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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 SEPTEMBER 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 37,525,031 Listed Shares, no par value
outstanding at November 2, 2004.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Statements*
Condensed Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2004 and 2003 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 5-6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-26
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. - Controls and Procedures 27
PART II - Other Information
Item 1. - Legal Proceedings 28
Item 4. - Submission of Matters to a Vote of Security Holders 28
Item 6. - Exhibits 28
Signatures 29
*The summarized condensed consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
financial statements have been included.
- 1 -
W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
September 30, 2004 December 31, 2003
(Unaudited) (Note)
------------------ -----------------
ASSETS:
Real estate accounted for under the operating method, net of accumulated
depreciation of $50,558 and $45,021 at September 30, 2004 and December 31, 2003 $ 479,110 $ 400,717
Net investment in direct financing leases 195,764 182,452
Operating real estate, net of accumulated depreciation of $6,723 and $5,805 at
September 30, 2004 and December 31, 2003 9,400 16,147
Real estate under construction and redevelopment - 4,679
Equity investments 104,320 82,800
Assets held for sale 11,308 13,609
Cash and cash equivalents 23,154 24,359
Marketable securities 4,378 5,208
Due from affiliates 62,142 50,917
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $33,160 and $25,262 at
September 30, 2004 and December 31, 2003 52,951 38,528
Other assets, net 10,086 23,482
------------------ -----------------
Total assets $ 1,016,220 $ 906,505
================== =================
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 187,757 $ 180,193
Credit facility 87,000 29,000
Accrued interest 1,453 1,163
Dividends payable 16,465 15,987
Accounts payable and accrued expenses 19,413 16,249
Prepaid rental income and security deposit 3,718 4,267
Due to affiliates 2,205 20,444
Accrued income taxes 22,711 1,810
Deferred income taxes, net 38,466 29,532
Other liabilities 10,040 11,221
------------------ -----------------
Total liabilities 389,228 309,866
------------------ -----------------
Minority interest 1,220 1,852
------------------ -----------------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 37,505,452 and 36,745,027 shares issued and outstanding at
September 30, 2004 and December 31, 2003 731,097 709,724
Dividends in excess of accumulated earnings (99,935) (112,570)
Unearned compensation (6,180) (4,863)
Accumulated other comprehensive income 790 2,496
------------------ -----------------
Total members' equity 625,772 594,787
------------------ -----------------
Total liabilities, minority interest and members' equity $ 1,016,220 $ 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 September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues:
Management income from affiliates $ 39,368 $ 26,197 $ 89,156 $ 69,168
Incentive and subordinated disposition fees 42,095 - 42,095 -
Rental income 11,658 11,003 33,245 33,184
Interest income from direct financing leases 5,334 5,192 15,876 15,483
Other operating income 868 594 5,347 4,552
Revenue from other business operations (52) 166 4,060 766
-------------- -------------- -------------- --------------
99,271 43,152 189,779 123,153
-------------- -------------- -------------- --------------
Operating expenses:
Depreciation 2,799 2,647 8,223 7,780
Amortization 4,486 1,693 7,871 5,603
General and administrative 14,563 12,102 39,684 34,983
Impairment charges and loan losses 6,500 - 9,300 272
Property expenses 1,006 1,445 4,477 4,389
Operating expenses from other business operations 1,446 - 4,761 -
-------------- -------------- -------------- --------------
30,800 17,887 74,316 53,027
-------------- -------------- -------------- --------------
Income from continuing operations before other
interest income, minority interest, equity income,
gains and losses, interest expense and income taxes 68,471 25,265 115,463 70,126
Other interest income 828 654 2,221 1,861
Minority interest in (income) loss (1,175) 22 (1,340) (69)
Income from equity investments 1,254 1,099 3,885 3,171
Gain on foreign currency transactions 163 97 569 593
Interest expense (3,664) (3,646) (10,632) (11,378)
-------------- -------------- -------------- --------------
Income from continuing operations before income taxes 65,877 23,491 110,166 64,304
Provision for income taxes (32,610) (8,717) (44,746) (19,045)
-------------- -------------- -------------- --------------
Income from continuing operations 33,267 14,774 65,420 45,259
-------------- -------------- -------------- --------------
Discontinued operations:
Income from operations of discontinued properties 2,875 280 2,395 1,318
Gain on sale of real estate 12 393 12 547
Impairment charge on properties held for sale and
extinguishment of debt (1,000) (1,400) (6,100) (2,830)
-------------- -------------- -------------- --------------
Income (loss) from discontinued operations 1,887 (727) (3,693) (965)
-------------- -------------- -------------- --------------
Net income $ 35,154 $ 14,047 $ 61,727 $ 44,294
============== ============== ============== ==============
--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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------- ---------------- -------------- -------------
Basic earnings per share:
Earnings from continuing operations $ .89 $ .40 $ 1.75 $ 1.24
Income (loss) from discontinued
operations .05 (.02) (.10) (.03)
------------- ---------------- -------------- -------------
Net income $ .94 $ .38 $ 1.65 $ 1.21
============= ================ ============== =============
Diluted earnings per share:
Earnings from continuing operations $ .85 $ .39 $ 1.69 $ 1.20
Income (loss) from discontinued
operations .05 (.02) (.10) (.03)
------------- ---------------- -------------- -------------
Net income $ .90 $ .37 $ 1.59 $ 1.17
============= ================ ============== =============
Weighted average shares outstanding:
Basic 37,472,823 36,650,893 37,398,280 36,511,621
============= ================ ============== =============
Diluted 38,929,696 38,239,815 38,761,745 37,728,358
============= ================ ============== =============
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------- ---------------- -------------- -------------
Net income: $ 35,154 $ 14,047 $ 61,727 $ 44,294
------------- ---------------- -------------- -------------
Other comprehensive (loss) income:
Change in unrealized (depreciation)
appreciation on marketable
securities (1,090) 1,549 (823) 2,389
Foreign currency translation
adjustment 129 (103) (883) 602
------------- ---------------- -------------- -------------
(961) 1,446 (1,706) 2,991
------------- ---------------- -------------- -------------
Comprehensive income $ 34,193 $ 15,493 $ 60,021 $ 47,285
============= ================ ============== =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended September 30,
--------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income $ 61,727 $ 44,294
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations, including gain on sale 3,693 965
Depreciation and amortization of intangible assets and deferred financing costs 13,864 13,938
Unrealized gain on foreign currency transactions (144) (133)
Minority interest in income 1,340 69
Straight-line rent adjustments and amortization of deferred income 944 569
Equity income in excess of distributions (457) (13)
Management income received in shares of affiliates (15,243) (13,669)
Costs paid by issuance of shares 124 160
Amortization of unearned compensation 2,947 2,662
Impairment charges and loan losses 12,098 272
Tax expense - share incentive plans 2,906 2,470
Deferred income tax provision 8,933 8,522
Increase in accrued taxes payable 20,901 4,456
Increase in structuring fees receivable (14,780) (11,365)
Deferred acquisition fees received 5,978 1,495
Net change in other operating assets and liabilities 1,134 (12,116)
-------------- --------------
Net cash provided by continuing operations 105,965 42,576
Net cash provided by discontinued operations 1,995 1,433
-------------- --------------
Net cash provided by operating activities 107,960 44,009
-------------- --------------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 5,852 2,177
Contributions to equity investments - (1,496)
Capital distributions from equity investments - 6,582
Purchases of real estate and equity investments (115,522) -
Proceeds from sale of property and investments 4,430 20,422
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 (1,498) (1,666)
Payment of deferred acquisition fees to affiliate (524) (524)
-------------- --------------
Net cash (used in) provided by investing activities (100,077) 26,795
-------------- --------------
Cash flows from financing activities:
Proceeds from credit facility 135,000 54,000
Prepayments of credit facility (77,000) (75,000)
Payments of mortgage principal (6,882) (6,448)
Prepayments of mortgage principal and note payable (9,962) (7,131)
Payment of financing costs (1,262) -
Distributions to minority interests (1,101) -
Dividends paid (48,614) (47,060)
Proceeds from issuance of shares 3,662 6,463
Retirement of shares (2,543) -
-------------- --------------
Net cash used in financing activities (8,702) (75,176)
-------------- --------------
Effect of exchange rate changes on cash (386) 115
-------------- --------------
Net decrease in cash and cash equivalents (1,205) (4,257)
Cash and cash equivalents, beginning of period 24,359 21,304
-------------- --------------
Cash and cash equivalents, end of period $ 23,154 $ 17,047
============== ==============
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. In connection with the acquisition of properties, the Company
assumed mortgage notes payable with a fair value of $27,756 (cost -
$27,003).
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 adjustments) 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 November 1, 2004,
CPA(R):16-Global has issued approximately 39,713,091 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 public 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 Note 4).
Dividends declared per share for the three and nine-month periods ended
September 30, 2004 were $.44 and $1.314, respectively.
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 9). As a result,
certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings (Loss) Per Share:
Basic and diluted earnings (loss) per common share for the Company for the three
and nine-month periods ended September 30, 2004 and 2003 were calculated as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Income from continuing operations $ 33,267 $ 14,774 $ 65,420 $ 45,259
Income (loss) from discontinued operations 1,887 (727) (3,693) (965)
--------------- --------------- --------------- ---------------
Net income $ 35,154 $ 14,047 $ 61,727 $ 44,294
=============== =============== =============== ===============
Weighted average shares - basic 37,472,823 36,650,893 37,398,280 36,511,621
Effect of dilutive securities: Stock options 1,456,873 1,588,922 1,363,465 1,216,737
--------------- --------------- --------------- ---------------
Weighted average shares - diluted 38,929,696 38,239,815 38,761,745 37,728,358
=============== =============== =============== ===============
Basic earnings per share:
Earnings from continuing operations $ .89 $ .40 $ 1.75 $ 1.24
Income (loss) from discontinued operations .05 (.02) (.10) (.03)
--------------- --------------- --------------- ---------------
Net income $ .94 $ .38 $ 1.65 $ 1.21
=============== =============== =============== ===============
Diluted earnings per share:
Earnings from continuing operations $ .85 $ .39 $ 1.69 $ 1.20
Income (loss) from discontinued operations .05 (.02) (.10) (.03)
--------------- --------------- --------------- ---------------
Net income $ .90 $ .37 $ 1.59 $ 1.17
=============== =============== =============== ===============
Note 3. Transactions with Related Parties:
The Company earns fees as the advisor ("Advisor") to the CPA(R) REITs: Corporate
Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates
14 Incorporated ("CPA(R):14"), Corporate Property Associates 15 Incorporated
("CPA(R):15"), CPA(R):16-Global and through August 31, 2004, Carey Institutional
Properties Incorporated ("CIP(R)") (collectively, the "CPA(R) REITs"). Under the
advisory agreements ("Advisory
- 7 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Agreements") with the CPA(R) REITs, the Company performs various services,
including but not limited to the day-to-day management of the CPA(R) REITs and
transaction-related services. The Company earns an asset management fee of 1/2
of 1% per annum of average invested assets, as defined in the Advisory
Agreements, for each CPA(R) REIT and, based upon specific performance criteria
for each REIT, may be entitled to receive performance fees, calculated on the
same basis as the asset management fee, and is reimbursed for certain costs,
primarily the cost of personnel. For the three-month periods ended September 30,
2004 and 2003, total asset-based fees and reimbursements earned were $16,051 and
$15,465, respectively. For the nine-month periods ended September 30, 2004 and
2003, total asset-based fees and reimbursements earned were $45,746 and $41,376,
respectively. For both the three-month and nine-month periods ended September
30, 2004, CPA(R):16-Global did not meet the preferred return criterion, as
defined in the Advisory Agreements, and therefore, the Company's recognition of
performance fees of $315 and $426, respectively, 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 September 30, 2004 and 2003, the Company earned
transaction fees of $11,975 and $10,732, respectively. For the nine-month
periods ended September 30, 2004 and 2003, the Company earned transaction fees
of $32,068 and $27,792, respectively. CPA(R):16-Global has not met its preferred
return and for the nine-month period ended September 30, 2004, cumulative
deferred acquisition fees of $6,748, were not recognized, and recognition is
deferred until CPA(R):16-Global meets the preferred return criterion.
In July 2004, the boards of directors of CIP(R) and CPA(R):15 each approved a
definitive agreement under which CPA(R):15 would acquire CIP(R)'s business in a
stock-for-stock merger (the "Merger"). The Merger was approved by the
shareholders of CIP(R) and CPA(R):15 in August 2004, and completed on September
1, 2004. In connection with providing a liquidity event for CIP(R) shareholders,
CIP(R) paid the Company incentive fees of $23,681 and disposition fees of
$22,679. Disposition fees relating to the interests in the properties acquired
by the Company of $4,265 were not earned and have been applied, for financial
reporting purposes, as a reduction in the cost basis of such interests. The
Company also recognized transaction fees of $11,493 in connection with the
Merger.
Prior to the Merger, the Company acquired interests in 17 properties from CIP(R)
with a fair value of $142,161 for approximately $115,158 in cash and the
assumption of approximately $27,003 in limited recourse mortgage notes payable
(the "Acquisition"). The purchase price of the properties was based on a third
party valuation of each of CIP(R)'s properties. The properties are primarily
single tenant net-leased properties, with remaining lease terms ranging from 19
months to over ten years. Seven of the properties are encumbered with limited
recourse mortgage financing with fixed rates of interest ranging from 7.5% to
10% and maturity dates ranging from December 2007 to June 2012. The results of
operations for the three and nine-month periods ended September 30, 2004 include
CIP(R) for the month of September 2004.
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.
In connection with the Merger, the Company elected to receive 1,098,367 shares
of common stock in CPA(R):15, in exchange for its CIP(R) shares. As of September
30, 2004, the Company's ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
--------- -----------------------
CPA(R):12 1,085,684 3.43%
CPA(R):14 2,086,455 3.04%
CPA(R):15 1,751,170 1.40%
CPA(R):16-Global 20,000 .05%
- 8 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In connection with the Acquisition, the Company increased its 18.54% interest in
a limited partnership, which leases property to Titan Corporation, to 100%. The
Company accounted for its 18.54% interest as an equity investment, and as a
result of acquiring the controlling ownership interest as of September 1, 2004,
the Company consolidates this interest. The Company also acquired CIP(R)'s 50%
noncontrolling interest in a general partnership which leases property to Sicor,
Inc., and is accounting for this interest under the equity method of accounting.
The Company also owns noncontrolling interests in (i) two 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 equity investees is summarized as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
Assets (primarily real estate) $ 4,880,908 $ 4,082,129
Liabilities (primarily mortgage notes payable) (2,429,423) (1,983,663)
------------------ -----------------
Partners' capital and shareholders' equity $ 2,451,485 $ 2,098,466
================== =================
Company's share of equity investees' net assets $ 104,320 $ 82,800
================== =================
Nine Months Ended September 30,
----------------------------------
2004 2003
--------------- ---------------
Revenues (primarily rental income and interest income
from direct financing leases) $ 248,969 $ 237,157
Expenses (primarily depreciation and property expenses) (104,050) (132,175)
Other interest income 5,195 4,397
Minority interest in income (8,996) (7,392)
Income from equity investments 27,479 32,017
Gain on sales of real estate and foreign currency
transactions 1,566 1,841
Interest expense (90,045) (83,927)
--------------- ---------------
Income from continuing operations 80,118 51,918
(Loss) income from discontinued operations (356) 703
Impairment charge on real estate (150) (1,000)
Gain on sale of real estate 1,754 258
--------------- ---------------
Net income $ 81,366 $ 51,879
=============== ===============
Company's share of net income from equity investments $ 3,885 $ 3,171
=============== ===============
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 lease revenues for the nine-month periods ended September 30, 2004
and 2003 are as follows:
2004 2003
------------ ------------
Per Statements of Income:
Rental income $ 33,245 $ 33,184
Interest income from direct financing leases 15,876 15,483
Adjustment:
Share of leasing revenues applicable to minority interests (1,184) (954)
Share of leasing revenues from equity investments 8,947 6,391
------------ ------------
$ 56,884 $ 54,104
============ ============
- 9 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
For the nine months ended September 30, 2004 and 2003, the Company earned 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 $ 3,245 6% $ 3,212 6%
Detroit Diesel Corporation 3,118 6 3,118 6
Gibson Greetings, Inc., a wholly-owned subsidiary of
American Greetings, Inc. 2,685 5 2,696 5
Bouygues Telecom, S.A. (b) 2,673 5 2,350 4
Carrefour France, SA (a) (e) 2,523 4 - -
Federal Express Corporation (a) 2,195 4 2,172 4
America West Holdings Corp. 2,128 4 2,029 4
Orbital Sciences Corporation 1,991 4 1,991 4
Quebecor Printing, Inc. 1,990 3 1,969 4
AutoZone, Inc. 1,724 3 1,782 3
Sybron International Corporation 1,715 3 1,563 3
Checkfree Holdings Corporation Inc. (a) 1,635 3 1,596 3
Sybron Dental Specialties Inc. 1,328 2 1,210 3
Unisource Worldwide, Inc. 1,279 2 1,283 2
Information Resources, Inc. (a) 1,233 2 1,233 2
CSS Industries, Inc. 1,229 2 1,236 2
BE Aerospace, Inc. 1,185 2 1,225 2
Sprint Spectrum, L.P. 1,068 2 1,068 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary
of Lowe's Companies Inc. 980 2 985 2
Brodart, Co. 960 2 906 1
AT&T Corporation 945 2 945 2
United States Postal Service 925 2 925 2
BellSouth Telecommunications, Inc. 918 1 918 2
Hologic, Inc. (a) 852 1 852 1
Cendant Operations, Inc. 813 1 807 1
Swat-Fame, Inc. 784 1 654 1
Anthony's Manufacturing Company, Inc. 764 1 764 1
Other (c) (d) 13,999 25 14,615 28
-------- --- -------- ---
$ 56,884 100% $ 54,104 100%
======== === ======== ===
(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.
(d) Includes the CIP(R) real estate interests acquired on September 1, 2004.
(e) The Company acquired its interest in this property in November 2003.
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.
In connection with the Acquisition, the Company recorded above-market rent,
in-place lease and tenant relationship intangibles of $22,321. Included in other
liabilities allocated to the purchase cost of the Acquisition is a below-market
rent intangible of $2,009. These intangibles are being amortized over periods
ranging from 19 months to 27 1/2 years. Amortization of below-market and
above-market rent intangibles are recorded as an adjustment to revenue.
- 10 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Goodwill and intangible assets are summarized as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
Amortized intangible assets:
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (32,942) (25,262)
------------------ -----------------
26,873 34,553
------------------ -----------------
Lease intangibles
In-place lease 13,630 -
Tenant relationship 4,863 -
Above-market rent 3,828 -
Less: accumulated amortization (218) -
------------------ -----------------
22,103 -
------------------ -----------------
Unamortized goodwill and indefinite-lived intangible assets:
Trade name 3,975 3,975
Goodwill 63,607 63,607
------------------ -----------------
$ 116,558 $ 102,135
================== =================
Below-market rent $ (2,009) $ -
Less: accumulated amortization 7 -
------------------ -----------------
$ (2,002) $ -
================== =================
Amortization of intangibles was $4,516 and $1,688 for the three-month periods
ended September 30, 2004 and 2003, respectively, and $7,892 and $5,031 for the
nine-month periods ended September 30, 2004 and 2003, respectively.
Scheduled amortization of intangibles for each of the next five years is as
follows: $9,648 in 2005, $9,648 in 2006, $9,572 in 2007, $7,837 in 2008 and
$7,837 in 2009.
Note 7. Impairment Charges and Loan Losses:
The Company owns a property that is leased to Livho, Inc. ("Livho"), which
operates the property as a Holiday Inn hotel in Livonia, Michigan. The Company
has provided Livho with significant financial support over the past several
years in order to support the hotel's operations. The Livonia hotel's financial
performance has continued to perform below projections even after certain
additional investments in the property were placed in service. The Company
performed an impairment valuation of the Livonia property in connection with the
preparation of the Company's third quarter report on Form 10-Q. This valuation
was performed in the third quarter in order to allow time for certain changes in
hotel operations to take effect and gauge their impact on cash flow for the
first two quarters of 2004. Based on the results of this valuation, the Company
has determined that the value of the Livonia property has undergone an other
than temporary decline in value, and accordingly, has recognized an impairment
charge of $7,500 for the three and nine-month periods ended September 30, 2004.
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 nine-month period ended September 30,
2004, installment payments due under the notes were not paid, however, the
Company received a $1,000 settlement payment from the former lessee and has
determined that the remaining amounts will not be recovered. The remaining
balance of $1,250 has been written off as a loan loss.
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 nine-month period
ended September 30, 2004 on properties held for sale of $4,700, 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
for $4,175.
- 11 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
The Company recognized impairment charges on other properties held for sale of
$1,000 and $1,400, respectively, during the three and nine-month periods ended
September 30, 2004, which are included in discontinued operations, and an
impairment charge of $550 on real estate held for use for the nine-month period
ended September 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported $ 35,154 $ 14,047 $ 61,727 $ 44,294
Add: Stock based compensation included in net income as
reported, net of related tax effects 486 466 1,805 1,346
Less: Stock based compensation determined under fair
value based methods for all awards, net of related tax
effects (620) (629) (2,277) (2,059)
---------- ---------- ---------- ----------
Pro forma net income $ 35,020 $ 13,884 $ 61,255 $ 43,581
========== ========== ========== ==========
Earnings per common share as reported
Basic $ .94 $ .38 $ 1.65 $ 1.21
Diluted $ .90 $ .37 $ 1.59 $ 1.17
Pro forma earnings per common share
Basic $ .93 $ .38 $ 1.64 $ 1.19
Diluted $ .90 $ .36 $ 1.58 $ 1.16
For the nine-month periods ended September 30, 2004 and 2003, the changes in
unearned compensation were as follows:
2004 2003
---------- ----------
Beginning of period $ 4,863 $ 5,671
Awards 4,398 3,626
Forfeitures (134) (92)
Compensation expense (amortization of unearned compensation) (2,947) (2,662)
---------- ----------
End of period $ 6,180 $ 6,543
========== ==========
For the nine-month periods ended September 30, 2004 and 2003, restricted shares
of $221 and $128, 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 determination of net income. For the three and nine-month
periods ended September 30, 2004, $644 and $1,757, respectively, have been
charged as an expense, representing amortization and an increase in fair value
of the awards.
Note 9. 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."
- 12 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In July 2004, the Company sold its Leeds, Alabama and Toledo, Ohio properties
for $4,625. The Company previously recognized an impairment charge on properties
held for sale of $690 in 2003 to write down the Leeds property to the estimated
net sales proceeds from the anticipated sale. The $4,700 impairment charge
recorded in 2004 on the Toledo property is described in Note 7.
The operations of six properties which are classified as held for sale as of
September 30, 2004 and the operations of eleven 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 September 30, Nine Months Ended September 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
REVENUES:
Rental income $ 238 $ 733 $ 948 $ 2,378
Interest income from direct financing leases - 74 42 622
Revenues of other business operations - 170 - 1,694
Other income 2,693 28 2,716 366
--------------- --------------- --------------- ---------------
2,931 1,005 3,706 5,060
--------------- --------------- --------------- ---------------
EXPENSES:
Depreciation 1 141 128 621
Property expenses 35 483 1,168 2,034
General and administrative - 1 - 3
Operating expenses of other business operations 20 162 15 1,346
Provision for income taxes - - - 35
Charge on extinguishment of debt - 290 - 290
Impairment charge on properties held for sale 1,000 1,110 6,100 2,540
--------------- --------------- --------------- ---------------
1,056 2,187 7,411 6,869
--------------- --------------- --------------- ---------------
Income (loss) before other interest income,
gain on sale and interest expense 1,875 (1,182) (3,705) (1,809)
Other interest income - 103 - 431
Gain on sale of real estate 12 393 12 547
Interest expense - (41) - (134)
--------------- --------------- --------------- ---------------
Income (loss) from discontinued operations $ 1,887 $ (727) $ (3,693) $ (965)
=============== =============== =============== ===============
In October 2004, the Company sold two properties located in Kenbridge, Virginia
and Panama City, Florida for $775. The properties have been classified as held
for sale as of September 30, 2003 in the accompanying condensed consolidated
financial statements.
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $127 and $68 for the three-month periods ended
September 30, 2004 and 2003, and $255 and $200 for the nine-month periods ended
September 30, 2004, and 2003, respectively.
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 September 30, Management Real Estate Other(1) Total Company
- ----------------------------------------- --------------- --------------- --------------- ---------------
Revenues:
2004 $ 81,463 $ 17,860 $ (52) $ 99,271
2003 26,197 16,789 166 43,152
Operating, depreciation, amortization and
interest expenses:
2004 $ 17,741 $ 15,277 $ 1,446 $ 34,464
- 13 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
2003 13,459 8,074 - 21,533
Income from equity investments:
2004 $ 403 $ 851 $ - $ 1,254
2003 324 775 - 1,099
Net operating income (loss)(2):
2004 $ 64,125 $ 4,262 $ (1,498) $ 66,889
2003 13,062 10,144 166 23,372
Nine Months Ended September 30, Management Real Estate Other(1) Total Company
- ----------------------------------------- --------------- --------------- --------------- ---------------
Revenues:
2004 $ 131,251 $ 54,468 $ 4,060 $ 189,779
2003 69,168 53,219 766 123,153
Operating, depreciation, amortization and
interest expenses:
2004 $ 44,625 $ 35,562 $ 4,761 $ 84,948
2003 38,423 25,982 - 64,405
Income from equity investments:
2004 $ 1,119 $ 2,766 $ - $ 3,885
2003 810 2,361 - 3,171
Net operating income (loss)(2):
2004 $ 87,745 $ 23,893 $ (701) $ 110,937
2003 31,555 31,459 766 63,780
As of
Long-lived assets:
September 30, 2004 $ 79,038 $ 749,132 $ 9,400 $ 837,570
December 31, 2003 75,433 629,767 16,147 721,347
Total assets:
September 30, 2004 $ 235,563 $ 770,920 $ 9,737 $ 1,016,220
December 31, 2003 214,408 675,113 16,984 906,505
(1) Primarily consists of the Company's other business operations, which
includes its hotel operations and the Los Angeles United School District
build-to-suit development project. The results of operations for the three
and nine-month periods ended September 30, 2004 include a loss in
development income related to the build-to-suit project of $1,767 and
$1,336, respectively.
(2) 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. Pro Forma Financial Information:
The following consolidated pro forma financial information has been presented as
if acquisition of interests in 17 properties from CIP(R) by the Company had
occurred on January 1, 2004 and 2003 for the three and nine-month periods ended
September 30, 2004 and 2003, respectively. In Management's opinion, all
adjustments necessary to reflect the Acquisition and the related issuance of
common stock of the Company have been made. The pro forma financial information
is not necessarily indicative of what the actual results would have been, nor
does it purport to represent the results of operations for future periods.
Three Months Ended September 30,
---------------------------------
2004 2003
--------------- ---------------
Pro forma total revenues $ 101,002 $ 45,820
Pro forma net income 35,129 14,424
Pro forma earnings per share:
Basic $ .94 $ .39
Diluted $ .90 $ .38
- 14 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Nine Months Ended September 30,
---------------------------------
2004 2003
--------------- ---------------
Pro forma total revenues $ 196,837 $ 131,158
Pro forma net income 62,216 45,190
Pro forma earnings per share:
Basic $ 1.66 $ 1.24
Diluted $ 1.60 $ 1.20
Note 12. Commitments and Contingencies:
As of September 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
- 15 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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 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 provided 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 December 2003, the FASB issued Interpretation No. 46(R), "Consolidation of
Variable Interest Entities" ("FIN 46(R)"), 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"). FIN 46(R) 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(R) requires
additional disclosures.
In accordance with the adoption of FIN 46(R) 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 September 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 (see Note 7).
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 September 30,
2004.
- 16 -
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 September
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 ("Advisor") to four publicly-owned real estate
investment trusts:, Corporate Property Associates 12 Incorporated ("CPA(R):12"),
Corporate Property Associates 14 Incorporated ("CPA(R):14"), Corporate Property
Associates 15 Incorporated ("CPA(R):15"), Corporate Property Associates
16-Global Incorporated ("CPA(R):16-Global") and through August 31, 2004, Carey
Institutional Properties Incorporated ("CIP(R)") (collectively, the "CPA(R)
REITs"). CPA(R):16-Global was formed in 2003. WPC has two primary business
operations: real estate operations and management services operations.
In August 2004, the shareholders of CIP(R) and CPA(R):15, approved a merger
agreement whereby CPA(R):15 acquired CIP(R)'s business operations on September
1, 2004 in a merger ("Merger"). CIP(R) shareholders had the option of exchanging
CIP(R) shares for CPA(R):15 shares or redeeming CIP(R) shares for cash (see
Current Developments and Trends below).
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. WPC may also earn
incentive and disposition fees in connection with providing liquidity
alternatives to CPA(R) REIT shareholders. 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
- 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)
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 CPA(R):16-Global's
"best efforts" public offering. CPA(R):16-Global has filed a registration
statement which is not yet effective, for a second offering. Management's
evaluation of operating results includes WPC's ability to generate necessary
cash flow in order to increase its distribution rate to its shareholders. As a
result, 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 on 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.
Current Developments and Trends
If 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, through the expansion of its investment management business and
opportunistic investments. 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 the portfolios of its managed CPA(R) REITs. 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.
For the nine months ended September 30, 2004, cash flow generated from
operations and equity investments were sufficient to fund dividends paid and
meet other obligations including partial funding for the purchase of interests
in 17 properties from CIP(R) prior to the Merger, paying scheduled mortgage
principal payments and making distributions to minority interests which hold
ownership interests in several WPC properties.
Current developments include:
Prior to the Merger, WPC acquired interests in 17 properties ("Acquisition"),
from CIP(R) for $142,161 (including the pro rata values of properties which, for
financial reporting purposes, will be accounted for under the equity method of
accounting). The purchase price is comprised of $115,158 in cash and WPC's
assumption of $27,003 in limited recourse mortgage notes payable. The purchase
price was based on a third party valuation of CIP(R)'s properties, and in total
represented approximately 20% of the total appraised value of the CIP(R)
portfolio prior to the Acquisition. The properties are primarily single tenant
net-leased properties totaling approximately 2.4 million square feet, with
remaining lease terms ranging from nineteen months to over ten years. Seven of
the properties are encumbered with limited recourse mortgage financing at fixed
rates of interest ranging from 7.5% to 10% and maturity dates ranging from
December 2007 to June 2012. Annual cash flow from the interests acquired in the
Acquisition is projected to be $8,885.
During the quarter ended September 30, 2004, WPC structured approximately
$335,000 in investments on behalf of the CPA(R) REITs. Through September 30,
2004, CPA(R):16-Global has raised $397,000 pursuant to its "best efforts" public
offering.
In connection with the Merger and related activities, WPC exchanged its shares
of CIP(R) for 1,098,367 shares of CPA(R):15, at an exchange ratio of 1.09 shares
of CPA(R):15 for each CIP(R) share redeemed. In providing a liquidity event for
CIP(R) shareholders, WPC earned incentive fees of $23,681 and disposition fees
of $18,414. Additionally,
- 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)
disposition fees received of $4,265 were not earned for financial reporting
purposes but applied as a reduction in the cost basis of the properties
acquired. WPC also earned transaction fees of $11,493 on CPA(R):15's acquisition
of $571,000 of real estate interests from CIP(R) and were based on the cash
component related to the merger.
WPC has filed, on behalf of CPA(R):16-Global, a registration statement with the
United States Securities and Exchange Commission for a second offering of shares
of common stock which has not yet been declared effective. The second offering
will be for a maximum of 80,000,000 shares at a price of $10 per share and will
register up to 40,00,000 shares for the Distribution Reinvestment and Share
Purchase Plan.
In September 2004, the Board of Directors of WPC approved and increased the
third quarter dividend to $.44 per share payable on October 15, 2004 to
shareholders of record as of September 30, 2004.
WPC owns a property in Livonia, Michigan, which it operates as a Holiday Inn
hotel. The Livonia hotel's financial performance has deteriorated steadily since
the year 2000. WPC has determined that the value of the Livonia property has
undergone an other than temporary decline in value, and accordingly has
recognized an impairment charge of $7,500 (see Impairment Charges and Loan
Losses below).
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 September 30, For the Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
2004 2003 Change 2004 2003 Change
----------- ----------- ----------- ----------- ----------- -----------
Lease revenues $ 16,992 $ 16,195 $ 797 $ 49,121 $ 48,667 $ 454
Other operating income 868 594 274 5,347 4,552 795
----------- ----------- ----------- ----------- ----------- -----------
Total revenue 17,860 16,789 1,071 54,468 53,219 1,249
----------- ----------- ----------- ----------- ----------- -----------
Depreciation and amortization 2,846 2,559 287 8,028 8,052 (24)
General and administrative 1,261 424 837 3,160 1,891 1,269
Impairment charges and loan losses 6,500 - 6,500 9,300 272 9,028
Property expenses 1,006 1,445 (439) 4,477 4,389 88
Interest expense 3,664 3,646 18 10,597 11,378 (781)
----------- ----------- ----------- ----------- ----------- -----------
Operating, depreciation and
interest expenses 15,277 8,074 7,203 35,562 25,982 9,580
----------- ----------- ----------- ----------- ----------- -----------
2,583 8,715 (6,132) 18,906 27,237 (8,331)
Other interest income 828 654 174 2,221 1,861 360
Income from equity investments 851 775 76 2,766 2,361 405
----------- ----------- ----------- ----------- ----------- -----------
Net operating income 4,262 10,144 (5,882) 23,893 31,459 (7,566)
Other Income/Expenses:
Minority interest in (income) loss (108) 9 (117) (318) (82) (236)
Gain on foreign currency transactions 163 97 66 569 593 (24)
Provision for income taxes (867) (563) (304) (1,589) (2,149) 560
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations $ 3,450 $ 9,687 $ (6,237) $ 22,555 $ 29,821 $ (7,266)
=========== =========== =========== =========== =========== ===========
Lease Revenues - For the comparable quarters ended September 30, 2004 and 2003,
lease revenues (rental income and interest income from direct financing leases)
increased by $797. The increase is primarily due to revenue of $932 from
properties acquired in the Acquisition, the positive effect of increases in
average foreign currency exchange rates, which contributed $158 and revenue of
$125 from new leases. These increases were partially offset by the consolidation
of Livho, Inc.'s operations in connection with the adoption of FIN 46(R) (see
Note 13 of the accompanying condensed consolidated financial statements). Prior
to the consolidation of Livho's operations, Livho contributed lease revenue of
$450 during the third quarter of 2003.
For the comparable nine-month periods ended September 30, 2004 and 2003, lease
revenues increased by $454 primarily due to the same factors as described above.
Increases of $932 from the Acquisition, $475 from the positive effect of
increases in average foreign currency exchange rates and $375 from new leases
were partially offset by a reduction of $1,350 related to Livho.
- 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)
Excluding the impact of the Livho consolidation, lease revenues increased by
$1,247 and $1,804 for the three and nine-month periods ended September 30, 2004,
respectively, as compared to the prior year's comparable periods.
Annual contractual lease revenues from the properties acquired in the
Acquisition approximate $11,322.
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 September 30, 2004 and 2003, other operating income
increased $274 primarily due an increase in operating expense reimbursements
received from tenants of $671 in 2004 as compared to $507 in 2003.
For the comparable nine-month periods ended September 30, 2004 and 2003, other
operating income increased $795 primarily due to the same factors as described
above. WPC received bankruptcy claim distributions and other settlement income
from former lessees of $3,779 and $3,082 in 2004 and 2003, respectively.
Depreciation and Amortization - For the comparable quarters ended September 30,
2004 and 2003, depreciation and amortization expense increased by $287. The
increase is primarily a result of depreciation and amortization expense
recognized on the properties acquired in the Acquisition which represented $253
for the three-month period ended September 30, 2004. Annual depreciation and
amortization expense from the Acquired properties will approximate $6,087.
For the comparable nine-month periods ended September 30, 2004 and 2003,
depreciation and amortization expense did not change significantly.
General and Administrative Expenses - For the comparable three and nine-month
periods ended September 30, 2004 and 2003, general and administrative expenses
increased $837 and $1,269, respectively. The increases are primarily due to
increases in fees for accounting, auditing and consulting services related to
SEC compliance matters, including the Sarbanes-Oxley Act, and internal audit
fees, as well as an increase in legal fees related to SEC matters.
Impairment Charges and Loan Losses - For the quarter ended September 30, 2004,
WPC recorded impairment charges of $7,500 related to the writedown of WPC's
Livonia property, partially offset by the adjustment of $1,000 on a previous
write-off of a note receivable of $2,250 recorded during the first quarter of
2004 in connection with receiving a final payment on the note in the third
quarter. WPC performed an impairment valuation of the Livonia property in
connection with the preparation of WPC's third quarter report on Form 10-Q. This
valuation was performed in the third quarter in order to allow time for certain
changes in hotel operations to take effect and gauge their impact on cash flow
for the first two quarters of 2004.
For the comparable nine-month periods ended September 30, 2004 and 2003,
impairment charges and loan losses increased $9,028 primarily due to the same
factors as described above, as well as an additional impairment charge of $550
related to the writedown of a property to its estimated fair value in 2004.
During 2003, WPC recognized impairment charges of $272.
Property Expenses - For the comparable three-month periods ended September 30,
2004 and 2003, property expenses decreased $439, primarily due to an increase in
the allowance for bad debt of $450 in 2003 related to WPC's Livonia property. As
described above, the Livonia property's financial performance had deteriorated,
and Livho, Inc. was
- 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)
unable to keep current on its monthly rent payments of $150. In addition, there
were increases in carrying costs on several vacant or partially vacant
properties.
For the comparable nine-month periods ended September 30, 2004 and 2003,
property expenses were stable.
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 evaluating alternatives,
including, but not limited to, re-leasing the vacant or partially vacant
properties on a multi-tenant basis. In October 2004, WPC sold two vacant
properties located in Leeds, Alabama and Kenbridge, Virginia for $600 and $175,
respectively.
Interest Expense - For the comparable three-month periods ended September 30,
2004 and 2003, interest expense did not change significantly because a decrease
in mortgage interest was offset by an increase in interest on WPC's credit
facility. The decrease in mortgage interest was primarily due to paying off
mortgages on two properties in 2004 and five properties in 2003. This decrease
was partially offset by the refinancing of the Pantin, France property in the
fourth quarter of 2003 and an increase in interest on mortgages assumed in the
Acquisition. The assumed mortgage contributed $155 of interest expense for the
three and nine-month periods ended September 30, 2004. Interest on WPC's credit
facility increased due to an increase in its average outstanding balance.
Interest expense decreased $781 for the comparable nine-month periods ended
September 30, 2004 and 2003, primarily due to lower outstanding balances on
WPC's mortgage notes payable during 2004, primarily as a result of the factors
described above. Interest on WPC's credit facility remained relatively stable
for the comparable periods.
Annual debt service from paying off mortgages is approximately $3,020. Annual
debt service on mortgages assumed in the Acquisition is approximately $3,148.
Income From Equity Investments - For the comparable three and nine-month periods
ended September 30, 2004 and 2003, income from equity investments increased by
$76 and $405, respectively, primarily due to the acquisition of a 22.5% interest
in the eight Carrefour, S.A. properties in France in November 2003. The
Carrefour investment contributed equity income of $123 and $430 for the three
and nine-month periods ended September 30, 2004.
In connection with the Acquisition, WPC acquired CIP(R)'s 50% interest in a
general partnership. WPC will record a loss related to this investment for
financial reporting purposes because of recurring non-cash charges. WPC's share
of annual cash flow (contractual lease revenues, net of property-level debt
service) from the partnership interest is projected to be $712.
Equity investments will also be affected by the acquisition of the remaining
81.46% interest in a limited partnership (one of the interests acquired in the
Acquisition), in which it previously owned an 18.54% interest as a limited
partner. Prior to this acquisition, WPC accounted for its 18.54% interest as an
equity investment. As a result of the Acquisition, as of September 1, 2004, WPC
now consolidates the accounts of its 100% ownership in the partnership. Equity
income from the 18.54% interest prior to the Acquisition was approximately $450.
Income from Continuing Operations - For the comparable quarters ended September
30, 2004 and 2003, income from continuing operations decreased to $3,450 from
$9,687. The decrease is primarily due to impairment charges of $6,500 during the
current quarter and an increase in general and administrative expense partially
offset by an increase in lease revenues and a decrease in property expenses, as
described above.
For the comparable nine-month periods ended September 30, 2004 and 2003, income
from continuing operations decreased to $22,555 from $29,821 primarily due to
impairment charges totaling $9,300 for the nine-month period ended September 30,
2004, and an increase in general and administrative expense, partially offset by
increases in lease revenues, other operating income, and income from equity
investments and a decrease in interest expense.
- 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)
Management Services Operations
For the Three Months Ended September 30, For the Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
2004 2003 Change 2004 2003 Change
----------- ----------- ----------- ----------- ----------- -----------
Management income from affiliates $ 39,368 $ 26,197 $ 13,171 $ 89,156 $ 69,168 $ 19,988
Incentive and subordinated
disposition fees 42,095 - 42,095 42,095 - 42,095
----------- ----------- ----------- ----------- ----------- -----------
81,463 26,197 55,266 131,251 69,168 62,083
----------- ----------- ----------- ----------- ----------- -----------
Depreciation and amortization 4,439 1,781 2,658 8,066 5,331 2,735
General and administrative 13,302 11,678 1,624 36,524 33,092 3,432
Interest expense - - - 35 - 35
----------- ----------- ----------- ----------- ----------- -----------
Operating, depreciation and
interest expenses 17,741 13,459 4,282 44,625 38,423 6,202
----------- ----------- ----------- ----------- ----------- -----------
63,722 12,738 50,984 86,626 30,745 55,881
Income from equity investments 403 324 79 1,119 810 309
----------- ----------- ----------- ----------- ----------- -----------
Net operating income 64,125 13,062 51,063 87,745 31,555 56,190
Minority interest in (income) loss (1,067) 13 (1,080) (1,022) 13 (1,035)
Provision for income taxes (31,743) (8,154) (23,589) (43,157) (16,896) (26,261)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 31,315 $ 4,921 $ 26,394 $ 43,566 $ 14,672 $ 28,894
=========== =========== =========== =========== =========== ===========
Management Income from Affiliates - For the comparable quarters ended September
30, 2004 and 2003, management income from affiliates increased $13,171 due to
increases in transaction fees of $12,585 and asset-based management and
performance fees of $586.
For the comparable nine-month periods ended September 30, 2004 and 2003,
management income from affiliates increased $19,988 due to an increase in
transaction fees of $15,618, and an increase in asset-based management and
performance fees of $4,370. The increase in transaction fees for the three and
nine-month periods ended September 30, 2004 and 2003 includes transaction fees
of $11,493 earned by WPC in connection with the Merger. Transaction fees also
included fees from structuring acquisitions and financing on behalf of the
CPA(R) REITs. WPC structured $335,000 of acquisitions for the quarter ended
September 30, 2004 as compared with $211,000 in the comparable prior year
quarter, and structured $829,000 of acquisitions for the nine-month period ended
September 30, 2004 as compared with $332,000 for the comparable prior year
nine-month period. The increase in asset-based fees resulted from an approximate
31% increase in the asset base of the CPA(R) REITs since September 30, 2003
(including the asset base of the interests in properties acquired by WPC in the
Acquisition). There will be no effect on asset-based fees related to the CIP(R)
properties involved in the Acquisition. Annual asset-based fees related to the
interests in properties acquired by WPC prior to the Acquisition, were
approximately $1,422, and WPC will no longer receive these asset-based fees.
Based on assets under management of the CPA(R) REITs as of September 30, 2004,
annualized management and performance fees under the advisory agreements are
approximately $48,723. As the real estate asset 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
- 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)
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 September 30, 2004, resulting in $6,748 in transaction
fees and $426 in performance fees not being recognized by WPC for the nine-month
period ended September 30, 2004. The performance criterion for CPA(R):16-Global
is a cumulative preferred return of 6%. As of September 30, 2004, the cumulative
distribution rate for CPA(R):16-Global is approximately 4.6%.
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. There is no assurance that the
preferred return will be achieved as projected. WPC cannot collect any fees
which are subject to preferred return criteria until after such criteria are
met.
Incentive and subordinated disposition fees - In connection with the Merger, WPC
earned fees from CIP(R), in addition to the asset based fees and structuring
fees mentioned above, as follows: incentive fees of $23,681 and subordinated
disposition fees of $18,414. Incentive and disposition fees are generally earned
in connection with events which provide liquidity or alternatives to CPA(R) REIT
shareholders. While WPC anticipates that such events will occur again, no
liquidity events are currently being planned and the timing of such events
cannot be predicted with any certainty.
Depreciation and Amortization - For the comparable three and nine-month periods
ended September 30, 2004 and 2003, depreciation and amortization expense
increased by $2,658 and $2,735, respectively. The increase is primarily due to
accelerated amortization of certain intangible assets relating to the management
contract with CIP(R) of $2,798.
General and Administrative Expenses - For the comparable quarters ended
September 30, 2004 and 2003, general and administrative expenses increased
$1,624 primarily due to an increase in personnel costs of $1,064 and increased
costs of $342 for legal and accounting services. The increase in personnel costs
was primarily associated with higher transaction volume, partially offset by a
decease in fundraising activity during the comparable quarters. A significant
portion of personnel costs is directly related to CPA(R) REIT capital raising
and transactions activities. WPC structured approximately $124,000 more in
transactions for the three-month period ended September 30, 2004 when compared
with the three-month period ended September 30, 2003, and there was a decrease
in fundraising volume of approximately $35,000.
For the comparable nine-month periods ended September 30, 2004 and 2003, general
and administrative expenses increased $3,432 primarily due to an increase in
personnel costs of $2,684. The increase in personnel costs was primarily
attributable to higher transaction volume during the comparable periods as well
as a $1,143 increase in personnel costs related to charges for amortization of
unearned compensation from share incentive plan awards to officers and employees
of WPC. These increases were partially offset by a decrease in capital raising
activities. WPC structured approximately $287,000 more in transactions for the
nine-month period ended September 30, 2004 compared with the nine-month period
ended September 30, 2003. For the comparable nine-month periods ended September
30, 2004 and 2003, there was a decrease in fund raising volume of approximately
$145,000.
Provision for Income Taxes - For the comparable three and nine-month periods
ended September 30, 2004 and 2003, the provision for income taxes increased
$23,589 and $26,261, respectively, primarily due to an increase in net operating
income from management services operations for the comparable periods. For the
three and nine-month periods ended September 30, 2004, approximately 97% and
95%, respectively, of management revenues were earned by a taxable, wholly-owned
subsidiary.
Net Income - For the comparable quarters ended September 30, 2004 and 2003, net
income increased to $31,315 from $4,921. For the comparable nine-month periods
ended September 30, 2004 and 2003, net income increased to $43,566 from $14,672.
The increase for the comparable three and nine-month periods is primarily
related to the incentive and subordinated disposition fees earned in connection
with the Merger, and an increase in management income from affiliates, partially
offset by increases in depreciation and amortization, and general and
administrative expenses and the income tax provision.
- 23 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
(dollars in thousands, except share and per share amounts)
Other
In 2002, a wholly-owned indirect subsidiary of WPC entered into a build-to-suit
development management agreement with the Los Angeles United School District
("District") with respect to the development and construction of a new high
school. Under the build-to-suit agreement, the subsidiary's role is that of a
development manager pursuant to provisions of the California Education Code. The
subsidiary, in turn, engaged a general contractor to undertake the construction
project. Under the construction agreement with the general contractor, a
subsidiary is acting as a conduit for the payments made by School District and
is only obligated to make payments to the general contractor based on payments
received, except for a maximum guarantee of up to $2,000 for nonpayment. WPC and
the District are currently preparing for an arbitration proceeding relating to
certain disagreements regarding the costs of the project and whether WPC is
entitled to reimbursement for incurring these costs. The recognition of income
on the project is being recognized using a blended profit margin under the
percentage of completion method of accounting. Due to its disputes with the
District and a change in estimate of profit on the development project, WPC has
recognized a loss in development income of $1,767 and $1,336 for the three and
nine-month periods ended September 30, 2004.
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 $23,154 as of September 30, 2004, a
decrease of $1,205 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.
Operating Activities - Cash flows from operating activities and distributions
received from equity investments for the nine-month period ended September 30,
2004 of $113,812 were sufficient to fund dividends to shareholders of $48,614.
During 2004, WPC received fees of $34,593 in connection with structuring
transactions on behalf of the CPA(R) REIT's, including $6,385 in transaction
fees related to the Merger, and the receipt of its annual installment of
deferred acquisition fees of $5,978 received in January 2004. The next
installment payable in January 2005 is expected to be approximately $8,950. The
installments are subject to certain subordination provisions. In addition, as a
result of the Merger, WPC received incentive fees of $23,681 and disposition
fees of $22,679. WPC also received fees of $18,657 during the first nine 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 $35,090.
Investing Activities - WPC's investing activities are generally comprised of
real estate purchases and capitalized property related costs. During the period,
WPC used $117,020 for purchases of real estate, equity investments and capital
expenditures at existing properties. The expenditures included using $111,230 in
connection with the Acquisition, $4,094 to fulfill obligations related to the
purchase of its 22.5% interest in the eight Carrefour, S.A. properties in
France, and $1,498 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 July 2004, WPC received net proceeds
of $4,430 related to the sales of 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 September 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 increasing its outstanding balance on its credit
facility by $58,000, using $9,962 to satisfy its limited recourse mortgage
financing on its Erlanger, Kentucky properties, making scheduled mortgage
principal installments of $6,882, paying $1,262 in financing costs, primarily in
connection with the new credit facility obtained in May 2004 and distributing
$1,101 to minority partners. The proceeds from the increase in borrowing under
the credit facility along with the fees
- 24 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
(dollars in thousands, except share and per share amounts)
received from the Merger, were primarily utilized to fund the Acquisition. WPC
raised $3,662 from the issuance of shares primarily through WPC's Distribution
Reinvestment and Share 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 nine-month period ended September 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, 74% 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.
The Acquisition (including the pro rata share of equity investments) is expected
to generate annual cash flow of approximately $8,885 as follows:
Annual Annual Annual Estimated
Lease Obligor Property Location(1) Contractual Rent Debt Service Cash Flow
- -------------------------------- ---------------------------- ---------------- --------------- ---------------
Titan Corporation (2) San Diego, CA $ 2,331 - $ 2,331
Omnicom Group, Inc. Venice, CA 1,083 $ 936 147
EnviroWorks Corporation Apopka, FL 1,564 779 785
Sicor, Inc. (3) San Diego, CA 1,473 761 712
Michigan Mutual Insurance
Company Charleston, SC 1,382 836 546
Sears Logistics, Inc. Jacksonville, FL 933 - 933
Hibbett Sporting Goods, Inc. Birmingham, AL 784 456 328
K mart Corporation Drayton Plains, MI; Citrus
Heights, CA 390 - 390
Qwest Communications, Inc. Scottsdale, AZ 270 141 129
Xerox Corporation Hot Springs, AR 165 - 165
Lucent Technologies, Inc. Charlotte, NC 2,035 - 2,035
Affiliated Foods Southwest, Inc. Hope, AR and Little Rock, AR 384 - 384
--------------- --------------- ---------------
$ 12,794 $ 3,909 $ 8,885
=============== =============== ===============
(1) WPC also acquired a property in Denton, Texas which is vacant.
(2) Excludes an 18.54% interest which WPC owned prior to the Acquisition.
(3) Represents WPC's pro rata share of equity investment.
Cash Resources
As of September 30, 2004, WPC has $23,154 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 in May
2004, which is also available to meet working capital needs and other
commitments. In addition, debt may be incurred on unleveraged properties with a
carrying value of $388,195 as of September 30, 2004 and any proceeds may be used
to finance future real estate purchases.
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
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
(dollars in thousands, except share and per share amounts)
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.
September 30, 2004 December 31, 2003
---------------------------- ---------------------------
Maximum Outstanding Maximum Outstanding
Available Balance Available Balance
--------- ----------- --------- -----------
Credit Facility $ 225,000 $ 87,000 $ 225,000 $ 29,000
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 is $4,919 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.
WPC may incur capital expenditures of up to approximately $2,644 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
expected environmental costs of $1,500 to be funded by WPC 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 certain environmental costs at
Red Bank. In addition, WPC has entered into an agreement to share certain other
of the expected environmental costs with a third party which operated a business
at the property prior to WPC's ownership. Additionally, WPC has commenced
negotiating a property improvement plan in connection with renewing the
franchise license with Holiday Inn at the Livonia hotel. WPC currently estimates
it may spend less than $1,000 over the next two years if it intends 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 the development project in Los
Angeles, California.
A summary of WPC's obligations, commitments and guarantees under contractual
arrangements as of September 30, 2004 are as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Obligations:
Mortgage notes payable $ 187,757 $ 7,146 $ 9,212 $ 23,660 $ 25,970 $ 11,182 $ 110,587
Unsecured credit facility 87,000 - - - 87,000 - -
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 8,917 128 698 766 866 833 5,626
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 287,383 $ 9,274 $ 10,434 $ 24,950 $ 114,360 $ 12,147 $ 116,218
========== ========== ========== ========== ========== ========== ==========
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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.
WPC's long-term debt of $138,132 bears interest at fixed rates, and therefore
the fair value of these instruments is affected by changes in the market
interest rates. The following table presents principal cash flows based upon
expected maturity dates of the debt obligations and the related weighted-average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate on the variable rate debt as of September 30, 2004 ranged from 2.95% to
6.44%. The interest on the fixed rate debt as of September 30, 2004 ranged from
6.11% to 10.00%.
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 $ 6,592 $ 6,979 $ 21,159 $ 23,204 $ 8,128 $ 72,070 $ 138,132 $ 139,495
Weighted average
interest rate 8.74% 7.59% 7.22% 7.91% 7.68% 7.31%
Variable rate debt $ 554 $ 2,233 $ 2,501 $ 89,766 $ 3,054 $ 38,517 $ 136,625 $ 136,625
Annual interest expense would increase or decrease on variable rate debt by
approximately $1,366 for each 1% increase or decrease in interest rates. A
change in interest rates of 1% would impact the fair value of WPC's fixed rate
debt at September 30, 2004 by approximately $4,600.
WPC conducts business in France. Accordingly, WPC is subject to foreign currency
exchange rate risks from the effects that exchange rate movements of foreign
currencies and this may affect our future costs and cash flows; however,
exchange rate movements to date have not had a significant effect on WPC's
financial position or results of operations. For the three and nine-month
periods ended September 30, 2004, WPC recognized $86 and $425, respectively, in
foreign currency transaction gains in connection with the transfer of cash from
foreign operating subsidiaries to the parent company, compared with $23 and $520
for the three and nine-month periods ended September 30, 2003. The cash received
was subsequently converted into dollars. In addition, for the three and
nine-month periods ended September 30, 2004, WPC recognized unrealized foreign
currency gains of $76 and $144, respectively, compared with a gain of $132 for
the three and nine-month period ended September 30, 2003. The cumulative foreign
currency translation adjustment reflects a loss of $204, 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 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.
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
September 30, 2004.
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.
There have been no changes during the most recent fiscal quarter in the
Company's internal control over financial reporting that have materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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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. In June 2004, the Company and
Carey Financial received subpoenas from the staff of Division of Enforcement of
the Commission and the Company has provided information in response to the
subpoenas.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2004, no matters were submitted to
a vote of Security Holders.
Item 6. - 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
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
11/5/2004 By: /s/ John J. Park
- ------------- ---------------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
11/5/2004 By: /s/ Claude Fernandez
- ------------- ---------------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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