Back to GetFilings.com
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 JUNE 30, 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 37,453,198 Listed Shares, no par value
outstanding at August 6, 2004.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of June 30, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2004 and 2003 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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 16-23
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. - Controls and Procedures 24
PART II - Other Information
Item 1. - Legal Proceedings 26
Item 4. - Submission of Matters to a Vote of Security Holders 26
Item 6. - Exhibits and Reports on Form 8-K 26
Signatures 27
*The summarized condensed consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
- 1 -
W.P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Real estate accounted for under the operating method, net of accumulated
depreciation of $48,079 and $45,021 at June 30, 2004 and December 31, 2003 $389,633 $400,717
Net investment in direct financing leases 181,234 182,452
Operating real estate, net of accumulated depreciation of $6,416 and $5,805 at
June 30, 2004 and December 31, 2003 17,207 16,147
Real estate under construction and redevelopment - 4,679
Equity investments 93,678 82,800
Assets held for sale 16,621 13,609
Cash and cash equivalents 15,200 24,359
Marketable securities 5,475 5,208
Due from affiliates 52,417 50,917
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $28,638 and $25,262 at June
30, 2004 and December 31, 2003 35,152 38,528
Other assets, net 13,907 23,482
-------- --------
Total assets $884,131 $906,505
======== ========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $174,030 $180,193
Credit facility 16,000 29,000
Accrued interest 1,211 1,163
Dividends payable 16,393 15,987
Accounts payable and accrued expenses 16,416 16,249
Prepaid rental income and security deposit 4,126 4,267
Due to affiliates 2,235 20,444
Accrued income taxes 5,212 1,810
Deferred income taxes, net 32,985 29,532
Other liabilities 9,989 11,221
-------- --------
Total liabilities 278,597 309,866
-------- --------
Minority interest 1,133 1,852
-------- --------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 37,426,143 and 36,745,027 shares issued and
outstanding at June 30, 2004 and December 31, 2003 727,654 709,724
Dividends in excess of accumulated earnings (118,669) (112,570)
Unearned compensation (6,335) (4,863)
Accumulated other comprehensive income 1,751 2,496
-------- --------
Total members' equity 604,401 594,787
-------- --------
Total liabilities, minority interest and members' equity $884,131 $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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Management income from affiliates $ 32,535 $ 17,179 $ 49,787 $ 42,971
Rental income 10,779 10,983 21,587 22,183
Interest income from direct financing leases 5,302 5,204 10,560 10,328
Other operating income 2,638 1,243 4,479 3,957
Revenue from other business operations 2,179 428 4,112 600
-------- -------- -------- --------
53,433 35,037 90,525 80,039
-------- -------- -------- --------
Operating expenses:
Depreciation 2,717 2,553 5,427 5,134
Amortization 1,692 1,756 3,385 3,911
General and administrative 14,382 10,821 25,121 22,881
Impairment charges and loan losses 950 - 3,200 272
Property expenses 1,570 952 3,556 2,944
Operating expenses from other business operations 1,680 - 3,315 -
-------- -------- -------- --------
22,991 16,082 44,004 35,142
-------- -------- -------- --------
Income from continuing operations before other
interest income, minority interest, equity income,
gains and losses, interest expense and income taxes 30,442 18,955 46,521 44,897
Other interest income 713 647 1,393 1,206
Minority interest in income (97) (58) (165) (91)
Income from equity investments 1,295 1,154 2,631 2,072
(Loss) gain on foreign currency transactions (42) 497 407 497
Interest expense (3,370) (3,857) (6,968) (7,732)
-------- -------- -------- --------
Income from continuing operations before income
taxes 28,941 17,338 43,819 40,849
Provision for income taxes (8,732) (3,338) (12,137) (10,327)
-------- -------- -------- --------
Income from continuing operations 20,209 14,000 31,682 30,522
-------- -------- -------- --------
Discontinued operations:
(Loss) income from operations of discontinued
properties (29) 414 (410) 1,001
(Loss) gain on sale of real estate - (10) - 154
Impairment charge on properties held for sale (4,700) (1,430) (4,700) (1,430)
-------- -------- -------- --------
Loss from discontinued operations (4,729) (1,026) (5,110) (275)
-------- -------- -------- --------
Net income $ 15,480 $ 12,974 $ 26,572 $ 30,247
======== ======== ======== ========
--Continued--
- 3 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share and share amounts)
(continued)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Basic earnings per share:
Earnings from continuing operations $ .54 $ .38 $ .85 $ .84
Loss from discontinued operations (.13) (.03) (.14) (.01)
------------ ------------ ------------ ------------
Net income $ .41 $ .35 $ .71 $ .83
============ ============ ============ ============
Diluted earnings per share:
Earnings from continuing operations $ .52 $ .37 $ .82 $ .82
Loss from discontinued operations (.12) (.03) (.13) (.01)
------------ ------------ ------------ ------------
Net income $ .40 $ .34 $ .69 $ .81
============ ============ ============ ============
Weighted average shares outstanding:
Basic 37,404,485 36,519,037 37,359,638 36,440,831
============ ============ ============ ============
Diluted 38,595,391 37,758,129 38,676,398 37,471,475
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income: $15,480 $12,974 $26,572 $30,247
------- ------- ------- -------
Other comprehensive income (loss):
Change in unrealized (depreciation)
appreciation on marketable
securities (90) 1,503 267 840
Foreign currency translation
adjustment 264 210 (1,012) 705
------- ------- ------- -------
174 1,713 (745) 1,545
------- ------- ------- -------
Comprehensive income $15,654 $14,687 $25,827 $31,792
======= ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended June 30,
-------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $26,572 $30,247
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Loss from discontinued operations 5,110 275
Depreciation and amortization of intangible assets and deferred financing costs 9,199 9,473
Unrealized loss on foreign currency transactions (68) -
Minority interest in income 165 91
Straight-line rent adjustments and amortization of deferred income 596 305
Equity income in excess of distributions (328) (28)
Management income received in shares of affiliates (10,941) (8,932)
Costs paid by issuance of shares 81 106
Amortization of unearned compensation 2,154 1,480
Impairment charges and loan losses 3,200 272
Tax benefit - share incentive plans 1,589 2,385
Deferred income tax provision 3,452 3,328
Increase in structuring fees receivable (6,970) (7,149)
Deferred acquisition fees received 5,978 1,495
Net change in other operating assets and liabilities 1,778 (4,187)
------- -------
Net cash provided by continuing operations 41,567 29,161
Net cash (used in) provided by discontinued operations (611) 1,073
------- -------
Net cash provided by operating activities 40,956 30,234
------- -------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 1,695 1,513
Capital distributions from equity investments - 6,582
Purchases of equity investments (4,290) -
Proceeds from sale of property and investments - 8,958
Release of funds from escrow in connection with the sale of a property 7,185 -
Cash acquired on acquisition of subsidiary - 1,300
Additional capital expenditures (1,332) (925)
Payment of deferred acquisition fees to affiliate (524) (524)
------- -------
Net cash provided by investing activities 2,734 16,904
------- -------
Cash flows from financing activities:
Proceeds from credit facility 42,000 33,000
Prepayments of credit facility (55,000) (55,615)
Payments of mortgage principal (4,642) (4,324)
Payment of financing costs (1,185) -
Distributions to minority interests (1,101) -
Dividends paid (32,265) (31,219)
Proceeds from issuance of shares 2,238 4,455
Retirement of shares (2,543) -
------- -------
Net cash used in financing activities (52,498) (53,703)
------- -------
Effect of exchange rate changes on cash (351) 145
------- -------
Net decrease in cash and cash equivalents (9,159) (6,420)
Cash and cash equivalents, beginning of period 24,359 21,304
------- -------
Cash and cash equivalents, end of period $15,200 $14,884
======= =======
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 Funds From Operations 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. Between January 1, 2004 and August 6, 2004,
CPA(R):16-Global has issued approximately 33,138,800 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).
The financial statements included in this Form 10-Q have been adjusted to
reflect the disposition (or planned disposition) of certain properties as
discontinued operations for all periods presented (see Note 10). As a result,
certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three and
six-month periods ended June 30, 2004 and 2003 were calculated as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Income from continuing operations $ 20,209 $ 14,000 $ 31,682 $ 30,522
Loss from discontinued operations (4,729) (1,026) (5,110) (275)
------------ ------------ ------------ ------------
Net income $ 15,480 $ 12,974 $ 26,572 $ 30,247
============ ============ ============ ============
Weighted average shares - basic 37,404,485 36,519,037 37,359,638 36,440,831
Effect of dilutive securities: Stock options 1,190,906 1,239,092 1,316,760 1,030,644
------------ ------------ ------------ ------------
Weighted average shares - diluted 38,595,391 37,758,129 38,676,398 37,471,475
============ ============ ============ ============
Basic earnings per share:
Earnings from continuing operations $ .54 $ .38 $ .85 $ .84
Loss from discontinued operations (.13) (.03) (.14) (.01)
------------ ------------ ------------ ------------
Net income $ .41 $ .35 $ .71 $ .83
============ ============ ============ ============
Diluted earnings per share:
Earnings from continuing operations $ .52 $ .37 $ .82 $ .82
Loss from discontinued operations (.12) (.03) (.13) (.01)
------------ ------------ ------------ ------------
Net income $ .40 $ .34 $ .69 $ .81
============ ============ ============ ============
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
- 7 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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. For the three-month periods ended June
30, 2004 and 2003, total asset-based fees and reimbursements earned were $15,403
and $13,581, respectively. For the six-month periods ended June 30, 2004 and
2003, total asset-based fees and reimbursements earned were $29,695 and $25,911,
respectively. For both the three-month and six-month periods ended June 30,
2004, CPA(R):16-Global did not meet the "preferred return" criterion, and
therefore, the Company's recognition of performance fees of $111 has been
deferred until the preferred return criterion is met.
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 June 30, 2004 and 2003, the Company earned transaction
fees of $17,133 and $3,598, respectively. For the six-month periods ended June
30, 2004 and 2003, the Company earned transaction fees of $20,093 and $17,060,
respectively. CPA(R):16-Global has not met its preferred return and for the
three-month and six-month periods ended June 30, 2004. Deferred acquisition fees
of $2,919, relating to CPA(R):16-Global acquisitions, were not recognized, with
such recognition deferred until the preferred return criterion is met.
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 June 30, 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.
On July 2, 2004, the boards of directors of CIP(R) and CPA(R):15 announced that
they each approved a definitive agreement under which CPA(R):15 will acquire
CIP(R)'s business in a stock-for-stock merger, subject to the approval of the
shareholders of CIP(R) and CPA(R):15. Prior to the proposed merger, CIP(R) will
also sell 16 properties valued at approximately $142,000 (including the pro
rata values of properties which, for financial reporting purposes, will be
accounted for under the equity method of accounting) to the Company for
approximately $111,000 in cash and the Company's assumption of $31,000 in
limited recourse mortgage notes payable. CIP(R)'s sale of properties to the
Company is contingent on the approval of the merger. The Company expects to use
the available credit facility to finance this transaction, however cash
received from fees payable by CIP(R) and CPA(R):15 of approximately $46,000 in
connection with the proposed liquidation of CIP(R) and related activities would
also be available. The proposed purchase price of the properties is based on
an independent valuation of CIP(R)'s properties.
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. A
proposed merger of CIP(R) and CPA(R):15 is being voted upon by the shareholders
of each company at a special shareholder meeting on August 24, 2004. As of June
30, 2004, the Company's ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
--------- -----------------------
CIP(R) 1,007,676 3.35%
CPA(R):12 1,085,686 3.44%
CPA(R):14 2,086,455 3.05%
CPA(R):15 652,804 0.61%
CPA(R):16-Global 20,000 0.09%
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
- 8 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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 equity investees is summarized as follows:
June 30, 2004 December 31, 2003
------------- -----------------
Assets (primarily real estate) $4,562,926 $4,062,295
Liabilities (primarily mortgage notes payable) 2,231,198 1,976,216
---------- ----------
Partners' capital and shareholders' equity $2,331,728 $2,086,079
========== ==========
Company's share of equity investees' net assets $ 93,678 $ 82,800
========== ==========
Six Months Ended June 30,
-------------------------
2004 2003
---- ----
Revenues (primarily rental income and interest income
from direct financing leases) $180,908 $152,377
Expenses (primarily depreciation and property expenses) (76,666) (63,184)
Other interest income 3,984 3,441
Minority interest in income (7,102) (4,801)
Income from equity investments 23,007 21,288
Gain on sales of real estate and foreign currency
transactions 1,007 939
Interest expense (64,846) (54,216)
-------- --------
Income from continuing operations 60,292 55,844
(Loss) income from discontinued operations (64) 746
Gain on sale of real estate 1,754 _
-------- --------
Net income $ 61,982 $ 56,590
======== ========
Company's share of net income from equity investments $ 2,631 $ 2,072
======== ========
Note 5. Lease Revenues:
The Company's real estate operations consist of the investment in and the
leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the six-month periods ended June 30, 2004 and
2003 are as follows:
2004 2003
---- ----
Per Statements of Income:
Rental income $21,587 $22,183
Interest income from direct financing leases 10,560 10,328
Adjustment:
Share of leasing revenues applicable to minority interests (783) (631)
Share of leasing revenues from equity investments 5,995 4,090
------- -------
$37,359 $35,970
======= =======
For the six months ended June 30, 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 $ 2,155 6% $ 2,133 6%
Detroit Diesel Corporation 2,079 6 2,079 6
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 1,791 5 1,798 5
Bouygues Telecom, S.A. (b) 1,790 5 1,568 4
- 9 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
2004 % 2003 %
---- --- ---- ---
Carrefour France, SA (a) 1,684 4 - -
Federal Express Corporation (a) 1,461 4 1,447 4
America West Holdings Corp. 1,419 4 1,319 4
Orbital Sciences Corporation 1,328 4 1,328 4
Quebecor Printing, Inc. 1,326 4 1,306 3
AutoZone, Inc. 1,170 3 1,183 3
Sybron International Corporation 1,144 3 1,043 3
Checkfree Holdings Corporation Inc. (a) 1,090 3 1,064 3
Sybron Dental Specialties Inc. 885 2 807 2
Unisource Worldwide, Inc. 853 2 855 2
Information Resources, Inc. (a) 822 2 822 2
CSS Industries, Inc. 820 2 825 2
BE Aerospace, Inc. 790 2 830 2
Sprint Spectrum, L.P. 712 2 712 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 657 2 645 2
Brodart, Co. 644 2 573 2
AT&T Corporation 630 2 630 2
United States Postal Service 617 2 617 2
BellSouth Telecommunications, Inc. 612 1 612 2
Hologic, Inc. (a) 568 1 568 2
Cendant Operations, Inc. 537 1 537 1
Anthony's Manufacturing Company, Inc. 510 1 510 1
Other (c) 9,265 25 10,159 29
------- --- ------- ---
$37,359 100% $35,970 100%
======= === ======= ===
(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 6. 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:
June 30, 2004 December 31, 2003
------------- -----------------
Amortized intangible assets
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (28,638) (25,262)
-------- --------
31,177 34,553
Unamortized goodwill and indefinite-lived
intangible assets:
Trade name 3,975 3,975
Goodwill 63,607 63,607
-------- --------
$ 98,759 $102,135
-------- --------
Amortization of intangibles was $1,687 and $1,672 for the three-month periods
ended June 30, 2004 and 2003, respectively, and $3,376 and $3,343 for the
six-month periods ended June 30, 2004 and 2003, respectively.
Scheduled amortization of intangibles for each of the next five years is as
follows: $6,660 in 2005, $4,584 in 2006, $4,508 in 2007 and $2,773 in 2008 and
2009.
- 10 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 7. Impairment Charges and Loan Losses:
As a result of entering into a commitment to sell a property in Toledo, Ohio in
June 2004, the Company recognized an impairment charge for the three and
six-month periods ended June 30, 2004 on properties held for sale of $4,700, and
which is included in discontinued operations. The charge was based on the
property's sales price, less estimated costs to sell. The property was sold in
July 2004 (see Note 10).
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 six-month period ended June 30, 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.
The Company recognized impairment charges of $950 on other properties during the
three and six-month periods ended June 30, 2004.
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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income as reported $ 15,480 $ 12,974 $ 26,572 $ 30,247
Add: Stock based compensation included in net income as
reported, net of related tax effects 702 482 1,309 879
Less: Stock based compensation determined under fair
value based methods for all awards, net of related tax
effects (847) (651) (1,648) (1,429)
------------ ------------ ------------ ------------
Pro forma net income $ 15,335 $ 12,805 $ 26,233 $ 29,697
============ ============ ============ ============
Earnings per common share as reported
Basic $ .41 $ .35 $ .71 $ .83
Diluted $ .40 $ .34 $ .69 $ .81
Pro forma earnings per common share
Basic $ .41 $ .35 $ .70 $ .81
Diluted $ .40 $ .34 $ .68 $ .79
For the six-month periods ended June 30, 2004 and 2003, the changes in unearned
compensation were as follows:
2004 2003
------- -------
Beginning of period $ 4,863 $ 5,671
Awards 3,745 3,579
Forfeitures (120) (35)
Compensation expense (amortization of unearned compensation) (2,153) (1,480)
------- -------
End of period $ 6,335 $ 7,735
======= =======
For the six-month periods ended June 30, 2004 and 2003, restricted shares of
$156 and $96, respectively, were issued to directors in consideration of
services rendered.
During 2003, W.P. Carey International LLC ("WPCI"), a majority-owned subsidiary,
granted equity awards to certain of its officers, consisting of restricted stock
and options. The awards are being accounted for as a variable plan. Amortization
and changes in the fair value of the awards subsequent to the grant date are
included in the
- 11 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
determination of net income. For the six-month period ended June 30, 2004,
$1,113 has been charged as an expense, representing amortization and an increase
in fair value of the awards.
Note 9. Credit Facility:
On May 27, 2004, the Company entered into a credit facility for a $175,000 line
of credit with J.P. Morgan Chase Bank and eight other banks. A prior line of
credit of $185,000 matured in March 2004 and was extended on a short-term basis.
The line of credit, which matures in May 2007, provides the Company a one-time
right to increase the amount available under the line of credit up to $225,000.
A previous credit facility was set to expire on June 1 2004. Advances from the
line of credit bear interest at an annual rate indexed to either (i) the one,
two, three or six-month London Inter-Bank Offered Rate, 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 a rate indexed to the
Federal Funds Effective Rate. Advances are prepayable at any time. The revolving
credit agreement has financial covenants that require, among other things, the
Company to (i) maintain minimum equity value of $550,000 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 ratios. The Company is in
compliance with these covenants.
Note 10. Assets Held for Sale and 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
June 30, 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 June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Rental income $ 335 $ 787 $ 710 $ 1,644
Interest income from direct financing leases - 172 24 511
Revenues of other business operations - 825 - 1,523
Other income - 30 - 338
------------ ------------ ------------ ------------
335 1,814 734 4,016
------------ ------------ ------------ ------------
EXPENSES:
Depreciation 63 240 125 480
Property expenses 324 710 1,042 1,549
General and administrative - 1 - 2
Operating expenses of other business operations - 621 - 1,184
Provision for income taxes - - - 35
Impairment charge on properties held for sale 4,700 1,430 4,700 1,430
------------ ------------ ------------ ------------
5,087 3,002 5,867 4,680
------------ ------------ ------------ ------------
Loss before other interest income, gain on
sale and interest expense (4,752) (1,188) (5,133) (664)
Other interest income 23 217 23 328
Gain on sale of real estate - (10) - 154
Interest expense - (45) - (93)
------------ ------------ ------------ ------------
Loss from discontinued operations $ (4,729) $ (1,026) $ (5,110) $ (275)
============ ============ ============ ============
- 12 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $64 and $52 for the three-month periods ended June
30, 2004 and 2003, and $128 and $119 for the six-month periods ended June 30,
2004, and 2003, respectively.
Note 11. 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 June 30, Management Real Estate Other(1) Total Company
- --------------------------- ---------- ----------- -------- -------------
Revenues:
2004 $ 32,535 $ 18,719 $ 2,179 $ 53,433
2003 17,179 17,430 428 35,037
Operating, depreciation, amortization
and interest expenses:
2004 $ 15,111 $ 9,570 $ 1,680 $ 26,361
2003 11,791 8,148 - 19,939
Income from equity investments:
2004 $ 363 $ 932 $ - $ 1,295
2003 392 762 - 1,154
Net operating income (2)(3):
2004 $ 17,787 $ 10,794 $ 499 $ 29,080
2003 5,780 10,691 428 16,899
Six Months Ended June 30,
Revenues:
2004 $ 49,787 $ 36,626 $ 4,112 $ 90,525
2003 42,971 36,468 600 80,039
Operating, depreciation, amortization and
interest expenses:
2004 $ 26,884 $ 20,773 $ 3,315 $ 50,972
2003 24,964 17,910 - 42,874
Income from equity investments:
2004 $ 716 $ 1,915 $ - $ 2,631
2003 486 1,586 - 2,072
Net operating income(2)(3):
2004 $ 23,619 $ 19,161 $ 797 $ 43,577
2003 18,493 21,350 600 40,443
As of
Long-lived assets:
June 30, 2004 $ 82,112 $ 613,611 $ 17,207 $ 712,930
December 31, 2003 75,433 629,767 16,147 721,347
Total assets:
June 30, 2004 $ 224,976 $ 641,895 $ 17,260 $ 884,131
December 31, 2003 214,408 675,113 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 $3,375 and $3,343 for the six-month periods ended June 30,
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.
- 13 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 12. Commitments and Contingencies:
As of June 30, 2004, the Company was not involved in any material litigation.
Following a broker-dealer examination of Carey Financial Corporation ("Carey
Financial"), a wholly owned subsidiary, the broker-dealer that managed the
public offerings of the common stock of CPA(R):15, by the staff of the
Broker-Dealer Inspection Program ("Inspection Staff") of the Securities and
Exchange Commission ("Commission"), the Company was notified that Carey
Financial had received a letter on or about March 4, 2004 from the Inspection
Staff alleging certain infractions by Carey Financial and CPA(R):15 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"). Although the letter was
delivered in the context of a broker-dealer examination of Carey Financial and
stated that it was for the purpose of requiring Carey Financial to take
corrective action, it contained allegations against both Carey Financial and
CPA(R):15.
In the March 4, 2004 letter, the Inspection Staff alleged that in connection
with public offerings of shares of CPA(R):15 between September 2002 and March
2003 for which Carey Financial served as the dealer manager, CPA(R):15, Carey
Financial and its retail distributors sold certain securities without an
effective registration statement. Specifically, the Inspection Staff alleged
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 on March 19, 2003. The Inspection Staff claimed that these sales were
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 (rescission).
If CPA(R):15 is required to offer rescission, or elects voluntarily to offer
rescission, it cannot be determined how many of the affected shareholders would
decide to accept rescission. Thus, the Company cannot predict the potential
effect a rescission offer may have on the operations of CPA(R):15 or the
Company. There can be no assurance that such effect, if any, would not be
material. Further, if the Commission commenced any proceeding against CPA(R):15
or the Company, it could impose or seek different or additional penalties or
relief, including without limitation, injunctive relief and/or civil monetary
penalties.
The Inspection Staff also alleged in the March 4, 2004 letter 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 Inspection Staff
claimed that the failure to disclose the advances constituted 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 by CPA(R):15 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 or a private investor of CPA(R):15 with respect
to these allegations. 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 its or
CPA(R):15's operations. There can be no assurance such effect, if any, would not
be material.
The Inspection Staff also alleged in the March 4, 2004 letter that CPA(R):15's
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 Inspection Staff asserted
that the payment of dividends to the Phase II shareholders resulted in
significantly higher annualized rates of return than were being earned by the
Phase I shareholders, and that CPA(R):15 failed to disclose to the Phase I
shareholders the various rates of return. The Inspection Staff claimed 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 a private
investor of CPA(R):15 with respect to these allegations. It cannot be determined
at this time what remedy, if any, would be pursued by the Commission if an
action were to be brought by the Commission with respect to these allegations.
As such, the
- 14 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Company cannot predict the potential effect such an action may ultimately have
on the Company's or CPA(R):15's operations. There can be no assurance such
effect, if any action would not be material. There can be no assurance that if
the Commission brought an action against the Company the remedy imposed would
not be material.
Commencing in June 2004, the Company, Carey Financial, and CPA(R):15 have
received subpoenas from the staff of the Division of Enforcement of the
Commission ("Enforcement Staff") seeking information relating to, among other
things, the events and issues addressed in the March 4, 2004 letter. The
Company, Carey Financial, and CPA(R):15 have commenced providing information to
the Enforcement Staff in response to the subpoenas and are cooperating with the
Enforcement Staff. It cannot be determined at this time what action, if any, the
Enforcement Staff will pursue or what relief or remedies the Enforcement Staff
may seek. There can be no assurance that the effect of the investigation by the
Enforcement Staff and any action, relief, or remedies sought by the Enforcement
Staff would not be material.
Note 13. Accounting Pronouncements:
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.
In accordance with the adoption of FIN 46 in January 2004, the Company 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 June 30, 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.
In May 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
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 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 June 30, 2004.
- 15 -
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)
The following discussion and analysis of financial condition and results of
operations of W. P. Carey & Co. LLC should be read in conjunction with the
condensed consolidated financial statements and notes thereto as of June 30,
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 WPC's 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.
EXECUTIVE OVERVIEW
Business Overview
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. CIP(R) and CPA(R):15 have agreed to merge, subject to pending
shareholder approval in August 2004. WPC has two primary business operations:
real estate operations and management services operations.
How WPC Earns Revenue
Revenues from the management services operations are earned by providing
services to the CPA(R) REITs in connection with structuring and negotiating
acquisition and debt placement transactions (transaction fees) and providing
on-going management of the portfolio (asset-based management and performance
fees). Asset-based management and performance fees for the CPA(R) REITs are
determined based on real estate assets under management. As funds available to
the CPA REITs are invested in properties, the asset base for which WPC earns
revenue increases. WPC may elect to collect performance fee revenue in cash or
shares of the CPA REITs at WPC's option. 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 are subject to
various uncertainties including competition for net lease transactions, the
requirement that each acquisition meet suitability standards and due diligence
requirements including approval of each purchase of real estate by the
Investment Committee of the Board of Directors and the ability to raise capital
on behalf of the CPA(R) REITs.
Revenues from the real estate operations are earned from leasing real estate.
WPC acquires and owns commercial and industrial properties that are then leased
to companies domestically and internationally, primarily on a net lease basis.
Revenue from this business segment is subject to fluctuation because of lease
expirations, lease terminations, the timing of new lease transactions and sales
of property.
How WPC Evaluates Results of Operations
Management evaluates the results of WPC with a primary focus on increasing and
enhancing the value and quality of the assets under management of its management
services operation and seeking to increase value in its real estate operations
through focusing its efforts on underperforming assets through re-leasing
efforts, including negotiation of lease renewals, or selectively selling such
assets. The ability to increase assets under management by structuring
acquisitions on behalf of the CPA(R) REITs is affected by the CPA(R) REITs
ability to raise capital. WPC is currently managing a "best efforts" public
offering of CPA(R):16-Global. Management's evaluation of operating results
includes its ability to generate necessary cash flow in order to increase its
distribution rate to its shareholders. As a result,
- 16 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
management's assessment of operating results gives less emphasis to the effect
of unrealized gains and losses, which may cause fluctuations in net income for
comparable periods but has no impact on cash flow and to other noncash charges
such as depreciation and impairment charges. In evaluating cash flow from
operations, management includes equity distributions that are included in
investing activities to the extent that the distributions in excess of equity
income are the result of noncash charges such as depreciation and amortization.
Management does not consider unrealized gains and losses from foreign currency
when evaluating its ability to fund dividends. Management's evaluation of WPC's
potential for generating cash flow is based on long-term assessments of both its
real estate portfolio and its assets under management.
For the six months ended June 30, 2004, cash flow generated from operations and
equity investments were sufficient to fund dividends paid and meet other
obligations including paying scheduled mortgage principal payments and making
distributions to minority interests which hold ownership interests in several
WPC properties.
Current Developments and Trends
As general economic conditions continue to improve, inflation and interest rates
are expected to continue to rise as well. In addition, competition for both real
estate properties and for investors' money continues to increase. These trends
generally present challenges to the real estate leasing market. Management feels
that its objective of maintaining a diverse portfolio of properties with
long-term leases and long-term, fixed rate debt obligations provides investors
protection from these trends.
WPC's objective is to increase shareholder value and earnings through prudent
management of both its real estate assets and the real estate assets of the
CPA(R) REITs, 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. To that end,
Management is seeking to continue to invest in the international commercial real
estate market as a means of diversifying its portfolio. If a proposed merger of
CIP(R) and CPA(R):15 is approved by their shareholders, WPC will acquire
$142,000 of real estate assets from CIP(R) in the third quarter. While more
complex and generally requiring a longer lead-time to complete, international
transactions currently provide the benefits of more favorable interest rates and
greater flexibility to leverage the underlying property.
Current developments include:
During the quarter ended June 30, 2004, WPC structured approximately $494,000 in
investments on behalf of the CPA(R) REITs, including a $312,000 lease
transaction involving 78 retail self-storage and truck rental facilities, which
operate under the U-Haul brand name. The U-Haul properties were acquired on
behalf of CPA(R):14, CPA(R):15 and CPA(R):16-Global. Assets under management
increased by approximately $730,000 to $4,700,000 as a result of acquisitions of
real estate and increases in the appraised value of CPA(R) REIT properties,
pursuant to their annual independent valuations. Through June 30, 2004,
CPA(R):16 Global raised $222,000 pursuant to its "best efforts" public offering
and raised in excess of $100,000 during July 2004.
On May 27, 2004, WPC entered into a new $175,000 credit facility to replace the
previous facility that was scheduled to expire on June 1, 2004. The new credit
facility, which matures in May 2007, provides WPC a one-time right to increase
the amount available under the credit facility up to $225,000.
In June 2004, the Board of Directors of WPC approved and increased the second
quarter dividend to $.438 per share payable on July 15, 2004 to shareholders of
record as of June 30, 2004.
In June 2004, WPC entered into an agreement with a third party to sell its
property located in Toledo, Ohio. In connection with this transaction, WPC
recognized an impairment charge of $4,700, which is based on the property's
sales price, less selling costs. Results of operations for this property are
classified as an asset held for sale within "Discontinued Operations."
On July 2, 2004, the boards of directors of CIP(R) and CPA(R):15 announced that
they each approved a definitive agreement under which CPA(R):15 will acquire
CIP(R)'s business in a stock-for-stock merger, subject to the approval of the
shareholders of CIP(R) and CPA(R):15. Prior to the proposed merger, CIP(R) will
also sell 16 properties valued at
- 17 -
'
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
approximately $142,000 (including the pro rata values of properties which, for
financial reporting purposes, will be accounted for under the equity method of
accounting) to WPC for approximately $111,000 in cash and WPC's assumption of
$31,000 in limited recourse mortgage notes payable. CIP(R)'s sale of properties
to WPC is contingent on the approval of the merger. WPC expects to use the
available credit facility to finance this transaction; however cash received
from fees payable by CIP(R) and CPA(R):15 of approximately $46,000 in connection
with the proposed liquidation of CIP(R) and related activities would also be
available. The proposed purchase price of the properties is based on an
independent valuation of CIP(R)'s properties.
RESULTS OF OPERATIONS:
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 are as follows:
Real Estate Operations
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
Lease revenues $ 16,081 $ 16,187 $ (106) $ 32,147 $ 32,511 $ (364)
Other operating income 2,638 1,243 1,395 4,479 3,957 522
-------- -------- -------- -------- -------- --------
Total revenue 18,719 17,430 1,289 36,626 36,468 158
-------- -------- -------- -------- -------- --------
Depreciation and amortization 2,591 2,532 59 5,185 5,496 (311)
General and administrative 1,090 807 283 1,899 1,467 432
Impairment charges and loan losses 950 - 950 3,200 272 2,928
Property expenses 1,570 952 618 3,556 2,944 612
Interest expense 3,369 3,857 (488) 6,933 7,731 (798)
-------- -------- -------- -------- -------- --------
Operating, depreciation
and interest expenses 9,570 8,148 1,422 20,773 17,910 2,863
-------- -------- -------- ------- ------- --------
9,149 9,282 (133) 15,853 18,558 (2,705)
Other interest income 713 647 66 1,393 1,206 187
Income from equity investments 932 762 170 1,915 1,586 329
-------- -------- -------- -------- -------- --------
Net operating income 10,794 10,691 103 19,161 21,350 (2,189)
Other Income/Expenses:
Minority interest in income (119) (58) (61) (210) (91) (119)
(Loss) gain on foreign currency
transactions (42) 497 (539) 407 497 (90)
Provision for income taxes (324) (670) 346 (723) (1,586) 863
-------- -------- -------- -------- -------- --------
Income from continuing
operations $ 10,309 $ 10,460 $ (151) $ 18,635 $ 20,170 $ (1,535)
======== ======== ======== ======== ======== ========
Lease Revenues - For the comparable three and six-month periods ended June 30,
2004, lease revenues (rental income and interest income from direct financing
leases) decreased by $106 and $364, respectively. The decrease is primarily a
result of the consolidation of Livho, Inc. operations in connection with the
adoption of FIN 46 (see Note 13 of the accompanying condensed consolidated
financial statements) and lease terminations/expirations; partially offset by
new leases entered into during 2003, scheduled rent increases at several
properties and the effect of increases
- 18 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
in average foreign currency exchange rates. Prior to the consolidation of
Livho's operations, Livho contributed $900 during the six-months ended June 30,
2003 to lease revenues. This decrease was partially offset by $240 from new
leases at the Pantin property in France and $349 from the increase in average
foreign currency exchange rates for the comparable periods.
Excluding the impact of the Livho consolidation, lease revenues increased by
$344 and $536 for the three and six-month periods ended June 30, 2004 as
compared to the prior year's comparable periods.
Other Operating Income - Other operating income generally consists of lease
termination payments and other non-rent related revenues from real estate
operations including, but not limited to, settlements of claims against former
lessees. WPC receives settlements in the ordinary course of business; however,
the timing and amount of such settlements cannot always be estimated. For the
comparable quarters ended June 30, 2004 and 2003, other operating income
increased $1,395 primarily due to the receipt of $2,144 in bankruptcy claims
from former lessees in 2004 as compared to $830 in 2003.
For the comparable six-month periods ended June 30, 2004 and 2003, other
operating income increased $522 primarily due to the same factors as described
above. WPC received bankruptcy claim distributions from former lessees of $3,718
in 2004 as compared to $3,082 in 2003.
Depreciation and Amortization - For the comparable quarters ended June 30, 2004
and 2003, depreciation and amortization expense did not change significantly.
For the comparable six-month periods ended June 30, 2004 and 2003, depreciation
and amortization expense decreased $311 primarily due to certain intangible
assets becoming fully amortized in 2003.
General and Administrative Expenses - For the comparable three and six-month
periods ended June 30, 2004 and 2003, general and administrative expenses
increased $283 and $432, respectively. The increases are primarily due to
increases in fees for accounting and auditing services related to SEC compliance
matters, including the Sarbanes-Oxley Act.
Impairment Charges and Loan Losses - For the quarter ended June 30, 2004, WPC
recorded impairment charges of $950 related to the writedown of two properties
to their estimated fair values.
For the comparable six-month periods ended June 30, 2004 and 2003, impairment
charges and loan losses increased $2,928 primarily due to the write-off in 2004
of a $2,250 note receivable in connection with the sale of property in Minnesota
in 2003.
Property Expenses - For the comparable three and six-month periods ended June
30, 2004 and 2003, property expenses increased $618 and $612, respectively,
primarily due to increases in carrying costs on several vacant or partially
vacant properties. The increase for the comparable six-month periods ended June
30, 2004 and 2003, was partially offset by $272 in costs incurred in the first
quarter of 2003, stemming from the expiration of WPC's lease with The Gap, Inc.
in January 2003.
While WPC considers single-tenant net leasing to be its primary real estate
operation, several net leases have expired and, as a result, the number of
properties which are multi-tenant, vacant or partially vacant has increased. WPC
is aggressively remarketing these properties or looking for alternatives,
including re-leasing the vacant or partially vacant properties on a multi-tenant
basis.
Interest Expense - For the comparable three and six-month periods ended June 30,
2004 and 2003, interest expense decreased $488 and $798, respectively, primarily
due to lower average outstanding balances on WPC's credit facility and mortgage
notes payable during 2004. Mortgages on five properties were paid off during
2003 resulting in an annual savings of $795.
Income From Equity Investments - For the comparable three and six-month periods
ended June 30, 2004 and 2003, income from equity investments increased by $170
and $329, respectively, primarily due to the acquisition of a 22.5%
- 19 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
interest in the eight Carrefour, S.A. properties in France in November 2003.
The Carrefour investment contributed equity income of $172 and $307 for the
three and six-month periods ended June 30, 2004.
Income from Continuing Operations - For the comparable quarters ended June 30,
2004 and 2003, income from continuing operations decreased slightly to $10,309
from $10,460. The decrease is primarily due to impairment charges of $950 during
the current quarter and increased property carrying costs on vacant properties
partially offset by the receipt of bankruptcy claims from former lessees and
reductions in interest expense as described above.
For the comparable six-month periods ended June 30, 2004 and 2003, income from
continuing operations decreased to $18,635 from $20,170 primarily due to the
same factors as described above. Impairment charges totaled $3,200 for the
six-month period ended June 30, 2004.
Management Services Operations
For the Three Months Ended June 30, For the Six Months Ended June 30,
------------------------------------- -----------------------------------
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
Management income from affiliates $ 32,535 $ 17,179 $ 15,356 $ 49,787 $ 42,971 $ 6,816
Depreciation and amortization 1,818 1,777 41 3,627 3,549 78
General and administrative 13,292 10,014 3,278 23,222 21,414 1,808
Interest expense 1 - 1 35 1 34
-------- -------- -------- -------- -------- --------
Operating, depreciation and
interest expenses 15,111 11,791 3,320 26,884 24,964 1,920
-------- -------- -------- -------- -------- --------
17,424 5,388 12,036 22,903 18,007 4,896
Income from equity investments 363 392 (29) 716 486 230
-------- -------- -------- -------- -------- --------
Net operating income 17,787 5,780 12,007 23,619 18,493 5,126
Minority interest in loss 22 - 22 45 - 45
Provision for income taxes (8,408) (2,668) (5,740) (11,414) (8,741) (2,673)
-------- -------- -------- -------- -------- --------
Net income $ 9,401 $ 3,112 $ 6,289 $ 12,250 $ 9,752 $ 2,498
======== ======== ======== ======== ======== ========
Management Income from Affiliates - For the comparable quarters ended June 30,
2004 and 2003, management income from affiliates increased $15,356 primarily due
to increases in transaction fees of $13,535 and asset-based management and
performance fees of $1,822. Transaction fees include fees from structuring
acquisitions and financing on behalf of the CPA(R) REITs. WPC structured
$429,000 of acquisitions for the quarter ended June 30, 2004, of which $312,000
was in connection with the U-Haul transaction, as compared to $59,000 in the
comparable prior year quarter.
For the comparable six-month periods ended June 30, 2004 and 2003, management
income from affiliates increased $6,816 primarily due to increases in
transaction fees of $3,033 and asset-based management and performance fees of
$3,784. WPC structured $494,000 of acquisitions for the six-month period ended
June 30, 2004 as compared to $332,000 for the comparable prior year six-month
period.
The increase in asset-based fees resulted from an approximate 24% increase in
the asset base of the CPA(R) REITs since June 30, 2003. Based on assets under
management of the CPA(R) REITs as of June 30, 2004, annualized management and
performance fees under the advisory agreements are approximately $47,098. As the
real estate asset
- 20 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
bases of the CPA(R) REITs continue to increase, management and performance fees
are projected to continue to increase.
Acquisition activity is subject to fluctuations. WPC is facing increased
competition for the acquisition of commercial and industrial 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.
A portion of the CPA(R) REIT transaction and management fees are based on each
CPA(R) REIT meeting specific performance criteria and is earned only if the
criteria are achieved. The performance criterion for CPA(R):16-Global has not
yet been satisfied as of June 30, 2004, resulting in $2,919 in transaction fees
and $111 in performance fees not being recognized by WPC for the three and
six-month periods ended June 30, 2004. The performance criterion for
CPA(R):16-Global is a cumulative preferred return of 6%. As of June 30, 2004,
the cumulative distribution rate for CPA(R):16-Global is approximately 4.5%.
Based on management's current assessment, CPA(R):16-Global is expected to meet
the cumulative preferred return by 2007, at which time, all cumulative
unrecognized fees will be recognized by WPC. WPC cannot collect any fees which
are subject to preferred return criteria until after such criteria are met.
General and Administrative Expenses - For the comparable quarters ended June 30,
2004 and 2003, general and administrative expenses increased $3,278 primarily
due to an increase in personnel costs of $3,056. The increase in personnel costs
was associated with higher transaction volume during the comparable periods. A
significant portion of personnel costs is directly related to CPA(R) REIT
capital raising and transactions activities. WPC structured approximately
$370,000 more in transactions for the three-month period ended June 30, 2004
when compared with the three-month period ended June 30, 2003.
For the comparable six-month periods ended June 30, 2004 and 2003, general and
administrative expenses increased $1,808 primarily due to an increase in
personnel costs of $1,620. The increase in personnel costs was primarily
attributable to higher transaction volume during the comparable periods
partially offset by a decrease in capital raising activities. WPC structured
approximately $162,000 more in transactions for the six-month period ended June
30, 2004 compared with the six-month period ended June 30, 2003. For the
comparable six-month periods ended June 30, 2004 and 2003, there was a decrease
in fund raising volume of approximately $110,000.
Provision for Income Taxes - For the comparable three and six-month periods
ended June 30, 2004 and 2003, the provision for income taxes increased $5,740
and $2,673, respectively, primarily due an increase in net operating income from
management services operations for the comparable periods. For the three and
six-month periods ended June 30, 2004, approximately 94% and 91%, respectively,
of management revenues were earned by a taxable, wholly-owned subsidiary.
Net Income - For the comparable quarters ended June 30, 2004 and 2003, net
income increased to $9,401 from $3,112. For the comparable six-month periods
ended June 30, 2004 and 2003, net income increased to $12,250 from $9,752. The
increase for the comparable three and six-month periods is primarily related to
an increase in management income from affiliates partially offset by increases
in general and administrative expenses and the income tax provision. Such
increases are generally attributable to higher transaction volume as described
above.
FINANCIAL CONDITION:
Uses of Cash During the Period
There has been no material change in WPC's financial condition since December
31, 2003. Cash and cash equivalents totaled $15,200 as of June 30, 2004, a
decrease of $9,159 from the December 31, 2003 balance. Management believes WPC
has sufficient cash balances to meet its working capital needs. WPC's use of
cash during the period is described below.
- 21 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
Operating Activities - Cash flows from operating activities and distributions
received from equity investments for the six-month period ended June 30, 2004 of
$42,651 were sufficient to fund dividends to shareholders of $32,265. During
2004, WPC received fees of $18,358 in connection with structuring transactions
on behalf of the CPA(R) REIT's, including its annual installment of deferred
acquisition fees of $5,978 received in January. The next installment payable in
January 2005 is expected to be approximately $8,950. The installments are
subject to certain subordination provisions. WPC received fees of $11,052 during
the first six months of 2004, from providing asset-based management services to
the CPA(R) REIT's. WPC's real estate operations provided cash flows (contractual
lease revenues, net of property-level debt service) of approximately $21,341.
Investing Activities - WPC's investing activities are generally comprised of
real estate purchases and capitalized property related costs. During the period,
WPC used $5,622 for purchases of equity investments and capital expenditures at
existing properties. The expenditures included using $4,092 to fulfill
obligations related to the purchase of its 22.5% interest in the eight
Carrefour, S.A. properties in France, and $1,332 of capital expenditures at
several existing properties. In June 2004, WPC received $7,185 from the release
of an escrow account in connection with a property sale in 2003. 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 June 30, 2004 is $1,709. WPC expects to use cash
from operations to fund the remaining obligation.
Financing Activities - In addition to paying dividends to shareholders, WPC's
financing activities included decreasing its outstanding balance on its credit
facility by $13,000, making scheduled mortgage principal installments of $4,642,
paying $1,185 in financing costs in connection with the new credit facility and
distributing $1,101 to minority partners. WPC raised $2,238 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 six-month period ended
June 30, 2004 based on meeting performance criteria as of December 31, 2003).
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. 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.
Cash Resources
As of June 30, 2004, WPC has $15,200 in cash and cash equivalents, which can be
used for working capital needs and other commitments and may be used for future
real estate purchases. WPC entered into a new credit facility during the period,
which is also available to meet working capital needs and other commitments (see
below for details on the credit facility). In addition, debt may be incurred on
unleveraged properties with a carrying value of $325,077 as of June 30, 2004
and any proceeds may be used to finance future real estate purchases.
June 30, 2004 December 31, 2003
------------- -----------------
Maximum Outstanding Maximum Outstanding
Available Balance Available Balance
--------- ----------- --------- -----------
Credit Facility $225,000 $16,000 $225,000 $29,000
In May 2004, WPC entered into a new credit facility, which in effect renewed and
extended its original revolving line of credit for three years through May 2007,
on substantially the same terms. The previously existing credit agreement was
set to expire on June 1, 2004. The new credit facility provides for borrowings
of up to $175,000, with a one-time right to increase the maximum available to up
to $225,000. The new credit facility has financial covenants requiring
- 22 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
WPC to maintain a minimum equity value and to meet or exceed certain operating
and coverage ratios. WPC is in compliance with these covenants. Amounts drawn on
the credit facility bear interest at a rate indexed to the London Inter-Bank
Offered Rate (see Note 9 of the accompanying condensed consolidated footnotes).
Because WPC has substantially paid down the balance on its credit facility, it
will not be significantly affected by an increase in interest rates. As of
August 1, 2004, the annual interest rate on the outstanding balance of $27,000
is approximately 2.475%. Based on the current outstanding balance, each increase
of 1% in the base rate would increase WPC's annual interest obligations by $270
and would not have a material effect on the results of operations.
Cash Requirements
During the next twelve months, cash requirements will include paying dividends
to shareholders, scheduled mortgage principal payments, making distributions to
minority partners as well as other normal recurring operating expenses. In
addition, there are $14,881 in scheduled balloon payments on limited recourse
mortgage loans due during the remainder of 2004. WPC may also seek to use its
cash to purchase new properties to further diversify its portfolio and maintain
cash balances sufficient to meet working capital needs. WPC may issue additional
shares in connection with purchases of real estate when it is consistent with
the objectives of the seller. If the proposed merger of CIP(R) and CPA(R):15, is
approved by their shareholders, then WPC will purchase interests in 16
properties from CIP(R) for $111,000 cash and the assumption of $31,000 in
limited recourse mortgage notes payable. WPC expects to use the new credit
facility to fund this transaction and to use cash generated from operations to
fund scheduled mortgage principal payments.
WPC may incur capital expenditures of up to approximately $2,000 at various
properties during the remainder of 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 $775 for the expected environmental costs to prepare the Red Bank
property for sale to a third party. WPC has received a grant from an agency of
the State of Ohio, 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. 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.
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 as of June 30,2004 are as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable $174,030 $18,957 $7,978 $22,315 $15,004 $9,584 $100,192
Unsecured note payable 16,000 - - - 16,000 - -
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 819 129 345 345 - - -
-------- ------- ------ ------- ------- ------ --------
$194,558 $21,086 $8,847 $23,184 $31,528 $9,716 $100,197
======== ======= ====== ======= ======= ====== ========
- 23 -
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.
WPC's long-term debt of $124,866 bears interest at fixed rates, and therefore
the fair value of these instruments is affected by changes in the market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the variable rate debt as of June 30, 2004 ranged from 2.23% to 6.44%.
The interest on the fixed rate debt as of June 30, 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 $17,885 $5,790 $19,864 $12,293 $6,591 $62,443 $124,866 $124,316
Weighted average
interest rate 8.17% 7.40% 7.13% 7.14% 7.47% 7.22%
Variable rate debt $ 1,072 $2,188 $ 2,451 $18,711 $2,993 $37,749 $ 65,164 $ 65,164
Annual interest expense would increase or decrease on variable rate debt by
approximately $651 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 and six-month periods
ended June 30, 2004, WPC recognized $3 and $339, respectively, in foreign
currency transaction gains in connection with the transfer of cash from foreign
operating subsidiaries to the parent company, compared with $497 for the three
and six-month periods ended June 30, 2003. The cash received was subsequently
converted into dollars. In addition, for the three and six-month periods ended
June 30, 2004, WPC recognized an unrealized foreign currency loss of $45 and a
gain of $68, respectively. The cumulative foreign currency translation
adjustment reflects a loss of $333, which is included in accumulated other
comprehensive income in the accompanying condensed consolidated financial
statements. To date, WPC has not entered into any foreign currency forward
exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
June 30, 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
- 24 -
W. P. CAREY & CO. LLC
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.
- 25 -
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. In June 2004, the Company and
Carey Financial received subpoenas from the staff of Division of Enforcement of
the Commission and the Company has commenced providing information in response
to the subpoenas.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 10, 2004, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a three-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No
- ---------------- ------------------- ----------------- ----------------
Gordon F. Dugan 30,591,839 30,360,907 230,932
Ralph F. Verni 30,591,839 30,344,686 247,153
Reginald Winssinger 30,591,839 30,326,901 264,938
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2004, the Company furnished a report on
Form 8-K on April 14, 2004 under Item 7, "Financial Statements and
Exhibits" and Item 9, "Regulation FD Disclosure."
During the quarter ended June 30, 2004, the Company furnished a report on
Form 8-K on May 20, 2004 under Item 9, "Regulation FD Disclosure."
During the quarter ended June 30, 2004, the Company furnished a report on
Form 8-K on June 7, 2004 under Item 5, "Other Items."
- 26 -
W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
8/6/2004 By: /s/ John J. Park
---------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
8/6/2004 By: /s/ Claude Fernandez
---------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
- 27 -