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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-13779
---------------
W. P. CAREY & CO. LLC
("WPC")
(FORMERLY CAREY DIVERSIFIED LLC)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3912578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Registrant has 37,735,178 Listed Shares, no par value, outstanding at
May 4, 2005.
W. P. CAREY & CO. LLC
INDEX
PAGE NO.
--------
PART I
Item 1. - Financial Statements*
Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 2
Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 3
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 5-6
Notes to Condensed Consolidated Financial Statements 7-14
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-25
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. - Controls and Procedures 26
PART II - Other Information
Item 1. - Legal Proceedings 27
Item 4. - Submission of Matters to a Vote of Security Holders 28
Item 6. - Exhibits 28
Signatures 29
*The summarized condensed consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair statement of such financial
statements have been included.
1
W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands except share amounts)
DECEMBER 31, 2004
MARCH 31, 2005 (NOTE)
--------------- -----------------
ASSETS:
Real estate accounted for under the operating method, net of accumulated depreciation of
$55,615 and $53,914 at March 31, 2005 and December 31, 2004 $ 468,544 $ 476,365
Net investment in direct financing leases 136,673 190,644
Operating real estate, net of accumulated depreciation of $6,983 at December 31, 2004 - 9,140
Equity investments 115,159 110,379
Assets held for sale 63,724 12,802
Cash and cash equivalents 24,428 16,715
Due from affiliates 53,670 63,471
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $38,060 and $35,610 at March 31,
2005 and December 31, 2004 48,051 50,501
Other assets, net 19,145 19,915
--------------- ---------------
Total assets $ 993,001 $ 1,013,539
=============== ===============
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 180,589 $ 190,698
Credit facility 100,000 102,000
Accrued interest 1,778 1,389
Dividends payable 16,715 16,626
Accounts payable and accrued expenses 15,064 19,838
Prepaid rental income and security deposit 6,204 4,881
Due to affiliates 3,175 2,033
Accrued income taxes 7,423 3,909
Deferred income taxes, net 37,219 38,359
Other liabilities 13,049 11,748
--------------- ---------------
Total liabilities 381,216 391,481
--------------- ---------------
Minority interest 1,428 1,407
--------------- ---------------
Commitments and contingencies (Note 10)
Members' equity:
Listed shares, no par value; 37,646,662 and 37,523,462 shares issued and outstanding at
March 31, 2005 and December 31, 2004 738,783 734,658
Dividends in excess of accumulated earnings (123,259) (112,441)
Unearned compensation (7,419) (5,366)
Accumulated other comprehensive income 2,252 3,800
--------------- ---------------
Total members' equity 610,357 620,651
--------------- ---------------
Total liabilities, minority interest and members' equity $ 993,001 $ 1,013,539
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2004 has been
derived from the audited consolidated financial statements at that date.
2
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share and share amounts)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2005 2004
------------ -------------
Revenues:
Management income from affiliates $ 26,138 $ 17,252
Rental income 13,429 10,702
Interest income from direct financing leases 3,836 3,785
Other operating income 559 1,815
Revenue from other business operations 34 168
------------ -------------
43,996 33,722
------------ -------------
Operating expenses:
Depreciation 2,901 2,377
Amortization 2,203 1,693
General and administrative 13,811 10,739
Impairment charges and loan losses - 2,250
Property expenses 1,663 1,783
------------ -------------
20,578 18,842
------------ -------------
Income from continuing operations before other interest
income, minority interest, equity income, gains and
losses, interest expense and income taxes 23,418 14,880
Other interest income 842 680
Minority interest in income (632) (68)
Income from equity investments 1,368 1,336
(Loss) gain on foreign currency transactions (350) 449
Interest expense (4,313) (3,598)
------------ -------------
Income from continuing operations before income taxes 20,333 13,679
Provision for income taxes (5,853) (3,405)
------------ -------------
Income from continuing operations 14,480 10,274
------------ -------------
Discontinued operations:
Income from operations of discontinued properties 1,067 818
Loss on sale of real estate (20) -
Impairment charge on properties held for sale (9,672) -
------------ -------------
(Loss) income from discontinued operations (8,625) 818
------------ -------------
Net income $ 5,855 $ 11,092
============ =============
Basic earnings per share:
Earnings from continuing operations $ .39 $ .28
(Loss) income from discontinued operations (.23) .02
------------ ------------
Net income $ .16 $ .30
============ ============
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .26
(Loss) income from discontinued operations (.22) .02
------------ ------------
Net income $ .15 $ .28
============ ============
Weighted average shares outstanding:
Basic 37,592,343 37,314,792
============ ============
Diluted 39,377,650 38,757,405
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(in thousands)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
---------- -----------
Net income: $ 5,855 $ 11,092
---------- -----------
Other comprehensive (loss):
Change in unrealized (depreciation) appreciation on
marketable securities (1,065) 358
Foreign currency translation adjustment (483) (1,276)
---------- -----------
(1,548) (918)
---------- -----------
Comprehensive income $ 4,307 $ 10,174
========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ ----------
Cash flows from operating activities:
Net income $ 5,855 $ 11,092
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 8,625 (818)
Depreciation and amortization of intangible assets and deferred financing costs 5,246 4,309
Unrealized loss (gain) on foreign currency transactions 363 (113)
Minority interest in income 632 68
Straight-line rent adjustments and amortization of deferred income and rent related
intangibles 830 (69)
Equity income in excess of distributions (75) (218)
Realized gain on foreign currency transactions (14) 336
Management income received in shares of affiliates (7,025) (5,346)
Costs paid by issuance of shares 47 38
Amortization of unearned compensation 830 997
Impairment charges and loan losses - 2,250
Tax (charge) benefit - share incentive plans (228) 1,618
Deferred income taxes (1,140) (652)
Increase (decrease) in accrued taxes payable 3,514 (5,272)
Increase in structuring fees receivable (1,572) (1,301)
Deferred acquisition fees received 8,961 5,978
Net change in other operating assets and liabilities 1,178 1,513
------------ ----------
Net cash provided by continuing operations 26,027 14,410
Net cash provided by discontinued operations 1,474 1,227
------------ ----------
Net cash provided by operating activities 27,501 15,637
------------ ----------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 1,937 782
Purchases of real estate and equity investments - (4,290)
Proceeds from sale of property 3,613 -
Capital expenditures (312) (808)
Payment of deferred acquisition fees to affiliate (524) (524)
------------ ----------
Net cash provided by (used in) investing activities 4,714 (4,840)
------------ ----------
Cash flows from financing activities:
Proceeds from credit facility 20,000 26,000
Payments of mortgage principal (2,285) (2,315)
Prepayments of mortgage principal and credit facility (26,893) (24,243)
Payment of financing costs - (12)
Distributions to minority interests - (884)
Dividends paid (16,584) (15,980)
Proceeds from issuance of shares 1,421 758
Retirement of shares - (2,543)
------------ ----------
Net cash used in financing activities (24,341) (19,219)
------------ ----------
Effect of exchange rate changes on cash (161) (216)
------------ ----------
Net increase (decrease) in cash and cash equivalents 7,713 (8,638)
Cash and cash equivalents, beginning of period 16,715 24,359
------------ ----------
Cash and cash equivalents, end of period $ 24,428 $ 15,721
============ ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
(in thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC ("Carey
Management") in June 2000, the Company had an obligation to issue up to
an additional 2,000,000 shares over four years to the former
shareholders of Carey Management and certain of its directors and
officers, if specified performance criteria were achieved, of which
1,900,000 shares were issued. For the year ended December 31, 2003, the
Company met the Funds From Operations Target and the cumulative Stock
Performance Target, and as a result 500,000 shares ($13,734) were
issued in March 2004.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
NOTE 1: BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
statement of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 2004.
Reclassification
The financial statements included in this Form 10-Q have been adjusted to
reflect the disposition (or planned disposition) of certain properties as
discontinued operations for all periods presented (see Note 8). As a result,
certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Dividend
Dividends declared per share for the three-month periods ended March 31, 2005
and 2004 were $.444 and $.436, respectively.
NOTE 2. EARNINGS (LOSS) PER SHARE:
Basic and diluted earnings (loss) per common share for the Company for the
three-month periods ended March 31, 2005 and 2004 were calculated as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -------------
Income from continuing operations $ 14,480 $ 10,274
(Loss) income from discontinued operations (8,625) 818
------------ -------------
Net income $ 5,855 $ 11,092
============ =============
Weighted average shares - basic 37,592,343 37,314,792
Effect of dilutive securities: Stock options 1,785,307 1,442,613
------------ -------------
Weighted average shares - diluted 39,377,650 38,757,405
============ =============
Basic earnings per share:
Earnings from continuing operations $ .39 $ .28
(Loss) income from discontinued operations (.23) .02
------------ -------------
Net income $ .16 $ .30
============ =============
Diluted earnings per share:
Earnings from continuing operations $ .37 $ .26
(Loss) income from discontinued operations (.22) .02
------------ -------------
Net income $ .15 $ .28
============ =============
NOTE 3. TRANSACTIONS WITH RELATED PARTIES:
The Company earns fees as the advisor ("Advisor") to the following affiliated
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 through September 1, 2004, Carey
Institutional Properties Incorporated ("CIP(R)") (collectively, the "CPA(R)
REITs"). Under the advisory agreements with the CPA(R) REITs, the Company
performs various services, including but not limited to the day-to-day
management of the CPA(R) REITs and transaction-related services. A portion of
the CPA(R) REIT transaction and management fees is based on each CPA(R) REIT
meeting specific performance criterion and is earned only if the criterion are
achieved. Generally, the Company earns a base 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 agreements were amended to allow the
Company to elect to receive restricted stock for any fee due from each CPA(R)
REIT. For the three-month periods ended March 31, 2005 and 2004, total
asset-based fees and reimbursements earned
7
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
were $15,432 and $14,292, respectively. For 2005, the Advisor has elected to
receive all performance fees as well as the asset management fees of CPA(R):12
and CPA(R):16-Global in restricted shares.
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. For the three-month periods
ended March 31, 2005 and 2004, the Company earned transaction fees of $10,707
and $2,960, respectively. 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.
CPA(R):16-Global has not met its performance criterion, a cumulative
non-compounded distribution return of 6%, and because of that the Company did
not recognize deferred acquisition and asset based fees of $4,162 and $637,
respectively, for the three-month period ended March 31, 2005. CPA(R):16-Global
did not incur fees during the three-month period ended March 31, 2004. Since the
inception of CPA(R):16-Global, the Company has not recognized $11,697 and $1,456
of CPA(R):16-Global deferred acquisition and asset based fees, respectively. The
Company will only be able to recognize the fees if CPA(R):16-Global meets its
performance criterion.
NOTE 4. EQUITY INVESTMENTS:
The Company owns interests in the CPA(R) REITs. The Company's interests in the
CPA(R) REITs are accounted for under the equity method due to the Company's
ability to exercise significant influence as the Advisor to the CPA(R) REITs.
The CPA(R) REITs are publicly registered and file financial statements with the
United States Securities and Exchange Commission. In connection with earning
management fees, the Company has elected to receive restricted shares of common
stock in CPA(R):12 rather than cash in consideration for such fees in 2005. In
connection with earning performance fees, the Company has elected to receive
restricted shares of common stock in CPA(R):12 and CPA(R):16-Global rather than
cash in consideration for such fees in 2005.
As of March 31, 2005, the Company's ownership in the CPA(R) REITs is as follows:
SHARES % OF OUTSTANDING SHARES
---------- -----------------------
CPA(R):12 1,319,677 4.12%
CPA(R):14 2,643,477 3.46%
CPA(R):15 2,396,305 1.90%
CPA(R):16-Global 59,512 0.01%
The Company also owns noncontrolling interests in (i) two limited partnerships
as a limited partner, (ii) three limited liability companies and (iii) a
jointly-controlled 36% tenancy-in-common interest in two properties subject to a
master lease, with the remaining interests owned by affiliates and all of which
net lease real estate on a single-tenant basis.
Combined financial information of the equity investees is summarized as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Assets (primarily real estate) $ 5,372,480 $ 5,190,622
Liabilities (primarily mortgage notes payable) (2,777,073) (2,617,962)
-------------- -----------------
Partners' capital and shareholders' equity $ 2,595,407 $ 2,572,660
============== =================
Company's share of equity investees' net assets $ 115,159 $ 110,379
============== =================
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
------------ ------------
Revenues (primarily rental income and interest income from direct financing leases) $ 107,242 $ 87,972
Expenses (primarily depreciation and property expenses) (45,919) (37,125)
Other interest income 3,070 2,094
Minority interest in income (4,543) (3,641)
Income from equity investments 12,064 11,583
Loss on sales of real estate and foreign currency transactions (2,561) 1,621
Interest expense (40,697) (31,484)
------------ ------------
Income from continuing operations 28,656 31,020
(Loss) income from discontinued operations (3,576) (483)
Gain on sale of real estate 17
------------ ------------
8
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Net income $ 25,097 $ 30,537
============ ============
Company's share of net income from equity investments $ 1,368 $ 1,336
============ ============
NOTE 5. INTANGIBLES:
In connection with the acquisition of properties, the Company has recorded net
lease intangibles of $20,312. 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 and intangible assets are summarized as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Amortized intangible assets:
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (35,234) (34,089)
------------ -------------
24,581 25,726
------------ -------------
Lease intangibles
In-place lease 13,630 13,630
Tenant relationship 4,863 4,863
Above-market rent 3,828 3,828
Less: accumulated amortization (2,826) (1,521)
------------ -------------
19,495 20,800
------------ -------------
Unamortized goodwill and indefinite-lived intangible assets:
Trade name 3,975 3,975
Goodwill 63,607 63,607
------------ -------------
$ 111,658 $ 114,108
============ =============
Below-market rent $ (2,009) $ (2,009)
Less: accumulated amortization 83 45
------------ -------------
$ (1,926) $ (1,964)
============ =============
Amortization of intangibles was $2,412 and $1,688 for the three-month periods
ended March 31, 2005 and 2004, respectively.
Based on the intangibles recorded through March 31, 2005, annual net
amortization of intangibles for each of the next five years is as follows: 2005
- - $9,648, 2006 - $9,406, 2007 - $7,295, 2008 - $4,211, 2009 - $4,184 and 2010 -
$3,542.
NOTE 6. IMPAIRMENT CHARGES AND LOAN LOSSES:
2005 - Impairment Charges on Discontinued Operations
In March, the Company received notification from the lessee of its Amberly
Village, Ohio and Berea, Kentucky properties, that the lessee has exercised its
option to purchase both properties, at fair value. Fair value is determined
pursuant to an appraisal process in accordance with the terms of the lease
agreement between the Company and the lessee.
The properties have a carrying value of $33,629 as of March 31, 2005. The
Company currently estimates the fair value of the properties to approximate
$24,100. As the estimated fair value, less estimated selling costs, is less than
the properties carrying value, the Company recorded an impairment charge of
$8,872 for the quarter ended March 31, 2005. Based on the results of the
appraisal, the sales price of the properties may differ from the Company's
current estimate.
9
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In March, management approved a plan of disposition for its property in Livonia,
Michigan. The Company is aggressively marketing this property for sale and
currently estimates the property's fair value to approximate $8,500. In
connection with the disposition plan, the Company incurred a non-cash impairment
charge of $800 as the property's estimated fair value was less than its carrying
value.
These properties are all classified as held for sale in the condensed
consolidated balance sheet as of March 31, 2005. The results of operations, and
related impairment charges, from these properties for the three-month periods
ended March 31, 2005 and 2004 are reflected in the condensed consolidated
statements of operations as "Discontinued Operations" (see Note 7).
2004 - Loan Loss
In February 2003, the Company sold its property in Winona, Minnesota to the
lessee for $8,550, consisting of cash of $6,300 and notes receivable with an
estimated fair value of $2,250. During the quarter ended March 31, 2004,
installment payments due under the notes were not paid. Based on the Company's
assessment of the recoverability of the note, it wrote off the entire $2,250 as
a loan loss.
NOTE 7. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations, impairments and gain or loss on
sales of real estate for properties sold or held for sale and the related gain
or loss on sale of the property are reflected in the condensed consolidated
statements of operations as "Discontinued Operations."
2005 Dispositions
In February, the Company sold its South Boston, Virginia property to a third
party for $59, net of selling costs and recognized a loss on the sale of $41.
This loss excludes a previous non-cash charge of $582 recorded in a prior year
to write down the property value to the estimated net sales proceeds.
In March, the Company sold its Denton, Texas property to a third party for
$1,998, net of selling costs and recognized a gain on the sale of $66.
In March, the Company also sold its Frankenmuth, Michigan property to a third
party for $1,556, net of selling costs and recognized a loss on the sale of $45.
This loss excludes a previous non-cash charge of $1,000 recorded in December
2004 to write down the property value to the estimated net sales proceeds.
The results of operations and gain (loss) on the sales of these properties have
been included in discontinued operations for the three-month periods ended March
31, 2005 and 2004.
Assets Held For Sale
In March, the Company received notification from the lessee of its property in
Amberly Village, Ohio and Berea, Kentucky, that the lessee exercised its option
to purchase both properties pursuant to the terms of the lease agreement between
the Company and the lessee. In connection with this notification, the Company
recorded a non-cash impairment charge of $8,872 (see Note 6). Pursuant to the
terms of the lease agreement, the closing date for this transaction is expected
to be no later than November 30, 2005.
In March, the Company received notification from the parent and guarantor of the
lessee of properties in Dubuque, Iowa, Portsmouth, New Hampshire and Penfield,
New York, of its intent to purchase these properties, pursuant to the terms of
the lease agreement between the Company and the lessee. This transaction was
completed during the Company's second quarter ending June 30, 2005. The proceeds
from this sale, net of closing costs, totaled $28,863 and resulted in a gain on
the sale of $9,156, which will be recorded in the Company's second quarter.
In March, management approved a plan of disposition for the Company's property
in Livonia, Michigan. The Company currently estimates that the property's fair
value approximates $8,500. In connection with the disposition plan, the Company
recorded a non-cash impairment charge of $800 in the current quarter. In a prior
year, the Company recorded a non-cash impairment charge of $7,500 related to
this property.
In March, the Company entered into a contract to sell its property in Travelers
Rest, South Carolina to a third party for $2,550. This transaction is currently
expected to be completed in the third quarter ending September 30, 2005. The
Company expects to record a gain on the sale of this property of approximately
$1,000.
The Company approved a plan of disposition for its property in Duffield,
Virginia during the quarter ended March 31, 2005. The Company is aggressively
marketing this property for sale and currently estimates the property's fair
value to approximate $940. When a sale of this property is completed, the
Company expects to record a gain on the sale of approximately $100 based on the
current estimated fair value.
10
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
A Summary of "Discontinued Operations" is as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
----------- -----------
REVENUES:
Rental income $ 62 $ 482
Interest income from direct financing leases 1,423 1,497
Revenues of other business operations 1,694 1,764
Other income 37 26
---------- -----------
3,216 3,769
---------- -----------
EXPENSES:
Depreciation 274 395
Property expenses 379 921
Operating expenses of other business operations 1,496 1,635
Impairment charge on properties held for sale 9,672 -
---------- -----------
11,821 2,951
---------- -----------
Income (loss) before other interest income, gain on sale and interest expense (8,605) 818
Gain on sale of real estate (20) -
---------- -----------
Income (loss) from discontinued operations $ (8,625) $ 818
========== ===========
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $139 and $64 for the three-month periods ended March
31, 2005 and 2004, respectively.
NOTE 8. STOCK OPTIONS AND RESTRICTED STOCK:
The Company has elected to adopt the disclosure only provisions of FAS No. 123,
"Accounting for Stock-Based Compensation." If stock-based compensation cost had
been recognized based upon fair value at the date of grant for options and
restricted stock awarded under the Company's share incentive plans and amortized
to expense over their respective vesting periods in accordance with the
provisions of FAS No. 123, pro forma net income would have been as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
----------- -----------
Net income as reported $ 5,855 $ 11,092
Add: Stock based compensation included in net income as reported, net of related tax effects 503 616
Less: Stock based compensation determined under fair value based methods for all awards, net
of related tax effects (653) (814)
----------- -----------
Pro forma net income $ 5,705 $ 10,894
=========== ===========
Earnings per common share as reported
Basic $ .16 $ .30
Diluted $ .15 $ .28
Pro forma earnings per common share
Basic $ .15 $ .29
Diluted $ .14 $ .28
For the three-month periods ended March 31, 2005 and 2004, the changes in
unearned compensation were as follows:
2005 2004
----------- -----------
Beginning of period $ 5,366 $ 4,863
Awards of restricted stock 2,900 2,788
Forfeitures (17) (4)
Compensation expense (amortization of unearned compensation) (830) (997)
----------- ----------
End of period $ 7,419 $ 6,650
=========== ===========
For the three-month periods ended March 31, 2005 and 2004, restricted shares of
$48 and $108, respectively, were issued to directors in consideration of
services rendered.
During 2003, W. P. Carey International LLC ("WPCI"), a majority-owned
subsidiary, granted equity awards to certain of its officers, consisting of
restricted stock and options. The awards are being accounted for as a variable
plan. Amortization and changes in the fair value of the awards subsequent to the
grant date are included in the determination of net income. As a result of an
increase in fair value, $255 was incurred as compensation expense for the
three-month period ended March 31, 2005. The unearned compensation is being
amortized over the vesting periods and $113 and $127 has been amortized into
compensation expense for the three-month periods ended March 31, 2005 and 2004,
respectively.
11
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
NOTE 9. SEGMENT REPORTING:
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:
Three Months Ended March 31, 2005: Management Real Estate Other (1) Total Company
- ----------------------------------------- ----------- ------------ ----------- -------------
Revenues:
2005 $ 26,138 $ 17,824 $ 34 $ 43,996
2004 17,252 16,302 168 33,722
Operating expenses:
2005 $ (14,289) $ (6,289) $ - $ (20,578)
2004 (11,739) (7,103) - (18,842)
Interest expense:
2005 $ - $ (4,313) $ - $ (4,313)
2004 (35) (3,563) - (3,598)
Other, net (2):
2005 $ 867 $ 361 $ - $ 1,228
2004 986 1,411 - 2,397
Provision for income taxes:
2005 $ (5,799) $ (54) $ - $ (5,853)
2004 (3,006) (399) - (3,405)
Income (loss) from continuing operations:
2005 $ 6,917 $ 7,529 $ 34 $ 14,480
2004 3,458 6,648 168 10,274
Total assets as of:
March 31, 2005 $ 241,804 $ 751,197 $ - $ 993,001
December 31, 2004 237,889 766,184 9,466 1,013,539
Total long-lived assets as of:
March 31, 2005 $ 88,438 $ 675,423 $ - $ 763,861
December 31, 2004 83,018 740,895 9,140 833,053
(1) Primarily consists of the Company's other business operations, which
includes the School District build-to-suit development project. The
Company's hotel operations were classified as held for sale as of March
31, 2005 (see Note 8).
(2) Includes interest income, minority interest, income from equity
investments and gains and losses on sales and foreign currency
transactions.
12
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES:
As of March 31, 2005, 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
13
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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.
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.
The Company has provided indemnification in connection with divestitures. These
indemnities address a variety of matters including environmental liabilities.
The Company's maximum obligations under such indemnification cannot be
reasonably estimated. The Company is not aware of any claims or other
information that would give rise to material payments under such
indemnifications.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2005, the Securities and Exchange Commission deferred the effective
date of FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS 123R") for a
six-month period. The Company is now required to adopt the provisions of FAS
123R beginning with its first quarter of fiscal 2006. FAS 123R 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. FAS 123R allows two different
methods of transition. Note 8 to the condensed consolidated financial statements
contains pro forma disclosures regarding the effect on net income and earnings
per share as if the Company had applied the fair value method of accounting for
stock-based compensation. Depending on the method 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 the Company's future financial statements. The
Company is currently evaluating the provisions of FAS 123R and methods that may
be used to calculate future stock-based compensation expense.
14
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share amounts)
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 condensed consolidated financial
statements and notes thereto as of March 31, 2005. As used in this quarterly
report on Form 10-Q, the terms "the Company," "we," "us" and "our" include W. P.
Carey & 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, the risk factors described in Item 1 of our Annual Report on
Form 10-K for the year ended December 31, 2004. 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.
Additionally, a description of our critical accounting estimates is included in
the management's discussion and analysis section in our Annual Report on Form
10-K for the year ended December 31, 2004. There has been no significant change
in such critical accounting estimates.
EXECUTIVE OVERVIEW
Business Overview
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").
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 REITs
are invested in properties, the asset base for which we earn revenue increases.
We may elect to receive fees in cash or restricted shares of the CPA 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 investment in 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 have generally
resulted 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 invest in 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.
15
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
The ability to increase assets under management by structuring acquisitions on
behalf of the CPA(R) REITs is affected, among other things, by the CPA(R) REITs
ability to raise capital.
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 has no impact on cash flow and to other noncash charges
such as depreciation and impairment charges. In evaluating cash flow from
operations, management includes equity distributions that are included in
investing activities to the extent that the distributions in excess of equity
income are the result of noncash charges such as depreciation and amortization.
Management does not consider unrealized gains and losses from foreign currency
when evaluating 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 three-month periods ended March 31, 2005 and 2004 is as
follows:
2005 2004
---- ----
Rental income from operating leases $ 13,429 $ 10,702
Interest income from direct financing leases 3,836 3,785
---------- ---------
$ 17,265 $ 14,487
========== =========
For the three months ended March 31, 2005 and 2004, we earned net leasing
revenues (i.e., rental income and interest income from direct financing leases)
from our direct ownership of real estate from the following lease obligations:
2005 2004
---- ----
Bouygues Telecom, S.A. (a) (d) $ 1,187 $ 1,096
Dr Pepper Bottling Company of Texas 1,088 1,078
Detroit Diesel Corporation 1,039 1,039
Quebecor Printing, Inc. (c) 768 663
Orbital Sciences Corporation (c) 756 664
Titan Corporation (b) 725 -
America West Holdings Corp. 709 709
AutoZone, Inc. 554 554
Eagle Hardware & Garden, Inc., a wholly-owned
subsidiary of Lowe's Companies Inc. (c) 446 336
Sybron Dental Specialties Inc. 443 443
Unisource Worldwide, Inc. 427 427
BE Aerospace, Inc. 395 395
Lucent Technologies, Inc. (b) 380 -
Sprint Spectrum, L.P. 356 356
CSS Industries, Inc. 349 410
AT&T Corporation 315 315
EnviroWorks, Inc. (b) 313 -
Swat-Fame, Inc. 309 263
United States Postal Service 308 308
BellSouth Telecommunications, Inc. 306 306
Omnicom Group Inc. (b) 285 -
Brodart, Co. 267 323
Lockheed Martin Corporation 260 269
Anthony's Manufacturing Company, Inc. 255 255
Other (a) (b) (d) 5,025 4,278
--------- ---------
$ 17,265 $ 14,487
========= =========
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) Includes the CIP(R) real estate interests acquired in September 2004.
(c) Increase is due to rent increase in 2005.
(d) Lease revenue applicable to minority interests in the consolidated amounts
above total $427 and $393 as of March 31, 2005 and 2004, respectively.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 18.54% to 50%. For the
three-month periods ended March 31, 2005 and 2004, our share of net lease
revenues in the following lease obligations was as follows:
2005 2004
------ ------
Carrefour France, SA (a) $ 947 $ 857
Federal Express Corporation 671 664
Checkfree Holdings Corporation Inc 562 545
Sicor, Inc. (b) 418 -
Information Resources, Inc. 411 411
Hologic, Inc. 284 284
Childtime Childcare, Inc 34 34
Titan Corporation (b) - 133
------ ------
$3,327 $2,928
====== ======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) Includes the CIP(R) real estate interests acquired in September 2004.
16
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Current Developments and Trends
Competition for investments remains strong. Inflation and interest rates, at
least for the short term, are expected to continue to rise. 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 inflation and a
corresponding 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;
- - Rising interest rates could make other income-generating products more
attractive to investors on a relative basis than our CPA(R) REITs; and
- - Rising interest rates may have an impact on the credit quality on certain
tenants.
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. On behalf of the CPA(R) REITs, 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 on behalf of the CPA(R) REITs, 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.
For the three months ended March 31, 2005, cash flows generated from operations
and equity investments were sufficient to fund dividends paid and meet other
obligations including making scheduled mortgage principal payments and paying
off a mortgage balance on one of our Houston, Texas properties.
17
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
CURRENT DEVELOPMENTS INCLUDE:
INVESTMENT ACTIVITY. During the quarter ended March 31, 2005, we structured
$367,000 in investments on behalf of the CPA(R) REITs. Approximately 75% of
these investments were made on behalf of CPA(R):16 - Global, with the remainder
made on behalf of CPA(R):15.
SENIOR MANAGEMENT. In March 2005, Gordon F. DuGan, vice chairman, was elected
chief executive officer. Mr. DuGan was previously our co-chief executive officer
with William Polk Carey, who will remain chairman of the board. Mr. DuGan will
also serve as chief executive officer of the CPA(R) REITs. Also in March 2005,
Thomas E. Zacharias was appointed chief operating officer. Mr. Zacharias will
continue to serve as managing director and head of our asset management
department and will also serve as chief operating officer of the CPA(R) REITs.
In connection with the ongoing investigation by the United States Securities and
Exchange Commission ("SEC") of payments to broker-dealers (as described in Item
1. Legal Proceedings), the board of directors has accepted the resignation of
John J. Park as chief financial officer and elected Claude Fernandez, who has
been our principal accounting officer, as acting chief financial officer. A
search is underway for a new chief financial officer. Mr. Park will remain with
us as managing director - strategic planning.
DISPOSITIONS. During the quarter ended March 31, 2005, we completed the sales of
three properties, two of which were vacant, for combined net proceeds of $3,613
and recognized a net loss on the sales of $20. In March, we received
notification from the Apogent Technologies Inc., parent and guarantor of the
lessee of three properties, of its intent to purchase these properties, pursuant
to the terms of the lease agreement between us and the lessee. This transaction
was completed during our second quarter ending June 30, 2005. The proceeds from
this sale, net of closing costs, totaled $28,863 and resulted in a gain on the
sale of $9,156, which will be recorded in our second quarter.
PROPOSED DISPOSITIONS. In March, we received notification from Gibson Greetings,
Inc., the lessee of two properties, that Gibson intends to exercise its option
to purchase both properties, at fair value, pursuant to the terms of the lease
agreement between us and Gibson. We recorded a non-cash impairment charge of
$8,872 in connection with this transaction as the properties estimated fair
value, less estimated selling costs, was less than the properties carrying value
of $33,629. We currently expect this transaction to close by November 30, 2005.
In March, management approved a plan of disposition for our property in Livonia,
Michigan. We currently estimate that the property's fair value approximates
$8,500. In connection with the disposition plan, we recorded a non-cash
impairment charge of $800.
In March, we entered into a contract to sell our property in Travelers Rest,
South Carolina to a third party for $2,550. This transaction is expected to be
completed in the third quarter ending September 30, 2005. We currently expect to
record a gain on the sale of this property of approximately $1,000.
We approved a formal plan of disposition for our property in Duffield, Virginia
during the quarter ended March 31, 2005. We are aggressively marketing this
property for sale and currently estimate the property's fair value to
approximate $940. When a sale of this property is completed, we expect to record
a gain on the sale of approximately $160 based on the current estimated fair
value.
CPA(R):16 - GLOBAL INITIAL OFFERING. In March 2005, CPA(R):16 - Global filed an
amendment to its registration statement to deregister shares of its common stock
that remained unissued as of March 8, 2005, pursuant to its initial offering. 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.
DIVIDEND. In March 2005, our board of directors approved and increased the first
quarter dividend to $.444 per share payable in April 2005 to shareholders of
record as of March 31, 2005.
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
18
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 THREE MONTHS ENDED MARCH 31,
------------------------------------
2005 2004 CHANGE
--------- --------- ---------
Lease revenues $ 17,265 $ 14,487 $ 2,778
Other operating income 559 1,815 (1,256)
--------- --------- ---------
Total revenue 17,824 16,302 1,522
--------- --------- ---------
Depreciation and amortization 3,793 2,261 1,532
General and administrative expenses 833 809 24
Property expenses 1,663 1,783 (120)
Impairment charges and loan losses -- 2,250 (2,250)
--------- --------- ---------
Total Operating expenses 6,289 7,103 (814)
--------- --------- ---------
Other interest income 45 70 (25)
Minority interest in (income) loss (157) (91) (66)
Income from equity investments 823 983 (160)
Interest expense (4,313) (3,563) (750)
(Loss) gain on foreign currency transactions (350) 449 (799)
--------- --------- ---------
Income from continuing operations before income taxes 7,583 7,047 536
Provision for income taxes (54) (399) 345
--------- --------- ---------
Income from continuing operations $ 7,529 $ 6,648 $ 881
========= ========= =========
Lease Revenues
For the comparable quarters ended March 31, 2005 and 2004, lease revenues
(rental income and interest income from direct financing leases) increased by
$2,778 primarily due to $2,769 in revenue from properties acquired from CIP(R)
in September 2004 and $419 from scheduled rent increases. These increases were
partially offset by a reduction in rent of $283 due to lease expirations and a
$319 reduction in interest income from direct financing leases for financial
reporting purposes as a result of reducing estimated residual values on several
leases. 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.
RECENT LEASE ACTIVITY - The following lease activity occurred during the quarter
ended March 31, 2005:
- In February, Winn-Dixie Stores, Inc., a lessee of our Bay Minette, Alabama
property, terminated its lease in connection with its reorganization in
Chapter 11 bankruptcy. Annual lease revenue from this property was $128.
- In March, we received notifications from Gibson, the lessee of our Amberly
Village, Ohio and Berea, Kentucky properties, and Apogent, parent and
guarantor of the lessee of our Dubuque, Iowa, Portsmouth, New Hampshire
and Penfield, New York properties, of their intent to purchase these
properties pursuant to the terms of their respective lease agreements. As
a result of receiving these notifications, these properties have been
classified as held for sale as of March 31, 2005 (see Discontinued
Operations below). Total annual lease revenues from these properties are
$5,425.
19
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
- A lease with Lucent Technologies that was scheduled to expire in March
2005 was extended for two years on substantially similar financial terms
and provides for annual rent of $1,942.
- We entered into a new long-term lease in March 2005 with Alcoa, Inc. for
property in Salisbury, North Carolina that was previously vacant. The
lease provides for initial annual rent of $450.
- We entered into a lease with Werner Co. in May 2005, effective in August,
for our property in Erlanger, Kentucky. The lease has an initial term of
10 years and provides for initial annual rent of $1,120 with annual stated
increases and also provides Werner with the right to terminate the lease
at the beginning of the seventh lease year, subject to a termination fee
of $489. We have also provided Werner with an improvement allowance of
$1,160. Werner is obligated to pay its share of insurance, maintenance and
real estate taxes; however, we retain the obligation for certain
structural repairs or replacements.
Other Operating Income
Other operating income generally consists of lease termination payments and
other non-rent related revenues from real estate operations including, but not
limited to, settlements of claims against former lessees. We receive settlements
in the ordinary course of business; however, the timing and amount of such
settlements cannot always be estimated. For the comparable quarters ended March
31, 2005 and 2004, other operating income decreased $1,256 primarily due to the
receipt of $1,500 in distributions in connection with a bankruptcy claim against
a former lessee in 2004.
Depreciation and Amortization
For the comparable quarters ended March 31, 2005 and 2004, depreciation and
amortization expense increased by $1,532. The increase is primarily a result of
depreciation and amortization expense recognized on the properties acquired from
CIP(R) in September 2004, which represented $1,514 for the three-month period
ended March 31, 2005.
Property Expenses
For the comparable quarters ended March 31, 2005 and 2004, property expenses
decreased $120, primarily due to the recognition in the first quarter of 2004 of
a $200 non-cash charge to the allowance for uncollectible rents. This decrease
was partially offset by an increase in real estate taxes on several vacant
properties.
While we consider single-tenant net leasing to be our primary real estate
operation, several net leases have expired and, as a result, there are a number
of properties which are multi-tenant, vacant or partially vacant. We are
aggressively remarketing these properties or evaluating alternatives, including,
but not limited to, re-leasing the vacant or partially vacant properties on a
multi-tenant basis and selling such properties. During the quarter ended March
31, 2005, we sold two vacant properties that had combined annual carrying costs
of approximately $150.
Impairment Charges and Loan Losses
For the quarter ended March 31, 2004, we incurred a loan loss of $2,250 related
to the write-off of a note receivable which was received in connection with the
sale of a property in 2003. There were no impairment charges or loan losses
incurred in the quarter ended March 31, 2005.
Interest Expense
For the comparable quarters ended March 31, 2005 and 2004, interest expense
increased $750, primarily due to an increase of $733 related to additional
borrowings and higher interest rates related to our credit facility. The average
outstanding balance and average annual variable interest rate on our credit
facility increased by approximately $76,000 and 1.49%, respectively, for the
comparable quarters.
Income From Equity Investments
For the comparable quarters ended March 31, 2005 and 2004, income from equity
investments decreased by $160. This decrease is primarily due to the acquisition
of the remaining 81.46% interest in a limited partnership in connection with the
acquisition of certain properties from CIP(R) in September 2004. We previously
owned an 18.54% interest as a limited partner and accounted for our 18.54%
interest as an equity investment. As a result of the acquisition, we now
consolidate the accounts of our 100% ownership in the partnership. Equity income
from the 18.54% interest for the three-month period ended March 31, 2004 was
$114.
20
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
(Loss) Gain on Foreign Currency Transactions
For the quarter ended March 31, 2005, we recognized a net loss on foreign
currency transactions of $350 as compared to a net gain of $449 for the
comparable prior year period. The net loss for the current quarter is comprised
of a gain of $14 from the transfer of cash from foreign operating subsidiaries
and a loss of $364 from exchange rate changes on intercompany debt within our
consolidated group. The decrease between the comparable quarters is primarily
due to the effect on the first quarter of 2005 of the strengthening of the US
dollar since December 31, 2004.
Provision for Income Taxes
For the comparable quarters ended March 31, 2005 and 2004, provision for income
taxes decreased $345, primarily due to the ability in certain states to file tax
returns for operating subsidiaries rather than filing consolidated returns and
changes in estimates for tax expense as a result of refunds received from prior
year tax returns. The ability to file tax returns for operating subsidiaries
rather than consolidated returns was deemed more tax efficient.
Income from Continuing Operations
For the comparable quarters ended March 31, 2005 and 2004, income from
continuing operations increased $881. The increase is primarily due to recent
lease activity, including the acquisition of CIP(R) properties which contributed
approximately $670 to income from continuing operations as a result of increased
lease revenues partially offset by increases in depreciation and amortization
and interest expenses. Income from continuing operations also benefited as a
result of prior year transactions (impairment charge partially offset by the
receipt of bankruptcy claim distributions) that were not repeated in the current
quarter. These variances are all described above.
Discontinued Operations
For the quarter ended March 31, 2005, we incurred a loss from discontinued
operations of $8,625. This loss is primarily the result of non-cash impairment
charges of $8,872 for our properties to be sold to Gibson and $800 for our
property held for sale in Livonia, Michigan. These charges were partially offset
by income generated from the operations of several discontinued properties.
In May 2005, we received net proceeds of $28,863 from the sale of real estate to
Apogent and will record a gain of $9,156 on this sale during our second quarter
ending June 30, 2005.
MANAGEMENT SERVICES OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
2005 2004 CHANGE
------------ ------------ -----------
Management income from affiliates $ 26,138 $ 17,252 $ 8,886
------------ ------------ -----------
Depreciation and amortization 1,311 1,809 (498)
General and administrative 12,978 9,930 3,048
------------ ------------ -----------
Total operating expenses 14,289 11,739 2,550
------------ ------------ -----------
Income from continuing operations before
other interest income, minority
interest, equity income, interest
expense and taxes 11,849 5,513 6,336
Other interest income 797 610 187
Minority interest in (income) loss (475) 23 (498)
Income from equity investments 545 353 192
Interest expense - (35) 35
------------ ------------ -----------
Income from continuing operations
before taxes 12,716 6,464 6,252
Provision for income taxes (5,799) (3,006) (2,793)
------------ ------------ -----------
Income from continuing operations $ 6,917 $ 3,458 $ 3,459
============ ============ ===========
Management Income from Affiliates
For the comparable quarters ended March 31, 2005 and 2004, management income
from affiliates increased $8,886 due to increases in transaction fees of $7,748,
which includes acquisition expense allowance fees related to CPA(R):16-Global,
and asset-based management and performance fees of $1,138. These increases were
partially offset by a decline in revenues related to fundraising activities as a
result of CPA(R):16-Global's termination of its initial offering in March 2005.
Transaction fees included fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. We structured $367,113 of acquisitions for the
quarter ended March 31, 2005 as compared with $68,376 in the comparable prior
year quarter. Approximately 75% of acquisitions structured in the quarter ended
March 31, 2005 related to CPA(R):16-Global, which commenced operations in
21
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
2004. The increase in asset-based fees resulted from an approximately 27%
increase in the asset base of the CPA(R) REITs since March 31, 2004. Annual
asset-based fees related to the interests in properties we acquired from CIP(R)
during 2004 were approximately $1,422 and we no longer receive these asset-based
fees.
Based on assets under management of the CPA(R) REITs as of March 31, 2005,
annualized management and performance fees under the advisory agreements are
approximately $51,000. The asset-based fees that we earn may increase or
decrease depending upon (i) increases in the CPA(R) REIT asset bases as a result
of new acquisitions; (ii) decreases in the CPA(R) REIT asset base resulting from
sales of properties; or (iii) increases or decreases in the asset valuations of
those CPA(R) REIT funds that are revalued annually (subsequent to an initial
valuation pursuant to each CPA(R) REITs advisory agreement).
Acquisition activity is subject to fluctuations. We continue to face 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 March 31, 2005, resulting in $4,162 in transaction fees
and $637 in performance fees not being recognized by us for the quarter ended
March 31, 2005. Since the inception of CPA(R):16-Global, we have not recognized
$1,456 and $11,697 of asset based and acquisition fees, respectively. We will
only be able to recognize the fees if the performance criterion is met. The
performance criterion for CPA(R):16-Global is a cumulative non-compounded
distribution return to shareholders of 6%. As of March 31, 2005, the cumulative
distribution return for CPA(R):16-Global is 4.78%. Based on management's current
assessment, CPA(R):16-Global is expected to meet the cumulative performance
criterion in 2006, at which time, we would record and collect the cumulative
unrecognized fees. There is no assurance that the performance criterion will be
achieved as projected as it is dependent on, among other factors, the investment
of CPA(R):16 - Global's existing capital, and any additional capital raised in a
future offering of its shares, in properties generating income in excess of the
performance criterion, as well as on the distribution rates that may be set by
CPA(R):16-Global's board of directors. 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 performance criterion are not expected to be met during
2005, transaction based revenue for 2005 is likely to decrease.
Depreciation and Amortization
For the comparable quarters ended March 31, 2005 and 2004, depreciation and
amortization expense decreased by $498. The decrease is primarily due to certain
intangible assets that fully amortized during 2004.
General and Administrative Expenses
For the comparable quarters ended March 31, 2005 and 2004, general and
administrative expenses increased $3,048 primarily due to an increase in
personnel costs of $1,435 and an increase of $838 in professional services,
which includes auditing, legal and consulting fees. A significant portion of
personnel costs is directly related to CPA(R) REIT transaction volume, which
increased by $299,000 over the comparable prior year quarter. The increases in
auditing, legal and related matters, and consulting fees are primarily related
to ongoing securities law compliance, including the Sarbanes-Oxley Act and the
ongoing SEC investigation. These increases were partially offset by a decrease
in capital raising activities, which decreased by approximately $73,500 over the
comparable prior year quarter, primarily due to CPA(R):16-Global's termination
of its initial offering.
Minority Interest in (Income) Loss
For the quarter ended March 31, 2005, the increase in minority interest in
(income) loss reflects the minority shareholders' interest in income generated
from our majority owned subsidiary, W. P. Carey International LLC ("WPCI"),
whose income increased primarily due to its increased acquisition activity. For
the comparable prior year quarter, WPCI generated a loss from operations.
Provision for Income Taxes
For the comparable quarters ended March 31, 2005 and 2004, the provision for
income taxes increased $2,379, primarily as a result of the increase in
pre-tax earnings from our management services for the comparable periods.
Approximately 92% of our management revenue for the three-month period ended
March 31, 2005 was earned by a taxable, wholly-owned subsidiary.
Income From Continuing Operations
For the comparable quarters ended March 31, 2005 and 2004, income from
continuing operations increased by $3,459 primarily due to an increase in
transaction and asset-based management and performance fees related to increased
acquisition activity. This increase was partially offset by increases in general
and administrative expenses and the provision for income taxes. These variances
are all described above.
22
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
OTHER
In 2002, one of our wholly-owned indirect subsidiaries entered into a
build-to-suit development management agreement with the Los Angeles United
School District (the "District") with respect to the development and
construction of a new high school. Under the build-to-suit agreement, the
subsidiary's role is that of a development manager pursuant to provisions of the
California Education Code. The subsidiary, in turn, engaged a general contractor
to undertake the construction project. Under the construction agreement with the
general contractor, the subsidiary is acting as a conduit for the payments made
by the 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. We and the District are currently involved in an arbitration
proceeding relating to certain disagreements regarding the costs of the project
and whether we are entitled to reimbursement for incurring these costs. We
currently project that we will recognize an overall profit under our development
management agreement. 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 our disputes with the District, which resulted in a
change in our estimate of profit on this project, development income decreased
to $34 in the current quarter from $168 in the comparable prior year quarter.
Our hotel operations in Livonia, Michigan have been classified as held for sale
as of March 31, 2005 and the results of operations, and related impairment
charge, from this property for the three-month periods ended March 31, 2005 and
2004 are reflected in the condensed consolidated statements of operations as
"Discontinued Operations" (see Discontinued Operations above).
FINANCIAL CONDITION
Uses of Cash During the Period
There has been no material change in our financial condition since December 31,
2004. Cash and cash equivalents totaled $24,428 as of March 31, 2005, an
increase of $7,713 from December 31, 2004. 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 period is described below.
OPERATING ACTIVITIES - 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. Cash flows from operating
activities and distributions received from equity investments for the quarter
ended March 31, 2005 of $29,438 were sufficient to fund dividends to
shareholders of $16,584. During the quarter ended March 31, 2005, we received
fees of $9,135 in connection with structuring acquisition transactions and fees
of $5,030, exclusive of that portion of such fees being satisfied by the CPA(R)
REITs through, the issuance of their common stock rather than paying cash, from
providing asset-based management services on behalf of the CPA(R) REITs. Our
real estate operations provided cash flows (contractual lease revenues less
property-level debt service) of approximately $11,880. In January 2005, we
received $11,817 from the annual installment of deferred acquisition fees,
including interest. The next installment payable in January 2006 is expected to
be approximately $15,550 including interest. The installments are subject to
certain performance criteria. CPA(R):16-Global has not yet met its performance
criterion and is not expected to pay any deferred amounts in 2006. We currently
expect that annual cash flows from operations will be sufficient to continue to
fund distributions; however, operating cash flows fluctuate on a quarterly basis
due to such factors as the timing of certain compensation payments, 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 quarter ended March 31, 2005, we received net proceeds of
$3,613 related to the sales of three properties, two of which were vacant. 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. As of March 31, 2005 we have
classified three additional vacant properties as held for sale. In January 2005,
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 as of March 31, 2005 is $1,709. We currently anticipate
using cash from operations to fund the remaining obligation. During the
three-month period ended March 31, 2005, we received distributions of $1,066
from the CPA(R) REITs, of which $520 is included in cash flows from investing
activities as it was in excess of the income recognized on the CPA(R) REIT
investments for financial reporting purposes. Based on current distribution
rates and our share holdings in the CPA(R) REITs, projected annual distributions
from these investments amount to approximately $4,650.
FINANCING ACTIVITIES - During the quarter ended March 31, 2005 we paid dividends
to shareholders of $16,584, an increase over the comparable prior year period.
In addition to paying dividends, our financing activities included paying down
the outstanding balance on our credit facility by $2,000. Gross borrowings under
the credit facility were $20,000, which were used for several purposes in the
normal course of business, and repayments
23
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
were $22,000. The majority of the repayments were made using
cash received in the normal course of business including cash proceeds from the
sales of three properties. We also raised $1,421 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. If 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. From time to time, we also evaluate 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 if they
are not refinanced. In addition, 72% of our outstanding mortgage debt has fixed
rates of interest so that debt service on these obligations will not be
significantly affected by any increases in interest rates.
Cash Resources
As of March 31, 2005, we had $24,428 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 also have a credit facility with unused capacity of up
to $125,000 available as of March 31, 2005, 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 $368,716 as of March 31, 2005
and any proceeds may be used to finance future real estate purchases. The credit
facility has financial covenants requiring us to maintain a minimum equity value
and to meet or exceed certain operating and coverage ratios. Amounts drawn on
the credit facility, which expires in May 2007, bear interest at a 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.
MARCH 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
MAXIMUM OUTSTANDING MAXIMUM OUTSTANDING
AVAILABLE BALANCE AVAILABLE BALANCE
--------- ----------- --------- -----------
Credit Facility $ 225,000 $ 100,000 $ 225,000 $ 102,000
Cash Requirements
During the next twelve months, cash requirements will include paying dividends
to shareholders, scheduled mortgage principal payments, including a mortgage
balloon payment of $9,555 scheduled for January 2006, making distributions to
minority partners as well as other normal recurring operating expenses. We may
also seek to use our cash to purchase new properties 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 $2,965 at various
properties over the next twelve months. 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.
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 our credit facility.
24
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of March 31, 2005 and
the effect that such obligations are expected to have on our liquidity and cash
flow in future periods.
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
Limited recourse mortgage notes payable (1) $ 202,854 $ 29,592 $ 56,500 $ 61,317 $ 55,445
Unsecured note payable (1) 108,576 - 108,576 - -
Deferred acquisition fees (1) 1,304 595 704 5 -
Development project (2) 2,000 2,000 - - -
Operating leases (3) 15,103 1,175 2,711 2,692 8,525
---------- --------- --------- --------- ---------
$ 329,837 $ 33,362 $ 168,491 $ 64,014 $ 63,970
========== ========= ========= ========= =========
(1) Amounts are inclusive of principal and interest.
(2) We have provided a guarantee of $2,000 related to the District development
project.
(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 March 31, 2005.
25
W. P. CAREY & CO. LLC
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands except share and per share amounts)
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 March 31, 2005, $129,770 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 our debt obligations and the related
weighted-average interest rates by expected maturity dates for our fixed rate
debt. Interest on fixed rate debt as of March 31, 2005 ranged from 6.11% to
10.125%. The interest rates on our variable rate debt as of March 31, 2005
ranged from 3.92% 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 $5,296 $ 21,159 $ 23,499 $8,128 $ 35,045 $ 36,643 $ 129,770 $ 130,343
Weighted average interest rate 7.60% 7.22% 7.92% 7.69% 7.39% 7.23%
Variable rate debt $1,759 $ 2,619 $102,898 $3,199 $ 3,386 $ 36,958 $ 150,819 $ 150,819
Annual interest expense would increase or decrease on variable rate debt by
approximately $1,508 for each 1% increase or decrease in interest rates. A
change in interest rates of 1% would increase or decrease the fair value of our
fixed rate debt at March 31, 2005 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 the Euro, which may affect future costs
and cash flows. We are a net receiver of the Euro (we receive more cash then we
pay out) and therefore our foreign operations benefit from a weaker U.S. dollar
and are adversely affected by a stronger U.S. dollar relative to the Euro. For
the quarters ended March 31, 2005 and 2004, we recognized $13 and $336,
respectively, 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
quarters ended March 31, 2005 and 2004, we recognized a net unrealized foreign
currency loss of $363 and a net gain of $113, respectively. The cumulative
foreign currency translation adjustment reflects a gain of $33. 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.
Item 4. - CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES
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 Chief Executive Officer 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.
It should be noted that no system of controls can provide complete assurance of
achieving our objectives, and that future events may impact the effectiveness of
a system of controls.
As previously reported in our Annual Report on Form 10-K/A Amendment No. 1 for
the year ended December 31, 2004, during the first quarter of 2005, we
identified a material weakness in internal control over financial reporting with
respect to maintaining effective controls over the calculation and review of
estimated deferred taxes. Our Chief Executive Officer and Chief Financial
Officer have conducted a review of the effectiveness of the design and operation
of our disclosure controls and procedures as of March 31, 2005. Although we have
begun implementing remediation steps as described in (b) below with respect to
controls over the calculation and review of estimated deferred taxes, these
remediation steps are not fully implemented yet and our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were not effective as of March 31, 2005.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We began to address our material weakness in internal control over financial
reporting with respect to the calculation and review of estimated deferred taxes
in May 2005 by implementing, in connection with the preparation of our first
quarter financial statements, a more in-depth and comprehensive review of the
calculation of the provision for income taxes, including review of this
calculation by an additional level of management.
We also commenced an assessment of other methods intended to improve both the
preparation and review of this calculation. We expect to complete our assessment
and implement additional procedures to address the material weakness during the
second quarter of 2005. We believe that, once fully implemented, these
remediation steps will be sufficient to address the material weakness discussed
above.
Except for the item discussed above, there were no changes in our internal
control over financial reporting during our most recently completed fiscal
quarter that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
26
W. P. CAREY & CO. LLC
PART II
Item 1. - LEGAL PROCEEDINGS
As of March 31, 2005, we were not involved in any material litigation.
In March 2004, following a broker-dealer examination of Carey Financial
Corporation ("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.
27
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
During the quarter ended March 31, 2005, no matters were submitted to a vote
of security holders.
Item 6. - EXHIBITS
10.9 Employment Agreement Dated April 7, 1997 between W.P. Carey & Co., Inc.
and Claude Fernandez
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
28
W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.P. CAREY & CO. LLC
5/16/2005 By: /s/ Claude Fernandez
- ------------------ ---------------------------------
Date Claude Fernandez
Managing Director and
acting Chief Financial Officer
(acting Principal Financial
Officer)
5/16/2005 By: /s/ Michael D. Roberts
- ------------------ ---------------------------------
Date Michael D. Roberts
Managing Director and Controller
(acting Principal Accounting
Officer)
29