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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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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 37,724,239 Listed Shares, no par value, outstanding at
August 2, 2005.
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W. P. CAREY & CO. LLC
INDEX
PAGE NO.
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PART I
Item 1. - Financial Statements*
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 3
Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2005 and 2004 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 6-7
Notes to Consolidated Financial Statements 8-16
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-28
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. - Controls and Procedures 29-30
PART II - Other Information
Item 1. - Legal Proceedings 31-32
Item 4. - Submission of Matters to a Vote of Security Holders 32
Item 6. - Exhibits 32
Signatures 33
*The summarized 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.
2
W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands except share amounts)
DECEMBER 31, 2004
JUNE 30, 2005 (NOTE)
------------- -----------------
ASSETS:
Real estate accounted for under the operating method, net of accumulated depreciation of
$57,897 and $53,914 at June 30, 2005 and December 31, 2004 $ 462,511 $ 476,365
Net investment in direct financing leases 136,044 190,644
Operating real estate, net of accumulated depreciation of $6,983 at December 31, 2004 - 9,140
Equity investments 121,306 110,379
Assets held for sale 37,647 12,802
Cash and cash equivalents 15,112 16,715
Due from affiliates 57,926 63,471
Goodwill 63,607 63,607
Intangible assets, net of accumulated amortization of $40,510 and $35,610 at June 30, 2005
and December 31, 2004 45,601 50,501
Other assets, net 22,657 19,915
----------- -----------
Total assets $ 962,411 $ 1,013,539
=========== ===========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 174,874 $ 190,698
Credit facility 77,000 102,000
Accrued interest 1,849 1,389
Dividends payable 16,807 16,626
Accounts payable and accrued expenses 18,804 19,838
Prepaid rental income and security deposit 4,384 4,881
Due to affiliates 1,483 2,033
Accrued income taxes 1,079 3,909
Deferred income taxes, net 37,805 38,359
Other liabilities 13,449 11,748
----------- -----------
Total liabilities 347,534 391,481
----------- -----------
Minority interest 1,065 1,407
----------- -----------
Commitments and contingencies (Note 10)
Members' equity:
Listed shares, no par value; 37,695,319 and 37,523,462 shares issued and
outstanding at June 30, 2005 and December 31, 2004 740,480 734,658
Dividends in excess of accumulated earnings (123,128) (112,441)
Unearned compensation (6,608) (5,366)
Accumulated other comprehensive income 3,068 3,800
----------- ------------
Total members' equity 613,812 620,651
----------- ------------
Total liabilities, minority interest and members' equity $ 962,411 $ 1,013,539
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
Note: The consolidated balance sheet at December 31, 2004 has been derived
from the audited consolidated financial statements at that date.
3
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share and share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
2005 2004 2005 2004
------------- ------------ ------------ -----------
Revenues:
Management income from affiliates $ 24,713 $ 32,535 $ 50,851 $ 49,787
Rental income 13,507 10,673 26,936 21,375
Interest income from direct financing leases 3,867 3,849 7,703 7,634
Other operating income 413 2,637 972 4,452
Revenue from other business operations 21 263 55 431
------------- ------------ ------------ -----------
42,521 49,957 86,517 83,679
------------- ------------ ------------ -----------
Operating expenses:
Depreciation 2,916 2,379 5,817 4,756
Amortization 2,203 1,692 4,406 3,385
General and administrative 14,218 14,382 28,029 25,121
Impairment charges and loan losses - 550 - 2,800
Property expenses 1,632 1,455 3,295 3,238
------------- ------------ ------------ -----------
20,969 20,458 41,547 39,300
------------- ------------ ------------ -----------
Income from continuing operations before other
interest income, minority interest, equity
income, gains and losses, interest expense
and income taxes 21,552 29,499 44,970 44,379
Other interest income 824 713 1,666 1,393
Minority interest in income (767) (97) (1,399) (165)
Income from equity investments 1,197 1,295 2,565 2,631
(Loss) gain on foreign currency transactions
and other gains, net (313) (42) (663) 407
Interest expense (4,195) (3,370) (8,508) (6,968)
------------- ------------ ------------ -----------
Income from continuing operations before
income taxes 18,298 27,998 38,631 41,677
Provision for income taxes (5,099) (8,732) (10,952) (12,137)
------------- ------------ ------------ -----------
Income from continuing operations 13,199 19,266 27,679 29,540
------------- ------------ ------------ -----------
Discontinued operations:
Income from operations of discontinued
properties 744 1,314 1,811 2,132
Gain on sale of real estate 9,139 - 9,119 -
Impairment charge on properties held for sale (6,149) (5,100) (15,821) (5,100)
------------- ------------ ------------ -----------
Income (loss) from discontinued operations 3,734 (3,786) (4,891) (2,968)
------------- ------------ ------------ -----------
Net income $ 16,933 $ 15,480 $ 22,788 $ 26,572
============= ============ ============ ===========
Basic earnings per share:
Earnings from continuing operations $ .35 $ .51 $ .74 $ .79
Income (loss) from discontinued operations .10 (.10) (.13) (.08)
------------- ------------ ------------ -----------
Net income $ .45 $ .41 $ .61 $ .71
============= ============ ============ ===========
Diluted earnings per share:
Earnings from continuing operations $ .34 $ .50 $ .71 $ .76
Income (loss) from discontinued operations .09 (.10) (.13) (.07)
------------- ------------ ------------ -----------
Net income $ .43 $ .40 $ .58 $ .69
============= ============ ============ ===========
Dividends declared per share $ .446 $ .438 $ .890 $ .874
============= ============ ============ ===========
Weighted average shares outstanding:
Basic 37,670,305 37,404,485 37,631,539 37,359,638
============= ============ ============ ===========
Diluted 39,017,636 38,595,391 39,185,907 38,681,413
============= ============ ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(in thousands)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- --------- ----------
Net income: $ 16,933 $ 15,480 $ 22,788 $ 26,572
--------- ---------- --------- ----------
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) on
marketable securities 1,179 (90) 114 267
Foreign currency translation adjustment (363) 264 (846) (1,012)
---------- ---------- --------- ----------
816 174 (732) (745)
---------- ---------- --------- ----------
Comprehensive income $ 17,749 $ 15,654 $ 22,056 $ 25,827
========== ========== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands, except share amounts)
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net income $ 22,788 $ 26,572
Adjustments to reconcile net income to net cash provided by continuing operating
activities:
Loss from discontinued operations, including impairment charges and gain/loss on sale 4,891 2,968
Depreciation and amortization of intangible assets and deferred financing costs 10,502 8,528
Unrealized loss (gain) on foreign currency transactions and warrants 754 (68)
Minority interest in income 1,399 165
Straight-line rent adjustments 1,676 491
Equity income in excess of distributions (100) (328)
Gain on sale of investments (96) -
Realized loss (gain) on foreign currency transactions 11 (339)
Management income received in shares of affiliates (14,769) (10,941)
Costs paid by issuance of shares 96 81
Amortization of unearned compensation 1,696 2,154
Impairment charges and loan losses - 2,800
Tax charge - share incentive plans 360 1,589
Deferred income taxes (554) 3,452
(Decrease) increase in accrued taxes payable (2,830) 3,402
Increase in structuring fees receivable (4,234) (6,970)
Deferred acquisition fees received 8,961 5,978
Net change in other operating assets and liabilities (2,738) (1,285)
---------- ----------
Net cash provided by continuing operations 27,813 38,249
Net cash provided by discontinued operations 2,438 2,707
---------- ----------
Net cash provided by operating activities 30,251 40,956
---------- ----------
Cash flows from investing activities:
Distributions received from equity investments in excess of equity income 3,049 1,695
Purchases of real estate and equity investments - (4,290)
Proceeds from sale of property and investments 32,604 -
Release of funds from escrow in connection with the sale of a property - 7,185
Capital expenditures (976) (1,332)
Payment of deferred acquisition fees to affiliate (524) (524)
---------- ----------
Net cash provided by investing activities 34,153 2,734
---------- ----------
Cash flows from financing activities:
Proceeds from credit facility 41,000 42,000
Scheduled payments of mortgage principal (4,616) (4,642)
Prepayments of mortgage principal and credit facility (70,893) (55,000)
Payment of financing costs - (1,185)
Distributions to minority interests (356) (1,101)
Dividends paid (33,294) (32,265)
Proceeds from issuance of shares 2,420 2,238
Retirement of shares - (2,543)
---------- ----------
Net cash used in financing activities (65,739) (52,498)
---------- ----------
Effect of exchange rate changes on cash (268) (351)
---------- ----------
Net decrease in cash and cash equivalents (1,603) (9,159)
Cash and cash equivalents, beginning of period 16,715 24,359
---------- ----------
Cash and cash equivalents, end of period $ 15,112 $ 15,200
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
6
W.P. CAREY & CO.LLC
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 these consolidated financial
statements.
7
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
NOTE 1: BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of W. P. Carey &
Co. LLC and its subsidiaries (the "Company") 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 United States Securities and Exchange
Commission ("SEC"). They do not include all information and notes required by
generally accepted accounting principles 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 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 7). As a result,
certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
NOTE 2. EARNINGS (LOSS) PER SHARE:
Basic and diluted earnings (loss) per common share for the Company for the three
and six-month periods ended June 30, 2005 and 2004 were calculated as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------- -----------
Income from continuing operations $ 13,199 $ 19,266 $ 27,679 $ 29,540
Income (loss) income from discontinued operations 3,734 (3,786) (4,891) (2,968)
------------ ------------ ------------- -----------
Net income $ 16,933 $ 15,480 $ 22,788 $ 26,572
============ ============ ============= ===========
Weighted average shares outstanding - basic 37,670,305 37,404,485 37,631,539 37,359,638
Effect of dilutive securities: Stock options 1,347,331 1,190,906 1,554,368 1,321,775
------------ ------------ ------------- -----------
Weighted average shares outstanding - diluted 39,017,636 38,595,391 39,185,907 38,681,413
============ ============ ============= ===========
Basic earnings per share:
Earnings from continuing operations $ .35 $ .51 $ .74 $ .79
Income (loss) from discontinued operations .10 (.10) (.13) (.08)
------------ ------------ ------------- -----------
Net income $ .45 $ .41 $ .61 $ .71
============ ============ ============= ===========
Diluted earnings per share:
Earnings from continuing operations $ .34 $ .50 $ .71 $ .76
Income (loss) from discontinued operations .09 (.10) (.13) (.07)
------------ ------------ ------------- -----------
Net income $ .43 $ .40 $ .58 $ .69
============ ============ ============= ===========
The diluted weighted average shares outstanding for the six months ended June
30, 2004 has been restated to conform to the current year presentation. This
change resulted in an increase in the diluted shares of 5,015 and had no impact
on the Company's diluted earnings per share for the six months ended June 30,
2004.
NOTE 3. TRANSACTIONS WITH RELATED PARTIES:
Through one of its wholly-owned subsidiaries, 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
8
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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 June 30, 2005 and 2004, total asset-based fees and
reimbursements earned were $14,896 and $15,403, respectively. For the six-month
periods ended June 30, 2005 and 2004, total asset-based fees and reimbursements
earned were $30,327 and $29,695, 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 June 30, 2005 and 2004, the Company earned transaction fees and
reimbursement allowances of $9,817 and $17,133, respectively. For the six-month
periods ended June 30, 2005 and 2004, the Company earned transaction fees of
$20,524 and $20,093, 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 $2,554 and $869,
respectively, for the three-month period ended June 30, 2005 and of $6,716 and
$1,506, respectively, for the six-month period ended June 30, 2005.
CPA(R):16-Global did not incur fees during the three and six-month periods ended
June 30, 2004. Since the inception of CPA(R):16-Global, the Company has not
recognized $14,251 and $2,325 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. If these fees become payable,
the Company may elect to receive them as either restricted shares or cash in
accordance with the advisory agreement.
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
SEC. In connection with earning asset management and performance fees, the
Company may elect to receive restricted shares of common stock in the CPA(R)
REITs (see Note 3).
As of June 30, 2005, the Company's ownership in the CPA(R) REITs is as follows:
SHARES % OF OUTSTANDING SHARES
--------- -----------------------
CPA(R):12 1,521,972 4.73%
CPA(R):14 2,830,827 4.06%
CPA(R):15 2,672,568 2.09%
CPA(R):16-Global 134,700 0.24%
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 method investees is summarized as
follows:
JUNE 30, 2005 DECEMBER 31, 2004
------------- ----------------
Assets (primarily real estate) $ 5,512,867 $ 5,189,736
Liabilities (primarily mortgage notes payable) (2,251,782) (2,372,468)
------------ -------------
Partners' capital and shareholders' equity $ 3,261,085 $ 2,817,268
============ =============
Company's share of equity investees' net assets $ 121,306 $ 110,379
============ =============
9
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
------------ ----------
Revenues (primarily rental income and interest income from direct financing leases) $ 218,926 $ 180,610
Expenses (primarily depreciation and property expenses) (93,220) (75,314)
Other interest income 6,817 3,984
Minority interest in income (9,156) (7,102)
Income from equity investments 24,330 23,007
(Loss) gain on sales of real estate, derivatives and foreign currency transactions, net (2,036) 1,008
Interest expense (83,756) (64,552)
------------ ----------
Income from continuing operations 61,905 61,641
(Loss) income from discontinued operations (1,921) 340
------------ ----------
Net income $ 59,984 $ 61,981
============ ==========
Company's share of net income from equity investments $ 2,565 $ 2,631
============ ==========
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.
Intangibles are summarized as follows:
JUNE 30, 2005 DECEMBER 31, 2004
------------- ------------------
Amortized intangible assets:
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (36,380) (34,089)
------------ ------------
23,435 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 (4,130) (1,521)
------------ ------------
18,191 20,800
------------ ------------
Unamortized goodwill and indefinite-lived intangible assets:
Trade name 3,975 3,975
Goodwill 63,607 63,607
------------ ------------
$ 109,208 $ 114,108
============ ============
Below-market rent $ (2,009) $ (2,009)
Less: accumulated amortization 121 45
------------ ------------
$ (1,888) $ (1,964)
============ ============
Net amortization of intangibles was $2,412 and $1,687 for the three-month
periods ended June 30, 2005 and 2004, respectively, and $4,824 and $3,376 for
the six-month periods ended June 30, 2005 and 2004, respectively.
Based on the intangibles recorded through June 30, 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
10
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In March 2005, the Company received notification from the lessee of its Amberly
Village, Ohio and Berea, Kentucky properties, that the lessee was exercising its
existing option to purchase both properties, at fair value, to be completed
pursuant to the terms of the agreement. Fair value is to be determined pursuant
to an appraisal process in accordance with the terms of the lease agreement
between the Company and the lessee-whereby each party obtains its own appraisal
and if the parties cannot agree on the properties fair value than a third
appraisal be obtained. In connection with this transaction, in the three month
period ended March 31, 2005, the Company recognized a noncash impairment charge
of $8,872, as the estimated fair value of the properties estimated by management
was lower than their carrying value. As a result of the Company obtaining its
own appraisal of these properties, the Company recorded an additional noncash
impairment charge of $5,819 in its quarter ended June 30, 2005 for a total
impairment charge on these properties during the six months ended June 30, 2005
of $14,691. The Company has been informed that the tenant's appraisal is
substantially lower than that obtained by the Company, and as such, it is likely
that a third appraisal will be required in accordance with the lease agreement.
Both parties are continuing the process of negotiating the fair value of these
properties in accordance with the appraisal process.
In connection with entering into a commitment to sell a property in Livonia,
Michigan for $8,500 during the first quarter of 2005, the Company recognized a
non-cash impairment charge of $800 as the property's estimated fair value was
lower than its carrying value. The $8,500 proposed transaction was terminated
and in June 2005 the Company entered into a letter of intent with a third party
to sell this property for $8,000. As the proposed sale proceeds net of closing
costs are below the property's current carrying value, the Company recorded an
additional non-cash impairment charge of $330 in its quarter ended June 30, 2005
for a total impairment charge on this property during the six months ended June
30, 2005 of $1,130. The Company had previously recorded an impairment charge of
$7,500 in a prior year related to this property.
These properties are all classified as held for sale in the accompanying
financial statements (see Note 7).
2004 -IMPAIRMENT CHARGES AND LOAN LOSS
As a result of entering into a commitment to sell a property in Toledo, Ohio in
June 2004, the Company recognized an impairment charge for the three and
six-month periods ended June 30, 2004 of $4,700. The charge was based on the
property's sales price, less estimated costs to sell. The property was sold in
July 2004.
In February 2003, the Company sold its property in Winona, Minnesota to the
lessee for $8,550, consisting of cash of $6,300 and notes receivable with an
estimated fair value of $2,250. During the quarter ended June 30, 2004,
installment payments due under the notes were not paid. Based on the Company's
assessment of the recoverability of the note, it wrote off the entire $2,250 as
a loan loss.
The Company recognized impairment charges of $950 on other properties during the
three and six-month periods ended June 30, 2004. Of this total, $550 relates to
impairment charges for properties held for use.
NOTE 7. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS:
2005 DISPOSITIONS
In May 2005, the Company sold its properties in Dubuque, Iowa, Portsmouth, New
Hampshire and Penfield, New York to a third party for $28,863, net of closing
costs and recognized a gain on the sale of $9,151.
In March 2005, 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 2005, the Company also sold its Frankenmuth, Michigan property to a
third party for $1,544, net of selling costs and recognized a loss on the sale
of $57. A non-cash charge of $1,000 was previously recorded in December 2004 to
write down the property value to the estimated net sales proceeds.
In February 2005, 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. A non-cash charge of $582 was previously recorded in a prior year to write
down the property value to the estimated net sales proceeds.
ASSETS HELD FOR SALE
In connection with receiving notification from the lessee of property in Amberly
Village, Ohio and Berea, Kentucky, that the lessee exercised its option to
purchase both properties, the Company has recorded non-cash impairment charges
totaling $14,691 during the
11
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
the six months ended June 30, 2005 (see Note 6 for details). 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 connection with entering into a commitment to sell a property in Livonia,
Michigan, the Company has recorded non-cash impairment charges totaling $1,130
during the first six months of the year. The commitment provides for a 75 day
due diligence period for the buyer. As such, there is no assurance that the
proposed sale will be completed (see Note 6). In a prior year, the Company
recorded a non-cash impairment charge of $7,500 related to this property.
In March 2005, the Company entered into a contract to sell its property in
Travelers Rest, South Carolina to a third party for $2,550. The Company
currently expects to complete this transaction within the next 12 months and
expects to record a gain on this sale of approximately $1,000. Noncash charges
totaling $2,507 were previously recorded in prior years to write down the
property value to the estimated net sales proceeds.
The Company approved a plan of disposition for its property in Duffield,
Virginia during the quarter ended March 31, 2005. The Company is 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 property's
current estimated fair value.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations, impairment charges and gain or
loss on sales of real estate for properties held for sale are reflected in the
accompanying financial statements as Discontinued Operations for all periods
presented and are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2005 2004 2005 2004
-------- -------- --------- ---------
REVENUES:
Rental income $ 6 $ 441 $ 68 $ 923
Interest income from direct financing leases 903 1,454 2,326 2,951
Revenues of other business operations 1,907 1,917 3,601 3,681
Other income 8 23 45 49
-------- -------- --------- ---------
2,824 3,835 6,040 7,604
-------- -------- --------- ---------
EXPENSES:
Depreciation - 401 274 796
Property expenses 493 439 872 1,361
Operating expenses of other business operations 1,587 1,681 3,083 3,315
-------- -------- --------- ---------
2,080 2,521 4,229 5,472
-------- -------- --------- ---------
Gain before impairment charge and gain on sale 744 1,314 1,811 2,132
Impairment charge on properties held for sale (6,149) (5,100) (15,821) (5,100)
Gain on sale of real estate 9,139 - 9,119 -
-------- -------- --------- ---------
Income (loss) from discontinued operations $ 3,734 $ (3,786) $ (4,891) $ (2,968)
======== ======== ========= =========
Depreciation is not recorded on properties held for sale. The effect of
suspending depreciation was $198 and $64 for the three months ended June 30,
2005 and 2004, respectively and $337 and $128 for the six months ended June 30,
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:
12
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30,
-------------------- --------------------
2005 2004 2005 2004
--------- -------- -------- --------
Net income as reported $ 16,933 $ 15,480 $ 22,788 $ 26,572
Add: Stock based compensation included in net income as reported,
net of related tax effects 526 702 1,029 1,309
Less: Stock based compensation determined under fair value based
methods for all awards, net of related tax effects (624) (847) (1,277) (1,648)
--------- -------- --------- --------
Pro forma net income $ 16,835 $ 15,335 $ 22,540 $ 26,233
========= ======== ======== ========
Earnings per common share as reported
Basic $ .45 $ .41 $ .61 $ .71
Diluted $ .43 $ .40 $ .58 $ .69
Pro forma earnings per common share
Basic $ .45 $ .41 $ .60 $ .70
Diluted $ .43 $ .40 $ .58 $ .68
For the six-month periods ended June 30, 2005 and 2004, the changes in unearned
compensation were as follows:
2005 2004
--------- -------
Beginning of period $ 5,366 $ 4,863
Awards of restricted stock 2,977 3,745
Forfeitures (39) (120)
Compensation expense (amortization of unearned compensation) (1,696) (2,153)
--------- -------
End of period $ 6,608 $ 6,335
========= =======
For the six-month periods ended June 30, 2005 and 2004, restricted shares of
$104 and $156, 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. Compensation expense
was reduced by $11 for the three-month period ended June 30, 2005 as a result of
a decrease in fair value. For the six-month period ended June 30, 2005, $244 was
incurred as compensation expense as a result of an increase in fair value. The
unearned compensation is being amortized over the vesting periods and $113 and
$575 has been amortized into compensation expense for the three-month periods
ended June 30, 2005 and 2004, respectively, and $226 and $702 for the
six-month-periods ended June 30, 2005 and 2004, respectively.
NOTE 9. SEGMENT REPORTING:
REAL ESTATE OPERATIONS. This business segment includes the operations of
properties under operating leases, 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 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.
13
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
A summary of comparative results of these business segments is as follows:
THREE MONTHS ENDED JUNE 30: MANAGEMENT REAL ESTATE (3) OTHER (1) TOTAL COMPANY
- ------------------------------------ ---------- --------------- ---------- -------------
Revenues:
2005 $ 24,713 $ 17,787 $ 21 $ 42,521
2004 32,535 17,159 263 49,957
Operating expenses:
2005 $ (13,744) $ (7,225) $ - $ (20,969)
2004 (15,085) (5,373) - (20,458)
Interest expense:
2005 $ - $ (4,195) $ - $ (4,195)
2004 - (3,370) - (3,370)
Other, net (2):
2005 $ 417 $ 524 $ - $ 941
2004 965 904 - 1,869
Provision for income taxes:
2005 $ (4,727) $ (372) $ - $ (5,099)
2004 (8,408) (324) - (8,732)
Income from continuing operations:
2005 $ 6,659 $ 6,519 $ 21 $ 13,199
2004 10,007 8,996 263 19,266
SIX MONTHS ENDED JUNE 30:
Revenues:
2005 $ 50,851 $ 35,611 $ 55 $ 86,517
2004 49,787 33,461 431 83,679
Operating expenses:
2005 $ (28,033) $ (13,514) $ - $ (41,547)
2004 (26,824) (12,476) - (39,300)
Interest expense:
2005 $ - $ (8,508) $ - $ (8,508)
2004 (35) (6,933) - (6,968)
Other, net (2):
2005 $ 1,284 $ 885 $ - $ 2,169
2004 1,951 2,315 - 4,266
Provision for income taxes:
2005 $ (10,526) $ (426) $ - $ (10,952)
2004 (11,414) (723) - (12,137)
Income from continuing operations:
2005 $ 13,576 $ 14,048 $ 55 $ 27,679
2004 13,465 15,644 431 29,540
AS OF:
Total assets as of:
June 30, 2005 $ 253,972 $ 708,439 $ - $ 962,411
December 31, 2004 237,889 766,184 9,466 1,013,539
Total long-lived assets as of:
June 30, 2005 $ 89,753 $ 671,733 $ - $ 761,486
December 31, 2004 83,018 740,895 9,140 833,053
(1) Primarily consists of the Company's other business operations, which
includes the Los Angeles United School District build-to-suit development
project.
(2) Includes other interest income, minority interest, income from equity
investments and gains and losses on sales and foreign currency
transactions.
(3) Includes two investments in France that accounted for lease revenues
(rental income and interest income in direct financing leases) of $2,081
and $1,874 for the three months ended June 30, 2005 and 2004,
respectively, lease revenues of $4,142 and $3,773 for the six months ended
June 30, 2005 and 2004, respectively, income from equity investments of
$203 and $134 for the three months ended June 30, 2005 and 2004,
respectively and income from equity investments of $417 and $307 for the
six months ended June 30, 2005 and 2004, respectively. These investments
also accounted for long-lived assets as of June 30, 2005 and December 31,
2004 of $67,787 and $76,332, respectively.
14
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES:
15
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In March 2004, following a broker-dealer examination of Carey Financial, LLC
("Carey Financial"), the Company's wholly-owned broker-dealer subsidiary, by the
staff of the SEC, Carey Financial received a letter from the staff of the SEC
alleging certain infractions by Carey Financial of the Securities Act of 1933,
the Securities Exchange Act of 1934, the rules and regulations thereunder and
those of the National Association of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of
CPA(R):15, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the
Commission pursues these allegations, or if affected CPA(R):15 investors bring a
similar private action, CPA(R):15 might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
CPA(R):15, Carey Financial would be required to return to CPA(R):15 the
commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part
of any action against the Company, the SEC could seek disgorgement of any such
commissions or different or additional penalties or relief, including without
limitation, injunctive relief and/or civil monetary penalties, irrespective of
the outcome of any rescission offer. The Company cannot predict the potential
effect such a rescission offer or SEC action may ultimately have on the
operations of Carey Financial or the Company. There can be no assurance that the
effect, if any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed CPA(R):15
for the interest cost of advancing the commissions that were later recovered by
CPA(R):15 from the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with CPA(R ):15 and other REITs managed by the Company, as well as
the disclosure of such arrangements. At that time the Company and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Company, Carey Financial, and REITs managed by the
Company to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Company and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Company, Carey Financial or any Company-managed REIT in connection with the
distribution of Company-managed REITs or the retention or maintenance of REIT
assets. Other information sought by the SEC includes information concerning the
accounting treatment and disclosure of any such payments, communications with
third parties (including other REIT issuers) concerning revenue sharing, and
documents concerning the calculation of underwriting compensation in connection
with the REIT offerings under applicable NASD rules.
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 CPA(R):10, CIP(R), CPA(R):12, CPA(R):14
and CPA(R):15), in addition to selling commissions and selected dealer fees.
Among the payments reflected on documents produced to the Staff were certain
payments, aggregating in excess of $9,400, made to a broker-dealer which
distributed shares of the REITs. The expenses associated with these payments,
which were made during the period from early 2000 through the end of 2003, were
borne by and accounted for on the books and records of the REITs. Of these
payments, CPA(R):10 paid in excess of $40; CIP(R) paid in excess of $870;
CPA(R):12 paid in excess of $2,400; CPA(R):14 paid in excess of $4,900; and
CPA(R):15 paid in excess of $1,200. In addition, other smaller payments by the
REITs to the same and other broker-dealers have been identified aggregating less
than $1,000.
The Company and Carey Financial are cooperating fully with this investigation
and have provided information to the Enforcement Staff in response to the
subpoenas and requests. Although no formal regulatory action has been initiated
against the Company or Carey Financial in connection with the matters being
investigated, the SEC may pursue such an action against either or both of them.
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 and the magnitude of that effect would not necessarily be
limited to the payments described above but could include other payments and
civil monetary penalties.
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 SEC 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.
16
W. P. CAREY & CO. LLC
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share amounts)
The following discussion and analysis of financial condition and results of
operations of W. P. Carey & Co. LLC contain forward-looking statements and
should be read in conjunction with the consolidated financial statements and
notes thereto as of June 30, 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/A 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/A 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 related 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
substantial investment of the offering proceeds. 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.
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)
HOW MANAGEMENT EVALUATES RESULTS OF OPERATIONS
Management evaluates our results with a primary focus on increasing and
enhancing the value, quality and amount of the assets under management by our
management services operations and seeking to increase value in our real estate
operations through focusing efforts on underperforming assets through re-leasing
efforts, including negotiation of lease renewals, or selectively selling such
assets. The ability to increase assets under management by structuring
acquisitions on behalf of the CPA(R) REITs is affected, among other things, by
the CPA(R) REITs ability to raise capital and our ability to identify
appropriate investments.
Management's evaluation of operating results includes our ability to generate
necessary cash flow in order to fund distributions 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 resulting from
short-term foreign currency fluctuations when evaluating our ability to fund
distributions. Management's evaluation of our potential for generating cash flow
includes our assessment of the long-term sustainability 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 six-month periods ended June 30, 2005 and 2004 is as
follows:
2005 2004
-------- -------
Rental income from operating leases $ 26,936 $21,375
Interest income from direct financing leases 7,703 7,634
--------- -------
$ 34,639 $29,009
========= =======
For the six months ended June 30, 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) $ 2,414 $ 2,193
Dr Pepper Bottling Company of Texas 2,175 2,155
Detroit Diesel Corporation 2,079 2,079
Quebecor Printing, Inc. (c) 1,535 1,326
Orbital Sciences Corporation (c) 1,511 1,328
Titan Corporation (b) 1,449 -
America West Holdings Corp. 1,419 1,419
AutoZone, Inc. 1,156 1,170
Sybron Dental Specialties Inc. 885 885
Unisource Worldwide, Inc. 851 853
BE Aerospace, Inc. 790 790
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of Lowe's Companies Inc. (c) 787 657
Lucent Technologies, Inc. (b) 759 -
Sprint Spectrum, L.P. 712 712
CSS Industries, Inc. 695 820
AT&T Corporation 630 630
EnviroWorks, Inc. (b) 627 -
Swat-Fame, Inc. (c) 618 505
United States Postal Service 617 617
BellSouth Telecommunications, Inc. 612 612
Omnicom Group Inc. (b) 570 -
Brodart, Co. 530 644
United Space Alliance, LLC 527 506
Lockheed Martin Corporation 519 555
Anthony's Manufacturing Company, Inc. 516 510
Other (a) (b) (d) 9,656 8,043
------- -------
$34,639 $29,009
======= =======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
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)
(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 $862 and $783 as of June 30, 2005 and 2004, respectively.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 22.5% to 50%. For the
six months ended June 30, 2005 and 2004, our share of net lease revenues in the
following lease obligations was as follows:
2005 2004
------ ------
Carrefour France, SA (a) $1,856 $1,684
Federal Express Corporation 1,343 1,329
Checkfree Holdings Corporation Inc 1,124 1,090
Sicor, Inc. (b) 836 -
Information Resources, Inc. 822 822
Hologic, Inc. 568 568
Childtime Childcare, Inc 236 236
Titan Corporation (b) - 265
------ ------
$6,785 $5,994
====== ======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) We acquired the remaining interest in this property in connection with the
September 2004 acquisition of CIP(R) real estate interests.
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 in 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 of 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 currently 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
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)
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.
Companies in automotive related industries (manufacturing, parts, services,
etc.) are currently experiencing a challenging environment, which has resulted
in several companies filing for bankruptcy protection recently. We currently
have several auto industry related tenants in the portfolios we manage, all of
which are current on their obligations. Some of these tenants in the CPA(R)
REITs that we manage have filed voluntary petitions of bankruptcy in recent
months. If conditions in this industry worsen, additional tenants may file for
bankruptcy protection and may disaffirm their leases as part of their bankruptcy
reorganization plans. The net result of these trends may have an impact on our
management income from affiliates.
For the six months ended June 30, 2005, cash flows generated from operations and
equity investments were sufficient to fund dividends paid. During this period we
used a portion of our cash reserves to pay installments on our 2005 estimated
taxes and leasing commissions for two properties that were previously vacant.
Additionally, for 2005 we 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
versus cash.
Current Developments Include:
INVESTMENT ACTIVITY - During the quarter ended June 30, 2005, we structured
$261,532 in investments on behalf of the CPA(R) REITs. Approximately 50% of
these investments were made on behalf of CPA(R):16 - Global, with the remainder
made on behalf of CPA(R):15. Additionally, 63% of investments structured were
for international transactions.
DISPOSITIONS - In May 2005, we sold three properties in Dubuque, Iowa;
Portsmouth, New Hampshire and Rochester, New York to a third party for $28,863,
net of closing costs and recognized a gain on the sale of $9,151.
IMPAIRMENT CHARGES - Non-cash impairment charges totaling $6,149 were recorded
during the quarter ended June 30, 2005 related to properties held for sale in
Berea, KY; Amberley Village, OH and Livonia, MI (see Note 6 in the accompanying
financial statements and Proposed Dispositions and Results of Operations below).
2005 IMPAIRMENT CHARGE ACTIVITY:
KY AND OH
PROPERTIES MI PROPERTY
---------- -----------
First quarter 2005 impairment charge $ 8,872 $ 800
Second quarter 2005 impairment charge 5,819 330
------- ------
Total 2005 impairment charges (year to date) $14,691 $1,130
======= ======
Carrying value as of June 30, 2005 $18,700 $7,750
======= ======
CPA(R):16 - GLOBAL PUBLIC OFFERING - We are continuing to evaluate investments
to utilize CPA(R):16 - Global's existing cash balances raised from its initial
public offering. During the quarter ended June 30, 2005, we completed
transactions totaling approximately $128,000 on CPA(R):16 - Global's behalf. We
currently anticipate that sales of shares in CPA(R):16 - Global's second
offering will commence before the end of 2005.
DIVIDEND - In June 2005, our board of directors approved and increased the
second quarter dividend to $.446 per share payable in July 2005 to shareholders
of record as of June 30, 2005.
RESULTS OF OPERATIONS
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)
We evaluate our results from operations by major business segment as follows:
REAL ESTATE OPERATIONS. This business segment includes the operations of
properties under operating lease, properties under direct financing leases, real
estate under construction and development, assets held for sale and equity
investments in ventures accounted for under the equity method which are engaged
in these activities. Because of our legal structure, these operations are not
generally subject to federal income taxes; however, they may be subject to
certain state, local and foreign taxes.
MANAGEMENT SERVICES OPERATIONS. This business segment includes management
operations on a fee for services basis predominately from the CPA(R) REITs
pursuant to 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 JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2005 2004 CHANGE 2005 2004 CHANGE
-------- -------- ------- -------- -------- -------
Lease revenues $ 17,374 $ 14,522 $ 2,852 $ 34,639 $ 29,009 $ 5,630
Other operating income 413 2,637 (2,224) 972 4,452 (3,480)
-------- -------- ------- -------- -------- -------
Total revenue 17,787 17,159 628 35,611 33,461 2,150
-------- -------- ------- -------- -------- -------
Depreciation and amortization 3,792 2,253 1,539 7,585 4,514 3,071
General and administrative
expenses 1,801 1,115 686 2,634 1,924 710
Property expenses 1,632 1,455 177 3,295 3,238 57
Impairment charges and loan
losses -- 550 (550) -- 2,800 (2,800)
-------- -------- ------- -------- -------- -------
Total Operating expenses 7,225 5,373 1,852 13,514 12,476 1,038
-------- -------- ------- -------- -------- -------
Other interest income 204 43 161 249 113 136
Minority interest in (income)
loss (149) (29) (120) (306) (120) (186)
Income from equity investments 782 932 (150) 1,605 1,915 (310)
Interest expense (4,195) (3,370) (825) (8,508) (6,933) (1,575)
(Loss) gain on foreign currency
transactions (313) (42) (271) (663) 407 (1,070)
-------- -------- ------- -------- -------- -------
Income from continuing
operations before income
taxes 6,891 9,320 (2,429) 14,474 16,367 (1,893)
Provision for income taxes (372) (324) (48) (426) (723) 297
-------- -------- ------- -------- -------- -------
Income from continuing
operations 6,519 8,996 (2,477) 14,048 15,644 (1,596)
-------- -------- ------- -------- -------- -------
Income (loss) from discontinued
operations 3,734 (3,786) 7,520 (4,891) (2,968) (1,923)
-------- -------- ------- -------- -------- -------
Net income $ 10,253 $ 5,210 $ 5,043 $ 9,157 $ 12,676 $(3,519)
======== ======== ======= ======== ======== =======
LEASE REVENUES
For the comparable quarters ended June 30, 2005 and 2004, lease revenues (rental
income and interest income from direct financing leases) increased by $2,852
primarily due to $2,774 in revenue from properties acquired from CIP(R) in
September 2004. Rent increases, rent from new tenants at existing properties and
lease expirations also affected lease revenues. 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.
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)
For the comparable six-month periods ended June 30, 2005 and 2004, lease revenue
increased $5,630 primarily due to the factors described above. Revenue from
properties acquired from CIP(R) accounted for $5,414 of the increase. Rent
increases and rent from new tenants at existing properties contributed $924
whereas a lease expiration had a negative impact of $537.
Current lease activity -
- Northern Tube, Inc., the lessee of property in Pinconning, MI that
generates annual lease revenues of $255, filed a voluntary petition
of bankruptcy in June 2005. Northern Tube, which is current on all
its lease obligations, has not yet notified us whether it intends to
affirm its lease.
- In July 2005, Excel Communications, Inc., which filed for bankruptcy
protection during 2004, notified us that they plan to reject their
lease by the end of September 2005. Annual lease revenue from this
property is approximately $580. We have begun efforts to re-lease
this property.
- During the first six months of 2005, several tenants with combined
annual rent approximating $5,100 and leases that expire during the
upcoming twelve months have renewed their leases early and on
similar financial terms as their original leases.
- We entered into a lease with Werner Co. in May 2005, effective in
August, for our property in Erlanger, Kentucky. The lease provides
for initial annual rent of $1,120 with annual stated increases. 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 three and six-month
periods ended June 30, 2005 and 2004, the decrease in other operating income is
primarily due to the receipt of bankruptcy claim distributions from former
lessees in 2004 of $2,144 and $3,718, respectively.
DEPRECIATION AND AMORTIZATION
For the comparable three and six-month periods ended June 30, 2005 and 2004,
depreciation and amortization expense increased by $1,539 and $3,071,
respectively. The increase is primarily a result of depreciation and
amortization expense recognized on the properties acquired from CIP(R) in
September 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
For the comparable three and six-month periods ended June 30, 2005 and 2004,
general and administrative expenses increased by $686 and $710, respectively.
The increases are primarily a result of an increase in professional fees and an
increase in our share of rental expenses under an office-sharing agreement. The
increase in professional fees for the three and six-month periods ended June 30,
2005 of $574 and $421, respectively, was primarily related to ongoing securities
law compliance, including the Sarbanes-Oxley Act, and the ongoing SEC
investigation.
IMPAIRMENT CHARGES AND LOAN LOSSES
We did not incur any impairment charges or loan losses with respect to
continuing operations for the three and six-month periods ended June 30, 2005.
Impairment charges and loan losses recorded in the comparable prior year periods
relate to the write-off of $2,250 note receivable in the first quarter of 2004
and an impairment charge of $550 in the second quarter of 2004 to writedown a
property's carrying value to its estimated fair value.
INTEREST EXPENSE
For the comparable quarters ended June 30, 2005 and 2004, interest expense
increased $825, primarily due to an increase of $826 related to higher average
outstanding borrowings and higher variable interest rates related to our credit
facility and $448 related to debt balances outstanding on the properties
acquired from from CIP(R). These increases were partially offset by lower
interest as a result of paying off mortgage balances and scheduled principal
payments. Although we reduced our outstanding credit facility balance by $25,000
as of June 30, 2005, average outstanding borrowings were greater in the quarter
ended June 30, 2005 versus the comparable prior year period.
For the comparable six-month periods ended June 30, 2005 and 2004, interest
expense increased $1,575, primarily due to the same factors described above.
Higher average outstanding borrowings and higher variable interest rates related
to our credit facility resulted in an increase of $1,602. Debt balances on the
properties acquired from CIP(R) contributed $902 of the increase. As described
above, these increases were partially offset by lower interest as a result of
paying off mortgage balances and scheduled principal payments.
INCOME FROM CONTINUING OPERATIONS
For the comparable quarters ended June 30, 2005 and 2004, income from continuing
operations decreased $2,477. Income from continuing operations for the
comparable prior year quarter benefited by $2,087 as a result of prior year
transactions (receipt of bankruptcy claim distributions partially offset by an
impairment charge) that were not repeated in the current quarter. Income
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)
generated from real estate operations, which benefited from the CIP(R)
acquisition in September 2004, was offset by the impact of increased foreign
currency losses due to the strengthening of the U. S. Dollar against the Euro
and increases in general and administrative expenses.
For the comparable six-month periods ended June 30, 2005 and 2004, income from
continuing operations decreased $1,596 primarily due to the same factors as
described above. Income from continuing operations for the comparable prior year
quarter benefited by $680 as a result of prior year transactions that were not
repeated in the current period. Foreign currency losses increased $1,070 for the
current year period as compared to the comparable prior year period, again due
to the strengthening of the U. S. Dollar against the Euro.
DISCONTINUED OPERATIONS
For the quarter ended June 30, 2005, we earned income from discontinued
operations of $3,734 primarily due to the recognition in May 2005 of a gain of
$9,151 on the sale of three facilities in Dubuque, IA; Portsmouth, NH and
Rochester, NY, which was partially offset by non-cash impairment charges
totaling $6,149 for properties in Berea, KY; Amberley Village, OH and Livonia,
MI. In 2004, we incurred a loss on operations from discontinued operations
primarily due to the recognition of non-cash charges totaling $5,100, the
majority of which related to a property in Toledo, OH.
For the six-month period ended June 30, 2005, we incurred a loss from
discontinued operations of $4,891 primarily due to the recognition of non-cash
impairment charges totaling $15,821 on the Berea, KY; Amberley Village, OH and
Livonia, MI properties, which was partially offset by the $9,151 gain on sale as
described above. In 2004, we incurred a loss from discontinued operations
primarily due to the recognition of non-cash impairment charges as described
above.
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)
MANAGEMENT SERVICES OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2005 2004 CHANGE 2005 2004 CHANGE
-------- -------- ------- -------- -------- -------
Management income from
affiliates $ 24,713 $ 32,535 $(7,822) $ 50,851 $ 49,787 $ 1,064
-------- -------- ------- -------- -------- -------
Depreciation and amortization 1,327 1,818 (491) 2,638 3,627 (989)
General and administrative 12,417 13,267 (850) 25,395 23,197 2,198
-------- -------- ------- -------- -------- -------
Total operating expenses 13,744 15,085 (1,341) 28,033 26,824 1,209
-------- -------- ------- -------- -------- -------
Income from continuing
operations before other
interest income, minority
interest, equity income,
interest expense and taxes 10,969 17,450 (6,481) 22,818 22,963 (145)
Other interest income 620 670 (50) 1,417 1,280 137
Minority interest in income (618) (68) (550) (1,093) (45) (1,048)
Income from equity investments 415 363 52 960 716 244
Interest expense - - - - (35) 35
-------- -------- ------- -------- -------- -------
Income from continuing
operations before taxes 11,386 18,415 (7,029) 24,102 24,879 (777)
Provision for income taxes (4,727) (8,408) 3,681 (10,526) (11,414) 888
-------- -------- ------- -------- -------- -------
Income from continuing
operations $ 6,659 $ 10,007 $(3,348) $ 13,576 $ 13,465 $ 111
======== ======== ======= ======== ======== =======
MANAGEMENT INCOME FROM AFFILIATES
For the comparable quarters ended June 30, 2005 and 2004, management income from
affiliates decreased $7,822 primarily due to a reduction in transaction fees
totaling $7,223 and a reduction in marketing reimbursement costs of $2,145,
which was partially offset by increased asset management and performance fees of
$1,566 as a result of the increase in assets under management.
Transaction fees included fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. We structured $261,532 of acquisitions for the
quarter ended June 30, 2005 as compared with $430,000 in the comparable prior
year quarter. The comparable prior year quarter included the $312,445 U-Haul
transaction. Approximately 50% of acquisitions structured in the quarter ended
June 30, 2005 related to CPA(R):16-Global, which commenced operations in 2004,
as compared to 33% in the comparable prior year quarter. The increase in the
percentage of investments structured on behalf of CPA(R):16-Global resulted in a
larger deferral of a portion of fees until CPA(R):16-Global's preferred return
is achieved. Marketing reimbursement costs were lower due to CPA(R):16-Global's
termination of its initial public offering in March 2005.
For the comparable six-month periods ended June 30, 2005 and 2004, management
income from affiliates increased $1,064 primarily due to an increase in current
transaction fees of $3,182, including an increase in acquisition expense
allowance fees of $1,334 related to CPA(R):16-Global and an increase in asset
management and performance fees of $3,474. Current transaction fees and asset
management and performance fees increased as a result of an increase in
investment volume and an increase in our assets under management. For the
six-months ended June 30, 2005, we structured $626,578 of acquisitions as
compared to $494,000 in the comparable prior year period. These increases were
partially offset by a reduction in marketing reimbursement costs of $2,864, a
reduction in transaction fees due to charging a reduced fee on an acquisition
completed on behalf of CPA(R):16-Global and lower deferred acquisition fees
because CPA(R):16-Global has not yet met its performance criterion. For the
six-months ended June 30, 2005, 66% of the total investment volume related to
CPA(R):16-Global as compared to 30% in the comparable prior year period.
Based on assets under management of the CPA(R) REITs as of June 30, 2005,
annualized management and performance fees under the advisory agreements are
expected to approximate $50,707. 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 CPA(R) REIT funds.
Acquisition activity is subject to fluctuations. We continue to face increased
competition for the acquisition of commercial and industrial properties
domestically. 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. The expansion of our international business has
helped to offset the increased competition for domestic properties; however, we
are also beginning to experience increased competition for international
transactions as well. For the three months ended June 30, 2005, international
investments accounted for $164,000 of the total investment volume, as compared
to $32,000 for the comparable prior year quarter. For the six months ended June
30, 2005, international investments accounted for $301,000 of the total
investment volume, as compared to $44,000 for the comparable prior year period.
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)
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 June 30, 2005, resulting in $2,554 in transaction fees
and $869 in performance fees not being recognized by us for the quarter ended
June 30, 2005. For the six months ended June 30, 2005, we have not recognized
transaction fees of $6,716 and performance fees of $1,506, as a result of
CPA(R):16-Global not meeting its performance criterion. Since the inception of
CPA(R):16-Global, we have not recognized $14,251 and $2,325 of acquisition and
asset based 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
June 30, 2005, the cumulative distribution return for CPA(R):16-Global was
5.06%. Based on management's current assessment, CPA(R):16-Global is expected to
meet the cumulative performance criterion during 2006, at which time, we would
record 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 we currently expect that CPA(R):16-Global will represent a significant
portion of our total 2005 acquisition volume relative to the other CPA(R) REITs
and its performance criterion are not expected to be met during 2005,
transaction based revenue for 2005 would likely moderate or decrease based on a
similar investment volume.
GENERAL AND ADMINISTRATIVE EXPENSES
For the comparable quarters ended June 30, 2005 and 2004, general and
administrative expenses decreased $850 primarily due to a reduction in personnel
costs of $2,839, which was partially offset by increased professional fees of
$1,347 as well as increases in business development expenses which were
primarily due to increased advertising. A significant portion of personnel costs
is directly related to CPA(R) REIT transaction volume, which decreased by
$168,544 over the comparable prior year quarter. Personnel costs were also lower
as a result of CPA(R):16-Global's termination of its initial offering in March
2005 and lower noncash charges related to equity plans. The increase in
professional fees is primarily related to ongoing securities law compliance,
including the Sarbanes-Oxley Act and the ongoing SEC investigation.
For the comparable six-month periods ended June 30, 2005 and 2004, general and
administrative expenses increased $2,198 primarily due to increases in
professional fees of $2,396 and business development expenses of $635 as
described above. These increases were partially offset by a reduction in
personnel costs. The reduction in personnel costs is primarily the result of
CPA(R):16-Global's termination of its initial offering in March 2005 as well as
lower noncash charges related to equity plans.
MINORITY INTEREST IN INCOME
For the three and six-month periods ended June 30, 2005, minority interest in
income increased as compared to the comparable prior year periods, primarily as
a result of the increase in income generated from our majority owned and
consolidated subsidiary, W. P. Carey International LLC ("WPCI"), whose income
increased primarily due to its increased acquisition activity. For both the
three and six month periods ended June 30, 2005, international investments
represented a larger portion of total investments than in the comparable prior
year periods.
PROVISION FOR INCOME TAXES
For the comparable quarters ended June 30, 2005 and 2004, the provision for
income taxes decreased $3,681, primarily due to a lower effective tax rate for
2005 as compared to 2004. This decrease is primarily due to a higher effective
tax rate in 2004 as a result of significant permanent differences and higher
apportionment of income to certain state/local jurisdictions with higher total
taxes in 2004.
For the comparable six-month periods ended June 30, 2005 and 2004, the provision
for income taxes decreased $888, primarily due to the factors described above.
Our effective tax rate was higher for the six months ended June 30, 2005 as
compared to the comparable prior year period as a result of significant
permanent differences and higher apportionment of income to certain state/local
jurisdictions with higher total taxes in 2004.
INCOME FROM CONTINUING OPERATIONS
For the comparable quarters ended June 30, 2005 and 2004, income from continuing
operations decreased by $3,348 primarily due to the decrease in management
income from affiliates of $7,822 partially offset by a reduction in the
provision for income taxes of $3,681. These variances are described above.
For the comparable six-month periods ended June 30, 2005 and 2004, income from
continuing operations increased by $111. Income benefited from increases in
management income and income from equity investments as well as from a reduction
in our provision for income taxes. These benefits were primarily offset by
increases in operating expenses. These variances are described above.
25
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
Other represents our build-to-suit development management agreement with the Los
Angeles United School District (the "District"). 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 has decreased for the three and six-month
periods ended June 30, 2005 versus the comparable prior year periods.
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 $15,112 as of June 30, 2005, a decrease
of $1,603 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. 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 six months
ended June 30, 2005 of $33,300 were sufficient to fund distributions to
shareholders of $33,294. During the six months ended June 30, 2005, we received
fees of $16,290 in connection with structuring acquisition transactions and fees
of $10,081, exclusive of that portion of such fees being satisfied by the CPA(R)
REITs through the issuance of their restricted 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 $25,412. 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 2005.
Cash flows from operating activities for the six months ended June 30, 2005,
were affected by several factors including the following:
- We prepaid approximately $4,700 more in estimated taxes as compared
to the comparable prior year period. Estimated tax payments in 2005
were higher as a result of increased estimated earnings for 2005
primarily due to an increase in assets under management and the
related vesting for tax purposes of restricted shares received in
consideration for performance fees.
- In 2005, we elected to receive all performance fees of the CPA(R)
REITs as well as the base asset management fees of CPA(R):12 and
the asset management fees payable by CPA(R):16-Global in restricted
shares versus cash. This election, combined with an increase in
performance fees over the prior year period, resulted in $3,828 less
in cash received from the CPA(R) REITS. We expect that this election
will continue to have a negative impact on cash flows for the
remainder of 2005 as the election as to which fees to collect in
cash or stock is annual.
- We paid approximately $710 in leasing commissions for two properties
that were previously vacant as well as for certain lease renewals.
Leasing these two vacant properties enabled us to eliminate carrying
costs on both properties and will generate additional cash flow.
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 the receipt of
transaction-related fees, the timing of certain compensation payments and
receipt of the annual installment of deferred acquisition fees and interest
thereon in the first quarter.
INVESTING ACTIVITIES - Our investing activities are generally comprised of real
estate transactions (purchases and sales) and capitalized property related
costs. During the six months ended June 30, 2005, we received net proceeds of
$32,604 related to the
26
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)
sales of several properties, including $28,863 in May from three properties and
$3,613 from the sales of three additional properties, two of which were vacant.
Over the past several years, we have pursued a strategy of selling certain of
our smaller properties as well as properties that do not generate significant
cash flow and require more intensive asset management services. During the six
months ended June 30, 2005, we have classified two 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 June 30, 2005 is
$1,185. We currently anticipate using cash from operations to fund the remaining
obligation.
During the six months ended June 30, 2005, we received distributions of $2,237
from the CPA(R) REITs, of which $1,278 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 current share holdings in the CPA(R) REITs, projected annual
distributions from these investments approximates $4,688.
FINANCING ACTIVITIES - During the six months ended June 30, 2005 we paid
distributions to shareholders of $33,294, an increase over the comparable prior
year period. In addition to paying distributions, our financing activities
included making scheduled and prepaying mortgage principal payments totaling
$9,509 and paying down the outstanding balance on our credit facility by
$25,000. Proceeds of $28,863 from the sale of properties were primarily used to
fund the repayment on our credit facility. Gross borrowings under the credit
facility were $41,000, which were used for several purposes in the normal course
of business, and repayments were $66,000. The majority of the repayments were
made using cash received in the normal course of business. We also raised $2,420
from the issuance of shares primarily through our Distribution Reinvestment and
Share Purchase Plan.
CASH RESOURCES
As of June 30, 2005, we had $15,112 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 $148,000 available as of June 30, 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 $335,240 as of June 30, 2005
and any proceeds may be used to finance future real estate purchases. We are
also evaluating other fixed-rate financing options, such as obtaining limited
recourse financing on our unleveraged properties. Any financing obtained may be
used for working capital objectives and may be used to pay down existing debt
balances.
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.
JUNE 30, 2005 DECEMBER 31, 2004
-------------------------- -----------------------
MAXIMUM OUTSTANDING MAXIMUM OUTSTANDING
AVAILABLE BALANCE AVAILABLE BALANCE
--------- ----------- --------- -----------
Credit Facility $225,000 $ 77,000 $ 225,000 $ 102,000
CASH REQUIREMENTS
During the next twelve months, cash requirements will include paying
distributions to shareholders, scheduled mortgage principal payments, including
mortgage balloon payments of $9,555 and $10,304 scheduled for January 2006 and
June 2006, respectively, 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. In July
2005, we obtained the commitment from a lender to refinance the $9,555 balloon
payment due in January, 2006 on similar financing terms to the original loan.
We have budgeted capital expenditures of up to approximately $2,359 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 approximately $954 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
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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)
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,
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.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of June 30, 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) $193,763 $ 28,867 $ 54,794 $63,392 $46,710
Unsecured note payable (1) 83,167 - 83,167 - -
Deferred acquisition fees to affiliate (1) 1,304 595 704 5 -
Development project (2) 2,000 2,000 - - -
Operating leases (3) 8,060 688 1,438 1,521 4,413
-------- -------- -------- ------- -------
$288,294 $ 32,150 $140,103 $64,918 $51,123
======== ======== ======== ======= =======
(1) Amounts are inclusive of principal and interest.
(2) In 2002, we entered into a commitment to capitalize a consolidated
subsidiary with $2,000 in connection with the District development
project.
(3) Operating lease obligations consist primarily of our share of minimum
rents payable under an office cost-sharing agreement with certain
affiliated entities. Such amounts are allocated among the entities based
on gross revenues and are therefore subject to fluctuation.
The Company has employment contracts with several senior executives. These
contracts provide for severance payments in the event of termination of
employment under certain conditions.
Amounts related to our foreign operations are based on the exchange rate of the
Euro as of June 30, 2005.
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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 June 30, 2005, $127,941 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 June 30, 2005 ranged from 6.11% to
10.125%. The interest rates on our variable rate debt as of June 30, 2005 ranged
from 3.97% 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 $ 3,584 $ 21,134 $ 23,468 $ 8,123 $ 35,041 $ 36,591 $127,941 $129,311
Weighted average interest rate 7.61% 7.22% 7.92% 7.69% 7.39% 7.22%
Variable rate debt $ 1,094 $ 2,440 $ 79,698 $ 2,979 $ 3,159 $ 34,563 $123,933 $123,933
Annual interest expense would increase or decrease on variable rate debt by
approximately $1,239 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 June 30, 2005 by approximately $3,867.
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 than 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 three-month periods ended June 30, 2005 and 2004, we recognized a loss of
$25 and a gain of $3, respectively, and for the six-month periods ended June 30,
2005 and 2004, we recognized a loss of $11 and a gain of $339, respectively,
from foreign currency transactions 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 three-month periods
ended June 30, 2005 and 2004, we recognized net unrealized foreign currency
losses of $456 and $46, respectively. The cumulative foreign currency
translation adjustment reflects a loss of $330. 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 acting 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 a company's 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 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 acting Chief Financial Officer
have conducted an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of June 30, 2005. Although we are
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W. P. CAREY & CO. LLC
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 Chief Executive Officer and
acting Chief Financial Officer have concluded that our disclosure controls and
procedures were not yet effective as of June 30, 2005.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the second quarter, we performed an assessment of the controls over
preparation and review of the estimated deferred taxes and began implementing
several additional controls to provide for a more comprehensive preparation and
review of this calculation. Controls being implemented include the addition of
new tax rate reconciliations, variance analyses and checklists. In addition, we
have added an additional level of management review. The implementation of these
remediation steps is ongoing and further steps in addition to those discussed
above, may be necessary to ensure full remediation of the material weakness.
Except for the items 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.
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W. P. CAREY & CO. LLC
31
W. P. CAREY & CO. LLC
PART II
(Amounts in thousands, except share amounts)
Item 1. - LEGAL PROCEEDINGS
In March 2004, following a broker-dealer examination of Carey Financial, LLC
("Carey Financial"), the Company's wholly-owned broker-dealer subsidiary, by the
staff of the SEC, Carey Financial received a letter from the staff of the SEC
alleging certain infractions by Carey Financial of the Securities Act of 1933,
the Securities Exchange Act of 1934, the rules and regulations thereunder and
those of the National Association of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of
CPA(R):15, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the
Commission pursues these allegations, or if affected CPA(R):15 investors bring a
similar private action, CPA(R):15 might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
CPA(R):15, Carey Financial would be required to return to CPA(R):15 the
commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part
of any action against the Company, the SEC could seek disgorgement of any such
commissions or different or additional penalties or relief, including without
limitation, injunctive relief and/or civil monetary penalties, irrespective of
the outcome of any rescission offer. The Company cannot predict the potential
effect such a rescission offer or SEC action may ultimately have on the
operations of Carey Financial or the Company. There can be no assurance that the
effect, if any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed CPA(R):15
for the interest cost of advancing the commissions that were later recovered by
CPA(R):15 from the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with CPA(R):15 and other REITs managed by the Company, as well as
the disclosure of such arrangements. At that time the Company and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Company, Carey Financial, and REITs managed by the
Company to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Company and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Company, Carey Financial or any Company-managed REIT in connection with the
distribution of Company-managed REITs or the retention or maintenance of REIT
assets. Other information sought by the SEC includes information concerning the
accounting treatment and disclosure of any such payments, communications with
third parties (including other REIT issuers) concerning revenue sharing, and
documents concerning the calculation of underwriting compensation in connection
with the REIT offerings under applicable NASD rules.
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 CPA(R):10, CIP(R), CPA(R):12, CPA(R):14
and CPA(R):15), in addition to selling commissions and selected dealer fees.
Among the payments reflected on documents produced to the Staff were certain
payments, aggregating in excess of $9,400, made to a broker-dealer which
distributed shares of the REITs. The expenses associated with these payments,
which were made during the period from early 2000 through the end of 2003, were
borne by and accounted for on the books and records of the REITs. Of these
payments, CPA(R):10 paid in excess of $40; CIP(R) paid in excess of $870;
CPA(R):12 paid in excess of $2,400; CPA(R):14 paid in excess of $4,900; and
CPA(R):15 paid in excess of $1,200. In addition, other smaller payments by the
REITs to the same and other broker-dealers have been identified aggregating less
than $1,000.
The Company and Carey Financial are cooperating fully with this investigation
and have provided information to the Enforcement Staff in response to the
subpoenas and requests. Although no formal regulatory action has been initiated
against the Company or Carey Financial in connection with the matters being
investigated, the SEC may pursue such an action against either or both of them.
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 and the magnitude of that effect would not necessarily be
limited to the payments described above but could include other payments and
civil monetary penalties.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual Shareholders' meeting was held on June 8, 2005, at which time a vote
was taken to elect our directors through the solicitation of proxies. The
shareholders elected the following directors for the ensuing year:
Name of Director Total Shares Voting Shares Voting For Shares Withheld
- ------------------ ------------------- ----------------- ---------------
Francis J. Carey 26,630,977 26,308,871 322,106
Eberhard Faber IV 26,630,977 25,988,752 642,225
George E. Stoddard 26,630,977 26,255,564 375,413
Karsten von Koller 26,630,977 26,344,483 286,494
The shareholders elected to amend and restate our Amended and Restated Limited
Liability Company Agreement to eliminate the classified board structure and
provide for the election of directors annually as follows:
Shares Voting For 26,158,187
Shares Voting Against 129,085
Shares Abstaining 343,705
----------
Total Shares Voted 26,630,977
==========
Item 6. - EXHIBITS
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
32
W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W.P. CAREY & CO. LLC
8/9/2005 By: /s/ Claude Fernandez
-------------------------------
Date Claude Fernandez
Managing Director and
acting Chief Financial Officer
(acting Principal Financial Officer)
8/9/2005 By: /s/ Michael D. Roberts
-----------------------
Date Michael D. Roberts
Executive Director and Controller
(acting Principal Accounting Officer)
33