307 7.92 2,655,320 CPI Sep. 2009 Sep. 2029
AUTOZONE, INC.(b) (g)
31 Locations :
NC, TX, AL, GA, IL, LA, MO 175,730 7.52 1,321,567 % Sales Feb. 2011 Feb. 2026
11 Locations:
FL, GA, NM, SC, TX 54,000 9.71 524,388 % Sales Aug. 2013 Aug. 2038
12 Locations :
FL, LA, MO, NC, TN 72,500 5.11 370,636 % Sales Various Various
------- ---------
Total: 302,230 2,216,591
SYBRON INTERNATIONAL CORPORATION
Dubuque, IA; Portsmouth, NH and
Rochester, NY 494,100 4.38 2,163,816 CPI Dec. 2013 Dec. 2038
CHECKFREE HOLDINGS, INC.(o)( b)
Norcross, GA 220,675 19.29 2,128,372 CPI Dec. 2015 Dec. 2030
LIVHO, INC.
Livonia, MI 158,000 11.39 1,800,000 Stated Dec. 2004 Jan. 2008
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W. P. CAREY & CO. LLC
LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE
LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR LEASE TERM MAXIMUM TERM
------------- -------------- ----------- --------------- -------- ---------- ------------
UNISOURCE WORLDWIDE, INC.
Anchorage, AK 44,712 7.34 328,360 Stated Dec. 2009 Dec. 2029
Commerce, CA(b) 411,561 3.46 1,422,080 Stated Apr. 2010 Apr. 2030
------- ---------
Total: 456,273 1,750,440
CSS INDUSTRIES, INC.
Memphis, TN 1,006,566 1.72 1,735,352 CPI Dec. 2005 Dec. 2015
INFORMATION RESOURCES, INC.(b) (f)
Chicago, IL 252,000 19.58 1,643,604 CPI Oct. 2010 Oct. 2015
VARIOUS TENANTS
Bloomingdale, IL 102,236 15.83 1,618,451 Various Various Various
BRODART CO.
Williamsport, PA (2) 521,240 3.30 1,720,686 CPI Jun. 2008 Jun. 2028
SYBRON DENTAL SPECIALTIES, INC.
Glendora, CA and Romulus, MI 245,000 6.59 1,613,096 CPI Dec. 2018 Dec. 2043
BE AEROSPACE, INC.(b)
Lenexa, KS 130,094 4.61 599,674 Stated Sep. 2017 Sep. 2037
Winston-Salem, NC 274,216 2.66 728,320 Stated Sep. 2017 Sep. 2037
Dallas, TX 22,680 5.04 114,224 Stated Sep. 2017 Sep. 2037
------- ---------
Total: 426,990 1,442,218
SPRINT SPECTRUM L.P.(b)
Albuquerque, NM 94,731 15.04 1,424,561 Stated May 2011 May 2021
EAGLE HARDWARE & Garden, Inc.(b)(g)
CPI &
Bellevue, WA 127,360 10.06 1,281,273 % Sales Aug. 2018 Aug. 2018
BELLSOUTH TELECOMMUNICATIONS, INC.(b)
Lafayette Parish, LA 64,803 16.92 1,096,170 Stated Dec. 2009 Dec. 2039
AT&T Corporation
Bridgeton, MO 85,510 14.14 1,209,048 Stated Jun. 2011 Jun. 2021
PANTIN, FRANCE - MULTI-TENANT(b) 69,211 22.41 1,163,165(j) INSEE(i) Various Various
HOLOGIC, INC. (b) (q)
Danbury, CT 62,042 9.42 210,526 CPI Aug. 2022 Aug. 2042
Bedford, MA 207,000 12.42 925,612 CPI Aug. 2022 Aug. 2042
------- ---------
Total: 269,042 1,136,138
CENDANT OPERATION, INC.(b)
Moorestown, NJ 65,567 17.11 1,121,792 Stated Jun. 2004 Jun. 2004
ANTHONY'S MANUFACTURING COMPANY, INC.
CPI/
San Fernando, CA 182,845 5.57 1,019,047 Market May 2007 May 2012
WAL-MART STORES, INC.
West Mifflin, PA 118,125 8.05 950,905 CPI Jan. 2007 Jan. 2037
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W. P. CAREY & CO. LLC
LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE
LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR LEASE TERM MAXIMUM TERM
------------- -------------- ----------- --------------- -------- ---------- ------------
UNITED STATIONERS SUPPLY COMPANY
New Orleans, LA; Memphis, TN and San
Antonio, TX 197,098 4.64 915,834 CPI Mar. 2010 Mar. 2030
SWAT-FAME, INC.
City of Industry, CA 220,401 4.19 923,477 CPI Dec. 2010 Dec. 2020
PRE FINISH METALS INCORPORATED
Walbridge, OH 313,704 2.84 892,091 CPI Jun. 2008 Jun. 2028
LOCKHEED MARTIN CORPORATION
King of Prussia, PA 84,926 9.39 797,202 Stated Jul. 2008 Jul. 2013
NVR L.P.
Thurmont, MD and
Farmington, NY 179,741 4.30 773,370 CPI Mar. 2014 Mar. 2039
AMS HOLDING GROUP
College Station, TX 52,552 14.56 765,101 Fixed Dec. 2004 Dec. 2009
LOCKHEED MARTIN CORPORATION 30,176 9.30 280,560 Stated Dec. 2007 Jul. 2009
UNITED SPACE ALLIANCE LLC 52,754 8.70 458,948 Stated Feb. 2005 Apr. 2011
------- ---------
Total for property in
Houston, TX: (b) 82,930 739,508
FAURECIA EXHAUST SYSTEMS, INC.
Toledo, OH 61,000 5.51 336,000 CPI Nov. 2022 Nov. 2042
STAR CARTAGE 10,000 3.00 30,000 Stated Mar. 2004 Mar. 2004
FAURECIA EXHAUST SYSTEMS, INC. 350,000 1.06 371,000 Stated Nov. 2005 Nov. 2007
------- -------
Toledo, OH(s)
Total for properties in
Toledo, OH: 421,000 737,000
EXIDE ELECTRONICS CORPORATION
Raleigh, NC 27,770 23.22 644,937 CPI Jul. 2006 Jul. 2031
WINN-DIXIE STORES, INC.(g)
Bay Minette, AL 34,887 3.68 128,470 % Sales Jun. 2007 Jun. 2032
Brewton, AL 30,625 4.39 134,500 % Sales Oct. 2010 Oct. 2030
Leeds, AL 26,470 5.47 144,713 % Sales Feb. 2004 Feb. 2034
Montgomery, AL 32,690 5.86 191,534 % Sales Mar. 2008 Mar. 2038
------- -------
Total: 124,672 599,217
EXEL COMMUNICATIONS, INC.
Reno, NV 53,158 10.93 580,800 Stated Dec. 2006 Dec. 2016
WESTERN UNION FINANCIAL SERVICES, INC.
Bridgeton, MO 78,080 7.34 573,221 Stated Nov. 2006 Nov. 2011
DS GROUP LIMITED
Goshen, IN 52,000 10.84 563,715 CPI Feb. 2010 Feb. 2035
UNITED SPACE ALLIANCE LLC 88,200 5.73 505,020 STATED SEP. 2006 SEP. 2016
FACILITY MANAGEMENT SOLUTIONS, LLC 3,600 8.40 30,240 Stated Dec. 2005 Dec. 2005
------ -------
Webster, TX 91,800 535,260
-13-
W. P. CAREY & CO. LLC
LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE
LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR LEASE TERM MAXIMUM TERM
------------- -------------- ----------- --------------- -------- ---------- ------------
TITAN CORPORATION (K)
San Diego, CA 166,403 17.20 530,627 CPI Jul. 2007 Jul. 2032
SOCIETE DE TRAITEMENTS 69,493 4.84 268,891(m) INSEE(i) May 2005 May 2008
DSM FOOD SPECIALITIES 37,337 7.83 233,868(m) INSEE(i) May 2008 May 2008
------- -------
Total for properties in Joue
Les Tours and Phalempin, France: (b) 106,830 502,759
TELLIT ASSURANCES(b)
Rouen, France 36,791 18.10 499,346(j) INSEE(i) Aug. 2010 Aug. 2010
BELLSOUTH ENTERTAINMENT, INC.
Ft. Lauderdale, FL 80,450 6.18 497,181 Fixed Jun. 2009 Jun. 2019
CHILDTIME CHILDCARE, INC.(b)(l)
12 Locations: AZ, CA, MI, TX 83,912 16.59 472,307 CPI Jan. 2016 Jan. 2041
YALE SECURITY, INC.
Lemont, IL 113,133 4.06 459,000 Stated Mar. 2011 Mar. 2011
HONEYWELL, INC. 119,320 2.03 242,400 Stated Sep. 2005 Sep. 2005
CONTINENTAL AIRLINES, INC. 25,125 5.96 149,688 Stated Jul. 2008 Jul. 2008
------- -------
Total for 2 properties in
Houston, TX: 144,445 392,088
OLMSTEAD KIRK PAPER COMPANY 5,760 6.56 37,800 Stated Dec. 2007 Dec. 2007
INDUSTRIAL DATA SYSTEMS CORPORATION
(PETROCON ENGINEERING, INC.) 42,880 8.16 349,900 Stated Dec. 2011 Dec. 2014
------ -------
Total for property in
Beaumont, TX: 48,640 387,700
BIKE BARN HOLDING COMPANY, INC. 6,216 10.42 64,800 Stated Aug. 2005 Aug. 2015
SEARS ROEBUCK AND CO. 21,069 10.60 223,331 Stated Sep. 2005 Sep. 2015
------ -------
Total for property in
Houston, TX: 27,285 288,131
ALSTOM POWER, INC.(b)
Erlanger, KY 118,200 2.43 287,226 Stated May 2013 May 2013
TOOLING SYSTEMS, LLC
Frankenmuth, MI 128,400 2.21 283,451 Stated Aug. 2012 Aug. 2017
VARIOUS TENANTS
Broomfield, CO 67,699 4.36 295,257 Various Various Various
THE ROOF CENTERS, INC.
Manassas, VA 60,446 4.51 272,660 Stated Jul. 2009 Jul. 2009
GAMES WORKSHOP, INC.
Glen Burnie, MD 45,300 5.99 271,185 CPI Apr. 2006 Apr. 2016
NORTHERN TUBE, INC.
Pinconning, MI 220,588 1.15 254,538 CPI Jul. 2013 Jul. 2023
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W. P. CAREY & CO. LLC
LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE
LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR LEASE TERM MAXIMUM TERM
------------- -------------- ----------- --------------- -------- ---------- ------------
DIRECTION REGIONAL DES AFFAIRES
SANITAIRES ET SOCIALES
Rouen, France (b) 25,618 13.03 246,547(j) INSEE(i) Mar. 2006 Mar. 2006
ADR BOOKPRINT INC. 3,330 7.56 25,176 Stated Feb. 2004 Feb. 2004
TRANS AMERICAN AUTOMATION INC. 5,632 7.92 44,604 Stated Feb. 2007 Feb. 2012
CUSTOM TRAINING GROUP, INC. 11,704 8.50 99,480 Stated Aug. 2006 Aug. 2006
RICHARD MILBURN ACADEMY 7,860 7.57 59,520 Stated Sep. 2008 Sep. 2008
WORK READY, INC. 7,306 9.66 70,560 Stated Aug. 2006 Aug. 2006
------ -------
Total for property in
Houston, TX: 35,832 299,340
PENBERTHY PRODUCTS, INC.
Prophetstown, IL 161,878 1.47 237,486 CPI Apr. 2006 Apr. 2026
VERIZON COMMUNICATIONS, INC.
Milton, VT 30,624 6.81 208,467 Stated Feb. 2013 Feb. 2023
ROCHESTER BUTTON COMPANY, INC.
South Boston and Kenbridge, VA 81,387 2.21 180,000 None Dec. 2016 Dec. 2036
PEPSI BOTTLING GROUP, LLC
Houston, TX 17,725 6.29 111,557 Stated Oct. 2004 Oct. 2004
PENN VIRGINIA COAL COMPANY
Duffield, VA 15,444 4.79 74,000 CPI Nov. 2004 Nov. 2019
SHINN SYSTEMS, INC. (n)
Salisbury, NC 13,284 2.00 26,568 Fixed Nov. 2006 Nov. 2006
VACANT PROPERTIES
McMinnville, TN 209,204
Cincinnati, OH(t) 597,996
City of Industry, CA 119,480
Salisbury, NC 298,681
Toledo, Ohio 764,000
Panama City, FL 33,837
Garland, TX 153,622
Webster, TX 25,648
Travelers Rest, SC 181,700
Broomfield, CO 34,086
Broomfield, CO (p) 12.5 acres Land Only
Erlanger, KY (2) 635,550
(a) Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and any ownership interest percentage as noted
below.
(b) These properties are encumbered by mortgage notes payable.
(c) Current annual rent represent the 22.5% ownership interest in a limited
liability company owning land and buildings in France. Rents are
collected in Euros, conversion rate at December 31, 2003 used.
(d) Current annual rent represents the 74.583% ownership interest as a
tenancy in common in this property.
(e) Current annual rent for the Colliersville, TN property represents the
40% ownership interest in a limited liability company owning land and
building.
(f) Current annual rent represents the 33.33% ownership interest in a
limited partnership owning land and building.
(g) Current annual rent does not include percentage of sales rent, payable
under the lease contract.
-15-
W. P. CAREY & CO. LLC
(h) Current annual rent represents the 95% ownership interest in a foreign
partnership owning land and building. Rents are collected in Euros,
conversion rate at December 31, 2003 used.
(i) INSEE construction index, an index published quarterly by the French
Government.
(j) Current annual rent represents the 75% ownership interest in a foreign
partnership owning land and building. Rents are collected in Euros,
conversion rate at December 31, 2003 used.
(k) Current annual rent represents the 18.54% ownership interest in a
limited partnership owning land and building.
(l) Current annual rent represents the 33.93% ownership interest in a
limited partnership owning land and building.
(m) Current annual rent represents the 80% ownership interest in a foreign
partnership owning land and building. Rents are collected in Euros,
conversion rate at December 31, 2003 used.
(n) The property is mostly vacant, except for one tenant occupying
approximately 4% of the property.
(o) Current annual rent represents the 50% ownership interest in a limited
liability company owning land and building.
(p) Land is currently under development.
(q) Current annual rent represents the 36% ownership interest as a tenancy
in common in this property.
(r) Current annual rent represents the 75% ownership interest in a foreign
partnership owning a building. Rents are collected in Euros, conversion
rate at December 31, 2003 used.
(s) The property is mostly vacant, except for two tenants, one of which is
occupying the space under a sublease that was assigned to WPC. The two
tenants are occupying approximately 33% of the property.
(t) As of December 31, 2003, the property is under contract for sale to a
third party
Item 3. Legal Proceedings.
As of December 31, 2003, the Company was not involved in any material
litigation.
Following a broker-dealer examination of Carey Financial Corporation ("Carey
Financial"), the Company's wholly-owned broker-dealer subsidiary, by the staff
of the Securities and Exchange Commission (the "SEC" or "Commission"), Carey
Financial received a letter from the staff of the Securities and Exchange
Commission, on or about March 4, 2004, alleging certain infractions by Carey
Financial of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder and of the
National Association of Securities Dealers, Inc. ("NASD"). The letter was
delivered for the purpose of requiring Carey Financial to take corrective
action and without regard to any other action the Commission may take with
respect to the broker-dealer examination. It is not known at this time if the
Commission intends to bring any action against Carey Financial. The
infractions alleged are described below.
The staff alleges that in connection with two public offerings of shares of
Corporate Property Associates 15 Incorporated ("CPA(R):15"), Carey Financial and
its retail distributors sold certain securities without an effective
registration statement. Specifically, the staff alleges that CPA(R):15 and
Carey Financial oversold the amount of securities registered in the first
offering (the "Phase I Offering") completed in the fourth quarter of 2002 and
sold securities with respect to the second offering (the "Phase II" Offering)
before a registration statement with respect to such offering became effective
in the first quarter of 2003. It appears to be the staff's position that,
notwithstanding the fact that pending effectiveness of the registration
statement investor funds were delivered into escrow and not to CPA(R):15 or
Carey Financial, such delivery involved sales of securities in violation of
Section 5 of the Securities Act of 1933. In the event the Commission pursues
these allegations, or if affected CPA(R):15 investors bring a similar private
action, CPA(R):15 might be required to offer the affected investors the
opportunity to receive a return of their investment. It cannot be determined
at this time if, as a consequence of investor funds being returned by
CPA(R):15, Carey Financial would be required to return to CPA(R):15 the
commissions paid by CPA(R):15 on purchases ultimately rescinded or, if so
required, the amount of commissions which would be due, as that amount would be
contingent on the amount of purchases actually rescinded. Further, as part of
any action against the Company, the Commission could seek disgorgement of any
such commissions or different or additional penalties or relief, including
without limitation, injunctive relief and/or civil monetary penalties,
irrespective of the outcome of any rescission offer. As such, the Company
cannot predict the potential effect such a rescission offer or SEC action may
ultimately have on the operations of Carey Financial or the Company. There can
be no assurance such effect, if any, would not be material.
-16-
The staff also alleges that the prospectus delivered with respect to the Phase
I Offering contained material misstatements and omissions because that
prospectus did not disclose that the proceeds of the Phase I Offering would be
used to advance commissions and expenses payable with respect to the Phase II
Offering. The staff claims that the failure to disclose this use of funds
constitutes a misstatement of a material fact in violation of Section 17(a) of
the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934.
Carey Financial has reimbursed CPA(R):15 for the interest cost of advancing the
commissions that were later recovered from the Phase II Offering proceeds. It
cannot be determined at this time what relief, if any, would be granted if an
action were to be brought by the Commission if an action were to be brought by
the Commission or a private investor of CPA(R):15 with respect to these
allegations. As such, the Company cannot predict the potential effect such an
action may ultimately have on the operations of Carey Financial, or the
Company. There can be no assurance such effect, if any, would not be material.
The staff also alleges that the CPA(R):15 offering documents contained material
misstatements and omissions because they did not include a discussion of the
manner in which dividends would be paid to the initial investors in the Phase
II offering. The staff letter asserts that the payment of dividends to the
Phase II shareholders resulted in significantly higher annualized rates of
return to the initial Phase II shareholders than was being earned by the Phase
I shareholders, and that the Company failed to disclose to the Phase I
shareholders the potential differences in the rates of return. The staff
claims that the failure to make this disclosure constitutes a misstatement of a
material fact in violation of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. It cannot be determined at this time
what relief, if any, would be granted if an action were to be brought by the
Commission or an affected CPA(R):15 investor with respect to these allegations.
There can be no assurance that, if an action were to be brought by the
Commission or a private investor of CPA(R):15 against Carey Financial, the
remedy imposed would not be material.
In addition to the allegations with respect to the CPA(R):15 offerings, the
staff alleges that Carey Financial violated Section 15(b)(7) of the Securities
Exchange Act of 1934 and Rule 15b-7 promulgated thereunder and NASD Rule
1031(a) with respect to the failure of four employees to transfer their
broker-dealer licenses to Carey Financial before they began work for Carey
Financial. These licenses have since been transferred to Carey Financial. It
cannot be determined at this time what remedy, if any, would be pursued by the
Commission if any action were to be brought by the Commission with respect to
these allegations. The Company does not expect such a remedy to be material;
however, there can be no assurance that if the Commission brought an action
against Carey Financial the remedy imposed would not be material.
-17-
The staff alleges that Carey Financial violated NASD Conduct Rule 3060 by
providing registered broker-dealers associated with its retail distributors who
sold shares of CPA(R):15 with non-cash sales incentives in excess of $100.
Neither the Commission nor the NASD has yet instituted a formal action against
Carey Financial and, in the letter, the staff only cited this violation in
general terms. The Company is in the process of ascertaining the specific
factual details forming the basis for these allegations. The Company is unable
to predict at this time the potential outcome of any SEC action against
Carey Financial with respect to such allegation, or the potential effect
an action may have on the operations of Carey Financial or the Company.
In addition to all of the above, the staff has alleged that each of these
actions constituted a violation of NASD Conduct Rules 3010(a) and (b) for Carey
Financial's failure to supervise its business activities and enforce its
written supervisory procedures. Neither the Commission nor the NASD has yet
instituted an action against Carey Financial. The Company is in
the process of ascertaining the specific factual details forming the basis for
these allegations. The Company is unable to predict at this time the potential
outcome of an action against Carey Financial or the potential effect an
action may have on the operations of Carey Financial or the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December
31, 2003 to a vote of security holders, through the solicitation of proxies or
otherwise.
-18-
W. P. CAREY & CO. LLC
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information with respect to Registrant's common equity is hereby incorporated by
reference to page 49 of the Company's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the
Company's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 15 of the Company's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
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.
$128,125 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 December 31, 2003 ranged from 2.34% to
6.44%. The interest on the fixed rate debt as of December 31, 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.
(in thousands)
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $21,145 $5,790 $19,864 $12,293 $6,590 $62,443 $128,125 $128,435
Weighted average
interest rate 8.07% 7.40% 7.13% 7.14% 7.47% 7.22%
Variable rate debt $31,151 $2,272 $ 2,546 $ 2,816 $3,109 $39,174 $ 81,068 $ 81,068
WPC conducts business in France. Accordingly, WPC is subject to foreign currency
exchange rate risk from the effects of exchange rate movements on 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 year ended December 31,
2003, WPC recognized $556 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 year ended December 31, 2003, the Company recognized unrealized foreign
currency gains of $130. The cumulative foreign currency translation adjustment
reflects a gain of $679. 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.
-19-
W. P. CAREY & CO. LLC
Scheduled future minimum rents, exclusive of renewals, under non-cancelable
operating leases resulting from WPC's foreign operations are as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Minimum Rents (1) $7,547 $7,539 $7,292 $7,164 $6,711 $18,939 $55,192
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2003 and thereafter are as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Mortgage notes
Payable(1) $2,151 $2,272 $2,546 $2,816 $3,109 $39,174 $52,068
(1) Based on December 31, 2003 exchange rate for the Euro.
Item 8. Consolidated Financial Statements and Supplementary Data:
The following consolidated financial statements and supplementary data of the
Company are hereby incorporated by reference to pages 16 to 49 of the Company's
Annual Report contained in Appendix A:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 2003 and 2002
(iii) Consolidated Statements of Operations for the years ended December
31, 2003, 2002 and 2001
(iv) Consolidated Statements of Members' Equity for the years ended
December 31, 2001, 2002 and 2003
(v) Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001
(vi) Notes to Consolidated Financial Statements
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
Item 9A. 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
December 31, 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.
-20-
W. P. CAREY & CO. LLC
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2004 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2004 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2004 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2004 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 14. Principal Accounting Fees and Services
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2004 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
-21-
W. P. CAREY & CO. LLC
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following financial statements are filed as a part of this
Report:
Report of Independent Auditors.
Consolidated Balance Sheets as of December 31, 2003 and
2002.
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001.
Consolidated Statements of Members' Equity for the years
ended December 31, 2001, 2002, and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference to
pages 16 to 49 of the Company's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Report of Independent Auditors.
Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 2003.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on
pages 26 to 33 of this Form 10-K.
Financial statement schedules other than those listed above
are omitted because the required information is given in the
financial statements, including the notes thereto, or because
the conditions requiring their filing do not exist.
-22-
W. P. CAREY & CO. LLC
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents other than
those designated as being filed herewith are incorporated herein by reference.
Exhibit Method of
No. Description Filing
- -------- ----------- -------------------
3.1 Amended and Restated Limited Liability Company Exhibit 3.1 to Registration
Agreement of Carey Diversified LLC. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration
and the Company. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.4 Investment Banking Engagement Letter between Exhibit 10.4 to Registration
W. P. Carey & Co. and the Company. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.5 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.6 Second Amended and Restated Credit Agreement Exhibit 10.6 to Form 10-K,
dated as of March 23, 2001 dated March 18, 2002
21.1 List of Registrant Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Certification of Chief Executive Officer pursuant to Filed herewith
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Executive Officer pursuant to Filed herewith
Section 302(a) Of the Sarbanes-Oxley Act of 2002.
-23-
W. P. CAREY & CO. LLC
Exhibit Method of
No. Description Filing
- -------- ----------- -------------------
32.1 Chief Executive Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
99.13 Amended and Restated Agreement of Limited Partnership Exhibit 99.13 to Registration
of CPA(R):1. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.16 Amended and Restated Agreement of Limited Partnership Exhibit 99.16 to Registration
of CPA(R):4. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.18 Amended and Restated Agreement of Limited Partnership Exhibit 99.18 to Registration
of CPA(R):6. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.21 Amended and Restated Agreement of Limited Partnership Exhibit 99.21 to Registration
of CPA(R):9. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
(b) Report on Form 8-K:
During the quarter ended December 31, 2003, the Company was not required to file
any reports on Form 8-K.
-24-
W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
3/12/2004 BY: /s/ John J. Park
- -------------- -----------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
BY: W. P. CAREY & CO. LLC
3/12/2004 BY: /s/ William P. Carey
- -------------- -----------------------------------
Date William P. Carey
Chairman of the Board, Co-Chief
Executive Officer and Director
3/12/2004 BY: /s/ Francis J. Carey
- -------------- -----------------------------------
Date Francis J. Carey
Vice Chairman of the Board,
Chairman of the Executive Committee
and Director
3/12/2004 BY: /s/ Gordon F. DuGan
- -------------- -----------------------------------
Date Gordon F. DuGan
President and Co-Chief Executive
Officer and Director
3/12/2004 BY: /s/ George E. Stoddard
- -------------- -----------------------------------
Date George E. Stoddard
Senior Executive Vice President,
Chairman of the Investment Committee,
and Director
3/12/2004 BY: /s/ Nathaniel S. Coolidge
- -------------- -----------------------------------
Date Nathaniel S. Coolidge
Chairman of the Audit Committee and
Director
3/12/2004 BY: /s/ Eberhard Faber IV
- -------------- -----------------------------------
Date Eberhard Faber IV
Chairman of Nomination & Corporate
Governance Committee and Director
3/12/2004 BY: /s/ Dr. Lawrence R. Klein
- -------------- -----------------------------------
Date Dr. Lawrence R. Klein
Chairman of the Economic Policy
Committee and Director
3/12/2004 BY: /s/ Charles C. Townsend, Jr.
- -------------- -----------------------------------
Date Charles C. Townsend, Jr.
Chairman of the Compensation
Committee and Director
3/12/2004 BY: /s/ Ralph Verni
- -------------- -----------------------------------
Date Ralph Verni
Director
3/12/2004 BY: /s/ Karsten von Koller
- -------------- -----------------------------------
Date Karsten von Koller
Director
3/12/2004 BY: /s/ Reginald Winssinger
- -------------- -----------------------------------
Date Reginald Winssinger
Director
3/12/2004 BY: /s/ John J. Park
- -------------- -----------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
3/12/2004 BY: /s/ Claude Fernandez
- -------------- -----------------------------------
Date Claude Fernandez
Managing Director and Chief
Accounting Officer
-25-
REPORT of INDEPENDENT AUDITORS
on FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
W. P. CAREY & CO. LLC:
Our audits of the consolidated financial statements referred to in our report
dated March 12, 2004 appearing in the 2003 Annual Report to Shareholders of W.
P. CAREY & CO. LLC (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 12, 2004
-26-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $ 247,993 $ 2,538,263 $1,200,000
Distribution facilities
and warehouses in
Erlanger, Kentucky
partially leased to
Alstom Power, Inc. $10,777,726 1,525,593 21,427,148 255,329 141,235
Supermarkets leased to
Winn-Dixie Stores, Inc. 855,196 6,762,374 (4,536,639)
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833
Land leased to Unisource
Worldwide, Inc. 4,573,360
Centralized telephone
bureau leased to Exel
Communications, Inc. 925,162 4,023,627 101,983
Office building leased to
Industrial Data Systems
Corporation and
Olmstead Kirk Paper
Company 164,113 2,343,849 445,640
Computer center leased to
AT&T Corporation 269,700 5,099,964 4,165,742 (2,612)
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,389,951 5,337,002 92,326 (1,039,757)
Warehouse and
distribution leased to
Shinn Systems 246,949 5,034,911 1,363,829
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267
Land leased to Exide
Electronics Corporation 1,638,012 (809,735)
Warehouse/ office
research facilities
leased to
Lockheed Martin
Corporation 1,218,860 6,283,475 539,706
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,912,271 31,176
Gross Amount at which Carried at Close of Period(d)
---------------------------------------------------
Life on which
Depreciation
in Latest
Statement of
Personal Accumulated Date Income
Description Land Buildings Property Total Depreciation(d) Acquired is Computed
----------- ---- --------- -------- ----- --------------- -------- ------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $ 247,993 $ 3,738,263 $ 3,986,256 $511,990 1/1/1998 40 yrs.
Distribution facilities
and warehouses in
Erlanger, Kentucky
partially leased to
Alstom Power, Inc. 1,525,593 21,823,712 23,349,305 3,240,623 1/1/1998 40 yrs.
Supermarkets leased to
Winn-Dixie Stores, Inc. 406,674 2,674,257 3,080,931 415,274 1/1/1998 40 yrs.
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833 8,732,879 1,261,326 1/1/1998 40 yrs.
Land leased to Unisource
Worldwide, Inc. 4,573,360 4,573,360 1/1/1998 N/A
Centralized telephone
bureau leased to Exel
Communications, Inc. 925,162 4,125,610 5,050,772 612,160 1/1/1998 40 yrs.
Office building leased to
Industrial Data Systems
Corporation and
Olmstead Kirk Paper
Company 164,113 2,789,489 2,953,602 395,059 1/1/1998 40 yrs.
Computer center leased to
AT&T Corporation 269,700 9,263,094 9,532,794 508,391 1/1/1998 40 yrs.
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,107,855 4,671,667 5,779,522 673,309 1/1/1998 40 yrs.
Warehouse and
distribution leased to
Shinn Systems 246,949 6,398,740 6,645,689 929,780 1/1/1998 40 yrs.
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267 849,339 91,390 1/1/1998 40 yrs.
Land leased to Exide
Electronics Corporation 828,277 828,277 1/1/1998 N/A
Warehouse/ office
research facilities
leased to
Lockheed Martin
Corporation 1,218,860 6,823,181 8,042,041 1,014,125 1/1/1998 40 yrs.
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,943,447 2,237,248 287,498 1/1/1998 40 yrs.
-27-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,368,141 242,885 98,916
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 3,913,657 60,394
Manufacturing facilities
leased to Faurecia
Exhaust Systems, Inc.
and Star Cartage Inc. 223,585 9,652,682 101,260 203,626
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,321,776 152,368
Manufacturing facilities
in Traveler's Rest, SC 263,618 4,046,406 (2,506,543)
Land leased to AutoZone,
Inc. 12,593,719 9,382,198 (147,949)
Office facility leased to
Verizon Communications,
Inc. 219,548 1,578,592
Land leased to Sybron
Dental Specialities,
Inc. 1,135,003 17,286
Office facility in
Bloomingdale, IL leased
to 5 lessees 1,074,640 11,452,967 154,728
Manufacturing facilities
leased to Tooling
Systems LLC 284,314 2,483,597 81,386
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737
Manufacturing facilities
leased to Quebecor
Printing Inc. 11,471,613 4,458,047 18,695,004 477,347
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193
Gross Amount at which Carried at Close of Period(d)
---------------------------------------------------
Life on which
Depreciation
in Latest
Statement of
Personal Accumulated Date Income
Description Land Buildings Property Total Depreciation(d) Acquired is Computed
----------- ---- --------- -------- ----- --------------- -------- ------------
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,709,942 4,883,050 534,015 1/1/1998 40 yrs.
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 3,974,051 4,319,374 592,404 1/1/1998 40 yrs.
Manufacturing facilities
leased to Faurecia
Exhaust Systems, Inc.
and Star Cartage Inc. 223,585 9,957,568 10,181,153 1,465,558 1/1/1998 40 yrs.
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580 1,723,305 253,737 1/1/1998 40 yrs.
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,474,144 7,525,913 811,146 1/1/1998 40 yrs.
Manufacturing facilities
in Traveler's Rest, SC 263,618 1,539,863 1,803,481 418,970 1/1/1998 40 yrs.
Land leased to AutoZone,
Inc. 9,234,249 9,234,249 1/1/1998 N/A
Office facility leased to
Verizon Communications,
Inc. 219,548 1,578,592 1,798,140 236,788 1/1/1998 40 yrs.
Land leased to Sybron
Dental Specialities,
Inc. 1,152,289 1,152,289 1/1/1998 N/A
Office facility in
Bloomingdale, IL leased
to 5 lessees 1,074,640 11,607,695 12,682,335 1,733,620 1/1/1998 40 yrs.
Manufacturing facilities
leased to Tooling
Systems LLC 365,700 2,483,597 2,849,297 186,270 1/1/1998 40 yrs.
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737 1,811,330 202,761 1/1/1998 40 yrs.
Manufacturing facilities
leased to Quebecor
Printing Inc. 4,458,047 19,172,351 23,630,398 2,844,580 1/1/1998 40 yrs.
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331 2,174,520 275,900 1/1/1998 40 yrs.
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193 9,795,193 1/1/1998 N/A
-28-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ---------------
Manufacturing facility
leased to Detroit
Diesel Corporation 14,360,440 5,967,620 31,730,547 775,099
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 13,886,877 5,034,749 18,956,971 2,185,077 541,325
Distribution facility
leased to Pepsi
Bottling Group, LLC 166,745 884,772
Retail store leased to
Eagle Hardware and
Garden, Inc. 10,046,975 4,125,000 11,811,641 393,206
Office building in
Pantin, France leased
to eleven lessees 12,747,965 2,674,914 8,113,120 1,227,878
Office facility in Mont
Saint Argany, France
leased to Tellit
Assurances 3,917,904 542,968 5,286,915 476,644
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 5,052,640 3,260,000 22,574,073 655,518
Office facility leased to
America West Holdings
Corp. 17,295,356 2,274,782 26,701,663
Office facility leased to
Sprint Spectrum L.P. 8,584,180 1,190,000 9,352,965 1,315,694
Office facility in Rouen,
France leased to
Direction Regional des
Affaires Sanitaires et
Sociales 1,482,967 303,061 2,109,731 61,703
Office facility leased to
Cendant Operations, Inc. 5,839,802 351,445 5,980,736 527,368 42,917
Office facility leased to
BellSouth
Telecommunications, Inc. 5,093,129 720,000 7,708,458 119,092
Office buildings in
Phalempine and Joue Les
Tourse, France leased
to DSM Food Specialties
and Societe de
Traitements 3,668,707 451,168 4,478,891 642,294
Office facility in Tours,
France leased to
Bouygues Telecom SA 9,699,179 1,033,532 9,737,359 3,441,919
Gross Amount at which Carried at Close of Period(d)
---------------------------------------------------
Life on which
Depreciation
in Latest
Statement of
Personal Accumulated Date Income
Description Land Buildings Property Total Depreciation(d) Acquired is Computed
----------- ---- --------- -------- ----- --------------- -------- -----------
Manufacturing facility
leased to Detroit
Diesel Corporation 5,967,620 32,505,646 38,473,266 4,825,069 1/1/1998 40 yrs.
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 5,034,749 21,683,373 26,718,122 3,141,921 1/1/1998 40 yrs.
Distribution facility
leased to Pepsi
Bottling Group, LLC 166,745 884,772 1,051,517 132,716 1/1/1998 40 yrs.
Retail store leased to
Eagle Hardware and
Garden, Inc. 4,493,534 11,836,313 16,329,847 1,688,232 4/23/1998 40 yrs.
Office building in
Pantin, France leased
to eleven lessees 1,469,611 10,546,301 12,015,912 1,460,261 5/27/1998 40 yrs.
Office facility in Mont
Saint Argany, France
leased to Tellit
Assurances 610,064 5,696,463 6,306,527 750,106 6/10/1998 40 yrs.
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 3,260,000 23,229,591 26,489,591 3,174,783 6/15/1998 40 yrs.
Office facility leased to
America West Holdings
Corp. 2,274,782 26,701,663 28,976,445 3,113,287 6/30/1998 40 yrs.
Office facility leased to
Sprint Spectrum L.P. 1,466,884 10,391,775 11,858,659 1,254,313 7/1/1998 40 yrs.
Office facility in Rouen,
France leased to
Direction Regional des
Affaires Sanitaires et
Sociales 237,275 2,237,220 2,474,495 280,031 11/16/1998 40 yrs.
Office facility leased to
Cendant Operations, Inc. 351,445 6,551,021 6,902,466 864,600 2/19/1999 40 yrs.
Office facility leased to
BellSouth
Telecommunications, Inc. 720,000 7,827,550 8,547,550 789,654 12/22/1999 40 yrs.
Office buildings in
Phalempine and Joue Les
Tourse, France leased
to DSM Food Specialties
and Societe de
Traitements 535,047 5,037,306 5,572,353 593,685 5/5/1999 40 yrs.
Office facility in Tours,
France leased to
Bouygues Telecom SA 1,377,724 12,835,086 14,212,810 1,041,036 9/1/2000 40 yrs.
-29-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investments (b)
----------- ------------ ---- --------- -------- --------------- ----------------
Operating Method:
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 20,551,413 18,520,178 7,722,717
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 13,163,763 684,955 317,639
Manufacturing facilities
leased to BE Aerospace,
Inc. 9,089,323 1,860,000 12,538,600 5,663
------------ ----------- ------------ ------------- ----------- ----------
$176,159,915 $78,890,664 $344,826,837 $ $14,554,917 $7,465,718
============ =========== ============ ============= =========== ==========
Gross Amount at which Carried at Close of Period(d)
---------------------------------------------------
Life on which
Depreciation
in Latest
Statement of
Personal Accumulated Date Income
Description Land Buildings Property Total Depreciation(d) Acquired is Computed
----------- ---- --------- -------- ----- --------------- -------- ------------
Operating Method:
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 26,242,895 26,242,895 1,339,481 12/3/2001 40 yrs.
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 14,166,357 17,955,376 659,371 1/1/1998 40 yrs.
Manufacturing facilities
leased to BE Aerospace,
Inc. 1,860,000 12,544,263 14,404,263 415,401 9/12/2002 40 yrs.
----------- ------------ ------------ ------------ -----------
$77,170,530 $368,567,606 $ $445,738,136 $45,020,621
=========== ============ ============ ============ ===========
-30-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized
Subsequent to
Description Encumbrances Land Buildings Acquisition (a)
----------- ------------ ---- --------- ---------------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $4,033,622 $ 331,910 $12,281,102
Centralized Telephone
Bureau leased to Western
Union Financial
Services, Inc. 842,233 4,762,302
Warehouse and
manufacturing buildings
leased to Gibson
Greetings, Inc. 3,495,507 34,016,822
Warehouse and
manufacturing buildings
leased to CSS
Industries, Inc. 1,051,005 14,036,912
Manufacturing,
distribution and office
buildings leased to
Brodart Co. 445,383 11,323,899
Technology center leased
to Faurecia Exhaust
Systems, Inc. 223,585 2,684,424
Manufacturing facilities
leased to Rochester
Button Company, Inc. 20,428 576,781
Office and research
facility leased to Exide
Electronics Corporation 2,844,120
Manufacturing facility
leased to Penberthy
Products, Inc. 70,317 1,476,657
Manufacturing facility and
warehouse leased to DS
Group Limited 238,532 3,339,449
Retail stores leased to
AutoZone, Inc. 16,416,402
Retail store leased to
Wal-Mart Stores, Inc. 1,839,303 6,535,144
Manufacturing and office
facilities leased to
Sybron International
Corporation 2,273,857 18,078,975 12,728
Manufacturing and office
facilities leased to
Sybron Dental
Specialties, Inc. 454,101 13,250,980 9,315
Manufacturing and office
facilities leased to NVR
L.P. 728,683 6,092,840
Office/warehouse
facilities leased to
United Stationers Supply
Company 1,882,372 5,846,214 26,581
Bottling and distribution
facilities lease to Dr
Pepper Bottling Company
of Texas 27,598,638
---------- ----------- ------------ -------
$4,033,622 $13,897,216 $181,161,661 $48,624
========== =========== ============ =======
Gross Amount at which Carried
at Close of Period
------------------
Increase
(Decrease) in Net
Description Investment(b) Total Date Acquired
----------- --------------- ----- -------------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $83,086 $12,696,098 1/1/1998
Centralized Telephone
Bureau leased to Western
Union Financial
Services, Inc. (375,711) 5,228,824 1/1/1998
Warehouse and
manufacturing buildings
leased to Gibson
Greetings, Inc. (2,642,078) 34,870,251 1/1/1998
Warehouse and
manufacturing buildings
leased to CSS
Industries, Inc. 206,965 15,294,882 1/1/1998
Manufacturing,
distribution and office
buildings leased to
Brodart Co. (3,960,678) 7,808,604 1/1/1998
Technology center leased
to Faurecia Exhaust
Systems, Inc. (276,580) 2,631,429 1/1/1998
Manufacturing facilities
leased to Rochester
Button Company, Inc. (86,164) 511,045 1/1/1998
Office and research
facility leased to Exide
Electronics Corporation (924,548) 1,919,572 1/1/1998
Manufacturing facility
leased to Penberthy
Products, Inc. (323,454) 1,223,520 1/1/1998
Manufacturing facility and
warehouse leased to DS
Group Limited (1,055,358) 2,522,623 1/1/1998
Retail stores leased to
AutoZone, Inc. (384,609) 16,031,793 1/1/1998
Retail store leased to
Wal-Mart Stores, Inc. (779,391) 7,595,056 1/1/1998
Manufacturing and office
facilities leased to
Sybron International
Corporation (547,150) 19,818,410 1/1/1998
Manufacturing and office
facilities leased to
Sybron Dental
Specialties, Inc. 174,479 13,888,875 1/1/1998
Manufacturing and office
facilities leased to NVR
L.P. 41,501 6,863,024 1/1/1998
Office/warehouse
facilities leased to
United Stationers Supply
Company (600,633) 7,154,534 1/1/1998
Bottling and distribution
facilities lease to Dr
Pepper Bottling Company
of Texas (1,204,683) 26,393,955 1/1/1998
------------ ------------
$(12,655,006) $182,452,495
============ ============
-31-
Initial Cost to Company
-----------------------
Costs
Capitalized
Personal Subsequent to
Description Encumbrances Land Buildings Property Acquisition (a) Land
----------- ------------ ---- --------- -------- --------------- ----
Operating real estate:
Hotel located in:
Livonia, Michigan $ $2,765,094 $11,086,650 $3,290,990 $4,809,318 $2,765,094
------------ ---------- ----------- ---------- ---------- ----------
$ $2,765,094 $11,086,650 $3,290,990 $4,809,318 $2,765,094
============= ========== =========== ========== ========== ==========
Gross Amount at which Carried at Close of Period (d)
---------------------------------------------------- Life on which
Depreciation in
Latest
Statement of
Personal Accumulated Date Income
Description Buildings Property Total Depreciation(d) Acquired is Computed
----------- --------- -------- ----- --- -------- ------------
Operating real estate:
Hotel located in:
Livonia, Michigan $13,177,870 $6,009,088 $21,952,052 $5,805,321 1/1/1998 7-40 yrs.
----------- ---------- ----------- ----------
$13,177,870 $6,009,088 $21,952,052 $5,805,321
=========== ========== =========== ==========
-32-
W. P. CAREY & CO. LLC
NOTES to Schedule III - Real Estate and ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs
subsequent to acquisition, including legal fees, appraisal fees,
title costs, other related professional fees and purchases of
furniture, fixtures, equipment and improvements at the hotel
properties.
(b) The increase (decrease) in net investment is primarily due to (i)
the amortization of unearned income from net investment in direct
financing leases producing a periodic rate of return which at times
may be greater or less than lease payments received, (ii) sales of
properties (iii) impairment charges, (iv) changes in foreign
currency exchange rates, and (v) an adjustment in connection with
purchasing certain minority interests.
(c) At December 31, 2003, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
approximately $620,222,000.
(d)
Reconciliation of Real Estate Accounted for
Under the Operating Method
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $474,272,069 $459,243,153
Additions 2,126,915 15,232,049
Dispositions (16,136,445) (2,582,356)
Foreign currency translation adjustment 10,747,719 8,424,122
Reclassification from/to assets held for sale, operating real
estate, net investment in direct financing lease and equity
investments (24,712,122) (1,692,544)
Impairment charge (560,000) (4,352,355)
------------ ------------
Balance at end of year $445,738,136 $474,272,069
============ ============
Reconciliation of Accumulated Depreciation
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $41,716,083 $32,401,204
Depreciation expense 10,262,019 10,169,739
Depreciation expense from discontinued operations 271,922 312,176
Foreign currency translation adjustment 772,590 417,239
Reclassification from/to assets held for sale, operating real
estate and net investment in direct financing lease (6,245,358) (1,362,047)
Dispositions (1,756,635) (222,228)
----------- -----------
Balance at end of year $45,020,621 $41,716,083
=========== ===========
Reconciliation for Operating Real Estate
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $5,720,760 $8,066,244
Additions 22,900 384,974
Reclass from real estate accounted for under the operating
method 21,952,052 --
Dispositions (5,743,660) (2,730,458)
---------- ----------
Balance at close of year $21,952,052 $5,720,760
========== ==========
Reconciliation of Accumulated Depreciation for
Operating Real Estate
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $1,664,817 $2,076,314
Depreciation expense -- 328,297
Depreciation expense from discontinued operations 170,219 154,491
Dispositions (1,835,036) (889,848)
Reclassification from real estate accounted for under the
operating method and others 5,805,321 (4,437)
---------- ----------
Balance at end of year $5,805,321 $1,664,817
========== ==========
-33-
APPENDIX A TO FORM 10-K
W. P. CAREY & CO. LLC
2003 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
Operating Data 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 163,379 $ 155,944 $ 123,383 $ 104,131 $ 71,591
Income (loss) from continuing operations (1) 62,212 45,902 32,290 (11,123) 25,991
Basic earnings (loss) from continuing
operations per share 1.70 1.29 .94 (.38) 1.03
Diluted earnings (loss) from continuing
operations per share 1.64 1.26 .92 (.38) 1.03
Net income (loss) 62,878 46,588 35,761 (9,278) 34,039
Basic earnings (loss) per share 1.72 1.31 1.04 (.31) 1.33
Diluted earnings (loss) per share 1.65 1.28 1.02 (.31) 1.33
Cash dividends paid 62,978 60,708 58,048 49,957 42,525
Cash provided by operating activities 67,851 75,896 58,877 58,222 48,186
Cash (used in) provided by investing activities 24,229 51,921 (13,368) 41,138 (55,173)
Cash (used in) provided by financing activities (89,299) (115,261) (46,815) (91,452) 3,392
Cash dividends declared per share 1.73 1.72 1.70 1.69 1.67
Balance Sheet Data:
Real estate, net (2) $ 421,543 $ 440,193 $ 435,629 $ 433,867 $ 501,350
Net investment in direct financing leases 182,452 189,339 258,041 287,876 295,556
Total assets 906,505 893,524 915,883 904,242 856,259
Long-term obligations (3) 158,605 226,102 287,903 176,657 310,562
(1) Includes gain (loss) on sale of real estate.
(2) Includes real estate accounted for under the operating method, operating
real estate and real estate under construction, net of accumulated
depreciation.
(3) Represents mortgage and note obligations and deferred acquisition fees due
after more than one year.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS
(dollar amounts in thousands)
Overview
The following discussion and analysis of financial condition and results of
operations of W. P. Carey & Co. LLC ("WPC") should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 2003. The following discussion includes forward looking statements.
Forward looking statements, which are based on certain assumptions, describe
future plans, strategies and expectations of WPC. Forward-looking statements
discuss matters that are not historical facts. Because they discuss future
events or conditions, forward-looking statements may include words such as
"anticipate", "believe", "expect", "estimate", "intend", "could", "should",
"would", "may", or similar expressions. Do not unduly rely on forward looking
statements. They give our expectations about the future and are not guarantees,
and speak only as of the date they are made. 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 plan expressed or implied by such forward looking
statements. The risk factors are fully described in Item 1 of this Annual Report
on Form 10-K. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or objectives and plans of WPC will be achieved.
WPC was formed in 1998 through the acquisition of nine affiliated real estate
limited partnerships that had been managed by an affiliate of WPC as general
partner and, at that time, became listed on the New York Stock Exchange. In June
2000, WPC acquired the net lease real estate management operations of its former
manager, Carey Management, LLC. As a result of the June 2000 acquisition, WPC is
currently the Advisor to five publicly-owned 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"), Corporate Property Associates 15 Incorporated
("CPA(R):15") and Corporate Property Associates 16-Global Incorporated
("CPA(R):16 - Global") (collectively, the "CPA(R) REITs"). CPA(R):16 - Global
was formed in 2003.
WPC is a publicly-traded limited liability company which consists of real estate
and management operations. Certain of the management operations taxable
subsidiaries are the Advisors to publicly registered real estate investment
trusts that were sponsored by the predecessors of WPC's management operations.
As a limited liability company, WPC's taxable income is passed through to its
shareholders, regardless of their cash distributions from WPC. Management
assesses performance, in part, to determine if cash flow from operations along
with distributions received from equity investments is sufficient to distribute
dividends at an increasing rate while preserving liquidity. For the year ended
December 31, 2003, cash flow from operations and equity investments was $71,354
and distributions paid were $62,978.
WPC's real estate operations are intended to provide a steady, reliable cash
flow from properties subject to single-tenant net leases. As leases have
expired, several properties are no longer subject to net leases or have been
retrofitted as multi-tenant properties resulting in more intensive asset
management activities by WPC. WPC evaluates its portfolio on an on-going basis
to give consideration to selling those properties that require more intensive
management or provide lower returns due to the absorbing the obligation to pay
property costs and lower rentals. In order to strengthen or increase cash flow
from its real estate portfolio, WPC has participated in real estate purchases
with affiliates. During 2003, WPC purchased a 22.5% interest in eight
distribution properties in France leased to Carrefour, S.A., the world's second
largest retailer. WPC expects to purchase properties or interests in real estate
partnerships with affiliates in 2004.
In connection with its management operations, WPC receives a portion of its fees
in shares of the CPA(R) REITs. As of December 31, 2003, WPC owns more than
3,900,000 shares of the CPA(R) REITs. These shares generate annual distributions
of approximately $3,300. WPC accounts for its interests in the CPA(R) REITs as
equity investments and recognizes income based on per share net income of each
CPA(R) REIT rather than on distributions received. Shares issued from CIP(R),
CPA(R):12 and CPA(R):14 for payment of fees are based on values, which are
determined by independent annual valuations. These appraised values are
generally in excess of the "book value" of the CPA(R) REITs and GAAP requires
that this difference be allocated to the assets and liabilities of the
underlying entities and charged as a reduction to earnings over the lives of
these assets and liabilities. Fees for CPA(R):15 are currently based on
historical cost and are scheduled to be based on appraised values in the future.
Income recognized from the investments in the CPA(R) REITs was $885 which
consisted of WPC's share of earnings of $1,592 less a noncash reduction for the
excess of appraised value to book value of $707. In general, the CPA(R) REITs,
like other REITs, have the ability to distribute amounts in excess of their net
income because of depreciation, a noncash expense.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
Revenues from the management services operations are earned as Advisor to the
CPA(R) REITs by providing services in connection with structuring and
negotiating acquisition and debt placement transactions and providing on-going
management of the portfolio. The revenues and income of this business segment
are subject to fluctuation because the volume of transactions that are
originated on behalf of the CPA(R) REITs is subject to various uncertainties
including competition for net lease transactions, the requirement that each
acquisition meet suitability standards and due diligence requirements and the
ability to raise capital on behalf of the CPA(R) REITs. During 2003, Management
revenues increased by approximately 4.5% because asset-based fees increased even
though transaction volume decreased. Asset-based management and performance fees
for CIP(R), CPA(R):12 and CPA(R):14 are determined based on Average Invested
Assets, that is, the appraised value of assets under management. CPA(R):15's
Average Invested Assets are currently determined based on the historical cost of
its real estate assets. As CPA(R):14 and CPA(R):15 have in excess of $387,000
available for investment and CPA(R):16 - Global has commenced a "best efforts"
offering for up to $1,100,000, the asset base can be expected to continue to
increase over the next several years as these available and to be raised funds
are invested for these CPA(R) REITs. The CPA(R) REITs use limited recourse debt
in their acquisition strategy and such leverage generally ranges between 50% and
60% of the acquisition cost for properties. This provides the capacity for up to
$2,900,000 of acquisitions and could generate as much as $29,000 of annual
asset-based revenues; however, there is no assurance that these funds will be
invested quickly, as all acquisitions are subject to a due diligence process
which includes approval of each purchase of real estate by the Investment
Committee of the Board of Directors or that the anticipated leverage will be
achieved. For the year ended December 31, 2003, Management services operations
provided approximately 54% of revenues.
Results of Operations:
Year-Ended December 31, 2003 Compared to Year-Ended December 31, 2002
WPC reported net income of $62,878 and $46,588 for the years ended December 31,
2003 and 2002, respectively. The results for 2003 and 2002 include noncash asset
impairment charges of $4,150 and $29,411, respectively, representing the
writedown of assets to their estimated fair value. In addition, 2002 results
include a gain of $11,160 on the sale of a property in Los Angeles, California.
Income from continuing operations before gains on sale of real estate increased
to $62,212 from $33,251, for the comparable years ended December 31, 2003 and
2002. The increase in 2003 was due primarily to a decrease in impairment charges
on real estate and investments, increases in other income, management income and
equity income and, to a lesser extent a decrease in amortization expense. This
was partially offset by a decrease in lease revenues and increases in property
and general and administrative expenses.
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.
The results of operations of each segment is as follows:
Real Estate Operations
Net operating income (income before gains and losses, income taxes, minority
interest and discontinued operations) from real estate operations increased to
$40,298 from $13,099, respectively, for the comparable years ended December 31,
2003 and 2002. The increase for the comparable periods was affected by a
decrease in noncash impairment charges on real estate and investments of
$18,806, and increases in other income and income from equity investments and,
to a lesser extent, a decrease in interest expense. This was partially offset by
a decrease in lease revenues and an increase in property expense.
As a result of its annual independent review of the estimated residual values on
its properties classified as net investments in direct financing leases, WPC
determined that an other than temporary decline in estimated residual value had
occurred at several properties and the net investment in direct financing leases
was revised using the changed estimates. The resulting changes in estimated
residual value resulted in the recognition of impairment charges in 2003 and
2002 of $1,208 and $14,880, respectively. In addition, during 2002 WPC incurred
an impairment charge of $4,596 on its investment in the operating partnership
units of MeriStar Hospitality Corporation due to the deterioration in the
operating results of MeriStar.
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
The operating partnership units were converted into MeriStar common stock in
2003 and the common stock is reflected in the accompanying consolidated
financial statements at fair value based on its quoted price per share.
Other income includes lease termination payments and other non-rent related
revenues from real estate operations including, but not limited to, settlements
of claims against former lessees and reimbursements of property costs. WPC
receives settlements in the ordinary course of business; however, the timing and
amount of such settlements cannot always be estimated. A lease termination
settlement of $2,250 in March 2003 was received 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 periods was
due primarily to the conversion of WPC's ownership interest in MeriStar to
publicly-traded common stock in 2003. For the year ended December 31, 2002, WPC
incurred a loss from the MeriStar investment of $3,019, 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. Equity income for 2003 was also affected by 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
years ended December 31, 2003 and 2002, the Hologic investment contributed
income of $565 and $35, respectively. Equity income also includes $258 and $51,
for the years ended December 31, 2003 and 2002, 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. Future equity income is
expected to benefit from the acquisition of a 22.5% interest in the eight
Carrefour, S.A. properties in November 2003. The properties are leased to
affiliates of Carrefour and the leases have nine-year terms, expiring between
December 2011 and November 2012, at an aggregate annual rent of Euro 11,799
($14,809 as of December 31, 2003), with annual rent increases based on a formula
indexed to increases in the INSEE, a French construction cost index. As of
December 31, 2003, limited recourse mortgage debt of Euro 96,697 ($121,422 as of
December 31, 2003) is outstanding on the properties. The Carrefour loans provide
for quarterly payments of interest at an annual interest rate of 5.55% and
stated principal payments with scheduled increases over their terms. The loans
mature in December 2014 at which time balloon payments are scheduled. WPC's
share of annual cash flow (rent less debt service) from the Carrefour investment
is expected to amount to $1,300.
The decrease in interest expense for the comparable periods ended December 31,
2003 and 2002 was primarily attributable to lower average outstanding balances
on WPC's $185,000 credit facility, partially offset by an increase in mortgage
interest expense. The average outstanding balance on the credit facility which
incurs interest at a variable rate decreased by approximately $38,000 for the
comparable periods but was not affected by fluctuations caused by changes in the
interest rate as rates were relatively stable throughout 2003. The increase in
mortgage interest was 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. This was partially offset by decreases
in interest expense on five mortgages that were paid off during 2003, with
annual interest expense of $780. In December 2003, WPC refinanced the mortgage
encumbering its Pantin, France property and borrowed an additional $5,080 under
similar terms as the prior mortgage. Annual debt service on the Pantin property
will increase by approximately $205.
Lease revenues decreased by $2,351 for the comparable years ended December 31,
2003 and 2002 as a result of several lease terminations and expirations,
including leases with Thermadyne Holdings Corp. 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 was reduced by $720. Because Livho is a variable
interest entity ("VIE"), as defined by the Financial Accounting Standards Board
("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), and WPC is the primary economic beneficiary, it does not qualify for
the deferral and WPC now consolidates Livho in its consolidated financial
statements. Accordingly, WPC will no longer recognize rental revenue from the
Livho lease (see Accounting Pronouncements). Lease revenues benefited from a
lease with BE Aerospace, Inc. on a property purchased during the third quarter
of 2002 as well as several rent increases on existing leases. Annual rentals
from BE Aerospace are $1,421. As the result of writedowns of direct financing
leases in 2003 and 2002, the rates of return on several leases were revised, and
interest income from direct financing leases for financial reporting purposes in
2003 decreased by
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
approximately $1,600, and in 2004 will decrease by approximately $2,000. This
change does not effect 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 Gap property to reach the previous levels. Management believes
that the prospects for leasing the Gap property on a long-term basis are good;
however, the effort to re-lease the facility has proceeded more slowly than
anticipated and portions of the property may remain vacant for an extended
period. 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, three new leases signed
with tenants at the Pantin property with annual rents of $500, as well as a
number of renewals on existing leases including five-year renewals with
Continental Airlines Inc. and Verizon Communications, Inc.
In addition to the impact of the expiration of the Gap lease, future operating
cash flow will be affected by lease terminations, a lease renewal with Lockheed
Martin Corporation, and the sales of properties. During 2003, WPC entered into a
five-year lease renewal with Lockheed Martin, lessee of its King of Prussia,
Pennsylvania property. Annual rents for the renewal period were reduced by $175.
In February and March 2003, WPC sold its properties leased to Peerless Chain
Company and Wozniak, Inc., respectively. Annual rents from these leases were
$2,155. WPC received a settlement payment of $290 from Wozniak for allowing to
terminate its lease which term was scheduled to expire in December 2003. In the
third and fourth quarters of 2003, WPC sold its properties leased to Datcon
Instrument Company, Harcourt General, Inc., Penn Crusher Corporation, and its
Oxnard, California property leased to Lockheed Martin Corporation and Merchants
Home Delivery, Inc. Annual rental income from these properties was $1,963. In
November 2003, in consideration for agreeing to the early termination of a lease
with Winn-Dixie Stores, Inc., WPC received a settlement payment of $569. The
lease was scheduled to expire in March 2008, and annual rental income under the
lease was $170. The results from these properties are reflected in discontinued
operations in the accompanying consolidated financial statements.
Property expenses increased for the comparable periods ended December 31, 2003
and 2002. The increase in property expenses was due to increases in operating
and maintenance expenses as a result of the expiration of the Thermadyne leases
and the restructuring of the Faurecia Exhaust Systems, Inc. lease in 2002
because WPC now has the obligation for carrying costs at those properties as
well as increases in costs at other non-net leased properties. There is also a
greater likelihood of re-leasing on a multi-tenant basis than as single tenant
net lease properties so there is no assurance that those costs will be absorbed
by lessees in the future. 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.
The increase in property expenses was partially offset by a decrease in the
provision for uncollected rents. The 2002 provision included approximately
$1,100 related to uncollected rents from a single lessee. WPC monitors the
financial condition of its lessees on an ongoing basis and many of it leases
require lessees to provide financial statements.
Over the past several years, WPC has pursued a strategy of selling its smaller
properties as well as properties that do not generate significant cash flow and
require more intensive asset management services. As of December 31, 2003, WPC
has classified seven properties as held for sale. WPC's Cincinnati, Ohio
property, formerly leased to Red Bank Distribution, Inc. is currently under
contract for sale for $10,088. Annual lease revenues from these properties
approximate $376.
Dr Pepper Bottling Company of Texas, WPC's largest tenant which contributes 6%
of lease revenues, has provided written notice of its intent to exercise its
purchase option. Dr Pepper is expected to make a decision as to whether to
exercise the option within the next several weeks. In the event that Dr Pepper
exercises its option, its purchase price will be determined by an appraisal
process and will be based on the fair value of the Dr Pepper properties as
encumbered by the lease. Factors included in valuing a property as encumbered by
lease include remaining lease term, inclusive of all renewals, projected
increases over the remaining terms and the applicable discount rate. In the
event the property is sold, WPC would receive substantial consideration. Annual
contractual rents from Dr Pepper are $4,475.
Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the
Impairment of Long-Lived Assets" requires that for disposal activities initiated
after January 1, 2002, including the sale of properties, the revenues and
expenses relating to the assets held for sale or sold be presented as a
discontinued operation for all periods presented in the financial statements.
Because WPC sells properties in the ordinary course of business, and may
reinvest the proceeds of sale to purchase new properties, WPC evaluates its
ability to fund distributions to shareholders by considering the
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
combined effect of cash flows from continuing operations and from discontinued
operations. WPC's income from discontinued operations was $666 and $686,
respectively, for the comparable years ended December 31, 2003 and 2002. The
results from discontinued operations included noncash impairment charges on
properties held for sale of $2,670 and $9,125 for the years ended December 31,
2003 and 2002, respectively.
Livho's operations were initially transferred to a separate company as a
strategy to protect WPC's tax status as a publicly-traded partnership. Livho's
operating revenues include food and beverage revenues. During 2003, a bar at the
hotel, which at one time was a significant source of revenues, was closed and
underwent renovations. The renovations were recently completed and the bar
re-opened in February 2004 as an Irish pub. The renovations were funded by WPC.
Revenues from the hotel's food and beverage operations are expected to improve
substantially as a result of the renovation.
Management Services Operations
Net operating income from WPC's management services operations for the year
ended December 31, 2003, was $39,994 as compared with $37,732 for the year ended
December 31, 2002. The increase for the comparable periods 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 a decrease in transaction fees earned and an increase in general and
administrative expenses.
Total revenues earned by the management services operations for the years ended
December 31, 2003 and 2002 were $88,060 and $84,255, respectively. Transaction
fees earned were $34,957 and $47,005 for the comparable years ended December 31,
2003 and 2002. Asset-based fees and reimbursements were $53,103 and $37,250 for
the comparable years ended December 31, 2003 and 2002.
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 WPC to complete acquisitions on behalf of the
CPA(R) REIT's. 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 CPA(R):15. Based on
assets under management of the CPA(R) REITs as of December 31, 2003, annualized
management and performance fees under the advisory agreements are approximately
$40,000. As the real estate asset bases of CPA(R):14, CPA(R):15 and CPA(R):16 -
Global 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 $647,000. 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.
Transaction fees include fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. WPC structured $725,000 and $981,000 of acquisitions
for the years ended December 31, 2003 and 2002, respectively. Acquisition
activity is subject to fluctuations. WPC is facing increased competition for the
acquisition of commercial properties. This competition is from insurance
companies, credit companies, pension funds, private individuals, investment
companies and other REITs. WPC also faces competition from institutions that
provide or arrange for other types of commercial financing through private or
public offerings of equity or debt or traditional bank financings. 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 March 1, 2004, the CPA(R) REITs have approximately $418,000
available for investment.
The shares of CPA(R):16 - Global's "best efforts" public offering are being
offered through Carey Financial Corporation, WPC's wholly-owned broker-dealer
subsidiary. WPC's management has projected to raise between $500,000 and
$750,000 in 2004 through this offering. If this offering is successful, it will
provide WPC the resources to increase its transaction-based revenues and assets
under management. WPC is attempting to further diversify the CPA(R):14 and
CPA(R):15 portfolios and reduce their cash available for investment as the
CPA(R):16 - Global offering commences.
On April 1, 2003, WPC increased its ownership interest in W.P. Carey
International LLC ("WPCI") through WPCI's redemption of William Polk Carey's 90%
interest. Mr. Carey is the Chairman and Co-Chief Executive Officer 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. Based on current assets outside
of the United States annual asset-based fees will increase by more than $200.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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. Management expects international assets under management to
increase substantially over the coming years as WPC believes there are
significant opportunities and there is a separate acquisitions team engaged on
behalf of WPCI. WPCI structured purchases in the United Kingdom, France and
Germany in 2003 and completed a purchase in Belgium since December 31, 2003.
The decrease in amortization expense of $1,918, to $7,296 for the comparable
years ended December 31, 2003 and 2002, was due to certain intangible assets
becoming fully amortized during the fourth quarter of 2002 and second quarter of
2003. Amortization of intangibles is expected to be $6,751 in 2004 and $6,660 in
2005.
The increase in general and administrative costs for the comparable years ended
December 31, 2003 and 2002 was due primarily to an increase in personnel costs
and professional fees incurred in 2003. A portion of personnel costs is directly
related to CPA(R) REIT capital raising and transactions activities. 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. The reimbursements of
such costs are subject to certain limitations. Based on its ongoing evaluation
of such limitations, WPC was able to recover additional deferred reimbursements
of $1,840 during 2003. Reimbursement for personnel-related costs for the years
ended December 31, 2003 and 2002 was $7,955 and $6,565, respectively. Reimbursed
amounts are also included in management revenues. $907 of the increase in
personnel costs related to charges for amortization of unearned compensation
from share incentive plan awards to officers and employees of WPC and WPCI and
totaled $3,536 in 2003.
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 the 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 WPC's efforts to increase value on
behalf of CPA(R) REIT shareholders.
The provision for income taxes increased by $1,033, to $19,116 for the year
ended December 31, 2003, of which $9,478 represented deferred taxes. In 2003,
approximately 93% of management revenues were earned by a taxable, wholly-owned
subsidiary, as compared with 90% in 2002, and income tax expense is most
affected by its earnings.
For the years ended December 31, 2003 and 2002 WPC recognized $1,298 and $289,
respectively, of development fee management income in connection with managing
the construction of a public high school in Los Angeles, California, which is
accounted for under the percentage of completion method of accounting.
Year-Ended December 31, 2002 Compared to Year-Ended December 31, 2001
WPC reported net income of $46,588 and $35,761 for the years ended December 31,
2002 and 2001, respectively. The results were not fully comparable due to the
adoption of SFAS No. 142 "Goodwill and other Intangibles" in 2002. SFAS No. 142
discontinued the amortization of goodwill and indefinite-lived intangibles
assets and is not retroactively applicable to 2001. Amortization of goodwill for
the year ended December 31, 2001 was $3,147. The results for 2002 and 2001
include non-cash asset impairment charges of $29,411 and $12,643, respectively,
representing the writedown of assets to estimated fair value. In addition, 2002
includes a gain of $11,160 on the sale of the property in Los Angeles,
California.
Income from continuing operations before gain on sale of real estate increased
to $33,251 from $30,386, for the comparable years ended December 31, 2002 and
2001. In addition to the effect of the change in the amortization of goodwill
and indefinite-lived intangible assets, the gain on the sale of the Los Angeles
property and non-cash asset impairment charges on real estate and investments
from continuing operations of $20,286 and $9,643, for 2002 and 2001,
respectively, the increase in income from continuing operations before gain on
sale of real estate was due to increases in management income and a decrease in
interest expense. These were partially offset by increases in general and
administrative expenses and the provision for income taxes, and, to a lesser
extent, decreases in other income, income from equity investments and lease
revenues.
Net operating income from real estate operations was $13,099 and $30,586 in 2002
and 2001, respectively. Excluding impairment charges, operating income from real
estate operations would have reflected a decrease of $6,844 for the
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
comparable years. The decrease in real estate operating income was primarily due
to decreases in other income, income from equity investments and lease revenues.
These were partially offset by a decrease in interest expense.
The increase in impairment charges was the result of WPC's annual review of the
estimated residual values on its properties classified as net investments in
direct financing leases. WPC determined that an other than temporary decline in
estimated residual value had occurred, which resulted in the recognition of
impairment charges on direct financing leases of $14,880 in 2002. WPC also
incurred impairment charges of $4,596 and $6,749 in 2002 and 2001, respectively,
on its investment in the operating partnership units of MeriStar.
The results for 2001 included settlements totaling $4,665 from (a) New Valley
Corporation in the final settlement of a claim relating to termination of a
lease in 1993 for WPC's property in Moorestown, New Jersey, and (b) Harcourt
General Corporation, the guarantor of a lease with General Cinema Corporation
for a property in Burnsville, Minnesota. The settlement with Harcourt General
resulted from the termination of the General Cinema lease in connection with
General Cinema's plan of reorganization. The Burnsville property was sold in
January 2002.
The decrease in income from equity investments was primarily due to MeriStar's
poor performance. WPC recorded a loss of $3,019 on the MeriStar equity
investment in 2002, compared with income of $436 for 2001.
Lease revenues decreased by $986 for the comparable years primarily as a result
of the sale of properties during 2001, including the property leased to
Duff-Norton, Inc. in July 2001 which had annual rents of $1,164, the sale of
four properties classified as held for sale as of December 31, 2001 (and not
included in discontinued operations), the termination of WPC's lease with
Thermadyne during 2002, and to a lesser extent, the reclassification of WPC's
investment in the properties leased to Childtime as an equity investment during
2002 subsequent to its contribution of its 33.93% interest to a limited
partnership. This was partially offset by a new lease in France with Bouygues
Telecom, S.A. and an increase in rent from the expansion of the property leased
to AT&T, both of which went into effect in the fourth quarter of 2001. Lease
revenues also benefited from the acquisition of the BE Aerospace properties in
the third quarter of 2002 as well as several rent increases on existing leases.
The decrease in interest expense for the comparable years was primarily
attributable to lower average outstanding balances on WPC's $185,000 credit
facility and a decrease in interest rates during the comparable periods. WPC's
credit facility is indexed to the London Inter-Bank Offered Rate ("LIBOR") and
the LIBOR benchmark rate declined in 2001 and 2002. The average outstanding
balance on the credit facility decreased by approximately $34,000 and the
average interest rate decreased to 3.24% from 5.40% for the comparable years. In
June 2002, WPC paid off $12,580 in mortgage bonds on the Alpena and Petoskey
hotel properties. The Alpena and Petoskey properties were subsequently sold in
July 2003 and August 2002, respectively. The payoff of the bonds on the Alpena
property resulted in an annual decrease in interest expense of more than $500.
The decrease in interest expense from the credit facility and the payoff of the
Alpena and Petoskey mortgage bonds were partially offset by an increase in
interest from mortgages placed on the Sprint Spectrum L.P. and Bouyges Telecom
properties in 2001. In addition, during 2002 WPC obtained new financing of
$7,000 on a property leased to Quebecor, Inc. and $9,200 on the newly-purchased
BE Aerospace properties. A mortgage on the Quebecor property had been paid off
in May 2001.
Property expenses decreased by $443 for the comparable years. Property expenses
for 2002 and 2001 include noncash charges of $142 and $1,321, respectively, in
connection with the writeoff of accumulated straight-line rents as uncollectible
in connection with the restructuring of the lease with Livho, Inc. Excluding the
writeoffs, property expenses for the comparable years increased by $736. The
increase in property expense was due to increases in operating and maintenance
costs. This was the result of the termination of the Thermadyne lease as well as
an increase in costs related to properties that are either vacant or not subject
to net leases, and charges of approximately $200 to write off unamortized
leasing costs in connection with a lease termination and the sale of a property.
Net operating income from WPC's management services operations for the years
ended December 31, 2002 and 2001 was $37,732 and $8,047, respectively. Results
for 2002 include noncash charges for amortization of intangible assets of $7,280
and results for 2001 include amortization of goodwill and intangible assets of
$11,903. The increase in net operating income for the comparable periods of
$29,685 was primarily the result of an increase in transaction and asset-based
fees, partially offset by an increase in general and administrative expenses.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
Total revenues earned by the management services operations for the years ended
December 31, 2002 and 2001 were $84,255 and $46,911, respectively. Management
fee revenues were comprised of transaction fees of $47,005 and $17,160,
respectively, and asset-based fees and reimbursements of $37,250 and $29,751,
respectively, for the years ended December 31, 2002 and 2001. WPC and affiliates
structured more than $981,000 of acquisitions on behalf of the CPA(R) REITs in
2002 as compared with $395,000 in 2001.
Total asset based management fees for the years ended December 31, 2002 and 2001
were $26,453 and $21,511, respectively. A portion of the CPA(R) REIT management
fees is based on each CPA(R) REIT meeting specific performance criteria (the
"performance fee") and is earned only if the criteria are achieved. The
performance criterion for Corporate Property Associates 10 Incorporated
("CPA(R):10") was satisfied during the second quarter of 2002, resulting in
WPC's recognition of $1,463 in performance fees for the period June 2000 through
March 2002. The performance criterion for CPA(R):14 was satisfied for the first
time during the second quarter of 2001, resulting in WPC's recognition of $3,112
for the period December 1997 through March 2001.
In April 2002, the shareholders of CPA(R):10 and CIP(R), approved a merger
agreement providing for the merger of CPA(R):10 into CIP(R). The merger, which
was effective on May 1, 2002, did not result in a change in assets under
management, so that the asset-based fees earned by WPC were not affected by the
merger. As a result of the merger, WPC received $248 in property disposition
fees which were earned in April 2002 when subordination provisions in the
CPA(R):10 Advisory Agreement were met.
The provision for income tax expense for the year ended December 31, 2002
increased by $9,724 over the comparable year ended December 31, 2001 and
resulted from the growth of the management services operations. Income tax
expense increased because approximately 90% of management revenues were earned
by a taxable, wholly-owned subsidiary which reflected a substantial increase in
earnings for the comparable periods.
The increase in general and administrative expenses was attributable to the
growth of the management services operations. A significant portion of the
increase represents costs that vary with acquisition and asset management
activity. The overall percentage increase in general and administrative expenses
was significantly lower than the percentage increase in management revenues.
Reimbursement for personnel-related costs, which is included in management
income, for the comparable years ended December 31, 2002 and 2001 were $6,565
and $5,255, respectively. Of the increase in personnel costs for the comparable
years, $927 reflected an increase in the non-cash charges relating to WPC's
share incentive plans. Equity awards are generally amortized over a four-year
vesting period.
Financial Condition
WPC has pursued a strategy of deleveraging, that is, reducing its debt over the
past several years. Between January 1, 2001 and December 31, 2003, combined
limited recourse mortgage debt and amounts outstanding on its $185,000 credit
facility decreased from $290,160 to $209,193, a decrease of approximately 28%.
Because $128,125 of its $180,193 of mortgage debt is fixed rate debt, WPC
believes that it should not be greatly affected by changes in interest rates.
WPC has substantially paid down the amounts outstanding on its credit facility,
which has decreased from $95,000 at November 31, 2001 to $29,000, at December
31, 2003. During this period, the rates on the credit facility declined.
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. The credit agreement matures in March 2004 and has been
extended on a short term basis through June 1, 2004. WPC will either seek to
extend or replace the credit facility. WPC believes that renewing or replacing
the facility after the current term is likely. Amounts drawn on the credit
facility bear interest at a rate indexed to the London Inter-Bank Offered Rate.
As of March 5, 2004, the annual interest rate on the outstanding balance of
$30,000 is approximately 2.275%.
There has been no material change in WPC's financial condition since December
31, 2002. WPC's cash balances increased to $24,359 from $21,304 and overall debt
decreased from $235,000 to $209,000. 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.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
Cash flows from operating activities and distributions received from equity
investments for the year ended December 31, 2003 of $71,354 were primarily used
to fund dividends to shareholders of $62,978. Annual cash flow from operations
is projected to continue to fund distributions; however, operating cash flow may
fluctuate on a quarterly basis due to the timing of certain compensation costs
that are paid and receipt of the annual installment of deferred acquisition fees
and interest therein in the first quarter and the timing of the receipt of
transaction-related fees. In 2003, WPC received deferred acquisition fees of
$1,495 in connection with structuring transactions on behalf of CPA(R):12 and
CPA(R):14. The annual installment paid in January 2004, which included an
initial installment from CPA(R):15, increased to $6,900. The payments of the
deferred acquisition fees by the CPA(R) REITs is subordinated to each CPA(R)
REIT meeting certain specified performance criteria. Installments are applied to
amounts due from affiliates when received.
Investing activities included using $9,531 for purchases of equity investments
and additional capital expenditures. The expenditures included using $6,688 for
the purchase of a 22.5% interest in the Carrefour properties, $1,100 for the
renovation of the restaurant and bar at the Livonia hotel and $1,743 of capital
expenditures at existing properties primarily related to leasehold improvements.
Limited recourse mortgage financing was placed on the Hologic properties, which
are accounted for as equity investments, and WPC received a capital distribution
of $6,582 representing WPC's proportionate share of the mortgage proceeds
related to its 36% tenancy-in-common interest. In July, WPC made a capital
contribution of $1,496, to a limited partnership that WPC has an 18.54% equity
ownership interest in, which net leases a property to The Titan Corporation. The
partnership owns a property in California and the contribution, along with
contributions from the other partners, was used to make a balloon payment to pay
off the existing mortgage encumbering the property.
WPC received $24,395 in connection with the sale of seven properties. A
purchaser of one of the properties did not make a scheduled payment in March
2004 and WPC is evaluating the realizability of the $2,250 carrying value of the
notes received from the sale. A portion of the proceeds from the sales was used
to partially pay down WPC's credit facility balance. In addition, WPC sold its
Oxnard, California property and placed the net cash proceeds from the sale of
$7,171 in an escrow account for the purpose of entering into a Section 1031
noncash exchange which, under the Internal Revenue Code, would allow WPC to
acquire like-kind real properties within a stated period in order to defer a
taxable gain of approximately $5,000. 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. The remaining obligation as of December
31, 2003 is $2,233. In connection with the acquisition of WPCI in April 2003,
WPC acquired $1,300 in cash.
In addition to paying dividends to shareholders, WPC's financing activities for
2003 included reducing its outstanding balance of its credit facility by
$20,000, paying off $10,250 in limited recourse mortgage financing on five of
its properties and making scheduled principal payment installments of $8,548 on
existing mortgages. In December 2003, WPC refinanced the existing mortgage on
the Pantin property, and was able to obtain additional mortgage financing of
$5,080 under similar terms as the original mortgage. 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 December
31, 2003, approximately 52% of WPC's properties are encumbered with mortgage
debt. WPC also raised $7,789 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 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 owned by WPCI and made a
payment of $1,898 to William Polk Carey in connection with the redemption of his
interests.
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 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 2004 and
early 2005 of approximately $2,800, 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
$650 in funding to complete the renovation of the restaurant and bar at the
Livonia hotel, which when completed, is expected to improve cash flow at the
property and $830 for the expected environmental costs to prepare the Red Bank
property for sale to a third party. Additionally, WPC has entered into a product
improvement plan in connection with renewing the franchise license with Holiday
Inn at the Livonia Hotel. The cost of the property improvements under the plan
could be as much as $3,500, however, WPC currently estimates to spend
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
under $1,000 over the next two years. WPC is evaluating redevelopment plans for
the Broomfield property but has not determined the cost of such redevelopment.
In the case of limited recourse mortgage financing that does not fully amortize
over its term or is currently due, WPC is responsible for the balloon payment
only to the extent of its interest in the encumbered property because the holder
has recourse only to the collateral. In the event that balloon payments come
due, WPC may seek to refinance the loans, restructure the debt with the existing
lenders or evaluate its ability to satisfy the obligation from its existing
resources including its revolving line of credit, to satisfy the mortgage debt.
To the extent the remaining initial lease term on any property remains in place
for a number of years beyond the balloon payment date, WPC believes that the
ability to refinance balloon payment obligations is enhanced. WPC also evaluates
all its outstanding loans for opportunities to refinance debt at lower interest
rates that may occur as a result of decreasing interest rates or improvements in
the credit rating of tenants. There 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, 71% 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 the development project in Los
Angeles.
A summary of WPC's obligations, commitments and guarantees under contractual
arrangements are as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable $180,193 $23,296 $ 8,062 $22,410 $15,109 $ 9,699 $101,617
Unsecured note payable 29,000 29,000
Deferred acquisition fees 2,233 524 524 524 524 132 5
Commitments and Guarantees:
Development project 2,000 2,000
Share of minimum rents payable
under office cost-sharing
agreement 939 255 342 342
-------- ------- ------- ------- ------- -------- --------
$214,365 $55,075 $ 8,928 $23,276 $15,633 $ 9,831 $101,622
======== ======= ======= ======= ======= ======== ========
As of December 31, 2003, WPC was not involved in any material litigation.
Following a broker-deal examination of Carey Financial Corporation ("Carey
Financial"), WPC's wholly-owned broker-dealer subsidiary, by the staff of the
United States Securities and Exchange Commission (the "SEC"), Carey Financial
received a letter from the staff of the SEC, on or about March 4, 2004, alleging
certain infractions by Carey Financial of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and rules and
regulations thereunder and of the National Association of Securities Dealers,
Inc. The letter was delivered for the purpose of requiring Carey Financial to
take corrective action and without regard to any other action the SEC may take
with respect to the broker-dealer examination. It is not known at this time if
the SEC intends to bring any enforcement action against Carey Financial. The
infractions alleged are described in Item 3 of this Annual Report on Form 10-K
and Note 20 to the accompanying consolidated financial statements.
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.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
Critical Accounting Estimates
WPC makes certain judgments and uses certain estimates and assumptions when
applying accounting principles generally accepted in the United States of
America in the preparation of its consolidated financial statements that affect
the reported amount of assets, liabilities, revenues and expenses. WPC believes
its most critical accounting estimates relate to its provision for uncollected
amounts from lessees, potential impairment of assets, identification of
discontinued operations, classification of real estate assets, identification of
intangible assets in connection with real estate asset acquisitions,
determination of certain asset-based fees and determining the fair value of
assets and liabilities which are "marked to market" but not actively traded in a
public market. WPC's significant accounting policies are described in the notes
to the consolidated financial statements. Certain policies, while significant,
may not require the use of estimates.
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 must assess its ability to collect rent and
other tenant-based receivables and determine 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 will measure its allowance against actual rent
arrearages and adjust the percentage applied. Based on actual experience during
2003, WPC recorded a provision equal to approximately 1.2% of lease revenues.
For certain CPA(R) REIT's, the asset management and performance fees are based
on an independent annual valuation of the underlying real estate assets of the
CPA(R) REIT. The valuation uses estimates, including but not limited to, market
rents, residual values and increases in the CPI and discount rates. Differences
in the assumptions applied would affect the management revenue recognized by
WPC. Additionally, a deferred compensation plan for certain officers is valued
based on the results of the annual valuations. The effect of any changes in the
annual valuations will be adjusted in the determination of net income.
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
projects costs incurred during the period of development. Interest capitalized
for the years ended December 31, 2003, 2002 and 2001 was $22, $216 and $443,
respectively.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
In connection with real estate asset acquisitions, WPC may determine that a
portion of the purchase price is allocable to intangible assets for above-market
and below-market leases, in-place lease intangibles and customer relationships.
Above-market and below-market leases intangibles will be based on the difference
between the market rent and the contractual rents and will be discounted to a
present value using an interest rate reflecting WPC's assessment of the risk
associated with the lease acquired. WPC acquires properties subject to net
leases and considers the credit of the lessee in negotiating the initial rent.
The total amount of other intangible assets will be allocated to in-place lease
values and tenant relationship intangible values based on our evaluation of the
specific characteristics of each tenant's lease and our overall relationship
with each tenant. Characteristics we will consider 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 will be 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 will be used to determine these values.
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, (b) the fair value at the date of the
subsequent decision not to sell, or (c) the current carrying value. The results
of operations and gain or loss on sales of real estate for properties sold or
classified as held for sale after January 1, 2002 are reflected in the
consolidated statements of operations as "Discontinued Operations" for all
periods presented.
In connection with the net lease real estate asset management business, WPC
earns transaction and asset-based fees. Transaction fees are primarily earned in
connection with investment banking services provided in connection with
structuring acquisitions, refinancing and dispositions on behalf of the
affiliated real estate investment trusts. Transaction fees are earned upon
consummation of a transaction, that is, when a purchase has been completed by
the affiliate. Completion of a transaction includes determining that the
purchaser and seller are bound by a contract and all substantive conditions of
closing have been performed. When these conditions are met, acquisition-based
services have been completed and the fees are recognized.
Asset-based management fees are earned when services are performed. A portion of
the fees are subject to subordination provisions pursuant to the Advisory
Agreements and are based on whether each CPA(R) REIT has met specific
performance criteria on a quarterly basis. 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 business operations of Carey Management 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 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 has performed its annual test for
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
impairment of its management services segment, the reportable unit of
measurement, and concluded that the goodwill is not impaired.
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 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.
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 foreign taxes, and (ii) for its taxable subsidiaries, estimating
deferred tax assets and liabilities and any valuation allowance that might be
required against the deferred tax assets. A 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 based on
Management's belief that 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.
Accounting Pronouncements
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 annual disclosure provisions of SFAS
No. 148 have been adopted.
On January 17, 2003, the FASB issued 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 (VIE's) and to determine when
and which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model applies when either (i) the equity investors (if
any) do not have a controlling financial interest of (ii) the equity investment
at risk is insufficient to finance that entity's activities without additional
financial support. In addition, effective upon issuance, FIN 46 requires
additional disclosures by the primary beneficiary and other significant variable
interest holders. The provisions of FIN 46 apply immediately to VIE's created
after January 31, 2003. In October 2003, the FASB issued FASB Staff Position
46-6, which deferred the effective date to December 31, 2003 for applying the
provisions of FIN 46 for interests held by public companies in all VIE's created
prior to February 1, 2003. Additionally, in December 2003, the FASB issued
Interpretation No. 46 (R), "Consolidation of Variable Interest Entities (Revised
December 2003)" ("FIN 46 (R)"). The provisions of FIN 46 (R) are effective as of
March 31, 2004 for all non-special purpose entity ("non-SPE") interests held by
public companies in all VIE's created prior to February 1, 2003. These deferral
provisions did not defer the disclosure provisions of FIN 46.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
WPC has evaluated its joint venture partnership investments established after
January 31, 2003 and based upon its interpretation of FIN 46 and applied
judgment, WPC has determined that it is not required to consolidate these joint
ventures.
WPC continues to evaluate all of its investments in joint ventures and
partnerships created prior to February 1, 2003 to determine whether any of these
entities are VIE's and whether WPC is considered to be the primary beneficiary
or a holder of a significant variable interest in a VIE. If it is determined
that certain of these entities are VIE's, WPC will be required to consolidate
these entities in which WPC is the primary beneficiary or make additional
disclosures for entities in which WPC is determined to hold a significant
variable interest in the VIE as of March 31, 2004.
Based on WPC's analysis of FIN 46, it has concluded that it is reasonably
possible that its investments in real estate joint ventures and other real
estate investments, created prior to February 1, 2003, may be investments in
VIE's and is therefore subject to the disclosure provisions of FIN 46.
WPC's joint ventures and other real estate investments primarily consist of
co-investments with other joint venture partners in commercial real estate
properties and ownership of common stock in the CPA(R) REIT's, which are
consistent with its core business. WPC's maximum loss exposure is the carrying
value of its equity investments.
WPC has concluded that Livho is a variable interest entity that does not qualify
for deferral with WPC as its primary beneficiary because WPC has provided it
with significant financial support over the past several years in order to
support Livho's operations and preserve the value of the property. As a VIE,
Livho is consolidated in WPC's financial statements as of December 31, 2003.
Livho operates a hotel as a Holiday Inn in Livonia, Michigan; its operations
were transferred to a separate company as a strategy to protect WPC's tax status
as a publicly-traded partnership. The real estate assets have historically been
reflected in WPC's consolidated financial statements. Livho's operating revenues
include food and beverage revenues. During 2003, a bar at the hotel, which at
one time was a significant source of revenues, was closed and underwent
renovations, which were funded by WPC. The renovations were recently completed
and the bar re-opened in February 2004 as an Irish pub and it is expected that
revenues from the food and beverage operations will improve substantially as a
result of the renovation.
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
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 to the accompanying
consolidated financial statements). WPC has interests in five additional joint
ventures located in France that are consolidated and have minority interests
that are considered mandatorily 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 $1,852 at December 31, 2003, which approximates their estimated
fair value at that date.
-15-
REPORT of INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
W. P. Carey & Co. LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, members' equity and cash flows present
fairly, in all material respects, the financial position of W. P. Carey & Co.
LLC and its subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standard
No. 142 "Goodwill and Other Intangibles", which requires that goodwill and
indefinite-lived intangible assets are no longer amortized and are assessed for
impairment annually. In addition, as discussed in Note 8 to the consolidated
financial statements, effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standard No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", which requires that the results of operations,
including any gain or loss on sale, relating to real estate that has been
disposed of or is classified as held for sale after the initial adoption be
reported in discontinued operations for all periods presented.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 12, 2004
-16-
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts) December 31,
------------
2003 2002
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method, net of accumulated
depreciation of $45,021 and $41,716 at December 31, 2003
and 2002 $400,717 $432,556
Net investment in direct financing leases 182,452 189,339
-------- --------
Real estate leased to others 583,169 621,895
Operating real estate, net of accumulated depreciation of $5,805 and
$1,665 at December 31, 2003 and 2002 16,147 4,056
Real estate under construction and redevelopment 4,679 3,581
Equity investments 82,800 67,742
Assets held for sale 13,609 22,158
Cash and cash equivalents 24,359 21,304
Due from affiliates 50,917 40,241
Goodwill 63,607 49,874
Intangible assets, net of accumulated amortization of $25,262 and
$18,543 at December 31, 2003 and 2002 38,528 44,567
Other assets, net of accumulated amortization of $2,716 and $1,927 at
December 31, 2003 and 2002 and reserve for uncollected rent of
$2,600 and $3,492 at December 31, 2003 and 2002 28,690 18,106
-------- --------
Total assets $906,505 $893,524
======== ========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities :
Mortgage notes payable $180,193 $186,049
Notes payable 29,000 49,000
Accrued interest 1,163 1,319
Dividends payable 15,987 15,486
Due to affiliates 20,444 12,874
Accounts payable and accrued expenses 16,249 17,931
Prepaid rental income and security deposits 4,267 3,951
Accrued income taxes 1,810 5,285
Deferred income taxes, net 29,532 19,763
Other liabilities 11,221 9,494
-------- --------
Total liabilities 309,866 321,152
-------- --------
Minority interest 1,852 1,484
-------- --------
Commitments and contingencies
Members' Equity:
Listed shares, no par value, 36,745,027 and 35,944,110 shares issued
and outstanding at December 31, 2003 and 2002 709,724 690,594
Dividends in excess of accumulated earnings (112,570) (111,970)
Unearned compensation (4,863) (5,671)
Accumulated other comprehensive income (loss) 2,496 (2,065)
-------- --------
Total members' equity 594,787 570,888
-------- --------
Total liabilities, minority interest and members' equity $906,505 $893,524
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-17-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of OPERATIONS
(In thousands except share and per share amounts) For the years ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Management income from affiliates $ 88,060 $ 84,255 $ 46,911
Rental income 45,422 46,092 43,725
Interest income from direct financing leases 20,730 22,411 25,764
Other interest income 2,581 1,639 1,023
Other income 5,288 1,258 5,960
Revenues of other business operations 1,298 289 --
------------ ------------ ------------
163,379 155,944 123,383
------------ ------------ ------------
Expenses:
Interest 15,116 16,134 19,001
Depreciation 10,741 10,111 9,221
Amortization 7,296 9,214 13,857
General and administrative 43,698 42,592 29,322
Property expenses 7,116 6,044 6,487
Charge on extinguishment of debt 350 -- --
Impairment charge on real estate and investments 1,480 20,286 9,643
Operating expenses of other business operations -- -- 46
------------ ------------ ------------
85,797 104,381 87,577
------------ ------------ ------------
Income from continuing operations before minority interest, equity
investments, gains and income taxes 77,582 51,563 35,806
Minority interest in (income) loss (370) 120 68
Income (loss) from equity investments 4,008 (443) 2,827
------------ ------------ ------------
Income from continuing operations before gains, minority interest and
income taxes 81,220 51,240 38,701
Gain on foreign currency transactions and sale of securities 108 94 44
------------ ------------ ------------
Income from continuing operations before income taxes
and gain on sale of real estate 81,328 51,334 38,745
Provision for income taxes (19,116) (18,083) (8,359)
------------ ------------ ------------
Income from continuing operations before gain on sale of real estate 62,212 33,251 30,386
------------ ------------ ------------
Discontinued operations:
Income from operations of discontinued properties 2,098 7,447 6,471
Gain on sale of real estate 1,238 2,364 --
Impairment charges on properties held for sale (2,670) (9,125) (3,000)
------------ ------------ ------------
Income from discontinued operations 666 686 3,471
------------ ------------ ------------
Gain on sale of real estate -- 12,651 1,904
------------ ------------ ------------
Net income $ 62,878 $ 46,588 $ 35,761
============ ============ ============
Basic earnings per share:
Income from continuing operations $ 1.70 $ 1.29 $ .94
Discontinued operations .02 .02 .10
------------ ------------ ------------
Net income $ 1.72 $ 1.31 $ 1.04
============ ============ ============
Diluted earnings per share
Income from continuing operations $ 1.64 $ 1.26 $ .92
Discontinued operations .01 .02 .10
------------ ------------ ------------
Net income $ 1.65 $ 1.28 $ 1.02
============ ============ ============
Weighted average shares outstanding:
Basic 36,566,338 35,530,334 34,465,217
============ ============ ============
Diluted 38,008,762 36,265,230 34,952,560
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-18-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of MEMBERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
(In thousands except share and per share amounts)
Dividends
in Excess
of
Paid-in Accumulated Unearned
Shares Capital Earnings Compensation
------ ------- ----------- ------------
Balance at December 31, 2000 33,604,716 $644,749 $(74,260) $(5,291)
Cash proceeds on issuance of shares, net 422,032 6,496
Shares issued in connection with services
rendered and properties acquired 6,825 134
Shares issued in connection with acquisition 651,964 10,956
Shares and options issued under share
incentive plans 63,749 1,235 (1,235)
Forfeitures (6,850) (117) 117
Dividends declared (58,701)
Tax benefit - share incentive plans 1,298
Amortization of unearned compensation 1,955
Net income 35,761
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income: ---------- -------- -------- -------
Balance at December 31, 2001 34,742,436 $664,751 $(97,200) $(4,454)
========== ======== ======== =======
Cash proceeds on issuance of shares, net 528,479 10,086
Shares issued in connection with services
rendered 5,755 390
Shares issued in connection with acquisition 500,000 10,440
Shares and options issued under share
incentive plans 170,768 3,913 (3,913)
Forfeitures (3,328) (70) 70
Dividends declared (61,358)
Tax benefit - share incentive plans 1,084
Amortization of unearned compensation 2,626
Net income 46,588
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income: ---------- -------- -------- -------
Balance at December 31, 2002 35,944,110 $ 690,594 $(111,970) $ (5,671)
========== ========= ========== =========
Cash proceeds on issuance of shares, net 412,012 7,789
Shares issued in connection with services
rendered and properties acquired 5,846 160
Shares issued in connection with acquisition 400,000 8,909
Shares and options issued under share
incentive plans 47,550 1,212 (2,827)
Forfeitures (9,726) (132) 99
Dividends declared (63,478)
Tax benefit - share incentive plans 2,700
Amortization of unearned compensation 3,536
Repurchase of shares (54,765) (1,508)
Net income 62,878
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income: ---------- -------- -------- -------
Balance at December 31, 2003 36,745,027 $ 709,724 $(112,570) $ (4,863)
========== ========= ========== ========
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income (Loss) Total
------------- ------------- -----
Balance at December 31, 2000 $(3,125) $562,073
Cash proceeds on issuance of shares, net 6,496
Shares issued in connection with services
rendered and properties acquired 134
Shares issued in connection with acquisition 10,956
Shares and options issued under share
incentive plans
Forfeitures
Dividends declared (58,701)
Tax benefit - share incentive plans 1,298
Amortization of unearned compensation 1,955
Net income $35,761 35,761
---------
Other comprehensive income:
Change in unrealized gains on marketable
securities 130
Foreign currency translation adjustment (437)
---------
(307) (307) (307)
---------
Comprehensive income: $35,454
--------- ------- --------
Balance at December 31, 2001 $(3,432) $559,665
======= ========
Cash proceeds on issuance of shares, net 10,086
Shares issued in connection with services
rendered 390
Shares issued in connection with acquisition 10,440
Shares and options issued under share
incentive plans
Forfeitures
Dividends declared (61,358)
Tax benefit - share incentive plans 1,084
Amortization of unearned compensation 2,626
Net income $46,588 46,588
Other comprehensive income:
Change in unrealized gains on marketable
securities 12
Foreign currency translation adjustment 1,355
--------
1,367 1,367 1,367
--------
Comprehensive income: $47,955
=======
-------- --------
Balance at December 31, 2002 $(2,065) $570,888
======== ========
Cash proceeds on issuance of shares, net 7,789
Shares issued in connection with services
rendered and properties acquired 160
Shares issued in connection with acquisition 8,909
Shares and options issued under share
incentive plans (1,615)
Forfeitures (33)
Dividends declared (63,478)
Tax benefit - share incentive plans 2,700
Amortization of unearned compensation 3,536
Repurchase of shares (1,508)
Net income $62,878 62,878
Other comprehensive income:
Change in unrealized gains on marketable
securities 2,567
Foreign currency translation adjustment 1,994
-------
4,561 4,561 4,561
-------
Comprehensive income: $67,439
-------
------ --------
Balance at December 31, 2003 $2,496 $594,787
====== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-19-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands) For the years ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 62,878 $ 46,588 $ 35,761
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from discontinued operations, including gain on sale (3,336) (9,811) (6,471)
Depreciation and amortization 18,914 20,162 23,879
Equity income (loss) in excess of distributions (23) (54) (232)
Loss (gain) on sales of real estate and securities, net 578 (12,745) (1,948)
Minority interest in income (loss) 370 (120) (68)
Straight-line rent adjustments and amortization of deferred income 7 (760) (1,365)
Management income received in shares of affiliates (18,599) (13,439) (11,489)
Unrealized gain on foreign currency transactions (130) -- --
Impairment charges on securities, real estate and properties held for sale 4,150 29,411 12,643
Deferred income tax provision 9,769 13,155 5,272
Costs paid by issuance of shares 215 500 278
Tax benefit - share incentive plans 2,700 1,084 1,298
Amortization of unearned compensation 3,536 2,626 1,955
Increase in structuring fees receivable (13,424) (18,529) (6,915)
Net changes in operating assets and liabilities, net of assets and
liabilities acquired on acquisition (2,345) 11,233 (1,497)
--------- --------- --------
Net cash provided by continuing operations 65,260 69,301 51,101
Net cash provided by discontinued operations 2,591 6,595 7,776
--------- --------- --------
Net cash provided by operating activities 67,851 75,896 58,877
--------- --------- --------
Cash flows from investing activities:
Distributions received from equity investments in excess of equity income 3,503 5,560 2,768
Capital distributions from equity investment, net of contributions ($1,496) 5,086 1,255 --
Purchases of real estate, equity investments and securities (6,688) (13,172) (23,290)
Additional capital expenditures (2,843) (811) (3,953)
Payment of deferred acquisition fees (524) (524) (520)
Release of funds from escrow from sale of real estate -- 9,366
Proceeds from sales of real estate, equity investments and securities 24,395 50,247 11,627
Cash acquired on acquisition of subsidiary 1,300 -- --
--------- --------- --------
Net cash provided by (used in) investing activities 24,229 51,921 (13,368)
--------- --------- --------
Cash flows from financing activities:
Dividends paid (62,978) (60,708) (58,048)
Payment of accrued preferred distributions -- (1,423) --
Contributions from minority interest -- 636 204
Payments of mortgage principal (8,548) (8,428) (8,230)
Proceeds from mortgages and notes payable 82,683 79,200 97,627
Prepayments of mortgage principal and notes payable (107,854) (134,316) (82,665)
Payment of financing costs (391) (308) (1,874)
Proceeds from issuance of shares 7,789 10,086 6,496
Repurchase of shares -- -- (325)
--------- --------- --------
Net cash used in financing activities (89,299) (115,261) (46,815)
--------- --------- --------
Effect of exchange rate changes on cash 274 (122) 11
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 3,055 12,434 (1,295)
Cash and cash equivalents, beginning of year 21,304 8,870 10,165
--------- --------- --------
Cash and cash equivalents, end of year $ 24,359 $ 21,304 $ 8,870
========= ========= ========
-Continued-
-20-
CONSOLIDATED STATEMENTS of CASH FLOWS, Continued
(Amounts in thousands except share and per share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in June
2000, the Company had an obligation to issue up to an additional
2,000,000 shares over four years if specified performance criteria
were achieved. As of December 31, 2003, 1,400,000 shares have been
issued. Based on the performance criteria 500,000 shares were issued
for both of the years ended December 31, 2001 and 2000 ($10,440 and
$8,145, respectively). For the year ended December 31, 2002, the
Company met one criterion and 400,000 shares ($8,910) were issued.
For the year ended December 31, 2003, the Company met the FFO Target
and the cumulative Stock Performance Target, and as a result 500,000
shares ($13,734) will be issued in 2004. The amounts attributable to
the 1,900,000 shares are included in goodwill. Accounts payable to
affiliates as of December 31, 2003 and 2002 included $13,734 and
$8,910, respectively for shares that were to be issued subsequent to
year end.
Effective January 1, 2001, the consolidated CPA(R) Partnerships
became wholly-owned subsidiaries of the Company when 151,964 shares
($2,811) were issued in consideration for acquiring the remaining
special partner interests.
B. The Company issued 5,846, 5,755 and 6,825 restricted shares valued
at $160 in 2003 and $134 in 2002 and 2001, to certain directors,
officers, and employees and affiliates in consideration of service
rendered. Restricted shares and stock options valued at $3,697,
$3,913 and $1,235 in 2003, 2002 and 2001, respectively, issued to
officers and employees and was recorded as unearned compensation of
which $99, $70 and $117, respectively, was forfeited in 2003, 2002
and 2001. Included in compensation expense for the years ended
December 31, 2003, 2002 and 2001 were $3,536, $2,626 and $1,955,
respectively, relating to equity awards from the Company's share
incentive plans.
C. As partial consideration for the sale of a property in 2003, the
Company received notes receivable with a fair value of $2,250. The
Company received a note receivable in 2001 of $700 in partial
consideration for a sale of property.
In December 2003, the Company sold a property located in California
and placed the net proceeds of $7,171 in an escrow account for the
purpose of entering into a Section 1031 noncash exchange which,
under the Internal Revenue Code, would allow the Company to acquire
like-kind property, and defer a taxable gain. In 2002, $15,174 was
placed in an escrow account from the sale of properties and was
subsequently used for the purchase of properties. During 2002,
$9,366 was released from an escrow account from the sale of a
property in 2001.
D. In 2002, the Company contributed its tenancy-in-common interest in
properties leased to Childtime Childcare, Inc. to a limited
partnership which is accounted for under the equity method. Assets
and liabilities were contributed to the limited partnerships as
follows:
Land $1,674
Net investment in direct financing lease 2,413
Other assets, net 1
Mortgage payable (1,134)
------
Equity investment $2,954
======
E. During 2001 the Company purchased an equity interest in an
affiliate, W. P. Carey International LLC ("WPCI"), in consideration
for issuing a promissory note of $1,000. The promissory note was
satisfied in 2002 through the issuance of 54,765 shares of the
Company to WPCI.
In April 2003, the Company's ownership interest in WPCI increased
from 10% to 100% at which time WPCI transferred the 54,765 shares
back to the Company and WPCI redeemed the interests of William P.
Carey, Chairman and Co-Chief Executive Officer of the Company, who
had owned a 90% interest in WPCI. As a result of increasing its
interest in WPCI to 100%, the Company acquired assets and
liabilities of WPCI as follows: (see Note 3)
Intangible assets (management contracts) 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
======
-21-
CONSOLIDATED STATEMENTS of CASH FLOWS, Continued
(Amounts in thousands except share and per share amounts)
Supplemental Cash Flows Information:
2003 2002 2001
---- ---- ----
Interest paid, net of amounts capitalized $14,395 $16,400 $22,144
======= ======= =======
Income taxes paid $ 9,074 $ 1,695 $ 1,615
======= ======= =======
Interest capitalized $ 22 $ 216 $ 443
======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
-22-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include W. P. Carey & Co.
LLC, its wholly-owned and majority-owned controlled subsidiaries
and a variable interest entity ("VIE") in which it is the primary
beneficiary (see Note 3) ("the Company"). All material
inter-entity transactions have been eliminated.
The consolidated financial statements include the accounts of
Corporate Property Associates 16 - Global Incorporated
("CPA(R):16 - Global"), and Corporate Property Associates
International Incorporated ("CPAI") which were formed in June and
July 2003, respectively. As of December 31, 2003, the Company
owns 20,000 shares each of CPA(R):16 - Global and CPAI,
representing 100% of the outstanding common stock of each
company. Effective December 12, 2003, CPA(R):16 - Global
commenced a "best efforts" public offering for up to 1,100,000
shares. CPAI has filed a registration statement with the SEC for
a public offering to sell up to 27,500,000 shares of common
stock. Upon issuance of common stock by CPA(R):16 - Global and
CPAI, the Company will no longer have voting control but will
retain significant influence, and, expects to account for its
investment under the equity method in the future. As of March 5,
2004, CPA(R):16 - Global has issued 6,386,336 shares pursuant to
its public offering.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant
estimates relate to the assessment of recoverability of real
estate; intangible assets and goodwill; classification of real
estate leased to others; identification of any intangible assets
in connection with real estate asset acquisitions, valuation of
CPA(R) REIT interests as the basis of determining certain fee
income and compensation costs and the allowance for uncollected
rents. Actual results could differ from those estimates.
Real Estate Leased to Others:
Certain of the Company's real estate is leased to others on a net
lease basis, whereby the tenant is generally responsible for all
operating expenses relating to the property, including property
taxes, insurance, maintenance, repairs, renewals and
improvements. Expenditures for maintenance and repairs including
routine betterments are charged to operations as incurred.
Significant renovations that increase the useful life of the
properties are capitalized. For the years ended December 31,
2003, lessees were responsible for the direct payment of real
estate taxes of approximately $6,901.
The Company diversifies its real estate investments among various
corporate tenants engaged in different industries, by property
type and geographically. No lessee currently represents 10% or
more of total leasing revenues.
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below (see Notes 4
and 5):
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net
investment (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Company's net
investment in the lease.
Operating method - Real estate is recorded at cost less
accumulated depreciation, minimum rental revenue is
recognized on a straight-line basis over the term of the
related leases and expenses (including depreciation) are
charged to operations as incurred.
In connection with the Company'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
-23-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
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.
Above-market and below-market in-place lease values for owned
properties are recorded 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) management's
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 are allocated to
in-place lease values and tenant relationship intangible values
based on management's evaluation of the specific characteristics
of each tenant's lease and the Company's overall relationship
with each tenant. Characteristics that are 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 will be 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
management's estimates are used to determine 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. The Company also considers information obtained about a
property in connection with its pre-acquisition due diligence.
Estimated carrying costs 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 management's assessment of specific market conditions.
Estimated 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 are also considered.
The value of in-place leases will be amortized to expense over
the remaining initial term of each lease. The value of tenant
relationship intangibles will be 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.
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on
formulas indexed to increases in the Consumer Price Index ("CPI")
or sales overrides. Rents from sales overrides (percentage rents)
are recognized as reported by the lessees, that is, after the
level of sales requiring a rental payment to the Company is
reached.
Operating Real Estate:
Land and buildings and personal property are carried at cost less
accumulated depreciation. Renewals and improvements are
capitalized, while replacements, maintenance and repairs that do
not improve or extend the lives of the respective assets are
expensed as incurred.
Real Estate Under Construction and Redevelopment:
For properties under construction, operating expenses including
interest charges and other property expenses, including real
estate taxes, are capitalized rather than expensed and rentals
received are recorded as a reduction of capitalized project
(i.e., construction) costs.
Interest is capitalized by applying the interest rate applicable
to outstanding borrowings to the average amount of accumulated
expenditures for properties under construction during the period.
-24-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Equity Investments:
The Company's interests in entities in which the entity is not
considered to be a VIE or the Company is not deemed to be the
primary beneficiary, and the Company's ownership is 50% or less
and has the ability to exercise significant influence and
jointly-controlled tenancy-in-common interests are accounted for
under the equity method, i.e. at cost, increased or decreased by
the Company's share of earnings or losses, less distributions.
Assets Held for Sale:
Assets held for sale are accounted for at the lower of carrying
value or fair value less costs to dispose. Assets are classified
as held for sale when the Company has committed to a plan to
actively market a property for sale and expects that a sale will
be completed within one year. The results of operations and the
related gain or loss on sale of properties classified as held for
sale by the Company after December 31, 2001, are included in
discontinued operations (see Note 8).
If circumstances arise that previously were considered unlikely
and, as a result, the Company 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, (b) the fair value at the date of the subsequent
decision not to sell, or (c) the current carrying value.
The Company recognizes gains and losses on the sale of properties
when among other criteria, the parties are bound by the terms of
the contract, all consideration has been exchanged and all
conditions precedent to closing have been performed. At the time
the sale is consummated, a gain or loss is recognized as the
difference between the sale price less any closing costs and the
carrying value of the property.
Goodwill and Intangible Assets:
Goodwill represents the excess of the purchase price of the net
lease real estate management operations over the fair value of
net assets acquired. Other intangible assets represent costs
allocated to trade names and advisory contracts with the CPA(R)
REITs. Effective January 1, 2002, goodwill and indefinite-lived
intangible assets are no longer amortized and workforce has been
reclassified as goodwill. Intangible assets are being amortized
over their estimated useful lives, which range from 2 1/2 to 16
1/2 years (see Note 11).
Impairments:
When events or changes in circumstances indicate that the
carrying amount may not be recoverable, the Company assesses the
recoverability of its long-lived assets and certain intangible
assets based on projections of undiscounted cash flows, without
interest charges, over the life of such assets. In the event that
such cash flows are insufficient, the assets are adjusted to
their estimated fair value. The Company 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 the Company's current estimate of residual
value of the underlying real estate assets (i.e., the estimate of
what the Company 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.
The Company tests goodwill for impairment at least annually using
a two-step process. To identify any impairments, the Company
first compares the estimated fair value of the reporting unit
(management services segment) with its carrying amount, including
goodwill. The Company 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
-25-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
is considered not impaired. 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 impairment
loss.
For the second step, the Company would compare the implied fair
value of the goodwill with its carrying amount and record an
impairment charge for 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. In accordance with the requirements
of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangibles," the Company performed its
annual tests for impairment of its management services segment,
the reportable unit of measurement, and concluded that the
goodwill is not impaired.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of the properties (generally forty years)
and for furniture, fixtures and equipment (generally up to seven
years).
Foreign Currency Translation:
The Company owns interests in several real estate investments in
France. The functional currency for these investments is the
Euro. The translation from the Euro to U. S. Dollars is performed
for assets and liabilities using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts
using a weighted average exchange rate during the period. The
gains and losses resulting from such translation are reported as
a component of other comprehensive income as part of members'
equity. The cumulative translation adjustment as of December 31,
2003 and 2002 was a gain of $679 and a loss of $1,315,
respectively.
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 will be 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 will be included in net income for the period in which
the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a
net investment and (ii) inter-company 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
will not be included in determining net income but will be
accounted for in the same manner as foreign currency translation
adjustments and reported as a component of other comprehensive
income as part of shareholder's equity. The contributions to the
equity investments were funded in part through subordinated debt.
Foreign currency intercompany transactions that are scheduled for
settlement, consisting primarily of accrued interest and the
translation to the reporting currency of intercompany
subordinated debt with scheduled principal payments, are included
in the determination of net income, and, for the year ended
December 31, 2003, the Company recognized unrealized gains of
$130 from such transactions. In 2003, the Company recognized
realized gains of $556 on foreign currency transactions in
connection with the transfer of cash from foreign operating
subsidiaries to the parent company.
Cash Equivalents:
The Company considers all short-term, highly liquid investments
that are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include
commercial paper and money market funds. Substantially all of the
Company's cash and cash equivalents at December 31, 2003 and 2002
were held in the custody of
-26-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
three financial institutions and which balances, at times, exceed
federally insurable limits. The Company mitigates this risk by
depositing funds with major financial institutions.
Other Assets and Liabilities:
Included in other assets are accrued rents and interest
receivable, deferred rent receivable, notes receivable, deferred
charges, escrow balances held by lenders, restricted cash
balances and marketable securities. Included in other liabilities
are accrued interest, accounts payable and accrued expenses,
security deposits and other amounts held on behalf of tenants
deferred rent, deferred revenue and minority interests that are
subject to redemption. Deferred charges include costs incurred in
connection with debt financing and refinancing and are amortized
and included in interest expense over the terms of the related
debt obligations. Deferred rent receivable is primarily the
aggregate difference for operating method leases between
scheduled rents which vary during the lease term and rent
recognized on a straight-line basis. The minority interests
subject to redemption are recorded at fair value based on a cash
flow model with changes in fair value reflected in the
determination of net income.
Marketable securities are classified as available-for-sale
securities and reported at fair value with the Company's interest
in unrealized gains and losses on these securities reported as a
component of other comprehensive income until realized. Such
marketable securities had a cost basis of $3,660 and $1,364 as of
December 31, 2003 and 2002, respectively, and reflected a fair
value of $5,479 and $639 at December 31, 2003 and 2002,
respectively.
Due to Affiliates:
Included in due to affiliates are deferred acquisition fees and
amounts related to issuable shares for meeting the performance
criteria in connection with the acquisition of Carey Management.
Deferred acquisition fees are payable for services provided by
Carey Management prior to the termination of the Management
Contract, relating to the identification, evaluation,
negotiation, financing and purchase of properties. The fees are
payable in eight equal annual installments each January 1
following the first anniversary of the date a property was
purchased.
Revenue Recognition:
The Company earns transaction and asset-based fees. Structuring
and financing fees are earned for investment banking services
provided in connection with the analysis, negotiation and
structuring of transactions, including acquisitions and
dispositions and the placement of mortgage financing obtained by
publicly registered real estate investment trusts formed by the
Company (the "CPA(R) REITs"). Asset-based fees consist of
property management, leasing and advisory fees and reimbursement
of certain expenses in accordance with the separate management
agreements with each CPA(R) REIT for administrative services
provided for operation of such CPA(R) REIT. Receipt of the
incentive fee portion of the management fee, however, is
subordinated to the achievement of specified cumulative return
requirements by the shareholders of the CPA(R) REITs. The
incentive portion of management fees (the "performance fees") may
be collected in cash or shares of the CPA(R) REIT at the option
of the Company. During 2003, 2002 and 2001, the Company elected
to receive its earned performance fees in CPA(R) REIT shares.
All fees are recognized as earned. Transaction fees are earned
upon the consummation of a transaction and management fees are
earned when services are performed. Fees subject to subordination
are recognized only when the contingencies affecting the payment
of such fees are resolved, that is, when the performance criteria
of the CPA(R) REIT is achieved. As of December 31, 2003, $831 of
transaction fees are recorded as deferred revenue in other
liabilities.
The Company also receives reimbursement of certain marketing
costs in connection with the sponsorship of a CPA(R) REIT that is
conducting a "best efforts" public offering. Reimbursement income
is recorded as the expenses are incurred, subject to limitations
on a CPA(R) REIT's ability to incur offering costs.
-27-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Income Taxes:
The Company is a limited liability company and has elected
partnership status for federal income tax purposes. The Company
is not liable for federal income taxes as each member recognizes
his or her proportionate share of income or loss in his or her
tax return. Certain wholly-owned subsidiaries are not eligible
for partnership status and, accordingly, all tax liabilities
incurred by these subsidiaries do not pass through to the
members. For these subsidiaries, the provision for federal income
taxes is based on the results of those consolidated corporate
subsidiaries that do not pass through any share of income or loss
to members. The Company is also subject to certain state and
local taxes and foreign taxes.
Deferred income taxes are provided for the corporate subsidiaries
based on earnings reported. The provision for income taxes
differs from the amounts currently payable because of temporary
differences in the recognition of certain income and expense
items for financial reporting and tax reporting purposes. Income
taxes are computed under the asset and liability method. The
asset and liability method requires the recognition of deferred
tax liabilities and assets for the expected future tax
consequences of temporary differences between tax bases and
financial bases of assets and liabilities (see Note 18).
Earnings Per Share:
The Company presents both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing
net income available to shareholders by the weighted average
number of shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other
contracts to issue shares were exercised or converted into common
stock, where such exercise or conversion would result in a lower
EPS amount.
Basic and diluted earnings per share were calculated as follows:
For the years ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Net income $ 62,878 $ 46,588 $ 35,761
========== ========== ==========
Weighted average shares - basic 36,566,338 35,530,334 34,465,217
Effect of dilutive securities - stock options
and warrants 1,442,424 734,896 487,343
---------- ---------- ----------
Weighted average shares - diluted 38,008,762 36,265,230 34,952,560
Basic earnings per share:
Income from continuing operations $ 1.70 $ 1.29 $ .94
Discontinued operations .02 .02 .10
------ ------ ------
Net income $ 1.72 $ 1.31 $ 1.04
====== ====== ======
Diluted earnings per share:
Income from continuing operations $ 1.64 $ 1.26 $ .92
Discontinued operations .01 .02 .10
------ ------ ------
Net income $ 1.65 $ 1.28 $ 1.02
====== ====== ======
For the year ended 2001, 725,930 share options and warrants were
anti-dilutive because the exercise prices of the options were
higher than the average share price.
Stock Based Compensation:
The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations ("APB No. 25"). Under APB No. 25,
compensation cost for fixed plans is measured as the excess, if
any, of the quoted market price of the Company's shares at the
date of grant over the exercise price of the option granted.
The Company has granted restricted shares and stock options to
substantially all employees. Shares were awarded in the name of
the employee, who has all the rights of a shareholder, subject to
certain
-28-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
restrictions of transferability and a risk of forfeiture. The
forfeiture provisions on the awards expire annually, over their
respective vesting periods. Shares and stock options subject to
forfeiture provisions have been recorded as unearned compensation
and are presented as a separate component of members' equity.
Compensation cost for stock options and restricted stock, if any,
is recognized over the applicable vesting periods.
Grants of restricted stock and options of a subsidiary were
awarded to certain of its officers. The awards are subject to
redemption in 2012 and, therefore are being accounted for as a
variable plan. The awards were initially recorded in unearned
compensation and changes in fair value subsequent to the grant
date are included in the determination of net income. The
unearned compensation is being amortized over the vesting
periods.
All transactions with non-employees in which the Company issues
stock as consideration for services received are accounted for
based on the fair value of the stock issued or services received,
whichever is more reliably determinable.
The Company has elected to adopt the disclosure only provisions
of SFAS No. 123. 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:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Net income as reported $62,878 $46,588 $35,761
Add: Stock based compensation included in net
income, as reported, net of related tax effects 2,282 1,709 1,349
Less: Stock based compensation determined under
fair value based methods for all awards, net of
related tax effects (3,144) (2,887) (2,391)
------- ------- -------
Pro forma net income $62,016 $45,410 $34,719
======= ======= =======
Net income per common share as reported:
Basic $1.72 $1.31 $1.04
Diluted $1.65 $1.28 $1.02
Pro forma net income per common share:
Basic $1.70 $1.28 $1.01
Diluted $1.63 $1.25 $ .99
The Company's non-qualified deferred compensation plan provides
that each participating officer's cash compensation in excess of
designated amounts is deferred and he or she is awarded an
interest that is intended to correspond to the per share value of
a CPA(R) REIT designated at the time of such award. The value of
the award is adjusted at least annually to reflect changes based
on the underlying appraised value of a share of common stock of
the CPA(R) REIT. The deferred compensation plan is a variable
plan and changes in the fair value of the interests are included
in the determination of net income.
Reclassification:
Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board
("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
-29-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
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 annual disclosure provisions
of SFAS No. 148 have been adopted.
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 (VIE's) and to determine when and
which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model applies when either (i)
the equity investors (if any) do not have a controlling financial
interest of (ii) the equity investment at risk is insufficient to
finance that entity's activities without additional financial
support. In addition, effective upon issuance, FIN 46 requires
additional disclosures by the primary beneficiary and other
significant variable interest holders. The provisions of FIN 46
apply immediately to VIE's created after January 31, 2003. In
October 2003, the FASB issued Staff Position 46-6, which deferred
the effective date to December 31, 2003 for applying the
provisions of FIN 46 for interests held by public companies in
all VIE's created prior to February 1, 2003. Additionally, in
December 2003, the FASB issued Interpretation No. 46 (R),
"Consolidation of Variable Interest Entities (Revised December
2003)" ("FIN 46 (R)"). The provisions of FIN 46 (R) are effective
as of March 31, 2004 for all non-special purpose entity
("non-SPE") interests held by public companies in all VIE's
created prior to February 1, 2003. These deferral provisions did
not defer the disclosure provisions of FIN 46.
The Company has evaluated its joint venture partnership
investments established after January 31, 2003 and based upon its
interpretation of FIN 46 and applied judgment, the Company has
determined that it is not required to consolidate these joint
ventures.
The Company continues to evaluate all of its investments in joint
ventures and partnerships created prior to February 1, 2003 to
determine whether any of these entities are VIE's and whether the
Company is considered to be the primary beneficiary or a holder
of a significant variable interest in a VIE. If it is determined
that certain of these entities are VIE's, the Company will be
required to consolidate these entities in which the Company is
the primary beneficiary or make additional disclosures for
entities in which the Company is determined to hold a significant
variable interest in the VIE as of March 31, 2004.
Based on the Company's analysis of FIN 46, it has concluded that
it is reasonably possible that its investments in real estate
joint ventures and other real estate investments, created prior
to February 1, 2003, may be investments in VIE's and is therefore
subject to the disclosure provisions of FIN 46.
The Company's joint ventures and other real estate investments
primarily consist of co-investments with other joint venture
partners in commercial real estate properties and ownership of
common stock in the CPA(R) REIT's, which are consistent with its
core business. The Company's maximum loss exposure is the
carrying value of its equity investments.
-30-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
The Company has concluded that Livho is a VIE, that does not
qualify for the deferral, with the Company as its primary
beneficiary, because the Company has provided it with significant
financial support over the past several years in order to support
Livho's operations and preserve the value of the property. As a
VIE, Livho is consolidated in the Company's financial statements
as of December 31, 2003. Livho operates a hotel as a Holiday Inn
in Livonia, Michigan; its operations were transferred to a
separate company as a strategy to protect the Company's tax
status as a publicly-traded partnership. The real estate assets
have historically been reflected in the Company's consolidated
financial statements. Livho's operating revenues include food and
beverage revenues. During 2003, a bar at the hotel, which at one
time was a significant source of revenues, was closed and
underwent renovations, which were funded by the Company. The
renovations were recently completed and the bar re-opened in
February 2004. The results of operations of Livho approximate the
rental revenues earned from Livho less allowances provided for.
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
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 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 mandatorily 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 $1,852 at
December 31, 2003, which approximates their estimated fair value
at that date.
2. Organization:
The Company commenced operations in January 1, 1998 by combining the
limited partnership interests in nine CPA(R) Partnerships, at which time
the Company listed on the New York Stock Exchange. On June 28, 2000, the
Company acquired the net lease real estate management operations of
Carey Management LLC ("Carey Management") from William P. Carey,
Chairman and Co-Chief Executives Officer of the Company, subsequent to
receiving shareholder approval. The assets acquired included the
Advisory Agreements with four affiliated CPA(R) REITs, the Company's
Management Agreement, the stock of an affiliated broker-dealer,
investments in the common stock of the CPA(R) REITs, and certain office
furniture, fixtures, equipment and employees required to carry on the
business operations of Carey Management. The purchase price consisted of
the initial issuance of 8,000,000 shares with an additional 2,000,000
shares issuable over four years if specified performance criteria were
achieved through a period ended December 31, 2003 (of which 1,400,000
shares have been issued and 500,000 shares will be issued in 2004
representing an aggregate value of $41,229). The initial 8,000,000
shares issued were restricted from resale for a period of up to three
years and the additional shares are subject to Section 144 regulations.
The acquisition of the interests in Carey Management was accounted for
as a purchase and was recorded at the fair value of the initial
8,000,000 shares issued. The total initial purchase price was
-31-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
approximately $131,300 including the issuance of 8,000,000 shares,
transaction costs of $2,605, the acquisition of Carey Management's
minority interests in the CPA(R) Partnerships and the value of
restricted shares and options issued in respect of the interests of
certain officers in a non-qualified deferred compensation plan of Carey
Management.
The purchase price was allocated to the assets and liabilities acquired
based upon their fair market values. Intangible assets acquired,
including the Advisory Agreements with the CPA(R) REITs, the Company's
Management Agreement, the trade name, and workforce (reclassified to
goodwill on January 1, 2002), were determined pursuant to an independent
valuation. The value of the Advisory Agreements and the Management
Agreement were based on a discounted cash flow analysis of the projected
fees. The excess of the purchase price over the fair values of the
identified tangible and intangible assets has been recorded as goodwill.
The value of additional shares issued under the acquisition agreement is
recognized as additional purchase price and recorded as goodwill.
Issuances based on performance criteria are valued based on the market
price of the shares on the date when the performance criteria are
achieved.
Effective January 1, 2001, the Company acquired the remaining minority
interest in the CPA(R) Partnerships held by the remaining partner of the
CPA(R) Partnerships, William P. Carey, Chairman of the Company, through
the issuances of 151,964 shares ($2,811). The acquisition price was
determined pursuant to an independent valuation of the CPA(R)
Partnerships as of December 31, 2000.
3. Transactions with Related Parties:
The Company earns fees as the Advisor to the CPA(R) REITs: Carey
Institutional Properties Incorporated ("CIP(R)"), Corporate Property
Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates
14 Incorporated ("CPA(R):14"), Corporate Property Associates 15
Incorporated ("CPA(R):15") and CPA(R):16-Global (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. The Company earns an
asset management fee of 1/2 of 1% per annum of Average Invested Assets,
as defined in the Advisory Agreements, for each CPA(R) REIT and, based
upon specific performance criteria for each REIT, may be entitled to
receive performance fees, calculated on the same basis as the asset
management fee, and is reimbursed for certain costs, primarily the cost
of personnel. Prior to April 2002, the Company had not recognized any
performance fees under its Advisory Agreement with CPA(R):10 since the
Company's management operations were acquired in June 2000. In April
2002, CPA(R):10 met its "preferred return" at which time the performance
criterion was met and the Company earned a performance fee of $1,463,
including $267 relating to 2002. The performance criteria for CPA(R):14
were initially satisfied in 2001, resulting in the Company's recognition
of $2,459 for the period December 1997 through December 31, 2000 which
had been deferred. For the years ended December 31, 2003, 2002 and 2001,
asset-based fees and reimbursements earned were $53,103, $37,250 and
$29,751, respectively.
In connection with structuring and negotiating acquisitions and related
mortgage financing for the CPA(R) REITs, the Advisory Agreements provide
for transaction fees based on the cost of the properties acquired. A
portion of the fees are payable in equal annual installments over no
less than eight years (four years for CPA(R):15), subject to each CPA(R)
REIT meeting its "preferred return." Unpaid installments bear interest
at annual rates ranging from 6% to 7%. The Company's broker-dealer
subsidiary earns fees in connection with the public offerings of the
CPA(R) REITs. The Company may also earn fees related to the disposition
of properties, subject to subordination provisions and will only be
recognized as such subordination provisions are achieved. The Company
earned disposition fees of $248 from CPA(R):10, representing a
percentage of the sales proceeds from CPA(R):10 property sales for the
period from June 28, 2000 (the date which Carey Management's operations
were acquired) through April 30, 2002, the date that CPA(R):10 and
CIP(R) merged. For the years ended December 31, 2003, 2002 and 2001, the
Company earned transaction fees of $34,957, $47,005 and $17,160,
respectively.
Prior to the termination of the Management Agreement, Carey Management
performed certain services for the Company and earned transaction fees
in connection with the purchase and disposition of properties. The
Company is obligated to pay deferred acquisition fees in equal annual
installments over a period of no less than eight years. As of December
31, 2003 and 2002, unpaid deferred acquisition fees were $2,234 and
$2,758,
-32-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
respectively, and bear interest at an annual rate of 6%. Installments of
$524, were paid in both 2003 and 2002, and $520 was paid in January
2001.
The Company owns interests in entities, which range from 18.54% to 50%,
a jointly-controlled 36% tenancy-in-common interest in two properties
subject to a net lease with the remaining interests held by affiliates
and owns common stock in each of the CPA(R) REITs. The Company has a
significant influence in these investments, which are accounted for
under the equity method of accounting.
The Company is the general partner in a limited partnership that leases
the Company's home office spaces and a participates in an agreement with
certain affiliates for the purpose of leasing office space used for the
administration of the Company and other affiliated real estate entities
and sharing the associated costs. Pursuant to the terms of the
agreement, the Company's share of rental, occupancy and leasehold
improvement costs is based on gross revenues. Expenses incurred were
$529, $545 and $528 in 2003, 2002 and 2001, respectively. The Company's
share of minimum lease payments on the office lease is currently $939
through 2006.
A person who serves as a director and an officer of the Company is the
sole shareholder of Livho, Inc. ("Livho"), a lessee of the Company (see
Note 14). As of December 31, 2003, the Company is consolidating the
accounts of Livho in its financial statements because the Company has
determined that Livho does not qualify for the FIN 46 deferral (see Note
1 - Accounting Pronouncements) and that Livho's equity is insufficient
to finance its activities and the Company has restructured its lease
with Livho in several instances.
An independent director of the Company has an ownership interest in
companies that own the minority interest in the Company's French
majority-owned subsidiaries. The director's ownership interest is
subject to the same terms as all other ownership interests in the
subsidiary companies.
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 P.
Carey ("Carey"), Chairman and Co-Chief Executive Officer 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 assets acquired and liabilities assumed at
their estimated fair value (see Note 16). 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.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Real estate leased to others, at cost, and accounted for under the
operating method is summarized as follows:
December 31,
-----------------------
2003 2002
---- ----
Land $ 77,170 $ 83,545
Buildings and improvements 368,568 390,727
-------- --------
445,738 474,272
Less: Accumulated depreciation 45,021 41,716
-------- --------
$400,717 $432,556
======== ========
-33-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
The scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases are as follows:
Year ended December 31,
-----------------------
2004 $40,939
2005 38,933
2006 36,285
2007 33,741
2008 30,183
Thereafter through 2019 123,628
-------
Total 303,709
=======
Contingent rentals (including percentage rents and CPI-based increases)
were $1,427, $1,550 and $1,253 in 2003, 2002 and 2001, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2003 2002
---- ----
Minimum lease payments receivable $173,120 $199,309
Unguaranteed residual value 179,869 185,487
-------- --------
352,989 384,796
Less: Unearned income 170,537 195,457
-------- --------
$182,452 $189,339
======== ========
The scheduled future minimum rents, exclusive of renewals, under
noncancelable direct financing leases are as follows:
Year ended December 31
----------------------
2004 $19,762
2005 19,822
2006 18,671
2007 17,180
2008 16,359
Thereafter through 2022 81,326
-------
Total 173,120
=======
Contingent rentals (including percentage rents and CPI-based increases)
were approximately $2,189, $2,710 and $2,331 in 2003, 2002 and 2001,
respectively.
6. Acquisition of Real Estate Interest:
In November 2003, the Company, purchased a 45% equity interest in an
existing limited liability company, whose remaining interests are owned
by CPA(R):12 and CPA(R):15, respectively. The limited liability company
owns a 50% interest in a limited partnership that owns eight properties
located in France. The remaining 50% interests in the limited
partnership are owned by CPA(R):12 and CPA(R):15. The Company's net
purchase price for its interests was $9,744, which effectively gives the
Company a 22.5% interest in the underlying properties. The purchase
price was based on current independent appraisal of the properties, net
of mortgage debt. The properties are leased to affiliates of Carrefour,
S.A ("Carrefour"). The leases have nine-year terms, expiring between
December 2011 and November 2012, at an aggregate annual rent of Euro
11,799 ($14,809 as of December 31, 2003), with annual rent increases
based on a formula indexed to increases in the INSEE, a French
construction cost index. As of December 31, 2003, limited recourse
mortgage debt of Euro 96,697 ($121,422 as of December 31, 2003) is
outstanding on the properties. The Carrefour loans provide for quarterly
payments of interest at an annual interest rate of 5.55% and stated
principal payments with scheduled increases over their terms. The loans
mature in December 2014 at which time balloon payments are scheduled.
-34-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
7. Equity Investments:
The Company owns equity interests as a limited partner in three limited
partnerships, three limited liability companies and 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.
The Company also owns common stock in four CPA(R) REITs with which it
has advisory agreements. The 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 their audited consolidated financial
statements are filed with the United States Securities and Exchange
Commission in Annual Reports on Form 10-K. 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 December 31, 2003, the Company ownership in the CPA(R)
REITs is as follows:
% of outstanding
Shares Shares
------ ------
CIP(R) 876,006 3.00%
CPA(R):12 933,764 2.98%
CPA(R):14 1,731,681 2.59%
CPA(R):15 382,298 0.36%
Combined financial information of the affiliated equity investees is
summarized as follows:
December 31,
------------
2003 2002
---- ----
Assets (primarily real estate) $4,062,295 $3,229,071
Liabilities (primarily mortgage notes payable) 1,976,216 1,685,003
---------- ----------
Owner's equity $2,086,079 $1,544,068
========== ==========
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenue (primarily rental revenue) $318,035 $226,167 $173,627
Expenses (primarily interest on mortgages,
depreciation and impairment charges) (278,863) (172,282) (128,574)
Minority interest in income (8,779) (4,344) (3,556)
Income from equity investments 41,249 21,220 16,399
Gain (loss) on sales 10,239 (216) 4,378
-------- --------- --------
Income from continuing operations 81,881 70,545 62,274
Income (loss) from discontinued operations 443 (900) (665)
Gain (loss) on sale of real estate 235 (317) 9,566
-------- -------- --------
Net income $ 82,559 $ 69,328 $ 71,175
======== ========- ========
As a result of the Company converting its 708,269 units of the operating
partnership ("OP units") of MeriStar Hospitality Corporation
("MeriStar"), a publicly traded real estate investment trust which
primarily owns hotels, to 708,269 shares of common stock, the Company is
accounting for its investment 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 and changes in the fair value of the shares
is reflected in other comprehensive income. Prior to the conversion in
2003, the Company accounted for its investment in MeriStar operating
partnership units under the equity method of accounting.
8. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for financial statements
issued for fiscal years beginning after December 15, 2001, the results
of operations, impairments and gain or loss on sales of real estate for
properties sold or held for sale are to be reflected in the consolidated
statements of operations as "Discontinued Operations" for all periods
presented.
-35-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
The provisions of SFAS No. 144 are effective for disposal activities
initiated by the Company's commitment to a plan of disposition after the
date it is initially applied (January 1, 2002). Properties held for sale
as of December 31, 2001 are not included in "Discontinued Operations".
The results of operations and the related gain or loss on sale of
properties sold in 2002 (see Note 9) that were held for sale as of
December 31, 2001 are not included in "Discontinued Operations."
Property sales and impairment charges in 2003, 2002 and 2001 that are
included in "Discontinued Operations" are as follows:
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 a 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 $46. The Company previously
recognized an impairment charge of $4,000 on the Peerless property,
which was held for sale in 2002.
In July 2003, the Company sold a property in Lancaster, Pennsylvania for
$5,000 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 charge on properties held for sale of $1,430
was recognized and included in discontinued operations for the year
ended December 31, 2003.
In December 2003, the Company sold a property located in Oxnard,
California for $7,500, and recognized a gain of $414. The Company placed
the net proceeds of the sale in an escrow account for the purpose of
entering into a Section 1031 noncash exchange which, under the Internal
Revenue Code, would allow the Company to acquire like-kind property, and
defer a taxable gain until the new property is sold, upon satisfaction
of certain conditions.
During 2003, the Company sold properties in Broomall, Pennsylvania;
Cuyahoga Falls, Ohio; Canton, Michigan; Alpena, Michigan; Apache
Junction, Arizona and Schiller Park, Illinois for net sales proceeds of
$12,986 and recognized net gain on sales of $807.
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 the Company recognized an
impairment charge on properties held for sale of $690 in 2003.
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 period ended December 31, 2003.
2002
In July 2002, the Company sold six properties leased to Saint-Gobain
Corporation 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. The sales proceeds were placed in an escrow
account for the purposes of entering into a Section 1031 noncash
exchange, which was completed as a result of purchasing replacement
properties in September and December 2002.
During 2002, the Company also sold properties in Petoskey, Michigan;
Colville, Washington; McMinnville, Tennessee; College Station, Texas and
Glendale, Arizona for an aggregate of $4,743 and recognized a net gain
on sales of $568.
The Company recognized impairment charges of $5,125 on other properties,
which were sold in either 2002 or 2003 or held for sale as of December
31, 2003.
-36-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
2001
The Company owns a property in Cincinnati, Ohio. In November 2001, the
Company evicted the tenant due to its inability to meet its lease
obligations and the Company assumed the management of public warehousing
operations at the property, at which time the Company recognized an
impairment charge on properties held for sale of $2,000 on the writedown
of the property to its estimated fair value.
The Company owns two properties located in Frankenmuth, Michigan and
McMinnville, Tennessee leased to one tenant. The tenant terminated its
master lease for the two properties in connection with its petition of
voluntary bankruptcy in 1999. The Company recognized an impairment
charge on properties held for sale on the McMinnville property of $500
in 2001.
The Company recognized impairment charges of $500 on other properties
during 2001, which were either sold in 2003 or held for sale as of
December 31, 2003.
Other Information:
The effect of suspending depreciation expense as a result of the
classification of certain properties as held for sale was $259, $116 and
$13 for the years ended December 31, 2003, 2002 and 2001, respectively.
As of December 31, 2003, the operations of sixteen properties, which
have been sold during 2003 or are held for sale as of December 31, 2003,
are included as "Discontinued Operations." Amounts reflected in
Discontinued Operations for the years ended December 31, 2003, 2002 and
2001 are as follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
REVENUES:
Rental income $ 1,810 $ 4,282 $ 4,039
Interest income from direct financing leases 590 3,593 6,044
Revenues of other business operations 1,694 4,769 5,944
Other income 1,427 2,338 2
------ -------- --------
5,521 14,982 16,029
------ -------- --------
EXPENSES:
Interest expense -- 1,108 2,596
Depreciation and amortization 442 1,201 1,313
Property expenses 1,457 1,093 552
General and administrative -- 48 24
Provision for income taxes - state and local 35 117 448
Operating expenses of other business operations 1,489 3,968 4,625
Impairment charge on real estate 2,670 9,125 3,000
------ -------- --------
6,093 16,660 12,558
------ -------- --------
(Loss) income before gain on sales (572) (1,678) 3,471
------ -------- --------
Gains on sale of real estate 1,238 2,364 --
------ -------- --------
Income from discontinued operations $ 666 $ 686 $ 3,471
====== ======== ========
9. Sales of Real Estate:
The results of operations and the related gain or loss on properties,
which were not held for sale as of December 31, 2001 and sold in 2003
and 2002, are included in "Discontinued Operations." (see Note 8)
2002
At December 31, 2001, the Company's 18.3 acre property in Los Angeles,
California was classified as held for sale. In June 2002, the Company
sold the property to the Los Angeles Unified School District (the
"School District") for $24,000, less costs, and recognized a gain on
sale of $11,160. Subsequent to the sale of the property, a subsidiary of
the Company entered into a build-to-suit development management
agreement with the
-37-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
School District with respect to the development and construction of a
new high school on the property. The subsidiary, in turn, engaged a
general contractor to undertake the construction project. Under the
build-to-suit agreement, the subsidiary's role is that of a development
manager pursuant to provisions of the California Education Code. Under
the construction agreement with the general contractor, a subsidiary is
acting as a conduit for the payments made by School District and is only
obligated to make payments to the general contractor based on payments
received, except for a maximum guarantee of up to $2,000 for nonpayment.
The guarantee ends upon completion of construction.
Due to the Company's continuing involvement with the development
management agreement of the property, the recognition of gain on sale
and the subsequent development management fee income on the
build-to-suit project are being recognized using a blended profit margin
under the percentage of completion method of accounting. The
build-to-suit development agreement provides for fees of up to $4,700
and an early completion incentive fee of $2,000 if the project is
completed before September 1, 2004. Incentive fees, which are
contingent, are not included in the percentage of completion
calculation. In addition, approximately $2,000 of the gain on sale has
been deferred and will be recognized only when the Company is released
from its $2,000 guarantee commitment. For the years ended December 31,
2003 and 2002, the Company recognized $1,298 and $289, respectively, of
build-to-suit development fee management income.
During 2002, the Company also sold properties in Fredericksburg,
Virginia; Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota;
Frankenmuth, Michigan; and Casa Grande for an aggregate of $10,594 and
recognized a net gain on sales of $1,481.
2001
In July 2001, the Company sold a property located in Forrest City,
Arkansas for approximately $9,400, and recognized a gain of $304. The
sales proceeds were placed in an escrow account for the purposes of
entering into a Section 1031 noncash exchange. In January 2002, the
funds in the escrow account were transferred to the Company and the
proposed noncash exchange was not completed.
During 2001, the Company sold nine other properties and an equity
investment in a real estate partnership for $12,061 (including $11,361
in cash and a note receivable of $700) and recognized a combined net
gain of $1,600 on the sales.
10. Impairment Charges on Real Estate and Other Investments:
In connection with the Company's annual review of the estimated residual
values on its properties classified as net investments in direct
financing leases, the Company determined that an other than temporary
decline in estimated residual value had occurred at several properties,
and the accounting for the direct financing leases was revised using the
changed estimates. The resulting changes in estimates resulted in the
recognition of impairment charges of $1,208 and $14,880 in 2003 and
2002, respectively.
Other significant impairment charges are as follows:
2003
The Company recognized an impairment charge of $272 on its assessment of
the recoverability of debentures received in connection with a
bankruptcy settlement with a former lessee.
2002
Because of a continued and prolonged weakness in the hospitality
industry, and a substantial decrease in MeriStar's earnings, the Company
concluded that the underlying value of its investment in the OP Units
had undergone an other than temporary decline. Accordingly, the Company
wrote down its equity investment in MeriStar by $4,596 and $6,749 in
2002 and 2001, respectively, to reflect the investment at its estimated
fair value. In 2003, the Company converted the OP units to shares of
MeriStar common stock (see Note 7).
The Company recognized impairment charges of $810 on other properties
during 2002.
-38-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
2001
The Company owned a property in Burnsville, Minnesota. During 2000, the
tenant filed a petition of voluntary bankruptcy, and in March 2001 the
lease was terminated. During 2000, the property had been written down to
its estimated fair value and an impairment charge of $1,500 was
recognized. In 2001, the Company entered into an agreement to sell the
property for $2,200. In connection with the proposed sale of the
property, the Company recognized an impairment charge of $763 in 2001 to
write down the property to the anticipated sales price, less estimated
costs to sell. The sale was completed in January 2002. In connection
with termination of the lease, the Company received $2,450 as a
settlement from the lease guarantor, of which $2,145 was included in
other income in 2001.
In 2001 the Company also recorded an impairment charge of $850 on its
assessments of the recoverability of a redeemable preferred limited
partnership interest that was acquired in connection with the sale of a
property in 1995.
The results of operations and the impairment charges on the properties
classified as assets held for sale subsequent to December 31, 2001 are
included in discontinued operations (see Note 8).
11. Goodwill and Intangible Assets:
With the acquisition of real estate management operations in 2000, the
Company allocated a portion of the purchase price to goodwill and
identifiable intangible assets. In adopting SFAS No. 142, the Company
discontinued its amortization of existing goodwill and indefinite-lived
assets and performed its annual evaluation of testing for impairment of
goodwill. Based on its evaluation, the Company concluded that its
goodwill is not impaired.
Goodwill and intangible assets as of December 31, 2003 and 2002 are
summarized as follows:
December 31,
------------
2003 2002
---- ----
Amortized intangible assets
Management contracts $ 59,815 $ 59,135
Less: accumulated amortization 25,262 18,543
--------- --------
34,553 40,592
Unamortized goodwill and indefinite-lived intangible
assets:
Trade name 3,975 3,975
Goodwill 63,607 49,874
--------- --------
$102,135 $94,441
-------- -------
Included in goodwill is $3,389 which prior to January 1, 2002 was
recorded as workforce. Trade name had previously been amortized using a
ten-year life; however, upon adoption of SFAS No. 142, trade name was
determined to have an indefinite useful life because it is expected to
generate cash flows indefinitely.
A summary of the effect of amortization of goodwill and intangible
assets on reported earnings for the years ended December 31, 2003, 2002
and 2001 are as follows:
2003 2002 2001
---- ---- ----
Goodwill amortization $ -- -- $ 4,127
Trade name amortization -- -- 470
Management contracts amortization $ 6,718 $ 7,280 7,306
Net income $ 62,878 46,588 35,761
2003 2002 2001
---------- ---------- ----------
Reported net income $ 62,878 $ 46,588 $ 35,761
Add back: Goodwill amortization -- -- 4,127
Trade name amortization -- -- 470
---------- ---------- ----------
Adjusted net income $ 62,878 $ 46,588 $ 40,358
========== ========== ==========
-39-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Basic earnings per share:
Reported net income $ 1.72 $ 1.31 $ 1.04
Add back: Goodwill amortization -- -- .11
Trade name amortization -- -- .01
---------- ---------- ----------
Adjusted basic earnings per share $ 1.72 $ 1.31 $ 1.16
========== ========== ==========
Diluted earnings per share:
Reported net income $ 1.65 $ 1.28 $ 1.02
Add back: Goodwill amortization -- -- .11
Trade name amortization -- -- .01
---------- ---------- ----------
Adjusted diluted earnings per share $ 1.65 $ 1.28 $ 1.14
========== ========== ==========
Amortization of intangibles for the next five years is estimated to be
$6,751 in 2004; $6,660 in 2005; $4,584 in 2006, $4,508 in 2007, and
$2,773 in 2008.
12. Mortgage Notes Payable and Notes Payable:
Mortgage notes payable, substantially all of which are limited recourse
obligations, are collateralized by the assignment of various leases and
by real property with a carrying value of approximately $285,093.
The interest rate on the variable rate debt as of December 31, 2003
ranged from 2.34% to 6.44% and mature from 2004 to 2016. The interest
rate on the fixed rate debt as of December 31, 2003 ranged from 6.11% to
9.13% and mature from 2004 to 2013.
Scheduled principal payments for the mortgage notes and notes payable
during each of the next five years following December 31, 2003 and
thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
------------------------ ---------- --------------- ------------------
2004 $ 52,296 $ 21,145 $ 31,151
2005 8,062 5,790 2,272
2006 22,410 19,864 2,546
2007 15,109 12,293 2,816
2008 9,699 6,590 3,109
Thereafter 101,617 62,443 39,174
-------- --------- --------
Total $209,193 $128,125 $ 81,068
======== ======== ========
The Company has a credit facility of $185,000 pursuant to a revolving
credit agreement in which numerous lenders participate. The revolving
credit agreement has a remaining term through March 2004. The Company
has extended the facility on a short-term basis through June 1, 2004 and
will either seek to extend or replace the credit facility. As of
December 31, 2003, the Company had $29,000 drawn from the credit
facility. As of March 5, 2004, the outstanding balance was $30,000.
Advances, which are prepayable at any time, bear interest at an annual
rate of either (i) the one, two, three or six-month LIBOR, as defined,
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 upon the Company's leverage. At December 31, 2003 and
2002, the average interest rate on advances on the line of credit was
2.34% and 2.59%, respectively. In addition, the Company pays a fee (a)
ranging between 0.15% and 0.20% per annum of the unused portion of the
credit facility, depending on the Company's leverage, if no minimum
credit rating for the Company is in effect or (b) equal to .15% of the
total commitment amount, if the Company has obtained a certain minimum
credit rating.
The revolving credit agreement has financial covenants that require the
Company to (i) maintain minimum equity value of $400,000 plus 85% of
amounts received by the Company as proceeds from the issuance of equity
interests and (ii) meet or exceed certain operating and coverage
-40-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
ratios. Such operating and coverage ratios include, but are not limited
to, (a) ratios of earnings before interest, taxes, depreciation and
amortization to fixed charges for interest and (b) ratios of net
operating income, as defined, to interest expense.
13. Dividends Payable:
The Company declared a quarterly dividend of $.435 per share on December
10, 2003 payable on January 15, 2004 to shareholders of record as of
December 31, 2003.
14. Lease Revenues:
The Company's operations include the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources
of the lease revenues for the years ended December 31, 2003, 2002 and
2001 are as follows:
2003 2002 2001
---- ---- ----
Per Statements of Income:
Rental income $45,422 $46,092 $43,725
Interest income from direct financing leases 20,730 22,411 25,764
Adjustment:
Share of leasing revenues applicable to minority interests (1,316) (766) (536)
Share of leasing revenues from equity investments 8,786 7,434 6,820
------- ------- -------
$73,622 $75,171 $75,773
======= ======= =======
For the years ended December 31, 2003, 2002 and 2001, the Company earned
its net leasing revenues (i.e., rental income and interest income from
direct financing leases) from over 90 lessees. A summary of net leasing
revenues including all current lease obligors with more than $1,000 in
annual revenues is as follows:
Years Ended December 31,
------------------------
2003 % 2002 % 2001 %
---- - ---- - ---- -
Dr Pepper Bottling Company of Texas $4,290 6% $4,405 6% $4,354 6%
Detroit Diesel Corporation 4,158 6 4,158 5 4,118 5
Gibson Greetings, Inc., a wholly-owned
subsidiary of American Greetings, Inc. 3,593 5 4,149 5 4,107 5
Bouygues Telecom, S.A. (a) 3,193 4 2,952 4 1,181 2
Federal Express Corporation (b) 2,903 4 2,876 4 2,836 4
America West Holdings Corp. 2,738 4 2,539 3 2,539 3
Orbital Sciences Corporation 2,655 4 2,655 3 2,655 4
Quebecor Printing Inc. 2,632 4 2,563 3 2,559 3
AutoZone, Inc. 2,393 3 2,411 3 2,400 3
CheckFree Holdings, Inc. (c) 2,128 3 2,108 3 2,088 3
Sybron International Corporation 2,083 3 2,164 3 2,164 3
Livho, Inc. (d) 1,800 2 2,520 3 2,568 3
Unisource Worldwide, Inc. 1,710 2 1,732 2 1,734 2
CSS Industries, Inc. 1,647 2 1,656 2 1,609 2
Information Resources, Inc. (c) 1,644 2 1,644 2 1,644 2
BE Aerospace, Inc. 1,620 2 433 1 - 0
Sybron Dental Specialties Inc. 1,613 2 1,613 2 1,613 2
Faurecia Exhaust Systems, Inc. (formerly
AP Parts Manufacturing Company) 1,597 2 1,657 2 1,617 2
Sprint Spectrum L.P. 1,425 2 1,425 2 1,380 2
Eagle Hardware & Garden, Inc., a
wholly-owned subsidiary of Lowe's
Companies Inc. 1,338 2 1,313 2 1,186 2
AT&T Corporation 1,259 2 1,259 2 886 1
Brodart Co. 1,235 2 1,519 2 1,519 2
United States Postal Service 1,233 2 1,233 2 1,165 2
-41-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
BellSouth Telecommunications, Inc. 1,224 2 1,224 2 1,224 2
Lockheed Martin Corporation 1,172 2 1,331 2 1,617 2
Hologic, Inc. 1,136 1 382 1 - 0
Cendant Operations, Inc. 1,075 1 1,075 1 1,075 1
Anthony's Manufacturing Company, Inc. 1,019 1 1,019 1 988 1
Other (e) 17,109 23 19,156 27 22,947 31
------ --- ------- --- ------- ---
$73,622 100% $75,171 100% $75,773 100%
======= === ======= === ======= ===
(a) Net of proportionate share applicable to its minority interest owners.
(b) Includes the Company's 40% proportionate share of lease revenues from its
equity ownership in one of the properties.
(c) Represents the Company's proportionate share of lease revenue from its
equity investment.
(d) Effective January 1, 2004, the hotel operations of Livho will be
consolidated in the Company's financial statements.
(e) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to its minority
interest owners.
15. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable and
other notes payable was $210,000 and $238,000 at December 31, 2003 and
2002, respectively. The carrying value of the combined debt was $209,193
and $235,049 at December 31, 2003 and 2002, respectively. The fair value
of fixed rate debt instruments was evaluated using a discounted cash
flow model with rates that take into account the credit of the tenants
and interest rate risk. The fair value of the note payable from the line
of credit approximates the carrying value as it is a variable rate
obligation with an interest rate that resets to market rates.
16. Stock Options, Restricted Stock and Warrants:
In January 1998, the predecessor of Carey Management (see Note 2) was
granted warrants to purchase 2,284,800 shares exercisable at $21 per
share and 725,930 shares exercisable at $23 per share as compensation
for investment banking services in connection with structuring the
consolidation of the CPA(R) Partnerships. The warrants are exercisable
until January 2009.
The Company maintains stock option incentive plans pursuant to which
share options may be issued. The 1997 Share Incentive Plan (the
"Incentive Plan"), as amended, authorizes the issuance of up to
2,600,000 shares. The Company Non-Employee Directors' Plan (the
"Directors' Plan") authorizes the issuance of up to 300,000 shares. Both
plans were approved by a vote of the shareholders.
The Incentive Plan provides for the grant of (i) share options which may
or may not qualify as incentive stock options, (ii) performance shares,
(iii) dividend equivalent rights and (iv) restricted shares. Share
options have been granted as follows: 122,000 in 2003 at exercise prices
ranging from $25.01 to $31.79 per share, 877,337 in 2002 at exercise
prices ranging from $22.73 to $24.01 per share and 465,000 in 2001 at
exercise prices ranging from $16.875 to $21.86 per share. The options
granted under the Incentive Plan have a 10-year term and vest over
periods ranging from three to ten years from the date of grant. The
vesting of grants is accelerated upon a change in control of the Company
and under certain other conditions.
The Directors' Plan provides for similar terms as the Incentive Plan.
Options granted under the Directors' Plan have a 10-year term and vest
over three years from the date of grant. No share options were granted
in 2003, 2002 and 2001.
-42-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Share option and warrant activity for the Company's Incentive Plan and
Directors' Plan is as follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 4,979,862 $20.26 4,320,815 $19.88 4,114,254 $19.57
Granted 122,000 $26.24 877,337 $23.03 465,000 $18.66
Exercised (251,113) $14.29 (192,617) $12.69 (229,105) $12.21
Forfeited (37,847) $19.14 (25,673) $19.17 (29,334) $16.62
---------- --------- ----------
Outstanding at end of year 4,812,902 $21.20 4,979,862 $20.26 4,320,815 $19.88
========== ========= =========
Options exercisable at end of year 4,108,073 $20.95 3,611,115 $20.31 3,403,724 $20.88
========== ========= =========
Stock options outstanding for the Company's Incentive Plan and
Directors' Plan as of December 31, 2003 are as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Range of Options Outstanding Remaining Average Options Exercisable Average
Exercise Prices at December 31, 2003 Contractual Life Exercise Price at December 31, 2003 Exercise Price
--------------- -------------------- ---------------- -------------- -------------------- --------------
$7.69 39,946 6.50 $ 7.69 39,946 $ 7.69
$16.25 to $31.79 4,772,956 6.03 $21.31 4,068,127 $21.08
--------- ---------
4,812,902 6.03 $21.20 4,108,073 $20.95
========= =========
At December 31, 2002 and 2001, the range of exercise prices and
weighted-average remaining contractual life of outstanding share options
and warrants was $7.69 to $24.01 and 6.9 years, and $7.69 to $23.00 and
8.32 years, respectively.
The per share weighted average fair value of share options and warrants
granted during 2003 under the Company's Incentive Plan were estimated to
range from $1.51 to $2.28 using a Black-Scholes option pricing formula
based on the date of grant. The more significant assumptions underlying
the determination of the weighted average fair values included risk-free
interest rates ranging from 2.6% to 3.69%, volatility factors ranging
from 21.35% to 21.89%, dividend yields ranging from 8.26% to 8.51% and
expected lives ranging from 4.56 to 7.5 years.
The per share weighted average fair value of share options and warrants
granted during 2002 under the Company's Incentive Plan were estimated to
be $1.26 using a Black-Scholes option pricing formula. The more
significant assumptions underlying the determination of the weighted
average fair value include a risk-free interest rate of 1.73%, a
volatility factor of 21.83%, a dividend yield of 8.59% and an expected
life of 2.99 years.
The per share weighted average fair value of share options and warrants
granted during 2001 under the Company's Incentive Plan were estimated to
be $1.70 using a Black-Scholes option pricing formula. The more
significant assumptions underlying the determination of the weighted
average fair value include a risk-free interest rate of 4.87%, a
volatility factor of 22.51%, a dividend yield of 8.04% and an expected
life of 3.21 years.
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 at that date. Both the
options and restricted stock are vesting 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
consolidated financial statements. Any
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W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
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 awards are being accounted for as
a variable plan and any subsequent changes in the fair value of the
minority interest subsequent to the grant date will be included in the
determination of net income based on the vesting period. The combined
estimated fair value of the options and restricted stock as of December
31, 2003 is $1,615. The unearned compensation is being amortized over
the vesting periods and $577 has been amortized into compensation
expense for the period ended December 31, 2003.
The per share fair value of the 1,500,000 share options granted by WPCI
during 2003 was estimated to be $.303 using a Black-Scholes option
pricing formula. The more significant assumptions underlying the
determination of the average fair value included a risk-free interest
rate of 4.55% and an expected life of 12 years.
The Company has elected to adopt the disclosure only provisions of SFAS
No. 123. 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 various 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:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Net income as reported $62,878 $46,588 $35,761
Add: Stock based compensation included in net
Income, as reported, net of related tax effects 2,282 1,709 1,349
Less: Stock based compensation determined under
Fair value based methods for all awards, net of
related tax effects (3,144) (2,887) (2,391)
------- -------- --------
Pro forma net income $62,016 $45,410 $34,719
======= ======= =======
Net income per common share as reported:
Basic $1.72 $1.31 $1.04
Diluted $1.65 $1.28 $1.02
Pro forma net income per common share:
Basic $1.70 $1.28 $1.01
Diluted $1.63 $1.25 $ .99
17. Segment Reporting:
The Company has determined that it operates in two business segments,
management services and real estate operations with domestic and
international investments. The two segments are summarized as follows:
Year Ended: Management Real Estate Other(1) Total Company
---------- ----------- ----- -------------
Revenues:
2003 $88,060 $74,021 $1,298 $163,379
2002 84,255 71,400 289 155,944
2001 46,911 76,472 -- 123,383
Operating, interest, depreciation and amortization expenses (excluding
income taxes):
2003 $48,925 $36,872 -- $85,797
2002 46,975 57,406 -- 104,381
2001 39,298 48,279 -- 87,577
Income (loss) from equity investments:
2003 $859 $3,149 -- $4,008
2002 452 (895) -- (443)
2001 434 2,393 -- 2,827
Net operating income (2) (3):
2003 $39,994 $40,298 $1,298 $81,590
2002 37,732 13,099 289 51,120
2001 8,047 30,586 -- 38,633
-44-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Total assets as of:
December 31, 2003 $200,674 $688,847 $16,984 $906,505
December 31, 2002 167,415 721,919 4,190 893,524
Total long-lived assets as of:
December 31, 2003 $75,433 $629,767 $16,147 $721,347
December 31, 2002 70,089 663,721 4,056 737,866
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for amortization of
intangibles of $6,718 and $7,280 in 2003 and 2002, respectively and
amortization of intangibles and goodwill of $11,903 in 2001.
(3) Net operating income excludes gains and losses on sales, foreign
currency transactions, provision for income taxes, minority interest
and discontinued operations.
The Company acquired its first international real estate investment in
1998. For 2003, geographic information for the real estate operations
segment is as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $66,797 $7,224 $74,021
Operating, interest, depreciation and amortization
expenses (excluding income taxes) 30,867 6,005 36,872
Income from equity investments 3,142 7 3,149
Net operating income(1) 39,072 1,226 40,298
Total assets 619,366 69,481 688,847
Total long-lived assets 568,407 61,360 629,767
For 2002, geographic information for the real estate operations segment
is as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $65,375 $6,025 $71,400
Operating, interest, depreciation and amortization
expenses (excluding income taxes) 52,677 4,729 57,406
Income from equity investments (895) -- (895)
Net operating income(1) 11,803 1,296 13,099
Total assets 666,281 55,638 721,919
Total long-lived assets 610,923 52,798 663,721
For 2001, geographic information for the real estate operations segment
is as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $ 72,711 $ 3,761 $ 76,472
Operating, interest, depreciation and
amortization expenses (excluding income taxes) 44,854 3,425 48,279
Income from equity investments 2,393 - 2,393
Net operating income(1) 30,250 336 30,586
Total assets 733,406 49,578 782,984
Total long-lived assets 675,919 45,976 721,895
(1) Net operating income excludes gains and losses on sales, foreign
currency transactions, provision for income taxes, minority interest
and discontinued operations.
-45-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
18. Income Taxes:
The components of the Company's provision for income taxes for the years
ended December 31, 2003, 2002 and 2001 are as follows:
2003 2002 2001
---- ---- ----
Federal:
Current $ 5,694 $2,436 $ (191)
Deferred 5,749 8,756 4,783
-------- ------- ------
11,443 11,192 4,592
------- ------- ------
State and local:
Current 3,944 2,492 1,980
Deferred 3,729 4,399 1,787
-------- -------- ------
7,673 6,891 3,767
-------- -------- ------
Total provision $19,116 $18,083 $8,359
======= ======= ======
Deferred income taxes as of December 31, 2003 and 2002 consist of the
following:
2003 2002
---- ----
Deferred tax assets:
Unearned compensation $ 863 $ 834
Other long-term liabilities 2,321 245
-------- -------
3,184 1,079
-------- -------
Deferred tax liabilities:
Receivables from affiliates 19,067 13,533
Investments 12,894 7,309
Other 755 --
---------- -------
32,716 20,842
-------- --------
Net deferred tax liability $29,532 $19,763
======= =======
The difference between the tax provision and the tax expense recorded at
the statutory rate at December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
---- ---- ----
Pre-tax income from taxable subsidiaries $41,820 $35,296 $ 3,236
Federal provision at statutory tax rate (34%) 14,219 12,001 1,100
State and local taxes, net of federal benefit 3,935 3,617 1,137
Amortization of intangible assets 1,625 1,886 3,458
Other (2,225) (517) 794
--------- -------- --------
Tax provision - taxable subsidiaries 17,569 16,987 6,489
Other state and local taxes 1,547 1,096 1,870
--------- -------- --------
Total tax provision $19,116 $18,083 $ 8,359
========= ======== ========
19. Employee Benefit Plans and Incentive Compensation:
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
-46-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
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 fair value of PEP Units and distributions paid are
included in compensation expense of the Company. Compensation expense
under this plan for the year ended December 31, 2003 was $2,028.
The Company sponsors a qualified profit-sharing plan and trust covering
substantially all of its full-time employees who have attained age
twenty-one, worked a minimum of 1,000 hours and completed one year of
service. The Company is under no obligation to contribute to the plan
and the amount of any contribution is determined by and at the
discretion of the Board of Directors. The Board of Directors can
authorize contributions to a maximum of 15% of an eligible participant's
compensation, limited to $30 annually per participant. For the years
ended December 31, 2003, 2002 and 2001, amounts expensed by the Company
for contributions to the trust were $1,926, $1,677 and $1,388,
respectively. Annual contributions represent an amount equivalent to 15%
of each eligible participant's compensation for that period.
20. Commitments and Contingencies:
As of December 31, 2003, the Company was not involved in any material
litigation.
Following a broker-dealer examination of Carey Financial Corporation
("Carey Financial"), the Company's wholly-owned broker-dealer
subsidiary, by the staff of the Securities and Exchange Commission,
Carey Financial received a letter from the staff of the Securities and
Exchange Commission, on or about March 4, 2004, alleging certain
infractions by Carey Financial of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended and the rules
and regulations thereunder and of the National Association of Securities
Dealers, Inc. ("NASD"). The letter was delivered for the purpose of
requiring Carey Financial to take corrective action and without regard
to any other action the Commission may take with respect to the
broker-dealer examination. It is not known at this time if the
Commission intends to bring any action against Carey Financial. The
infractions alleged are described below.
The staff alleges that in connection with two public offerings of shares
of CPA(R):15, Carey Financial and its retail distributors sold certain
securities without an effective registration statement. Specifically,
the staff alleges that CPA(R):15 and Carey Financial oversold the amount
of securities registered in the first offering (the "Phase I Offering")
completed in the fourth quarter of 2002 and sold securities with respect
to the second offering (the "Phase II" Offering) before a registration
statement with respect to such offering became effective in the first
quarter of 2003. It appears to be the staff's position that,
notwithstanding the fact pending effectiveness of the registration
statement investor funds were delivered into escrow and not to CPA(R):15
or Carey Financial, such delivery constituted sales of the securities in
violation of Section 5 of the Securities Act of 1933. In the event the
Commission brings an action with respect to these allegations, CPA(R):15
might be required to offer the affected investors the opportunity to
receive a return of their investment. It cannot be determined at this
time if investor funds were returned whether Carey Financial would be
required to return net commissions paid by CPA(R):15 on purchases
ultimately rescinded or if so required, the amount of net commissions
which would be due, as the amount would be contingent on the number of
purchases actually rescinded. Further, as part of an action the
Commission could seek disgorgement of any such commissions, irrespective
of the outcome of any rescission offer. As such, the Company cannot
predict the potential effect such a rescission offer or any action may
ultimately have on the operations of Carey Financial or, the Company.
There can be no assurance such effect, if any, would not be material.
The staff also alleges that the prospectus delivered with respect to the
Phase I Offering contained material misstatements and omissions because
that prospectus did not disclose that the proceeds of the Phase I
Offering would be used to advance commissions and expenses payable with
respect to the Phase II Offering. The staff claims that the failure to
disclose this use of funds constitutes a misstatement of a material fact
in violation of Section 17(a) of the Securities Act of 1933, Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. Carey Financial has
reimbursed CPA(R):15 for the interest cost of advancing the commissions
that were later recovered from the Phase II Offering proceeds. It cannot
be determined at this time what remedy, if any, would be pursued by the
Commission if any action were to be brought by the Commission with
respect to these allegations. As such, the Company cannot predict the
potential effect such an action may ultimately have on the operations of
Carey Financial or the Company. There can be no assurance such effect,
if any, would not be material.
The staff also alleges that the CPA(R):15 offering documents contained
material misstatements and omissions because they did not include a
discussion of the manner in which dividends would be paid to the initial
investors in the Phase II offering. The staff letter asserts that the
payment of dividends to the Phase II shareholders resulted in
significantly higher annualized rates of return than was being earned by
the Phase I shareholders, and that the Company failed to disclose to the
Phase I shareholders the various rates of return. The staff claims that
the failure to make this disclosure constitutes a misstatement of a
material fact in violation of Section 17 of the Securities Act of 1933
and Section 10(b) of the Securities Exchange Act of 1934. It cannot be
determined at this time what remedy, if any, would be pursued by the
Commission if any action were to be brought by the Commission with
respect to these allegations. There can be no assurance that if the
Commission brought an action against Carey Financial that the remedy
imposed would not be material.
In addition to the allegations with respect to the CPA(R):15 offerings,
the staff alleges that Carey Financial violated Section 15(b)(7) of the
Securities Exchange Act of 1934 and Rule 15b-7 promulgated thereunder
and NASD rule 1031(a) and NASD Conduct Rule 3060. In addition to all of
the above, the staff has alleged that each of these actions constituted
a violation of NASD Conduct Rules 3010(a) and (b). The Company is in the
process of ascertaining the specific factual details forming the basis
for these allegations. The Company is unable to predict at this time the
potential outcome of any formal action against Carey Financial or the
potential effect such an action may have on the operations of Carey
Financial or the Company.
21. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues $45,859 $35,966 $44,098 $37,456
Expenses 23,453 20,379 22,142 19,823
Income from continuing operations (1) 16,302 13,842 14,515 17,553
Income from continuing operations per
share -
Basic .45 .38 .38 .48
Diluted .44 .37 .36 .46
Net income 17,273 12,974 14,047 18,584
Net income per share -
Basic .48 .35 .38 .51
Diluted .46 .34 .37 .49
Dividends declared per share .4320 .4330 .4340 .4350
Certain prior quarter amounts have been reflected as discontinued operations
in accordance with Statement of Financial Accounting Standard No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets".
(1) Includes impairment charges on real estate and investments of $1,208
for the three-month period ended December 31, 2003, respectively.
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $31,688 $36,418 $36,277 $51,561
Expenses 17,633 19,384 21,151 46,213
Income (loss) from continuing
operations (1) 12,471 24,468 11,524 (2,561)
-47-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
Income (loss) from continuing
operations per share -
Basic .35 .69 .32 (.07)
Diluted .35 .68 .32 (.07)
Net income (loss) 13,729 23,593 12,985 (3,719)
Net income (loss) per share -
Basic .39 .66 .36 (.10)
Diluted .38 .65 .36 (.10)
Dividends declared per share .4280 .4290 .4300 .4310
Certain prior quarter amounts have been reflected as discontinued operations
in accordance with Statement of Financial Accounting Standard No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets".
(1) Includes impairment charges on real estate and investments of $20,286
for the three-month period ended December 31, 2002.
-48-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Listed Shares are listed on the New York Stock Exchange. Trading commenced on
January 21, 1998.
As of December 31, 2003 there were 27,587 shareholders of record.
Dividend Policy
Quarterly cash dividends are usually declared in December, March, June
and September and paid in January, April, July and October. Quarterly
cash dividends declared per share in 2003, 2002 and 2001 are as
follows:
Quarter 2003 2002 2001
------- ---- ---- ----
1 $ .4320 $ .4280 $ .4225
2 .4330 .4290 .4250
3 .4340 .4300 .4260
4 .4350 .4310 .4270
------- ------- -------
Total: $1.7340 $1.7180 $1.7005
======= ======= =======
Listed Shares
The high, low and closing prices on the New York Stock Exchange for a
Listed Share for each fiscal quarter of 2001, 2002, and 2003 were as
follows (in dollars):
2001 High Low Close
---- ---- --- -----
First Quarter $20.60 $18.26 $19.35
Second Quarter 21.80 18.50 18.50
Third Quarter 22.05 19.25 21.35
Fourth Quarter 23.80 20.00 23.20
2002 High Low Close
---- ---- --- -----
First Quarter $24.40 $22.78 $23.24
Second Quarter 24.15 22.30 22.50
Third Quarter 25.90 21.28 24.80
Fourth Quarter 25.40 22.95 24.75
2003 High Low Close
---- ---- --- -----
First Quarter $25.35 $24.15 $25.00
Second Quarter 30.50 24.81 29.94
Third Quarter 33.70 27.13 31.75
Fourth Quarter 33.14 29.10 30.52
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K ("10-K") for the year ended
December 31, 2003 as filed with the Securities and Exchange Commission ("SEC").
The 10-K may also be obtained through the SEC's EDGAR database at www.sec.gov.
-49-