Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
(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 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
---------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
LISTED SHARES, NO PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[X] No[ ]
As of June 30, 2004, the aggregate market value of the Registrants' Listed
Shares held by non-affiliates was $780,110,765.
As of March 10, 2005, there are 37,640,176 Listed Shares of Registrant
outstanding.
The Registrant incorporates by reference its definitive Proxy Statement
with respect to its 2005 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
W. P. CAREY & CO. LLC
PART I
This Annual Report on Form 10-K contains certain forward-looking statements
relating to W. P. Carey & Co. LLC. As used in this Annual Report on Form 10-K,
the terms "the Company," "we," "us" and "our" include W. P. Carey & Co. LLC, its
consolidated subsidiaries and predecessors, unless other indicated.
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," "seeks," "plans" or similar expressions. Do
not unduly rely on forward-looking statements. They give our expectations about
the future and are not guarantees, and speak only as of the date they are made.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievement to be materially
different from the results of operations or plan expressed or implied by such
forward-looking statements. While we cannot predict all of the risks and
uncertainties, they include but are not limited to, those described below in
"Factors Affecting Future Operating Results." Accordingly, such information
should not be regarded as representations that the results or conditions
described in such statements or that our objectives and plans will be achieved.
(In thousands except share and per share amounts)
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Overview
We are a real estate investment, management and advisory company that invests in
commercial properties leased to companies domestically and internationally, and
earns fees as the advisor to affiliated real estate investment trusts ("CPA(R)
REITs") that each make similar investments. We own and manage commercial and
industrial properties located in 34 states and Europe, net leased to more than
107 tenants. As of December 31, 2004, our portfolio consisted of 168 properties
in the United States and 15 properties in Europe and totaled more than 19.4
million square feet. In addition, we manage over 765 net leased properties on
behalf of 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"), Corporate Property
Associates 16 - Global Incorporated ("CPA(R):16 - Global") and Carey
Institutional Properties Incorporated ("CIP(R)") until its merger into CPA(R):15
during 2004 (see "Significant Developments during 2004" below). We also hold
ownership interests in the CPA(R) REITs (see Note 6 of the accompanying
financial statements).
Our core real estate investment strategy is to purchase properties leased to a
diversified group of companies on a single tenant net lease basis. These leases
generally place the economic burden of ownership on the tenant by requiring them
to pay the costs of maintenance, insurance, taxes, structural repairs and other
operating expenses. We also generally seek to include in our leases:
- Clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index ("CPI") or
other indices in the jurisdiction in which the property is located
or, when appropriate, increases tied to the volume of sales at the
property;
- Indemnification for environmental and other liabilities; and
- Guarantees from parent companies.
Under advisory agreements that we have with each of the CPA(R) REITs, we perform
services related to the day-to-day management of the CPA(R) REITs and provide
transaction-related services in connection with structuring and negotiating real
estate acquisitions and mortgage financing. We earn an asset management fee at a
per annum rate of 1/2 of 1% of average invested assets, as defined in the
advisory agreement for each CPA(R) REIT and, based upon specific performance
criteria for each CPA(R) REIT, may be entitled to receive a performance fee of
1/2 of 1% of average invested assets. (For CPA(R):16 - Global, the asset
management fee is equal to 1% of average invested assets, with the payment of
half of such fee dependent upon specific performance criteria for CPA(R):16 -
Global). Fees for transaction-related services are only earned for completed
transactions. We earn acquisition fees on CPA(R) REIT real estate purchases
equal to 4.5% of the cost of the properties acquired, 2% of which is deferred
and payable in annual installments over terms which range from 3 to 8 years and
we may earn a 1% fee for certain refinancing of debt, subject to the approval of
the independent directors of the applicable CPA(R) REIT. We are reimbursed for
the cost of personnel provided for the administration of the CPA(R) REITs.
We were formed as a limited liability company under the laws of Delaware on July
15, 1996. Since January 1, 1998, we have been consolidated with nine Corporate
Property Associates limited partnerships and their successors and are the
-1-
W. P. CAREY & CO. LLC
General Partner (indirectly, through our wholly-owned subsidiary Carey Asset
Management Corp.) and owner of all of the limited partnership interests in each
partnership. Our shares began trading on the New York Stock Exchange on January
21, 1998. As a limited liability company, we are not subject to federal income
taxation as long as we satisfy certain requirements relating to our operations
and pass through such tax liability to our shareholders; however, certain
subsidiaries of our management services operations are subject to federal, state
and local income taxes and certain subsidiaries may be subject to foreign taxes.
Our principal executive offices are located at 50 Rockefeller Plaza, New York,
NY 10020 and our telephone number is (212) 492-1100. Our website address is
http://www.wpcarey.com. As of December 31, 2004, we employed 129 individuals
through our wholly owned subsidiaries.
Significant Developments During 2004
During 2004, we structured approximately $890,000 of acquisitions on behalf of
the CPA(R) REITs. Excluding the merger (discussed below), we sold four
properties on behalf of the CPA(R) REITs for $28,852 in 2004.
CREDIT FACILITY. On May 27, 2004, we entered into a credit facility for a
$175,000 revolving line of credit with J.P. Morgan Chase Bank and eight other
banks. The line of credit, which matures in May 2007, provides us a one-time
right to increase the amount available under the line of credit to $225,000.
Advances are prepayable at any time. The revolving credit agreement has
financial covenants that among other things, require us to maintain a minimum
equity value and meet or exceed certain operating and coverage ratios. As of
December 31, 2004, we had $102,000 outstanding under the revolving line of
credit and were in compliance with all covenants. See the "Cash Resources"
section within Management's Discussion and Analysis for further details.
SEC INVESTIGATION. As previously reported, we and Carey Financial Corporation
("Carey Financial"), our wholly-owned broker-dealer subsidiary, are currently
subject to an investigation by the United States Securities and Exchange
Commission ("SEC") into payments made to third party broker dealers in
connection with the distribution of REITs managed by us and other matters.
Although no regulatory action has been initiated against us or Carey Financial
in connection with the matters being investigated, it is possible that the SEC
may pursue an action in the future. The potential timing of any such action and
the nature of the relief or remedies the SEC may seek cannot be predicted at
this time. If such an action is brought, it could materially affect us. See Item
3-Legal Proceedings for a discussion of this investigation.
MERGER OF CIP(R) AND CPA(R):15. 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"). The Merger
provided a liquidation option for CIP(R) shareholders and provided CPA(R):15
with the opportunity to acquire properties that are consistent with its
investment objectives. CIP(R) shareholders had the option of exchanging CIP(R)
shares for CPA(R):15 shares or redeeming CIP(R) shares for cash.
Prior to the Merger, we acquired interests in 17 properties from CIP(R) in
September 2004. The properties are primarily single tenant net-leased properties
with remaining lease terms generally being eight years or less. These
properties were purchased by us as their remaining lease terms did not
strategically fit with CPA(R):15's goal of investing in long term investments
but did fit with our investment objectives. The purchase price was $142,161,
which was comprised of $115,158 in cash and our 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.
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 in 2005.
Our revenues for 2004 were substantially increased by fees earned in connection
with the Merger. In providing a liquidity event for CIP(R) shareholders, we
received incentive fees, in accordance with our advisory agreement with CIP(R),
of $23,681 and disposition fees of $22,679 including disposition fees in the
amount of $4,265 that were not earned for financial reporting purposes but were
applied as a reduction in the cost basis of the properties acquired by us. We
also earned transaction fees of $11,493 on CPA(R):15's acquisition of $571,000
of real estate interests from CIP(R). In connection with the Merger and related
activities, we exchanged our shares of CIP(R) in September, 2004 for 1,098,367
shares of CPA(R):15, at the established exchange ratio of 1.09 shares of
CPA(R):15 for each CIP(R) share redeemed.
CPA(R):16 - GLOBAL BEST EFFORTS OFFERING. Throughout 2004, we continued the
CPA(R):16 - Global "best efforts" public offering of up to $1,100,000, which
commenced in December 2003, in which we served as the advisor to CPA(R):16 -
Global. During 2004, CPA(R):16 - Global raised $511,333 pursuant to its "best
efforts" public offering. Further sales of
-2-
W. P. CAREY & CO. LLC
shares in the CPA(R):16 - Global offering were temporarily discontinued on
December 31, 2004 for an unspecified time period in order to bring into balance
the rate of fundraising and the rate of investment, as CPA(R):16 - Global
believed that it was prudent to cease taking in additional money until
CPA(R):16 - Global has made additional real estate acquisitions.
CPA(R):16 - Global subsequently withdrew its offering. Currently, we anticipate
that CPA(R):16 - Global may recommence sales of its securities during the second
quarter of 2005 pursuant to the second offering described below; however, the
decision as to whether and when to recommence sales of interests in CPA(R):16 -
Global is not dependent on achievement of any fixed amount of additional
acquisitions and could be affected by other factors which may affect the
marketing of such interests.
In September, 2004, CPA(R):16 - Global filed a registration statement with the
SEC for a second offering of shares of common stock that has not yet been
declared effective. Once a decision is made to recommence sales of shares, the
second offering, which will also be on a "best efforts" basis, will be for a
maximum of 80,000,000 shares at a price of $10 per share and will register up to
40,000,000 shares for the Distribution Reinvestment and Share Purchase Plan.
IMPAIRMENT CHARGES. During 2004, impairment charges were recorded due to several
factors, including our decision to sell property at less than its carrying
value, our determination that certain property has experienced an other than
temporary decline in value and, for direct financing leases, our assessment that
the unguaranteed residual value of the underlying property had declined. The
table below summarizes the impairment charges recorded in 2004 for both assets
held for use and assets held for sale:
2004
IMPAIRMENT
PROPERTY CHARGES REASON
-------- ----------- ------
Livonia, Michigan $ 7,500 Evaluation determined that property value has declined
Memphis, Tennessee 2,337 Decline in unguaranteed residual value of property
Winona, Minnesota 1,250 Loan loss related to sale of property
Various properties 2,911 Decline in unguaranteed residual value of properties or
decline in asset value
Bay Minette, Alabama 550 Evaluation determined that property value has declined
-------
Impairment charges from
continuing operations $14,548
=======
Toledo, Ohio $ 4,700 Property sold for less than carrying value
Frankenmuth, Michigan 1,000 Property to be sold for less than carrying value
Various properties 1,850 Decided to sell property or property value has declined
-------
Impairment charges from
discontinued operations $ 7,550
=======
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
We operate in two operating segments, real estate operations, with investments
in the United States and Europe, and management services operations. For the
year ended December 31, 2004, no lessee represented 10% or more of our total
lease revenues. The management services operations segment derives substantially
all of its revenues from the affiliated CPA(R) REITs.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Business Objectives and Strategy
Our objective is to increase shareholder value and earnings through prudent
management of our real estate assets and opportunistic investments and through
the expansion of our management services business. We expect to evaluate a
number of different opportunities in a variety of property types and geographic
locations and to pursue opportunities based upon our analysis of the risk/return
tradeoffs. We will continue to own properties as long as we believe ownership
helps us to attain our objectives.
We seek to:
- Increase revenues from the management services business by
increasing assets under management as the CPA(R) REITs acquire
additional property and from organizing new investment entities;
- Utilize core management skills (which include in-depth credit
analysis, asset valuation and sophisticated structuring techniques)
in our evaluation of new investment opportunities to maximize our
investment returns;
- Enhance the current portfolio of properties through follow-on
transactions, dispositions and favorable lease modifications;
-3-
W. P. CAREY & CO. LLC
- Utilize our size and access to capital to refinance existing debt,
where appropriate; and
- Increase the diversification of our portfolio through direct or
indirect investments in real estate outside the United States.
Investment Strategies
In analyzing potential acquisitions we review many aspects of a transaction,
including the tenant, the real estate and the lease, to determine whether a
potential investment can be structured to satisfy our investment criteria. The
aspects of a transaction that we evaluate and structure include the following:
TENANT EVALUATION. We evaluate each potential tenant for its credit, management,
position within its industry, operating history and profitability. We generally
seek tenants that we believe will have stable or improving credit. By leasing
properties to these tenants, we can generally charge rent that is higher than
the rent charged to tenants with recognized credit and thereby enhance our
current return from these properties as compared with properties leased to
companies whose credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of the property
subject to the lease will likely increase (if all other factors affecting value
remain unchanged). We may also seek to enhance the likelihood of a tenant's
lease obligations being satisfied, such as through a security deposit which may
be in the form of a letter of credit or cash, or through a guarantee of lease
obligations from the tenant's corporate parent. In evaluating a possible
investment, the creditworthiness of a tenant generally will be a more
significant factor than the value of the property absent the lease with such
tenant. While we select tenants we believe are creditworthy, tenants are not
required to meet any minimum rating established by a third party credit rating
agency. Our standards for determining whether a particular tenant is
creditworthy vary in accordance with a variety of factors relating to specific
prospective tenants. The creditworthiness of a tenant is determined on a
tenant-by-tenant basis. Therefore, general standards for creditworthiness cannot
be applied.
LEASES WITH INCREASING RENT. We seek to include a clause in each lease that
provides for increases in rent over the term of the lease. These increases are
generally tied to increases in indices such as the CPI, or mandated rental
increases on specific dates, or in the case of retail stores, participation in
gross sales above a stated level.
PROPERTIES IMPORTANT TO TENANT OPERATIONS. We generally seek to acquire
properties with operations that are essential or important to the ongoing
operations of the tenant. We believe that these properties provide better
protection if a tenant files for bankruptcy, since leases on properties
essential or important to the operations of a bankrupt tenant are less likely to
be terminated by a bankrupt tenant. We also seek to assess the income, cash flow
and profitability of the business conducted at the property so that, if the
tenant is unable to operate its business, we or the CPA(R) REITs can either
continue operating the business conducted at the property or re-lease the
property to another entity in the same industry as the tenant which can operate
the property profitably.
LEASE PROVISIONS THAT ENHANCE AND PROTECT VALUE. When available, we attempt to
include provisions in our leases that require our consent to specified tenant
activity or require the tenant to satisfy specific operating tests. These
provisions could include, for example, operational and financial covenants of
the tenant, prohibitions on a change in control of the tenant without our
consent and indemnification from the tenant against environmental and other
contingent liabilities.
DIVERSIFICATION. We seek to diversify our portfolio and the portfolio of each
of the CPA(R) REITs to avoid dependence on any one particular tenant or tenant
industry, which also generally results in diversification by type of facility
and geographic location. Diversification, to the extent achieved, helps reduce
the adverse effect of a single under-performing investment or a downturn in any
particular industry or geographic location.
INVESTMENT COMMITTEE. We have an investment committee that provides services to
both the CPA(R) REITs and us. As a transaction is structured, it is evaluated by
the chairman of our investment committee with respect to the potential tenant's
credit, business prospects, position within its industry and other
characteristics important to the long-term value of the property and the
capability of the tenant to meet its lease obligations. Before a property is
acquired, the transaction is reviewed by the investment committee to ensure that
it satisfies the investment criteria. For transactions that meet the investment
criteria, the investment committee has sole discretion as to which CPA(R) REIT
or if we will hold the investment. In cases where the investment committee
determines that two or more entities among the CPA(R) REITs and us should hold
the investment, the independent directors of each participating CPA(R) REIT (and
our directors if we participate) must also approve the transaction.
The investment committee is not directly involved in originating or negotiating
potential investments, but instead functions as a separate and final step in the
investment process. We place special emphasis on having experienced individuals
serve on our investment committee and do not invest in a transaction directly or
on behalf of the CPA(R) REITs unless the investment committee approves it.
-4-
W. P. CAREY & CO. LLC
The following people serve on our investment committee:
- George E. Stoddard, Chairman (1), was formerly responsible for
the direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the CPA(R)
programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge (1) previously served as Senior Vice President
Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibilities included
overseeing fixed income investments for Hancock, its affiliates and
outside clients.
- Lawrence R. Klein (1) is the Benjamin Franklin Professor of
Economics Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize
in Economic Sciences and currently advises various governments and
government agencies.
- Ralph F. Verni (1) is a private investor and business consultant and
formerly Chief Investment Officer of The New England Mutual Life
Insurance Company.
- Karsten von Koller (1) was formerly Chairman and Member of the Board
of Managing Directors of Eurohypo AG, the leading commercial real
estate financing company in Europe.
(1) Investment committee member also serves as a director for us.
Financing Strategies
Consistent with our investment policies, we use leverage when available on
favorable terms. We have a credit facility in place for a line of credit of up
to $225,000, which we have used and intend to continue to use in connection with
acquiring properties, funding build-to-suit projects and refinancing existing
debt. The line of credit has a three-year term expiring in May 2007. As of
December 31, 2004, we had $102,000 outstanding under the line of credit and
approximately $190,700 in limited recourse property-level debt outstanding. We
continually seek opportunities and consider alternative financing techniques to
refinance debt, reduce interest expense or improve our capital structure.
Substantially all of our mortgages are limited recourse and bear interest at
fixed rates. We may seek to refinance maturing or recently paid-off mortgage
debt with new property-level financing. There is no assurance that existing debt
will be refinanced at lower rates of interest as such debt matures. Many of the
loans restrict our ability to prepay a loan or provide for payment of premiums
if paid prior to the scheduled maturity, but allow defeasance of the loan, that
is, a deposit is made to service the loan commitment even if the underlying
property is sold.
A lender on limited recourse mortgage debt has recourse only to the property
collateralizing such debt and not to any of our other assets, while full
recourse financing would give a lender recourse to all of our assets. The use of
limited recourse debt, therefore, will help us to limit the exposure of all of
our assets to any one debt obligation. We believe that the strategy of combining
equity and limited recourse mortgage debt will allow us to meet our short-term
and long-term liquidity needs and will help to diversify our portfolio and,
therefore, reduce concentration of risk in any particular lessee.
Asset Management
We believe that effective management of net lease assets is essential to
maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
We monitor, on an ongoing basis, compliance by tenants with their lease
obligations and other factors that could affect the financial performance of any
of our properties. Monitoring involves receiving assurances that each tenant has
paid real estate taxes, assessments and other expenses relating to the
properties it occupies and confirming that appropriate insurance coverage is
being maintained by the tenant. We review financial statements of tenants and
undertake regular physical inspections of the condition and maintenance of
properties. Additionally, we periodically analyze each tenant's financial
condition, the industry in which each tenant operates and each tenant's relative
strength in its industry.
-5-
W. P. CAREY & CO. LLC
Competition
We face competition for investments in commercial properties in general, and
such properties net leased to major corporations in particular, from insurance
companies, credit companies, pension funds, private individuals and investment
companies. We also face competition from institutions that provide or arrange
for other types of commercial financing through private or public offerings of
equity or debt or traditional bank financings. We believe that our management's
experience in real estate, credit underwriting and transaction structuring
should allow us to compete effectively for office and industrial properties.
Environmental Matters
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. Our leases often provide that
the tenant is responsible for all environmental liability and for compliance
with environmental regulations relating to the tenant's operations.
We typically undertake an investigation of potential environmental risks when
evaluating an acquisition. Phase I environmental assessments are performed by
third party environmental consulting and engineering firms for all properties
acquired. Where we believe them to be warranted, Phase II environmental
assessments are performed. Phase I assessments do not involve subsurface
testing, whereas Phase II assessments involve some degree of soil and/or
groundwater testing. We may acquire a property that is known to have had a
release of hazardous materials in the past, subject to a determination of the
level of risk and potential cost of remediation. We normally require property
sellers to indemnify the buyer fully against any environmental problem existing
as of the date of purchase. Additionally, we often structure leases to require
the tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, we may also require a cash reserve, a
letter of credit or a guarantee from the tenant, the tenant's parent company or
a third party to assure lease compliance and funding of remediation. The value
of any of these protections depends on the amount of the collateral and/or
financial strength of the entity providing the protection. Such a contractual
arrangement does not eliminate statutory liability or preclude claims against us
by governmental authorities or persons who are not a party to the arrangement.
Contractual arrangements in leases may provide a basis for recovery from the
tenant of any damages or costs for which we have been found liable.
Some of the properties are located in urban and industrial areas where fill or
current or historic industrial uses of the areas may have caused site
contamination at the properties. In addition, we are aware of environmental
conditions at certain of the properties that require some degree of remediation.
All such environmental conditions are primarily the responsibility of the
respective tenants under their leases. We, with assistance from consultants,
estimate that the majority of the aggregate cost of addressing environmental
conditions known to require remediation at the properties is covered by existing
letters of credit and corporate guarantees. We believe that the tenants are
taking or will soon be taking all required remedial action with respect to any
material environmental conditions at the properties. However, we could be
responsible for some or all of these costs if one or more of the tenants fails
to perform its obligations or to indemnify us, as applicable. Furthermore, no
assurance can be given that the environmental assessments that have been
conducted at the properties disclosed all environmental liabilities, that any
prior owner did not create a material environmental condition not known to us,
or that a material condition does not otherwise exist as to any of the
properties.
Factors Affecting Future Operating Results
Future results may be affected by certain risks and uncertainties including the
following:
WE ARE CURRENTLY BEING INVESTIGATED BY THE SEC.
We and Carey Financial, our wholly-owned broker-dealer subsidiary, are currently
subject to an SEC investigation into payments made to third party broker dealers
in connection with the distribution of REITs managed by us and other matters.
Although no regulatory action has been initiated against us or Carey Financial
in connection with the matters being investigated, it is possible that the SEC
may pursue an action in the future. The potential timing of any such action and
the nature of the relief or remedies the SEC may seek cannot be predicted at
this time. If such an action is brought, it could materially affect us. See Item
3-Legal Proceedings for a discussion of this investigation.
THE REVENUE STREAMS FROM THE INVESTMENT ADVISORY AGREEMENTS WITH THE CPA(R)
REITS ARE SUBJECT TO LIMITATION OR CANCELLATION.
The agreements under which we provide investment advisory services may generally
be terminated by each CPA(R) REIT upon 60 days notice, with or without cause. In
addition, the fees payable under each agreement are subject to a variable annual
cap based on a formula tied to the assets and income of that CPA(R) REIT. This
cap may limit the growth of the management fees. There can be no assurance that
these agreements will not be terminated or that our income will not be limited
by the cap on fees payable under the agreements. The elimination of or any cap
on fees could have a material adverse effect on our business, results of
operations and financial condition.
-6-
W. P. CAREY & CO. LLC
OUR CAPITAL RAISING ABILITY FOR THE CPA(R) REITS IS OVERLY RELIANT ON ONE
SELECTED-DEALER.
We are overly reliant on American Express Financial Advisors, Inc. to market our
CPA(R) REIT offerings to investors. Any adverse change in that arrangement could
severely limit our ability to increase assets under management and may prevent
us from having funds available for new transactions. Certain payments made to
American Express Financial Advisors, Inc. in connection with the distribution of
our CPA(R) REIT offerings to investors are a subject of the SEC investigation
described under Item 3-Legal Proceedings.
OUR ADVISORY BUSINESS EXPOSES US TO MORE VOLATILITY IN EARNINGS THAN OUR REAL
ESTATE INVESTMENT BUSINESS.
The growth in revenue from the management services business is dependent in
large part on future capital raising in existing or future managed entities and
our ability to invest the money accordingly, which is subject to uncertainty and
is subject to capital market and real estate market conditions. This uncertainty
can create more volatility in our earnings because of the resulting increased
volatility in transaction based fee revenue from the management services
business as compared to revenue from ownership of real estate subject to triple
net leases, which historically has been less volatile. In addition, revenues
from the management services business, as well as the value of our holdings of
CPA(R) REIT interests and dividend income from those interests, may be
significantly affected by the results of operations of the CPA(R) REITs. Each of
the CPA(R) REITs has invested substantially all of its assets (other than
short-term investments) in triple net leased properties substantially similar to
those we hold, and consequently the results of operations of, and cash available
for distribution by, each of the CPA(R) REITs, is likely to be substantially
affected by the same market conditions, and subject to the same risk factors, as
the properties we own. Four of the prior thirteen CPA(R) funds reduced the rate
of distributions to their investors as a result of adverse developments
involving tenants. Each of the CPA(R) REITs we advise and manage may also incur
significant debt. This significant debt load could restrict their ability to pay
fees owed to us when due, due to either liquidity problems or restrictive
covenants contained in their borrowing agreements.
THE NET ASSET VALUE (NAV) OF THE CPA(R) REITS IS BASED ON INFORMATION THAT WE
PROVIDE TO A THIRD PARTY.
Our asset management and performance fees for CPA(R):12 and CPA(R):14, and
beginning in 2006 for CPA(R):15, are based on a third party valuation and are
used as the basis for determining these asset based fees payable to us. Any
valuation includes the use of estimates and these valuations may be influenced
by the information provided by us.
THE INABILITY OF A TENANT IN A SINGLE TENANT PROPERTY TO PAY RENT WILL REDUCE
OUR REVENUES.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments is materially dependent on the financial stability of
these tenants. Lease payment defaults by tenants negatively impact our net
income and reduce the amounts available for distributions to shareholders. In
the event of a default, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting the investment and
re-leasing the property. If a lease is terminated, there is no assurance that we
will be able to lease the property for the rent previously received or sell the
property without incurring a loss.
WE DEPEND ON MAJOR TENANTS.
Revenues from several of our tenants and/or their guarantors constitute a
significant percentage of our net leasing revenues. Our five largest
tenants/guarantors, which occupy 15 properties, represented approximately 25% of
total net leasing revenues in 2004. The default, financial distress or
bankruptcy of any of the tenants of these properties could cause interruptions
in the receipt of lease revenues from these tenants and/or result in vacancies
in the respective properties, which would reduce our revenues at least until the
affected property is re-leased, and could decrease the ultimate sale value of
each such property.
IF OUR TENANTS ARE HIGHLY LEVERAGED, THEY MAY HAVE A GREATER POSSIBILITY OF
FILING FOR BANKRUPTCY.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy,
a tenant has the option of vacating a property instead of paying rent. We have
highly leveraged tenants at this time, and we may have additional highly
leveraged tenants in the future.
THE BANKRUPTCY OF TENANTS MAY CAUSE A REDUCTION IN REVENUE.
Bankruptcy of a tenant could cause the loss of lease payments as well as an
increase in the costs incurred to carry the property, with a concomitant
reduction in our revenues.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms, which may provide an option to purchase a property by
the tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we
-7-
W. P. CAREY & CO. LLC
would not be treated as the owner of the property, but might have additional
rights as a secured creditor. We have had tenants file for bankruptcy protection
and are involved in litigation.
OUR TENANTS GENERALLY DO NOT HAVE A RECOGNIZED CREDIT RATING, WHICH MAY CREATE A
HIGHER RISK OF LEASE DEFAULTS AND THEREFORE LOWER REVENUES THAN IF OUR TENANTS
HAD A RECOGNIZED CREDIT RATING.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default.
WE CAN BORROW A SIGNIFICANT AMOUNT OF FUNDS.
We have incurred, and may continue to incur, indebtedness (collateralized and
unsecured) in furtherance of our activities. Neither our operating agreement nor
any policy statement formally adopted by our board of directors limits either
the total amount of indebtedness or the specified percentage of indebtedness
(based upon our total market capitalization) that may be incurred. Accordingly,
we could become more highly leveraged, resulting in increased risk of default on
our obligations and in an increase in debt service requirements which could
adversely affect our financial condition and results of operations and our
ability to pay distributions. Our current unsecured revolving credit facility
contains various covenants that limit the amount of secured and unsecured
indebtedness we may incur.
WE MAY NOT BE ABLE TO REFINANCE BALLOON PAYMENTS ON OUR MORTGAGE DEBTS.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. Scheduled balloon payments, including our pro rata
share of mortgage obligations of equity investees, for the next five years are
as follows:
2005 - $ 4,893
2006 - $24,192
2007 - $15,541(1)
2008 - $ 0
2009 - $26,755
(1) Does not include amounts that will be due upon maturity of credit facility.
As of December 31, 2004, we had $102,000 drawn from the line of credit under our
credit facility. Our ability to make balloon payments on debt will depend upon
our ability either to refinance the obligation when due, invest additional
equity in the property or to sell the related property. Our ability to
accomplish these goals will be affected by various factors existing at the
relevant time, such as the state of the national and regional economies, local
real estate conditions, available mortgage rates, our equity in the mortgaged
properties, our financial condition, the operating history of the mortgaged
properties and tax laws.
INTERNATIONAL INVESTMENTS INVOLVE ADDITIONAL RISKS.
We have purchased and may continue to purchase property located outside the
United States. These investments may be affected by factors peculiar to the laws
of the jurisdiction in which the property is located. These laws may expose us
to risks that are different from and in addition to those commonly found in the
United States. International investments could be subject to the following
risks:
- Changing governmental rules and policies;
- Enactment of laws relating to the foreign ownership of property and
laws relating to the ability of foreign entities to remove profits
earned from activities within the country to the United States;
- Fluctuations in the currency exchange rates;
- Adverse market conditions caused by changes in national or local
economic conditions;
- Changes in relative interest rates;
- Changes in the availability, cost and terms of mortgage funds
resulting from varying national economic policies;
- Changes in real estate and other tax rates and other operating
expenses in particular countries;
- Changes in land use and zoning laws; and
- More stringent environmental laws or changes in such laws.
WE MAY INCUR COSTS TO FINISH BUILD-TO-SUIT PROPERTIES.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
-8-
W. P. CAREY & CO. LLC
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
WE MAY HAVE DIFFICULTY RE-LEASING OR SELLING OUR PROPERTIES.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. The net leases
we may enter into or acquire may be for properties that are specially suited to
the particular needs of the tenant. With these properties, if the current lease
is terminated or not renewed, we may be required to renovate the property or to
make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, it may be difficult
to sell to a party other than the tenant due to the special purpose for which
the property may have been designed. These and other limitations, such as a
property's location and/or local economic conditions, may affect our ability to
re-lease or sell properties without adversely affecting returns to shareholders.
Our own scheduled lease expirations, as a percentage of annualized rental
revenues for the next five years, are as follows:
2005 - 2.7%
2006 - 5.2%
2007 - 7.0%
2008 - 6.5%
2009 - 11.7%
OUR PARTICIPATION IN JOINT VENTURES CREATES ADDITIONAL RISK.
We may participate in joint ventures or purchase properties jointly with other
entities, some of which may be unaffiliated with us. There are additional risks
involved in these types of transactions. These risks include the potential of
our joint venture partner becoming bankrupt and the possibility of diverging or
inconsistent economic or business interests of our partner and us. These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that our board or we may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
WE DO NOT FULLY CONTROL THE MANAGEMENT OF OUR PROPERTIES.
The tenants or managers of net lease properties are responsible for maintenance
and other day-to-day management of the properties. Because our revenues are
largely derived from rents and from management fees, which in turn are derived
from rents collected by the CPA(R) REITs, our financial condition is dependent
on the ability of net lease tenants to operate the properties successfully. If
tenants are unable to operate the properties successfully, the tenants may not
be able to pay their rent, which could adversely affect our financial condition.
WE ARE SUBJECT TO POSSIBLE LIABILITIES RELATING TO ENVIRONMENTAL MATTERS.
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. These
responsibilities and liabilities also exist for properties owned by the CPA(R)
REITs and in the event they become liable for these costs, their ability to pay
our fees could be materially affected. Some of these laws could impose the
following on us:
- Responsibility and liability for the cost of investigation and
removal or remediation of hazardous substances released on our
property, generally without regard to our knowledge or
responsibility of the presence of the contaminants;
- Liability for the costs of investigation and removal or remediation
of hazardous substances at disposal facilities for persons who
arrange for the disposal or treatment of such substances;
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants; and
- Being sued by the CPA(R) REITs for inadequate due diligence.
WE MAY BE UNABLE TO MAKE ACQUISITIONS ON AN ADVANTAGEOUS BASIS.
A significant element of our business strategy is the enhancement of our
portfolio and the CPA(R) REIT portfolios through acquisitions of properties. The
consummation of any future acquisition will be subject to satisfactory
completion of our extensive analysis and due diligence review and to the
negotiation of definitive documentation. There can be no assurance that we will
be able to identify and acquire additional properties or that we will be able to
finance acquisitions in the future. In addition, there can be no assurance that
any such acquisition, if consummated, will be profitable for us or the CPA(R)
REITs. If we are unable to consummate the acquisition of additional properties
in the future, there can be no assurance that
-9-
W. P. CAREY & CO. LLC
we will be able to maintain the cash available for distribution to our
shareholders, either through net income on properties we own or through net
income generated by the management services business.
WE MAY SUFFER UNINSURED LOSSES.
There are certain types of losses (such as due to wars or some natural
disasters) that generally are not insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of the
limits of our insurance occur, we could lose capital invested in a property, as
well as the anticipated future revenues from a property, while remaining
obligated for any mortgage indebtedness or other financial obligations related
to the property. Any such loss would adversely affect our financial condition.
CHANGES IN MARKET INTEREST RATES COULD CAUSE OUR STOCK PRICE TO GO DOWN.
The trading prices of equity securities issued by real estate companies have
historically been affected by changes in broader market interest rates, with
increases in interest rates resulting in decreases in trading prices, and
decreases in interest rates resulting in increases in such trading prices. An
increase in market interest rates could therefore adversely affect the trading
prices of any equity securities issued by us. The stock price could also be
affected by factors other than changes in interest rates.
WE FACE INTENSE COMPETITION.
We face competition for the acquisition of office and industrial properties in
general, and such properties net leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. We also face competition from institutions
that provide or arrange for other types of commercial financing through private
or public offerings of equity or debt or traditional bank financings. These
institutions may accept greater risk or lower returns, allowing them to offer
more attractive terms to prospective tenants.
A CHANGE IN ACCOUNTING STANDARDS REGARDING OPERATING LEASES MAY MAKE THE LEASING
OF FACILITIES IN THE FUTURE LESS ATTRACTIVE TO OUR POTENTIAL TENANTS, WHICH
COULD REDUCE OVERALL DEMAND FOR OUR LEASING SERVICES.
Under Statement of Financial Accounting Standard No. 13 "Accounting for Leases,"
if the present value of a company's minimum lease payments equal 90% or more of
a property's fair value, the lease is classified as a capital lease, and the
lease obligation is included as a liability on the company's balance sheet.
However, if the present value of the minimum lease payments is less than 90% of
the property's value, the lease is considered an operating lease, and the
obligation does not appear on the company's balance sheet, but rather in the
footnotes thereto. Thus, entering into an operating lease can appear to enhance
a tenant's balance sheet. The SEC is currently conducting a study of
off-balance-sheet financing, including leasing, and the Financial Accounting
Standards Board has recently indicated that it is considering addressing the
issue. If the accounting standards regarding the financial statement
classification of operating leases are revised, then companies may be less
willing to enter into new leases because the apparent benefits to their balance
sheets could be reduced or eliminated. This in turn could make it more difficult
for us to enter into new leases on terms we find favorable.
THE VALUE OF OUR REAL ESTATE IS SUBJECT TO FLUCTUATION.
We are subject to all of the general risks associated with the ownership of real
estate. In particular, we face the risk that lease revenue from the properties
will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. Additional real estate ownership risks
include:
- Adverse changes in general or local economic conditions,
- Changes in supply of or demand for similar or competing properties,
- Changes in interest rates and operating expenses,
- Competition for tenants,
- Changes in market rental rates,
- Inability to lease properties upon termination of existing leases,
- Renewal of leases at lower rental rates,
- Inability to collect rents from tenants due to financial hardship,
including bankruptcy,
- Changes in tax, real estate, zoning and environmental laws that may
have an adverse impact upon the value of real estate,
- Uninsured property liability, property damage or casualty losses,
- Unexpected expenditures for capital improvements or to bring
properties into compliance with applicable federal, state and local
laws, and
- Acts of God and other factors beyond the control of our management.
WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS.
We depend on the efforts of our executive officers and key employees. The loss
of the services of these executive officers and key employees could have a
material adverse effect on our operations.
-10-
W. P. CAREY & CO. LLC
Our business, results of operations or financial condition could be materially
adversely affected by the above conditions. The risk factors may have affected,
and in the future could affect, our actual operating and financial results and
could cause such results to differ materially from those in any forward-looking
statements. You should not consider this list exhaustive. New risk factors
emerge periodically, and we cannot completely assure you that the factors
described above list all material risks to us at any specific point in time. We
have disclosed many of the important risk factors discussed above in our
previous filings with the SEC.
OUR GOVERNING DOCUMENTS AND CAPITAL STRUCTURE MAY DISCOURAGE A TAKEOVER.
Our Amended and Restated Limited Liability Company Agreement provides for a
classified board with staggered three-year terms. As a result, a majority of
the board is not subject to reelection in any single year. In addition, William
P. Carey, Chairman, is the beneficial owner of approximately 36% of the
outstanding shares of the Company. The provisions of our Amended and Restated
Limited Liability Company Agreement and the share ownership of Mr. Carey may
discourage a tender offer for our shares or a hostile takeover, even though
these may be attractive to shareholders.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 18 of the consolidated financial statements for financial data
pertaining to our segment and geographic operations.
(e) AVAILABLE INFORMATION
All filings we make with the SEC, including our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and any
amendments, are available for free on our website as soon as reasonably
practicable after they are filed or furnished to the SEC. Our website address is
http://www.wpcarey.com. Our SEC filings are available to be read or copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information regarding the operation of the Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained
for free on the SEC's Internet site at http://www.sec.gov. The reference to our
website address does not constitute incorporation by reference of the
information contained on our website in this Report or other filings with the
SEC, and the information contained on our website is not part of this document.
-11-
W. P. CAREY & CO. LLC
ITEM 2. PROPERTIES.
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE
LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM MAXIMUM TERM
- ------------------------------------ -------- --------- -------- ---------------- --------- --------- ------------
DR. PEPPER BOTTLING COMPANY OF TEXAS
Irving and Houston, TX 100% 721,947 6.27 4,527,460 CPI June 2014 June 2029
CARREFOUR FRANCE, SAS (2)
Cholet, Ploufragan, Colomiers, 22.5% interest
Crepy en Vallois, Lens, Nimes, in foreign
and Thuit Hebert, France partnership
company owning 2,940,004 5.95 3,935,568 (3) INSEE (6) Dec. 2011 Dec. 2011
land and building
Nimes Rue Soufflot 22.5% interest
in a foreign
partnership 388,265 6.05 528,525 Nov. 2012 Nov. 2012
owning land and --------- ---------
buildings (10)
Total: 3,328,269 4,464,093
DIETROIT DIESEL CORPORATION (2)
Detroit, MI 100% 2,730,750 1.52 4,157,524 PPI June 2020 June 2040
BOUYGUES TELECOM SA (2)
Tours, France 95% interest in
a foreign
partnership
owning land and 107,618 14.94 1,527,859 (3) INSEE (6) Sept.2009 Sept. 2012
building (11)
Illkirch, France 75% interest in
a foreign
partnership 107,639 30.36 2,450,094 (3) INSEE (6) July 2013 July 2013
owning building (11) --------- ---------
Total: 215,257 3,977,953
GIBSON GREETINGS, INC.
Berea, KY and Cincinnati, OH 100% 1,194,840 3.11 3,720,000 Stated Nov.2013 Nov 2023
ORBITAL SCIENCES CORPORATION (2)
Chandler, AZ 100% 335,307 9.02 3,022,947 CPI Sept.2009 Sept.2029
FEDERAL EXPRESS CORPORATION
College Station, TX 100% 12,080 5.66 68,400 Stated April 2007 April 2009
Corpus Christi, TX 100% 30,212 6.55 197,896 Stated May 2007 May 2012
Colliersville, TN (2) 40% interest in
a limited
liability
company owning 394,400 17.03 2,687,088 CPI Aug. 2019 Aug. 2039
land and building (10) --------- ---------
Total: 436,692 2,953,384
TITAN CORPORATION
San Diego, CA 100% 166,403 17.20 2,862,068 CPI July 2007 July 2032
AMERICA WEST HOLDINGS CORPORATION (2)
Tempe, AZ 74.59% tenancy
in common
interest in land
and building (11) 225,114 16.90 2,837,889 CPI Apr. 2014 Apr. 2024
QUEBECOR PRINTING INC. (2)
Doraville, GA 100% 432,559 3.52 1,522,498 CPI Dec. 2009 Dec. 2034
Olive Branch, MS 100% 285,500 4.16 1,186,578 Fixed June 2008 June 2033
--------- ---------
Total: 718,059 2,709,076
SYBRON INTERNATIONAL CORPORATION
Dubuque, IA; Portsmouth, NH; 100% 494,100 4.81 2,374,690 CPI Dec. 2013 Dec. 2038
Rochester, NY
AUTOZONE, INC. (2, 5)
31 Locations : NC, TX, AL, GA, 100% 175,730 7.52 1,321,567 % Sales Feb. 2011 Feb. 2026
IL, LA, MO
11 Locations: FL, GA, NM, SC, TX 100% 54,000 9.71 524,388 % Sales Feb. 2013 Feb. 2038
12 Locations : FL, LA, MO, NC, TN 100% 72,500 5.11 370,636 % Sales Various Various
--------- ---------
Total: 302,230 2,216,591
-12-
W. P. CAREY & CO. LLC
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ------------------------------------ ----------------- ---------- ----------- ---------------- -------- ---------- -----------
CHECKFREE HOLDINGS, INC. (2, 4)
Norcross, GA 50% interest in
a limited
liability
company owning 220,675 19.76 2,180,360 CPI Dec. 2015 Dec. 2030
land and building (10)
LUCENT TECHNOLOGIES, INC.
Charlotte, NC 100% 568,670 3.46 1,956,121 Stated Mar. 2007 Mar. 2020
LIVHO, INC. (7)
Livonia, MI 100% 158,000 11.39 1,800,000 (7) Stated Dec. 2004 Jan. 2008
SYBRON DENTAL SPECIALTIES, INC.
Glednora, CA Romulus, MI 100% 245,000 7.23 1,770,298 CPI Dec. 2018 Dec. 2043
UNISOURCE WORLDWIDE, INC.
Anchorage, AK 100% 44,712 7.34 328,360 Stated Dec. 2009 Dec. 2029
Commerce, CA (2) 100% 411,561 3.46 1,422,080 Stated April 2010 April 2030
--------- ---------
Total: 456,273 1,750,440
CSS INDUSTRIES, INC.
Memphis, TN 100% 1,006,566 1.72 1,735,352 CPI Dec. 2010 Dec. 2015
BRODART CO.
Williamsport, PA (2) 100% 521,240 3.30 1,720,686 CPI June 2008 June 2028
SICOR, INC. (2)
San Diego, CA 50% in a limited
partnership
owning land and
buildings (10) 144,311 23.16 1,671,410 CPI July 2009 July 2049
INFORMATION RESOURCES, INC.(2)
Chicago, IL 33.33% interest
in a limited
partnership
owning land and 252,000 19.57 1,643,604 CPI Oct. 2013 Oct. 2023
building (10)
FISKARS,INC. (F/K/A ENVIROWORKS,
INC.) (2)
Apopka, FL 100% 374,829 4.33 1,621,463 CPI Mar. 2010 Mar. 2035
BE AEROSPACE, INC.(2)
Lenexa, KS 100% 130,094 4.61 599,674 Stated Sept. 2017 Sept. 2037
Winston-Salem, NC 100% 274,216 2.66 728,320 Stated Sept. 2017 Sept. 2037
Dallas, TX 100% 22,680 5.04 114,224 Stated Sept. 2017 Sept. 2037
--------- ---------
Total: 426,990 1,442,218
SPRINT SPECTRUM L. P. (2)
Albuquerque, NM 100% 94,731 15.04 1,424,561 Stated May 2011 May 2021
AMERISURE INSURANCE (2)
Charleston, SC 100% 134,985 10.24 1,382,256 Stated Dec. 2007 Dec. 2028
PANTIN, FRANCE - MULTI-TENANT (2)
Various Tenants 75% interest in
foreign
partnership
owning land and 69,211 25.54 1,325,747 (3) INSEE (6) Various Various
building (11)
BLOOMINGDALE, IL
Various 100% 18,713 9.00 80,872 Various Various Varous
United States Postal Service 100% 60,320 18.20 1,233,000 Various Various Various
Vacant 36,967 -
--------- ---------
Total: 116,000 1,313,872
EAGLE HARDWARE & GARDEN, INC. (2, 5)
Bellevue, WA 100% 127,360 10.25 1,305,334 CPI & % Aug. 2018 Aug. 2018
Sales
AT&T CORPORATION
Bridgeton, MO 100% 85,510 14.14 1,209,048 Stated June 2011 June 2021
-13-
W. P. CAREY & CO. LLC
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ------------------------------------ -------------------- ---------- ---------- ---------------- -------- --------- ----------
HOLOGIC, INC. (2) 36% interest in a
Danbury, CT jointly controlled 62,042 9.42 210,526 CPI Aug. 2022 Aug. 2042
Bedford, MA tenancy-in-common(10) 207,000 12.42 925,612 CPI Aug. 2022 Aug. 2042
--------- ---------
Total: 269,042 1,136,138
CENDANT OPERATIONS, INC. (2, 8)
Moorestown, NJ 100% 65,567 17.11 1,121,792 Stated Dec. 2004 Dec. 2004
BELLSOUTH TELECOMMUNICATIONS, INC. (2)
Lafayette Parish, LA 100% 66,846 16.40 1,096,170 Stated Dec. 2009 Dec. 2039
OMNICOM GROUP, INC. 2
Venice, CA 100% 77,719 13.93 1,082,685 CPI Sept.2010 Sept. 2030
UNITED STATIONERS SUPPLY COMPANY
New Orleans, LA; Memphis, TN; 100% 197,098 5.25 1,034,837 CPI Mar. 2010 Mar. 2030
San Antonio, TX
ANTHONY'S MANUFACTURING COMPANY, INC.
San Fernando, CA 100% 182,845 5.57 1,019,047 CPI/ May 2012 May 2012
Market
SEARS LOGISTICS SERVICES, INC.
Jacksonville, FL 100% 240,000 4.04 969,946 Stated Sept.2007 Sept. 2007
WAL-MART STORES, INC.
West Mifflin, PA 100% 118,125 8.05 950,905 CPI Jan. 2007 Jan. 2037
SWAT-FAME, INC.
City of Industry, CA 100% 233,205 3.96 923,477 CPI Dec. 2010 Dec. 2020
PRE FINISH METALS, INC.
Walbridge, OH 100% 313,704 2.84 892,091 CPI June 2008 June 2028
FORGE RIVER ROAD, WEBSTER, TX (2)
Lockheed Martin Corp. 100% 30,176 9.30 241,416 Stated Dec. 2007 July 2009
United Space Alliance 100% 59,905 8.70 585,120 Stated Feb. 2005 April 2011
Vacant 18,497 -
--------- ---------
Total: 108,578 826,536
NVR L. P.
Thurmont, MD Farmington, NY 100% 179,741 4.57 820,797 CPI Mar. 2014 Mar. 2039
HIBBETT SPORTING GOODS, INC. (2)
Birmingham, AL 100% 219,312 3.74 819,935 CPI Dec. 2014 Dec. 2029
LOCKHEED MARTIN CORPORATION
King of Prussia, PA 100% 88,578 9.00 797,202 Stated July 2008 July 2013
AMS HOLDING GROUP
College Station, TX 100% 52,552 14.56 765,101 Fixed Dec. 2009 Dec. 2016
EATON CORPORATION
(F/K/A POWERARE CORPORATION)
Raleigh, NC 100% 27,770 23.22 644,937 CPI July 2006 July 2031
EXEL COMMUNICATIONS, INC. (4)
Reno, NV 100% 53,158 10.93 580,800 Stated Dec. 2006 Dec. 2016
WESTERN UNION FINANCIAL SERVICES,
INC.
Bridgeton, MO 100% 78,080 7.34 573,221 Stated Nov. 2006 Nov. 2011
SOCIETE DE TRAITEMENTS
DSM FOOD SPECIALITIES
80% interest in
foreign
Joue les Tours Phalempin, France (2) partnership
owning land and 69,493 5.44 302,638 (3) INSEE (6) May 2005 May 2005
building (11) 37,337 8.82 263,329 (3) INSEE (6) May 2008 May 2008
--------- ---------
Total: 106,830 565,967
DS GROUP LIMITED
Goshen, IN 100% 52,000 10.84 563,715 CPI Feb. 2010 Feb. 2035
-14-
W. P. CAREY & CO. LLC
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ----------------------------------- ----------------- ---------- ----------- ---------------- -------- --------- -----------
TELLIT ASSURANCES (2)
75% interest in
foreign
Rouen, France partnership 36,791 20.06 553,654 (3) INSEE (6) Aug. 2010 Aug. 2010
owning land and
building (11)
FEATHERCRAFT LANE, WEBSTER, TX
United Space Alliance 100% 88,200 5.73 505,020 Stated Sept.2006 Sept. 2016
Facilities Management Solutions 100% 3,600 8.40 30,240 Stated Dec. 2005 Dec. 2005
---------- ---------
Total: 91,800 535,260
BELLSOUTH ENTERTAINMENT, INC.
Ft. Lauderdale, FL 100% 80,450 6.37 512,096 Fixed June 2009 June 2019
LEARNING CARE GROUP, INC.
(F/K/A CHILDTIME CHILDCARE, INC.) (2)
12 Locations: AZ, CA, MI, TX 33.93% interest
in limited
partnership
owning land and 83,912 16.59 472,307 CPI Jan. 2016 Jan. 2041
building (10)
YALE SECURITY, INC.
Lemont, IL 100% 113,133 4.06 459,000 Stated Mar. 2011 Mar. 2011
WINN-DIXIE STORES, INC. (5)
Bay Minette, AL (9) 100% 34,887 3.68 128,470 % Sales June 2007 June 2037
Brewton, AL 100% 30,625 4.39 134,500 % Sales Oct. 2010 Oct. 2030
Montgomery, AL 100% 32,690 5.86 191,534 % Sales Mar. 2008 Mar. 2038
---------- ---------
Total: 98,202 454,504
AFFILIATED FOODS SW, INC.
Hope, AR Mar. 2007 Mar. 2037
Little Rock, AR 100% 122,074 3.28 400,148 CPI Mar. 2007 Mar. 2022
Little Rock, AR Jan. 2009 Jan. 2024
BEAUMONT, TX
Olmstead Kirk Paper Company 100% 5,760 6.76 38,934 Stated Dec. 2007 Dec. 2007
Petrocon Engineering, Inc. 42,880 8.40 360,192 Dec. 2011 Dec. 2014
------ ---------
Total: 48,640 399,126
LOCKHAVEN DRIVE, HOUSTON, TX
Honeywell, Inc. 100% 119,320 2.03 242,400 Stated Sept.2005 Sept. 2005
Continental Airlines, Inc. 25,125 5.96 149,688 July 2008 July 2008
---------- ---------
Total: 144,445 392,088
KMART CORPORATION
Citrus Heights, CA 100% 192,778 2.02 390,000 Stated/% May 2006 May 2026
Drayton Plains, MI Rent Mar. 2006 Mar 2026
CENTURY CENTER, HOUSTON, TX
Various Tenants 100% 40,568 8.55 346,764 Stated Various Various
Vacant 9,072 -
------ ---------
Total: 49,640 346,764
FAURECIA EXHAUST SYSTEMS, INC.
Toledo, OH 100% 61,000 5.51 336,000 CPI Nov. 2022 Nov. 2042
BROOMFIELD, CO
Various Tenants 100% 81,158 4.09 332,138 Various Various Various
Vacant 23,297 -
---------- ---------
Total: 104,455 332,138
BAY AREA BOULEVARD, HOUSTON, TX
Bike Barn Holding Company, Inc. 100% 6,216 10.42 64,800 Stated Aug.2010 Aug. 2015
Sears Roebuck and Co. 21,069 10.60 223,331 Sept.2005 Sept. 2015
---------- ---------
Total: 27,285 288,131
ALSTOM POWER, INC.
Erlanger, KY 100% 118,200 2.43 287,226 Stated May 2013 May 2013
Vacant 631,500 -
---------- ---------
Total: 749,700 287,226
-15-
W. P. CAREY & CO. LLC
RENT PER
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ------------------------------- ----------------------- ------- -------- ---------------- -------- ---------- -----------
TOOLING SYSTEMS, LLC(4)
Frankenmuth, MI 100% 128,400 2.21 283,451 Stated Aug. 2012 Aug. 2017
DIRECTION REGIONAL DES AFFAIRES
SANITAIRES ET SOCIALES
Rouen, France(2) 75% interest in foreign
partnership owning land
and building (11) 25,618 14.42 276,987(3) INSEE(6) Mar. 2006 Mar. 2006
THE ROOF CENTER, INC.
Manassas, VA 100% 60,446 4.58 276,750 Stated July 2009 July 2009
GAMES WORKSHOP, INC.
Glen Burnie, MD 100% 45,300 6.10 276,155 CPI April 2006 April 2016
QWEST COMMUNICATIONS, INC.(2)
Scottsdale, AZ 100% 4,460 60.60 270,270 Stated Feb. 2007 Feb. 2017
NORTHERN TUBE, INC.
Pinconning, MI 100% 220,588 1.15 254,538 CPI July 2013 July 2023
PENBERTHY PRODUCTS, INC.
Prophetstown, IL 100% 161,878 1.47 237,486 CPI April 2006 April 2026
VERIZON COMMUNICATIONS, INC.
Milton, VT 100% 30,624 6.81 208,467 Stated Feb. 2013 Feb. 2023
XEROX CORPORATION/PHOTO CENTER
Hot Springs, AR 100% 37,190 4.53 168,414 Stated May 2011 May 2021
KENYON INTERNATIONAL EMERGENCY SERVICES, INC.
Houston, TX 100% 17,725 3.95 70,014 Stated Oct. 2009 Oct. 2019
SALISBURY, NC
Shinn Systems, Inc. 100% 13,284 2.00 26,568 Fixed Nov. 2006 Nov. 2006
Vacant 298,681 -
------- -------
Total: 311,965 26,568
VACANT
Cincinnati, OH (Property to be
Sold) 597,996
Travelers Rest, SC 181,700
Denton, TX 90,140
Houston, TX 10,960
South Boston, VA (Property Sold) 43,387
Duffield, VA 15,444
-------
Total: 939,627
1. Share of Current Annual Rents is the product of the Square Footage,
the Rent per Square Foot, and any ownership interest percentage as
noted.
2. These properties are encumbered by mortgage notes payable.
3. Based on exchange rates at December 31, 2004.
4. Tenant has filed bankruptcy.
5. Current annual rent does not include percentage of sales rent, payable
under the lease contract.
6. INSEE construction index, an index published quarterly by the French
Government.
7. Rent to be reduced to $1,000,000/yr. effective January 1, 2005. For
financial statement purposes, Livho, Inc. is consolidated as we have
concluded that it is a variable interest entity.
8. Lease expired December 31, 2004 and property was vacant effective
January 1, 2005.
9. Winn-Dixie has filed for Chapter 11 bankruptcy protection in February
2005.
10. Remaining interest in this property is owned by an affiliate(s).
11. Remaining interest in this property is owned by a non-affiliated third
party.
-16-
W. P. CAREY & CO. LLC
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 2004, we were not involved in any material litigation.
In March 2004, following a broker-dealer examination of Carey Financial, our
wholly-owned broker-dealer subsidiary, by the staff of the SEC, Carey Financial
received a letter from the staff of the SEC alleging certain infractions by
Carey Financial of the Securities Act of 1933, the Securities Exchange Act of
1934, the rules and regulations thereunder and those of the National Association
of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of
CPA(R):15, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the
Commission pursues these allegations, or if affected CPA(R):15 investors bring a
similar private action, CPA(R):15 might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
CPA(R):15, Carey Financial would be required to return to CPA(R):15 the
commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part
of any action against us, the SEC could seek disgorgement of any such
commissions or different or additional penalties or relief, including without
limitation, injunctive relief and/or civil monetary penalties, irrespective of
the outcome of any rescission offer. We cannot predict the potential effect such
a rescission offer or SEC action may ultimately have on our operations or the
operations of Carey Financial. There can be no assurance that the effect, if
any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. 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.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with CPA(R):15 and other REITs managed by us, as well as the
disclosure of such arrangements. At that time we and Carey Financial received a
subpoena from the Enforcement Staff seeking documents relating to payments by
us, Carey Financial, and REITs managed by us to (or requests for payment
received from) any broker-dealer, excluding selling commissions and selected
dealer fees. We and Carey Financial subsequently received additional subpoenas
and requests for information from the Enforcement Staff seeking, among other
things, information relating to any revenue sharing agreements or payments
(defined to include any payment to a broker-dealer, excluding selling
commissions and selected dealer fees) made by us, Carey Financial or any REIT
managed by us in connection with the distribution of REITs managed by us or the
retention or maintenance of REIT assets. Other information sought by the SEC
includes information concerning the accounting treatment and disclosure of any
such payments, communications with third parties (including other REIT issuers)
concerning revenue sharing, and documents concerning the calculation of
underwriting compensation in connection with the REIT offerings under applicable
NASD rules.
In response to the Enforcement Staff's subpoenas and requests, we and Carey
Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by us (including Corporate Property Associates 10 Incorporated,
CIP(R), CPA(R):12, CPA(R):14, and CPA(R):15), in addition to selling commissions
and selected dealer fees. The expenses associated with these payments, which
were made during the period from early 2000 through the end of 2003, were borne
by the REITs. We are continuing to gather information relating to these types of
payments made to broker-dealers and supply it to the SEC.
-17-
W. P. CAREY & CO. LLC
We and Carey Financial are cooperating fully with this investigation and are in
the process of providing information to the Enforcement Staff in response to the
subpoenas and requests. Although no regulatory action has been initiated against
Carey Financial or us in connection with the matters being investigated, it is
possible that the SEC may pursue an action against either us or Carey Financial
in the future. The potential timing of any such action and the nature of the
relief or remedies the SEC may seek cannot be predicted at this time. If such an
action is brought, it could have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2004 to a vote of security holders, through the solicitation of proxies or
otherwise.
-18-
W. P. CAREY & CO. LLC
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Information with respect to Registrant's common equity is hereby incorporated by
reference to page 51 of our Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 2 of our
Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 3 to 18 of our Annual Report contained in Appendix A.
Item 7A. 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 our business plan, the
primary risks to which we are exposed are interest rate risk and foreign
currency exchange risk.
Interest Rate Risk
The value of our 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 our ability to refinance
property-level mortgage debt when balloon payments are scheduled.
At December 31, 2004, $136,402 of our long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the market interest rates. The following table presents principal cash flows
based upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. Interest on fixed rate debt as of December 31, 2004 ranged from 6.11% to
10.125%. The interest rate on variable rate debt as of December 31, 2004 ranged
from 3.5375% to 6.44%.
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 our leverage.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
Fixed rate debt $ 11,885 $ 21,159 $ 23,526 $ 8,128 $ 35,045 $ 36,659 $ 136,402 $ 137,825
Weighted average
interest rate 8.23% 7.22% 7.91% 7.69% 7.39% 7.23%
Variable rate debt $ 2,470 $ 2,767 $ 105,061 $ 3,379 $ 3,577 $ 39,042 $ 156,296 $ 156,296
Annual interest expense would increase or decrease on variable rate debt by
approximately $1,563 for each 1% increase or decrease in interest rates. A
change in interest rates of 1% would impact the fair value of our fixed rate
debt at December 31, 2004 by approximately $4,367.
Foreign Currency Exchange Rate Risk
We have foreign operations in France and as such are subject to risk from the
effects of exchange rate movements of foreign currencies, which may affect
future costs and cash flows. All of our foreign operations for the preceding
year were conducted in the Euro. We are a net receiver of the foreign currency
(we receive more cash then we pay out) and therefore we benefit from a weaker
U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the
foreign currency. For the year ended December 31, 2004, we recognized $430 in
foreign currency transaction gains in connection with the transfer of cash from
foreign operating subsidiaries to the parent company. The cash received was
subsequently converted into dollars. In addition, for the year ended December
31, 2004, we recognized net unrealized foreign currency gains of $790. The
cumulative foreign currency translation adjustment reflects a gain of $515. To
date, we have not entered into any foreign currency forward exchange contracts
or other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates.
-19-
W. P. CAREY & CO. LLC
Scheduled future minimum rents, exclusive of renewals, under non-cancelable
operating leases resulting from our foreign operations are as follows:
2005 2006 2007 2008 2009 Thereafter Total
------- ------- ------- ------- ------- ---------- --------
Minimum Rents (1) $ 8,548 $ 8,547 $ 8,476 $ 7,959 $ 7,192 $ 14,771 $ 55,493
Scheduled principal payments for mortgage notes payable for our foreign
operations during each of the next five years following December 31, 2004 and
thereafter are as follows:
2005 2006 2007 2008 2009 Thereafter Total
------- ------- ------- ------- ------- ---------- --------
Mortgage notes
Payable (1) $ 2,470 $ 2,767 $ 3,061 $ 3,379 $ 3,578 $ 39,041 $ 54,296
(1) Based on the December 31, 2004 exchange rate for the Euro.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data are
hereby incorporated by reference to pages 19 to 50 of our Annual Report
contained in Appendix A:
(i) Report of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets as of December 31, 2004 and 2003
(iii) Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002
(iv) Consolidated Statements of Members' Equity for the years ended December
31, 2002, 2003 and 2004
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
(vi) Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Our co-chief executive officers and chief financial officer have conducted a
review of our disclosure controls and procedures as of December 31, 2004.
Our disclosure controls and procedures include our 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 our management, including our
co-chief executive officers and chief financial officer, to allow timely
decisions regarding required disclosure and to ensure that such information is
recorded, processed, summarized and reported, within the required time periods.
Based upon this review, our co-chief executive officers and chief financial
officer have concluded that our disclosure controls (as defined in Rule
13a-14(c) under the Exchange Act) are sufficiently effective to ensure that the
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported within the required time
periods.
-20-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
concluded that, as of December 31, 2004, our internal control over financial
reporting is effective based on those criteria.
Our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm who also audited our consolidated
financial statements included in Item 8, as stated in their report in Item 8.
-21-
W. P. CAREY & CO. LLC
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information will be contained in our definitive Proxy Statement with
respect to our 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in our definitive Proxy Statement with
respect to our 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in our definitive Proxy Statement with
respect to our 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in our definitive Proxy Statement with
respect to our 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year, and is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
This information will be contained in our definitive Proxy Statement with
respect to our 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year, and is hereby incorporated by reference.
-22-
W. P. CAREY & CO. LLC
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements:
The following financial statements are filed as a part of this Report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Consolidated Statements of Income for the years ended December 31, 2004, 2003,
and 2002.
Consolidated Statements of Members' Equity for the years ended December 31,
2002, 2003, and 2004.
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003, and 2002.
Notes to Consolidated Financial Statements.
The Consolidated Financial Statements are hereby incorporated by reference to
pages 19 to 50 of our Annual Report contained in Appendix A.
2. Financial Statement Schedules:
The following schedule is filed as a part of this Report:
Report of Independent Registered Public Accounting Firm.
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
2004.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on pages 27 to 34 of
this Form 10-K.
Financial statement schedules other than those listed above are omitted because
the required information is given in the financial statements, including the
notes thereto, or because the conditions requiring their filing do not exist.
-23-
W. P. CAREY & CO. LLC
(a) 3 Exhibits:
The following exhibits are filed as part of this Report. Documents other than
those designated as being filed herewith are incorporated herein by reference.
Exhibit Method of
No. Description Filing
- ------- ------------------------------------------------------------------- -----------------------------
3.1 Amended and Restated Limited Liability Company Exhibit 3.1 to Registration
Agreement of Carey Diversified LLC. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration
and the Company. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.4 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.5 Carey Asset Management Corp. 2005 Partnership Equity Filed herewith
Unit Plan.
10.6 Third Amended and Restated Credit Agreement Filed herewith
dated as of May 27, 2004.
10.7 Employment Agreement Dated April 7, 1997 between Filed herewith
W.P. Carey & Co., Inc. and Gordon S. DuGan.
10.8 Employment Agreement dated April 7, 1997 between Filed herewith
W.P. Carey & Co., Inc. and John J. Park.
21.1 List of Registrant Subsidiaries. Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith
31.1 Certification of Chief Executive Officer pursuant to Section 302(a) Filed herewith
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302(a) Filed herewith
Of the Sarbanes-Oxley Act of 2002.
-24-
W. P. CAREY & CO. LLC
Exhibit Method of
No. Description Filing
- ------- ------------------------------------------------------------------- -----------------------------
32.1 Chief Executive Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
99.13 Amended and Restated Agreement of Limited Partnership Exhibit 99.13 to Registration
of CPA(R): 1. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.16 Amended and Restated Agreement of Limited Partnership Exhibit 99.16 to Registration
of CPA(R): 4. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.18 Amended and Restated Agreement of Limited Partnership Exhibit 99.18 to Registration
of CPA(R): 6. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.21 Amended and Restated Agreement of Limited Partnership Exhibit 99.21 to Registration
of CPA(R): 9. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
-25-
W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
W. P. CAREY & CO. LLC
3/15/2005 BY: /s/ John J. Park
- --------- ---------------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
3/15/2005 BY: /s/ William P. Carey
- --------- --------------------------------------------------------------
Date William P. Carey
Chairman of the Board, Co-Chief Executive Officer and Director
(Co-Principal Executive Officer)
3/15/2005 BY: /s/ Francis J. Carey
- --------- --------------------------------------------------------------
Date Francis J. Carey
Vice Chairman of the Board, Chairman of the Executive Committee
and Director
3/15/2005 BY: /s/ Gordon F. DuGan
- --------- --------------------------------------------------------------
Date Gordon F. DuGan
President and Co-Chief Executive Officer and Director
(Co-Principal Executive Officer)
3/15/2005 BY: /s/ George E. Stoddard
- --------- --------------------------------------------------------------
Date George E. Stoddard
Senior Executive Vice President and Director
3/15/2005 BY: /s/ Nathaniel S. Coolidge
- --------- --------------------------------------------------------------
Date Nathaniel S. Coolidge
Chairman of the Audit Committee and Director
3/15/2005 BY: /s/ Eberhard Faber IV
- --------- --------------------------------------------------------------
Date Eberhard Faber IV
Chairman of Nomination & Corporate Governance Committee and
Director
3/15/2005 BY: /s/ Dr. Lawrence R. Klein
- --------- --------------------------------------------------------------
Date Dr. Lawrence R. Klein
Chairman of the Economic Policy Committee and Director
3/15/2005 BY: /s/ Charles C. Townsend, Jr.
- --------- --------------------------------------------------------------
Date Charles C. Townsend, Jr.
Chairman of the Compensation Committee and Director
3/15/2005 BY: /s/ Ralph Verni
- --------- --------------------------------------------------------------
Date Ralph Verni
Director
3/15/2005 BY: /s/ Karsten von Koller
- --------- --------------------------------------------------------------
Date Karsten von Koller
Director
3/15/2005 BY: /s/ Reginald Winssinger
- --------- --------------------------------------------------------------
Date Reginald Winssinger
Director
3/15/2005 BY: /s/ John J. Park
- --------- --------------------------------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
3/15/2005 BY: /s/ Claude Fernandez
- --------- --------------------------------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting Officer
-26-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
W. P. Carey & Co. LLC:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 15, 2005 appearing in the 2004 Annual Report to Shareholders
of W. P. Carey & Co. LLC (which report, consolidated financial statements and
assessment are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-27-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company Costs Capitalized
----------------------- Subsequent to Increase (decrease) in
Description Encumbrances Land Buildings Acquisition (a) Net Investments (b)
----------- ------------ ---------- ----------- ----------------- ----------------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $ 247,993 $ 2,538,263 $4,779,536
Distribution facilities
and warehouses in
Erlanger, Kentucky
partially leased to
Alstom Power, Inc. 1,525,593 21,427,148 255,329 141,235
Supermarkets leased to
Winn-Dixie Stores, Inc. 855,196 6,762,374 (3,973,120)
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833
Land leased to Unisource
Worldwide, Inc. 4,573,360
Centralized telephone
bureau leased to Exel
Communications, Inc. 925,162 4,023,627 101,983
Office building leased to
Petrocon Engineering,
Inc. and Olmstead Kirk
Paper Company 164,113 2,343,849 504,941
Computer center leased to
AT&T Corporation 269,700 5,099,964 4,165,742 (2,612)
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,389,951 5,337,002 92,326 (1,039,757)
Warehouse and
distribution leased to
Shinn Systems 246,949 5,034,911 1,363,829
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267
Land leased to Eaton
Corporation (f/k/a
Powerware Corporation) 1,638,012 (809,735)
Warehouse/ office
research facilities
leased to
Lockheed Martin
Corporation 1,218,860 6,283,475 539,706
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,912,271 79,682
Life on which
Gross Amount at Depreciation in
which Carried at Close of Period (e) Latest
------------------------------------------------------ Statement of
Accumulated Date Income
Description Land Buildings Total Depreciation (e) Acquired is Computed
----------- ---------- ----------- ----------- ---------------- --------- ---------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $3,827,529 $ 3,738,263 $ 7,565,792 $ 605,447 1/1/1998 40 yrs.
Distribution facilities
and warehouses in
Erlanger, Kentucky
partially leased to
Alstom Power, Inc. 1,525,593 21,823,712 23,349,305 3,805,365 1/1/1998 40 yrs.
Supermarkets leased to
Winn-Dixie Stores, Inc. 406,674 3,237,776 3,644,450 670,948 1/1/1998 40 yrs.
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833 8,732,879 1,471,546 1/1/1998 40 yrs.
Land leased to Unisource
Worldwide, Inc. 4,573,360 4,573,360 1/1/1998 N/A
Centralized telephone
bureau leased to Exel
Communications, Inc. 925,162 4,125,610 5,050,772 715,300 1/1/1998 40 yrs.
Office building leased to
Petrocon Engineering,
Inc. and Olmstead Kirk
Paper Company 164,113 2,848,790 3,012,903 503,172 1/1/1998 40 yrs.
Computer center leased to
AT&T Corporation 269,700 9,263,094 9,532,794 739,969 1/1/1998 40 yrs.
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,107,855 4,671,667 5,779,522 790,101 1/1/1998 40 yrs.
Warehouse and
distribution leased to
Shinn Systems 246,949 6,398,740 6,645,689 1,089,748 1/1/1998 40 yrs.
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267 849,339 106,622 1/1/1998 40 yrs.
Land leased to Eaton
Corporation (f/k/a
Powerware Corporation) 828,277 828,277 1/1/1998 N/A
Warehouse/ office
research facilities
leased to
Lockheed Martin
Corporation 1,218,860 6,823,181 8,042,041 1,184,704 1/1/1998 40 yrs.
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,991,953 2,285,754 337,957 1/1/1998 40 yrs.
-28-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company Costs Capitalized
----------------------- Subsequent to Increase (decrease) in
Description Encumbrances Land Buildings Acquisition(a) Net Investments(b)
- ------------------------- ------------ --------- ------------ ----------------- ---------------------
Operating Method:
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,368,141 242,885 98,916
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 3,913,657 186,165 60,394
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,321,776 152,368
Manufacturing facilities
in Traveler's Rest, SC 263,618 4,046,406 (2,506,543)
Land leased to AutoZone,
Inc. 11,350,339 9,382,198 (147,949)
Office facility leased to
Verizon Communications,
Inc. 219,548 1,578,592
Land leased to Sybron
Dental Specialities,
Inc. 1,135,003 17,286
Office facility in
Bloomingdale, IL leased
to 4 lessees 1,074,640 11,452,967 324,192
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737
Manufacturing facilities
leased to Quebecor
Printing Inc. 11,145,915 4,458,047 18,695,004 477,347
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193
Manufacturing facility
leased to Detroit
Diesel Corporation 12,600,516 5,967,620 31,730,547 775,099
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 13,585,396 5,034,749 18,956,971 2,185,077 541,325
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (e) Accumulated Statement of
--------------------------------- Depreciation Date Income
Description Land Buildings Total (e) Acquired is Computed
- ------------------------- --------- ---------- --------- ------------ -------- --------------
Operating Method:
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,709,942 4,883,050 626,763 1/1/1998 40 yrs.
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 4,160,216 4,505,539 695,440 1/1/1998 40 yrs.
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580 1,723,305 296,027 1/1/1998 40 yrs.
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,474,144 7,525,913 948,000 1/1/1998 40 yrs.
Manufacturing facilities
in Traveler's Rest, SC 263,618 1,539,863 1,803,481 457,467 1/1/1998 40 yrs.
Land leased to AutoZone,
Inc. 9,234,249 9,234,249 1/1/1998 N/A
Office facility leased to
Verizon Communications,
Inc. 219,548 1,578,592 1,798,140 276,253 1/1/1998 40 yrs.
Land leased to Sybron
Dental Specialities,
Inc. 1,152,289 1,152,289 1/1/1998 N/A
Office facility in
Bloomingdale, IL leased
to 4 lessees 1,085,551 11,766,248 12,851,799 2,025,367 1/1/1998 40 yrs.
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737 1,811,330 236,554 1/1/1998 40 yrs.
Manufacturing facilities
leased to Quebecor
Printing Inc. 4,458,047 19,172,351 23,630,398 3,323,889 1/1/1998 40 yrs.
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331 2,174,520 321,883 1/1/1998 40 yrs.
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193 9,795,193 1/1/1998 N/A
Manufacturing facility
leased to Detroit
Diesel Corporation 5,967,620 32,505,646 38,473,266 5,637,710 1/1/1998 40 yrs.
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 5,034,749 21,683,373 26,718,122 3,684,005 1/1/1998 40 yrs.
29
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2004
Initial Cost to Company Costs Capitalized
----------------------- Subsequent to Increase (decrease)in
Description Encumbrances Land Buildings Acquisition(a) Net Investments(b)
- ------------------------- ------------ --------- ------------ ----------------- ---------------------
Operating Method:
Distribution facility
leased to Kenyon
International Emergency
Services, Inc. 166,745 884,772
Retail store leased to
Eagle Hardware and
Garden, Inc. 9,809,802 4,125,000 11,811,641 393,206
Office building in
Pantin, France leased
to eleven lessees 13,222,810 2,674,914 8,113,120 2,211,580
Office facility in Rouen,
France leased to Tellit
Assurances 3,988,428 542,968 5,286,915 1,007,506
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 4,905,935 3,260,000 22,574,073 377,160
Office facility leased to
America West Holdings
Corporation. 16,919,104 2,274,782 26,701,663
Office facility leased to
Sprint Spectrum L.P. 8,503,603 1,190,000 9,352,965 1,315,694
Office facility in Rouen,
France leased to
Direction Regional des
Affaires Sanitaires et
Sociales 1,497,610 303,061 2,109,731 268,173
Office facility leased to
Cendant Operations, Inc. 5,777,939 351,445 5,980,736 527,368 42,917
Office facility leased to
BellSouth
Telecommunications, Inc. 4,813,186 720,000 7,708,458 119,092
Office buildings in
Phalempine and Joue Les
Tourse, France leased
to DSM Food Specialties
and Societe de
Traitements 3,720,064 451,168 4,478,891 1,107,879
Office facility in Tours,
France leased to
Bouygues Telecom SA 10,063,942 1,033,532 9,737,359 4,640,780
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 21,803,491 18,520,178 10,006,308
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 13,163,763 1,090,044 317,639
Manufacturing facilities
leased to BE Aerospace, 8,971,692 1,860,000 12,538,600 5,663
Life on
which
Gross Amount at which Carried Depreciation
at Close of Period (e) in Latest
--------------------------------- Accumulated Statement of
Depreciation Date Income
Description Land Buildings Total (e) Acquired is Computed
- ------------------------- --------- ---------- ---------- ------------ ---------- ------------
Operating Method:
Distribution facility
leased to Kenyon
International Emergency
Services, Inc. 166,745 884,772 1,051,517 154,835 1/1/1998 40 yrs.
Retail store leased to
Eagle Hardware and
Garden, Inc. 4,493,534 11,836,313 16,329,847 1,984,140 4/23/1998 40 yrs.
Office building in
Pantin, France leased
to eleven lessees 1,597,493 11,402,121 12,999,614 1,865,389 5/27/1998 40 yrs.
Office facility in Rouen,
France leased to Tellit
Assurances 663,150 6,174,239 6,837,389 967,526 6/10/1998 40 yrs.
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 3,260,000 22,951,233 26,211,233 3,774,755 6/15/1998 40 yrs.
Office facility leased to
America West Holdings
Corporation. 2,274,782 26,701,663 28,976,445 3,780,828 6/30/1998 40 yrs.
Office facility leased to
Sprint Spectrum L.P. 1,466,884 10,391,775 11,858,659 1,514,107 7/1/1998 40 yrs.
Office facility in Rouen,
France leased to
Direction Regional des
Affaires Sanitaires et
Sociales 257,922 2,423,043 2,680,965 363,921 11/16/1998 40 yrs.
Office facility leased to
Cendant Operations, Inc. 351,445 6,551,021 6,902,466 1,028,376 2/19/1999 40 yrs.
Office facility leased to
BellSouth
Telecommunications, Inc. 720,000 7,827,550 8,547,550 985,343 12/22/1999 40 yrs.
Office buildings in
Phalempine and Joue Les
Tourse, France leased
to DSM Food Specialties
and Societe de
Traitements 581,606 5,456,332 6,037,938 778,978 5/5/1999 40 yrs.
Office facility in Tours,
France leased to
Bouygues Telecom SA 1,497,610 13,914,061 15,411,671 1,476,554 9/1/2000 40 yrs.
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 28,526,486 28,526,486 2,338,203 12/3/2001 40 yrs.
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 14,571,446 18,360,465 1,075,625 1/1/1998 40 yrs.
Manufacturing facilities
leased to BE Aerospace, 1,860,000 12,544,263 14,404,263 737,049 9/12/2002 40 yrs.
30
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company Costs Capitalized
-------------------------- Subsequent to Increase (decrease)in
Description Encumbrances Land Buildings Acquisition (a) Net Investments (b)
----------- ------------ ------------ ------------ ----------------- ---------------------
Operating Method:
Inc.
Office buildings leased to
Omnicom Group, Inc. (c) 4,594,898 2,032,029 10,151,780
Retail stores leased to Kmart
Corporation (c) 1,039,313 4,788,318
Office building leased to
Titan Corporation (c) 4,646,946 19,711,863
Warehouse/office leased to
Hibbett Sporting Goods,
Inc. (c) 4,860,520 1,255,668 7,703,604
Office/repair facility leased
to Qwest Communications,
Inc. (c) 1,579,242 586,369 45,954
Office buildings leased to
Xerox Corporation/Photo
Center and Affiliated
Foods SW, Inc. (c) 850,212 2,938,815
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. (c) 3,658,595 362,004 10,854,781
Warehouse leased to Sears
Logistics Services, Inc. 974,500 6,979,507
Warehouse leased to Lucent
Technologies, Inc. (c) 1,639,057 10,607,869
------------ ----------- ------------ ----------- -----------
$177,373,027 $91,768,863 $406,473,049 $18,541,974 $13,494,682
============ =========== ============ =========== ===========
Life on which
Depreciation in
Gross Amount at which Carried Latest
at Close of Period (e) Statement of
--------------------------------------- Accumulated Date Income
Description Land Buildings Total Depreciation (e) Acquired is Computed
----------- ----------- ------------ ------------ ---------------- -------- ---------------
Operating Method:
Inc.
Office buildings leased to
Omnicom Group, Inc. (c) 2,032,029 10,151,780 12,183,809 74,023 9/1/2004 40 yrs.
Retail stores leased to Kmart
Corporation (c) 1,039,313 4,788,318 5,827,631 34,915 9/1/2004 40 yrs.
Office building leased to
Titan Corporation (c) 4,646,946 19,711,863 24,358,809 143,732 9/1/2004 40 yrs.
Warehouse/office leased to
Hibbett Sporting Goods,
Inc. (c) 1,255,668 7,703,604 8,959,272 56,172 9/1/2004 40 yrs.
Office/repair facility leased
to Qwest Communications,
Inc. (c) 586,369 45,954 632,323 335 9/1/2004 40 yrs.
Office buildings leased to
Xerox Corporation/Photo
Center and Affiliated
Foods SW, Inc. (c) 850,212 2,938,815 3,789,027 21,429 9/1/2004 40 yrs.
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. (c) 362,004 10,854,781 11,216,785 79,150 9/1/2004 40 yrs.
Warehouse leased to Sears
Logistics Services, Inc. 974,500 6,979,507 7,954,007 50,892 9/1/2004 40 yrs.
Warehouse leased to Lucent
Technologies, Inc. (c) 1,639,057 10,607,869 12,246,926 77,349 9/1/2004 40 yrs.
----------- ------------ ------------ -----------
$93,925,850 $436,352,718 $530,278,568 $53,913,863
=========== ============ ============ ===========
31
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company Costs Capitalized
----------------------- Subsequent to Increase (Decrease)
Description Encumbrances Land Buildings Acquisition (a) in Net Investment(b)
----------- ------------ ---------- ----------- ---------------- --------------------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $ 3,503,387 $ 331,910 $12,281,102 $ 37,871
Centralized Telephone Bureau
leased to Western Union
Financial Services, Inc. 842,233 4,762,302 (418,724)
Warehouse and manufacturing
buildings leased to Gibson
Greetings, Inc. 3,495,507 34,016,822 (3,883,100)
Warehouse and manufacturing
buildings leased to CSS
Industries, Inc. 1,051,005 14,036,912 (2,228,579)
Manufacturing, distribution
and office buildings leased
to Brodart Co. 445,383 11,323,899 (5,305,413)
Technology center leased to
Faurecia Exhaust Systems, Inc. 223,585 2,684,424 (276,580)
Office and research facility
leased to Eaton Corporation
(f/k/a Powerware Corporation) 2,844,120 (1,326,380)
Manufacturing facility leased
to Penberthy Products, Inc. 70,317 1,476,657 (367,656)
Manufacturing facility and
warehouse leased to DS Group
Limited 238,532 3,339,449 (1,199,858)
Retail stores leased to
AutoZone, Inc. 16,416,402 (384,609)
Retail store leased to
Wal-Mart Stores, Inc. 1,839,303 6,535,144 (869,560)
Manufacturing and office
facilities leased to Sybron
International Corporation 2,273,857 18,078,975 12,728 (635,702)
Manufacturing and office
facilities leased to Sybron
Dental Specialties, Inc. 454,101 13,250,980 9,315 174,479
Manufacturing and office
facilities leased to NVR L.P. 728,683 6,092,840 41,501
Office/warehouse facilities
leased to United Stationers
Supply Company 1,882,372 5,846,214 26,581 (1,156,540)
Bottling and distribution
facilities lease to Dr Pepper
Bottling Company of Texas 27,598,638 (1,371,862)
Gross Amount at which Carried
at Close of Period
------------------------------
Description Total Date Acquired
----------- ------------------------------ -------------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $ 12,650,883 1/1/1998
Centralized Telephone Bureau
leased to Western Union
Financial Services, Inc. 5,185,811 1/1/1998
Warehouse and manufacturing
buildings leased to Gibson
Greetings, Inc. 33,629,229 1/1/1998
Warehouse and manufacturing
buildings leased to CSS
Industries, Inc. 12,859,338 1/1/1998
Manufacturing, distribution
and office buildings leased
to Brodart Co. 6,463,869 1/1/1998
Technology center leased to
Faurecia Exhaust Systems, Inc. 2,631,429 1/1/1998
Office and research facility
leased to Eaton Corporation
(f/k/a Powerware Corporation) 1,517,740 1/1/1998
Manufacturing facility leased
to Penberthy Products, Inc. 1,179,318 1/1/1998
Manufacturing facility and
warehouse leased to DS
Group Limited 2,378,123 1/1/1998
Retail stores leased to
AutoZone, Inc. 16,031,793 1/1/1998
Retail store leased to
Wal-Mart Stores, Inc. 7,504,887 1/1/1998
Manufacturing and office
facilities leased to Sybron
International Corporation 19,729,858 1/1/1998
Manufacturing and office
facilities leased to Sybron
Dental Specialties, Inc. 13,888,875 1/1/1998
Manufacturing and office
facilities leased to NVR L.P. 6,863,024 1/1/1998
Office/warehouse facilities
leased to United Stationers
Supply Company 6,598,627 1/1/1998
Bottling and distribution
facilities lease to Dr Pepper
Bottling Company of Texas 26,226,776 1/1/1998
32
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Gross Amount
at which
Carried at
Close of
Initial Cost to Company Costs Capitalized Period
------------------------- Subsequent to Increase (Decrease) ------------ Date
Description Encumbrances Land Buildings Acquisition (a) in Net Investment (b) Total Acquired
----------- ------------ ----------- ------------ ----------------- -------------------- ------------ ---------
Direct Financing Method:
Office buildings leased
to Amerisure Mutual
Insurance Company (c) 9,821,824 1,965,093 11,884,907 5,919 1,448,829 15,304,748 9/1/2004
------------ ----------- ------------ ----------------- ------------------- ------------
$ 13,325,211 $15,841,881 $192,469,787 $ 54,543 $ (17,721,883) $190,644,328
============ =========== ============ ================= =================== ============
Initial Cost to Company
---------------------------------------------
Costs Increase
Capitalized (decrease)
Personal Subsequent to in Net
Description Land Buildings Property Acquisition (a) Investments (b)
----------- ---------- ----------- ----------- --------------- ---------------
Operating real
estate:
Hotel located in:
Livonia, Michigan $2,765,094 $11,086,650 $ 3,277,133 $ 6,494,138 $ (7,500,000)
---------- ----------- ----------- -------------- --------------
$2,765,094 $11,086,650 $ 3,277,133 $ 6,494,138) $ (7,500,000)
========== =========== =========== ============== ==============
Life on which
Gross Amount at which Carried Depreciation in
at Close of Period (e) Latest Statement
-------------------------------------------------- of Income Statement
Personal Accumulated Date of Income is
Description Land Buildings Property Total Depreciation (e) Acquired computed
----------- ------------ ----------- ---------- ----------- ---------------- -------- -------------------
Operating real
estate:
Hotel located in:
Livonia, Michigan $ 2,765,094 $ 7,362,690 $5,995,231 $16,123,015 $ 6,982,836 1/1/1998 7-40 yrs.
------------ ----------- ---------- ----------- ----------------
$ 2,765,094 $ 7,362,690 $5,995,231 $16,123,015 $ 6,982,836
============ =========== ========== =========== ================
33
W. P. CAREY & CO. LLC
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs
subsequent to acquisition, including legal fees, appraisal fees,
title costs, other related professional fees and purchases of
furniture, fixtures, equipment and improvements at the hotel
properties.
(b) The increase (decrease) in net investment is primarily due to (i)
the amortization of unearned income from net investment in direct
financing leases producing a periodic rate of return which at times
may be greater or less than lease payments received, (ii) sales of
properties (iii) impairment charges, (iv) changes in foreign
currency exchange rates, and (v) an adjustment in connection with
purchasing certain minority interests.
(c) Property acquired in connection with merger transaction on September
1, 2004.
(d) At December 31, 2004, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
approximately $709,744.
(e)
Reconciliation of Real Estate Accounted for Under the
Operating Method
December 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $445,738,136 $474,272,069 $459,243,153
Additions 87,599,638 2,126,915 15,232,049
Dispositions (5,548,193) (16,136,445) (2,582,356)
Foreign currency translation adjustment 5,669,071 10,747,719 8,424,122
Reclassification from/to assets held for sale, operating real estate,
net investment in direct financing lease and equity investments and
under development 2,069,916 (24,712,122) (1,692,544)
Impairment charge (5,250,000) (560,000) (4,352,355)
------------ ------------ ------------
Balance at end of year $530,278,568 $445,738,136 $474,272,069
============ ============ ============
Reconciliation of Accumulated Depreciation
December 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $ 45,020,621 $ 41,716,083 $ 32,401,204
Depreciation expense 9,593,923 10,262,019 10,169,739
Depreciation expense from discontinued operations 200,046 271,922 312,176
Foreign currency translation adjustment 783,292 772,590 417,239
Reclassification from/to assets held for sale, operating real estate and
net investment in direct financing lease (93,241) (6,245,358) (1,362,047)
Dispositions (1,590,778) (1,756,635) (222,228)
------------ ------------ ------------
Balance at end of year $ 53,913,863 $ 45,020,621 $ 41,716,083
============ ============ ============
Reconciliation for Operating Real Estate
December 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $ 21,952,052 $ 5,720,760 $ 8,066,244
Additions 1,670,963 22,900 384,974
Reclass from real estate accounted for under the operating method - 21,952,052 -
Dispositions - (5,743,660) (2,730,458)
Impairment charge (7,500,000) - -
------------ ------------ ------------
Balance at close of year $ 16,123,015 $ 21,952,052 $ 5,720,760
============ ============ ============
Reconciliation of Accumulated Depreciation for
Operating Real Estate
December 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $ 5,805,321 $ 1,664,817 $ 2,076,314
Depreciation expense 1,177,515 - 328,297
Depreciation expense from discontinued operations - 170,219 154,491
Dispositions - (1,835,036) (889,848)
Reclassification from real estate accounted for under the operating method - 5,805,321 (4,437)
------------ ------------ ------------
Balance at end of year $ 6,982,836 $ 5,805,321 $ 1,664,817
============ ============ ============
34
APPENDIX A TO FORM 10-K
W. P. CAREY & CO. LLC
2004 ANNUAL REPORT
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
concluded that, as of December 31, 2004, our internal control over financial
reporting is effective based on those criteria.
Our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm who also audited our consolidated
financial statements included in Item 8, as stated in their report in Item 8.
-1-
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
2004 2003 2002 2001 2000
---------- -------- -------- -------- ----------
Operating Data:
Revenues (1) $ 227,774 $159,238 $152,404 $120,493 $ 101,469
Income (loss) from continuing operations (2) 69,048 62,562 44,138 31,079 (12,688)
Basic earnings (loss) from continuing
operations per share 1.85 1.71 1.24 .90 (.43)
Diluted earnings (loss) from continuing
operations per share 1.77 1.64 1.21 .89 (.43)
Net income (loss) 63,851 62,878 46,588 35,761 (9,278)
Basic earnings (loss) per share 1.71 1.72 1.31 1.04 (.31)
Diluted earnings (loss) per share 1.64 1.65 1.28 1.02 (.31)
Cash dividends paid 65,073 62,978 60,708 58,048 49,957
Cash provided by operating activities 98,849 67,295 75,896 58,877 58,222
Cash dividends declared per share 1.76 1.73 1.72 1.70 1.69
Payment of mortgage principal (3) 9,428 8,548 8,428 8,230 7,590
Balance Sheet Data:
Real estate, net (4) $ 485,505 $421,543 $440,193 $435,629 $ 433,867
Net investment in direct financing leases 190,644 182,452 189,339 258,041 287,876
Total assets 1,013,539 906,505 893,524 915,883 904,242
Long-term obligations (5) 278,821 158,605 226,102 287,903 176,657
(1) Prior year amounts have been reclassified to conform to the current year
presentation of excluding other interest income from revenues.
(2) Includes gain on sale of real estate in 2002 and 2001 and a loss on sale
of real estate in 2000.
(3) Represents scheduled mortgage principal amortization paid.
(4) Includes real estate accounted for under the operating method, operating
real estate and real estate under construction, net of accumulated
depreciation.
(5) Represents mortgage and note obligations and deferred acquisition fee
installments that are due after more than one year.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In thousands except share and per share amounts)
The following discussion and analysis of financial condition and results of
operations of W. P. Carey & Co. LLC contain forward-looking statements and
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2004. As used in this Annual
Report on Form 10-K, the terms "the Company," "we," "us" and "our" include W. P.
Carey and Co, LLC, its consolidated subsidiaries and predecessors, unless
otherwise indicated. 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," "seeks,"
"plans" or similar expressions. Do not unduly rely on forward-looking
statements. They give our expectations about the future and are not guarantees,
and speak only as of the date they are made. Such statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievement to be materially different from the results
of operations or plan expressed or implied by such forward-looking statements.
While we cannot predict all of the risks and uncertainties, they include, but
are not limited to, those described in Item 1 of this Annual Report on Form
10-K. Accordingly, such information should not be regarded as representations
that the results or conditions described in such statements or that our
objectives and plans will be achieved.
EXECUTIVE OVERVIEW
Nature of Business
As described in more detail in Item 1 of this Annual Report, we are a publicly
traded limited liability company. Our stock is listed on the New York Stock
Exchange. We operate in two operating segments, real estate operations, with
investments in the United States and Europe, and management services operations.
Within our management services operations, we are the advisor to the following
affiliated publicly-owned, non-traded 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, until its merger into CPA(R):15 during 2004, Carey Institutional
Properties Incorporated ("CIP(R)"), (collectively, the "CPA(R) REITs").
CPA(R):16-Global was formed in 2003.
How We Earn 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. We may also earn
incentive and disposition fees in connection with providing liquidity
alternatives to CPA(R) REIT shareholders. As funds available to the CPA(R) REITs
are invested in properties, the asset base for which we earn revenue increases.
We may elect to collect performance fee revenue in cash or shares of the CPA(R)
REITs at our 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 and the
ability to raise capital on behalf of the CPA(R) REITs. We typically start to
evaluate liquidity alternatives for the CPA(R) REITs that we manage, 8 to 12
years after completion of the offering. Such events occur periodically and
generally result in higher revenue being realized than in periods where there
are no such events.
Revenues from our real estate operations are earned primarily from leasing real
estate. We acquire and own 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,
tenant defaults and sales of property.
How Management Evaluates Results of Operations
Management evaluates our results with a primary focus on increasing and
enhancing the value, quality and amount of the assets under management by our
management services operations and seeking to increase value in our real estate
operations through focusing 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
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
CPA(R) REITs is affected, among other things, by the CPA(R) REITs ability to
raise capital. During 2004, we managed CPA(R):16-Global's "best efforts" public
offering. CPA(R):16-Global suspended this offering in December 2004 for an
unspecified time and subsequently withdrew its offering. CPA(R):16-Global has
filed a registration statement, which is not yet effective, for a second
offering. (See "Significant Developments During 2004" section of Item 1 to this
Annual Report.)
Management's evaluation of operating results includes our ability to generate
necessary cash flow in order to fund dividends to our 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 have no impact on cash flow and to other noncash charges
such as depreciation and impairment charges. In evaluating cash flow from
operations, management includes equity distributions that are included in
investing activities to the extent that the distributions in excess of equity
income are the result of noncash charges such as depreciation and amortization.
Management does not consider unrealized gains and losses from foreign currency
when evaluating our ability to fund dividends. Management's evaluation of our
potential for generating cash flow is based on long-term assessments of both our
real estate portfolio and our assets under management.
Our real estate operations consist of the investment in and the leasing of
industrial and commercial real estate. Management's evaluation of the sources of
lease revenues for the years ended December 31, 2004, 2003 and 2002 are as
follows:
2004 2003 2002
-------- --------- --------
Per Statements of Income:
Rental income $ 46,472 $ 43,992 $ 44,304
Interest income from direct financing leases 21,322 20,655 22,298
Adjustments:
Share of lease revenues applicable to minority interests (1,597) (1,316) (766)
Share of lease revenues from equity investments 12,426 8,786 7,434
-------- -------- --------
$ 78,623 $ 72,117 $ 73,270
======== ======== ========
For the years ended December 31, 2004, 2003 and 2002, we earned net lease
revenues (i.e., rental income and interest income from direct financing leases)
from over 100 lessees. A summary of net lease revenues including all current
lease obligors with more than $1,000 in 2004 annual revenues is as follows:
Years Ended December 31,
----------------------------------------------
2004 % 2003 % 2002 %
------- --- ------- --- ------- ---
Dr Pepper Bottling Company of Texas $ 4,334 6% $ 4,290 6% $ 4,405 6%
Detroit Diesel Corporation 4,158 5 4,158 6 4,158 6
Bouygues Telecom, S.A. (a) (b) 3,619 5 3,193 4 2,952 4
Gibson Greetings, Inc., a wholly owned
subsidiary of American Greetings, Inc. 3,578 5 3,593 5 4,149 6
Carrefour France, SA (b) (d) (g) 3,417 4 253 0 - -
Federal Express Corporation (c) 2,933 4 2,903 4 2,876 4
America West Holdings Corp. 2,838 4 2,738 4 2,539 3
Orbital Sciences Corporation 2,747 4 2,655 4 2,655 4
Quebecor Printing Inc. 2,653 3 2,632 4 2,563 3
AutoZone, Inc. 2,362 3 2,393 3 2,411 3
Sybron International Corporation 2,286 3 2,083 3 2,164 3
CheckFree Holdings, Inc. (d) 2,180 3 2,128 3 2,108 3
Sybron Dental Specialties Inc. 1,770 2 1,613 2 1,613 2
Unisource Worldwide, Inc. 1,705 2 1,710 2 1,732 2
Information Resources, Inc. (d) 1,644 2 1,644 2 1,644 2
CSS Industries, Inc. 1,637 2 1,647 2 1,656 2
BE Aerospace, Inc. 1,585 2 1,620 2 433 1
Sprint Spectrum L.P. 1,425 2 1,425 2 1,425 2
Titan Corporation (e) 1,316 2 517 1 507 1
Eagle Hardware & Garden, Inc., a wholly 1,306 2 1,338 2 1,313 2
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Years Ended December 31,
----------------------------------------------
2004 % 2003 % 2002 %
------- --- ------- --- ------- ---
owned subsidiary of Lowe's Companies Inc.
Brodart Co. 1,273 2 1,235 2 1,519 2
AT&T Corporation 1,259 2 1,259 2 1,259 2
United States Postal Service 1,233 2 1,233 2 1,233 2
BellSouth Telecommunications, Inc. 1,224 1 1,224 2 1,224 2
Hologic, Inc. (d) 1,136 1 1,136 2 382 1
Lockheed Martin Corporation 1,094 1 1,196 2 1,389 2
Cendant Operations, Inc. 1,093 1 1,075 1 1,075 1
Swat-Fame, Inc. 1,086 1 885 1 749 1
United Space Alliance 1,051 1 951 1 885 1
Anthony's Manufacturing Company, Inc. 1,019 1 1,019 1 1,019 1
Other (b) (f) 17,662 22 16,371 23 19,233 26
------- --- ------- --- ------- ---
$78,623 100% $72,117 100% $73,270 100%
======= === ======= === ======= ===
(a) Net of proportionate share applicable to our minority interest
owners.
(b) Revenue amounts are subject to fluctuations in foreign currency
exchange rates.
(c) Includes our 40% proportionate share of lease revenues from our
equity ownership in one of the properties.
(d) Represents our proportionate share of lease revenue from our equity
investment.
(e) Includes our 18.54% proportionate share of lease revenues from our
equity ownership from the period January 1, 2004 through August 31,
2004, at which time we acquired the remaining 81.46% interest in the
investment.
(f) Includes proportionate share of lease revenues from our equity
investments and net of proportionate share applicable to our
minority interest owners.
(g) The Carrefour France, SA interest was acquired in November 2003.
Current Developments and Trends
Competition for investments remains strong. If general economic conditions
continue to improve, inflation and interest rates, at least for the short term,
are expected to continue to rise as well. Rising interest rates are expected to
have the following impact on our business:
- Rising interest rates would likely cause a decline in the
values of properties in our investment portfolio;
- Rising interest rates would likely cause an increase in the
Consumer Price Index ("CPI"), which over time will result in
increased revenue and partially offset the impact of declining
property values;
- Rising interest rates would have an impact on debt costs as
the line of credit under our credit facility is a variable
rate obligation;
- Rising interest rates are expected to enable us to achieve
higher rates of return on new investments, which would be
partially offset by increased debt costs on these new
investments associated with increased interest rates; and
- Rising interest rates could make other income-generating
products more attractive to investors on a relative basis than
our CPA(R) REITs.
Our objective is to increase shareholder value and earnings through prudent
management of both our real estate assets and the real estate assets of the
CPA(R) REITs, through the expansion of our management services business and
opportunistic investments. We expect 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 our analysis of the
risk/return tradeoffs.
We expect to continue investing in the international commercial real estate
market, as we believe the international market provides for favorable
opportunities relative to risk/return as compared to U.S. opportunities. In
addition, financing terms are generally more favorable for international
transactions. Financing terms for international transactions generally provide
for lower interest rates and greater flexibility to finance the underlying
property. These benefits are partially offset by shorter financing maturities.
Investing in additional international properties is also expected to increase
our exposure to fluctuations in foreign currency exchange rates (primarily the
Euro).
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
For the year ended December 31, 2004, cash flows generated from operations and
equity investments were sufficient to fund dividends paid and meet other
obligations including paying scheduled mortgage principal payments and making
distributions to minority interests which hold ownership interests in several of
our properties. Such cash flows also provided partial funding for the purchase
of interests in 17 properties from CIP(R) prior to the merger.
Significant business developments that occurred during 2004 are detailed in the
"Significant Developments During 2004" section of Item 1 to this Annual Report.
RESULTS OF OPERATIONS
We evaluate our results from operations by major business segment as follows:
REAL ESTATE OPERATIONS. This business segment includes the operations of
properties under operating lease, properties under direct financing leases, real
estate under construction and development, assets held for sale and equity
investments in ventures accounted for under the equity method which are engaged
in these activities. Because of our legal structure, these operations are not
generally subject to federal income taxes; however, they may be subject to
certain state, local and foreign taxes.
MANAGEMENT SERVICES OPERATIONS. This business segment includes management
operations on a fee for services basis predominately from the CPA(R) REITs
pursuant to the advisory agreements and to a lesser extent from third parties.
This business line also includes interest on deferred fees and earnings from
unconsolidated investments in the CPA(R) REITs accounted for under the equity
method which were received in lieu of cash for certain fees. In connection with
maintaining our status as a publicly traded partnership, these operations are
performed in corporate subsidiaries and are subject to federal, state, local and
foreign taxes as applicable. Our financial statements are prepared on a
consolidated basis including these taxable operations and include a provision
for current and deferred taxes on these operations.
A summary of comparative results of these business segments is as follows:
REAL ESTATE OPERATIONS
--------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2004 2003 CHANGE 2003 2002 CHANGE
-------- -------- -------- -------- -------- --------
Lease revenue $ 67,794 $ 62,847 $ 4,947 $ 62,847 $ 64,077 $ (1,230)
Other operating income 5,798 5,233 565 5,233 1,258 3,975
-------- -------- -------- -------- -------- --------
Total revenue 73,592 68,080 5,512 68,080 65,335 2,745
Depreciation and amortization 10,841 9,474 1,367 9,474 10,213 (739)
General and administrative expenses 3,561 1,893 1,668 1,893 1,456 437
Property expenses 5,651 5,854 (203) 5,854 5,281 573
Impairment charges and loan losses 7,048 1,480 5,568 1,480 20,510 (19,030)
-------- -------- -------- -------- -------- --------
Operating expenses 27,101 18,701 8,400 18,701 37,460 (18,759)
-------- -------- -------- -------- -------- --------
46,491 49,379 (2,888) 49,379 27,875 21,504
Other interest income 270 248 22 248 542 (294)
Minority interest in (income) loss (489) (168) (321) (168) 120 (288)
Income (loss) from equity investments 3,665 3,149 516 3,149 (895) 4,044
Interest expense (14,803) (14,982) 179 (14,982) (15,893) 911
Gain on foreign currency transactions 1,222 48 1,174 48 - 48
Gain on sales of real estate and
securities - - - - 12,415 (12,415)
-------- -------- -------- -------- -------- --------
Income from continuing operations
before income taxes 36,356 37,674 (1,318) 37,674 24,164 13,510
Provision for income taxes (1,437) (1,401) (36) (1,401) (1,496) 95
-------- -------- -------- -------- -------- --------
Income from continuing operations $ 34,919 $ 36,273 $ (1,354) $ 36,273 $ 22,668 $ 13,605
======== ======== ======== ======== ======== ========
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Lease Revenue
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, lease
revenue (rental income and interest income from direct financing leases)
increased by $4,947. The increase was primarily attributable to revenue earned
from the properties acquired from CIP(R) in September 2004 of $3,559 and
additional revenue from scheduled rent increases and new leases of $1,638.
Annual contractual lease revenues from the interests acquired from CIP(R) are
$11,321 for 2005. Our net leases generally have rent increases based on formulas
indexed to increases in the CPI or other indices for the jurisdiction in which
the property is located, sales overrides or other periodic increases, which are
designed to increase lease revenues in the future.
In February 2005, Winn-Dixie Stores, Inc., a lessee of WPC's Bay Minette,
Alabama property, indicated that it intends to terminate its lease in
connection with its reorganization in Chapter 11 bankruptcy. Annual lease
revenue from the Bay Minette property is $128.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, lease
revenue decreased by $1,230. Lease terminations and expirations in 2002 and 2003
reduced lease revenue by $2,535 in 2003. As the result of writedowns of direct
financing leases in 2003 and 2002, the rates of return on several leases were
revised, and interest income from direct financing leases for financial
reporting purposes in 2003 decreased by approximately $1,460. Lease revenues
were also negatively affected by the reclassification of our ownership interest
in Learning Care Group, Inc. (formerly Childtime Childcare, Inc.) as an equity
investment in August 2002, which decreased lease revenue by $256. These
decreases were partially offset by revenue from a new lease with BE Aerospace,
Inc. on properties purchased during the third quarter of 2002 which contributed
revenue of $1,187, the positive effect of increases in average foreign currency
exchange rate for the Euro of approximately $1,050, as well as new leases and
several rent increases on existing leases of approximately $775.
Other Operating Income
2004 VS. 2003 - Other operating income generally consists of lease termination
payments and other non-rent related revenues including, but not limited to,
settlements of claims against former lessees. We receive settlements in the
ordinary course of business; however, the timing and amount of such settlements
cannot always be estimated. For the comparable years ended December 31, 2004 and
2003, other operating income increased $565 primarily due to increased
bankruptcy claim distributions and other settlement income received from former
lessees in 2004.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, other
operating income increased $3,975 primarily due to the same reasons as stated
above. In 2003, we received a lease termination settlement of $ 2,250 from The
Gap, Inc.
Depreciation and Amortization
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
depreciation and amortization expense increased $1,367. The increase is
primarily a result of depreciation and amortization expense recognized on the
properties acquired from CIP(R), which represented $1,766, partially offset by a
decrease in amortization of certain intangibles that became fully amortized in
2003. Annual depreciation and amortization expense for the properties acquired
from CIP(R) is expected to be approximately $6,050.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
depreciation expense decreased $739. The decrease is primarily the result of
certain intangibles becoming fully amortized in 2003, which resulted in a
decrease of $1,356. This decrease was partially offset by additional
depreciation of $228 related to the acquisition of the BE Aerospace
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
properties in 2002, and increases in depreciation for capital improvements on
existing properties and the effect of increases in average foreign currency
exchange rates.
General and Administrative Expenses
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
general and administrative expenses increased $1,668 primarily due to an
increase in fees for auditing and consulting services related to
ongoing securities law compliance, including the Sarbanes-Oxley Act, and
internal audit fees, as well as an increase in legal fees related to the ongoing
SEC investigation described in Item 3 to this Annual Report.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
general and administrative expenses increased $437 primarily due to increases in
fees for accounting, auditing and consulting services including internal audit
fees.
Impairment Charges and Loan Losses
2004, 2003 and 2002 - For the comparable years ended December 31, 2004 and 2003,
impairment charges and loan losses increased $5,568. For the comparable years
ended December 31, 2003 and 2002, impairment charges and loan losses decreased
$19,030. Impairment charges were recorded due to several factors including our
decision to sell property at less than its carrying value, our determination
that the property has experienced an other than temporary decline in value and
for direct financing leases our assessment that the unguaranteed residual value
of the underlying property had declined. The table below summarizes the
impairment charges recorded in 2004, 2003 and 2002 for both assets held for use
and assets held for sale:
2004 2003 2002
IMPAIRMENT IMPAIRMENT IMPAIRMENT
PROPERTY CHARGES CHARGES CHARGES REASON
-------- ---------- ---------- ----------- ------
Meristar operating partnership units $ 4,596 Evaluation determined that investment value has declined
Cincinnati, Ohio 4,588 Decline in unguaranteed residual value of property
Williamsport, Pannsylvania 3,486 Decline in unguaranteed residual value of property
Memphis, Tennessee $ 2,337 Decline in unguaranteed residual value of property
Winona, Minnesota 1,250 Loan loss related to sale of property
Various properties Decline in unguaranteed residual value of properties or
2,911 $ 1,480 7,840 decline in asset value
Bay Minette, Alabama 550 _ _ Evaluation determined that property value has declined
------- ------- -------
Impairment charges from
continuing operations $ 7,048 $ 1,480 $20,510
======= ======= =======
Toledo, Ohio $ 4,700 Property sold for less than carrying value
Winona, Minnesota $ 4,000 Property sold for less than carrying value
Frankenmuth, Michigan 1,000 Property to be sold for less than carrying value
Lancaster, Pennsylvania $ 1,430 Property sold for less than carrying value
Various properties 1,850 1,530 4,901 Decided to sell property or property value has declined
------- ------- -------
Impairment charges from discontinued
operations $ 7,550 $ 2,960 $ 8,901
======= ======= =======
Income (Loss) from Equity Investments
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from equity investments increased $516, primarily due to income of $755
representing the full year impact from the acquisition of a 22.5% interest in
eight Carrefour France, SA properties in France in November 2003, partially
offset by a decrease in equity income in connection with acquiring a 50%
interest in a general partnership and the remaining 81.46% interest in a limited
partnership (both interests were acquired in connection with our acquisition of
17 properties from CIP(R)). We recorded a loss of $136 related to the 50%
interest in the general partnership for financial reporting purposes because of
non-cash charges relating to the amortization of the difference between the fair
value of the interest acquired and its underlying cost basis. Our share of
annual cash flow (contractual lease revenues, net of property-level debt
service) from our interest in the general partnership is projected to be $712.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from equity investments increased $4,044, primarily due to the conversion
of our ownership interest in MeriStar to publicly traded common stock in 2003.
For the year ended December 31, 2002, we incurred a loss from the MeriStar
investment of $3,019, which was included in equity income. We now account for
our investment in common stock of MeriStar as an available-for-sale security
and,
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
therefore record income as dividends are earned and no longer recognize our
share of MeriStar's reported net income or loss. Equity income for 2003 was also
affected by the acquisition, in December 2002, of a jointly controlled
tenancy-in-common interest in the Hologic, Inc. properties, which contributed
$530 and increases in the earnings of our equity investees.
Interest Expense
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
interest expense decreased by $179. The decrease was partially due to a
reduction in interest expense of $1,371 as a result of paying off mortgages on
two properties in 2004 and five properties in 2003 and reductions in mortgage
notes payable balances, all of which provide for scheduled mortgage principal
payments. The decrease was partially offset by increases in interest expense of
$615 related to the assumption of mortgages from our acquisition of 17
properties from CIP(R) and $458 related to additional borrowings and higher
interest rates related to our credit facility. The average outstanding balance
and interest rate on our credit facility, which incurs annual interest at a
variable rate, increased by approximately $15,000 and 1.1%, respectively, for
the comparable years. Annual debt service on mortgages assumed in our
acquisition from CIP(R) is approximately $3,148.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
interest expense decreased by $911 primarily due to a decrease in interest of
$1,323 on our credit facility arising from lower average outstanding balances
during 2003, partially offset by an increase in mortgage interest expense of
$308. The increase in mortgage interest was due primarily to new mortgage
financing placed on two of our properties during the third and fourth quarters
of 2002, which contributed $765, partially offset by decreases in interest
expense on five mortgages that were paid off during 2003. The average
outstanding balance on the credit facility decreased by approximately $38,000
for the comparable years but was not affected by fluctuations caused by changes
in the interest rate, as rates were relatively stable throughout 2003.
Income from Continuing Operations
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from continuing operations decreased $1,354, primarily due to an
increase in impairment charges of $5,568 and increases in general and
administrative expenses and depreciation and amortization, all of which are
described above. These decreases were partially offset by an increase in total
revenue of $5,512, which is described above and an increase in gain on foreign
currency transactions of $1,174.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from continuing operations increased $13,605, primarily due to a decrease
in impairment charges of $19,030 and increases in total revenue of $2,020, and
equity income of $4,044. These were partially offset by a decrease in gain on
sales of real estate of $12,415.
MANAGEMENT SERVICES OPERATIONS
--------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2004 2003 CHANGE 2003 2002 CHANGE
--------- -------- -------- -------- -------- -------
Management income from affiliates $ 106,362 $ 88,060 $ 18,302 $ 88,060 $ 84,255 $ 3,805
Incentive and subordinated disposition fees 42,095 - 42,095 - - -
--------- -------- -------- -------- -------- -------
Total revenue 148,457 88,060 60,397 88,060 84,255 3,805
Depreciation and amortization 9,366 7,123 2,243 7,123 7,575 (452)
General and administrative 47,424 41,802 5,622 41,802 41,133 669
--------- -------- -------- -------- -------- -------
Operating expenses 56,790 48,925 7,865 48,925 48,708 217
--------- -------- -------- -------- -------- -------
Income from continuing operations before other
interest income, minority interest, equity
income, interest expense and taxes 91,667 39,135 52,532 39,135 35,547 3,588
Other interest income 2,857 2,323 534 2,323 1,098 1,225
Minority interest in (income) loss (1,010) (202) (808) (202) - (202)
Income from equity investments 1,643 859 784 859 452 407
Interest expense (35) - (35) - - -
--------- -------- -------- -------- -------- -------
Income from continuing operations before taxes 95,122 42,115 53,007 42,115 37,097 5,018
Provision for income taxes (51,537) (17,715) (33,822) (17,715) (16,587) (1,128)
--------- -------- -------- -------- -------- -------
Income from continuing operations $ 43,585 $ 24,400 $ 19,185 $ 24,400 $ 20,510 $ 3,890
========= ======== ======== ======== ======== =======
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Management Income from Affiliates
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
management income from affiliates increased $18,302 primarily due to increases
in transaction fees of $10,687 and asset-based management and performance fees
of $8,607. Transaction fees included fees from structuring acquisitions and
financing on behalf of the CPA(R) REITs and $11,493 that we earned in connection
with the merger between CIP(R) and CPA(R):15 ("Merger"). We structured $890,000
of acquisitions for the year ended December 31, 2004 as compared with $725,000
in 2003. The transaction fees do not include $7,535 from structuring
acquisitions on behalf of CPA(R):16-Global as the fees are subject to
subordination provisions that were not met as of December 31, 2004. Because
CPA(R):16-Global's proportion of total acquisition volume is expected to
increase in 2005 relative to the other CPA(R) REITs and its subordination
provisions are not expected to be met during 2005, transaction based revenue for
2005 is likely to decrease. The increase in asset-based fees resulted from an
approximately 41% increase in the asset base (including the asset base of the
interests in properties we acquired from CIP(R) of the CPA(R) REITs since
December 31, 2003. Annual asset-based fees related to the interests in
properties we acquired from CIP(R) were approximately $1,422, and we will no
longer receive these asset-based fees. There will be no effect on annual
asset-based fees related to the properties involved in the Merger.
Based on assets under management of the CPA(R) REITs as of December 31, 2004,
annualized management and performance fees under the advisory agreements are
approximately $47,680. The asset based fees that we earn increase or decrease in
direct relation to increases and decreases in the values of the real estate
asset bases of the CPA(R) REITs. If the real estate asset bases of the CPA(R)
REITs continue to increase, asset management fees are projected to increase.
Currently, we are evaluating a number of proposed transactions on behalf of the
CPA(R) REITs.
Acquisition activity is subject to fluctuations. We are 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. We also face
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional bank financings.
A portion of the CPA(R) REIT transaction and management fees is 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 December 31, 2004, resulting in $7,535 in transaction
fees and $819 in performance fees not being recognized. The performance
criterion for CPA(R):16-Global is a cumulative preferred return of 6%. As of
December 31, 2004, the cumulative distribution rate for CPA(R):16-Global is
approximately 4.61%. Based on management's current assessment, CPA(R):16-Global
is expected to meet the cumulative preferred return in 2006, at which time we
will record and collect the cumulative unrecognized fees. There is no assurance
that the preferred return will be achieved as projected.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
management income from affiliates increased $3,805 due to increases in
asset-based management and performance fees of $15,853, partially offset by a
decrease in transaction fees of $12,048. The increase in asset-based management
and performance fees resulted from an increase in the asset base of the CPA(R)
REITs during 2003 of approximately 30%. The decrease in transaction fees
resulted from a decrease in structuring volume of acquisitions on behalf of the
CPA(R) REITs of $256,000 for the comparable years.
Incentive and Subordinated Disposition Fees
2004 VS. 2003 - In connection with the Merger, we earned incentive fees of
$23,681 and subordinated disposition fees of $18,414 from CIP(R). Incentive and
disposition fees are earned in connection with events which provide liquidity or
alternatives to the CPA(R) REIT shareholders. While we anticipate 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
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
depreciation and amortization expense increased by $2,243 primarily due to
accelerated amortization of certain intangible assets of $2,798 related to the
management contract with CIP(R), which was terminated as a result of the Merger.
This increase was partially offset by a reduction in amortization expense on
certain intangibles assets that became fully amortized during 2003.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
depreciation and amortization expense decreased by $452 primarily due to certain
intangibles assets that became fully amortized during 2003.
General and Administrative
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
general and administrative expense increased by $5,622, primarily due to an
increase in personnel costs of $3,903 and increases in fees for accounting,
auditing and consulting services related to ongoing securities law compliance,
including the Sarbanes-Oxley Act, as well as an increase in legal fees related
to the ongoing SEC investigation. A portion of personnel costs is directly
related to CPA(R) REIT fundraising and transaction activities. The increase in
personnel costs was attributable to higher transaction volume of $165,000 during
the comparable years and a $2,385 increase in personnel costs related to
non-cash charges for compensation from share incentive plan awards to our
officers and employees. Of the $2,385 increase, $2,155 reflects an increase in
awards that fluctuate with changes in fair value because such awards are
accounted for using variable plan accounting. These increases were partially
offset by a decrease in capital raising activities. For the comparable years,
there was a decrease in fund raising volume of approximately $41,000.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
general and administrative expense increased by $669, primarily due to increases
in fees for accounting, auditing and consulting services including internal
audit fees.
Other Interest Income
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, other
interest income increased $534, due to an increase in interest income earned on
deferred acquisition fees. 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 properties
acquired. A portion of the fees applicable to the CPA(R) REITs is 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%.
2003 VS. 2002 - For the comparable years ended December 31, 2004 and 2003, other
interest income increased $1,225 due to the same factor as stated above.
Income From Equity Investments
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from equity investments increased $784, primarily due to an increase in
our ownership of shares in the CPA(R) REITs as a result of receiving restricted
shares in consideration for performance fees. In general, the CPA(R) REITs, like
other REITs, have the ability to distribute amounts in excess of their net
income because of depreciation and amortization, which are both non-cash
expenses. Based on current distribution rates, our annual dividends from the
CPA(R) REITs for 2005 are projected to be $4,262.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from equity investments increased $407, due to the same factor as
mentioned above.
Provision for Income Taxes
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, the
provision for income taxes increased $33,822 due to increased pre-tax earnings
in 2004 as discussed above. Approximately 95% of our management revenue in 2004,
which increased $60,397 as compared to 2003, was earned by a taxable, wholly
owned subsidiary. The effective income tax rate for 2004 was 54% as compared to
42% in 2003. The increase is primarily due to increases in state and local
taxes, and increases in permanent differences, such as certain stock based
compensation, which are not deductible for income tax purposes, but are recorded
as expenses for financial reporting purposes.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, the
provision for income taxes increased by $1,128 to $17,715, of which $9,478
represented deferred taxes and the reclassification of $2,700 of tax benefits
related to share incentive plans as a direct benefit to Partners' Capital. In
2003, approximately 91% of management revenues were earned by a taxable, wholly
owned subsidiary, and income tax expense is most affected by its earnings.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Income from Continuing Operations
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from continuing operations increased $19,185 primarily due to fees earned
in connection with the Merger and increased management fees earned in connection
with 2004 fundraising and acquisition activity on behalf of the CPA(R) REITs.
These increases were primarily offset by an increase in the provision for income
taxes. These variances are all described above.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from continuing operations increased $3,890 primarily due to an increase
in management income from affiliates of $3,805, and to a lesser extent an
increase in equity income of $407 and a decrease in depreciation and
amortization expenses of $452. These were partially offset by an increase in the
provision for income taxes of $1,128.
OTHER
In 2002, a wholly-owned indirect subsidiary of ours entered into a build-to-suit
development management agreement with the Los Angeles United School District
("School District") with respect to the development and construction of a new
high school. Income on the project is being recognized under the percentage of
completion method of accounting. The School District and we are currently
preparing for an arbitration proceeding relating to certain disagreements
regarding the costs of the project and whether we are entitled to reimbursement
for incurring these costs. Due to our disputes with the School District and the
possibility that certain costs will not be reimbursed, we have revised our
estimate of profit on the development project, and recognized a loss in
development income of $1,303 for the year ended December 31, 2004 as compared
with development income of $1,298 for the comparable year ended December 31,
2003. We currently project that we will recognize an overall profit under our
development management agreement. In addition, during 2004 we incurred an
impairment charge of $7,500 related to our hotel operations in Livonia,
Michigan. The impairment charge was the result of decline in this property's
value.
FINANCIAL CONDITION
Uses of Cash During the Year
There has been no material change in our financial condition since December 31,
2003. Cash and cash equivalents totaled $16,715 as of December 31, 2004, a
decrease of $7,644 from the December 31, 2003 balance. We believe that we will
generate sufficient cash from operations and, if necessary, from the proceeds of
limited recourse mortgage loans, unsecured indebtedness and the issuance of
additional equity securities to meet our short-term and long-term liquidity
needs. We assess our ability to access capital on an ongoing basis. Our use of
cash during the year is described below.
Operating Activities
Cash flows from operating activities and distributions received from equity
investments for the year ended December 31, 2004 of $105,782 were sufficient to
fund dividends to shareholders of $65,073. During 2004, we received fees of
$36,679 in connection with structuring acquisition transactions and fees of
$24,215 from providing asset-based management services on behalf of the CPA(R)
REITs. We also benefited from the Merger, which generated cash receipts for us
of $23,681 related to incentive fees and $22,679 related to disposition fees. In
January 2004, we received $5,978 from the annual installment of deferred
acquisition fees. The next installment of deferred acquisition fees was paid in
January 2005 and approximated $8,950. The installments are subject to certain
subordination provisions. CPA(R):16-Global has not yet met the subordination
provisions and is not expected to pay any deferred amounts in 2005. Our real
estate operations provided cash flows (contractual lease revenues, net of
property-level debt service) of approximately $47,800. Annual cash flow from
operations is projected to continue to fund distributions; however, operating
cash flow fluctuates on a quarterly basis due to the timing of certain
compensation costs that are paid and receipt of the annual installment of
deferred acquisition fees and interest thereon in the first quarter and the
timing of the receipt of transaction-related fees.
Investing Activities
Our investing activities are generally comprised of real estate transactions
(purchases and sales) and capitalized property related costs. During the year,
we used $111,230 to purchase 17 properties from CIP(R) (see Item 1 "Significant
Developments in 2004" for further details). Substantially all cash used for this
purchase came from borrowings under our credit facility and fees received from
the merger. In connection with this purchase, we also assumed existing limited
recourse mortgages on the properties of $27,003. Other investing activities
included $4,094 to fulfill obligations related to
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
the November 2003 purchase of our 22.5% interest in the eight Carrefour, S.A.
properties in France and $1,596 of capital expenditures at several existing
properties. In January 2004, we paid our annual installment of deferred
acquisition fees of $524 to our former management company relating to 1998 and
1999 property acquisitions. The remaining obligation is $1,709. We intend to use
cash from operations to fund the remaining obligation.
Cash proceeds from investing activities in 2004 included the receipt of $7,185
in June 2004 related to the release of an escrow account in connection with a
property sale in 2003 and $6,548 from the sales of seven properties. Over the
past several years, we have pursued a strategy of selling our smaller properties
as well as properties that do not generate significant cash flow and require
more intensive asset management services. During 2004, we sold properties
located in Toledo, Ohio; Kenbridge, Virginia; McMinnville, Tennessee; Panama
City, Florida; Leeds, Alabama and Garland, Texas, all of which required
intensive asset management services. As of December 31, 2004, we have classified
four additional properties as held for sale.
Financing Activities
During 2004 we paid dividends of $65,073, an increase over prior year dividends
paid. We entered into a new $225,000 credit facility in 2004 (see Cash Resources
below). Gross borrowings under the new credit facility approximated $203,000 and
were used primarily to fund the acquisition of 17 properties from CIP(R)
($70,000), pay taxes related to management fees earned in connection with the
Merger ($25,000), pay down the prior credit facility ($30,000), which expired in
2004, and for several other purposes in the normal course of business, such as
other loan payments and dividend payments. During 2004, we made repayments of
$130,000 on outstanding credit facility balances. The majority of the repayments
were made using cash received in the normal course of business, with the
remainder coming from the new facility to pay down the prior facility and cash
receipts of $11,000 from the sales of various properties. We also used $9,962 to
satisfy the limited recourse mortgage financing on our Erlanger, Kentucky
properties, and also paid down $9,428 on existing principal balances. In
addition, we raised $6,649 from the issuance of shares primarily through our
Distribution Reinvestment and Share Purchase Plan.
In the case of limited recourse mortgage financing that does not fully amortize
over its term or is currently due, we are responsible for the balloon payment
only to the extent of our interest in the encumbered property because the holder
has recourse only to the collateral. In the event that balloon payments come
due, we may seek to refinance the loans, restructure the debt with the existing
lenders or evaluate our ability to satisfy the obligation from our existing
resources including our 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, we believe that the ability to refinance balloon
payment obligations is enhanced. We also evaluate all our 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. We believe we have sufficient resources to pay off the loans in the
event they are not refinanced. In addition, approximately 72% of our outstanding
mortgage debt has fixed rates of interest so that debt service obligations will
not significantly increase from increases in interest rates.
Cash Resources
As of December 31, 2004, we have $16,715 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. We 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 $370,381 as of December 31, 2004 and any proceeds may be used to finance
future real estate purchases.
In May 2004, we entered into a credit facility for a $175,000 revolving line of
credit with J.P. Morgan Chase Bank and eight other banks. The line of credit,
which matures in May 2007, provides us a one-time right to increase the amount
available under the line of credit to $225,000. Advances are prepayable at any
time. Advances from the line of credit bear interest at an annual rate indexed
to either (i) the one, two, three or six-month London Inter-Bank Offered Rate,
as defined, plus a spread which ranges from 0.6% to 1.45% depending on leverage
or corporate credit rating or (ii) the greater of the bank's Prime Rate and a
rate indexed to the Federal Funds Effective Rate. The revolving credit agreement
has financial covenants that require us, among other things, to maintain a
minimum equity value and to meet or exceed certain operating and coverage
ratios. We are in compliance with these covenants as of December 31, 2004.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- -----------------------
MAXIMUM OUTSTANDING MAXIMUM OUTSTANDING
AVAILABLE BALANCE AVAILABLE BALANCE
---------- ----------- ---------- -----------
Credit Facility $ 225,000 $ 102,000 $ 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 $4,893 in scheduled balloon payments on our share of limited
recourse mortgage loans due during 2005. We may also seek to use our cash to
purchase new properties or other investments to further diversify our portfolio
and maintain cash balances sufficient to meet working capital needs. We may
issue additional shares in connection with purchases of real estate when it is
consistent with the objectives of the seller.
We have budgeted capital expenditures of up to approximately $3,575 at various
properties during 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
remediation costs of $1,500 to be funded to prepare the Red Bank property for
sale to a third party. We have received a grant from an agency of the State of
Ohio, which will reimburse us for certain environmental costs at Red Bank. In
addition, we have 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 our ownership. Additionally, we have commenced negotiating a
property improvement plan in connection with renewing the franchise license with
Holiday Inn at the Livonia hotel. We currently estimate that we may spend less
than $1,000 over the next two years if we intend to continue to operate the
hotel under the Holiday Inn brand.
We expect to meet our capital requirements to fund future property acquisitions,
construction costs on build-to-suit transactions, any capital expenditures on
existing properties and scheduled debt maturities on limited recourse mortgages
through use of our cash reserves or unused amounts on its credit facility.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of December 31, 2004
and the effect that such obligations are expected to have on our liquidity and
cash flow in future periods.
Less than 3-5 More than
Total 1 Year 1-3 Years Years 5 years
Limited recourse mortgage
notes payable (1) $251,156 $ 26,856 $ 71,342 $64,566 $88,392
Unsecured note payable (1) 110,720 - 110,720 - -
Deferred acquisition fees (1) 1,931 627 1,159 145 -
Development project (2) 2,000 2,000 - - -
Operating leases (3) 8,086 646 1,513 1,535 4,392
-------- -------- -------- ------- -------
$373,893 $ 30,129 $184,734 $66,246 $92,784
======== ======== ======== ======= =======
(1) Amounts are inclusive of principal and interest.
(2) We have provided a guarantee of $2,000 related to the development project in
Los Angeles.
(3) Operating lease obligations consist primarily of our share of minimum rents
payable under an office cost-sharing agreement. Amounts related to our foreign
operations are based on the exchange rate of the Euro as of December 31, 2004.
As of December 31, 2004, we have no material capital lease obligations, either
individually or in the aggregate.
We and Carey Financial Corporation ("Carey Financial"), our wholly-owned
broker-dealer subsidiary, are currently subject to an SEC investigation into
payments made to third party broker dealers in connection with the distribution
of REITs managed by us and other matters. Although no regulatory action has been
initiated against us or Carey Financial in connection with the matters being
investigated, it is possible that the Commission may pursue an action in the
future. The potential timing of any such action and the nature of the relief or
remedies the Commission may seek cannot be predicted at
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
this time. If such an action is brought, it could materially affect our cash
requirements. See Item 3 Legal Proceedings for a discussion of this
investigation.
In connection with the purchase of many of our properties, we required the
sellers to perform environmental reviews. We believe, based on the results of
such reviews, that our properties were in substantial compliance with Federal
and state environmental statutes at the time the properties were acquired.
However, portions of certain properties have been subject to some degree of
contamination, principally in connection with leakage from underground storage
tanks, surface spills or historical on-site activities. In most instances where
contamination has been identified, tenants are actively engaged in the
remediation process and addressing identified conditions. Tenants are generally
subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our
leases generally require tenants to indemnify us from all liabilities and losses
related to the leased properties with provisions of such indemnification
specifically addressing environmental matters. The leases generally include
provisions that allow for periodic environmental assessments, paid for by the
tenant, and allow us to extend leases until such time as a tenant has satisfied
its environmental obligations. Certain of our leases allow us to require
financial assurances from tenants such as performance bonds or letters of credit
if the costs of remediating environmental conditions are, in our estimation, in
excess of specified amounts. Accordingly, we believe that the ultimate
resolution of environmental matters should not have a material adverse effect on
our financial condition, liquidity or results of operations.
CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is described in note 1 to the
consolidated financial statements. Many of these accounting policies require
certain judgment and the use of certain estimates and assumptions when applying
these policies in the preparation of our consolidated financial statements. On a
quarterly basis, we evaluate these estimates and judgments based on historical
experience as well as other factors that we believe to be reasonable under the
circumstances. These estimates are subject to change in the future if underlying
assumptions or factors change. Certain accounting policies, while significant,
may not require the use of estimates. Those accounting policies that require
significant estimation and/or judgment are listed below.
Classification of Real Estate Assets
We classify our directly owned leased assets for financial reporting purposes as
either real estate leased under the operating method or net investment in direct
financing leases at the inception of a lease. This classification is based on
several criteria, including, but not limited to, estimates of the remaining
economic life of the leased assets and the calculation of the present value of
future minimum rents. In determining the classification of a lease, we use
estimates of remaining economic life provided by third party appraisals of the
leased assets. The calculation of the present value of future minimum rents
includes determining a lease's implicit interest rate, which requires an
estimate of the residual value of leased assets as of the end of the
non-cancelable lease term. Different estimates of residual value result in
different implicit interest rates and could possibly affect the financial
reporting classification of leased assets. The contractual terms of our leases
are not necessarily different for operating and direct financing leases; however
the classification is based on accounting pronouncements which are intended to
indicate whether the risks and rewards of ownership are retained by the lessor
or substantially transferred to the lessee. Management believes that it retains
certain risks of ownership regardless of accounting classification. Assets
classified as net investment in direct financing leases are not depreciated and,
therefore, the classification of assets may have a significant impact on net
income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate
Acquisitions
In connection with the acquisition of properties, purchase costs are allocated
to tangible and intangible assets and liabilities acquired based on their
estimated fair values. The value of tangible assets, consisting of land,
buildings and tenant improvements, is determined as if vacant. Intangible assets
including the above-market value of leases, the value of in-place leases and the
value of tenant relationships are recorded at their relative fair values.
Below-market value of leases are also recorded at their relative fair values and
are recorded as liabilities in the accompanying financial statements.
The value attributed to tangible assets is determined in part using a discount
cash flow model which is intended to approximate what a third party would pay to
purchase the property as vacant and rent at current "market" rates. In applying
the model, we assume that the disinterested party would sell the property at the
end of a market lease term. Assumptions used in the model are property-specific
as it is available; however, when certain necessary information is not
available, we will use available regional and property-type information.
Assumptions and estimates include a discount rate or internal
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
rate of return, marketing period necessary to put a lease in place, carrying
costs during the marketing period, leasing commissions and tenant improvements
allowances, market rents and growth factors of such rents, market lease term and
a cap rate to be applied to an estimate of market rent at the end of the market
lease term.
Above-market and below-market lease intangibles are based on the difference
between the market rent and the contractual rents and are discounted to a
present value using an interest rate reflecting our current assessment of the
risk associated with the lease acquired. We acquire properties subject to net
leases and consider the credit of the lessee in negotiating the initial rent.
The total amount of other intangibles is allocated to in-place lease values and
tenant relationship intangible values based on our evaluation of the specific
characteristics of each tenant's lease and our overall relationship with each
tenant. Characteristics we consider in allocating these values include the
nature and extent of the existing relationship with the tenant, prospects for
developing new business with the tenant, the tenant's credit quality and the
expectation of lease renewals, among other factors. Intangibles for above-market
and below-market leases, in-place lease intangibles and tenant relationships are
amortized over their estimated useful lives. In the event that a lease is
terminated, the unamortized portion of each intangible, including market rate
adjustments, in-place lease values and tenant relationship values, are charged
to expense.
Factors considered include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, based on
assessments of specific market conditions. Estimated costs to execute leases
include commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
Impairments
Impairment charges may be recognized on long-lived assets, including but not
limited to, real estate, direct financing leases, assets held for sale, goodwill
and equity investments. Estimates and judgments are used when evaluating whether
these assets are impaired. When events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable, we perform projections
of undiscounted cash flows, and if such cash flows are insufficient, the assets
are adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires us to make our best
estimate of market rents, residual values and holding periods. In our
evaluations, we generally obtain market information from outside sources;
however, such information requires us to determine whether the information
received is appropriate to the circumstances. As our investment objective is to
hold properties on a long-term basis, holding periods used in the analyses
generally range from five to ten years. Depending on the assumptions made and
estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. We will consider the likelihood of
possible outcomes in determining the best possible estimate of future cash
flows. Because in most cases, each of our properties is leased to one tenant, we
are more likely to incur significant writedowns when circumstances change
because of the possibility that a property will be vacated in its entirety and,
therefore, it is different from the risks related to leasing and managing
multi-tenant properties. Events or changes in circumstances can result in
further noncash writedowns and impact the gain or loss ultimately realized upon
sale of the assets.
We perform a review of our estimate of residual value of our direct financing
leases at least annually to determine whether there has been an other than
temporary decline in the current estimate of residual value of the underlying
real estate assets (i.e., the estimate of what we could realize upon sale of the
property at the end of the lease term). If the review indicates a decline in
residual value, that is other than temporary, a loss is recognized and the
accounting for the direct financing lease will be revised to reflect the
decrease in the expected yield using the changed estimate, that is, a portion of
the future cash flow from the lessee will be recognized as a return of principal
rather than as revenue. While an evaluation of potential impairment of real
estate accounted for under the operating method is determined by a change in
circumstances, the evaluation of a direct financing lease can be affected by
changes in long-term market conditions even though the obligations of the lessee
are being met. Changes in circumstances include, but are not limited to, vacancy
of a property not subject to a lease and termination of a lease. We may also
assess properties for impairment because a lessee is experiencing financial
difficulty and because management expects that there is a reasonable probability
that the lease will be terminated in a bankruptcy organization or a property
remains vacant for a period that exceeds the period anticipated in a prior
impairment evaluation.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
We accounted for our acquisition of business operations of Carey Management LLC
in 2000 as a purchase. The excess of the purchase price over the fair value of
the net assets acquired was recorded as goodwill. We evaluate goodwill for
possible impairment at least annually using a two-step process. To identify any
impairment, we first compare the estimated fair value of the reporting unit
(management services segment) with our carrying amount, including goodwill. We
calculate the estimated fair value of the management services segment by
applying a multiple, based on comparable companies, to earnings. If the fair
value of the management services segment exceeds its carrying amount, goodwill
is considered not impaired and no further analysis is required. If the carrying
amount of the management services unit exceeds its estimated fair value, then
the second step is performed to measure the amount of the impairment charge.
For the second step, we would determine the impairment charge by comparing the
implied fair value of the goodwill with its carrying amount and record an
impairment charge equal to the excess of the carrying amount over the fair
value. The implied fair value of the goodwill is determined by allocating the
estimated fair value of the management services segment to its assets and
liabilities. The excess of the estimated fair value of the management services
segment over the amounts assigned to its assets and liabilities is the implied
fair value of the goodwill. We have performed our annual test for impairment of
our management services segment, the reportable unit of measurement, and
concluded that the goodwill is not impaired.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and
subsequently adjusted for our proportionate share of earnings and cash
contributions and distributions. On a periodic basis, we assess whether there
are any indicators that the value of equity investments may be impaired and
whether or not that impairment is other than temporary. To the extent impairment
has occurred, the charge shall be measured as the excess of the carrying amount
of the investment over the fair value of the investment.
When we identify assets as held for sale, we discontinue depreciating the assets
and estimate the sales price, net of selling costs, of such assets. If in our
opinion, the net sales price of the assets, which have been identified for sale,
is less than the net book value of the assets, an impairment charge is
recognized and a valuation allowance is established. To the extent that a
purchase and sale agreement has been entered into, the allowance is based on the
negotiated sales price. To the extent that we have adopted a plan to sell an
asset but have not entered into a sales agreement, we will make judgments of the
net sales price based on current market information. Accordingly, the initial
assessment may be greater or less than the purchase price subsequently committed
to and may result in a further adjustment to the fair value of the property. If
circumstances arise that previously were considered unlikely and, as a result,
we decide not to sell a property previously classified as held for sale, the
property is reclassified as held and used. A property that is reclassified is
measured and recorded individually at the lower of (a) its carrying amount
before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, (b) the fair value at the date of the
subsequent decision not to sell, or (c) the current carrying value.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other
tenant-based receivables and determine an appropriate allowance for uncollected
amounts. Because our real estate operations have a limited number of lessees
(fewer than 30 lessees represent more than 75% of annual rental income), we
believe that it is necessary to evaluate the collectibility of these receivables
based on the facts and circumstances of each situation rather than solely use
statistical methods. We generally recognize a provision for uncollected rents
and other tenant receivables that typically range between 0.5% and 2% of lease
revenues (rental income and interest income from direct financings leases) and
will measure our allowance against actual rent arrearages and adjust the
percentage applied. For amounts in arrears, we make subjective judgments based
on our knowledge of a lessee's circumstances and may reserve for the entire
receivable amount from a lessee because there has been significant or continuing
deterioration in the lessee's ability to meet its lease obligations. Based on
actual experience during 2004, we did not record a provision, as it was
determined that our current allowance for uncollectible accounts was sufficient.
Determination of Certain Asset Based Management and Performance Fees
We earn asset-based management and performance fees for providing property
management, leasing, advisory and other services to the CPA(R) REIT's. For
certain CPA(R) REIT's, these fees are based on third party annual valuations of
the underlying real estate assets of the CPA(R) REIT. The valuation uses
estimates, including but not limited to, market rents,
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
residual values and increases in the CPI and discount rates. Differences in the
assumptions applied would affect the amount of revenue that we recognize.
Additionally, a deferred compensation plan for certain officers is valued based
on the results of the annual valuations. The effect of any changes in the annual
valuations will affect both revenue and compensation expense and therefore the
determination of net income.
Income Taxes
Significant judgment is required in developing our provision for income taxes,
including (i) the determination of partnership-level state and local taxes and
foreign taxes, and (ii) for our taxable subsidiaries, estimating deferred tax
assets and liabilities and any valuation allowance that might be required
against the deferred tax assets. A valuation allowance is required if it is more
likely than not that a portion or all of the deferred tax assets will not be
realized. We have not recorded a valuation allowance based on our current belief
that operating income of the taxable subsidiaries will be sufficient to realize
the benefit of these assets over time. For interim periods, income tax expense
for taxable subsidiaries is determined, in part, by applying an effective tax
rate, which takes into account statutory federal, state and local tax rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("FAS 123R"), which requires that the fair value of all stock and other
equity-based compensation be treated as an expense that is reflected in the
income statement. Note 1 to the consolidated financial statements of this Annual
Report on Form 10-K contains pro forma disclosures regarding the effect on net
income and earnings per share as if we had applied the fair value method of
accounting for stock-based compensation. Depending on the model used to
calculate stock-based compensation expense in the future and other requirements
of FAS 123R, the pro forma disclosure may not be indicative of the stock-based
compensation expense that will be recognized in our future financial statements.
FAS 123R is effective for periods beginning after June 15, 2005, and allows two
different methods of transition. We expect to implement FAS 123R beginning with
the third quarter of fiscal 2005, which begins on July 1, 2005. We are currently
evaluating this new standard and models that may be used to calculate future
stock-based compensation expense.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("FAS 148") which amends SFAS No.
123, Accounting for Stock Based Compensation. FAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock based compensation (i.e., recognition of a charge for
issuance of stock options in the determination of income). However, FAS No. 148
does not permit the use of the original FAS No. 123 prospective method of
transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of FAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for stock
based employee compensation, description of transition method utilized and the
effect of the method used on reported results. The annual disclosure provisions
of FAS No. 148 have been adopted.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS
150 establishes standards to classify as liabilities certain financial
instruments that are mandatorily redeemable or include an obligation to
repurchase and expands financial statement disclosure requirements. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. FAS 150 was 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.
In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which
defers the classification and measurement provisions of FAS 150 indefinitely as
they apply to mandatorily redeemable non-controlling interests associated with
finite-lived entities. We have interests in five joint ventures that are
consolidated and have minority interests that have finite lives and were
considered mandatorily redeemable non-controlling interests prior to the
issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3,
these minority interests have not been reflected as liabilities. The carrying
value of these minority interests approximates their estimated fair value as of
December 31, 2004. We adopted FAS 150 in July 2003 and it did not have a
significant impact on our consolidated financial statements.
-18-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
W. P. Carey & Co. LLC:
We have completed an integrated audit of W. P. Carey & Co. LLC's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of W. P. Carey
& Co. LLC and its subsidiaries at December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-19-
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
December 31,
-------------------------------
2004 2003
---------- --------
ASSETS:
Real estate leased to others:
Accounted for under the operating method, net of accumulated
depreciation of $53,914 and $45,021 at December 31, 2004
and 2003 $ 476,365 $400,717
Net investment in direct financing leases 190,644 182,452
---------- --------
Real estate leased to others 667,009 583,169
Operating real estate, net of accumulated depreciation of $6,983 and
$5,805 at December 31, 2004 and 2003 9,140 16,147
Real estate under construction and redevelopment - 4,679
Equity investments 110,379 82,800
Assets held for sale 12,802 13,609
Cash and cash equivalents 16,715 24,359
Due from affiliates 63,471 50,917
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $35,610 and
$25,262 at December 31, 2004 and 2003 50,501 38,528
Other assets, net of accumulated amortization of $1,494 and $2,716 and
reserve for uncollected rent of $2,601 and $2,600 at December 31,
2004 and 2003 19,915 28,690
---------- --------
Total assets $1,013,539 $906,505
========== ========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities :
Mortgage notes payable $ 190,698 $180,193
Notes payable 102,000 29,000
Accrued interest 1,389 1,163
Dividends payable 16,626 15,987
Due to affiliates 2,033 20,444
Accounts payable and accrued expenses 19,838 16,249
Prepaid rental income and security deposits 4,881 4,267
Accrued income taxes 3,909 1,810
Deferred income taxes, net 40,349 29,532
Other liabilities 11,748 11,221
---------- --------
Total liabilities 393,471 309,866
---------- --------
Minority interest 1,407 1,852
---------- --------
Commitments and contingencies
Members' Equity:
Listed shares, no par value, 37,523,462 and 36,745,027 shares issued
and outstanding at December 31, 2004 and 2003 734,658 709,724
Dividends in excess of accumulated earnings (114,431) (112,570)
Unearned compensation (5,366) (4,863)
Accumulated other comprehensive income 3,800 2,496
---------- --------
Total members' equity 618,661 594,787
---------- --------
Total liabilities, minority interest and members' equity $1,013,539 $906,505
========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-21-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of INCOME
(In thousands except share and per share amounts)
For the years ended December 31,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Revenues:
Management income from affiliates $ 106,362 $ 88,060 $ 84,255
Incentive and subordinated disposition fees 42,095 - -
Rental income 46,472 43,992 44,304
Interest income from direct financing leases 21,322 20,655 22,298
Other operating income 5,798 5,233 1,258
Revenues of other business operations 5,725 1,298 289
----------- ----------- -----------
227,774 159,238 152,404
----------- ----------- -----------
Operating Expenses:
Depreciation 11,311 10,432 9,767
Amortization 10,074 7,296 9,208
General and administrative 50,985 43,698 42,592
Property expenses 5,893 5,929 5,945
Impairment charge on real estate and investments and loan losses 14,548 1,480 20,510
Operating expenses of other business operations 6,261 - -
----------- ----------- -----------
99,072 68,835 88,022
----------- ----------- -----------
Income from continuing operations before other interest income, minority
interest, equity investments, interest expense, gains and
losses and income taxes 128,702 90,403 64,382
Other interest income 3,127 2,571 1,640
Minority interest in (income) loss (1,499) (370) 120
Income (loss) from equity investments 5,308 4,008 (443)
Interest expense (14,838) (14,982) (15,893)
Gain on foreign currency transactions and sale of securities 1,222 48 94
----------- ----------- -----------
Income from continuing operations before income taxes and gain on sale
of real estate 122,022 81,678 49,900
Provision for income taxes (52,974) (19,116) (18,083)
----------- ----------- -----------
Income from continuing operations before gain on sale of real estate 69,048 62,562 31,817
----------- ----------- -----------
Discontinued operations:
Income from operations of discontinued properties 2,263 2,038 8,657
Gain on sale of real estate 90 1,238 2,694
Impairment charges on properties held for sale (7,550) (2,960) (8,901)
----------- ----------- -----------
(Loss) income from discontinued operations (5,197) 316 2,450
----------- ----------- -----------
Gain on sale of real estate - - 12,321
----------- ----------- -----------
Net income $ 63,851 $ 62,878 $ 46,588
=========== =========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 1.85 $ 1.71 $ 1.24
(Loss) income from discontinued operations (.14) .01 .07
----------- ----------- -----------
Net income $ 1.71 $ 1.72 $ 1.31
=========== =========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 1.77 $ 1.64 $ 1.21
(Loss) income from discontinued operations (.13) .01 .07
----------- ----------- -----------
Net income $ 1.64 $ 1.65 $ 1.28
=========== =========== ===========
Weighted average shares outstanding:
Basic 37,417,918 36,566,338 35,530,334
=========== =========== ===========
Diluted 38,904,725 38,008,762 36,265,230
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-22-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of MEMBERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
(In thousands except share and per share amounts)
Dividends
in Excess
of
Paid-in Accumulated Unearned
Shares Capital Earnings Compensation
---------- -------- ----------- ------------
Balance at December 31, 2001 34,742,436 $664,751 $ (97,200) $ (4,454)
========== ======== =========== ============
Cash proceeds on issuance of shares, net 528,479 10,086
Shares issued in connection with services
rendered 5,755 390
Shares issued in connection with prior
acquisition 500,000 10,440
Shares and options issued under share
incentive plans 170,768 3,913 (3,913)
Forfeitures (3,328) (70) 70
Dividends declared (61,358)
Tax benefit - share incentive plans 1,084
Amortization of unearned compensation 2,626
Net income 46,588
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income:
---------- -------- ----------- ------------
Balance at December 31, 2002 35,944,110 $690,594 $ (111,970) $ (5,671)
---------- -------- ----------- ------------
Cash proceeds on issuance of shares, net 412,012 7,789
Shares issued in connection with services
rendered and properties acquired 5,846 160
Shares issued in connection with prior
acquisition 400,000 8,909
Shares and options issued under share
incentive plans 47,550 1,212 (2,827)
Forfeitures (9,726) (132) 99
Dividends declared (63,478)
Tax benefit - share incentive plans 2,700
Amortization of unearned compensation 3,536
Repurchase of shares (54,765) (1,508)
Net income 62,878
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income:
---------- -------- ----------- ------------
Balance at December 31, 2003 36,745,027 $709,724 $ (112,570) $ (4,863)
---------- -------- ----------- ------------
Cash proceeds on issuance of shares, net 274,262 6,649
Shares issued in connection with services
rendered 8,938 271
Shares issued in connection with prior
acquisition 500,000 13,734
Shares and options issued under share
incentive plans 118,683 3,538 (4,409)
Forfeitures (32,869) (138) 138
Dividends declared (65,712)
Tax benefit - share incentive plans 3,423
Amortization of unearned compensation 3,768
Repurchase and retirement of shares (90,579) (2,543)
Net income 63,851
Other comprehensive income:
Change in unrealized gains on marketable
securities
Foreign currency translation adjustment
Comprehensive income:
---------- -------- ----------- ------------
Balance at December 31, 2004 37,523,462 $734,658 $ (114,431) $ (5,366)
========== ======== =========== ============
Accumulated
Other
Comprehensive Comprehensive)
Income (Loss) Income(Loss Total
-------------- -------------- -----------
Balance at December 31, 2001 $ (3,432) $ 559,665
============== ===========
Cash proceeds on issuance of shares, net 10,086
Shares issued in connection with services
rendered 390
Shares issued in connection with prior
acquisition 10,440
Shares and options issued under share
incentive plans
Forfeitures
Dividends declared (61,358)
Tax benefit - share incentive plans 1,084
Amortization of unearned compensation 2,626
Net income $ 46,588 46,588
Other comprehensive income:
Change in unrealized gains on marketable
securities 12
Foreign currency translation adjustment 1,355
--------------
1,367 1,367 1,367
--------------
Comprehensive income: $ 47,955
--------------
-------------- -----------
Balance at December 31, 2002 $ (2,065) $ 570,888
-------------- -----------
Cash proceeds on issuance of shares, net 7,789
Shares issued in connection with services
rendered and properties acquired 160
Shares issued in connection with prior
acquisition 8,909
Shares and options issued under share
incentive plans (1,615)
Forfeitures (33)
Dividends declared (63,478)
Tax benefit - share incentive plans 2,700
Amortization of unearned compensation 3,536
Repurchase of shares (1,508)
Net income $ 62,878 62,878
Other comprehensive income:
Change in unrealized gains on marketable
securities 2,567
Foreign currency translation adjustment 1,994
--------------
4,561 4,561 4,561
--------------
Comprehensive income: $ 67,439
--------------
-------------- -----------
Balance at December 31, 2003 $ 2,496 $ 594,787
-------------- -----------
Cash proceeds on issuance of shares, net 6,649
Shares issued in connection with services
rendered 271
Shares issued in connection with prior
acquisition 13,734
Shares and options issued under share
incentive plans (871)
Forfeitures
Dividends declared (65,712)
Tax benefit - share incentive plans 3,423
Amortization of unearned compensation 3,768
Repurchase and retirement of shares (2,543)
Net income $ 63,851 63,851
Other comprehensive income:
Change in unrealized gains on marketable
securities 1,467
Foreign currency translation adjustment (163)
--------------
1,304 1,304 1,304
--------------
Comprehensive income: $ 65,155
--------------
-------------- -----------
Balance at December 31, 2004 $ 3,800 $ 618,661
============== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-23-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31,
---------------------------------
(In thousands) 2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income $ 63,851 $ 62,878 $ 46,588
Adjustments to reconcile net income to net cash provided by continuing operating
activities:
Loss (income) from discontinued operations, including impairment charges and gain on
sale 5,197 (316) (2,450)
Depreciation and amortization of intangibles assets and deferred financing costs 22,096 18,589 19,811
Equity income in excess of distributions (793) (23) (54)
Loss (gain) on sales of real estate and securities, net - 578 (12,415)
Minority interest in income (loss) 1,499 370 (120)
Straight-line rent adjustments and amortization of deferred income and rent related
intangibles 1,732 925 (719)
Management income received in shares of affiliates (20,999) (18,599) (13,439)
Unrealized gain on foreign currency transactions (790) (130) -
Impairment charges on securities and real estate and loan losses 14,548 1,480 20,510
Deferred income tax provision 10,817 9,769 13,155
Realized gain on foreign currency transaction (430) (556) -
Costs paid by issuance of shares 168 215 500
Increase (decrease) in accrued taxes payable 2,099 (3,475) 2,265
Tax benefit - share incentive plans 3,423 2,700 1,084
Amortization of unearned compensation 3,768 3,536 2,626
Deferred acquisition fees received 5,978 1,495 916
Increase in structuring fees receivable (14,860) (13,424) (18,529)
Net changes in operating assets and liabilities (372) (655) 8,004
--------- --------- ---------
Net cash provided by continuing operations 96,932 65,357 67,733
Net cash provided by discontinued operations 1,917 1,938 8,163
--------- --------- ---------
Net cash provided by operating activities 98,849 67,295 75,896
--------- --------- ---------
Cash flows from investing activities:
Distributions received from equity investments in excess of equity income 6,933 3,503 5,560
Capital distributions from equity investment - 6,582 1,255
Purchases of real estate and contributions to equity investments (115,522) (8,184) (13,172)
Additional capital expenditures (1,596) (2,843) (811)
Payment of deferred acquisition fees to affiliate (524) (524) (524)
Release of funds from escrow in connection with the sale of a property 7,185 - 9,366
Proceeds from sales of real estate and investments 6,548 24,395 50,247
Cash acquired on acquisition of subsidiary - 1,300 -
--------- --------- ---------
Net cash (used in) provided by investing activities (96,976) 24,229 51,921
--------- --------- ---------
Cash flows from financing activities:
Dividends paid (65,073) (62,978) (60,708)
Payment of accrued preferred distributions - - (1,423)
Contributions from minority interest - - 636
Distributions to minority interests (1,101) - -
Payments of mortgage principal (9,428) (8,548) (8,428)
Proceeds from mortgages and credit facility 170,000 82,683 79,200
Prepayments of mortgage principal and credit facility (106,962) (107,854) (134,316)
Payment of financing costs (1,238) (391) (308)
Proceeds from issuance of shares 6,649 7,789 10,086
Retirement of shares (2,543) - -
--------- --------- ---------
Net cash used in financing activities (9,696) (89,299) (115,261)
--------- --------- ---------
Effect of exchange rate changes on cash 179 830 (122)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (7,644) 3,055 12,434
Cash and cash equivalents, beginning of year 24,359 21,304 8,870
--------- --------- ---------
Cash and cash equivalents, end of year $ 16,715 $ 24,359 $ 21,304
========= ========= =========
-24-
W. P. CAREY & CO. LLC
-Continued-
CONSOLIDATED STATEMENTS of CASH FLOWS, Continued
(In thousands except share and per share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in June 2000,
the Company had an obligation to issue up to an additional 2,000,000
shares over four years if specified performance criteria were achieved. As
of December 31, 2004, 1,900,000 shares have been issued and our obligation
has been satisifed. Based on the performance criteria 500,000 shares were
issued for the years ended December 31, 2003, 2001 and 2000 ($13,734,
$10,440 and $8,145, respectively). For the year ended December 31, 2002,
the Company met one criterion and 400,000 shares ($8,910) were issued. The
amounts attributable to the 1,900,000 shares are included in goodwill.
Accounts payable to affiliates as of December 31, 2003 includes $13,734
for shares that were issued in 2004.
B. The Company issued 8,938, 5,846 and 5,755 restricted shares valued at $271
in 2004, $160 in 2003 and $134 in 2002, to certain directors, officers,
and employees and affiliates in consideration of service rendered.
Restricted shares and stock options valued at $3,538, $3,697 and $3,913 in
2004, 2003 and 2002, respectively, issued to officers and employees and
was recorded as unearned compensation of which $138, $99 and $70,
respectively, was forfeited in 2004, 2003 and 2002. Included in
compensation expense for the years ended December 31, 2004, 2003 and 2002
were $3,768, $3,536 and $2,626, respectively, relating to equity awards
from the Company's share incentive plans.
C. During 2004, the Company acquired interests in 17 properties from Carey
Institutional Properties Incorporated 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 fair value of the assumed
mortgages was $27,756.
D. As partial consideration for the sale of a property in 2003, the Company
received notes receivable with a fair value of $2,250.
During 2004, $7,185 was released from an escrow account from the sale of a
property in 2003. During 2002, $9,366 was released from an escrow account
from the sale of a property in 2001.
E. In 2002, the Company contributed its tenancy-in-common interest in
properties leased to Learning Care Group, Inc. to a limited partnership
which is accounted for under the equity method. Assets and liabilities
were contributed to the limited partnerships as follows:
Land $ 1,674
Net investment in direct financing lease 2,413
Other assets, net 1
Mortgage payable (1,134)
--------
Equity investment $ 2,954
========
F. During 2001 the Company purchased an equity interest in an affiliate, W.
P. Carey International LLC ("WPCI"), in consideration for issuing a
promissory note of $1,000. The promissory note was satisfied in 2002
through the issuance of 54,765 shares of the Company to WPCI.
In April 2003, the Company's ownership interest in WPCI increased from 10%
to 100% at which time WPCI transferred the 54,765 shares back to the
Company and WPCI redeemed the interests of William P. Carey, Chairman and
Co-Chief Executive Officer of the Company, who had owned a 90% interest in
WPCI. As a result of increasing its interest in WPCI to 100%, the Company
acquired assets and liabilities of WPCI as follows: (see Note 3)
Intangible assets (management contracts) 679
Equity investments 324
Due to affiliates (including $1,898 due to William P. Carey) (2,559)
Other assets and liabilities, net 256
-------
Net cash acquired $ 1,300
=======
Supplemental Cash Flows Information:
2004 2003 2002
-------- -------- --------
Interest paid, net of amounts capitalized $ 13,901 $ 14,395 $ 16,400
======== ======== ========
Income taxes paid $ 36,944 $ 9,074 $ 1,695
======== ======== ========
Interest capitalized $ - $ 22 $ 216
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-25-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
1. Organization:
W. P. Carey & Co. LLC (the "Company") is a real estate investment, management
and advisory company that invests in commercial properties leased to companies
domestically and internationally, and earns fees as the advisor to affiliated
real estate investment trusts ("CPA(R) REITs") that each make similar
investments. Under the advisory agreements with the CPA(R) REITs, the Company
performs services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. The Company owns and manages commercial and
industrial properties located in 34 states and Europe, net leased to more than
107 tenants. As of December 31, 2004, the Company's portfolio consisted of 168
properties in the United States and 15 properties in Europe and totaled more
than 19.4 million square feet. In addition, the Company manages over 765 net
leased properties on behalf of 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"),
Corporate Property Associates 16 - Global Incorporated ("CPA(R):16 - Global")
and Carey Institutional Properties Incorporated ("CIP(R)") until its merger into
CPA(R):15 during 2004.
The Company commenced operations on January 1, 1998 by combining the limited
partnership interests in nine CPA(R) Partnerships, at which time the Company
listed on the New York Stock Exchange. On June 28, 2000, the Company acquired
the net lease real estate management operations of Carey Management from William
P. Carey ("Carey"), Chairman and Co-Chief Executive Officer of the Company,
subsequent to receiving shareholder approval. The assets acquired included the
advisory agreements with four affiliated CPA(R) REITs, the Company's management
agreement, the stock of an affiliated broker-dealer, investments in the common
stock of the CPA(R) REITs, and certain office furniture, fixtures, equipment and
employees required to carry on the business operations of Carey Management. The
purchase price consisted of the initial issuance of 8,000,000 shares with an
additional 2,000,000 shares issuable over four years if specified performance
criteria were achieved through a period ended December 31, 2004 (of which
1,900,000 shares were issued representing an aggregate value of $41,229). The
initial 8,000,000 shares issued were restricted from resale for a period of up
to three years and the additional shares are subject to Section 144 regulations.
The acquisition of the interests in Carey Management was accounted for as a
purchase and was recorded at the fair value of the initial 8,000,000 shares
issued. The total initial purchase price was approximately $131,300 including
the issuance of 8,000,000 shares, transaction costs of $2,605, the acquisition
of Carey Management's minority interests in the CPA(R) partnerships and the
value of restricted shares and options issued in respect of the interests of
certain officers in a non-qualified deferred compensation plan of Carey
Management.
The purchase price was allocated to the assets and liabilities acquired based
upon their fair market values. Intangible assets acquired, including the
advisory agreements with the CPA(R) REITs, the Company's management agreement,
the trade name, and workforce (reclassified to goodwill on January 1, 2002),
were determined pursuant to a third party valuation. The value of the advisory
agreements and the management agreement were based on a discounted cash flow
analysis of the projected fees. The excess of the purchase price over the fair
values of the identified tangible and intangible assets has been recorded as
goodwill. The value of additional shares issued under the acquisition agreement
is recognized as additional purchase price and recorded as goodwill. Issuances
based on performance criteria are valued based on the market price of the shares
on the date when the performance criteria are achieved.
2. Summary of Significant Accounting Policies:
BASIS OF CONSOLIDATION
The consolidated financial statements include the Company, its wholly owned and
majority owned controlled subsidiaries and a variable interest entity ("VIE") in
which it is the primary beneficiary. All material inter-entity transactions have
been eliminated.
For acquisitions of an interest in an entity, the Company evaluates the
entity to determine if the entity is deemed a VIE, and if the Company is deemed
to be the primary beneficiary, in accordance with FASB Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" ("FIN 46(R)"). Entities that meet
one or more of the criteria listed below are considered VIEs.
- The Company's equity investment is not sufficient to allow the
entity to finance its activities without additional third party
financing;
- The Company does not have the direct or indirect ability to make
decisions about the entity's business;
- The Company is not obligated to absorb the expected losses of the
entity;
- The Company does not have the right to receive the expected residual
returns of the entity; and
-26-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
- The Company's voting rights are not proportionate to its economic
interests, and substantially all of the entity's activities either
involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
The Company consolidates the entities that are VIEs and the Company is deemed to
be the primary beneficiary of the VIE. For entities where the Company is not
deemed to be the primary beneficiary or the entity is not deemed a VIE and the
Company's ownership is 50% or less and has the ability to exercise significant
influence as well as jointly-controlled tenancy-in-common interests are
accounted for under the equity method, i.e. at cost, increased or decreased by
the Company's share of earnings or losses, less distributions. The Company will
reconsider its determination of whether an entity is a VIE and who the primary
beneficiary is if certain events occur that are likely to cause a change in the
original determinations.
Beginning in 2004, the Company accounts for its interest in CPA(R):16 - Global
under the equity method. For 2003, the accounts of CPA(R):16-Global, which was
formed in June 2003, were included in the Company's consolidated financial
statements, as the Company owned all of CPA(R):16 - Global's outstanding common
stock. Effective December 12, 2003, CPA(R):16 - Global commenced a "best
efforts" public offering for up to 1,100,000 shares. CPA(R):16- Global
temporarly suspended this offering in December 2004 and subsequently withdrew
it. The consolidated financial statements also include the accounts of Corporate
Property Associates International Incorporated ("CPAI"), which was formed in
July 2003. The Company owns all of CPAI's outstanding common stock. CPAI has
filed a registration statement with the Securities and Exchange Commission
("SEC") for a public offering to sell up to 27,500,000 shares of common stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.
PURCHASE PRICE ALLOCATION
In connection with the Company's acquisition of properties, purchase costs are
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, are determined as if vacant. Intangible
assets including the above-market value of leases, the value of in-place leases
and the value of tenant relationships are recorded at their relative fair
values. Below-market value of leases are also recorded at their relative fair
values and are recorded as liabilities in the accompanying financial statements.
Above-market and below-market in-place lease values for owned properties are
recorded based on the present value (using an interest rate reflecting the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in-place at
the time of acquisition of the properties and (ii) management's estimate of fair
market lease rates for the property or equivalent property, measured over a
period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease value is amortized as a reduction of rental income over the
remaining non-cancelable term of each lease. The capitalized below-market lease
value is amortized as an increase to rental income over the initial term and any
fixed rate renewal periods in the respective leases.
The total amount of other intangibles are allocated to in-place lease values and
tenant relationship intangible values based on management's evaluation of the
specific characteristics of each tenant's lease and the Company's overall
relationship with each tenant. Characteristics that are considered in allocating
these values include the nature and extent of the existing relationship with the
tenant, prospects for developing new business with the tenant, the tenant's
credit quality and the expectation of lease renewals among other factors. Third
party appraisals or management's estimates are used to determine these values.
Intangibles for above-market and below-market leases, in-place lease intangibles
and tenant relationships are amortized over their estimated useful lives. In the
event that a lease is terminated the unamortized portion of each intangible,
including market rate adjustments, in-place lease values and tenant relationship
values, is charged to expense.
-27-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
Factors considered in the analysis include the estimated carrying costs of the
property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. The Company also considers
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market rates during
the hypothetical expected lease-up periods, based on management's assessment of
specific market conditions. Estimated costs to execute leases including
commissions and legal costs to the extent that such costs are not already
incurred with a new lease that has been negotiated in connection with the
purchase of the property are also considered.
The value of in-place leases are amortized to expense over the remaining initial
term of each lease. The value of tenant relationship intangibles are amortized
to expense over the initial and expected renewal terms of the leases but no
amortization periods for intangibles will exceed the remaining depreciable life
of the building.
OPERATING REAL ESTATE
Land and buildings and personal property are carried at cost less accumulated
depreciation. Renewals and improvements are capitalized, while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed as incurred.
REAL ESTATE UNDER CONSTRUCTION AND REDEVELOPMENT
For properties under construction, operating expenses including interest charges
and other property expenses, including real estate taxes, are capitalized rather
than expensed and rentals received are recorded as a reduction of capitalized
project (i.e., construction) costs. Interest is capitalized by applying the
interest rate applicable to outstanding borrowings to the average amount of
accumulated expenditures for properties under construction during the period.
CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of three months or less at the
time of purchase to be cash equivalents. Items classified as cash equivalents
include money market funds. Substantially all of the Company's cash and cash
equivalents at December 31, 2004 and 2003 were held in the custody of three
financial institutions and which balances, at times, exceed federally insurable
limits. The Company mitigates this risk by depositing funds with major financial
institutions.
DUE TO AFFILIATES
Included in due to affiliates are deferred acquisition fees and amounts related
to issuable shares for meeting the performance criteria in connection with the
acquisition of Carey Management LLC ("Carey Management"). Deferred acquisition
fees are payable for services provided by Carey Management prior to the
termination of the management contract, relating to the identification,
evaluation, negotiation, financing and purchase of properties. The fees are
payable in eight equal annual installments each January 1 following the first
anniversary of the date a property was purchased.
OTHER ASSETS AND LIABILITIES
Included in other assets are accrued rents and interest receivable, deferred
rent receivable, notes receivable, deferred charges, escrow balances held by
lenders, restricted cash balances and marketable securities. Included in other
liabilities are accrued interest, accounts payable and accrued expenses,
security deposits and other amounts held on behalf of tenants, deferred rent,
deferred revenue, including unamortized below-market rent intangibles, and
minority interests that are subject to redemption. Deferred charges include
costs incurred in connection with debt financing and refinancing and are
amortized and included in interest expense over the terms of the related debt
obligations using the effective interest method. Deferred rent receivable is
primarily the aggregate difference for operating method leases between scheduled
rents which vary during the lease term and rent recognized on a straight-line
basis. Minority interests subject to redemption are recorded at fair value based
on a cash flow model with changes in fair value reflected in the determination
of net income.
Marketable securities are classified as available-for-sale securities and
reported at fair value with the Company's interest in unrealized gains and
losses on these securities reported as a component of other comprehensive income
until realized.
-28-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of December 31, 2004 and 2003, accumulated other comprehensive income
reflected in the members' equity is comprised of the following:
As of December 31,
2004 2003
------- -------
Unrealized gains on marketable securities $ 3,285 $ 1,818
Foreign currency translation adjustment 515 678
------- -------
Accumulated other comprehensive income $ 3,800 $ 2,496
======= =======
REAL ESTATE LEASED TO OTHERS
Certain of the Company's real estate is leased to others on a net lease basis,
whereby the tenant is generally responsible for all operating expenses relating
to the property, including property taxes, insurance, maintenance, repairs,
renewals and improvements. Expenditures for maintenance and repairs including
routine betterments are charged to operations as incurred. Significant
renovations that increase the useful life of the properties are capitalized. For
the year ended December 31, 2004, lessees were responsible for the direct
payment of real estate taxes of approximately $7,119.
The Company diversifies its real estate investments among various corporate
tenants engaged in different industries, by property type and geographically. No
lessee currently represents 10% or more of total leasing revenues. Substantially
all of the Company's leases provide for either scheduled rent increases,
periodic rent increases based on formulas indexed to increases in the Consumer
Price Index ("CPI") or sales overrides. Rents from sales overrides (percentage
rents) are recognized as reported by the lessees, that is, after the level of
sales requiring a rental payment to the Company is reached.
The leases are accounted for under either the direct financing or operating
methods. Such methods are described below (see Notes 4 and 5):
Direct financing method - Leases accounted for under the direct financing method
are recorded at their net investment (see Note 5). Unearned income is deferred
and amortized to income over the lease terms so as to produce a constant
periodic rate of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost less accumulated
depreciation, minimum rental revenue is recognized on a straight-line basis over
the term of the related leases and expenses (including depreciation) are charged
to operations as incurred.
On an ongoing basis, the Company assesses its ability to collect rent and other
tenant-based receivables and determines an appropriate allowance for uncollected
amounts. Because the real estate operations has a limited number of lessees, the
Company believes that it is necessary to evaluate the collectibility of these
receivables based on the facts and circumstances of each situation rather than
solely use statistical methods. The Company generally recognizes a provision for
uncollected rents and other tenant receivables that typically ranges between
0.5% and 2% of lease revenues (rental income and interest income from direct
financings leases) and will measure its allowance against actual rent arrearages
and adjust the percentage applied. For amounts in arrears, the Company makes
subjective judgments based on its knowledge of a lessee's circumstances and may
reserve for the entire receivable amount from a lessee because there has been
significant or continuing deterioration in the lessee's ability to meet its
lease obligations.
REVENUE RECOGNITION
The Company earns transaction and asset-based fees. Structuring and financing
fees are earned for investment banking services provided in connection with the
analysis, negotiation and structuring of transactions, including acquisitions
and dispositions and the placement of mortgage financing obtained by publicly
registered real estate investment trusts formed by the Company (the "CPA(R)
REITs"). Asset-based fees consist of property management, leasing and advisory
fees and reimbursement of certain expenses in accordance with the separate
management agreements with each CPA(R) REIT for administrative services provided
for operation of such CPA(R) REIT. Receipt of the incentive fee portion of the
management fee, however, is subordinated to the achievement of specified
cumulative return requirements by the shareholders of the CPA(R) REITs. The
incentive portion of management fees (the "performance fees") may be collected
in cash or shares of the CPA(R) REIT at the option of the Company. During 2004,
2003 and 2002, the Company elected to receive its earned performance fees in
CPA(R) REIT shares. Performance fees of CIP(R) in the amount of $1,494 were
received in cash in 2004.
-29-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
All fees are recognized as earned. Transaction fees are earned upon the
consummation of a transaction and management fees are earned when services are
performed. Fees subject to subordination are recognized only when the
contingencies affecting the payment of such fees are resolved, that is, when the
performance criteria of the CPA(R) REIT is achieved and contractual limitations
are not exceeded. As of December 31, 2004, $800 of transaction fees are recorded
as deferred revenue in other liabilities, as a limitation which provides that
certain transaction fees cannot exceed 4.5% of the aggregate cost of properties
of a CPA(R) REIT was exceeded. In addition, 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 $819 and deferred
acquisition fees of $7,535 were not recognized and has been deferred until the
preferred return criterion is met.
The Company also receives reimbursement of certain marketing costs in connection
with the sponsorship of a CPA(R) REIT that is conducting a "best efforts" public
offering. Reimbursement income is recorded as the expenses are incurred, subject
to limitations on a CPA(R) REIT's ability to incur offering costs.
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the properties (generally forty years) and for furniture,
fixtures and equipment (generally up to seven years).
IMPAIRMENTS
When events or changes in circumstances indicate that the carrying amount may
not be recoverable, the Company assesses the recoverability of its long-lived
assets and certain intangible assets based on projections of undiscounted cash
flows, without interest charges, over the life of such assets. In the event that
such cash flows are insufficient, the assets are adjusted to their estimated
fair value. The Company performs a review of its estimate of residual value of
its direct financing leases at least annually to determine whether there has
been an other than temporary decline in the Company's current estimate of
residual value of the underlying real estate assets (i.e., the estimate of what
the Company could realize upon sale of the property at the end of the lease
term). If the review indicates a decline in residual value that is other than
temporary, a loss is recognized and the accounting for the direct financing
lease will be revised to reflect the decrease in the expected yield using the
changed estimate, that is, a portion of the future cash flow from the lessee
will be recognized as a return of principal rather than as revenue.
The Company tests goodwill for impairment at least annually using a two-step
process. To identify any impairment, the Company first compares the estimated
fair value of the reporting unit (management services segment) with its carrying
amount, including goodwill. The Company calculates the estimated fair value of
the management services segment by applying a multiple, based on comparable
companies, to earnings. If the fair value of the management services segment
exceeds its carrying amount, goodwill is considered not impaired. If the
carrying amount of the management services unit exceeds its estimated fair
value, then the second step is performed to measure the amount of impairment
loss.
For the second step, the Company would compare the implied fair value of the
goodwill with its carrying amount and record an impairment charge for the excess
of the carrying amount over the fair value. The implied fair value of the
goodwill is determined by allocating the estimated fair value of the management
services segment to its assets and liabilities. The excess of the estimated fair
value of the management services segment over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. In accordance with
the requirements of Statement of Financial Accounting Standards ("FAS") No. 142,
"Goodwill and Other Intangibles," the Company performed its annual tests for
impairment of its management services segment, the reportable unit of
measurement, and concluded that the goodwill is not impaired.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, and subsequently adjusted for our
proportionate share of earnings and cash contributions and distributions. On a
periodic basis, we assess whether there are any indicators that the value of
equity investments may be impaired and whether or not that impairment is other
than temporary. To the extent impairment has occurred, the charge shall be
measured as the excess of the carrying amount of the investment over the fair
value of the investment.
When the Company identifies assets as held for sale, it discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in the Company's opinion, the net sales price of the assets,
which have been identified for sale, is less than the net book value of the
assets, an impairment charge is recognized and a valuation allowance is
established. To the extent that a purchase and sale agreement has been entered
into, the allowance is based
-30-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
on the negotiated sales price. To the extent that the Company has adopted a plan
to sell an asset but has not entered into a sales agreement, it will make
judgments of the net sales price based on current market information.
Accordingly, the initial assessment may be greater or less than the purchase
price subsequently committed to and may result in a further adjustment to the
fair value of the property. If circumstances arise that previously were
considered unlikely and, as a result, the Company decides not to sell a property
previously classified as held for sale, the property is reclassified as held and
used. A property that is reclassified is measured and recorded individually at
the lower of (a) its carrying amount before the property was classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held and used, (b) the fair
value at the date of the subsequent decision not to sell, or (c) the current
carrying value.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations ("APB No. 25"). Under
APB No. 25, compensation cost for fixed plans is measured as the excess, if any,
of the quoted market price of the Company's shares at the date of grant over the
exercise price of the option granted.
The Company has granted restricted shares and stock options to substantially all
employees. Shares were awarded in the name of the employee, who has all the
rights of a shareholder, subject to certain restrictions of transferability and
a risk of forfeiture. The forfeiture provisions on the awards expire annually,
over their respective vesting periods. Shares and stock options subject to
forfeiture provisions have been recorded as unearned compensation and are
presented as a separate component of members' equity. Compensation cost for
stock options and restricted stock, if any, is recognized over the applicable
vesting periods.
Grants of restricted stock and options of a subsidiary were awarded to certain
of its officers. The awards are subject to redemption in 2012 and, therefore are
being accounted for as a variable plan. The awards were initially recorded in
unearned compensation and changes in fair value subsequent to the grant date are
included in the determination of net income (see below). The unearned
compensation is being amortized over the vesting periods.
All transactions with non-employees in which the Company issues stock as
consideration for services received are accounted for based on the fair value of
the stock issued or services received, whichever is more reliably determinable.
The Company has elected to adopt the disclosure only provisions of FAS No. 123.
If stock-based compensation cost had been recognized based upon fair value at
the date of grant for options and restricted stock awarded under the Company's
share incentive plans and amortized to expense over their respective vesting
periods in accordance with the provisions of FAS No. 123, pro forma net income
would have been as follows:
Year Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income as reported $ 63,851 $ 62,878 $ 46,588
Add: Stock based compensation included in net
income, as reported, net of related tax effects 2,264 2,282 1,709
Less: Stock based compensation determined under
fair value based methods for all awards, net of related tax
effects (2,853) (3,144) (2,887)
---------- ---------- ----------
Pro forma net income $ 63,262 $ 62,016 $ 45,410
========== ========== ==========
Earnings per common share as reported:
Basic $ 1.71 $ 1.72 $ 1.31
Diluted $ 1.64 $ 1.65 $ 1.28
Pro forma earnings per common share:
Basic $ 1.69 $ 1.70 $ 1.28
Diluted $ 1.63 $ 1.63 $ 1.25
The per share weighted average fair value of share options and warrants granted
during 2004 under the Company's Incentive Plan were estimated to range from
$1.96 to $2.47 using a Black-Scholes option pricing formula based on the date of
grant. The more significant assumptions underlying the determination of the
weighted average fair values included risk-free interest rates ranging from
3.63% to 3.92%, volatility factors ranging from 20.66% to 21.56%, dividend
yields ranging from 7.79% to 8.19% and expected lives ranging from 7 to 7.13
years.
-31-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
The per share weighted average fair value of share options and warrants granted
during 2003 under the Company's Incentive Plan were estimated to range from
$1.51 to $2.28 using a Black-Scholes option pricing formula based on the date of
grant. The more significant assumptions underlying the determination of the
weighted average fair values included risk-free interest rates ranging from
2.60% to 3.69%, volatility factors ranging from 21.35% to 21.89%, dividend
yields ranging from 8.26% to 8.51% and expected lives ranging from 4.56 to 7.5
years.
The per share weighted average fair value of share options and warrants granted
during 2002 under the Company's Incentive Plan were estimated to be $1.26 using
a Black-Scholes option pricing formula. The more significant assumptions
underlying the determination of the weighted average fair value include a
risk-free interest rate of 1.73%, a volatility factor of 21.83%, a dividend
yield of 8.59% and an expected life of 2.99 years.
The Company's non-qualified deferred compensation plan provides that each
participating officer's cash compensation in excess of designated amounts is
deferred and he or she is awarded an interest that is intended to correspond to
the per share value of a CPA(R) REIT designated at the time of such award. The
value of the award is adjusted at least annually to reflect changes based on the
underlying appraised value of a share of common stock of the CPA(R) REIT. The
deferred compensation plan is a variable plan and changes in the fair value of
the interests are included in the determination of net income.
FOREIGN CURRENCY TRANSLATION
The Company owns interests in several real estate investments in France. The
functional currency for these investments is the Euro. The translation from the
Euro to U. S. Dollars is performed for assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains and
losses resulting from such translation are reported as a component of other
comprehensive income as part of members' equity. The cumulative translation
adjustment as of December 31, 2004 and 2003 were gains of $515 and $678,
respectively.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss (measured from the transaction date or the most recent
intervening balance sheet date) whichever is later, realized upon settlement of
a foreign currency transaction generally will be included in net income for the
period in which the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a net investment
and (ii) inter-company foreign currency transactions that are of a long-term
nature (that is, settlement is not planned or anticipated in the foreseeable
future), when the entities to the transactions are consolidated or accounted for
by the equity method in the Company's financial statements will not be included
in determining net income but will be accounted for in the same manner as
foreign currency translation adjustments and reported as a component of other
comprehensive income as part of shareholder's equity. The contributions to the
equity investments were funded in part through subordinated debt. Foreign
currency intercompany transactions that are scheduled for settlement, consisting
primarily of accrued interest and the translation to the reporting currency of
intercompany subordinated debt with scheduled principal payments, are included
in the determination of net income, and, for the years ended December 31, 2004
and 2003, the Company recognized unrealized gains of $790 and $130,
respectively, from such transactions. In 2004 and 2003, the Company recognized
realized gains of $430 and $556, respectively, on foreign currency transactions
in connection with the transfer of cash from foreign operating subsidiaries to
the parent company.
INCOME TAXES
The Company has elected to be treated as a partnership for federal income tax
purposes. The Company's real estate operations are conducted through partnership
or limited liability companies electing to be treated as partnerships for
Federal income tax purposes. As partnerships, the Company and its partnership
subsidiaries are generally not directly subject to tax and the taxable income or
loss of these operations are included in the income tax returns of the members;
accordingly, no provision for income tax expense or benefit is reflected in the
accompanying financial statements. These operations are subject to certain
state, local and foreign taxes.
-32-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
The Company conducts its management services operations though a wholly owned
taxable corporation. These operations are subject to federal, state, local and
foreign taxes as applicable. The Company's financial statements are prepared on
a consolidated basis including this taxable subsidiary and include a provision
for current and deferred taxes on these operations.
Deferred income taxes are provided for the corporate subsidiaries based on
earnings reported. The provision for income taxes differs from the amounts
currently payable because of temporary differences in the recognition of certain
income and expense items for financial reporting and tax reporting purposes.
Income taxes are computed under the asset and liability method. The asset and
liability method requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between tax
bases and financial bases of assets and liabilities (see Note 17).
ASSETS HELD FOR SALE
Assets held for sale are accounted for at the lower of carrying value or fair
value less costs to dispose. Assets are classified as held for sale when the
Company has committed to a plan to actively market a property for sale and
expects that a sale will be completed within one year. The results of operations
and the related gain or loss on sale of properties classified as held for sale
are included in discontinued operations (see Note 7).
If circumstances arise that previously were considered unlikely and, as a
result, the Company decides not to sell a property previously classified as held
for sale, the property is reclassified as held and used. A property that is
reclassified is measured and recorded individually at the lower of (a) its
carrying amount before the property was classified as held for sale, adjusted
for any depreciation expense that would have been recognized had the property
been continuously classified as held and used, (b) the fair value at the date of
the subsequent decision not to sell, or (c) the current carrying value.
The Company recognizes gains and losses on the sale of properties when among
other criteria, the parties are bound by the terms of the contract, all
consideration has been exchanged and all conditions precedent to closing have
been performed. At the time the sale is consummated, a gain or loss is
recognized as the difference between the sale price less any closing costs and
the carrying value of the property.
EARNINGS PER SHARE
The Company presents both basic and diluted earnings per share ("EPS"). Basic
EPS excludes dilution and is computed by dividing net income available to
shareholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
common stock, where such exercise or conversion would result in a lower EPS
amount.
Basic and diluted earnings per share were calculated as follows:
For the year ended December 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Net income $ 63,851 $ 62,878 $ 46,588
========== ========== ==========
Weighted average shares - basic 37,417,918 36,566,338 35,530,334
Effect of dilutive securities - stock options and warrants 1,486,807 1,442,424 734,896
---------- ---------- ----------
Weighted average shares - diluted 38,904,725 38,008,762 36,265,230
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("FAS 123R"), which requires that the fair value of all stock and other
equity-based compensation be treated as an expense that is reflected in the
income statement. Depending on the model used to calculate stock-based
compensation expense in the future and other requirements of FAS 123R, the pro
forma disclosure may not be indicative of the stock-based compensation expense
that will be recognized in our future financial statements. FAS 123R is
effective for periods beginning after June 15, 2005, and allows two different
methods of transition. We expect to implement FAS 123R beginning with the third
quarter of fiscal 2005, which begins on July 1, 2005. We are currently
evaluating this
-33-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
new standard and models that may be used to calculate future stock-based
compensation expense.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("FAS 148") which amends SFAS No.
123, Accounting for Stock Based Compensation. FAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock based compensation (i.e., recognition of a charge for
issuance of stock options in the determination of income). However, FAS No. 148
does not permit the use of the original FAS No. 123 prospective method of
transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of FAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for stock
based employee compensation, description of transition method utilized and the
effect of the method used on reported results. The annual disclosure provisions
of FAS No. 148 have been adopted.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS
150 establishes standards to classify as liabilities certain financial
instruments that are mandatorily redeemable or include an obligation to
repurchase and expands financial statement disclosure requirements. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. FAS 150 was 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.
In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which
defers the classification and measurement provisions of FAS 150 indefinitely as
they apply to mandatorily redeemable non-controlling interests associated with
finite-lived entities. We have interests in five joint ventures that are
consolidated and have minority interests that have finite lives and were
considered mandatorily redeemable non-controlling interests prior to the
issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3,
these minority interests have not been reflected as liabilities. We adopted FAS
150 in July 2003 and it did not have a significant impact on our consolidated
financial statements.
3. Transactions with Related Parties:
The Company earns fees as the advisor ("Advisor") to CPA(R):12, CPA(R):14,
CPA(R):15, CPA(R):16-Global and through September 1, 2004, CIP(R). Effective
September 1, 2004, CIP(R) was merged into CPA(R):15. Under the advisory
agreements with the CPA(R) REITs, the Company performs various services,
including but not limited to the day-to-day management of the CPA(R) REITs and
transaction-related services. The Company earns an asset management fee of 1/2
of 1% per annum of average invested assets, as defined in the advisory
agreements, for each CPA(R) REIT and, based upon specific performance criteria
for each REIT, may be entitled to receive performance fees, calculated on the
same basis as the asset management fee, and is reimbursed for certain costs,
primarily the cost of personnel. Effective in 2005, the advisory agreement was
amended to allow the Company to elect to receive restricted stock for any fee
due from each CPA(R) REIT. For the years ended December 31, 2004, 2003 and 2002,
asset-based fees and reimbursements earned were $61,193, $53,103 and 37,250,
respectively. For the year ended December 31, 2004, CPA(R):16-Global did not
meet the preferred return criterion (a non-compounded cumulative distribution
return of 6%), as defined in the Advisory Agreements, and therefore, the
Company's recognition of performance fees of $819 will only be recorded if 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 are
payable in equal annual installments 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%. The Company may also earn fees
related to the disposition of properties, subject to subordination provisions
and will only be recognized as such subordination provisions are achieved. For
the years ended December 31, 2004, 2003 and 2002, the Company earned transaction
fees of $33,677, $34,957 and $47,005, respectively. CPA(R):16-Global has not met
its preferred return and for year ended December 31, 2004, cumulative deferred
acquisition fees of $7,535 and interest thereon of $171, were not recognized,
and will be recognized if CPA(R):16-Global meets the preferred return criterion.
-34-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
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
CPA(R):15's acquisition of properties 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 $115,158 in cash and the assumption of $27,003
in limited recourse mortgage notes payable, (the "Acquisition"). The amounts are
inclusive of the Company's pro rata share of equity interests acquired in the
transaction. The fair value of the assumed mortgages was $27,756. 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 Company owns interests in entities, which range from 22.50% to 50%, a
jointly-controlled 36% tenancy-in-common interest in two properties subject to a
net lease with the remaining interests held by affiliates and owns common stock
in each of the CPA(R) REITs. The Company has a significant influence in these
investments, which are accounted for under the equity method of accounting.
The Company is the general partner in a limited partnership that leases the
Company's home office spaces and participates in an agreement with certain
affiliates, including the CPA(R) REITs for the purpose of leasing office space
used for the administration of the Company and other affiliated real estate
entities and sharing the associated costs. Pursuant to the terms of the
agreement, the Company's share of rental, occupancy and leasehold improvement
costs is based on gross revenues. Expenses incurred were $531, $529 and $545 in
2004, 2003 and 2002, respectively. The Company's share of minimum lease payments
on the office lease as of December 31, 2004 is $7,137 through 2016.
Prior to the termination of the management agreement, Carey Management performed
certain services for the Company and earned transaction fees in connection with
the purchase and disposition of properties. The Company is obligated to pay
deferred acquisition fees in equal annual installments over a period of no less
than eight years. As of December 31, 2004 and 2003, unpaid deferred acquisition
fees were $1,709 and $2,234, respectively, and bear interest at an annual rate
of 6%. Installments of $524, were paid in 2004, 2003 and 2002.
A person who serves as a director and an officer of the Company is the sole
shareholder of Livho, Inc. ("Livho"), a lessee of the Company. Effective
December 31, 2003, the Company consolidates the accounts of Livho in its
consolidated financial statements in accordance with FIN 46(R).
An independent director of the Company has an ownership interest in companies
that own the minority interest in the Company's French majority-owned
subsidiaries. The director's ownership interest is subject to the same terms as
all other ownership interests in the subsidiary companies.
Prior to April 1, 2003, the Company owned a 10% interest in W.P. Carey
International LLC ("WPCI"), a company that structures net lease transactions on
behalf of the CPA(R) REITs outside of the United States of America. The
remaining 90% interest in WPCI was owned by Carey. The Company's Board of
Directors approved a transaction, which resulted in the Company's acquisition of
100% of the ownership of WPCI through the redemption of Carey's interest on
April 1, 2003. WPCI distributed 492,881 shares of the Company and $1,898 of cash
to Carey, equivalent to his contributions to WPCI. The Company accounted for the
acquisition as a purchase and reflected the assets acquired and liabilities
assumed at their estimated fair value. Prior to the redemption, the Company
accounted for its investment in WPCI under the equity method of accounting. As a
result of this transaction, the Company through WPCI has acquired exclusive
rights to structure net lease transactions outside of the United States of
America on behalf of the CPA(R) REITs.
The following consolidated pro forma financial information has been presented as
if acquisition of interests in 16 properties from CIP(R) by the Company had
occurred on January 1, 2004 and 2003 for the years ended December 31,
-35-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
2004 and 2003, respectively. No pro forma effect is given to a property acquired
which is currently held for sale and included in discontinued operations. 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.
For the Year
Ended December 31,
------------------------------
2004 2003
-------------- -----------
(Unaudited) (Unaudited)
Pro forma total revenues $ 234,870 $ 170,147
Pro forma net income 64,616 64,614
Pro forma earnings per share:
Basic $ 1.73 $ 1.77
Diluted $ 1.66 $ 1.70
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Real estate leased to others, at cost, and accounted for under the operating
method is summarized as follows:
December 31,
--------------------
2004 2003
-------- --------
Land $ 93,926 $ 77,170
Buildings and improvements 436,353 368,568
-------- --------
530,279 445,738
Less: Accumulated depreciation 53,914 45,021
-------- --------
$476,365 $400,717
======== ========
The scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable operating leases are as follows:
Year ended December 31,
- -----------------------
2005 $ 49,941
2006 47,513
2007 41,319
2008 35,727
2009 31,298
Thereafter through 2021 104,477
Contingent rentals (including percentage rents and CPI-based increases) were
$2,137, $1,427 and $1,550 in 2004, 2003 and 2002, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
--------------------
2004 2003
-------- --------
Minimum lease payments receivable $158,864 $173,120
Unguaranteed residual value 162,724 179,869
-------- --------
321,588 352,989
Less: Unearned income (130,944) (170,537)
-------- --------
$190,644 $182,452
======== ========
-36-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under noncancelable direct financing leases are as follows:
Year ended December 31,
- -----------------------
2005 $ 21,822
2006 20,381
2007 18,510
2008 16,636
2009 15,873
Thereafter through 2022 65,642
Contingent rentals (including percentage rents and CPI-based increases) were
approximately $2,382, $2,189 and $2,710 in 2004, 2003 and 2002, respectively.
6. Equity Investments:
The Company owns equity interests as a limited partner in two limited
partnerships, four limited liability companies and a jointly-controlled 36%
tenancy-in-common interest in two properties subject to a master lease with the
remaining interests owned by affiliates and all of which net lease real estate
on a single-tenant basis.
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 as of such date. The Company also
acquired CIP(R)'s 50% noncontrolling interest in a limited partnership, which
leases property to Sicor, Inc., and is accounting for this interest under the
equity method of accounting.
The Company also owns common stock in four CPA(R) REITs with which it has
advisory agreements. The interests in the CPA(R) REITs are accounted for under
the equity method due to the Company's ability to exercise significant influence
as the Advisor to the CPA(R) REITs. The CPA(R) REITs are publicly registered and
their audited consolidated financial statements are filed with the SEC in Annual
Reports on Form 10-K. In connection with earning performance fees, the Company
has elected to receive restricted shares of common stock in the CPA(R) REITs
rather than cash in consideration for such fees. 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, a portion of which are still restricted.
As of December 31, 2004, the Company's ownership in the CPA(R) REITs is as
follows:
% of outstanding
Shares Shares
--------- ----------------
CPA(R):12 1,242,519 3.91%
CPA(R):14 2,465,236 3.57%
CPA(R):15 2,129,361 1.69%
CPA(R):16-Global 20,000 0.04%
Combined financial information of the affiliated equity investees is
summarized as follows:
December 31,
------------
2004 2003
---------- ----------
Assets (primarily real estate) $5,189,736 $3,535,954
Liabilities (primarily mortgage notes payable) 2,372,468 1,719,459
---------- ----------
Owner's equity $2,817,268 $1,816,495
========== ==========
Company's share of equity investees' net assets $ 110,379 $ 82,800
========== ==========
-37-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
Year Ended December 31,
-----------------------
2004 2003 2002
-------- -------- --------
Revenue (primarily rental income and interest income from
direct financing leases) $349,023 $263,719 $175,031
Expenses (primarily depreciation and property expenses) (145,194) (141,964) (68,237)
Other interest income 7,927 6,204 4,832
Minority interest in income (12,986) (5,720) (3,286)
Income from equity investments 38,439 30,650 12,354
Interest expense (130,302) (95,128) (65,136)
Gain (loss) on sales 7,464 9,316 (92)
-------- ------- --------
Income from continuing operations 114,371 67,077 55,466
(Loss) income from discontinued operations (483) (114) 1,753
Gain on sale of real estate 2,232 - 333
Impairment charge on real estate (5,150) (1,000) -
-------- -------- --------
Net income $110,970 $ 65,963 $ 57,552
======== ======== ========
Company's share of net income (loss) from equity
investments $ 5,308 $ 4,008 $ (443)
======== ======== ========
Until January 1, 2003, the Company owned interests in the operating partnership
("OP units") of MeriStar Hospitality Corporation ("MeriStar"), a publicly traded
real estate investment trust accounted as an equity investment. Effective
January 1, 2003, the OP units were converted to shares of MeriStar common stock
at which time the Company started accounting for its interest as an
available-for-sale security.
For the year ended December 31, 2002, MeriStar reported revenues of $865,693
expenses of $799,278 and a net loss of $161,248. The Company's share of the loss
for 2002 was $3,019.
7. Assets Held for Sale and Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144"), effective for financial statements issued for
fiscal years beginning after December 15, 2001, the results of operations,
impairments and gain or loss on sales of real estate for properties sold or held
for sale are to be reflected in the consolidated statements of operations as
"Discontinued Operations" for all periods presented. The provisions of FAS 144
are effective for disposal activities initiated by the Company's commitment to a
plan of disposition after the date it is initially applied (January 1, 2002).
Properties held for sale as of December 31, 2001 are not included in
"Discontinued Operations". The results of operations and the related gain or
loss on sale of properties sold in 2002 (see Note 14) that were held for sale as
of December 31, 2001 are not included in "Discontinued Operations."
Property sales and impairment charges in 2004, 2003 and 2002 that are included
in "Discontinued Operations" are as follows:
2004
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 13. The results of
operations from the Leeds and Toledo properties are included in discontinued
operations.
In December 2004, the Company entered into an agreement with an auctioneer to
sell its Frankenmuth, Michigan property, at auction. In March 2005, the Company
sold this property to a third party for $1,700. The Company recognized an
impairment charge of $1,000 to write down the property value to the estimated
net sales proceeds anticipated from the sale (see Note 13). The property has
been classified as held for sale as of December 31, 2004, and the results of its
operations have been included in discontinued operations.
During 2004, the Company sold properties in Kenbridge, Virginia; McMinnville,
Tennessee; Panama City, Florida and Garland, Texas for $2,256 and recognized net
gain on sales of $85.
-38-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
2003
During 2003, the Company sold properties in Broomall, Pennsylvania; Cuyahoga
Falls, Ohio; Canton, Michigan; Alpena, Michigan; Apache Junction, Arizona and
Schiller Park, Illinois for net sales proceeds of $12,986 and recognized net
gain on sales of $807.
In July 2003, the Company sold a property in Lancaster, Pennsylvania for $5,000
and recognized a loss on sale of $29. Prior to the sale, the property value was
written down to reflect the estimated net sales proceeds and an impairment
charge on properties held for sale of $1,430 was recognized and included in
discontinued operations for the year ended December 31, 2003.
In connection with the anticipated sale of the Company's McMinnville, Tennessee
property the Company recognized an impairment charge on properties held for sale
of $550 on the writedown of the property to its anticipated sales price, less
estimated costs to sell, for the period ended December 31, 2003. The property
was sold in July 2004.
The Company incurred other charges of $690 during 2003 in connection with a
property's decline in value and a $290 charge related to the early retirement of
a mortgage obligation.
2002
In July 2002, the Company sold six properties leased to Saint-Gobain Corporation
located in New Haven, Connecticut; Mickelton, NJ; Aurora, Ohio; Mantua, Ohio and
Bristol, Rhode Island for $26,000 and recognized a gain on sale of $1,796. The
sales proceeds were placed in an escrow account for the purposes of entering
into a Section 1031 noncash exchange, which was completed as a result of
purchasing replacement properties in September and December 2002.
During 2002, the Company also sold properties in Petoskey, Michigan; Colville,
Washington; McMinnville, Tennessee; College Station, Texas and Glendale, Arizona
for an aggregate of $4,743 and recognized a net gain on sales of $568.
Other Information:
The effect of suspending depreciation expense as a result of the classification
of certain properties as held for sale was $381, $259 and $116 for the years
ended December 31, 2004, 2003 and 2002, respectively.
As of December 31, 2004, the operations of ten properties, which have been sold
during 2004 or are held for sale as of December 31, 2004, are included as
"Discontinued Operations." Amounts reflected in Discontinued Operations for the
years ended December 31, 2004, 2003 and 2002 are as follows:
Year Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
REVENUES:
Rental income $ 1,248 $ 3,240 $ 6,070
Interest income from direct financing leases 42 665 3,705
Revenues of other business operations - 1,694 4,769
Other income 2,767 915 2,250
------- ------- -------
4,057 6,514 16,794
------- ------- -------
EXPENSES:
Depreciation and amortization 200 751 1,552
Property expenses 1,559 2,634 1,192
General and administrative - - 48
Provision for income taxes - state and local - 35 117
Operating expenses of other business operations 35 1,489 4,209
Impairment charge on real estate 7,550 2,960 8,901
------- ------- -------
9,344 7,869 16,019
------- ------- -------
(Loss) income before other interest income,
gains on sale and interest expense (5,287) (1,355) 775
Other interest income - 567 89
-39-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
Gains on sale of real estate 90 1,238 2,694
Interest expense - (134) (1,108)
------- ------- --------
(Loss) income from discontinued operations $(5,197) $ 316 $ 2,450
======= ======= ========
In March 2005, the Company sold its Denton, Texas property for $2,000 which
approximated the property's carrying value. The Property had been classified as
held for sale as of December 31, 2004 in the accompanying financial statements.
8. Goodwill and Intangibles:
In connection with its acquisition of properties, the Company has 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.
Goodwill represents the excess of the purchase price of the net lease real
estate management operations over the fair value of net assets acquired. Other
intangible assets represent costs allocated to trade names and advisory
contracts with the CPA(R) REITs. Effective January 1, 2002, goodwill and
indefinite-lived intangible assets are no longer amortized and workforce has
been reclassified as goodwill. Intangibles are being amortized over their
estimated useful lives, which range from 2 1/2 to 16 1/2 years. The Company
performs an annual evaluation of testing for impairment of goodwill. Based on
its evaluation, the Company concluded that its goodwill is not impaired.
Goodwill and intangibles are summarized as follows:
DECEMBER 31,
-------------------------
2004 2003
---------- -----------
Amortized intangibles:
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (34,089) (25,262)
---------- -----------
25,726 34,553
---------- -----------
Lease intangibles
In-place lease 13,630 -
Tenant relationship 4,863 -
Above-market rent 3,828 -
Less: accumulated amortization (1,521) -
---------- -----------
20,800 -
---------- -----------
Unamortized goodwill and indefinite-lived intangibles:
Trade name 3,975 3,975
Goodwill 63,607 63,607
---------- -----------
$ 114,108 $ 102,135
========== ===========
Below-market rent $ (2,009) $ -
Less: accumulated amortization 45 -
---------- -----------
$ (1,964) $ -
========== ===========
Amortization of intangibles was $10,304, $7,277 and $9,194 for the years ended
December 31, 2004, 2003 and 2002, respectively. The remaining unamortized
management contract for CIP(R) was accelerated to expense as a result of the
Merger.
Scheduled net amortization of intangibles for each of the next five years is as
follows: $9,648 in 2005, $9,406 in 2006, $7,295 in 2007, $4,211 in 2008 and
$4,184 in 2009.
-40-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
9. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable and other
notes payable was $294,121 and $210,000 at December 31, 2004 and 2003,
respectively. The fair value of fixed rate debt instruments was evaluated using
a discounted cash flow model with rates that take into account the credit of the
tenants and interest rate risk. The carrying value of the combined debt was
$292,698 and $209,193 at December 31, 2004 and 2003, respectively. The fair
value of the note payable from the line of credit approximates the carrying
value as it is a variable rate obligation with an interest rate that resets to
market rates.
Marketable securities had a carrying value of $3,655 and $3,660 as of December
31,2004 and 2003, respectively, and a fair value of $6,940 and $5,479 as of
December 31,2004 and 2003, respectively. The Company's other assets and
liabilities, including minority interests, had fair values that approximated
their carrying values at December 31, 2004 and 2003, respectively.
10. Mortgage Notes Payable and Notes Payable:
Mortgage notes payable, substantially all of which are limited recourse
obligations, are collateralized by the assignment of various leases and by real
property with a carrying value of approximately $313,689 at December 31, 2004.
The interest rates on the variable rate debt as of December 31, 2004 ranged from
3.5375% to 6.44% and mature from 2007 to 2016. The interest rates on the fixed
rate debt as of December 31, 2004 ranged from 6.11% to 10.125%, and mature from
2005 to 2018.
Scheduled principal payments for the mortgage notes and notes payable during
each of the next five years following December 31, 2004 and thereafter are as
follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ---------------------------- ---------- --------------- ------------------
2005 $ 14,355 $ 11,885 $ 2,470
2006 23,926 21,159 2,767
2007 128,587 23,526 105,061(a)
2008 11,507 8,128 3,379
2009 38,622 35,045 3,577
Thereafter through 2018 75,701 36,659 39,042
---------- --------------- ------------------
Total $ 292,698 $ 136,402 $ 156,296
========== =============== ==================
(a) Includes maturity of credit facility in May 2007.
On May 27, 2004, the Company entered into a credit facility for a $175,000 line
of credit with J.P. Morgan Chase Bank and eight other banks. A prior line of
credit of $185,000 matured in March 2004 and was extended on a short-term basis.
The line of credit, which matures in May 2007, provides the Company a one-time
right to increase the amount available under the line of credit up to $225,000.
Advances from the line of credit bear interest at an annual rate indexed to
either (i) the one, two, three or six-month London Inter-Bank Offered Rate, as
defined, plus a spread which ranges from 0.6% to 1.45% depending on leverage or
corporate credit rating or (ii) the greater of the bank's Prime Rate and a rate
indexed to the Federal Funds Effective Rate. Advances are prepayable at any
time. The revolving credit agreement has financial covenants that require, among
other things, the Company to (i) maintain minimum equity value of $550,000 plus
85% of amounts received by the Company as proceeds from the issuance of equity
interests and (ii) meet or exceed certain operating and coverage ratios. The
Company is in compliance with these covenants. As of December 31, 2004, the
Company had $102,000 drawn from the credit facility.
At December 31, 2004 the average interest rate on advances on the line of credit
was 3.5375%. At December 31, 2003 the average interest rate on advances on the
prior line of credit was 2.34%. In addition, the Company pays a fee (a) ranging
between 0.15% and 0.20% per annum of the unused portion of the credit facility,
depending on the Company's leverage, if no minimum credit rating for the Company
is in effect or (b) equal to .15% of the total commitment amount, if the Company
has obtained a certain minimum credit rating.
-41-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
11. Dividends Payable:
The Company declared a quarterly dividend of $.442 per share on December 13,
2004 payable on January 15, 2005 to shareholders of record as of December 31,
2004.
12. Commitments and Contingencies:
As of December 31, 2004, the Company was not involved in any material
litigation.
In March 2004, following a broker-dealer examination of Carey Financial
Corporation ("Carey Financial"), the Company's wholly-owned broker-dealer
subsidiary, by the staff of the SEC, Carey Financial received a letter from the
staff of the SEC alleging certain infractions by Carey Financial of the
Securities Act of 1933, the Securities Exchange Act of 1934, the rules and
regulations thereunder and those of the National Association of Securities
Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of
CPA(R):15, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the
Commission pursues these allegations, or if affected CPA(R):15 investors bring a
similar private action, CPA(R):15 might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
CPA(R):15, Carey Financial would be required to return to CPA(R):15 the
commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part
of any action against the Company, the SEC could seek disgorgement of any such
commissions or different or additional penalties or relief, including without
limitation, injunctive relief and/or civil monetary penalties, irrespective of
the outcome of any rescission offer. The Company cannot predict the potential
effect such a rescission offer or SEC action may ultimately have on the
operations of Carey Financial or the Company. There can be no assurance that the
effect, if any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. 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.
In June 2004, the Division of Enforcement of the SEC (" Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with CPA(R):15 and other REITs managed by the Company, as well as
the disclosure of such arrangements. At that time the Company and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Company, Carey Financial, and REITs managed by the
Company to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Company and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Company, Carey Financial or any Company-managed REIT in connection with the
distribution of Company-managed REITs or the retention or maintenance of REIT
assets. Other information sought by the SEC includes information concerning the
accounting treatment and disclosure of any such payments, communications with
third parties (including other REIT issuers) concerning revenue sharing, and
documents concerning the calculation of underwriting compensation in connection
with the REIT offerings under applicable NASD rules.
-42-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
In response to the Enforcement Staff's subpoenas and requests, the Company and
Carey Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by the Company (including Corporate Property Associates 10
Incorporated, CIP(R), CPA(R):12, CPA(R):14, and CPA(R):15), in addition to
selling commissions and selected dealer fees. The expenses associated with these
payments, which were made during the period from early 2000 through the end of
2003, were borne by the REITs. The Company is continuing to gather information
relating to these types of payments made to broker-dealers and supply it to the
SEC.
The Company and Carey Financial are cooperating fully with this investigation
and are in the process of providing information to the Enforcement Staff in
response to the subpoenas and requests. Although no regulatory action has been
initiated against the Company or Carey Financial in connection with the matters
being investigated, it is possible that the SEC may pursue an action against
either of them in the future. The potential timing of any such action and the
nature of the relief or remedies the SEC may seek cannot be predicted at this
time. If such an action is brought, it could have a material adverse effect on
the Company.
13. Impairment Charges and Loan Losses:
The Company incurred impairment charges of $22,098, $4,440 and $29,411 for the
years ended December 31, 2004, 2003 and 2002, respectively, of which $7,550,
$2,960 and $8,901 are included in Discontinued Operations for each respective
year.
2004
In connection with the Company's annual review of the estimated residual values
on its properties classified as net investments in direct financing leases, the
Company determined that an other than temporary decline in estimated residual
value had occurred at several properties due to market conditions, and the
accounting for the direct financing leases was revised using the changed
estimates. The resulting changes in estimates resulted in the recognition of
impairment charges of $5,248 in 2004.
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 and 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 2004.
In February 2003, the Company sold its property in Winona, Minnesota to the
lessee, Peerless Chain Company ("Peerless") for $8,550, consisting of cash of
$6,300 and notes receivable with a fair value of $2,250, and recognized a gain
on sale of $46. The Company also received a note receivable from Peerless of
approximately $1,700 for unpaid rents which was previously included in the
allowance for uncollected rents. The Company previously recognized an impairment
charge of $4,000, in 2002, on the Peerless property, which was classified as
held for sale in 2002. During 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 on the notes 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, recognized an impairment charge 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 and a gain on sale of $6 was recognized.
The Company recognized impairment charges on other properties classified as held
for sale as of December 31, 2004, or sold during 2004, of $2,850, which are
included in discontinued operations, and an impairment charge of $550 on real
estate held for use.
-43-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
2003
In addition to impairment charges totaling $1,208 related to the Company's
annual review of the estimated residual values on its properties classified as
net investments in direct financing leases, the Company recognized an impairment
charge of $272 on its assessment of the recoverability of debentures received in
connection with a bankruptcy settlement with a former lessee.
The company recognized impairment charges on other properties held for sale as
of December 31, 2003, or sold during 2003, of $2,960, which are included in
discontinued operations. The impairments are discussed further in Note 7.
2002
The Company recorded impairment charges totaling $14,880 related to its annual
review of the estimated residual values on its properties classified as net
investments in direct financing leases.
Prior to the Company converting its 708,269 units of the operating partnership
("OP units") of MeriStar Hospitality Corporation ("MeriStar"), a publicly traded
real estate investment trust which primarily owns hotels, to 708,269 shares of
common stock in 2003, the Company accounted for its investment as an available
for sale marketable security. Because of a continued and prolonged weakness in
the hospitality industry, and a substantial decrease in MeriStar's earnings, the
Company concluded that the underlying value of its investment in the OP Units
had undergone an other than temporary decline. Accordingly, the Company wrote
down its equity investment in MeriStar by $4,596 in 2002, to reflect the
investment at its estimated fair value.
The Company recognized impairment charges of $4,900 on other properties, which
were sold in either 2002 or 2003 or held for sale as of December 31, 2002.
14. Sales of Real Estate:
The results of operations and the related gain or loss on properties, which were
not held for sale as of December 31, 2001 and sold in 2004, 2003 and 2002, are
included in "Discontinued Operations." (see Note 7)
2003
In December 2003, the Company sold a property in Oxnard, California for $7,500,
and recognized a gain of $414. The Company placed proceeds of the sale in an
escrow account with the intention of entering into a Section 1031 noncash
exchange which, under the Internal Revenue Code, would allow the Company to
acquire like-kind property, and defer a taxable gain until the new property is
sold, upon satisfaction of certain conditions. During 2004, $7,185 was released
from the escrow account, when an exchange was not completed.
2002
At December 31, 2001, the Company's 18.3 acre property in Los Angeles,
California was classified as held for sale. In June 2002, the Company sold the
property to the Los Angeles Unified School District (the "School District") for
$24,000, less costs, and recognized a gain on sale of $11,160. Subsequent to the
sale of the property, a subsidiary of the Company entered into a build-to-suit
development management agreement with the School District with respect to the
development and construction of a new high school on the property. The
subsidiary, in turn, engaged a general contractor to undertake the construction
project. Under the build-to-suit agreement, the subsidiary's role is that of a
development manager pursuant to provisions of the California Education Code.
Under the construction agreement with the general contractor, a subsidiary is
acting as a conduit for the payments made by School District and is only
obligated to make payments to the general contractor based on payments received,
except for a maximum guarantee of up to $2,000 for nonpayment. The guarantee
ends upon completion of construction.
Due to the Company's continuing involvement with the development management
agreement of the property, the recognition of gain on sale and the subsequent
development management fee income on the build-to-suit project are being
recognized using a blended profit margin under the percentage of completion
method of accounting. The build-to-suit development agreement provides for fees
of up to $4,700 and an early completion incentive fee of $2,000 if the
-44-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
project is completed before September 1, 2004. Incentive fees, which are
contingent, are not included in the percentage of completion calculation. In
addition, approximately $2,000 of the gain on sale has been deferred and will be
recognized only when the Company is released from its $2,000 guarantee
commitment. The Company and the School District are currently preparing for an
arbitration proceeding relating to certain disagreements regarding the costs of
the project and whether the Company 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, the Company has recognized a loss in development income of
$1,303 and income of $1,298, for the years ended December 31, 2004 and 2003,
respectively.
During 2002, the Company also sold properties in Fredericksburg, Virginia;
Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota; and Casa Grande for
an aggregate of $10,238 and recognized a net gain on sales of $1,151.
15. Stock Options, Restricted Stock and Warrants:
In January 1998, the predecessor of Carey Management (see Note 2) was granted
warrants to purchase 2,284,800 shares exercisable at $21 per share and 725,930
shares exercisable at $23 per share as compensation for investment banking
services in connection with structuring the consolidation of the CPA(R)
Partnerships. The warrants are exercisable until January 2009.
The Company maintains stock option incentive plans pursuant to which share
options may be issued. The 1997 Share Incentive Plan (the "Incentive Plan"), as
amended, authorizes the issuance of up to 2,600,000 shares. The Company
Non-Employee Directors' Plan (the "Directors' Plan") authorizes the issuance of
up to 300,000 shares. Both plans were approved by a vote of the shareholders.
The Incentive Plan provides for the grant of (i) share options which may or may
not qualify as incentive stock options, (ii) performance shares, (iii) dividend
equivalent rights and (iv) restricted shares. Share options have been granted as
follows: 513,171 in 2004 at exercise prices ranging from $22.59 to $35.16,
122,000 in 2003 at exercise prices ranging from $25.01 to $31.79 per share and
877,337 in 2002 at exercise prices ranging from $22.73 to $24.01 per share. The
options granted under the Incentive Plan have a 10-year term and vest over
periods ranging from three to ten years from the date of grant. The vesting of
grants is accelerated upon a change in control of the Company and under certain
other conditions.
The Directors' Plan provides for similar terms as the Incentive Plan. Options
granted under the Directors' Plan have a 10-year term and vest over three years
from the date of grant. During 2004, 12,000 share options were granted at
exercise prices ranging from $24.50 to $30.25 per share. No share options were
granted in 2003 and 2002.
Share option and warrant activity for the Company's Incentive Plan and
Directors' Plan is as follows:
Year Ended December 31,
---------------------------
2004 2003 2002
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- ---------- --------------
Outstanding at beginning of year 4,812,902 $ 20.95 4,979,862 $ 20.26 4,320,815 $ 19.88
Granted 525,171 $ 29.68 122,000 $ 26.24 877,337 $ 23.03
Exercised (146,121) $ 21.09 (251,113) $ 14.29 (192,617) $ 12.69
Forfeited (26,335) $ 24.18 (37,847) $ 19.14 (25,673) $ 19.17
--------- --------- ----------
Outstanding at end of year 5,165,617 $ 22.05 4,812,902 $ 21.20 4,979,862 $ 20.26
========= ========= ==========
Options exercisable at end of year 4,287,999 $ 20.97 4,108,073 $ 20.95 3,611,115 $ 20.31
========= ========= ==========
-45-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
Stock options outstanding for the Company's Incentive Plan and Directors' Plan
as of December 31, 2004 are as follows:
Options Outstanding
------------------- Options Exercisable
Weighted -------------------
Options Average Weighted Options Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 2004 Contractual Life Exercise Price December 31, 2004 Exercise Price
- ----------------- ----------------- ---------------- -------------- ----------------- --------------
$ 7.69 39,946 5.50 $ 7.69 39,946 $ 7.69
$ 16.25 to $35.16 5,125,671 5.40 $ 22.16 4,248,053 $ 21.09
--------- ---------
5,165,617 5.41 $ 22.05 4,287,999 $ 20.97
========= =========
At December 31, 2003 and 2002, the range of exercise prices and weighted-average
remaining contractual life of outstanding share options and warrants was $7.69
to $31.79 and 6.03 years, and $7.69 to $24.01 and 6.9 years, respectively.
On June 30, 2003, WPCI granted an incentive award to certain officers of WPCI
consisting of 1,500,000 restricted shares, representing an approximate 13%
interest in WPCI, and 1,500,000 options for WPCI common stock with a combined
fair value of $2,485 at that date. Both the options and restricted stock were
issued in 2003 and are vesting ratably over five years. The options are
exercisable at $1 per share for a period of ten years from the initial vesting
date. The vested restricted stock and stock received upon the exercise of
options of WPCI by minority interest holders may be redeemed commencing in 2012
or thereafter solely in exchange for shares of the Company. Any redemption will
be subject to a third party valuation of WPCI. The fair value of the awards has
been recorded as minority interest and included in other liabilities in the
accompanying consolidated financial statements. The awards were also initially
recorded in unearned compensation as a component of shareholders' equity. The
awards are being accounted for as a variable plan in accordance with APB No. 25
because the number of Company shares to be issued upon a redemption will not be
known until a redemption occurs. Subsequent changes in the fair value of the
minority interest subsequent to the grant date are included in the determination
of net income based on the vesting period and valued quarterly. As a result of
an increase in fair value, $2,155 was incurred as compensation expense for the
year ended December 31, 2004. The combined estimated fair value of the options
and restricted stock as of December 31, 2004 and 2003 is $5,691 and $1,615,
respectively. The unearned compensation is being amortized over the vesting
periods and $1,094 and $577 and has been amortized into compensation expense for
the years ended December 31, 2004 and 2003, respectively.
The per share fair value of the 1,500,000 share options granted by WPCI during
2003 was estimated to be $1.593 using a Black-Scholes option pricing formula.
The more significant assumptions underlying the determination of the average
fair value included a risk-free interest rate of 4.42% and an expected life of
11 years.
16. Employee Incentive and Benefit Plans Compensation:
During 2003, the Company adopted a non-qualified deferred compensation plan
under which a portion of any participating officer's cash compensation in excess
of designated amounts will be deferred and the officer will be awarded a
Partnership Equity Plan Unit ("PEP Unit"). The value of each PEP Unit is
intended to correspond to the value of a share of the CPA(R) REIT designated at
the time of such award. Redemption will occur at the earlier of a liquidity
event of the underlying CPA(R) REIT or twelve years from the date of award. The
award is fully vested upon grant, and the Company may terminate the plan at any
time. The value of each PEP Unit will be adjusted to reflect the underlying
appraised value of the CPA(R) REIT. Additionally, each PEP Unit will be entitled
to a distribution equal to the distribution rate of the CPA(R) REIT. All
issuances of PEP Units, changes in the fair value of PEP Units and distributions
paid are included in compensation expense of the Company. Compensation expense
under this plan for the years ended December 31, 2004 and 2003 was $2,826 and
$2,028, respectively.
The Company sponsors a qualified profit-sharing plan and trust covering
substantially all of its full-time employees who have attained age twenty-one,
worked a minimum of 1,000 hours and completed one year of service. The Company
is under no obligation to contribute to the plan and the amount of any
contribution is determined by and at the discretion of the Board of Directors.
The Board of Directors can authorize contributions to a maximum of 15% of an
eligible participant's compensation, limited to $31 annually per participant.
For the years ended December 31, 2004, 2003 and
-46-
W.P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands except share and per share amounts)
2002, amounts expensed by the Company for contributions to the trust were
$1,988, $1,926 and $1,677, respectively. Annual contributions represent an
amount equivalent to 15% of each eligible participant's compensation for that
period.
17. Income Taxes:
The components of the Company's provision for income taxes for the years ended
December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
---------- ---------- ----------
Federal:
Current $ 26,330 $ 5,694 $ 2,436
Deferred 7,497 5,749 8,756
---------- ---------- ----------
33,827 11,443 11,192
---------- ---------- ----------
State, local and foreign:
Current 15,827 3,944 2,492
Deferred 3,320 3,729 4,399
---------- ---------- ----------
19,147 7,673 6,891
---------- ---------- ----------
Total provision $ 52,974 $ 19,116 $ 18,083
========== ========== ==========
Deferred income taxes as of December 31, 2004 and 2003 consist of the
following:
2004 2003
---------- ----------
Deferred tax assets:
Unearned and deferred
compensation $ 3,436 $ 2,063
Other liabilities - 1,121
---------- ----------
3,436 3,184
---------- ----------
Deferred tax liabilities:
Receivables from affiliates 22,939 19,067
Investments 18,974 12,894
Other 1,872 755
---------- ----------
43,785 32,716
---------- ----------
Net deferred tax liability $ 40,349 $ 29,532
========== ==========
The difference between the tax provision and the tax benefit recorded at the
statutory rate at December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---------- ---------- ----------
Pre-tax income from taxable subsidiaries $ 98,707 $ 41,820 $ 35,296
Federal provision at statutory tax rate (35%) 34,547 14,219 12,001
State and local taxes, net of federal benefit 11,695 3,950 3,617
Amortization of intangible assets 2,210 1,625 1,886
Other 3,215 (2,225) (517)
---------- ---------- ----------
Tax provision - taxable subsidiaries 51,667 17,569 16,987
Other state, local and foreign taxes 1,307 1,547 1,096
---------- ---------- ----------
Total tax provision $ 52,974 $ 19,116 $ 18,083
========== ========== ==========
-47-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
18. Segment Reporting:
The Company evaluates its results from operations by major business segment as
follows:
REAL ESTATE OPERATIONS. This business segment includes the operations of
properties under operating lease, properties under direct financing leases, real
estate under construction and development, assets held for sale and equity
investments in ventures accounted for under the equity method which are engaged
in these activities. Because of the Company's and its subsidiaries legal
structure, these operations are not generally subject to federal income taxes
however, they may be subject to certain state, local and foreign taxes.
MANAGEMENT SERVICES OPERATIONS. This business segment includes management
operations on a fee for services basis predominately from the CPA(R) REITs
pursuant to the Advisory Agreements and to a lesser extent from third parties.
This business line also includes interest on deferred fees and earnings from
unconsolidated investments in the CPA(R) REITs accounted for under the equity
method which were received in-lieu of cash for certain fees. These operations
are performed in corporate subsidiaries and are subject to federal, state, local
and foreign taxes as applicable. The Company's financial statements are prepared
on a consolidated basis including these taxable operations and include a
provision for current and deferred taxes on these operations.
A summary of comparative results of these business segments is as follows:
Year Ended: Management Real Estate Other (1) Total Company
---------- ----------- --------- -------------
Revenues:
2004 $ 148,457 $ 73,592 $ 5,725 $ 227,774
2003 88,060 68,080 3,098 159,238
2002 84,255 65,335 2,814 152,404
Operating expenses:
2004 $ (56,790) $ (27,101) $(15,181) $ (99,072)
2003 (48,925) (18,701) (1,209) (68,835)
2002 (48,708) (37,460) (1,854) (88,022)
Interest expense:
2004 $ (35) $ (14,803) $ - $ (14,838)
2003 - (14,982) - (14,982)
2002 - (15,893) - (15,893)
Other, net (2):
2004 $ 3,490 $ 4,668 $ - $ 8,158
2003 2,980 3,277 - 6,257
2002 1,550 12,182 - 13,732
Provision for income taxes:
2004 $ (51,537) $ (1,437) $ - $ (52,974)
2003 (17,715) (1,401) - (19,116)
2002 (16,587) (1,496) - (18,083)
Income (loss) from continuing operations:
2004 $ 43,585 $ 34,919 $(9,456) $ 69,048
2003 24,400 36,273 1,889 62,562
2002 20,510 22,668 960 44,138
Total assets as of:
December 31, 2004 $ 237,889 $ 766,184 $ 9,466 $ 1,013,539
December 31, 2003 200,674 688,848 16,983 906,505
Total long-lived assets as of:
December 31, 2004 $ 83,018 $ 740,895 $ 9,140 $ 833,053
December 31, 2003 75,433 629,767 16,147 721,347
- 48 -
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
(1) Primarily consists of the Company's other business operations, which
includes its hotel operations and the School District build-to-suit
development project. The results of operations for the period ended
December 31, 2004 include a loss in development income related to the
build-to-suit project of $1,303.
(2) Includes interest income, minority interest, income from equity
investments and gains and losses on sales and foreign currency
transactions.
For 2004, geographic information for the real estate operations segment is as
follows:
Domestic International (1) Total Real Estate
-------- ----------------- -----------------
Revenues $ 65,910 $ 7,682 $ 73,592
Operating expenses (24,117) (2,984) (27,101)
Interest expense (11,458) (3,345) (14,803)
Other, net (2) 2,545 2,123 4,668
Provision for income taxes (806) (631) (1,437)
Income from continuing operations 32,076 2,843 34,919
Total assets 696,378 69,806 766,184
Total long-lived assets 676,192 64,703 740,895
For 2003, geographic information for the real estate operations segment is as
follows:
Domestic International (1) Total Real Estate
-------- ----------------- -----------------
Revenues $ 61,678 $ 6,402 $ 68,080
Operating expenses (16,108) (2,593) (18,701)
Interest expense (11,569) (3,413) (14,982)
Other, net (2) 2,608 669 3,277
Provision for income taxes (893) (508) (1,401)
Income from continuing operations 35,716 557 36,273
Total assets 619,367 69,481 688,848
Total long-lived assets 568,407 61,360 629,767
For 2002, geographic information for the real estate operations segment is as
follows:
Domestic International (1) Total Real Estate
-------- ---------------- -----------------
Revenues $ 60,037 $ 5,298 $ 65,335
Operating expenses (35,625) (1,835) (37,460)
Interest expense (12,880) (3,013) (15,893)
Other, net (2) 11,335 847 12,182
Provision for income taxes (1,066) (430) (1,496)
Income from continuing operations 21,801 867 22,668
(1) The company's international operations consist of investments in France.
(2) Includes interest income, minority interest, income from equity
investments and gains and losses on sales and foreign currency
transactions.
- 49 -
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands except share and per share amounts)
19. Selected Quarterly Financial Data (unaudited):
Three Months Ended
-----------------------------------
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
-------------- ------------- ------------------ -----------------
Revenues (2) $ 36,973 $ 53,359 $ 99,179 $ 38,263
Expenses (2) 20,878 22,555 30,689 24,950
Net income 11,092 15,480 35,154 2,125
Earnings per share -
Basic .30 .41 .94 .06
Diluted .29 .40 .90 .05
Dividends declared per share .4360 .4380 .4400 .4420
Three Months Ended
-----------------------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues (1)(2) $ 44,869 $ 34,944 $ 43,055 $ 36,370
Expenses (1)(2) 18,962 16,065 17,848 15,960
Net income 17,273 12,974 14,047 18,584
Earnings per share -
Basic .48 .35 .38 .51
Diluted .46 .34 .37 .48
Dividends declared per share .4320 .4330 .4340 .4350
(1) 2003 amounts have been reclassified to conform to the current year
presentation of excluding interest income and interest expense from the
revenues and expenses line items above, respectively.
(2) Certain amounts from previous quarters have been reclassified to
discontinued operations (see Note 7).
-50-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Listed Shares are listed on the New York Stock Exchange. As of December 31, 2004
there were 29,645 holders of record of the Shares of the Company.
Dividend Policy
Quarterly cash dividends are usually declared in December, March, June and
September and paid in January, April, July and October. Quarterly cash dividends
declared per share in 2004 and 2003 are as follows:
Cash Dividends Declared Per Share
2004 2003
-------- ---------
First quarter $ .4360 $ .4320
Second quarter .4380 .4330
Third quarter .4400 .4340
Fourth quarter .4420 .4350
-------- ---------
Total: $ 1.7560 $ 1.7340
======== =========
Listed Shares
The high, low and closing prices on the New York Stock Exchange for a Listed
Share for each fiscal quarter of 2003 and 2004 were as follows (in dollars):
2003 High Low Close
- -------------- ------ ------ ------
First Quarter $25.35 $24.15 $25.00
Second Quarter 30.50 24.81 29.94
Third Quarter 33.70 27.13 31.75
Fourth Quarter 33.14 29.10 30.52
2004 High Low Close
- -------------- ------ ------ ------
First Quarter $30.99 $29.01 $30.95
Second Quarter 30.99 25.22 29.78
Third Quarter 31.00 29.00 29.86
Fourth Quarter 35.98 29.76 35.16
In accordance with the rules of the New York Stock Exchange ("NYSE"), each of
William P. Carey and Gordon F. DuGan, our Co-Chief Executive Officers, have
certified, without qualification, that he is not aware of any violation by the
Company of the NYSE's corporate governance listing standards. Further, Messrs.
Carey and DuGan have filed with the SEC, as Exhibit 31.1 to the Company's most
recently filed Form 10-K, the Sarbanes-Oxley Act Section 302 certification
regarding the quality of the Company's public disclosure.
REPORT ON FORM 10-K
The Company will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K ("10-K") for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission ("SEC").
The 10-K may also be obtained through the SEC's EDGAR database at www.sec.gov.
-51-