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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-13779
-------------------------
W. P. CAREY & CO. LLC
("WPC")
(FORMERLY CAREY DIVERSIFIED LLC)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3912578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
W. P. Carey & Co. LLC has 37,395,887 Listed Shares, no par value
outstanding at May 6, 2004.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the
three months ended March 31, 2004 and 2003 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 5-6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-20
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. - Controls and Procedures 21
PART II - Other Information
Item 1. - Legal Proceedings 22
Item 4. - Submission of Matters to a Vote of Security Holders 22
Item 6. - Exhibits and Reports on Form 8-K 22
Signatures 23
*The summarized condensed consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
-1-
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Real estate leased to others:
Real estate leased to others under the operating method, net of accumulated
depreciation of $47,369 and $45,021 at March 31,
2004 and December 31, 2003 $ 397,831 $ 400,717
Net investment in direct financing leases 182,101 182,452
--------- ---------
Real estate leased to others 579,932 583,169
Operating real estate, net of accumulated depreciation of $6,109 and
$5,805 at March 31, 2004 and December 31, 2003 17,213 16,147
Real estate under construction and redevelopment 3,580 4,679
Equity investments 88,937 82,800
Assets held for sale 12,663 13,609
Cash and cash equivalents 15,721 24,359
Due from affiliates 45,662 50,917
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $26,950 and
$25,262 at March 31, 2004 and December 31, 2003 36,840 38,528
Other assets 26,061 28,690
--------- ---------
Total assets $ 890,216 $ 906,505
========= =========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 176,640 $ 180,193
Notes payable 30,757 29,000
Accrued interest 1,268 1,163
Dividends payable 16,255 15,987
Accounts payable and accrued expenses 10,320 16,249
Prepaid rental income and security deposit 5,310 4,267
Due to affiliates 2,276 20,444
Accrued income taxes 3,318 1,810
Deferred income taxes, net 28,880 29,532
Other liabilities 10,441 11,221
--------- ---------
Total liabilities 285,465 309,866
--------- ---------
Minority interest 1,368 1,852
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 37,367,503 and 36,745,027 shares issued
and outstanding at March 31, 2004 and December 31, 2003 726,182 709,724
Dividends in excess of accumulated earnings (117,727) (112,570)
Unearned compensation (6,650) (4,863)
Accumulated other comprehensive income 1,578 2,496
--------- ---------
Total members' equity 603,383 594,787
--------- ---------
Total liabilities, minority interest and members' equity $ 890,216 $ 906,505
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited consolidated financial statements at that date.
-2-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
Revenues:
Management income from affiliates $ 17,252 $ 25,793
Rental income 11,117 11,530
Interest income from direct financing leases 5,258 5,124
Other operating income 1,841 2,714
Revenue from other business operations 1,933 171
-------- --------
37,401 45,332
-------- --------
Operating expenses:
Depreciation 2,772 2,643
Amortization 1,693 2,155
General and administrative 10,739 12,060
Impairment charges and loan losses 2,250 272
Property expenses 2,318 2,400
Operating expenses from other business operations 1,635 --
-------- --------
21,407 19,530
-------- --------
Income from continuing operations before other interest income, minority
interest, equity income, gain, interest expense and income taxes 15,994 25,802
Other interest income 680 560
Minority interest in income (68) (33)
Income from equity investments 1,336 918
Gain on foreign currency transactions 449 --
Interest expense (3,598) (3,923)
-------- --------
Income from continuing operations before income taxes 14,793 23,324
Provision for income taxes 3,405 6,989
-------- --------
Income from continuing operations 11,388 16,335
-------- --------
Discontinued operations:
(Loss) income from operations of discontinued properties (296) 774
Gain on sale of real estate -- 164
-------- --------
(Loss) income from discontinued operations (296) 938
-------- --------
Net income $ 11,092 $ 17,273
======== ========
-- Continued --
-3-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
(continued)
Three Months Ended
March 31,
-----------------------------------
2004 2003
-------------- --------------
Basic earnings per share:
Earnings from continuing operations $ .31 $ .45
(Loss) earnings from discontinued operations (.01) .03
-------------- --------------
Net income $ .30 $ .48
============== ==============
Diluted earnings per share:
Earnings from continuing operations $ .29 $ .44
(Loss) earnings from discontinued operations (.01) .02
-------------- --------------
Net income $ .28 $ .46
============== ==============
Weighted average shares outstanding:
Basic 37,314,792 36,389,289
============== ==============
Diluted 38,757,405 37,211,485
============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
Net income: $ 11,092 $ 17,273
-------- --------
Other comprehensive income:
Change in unrealized gain on marketable
securities 358 (663)
Foreign currency translation adjustment (1,276) 493
-------- --------
(918) (170)
-------- --------
Comprehensive income $ 10,174 $ 17,103
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 11,092 $ 17,273
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Loss (income) from discontinued operations, including gain on sale 296 (938)
Depreciation and amortization 4,704 5,012
Unrealized gain on foreign currency transactions (113) --
Minority interest in income 68 33
Straight-line rent adjustments and amortization of deferred income 85 (91)
Equity income in excess of distributions (218) (12)
Management income received in shares of affiliates (5,346) (4,334)
Costs paid by issuance of shares 38 52
Amortization of unearned compensation 997 712
Impairment charges and loan losses 2,250 272
Tax benefit - share incentive plans 1,618 1,636
Deferred income tax provision (652) 2,651
Increase in structuring fees receivable (1,301) (5,449)
Deferred acquisition fees received 5,978 1,495
Net change in other operating assets and liabilities (3,654) (3,876)
-------- --------
Net cash provided by continuing operations 15,842 14,436
Net cash (used in) provided by discontinued operations (205) 952
-------- --------
Net cash provided by operating activities 15,637 15,388
-------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 782 784
Proceeds from sale of property and investments -- 8,602
Purchases of equity investments (4,290) --
Additional capital expenditures (808) (463)
Payment of deferred acquisition fees (524) (524)
-------- --------
Net cash (used in) provided by investing activities (4,840) 8,399
-------- --------
Cash flows from financing activities:
Proceeds from note payable 26,000 21,000
Payments of mortgage principal (2,315) (1,965)
Prepayments of note payable (24,243) (34,000)
Payment of financing costs (12) --
Distributions to minority interests (884) --
Dividends paid (15,980) (15,489)
Proceeds from issuance of shares 758 1,780
Retirement of shares (2,543) --
-------- --------
Net cash used in financing activities (19,219) (28,674)
-------- --------
Effect of exchange rate changes on cash (216) 153
-------- --------
Net decrease in cash and cash equivalents (8,638) (4,734)
Cash and cash equivalents, beginning of period 24,359 21,304
-------- --------
Cash and cash equivalents, end of period $ 15,721 $ 16,570
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - (Continued)
(in thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC ("Carey
Management") in June 2000, the Company had an obligation to issue up
to an additional 2,000,000 shares over four years to the former
shareholders of Carey Management and certain of its directors and
officers, if specified performance criteria were achieved, of which
1,900,000 shares were issued. For the year ended December 31, 2002,
the Company met one criterion and 400,000 shares ($8,910) were
issued during the three-month period ended March 31, 2003. 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) were issued in March 2004. Accounts payable to affiliates
as of December 31, 2003 included $13,734 for the shares that were
issued in March 2004 and were reflected as members' equity upon
issuance of the shares. The value attributed to the shares issued
was recorded as goodwill.
B. As partial consideration for the sale of a property in 2003, the
Company received notes receivable with a fair value of $2,250.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Note 1: Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
As of December 31, 2003, the Company owned 20,000 shares of Corporate Property
Associates 16 - Global Incorporated ("CPA(R):16-Global"), all of the shares then
issued and outstanding. Since December 31, 2003, CPA(R):16-Global has issued
approximately 14,475,000 shares and the Company's ownership interest has
decreased to less than 1% of outstanding shares. In connection with the issuance
of common stock by CPA(R):16 - Global, pursuant to its offering, the Company no
longer controls but retains significant influence in CPA(R):16 - Global. The
Company has concluded that CPA(R):16 - Global is not a variable interest entity
and, therefore, is now accounting for its interest in CPA(R):16 - Global under
the equity method of accounting (see also Note 4).
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 2004 and 2003 were calculated as follows:
Three Months Ended March 31,
-----------------------------------
2004 2003
-------------- --------------
Income from continuing operations $ 11,388 $ 16,335
(Loss) earnings from discontinued operations (296) 938
-------------- --------------
Net income $ 11,092 $ 17,273
============== ==============
Weighted average shares - basic 37,314,792 36,389,289
Effect of dilutive securities: Stock options 1,442,613 822,196
-------------- --------------
Weighted average shares - diluted 38,757,405 37,211,485
============== ==============
Basic earnings per share:
Earnings from continuing operations $ .31 $ .45
(Loss) earnings from discontinued operations (.01) .03
-------------- --------------
Net income $ .30 $ .48
============== ==============
Diluted earnings per share:
Earnings from continuing operations $ .29 $ .44
(Loss) earnings from discontinued operations (.01) .02
-------------- --------------
Net income $ .28 $ .46
============== ==============
Note 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"). 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
-7-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
certain costs, primarily the cost of personnel. For the three-month periods
ended March 31, 2004 and 2003, total asset-based fees and reimbursements earned
were $14,292 and $12,330, 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
applicable to CPA(R):12, CPA(R):14, CPA(R):15 and CPA(R):16 - Global are
deferred and payable in equal annual installments over periods ranging from
three to eight years, subject to each CPA(R) REIT meeting its "preferred
return." Unpaid installments bear interest at annual rates ranging from 5% to
7%. For the three-month periods ended March 31, 2004 and 2003, the Company
earned transaction fees of $2,960 and $13,463, 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 March 31, 2004, deferred acquisition fees payable were
$1,709, and bear interest at an annual rate of 6%. Annual installments of $524
were paid in January 2004 and 2003.
Note 4. Equity Investments:
The Company owns interests in the CPA(R) REITs. The Company's interests in the
CPA(R) REITs are accounted for under the equity method due to the Company's
ability to exercise significant influence as the Advisor to the CPA(R) REITs.
The CPA(R) REITs are publicly registered and file financial statements with the
United States Securities and Exchange Commission. In connection with earning
performance fees, the Company has elected to receive restricted shares of common
stock in the CPA(R) REITs rather than cash in consideration for such fees. As of
March 31, 2004, the Company's ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
------ -----------------------
CIP(R) 941,481 3.21%
CPA(R):12 1,007,358 3.21%
CPA(R):14 1,900,366 2.80%
CPA(R):15 509,797 0.48%
CPA(R):16 - Global 20,000 0.23%
The Company also owns noncontrolling interests in (i) three limited partnerships
as a limited partner, (ii) three limited liability companies and (iii) a
jointly-controlled 36% tenancy-in-common interest in two properties subject to a
master lease with the remaining interests owned by affiliates and all of which
net lease real estate on a single-tenant basis.
Combined financial information of the affiliated equity investees is summarized
as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Assets (primarily real estate) $4,136,737 $4,062,295
Liabilities (primarily mortgage notes payable) 1,976,515 1,976,216
Partners' capital and shareholders' equity 2,160,222 2,086,079
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
Revenues (primarily rental revenue) $ 88,179 $ 77,047
Expenses (primarily depreciation and property
expenses) (38,169) (30,629)
Other interest income 2,094 1,478
Minority interest in income (3,641) (2,371)
Income from equity investments 11,583 10,683
Gain on sales 1,621 1,176
Interest expense (31,269) (27,058)
-------- --------
Income from continuing operations 30,398 30,326
Income from discontinued operations 139 236
-------- --------
Net income $ 30,537 $ 30,562
======== ========
-8-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 5. Intangible Assets:
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangibles," addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are not amortized and must be tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives.
Goodwill and intangible assets are summarized as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Amortized intangible assets
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization 26,950 25,262
-------- --------
32,865 34,553
Unamortized goodwill and indefinite-lived
intangible assets:
Trade name 3,975 3,975
Goodwill 63,607 63,607
-------- --------
$100,447 $102,135
-------- --------
Amortization of intangibles was $1,688 and $1,671 for the three-month periods
ended March 31, 2004 and 2003, respectively.
Scheduled amortization of intangibles for each of the next five years is as
follows: $5,063 in 2004, $6,660 in 2005, $4,584 in 2006, $4,508 in 2007 and
$2,773 in 2008.
Note 6. Lease Revenues:
The Company's real estate operations consist of the investment in and the
leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the three-month periods ended March 31, 2004
and 2003 are as follows:
2004 2003
-------- --------
Per Statements of Income:
Rental income $ 11,117 $ 11,530
Interest income from direct financing leases 5,258 5,124
Adjustment:
Share of leasing revenues applicable to minority interests (393) (303)
Share of leasing revenues from equity investments 3,012 2,126
-------- --------
$ 18,994 $ 18,477
======== ========
For the three months ended March 31, 2004 and 2003, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 90 lessees. A summary of net leasing revenues is as
follows:
2004 % 2003 %
------- ------- ------- -------
Dr Pepper Bottling Company of Texas $ 1,078 6% 1,067 6%
Detroit Diesel Corporation 1,039 5 1,039 6
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 896 5 899 5
Bouygues Telecom, S.A. (b) 896 5 753 4
Carrefour France, SA (a) 857 5 -- --
Federal Express Corporation (a) 731 4 723 4
America West Holdings Corp. 709 4 635 3
Orbital Sciences Corporation 664 3 664 4
Quebecor Printing, Inc. 663 3 643 3
Sybron International Corporation 572 3 522 3
AutoZone, Inc. 554 3 558 3
Checkfree Holdings Corporation Inc. (a) 545 3 532 3
Sybron Dental Specialties Inc. 443 2 403 2
-9-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
2004 % 2003 %
------- ------- ------- -------
Unisource Worldwide, Inc. 427 2 428 2
Information Resources, Inc. (a) 411 2 411 2
CSS Industries, Inc. 410 2 413 2
BE Aerospace, Inc. 395 2 435 2
Faurecia Exhaust Systems, Inc. 393 2 414 2
Sprint Spectrum, L.P. 356 2 356 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 336 2 328 2
Brodart, Co. 323 2 288 2
AT&T Corporation 315 2 315 2
United States Postal Service 308 2 308 2
BellSouth Telecommunications, Inc. 306 2 306 2
Hologic, Inc. (a) 284 2 284 2
Lockheed Martin Corporation 269 1 328 2
Cendant Operations, Inc. 268 1 268 1
Swat-Fame, Inc. 263 1 223 1
Anthony's Manufacturing Company, Inc. 255 1 255 1
Other (c) 4,028 21 4,679 25
------- ------- ------- -------
$18,994 100% $18,477 100%
======= ======= ======= =======
(a) Represents the Company's proportionate share of lease revenue from its
equity investment.
(b) Net of proportionate share applicable to its minority interest owners.
(c) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to minority interest
owners.
Note 7. Impairment Charges and Loan Losses:
In February 2003, the Company sold its property in Winona, Minnesota to the
lessee for $8,550, consisting of cash of $6,300 and notes receivable with an
estimated fair value of $2,250. During the three-month period ended March 31,
2004, installment payments due under the notes were not paid. Based on the
Company's assessment of the recoverability of the note, it has written off the
entire $2,250 as a loan loss.
Note 8. Stock Options and Restricted Stock:
The Company has elected to adopt the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If stock-based compensation cost had
been recognized based upon fair value at the date of grant for options and
restricted stock awarded under the Company's share incentive plans and amortized
to expense over their respective vesting periods in accordance with the
provisions of SFAS No. 123, pro forma net income would have been as follows:
Three Months Ended
March 31,
---------------------------
2004 2003
---------- ----------
Net income as reported $ 11,092 $ 17,273
Add: Stock based compensation included in net income as
reported, net of related tax effects 616 397
Less: Stock based compensation determined under fair value
based methods for all awards, net of related tax effects (814) (778)
---------- ----------
Pro forma net income $ 10,894 $ 16,892
========== ==========
Net income per common share as reported
Basic $ .30 $ .48
Diluted $ .28 $ .46
Pro forma net income per common share
Basic $ .29 $ .46
Diluted $ .28 $ .45
-10-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
For the three-month periods ended March 31, 2004 and 2003, the changes in
unearned compensation were as follows:
2004 2003
------- -------
Beginning of period $ 4,863 $ 5,671
Awards 2,788 46
Forfeitures (4) (36)
Compensation expense (amortization of unearned compensation) (997) (712)
------- -------
End of period $ 6,650 $ 4,969
======= =======
For the three-month periods ended March 31, 2004 and 2003, restricted shares of
$108 and $40, respectively, were issued to directors in consideration of
services rendered.
Note 9. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations for properties sold or held for
sale and the related gain or loss on sale of the property are reflected in the
consolidated statements of operations as "Discontinued Operations."
The operations of seven properties which are classified as held for sale as of
March 31, 2004 and the operations of fifteen properties which were sold since
January 1, 2003 are included as "Discontinued Operations" for all periods
presented in the accompanying condensed consolidated financial statements. A
summary of discontinued operations is as follows:
Three Months Ended
March 31,
---------------------
2004 2003
------- -------
REVENUES:
Rental income $ 66 $ 527
Interest income from direct financing leases 24 339
Revenues of other business operations -- 699
Other income -- 19
Settlement income -- 290
------- -------
90 1,874
------- -------
EXPENSES:
Depreciation -- 178
Property expenses 386 434
General and administrative -- 1
Operating expenses of other business operations -- 563
Taxes -- 35
------- -------
386 1,211
------- -------
(Loss) income before other interest income
and gain on sales (296) 663
Other interest income -- 111
Gain on sales of real estate -- 164
------- -------
(Loss) income from discontinued operations $ (296) $ 938
======= =======
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $64 and $74 for the three-month periods ended March
31, 2004 and 2003, respectively.
-11-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 10. Segment Reporting:
The Company operates in two business segments - management services and real
estate operations. The two segments are summarized as follows:
Three Months Ended March 31, Management Real Estate Other(1) Total Company
- ---------------------------- ---------- ----------- ----- -------------
Revenues:
2004 $ 17,252 $ 18,216 $ 1,933 $ 37,401
2003 25,793 19,368 171 45,332
Operating, interest, depreciation and
amortization expenses:
2004 $ 11,758 $ 11,612 $ 1,635 $ 25,005
2003 13,163 10,290 -- 23,453
Income from equity investments:
2004 $ 353 $ 983 $ -- $ 1,336
2003 94 824 -- 918
Net operating income(2)(3):
2004 $ 5,847 $ 8,267 $ 298 $ 14,412
2003 12,724 10,462 171 23,357
As of
Long-lived assets:
March 31, 2004 $ 78,520 $626,793 $ 17,213 $722,526
December 31, 2003 75,433 629,767 16,147 721,347
Total assets:
March 31, 2004 $210,262 $660,792 $ 19,162 $890,216
December 31, 2003 200,674 688,847 16,984 906,505
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for amortization of
intangibles of $1,688 and $1,671 for the three-month periods ended March
31, 2004 and 2003, respectively.
(3) Net operating income includes other interest income and excludes gains and
losses on sales and foreign currency transactions, provision for income
taxes, minority interest and discontinued operations.
Note 11. Commitments and Contingencies:
As of March 31, 2004, 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 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 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
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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 that 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 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 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 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.
Note 12. 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 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
-13-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures.
The Company has adopted FIN 46 and concluded that Livho is a VIE, 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 accompanying condensed consolidated financial statements as
of March 31, 2004. Livho operates a hotel as a Holiday Inn at the Company's
property in Livonia, Michigan; its operations were transferred to a separate
company in 1998 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.
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 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 entered into before November 5, 2003. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company has interests in five joint ventures that are consolidated
and have minority interests that have finite lives and were considered
mandatorily redeemable noncontrolling interests prior to the issuance of the
deferral. Accordingly, in accordance with the deferral noted above, these
minority interests have not been reflected as liabilities. The carrying value of
these minority interests approximates their estimated fair value as of March 31,
2004.
-14-
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share amounts)
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 condensed consolidated financial statements and notes thereto as of March
31, 2004 of W. P. Carey & Co. LLC and its subsidiaries ("WPC") included in this
quarterly report and WPC's Annual Report on Form 10-K for the year ended
December 31, 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 the Annual Report
on Form 10-K for the year ended December 31, 2003. 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.
Additionally, a description of WPC's critical accounting estimates is included
in the management's discussion and analysis in the Annual Report on Form 10-K
for the year ended December 31, 2003. There has been no significant change in
such critical accounting estimates.
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 has two primary business operations: real estate operations
and management operations.
Revenues from the management operations are earned as Advisor to the CPA(R)
REITs by providing services to the CPA(R) REITs 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 and timing 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 the
three-month period ended March 31, 2004, management revenues decreased by
approximately 33% because of lower transaction volume and related fees, while
asset-based fees increased by approximately 16%. Asset-based management and
performance fees for the CPA(R) REITs are determined based on real estate assets
under management. Since March 31, 2003 assets under management for CPA(R):14 and
CPA(R):15 have grown by approximately 28%. CPA(R):16-Global has commenced a
"best efforts offering" and Management expects CPA(R):16-Global to raise more
than $500,000 in 2004. As of April 30, 2004 the CPA(R):16-Global offering has
raised more than $144,000. The asset base; therefore, can be expected to
continue to increase over the next several years as these available and to be
raised funds are invested by the 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. 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 and the
competition for net lease transactions by other investors has increased. Since
March 31, 2004, WPC has structured a $312,000 transaction which is jointly owned
by CPA(R):14, CPA(R):15 and CPA(R):16-Global. For the three-month period ended
March 31, 2004, management services operations provided approximately 45% of
total revenues.
-15-
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
RESULTS OF OPERATIONS:
WPC reported net income of $11,092 and $17,273 for the three-month periods ended
March 31, 2004 and 2003, respectively.
Income from continuing operations decreased to $11,388 from $16,335 for the
comparable three-month periods ended March 31, 2004 and 2003. The decrease was
due primarily to a loan loss of $2,250 on the writeoff of notes received in
connection with the sale of a property in 2003, a decrease in management income
and, to a lesser extent, a decrease in other income. This was partially offset
by decreases in general and administrative expense, the provision for income
taxes and, to a lesser extent, a decrease in amortization expense and an
increase in income from equity investments.
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
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest and discontinued operations) decreased
to $8,267 from $10,462, for the comparable three-month periods ended March 31,
2004 and 2003, respectively. In addition to the loan loss of $2,250, the
decrease for the comparable three-month periods was due to a decrease in other
operating income and lease revenues. These were partially offset by decreases
in interest expense and an increase in gains on foreign currency transactions.
Other operating income which decreased by $873 for the comparable periods
generally consists of lease termination payments and other non-rent related
revenues from real estate operations including, but not limited to, settlements
of claims against former lessees. WPC receives settlements in the ordinary
course of business; however, the timing and amount of such settlements cannot
always be estimated. WPC received a lease termination settlement of $2,250 in
March 2003 from The GAP, Inc. During the three-month period ended March 31,
2004, WPC received approximately $1,500 in distributions in connection with a
bankruptcy settlement with a former lessee. WPC received bonds in connection
with a bankruptcy settlement which it had previously written off because
interest payments had been suspended and collection was uncertain. Upon sale of
the company, the acquirer paid off the bonds and all cumulative unpaid interest.
Lease revenues (rental income and interest income from direct financing leases)
decreased by $279 for the comparable three-month periods, as a result of several
lease terminations and expirations including the Gap lease in 2003. The Gap
lease, which expired in January 2003, provided annual rents of $2,205.
Management believes that the prospects for leasing the former Gap property,
which is partially occupied, on a long-term basis are good; however, it may take
several years to remarket the entire property. WPC no longer recognizes rental
revenue from the Livho Inc. property, and recognizes the revenues and expenses
of the hotel's operations as revenue from other business operations because it
now consolidates Livho in its financial statements as a variable interest
entity. Livho's annual rent was $1,800. Lease revenues benefited from rent
increases, including an annual increase of $300 on the America West Holdings
Corporation lease in August 2003. Additionally, three new leases at the Pantin,
France property with aggregate annual rents of $500 went into effect in December
2003. As a result of adjustments to the estimated residual value of direct
financing leases in 2003 and 2002, the rates of return on several leases were
revised, and annual interest income from direct financing leases for financial
reporting purposes in 2004 is decreasing by approximately $2,000. This change
does not affect operating cash flow, as contractual rent from the underlying
lessees is not affected by this change in accounting estimate.
The decrease in interest expense of $325 for the comparable three-month periods
ended March 31, 2004 and 2003 was primarily attributable to a lower average
outstanding balance on WPC's credit facility, and a decrease in mortgage
balances. The average outstanding balance on the credit facility decreased by
approximately $16,400 for the comparable three-month periods and the interest
rate remained relatively stable. The decrease in mortgage interest for
-16-
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
the comparable three-month periods was due primarily to paying off five
mortgages during 2003. As a result of paying off the mortgages, the annual
interest expense decreased by approximately $795.
For the three-month period ended March 31, 2004, WPC recognized $336 in foreign
currency transaction gains in connection with the transfer of cash from foreign
operating subsidiaries, which own properties in France, to the parent company.
In addition, for the three-month period ended March 31, 2004, WPC recognized
unrealized foreign currency transaction gains of $113.
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 March 31, 2004, WPC has
classified six 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 $241.
Dr Pepper Bottling Company of Texas which contributes 6% of lease revenues, has
decided not to exercise its purchase option. Annual contractual rents from Dr
Pepper are $4,475.
Management
Net operating income from WPC's management operations for the three-month period
ended March 31, 2004, was $5,847 as compared with $12,724 for the comparable
three-month period ended March 31, 2003. The decrease for the comparable periods
is directly attributable to a decrease in transaction fees. This was partially
offset by an increase in asset-based fees and reimbursements and a decrease in
general and administrative expense and, to a lesser extent, a decrease in
amortization of intangibles and an increase in income from equity investments.
Total revenues earned by the management operations for the three-month periods
ended March 31, 2004 and 2003 were $17,252 and $25,793, respectively.
Transaction fees earned were $2,960 and $13,463 for the comparable periods ended
March 31, 2004 and 2003. Asset-based fees and reimbursements were $14,292 and
$12,330 for the comparable periods ended March 31, 2004 and 2003.
The increase in asset-based fees resulted from the substantial increase in the
asset base of the CPA(R) REITs. Based on assets under management of the CPA(R)
REITs as of March 31, 2004, annualized management and performance fees under the
advisory agreements are approximately $42,800. 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.
Transaction fees include fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. WPC structured $65,000 and $272,000 of acquisitions
for the three-month periods ended March 31, 2004 and 2003, 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.
The decrease in general and administrative costs for the comparable three-month
periods March 31, 2004 and 2003 was due primarily to a decrease in personnel
costs incurred in 2004. A portion of personnel costs is directly related to
CPA(R) REIT capital raising and transactions activities. The decrease in
personnel costs was directly attributable to lower transaction and capital
raising 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 and for the three-month periods ended March 31, 2004 and 2003
was $2,189 and $2,072, respectively.
The decrease in amortization expense of $462, to $1,693 for the comparable
three-month periods ended March 31, 2004 and 2003, was due to certain intangible
assets becoming fully amortized during the second quarter of 2003.
-17-
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Equity income recognized from the investments in the CPA(R) REITs was $353 and
$121 for the three-month periods ended March 31, 2004 and 2003. The increase in
income is due primarily to an increase in WPC's ownership of shares in the
CPA(R) REITs as a result of receiving restricted shares in consideration for
performance fees. 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. Based on current distribution rates WPC's
projected annual dividends from the CPA(R) REITs are $3,500.
The provision for income taxes decreased by $3,584, to $3,405 for the comparable
three-month periods ended March 31, 2004 and 2003. The decrease is due primarily
to a decrease in net operating income from management services operations for
the comparable periods. For the three-month period ended March 31, 2004,
approximately 88% of management revenues were earned by a taxable, wholly-owned
subsidiary, and income tax expense is most affected by its earnings.
FINANCIAL CONDITION:
There has been no material change in WPC's financial condition since December
31, 2003. Management believes that WPC will generate sufficient cash from
operations and, if necessary, from the proceeds of limited recourse mortgage
loans, unsecured indebtedness and the issuance of additional equity securities
to meet its short-term and long-term liquidity needs. WPC assesses its ability
to access capital on an ongoing basis.
Cash flows from operating activities and distributions received from equity
investments for the three-month period ended March 31, 2004 of $16,419 were
sufficient to fund dividends to shareholders of $15,980. In January 2004, WPC
received its annual installment of deferred acquisition fees of $5,978 in
connection with structuring transactions on behalf of CPA(R):12, CPA(R):14 and
CPA(R):15. The next installment payable in January 2005 is expected to be
approximately $8,950. The installments are subject to certain subordination
provisions.
Investing activities included using $5,098 for purchases of equity investments
and capital expenditures at existing properties. The expenditures included using
$4,092 to complete the purchase of a 22.5% interest in the eight Carrefour, S.A.
properties, which were acquired in November 2003, $284 for the renovation of the
restaurant and bar at the Livonia hotel and $524 of capital expenditures at
existing properties. In January 2004, WPC paid its annual 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 March 31,
2004 is $1,709.
In addition to paying dividends to shareholders, WPC's financing activities
included increasing its outstanding balance on its credit facility by $1,757,
paying scheduled mortgage principal installments of $2,315 and distributing $884
to minority interests. WPC raised $758 from the issuance of shares primarily
through WPC's dividend reinvestment and stock purchase plan. WPC issued its
final installment of shares pursuant to its 2000 merger agreement (500,000
shares valued at $13,734 were issued during the three-month period ended March
31, 2004 based on meeting performance criteria as of December 31, 2003). 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 March 31, 2004, approximately 52% of WPC's properties are unencumbered by
mortgage debt.
WPC has a revolving credit agreement that has financial covenants requiring WPC
to maintain a minimum equity value and to meet or exceed certain operating and
coverage ratios. The credit agreement matured in March 2004 and has been
extended on a short-term basis through June 1, 2004. Under the extension
agreement, the amount available on the line of credit was reduced by $20,000 to
$165,000. WPC is in the process of replacing the credit facility. WPC believes
that replacing the facility after the current term is likely as it is currently
in discussions with several lenders. As of March 31, 2004, WPC has $134,243 of
unused capacity under the credit facility. Because WPC has substantially paid
down the balance on its credit facility, it will not be significantly affected
by an increase in interest rates. Amounts drawn on the credit facility bear
interest at a rate indexed to the London Inter-Bank Offered Rate. As of May 1,
2004, the annual interest rate on the outstanding balance of $43,189 is
approximately 2.2750%. Based on the current outstanding balance, each increase
of 1% in the base rate would increase WPC's annual interest obligations by $432
and would not have a material effect on the results of operations.
-18-
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 of approximately $2,500 at various
properties in 2004 and early 2005. The capital expenditures will primarily be
for tenant and property improvements in order to enhance a property's cash flow
or marketability for re-leasing or sale. This includes approximately $365 to
complete the renovation of the restaurant and bar at the Livonia hotel and $850
for the expected environmental costs to prepare the Red Bank property for sale
to a third party. WPC has received a grant, which will reimburse it for the
environmental costs at Red Bank. Additionally, WPC has commenced a property
improvement plan in connection with renewing the franchise license with Holiday
Inn at the Livonia hotel. The plan costs could be as much as $3,500; however,
WPC currently estimates it will not spend more than $1,000 over the next two
years in order to comply with the plan. 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 the extent the remaining
initial lease term on any property remains in place for a number of years beyond
the balloon payment date, WPC believes that the ability to refinance balloon
payment obligations is enhanced. WPC also evaluates all its outstanding loans
for opportunities to refinance debt at lower interest rates that may occur as a
result of decreasing interest rates or improvements in the credit rating of
tenants. There are $14,881 in scheduled balloon payments on limited recourse
mortgage notes due in 2004 and $13,888 due in 2006. WPC believes it has
sufficient resources to pay off the loans in the event they are not refinanced.
In addition, 72% of WPC's outstanding mortgage debt has fixed rates of interest
so that debt service obligations will not be significantly affected by any
increases in interest rates.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
WPC has provided a guarantee of $2,000 related to a development project in Los
Angeles, California
A summary of WPC's obligations, commitments and guarantees under contractual
arrangements are as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Obligations:
Mortgage notes payable $176,640 $ 21,196 $ 7,995 $ 22,334 $ 15,025 $ 9,607 $100,483
Unsecured note payable 30,757 30,757
Deferred acquisition fees 1,709 -- 524 524 524 132 5
Commitments and Guarantees:
Development project 2,000 2,000 -- -- -- -- --
Share of minimum rents payable
under office cost-sharing
agreement 890 194 348 348 -- -- --
-------- -------- -------- -------- -------- -------- --------
$211,996 $ 54,147 $ 8,867 $ 23,206 $ 15,549 $ 9,739 $100,488
======== ======== ======== ======== ======== ======== ========
As of March 31, 2004, 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
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W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Carey Financial. The infractions alleged are described in Item 3 of WPC's Annual
Report on Form 10-K and Note 20 to the accompanying consolidated financial
statements, filed with the SEC for fiscal year 2003. There has been no change in
the status of this matter since the filing of the Annual Report.
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.
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W. P. CAREY & CO. LLC
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest, foreign
currency exchange rates and equity prices. In pursuing its business plan, the
primary risks to which WPC is exposed are interest rate risk and foreign
currency exchange risk.
The value of WPC's real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, all which may affect WPC's ability to refinance
property-level mortgage debt when balloon payments are scheduled.
$126,567 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 March 31, 2004 ranged from 2.275% to 6.44%.
The interest on the fixed rate debt as of March 31, 2004 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.
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 19,586 $ 5,790 $ 19,864 $ 12,293 $ 6,591 $ 62,443 $126,567 $128,190
Weighted average
interest rate 8.11% 7.40% 7.13% 7.14% 7.47% 7.22%
Variable rate debt $ 32,367 $ 2,205 $ 2,470 $ 2,732 $ 3,016 $ 38,040 $ 80,830 $ 80,830
Annual interest expense would increase or decrease on variable rate debt by
approximately $808 for each 1% increase or decrease in interest rates.
WPC conducts business in France. Accordingly, WPC is subject to foreign currency
exchange rate risk from the effects that exchange rate movements of foreign
currencies and this may affect our future costs and cash flows; however,
exchange rate movements to date have not had a significant effect on WPC's
financial position or results of operations. For the three-month period ended
March 31, 2004, WPC recognized $336 in foreign currency transaction gains in
connection with the transfer of cash from foreign operating subsidiaries to the
parent company. The cash received was subsequently converted into dollars. In
addition, for the three-month period ended March 31, 2004, the Company
recognized unrealized foreign currency gains of $113. The cumulative foreign
currency translation adjustment reflects a loss of $598. To date, WPC has not
entered into any foreign currency forward exchange contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2004.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
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W. P. CAREY & CO. LLC
PART II
Item 1. - LEGAL PROCEEDINGS
As reported in the Company's Annual Report on Form 10-K for fiscal year 2003,
Carey Financial Corporation ("Carey Financial"), the Company's wholly-owned
broker-dealer subsidiary, received a letter from the Securities and Exchange
Commission (the "Commission"), on or about March 4, 2004, alleging certain
infractions by Carey Financial of 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. 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. There has been no change in the
status of this matter since the filing of the Annual Report.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2004, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2004, the Company furnished a report on
Form 8-K on March 2, 2004 under Item 7, "Financial Statements, Pro Forma
Financial Information and Exhibits" and Item 9, "Regulation FD
Disclosure."
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
5/6/2004 By: /s/ John J. Park
- ------------ ---------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/6/2004 By: /s/ Claude Fernandez
- ------------ ---------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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