1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 2001
of
W. P. CAREY & CO. LLC
("WPC")
A DELAWARE Limited Liability Company
IRS Employer Identification No. 13-3912578
SEC File Number 001-13779
50 Rockefeller Plaza,
New York, New York 10020
(212) 492-1100
WPC has LISTED SHARES registered pursuant to Section 12(b) of the
Act.
WPC is registered on the NEW YORK STOCK EXCHANGE and the PACIFIC
STOCK EXCHANGE.
WPC does not have any Securities registered pursuant to Section
12(g) of the Act.
WPC (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for 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.
W. P. Carey & Co. LLC has 34,510,475 Listed Shares, no par value
outstanding at August 9, 2001.
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W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 2
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 3
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 5-6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II - Other Information
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. - Submission of Matters to a Vote of Security Holders 16
Item 6. - Exhibits and Reports on Form 8-K 16
Signatures 17
*The summarized financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
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W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited) (Note)
ASSETS:
Real estate leased to others under the operating method, net of
accumulated depreciation of $28,828 and $24,159
at June 30, 2001 and December 31, 2000 $408,633 $414,006
Net investment in direct financing leases 273,339 287,876
Operating real estate, net of accumulated depreciation of $1,759 and
$1,442 at June 30, 2001 and December 31, 2000 6,228 6,502
Real estate under construction and redevelopment 22,593 13,359
Equity investments 54,875 47,224
Assets held for sale 9,045 2,573
Cash and cash equivalents 9,176 10,165
Due from affiliates 12,166 7,945
Intangible assets, net of accumulated amortization 88,322 94,183
Other assets 20,156 20,409
-------- --------
Total assets $904,533 $904,242
======== ========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $187,801 $196,094
Notes payable 106,000 94,066
Accrued interest 1,567 2,655
Due to affiliates 6,318 15,308
Dividends payable 14,655 14,182
Accrued taxes 1,873 2,688
Other liabilities 15,048 16,374
-------- --------
Total liabilities 333,262 341,367
-------- --------
Minority interest 718 802
-------- --------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 34,482,165 and 33,604,716 shares issued and
outstanding at June 30, 2001 and December 31, 2000 658,703 644,749
Distributions in excess of accumulated earnings (79,023) (74,260)
Unearned compensation (5,427) (5,291)
Accumulated other comprehensive loss (3,700) (3,125)
-------- --------
Total members' equity 570,553 562,073
-------- --------
Total liabilities, minority interest and members' equity $904,533 $904,242
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2000 has been
derived from the audited consolidated financial statements at that date.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share and share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Rental income $ 11,745 $ 13,079 $ 23,571 $ 25,822
Interest income from direct financing leases 8,167 8,436 16,356 16,760
Management income from affiliates 13,505 2,843 21,048 2,843
Other income 502 630 3,213 1,482
Other interest income 292 170 535 205
Revenue from hotel operations 1,447 1,453 2,832 2,775
------------ ------------ ------------ ------------
35,658 26,611 67,555 49,887
------------ ------------ ------------ ------------
Expenses:
Interest 5,356 6,874 10,952 12,884
Depreciation 2,672 3,663 5,284 6,582
Amortization 3,467 437 7,313 645
General and administrative 6,650 2,405 12,891 4,090
Property expenses 2,767 2,179 4,069 3,845
Termination of management contract -- 38,000 -- 38,000
Impairment of real estate -- 331 -- 331
Operating expenses from hotel operations 1,109 1,186 2,303 2,357
------------ ------------ ------------ ------------
22,021 55,075 42,812 68,734
------------ ------------ ------------ ------------
Income (loss) before minority interest
in loss (income), income from
equity investments, gain (loss)
on sale and income taxes 13,637 (28,464) 24,743 (18,847)
Minority interest in loss (income) 18 (702) 62 (1,572)
------------ ------------ ------------ ------------
Income (loss) before income from equity
investments, gain (loss) on sale and
income taxes 13,655 (29,166) 24,805 (20,419)
Income from equity investments 778 108 2,230 1,330
------------ ------------ ------------ ------------
Income (loss) before gain (loss) on sale
and income taxes 14,433 (29,058) 27,035 (19,089)
Gain (loss) on sale of real estate and equity
investment 224 (18) 441 (134)
------------ ------------ ------------ ------------
Income (loss) before income taxes 14,657 (29,076) 27,476 (19,223)
Provision for income taxes (2,905) (965) (3,085) (1,193)
------------ ------------ ------------ ------------
Net income (loss) $ 11,752 $ (30,041) $ 24,391 $ (20,416)
------------ ------------ ------------ ------------
Basic earnings (loss) per share: $ .34 $ (1.18) $ .71 $ (.80)
============ ============ ============ ============
Diluted earnings (loss) per share: $ .34 $ (1.18) $ .70 $ (.80)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 34,402,356 25,425,965 34,336,036 25,525,951
============ ============ ============ ============
Diluted 34,719,525 25,425,965 34,652,212 25,525,951
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss): $11,752 $(30,041) $24,391 $(20,416)
------- -------- ------- --------
Other comprehensive (loss) income:
Change in unrealized gain on marketable securities 10 (277) 135 (216)
Foreign currency translation (loss) income (122) 289 (710) (572)
------- -------- ------- --------
Other comprehensive(loss) income (112) 12 (575) (788)
------- -------- ------- --------
Comprehensive income (loss) $11,640 $(30,029) $23,816 $(21,204)
======= ======== ======= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 24,391 $(20,416)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,597 7,227
Amortization of deferred income (295) (283)
(Gain) loss on sale of real estate and equity investments (441) 134
Minority interest in (loss) income (62) 1,572
Straight-line rent adjustments (449) (1,042)
Income from equity investments in excess of distributions received - (27)
Termination of management contract - 38,000
Management income received in shares of affiliates (6,751) -
Costs paid by issuance of shares 70 1,297
Writeoff of cumulative straight-line rent adjustment 1,321 -
Amortization of unearned compensation 958 -
Provision for uncollected rents 746 362
Impairment of real estate - 331
Structuring fees receivable (2,303) -
(Decrease) increase in accrued interest payable (1,088) 315
Decrease in income taxes payable (815) (33)
Net change in other operating assets and liabilities (3,439) (1,690)
-------- --------
Net cash provided by operating activities 24,440 25,747
-------- --------
Cash flows from investing activities
Distributions in excess of income from equity investments 301 -
Purchases of real estate and equity investments (8,591) (11,267)
Additional capital expenditures (1,469) (866)
Proceeds from sale of property and equity investments 7,522 982
Payment of deferred acquisition fees (520) (392)
Cash acquired on acquisition of business operations - 212
-------- --------
Net cash used in investing activities (2,757) (11,331)
-------- --------
Cash flows from financing activities:
Dividends paid (28,680) (21,482)
Contributions from minority interest 162 -
Distributions to minority interest - (1,172)
Proceeds from issuance of shares 1,836 -
Payments of mortgage principal and notes payable (38,486) (3,421)
Proceeds from note payable 34,000 30,094
Proceeds from mortgages payable 10,459 -
Payment of financing costs (1,595) -
Repurchases of shares (325) (12,204)
Other - 18
-------- --------
Net cash used in financing activities (22,629) (8,167)
-------- --------
Effect of exchange rate changes on cash (43) (29)
-------- --------
Net (decrease) increase in cash and cash equivalents (989) 6,220
Cash and cash equivalents, beginning of period 10,165 2,297
-------- --------
Cash and cash equivalents, end of period $ 9,176 $ 8,517
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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 in June 2000,
the Company has an obligation to issue up to an additional 2,000,000 shares
over four years, if specified performance criteria are achieved. The
performance criteria for the period ended December 31, 2000 were achieved,
and as a result, 500,000 shares ($8,145) were issued during the six months
ended June 30, 2001. In addition, the Company issued 151,964 shares
($2,811) in connection with acquiring the remaining special partner
interests in the CPA(R) Partnerships. The issuance of the shares has been
recorded as follows:
Goodwill $ 9,050
Other assets and liabilities, net 1,906
Shares issued (10,956)
--------
-
========
B. During the six months ended June 30, 2001 and 2000, the Company issued
restricted shares of $67 and $2,345, respectively, to affiliated parties,
including directors, in consideration of services rendered. Restricted
shares valued at $1,208 have been issued to employees and recorded as
unearned compensation. Unvested restricted shares and options of $106
issued were forfeited. Included in compensation expense for the six months
ended June 30, 2001 was $958 relating to restricted shares and options held
by employees.
C. During the six-month period ended June 30, 2001, the Company purchased an
equity interest in an affiliate in consideration for issuing a promissory
note of $1,000.
D. In connection with the sale of a property during the six months ended June
30, 2001, the Company received a note receivable of $700 in partial
consideration for the sale.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share and per share amounts)
Note 1: Basis of Presentation/Accounting Policies:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC ("the Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
Note 2. Transactions with Related Parties:
The Company earns fees as the Advisor to the four affiliated CPA(R) REITs,
Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional
Properties Incorporated ("CIP(R)"), Corporate Property Associates 12
Incorporated ("CPA(R):12") and Corporate Property Associates 14 Incorporated
("CPA(R):14"). Under the advisory agreements with the CPA(R) REITs, the Company
performs services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. In addition, the Company's broker-dealer
subsidiary earns fees in connection with the on-going "best efforts" public
offering of CPA(R):14. The Company earns an asset management fee of -1/2 of 1%
per annum of Average Invested Assets, as defined in the Agreements, for each
CPA(R) REIT and, based upon certain performance criteria for each CPA(R) REIT,
may be entitled to receive a performance fee of -1/2 of 1% of Average Invested
Assets. The Company is reimbursed for the cost of personnel provided for the
administration of the CPA(R) REITs. For the three-month and six-month periods
ended June 30, 2001, asset-based fees and reimbursements earned were $10,182 and
$15,693, respectively, and $30 from the date of acquisition of the advisory
contracts (June 29, 2000) through June 30, 2000. The performance criteria for
CPA(R):14 were satisfied for the first time during the three months ended June
30, 2001, resulting in the Company's recognition of $3,112 for the period
December 1997 through March 2001. For the three-month and six-month periods
ended June 30, 2001, the Company earned transaction fees of $3,323 and $5,355,
respectively, and $2,813 from the date of acquisition of the advisory contracts
through June 30, 2000 in connection with structuring and negotiating real estate
acquisitions and mortgage financing for the CPA(R) REITs.
As a result of the cancellation of its Management Agreement in June 2000, the
Company no longer incurs management fees and general and administrative
reimbursements. For the three-month and six-month periods ended June 30, 2000,
the Company incurred management fees of $967 and $1,924, respectively, and
general and administrative reimbursements of $372 and $729, respectively.
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 3. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues for the six-month periods ended June 30, 2001 and 2000 are as
follows:
2001 2000
---- ----
Per Statements of Income:
Rental income $23,571 $25,822
Interest income from direct financing leases 16,356 16,760
Adjustment:
Share of leasing revenues applicable to minority interests (241) (229)
Share of leasing revenues from equity investments 3,405 1,618
------- -------
$43,091 $43,971
======= =======
For the six months ended June 30, 2001 and 2000, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 80 lessees. A summary of net leasing revenues is as
follows:
2001 % 2000 %
---- - ---- -
Dr Pepper Bottling Company of Texas $ 2,159 5% $ 2,124 5%
Gibson Greetings, Inc., a wholly-owned subsidiary of
American Greetings, Inc. 2,049 5 2,011 5
Detroit Diesel Corporation 2,031 5 1,829 4
Orbital Sciences Corporation 1,328 3 1,328 3
Federal Express Corporation (a) 1,286 3 2,889 7
Quebecor Printing, Inc. 1,285 3 1,254 3
America West Holdings Corp. 1,269 3 1,269 3
Thermadyne Holdings Corporation 1,263 3 1,214 3
Livho, Inc. 1,260 3 1,613 4
AutoZone, Inc. 1,239 3 1,236 3
Furon Company 1,207 3 1,207 3
Lockheed Martin Corporation 1,159 3 1,224 3
The Gap, Inc. 1,103 3 1,103 3
Sybron International Corporation 1,081 3 1,081 2
Checkfree Holdings Corporation Inc. (b) 1,044 2 646 1
Unisource Worldwide, Inc. 867 2 835 2
BellSouth Telecommunication, Inc. 855 2 642 1
Information Resources, Inc. (b) 822 2 729 2
AP Parts International, Inc. 808 2 808 2
Sybron Dental Specialties Inc. 807 2 732 2
CSS Industries, Inc. 803 2 798 2
Red Bank Distribution, Inc. 790 2 700 2
Brodart, Co. 760 2 760 2
Peerless Chain Company 732 2 732 2
United States Postal Service 667 1 545 1
Sprint Spectrum, L.P. 582 1 577 1
Duff-Norton Company, Inc. 555 1 582 1
Eagle Hardware & Garden, Inc., a wholly-owned
subsidiary of Lowe's Companies Inc. 545 1 692 2
Cendant Operations, Inc. 537 1 537 1
Anthony's Manufacturing Company, Inc. 479 1 473 1
Bouygues Telecom, S.A. 461 1 - -
United Stationers Supply Company 458 1 458 1
Other (c) 10,800 24 11,343 23
------- --- ------- ---
$43,091 100% $43,971 100%
======= === ======= ===
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
(a) Represents the Company's 40% pro rata equity ownership in 2001. The
Company owned a 100% interest in 2000.
(b) Represents the Company's proportionate share of lease revenue from its
equity investment.
(c) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to its minority
interest owners.
Note 4. Equity Investments:
The Company owns 780,269 units of the operating partnership of Meristar
Hospitality Corporation ("Meristar"), a publicly traded real estate investment
trust which primarily owns hotels, and which is being accounted for under the
equity method. The Company has the right to convert its units in the operating
partnership to shares of common stock in Meristar at any time on a one-for-one
basis.
Meristar's financial statements for the quarter ended March 31, 2001 reported
total assets of $3,101,851 and shareholders' equity of $1,119,317 as of March
31, 2001 and revenues of $302,684 and net income of $11,815 for the three months
then ended. As of August 3, 2001, Meristar's quoted share price was $21.74,
resulting in an aggregate value of the Company's units of approximately $16,963
if converted. The carrying value of the equity interest in the Meristar
operating partnership as of June 30, 2001 was $19,162.
The Company owns equity interests with affiliates in four entities that each own
real estate net leased to a single tenant. The entities lease property to
Federal Express Corporation, Information Resources Inc., Checkfree Holdings,
Inc. and Titan Corporation. In addition, the Company owns common stock in the
four CPA(R) REITs with which it has advisory agreements. Combined financial
information of the affiliated equity investees is summarized as follows:
June 30, 2001 December 31, 2000
------------- -----------------
Assets $1,885,556 $1,745,901
Liabilities 849,393 789,984
Partners' capital/Shareholders' equity 1,036,163 955,917
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Revenues $107,916 $ 4,788
Expenses (65,038) (3,274)
-------- -------
Net income $ 42,878 $ 1,514
======== =======
As of June 30, 2001, the Company owns 20,000 shares of CPA(R):10, 179,978 shares
of CIP(R), 217,535 shares of CPA(R):12 and 322,080 shares of CPA(R):14.
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 5. Segment Reporting:
The Company operates in two business segments - real estate and the net lease
management operations of affiliates. The management operations were acquired in
June 2000. The two segments are summarized as follows:
Six months ended June 30, Management Real Estate Other(1) Total Company
- ------------------------- ---------- ----------- ----- -------------
Revenues:
2001 $ 21,048 $ 43,675 $2,832 $ 67,555
2000 2,843 44,269 2,775 49,887
Operating and interest expenses(4)
(excluding depreciation, amortization
and provision for income taxes):
2001 10,663 17,249 2,303 30,215
2000 566 20,584 2,357 23,507
Income from equity investments:
2001 141 2,089 - 2,230
2000 - 1,330 - 1,330
Net operating income(2)(3)(4):
2001 7,011 22,362 529 29,902
2000 1,924 15,729 418 18,071
Long-lived assets:
June 30, 2001 116,881 752,092 6,228 875,201
December 31, 2000 105,504 761,028 7,136 873,668
Total assets:
June 30, 2001 119,761 776,800 7,972 904,533
December 31, 2000 111,375 784,628 8,239 904,242
(1) Primarily consists of the Company's hotel operations.
(2) Excludes amortization of intangibles and goodwill of $5,952 and $353
in 2001 and 2000, respectively.
(3) Net operating income excludes gains and losses on sales.
(4) Excludes the writeoff of an acquired management contract of $38,000
in 2000.
Note 6. Gain on Sale of Real Estate Interests:
During the six months ended June 30, 2001, the Company sold seven properties and
an equity investment in a real estate partnership for proceeds of $8,222
(including a note for $700) and recognized net gain on sales of $441.
Note 7. Assets Held for Sale:
On July 20, 2001, the Company sold its property in Forrest City, Arkansas leased
to Duff-Norton Company, Inc. for approximately $9,400. The funds are held by an
intermediary in an escrow account for the purpose of entering into a Section
1031 noncash exchange which, under the Internal Revenue Code, would allow the
Company to acquire like-kind real properties within a stated period in order to
defer a taxable gain of approximately $8,900. If a like-kind exchange is
accomplished, the taxable gain will not be recognized until the properties
acquired using the proceeds in the escrow account are sold.
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 8. Accounting Pronouncements:
On July 20, 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangibles," which establish accounting and reporting
standards for business combinations and certain assets and liabilities acquired
in business combinations.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method, establishes specific criteria
for the recognition of intangible assets separately from goodwill and requires
that unallocated negative goodwill be written off immediately as an
extraordinary gain. Use of the pooling-of-interests method for business
combinations is no longer permitted. The adoption of SFAS 141 will not have a
material effect on the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001 and must be adopted
at the beginning of a fiscal year. Early adoption and retroactive application of
SFAS No. 142 are not permitted in 2001. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets will no longer be amortized but will be
tested for impairment at least annually. Intangible assets acquired in business
combinations will only be amortized if such assets are capable of being
separated or divided and sold, transferred, licensed, rented or exchanged or
arise from contractual or legal rights, and will be amortized over their useful
lives.
The Company will adopt the provisions of SFAS No. 142 for the fiscal year
beginning January 1, 2002. With the acquisition of real estate management
operations in 2000, the Company allocated a portion of the purchase price to
goodwill and other identifiable intangible assets. In adopting SFAS No. 142, the
Company will discontinue amortization of existing goodwill. Based on the current
amount of goodwill, amortization of goodwill in 2001 is expected to approximate
$3,150. The Company will also be required to evaluate its intangible assets to
determine whether a portion of such intangible assets will continue to be
amortized. The results of any evaluation of existing intangible assets cannot be
determined at this time.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share amounts)
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of June 30, 2001 of W. P.
Carey & Co. LLC and its subsidiaries ("WPC") included in this quarterly report
and WPC's Annual Report on Form 10-K for the year ended December 31, 2000. This
quarterly report contains forward looking statements. Such statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievement of WPC to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or the objectives and plans of WPC will be achieved.
RESULTS OF OPERATIONS:
Effective June 29, 2000, WPC acquired the real estate management operations of
an affiliate by issuing 8 million shares. Since that date, WPC is engaged in two
reportable operating segments, real estate operations and management services as
the Advisor to four affiliated real estate investment trusts (the "CPA(R)
REITs"). Accordingly, the results of operations for the three-month and
six-month periods ended June 30, 2001 and 2000 are not fully comparable. WPC had
net income of $11,752 and $24,391 for the three-month and six-month periods
ended June 30, 2001 and incurred net losses of $30,041 and $20,416 for the
three-month and six-month periods ended June 30, 2000. Upon acquisition of the
management services operation in June 2000, the Company incurred a charge of
$38,000 in connection with terminating its management contract. Excluding the
charge on the termination of the management contract in 2000, income for the
comparable three-month and six-month periods increased by $3,793 and $6,807,
respectively, as compared with the three-month and six-month periods ended June
30, 2000. The increases in income were due to improved results from WPC's real
estate operations and the income from the management services operations. Total
revenues for the three-month and six-month periods ended June 30, 2001 reflected
increases of $9,047 and $17,668 as compared with 2000. The increase in revenues
was due to fees earned from management services operations.
The results for 2001 include $5,952 of noncash charges for amortization of
goodwill and intangible assets, and the results for 2000 include $1,521 of
minority interest income that was applicable to affiliates' interests in the
real estate operations. These minority interests have now been exchanged for
shares of WPC.
Net income from real estate operations increased to $10,337 from $6,121 and to
$22,803 from $15,595 for the three-month and six-month periods ended June 30,
2001 as compared with the three-month and sixth-month periods ended June 30,
2000. Excluding gains and losses on the sale of real estate interests, income
would have increased by $3,757 and $6,633 for the comparable three-month and
six-month periods. Both the three-month and six-month periods benefited from
increases in equity income and decreases in interest expense and depreciation.
For the six-month period ended June 30, 2001, there was a substantial increase
in other income, which consists of revenues from real estate other than lease
revenues. The increase in other income of $1,731 for the comparable six months
was due to a $2,500 final settlement of a bankruptcy claim in the first quarter
against a former lessee, New Valley Corporation, relating to the termination of
a lease in 1993 on a property in Moorestown, New Jersey. The Moorestown property
is now leased to Cendant Operations, Inc. WPC is continuing to seek settlements
with other former lessees; however, the timing of such settlements and the
amounts that will be received cannot be estimated. Accordingly, WPC has not
recognized any income from its pending settlement actions. The decrease in
interest expense was due to lower interest incurred on WPC's advances on its
line of credit as the result of both lower average outstanding balances and
lower interest rates for the comparable periods. The decrease in depreciation
was primarily due to the disposition of a majority interest in the Federal
Express Corporation property in Colliersville, Tennessee in December 2000 to an
affiliate. The increase in property expenses in 2001 was affected by a noncash
charge for the writeoff of $1,321 of straight-line rents as uncollectible in
connection with a lease amendment. Excluding the writedown, property expense
would have reflected a decrease and was directly attributable to the termination
of the management contract in connection with the June 2000 acquisition of the
real estate management operations as WPC is no longer charged asset management
fees. Management fees incurred in 2000 were $967 and $1,924 for the three-month
and six-month periods ended June 30, 2000.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands, except share and per share amounts)
Lease revenues (rental income and interest income from direct financing leases)
decreased as a result of the sale of a 60% majority interest in the Federal
Express property. During the six months ended June 30, 2000, revenues from the
Federal Express lease were $2,762. The remaining 40% interest in the property is
now accounted for under the equity method of accounting. Under the equity
method, WPC recognizes its share of the net income or loss from the Federal
Express investment, but does not record pro rata rents nor depreciation expense
for financial statement purposes. The increase in equity income was due to
improved results from WPC's ownership interest in the operating partnership of
Meristar Hospitality Corp., a publicly-traded real estate investment trust, and,
to a lesser extent, income from investments in the four affiliated CPA(R) REITs
which were initially acquired in June 2000.
Net income from WPC's management services operations for the three-month and
six-month periods ended June 30, 2001 was $1,294 and $1,059, respectively, and
is not fully comparable to net income of $1,571 for the three-month and
six-month periods ended June 30, 2000 as the acquisition of the management
services operations occurred June 29, 2000. Results for the three-month and
six-month periods ended June 30, 2001 include noncash charges for amortization
of goodwill and intangible assets of $2,789 and $5,952, respectively, and $353
for the periods ended June 30, 2000. The results for the prior-year periods
primarily reflect transaction fees, while the current-year periods more fully
reflect the results of an on-going business operation and also include
substantial asset-based income and the general and administrative expenses
necessary to operate an on-going business. Excluding the charges for
amortization, income would have been $4,083 and $7,011 for the three-month and
six-month periods ended June 30, 2001 and $1,924 for the periods ended June 30,
2000.
Total revenues earned by the management services operations for the three-month
and six-month periods ended June 30, 2001 were $13,406 and $21,048,
respectively, compared with $2,843 for the three-month and six-month periods
ended June 30, 2000. Management fee income earned from affiliates was comprised
of transaction fees of $3,562 and $5,751 and asset-based fees and reimbursements
of $9,944 and $15,297 for the three-month and six-month periods ended June 30,
2001. Transaction fees included fees from structuring acquisition and
refinancing transactions. Transaction-based fees are seasonal, and Management
currently projects an increase in transaction-based activity for the second half
of the year. Asset-based management income was $11,619 for the six months ended
June 30, 2001. The asset-based management income includes fees based on the
value of CPA(R) REIT real estate assets under management. A portion of the
CPA(R) REIT management fees is based on each CPA(R) REIT meeting specific
performance criteria (the "performance fee") and WPC earns this performance fee
income only when the performance criteria of each CPA(R) REIT are being
achieved. During the second quarter, the performance criteria for Corporate
Property Associates 14 Incorporated ("CPA(R):14") were satisfied for the first
time, resulting in WPC's recognition of a performance fee of $3,112 for the
period December 1997 through March 31, 2001. WPC had not previously earned
performance fees from CPA(R):14. For the quarter ended June 30, 2001, WPC earned
performance fees of $972 from CPA(R):14. Based on CPA(R):14's current asset
base, annual performance fees earned under the advisory agreement are expected
to be approximately $3,500. CPA(R):14 continues to invest funds from its "best
efforts" public offering in net lease real estate. As the real estate asset base
of CPA(R):14 continues to increase, the management and performance fees earned
under WPC's advisory agreement with CPA(R):14 are expected to increase.
CPA(R):14's public offering will terminate no later than November 16, 2001, and
it will still have funds raised from the offering available for investment for
at least several months. Additionally, a new CPA(R) REIT has been formed and
Management anticipates a "best efforts" public offering to commence in the
fourth quarter.
The increase in general and administrative expenses was due to the acquisition
of the management services operations. Approximately 87% of the increase in
general and administrative costs resulted from personnel-related costs with the
remaining increase attributable to management services operations. The portion
of personnel costs necessary to administer the CPA(R) REITs is billed back to
the REITs and is recognized as management income. Because the results of the
management services operations for 2000 include only three days of operations,
expenses for the first six months of 2000 related to management services
operations were minimal.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands, except share and per share amounts)
WPC acquired a 90% interest in a joint venture that has entered into a
build-to-suit commitment in Strasbourg, France which will be net leased to
Bouygues Telecom S.A., an existing lessee. The expected completion date of the
property is November 2001. The lease will have an initial term of nine and a
half years and annual rents will be approximately $2,000. During 2000, WPC
committed to fund an expansion at the Sprint Spectrum L.P. property in Rio
Rancho, New Mexico. The Sprint expansion was completed in July 2001, and annual
rent from Sprint has increased by approximately $270. The Company also committed
to fund a $4,000 expansion of the AT&T property in Bridgeton, Missouri. The
expansion is scheduled to be completed in the third quarter and AT&T's annual
rent will increase by $360.
In July 2001, the Company sold its property in Forrest City, Arkansas to the
lessee, Duff-Norton Company, Inc. for $9,400. Annual rent from the Duff-Norton
lease was $1,164. In order to defer the substantial taxable gain from the sale,
the sale has been structured as a 1031 like-kind exchange and requires WPC to
use the proceeds within a stated period to acquire new properties. In addition,
annual rents have decreased by $898 as a result of selling seven properties
during the six months ended June 30, 2001.
WPC amended its lease with Livho, Inc., the lessee of the Holiday Inn in
Livonia, Michigan. As amended, annual rent was retroactively reduced to $2,520
from $3,109 effective January 1, 2001. In addition, the lease term shortened and
future stated rent increases have been adjusted. As amended, annual rents will
be renegotiated during each lease extension period and, if market conditions
permit, will allow for negotiating higher rents, but no less than $2,621. Due to
the cyclical nature of the hotel business, Management concluded that scheduled
rent increases would not be collectible if the lessee's business could not
support the rental obligation. WPC wrote off $1,321 of straight-line rents
during the second quarter in connection with amending the Livho lease, with such
charges included in property expenses in the accompanying condensed consolidated
financial statements. With more frequent renewal periods, rentals can be more
closely matched with existing business conditions.
FINANCIAL CONDITION:
Cash flows from operations of $24,440 for the period ended June 30, 2001 were
not sufficient to fund dividends to shareholders of $28,680. Cash flows from
operations for the six-month period ended June 30, 2001 are not expected to be
representative of cash flows from operations for the full year as both
transaction-based and asset-based management revenues are projected to be higher
during the second half of the year. In addition, cash from operations was
affected by certain compensation-related costs that are paid annually during the
second quarter but are accrued for proportionately throughout the year.
Additionally, a higher proportion of partnership-level tax payments are usually
paid in the second quarter.
Investing activities included using $10,060 for purchases of real estate and
additional capital expenditures, including $7,489 used for the construction of
the Bouygues Telecom facility, $877 for the expansion at the Sprint property,
$952 related to the redevelopment of the former Copeland Beverage Group property
in Los Angeles and a property in Broomfield, Colorado and $742 to fund other
improvements. The funding commitment at the AT&T property, which is expected to
be completed and paid in August 2001, is expected to amount to $4,000. Costs to
complete the Bouygues Telecom facility are estimated to be $7,600. WPC received
$7,522 in net cash and a note receivable of $700 in connection with the sales of
properties and an equity investment in a property in Carlsbad, California.
Management continues to evaluate the real estate portfolio and is actively
evaluating opportunities to sell smaller properties, as such properties require
more intensive asset-management services than larger single-tenant net lease
properties. WPC also sold the Duff-Norton property in July 2001 pursuant to a
tax-free like-kind exchange and expects to complete the exchange with the
acquisition of a new property within six months of the disposition of the
Duff-Norton property. In January 2001, WPC paid an installment of deferred
acquisition fees for $520 relating to 1998 and 1999 purchases to WPC's former
management company. Deferred acquisition fees are payable over a period of no
less than eight years.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands, except share and per share amounts)
In March 2001, the Company entered into a revolving credit agreement for a
$185,000 line of credit which renewed and extended its original revolving
unsecured line of credit. The credit agreement has a three-year term through
March 2004. WPC has a one-time right to increase the commitment to up to
$225,000. Borrowings on the credit facility were $106,000 as of June 30, 2001.
The revolving credit agreement has financial covenants that require WPC to
maintain a minimum equity value and to meet or exceed certain operating and
coverage ratios. WPC remains in compliance with the financial covenants.
In addition to paying dividends to its shareholders, WPC drew net cash of
$12,000 from its line of credit, paid off three existing mortgages of $10,542
including $9,225 of balloon payments on properties leased to Quebecor, Inc.,
received refinancing proceeds of $5,000 on one of the Quebecor properties and
drew $5,459 of construction financing on the Bouygues Telecom build-to-suit
project. WPC issued an additional 500,000 shares pursuant to its merger
agreement for the management services operations in connection with meeting
specified performance criteria. WPC also acquired the remaining minority
interest in the CPA(R) Partnerships for $2,811 through the issuance of 151,964
shares.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method, establishes specific criteria
for the recognition of intangible assets separately from goodwill and requires
that unallocated negative goodwill be written off immediately as an
extraordinary gain. Use of the pooling-of-interests method for business
combinations is no longer permitted. The adoption of SFAS 141 will not have a
material effect on WPC's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001 and must be adopted
at the beginning of a fiscal year. Early adoption and retroactive application of
SFAS No. 142 are not permitted in 2001. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets will no longer be amortized but will be
tested for impairment at least annually. Intangible assets acquired in business
combinations will only be amortized if such assets are capable of being
separated or divided and sold, transferred, licensed, rented or exchanged or
arise from contractual or legal rights, and will be amortized over their useful
lives.
WPC will adopt the provisions of SFAS No. 142 for the fiscal year beginning
January 1, 2002. With the acquisition of real estate management operations in
2000, WPC allocated a portion of the purchase price to goodwill and other
identifiable intangible assets. In adopting SFAS No. 142, WPC will discontinue
amortization of existing goodwill. Based on the current amount of goodwill,
amortization of goodwill in 2001 is expected to approximate $3,150. WPC will
also be required to evaluate its intangible assets to determine whether a
portion of such intangible assets will continue to be amortized. The results of
any evaluation of existing intangible assets cannot be determined at this time.
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W. P. CAREY & CO. LLC
PART II
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
$160,538 of the Company's long-term debt bears interest at fixed rates, and
therefore the fair value of these instruments is affected by changes in the
market interest rates. The following table presents principal cash flows based
upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The interest rate on the variable rate debt as of June 30, 2001 ranged
from 4.56% to 6.75%.
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $3,808 $9,510 $10,014 $ 26,973 $7,946 $102,287 $160,538 $162,913
Average interest rate 7.98% 7.86% 7.92% 7.75% 7.76% 7.61%
Variable rate debt $2,161 $6,346 $ 918 $106,983 $1,015 $ 15,840 $133,263 $133,263
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual shareholders meeting was held on June 7, 2001, at which time a
vote was held to elect directors for the Company. The vote was held
through the solicitation of proxies. The following directors were elected
for a three year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No
---------------- ------------------- ----------------- ----------------
Gordon F. Dugan 29,142,350 28,542,638 599,712
Reginald Winssinger 29,142,350 28,896,587 245,763
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended June 30, 2001 the Company was not required to
file any reports on Form 8-K.
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
8/9/01 By: /s/ John J. Park
------------- ------------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
8/9/01 By: /s/ Claude Fernandez
------------- ------------------------------------
Date Claude Fernandez
Executive Vice President -
Financial Operations
(Principal Accounting Officer)
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